Summary
Full Decision
ARBITRATION DECISION (consult full version in PDF)
The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. João Marques Pinto and Prof. Dr. Maria do Rosário Anjos, designated by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 10-12-2018, agree as follows:
1. Report
A..., LDA., NIPC..., with registered office at ..., on Rua ..., no. ..., ..., ...-... Estoril (hereinafter referred to as "Claimant"), pursuant to articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), submitted a request for arbitral pronouncement in which the TAX AND CUSTOMS AUTHORITY is required as respondent.
The Claimant requests the annulment of the Corporate Income Tax (IRC) assessment no. 2017..., relating to the 2014 tax period, with a total value of € 120,413.85, which includes the sum of € 4,878.56 in compensatory interest and the sum of € 61,233.86 in autonomous taxation.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 31-10-2018.
Within the deadline referred to in article 13, no. 1, of RJAT, the Tax and Customs Authority partially revoked the assessment in the amount of € 7,001.06 of autonomous taxation, relating to charges with light passenger vehicles, which was reduced from € 8,619.87 to € 1,618.82.
Notified of the decision of the Tax and Customs Authority, the Claimant expressed interest in continuing the proceedings.
Pursuant to the provisions of article 6, no. 2, letter a) and article 11, no. 1, letter b) of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the undersigned signatories, who communicated their acceptance of the assignment within the applicable deadline.
On 20-10-2018, the parties were duly notified of this designation and did not manifest the intention to refuse the designation of the arbitrators, in accordance with article 11, no. 1, letters a) and b) of RJAT and articles 6 and 7 of the Code of Ethics.
Thus, in accordance with the provision of article 11, no. 1, letter c) of RJAT, as amended by article 228 of Law no. 66-B/2012, the Arbitral Tribunal was constituted on 10-01-2018.
The Tax and Customs Authority filed a defence in which it raised the exception of untimeliness and argued for dismissal of the claim.
On 13-03-2019, a hearing was held for the production of witness evidence, at which it was decided that the proceedings would continue with written arguments.
The parties filed arguments.
The Arbitral Tribunal was regularly constituted and is competent.
The parties are duly represented, enjoy legal personality and capacity and are legitimate (articles 4 and 10, no. 2, of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings do not suffer from any nullities.
It is important to primarily assess the exception of untimeliness.
2. Issue of untimeliness of submission of the request for constitution of the arbitral tribunal
The Tax and Customs Authority raises the issue of untimeliness of submission of the request for constitution of the arbitral tribunal on the grounds that, in summary, the Claimant submitted it after the expiry of 90 days from the end of the voluntary payment deadline of the assessment.
The voluntary payment deadline for the contested assessment ended on 12-06-2017.
On 22-09-2017, the Claimant filed an administrative appeal (reclamação graciosa) against the assessment, within the 120-day deadline provided for in article 70, no. 1 of the Tax Code and Procedure (CPPT).
As results from the provision of article 10, no. 1, letter a) of RJAT, "the request for constitution of an arbitral tribunal is submitted" "within 90 days, counted from the facts provided for in nos. 1 and 2 of article 102 of the Tax Code and Procedure, as regards acts susceptible to autonomous challenge and, as well, from notification of the decision or the end of the legal deadline for decision of the hierarchical appeal".
One of the acts susceptible to autonomous challenge is the decision on the administrative appeal, as results from the provision of articles 95, nos. 1 and 2, letter d) of the General Tax Law (LGT) and article 97, no. 1, letter c) of CPPT.
On the other hand, as results from article 2, no. 1, letter a) of RJAT, the subject matter of the arbitral proceedings is the assessment act and not the decision on the administrative appeal, whereby the Claimant did not have to challenge this decision, which was merely confirmatory, but rather the assessment act that was confirmed.
Therefore, the deadline for submitting a request for constitution of an arbitral tribunal regarding assessment acts against which an administrative appeal was filed is 90 days from notification of the decision dismissing the appeal and not from the end of the voluntary payment deadline.
The decision on the administrative appeal was notified to the Claimant by letter sent on 27-07-2018 (document no. 6 attached to the request for arbitral pronouncement, the content of which is hereby reproduced).
Notification was made to the Claimant's electronic tax address, as can be inferred from the text of the official letter which appears in document no. 6, in which it is expressly stated that the calculation of deadlines "begins on the next business day after the day on which notification was effected, pursuant to no. 10 of article 39 of CPPT".
Pursuant to this no. 10 of article 39 of CPPT, "notifications made to the electronic tax address shall be deemed to have been made on the fifth day following the date of availability of such notifications in the electronic notification system associated with the single digital address or in the electronic mailbox of the person to be notified".
Therefore, the notification sent on 27-07-2018 is deemed to have been made on 01-08-2018, the fifth subsequent day.
