Summary
Full Decision
ARBITRAL DECISION
The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Jaime Carvalho Esteves and Sofia Cardoso, appointed by the Deontological Board of the Center for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:
I – REPORT
On 30 October 2015, A…, S.A. with registered office at Avenue …, no. …, …, …-… …, registered at the Commercial Registration Office of … with the collective person identification number …, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the following tax acts:
Tax assessment act for Corporate Income Tax (IRC) no. 2014 … and the respective tax assessment acts for default interest no. 2014 … and late payment interest no. 2014…, to which correspond the Statement of Account Settlement for IRC no. 2014… and the Compensation no. 2014…, of 7 November 2014, with reference to the tax year 2010, in the amount of €113,096.25 (one hundred and thirteen thousand, ninety-six euros and twenty-five cents);
Tacit rejection decision of the administrative complaint submitted against the tax acts identified in the previous paragraph.
To support its request, the Claimant alleges, in summary, that the following exist:
i. Lack of reasoning of the disputed tax assessment act;
ii. Violation of the right to be heard;
iii. Expiration of the right to assess the tax;
iv. Violation of the legislation in force on the date of the tax event;
v. Impossibility of applying paragraph b) of section 3 of article 58-A of the Corporate Income Tax Code (CIRC) and violation of applicable accounting standards and principles;
vi. Violation of Community law;
vii. Illegality of the assessment of default interest.
On 02-11-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.
The Claimant did not proceed to appoint an arbitrator, whereby, pursuant to paragraph a) of section 2 of article 6 and paragraph a) of section 1 of article 11 of the RJAT, the President of the Deontological Board of the CAAD appointed Ms. Councillor Fernanda Maçãs, Mr. Dr. Jaime Carvalho Esteves and Ms. Dr. Sofia Cardoso as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.
On 30-12-2015, the parties were notified of these appointments and did not express any intention to challenge any of them.
In accordance with the provision in paragraph c) of section 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 15-01-2016.
On 03-02-2016, the present Rapporteur was appointed as president, after accepting the appointment, due to the resignation of Ms. Councillor Fernanda Maçãs, who resigned for reasons deemed justified.
On 11-03-2015, the Respondent, having been duly notified for this purpose, submitted its response defending itself solely by way of challenge.
On 27-04-2016, the hearing referred to in article 18 of the RJAT took place, where witnesses presented by the Claimant were examined.
A period was granted for the submission of written pleadings, which were submitted by the parties, pronouncing on the evidence produced and reiterating and developing their respective legal positions.
A period of 30 days was fixed for the issuance of the final decision, following the submission of pleadings by the Tax Authority.
The period referred to in article 21/1 of the RJAT was extended by 30 days.
The Arbitral Tribunal is materially competent and regularly constituted, in accordance with articles 2, section 1, paragraph a), 5 and 6, section 1, of the RJAT.
The parties have legal personality and capacity, are entitled to appear and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Administrative Order no. 112-A/2011, of 22 March.
The proceedings are not affected by any nullities.
Therefore, there is no obstacle to adjudication on the merits of the case.
Having considered everything, it is appropriate to render judgment.
II. DECISION
A. FACTUAL MATTERS
A.1. Facts established as proven
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The Claimant has as its business purpose, among others, the purchase and sale of immovable property, as well as the resale of immovable property acquired for that purpose.
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In the course of its commercial activity, the Claimant acquired for resale, on 03/02/2006, the urban property registered in the urban property register under article .., in the parish of …, municipality of …, at the price of €150,000.00.
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Said acquisition was recorded in the purchases-inventories account at the same value (€150,000.00), plus the expenses inherent to the notarial deed and registrations.
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On that date, the patrimonial tax value (VPT) of the PROPERTY was €73,015.69.
