Summary
Full Decision
ARBITRAL DECISION
The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Prof. Doctor António Martins and Prof. Luís Menezes Leitão, appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Court, constituted on 03-12-2014, agree as follows:
1. Report
A..., S.A., NIPC..., with registered office in ..., ..., ..., filed a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of articles 2º and 10º of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as LRAT), in which the Tax and Customs Authority is the Respondent.
The Applicant requests that the partial illegality of the IRC assessment No. 2014..., and the corresponding compensatory interest, relating to the fiscal year 2011 of fiscal group B..., in the total amount of € 2,208,268.41 (€ 2,086,114.61 in tax and € 122,153.80 in compensatory interest), be declared, with its consequent annulment in that part, for violation of law and the principle of legality, with all legal consequences, namely the reimbursement of € 2,208,268.41 to the applicant, plus statutory indemnifying interest accrued from 05-08-2014 until complete reimbursement.
Alternatively, the Applicant requests that the partial illegality of the aforementioned assessment and corresponding compensatory interest in the total amount of € 1,875,155.61 (€ 1,771,428.46 in tax and € 103,727.15 in compensatory interest) be declared, with only € 333,112.80 (€ 314,686.15 in tax and € 18,426.65 in compensatory interest) of the proportional share of the assessment being the subject of this proceeding remaining intact, with its consequent annulment in that part, for violation of law and the principle of legality, with all legal consequences, namely the reimbursement of € 1,875,155.61 to the applicant, plus statutory indemnifying interest accrued from 5 August 2014 until complete reimbursement.
The Applicant further states that with respect to an amount of € 1,260,003.75, to which compensatory interest of € 73,780.33 corresponds, totaling € 1,333,784.08, there is also at issue the application to RFAI acquired prior to 2011 of legal restriction that only came into effect in 2011 (in addition to questions concerning the special margin in the context of RFAI for use of 25% of IRC collection and, in any case, the calculation method of the general margin of 10% provided for in article 92º of the CIRC).
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 03-10-2014.
Pursuant to the provisions of subparagraph a) of no. 2 of article 6º and subparagraph b) of no. 1 of article 11º of the LRAT, the Ethics Council:
I. Appointed the arbitrators of the collective arbitral tribunal: Councillor Jorge Lino Ribeiro Alves de Sousa (President), Prof. Doctor António Martins and Prof. Doctor Luís Menezes Leitão, who communicated acceptance of their assignment within the applicable deadline; and
II. Notified the parties of such appointment on 18-11-2014.
As the Parties did not express an intention to challenge the appointment of the arbitrators, pursuant to the combined provisions of article 11º, no. 1, subparagraphs a) and b) of the LRAT and articles 6º and 7º of the Ethics Code, the collective Arbitral Court was constituted on 05-12-2014, in accordance with the provision in subparagraph c) of no. 1 of article 11º of the LRAT.
The Tax and Customs Authority responded, raising the exception which it termed the "incompetence of the Arbitral Court to assess the partial assessment act – subject of the present request for arbitral ruling and/or the non-reviewability of such act" and defending the lack of merit of the request for arbitral ruling.
By order of 05-02-2015, the President of the Ethics Council of CAAD appointed Councillor Jorge Lopes de Sousa to replace Councillor Jorge Lino Alves de Sousa, given the incapacity that affected him.
By order of 06-02-2015, it was decided that the Response of the Tax and Customs Authority was filed in a timely manner, the holding of the meeting provided for in article 18º of the LRAT was dispensed with, and it was decided that the proceeding continue with written submissions.
The Parties filed submissions.
The Parties enjoy legal personality and capacity, are legitimate and are duly represented (articles 4º and 10º, no. 2, of the same statute and article 1º of Ordinance No. 112-A/2011, of 22 March).
The proceeding does not suffer from any nullities.
By decision of 05-05-2015, it was decided to dismiss the exceptions raised by the Tax and Customs Authority as lacking merit and, as to the merits of the case:
a) To dismiss as lacking merit the request for declaration of partial illegality of the IRC assessment No. 2014..., and the corresponding compensatory interest, relating to fiscal year 2011;
b) To dismiss as lacking merit the request for reimbursement of amount paid and indemnifying interest.
