Summary
Full Decision
ARBITRAL DECISION
The Arbitrator Raquel Franco, appointed by the Ethics Council of the Centre for Administrative Arbitration ("CAAD") to form the Arbitral Tribunal constituted on 16.01.2019, decides in the terms and with the grounds that follow:
I – REPORT
A..., Lda., a limited liability company, with registered office at Rua..., n.º..., room..., ...-... Guimarães, with the company identification number ..., hereinafter designated as the Claimant, filed a request for constitution of an Arbitral Tribunal and for an arbitral decision on 02.11.2018, which was accepted and automatically notified to the Tax and Customs Authority ("AT"), in its capacity as Respondent.
The Claimant contests the legality of the following acts:
• Additional assessments of VAT and CIT, for the periods of 201512T and 201612T, and 2015 and 2016, respectively, specifically:
- VAT Assessment n.º 2018..., period of 201512T, in the amount of € 2,751.14;
- VAT Assessment n.º 2018..., period of 201612T, in the amount of € 2,717.82;
- CIT Assessment n.º 2018..., period of 2015;
- CIT Assessment n.º 2018..., period of 2016.
• Dismissals of the gracious claims n.os ...2018... (VAT 201512T), ...2018... (VAT 201612T) and ...2018... (CIT 2015 and 2016).
The Claimant did not proceed with the appointment of an arbitrator, wherefore pursuant to the provisions of article 6, n. 2, subsection a) and article 11, n. 1, subsection a) of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrator of the Single Arbitral Tribunal, who communicated acceptance of the appointment within the applicable period.
On 26.12.2018, the parties were notified of this appointment and did not manifest any wish to refuse it.
In accordance with the provisions of article 11, n. 1, subsection c) of the RJAT, the Single Arbitral Tribunal was constituted on 16.01.2019.
On 20.02.2019, the Respondent, duly notified for that purpose, filed its response defending itself by way of contestation.
The parties submitted pleadings in which they reiterated their requests and respective grounds.
Summary of the Claimant's position
The additional assessment acts contested resulted from substitute declarations submitted by the Claimant for voluntary correction of the irregularities/omissions detected within the scope of an inspection procedure.
Upon completion of the inspection action, the Tax Inspection Division III, of the Finance Department of ..., proposed corrections to the taxable matter declared for purposes of CIT and VAT, resorting to indirect methods, which resulted in the Assessment now subject to arbitral decision (cf. Tax Inspection Report, of which the Claimant attached the cover sheet as doc. n.º 3, and which integrates the Administrative Process).
The corrections proposed by the Inspection Services, both in the context of CIT and VAT, resorting to indirect methods, amount to the attribution of a value resulting from service provision obtained through the application of the gross margin ratio II, with the result that, for the year 2015, an estimated value of € 27,347.66 was obtained and for the year 2016 an amount of € 28,739.31 (cf. page 10 of doc. n.º 3).
The value resulting and attributed by the Tax and Customs Authority (AT) to the hairdressing service provision of the Claimant was due to the fact that the invoiced values were not sufficient to pay the costs inherent to the activity, as well as the high accounting losses obtained over the years for the activity sector.
Thus, in the context of CIT, having the Claimant declared as turnover € 15,386.15 and € 16,922.75, for the years 2015 and 2016, respectively, the declared tax losses were corrected from - € 13,034.28 (2015) and - € 12,673.37 (2016) to - € 1,072.77 (2015) and - € 856.81 (2016), which resulted in a tax correction by the AT inspection services, for the years 2015 and 2016, of € 11,759.13 and € 10,708.49, respectively.
To determine the VAT in default, the AT applied the rate of 23% to the value corresponding to the difference between the value of the service provision declared (€ 15,386.15 "2015" and € 16,922.75 "2016") and that of the service provision estimated (€ 27,347.66 "2015" and € 28,739.31 "2016"), calculating a tax in default in the amount of € 2,751.15 and € 2,717.81 for the years 2015 and 2016, respectively.
