Process: 564/2017-T

Date: July 8, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 564/2017-T) addresses a Corporate Income Tax (IRC) dispute for the 2012 tax year involving €175,634.90. The taxpayer challenged an IRC assessment on four grounds: illegality due to violation of Article 15 of RCPIT (procedural rules for tax inspections), expiry (caducidade) of the assessment right under Article 45(1) of the Portuguese General Tax Law (LGT), erroneous quantification of taxable income violating Article 18(6) of the IRC Code, and incorrect qualification of tax facts under Article 45(1) of the IRC Code. The case originated from a tax inspection initially limited to verifying IRS withholding obligations on profit distributions to a shareholder but was subsequently expanded to cover the taxpayer's general tax situation, including IRC and Stamp Tax. The main substantive issue concerned €554,262.90 in bank financing charges that the taxpayer had estimated and accrued in 2012 but for which documentation was only issued in 2013. The Tax Authority disallowed these expenses as improperly documented under Article 45(1)(g) of the IRC Code. The taxpayer argued the expansion of the inspection scope violated procedural requirements and that the assessment right had expired. The tribunal examined whether the procedural expansion was lawful, whether the statute of limitations had run, and whether the accrual accounting method used for financing charges complied with IRC provisions on deductibility and income quantification. The decision clarifies important principles regarding inspection procedure modifications, limitation periods for IRC assessments, and documentation requirements for deductible expenses.

Full Decision

ARBITRAL DECISION

The Arbiters José Pedro Carvalho (President Arbiter), Raquel Franco and Amílcar Jorge Sampaio Nunes, appointed by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:

I – REPORT

On 24 October 2017, A…, S.A., Tax ID …, with registered office …, …, …, Lisbon, filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the Corporate Income Tax (IRC) Assessment Act No. 2017…, relating to the tax year 2012, in the amount of €175,634.90.

To support its request, the Applicant alleges, in summary, the occurrence of the following defects:

  • illegality, by violation of Article 15 of the RCPIT;
  • expiry, by violation of Article 45, No. 1 of the LGT;
  • erroneous quantification of taxable income, by violation of Article 18, No. 6 of the CIRC; and
  • erroneous qualification of the tax facts, as the situation at hand is not subsumable under Article 45, No. 1 of the CIRC.

On 24-10-2014, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Applicant failed to appoint an arbiter, so, under the provisions of Article 6, No. 2, lit. a) and Article 11, No. 1, lit. a) of the RJAT, the President of the Ethics Council of the CAAD appointed the undersigned as arbiters of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 15-12-2017, the parties were notified of these appointments and did not manifest any intention to challenge any of them.

In accordance with Article 11, No. 1, lit. c) of the RJAT, the collective Arbitral Tribunal was constituted on 08-01-2018.

On 09-02-2018, the Respondent, duly notified for this purpose, filed its response defending itself by way of objection.

Under Articles 16, lit. c) and e) and Article 29, No. 2, both of the RJAT, the holding of the meeting referred to in Article 18 of the RJAT was dispensed with.

Having been granted a period for the submission of written arguments, these were submitted by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the rendering of the final decision, after the submission of arguments by the Respondent, which period was extended until the end of the period referred to in Article 21/1 of the RJAT. The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, No. 1, lit. a), 5 and 6, No. 1, of the RJAT.

The parties have legal personality and capacity, are legitimately interested and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March.

The case does not suffer from any nullities.

Therefore, there is no obstacle to the consideration of the case.

Having reviewed all matters, it is necessary to render the following decision:

II. DECISION

A. FACTUAL MATTERS

A.1. Facts established as proven

The Applicant was subject to an external inspection procedure, for the tax year 2012, in compliance with Service Order No. OI2016…, issued on 02-11-2016.

The aforementioned Service Order was of partial scope (not covering either IRC or VAT), limiting the scope of the inspection action to verifying the Applicant's compliance with the tax obligations of withholding at source for Personal Income Tax (IRS), in any distributions of profits made to shareholder B….

The inspection procedure was initiated on 2016-11-30, with the signature of the respective Service Order by B…, in the capacity of administrator of the society now Applicant.

On 2017-03-08, the Tax Authority decided that it should expand the scope of the inspection action and on that same date informed the current applicant of the following: "The service order notified to you on 30-11-2016 is hereby amended, with the following grounds: From the analysis undertaken, it resulted in the necessity of expanding the scope of the inspection procedure to the general tax situation of the taxpayer."

