CAAD Case 474/2014-T: IRS Classification of Monetary Incentives as Bonuses – Material Incompetence Ruling

ARBITRAL DECISION

CLAIMANT: A, S.A., legal entity no. …, registered in the Commercial Registry Office of Lisbon, with registered address at Rua … Lisbon

RESPONDENT: Tax and Customs Authority (hereinafter referred to as TA) represented by … and …, pursuant to appointment order of the Director General of the TA, dated 21-7-2014.

I – REPORT

1. The CLAIMANT submitted a request for arbitral pronouncement, pursuant to the provisions of articles 2, 3, 10 and following of the LJAT and of articles 68 and 99 and following of the Code of Tax Procedure and Procedural Law (CTPPL), in which it states that the same has as its object:

The challenge and annulment of the tax act consisting of the dispatch, with the heading "Information", which responds to the request for binding information required by the Claimant, issued by the Director of the IRS Services, by subdelegation of the respective Director-General.

The Claimant finally petitions that this Arbitral Tribunal pronounce:

(i) The annulment of the tax act issued by the Director of IRS Services, consisting of the dispatch, with the heading "Information", published on 13 April 2014;

(ii) The substitution of that act by another declaring that the income described falls within IRS Category A, pursuant to subparagraph g) of no. 3 of article 2 of the IRS Code.

1. The CLAIMANT submitted a Request for constitution of the Arbitral Tribunal on 09-07-2014, which was accepted by the President of CAAD on 11-07-2014, leading to the notification of the TA, in compliance with no. 3 of article 10 of the Legal Framework for Arbitration in Tax Matters (hereinafter LJAT).

2. Having the CLAIMANT opted not to appoint an arbitrator, pursuant to the provisions of no. 1 of article 6 of the LJAT, the signatory was appointed sole arbitrator by the Deontological Council of the Administrative Arbitration Center on 17-04-2014, appointment which was timely accepted and notified to the parties who did not oppose the said appointment.

3. The Sole Arbitral Tribunal was constituted on 11-09-2014, applying the provisions of subparagraph c), of no. 1, together with no. 8 of article 11, of the LJAT, whereby on 16-09-2014 the TA was notified to, in accordance with and for the purposes of the provisions of nos. 1 and 2 of article 17 of the LJAT, submit its Response and the corresponding administrative file;

4. In Response, the TA, on 16-10-2014, presents defense by exception and challenge, raising, as to the exception, the lack of material jurisdiction of this Arbitral tribunal, as the object of the arbitral pronouncement would be aimed at the annulment and substitution of a dispatch issued by the IRS Services Director in the context of a request for binding information submitted by the Claimant (§8).

5. Having on 21-10-2014 been scheduled the meeting provided for in article 18 of the LJAT, it took place on 03-11-2014, from which minutes were drawn up, which records the fixing of the date of 06-03-2015 for the pronouncement of the arbitral decision.

6. As noted in the said minutes, the Claimant, on 11-11-2014, came to pronounce itself in writing as to the exceptions;

7. Which led to a new pronouncement by the TA, on 12-01-2015, regarding the verification of the already adduced exception of lack of material jurisdiction of this Arbitral Tribunal.

8. The process does not suffer from any nullities.

WHEREFORE,

It is thus important to examine the exception invoked of lack of material jurisdiction of this Arbitral Tribunal, as if it is found to be well-founded, constituting a dilatory exception preventing the examination of the merits of the case, pursuant to the provisions of article 576, no. 1 and 2, article 577, subparagraph a) of the CPC ex vi, article 2, subparagraph e) of the CTPPL and article 29, no. 1, subparagraphs a) and e) of the LJAT, it will determine the impossibility of hearing the petition, cf. article 608, no. 2 of the CPC, being grounds for the dismissal of the TA from the instance, pursuant to articles 99, no. 1 and 278, no. 1 subparagraph a) of the CPC ex vi, article 29, no. 1 subparagraph e) of the LJAT.

