Process: 522/2017-T

Date: March 12, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

In Process 522/2017-T, taxpayers challenged an IRS assessment of €53,452.70 for 2014, disputing their classification under the organized accounting regime for Category B income. The taxpayers had initially opted for organized accounting in 2001-2003, with successive three-year renewals through 2013-2015. In January 2014, citing Law 83-C/2013's amendments to Article 28(2) of the IRS Code, they requested to switch to the simplified regime. The Tax Authority denied this request, arguing that the three-year permanence period (2013-2015) was ongoing and could not be interrupted mid-cycle. Article 28 of the IRS Code establishes that taxpayers must remain in their chosen regime for a minimum three-year period, renewable for equal periods, and can only switch by notifying the authority before the start of a new period (typically by March of the preceding year). The taxpayers contended that Law 83-C/2013 and the interpretative Law 82-E/2014 permitted regime changes due to altered gross income thresholds. However, the Tax Authority maintained that these laws only allowed taxpayers already in the simplified regime to opt for organized accounting until December 31, 2014, per Article 177(9) of Law 83-C/2013. The taxpayers filed a hierarchical appeal requesting suspensive effect, but the assessment was issued on May 12, 2017, before the appeal's resolution (ultimately denied December 7, 2017). This case illustrates the strict application of the three-year lock-in period for IRS regime elections and the limited circumstances under which mid-period switches are permitted under Portuguese tax law.

Full Decision

ARBITRAL DECISION

REPORT

On September 26, 2017, A… and his wife, B…, holders of tax identification numbers (NIF) … and …, respectively, resident at …, no. …, … - …-…, … (hereinafter referred to as the Applicant or, individually, as Applicants), came, under the combined provisions of articles 2, no. 1, subparagraph a) and 10, no. 1, subparagraph a) of Decree-Law no. 10/2011, of January 20, which approved the Legal Framework for Arbitration in Tax Matters (RJAT), and article 99, subparagraph a) of the Tax Procedure and Process Code, to request the constitution of a Sole Arbitral Tribunal, with the Tax and Customs Authority (hereinafter AT or Respondent) as respondent, with a view to the declaration of illegality and annulment of the Personal Income Tax (IRS) assessment no. 2017…, of 12/05/2017, relating to the year 2014, in the amount of €53,452.70, as well as its replacement with a new assessment that considers the taxation of their category B income under the simplified regime, assigning to the claim an economic value of €19,461.70, equivalent to the value of the tax annulment claimed.

Summary of the Parties' Positions

From the Applicants:

In support of their request for arbitral pronouncement, the Applicants allege, in summary, the following:

The contested assessment is unlawful, as it was based on taxation according to the organized bookkeeping regime of category B personal income tax (IRS) earned by the Applicant husband in the year 2014.

The Applicant chose that regime in the period 2001/2003, which had successive extensions in the periods 2004/2006, 2007/2009, 2010/2012 and 2013/2015, as, having not chosen the simplified regime, he was legally obliged to the organized bookkeeping regime.

On 30/01/2014, in view of the new wording given to no. 2 of article 28 of the IRS Code, by Law no. 83-C/2013, of 31/12, the Applicant requested the AT to alter his taxation regime, seeking to move from the organized bookkeeping regime to the simplified regime.

On 1/10/2014, the Applicant was notified by the IRS Service Directorate – Design Division, of the draft decision denying his request, on which he exercised his right to be heard, which he supplemented by a request dated 22/01/2015, invoking the new wording given to article 28 of the IRS Code, by Law no. 82-E/2014, of 31/12, of an indisputably interpretative nature.

The request for classification under the simplified regime was denied by dispatch of the IRS Service Director, of 23/02/2017, against which the Applicant filed the necessary hierarchical appeal of that decision to the Minister of Finance, in accordance with article 66, nos. 1 and 2 of the Tax Procedure and Process Code and articles 184, nos. 1, subparagraph a), 2 and 3, 185, no. 1, 186, no. 1, subparagraph a), 189, no. 1, 193, nos. 1, subparagraph a) and 2, and 194, nos. 1 and 2, all of the Administrative Procedure Code, under which he requested that suspensive effect be attributed to it.

Meanwhile, following various steps taken with the AT services in order to obtain a decision on the request for classification under the simplified regime, the Applicants submitted the model 3 IRS declaration relating to the income of the year 2014.

They were subsequently notified, by official letter of 08/06/2015, that said declaration showed the error "B55 – Incompatibility between the annex delivered and the option in registration," which they could justify at their Finance Service, which they did.

By official letter of 7/04/2017, from the Finance Directorate of Braga, without there having been a decision on the hierarchical appeal, the Applicants were notified that, within 30 days, they should submit the model 3 IRS declaration for the year 2014, and that category B income should be declared in annex C (organized bookkeeping).

On 12/05/2017, the contested assessment was issued, in the amount of €53,452.70 with a payment deadline of 03/07/2017, which includes compensatory interest of €3,823.48, which the Applicants consider undue.

