Summary
Full Decision
ARBITRATION AWARD
The arbitrator José Rodrigo de Castro, appointed pursuant to Article 6 of the Legal Regime for Arbitration in Tax Matters (RJAT), approved by Decree-Law No. 10/2011, of 20 January, decides as follows:
1. REPORT
The Claimants A…, with tax identification number … and B…, with tax identification number …, married, with residence at …–…-… …, hereinafter referred to as "Claimants," requested on 28 November 2017 the constitution of an Arbitral Tribunal, pursuant to Articles 2 and 10 of the Legal Regime for Tax Arbitration "RJAT," approved by Decree-Law No. 10/2011, of 20 January, on account of their disagreement with the rejection of the administrative complaint and, consequently, with the Personal Income Tax (IRS) assessment for the year 2016, with number 2017…, in the amount of € 1,762.70 to be paid.
The aforementioned administrative complaint was filed on 10 September 2017, with number …2017…, which aimed at assessing the legality of the IRS assessment for the year 2016, on the grounds that the Tax Authority (AT) did not apply the provisions of paragraph 10 of Article 31 of the Personal Income Tax Code (CIRS), regarding professional income of Category B – self-employment, earned by Claimant B….
The complaint was subject to a draft rejection decision, communicated to the Claimants for prior hearing, in accordance with Article 60(b) of the General Tax Law (LGT), a right which was exercised, submitting their arguments.
The AT presented its interpretation of the applicable norm and considered that the assessment was correct, therefore converting the provisional decision into final on 4 October 2017, which was notified to the Claimants by letter dated 6 of that month and which was received on 13 October.
Not being satisfied with the rejection decision, the Claimants presented on 28 November 2017 the present request for arbitral review, which was accepted by the President of CAAD and followed its normal procedure, including notification to the AT.
On 22 December 2017 CAAD appointed the arbitrator Dr. José Rodrigo de Castro, who accepted, having been formally appointed on 18 January 2018 and communicated to the Claimants on the same date, and on 7 February 2018 the present Singular Arbitral Tribunal was constituted, also communicated to the parties, who expressed no intention to challenge the appointment of the arbitrator.
The Claimants argue, both in the administrative complaint proceedings and now in the arbitral tribunal proceedings, that the Respondent (AT), in the IRS assessment for the household for the year 2016, with number 2017…, did not correctly proceed with the IRS assessment because it did not take into account the true meaning and scope of the provisions of paragraph 10 of Article 31 of the Personal Income Tax Code, regarding the determination of net income of Category B earned by Claimant B… in that year of 2016.
The Respondent AT, for its part, made its interpretation of the norm of paragraph 10 of Article 31 of the CIRS, to the effect that the coefficient of 0.75, referred to in Article 31, paragraph 1, subsection b) of the CIRS, applicable in determining the net income from professional activities, self-employed, specifically provided in the table referred to in Article 151 of the same Code, is not susceptible to the 50% reduction provided for in the aforementioned paragraph 10 of Article 31, because the Claimant was a beneficiary of professional income in 2016 and earned, in that same year, simultaneously, income from Category A, as per IRS form 3 timely filed.
It should be noted that Claimant B… began her activity of providing services as a Tutor (Explicadora), self-employed, corresponding to Code 8010 of the Activities Table of Article 151 of the CIRS, on 1 December 2016, having declared in that same year professional income in the amount of € 9,702.88, as well as, simultaneously, gross income from Category A in the amount of € 15,494.20.
The Respondent filed its Reply on 7 March 2018, attaching the Administrative File.
As there was no further evidence to produce and no exceptions were raised, the meeting provided for in Article 18 of the RJAT was dispensed with by order of the same date of 7 March, which also determines notification of the parties to file written submissions and sets 30 April as the date for issuing the decision.
The Claimants filed their submissions on 20 March and the Respondent on 2 April.
The arbitral tribunal was duly constituted on 7 February 2018, in accordance with Articles 2, paragraph 1, subsection a), and 10, paragraphs 1 and 2 of Decree-Law No. 10/2011, of 20 January, and is competent.
The parties possess legal personality and capacity, are legitimate parties and are duly represented (Articles 4 and 10, paragraph 2, of the same legal instrument and Article 1 of Administrative Order No. 112-A/2011, of 22 March).
The case does not suffer from any nullities and there are no exceptions or any obstacle to the examination of the merits of the case.
