IRS Organized Accounting Option Under Article 28 CIRS – CAAD Arbitral Tribunal Ruling 530/2017-T

Arbitral Decision

REPORT

A - PARTIES

A…, with NIF… and B…, with NIF…, residents at Rua…, no.…, …-… Porto, hereinafter referred to as Claimant or taxpayer.

The Tax and Customs Authority, hereinafter referred to as Respondent or AT.

The petition for constitution of the Arbitral Tribunal, accepted by the President of CAAD, and therefore the Arbitral Tribunal was duly constituted on 03-10-2017, to hear and decide on the subject matter of the present dispute, and the Tax and Customs Authority was automatically notified on 03-10-2017, as set out in the respective minutes.

The Claimant did not proceed with the appointment of an arbitrator, wherefore, pursuant to Article 6, paragraph 1 and Article 11, paragraph 1, paragraph b) of Decree-Law no. 10/2011 of 20 January, as amended by Article 228 of Law no. 66-B/2012 of 31 December, the Ethics Council appointed Arbitrator Paulo Ferreira Alves, whose appointment was accepted in accordance with the legal provisions.

On 21-11-2017, both parties were duly notified of such appointment, in accordance with Article 11, paragraph 1, paragraphs a) and b) of RJAT and Articles 6 and 7 of the Ethics Code, and did not manifest any will to refuse the appointment of the Arbitrator.

In accordance with Article 11, paragraph 1, paragraph c) of Decree-Law no. 10/2011 of 20 January, as amended by Article 228 of Law no. 66-B/2012 of 31 December, the sole Arbitral Tribunal was duly constituted on 14-12-2017.

Both parties agreed to dispense with the holding of the meeting provided for in Article 18 of RJAT.

The Arbitral Tribunal was duly constituted and is materially competent, in accordance with Articles 2, paragraph 1, paragraph a), and 30, paragraph 1 of Decree-Law no. 10/2011 of 20 January.

The parties have legal personality and capacity, are legitimate and are legally represented (Articles 4 and 10, paragraph 2, of the same statute and Article 1 of Order no. 112-A/2011 of 22 March).

The proceedings do not contain vices that would invalidate them.

B - REQUEST/CLAIM

The Claimant herein petitions for a declaration of illegality of the tax assessment act of additional liquidation in the context of the Personal Income Tax (Imposto Sobre o Rendimento das Pessoas Singulares) no. 2016…, for the tax year 2015, in the amount of 24,006.74€ (twenty-four thousand and six euros and seventy-four cents).

C - CAUSE OF ACTION

To support its petition for arbitral decision, the Claimant alleged, with a view to the declaration of illegality of the tax assessment act in the context of Personal Income Tax, already described in point 1 of this Award, in summary, the following:

• The Claimant disagrees with the dismissal decision of the petition for classification in the organized accounting regime for IRS/2015.

• The Claimant has been registered as an independent professional since 02.01.1983, having opted for the organized accounting regime on 28.06.2001.

• In the declaration of 28.06.2001 the Claimant declared that, for purposes of Income Tax - category B, he chose to be classified in the organized accounting regime.

• In May 2016, the Claimant submitted the income tax declaration for IRS for the year 2015, which included Annex C, however the Tax Authority's portal generated an error, preventing the submission of IRS with Annex C, since the AT's information system had classified the taxpayer in the simplified regime, by virtue of the fact that in the year 2014, his income had not exceeded the amount of €200,000.00.

• The Claimant submitted the respective IRS model 3 declaration for 2015, with the declaration of category B income determined on the basis of organized accounting, but the AT's information system did not validate it.

• He attempted, as a last resort, to deliver the IRS model 3 declaration for 2015 in paper form to the Tax Service, but they refused to accept the declaration.

• Wherefore the Claimant (so as not to be penalized for failure to submit an IRS declaration) was forced to present a new IRS declaration for 2015 (on 31.05.2016), with the declaration of category B income determined on the basis of the simplified taxation regime.

• The assessment here challenged was determined by calculating the taxable income of category B of the Claimant according to the rules of the simplified taxation regime, affecting the Claimant's taxable income.

• The Claimant alleges that, being classified in the organized accounting regime by choice, then the Claimant would only be classified in the simplified regime if he expressly opted for it, which did not occur.

• The Claimant contends that there is thus no legal basis justifying that the Claimant was classified in the simplified regime, wherefore he should have continued to be classified in the organized accounting regime in 2015.

