Summary
Full Decision
ARBITRATION DECISION
Parties
Claimant: A…, Lda. NIPC…, with registered office at Rua … nº…, …-… …
Respondent: Tax and Customs Authority (AT)
I. REPORT
a) On 19 January 2017 the Claimant filed with CAAD a request for arbitration ruling (PPA) requesting, under the Legal Regime for Arbitration in Tax Matters (RJAT), the constitution of a singular arbitration tribunal (TAS).
THE REQUEST
b) The Claimant challenges the decision that rejected its administrative appeal nº …2016…, adopted by the AT on 19.10.2016, and which was notified to it on 21.10.2016, a procedure it filed against the assessments referred to in the following section.
c) It requests a declaration of illegality of the tax assessment acts for Personal Income Tax (Withholding Tax) nº 2016 … in the amount of € 16,902.47 and also of the act of assessment of compensatory interest with the same number, in the amount of € 2,652.53, for a total of € 19,555.00, relating to the fiscal year 2011.
d) It concludes by requesting a declaration of illegality, both of the decision that rejected its administrative appeal and of the Personal Income Tax and compensatory interest assessments.
THE GROUNDS FOR CLAIM
e) The Claimant was subject to an external tax inspection, which resulted in the additional assessment of Personal Income Tax (withholding tax on capital income distributed to shareholders) and compensatory interest as indicated above, having filed an administrative appeal, the rejection of which was notified to it on 21.10.2016.
f) It objects especially to what is stated on page 18 of the Inspection Conclusion Report: "... the income obtained deposited in the identified bank accounts and which remain in the legal sphere of the family, were obtained by its managing shareholders, constituting capital income invested in the company, namely advances on account of profits, under the terms provided for in Article 5 No. 2, paragraph h) of CIRS".
g) Since, recognizing that the Claimant did not have a bank account through which, exclusively, all credits and debits relating to its activity passed, but had 3 bank accounts (one in the name of each managing shareholder and another in the name of the son of both), they do not accept that the AT considers that "... the difference between the amounts deposited in the bank accounts and the amounts declared for tax purposes constitutes omitted income from tax declarations".
h) For the reason that "... it explained why these bank accounts were used and explained that one of the shareholders exercises another professional activity for which he is remunerated" and questions "why did the Tax and Customs Authority not consider that such difference corresponds to remuneration, not of the Author, but of the shareholder for the exercise of his professional activity as a teacher?".
i) It disagrees with the classification made by the AT under paragraph h) of No. 2 of Article 5 of the Personal Income Tax Code, since if "... the Tax and Customs Authority admits that the identified bank accounts, without prejudice to their respective holder, were dedicated to the activity of the shareholder, either through the Claimant here, or through its personal activity as a teacher", "... two scenarios would be possible" ...: "... to consider income taxable in Personal Income Tax the amounts used for personal purposes" or it would be proper to conclude "... that all financial resources not used, are within the sphere of the Claimant, not having been distributed". And it concludes: "what cannot be is to consider that the amounts represent income omitted by the Claimant and simultaneously distributed profits".
j) It refers that "... the amounts that appear in the said bank accounts do not represent income of the Claimant, as has always been demonstrated throughout the inspection procedure, so they could never have been distributed".
k) It invokes that the assessments thus issued suffer from lack of grounds, since in the assessment notice "... all its grounds are not made explicit, either of fact or of law, only resulting from the same that it respects withholding taxes for the month of December 2012 relating to capital - other income", concluding that "... the contested assessment act is totally incomprehensible to a normal recipient and, naturally, also to the now Claimant".
l) It further invokes the "... lack, incongruence or insufficiency of grounds of the inspection conclusion report" which is reflected in the assessment act, for the reasons mentioned above in f) and g).
m) It concludes by invoking "error concerning the assumptions of fact and law" of the assessment act, for the reasons contained in h) to j).
