CAAD Case 435/2018-T: IRS Assessment Formalities and Constitutionality of Tax Deductions

ARBITRAL DECISION

I. Report

1. Taxpayers A... and B..., married, with tax identification numbers ... and ..., respectively (hereinafter referred to as "Requesters"), residents at ... – Street of ..., no. ..., ...-... ..., filed, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011 of 20 January, i.e., the Legal Framework for Arbitration in Tax Matters ("RJAT"), a request for the establishment of an Arbitral Tribunal in order to have declared illegal the assessment act for Personal Income Tax ("IRS") for the tax year 2017, with the Tax and Customs Authority ("Respondent" or "AT") being named as defendant.

A) Constitution of the Arbitral Tribunal

1. Pursuant to the provisions of subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of the RJAT, the Deontological Council of the Administrative Arbitration Centre ("CAAD") appointed the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the appointment within the applicable period, and notified the parties of this appointment on 21 September 2018.

2. Thus, in accordance with the provision of subparagraph c) of paragraph 1 of article 11 of the RJAT, and through communication from the President of the Deontological Council of CAAD, the Single Arbitral Tribunal was constituted on 14 November 2018.

B) Procedural History

1. In the request for arbitral decision, the Requesters petition for the illegality of the IRS assessment act for 2017, bearing number 2018..., which resulted in a tax refund of Euro 2,613.16.

2. In turn, the AT presented its Response, in which it raises the exception of material incompetence of the Arbitral Tribunal, which prevents the tribunal from ruling on the merits of the case, thereby petitioning dismissal of the action.

3. In addition to the exception of material incompetence raised, the AT further petitions for the dismissal of the request for arbitral decision on the ground that there is no breach of law, requesting that the tax act under analysis, as it violates no legal or constitutional provision, be maintained in the legal order.

4. By order of 9 May 2019, the Single Arbitral Tribunal, under the provision of subparagraph c) of article 16 of the RJAT, decided, without opposition from the parties, that it was not necessary to hold the meeting referred to in article 18 of the RJAT, given the simplicity of the matters at issue, as well as considering that it had at its disposal all the elements necessary to render a clear and impartial decision.

5. It should be noted that the parties produced additional pleadings, in which the Requesters addressed the exceptions raised by the AT, and the Respondent presented an additional piece of evidence, which pleadings this Arbitral Tribunal is fully considering for purposes of its decision.

6. The Arbitral Tribunal was duly constituted, the parties have legal personality and capacity and have full standing (articles 4 and 10, paragraph 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).

7. Prior to ruling on the merits of the case, however, it falls to this Arbitral Tribunal to analyse the exception of material incompetence raised by the Respondent in its Response, which, if sustained, prevents the tribunal from ruling on the case and results in dismissal of the action.

C) Question of the Competence of the Arbitral Tribunal

1. The Requesters petition for the illegality of the IRS assessment no. 2018..., on the basis of three distinct grounds: i) the lack of reasoning of the assessment act, ii) the failure to comply with the essential formality of the Right to Prior Hearing, and iii) the fact that the rules on which the assessment is based conflict with the Constitution of the Portuguese Republic ("CRP"), namely with the principle of equality, in its aspect of ability to contribute.

2. In this context, regarding the latter ground invoked, the Respondent argues that "such claim is not covered in the exhaustive list of claims for which the legislator considered arbitral tribunals to be competent" (point 9 of the Response).

3. Additionally, it argues that the claim formulated by the Requesters constitutes a request to an arbitral tribunal regarding the constitutionality of a rule, aiming at "the pursuit of an end not permitted by law" (article 11 of the Response).

4. It is necessary, at this point, to take a position.

5. The Arbitral Tribunal has competence to review the legality of assessment acts as provided for in subparagraph a) of paragraph 1 of article 2 of the RJAT.

6. In the case at hand, an assessment act is being challenged and the Requester has the right to attribute to it the illegalities he deems fit, even if it is concluded that he is incorrect, and the Arbitral Tribunal is competent to review whether they affect the assessment or not.

7. In this context, there is no incompetence of the Arbitral Tribunal to review any question raised in the Request for Arbitral Decision, and the exception of material incompetence raised by the Respondent does not proceed.

8. Still regarding the competence of this Arbitral Tribunal to review this proceeding, the Respondent argues that there is an inadequacy of the procedural means to the claim, since the challenge of rules on the ground of alleged unconstitutionality would be the exclusive competence of the Learned Administrative Courts.

