Summary
Full Decision
ARBITRAL DECISION (please consult full version in PDF)
REPORT
A..., resident at Street..., no...., ..., ...-... Porto, tax identification number ..., hereinafter designated as the "Claimant", hereby, pursuant to the provisions of article 10 of Decree-Law no. 10/2011 of 20 January (hereinafter "RJAT"), requests the constitution of an arbitral tribunal and submits a request for arbitral pronouncement, in which the Tax and Customs Authority (hereinafter designated as "Respondent" or "AT") is the Respondent, and which has as its object the dismissal order of the request for official review of the assessment of Personal Income Tax (hereinafter "IRS") for the year 2010, delivered by the Director of International Relations Services, notified on 16-04-2018, with a view to its annulment, as it appears to be tainted with illegality, and the correction of the IRS return for the year 2010 and restitution of the excess tax paid.
The request for constitution of an arbitral tribunal was presented by the Claimant on 03-09-2018, having been accepted by the Honorable President of CAAD and notified to the Respondent on 04-09-2018.
The Claimant chose not to appoint an arbitrator, and, in accordance with article 6, no. 1 and article 11, no. 1 of the RJAT, the Deontological Council appointed as arbitrator of the sole arbitral tribunal the undersigned, who accepted the assignment within the legally stipulated period.
The parties were duly notified of the appointment on 24 September 2018, having manifested no wish to refuse it.
In accordance with the provisions of article 11, no. 1, subsection c) of the RJAT, the sole arbitral tribunal was constituted on 14-11-2018.
The Claimant was notified on that same date of the order delivered by the arbitral tribunal, inviting him to remedy the lack of signature of the request for arbitral pronouncement by a lawyer, mandatory under article 6 of the CPPT, pursuant to article 29 of the RJAT.
On 4-12-2018, the Claimant presented a motion to attach to the proceedings the request for arbitral pronouncement signed by a lawyer.
On the same date, the Respondent was notified of the order delivered by the arbitral tribunal, under the provisions of article 17, no. 1 of the RJAT, to submit a response, request the production of additional evidence and remit the administrative file. In the same period, pursuant to the principle of adversarial proceedings, the respondent was notified to pronounce itself on the attachment by the Claimant of the request for arbitral pronouncement signed by a lawyer.
On 21-01-2019, the Respondent submitted its response, in which it sought dismissal of the action on the basis of the following exceptions: i) error in the form of procedure; ii) expiration of the right of action; and iii) lack of material jurisdiction of the arbitral tribunal. The Respondent further sustained the legality of the assessment, concluding by arguing for the total lack of merit of the request with the consequent dismissal thereof.
By order dated 21-01-2019, the Arbitral Tribunal, in exercise of the principles of autonomy in the conduct of proceedings, celerity, simplification and procedural informality (articles 16, 19, no. 2, and 29, no. 2, of the RJAT), dispensed with the holding of the meeting provided for in article 18 of the RJAT and determined that proceedings continue with optional written submissions. For this purpose, it granted a period of 10 days (successive period), with the Claimant's period commencing upon notification of the order and the Respondent's period commencing upon notification of the submission of the Claimant's submissions or upon the expiry of the 10-day period. The Arbitral Tribunal indicated that the arbitral decision would be rendered by 13 May 2019, warning the Claimant that it should proceed with payment of the subsequent arbitral fee in accordance with article 4, no. 3 of the Costs Regulations in Arbitration Proceedings, and communicate its payment to CAAD.
On 22-01-2019, the Respondent submitted the administrative file to the proceedings.
The Claimant presented written submissions on 05-02-2019, maintaining the arguments set out in the request for arbitral pronouncement.
The Respondent presented written submissions on 18-02-2019, in which it declared that the Claimant's submissions did not have the effect of contradicting the position assumed by the Tax and Customs Authority, either in the course of the procedure or in the Response, and therefore it remitted and deemed fully reproduced what was stated in the Response and petitioned therein.
PROCEDURAL SOUNDNESS
This Arbitral Tribunal considers itself regularly constituted to adjudicate the dispute (article 5, no. 1 and no. 2, article 6, no. 1 and article 11 of the RJAT).
The parties have legal personality and capacity, are legitimized and are legally represented (articles 3, 6 and 15 of the Code of Tax Procedure and Process, pursuant to article 29, no. 1, subsection a) of the RJAT).
The Respondent raised preliminary issues – lack of material jurisdiction of the arbitral tribunal to rule on the request for annulment of the act dismissing the request for official review of the IRS assessment act for 2010, error in the form of procedure and timeliness of the request for arbitral pronouncement – which shall be analyzed in the decision section, after establishing the facts held as proven.
STATEMENT OF FACTS
Facts Held as Proven
With relevance for the resolution of the dispute, the following facts are held as proven.
The Claimant is a natural person, tax resident in Portugal in the year 2010.
The Claimant entered into an employment contract with B..., an entity with registered office in ..., United Kingdom, with a start date of 29-08-2010.