It is from the next business day, 02-08-2018, that the 90-day deadline provided for in article 10, no. 1, letter a) of RJAT is counted, which therefore ended on 31-10-2018.
Since the request for constitution of the arbitral tribunal was submitted on 30-10-2018, it must be concluded that the submission was made within the legal deadline.
The exception of untimeliness is therefore not upheld.
3. Facts
The following facts are deemed proven:
The Claimant is a limited liability company with registered office in national territory whose corporate purpose includes the civil construction industry, public and private works, urban development, purchase and sale of real estate, resale of property acquired for that purpose, trade in construction materials, construction of buildings for sale and resale of property acquired for that purpose, as well as rental of real estate and furnished accommodation for tourists, in accordance with the Economic Activity Code (CAE) - Rev. 3, no. 41200, relating to "Construction of buildings (residential and non-residential)" and no. 68200, relating to "Rental of real estate";
On 27 October 2016, a tax inspection was initiated at the Claimant by the Lisbon Tax Authority, which lasted until 20 February 2017 (document no. 1 attached to the request for arbitral pronouncement, the content of which is hereby reproduced);
In the Report of the Tax Inspection, the following is stated:
II.4 Accounting and Tax Assessment
Following analysis of the declarations submitted by the taxpayer relating to the years 2013 and 2014, it is noted that there was a very significant increase in the net result for the period.
This increase is essentially due to the increase in sales in 2014, which resulted from the opportunity created by the Golden Visa programme.
This opportunity follows the approval of Law no. 29/2012, of 9 August, which amended Law no. 23/2007, of 4 July, by means of which the Portuguese Government approved legislation that amended the legal regime governing the entry, stay and departure of foreigners from national territory, allowing non-EU foreign nationals, through investment activities, to obtain a special residence authorization, called "GOLDEN VISA" or "VISTO GOLD", which allows foreign investors to move freely in the "Schengen" area.
This residence authorization is granted to citizens who request it, provided they meet certain requirements, particularly those related to investments, acquisition of real estate and/or generation of employment, identified below:
Acquisition of real estate with a value equal to or greater than €500,000.00, the investment being able to correspond to one or more real estate properties;
Transfer of capital in an amount equal to or greater than €1,000,000.00;
Investment leading to the creation of at least 10 jobs.
Faced with this situation, the following most significant findings are reported:
II.4.1 For Corporate Income Tax purposes
2013 tax year
The taxpayer in the 2013 tax year proceeded with the sale of real estate to a Portuguese client, thus making the total sales value € 124,000.00, as per the table below:
2014 tax year
In the 2014 tax year the taxpayer calculated the total sales value of € 5,126,000.00, as per the table below:
Regarding sales made to purchasers of Chinese nationality, service provision contracts were concluded with the following companies:
– B... LIMITED, headquartered in HONG KONG;
– C... LTD, headquartered in Cyprus.
A... bore and paid advertising expenses invoiced by B..., LIMITED in the amount of €147,000.00 (Annex III) and to C... LTD in the amount of €384,500.00 (Annex IV).
(...)
III - DESCRIPTION OF THE FACTS AND GROUNDS FOR PURELY ARITHMETICAL CORRECTIONS TO TAXABLE INCOME
III.1. ANALYSIS WITHIN THE SCOPE OF CORPORATE INCOME TAX
III.1.1. CORRECTIONS TO FISCAL RESULT
III.1.1.1. SERVICES ACQUIRED FROM ENTITIES HEADQUARTERED IN HONG KONG
A) FISCALLY NON-DEDUCTIBLE EXPENSES - 2014 PERIOD
Tax legislation establishes the general conditions to which expenses must comply to be fiscally deductible, in accordance with the provisions of article 23 of the Corporate Income Tax Code (CIRC), which stipulates:
"7 - For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to Corporate Income Tax shall be deductible."
The legislator thus makes the fiscal deductibility of an expense dependent on a justified relationship with the activity generating income subject to tax.
Obviously, first and foremost, and without the legislation expressly referring to it, it is important to verify the effectiveness and proof of the realization of the expenses, which will consist in their documentary evidence, supporting the accounting records.
On the other hand, the legislation imposes, for the fiscal deductibility of the expense, the existence of a justified relationship with the productive activity, and this indispensability is verified whenever such charges are connected with the obtaining of income.
However, the general principle of deductibility of expenses suffers a derogation in the case of payments to non-resident entities located in jurisdictions with privileged tax status, as a way to prevent erosion of the tax base.
Thus, with a view to combating evasion and international tax fraud, and in order to restrict the use of tax havens, the Portuguese legislator opted to introduce into our legal system measures, generically designated as anti-abuse measures, through the creation of specific clauses in the law.