Now,

1. This Tribunal is of the view that the AT is mistaken regarding the claim formulated by the now Requesters, since what is being petitioned is the illegality of the aforesaid IRS assessment act, and not the illegality of the rules underlying it, as the AT alleges.

2. In this context, this tribunal is of the view that the Requesters raise questions of concrete unconstitutionality and not of abstract unconstitutionality, since their resolution has potential repercussions on the assessment being challenged.

Therefore,

1. This argument raised by the Respondent also does not proceed.

2. With nothing further preventing judgment on the merits, this proceeding is thus in a position to have the final decision rendered on the merits.

II. Question to be Decided

1. The central question to be reviewed and decided regarding the merits of the case, as appears from the procedural pleadings of the parties, is whether the aforementioned IRS assessment suffers from the defects of illegality that the Requesters attribute to it, namely: i) insufficient reasoning of the assessment act, ii) failure to comply with the essential formality of the Right to Prior Hearing, and iii) the fact that the rules on which the assessment is based conflict with the CRP, namely with the principle of equality, in its aspect of ability to contribute.

III. Finding of Facts and its Reasoning

1. Having examined the documentary evidence produced, this tribunal finds as proven, with relevance to the resolution of the case, the following facts:

I. The now Requesters are married, their family unit being composed of two spouses (the Requesters) and three dependents.

II. In fulfilment of the tax obligations to which they are subject, the Requesters proceeded to file, within the legally prescribed period, the Statement of Income (Form 3), in the context of IRS, for the tax period 2017, having chosen joint taxation of income.

III. Following the filing of the aforementioned statement, and based on the elements declared by the Requesters, the IRS assessment act no. 2018..., dated 2 May 2018, was issued, which resulted in a tax refund of Euro 2,613.16.

IV. Dissatisfied with this assessment, the Requesters are now requesting that this Arbitral Tribunal decide that the said IRS assessment act is illegal.

1. The conviction of this tribunal regarding the facts found as proven resulted from the documents attached to the case file and contained in the pleadings and uncontested allegations of the parties, as specified in the points of the finding of facts enumerated above.

2. There is no factual matter relevant to the resolution of the case found to be unproven.

IV. On the Law

A) Legal Framework

1. Given that the legal question to be decided in this proceeding requires the interpretation of the pertinent legal texts, it is important, first of all, to list the rules that comprise the relevant legal framework, as of the date the facts occurred.

2. As a preliminary matter, and given the arguments presented by the now Requesters, it is necessary to examine the normative provisions that concern the formalities to which tax authority acts are subject.

3. In this context, with particular relevance to the concrete case, reference should be made to article 66 of the IRS Code, which addresses the duty to give reasons for assessment acts as follows:

"1 - Acts establishing or amending as provided in article 65 are always notified to taxpayers, with the respective reasoning.

2 - The reasoning must be expressed through a statement, albeit brief, of the factual and legal grounds of the decision, with lack of reasoning being equivalent to the adoption of grounds which, due to obscurity, contradiction or insufficiency, do not specifically clarify its motivation."

1. In turn, as regards the principle of participation, and on the matter relevant to the present case, article 60 of the General Tax Code (LGT) provides as follows:

"1 - Taxpayers' participation in the formation of decisions that concern them may take place, whenever the law does not prescribe otherwise, by any of the following means:

a) Right to prior hearing before assessment;

(…)

2 - Hearing is dispensed with:

a) In the event the assessment is made on the basis of the taxpayer's statement or the decision on the claim, complaint, appeal or petition is favorable to him."

1. With these provisions duly referenced and cited, it falls to this Arbitral Tribunal to refer to the applicable legal framework, in the context of IRS, regarding the assessment act of the now Requesters.

2. In this regard, note the wording of paragraphs 2, 3 and 4 of article 13 of the IRS Code, in which the legislator refers to the taxation of household income for IRS purposes:

"2 - When there is a family unit, the tax is computed individually in relation to each spouse or de facto partner, without prejudice to the provisions relating to dependents, unless the option for joint taxation is exercised.

3 - In the event of choice for joint taxation, the tax is due by the sum of the income of the persons making up the family unit, those to whom its direction falls being considered as taxpayers.