The Claimant earned income from dependent work paid by that entity, in the amount of £1,322,490, as evidenced by the income declaration submitted in the United Kingdom on 06-04-2011, for the tax period between 06-04-2010 to 05-04-2011.
In that declaration, the date of arrival in the United Kingdom was indicated in field 6 as C... on 29-08-2010:
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In Portugal, the Claimant submitted his IRS income declaration (Model 3), for the year 2010, which was submitted on 31-05-2011 and to which number ... was assigned.
In Annex J of said income declaration, income from dependent work obtained abroad – United Kingdom and South Africa – was indicated in field 401, which amounted to €1,547,550.42, and the tax paid abroad on such income amounted to €617,438.46:
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The submission of the declaration resulted in the issuance of IRS assessment no. 2011..., dated 14-07-2011, with an amount payable of €236,758.60, reassessed on 23-09-2011, with an amount payable of €237,054.10.
Following the submission of Model 3 declaration for 2010, the Claimant was notified, by Office Letter no. ... from the Finance Directorate of Porto – Division of Income and Expenditure Tax Assessment, dated 03-04-2013, to submit additional documents:
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The Claimant requested an extension of the deadline for submission of the declaration referred to in subsection a) above, by registered letter sent on 19-04-2013, and such extension was granted, as evidenced by Office Letter no. ... of 08-05-2013, from the Finance Directorate of Porto.
On 25-06-2013, the Claimant remitted to the Finance Directorate of Porto the declaration issued by the employer entity in the United Kingdom.
On 26-03-2014, the Finance Directorate of Porto notified the Claimant through Office Letter no...., of the proposal for corrections to the IRS assessment for 2010 and the period for exercising the right to be heard, based on Information no. .../2014, with order from the Director of the International Relations Services Directorate ("DSRI"), dated 27-02-2014:
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On 22-04-2014, the Claimant exercised his right to be heard, by email sent to the Finance Directorate of Porto, attaching to the request the "Tax Credit Certificate" issued by "D...", further requesting an extension of the deadline for submission of the tax document relating to the United Kingdom.
On 30-09-2014, the Claimant submitted a new request to the Finance Directorate of Porto, requesting a further extension of the deadline to submit the tax documents requested, particularly those relating to the United Kingdom, which, despite having been requested, had not been made available by the tax authority of the source of income until that date.
Upon obtaining the tax document issued by the Tax Authority – "Tax return 2011" (Tax year 6 April 2010 to 5 April 2011) – relating to income earned in the United Kingdom, it was remitted by email to the Finance Directorate of Porto on 05-10-2014.
By office letter no. ... of 08-01-2015 from the Finance Directorate of Porto – Division of Income and Expenditure Tax Assessment, the Claimant was notified that the values declared in annex J of the 2010 Model 3 Declaration would be correct, and therefore the procedure would be filed:
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The content of office letter no. ... of 27-10-2014 is transcribed below:
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On 31-05-2015, the Claimant submitted a request for official review of the IRS assessment for 2010, under the provisions of article 78 of the LGT, in which he invoked the following grounds:
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Following analysis of the request for official review, the Claimant was notified of the draft decision dismissing the request for official review, to exercise the right to prior hearing, in accordance with article 60 of the LGT, by order from the Director of DSRI, dated 24-01-2018.
The Claimant did not exercise his right to be heard.
By office letter no...., dated 13-04-2018, the Claimant was notified on 16-04-2018 of the order from the Director of Services of DSRI dated 02-04-2018:
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On 03-09-2018, the Claimant submitted the present request for constitution of the arbitral tribunal to CAAD.
Facts Not Proven
There are no facts relevant to the decision that have not been held as proven.
Reasoning for the Facts Held as Proven and Not Proven
The Tribunal's conviction regarding the facts held as proven was based on examination of the documents submitted to the proceedings by the Claimant and of the documents contained in the administrative file submitted by the Respondent, as well as the acknowledgment of facts made by the parties, as specified in each of the points above.
ISSUES TO BE DECIDED
In the context of the dispute concerning the claim for a declaration of illegality of the IRS assessment no. 2011..., dated 14-07-2011, in the total amount of €237,054.10, reassessed on 23-09-2011, in the total amount of €236,758.60, in the face of the allegations contained in the request for arbitral pronouncement ("PPA") and the exceptions raised by the Respondent in its Response, the issues submitted for decision by the Arbitral Tribunal, defined by the facts alleged and by the claims procedurally formulated that require specific decision, including matters relating to procedural prerequisites raised by the parties or to be known of official motion, are as follows:
a) lack of material jurisdiction of the Arbitral Tribunal;
b) error in the form of procedure;
c) timeliness of the request for official review and expiration of the right of action;
d) illegality of the IRS assessment due to income from dependent work earned in the period 1 January to 5 April 2011 having been considered and taxed in 2010.