2. FINDINGS OF FACT
2.1. Proven Facts
Based on the elements contained in the file and documents attached to the request for arbitral decision, the following facts are considered proven:
a) The Claimants A… and B… filed on 28 May 2017 their IRS form 3 declaration for the year 2016 and respective attachments, which include an Annex H and two Annexes B, one of these Annexes B relating to income from the professional activity carried out self-employed by Claimant A…, as a Tax Consultant (Code 4012), and another also relating to income from the self-employed activity of Tutor (Code 8010), earned by Claimant B…, both from the Table Annexed as referred to in Article 151 of the Personal Income Tax Code.
b) From the same declaration it can be ascertained that Claimant A… had already been carrying out the professional activity self-employed, at least since 2015, whereas Claimant B… only declared self-employed professional income in 2016, in the amount of € 9,702.88, the year in which she began her activity on 1 December and in which she also declared income from Category A – dependent employment, in the amount of € 15,494.20.
c) The declared taxation regime for self-employed professional income was the Simplified Regime, in accordance with Articles 28 and 31 of the CIRS.
d) On the basis of the aforementioned declaration, the AT proceeded with the respective IRS assessment for the year 2016, determining tax to be paid of € 1,762.70, duly notified to the Claimants.
e) Not being satisfied with the amount resulting from the assessment act No. 2017…, in the aforementioned amount of € 1,762.70, they filed on 24 July 2017 an administrative complaint against the assessment act, whose procedure was numbered …2017…, arguing that Claimant B… had the right to the application of the provisions of paragraph 10 of the same Article 31, for purposes of reducing by 50% the coefficient of 0.75 applicable by virtue of Article 31, paragraph 1, subsection b) of the CIRS, for determining the net income from her self-employed professional activity, specifically provided in the table referred to in Article 151 of the same Code.
f) The Claimants understand, as stated in the Reply to the Draft Rejection Decision of the aforementioned Complaint, that in accordance with the provisions referred to in the aforementioned paragraph 10 of Article 31, the coefficient of 0.75 must be reduced by 50% and 25%, respectively, "in the taxation period of the commencement of activity and in the following taxation period," except if "in these periods" the taxpayer also earns income from Categories A and/or H.
g) They further argue that "the expression 'in these periods' necessarily must refer to the periods mentioned in the first part of the norm," that is, that the taxation period of an activity is not, as the AT understands, the entirety of the fiscal year, but "the period that runs between the date of its commencement and 31 December of that fiscal year."
h) The Respondent did not agree and rejected the complaint, which was notified to the Claimants for prior hearing purposes, a right which was exercised in writing on 10 September 2017, in accordance with and on the grounds briefly referred to above, such rejection converted to final and notified to the Claimants on 13 October 2017.
i) Against the rejection of the complaint, an arbitral challenge was filed, with identical grounds as the administrative complaint and the written reply to the hearing notice, and therefore it is necessary to examine and decide.
2.2. Unproven Facts
The factually relevant unproven facts are as follows:
-
Which months the dependent employment income – wages – under Category A of the IRS, earned in 2016 by Claimant B…, relates to;
-
Lack of proof of payment of the IRS assessed for 2016, in the amount of € 1,762.70, notwithstanding what is stated in Article 17 of the PI (Procedural Instructions).
-
It is not known from the records whether Claimant B… ceased any self-employed professional activity that she may have carried out less than 5 years prior.
2.3. Justification for the Determination of Findings of Fact
The proven facts were based on a critical appreciation of the procedural position assumed by each of the parties, as well as critical analysis of the documents presented and official information attached to the file, whose authenticity and truthfulness were not challenged by any of the parties.
3. MATTERS OF LAW
REGARDING THE ILLEGALITY OF THE ASSESSMENT
In the case at hand, the decision rejecting the administrative complaint regarding the IRS assessment No. 2017…, relating to the year 2016, in the amount of € 1,762.70 and the consequent assessment act are being challenged.
At issue, in any case, is the non-application, in the aforementioned IRS assessment act for the year 2016, of paragraph 10 of Article 31 of the Personal Income Tax Code, which provides for a 50% reduction of the coefficient of 0.75 applicable by virtue of Article 31, paragraph 1, subsection b) of the CIRS, to income from Category B earned in 2016 by Claimant B…, for determining the net income from her self-employed professional activity, specifically provided in the table referred to in Article 151 of the same Code (Code 8010).