Thus, the IRS assessment for the year 2014 is unlawful for being untimely and premature, being made before the due time and is not properly reasoned, despite not having been made on the basis of the income declaration presented by the Applicants.

Accordingly, the Applicants request that the claim be judged favorably, annulling the contested assessment, which should be replaced by a new tax act in which the taxation of income for the year 2014 under the simplified regime is considered, all with the legal consequences thereof.

From the Respondent:

Notified in accordance with the provisions of article 17 of the RJAT, the AT submitted its reply and annexed the administrative file (PA), in which it defended the legality and maintenance of the assessment subject to this request for arbitral pronouncement, on the following grounds:

The declaration of changes submitted by the Applicant on 31/01/2014 was rejected by the Finance Service of … …, because the option indicated did not apply to his situation.

Although considering that, in view of the provision in no. 5 of article 28 of the IRS Code, the minimum period of permanence in either of the taxation regimes was three years, renewable for equal periods, except if the taxpayer had notified the change of regime by which he was covered until March 2013, the Finance Directorate of Braga sent the request to the IRS Service Directorate, for consideration and decision.

The taxpayer exercised his right to be heard on the draft denial of the request, on the same grounds contained in the request for arbitral pronouncement, which he also did in the hierarchical appeal proceedings.

The hierarchical appeal was denied on 07/12/2017, with reasoning accepted by case law, that the "three-year period of permanence (2013/2015) in the organized bookkeeping regime by choice (…)" was ongoing.

The simplified regime is a non-binding regime, valid only for those who have not chosen the organized bookkeeping regime, and the taxpayer was covered by the organized bookkeeping regime, by choice in the period 2001/2003 with extensions in the periods 2004/2006, 2007/2009, 2010/2012 and, since he did not choose the simplified regime by March 2013, was legally obliged to remain in the organized bookkeeping regime for the three-year period 2013/2015.

The wording given to no. 2 of article 28 of the IRS Code, by Law no. 83-C/2013, of 31/12, by altering the annual gross amount that delimits the determination of business and professional income, prompted the administrative instruction contained in Circular Letter no. 20172/2014, of 28/3 of the IRS Service Directorate, giving taxpayers in the IRS category B simplified regime the possibility of choosing the organized bookkeeping regime, until 31/12/2014, in accordance with the provision in no. 9 of article 177 of the same Law.

The Respondent does not subscribe to the Applicant's understanding that, where the three-year period of permanence in the organized bookkeeping regime by choice is ongoing, this would be equivalent to organized bookkeeping imposed by law.

The Applicants invoke the lack of reasoning of the assessment act; however, they were notified by the Services to submit an income declaration in accordance with the provisions of article 76 of the IRS Code, not being unaware of the procedural course that underlies the acts now contested.

The Applicants had full knowledge that, having not submitted the model 3 IRS declaration for the year 2014, even after being notified to do so, the official assessment would be based on the elements available to the AT.

In case of doubt regarding the origin and amount of income contained in the notified assessment, they could have resorted to the provision in no. 2 of article 37 of the Tax Procedure and Process Code, requesting notification of the requirements that they believed were omitted, or requesting a certified copy containing them, which they did not do.

On these grounds, the AT requests that the request for arbitral pronouncement be judged unfounded, with the Respondent being absolved of all claims, all with the due and legal consequences.

Not having raised exceptions or requested the production of additional evidence, it was, by dispatch of 29/01/2018, dispensed with the meeting referred to in article 18 of the RJAT, inviting the Parties to, if they wished, produce successive written submissions, within ten days, designating March 19, 2018 as the date for the arbitral decision and warning the Applicants that, until that date, they should proceed with payment of the subsequent arbitration fee.

The Parties made no submissions.

II. PROCEDURAL MATTERS

The sole arbitral tribunal is competent and was regularly constituted on December 6, 2017, in accordance with articles 2, no. 1, subparagraph a), 5 and 6, all of the RJAT.

The parties have legal personality and capacity, are legitimately entitled, and are legally represented (the Applicant as a lawyer in his own cause, with active registration in the Bar Association), in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of March 22.

The proceedings are not vitiated by defects that would render them invalid.

No exceptions requiring consideration and decision by the tribunal were raised.

III. GROUNDS FOR DECISION

III.1 FACTUAL MATTERS

A – Established Facts

With respect to the factual matters, the Tribunal is not required to pronounce upon everything alleged by the parties; rather, it has a duty to select the facts that matter for the decision and to distinguish the proven matter from the unproven (see articles 123, no. 2 of the Tax Procedure and Process Code and 607, no. 3 of the Civil Procedure Code, applicable by virtue of article 29, no. 1, subparagraphs a) and e) of the RJAT).

