CAAD Arbitral Tribunal Incompetence Ruling on IRC Corporate Tax Corrections (62/2017-T)

ARBITRAL DECISION [1] [2]

The arbitrators Counselor Maria Fernanda dos Santos Maçãs (President), Dr. Sílvia Oliveira (Member) and Dr. Artur Silva (Member), appointed by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Collective Arbitral Tribunal, decided as follows:

I. REPORT

1.1. On 16.01.2017, the company A…, Lda., with registered office in …, …, with the collective person number and tax identification number … (hereinafter referred to as "Claimant"), requested pursuant to and for the purposes of the provisions in subparagraph a) of no. 1 of article 2 and in article 10, both of Decree-Law no. 10/2011, of 20 January, the constitution of an Arbitral Tribunal with the appointment of a collective of three arbitrators by the Deontological Council of the Administrative Arbitration Center, pursuant to the provisions in subparagraph a), no. 2 of article 6 of the aforementioned decree-law.

1.2. The request for constitution of the Arbitral Tribunal was accepted by the Excellent President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as AT or "Defendant") on 13 March 2017.

1.3. The Claimant did not proceed with the appointment of arbitrators, whereby, under the provisions of article 5, no. 3, subparagraph a) and article 6, no. 2, subparagraph a) of the Legal Regime of Tax Arbitration (RJAT), the undersigned were appointed by the President of the Deontological Council of CAAD to form the present Collective Arbitral Tribunal, having accepted pursuant to legally provided terms.

1.4. The Tribunal was constituted on 26 April 2017.

2.1. The Claimant, in its petition for arbitral pronouncement, petitions for "the constitution of an Arbitral Tribunal for arbitral pronouncement of the objection (…)" of the "(…) compensatory interest assessment notes nos. 2016…, 2016… (…) in the total amount of € 4,318.75 relating to Corporate Income Tax for the years 2012 and 2014 (…)", as well as of the "assessment notes nos. 2016…, in the amount of € 11,481.88 (…)" and "(…) no. 2016…, in the amount of € 11,072.65 (…), relating to Corporate Income Tax in the fiscal years of 2012 and 2013, in the total of € 22,554.53".

2.2. The request presented is based on the illegality of the corrections made by AT for violation, among others, of the principles of legality, legal certainty, trust and tax neutrality, as well as the prevalence of substance over form, with violation of the provisions in articles 10, 38 and 39, as well as in article 11, no. 3, of the General Tax Law (LGT).

2.3. The Claimant concludes by requesting:

"(…)

That the assessment notes relating to Corporate Income Tax for 2012, 2013 and 2014 be annulled or, if not so understood, the restitution of compensatory interest identified above be made to the Claimant by not being legally due.

Declaration of illegality of the action of correction of taxable matter in the context of Corporate Income Tax, relating to 2012, 2013 and 2014, in the amount of €117,145.05;

Annulment of the aforementioned additional Corporate Income Tax assessments for 2012, 2013, 2014;

Declaration of illegality of the statement of reconciliation of accounts and compensatory interest nos. 2016…

2016… and 2016…

Condemnation of AT to pay arbitration costs and fees".

1. The Defendant submitted the administrative file and presented a response, defending itself by exception and by objection sustaining the illegality of the corrections.

3.1. On the matter of exception, AT contended that the request for constitution of the arbitral tribunal is out of time, in that it was not presented within the 90-day period provided for in article 10, no. 1, subparagraph a), of RJAT, counted from the end of the voluntary payment period of the tax installments that were notified to it, as provided in article 102, no. 1, subparagraph a), of the Code of Tax Procedure and Process (CPPT).

1. Duly notified, by order of 6 June 2017, to respond to the matter of exception in writing and to indicate the facts on which it intended witness examination of the witnesses indicated in the arbitral petition, the Claimant said nothing.

2. By order of 9 July 2017, given the circumstance that the matters to be decided correspond to matters of law or matters of fact requiring documentary evidence, the request for witness evidence was rejected.

5.1. On the other hand, in the same order, given the absence of evidence to be produced at a hearing and the Claimant having been duly notified to exercise written response in relation to the matter of exception, the holding of the meeting referred to in article 18 of RJAT was dispensed with and the production of successive written submissions was ordered.

5.2. The Arbitral Tribunal fixed, in that order, as the deadline for rendering the arbitral decision the day 26 October 2017.

1. The parties did not produce submissions.

2. On 29 July 2017 an order was issued with the following content:

"(…) the total value of the petition that was indicated by the Claimant amounts to EUR 70,000.00, but given the total value of the assessments subject of the arbitral petition, the amount is far from that value, not even reaching the amount indicated in RJAT for the functioning of the tribunal with the intervention of a collective of three arbitrators [article 5, no. 3, subparagraph a) of RJAT)].

This situation, if confirmed, constitutes an exception of incompetence to be raised ex officio by the Tribunal.

In these terms, the Claimant is granted a period of ten days to respond.

In the same period AT may, if it wishes, pronounce itself. Both Parties shall be notified of this order (…)".

1. Neither the Claimant nor the Defendant exercised response in relation to the matter referred to in the previous point.

