Summary
Full Decision
ARBITRAL TRIBUNAL DECISION
I – Report
A..., S.A. filed a request for constitution of an arbitral tribunal, under the terms of Article 2, paragraph 1, subparagraph a), and Articles 10 and following of Decree-Law No. 10/2011 of 20 January, to assess the legality of the partial dismissal decision on the application for official review by the Director of the IRC Services, dated 30 June 2017, relating to self-assessments of Corporate Income Tax (IRC) for the years 2010 and 2011.
The request is based on the following grounds.
The Claimant requested official review of the IRC self-assessments for the years 2010 and 2011 in order to reflect in the determination of taxable profit the tax benefit for net job creation under the terms of Article 19 of the Tax Benefits Statute (EBF).
The request was dismissed by the Tax Authority with respect to the year 2011, in the amount of € 135,215.08, on the grounds that the regime for accumulation of tax benefits specifically provided for in Law No. 3-B/2010 of 28 April was only applicable to workers on permanent contracts during the year 2010.
The Claimant considers, however, that by virtue of Article 12 of the EBF, the right to the benefit is constituted at the moment when its prerequisites are satisfied. Accordingly, as the hiring of workers on permanent contracts took place in 2010, the accumulation of tax benefits referred to in Law No. 3-B/2010 would have to be recognized during a period of five years from the commencement of the contract, as provided in paragraph 5 of Article 19 of the EBF.
The Claimant also contests the application of the state surtax instituted by Law No. 12-A/2010 of 20 June to the portion of taxable profit calculated during the year 2010, on the grounds that, as the law entered into force on 1 July 2010, it should only apply to the period from that date onwards, by virtue of Article 12, paragraph 2 of the General Tax Code (LGT), which establishes the pro rata temporis principle.
The Tax Authority, in its reply, invoked the exception of lack of jurisdiction of the tribunal to assess decisions refusing official review requests, on the grounds that the binding to arbitral jurisdiction, under Article 2, paragraph 1, subparagraph a), of Order No. 112-A/2011 of 22 March, is limited to "claims relating to declaration of illegality of self-assessment acts that have not been preceded by resort to administrative proceedings under Articles 131 to 133 of the Code of Tax Procedure and Process".
On the matter of challenge, the Respondent contends that the accumulation of the tax benefit for net job creation with other benefits or employment incentives applicable to the same workers was only exceptionally admitted by the 2010 State Budget Law for that same year, and therefore could not be considered, under paragraph 5 of Article 19 of the EBF, in relation to the subsequent taxation period.
As to the application of the state surtax to the annual taxation period, the Tax Authority considers that the official review request is, in that respect, time-barred and argues, in any case, that the scope of application is justified by application of the principle of annuality of the tax, implying that the taxable event is deemed to occur on 31 December (Articles 8, paragraphs 1 and 9, of the Corporate Income Tax Code – CIRC), considering that this rule constitutes a special provision that prevails over the rule governing the application of law in time under Article 12, paragraph 2 of the General Tax Code.
It is concluded that the request is unfounded.
- In the course of the proceedings, the meeting referred to in Article 18 of the Regulation of Tax Arbitration (RJAT) was dispensed with, as was the production of witness evidence.
In submissions, the parties reiterated their previous positions.
The Claimant was notified to express itself on the possibility of not hearing the request relating to the state surtax on the grounds of time-bar of the official review request, and stated that it merely raised an additional illegality already pending in the official review procedure and that judicial challenge relating to the dismissal of the official review request is not limited to the defects that were raised in the procedural phase.
- The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority under the applicable regulations.
Under the terms of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable period.
The parties were duly and timely notified of this appointment and did not manifest any intention to refuse it, under the combined terms of Article 11, paragraph 1, subparagraphs a) and b), of the RJAT and Articles 6 and 7 of the Ethics Code.
Thus, in accordance with the provision of subparagraph c) of paragraph 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the collective arbitral tribunal was constituted on 21 November 2017.
The arbitral tribunal was duly constituted and is materially competent, in accordance with Articles 2, paragraph 1, subparagraph a), and 30, paragraph 1, of Decree-Law No. 10/2011 of 20 January.
The parties have legal personality and capacity, are legitimate parties, and are represented (Articles 4 and 10, paragraph 2, of the same statute and Article 1 of Order No. 112-A/2011 of 22 March).
The proceedings are not vitiated by any nullities.
The exception of material incompetence of the arbitral tribunal to hear the request was raised, under the combined terms of Articles 2, subparagraph a), of the RJAT and 2, subparagraph a), of Order No. 112/2011 of 22 March, on the grounds that it concerns assessment of a claim relating to declaration of illegality of self-assessment acts that was not preceded by resort to administrative proceedings, but only was the subject of an official review request.
It is necessary to consider and decide on this matter.
