Process: 481/2018-T

Date: March 7, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 481/2018-T) addresses critical procedural questions arising when the Tax Authority revokes a contested act during pending arbitration proceedings. The taxpayer initially challenged an additional IRS (Personal Income Tax) assessment for 2010 totaling €566,980.52 and the dismissal of a hierarchical appeal, also requesting compensatory interest under Article 43 of the LGT. During arbitration, the Tax Authority revoked the dismissal decision and implicitly annulled the underlying tax assessment, recognizing that the company qualified as a small enterprise under Article 43 of the IRS Code. The taxpayer sought to continue proceedings solely for compensatory interest, while the Tax Authority raised an exception of material incompetence. The tribunal analyzed whether arbitral proceedings could continue after revocation and whether CAAD had jurisdiction over compensatory interest claims. The decision distinguishes between revocation (cessation for merit/convenience) and administrative annulment (destruction for invalidity) under the 2015 Administrative Procedure Code. Although labeled as revocation, the Tax Authority's act constituted administrative annulment with retroactive effects. The tribunal examined Article 64 of the Administrative Court Procedure Code regarding procedural consequences when challenged acts are annulled during proceedings. This ruling clarifies the scope of CAAD's material competence, the effects of revocatory acts on arbitration continuity, and the procedural framework for compensatory interest claims following tax assessment annulment.

Full Decision

ARBITRAL DECISION

The arbitral tribunal hereby agrees:

I – Report

  1. A..., Tax Identification Number..., resident in..., ... – ... ...-... Matosinhos, hereby requests the constitution of an arbitral tribunal, pursuant to the provisions of Article 2, paragraph 1, subsection a), and Article 10 of Decree-Law No. 10/2011, of 20 January, to assess the legality of the tax act comprising additional assessment of Personal Income Tax (IRS), relating to the year 2010, in the total amount of €566,980.52, as well as the dismissal of the hierarchical appeal filed against a previous decision granting partial relief through a gracious complaint, further requesting the Tax Authority to be condemned to pay compensatory interest.

Notified to present a response, the Tax Administration stated that it notified the Applicant of the revocation of the decision dismissing the hierarchical appeal, within the period established in Article 13 of the Regulations on Tax Arbitration (RJAT), the Applicant subsequently manifesting interest in continuing the proceedings for a decision regarding their right to receive compensatory interest, pursuant to Article 43 of the General Tax Law (LGT).

Given the position adopted by the Applicant, and also in the response, the Tax Administration raises the exception of material incompetence of the arbitral tribunal to rule on the claim for compensatory interest.

By arbitral order of 23 January 2019, the Applicant was notified to pronounce on the revocatory act and its consequences regarding the continuation of the proceedings.

In response, the Applicant stated that in the arbitral petition they requested the annulment of the decision dismissing the hierarchical appeal and the additional Personal Income Tax assessment for the year 2010, as well as the condemnation of the Tax Authority to return the tax unduly assessed and condemnation to payment of compensatory interest, adding that this latter claim falls within the scope of the arbitral proceedings and nothing prevents it from being decided in the continuation of the proceedings notwithstanding the revocation of the challenged act.

  1. The petition for constitution of the arbitral tribunal was accepted by the President of the Administrative Tax Arbitration Centre (CAAD) and automatically notified to the Tax Authority in accordance with the applicable regulations.

Pursuant to the provisions of subsection a) of paragraph 2 of Article 6 and subsection b) of paragraph 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable period.

The parties were timely and properly notified of this appointment and did not manifest the will to refuse it, pursuant to the combined provisions of Article 11, paragraph 1, subsections a) and b), of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of subsection c) of paragraph 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 6 December 2018.

The arbitral tribunal was regularly constituted and has material jurisdiction, pursuant to the provisions of Article 2, paragraph 1, subsection a), and Article 30, paragraph 1, of Decree-Law No. 10/2011, of 20 January.

The parties possess legal personality and capacity, are entitled to sue and be sued, and are duly represented (Articles 4 and 10, paragraph 2, of the same statute and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings are not vitiated by defects of nullity, having raised the exception of incompetence of the arbitral tribunal to rule on the claim for condemnation to compensatory interest, following the revocation of the challenged acts.

