Process: 694/2014-T

Date: April 15, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral case (Process 694/2014-T) addresses the legality of an IRS assessment using indirect methods for the 2010 tax year. The tax authority identified €64,820.08 deposited into the taxpayer's spouse's bank account from a company that was not declared in their joint IRS return. After two failed attempts to notify the spouse at the registered tax domicile (both letters returned as 'not claimed'), the tax authority applied indirect assessment methods under articles 87 and 88 of the General Tax Code, classifying the amounts as unjustified increases in assets per article 9(1)(d) of CIRS. The taxpayer challenged the assessment through CAAD arbitration on three grounds: omission of essential formalities, violation of the principle of material truth and burden of proof, and error as to legal requirements. The arbitral tribunal confirmed its material competence under articles 2(1)(a), 5, and 6(1) of LRAT to review indirect method assessments. The case establishes that taxpayers can contest IRS assessments based on indirect methods through tax arbitration when the tax authority determines taxable income through presumptive methods due to lack of taxpayer cooperation or justification. Essential formalities include proper notification under article 59 GTC requesting clarification, notification of draft inspection reports for prior hearing rights, and compliance with procedural requirements of articles 87-88 GTC. The case demonstrates that while article 89-A cases involving unjustified asset increases allow direct appeal to tax court within 10 days, the broader arbitration remedy remains available, highlighting the importance of procedural compliance when tax authorities resort to indirect assessment methods.

Full Decision

ARBITRAL DECISION

I – REPORT

On 24 September 2014, A..., taxpayer no. …, with tax domicile at Rua …Vila Nova de Gaia, filed a petition for the constitution of an arbitral tribunal, under the joint 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 LRAT), seeking a declaration of illegality of the decision dismissing the Gracious Complaint filed with number …, as well as of the tax act of assessment under Personal Income Tax and compensatory interest, relating to the 2010 tax period, in the total amount of €20,951.40.

To support his petition, the Claimant alleges, in summary, that the acts subject to arbitral review are vitiated by illegality due to:

i. Omission of essential formalities;

ii. Violation of the principle of material truth and the burden of proof; and

iii. Error as to the legal requirements.

On 26-09-2014, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant failed to appoint an arbitrator; therefore, pursuant to paragraph a) of article 6(2) and paragraph a) of article 11(1) of the LRAT, the President of the Deontological Council of CAAD designated, in accordance with law, the arbitrator of the single arbitral tribunal. Having been informed by the Tax Authority of its intention to challenge the designated arbitrator, which objection was ultimately upheld by the President of the Deontological Council of CAAD, the latter designated the undersigned as arbitrator of the single arbitral tribunal, and acceptance of the appointment was communicated within the applicable deadline.

On 17-12-2014, the parties were notified of this designation and did not express any intention to challenge it.

In accordance with the provision of paragraph c) of article 11(1) of the LRAT, the collective arbitral tribunal was constituted on 06-01-2015.

On 12-02-2015, the Respondent, duly notified for this purpose, filed its response defending itself by way of exception and impugnation.

Notified for this purpose, the Claimant submitted written observations on the matter of exception.

As the parties waived the same, the meeting referred to in article 18 of the LRAT, as well as the submission of pleadings, were dispensed with.

By order, a deadline of 30 days was set for the rendering of the final decision.

The Arbitral Tribunal is materially competent and is regularly constituted in accordance with articles 2(1)(a), 5, and 6(1) of the LRAT.

The parties have legal capacity and standing, are legitimate and are legally represented, in accordance with articles 4 and 10 of the LRAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceeding has no defects of nullity.

Having examined everything, it is necessary to render

II. DECISION

A. FACTS

A.1. Facts deemed proven

  1. In 2010, the Claimant filed IRS Model 3 return jointly with B..., with Tax ID …, as passive subjects of the tax, in the capacity of married persons not judicially separated in person and property.

  2. In the scope of external inspection activities at the company "C..., LDA.", with Tax ID …, amounts credited to the bank account at "Montepio Geral" of the passive subject B… in 2010 were identified, in the form of cheque deposits and bank transfers issued by the aforementioned company, in the total amount of €64,820.08.

  3. Because the 2010 IRS Model 3 return did not reflect receipt of that global amount, nor was the passive subject registered for any commercial or industrial activity, service order OI2013… was opened in order to clarify his tax-legal situation.

