Process: 587/2018-T

Date: May 28, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 587/2018-T) addresses whether a taxpayer's option for the organized accounting regime (contabilidade organizada) in Portuguese IRS becomes definitive or requires renewal when business volume falls below mandatory thresholds. The taxpayer commenced activity in 2004 under organized accounting due to high expected revenue, then formally opted for this regime via declaration of alterations in March 2006. In 2014, their sales volume dropped to €172,629.02, below the simplified regime threshold. The Tax Authority (AT) reclassified the taxpayer to the simplified regime for 2015, arguing they failed to renew their organized accounting option by March 15, 2015. This generated discrepancy code C70 (incompatibility between annex filed and records) when filing the IRS Form 3 declaration. The taxpayer challenged IRS assessment 2018... totaling €109,450.97, contending their 2006 option remained valid indefinitely without need for renewal. The AT raised a jurisdictional exception, claiming CAAD lacked competence as the dispute concerned classification regime rather than assessment legality. The arbitral tribunal rejected this exception, affirming competence under Article 2(1)(a) of RJAT since the case fundamentally challenged erroneous quantification of taxable income in a tax assessment act. The decision clarifies that organized accounting options are not perpetual when taxpayers fall below mandatory thresholds—they must affirmatively renew by March 15 to avoid automatic reclassification to the simplified regime, highlighting the temporal nature of regime options and procedural requirements for maintaining organized accounting status in Portuguese tax law.

Full Decision

ARBITRAL DECISION

The arbitrators Dr. José Poças Falcão (arbitrator president), Dr. Maria Alexandra Mesquita and Dr. Mariana Vargas (arbitrator members), designated by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 4 February 2019, agree as follows:

I – Report

A..., taxpayer no. ..., resident at ..., no. ..., ...-... ..., hereinafter referred to as the Applicant, requested on 23 November 2018 the constitution of a collective arbitral tribunal, under the combined provisions of article 2, no. 1, paragraph a) and article 10, both of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters (RJAT) and articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, in which the Tax and Customs Authority is the Respondent (hereinafter Respondent or AT), with a view to the declaration of illegality and consequent annulment of the IRS assessment no. 2018..., of 28 September 2018, referring to the year 2015, in the total amount of € 109,450.97 and with a payment deadline of 12 November 2018.

The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to the AT, and, pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated their acceptance of the appointment within the applicable period, without objection from the parties.

Summary of the Parties' Positions

a. Of the Applicant:

The Applicant bases its request for annulment of the contested assessment on the following factual and legal arguments:

Having commenced its activity in 2004, it was classified under the regime for determining Category B income by organized accounting in light of the results expected for that year.

Subsequently, in March 2006, by means of presenting a declaration of alterations, it expressly opted for that form of determining business income, an option that was successively accepted by the Respondent until the end of 2014.

When filing the IRS form 3 declaration for the year 2015, it generated the discrepancy "C70-incompatibility between the annex filed and option in records," as the AT considered that due to the fact that the Applicant had presented a sales volume of € 172,629.02 in the year 2014, it would meet the criteria for classification under the simplified taxation regime, which would only not occur if it had filed a declaration of alterations by the end of March 2015, opting for the organized accounting regime.

However, the Applicant understands that the option for the organized accounting regime, expressed in the declaration of alterations presented in March 2006, became final, and the AT had no legitimacy to, ex officio, determine its business income according to the simplified regime.

For which reasons the Applicant considers that the contested assessment is tainted with illegality, due to error in the quantification of taxable income.

b. Of the Respondent:

Notified pursuant to the terms and for the purposes provided in article 17 of the RJAT, the AT presented a response and attached the administrative file, arguing for the dismissal of the present request for arbitral pronouncement, with defense by exception and by objection.

As a dilatory exception, the Respondent invokes the absolute lack of competence of the arbitral tribunal, in view of the provision in article 2 of the RJAT, to rule on the classification regime applicable to the determination of the business income of the Applicant, the appropriate procedural means being the administrative action referred to in articles 97, no. 1, paragraph p), of the CPPT and article 37 of the CPTA.

Furthermore, the IRS assessment for the year 2015 has already been partially analyzed and granted in the context of the administrative complaint no. ...2018....