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As a result of the 1st transfer occurring during the validity of the Real Property Transfer Tax Code (acquisition made by the taxpayer on 03/02/2006), the Finance Service of … – …, through official letter no. … of 26/06/2007, registered by the Postal Services under no. RY…PT, notified the taxpayer of the definitive patrimonial tax value attributed to the property, as a result of the evaluation carried out in accordance with articles 37 et seq. of the Municipal Property Tax Code (IMI), of €538,210.00 and, consequently, to request a second evaluation, within 30 days of the notification, if not in agreement with the stated value.
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The Claimant did not request a 2nd evaluation of the property, thus accepting the VPT that was assigned to it by the Tax Authority services.
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By purchase and sale agreement, executed by public deed on 08/07/2010, at the Notarial Office of …, of B…, it proceeded with the disposal of the urban property, registered in the property register of the parish of …, municipality of …, under article …, at the price of €155,000.00.
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The VPT of the property, on the date of disposal, as a result of the periodic updating carried out in accordance with article 138 of the Municipal Property Tax Code, was €558,392.88.
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Following the last transfer of the property, and through the complaint filed by the new acquirer under article 130 of the Municipal Property Tax Code, the VPT of said property came to be updated to €276,910.00 in 2011.
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The Claimant did not avail itself of the proper procedure for proof of the effective price in transfers of immovable property, provided in art. 139 of the CIRC, and did not complete any field of table 07 of form 22 of the 2010 tax year that it submitted.
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Having the Tax Authority ascertained that there was a positive difference between the value of the property contained in the contract (€155,000.00) and its respective VPT (€558,392.88), in the amount of €403,392.88, it notified the Claimant, through official letter no. … of 2014/04/09, registered by the Postal Services under no. RC…PT, to proceed with the correction of its Form 22, adding the said positive difference to taxable profit, in field 745 of table 07 of the replacement Form 22.
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The Claimant proceeded with the submission of the replacement Form 22 for the tax year 2010, where, in addition to the correction under article 64 of the CIRC, of field 745 of table 07 - €558,392.88 - €155,000.00 = €403,392.88 – of the difference between the VPT and the sale value, it also considered it appropriate to deduct the corrected purchase value in field 772 - €538,210.00 - €150,000.00 = €388,210.00.
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Service Order no. 0I2014… was issued, under which the Claimant would be subject to a tax inspection, of an internal character, to "monitor the tax situation of the company, in relation to tax facts arising from the transfer of real property rights in the tax year 2010, subject to taxation under article 64 (as amended by Decree-Law no. 159/2009, of 13/07) of the Corporate Income Tax Code".
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The Claimant was notified of the draft corrections to the taxable profit for the tax year 2010, in accordance with which the entry of the amount of €388,210.00 in field 772 of table 07 of the replacement Form 22 submitted with reference to the tax year 2010 was rejected.
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The Claimant exercised its right to prior hearing, having petitioned for the annulment of the proposed correction.
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The Tax Authority maintained the understanding expressed in the draft corrections, making definitive the correction that had been proposed and notifying the Claimant of the Tax Inspection Report, in accordance with which an arithmetic correction was made to the Claimant's taxable profit for the tax year 2010, in the amount of €388,210.00.
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The Inspection Report states, among other things, that:
a. "according to the wording of the law in force on the date of acquisition, the taxpayer could or could not record the immovable property in accounting at its definitive patrimonial tax value. However, such recording is nonetheless a legally essential condition if the acquiring taxpayer intends to take the definitive patrimonial tax value as the basis for purposes of determining the cost of goods sold - in the case where the asset was acquired for resale";
b. "for the taxpayer to take the definitive patrimonial tax value of the property as the acquisition cost, in accordance with article 58-A of the CIRC, as amended by Decree-Law 287/2003, of 12 November, it would have to make the accounting correction of the acquisition value to its patrimonial tax value, which did not occur, since that was the law in force on the date when it acquired and became aware of the patrimonial tax value of the property (Official Letter no. … of 2007/06/26) and not the law contained in Decree-Law no. 159/2009, of 13/07";
c. "having the taxpayer acquired the property during the validity of Decree-Law no. 287/2003, of 12 November, not having recorded the immovable property in accounting at its definitive patrimonial tax value, which means that it did not adopt the patrimonial tax value at the acquisition of the property, and therefore should not complete field 772 of table 07 - Corrections by the acquirer of the property when adopting the definitive patrimonial tax value for determining the taxable result in the respective transfer (art. 64, n. 3, al. b) of the CIRC), we will proceed to determine the taxable profit of the year 2010."
