Process: 600/2014-T

Date: June 9, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitral decision (Process 600/2014-T) concerns a challenge by a retail meat trade company against additional Corporate Income Tax (IRC) assessments and compensatory interest for the 2007 and 2008 tax periods. Following an external tax inspection, the Portuguese Tax Authority made corrections using indirect methods, adding €111,121.07 in sales for 2007 and €29,423.91 for 2008, resulting in additional IRC assessments of €20,043.66 and €4,443.89 respectively. The claimant raised three core arguments: first, that the requirements for applying indirect methods under Article 90 of the General Tax Code (LGT) were not met, as detected irregularities (failure to register amounts received by debit card terminal) did not sufficiently undermine accounting reliability; second, that the Tax Authority illegally changed the taxation criterion from analyzing differences between daily reconciliations and bank deposits to using profitability margins based on economic activity sector (CAE) data without revoking the original assessment; and third, that the criterion adopted (average profitability margins rather than median) was inappropriate given the large sample size of taxpayers in the same sector. The Tax Authority raised a preliminary jurisdictional objection, arguing that under Article 2 of Ordinance 112-A/2011, CAAD arbitral tribunals lack jurisdiction over disputes concerning taxable base determinations made through indirect methods. The Respondent contended that the inspection revealed substantive deficiencies: missing daily sales reconciliations for several meat counters, lack of control over machine-recorded values, and irregularities in expense accounting. This case highlights fundamental tensions in Portuguese tax law regarding the scope of arbitral jurisdiction over indirect method assessments and the procedural safeguards governing presumptive taxation.

Full Decision

ARBITRAL DECISION

I – REPORT

A, Lda, taxpayer no. …, with registered office at Rua …, hereinafter referred to as the Claimant, filed a request for establishment of an arbitral tribunal in tax matters and a request for arbitral award, pursuant to the provisions of articles 2.º no. 1 a) and 10.º no. 1 a), both of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, abbreviated as RJAT), requesting the declaration of illegality of the additional assessments of Corporate Income Tax and compensatory interest nos. 2011… and 2011…, relating to the periods of 2007 and 2008.

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 05-08-2014.

Pursuant to the provisions of articles 5.º, no. 2, al. a), 6.º, no. 1 and 11.º, no. 1, al. a) of the RJAT, the Deontological Council designated the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 19-09-2014, the parties were duly notified of this designation and did not manifest an intention to refuse the arbitrator's designation, in accordance with the combined provisions of article 11.º no. 1 sub-paragraphs a) and b) of the RJAT and articles 6.º and 7.º of the Deontological Code.

Thus, in compliance with the provisions of sub-paragraph c) of no. 1 of article 11.º of the RJAT, the singular arbitral tribunal was established on 13-11-2014.

Given the circumstance that none of the objectives legally entrusted to it are present in this case, the meeting provided for in article 18.º of the RJAT was dispensed with.

The arbitral tribunal was regularly established and is materially competent, in light of the provisions of articles 2.º, no. 1, sub-paragraph a), and 30.º, no. 1, of Decree-Law no. 10/2011, of 20 January.

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

The proceedings are not affected by any nullities.

The allegations supporting the Claimant's request for arbitral award are, in summary, as follows:

Claimant's Allegations

11.1 The Claimant is a commercial company engaged in the activity of "retail trade in meat and meat-based products".

11.2 Through Service Order no. OI…, of 28 June 2010, it was subject to external inspection for the years 2007 and 2008.

11.3 As a result of this inspection, corrections were made by presumption in the total amounts of sales of €111,121.07 in 2007 and €29,423.91 in 2008.

11.4 Upon conclusion of the procedure for revision of the taxable base, pursuant to article 91.º of the General Tax Code (LGT), the Claimant was notified of additional assessments of Corporate Income Tax, VAT, and compensatory interest in the amounts of €20,043.66 and €4,443.89, relating to the periods of 2007 and 2008, respectively.

11.5 The claim presented to the tribunal incorporates essentially three issues: (i) the failure to meet the requirements for taxation by indirect methods; (ii) change of the taxation criterion; and, finally, (iii) the appropriateness of the criterion adopted.

11.6 Regarding the fulfillment of the requirements for taxation by indirect methods, the Claimant alleges that the irregularities detected ("failure to register in the electronic scale or cash register the amounts received by debit card terminal") do not constitute sufficient reason to call into question the reliability of the accounting records.