II - FACTS

The relevant factual matter, considered proven, for examining the exception invoked by the TA of lack of material jurisdiction of the tribunal is as follows:

1. The Claimant submitted, on 24-01-2014, in the Information Management and Binding Information System a request for binding information, with urgent character, to which was assigned no. …, requesting the issuance of binding information on the tax classification of the income attributed to employees of the establishments that commercialize its products to the end customer as a way to promote their sale.

2. The binding information provided – unfavorable to the claimant's claim – was authorized by dispatch, dated 10-04-2014, of the IRS Services Director, by subdelegation, and the Claimant was notified on 13 April 2014, of the understanding set forth as to the legal-tax classification of the facts in question.

III – PRELIMINARY MATTERS

The TA sustains the exception of lack of material jurisdiction of this Arbitral Tribunal. For its examination it is important to understand the position of the parties. Thus, we have:

POSITION OF THE TA

The TA sustains the exception of lack of material jurisdiction of this Arbitral Tribunal alleging, in summary, and with relevance for the examination, the following:

1. The petition formulated, in directing itself to the annulment and substitution of the dispatch issued by the IRS Services Director in the context of the Claimant's Binding Information request, is outside the scope of competence of this Arbitral Tribunal, as provided for in no. 1 of article 2 of the LJAT, and, secondly, of the binding of the TA to that jurisdiction, by means of Order no. 112-A/2011, of 22 March. To which it adds,

2. The Claimant submitted, on 24-01-2014, in the Information Management and Binding Information System a request for binding information, with urgent character, to which was assigned no. …, requesting the issuance of binding information on the tax classification of the income attributed to employees of the establishments that commercialize its products to the end customer as a way to promote their sale (as per document no. 2 attached with the P.I. and PA now attached, at pp. 9 to 22).

3. The binding information provided was authorized by dispatch, dated 10-04-2014, of the IRS Services Director, by subdelegation, and the Claimant was notified of the understanding set forth as to the legal-tax classification of the facts in question, as per document no. 1 attached with the P.I. and PA at pp. 1 to 4.

4. Now, the dispatch issued in the context of the Binding Information request submitted by the Claimant does not constitute a tax assessment act, a self-assessment act, a withholding at source act, nor a payment on account act.

5. The dispatch which the Claimant seeks to have annulled also does not correspond to a taxable matter determination act, a taxable matter fixing act, nor a patrimonial value fixing act.

6. In this way, the object of the present request for arbitral pronouncement does not fall within what is provided for in article 2 no. 1 of the LJAT.

7. In fact, the scope of competence of the arbitral tribunals established pursuant to the provisions of the LJAT does not contemplate the possibility of examining petitions aimed at the annulment and substitution of dispatches issued in the context of a procedure concerning requests for binding information.

8. The TA concludes that the Arbitral Tribunal established is materially incompetent to examine and decide the petition which is the subject of the present dispute, pursuant to articles 2, no. 1 and 4, no. 1, both of the LJAT.

9. Which constitutes a dilatory exception preventing the examination of the merits of the case, pursuant to the provisions of article 576, no. 1 and 2, article 577, subparagraph a) of the CPC ex vi, article 2, subparagraph e) of the CTPPL and article 29, no. 1, subparagraphs a) and e) of the LJAT.

10. Which stands as an obstacle to the hearing of the petition and the dismissal of the instance of the TA pursuant to subparagraph a) of no. 1 of article 278 of the CPC, ex vi article 29, no. 1, subparagraph e) of the LJAT.