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The Claimant was notified of the Corporate Income Tax assessment act no. 2014 …, the Default Interest assessment act no. 2014 … and the Late Payment Interest assessment act no. 2014 …, to which correspond the Statement of Account Settlement for IRC no. 2014 … and the Compensation no. 2014…, of 7 November 2014, from which results the amount to be paid of €112,937.70, all acted upon with reference to the tax year 2010.
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The Claimant submitted an administrative complaint against the same, petitioning for their annulment.
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The Claimant was not notified of the final decision on the administrative complaint submitted.
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In 2011, the VPT of the property was reviewed by the Tax Authority, and was set at €276,910.00.
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The Finance Service of …-… initiated the competent tax enforcement proceedings, filed with no. …2015…, for coercive collection of the alleged tax debt and default interest.
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To suspend the aforementioned tax enforcement proceedings, the Claimant provided security, in the amount of €143,322.66, which consisted of a voluntary mortgage on immovable property.
A.2. Facts established as not proven
With relevance to the decision, there are no facts that should be considered as not proven.
A.3. Reasoning of the proven and not proven factual matters
With respect to the factual matters, the Tribunal does not need to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven matters from those not proven (see art. 123, n. 2, of the Tax Code of Procedure and Process (CPPT) and article 607, n. 3 of the Code of Civil Procedure (CPC), applicable by virtue of article 29, n. 1, paragraphs a) and e), of the RJAT).
In this manner, the facts relevant to the judgment of the case are selected and defined according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (see previous article 511, n. 1, of the CPC, corresponding to the current article 596, applicable by virtue of article 29, n. 1, paragraph e), of the RJAT).
Thus, having regard to the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the administrative file attached to the record, the facts listed above were considered proven, with relevance to the decision.
B. ON THE LAW
The Claimant submits to the Tribunal's consideration, in summary, the following issues:
i. Lack of reasoning of the disputed tax assessment act;
ii. Violation of the right to be heard;
iii. Expiration of the right to assess the tax;
iv. Violation of the legislation in force on the date of the tax event;
v. Impossibility of applying paragraph b) of section 3 of article 58-A of the CIRC and violation of applicable accounting standards and principles;
vi. Violation of Community law;
vii. Illegality of the assessment of default interest.
No defects leading to nullity or non-existence of the challenged act having been raised, and having not been expressly requested that the Tribunal follow a determined order in considering the issues raised, it is appropriate, in accordance with article 124 of the CPPT, to address the defect "whose establishment shall determine, according to the prudent discretion of the judge, the most stable or effective protection of the interests violated".
In its essential aspects, the substantive issue presented for decision in the present case may be formulated as follows:
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On 03/02/2006, the Claimant acquired, for resale, an urban property, whose VPT, on that date, was €73,015.69, for €150,000.00, having recorded the property in question at the latter value;
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On 26/06/2007, the property was assigned a VPT of €538,210.00;
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On 08/07/2010, the Claimant sold the same property at the price of €155,000.00, with the VPT of the property on that date being €558,392.88;
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In 2011, that same value came to be updated to €276,910.00;
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The Claimant, in its income statement for 2010, initially recorded, as cost of goods sold, the value contained in the contracts;
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Subsequently, given the Tax Authority's understanding that the resale value to be considered should be the VPT, it submitted a new statement, where it indicated as the acquisition value the VPT, on that date.
