Process: 588/2017-T

Date: March 27, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 588/2017-T) addresses the fundamental requirement that Portuguese tax authorities provide adequate reasoning when correcting taxpayer declarations. The taxpayer, a telemarketing operator earning minimum wage, received gratuities totaling €7,572 from a third-party entity (not their employer) and declared this income under the special 10% autonomous taxation regime pursuant to Article 2(3)(g) and Article 72(3) of the IRS Code. The Tax Authority initially accepted this tax treatment but later issued an additional IRS assessment of €1,175.28 plus compensatory interest, altering the taxpayer's declared elements without clear justification. The taxpayer challenged this through administrative complaint (expressly denied) and hierarchical appeal (tacitly denied), ultimately seeking CAAD arbitration. The central legal question is whether the AT violated the legal duty to state reasons (fundamentação) when correcting the taxpayer's income classification. The taxpayer argued that gratuities not attributed by the employer qualify for the special 10% autonomous rate under Article 72(3) of the IRS Code, and that the AT failed to explain why this classification was incorrect. This case illustrates critical taxpayer protections in Portuguese tax procedure: the mandatory duty of tax authorities to provide clear, objective reasoning for assessment corrections; the right to challenge tacit denials through arbitration; and potential entitlement to compensatory interest when unlawful assessments are annulled. The case highlights tensions between different categories of employment income and the proper application of autonomous taxation rates to atypical remuneration like gratuities from non-employer entities.

Full Decision

ARBITRAL DECISION

I. REPORT

  1. A…, holder of tax identification number…, resident in …, …, no. …, …-…, …, requested the establishment of an arbitral tribunal in tax matters, raising a request for arbitral decision against the act of tacit dismissal of the hierarchical appeal filed against the express dismissal order of the administrative complaint relating to an additional IRS assessment and corresponding compensatory interest – in the total amount of € 1,205.63, of which € 1,175.28 is tax and € 30.35 is compensatory interest – resulting from the alteration of the declared elements relating to the tax year 2015. Petitioning for the annulment of the said acts and the consequent reimbursement of amounts unduly paid, the Claimant further requests recognition of the right to corresponding indemnificatory interest, calculated in accordance with legal terms.

  2. Basing the request, presented on 09-11-2017, the Claimant alleges, in essence, that "the Tax Administration did not present in a clear, objective and coherent manner the reasons that motivated the corrections to the annual income declaration Model 3 of 2015 and, consequently, to the issuance of the additional tax assessment in the amount of € 1,175.28, whereby the Claimant understands there to be a defect of violation of law due to absence of the legally required substantiation." The Claimant particularly requests that the tribunal "establish and confirm the adequate declaration in the Model 3 income declaration of the income earned by way of gratuities not attributed by the employer and the subjection thereof to a special autonomous rate of 10% in IRS, pursuant to letter g) of no. 3 of article 2 and no. 3 of article 72 of the IRS Code."

  3. In response to what was requested, the Tax and Customs Authority (AT) pronounced itself in the sense of the dismissal of the present request for arbitral decision, maintaining in the legal order the impugned acts and, accordingly, in absolution of the Respondent entity.

  4. The request for establishment of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 16-11-2017.

  5. Pursuant to the provisions of letter a) of no. 2 of article 6 and letter b) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20/01, as amended by article 228 of Law no. 66-B/2012, of 31/12, the Deontological Council designated the signatory as arbitrator of the singular arbitral tribunal, who communicated acceptance of the appointment within the applicable period, and notified the parties of such appointment on 04-01-2018.

  6. Duly notified of such appointment, the parties did not express willingness to refuse the designation of the arbitrator, pursuant to the combined provisions of article 11, no. 1, letters a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

  7. Thus, in accordance with the provisions of letter c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31/12, the singular arbitral tribunal was established on 24-01-2018.

  8. With the arbitral tribunal duly established, it is materially competent, given the provisions of articles 2, no. 1, letter a), of the RJAT.

  9. The parties have judicial personality and capacity and have legitimacy (articles 4 and 10, no. 2, of the RJAT, and article 1 of Ordinance no. 112-A/2011, of 22/03).

  10. Given the knowledge arising from the procedural documents submitted by the parties, which is deemed sufficient for the decision, the Tribunal decided to dispense with the meeting alluded to in article 18 of the RJAT as well as the examination of the witness summoned by the Claimant.

II. STATEMENT OF FACTS

  1. With relevance for the appreciation of the request for arbitral decision, the following factual elements are highlighted, which, based on the documentary elements attached to the case file, are deemed proven:

11.1. On 31-07-2012, the Claimant entered into a fixed-term employment contract, initiated on that same date, with company B…, S.A.[i], NIPC…, with headquarters at Street …, …, in Lisbon (Doc.5).

11.2. The said company has as its activity "the provision of management services in the area of telemarketing and telephone communications to entities and institutions that require high service volumes with marked fluctuations, particularly by virtue of the organization of short-duration campaigns." (Doc.5 – Clause 9)

11.3. Pursuant to the contract, the Claimant, under the guidance and authority of the said company, will exercise the functions of a telemarketing operator, being responsible, in particular, for receiving and making telephone calls, electronic communications and other communications, telephone interviews and data entry (Doc.5 - Clause 1).

11.4. The agreed monthly remuneration is € 485.00 – a value corresponding to the guaranteed minimum monthly remuneration in force at the date [ii] – increased by Christmas and holiday allowances, as well as meal allowance and subject to legal deductions (Doc.5 – Clauses 5 and 6).

11.5. As extracted from the case elements, the Claimant in the years 2015 and thereafter maintains the dependent work relationship with the employer entity identified above, being attributed a remuneration equivalent in value to the guaranteed minimum monthly remuneration (Doc. 7).

11.6. In his periodic income declaration for the tax year 2015, the Claimant declared the amount of income earned as a dependent worker – € 7,951.23 entered in Code 401, of Annex A of the Model 3 declaration – as well as income, also within Category A of IRS but subject to autonomous taxation, relating to gratuities attributed by company C…, Ltd., with NIPC … – € 7,572.00, entered in Code 402 of Annex A.

11.7. Following the Claimant's submission of the annual income declaration – IRS Model 3 declaration – the corresponding assessment was issued on 17-05-2016, from which resulted an amount of tax due of € 137.46.