4 - The family unit consists of:

a) Spouses not divorced as to persons and property, or de facto partners, and their respective dependents; (…)."

1. Having appropriately defined these concepts, it falls to the legislator to provide for how the amount of tax to be paid is calculated when spouses choose joint taxation of income, which it does in paragraph 2 of article 59 of the IRS Code as follows:

"2 - In joint taxation:

a) Spouses or de facto partners present a statement containing the total income obtained by all members making up the family unit;

b) Both spouses or de facto partners must exercise the option in the statement of income;

c) The option is valid only for the year in question."

1. Based on this legal basis, and having determined the tax collected, article 78 of the IRS Code lists, in its paragraph 1, which expenses are subject to deduction from the tax, namely those relating to:

"a) Dependents of the family unit and ascendants who live in shared accommodation with the taxpayer;

b) General family expenses;

c) Health expenses and health insurance expenses;

d) Education and training expenses;

e) Charges relating to real property;

f) Amounts relating to alimony;

g) The requirement for an invoice;

h) Charges relating to care homes;

i) Persons with disabilities;

j) International double taxation;

k) Tax benefits."

1. In turn, paragraph 6 of the same article provides that "The deductions referred to in subparagraphs a) to i) and in subparagraph k) of paragraph 1 may only be made:

a) Through identification of the dependents, ascendants, collaterals or beneficiaries to which they relate, made in the statement referred to in paragraph 1 of article 57;

b) In the case of deductions that are not of a fixed amount, the same may only be made if they appear in documents communicated by the issuing parties to the Tax and Customs Authority, with identification of the taxpayer or member of the unit to which they relate through the corresponding tax identification number, which are:

i) Invoice, invoice-receipt or receipt, issued in accordance with the VAT Code or subparagraph a) of paragraph 1 of article 115; or

ii) Another document, when the supplier of goods or provider of services is exempted from that obligation."

1. Still regarding deductions from tax, paragraph 8 of the same article provides that "In family units with three or more dependents in their charge, the limits provided for in the preceding paragraph are increased by 5% for each dependent or civil godchild who is not a subject of the IRS."

2. Keeping this legislative framework in mind, we shall now examine the arguments presented by the Parties.

B) Arguments of the Parties

1. In this request for arbitral decision, the Requesters argue that the IRS assessment they now seek to annul is afflicted with illegality, alleging for this purpose, in summary, three distinct grounds:

i) insufficiency of reasoning of the assessment act,

ii) failure to comply with the essential formality of the Right to Prior Hearing, and,

iii) the fact that the rules on which the assessment is based conflict with the CRP, namely with the principle of equality, in its aspect of ability to contribute.

1. With regard to the first argument presented – insufficiency of reasoning of the assessment act – the Requesters argue that "in the assessment act notified, the grounds that determined its issuance are not explained, with only a set of values being indicated that are imperceptible to a normal recipient and, a fortiori, also to the Requesters" (article 8 of the Request for Arbitral Decision).

2. Supporting their position in this regard, the Requesters also cite extensive doctrine and jurisprudence, both administrative and arbitral, which serves to specify what reasoning should be considered as "sufficient" to comply with the legal obligation to provide reasons for assessment acts that falls on the AT.

3. Concluding, in their analysis, that the assessment act notified to them is afflicted with illegality due to insufficiency of reasoning.

4. Additionally, the Requesters further argue that, not having been notified to exercise the Right to Prior Hearing before the issuance of the IRS assessment, the respective assessment act should be annulled, for non-compliance with an essential legal formality.

5. Subsidiarily, they argue that the IRS assessment act underlying this Request for Arbitral Decision is unconstitutional, due to violation of the principle of equality, in its aspect of ability to contribute, with regard to the calculation of tax deductions.

6. To support their position, the Requesters expound, exhaustively, the legislation applicable to the calculation of IRS for the income of a family choosing joint taxation, as well as the normative provisions relating to tax deductions, which the Requesters believe conflict with the principle of equality present in the Constitution.

7. The main thesis of this argument is that "by disregarding the existence of dependents in the family unit for purposes of calculating the tax, by providing for a "blind" amount of fixed deductions allowed without regard to expenses actually borne by the family unit and, as well, by excessively reducing the amount of tax deductions allowed, the ordinary legislator violated the requirement imposed by the constitutional legislator, violating in particular the principles of ability to contribute and equality." (Article 181 of the Request for Arbitral Decision).

