CAAD Process 583/2017-T: IRC Tax Liquidation Annulment – Right to Hearing, Lis Pendens & Legal Basis Requirements

ARBITRAL DECISION

The arbitrators designated to form the Arbitral Tribunal, constituted on 24 January 2018, Dr. Alexandra Coelho Martins (President Arbitrator), Dr. Nuno Pombo and Dr. Paulo Ferreira Alves (Member Arbitrators), agree as follows:

REPORT

A..., LDA., legal entity number ..., with registered office at Av. ..., ..., ..., ...-... ..., hereinafter referred to as "Applicant", submitted a request for arbitral pronouncement to assess the illegality and consequent annulment of Corporation Income Tax (IRC) assessments and compensatory interest for the tax years 2001 to 2004, in the total amount of € 152,675.56, with the Tax and Customs Authority ("AT") as Respondent.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and followed its normal processing, namely with notification to the AT.

The Deontological Council designated the signatories as arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the appointment within the applicable period, pursuant to Article 6, paragraph 2, subparagraph a) and Article 11, paragraph 1, subparagraph a), both of the RJAT.

The parties, duly notified, did not express an intention to challenge the designations and the Collective Arbitral Tribunal was constituted on 24 January 2018, in accordance with Article 11, paragraph 1, subparagraphs b) and c) of the RJAT and Articles 6 and 7 of the Code of Ethics.

As the basis of its claim, the Applicant alleges the formal defects of breach of the right to be heard regarding the draft decision, pursuant to Articles 60 of the General Tax Law ("LGT") and 266 of the Constitution of the Portuguese Republic ("CRP"), and lack of reasoning of the tax acts, in accordance with Articles 77, paragraph 2 of the LGT, 268, paragraphs 3 and 4 of the CRP and 125, paragraph 2 of the Administrative Procedure Code ("CPA").

In turn, the Respondent invokes, in its statement of defence, that the assessments for the years 2001 to 2004, now contested, correspond to the execution of the judgment in the judicial challenge case no. .../09...BECBR, which decided in favour of partial annulment of the IRC assessments for the tax years 2001 and 2002 and which, consequently, resulted in the carrying forward of tax losses with repercussions also in the subsequent years, 2003 and 2004.

Thus, the assessment acts subject to the present arbitral action correspond to the re-issuance of previous acts relating to the tax years 2001 and 2002, duly purged of the illegalities assessed in the judicial decision and, similarly, with respect to the tax years 2003 and 2004, they are the necessary consequence of the execution of that same judicial decision.

As regards these latter assessment acts relating to 2003 and 2004, given that the Applicant also filed a judicial challenge pending before the Administrative and Tax Court ("TAF") of Coimbra under case no. .../17...BECBR, the Respondent raises the exception of lis pendens, pursuant to Article 580 of the Civil Procedure Code ("CPC"). According to the Respondent, the same parties, from the perspective of their legal standing, the same request for annulment of the assessment acts for the years 2003 and 2004 and the same cause of action, embodied in the illegalities of the contested acts, are at issue both in the present arbitral process and simultaneously in the aforementioned case no. .../17...BECBR, in which the Respondent was cited to defend in the first instance.

With respect to the formal defect of lack of reasoning, the Respondent considers it unverified as such reasoning is contained clearly, sufficiently and congruently in the judgment delivered in the judicial challenge case no. .../09...BECDR, of which the contested assessment acts constitute execution.

Finally, the Respondent submits that the arbitral action commenced represents a dilatory expedient with the purpose of delaying payment of the missing tax, constituting bad faith litigation, pursuant to Article 542, paragraph 2, subparagraph a) of the CPC, ex vi Article 104, paragraph 2 of the LGT, and concludes that the dilatory exception of lis pendens should be upheld or, if not so understood, that the request should be entirely dismissed. The administrative file was attached with the response.

Notified of the response, the Applicant exercised its right of reply, arguing that the requirement of identity of cause of action required for the exception of lis pendens is not met, since the IRC assessments in the proceedings filed at the TAF of Coimbra are different and have values distinct from those at issue in the present arbitral action, despite relating to the same years (2003 and 2004). The Applicant additionally submits a request for condemnation of the AT for bad faith litigation due to willful concealment of material facts essential to the discovery of material truth.

On 19 March 2018, the meeting referred to in Article 18 of the RJAT was held, giving the parties the opportunity for oral argument on the exception of lis pendens invoked by the Respondent and on the matter of res judicata, the latter raised by the Tribunal for the years 2001 and 2002. The parties relied on their written submissions and as regards the res judicata exception declared they would address it in their closing arguments. The joinder of various documents was admitted and additional elements were officially requested.

At the same meeting, the parties were notified to submit successive closing arguments and of the deadline for delivery of the decision, which was set for 1 June 2018. Given the procedural circumstances, that date was changed to the end of the six-month period provided for in Article 21, paragraph 1 of the RJAT. Finally, the Applicant was warned to effect payment of the subsequent arbitration fee, in accordance with Article 4, number 3 of the Regulations on Costs in Tax Arbitration Proceedings, and to notify CAAD of such payment, prior to delivery of the arbitral decision.

The Applicant submitted closing arguments on 26 March 2018. It maintains that tax litigation is purely for annulment, and therefore the grounds justifying the assessment acts are those contained in the certificate obtained through the mechanism of Article 37 of the Tax Procedure and Process Code ("CPPT") and no others. As regards the possible exception of res judicata (tax years 2001 and 2002), it considers that there is no identity of cause of action since the same question was not raised in another proceeding nor was it there assessed and judged by a decision that has become final. It states that apparently the AT by its own initiative partially annulled the assessments for 2001 and 2002, issuing and notifying new assessments, which are the subject of the present proceedings, with the previous ones being revoked. On the matter of lis pendens, it reiterates its previous argument regarding lack of identity of cause of action and maintains its request made in the petition.