II – Reasoning
- The facts relevant to the decision of the case are as follows:
a) The Claimant submitted income tax returns Model 22 of the IRC on 23 May 2011 and 24 May 2012, with reference to the taxation periods of 2010 and 2011.
b) On 8 May 2013, it submitted substitute income tax returns for the year 2011.
c) On 22 May 2015, the Claimant deduced a request for official review of the IRC self-assessment tax acts for the years 2010 and 2011, seeking to reflect in the determination of the respective taxable profit the expenses incurred with net job creation in the amounts of € 331,741.68 and € 668,246.08, respectively.
d) The Tax Authority notified the Claimant, for purposes of exercising the right to be heard, of a draft decision in which it proposed partial granting of the official review request.
e) On 14 June 2017, the Claimant exercised the right to be heard, and then expanded the official review request to the self-assessment of the state surtax provided for in Law No. 12-A/2017 of 20 June, with reference to the period of 2010, to the extent that it applied to taxable profits obtained up to 1 July 2010, the date the law entered into force.
f) By decision of 17 June 2017, the Director of IRC Services partially granted the official review request, admitting the deduction of the amount of € 331,741.68 for the year 2010, and reducing to € 533,031.91 the amount to be considered for the year 2011.
g) The difference determined, in the amount of € 135,215.08, in relation to the total expenses that the Claimant intended to deduct in the year 2011 is justified in the decision of the Director of IRC Services by the disregard of expenses incurred in relation to 19 workers who, in that year, were covered by the tax benefit for creation of first employment.
h) With respect to the state surtax, the Director of IRC Services, in the same decision, considered that the request was time-barred, as it was made more than four years after the assessment, and, in any case, did not accede to the request on the basis of the principle of annuality of the tax.
i) The Claimant made payment of the surtax by reference to the taxable profit determined for the entire year 2010.
j) The Claimant hired 16 workers on permanent contracts in the year 2009, 59 workers in the year 2010, and 42 workers in the year 2011, and terminated the employment relationship with respect to one worker in the same circumstances in the years 2009 and 2011, having generated net job creation of 15 positions in 2009, 59 positions in 2010, and 41 positions in 2011.
l) The Claimant benefited from exemption from payment of social security contributions in the years 2010 and 2011 with respect to 19 workers who were part of the new jobs created in that period.
m) With reference to the year 2010, the Claimant declared the amount of € 4,548,895.28 as state surtax, in application of Article 87-A added to the CIRC by Law No. 12-A/2010 of 30 June, which entered into force on 1 July following.
n) This amount reached € 5,111,442.60 as a result of corrections made by the Tax Authority to the taxable profit declared for that year.
o) The surtax was calculated by reference to part of the taxable profit determined during the entire year of 2010.
The Tribunal formed its conviction as to the proven facts on the basis of the documents attached to the petition and those contained in the administrative proceedings presented by the Tax Authority with its reply.
Matter of Exception
Lack of Jurisdiction of the Arbitral Tribunal
- The Tax Authority raises the question of material incompetence of the arbitral tribunal on the grounds that decisions refusing official review requests are excluded from the scope of tax arbitration.
The issue concerns the interpretation of Article 2, paragraph 1, subparagraph a), of Order No. 112-A/2011 of 22 March, a statute which, in application of Article 4 of the Regulation of Tax Arbitration (RJAT), regulates the scope of binding of the tax administration to the arbitral tribunals functioning in CAAD. Under this provision, the services and bodies that comprise the Tax Authority are bound to arbitral jurisdiction with respect to any of the types of claims identified in paragraph 1 of Article 2 of that Regulation, with the exception of those relating to "declaration of illegality of self-assessment acts that have not been preceded by resort to administrative proceedings under Articles 131 to 133 of the Code of Tax Procedure and Process".
In the view of the Respondent, the resort to administrative proceedings referred to in the regulatory norm covers only any of the means of administrative challenge specifically provided for in the mentioned provisions of the Code of Tax Procedure and Process, to which cannot be equated the procedures of official review. And in that sense, referring the mentioned provision of Article 131 of the Code of Tax Procedure and Process to the necessary administrative challenge of self-assessment acts, in the form of gracious claim, the assessment of disputes resulting from partial refusal of an official review request is not covered by tax arbitration.
The Tax Authority further characterizes as unconstitutional, for violation of the principles of the Rule of Law and separation of powers, as well as the right of access to justice and legality, as a corollary the principle of indisponibility of tax claims, the normative interpretation according to which "claims relating to declaration of illegality of self-assessment acts that have not been preceded by resort to administrative proceedings under Articles 131 to 133 of the Code of Tax Procedure and Process" includes the official review request.
The question under analysis was already decided in the negative by widely prevalent arbitral tribunal jurisprudence (among many, the decision of 22 February 2016, Case No. 617/2015-T), which was subsequently upheld by the decision of 27 April 2017 of the Central Administrative Court of the South (Case No. 08599/17), and there is no reason to alter this understanding.
According to Article 2, paragraph 1, of the RJAT, the jurisdiction of arbitral tribunals comprises, among other claims, the assessment of declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source, and payment on account (subparagraph a), even though the law makes the binding of the tax administration to arbitral jurisdiction dependent on an order of the Government members responsible for the areas of finance and justice, which shall establish, in particular, the type and maximum value of disputes covered (Article 4, paragraph 1).
This latter provision was regulated by Order No. 112-A/2011 which, in its Article 2, defines as the object of binding the assessment of the claims referred to in Article 2, paragraph 1, of the RJAT, with the exception – in the part now relevant to consider – of "claims relating to declaration of illegality of self-assessment acts, withholding at source and payment on account that have not been preceded by resort to administrative proceedings under Articles 131 to 133 of the Code of Tax Procedure and Process".
