Summary
Full Decision
TAX ARBITRATION JURISPRUDENCE
Case No. 47/2019-T
Date of Decision: 2019-07-31
IRS
Value of Claim: € 709,644.27
Subject Matter: IRS – General anti-abuse clause. Tax substitution. Withholding at source.
ARBITRAL DECISION
The arbitral tribunal hereby agrees:
I – REPORT
- A..., S.A., a legal entity No. ..., with registered office at Street ..., No. ..., ...-... – ..., ..., hereby petitions for the establishment of an arbitral tribunal, pursuant to the provisions of Articles 2, No. 1, paragraph a), and 10 of Decree-Law No. 10/2011, of 20 January, to assess the legality of the assessment of withholding at source on IRS and the assessment of compensatory interest for the year 2014, in the total amount of € 709,644.27.
The petition is grounded in the following terms.
Following an inspection proceeding, the Tax Authority concluded that two bank transfers made by the Claimant for payment of an invoice issued by a third party, relating to the sale of machinery, do not correspond to payment of the respective price, but rather to an advance on account of profits in favour of a shareholder, in the amount of € 2,140,000.00, for which reason withholding at source should have been effected, pursuant to the provisions of paragraph h) of No. 2 of Article 5 and paragraph c) of No. 1 of Article 71 of the IRS Code.
Accordingly, the Administration, based on the falsity of the invoice, disregarded the payment of the price for the commercial transaction, in the opinion of the Claimant, by qualifying that act as an advance on account of profits, thereby effectively applying the anti-abuse clause referred to in Article 38, No. 2, of the General Tax Law, without implementing the procedure provided for in Article 63 of the Tax Procedure and Process Code, thereby incurring a violation of legal formality.
The Claimant further adds that even if withholding at source were to be understood as due, the tax obligation would have to fall directly on the shareholder to whom the benefit is attributed, and the disregard of the tax treatment of legal transactions resulting from the application of the general anti-abuse clause would be unenforceable against the Claimant as tax substitute.
It further contends that in any case the burden would rest on the tax substitute to ascertain whether the person obligated to pay tax could have carried out abusive acts justifying withholding at source, when this constitutes a disproportionate and inadmissible requirement, since it is the Tax Authority that has the duty to initiate the appropriate procedure for the assessment of taxes based on an anti-abuse provision.
It therefore argues that it is not legally possible for the Claimant, as tax substitute, to recover the tax subject to withholding at source, and that the provision of Article 38, No. 2, of the General Tax Law, when interpreted to mean that the effects resulting from the application of the anti-abuse clause are enforceable against the tax substitute, is unconstitutional by reason of violation of the principle of proportionality and the right to property (Articles 18, No. 2, and 62, No. 1, of the Constitution).
The Tax Authority, in its response, argues that the taxation of advances on account of profits provided for in paragraph h) of No. 2 of Article 5 of the IRS Code, pursuant to paragraph c) of No. 1 of Article 71, constitutes a specific anti-abuse provision, which takes precedence over the general rule of Article 38, No. 2 of the General Tax Law, and therefore the provision of Article 63 of the Tax Procedure and Process Code does not apply.
On the other hand, the bank transfers in the total amount of € 2,140,000.00 do not correspond to any commercial transaction that was carried out but rather to amounts that were deposited into the personal accounts of the shareholder of the Claimant, which were in turn used to make capital contributions and increase the share capital of the company.
In any case, according to the Respondent, there was no disregard of any legal transaction, but rather the taxation as an advance on account of profits of a sum of money that was transferred to the shareholder and which should have been subject to withholding at source.
It concludes in favour of dismissal of the petition.
- Following the proceedings, the meeting referred to in Article 18 of the Tax Arbitration Regulations was dispensed with and the proceedings were ordered to continue for arguments on successive time periods.
The parties did not submit arguments.
- The petition for establishment of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority in accordance with regulations.