The Respondent submitted closing arguments on 11 April 2018, in the same sense as argued in its statement of defence, and considers that there is no reason for it to be condemned as acting in bad faith. It ends by arguing for the upholding of the exception of lis pendens or, if not so understood, for complete dismissal of the request.

The Respondent attached additional elements requested by the Tribunal (successive handling of the assessments), as to which the Applicant pronounced itself in the sense that they confirm its arguments.

Additionally, the Applicant presented a subsequent document from the AT which, in its understanding, confirms that the AT, by its own initiative, partially annulled the assessments for 2001 and 2002, issuing and notifying new assessments.

The Tribunal raised officially the prior question of partial unimpugnable acts, notifying the parties of this in light of the principle of due process.

PRELIMINARY MATTERS

The Tribunal was regularly constituted and is competent ratione materiae (cf. Articles 2, paragraph 1, subparagraph a) and 5 of the RJAT).

The parties have legal personality and capacity, have standing and are properly represented (cf. Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Portaria no. 112-A/2011, of 22 March). The proceedings are not affected by nullities.

The Respondent raised the exception of lis pendens. The arbitral tribunal also raised exceptions relating to the (partial) unimpugnability of the acts or to res judicata. The exceptions shall be assessed below, immediately after the establishment of the facts.

STATEMENT OF FACTS

The following facts are material to the decision:

A..., LDA., hereinafter Applicant, reported tax losses in the amount of € 28,358.87 relating to the tax year 2001 and € 143,265.53 relating to the tax year 2002 – cf. Administrative File ("PA"), including the Final Tax Inspection Report ("RIT"), judgment delivered in case no. .../09...BECDR and documents attached by the Applicant.

Following a tax inspection action relating to the tax years 2001 and 2002, the AT disallowed various costs and corrected the Applicant's taxable income, which changed from a negative result to taxable profit, totalling € 41,574.17 for 2001 and € 4,467.44 for 2002, with no remaining losses available to be carried forward to subsequent years – cf. PA, including the RIT, judgment delivered in case no. .../09...BECDR and documents attached by the Applicant.

As a result of the same inspection action, the Applicant also saw amounts of Autonomous Taxation of expenses relating to travel and accommodation-meals and payments without identified recipient being modified and additionally fixed by the AT at € 2,665.41 for 2001 and € 131,402.21 for 2002 (tax amounts) – cf. PA, including the RIT, judgment delivered in case no. .../09...BECDR and documents attached by the Applicant.

In this context, the following IRC assessments were issued by the AT and notified to the Applicant, covering the adjustments to the tax referred to in subparagraphs B and C above that altered the amounts initially self-assessed by the Applicant:

– cf. PA, judgment delivered in case no. .../09...BECDR and documents attached by the Applicant.

Consequent enforcement proceedings were instituted against the Applicant for failure to pay the identified tax acts, nor, to date, have these been claimed or challenged – cf. PA and judgment delivered in case no. .../09...BECDR.

Additionally, as a consequence of the elimination of the tax losses reported by the Applicant in 2001 and 2002 by those tax acts (preceding subparagraph E), the AT corrected the Applicant's taxable income for the subsequent tax years 2003 and 2004, which had benefited from those losses – cf. PA and documents attached by the Applicant and Respondent after the initial pleadings.

With reference to the tax year 2003, the Applicant had reported taxable profit of € 77,664.52 to which it deducted tax losses of the same amount, thus arriving at IRC taxable income of zero. In the tax year 2004, the Applicant had arrived at taxable profit of € 159,142.90 to which it deducted tax losses in the amount of € 93,959.88, setting the taxable income at € 65,183.02. The AT, as a result of the previous corrections to the years 2001 and 2002, disallowed these loss deductions and issued additional IRC assessments and compensatory interest assessments for the tax years 2003 and 2004 in the amounts of € 8,463.41 and € 24,508.17, under numbers 2006 ... and 2006 ..., respectively, totalling € 32,971.58 – cf. PA and documents attached by the Applicant and Respondent after the initial pleadings.

On 4 December 2009, following rejection of a request for official review, the Applicant filed a judicial challenge against the assessment acts identified above (subparagraph D) relating to the tax years 2001 and 2002, arguing error regarding the assumptions of fact and law, breach of the inquisitorial principle, lack or insufficiency of reasoning and the AT's breach of the duty to analyse the request for official review. The challenge proceeded under case no. .../09...BECBR in the Administrative and Tax Court of Coimbra – cf. PA and judgment delivered in case no. .../09...BECDR.

The assessment acts relating to 2001 and 2002 identified above were partially annulled in the aforementioned case no. .../09...BECBR by judgment dated 17 November 2015. The partial annulment concerned the part relating to the non-acceptance of costs by the AT which (improperly) disallowed the tax losses reported by the Applicant. However, the request for annulment was dismissed as to the other part concerning Autonomous Taxation, which was maintained – cf. PA and judgment delivered in case no. .../09...BECDR.

The Applicant filed an appeal of the decision in case no. .../09....BECBR against the part that was unfavourable to it (Autonomous Taxation), which is pending before TCA Norte, and the Public Finance did not appeal from the other part of the judgment, which therefore became final – cf. PA and documents attached by the Applicant and Respondent after the initial pleadings.

On 15 February 2017, the Head of Finance of the Finance Office of ... rejected the Applicant's request for partial extinction of the enforcement proceedings in light of the favorable decision obtained in case no. .../09... BECBR. The grounds for rejection stated that "without knowledge of a final judgment of the aforementioned challenge, the applicant's request should be rejected" – cf. Document attached by the Applicant in its statement of reply to the lis pendens exception.