The mentioned provisions of Articles 131 to 133 of the Code of Tax Procedure and Process are intended to identify the situations in which, in matters of self-assessment, tax substitution and payments on account, there is place for necessary administrative challenge. In the case of error in self-assessment, Article 131 specifies that judicial challenge "shall necessarily be preceded by a gracious claim directed to the regional peripheral body of the tax administration, within the period of two years from the presentation of the declaration". This provision, like all others to which Order No. 112-A/2011 refers, has the unequivocal meaning of making prior administrative challenge of the tax act a requirement, as a condition of access to judicial proceedings, and is in full consonance with the principle expressed in Article 185 of the Administrative Procedure Code (CPA), according to which administrative claims and appeals are necessary or optional, depending on whether the prior use thereof is necessary for the possibility of access to contentious means of challenge or condemnation to perform a due act (paragraph 1). The same provision clarifies that claims and appeals have an optional character, except where the law designates them as necessary (paragraph 2).
As all evidence points to, the necessary gracious claim provided for in the cited provisions of the Code of Tax Procedure and Process constitutes a requirement of contentious challengeability of the tax act, characterizing itself as an atypical procedural requirement, which, as such, becomes applicable regardless of whether judicial challenge comes to be brought before an arbitral tribunal or a state tribunal.
On the other hand, the legal requirement of necessary administrative challenge aims at obtaining, through a second-level procedure, a reassessment of the legality of the challenged act, allowing the Administration to still take a definitive position on the matter before the interested party can raise a judicial dispute. Thus is understood why necessary administrative challenge automatically suspends the effects of the act (Article 189, paragraph 1, of the CPA) and why its use constitutes, for the individual, a procedural burden on which the guarantee of access to contentious proceedings depends.
It should also be noted that the law allows the passive subject, on its own initiative, to request revision of the tax acts by the entity that performed them within the period of administrative claim and on the basis of any illegality (Article 78, paragraph 1, of the LGT).
The request for revision also constitutes a second-level procedure, which has the same legal effect as the necessary claim referred to in Article 131 of the Code of Tax Procedure and Process, insofar as it allows the Administration to recognize the existence of illegality in the practice of the tax act, and which can lead, in identical terms, in case of dismissal, to resort to contentious proceedings.
As the law grants the interested party two alternative means of administrative reaction against the tax act with identical legal effects, there is no reason why equivalence between these means should not be established for the purpose of subjecting the dispute to arbitration.
As was clarified, the provision of Article 2, subparagraph a), of Order No. 112-A/2011 is not intended to restrict tax arbitration to those specific situations in which there has been a gracious claim of the tax act. What is intended is to prevent resort to the arbitral tribunal from occurring when the procedural requirement of prior administrative challenge is not met, where this is required, and thus to avoid the claim being brought before arbitral jurisdiction before the Administration has taken a definitive position.
But, as we have seen, this is not a specific condition of arbitrability of tax disputes, but a procedural requirement relating to the judicial remedy itself, meaning that it is not possible to bring a judicial challenge against the self-assessment act, in any jurisdiction, before this requirement is fulfilled.
In this entire context, it becomes clear that there is no obstacle to subjecting a tax dispute to arbitration when the Administration has been able to take a position, in a second-level procedure, on the matter of judicial challenge.
And in this sense also points the provision in paragraph 3 of Article 131 of the Code of Tax Procedure and Process, by establishing that there is no place for prior claim when the question is "exclusively a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration", showing that submission of a dispute to a tribunal does not depend on necessary administrative challenge when there has already been a definitive pronouncement on the legality of the legal situation created with the self-assessment act, even if that pronouncement translates into the mere issuance of generic instructions.
The Tax Authority further raises the question of unconstitutionality of the provision of Article 2, subparagraph a), of Order No. 112-A/2011, when interpreted to mean that "claims relating to declaration of illegality of self-assessment acts that have not been preceded by resort to administrative proceedings under Articles 131 to 133 of the Code of Tax Procedure and Process include the official review request", attributing to it the violation of the principles of the Rule of Law and separation of powers, as well as the right of access to justice and legality, as a corollary the principle of indisponibility of tax claims.
The invoked violation of the principles of the Rule of Law and separation of powers and of the right of access to justice and legality, by reference to Articles 2, 20, 202, 203 and 266, paragraph 3, of the Constitution, without any further development or explanation, suggests that the Respondent understands the subjection of a dispute to an arbitral tribunal, outside the cases legally typified, as corresponding to the violation of a reservation of jurisdiction, with the consequent loss of the characteristic nature of the tribunal's own jurisdictional activity.
It is important to begin by noting, in this regard, that the Constitution, in its Article 202, instituted a reservation of jurisdiction for the exercise of the jurisdictional function exclusively in favor of the courts, where one can distinguish between the absolute reservation of jurisdiction, constituted by those situations that are substantively jurisdictional and cannot be resolved by administrative bodies or non-judicial entities, and the relative reservation of jurisdiction, comprised by those other situations in which the guarantee of justice is satisfied by the possibility of a review through a means of challenge or appeal to the courts.
As the Constitutional Court has emphasized, the existence of a reservation of jurisdiction is also a corollary of the application of the principles of separation and interdependence of powers: as the jurisdiction of organs of sovereignty is defined in the Constitution and these must observe the separation and interdependence established therein (Articles 110, paragraph 2, and 111, paragraph 1), it must be concluded that the constitutional attribution of certain jurisdiction to a particular organ of sovereignty excludes the possibility of it being able to be legally attributed to any other, save explicit or implicit constitutional authorization (decision No. 71/84).
