Summary
Full Decision
ARBITRAL DECISION
The arbitrators Dr. Alexandra Coelho Martins (Chair), Dr. Henrique Nogueira Nunes and Dr. José Joaquim Sampaio e Nora, appointed by the Ethics Council of the Administrative Arbitration Centre ("CAAD") as arbitrators in a Collective Tribunal, constituted on 13 November 2018, hereby render the following arbitral decision:
I. REPORT
A..., NIF..., and B..., NIF ..., hereinafter "Requesters", married, both resident at Rua..., ..., ...-... Lisbon, have requested the CONSTITUTION OF AN ARBITRAL TRIBUNAL, pursuant to articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, both of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "RJAT"), and article 2 of Ministerial Order no. 112-A/2011, of 22 March, in order to obtain the annulment of the decision dismissing the administrative complaint presented regarding the tax assessment acts for Personal Income Tax ("IRS") for the year 2016, issued under no. 2017..., of 17 November 2017, in the amount payable of € 20,171.27, and under no. 2017..., of 22 December 2017, in the amount payable of € 221,336.74. The Requesters also petition for the annulment of the aforementioned IRS assessments.
The respondent is the TAX AND CUSTOMS AUTHORITY ("AT").
As the basis for their annulment claim, the Requesters invoke a breach of law, on the grounds that the substitutive declaration submitted by them was not taken into consideration. In this regard, they state that the first IRS declaration presented with reference to 2016 income contained several errors, which generated an assessment of this tax in the amount payable of € 20,171.27. This declaration was promptly amended by means of a substitutive declaration, which they presented on 12 December 2017.
In the substitutive declaration, the Requesters removed the income in category A of the Requester husband relating to company C..., SGPS, S.A., because he did not receive such income in that year (but rather in the previous year, 2015, in which it had already been declared), added the alienation of a real estate property belonging to both Requesters, which generated capital gains, and exercised the option for joint taxation of income.
The AT made a second IRS assessment, in the amount of € 221,336.74, which only took into consideration the part of the declarative rectification that generated tax revenue value for the AT and did not heed the removal of the category A income relating to company C..., SGPS, S.A., which the Requesters proved, nor the option for joint taxation of income.
According to the Requesters, the AT's position violates articles 1, no. 1, 2 and 22 of the IRS Code and the principle of effective income taxation, by making this tax applicable to income not declared and not received, relating to company C..., SGPS, S.A..
They further allege violation of articles 13, nos. 2 and 3 and 140, no. 2 of the IRS Code, and also article 1714 of the Civil Code, because the AT did not accept the option for joint taxation. They add that the capital gains generated by the alienation of the real estate property, which is a common asset of the couple, cannot fail to be treated as income of both Requesters. Subsidiarily, if the option for joint taxation did not apply, the value of the capital gains would have to be allocated at 50% to the Requester husband and at 50% to the Requester wife, given the regime of community of property (acquired) and the fact that it is a common asset of the couple. They attached documents and listed 2 witnesses.
The request for constitution of the Arbitral Tribunal, presented on 31 August 2018, was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 3 September 2018.
Pursuant to the provisions of article 6, no. 2, paragraph a) and article 11, no. 1, paragraph a) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed the herein signatories as arbitrators, who communicated their acceptance of the appointment within the applicable time period.
On 23 October 2018, the parties were duly notified of this appointment, and neither expressed a wish to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.
Thus, in accordance with the provisions of article 11, no. 1, paragraph c) of the RJAT, the Collective Arbitral Tribunal was constituted on 13 November 2018.
On 18 December 2018, the AT submitted its reply, attaching the administrative file ("AF"). It argues that the substitutive declaration is registered in the AT's system as "erroneous" and was not taken into consideration. The new official IRS assessment considered all income, even that declared as not received, and did not heed the subsequent option for joint taxation. Regarding the capital gains, the AT considers that even if the option for joint taxation were accepted, the amount of tax payable by the Requesters would be the same.
Regarding the income relating to C..., SGPS, S.A., the Respondent argues that such income should be maintained, due to the Requesters having made no statement in the divergence procedure and having not submitted evidence allowing the conclusion to be drawn that it was not received (Social Security statement showing that no contributions were made by C..., SGPS, S.A. as from 2015, cessation of the Requester husband's functions as a member of the board of that entity, failure to complete form 10 by the company and absence of source tax withholdings). It concludes for non-acceptance of the arbitral claim due to lack of legal support.
By order of 26 December 2018, this Tribunal decided to dispense with the examination of the witnesses indicated by the Requester, given the finding that the factual matter is only capable of documentary proof, and dispensed with the meeting referred to in article 18 of the RJAT, as unnecessary.