8. In this regard, the Requesters object to the fixed deductions imposed by the IRS Code, arguing that "The assignment of fixed values to tax deductions completely deprives them of their function. And the introduction of the family quotient does not replace them as an element of personalisation of the tax, because only tax deductions take into account the actual expenses of families." (Article 158 of the Request for Arbitral Decision).

9. Further, they claim that "Along with the problem of fixed deductions, reference should also be made to the manifest insufficiency of the tax deduction system of the CIRS, which appears to be unconstitutional." (Article 163 of the Request for Arbitral Decision).

10. On this subject, the Requesters state "Family expenses for the satisfaction of social rights to health, education, housing and social security are treated in very limited terms (…)" (article 165 of the Request for Arbitral Decision), with the respective deductions not taking into account the number of family unit members that give rise to such expenses.

11. Additionally, the Requesters argue that the fact that the deductibility of incurred charges depends on the existence of invoices communicated to the AT by the respective issuer means "for the taxpayer an additional obligation (to request an invoice, in exchange for being able to make that deduction)", a burden that, in the view of the Requesters, does not appear to be compatible with the principle of ability to contribute, limiting the minimal concept of existence to the concept of "minimum invoices."

12. In turn, the Respondent, duly notified to that effect, presented its Response, in which it addressed only the arguments raised by the now Requesters of a formal nature.

13. Indeed, with regard to the alleged defect of insufficiency of reasoning, the Respondent argues that the assessment was entirely made on the basis of the elements declared by the Requesters, not being an additional assessment or an ex officio assessment, nor has there been any process of divergences.

14. In this context, the IRS assessment being processed automatically on the basis of the elements provided by the Requesters, and the AT having made no calculation, determination or alteration of the data provided, "the reasoning is embodied in the statement of A itself, accompanied by the demonstration of the assessment which they attach as doc. 1, as well as that which is available in the individual area of the Tax Authority Portal". (article 26 of the Response).

15. Without conceding, the Respondent further argues that it follows from the Request for Arbitral Decision that the Requesters "perfectly and fully understood the demonstration of the assessment, as well as its factual and legal reasoning." (Article 30 of the Response).

16. With regard to the failure to comply with the essential formality of the Right to Prior Hearing, the Respondent argues that article 60 of the LGT provides for the dispensation of the Right to Hearing in the event the assessment is made on the basis of the taxpayer's statement, which it believes to be the case.

C) Tribunal's Assessment

1. As a preliminary matter, it should be noted that this Arbitral Tribunal will address the questions raised by the now Requesters regarding the legality of the assessment act in the order they were raised in the Request for Arbitral Decision, with the tribunal's jurisdiction over the merits of the reasons invoked for the illegality being precluded in the event one of the grounds of formal illegality of the act is upheld.

2. In this context, it is first necessary to take a position regarding the argument of insufficiency of reasoning of the assessment act.

3. In this regard, it should be noted that, as appears from the facts described above, the contested IRS assessment was entirely made on the basis of the elements declared by the Requesters, in accordance with paragraph 1 of article 57 of the IRS Code.

4. As such, this Arbitral Tribunal finds that the refund amount in the assessment now being contested does not result from an additional assessment or ex officio assessment.

5. Nor has any process of divergences been raised by the AT.

6. In this context, it should be noted that paragraph 1 of article 65 of the IRS Code provides that: "The taxable income for IRS is determined in accordance with the rules established in the preceding sections and with the rules relating to tax benefits to which taxpayers are entitled, on the basis of the annual statement of income submitted within the legally prescribed period and other elements available to the Tax and Customs Authority." (Emphasis ours).

7. In this context, and since, as far as can be ascertained, the AT merely proceeded with the assessment in accordance with the elements declared by the Requesters in their annual statement, it is necessary here to undertake a critical analysis of the content of article 66 of the IRS Code, cited, moreover, by the Respondent, which specifically addresses the notification and reasoning of acts.

8. As cited in the chapter referring to the "Legal Framework" above, the said normative provision of the IRS Code provides that only acts establishing or amending the income declared by taxpayers must always be notified to taxpayers, with the respective reasoning.

That is,

1. Whenever the assessment of the tax is made solely on the basis of the annual statement of income submitted within the legally prescribed period by taxpayers, the AT is not required to provide reasoning for the assessment act.

