Process: 568/2017-T

Date: November 30, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitral decision 568/2017-T addressed an IRS additional assessment of €85,267.94 plus compensatory interest of €5,797.02, totaling €91,064.96, for the 2013 tax year. The taxpayers challenged the assessment on three grounds: violation of the right to prior hearing under article 60 of the General Tax Law (LGT), quantification errors violating the presumption of truthfulness and the inquisitorial principle, and lack of substantiation of information from Swiss authorities under the EU Savings Directive. The Tax Authority had received information from Swiss tax authorities regarding undeclared income and notified taxpayers for prior hearing on April 5, 2017, proposing corrections. When taxpayers did not respond, the Authority issued the assessment based on a total correction of €180,345.38. The arbitral tribunal, constituted on January 11, 2018, under RJAT provisions, found that the notification for prior hearing properly indicated the amounts earned by each taxpayer in Switzerland during 2013. The tribunal concluded that any discrepancy between the hearing notification amount and the final assessment amount constituted a manifest clerical error, not a substantive violation of essential formalities. The decision emphasizes that the right to prior hearing is a fundamental procedural guarantee in Portuguese tax law, dispensed only in specific circumstances such as assessments based on taxpayer declarations or objective legal values. The case illustrates the importance of proper notification procedures in tax assessments based on international exchange of information and the application of the inquisitorial principle requiring tax authorities to investigate facts thoroughly.

Full Decision

Arbitral Decision

The arbitrator Paulo Lourenço, designated by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 11 January 2018, decides as follows:

1. Report

A... and B..., married to each other, taxpayers no. ... and..., respectively, resident at Street ..., no...., ..., ...- ...Lisbon, came, pursuant to paragraph a) of article 2(1) and articles 10 and following of Decree-Law no. 10/2011 of 20 January (RJAT), to request the constitution of the Arbitral Tribunal, with a view to the declaration of illegality and annulment of the additional Personal Income Tax (IRS) assessment no. 2017..., in the amount of € 85,267.94 (eighty-five thousand two hundred and sixty-seven euros and ninety-four cents), as well as the assessment of compensatory interest no. 2017..., in the amount of € 5,797.02 (five thousand seven hundred and ninety-seven euros and two cents), all in a total of € 91,064.96 (ninety-one thousand and sixty-four euros and ninety-six cents). They further request, as a consequence of the aforementioned annulment, that the Tax Authority be ordered to reimburse the Claimants in the amount of € 56,251.95 (fifty-six thousand two hundred and fifty-one euros and ninety-five cents), with compensatory interest at the current legal rate and also regarding procedural costs.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 30 October 2017.

Pursuant to the provisions of paragraph a) of article 6(2) and paragraph b) of article 11(1) of RJAT, the Ethics Council designated the undersigned as arbitrator, who communicated acceptance of the charge within the applicable period.

On 21 December 2017, the Parties were notified and did not manifest any intention to refuse the designation of the arbitrator, in accordance with the combined provisions of article 11(1) paragraphs a) and b) of RJAT and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provisions of paragraph c) of article 11(1) of RJAT, the arbitral tribunal was constituted on 11 January 2018.

The Tax and Customs Authority responded on 27 February 2018 and the meeting provided for in article 18 of RJAT was held on 19 October 2018, taking into account the need to define procedural arrangements, given the successive submission of requests by the Claimants and the Respondent.

The Parties presented arguments.

The arbitral tribunal was duly constituted.

The parties possess legal personality and capacity, are legitimate (articles 4 and 10(2) of the same act and article 1 of Ordinance no. 112-A/2011 of 22 March) and are duly represented.

The proceedings do not suffer from any nullities.