By objection, the AT states that:

* The Applicant commenced its activity being integrated into the organized accounting regime, by legal mandate, since the value of the business volume exceeded the legal limit set forth in no. 6 of article 28 of the IRS Code, remaining in the same regime until 2015.

* In 2014, the Applicant declared, in annex C of the IRS income declaration form, a business volume of € 172,629.02, below the limit in no. 2 of article 28 IRS Code, whereby it met the requirements for classification in the simplified regime, which had effects in the taxation period of 2015.

* Thus, in order for the Applicant to remain in the organized accounting regime, it would have had to exercise that option by 15 March of the year of taxation, thereby avoiding classification in the simplified regime, which it did not do.

* According to the AT, the Applicant's classification regime is as shown in the table below (page 13 of the Response, article 54):

2004 Organized accounting
2005 Organized accounting
2006 Organized accounting
2007 Organized accounting
2008 Organized accounting
2009 Organized accounting
2010 Organized accounting
2011 Organized accounting
2012 Organized accounting
2013 Organized accounting
2014 Organized accounting
2015 Simplified regime

The Respondent further requests the exemption from holding the meeting referred to in article 18 of the RJAT, as well as the correction of the process value to € 1,133.43, the amount of the corrected assessment after the grant of the administrative complaint no. ...2018....

Notified by arbitral order of 8 March 2019, the Applicant came to respond to the matter of exception invoked by the AT, stating that the request object of the case "is inevitably the declaration of illegality of the IRS assessment act for 2015," "based on breaches of law" that are directly imputed to it in the request for arbitral pronouncement, although the illegality affecting that act results from incorrect classification in the simplified taxation regime.

By arbitral order of 26 April 2019, the meeting referred to in article 18 of the RJAT was waived, by agreement of the parties, the latter being notified to present simultaneous written submissions, within a period of 20 days, and the date of 5 July 2019 was fixed for the pronouncement of the arbitral decision, warning the Applicant that by that date it should comply with the provision in article 4, no. 3, of the Regulations on Costs in Tax Arbitration Proceedings.

Both parties submitted their written submissions, in which they reiterated the positions expressed in the initial pleadings.

II. SANCTION OF PLEADINGS

1. The arbitral tribunal is competent and was regularly constituted on 4 February 2019, in accordance with the provision in paragraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December.

It is indeed unequivocal from the content of the request for arbitral pronouncement at the origin of the case that the challenged act is a tax assessment act, whose declaration of illegality is requested, due to erroneous quantification of income [article 99, paragraph a), of the Code of Tax Procedure and Process, applicable to the tax arbitration process, by reference to the provision in article 29, no. 1, paragraph a), of the RJAT], which falls, without doubt, within the competence attributed to arbitral tribunals by paragraph a) of no. 1 of article 2 of the RJAT, since the tax arbitration process was conceived as an alternative means to the judicial challenge process (see the legislative authorization granted to the Government by article 124, no. 2 (first part) of Law no. 3-B/2010, of 28 April – State Budget Law for 2010).

It is thus considered that the lack of competence of the arbitral tribunal has not been established, nothing preventing the tribunal from ruling on the merits of the case.

2. The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

3. The proceedings are not affected by any defects that would invalidate them.

It is necessary to assess the merits of the case.

III. GROUNDS

III.1 FACTUAL MATTER

1.1. Established Facts

The factual matter relevant to the understanding and decision of the case, following critical examination of the documentary evidence offered by the Applicant and the administrative file attached to the case, is established as follows:

1. The Applicant commenced its activity in wholesale trade of horticultural products (CAE 51311), on 18 March 2004, having declared an expected business volume until the end of the year (10 months) of € 172,500.00, being classified under the organized accounting regime (no. 3 of article 28 of the IRS Code) – table 10, field 19 of the activity commencement declaration attached to PI as Doc. 2;

2. On 30 March 2006, the Applicant filed a declaration of alterations, in which table 19 indicated the option for the organized accounting regime – Doc. 3 attached to PI;

3. The sales volumes declared by the Applicant in annex C to the IRS form 3 declarations and in the simplified business information declarations, in the years 2006 to 2014, were as follows (Docs. 11 to 27, attached to PI):

a. 2006 - € 193,513.90;
b. 2007 - € 226,141.76;
c. 2008 - € 225,545.01;
d. 2009 - € 232,527.70;
e. 2010 - € 269,309.26;
f. 2011 - € 193,043.64;
g. 2012 - € 181,329.76;
h. 2013 - € 275,672.57;
i. 2014 - € 172,629.02;

