Summary
Full Decision
ARBITRAL TAX JURISPRUDENCE
Case No. 42/2018-T
Date of Decision: 2020-01-14
IRC
Amount of Claim: € 732,059.01
Subject Matter: IRC – credit for international double taxation: deduction from the collection of municipal surtax - Reform of the Arbitral Decision (attached to the decision).
*Replaces the Arbitral Decision of 2 November 2018.
ARBITRAL DECISION
- A..., SA., NIPC..., with registered office at Av. ... no. ..., ...-..., ..., filed a request for constitution of an arbitral tribunal, pursuant to Article 2, No. 1, paragraph a), and Articles 10 et seq. of Decree-Law No. 10/2011, of 20 January, to assess the legality of part of the supplementary IRC assessment notice No. 2017..., relating to the financial year 2014, embodied in the compensation document No. 2017..., as well as the rejection of the administrative appeal filed against such tax act.
The request was based on the deductibility from the collection of the municipal surtax of a credit for international double taxation, which the Respondent did not accept and which resulted in a supplementary IRC assessment.
By decision of 2 November 2018, the arbitral tribunal decided to find the arbitral claim well-founded regarding the deductibility from the collection of the municipal surtax of the tax credit for international double taxation and to annul the impugned assessment, as well as the decision rejecting the administrative appeal presented against the assessment act.
Dissatisfied with that decision, the Tax Authority brought an action before the Central Administrative Court - South, arguing that in its response and in its submissions, it had raised the dilatory exception of lis pendens and requested the suspension of the arbitral proceedings and invoked that the interpretation according to which the municipal surtax, like the state surtax, forms part of the calculation of the "fraction of IRC" provided for in paragraph b) of No. 1 of Article 91 of the IRC Code, regardless of whether the income is obtained in countries with which Portugal has or has not concluded a Convention to Avoid Double Taxation, violates the principle of equality and tax legality and, as a corollary thereof, the principle of unavailability of tax credits. Concluding that there was an omission of judgment insofar as the arbitral tribunal failed to assess and decide any of these issues.
By decision of 13 December 2019, the Central Administrative Court - South found the action well-founded and declared the arbitral decision null due to having omitted judgment on the aforementioned issues.
Accordingly, it falls to remedy the nullity and reform the decision, which is done in the following terms.
- In its response to the arbitral claim, the Tax Authority argued that the Claimant had requested a binding ruling under Article 68 of the General Tax Law, raising the question of whether, in cases where a company conducts its activity in Portugal and in various other countries through branches and pays the corresponding tax in the State of source of the income, in the calculation of the fraction provided for in paragraph b) of No. 1 of Article 91 of the IRC Code, relating to the tax credit for international legal double taxation, in addition to the principal tax (IRC) and the state surtax, the municipal surtax is also considered, regardless of whether Portugal has concluded a Convention to Avoid Double Taxation (CDT) with the countries where the income was obtained.
In response, a binding ruling was issued, sanctioned by decision of 24 March 2017 of the Deputy Director-General, communicated to the claimant by official letter No. ..., of 28 March following, to the effect that only in cases where income covered by a CDT is involved, the deduction corresponding to the tax credit for international double taxation is effected from the sum resulting from the IRC assessed in accordance with the IRC Code rules and the amount of the municipal surtax assessed pursuant to the respective legislation.
On 24 May 2017, the Claimant filed a special administrative action (Case No. .../17...BEPNF), which is pending before the Administrative Court of First Instance of Penafiel against the said administrative decision dated 24 March 2017, seeking its annulment and "recognition of the Claimant's right to include in the fraction of IRC the municipal surtax, in relation to income obtained in territories with which Portugal has not concluded a Convention to Avoid Double Taxation, for the purposes of paragraph b) of No. 1 of Article 91 of the IRC Code".
In light of the filing of this procedural remedy by the Claimant, the Tax Authority contends that the exception of lis pendens applies to the present arbitral claim, and, should this not be accepted, there is a relationship of prejudicialità between the special administrative action and the arbitral claim that justifies the suspension of the arbitral proceedings, pursuant to Article 272 of the Code of Civil Procedure, until a decision is rendered in the action pending before the state court.
In its action for annulment, the Tax Authority further argues that the interpretation according to which the municipal surtax, like the state surtax, forms part of the calculation of the "fraction of IRC" provided for in paragraph b) of No. 1 of Article 91 of the IRC Code, regardless of whether the income is obtained in countries with which Portugal has or has not concluded a Convention to Avoid Double Taxation, is unconstitutional due to violation of the principles of equality and legality and, as a corollary thereof, the principle of unavailability of tax credits.