  4. In the scope of that service order, a request for clarification was made to said passive subject, through registered letter with return receipt, to the address of the tax domicile located at Av. …, Lousada (office no. … of 2013-01-21), pursuant to article 59 of the General Tax Code, to justify within 10 days the nature of the income received from the company "C... –, Lda.", in 2010, in the total amount of €64,820.08.

  5. Office no. … was returned with the notation "Not claimed"/"Item not claimed".

  6. Passive subject B… was notified again, through registered letter with return receipt, to the address of the tax domicile located at Av. …, Lousada (office no. … of 2013-02-06), pursuant to article 59 of the General Tax Code, to justify within 10 days the nature of the income received from the company "C... –, Lda.", in 2010, in the total amount of €64,820.08.

  7. Office no. … was likewise returned with the notation "Not claimed"/"Item not claimed".

  8. Subsequently, it was concluded in the inspection procedure that "given the absence of justification by the passive subject "B..." regarding the nature of the income received from the company "C... – ..., Lda.", in 2010, in the total amount of €64,820.08, the same were considered unjustified increases in assets in accordance with paragraph d) of article 9(1) of the Personal Income Tax Code (CIRS), determined using Indirect Methods in accordance with articles 87 and 88 of the General Tax Code (GTC), since we are faced with a contributive capacity significantly greater than that declared, in light of the provision in the second part of paragraph d) of article 88 of the GTC, with impossibility of direct and exact proof and quantification of the elements essential to the correct determination of the taxable matter of IRS 2010 of passive subject "B...", as provided in paragraph b) of article 87 of the GTC".

  9. Following the application of Indirect Methods in the determination of taxable income under IRS for 2010, in accordance with paragraph d) of article 88 and paragraph b) of article 87 of the GTC, the values deposited/transferred in the amount of €64,820.08 were considered by the Tax Authority to be unjustified increases in assets, in accordance with the provisions of paragraph d) of article 9(1) of the Personal Income Tax Code (CIRS).

  10. By office no. …, of 03/04/2013, the passive subjects were notified of the draft inspection report for the exercise of the right to prior hearing, which they exercised by means of a statement of 23/04/2013.

  11. By order of 30/04/2013, the conclusions of the tax inspection were approved and, consequently, indirect assessment of the taxable matter was determined.

  12. By postal registration of CTT …PT, of 26/08/2013, received on 27/08/2013, additional assessment no. 2013 … was sent to the passive subject.

  13. Following said additional assessment, the taxpayer filed, in accordance with article 37 of the CPPT, a request for issuance of a certificate with the facts and legal grounds for the same, to which a response was given.

  14. From office no. … dated 6/05/2013, which notified "the corrections resulting from the inspection action" it appears, among other things, that:

"Pursuant to article 91 of the GTC, you may request the revision of the taxable matter fixed by indirect methods in a single duly substantiated petition, addressed to the Director of Finance of the area of your tax domicile, to be submitted within 30 (thirty) days from the date of this notification, with indication of the expert who represents you and, if applicable, the request for appointment of an independent expert.

In the event that the regime provided for in article 89-A of the GTC has been applied - manifestations of wealth and other unjustified increases in assets - you may file an appeal to the tax court within 10 days in accordance with nos. 7 and 8 of the aforementioned, the procedure provided for in articles 91 and following of the GTC not being applicable"

  1. The Claimant proceeded to pay the tax underlying the additional IRS assessment, plus the respective compensatory interest, associated with the taxable event sub judice.
A.2. Facts deemed not proven

  1. The taxpayer was a partner in the company called D..., Lda. which operates in the industrial sector of paper production.

  2. For the exercise of industrial activity, said company had the need to renew the fleet of machinery it uses in the transformation of paper and its derivatives.

  3. To this end, the company, as a result of market demands, made significant investments in the renewal of the machinery fleet through the acquisition of equipment under a leasing system.

  4. In order to meet its obligations to the banking sector, the company in question resorted to direct and indirect financing operations, in many cases using current operations through the issuance of accommodation bills accepted by third parties.

  5. To segregate and separate the movements of D... relating to operations of a commercial nature from movements related to banking operations, the taxpayer established a dedicated bank account exclusively to carry out such movements.

  6. The account at Montepio Geral was used in this case with the purpose of being a vehicle account, with the objective of receiving flows from third parties that had a direct or indirect relationship with D... and immediately fulfilling obligations relating to this company.