Pursuant to the provisions of paragraph a) of No. 2 of Article 6 and paragraph b) of No. 1 of Article 11 of the Tax Arbitration Regulations, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the mandate within the applicable time period.
The parties were duly and timely notified of this designation and did not express any wish to refuse it, in accordance with the combined provisions of Article 11, No. 1, paragraphs a) and b), of the Tax Arbitration Regulations and Articles 6 and 7 of the Code of Ethics.
Accordingly, in compliance with the provision of paragraph c) of No. 1 of Article 11 of the Tax Arbitration Regulations, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was established on 4 April 2019.
The arbitral tribunal was duly established and is materially competent in view of the provisions of Articles 2, No. 1, paragraph a), and 30, No. 1, of Decree-Law No. 10/2011, of 20 January.
The parties have legal personality and capacity, are legitimate and are represented (Articles 4 and 10, No. 2, of the same legislation and 1 of Order No. 112-A/2011, of 22 March).
The proceedings are not affected by nullities and no exceptions were raised.
It is incumbent upon this tribunal to assess and decide.
II – GROUNDS
Matters of Fact
- The facts relevant to the decision of the case that may be considered as established are the following:
A) The Claimant was the subject of an external inspection proceeding titled by Service Orders Nos. 012018..., 012018... and 012018..., relating to the tax years 2014, 2015 and 2016, with a view to verifying compliance with the obligations of taxpayers and other persons obligated to pay taxes;
B) During the course of the inspection proceeding, the Inspection Services verified that the Claimant applied in 2013 for a Community programme under the European Regional Development Fund (ERDF), comprising an investment of € 4,990,242.92;
C) Within the scope of the project covered by the ERDF, the Claimant recorded an invoice issued by company B... relating to investments in fixed assets in the amount of € 2,140,000.00;
D) In the Claimant's current account extract it appears that the invoice issued by B... was paid through two bank transfers of € 1,140,000.00 and € 1,000,000.00, with dates of 30 and 31 January 2014;
E) In the Tax Inspection Report, which is part of the Administrative File and is hereby reproduced, it is concluded that the Claimant effected two bank transfers, in the total amount of € 2,140,000.00, to the accounts of shareholder C..., with documentary support consisting of an invoice that corresponds to a simulated transaction, these transfers constituting an advance on account of profits that is taxable at the rate of 28% in accordance with Article 5, No. 2, paragraph h), of the IRS Code;
F) In the same Report, by reference to the taxation of the sum as an advance on account of profits, withholding at source was proposed to be assessed, charged to the Claimant, in the partial amounts of € 319,200.00 and € 280,000.00;
G) The Tax Authority issued the IRS assessment act – withholding at source No. 2018..., in the amount of € 599,200.00, relating to 2014, and the acts assessing compensatory interest Nos. 2018... and 2018..., in the amounts of € 59,292.49 and € 51,151.78.
The facts that are proven are those described in the Tax Inspection Report that served as the basis for the correction of the additional tax assessment. The challenging party neither requested nor produced documentary evidence, nor any other form of evidence, and failed to demonstrate that the commercial transaction evidenced by the invoice issued by B... corresponds to reality and that the bank transfers of € 1,140,000.00 and € 1,000,000.00, recorded in the accounts as payment of the invoice, were in fact intended to settle an existing debt with respect to that entity.
Matters of Law
Violation of the Specific Procedure for Application of the General Anti-Abuse Clause
- The Claimant contends, in the first instance, that the Tax Authority, in qualifying the bank transfers effected for payment of the invoice relating to the acquisition of equipment as an advance on account of profits in favour of a shareholder, pursuant to paragraph h) of No. 2 of Article 5 of the IRS Code, applied in practice the regime of the general anti-abuse clause provided for in Article 38, No. 2, of the General Tax Law, without simultaneously implementing the specific procedure mentioned in Article 63 of the Tax Procedure and Process Code, thereby incurring a violation of that legal provision.
