Process: 700/2015-T

Date: July 15, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration process 700/2015-T addressed a withholding tax dispute concerning IRS obligations for income paid in 2014. The applicant company initially submitted a payment slip for €100,298.92 in withholding tax for October 2014, but subsequently replaced it with a corrected slip for only €1,631.32, claiming the payments were actually made in December 2014, not October. The company filed an administrative complaint seeking annulment of the original assessment, which was rejected, leading to a hierarchical appeal. The Tax Authority partially granted the appeal, cancelling €1,681.32 in duplicate withholdings for business and property income, but maintained the assessment of €97,965.00 for remaining income relating to holiday bonuses and employment termination payments. The central legal issue concerned determining when the withholding obligation arose based on when income was actually paid or made available to employees. The tribunal emphasized the burden of proof requirements, noting that while the company provided accounting extracts from accounts 231 (remuneration payable), 238 (other personnel operations), 242 (tax withholdings), and 63 (personnel expenses), it failed to provide conclusive banking documents evidencing the actual payment dates. This case illustrates the critical importance of maintaining comprehensive documentary evidence, particularly banking records, to substantiate the timing of income payments for withholding tax purposes under Portuguese IRS regulations.

Full Decision

ARBITRAL AWARD

The arbitrators Counselor José Baeta de Queiroz (presiding arbitrator), Dr. Paulo Lourenço and Professor Doctor Paulo Nogueira da Costa (associate arbitrators), designated by the Ethics Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 5 February 2016, agree as follows:

  1. Report

A…, SA (hereinafter, the Applicant), legal entity no…, filed a request for the constitution of the collective arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter referred to only as RJAT), in which the Tax and Customs Authority (hereinafter, AT, or Respondent) is sought to be held liable, with a view to the declaration of illegality of the withholding tax assessment for personal income tax for the year 2014, following the tacit rejection of a hierarchical appeal.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the AT on 27 November 2015.

Pursuant to the provisions of subparagraph a) of article 6, paragraph 2 and subparagraph b) of article 11, paragraph 1 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal those identified above, who communicated acceptance of the appointment within the applicable period.

On 21 January 2016 the parties were duly notified of this designation and did not express their intention to refuse, in accordance with article 11, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provisions of subparagraph c) of article 11, paragraph 1 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 5 January 2016.

The Tax and Customs Authority filed its answer, arguing that the request should be dismissed as unfounded.

By order of 8 March 2016, the tribunal determined that there was no justification for the hearing provided for in article 18 of the RJAT, dispensing with such procedural step, inviting the parties to submit their arguments, if they wished, within a period of 15 days, to be done successively.

The Applicant and the Respondent submitted their arguments on 1 April 2016 and 19 April 2016, respectively.

The arbitral tribunal was duly constituted and is materially competent, in light of the provisions of articles 2, paragraph 1, subparagraph a), and 30, paragraph 1, of Decree-Law no. 10/2011, of 20 January.

The parties possess legal personality and capacity, are legitimate and are properly represented (articles 4 and 10, paragraph 2, of the same decree and article 1 of Portaria no. 112-A/2011, of 22 March).

The proceedings do not suffer from any defects of form and no exceptions were raised.

Thus, there is no obstacle to the examination of the merits of the case.

  1. Factual Matter

2.1. Proven Facts

The following facts are considered proven:

a. The Applicant recorded in account 231 (remuneration payable) the holiday bonuses relating to the corporate bodies and to the employees;

b. Likewise, it recorded in the same account the amounts corresponding to the termination of employment contracts of 5 employees.

c. The Applicant recorded in account 238 (other operations with personnel) salary advances to employees.

d. The amounts withheld mentioned above were recorded in account 242 (withholdings of taxes on income – dependent employment, self-employment, property income and surcharge).

e. The Applicant delivered, in November 2014, the payment slip no…, relating to the withholding tax mentioned above and relating to the period of October 2014, which comprised an amount of tax to be paid corresponding to € 100,298.92.

f. Later, in December 2014, the Applicant proceeded to substitute the aforementioned payment slip by delivering a new payment slip numbered…, relating to the withholding tax of the same period of 2014, in the amount of € 1,631.32.

g. The Applicant submitted an administrative complaint (…2015…), petitioning for the annulment of payment slip no…, relating to withholding tax on personal income tax for the month of October 2014.