11.8. According to the "demonstration of assessment," this was made in accordance with the elements declared by the taxpayer, considering the amount of € 7,951.23 of dependent work income covered by the general regime for consolidation of income and € 7,572.00 subject to autonomous taxation at the rate of 10% (Doc. 8).

11.9. The income relating to gratuities not attributed by the employer entity, in the amount referred to above, as well as the corresponding withholding at source, are set out in a declaration issued, pursuant to letter b) of no. 1 of article 119 of the IRS Code, by the entity that attributed them (Doc.9, presented by the Claimant), but which is equally incorporated in the administrative file (PA 2), which is transcribed below:

"Income Declaration

It is hereby declared, pursuant to and for the purposes of article 119, no. 1 of the IRS Code, that in the tax year 2015, A…, taxpayer no. …, earned net gratuities relating to Category A, classifiable under Article 2, No. 3 Letter g) of the IRS Code, in the amount of 7,572€, to which the following deductions were made:

I.R.S.: 754.00€

Social Security: 0.00€

Union: 0.00€

C.G.A.: 0.00€

Extraordinary Surcharge: 0.00€"

11.10. This income is recorded, in identical terms, in the monthly declaration of remuneration (DMR) referred to in letter c) of no. 1 of the same article 119, as clarified by the Information prepared by a technician of the AT that forms part of the administrative complaint file no. …2017…: "The Tax Authority, through the current computer system, verified in the declaration DMR-Income Holders, that company C…, Ltd., in its capacity as debtor entity, declared the payment of the amount of € 7,572.00 as Gratuities not attributed by the employer…"

11.11. As extracted from various printouts of records contained in the AT's computer system that form part of the administrative file (PA 5) – discrepancy management – doubts would have been raised in the tax office of … regarding the classification, in IRS, of the amounts declared as "Gratuities," which raised the question to the IRS Services Department: "THE WORKER WORKS FOR COMPANY … WHICH DECLARED DEPENDENT WORK INCOME FOR THE YEAR 2015. COMPANY … ALSO REPORTED THAT IT PAID GRATUITIES IN 2015. CAN GRATUITIES PAID BY ENTITY … BE CONSIDERED AS SUCH OR MUST THEY BE CONSIDERED AS DEPENDENT WORK"

11.12. Following the said inquiry, on 26-10-2016, a new computer record was prepared "Discrepancy Management – Notification for Prior Hearing" which contains: "Text of error: Deliver IRS/2015 substitute declaration stating the Category A income with code 402 (Gratuities) in field 401 (dependent work), as well as the withholdings at source." (PA 5)

11.13. After notification of the taxpayer and exercise of the right to a hearing, by order of 26-12-2016, the effectuation of corrections to the submitted declaration was determined, and the decision was notified in the following terms: "From the analysis made to the documents/allegations presented in the prior hearing, regarding the notification of the discrepancy(ies) identified in the Model 3 income declaration for the year 2015 with identification I…/21, the elements declared were not proven, such that by my decision of 2016-12-28 the effectuation of the following correction(s) was determined:

Annex Table Field Declared Value Correction to be made Final Value
A 4A 401 € 7,951.23 € 7,572.00 € 15,523.23
A 4A 402 € 7,572.00 € 7,572.00 € 0.00
A 4A RETEN € 754.00 € 12.00 € 768.00

Resulting from said alteration(s) to the declared values, you will be duly notified of the assessment of the corresponding tax, from which you may file complaint/appeal pursuant to article 140 of the IRS Code and articles 68/99 of the Code of Tax Procedure and Process." (Doc.10)

11.14. On 06-01-2017, notification of the "Demonstration of settlement of accounts" for the year 2015 was made, reporting the official corrections referred to in the previous point and containing the indication of the amount of tax and compensatory interest to pay, with the payment deadline indicated as 22-02-2016 (Doc. 4).

11.15. The amount of tax and interest resulting from the corrections made to the previously declared elements amounts to € 1,175.28, corresponding to the sum of the amount of € 1,282.39, relating to tax, increased by € 30.35 of compensatory interest, with the amount of € 137.46 resulting from the initial assessment deducted therefrom.

11.16. Not having been made payment within the period indicated in the "Demonstration of assessment," the tax enforcement proceeding no. …2010… was instituted for coercive collection of the amount ascertained in the corrective assessment (Doc.11). The debtor was summoned on 16-03-2017, having on 4 May of the same year made voluntary payment of the amount of € 1,204.93, corresponding to the collectible amount and legal increments (Doc. 12).

11.17. From the corrections made by the AT to the submitted declaration and consequent official assessment, on 05-02-2017, an administrative complaint was filed, essentially on the ground that the declaration submitted by the taxpayer did not suffer from error or discrepancy as to the nature of the income declared, whereby the decision of the AT lacked legal foundation.

11.18. By Office no. …, of 27-04-2017, the now Claimant was notified of the draft dismissal of the complaint presented and to, if desired, exercise the right to a hearing.

11.19. Having exercised said right, within the scope of the administrative complaint process, the Information was prepared by the AT technician (Doc.2), from which it is extracted:

"The Tax and Customs Authority proceeded to tax assessment, resulting in assessment(s) no.(s) … made on 06/01/2017, and based on the elements contained in this case and consulting the data in the computer system through the central information system, it is verified that the claimant's allegations have no foundation, given that:

After analysis of the case, it is found that: The taxpayer C…, Ltd. with NIF … declared in the DMR/2015 (see fl. 7 of the case) that it paid "Gratuities-tips" not attributed by the employer, to the claimant, worker of company "D…, S.A." with NIF… . In this context, given the institution of the discrepancy process, the claimant was notified of the alterations made, since the declared elements were not proven, see fl. 9 of the case. That discrepancy process ended with the preparation of the Statement which gave rise to the official declaration, which is currently in force, considering the "gratuities" earned as dependent work income, see fl. 12 and 16.

Gratuities not attributed by the employer have the nature of dependent work income pursuant to letter g) of no. 3 of article 2 of the IRS Code, of gratuities earned by the performance or by reason of the performance of work, when not attributed by the respective employer. These are, therefore, income subject to taxation within Category A accruing to other dependent work remuneration earned by their respective holders. Thus, I am of the opinion that the official assessment is correct."

