Process: 702/2015-T

Date: June 8, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

Process 702/2015-T concerns a dispute over IRS withholding obligations under Article 99 of the CIRS involving employment, professional, and property income. The claimant company contested a withholding tax assessment of €72,160.66 for September 2014, arguing it was issued in error because no remuneration was actually paid to workers during that month. The company processed payroll and made accounting entries recording wages payable and corresponding withholdings, but the actual payment to employees only occurred in December 2014, when the company declared and withheld the relevant amounts. The claimant argued that under Article 99(1) CIRS, the withholding obligation arises only upon payment or placement of income at the disposal of beneficiaries, not merely upon accounting recognition. The company maintained it properly applied the accrual accounting principle required by accounting standards and tax law, recording expenses in the period to which they relate regardless of payment date. It contended that booking entries in account 231 'Remuneration payable' does not constitute placement at disposal, as evidenced by workers' subsequent employment contract resolutions. The Tax Authority partially revoked the contested assessment during proceedings under Article 13 RJAT, reducing it to €70,518.42. The claimant argued that maintaining the assessment would result in double taxation, as the September 2014 remuneration withholdings were declared and are being paid under a payment plan for December 2014. The case centers on the critical distinction between accounting recognition of wage obligations and the actual triggering event for withholding tax obligations, raising fundamental questions about the interaction between accounting principles and tax withholding rules under Portuguese law.

Full Decision

ARBITRAL DECISION

Claimant: A… – …, S.A.

Respondent: Tax and Customs Authority

REPORT

A… – …, S.A., Tax Identification Number …, with registered office at Rua …, no. …, (hereinafter referred to only as the Claimant), submitted, on 26-11-2015, a request for the constitution of an arbitral tribunal, in accordance with articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as LRAT), in conjunction with article 102 of the Tax and Procedural Code, against the Tax and Customs Authority (hereinafter referred to only as the Respondent).

The Claimant seeks a declaration of illegality of the decision of tacit dismissal of the hierarchical appeal filed against the decision of dismissal of the administrative review submitted with reference to the assessment no. …, relating to withholdings at source of Personal Income Tax (IRS) for the month of September 2014, in the amount of Euro 72,160.66, and, as a consequence, the annulment of the said tax assessment.

The request for constitution of the arbitral tribunal was accepted by the esteemed President of CAAD on 27-11-2015 and notified to the Tax and Customs Authority on that same date.

On 18-01-2016, the Tax and Customs Authority informed CAAD that, pursuant to article 13 of the LRAT, the tax acts subject to the present request for arbitral ruling were partially revoked, maintaining the dismissal of the hierarchical appeal and the assessment of withholdings at source for IRS in the amount of Euro 70,518.42.

On that same date, the Claimant was notified to submit observations on the partial revocation of the contested tax acts, and informed CAAD that it intended to proceed with the case for review of the non-revoked portion.

In accordance with the provisions of subsection a) of no. 2 of article 6 and subsection b) of no. 1 of article 11 of the LRAT, the Deontological Council appointed as arbiters of the collective arbitral tribunal the undersigned signatories, who communicated acceptance of the appointment within the applicable timeframe.

On 21-01-2016 the parties were duly notified of this appointment, and neither manifested any intention to challenge the appointment of the arbiters, in accordance with the combined provisions of article 11 no. 1, subsections a) and b) of the LRAT and articles 6 and 7 of the Deontological Code.

In accordance with the provisions of subsection c) of no. 1 of article 11 of the LRAT, the collective arbitral tribunal was constituted on 05-02-2016.

Notified to submit observations on the request filed by the Claimant, the Respondent submitted its response, arguing for the dismissal of the request filed by the Claimant.

By order of 17-03-2016, the meeting provided for in article 18 of the LRAT was dispensed with, and the parties were granted a timeframe for submissions.

CLAIMANT'S REQUEST

In the request for arbitral ruling that gave rise to the present proceedings, the Claimant requested (i) a declaration of illegality of the dismissal of the hierarchical appeal filed following the dismissal of the administrative review presented with reference to the withholding at source guide for IRS for the month of September 2014 bearing number …, in the amount of Euro 72,160.66, and, as a consequence, (ii) the annulment of the said withholding at source payment guide.