The Applicant filed a challenge of the aforementioned arbitral decision with the Constitutional Court, which gave rise to case No. 486/15.
By decision No. 309/2018, delivered on 07-06-2018, the Constitutional Court came to assess that challenge, deciding, among other things, the following:
b) To declare unconstitutional, for violation of the principle of protection of legitimate expectations, inherent in article 2º of the Constitution of the Portuguese Republic, the norm extracted from no. 1 of article 92º of the IRC Code, in the version introduced by no. 1 of article 99º of Law No. 55-A/2010, of 31 December, in the interpretation according to which the margin of IRC collection susceptible to be used by the deduction from IRC collection granted under the Tax Regime for Support to Investments (RFAI), approved by Law No. 10/2009, of 10 March, for investments made before the entry into force of that amendment is reduced to 10%.
c) Consequently, grant the challenge and order reform of the arbitral decision appealed against in accordance with this decision on unconstitutionality.
This decision became final, as stated in the order by which it was sent to CAAD.
No. 2 of article 80º of the Law on Organization, Functioning and Procedure of the Constitutional Court (Law No. 28/82, of 15 November, in the version of Organic Law No. 1/2018, of 19 April) establishes the following:
If the Constitutional Court grants the challenge, even if only partially, the case shall be returned to the court from which it came, so that this court, as appropriate, shall reform the decision or cause it to be reformed in accordance with the judgment on the question of unconstitutionality or illegality.
Thus, although the Arbitral Court has long been dissolved, it follows from this norm that it shall be reconstituted for the purpose of reformulating the decision, which is done on the following terms.
2. Substantive Law Matters
The issue at stake in this proceeding is the challenge of the IRC assessment and consequent municipal surcharge act, and corresponding compensatory interest No. 2014... relating to fiscal year 2011 (see Doc. No. 1, attached to the initial petition).
In fiscal year 2011, article 92º of the CIRC at the date of the facts, which was that of Law 55-A/2010, of 21 December, provided as follows:
"1 — For entities that exercise, as their principal activity, a commercial, industrial or agricultural activity, as well as non-residents with a permanent establishment in Portuguese territory, the tax levied pursuant to no. 1 of article 90º, net of the deductions provided for in subparagraphs a) and b) of no. 2 of the same article, cannot be less than 90% of the amount that would be determined if the taxpayer did not benefit from fiscal benefits and the regimes provided for in no. 13 of article 43º and in article 75º.
2 — The following fiscal benefits are excluded from the provisions of the preceding number:
a) Those of a contractual nature;
b) The system of fiscal incentives for business research and development II (SIFIDE II);
c) The fiscal benefits to free trade zones provided for in articles 33º and following of the Tax Benefits Statute and those operating by tax rate reduction;
d) Those provided for in articles 19º, 32º and 42º of the Tax Benefits Statute".
Likewise, article 3º of the Tax Regime for Support to Investments (RFAI), approved by article 13º of Law 10/2009, of 10 March, provided at that date as follows:
Article 3º
Fiscal Incentives
1 – Taxpayers subject to IRC resident in Portuguese territory or having a permanent establishment there, who exercise as their principal activity a commercial, industrial or agricultural activity covered by no. 1 of the preceding article and who make, in 2009, investments considered relevant, are granted the following fiscal benefits:
a) Deduction from IRC collection, up to 25% of the same, of the following amounts, for investments made in regions eligible for support under incentives with regional purpose:
i) 20% of the relevant investment, with respect to investment up to the amount of € 5,000,000;
ii) 10% of the relevant investment, with respect to investment of value exceeding € 5,000,000;
b) Exemption from municipal property tax, for a period of up to five years, with respect to properties owned by it that constitute relevant investment;
c) Exemption from municipal tax on costly transfers of real property with respect to acquisitions of properties that constitute relevant investment;
d) Exemption from stamp duty with respect to acquisitions of properties that constitute relevant investment.
2 – The deduction referred to in subparagraph a) of the preceding number is made in the assessment relating to the taxation period that begins in 2009.