D - RESPONDENT'S RESPONSE

The Respondent, duly notified for that purpose, timely presented its response in which, in abbreviated summary, alleged the following:

• On 2001-06-26, the Claimant exercised the option for the organized accounting regime for the exercise of his activity "CIRS 6010–lawyers", an option which was in effect for the tax year 2001.

• Between 2002 and 2014, given the income determined, the Claimant was automatically classified in the organized accounting regime, by legal requirement.

• In 2014, the income determined for the Claimant was less than €200,000.00, wherefore, not having exercised the option for the organized accounting regime, he was classified in the simplified regime.

• As appears from the Administrative File and Annex 4 attached to the arbitral petition, the Claimant indicated, with reference to the year 2014, income of €191,860.00, that is, an amount less than the limit in paragraph 2 of Article 28 CIRS, wherefore he met the prerequisites for classification in the simplified regime, which took effect in the tax period of 2014.

• In summary, if the gross income of the category earned in the previous year is less than €200,000.00, the taxpayer is, by legal requirement, included in the simplified regime of income determination, but may, however, subject to certain legal requirements, opt for the organized accounting taxation regime.

• And he also did not manifest any option for the organized accounting regime, since he did not deliver any alteration declaration by the end of March 2015, wherefore the simplified regime remained applicable.

• In this manner, the classification of the Claimant in the simplified regime was automatic, by verification of the legal requirements provided in paragraph 2 of Article 28 CIRS.

• The Respondent concludes that the Tax Administration acted legally, with the contested assessment remaining entirely valid and legal and properly substantiated in the administrative file.

E - FACTUAL FINDINGS

Prior to entering into the consideration of the question submitted for decision, it is necessary to present the factual matter relevant to its understanding and decision, based on documentary evidence and the facts alleged.

Thus, in accordance with the principle of free assessment of evidence, given the evidence provided by documents and in the absence of any challenge by the parties to the authenticity or probative force of the documents submitted, this Tribunal considers the submitted documents as true, suitable, and authentic in accordance with Article 75, paragraph 1 of LGT.

As matters of relevant fact, this Tribunal finds the following facts established:

• On 2001-06-26, the Claimant exercised the option for the organized accounting regime for the exercise of his activity "CIRS 6010–lawyers".

• The Claimant did not request a change to the simplified regime between 2001 and 2016.

• With reference to the year 2014, the Claimant indicated income of €191,860.00.

• The Claimant submitted the respective IRS model 3 declaration for 2015, with the declaration of category B income determined on the basis of organized accounting, but the AT's information system did not validate it.

• The Claimant presented a new IRS declaration for 2015, on 31.05.2016, with the declaration of category B income determined on the basis of the simplified taxation regime.

F - UNPROVEN FACTS

Of the facts of interest for the decision of the case, contained in the challenge, all subject to concrete analysis, those not contained in the factuality described above were not proven.

G - ISSUES TO BE DECIDED

Given the positions assumed by the parties, the following central issues to be decided constitute matters which must be considered and decided:

• Those alleged by the Claimant:

Declaration of illegality of the tax assessment act of additional liquidation in the context of Personal Income Tax no. 2016…, for the tax year 2015, in the amount of 24,006.74€ (twenty-four thousand and six euros and seventy-four cents).

Condemnation to the payment of compensatory interest.

• Those alleged by the Respondent, the exception of absolute incompetence of the Arbitral Tribunal, on grounds of subject matter.

H - EXCEPTION OF INCOMPETENCE OF THE ARBITRAL TRIBUNAL ON GROUNDS OF SUBJECT MATTER

The question regarding the determination of the competence of courts is to be examined ex officio and as a matter of priority, in accordance with Article 13 of the Code of Procedure of the Administrative Court and Article 578 of the Code of Civil Procedure by application as subsidiary law, provided for in Article 29 of RJAT, which is why the present petition will be analyzed below.

The Respondent raised the question of absolute incompetence of the Arbitral Tribunal on grounds of subject matter, on the basis that the petition presented by the Claimant does not fall within the scope of competence of Tax Arbitral Tribunals provided for in Article 2 of RJAT, and thus the subject matter of the petition for arbitral decision goes beyond the scope of competence of the Arbitral Tribunal.