In opposition, the Tax Authority considers that the taxation of advances on account of profits referred to in paragraph h) of No. 2 of Article 5 of the IRS Code constitutes a specific anti-abuse provision, which takes precedence over the general rule of Article 38, No. 2, of the General Tax Law, and therefore there is no need to resort to the procedure provided for in Article 63 of the Tax Procedure and Process Code for the purposes of applying that provision.
In an initial approach to the problem, given the established facts – which result exclusively from the factuality considered by the Administration for the purpose of proceeding with the additional tax assessment – the question that arises is whether what is at issue is mere simulation of a legal transaction or application of the general anti-abuse clause.
In fact, the Tax Inspection Report establishes as fact that the Claimant did not carry out any acquisition of equipment from B... and the bank transfers recorded in the accounts as being intended for payment of the invoice relating to that commercial transaction were made to the bank account of a shareholder, corresponding to an advance on account of profits, such that the issuance of the invoice would constitute a simulated transaction.
Doctrine has distinguished between simulation and the general anti-abuse clause. In the case of simulation of a legal transaction, taxation falls on the actual transaction and not on the simulated legal transaction, and depends on a judicial decision of nullity when the transaction is evidenced in a public deed. By contrast, the general anti-abuse clause applies to an actual transaction but one carried out with a view to artificially obtaining a tax advantage for the taxpayer, in which case the transaction is taxed as if the taxpayer had chosen the form that would normally be adopted in legal commerce to achieve the same economic result. In summary, in one case there is an intentional divergence between will and declaration, combined between the declarant and the recipient, intended to deceive third parties; in the other case, there is an actual transaction (and not an apparent one) which through a fraudulent means seeks to achieve in a fiscally less burdensome manner the same economic effect or an economic effect approximating that which would be achieved through the normal route (GUSTAVO COURINHA, The General Anti-Abuse Clause in Tax Law: Contributions to its Understanding, Coimbra, 2009, pp. 79 et seq.).
In the present case, it does not appear that we are dealing with a simulation.
What the Tax Inspection Report considers is that the commercial transaction with company B... was never carried out and the accounting entries supposedly intended to settle the price of the transaction correspond to bank transfers in favour of a shareholder which, for that reason, should be qualified as advances on account of profits.
There does not exist, in this context, any vice of will that could affect a legal transaction that may have been concluded between the Claimant and a third party, and that could result in a divergence between actual will and declared will based on a simulated agreement between the parties (see Article 240 of the Civil Code). In fact, what the Tax Authority asserts is that no transaction was carried out and there was simply an inaccuracy in the records, falsely entering as payments of an invoice relating to a commercial transaction amounts that correspond to profits made available to the shareholders.
Nor does it appear that the circumstances of the case fall within the application of the general anti-abuse clause.
Article 38, No. 2, of the General Tax Law stated at the time of the events that "acts or legal transactions essentially or mainly directed, by artificial or fraudulent means and by abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions with an identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without the use of such means, shall be ineffective for tax purposes". And, in that case, it determines that taxation shall be carried out in accordance with the rules that would be applicable if those means had not been used, the tax advantages sought to be obtained not being produced.
According to SÉRGIO VASQUES, the general anti-abuse clause enshrined in the General Tax Law is composed of three essential elements. "In the first place, the performance of an artificial or fraudulent act or transaction is required which expresses abuse of legal forms, in the sense that we are dealing with business schemes that conceal their true purposes and to which a manifestly anomalous use is given in relation to common legal practice. In the second place, the sole or principal objective of obtaining a tax advantage through those business schemes is required, whatever its nature may be, with the evident marginalisation of actual economic objectives. In the third place, it is required that the law clearly expresses the intention to tax the assets in question, in the same manner in which they would be taxed if the taxpayer had resorted to the more common legal forms and business practices" (Manual of Tax Law, Coimbra, 2018, p. 369).
The general sense of the rule is, in these terms, to permit the disqualification for tax purposes of any act or legal transaction carried out by the taxpayer with the sole or principal objective of obtaining a tax advantage, which may constitute a fraud against tax law. The legal effect resulting from the operation of the anti-abuse clause is to consider the acts as performed in accordance with the normal standard of legal commerce to achieve the same economic result, determining the tax obligation as a function of the equivalent acts that could be performed.