LEGAL REASONING
In accordance with the provisions of article 608 of the CPC, pursuant to article 29 of the RJAT, "(…) the court shall first decide on procedural issues that may lead to dismissal of the action, according to the order required by their logical priority. (…)", and "(…) the judge must decide all issues that the parties have submitted for its consideration, except those whose decision is precluded by the solution given to other matters; it may not concern itself except with issues raised by the parties, save if the law permits or requires it to know of other matters of official motion (…)".
In these terms, it becomes necessary to evaluate and decide previously, in the present arbitral proceedings, the exceptions raised by the Respondent.
On Lack of Material Jurisdiction of the Arbitral Tribunal and Error in Form of Procedure
Lack of material jurisdiction of the Tribunal to hear the request constitutes a dilatory exception that prevents the continuation of proceedings, leading to dismissal of the action regarding the claims in question, in accordance with article 576, no. 2 and article 577, subsection a) of the Code of Civil Procedure (CPC), applicable pursuant to article 29, subsection a) of the RJAT.
The Respondent invokes the lack of material jurisdiction of CAAD to hear the request for annulment of the IRS assessment for 2010 of the Claimant, based on the following arguments:
"In sum, it should therefore be understood that in light of the aforementioned constitutional and legal principles, the interpretation of the provisions of Ordinance no. 112-A/2011 should be configured in a literal sense, as it is not negligible that the legislator in subsection a) of article 2 of Ordinance no. 112-A/2011, by completing the expression 'which have not been preceded by recourse to the administrative remedy' with the reference 'in accordance with articles 131 to 133 of the Code of Tax Procedure and Process', intentionally delimited the binding of the AT to such situations, in light of the reasons set forth.
Therefore, this latter part of the provision cannot, under penalty of manifest illegality/unconstitutionality, be disregarded, interpreting the rule as if the specific reference to a specific administrative procedure did not exist, with the interpreting judge erasing the distinction provided by the legislator."
For his part, the Claimant understands that the Respondent's argument has no merit, in light of the decision contained in point 4.29 of Case no. 212/2016-T, of 16-11-2017 following its points 4.3 to 4.28:
"Thus, it should be concluded that article 2, subsection a) of Ordinance no. 112-A/2011 (duly interpreted based on the law interpretation criteria provided in article 9 of the Civil Code) and with the application of tax substantive and procedural rules (by virtue of the provisions of article 11, no. 1, of the LGT), enables the submission of requests for arbitral pronouncement regarding assessment acts that have been preceded by a request for official review (without such limitations being applicable to them as referred to above in point 4.12.) and consequently, the exception of lack of material jurisdiction of the Arbitral Tribunal raised by the Respondent does not hold." (emphasis ours).
The jurisdiction of arbitral tribunals operating in CAAD is delimited by the provisions of article 2, no. 1, subsection a), comprising "(…) the examination of the following claims: a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;(…)".
Now, as stated by Carla Costa Trindade, "to properly define the tax acts that are arbitrable"[1], it is necessary to determine the concepts of assessment and self-assessment: "(…) the act of assessment is the administrative act through which, as a result of the assessment operation, the amount of tax due is determined, it is now accepted that the act of self-assessment is the operation through which the taxpayer himself determines, based on the declaration, the amount of tax due, with no intervention whatsoever by the Tax Administration." [2]
Concluding that, "(…) in IRS it is the responsibility of the Tax Administration to assess the tax in accordance with the provisions of article 75 of the IRS Code", adding "Common examples of taxes whose assessment is carried out through self-assessment include corporate income tax (IRC) and VAT (IVA). In both cases the legislator shifted the competence of the assessment obligation to the taxpayer (…)"[3].
That is, "IRS is a tax subject to 'assessment by the authority', with the DGCI being responsible for assessment (article 75)" [4].
Establishing article 4 of the RJAT that "(…) the binding of the tax administration to the jurisdiction of the tribunals constituted under the terms of this law depends on an order of the members of the Government responsible for the areas of finance and justice, (…)".
For its part, article 2 of Ordinance no. 112-A/2011, of 22 March, establishes that:
"The services and organisms referred to in the preceding article bind themselves to the jurisdiction of the arbitral tribunals operating in CAAD that have as their object the examination of claims relating to taxes whose administration is entrusted to them referred to in no. 1 of article 2 of Decree-Law no. 10/2011, of 20 January, with the exception of the following:
a) Claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative remedy in accordance with articles 131 to 133 of the Code of Tax Procedure and Process;(…)".
Thus, expressly excluded from the scope of the binding of the Tax Administration to the jurisdiction of arbitral tribunals operating in CAAD are "claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative remedy in accordance with articles 131 to 133 of the Code of Tax Procedure and Process".
No. 1 of article 131 provides that, "In the event of error in self-assessment, the challenge shall necessarily be preceded by a gracious appeal to the head of the regional peripheral organ of the tax administration, within 2 years of the submission of the declaration".
Therefore, being an act of IRS assessment in the strict sense, the provisions of article 131 of the CPPT would not apply, and the Arbitral Tribunal would be competent to examine the legality of the assessment, under the terms of the above-cited provisions of the RJAT and the binding ordinance.