11.7 The change of the taxation criterion – increases in differences between daily reconciliations and bank deposits versus taxation based on the profitability criterion of the economic activity sector (CAE) – is illegal as the original assessment act was not revoked.

11.8 The criterion adopted of the average (versus median) of profitability margins is also not the most appropriate; the superiority of the median is evident, especially when we are dealing with the case of thousands of taxpayers registered in the same economic activity sector.

11.9 From the foregoing, it follows that the taxation is illegal due to violation of article 90.º of the LGT and due to inadequacy of the criterion used in violation of article 84.º of the same legal instrument.

Respondent's Reply

12.1 In its Reply, preliminarily, the Respondent raises the exception of lack of jurisdiction of the arbitral tribunal to rule on the illegality of the determination of the taxable base through the application of indirect methods, as appears from the claim presented.

12.2 In fact, the provision of article 2.º of the RJAT, Decree-Law no. 10/2011, of 20 January, regarding the competence of arbitral tribunals, must take into account the provision of article 4.º of the same decree which establishes that "the binding of the tax administration to the jurisdiction of tribunals established pursuant to the provisions of the present law depends on an ordinance of the members of the Government responsible for the areas of finance and justice…".

12.3 In compliance, Ordinance no. 112-A/2011, of 22 March, establishes in article 1.º the binding of the Tax Authority to the jurisdiction of the arbitral tribunals.

12.4 In article 2.º of the Ordinance, the binding of the Tax Authority to the jurisdiction of the arbitral tribunals is excepted with regard to "Claims relating to acts determining the taxable base and acts determining the tax base, both by indirect methods, including the decision of the revision procedure."

12.5 In sum, having regard to the provisions of articles 2.º and 4.º of the RJAT, as well as Ordinance no. 112-A/2011, of 22 March, it is concluded that the Tax Authority is not bound by the arbitral jurisdiction with respect to acts determining the taxable base by indirect methods, and likewise, with respect to the decision of the revision procedure.

12.6 This non-binding of the Tax Authority constitutes a dilatory exception which translates into the absolute lack of jurisdiction of the tribunal, and accordingly the dismissal of the Respondent from the proceedings should be determined, having regard to the provisions of articles 278.º, no. 1, sub-paragraph a), 576.º, nos. 1 and 2, and 577.º, sub-paragraph a) of the Code of Civil Procedure (CPC), applicable by virtue of article 29.º, no. 1, sub-paragraph e) of the RJAT.

12.7 Without prejudice, the Respondent also contests the claim presented.

12.8 Regarding the alleged failure to verify the requirements for taxation by indirect methods, the Respondent states that from the inspection report it became clear that the Claimant's accounting records did not have all the elements that would permit the "proof and direct and precise quantification of the facts essential to the correct determination of the taxable base for any tax", namely the non-existence of daily sales reconciliations for part of the meat counters (only sales from three of the six meat counters were presented); lack of control over the values recorded in the machines; irregularities in the organization and accounting of general expenses and consequent validation of deductible VAT).

12.9 It results from the analysis of the inspection report that the Tax Authority demonstrated and proved in a clear and irrefutable manner that the Claimant practiced sales without issuing the corresponding documentary evidence and consequent accounting record, as well as the receipt of amounts through debit card terminal, which did not even give rise to any record.

12.10 With regard to the change and inadequacy of the criterion adopted for fixing the taxable base, the criteria defined in no. 1 of article 90.º of the LGT are not exhaustive but merely illustrative.

12.11 In this sense, the Respondent specified, pursuant to no. 4 of article 77.º of the LGT, the reasons for the impossibility of direct proof and quantification of the taxable base and indicated the criteria used in evaluating the taxable base.

12.12 Finally, the application of the average of the economic activity sector was discussed, in the context of official revision, by the experts, and the application of the ratio of the average of gross margin on sales of the organizational unit was accepted by the Tax Authority because the value of the increases to the taxable base of Corporate Income Tax for the two years analyzed exceeds the values of sales received through debit card terminal; and the gross merchandising margins used correspond to the margins in the economic activity sector in which the taxpayer is engaged and in the district of Aveiro.

12.14 Accordingly, the presumptive method elected is appropriate and is grounded on the facts concretely established, with the burden of proof of excess falling on the Claimant, which it failed to discharge.

