Summary
Full Decision
ARBITRAL DECISION
I – REPORT
On 04 October 2017, A…, Tax Number…, with tax domicile at … Street, No.…, …-… … (hereinafter, for short, the Claimant), and the Estate of B… (deceased), Tax Number…, with domicile at the same address (hereinafter, when identified jointly, the Claimants), filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, with the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, for short designated RJAT), aimed at declaring the illegality of the personal income tax (IRS) assessment act relating to the year 2012, titled by assessment note No. 2017… of 15/02/2017, and the respective calculation of interest.
To substantiate its request, the Claimant alleges, in summary, that the Tax Authority's right to assess the tax has expired by limitation.
On 06-10-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.
The Claimant did not proceed with the appointment of an arbitrator, whereby, under the provisions of Article 6, No. 2, paragraph a) and Article 11, No. 1, paragraph a) of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.
On 28-11-2017, the parties were notified of these designations and did not express any intention to refuse any of them.
In conformity with the provisions of Article 11, No. 1, paragraph c) of the RJAT, the collective Arbitral Tribunal was constituted on 20-12-2017.
On 01-02-2018, the Respondent, duly notified for that purpose, submitted its reply defending itself by way of challenge.
Under the provisions of Articles 16, paragraphs c) and e), and Article 29, No. 2, both of the RJAT, the holding of the meeting referred to in Article 18 of the RJAT was waived.
Having been granted a period for the presentation of written submissions, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.
A period of 30 days was set for the pronouncement of a final decision, after the submission of arguments by the Respondent, which period was extended until the end of the period referred to in Article 21, No. 1 of the RJAT.
The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, No. 1, paragraph a), 5 and 6, No. 1, of the RJAT.
The parties have legal personality and capacity, are legitimately constituted and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Administrative Order No. 112-A/2011, of 22 March.
The proceedings do not suffer from nullities.
Thus, there is no obstacle to consideration of the case.
Having examined all matters, it is necessary to deliver
II. DECISION
A. MATTER OF FACT
A.1. Facts established as proven
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The Tax Authority conducted an inspection procedure, which it classified as external, of the commercial company C… SGPS S.A. under the service order DI2016…, completed before August 2016;
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In the course of this procedure, the inspection services collected documents and information from the aforementioned company – C….
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From the documents obtained, the inspection services became aware of the existence of a partial redemption operation of a quota held by shareholder B… from the nominal value of €6,250,000.00 to €250,000.00, and the consequent reduction of capital of the commercial company C… SGPS, S.A. (then in the form of a limited liability company).
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In 2013, the Claimant A… and her then-husband B… submitted to the Tax Authority the Model 3 tax return referred to in Article 57 of the Personal Income Tax Code (CIRS) for the year 2012, where they did not declare this redemption operation.
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This discrepancy led to the opening of an inspection procedure concerning personal income tax for the year 2012 of the aforementioned A… and B… under service order No. OI2016….
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On 10/09/2015, B… died, leaving his spouse A… as heir and head of the indivisible estate, and also as heirs the children of the deceased, D… and E….
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On 11/08/2016, service order No. OI2016… was issued, for an external inspection procedure concerning Claimant A… and her then-husband B… (now indivisible estate), which fixed the scope and extension to the year 2012, concerning personal income tax, accrediting for this purpose the inspectors F… and G….
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On 13/09/2016, at the offices of the inspection service, the notice letter addressed to A… was delivered to D…, by which the object, extension, scope and accreditation for the inspection set by service order No. OI2016… were communicated.
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In that document the aforementioned D… left the notation "I received on 13/09/2016 the present notification in the capacity of representative of A…", followed by the expression "son" and the signature of D….
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Service order No. OI2016… was not sent to the Claimants, nor were they called to any location to receive it or to become acquainted with it.
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The Claimant A…, to whom the notice letter was addressed, was, on 13/09/2016, of legal age, having full legal capacity.
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After the procedure was initiated and throughout its conduct, none of the inspection service personnel contacted the Claimant, spoke with her, or visited her address to make contact, either to notify her personally of service order No. OI2016…, or to gather any evidence element necessary for the inspection.
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During the procedure, various pieces of information were requested from D…, which were always promptly provided.
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On 20/10/2016, a diligence note notification was sent to the Claimant A… communicating the conclusion of the inspection acts.
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Such communication did not include a copy of the service order, nor information about the accreditation, scope, extension or purpose of the inspection.
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On 12/12/2016, notification of the draft inspection report was sent to the Claimants, so that they could exercise their right to prior hearing, pursuant to Article 60 of the Supplementary Regime for Tax and Customs Inspection Procedure (hereinafter, for short, RCPITA).