To reach this conclusion, it considers that it is not equal nor does it call for equal treatment the situation of a resident taxpayer who has a tax credit for double taxation and who is simultaneously covered by a CDT concluded by Portugal and another Contracting State, and the situation of a resident taxpayer who also has a tax credit for international double taxation on income obtained in another State with which Portugal has not concluded a CDT. On the other hand, it understands that the normative interpretation adopted derogates from paragraph b) of No. 1 of Article 91 of the IRC Code, coming to create an innovative legal rule, in violation of Articles 3, No. 2, 202 and 203 of the Constitution and also Article 266, No. 2, of the Constitution,
compromising the principle of unavailability of tax credits, which is a direct consequence of the principles of tax legality and equality.
It is on these issues that judgment must be rendered.
- The Respondent considers there to be a situation of lis pendens by reason of the case pending before the Administrative Court of First Instance of Penafiel.
It is readily apparent that this is not the case.
It is true that the legal question invoked by the Claimant as the cause of action is the same in both proceedings.
However, the claim formulated in each action is different: in the present case, the Claimant seeks the annulment of the supplementary IRC assessment for the year 2014; in the case pending before the Administrative Court of First Instance of Penafiel, the Claimant seeks a binding clarification of the interpretation to be given to the norm of Article 91, No. 1, paragraph b), of the IRC Code, which, in the event it is granted, can only have application prospectively.
That is, such claims do not overlap given their different period of temporal application.
As is clear, the understanding that may be endorsed by the Administrative Court of First Instance of Penafiel will never have retroactive effects, the force of res judicata formed there will never extend to financial years prior to the date on which the request for binding ruling underlying it was made.
The invoked exception of lis pendens is therefore without merit.
For the same reason, there is no alleged relationship of prejudicialità, since the decision that may be taken by the Administrative Court of First Instance of Penafiel would in no way be capable of conditioning the decision in the present case.
It is manifest that, since IRC is a periodic tax (that is, one whose taxable event is continuous, being divided, in a somewhat artificial manner, into annual periods for taxation purposes), it can happen (it is a common situation) that, with respect to different periods, different interpretations of applicable legal norms be made. But the risk of such "contradictions" is not capable of constituting a situation of prejudicialità, contrary to what the Respondent understands.
The request for suspension of the present proceedings is thus rejected.
- It is further argued that the interpretation according to which the municipal surtax forms part of the calculation of the "fraction of IRC" provided for in paragraph b) of No. 1 of Article 91 of the IRC Code, regardless of whether the income is obtained in countries with which Portugal has or has not concluded a Convention to Avoid Double Taxation, is unconstitutional due to violation of the principles of equality and legality and the principle of unavailability of tax credits.
The principle of tax legality, which stems essentially from Article 103, Nos. 2 and 3, of the Constitution, presupposes the formal requirement of parliamentary legislative reservation in tax matters and the requirement of typicality and determinability of tax law, from which it follows that the discretion of the administration in implementing the essential elements of taxes must be limited, as well as the use of indeterminate concepts.
On the other hand, as a presupposition and criterion of taxation, the general idea of tax equality is associated with the principle of taxable capacity, and aims to ascertain the existence and maintenance of an effective connection between the tax obligation and the economic presupposition that constitutes the object of the tax, so as to ensure an adequate criterion for distribution of taxes, excluding situations of inequality or devoid of rational foundation (see Constitutional Court decisions No. 306/2010 and No. 695/2014).
In this regard, the Constitutional Court has been moving away from a merely negative control of tax equality, coming to adopt the principle of taxable capacity as an adequate criterion for tax distribution; but it does not cease to accept the prohibition of arbitrariness as an adjuvant element in verifying the constitutional validity of fiscal normative solutions, especially when these are dictated by considerations of legislative policy related to the rationalization of the system.
In short, the principle of tax equality can be implemented through different dimensions: a first one is found in the generality of the tax law, in its application to all without exception; a second, in the uniformity of the tax law, in treating equally taxpayers who are in equal situations and differently those who are in different situations, to the extent of the difference, to be assessed by taxable capacity; a last one is found in the prohibition of arbitrariness, in preventing the introduction of discriminations among taxpayers that are devoid of rational foundation.
In the dimension of prohibition of discrimination – which is particularly in focus here – what is required is that there be no differentiation of treatment based on merely subjective categories or by reason of those categories and that, should there be discrimination, the measures of differentiation be materially founded.