On 16 February 2017, the Applicant requested official review of the additional assessment acts relating to the tax years 2003 and 2004, identified in preceding subparagraph G, on the ground that, as the additional assessment acts relating to 2003 and 2004 are consequent acts of the corrections made by the AT in 2001 and 2002, and these latter acts were partially annulled by judicial decision that has become final, the AT should draw the legal consequences from this – cf. PA and documents attached by the Applicant and Respondent after the initial pleadings.

The Applicant also filed a judicial challenge against the additional assessment acts relating to the tax years 2003 and 2004 referred to in the preceding subparagraph, based on grounds identical to those of the request for official review it had submitted as regards the same acts, and requests the nullity of those acts pursuant to Article 133, paragraph 2, subparagraph i) of the CPA, as they are consequent to acts annulled by the Court. This challenge is pending before the TAF of Coimbra under case no. .../17...BECBR, and the Representative of the Public Finance was notified to defend on 5 May 2017 – cf. PA and documents attached by the Respondent contained in the minutes of the meeting.

On 20 September 2017, (new) IRC assessments were issued by the AT for the tax years 2001 and 2002, which contain the following reasoning: "The assessment made corresponds to the execution of the decision delivered in the identified contentious proceeding, within the scope of which the respective reasoning was sent to Your Excellency" – cf. PA and IRC assessment statements attached with the petition.

The (new) assessments for 2001 and 2002 do not mention a payment deadline and contain the following values:

Tax Year 2001 – Assessment no. 2017 ...

Tax Year 2002 – Assessment no. 2017 ...

– cf. PA and IRC assessment statements attached with the petition.

On 2 October 2017, (new) IRC assessments were issued by the AT for the tax years 2003 and 2004, which contain the following reasoning: "The assessment made corresponds to the execution of the decision delivered in the identified contentious proceeding, within the scope of which the respective reasoning was sent to Your Excellency" – cf. PA and IRC assessment statements attached with the petition.

The (new) assessments for 2003 and 2004 do not mention a payment deadline and contain the following values:

Tax Year 2003 – Assessment no. 2017 ...

Tax Year 2004 – Assessment no. 2017 ...

– cf. PA and IRC assessment statements attached with the petition.

The (new) assessments relating to the four tax years – 2001 to 2004 – were notified to the Applicant without being preceded by notification of a draft decision – cf. PA and proven by agreement.

The Applicant requested an extract of the reasoning on matters of fact and law of the IRC assessments for 2001 and 2002, pursuant to and for the purposes of Article 37 of the CPPT, which was sent to it by official letter of 26 October 2017, with a copy of the judgment delivered in case no. .../09...BECBR, stating that the basis for the IRC assessments for the years 2001 and 2002 was compliance with that decision, in the part not appealed by the Applicant – cf. document 1 attached by the Applicant.

The Applicant requested an extract of the reasoning on matters of fact and law of the IRC assessments for 2003 and 2004, pursuant to and for the purposes of Article 37 of the CPPT, which was sent to it by official letter of 26 October 2017 with a copy of the judgment delivered in case no. .../09...BECBR, stating that such assessments (2003 and 2004) "were based on official corrections to the IRC for the years 2001 and 2002, assessments that resulted from compliance with the decision delivered in the judicial challenge case .../09...BECBR, in the part not appealed by the Applicant" – cf. document 1 attached by the Applicant.

On 6 November 2017, the Applicant submitted a request for constitution of the Arbitral Tribunal in the CAAD computer system.

On 25 January 2018 the Respondent was notified, via the CAAD Case Management System, to submit its statement of defence in the present arbitral action.

UNPROVEN FACTS AND GROUNDS

It was not proven that the assessment acts for the years 2003 and 2004 contested in the arbitral proceedings are the same ones that gave rise to the judicial case no. .../17...BECBR.

It failed to be demonstrated that the arbitral action was a dilatory expedient on the part of the Applicant and that the latter was aware of the lack of foundation of the action it filed.

The material facts for judging the case were chosen and selected according to their legal relevance, in light of the plausible solutions to the legal issues, pursuant to Article 596 of the CPC, applicable ex vi Article 29, paragraph 1, subparagraph e), of Decree-Law no. 10/2011, of 20 January ("RJAT").

With relevance to the decision, there are no other facts that should be considered unproven.

With respect to the proven facts, the arbitrators' conviction was based on critical analysis of the documentary evidence attached to the proceedings.

PRIOR ISSUES

ASSESSMENT ACTS RELATING TO THE TAX YEARS 2001 AND 2002: UNIMPUGNABILITY

It follows from the factual framework established that the assessments issued on 20 September 2017, relating to the IRC for 2001 and 2002, here contested, merely give execution to the judgment delivered on 17 November 2015 in the judicial challenge case no. .../09...BECBR, in the part in which it became final and which was favorable to the Applicant.

Having reviewed the facts, we note that, indeed, the Applicant had reported tax losses in the years in question. However, this tax-legal definition was altered by the additional IRC assessment acts and interest issued by the Respondent under numbers 2004 ... and 2004 ..., dated 14 and 16 March 2005, for each respective year (subparagraphs A and D of the facts).

Such additional assessment acts made two material modifications. On the one hand, they altered the Applicant's declared taxable income, which was zero (as a result of the reported tax losses), changing it to taxable profit, with the consequent IRC assessment and elimination of losses available to be carried forward to subsequent years. On the other hand, they subjected to autonomous taxation confidential expenses (without identified recipient), assessing the corresponding tax amounts.