4. The sales volume realized by the Applicant in the years 2004 and 2005 was € 153,151.08 and € 145,072.27, respectively, as shown in table 12 of annex C to the IRS form 3 declaration for the year 2006 (years N-1 and N-2) – Doc. 11 attached to PI;

5. The IRS form 3 declaration referring to 2015 income, in which the Applicant included an annex C declaring the net result of the period of € 4,775.20 and a sales volume of € 223,770.56, showed the central errors "C70 – Incompatibility between the annex filed and the option in records" and "E32 – Taxation regime option not permitted," notified by official letter no. ..., of 23/06/2016 (Docs. 4 and 9, attached to PI);

6. On 28/09/2018, the AT issued, in the name of the Applicant and spouse, B..., the ex officio IRS assessment no. 2018..., referring to the year 2015, in the total amount of € 109,450.97, which includes compensatory interest of € 9,226.16, with a payment deadline of 12/11/2018;

7. On 22/11/2018, the Applicant filed an administrative complaint in which it invoked error in the quantification of Category B income, due to incorrect application of the coefficient of 0.15 to the sales volume, instead of the coefficient of 0.75, pursuant to the law, copy attached to PA);

8. The administrative complaint registered under no. ...2018..., was granted by order of the Head of the Tax Justice Division of the Finance Directorate of ..., of 06/12/2018, notified to the Applicant "via CTT," by official letter of the same date and Regional Service of AT (copy attached to PA);

9. At the date of the decision on the administrative complaint, the contested assessment was in the coercive collection phase, required in the tax enforcement proceedings no. ...2018..., instituted on 19/11/2018 (information provided in the administrative complaint procedure, with copy attached to PA);

10. Based on the decision to grant the administrative complaint, the correction document was prepared resulting in assessment no. 2018..., of 18/12/2018, "Without Collection Document," notified to the Applicant by official letter remitted under the cover of CTT registration no. RY...PT (document attached to PA);

11. The corrected assessment was issued for the total amount of € 1,133.43 (response of the AT).

1.2 – Unproven Facts

There are no facts relevant to the decision of the case that should be considered as unproven.

1.3. Grounds for the Proven Factual Matter

With regard to factual matters, the tribunal does not have to rule on everything alleged by the parties; rather, it has the duty to select the facts that are important for the decision and to distinguish the proven facts from those that are not proven.

Thus, the facts relevant to the judgment of the case are chosen and defined based on their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (see former article 511, no. 1, of the CPC, corresponding to current article 596, applicable pursuant to article 29, no. 1, paragraph e), of the RJAT).

Accordingly, having regard to the documents indicated in each of the subparagraphs of the evidence above, the facts stated above are considered to be proven.

III.2 LAW

a. Preliminary Matter

In its Response, the Respondent invokes as a preliminary matter the matter of the value of the case, indicated by the Applicant in the request for arbitral pronouncement as corresponding to the value of the IRS assessment no. 2018..., of 28 September 2018, referring to the year 2015, in the total amount of € 109,450.97.

The Respondent contends that, given that said assessment was partially annulled in the context of administrative complaint no. ...2018..., from which the grant resulted in assessment no. 2018..., issued on 14/12/2018, in which the amount due was determined to be € 1,133.43, this should be the value of the case and not that indicated by the Applicant in the initial petition, since, pursuant to paragraph a) of no. 1 of article 97-A of the Code of Tax Procedure and Process (CPPT), when an assessment is challenged, the value of the case corresponds to that of the amount whose annulment is sought.

However, the Respondent's position is incorrect.

In fact, in accordance with no. 1 of article 299 of the Code of Civil Procedure (CPC), which applies subsidiary to the tax arbitration process, by reference to article 29, no. 1, paragraph e), of the RJAT, the determinative moment for the fixing of the value of the case is that of the filing of the action, which, in the tax arbitration process, corresponds to the presentation of the request for arbitral pronouncement.

The competence of the judge in determining the value of the case does not prejudice the duty of its indication by the parties (article 306, no. 1, of the CPC), and its indication by the plaintiff is one of the requirements of the initial petition, provided for in article 522, no. 1, paragraph f), of the CPC.

