Process: 38/2014-T

Date: September 15, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

This case (CAAD 38/2014-T) addresses whether taxpayers are entitled to compensatory interest when self-assessed IRC autonomous taxes are subsequently deemed unlawful due to application of an unconstitutional legal provision. The claimant self-assessed IRC for 2008, applying autonomous tax rates from Law 64/2008 (effective December 6, 2008) retroactively to expenses incurred throughout 2008. In 2013, the company requested ex officio review based on unconstitutionality. The Tax Authority acknowledged the unconstitutionality and granted reimbursement but denied compensatory interest. The claimant argued that Article 43(1) of the General Tax Law (LGT) establishes the right to compensatory interest when 'error attributable to the administration' occurs, which should include following a subsequently invalidated legal provision. The claimant contended this right applies to ex officio review procedures, not just administrative and judicial challenges, and that denying it violates Article 22 of the Portuguese Constitution regarding compensation for damages caused by public entities. The Tax Authority raised two preliminary objections: (1) the arbitral tribunal lacked material competence because the claim involved self-assessment without prior administrative review as required by Article 131-133 TPPC and Article 2 of Ordinance 112-A/2011, and (2) compensatory interest claims fall outside Article 2 of the Legal Framework for Tax Arbitration (RJAT). On the merits, the Authority argued that compensatory interest requires filing administrative review under Article 43(1) LGT, which the claimant did not do. The case raises fundamental questions about arbitral tribunal jurisdiction over compensatory interest disputes and whether taxpayers bear the consequences of applying unconstitutional tax provisions through self-assessment.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 38/2014 – T

Subject Matter: CIT – Indemnity Interest; Incompetence of the Arbitral Tribunal

I - REPORT

  1.  A. S.A, taxpayer number …, with registered office at …, …, …, hereinafter referred to as Claimant, filed, on 17.01.2014, pursuant to the provisions of Article 10, paragraphs 1 and 2 of Decree-Law No. 10/2011, of 20 January ("Legal Framework for Arbitration in Tax Matters" – LFATM), and Articles 1 and 2 of Ordinance No. 112-A/2011, a request for arbitral decision in which the Tax and Customs Authority – AT, as successor to the General Tax Directorate, is named as Respondent, with a view to:

  •    The partial annulment of the administrative decision of the Tax Administration on the request for ex officio review of self-assessment of autonomous taxes levied under the Corporate Income Tax (CIT), insofar as it dismissed the Claimant's request for indemnity interest;

  •    The recognition of the Claimant's right to payment by the Respondent of indemnity interest on the amount of tax self-assessed, paid, and declared unlawful by the Tax Administration in the aforementioned decision.

  1.  The Claimant supports its request by alleging, in essence, the following:

  •    Article 43, paragraph 1 of the General Tax Law (GTL) establishes the right of the taxpayer to indemnity interest when it is determined that "error attributable to the administration" has occurred, resulting in payment of a tax debt in an amount greater than due, with paragraph 2 of the same provision establishing that it is equally considered that there is "error attributable to the administration" when, the assessment having been made on the basis of the taxpayer's declaration, the taxpayer has followed in its completion the generic guidance of the tax administration duly published;

  •    Since the lesser is included in the greater, it must also be considered that there is "error attributable to the administration" when the taxpayer has followed, in the self-assessment, a legal provision that was subsequently declared invalid;

  •    Furthermore, although the provision (Article 43, paragraph 1 of the GTL) refers only to the cases of administrative review and judicial challenge, as the defence procedures in which "error attributable to the administration" gives rise to the right to indemnity interest, the same rule cannot fail to apply to cases of request for review of tax acts, since the main rule enshrined in paragraph 1 of Article 43 is that indemnity interest is due whenever "error attributable to the administration" occurs;

  •    Subsection c) of paragraph 3 of Article 43 should not be interpreted to the effect of excluding the request for review of tax acts from the general rule of paragraph 1 of Article 43 of the GTL;