It further decided that the deadline for rendering the arbitral award would be that provided for in article 21, no. 1 of the RJAT, warning the Requesters that until that date they should proceed to payment of the subsequent arbitration fee, pursuant to article 4, no. 3 of the Regulations for Costs in Tax Arbitration Proceedings ("RCPAT") and communicate such payment to CAAD. Finally, the parties were notified to, if they wished, submit successive written submissions within a period of 10 days.
Both parties submitted submissions, maintaining, in substance, the positions they had already taken in their pleadings.
II. CLARIFICATION OF ISSUES
The Arbitral Tribunal was regularly constituted, pursuant to the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of the RJAT, it is competent ratione materiae, the parties have legal personality and capacity and have standing (articles 4 and 10, no. 2, of the same instrument and article 1 of Ministerial Order no. 112-A/2011, of 22 March) and are duly represented, with no other exceptions or irregularities capable of being known ex officio to be considered.
III. FACTS
Relevant to the decision, the following facts are considered proved, taking into account the positions adopted by the parties and critical analysis of the contents of the documents attached by the Requesters and the Respondent (AF):
a) The Requesters are married to each other as of 24 November 1979, under the supplementary regime of community of acquired property (proved by the marriage record attached under no. 1 with the request for arbitral decision or "rad").
b) On 14 November 2017, the Requester husband submitted the income declaration – Form 3 – relating to IRS for the year 2016 (proved by copy of the income declaration attached under no. 2 with the rad).
c) In Annex A of that declaration, relating to employment income in category A, the Requester husband reported income in the amount of € 258,323.66, source tax withholdings of € 99,574.00, contributions of € 3,536.33 and surtax withholdings of € 4,860.00, with the following breakdown:
NIPC –...:
income of € 17,170.16, source tax withholdings of € 2,478.00, contributions of € 0.00 and surtax withholdings of € 70.00;
NIPC –...– of company C..., SGPS, S.A.:
income of € 241,153.50, source tax withholdings of € 97,096.00, contributions of € 3,538.33 and surtax withholdings of € 4,790.00
(proved by copy of the income declaration attached under no. 2 with the rad).
d) The income declarations for 2016 and 2015 were submitted within a lapse of two days, on 14 and 16 November 2017, respectively, with these declarations reporting exactly the same income, to the cent, and the same paying entities (proved by analysis of the documents attached under nos. 2 and 3 with the rad).
e) The Requester was an administrator of company C..., SGPS, S.A., having exercised these functions until 14 July 2015, as is evident from the respective permanent certificate with access code ... (proved by the cited document attached under no. 4 with the rad).
f) Company C..., SGPS, S.A. was declared insolvent by decision rendered in the proceedings conducted at the Judicial Court of the District of Lisbon – Commercial Court – Judge ..., under no. .../15...T8SLB (proved by document attached under no. 5 with the rad).
g) The Insolvency Administrator of C..., SGPS, S.A. declared that, after the date of the Requester husband's resignation from the position of administrator of the aforementioned company, he did not receive any amount from that company (proved by the cited document attached under no. 5 with the rad).
h) The AT, on 17 November 2017, initiated a divergence analysis procedure against the Requester husband, for reasons D 10 "Employment income – withholding divergences", D55 "Surtax withholdings", on the grounds that the source tax withholdings evidenced in the 2016 declaration did not correspond to reality, as there were no declarations from the paying entities in that regard (proved by the AF and by agreement of the parties).
i) The Requester husband was notified of the IRS assessment Statement no. 2017..., concerning the year 2016, dated 17 November 2017, according to which he would have to pay the amount of € 20,171.27, by 2 January 2018 (proved by document attached under no. 6 with the rad).
j) On 17 November 2018, a divergence analysis procedure was also initiated against the Requester husband, with reasons D10 "Employment income – withholding divergences", D39 "Real estate alienation" and D55 "Surtax withholdings", and he was notified to submit a substitutive IRS declaration for the year 2016, in which he would have to remove values of source tax withholdings, contributions and surtax withholding from annex A, and include annex G, relating to the alienation of fraction «AL» of the urban real estate property registered under article ... of the parish of ..., and exercise prior hearing (proved by the AF).
k) On 12 December 2017, the Requesters jointly presented a substitutive income declaration relating to the year 2016 (proved by document attached under no. 7 with the rad).
l) In that substitutive declaration, the Requesters expressed the option for joint taxation of their respective income (proved by document attached under no. 7 with the rad).