These acts were partially annulled by the TAF of Coimbra, in the segment concerning the AT's non-acceptance of tax-deductible costs at source leading to the disallowance of the Applicant's reported tax losses, with the judgment becoming final in that respect.

As regards Autonomous Taxation, the Applicant was unsuccessful, with the TAF of Coimbra upholding the tax acts, and an appeal of the decision filed by the Applicant is pending.

The new assessments meanwhile issued for the years 2001 and 2002 (numbers 2017 ... and 2017 ...), which are the subject of this arbitral action, expressly state in the notification document that they correspond to the execution of a decision delivered in the contentious proceeding, a statement confirmed by the extract of the reasoning obtained pursuant to Article 37, paragraph 1 of the CPPT, with a copy of the mentioned judgment in the judicial challenge case no. .../09...BECBR, and they effect the restoration of the Applicant's tax situation in the exact terms that resulted from its initial tax declarations, materializing the restorative effect that the annulment judgment postulates.

Thus, the tax acts (2001 and 2002) now contested reflect the Applicant's zero taxable income, raising no IRC payable (as if the AT's additional assessment acts had never existed), with the exception of the part relating to Autonomous Taxation, in the amount of € 2,665.41 and € 131,402.21, respectively, plus compensatory interest, which correspond to the amounts of the assessment acts issued by the AT and which, in that part, were not annulled by the Court (cf. points C, D, I and O of the facts).

It must be concluded that the assessment acts relating to 2001 and 2002 issued in 2017 and subject to this action do not contain, in this manner, any innovative legal definition:

In the part relating to Autonomous Taxation, the values of the previous additional assessments issued by the AT in 2006 are maintained in their exact terms, which were not annulled in the judgment delivered in the judicial challenge case no. .../09...BECBR. In this matter, therefore, we are faced with merely confirmatory acts of decisions contained in previous tax acts. Thus, even if the new acts had not been issued, the aforementioned values of Autonomous Taxation would be due, by virtue of the previous additional assessments by the AT. This framework is not prejudiced by the fact that a pending judicial appeal on this matter is pending in case no. .../09...BECBR, as only a final annulment judgment that has become final (which does not exist, either as annulment nor as final) would be capable of a different conformity;

In the part relating to the calculation of (IRC) taxable income of zero, the contested acts relating to 2001 and 2002 correspond to the legal effect resulting from the constitutive annulment pronouncement in case no. .../09...BECBR, which became definitive by becoming final. Indeed, from a legal standpoint, the partial annulment of the tax acts issued in 2006 and the restoration of (or right to) losses to the Applicant's sphere do not require the mediation of these new assessment acts, which, in that perspective, are redundant (without prejudice to their instructive or clarifying character), since the constitutive nature of the annulment pronouncement in the judicial challenge proceedings and its restorative ex tunc effect imply the immediate elimination of the legal order of the act (or parts of the act) annulled and the restoration of the hypothetical current situation that would exist if that act (or part of act) had never existed;

It should further be noted that, given the previous legal definition that had been determined by the assessment acts issued by the AT in 2006 disallowing the Applicant's tax losses, if the assessment acts issued in 2017 were now innovative (which they are not), i.e., if they were capable of producing a definition of legal effects not previously existing, they would be favorable to the Applicant, as it would move from a situation of taxable profit with IRC assessment to a situation of zero taxable income with no tax payment. If it were a favorable act, the question of standing to sue would arise.

It should be noted that the tax act is a species within the generic category of "administrative act" and arises within the scope of tax-legal relationships established between the tax administration and individuals or legal entities (or equivalent entities). Tax-legal relationships extend into the field of application of the Administrative Procedure Code and the Code of Administrative Courts ("CPTA"), in everything not specifically governed by tax codes (cf. Articles 1, paragraph 1 and 2, subparagraph c) of the LGT; 2, subparagraphs c) and d) of the CPPT; 2 of the CPA; and 29, paragraph 1, subparagraph c) of the RJAT). This explains why the Applicant invokes in its arguments and in response to the exceptions raised various norms and principles of administrative procedure and process.

Inherent to the concept of administrative act and, therefore, to tax act, is the exercise of a decision-making power that aims to produce legal effects in an individual and concrete situation, with the revision of the CPA having added the reference to the production of external effects (cf. Article 120 of the CPA and Article 149 of the new CPA). Administrative act does not equal, or is synonymous with, act of the Administration. An act can only be classified as an administrative/tax act insofar as it expresses the power, legally conferred on the Administration, to proceed with the "unilateral legal definition of the legal situation of another" (Mário Aroso de Almeida – "Annulment of Administrative Acts and Emerging Legal Relationships", Theses Collections, Almedina, 2002, p. 83).

This conceptual demarcation is important in the assessment of the concrete case at two levels: the determination of the effects of the annulment of these acts and the assessment of the specific procedural requirement of the impugnability of the act (cf. Articles 51, 53 and 89 of the CPTA).

With respect to the first, according to Mário Aroso de Almeida, the annulment of an administrative act produces a constitutive effect that translates into the elimination of that act from the legal world. For this effect to occur, there is no need for any mediating legal intervention by the Administration. The annulment judgment "directly and immediately eliminates from the legal world the annulled administrative act, automatically restoring ex tunc the status quo ante, without any intervention by the administrative authority for such purpose", and leads to the re-emergence of the (legal) regime that would have been in force if the act had not been performed. This author further states that in many situations it may be justified to issue administrative pronouncements intended to certify and make public knowledge of the situation resulting from the annulment. "It is important to note, however, that these pronouncements, although they may resemble a kind of act transposing the judgment (…) merely possess a declarative content of a modification that has already occurred by direct effect of the judgment". The annulment judgment has the scope of eliminating from the legal order the definition that the annulled act had introduced. And, consequently, it also has the scope of redefining, itself, the legal situation on which that act had an impact (ob. cit. pp. 224 to 226).