However, in the case at hand, the Claimant requests examination of the legality of the act dismissing the request for official review of the IRS assessment for 2010, that is, it concerns the examination of a second or third-degree act.
The examination of second-degree acts[5] – such as decisions dismissing requests for official review – shall still be framed within the scope of competence defined in article 2, no. 1, subsection a) of the RJAT, relating to the "declaration of illegality of acts of tax assessment", when these have as their object the examination of the legality of the tax act[6].
A doctrine that has been followed by the arbitral tribunals operating in CAAD. Indeed, arbitral tribunals have been deciding in this manner. See, by way of example, the arbitral decision in case no. 346/2017-T: "Acts that decide gracious appeals, hierarchical appeals or requests for review of a tax act constitute second and third-degree acts insofar as they involve the examination of the legality of first-degree acts, that is, assessment acts, and as such, it is understood that examination of those acts falls within the scope of competence of arbitral tribunals." [7]
However, as that arbitral decision clarifies, "Only in cases where the second or third-degree act examined only and solely a preliminary issue whose resolution prevented examination of the legality of the primary act – such as, for example, timeliness, lack of standing or lack of jurisdiction – would be outside the scope of material competence of arbitral tribunals operating with CAAD. This would not be the case if the AT had refused to examine the request for official review on the grounds of any preliminary issue that prevented knowledge of the legality of the tax act, as in that case the tax act would have to be challenged by means of a special administrative action and consequently would fall outside the sphere of jurisdiction of the arbitral tribunal."[8]
Thus, to conclude on the jurisdiction of the Arbitral Tribunal, it will be necessary to determine the content of the challenged act in order to verify whether it involves examination of the legality of an assessment act.
According to the understanding promoted by the arbitral tribunals operating in CAAD, "For this purpose, as results from the expression "examination" used in article 97, no. 1, subsection d) of the CPPT, it is sufficient that, in the act in question, the "legality of the assessment act" was evaluated or examined, even if that examination is not the basis for the administrative decision (see, in this sense, the arbitral award of 06/12/2013, delivered in case no. 117/2013-T). This is the understanding, consolidated in the jurisprudence of the Arbitral Tribunals operating within the scope of CAAD (see awards nos. 148/2014-T, 236/2013-T and 244/2013-T, among others). Also the jurisprudence of the Supreme Administrative Court has been pronouncing itself in the same sense, see awards of 14-05-2015 (01958/13), 18-06-2014 (01752/13) and 28-05-2014 (Case 01263/13), among many others.".[9]
Now, in the case under examination, the request for official review was dismissed by order from the Director of Services, of 02-04-2018, delivered in the following terms: "I agree. I dismiss the present request for official review in the terms and with the grounds proposed. The claimant shall be notified."
For its part, the draft decision on the request for official review, notified to the Claimant through Office Letter no. ... of 24-01-2018, was delivered in the following terms: "I confirm the proposal for dismissal, as informed, and the claimant is to be notified for purposes of exercising his right to prior hearing as referred to in article 60 of the General Tax Law."
It results from the content of Information no. 6620 from the International Relations Services Directorate that the Respondent does not limit itself to examining "only and solely" the preliminary issue of the untimeliness of the submission of the request.
Indeed, regarding the verification of the prerequisites for review of the tax act on grounds of grave and notorious injustice and duplicate collection, the Respondent makes considerations about the legality of the sub judice assessment, by stating that:
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"(…) examining the prerequisite that may justify an injustice in the assessment (income for 2010 higher than actually earned) (…) it appears that it originated from the behavior of the taxpayer. It was the taxpayer who voluntarily declared having earned abroad in the year 2010 a determined income, and later in 2015 came to attempt to correct the income declared" (Paragraphs 13 and 14 of Information no. 6629, contained in the administrative file);
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"Whereby it is inferred that the same [duplicate collection] only occurs when there is repetition in the application of the same tax rule to the same tax fact and at the same time (…) this reality not being present here as there are various legal systems involved(…)" (Paragraph 17 of Information no. 6629, contained in the administrative file).
From which it can be derived that we are dealing with considerations about the specific situation of the assessment, which underlie a value judgment that go beyond mere examination of the timeliness of the request for official review.
From all the above it results that we are dealing with a tax administrative act that, by examining or discussing the legality of the assessment act, may be challengeable through judicial challenge, in the terms provided for in article 97, no. 1, subsection a) of the CPPT and article 2 of the RJAT, falling within the scope of material competence of Arbitral Tribunals.
Thus, this Arbitral Tribunal has material jurisdiction to examine and decide the request subject matter of the sub judice dispute, under the terms of articles 2, no. 1, subsection a) and 4, no. 1, both of the RJAT and articles 1 and 2, subsection a), of Ordinance no. 112-A/2011, of 22-03-2011, with the dilatory exception preventing knowledge of the merits of the case, raised by the Respondent, being without merit.