In this context, article 23-A of CIRC stipulates:
"1 - The following charges shall not be deductible for the purpose of determining taxable profit, even when accounted for as expenses of the tax period:
(...)
r) Amounts paid or due, in any form whatsoever, to natural or legal persons resident outside Portuguese territory and there subject to a tax regime identified by ordinance of the government member responsible for finance as a clearly more favourable taxation regime, unless the taxpayer proves that such charges correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.
7 - The provision of letter r) of no. 1 applies equally to amounts indirectly paid or due, in any form whatsoever, to natural or legal persons resident outside Portuguese territory and there subject to a clearly more favourable tax regime, when the taxpayer has or should have knowledge of their destination, such knowledge being presumed when there are special relationships, in accordance with no. 4 of article 63, between the taxpayer and the aforementioned natural or legal persons, or between the taxpayer and the agent, fiduciary or interposed person who makes the payment to the natural or legal persons.
8 - The Tax and Customs Authority shall notify the taxpayer to produce the evidence referred to in letter r) of no. 1, and for this purpose, a deadline of no less than 30 days shall be set."
These norms aim to combat a type of evasive or fraudulent operations, through payments to non-resident entities established in jurisdictions with privileged tax status, so as to transfer income generated and located in Portugal to places with more favourable tax regimes, with reduced or non-existent taxation, and traditionally reluctant to cooperate in the exchange of information for tax purposes.
Their stipulation determines the general principle of non-deductibility of expenses borne with this type of payment, consecrating, however, a safeguard clause, which operates through proof, the burden of producing which falls on the taxpayer, through the demonstration of the cumulative compliance with two conditions:
The expenses correspond to real operations; and
They do not have an abnormal character or an exaggerated amount.
This is a double proof that will be incumbent upon the taxpayer to demonstrate:
That the expenses materialized in actual acts, the mere formal existence of documents, such as contracts, invoices and bank transfers, not being sufficient; and
That such expenses are not abnormal or of excessive amount, which may be proved through comparison with comparable market situations in a context of full competition.
In this regard, reference is made to the judgment delivered on 2015-02-19, in case 08126/14, in the Central Administrative Court of the South (TCAS), which judged a case of payment to non-resident entities subject to a privileged tax regime, highlighting the importance of demonstrating proofs, to the detriment of form, whose summary is transcribed:
"With regard to proof of the truthfulness of the operation, the exhibition of written documents alone will not suffice, namely contracts concluded between the parties, since these are presumed to be simulated, nor the demonstration of payment of the price, since such is not disputed. What must be the subject of proof is rather the actual provision of services, or the receipt of a loan, that is, the business fact that originated the payment of that same price which appears as a cost to be deducted for Corporate Income Tax purposes. As for proof of the absence of abnormal or exaggerated character of the expenses, this must involve the demonstration that the contract, whose truthfulness has been proved, is balanced. For this purpose, the taxpayer should demonstrate what the real value of the advantages obtained from the contract in question is, as well as prove that the charges established constitute the fair remuneration of these advantages, particularly by comparison with the costs of similar services in the market."
In the absence of proof of these requirements, it is concluded that the expenses in question are not deductible and there is consequently an increase in the respective amounts in the fiscal result.
The production of this proof should be made by the taxpayer before the Tax Authority, presenting the evidence of the actuality of the expense, the normal character and non-exaggerated amount, to whom it falls to assess it with a view to forming an administrative judgment on the validity of the payments. It is, therefore, a legislative solution in which a "burden of proof" is reversed to the taxpayer in which, by force of the provisions of the rules in question, in the field of payments to entities domiciled in territories of low taxation, the presumption contained in no. 1 of article 75 of the General Tax Law (LGT), of truthfulness and good faith in their declarations and data and appraisals recorded in their accounting, is set aside.
In this way, if the taxpayer fails to produce such proof, the expense is not fiscally accepted, and the taxable profit is increased for taxation purposes.
In the concrete case, the taxpayer, in 2014, made the following payment to a non-resident entity outside national territory, headquartered in Hong Kong:
Now, from the documentary analysis it was found that the taxpayer has:
A contract;
Invoice no. 08672014, issued by the service provider in question on 11.04.2014;
Proof of payment of the invoice - bank transfer, from D... Ref PGF...
However, although this documentary set provides the operation with the fulfilment of formal requirements, it lacks substantial proof, a failure that was not filled for the following reasons:
It was not evidenced that the said service-providing company carried out any concrete and effective action, campaign or equivalent publicity aimed at the sale of units;
That if it had occurred, the same was appropriated and directed to the objective, that is, in the event that it was carried out, it was intended to attempt to sell units or any other product;
Proof that the service was actually provided;
And even if physical evidence of the work carried out had been exhibited, it would still be necessary to demonstrate the adequacy of each of them to the requirements of article 23 of CIRC;
And that, beyond the contract, no exchange of any correspondence or contacts with the alleged service provider connected with the services allegedly intermediated was evidenced.