…

Following the notification made pursuant to article 60 of the LGT, the taxpayer comes to contest the dismissal decision rendered in the "Draft Decision," with the following grounds: … agrees with the qualification made by the Tax Administration, that is, income not attributed by the employer has the nature of dependent work income /letter g) of no. 3 of article 2 of the IRS Code). But, in completing its annual income declaration Model 3, it reflects the qualification of the income as being gratuities not attributed by the employer and to this extent includes the value of € 7,572.00 in field 402, that is, in the field specifically created for the declaration of amounts earned as gratuities not attributed by the employer but received by reason of the development of professional activity.

Next, it says that the form of taxation of the alleged income is the one resulting from the application of the provisions of article 72, no. 3 of the IRS Code, being subject to a special taxation rate of 10%.

In this context, they are excluded from taxation under the rules established for Category A, that is, the application of progressive rates provided for in article 68 of the same statute.

It is necessary to assess: In the draft decision, it was textually stated that it was essential to prove the origin of the income at issue here. The Tax Administration, through the current computer system, verified in the declaration DMR – Income Holders, that company C…, Ltd., in its capacity as debtor entity, declared the payment of the amount of € 7,572.00 as Gratuities not attributed by the employer – see fl. 38 of the case. To date, there are no documentary proofs in the case as to how that amount is "Prize for workers having achieved the targets." It is stated again that there is no declaration in the case from the company, issued to the taxpayer, that could clarify the origin of the income.

Given the factuality set out above, and the fact that the right to a hearing presented does not bring new elements to the case, I am of the opinion that the dismissal decision given in the Draft Decision should be upheld."

…

11.20. On the Information, of which the excerpts relating to the analysis of the complaint and assessment of the elements brought to the case in the prior hearing procedure are transcribed above, the following decision was rendered by the Head of the Administrative Justice Division of the Finance Directorate of Lisbon, by subdelegation of powers: "I agree, whereby with the grounds contained in this information and respective opinion, I DISMISS the claimant's request as proposed. Notify. Lisbon 30.5.2017."

11.21. By office no. …, of the Finance Directorate of Lisbon, of 01-06-2017, the claimant was notified of the decision rendered in the complaint process, from which he filed a hierarchical appeal, alleging, in essence, that the impugned acts "suffer from the defect of violation of law, either by omission of essential formalities, in particular, by absence of the legally required substantiation, or by erroneous interpretation and application of the legal norms in force."

11.22. Said hierarchical appeal was presented, by facsimile, on 30-06-2017 (Doc. 1), and was not the subject of decision until the date on which the present request for arbitral decision was presented.[iii]

  1. There are no facts relevant to the decision that have not been proven.

  2. The proven facts are based on the documents submitted by the Claimant as well as those that form part of the administrative file, with no controversy being verified regarding the statement of facts.

III. ON THE TIMELINESS OF THE REQUEST

  1. As results from the provisions in the final part of letter a) of no. 1 of article 10 of the Legal Regime for Tax Arbitration (RJAT), the request for establishment of the arbitral tribunal must be presented within a period of 90 days from "... notification of the decision or the expiration of the legal period for decision of the Hierarchical Appeal."

  2. The maximum legal period for decision of the hierarchical appeal, contained in article 66, no. 5, of the Code of Tax Procedure and Process (CPPT) is 60 days. If the appeal is not decided within that period, the presumption of dismissal is formed, such that, upon the expiration of that period, the interested party may challenge such dismissal within the period referred to in letter d) of no. 1 of article 102 of the CPPT. [iv]

  3. Thus, whether one considers that the starting point of the said period is on the date of delivery of the appeal with the entity that rendered the decision – in the present case, delivered on 30-06-2017 at the tax office – or whether one considers that this period occurs on the date of referral to the competent entity to decide the appeal [v] – 04-08-2017 [vi] – it is verified that such period had already elapsed on the date of presentation of the present request – 09-11-2017 – without there having been an express decision by that date, whereby one concludes on its timeliness.

IV. LEGAL ISSUES

  1. As the foundation of the request for arbitral decision that it formulates, in the sense of declaring the illegality of the acts practiced by the AT, particularly the additional IRS assessment resulting from the official requalification of the declared income, the Claimant enumerates various orders of reasons, of which are highlighted the lack of substantiation of the decision, the violation of the presumption of the truth of the declaration and of the principle of pursuit of material truth, and also, particularly, the qualification and taxation of the income earned and declared.

Position of the Claimant

  1. According to the Claimant, invoking the norms of article 100 of the CPPT and having regard to the provisions of no. 2 of article 124 of the same Code, the decision capable of bringing about the "most stable or effective protection of the offended interests" corresponds to a decision that recognizes, substantially, the legal correctness of the tax fact as it was declared in the Model 3 IRS income declaration.

  2. In that sense, he requests the Tribunal to establish and confirm the adequate declaration in field 402 of the said Model 3 income declaration of the income earned by way of gratuities not attributed by the employer and the subjection thereof to a special autonomous rate of 10% in IRS, pursuant to letter g) of no. 3 of article 2 and no. 3 of article 72 of the IRS Code.

  3. On the qualification of the income at issue, as so declared both by the beneficiary and by the entity that attributes them, the Claimant clarifies that:

"15. In addition to the fixed monthly remuneration contractually stipulated and paid by the EMPLOYER, the CLAIMANT may benefit, occasionally and spontaneously, from monetary gratuities attributed by an external, third and independent entity from the EMPLOYER (hereinafter referred to as "REWARDING ENTITY"),

  1. In this context, a given REWARDING ENTITY, seeking to encourage and motivate the telemarketing operators of the EMPLOYER, such as the CLAIMANT herein, attributes, in a voluntary and unilateral manner, the said gratuities.

  2. These gratuities are paid, at the indication of the REWARDING ENTITY, to a third entity (hereinafter referred to as "MANAGING ENTITY") to the operators in which the CLAIMANT herein is included.

  3. For this purpose, a REWARDING ENTITY, within the scope of its short-duration campaigns, determines eligibility parameters for the attribution of gratuities that typically take into account aspects such as:

i. the strategic principles that guide and govern the REWARDING ENTITY at any given moment;

ii. compliance with "Service Level Agreements" or Service Level Agreements related to quality;

iii. the achievement of certain performance levels, not only individual but also collective or related to a project; and

iv. limitation of gratuities to maximum values.