Given this factual situation, the Tax Authority considered, in summary, that, having the taxpayer acquired the property during the validity of Decree-Law no. 287/2003, of 12 November, on the date of acquisition, the Claimant could or could not record the property in accounting at its definitive patrimonial tax value, and that such recording would be a legally essential condition if the acquiring taxpayer intends to take the definitive patrimonial tax value as the basis for purposes of determining the cost of goods sold, in the case where the asset was acquired for resale, and therefore to take the definitive patrimonial tax value of the property as the acquisition cost, in accordance with article 58-A of the CIRC, as amended by Decree-Law 287/2003, of 12 November, it would have had to make the accounting correction of the acquisition value to its patrimonial tax value, which it did not do, and therefore could not adopt the definitive patrimonial tax value for determining the taxable result in the respective transfer in the tax year 2010, in accordance with art. 64, n. 3, al. b) of the CIRC.
Let us examine this now.
Essentially, what is at issue in the present tax arbitration action is a question of application of law in time, with the tax act that is the subject matter thereof being based on the application of the regime deriving from Decree-Law no. 287/2003, of 12 November (in force on the date of acquisition of the property and which remained in force until 31/12/2009), which provided that:
"1 - The sellers and buyers of real property rights must adopt, for purposes of determining taxable profit in accordance with the present Code, fair market values that may not be less than the definitive patrimonial tax values that served as the basis for the assessment of the municipal tax on onerous transfers of immovable property (Real Property Transfer Tax) or that would serve in case there were no assessment of this tax.
2 - Whenever, in the onerous transfers provided in the previous number, the value contained in the contract is less than the definitive patrimonial tax value of the property, it is this value that shall be considered by the seller and buyer for determining taxable profit.
3 - For application of the provision in the previous number:
a) The selling taxpayer must make a correction, in the income statement of the tax period to which the profit obtained from the transfer operation is attributed, corresponding to the positive difference between the definitive patrimonial tax value of the property and the value contained in the contract;
b) The buying taxpayer, provided that it records the immovable property in accounting at its definitive patrimonial tax value, must take such value as the basis for calculating depreciation allowances and for determining any taxable result under the Corporate Income Tax Code with respect to the same property."
For its part, the Claimant argues that article 64 of the Corporate Income Tax Code, as worded in the version in force at the end of the 2010 tax year, provided that in cases where the contract value is less than the definitive VPT of the property, both the seller and the buyer should adopt the VPT for determining any taxable result under the Corporate Income Tax Code with respect to the property, that is, the Claimant argues that in accordance with the law applicable on the date of the tax event, regardless of the manner in which the property is recorded in accounting, the seller and buyer must adopt the VPT for determining any taxable result under the Corporate Income Tax Code with respect to the property.
Indeed, article 64 of the CIRC, as worded in the version in force at the end of the 2010 tax year, provided:
"1 — The sellers and buyers of real property rights must adopt, for purposes of determining taxable profit in accordance with the present Code, fair market values that may not be less than the definitive patrimonial tax values that served as the basis for the assessment of the municipal tax on onerous transfers of immovable property (Real Property Transfer Tax) or that would serve in case there were no assessment of this tax.
2 — Whenever, in the onerous transfers provided in the previous number, the value contained in the contract is less than the definitive patrimonial tax value of the property, it is this value that shall be considered by the seller and buyer for determining taxable profit.
3 — For application of the provision in the previous number:
a) The selling taxpayer must make a correction, in the income statement of the tax period to which the profit obtained from the transfer operation is attributed, corresponding to the positive difference between the definitive patrimonial tax value of the property and the value contained in the contract;
b) The buying taxpayer adopts the definitive patrimonial tax value for determining any taxable result under the Corporate Income Tax Code with respect to the property.
4 — If the definitive patrimonial tax value of the property is not determined by the end of the deadline established for submission of the income statement for the tax period to which the transfer relates, the taxpayers must submit the replacement income statement during the month of January of the year following that in which the patrimonial tax values became definitive.
5 — In the event of a positive difference between the definitive patrimonial tax value and the acquisition or construction cost, the buying taxpayer must prove in the tax documentation process provided in article 130, for purposes of the provision in paragraph b) of section 3, the accounting and tax treatment given to the property.