POSITION OF THE CLAIMANT

The Claimant comes to oppose the exception of lack of material jurisdiction of the tribunal alleging, in summary, and with relevance for the examination, the following:

1. The provisions of subparagraphs a) and b) of no. 1 of article 2 of the LJAT in defining the scope of material competence of the Arbitral Tribunal were formulated in an "open" manner so as to encompass a multiplicity of acts of the tax administration generically and without enumerating them exhaustively;

2. Whereby the act which is the object of the dispute will fall within the broad category of tax acts susceptible to pronouncement by this Arbitral tribunal, as

3. It may be understood that the challenge and annulment of the tax act consisting of the dispatch, with the heading "information", which responds to the request for binding information required by the Claimant, and issued by the Director of IRS Services, by subdelegation of the respective director-general, may be qualified as an act "of taxable matter determination when it does not give rise to the assessment of any tax, of acts of taxable matter determination and of patrimonial value fixing acts". Adding,

4. The classification of income into categories is a moment ontologically inherent to the determination of taxable matter (cf. § 10 of the response to the exceptions), to reaffirm that,

5. The act issued by the Director of IRS Services, which declared "(…) the referred income constitutes commissions taxed in IRS Category B", constitutes an act of determination of taxable matter (…) (cf. § 11 of the response to the exceptions).

6. Coming the claimant, to refer finally that constituting the binding information sub judice, as has been set out above, in binding its recipients to classify a certain income in a certain category, instead of another, an "act of determination of taxable matter", the challenge of the tax classification assumed therein by the TA – falls within the scope of subparagraph b) of no. 1 of article 2 of the LJAT (…) (cf. § 16 of the response to the exceptions).

RESPONSE OF THE TA TO THE OPPOSITION TO THE EXCEPTION

The TA came to respond to the opposition to the exception made by the Claimant, alleging, in summary, and with relevance for the examination, the following:

1. What is sought is the declaration of illegality of the decision of the Tax Administration that classifies, for tax purposes, a certain income (…) which being prejudicial in relation to the "assessment act" properly so-called also does not confuse with the taxable matter determination act (…) as this integrates a set of phases that are to culminate with the fixing of a value: the value of the taxable matter;

2. Now, the decision now impugned does not compute any net income, does not subtract from any gross income the specific deductions, does not proceed to any combining of income, does not subtract from any income the value of any deduction, does not compute any marital coefficient.

The TA continues by questioning:

1. What was the taxable matter determined by the dispatch now impugned?

2. What action of subtraction (of the deductions and deductions from a certain value of income) does that dispatch contain? Responding:

3. In fact, nor could the decision that fell on the binding information contain it, since the same relates only to the classification, for tax purposes, of an income,

4. Being faced with an administrative act on a tax matter, which does not integrate the acts provided for in subparagraph a) and b) of no. 1 of article 2 of the LJAT, the competence of the arbitral tribunals is excluded.

IV - EXAMINATION OF THE QUESTION OF INCOMPETENCE

1. Pursuant to no. 1 of article 2 of the LJAT, the competence of the arbitral tribunals comprises the examination of the following claims:

a) The declaration of illegality of tax assessment acts, self-assessment acts, withholding at source acts and payment on account acts;

b) The declaration of illegality of taxable matter determination acts when they do not give rise to the assessment of any tax, of acts of taxable matter determination and of patrimonial value fixing acts;

It is thus important, in order to examine the exception of lack of material jurisdiction of this arbitral tribunal, to verify whether the question in question is susceptible of being examined under this provision. Now,

1. The CLAIMANT submitted a request for constitution of an arbitral tribunal stating that the same has as its object:

The challenge and annulment of the tax act consisting of the dispatch, with the heading "Information", which responds to the request for binding information required by the Claimant, issued by the Director of IRS Services, by subdelegation of the respective Director-General.

1. Coming, finally, the Claimant to petition that this Arbitral Tribunal pronounce:

(i) The annulment of the tax act, issued by the Director of IRS Services, consisting of the dispatch, with the heading "Information", published on 13 April 2014;

(ii) The substitution of that act by another declaring that the income described falls within IRS Category A, pursuant to subparagraph g) of no. 3 of article 2 of the IRS Code.