In more complex situations, where the execution of the restorative effect requires or recommends the issuance of administrative pronouncements intended to restore the legal situation and/or to complete the modification introduced by the judgment, this does not pass through the "issuance of legal acts aimed at altering the definition of the situation resulting from the annulment, through the re-exercise of the power of primary legal definition that had been manifested with the annulled act (…) The administrative pronouncements that are issued within the scope of execution of the restorative effect do not constitute, nor do they involve, therefore, a true substitution of the annulled act."[1]

Thus, the legal acts intended to recognize the situation restored by the judgment, or to draw consequences from it, which the Administration must adopt following the annulment in order to execute the restorative effect of the judgment, do not constitute the exercise of the power to define that situation anew, as they already take that legal definition as a given[2].

In the same sense, José Carlos Vieira de Andrade states that the direct effect of the judgment granting the annulment request is the "constitutive" effect that translates into the invalidation of the contested act, eliminating it from the moment in which the illegality was verified, i.e., as a rule, from its performance (judgment "ex tunc" effectiveness). This constitutive effect, as a factual effect of the judgment, naturally applies erga omnes, insofar as no one can claim that the act was not annulled – "Administrative Justice", 14th Edition, 2015, Almedina, pp. 320, 331.

It is thus clear that the tax acts under assessment, in the part respecting the execution of the annulment judgment (case no. .../09...BECBR), are not capable of producing tax-legal effects. These were constituted and arise from the judgment that partially invalidated the previous IRC assessment acts and restored the status quo ante: the tax losses and zero taxable income resulting from the Applicant's declarations through self-assessment. The conduct of the Respondent is not subject to censure, as it conformed to the content of the judicial decision favorable to the Applicant, which became binding on all public and private entities, as prescribed by Articles 158, paragraph 1 of the CPTA and 205 of the CRP, with the aim of executing it as provided in Article 173, paragraph 1 of the CPTA, applicable by referral from Article 29, paragraph 1, subparagraph c) of the RJAT.

For that reason, such acts do not meet the requirements of impugnability, pursuant to Article 51, paragraph 1 of the CPTA (applicable by referral from Article 29, paragraph 1 of the RJAT), which provides:

"Article 51 - Impugnable acts

1 - Notwithstanding whether they put an end to a proceeding, all decisions are impugnable which, in the exercise of legal-administrative powers, aim to produce external legal effects in an individual and concrete situation, including those delivered by authorities not integrated into the Public Administration and by private entities acting in the exercise of legal-administrative powers."

The impugnability of administrative acts (including tax acts) constitutes a procedural requirement whose non-verification is a dilatory exception, known ex officio, which prevents the Court from knowing on the merits of the case, pursuant to Article 89, paragraph 2 and 4, subparagraph i) of the CPTA.

It should further be noted that in the other segment of the tax acts in issue, which maintain Autonomous Taxation, this is mentioned in the exact terms of the previous additional assessments issued by the AT in 2006, which, it should be emphasized, were not annulled. In this part, the assessment acts are merely confirmatory of decisions/previous tax acts.

Merely confirmatory acts are those which have as their object previous harmful acts, when the following requirements are cumulatively met:

a) that the confirmed act be harmful (the additional tax assessment act is an impositive act and, by definition, harmful);

b) that such act (confirmed) be known to the interested party (and it is, as the latter challenged it contenciously and appealed the judicial decision that did not annul it);

c) that between the confirmed act and the confirmatory act there be identity of subjects, object and decision (which is verified by analysis of the assessment acts in issue which concern the same tax - Autonomous Taxation -, the same years and whose values coincide "to the cent").

Wherefore, with respect to this other segment of the contested assessments, relating to the years 2001 and 2002, the exception of unimpugnability is likewise raised, with the consequences already referred to.

Pursuant to Article 53, paragraph 1 of the CPTA, applicable by referral from Article 29, paragraph 1 of the RJAT, "[c]onfirmatory acts are not impugnable, understood as such acts which merely reiterate, with the same grounds, decisions contained in previous administrative acts".

In light of the foregoing, the exception of unimpugnability of the assessment acts relating to the tax years 2001 and 2002, issued on 20 September 2017, under numbers 2017 ... and 2017 ..., respectively, in both segments, of IRC and Autonomous Taxation, is deemed verified, and the Respondent is absolved of the instance in that respect, with this Tribunal unable to know of the other issues raised relating to the same.

Indeed, upon finding the exception of unimpugnability verified, the knowledge of the remaining issues raised in the present proceeding relating to the aforementioned acts of 2001 and 2002 is prejudiced (cf. Articles 51, paragraph 1, 53, paragraph 1 and 89, paragraph 2 and 4, subparagraph i) of the CPTA; 278, paragraph 1 and 608 of the CPC, applicable pursuant to the provision of Article 29, paragraph 1, subparagraph e), of the RJAT).

ASSESSMENT ACTS RELATING TO THE TAX YEARS 2003 AND 2004 (RELATED ACTS)

The restoration of the tax losses for the tax years 2001 and 2002, resulting from the judgment delivered in case no. .../09...BECBR, has repercussions in the subsequent years 2003 and 2004.

Indeed, it follows from the factual framework that, with reference to 2003, the Applicant had reported taxable profit of € 77,664.52 to which it deducted tax losses of the same amount, leaving zero IRC taxable income, and that, in the tax year 2004, it arrived at taxable profit of € 159,142.90 to which it deducted tax losses in the amount of € 93,959.88, arriving at a taxable income of € 65,183.02.