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This notification, made by official letter No.…, was returned on 23/12/2016.
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On 28/12/2016, the Claimant A… changed her address.
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Thus, a new notification of the draft report was sent, by official letter No.… of 29/12/2016, which was received on 04/01/2017, by the Claimant A….
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Without the right of prior hearing being exercised, the final inspection report was prepared, and the Claimants were notified of it on 09/02/2017.
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This report states that:
"The inspection action was based on declarative control of the Model 3 tax return for the year 2012, namely the analysis of capital gains obtained from the operation of redemption and capital reduction of company C… SGPS S.A. From such operation, classified under Article 10, No. 1, paragraph b) of the CIRS, resulted the determination of a capital gain in the amount of 3,250,000.00, which was not recognized in the tax return of the taxpayer. Taking into account the other values declared in Annex G, a positive balance was determined between capital gains and capital losses, which is subject to taxation of 26.5% pursuant to No. 4 of Article 72 of the CIRS. For the above reasons, the following amounts in default were determined:
For personal income tax purposes:
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Autonomous taxation: €856,629.06".
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Using documents and information that the Tax Authority already had and retained before the issuance of the aforementioned service order, previously collected in the inspection directed at the aforementioned C… SGPS, S.A.
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It was only on these elements and acts that the final inspection report was based in order to correct the personal income tax assessment relating to 2012.
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In the aftermath of the conclusions of the inspection report to the Claimants, in February 2017, the Tax and Customs Authority proceeded with a new assessment to correct the personal income tax of the Claimants for the year 2012.
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Of which the claimants were notified on 21/02/2017, titled by assessment notes 2017…, reversal of assessment No. 2013… and assessment No. 2017….
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From those operations resulted the correction of the personal income tax in the amount of €856,629.06 (assessment 2017…), plus compensatory interest in the amount of €125,138.24, calculated on the value of the tax correction (assessment 2017…).
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On 17/03/2017, the Claimants filed an administrative appeal with the Finance Directorate of… for annulment of the aforementioned assessment act.
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The aforementioned administrative appeal was the subject of an express rejection decision on 30/08/2017, notified by registered mail on that same date, with the following reasoning:
"1. The inspection procedure resulted from elements collected externally in the context of an external procedure directed at the company C… SGPS, S.A., of which the deceased spouse of the appellant was a shareholder;
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The aforementioned personal income tax assessment resulted from the capital reduction of that company through the redemption of quotas in the amount of €6,000,000.00 (at that time it was still a limited liability company) through the assignment of rights held by the company over third parties to that shareholder.
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In the context of that procedure, a broad range of documentation about the operation was obtained which could only be obtained through on-site examination of the company's records (…).
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The elements thus collected completely preclude the possibility of the appellant being subject to an internal procedure, which requires that inspection be conducted exclusively at the tax administration offices through formal and consistency analysis of documents held by or obtained by it in the context of the aforementioned procedure – Article 13, paragraph a) of RCPITA.
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Whereas there exist materially relevant acts of evidence gathering and substantiation of the tax act performed in the course of a third party, the company C… SGPS, S.A., with which the deceased taxpayer maintained economic relations, the present procedure would always have had to have, as it did have, an external character".
A.2. Facts not established as proven
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That when signing the notice letter referred to in point 8 of the facts established as proven, D… informed that A… was physically debilitated due to age;
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That A… conferred on her son D… the authority to represent her in the notification act of the service order, or in any other act in the further course of the procedure, with the Tax Authority, or with any other entity.
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That in the inspection procedure to which service order No. OI2016… relates, there occurred acts of inspection outside the offices of the inspection service.
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That the Claimant A… was not, on 13/09/2016, lucid and mentally sound.
A.3. Reasoning for the matter of fact established and not established as proven
Regarding the matter of fact, the Tribunal does not need to pronounce on everything that was alleged by the parties; rather, it is its duty to select the facts that matter for the decision and to distinguish established facts from those not established (see Article 123, No. 2, of the Code of Tax Procedure and Process (hereinafter, for short, CPPT) and Article 607, No. 3, of the Code of Civil Procedure (hereinafter, for short, CPC), applicable by virtue of Article 29, No. 1, paragraphs a) and e) of the RJAT).
Thus, the facts pertinent to the judgment of the case are chosen and selected in light of their legal relevance, which is established with respect to the various plausible solutions of the question(s) of Law (see former Article 511, No. 1, of the CPC, corresponding to the current Article 596, applicable by virtue of Article 29, No. 1, paragraph e), of the RJAT).