  1. The REWARDING ENTITY occasionally communicates the said incentive campaigns to the telemarketing operators of the EMPLOYER, among which was, at the date of the relevant facts, the CLAIMANT.

  2. In turn, the MANAGING ENTITY, which has as its corporate purpose the provision of incentive management services, makes the awards directly available to the telemarketing operators of the EMPLOYER through an electronic platform (...).

  3. Thus, the EMPLOYER has no control or influence on the procedure for attribution and distribution of prizes, nor is it, in any way, responsible for their attribution and payment, as results from the analysis of the pay slip of the CLAIMANT herein (see Document no. 7, which is hereby attached and whose content is deemed to be fully reproduced for the proper legal purposes).

  4. It is thus, based on this context of duality of types of income – on the one hand the base salary paid by the EMPLOYER and, on the other, the gratuities attributed by the EMPLOYER through the MANAGING ENTITY – that the CLAIMANT annually proceeds to complete and deliver the annual income declaration Model 3 of IRS.

  5. This duality of types of income was reflected in the CLAIMANT's annual income declaration for the exercise of 2015."

  6. On the remaining defects alleged, whose assessment by the Tribunal is requested as subsidiary in relation to the erroneous qualification of the tax fact made by the AT, the Claimant maintains that:

"49. … the Claimant was only notified of the effectuation of corrections to the values declared in fields 401 and 402 of table 4a of Annex A of Model 3 declaration, without any explanation that would elucidate the motivation of the Tax Administration for the practice of the same.

  1. Having the Tax Administration only informed the CLAIMANT that, in view of the corrections made, it would "be duly notified of the assessment of the corresponding tax."

  2. Subsequently, the CLAIMANT was, in fact, notified of a new tax assessment, for the year 2015, which, however, does not establish any link with the previously received notification and which contained alterations to his taxable income.

  3. The new assessment, now contested, also does not elucidate the concrete grounds of fact and law that were at its origin.

  4. At no time did the Tax Administration reveal the objective grounds that led to the income declared as gratuities earned by, or by reason of the performance of work, but not attributed by the EMPLOYER, being requalified as gross dependent work income and, thereby, the value of its global IRS income being altered from € 7,951.23 to € 15,523.23.

  5. There was not even attached to the notification of the corrections, nor subsequently to the assessment act, any explanation that could elucidate the CLAIMANT on such a significant and sudden alteration, both of the taxable income, and of the tax to be paid in the exercise of 2015.

  6. It is worth noting that this correction had as a consequence the change of the IRS bracket applicable to the CLAIMANT's global income, which began to be taxed at the rate of 28.5% instead of 14.5%.

  7. In this context, the Tax Administration only made known, without substantiating, explaining or justifying, that the CLAIMANT was subject to a significant alteration in its tax sphere and that it had to pay an amount of tax ten times greater than what it expected.

  8. This action does not integrate the concept of a substantiated act, as it neglects the full scope of no. 7 of article 60 and article 77 of the General Tax Law, revealing itself to be clearly in violation of fundamental legal principles, namely the principles of legal certainty and security and of confidence."

  9. Appealing to the presumption of veracity of the declarations of taxpayers established in no. 1 of article 75 of the General Tax Law, the Claimant further alleges that "the Tax Administration not only failed to comply with its duty to carry out the necessary diligences for the discovery of material truth, but did not prove the absence of veracity of the Model 3 IRS income declaration for the year 2015 delivered by the CLAIMANT, in particular the completion of field 402, further requiring that such proof be made, on the contrary, by the taxpayer, here the CLAIMANT."

Position of the Respondent

  1. Pronouncing itself on what is alleged by the Claimant, in particular regarding the erroneous qualification of the income earned and declared as "gratuities" not attributed by the employer, the Respondent says:

"42. Contrary to what is alleged by the Claimant, the AT, given the elements that were communicated to it by the entity C…, Ltd., NIPC…, which declared the payment relating to "Gratuities – tips," not attributed by the employer, to the claimant and by the entity D…, S.A., NIPC…, of which the claimant is a worker, and in strict compliance with articles 59 and 77 of the General Tax Law, as well as article 65 of the IRS Code, notified the claimant, in the course of the discrepancy process, for clarifications on the situation at issue, by non-conformity of the declared elements with those communicated and known to the AT.

  1. Moreover: as the Claimant did nothing to clarify, was again notified of the draft corrections of the assessment, as well as of the right that was his in the course of prior hearing and as he again said nothing, was then notified of the final decision to proceed with a new assessment.

  2. Therefore, the Claimant did not clarify and did not participate in the decision in the course of the discrepancy process because he chose not to do so, for he was always duly notified and informed with sufficient information and substantiation of the reasons why the new assessment was proceeded with.

  3. Being that, what the Claimant seeks to demonstrate, without being able to do so, is that he earned salary income paid by his employer entity, which he calls the employer, and that he earned income relating to gratuities, attributed by a rewarding entity through a managing entity, entities with which the employer has no control or influence.

  4. In order to support documentarily what it alleges, in the administrative file is the employment contract and a pay slip of the employer, a declaration of income issued by C…, in which it states having paid gratuities to the Claimant, and document 6, which is stated to be a "print of award attribution," which is not identified, nor allows ascertaining what type of awards they are, but which the claimant states that this list is made available by the managing entity to the operators of the employer, through a computer platform.

  5. It becomes difficult to understand, in the array of explanations and designations of entities, that the gratuities earned by the Claimant should be classified under article 72, no. 3 of the IRS Code, which determines that "gratuities earned by the performance or by reason of the performance of work, when not attributed by the respective employer nor by an entity that with it maintains group relations, control or simple participation, regardless of the respective geographic location, are taxed autonomously at the rate of 10%."

  6. First, it is not possible to see what the reason is why the entity (whether the claimant calls it managing or rewarding, for the elements that the AT has are limited to a declaration issued by C…) pays gratuities to certain workers of company D…, employer entity of the Claimant, without with it having any relationship or interest, being that this same interest focuses only and exclusively on the performance of certain (or all?) workers of the latter.