The factual matter relevant to the understanding and decision of the case, following critical examination of the documentary evidence attached to the proceedings (P.I.) and the administrative file (PA), is established as follows:

  • In the period 2001/2003, the Applicant chose taxation of his category B IRS income under the organized bookkeeping regime, remaining in that regime for successive three-year periods until the three-year period 2013/2015, by not having chosen taxation under the simplified regime by the end of March 2013 (fact admitted by agreement);

  • On 31/01/2014, the Applicant directed to the Finance Service Chief of … …, following the refusal to accept the Declaration of Changes with completion of field 19, box 2, a request for classification under the simplified regime, alleging that he had been in the organized bookkeeping regime since the beginning, having already exceeded a period of more than 3 years of permanence in that regime (Doc. 2 attached to the proceedings);

  • Through official letter no. …, from the IRS Service Directorate – Design Division (hereinafter DSIRS), of 1/10/2014, the Applicant was notified to exercise his right to be heard on the draft denial of the request for classification under the simplified regime, with the following grounds (Doc. 10, attached to the proceedings);

  • The Applicant exercised his right to be heard, arguing, in particular, that the draft denial goes against point 5 of Circular Letter no. 20172/2014, of 28/03/2014, from the DSIRS (Doc. 9 attached to the proceedings);

  • On 12/03/2015, the Applicant sent an email to the DSIRS, requesting that a final decision be made on the request for classification, as he had doubts about completing the model 3 IRS declaration for 2014 (Doc. 5 attached to the proceedings);

  • By official letter no. GIC5/…, from the DSIRS, of 8/06/2015, the Applicant was notified that the model 3 IRS declaration for the year 2014, delivered via the internet, showed the main error "B55 – Incompatibility between the annex delivered and the option in registration," and should go to his Finance Service to justify the reasons for the way he filled out the declaration (Doc. 5 attached to the proceedings);

  • The request for classification under the simplified taxation regime was denied by dispatch of the IRS Service Director, of 23/02/2017, notified to the Applicant by official letter no. …/…/2017, from the Finance Service of …, of 04/04/2017 (Doc. 2 attached to the proceedings);

  • Against the dispatch denying the request, a hierarchical appeal was filed with the Minister of Finance, which the Applicant classifies as necessary, requesting that "suspensive effects of the appealed decision" be attributed to it (Doc. 3 attached to the proceedings);

  • Through official letter no. …, from the Finance Directorate of Braga, of 07/04/2017, the Applicant was notified that he should submit the model 3 IRS declaration for the year 2014, within 30 days, with notice that, if he failed to do so, the services would proceed with the assessment of the tax, in accordance with article 76, no. 3 of the IRS Code. It also informed that "Category B income should be declared in annex C" (Doc. 8 attached to the proceedings);

  • On 03/05/2017, the AT services officially processed the model 3 IRS declaration for the year 2014, which was assigned no. …-2014-…-…, including annexes A, C, G and H, on the basis of which the IRS assessments and compensatory interest mentioned were issued (pages 14 et seq. of the PA);

  • In box 12, field 1204, of annex C of the official declaration, the total value of "service provision and other income" for the previous year (2013) was entered as €78,620.59 (page 15 reverse, of the PA);

  • On 12/05/2017, IRS assessments and compensatory interest for the year 2014 were issued with nos. 2017… and 2017…, respectively, in the total amount of €53,452.70, with a payment deadline of 03/07/2017 (Doc. 1 attached to the proceedings);

  • The hierarchical appeal was denied by dispatch of the Assistant General Director of the AT, of 30/11/2017 (Doc. attached to the PA).

B – Unproven Facts

There are no facts with relevance to the decision of the case that should be considered unproven.

C – Grounds for the Establishment of Factual Matters

The establishment of factual matters was based on the critical analysis of the documentary evidence attached to the proceedings by the Applicants and the Respondent, as well as on the facts alleged and not contested by the Parties.

III.2 LEGAL MATTERS

The Questions to be Decided

The questions to be decided consist of determining (i) whether the challengers should be taxed under the simplified regime or under the organized bookkeeping regime, regarding IRS for the year 2014, in light of the legislative changes to article 28 of the IRS Code, introduced by Laws no. 83-C/2013, of 31/12 and 82-E/2014, of 31/12; (ii) whether, the IRS assessment for the year 2014 having been issued pending the hierarchical appeal presented against the denial of the request for classification under the simplified taxation regime, compensatory interest is due on the tax owed, and (iii) whether the IRS assessment for the year 2014 is vitiated by the defect of lack of reasoning.

2. Order of Examination of Defects

In accordance with article 124 of the Tax Procedure and Process Code, subsidiarily applicable to tax arbitration proceedings by virtue of article 29, no. 1, subparagraph a) of the RJAT, the contested assessments not being imputed defects leading to a declaration of non-existence or nullity, nor a relationship of subsidiarity being indicated between them, the order of examination of the defects should be that which, according to the prudent discretion of the judge, ensures the most stable or effective protection of the offended interests.