Therefore, taking into account the positions assumed by the parties, in light of Article 110, No. 7, of the CPPT, the documentary evidence and the case file included in the record, the facts listed above were considered established, with relevance to the decision, bearing in mind that, as was written in the Judgment of the Central Administrative Court of the South (TCA-South) of 26-06-2014, rendered in case No. 07148/13, "the evidentiary value of the tax inspection report (…) may have probative force if the assertions contained therein are not challenged".
Allegations made by the parties that were presented as facts and consisting of strictly conclusive statements, incapable of proof, and whose truthfulness must be assessed in relation to the concrete matter of fact established above, were not considered either as established or not established.
B. LAW
The sole matter at issue in this arbitral action is to determine whether or not the Tax Authority's right to assess the tax in question – personal income tax for the year 2012 – has expired by limitation.
To this effect, Article 48, No. 1 of the General Tax Code (LGT) provides:
"The right to assess taxes expires if the assessment is not validly notified to the taxpayer within four years, unless the law stipulates otherwise."
In compliance with this legislative command, it must be concluded that the period of limitation in question, taking into account the nature of the tax at issue, expires on 31-12-2016.
However, Article 49, No. 1, of the same statute provides:
"The period of limitation is suspended upon notification to the taxpayer, in accordance with the law, of the service order or dispatch at the beginning of the external inspection action, however, such effect ceases, counting the period from its beginning, should the duration of the external inspection exceed the period of six months after notification."
As follows from the rule transcribed above, the period of limitation in question may be suspended, if two prerequisites are met, namely:
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The occurrence of an external inspection action; and
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The notification to the taxpayer, in accordance with the law, of the service order or dispatch at the beginning of the aforementioned external inspection action.
The aforementioned prerequisites are cumulative, whereby the suspension of the period in question shall only operate if and to the extent that both are met.
Let us examine this, then.
With respect to the nature of the inspection procedure, Article 13 of the RCPITA, as drafted, provides that:
"With respect to the place of conduct, the procedure may be classified as:
a) Internal, when inspection acts are conducted exclusively at the offices of the tax administration through formal analysis and consistency analysis of documents held by or obtained by it in the course of the aforementioned procedure;
b) External, when inspection acts are conducted, in whole or in part, at the offices or facilities of taxpayers or other tax-obligated persons, third parties with whom they maintain economic relations or at any other location to which the administration has access."
In the concrete case, and given the facts established, it is clear that the Tax Authority qualified the inspection procedure as external.
However, as was written in the Judgment of the Central Administrative Court of the North (TCA-North) of 13-11-2014, rendered in case No. 01854/10.8BEBRG, "The qualification given by the Administration to a procedure is not binding."
Returning to the facts established in the present arbitral proceedings, it is evident that the elements of evidence and material acts of inspection on which the assessment act now under challenge is based are those that the Tax Authority collected in the external inspection procedure directed at the commercial company C… SGPS, S.A., and that no material act of inspection was conducted outside the offices of the tax administration in the context of service order No. OI2016…, which was limited to formal and consistency analysis of documents.
This alone would be sufficient to qualify, in principle, the inspection procedure as merely internal, in light of the content of Article 13, paragraph a) of the RCPITA.
Effectively, the regulation of the tax inspection procedure is justified, in the first instance, by its unfavorable, intrusive nature and the imposition of obligations on the taxpayer.
As expressly stated in the preamble of the RCPITA, the regulation of the tax inspection procedure aims "essentially at the organization of the system, and consequently at ensuring proportionality to the objectives to be achieved, the security of taxpayers and other tax-obligated persons and their own participation in the formation of decisions."
Thus, it should be considered that the regulation of the tax inspection procedure has, in the first instance, an essentially organizational (ordering) purpose and, from the perspective of taxpayers, will aim essentially to define the conditions under which the legal effects proper to such procedure will be effectively reflected in their legal sphere, in addition to ensuring their participation in the decisions that may be taken.
Regarding this latter aspect, it should be said from the outset that, in light of the general principle of taxpayers' participation in the formation of decisions affecting them, enshrined in Article 60 of the LGT, the essential legally relevant interests of such would always be duly safeguarded, regardless of the specific regulation of the tax inspection procedure. Furthermore, in this regard, the fact that, as a principle, the tax inspection procedure does not have, primordially, a decision-making nature (hence, for example, its final act – the report – is not directly challengeable, since it is not, in itself, injurious), but merely preparatory or accessory, means that the need to safeguard taxpayers' participation in the formation of decisions in its sphere would be highly diminished.
