Summary
Full Decision
The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Maria Cristina Aragão Seia and Dr. Mariana Vargas, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 09-12-2015, agree as follows:
- Report
A…, LDA., tax identification number…, with registered office at Rua…, Building…, … floor, …-… … (hereinafter referred to as "Claimant" or "A…"), came, pursuant to Article 2, paragraph 1, subparagraph a), and Articles 10 et seq. of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), to present a request for arbitral ruling on the legality of the act of additional withholding tax assessment at source on personal income tax (IRS) No. 2014…, and the respective compensatory interest assessments Nos. 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, identified in the statement of withholding tax assessment at source of IR No. 2015…, relating to the year 2012, from which resulted a balance due of € 1,661,073.48.
The respondent is the TAX AND CUSTOMS AUTHORITY.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 09-10-2015.
Pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable period.
On 23-11-2015, the parties were duly notified of this appointment, and neither manifested an intention to refuse the appointment of the arbitrators, in accordance with Articles 11, paragraph 1, subparagraphs a) and b), of RJAT and Articles 6 and 7 of the Deontological Code.
Thus, in compliance with the provision of subparagraph c) of paragraph 1 of Article 11 of RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, the Arbitral Tribunal was constituted on 09-12-2015.
The Tax and Customs Authority presented a response in which it challenged the admissibility of the request.
On 17-02-2016, a hearing took place in which witness testimony was produced and it was agreed that the proceedings would continue with successive written submissions.
The parties presented submissions.
The Arbitral Tribunal is competent and was regularly constituted.
The parties are duly represented, possess legal personality and capacity, and the Claimant has standing (Articles 4 and 10, paragraph 2, of the same decree and Article 1 of Order No. 112-A/2011, of 22 March).
The proceedings do not contain any nullities and no exceptions were raised.
- Factual Matters
2.1. Established Facts
The following facts are considered established:
a) A… is a temporary work agency;
b) In fulfillment of its corporate purpose, the said company contracts workers, being their employer, which it subsequently provides to third parties ("Users");
c) The vast majority of these workers perform their functions at work locations situated outside the national territory;
d) Ordinarily residing in Portugal, all such workers who perform functions abroad must move from their usual residences and their families' social circles in order to be able to provide their work at the User's premises to whom they were assigned;
e) In many cases, the worker assigned to a given User does not always perform his functions at the work location defined in the temporary work contract;
f) As a rule, after the work contract is executed and under it, the worker provides his services to the User wherever the User requires and without new contracts being executed for this purpose;
g) For these reasons, the Claimant decided to attribute to its workers, together with their respective salary, a monetary sum (cost allowances) as a way to compensate them for the inconvenience caused by the aforementioned displacements;
h) By choice and for resource economy, the Claimant does not provide to its workers assigned abroad any type of accommodation or food;
i) The accommodation and food expenses of the workers referred to are not identical to those they would have to bear if they continued to perform their functions in Portugal and are borne by the workers themselves;
j) The amounts paid to workers assigned as cost allowances varied according to a number of factors, namely, the location where the worker was assigned, as the price of accommodation and housing is not the same in all countries and there may be variations depending on the period of the year in which the assignment occurred, since the greater influx of people to a tourist area in a given period of the year drove up the price of accommodation and food;
k) After the workers moved to the locations where they had to perform their functions, they communicated to the Claimant the expenses they had to bear with accommodation and food, after which the Claimant paid them, passing on their cost to the purchasers of services;
l) The Claimant was subject to an inspection procedure, following Inspection Order OI2014…, of general scope, relating to the fiscal year 2012;
m) In the said inspection procedure, the Tax Inspection Report was prepared, which forms part of the administrative file, the contents of which are reproduced, in which, among other things, the following is stated:
II.5. DEVELOPMENT OF THE ANALYSIS OF THE ACTIVITY
II.5.1. Temporary work. Legislation
The taxpayer is a temporary work agency (TWA), whose activity consists of providing services of temporary assignment of workers to other companies.
The exercise and licensing of TWA activity are regulated by Decree-Law No. 260/2009, of 25 September, which repealed Decree-Law No. 124/89, of 14 April, and Law No. 19/2007, of 22 May, in the part not repealed by Law No. 7/2009, of 12 February, which approved the new Labour Code.
Subparagraph d) of Article 2 of Decree-Law No. 260/2009 defines as "temporary work agency" the natural or legal person whose activity consists of the temporary assignment to users of the activity of workers whom it hires and remunerate for that purpose.
Pursuant to Articles 5 and 8 of that decree, the exercise of this activity is subject to licensing. A… TWA is licensed to exercise TWA activity, being the holder of License No. …/2000.
Temporary work is regulated in Articles 172 et seq. of the Labour Code, approved by Law No. 7/2009, of 12 February.
It is defined as a triangular relationship, in which an employing entity (the TWA) hires, remunerate and exercises disciplinary power over a temporary worker, assigning him to provide his activity to another entity (user) that receives him and exercises, in a delegated manner, the powers of authority and direction.