Now, arbitral tribunals are one of the categories of tribunals expressly enshrined in the Constitution (Article 209, paragraph 2), and, as has been recognized by constitutional jurisprudence, although they are not state bodies and do not fall within the definition of organs of sovereignty, "they cannot therefore fail to be qualified as tribunals for other constitutional purposes" (decisions Nos. 230/86, 52/92 and 250/96). And while a category of tribunals constitutionally enshrined, they are subject to the same limits that apply to state tribunals, their decisions have a jurisdictional nature, and arbitrators are subject to a status similar to that of judicial tribunals, with constitutional requirements of independence and impartiality applying to them as a means of ensuring confidence in arbitral jurisdiction.
On the other hand, as has been repeatedly stated, resort to arbitration constitutes a fundamental right, which, as such, is covered by the provision of Article 20 of the Constitution, and the possibility of resolution of disputes through an arbitral tribunal chosen by the parties is itself a concrete realization of the guarantee of access to law and courts and the principle of effective judicial protection (see FAUSTO QUADROS, "Necessary, Obligatory, Forced Arbitration: brief note on the interpretation of Article 182 of the Code of Process in the Administrative Courts", in Studies in tribute to Miguel Galvão Teles, vol. II, Coimbra, 2012, page 258, and RUI MEDEIROS, "Necessary Arbitration and Constitution, in Studies in memory of Counsellor Artur Maurício", page 1318, and, in identical terms, Constitutional Court decisions Nos. 250/96 and 506/96).
And, on that plane, there is no reason to establish any differentiation with respect to necessary arbitration, since the Constitution, in recognizing the possibility of the existence of arbitral tribunals, does not distinguish between voluntary and necessary arbitral tribunals, legitimating the understanding that these tribunals may be constituted by citizens in the exercise of autonomy of will, but may also be created by the legislature itself for the judgment of a determined category of disputes, as a means of imposing on citizens the necessary resort to this means of jurisdictional resolution of conflicts (decisions Nos. 52/92, 757/95 and 262/98).
Furthermore, as a result of the general principle of law that flows from Article 18, paragraph 1, of the Voluntary Arbitration Law (LAV), the arbitral tribunal can decide on its own jurisdiction, even if for that purpose it is necessary to assess the existence, validity or effectiveness of the arbitration agreement or its applicability to the specific case, and the decision of the arbitral tribunal on its jurisdiction is only subject to control by state tribunals through a challenge request (see Article 18, paragraph 9, of the LAV). And this same principle cannot fail to be applied even in cases where the list of matters on which the arbitral tribunal can pronounce itself is legally defined, as is the case with tax arbitration.
The challenge may also have as its basis the incompetence of the arbitral tribunal, based on undue pronouncement, when the arbitral award has pronounced on disputes that are not subject to arbitration in accordance with the law (in this sense, the decision of the Constitutional Court No. 177/2016, which judged unconstitutional subparagraph c) of paragraph 1 of Article 28 of the RJAT, in the normative interpretation that the concept of "undue pronouncement" does not cover the challenge of the arbitral decision on the basis of incompetence of the arbitral tribunal, for concomitant violation of Articles 20 and 209, paragraph 2, of the Constitution).
As is to be concluded, the arbitral tribunal, when it decides on its jurisdiction to assess a dispute submitted to it, is still exercising its jurisdictional function. And if the tribunal considers that it is competent to assess the question on the basis of a certain interpretation of a legal provision – in this case the provision of Article 131 of the Code of Tax Procedure and Process – that interpretation, although subject to being challenged before a state tribunal through a challenge request, does not violate any of the constitutional principles invoked by the Claimant.
Matters of Merit
State Surtax
- The Claimant deduced a request for official review of the IRC self-assessment tax acts for the years 2010 and 2011, seeking to reflect in the determination of the respective taxable profit the expenses incurred with net job creation. Notified of the draft decision proposing partial granting of the official review request, the Claimant, in exercising the right to be heard, expanded the official review request to the self-assessment of the state surtax provided for in Law No. 12-A/2017 of 20 June, to the extent that it applied to taxable profits obtained before the date the law entered into force.
In the impugned decision, the Tax Authority invoked that the official review request relating to the surtax, having been made at a later moment, was time-barred as it was formulated more than four years after the assessment of the tax. However, without granting it, it pronounced on the legality of the surtax assessment, considering that the taxable base is determined on the basis of the annual taxation period by virtue of the application of the principle of annuality of the tax, thus dismissing the request.
In its reply, the Respondent also refers to the invocation, by the author of the impugned act, of the time-bar of the official review request.
It must be understood, in these terms, that the dismissal of the official review request was based on two different grounds: the time-bar of the request, as it was made more than four years after the assessment, and the legal conformity of the surtax assessment.
Regardless of the validity of this second argument, it is possible to establish, on the basis of the facts taken as proven, that the official review request relating to the self-assessment of the state surtax is time-barred.
Under Article 78 of the LGT, "revision of tax acts by the entity that performed them may be effected on the initiative of the passive subject, within the period of administrative claim and on the basis of any illegality, or, on the initiative of the tax administration, within four years of the assessment or at any time if the tax has not yet been paid".
In this case, the Claimant presented substitute income tax returns for the year 2011 on 8 May 2013 and deduced the official review request of the IRC self-assessment tax acts relating to the increase in expenses for net job creation on 22 May 2015. The official review request for the self-assessment of the state surtax was formulated on 14 June 2017, in the context of exercising the right to be heard regarding the draft decision prepared in relation to the initial official review request.
