IUC Subjective Incidence: Leasing Company Tax Liability Presumption – CAAD 58/2014-T

ARBITRAL DECISION

Claimant: A..., S.A.

Respondent: Tax and Customs Authority

The Arbitrator Judge Francisco de Carvalho Furtado, appointed by the Deontological Council of the Administrative Arbitration Centre (CAAD), to form the Arbitral Tribunal constituted on 28 March 2014, decides as follows:

A) Report

1. On 25 January 2014, A..., S.A., taxpayer no. ..., hereinafter identified as Claimant, submitted a request for arbitral pronouncement, pursuant to the provisions of articles 2, no. 1, paragraph a) and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter designated RJAT), in conjunction with paragraph a) of article 99 and paragraph d) of no. 1 of article 102 of the Code of Tax Procedure and Process (CPPT), applicable ex vi article 10, no. 1, paragraph a) of Decree-Law no. 10/2011, of 20 January.

2. With the aforementioned request for arbitral pronouncement the Claimant seeks for the Arbitral Tribunal to declare the illegality of the assessment acts for Unique Circulation Tax for the years 2009, 2010, 2011 and 2012, better identified in the Initial Petition.

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and was notified to the Tax and Customs Authority (hereinafter identified as Respondent).

4. The Claimant did not appoint an arbitrator, so, pursuant to the provision of article 6, no. 1, of RJAT, the undersigned was appointed by the President of the Deontological Council of CAAD to integrate the present Singular Arbitral Tribunal, with the appointment having been accepted pursuant to legal provisions. The Tribunal was constituted, pursuant to the provision of article 11 of RJAT, on 28 March 2014.

5. On 7 May 2014, the Respondent submitted its Reply.

6. Through requests submitted following the arbitral order of 16 May 2014, the parties declared to waive the holding of the meeting referred to in article 18 of RJAT.

7. On 28 July 2014, the Claimant submitted its arguments.

8. On 8 September 2014, the Respondent submitted its arguments.

The Claimant supports its request, in summary, as follows:

• The Claimant is a credit institution;

• Among its areas of activity, financing to the automotive sector assumes special relevance;

• The Claimant enters into – among others – financial leasing contracts intended for the acquisition, by companies and individuals, of motor vehicles;

• The contracts entered into generally follow a common script, typical of this type of financing: the Claimant, after being contacted by the customer – who, at that stage, has already chosen the type of vehicle they wish to acquire, its characteristics (make, model, accessories, etc.), and even its price – acquires the vehicle from the supplier indicated to it by the customer;

• It then proceeds to its delivery to the said customer – who thus assumes the quality of lessee and maintains the use and enjoyment of the vehicle during the period in which the contract is in force;

• All assessment acts whose declaration of illegality is sought refer to vehicles in relation to which a leasing contract was entered into and relate to the period in which that contract was in force;

• The Claimant paid the tax assessed in each of the assessment acts whose annulment is sought;

• The tax administration knew – or ought to have known, given that financial leasing is subject to registration at the Commercial Registry – that, over these particular motor vehicles, financial leasing contracts were in effect, and knew the identity of the lessees;

• The IUC is the tax that aims to impose on taxpayers the environmental and road cost associated with them, in a logic of equivalence and tax equality (article 1 of the IUC Code).

• Underlying this rule of taxable scope is the assumption of the potential for use of motor vehicles, that is the taxation of whoever has at their disposal the right to use a vehicle;

• In the majority of cases, it will be the owner of the automobile;

• The situation is different, however, if the vehicle is systematically used – and, even more so, by contractual and legal requirement – by someone other than its owner;

• That is: if the Tax Authority has knowledge – or ought to have – that the potential use of the vehicle belongs not to its owner, but to a third entity;

• And not only that: if the Tax Authority knows – or ought to know – that the owner, by force of the contract it entered into, is even prohibited from using the vehicle, since it attributed the right to its exclusive use to such third entity;