On Error in Form of Procedure
The Respondent also raises the issue of error in the form of procedure, as the present request would not permit examination of the legality of the assessment act and should have been filed as a special administrative action.
However, such issue does not arise in the case of arbitral proceedings operating in CAAD, insofar as there is only one form of procedure[10].
If the proper form of procedure to examine the legality of the act dismissing the request for official review were the special administrative action, provided for in article 97, no. 2 of the CPPT, one would be dealing with a situation of lack of material jurisdiction of this Arbitral Tribunal and not with error in the form of procedure.
Thus, the preliminary issue of error in the form of procedure raised by the Respondent does not hold.
On Timeliness of Official Review Procedure and Consequent Expiration of the Right of Action
Accepting, thus, the jurisdiction of the Arbitral Tribunal to examine the legality of the request for official review of the IRS assessment act, it will be necessary to determine whether the request for official review in the present proceedings complied with the legal requirements or whether, as alleged by the Respondent, it was filed outside the administrative appeal period, provided for in the first part of article 78, no. 1 of the LGT, making it untimely, which would result in the expiration of the right to file the present action/request for arbitral pronouncement.
Consider the wording of article 78 of the LGT in force at the date of the facts:
"1 - The review of tax acts by the entity that performed them may be carried out at the initiative of the taxpayer, within the administrative appeal period and on the grounds of any illegality, or, at the initiative of the tax administration, within four years of the assessment or at any time if the tax has not yet been paid, on the grounds of error attributable to the services.
2 - Without prejudice to the legal burdens of appeal or challenge by the taxpayer, error is considered attributable to the services, for purposes of the preceding number, in the case of error in self-assessment.[11]
3 - The review of tax acts in accordance with no. 1, regardless of whether it is material or substantive error, requires its respective recognition duly reasoned in accordance with no. 1 of the preceding article.
4 - The senior official of the service may exceptionally authorize, within three years following the year of the tax act, review of the taxable matter determined on grounds of grave or notorious injustice, provided the error is not attributable to negligent conduct of the taxpayer.
5 - For purposes of the preceding number, only ostensible and unequivocal injustice is considered notorious and injustice resulting from manifestly excessive and disproportionate taxation with reality or from which considerable prejudice has resulted to the National Treasury is considered grave.
6 - Review of the tax act on the grounds of duplicate collection may be carried out, whatever the grounds, within four years.
7 - The period for official review of the tax act or taxable matter is interrupted by the taxpayer's request addressed to the competent organ of the tax administration for its realization."
There is, as of the date of the present award, extensive jurisprudence from superior courts and from Arbitral Tribunals operating in CAAD regarding the request for review of a tax act provided for in article 78 of the LGT.
Thus, the request for review of the tax act, under the first part of article 78, no. 1, at the initiative of the taxpayer, shall be presented within the period of administrative appeal.
Already, under the final part of no. 1 of article 78, such request may be submitted within 4 years, even though at the initiative of the taxpayer, provided it is on grounds of "error attributable to the services".
In this sense, see the award of the STA in appeal no. 0407/15 of 04-05-2016: "In truth, it is today settled that the review provided for in art. 78 of the LGT constitutes a power-duty of the AT, which is imposed on it, by virtue of the principles of justice, equality and legality of taxes, which the AT is obliged to observe in its activity (see art. 266, no. 2, of the Constitution of the Portuguese Republic and art. 55 of the LGT), which does not require from taxpayers other than the tax resulting from the terms of the law; and it is also settled jurisprudence that, just as the AT must, at its own initiative, proceed with official review of the tax act (within four years of the assessment, or at any time if the tax has not yet been paid, as results from no. 1 of art. 78 of the LGT), on the grounds of error attributable to the services, the taxpayer may also, within the same periods, request that such duty be fulfilled (See RUI DUARTE MORAIS, Manual of Tax Procedure and Process, Almedina, 2012, 28.5, pages 212 to 214.) (…) On the other hand, it is also today settled jurisprudence that, in light of the dismissal, express or tacit, of the request for official review, even if this is formulated beyond the period of administrative appeal (Whether this period is the two years provided for in art. 132, nos. 3 and 4, of the CPPT, or the period of 15 days provided for in art. 162 of the Code of Administrative Procedure, in the version in force at that date.), but within the temporal limits in which the AT can review the act, the contentious remedy is opened under the terms of art. 95, nos. 1, subsection d), and 2, of the LGT (See, among others, the award of the Tax Disputes Section of the Supreme Administrative Court of 2 July 2014, delivered in case no. 1950/13, published in the Appendix to the Official Gazette of 19 October 2015)(…)"[12][13]
As has been clarified by superior courts and followed by arbitral tribunals with a seat in CAAD, "(…) 'official review' requires that, cumulatively, the following requirements be met: i) the request be formulated within 4 years counted from the act whose review is requested or at any time when the tax is not yet paid; ii) it originates in 'error attributable to the services' and iii) it proceeds from the initiative of the taxpayer or is carried out officially by the AT."[14]