However, from careful reading of the initial petition and evaluation of the documents in the file, the following results:

A petition for arbitral decision determining that the Claimant was classified in the organized accounting regime, and consequently that fiscal treatment should be carried out in that regime. They further allege that the act subject to the dispute cannot be qualified as an act of determination of taxable matter that gives rise to the assessment of taxes for purposes of Article 2, paragraph 1, paragraph b) of RJAT.

In effect, the Claimant expressly challenges the assessment act in the context of IRS for the year 2015, requesting, ultimately, its annulment with the consequent restitution of tax paid, as well as the condemnation of the AT to the payment of compensatory interest.

The act examined by the Claimant, and mediate subject matter of the present arbitral action is the assessment act in the context of IRS no. 2016… and, subsidiarily, the declaration of illegality of the decision that dismissed the administrative claim (RG) filed by the Claimant.

In the present Arbitral Process, the Respondent raises the impropriety of the procedural means and the incompetence of the arbitral tribunal to hear the petition.

Let us then investigate whether in the present proceeding there exists the dilatory exception of incompetence, whether absolute or relative, of the Arbitral Tribunal as to its material capacity to hear the acts subject to the arbitral claim (Article 577 of CPC and Article 2 of RJAT).

It is therefore necessary, in light of the foregoing, to consider the present dilatory exception, and if such dilatory exception is found to exist, whether the hearing of the questions raised by the Claimant in his Initial Petition will be precluded.

In accordance with the current regime set out in Article 124 of Law no. 3-B/2010 of 28 April (State Budget for 2010), the Government was authorized to legislate in order to establish arbitration as an alternative form of jurisdictional resolution of disputes in tax matters, so that the tax arbitral process would constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters.

Article 4, paragraph 1 of Decree-Law no. 10/2011 of 20 January, which created the Legal Regime for Arbitration in Tax Matters, in the version brought by Law no. 64-B/2011 of 30 December, provides for the binding of the AT to arbitral jurisdiction dependent on regulation subsequently issued by Order 112-A/2011 of 22 March, which provides in its Article 1 the binding of the Directorate-General for Taxes and the Directorate-General for Customs and Special Consumption Taxes to the jurisdiction of Arbitral Tribunals functioning under the Legal Regime for Arbitration in Tax Matters.

The competence of the Arbitral Tribunals functioning at CAAD is, in the first place, limited to the matters indicated in Article 2, paragraph 1 of RJAT. In a second line, the competence of the Arbitral Tribunals is also limited by the terms in which the AT bound itself to that jurisdiction, in accordance with Article 4 of RJAT which establishes that "the binding of the tax administration to the jurisdiction of tribunals constituted in accordance with this law depends on an order of the Government members responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered". Which is made concrete by Order no. 112-A/2011 of 22 March.

In view of this second limitation on the competence of the Arbitral Tribunals functioning at CAAD, the resolution of the competence question depends essentially on the terms of that binding, since, even if one is faced with a situation classifiable under Article 2 of RJAT, if it is not covered by the binding provided for in said order, then the possibility of the dispute being jurisdictionally decided by this Arbitral Tribunal will be excluded.

Note should be taken of the fact that the scope of the legislative authorization given by Article 124 of Law no. 3-B/2010 of 28 April was not exhausted, which provided that the arbitral process should constitute not only an alternative procedural means to the judicial challenge process, but also applicable to the action for recognition of a right or legitimate interest in tax matters (paragraphs 2 and 4, paragraphs a) and b) of said Article 124), since it was not subject to regulation in this latter part.

Thus we can derive another restriction on the scope of competence of the Arbitral Tribunals arising from the fact that the petition for recognition of rights and legitimate interests in tax matters only falls within the circle of competence of the Arbitral Tribunals in cases where it is underlain by a declaration of illegality of an act of tax assessment or acts that determine the taxable matter or taxable profit.

As regards binding and its respective subject matter, in light of Article 2 of Order no. 112-A/2011 of 23 March, the General Directorate for Taxes only accepted the jurisdiction of the Arbitral Tribunal provided that the necessary administrative claim provided for in Articles 131 to 133 of CPPT takes place as a prior condition to judicial challenge in cases of self-assessment, withholding at source and advance payments, which may be considered justified in light of the subsidiary application of the norms of tax process and procedure carried out by Article 29 of RJAT as well as the qualification of arbitration as an alternative procedural means to the judicial challenge process.