• In those cases, it makes little sense, in light of the teleology that permeates this tax, that the owner be burdened with the obligation to pay the IUC;

• Thus, after establishing the general rule that the obligation to pay tax lies with the owner, the fiscal legislator made them equivalent, immediately thereafter, among others, to financial lessees;

• The lessee is equated with the owner of the vehicle for the purposes of no. 1 of article 3 of the IUC Code, being considered a passive subject of the IUC;

• In the financial leasing contract, the right to use the asset is withdrawn from its respective owner – who, in this regard, is assumed as lessor – to be integrated in the sphere of the lessee;

• Pursuant to no. 2 of article 3 of the IUC Code, with the lessee having the exclusive use of the motor vehicle which is the subject of the contract, the obligation to pay the tax also falls to the lessee;

• In the present case all motor vehicles were already in the possession of the respective lessees by the end of the month of registration or, in the case of the year of vehicle registration, ninety days after the date of registration – without exception, therefore it should be concluded that responsibility for the assessment of the tax belongs to the lessees;

• Equally, there is no question of joint and several liability, as such situation is not provided for in the Law;

• It concludes by also requesting the condemnation of the Respondent to reimburse the tax paid and to pay compensatory interest.

In its Reply, the Respondent invoked, in summary, the following:

1. The interpretation and application that the Claimant seeks to uphold does not consider the systemic element, violating the unity of the regime enshrined throughout the IUC Code;

2. The legislator established in article 3, no. 1, of the IUC Code who are the passive subjects of this tax not using the term "are presumed", but "are considered";

3. Thus, it will be imperative to conclude that the legislator expressly and intentionally established upon whom the tax is subjectively incumbent, that is the person in whose name the vehicles are registered;

4. It is not a presumption, but an option of legislative policy;

5. Similarly, it is necessary to consider the fact that article 6, no. 1, of the IUC Code determines that the taxable event is ownership as certified by the registration or record in national territory;

6. From the articulation between subjective scope and the taxable event it results that only legal situations that are subject to registration give rise to the birth of the tax obligation;

7. There is a direct relationship between the moment from which the tax obligation is constituted and the issuance of the registration certificate;

8. The tax administration assesses the tax based on public elements contained in the Vehicle Registration;

9. The ratio of the regime points to the intention of the legislator having been to create a Unique Circulation Tax based on the taxation of the vehicle owner, as stated in the vehicle registration;

10. Indeed, the IUC Code proceeded to a reform of the regime of vehicle taxation in Portugal, with the passive subject of the tax becoming the owner appearing in the property register, irrespective of the circulation of vehicles on public roads;

11. The IUC is now owed by persons appearing in the register as owners of the vehicles;

12. This ratio results from the parliamentary debates surrounding the approval of Decree-Law no. 20/2008, of 31 January;

13. The Claimant did not demonstrate having complied with the provision of article 19 of the IUC Code;

14. The application of no. 2 of article 3 of the IUC Code is dependent on compliance with the provision of article 19 of the same Code;

15. The interpretation of article 3 of the IUC Code that the Claimant wishes to uphold is offensive to the fundamental principle of good faith, legal security and proportionality, which should inform any legal relationship;

16. Equally, such interpretation by the Claimant is also offensive to the principle of efficiency of the tax system;

17. The prerequisites are not met for the Respondent to be condemned to pay compensatory interest;

18. Even if the Arbitral Tribunal decides in favour of the illegality of the assessments in question, the arbitration costs should be borne by the Claimant.

B) Object of the Arbitral Pronouncement

The following questions are placed before the Tribunal, as described above:

a) Existing a financial leasing contract at the moment the taxable event occurs, who, considering the provisions of nos. 1 and 2 of article 3 of the IUC Code, should be considered the passive subject of this tax: the owners of the vehicles considered as such the natural or legal persons, of public or private law, in whose name the same are registered, or the financial lessees?

b) Are the prerequisites met for condemning the Respondent to pay compensatory interest?