Regarding what constitutes "error attributable to the services", it is jurisprudence of superior courts, namely the Supreme Administrative Court, that: "(…), '[a]lthough the concept of "error attributable to the services" referred to in the 2nd part of no. 1 of 78 of the LGT does not include every "defect" (particularly defects of form or procedure) but only "errors", these encompass error in the factual and legal premises, with such attributability to the services being independent of demonstrating the fault of the officials involved in issuing the act affected by error' (See, for all and with numerous reference to jurisprudence, the award of the Tax Disputes Section of the Supreme Administrative Court of 6 February 2013, delivered in case no. 839/11, published in the Appendix to the Official Gazette of 11 March 2014 (…)"[15]
As Professor Rui Duarte Morais teaches, "When the assessment is carried out by the tax administration, we can state, as a rule, that the deficient application of the law to the specific case – legal error – is to be imputed to the services. (…) However, it must be taken into account that the completion of declarations has implicit in it a certain degree of legal qualification of facts. If, for example, in his IRS declaration, the taxpayer included in the "annex" relating to taxable capital gains a capital gain not subject to taxation, the tax administration (the computer system) will carry out the assessment in accordance with what was declared, calculating an excessive amount of collection. It seems to us that, also for systematic consistency with what happens in self-assessment situations, this error (which is a legal error) should be considered attributable to the services. In the case of self-assessment, the law expressly equates, albeit only for purposes of review, error (of law or fact) committed by the taxpayer with error committed by the services." (Emphasis ours). [16]
Thus, in the case sub judice, it will be necessary to determine whether the error evidenced in the IRS declaration is to be imputed to the services or, as the Respondent argues, whether it is to be imputed to the Claimant.
In IRS matters, the principle of taxpayer declaration prevails[17], which means that it is the taxpayer's responsibility to take the initial impetus in the assessment procedure with the filing of the declaration: "The Portuguese tax system thus consecrates the method of taxpayer declaration in the determination of taxable matter (articles 57 to 61 of the CIRS, 16 of the CIRC and 28 to 40 of the CIVA). (…) Therefore, when the taxpayer's declaration is in accordance with the elements in his accounting records or accounts, these are properly maintained as required by law and there are no errors, inaccuracies or other founded indications that it does not correspond to reality, it is presumed that the declared taxable matter is the actual matter. And, as results from article 38 of the CIRS, the AT may only correct the declarations of taxpayers and proceed with the corresponding additional assessment when it fundamentally considers that it shows a tax lower than what is due"[18] [19]
Indeed, "IRS is a tax subject to 'assessment by the authority', with the DGCI being responsible for assessment (article 75)" [20].
The assessment, in the strict sense, being the tax act par excellence that is the responsibility of the Respondent, with the issuance of the assessment, the AT accepts the qualification and quantification of income contained in the IRS declaration presented by the now Claimant for the fiscal year 2010.
Having made no correction at the time of submission of the declaration, nor having made any correction when additional clarifications were requested from the Claimant, as was its responsibility, the services conformed to the declaration, transforming it into an IRS assessment.
Indeed, it results from the administrative file that, facing the IRS declaration for 2010 submitted and assessed in 2011, the services of the AT would, in 2013, under the provisions of article 128 of the IRS Code, request from the Claimant additional information about the values declared in annex J of the 2010 Model 3 Declaration, that is, about the income earned by the Claimant abroad and its respective taxation in the source state, for purposes of validation of the foreign tax credit for international double taxation.
Having the Claimant provided the information requested by the AT, the procedure would be filed by the services of the AT, on the basis of the following conclusion "(…) I report that after carrying out the calculations for determining income and tax due based on the documents remitted issued by the Tax Authorities of the United Kingdom and South Africa (…) it appears that the values declared in Annex J are correct. Thus, the conclusion of our information no. .../2014 of 2013.02.13 should not be considered."
Thus, in the case sub judice, we are dealing with an error of fact and law evidenced in the declaration presented by the Claimant, but which cannot fail to be considered attributable to the services, for purposes of a request for review of the tax act.
Therefore, concluding that there is an "error attributable to the services", examination thereof will be permitted within a 4-year period counted from the issuance of the IRS assessment.
In this measure, the request for official review having been submitted on 31-05-2015, it is timely with respect to the IRS assessment for 2010, issued on 14-07-2011 and reassessed on 23-09-2011, as the 4-year period with respect to the IRS assessment provided for in the final part of article 78, no. 1 of the LGT had not been exceeded.
Thus, the examination of the verification of the requirements of the request for review under the provisions of no. 4 and no. 6 of article 78 of the LGT, that is, on the grounds of grave or notorious injustice and duplicate collection, is moot.
On the Illegality of the IRS Assessment Act
For its part, the Claimant imputed to the tax act a defect of violation of law, due to erroneous qualification and quantification of income.