For this purpose, pursuant to paragraph 1 of Article 4 of Decree-Law No. 260/2009, a contract for the use of temporary work must be mandatorily executed between the TWA and the user.
In the same terms, it is mandatory to execute, between the TWA and the worker, a temporary work contract or an indefinite-term employment contract.
As required by Articles 181 and 183 of the Labour Code, the temporary work contract and the indefinite-term employment contract are subject to written form and must contain, among other elements, the contracted activity or generic description of the functions to be performed and the work location or the geographic area in which the worker is bound to perform functions.
II.5.2. Activity of the Taxpayer as a TWA
In 2012, the taxpayer recorded a turnover volume, relating to its TWA activity, exceeding 10 million euros, with the following main clients standing out:
Table 6 - Weight of turnover by client
| Client Location | Client | % |
|---|---|---|
| National Market | B… Ltd. | 54% |
| C… S.A. | 9% | |
| D… Ltd. | 6% | |
| Community Market | E… | 8% |
| F… | 7% | |
| G… S.A. | 6% | |
| H… | 3% | |
| I… | 3% | |
| J… | 1% | |
| Non-Community Market | K… Ltd. | 2% |
| L… | 1% |
The client B…, Ltd., with Tax ID/Company ID…, is a company held by the same shareholders as the taxpayer, and is registered for the exercise of the activity corresponding to CAE "…-Other specialized diverse construction activities, n.e.c.".
The taxpayer invoices to B… Ltd. the assignment of temporary personnel for its works. Given that special relationships exist between the taxpayer and client B… Ltd., the respective transfer prices are defined in accordance with Article 63 of the Corporate Income Tax Code.
The taxpayer was requested to present the utilization contracts executed with its clients. In response, it informed that it did not possess them, just as it did not possess the employment contracts made with the workers.
In fact, in a statement record drawn up on 2014-07-07, at the time of the first visit to the taxpayer's premises, the official accountant and representative appointed in relations with the Tax Authority during the inspection procedure, stated that it did not have employment contracts made with workers on file.
From the taxpayer's records, in 2012 there were remuneration records for 411 employees, counting here all employees, including company officials and temporary workers.
According to the "Cost Allowances" maps of which copies were provided to us by the taxpayer, a large part of those employees was assigned to work outside Portugal: in France, Algeria, Angola, Congo, United States of America and Singapore.
From the analysis of the company's cost structure, personnel expenses stand out, reaching 94% of turnover. External supplies and services account for 2.6% of turnover.
III. DESCRIPTION OF FACTS AND BASES OF MERELY ARITHMETIC CORRECTIONS TO TAXABLE INCOME
III.1. IRS – WITHHOLDING AT SOURCE
III.1.1. Personnel Expenses
As mentioned in point 5.2 of Chapter II, from the company's cost structure, the item with the greatest value is personnel expenses, recorded in account 63, in the total amount of 9,871,188.56 EUR and corresponding to approximately 96% of all expenses and losses recorded in accounting in class 6.
From personnel expenses, we highlight expenses with temporary workers whose work location is situated outside the national territory, recorded in the following expense accounts:
i) 63.2251 – Personnel expenses, personnel remuneration, temporary staff leasing, cost allowances without IRS, in the amount of 1,989,793.28 EUR;
ii) 63.81 – Personnel expenses, other personnel expenses, accommodation, food and travel, in the total amount of 2,973,659.36 EUR.
In account 63.2251 are recorded the expenses with alleged "cost allowances" paid at the end of each month to temporary workers assigned abroad, included in salary slips.
In account 63.81 are recorded:
a) Others called "cost allowances (partial)", paid to temporary workers assigned abroad and not appearing in remuneration slips;
b) Other expenses with temporary workers assigned abroad, called "travel (partial)".
According to what appears in the accounting records and salary slips, the alleged "cost allowances" paid to temporary workers, whether those recorded in account 63.2251 or those recorded in account 63.81, were not subject to withholding tax at source on IRS.
III.1.2. Concepts and Definitions
Paragraph 1 of Article 2 of the IRS Code provides that all remuneration paid or made available to its holder, arising from work on account of another person, are considered dependent work income, subject to tax.
Pursuant to paragraph 2 of the same article, such remuneration comprises other accessory remuneration, whether periodic, fixed or variable, of a contractual or non-contractual nature.
The assignment of cost allowances aims to compensate the worker for expenses borne by him when displaced from his domicile necessary for the service of the employing entity and presupposes the actual displacement of the beneficiary, with the aim of meeting the expenses borne by the worker with accommodation and meals.
In accordance with Decree-Law No. 106/98 of 24 April, without prejudice to what is established in special law, the following are considered as domicile necessary for purposes of awarding cost allowances:
a) The locality where the worker accepted the position or office, if he remains there to provide service;
b) The locality where he performs functions, if assigned to a different locality;
c) The locality where the centre of his functional activity is situated, when there is no fixed place for the exercise of functions.