C) Matters of Fact

C.1 – Established Facts

The following facts are considered as established with relevance to the decision, based on the documentary evidence provided to the case file:

a) The Claimant was notified of the 189 IUC assessment acts attached to the initial request (see assessment acts attached to the Initial Petition and identified in Annex A thereto);

b) In relation to the vehicles on which the tax was assessed a contract called "financial leasing contract" was entered into (see contracts attached to the Initial Petition);

c) Each of the financial leasing contracts was in force during each of the tax periods assessed (see contracts attached to the Initial Petition);

d) The Claimant promoted the payment of the IUC assessment acts identified in a) (see assessment acts attached to the initial request and identified in Annex A thereto);

As for the established facts, the conviction of the Tribunal was based on the documentary evidence referred to, attached to the case file.

C.2 – Unestablished Facts

a) The Claimant, in relation to each of the contracts called "financial leasing contract", communicated, pursuant to article 19 of the IUC Code, the data relating to the tax identification of the users of the leased vehicles;

b) No other facts that could affect the decision on the merits were established, given the possible legal solutions, and which therefore should be registered as unestablished.

D) Sanative Decision

The Tribunal is competent and is regularly constituted, pursuant to articles 2, no. 1, paragraph a), 5 and 6, all of RJAT. The parties have legal personality and capacity, are legitimate and are represented, pursuant to articles 4 and 10 of RJAT and article 1 of Decree no. 112-A/2011, of 22 March. There are no nullities and preliminary questions affecting the entire process, therefore the merits of the request must now be decided.

E) On the Law

Given what has been set out above, it is important, first and foremost, to interpret article 3, nos. 1 and 2, of the IUC Code. Indeed, the source of discord between the Claimant and the Respondent is essentially linked to the fact that the Claimant considers that from the said legal provision it results that the passive subject of the tax, in cases where a financial leasing contract is in force, is the lessee and the Respondent considers, for its part, that the passive subject is the person in whose name the vehicle is registered with the competent Registry.

The legal provision in question has the following wording:

"ARTICLE 3

SUBJECTIVE SCOPE

1 – Passive subjects of the tax are the owners of vehicles, considered as such the natural or legal persons, of public or private law, in whose name the same are registered.

2 – Financial lessees, reserve of ownership acquirers, as well as other holders of purchase option rights by force of the leasing contract are equated with owners".

It is important, therefore, to determine, also in light of articles 11 of the General Tax Law and 9 of the Civil Code, the scope of the aforementioned rule.

In the first place, it seems to us that no. 1 of article 3 of the IUC Code establishes a presumption: that the owner of the vehicle is the person in whose name it is registered. The notion of presumption is enshrined in article 349 of the Civil Code, which defines it as "inferences that the law or the judge draws from a known fact to form an unknown fact." Now, the use of presumptions is not unknown within tax law insofar as they can confer greater practicality to the system and, likewise, be instruments for combating fraud and evasion. Indeed, "faced with doubt about certain facts or situation to be regulated, the legal rule assumes that these contours are those of another fact or situations foreseen in another legal rule" (Sousa, Marcelo Rebelo de; Galvão, Sofia, Introduction to the Study of Law, Lex, 2000, Lisbon, Page 241).

On the other hand, it is also important to note that presumptions can be either explicit or implicit. The former are "revealed by the use of the expression 'are presumed' or similar (...)" (Sousa, Jorge Lopes de, Code of Tax Procedure and Process, Vol. I 6th Edition, Áreas Editoras, 2011, Lisbon, page 589).