In this manner, the AT presumed, for purposes of CIT and VAT, the value of service provision, resorting to indirect assessment, pursuant to subsections b) and e), of n. 1 of article 87 and subsection a) of article 88, both of the LGT, and the taxable matter was determined pursuant to the provisions of article 90, n. 1, subsection a) of the LGT.
Despite not agreeing with the corrections, the Claimant filed substitute declarations in which it adopted and declared the values resulting from the indirect assessment carried out by the AT. Following the submission of those declarations, it was notified of the additional VAT assessments n.os 2018..., period of 201512T, in the amount of € 2,751.14, and 2018..., period of 201612T, in the amount of € 2,717.82, and of the additional CIT assessments n.os 2018..., period of 2015, in the amount of "0", and 2018..., period of 2016, in the amount of "0".
Subsequently, on 22 May 2018, it filed a gracious claim against the additional VAT and CIT assessments in question, having been notified of their dismissal on 02 August 2018.
Now, in the context of arbitral impugnation, it presents the following grounds for the alleged illegality of the assessment acts:
- first, by way of preliminary issue, it invokes the lack of reasons on the part of the AT for resorting to indirect methods;
- secondly, it alleges that we are faced with a case in which recourse to indirect assessment is not necessary as it does not fall within any restricted situation of article 87 of the LGT, having in mind, in particular, the fact that: (i) the Claimant's accounting directly and accurately proves its taxable matter; (ii) indirect assessment always arises as subsidiary to direct assessment (cf. article 85, n. 1 of the LGT); (iii) no one can be obliged to pay taxes whose assessment is not made in accordance with the Law (cf. article 103, n. 3 of the CRP); (iv) there is no proof on the part of the AT regarding the impossibility of reconstruction of the Claimant's accounting (cf. articles 74, n. 3 of the LGT and 100, n. 2 and 3 of the CPPT).
- thirdly, it considers that the inspection services made an incorrect interpretation in the analysis carried out on the Claimant's turnover. It is stated in the Report that the Claimant's turnover has been decreasing year on year; however, in the period to which the inspection action relates, 2015 and 2016, analyzing the values declared by the Claimant, the service provision item revealed a slight increase in the year 2016 compared to the year 2015 and, in contrast, the item of other expenses and losses also underwent a slight increase compared to the year 2015, accompanying the revenue.
- The Claimant must act with freedom in the market and it is not incumbent upon the tax administration to replace it with a criterion of "better management". There are many causes, among them geographic, temporal, relating to market implementation strategies, among others, which can justify the use of values (purchase or sales) divergent from the "usual", without such divergence justifying indirect assessment.
- It thus considers that the tax acts in question are invalid by violation of the provisions of articles 87, n. 1, subsections b) and e), 88, subsection a), 90, n. 1, subsection a), all of the LGT, to the extent that the AT: (i) did not prove the verification of the prerequisites for resorting to indirect methods to fix the Claimant's taxable matter, (ii) incurred in error regarding the factual prerequisites, when it states that the invoiced values relating to service provision are not sufficient to pay the costs inherent to the activity, (iii) could not have been considered only the criterion of water and electricity, as a way to justify the gross margin ratio II for calculating the value of estimated service provision, thus the indirect assessment that only determines revenue without reflecting on the costs that will have contributed to the formation of such revenue is not legitimate; (iv) even if this were the case, the AT could resort to technical corrections instead of indirect taxation methods. Consequently, the Claimant considers that the taxable matter should not be fixed at € 27,347.66 for the year 2015 and € 28,739.31 for the year 2016, by application of the regime provided for in articles 87, n. 1 subsections b) and e), 88, subsection a) and 90, n. 1 a), all of the LGT.