As is well known, the competence of the court is determined by the claim of the plaintiff and the cause of action on which it is based, expressed in the initial petition, since it does not depend on either the legitimacy of the parties or the merits of the action, as is uniform understanding in doctrine and case law (see, among others, Manuel de Andrade, Elementary Notions of Civil Procedure, 1979, p. 91; Miguel Teixeira de Sousa, Declaratory Competence of Common Courts, p. 36; and Decisions of the STJ of 12/1/94, 2/7/96 and 3/2/97, in BMJ, respectively, nos. 433, p. 554, 459/444 and 364/591, of 5/2/2002, in CJ – STJ -, year X, vol. I, p. 68, of 18/3/2004, in case no. 04B873, of 13/5/2004, in case no. 04A1213 and of 10/4/2008, in case no. 08B845, these last three available at www.dgsi.pt; of the Court of Conflicts, of 20/10/2011, delivered in case no. 13/11, available at the same site, and of this Court of Appeal of 7/11/2000, CJ, year XXV, vol. V, p. 184).

Regarding the competence of the Arbitral Tribunals, Counselor Lopes de Sousa tells us: "Although in paragraph a) of paragraph 1 of Article 2 of RJAT only an explicit reference is made to the competence of Arbitral Tribunals to declare the illegality of assessment acts, acts defining the amount to be paid by the taxpayer, such competence also extends to acts of second and third degree that assess the legality of those primary acts, namely acts of dismissal of administrative claims and acts of dismissal of hierarchical appeals filed from decisions of such claims. In fact, such conclusion is clearly derived from paragraph a) of paragraph 1 of Article 10 of RJAT, which makes express reference to paragraph 2 of Article 102 of CPPT (which deals with the dismissal of administrative claim) and to "the decision of the hierarchical appeal." (Jorge Lopes de Sousa, in Commentary on the Legal Regime for Arbitration in Tax Matters, Guide to Tax Arbitration, Almedina, 2013, p. 121).

Moreover, it adds that: "Limiting the competence of the Arbitral Tribunals functioning at CAAD, with respect to assessment acts, self-assessment, withholding at source and advance payments, to the declaration of their illegality and its consequences, only acts of dismissal of administrative claims or hierarchical appeals or requests for review of tax acts will be included in such competence in cases where these acts of second degree or third degree actually heard the legality of acts of assessment, self-assessment, withholding at source and advance payments and not also when such acts refrained from such hearing, on the understanding that there was some obstacle to it (such as, for example, untimeliness or lack of legitimacy, or incompetence." (ibidem, p. 123).

As observed by Counselor Lopes de Sousa, the possibility of assessing the legality of primary acts through assessment of the legality of acts of second degree is confirmed in the provision of Article 2 of RJAT of assessment of claims relating to acts of self-assessment, withholding at source and advance payments (with respect to which the administrative claim is necessary, in Articles 131 to 133 of CPPT), it being certain that in such cases, the immediate subject matter of the challenge procedure is, as a rule, the act of second degree that assesses the legality of the assessment act, and which, if it confirms it, must be annulled, in order to obtain the declaration of illegality of the assessment act.

This limitation is explained because "in the case where the act of second degree or third degree hears the legality of the assessment act, the dismissal of the administrative claim that confirms the act makes its respective illegalities its own, which means that from the assessment of the illegality of the act of second or third degree results the illegality of the assessment act. However, such effect does not occur in cases where the act of second or third degree only assessed a preliminary question whose solution prevented the assessment of the legality of the primary act, since in such case, the possible illegality of the act of second or third degree only has as a corollary that the legality of the primary act should be assessed, not implying its illegality" (idem, ibidem).

The rule is that the challenge of administrative acts in tax matters must be conducted in the judicial tax process, through judicial challenge or special administrative action (paragraphs d) and p) of paragraph 1 and paragraph 2 of Article 97 of CPPT), depending on whether such acts involve or do not involve the assessment of the legality of administrative assessment acts. There are exceptions to this division of the fields of application of the judicial challenge process and special administrative action such as for example the challenge of acts of dismissal of administrative claims (special provision paragraph 2 of Article 102 of CPPT).

However, as regards the Arbitral Tribunals functioning at CAAD such exception will be irrelevant, since it results from paragraph a) of paragraph 1 of Article 2 of RJAT that, in relation to assessment acts, self-assessment, withholding at source and advance payments, only the declaration of their illegality is included in their competence and not the assessment of the legality of acts that do not involve such assessment.