In turn, the principle of unavailability of tax credits, set forth in Article 30, No. 2, of the General Tax Law – although it may be understood as forming part of the constitutional order, albeit without express constitutional recognition – is a command directed at the Tax Authority, constituting a consequence of the principle of legality – in the aspect of the Administration's obedience to the law – and of the principle of equality – in the aspect of equal treatment of tax subjects regardless of the weighing of the specific case. What the principle intends to signify is that tax obligations cannot be modified or extinguished by the Administration and that moratoriums or negotiations between the Administration and taxpayers that may favor unequal treatment are not admissible.
Given these general considerations, it is not apparent in what terms the normative interpretation examined is capable of violating any of the aforementioned constitutional principles.
The Tax Authority understands that the interpretation according to which the municipal surtax forms part of the calculation of the "fraction of IRC" provided for in paragraph b) of No. 1 of Article 91 of the IRC Code, regardless of whether the income is obtained in countries with which Portugal has or has not concluded a Convention to Avoid Double Taxation, is unconstitutional due to violation of the principles of equality, in the dimension of prohibition of discrimination, by considering that there is a sufficient material foundation to distinguish between resident taxpayers who are or are not covered by a CDT. But that argument would only serve to justify the exclusion of the municipal surtax from the calculation of the IRC fraction and thus to establish unequal treatment between resident taxpayers, on the assumption that the mere existence of a convention to avoid double taxation would constitute a sufficient foundation to justify the differentiation.
It cannot be concluded, however, that the disregard of this distinctive element generates, by itself, a violation of the principle of equality in the mode of prohibition of discrimination, since – as has been stated – the prohibition of discrimination merely aims to prevent situations of inequality based on illegitimate discriminatory factors, when what is at issue here is not a difference in legal treatment among taxpayers, but the application of equal treatment among taxpayers.
That is, the interpretation adopted by the tribunal does not operate any discrimination among taxpayers, and what would need to be justified, from the perspective of tax equality, would be the inverse solution, whereby taxpayers obtaining income in other States would be covered by a different tax regime depending on whether or not a Convention to Avoid Double Taxation had been concluded with that other State.
On the other hand, the invoked violation of the principle of legality and the principle of unavailability of the tax credit is difficult to comprehend.
Arbitral tribunals are a category of courts expressly recognized in the Constitution (Article 209, No. 2), and, as has been recognized by constitutional jurisprudence, although they are not state organs nor fall within the definition of sovereign bodies, "they cannot therefore fail to be qualified as courts for other constitutional purposes" (decisions No. 230/86, 52/92 and 250/96). And as a category of courts constitutionally recognized, they are subject to the same limits that apply to state courts, their decisions have judicial character, and arbitrators are subject to a status similar to that of judicial officers, with constitutional requirements of independence and impartiality being applicable to them as a way to ensure confidence in arbitral jurisdiction.
In this way, the arbitral tribunal, when defining the applicable law to assess a dispute submitted to it, is exercising its judicial function. And, in that case, in adopting a certain normative interpretation in view of resolving the concrete case, it is not derogating the law or creating new law or overriding the principle of legality, but precisely exercising the judicial competence entrusted to it.
On the other hand, as has been stated, the principle of unavailability of tax credits binds the Tax Authority and not the courts.
If the judicial decision finds the arbitral claim well-founded and annuls the impugned assessment act, the loss of the corresponding tax credit by the Administration is a necessary effect of the judgment, and the arbitral decision binds the Administration and the latter is obligated to restore the situation that would have existed if the tax act had not been performed (Article 24, No. 1, of the Arbitration Regulations), without this representing – as is obvious – any violation of the principle of unavailability of tax credits, but rather a consequence of the judicial decision that resolved the conflict.
There is not, therefore – as becomes evident – any violation of constitutional principles.
-
This addendum forms an integral part of the reasoning of the arbitral decision of 2 November 2018.
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In these terms, the decision is:
a) To find without merit the exception of lis pendens and to reject the request for suspension of proceedings;
b) To find without merit the allegation concerning issues of unconstitutionality;
c) To maintain the decision finding the arbitral claim well-founded regarding the deductibility from the collection of the municipal surtax of the tax credit for international double taxation, and the annulment of the impugned assessment, as well as the annulment of the decision rejecting the administrative appeal filed by the Claimant.
Notify.
Lisbon, 14 January 2020.
The Presiding Arbitrator
Carlos Cadilha
The Arbitrator Member
Rui Duarte Morais
The Arbitrator Member
Manuel Pires
(in dissent as per declaration of vote attached)
DECLARATION OF VOTE
In a matter of substantive nature, I wrote, in the previous declaration of vote to justify my position, apart from other considerations relating to the subject matter, which I also reiterate, "the situations are different and the interpreter cannot assume the position of the judge made treaties".