- In this manner, it considers that the assessments subject to the arbitral decision request are invalid due to defects of non-existence of the tax fact, of error of fact and law, of erroneous quantification of the taxable matter and also of an insuperable formal defect, consisting of lack of reasoning, pursuant to, among others, articles 74, n. 3, 75, n. 1, 77, n. 4, 85, 87, 88 and 90, all of these of the LGT, 100, n.s 2 and 3 of the CPPT and 103, n. 3, 104, n. 2, both of the CRP, and should, consequently, be annulled with all legal consequences.
Summary of the AT's position
The AT begins by raising two exceptions, from which would result the impossibility of this tribunal hearing the merits of the case.
The first of the exceptions concerns the material incompetence of the arbitral tribunal and is based by the AT with recourse to the limits of the AT's binding effect provided for in article 2 of Ordinance n.º 112-A/2011 of 22 March, whose article 2 (with the heading "Object of Binding Effect"), provides:
"The services and entities referred to in the previous article shall be bound to the jurisdiction of the arbitral tribunals functioning at CAAD that have as their object the examination of claims relating to taxes whose administration is entrusted to them referred to in n. 1 of article 2 of Decree-Law n.º 10/2011, of 20 January, with the exception of the following:
(…)
Claims relating to acts of determination of taxable matter and acts of determination of tax matter, both by indirect methods, including the decision of the revision procedure.
(…)
(…)."
The AT considers that the acts submitted for examination by the tribunal in the present case are included in that limitation to the AT's binding effect to arbitral jurisdiction because they are "assessment acts resulting from the application of indirect methods of determination of taxable matter, relating to CIT and VAT, corresponding to the fiscal years 2015 and 2016, a matter that is excluded from the material competence of this Tribunal."
The AT further considers that an interpretation to the contrary, to the effect that the arbitral tribunal has competence to decide acts of assessment and fixing of tax matter resulting from application of indirect methods is unconstitutional by violation of article 212, n. 3 of the CRP and also by violation of the principle of free access to courts, in the aspect of the right to appeal, arising from articles 20 and 268 of the CRP.
Secondly, the AT invokes the exception of "impropriety of the procedural means", considering that what is provided for in the final part of n. 1 of article 117 of the CPPT was not complied with, pursuant to which, with the heading "Impugnation based on error in the quantification of tax matter or in the prerequisites for application of indirect methods", "impugnation depends on prior submission of a request for revision of tax matter". Therefore, even if the impugnation with the arbitral tribunals were an adequate procedural means for the acts in question, the necessary requirement for being able to impugn the acts would not be complied with, since the Claimant did not comply with the necessary condition for access to impugnation – the request for revision of taxable matter provided for in article 91 of the LGT. The Claimant's cause of action is based solely and exclusively on the illegality of the tax act, by violation of article 90, n. 1, subsection a), of the LGT and on the determination of taxable matter by application of indirect methods, wherefore recourse to impugnation would have to be preceded by a request for revision of taxable matter.
Also for this reason, the AT considers that it should be absolved from the arbitral proceedings.
By way of contestation, the AT puts forward the following arguments:
- The Claimant imputes to the contested acts only defects relating to the application of indirect methods, and the cause of action is based solely and exclusively on the illegality of the tax act, by violation of article 90, n. 1, subsection a), of the LGT and on the determination of taxable matter by application of indirect methods, namely the erroneous quantification of taxable matter. That is, even if the request is based on the revocation of the acts denying the gracious claims that upheld the assessments sub judice, the cause of action is based exclusively on defects arising from the application of indirect methods.
- At no time did the Claimant argue for the illegality of the assessment that is not based on the application and quantification of the recourse to indirect methods, that is, the Claimant did not raise any defects peculiar to the assessments, other than defects based on the application and quantification of the recourse to indirect methods.
- Without conceding, it specifically contests, as not proven, not being true or as totally irrelevant to the decision of the case, points 17 and 22 to the end of the request for arbitral decision, and further considers as fully reproduced, for reasons of procedural economy, the reasoning inherent in the administrative process and set forth in the inspection and gracious proceedings.
For the reasons stated, the AT concludes that the arbitral request is unfounded.