6 — The provision in the present article does not preclude the possibility of the General Tax Directorate proceeding, in accordance with the provisions of law, to corrections to taxable profit whenever it has elements that prove that the price actually practiced in the transfer was higher than the value considered."
In the case sub iudice, what is at issue is the determination of the taxable income of the Claimant subject to taxation, resulting from the difference between the acquisition cost of a property and the gain resulting from its resale in 2010.
This simple formulation makes it possible to immediately highlight two fundamental points for the solution to the problem at issue, and these are:
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The fact that the taxable income is formed in the year 2010; and
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The issue concerns the determination of the method for calculating the taxable income.
Having regard to the first of the points indicated, it is immediately apparent the inapplicability to the present case of Decree-Law no. 287/2003, of 12 November (in force on the date of acquisition of the property and which remained in force until 31/12/2009), since it was no longer in force at the moment when it becomes necessary to determine the method for calculating the 2010 taxable income subject to taxation, and no provision in force at that time referred to such enactment.
Indeed, with respect to the calculation of the 2010 taxable income subject to taxation, such operation must be carried out exclusively in light of the legislation in force at that time, which in this case is to say, in light of article 64 of the CIRC.
Now, this provision prescribes, from the outset in section 1, and insofar as is relevant to this case, that "The sellers and buyers of real property rights must adopt, for purposes of determining taxable profit in accordance with the present Code, fair market values that may not be less than the definitive patrimonial tax values that served as the basis for the assessment of the municipal tax on onerous transfers of immovable property (Real Property Transfer Tax)" (emphasis ours).
From the provision in question, it follows, unquestionably, it is held, that the sellers of real property rights must adopt, for purposes of determining taxable profit in accordance with the Code in question, fair market values that may not be less than the definitive patrimonial tax values.
Thus being, two conclusions follow. The first, more clearly, will be that the mandatory nature, under the terms of the provision being analyzed, of the use of the VPT, in the case that it is higher than the value used, encompasses both buyers and sellers, a position in which the Claimant finds itself, in this case, and therefore also with respect to the Claimant, as a seller, it is that value – in principle – that should be considered.
The second is that such mandatory nature relates not only to the value of the operation in which the seller and buyer intervene and which generates the gain to be taxed, but to all values to be considered for determining taxable profit under the CIRC, which follows directly from the use, by the legislator, of the plural, when referring to "fair market values" and "definitive patrimonial tax values". Indeed, if, as appears to be the understanding of the Tax Authority, the legislator intended that only the market value or the VPT to be used would be that relating to the operation in which the seller and buyer intervene and which generates the taxable gain, it would, strictly speaking, have to use the expression "value" in the singular. The use of such expression in the plural cannot have any other sense, it is held, than to express that in the operations necessary to determine taxable profit under the CIRC, for purposes of the provision in question, the "fair market values" and/or the "definitive patrimonial tax values" that, based on the rule established (prevalence of the higher amount), are applicable should be used.
Thus, and in summary, considering that the tax event sub iudice, which occurs in 2010, is not governed by the regime of article Decree-Law no. 287/2003, of 12 November, since it is no longer in force, but rather by that of article 64 of the CIRC in force at the time, which does not support the correction made by the Tax Authority and against which the claimant, in the present arbitration action, objects, the tax act that is the subject matter thereof will be affected by an error in the legal premises and should be annulled, which is hereby determined.
Given the decision, the consideration of the remaining issues raised by the Claimant is rendered moot.
The Claimant also petitions for recognition of the right to compensation for costs incurred with the security provided.
The arbitral decision on the merits of a claim as to which no appeal or challenge is available binds the tax administration as of the expiration of the period provided for appeal or challenge, and the administration must, in the exact terms of the merit of the arbitral decision in favor of the taxpayer and until the expiration of the period provided for voluntary execution of the decisions of the tax courts, restore the situation that would have existed if the tax act that is the subject matter of the arbitral decision had not been acted upon, adopting the acts and operations necessary for that purpose, as expressly follows from paragraph b) of art. 24 of the RJAT.