To substantiate such request, the Claimant alleged, in summary, that:

a) The withholding at source guide for IRS for the month of September 2014 bearing number …, in the amount of Euro 72,160.66, was issued by error.

b) During the period in question, no remuneration was paid to workers, so the declared amount of IRS withholdings and surtax, totalling Euro 70,413.00, was not due.

c) The withholdings at source corresponding to professional income and property income, in the total amount of Euro 1,642.24, were effectively due, and the corresponding amount was declared and paid through the withholding guide no. ….

d) With regard to employment income, although the Claimant processed payroll and recorded the amounts payable as remuneration in account # 231 "Remuneration payable" and recorded the amount of withholdings to be remitted to the State in accounts # 2421 "Withholdings on income tax – Dependent work" and # 2425 "Withholdings on income tax – Surtax", such amounts were not paid to workers in September.

e) The remuneration for the month of September 2014 was only paid in December 2014, and thus the obligation to withhold tax only arose at that moment.

f) Accordingly, in the withholding guide no. …, relating to the month of December 2014, the Claimant declared the withholdings made in that month relating to remuneration for September 2014.

g) The guide relating to the month of December 2014 is being paid under a payment arrangement agreement entered into with the Tax and Customs Authority.

h) The refusal to annul the said guide no. … implies payment in duplicate of the same tax debt.

i) In accordance with no. 1 of article 99 of the IRS Code, the obligation to withhold tax on account of IRS with respect to employment income arises only at the moment of its payment or placement at the disposal of the respective beneficiaries.

j) The Tax Authority itself acknowledged that the remuneration for September 2014 was not paid in that month, so the tax act can only be upheld if it is concluded that the remuneration was placed at the disposal of the workers.

k) Mere payroll processing with accounting entries in account # 63 "Personnel expenses" on behalf of accounts # 231 "Remuneration payable", "Withholdings on income tax – Dependent work" and # 2425 "Withholdings on income tax – Surtax", does not imply any placement at disposal.

l) The demonstration that, in fact, the remuneration for September 2014 was not placed at the disposal of the workers results from the communications of resolution of employment contracts submitted by the Claimant's workers, pursuant to no. 2 of article 394 of the Labour Code.

m) Furthermore, the Claimant is required to make accounting entries of costs in accordance with the specialization principle, enshrined in the National Accounting Standards (NAS) and in article 18 of the Corporate Income Tax Code.

n) This principle requires the accounting of all expenses and their allocation to the taxation period to which they relate, regardless of the date on which they are paid, so that monthly remuneration due to workers must be accounted for monthly in the corresponding taxation period.

o) Remuneration due to workers, constituting accrued obligations, must be recorded in account # 231 "Remuneration payable" and not in account # 2722 "Creditors for accrued expenses" which is used for recognition of expenses whose costs will only occur in a later period.

p) The obligation to record remuneration payable in account # 231 "Remuneration payable" with reference to the period to which they relate and not in the period in which they were paid also results from the legal requirement that, regardless of payment of remuneration, social security contributions are always due, for the calculation of which the employing entity needs to process the respective salaries.

q) By processing the remuneration for September 2014 as described, although without actual payment to workers, the Claimant complied with the applicable accounting rules, so it cannot be concluded, as the Tax Authority did, that the income is considered placed at the disposal of the workers in that period.

r) By refusing to annul guide no. …, the Tax Authority requires the Claimant to pay double the same tax, in clear violation of the principles of legality, contributive capacity and the prevalence of substance over form.

RESPONDENT'S RESPONSE

The Respondent argues for the dismissal of the request filed by the Claimant, in the non-revoked portion under the regime provided for in article 13 of the LRAT, alleging, in brief, that:

a) In accordance with the NAS, accounting entries relating to payroll processing should take into account the corresponding economic and financial flows, varying according to the same.

b) Thus, when remuneration is paid/placed at disposal in the periods to which it relates (economic and financial flows coincide), the accounting treatment will be:

Debit: account 63 – Personnel expenses (for the gross amount)

Credit: account 231 – Remuneration payable (for the net amount)

account 242 – Withholding on income tax (for IRS)

account 245 – Social security contributions (for social security deductions)

c) On the other hand, when remuneration is paid/placed at disposal at a later moment than those to which it relates (economic flow is prior to the financial flow), we would have two moments for accounting entry:

