Process: 635/2016-T

Date: March 24, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

In CAAD Process 635/2016-T, a taxpayer challenged the Portuguese Tax Authority's rejection of €12,456.00 in expenses declared in Annex G (capital gains) of their 2012 IRS return related to a property sale. The Tax Authority refused to accept these costs because the taxpayer provided only invoices without corresponding payment receipts or the property sale deed identifying the intermediary. This disallowance resulted in an alleged tax overpayment of €4,169.68. The taxpayer filed a gracious complaint on 07/09/2016, which was rejected on 17/10/2016, and then submitted a CAAD arbitration petition on 24/10/2016. The Tax Authority raised a dilatory exception arguing the petition was premature, filed before the final complaint decision issued on 02/12/2016, violating the principle that only final administrative acts can be challenged under Article 54 of CPPT. The tribunal constituted on 17/01/2017 ordered the taxpayer to present payment receipts. The taxpayer subsequently filed on 22/02/2017 a receipt for €3,600.00 and bank transfers totaling €4,428.00, acknowledging only partial documentation for an invoice claiming €8,856.00. The case illustrates critical requirements for substantiating deductible expenses in Portuguese capital gains taxation: mere invoices are insufficient without proof of actual payment through receipts, bank statements, or other payment documentation. The case also addresses procedural timing requirements for tax arbitration following administrative complaint procedures.

Full Decision

Arbitral Decision

I – REPORT

1 A…, TIN[1] … resident at Rua … …-… CASCAIS, filed a petition for arbitral opinion, pursuant to the provisions of subparagraph a) of no. 1 of Article 2, of no. 1 of Article 3 and subparagraph a) of no. 1 of Article 10, all of the RJAT[2], with the Revenue Authority[3] being summoned, for the purpose of assessing the legality of the non-acceptance of expenses and charges, in the amount of € 12,855.75, which it incurred in the alienation of a property that it included in Annex G of the Income Declaration Form 3 relating to the year 2012, which resulted in an overpayment of Personal Income Tax in the amount of € 4,169.68.

2 That the petition was filed without exercising the option of designating an arbitrator, and was accepted by the Honorable President of CAAD[4] and automatically notified to the Revenue Authority on 26/10/2016.

3 Pursuant to and for the purposes of the provisions of no. 2 of Article 6 of the RJAT, by decision of the Honorable President of the Deontological Council, duly communicated to the parties, within the legally applicable time limits, Arlindo José Francisco was designated as arbitrator of the tribunal on 28/12/2016, who communicated acceptance of the assignment within the legally stipulated time period.

4 The tribunal was constituted on 17/01/2017 in accordance with the provisions contained in subparagraph c) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012 of 31 December.

5 In his petition, the claimant merely requests that the value of the invoices included in Annex G in the amount of € 12,456.00, which the Revenue Authority did not accept as it does not consider them proof of payment, be accepted, which resulted in an overpayment of € 4,169.68, whose annulment and consequent refund he requests accompanied by the respective interest.

6 He further states that he filed a gracious complaint on 07/09/2016 which was dismissed on 17/10/2016.

7 In its response, the respondent considers there to be no basis for the claimant's claim since the expenses included in Annex G of the declaration in question were justified only by invoices and not by invoices/receipts or receipts.

8 Furthermore, the income declared in the aforementioned annex, both as to the alienation of the property in question (€ 245,000.00) and as to the value of its acquisition (€ 130,812.44), do not correspond to the values contained in the official documents, which are respectively € 240,000.00 and € 138,200.00, in addition to not having exhibited the deed of alienation which would have made it possible to ascertain the intermediary involved and not having exercised the right of hearing in the complaint procedure.

9 He further invokes a dilatory exception, embodied in the fact that the claimant filed the petition for arbitral opinion before there was a final decision on the complaint, duly presented, which if upheld would prevent examination of the merits of the annulment claim raised.

II - PRELIMINARY RULING

The tribunal was regularly constituted, is competent, the parties have legal personality and capacity, are legitimate and are regularly represented in accordance with Articles 4 and 10, no. 2 of the RJAT and Article 1 of Ordinance no. 112-A/2011 of 22 March.

After the filing of the Revenue Authority's response, the tribunal scheduled 21 February 2017 for the holding of the meeting referred to in Article 18 of the RJAT, the respondent requesting a rescheduling, arguing that it would not be possible for it to be present on the scheduled date. The tribunal maintained the scheduled date in the precise terms of the order issued on 30 January 2017.

The meeting referred to in Article 18 of the RJAT having been held on the scheduled date, with the presence of both parties, the claimant was notified to present within five days the receipts evidencing the expenses incurred in the alienation, the same time period being granted to the Revenue Authority, after their filing, to comment thereon.

At the same meeting, the claimant was invited to comment on the exception raised by the Revenue Authority, and he declared that he did not wish to do so.