2. Which, moreover, is understood, given that it is presumed that the taxpayer agrees with the data he himself declared.

Now,

1. In this case, the IRS assessment notified to the Requesters was based only on the elements provided by themselves, with the AT validating the completion of the Statement of Income Form 3 and issuing the corresponding refund note.

As such,

1. There was no act of establishing or amending income that would require reasoning for the notification in question, and the act being contested is not tainted by the defect of insufficiency of reasoning.

2. It should further be noted that, in the event the Requesters did not actually understand the data of the assessment issued (which this Arbitral Tribunal is not assuming, given that all the documentation produced in the case file appears to indicate the contrary), they could always have requested, through the administrative means available for that purpose, notification of the requirements that were omitted or a certified copy containing them, free of any payment.

3. This is the facility granted to taxpayers, notably in article 37 of the Tax Procedure and Process Code ("CPPT"), when the notification received is tainted by insufficiency of reasoning.

4. Not having done so, and such reasoning not even being legally required in light of the applicable normative provisions, the argument raised by the Requesters regarding insufficiency of reasoning of the assessment act now being contested cannot be upheld.

5. With regard to the failure to comply with the essential formality of the Right to Prior Hearing, this Arbitral Tribunal can only decide that this argument cannot be upheld.

As follows,

1. Subparagraph a) of paragraph 2 of article 60 of the LGT, already cited in the chapter "Legal Framework", provides that hearing is dispensed with when the assessment of the tax is made on the basis of the taxpayer's statement.

2. Which, as already established, is the case here.

Therefore,

1. With neither of the formal defects raised by the Requesters being upheld, it falls to this Arbitral Tribunal to judge the conformity of the present IRS assessment with the constitutional principle of equality, in particular in its aspect of ability to contribute.

2. In this context, in the view of this Tribunal, the question to be decided concerns whether any of the arguments raised by the Requesters regarding the non-conformity of the present system of tax deductions under IRS with the constitutional principle of equality, in its aspect of ability to contribute, is upheld.

3. As a preliminary matter, a brief introduction to the principle of equality, in its aspect of ability to contribute, which the Requesters are now invoking, is warranted.

4. Equality is a value and a principle inherent in the paradigm of the Rule of Law that permeates the entire Portuguese material Constitution, which in fact becomes a component part of the very idea of Law or Legal Order as a Legal Cosmos.

5. On the principle of equality, article 13, paragraph 1 of the CRP provides that "All citizens have the same social dignity and are equal before the law; (…)".

6. Given that the principle of equality is directly stated in the constitutional text, as provided above, it is also necessary to analyse its obvious refraction in the plane of the principle of ability to contribute, which represents a special orientation of equality in tax matters.

7. In this sense, article 103 of the CRP provides that "The tax system aims to satisfy the financial needs of the State and other public entities and a just distribution of income and wealth."

8. Given the permeability and need for integration of constitutional principles that should guide the entire legal order, the LGT also specifies the principle of equality in article 5 as follows:

"1. Taxation aims to satisfy the financial needs of the State and other public entities and promotes social justice, equal opportunities and the necessary corrections of inequalities in the distribution of wealth and income";

1. Taxation respects the principles of generality, equality, legality and material justice."

2. It should be noted that there is also a specific provision regarding IRS, expressed in paragraph 1 of article 104 of the CRP, which provides "Personal income tax aims at reducing inequalities and shall be unique and progressive, taking into account the needs and income of the family unit."

3. As has been uniformly understood by the Constitutional Court (from which we highlight Decision no. 590/2015), the principle of equality, as a limit on legislative discretion, does not require the equal treatment of all situations but, rather, requires that those in equal situations be treated equally and those in unequal situations be treated unequally, so as not to create arbitrary and unreasonable discriminations, because they lack sufficient material foundation.

4. As such, the principle of equality does not prohibit the establishment of distinctions; rather, it prohibits the establishment of distinctions lacking objective and rational justification – This is, therefore, the assessment that must be made in the case at hand.

5. In this context, the Requesters argue in their Request for Arbitral Decision that the current system of tax deductions conflicts with the principle of ability to contribute, in particular as it applies to families.

6. In this regard, this Arbitral Tribunal does not dispute the importance of the family unit to the Portuguese legal and social order, nor its undeniable protection by the Fundamental Law.