  • In the period to which the salary relates (economic flow):

Debit: account 63 – Personnel expenses (for the gross amount)

Credit: account 231 - Remuneration payable (for the net amount),

account 245 – Social security contributions (for social security deductions)

account 272 – Debtors and creditors for accrued items (for deductions whose payment obligation has not yet occurred, e.g. IRS)

  • In the period in which the salary was paid/placed at disposal (financial flow):

Debit: account 272 – Debtors and creditors for accrued items

Credit: account 242 – Withholding on income tax (for IRS due with payment/placement at disposal)

d) In this way, the recording of the totality of the expense in the period to which it relates is ensured, regardless of when the payment of the expense occurs, giving full compliance with the specialization principle of the accounting periods.

e) It is not the entry in account # 231 "Remuneration payable" that places the remuneration at the disposal of the workers, but rather the credit entry of account # 242 "Withholding on income tax".

f) Upon examination of the accounting extracts attached to the case, it is verified that the Claimant entity made the accounting entry, to the credit of account # 2421 "Dependent work", of the IRS withholding at source affecting the salaries in the periods to which they related.

g) It follows that the salaries were placed at the disposal of the beneficiaries in the month of September 2014, whereby the withholding guide no. ….

h) There will be no duplication of withholdings at source in the months of September and December because the Claimant only made the credit entry in account # 2421 "Dependent work" in the moment to which the remuneration related and never on the date on which it claims it was paid.

i) As for income from business and professional activities, the withholding guide no. … should be corrected to € 105.42, corresponding to the difference between the amount recorded as withholdings made in the month of September 2014 (Euro 672.91) and the amount declared and paid via guide no. … (Euro 567.49).

j) As for the surtax, the obligation to withhold arises at the moment when the income becomes due, even though there is no payment or placement at disposal, as clarified in circular no. 23/2011, of 3 November, from the Office of the Director General.

k) In any case, the Respondent considers that it is not proven in the case that the remuneration for September 2014 was paid in December 2014 and that, consequently, there is duplication of tax.

m) The Claimant itself affirms that its accounting is organized in accordance with NAS rules, which provides for accounts suitable for correct recording of economic and financial movements associated with the payment of remuneration.

n) Now, it is the credit entry in account # 242 "Withholdings on income tax" that identifies the payment/placement at disposal now in dispute.

o) From the examination of the accounting extracts presented by the Claimant it is evident the recording of the income in dispute in the said account # 242 "Withholdings on income tax" with reference to the month of September 2014, which did not occur in December 2014, thus not proving that those incomes were only paid/placed at disposal in the month of December nor the consequent duplication of collection that the Claimant invokes.

p) The request filed by the Claimant should therefore be dismissed, maintaining in the legal order the contested tax acts.

PRELIMINARY RULING

The Arbitral Tribunal has been regularly constituted and is competent.

The parties have tax and judicial capacity and are legitimate (articles 4 and 10, no. 2, of the same decree and article 1 of Ordinance no. 112-A/2011, of 22 March).

The case has no procedural defects and there is no obstacle to the consideration of the merits of the case.

II - GROUNDS

THE FACTUAL MATTER

A. Facts Proven

The following facts are considered proven:

  1. On 17-10-2014, the Claimant submitted the withholding at source guide no. …, in the total amount of Euro 72,160.66, which remains unpaid.

  2. The guide referred to in the previous number corresponded to withholding at source of IRS made during the month of September 2014 on the following categories of income:

a) Dependent work: Euro 66,338.00;

b) Business and professional income: Euro 672.91;

c) Property income: Euro 1,074.75;

d) Extraordinary surtax: Euro 4,075.00.

  1. On 11-12-2014, the Claimant submitted the withholding at source guide no. …, in the total amount of Euro 1,642.24, which was paid.