The tribunal must assess and decide.

II – Substantive Analysis

  1. The issue to be discussed is whether, having the Tax Administration revoked the decision dismissing the hierarchical appeal which is the object of the arbitral proceedings, the proceedings may continue for a condemnation to compensatory interest, and, if so, whether the tribunal has the jurisdictional competence to issue a condemning decision regarding interest.

Recall that the Applicant requested the constitution of an arbitral tribunal to assess the legality of the tax act comprising additional Personal Income Tax assessment, relating to the year 2010, as well as the dismissal of the hierarchical appeal filed against a previous decision granting partial relief through a gracious complaint, further requesting the Tax Authority to be condemned to pay compensatory interest.

By order of 29 October 2018, of the Deputy Director-General of the Tax Management Area, the previous order dismissing the hierarchical appeal was revoked.

The revocatory act was based on the information from the Service Directorate of Personal Income Tax in which it is recognized that company B... Lda. may be classified as a small enterprise for the purposes of paragraphs 3 and 4 of Article 43 of the Personal Income Tax Code and, consequently, it proposes the administrative annulment of the tax act in question, in application of the provision of Article 168, paragraph 1, of the Code of Administrative Procedure (CPA).

In these terms, and regardless of what will be stated below concerning the legal nature of the act, the revocation of the dismissal of the hierarchical appeal, based on the grounds contained in the information to which it refers, implicitly carries the annulment of the tax act of assessment itself.

  1. It should be noted that the new Code of Administrative Procedure, approved by Decree-Law No. 4/2015, of 7 January, now distinguishes between revocation and administrative annulment, making each of these figures correspond to the two previous modalities of abrogative or extinctive revocation and annulatory revocation. According to the definition contained in Article 165, revocation is "the administrative act that determines the cessation of the effects of another act, for reasons of merit, convenience or opportunity," whereas administrative annulment is "the administrative act that determines the destruction of the effects of another act, on the ground of invalidity." Revocation produces, as a general rule, only future effects (Article 171, paragraph 1), while administrative annulment, having as its object the elimination from the legal sphere of annullable acts, has, as a general rule, retroactive effects (Article 171, paragraph 3).

Furthermore, pursuant to Article 197, paragraph 1, of the CPA, in case of a hierarchical appeal, "the authority competent to rule on the appeal may confirm or annul the challenged act and, if the authority of the author of the challenged act is not exclusive, may also revoke it, modify it or substitute it, even to the detriment of the appellant."

In the present case, the Tax Authority chose to revoke the challenged act on the ground of considerations of administrative legality and not mere discretion, so that, although it adopts the verbal formula previously applied, it practiced, according to the new terminology, an act of administrative annulment, having determined, strictly speaking, the annulment of the tax act that was challenged via the hierarchical appeal.

On the other hand, as regards the procedural consequences of administrative annulment, it is important to consider the provision of Article 64 of the Code of Administrative Court Procedure, subsidiarily applicable, and especially the provisions of its paragraphs 1 and 2:

1 – When, pending the proceedings, the challenged act is the subject of administrative annulment accompanied or followed by new regulation, the applicant may request that the proceedings continue against the new act on the ground of recurrence of the same illegalities, the evidence produced being utilized and the applicant having the faculty of presenting new evidence.

2 – The request referred to in the previous paragraph shall be submitted within the period for challenging the annulling act and before the judgment becoming final that rules the instance extinct.

(…)

This provides for the typical hypothesis of expansion of the object of the proceedings when, pending an impugning proceeding, the Administration annuls the challenged act by practicing a new act in its place against which the challenger may still have interest in reacting.

It is clear, however, that this is not the situation in the present case.

The Administration annulled the act without establishing any new regulation of the legal situation, merely conforming itself with the recognition of the illegality of the act previously practiced.

