Summary
Full Decision
ARBITRAL DECISION
I - REPORT
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A…, Tax Identification Number …, resident at Street … No. …, …, …-… Lisbon, requested, on 22 June 2015, pursuant to article 10.º/1, letter a) of Decree-Law No. 10/2011, of 20 January (hereinafter, RJAT), articles 1.º and 2.º of Ordinance 112-A/2011, of 22 March, article 102.º/1, letter e) of the Code of Tax Procedure and Process (CPPT), the constitution of the Arbitral Court, for assessment of the illegality of the acts of assessment of Personal Income Tax (IRS) to which were attributed the numbers 2014 … and 2014…, referring to the years 2010 and 2011, and compensatory interest, all in the total amount of € 30,850.87, as well as for reimbursement of the amount unduly paid and respective compensatory interest.
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In the request for arbitral decision, the Claimant chose not to appoint an arbitrator.
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Pursuant to article 6.º/2, letter a) and article 11.º/1, letter b) of the RJAT, the Deontological Council appointed the undersigned as sole arbitrator, who accepted the appointment within the legally stipulated period.
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The Arbitral Court was constituted on 24 August 2015.
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The Respondent presented its reply on 5 October 2015.
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The arbitral hearing took place on 4 December 2015, with the Claimant being notified to, within the period of 30 days, obtain from the Spanish Tax Administration proof of tax paid/withheld in Spain.
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On 5 January 2016, the Claimant filed on the record that it was not possible to obtain from the Spanish tax authorities any documentation attesting to the withholding at source made to the Claimant in 2010.
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On 14 January 2016, the Claimant filed to the record tax declarations presented by the Brazilian tax authorities, referring to the years 2010 and 2011, certified and authenticated by the General Consulate of Portugal in São Paulo.
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The Claimant and Respondent presented written submissions on 1/02/2016 and 9/02/2016, respectively.
C – Proven Facts
- Based on the facts alleged by the parties and not contested by the Respondent, as well as on the documentation filed in the record, the following facts relevant to the proper decision of the case are established:
A) On 25/10/2011, the Claimant submitted its Income Declaration – IRS, Form No. 3, referring to the year 2010.
B) In the aforementioned declaration, the Claimant entered, in Annex J, income obtained abroad, having there declared, among others, income obtained in Brazil and in Spain, as well as tax paid abroad, with the following amounts:
| Country | Income | Tax Paid Abroad |
|---|---|---|
| Brazil (line 601) | € 72,394.82 | € 14,508.59 |
| Spain (line 602) | € 12,000.00 | € 2,880.00 |
C) On 16/04/2012, the Claimant submitted its Income Declaration – IRS, Form No. 3, year 2011.
D) In the aforementioned declaration, the Claimant entered, in Annex J, income obtained abroad, having there declared, among others, income obtained in Brazil, as well as tax paid, with the following amounts:
| Country | Income | Tax Paid Abroad |
|---|---|---|
| Brazil (line 602) | € 66,455.56 | € 9,329.62 |
E) The Claimant, within an inspection action conducted by the Finance Directorate of Lisbon, was notified that aimed to assess the correct determination of the tax credit for international double taxation, deducted from the collection by the Claimant in the income declarations Form No. 3 of IRS referring to the years 2010, 2011 and 2012.
F) Within that action, the Claimant was notified, pursuant to No. 1 of article 128.º of the IRS Code, to submit "valid original document, issued or authenticated by the respective tax authority of the source state of the income".
G) The Claimant submitted a statement from B… and a simple copy of the proof of income paid and income tax withheld at source, for the year 2011, issued by the Ministry of Finance – Federal Revenue Service of Brazil.