Consequently, the contrary majority position that led to the decision implies treating unequal situations equally or, in other words, completing the statement of the principle of equality, not treating unequal situations unequally in the measure of that inequality.
(Manuel Pires)
ARBITRAL DECISION
I – Report
- A..., SA., NIPC..., with registered office at Av. ... no...., ...-..., ..., filed a request for constitution of an arbitral tribunal, pursuant to Article 2, No. 1, paragraph a), and Articles 10 et seq. of Decree-Law No. 10/2011, of 20 January, to assess the legality of part of the supplementary IRC assessment notice No. 2017..., relating to the financial year 2014, embodied in the compensation document No. 2017..., as well as the rejection of the administrative appeal filed against such tax act.
The Claimant bases the request on the fact that it is the holder of a credit for international double taxation, which it deducted from the collection of the municipal surtax, which the Respondent (Tax Authority) did not accept, having proceeded with the consequent supplementary assessment.
The Claimant supports such deductibility based on the following arguments: (i) the municipal surtax has the same nature as the state surtax (which the Tax Authority, for this purpose, considers to be a "fraction of IRC"); (ii) the OECD Model Convention serves as an interpretive instrument in international legal relationships constituted by Portugal, even in relation to countries with which Portugal has not concluded a CDT; (iii) the principle of tax non-discrimination prevents the interpretation and application of a national norm that discriminates among member states of the World Trade Organization; (iv) the principle of justice and taxable capacity cannot accept that the same income be taxed twice (in the source country and in the country of residence).
The Claimant further invokes the exception of res judicata, based on the fact that there is another arbitral decision (Case No. 340/2017–T) that assessed the same issue, having decided favorably to (the same) claim of the Claimant.
The Respondent, the Tax Authority, for its part, understands, in summary, that: (i) the IRC and the municipal surtax are distinct taxes and that this autonomy does not allow the inclusion of the collection of the latter in the expression "fraction of IRC" used by Article 91, No. 1, paragraph b), of the IRC Code; (ii) that such deduction should only take place if a CDT is in force, which is not the case; (iii) that the municipal surtax and the state surtax constitute different realities with respect to the IRC, in that the municipal surtax is a tax distinct from the latter insofar as its taxable subject is the municipality, which has a role in shaping certain of its essential elements.
In its submissions, the parties reiterated their previous positions.
- The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority in accordance with the applicable regulations.
Pursuant to paragraph b) of No. 2 of Article 6 of the Arbitration Regulations, in the version introduced by Article 228 of Law No. 66-B/2012, of 31 December, the arbitrators were appointed by the parties, and these appointed the presiding arbitrator.
The collective arbitral tribunal was constituted, in these terms, by the undersigned, who communicated acceptance of the charge within the applicable period.
The parties were duly notified of this appointment and did not express their wish to reject it, in accordance with the combined provisions of Article 11, Nos. 4 and 5, of the Arbitration Regulations and Articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provisions of No. 7 of Article 11 of the Arbitration Regulations, in the version introduced by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 2 May 2018.
The arbitral tribunal was properly constituted and is materially competent, in light of the provisions of Articles 2, No. 1, paragraph a), and 30, No. 1, of Decree-Law No. 10/2011, of 20 January.
The parties have legal personality and capacity, are legitimate parties and are represented (Articles 4 and 10, No. 2, of the same decree-law and 1 of Ordinance No. 112-A/2011, of 22 March).
The proceeding does not suffer from any nullities, and the exception of res judicata was raised.
By arbitral order of 28/06/2018, the meeting referred to in Article 18 of the Arbitration Regulations was dispensed with, due to lack of purpose.
- The parties submitted written submissions, in successive periods, in which they analyzed the facts and reiterated their previous positions.
It falls to assess and decide.
II – Reasoning
Factual Matter
- The factual matter relevant to the decision of the case, accepted as proven, is as follows:
a) The Claimant was subject to an inspection concerning the IRC, following Service Order No. OI 2016....
b) In the Tax Inspection Report, two corrections to taxable profit were proposed, resulting in a total tax payable of € 732,059.01, one relating to the (non-)deduction of a credit for international double taxation and another relating to the (non-)deduction of an extraordinary tax credit for investment.
c) The Claimant voluntarily regularized the tax due by reason of this latter correction.
d) The Claimant filed an administrative appeal against the part of the assessment now impugned, and the rejection was communicated by official letter No. ..., of 9/11/2017.
e) The Claimant is the holder of a credit for international double taxation, resulting from the tax on profits obtained in Angola that are included in the taxable income of its IRC for the financial year in question.
g) Between Portugal and Angola, no CDT was concluded.
h) The issue raised in the present proceedings was assessed and decided in arbitral proceedings Case No. 340/2017–T, in which the Claimant was also the plaintiff, and which involved a supplementary assessment for the financial year 2013.