OF THE SINGULAR ARBITRATION TRIBUNAL (TAS)
n) The request for constitution of the TAS was accepted by the President of CAAD and automatically notified to the AT on 31-01-2017.
o) By the Deontological Council of CAAD an arbitrator was appointed who is the signatory of this decision, the parties having been notified thereof on 15.03.2017. The parties did not manifest any desire to refuse the appointment, under the terms of Article 11 No. 1 paragraphs a) and b) of RJAT and Articles 6 and 7 of the Deontological Code.
p) The Singular Arbitration Tribunal (TAS) has been regularly constituted, as of 19.04.2017, to review and decide the subject matter of this dispute (Articles 2 No. 1, paragraph a) and 30 No. 1, of RJAT).
q) All these acts are documented in the communication of constitution of the Singular Arbitration Tribunal dated 19.04.2017 which is hereby reproduced.
r) On 19-04-2017 the AT was notified under the terms and for the purposes of Article 17-1 of RJAT. It responded on 24.05.2017 enclosing the Administrative Process (PA) composed of a computerized file with 202 pages.
s) On 27-06-2017 the hearing of parties was held under the terms and for the purposes of Article 18 of RJAT and for hearing of the witness evidence adduced. The representative of the Claimant requested the use of evidence produced within the scope of case 69/2017-T, relating to the statements of the party made by witness B…, given in the condition of "statements of the party". The Tribunal granted the request and ordered the joining to these records of the minutes of the hearing held in the said case and the sending of the audio file to the procedural participants. The Respondent dispensed with the examination of the adduced witness, which was granted. The Respondent requested the joining to the records of two documents, which was granted. A period for review was granted to the Claimant to comment on the same concurrently with the allegations to be submitted. The Tribunal then notified the Claimant and the Respondent to, in that order and successively, submit written allegations within a period of ten days, with the period for the Respondent beginning to run upon notification of the joining of the Claimant's allegations and gave compliance with the provisions of Article 18 No. 2 of RJAT, designating 18-09-2017 for the purpose of delivering the arbitration decision.
t) It appears in the CAAD's SGP, on 27.06.2017, a record of sending the audio file to the TAS and to the representatives of the parties, containing the statement of B…, as declarant of the party on the matters of Articles 44, 46, 75 and 76, 86, 88, 89, 112, 113, 116 to 119, 123 and 124, 129 and 133 of the request for arbitration ruling.
u) On 07 July 2017 the Claimant submitted written allegations, maintaining what it had already sustained in the request for arbitration ruling. It did not comment on the content of the documents joined by the AT in the hearing of parties held on 27.06.2017. On 05 September 2017 the Respondent counter-alleged, joining again the documents it had joined in the hearing of parties held on 27.06.2017, also maintaining what it had stated in its response. Although this is a repetition of joining documents, the Tribunal notified the Claimant to comment, if it so wished, on the same by order of 05.09.2017, a faculty which it did not exercise.
PROCEDURAL REQUIREMENTS
v) Legitimacy, capacity and representation – The parties are legitimate, possess legal personality and procedural capacity and are represented (Articles 4 and 10 No. 2 of RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).
w) Principle of contradiction – The AT was notified under the terms of section s) of this Report. All procedural documents and all documents joined to the process were made available to the respective counterpart in CAAD's Procedural Management System. Notifications of their joining were always made to both parties.
x) Dilatory exceptions – The arbitration procedure does not suffer from any defects and the request for arbitration ruling is timely since it was submitted within the prescribed period in paragraph a) of No. 1 of Article 10 of RJAT. Moreover, the AT did not raise any challenge regarding the timeliness of submission of the present request for arbitration ruling.
SUMMARY OF THE CLAIMANT'S POSITION
y) The Claimant begins by invoking the lapse of the AT's right to assess the tax invoking Article 45 Nos. 1 and 4 of LGT, stating that "... being at issue an act of assessment of Personal Income Tax for the year 2011, but concretely wrongly assigned to the month of December 2011, the right of the Tax and Customs Authority to assess this tax would lapse, in principle, on 31 December of the year 2015".
z) Then "it considers that throughout the process and through the evidence, documentary and testimonial evidence produced, it has succeeded in demonstrating the facts from which results the illegality, both of the decision of the administrative appeal that precedes, and of the assessment act that also constitutes the subject matter of the present process".