H) The documents submitted by the Claimant were sent to the Administrative Division of the International Relations and Services Directorate, which ruled by official letter …/2014, dated 2014/10/13, in the following terms:
"With the lack of supporting documents for the amounts of income earned/tax borne, for Spain and Brazil, thus the corrections to be made, Annex J, of 2010, are as follows:
| Item | Declared Amount | Amount to be Considered |
|---|---|---|
| Income earned in Brazil | € 72,394.82 | € 72,394.82 |
| Tax paid in Brazil | € 14,508.59 | 0 |
| Income earned in Spain | € 12,000.00 | € 12,000.00 |
| Tax paid in Spain | € 2,880.00 | 0 |
"With the lack of supporting documents for the amounts of income earned/tax borne, for Brazil, thus the corrections to be made, in Annex J, of 2011, are as follows:
| Item | Declared Amount | Amount to be Considered |
|---|---|---|
| Income earned in Brazil | € 66,455.56 | € 66,455.56 |
| Tax paid in Brazil | € 9,329.62 | 0 |
I) On 25/11/2014, the Claimant was notified to exercise the right of prior hearing, "with respect to the draft amendments to its Form 3 declaration of IRS for the years 2010, 2011 and 2012 that will be made in accordance with the grounds contained in information No. …/2014 of 13/10/2014, sent by the International Relations Services Directorate, a copy of which is attached".
J) After exercising the right of prior hearing, the Claimant was notified (official letter No. …-…) that additional tax assessment would proceed, the collection notice of which would be sent to the Claimant.
K) On 19/12/2014, an additional IRS assessment was issued, referring to the year 2010, assessment No. 2014…, from which resulted tax to be paid in the amount of € 88,793.71, which after adjustment of accounts and assessment of compensatory interest, resulted in a payment of € 11,622.20.
L) In the assessment, no portion of tax borne by the Claimant in Brazil and in Spain in the year 2010 was considered, only income earned being considered.
M) On 19/12/2014, an additional IRS assessment was issued, referring to the year 2011, assessment No. 2014…, from which resulted tax to be paid in the amount of € 79,789.18, which after adjustment of accounts and assessment of compensatory interest, resulted in a payment of € 19,692.91.
N) In the assessment, no portion of tax borne by the taxpayer in Brazil in the year 2011 was considered, only income earned being considered.
O) The Claimant filed a complaint with respect to those additional IRS assessments, for the years 2010 and 2011.
P) The complaint was accompanied by simple copies of the document issued by B…, dated 31 January 2011, as well as simple copy of the proof of income paid and income tax withheld at source, for the year 2011, issued by the Ministry of Finance – Federal Revenue Service of Brazil.
Q) The complaint was denied by order of 22/04/2015.
R) On file is a document issued by the entity designated by "B…", dated 31 January 2011, entitled "Tax Information for Fiscal Year 2010", with the following content: "That Mr. A…, with address at …, … Lisbon (Portugal) and tax identification number X-…-M, and for tax purposes as compensation from the Board of Directors and non-resident income tax corresponding to fiscal year 2010, the following withholdings have been made to him:
Board of Directors Compensation 12,000.00
Withholding 24% (Art. 13.1. e) LIRNR) 2,880.00".
S) By the Claimant was filed a document issued by the Ministry of Finance – Federal Revenue Service of Brazil, which certifies that in the year 2010, the Claimant earned in Brazil € 72,394.82 and paid tax in the amount of € 14,508.50 (pages ... of the record, filed by the Claimant on 14/01/2016).
T) By the Claimant was filed a document issued by the Ministry of Finance – Federal Revenue Service of Brazil, which certifies that in the year 2011, the Claimant earned in Brazil € 66,455.56 and paid tax in the amount of € 13,095.24 (pages ... of the record, filed by the Claimant on 14/01/2016).
II – PROCEDURAL MATTERS
- The Court is competent and regularly constituted, pursuant to articles 2.º/1, letter a), 5.º/2, and 6.º/1, all of the RJAT.
The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4.º and 10.º/2 of the RJAT and article 1.º of Ordinance No. 112-A/2011, of 22 March.
The proceedings are not affected by defects that would invalidate them, and therefore the conditions for rendering the final decision are met.