In the case at hand, the defect which, if verified, would ensure the most stable and effective protection of the Applicants' interests will be the defect of violation of law, by error in the interpretation of article 28 of the IRS Code. It will begin the examination of the merits of the case.

– On the Taxation Regime Applicable to Category B Income Earned by the Applicant in the Year 2014:

Article 28 of the IRS Code, before the changes introduced by Law no. 83-B/2013, of 31/12, had the following wording:

"Article 28 – Forms of Determination of Business and Professional Income

1 – The determination of business and professional income, except in the case of attribution provided for in article 20, is made:

a) On the basis of the application of the rules arising from the simplified regime;

b) On the basis of bookkeeping.

2 – Taxpayers who, in the exercise of their activity, have not exceeded in the immediately preceding tax period an annual gross amount of income in this category of €150,000 are covered by the simplified regime. (Wording given by Law no. 3-B/2010, of 28/04)

3 – Taxpayers covered by the simplified regime may choose the determination of income on the basis of bookkeeping. (Wording of Decree-Law no. 211/2005, of 07/12)

4 – The choice referred to in the previous paragraph shall be made by taxpayers: (Wording of Law no. 53-A/2006, of 29/12)

a) In the declaration of commencement of activity;

b) By the end of March of the year in which they intend to alter the form of determination of income, by submission of a declaration of changes. (Wording of Law no. 53-A/2006, of 29/12)

5 – The minimum period of permanence in either of the regimes referred to in no. 1 is three years, renewable for equal periods, except if the taxpayer communicates, in accordance with subparagraph b) of the previous paragraph, the change of regime by which he is covered. (Wording of Law 53-A/2006, of 29/12)

6 – The application of the simplified regime ceases only when the amount referred to in no. 2 is exceeded in two consecutive tax periods or, if exceeded in a single year, by an amount exceeding 25%, in which case taxation by the organized bookkeeping regime applies from the tax period following the occurrence of either of these facts. (Wording given by Law no. 3-B/2010, of 28/04)

7 – The basis values necessary for the determination of taxable income are subject to correction by the General Tax Directorate in accordance with article 39, the provision of the previous paragraph applying when the requirements referred to therein are met.

8 – If the income earned results from services provided to a single entity, except in the case of service provisions made by a partner to a company covered by the transparent taxation regime, in accordance with subparagraph b) of no. 1 of article 6 of the Corporate Income Tax Code, the taxpayer may choose taxation in accordance with the rules established for category A, with such choice remaining valid for a period of three years. (Wording of Law no. 64-A/2008, of 31/12)

9 – Whenever the application of the base indicators of a technical-scientific nature referred to in no. 1 of article 31 results in a taxable income higher than that resulting from the coefficients established in no. 2 of the same article, the taxpayer may, in the year such indicators enter into force, choose, within the timeframe and in the manner provided for in subparagraph b) of no. 4, the organized bookkeeping regime, even if the minimum period of permanence in the simplified regime has not elapsed. (Wording given by Law no. 3-B/2010, of 28/04)

10 – In the year of commencement of activity, classification in the simplified regime is made, once other requirements are met, in accordance with the annual income value estimated, contained in the commencement of activity declaration, should the choice referred to in no. 3 not be exercised. (Wording given by Law no. 3-B/2010, of 28/04)

11 – If, following cessation of activity, it is resumed before January 1 of the year following the one in which 12 months, counted from the date of cessation, have been completed, the regime for determining business and professional income to be applied is the one that was in effect at the date of cessation. (Added by Law no. 32-B/2002, of 30/12)

12 – The above provision does not prejudice the possibility of the DGCI authorizing the change of regime, at the request of taxpayers, when it is established that there has been substantial modification of the conditions of exercise of the activity. (Added by Law no. 32-B/2002, of 30/12)

13 – Exceptions are made to the provision in no. 11 the situations in which the resumption of activity occurs after the completion of the minimum period of permanence. (Wording given by Law no. 53-A/2006 of 29/12)"

The new wording given to no. 2 of article 28 of the IRS Code, by article 175 of Law no. 83-B/2013, of 31/12, established that "2 – Taxpayers who, in the exercise of their activity, have not exceeded in the immediately preceding tax period an annual gross amount of income in this category of €200,000 are covered by the simplified regime."

No. 9 of article 177 of the same Law no. 83-B/2013, of 31/12, determined that "Until January 31, 2014, taxpayers subject to IRS and classified in the simplified regime for category B may freely choose the organized bookkeeping regime."

In turn, Law no. 84-E/2014, of 31/12, which carried out the "reform of taxation of individuals," gave new wording to nos. 5 and 8 of article 28 of the IRS Code, repealing nos. 9, 11, 12 and 13 of the same article.

The following is the wording given by Law no. 84-E/2014, of 31/12, to no. 5 of article 28 of the IRS Code:

"Article 28 – [...]