  7. Second, neither the declaration of payment of gratuities, nor any other element existing in the present case, allows us to ascertain the reasons why an entity that has nothing to do with the employer is concerned with encouraging and motivating workers of another company with which it has no interest, in the course of short-duration campaigns about which we know nothing.

  8. Campaigns for what? Directed to whom? And what is the reason why the workers of D… have to be motivated? By achieving whose targets, those of C… or D…?

  9. Third, and despite the fact that it is not possible at all to analyze what it pertains to or what or to whom, document 6 attached by the Claimant, what is certain is that it informs that the rewarding entity makes the awards directly available to the operators of D… through an electronic platform, making it impossible to understand also how a company that has no connection or interest with another allows this one to have at its disposal its workers, its performance and certainly its working hours, as well as its computer system to contact with them.

  10. Finally, if, as the claimant states in article 107, "the gratuities at issue only have the value of an incentive, not being calculated or attributed as a function of a percentage on transactions or sales and are not qualifiable as being a remuneration of the nature of commission or remuneration of a given work," then they would not even be gratuities, but an authentic act of kindness, generosity and altruism, quite costly to understand given the fierce competition of markets."

  11. Therefore, it is clear that the increase in fixed monthly remuneration, in no way concerns gratuities, attributed by a company that has nothing to do with the employer, but rather true dependent work performance, thus being correct the procedure carried out by the Tax and Customs Authority.

  12. As regards the alleged lack of substantiation of the AT's decision to alter the declared income and consequent additional IRS assessment, the Respondent, recognizing that "the duty of substantiation merits constitutional recognition, guaranteeing administrated persons the substantiation expressed and accessible of all acts that affect rights or interests legally protected, pursuant to the provisions of article 268, no. 2 of the Constitution of the Portuguese Republic," considers that:

"11. The Claimant alleges that "the Tax Administration did not present in a clear, objective and coherent manner the reasons that motivated the corrections to the annual Model 3 income declaration of 2015 and, consequently, to the issuance of the additional tax assessment in the amount of € 1,175.28, whereby the Claimant understands there to be a defect of violation of law due to absence of the legally required substantiation."

  1. As shown in the information contained in the administrative file (PA), the Claimant was notified that a discrepancy process was opened due to discrepancy between the values he declared in the Model 3 IRS declaration and those found at the AT, by delivery of declarations of third parties, as well as to clarify the situation.

  2. By office of 2016-10-26, the Claimant was notified to exercise the right to a prior hearing on the draft of the new assessment, in which the total value of income would now be entered in field 401 of Annex A of Model 3 declaration, a right to a hearing which was not exercised by the Claimant.

  3. On 2016-12-28, the single correction document was prepared, of which the Claimant was notified, having the AT issued the single correction document, which was assessed on 2017-01-06, with no. 2017… .

  4. The Claimant alleges that the assessment act, which it now challenges, suffers from the defect of lack of substantiation, since "the Tax Administration did not present in a clear, objective and coherent manner the reasons that motivated the corrections to the annual Model 3 income declaration of 2015," as per article 48 of the arbitral request.

However, such argumentation cannot proceed, because

  1. The duty of substantiation merits constitutional recognition, guaranteeing administrated persons the right to expressed and accessible substantiation of all acts that affect rights or interests legally protected, pursuant to the provisions of article 268, no. 2 of the Constitution of the Portuguese Republic.

  2. However, it is important to define the precise scope of this constitutional duty and for this we can resort to the terms of the judgment of the TCA of 2004-01-13 (case no. 03804/00), as this clarifies that, according to the understanding of doctrine and jurisprudence, substantiation has two functions: "one of endogenous nature that results from the principles of legality, justice and impartiality that is imposed on all action of the Administration and (…) another of a guarantistic nature which is to allow the citizen knowledge of the grounds of fact and law that motivated the administrative authority to decide in the concrete way that it did and, thus, allow it to choose consciously between the acceptance of the administrative decision, accepting its legality, or to react against it through administrative or judicial means."

  3. That is, the substantiation of tax acts aims to allow knowledge of the reasons that determined the body to act as it acted, so as to allow the taxpayer to choose consciously between accepting the legality of the act or its challenge.

  4. It is also relevant for the realization of the concept of substantiation that substantiating "does not mean an exhaustive description of all the reasons that determine its practice, but implies properly clarifying its recipient of the motives that are at the genesis and the reasons that support its content (…) This duty of substantiation thus aims to allow the recipient of the act to know the cognitive and evaluative itinerary of this, allowing him to know what the motives were that led the Administration to its practice (…) an act is duly substantiated whenever the administrated person, placed in its position as a normal recipient – the bonus pater familia, of which article 487, no. 2 of the Civil Code speaks – becomes clarified as to the reasons that motivated it."

  5. In turn, article 77 of the General Tax Law establishes in its nos. 1 and 2:

"(…)"

  1. An act is deemed to be duly substantiated whenever its recipient demonstrates having grasped its grounds, which may consist of mere declaration of agreement with the grounds of previous opinions, information or proposals (no. 1) or be effected in summary form, containing the applicable legal provisions.

  2. In this sense, see General Tax Law annotated and commented, Diogo Leite de Campos, Benjamin Rodrigues, Jorge Lopes de Sousa, 3rd ed. Visis, September 2003, p. 381-382: "However, it should be noted that the defects may be considered healed when it is demonstrated that, despite the imprecision or omission or irregularity of the content of the act, the objective that was intended to be achieved with the imposition of this content was achieved, particularly that its recipient correctly realized its exact scope. The STA has consistently understood, regarding formal defects of administrative acts, that irregularities should be considered as non-essential as long as the objective intended by law with their imposition is achieved."

  3. In the concrete case, the tax act is duly substantiated, both in fact and in law, especially since the Claimant's argument in the arbitral request reveals that it had no difficulty whatsoever in apprehending the motives that led to the practice of the act.

  4. Indeed, by disagreeing with the tax act, the Claimant filed an administrative complaint, which was dismissed and from which a hierarchical appeal was filed, which was also dismissed.

  5. Thus, necessarily, one must conclude that the tax act at issue did not violate any legal or constitutional principle, whereby the assessments at issue should be upheld as entirely valid and legal and duly substantiated in the administrative file.