  2. The guide referred to in the previous number corresponded to withholding at source of IRS made during the month of September 2014 on the following categories of income:

a) Business and professional income: Euro 567.49;

b) Property income: Euro 1,074.75;

  1. With reference to the month of September 2014, the Claimant submitted, on 08-10-2014, the Monthly Statement of Remuneration with identification code no. …, with the following amounts:

a) IRS withholding: Euro 66,338.00;

b) Surtax withholding: Euro 4,075;

  1. The Monthly Statement of Remuneration identified in the previous point was replaced by declaration no. …, filed on 12-01-2015, with the following amounts:

a) IRS withholding: Euro 66,338.00;

b) Surtax withholding: Euro 4,075;

  1. In account # 2311 "Remuneration payable to corporate officers", with reference to the month of September 2014, the Claimant recorded to the credit a total of Euro 4,885.70;

  2. During the month of September, the Claimant did not record any debit movement in account # 2311 "Remuneration payable to corporate officers";

  3. In account # 2312 "Remuneration payable to personnel", with reference to the month of September 2014, the Claimant recorded to the credit a total of Euro 207,629.38;

  4. During the month of September, the Claimant did not record any debit movement in account # 2312 "Remuneration payable to personnel";

  5. In account # 2421 "Withholdings on income tax – Dependent work", with reference to the month of September 2014, the Claimant recorded to the credit a total of Euro 66,338.00;

  6. During the months of September and October 2014, the Claimant did not record any debit movement in the account referred to in the previous point;

  7. In account # 2425 "Withholdings on income tax – IRS Surtax", with reference to the month of September 2014, the Claimant recorded to the credit a total of Euro 4,075.00;

  8. During the months of September and October 2014, the Claimant did not record any debit movement in the account referred to in the previous point;

  9. In account # 24221 "Withholdings on income tax – Self-employed workers IRS", with reference to the month of September 2014, the Claimant recorded to the credit a total of Euro 672.91;

  10. During the months of September and October 2014, the Claimant did not record any debit movement in the account referred to in the previous point;

  11. During the months of November and December 2014, 31 workers of the Claimant presented letters of resolution of the employment contract due to non-payment of remuneration due since September 2014, in accordance with subsection a) of no. 2 of article 394 of the Labour Code.

  12. On 08-01-2015, the Claimant filed an administrative review requesting the annulment of guide no. ….

  13. The administrative review was dismissed by order of 22-05-2015, issued by the Head of the Administrative Justice Division of the Finance Directorate of Lisbon, in a substitutive capacity, pursuant to a delegation of powers.

  14. The Claimant appealed hierarchically against the decision dismissing the administrative review.

  15. The hierarchical appeal is presumed dismissed on 31-08-2015.

  16. Following the filing of the request for arbitral ruling, the Respondent partially maintained the act of tacit dismissal of the hierarchical appeal and the self-assessment of withholding at source of IRS for the month of September 2014 in the amount of Euro 70,518.42.

B. Facts Not Proven

No other facts of relevance to the arbitral decision were proven.

C. Grounds for the Factual Matter

The factual matter determined as proven is based on documentary evidence presented and not contested.

II – GROUNDS (CONTINUED)

THE LAW

Subject Matter of the Dispute

I - The issue to be analyzed concerns the appeal filed by A… – …, SA, against the dismissal of the hierarchical appeal presented following dismissal of the administrative review against the assessment contained in guide no. … relating to withholding at source due from dependent work income for the period of September 2014.

From the documents analyzed and attached to the present proceedings, it appears that all administrative procedures were complied with, however, it must be concluded that the parties advocate two distinct understandings:

a) The Tax Authority argues that "…while they clearly show that the salaries for September were not paid to the employees, they also show that the claimant processed the salaries, thereby placing them, in accordance with the provisions of article 99 of the IRS Code, at the disposal of its workers" (pages 2/3 of the Administrative Justice Division - Finance Directorate of Lisbon, of 4 September 2015), whereby it dismisses the claimant's request for annulment of the said guide.

b) A…, claimant in the present proceedings, considers that the said guide should be annulled, based on illegality through violation of the principle of contributive capacity and duplication of collection, as it argues that the income relating to September 2014 was only effectively paid in December, having, on that date, proceeded to the assessment and payment of the amounts relating to the withholding at source due, in the context of guide … in the total amount of €1,642.24.

II – From what has been stated, it appears to be possible to identify, with some clarity, that the subject of the present dispute comes down to the better interpretation of article 99 no. 1, subsection a) of the IRS Code when it provides that: "1. The following debtors of income are obliged to withhold tax at the moment of its payment or placement at the disposal of the respective beneficiaries: a) dependent work income…".