(…)

5 – The choice referred to in no. 3 remains valid until the taxpayer submits a declaration of changes, which takes effect from the very year in which it is delivered, provided that it is made by the end of March.

(…)"

Thus, two regimes for determining business and professional income coexist (except in the cases provided for in article 20 of the IRS Code): on the basis of the simplified regime rules and on the basis of bookkeeping.

As a rule, taxation of businesses, individual or collective, is by the organized bookkeeping regime, more apt to satisfy the constitutional requirement of taxation on actual income (article 104, no. 2 of the Constitution of the Portuguese Republic); however, the existence of a simplified regime is understood "for businesses that are not required to have organized bookkeeping, primarily because its requirement would be excessive or disproportionate, and which have not chosen it (…)."[1]

Thus, in the words of Saldanha Sanches, "the simplified regime always presupposes a choice by the taxpayer who renounces his subjective right to be taxed on the basis of bookkeeping," but "The possibilities of choice by the taxpayer of a certain taxation regime with the consequent relevance of will in fiscal matters cannot fail to be considered as an exceptional regime (…)."[2]

No. 3 of article 28 of the IRS Code, in the wording in force for 2013, allowed taxpayers covered by the simplified regime who had not reached, in the immediately preceding tax period, income of an amount exceeding €150,000 (no. 2 of the same article) and who were not obliged to have organized bookkeeping (under no. 6 of the cited article), to choose taxation by the organized bookkeeping regime.[3]

However, once a choice was made for either of the said regimes, in the manner defined by no. 4 of article 28 of the IRS Code, its no. 5, in the wording given by Law 53-A/2006, of 29/12, required a minimum period of permanence of three years in the chosen regime, renewable for equal periods, except if the choice referred to in no. 4 was made, by March 31 of the year in which the taxpayer intended to alter the form of determination of income.

With the new wording given to no. 2 of article 28 of the IRS Code, by Law no. 83-C/2013, of 31/12, the amount of income provided for therein increased from €150,000 to €200,000, thus broadening the universe of taxpayers who were able to choose the simplified regime.

Hence it is understood that the legislator established in no. 9 of article 177 of that Law no. 83-C/2013, of 31/12, a transitional period (until January 31, 2014) during which taxpayers previously obliged to the bookkeeping regime and who were no longer obliged, because they had not earned income exceeding the new legal limit of €200,000 in the previous year, could choose the simplified regime.

And, in that same sense, goes no. 5 of Circular Letter no. 20172 of the DSIRS, of 28/03/2014, in which the understanding is conveyed that "5. For taxpayers who in 2013 were in the bookkeeping regime by legal obligation, they are classified in the simplified regime in 2014 if their annual gross category B income in 2013 was equal to or less than €200,000. If they wish to maintain the bookkeeping regime, they should exercise the respective choice by the end of March 2014 (cf. nos. 3 and 4 of art. 28 of the IRS Code)."

However, the Applicant's situation is not accommodated either in the provision of no. 9 of article 177 of Law no. 83-C/2013, of 31/12, nor in no. 5 of Circular Letter no. 20172 of the DSIRS, of 28/03/2014.

This is because the Applicant was not, in 2014, mandatorily (by legal obligation) covered by the taxation regime of bookkeeping, for having exceeded any of the limits provided for in nos. 2 or 6 of article 28 of the IRS Code.

Category B income was then determined by bookkeeping, by choice of the Applicant, renewed by successive three-year periods, in the absence of choice of the simplified regime.

With the last period of permanence in the organized bookkeeping regime ending in 2012, the choice of the simplified regime should have been exercised by the Applicant by submission of a declaration of changes by the end of March 2013, in order to prevent the automatic extension, for a new three-year period, of taxation by the bookkeeping regime.

Once a new three-year period in the bookkeeping regime commenced, it could not, during its course, be valid for the choice made for the simplified regime, on pain of leaving the first part of no. 5 of article 28 of the IRS Code devoid of content.

The Applicant believes that permanence for a new three-year period in the bookkeeping regime (three-year period 2013/2015) results from the "legal obligation" referred to in no. 5 of Circular Letter no. 20172 of the DSIRS, of 28/03/2014.

But he is not correct, inasmuch as the law only imposes as mandatory the taxation by the bookkeeping regime to taxpayers who exceed any of the limits provided for in nos. 2 or 6 of article 28 of the IRS Code.[4]

The permanence for a minimum period of three years in the bookkeeping regime of taxpayers who, meeting the requirements for application of the simplified regime, choose the determination of category B income by organized bookkeeping, is nothing more than the consequence of their choice.

The Applicant further invokes the interpretative nature of the wording given by Law no. 84-E/2014, of 31/12, to no. 5 of article 28 of the IRS Code, which would be integrated into the interpreted law, applying to situations prior to the date of its entry into force.