12.15 In light of the foregoing, it is evident that the claim lacks foundation and accordingly should be dismissed.

All matters considered, a final decision must be rendered.

A. MATTERS OF FACT

A.1. Facts Established as Proven

1-The Claimant is a commercial company engaged in the activity of "retail trade in meat and meat-based products".

2-By Service Order no. OI…, of 28 June 2010, the Claimant was subject to external inspection for the years 2007 and 2008.

3-As a result of this inspection, corrections were made by presumption in the total amounts of sales of €111,121.07 in 2007 and €29,423.91 in 2008.

4-The Claimant presented, on 21 April 2011, a request for revision of the taxable base, pursuant to article 91.º, and no agreement was reached at the conclusion thereof.

5-Consequently, the Claimant was notified of additional assessments of Corporate Income Tax and compensatory interest nos. 2011… and 2011…, in the amounts of €17,364.31 and €3,476.21 relating to the periods of 2007 and 2008, respectively.

6-The Claimant challenged this assessment by filing a request for administrative reconsideration on 07/12/2011.

7-Notified of the dismissal of the request for administrative reconsideration, it filed a hierarchical appeal, which was dismissed by order of the Director of Corporate Income Tax Services on 31/03/2014.

There are no unproven facts relevant to the assessment of the merits of the case.

B. ON THE LAW

B.1 On the Exception of Lack of Jurisdiction of the Arbitral Tribunal

As concluded by the Claimant, three issues are put to the tribunal: "the requirements for taxation by indirect methods; change of the taxation criterion and appropriateness of the method adopted."

In its reply, the Respondent raises the exception of lack of jurisdiction of the arbitral tribunal to rule on the illegality of the determination of the taxable base through the application of indirect methods, as requested.

The violation of the rules of jurisdiction ratione materiae determines the absolute lack of jurisdiction of the tribunal, whereby consideration thereof precedes any other matter.

It is accordingly necessary to assess the exception invoked.

Arbitration in tax matters was introduced into our legal system by Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Tax Arbitration (RJAT). It is, as provided in no. 2 of article 4.º of the aforementioned RJAT, an alternative means of dispute resolution in tax matters which operates in CAAD – the Administrative Arbitration Center.

Pursuant to no. 1 of article 2.º of the RJAT, the jurisdiction of said arbitral tribunals comprises: a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account; b) The declaration of illegality of acts determining the taxable base, acts determining the tax base and acts fixing property values.

From the legal comparison it results that the jurisdiction of these tribunals is restricted, in essence, to activity connected with acts of assessment of taxes, with the exclusion of, among others, the consideration of the legality of administrative acts of rejection in whole or in part or revocation of tax exemptions or benefits, acts that do not entail the consideration of the legality of the assessment act, consideration of disputes within fiscal execution proceedings or contraordinal proceedings.

The scope of the jurisdiction of the arbitral tribunals is subject, at a second level, to the exact terms in which the Tax and Customs Authority bound itself to this jurisdiction, as expressly defined in no. 1 of article 4.º of the RJAT: The binding of the tax administration to the jurisdiction of tribunals established pursuant to the provisions of the present law depends on an ordinance of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered. That is, it is not sufficient that the claim falls within article 2.º of the RJAT; it is also necessary that the Tax Authority has bound itself for the arbitral tribunal to be competent to rule on a particular dispute.

This binding was made concrete in Ordinance no. 112-A/2011, of 22 March, which in its article 2.º establishes, with relevance for the present proceedings, the following:

Article 2.º

Object of the Binding

The services and entities referred to in the preceding article bind themselves to the jurisdiction of the arbitral tribunals operating in CAAD which have as their object the consideration of claims relating to taxes whose administration is entrusted to them referred to in no. 1 of article 2.º of Decree-Law no. 10/2011, of 20 January, with the exception of the following:

(…)

b) Claims relating to acts determining the taxable base and acts determining the tax base, both by indirect methods, including the decision of the revision procedure;

(…)

Accordingly, although sub-paragraph b) of no. 1 of article 2.º of the RJAT includes in the jurisdiction of the arbitral tribunals the declaration of illegality of acts fixing the taxable base (by indirect methods), such jurisdiction was expressly excluded by sub-paragraph b) of article 2.º of Ordinance no. 112-A/2011, of 22 March.