3 – When the deduction referred to in the preceding number cannot be made in full due to insufficiency of collection, the amount not yet deducted may be so, under the same conditions, in the assessments of the four following taxation periods.
4 – For purposes of the provisions of subparagraphs b) and c) of no. 1, the exemptions provided for therein are conditional upon recognition, by the competent municipal assembly, of the interest of the investment for the region.
5 – The total amount of fiscal incentives granted pursuant to the preceding numbers cannot exceed the amount that results from the application of the maximum limits applicable to investment with regional purpose for the period 2007-2013, in force in the region in which the investment is made, contained in article 7º.
It is thus evident that in subparagraph a) of no. 1 of article 3º of the RFAI a maximum percentage of annual deduction from IRC collection of 25% is established, which implies that IRC collection could not drop below 75% of what the collection would be without RFAI.
By contrast, article 92º of the CIRC regulates, in generic terms, the maximum percentage of annual reduction of IRC collection resulting from the use of various fiscal benefits and regimes provided for in no. 13 of article 43º and in article 75º of the same statute. What article 92º of the CIRC provides is that minimum IRC collection cannot be less than 90% of what collection would be without the application of fiscal benefits or other regimes already mentioned. Only the fiscal benefits referred to in its no. 2 are excepted.
The percentage of minimum collection contained in article 92º of the CIRC has been increased several times. Initially, in the version given to what was then article 86º of the CIRC by Law 55-B/2014, of 30 December, this percentage was 60%. Subsequently, through Law No. 3-B/2010, of 28 April, the minimum collection percentage was increased to 75%. Finally, through Law No. 55-A/2010, of 31 December 2010, this percentage was further increased to 90%. Thus, when the CIRC and RFAI norms emerged, they could coexist perfectly, since initially there would be a deduction limit percentage of 25% for RFAI and a percentage of 40% for IRC in general, these two percentages then coinciding from April 2010 onwards. Only from 2011 onwards did the issue arise, with the elevation of the minimum IRC collection percentage to 90%. However, the same Law 55-A/2010, of 31 December, which amended article 92º of the CIRC, also renewed the RFAI for 2011.
As stated, the Constitutional Court in decision 309/2018 decided that it is "unconstitutional, for violation of the principle of protection of legitimate expectations, inherent in article 2º of the Constitution of the Portuguese Republic, the norm extracted from no. 1 of article 92º of the IRC Code, in the version introduced by no. 1 of article 99º of Law No. 55-A/2010, of 31 December, in the interpretation according to which the margin of IRC collection susceptible to be used by the deduction from IRC collection granted under the Tax Regime for Support to Investments (RFAI), approved by Law No. 10/2009, of 10 March, for investments made before the entry into force of that amendment is reduced to 10%".
The Tax and Customs Authority, in the contested assessment, applied the new 90% limit introduced in this article 92º, no. 1, of the CIRC by Law No. 55-A/2010, of 31 December, instead of the 25% limit that appeared in the version of Law No. 3-B/2010, of 28 April, thus considering that only 10% of collection could be used for deduction under RFAI, instead of 25% of this collection that resulted from the preceding version.
For this reason, by force of the finality of the decision of the Constitutional Court, it must be concluded that the contested assessment suffers from a defect of violation of law, in the respective part, which justifies the partial annulment of the contested assessment.
4. Reimbursement of Amount Paid and Indemnifying Interest
The Applicant requests reimbursement of the amount of € 2,208,268.41, plus statutory indemnifying interest accrued from 05-08-2014 until complete reimbursement.
In accordance with the provision in subparagraph b) of article 24º of the LRAT, the arbitral decision on the merits of the claim which is not subject to challenge or appeal binds the Tax Administration from the end of the period provided for challenge or appeal, and this administration must, in the exact terms of the merit of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary execution of decisions of tax courts, "restore the situation that would exist if the tax act subject of the arbitral decision had not been carried out, adopting the necessary acts and operations for this purpose", which is in line with the provision in article 100º of the LGT [applicable by force of the provision in subparagraph a) of no. 1 of article 29º of the LRAT] which establishes that "the tax administration is obliged, in case of total or partial success of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject of the dispute, including the payment of indemnifying interest, if applicable, from the end of the period for execution of the decision".