It is not enough, therefore, the existence of invoices or bank transfers. Evidence of a whole set of actions, activities, such as concrete advertising campaigns, or other complementary justifying elements to fiscally relevant documentation, is necessary, in order to conclusively eliminate well-founded doubts about the actual realization of the operation which the invoice purports to document.
In sum, there is no proof whatsoever of the material realization of the provision of marketing and promotion services by the service provider headquartered in Hong Kong.
Now, emphasizing that pursuant to the legislation already cited, it is incumbent upon the taxpayer to demonstrate the material evidence that supports the provision of services, and not having succeeded in doing so, this requirement of deductibility is not met.
(i) AS REGARDS ABNORMAL CHARACTER
In this context, it is concluded that, having the taxpayer failed to produce any material proof that allows assessment of the intrinsic nature of the expense, or its fitness with the business activity, it is not possible to assess its normal character in relation to the activity carried out. That is, if the taxpayer failed to prove the substance of the expense, it is not possible to assess whether what is qualified as marketing and promotion has a normal character in relation to the activity carried out. Here too the taxpayer has failed to fulfil the burden that the law imposes on it.
(ii) AS REGARDS EXAGGERATED AMOUNT
For assessment of this condition that the payment is adequate to the real value of the service provided, it appears that the cost-benefit relationship would be appropriate, with the condition being considered met provided that the income compensates the respective expenses, that is, the amount of income justifies the respective charge.
That is, despite the gross sales margin being positive, it is absorbed by external service expenses relating to marketing and promotion paid to the service provider headquartered in Hong Kong. Now, in situations involving human intervention with studies, projects, or publicity as in the case in question, the taxpayer should have in its files elements that would allow judgment of the adequacy of the amount to the objective and enable assessment of possible exaggeration, specifically:
Identification of human resources involved, hours applied and hourly rates per consultant,
Evidence of meetings, research,
Travel,
Information about the professional experience of the executor,
Whether quotations were requested in the national or international market for comparison.
It would also be necessary to allow assessment of whether the amount of the service charged is appropriate, taking into account the market and the risk of the operation, by comparison with those that would be applied by other entities in an equivalent context, in compliance with and in accordance with the "at arm's length" principle, which also did not occur, as no relevant elements were presented directed to this objective.
In view of the above, it is concluded that the elements presented by the taxpayer are insufficient to assess that the charge corresponds to the operation actually carried out and that they do not have an abnormal character or an exaggerated amount, as provided for in article 23-A of CIRC. Therefore, the following deduction is not accepted as an expense for the service acquired from the entity headquartered in Hong Kong, in the amount of € 147,000.00 in the 2014 tax period.
Thus, the correction proposed for this tax period consists of an annulment of the deduction relating to improperly deducted expense and the consequent reintegration of the respective amounts in the fiscal result.
(...)
III.1.1.2. EXPENSES NOT DULY DOCUMENTED
No. 1 of article 17 of CIRC establishes that the taxable profit of legal entities is determined on the basis of accounting, which, pursuant to letters a) and b) of no. 3 of the same norm, must be organized in accordance with the accounting standards in force and must also reflect all operations carried out by the taxpayer in the context of its activity. On the other hand, no. 1 and letter a) of no. 3 of article 123 of CIRC establish that commercial companies "are required to maintain organized accounting in accordance with the law which, in addition to the requirements indicated in no. 3 of art. 17, allows for the control of taxable profit", also stating that "in the execution of accounting the following should be observed in particular: [...] all entries must be supported by justifying documents, dated and liable to be presented whenever necessary".
In these terms, article 23, no. 1 of CIRC provides that "For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to Corporate Income Tax shall be deductible". No. 3 of the same article states that "deductible expenses [...] must be documented proof, regardless of the nature or medium of the documents used for that purpose" and no. 4 of article 23 of CIRC established a set of requirements that the supporting document must contain:
"a) Name or corporate name of the supplier of goods or service provider and of the purchaser or recipient,
b) Tax identification numbers of the supplier of goods or service provider and of the purchaser or recipient, whenever these are entities with residence or permanent establishment in national territory.
c) (...)"
A) 2014 Period
III.1.1.3. EXPENSES NOT FISCALLY ACCEPTED
III.1.1.3.1. EXPENSES NOT INDISPENSABLE TO THE REALIZATION OF INCOME
A) 2013 Tax Year
No. 1 of article 23 of IRC, in its wording at the date of the facts, states "expenses are considered those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the productive source, namely:
d) Of an administrative nature, such as remuneration, including those awarded as profit participation, allowances, current consumable materials, transport and communications, rent, litigation, insurance, including life insurance and life insurance operations, contributions to retirement savings funds, contributions to pension funds and to any complementary social security schemes, as well as expenses with benefits upon termination of employment and other post-employment or long-term employee benefits;
(...)