2. Factual Matters

2.1. Established Facts

The following facts are considered established:

i) On 30 May 2014, the Claimants filed their Personal Income Tax (IRS) Form 3 Tax Return for the year 2013.

ii) On 22 October 2014, the Claimants filed a replacement Personal Income Tax (IRS) Form 3 Tax Return, with a view to declaring new income.

iii) As a consequence, the Claimants were notified of Personal Income Tax assessments no. 2014 ... and 2015... in the total amount of EUR 29,015.99.

iv) Following the receipt by the Respondent of information provided by the Swiss tax authorities, pursuant to Council Directive no. 2003/48/CE of 3 June 2003 ("Savings Directive"), the Claimants were notified to exercise the right of prior hearing, through office no. ..., of 5 April 2017, from the Finance Department of Lisbon, which contained a proposal for correction of the income of each of the Claimants, relating to the year 2013.

v) The Claimants did not exercise the right of prior hearing, which is why the official amendment of the income declared by the Claimants was carried out.

vi) Through office no. ..., of 9 June 2017, from the Finance Department of Lisbon, the Claimants were notified of a correction in the total amount of € 180,345.38.

vii) On 30 June 2017, the Claimants were notified:

i) Of the additional Personal Income Tax assessment no. 2017..., of 16 June 2017, in the total amount of € 85,267.94;

ii) Of the assessment of compensatory interest no. 2017..., of 21 June 2017, in the total amount of € 5,797.02;

iii) Of the statement of account settlement no. 2017..., of 21 June 2017, from which it results that the total amount of € 56,251.95 is due, corresponding to an amount of € 50,454.93 to tax and € 5,797.02 to compensatory interest.

viii) On 28 July 2017, the Claimants voluntarily paid the amount of tax and compensatory interest, in the total amount of € 56,251.95.

2.2. Unestablished Facts

There are no unestablished facts.

2.3. Justification for the Determination of Factual Matters

The facts were established on the basis of documents attached with the request for arbitral pronouncement and in the administrative proceedings.

3. Legal Matters

The issues to be decided in the course of these proceedings are as follows:

  1. The possible failure to grant the right of prior hearing referred to in article 60 of the General Tax Law.

  2. The error in quantification by violation of the presumption of truthfulness of the declarations presented by the Claimants and by violation of the inquisitorial principle.

  3. The lack of substantiation of the information provided by the Swiss authorities.

Given this, the legality of the challenged acts must be assessed as they were carried out, with the justification used in them, it being irrelevant other possible justifications that could support other acts, with decisional content wholly or partially coinciding with the act carried out. Thus, justifications invoked a posteriori, after the conclusion of the tax procedure in which the act whose declaration of illegality is requested was carried out, are irrelevant.

The Claimants contend that the Tax Authority did not proceed with their notification to rule, if they saw fit, on the amounts stated in the official rectification it made based on the information received from the Swiss authorities, the total amount of which rises to € 180,345.38.

The Tax Authority, for its part, contends that the notification to exercise the right of prior hearing contains, in the part concerning substantiation, the indication of the amounts earned by each of the Claimants and that the reference to a correction with a value lower than that which served as the basis for the assessment constitutes a manifest clerical error.

Article 60(1) paragraph a) and article 60(2) of the General Tax Law establish that the participation of taxpayers in the formation of decisions concerning them may be carried out, whenever the law does not provide otherwise, through the right of prior hearing before assessment, with hearing being dispensed with in the event of assessment being carried out on the basis of a declaration by the taxpayer or the decision on the complaint, appeal, appeal or petition being favorable to him, as well as in the event of assessment being carried out officially, based on objective values provided for in the law, provided that the taxpayer has been notified to submit the missing declaration without having done so. From the analysis of the legal provisions mentioned above, it appears evident that the Tax Authority was not dispensed from notifying the Claimants before the implementation of the assessment act, which means that it is only necessary to verify whether the notification carried out complies or not with the legally required requirements.

Having verified the relevant facts, it appears possible to reach the same conclusion as reached by the Tax Authority.

In fact, the notification carried out contains the express indication of the amounts earned in Switzerland in 2013, by each of the Claimants, based on the information provided by the Swiss tax authorities.

Moreover, it should even be said that the Claimants, upon learning of the assessment made based on the amount of € 180,345.38, would not fail to attach to the request for constitution of the arbitral tribunal the documents evidencing that the income earned was € 9,161.78 by each of them and not € 180,345.38.

In fact, it was the Claimants themselves who, upon detecting the error, took the initiative to present a replacement declaration to include the interest income from Switzerland, which means that they had in their possession documentation supporting such amounts and would not fail to use it to contradict the amount of income that was used officially by the Tax Authority to carry out the official assessment. Even if they based their claim on the violation of essential formalities, they would not fail to use equally all the means of proof in their power, in order to justify that the amounts received by them were manifestly lower than those revealed by the Tax Authority.