  •    In the decision it delivered on the review request presented by the Claimant, the Respondent itself concluded that self-assessment in accordance with an unconstitutional provision fulfilled the concept of "error attributable to the administration";

  •    Despite this, the tax administration refused to recognize the Claimant's right to indemnity interest, under Article 43 of the GTL, making a restrictive interpretation of this provision, contrary to the constitutional principle of the right to compensation for damages caused by public entities in the exercise of their activity, enshrined in Article 22 of the Constitution of the Portuguese Republic (CPR);

  1.  In its response, the Respondent Tax and Customs Authority raises a defence by way of exception, invoking the incompetence of the tribunal ratione materiae, arguing, in essence:

  •    Under subsection a) of Article 2 of Ordinance No. 112-A/2011, of 22 March ("Binding Ordinance"), the Tax and Customs Authority is not bound by the jurisdiction of arbitral tribunals regarding claims relating to the declaration of unlawfulness of self-assessment acts that have not been preceded by recourse to the administrative procedure, in accordance with Articles 131 to 133 of the Tax Procedure and Process Code".

  •    Although it is well-established in case law that, given the administrative nature of the ex officio review procedure, it is possible to equate it to administrative review for purposes of subsequent challenge of the respective dismissal decision, such equivalence is legally prohibited in arbitral jurisdiction;

  •    Furthermore, the self-assessment not having been made in accordance with generic guidance issued by the tax administration, it would always be necessary, in order for the self-assessment to be subject to judicial review, that this challenge be preceded by administrative review, as provided in Article 131 of the Tax Procedure and Process Code (TPPC);

  •    The Arbitral Tribunal would furthermore, in the view of the Respondent, be incompetent ratione materiae to consider questions related to the request for indemnity interest, since such request is not provided for in Article 2 of the LFATM;

  1.  Subsidiarily, by way of challenge on the merits, the Respondent maintains that indemnity interest is not, in this case, due, because the Claimant did not lodge an administrative review, as required by paragraph 1 of Article 43 of the General Tax Law.

  2.  Having been, by proposal and with the agreement of the parties, the holding of the meeting provided for in Article 18, paragraph 1 of the LFATM dispensed with, written submissions were presented by both parties.

  3.  In the submissions, the Claimant sustained the lack of merit of the dilatory exceptions raised and the Respondent reiterated the grounds thereof.

III – QUESTIONS TO BE DECIDED

  1.  The following are the questions to be decided by the Tribunal:

  •    The material competence of the Tribunal to consider the request for partial annulment of the decision on a request for ex officio review of a tax act, insofar as such decision dismisses the Claimant's claim regarding indemnity interest;

  •    To the extent that material competence is found, the Claimant's right to receive indemnity interest following the annulment of an assessment act on the basis of unconstitutionality of the applied provision.

IV – FACTS FOUND TO BE RELEVANT TO THE DECISION

  1.  The following are the facts found to be relevant to the decision:

  •    In 2009, the Claimant carried out the self-assessment of CIT relating to the year 2008, self-assessment in which autonomous taxes related to expenses with vehicles and representation were included, as provided for in (then) Article 81 of the CIT Code, in the amount of 216,016.73 euros;

  •    Such amount resulted from the application, to expenses incurred throughout the year 2008, of the autonomous tax rates established with the new wording given to paragraph 3 of Article 81 of the CITC by Law No. 64/2008, of 5 December, which entered into force only on 06-12-2012;

  •    On 14-02-2013, the Claimant submitted a request for review of the CIT self-assessment for the year 2008, on the basis of the unconstitutionality of the application of the aforementioned rates to expenses incurred throughout the year 2008;

  •    On this review request a decision of partial dismissal was issued, on 19-07-2013, the Tax Administration having acknowledged the unconstitutionality invoked and, consequently, the unlawfulness of the self-assessment and the Claimant's right to reimbursement of the tax paid, but not the right thereof to indemnity interest on the amount of tax improperly paid.

V. REASONING

A - Regarding the exception of material incompetence of the Arbitral Tribunal by reason of the Claimant's claim not being included within the scope of the competence of tax arbitral tribunals.