By contrast with that category of presumptions, there are implicit presumptions, that is, those that do not result directly and expressly from the terminology used by the legislator. Now, as well referred to in the learned arbitral decision – to which adherence is given - rendered in Case no. 14/2013-T: "Examining the Portuguese legal system, we find countless rules that enshrine presumptions using the verb consider, many of which are employed in the gerund ('considering' or even 'being considered'). Examples thereof are the rules listed below: In the Civil Code, among others, articles 314, 369 no. 2, 374 no. 1, 376 no. 2, 1629. In the Code of Industrial Property, we cite by way of example article 98 where the term 'considering' is also used in a presumptive context. Also in the tax legal system can be found the verb 'consider', namely the term 'is considered' with a presumptive meaning. As explained by Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, in the annotation no. 3 to article 73 of the GTL 'presumptions in matters of tax scope can be explicit, revealed by the use of the expression is presumed or similar (...). However, presumptions can also be implicit in scope norms, namely objective scope, when certain values of movable or immovable property are considered to constitute taxable matter, in situations where it is not impractical to ascertain the real value' (emphasis ours), then giving some examples of norms in which the verb 'consider' is used as in no. 2 of article 21 of the IRC Code happens, in establishing that 'for purposes of determining taxable profit, the value of acquisition of patrimony increases obtained free of charge is considered to be its market value, not being able to be less than that resulting from the application of the rules for determining the taxable value provided for in the Stamp Duty Code'. Taking into account that the legal system should form a coherent whole, the examples above referred to, accompanied by the doctrine and jurisprudence indicated, by appeal to the systemic element (context of the law and parallel places), authorize the conclusion that it is not only when the verb 'presume' is used that we are faced with a presumption, but also the use of other terms or expressions can serve as the basis for presumptions, namely the term 'is considered', thus showing that the condition established in no. 2 of article 9 of the CC is met, which requires that the legislative thought has in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed." (in www.caad.pt).

Indeed, assuming that one is unaware of the real situation to be regulated (the holder of the actual use of the vehicle equated with owner) resort is had to another situation already known to the Law (the registration). It is important to note here that, as constantly referred to in jurisprudence, registration is not constitutive of the right but merely declarative. It is, therefore, a true presumption and not a fiction (which could justify a legislative policy choice) insofar as in the latter case the law treats differently facts that are known to be distinct. In the present case, and as results from the first part of no. 1 of article 3 of the IUC Code the intention is to tax the real owner or equated owner (unknown fact) and, in the second part of the rule, a relationship is established with another fact of law, the registration (known fact).

And it is understandable that the Legislator followed this course, for reasons related to the practicability and management of the tax, and even the prevention of evasion and fraud, the tax should be assessed based on data known to the active subject of the tax relationship. However, these reasons of practicability are not absolute and cannot override other principles of much higher value to the law, namely the Constitutional, such as that of equality. Indeed, the Constitutional Court has come to consider that it is not constitutionally prohibited to use presumptions in tax law, provided that the same can be rebutted (see Judgment of the Constitutional Court no. 348/97, published in Diário da República, II Series, of 25 July 1997 and Judgment no. 211/2003, of 28 April 2003). That is, the Constitutional Court considers in its Jurisprudence that, although it is legitimate for the tax legislator to resort to presumptions, it is constitutionally limited by the principles of equality, of taxpaying capacity and of fair distribution of income and wealth (which is the basic objective of the tax system, as inferred from article 103, no. 1, of the Constitution of the Portuguese Republic) and it is prohibited from using absolute presumptions. Indeed, "the establishment of presumptions with the objective of conferring certainty and simplicity to fiscal relationships, of permitting prompt regular collection of taxes and of preventing evasion and fraud (...) must be compatible with the principle in question (of tax equality) which passes, both through the constitutional illegitimacy of absolute presumptions insofar as they prevent the taxpayer from proving the non-existence of the taxpaying capacity targeted in the respective Law, and through the requirement of adequacy of relative presumptions to present the economic assumption taken into account"» (...) «Presumptions must be supported by concretely positive elements that rationally justify them and admit proof to the contrary, so that the tax is linked to a certain, proven and not merely probable economic assumption»" (Judgment of the Constitutional Court no. 348/1997, citing Casalta Nabais, Fiscal Contracts (Reflections on their Admissibility), page 279). Thus, and as sustained by this latter Author in the Work cited, pages 265 et seq., "Taxation in conformity with the principle of taxpaying capacity will imply the existence and maintenance of an actual connection between the tax payment and the economic assumption selected as the object of the tax (...)"