The basis of the Claimants' argument, and in particular of Claimant B…, who is the beneficiary of both types of income in question and on whose behalf the 50% reduction of the 0.75 coefficient is being claimed, is that for her, the year 2016 has two taxation periods – one running from 1 January to 30 November (or earlier, it is not known from the records) and another from 1 to 31 December of that same year of commencement of activity in 2016.
And they base their interpretation on the literal element of the norm of paragraph 10 of Article 31, as well as on the teleological element…
…When the same norm states that:
"…are reduced by 50% and 25% in the taxation period of the commencement of activity and in the following taxation period,…[1]"
And further that:
"…in the taxation period of the commencement of activity and in the following taxation period, respectively, provided that, in these periods[2], the taxpayer does not earn income from Categories A or H.
And they further sustain their interpretation based on the teleological element, arguing that…
"…The legislator refers to taxation period and not to fiscal year…"
And that…
"When income from Categories B is accumulated with A and/or H, the legislator understood that income from Category B is merely complementary to income from Categories A and/or H, not being properly a situation in which there is risk and social mobility is enhanced[3]."
And further that…
…"In this way, the legislator's intention is apparent: to encourage those who commence an activity, but to limit the incentive to those who genuinely bear risk by not simultaneously having income from Categories B with A and/or H."
Finally, they conclude that…
…"The expression 'in these periods' contained in paragraph 10 of Article 31 of the CIRS must be understood as referring to the 'taxation period of commencement of activity' and to the 'following taxation period,' also mentioned in this provision."
And they reinforce their understanding, given the "positions previously taken by the AT, that the taxation period of an activity in the year of its commencement is the period that runs between the date of its commencement and 31 December of that fiscal year."
And that this is why the legislator "uses the expression 'taxation period' and not 'fiscal year,' to specify that it refers to the temporal period of taxation of the activity."
The Respondent, for its part, both in the context of examining the administrative complaint and in its Reply and Submissions, contests the Claimants' understanding, with the following arguments.
On one hand, that "IRS is levied on the annual value of income from the various categories, that is, on the global income obtained during the year."
And, on the other hand, that "in the context of IRS there is no special taxation period, but rather a single period – the annual one."
The AT further states that in the CIRS, the classification in the Simplified Taxation Regime is made, notably, "in accordance with the estimated annual income value, contained in the declaration of commencement of activity," regardless of the timing of its commencement and not with the value of "partial taxation periods."
Wherefore, the AT concludes that "the taxation period is annual, unique, corresponding to the period of time that runs between 1 January and 31 December of the same year."
The AT further notes that "conversely, in the context of CIT [Corporate Income Tax], the taxation period may not coincide with the calendar year," as follows from paragraph 1 of Article 8 of the CIT Code.
The Respondent also notes that it does not challenge the teleological element underlying the provision of paragraph 10 of Article 31 of the CIRS, invoked by the Claimants, but understands that this norm does not apply to taxpayer B, B…, "because she earned income from Categories A and B in 2016, that is, in the same fiscal year."
The Respondent contests the parallelism that the Claimants draw between IRS and VAT [Value Added Tax], as such comparison is not legally possible given the different nature of the two taxes (IRS is levied on income whereas VAT is levied on consumption).
And it also contests, due to lack of legal basis, the treatment of some income as complementary to other income, in accordance with the Claimants' argument, contained in Article 52 of the PI, which refers to the supposed understanding of the legislator that "when income from Category B is accumulated with A and/or H, … income from Category B is merely complementary to income from Categories A and/or H, not being properly a situation in which there is risk and social mobility is enhanced."
In their written submissions, the Claimants again describe the facts and present the same thesis contained in the Initial Petition (PI), both from the perspective of the literal element and the teleological element, without new relevant arguments, reaffirming, based on the literal and teleological elements, that "the expression 'in these periods' contained in paragraph 10 of Article 31 of the CIRS must be understood as referring to the 'taxation period of commencement of activity' and to the 'following taxation period' also mentioned in this provision."
The elements newly introduced with some relevance seek to reinforce their thesis by invoking the fact that "any expense incurred by the taxpayer before the commencement of the taxation period of the activity (insofar as such expenses are relevant to determining taxable income) is not considered as fiscally deductible expense by the AT precisely because it was not incurred during the taxation period."