The AT disallowed these loss deductions and issued additional IRC assessments and compensatory interest assessments for the tax years 2003 and 2004 in the amounts of € 8,463.41 and € 24,508.17, under numbers 2006 ... and 2006 ..., respectively, totalling € 32,971.58 (subparagraph G of the facts).

As noted above, it is imperative as a corollary of the restorative effect of the cassatory judgment to reconstruct the IRC calculation for the (subsequent) years 2003 and 2004, so as to achieve a situation equal to that which would be verified if the illegal acts had not been performed.

The acts relating to 2003 and 2004 are in a relationship of tax-legal dependence with respect to 2001 and 2002, as the losses carried forward from the latter are deductible up to the amount of the taxable profits of the former (cf. Article 52 of the IRC Code).

Circumstance that constitutes a relationship of prejudicial dependence between the assessment acts relating to the tax years 2001 and 2002 and the assessment acts for the tax years 2003 and 2004, qualifiable as related acts, insofar as the former introduce a definition that conditions the latter, which are based on the definition contained in the preceding acts, whose content is binding on them, and one may even assert that they are, in that respect, confirmatory of that definition, which they make their own and thus incorporate in their own content – Mário Aroso de Almeida, op. cit., p. 334.

To such an extent is this the case that the Applicant itself submitted a request for official review so that the assessment acts for 2003 and 2004 would be eliminated, as consequent acts of the corrections made by the AT with respect to 2001 and 2002, following the partial annulment of these corrections by judicial decision that has become final in case no. .../09...BECBR. And, subsequently, it filed a judicial challenge with the same object at the TAF of Coimbra, proceeding under case no. .../17... BECBR, requesting the nullity of those same assessment acts relating to 2003 and 2004, pursuant to Article 133, paragraph 2, subparagraph i) of the CPA (in force at the time), as they are consequent to acts annulled by the Court (subparagraphs L and M of the facts).

In this manner, it is the Applicant itself that, in a moment prior to the filing of the present arbitral action, intended that the AT replace the tax assessment acts for 2003 and 2004, which is what came to occur.

It is important, however, to assess in concreto whether the replacement of the acts in question corresponds exactly to the execution of the annulment judgment (relating to case no. .../09...BECBR) or whether it contains an innovative tax-legal definition.

ASSESSMENT ACT FOR THE TAX YEAR 2003: UNIMPUGNABILITY

With respect to the tax year 2003, the assessment act at issue in the arbitral proceedings, issued under number 2017..., corrects the taxable income and implements the deduction of tax losses carried forward from prior years against the taxable profit of the year, of € 77,664.52, arriving at a calculated amount of "zero profit" or € 0.00. Indeed, the column under the heading "Corrected Amounts" contains all values at zero, i.e., with no taxable income or tax amount payable.

Thus, this act merely executes the judgment in case no. .../09...BECBR, embodying a related act to those annulled by it, without new content or innovative legal definition compared to that which results from the restorative ex tunc effect of the annulment of the assessment acts that had removed the Applicant's tax losses in the years in question, as the Applicant itself alleged in a request for official review and in the challenge action no. .../17...BECBR.

It should be noted that the content of the new assessment act relating to 2003 here contested is entirely favorable to the Applicant, with there being no issue, for that year, regarding Autonomous Taxation.

Thus, it must be concluded that the exception of unimpugnability is verified, for reasons identical to those set forth with respect to the acts for 2001 and 2002, i.e., on the ground that the IRC assessment act relating to the tax year 2003, issued on 2 October 2017, under number 2017..., merely recognizes and draws consequences from the judgment ("by executing it"), without any legal effect defining a new tax status, wherefore, in the part to which this action relates to it, the Respondent is absolved of the instance.

Upon finding the exception of unimpugnability of the act relating to the tax year 2003 verified, the knowledge of the remaining issues raised in the present proceeding relating to the same is prejudiced (cf. Articles 51, paragraph 1 and 89, paragraph 2 and 4, subparagraph i) of the CPTA; 278, paragraph 1 and 608 of the CPC, applicable by virtue of the provision of Article 29, paragraph 1, subparagraph e), of the RJAT).

ASSESSMENT ACT FOR THE TAX YEAR 2004: UNIMPUGNABILITY AND LIS PENDENS

By contrast with what was found with respect to the tax acts at issue relating to the years 2001 to 2003, which merely reproduce the effects of the judgment that became final in case no. .../09...BECBR[3] and which therefore are not subject to review in challenge proceedings, it is not proven that the (new) IRC assessment for 2004, as a related act and necessarily dependent on the annulled acts, merely executes or faithfully executes that annulment decision.

It is recalled that the losses originally deducted by the Applicant in 2004 totalled € 93,959.88, with the taxable profit of the year being calculated at € 159,142.90, and therefore the taxable income for purposes of IRC incidence was the positive difference of € 65,183.02.

The annulment, by judgment that became final, of the assessment acts in the part in which they disallowed those losses has the effect of restoring them. However, the new assessment for 2004, issued under number 2017..., considers a significantly higher corrected taxable income in the amount of € 116,192.06, more than double the original € 65,183.02 after loss deduction. Such an act does not restore the status quo ante, nor does it reconstitute the hypothetical current situation that would exist if the illegal act had not been performed, whose taxable income would have to correspond to € 65,183.02.

The conclusion drawn is that this act contains a tax-legal regulation distinct from what would be a mere reflection of the annulment judgment in issue, wherefore, in light of this, it is an innovative tax act with external effects and is, consequently (and unlike the previous acts), impugnable.