On the concept of necessary domicile, binding information was prepared, on the legal-tax framework of remuneration earned through the execution of temporary work contracts and which, although binding only to the Tax Authority with respect to the taxpayer who requested it, serves as guidance for similar cases.
This binding information, in which the Tax Authority pronounces itself in the same sense as the judgment of the Central Administrative Court of the North, handed down in case No. 01006/04.6BRBRG, addresses exactly the same situation as the concrete case of the taxpayer, and states the following:
The temporary work contract is merely instrumental to the utilization contract: the temporary work agency executes the employment contracts when it has the prospect of execution of a utilization contract and in this the work location must be identified.
Thus, and although these workers have no contractual link with the user, it is the location where the user intends that the utilization contract be performed that constitutes their work location and, as such should be identified in the temporary work contract, as the law requires, and this should be assumed as their necessary domicile.
It is precisely this concept of necessary domicile that justifies the payment of cost allowances to workers who, having their centre of activity previously defined, are occasionally sent to an employing entity outside the locality where it is situated, to perform their duties there, bearing expenses that the remuneration does not take into account.
Essential for assessing the existence of a displacement is always a prior determination of a location for the performance of the service, so that considering that this corresponds to the seat of the temporary work agency would constitute a form of fictionalizing a displacement.
Such understanding would lead to the conclusion that almost all workers hired by temporary work agencies would be entitled to cost allowances, ending up receiving part of the consideration for their work under that designation.
Given that the execution of the temporary work contract always has as a prerequisite the existence of a client with whom the temporary work agency has executed a utilization contract, at the moment of execution of that contract, the Temporary Work Agency already knows the work location of the hired worker, so the remuneration must be agreed based on the additional expenses that the worker will have to bear, namely, if the work location is in a different country.
The remuneration thus determined is considered compensation and, as such, is subject to taxation as income of IRS category A.
In this sense, also, recent case law contained in the judgment of the Central Administrative Court of the North, handed down in Case No. 01006/04.6BEBRG, 2nd Section, Tax Contentious, on 2007-11-08."
III.1.3. Employment Contracts
In the concrete case, the temporary worker accepts to perform his functions at the location defined in the employment contract executed with the temporary work agency, signed by the worker himself.
At the beginning of the inspection action, the taxpayer was notified to present "copies of employment contracts of all workers in service in 2012". In statements recorded, dated 2014-07-24, the accountant and representative of the taxpayer stated that "he does not present them because they do not exist because after one year they are destroyed, for reasons of space and labour law because they are only mandatorily retained for one year".
As referred to in point 2.2 of Chapter II of this report, this inspection action was carried out jointly with the action of the Social Security inspection services. Within the scope of the joint action and in accordance with the provisions of Articles 63 of the LGT and 9 of RCPIT, information and documents were exchanged between the Tax Authority and the Social Security services.
In the exchange of information, it was possible to collect copies of temporary work contracts, for an uncertain term, executed between the taxpayer and temporary workers assigned in 2012, namely to France, photocopies of which are attached to this report.
In the temporary work contracts, signed by the temporary work agency and the hired worker, the work location is defined as the law requires, and, for workers assigned to perform functions outside the national territory, the work location is the locality of the country to which they will be assigned.
In the following image, an extract from an image of a contract is presented, where an arrow indicates the field of the contract where the work location is pre-determined:
[Image content not translated as it is descriptive of document structure]
At the time of entering into the employment contract with the hired worker, the taxpayer already knows the location where the user intends that worker to perform his functions, since that fact is previously and mandatorily contracted between the taxpayer and the using company.
In the utilization contract, executed with the client seeking workers to perform functions in foreign countries, the work location is identified, which is the location where the user intends the utilization contract to be performed, as defined in the employment contract executed between the taxpayer and the worker who will be assigned to the desired country.
That work location in a foreign country is assumed as their necessary domicile, thus not justifying the payment of cost allowances to those assigned workers who have their work location previously defined.
On the other hand, given the obligation to mention the work location in the contract, if the using company needs a worker in another location, a new employment contract must be drawn up and never rely on the assignment of cost allowances with fixed, regular and permanent character that embody true remuneration, and thus subject to IRS.
In 2012, the taxpayer assigned workers to France, Algeria, Angola, Congo, United States and Singapore, being in these countries their work location.
As the work location of the worker hired to perform functions in foreign countries is already known, defined between the taxpayer and the using company, the remuneration of those assigned workers is agreed based on the additional expenses that the worker will have to bear, such as travel, food and accommodation, these being considered as remuneration and, as such, subject to taxation as IRS category A income.
Thus, the expenses recorded by the taxpayer in accounts 63.2251 and 63.81 of accounting as "cost allowances" are considered dependent work remuneration, in accordance with the provisions of Article 2 of the IRS Code and, as such, subject to taxation as IRS category A income.
III.1.4. Cost Allowances Maps
At the beginning of the inspection action, on 2014-07-07, the taxpayer was notified to present "Copies of itinerary bulletins / cost allowances maps for each worker and for each month in 2012", that is, maps through which it would be possible to control the cost allowances.