The Respondent presented its Submissions on 2 April, maintaining its position that there is no illegality in the assessment in question and reiterating the position defended in its Reply, which is to the effect that in IRS there exists, in each calendar year, only a single taxation period, running from 1 January to 31 December.
It is now necessary to analyze the content of the applicable norms, in the part relevant to the case, in the wording in effect until 31 December 2016:
"Art. 31 – Simplified Regime
1 – Under the simplified regime, the determination of taxable income is obtained through the application of the following coefficients:
…
b) 0.75 to income from professional activities specifically provided in the table referred to in Article 151.
…
10 – The coefficients provided for in subsections b), c) and f) of paragraph 1 are reduced by 50% and 25% in the taxation period of commencement of activity and in the following taxation period, respectively, provided that, in these periods, the taxpayer does not earn income from Categories A or H.
11 – The provision of the preceding paragraph shall not apply in cases where activity cessation has occurred less than five years previously.
…"
It is now necessary to proceed with its correct legal interpretation, assisted by the elements, means, factors or criteria that should be used harmoniously and not in isolation, notably through the literal element and historical, rational and teleological elements[4].
The literal or grammatical element results from the words in which the law is expressed and constitutes the starting point for the interpreter and the limit of interpretation.
However, the interpreter, when facing doubts, must resort to the logical elements already mentioned, namely historical, systematic and rational or teleological elements.
The historical element attends to the history of the law, particularly preparatory work, the Statement of Reasons, the preamble, reports and, possibly, social, political and economic circumstances in which the law was enacted, and hence this form of interpretation is also known as historical-sociological.
The systematic element allows laws to be interpreted from a global perspective, through systematic analysis of the legal order, because the legal order forms a system as a whole.
As for the teleological element, attention must be paid to the purpose of the legal norm, subjectively or objectively, that is, attention must be paid to the legislator's intention in enacting the norm, and for this purpose, the legislative process of its creation and its purpose must be analyzed, that is, its "ratio legis."
Let us begin, then, in light of these principles of interpretation of the applicable norms, to understand the meaning and scope thereof.
Regarding literal interpretation and given the positions taken by the parties, it is easily concluded that the letter of the law does not lead us, by itself, to an unequivocal interpretation, and therefore we must resort to other forms.
As for the historical element, the Tribunal recognizes that in the preamble to Law No. 82-E/2014, of 31/12, which carries out a reform of the taxation of natural persons (with amendments to other legislation in the field of taxation), and which, among other amendments to the CIRS, added paragraphs 10 and 11 to Article 31, the legislator clarifies that the reform of the CIRS is "oriented toward the family, for simplification and for social mobility…"
And it recognizes that one of the amendments that goes in the direction indicated by the legislator of this reform is, for example, that of Article 13, paragraph 2, which introduces separate taxation of members of the household, except for opting for joint taxation.
This is indeed a reform oriented toward the family, toward simplification and toward social mobility.
The addition of paragraphs 10 and 11 to Article 31 does not, however, appear to have the full scope intended by the Claimants, although some of these objectives are recognized in the situations expressly provided therein, in particular due to the benefit to any members of households or both, through the reduction to taxable income in certain circumstances, and therefore this amendment is directed at the family, single-parent or otherwise, with separate or joint taxation.
And also protection for the creation of self-employment, through self-employed professional and business activity, given the economic-financial difficulties the country was experiencing and, as a result, the unemployment affecting families. There was practically no job creation, except for private initiative.
Hence the legislator created certain incentives for self-employment. But in order for this reduction to taxable income in Category B to be possible, the legislator of the reform required and requires that the taxpayer who begins their self-employed professional activity, specifically listed in the annex attached to the CIRS, in a given year (regardless of when they do so), not accumulate their Category B income with dependent employment income (Category A) or pension income (Category H).
And this requirement of the legislator is understood, because if it is a matter of reducing taxable income from Category B, it does not seem to make sense that the beneficiary or beneficiaries of this reduction to income could accumulate this income with that from Categories A and/or H.
It is recalled that this is the first time, since the enactment of the Reform of personal income taxation in 1989, that this provision in paragraph 10, as well as other innovative provisions, such as separate taxation, has been introduced by the legislator of the 2014 Reform, during a period of economic and financial crisis in the country.