Although article 2º, no. 1, subparagraphs a) and b) of the LRAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral courts operating in CAAD, making no reference to condemnatory decisions, it should be understood that the powers granted to tax courts in judicial challenge proceedings are comprised within their jurisdiction, and this is the interpretation that is in line with the meaning of the legislative authorization on which the Government based itself to approve the LRAT, which proclaims, as the first directive, that "the tax arbitration proceeding must constitute an alternative procedural means to the judicial challenge proceeding and to the action for recognition of a right or legitimate interest in tax matters".
The judicial challenge proceeding, although essentially a proceeding for annulment of tax acts, admits condemnation of the Tax Administration to payment of indemnifying interest, as can be inferred from article 43º, no. 1, of the LGT, in which it is established that "indemnifying interest is due when it is determined, in a gracious claim or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount exceeding the legally due amount" and from article 61º, no. 4 of the CPPT (in the version given by Law No. 55-A/2010, of 31 December, to which corresponds no. 2 in the original version), which provides that "if the decision that recognized the right to indemnifying interest is judicial, the payment period is counted from the beginning of the voluntary execution period".
Thus, no. 5 of article 24º of the LRAT, in stating that "payment of interest is due, regardless of its nature, in accordance with the terms provided for in the general tax law and in the Tax Procedure and Process Code", should be understood as permitting recognition of the right to indemnifying interest in the arbitration proceeding.
On the other hand, as the right to indemnifying interest depends upon the right to reimbursement of amounts paid unduly, which are its calculation basis, the possibility of recognition of the right to indemnifying interest necessarily encompasses the possibility of assessment of the right to reimbursement of such amounts.
However, condemnation to reimbursement and payment of indemnifying interest should only be pronounced if the proceeding provides all necessary elements, since this is a matter that, if not decided in an annulment proceeding, should be decided in execution of judgment pursuant to articles 100º of the LGT, 24º, no. 1, of the LRAT and 61º of the CPPT.
Thus, it is appropriate to assess the request for reimbursement and payment of indemnifying interest.
4.1. Request for Reimbursement
The amounts of RFAI susceptible to deduction from IRC collection, when they could not be made in full due to insufficiency of collection, could still "be so, under the same conditions, in the assessments of the four following taxation periods" (no. 3 of article 3º of RFAI, approved by article 13º of Law 10/2009, of 10 March), so that only with complete knowledge of the deductions made or not in the four taxation periods following 2011 can it be concluded that reimbursement is necessary.
Thus, as it does not result from the established facts whether the amounts that could be deducted from IRC collection for fiscal year 2011 were or were not subsequently deducted from the collection of subsequent years, it cannot be concluded that full or partial reimbursement is necessary for such restoration.
This is a matter that does not fall to this Arbitral Court to decide and which is the responsibility of the Tax and Customs Authority to decide in execution of judgment, in accordance with article 24º, no. 1, of the LRAT.
This request therefore lacks merit, without prejudice to reimbursement, without prejudice to any eventual recognition that must be made in execution of this decision.
4.2. Indemnifying Interest
Article 43º, no. 1, of the LGT establishes that "indemnifying interest is due when it is determined, in a gracious claim or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount exceeding the legally due amount".
The only defect that justifies the annulment of the contested assessment, in the part that is the subject of this proceeding, is that of unconstitutionality of article 92º, no. 1, of the CIRC, in the version of Law No. 55-A/2010, when applied to investments covered by RFAI carried out before its entry into force.
As the Supreme Administrative Court has been consistently deciding, in cases of annulment of assessments for defects resulting from unconstitutionality of tax norms applied therein, the assessments do not suffer from any error attributable to the services of the Tax and Customs Authority, as this cannot refuse to apply ordinary law based on unconstitutionality, outside cases in which it is declared with general binding force and cases of directly applicable constitutional norms) and, for this reason, there is no right to indemnifying interest, in accordance with the provision in article 43º, no. 1, of the LGT [1].