  7. In this manner, and for this purpose, said account was used, managed by the company's financial manager, with the Claimant limiting himself to signing the cheques or subscribing the transfer orders that were indicated to him by the person responsible for the company's financial management.

  8. The taxpayer had no commercial relationship with the entity that promoted the bank deposits or transfers to the Montepio Geral account, nor obtained any benefit from the resulting flows, given that such amounts after being received were immediately directed to pay liabilities assumed by D… as a result of leasing contracts with various institutions or accommodation bills that third parties would have accepted, and which it would be D...'s obligation to honour.

  9. The aforementioned deposit originates from an entity that would promote the payment of D…'s banking liabilities, and which used the taxpayer's Montepio Geral account as a vehicle account to differentiate the flows arising from D...'s commercial relations from the flows related to the fulfillment of banking obligations, all at the indications and discretion of the person responsible for the company's financial management.

  10. The deposit in question resulted from a third-party entity that aimed to promote the financing of D... so that it could, as it did, meet its obligations to the banking sector.

  11. Such amounts resulted from the sale of equipment carried out by such entities.

  12. There are other credit movements in addition to those identified by the Tax Authority and, in the same period as the credit movements, there are operations or debit movements in the same amount, which were intended to be deposited in the account of D... (BES account with number …, Montepio Geral account …, Millennium account …, Banco Popular account …, CGD account …), or of third parties that had accepted accommodation bills to address specific treasury problems of D..., and whose payment had to be made by the beneficiary entity (in this case D...), as well as to the payment of accommodation bills which, on the date of their maturity, were debited from the ora claimant's Montepio Geral account.

A.3. Reasoning on facts proven and not proven

Regarding the facts, the Tribunal does not have to pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven from the unproven facts (see article 123(2) of the CPPT and article 607(3) of the CPC, applicable by virtue of article 29(1), paragraphs a) and e), of the LRAT).

Accordingly, the relevant facts for the judgment of the case are chosen and delineated based on their legal significance, which is established in light of the various plausible solutions to the legal question(s) (see former article 511(1) of the CPC, corresponding to current article 596, applicable by virtue of article 29(1), paragraph e), of the LRAT).

Thus, having regard to the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the inspection report attached to the file, the facts listed above were considered proven, as relevant to the decision.

The facts deemed not proven arise from the absence of sufficient proof in relation to them.

B. THE LAW

Prior to addressing the merits, the Tax Authority raises the question of whether this arbitral tribunal has jurisdiction to know the object of the present proceedings.

The Tax Authority considers that "it follows from the petition and the cause of action presented by the Claimant that this arbitral remedy is intended to react against the correction carried out exclusively through the application of indirect methods, a correction that resulted from the total impossibility of quantifying the taxable matter directly and exactly, meeting the requirements provided for in paragraph b) of article 87(1) and paragraph d) of article 88, both of the General Tax Code (GTC)". Thus, understanding the Tax Authority that "there is no doubt, given the above, that the claim of the now Claimant aims at the assessment of the assessment act resulting from the application of methods" indirectly, it concludes "on the impossibility of this arbitral tribunal deciding the present dispute, whether it is considered that we are faced with the exception of material incompetence of the arbitral tribunal or with an unnamed dilatory exception for lack of binding of the Tax Authority".

For his part, the Claimant reports that "in the case in question the claim of arbitral review instituted of the IRS assessment act better identified in the body of the petition and in article 1 of the same document", and therefrom it follows that "the claim for arbitral protection does not have as its object the act of assessment [of determination of taxable matter or taxable income], but the tax act of assessment, which constitutes the final decision of the tax procedure."

As the Tax Authority rightly notes, "the decision to assess the taxable matter by indirect methods constitutes an act distinguishable from the tax procedure, susceptible to challenge by passive subjects only through its own remedy".

And as, also rightly, the Claimant notes, the object of the present arbitral proceeding is the tax act of assessment under Personal Income Tax and compensatory interest, relating to the tax period 2010 in the total amount of €20,951.40.

Now, these are not to be confused. And since the object of this arbitral action is the latter act, and not the former, the Tribunal should declare itself competent, in accordance with article 2(1)(a) of the LRAT, and article 2 of Ordinance no. 112-A/2011 of 22 March.

It is true that, in arbitral proceedings, the Tribunal cannot know of "Claims relating to acts determining the taxable matter and acts determining the taxable income, both by indirect methods, including the decision of the revision procedure", as follows from paragraph b) of article 2 of the aforementioned Ordinance.