The Project of the Reform prepared by the respective Commission has as its subtitle "A Reform of IRS Oriented toward Simplification, the Family and Social Mobility."
Regarding the Mandate conferred on it, the following can be extracted, at pages 38:
"a) Review and simplification of IRS and other tax regimes applicable to the income of natural persons, in order to simplify the regime and its respective declarative obligations and to facilitate compliance with the obligations inherent to this tax, in accordance with international best practices;
b) Promotion of social mobility through, notably, the assessment of taxation applying to employment income, with the objective of recognizing and valuing merit and effort;
c) Protection of families, taking notably into account the importance of natality, through the assessment of the general basis of family taxation under IRS and the strengthening of fiscal family policies, in order to contribute to reversing the current demographic deficit in Portuguese society."
Further on, in Point 3.2.3 - The fiscal unit, it is proposed by the Commission "that separate taxation be the rule, while safeguarding, however, the possibility of opting for joint taxation for married persons and unmarried couples."
And further, in Point 3.3.5 – Social mobility, in the same Report, the following is stated:
"One of the aspects that assumes greater relevance, in the context of any fiscal system of taxation of individuals, is the taxation to which income derived from the labor factor is subject, given its profound consequences, not only in terms of fiscal justice but also in terms of economic and social evolution.
The consideration that merit and effort should be rewarded should, in principle, be taken into account at the time of taxation. This requirement is even more acute at a time, such as the one we currently are experiencing[5], when there is a need to foster entrepreneurship and productivity."
In this sequence, it is also worth citing the following Point 3.3.6 – The option taken, in which the following is stated:
"The Commission reflected on several possible ways to achieve this objective. Based on this reflection, it concluded that any solution on this matter must be extremely cautious[6], under penalty of potentially stimulating forms of fraud that are not only counterproductive but may also correspond to a signal contrary to the enormous effort that has been made to combat tax evasion.
Hence it was concluded that it is not advisable to fiscally differentiate the various forms of dependent employment remuneration.
…
On the other hand, as to Category B (self-employment) the Commission proposes a reduction in taxation of entrepreneurs who commence activity for the first time under the simplified regime."
It is worth highlighting what is stated in Point 3.4.2 – Category B (business and professional income), of the same Report, in which the following is stated in the first paragraph:
"As to Category B (business and professional income), the aim was that, regarding taxpayers whose income is determined based on organized accounting, equivalent solutions to those in force in CIT should apply."
And in the continuation of this initiative, it is stated in Point 5.1.9 – Category B, Reduction of taxation for entrepreneurs who commence activity:
"One of the vectors of development of the work of this commission was the promotion of social mobility, seeking to encourage the productivity and initiative capacity of Portuguese workers.
In this context, it is proposed to adopt in IRS the rules for entry into the simplified regime, established in the CIT Code, under which, in periods of activity startup there will be a reduction of the estimated taxable income, seeking, as much as possible[7], to accommodate in the regime the conditions usually prevailing in these temporal periods.
In this way, individual entrepreneurship and thereby social mobility in general are encouraged."
For its part, in the Statement of Reasons contained in the Bill No. 256/XII, it is stated, for this purpose, that:
"The IRS reform now proposed is a structural reform of the income of individuals and rests on three pillars: (i) it is a reform oriented toward families; (ii) it is a reform that promotes social and geographic mobility; (iii) it is a reform that significantly simplifies the tax."
Next, in the same Statement of Reasons, the Government explains these three principles, referring to consideration in IRS of dependent ascendants, the increase of the deduction for dependents and ascendants, the creation of social vouchers, the option for separate taxation and the promotion of individual entrepreneurship and support at the commencement of business activity, with the creation "of a very favorable regime for dependent employees who opt to commence an economic activity self-employed, reducing IRS payable by 50% in the first year and 25% in the second year."
And hence the establishment of paragraphs 10 and 11 of Article 31 of the CIRS, but with cautious safeguards to prevent tax evasion.
Through this form of interpretation, which is intertwined with the systematic approach, some meaning of the applicable norms begins to become clearer.
It is now important to proceed, regarding the systematic element, according to which attention must be paid to the unity of the fiscal system, which is determined both in the Commission's Report and in the Government's Statement of Reasons presenting the Bill for IRS Reform, when, both in Point 3.4.2 and in 5.1.9 of the Report, the adoption of rules for entry into activity at the commencement in IRS identical[8] to those established in the CIT Code is proposed.