Now, nothing permits one to consider that the taxpayer intended to substitute a factually taxable situation for another which, generating the same practical and economic consequences, might produce a tax advantage. In fact, it is not discernible in the situation of the case that the person obligated to pay tax performed an act or legal transaction directed at obtaining a tax advantage which, in application of the general anti-abuse clause, might be reconfigured as another act or legal transaction that would normally be performed to achieve the same economic result.
What is at issue – if it is correctly understood – is a falsification of the accounting records of the person obligated to pay tax who falsely entered accounting entries for payments of debts to third parties as a means of concealing the transfer of capital income to associates.
In this context, the question comes down to a problem of burden of proof.
Pursuant to Article 74, No. 1, of the General Tax Law, it is incumbent on the Tax Authority to prove the facts constitutive of the existence and quantification of the taxable event, which, in the case, is reflected in the taxation of certain amounts as an advance on account of profits. On the other hand, pursuant to Article 75 of that Law, the declarations of taxpayers are presumed to be true and made in good faith, as well as the data and calculations recorded in their accounts or records (No. 1), which presumption ceases, in particular when "the declarations, accounts or records reveal omissions, errors, inaccuracies or reasonable grounds for suspicion that do not reflect or impede knowledge of the actual taxable matter of the person obligated to pay" (No. 2, paragraph a)).
By virtue of this last provision, it is incumbent on the Administration to prove the cessation of the presumption of veracity of the accounting elements, demonstrating in a substantiated manner that the accounts of the person obligated to pay contain inaccuracies and that they may constitute sufficient grounds for suspicion of the existence of the taxable event that is subject to tax. And a paradigmatic example of a material vice that removes the presumption is the fact that the accounts include invoices that do not correspond to actual transactions (SERENA CABRITA NETO/CARLA CASTELO TRINDADE, Tax Litigation, vol. I, Coimbra, 2017, pp. 645-646).
Having the Tax Authority demonstrated, in the inspection proceeding, that the invoices do not correspond to actual transactions, it is incumbent on the taxpayer – as was considered in the judgment of the Court of Appeals of the North of 26 November 2015 (Case No. 00115/04) – to prove the contrary, that is, to present probative elements that reveal that the commercial transaction existed and there is no material or formal vice affecting the elements resulting from the statement that was submitted for tax purposes.
Now, in the present case, it results from the Tax Inspection Report that the person obligated to pay tax made, in 2013, an accounting entry of an invoice in favour of company B..., in the amount of € 2,140,000.00, which was recorded as a debit in "account 433315 – tangible assets – basic equipment – acquisitions", and, by reference to that invoice, entered in the extract of the supplier's current account two payments by bank transfer, in the partial amounts of € 1,140,000.00 and € 1,000,000.00, with dates of 30 and 31 January 2014. However, through analysis of various accounting data, in the same Report it was verified that the transfers, in the stated amounts of € 1,140,000.00 and € 1,000,000.00, had as their destination the bank account of shareholder C.... Statements were obtained in the meantime from the president of the Board of Directors of the Claimant, within the scope of the inspection proceeding, wherein it is stated that the machinery supposedly evidenced by the invoice issued in favour of B... was acquired from A..., S.A. (now called D...), within the scope of the Community project subsidised by the ERDF and that there was no commercial transaction whatsoever with that other company.
In the Tax Inspection Report it was concluded that the invoice issued by B... does not correspond to an actual transaction and the amounts supposedly intended for its payment entered the bank account of shareholder C....
Accordingly, the Tax Authority effected proof of the inaccuracy of the accounts, removing the presumption of veracity established in No. 1 of Article 75 of the General Tax Law, and gathered reasonable grounds for suspicion of a taxable event subject to tax, characterised as an advance on account of profits.