The facts accepted as proven are documented and there is agreement between the parties on them.
No facts relevant to the proper decision of the case were accepted as not proven.
- Exception of Res Judicata
The Claimant begins by raising the exception of material res judicata resulting from the arbitral decision rendered in Case No. 340/2017-T, which concerned a supplementary assessment for the year 2013, involving the same parties and the same legal issues.
It must first be stated that the effect of material res judicata that the Claimant seeks to obtain is not characterized as an exception. In fact, the effects of material res judicata may project themselves into a subsequent procedural relationship in two ways: either through the invocation of the force of res judicata, which binds the court to apply the definition of the law that has already become final with respect to a same issue that arises again in another action; or through the invocation of a dilatory exception, which prevents the court from pronouncing itself in another proceeding on the merit issue already previously decided, and which will lead to the dismissal of the action (Article 577, paragraph i), of the Code of Civil Procedure). In the first case, the court merely adopts the content of the previous decision regarding the legal aspect that is covered by res judicata; in the second case, where there is total identity of the object of the proceeding with respect to another previously decided (because the same claim is at issue), the court does not have to issue any judgment and declares the action dismissed.
In the present case, the Claimant will not seek to obtain the negative procedural effect of inadmissibility of assessment of the case in a second action (which would correspond to the exception of res judicata), but rather the positive effect of the authority of res judicata, serving to guarantee the immutability of a previous decision that has become final. It is not a question of the prohibition of repetition, which the law prevents through the dilatory exception, but of the prohibition of contradiction, which is guaranteed not only through the authority of res judicata, but also through the prevalence of the first decision that has become final when the court, in distinct proceedings, comes to issue contradictory decisions on the same claim (Article 625, No. 1, of the Code of Civil Procedure).
Understood in this substantive aspect, res judicata prevents "that in a new proceeding the judge may validly rule differently on the right, situation or concrete legal position defined by a previous decision, and therefore disregard in whole or in part the rights recognized and protected by it" (cf. MANUEL DE ANDRADE, Elementary Notions of Civil Procedure, Coimbra, 1976, p. 317).
As results from Article 619 of the Code of Civil Procedure, the extra-procedural effect of res judicata operates within the limits established by Articles 580 and 581, which define the concept and requirements of res judicata. It is understood that the case is repeated "when an action identical to another is filed with respect to the parties, the claim and the cause of action" (Article 581, No. 1, of the Code of Civil Procedure). These are the elements that permit, in turn, defining the extent of res judicata. The identity of the procedural parties delimits the subjective limits of res judicata, while the objective limits are defined by the identity of the claim and the cause of action, that is, by the object of the proceeding. Res judicata thus covers only the claim of the plaintiff (claim) in light of the fact invoked as its foundation (cause of action).
The Claimant argues that the requirements of Article 581 are met in the case, insofar as the proceeding takes place between the same parties, has the same cause of action and aims at the same legal effect – the non-withholding of tax on payments to non-resident entities associated with economic and image rights – with only the observation that the assessment refers to a different time period.
This is, however, a decisive element for determining the extent of res judicata. In Case No. 340/2017-T, the supplementary assessment for the year 2013 was at issue, whereas the present proceeding concerns the assessment for the year 2014. The proceedings do not aim at the same legal effect for the simple reason that in each of them it is sought to obtain the annulment of a different tax act and, consequently, the substantive annulment effect resulting from the decision that has become final and dealt with one of these acts cannot extend to another act that has not yet been subject to judicial judgment.
It is not overlooked that in the decision of the Superior Administrative Court of 7 December 2011 (Case No. 0419/11), it was decided that there is identity of object if there already exists a final judgment that assessed the same factual and legal foundations on which the claim to annul the impugned act is based. There was, however, a different reality at issue, in that the first action concerned the express act of tax assessment whereas the second action referred to the implied rejection of the request for official revision of the same assessment act previously impugned. The court understood in that circumstance that "since the implied act lacks any substantive content, the claim for annulment aims at the elimination of the assessment act that is the object of the request for revision, precisely the same against which the respondent had already reacted in a previous proceeding".
This is not the situation in the case, given that – as has been seen – both proceedings concern claims for annulment referring to different tax acts.