Between 2017-03-08 (the date from which the inspection action was expanded to all taxes) and 2017-05-18 (date of the conclusion of the inspection report), the AT corrected the IRC taxable income by €634,480.92, Stamp Tax by €9,897.55 and autonomous IRC taxation by €1,381.98.

Among the corrections to IRC taxable income, which total €634,480.92, there is one correction, relating to "bank financing charges" (see point III.1.1.1.1. of doc. 3 – at pages 10 and 11) amounting to €554,262.90.

From the inspection report (RIT) it appears, among other things, that:

  • "the inspection procedure ... originated from a previous inspection procedure for the period before 2013, in which the issuance of a cheque in favor of one of the shareholders was detected, with the objective of investigating the possible distribution of profits";

  • "In light of the reason that originated the present inspection procedure – issuance of a cheque in favor of one of the shareholders in the amount of €17,554,918.97, and possible classification as a distribution of profits, given the placing at the disposal of that amount – all accounting entries recorded in the accounts relating to the same were validated – accounts SNC 2532 and 26101."

  • the Tax Authority "concluded that the amount placed at the disposal of the shareholder at the end of the 2012 tax period relates to the repayment of amounts previously advanced by that person to the taxpayer, and therefore not classified as a distribution of profits, and consequently not taxable under IRS";

  • "On 2017-03-08 the scope of the present procedure was expanded to other taxes, namely stamp tax, which was notified on that date to the administrator of the taxpayer previously identified, by means of the signature of a new service order";

  • "the taxpayer carries out the accounting for each period of the value of expenses based on estimates, and in the following period, upon receipt of the documents in question and their accounting, compensates the values that were not specialized, by cancellation with the estimated value in the previous period";

  • "Thus, the taxpayer accounts on the debit side of the sub-accounts relating to financing charges the total amount communicated by the entities, without specialization, and accounts on the credit side the estimated value in the previous period that it debited, as a means of specialization of charges";

  • "According to the criterion adopted, the taxpayer, in the 2012 period, estimated the financing charges that it would incur in the final fraction of the year, due to the fact that the entities only issued their respective documents in the following year, in the amount of €624,473.51";

  • "Therefore, in light of the criterion adopted by the taxpayer as set out above, that amount must be purged of expenses";

  • "no respective bank document having been issued confirming the estimated amounts and these not having been cancelled in the following period ... it is not considered proven that they occurred. Therefore, it is concluded that those expenses accounted for as financing interest obtained are not properly documented, in accordance with Article 45, No. 1, lit. g) of the CIRC...".

In pursuit of its corporate purpose of "construction of properties for sale", the applicant obtained bank financing, intended to acquire land and thereon construct, on its own account, buildings intended for sale, in autonomous units, to its clients.

The Tax Authority verified that in the year 2013 only the amount of €70,210.61 was recorded as a credit in the expenses account and, for that reason, the AT increased the IRC taxable income by €554,262.90 (€624,473.51 - €70,210.61).

The thirteen bank loans that contributed to the determination of the value €624,473.51 were the following:

[Details of loans omitted in translation as they appear in tabular form in original]

The AT understood that "although there is evidence that these expenses were transferred to account SNC 361004 at the end of the period, they will be incorporated into the production cost of products in the course of manufacture, and consequently affect the result determined upon the sale of the same".

Having considered the arguments presented by the taxpayer in prior hearing, the draft report was made final.

By means of Official Letter DF LISBOA … of 24-05-2017, with CTT registration number RD …PT, delivered on 30-05-2017, the taxpayer was notified of the final report, thereby terminating the inspection procedure.

The assessment was issued on 01-06-2017.

A.2. Facts established as not proven

As relevant to the decision, there are no facts that should be considered as not proven.

A.3. Justification of proven and not proven factual matters

With respect to the factual matters, the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts that are relevant to the decision and to distinguish proven facts from those not proven (see Article 123, No. 2 of the CPPT and Article 607, No. 3 of the CPC, applicable by virtue of Article 29, No. 1, lit. a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and determined according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see former Article 511, No. 1 of the CPC, corresponding to current Article 596, applicable by virtue of Article 29, No. 1, lit. e), of the RJAT).