Now, as follows from the cited paragraph 2 of Article 64, the annulment of the challenged act by the Administration itself, pending the proceedings, satisfying the applicant's claim for impugnation, leads to the supervening impossibility of the dispute, which constitutes a cause of extinction of the instance (Article 277, subsection e), of the Code of Civil Procedure).

It is certain that, in general theory, the administrative annulment of an administrative act pending the judicial proceeding for impugnation may not necessarily lead to the extinction of the instance when other claims have been deduced cumulatively with the claim for impugnation, directed at obtaining restorative, compensatory or other relief, which the annulment of the act alone does not satisfy: in this hypothesis, the administrative annulment does not prevent the proceedings from continuing for the appreciation of the claims that came cumulated as dependent claims with the main claim for impugnation (MÁRIO AROSO DE ALMEIDA/CARLOS FERNANDES CADILHA, Commentary to the Code of Administrative Court Procedure, 4th edition, Coimbra, p. 440).

This possibility, however, does not arise in the context of the arbitral proceedings, in which case, as follows from Article 24, paragraph 5, of the RJAT, the payment of compensatory interest is due as an effect of the arbitral decision granting the claim on the merits of the pretension deduced by the taxpayer and aims to restore the situation that would have existed if the tax act subject to the arbitral decision had not been practiced (Article 24, paragraph 1, subsection b), of the RJAT).

Given that it is the annulment of the tax act at the initiative of the Tax Administration, the payment of compensatory interest is due within the scope of the tax procedure itself, in application of the provision of Article 43 of the General Tax Law. Moreover, contrary to what the Supreme Administrative Court decision of 7 January 2016 (Case 0574/14) seems to presuppose, the condemnation to compensatory interest could not result directly from official annulment, but would imply the continuation of the judicial proceedings for the purpose of assessing the validity of the tax act, since only in case the claim succeeds on the merits can the court issue a condemning decision.

Furthermore, Article 172 of the CPA, under the heading "Consequences of Administrative Annulment," reproduces the provision of Article 173 of the Code of Administrative Court Procedure, applicable to the execution of sentences annulling administrative acts, stipulating a set of duties to execute with respect to the act administratively annulled that correspond to those equally imposed on the Administration if there is contencious annulment within an impugning proceeding. This suggests that the consequences resulting from the annulment of an administrative act are fundamentally identical, regardless of whether the annulment results from an act by the Administration itself or from a judicial decision issued in an impugning proceeding (in these precise terms, CARLOS FERNANDES CADILHA, "Implications of the New Regime of the Code of Administrative Procedure on Administrative Procedural Law," in Julgar No. 26, May-August 2015, p. 31).

Being one of the duties in which the Administration is bound, by effect of the administrative annulment of the act, the reconstitution of the situation that would have existed if the act had not been practiced, through the execution of the restorative effect of the annulment, nothing prevents that within this scope compensatory interest should be owed for unduly paid tax liability, in consonance with that also established in Article 43 of the General Tax Law.

And it is not excluded, in any case, that the Applicant may deduce a claim for damages in an autonomous civil liability action.

What cannot fail to be recognized is that the present arbitral proceedings, by effect of the administrative annulment of the challenged acts, cannot continue due to the supervening impossibility of the dispute.

Consequently, the ruling on the exception of incompetence of the arbitral tribunal to rule on the claim regarding compensatory interest becomes moot.

III – Decision

In these terms, it is decided to rule the instance extinct due to supervening impossibility of the dispute.

Value of the Cause

The Applicant indicated as the value of the cause the amount of €195,323.14, which was not contested by the Respondent and corresponds to the value of the assessment which it was sought to oppose, whereby the value of the cause is fixed at that amount.

Costs

Pursuant to Articles 12, paragraph 2, and 24, paragraph 4, of the RJAT, and Article 3, paragraph 2, of the Regulations on Costs in Tax Arbitration Proceedings and Table I annexed to that Regulation, the amount of costs is fixed at €3,672.00, which shall be borne by the Respondent (Article 536, paragraph 3, second part, of the Code of Civil Procedure).

Let notification be made.