II. PROCEDURAL REQUIREMENTS
The Arbitral Tribunal is regularly constituted, pursuant to articles 2, n. 1, subsection a), 5 and 6, n. 1, of the RJAT.
The parties have legal personality and capacity, are legitimate and are legally represented, as provided for in articles 4 and 10 of the RJAT and article 1 of Ordinance n.º 112-A/2011, of 22.03.
The action is timely and the process does not suffer from nullities.
Regarding the cumulation of requests, this Tribunal considers that the arbitral decision on the legality of the VAT assessment acts for the periods 201512T and 201612T, and CIT for the years 2015 and 2016, is admissible, since the circumstances of fact are the same and what is at issue is the interpretation and application of the same legal principles and rules, wherefore, pursuant to the provisions of article 3 of the RJAT, the cumulation of requests is admitted.
Exception of material incompetence invoked by the AT
Before proceeding, it is necessary to examine the exception of material incompetence of the tribunal invoked by the AT. Since the reasons upon which the AT bases this exception have already been summarized above, it is now important to summarize the argument used by the Respondent to counter them.
The Claimant begins by emphasizing that what is at issue are not additional assessments resulting from the tax inspection action against the Claimant, but rather those resulting from voluntary regularizations carried out by the Claimant through the substitute declarations it submitted. Thus, the request for arbitral protection does not have as its object the act of determination of taxable matter or tax matter, which in this case did not even exist, but the tax act of assessment, which constitutes the final decision of the tax procedure.
For this reason, it considers that the Tribunal should deem itself competent, pursuant to article 2, n. 1, subsection a) of the RJAT, and 2 of Ordinance n.º 112-A/2011 of 22 March.
As to the exception of impropriety of the procedural means, the Claimant contradicts the Respondent by saying that the assessment acts in question (mediate object of the present action) resulted from the substitute declarations submitted by the Claimant, and for this reason this is not an impugnation based on error in the quantification of tax matter or in the prerequisites for application of indirect methods, wherefore impugnation does not depend on the prior submission of a request for revision of tax matter.
What is at issue is the provision of n. 1 of art. 2 of the RJAT and of art. 2, subsection b), of Ordinance 112-A/2011, of 22 March. Indeed, this latter diploma, which determines the scope of the AT's binding effect to arbitral jurisdiction, excepts from the competence of the arbitral tribunal the "… claims relating to acts of determination of taxable matter and acts of determination of tax matter, both by indirect methods, including the decision of the revision procedure".
The request submitted to this tribunal aims at obtaining a decision that declares the illegality of the CIT and VAT assessment acts relating to the fiscal years 2008 and 2009. The additional assessments in question were issued following the submission of substitute declarations by the Claimant after an inspection procedure in which the AT services understood that there were grounds for the determination of the Claimant's taxable matter by indirect methods.
Although the request for arbitral decision was submitted following the dismissal of the gracious claims presented (second-degree acts), what is truly at issue are the additional tax assessments, whose annulment the Claimant bases on reasons that relate to the process of indirect determination of taxable matter that preceded the submission of substitute declarations.
Article 124 of Law n.º 3-B/2010, of 28 April (State Budget for 2010), authorized the Government to legislate in the sense of instituting arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, so that the tax arbitral process would constitute an alternative procedural means to the judicial impugnation process and to the action for recognition of a right or legitimate interest in tax matters.
The legislative authorization enshrined in article 124 of Law n.º 3-B/2010, of 28 April, came to be materialized through the approval of Decree-Law n.º 10/2011, of 20 January (RJAT).
The current wording of n. 1 of art. 2 of the RJAT (whose heading is "Competence of arbitral tribunals and applicable law") is as follows:
"1 - The competence of arbitral tribunals comprises the examination of the following claims:
a) The declaration of illegality of tax assessment acts, self-assessment acts, withholding at source acts and payment on account acts;
b) The declaration of illegality of acts of fixing tax matter when not giving rise to the assessment of any tax, of acts of determination of taxable matter and of acts of fixing patrimonial values; (…)".