As this is official revision of tax acts – as is the case – the period for opening the procedure is four years after the assessment, when the tax has already been paid. Therefore, as the request was made on 14 June 2017 and the substitute income tax return is dated 8 May 2013, and payment of the tax has taken place, the indicated period of four years had already elapsed.
It is not valid to assert, on the other hand, that the defect relating to the state surtax assessment constitutes an additional illegality that could always be raised in judicial challenge. In fact, the Claimant, reacting against the dismissal of the official review request, seeks to obtain the annulment of the IRC assessment for the years 2010 and 2011 so that the tax benefit for net job creation is considered, and also the annulment of the assessment relating to the state surtax for the year 2010 on the grounds that it was only due from 1 July of that year. There are, therefore, different defects relating to different segments of the IRC assessment, and the fact that the extension of the scope of the official review request to the segment relating to the State Surtax was only effected in exercising the right to be heard, when four years had already elapsed, makes that segment unimpugnable due to time-bar.
In these terms, it is understood that the arbitral tribunal should not hear the request in respect of this matter, as the official review request is, in fact, time-barred.
Net Job Creation
- In the context of the official review request of the IRC self-assessment tax acts for the years 2010 and 2011, the Tax Authority did not consider as eligible for the attribution of the tax benefit relating to net job creation, for the year 2011, the expenses incurred by the Claimant in relation to workers who, having been hired in 2010, fell cumulatively within the tax benefit for creation of first employment.
To reach this conclusion, the Administration was based on the rule of Article 19, paragraph 5, of the EBF, which excludes the increase provided in paragraph 1 of that article with other tax benefits or other employment incentives, when applicable to the same workers, and on the inapplicability, in relation to the year 2011, of the provision of Article 115 of Law No. 3-B/2010 of 28 April, which permitted the accumulation of tax benefits for job creation with other employment incentives during the year 2010.
The Claimant argues that the constitution of the right to tax benefits is dated to the moment of satisfaction of their respective requirements, and the relevant moment, for purposes of the increase for net job creation, is that of the commencement of the permanent employment contract, with the tax benefit being realized over a period of five years from that moment. As it was the intention of the legislature to promote job creation during the year 2010, and the right to the tax benefit being constituted in that year, the increase in expenses with workers hired in that same year is applicable in subsequent years under the conditions provided for in Article 115 of Law No. 3-B/2010. Accumulation of tax benefits would thus be admissible, even in relation to the year 2011, as this possibility was provided for in the said Law at the moment when the right to the increase in expenses for net job creation was constituted.
This is the question to be decided.
Article 19 of the EBF, referring to tax benefits for job creation, in the part most relevant to consider, provides as follows:
1- For the determination of taxable profit of IRC passive subjects and IRS passive subjects with organized bookkeeping, the expenses corresponding to net creation of jobs for young people and long-term unemployed, hired on permanent employment contracts, are considered at 150% of their respective amount, accounted for as an exercise cost.
(…)
5 - The increase referred to in paragraph 1 applies for a period of five years from the commencement of the employment contract, not being cumulative, either with other tax benefits of the same nature, or with other employment support incentives provided for in other statutes, when applicable to the same worker or job position.
(…)
In turn, Article 115 of Law No. 3-B/2010, under the heading "Strengthening of tax benefits for job creation in 2010", provided: "During the year 2010, the tax benefit provided for in Article 19 of the Tax Benefits Statute, approved by Decree-Law No. 215/89 of 1 July, is cumulative with other employment support incentives provided for in other statutes, when applicable to the same worker or job position".
The rule is thus that of non-accumulation of the increase provided in paragraph 1 of Article 19 of the EBF with other tax benefits or employment incentives, even if provided for in separate statutes. Law No. 3-B/2010, being a budget law, exceptionally admitted accumulation during the year 2010 with the objective of encouraging job creation, thus allowing that the increase in expenses incurred with net job creation may be supplemented, for taxation purposes, by another tax benefit associated with job creation, such as that resulting from creation of first employment.
The question that arises, and which constitutes the subject matter of the dispute, is whether the accumulation of tax benefits in relation to the same universe of workers is itself a requirement of the tax benefit, in such a way that the right to the increase for net job creation during the year 2010 can continue to accumulate with other tax benefits in the five subsequent years.
There is no doubt that the right to the tax benefit for net job creation is constituted at the moment when the job creation occurs, this being the solution that flows from the provision of Article 12 of the EBF in which it states that "[t]he right to tax benefits must be dated to the moment of satisfaction of their respective requirements (…)".
To determine what is the requirement for constitution of the right to the tax benefit, Article 19, paragraph 2, of the EBF is of particular relevance, which prescribes:
For purposes of the provision in the preceding paragraph, the following are considered:
(…)
"Net creation of jobs" the positive difference, in a given economic year, between the number of eligible hirings under paragraph 1 and the number of departures of workers who, at the date of their hiring, were in the same circumstances.
As can be seen, the requirement for attribution of the tax benefit is the verification of a positive difference, in an economic year, between the entry and departure of workers hired on permanent contracts, and it is in these terms that the law defines what it understands by net job creation. The right to the increase on expenses operates, therefore, when the employer comes to hire, on a permanent employment contract, a number of workers greater than that which has terminated the employment relationship.
The non-accumulation of the tax benefit for net job creation with another benefit of the same nature is not, in itself, a requirement of the right to the increase, but an element of the applicable legal regime. That is, where there is place for the increase, because the requirements of Article 19, paragraph 2, subparagraph d), of the EBF are met, this right is not cumulative with another benefit related to job creation or employment incentive. And this criterion was only departed from by the provision of the 2010 State Budget Law, which provided, in the terms already explained, for accumulation with other employment support incentives during the year 2010.