  1.  The competence of tax arbitral tribunals is delimited, in the first place, by Article 2 of the Legal Framework for Arbitration in Tax Matters, whose paragraph 1 provides:

"1 - The competence of arbitral tribunals comprises the consideration of the following claims:

a) The declaration of unlawfulness of acts of assessment of taxes, self-assessment, retention at source and payment on account;

b) The declaration of unlawfulness of acts of determination of taxable matter when it does not give rise to the assessment of any tax, acts of determination of taxable matter and acts of determination of patrimonial values".

  1. The legislative authorization law pursuant to which the Legal Framework for Arbitration in Tax Matters was approved provided, in its Article 124, paragraph 4, subsection a), that the object of the tax arbitral proceedings could include "acts of assessment of taxes, including self-assessments, retention at source and payments on account, determination of taxable matter when they do not give rise to assessment, total or partial dismissal of administrative reviews or requests for review of tax acts, administrative acts which involve the consideration of the lawfulness of assessment acts, acts of determination of patrimonial values and rights or legitimate interests in tax matters" (emphasis added).

  2. From the comparison between the two provisions, it is inferred that the legislator restricted the scope of the jurisdiction of tax arbitral tribunals, by comparison with what had been established in the legislative authorization law, removing from it claims aimed at the declaration or recognition of rights or legitimate interests in tax matters.

  3. Thus, it must be concluded that tax arbitral tribunals are not competent to know of requests which have as their immediate object the recognition of a right of the taxpayer.

  4. It is true that tax arbitral tribunals may consider questions relating to the right to interest, as has frequently occurred in tax arbitration, when such questions are in connection with a request for declaration of unlawfulness of one of the acts named in subsections a) and b) of paragraph 1 of Article 2 of the LFATM, which is justified by the fact that, without such competence, the jurisdiction of tax arbitral tribunals would be impaired in its effectiveness.

  5. But the law is sufficiently clear as to the exclusion of the competence of arbitral tribunals from requests aimed directly at the declaration of a tax right. In this sense, reference may be made to Jorge Lopes de Sousa, Commentary on the Legal Framework for Tax Arbitration, in N. Villa-Lobos and M. Brito Vieira (ed.), Guide to Tax Arbitration, Almedina, Coimbra, 2013, p. 105, according to which "even with regard to the challenge of acts performed within the scope of tax procedures, the competence of these arbitral tribunals is restricted to activities connected with acts of assessment of taxes, remaining outside their competence the consideration of the lawfulness of administrative acts (…) as well as other administrative acts relating to tax issues that do not involve consideration of the lawfulness of the assessment act (…)".

  6. There is thus established the merit of the exception of absolute incompetence of this arbitral tribunal ratione materiae, which determines, being a dilatory exception, the absolution of the Respondent from the instance, in accordance with the provision in subsection e) of paragraph 1 of Article 278 of the CPC, applicable by reference to subsection e) of paragraph 1 of Article 29 of the LFATM.

  7. By virtue of the merit of this exception, the consideration of the other exceptions raised is foreclosed and consideration of the merits of the case is barred.

DECISION

In view of the foregoing, the exception of absolute incompetence of the arbitral tribunal ratione materiae is upheld, and in consequence, it is decided to reject the request for arbitral decision, absolving the Respondent from the instance.

Value of the case: The value of the case is set at: 18,327.69 euros.

Costs: Under Article 22, paragraph 4, of the LFATM, the amount of costs is set at 1,224.00 euros, in accordance with Table I appended to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Let it be registered and this arbitral decision be notified to the parties.

Lisbon, Administrative Arbitration Centre, 15 September 2014.

The Arbitral Tribunal

(Nina Aguiar)

Text prepared by computer, under Article 131, paragraph 5 of the Code of Civil Procedure (CPC), applicable by reference to Article 29, paragraph 1, subsection e) of the LFATM, with blank lines.

The wording of the present Arbitral Award is governed by the old orthography.