Given the voluntary character of submission to arbitral jurisdiction, n. 1 of article 4 of the RJAT provides that:
"1 — The binding of the tax administration to the jurisdiction of the tribunals constituted pursuant to this law depends on an ordinance of the members of Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the litigations covered."
This binding was materialized with Ordinance n.º 112-A/2011, of 22 March, whose article 2 (whose heading is "Object of Binding Effect"), provides as follows:
"The services and entities referred to in the previous article shall be bound to the jurisdiction of the arbitral tribunals functioning at CAAD that have as their object the examination of claims relating to taxes whose administration is entrusted to them referred to in n. 1 of article 2 of Decree-Law n.º 10/2011, of 20 January, with the exception of the following:
a) Claims relating to the declaration of illegality of self-assessment acts, withholding at source acts and payment on account acts that have not been preceded by recourse to the administrative procedure pursuant to articles 131 to 133 of the Tax Procedure and Process Code;
b) Claims relating to acts of determination of taxable matter and acts of determination of tax matter, both by indirect methods, including the decision of the revision procedure;
c) Claims relating to customs duties on importation and other indirect taxes affecting goods subject to import duties; and
d) Claims relating to the tariff classification, origin and customs value of goods and tariff contingents, or whose resolution depends on laboratory analysis or steps to be taken by another Member State within the framework of administrative cooperation in customs matters."
(underlining ours)
It is thus important to ascertain whether the matter in dispute is covered by this exclusion, and it should be recalled that the Claimant ultimately seeks the examination of the CIT and VAT assessment acts resulting, albeit indirectly, from the application of indirect methods of determination of tax matter.
The Claimant seeks the annulment of the additional tax assessments, based on the illegality of the gracious claim decision and on various illegalities of the revision procedure (including the lack of prerequisites for the application of indirect methods and the erroneous quantification of tax matter and, consequently, of the tax).
It is a fact that it does so by impugning additional assessments issued following substitute declarations submitted by itself – which, in its view, would constitute an interposition of acts between the indirect assessment and the present impugnation that would justify the non-application of subsection b) of article 2 of Ordinance n.º 112-A/2011.
However, it is also a fact that the additional assessment acts contested are inseparable from the indirect assessment of tax matter made during the inspection procedure – being, moreover, that same indirect assessment the common denominator of all the acts sub judice. This is likewise demonstrated by the fact that all the arguments invoked by the Claimant to justify the request for annulment of the additional assessment acts refer to the indirect assessment. There is not, moreover, a single argument that is autonomous from the indirect assessment and relating only to the additional assessment acts proper – which, in any case, given that the additional assessment acts proceed from substitute declarations submitted by the Claimant itself – would be justified only in very limited cases.
The Arbitral Tribunal has already pronounced itself in this sense, in the Decision handed down in Process n.º 17/2012-T, in which one can read:
"The acts of assessment of taxes unilaterally and authoritatively define the tax obligation of taxpayers, embodying administrative acts with external effects.
As an administrative act, tax assessment shares the characteristics of administrative acts in general.
Assessment, in the strict sense, is the last phase of the administrative procedure of tax assessment, regulated in articles 59 to 64 of the CPPT, constituted by a series of acts designed to obtain a final legal result, the amount of tax to be paid into the state treasury.
Therefore, assessment hoc sensu is the phase that is translated into the application of the tax rate to the taxable matter already determined, with the preparatory acts not being autonomously challengeable, and may be called into question when challenging the definitive, final act, in obedience to the principle of unitary impugnation expressed in article 54 of the CPPT."
Regarding the binding of the Tax Administration to tax arbitration, the Illustrious Counselor Jorge Lopes de Sousa states in the Guide to Tax Arbitration, Almedina, 2013, at pages 138-139:
""Although subsection b) of n. 1 of article 2 of the RJAT includes in the competence of arbitral tribunals the declaration of illegality of acts of fixing tax matter and determination of taxable matter in which indirect methods were used, the Tax Administration excluded that possibility by expressly excepting from its binding to those tribunals the «claims relating to acts of determination of taxable matter and acts of determination of tax matter, both by indirect methods, including the decision of the revision procedure» – subsection b) of article 2 of Ordinance n.º 112-A/2011, of 22 March.