III. REASONING
The issues in question in the present proceedings are as follows:
a) To ascertain whether the additional IRS assessments for the years 2010 and 2011, which disregarded the tax credit for international double taxation, provided for in article 81.º/2 of the IRS Code, are illegal, more specifically, to ascertain whether the documents presented to prove the tax paid abroad (Brazil and Spain) are sufficient to effect the deduction of the tax credit for international double taxation;
b) To ascertain whether it was the duty of the tax administration, within its investigative powers, to activate the information exchange mechanisms provided for in the Conventions to avoid double taxation.
Article 81.º/1 and 2 of the Personal Income Tax Code contains rules aimed at eliminating international double taxation. The right is granted to a taxpayer resident in Portugal to deduct from the collection the amount of tax paid abroad. In this sense, article 81.º/1 and 2 of the IRS Code, with the heading "Elimination of international double taxation" in force on the date of the facts, provides that:
"1. Persons deriving income of different categories obtained abroad have the right to a tax credit for international double taxation, deductible up to the extent of the part of the collection proportional to that net income, considered pursuant to letter a) of No. 6 of article 22.º, which shall correspond to the lesser of the following amounts:
a) Income tax paid abroad;
b) The fraction of IRS collection, calculated before deduction, corresponding to income that in the country in question may be taxed, net of the specific deductions provided for in this Code.
- When there is a convention to eliminate double taxation concluded by Portugal, the deduction to be made pursuant to the preceding number cannot exceed the tax paid abroad as provided for by the convention.".
Given that, in the present case, the Claimant earned dependent employment income in Brazil and in Spain, there is no doubt that the Claimant, resident in Portugal, and under the conditions provided for in article 81.º/2 of the IRS Code, has the right to deduct the income tax paid abroad.
With respect to the deduction of tax paid outside Portugal, article 23.º/1 of the Convention concluded between the Portuguese Republic and the Federative Republic of Brazil aimed at avoiding Double Taxation, approved for ratification by resolution of the Assembly of the Republic No. 33/2001, of 1 March 2001 and ratified by decree of the President of the Republic No. 27/2001, of 27/04 (hereinafter CDT Portugal/Brazil), establishes that it is the duty of the State of residence to deduct from the income tax an amount equal to the income tax paid in the source state.
With respect to the income obtained by the Claimant in Brazil, the issue is whether the documents presented to prove the tax paid in Brazil are sufficient to effect the deduction of the tax credit for income tax paid in Brazil, for the years 2010 and 2011, in accordance with article 81.º/2 of the IRS Code and article 23.º/1 of the Convention.
In the context of the present judicial proceeding, the Claimant presented (for the years 2010 and 2011) a document, duly certified, issued by the "Ministry of Finance – Federal Revenue Service of Brazil – Personal Income Tax" as "Proof of Income Paid and Personal Income Tax Withheld at Source".
From the document referring to fiscal year 2010, it results that the Claimant earned income in Brazil in the amount of € 72,394.82 and paid tax in the amount of € 14,508.50 (point S of the proven facts).
From the document referring to fiscal year 2011, it results that the Claimant earned income in Brazil in the amount of € 66,455.56 and paid tax in the amount of € 13,095.24 (point T of the proven facts).
The documentary evidence filed in the record reveals the amount of income earned, as well as the amount of tax withheld and the tax ultimately paid. Thus, there is no doubt as to the amounts earned by the Claimant, nor as to the tax withheld, which is evidenced in the statement "Proof of Income Paid and Personal Income Tax Withheld at Source", issued by the fiscal authorities of the Federative Republic of Brazil, specifically by the "Ministry of Finance – Federal Revenue Service of Brazil – Personal Income Tax".
In view of the documents presented by the Claimant and having regard to article 23.º/1 of the CDT Portugal/Brazil, in conjunction with article 81.º/2 of the IRS Code, the tax paid in Brazil may and should be deducted from income tax, within the limits established in the final part of that provision.
Having failed to consider such deduction, the Tax Administration violated article 23.º/1 of the CDT Portugal/Brazil and article 81.º/2 of the IRS Code, whereby the additional IRS assessment for the year 2010, to the extent that it disregards the tax credit for international double taxation, must be annulled, with the legal consequences.