2. On 18 September 2017 an order was issued with the following content:

"(…) it being verified that the file does not contain the power of attorney of the representative, a period of ten days is granted to the Claimant to remedy this omission and ratify the proceedings, under penalty of the respective legal sanction (dismissal of the action - article 278, no. 1, subparagraph c), of CPC). Both Parties shall be notified of this order (…)".

1. By petition of 16 October 2017, the Claimant came to request the attachment to the file of a substitute power of attorney, which was granted.

2. The Arbitral Tribunal is regularly constituted (arts. 5, nos. 1 and 3, subparagraph a), 6, no. 2, subparagraph a) and 11 of RJAT), the parties enjoy legal personality and capacity and show themselves duly represented.

3. Exceptions were raised, both by the Defendant and ex officio by the Tribunal, which will be considered below according to the order of priorities.

II. MATTERS OF FACT

With relevance to the decision of the case, the Tribunal deems the following facts proven:

§1. Proven Facts

The Claimant is a commercial company limited by quotas, with share capital of € 100,000.00, distributed in two equal quotas, of nominal value of € 50,000.00 each.

The Claimant develops activity within the scope of the manufacture and production of molds for footwear, being as such classified in Corporate Income Tax, Personal Income Tax and VAT.

The Claimant has its registered office in …, in … and carries out its activity both in the office building and in another building in …, … .

The Claimant was subject to a tax inspection, for the years 2012 (partial scope), 2013 and 2014 (general scope), originating from possible inventory discrepancies, aimed at verifying compliance with tax obligations, carried out in accordance with the following service orders:

Following the inspection procedures identified above, the Claimant was notified of Office no. …, of 17 May 2016, relating to the draft tax inspection report, pursuant to which the following technical corrections were proposed:

Additionally, the Claimant was also notified to exercise (if desired), within a period of fifteen days, its respective right of hearing with respect to the aforementioned draft report.

The Claimant, within the period, exercised the right of hearing, in writing, with respect to the aforementioned tax inspection report, having voluntarily proceeded to regularize the situations described in the table above, except as regards depreciation not accepted for tax purposes (years 2012, 2013 and 2014).

The Claimant was notified of Office no. …, of 4 July 2016, relating to the tax inspection report relating to the service orders identified above, pursuant to which the corrections relating to depreciation not accepted for tax purposes were maintained, for each of the years in question, and the respective record was drawn up, as an administrative offense.

As a consequence, the Claimant was notified of the following tax and interest assessment notices (amounts expressed in Euros - €):

§2. Motivation regarding Matters of Fact

As regards the matters of fact proven, the conviction of the Arbitral Tribunal was based on the free assessment of the positions assumed by the Parties (as regards facts) and on the content of the documents attached to the file, not contested by the Parties, as well as on the analysis of the administrative file submitted by the Defendant.

III. PRELIMINARY MATTER

On the Jurisdiction of the Arbitral Tribunal

According to the provisions of article 608, no. 1 of the Code of Civil Procedure (CPC), procedural matters that are susceptible to determining the dismissal of the action must be considered in the order imposed by their logical precedence.

It follows from this the need to consider, in the first place, the matter of the jurisdiction of the Arbitral Tribunal, the knowledge of which precedes that of any other matter (see articles 13 of the Code of Procedure in the Administrative Courts (CPTA) and 278, no. 1, subparagraph a) of CPC), since, with the exception precisely of its own jurisdiction, a tribunal that is incompetent is prevented not only from considering the merits of the case, but all other procedural prerequisites.

In this way, it falls, preliminarily, to proceed to the assessment of this matter.

The Claimant, in its petition for arbitral pronouncement, petitions for "the constitution of an Arbitral Tribunal for arbitral pronouncement of the objection (…)" of the "(…) compensatory interest assessment notes nos. 2016..., 2016… (…) in the total amount of € 4,318.75 relating to Corporate Income Tax for the years 2012 and 2014 (…)", as well as of the "assessment notes nos. 2016…, in the amount of € 11,481.88 (…)" and "(…) no. 2016…, in the amount of € 11,072.65 (…), relating to Corporate Income Tax in the fiscal years of 2012 and 2013, in the total of € 22,554.53".

In these terms, the total value of the arbitral petition, as described above, amounts to € 26,873.28.

Nevertheless, the Claimant attributed to the aforementioned petition for arbitral pronouncement the value of € 70,000.00.

The Defendant, in the Response presented, reiterated that "the Claimant comes, by the present arbitral petition, to object the following assessment notes: - 2016…, in the amount of € 11,481.88; - 2016…, in the amount of € 11,072.65; - 2016…, in the amount of € 4,318.75; - 2016…, in the amount of € 36.56", in a total of € 26,909.84, insofar as the Defendant indicates in assessment no. 2016… the amount of € 4,318.75 (and not € 4,282.19 given that it considers twice the amount of € 36.56 relating to assessment no. 2016…).

Given the difference in value noted ex officio, and this being a relevant element for the jurisdiction of this Tribunal to function as a Collective, both parties were notified of the arbitral order of 29 July 2017, to pronounce themselves within a period of 10 days on this matter of exception.