7. The wording of paragraph 1 of article 67 of the CRP is thus emphasized, which provides that "The family, as a fundamental element of society, has the right to protection by society and the State and to the implementation of all conditions allowing the personal fulfilment of its members."

8. In this context, as fundamental obligations of the State, particular emphasis should be placed, for purposes of the present articulation, on subparagraph f) of paragraph 2 of the article above, which provides that it is the State's duty, for the protection of the family, to "Regulate taxes and social benefits, in harmony with family burdens."

9. Given this list of normative provisions that permeates not only all the tax legislation that flows from it, but also the legal intention that moves this Arbitral Tribunal, it is necessary to verify whether the system of tax deductions, in its current configuration, respects, or does not, the State's duty to regulate taxes in harmony with family burdens.

Now,

1. This Tribunal is of the view that IRS legislation does not conflict with the State's duty of taxation according to ability to contribute, demonstrating the necessary care to adapt taxation to family units.

As follows,

1. The Requesters argue that because tax deductions are fixed amounts, they do not accord with the element of personalisation of IRS, failing to consider expenses actually borne and, therefore, the ability to contribute of the family unit.

2. They further argue, in this regard, that the tax deductions themselves present limits that are too narrow, being confined to amounts that do not take into account the number of persons in the family unit, as well as,

3. That the burden incumbent on the taxpayer to request an invoice from the respective economic operators with whom it conducts transactions in order to make tax deductions is too onerous to accord with the ability to contribute of families.

4. Taking duly into consideration the arguments presented, it is, however, necessary to observe them in light of the principle of equality and the constitutional jurisprudence that specifies it.

5. Indeed, the Decision of the Constitutional Court no. 711/2006 assumes salutary importance for this case, addressing the principle of equality in the Portuguese legal order and its necessary harmonisation with the remaining constitutional principles.

6. In this context, we transcribe the following passages, with which we fully agree:

"(…) The progressivity of the tax according to the economic capacity of taxpayers and the idea of just distribution of income and wealth, which is found in article 103, paragraph 1 of the Constitution, preferentially invoke an objective of material equality both in the sacrifice that citizens must individually bear and as regards the result of the consequent redistribution of wealth. The invoked principle of ability to contribute is based on the criterion that the incidence and distribution of taxes must take into account the economic capacity of each person and not what each person might eventually receive in public goods or services.

However, the Court already stated in Decision no. 84/2003 (Official Gazette, 2nd series, of 29 May 2003), "it is not easy to draw clear and certain legal consequences from the principle of ability to contribute translated into a judgment of constitutional inadmissibility of certain or certain solutions adopted by the tax legislator."

The invoked principle imposes the duty for all to pay taxes according to the same criterion, but does not dispense with the concurrence of other constitutional principles in resolving the problem that is now raised. In consonance with this doctrine, Decision no. 142/04 states (Official Gazette, 2nd series, of 19 April 2004):

"On the other hand, it is clear that the 'principle of ability to contribute' must be harmonised with other principles with constitutional dignity, such as the principle of the social state, the freedom of legislative configuration and certain requirements of practicability and cognoscibility of the tax fact, equally indispensable for the fulfilment of the purposes of the tax system." (Emphasis ours).

1. And the said Decision continues:

"In fact, it is the appeal to other values with constitutional standing that enables the ordinary legislator to weigh the framing of this matter within a range of possible solutions, the concrete choice of which falls within the freedom of legislative configuration permitted by the exercise of democratic power. It is, after all, the practical implementation of governmental action, translated in the choice of this matter as an instrument of financial policy, subject, therefore, to diversified degrees of evaluation and configuration.

It is precisely the harmonisation of the principle of ability to contribute with other principles with constitutional dignity that the Court has sought to establish when it weighs the conformity of the ordinary legislator's choices, in matters of taxes, with the principle of equality. It is stated in Decision no. 806/93 (Official Gazette, 2nd series, of 29 January 1994):

But, being thus, from this close connection between the tax system and the principle of equality, does it inevitably follow that every and any discrimination must always be considered as violating said principle? The answer to this question is, naturally, only possible if negative." (Emphasis ours).