On 2014-07-24, the taxpayer presented copies of maps called "Cost Allowances 2012 – A…", containing one map for each of the 253 assigned workers, which includes the indication, by month, of the work location, number of working days, value of "cost allowances" recorded in account 63.225, "cost allowances (partial)" recorded in account 63.81 and travel expenses (partial) recorded in account 63.81.
A copy of the first sheet is attached to this report, as exemplifying, containing maps corresponding to six employees (the first six arranged alphabetically), and an "Excel" table containing the data collected from all those maps.
The total amount appearing in the column of alleged cost allowances in the maps of all displaced workers reaches 1,989,808.00 EUR and corresponds to the annual value recorded in accounting in account 63.2251, in the amount of 1,989,793.28 EUR. There is a difference of 14.72 EUR, materially irrelevant, which the accountant of the taxpayer admitted to be a material error in accounting: "... the only explanation I find is a bookkeeping error. The map value is the correct one. The accounting movement is wrong, revealing a cost lower than the real".
The total amount appearing in the columns of alleged cost allowances "partial account 63.81" and travel "partial 63.81" in the maps of all workers totals the value of 2,958,444.00 EUR, with the difference to the total of the accounting extract of account 63.81, in the amount of 15,218.09 EUR, recorded in the account "78.8882 - Settlement of personnel costs", existing a materially irrelevant divergence of 2.73 EUR.
III.1.5. Analysis of the "Cost Allowances" Maps
In the maps called "Cost Allowances 2012 - A…" presented by the taxpayer, are discriminated, for each of the assigned workers whose work location is outside Portugal, the work location, the monthly value of expenses recorded as "cost allowances" in account 63.2251 and in account 63.81 and expenses recorded in account 63.81 as travel, food and accommodation.
Cost allowances (account 63.2251): Expenses recorded in account 63.2251 are included in the salary slips of workers, are paid with the remaining remuneration and have no supporting document.
Since the work location is defined as being in the countries to which they were assigned and by the concept of necessary domicile, these remuneration cannot be considered as cost allowances, but rather as compensation for dependent work income.
Cost allowances (partial account 63.81): Payments made to temporary workers, almost always by bank transfer. Defined by the taxpayer as "cost allowances", there are no supporting documents of the type of expense paid.
Pursuant to Article 258 of the Labour Code, remuneration comprises basic remuneration and other regular and periodic benefits.
Analyzing the maps "Cost Allowances 2012 - A…" presented to us by the taxpayer, if we look at the values appearing in the column of alleged cost allowances (account 63.2251) and the column of alleged cost allowances (account 63.81), it is verified that the amounts paid monthly to each employee are disparate, varying from one period to another.
However, if we perform the exercise of adding the values appearing in both columns of alleged cost allowances (account 63.2251 + account 63.81) and then dividing this total value by the number of working days of the month to which it corresponds, we obtain an exact and constant daily value.
Thus, pursuant to paragraph 2 of Article 258 of the Labour Code (transcribed in footnote), these values correspond to work remuneration.
As an example, the following table presents the calculations made relating to one employee. In the Maps in Annex III – "Cost Allowances", the same calculation is presented regarding all employees included in the maps in question.
[Calculation table not translated as it contains numerical data]
On the other hand, from the analysis of the previous table and the others (see Annex III - "Cost allowances"), it is verified that workers did not work all the days of some months, although they remained outside Portugal.
However, as verified, for example, by reading the previous table, regarding the months of February, May and September, the alleged "cost allowances" were not paid for the entire month, but only for the days the worker was in use.
For clarification of the concept of temporal "utilization" of the worker, let us see an invoice issued by the taxpayer, which can be read: "Mise à disposition de MONTEUR du 5 au 31 Janvier/12".
It is verified that the worker, although displaced for the entire month, only received alleged "cost allowances" for the periods he was being utilized, that is, those alleged "cost allowances" did not aim to compensate the worker based on displacement, but are in fact remuneration for work, only paid for the days he is being utilized in work.
Even when, according to the "Cost Allowances" maps presented by the taxpayer, the location where the worker performs work may vary between localities of the same country (in the case France), the worker would only have compensation for displacement between localities, which did not occur, because, as can be verified, the cost allowance is always the same.
Furthermore, regarding expenses with travel and displacements, they appear in the maps presented by the taxpayer in a separate column or are even accounted for in differentiated accounts, and neither one nor the other are challenged in this report.
Thus, it is proven that those remuneration, which the taxpayer designated as "cost allowances" are, effectively, regular and periodic benefits, so they are necessarily included in the concept of remuneration, pursuant to the aforementioned Article 258 of the Labour Code.
III.1.6. Some Case Law
As concluded in the judgment of the Central Administrative Court of the South, in case No. 6785/02: "The essential characteristic of cost allowances is their compensatory character, (...), and the absence of any correlation between their receipt and the provision of work". The contrary is verified in the case at hand, as was demonstrated.