Thus, having regard to the positions taken by the parties, in light of Article 110/7 of the CPPT, the documentary evidence and the procedure file attached to the records, the facts listed above were considered proven, as relevant to the decision, taking into account that, as written in the Judgment of TCA-Sul of 26-06-2014, delivered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".

Not established as proven or not proven were the allegations made by the parties, and presented as facts, consisting of strictly conclusive statements, incapable of proof, and whose truthfulness must be assessed in relation to the concrete factual matters above established.

B. ON THE LAW

As already stated, the Applicant raises the following issues:

  • illegality of the assessment, by violation of Article 15, No. [blank] of the RCPIT;

  • expiry of the right to assess, by violation of Article 45, No. 1 of the LGT;

  • erroneous quantification of taxable income, by violation of Article 18, No. 6 of the CIRC; and

  • erroneous qualification of the tax facts, as the situation at hand is not subsumable under Article 45, No. 1 of the CIRC.

Let us examine these.

i.

The Applicant begins by alleging that "in the case at hand, it is not at all clear what the reason was for deciding to extend the inspection to all taxes, when initially it was only necessary to ascertain the regularity and compliance with the rules on withholding at source for IRS."

For the Applicant, "the expansion of the scope of inspection runs counter to the conclusions of the AT expressed (...) in the inspection report, where it is stated that the AT concluded that the amount placed at the disposal of the shareholder at the end of the 2012 tax period relates to the repayment of amounts previously advanced by that person to the taxpayer, and therefore not classified as a distribution of profits, and consequently not taxable under IRS".

The Applicant further considers that "the conclusions resulting from the first phase of the inspection action (which occurred between 30-11-2016 and 07-03-2017) contained in the inspection report demonstrate that the AT was fully informed about the reasons that gave rise to the inspection action and no reason or ground can be discerned for expanding the scope of the inspection action to the general tax situation of the taxpayer," and therefore "there is not a single indication that would justify the supposed 'necessity of expanding the scope of the inspection procedure to the general tax situation of the taxpayer'." and "it is concluded that the order deciding the extension of the scope of the inspection action to all taxes, namely to IRC, is not substantiated."

The Applicant further adds that "neither the order that notified the expansion of the scope of the inspection action, nor the final inspection report itself provide any substantiation, among those provided for in Article 27 of the RCPIT, for the selection of the taxpayer to be inspected, with respect to the matters covered by the expansion of the inspection scope," and therefore "the decision to extend the tax inspection is illegal because it is not substantiated, thereby violating Article 15, No. 1 of the RCPIT."

Article 15/1 of the RCPIT provides that:

"The purposes, scope and extent of the inspection procedure may be altered during its execution by means of a substantiated order of the entity that ordered it, and must be notified to the inspected entity".

The regulation of the tax inspection procedure has, in the first place, an essentially organizational (ordering) purpose and, from the perspective of taxpayers, is intended essentially to define the conditions under which the legal effects proper to such procedure will effectively reflect on their legal sphere, while also ensuring their participation in the decisions to be taken.

With respect to this latter aspect, it should be noted, however, that, given the general principle of taxpayer participation in the formation of decisions that concern them, as enshrined in Article 60 of the LGT, the legally relevant interests thereof will, in essence, be adequately safeguarded regardless of the concrete regulation of the tax inspection procedure. Furthermore, in this regard, it should be added that, as a principle, the tax inspection procedure does not have, primarily, a decision-making nature (hence, for example, its final act – the report – is not directly challengeable, since it is not, in itself, injurious), but merely preparatory or ancillary, such that the need to safeguard taxpayer participation in the formation of decisions within its scope will be secondary.

Thus, the primary purpose, always from the perspective of taxpayers, of the regulation of the tax inspection procedure and its observance by the Tax Administration will reside in the fixing of legally necessary conditions so that the legal effects proper to the procedure in question are effectively reflected in the legal sphere of taxpayers, particularly the suspension of the limitation period for the right of the Administration to assess taxes, in accordance with Article 46, No. 1 of the LGT, as well as the subjection of those concerned to the guarantees and prerogatives of tax inspection (Articles 28 and 29 of the RCPITA), and to the application of precautionary measures (Articles 30 and 31 of the RCPITA).

Indeed, the initiation of an external inspection procedure generates various duties of collaboration and submission for the taxpayer, such as, for example, that of providing the elements referred to in lit. c) and d) and that of allowing the inspection in its facilities under the terms described in lit. a) and b), all of No. 2 of Article 28 of the RCPITA.

