Process: 454/2018-T

Date: December 12, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 454/2018-T) addresses the procedural consequences when the Portuguese Tax Authority (AT) revokes an IRS assessment during pending arbitration proceedings. The taxpayers challenged an IRS assessment and requested arbitration. After the arbitral tribunal was requested but before its constitution, the AT revoked the contested assessment on October 9, 2018, and reimbursed all amounts paid. The taxpayers initially requested continuation of proceedings to secure compensatory interest (juros indemnizatórios) but later acknowledged that all claims had been satisfied. The tribunal held that revocation of the tax act before the tribunal's constitution created an original impossibility of proceedings rather than supervening futility, as the contested act ceased to have legal effect per Article 165(1) of the Administrative Procedure Code. Since the AT voluntarily satisfied all taxpayer claims, the arbitral decision would serve no useful purpose. Applying Article 277(e) of the Civil Procedure Code via Article 29(1)(e) RJAT, the tribunal terminated the proceedings due to impossibility. Regarding costs, both parties disagreed on allocation: the AT argued taxpayers should bear costs since revocation occurred within the 30-day period of Article 13(1) RJAT, while taxpayers sought cost reimbursement. The decision emphasizes that administrative annulment operates independently of private party consent, and claims for compensatory interest are merely accessory to the main claim, requiring examination of the contested act's legality only for determining entitlement to such interest.

Full Decision

Arbitral Decision

REPORT

On 12 September 2018, the taxpayers A... and B..., with Tax Identification Numbers ... and ..., respectively, both with tax domicile at ..., no. ..., ...-... ..., Santo Tirso, requested, under the terms and for the purposes of the provisions of article 2nd and article 10th, both of Decree-Law no. 10/2011, of 20 January, the constitution of an Arbitral Tribunal with the designation of a sole arbitrator by the Ethics Council of the Centre for Administrative Arbitration, pursuant to the provisions of section 1 of article 6th of the said legislation.

The request for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as AT or "Respondent") on 17 September 2018.

On 23.10.2018 the Claimants informed the case file that the tax act under review (IRS assessment no. 2018...) had been revoked, requesting continuation of the proceedings with a view to recognition of indemnity interest and reimbursement of the amount paid.

The Claimants did not proceed with the appointment of an arbitrator, and therefore, under the provisions of article 5th, section 2, subsection b) and article 6th, section 1, of the RJAT, the undersigned was designated by the President of the Ethics Council of CAAD to serve on the present sole Arbitral Tribunal, having accepted in accordance with legally foreseen terms.

By order dated 21.11.2018 the Respondent was notified to submit a reply.

On 04.12.2018 the Claimants informed the case file that the tax paid had been reimbursed, as well as all other matters petitioned, requesting that the supervening futility of the proceedings be recognized, with costs to be borne by AT.

The Respondent was notified of the Claimants' request, having informed that it does not object to the recognition of the supervening futility of the proceedings, provided, however, that the arbitration costs remain the responsibility of the Claimants.

II. PRELIMINARY DETERMINATION OF MATTERS

The Tribunal is competent and is regularly constituted, pursuant to the provisions of articles 2nd, section 1, subsection a), 5th and 6th, all of the RJAT.

The parties have legal personality and legal capacity.

The parties are legitimate and are legally represented, pursuant to the provisions of articles 4th and 10th of the RJAT and article 1st of Ordinance no. 112-A/2011, of 22 March.

The proceedings are proper.

Since the preliminary question of the supervening futility of the proceedings is raised, this shall be addressed with priority.

II.1. Impossibility/Futility of the Proceedings

Both parties have expressed the understanding that there is supervening futility of the proceedings and, consequently, both request the termination of the present arbitral instance.

It is necessary to assess and decide.

Article 277th, subsection e), of the CPC, applicable by virtue of article 29th, section 1, subsection e), of the RJAT, provides as follows: "The proceedings are terminated by the impossibility or supervening futility of the action".

The impossibility of the proceedings occurs in the event of death or extinction of one of the parties, by disappearance or destruction of the object of the proceedings or by extinction of one of the conflicting interests. If the subject matter of the proceedings ceases to exist, the instance must be terminated.

The supervening futility of the proceedings occurs when, by virtue of new facts that occur during the pendency of the proceedings, the decision to be rendered would have no useful effect, either because it is not possible to satisfy the claim that the claimant wishes to assert in the proceedings or because the purpose sought by the action has been achieved by another means.

In the present case, on 12 September 2018, the request for constitution of the Arbitral Tribunal was filed, which gave rise to the present proceedings. The Respondent was notified of the request for constitution of the arbitral tribunal on 17.09.2018.

The contested tax act (IRS assessment no. 2018...) was revoked by the Deputy Director-General of Income on 09.10.2018. The revocation was notified to the claimants and the Representative by letter dated 11.10.2018.

The Claimants requested continuation of the proceedings by request dated 23.10.2018. The Arbitral Tribunal was constituted on 20.11.2018.