The judgment of the Central Administrative Court of the South, in case No. 00699/03, concludes in a situation identical to those here at issue, that: "Indeed, when signing the employment contract, the challenger and his employer knew that the work location would be in a foreign country, so they had the opportunity to adjust the salary based on that constraint, thus stipulating a complement to remuneration corresponding to his work provision, which cannot, in light of our legal system, specifically the concept of compensation contained in the cited article 82 of the LCT, be qualified as "cost allowances"."
And in case No. 00700/03, "(…) And so much so that the value of those items was regularly and periodically processed in salary slips and the amount was previously fixed as a fixed and permanent item per day of actual work in the employment contract, varying monthly, as can be seen from the slips, a variation that was due to variations in the amount of work performed each month by the worker. We must therefore conclude that those items are subject to IRS, in accordance with the provisions of article 2 of the IRS Code, with no room for the application of the provisions of article 2, paragraph 3 e) of the same decree (taxation of cost allowances only in the part exceeding legal limits), because the nature of cost allowances is completely ruled out from those items, that is, the questioned items do not assume the nature of compensatory cost allowances but rather the compensatory nature. remuneration."
The fact that the alleged "cost allowances" paid by the taxpayer do not appear in the employment contract and that part of them are not mentioned in the salary slips does not alter the substance of the facts analyzed and demonstrated or the conclusions previously substantiated.
III.1.7. Travel (partial account 63.81)
The expenses hitherto designated by the taxpayer as "cost allowances" and analyzed in the preceding paragraphs do not include the other expenses that the taxpayer incurred and recorded separately as expenses relating to worker travel:
a) In account 63.81, described as "Travel (partial account 63.81)";
b) In account "62.52 - Personnel Transport";
c) In account "63.871 - Assignment Documentation".
When asked to present documents proving the cost allowances expenses recorded in account 63.81, the taxpayer responded through its accountant in an email dated 2014-11-05; "(…), in principle, all supporting documents of expenses that are in the possession of A…, are those indicated in the column "Travel - Partial of 63.81".
It is verified, therefore, that the taxpayer incurred and recorded in accounting as expenses the expenses with worker displacements and that are accepted as tax deductible expenses.
III.1.8. Joint and Several Liability
As stipulated in paragraph 4 of Article 103 of the IRS Code, concerning liability in case of substitution, "in the case of income subject to withholding that has not been accounted for or communicated as such to the beneficiaries, the substitute assumes joint and several liability for the tax not withheld".
Paragraph 4 of Article 103 of the IRS Code was added by Article 46 of Law No. 53-A/2006, of 29 December – State Budget Law for 2007, aiming to address situations such as the one at hand.
The Report on the State Budget for 2007, published by the Ministry of Finance and Public Administration, in October 2006, emphasizes the "Institution of a regime of joint and several liability of the substitute for tax not withheld to beneficiaries of income in situations qualified as fraudulent practices related to the omission or reduction of the amount of remuneration paid, whether by its non-accounting or its characterization as income not subject to taxation (e.g. cost allowances)."
In accordance with Article 20 of the General Tax Law, tax substitution occurs when the tax obligation is required from a person different from the taxpayer and is effectuated through the mechanism of withholding the tax at source.
The dependent work income paid to displaced workers, subject to taxation, recorded in accounts 63.2251 and 63.81, in the total value of 4,645,067 EUR, was not accounted for by the taxpayer as such, but rather characterized as income not subject to tax, as "cost allowances".
That income, subject to taxation, recorded in accounts 63.2251 and 63.81, was also not communicated as such to the temporary workers assigned, as evidenced by the statements delivered by the employing entity to these workers, relating to the amounts due in the year 2012 and respective tax withheld at source, in accordance with subparagraph b) of paragraph 1 of Article 119 of the IRS Code.
The statements referred to conform to the values indicated in the declaration model 10, referred to in subparagraph c) of the same legal provision, relating to the year 2012, which contains dependent work income, annual, due to the same workers in 2012, subject to taxation for IRS purposes.
In light of the above, it is concluded that the taxpayer, as substitute of the workers in the determination and payment of withholding at source, is jointly and severally liable for the tax not withheld, pursuant to paragraph 4 of Article 103 of the IRS Code.
Thus, the taxpayer must deliver payment slips for withholding at source, relating to each of the months of the year 2012, with the code "101 – IRS, dependent work", relating to the tax not withheld on dependent work income – category A, in the total annual amount of 1,515,328.00 EUR (as per point III.1.7 and Annex IV).
On the values of the withheld taxes, compensatory interest is due, from the date they should have been delivered to the State Treasury (column 4 of table 8), pursuant to Article 35 of the LGT.
III.1.9. Calculation of Withholding Tax at Source in Default
Concluding that the expenses recorded in accounting as alleged "cost allowances" in accounts 63.2251 and 63.81 constitute dependent work income paid to temporary workers assigned, whose work location and necessary domicile are situated outside the national territory, that income is subject to withholding tax at source on IRS.