But neither is he correct here. According to Baptista Machado,[5] for the new law to be considered interpretative "two requirements are necessary: (…) that the solution of the previous law be contested or at least uncertain; and that the solution defined by the new law is within the scope of the controversy and such that the judge or interpreter could reach it without exceeding the limits normally imposed on the interpretation and application of law. If the judge or interpreter, in the face of the old texts, could not feel authorized to adopt the solution that the new law comes to establish, then this is decidedly innovative."

Not being the interpreter authorized to reach the same solution in view of the wording of no. 5 of article 28 of the IRS Code, in its previous wording and in that given to that provision by Law no. 84-E/2014, of 31/12, it cannot be considered that this has the interpretative nature that the Applicant attributes to it.

In view of the foregoing, it is to be concluded that the professional income earned by the Applicant in the year 2014 could not be taxed under the simplified regime.

(ii) On the Untimeliness of the Assessment. Compensatory Interest:

The Applicant alleges that the IRS assessment for the year 2014 is also unlawful, for being untimely and premature, by virtue of having been issued pending the hierarchical appeal directed to the Minister of Finance, under the provisions of article 66, no. 2 of the Tax Procedure and Process Code (CPPT), against the dispatch of the IRS Service Director, of 23/02/2017, which denied the request for classification under the simplified regime for the year 2014 and to which he expressly requested that suspensive effect be attributed (articles 184, nos. 1, subparagraph a), 2 and 3, 185, no. 1, 186, no. 1, subparagraph a), 189, no. 1, 193, nos. 1, subparagraph a) and 2, and 194, nos. 1 and 2, all of the Administrative Procedure Code (CPA)).

He therefore objects to the assessment of compensatory interest on the value of the assessed IRS, which he considers undue, as he did not give cause for it.

The CPA applies subsidiarily to the procedure and judicial process in tax matters, in accordance with article 2, subparagraph d) of the CPPT, in everything not regulated therein.

However, in accordance with no. 1 of article 67 of the CPPT, "Hierarchical appeals, except where otherwise provided by tax laws, are merely optional in nature and have devolutive effect," which means that the appealed decision is immediately enforceable.

Furthermore, the act that determined the correction of the income declaration submitted according to the simplified regime must be understood as an act that is immediately harmful,[6] and it was autonomously challengeable through an administrative action provided for in article 37 of the Code of Procedure in Administrative and Tax Courts (CPTA), to be filed within the deadline referred to in article 58, no. 1, subparagraph b) of the same Code.[7]

However, having the Applicant not challenged the act as a separate matter in the manner mentioned, his right to challenge the subsequent assessment was not precluded, on the grounds of any illegality, in accordance with article 99 of the CPPT.

Compensatory interest is part of the tax debt itself, with which it is jointly assessed and is due when, due to a fact imputable to the taxpayer, the assessment of the tax is delayed, it being understood as imputable to the taxpayer the failure to deliver the legally required declaration, within the respective deadline (see article 35, nos. 1, 6 and 8 of the General Tax Law).

As the determination of the Applicant's income cannot be made in accordance with the simplified taxation regime, for the reasons already set forth, not having the Applicant proceeded to submit the model 3 IRS declaration for the year 2014, with inclusion of annex C (category B income – organized bookkeeping regime), in accordance with the notification directed to him for that purpose, and lacking legal basis the requested suspensive effect of the hierarchical appeal of the dispatch denying the request for classification under the simplified regime, there is nothing to censure in the assessment of compensatory interest made jointly with the IRS assessment, and both should be maintained.

On the Defect of Lack of Reasoning:

The Applicant further invokes the defect of lack of reasoning of the assessment issued officially and not on the basis of the income declaration submitted by him.

Pursuant to no. 2 of article 77 of the General Tax Law, "The reasoning of tax acts may be summary in nature, and should contain the applicable legal provisions, the qualification and quantification of tax facts and the operations for determination of taxable matter and tax," and may, in accordance with no. 1 of the same article, "consist of mere declaration of agreement with the grounds of prior opinions, information or proposals."

Given the protective function of the right to reasoning, what is required is that it gives interested parties the possibility of being able to challenge the harmful acts of their rights and legally protected interests in court, with complete knowledge of the reasons that motivated them.

In the concrete case at hand, the set of circumstances that preceded the official IRS assessment in question, notably the refusal to accept the declaration of changes submitted by the Applicant, the reasoning of the decision denying the request for classification under the simplified regime for the year 2014 (draft decision and subsequent dispatch of the IRS Service Director, of 23/02/2017), as well as the notification directed to him by official letter no. … from the Finance Directorate of Braga, of 07/04/2017, to submit the model 3 IRS declaration for the year 2014, with the indication that "Category B income should be declared in annex C," constitutes sufficient, clear and accessible reasoning for the practice of the tax act in question, as it was practiced.

It is concluded, therefore, that the IRS assessments for the year 2014 and respective compensatory interest, based on elements that the Applicant well knew, do not suffer from the defect of lack of reasoning imputed to them.