And indeed, in the CIT Code, we find in Article 86-B, paragraph 5, a provision that states the following:
"The coefficients provided for in subsections a) and c) of paragraph 1 and the limit provided for in paragraph 2 are reduced by 50% and 25% in the taxation period of commencement of activity and in the following taxation period, respectively."
It is also worth citing, as relevant, the provision in paragraph 2 of Article 86-A of the CIT Code:
"2 – In the period of commencement of activity, the classification in the simplified regime of determining the taxable base is made, provided other requirements are met, in accordance with the annualized estimated income value[9], contained in the declaration of commencement of activity."
And regarding commencement of activity and taxation period, see what is established in Article 8, paragraphs 1 and 4 of the CIT Code:
"1 – CIT, except where provided in paragraph 10, is due for each taxation period, which coincides with the calendar year, without prejudice to exceptions provided in this article.
4 – The taxation period may, however, be less than one year:
a) In the year of commencement of taxation, in which it is constituted by the period running from the date on which activity commences… and the end of the taxation period.
…"
It can be seen, from the outset, that the legislator of the Reform established rules identical to those of CIT and even used the expressions "taxation period[10]" which appear in paragraph 2 of Article 86-A of the CIT Code, where this same expression makes sense, given the provisions of paragraphs 1 and 4 of Article 8 of the same Code.
However, it did not introduce provisions identical to those of the aforementioned paragraphs 1 and 4 of the CIT Code, which would be the only legal way to establish in IRS taxation periods different from the calendar or fiscal year. However, this did not occur.
Finally, regarding the teleological element, attention must be paid to the thought of the legislator, that is, to the "mens legis," as well as to the scope or purpose of the norms.
Having arrived here, and now in possession of all the cited elements, it will be through the combination of all these forms of interpretation of the applicable norms that an interpretation can be achieved that does not raise doubts for the Tribunal.
It is recalled that the issue is whether, for purposes of applying or not the 50% reduction of the 0.75 coefficient for determining the income from Claimant B…'s professional activity in the year 2016, in which she commenced her activity on 1 December, in that same year of 2016, there will be two taxation periods as the Claimants claim, or, conversely, only one, the 2016 fiscal year as a whole, as the Respondent contends.
And this is because, if a single taxation period, coinciding with the calendar year, is considered to exist, then the provision of paragraph 10 of Article 31 of the CIRS will not be applicable in the case at hand, as the AT contends, because Claimant B… earned, in that same year, income from Categories A and B, as indeed appears in the respective IRS declaration.
Conversely, if the Claimants' thesis is the one that correctly interprets the norm, then Claimant B… is entitled to the claimed reduction in 2016 of 50% of the 0.75 coefficient, corresponding to the nature of the income earned.
Let us see, then:
It is established as certain, as clearly evidenced by the Commission and the Government's Bill, that it was its intention to create an incentive for entrepreneurship in the first and second year of activity, for the reasons already expressed above, and therefore, in Law No. 80-E/2014, of 31 December, which entered into force on 1 January 2015, an addition of the provisions of paragraphs 10 and 11 to Article 31 of the CIRS was made, which we cite again, as they are relevant:
"Art. 31 – Simplified Regime
1 – Under the simplified regime, the determination of taxable income is obtained through the application of the following coefficients:
…
b) 0.75 to income from professional activities specifically provided in the table referred to in Article 151.
…
10 – The coefficients provided for in subsections b), c) and f) of paragraph 1 are reduced by 50% and 25% in the taxation period of commencement of activity and in the following taxation period, respectively, provided that, in these periods, the taxpayer does not earn income from Categories A or H.
11 – The provision of the preceding paragraph shall not apply in cases where activity cessation has occurred less than five years previously."
In this way, the objective of the Commission and the Government was fulfilled, with this addition, in terms identical[11] to those already existing in CIT.
And we reinforce identical, since the philosophy of taxation in CIT does not have, nor can it have the same concept as, much less, in VAT.
It is known that in CIT the taxation period is annual, but it may, however, be less, as per paragraphs 1 and 4 of Article 8 of this Code. And because an equivalent provision to this in CIT was not created, one cannot fail to conclude that the legislator did not intend to go as far as in CIT, especially since in IRS the requirement not to accumulate income from Categories B with A and/or H was created, categories that in CIT, in the aspect at issue, do not exist.