In light of the facts, in the case at hand we are dealing with an impossibility of the proceedings and not a futility of the proceedings. The revocation of the tax act, whose legality constituted the immediate object of the proceedings, makes this action impossible to continue because the contested tax act ceased to have effect (art. 165th, section 1 of the CPA).

As of the date of constitution of the arbitral tribunal (20.11.2018) the proceedings were already impossible because the tax act had already been revoked previously (09.10.2018). Therefore, in truth we are not dealing with a supervening impossibility of the proceedings, but rather with an original impossibility.

In either case, the impossibility or futility of the proceedings translates, thus, into a legal impossibility or futility, whose determination has as reference the provisions established in law.

According to José Lebre de Freitas, Rui Pinto and João Redinha (Código de Processo Civil Anotado, Volume 1st, 2nd edition, Coimbra Editora, Coimbra, 2008, p. 555), "the impossibility or supervening futility of the proceedings occurs when, by a fact that occurs during the pendency of the instance, the claimant's claim cannot be maintained, by virtue of the disappearance of the subjects or object of the proceedings, or finds satisfaction outside the scheme of the relief sought. In one and the other case, the solution of the dispute ceases to be of interest – beyond, by impossibility of achieving the intended result; here, because it has already been achieved by another means".

Returning to the specific case, it must be added that the AT satisfied in full and voluntarily the claims that the Claimants formulated in these proceedings, as the Claimants themselves came expressly to recognize.

To that extent, the results that the Claimants sought to achieve with the present arbitral proceedings have already been fully achieved, and therefore the arbitral decision that would normally be rendered, addressing the merits of the claims asserted, appears to be devoid of any useful effect, and therefore its rendering is not justified.

In the case at hand, the legality of the assessment cannot be examined because the tax act was revoked before the constitution of the arbitral tribunal. Accordingly, there is an impossibility of the proceedings.

Without need for further consideration, it is therefore held that the impossibility of the proceedings is verified, which determines the termination of the arbitral instance (art. 277th, subsection e) of the CPC).

II.2. Costs

The Respondent was notified of the request for constitution of the Arbitral Tribunal on 17.09.2018. On 09.10.2018 the contested act was revoked. The revocation occurred within the 30-day period provided for in art. 13th, section 1 of the RJAT.

Nevertheless, the Claimants requested continuation of the proceedings with a view to recognition of the right to indemnity interest and reimbursement of the amount paid.

It is important to bear in mind in this regard that administrative annulment is at the official initiative of the Administration and, constituting a unilateral act, its effects do not depend on the manifestation of will of the interested private party. On the other hand, the arbitral claim regarding indemnity interest can only be understood as an accessory or consequential claim for relief in relation to the main claim, implying that the proceedings should continue for the incidental examination of the legality of the contested act only for the purpose of determining whether there is grounds for the requested compensation by way of indemnity interest.

The fact is that administrative revocation determines the cessation of the effects of the annulled administrative act (article 165th, section 1, of the CPA), and therefore, a situation of supervening impossibility of the proceedings would occur due to lack of procedural subject matter.

Furthermore, the examination of acts is excluded from arbitral jurisdiction, as it is not covered by art. 2nd, section 1 of the RJAT, to the extent that such examination does not involve the examination of the legality of assessment acts. The legislative concern to exclude from the competence of arbitral tribunals functioning within CAAD the examination of the legality of administrative acts that do not involve the examination of the legality of assessment acts, beyond resulting from the generic directive of creating an alternative means to the process of judicial challenge and the action for recognition of a right or legitimate interest, results clearly from subsection a) of section 4 of art. 124th of Law no. 3-B/2010, of 28 April, in which are indicated among the possible subjects of the tax arbitral process "the administrative acts that involve the examination of the legality of assessment acts", as this specification can only be justified by a legislative intent to exclude from the possible subjects of the arbitral process the examination of the legality of acts that do not involve the examination of the legality of assessment acts.

The Arbitral Tribunal could not examine a claim for judgment in the payment of indemnity interest without the legality of an assessment act being under examination.

What cannot be left unrecognized is that the present arbitral proceedings, by effect of the administrative annulment of the contested acts, could not proceed due to impossibility of the proceedings.

Furthermore, the process of tax enforcement related to the reimbursement to the taxpayer of the amounts paid cannot constitute the object of these proceedings, under penalty of absolute material incompetence of the Arbitral Tribunal to examine the matter relating to the enforcement process (art. 2nd, section 1, subsections a) and b) of the RJAT).

In this manner, the arbitral proceedings could not continue for the examination only of the right to indemnity interest, nor could it continue with a view to execution of the reimbursement of the amounts paid by the Claimants.

The continuation of the proceedings (properly speaking, of the arbitral procedure) can only be imputed to the Claimants.