As the request for arbitral pronouncement was filed on 23 November 2018, the date on which the assessment act no. 2018..., referring to the year 2015, issued on 28 September 2018, in the total amount of € 109,450.97, was in force, and the Applicant fulfilled the burden of indicating in the request for arbitral pronouncement the value of the assessment whose legality is under review, that amount should be the one to be considered for purposes of determining the value of the case, regardless of the subsequent vicissitudes of the challenged act.

b. Quantification of Category B Income

In order to ascertain the alleged error in the quantification of Category B income earned by the Applicant in the year 2015, the subject matter of the dispute under analysis, it is necessary to briefly discuss the classification regime applicable to the determination of such income, from the beginning of its activity, in 2004, until the year in question, keeping in mind that "The simplified taxation regime (art. 28 of the IRS Code) constitutes a non-binding regime, valid only for those who have not opted for the organized accounting regime" and that "The general regime is that taxation of business income is based on accounting."

At the date when the Applicant commenced its activity (18/03/2004), article 28, no. 1 of the IRS Code, as amended by Decree-Law DL 198/2001, of 3 July, provided for two modalities for determining business and professional income: according to the rules of the simplified regime or on the basis of accounting.

The simplified regime was then the general regime for taxpayers who had not obtained, in the immediately preceding fiscal year, a business volume exceeding € 149,739.37 or a net value of other Category B income exceeding € 99,759.58 (no. 2 of article 28 of the IRS Code), without prejudice to the option for the accounting regime, to be formalized by the end of March of the year in which they intended its application, in a declaration of alterations (no. 4 of article 28 of the IRS Code).

If the option for the accounting regime were not exercised, article 28, no. 5 of the IRS Code, provided for a minimum period of permanence in the simplified regime, except if any of the limits mentioned in no. 2 of the same article were exceeded in two consecutive taxation periods or if exceeded in a single fiscal year by an amount exceeding 25% of that limit (no. 6 of article 28 of the IRS Code).

In the year of commencement of activity, the classification of the taxpayer in one or the other of said taxation regimes depended, pursuant to no. 10 of said article 28 of the IRS Code, as amended by Law no. 109-B/2001, of 27 December, with interpretative nature, on the annual estimated revenue value stated in the activity commencement declaration, although taxpayers who met the requirements for classification in the simplified regime could opt for the accounting regime, by means of an option to be formalized in the activity commencement declaration.

At the date when the Applicant commenced its activity, there was no minimum period of permanence in the accounting regime; therefore, absent such an option, taxpayers who in the immediately preceding fiscal year obtained revenues of an amount below those provided for in no. 2 of article 28 of the IRS Code, would be classified in the simplified regime.

However, with the amendment introduced to the wording of no. 5 of article 28 of the IRS Code, by article 46 of Law no. 53-A/2006, of 29 December, the minimum period of permanence for three years began to apply to either of the regimes for determining taxable income of Category B, renewable for equal periods, except if the taxpayer elected to opt for a different regime than that which applied.

The new wording of that no. 5 of article 28 of the IRS Code, given by Law no. 53-A/2006, of 29 December, became the following:

"5 — The minimum period of permanence in any of the regimes referred to in no. 1 is three years, renewable for equal periods, except if the taxpayer communicates, pursuant to paragraph b) of the preceding number, the alteration of the regime which applies to it."

Returning to the case at hand and taking into account the facts established above, the following conclusions can be reached:

(i) The Applicant, which in the activity commencement declaration filed on 18 March 2004, indicated an estimated annual sales volume of € 207,000.00 (€ 172,500.00/10.12), exceeding the limit provided for in article 28, no. 2, paragraph a), of the IRS Code, was classified in the accounting regime by legal mandate.

(ii) In the fiscal year 2005, the Applicant realized sales in the amount of € 145,072.27 (see table 12 of annex C to the IRS form 3 declaration for fiscal year 2006, by reference to year N-1), having remained in the accounting regime, given the sales volume declared in the prior year, of € 153,151.08, exceeding the limit provided for in article 28, no. 2, paragraph a), of the IRS Code (see table 12 of annex C to the IRS form 3 declaration for fiscal year 2006, by reference to year N-1), maintaining classification in the accounting regime by legal mandate.