Let us then examine the petition under each of the subparagraphs of no. 1 of article 2 of the LJAT:

Pursuant to subparagraph a) of no. 1 of article 2 of the LJAT

1. The examination of the petition under this subparagraph would imply considering that a dispatch issued in the context of a request for binding information may constitute a tax assessment act, a self-assessment act, a withholding at source act and a payment on account act; this because,

2. Now, as is clearly evident, no act issued in the context of a request for binding information can be included in the category of tax assessment acts, self-assessment acts, withholding at source acts and payment on account acts;

3. As does not the act examined which consists of the dispatch, with the heading "Information", which responds to the request for binding information required by the Claimant, issued by the Director of IRS Services, by subdelegation of the respective Director-General.

4. As furthermore the Claimant assumed as much when in the opposition to the exception raised by the TA it seeks to frame the request for pronouncement of this arbitral tribunal under subparagraph b) of no. 1 of article 2 in terms of an act of determination of taxable matter (cf. § 11 and 16 of the response to the exceptions).

5. Whereby it is concluded that the examination of the petition for annulment and subsequent petition for substitution of the dispatch in question – the act issued by the Director of IRS Services, by subdelegation of the respective Director-General, with the heading "Information", which responds to the request for binding information required by the Claimant, which declared "(…) the referred income constitutes commissions taxed in IRS Category B" - , is outside the scope of material competence of the arbitral tribunals, under subparagraph a) of no. 1 of article 2 of the LJAT.

Let us now make an identical framing, pursuant to subparagraph b) of no. 1 of article 2 of the LJAT:

1. The examination of the petition under this subparagraph would imply considering that a dispatch issued in the context of a request for binding information which classifies a given income in a given category, in the IRS context, constitutes an act of determination of taxable matter, as the Claimant raises, in concreto:

The act issued by the Director of IRS Services, which declared "(…) the referred income constitutes commissions taxed in IRS Category B", constitutes an act of determination of taxable matter (…) (cf. § 11 of the response to the exceptions).

1. Now, as is clearly evident, despite the Claimant's argument, that subparagraphs a) and b) of no. 1 of article 2 of the LJAT in defining the scope of material competence of the Arbitral Tribunal were formulated in an "open" manner encompassing a multiplicity of acts of the tax administration generically and without enumerating them exhaustively, the Claimant's argument is not well-founded as the request for binding information does not constitute a moment in the life of the tax that is part of the determination of taxable matter, given that,

2. The said conditioning is done in an earlier phase - that of the classification of income into categories -, in accordance with the rules of objective incidence.

3. As the Claimant refers – in its opposition to the exception raised - , there was not, as a result of the classification of income, any determination of taxable matter, as is extracted from its § 12, in the following terms:

It is evident that the response to that petition will orient – given its binding character – be the conduct of that [TA], be, reflexively, but necessarily, the conduct of these [taxpayers], whereby the said Dispatch constitutes, from now on, an act of determination of taxable matter - except, naturally, if the taxpayers choose to "disobey" the binding guidance of the TA, which appears undesirable for all parties.

1. When the Claimant states that it "constitutes (…) an act of determination of taxable matter - except (…) if" this confirms that the taxable matter is not determined by that dispatch, and will only be so when, in a later phase, it is followed and applied.

2. Indeed, the determination of taxable matter constitutes a moment of calculation in the life of the tax, while the act impugned a moment of objective classification of the tax, located in an ex-ante moment.

3. As stated by Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, LGT Annotated Almedina, 2012, in annotation to article 81 "1- Evaluation and calculation of taxable matter":

§2 "In cases where the determination of taxable matter is possible on the basis of objective elements (such as accounting and respective documentation) there is not properly a place for an evaluation of taxable matter, but rather its calculation, through the ascertainment of these elements and mathematical operations based on them carried out."

1. That is to say, the determination of taxable matter constitutes a calculation that starts from the elements of accounting and respective documentation and translates into mathematical operations based on them carried out."