It is important to bear in mind, as MANUEL DE ANDRADE underscored, that "res judicata is only intended to prevent a practical contradiction, and not already its theoretical or logical collision". It matters little that questions whose elements of law, or even of fact, are identical may be resolved by the courts. There are other procedural institutes that prevent the possible conflict of jurisprudence on the same fundamental issue – such as is the case with recourse for uniformization of jurisprudence. Res judicata, by contrast, "can only prevent decisions that are concretely incompatible", that is, decisions "that cannot both be executed without detriment to one of them" (op. cit., pp. 316-317).
Plainly, this is not the case, so the authority of res judicata cannot be invoked.
6. The Merits of the Challenge
The question is whether the expression "fraction of IRC" contained in paragraph b) of No. 1 of Article 91 of the IRC Code should or should not include the collection of the municipal surtax.
Without prejudice to what has been stated above regarding the exception of res judicata, this Arbitral Tribunal shares, regarding the substantive issue, the understanding that founded the arbitral decision No. 340/2017-T, which is transcribed below:
We believe, first and foremost, that the municipal surtax is an ancillary tax of the IRC (currently, an addendum), applying to the profit of taxpayers subject to this tax. Thus, the text of the law ("fraction" of IRC) is susceptible to encompassing the municipal surtax (by application of the principle accessorium sequitur principale), that is, it does not exclude (negative function of the grammatical element) the interpretation endorsed by the Claimant.
It is important now to examine the evolution of the text of the norm (historical element of interpretation), that is, the legislature's use of the expression "fraction of IRC".
It must be noted first that this expression has remained unchanged in the legal text since the original version of the IRC Code. This assumes particular interpretive significance insofar as, initially, the tax credit for international double taxation was only granted for income from countries with which Portugal had in force a CDT.
That is, in the original version of the norm, the expression "fraction of tax" necessarily and in all cases had to be interpreted in accordance with treaty texts, which, in No. 2 thereof (taxes covered), regardless of the specific formulation used, encompass the municipal surtax.
When, later, the legislature decided that Portugal, as the country of residence, would unilaterally grant (that is, regardless of the existence of a CDT) a tax credit for international double taxation, it did not alter the expression "fraction of IRC". That is, analysis of the evolution of the literal element does not permit, at any time, discerning a legislative intent to distinguish between the implementation (the collections to which the credit may be deducted) of the tax credit for international double taxation in situations where a CDT exists and those in which it does not exist (in which the grant of such credit is unilateral, resulting from internal law).
The teleological element of interpretation also does not point in the direction defended by the Respondent. Portugal's decision to grant, unilaterally (i.e., in the absence of a CDT imposing it), to its residents with income from abroad, a credit by reason of the tax paid in source countries gives expression to the so-called principle of export neutrality: "taxpayers obtaining income in other states should be subject to fiscal treatment similar to that applicable to those whose income is obtained exclusively in the state of residence". What is at issue, therefore, is an equality among residents, which should not be limited by restrictive interpretations of the law, by interpretations that restrict the practical possibility of deducting such a credit.
Finally, one must consider the systematic element of interpretation, which consists of determining what interpretation appears most coherent with the legal system in which the norm is placed, considered as a whole. There is no doubt that the obligations assumed by Portugal, namely in the context of the WTO and, in particular, in the Agreement on the Promotion and Reciprocal Protection of Investments concluded with Angola (the country where, as proven, the Claimant's main foreign permanent establishment is located) – which aim at the elimination of restrictions on free international competition in investment matters – will be more fully met if, on the fiscal plane, differentiation among residents investing abroad is avoided, depending on the country where such investments take place. That is, even if one may understand that such international commitments do not directly bind the tax legislator, the interpreter cannot fail to take them into account, in the name of the unity of the legal system, considered as a whole. The interpretation that assures the coherence of the legal system is, certainly, the one that corresponds to "the most correct legal solution" which is supposed to have been adopted by the legislator (No. 3 of Article 9 of the Civil Code).
Finally, and still within the framework of the rational/teleological element of interpretation, one cannot fail to consider the absurdity of seeking to maintain intact the collection of the municipal surtax in situations in which doing so would lead to international double taxation of the income. We would even say that, rationally, this would be the collection relative to which the deduction corresponding to the credit for international double taxation should be implemented in the first place. In reality, the municipal surtax aims to provide municipal authorities with their own financial resources, obtained through taxes applying to those who conduct profit-making activities in the area of a particular municipality. Thus, going beyond the specific issue being analyzed, it appears to lack reasonable foundation to require payment of such a tax for activities conducted outside the national territory. What, by extension, reinforces our understanding that payment of this levy should be "eliminated" through deduction of credits for international double taxation whenever the collection of IRC, strictly speaking, is not sufficient to absorb them entirely, as happens in the present case.