(iii) However, considering the 2005 sales volume (€ 145,072.27), below the limit provided for in article 28, no. 2, paragraph a), of the IRS Code, the Applicant would have been classified in the simplified regime in 2006, for a minimum period of three years (article 28, no. 5, of the IRS Code, in the wording in force at that time), had it not formulated the option for the accounting regime, in the declaration of alterations filed on 30 March of that year.

(iv) With the amendment introduced to the wording of no. 5 of article 28 of the IRS Code, by article 46 of Law no. 53-A/2006, of 29 December, the minimum period of permanence for three years began to apply to either of the regimes for determining taxable income of Category B, renewable for equal periods, except if the taxpayer elected to opt for a different regime than that which applied, which, in the present case, did not occur.

The Respondent contends that the application of the rules of the simplified regime to the determination of the Applicant's business income, in fiscal year 2015, results from the administrative doctrine set forth in Circular no. 5/2007, of the DSIRS, of 13 March, issued following the amendments introduced by Law no. 53-A/2006, of 29 December, in accordance with whose no. 1 "Taxpayers who are covered by the regime for determining business and professional income on the basis of accounting for not meeting the requirements provided for in no. 2 of article 28 of the IRS Code shall not be subject to the minimum period of permanence provided for in no. 5 of the same article, since their classification does not result from an option."

Regardless of the legal value that doctrine has traditionally attributed to circulars, as generic instructions, it is the conviction of this arbitral tribunal that said Circular no. 5/2007 does not apply to the Applicant's tax situation.

While, on the one hand, according to traditional doctrinal perspective, the binding force of circulars "results solely from the hierarchical authority of the agents from which they emanate, and from the duties of subordinates to comply with them (...)", as "they are not intended for individuals, citizens, taxpayers," not binding them, "Nor to the Courts, which treat of interpreting and applying tax laws without any dependence on the criteria adopted by the Tax Administration (...)", more recent doctrine attributes to the "principal role occupied by the taxpayer in the life of taxation (...) the existence of generic guidelines that attempt to standardize predominantly private application of law, as a consequence of the constitutional imperative of equality, but also to guidelines justified by the need to facilitate taxpayers' task of applying the law, as well as to equip them with mechanisms for predictability of eventual administrative action."

From this latter perspective, given the filing of a declaration of alterations on 30 March 2006, in which it exercised the option for the accounting regime and the amendments introduced by Law no. 53-A/2006, of 29 December, to the wording of article 28 of the IRS Code, which extended to both regimes for determining business and professional income the minimum period of permanence for three years, renewable for equal periods, the expectation of the Applicant in the maintenance of the determination of its Category B income in the accounting regime is justified.

In fact, although said Law no. 53-A/2006, of 29 December, which approved the State Budget for 2007, came into force on 1 January of that year, the reference to the "regime which applies to [the taxpayer]" indicates, without great margin for doubt, that the new wording of no. 5 of article 28 of the IRS Code, covers situations already established at the date of the beginning of its validity, pursuant to no. 2 of article 12 of the Civil Code.

Being so and, notwithstanding the subsequent amendments introduced to the wording of article 28 of the IRS Code, namely the increase of the annual net amount of the income mentioned in its no. 2, to € 200,000.00, by Law no. 83-C/2013, of 31 December, these do not appear capable of altering the Applicant's classification for IRS purposes, as intended by the AT, unless it had opted for the simplified regime in 2015, which it did not.

It follows from the above that the Applicant was classified in the accounting regime, by option and not by "legal mandate," in the three-year period of 2006/2008, renewable for equal periods, the interpretation conveyed by said Circular no. 5/2007 of the DSIRS not being applicable to it, and thus confirming the erroneous quantification of its business income according to the rules of the simplified regime, which taints the IRS assessment no. 2018... with illegality, the subject matter of the present case.

c. Reconstitution of the Situation that Would Have Existed Had the Illegality Not Been Committed

In accordance with the provision of article 100 of the General Tax Law (LGT), "in case of total or partial allowance of administrative complaints or appeals, or of judicial proceedings in favor of the taxpayer," the tax administration is bound to "immediate and complete reconstitution of the situation that would have existed had the illegality not been committed."