Indeed, the Claimant argues that, through oversight, he declared in field 401 of Annex J to his 2010 IRS Model 3 declaration the total amount of income earned in the United Kingdom during the period of 6-04-2010 to 5-04-2011.
It results from the facts held as proven that the Claimant earned income from dependent work in the United Kingdom starting from 29-08-2010, whereby the declaration of income filed in the United Kingdom included income earned from 29-08-2010 to 05-04-2011.
However, in Portugal, "Personal Income Tax (IRS) applies to the annual value of income from the following categories (…)" (no. 1 of article 1 of the IRS Code).
"(…) the fiscal year coincides with the calendar year", in accordance with article 143 of the IRS Code, that is, from 1 January to 31 December of the same year.
In accordance with no. 1 of article 57 of the IRS Code, "[t]axpayers must present, annually, a declaration of official model, relating to the income from the preceding year (…)".
Thus, in accordance with the above-cited rules, as regards the 2010 IRS declaration, the Claimant should have included in Annex J only the income earned in the United Kingdom in the calendar year 2010, that is, during the period between 29-08-2010 and 31-12-2010.
By including in the 2010 IRS Model 3 declaration the totality of income contained in the declaration of income submitted in the United Kingdom, attached to the file, it can be concluded that income was considered in the income declaration for 2010 and taxed income earned in the 2011 period, that is, from 01-01-2011 to 05-04-2011.
By comparing the content of office letters no...., of 26-03-2014 and no...., of 08-01-2015, with the content of the Response presented (see paragraph 94), it results that the Respondent, for purposes of validating the foreign tax credit for international double taxation, understood, "within its discretionary powers", that the documentation presented "constituted sufficient evidence of the income earned and tax paid abroad declared in annex J of the Model 3 declaration for the year 2010".
Now, if the documentation presented was accepted by the Respondent as sufficient evidence of the amount of income earned in the United Kingdom and South Africa, as well as of the foreign tax credit for international double taxation, that same documentation could not fail to be accepted by the Respondent for proving the facts invoked by the Claimant. The Respondent cannot seek to assess the evidence differently depending on whether it concerns the proof of its rights and the proof of the Claimant's rights, which would affront the principles of distribution of the burden of proof provided for in article 74, no. 1 of the LGT.
On the other hand, under the inquisitorial principle provided for in article 58 of the LGT, the Respondent had the "duty (…) to carry out all the necessary diligences for the discovery of truth, even those that aim to prove facts invoked by the interested parties (…)"[21][22]
Thus, faced with doubt regarding the distribution of income earned in the United Kingdom between 2010 and 2011, it would also be incumbent on the Respondent to carry out the necessary diligences for the discovery of truth, namely under the mechanism for exchange of information provided for in article 25 of the Convention to Avoid Double Taxation entered into between Portugal and the United Kingdom.
Add to this that, in accordance with no. 1 of article 100 of the CPPT, applicable pursuant to article 29, subsection c) of the RJAT, "Whenever from the evidence produced results founded doubt about the existence and quantification of the tax fact, the challenged act should be annulled."
Thus, it cannot fail to be concluded that there was an overreporting with respect to income earned by the Claimant in fiscal year 2010, whereby the issued IRS assessment is illegal due to violation of the provisions of articles 1, 57 and 143 of the IRS Code.
A different matter, which will not fall within the jurisdiction of the Arbitral Tribunal, is the quantification of said income that will have been overreported by the Claimant and that relates to the year 2011. This is a matter within the competence of the services of the Respondent, in the context of execution of the arbitral decision, under the provisions of article 100 of the LGT and subsection b) of no. 1 of article 24 of the RJAT.
In light of all the above, the request for declaration of illegality of the Claimant's IRS assessment for the year 2010 is held to be well-founded, on grounds of defect of violation of law, due to error regarding the factual and legal premises.
On Indemnity Interest
With regard to the claim formulated by the Respondent for indemnity interest, consider the provisions of article 43 of the General Tax Law ("LGT"):
"1 - Indemnity interest is due when it is determined, by gracious appeal or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due.
2 - It is also considered to be error attributable to the services in cases in which, although the assessment is carried out based on the taxpayer's declaration, the taxpayer followed, in completing it, the generic orientations of the tax administration, duly published.
3 - Indemnity interest is also due in the following circumstances:
a) When the legal period for official restitution of taxes is not complied with;
b) In case of annulment of the tax act at the initiative of the tax administration, from the 30th day following the decision, without the credit note having been processed;
c) When the review of the tax act at the initiative of the taxpayer takes place more than one year after his request, unless the delay is not attributable to the tax administration.
d) In case of judicial decision with force of res judicata declaring or adjudging the unconstitutionality or illegality of the legislative or regulatory norm on which the assessment of the tax obligation was founded and determining its refund (…)" (emphasis ours).
Indeed, under article 100 of the LGT: "The tax administration is obliged, in case of full or partial success of appeals or administrative remedies, or judicial proceedings in favor of the taxpayer, to immediately and fully restore the situation that would exist if the illegality had not been committed, including the payment of indemnity interest, in accordance with the terms and conditions provided by law."