Thus, in the expression "fraction of IRC" contained in the then paragraph b) of No. 1 of Article 41 (now Article 91) of the IRC Code, the collection of the municipal surtax should be included. Which is to say that the credit for international double taxation may be deducted from the fraction of the collection of such tax arising from income obtained abroad.
- It remains, finally, to consider that it does not preclude characterization as a fraction of IRC, for purposes of deduction corresponding to international legal double taxation, the current classification of the municipal surtax that results from the provisions of Article 18 of the Law of the Financial Regime of Local Authorities. Traditionally, municipal surtaxes could only be levied to "strengthen financial capacity or in the context of the conclusion of financial rebalancing contracts", and were calculated by applying a rate to the collection of IRC, characterizing themselves as revenue tied to specific expenditures and assuming the nature of an extraordinary tax (cf. Law No. 1/87, of 6 January, and Law No. 42/98, of 6 August).
Under the Law No. 2/2007, of 15 January – whose regime, in this aspect, remained in the current Law of the Financial Regime of Local Authorities – the surtax, although continuing to be defined as a tribute subject to discretionary levying, became a mechanism for current financing of municipalities, dividing itself from its specific dedication to certain types of expenditures, although it came to apply not to the collection but to taxable profit.
Faced with the alteration of the legal regime, one may understand that the surtax is not today an addition to the IRC, in that it is not a levy that increases that which has been determined in accordance with the IRC assessment rules. Nevertheless, the surtax continues to apply to the proportion of income generated by the taxpayer in the geographic area of the municipality, maintaining a base of a common objective incidence with the IRC, which merely shifted from collection to taxable profit.
It is true that the surtax retains the nature of a tax autonomous in relation to the IRC in the sense that all its essential elements are either set forth in the law (active tax subject, rate range) or depend on the initiative of the local authority (discretion of taxation, definition of the concretely applicable rates), falling within the scope of the tax powers of local authorities that are constitutionally recognized (Article 238, No. 4).
But that autonomy, both at the normative level and at the level of the concrete tax relationship, already existed when the surtax was considered an addition to the IRC. Furthermore, the surtax continues to be characterized as an ancillary tax, in that it is only due when the principal tax obligation is, in concrete terms, exigible, a relationship of dependence between the municipal and state tax remaining in that same measure.
The significant difference resulting from the most recent laws on local finances is that the surtax now applies not to collection (that is, to the already assessed IRC tax), but to taxable profit (that is, to the income constituting the basis of the tax). But that circumstance does not remove its nature as an ancillary tax, and one may only say, from the fiscal-financial perspective – as has also been underscored by legal doctrine – that the levy lost its nature as an addition to be converted into an addendum to the IRC (RUI DUARTE MORAIS, "Past, Present and Future of the Surtax", Taxation, No. 38, pp. 110-111; SÉRGIO VASQUES, "The system of local taxation and the surtax", Taxation, No. 38, p. 121; JÓNATAS MACHADO/PAULO NOGUEIRA DA COSTA, "Municipal surtaxes and the concept of permanent establishment", Studies in Honor of Prof. Dr. J. L. Saldanha Sanches, Coimbra, 2011, p. 854).
It cannot therefore be concluded – contrary to what is asserted by the Tax Authority – that deductions from the assessed amount of IRC, in accordance with the provisions of Article 90, No. 2, of the IRC Code, which includes the credit for international double taxation, must be reported to the collection of IRC with exclusion of the addendum that derives from the municipal surtax. Such an interpretation cannot be based, as we have seen, on the supposed autonomy of the municipal surtax, since this relates to certain structuring elements of the tax but does not strip it of its character as an ancillary tax, which continues to be governed by the rules specific to the IRC regarding the basis of subjective and objective incidence, the determination of taxable income and assessment. And there is no need even to distinguish, in this respect, between the municipal surtax and the state surtax, since both share the common characteristic of taxes that increase the principal tax, and no distinctive criterion can be established regarding the scope of application of Article 91, No. 1, paragraph b), of the IRC Code solely on the basis of the ownership of tax revenue.
Moreover, the normative interpretation that permits including in the term "fraction of IRC" the collection of the municipal surtax is not of a nature to compromise the guarantee of local autonomy in the dimension of financial and patrimonial autonomy of municipalities. In this regard, local autonomy presupposes that local authorities have sufficient financial means for the performance of their attributions and competencies and enjoy autonomy in managing those means, and is based essentially on a principle of financial equilibrium between the State and local authorities ensuring fair distribution of public resources. However, the deduction of a credit for international double taxation from the collection of the municipal surtax, to the point that this is understood as constituting a fraction of IRC, in no way interferes with the financial autonomy of municipalities. The legislative choice is linked to considerations of fiscal policy that pertain exclusively to a state tax and which, while potentially determining a reduction in the amount of tax payable by the taxpayer, does not affect nor restrict the revenue that is legally attributed to local authorities nor limits the powers of management that fall within autonomous power.