The decisions of dismissal of administrative claims cannot be assessed in themselves, particularly those that did not hear the merits of the assessment act that is the subject of the claim, because what is sought through the challenge of the administrative claim decision is to assess the legality of the underlying assessment act, and not the administrative claim decision that did not hear the merits of the taxpayer's claim.

In effect, Article 2 contains no express reference to such acts, unlike what occurs with the legislative authorization on which the Government based itself to approve RJAT, which refers to "petitions for review of tax acts" and "administrative acts that involve the assessment of the legality of assessment acts".

However, the formula "declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and advance payments", used in paragraph a) of paragraph 1 of Article 2 of RJAT does not restrict, in a mere declarative interpretation, the scope of arbitral jurisdiction to cases where an act of one of those types is directly challenged. In fact, the illegality of assessment acts may be declared jurisdictionally as a corollary of the illegality of an act of second degree, which confirms an assessment act, incorporating its illegality.

The formula used in paragraph a) of paragraph 1 of Article 2 of RJAT does not exclude cases where the declaration of illegality results from the illegality of an act of second degree, it will also cover cases where the act of second degree is that of dismissal of a petition for review of the tax act, since no reason is seen to restrict.

In cases where the act of second degree or third degree hears the legality of the assessment act, the dismissal of the administrative claim or hierarchical appeal that confirms such act makes its respective illegality its own, wherefore from the assessment of the illegality of the act of second or third degree results illegality of the assessment act.

The proper means to challenge acts that do not involve the assessment of the legality of assessment acts and that are also not acts of determination of taxable matter or taxable amount is not judicial challenge but special administrative action, in accordance with paragraph p) of paragraph 1 of Article 97 of CPPT and Article 46 et seq. of CPTA.

In light of what is established in Article 24 of RJAT, regarding the effects of the arbitral decision favorable to the taxpayer, it is evident that arbitral decisions have in practice a constitutive effect, since the declaration of illegality of the acts is associated with execution obligations identical to those provided for judicial annulment decisions, including the performance of the due act in substitution of what was declared illegal and reconstitution of the situation that would exist if such act had not been performed (…), imposing on the AT that it eliminate from the legal order that act, annulling it.[1]

Condemnatory decisions or others that explicitly impose on the tax administration the adoption of conduct are not provided, with the exception of condemnation to the payment of compensatory interest and tax indemnification.

As was written in Arbitral Process 17/2012-T, assessment, in the strict sense, is the final phase of the administrative procedure of tax assessment, regulated in Articles 59 to 64 of CPPT, constituted by a series of acts intended to obtain a final legal result, the amount of tax to be delivered to the State treasury[2]. Therefore, assessment in the strict sense is the phase that results in the application of the tax rate to the taxable matter already determined, preparatory acts not being autonomously challengeable, but being able to be called into question when the final, definitive act is challenged, in obedience to the principle of unitary challenge expressed in Article 54 of CPPT[3]

Thus and in accordance with Article 2, paragraph 1, paragraph a) of RJAT, Arbitral Tribunals have competence to declare the "(…) illegality of acts of assessment of taxes, self-assessment, withholding at source and advance payments.", which is why the Tribunal has competence to assess the legality of the assessment act examined.

As regards the interlocutory act (cadastral classification) that occurred on a date prior to assessment, from the principle of unitary challenge enshrined in Article 54 of CPPT, applicable ex vi, Article 29 of RJAT, it results that any illegality committed on a date prior to assessment may and should be invoked when the assessment is challenged.

The interlocutory act is not subject to autonomous challenge, especially since it is not in itself injurious, since it is not capable of producing, by itself, immediate negative legal effects in the legal sphere of the challenger.

In the case at hand, the Claimant challenged the assessment act, which was based, among other prerequisites, on the classification of the Claimant in the simplified regime of IRS. And he does so by attacking precisely the legality of such classification act. The Claimant's petition is, therefore in accordance with the principle of unitary challenge of the tax act, provided for in Article 54 of CPPT and applicable to the present proceedings by force of paragraph a) of paragraph 1 of Article 29 of RJAT.