m) In Annex A of the substitutive declaration (employment income), the Requesters declared only the income that the Requester husband received from NIF –..., in the amount of € 17,170.16, the corresponding source tax withholdings of € 2,478.00, contributions of € 0.00 and surtax withholdings of € 70.00, with no mention whatsoever of the income declared in the replaced declaration relating to company C..., SGPS, S.A. (proved by document attached under no. 7 with the rad).
n) In Annex G of the substitutive declaration, relating to capital gains and other capital increments, the Requesters declared the capital gain obtained from the alienation of the urban real estate property with registration article..., of the Union of Parishes of ... and ... .(proved by document attached under no. 7 with the rad).
o) This property was acquired for the amount of € 142,456.00, on 23 July 1996, by deed of purchase and sale in which the Requester husband, declaring himself married to the Requester wife, acquired the aforementioned real estate property from D... (proved by document – copy of the deed – attached under no. 8 with the rad).
p) By deed of purchase and sale, executed on 27 June 2016, the Requesters sold the aforementioned property for the price of € 550,000.00 (proved by document – copy of the deed – attached under no. 9 with the rad).
q) On 22 December 2017, the AT issued assessment no. 2017..., in the amount payable of € 221,336.74, which replaced the previous IRS assessment no. 2017..., in the amount of € 20,171.27, identified in paragraph i) above (proved by document attached under no. 10 with the rad).
r) The Requester husband was notified of the Statement of Account Adjustment, dated 28 December 2017, by means of which he would have to pay the balance determined of € 201,165.47 (resulting from the deduction, from the amount of the second assessment referred to in paragraph q) above, of the amount of the first assessment of € 20,171.27, stated in paragraph i)), by 7 February 2018 (proved by document attached under no. 11 with the rad).
s) On 4 January 2018, the Requesters submitted an administrative complaint against the two IRS assessments received (proved by document attached under no. 12 with the rad).
t) By letter dated 16 March 2018, the Requester husband was notified of the draft dismissal of the administrative complaint and, likewise, to exercise the right of prior hearing, which he did on 4 April 2018 (proved by documents attached under nos. 13 and 14 with the rad).
v) On 23 May 2018, the Requesters, through their representative, were notified of the dismissal of the administrative complaint (proved by document attached under no. 15 with the rad).
x) The Requester, in disagreement with the aforementioned IRS assessment acts, submitted to CAAD on 31 August 2018 the request for constitution of the Collective Arbitral Tribunal that gave rise to the present proceeding.
* * *
The facts pertinent to the judgment of the case were chosen and delimited according to their legal relevance, in light of the plausible solutions to the legal questions, pursuant to the combined application of articles 123, no. 2, of the Code of Procedure and Tax Process ("CPPT"), 596, no. 1 and 607, no. 3 of the Code of Civil Procedure ("CPC"), by reference to article 29, no. 1, paragraphs a) and e) of the RJAT.
Relevant to the decision, there are no alleged facts to be considered unproved.
IV. LAW
Essentially two questions are raised for the consideration and decision of this Arbitral Tribunal.
The first concerns whether, with reference to income received in 2016, the option for joint taxation of married taxpayers was admissible and capable of producing the intended legal-tax effects, when exercised in a substitutive declaration (form 3) delivered outside the legal time period, having regard to the provisions of articles 59, no. 2 and 60, no. 1, both of the IRS Code.
The second relates to the consideration by the AT of category A income which, according to the declarations of the taxpayers here as Requesters, was not received in 2016 by the Requester husband.
Regarding real estate capital gains, there is no conflict between the parties insofar as the Requesters expressly admit being liable for the tax that falls on such gains, seeking only to be jointly taxed.
Having regard to the provisions of article 124 of the CPPT, subsidiarily applicable pursuant to article 29, no. 1, paragraph c) of the RJAT, in the absence of defects leading to a declaration of non-existence or nullity of the challenged act, the order of examination of the defects should be that which determines, according to the prudent discretion of the judge, the most stable or effective protection of the interests offended. Since the effects of the acceptance of the substantive defects attributed to the acts are similar from the perspective of the stability and efficacy of the protection of the Requesters' interests, the order indicated by them is followed.
1. ON THE OPTION FOR JOINT TAXATION
Regarding the first question, article 59 of the IRS Code applies, which underwent two successive versions over time that are relevant to the legal solution of the present case. Until 31 December 2016, this provision provided as follows:
"Article 59
Taxation of spouses and unmarried partners
1 - In separate taxation, each of the spouses or unmarried partners, if not exempted from doing so, presents a declaration which includes the income they are entitled to and 50% of the income of dependents who make up the household.