Pursuant to the provisions of article 536th, section 3 of the CPC, responsibility for costs shall be borne by the claimant or applicant, unless such impossibility or futility is imputable to the defendant or respondent, in which case the latter is responsible for all costs.

Given that the AT proceeded with the revocation of the assessment act before the constitution of the Arbitral Tribunal, the continuation of the proceedings, despite the satisfaction of the claim formulated, can only be imputed to the Claimants.

The costs must, therefore, be entirely imputable to the Claimants.

III. DECISION

For these reasons, it is decided to terminate the instance by impossibility of the proceedings and to order the Claimants to pay the costs of the proceedings.

The value of the proceedings is fixed at €22,046.02 pursuant to article 97th-A, section 1, a), of the CPPT, applicable by virtue of subsection a) of section 1 of article 29th of the RJAT and section 2 of article 3rd of the Regulation of Costs in Tax Arbitration Proceedings.

The arbitration fee is fixed at €1,224.00, pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid in full by the Claimants, pursuant to articles 12th, section 2, and 22nd, section 4, both of the RJAT, and article 4th, section 4, of the said Regulation.

Let notification be made.

Lisbon, 12 December 2018

The Arbitrator

(André Festas da Silva)

Frequently Asked Questions

Automatically Created

What happens when the tax authority revokes an IRS assessment during CAAD arbitration proceedings?
When the Tax Authority revokes an IRS assessment during CAAD arbitration proceedings, it creates an impossibility of proceedings (impossibilidade da lide) rather than mere supervening futility. According to this decision, the revocation eliminates the legal effect of the contested tax act per Article 165(1) of the Administrative Procedure Code, making it impossible for the tribunal to examine the act's legality. If revocation occurs before the tribunal's constitution, this constitutes original impossibility rather than supervening impossibility. The tribunal must terminate the arbitration instance under Article 277(e) of the Civil Procedure Code as applied through Article 29(1)(e) RJAT, since any decision would lack useful effect once the contested act no longer exists.
What is supervening uselessness of proceedings (inutilidade superveniente da lide) in Portuguese tax arbitration?
Supervening uselessness of proceedings (inutilidade superveniente da lide) in Portuguese tax arbitration occurs when facts arising during proceedings render the eventual decision devoid of useful effect, either because the claimant's claim cannot be satisfied or because the action's objective has been achieved through other means. This differs from impossibility of proceedings, which occurs when the subject matter ceases to exist (e.g., through revocation of the contested act). In this case, the tribunal classified the situation as impossibility rather than futility because the tax act's revocation eliminated the object of review. Both impossibility and supervening futility mandate termination of proceedings under Article 277(e) CPC, applicable to tax arbitration via Article 29(1)(e) RJAT.
Who bears the arbitration costs when the tax authority revokes the contested act during proceedings?
The allocation of arbitration costs when the Tax Authority revokes a contested act during proceedings depends on timing and circumstances. Article 13(1) RJAT provides that if the AT revokes the act within 30 days of notification of the arbitration request and satisfies all taxpayer claims, costs should generally fall on the taxpayer. However, this decision shows disagreement between parties: the AT argued taxpayers should bear costs since revocation occurred within the statutory period, while taxpayers sought cost recovery. The tribunal's analysis was incomplete in the excerpt, but it noted that administrative annulment is an official act whose effects don't depend on the taxpayer's consent, and that claims for compensatory interest are merely accessory to the main claim.
Are taxpayers entitled to compensatory interest (juros indemnizatórios) when an IRS assessment is revoked?
Taxpayers may be entitled to compensatory interest (juros indemnizatórios) when an IRS assessment is revoked, but this right is not automatic upon revocation. According to this decision, claims for compensatory interest are considered accessory or consequential to the main claim challenging the tax assessment's legality. The tribunal emphasized that determining entitlement to compensatory interest requires examining whether there were grounds for the payment in the first place—essentially requiring an incidental examination of the contested act's legality. In this case, the taxpayers initially requested continuation of proceedings specifically to secure recognition of their right to compensatory interest and reimbursement, but later withdrew this request after the AT voluntarily satisfied all claims, including presumably any applicable interest.
How does Article 277(e) of the Portuguese Civil Procedure Code apply to tax arbitration under RJAT?
Article 277(e) of the Portuguese Civil Procedure Code (CPC) applies to tax arbitration through Article 29(1)(e) of the RJAT (Legal Regime for Tax Arbitration), which incorporates CPC provisions subsidiarily. Article 277(e) CPC provides that proceedings terminate due to impossibility or supervening futility of the action. In tax arbitration, this means that when the contested tax act is revoked or the taxpayer's claims are otherwise fully satisfied, the tribunal must terminate the instance because any decision would lack useful effect. The tribunal distinguished between impossibility (when the subject matter ceases to exist, as with revocation of the tax act) and futility (when the action's purpose is achieved by other means). Both scenarios mandate termination, preventing wasteful continuation of proceedings when no practical benefit can result from a decision on the merits.