However, since this action does not have as its object "the decision to assess the taxable matter by indirect methods", it could not, in any case, even if this action were proceeding in a Tax Court, know of the claims relating to that act, since that "constitutes an act distinguishable from the tax procedure", being unable to be covered by the power granted in article 54 of the CPPT.

In effect, the act of fixing the taxable matter by indirect methods preceding the impugned act in the present arbitral proceedings is directly challengeable, in accordance with nos. 7 and 8 of article 89-A of the GTC.

Being so, the considerations made by the Illustrious Counselor Jorge Lopes de Sousa[1], regarding acts distinguishable from direct assessment, are directly transposable to the present case, when he states that "the defects affecting the act of assessment" (in this case, indirect) "whether existing in the assessment act itself or those relating to the respective assessment procedure, can only be invoked in its respective challenge and not in the challenge of the assessment acts that may be practiced on the basis of the assessment act". "On the other hand, in order to challenge the assessment act in its respective challenge, the interested party cannot use the grounds he has to challenge the act of assessment" (in this case, indirect) "and, in particular, cannot maintain that the taxable matter to be considered is not the one used to effect the assessment."

That is, in short: one thing is the challenge of the indirect assessment act, and another is the challenge of the assessment act practiced on the basis of the latter act.

The present proceeding relates to the second of those cases, it being that, from the above, "the defects affecting the act of assessment" "whether existing in the assessment act itself or those relating to the respective assessment procedure" cannot be known, since these could only "be invoked in its respective challenge".

Thus, with the object of this proceeding so clarified, there should be no doubt, it is judged, of the competence of this arbitral tribunal to know of it.

The above will not change, whether verified or hypothetical, the fact that in the challenge of the assessment act the interested party raises issues relating to defects affecting the act of assessment. In effect, the Tribunal only has to ascertain whether such issues have a bearing, or not, on the legality of the assessment act, a judgment for which it is competent, it being that if, erroneously, it considers as having such bearing a defect of the assessment act autonomously challengeable as such, it will be, not overstepping its competence (which would only occur if it pronounced on the validity of the assessment act[2]), but, simply, erroneously applying the law to a question (the validity or not of the assessment act) whose decision falls within its scope.

Thus, and in light of all the above, the exception raised by the Tax Authority is unfounded.

The Tax Authority further argues the occurrence of error in the form of the proceedings, in that "the Claimant invokes the omission of essential formality due to failure to notify the remedies available to him, alleging that the certificate issued to him under article 37 of the CPPT is vitiated by ambiguity", therefore "understanding the Claimant that the requested certificate did not contain the deadline and remedies against the notified act, it was incumbent on him to use the remedy of intimation for an expressly provided conduct in article 147 of the CPPT, so that the Tax Authority would fully comply with the provision of article 37 of the CPPT, issuing the requested certificate for the purposes sought by the Claimant".

Also here, with all due respect, it is understood that the Tax Authority is not correct.

In fact, as the Claimant notes, "what is sought with the request for arbitral protection is not the intimation of the Tax Authority to disclose the content of the notification, but the pronouncement of the Tribunal on the effects of a notification with error as to the legal requirements, which in the claimant's thesis constitutes an omission of essential formality that determines the intrinsic illegality of the act in question".

That is, once again, what is at issue in the present proceeding is whether, if there is some deficiency in the notification, the same is reflected or not in the assessment act. And as to this, there is nothing wrong with the form of proceeding elected.

Hence, this preliminary question should also be dismissed as unfounded.

Entering into the merits of the case, the Claimant begins by arguing that "the indication of the means of defense and respective deadline are part of the content of the notification of the act, constituting a condition of efficacy of the decision", and that "considering that in this case the notification is a condition of efficacy of the notifying act (...) its lack, although not contending with the perfection of the notifying act (...) determines its non-enforceability and a subsequent internal inefficacy of that same act". Understanding the Claimant that "not being validly notified to the Claimant what the means of defense and deadline are to react against the notified act" concludes that "The lack of legally required notification constitutes an omission of essential formality of the procedure, in light of articles 36(1) of the CPPT and 77(6) of the GTC, as it constitutes a requirement of efficacy of the act itself, preventing the practice of the subsequent act", being that, in his view, the "said omission of essential formality constitutes a defect determining the annulment of the assessment, in accordance with article 99(d) of the CPPT".