It is true that the right to the increase, being dated to a determined economic year, materializes over a period of five years from the commencement of the employment contract. This means that the advantage sought to be achieved with the 2010 legislative measure, in terms of strengthening tax benefits for job creation, has a limited practical effect, as it will only benefit the employers in the short period of time that elapses between the commencement of the contract and the end of the calendar year in which it was concluded.
In any case, nothing would have prevented the legislature, if it intended to achieve a more significant result from the point of view of political objectives, from altering the provision of paragraph 5 of Article 19 of the EBF, eliminating or limiting the rule prohibiting accumulation of tax benefits, or from renewing the special regime defined in Law No. 3-B/2010 by providing for an identical provision in the budget laws for the following years, or by establishing for that same rule a multi-year duration.
The Constitution expressly enshrined the rule of annuality of the Budget (Article 106, paragraph 1), but it has been understood that the scope of application of that rule refers to the Budget itself, whence it follows that "the principle of annuality of the Budget (…) will only be violated when a certain provision for revenue or expenditure of the Budget – the provision of a revenue from its respective schedule or the allocation of certain sums from an expenditure schedule – is given a multi-year duration" (see decisions of the Constitutional Court Nos. 108/88 and 358/92 and, more recently, decision No. 2/2013).
Nothing would therefore prevent the provision of Article 115 of Law No. 3-B/2010 from expanding its scope of application so as to ensure that the effects of job creation in the year 2010 could extend over the period of five years from the commencement of the contract, thus allowing that the special regime of accumulation could cover the total period of attribution of the tax benefit.
This is not, however, the meaning of the budget provision, which, unequivocally, as results from its heading and wording context, confined the strengthening of tax benefits for job creation to 2010.
And as it cannot be understood – as was clarified – the accumulation of tax benefits as a requirement of the benefit related to net job creation, the claimed illegality of the Tax Authority's decision cannot be sustained.
III – Decision
It is decided as follows:
a) Not to hear the arbitral tribunal's ruling request, to the extent that, with respect to the year 2010, it makes the state surtax provided for in Law No. 12-A/2010 of 20 June apply to taxable profits obtained up to the date the law entered into force;
b) To judge the arbitral tribunal's ruling request unfounded with respect to the same decision to the extent that, with respect to the year 2011, it disregarded the deduction of € 135,215.08 as a tax benefit for net job creation.
Value of the Case
The Claimant indicated as the value of the case the amount of € 2,594,933.67, which was not contested by the Respondent and corresponds to the value of the assessment that it sought to challenge, and thus the value of the case is fixed at that amount.
Costs
Under Articles 12, paragraph 2, and 24, paragraph 4, of the RJAT, and Article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings and Schedule I attached to that Regulation, the amount of costs is fixed at € 33,354.00, to be borne by the Claimant.
Notify accordingly.
Lisbon, 28 May 2018
The President of the Arbitral Tribunal
Carlos Fernandes Cadilha
The Arbitrator Member
João Taborda da Gama
The Arbitrator Member
Luís Oliveira
(dissenting as per attached declaration)
Dissenting Opinion
I would have decided that the arbitral tribunal is materially incompetent to hear both the request for annulment of the decision that, in official review proceedings, disregarded the deduction of EUR 135,215.08 as a tax benefit for net job creation, and the request for annulment of the self-assessment to the extent that, with respect to the year 2010, it made the state surtax provided for in Law No. 12-A/2010 of 20 June apply to taxable profits obtained up to the date the law entered into force.
As contained in the facts established as proven, the Claimant submitted income tax returns Model 22 of the IRC on 23 May 2011 and 24 May 2012, with reference to the taxation periods of 2010 and 2011; on 8 May 2013, it submitted substitute income tax returns for the year 2011; on 22 May 2015, the Claimant deduced a request for official review of the IRC self-assessment tax acts for the years 2010 and 2011 seeking to reflect in the determination of the respective taxable profit the expenses incurred with net job creation; the Tax Authority notified the Claimant, for purposes of exercising the right to be heard, of a draft decision in which it proposed partial granting of the official review request, and it was in exercising this right that the Claimant, on 14 June 2017, expanded the official review request to the self-assessment of the state surtax provided for in Law No. 12-A/2017, to the extent that it applied to taxable profits obtained up to 1 July 2010, the date the law entered into force.
Regarding the request for annulment of the decision that, in official review proceedings, disregarded the deduction of EUR 135,215.08 as a tax benefit for net job creation, I begin by accompanying the assessment made in the Award with respect to certain interpretative statements, in this respect diverging, in relative terms, from understandings I had expressed in earlier decisions of this arbitral jurisdiction.