On the other hand, it is clearly known that the legislator of the IRS Code has always defined that taxation is levied on the annual value of income from the various categories and has not introduced, neither initially nor in the various subsequent reforms, any provision equivalent to that of paragraphs 1 and 4 of Article 8 of the CIT Code, which would provide that the taxation period may be less than one year.
See, for all cases, the situations in which the taxpayer may be considered a resident in Portuguese territory, e.g., from March to December or even from 1 December, and it is provided that they maintain their residence there, and also when there is death of one of the spouses.
And in these and other cases, the deductions to which taxpayers are entitled are always considered in full (whether reductions in income or reductions in the tax itself) and are not apportioned by taxation periods, namely those of Article 25, paragraph 1, subsection a), as well as those of the various subsections of Article 78, paragraph 1, all of the IRS Code, and this is because there are no taxation periods beyond the annual one.
Also the Claimants' argument that the legislator established two taxation periods in IRS, with one starting from the commencement of professional or business activity, on the basis that the expenses inherent to the activity before this are not considered, makes no sense whatsoever, given that, although taxation is annual, the expenses of the activity (and only under the organized accounting regime – which is not the case in the present file) must respect the principle of accrual. Otherwise, the principle prevails in IRS of income earned and expenses incurred in each fiscal year.
However, all deductions in IRS, notably those of Article 75, are annual and not by taxation periods.
Hence, based on the forms of interpretation previously referred to and developed, according to the principles of Law, whether based on literal, historical, logical-systematic and teleological interpretation, it is not clear how any other interpretation could be given to the content of paragraph 10 of Article 31 of the CIRS under examination than that in IRS the taxation period is annual, due to the absence of a provision equivalent to those of paragraphs 1 and 4 of Article 8 of the CIT Code and by virtue of the general principle established in Article 1 of the CIRS and of the other applicable assessment rules.
And even regarding the Claimants' argument, contained in Article 52 of the PI, which refers to the supposed understanding of the legislator that "when income from Category B is accumulated with A and/or H, … income from Category B is merely complementary to income from Categories A and/or H, not being properly a situation in which there is risk and social mobility is enhanced," this Tribunal understands that this "protection" of Category B income, in the case at hand, cannot lead to interpreting the "mens legis" in the sense that taxation is not always annual, with the possibility of the existence of two taxation periods in IRS in the same fiscal year.
And this protection and enhancement of fiscal mobility exist, provided that the required conditions are met, namely non-accumulation, in the same fiscal year of income from Categories B with A and/or H, in the year of commencement of activity and in the following year.
See, for all cases, a situation in which self-employed professional activity commences on 1 February and this taxpayer earned Category A income only in the month of January of that same year.
Would it in this case be possible to state that the provision of paragraph 10 of Article 31 of the CIRS is applicable, because income from Category B, relating to 11 months of the fiscal year, is merely complementary to that from Category A of only 1 month and that the former should be protected?
It is certainly not defensible that the legislator had in mind the protection of Category B income, provided that, in the same year, income from Categories A and/or H was also earned, regardless of whether or not there was temporal coincidence in the receipt of such income.
Now, if this appears to be so with complete clarity, it cannot be that the legislator intended the application of the coefficient reduction for a situation in which activity commenced on 1 December – as happened in the case at hand – and not to have intended it for one who commenced on 1 February.
Indeed, it is recalled that, as shown in Annex B of B…, which is part of the Claimants' IRS declaration, it can be ascertained that the Category A income earned by the same B… in 2016, the temporal period of which is not known, and which could relate to 1 as well as 11 months, was € 15,494.20, and that from Category B, relating only to the month of December, was € 9,702.88, in just one month!
Indeed, the conclusion that in IRS there exists only a single taxation period which is annual, is drawn from the very wording of paragraph 10 in question, when it refers to the 25% reduction of the coefficient "in the following taxation period" to that of commencement of activity. Now, the following taxation period is the entire fiscal year, as it could not be otherwise, and yet the legislator also called it a taxation period, to which the significance of fiscal year cannot but be attributed.
If that is, without doubt, the meaning of taxation period for the year following the commencement of activity, why should it be different regarding the year of commencement? As is evident, there cannot be two forms of interpretation.