1. Indeed, and as already established, what the principle of equality actually seeks to protect is a prohibition against arbitrariness, creating a negative delimitation to the powers of the legislator, as the aforesaid Decision describes below:

"To ascertain, however, the existence of a particularism sufficiently distinct to justify an inequality of legal treatment and to decide on the circumstances and factors to be considered relevant in such an ascertainment is a task that primarily falls to the legislator, who holds the primacy of the concretisation of constitutional principles and the corresponding freedom of configuration. For this reason, the principle of equality presents itself fundamentally to legal operators, in the context of constitutional review, as a negative principle, as indicated above as a prohibition against arbitrariness.

(…)

Now, as is clearly apparent, the determination of the meaning and extent of the discrimination, being in itself an operation of a legal nature, cannot, however, dispense, in a field such as that of tax activity, with making an appeal to the social reality in which the rule is to operate, as follows, moreover, from the postulate of real equality to which we referred above when we examined the constitutional foundations of the Portuguese tax system."

1. In this context, and as appears from reading the passages above, the principle of equality does not dispense with a test of proportionality, taking into account the social circumstances in which the rule will have effect.

2. In this regard, the cited Decision further argues:

"It is for this reason that it does not run counter to a constitutionally adequate conception of equality (and specifically of tax equality) that the rule may contain a minimum of formal inequality if this proves necessary, adequate and proportional to the realisation of substantial equality. For this reason, this is not a matter of seeking to formulate a judgment regarding observance in the case of the principle of equality confined only to the plane of law (or of legislation, if you prefer), but also of carrying into the interpretation and determination of the meaning both of the constitutional principle constituting the value parameter invoked by the applicant and of the rule being examined, the very data of economic and social reality as integrating elements of the legal assessment relating to the concrete application by public authorities of the principles of the legal order tending to modify that reality.

This is therefore why the tax discrimination alleged by the applicant as violating the principle of equality must be seen and evaluated not only within the limits of the normative system but also in light of the social needs that the impugned rule sought to address and the ends of justice guiding the conduct of the legislator." (Emphasis ours).

1. Given the Learned jurisprudence cited, with which we fully agree, we find that the case at hand falls within the considerations made by the Constitutional Court regarding the need to harmonise the principle of equality with "the very data of economic and social reality as integrating elements of the legal assessment relating to the concrete application by public authorities of the principles of the legal order tending to modify that reality."

2. Indeed, taking into consideration the concrete case of the Requesters, we are of the view that the tax legislator has established, in IRS, various measures designed to promote the substantial equality of citizens, granting families certain tax benefits through tax deductions made available to them – as occurs with the family quotient.

3. It is true that one could engage in a judgment as to whether or not these measures are insufficient to guarantee the harmony of taxation with family burdens in concrete situations, but this Arbitral Tribunal does not intend to rule on this matter except to the extent that it considered the application of the rules on tax deductions to be manifestly illegal.

4. Which is not the case.

5. This Arbitral Tribunal is of the view that the wording of the rules on tax deduction in the IRS Code is adequate to the social reality in which the rule will operate, taking into account the social needs that the legislator sought to address and the ends of justice guiding its conduct.

6. With no arbitrary conduct on the part of the legislator, we are of the view that the rules on which the Requesters' IRS assessment was based are entirely adequate to promote equality and taxation according to the ability to contribute of citizens and taxpayers.

7. As such, the decision of this Arbitral Tribunal is that the tax act of additional CIT assessment contested in this case does not suffer from any defect of violation of law.

Accordingly,

1. The request for annulment of the aforementioned assessment act does not proceed, and consequently the request for condemnation of the Respondent to payment of costs and other case expenses does not proceed either.

V. Decision

1. For these reasons, this Arbitral Tribunal decides to declare the request for arbitral decision entirely without merit and to absolve the Respondent of the claim, with all legal consequences.

VI. Value of the Proceeding

1. The value of the proceeding is fixed at Euro 2,613.16, in accordance with article 97-A, paragraph 1, subparagraph a) of the CPPT, applicable by virtue of subparagraphs a) and b) of paragraph 1 of article 29 of the RJAT and paragraph 2 of article 3 of the Arbitration Tax Proceedings Costs Regulation ("RCPAT").

VII. Costs

1. In accordance with the provision of article 22, paragraph 4 of the RJAT, the arbitration fee is fixed at Euro 612.00, in accordance with Table I of the aforementioned Regulation, to be borne by the Requesters, given the entire lack of merit of the request.

Notify.

Lisbon, CAAD, 13 May 2019

The Arbitrator

(Sérgio Santos Pereira)