Now, the Claimant's request falls expressly within this exclusion: non-compliance with the legal requirements for applying indirect methods and inadequacy of the criteria defined for determining the taxable base, within the scope of the revision procedure.

In this case, the act of assessment of the tax challenged is nothing more than the materialization of the assumptions and criteria defined in the context of the determination by indirect methods of the taxable base and subject to prior mandatory revision, pursuant to article 91.º of the LGT. This procedure for revision of the taxable base constitutes, moreover, a condition for challenging the assessment act, if there is no agreement between the parties.

That is, the assessment acts now challenged are the direct consequence of the decision of the revision procedure that dismissed the Claimant's claims, a decision expressly excluded from the knowledge of the arbitral tribunals.

As stated in the CAAD Decision of 22 October 2012, in the context of proceedings no. 52/2012-T, "If this were not the case, it would mean allowing, through the aforementioned consideration of the assessment acts, the judgment of a claim relating to 'acts determining the taxable base (…) by indirect methods' expressly prohibited by the Binding Ordinance, specifically by article 2.º, sub-paragraph b) cited above.

In fact, such consideration, if it were to be admitted (which, it is reiterated, does not appear to be the case), would have to be restricted to formal defects relating to the assessment acts, since the substantive matter and its grounds, being covered by the revision procedure and its decision, cannot be known by the arbitral tribunals."[1]

From the foregoing, it is concluded that the exception raised by the Respondent is well-founded, and therefore this Arbitral Tribunal cannot rule, ratione materiae, on the merits of the claim.

The well-foundedness of the dilatory exception leads to the dismissal of the Respondent from the proceedings, pursuant to articles 278.º, nos. 1 and 2 and 577.º, sub-paragraph a) of the Code of Civil Procedure, applicable by virtue of article 29.º, no. 1, sub-paragraph e) of the RJAT.

D. DECISION

Accordingly, this Arbitral Tribunal rules the exception of absolute lack of jurisdiction of the tribunal, ratione materiae, to be well-founded, and consequently rejects the request for arbitral award, dismissing the Respondent from the proceedings.

E. Value of the Proceedings

The value of the proceedings is fixed at €20,840.62, pursuant to article 97.º-A, no. 1, a), of the Tax Procedure and Process Code, applicable by virtue of sub-paragraphs a) and b) of no. 1 of article 29.º of the RJAT and of no. 2 of article 3.º of the Regulation of Costs in Tax Arbitration Proceedings.

F. Costs

The arbitration fee is fixed at €1,224.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the claim was entirely unsuccessful, pursuant to articles 12.º, no. 2, and 22.º, no. 4, both of the RJAT, and article 4.º, no. 4, of the aforementioned Regulation.

Let notification be made.

Lisbon,

9 June 2015

The Arbitrator

(Amândio Silva)

[1] Similarly, see the CAAD Decision of 14 May 2012, in proceedings no. 17/2012-T.