This understanding is adopted, among others, in the decision of the Supreme Administrative Court dated 13-11-2013, issued in the course of case no. 0897/13 "(…)Article 54 of CPPT enshrines the so-called principle of unitary challenge, according to which it is only possible, in principle, to challenge the final act of the procedure, and not already the interlocutory or procedural acts, since only the final act affects or injures, immediately, the legal sphere of the taxpayer, establishing the position of the tax administration before him and defining his rights and obligations. And from it results, further, that in tax contentious proceedings, contrary to what currently happens in administrative contentious proceedings, the criterion for the challengeability of acts is that of their immediate and actual lesivity (and not merely potential), or, in other words, depends on the production of immediate negative effects in the legal sphere of the taxpayer, by violation of his legally protected rights or interests. In this way, the interlocutory acts of the tax procedure, being merely instrumental or preparatory of the final decision, even if illegal, are not, in principle, immediately injurious to the interests of the taxpayer, since his tax situation is not with them defined or resolved. In truth, being the tax assessment procedure constituted by a series of interconnected acts directed at achieving a final legal result, that is, at assessing the amount of tax that the taxpayer must deliver to the State treasury, it is understandable that only the final act (assessment in the strict sense) be capable of affecting, in an objective and immediate manner, the legal sphere of the taxpayer, being that, therefore, the injurious act and contenciously challengeable act.

In this same sense it has already been decided in the context of arbitral jurisdiction in cases 266/2013-T, 253/2013-T, 114/2017-T and 295/2017-T.

In these terms, it is evident that the illegality of the classification may be judicially examined in the context of judicial challenge or arbitral action, in which the assessment of the legality of the assessment in the context of IRS was requested, which is why the Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, paragraph 1, paragraph a), 5 and 6, paragraph 1 of RJAT. Wherefore the Respondent's petition for exception of absolute incompetence of the Arbitral Tribunal, on grounds of subject matter, fails.

J - LEGAL ISSUES

Given the positions assumed by the parties in the pleadings presented, the petition for arbitral decision to be resolved by the present Arbitral Tribunal consists in assessing the legality of the act of additional assessment in the context of Personal Income Tax no. 2016…, for the tax year 2015, in the amount of 24,006.74€.

The Claimant's claim, in summary, falls under the declaration of illegality of the unilateral alteration made by the AT to his income determination regime of Category B, which was altered from the organized accounting regime to the simplified regime, without there being any express option by the Claimant.

The Respondent, in summary, counters by arguing that the Claimant was by legal requirement classified in the organized accounting regime and that upon determining in 2014 the Claimant's income in an amount less than €200,000.00, and not having exercised the option for the organized accounting regime, he was classified by the AT in the simplified regime.

In light of the positions of the parties, the following summary of the most relevant facts is made:

• The Claimant on 2001-06-26, exercised the option for the organized accounting regime for the exercise of his activity "CIRS 6010–lawyers".

• The Claimant in the year 2014 declared income of €191,860.00.

• The AT unilaterally and ex officio altered the Respondent's regime to the simplified regime, for the year 2015.

Given the foregoing it falls to the present Tribunal to analyze, based on the matters of law and fact, whether it is permitted for the AT to alter ex officio the taxation regime, in the context of IRS, of the taxpayer who was already classified in the previous year by his choice in the organized accounting regime.

At the date of the facts under analysis, income earned in the year 2015, Article 28 of CIRS, in the part relevant to us, 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 the imputation provided for in Article 20, is made:

a) Based on the application of the rules arising from the simplified regime;

b) Based on accounting.

2 - Those classified under the simplified regime are taxpayers who, in the exercise of their activity, have not exceeded in the immediately preceding tax period an annual gross amount of income of this category of (euro) 200 000. (Wording given by Law no. 83-C/2013 - 31/12)

3 - Taxpayers classified under the simplified regime may opt for the determination of income based on accounting. (Wording of Decree-Law 211/2005-07/12)

4 - The option referred to in the preceding number must be formulated by taxpayers:
(Wording of Law 53-A/2006-29/12)

a) In the declaration of commencement of activity;

b) Until the end of the month of March of the year in which they intend to alter the form of income determination, through the presentation of an alteration declaration. (Wording of Law 53-A/2006-29/12)

5 - The minimum period of permanence in any of the regimes referred to in paragraph 1 is three years, renewable for equal periods, except if the taxpayer communicates, in the terms of paragraph b) of the preceding number, the alteration of the regime under which it is classified. (Wording of Law 53-A/2006-29/12)

It is equally important to transcribe the statute in force at the date of the Claimant's communication of the option for the organized accounting regime, respectively in the year 2001, in force Law 30G/2000, which provided in its Article 31, the following:

Article 31

Forms of determination of business and professional income

1 - The determination of business and professional income is made:

a) Based on the application of the rules arising from the simplified regime;

b) Based on accounting.