  6. Reporting on the alleged violation of the presumption of veracity of taxpayers' declarations, the Respondent considers that such presumption is capable of being rebutted and that the discrepancy procedure "is nothing more than a procedure aimed at rebutting the presumption, since the data that the Claimant declares in Annex A of the Model 3 IRS declaration do not coincide with those that the AT knows." The Respondent further states that it was with recourse to the norm of no. 4 of article 65 of the IRS Code that the AT founded the correction of the Claimant's income, "since the divergence in the qualification of acts, facts or documents relevant to the tax assessment was verified." Concluding that "... the AT, by having data that did not correspond to those the Claimant entered in the Model 3 IRS declaration, instituted a discrepancy process, the Claimant not having cooperated with the AT in order to remedy the divergences, which culminated with the replacement of the submitted declaration by another prepared by the AT, with the elements it had."

  7. Based on the substantiation that, in its essential aspects, is transcribed above, the Respondent concludes that the present request for arbitral decision should be judged as dismissed, as not proven, maintaining the tax assessment act impugned in the legal order, absolved accordingly, the respondent entity from the request.

  8. Given the statement of facts deemed proven based on the documents that form part of the present case and the positions assumed by the Parties, it is verified that the question to be decided consists of knowing whether the IRS tax act for the tax year 2015 is affected by illegality, whether by erroneous classification of the declared income, or by lacking the legally required substantiation.

  9. As extracted from the facts documentally proven, the Claimant, in a timely manner, submitted the periodic income declaration for the tax year 2015, from which appear income from dependent work, subject to consolidation on general terms, in the amount of € 7,951.23, as well as income relating to "gratuities not attributed by the employer," also qualified as dependent work income pursuant to article 2, no. 3, letter g) of the IRS Code, but subject to special autonomous taxation at the rate of 10%, pursuant to article 72, no. 3, of the said Code.

  10. The values declared by the Claimant, notwithstanding appearing also in the declarations submitted by the paying entities in coinciding terms both as to their amount and as to the qualification attributed to them, were questioned by the AT in the course of the discrepancy process.

  11. The doubts that were raised to the Tax Administration pertain to the qualification of the income declared as "gratuities," having the Claimant been requested to prove their nature.

  12. The proof produced by the Claimant does not appear to have been convincing, with the AT requalifying that income as dependent work income, of a wage nature, and consequently subject to consolidation on general terms, promoting, consequently, the additional IRS assessment, increased by compensatory interest.

  13. At the origin of the divergence that opposes the Claimant to the AT is therefore the qualification of the said income, given the relevance assumed by the special regime of taxation in IRS to which "gratuities" are subject, more favorable than the general regime for consolidation of income.

  14. Indeed, article 2, no. 1, letter g), of the IRS Code, qualifies as dependent work income, classified in Category A, "Gratuities earned by the performance or by reason of the performance of work, when not attributed by the respective employer."

  15. These income are not subject to consolidation for purposes of determining the general rates applicable to global income of taxpayers (see IRS Code, article 22, no. 3, letter b), being instead subject to autonomous taxation, under the norm of article 72, no. 3, of the IRS Code, which, in the wording given by Law no. 82-E/2014, of 31 December, establishes that "Gratuities earned by the performance or by reason of the performance of work, when not attributed by the employer nor by an entity that with it maintains group relations, control or simple participation, regardless of the respective geographic location, are taxed autonomously at the rate of 10%."

  16. Unless the taxpayer opts otherwise, these income are not subject to withholding at source (see IRS Code, articles 99, no. 1, letter a) and 99-C, no. 3).

  17. According to the income declaration submitted by the Claimant – and further confirmed by the official information contained in the documents that form part of the present case – the "gratuities" attributed by a third entity were subject to withholding at source, at a rate close to 10%.

  18. Notwithstanding the presumption of veracity enjoyed by taxpayers' declarations submitted within the legal deadline, the AT is not bound, without more, to accept the qualification of income as declared by their respective holders.

  19. Indeed, article 128, no. 1, of the IRS Code, in the wording given by Law no. 82-E/2014, of 31/12, determines that "Persons subject to IRS must present, within 15 days, the documents proving the income earned, the deductions and other facts or situations mentioned in their respective declaration, when the Tax and Customs Authority requires them."

  20. On the other hand, although article 65, no. 1, of the said Code continues to embrace the principle of declaration, determining that the assessment of IRS is effected based on the declared elements, no. 4 of the same article provides that "The Tax and Customs Authority proceeds to alter the declared elements whenever, where there is no place for the fixation referred to in no. 2, corrections should be made resulting from errors evidenced in the declarations themselves, from omissions made in them or corrections resulting from divergence in the qualification of acts, facts or documents relevant to the tax assessment."

  21. From the elements that form part of the present case, particularly from the administrative file, it is extracted that the AT considers that the amount declared by the Claimant as "gratuities" will not have such a nature, being rather dependent work income subject to the consolidation regime, without, however, there being any elements that substantiate such decision.

  22. The substantiation of the act, in addition to constituting a constitutional imperative, is established, in generic terms, in article 77 of the General Tax Law, being imposed, specific and expressly, in article 66 of the IRS Code, which, under the heading, "Notification and substantiation of acts," determines:

"1 - Acts of fixation or alteration provided for in Article 65 are always notified to taxpayers, with the respective substantiation.

2 - The substantiation must be expressed through an exposition, even if succinct, of the grounds of fact and law of the decision, the lack of substantiation being equivalent to the adoption of grounds that, by obscurity, contradiction or insufficiency, do not specifically clarify its motivation."

  1. From the elements of the case, particularly from the administrative file attached by the Respondent, there are no elements that allow knowledge of the grounds of the decision which, starting from the requalification of the declared income, led to the additional assessment impugned.

  2. One does not know, therefore, why, not evidenced in the discrepancy process, in the assessment procedure or in the administrative complaint process, the reasons that led the AT to decide on the requalification of the income.

  3. Indeed, even if one admits that the explanation presented by the Claimant in the course of exercise of the right of a hearing, either subsequently in administrative complaint of the tax act or in the hierarchical appeal filed from the express dismissal thereof, or in the present request, offers doubts, and could possibly indicate an artificial procedure with a view to obtaining tax advantages, what is verified is that the AT not only did not gather elements that could support the decision taken nor made use of the faculty provided for in article 38, no. 2, of the General Tax Law.