Three essential requirements are thus required for expenses borne to be valued and accepted as tax expenses: proof (justification), indispensability and connection to income subject to tax.
The first requirement relates to the effectiveness of the realization of the costs, which consists of various forms of written support to accounting entries, that is, their documentary proof.
The second requirement makes the fiscal deductibility of the cost dependent on a justified relationship with the company's productive activity, and this indispensability is verified whenever such charges are connected with the obtaining of profit.
The third requirement that makes up the general clause for deductibility of expenses, in the legal formulation introduced by the Corporate Income Tax Code, is the requirement of connection to "income subject to tax or for the maintenance of the productive source". It follows from the general principle of article 23 of CIRC that expenses incurred by the taxpayer, in order to be fiscally deductible, must be restricted either to the obtaining of income subject to tax or to the maintenance of the productive source.
In the analysis of the documentation supporting the accounting records, of the 2013 and 2014 tax years, various charges were found to be recorded which are quantified below, and whose supporting documents for these records are contained in Annex IX.
B) 2014 TAX YEAR
In its wording at the date of the facts, "all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to Corporate Income Tax shall be deductible.
(...)
Thus, and in accordance with the legislation already cited, the taxpayer was notified to prove the indispensability of these expenses for the maintenance of the productive source.
On 23.01.2017, the taxpayer, via email (Annex X), declared "the values underlined in color in the attached invoices are referring to construction materials applied during the normal functioning of the company in its construction activity" as per the table below:
In view of the above, the taxpayer only justified the amount of €1,250.00 in 2013 and € 486.31 in 2014 as being expenses relating to the company's activity. Taking into account the description of the invoices, in the name of the taxpayer, the remainder are expenses of a personal nature and payments of a non-commercial nature.
From this it follows that the expenses are not related to the activity of the taxpayer, whose corporate purpose consists of "civil construction industry, public and private works, urban development, purchase and sale of real estate, resale of property acquired for that purpose, trade in construction materials, construction of buildings for sale and resale of property acquired for that purpose",
Since they are not related to the taxpayer's activity, the requirement of indispensability of the expenses recorded by the taxpayer, as established in article 23 of CIRC, is not fulfilled, and it is therefore proposed to correct the amounts of €833.67 (2,084.06-1,250.39) and €1,862.16 (2,347.91 - 486.31), respectively for the 2013 and 2014 tax years.
III.1.1.4. SUMMARY OF CORRECTIONS TO FISCAL RESULT
From which the corrected fiscal result follows:
III.1.2. CORRECTIONS TO TAX - AUTONOMOUS TAXATION - 2013 and 2014 PERIODS
The taxpayer calculated in its respective Corporate Income Tax return, model 22, the following amounts of autonomous taxation, which it stated were related to the charges identified below:
From the validation of the values declared to the Tax Authority, it was found that the autonomous taxation (Annex XI) calculated by the taxpayer is not correct, in particular due to the fact that the accounting of other charges subject to autonomous taxation in accordance with article 88 of CIRC was detected, as set out below.
III.1.2.1. REPRESENTATION EXPENSES
In accordance with the provision of article 88, no. 7 of CIRC:
"7 - Charges of a deductible nature relating to representation expenses are taxed autonomously at the rate of 10%, considering as such, namely, expenses borne with receptions, meals, travel, trips to shows offered in the country or abroad to customers or suppliers or to any other persons or entities".
The following charges were accounted for as an expense by the taxpayer, and which, in view of their nature, fall within the concept of representation expenses provided for in CIRC (Annex XII) transcribed above, although in some cases recorded under the "designation of travel and accommodation" and whose corresponding autonomous taxation is calculated in accordance with the table below:
III.1.2.2. CHARGES RELATING TO LIGHT PASSENGER VEHICLES
The aforementioned article 88 of CIRC provides:
"5 - Charges related to light passenger vehicles, motorcycles and mopeds are considered, namely, depreciation, rent or lease, insurance, maintenance and preservation, fuel and taxes levied on their possession or use."
Accounting records were found relating to charges of this nature, listed below, relating to various vehicles owned by the taxpayer at the date in question and whose acquisition costs (Annex XIV) are as set out in the table below:
Therefore, in view of the legislation in force in the tax periods in question, they are taxed:
(...)
B) 2014 PERIOD
Pursuant to the provision of no. 3 of article 88 of CIRC, charges of this nature are taxed at the rates of:
* 10% for vehicles with an acquisition cost of less than € 25,000.00;
* 27.5% for vehicles with an acquisition cost equal to or greater than € 25,000.00 and less than €35,000.00;
* 35% for vehicles with an acquisition cost equal to or greater than € 35,000.00.