In consonance with the learned jurisprudence of the Constitutional Court and, likewise, the most reputed doctrine, article 73 of the General Tax Law expressly determines that "the presumptions enshrined in the rules of tax scope always admit proof to the contrary"

In sum: article 3, no. 1, of the IUC Code establishes a presumption as regards the subjective scope of the tax, which is rebuttable. This is the only interpretation that, moreover, permits safeguarding the constitutional principles indicated by the tax administration in its Defence which, contrary to what it sustains, would be prejudiced and offended by the acceptance of the understanding set forth by the Respondent in its procedural documents.

As regards no. 2 of the aforementioned legal provision, it is verified that it expressly equates lessees with owners. That is, in cases where a financial leasing contract is in force, the passive subject of tax is the lessee while equated with owner. In view of the established facts it is concluded that the Claimant, through the attachment of the financial leasing contracts, succeeded in rebutting the presumption established in article 3 of the IUC Code.

In view of the conclusion reached, it is important to analyse a second question which, indeed, the tax administration raises in its Defence – whether the fact that there is no proof of compliance with the obligation referred to in article 19 of the IUC Code is prohibitive of the setting aside of the presumption. Indeed, since it is a presumption (as is now established), the beneficiary thereof (the Respondent) is excused from proving the fact to which it leads, it being incumbent on the Claimant to prove the contrary. This is the regime that results from article 350 of the Civil Code.

The Respondent sustains that the consequence of such non-compliance will be that it cannot benefit from the provision of no. 2 of article 3 of the IUC Code. We cannot, however, follow such understanding.

There are no doubts that the basic principle of our tax-legal system is that of taxation in accordance with substantive justice. This follows, without margin for doubt, from the provision of articles 103 and 104 of the Constitution of the Portuguese Republic. In the same way, article 266 of the Constitution of the Portuguese Republic, in determining that administrative activity must, above all, aim at the pursuit of public interest and the justice and proportionality of measures, demonstrates that the ultimate end is substantive truth. Let us see, then, how the tax system is structured, notably as regards declarative obligations. Having analyzed the various tax codes it is verified that the rule is that even the declarations through which the tax administration determines the taxable matter of a tax can be presented outside their respective legal deadline or replaced. And the consequence, even in these cases where the taxpayer does not declare its taxable matter, or in the letter of the law when there are errors or omissions in the declarations that must be presented so that the tax administration specifically determining, evaluates or verifies the taxable matter is the, eventual, application of a fine in the context of a breach of regulations procedure if there is legal provision for this. That is, considering the principle of substantive truth and the pursuit of public interest, the law penalizes the taxpayer for the omission, but for that reason does not cloud the substantive truth of the concrete case. It is, therefore, evident, that the tax-legal system is, in its entirety, designed so that the untimely non-compliance with a declarative obligation does not have drastic, definitive, and, possibly, disproportionate consequences. Thus, it seems fitting that it be concluded that the consequence arising from non-compliance with the provision of article 19 of the IUC Code cannot be that invoked by the Respondent but, at most, if the conduct is classified, the application of administrative sanction.

There is, still, another circumstance that seems to prevent that non-compliance with the accessory obligation provided for in article 19 of the IUC Code has the consequence sought by the Respondent. As Menezes Cordeiro teaches (Franco, João Melo; Martins, Herlander Antunes, Dictionary of Legal Concepts and Principles, Almedina, 1995, page 489) non-compliance is the non-performance of the obligation as owed. Non-compliance cannot be considered as mere absence of conduct. Now, having analyzed the relevant legal rule, it is verified that therefrom does not result any deadline for compliance, therefore the same seems to lack regulation and is not self-sufficient as sustained by the Respondent. For this reason also cannot the consequences advocated by the Respondent be extracted.