That income was not recorded in the taxpayer's accounting as dependent work remuneration subject to tax, so the respective IRS withholding was not effected.
In accordance with the provisions of Articles 98 and 99 of the IRS Code and Decree-Law No. 42/91, of 22 January, which approves the Legal Framework for Withholding at Source, entities owing dependent work income are obliged to withhold the tax at the moment of its payment or making available to their respective holders.
The amounts withheld must, pursuant to those norms, be delivered to the State by the 20th of the month following the month in which they were deducted.
In determining the IRS to be withheld on dependent work remuneration paid or made available to their respective holders, account shall be taken of the personal and family situation of the taxpayers in accordance with individualized withholding tables.
IRS withholding is effected on remuneration paid or made available to its holders, by applying the rates corresponding to them, contained in the respective table. The withholding tax tables are annually approved by decree of the Minister of Finance.
The tables with the withholding tax rates on dependent work for the year 2012 were approved by Decree No. 2075-A/2012, of 10 February.
The calculation of IRS withholding at source on the dependent work income in question is based on the values of remuneration paid appearing in the remuneration slips and the values appearing in the maps "Cost Allowances 2012 - A…", copies of which were delivered to us by the taxpayer.
The total monthly remuneration of each worker subject to tax was determined. To the income appearing in the remuneration slips that were subject to tax, the value of the so-called "cost allowances" recorded in account 63.2251, which appear in the remuneration slips, and the value of the so-called "cost allowances" recorded in account 63.81, which do not appear in the remuneration slips, were added.
From the databases of the Tax Authority and from the elements contained in the headings of the documents designated "Employee Account Statement" relating to each employee and copies of which were delivered to us by the taxpayer, the personal and family situation of the workers was verified for purposes of the provisions of Article 2 of Decree-Law No. 42/91, of 22 January.
The personal and family situation of each worker was verified and updated throughout the twelve months of the year, taking into account the data contained in the "Employee Account Statement" heading, verification of the rate applied in each month through the respective "Remuneration Slip" and other information provided by the taxpayer.
With the total monthly remuneration of each worker and the personal and family situation determined, the rate corresponding to him can be determined, in accordance with the withholding tax tables, and which should have applied to the total income received by the workers.
The withholding rates applied regarding holiday and Christmas bonuses were calculated autonomously, pursuant to paragraphs 4 and 5 of Article 3 of Decree-Law No. 42/91.
Regarding the month of January 2012, and given that the withholding tax tables for 2012 were only published on 2012-02-10, the procedure used by the taxpayer of applying the corresponding tables in force for the year 2011 was maintained.
The values of the correct withholdings to be made for each worker, in each month, are calculated in the maps attached to this report, in Annex IV - "Calculation of Withholdings".
From the values resulting from the calculations presented in those maps, we can conclude that the total monthly withholding tax at source on dependent work income in default, pursuant to Articles 98 and 99 of the IRS Code, is what is summarized in the following table:
[Calculation table - numerical data not translated]
IX. RIGHT TO HEARING
The taxpayer was notified, pursuant to Article 60 of the General Tax Law (LGT) and Article 60 of RCPIT, through office No. …, of 2014-11-14, to exercise the right to hearing on the Draft Tax Inspection Report, sent to his tax address.
On 2014-12-10, a submission was received at the Finance Directorate of … by the taxpayer exercising the prior hearing right.
As stated in the said submission, the taxpayer disagrees with the proposed corrections, for the reasons transcribed below:
[The taxpayer's submission arguing that cost allowances were compensatory in nature and based on actual expenses...]
As was duly substantiated in point III.1.2 of this report, the assignment of cost allowances aims to compensate the worker for expenses borne by him when displaced from his necessary domicile.
The issue here is not whether the worker has or does not have residence in Portugal, but rather what is his necessary domicile.
In accordance with Decree-Law No. 106/98, the following are considered as necessary domicile for purposes of awarding cost allowances:
a) The locality where the worker accepted the position or office, if he remains there to provide service;
b) The locality where he performs functions, if assigned to a different locality;
c) The locality where the centre of his functional activity is situated, when there is no fixed place for the exercise of functions.
In temporary work contracts signed by the temporary work agency and the hired worker, the work location is defined as the law requires, and for workers assigned to perform functions outside the national territory, the work location is the locality of the country to which they will be assigned.
In the concrete case, the temporary worker accepts to perform his functions at the location defined in the employment contract executed with the temporary work agency, signed by the worker himself.
That work location in a foreign country is assumed as his necessary domicile, thus not justifying the payment of cost allowances to those assigned workers who have their work location previously defined.
The taxpayer further alleges that:
[Further arguments regarding the compensatory nature...]
Regarding this point and following ones, its analysis is prejudiced by the fact that the remuneration in question are not cost allowances, as was previously demonstrated, but are regular and periodic benefits and, as such, included in the concept of remuneration, pursuant to the aforementioned Article 258 of the Labour Code.
n) Following the inspection, on 29-04-2015, the Tax and Customs Authority issued the assessment No. 2014…, relating to withholding tax at source on IRS for the year 2012, in the amount of € 1,516,328.00 and the assessments for compensatory interest Nos. 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, in the total amount of € 145,745.48, from which resulted a balance due of € 1,661,073.48.
o) On 28-09-2015, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.