The same applies to the additional IRS assessment for the year 2011, since it also disregards the tax credit for international double taxation to which the Claimant is entitled.
With respect to the income obtained by the Claimant in Spain, the Convention concluded between the Portuguese Republic and the Kingdom of Spain aimed at avoiding Double Taxation, approved by Resolution of the Assembly of the Republic No. 6/95, of 29 June 1994, ratified by Decree of the President of the Republic No. 14/95, of 28 January (hereinafter CDT Portugal/Spain), establishes in letter a) of No. 2 of article 23.º that "When a resident of Portugal obtains income which, in accordance with the provisions of this Convention, may be taxed in Spain, Portugal shall deduct from the income tax of that income an amount equal to the tax paid in Spain". And adds "The amount deducted shall not, however, exceed the fraction of income tax, calculated before deduction, corresponding to income that may be taxed in Spain;".
To prove the tax paid in Spain, the Claimant filed a statement from B… (cf. point R of the proven facts). The Tax Administration did not accept that document as proof of tax paid abroad, in Spain. The Claimant argues that, on the one hand, the Tax Administration should have accepted that document and, on the other, that given the document presented, if the Tax Administration had doubts as to the value of the tax paid in Spain, it should have resorted to the information exchange mechanisms provided for in article 26.º of the CDT Portugal/Spain.
As is known, in the matter of proof of tax paid abroad, the law does not require a specific type of proof. The law does not stipulate a system of binding proof. In this case, the principle of free appraisal of evidence applies, which must be appreciated by the judge and necessarily reasoned (without prejudice, necessarily, to the evidential value attributed to certain types of documents).
Article 128.º of the IRS Code provides that it is the duty of persons subject to IRS to present documents proving the income earned, the deductions and other facts or situations mentioned in their declaration, when the Tax and Customs Authority requires them. In turn, regarding the burden of proof, article 342.º of the Civil Code, as well as article 74.º of the General Tax Law (LGT), both provide that it is incumbent upon whoever invokes a right to prove the constituent facts of the alleged right, with the other party bearing the burden of proving the preventing, modifying or extinctive facts.
The duty of official investigation shall apply, among others, in situations where there is a principle of proof capable of generating reasonable doubt about the reality of the relevant facts and/or when the taxpayer alleges the existence of comprehensive difficulties in producing proof. In these cases, it would be incumbent on the Portuguese Tax Administration to proceed with the exchange of information with the foreign tax authority, in order to avoid international double taxation.
In analyzing the evidentiary value of statements issued by employers as a means of proof of tax paid abroad, case law has held that documents issued by employers, when accompanied by other documents from foreign tax authorities, are sufficient to prove tax paid abroad. In this regard, see the judgment of the Northern Administrative Tax Court of 14/04/2015, where the Court considered that to prove the payment of tax in Switzerland for employment income earned there, the statement of the employer was sufficient, together with the certified statement by the Swiss tax authority attesting to the amount of income earned there and the amount of tax paid there by withholding at source. In this judgment, the document issued by the employer ("certificate of withholding at source in Switzerland for persons residing abroad") had the seal of the respective tax authority affixed. And it concludes that, should doubts persist, specifically regarding the coincidence between the amount withheld at source and the tax assessed, it would be incumbent on the Tax Administration to proceed with the exchange of information with those authorities, under the respective Convention. In the judgment of the Northern Administrative Tax Court of 20/04/2005, the Court held that, "with the taxpayer being unable to present a document issued by the German Tax Authority proving such payment, it is sufficient for the deduction the submission of a statement from the employer, which contains the withholdings made, as well as the payment slips" for the respective tax.
However, the document issued by B… is not stamped by the Spanish tax authorities. There is no document in the record, issued by the Spanish Tax Authority, attesting to the payment of the amount of tax allegedly withheld from the Claimant, nor to the communication of that income to the Spanish tax authorities, nor to the tax withheld. Furthermore, the Claimant also failed to demonstrate that it took steps to obtain a document issued by the Spanish tax authorities attesting to the amount of tax withheld/paid in that country. There is no documentary support in the record evidencing that the Claimant requested from the Spanish tax authorities proof of tax paid in this country. This absence of proof leads us to conclude that the mere document issued by the Claimant's employer is not sufficient to prove the tax withheld/paid in Spain. Thus, lacking any other document, specifically a document issued by the Spanish tax authority, we cannot accept that document as proof of the tax withheld/paid in Spain.