Thus, given that at the date of the occurrence of the taxable event a financial leasing contract was in force having as its object the vehicle underlying each one of the assessments, the passive subject of the tax is not the lessor but rather, in light of nos. 1 and 2 of article 3 of the IUC Code, the lessee, and the assessment acts in question are illegal, and should be annulled accordingly.

In this manner, aiming, as we have already seen, the IUC to be subjectively incident upon the real owner (to whom the lessee is expressly equated) of the vehicle in each year and in the month of registration (see articles 3, 4 and 6 of the IUC Code), it is inescapable that it be concluded that the said assessment acts violate the provision of the said legal dispositions and should be declared illegal and annulled, because performed in violation of the rules and legal principles in force (see article 135 of the Code of Administrative Procedure).

Finally, the Claimant requests the reimbursement of the amounts paid, plus compensatory interest, pursuant to the provision of article 43 of the General Tax Law. Against this claim the Respondent objects, not only because it considers that the assessment acts performed are legal, but also because no fault can be imputed to it given the non-compliance with the accessory obligation by the Claimant. Having analyzed the facts, it is verified that it is not demonstrated that the Claimant communicated to the tax administration the data relative to the tax identification of the lessees. Equally, the Claimant does not allege nor demonstrate that in a moment prior to the performance of each one of the assessment acts sub judice it transmitted to the tax administration the elements that would permit concluding that the passive subject of tax by reference to each one of the assessment acts would be the respective lessees. Let us see then:

Article 43 of the General Tax Law determines that the taxpayer will have the right to be compensated through compensatory interest whenever the wrongful payment of tax is imputable to error of the services.

"Error imputable to the services that operated the assessment is demonstrated when they proceed to amicable reclamation or challenge of that same assessment and the error is not imputable to the taxpayer (for example, there will be annulment due to error imputable to the taxpayer when the assessment is based on erroneous factual assumptions, but the error is based on an incorrect indication in the declaration presented by the taxpayer)." (Campos, Diogo Leite de; Rodrigues, Benjamim Silva, Sousa, Jorge Lopes de, General Tax Law, Annotated and Commented, 4th Ed. 2012 Encontro da Escrita, Lisbon, page 342).

In the case at hand, as already determined, the IUC assessment acts are illegal, because performed with error and violation of applicable rules and legal principles. However, considering the facts known in the case file it is not demonstrated that such error is imputable to the Respondent, given that it is unknown whether the Claimant transmitted the elements of tax identification of the lessees. Thus, in the present case, there is not verified a culpable action by the Respondent, and therefore the prerequisites provided for in article 43 of the GTL are not met for the Claimant to be recognized the right to compensatory interest. It is judged unmeritorious, in this part, the request formulated.

Decision

Given the foregoing, this Arbitral Tribunal decides to judge the request partially meritorious and consequently:

a) Declare the illegality of the IUC assessment acts and compensatory interest contested, annulling them;

b) Judge unmeritorious the request for condemnation of the Respondent to pay compensatory interest;

c) Condemn the Claimant and the Respondent to pay the costs in proportion to their failure, which is fixed at 5% for the Claimant and 95% for the Respondent.

The value of the action is fixed at € 17,807.55 (seventeen thousand, eight hundred and seven euros and fifty-five cents), pursuant to the provision of article 97-A, no. 1, paragraph a) of CPPT, applicable ex vi article 29, no. 1, paragraph a) of RJAT.

The value of the Arbitration Fee is fixed at € 1,224.00, pursuant to Table I of the Regulation of Costs of Tax Arbitration Processes, to be paid by the Claimant and the Respondent as stated above, pursuant to articles 12, no. 2, 22, no. 4, of RJAT and 4 of the aforesaid Regulation.

Notify accordingly.

Lisbon, 24 March 2015

The Arbitrator

Francisco de Carvalho Furtado