In addition, in the arbitral proceeding, the Claimant neither requested nor produced documentary evidence or evidence of any other nature, failing to demonstrate – by absence of proof – that the invoice in question corresponds to a transaction actually carried out by its issuer and that the accounting movements of payment were intended to settle the debt resulting from that transaction.
Having the Tax Authority removed the presumption of the veracity of the accounting elements presented by the Claimant, there is no reason to call into question the legality of the correction of the taxable matter that was disputed.
Unenforceability of the Assessment Act Against the Tax Substitute
- The Claimant further alleges that the legal-tax recharacterisation of the transaction cannot result in the imposition of ancillary tax obligations on third parties, such as withholding at source of the tax that should be paid by the principal obligated party, and that therefore, if withholding at source were to be due, the tax obligation would have to fall directly on the partner to whom the advance on account of profits is attributed.
Otherwise – it argues – it would be incumbent on the tax substitute to bear the burden of ascertaining whether the person obligated to pay tax could have carried out abusive acts justifying withholding at source, when this constitutes a disproportionate and inadmissible requirement, since it is the Tax Authority that has the duty to initiate the appropriate inspection procedure for the purposes of additional tax assessment.
And it adds that it is not legally possible for the Claimant, as tax substitute, to recover the tax subject to withholding at source, and that the provision of Article 38, No. 2, of the General Tax Law, when interpreted to mean that the effects resulting from the recharacterisation of the transaction are enforceable against the tax substitute, is unconstitutional by reason of violation of the principle of proportionality and the right to property (Articles 18, No. 2, and 62, No. 1, of the Constitution).
It should first be stated that what is at issue here – as has been clarified – is not the application of the general anti-abuse clause, and therefore the claim of unconstitutionality must be understood as relating to the provisions permitting withholding at source with respect to capital income.
Pursuant to Article 5, No. 1, paragraph h), of the Corporate Income Tax Code, the profits of entities subject to Corporate Income Tax made available to associates or holders and advances on account of profits (excluding those that are subject to special attribution to partners or members of entities covered by the transparent tax regime) constitute the taxable event of capital income and are subject to taxation. On the other hand, capital income obtained in Portuguese territory is subject to final withholding at source, at the liberatory rate of 28% (Article 71, No. 1, paragraph c), of the IRS Code).
As results from No. 2 of Article 20 of the General Tax Law, the mechanism of withholding at source of tax due constitutes a form of tax substitution. Tax substitution, referred to in that provision, presupposes the displacement of the tax obligation from the direct taxpayer – who is covered by the rules of tax incidence of the tax – to a third party who is the debtor of the income subject to taxation and who is responsible for the deduction of a portion of that income at the time of its payment for remittance to the State. The responsibility of the tax substitute – as specified in Article 28 – is reflected in the obligation to deduct the amounts that are subject to withholding and their remittance to the State Treasury which, once satisfied, relieves the person substituted for of the payment of those amounts.
As explained by SALDANHA SANCHES, tax substitution by means of withholding at source of income is explained by reasons of an essentially practical nature, aiming to ensure through a safe means the collection of the tax and, simultaneously, to approximate temporally the moment of the occurrence of the taxable event – reflected in the payment of the income subject to tax – and the fulfilment of the tax debt. In this manner, the withholding of the income by the debtor will serve for the payment of a part of the tax debt, if it is a payment on account of a future tax obligation (as occurs in withholdings made on employment income) or of its entirety (as occurs in the case of withholdings made, as final payment, through the application of liberatory rates that burden capital income) (Manual of Tax Law, 3rd edition, Coimbra, p. 269).
For its part, the mechanism of withholding at source is regulated, in general terms, in Article 98 of the IRS Code, providing that, in cases where withholding of tax is to take place at the moment of payment of employment income, the entities owing the income subject to withholding are obligated, at the time of payment of remuneration, to deduct the amounts corresponding to the application of the tax rates that are provided for that category of income (No. 1), with remittance to take place by the 20th day of the month following that in which the withheld amounts were deducted (No. 3). In the case of capital income, withholding is final, pursuant to the provision of Article 71, No. 1, paragraph a), of the IRS Code, the person substituted for being only subsidiarily liable for non-withholding or non-remittance of the tax (Article 28, No. 3, of the General Tax Law).