Regarding this matter, the respective analysis must be divided into two aspects.

The first issue concerns establishing whether an absence of notification, or an illegality thereof that invalidates it, regarding the act of fixing the taxable matter, is reflected or not in the validity of the subsequent assessment act.

On the matter of notification of tax acts, it is understood, with the Illustrious Counselor Jorge Lopes de Sousa[3], that:

"As a rule, facts that do not affect the validity of the acts but only relate to their efficacy, such as the lack or irregularity of their notification, cannot be used as grounds for judicial challenge.

The notification of the assessment is an act subsequent and external to this and therefore, as a rule, the defects that affect the act of notification do not affect the notified act.

Questions that relate to the efficacy or inefficacy of the act, as questions that arise subsequently to the practice of the act which concern the possibility of the act producing effects in relation to the recipient, are matters that may be known in a proceeding of opposition to tax collection, but they cannot be the independent subject of assessment in a judicial challenge proceeding. (...)

Therefore, it now seems clear that the lack of notification (or the existence of irregularities that affect its validity, which translate into lack of a valid notification) affects the efficacy of the assessment act and not its validity, therefore it is in the opposition that, in principle, this lack of notification should be invoked and, as grounds for opposition, this lack of valid notification may be invoked in it even if the assessment has not been challenged."

Continuing with the same author[4]:

"However, the deficiencies that affect the validity of the notification do not affect the validity of the notified act.

In effect, the notification of an act is an act external to this and, therefore, the defects affecting the notification, being able to determine the invalidity of the notification and the consequent inefficacy of the notified act, do not affect the validity of this".

That is, in short: it is understood that the lack of (or the illegality invalidating the) notification of a tax act does not contend with the validity of that act, but solely with its efficacy.

This does not mean, however, that the lack of (or the illegality invalidating the) notification of an act cannot be reflected in the legality of a subsequent act that presupposes it. Thus, for example, it is admitted that the lack of (or the illegality invalidating the) notification of a distinguishable act of fixing the taxable matter generates, by virtue of a procedural defect, the invalidity of the subsequent assessment act.

Continuing with the Illustrious Counselor Jorge Lopes de Sousa, "the interested party may challenge the assessment act on the ground of the inefficacy of the assessment act on which it is based, which prevents it from being able to produce, even indirectly, effects in relation to the recipient."[5]

In conclusion, and transposing what has been said to the concrete case, it is considered that the lack of (or the illegality invalidating the) notification of the indirect assessment act that occurred upstream of the assessment act which is the object of this arbitral action, generating the inefficacy of that assessment as to the Claimant, will be susceptible to invalidating said assessment, since the latter legally presupposes the existence of a prior, valid and efficacious assessment act.

Entering, thus, into the second aspect of the question to be decided, it is necessary to ascertain whether or not there is a lack of (or an illegality invalidating the) notification of the indirect assessment act.

On this matter, the Claimant does not question the occurrence of the act of notification. Rather, he questions the legality of the same, in the sense that its failure to meet the requirements which he understands as legally imposed prevents it from producing its effects, conferring efficacy to the act of determining the taxable matter, which is presupposed by the assessment which is the object of this proceeding.

In the understanding of the Claimant, the text contained in the notification directed to him "was indicated, in a vague and ambiguous manner, different means of defense and with differing legal basis".

Examining the text in question, it is found that this is so. It remains to be established whether the effects arising from this are what the Claimant intends.

Here, with due respect to his opinion, it is understood that they are not.

Continuing with the teachings of the Illustrious Counselor Jorge Lopes de Sousa[6], "the lack of any of those requirements" of article 36(2) of the CPPT (with the exception of the reference to delegation of powers, if applicable) "does not necessarily imply the invalidity of the notification". Rather, "the consequences of non-observance of the aforementioned requirements must be connected with the purpose that justifies their requirement".

That is, it is considered that the formalities provided for notifications must be understood as being functional to certain purposes, which explain and justify them, and that, consequently, the consequences of non-observance of those will be in direct dependence on the degree to which the purposes envisaged are compromised.

In the case, the indication of the means of defense and deadline to react against the notified act is intended to provide the notified party with knowledge of the means at his disposal to challenge such act.