2 - Those classified under the simplified regime are taxpayers who, not having opted for the organized accounting regime in the immediately preceding tax period, have not attained an amount superior to any of the following limits:

a) Volume of sales: 30000000$00;

b) Gross value of the remaining income of this category: 20000000$00.

3 - Excluded from the simplified regime are:

a) Taxpayers who, by legal requirement, are obliged to maintain organized accounting;

b) Partners or members of entities covered by the provisions of Article 5 of the IRC Code.

4 - The option referred to in paragraph 2 must be formalized by taxpayers:

a) In the declaration of commencement of activity;

b) Until the end of the month of March of the year in which they intend to use organized accounting as the form of income determination, through the presentation of an alteration declaration.

5 - The minimum period of permanence in the simplified regime is five years, automatically renewable for equal periods, except if the taxpayer communicates, in the terms of paragraph b) of the preceding number, the option for the application of the organized accounting regime.

Both the statutory provisions described above expressly provide for the option by the taxpayer for the organized accounting regime, which excludes the application of the simplified regime.

Notably, Article 28 of CIRS for the year 2015 does not distinguish whether such period of permanence applies only in situations where the taxpayer manifests the will to be taxed according to the organized accounting regime, nor does it provide for any regime of lapse in situations where, such classification not having resulted from the will of the taxpayer, the prerequisites that led to its classification in the same regime cease to exist.

As can be gathered from the factual findings, the Claimant expressly opted in the year 2001 for the application of the organized accounting regime.

In these terms, it is clear that, having the taxpayer expressly opted for the organized accounting regime, it is this regime that should be applied to him until express indication to the contrary by the taxpayer, thus excluding the application of Article 28, paragraph 2.

Moreover, no provision of law results in any requirement on the taxpayer - who earns income of an amount less than that established in Article 28, paragraph 2 of CIRS - to manifest his will to remain in the organized accounting regime, as the AT purports.

In this same sense, it has been decided in the context of arbitral jurisdiction in cases 266/2013-T, 253/2013-T, 114/2017-T and 295/2017-T.

On the interpretation to be given to Article 28, we refer to the arbitral decision 295/2017-T:

"Moreover, it is the law itself that, in an explicit manner, in paragraph 4 of Article 28 of CIRS, provides that the option of the taxpayer for the organized accounting regime must be carried out in two circumstances:

In the declaration of commencement of activity;

Until the end of the month of March of the year in which they intend to alter the form of income determination.

There is, therefore, no correspondence in the letter of the law for the interpretation defended by the AT, according to which, once the volume of sales provided for in paragraph 2 of Article 28 CIRS is exceeded, his taxation according to the organized accounting regime lapses.

It being certain that, in the interpretation of norms one should presume that the legislator knew how to express his thought and enacted the most accurate solution, as results from Article 9, paragraph 2 of CC, ex vi Article paragraph 1 of Article 11 and Article 2 of LGT.

Moreover, inasmuch as Article 28 paragraph 2 contains no distinction concerning the maintenance in a given classification, the AT cannot make such a distinction, as results from the legal maxim "bi lex non distinguir, nec... nos distinguere debemus", that is, where the law does not distinguish, the interpreter is not permitted to do so.

Not having the legislator provided for any situation that would cause the organized accounting regime to cease during the three-year cycle, should the interpreter conclude, in accordance with the rules of interpretation, that its non-existence is the most accurate.

And even if one understood there to be a lacuna, which is not conceded, it would not be subject to analogical integration, as expressly prohibited by Article 11, paragraph 4 of LGT.

Wherefore, not having the Claimant communicated any alteration to his taxation regime, he made a clear and unequivocal option for the maintenance of the taxation regime in which he was classified, and the AT cannot proceed to alter it ex officio, when the taxpayer does not attain income in an amount exceeding that provided for in Article 28 of CIRS."

Also in accordance with the understanding delivered in terms of case law, it is clear that, not having the taxpayer communicated his intention to alter the organized accounting regime, the AT cannot ex officio alter the same.