Moreover, an external inspection procedure, as already seen, has the effect of suspending the running of the limitation period for the right to assess.

Hence, as stated, the normation that disciplines the tax inspection procedure is underpinned, in the first place, by regulating the terms in which it is lawful for the Tax Administration to impose on the taxpayer the duties, submissions and other unfavorable effects inherent in that inspection procedure.

In the case at hand, the norm that the Applicant points to is integrated into the regime of the imposition of notification to the taxpayer of the essential elements of the tax inspection procedure, provided for, in the first place, in Article 49 of the RCPITA, which provides, in the applicable wording, that:

"1 - The external inspection procedure must be notified to the taxpayer or tax obligor with a minimum advance notice of five days relative to its commencement.

2 - The notification provided for in the preceding number is effected by a notice letter drawn up in accordance with the model approved by the director-general of taxes, containing the following elements:

a) Identification of the taxpayer or tax obligor subject to inspection;

b) Scope and extent of the inspection to be carried out.

3 - The notice letter shall contain an annex setting forth the rights, duties and guarantees of taxpayers and other tax obligors in the inspection procedure."

It is in this context that, having fixed the scope of the external inspection procedure in the terms transcribed, should the AT wish to modify the scope thereof, it is bound by the terms of Article 15 invoked by the Applicant.

Now, this normation, as stated, is underpinned, essentially, by allowing the taxpayer to know the scope of the inspection procedure, so as to properly determine the duties and submissions that legally apply to it within the framework thereof, and to produce effects with respect to the limitation period for the right to assess, in accordance with Article 46 of the LGT.

Hence, as stated in the Judgment of TCA-Sul of 09-03-2017, delivered in case 05458/12, "The lack of the prior notification provided for in Article 49 of the RCPIT does not generate the annullability of the procedure decision, such formality being degraded to a mere irregularity, without invalidating effects, if the interested party was given knowledge of the procedure and its object in time to participate therein and if he was given the legal possibility of exercising his right of prior hearing during the inspection procedure."

Also in the judgment of the same Court of 06-04-2017, delivered in case 164/12.0BEBJA, it may be read that:

"4. The notification that permits suspension, in accordance with legal terms (cf. Article 46, No. 1, of the LGT) of the limitation period for assessment is that of the service order or order at the commencement of the external inspection action, to be effected in accordance with Article 51 of the RCPIT, and the signature of such service order may be carried out by the official accounting technician, in accordance with No. 3 of the provision, regardless of whether the taxpayer in question is a natural or legal person.

  1. The lack of mention of the powers under which the service orders were issued, together with the consequent communication of the commencement of external inspection procedure does not generate any invalidity if, despite its lack, it is demonstrated that the interested party had knowledge of the procedure (and its respective object) in time to be able to intervene therein. And if there is an opportunity for notification for the exercise of the right of prior hearing, the vector in question may be immediately satisfied (notwithstanding the lack of communication), if the interested party considers that it has nothing to add to what resulted from the earlier instruction of the procedure. And it could not be otherwise in that procedural formalities are means of ensuring objectives and not purposes in themselves, thus being visualizable as mere irregularities without invalidating effects in accordance with the principle of conservation of the administrative act."

In the same sense, the STA had already decided in its Judgment of 29-06-2016, delivered in case 01095/15, where it reads that "The lack of the prior notification provided for in Article 49 of the RCPIT does not generate the annullability of the procedure decision, such formality being degraded to a mere irregularity, without invalidating effects, if the interested party was given knowledge of the procedure and its object in time to participate therein and if he was given the legal possibility of exercising his right of prior hearing during the inspection procedure."

Now, naturally, if the lack of notification provided for in Article 49 of the RCPITA does not, by itself, generate invalidity of the procedure, then naturally the irregularities or deficiencies in such notification and, consequently, by parity of reasoning, the order referred to in Article 15 of the RCPITA, will likewise not, by itself, entail such invalidity, without prejudice to possible effects on the running of the limitation period for the right to assess (to be discussed below), and the need to ensure the taxpayer's right to participate.

Furthermore, even if it were otherwise, jurisprudential understanding has been that the invalidity of the external inspection procedure do not project, immediately and automatically, onto the validity of the assessment act.