Article 61 of the CPPT adds:
"(…) 2 - In case of judicial annulment of the tax act, it is incumbent on the entity that executes the judicial decision from which such right results to determine the payment of indemnity interest to which there may be occasion.
3 - Indemnity interest shall be calculated and paid within 90 days counted from the decision recognizing the respective right or from the day following the term of the legal period for official restitution of the tax.
4 - If the decision recognizing the right to indemnity interest is judicial, the payment period is counted from the beginning of the period of its voluntary execution.
5 - Interest is counted from the date of the undue payment of the tax until the date of processing of the respective credit note, into which they are included. (…)"
There arises, thus, the question of whether in the case at hand, faced with the success of the request for arbitral pronouncement, indemnity interest will be due and what its initial and final term will be.
With regard to the problem of indemnity interest in the case of a request for official review of tax acts, see, for all, the Award of the STA in case 0722/2014, whose reasoning we follow: "The situation in the file is framed in no. 3, subsection c) of article 43 of the General Tax Law because the taxpayer, being able to have obtained earlier the annulment of the assessment act practiced on 27/08/2004, did nothing, temporarily disinteresting himself in the recovery of his money, until on 23/11/2007, he presented a request for official review of the tax act. Between 2004 and 2007 there is an extensive period in which the restoration of legality could have been provoked by the taxpayer's initiative which he did not develop, which justifies that the right to indemnity interest should have more limited scope by contrast to the situation in which the taxpayer raises the question of the illegality of the assessment act immediately after the disbursement of the amount in question. The legislator considers that the period of one year is the reasonable period for the Administration to decide the request for review and execute the respective decision, when favorable to the taxpayer, departing from full indemnification of damages from the moment they arose in the taxpayer's patrimonial sphere. (…) The decision appealed from attributed indemnification from the occurrence of the damaging event, whereas in light of the rules of substantive tax law in force such indemnification has no legal basis, at least under the process of challenging the decision dismissing the request for official review of the assessment act. Such has been the repeatedly asserted position of the jurisprudence of the Supreme Administrative Court, in similar situations, which by way of merely exemplary mention includes Award 01041/06 of 15-02-2007, available at www.dgsi.pt, here reiterated. Therefore, it is declared that the indemnity interest to which the appellants are entitled in this case is only due from one year after the review request formulated by them, that is, from 24/11/2008." (emphasis ours).
In the case at hand, with the request for official review being a tax act dated 31-05-2015, indemnity interest will only be due from a period commencing one year following the filing of the said request for review, that is, from 31-05-2016.
Thus, the request for payment of indemnity interest is well-founded, counted from the year following the filing of the request for review until the date of issuance of the respective credit note.
DECISION
Accordingly, this Arbitral Tribunal decides:
To declare without merit the exceptions of lack of material jurisdiction, error in the form of procedure and untimeliness;
To declare well-founded, as proven, the request for arbitral pronouncement insofar as it seeks the annulment of the IRS assessment for the year 2010, on grounds of defect of violation of law, due to error regarding the factual and legal premises;
To declare well-founded, as proven, the request for payment of indemnity interest by the Respondent to the Claimant, from the year following the filing of the request for review until the date of issuance of the respective credit note, in accordance with the provisions of article 43, no. 1, subsection c) of the LGT and article 61 of the CPPT;
To declare the Tax Authority obliged, under the terms of article 100 of the LGT and article 24, no. 1, subsection b) of the RJAT, to restore the situation that would exist if the assessment act declared illegal had not been carried out, adopting the necessary acts and operations for such purpose.
To condemn the Respondent in costs.
VALUE OF CLAIM:
In accordance with the provisions of article 306, no. 2 of the CPC and article 97-A, no. 1, subsection a) of the CPPT, applicable by virtue of article 29, no. 1, subsections a) and b) of the RJAT and article 3, no. 2 of the Costs Regulations in Tax Arbitration Proceedings (RCPTA), the value of the case is set at €39,133.95 (thirty-nine thousand, one hundred thirty-three euros and ninety-five cents).
COSTS
Pursuant to article 12, no. 2 and article 22, no. 4, both of the RJAT, and article 4, no. 4, of the said Costs Regulations in Tax Arbitration Proceedings, the amount of costs is set at €1,836.00, in accordance with Table I of the RCPTA, calculated based on the value of the claim, to be borne by the Respondent.
Let this arbitral decision be notified to the parties and the case be filed.
Lisbon, 29 March 2019
The Sole Arbitrator,
(Vera Figueiredo)
Text prepared by computer, in accordance with article 131, no. 5 of the Code of Civil Procedure, applicable by referral of article 29, no. 1, subsection e) of the RJAT, drafted in accordance with the spelling of the Orthographic Agreement of the Portuguese Language, approved by Resolution of the Assembly of the Republic no. 26/91 and ratified by Decree of the President of the Republic no. 43/91, both of 23 August.
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