Consequently, it is understood that the deficient (or even non-existent) indication of the means of defense and deadline to react against the notified act should only be relevant to the acceptability of the remedy and deadline which the interested party resorts to in defending himself. Thus, for example, if an incorrect deadline is indicated, longer than the legal one, and the interested party presents itself to defend within the indicated deadline, but outside the legal deadline, the reaction should be understood as timely. Similarly, if an incorrect remedy is indicated, and the interested party uses it, he cannot be penalized for its unsuitability.

Hence, it is concluded that, in the concrete case, the deficient indication of the means and deadline for defense has no invalidating effect on the notification.

In any case, even if this were not so, it is equally understood, also by the Illustrious Counselor Jorge Lopes de Sousa[7], according to which "the defect affecting the notification will be cured if notice is not sought of the omitted requirements or the passage of a certificate containing them, in accordance with article 37", from which is drawn the corollary that if the notification is not made or the certificate is not passed in the terms required, the interested party should resort to the respective contentious remedy (intimation for conduct, of article 147 of the CPPT), under penalty of curing the defects that may have occurred in the notification.

That is: if the notification made does not contain the means and deadlines for reaction, the notified party should, if he wishes, request the respective notification in accordance with article 37 of the CPPT, benefiting from the effect provided for in no. 2 of that article, under penalty of the notification deficiency being considered cured. If, in that sequence, the Tax Authority does not respond, or responds in terms which the interested party deems, in light of legal requirements, unsatisfactory, the same should resort to the legally available means to intimate the Tax Authority to give the response it considers legally due, under penalty of, in the same terms, the eventual notification deficiency being considered cured.

Thus, and in light of all the above, detecting no invalidating defect in the notification of the act of determining the taxable matter, the alleged omission of formalities of the act subject to this arbitral action should be dismissed as unfounded.

The Claimant further alleges that "in the case of the present proceedings (...) the Tax Authority clearly violated article 58 of the GTC, since it was required to carry out all necessary diligences to discover material truth", in that, in his view, "the Tax Authority did not seek to collect elements necessary to obtain material truth as referred to, basing its substantiation solely on the existence of deposits and bank transfers to the Claimant's account", "when it was required a different procedure (...) Not only by way of the inquisitorial, already mentioned, but also by way of article 74 of the GTC", understanding that the Tax Authority should have proceeded to the "hearing of other participants who could ascertain the veracity of the transactions verified". Moreover, the Claimant understands that "the Tax Authority in the scope of the inspection procedure that determined the assessment in IRS sub judice did not ascertain elements that demonstrate that the bank account in this case was fed with values actually coming from activities developed by the taxpayer".

With all due respect for another opinion, it is understood that the defects which the Claimant ascribes, in this part, are defects not of the assessment act, but of the (procedure relating to the) act of fixing the taxable matter.

In effect, the diligences which the Claimant demands, as well as the allegedly incorrect application of the rules of burden of proof pointed out by him, relate directly to the requirements for the application of the indirect methods used in that act.

In this manner, such defects should/would be ascribed to the act directly determined by them, since, as has been seen, this is an act distinguishable.

Having been, in this action, by force of the Tribunal's binding to the object of the petition, and of the aforementioned distinguishable nature of the act of fixing the taxable matter by indirect methods, as already addressed, to take this act as valid, no effect could be drawn from the verification of the alleged defects now in question.

Thus, and as stated, this allegation should also be dismissed as unfounded.

Finally, the Claimant alleges that "the Tax Authority must justify, motivate and prove the relationship of cause and effect between the action/omission of the taxpayer and the impossibility of applying the direct assessment method (...)What was not verified in the present proceedings", concluding "in the case in question, the necessary legal requirements were not met for the Tax Authority to resort to the indirect methodology based on the factuality contained in the inspection report".

The considerations made above are valid here, mutatis mutandis.

In effect, the eventual lack of the "necessary legal requirements for the Tax Authority to resort to the indirect methodology" is directly reflected in the act of fixing the taxable matter by such methods, and only mediately (by means of that act) in the assessment act.

Understanding, as has been expounded and previously cited, that "in order to challenge the assessment act in its respective challenge, the interested party cannot use the grounds he has to challenge the act of assessment", it is considered that, while the act of fixing the taxable matter by indirect methods remains validly in force in the legal order, the eventual error in the requirements thereof is not susceptible to affecting the validity of the subsequent assessment act which, as has already been seen, constitutes the object of this arbitral action.

This allegation of the Claimant should, therefore, also be dismissed as unfounded.