Thus, in the concrete case we have (Annex XIII):
III.1.2.3. PAYMENTS TO ENTITIES ESTABLISHED IN TERRITORY WITH FAVOURABLE TAX REGIME
Article 88 of CIRC determines:
"8 - Expenses corresponding to amounts paid or due, in any form whatsoever, to natural or legal persons resident outside Portuguese territory and there subject to a clearly more favourable tax regime, as defined in the terms of the Code, are subject to the regime of no. 1 or no. 2, as the case may be, with the applicable rates being, respectively, 35% or 55%, unless the taxpayer can prove that they correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.
A) PAYMENT TO ENTITY B... - 2014 PERIOD
In view of the aforementioned legislation, the non-proof of the expense substantiated in point III.1.1.1.A), relating to the payment to entity € 147,000.00, resident in territory with a clearly more favourable tax regime - Hong Kong -, in the 2014 tax period, further results in its autonomous taxation, at the rate of 35%.
Therefore, the tax shortfall was calculated as:
€ 147,000.00 (payment) x 35% = € 51,450.00
III.1.2.4. SUMMARY OF CORRECTIONS TO AUTONOMOUS TAXATION
In view of the foregoing, it is proposed to correct the autonomous taxation calculated by the taxpayer in each of the tax periods as detailed below:
Following the inspection, the Tax and Customs Authority issued Corporate Income Tax assessment no. 2017..., relating to the 2014 tax period, with a total value of € 120,413.85, which includes the sum of € 4,878.56 in compensatory interest and the sum of € 61,233.86 in autonomous taxation (document no. 2 attached to the request for arbitral pronouncement, the content of which is hereby reproduced);
On 22-09-2017, the Claimant filed an administrative appeal against the assessment referred to (document no. 3 attached to the request for arbitral pronouncement, the content of which is hereby reproduced);
The administrative appeal was dismissed by decision of 25-07-2018 (document no. 6 attached to the request for arbitral pronouncement, the content of which is hereby reproduced);
The Tax and Customs Authority sent the draft Report of the Tax Inspection to the Claimant by registered letter sent on 02-03-2017, to the Claimant's tax address, which was returned with the indication of "not delivered", "recipient absent, noted at ..." and "object returned";
In the Report of the Tax Inspection, the following is stated regarding the Right of Hearing on the respective Draft:
9.1 - Notification provided for in article 60 of the General Tax Law and article 60 of the Complementary Regime of Tax Inspection Procedure (RCPIT)
In compliance with the provision of article 60 of the General Tax Law and article 60 of the Complementary Regime of Tax Inspection Procedure, a draft of the conclusions of the report was drawn up, which accompanied the notification sent to the inspected entity, which was assigned the reference number ... dated 02.03.2017, granting it a period of fifteen days to exercise the right of prior hearing. It was found that the same was re-sent to Rua..., ..., ...-... Parede, however it was returned to the sender, with the indication of "official letter not claimed". It was also found that the address belongs to the tax address of the administrators of the taxpayer, E... (TIN...) and F... (TIN...).
Following a request by the Claimant, the CTT (postal service) reported the following:
Subject: Failure to receive notice for collection of postal object no. RD...PT
Dear Sirs,
We acknowledge receipt of your communication of 19 June 2017, relating to the object RD...PT returned with the indication of "not claimed", which merited our attention and investigation.
Following further examination of the matter, the operational services report that due to an operational anomaly, you were not aware of the existence of the aforementioned registration, for which we present our apologies, regretting the inconvenience resulting from the situation.
For the above reasons, you may, if you so wish, present our official letter to the tax entity that sent the registration in question in order to justify its return and the information contained therein.
We cannot but present once again our apologies for the inconvenience involuntarily caused.
Yours faithfully.
In the year 2014, after completing the construction of the development located in ..., the Claimant found that there were difficulties in materializing the sale of the units because the real estate sector in Portugal was going through a period of crisis in terms of internal demand;
In order to materialize the sale of the units, the Claimant concluded a Service Provision Agreement with entity B..., LIMITED (hereinafter "B..."), with registered office in Hong Kong, which developed activities for the recruitment of potential buyers from the People's Republic of China interested in acquiring real estate in Portugal, with a value equal to or greater than € 500,000.00, within the scope of the Golden Visa Programme;
The services provided by B... included the recruitment of customers, the delivery of documentation relating to the properties and the provision of all technical details and information available about them, as well as the organization and provision of assistance in visits to the real estate units and in the contracting process;
The company B... presented customers who visited the real estate that the Claimant had for sale, without the Claimant assuming any charges either with the travel and accommodation of such persons or any other services such as interpreter, travel or documentation;
The Claimant only made commission payments to B... when sales were concluded;
The commissions in amounts of around 15% of the values of the sales of real estate were common practice in the year 2014, in relation to the services provided by B... which resulted in sales, there being situations where the values paid for services of this type reached around 20%;
In the year 2014, almost all of the Claimant's sales were made to customers recruited by B...;
The Claimant had no possibility of directly recruiting the customers to whom it sold real estate with the provision of services by B...;
On 30-10-2018, the Claimant filed the request for arbitral pronouncement which gave rise to the present proceedings.