If, eventually, this restriction on binding is to be eliminated, it is to be noted that in n. 5 of article 86 of the LGT it is imposed, as a condition of judicial impugnation of impugnation (…)."
Now, if the Tax Administration is not bound to tax arbitration in this matter – as we understand to be the case, the Tribunal cannot pronounce itself on the acts resulting from the application of indirect methods, not even when between the procedure of determination of taxable matter by indirect methods and the impugnation of the acts of additional assessment consequent thereto substitute declarations submitted by the Claimant itself are interposed. It thus seems to us that this situation falls within the provision of the norm resulting from subsection b) of article 2 of Ordinance n.º 112-A/2011, of 22 March. Understanding it otherwise would constitute an interpretation inconsistent and incongruous with the above-cited norms and that determine the scope of the competence of the arbitral tribunals functioning with the CAAD.
The Arbitral Tribunal has already pronounced itself in this sense, in the Decision handed down in Process n.º 17/2012-T, in which one can read:
"The quantification of tax matter by indirect methods constitutes the object of the decision of the revision procedure that is excluded from tax arbitral jurisdiction, pursuant to subsection b) of article 2 of Ordinance n.º 112-B/2011, of 22 March.
The act of assessment of tax embodies such decision, giving it concrete form, and cannot be subject to individual examination, as it does not have autonomy in relation thereto. Indeed, such examination, if it were to be admitted (which, it is reiterated, is not the case), would have to be restricted to formal defects relating to the assessment, for as to the substantive matter and its reasoning, to the extent that it is set forth entirely in the decision of the revision procedure, whose knowledge is withdrawn from arbitral jurisdiction, it would necessarily be outside the scope of this jurisdiction.
(…)
"In truth, the lack of binding of the Tax and Customs Authority to the arbitral tribunal translates into the immediate impossibility of the effect of a judgment which, if handed down by this tribunal in the matters excluded, would not produce any effects on the party that would have to execute it, embodying, therefore, lack of jurisdiction, which is delimited according to the subject matter and, therefore, constitutes the material incompetence of this tribunal.
It is, then, for us unequivocal that the lack of jurisdiction of the tribunal to settle the dispute effectively configures the dilatory exception of incompetence and not any other, making, given the arbitral nature of the tribunal, an integrated reading of n.1 of article 2 of the RJAT, with n. 1 of its article 4 and, moreover, with the aforementioned article 2 of the Binding Ordinance above transcribed".
In view of the foregoing, it is concluded that the exception of material incompetence raised by the Respondent is well-founded, which precludes the examination of the merits of the request and leads to the absolution of the Respondent from the proceedings – and, thus being, the examination of the second exception invoked by the AT, relating to impropriety of the procedural means, is rendered moot.
IV – DECISION
In such terms, this Arbitral Tribunal decides:
(i) To uphold the exception of absolute incompetence of the arbitral tribunal, on the grounds of subject matter;
(ii) To absolve the Respondent from the proceedings, with the result that the examination of the merits of the case is rendered moot;
(iii) To condemn the Claimant to payment of the costs of the process.
V – Value of the process
The value of the process is fixed at € 27,936.58 (twenty-seven thousand nine hundred and thirty-six euros and fifty-eight cents), pursuant to article 97-A, n. 1, a), of the Tax Procedure and Process Code, applicable by force of subsections a) and b) of n. 1 of article 29 of the RJAT and of n. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
VI – COSTS
The value of the arbitration fee is fixed at € 1,530.00 (one thousand five hundred and thirty euros) pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.
Lisbon, 07 July 2019
The Arbitrator
(Raquel Franco)
Frequently Asked Questions
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