Thus, the principal purpose, always from the perspective of taxpayers, of the regulation of the tax inspection procedure, and of its observance by the Tax Administration, will reside in the fixing of the legally necessary conditions for the legal effects proper to the procedure in question to be effectively reflected in the legal sphere of taxpayers, especially the suspension of the period of limitation of the right to assess taxes by the Administration, pursuant to Article 46, No. 1 of the LGT, as well as subjection of those targeted to the guarantees and prerogatives of the tax inspection (Articles 28 and 29 of the RCPITA), and to the application of precautionary measures (Articles 30 and 31 of the RCPITA).
With effect, the initiation of an external inspection procedure generates various duties of cooperation and subjection for the taxpayer, such as, for example, that of providing the elements referred to in paragraphs c) and d) and that of permitting the inspection to be conducted at its facilities in accordance with the terms described in paragraphs a) and b), all of Article 28, No. 2 of the RCPITA.
Furthermore, an external inspection procedure, as has been seen, has the effect of suspending the running of the period of limitation of the right to assess.
Hence, as mentioned, the regulation of the tax inspection procedure has underlying, in the first instance, the regulation of the terms in which it is legitimate for the Tax Administration to impose on the taxpayer the duties, subjections and other unfavorable effects inherent in such inspection procedure.
Now, an inspection procedure of an internal nature – by its nature – does not entail, per se, any unfavorable effects on the taxpayer, which is what occurs in the present case.
That is, the inspection procedure at issue, having limited itself to the analysis of documentation that was already in the possession of the Tax Administration, should not, in principle, be qualified as external, since it did not result in the imposition of duties or subjections on those targeted by such inspection procedure.
In this way, the inspection procedure in question should not have, given its nature, the capacity to, in accordance with the aforementioned provision of Article 49, No. 1 of the LGT, suspend the period of limitation, which, consequently, must be considered as having expired on 31-12-2016.
However, the existence of jurisprudence capable of substantiating another reading is not overlooked, regarding the qualification of the inspection procedure now being analyzed.
Thus, the already cited Judgment of the TCA-North of 13-11-2014, rendered in case No. 01854/10.8BEBRG, also states:
"In the case under analysis, there was an activity initiated by the Tax Administration, directed at the Official Accounting Technician, designed to obtain elements that were not in its availability. All this investigative activity occurred at a moment prior to that of the beginning of the period which, according to the inspection report, corresponds to that during which the inspection action took place. This factuality does not change the characterization of the procedure, and it should be qualified as being of an external nature."
Also, the Judgment of the Supreme Administrative Court (STA) of 05/11/2014, rendered in case No. 0914/13, cited by the Claimant herself, states:
"Prior requests for elements from third parties (with whom the taxpayer maintains professional and economic relations) conducted under the principle of cooperation (No. 2 of Article 31 and No. 4 of Article 59 of the LGT and paragraph b), No. 3, of Article 29 of RCPIT), if such elements are not directly the object of any analysis or appraisal, are not to be integrated into the concept of a material act of an external inspection procedure."
In light of the cited jurisprudence, it could be sustained that the inspection procedure in question has an external nature, and, regarding such matter, the legislative amendment made by Decree-Law No. 36/2016, of 1 July, does not provide any decisive argument, since, on the one hand, the same may be read as, the Tax Authority claims, in the sense that analysis of elements obtained in the context of other inspection procedures would qualify the inspection procedure as external, from the start, and on the other hand, it may be read as, being in question the analysis of elements "held" by the Tax Authority, one would be faced with an inspection procedure of an internal nature.
However, even in that case, the same conclusion would have to be reached.
Effectively, even if it were an external inspection procedure, in order for the suspension of the period of limitation referred to in Article 49, No. 1 of the LGT to be verified, notification to the taxpayer, in accordance with the law, of the service order or dispatch at the beginning of the external inspection action would still be necessary.
As follows from the law (by making reference to the need for notification "in accordance with the law") and from the jurisprudence of the STA, the communication of the service order or dispatch of the beginning of external inspection, in order to produce the suspensive effect of the period of limitation, must observe the rules concerning notification of the tax act.
Now, in the case, returning to the facts established above, it is evident that the service order in question was not signed by the Claimant A…, by herself or in representation of the estate, but only by her son D…, and it has also not been established that:
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That when signing the notice letter referred to in point 8 of the facts established as proven, D… informed that A… was physically debilitated due to age;
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That A… conferred on her son D… the authority to represent her in the notification act of the service order, or in any other act in the further course of the procedure, with the Tax Authority, or with any other entity.
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That in the inspection procedure to which service order No. OI2016… relates, there occurred acts of inspection outside the offices of the inspection service.