2.2. Unproven Facts
There are no facts relevant to the decision of the case that have not been proven.
2.3. Substantiation of the Determination of Factual Matters
The established facts are based on documents contained in the administrative file and on witness testimony.
The witnesses examined appeared to testify with impartiality and with direct knowledge of the facts they stated.
- Legal Matters
The Claimant is a temporary work agency which, in the year 2012, hired workers in Portugal, becoming their employing entity, which it subsequently provided to third parties, in most cases to perform their functions at work locations situated outside the national territory, namely in France, Algeria, Angola, Congo, United States of America and Singapore.
As results from the evidence produced, the workers who provided service abroad in the year 2012 resided and continued to reside ordinarily in Portugal, and the Claimant made payments to them destined to compensate the expenses they bore with accommodation in the countries where they provided service, payments that varied according to the actual cost of that accommodation in each location, taking into account, even, the period of the year in which the accommodation occurred, in the case of locations where that cost varies according to the period of the year.
It was further proven that the locations where workers perform their functions do not always coincide with what is indicated in the employment contracts, varying according to the needs of the entity for whom the service was provided.
The Tax and Customs Authority, in the Tax Inspection Report underlying the contested assessment, understood that the concept of necessary domicile contained in Decree-Law No. 106/98, of 24 April, is applicable to the situation and proceeded from the presupposition that "when entering into the employment contract with the hired worker, the taxpayer already knows the location where the user intends that worker to perform his functions, since that fact is previously and mandatorily contracted between the taxpayer and the using company" and that "given the obligation to mention the work location in the contract, if the using company needs a worker in another location, a new employment contract must be executed and never rely on the assignment of cost allowances with fixed, regular and permanent character that embody true remuneration, and thus subject to IRS".
From the evidence produced, it was concluded with certainty that this presupposition of the Tax and Customs Authority that service is always provided in the locations that appear in the contracts does not correspond to reality and that service is provided in locations different from those indicated in the contracts, according to the occasional needs of the companies that acquire the services, without new contracts being executed.
On the other hand, it was also proven that the assertion made by the Tax and Customs Authority in the said Tax Inspection Report that "the remuneration of those assigned workers is agreed based on the additional expenses that the worker will have to bear, such as travel, food and accommodation, these being considered as remuneration and, as such, subject to taxation as IRS category A income" did not correspond to reality.
In truth, it was proven that the accommodation and food expenses of workers are not agreed in advance between the Claimant and the workers, with only the remuneration being agreed, the value of compensation for accommodation and food expenses being fixed only after confirmation by the workers at the destination locations of the costs they actually have to bear, which vary according to the cost of living in the respective locations and sometimes according to the period of the year.
Thus, it must be concluded that, contrary to what the Tax and Customs Authority concluded in the Tax Inspection Report, the sums received by the workers destined to compensate accommodation and food expenses do not fall within the concept of "remuneration" as defined by Article 258, paragraphs 1 and 2, of the Labour Code, since it was proven that one is not dealing with regular and periodic benefits earned as consideration for work provided, having thus rebutted the presumption that constitutes "remuneration any benefit from the employer to the worker", contained in paragraph 3 of the same article.
Therefore, the sums in question are considered cost allowances for purposes of subparagraph a) of paragraph 1 of Article 260 of the Labour Code.
As has been settled case law of the Supreme Administrative Court, regarding similar situations of workers hired in Portugal to provide service abroad, "it is incumbent upon the Tax Administration to demonstrate the existence of the facts constitutive of its rights, that is, that situations occurred susceptible of being taxed, namely under Article 2 of the IRS Code" and "it is incumbent upon the Tax Authority to satisfy the burden that falls upon it of "pointing out factual elements demonstrative or seriously indicative that the benefits received (by the Claimant, here appellant) did not have any compensatory purpose" ([1]).
As stated in the ruling of the Plenary of the Supreme Administrative Court of 08-11-2006, handed down in case No. 01082/04:
The structure of IRS aims to tax only the actual income of taxpayers, although that actual income may be presumed.
Therefore, Article 2 of the IRS Code, which defines work income, must be interpreted in this light, as covering only cases in which monetary attributions made to workers on account of another person aim to provide them with an increase in assets, ruling out the incidence of the tax regarding patrimonial attributions that aim only to compensate the worker for expenses he had to bear to ensure the proper exercise of the function.
It is true, however, that under the guise of attribution of "compensations" of this type, true remuneration attributions may sometimes be hidden, which justifies that limits be established for these patrimonial attributions in subparagraphs c), d) and e) of paragraph 3 of Article 2 of the IRS Code in the wording prior to Law No. 39-B/94, of 27 December.
But only in the part exceeding those limits.