On 22/02/2017, the claimant filed documents intended to comply with the notification made at the meeting referred to in Article 18 of the RJAT.

By motion of 27/02/2017, the Revenue Authority exercised its right of reply with respect to the documents now filed by the claimant.

By order of 11 March 2017, the tribunal deemed the production of written pleadings unnecessary and deemed conditions to be in place for rendering a decision on the date already scheduled.

Thus, the proceedings not being affected by nullities, it is necessary to decide.

III - REASONING

1 – The issues to be resolved, with relevance to the proceedings, are as follows:

a) Assess the dilatory exception raised by the Revenue Authority.

b) In the event of the exception being dismissed, declare whether the documents presented by the claimant are capable of proving or not the charges declared in Annex G in question, with the consequent effect on the tax assessment act here disputed.

c) In the event of annulment and refund of the overpaid tax, whether or not there shall be an entitlement to payment of compensatory interest by the Revenue Authority.

2 - Findings of Fact

a) The claimant declared expenses in Annex G of the income declaration for the year 2012, in the amount of 12,456.00, a value which he justified only by invoices without the corresponding payment receipts nor the presentation of the deed of purchase and sale where the mediating entity would necessarily have been identified.

b) Faced with this procedure, the Revenue Authority did not accept the said expenses, a fact which led the claimant to file a gracious complaint against the assessment act.

c) The claimant was notified of the draft decision rejecting his complaint on 24/10/2016 to exercise the right of hearing, which he did not exercise.

d) The draft decision was converted into a final decision and notification of the final decision of rejection was given on 02/12/2016.

e) The petition for arbitral opinion was presented on 24/10/2016 and accepted on 26/10/2016.

f) On 22/02/2017, the claimant filed a receipt dated 12/12/2012 from the company B… Ltd., in the amount of € 3,600.00, a bank transfer to C… dated 31/01/2012 in the amount of € 3,000.00 and another bank transfer to the same company in the amount of € 1,428.00 dated 02/03/2016, further stating that the invoice in the amount of € 8,856.00 has only € 4,428.00 in supporting documentation, further alleging that the intermediary C… did not issue any credit note for the unpaid amount.

No other facts with relevance to the decision that were not established as proven were considered.

3 – Matters of Law

3.1 – Assessment of the Dilatory Exception

The respondent contends in its response that the claimant, by presenting the petition for arbitral opinion at a moment prior to the issuance of the final decision of the complaint procedure, would have been prevented from doing so, since only the final act of the procedure is harmful to the rights and guarantees of the taxable persons, as provided for in Article 54 of the CPPT[5], which establishes the regime of unitary challenge of the act, concluding that it should be absolved of the instance, since the incontestability of the tax act constitutes a dilatory exception that prevents examination of the merits of the petition.

For his part, the claimant, invited at the meeting referred to in Article 18 of the RJAT to comment on the exception raised by the Revenue Authority, declared that he did not wish to do so.

The tribunal considers that, despite the summary nature of the petition, it is possible to understand that what the claimant seeks to be evaluated is the assessment act, in which the expenses declared in Annex G were not accepted, and does not concern the interlocutory act of prior hearing, as may be verified from the petition itself; thus, the tribunal considers the exception raised by the Revenue Authority to be unfounded.

3.2 – Assessment of Documents Presented to Prove the Charges in Annex G

In the calculation of capital gains subject to tax, in accordance with the provisions of Article 51 of the PIT Code[6], the acquisition value is increased by, in addition to the value of the charges provided for in its subparagraph a), also the value of necessary and actually incurred expenses, provided for in its subparagraph b), which includes amounts paid to the real estate agent for the provision of mediation services in the transaction, provided that they are duly proven, it being incumbent upon the taxpayer, in accordance with no. 1 of Article 74 of the General Tax Law[7], to bear the burden of proof.

Proof of payment can only be obtained through a receipt of discharge or debit note, invoices not meeting this requirement.

In the case at hand, the claimant merely states in his petition for arbitral opinion that he "is able to prove" that he incurred the expenses contained in the invoices in the amount of € 12,456.00 which he mentioned in the respective Annex G.

At the meeting referred to in Article 18 of the RJAT, held on 21/02/2017, the claimant was notified to present proof of payment within five days, coming on the 22nd of that month to inform that the invoice for € 8,856.00 issued by C… Ltd. showed that he had only paid 50% (€ 4,428.00), the intermediary not having issued any credit note for the 50% unpaid. To prove payment, he filed a bank transfer dated 02/03/2016 in the amount of € 1,428.00 and another dated 31/01/2012 in the amount of € 3,000.00. He also filed on the same date a receipt dated 12/12/2012 with no. …/…, in the amount of € 3,600.00 issued by company B… Ltd., which states that it is a value received by offset against the partner account of the claimant.