Frequently Asked Questions

Automatically Created

Can the CAAD Arbitral Tribunal rule on compensatory interest claims arising from IRC autonomous taxation self-assessments?
The CAAD's competence to rule on compensatory interest claims from IRC self-assessments is contested in this case. The Tax Authority argues that arbitral tribunals lack material competence for two reasons: first, claims involving self-assessment not preceded by administrative review (per Articles 131-133 TPPC) are excluded from arbitral jurisdiction under Article 2 of Ordinance 112-A/2011; second, compensatory interest claims are not enumerated in Article 2 of the Legal Framework for Tax Arbitration. The claimant contends that ex officio review should be equated to administrative review for jurisdictional purposes, making the claim arbitrable. The tribunal must determine whether compensatory interest disputes arising from review decisions fall within its statutory competence.
What constitutes an 'error attributable to tax services' under Article 43 of the Portuguese General Tax Law (LGT)?
Under Article 43(1) of the Portuguese General Tax Law (LGT), 'error attributable to tax services' (erro imputável aos serviços) occurs when the administration's mistake results in overpayment of tax. Article 43(2) specifically provides that error attributable to the administration exists when assessment is based on the taxpayer's declaration following published generic guidance from the tax administration. The claimant argues this concept should be interpreted broadly to include situations where taxpayers self-assess following a legal provision subsequently declared unconstitutional or invalid, as the lesser is included in the greater. The Tax Authority in its review decision acknowledged that self-assessment pursuant to an unconstitutional provision constitutes error attributable to the administration, but then denied compensatory interest on procedural grounds.
Are taxpayers entitled to compensatory interest when self-assessment follows a law later declared unconstitutional?
The claimant argues that taxpayers should be entitled to compensatory interest when self-assessment follows a law later declared unconstitutional, as this constitutes 'error attributable to the administration' under Article 43 LGT. The rationale is that if following published administrative guidance (Article 43(2) LGT) triggers compensatory interest, then following an official legal provision later invalidated should equally qualify. The claimant contends that denying compensatory interest in such circumstances violates Article 22 of the Portuguese Constitution, which guarantees compensation for damages caused by public entities. The Tax Authority counters that Article 43(1) LGT requires administrative review or judicial challenge as procedural prerequisites for compensatory interest, which were not satisfied through the ex officio review procedure alone.
How does the official review procedure (revisão oficiosa) interact with the right to compensatory interest under Portuguese tax law?
The ex officio review procedure (revisão oficiosa) creates a procedural tension regarding compensatory interest rights under Portuguese tax law. While established case law equates ex officio review to administrative review for purposes of subsequent judicial challenge given its administrative nature, the Tax Authority argues this equivalence is legally prohibited in arbitral jurisdiction under Ordinance 112-A/2011. Article 43(1) LGT conditions compensatory interest on 'administrative review or judicial challenge,' and Article 43(3)(c) further specifies procedural requirements. The claimant contends that Article 43(3)(c) should not be interpreted to exclude ex officio review from the general rule in Article 43(1), as the fundamental principle is that compensatory interest is due whenever error attributable to the administration occurs, regardless of the specific procedure used to correct it.
What are the limits of arbitral tribunal competence when reviewing tax authority decisions on compensatory interest in IRC cases?
The limits of arbitral tribunal competence in reviewing Tax Authority decisions on compensatory interest in IRC cases are central to this dispute. Article 2 of the Legal Framework for Tax Arbitration (RJAT) defines arbitral jurisdiction, and Article 2 of Ordinance 112-A/2011(a) excludes claims regarding unlawfulness of self-assessment acts not preceded by administrative review under Articles 131-133 TPPC. The Tax Authority argues that compensatory interest claims are not explicitly listed in Article 2 RJAT and therefore fall outside arbitral competence. Additionally, they contend that even if generally competent, the tribunal cannot hear claims arising from ex officio review when the underlying self-assessment should have been challenged through administrative review first. The resolution of these competence questions determines whether arbitral tribunals can provide comprehensive relief including compensatory interest, or whether such claims must be pursued through administrative courts.