Now, having there been a correction of the taxable matter as a result of the inspection proceeding, with the consequent issuance of an additional tax assessment act, everything occurs as if that assessment had resulted from the income originally declared by the taxpayer, and there is no reason to refrain from applying the general rules regarding tax substitution and withholding at source. That is, if the shareholder had declared the amounts that were transferred to his account as an advance on account of profits, the Claimant would have had to carry out withholding at source, in accordance with Article 71, No. 1, paragraph c), of the IRS Code. And if the tax assessment results, in exactly the same manner, from the correction resulting from the inspection proceeding, by parity of reasoning, the entity that made available to the shareholder the amounts that generated the taxation is subject to the same duty of withholding at source. It is not a new tax obligation or a tax obligation that does not result directly from the law, but rather the same obligation that already fell on the tax substitute and which became effective only as a result of the correction of the taxable matter following the inspection proceeding.
Questions of Constitutionality
- In this framework, it also becomes clear that the invoked violation of the principle of proportionality and the right to property does not occur.
As has been stated, the disregard of the legal transaction evidenced by an invoice that was understood not to correspond to reality, entailing the restoration of the obligation of withholding at source by the tax substitute, returns the substitute to the situation that would have existed if that transaction had not been carried out, everything occurring as if there were ab initio to be a payment of capital income subject to taxation in IRS with respect to which withholding at source became required.
The entities owing income subject to taxation would always be obligated to deduct the amounts corresponding to the application of the tax rates that are provided for that category of income, at the moment they made it available to the person obligated to pay the tax. That tax obligation does not come to assume a different legal nature merely because withholding at source operates as a result of the inspection proceeding that culminated in the declaration of ineffectiveness of the transaction.
With respect to the adequacy of the means used for the pursuit of the purposes that are sought by the law, it is emphasised that the principle of suitability or aptness means that legislative measures must be apt to accomplish the intended purpose or contribute to its achievement. However, "the control of suitability or adequacy of the measure, as a dimension of the principle of proportionality, refers exclusively to the objective and formal aptness of a means to accomplish a purpose and not to any substantive evaluation of the intrinsic goodness or the advisability of the measure. That is, a measure is suitable when it is useful for the accomplishment of a purpose, when it permits the approximation of the intended result, whatever the measure and the purpose and independently of the corresponding merits. And, thus, a measure will only be susceptible to being invalidated by unsuitability or inaptness when its effects are or prove to be indifferent, innocuous or even negative taking as a reference the approximation of the intended purpose" (in this sense, the judgment of the Constitutional Court No. 188/2009).
And, on the other hand, it is also not apparent, nor does the Claimant clarify, in what manner the enforceability against the tax substitute of the disregard of the tax effects of a transaction that is understood not to have been actually carried out affects the sub-principles of necessity and proportionality in the strict sense.
III – DECISION
The tribunal hereby decides to declare the arbitral petition wholly without merit.
Value of the Cause
The Claimant stated as the value of the cause the amount of € 1,709,664.27, which was not contested by the Respondent and corresponds to the value of the assessment that it was sought to oppose, and therefore the value of the cause is fixed at that amount.
Costs
Pursuant to Articles 12, No. 2, and 24, No. 4, of the Tax Arbitration Regulations, and 3, No. 2, of the Regulations on Costs in Tax Arbitration Proceedings and Table I attached to those Regulations, the amount of costs is fixed at € 10,404.27, which shall be borne by the Claimant.
Notify accordingly.
Lisbon, 31 July 2019
The President of the Arbitral Tribunal
Carlos Fernandes Cadilha
The Arbitrator Member
Carla Castelo Trindade
The Arbitrator Member
Amândio Silva
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