Indeed, it results from the understanding of the AT disclosed through Circular no. 2/2016 of 6 May, that "taxpayers who exercise the option for income determination based on accounting in the conditions provided for in paragraph 4 of Article 28 of the IRS Code remain in that regime until they manifest otherwise, the variations in the annual gross amount of income of category B that may occur being irrelevant." [emphasis ours]. Wherefore, even by the understanding set out in said circular, the AT should have decided otherwise in the present case.

Now, in the case sub judice, the Claimant was ex officio classified in the simplified regime with effect from 2015, under paragraph 2 of Article 28 of the IRS Code, because in the year 2014 income of category B of €191,860.00 was determined, that is, less than €200,000.00.

By the firmness of said paragraph 5 of Article 28 of the IRS Code, the organized accounting regime relating to the taxation of category B income in which the Claimant has remained classified since 2001 (upon commencement of activity) remains in effect until the taxpayer proceeds to deliver an alteration declaration.

Accordingly, not having the Claimant submitted any alteration declaration of classification by the end of March 2015, the regime in effect – organized accounting regime – would remain applicable.

In light of all the foregoing, the interpretation that the Respondent makes of paragraph 1, paragraph 2 and paragraph 4 of Article 28 of CIRS lacks legal support, which seeks to impose on the taxpayer a burden, relating to an ancillary tax obligation, which the law does not provide, and which is even contrary to its literal meaning, violating the principle of tax legality enshrined in Article 103, paragraphs 2 and 3 of CRP and in Article 8, paragraphs 1 and 2 of LGT.

By the foregoing, it is understood that the assessment in the context of IRS no. 2016…, for the year 2015, and the decision of dismissal issued in the context of the Administrative Claim filed against the same, suffer from the vice of violation of law, by erroneous interpretation of Article 28 of CIRS and, in consequence, such acts should be annulled.

And, in this manner, the Claimant's claim is upheld.

I - COMPENSATORY INTEREST

The Claimant also petitions for the payment of compensatory interest.

Given the foregoing, the assessment of IRS, in the part covered by the annulment to be decreed, results from errors of fact and law attributable exclusively to the tax administration, insofar as the Claimant fulfilled its declaration obligation and they were committed by it and could not be unaware of different understandings.

In truth, it being demonstrated that the Claimant paid the tax challenged in an amount exceeding that which is due, by force of Articles 61 of CPPT and 43 of LGT, the Claimant is entitled to the compensatory interest due, such interest to be counted from the date of payment of the undue tax (annulled) until the date of issuance of the respective tax credit note, counting the period for such payment from the beginning of the period for spontaneous execution of the present decision (Article 61, paragraphs 2 to 5, of CPPT), all at the rate determined in accordance with paragraph 4 of Article 43 of LGT.

The Claimant's petition is upheld.

L - DECISION

The present Tribunal hereby decides:

To uphold the petition for declaration of illegality of the tax assessment act of additional liquidation in the context of Personal Income Tax no. 2016…, for the tax year 2015, in the amount of 24,006.74€ (twenty-four thousand and six euros and seventy-four cents).

Condemns the Respondent to restore to the Claimant that amount wrongfully assessed and paid together with the payment of accrued compensatory interest relating to the period from payment of the tax in accordance with paragraphs 2 to 5 of Article 61 of CPPT and at the rate determined in accordance with paragraph 4 of Article 43 of LGT and future interest until full reimbursement.

The value of the case is fixed at 24,006.74€ given the economic value of the case measured by the amount of the contested tax assessments, and in accordance with that the costs are fixed in the respective amount of 1,530.00€ (one thousand five hundred and thirty euros), to be borne by the Respondent in accordance with Article 12, paragraph 2 of the Legal Regime for Tax Arbitration, Article 4 of RCPAT and Table I annexed thereto, paragraph 10 of Article 35, and paragraphs 1, 4 and 5 of Article 43 of LGT, Articles 5, paragraph 1, paragraph a) of RCPT, 97-A, paragraph 1, paragraph a) of CPPT and 559 of CPC).

Notify parties accordingly.

Lisbon, 22 March 2018

The Arbitrator

Paulo Ferreira Alves

[1] Jorge Lopes de Sousa, in Commentary on the Legal Regime for Arbitration in Tax Matters, Guide to Tax Arbitration, Almedina, 2013.

[2] In this sense the Decision of the STA, no. 0188/09, of 9 September 2009

[3] This principle has certain exceptions, being acts of determination of taxable matter subject to autonomous challenge. See Alberto Xavier, Concept and Nature of the Tax Act, pp. 140 to 191.