2.1. Facts not proven and justification for the determination of the facts
There are no facts relevant to the determination of the case that have not been proven.
The facts were deemed proven on the basis of the documents referred to and, as regards those referred to in letters j) to q), on the basis of the testimony of witnesses G... and H..., who appeared to give evidence with impartiality and with knowledge of the facts referred to.
4. Legal matters
4.1. Issue of breach of legal formality due to failure to notify the draft Report of the Tax Inspection
It results from the facts established that the letter sent by the Tax and Customs Authority was not delivered to the Claimant to exercise the right of hearing on the draft Report of the Tax Inspection.
The Claimant raises the issue of breach in exercising the right of hearing.
The Tax and Customs Authority argues, in summary,
– that at the date of the beginning of the inspection procedure, the Claimant had its registered office at ..., ..., no. ... in Estoril;
– during the inspection procedure, the Claimant changed, on two occasions, its registered office to different units of the aforementioned property;
– the draft tax inspection report was sent to the Claimant's registered office: ..., ..., no. ..., in Estoril;
– the typewritten insertion of the address "Rua..., no. ...", in Parede, was not made by the Respondent, nor did the latter request such insertion at any time. Such insertion is the result of a re-sending at the request of third parties, not the Respondent;
– Rua..., no. ..., in Parede, corresponds to the tax address of the administrators of the Claimant, E... and F...;
– the notification was sent only to the address corresponding to the Claimant's registered office, whereby the Respondent is completely unrelated to the postal re-mailing service contracted with CTT;
– if the administrators of the Claimant (domiciled in the aforementioned Rua..., in Parede) did not receive the notification sent, and rightly so, by the Respondent to ..., Avenida..., no. ..., in Estoril, then, naturally, they will be in a position to demand, from CTT, compensation for damages resulting from the poor execution of the postal service contracted.
4.1.1. The right of hearing
Article 60 of the General Tax Law establishes the following:
Article 60
Principle of participation
1. The participation of taxpayers in the formation of decisions concerning them may be carried out, whenever the law does not provide otherwise, by any of the following means:
a) Right of hearing before assessment;
b) Right of hearing before the total or partial dismissal of requests, appeals, appeals or petitions;
c) Right of hearing before revocation of any benefit or administrative act in tax matters;
d) Right of hearing before the decision to apply indirect methods, where there is no tax inspection report;
e) Right of hearing before the conclusion of the tax inspection report.
2 - Hearing is dispensed with:
a) In the case of assessment being made on the basis of the taxpayer's declaration or the decision on the request, appeal, appeal or petition being favourable to him;
b) In the case of assessment being made ex officio, on the basis of objective values provided for in the law, provided that the taxpayer has been notified to submit the missing declaration, without having done so.
3 - Having the taxpayer been previously heard in any of the phases of the procedure referred to in letters b) to e) of no. 1, his hearing before assessment is dispensed with, except in case of invocation of new facts on which he has not yet made pronouncements.
4. The right of hearing must be exercised within the deadline set by the tax administration in a registered letter to be sent for that purpose to the taxpayer's tax address.
5. In any of the circumstances referred to in no. 1, for the purposes of exercising the right of hearing, the tax administration must communicate to the taxpayer the draft decision and its grounds.
6. The deadline for exercising the right of hearing orally or in writing is 15 days, and the tax administration may extend this deadline to a maximum of 25 days depending on the complexity of the matter.
7. New elements raised in the hearing of taxpayers are compulsorily taken into account in the justification of the decision.
The right of hearing has constitutional roots, being postulated by article 267, no. 5 of the Portuguese Constitution, which establishes that "the processing of administrative activity shall be the subject of special legislation, which will ensure the rationalization of the means to be used by the services and the participation of citizens in the formation of decisions or deliberations concerning them".
However, as follows from this norm, the Constitution does not regulate the regime of the right of hearing, relegating to "special legislation" the definition of the terms on which such right will be exercised, terms in which various factors may be taken into account, including those of an economic nature and of practicability.
Regarding the Report of the Tax Inspection, the right to prior hearing is materialized in article 60 of the Complementary Regime of Tax Inspection Procedure (RCPIT), which, in the version in force in 2017, established the following:
Article 60
Prior hearing
1 - Once the inspection acts have been completed and provided that they may give rise to tax acts or acts in tax matters unfavourable to the inspected entity, the latter must be notified within 10 days of the draft conclusions of the report, with identification of those acts and their grounds.