With respect to the raised exception of lis pendens, this is a procedural requirement that aims to prevent the repetition of a prior cause that is pending and to prevent, thereby, that the tribunal be placed in the position of contradicting or reproducing a prior decision. In order for this requirement to be found verified, three conditions are required, which imply a triple identity: of parties, of request and of cause of action (cf. Articles 89 of the CPTA, 577, subparagraph i), 580 and 581 of the CPC, applicable by referral from Articles 29, paragraph 1, subparagraphs c) and e) of the RJAT and Article 1 of the CPTA).

It follows from the evidence that there is indeed a pending judicial challenge at the TAF of Coimbra, under case no. .../17...BECBR, which covers the IRC for the years 2003 and 2004 and to which the Respondent was cited to defend in the first instance (cf. Article 582 of the CPC), with the parties being the same from the perspective of their legal standing.

Notwithstanding, the value of that judicial challenge (case no. .../17...BECBR), which covers IRC assessments and interest relating to the tax years 2003 and 2004, is € 32,971.58[4], quite distinct from the value of the acts questioned in the present arbitral action, relating to the same years, which correspond to the total amount of € 13,585.53 (€ 0.00 for 2003 and € 13,585.53 for 2004).

The differences do not end there. In the challenge case no. .../17...BECBR nullity is requested, in this arbitral action voidability is requested. In addition, the cause of action in the first proceeding is the invalidity consequent to the annulment, by judicial decision, of acts legally connected and incompatible. In the arbitral proceeding, on the other hand, formal defects of breach of the right to be heard and lack of reasoning of the tax acts are invoked. It is true that the years and the type of tax (IRC) are the same. However, the request differs as to the invalidating effect requested and the contested acts (whose value is distinct).

It is debated in the doctrine, with respect to challenge proceedings of acts, whether the cause of action concerns the invalidity of the act in unitary terms, a position to which Mário Aroso de Almeida tends, or whether, in the face of diverse causes of invalidity, we are faced with a concurrence of causes of action, as José Carlos Vieira de Andrade argues (ob. cit. p. 243-245). It is important to note that the effects of finding merit may be qualitatively distinct, as, for example, there are causes of invalidity that prevent or limit the possibility of renewal of the annulled act, and others that do not, wherefore one tends toward this latter position.

In the situation at hand, the request and the defects invoked (cause of action) are distinct, with the triple identity not being demonstrated that is a requirement of the lis pendens exception, wherefore it is found to be without merit.

ON THE MERITS

ASSESSMENT ACT RELATING TO THE TAX YEAR 2004

Breach of the Right to Be Heard

The Applicant was not notified of any draft decision with respect to the IRC assessment act for the year 2004, which, as noted above, and unlike the preceding years, does not reflect the restoration (at least in substantial part) of the losses that would derive from the execution of the judicial decision annulling the acts relating to the years 2001 and 2002. And it is not an act (entirely) favorable, as in not reflecting the totality of those losses, it derives a higher tax payment than that which, by effect of that judicial decision, is legally due.

Article 60, paragraph 1, subparagraph a) of the LGT, which implements the constitutional guarantee of participation of citizens in the formation of decisions that concern them, particularly impositive ones, grants taxpayers the right to be heard prior to the issuance of tax assessment acts. For taxpayers to be able to exercise the right to be heard, they must be notified before the assessment. If the taxpayer is not given the opportunity to exercise that right, the final act is voidable by virtue of a formal defect – cf. judgments of the STA, cases nos. 0671/10, of 10 November 2010, and 0337/07, of 26 November 2008.

In the situation at hand, the aforementioned right was not ensured, wherefore the IRC assessment act relating to the year 2004, issued on 2 October 2017, under number 2017..., is affected by voidability, pursuant to and for the purposes of Article 163 of the CPA.

Lack of Reasoning

Additionally, the Applicant invokes the defect, also formal, of lack of reasoning, grounded in Articles 77 of the LGT, 125, paragraph 2 of the CPA and 268, paragraph 3 of the CRP.

In this context, it is important to note that the tax act in issue mentions as its reasoning that the assessment corresponds to the execution of the judicial decision delivered in the contentious proceeding, with a copy of that decision having been provided through the extract obtained pursuant to Article 37 of the CPPT.

However, as noted above, such act does not reflect the restorative effect that results from the mentioned judgment and which appears to be simple: the destruction with retroactive effects of the IRC assessment acts that rejected the Applicant's reported tax losses and the restoration of the legal situation resulting from the Applicant's tax declarations.

In the year 2004 under analysis, the tax losses deducted by the Applicant from the 2004 taxable profit (calculated at € 159,142.90) were € 93,959.88 (carried forward from prior years), resulting in a positive IRC taxable income of € 65,183.02. However, the act in issue indicates a much higher taxable income of € 116,192.06, which does not derive from the judgment, nor from any other source acquired in this proceeding.

The jurisprudence of the Supreme Administrative Court ("STA") establishes that reasoning is a relative concept that varies depending on the legal type of act, aiming to respond to the taxpayer's need for clarification, allowing the taxpayer to know the reasons, of fact and law, that determined its performance and why the decision was made in one sense and not another – see, by way of example, the judgments of the STA, cases nos. 065/09, of 15 April 2009, and 01114/05, of 2 February 2006.

José Carlos Vieira de Andrade considers that insufficiency of reasoning leads to a formal defect equivalent to lack of reasoning when it is manifest – cf. The Duty of Explicit Reasoning of Administrative Acts, Theses Collection, 2003, Almedina, pp. 232-239.