Let us therefore examine what should be the better understanding of the provision of the cited legal norm:

Meaning, Scope and Reach of the Applicable Legal Norm:

a) The interpreter must seek, in accordance with the systematic order of the elements of interpretation of the law, to grasp the meaning of the norm, especially its useful meaning, or, in the present case, determine when the withholding and delivery of tax at source due for dependent work income should be made;

b) First, at the moment of payment of such income, or, as the law states, at the moment of placing it at the disposal of the respective beneficiaries;

c) From our interpretation of the documents attached to the case, it appears that there is agreement between the Tax Authority and the claimant regarding the non-occurrence of the legal condition that requires the withholding to be made and delivered at the moment of payment of the income;

d) In fact, it appears to be a fact to note that the income was not actually paid in September 2014, despite having been recorded in the relevant books, as if it had been;

e) We must therefore take the next step and verify whether the fact that such income was duly recorded has as a useful effect and capable of being framed within the legal norm, that of having been placed at the disposal of the respective beneficiaries;

f) What it means, in the context of the norm, "… or placement at disposal…." is therefore what needs to be clarified;

g) Placing the income at the disposal of its beneficiary means that the company has, in its treasury, available funds to proceed with payment promptly and at the moment when requested by the beneficiary of the income;

h) Now, in the present case, it does not appear from any of the documents analyzed that the beneficiary of the income requested it or took steps to obtain its payment;

i) Moreover, and to corroborate this understanding, it may be said in analogy that, in the case of fraudulent breach of tax duty, the crime is not completed if the entity, although proceeding with the accounting withholding, verifies that it does not have resources to deliver it to the State, in which case the fact of "improper appropriation", as the typical fact generating the crime, cannot be deemed verified;

j) Thus, we consider that the entity owing the income must proceed with the withholding and its delivery when it pays the income to the beneficiary thereof, or;

k) When it places the income at the disposal of the beneficiary, that is, when it has treasury funds/resources available that allow it to pay the income when and at the moment it is called upon to do so;

l) We have, therefore, that the useful meaning that should be drawn from subsection a) of no. 1 of article 99 of the IRS Code is that the withholding should be made and correspondingly delivered to the State coffers at the moment of payment of the income or of its placement at the disposal of the respective beneficiary; being that:

m) In the present case none of these conditions should be deemed verified;

n) This same assertion is adopted both by the Tax Authority and by the claimant;

o) What means that the Tax Authority, in the context of its understanding, focuses solely on the recording of the corresponding accounts contained in the available accounting elements, which:

p) In our view cannot be framed within the legal conditions justifying the application of the applicable legal norm.

III - DECISION

In accordance with the foregoing, this Arbitral Tribunal agrees to:

A) Judge the request entirely well-founded and, in consequence, decree the annulment of the withholding at source guide no. …, relating to the month of September 2014, as requested, and

B) Condemn the Tax and Customs Authority to pay the costs of the proceedings.

Value of the Case

In accordance with the provisions of article 306, nos. 1 and 2 of the Code of Civil Procedure, approved by Law no. 47/2013, of 26 June, 97-A), no. 1, subsection a) of the Tax and Procedural Code, and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 72,160.66.

Costs

In accordance with articles 12 no. 2, 22 no. 4 of the LRAT, and articles 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings, and Schedule I attached hereto, the amount of the costs is set at €2,448.00, at the charge of the Tax Authority, as previously decided.

Let it be notified.

[Text prepared by computer, in accordance with article 131 of the Code of Civil Procedure, applicable by reference of article 29 no. 1 of the Legal Regime for Arbitration in Tax Matters, with blank lines and revised by the collective of arbiters].

[The preparation of this decision is governed by the orthography prior to the 1990 Orthographic Agreement].