2 - In joint taxation:
a) The spouses or unmarried partners present a declaration which includes all income obtained by all members who make up the household;
b) Both spouses or unmarried partners must exercise the option in the income declaration;
c) The option is only considered if exercised within the time periods provided for in the following article, being valid only for the year in question;
d) The option, having been exercised within the time period, as provided in the preceding paragraph, may be maintained even if a substitutive declaration is presented outside the time period." (emphasis ours)
Subsequently, through Law no. 42/2016, of 28 December, effective from 1 January 2017, the legislator repealed paragraph d) of no. 2 and amended paragraph c) of the same number, in the following terms:
"Article 59
Taxation of spouses and unmarried partners
1 - In separate taxation, each of the spouses or unmarried partners, if not exempted from doing so, presents a declaration which includes the income they are entitled to and 50% of the income of dependents who make up the household.
2 - In joint taxation:
a) The spouses or unmarried partners present a declaration which includes all income obtained by all members who make up the household;
b) Both spouses or unmarried partners must exercise the option in the income declaration;
c) The option is valid only for the year in question; (Amended by Law no. 42/2016, of 28 December)
d) (Repealed by article 196 of Law no. 42/2016, of 28 December)." (emphasis ours)
In other words, the law (cf. paragraph d) of no. 2 of article 59 of the IRS Code), as worded in force until 31 December 2016, did not allow taxpayers to change the application of the default taxation regime – separate taxation – to the optional regime – joint taxation, unless they had exercised that option within the legal time period for filing the declaration, which did not occur in the situation sub judice.
Such provision, in addition to appearing unconstitutional for violation of the principle of taxpaying capacity which, as a material criterion for just apportionment of burdens, requires that the net, available and real income of families be taxed, created an enormous tax injustice that was moreover acknowledged by the legislator who, alongside this amendment, effective from 1 January 2017, and therefore applicable to the present case, introduced a transitional regime embodied in Law no. 3/2017, of 16 January, to allow that option for declarations relating to the 2015 fiscal year filed outside the legally prescribed time periods.
In the present case, the discussion concerns the income declaration for the year 2016, which was filed outside the legal time period by the Requester husband in 2017, the same applying to the substitutive declaration then filed by both Requesters.
At either of those two moments (14 November 2017 and 12 December 2017), the legal possibility of filing a substitutive declaration outside the time period with the option for joint taxation regime already existed, meaning that as of the date when the Requesters' income declarations were made, the legal constraint and consequent prohibition contained in the previous wording of paragraphs c) and d) of no. 2 of article 59 of the IRS Code in force until 31 December 2016 had been repealed which, as a procedural provision, is of immediate application, having regard to the provisions of article 12, no. 3 of the General Tax Code.
In other words, there was no longer a temporal limitation for that option, so that the substitutive declaration filed by the Requesters on 12 December 2017 is valid and capable of producing its respective effects. Thus, acceptance thereof by the AT is required, without prejudice to the liability for administrative infraction provided for by law.
The understanding adopted by the Respondent that circular letter no. 20187, of 5 April 2016, is invocable, not only does it not apply to the present case, as it is prior to the legislative amendment just referred to, but even if it did apply (and it does not), it would only bind the services since it constitutes an administrative regulation emanating from the AT and not a legislative act, a position that constitutes established case law.
In this sense, the Decision of the Supreme Administrative Court, of 29 November 2017, in case 1292/16 states: "being true that the principle of legality in tax matters requires that the incidence of taxes, their respective rates, tax benefits and taxpayer guarantees be determined solely by acts of a legislative nature (not regulatory) — see no. 2 of article 103° of the Constitution and no. 1 of article 8° of the General Tax Code —, then the guidance in this regard contained in the aforementioned Circular cannot be relevant, to the extent that it conflicts with this principle […]" (in the same sense, see also the Decision of the Central Administrative Court South, of 23 April 2008, rendered in case no. 2312/08, accessible at www.dgsi.pt).
Without need to elaborate further on this first question, it is concluded, pursuant to the provisions of article 163 of the Code of Administrative Procedure ("CPA"), that the order dismissing the Administrative Complaint is voidable, insofar as it determined the inadmissibility of the submission of the substitutive declaration with the option for joint taxation, and likewise the official IRS assessment no. 2017 ... in the same terms.