Thus, this Tribunal cannot support the interpretation of the Claimants, nor its grounds, because:
-
The taxation period in IRS is a single one - the fiscal year corresponding to the calendar year;
-
The protection given by the legislator to this type of Category B income can only be understood when, in the fiscal year of commencement of activity and in the following year, there is no accumulation of Category B income with that from A and/or H.
-
The same legislator of the Reform made this understanding very clear, when referring to the "following taxation period," that is, in the fiscal year following, reducing in that case by 25% the coefficient of 0.75.
-
As to the expression "following taxation period," no other interpretation is even admissible than that of the fiscal year, as it would be absurd to interpret that in the following year there could still be two taxation periods.
This is therefore the understanding of the Tribunal, because it considers that it is making a correct interpretation of the applicable norms, in the best manner, taking into account the purpose of the law and the thought of the legislator, who indeed thought of applying a "benefit" to those who, at a certain period of the fiscal year, commence the exercise of a self-employed professional or business activity, specifically listed in the Activities Table referred to in Article 151, annexed to the CIRS (and in the following year), provided that they do not earn, in those same years, income from Categories A and/or H.
This Tribunal understands in this manner, for all the grounds before expressed and because it cannot fail to take into account the requirement of a minimum correspondence of the wording of the norms, as required in Article 9 of the Civil Code, with the meaning and scope of the law as referred to above, further considering that the legislator established the most correct solutions and knew how to express its thought in adequate terms.
4. INDEMNIFIABLE INTEREST
The Claimant requests that the Tribunal condemn the AT to pay indemnifiable interest, counted from the date of payment of the contested assessments, based on error attributable to the services, in accordance with Article 43, paragraph 1 of the LGT.
In accordance with the combined provisions of Article 43, paragraphs 1 and 2 of the LGT and Article 61, paragraph 5 of the CPPT (Tax Procedure and Process Code), the AT will be condemned to pay indemnifiable interest when, due to error (of fact or law) attributable to such services, the taxpayer pays an undue tax and this comes to be considered undue because the assessment act or acts are annulled as a result of judicial challenge – as was the case.
It is further stated in the cited norms that indemnifiable interest is counted from the date of payment of the tax to the issuance of the respective credit note, and is calculated in accordance with the application of the rate provided for in Articles 43, paragraph 4 and 35, paragraph 10 of the LGT and in Article 559, paragraph 1 of the Civil Code.
In this manner, as it is verified that the IRS assessment in question has been correctly made and does not suffer from any defect of violation of law, it cannot be recognized that the Claimants are entitled to payment of any indemnifiable interest.
5. DECISION
In these terms, this Singular Tribunal agrees to:
-
Find the request for arbitral decision unsubstantiated, because, as previously expressed, the grounds invoked by the Claimants for annulment of the IRS assessment subject to the present request are not accepted as valid;
-
Declare correct the decision rejecting the administrative complaint No. …2017…;
-
Declare the legality of the IRS assessment No. 2017…, relating to the year 2016, in the amount of € 1,762.70;
-
Consequently, dismiss the request for payment of indemnifiable interest, as the requirements provided for in Article 43, paragraphs 1 and 2 of the LGT and Article 61, paragraph 5 of the CPPT are not met.
6. VALUE OF THE CASE
In accordance with the provisions of Articles 306, paragraph 2, 297, paragraph 2 of the Code of Civil Procedure, Article 97-A, paragraph 1, subsection a) of the Tax Procedure and Process Code and Article 3, paragraph 2 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the case is set at € 1,762.70.
Costs by the Claimants.
Notify accordingly.
Lisbon, 5 April 2018.
The Singular Arbitrator,
(José Rodrigo de Castro)
[1] Emphasized and underlined by the Tribunal.
[2] Ibid.
[3] The Claimants cite the Report of the Commission for Tax Reform (pages 39 and 40), in which it is stated that this was the fiscal avenue found to promote social mobility, as well as to promote productivity and initiative capacity of Portuguese workers.
[4] See Decision of Administrative Court of the Supreme Court, Case No. 701710, of 29-11-2011.
[5] Referring to 2014, during the full period of economic-financial crisis and employment.
[6] Underlined by the Tribunal.
[7] Underlined by the Tribunal.
[8] Underlined by the Tribunal.
[9] Underlined by the Tribunal.
[10] Underlined by the Tribunal.
[11] Underlined by the Tribunal.
Frequently Asked Questions
Automatically Created