h. On 27 March 2015, the Applicant was notified of the draft rejection of the complaint and to exercise, if it wished, within a period of 15 days, the right to prior hearing.

i. On 13 April 2015, the Applicant exercised the right to prior hearing and on 28 May 2015 was notified of the rejection of the administrative complaint.

j. On 30 June 2015, the Applicant filed a hierarchical appeal (…2015…) against the rejection of the administrative complaint.

k. The hierarchical appeal was partially granted by order of the Director of the Corporate Income Tax Services Directorate, of 11 January 2016, set forth in memorandum no…/2016.

l. The Corporate Income Tax Services Directorate cancelled the self-assessed tax relating to business and professional income, in the amount of € 606.57, as well as the tax relating to property income, in the amount of € 1,074.75, taking into account that such amounts were already included in payment slip no…, also relating to the month of October 2014.

m. The Tax and Customs Authority maintained the tax assessment in the total amount of € 97,965.00 in relation to the remaining income.

n. The Applicant submitted extracts of accounts 231 (remuneration payable), 238 (other operations with personnel), 242 (withholdings of taxes on income – dependent employment, self-employment, property income and surcharge) and 63 (personnel expenses), relating to the fiscal year 2014.

o. The accounting records and declarations submitted by the Applicant show that the payments and withholdings were made in the month of October 2014.

2.2. Unproven Facts

Notwithstanding the fact that it presented extracts of the accounts and other documents which, in its view, justify the payments, the Applicant did not provide effective proof of the moment in which it paid, namely through the attachment of banking documents evidencing the amounts paid and the dates on which such payments occurred.

Accordingly, the moment in which payments were made to employees is considered unproven.

2.3. Reasoning for the Establishment of Factual Matter

The proven facts are based on the documents attached to the proceedings, namely those in the administrative file, all of which are hereby reproduced, and on the agreement of the Parties.

  1. Legal Matter

The question to be decided in the present proceedings concerns the need to determine whether the Applicant had or did not have the obligation to proceed with the delivery of withholding tax relating to the remuneration for the month of October 2014.

The Applicant argues that the payment was made in the month of December 2014 and that it submitted adequate documentary proof to ascertain the veracity of the facts alleged, namely by attaching to the proceedings extracts of the accounts relating to the entire fiscal year 2014, namely:

a. Account 231: Remuneration payable;

b. Account 238: Other operations with personnel;

c. Account 242: Withholdings of taxes on income – dependent employment, self-employment, property income and surcharge;

d. Account 63: Personnel expenses.

The Applicant, to justify its position, states that, after analysis of the extract of account 231, it is verified that the following payments were made:

a. holiday bonuses in the total amount of 89,528.72, corresponding to € 2,324.50 to corporate bodies and € 87,204.22 to the remaining employees, which gives rise to a withholding tax of € 28,882.00;

b. amounts paid to 5 employees as a result of the termination of their employment contract for just cause, in the total amount of € 11,933.79, to which corresponds a withholding tax of € 3,825.00.

The Applicant, upon verifying that in the declaration of remuneration for October 2014 values relating to that month were included and that there would not be sufficient liquidity for payment, proceeded to substitute this declaration, which gave rise to assessment no…

However, continues the Applicant, by manifest oversight, when annulling the income included in that declaration, all declared values were annulled, when only the values corresponding to the payments which had effectively not been made were intended to be annulled.

With regard to account 238, the Applicant considers that, after its analysis, it is possible to verify that in the month of October payments were made to employees relating to salary advances, in the total amount of € 12,510.17, to which corresponds a withholding tax of € 1,135.00.

As regards account 242, the Applicant invokes that, although the extraordinary personal income tax surcharge for the year 2014 is due regardless of whether the income is paid or not, the fact is that there is no way to, informatically, submit the declaration for payment without the submission of the income.

In summary, the Applicant argues that all the amounts paid in October of that same year were included in the declaration relating to the month of December 2014, which, by oversight, were wrongly annulled.

The Tax and Customs Authority, for its part, states that it is not necessary, for the payment obligation to become effective, that it has been actually paid and received, it sufficing that it has been made available.

Furthermore, it is also important, according to the Tax and Customs Authority, to resort to the accounting of the Applicant as the instrument that reflects the true and appropriate picture of the company and that identifies it as having been prepared in accordance with the accounting rules arising from the SNC (Accounting Normalization System).