It is true that the Judgment of the STA of 15-06-2016, delivered in case 01101/05, cited by the Applicant, points in a direction contrary to the understanding set forth above. However, given the contradiction between the jurisprudence of that high Court, it falls to the same to overcome it, and it is also certain that, with respect to the present decision, it is considered that there is no contradiction of precedent, inasmuch as in that case a situation existed in which there was no notification of the order that determined the expansion of the object of the inspection procedure, unlike what occurs in the case sub iudice.

Thus, and for the foregoing, it is concluded that, regardless of whether or not the deficiencies of substantiation alleged by the Applicant to the order determining the expansion of the scope of the inspection procedure are verified, given that its right to participate was duly ensured, there will be, on such ground, any illegality in that aforementioned assessment, and the arbitral request should therefore be rejected in this part, without prejudice to what will be decided below in respect of the alleged expiry of the right to assess.

ii.

The Applicant next argues the expiry of the right to assess.

The Applicant contends that "in the case sub judice, as this is an additional assessment of IRC relating to the tax year 2012, the right to perform the act of tax assessment expired on 31 December 2016".

For the Applicant, "The general scope external inspection action – which covers the IRC whose assessment is now being challenged – commenced on 08-03-2017, and was notified to the taxpayer, now applicant, on that same date, that is, on 03-08-2017," and therefore "before 08-03-2017 there was no external inspection action in respect of IRC and, as there was not, obviously the taxpayer, now applicant, was not notified of such fact before its existence".

Thus, the Applicant states, "the rule of suspension of the limitation period, provided for in No. 1 of Article 46 of the LGT, is not applicable to the case sub judice, because on 03-08-2017 the limitation period for assessing IRC relating to the tax year 2012 had already run and, by definition of concept, a rule of suspension of a period only applies to periods still running and not to those already expired".

The Applicant concludes that "as the rule of suspension of the limitation period provided for in Article 46, No. 1 of the LGT is not applicable to the case at hand, the right to perform the act of tax assessment of IRC relating to the tax year 2012 expired on 31 December 2016, as provided for in Article 45, No. 1 of the LGT".

The Respondent, for its part, argues that "with the notification of the Service Order it is that the inspection procedure has its commencement (cf. Article 51 of the RCPITA), which occurred with the signature of Service Order No. OI2016… on 30-11-2016," and therefore "the inspection procedure commenced on 30-11-2016 and ended on 30-05-2017." Consequently, the Respondent continues, "given the duration of the inspection procedure (6 months) and the consequent suspension ope legis of the limitation period, the assessment was effected and notified within the limitation period."

Regarding the expiry of the right to assess, Article 48, No. 1 of the LGT provides that:

"The right to assess taxes expires if the assessment is not validly notified to the taxpayer within four years, when the law does not fix otherwise."

In obedience to this legislative command, and as both Applicant and Respondent agree, it must be concluded that the limitation period at issue, having regard to the nature of the tax in question, expires on 31-12-2016.

Notwithstanding, Article 49, No. 1 of the same statute provides:

"The limitation period is suspended by notification to the taxpayer, in accordance with legal terms, of the service order or order at the commencement of the external inspection action, provided, however, that this effect ceases, counting the period anew from its commencement, should the duration of the external inspection have exceeded six months from the notification."

The question that arises, therefore, is to determine whether, as the Respondent contends, the cause of suspension provided for in the transcribed normative occurred or whether, as the Applicant contends, this is not the case.

The crux of such question, in this case, centers on the circumstance that the external inspection action that was carried out, and that is at the genesis of the IRC assessment at issue, as proven above, commenced with "partial scope (not covering either IRC or VAT), limiting the scope of the inspection action to ascertaining the Applicant's compliance with the tax obligations of withholding at source for IRS, in any distributions of profits made to shareholder B…," with the respective scope only having been expanded to IRC on a date subsequent to the expiry of the limitation period for assessing such tax, stemming from the regime of Article 48/1 of the LGT.

Subject to respect due to other opinions, it is believed that it cannot be considered that an external inspection action is capable of suspending the limitation period for assessing taxes, in accordance with Article 49/1 of the LGT, with respect to taxes that were not covered by the respective scope, as defined in the service order or order that determined the inspection procedure, notified in accordance with the terms referred to in Article 51 of the RCPITA.