In the same provision, "the legislator made clear that the effects provided therein are 'without prejudice to the other effects provided in the Tax Code of Procedure and Process'. It is considered in this regard that the legislator is here referring to all effects that flow from the CPPT, for the taxpayer, and that are applicable after the consolidation in the legal order of a certain tax-legal situation, arising from a final decision whether administrative or judicial."[1]
Notwithstanding the fact that the judicial challenge process is essentially a process of annulment only, compensation may be awarded therein against the Tax Authority for payment of compensation for undue security, as results from art. 171 of the CPPT.
As stated in the decision rendered in Case No. 28/2013-T[2], "it is unquestionable that the judicial challenge process encompasses the possibility of compensation for the payment of undue security and is even, in principle, the appropriate procedural remedy to formulate such a request, which is justified by obvious reasons of procedural economy, since the right to compensation for undue security depends on what is decided regarding the legality or illegality of the assessment act. The request for constitution of an arbitral tribunal has as a corollary that it shall be in the arbitration proceedings that the 'legality of the enforceable debt' will be discussed, and therefore, as results from the express terms of that n. 1 of the cited art. 171 of the CPPT, it is also the arbitration proceedings that is the appropriate remedy for considering the request for compensation for undue security."
It is concluded, therefore, that this tribunal is competent to consider the request for compensation for unduly provided security.
The regime governing the right to compensation for undue security is set out in article 53 of the General Tax Law (LGT), which establishes the following:
"1. The debtor who, in order to suspend enforcement, offers bank guarantee or equivalent, shall be compensated wholly or in part for the damages resulting from its provision, if it has maintained it for a period exceeding three years in proportion to the exhaustion of administrative appeal, judicial challenge or opposition to enforcement that have as their object the guaranteed debt.
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The period referred to in the previous number does not apply when it is found, in administrative complaint or judicial challenge, that there was an error attributable to the services in the assessment of the tax.
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The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnification interest provided in the present law and may be requested in the administrative complaint or judicial challenge proceedings themselves, or autonomously.
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Compensation for provision of undue security shall be paid by credit against the tax revenue of the year in which payment was made."
In the present case, it is manifest that the error affecting the assessment acts is attributable to the Respondent entity, since the assessments were made at its initiative and the Claimant in no way contributed to that error being committed.
The Claimant therefore has the right to compensation for the security provided, with reference to the value whose annulment has been determined and which remains unpaid.
However, the charges incurred by the Claimant to provide the security were neither alleged nor proven, and therefore it is not possible to fix here the compensation to which it is entitled, which may only be determined in execution of this decision.
C. DECISION
Whereas it is determined in this Arbitral Tribunal that the arbitration claim filed is well founded and, consequently,
a) Annul the tax acts that are the subject matter of the present arbitration action;
b) Condemn the Respondent entity to pay to the Claimant compensation for undue security, with reference to the value whose annulment has been determined and which remains unpaid, in the amount to be determined in execution of judgment; and
c) Condemn the Respondent entity for the costs of the proceedings, in the amount of €3,060.00.
D. Value of the proceedings
The value of the proceedings is set at €113,096.25, in accordance with article 97-A, n. 1, a), of the Tax Code of Procedure and Process, applicable by virtue of paragraphs a) and b) of section 1 of article 29 of the RJAT and section 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The arbitration fee is set at €3,060.00, in accordance with Schedule I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was entirely well founded, in accordance with articles 12, n. 2, and 22, n. 4, both of the RJAT, and article 4, n. 4, of the aforesaid Regulation.
Let it be served.
Lisbon
27 June 2016
The Presiding Arbitrator
(José Pedro Carvalho - Rapporteur)
The Co-arbitrator
(Jaime Carvalho Esteves)
The Co-arbitrator
(Sofia Cardoso)
[1] Carla Castelo Trindade – Legal Regime for Arbitration in Tax Matters – Annotated, Coimbra, 2016, p. 122.
[2] Available at www.caad.org.pt.
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