In accounting, it is important to distinguish the economic flow, which records expenses and income, from the financial flow, which records expenditures and receipts, from the perspective of payment and receipt.

Finally, concludes the Tax and Customs Authority, the accounting entry in account 242 – Withholding tax on income – means that the income has already been made available to the respective beneficiaries, which is why the withholding tax payment slip no…, relating to the month of October 2014, should be maintained in the amount of € 92,388.00.

Let us therefore examine this matter.

Article 98, paragraph 1 of the Personal Income Tax Code provides that "In the cases provided for in articles 99 to 101 and in other cases established by law, the entity owing the income subject to withholding tax, the registering or depositing entities, as appropriate, are obliged, at the moment of payment, of the payment obligation, even if presumed, of its making available, of its liquidation or of the determination of the respective amount, as appropriate, to deduct from them the amounts corresponding to the application of the rates provided for therein on account of the tax relating to the year in which these acts occur."

On the other hand, article 98, paragraph 3 of the same Code provides that "The amounts withheld under the terms of articles 99 to 101 must be delivered by the 20th day of the month following the month in which they were deducted."

In addition to the withholding obligation, there is also an obligation of an accounting nature provided for in subparagraph a) of article 119, paragraph 1 of the Personal Income Tax Code, a provision that stipulates that entities owing income are obliged to maintain an updated register of the creditor persons, even if there has been no withholding of tax, which must include, namely, the name, the tax identification number and respective code, as well as the date and amount of each payment or income in kind that has been attributed to them.

Given this, it is necessary to determine what is meant by making income available.

As Manuel Faustino teaches in "The duty of withholding tax and other autonomous duties of cooperation in personal income tax," Áreas Editora, Taxation Collection, 2003, pages 45 et seq., "Making available means, for the debtor, to relieve himself of the obligation incumbent upon him without needing the collaboration of the creditor. Which is why it also seems inadmissible, in relation to the debtor, the enforceability of the will of the creditor, if that will does not have a legal justification. Making the payment to which he is bound available to the creditor, by the debtor, constitutes a valid form of performance of pecuniary obligations when the creditor, without justified reasons, does not accept it or does not perform the acts necessary for the performance of the obligation on the part of the debtor."

According to the same author, "Suppose, for example, that on the day of payment of monthly remuneration the employee to whom it is owed is absent for any reason, the recording of that credit in an account existing in the company's accounting in the name of the employee, without any restriction as to withdrawal of the credit, constitutes a situation of making available."

In the concrete case at hand this is not what is verified, since, even invoking the existence of an accounting entry compatible with the financial flow mentioned above, as the Tax and Customs Authority argues, the fact is that it was not demonstrated that the credit in question was available without restrictions in favor of the respective creditors and that they, without any justified reason, did not accept it or did not perform the acts necessary to receive it.

Moreover, beyond the accounting argument, based on the distinction between the economic flow and the financial flow, the Tax and Customs Authority did not invoke other relevant arguments that, in any way, could demonstrate that the income was actually made available to the respective beneficiaries, so it is not certain that such making available did not occur in October 2014.

The Applicant intends to demonstrate that the payment was only made in December 2014, using for this purpose the accounting of the payment operations and the withholding tax.

However, the accounting of the operations proves to be manifestly insufficient to demonstrate the month in which the payments and the consequent withholding tax were made.

In fact, even though the accounting clearly shows the regularity of the operations described above, the fact is that the delivery, whether to the beneficiaries or to the State, of the amounts that prove to be owed may not materialize, namely due to financial unavailability.

Furthermore, even with the operations properly accounted for, this is the boundary normally used to distinguish the crime of abuse of tax trust from mere administrative offense, bearing in mind that in the first case there is actual appropriation of amounts that should be delivered to the State coffers.

Article 74, paragraph 1 of the General Tax Law provides that "The burden of proof of the facts constitutive of the rights of the tax administration or of the taxpayers falls on whoever invokes them."

Article 75, paragraph 1 of the said law stipulates that "The declarations of taxpayers submitted in accordance with the terms provided for by law are presumed to be true and made in good faith, as well as the data and calculations entered in their accounting or books, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends."