Knowledge Rendered Moot
- Given the solution reached at the level of infra-constitutional law, knowledge of the constitutional issues raised by the Claimant is rendered moot.
III – Decision
The decision is in the following terms:
d) To find the arbitral claim well-founded regarding the deductibility from the collection of the municipal surtax of the tax credit for international double taxation, being to that extent the impugned assessment annulled, with all further legal consequences.
e) Consequently, to annul the decision rejecting the administrative appeal filed by the claimant.
Amount: € 732,059.01
Lisbon, 2 November 2018
The Presiding Arbitrator
Carlos Cadilha
The Arbitrator Member
Rui Duarte Morais
The Arbitrator Member (in dissent, as per attached declaration)
Manuel Pires
DECLARATION OF VOTE
The consideration of the municipal surtax as an amount to be included in the tax credit as a method to eliminate/prevent international double taxation established in a unilateral norm cannot merit agreement. Otherwise, the character of that surtax would not be taken into account. If the latter were included in the "fraction of IRC" (literal element), it could not exist without the latter, which may not occur, given their respective governing rules (taxation on taxable profit vs. deductions from collection and unlimited progressive loss carry-forward, unlimited carry-forward that only ceased in 2012, for reasons that were purely tax-driven). Also the values on which these taxes apply may currently be diverse, in the case of deduction of such losses. The surtax, if it is an ancillary tax, is not a pure ancillary, since it does not necessarily follow the IRC in full. Additionally – and this is not the least important – these taxes are further different both with respect to the active tax subject, differently, thus, from the state surtax, and with respect to objective aspects, because the municipal surtax applies and is shaped in its essential elements by decision of the local entity, confirming, at most, its impure nature as ancillary. Therefore, application of the old maxim "the accessory follows the principal" is not possible. This configuration results from local power, from financial autonomy enshrined constitutionally, thus excluding heteronomy [Articles 6 No. 1, 238 and 254 of the Constitution; see further as a limitation on heteronomy, e.g., Articles 15, paragraph e) and 16 Nos. 4 and 6 of Law No. 73/2013, of 3 September, not modified by Law No. 51/2018, of 16 August]. And the circumstance that, from the conclusion of conventions relating to double taxation, the municipal surtax is encompassed in the "fraction of IRC" (historical element) derives from such surtax being explicitly included together with the IRC in the framework of conventions. To extrapolate the same solution to unilateral norms for the purpose of eliminating double taxation gives rise to a petitio principii. It further implies this orientation results in disregarding that convention solutions result from advantages obtained and concessions accepted, that is, from the balance achieved, which makes their application in different contexts, that is, to the said unilateral norms, unacceptable, the law in action rejects it, would be an application mutatis mutandis of the most favored nation clause, totally to be rejected, there being, therefore, no place for any discrimination (the situations are different and the interpreter cannot assume the position of the judge-made treaties). For in the area of double taxation, as, moreover, in many frameworks, there are own visions that must be grasped, that cannot be disregarded, since they are imperative. Furthermore, there exists no principle that rejects double taxation. Likewise, the taxation in the capital-exporting country the equality of taxation, in this country, of income generated externally and internally (CEN) – (teleological element) does not determine the inclusion of the municipal surtax in the "fraction of IRC", since such equality has the extent that that country establishes (for example, for the CEN policy to be adopted in full, one would need to adopt, to eliminate double taxation, the method of imputation or full credit, which never occurs, in Portugal and in other countries, since one adopts the method of ordinary imputation or ordinary credit, according to which not the entirety of the foreign tax is deducted, when it is higher than the domestic tax, thus not achieving equality of tax between external and internal income in the capital-exporting State). Similarly, taxation in the municipal surtax is justified by virtue of the connection element of residence, paired with the connection element of source, given, and it is merely one of the many foundations, the location of residence being a factor for income generation.
Finally, in the domains of international tax law and fiscal international law, there does not exist the degree of strict or necessary interconnection with other types of legal discipline, and therefore the unity of the legal system (systematic element) is not at issue. Thus, e.g., investment protection does not necessarily entail the resolution of double taxation, as has been the case, given they are different things. Possible better solutions de iure condendo do not permit the interpreter to substitute itself for the legislator.
(Manuel Pires)
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