Now, as the notification contains, in the part concerning substantiation, the indication that each of the Claimants earned, in the year 2013, interest income from Switzerland, in the total amount of € 90,172.69 by each of them, it is easy to conclude that the indication of the value corresponding to € 9,161.78 by each of them constitutes a clerical error that does not affect the assessment act nor calls into question any rights of the Claimants who, as mentioned, had knowledge that the value that would be used in the assessment of the tax would not be the one expressly indicated, due to an oversight, but the one contained in the substantiation and that had been indicated by the Swiss tax authorities. Even if the notification proves to be contradictory in its entire content, due to manifest divergence of values, the truth is that the Claimants, in order to dispel all doubts, could always have requested, pursuant to the provisions of article 37 of the Tax Procedure Code and Tax Process, notification of the omitted requirements or the passing of a certificate containing them, free of any payment.

Additionally, with the use of the aforementioned faculty, the periods for complaint, appeal, challenge or other legal remedy would be counted only from the notification or delivery of the requested certificate.

Moreover, the Claimants, even arguing that they were not afforded the opportunity to rule on the amount corresponding to € 90,172.69 by each of them, would not fail to use in their favor the documentation that supported the replacement declaration presented by them, so as to demonstrate conclusively that, without conceding as to the right of prior hearing, they had not earned the income officially imputed by the Tax Authority.

All considered, it can then be concluded that there was no violation of the right of prior hearing and, even if such violation were eventually admitted, the Claimants could and should have safeguarded their legitimate interests through the unequivocal demonstration of the income earned or by further demanding from the Tax Authority notification of the requirements which, in their view, had been omitted.

Regarding the presumption of truthfulness of the declarations presented by the taxpayers, it will be said that, as it embodies a fundamental principle of the tax legal order, it does not appear to have been put in question by the Tax Authority in the specific case at hand.

In fact, as the Tax Authority correctly states, article 76(1) of the General Tax Law provides that information provided by the tax inspection constitutes evidence when substantiated and based on objective criteria, in accordance with the law. Additionally, pursuant to article 76(4) of the same provision, information provided by foreign tax administrations pursuant to international conventions on mutual assistance to which the Portuguese State is bound are covered by article 76(1), without prejudice to proof to the contrary by the taxpayer or interested party.

Having regard to the content of the norms mentioned, it can be concluded that the information provided by the Swiss authorities is sufficient to place the declarations presented by the Claimants in question and to transfer to them the burden of demonstrating that the values revealed do not correspond to those actually earned.

As previously mentioned, the Claimants could and should have demonstrated, by means of the documentation they received from the bank, that the income actually earned was substantially lower than what was communicated by the Swiss tax authorities, so that, having not done so, they failed to remove the public faith from the information provided by the Swiss tax authorities.

Given this, it is not apparent that the Tax Authority was required to attach any other elements or carry out any other acts, so that there is no question of violation of the inquisitorial principle sustained by the Claimants.

The exercise of any other activity capable of, being incumbent on them, by way of the reversal of the burden to the taxpayers of demonstrating the information, naturally having any valid argument that could put in question such principle, the truth is that it does not appear that the Claimants have reason.

As there is no legal basis supporting the illegality of the assessments, the arguments invoked to call in question the compensatory interest are without foundation, which for this reason are shown to be due, there being also no valid reason that could determine the reimbursement of the tax paid.

4. Decision

In these terms, it is decided:

  1. To judge the request for arbitral pronouncement unfounded, the additional Personal Income Tax assessment no. 2017..., of 16 June 2017, in the total amount of € 85,267.94 remaining valid;

  2. To judge the request for arbitral pronouncement unfounded, the assessment of compensatory interest no. 2017..., of 21 June 2017, in the total amount of € 5,797.02 remaining equally valid;

  3. To judge equally unfounded, as a consequence of what was previously decided, the request for reimbursement of the amount corresponding to € 56,251.95.

5. Value of the Proceedings

In accordance with the provisions of article 306(2) of CPC, 97-A(1) paragraph a) of CPPT and 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are fixed at the value of € 56,251.95 (fifty-six thousand two hundred and fifty-one euros and ninety-five cents).