The burden of overcoming this presumption falls, in the concrete case at hand, to the Applicant, by virtue of what is stated in the aforementioned article 74 of the General Tax Law, since, contrary to what its accounting shows, it invokes that payment was only made in December 2014 and not in October of the same year.

Accordingly, since the Applicant has failed to demonstrate, in a manner other than through accounting, that payment was made in December, its claim cannot prevail.

  1. Decision

In accordance with the above, this Arbitral Tribunal agrees to dismiss the arbitral request filed as unfounded, maintaining the rejection of the hierarchical appeal and, consequently, the tax assessment relating to the withholding tax on personal income tax for the year 2014.

  1. Value of the Proceedings

In accordance with the provisions of article 315, paragraph 2, of the Civil Procedure Code and article 97-A, paragraph 1, subparagraph a), of the Tax Procedure and Process Code and article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 100,298.92.

  1. Costs

Pursuant to article 22, paragraph 4, of the RJAT, the amount of costs is set at € 3,060.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Applicant.

Lisbon, 15 July 2016

The Arbitrators

(José Baeta de Queiroz)

(Paulo Lourenço)

(Paulo Nogueira da Costa)

Frequently Asked Questions

Automatically Created

What was the IRS withholding tax dispute addressed in CAAD arbitration process 700/2015-T?
The dispute in CAAD process 700/2015-T concerned IRS withholding tax obligations for October 2014. The applicant company submitted a payment slip for €100,298.92 in withholding tax, then replaced it with a corrected slip for €1,631.32, arguing that payments including holiday bonuses (€89,528.72) and employment termination compensation (€11,933.79) were made in December 2014, not October 2014. The Tax Authority maintained that €97,965.00 in withholding tax was due for October 2014 after cancelling €1,681.32 in duplicated amounts.
Who bears the burden of proof regarding income paid or made available for IRS withholding tax purposes in Portugal?
Under Portuguese tax law, the taxpayer (withholding agent) bears the burden of proof regarding when income was actually paid or made available to beneficiaries. In this case, the arbitral tribunal found that accounting records alone were insufficient evidence. The company needed to provide banking documents conclusively demonstrating payment dates. The tribunal specifically noted that despite submitting account extracts, the applicant 'did not provide effective proof of the moment in which it paid, namely through the attachment of banking documents evidencing the amounts paid and the dates on which such payments occurred.'
How does the CAAD tax arbitration procedure work for challenging IRS withholding tax assessments?
The CAAD tax arbitration procedure for challenging IRS withholding assessments follows these steps: (1) file an administrative complaint with the Tax Authority; (2) if rejected, file a hierarchical appeal; (3) after tacit or express rejection of the appeal, request constitution of an arbitral tribunal under RJAT (Decree-Law 10/2011); (4) the CAAD President accepts the request and designates arbitrators; (5) the Tax Authority files an answer; (6) parties may submit written arguments; (7) the tribunal issues a decision within statutory deadlines. The tribunal has jurisdiction over disputes concerning IRS withholding tax legality pursuant to articles 2(1)(a) and 30(1) of RJAT.
What are the legal grounds for contesting IRS source retention liquidations after a tacit dismissal of a hierarchical appeal?
After tacit dismissal of a hierarchical appeal against IRS withholding tax assessments, taxpayers may contest the liquidation by requesting constitution of an arbitral tribunal under articles 2 and 10 of the RJAT (Legal Framework for Tax Arbitration - Decree-Law 10/2011). Legal grounds include: illegality of the assessment act, errors in calculating withholding obligations, incorrect determination of when income was paid or made available, violation of procedural rights, and disputes over the factual basis for the withholding obligation. The request must be filed within the statutory deadline after the tacit rejection is deemed to occur.
What was the outcome of the arbitral decision on IRS withholding obligations for income paid or made available in 2014?
While the complete decision text is not provided, the arbitral tribunal ruled partially in favor of the Tax Authority. The hierarchical appeal resulted in cancellation of €1,681.32 in duplicated withholdings (€606.57 for business income and €1,074.75 for property income already included in another payment slip). However, the Tax Authority maintained the €97,965.00 assessment for the remaining withholding obligations. The tribunal found that the applicant failed to meet its burden of proof regarding when payments were actually made to employees, as it did not provide banking documents evidencing the payment dates, only accounting extracts which were deemed insufficient to establish the timing of income payment or availability.