I thus accompany the Award in its interpretative assertions that: (a) Order No. 112-A/2011, in its Article 2, defines as the object of binding of the Tax Authority to the jurisdiction of the arbitral tribunals functioning in CAAD the assessment of the claims referred to in Article 2, paragraph 1, of the RJAT, with the exception of "claims relating to declaration of illegality of self-assessment acts, withholding at source and payment on account that have not been preceded by resort to administrative proceedings under Articles 131 to 133 of the Code of Tax Procedure and Process"; (b) the mentioned provisions of Articles 131 to 133 of the Code of Tax Procedure and Process are intended to identify the situations in which, in matters of self-assessment, tax substitution and payment on account, there is place for necessary administrative challenge; (c) in the case of error in self-assessment, Article 131 specifies that judicial challenge "shall necessarily be preceded by a gracious claim directed to the regional peripheral body of the tax administration, within the period of two years from the presentation of the declaration", a provision that has the meaning of making prior administrative challenge of the tax act a requirement as a condition of access to judicial proceedings and is in consonance with the principle expressed in Article 185 of the Administrative Procedure Code, according to which administrative claims and appeals are necessary or optional, depending on whether the prior use thereof is required for the possibility of access to contentious means of challenge or condemnation to perform a due act; (d) the necessary gracious claim provided for in Article 131 of the Code of Tax Procedure and Process constitutes a requirement of contentious challengeability of the tax act, characterizing itself as an atypical procedural requirement; (e) necessary administrative challenge aims at obtaining, through a second-level procedure, an assessment of the legality of the challenged act, allowing the Tax Authority to take a definitive position on the matter before the interested party can raise a judicial dispute; (f) the law allows the passive subject, on its own initiative, to request revision of the tax acts by the entity that performed them within the period of administrative claim and on the basis of any illegality (Article 78, paragraph 1, of the LGT); (g) the official review request is likewise a second-level procedure, which has the same legal effect as the necessary claim referred to in Article 131 of the Code of Tax Procedure and Process, insofar as it allows the Administration to recognize the existence of illegality in the practice of the tax act and can lead, in identical terms, in case of dismissal, to resort to contentious proceedings.
In accompanying the assessment made in the Award as to these interpretative statements, I thus come to accept as the better interpretation that which equates resort to an official review request with administrative challenge for purposes of opening the way to arbitral jurisdiction, on the substantive basis that either of those means responds to the ends underlying the establishment of necessary administrative challenge: to open the possibility of assessment by the Tax Authority of the legality of the act, allowing it to take a definitive position on the matter before the interested party can raise a judicial dispute.
In other words, I come to accept as the better interpretation that which superimposes this substantive basis on the literal meaning of the reference to "the terms of Articles 131 to 133 of the Code of Tax Procedure and Process".
However, I maintain that the said equivalence can only apply when there is effective identity of means in the specific case, measured inter alia by the interposition of the official review request within the period of two years from the presentation of the declaration. To accept that the interposition of an official review request beyond the end of that period still falls within a judgment of equivalence between the two means is, in my opinion, manifestly disproportionate and without hermeneutical legitimacy, not passing the necessary extensive interpretation to thus conclude on the criterion of minimum correspondence of wording with the applicable provisions.
It is important to recall the relevant legal and regulatory provisions, on the basis of which the tribunal assesses and decides the invoked exception, in the version in force at the date of the facts, that is, on 31 December 2010 and 2011 (paragraph 9 of Article 8 of the Corporate Income Tax Code):
Code of Tax Procedure and Process, Article 131, paragraph 1: In case of error in self-assessment, judicial challenge shall necessarily be preceded by a gracious claim directed to the head of the regional peripheral body of the tax administration, within the period of 2 years from the presentation of the declaration.
General Tax Code, Article 78, paragraph 1: Revision of tax acts by the entity that performed them may be effected on the initiative of the passive subject, within the period of administrative claim and on the basis of any illegality, or, on the initiative of the tax administration, within four years of the assessment or at any time if the tax has not yet been paid, on the grounds of error attributable to the services.
Paragraph 2 - Without prejudice to the legal burdens of claim or challenge by the taxpayer, error in self-assessment is considered attributable to the services for purposes of the preceding paragraph.
Law No. 3-B/2010 of 28 April, Article 124, paragraph 4: The scope of the authorization (…) comprises, in particular, the following matters: a) The definition of the object of the tax arbitration process, which may include acts of assessment of taxes, including self-assessment acts, withholding at source and payment on account, acts of determination of taxable base, where they do not give rise to assessment, acts of total or partial refusal of gracious claims or of requests for revision of tax acts, administrative acts involving assessment of the legality of assessment acts, acts of determination of property values and rights or legitimate interests in tax matters;
Decree-Law No. 10/2011 of 20 January, Article 4, paragraph 1: The binding of the tax administration to the jurisdiction of the tribunals constituted under the terms of this law depends on an order of the Government members responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered.
Order No. 112-A/2011 of 22 March, Article 2: The services and bodies referred to in the preceding article are bound to the jurisdiction of the arbitral tribunals functioning in CAAD which have as their object the assessment of the claims relating to taxes whose administration is their responsibility referred to in paragraph 1 of Article 2 of Decree-Law No. 10/2011 of 20 January, with the exception of the following: a) Claims relating to declaration of illegality of self-assessment acts, withholding at source and payment on account that have not been preceded by resort to administrative proceedings under Articles 131 to 133 of the Code of Tax Procedure and Process.
The Government's use of the legislative authorization was partial – as it was authorized to be: "which may include" – as appears from the comparison with the list contained in Article 2 of the RJAT. Subsequently, the legislature of Decree-Law No. 10/2011 chose to refer to an order of the Government members responsible for the areas of finance and justice the definition of the type and maximum value of disputes covered in the scope of the binding of the Tax Authority to arbitral tribunal jurisdiction (paragraph 1 of Article 4). That is, in the use of the delegated legislative function, the Government chose not to define in the law itself the scope of binding of the Tax Authority, but rather referred that definition to the enactment of an administrative act, in the form of an order.