6. Costs

Pursuant to article 22(4) of RJAT, the amount of costs is fixed at € 2,142.00 (two thousand one hundred and forty-two euros) in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimants.

Lisbon, 30 November 2018

The Arbitrator

(Paulo Lourenço)

Frequently Asked Questions

Automatically Created

What essential formalities were violated in the IRS additional tax assessment in CAAD case 568/2017-T?
In case 568/2017-T, the taxpayers alleged violation of the right to prior hearing (direito de audição prévia) under article 60 of the General Tax Law. However, the CAAD tribunal found no essential formalities were violated. The Tax Authority properly notified taxpayers on April 5, 2017, providing the amounts earned in Switzerland by each taxpayer in 2013 based on information from Swiss authorities under the EU Savings Directive. The discrepancy between the notification amount and final assessment was deemed a manifest clerical error, not a substantive procedural defect. The notification allowed taxpayers meaningful opportunity to respond before the assessment was finalized.
How does the right to a prior hearing (direito de audição) affect the legality of an IRS tax assessment in Portugal?
The right to prior hearing (direito de audição) is fundamental to the legality of IRS assessments in Portugal under article 60 of the General Tax Law (LGT). This procedural guarantee requires the Tax Authority to notify taxpayers before issuing assessments, allowing them to present their position on proposed corrections. The right is dispensed only in specific cases: assessments based on taxpayer declarations, decisions favorable to taxpayers, or official assessments based on objective legal values when taxpayers failed to submit required declarations after notification. In CAAD case 568/2017-T, proper exercise of this right was essential for assessment validity, and the tribunal confirmed the notification met legal requirements by clearly indicating the proposed income corrections.
What is the inquisitorial principle (princípio do inquisitório) and how does it apply to Portuguese tax quantification errors?
The inquisitorial principle (princípio do inquisitório) in Portuguese tax law requires tax authorities to actively investigate and determine facts, not relying solely on taxpayer declarations. Under this principle, authorities must pursue truth and ensure correct tax quantification. In case 568/2017-T, taxpayers alleged the Tax Authority violated this principle and the presumption of truthfulness of their declarations. However, when authorities receive credible information from foreign tax administrations under international cooperation instruments like the EU Savings Directive, they have a duty to investigate and correct undeclared income. The principle empowers authorities to make official corrections when taxpayers fail to declare income fully, particularly when objective evidence contradicts filed returns.
Can taxpayers claim reimbursement and compensatory interest after an IRS assessment is annulled by the CAAD arbitral tribunal?
Yes, under Portuguese tax arbitration law, taxpayers can claim reimbursement and compensatory interest after successful annulment of IRS assessments. In case 568/2017-T, the taxpayers requested reimbursement of €56,251.95 paid voluntarily on July 28, 2017, plus compensatory interest at the legal rate and procedural costs. Article 43 of the General Tax Law (LGT) establishes the right to compensatory interest when taxpayers have paid amounts subsequently found to be unduly collected. The RJAT (Decree-Law 10/2011) grants arbitral tribunals jurisdiction to order such reimbursements as a consequence of declaring assessments illegal. The compensatory interest compensates taxpayers for the unavailability of funds improperly collected, calculated from payment date until reimbursement at legally established rates.
What are the grounds for declaring an IRS additional assessment illegal under Portuguese tax arbitration law (RJAT)?
Under RJAT (Regime Jurídico da Arbitragem Tributária), grounds for declaring IRS assessments illegal include: (1) violation of essential formalities, particularly the right to prior hearing under article 60 LGT; (2) errors in legal application or fact determination; (3) quantification errors violating the inquisitorial principle or presumption of declaration truthfulness; (4) lack of proper substantiation; (5) violation of fundamental procedural guarantees. Article 2 and article 10 of RJAT establish taxpayer standing to challenge assessments and compensatory interest determinations. The arbitral tribunal must assess legality based on justifications used in the original acts, not post-hoc rationalizations. In case 568/2017-T, taxpayers invoked all these grounds, claiming procedural violations, quantification errors, and insufficient substantiation of Swiss authority information, though the tribunal ultimately rejected these claims after finding proper notification and substantiation.