  4. Regarding this aspect, the Respondent alleges that "... despite the fact that it is not possible at all to analyze what it pertains to or what or to whom, document 6 attached by the Claimant, what is certain is that it informs that the rewarding entity makes the awards directly available to the operators of D… through an electronic platform, making it impossible to understand also how a company that has no connection or interest with another allows this one to have at its disposal its workers, its performance and certainly its working hours, as well as its computer system to contact with them."

  5. Accepting the pertinence of the observations and doubts raised by the AT in its response, it is not understood why the AT, under the principle of inquisitorialness, did not clarify the doubts that it now raises in order to substantiate its decision or, should it have ascertained elements that would allow concluding for the existence of artificial means tending to obtain tax advantages, would not activate the anti-abuse procedure provided for in articles 38, no. 2, of the LGT and 63 of the CPPT.

  6. It is certain that, as verified from the documentation that forms part of the present case, particularly from the administrative file attached by the Respondent, the decision of requalification as income of a wage nature of those declared as "gratuities" lacks, in its entirety, any substantiation that supports it.

  7. In the same way, the consequent additional assessment is not minimally substantiated.

  8. Basing itself on Supreme Administrative Court jurisprudence, which it cites, to the effect that "regarding formal defects of administrative acts, irregularities should be considered as non-essential as long as the objective intended by law with their imposition is achieved," the Respondent alleges that, in the present case, the tax act is duly substantiated, both in fact and in law, in the following terms: "the tax act is duly substantiated, both in fact and in law, especially since the Claimant's argument in the arbitral request reveals that it had no difficulty whatsoever in apprehending the motives that led to the practice of the act. ... Indeed, by disagreeing with the tax act, the Claimant filed an administrative complaint, which was dismissed, and from which a hierarchical appeal was filed, which was also dismissed.

  9. The substantiation presented does not, however, have adherence to the facts. First of all, in the petition of the administrative complaint which would be dismissed, the Claimant raises the lack of substantiation of the decision that is at the basis of the additional assessment complained of. The same allegation of lack of substantiation is evidenced in the hierarchical appeal of the decision dismissing such complaint, being also clearly expressed in the present request for arbitral decision.

  10. From the documents referred to, it is extracted, as could not be otherwise, that the Claimant understands that the income declared by him were subject to requalification, but what he does not understand is the reason that is at the basis of such decision.

  11. In the present case, as can be verified from the documents presented, in particular from the administrative file attached by the Respondent, the decision of the AT is not supported by any substantiation, nor is it at all possible to discern the reason why the correction was made that gave rise to the impugned assessment.

  12. It is verified, therefore, that the AT merely recorded, in what it designates as a discrepancy process, that the income declared as "gratuities" constitute income of a wage nature, subject to the general consolidation regime of IRS, not demonstrating the factuality that led it to disregard the declared qualification.

  13. In these terms, it is verified that the AT did not comply with the substantiation obligation to which, expressed and specifically, article 66 of the IRS Code refers, whereby the illegality of the impugned assessment act is declared and, equally, the decision dismissing in express terms the administrative complaint relating to such act and tacit dismissal of the hierarchical appeal filed therefrom, by violation of the provisions of the cited precept as well as, in generic terms, articles 77 of the General Tax Law and 152 and 153 of the Code of Administrative Procedure.

  14. It being undisputed that the lack of express substantiation of the tax act, insofar as it reveals the omission of an essential formality for guaranteeing the right of defense of individuals against an act that is reputed to be injurious to their rights and legitimate interests, implies its annulability, the tax assessment act impugned should thus be annulled as well as the corresponding compensatory interest assessment.

ON THE RIGHT TO INDEMNIFICATORY INTEREST

  1. In addition to the annulment of the IRS and compensatory interest assessments, and consequent reimbursement of amounts unduly paid, the Claimant further requests that he be recognized the right to indemnificatory interest, under article 43 of the LGT.

  2. Indeed, pursuant to the norm of no. 1 of the said article, indemnificatory interest will be due "when it is determined, in administrative complaint or judicial challenge, that there was an error attributable to the services, resulting in payment of the tax debt in an amount greater than legally due." In addition to the means referred to in the norm that is transcribed, we understand that, as results from no. 5 of article 24 of the RJAT, the right to the mentioned interest may be recognized in the arbitral process and, thus, the request is known.

  3. The right to indemnificatory interest to which the norm of the LGT referred to above refers presupposes that tax in an amount greater than due has been paid and that such derives from an error, of fact or of law, attributable to the services of the AT.

  4. In the present case, even if one recognizes that the tax paid by the Claimant is not due as it is affected by the illegality of the assessment to which it relates, due to lack of the legally required substantiation, determining, as a consequence, the annulment of the act and restitution of the amounts unduly collected, it is not seen that, in its origin, there is an error attributable to the services, which determines such right in favor of the taxpayer.

  5. In this matter, account is taken of the guidance of the consolidated jurisprudence of the Supreme Administrative Court, which goes in the direction that the right to indemnificatory interest provided for in no. 1 of article 43 of the LGT presupposes that in the process it is determined that in the assessment "there was an error attributable to the services," understood as the "error on the assumptions of fact or law attributable to the Tax Administration." As results from the said jurisprudence, the expression "error attributable to the services" refers to "error" and not to "defect," which implies that both should be relevant to errors on the assumptions of fact or law that led the Administration to an illegal definition of the taxpayer's tax relationship, not considering the formal or procedural defects which, injuring, even if, the act of illegality, do not necessarily imply an erroneous definition of that relationship." It results, thus, that only in cases of annulment based on defects relating to the tax relationship will there be a right to payment of indemnificatory interest, such right not being recognized in the case of annulment of an assessment act based solely on a formal defect of lack of substantiation (see, among others, Judgments of the STA of 27.6.2007, Case 80/07, of 1.1.2008, Case no. 0244/08, of 29.10.2008, Case no. 0622/08, of 4.11.2009, Case no. 0665/09, of 20.01.2010, Case no. 942/09, of 8.06.2011, Case no. 876/09, of 7.09.2011, Case no. 416/11, of 30.5.2012, Case no. 410/12, of 22.05.2013, Case no. 0245/13, of 12.2.2015, Case no. 01610/13).