Concurrently, article 24, no. 1 of the RJAT provides:

"Article 24 - Effects of the arbitral decision against which there is no appeal or challenge

1 - The arbitral decision on the merits of the claim against which there is no appeal or challenge binds the tax administration from the end of the period provided for appeal or challenge, and the latter, in the exact terms of the allowance of the arbitral decision in favor of the taxpayer and until the end of the period provided for spontaneous execution of tax court judgments, alternatively or cumulatively, as the case may be:

a) Practice the tax act legally due in replacement of the act subject to the arbitral decision;

b) Restore the situation that would have existed had the tax act subject to the arbitral decision not been practiced, adopting the acts and operations necessary for that purpose;

c) Review the tax acts which are in a relation of prejudice or dependence with the tax acts subject to the arbitral decision, in particular by being within the scope of the same tax legal relationship, even if corresponding to distinct periodic obligations, altering or replacing them, totally or partially;

d) Liquidate the tax obligations in accordance with the arbitral decision or refrain from liquidating them."

It is concluded above that there is illegality in the IRS assessment no. 2018..., referring to the year 2015, in the total amount of € 109,450.97, from which would result its consequent annulment.

However, as the Respondent invokes in its Response as a preliminary matter, that tax act has already been partially annulled (partial annulling revocation), in execution of the decision to grant the administrative complaint filed by the Applicant on 22/11/2018, having been replaced by assessment no. 2018..., issued on 14 December 2018, in which the amount due was determined to be € 1,133.43 and with which the Applicant did not comply, because, otherwise, by applying subsidiary the provision of no. 3 of article 112 of the CPPT, there would have been no occasion for the constitution of the present arbitral tribunal on 4 February 2019.

Analyzing the petition of administrative complaint no. ...2018..., with copy attached to PA, it is verified that the Applicant requests the correction of the initial assessment, in which it supposed that the coefficient of 0.75 had been applied to the sales volume of fiscal year 2015, instead of the coefficient of 0.15.

These coefficients are those set forth in article 31, no. 1, paragraphs a) and b), of the IRS Code, which establish the rules for determining Category B income, in the simplified regime.

The Applicant declared a sales volume of € 223,770.56, for fiscal year 2015, which amount was considered in its entirety as Category B income (and not by application of the coefficient of 0.75, as it may have supposed) and resulted in total income of € 229,830.56, as well as the tax assessment subject to the complaint. The new assessment, of € 1,133.43, resulted, therefore, from the application of the coefficient of 0.15 to the sales volume of fiscal year 2015.

Now, having concluded that the error in the quantification of the Applicant's business income, in fiscal year 2015, resulted from the application of the rules of the simplified regime, it is obvious that the corrective assessment also suffers from the same illegality vice, and cannot be maintained in the legal order.

Nor shall this be impeded by the fact that the Applicant invoked different causes of action in the administrative complaint and in the request for arbitral pronouncement, since the request for arbitral pronouncement, like the judicial challenge process, may be based on any illegality, in particular error in the quantification of income (article 2, no. 1, paragraph a), of the RJAT and article 99, paragraph a), of the CPPT, applicable pursuant to article 29, no. 1, paragraph a), of the RJAT).

Anticipating the decision it will be said that, with a view to the complete reconstitution of the violated legality, both the IRS assessment no. 2018..., referring to the year 2015, in the total amount of € 109,450.97, already partially revoked by the AT in the context of administrative complaint no. ...2018..., and assessment no. 2018..., of € 1,133.43, which replaced it, should be annulled, given the relationship of dependence with the tax act subject to the request for arbitral pronouncement, and the Respondent shall be sentenced to issue a new assessment for fiscal year 2015, based on the values determined by the Applicant in its accounting records.

IV – DECISION:

Based on the factual and legal grounds set out above, and pursuant to article 2 of the RJAT, the decision is, finding the present request for arbitral pronouncement to be well-founded:

a. To declare the illegality of the IRS assessment no. 2018..., referring to the year 2015, in the total amount of € 109,450.97, already partially revoked by the AT, which is annulled in its entirety;

b. To declare the illegality and determine the annulment of the IRS assessment no. 2018..., of € 1,133.43, which replaced the prior assessment;

c. To condemn the Respondent to practice the act legally due, embodied in the issuance of an IRS assessment for the year 2015, based on the values determined by the Applicant in its accounting records.

VALUE OF THE CASE: In accordance with the provision of article 306, nos. 1 and 2, of the CPC, article 97-A, no. 1, paragraph a), of the CPPT, and article 3, no. 2, of the Regulations on Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 109,450.97 (one hundred and nine thousand, four hundred and fifty euros and ninety-seven cents).