Indeed, as written in the Judgment of the STA of 12-10-2016, delivered in case 0879/15, "The starting date (dies a quo) of the six-month period for the conclusion of the inspection procedure is not that of the date of receipt by the taxpayer or tax obligor of the notice letter referred to in Article 49 of the RCPIT, but rather that of the date on which the latter signs or should sign the service order or order that ordered the inspection, of which a copy must be given at the commencement of the inspection, in accordance with Article 51 of the RCPIT, even in the wording of those provisions prior to that given by Law No. 50/2005, of 30 August."

As already stated, the notification referred to has the purpose of bringing about effects in the legal sphere of the taxpayer legally resulting from the initiation of the external inspection action, particularly, and for what is relevant to the case, with respect to the suspension of the limitation period for the right to assess, as extensive jurisprudence demonstrates.

Now, given that a given tax (or tax period) was not included in the scope of the external inspection action by the service order or order that determined the inspection procedure notified to the taxpayer in accordance with the aforementioned Article 51 of the RCPITA, naturally that the notification thus effected will not have the effect of suspending the limitation period with respect to such tax (or tax period), not least because such a situation will be equivalent to the non-notification of the order that determined the inspection procedure.

This understanding, moreover, flows already in some way from the aforementioned Judgment of the STA of 12-10-2016, delivered in case 0879/15, where it may be read that "the question of characterizing the inspection procedure as internal, as the Appellant contends, or as external, as the Appellee contends, is not relevant for the decision of the case, contrary to what would be the case if the expiry of the right to assess and the possible suspension of that period were at issue".

Also a historical look at the regime of expiry of the right to assess confirms the understanding referred to. Indeed, Law No. 15/2001, of 5 June, added to Article 45 of the LGT a No. 5, with the following wording:

"Once the tax inspection procedure is initiated, the right to assess the taxes included in the scope of the inspection expires within a period of six months after the term of the period fixed for its conclusion, without prejudice to the extensions provided for in the law governing that procedure, unless before that period the expiry provided for in the general period fixed in No. 1 occurs."

The aforementioned norm was clear in the sense that the interference of the tax inspection procedure in the limitation period for the right to assess was restricted to the "taxes included in the scope of the inspection," and nothing in the subsequent legislative amendments indicates that a different understanding has been adopted.

On the other hand, consideration of the systematic element will equally ratify the conclusion drawn, since Article 63 of the LGT, in its No. 4, expressly confers relevance to the scope of the properly defined and notified inspection procedure, which concerns, concretely, the tax and tax period, for the purposes of the prohibition on repetition of the inspection procedure, and that, for reasons of coherence, equal relevance should be recognized to such delimitation for the purposes of determining the suspensive effects on the limitation period for assessing taxes.

Concluding thus, that an external inspection action is not capable of suspending the limitation period for assessing taxes, in accordance with Article 49/1 of the LGT, with respect to taxes that were not covered by the respective scope, as defined in the service order or order that determined the inspection procedure, notified in accordance with the terms referred to in Article 51 of the RCPITA, it is concluded in the same way, and absent any legal provision sustaining a different understanding, that it cannot be considered that the expansion of the scope of the external inspection action, in accordance with Article 15 of the RCPITA, is capable of producing retroactive effects, particularly with respect to the suspension of limitation periods for the right to assess tax, that in the meantime have expired.

Thus, the presuppositions of Article 49/1 of the LGT not being met, the limitation period for the right to assess the tax at issue (IRC of 2012) must be deemed to have expired on 01-01-2017.

Given that it is proven that the assessment sub iudice was issued and notified after that date, it must be recognized that the same corresponds to the exercise of a right to assess that had already expired.

At the jurisprudential level, it has been admitted that the expiry of the right to assess can be raised in judicial challenge proceedings and, by way of example, the Judgment of the STA of 19-12-2007, drawn in case No. 0617/07, where the question was raised in the same forum, may be consulted. In the same sense, the Judgments of 12-10-2005, case No. 0633/05, 28-03-2007, case No. 0965/06, and 19-12-2007, case No. 0617/07 may be consulted.

Not having thus the tax in question in the proceeding been assessed, and its notification to the taxpayer effected, within the applicable limitation period, it must therefore be annulled, as illegal, making the arbitral request partly procedent.

C. DECISION

Having examined all matters, this Arbitral Tribunal judges the arbitral request filed to be entirely well-founded and, in consequence:

  • Annuls the Corporate Income Tax (IRC) Assessment Act No. 2017…, relating to the tax year 2012, in the amount of €175,634.90;

  • Condemns the Respondent to pay the costs of the proceeding in the amount of €3,672.00.