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That the Claimant A… was not, on 13/09/2016, lucid and mentally sound.
Thus, in accordance with what was stated in the aforementioned Judgment of the STA of 12-10-2016, rendered in case 0879/15, the starting date of the period of suspension of the period of limitation of the right to assess the tax in question cannot be considered to have occurred, whereby, as above, it must be concluded that the period of limitation referred to must be considered as having expired on 01-01-2017.
This conclusion is not obstructed by the allegation of the Respondent that "there is no way that the fact that the Inspection Order was signed by the son of one of the Claimants, who is also an heir of the other Claimant, and who, throughout the inspection procedure, was the contact point with the Tax Authority, could invalidate this procedure," firstly because such allegation is not based on any legal rule that could substantiate the judgment that the signature of a son, or of an heir who is not the head of the estate, produces the same effects, in general or for the concrete situation, as the signature of one of the parents or the head of the estate, and it is certain that the person who signed the service order was not "an employee or collaborator" of the inspected taxpayers, and it is equally not demonstrated that the latter refused to sign any notification.
In reality, the involvement of A…'s son is subsumable under the figure of management of affairs, regulated, in the tax domain, by Article 17 of the LGT. Since none of the situations provided for in No. 3 of such a rule are at issue (the receipt of a notice letter in which notification of the conduct of an inspection is communicated does not constitute the fulfillment of an ancillary obligation), the discipline of this institute applies as it results from the pertinent rules of the Civil Code (No. 1).
Being a case of representative management (it could not be otherwise, since the Claimant's son, not being a taxpayer, could never act in his own name), we have that the act is originally ineffective against the owner of the business. For it to produce effects against the "dominus," its ratification is necessary (ANTUNES VARELA, Law of Obligations, 2000, p. 436). Now, the position assumed by the Claimant in the present proceedings is, clearly, one of non-ratification of the acts carried out by the son, and it has not been established that any fact exists from which a ratification can be inferred, even a tacit one, at an earlier moment, whereby such "signature" is not opposable to her.
Equally unobstructed by this conclusion is the circumstance, equally invoked by the Tax Authority, that "the Claimant A… was notified, in October 2016, of the diligence note attesting the conclusion of the inspection acts, whereby, at least from that date, she had knowledge that an inspection procedure was unfolding," and therefore "any possible pretermission of formality that might still exist (…) would always be downgraded to a mere irregularity without any effect invalidating the process," since the same is anchored in jurisprudence that examines the question of the impact of illegalities of the inspection procedure on the assessment act, and not the question, at issue in the present proceedings, of the impact of such illegalities on the running of the period of limitation of the right to assess, and, regarding this matter, the jurisprudence of the Central Courts and of the STA has been consistent in asserting that the occurrence of some illegality in the inspection procedure does not have the effect "of annulling the subsequent assessment, but only of not counting as a period of suspension in the running of the period of limitation of the right to assess."
Given that it is established that the tax inspection report was only notified on 04-01-2017 and that the assessment act under challenge was only notified to the taxpayers on 21-02-2017, it must be concluded that this occurred when the period legally given to the Tax Authority for doing so had already expired.
At the jurisprudential level, knowledge of the expiration of the right to assess by limitation has been admitted in the context of judicial challenge, and reference may be made, by way of example, to the Judgment of the STA of 19-12-2007, rendered in case No. 0617/07, where the matter was known in that same context. In the same sense, reference may be made to the Judgments of 12-10-2005, case No. 0633/05, of 28-03-2007, case No. 0965/06, and of 19-12-2007, case No. 0617/07.
Since, then, the tax in question in the proceedings was not assessed, and notification thereof to the taxpayer was not made, within the applicable period of limitation, the assessment shall be annulled as illegal.
C. DECISION
In view of the above, this Arbitral Tribunal decides to render fully substantiated judgment on the arbitral claim formulated and, in consequence:
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To annul the personal income tax assessment act relating to the year 2012, titled by assessment note No. 2017… of 15/02/2017, and the respective calculation of interest;
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To condemn the Respondent in the costs of the proceedings, in the amount fixed below.
D. Value of the Proceedings
The value of the proceedings is fixed at €892,643.18, pursuant to Article 97-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The amount of the arbitration fee is fixed at €12,546.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Tax Authority, since the claim was fully substantiated, pursuant to Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4, of the aforementioned Regulation.
Let notice be given.
Lisbon, 20 June 2018
The President Arbitrator
(José Pedro Carvalho)
Arbitrator Member
(Leonardo Marques dos Santos)
Arbitrator Member
(Rui Duarte Morais)
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