2. Now the Claimant does not refer to such calculation operations, whereby this Tribunal has to conclude that, as the Respondent contends, the decision now impugned does not compute any net income, does not subtract from any gross income the specific deductions, does not proceed to any combining of income, does not subtract from any income the value of any deduction, does not compute any marital coefficient.

3. In fact, as exposed by the Claimant in the request for constitution of the arbitral tribunal at § 74, since it refers there to the erroneous classification of the identified income;

4. To add, at § 77, that the Claimant is a party with standing to request the annulment of the act called into question, for, being unlawful and constituting an erroneous classification of tax income;

5. Coming, finally, the Claimant to petition that this Arbitral Tribunal pronounce for the annulment of the tax act, and for the substitution by another declaring that the income described falls within IRS Category A, pursuant to subparagraph g) of no. 3 of article 2 of the IRS Code, grounding that what it seeks to attack is the classification of income and not its quantification.

6. In these terms, and as already mentioned, the determination of taxable matter constitutes a moment of calculation in the life of the tax, while the act impugned a moment of objective classification of the tax, located in an ex ante moment, whereby

7. The decision now impugned - the act issued by the Director of IRS Services, which declared "(…) the referred income constitutes commissions taxed in IRS Category B", - does not compute any net income, does not subtract from any gross income the specific deductions, does not proceed to any combining of income, does not subtract from any income the value of any deduction, does not compute any marital coefficient.

8. In sum, it does not constitute an act of determination of taxable matter.

9. Whereby it is concluded that the examination of the petition for annulment and subsequent petition for substitution of the dispatch in question – the act issued by the Director of IRS Services, by subdelegation of the respective Director-General, with the heading "Information", which responds to the request for binding information required by the Claimant, which declared "(…) the referred income constitutes commissions taxed in IRS Category B" - , is outside the scope of material competence of the arbitral tribunals, under subparagraph b) of no. 1 of article 2 of the LJAT.

Concluding the examination of the exception of lack of competence, pursuant to article 2 of the LJAT:

1. The annulment of a dispatch issued by the DSIRS in the context of a request for binding information is outside the scope of material competence of the arbitral tribunals. At most could have been raised the examination of acts provided for in article 2 which might eventually apply the understanding of the binding information, but for being acts of one of those types.

2. Whereby it is concluded that this arbitral tribunal is materially incompetent to hear the petition.

V - DECISION ON THE QUESTION OF INCOMPETENCE

Wherefore the exception of lack of material jurisdiction of this Arbitral Tribunal, raised by the TA, is well-founded, a fact which determines its dismissal from the instance, cf. provided for in article 99, no. 1 of the CPC, ex vi, article 29, no. 1 subparagraph e) of the LJAT.

VI - MATTERS OF PREJUDICED KNOWLEDGE

The acceptance of the exception of lack of material jurisdiction of this Arbitral Tribunal has as consequences the dismissal of the TA from the instance, thus leaving prejudiced the knowledge of the other matters raised in the process, cf. provided for in article 608, no. 2 of the CPC, ex vi, article 29, no. 1 subparagraph e) of the LJAT.

VII - DECISION

In view of the foregoing, it is decided:

1. To uphold the exception of lack of material jurisdiction of this tribunal to examine the matter which is the subject of the dispute;

2. To find prejudiced the knowledge of the other matters raised in the process;

3. To dismiss the Tax and Customs Authority from the instance.

VIII - VALUE OF THE PROCESS

€ 30,000.01 (thirty thousand euros and one cent).

IX – COSTS

Pursuant to the provisions of the Regulation of Costs in Tax Arbitration Processes, the costs are fixed at €1,836.00.

Lisbon, 4 March 2015

Text prepared by computer, pursuant to article 131, no. 5 of the CPC, ex vi, article 29, no. 1 subparagraph e) of the LJAT, with blank verso of each page, the spelling being prior to the last spelling agreement.

The Arbitrator

Henrique Curado

[1] It is noted that the authors use the concepts of taxable matter and taxable matter indistinctly.