aa) Moreover "it considers that the assessment act which also constitutes the subject matter of the present action is not grounded in the legally required terms, ... first of all because all the evidence is related to an ongoing criminal process, being imported, as if it were dogma, into the tax procedure. Now, the evidence and demonstration of facts must be accomplished in the procedure itself. Especially since the inquiry process has its own characteristics and its own purposes. That is, the facts are analyzed from a perspective different from that which should preside over and has relevance in the tax procedure. In this way, and as it is crystal clear from Articles 355 et seq. of the Criminal Code of Procedure (relevant because the matter at issue is subject to criminal investigation), one cannot say that evidence exists, even. At best there might be indicia, but nothing more, which is not sufficient to motivate an act of additional tax assessment. So much so that Article 100 of CPPT determines the annulment of assessment acts whenever there is doubt about the relevant facts. Now, if in the case at hand we are faced with, at best, mere indication and beginning of proof (as per Article 421 of CPC), one cannot assert that there is certainty regarding the relevant facts".
bb) It refers that "...in the additional Personal Income Tax assessment notified, all its grounds are not made explicit, either of fact or of law, only resulting from the same that it respects withholding taxes for the month of December 2011 relating to capital - other income".
cc) And it continues: "nor are even identified the concrete legal provisions under which the tax, and compensatory interest, are assessed", concluding that "... the assessment acts in question are illegal, by violation of the provision of Article 77 of LGT".
dd) And for the reason that "... the Tax and Customs Authority limits itself to listing mere conclusory statements ..." and to "... assert that the difference between the amounts deposited in the bank accounts and the amounts declared for tax purposes constitutes omitted income from tax declarations", "... in a context in which the Author explained the reason for the use of the said bank accounts and explained that one of the shareholders exercises another professional activity for which he is remunerated", questioning: "why did the Tax and Customs Authority not consider that such difference corresponds to remuneration, not of the Author, but of the shareholder for the exercise of his professional activity as a teacher?" and "... why was it considered that the income was obtained in the month of December of the respective calendar year? Why not in January or March or August?".
ee) And adds: "equally, it cannot be accepted that the Tax and Customs Authority asserts that it assigned all income to the month of December, on grounds of complexity" since "being at issue tax calculated on the basis of a liberatory rate it is imperative that the taxpayer concerned knows the concrete tax period to which the income refers" having in mind that "only with that essential data can a reasoned judgment be made about the additional taxation to which it is subject...", for the reason that, having the AT "... analyzed and described the bank statements, the assignment of the alleged income to the respective tax periods is not only essential to the Author's defense, but was imposed, as this withholding tax on a definitive basis has as many tax periods as there are calendar months".
ff) It especially disagrees with the conclusion adopted by the AT that "considers that the amounts deposited in bank accounts whose holders are the shareholders of the company constitute income subject to Personal Income Tax and taxed through the application of a liberatory rate" and it also disagrees with the fact that the "Tax and Customs Authority ... assigns all the income to the month of December, because "exact distribution of the values obtained by the various months turns out to be a task of high difficulty"".
gg) It further disagrees with the classification made by the AT that the income in question is classifiable under paragraph h) of No. 2 of Article 5 of the Personal Income Tax Code, since if "... the Tax and Customs Authority admits that the bank accounts are dedicated to the activity (of the Claimant and of its managing shareholder as an independent teacher), then it seems proper that it conclude that all financial resources not used, are within the sphere of the Claimant, not having been distributed. What cannot be is to consider that the amounts represent income omitted by the Claimant and simultaneously distributed profits".
hh) It adds: "... even if there were taxable income as intended, which is not conceded, the truth is that the tax facts would have been distributed over the twelve months of the calendar year. As is evident the supposed (but non-existent) income would not have occurred only in the month of December of the respective calendar year, precisely because the analyzed bank accounts do not reflect deposits only in that month. However, the assessment act under analysis was practiced in those terms, that is, on the assumption that the income occurred entirely in the month of December, which does not correspond to the truth (nor even to the truth fictionalized by the Tax and Customs Authority)".
ii) It refers that there is violation of No. 1 of Article 28 of LGT inasmuch as "... the Author at no moment conceived that it had paid income with the said characteristics to the holders of the capital stock, nor did it retain any amount in the form of tax (nor in any capacity to be precise), for subsequent delivery to the State".
jj) It further argues that the AT violated the principle of contradiction enshrined in Article 58 of LGT, inasmuch as it did not carry out "... all the necessary measures for the satisfaction of the public interest and the discovery of the material truth" which "... did not occur in the case at hand, with the assessment acts being illegal by violation of the above-mentioned legal provision".
kk) It concludes by requesting that the contested assessment acts and the order that rejected the administrative appeal be declared non-conforming with the law and be annulled.