V. DECISION

In these terms, and with the grounds exposed, the Arbitral Tribunal decides:

a) To judge the request for arbitral decision well-founded, as regards the illegality of the additional IRS assessment impugned, due to lack of legal substantiation, determining its annulment, as well as the annulment of the decision dismissing the administrative complaint, with the consequent reimbursement of amounts unduly paid.

b) To judge the request for recognition of the right to indemnificatory interest as dismissed.

Value of the case: € 1,205.63

Costs: Under article 22, no. 4, of the RJAT, and pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, I set the amount of costs at € 306.00, to the account of the Respondent (AT).

Lisbon, 27 March 2018,

The Arbitrator, Álvaro Caneira.

[i] Although the company maintained the same NIPC, it changed its name to D…, S.A., as per Information that forms part of the Administrative Complaint file no. …2017…, of the Finance Directorate of Lisbon (Doc.2)

[ii] See Decree-Law no. 143/2010, of 31 December.

[iii] From the administrative file, it is verified that the hierarchical appeal was subject to express dismissal, by decision of the IRS Services Director, rendered in the use of subdelegation of authority, on 29 November 2017 (PA 5).

[iv] In this sense, see STA, judgments of 20.6.2007, Case 01015/06, of 18.9.2008, Case 0338/08 and of 30.4.2013, Case 0122/13.

[v] As per the understanding set forth in the Arbitral Decision of 29.10.2012, Case 76/2012-T.

[vi] See Administrative File, PA 6

Frequently Asked Questions

Automatically Created

What happens when the Portuguese Tax Authority fails to provide adequate reasoning for an IRS additional assessment?
When the Portuguese Tax Authority (AT) fails to provide adequate fundamentação (statement of reasons) for an IRS additional assessment, the assessment is subject to annulment for violation of law. Under Portuguese tax procedural law, the AT must present clear, objective, and coherent reasons explaining why declared elements were corrected and how the new assessment was calculated. This duty of fundamentação is a fundamental procedural guarantee protecting taxpayers' rights to understand and effectively challenge tax decisions. If the reasoning is absent, unclear, or insufficient, taxpayers can challenge the assessment through administrative complaint, hierarchical appeal, and ultimately CAAD arbitration. Courts and arbitral tribunals will annul assessments lacking proper justification, even if the substantive tax calculation might be correct, as procedural guarantees are essential to the rule of law in tax matters. Successful challenges typically result in annulment of the assessment and entitlement to compensatory interest for amounts unduly paid.
How are gratifications taxed under Portuguese IRS law, and does the special 10% autonomous rate under Article 72(3) of the IRS Code apply?
Gratifications (gratuities/tips) under Portuguese IRS law are classified as Category A income (dependent work income) but receive special tax treatment depending on their source. Article 2(3)(g) of the IRS Code includes gratifications not attributed by the employer within Category A. Crucially, Article 72(3) of the IRS Code subjects such gratifications to autonomous taxation at a special rate of 10%, separate from the taxpayer's general progressive rate calculation. This means gratifications from third parties are not aggregated with other employment income for progressive rate purposes but are taxed definitively at the lower 10% rate. This treatment recognizes the atypical nature of such income and prevents it from pushing taxpayers into higher marginal tax brackets. The taxpayer must declare this income separately (Code 402 in Annex A of the Model 3 declaration) to benefit from this regime. The paying entity must issue appropriate income declarations (Article 119 IRS Code) and make withholding at the 10% rate.
Can a taxpayer challenge a tacit denial of a hierarchical appeal through CAAD tax arbitration?
Yes, taxpayers can challenge the tacit denial (indeferimento tácito) of a hierarchical appeal through CAAD (Centro de Arbitragem Administrativa) arbitration. Under Portuguese tax procedural law, when the tax authority fails to decide a hierarchical appeal within the statutory timeframe, the appeal is deemed tacitly denied, giving the taxpayer standing to seek judicial or arbitral review. Article 2(1)(a) of the RJAT (Legal Regime of Tax Arbitration) grants CAAD jurisdiction over challenges to acts of tax assessment and administrative decisions, including tacit denials. The taxpayer must file the arbitration request within the applicable deadline following the formation of the tacit denial. CAAD arbitration provides a faster, more specialized alternative to tax courts, with arbitrators examining both the underlying substantive tax issue and any procedural violations such as lack of fundamentação. The tacit denial is treated as confirming the original administrative decision, allowing full review of the merits.
What constitutes a violation of the legal duty to state reasons (fundamentação) in Portuguese tax corrections?
A violation of the duty to state reasons (fundamentação) occurs when the Portuguese Tax Authority corrects taxpayer declarations without providing clear, objective, and coherent explanations for the changes. Adequate fundamentação requires the AT to: (1) identify specifically which declared elements were altered; (2) explain the legal and factual basis for the correction; (3) demonstrate how the corrected assessment was calculated; and (4) provide sufficient detail for the taxpayer to understand the reasoning and mount an effective defense. Violations include complete absence of reasoning, generic or formulaic statements, contradictory explanations, or failure to address the taxpayer's specific factual circumstances and legal arguments. The duty applies to assessment notices, administrative complaint decisions, and hierarchical appeal decisions. This requirement protects fundamental taxpayer rights and enables effective judicial review. Even if the substantive tax result is correct, inadequate fundamentação renders the act voidable. Courts and arbitral tribunals scrutinize reasoning carefully, as this procedural guarantee is essential to preventing arbitrary tax administration.
Is a taxpayer entitled to compensatory interest (juros indemnizatórios) when an IRS additional assessment is annulled by CAAD?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when an IRS additional assessment is annulled by CAAD arbitration, provided they paid the unlawfully assessed amounts. Compensatory interest compensates taxpayers for the financial loss caused by erroneous tax collection, reflecting the time value of money and the State's unjust enrichment from holding funds to which it was not entitled. The interest accrues from the date of payment until reimbursement, calculated according to legal rates established in tax legislation. Entitlement is automatic upon annulment of the assessment—taxpayers need only request it in their arbitration petition. CAAD tribunals routinely grant compensatory interest as an integral component of making taxpayers whole after unlawful taxation. This differs from late-payment interest (juros compensatórios) which the State charges taxpayers. The right to compensatory interest is a fundamental guarantee ensuring the State bears the cost of its errors, incentivizing careful tax administration and protecting taxpayers from financial harm due to unlawful assessments.