It is a different matter to know whether such reasoning is contained in the assessment statement and the collection note attached to it, and whether, if not contained in them, such fact is equivalent to lack of reasoning.

The Supreme Administrative Court (STA) has repeatedly held that "The lack of reasoning of the act is not confused with the failure to notify the grounds thereof, only the former constituting invalidity of the act,"[8] and that "one thing is the reasoning of the act and another is the communication of those grounds to the interested party: while the former constitutes a defect capable of determining the annulment of the act that suffers from it, noncompliance or defective compliance with the duty to communicate the grounds cannot reflect on the validity of the communicated act."[9]

When the notification does not contain the reasoning of the notified act, the recipient is permitted to remedy this deficiency through the expedient provided in no. 1 of article 37 of the CPPT, that is, by request for a certified copy containing the omitted reasoning, with suspensive effect on the deadline for complaint, appeal, challenge or other judicial means adequate to protect the offended right (no. 2 of the same article).

On these grounds, in the event that the AT does not satisfy the claim or the certified copy requested does not contain the omitted reasoning, "the interested party may, naturally, seek to remedy the deficiency itself, by approaching the services and consulting the file in which the act was practiced, in order to obtain knowledge of the elements it is interested in knowing. However, it is not obliged to do so, having the right to react contentiously against the inertia or persistence in the omission by the tax administration through intimation for certified copy issuance, provided for in art. 146, no. 1 of the CPPT and in arts. 104 to 108 of the CPTA."[10]

In the case at hand, even if it should be understood that the notification of the assessment in question was not accompanied by the required reasoning, the Applicant could have requested a certified copy thereof, in accordance with article 37 of the CPPT and, not having done so, any failure to notify the legally required reasoning was remedied.

DECISION

On the basis of the factual and legal grounds set forth above and, in accordance with article 2 of the RJAT, it is decided, judging the present request for arbitral pronouncement unfounded, to maintain the IRS assessments and compensatory interest for the year 2014, absolving the AT of all claims.

VALUE OF THE CASE: In accordance with articles 306, nos. 1 and 2 of the Civil Procedure Code, 97-A, no. 1, subparagraph a) of the Tax Procedure and Process Code, and 3, no. 2 of the Arbitration Costs Regulations in Tax Matters, the case value is fixed at €19,461.70 (nineteen thousand, four hundred and sixty-one euros and seventy cents).

COSTS: Calculated in accordance with article 4 of the Arbitration Costs Regulations in Tax Matters and the Table I attached thereto, in the amount of €1,224.00 (one thousand two hundred and twenty-four euros), to be borne by the Applicants.

Let notification be made.

Lisbon, March 12, 2018.

The Arbitrator,

/Mariana Vargas/

Text prepared by computer, in accordance with no. 5 of article 131 of the Civil Procedure Code, applicable by referral of subparagraph e) of no. 1 of Decree-Law 10/2011, of January 20.

The wording of this decision is governed by the 1990 spelling agreement.

[1] José Casalta Nabais "Introduction to Business Income Tax Law," Almedina, Coimbra, 2013, pages 128 et seq.

[2] Saldanha Sanches, "Concept of IRS Income," in Taxation 7/8, ISG Publication, July/October 2001, pages 33 et seq.

[3] Writes Rui Duarte Morais, "On IRS," Almedina, Coimbra, 3rd Edition, 2014, page 89: "In brief summary, we say that the current simplified regime is characterized by:

a) being optional

Taxpayers potentially covered by it can choose to determine their profit according to the normal organized bookkeeping regime (art. 28, no. 3).

Such choice can be made when commencing activity or after each three-year permanence period in the simplified regime (nos. 4 and 5 of art. 28)."

[4] The expression "legal obligation" is not in the letter of the law, appearing only in the administrative instruction cited, and should be understood as equivalent to "obligatoriness," as the norms contained in nos. 2 and 6 of article 28 of the IRS Code have an injunctive nature (they are mandatorily applicable, independently of the will of the taxpayer), whereas the norm in no. 3 of article 28 has a permissive or dispositive nature.

On the classification of legal rules into injunctive and permissive or dispositive, see José de Oliveira Ascensão, "The Law – Introduction and General Theory," Almedina, Coimbra – 13th Revised Edition, pages 522 et seq. Exemplifying what are permissive rules, the Author writes: "Thus, the rule that permits marriage is a typically permissive rule, as it applies in the sequence of a manifestation of will by the parties in that direction. There is a series of legal effects predisposed, offered to the will of people, but which do not concretize independently of that will."

[5] "Introduction to Law and the Legitimating Discourse," Almedina, Coimbra, 1995, page 247.

[6] See Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, "General Tax Law – Annotated and Commented," Writing Meeting, 4th Edition 2012, page 828 (commentary on article 95 of the General Tax Law). According to the Authors, "Given the optional nature and merely devolutive effect of the hierarchical appeal provided for in art. 67, no. 1 of the CPPT, tax acts practiced by the subordinate are also, from the outset, harmful, and as such may be appealed, as emanated in the exercise of competence reserved to them."