Lisbon, 7 March 2019

The President of the Arbitral Tribunal

Carlos Fernandes Cadilha

The Arbitrator (Vogal)

José Rodrigo de Castro

The Arbitrator (Vogal)

Magda Feliciano

Frequently Asked Questions

Automatically Created

What happens when the Tax Authority revokes the contested act during CAAD arbitral proceedings?
When the Tax Authority revokes a contested act during CAAD proceedings, the arbitral tribunal must determine whether grounds exist for continuing the proceedings. Under Article 64 of the Administrative Court Procedure Code (CPTA), applied subsidiarily, if the act is subject to administrative annulment, the applicant may request continuation against any new regulatory act on grounds of recurring illegalities. However, if the revocation fully satisfies the taxpayer's substantive claims regarding the tax assessment itself, the proceedings may be extinguished regarding that primary claim, though ancillary claims like compensatory interest may potentially proceed if within the tribunal's competence.
Can a taxpayer claim compensatory interest (juros indemnizatórios) after the revocation of a tax assessment in arbitration?
Yes, taxpayers can claim compensatory interest (juros indemnizatórios) after revocation of a tax assessment, as these are distinct legal claims. Under Article 43 of the LGT, taxpayers are entitled to compensatory interest when tax payments are made and subsequently the tax is reduced, annulled, or declared undue. The right arises independently from the annulment itself. However, the critical question is whether the CAAD arbitral tribunal has material competence to decide such claims. The Tax Authority commonly raises exceptions of incompetence, arguing that compensatory interest claims fall outside the scope of arbitral jurisdiction defined in Article 2 of the RJAT, which primarily covers legality review of tax acts rather than condemning the administration to specific payments.
Does the CAAD arbitral tribunal have material competence to decide on compensatory interest claims under Article 43 of the LGT?
The material competence of CAAD tribunals to decide compensatory interest claims under Article 43 of the LGT remains contentious. Article 2(1)(a) of the RJAT grants arbitral tribunals jurisdiction to 'assess the legality of tax acts,' but whether this extends to condemning the Tax Authority to pay compensatory interest is debated. Some arbitral decisions have accepted competence when the interest claim is accessory to the principal claim for assessment annulment. However, others distinguish between reviewing administrative legality and issuing condemnatory judgments requiring positive actions. The Tax Authority frequently argues that such condemnatory powers exceed arbitral competence and belong exclusively to administrative courts. The tribunal's resolution of this exception determines whether the proceedings can continue solely for interest determination.
What is the legal effect of revoking the rejection of a hierarchical appeal (recurso hierárquico) on pending arbitral proceedings?
The revocation of a hierarchical appeal dismissal during arbitral proceedings has significant effects on case continuity. Under the new Administrative Procedure Code (CPA 2015), Article 165 distinguishes revocation (for merit/convenience with prospective effects) from administrative annulment (for invalidity with retroactive effects). When the Tax Authority revokes a hierarchical appeal dismissal on legality grounds—as occurred here when recognizing small enterprise status—it constitutes administrative annulment despite the terminology used. This annulment implicitly cancels the underlying tax assessment with retroactive effect under Article 171(3) CPA. Procedurally, this satisfies the taxpayer's primary claim for assessment annulment, potentially causing extinction of the principal proceedings while leaving ancillary claims like compensatory interest subject to competence determinations.
How does the extinction of proceedings (extinção da instância) work in Portuguese tax arbitration under the RJAT?
Extinction of proceedings (extinção da instância) in Portuguese tax arbitration under the RJAT occurs when the object of the arbitration ceases to exist or the taxpayer's interest in a decision disappears. When the Tax Authority revokes or annuls the contested act during arbitration, the tribunal must assess whether continuation serves any purpose. Under Article 13 of the RJAT, the Tax Authority can notify revocation during proceedings. If the revocation fully satisfies the taxpayer's claims, the proceedings typically extinguish regarding those claims. However, taxpayers may maintain interest in continuation for ancillary issues like compensatory interest or to obtain a formal decision on illegality. The tribunal must examine whether remaining claims fall within its material competence and whether the taxpayer retains legitimate procedural interest warranting continuation despite satisfaction of the primary substantive claim.