Frequently Asked Questions

Automatically Created

What are indirect methods (métodos indiretos) for determining taxable income under Portuguese IRC law?
Indirect methods (métodos indiretos) under Portuguese IRC law are alternative taxation mechanisms applied when direct and precise quantification of taxable income is impossible. According to Article 90 of the General Tax Code (LGT), the Tax Authority may resort to indirect methods when accounting records lack reliability or completeness. These methods include analyzing profitability margins by economic activity sector (CAE), comparing bank deposits with declared revenues, or examining consumption patterns. The Tax Authority must first demonstrate that direct assessment is impossible due to: (a) lack of accounting organization, (b) refusal to present required documents, (c) accounting irregularities that prevent reliable income determination, or (d) substantial differences between declared income and actual economic capacity. The methods applied must be appropriate, reasonable, and justified in the assessment notice, with criteria specified under Article 90(1) being illustrative rather than exhaustive. Taxpayers retain rights to prior hearing under Article 60 of the LGT and to challenge the assessment's legality and adequacy of the chosen criterion.
When can the Portuguese Tax Authority apply compensatory interest (juros compensatórios) on additional IRC assessments?
Compensatory interest (juros compensatórios) on additional IRC assessments is applied automatically when tax assessments are issued after the voluntary payment deadline, pursuant to Article 35 of the General Tax Code (LGT). The Portuguese Tax Authority must charge compensatory interest on additional tax resulting from corrections to declared taxable income, including assessments based on indirect methods. Interest accrues from the day following the voluntary payment deadline until the date of the additional assessment notice, calculated at the legal rate established annually by ministerial order. The rationale is compensating the State for delayed tax collection due to underpayment. Compensatory interest applies regardless of taxpayer fault or good faith, making it objective rather than punitive. When challenging additional IRC assessments, taxpayers may also contest the corresponding compensatory interest calculation. If the underlying tax assessment is annulled through administrative or judicial proceedings, the compensatory interest automatically falls as an accessory obligation. The interest amount must be specified in the assessment notice and is subject to the same collection procedures as the principal tax.
How can a taxpayer challenge additional IRC liquidations through CAAD tax arbitration?
Taxpayers can challenge additional IRC liquidations through CAAD (Centro de Arbitragem Administrativa) tax arbitration by filing a request for establishment of an arbitral tribunal under Decree-Law 10/2011 (RJAT - Legal Framework for Arbitration in Tax Matters). The request must be submitted within 90 days of notification of the contested act or expiry of the legally established decision period. However, jurisdiction is limited by Article 2 of Ordinance 112-A/2011, which excludes CAAD jurisdiction over acts determining taxable base by indirect methods. For assessments using direct methods, taxpayers must: (1) submit a written request identifying the contested act and grounds for illegality; (2) pay arbitration fees; (3) provide supporting documentation. The arbitral tribunal is established within specified timelines, with a single arbitrator or three-member panel depending on case value. Proceedings follow principles of adversarial procedure, with the Tax Authority submitting a reply. The arbitral award has the same force as judicial decisions and may annul illegal assessments. Appeals to administrative courts are limited to matters of law. This alternative dispute resolution mechanism offers faster resolution than traditional tax courts, though jurisdictional limitations regarding indirect methods significantly restrict its scope.
What is the legal procedure for reviewing taxable income determined by presumption under Article 91 of the LGT?
The legal procedure for reviewing taxable income determined by presumption is governed by Article 91 of the General Tax Code (LGT), establishing a specific administrative revision process before assessment finalization. When the Tax Authority intends to determine taxable income using indirect methods (presumptive basis), it must: (1) issue a draft report identifying accounting deficiencies and proposed corrections; (2) grant the taxpayer prior hearing rights (audiência prévia) under Article 60 of LGT to present objections, evidence, and arguments within 15 days; (3) analyze taxpayer submissions and issue a final inspection report justifying the indirect method application and criterion adopted; (4) issue the additional assessment notice specifying legal grounds, calculation methodology, and evidence supporting the presumptive determination. The taxpayer may challenge the indirect method application on substantive grounds: (a) requirements for indirect methods are not met; (b) accounting irregularities are insufficient to justify presumptive taxation; (c) the criterion adopted is inappropriate or excessive; (d) procedural violations occurred. The revision procedure under Article 91 is mandatory before assessment becomes final, ensuring taxpayers can contest both the legality of applying indirect methods and the adequacy of the specific criterion chosen. Failure to provide adequate prior hearing constitutes a procedural defect that may invalidate the assessment.
What are the grounds for contesting tax corrections based on indirect methods for IRC purposes in Portugal?
Grounds for contesting tax corrections based on indirect methods for IRC purposes in Portugal include both procedural and substantive challenges. Procedurally, taxpayers may argue: (1) violation of prior hearing rights under Article 60 of LGT; (2) insufficient justification in the assessment notice for applying indirect methods; (3) failure to specify the criterion adopted and supporting calculations; (4) illegal change of taxation criterion without revoking the original assessment. Substantively, challenges focus on: (a) non-fulfillment of Article 90 LGT requirements—demonstrating that accounting records are reliable and permit direct assessment, or that detected irregularities are minor and do not justify presumptive taxation; (b) inappropriateness of the chosen criterion—arguing that alternative methods better reflect actual economic activity, such as median versus average profitability margins when dealing with large taxpayer populations; (c) excessive or unreasonable corrections—proving that presumed income significantly exceeds actual economic capacity; (d) errors in applying the selected method—challenging calculation errors, incorrect statistical data, or misapplication of sector profitability ratios. The burden of proof regarding the impossibility of direct assessment and appropriateness of the method lies with the Tax Authority. Taxpayers must present concrete evidence demonstrating accounting reliability or method inadequacy to successfully contest indirect method corrections.