Regarding the duty imposed on the tax administration to ascertain the material truth and investigative duties (inquisitorial principle), article 58.º of the LGT provides that the tax administration must undertake the necessary evidentiary steps to discover the material truth. This principle must be tempered with other principles, such as the principle of proportionality and practicability. This principle does not, however, exempt the taxpayer from the obligation to cooperate in the production of evidence (article 50.º of the LGT). It is therefore in light of these principles that it must be assessed whether, in the present case, the Tax Authority was obliged, or not, to resort to the mechanism for exchange of information, provided for in article 26.º of the CDT Portugal/Spain. We believe it was not. In fact, only in cases where there is evidence (supported by a document issued by the tax authority of a certain country evidencing the amount of tax withheld/paid or, in cases where it is alleged and proven that serious difficulties exist in obtaining evidence) would it be incumbent on the Portuguese tax administration to resort to the mechanism for exchange of information, provided for in the CDT or in internal legislation. Otherwise, the Claimant would be relieved of the obligation to prove facts that are in its interest, and of the inherent obligation of the taxpayer to cooperate in the production of evidence (article 59.º of the LGT).
The Claimant's challenge fails on this point.
c) Compensatory Interest
The Claimant requests that the Tax and Customs Authority be condemned to reimburse the tax unduly paid, as well as the respective compensatory interest.
Article 43.º, No. 1 of the General Tax Law provides that "compensatory interest is due when it is determined, in a complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than that legally due." In turn, article 24.º, No. 1, letter b) of the RJAT provides that "an arbitral decision on the merits of a claim not subject to appeal or challenge binds the tax administration from the end of the period provided for appeal or challenge, and the tax administration must, in the exact terms of the upholding of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of judgments of judicial tax courts, restore the situation that would have existed if the tax act subject to the arbitral decision had not been performed.
In the case under consideration, there is a (partial) illegality of the disputed assessments, due to error attributable to the services, which by disregarding the documents submitted by the Claimant proving the credit for international double taxation as to income earned in Brazil in the years 2010 and 2011, assessed tax higher than legally due.
Thus, it appears that the Claimant has the right to (partial) reimbursement of the tax paid for the year 2010, as well as reimbursement of the tax paid for the year 2011, plus compensatory interest from the date of payment until full reimbursement of the amount unduly paid, at the legal rate.
Decision:
Based on the foregoing, the arbitral court decides:
a) To partially uphold the request for arbitral decision and, in consequence, to partially declare illegal the IRS assessments for the years 2010 and 2011 to the extent that they disregard the credit for international double taxation resulting from tax paid in Brazil, with the legal consequences.
b) To partially uphold the request for an order condemning the Tax and Customs Authority to reimburse the Claimant for the amount of tax unduly paid, plus compensatory interest until full reimbursement of the excess amount paid.
c) To partially reject the request for arbitral decision to the extent that it relates to the tax withheld/paid in Spain, for the year 2010.
d) To condemn the Claimant and the Respondent in the costs of the proceedings, in proportion to their success and failure.
Case Value:
Pursuant to No. 2 of article 315.º of the Code of Civil Procedure, combined with letter a) of No. 1 of article 97.º-A of the Tax Procedure Code and No. 2 of article 3.º of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 30,850.87.
Costs:
For the purposes of No. 2 of article 12.º and No. 4 of article 22.º of the General Rules of Tax Arbitration and No. 4 of article 4.º of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 1,836.00, pursuant to Table I attached to the regulation, to be borne by the Claimant and the Respondent, in the proportion of 10% for the Claimant and 90% for the Respondent.
Lisbon, 19 February 2016
The Arbitrator,
(Alexandra Gonçalves Marques)
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