Now, in addition to admitting that he did not bear the entirety of the expenses declared in Annex G of the income declaration for 2012, indicating an expense incurred only in 2016, it is also not possible to establish a connection between the documents presented and the expenses which he seeks to have considered, it not being possible for the tribunal to conclude that these were necessary and actually incurred expenses, as required by subparagraph a) of Article 51 of the PIT Code already cited, the tax assessment act here in question should therefore remain in the legal order.

3.3 – Request for Payment of Compensatory Interest

In view of what was stated in section 3.2, it becomes unnecessary to examine this matter.

IV DECISION

In view of the foregoing, the tribunal decides as follows:

a) Declare the dilatory exception raised by the Revenue Authority to be unfounded.

b) Declare the petition for arbitral opinion to be unfounded as not proven and maintain in the legal order the tax assessment act here in question.

c) Set the value of the case at € 4,169.68 in accordance with the provisions contained in Article 299, no. 1, of the CPC[8], Article 97-A of the CPPT, and Article 3, no. 2, of the RCPAT[9].

d) Set costs, pursuant to no. 4 of Article 22 of the RJAT, in the amount of € 612.00 in accordance with the provisions of Table I referred to in Article 4 of the RCPAT, which shall be borne by the claimant.

Notify.

Lisbon, 24 March 2017

Document drawn up by computer, in accordance with Article 131, no. 5 of the CPC, as applied by reference to Article 29, no. 1, subparagraph e) of the RJAT, with blank lines and reviewed by the tribunal.

The Arbitrator

Arlindo José Francisco

[1] Acronym for tax identification number

[2] Acronym for Legal Regime for Arbitration in Tax Matters

[3] Acronym for Revenue Authority and Customs Service

[4] Acronym for Centre for Administrative Arbitration

[5] Acronym for Code of Tax Procedure and Process

[6] Acronym for Personal Income Tax Code

[7] Acronym for General Tax Law

[8] Acronym for Code of Civil Procedure

[9] Acronym for Rules of Costs in Tax Arbitration Proceedings

Frequently Asked Questions

Automatically Created

What happens when expenses declared in Annex G of the IRS Model 3 return are not supported by receipts?
When expenses declared in Annex G are not supported by payment receipts, the Portuguese Tax Authority rejects them as deductible costs. Invoices alone are insufficient proof because they document only the issuance of charges, not actual payment. This rejection increases the taxable capital gain, resulting in higher IRS liability. Taxpayers must provide receipts (recibos), bank transfer confirmations, or other payment evidence to substantiate expenses related to property acquisitions or sales declared in Annex G of Model 3.
Can invoices alone serve as proof of payment for deductible expenses in Portuguese capital gains tax?
No, invoices alone cannot serve as proof of payment for deductible expenses in Portuguese capital gains tax. The Tax Authority requires documentation proving actual payment occurred, such as receipts (faturas-recibo), payment receipts (recibos), or bank transfer statements. An invoice (fatura) merely documents a claim for payment but does not prove the transaction was completed. For expenses in Annex G, taxpayers must demonstrate both the obligation (invoice) and its satisfaction (payment proof).
What is the procedure for challenging an IRS assessment through CAAD arbitration after a rejected gracious complaint?
To challenge an IRS assessment through CAAD arbitration after a rejected gracious complaint, taxpayers must: (1) file the complaint with the Tax Authority and await notification of the draft decision; (2) exercise or waive the right of hearing (direito de audição prévia) within the deadline; (3) wait for the final complaint decision; (4) file the CAAD arbitration petition within the legal deadline after the final decision. Filing before the final decision may result in a dilatory exception for prematurity, as only final administrative acts are legally contestable under Article 54 of CPPT.
How does the Portuguese tax authority verify property sale and acquisition values declared in Annex G?
The Portuguese Tax Authority verifies property values in Annex G by comparing declared amounts against official documents including purchase and sale deeds (escrituras), property registration records, and IMT (property transfer tax) declarations. In Process 635/2016-T, discrepancies existed between declared values (sale: €245,000; acquisition: €130,812.44) and official documents (sale: €240,000; acquisition: €138,200.00). The Authority also requires the sale deed to identify intermediaries and verify their commission expenses. Inconsistencies may trigger adjustments or requests for additional documentation.
What are the consequences of filing a CAAD arbitration request before a final decision on a pending gracious complaint?
Filing a CAAD arbitration request before the final decision on a pending gracious complaint constitutes a procedural violation that may result in a dilatory exception for prematurity. Under Article 54 of CPPT, only final administrative acts affecting taxpayer rights are contestable. In Process 635/2016-T, the taxpayer filed on 24/10/2016 after draft decision notification but before the final decision issued on 02/12/2016. The Tax Authority argued this violated the unitary challenge principle and requested absolution from the instance, preventing examination of the merits and potentially requiring refiling after the final decision.