From this it is clear that cost allowances have a compensatory nature only in the part in which they exceed the stated limits, having a compensatory nature in the part that does not exceed them".
In the case at hand, it resulted from the evidence produced that the sums in question were destined to compensate the workers for the increased expenses that they actually had to bear to provide service in the locations where they performed their functions, so that, not having exceeded the legal limits, one is dealing with benefits attributed to workers that are not considered income for IRS purposes, by virtue of the provisions of subparagraph d) of paragraph 3 of Article 2 of the IRS Code.
Moreover, although this norm also makes the non-qualification of cost allowances as income dependent on the observance of the "presuppositions of their attribution to civil servants", this limitation aims to prevent the abusive attribution of the qualification of cost allowances to patrimonial attributions that do not have the compensatory nature of expenses borne by workers, since it would be a solution materially unconstitutional, by breach of the principle of equality [Articles 13 and 59, paragraph 1, subparagraph a), of the Constitution], to tax as income, with the correlative diminution of work remuneration, patrimonial attributions made with that purpose in situations in which it is justified that the expenses be compensated as such.
Now, for the specific case of situations of temporary work in which the worker is assigned to a user abroad, there is special legislation that expressly regulates the assignment of cost allowances and fixes its limit (Article 185 of the Labour Code of 2009), so that, regarding the benefits attributed to workers who find themselves in these conditions, there is an express legislative recognition that one is dealing with cost allowances and, therefore, patrimonial attributions that do not constitute income for IRS purposes. Indeed, it is evident the reasonableness of this legislative option, since it is normal that the temporary displacement of the worker to a location distant from his usual residence implies expenses that he would not have to bear if he remained in that residence or transferred his usual residence abroad.
Therefore, it is clear the error of the Tax and Customs Authority in understanding that the "work location in a foreign country is assumed as its necessary domicile, thus not justifying the payment of cost allowances to those assigned workers who have their work location previously defined", since, from the legislative perspective, the payment of cost allowances is justified even if the worker performs functions only in the work location indicated in the respective contract, provided that it is a temporary displacement, as provided in that norm.
On the other hand, it is observed that the Tax and Customs Authority used the concept of necessary domicile provided for in Article 2 of Decree-Law No. 106/98, of 24 April, to ascertain whether the sums considered by the Claimant as cost allowances meet the "presuppositions of their attribution to civil servants" referred to in subparagraph d) of paragraph 3 of Article 2 of the IRS Code, but such use does not appear appropriate in cases where service provision abroad is at issue.
In truth, Decree-Law No. 106/98, of 24 April, is not intended for situations in which the location where functions must be performed is situated abroad, as concluded from Article 15 of that decree, which states that "The award of cost allowances for displacements abroad and for displacements in foreign territories is regulated by special legislation".
Moreover, as stated, it was proven that the workers did not always perform functions abroad in the locations indicated in their respective contracts, so that, even if the concept of necessary domicile provided for in Article 2 of Decree-Law No. 106/98 were understood to be applicable, it would have to be recognized that the contested assessment, by presupposing that functions were always performed in those locations, is vitiated by error regarding the factual presuppositions.
Furthermore, as the Supreme Administrative Court has understood (and as seen from the cited case law), for IRS to apply to sums paid as cost allowances, the Tax and Customs Authority must prove that the benefits received did not have any compensatory purpose, so that, to ensure the legality of the IRS assessment that is contested in this proceeding, it would be necessary to demonstrate that none of the sums paid to workers had a compensatory nature.
From the foregoing, it is concluded that the contested assessment is vitiated by error regarding the factual presuppositions and error regarding the legal presuppositions, which justify its annulment [Article 163, paragraph 1 of the Administrative Procedure Code of 2015, subsidiarily applicable by virtue of the provision of Article 2, subparagraph c), of the LGT].
The assessments for compensatory interest form part of the proper tax debt, which is its presupposition (Article 35, paragraph 8, of the LGT), so they are vitiated by the same defects.
- Decision
In accordance with the foregoing, the Arbitral Tribunal agrees to:
a) Declare the request for arbitral ruling admissible;
b) Annul the IRS assessment No. 2014… and the assessments for compensatory interest Nos. 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, identified in the statement of withholding tax assessment at source of IR No. 2015…;
- Case Value
In accordance with the provisions of Article 305, paragraph 2, of the CPC and Article 97-A, paragraph 1, subparagraph a), of CPPT and Article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case value is fixed at € 1,661,073.48.
- Costs
Pursuant to Article 22, paragraph 4, of RJAT, the amount of costs is fixed at € 22,032.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Lisbon, 15 March 2016
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Maria Cristina Aragão Seia)
(Mariana Vargas)
[1] Ruling of the STA of 22-05-2013, handed down in case No. 0146/13, which cites, in the same sense, the rulings of 06-03-2008, handed down in cases Nos. 01043/07 and 01063/07; of 12-03-2008, handed down in cases Nos. 01042/07 and 01065/07; and of 23-04-2008, handed down in cases Nos. 01055/07 and 01044/07.
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