D. Case Value

The case value is fixed at €175,634.90, in accordance with Article 97-A, No. 1, lit. a) of the Code of Tax Procedure and Process, applicable by virtue of Article 29, No. 1, lit. a) and b) of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €3,672.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, given that the request was entirely well-founded, in accordance with Articles 12, No. 2 and 22, No. 4, both of the RJAT, and Article 4, No. 4 of the aforementioned Regulation.

Let notification be made.

Lisbon, 8 July 2018

The President Arbiter

(José Pedro Carvalho)

The Arbiter Member

(Raquel Franco)

The Arbiter Member

(Amílcar Jorge Sampaio Nunes)

Frequently Asked Questions

Automatically Created

What is the statute of limitations for IRC tax assessment under Article 45(1) of the Portuguese General Tax Law (LGT)?
Under Article 45(1) of the Portuguese General Tax Law (LGT), the general statute of limitations for IRC tax assessment is four years, counted from the end of the year in which the tax became due. For the 2012 tax year, this means the Tax Authority's right to issue an assessment would generally expire on December 31, 2016. However, this period may be interrupted or suspended under specific circumstances defined in Articles 46 and 49 of the LGT, such as the initiation of an inspection procedure, which suspends the limitation period during the inspection and for six months thereafter.
How does a violation of Article 15 of the RCPIT affect the legality of a tax inspection procedure in Portugal?
A violation of Article 15 of the RCPIT (Tax Inspection Procedures Code) can render a tax inspection procedure illegal and consequently invalidate any resulting tax assessments. Article 15 establishes mandatory procedural requirements for tax inspections, including proper notification, scope definition, and compliance with taxpayer rights. If the Tax Authority expands the scope of an inspection from a specific tax to the general tax situation without proper legal justification or procedural compliance, this may constitute a substantive irregularity affecting the legality of the entire procedure and any assessments issued as a result, potentially leading to their annulment by arbitral tribunals or administrative courts.
Can a taxpayer challenge an IRC tax assessment based on the erroneous quantification of taxable income under Article 18(6) of the IRC Code?
Yes, a taxpayer can challenge an IRC tax assessment based on erroneous quantification of taxable income under Article 18(6) of the IRC Code. This provision establishes the accrual principle for income and expense recognition in Portuguese corporate taxation. Taxpayers may argue that the Tax Authority incorrectly calculated taxable income by failing to properly apply accrual accounting principles, disallowing legitimately accrued expenses, or improperly timing income recognition. Such challenges are common in cases involving estimated expenses, year-end accruals, or financing charges where documentation may be received in a period subsequent to the economic occurrence of the expense, as was the central issue in this case regarding bank financing charges.
What are the grounds for claiming caducidade (expiry) of the right to issue a tax assessment in Portuguese tax law?
The grounds for claiming caducidade (expiry) of the right to issue a tax assessment in Portuguese tax law are primarily governed by Articles 45-49 of the LGT. The main grounds include: (1) expiration of the four-year limitation period from the end of the year when the tax became due; (2) failure by the Tax Authority to issue the assessment within applicable statutory deadlines; (3) improper interruption or suspension of the limitation period; and (4) procedural irregularities that prevent the lawful extension of assessment deadlines. The limitation period can be interrupted by notification of the taxpayer of the tax debt or suspended during inspection procedures and subsequent administrative or judicial proceedings, but such interruptions and suspensions must comply with strict legal requirements to be valid.
How does Article 45(1) of the IRC Code apply to the qualification of taxable facts in corporate income tax disputes?
Article 45(1) of the IRC Code establishes the general rule for determining taxable income and sets forth specific provisions regarding deductibility of expenses. Under paragraph (g), expenses must be properly documented to be deductible. In qualification of taxable facts, the Tax Authority must correctly classify transactions and expenses according to their economic substance and legal nature. If the Tax Authority mischaracterizes a transaction—for example, treating a legitimate business expense as a non-deductible item or vice versa—the taxpayer can challenge this erroneous qualification. The proper application requires analyzing whether expenses meet all deductibility requirements: they must be indispensable or relevant to generating taxable income, properly documented, recorded in the correct tax period under accrual principles, and not fall within the categories of non-deductible expenses enumerated in Article 45.