[7] In the sense that this is the adequate procedural means for the effect, see, among others, the Decision rendered by the Supreme Administrative Court on 18/06/2014, in Proc. no. 01752/13, according to whose summary "The special administrative action is the adequate procedural means to challenge contenciously the harmful act practiced by the General Directorate of Taxes that determines the correction of the IRS declaration submitted via the internet, replacing annex B with annex C."

[8] See the STA Decision, of 9/11/2016, Proc. no. 01118/15.

[9] STA Decision, of 16/11/16, Proc. no. 0954/16.

[10] Jorge Lopes de Sousa, "Tax Procedure and Process Code" Annotated and Commented, Volume I, 6th Edition, Áreas Publisher, 2011, page 352.

Frequently Asked Questions

Automatically Created

Can a taxpayer switch from organized accounting to the simplified regime for IRS Category B income?
Yes, but with significant restrictions. Under Article 28 of the IRS Code, taxpayers can switch from organized accounting to the simplified regime for Category B income, but must remain in their chosen regime for a minimum three-year period, renewable for equal periods. To switch regimes, taxpayers must notify the Tax Authority before the start of the new three-year period, typically by March of the year preceding the new cycle. Attempting to switch mid-period, as in Process 522/2017-T, will generally be denied unless specific transitional legal provisions apply.
What does Article 28 of the Portuguese IRS Code establish regarding the choice of tax regime?
Article 28 of the Portuguese IRS Code establishes the framework for choosing between the simplified regime and organized accounting regime for Category B (business and professional) income. It mandates a three-year minimum permanence period in either regime, renewable for equal periods unless the taxpayer notifies a regime change before the renewal deadline. The article specifies gross income thresholds that determine eligibility for each regime. Law 83-C/2013 amended Article 28(2) to modify these thresholds, while maintaining the three-year lock-in requirement. Taxpayers who fail to notify a regime change by the deadline (typically March) are automatically renewed in their current regime for another three-year period.
How did Law 83-C/2013 and Law 82-E/2014 change the rules for opting into the simplified tax regime?
Law 83-C/2013 (December 31, 2013) modified Article 28(2) of the IRS Code by changing the annual gross income thresholds that determine whether taxpayers must use organized accounting or can use the simplified regime. Article 177(9) of this law provided a transitional rule allowing taxpayers currently in the simplified regime to opt for organized accounting until December 31, 2014. Law 82-E/2014 (December 31, 2014) provided interpretative clarification to these amendments. Critically, these laws did not permit taxpayers already locked into a three-year organized accounting period by choice to switch to the simplified regime mid-cycle. In Process 522/2017-T, the Tax Authority rejected the taxpayer's interpretation that these laws created a general mid-period switching right, emphasizing that the three-year permanence rule remained in force for those who hadn't notified a change by March 2013.
What is the procedure to challenge an IRS tax assessment through CAAD tax arbitration in Portugal?
Under Decree-Law 10/2011 (RJAT - Legal Framework for Arbitration in Tax Matters), Article 2(1)(a) and Article 10(1)(a), combined with Article 99(a) of the Tax Procedure and Process Code (CPPT), taxpayers can challenge IRS assessments through CAAD arbitration. The procedure requires: (1) filing a written request with CAAD identifying the contested assessment and taxpayer details; (2) stating specific grounds for illegality and requesting annulment; (3) assigning an economic value to the claim; (4) CAAD constitutes a sole or three-member arbitral tribunal; (5) the Tax Authority is notified and must submit a reply with the administrative file per Article 17 of RJAT; (6) the tribunal conducts proceedings and issues a binding arbitral decision. In Process 522/2017-T, the taxpayers requested annulment of a €53,452.70 assessment, assigning a claim value of €19,461.70 representing the disputed tax difference.
Can a taxpayer request suspension of tax effects while appealing a regime classification decision?
Yes. Under Articles 66(1-2) of the Tax Procedure and Process Code (CPPT) and Articles 184-194 of the Administrative Procedure Code (CPA), taxpayers can file a hierarchical appeal against administrative decisions denying regime classification requests and specifically request suspensive effect (efeito suspensivo). Article 184(1)(a) CPA allows appeals of non-definitive decisions to the superior hierarchical authority (ultimately the Minister of Finance for tax matters). Article 66 CPPT governs the suspension of tax effects during appeals. In Process 522/2017-T, the taxpayer filed a hierarchical appeal against the IRS Service Director's denial of their simplified regime request, explicitly requesting suspensive effect. However, suspensive effect is not automatic—it must be granted by the deciding authority. The Tax Authority may proceed with assessment despite pending appeals unless suspension is formally granted, as occurred when the €53,452.70 assessment was issued on May 12, 2017, before the hierarchical appeal was decided (ultimately denied December 7, 2017).