Second, and downstream, another interpretative element, carried by the preamble of Order No. 112-A/2011, cannot equally be disregarded. There it reads: "With the present order, the tax administration binds itself also to the jurisdiction of CAAD under the terms of paragraph 1 of Article 4 of Decree-Law No. 10/2011 of 20 January, joining this mechanism of alternative dispute resolution and under the terms and conditions here established."
The binding is thus enshrined "under the terms and conditions here established". It might seem unnecessary to say it, as a binding must always apply in its precise terms and conditions, but the Government members responsible for the areas of finance and justice – so authorized by the provision of paragraph 1 of Article 4 of the RJAT – deemed the phrase not insignificant.
That is, I consider, in this point accompanying the decision in Case 236/2013-T, that the terms of binding of the Tax Authority incorporate strict delimitation of the scope of application of arbitration, to be interpreted literally. I do not see how one can validly consider that, where binding is expressed in precise and carefully worded terms, it is to be interpreted that, after all, binding occurs beyond them. I find this inescapable in cases where an official review request is deduced outside the period for bringing an administrative claim, as occurs in what is the subject of the present proceedings.
On the meaning and scope of the binding of the Tax Authority under the terms of subparagraph a) of Article 2 of Order No. 112-A/2011, there are diametrically opposed decisions in tax arbitration proceedings concerning the question of whether these tribunals are, or are not, competent to hear requests for declaration of illegality of second-level acts, performed in official review proceedings, on self-assessment acts.
Certain decisions, of which the one extracted in Case 117/2013-T (06.12.2103) is paradigmatic, tend not to consider the exception of incompetence well-founded, on the basis of a certain exegetical and dogmatic construction, followed in several other decisions of tax arbitration and also in the decision of the Central Administrative Court of the South in Case 08599/15 (27.04.2017), in judgment of the challenge of the arbitral decision in Case 630/2014-T. The challenge, brought by the Tax Authority, was dismissed on the basis of the exegetical-dogmatic reasoning established in Case 117/2013-T, which the Central Administrative Court of the South transcribes almost in its entirety.
The opposite jurisprudential line formed in CAAD, of which Case 236/2013-T (22.04.2014) is paradigmatic, tends to consider the exception of incompetence established, on the basis of an exegetical and dogmatic construction erected on the basis of the binding of the Tax Authority, with implicit renunciation of the common forum of state tax tribunals, to be interpreted strictly, as all acts of renunciation, therefore of the exhaustive and literal character of the exception contained in Article 2 of Order No. 112-A/2011, with its immediate restrictive and exhaustive realization ("under the terms of Articles 131 to 133 of the Code of Tax Procedure and Process") and the absence of even a minimum of verbal correspondence, even if imperfectly expressed, with the possibility of being able to dispense with resort to gracious claim, strictly speaking, for arbitration of the tax claim, even though there has been some second-level act regarding it and thus there has been, in the present case, a reassessment of the tax act challenged by the Tax Authority in the sequence of an official review request formulated by the passive subject.
My understanding, which in the case sub iudice leads to the conclusion of incompetence of the arbitral tribunal, is thus intermediate: I accept the equivalence of the means in question, but only for cases in which it effectively exists, because an official review request has been brought within the period of two years for bringing administrative claim. It should also be clarified that the procedural requirement of prior necessary administrative challenge only becomes a matter of possible incompetence of the tribunal – it would never be so before a state tax tribunal – due to the nature of voluntary binding of the Tax Authority, under the terms of the RJAT and Order No. 112-A/2011, to arbitral tribunals, which ends up delimiting the concrete arbitrability of tax disputes and, downstream, the jurisdiction of those tribunals.
Moreover, this same understanding that the equivalence of the means in question depends on an official review request having been brought within the period of two years for bringing administrative claim seems to emerge in some of the decisions that considered the exception of incompetence unfounded. In Case 117/2013-T it can be read that "the formula used in subparagraph a) of paragraph 1 of Article 2 of the RJAT covers cases in which the second-level act is that of refusal of a request for revision of the tax act, as there is no reason to restrict, especially since, in cases where the revision request is made within the period of gracious claim, it must be equated with a gracious claim". Further on: "allowing the law expressly that taxpayers choose between gracious claim or official revision of self-assessment acts and being the official revision request formulated within the period of gracious claim perfectly equatable to a gracious claim, there can be no reason that might explain why a taxpayer who has chosen revision of the tax act instead of gracious claim cannot access arbitral proceedings". In Case 73/2012-T: "the reference (…) to «resort to administrative proceedings under the terms of Articles 131 to 133 of the Code of Tax Procedure and Process» must be interpreted as reporting only to cases in which such resort, through gracious claim (which is equatable to the request for revision of the tax act formulated within the period of administrative claim) is imposed by those provisions of the Code of Tax Procedure and Process."
With respect to the request for annulment of the self-assessment of the state surtax provided for in Law No. 12-A/2017, to the extent that it applied to taxable profits obtained up to 1 July 2010, the date the law entered into force, I would apply, with even greater reason, the foregoing understanding: only in the context of expansion of the official review request – on 14 June 2017 – did the Claimant bring that annulment request, and it did so after the end of the four-year period established for the official review request itself.
I would accompany the Award's decision not to hear the arbitral tribunal's ruling request on the grounds that the official review request is time-barred, in the hypothesis of considering the tribunal competent to hear it. Naturally, a judgment of incompetence precludes the mere judgment of the provision underlying non-hearing of the request.
Luís Oliveira
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