Lisbon, 8-6-2016

The Collective Arbitral Tribunal,

José Poças Falcão
(President)

Maria Celeste Cardona
(Member)

Maria Forte Vaz
(Member)

Frequently Asked Questions

Automatically Created

What is the scope of IRS withholding tax obligations under Article 99 of the CIRS for professional and property income?
Article 99(1) of the CIRS establishes that the obligation to withhold IRS on professional and property income arises at the moment of payment or placement of income at the disposal of beneficiaries. This provision applies to employment income, professional income, and property income. The timing of the withholding obligation is tied to the actual availability of funds to the income recipient, not merely to accounting recognition or accrual of the obligation. The law distinguishes between the accounting requirement to recognize expenses in the period to which they relate (accrual principle) and the tax withholding obligation, which is triggered by the payment event. For employment income specifically, mere processing of payroll with accounting entries does not create the withholding obligation unless the remuneration is paid or effectively placed at the worker's disposal.
How did the CAAD rule on the legality of the IRS withholding tax assessment in Process 702/2015-T?
The complete ruling is not provided in the available excerpt. However, the procedural history shows that the Tax Authority exercised its powers under Article 13 RJAT to partially revoke the contested assessment during arbitration proceedings, reducing the amount from €72,160.66 to €70,518.42. The claimant elected to proceed with arbitration for the non-revoked portion. The case involved a collective arbitral tribunal constituted on 05-02-2016, following the appointment of arbitrators by the Deontological Council. The tribunal dispensed with the hearing under Article 18 RJAT and granted the parties an opportunity for written submissions. The central legal issue concerned whether withholding obligations arose in September 2014 when payroll was processed but remuneration was not paid, or in December 2014 when actual payment occurred.
What procedural steps must a taxpayer follow to challenge an IRS withholding tax assessment through hierarchical appeal and arbitration?
The procedural path for challenging an IRS withholding tax assessment involves three sequential stages: First, the taxpayer must file an administrative review (reclamação graciosa) with the Tax Authority challenging the assessment. Second, if the administrative review is dismissed or denied, the taxpayer may file a hierarchical appeal (recurso hierárquico) to a superior tax authority. Third, if the hierarchical appeal is dismissed (including tacit dismissal through administrative silence), the taxpayer may request constitution of an arbitral tribunal under the RJAT (Decree-Law 10/2011) within the applicable timeframe. The request must comply with Articles 2 and 10 RJAT and Article 102 of the Tax Procedural Code. Upon acceptance by the CAAD President, the Tax Authority is notified and may exercise its right to revoke the contested act under Article 13 RJAT before the arbitral tribunal is constituted.
Under what circumstances can the Tax Authority partially revoke a contested IRS withholding tax assessment during arbitration proceedings?
Under Article 13 RJAT, the Tax Authority may partially or fully revoke contested tax acts during arbitration proceedings after being notified of the arbitration request but before the final decision. In Process 702/2015-T, the Tax Authority exercised this power on 18-01-2016, partially revoking the original assessment of €72,160.66 and reducing it to €70,518.42. When partial revocation occurs, the taxpayer must be notified and given the opportunity to submit observations on whether to proceed with arbitration for the non-revoked portion or accept the partial revocation as satisfactory resolution. This mechanism allows the Tax Authority to correct errors or reconsider positions without requiring full arbitral proceedings, promoting administrative efficiency and potentially reducing litigation costs. The taxpayer retains the right to continue arbitration for any portion of the assessment that remains contested after the partial revocation.
How does the RJAT framework apply to disputes involving IRS source retention on professional and rental income?
The RJAT (Legal Regime for Arbitration in Tax Matters, established by Decree-Law 10/2011) provides the comprehensive procedural framework for resolving tax disputes through arbitration, including those involving IRS withholding obligations on professional and rental income. Under RJAT Articles 2 and 10, taxpayers may request arbitration following exhaustion of administrative remedies (administrative review and hierarchical appeal). The framework establishes the CAAD (Administrative Arbitration Centre) as the administering institution, which appoints arbitrators through its Deontological Council per Article 6(2)(a) and Article 11(1)(b). Arbitral tribunals may be singular or collective depending on the case value and complexity. The RJAT establishes specific timelines for tribunal constitution, party submissions, hearings (which may be dispensed with per Article 18), and final decisions. It grants the Tax Authority the power to revoke contested acts during proceedings under Article 13. The regime applies to disputes concerning the legality of tax assessments, including withholding tax guides, and provides an alternative to judicial review in administrative courts, offering specialized expertise and potentially faster resolution of technical tax disputes.