COSTS: Calculated in accordance with article 4 of the Regulations on Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of € 3,060.00 (three thousand and sixty euros), to be borne by the Tax and Customs Authority.

Let it be notified.

Lisbon, 28 May 2019.

The Arbitrators,

José Poças Falcão
(Arbitrator President)

Maria Alexandra Mesquita
(Arbitrator Member)

Mariana Vargas
(Arbitrator Member)

Text prepared by computer, pursuant to no. 5 of article 131 of the CPC, applicable by reference to paragraph e) of no. 1 of article 29 of DL 10/2011, of 20 January.

The wording of this decision is governed by the 1990 spelling agreement.

Frequently Asked Questions

Automatically Created

Does the option for organized accounting in IRS become definitive after the initial declaration of alterations in Portugal?
No, the option for organized accounting in IRS does not become permanently definitive. According to this CAAD decision, when a taxpayer's business volume falls below the mandatory threshold for organized accounting (currently €200,000), they automatically qualify for the simplified regime unless they affirmatively renew their organized accounting option. The taxpayer's 2006 declaration of alterations opting for organized accounting did not create a perpetual obligation—it required renewal by March 15 of the relevant tax year to maintain the regime when conditions changed.
What happens if a taxpayer fails to renew the organized accounting option by March when falling below the simplified regime threshold?
If a taxpayer fails to renew the organized accounting option by March 15 when their revenue falls below the simplified regime threshold, the Tax Authority automatically reclassifies them to the simplified regime for that tax year. This occurred in Process 587/2018-T where the taxpayer's 2014 sales volume of €172,629.02 fell below thresholds, triggering automatic classification to simplified regime for 2015. The taxpayer must file a declaration of alterations (declaração de alterações) by the March deadline to maintain organized accounting status, otherwise the reclassification occurs by operation of law under Article 28 of the IRS Code.
Can the Portuguese Tax Authority (AT) reclassify a taxpayer from organized accounting to the simplified regime without a new declaration of alterations?
Yes, the Portuguese Tax Authority can reclassify a taxpayer from organized accounting to the simplified regime without requiring a new declaration of alterations from the taxpayer. When business volume falls below statutory thresholds and the taxpayer fails to exercise the option to remain in organized accounting by the March 15 deadline, reclassification occurs automatically by legal operation under Article 28 of the IRS Code. As confirmed in this CAAD decision, the regime classification is determined annually based on prior year revenues and timely option exercises, not solely on historical declarations. The AT's reclassification authority is a consequence of the taxpayer's failure to act, not an independent administrative decision requiring separate procedural formalities.
How does CAAD handle disputes over the quantification of Category B professional and business income under IRS?
CAAD handles disputes over quantification of Category B professional and business income by examining whether the tax assessment correctly applied the applicable regime (organized accounting versus simplified regime) and properly calculated taxable income accordingly. In Process 587/2018-T, the tribunal affirmed jurisdiction under Article 2(1)(a) of RJAT, rejecting the AT's argument that regime classification disputes fall outside arbitral competence. The tribunal clarified that challenges to IRS assessments based on erroneous income quantification—even when rooted in regime misclassification—constitute legitimate grounds for tax arbitration under Article 99(a) of the Tax Procedure Code. CAAD examines both the procedural validity of regime determination and substantive accuracy of income calculations, serving as an alternative to judicial challenge processes for Category B income disputes.
What is the divergence code C70 and how does it affect IRS tax returns filed with organized accounting in Portugal?
Divergence code C70 (incompatibility between annex filed and option in records) appears when there is a mismatch between the IRS regime shown in the Tax Authority's taxpayer records and the annexes submitted with the IRS declaration. In this case, C70 was triggered when the taxpayer filed Annex C for organized accounting in 2015, but AT records showed classification in the simplified regime based on 2014 revenues of €172,629.02. This discrepancy code signals that the taxpayer filed documentation inconsistent with their official classification status, typically because they failed to submit a timely declaration of alterations to exercise the organized accounting option. C70 alerts both taxpayer and AT to regime misalignment requiring resolution before the declaration can be properly processed, often resulting in assessment corrections or requiring regime clarification through administrative or arbitral procedures.