The grounds for this jurisprudence are as follows:
In that case, and unless there is at issue a breach of directly applicable and binding constitutional norms, such as those referring to rights, freedoms and guarantees (see article 18º, no. 1, of the CRP), the TA cannot refuse to apply the norm based on unconstitutionality (On this matter of interest, see the opinions of the Advisory Council of the Office of the Attorney General referred to in the Collection of Opinions of the Office of the Attorney General, volume V, points 10, 3, 3.2 – respectively, with the headings "Review of constitutionality", "Subsequent review" and "(Non)application of unconstitutional norm (powers and duties of Public Administration)" – whose doctrine we follow). The Administration in general is subject to the principle of legality, constitutionally established and the TA is subject to it also by force of the provision in article 55º of the LGT.
In our view, the TA should await the declaration of unconstitutionality with general binding force, to be issued by the Constitutional Court (TC), pursuant to article 281º of the CRP.
As VIEIRA DE ANDRADE says, "This conflict [between constitutionality and the principle of legality] cannot be resolved through the automatic prevalence of constitutional law over statutory law. This is not what is at issue, because what is at stake is not the constitutionality of the law, but the judgment that administrative bodies may make about that constitutionality. On the one hand, the Administration is not an organ for review of constitutionality; on the other hand, the subjection of the Administration to law aims not only at protection of the rights of individuals, but also at defense and pursuit of public interests [...]. Granting the administrative power unlimited powers to review the unconstitutionality of the laws it applies would lead to administrative anarchy, would reverse the Law-Administration relationship and would directly undermine the principle of separation of powers, as established in our Constitution" (Constitutional Law, Almedina, 1977, p. 270).
In the same sense, JOÃO CAUPERS states that "the Administration does not, in principle, have the competence to decide not to apply norms whose constitutionality raises doubts for it, unlike courts, to whom falls the task of diffuse and concrete review of constitutional conformity, as shown by the differences between articles 207º [now 204º] and 266º, no. 2, of the Constitution. While the former prevents courts from applying unconstitutional norms, the latter stipulates the subjection of administrative bodies and agents to the Constitution and law.
It is clear that the essential difference between the two provisions stems precisely from the fact that it was not intended to entrust the Administration with the task of review of constitutionality of laws. The performance of such a function by it must be seen as exceptional" (Fundamental Rights of Workers and the Constitution, Almedina, 1985, p. 157).
We thus conclude that in Portuguese Constitutional Law there is no possibility of the Administration refusing to comply with a norm it considers unconstitutional, substituting itself for the organs of review of constitutionality, unless there is at issue a violation of constitutionally enshrined rights, freedoms and guarantees, which is manifestly not the case when at issue is the application of a norm possibly violating the principle of non-retroactivity of tax law.
In line with this jurisprudence, the request for indemnifying interest must be dismissed as lacking merit.
5. Decision
In accordance with the above, the arbitrators on this Arbitral Court agree to:
a) Dismiss as lacking merit the exceptions raised by the Tax and Customs Authority and, as to the merits of the case:
i) Grant the request for declaration of partial illegality of the IRC assessment No. 2014..., and the corresponding compensatory interest, relating to fiscal year 2011;
ii) Dismiss as lacking merit the request for reimbursement of amount paid, without prejudice to any eventual recognition of such right in execution of this decision;
iii) Dismiss as lacking merit the request for indemnifying interest.
6. Value of the Case
In accordance with the provision in article 306º, no. 2, of the CPC and 97º-A, no. 1, subparagraph a), of the CPPT and 3º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 2,208,268.41.
7. Costs
Pursuant to article 22º, no. 4, of the LRAT, the amount of costs is fixed at € 28,764.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Lisbon, 03-07-2018
The Arbitrators
(Jorge Lopes de Sousa)
(António Martins)
Dissenting as to subparagraph b), since I consider that from the moment the Arbitral Court declares the annulment of the assessment, following the decision of the Constitutional Court, it must also determine the restitution of the tax possibly paid, to be calculated in execution of judgment. It does not seem to me, therefore, that that request could have been dismissed as lacking merit.
I therefore vote that this decision be partially dissenting.
(Luís Menezes Leitão)
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