Reasoning is sufficient when it provides the recipients of the act with the reconstruction of the cognitive and evaluative itinerary followed by the authority that performed it, i.e., when a normal recipient, faced with the act in question, may become aware of the reasons that support the decision made in it (cf. judgments of the STA, cases nos. 0512/17, of 14 March 2018, 42180, of 20 November 2002, and 46796, of 14 March 2001.

In the concrete situation, we are faced with a case of manifest insufficiency of reasoning that is equivalent to lack of reasoning, in accordance with Article 153, paragraph 2 of the CPA applicable by referral from Article 2, subparagraph c) of the LGT. In such terms, this tax act should also be annulled by this route.

BAD FAITH LITIGATION

Both parties reciprocally request the condemnation of the other for bad faith litigation.

It is important to emphasize that the right of action legitimately coexists with the non-existence of the invoked right. The proceeding integrates, by definition, a legal battle in which at least one of the interveners, in whole or in part, will be unsuccessful. However, this right of procedural character is subject to certain limits, namely those that derive from the general principle of good faith.

The AT argues that the Applicant has full knowledge of the corrections to which it was subject for the periods 2001 to 2004, wherefore the present action represents a dilatory expedient to delay an outcome that appears evident and will result in the payment of the missing tax. It claims that such procedural conduct falls within Article 542, paragraph 2, subparagraph a) of the CPC (applicable ex vi Article 104, paragraph 2 of the LGT), according to which a person is qualified as acting in bad faith when, with intent or gross negligence, the person has raised a claim or defense whose lack of foundation the person should not have been unaware of.

One cannot agree with the position of the Respondent, as in the circumstances of the case, the defects invoked by the Applicant, of breach of the right to be heard and lack of reasoning, do not appear to be ostensibly lacking in foundation, being moreover pertinent in the assessment of the tax act relating to the tax year 2004, grounding its annulment. Differences or deficiencies in the interpretation and application of law do not by themselves signify conduct constituting responsibility for bad faith litigation, nor do the records contain elements that would indicate such conduct and that would have to reveal stubborn unfounded defense of positions, the bringing of an action merely out of caprice or with gross error, reckless and imprudent litigation or persistent procedural action arising from inexcusable interpretation of law – cf. Abrantes Geraldes, Topics of Civil Procedure Reform, II Volume, 3rd Edition, Almedina, pp. 339 and following.

On the other hand, the Applicant requests the condemnation of the AT for bad faith litigation due to willful concealment of material facts essential to the discovery of material truth, specifically, for not having filed a statement of defence in the judicial challenge no. .../17...BECBR and for the Finance Office not having extinguished the enforcement proceedings instituted, on the ground of the additional assessments issued in 2004, with the ground of "non-existence of finality of the judgment" delivered in the judicial challenge case no. .../09...BECBR.

Neither is the Applicant's position justified. First, the reasons invoked do not correspond to the specific requirements provided for in Article 104 of the LGT, which provides for the condemnation of the AT for bad faith litigation, in the event that it "acts in court against the content of binding information previously provided to the interested parties or its conduct in the proceeding differs from that habitually adopted in identical situations".

Additionally, with respect to the general requirements of bad faith litigation contained in Article 542 of the CPC, the circumstances invoked do not constitute any concealment of facts, whose knowledge is entirely accessible to the Applicant, which is a party to both the challenge proceedings and the enforcement proceedings, and much less willfully concealed.

In light of the foregoing, the requests for condemnation for bad faith litigation reciprocally submitted by the Respondent and the Applicant fail.

Finally, it should be noted that the relevant issues submitted for assessment by this Tribunal were known and assessed, with those whose decision was prejudiced by the solution given to others not being so addressed.

DECISION

In light of the foregoing, the arbitrators of this Arbitral Tribunal agree to:

1. Find the exception of unimpugnability verified with respect to the acts of IRC and interest assessments relating to the tax years 2001, 2002 and 2003, issued under numbers 2017 ..., 2017 ... and 2017 ..., respectively, wherefore the Tax and Customs Authority is absolved of the instance in that respect;

2. Find the request partially meritorious, in the part in which it relates to the annulment of the assessment relating to the tax year 2004, issued under number 2017 ..., in the amount of € 13,585.53;

3. Find without merit the requests for condemnation for bad faith litigation submitted by the Respondent and the Applicant.

The value of the case is fixed at € 152,675.56 in accordance with Articles 3, paragraph 2 of the Regulations on Costs in Tax Arbitration Proceedings ("RCPAT"), 97-A, paragraph 1, subparagraph a) of the CPPT and 306, paragraphs 1 and 2 of the CPC, the latter ex vi Article 29, paragraph 1, subparagraph e) of the RJAT.

Costs in the amount of € 3,672.00, of which € 3,345.00 are borne by the Applicant and € 327.00 are borne by the Respondent, in accordance with Table I attached to the RCPAT and Articles 12, paragraph 2 of the RJAT, 4, paragraph 5 of the RCPAT and 527, paragraphs 1 and 2 of the CPC, ex vi Article 29, paragraph 1, subparagraph e) of the RJAT.

Lisbon, 19 June 2018

[Text prepared by computer, pursuant to Article 131, paragraph 5 of the CPC, applicable by referral from Article 29, paragraph 1, subparagraph e) of the RJAT]

The Arbitrators,

Alexandra Coelho Martins

Nuno Pombo

Paulo Ferreira Alves

[1] Cf. Mário Aroso de Almeida, ob. cit, p. 479.

[2] Cf. Mário Aroso de Almeida, ob. cit, p. 482.

[3] And which, as to the years 2001 and 2002, in the part concerning Autonomous Taxation are merely confirmatory and, therefore, also not impugnable.

[4] It is considered that the value of the challenge is equal to the value of the acts, given the rule of Article 97-A, paragraph 1, subparagraph a) of the CPPT.