C. DECISION

Therefore, this Arbitral Tribunal decides to dismiss entirely the arbitral petition filed and, consequently,

a) Absolve the Respondent of the claim; and

b) Condemn the Claimant to pay the costs of the proceeding in the amount of €1,224.00, taking into account amounts already paid.

D. Value of the proceeding

The value of the proceeding is fixed at €20,951.40, in accordance with article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of article 29(1) of the LRAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €1,224.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the petition was entirely unfounded, in accordance with articles 12(2) and 22(4), both of the LRAT, and article 4(4) of the aforementioned Regulation.

Notify the parties.

Lisbon

15 April 2015

The Arbitrator

(José Pedro Carvalho)

[1] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 425.

[2] Which would, moreover, constitute a pronouncement beyond the scope of the petition (extra petitum).

[3] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 706 et seq.

[4] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 327.

[5] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 426.

[6] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 325.

[7] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 325.

Frequently Asked Questions

Automatically Created

Can taxpayers challenge IRS assessments based on indirect methods through tax arbitration at CAAD?
Yes, taxpayers can challenge IRS assessments based on indirect methods through tax arbitration at CAAD. This case (Process 694/2014-T) confirms that the arbitral tribunal has material competence under articles 2(1)(a), 5, and 6(1) of the Legal Regime for Arbitration in Tax Matters (LRAT) to review decisions where the tax authority applied indirect assessment methods pursuant to articles 87 and 88 of the General Tax Code. The tribunal was regularly constituted and accepted jurisdiction over the challenge to an indirect method assessment for the 2010 tax year.
What are the grounds for contesting the legality of an IRS tax assessment using indirect methods in Portugal?
The grounds for contesting the legality of an IRS tax assessment using indirect methods include: (i) omission of essential formalities in the assessment procedure; (ii) violation of the principle of material truth and improper application of the burden of proof; (iii) error as to the legal requirements for applying indirect methods under articles 87 and 88 of the General Tax Code; (iv) failure to demonstrate that direct and exact proof of taxable income was impossible; (v) improper classification of amounts as unjustified increases in assets under article 9(1)(d) of CIRS; and (vi) procedural defects such as inadequate notification or denial of the right to prior hearing.
Does the CAAD arbitral tribunal have jurisdiction to review decisions made using indirect taxation methods?
Yes, the CAAD arbitral tribunal has jurisdiction to review decisions made using indirect taxation methods. In this case, the tribunal explicitly stated: 'The Arbitral Tribunal is materially competent and is regularly constituted in accordance with articles 2(1)(a), 5, and 6(1) of the LRAT.' The tribunal accepted jurisdiction over a challenge to an IRS assessment determined through indirect methods under articles 87 and 88 of the General Tax Code, demonstrating that arbitral review extends to both the substantive and procedural aspects of indirect assessment determinations.
What essential formalities must the Portuguese tax authority follow when applying indirect assessment methods for IRS?
When applying indirect assessment methods for IRS, the Portuguese tax authority must follow several essential formalities: (i) issue proper notification under article 59 of the General Tax Code requesting the taxpayer to justify the nature of undeclared income within the legal deadline; (ii) attempt notification at the registered tax domicile address; (iii) provide the taxpayer with the draft inspection report and opportunity for prior hearing before finalizing the assessment; (iv) obtain formal approval of the inspection conclusions and determination to use indirect assessment; (v) properly notify the taxpayer of the additional assessment; (vi) demonstrate compliance with the legal requirements of articles 87 and 88 GTC, including impossibility of direct proof and evidence of contributive capacity significantly greater than declared; and (vii) inform taxpayers of their right to request revision under article 91 GTC or appeal under article 89-A GTC as applicable.
How does the burden of proof apply when the tax authority uses indirect methods to determine taxable income?
When the tax authority uses indirect methods to determine taxable income, the burden of proof operates in stages. Initially, the tax authority bears the burden of proving that the legal conditions for applying indirect methods exist under articles 87 and 88 of the General Tax Code, including demonstrating impossibility of direct and exact proof and evidence of contributive capacity significantly greater than declared. Once indirect methods are applied and the assessment is made, the taxpayer may request revision under article 91 GTC by submitting a substantiated petition with expert evidence within 30 days. In cases involving unjustified increases in assets under article 89-A GTC, the taxpayer can directly appeal to tax court within 10 days. The taxpayer bears the burden of proving that the presumptive assessment is incorrect or that the amounts have a legitimate, justified source.