After the period granted had elapsed, neither party pronounced itself as to the content thereof.

Thus, it is incumbent to preliminarily analyze the matter, vital for the functioning of this Collective Arbitral Tribunal.

Now, as regards the value of the petition for arbitral pronouncement, having regard to the provisions of article 306 and article 297 (both of CPC), "where several claims are combined in the same action, the value is the amount corresponding to the sum of the values of all of them".

In the case under analysis, and as referred to above and detailed under "Matters of Fact", the annulment of acts of tax assessment and interest is requested, in the total amount of € 26,873.28.

Thus, the value of the petition should correspond to the total of the aforementioned assessments, that is, to € 26,873.28 and not, as indicated by the Claimant, to € 70,000.00.

Having regard to the jurisdiction conferred, by article 2 of RJAT, on the Arbitral Tribunals, these may function, in accordance with the provisions of article 5 of RJAT:

• With a single arbitrator when i) the value of the petition for pronouncement does not exceed twice the value of the jurisdiction of the Central Administrative Court and (ii) the taxpayer opts not to appoint an arbitrator, or,

• With the intervention of a collective of three arbitrators when i) the value of the petition for pronouncement exceeds twice the value of the jurisdiction of the Central Administrative Court or ii) the taxpayer opts to appoint an arbitrator, regardless of the value of the petition for pronouncement.

In these terms, Arbitral Tribunals function as a Singular Arbitral Tribunal whenever the value of the petition for pronouncement does not exceed € 60,000.00 (or the taxpayer does not opt to appoint an arbitrator) and function as a Collective Arbitral Tribunal whenever the petition exceeds that amount.

In the case under analysis, considering the amount of € 70,000.00 indicated by the Claimant as the value of the petition for arbitral pronouncement, this Collective Arbitral Tribunal was constituted and not a Singular Arbitral Tribunal as should have been, having regard to the actual value of that petition (€ 26,873.28), given the above.

Now, in accordance with the provisions of article 102 of CPC, "the infraction of the rules of jurisdiction based on the value of the case (…) determines the relative incompetence of the tribunal" and that, in accordance with the provision of article 104, no. 2 of CPC, "incompetence as to the value of the case is always known ex officio by the tribunal, whatever the action in which it is raised" (emphasis ours).[4]

In this context, in accordance with the provisions of article 577 of CPC, the relative incompetence of the tribunal is a dilatory exception, which, according to article 576 of CPC, prevents the tribunal from considering the merits of the case, giving rise to dismissal of the action or referral of the case to another tribunal (which in the case under analysis is not admissible).

Thus, in this case, in accordance with the provisions of article 278, no. 1, subparagraph e) of CPC, "the judge must refrain from considering the claim and dismiss the defendant from the action" (emphasis ours).

In summary, given the above, the dilatory exception of incompetence of this Collective Arbitral Tribunal is deemed well-founded, with the consequent dismissal of the Defendant from the action.

The merit of this exception renders unnecessary the analysis of the exception of lapse of the right of action raised by the Defendant in the Response.

Additionally, in harmony with the provisions of article 22, no. 4, of RJAT, "in the arbitral decision rendered by the arbitral tribunal, the determination of the amount and the apportionment among the parties of the costs directly resulting from the arbitral process is included".

In this context, the basic rule relating to liability for process costs is that the party that has caused them must be condemned, understanding that the party that causes the process costs is the losing party, in the proportion in which it is so (article 527, nos. 1 and 2 of CPC).

IV. DECISION

In these terms, this Collective Arbitral Tribunal decides:

• To deem well-founded the exception of relative incompetence of this Collective Arbitral Tribunal and, as a consequence, dismiss the Defendant from the action;

• To condemn the Claimant to pay the costs of the present process.

V. VALUE OF THE CASE

Pursuant to the provisions of article 299, no. 1, of CPC, subsidiarily applicable by virtue of the provisions of article 29, no. 1, subparagraph e), of RJAT and article 6, subparagraph a), of the Regulation of Costs in Tax Arbitration Proceedings, combined with the provisions of article 97-A, no. 1, subparagraph a), of CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is € 70,000.00.

VI. COSTS

Pursuant to article 22, no. 4, of RJAT, the amount of costs is fixed at € 2,448.00, in accordance with the provisions in Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Notify.

Lisbon, 23 October 2017.

[1] The writing of the present decision is governed by the spelling prior to the Orthographic Agreement of 1990, except as regards the transcriptions made.

[2] Text prepared by computer, pursuant to the provisions of article 131, no. 5, of CPC, applicable by reference of article 29, no. 1, subparagraph e), of RJAT.

[3] Fact proven because also mentioned and not contested in the Response but without documentary evidence (amount considered as presented by the Claimant).

[4] In accordance with article 578 of CPC, "the tribunal must know ex officio of dilatory exceptions, except for absolute incompetence resulting from the violation of a private agreement conferring exclusive jurisdiction or the preclusion of a voluntary arbitral tribunal and relative incompetence in cases not covered by the provision in article 104".