2. ON THE TAXATION OF INCOME ALLEGEDLY PAID BY COMPANY C..., SGPS, S.A.
It appears from the evidence that the Requesters, through the submission, in December 2017, of a substitutive income declaration form 3 for IRS for the year 2016, corrected errors in the declaration initially presented on 14 November 2017, one of which concerned the indication that category A income had been received from company C..., SGPS, S.A. and the respective source tax withholdings had been made, when this had not occurred in that year (2016).
Regarding the probative value of taxpayer declarations, article 75, no. 1 of the General Tax Code provides as follows:
"Article 75
Declaration and other elements of taxpayers
1 - Declarations of taxpayers presented in accordance with the provisions of the law are presumed to be true and made in good faith, as are the data and calculations recorded in their accounting records or books, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements upon which deductibility of expenses depends."
The reason why the AT does not accept the presumption of truthfulness established by law for the Requesters' declarations is not apparent, without even alleging some justifying reason for departure from that presumption, namely pursuant to no. 2 of the cited provision. Contrary to what is asserted by the AT, it does not fall to the Requesters to demonstrate that they did not receive certain income that they did not declare (it is recalled that the initial declaration was validly replaced by another, which does not contain such income), as this would amount to requesting that they prove (negatively) a fact.
It should furthermore be noted that the AT cannot draw legal consequences from the fact that the computer system has registered the Requesters' substitutive declaration as "erroneous". Systems are not the basis for the conformation of legal tax relations, nor are they a source defining tax rights and duties, whose support is the law. Absent any basis for classifying the substitutive declaration as "erroneous," the error lies in the system. On a formally similar question, the recent Decision of the Supreme Administrative Court, of 20 February 2019, in case no. 244/11.0BELRS, provides that: "[t]he application of appropriate hermeneutical rules cannot be prevented by the circumstance that section 4 of annex G1 of form 3 declaration […] does not contemplate in its own fields the indication of the days of acquisition and alienation of the securities, as it follows from the general rules and principles, in particular regarding the hierarchy of legal norms, that it is the «forms» approved for performance of the declarative obligations of taxpayers that must adapt to the law and not the interpretation of laws that must adapt to the «forms»".
On the other hand, all the indications brought to the proceeding unequivocally support the view that the income in question was not received by the Requester husband, being attributable to a declarative error corrected by the submission of the substitutive declaration, in particular:
(i) The Requester having ceased functions as administrator of the alleged paying company in the preceding year (2015);
(ii) No source tax withholdings having been made nor any Form 10 income declaration existing from the paying entity for the period in question;
(iii) The Insolvency Administrator of the company in question having declared that no amount was paid to the Requester husband with respect to the 2016 fiscal year.
In these circumstances, pursuant to the provisions of article 74 of the General Tax Code, it was incumbent upon the AT to bear the burden of proof of the facts constituting the right it invokes regarding the assessment of tax (IRS) on such income, or, in other words, of the tax assumptions, which it did not do, as the proceeding contains no indications that undermine the presumption of truthfulness of the Requesters' declarations.
Therefore, regarding this second question, the Arbitral Tribunal likewise considers it voidable, due to a substantive defect, pursuant to article 163 of the CPA, the order that resulted in the dismissal of the Administrative Complaint and the IRS assessment no. 2017..., on which it was based.
V. DECISION
In light of the foregoing, the arbitrators of this Arbitral Tribunal agree to rule entirely in favor of the request for arbitral decision and, consequently, to annul the order dismissing the Administrative Complaint aforementioned and the tax assessment act for IRS issued under no. 2017..., relating to the year 2016, in the amount of € 221,336.74, which is its subject matter, due to a defect of breach of law by error in the tax assumptions, with the legal consequences thereof.
* * *
The value of € 221,336.74 is fixed as the value of the proceeding, corresponding to the amount of the annulled IRS assessment, in accordance with the provisions of articles 3, no. 2 of the RCPAT, 97-A, no. 1, paragraph a) of the CPPT and 306 of the CPC.
The amount of costs is fixed at € 4,284.00, pursuant to article 22, no. 4 of the RJAT and Table I attached to the RCPAT, payable by the Respondent, in accordance with the provisions of articles 12, no. 2 of the RJAT and 4, no. 4 of the RCPAT.
Notify accordingly.
Lisbon, 6 March 2019
The Arbitrators,
(Dr. Alexandra Coelho Martins – Chair)
(Dr. Henrique Nogueira Nunes)
(Dr. José Joaquim Sampaio e Nora)
Text prepared by computer, pursuant to article 131, no. 5 of the Code of Civil Procedure, applicable by reference to article 29, no. 1, paragraph e) of the RJAT.
The text of this arbitral decision is governed by the orthography prior to the Orthographic Agreement of 1990.
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