2 - The notification must set a period between 10 and 15 days for the inspected entity to pronounce itself on the draft conclusions referred to.
3 - The inspected entity may pronounce itself in writing or orally, in which case its statements shall be reduced to writing.
4 - Within 10 days after the making of the statements referred to in the preceding number, the final report shall be drawn up.
There is no situation of dispensation of the right of hearing in the light of the provision of article 60, no. 3 of the General Tax Law, whereby it is unequivocal that the right of hearing should have been secured.
On the other hand, in the case at hand, it is manifest that the exercise of the right of hearing could influence the preparation of the Tax Inspection Report, since, including, diligences could be suggested, such as the examination of the persons who were relevantly indicated to be examined in the present arbitral proceedings, whose testimonies had manifest relevance for the determination of the facts.
In such situations where there is relevant witness evidence for the determination of the facts, the fact that the Taxpayer had the possibility of using an administrative appeal, as occurred, cannot be considered sufficient to remedy the lack of the right of hearing, since in the administrative appeal procedure the means of evidence that can be used are limited "to documentary form and to official elements available to the services", in accordance with article 69, letter e) of the Tax Code and Procedure. Moreover, although this norm admits that the Tax and Customs Authority proceed with "additional diligences manifestly indispensable to the discovery of material truth", the fact is that, in this case, none were carried out.
Therefore, it must be concluded that, in the case at hand, the Claimant had the right to pronounce itself on the draft Report of the Tax Inspection and that the lack of possibility to pronounce cannot be considered remedied.
Thus, the obstacle to the finding of merit of the request for arbitral pronouncement on the grounds of the first defect imputed by the Claimant depends solely on the question of whether the Claimant was regularly notified.
4.1.2. Notification for exercise of the right of hearing
In the case at hand, it is certain that the Claimant did not receive the letter that was sent to its office.
According to the Report of the Tax Inspection, the letter was re-sent to Rua..., ..., ...-... Parede, and was returned to the sender, with the indication of "official letter not claimed" (point 9.1 of the Tax Inspection Report).
It is not clear under what conditions the aforementioned re-sending was carried out, but the CTT services, used by the Tax and Customs Authority, acknowledged that an "operational anomaly" occurred which had the consequence that the Claimant "was not aware of the existence of the aforementioned registration".
No proof was presented that the Claimant had contracted with CTT any re-sending service or that the aforementioned anomaly was attributable to it.
On the other hand, article 43, no. 1 of RCPIT only allows to presume notification when the letter has been returned "with indication of not having been collected, of having been refused or that the recipient is absent at an unknown address", which did not occur in the case at hand, in which only "official letter not claimed" is mentioned.
Furthermore, in these situations where the presumption applies, it is presupposed that the letter was made available to the recipient or that his whereabouts are unknown, which did not occur.
Therefore, it must be concluded that the Claimant cannot be considered notified of the draft Report of the Tax Inspection.
It is to the Tax and Customs Authority, which entrusted the CTT services with carrying out the notification, that the consequences of the omission must fall, without prejudice to any responsibility that may be imputed to those services for non-compliance.
Therefore, the contested assessment suffers from the procedural defect that the Claimant imputes to it, which justifies its annulment, in the part that is the subject of challenge in the present proceedings.
4.2. Issues of moot questions
Since the request for arbitral pronouncement is to be upheld on the grounds of procedural defect prior to assessment, which globally affects the Tax Inspection Report and the subsequent assessment, the determination of the remaining defects imputed to the assessment is rendered moot, as it would be futile.
5. Decision
In these terms, the arbitrators of this Arbitral Tribunal agree to:
– find merit in the request for arbitral pronouncement;
– annul the Corporate Income Tax assessment no. 2017..., relating to the 2014 tax period, in the part in which it was not revoked (annulled) in accordance with article 13, no. 1 of RJAT.
6. Value of the case
The value of the case is fixed at € 113,412.79, in accordance with the provision of article 306, no. 2 of the Code of Civil Procedure (CPC) and 97-A, no. 1, letter a) of the Tax Code and Procedure (CPPT) and 3, no. 2 of the Regulation on Costs in Tax Arbitration Proceedings (having regard to the value indicated by the Taxpayer and the partial revocation in the amount of € 7,001.06).
7. Costs
Pursuant to article 22, no. 4 of RJAT, the costs are fixed at € 3,060.00, in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Lisbon, 08-04-2019
The Arbitrators
(Jorge Lopes de Sousa)
(João Marques Pinto)
(Maria do Rosário Anjos)
Frequently Asked Questions
Automatically Created