SUMMARY OF THE RESPONDENT'S POSITION
ll) The Respondent has another reading of the facts and the law and argues for the dismissal of the request for arbitration ruling.
mm) With regard to the alleged lapse of the right to assess, it refers that "...the legal period contained in No. 1 of Article 45 of LGT was extended under No. 5 of the same legal provision by virtue of the right to assess relating to facts in respect of which criminal investigation was instituted".
nn) And it appears "... in the tax inspection report that "it should be noted that, the present inspection procedure under the orders of service No. OI2013…, OI2014… and OI2014…, is taking place within the scope of the Criminal Inquiry Process …/2013… TDLSB (…)"". "Therefore the general period of 4 years provided for in No. 1 of Article 45 of LGT does not apply to the situation sub judice", applying instead "... the extension of the period provided for in No. 5 of the said legal provision given that the facts that were the subject of investigation in criminal proceedings and in respect of which the said criminal investigation was instituted, are the same facts underlying the contested tax assessment acts, concluding that there has been no lapse of the right to assess the tax".
oo) Regarding the lack of grounds of the Personal Income Tax and interest assessment acts, it begins by stating that "... it is important to distinguish the grounds of the acts, which consists of the reasons of fact and law that sustain them, from the act of notification of those grounds to the taxpayer, with that notification being able to occur with the assessment act or, as is the case in the present records, occur at a moment prior to the assessment act because effected with the notification of the final inspection report", it being certain that the "...grounds of fact and law of the contested assessments are contained in the contents of the final inspection report, a fact which the Claimant cannot be unaware of since the notification of the report expressly states that it will give rise to the issuance of assessments, against which it may react via administrative or contentious means".
pp) Although the "... claimant alleges that it was not notified, under the terms of paragraph a) of No. 1 of Article 60 of LGT, it is verified that it was notified under the terms of paragraph e) of the same legal provision, that is, the now claimant was notified to exercise the right to prior hearing before the conclusion of the tax inspection report ..." that is, "... it was notified by Office nº …, of 20-11-2015, to, if it so wishes, exercise the right to prior hearing on the draft tax inspection report (CTT Record RD … PT), having ... exercised that faculty". And later it was "... notified of the Tax Inspection Report, by Office nº…, of 30-12-2015 (CTT Record RD … PT). The said notification states that "In the near future, the AT services will proceed with the notification of the respective assessment, which will contain the means of reaction, as well as the payment period if applicable"".
qq) Concluding that, in this case, under No. 3 of Article 60 of LGT, there is a dispensation from prior hearing before assessment.
rr) Regarding the lack, incongruence or insufficiency of grounds of the inspection conclusion report, it refers that "a careful reading of the final report allows one to know the concrete facts and the legal reasons that led to the conclusion regarding the need for the contested corrections, as explained below regarding the defect of law by error concerning the assumptions of fact and law", it not being true "... that the AT "limits itself to listing mere conclusory statements", since these follow from a detailed analysis properly documented by the tax inspection".
ss) And it further refers that "regarding the assignment of income to the last quarter of the year, it is, as will be better explained below, a way of taxing the tax owed with reference to the year to which it demonstrably relates, without burdening the taxpayer with compensatory interest owed for delay in assessment when the specific tax period to which it should be assigned is unknown, which is understood since the tax is owed with reference to the moment when the service is provided and not with reference to the moment of its payment" being certain that "the absence of elements that allow ascertaining which tax period the service provision should be assigned to is not preventive of its taxation, even if to the detriment of the State as regards compensatory interest owed, in the last period of the year in which the provision occurred, under penalty of violation of the principle of legality, as well as of tax justice and equality".
tt) Regarding the alleged errors concerning the assumptions of fact and law, it refers that "... contrary to what is alleged by the Claimant, the Tax Authority based itself on the elements available to it, to from a logic easily perceptible conclude regarding the corrections proposed".
uu) And for the reason that, given the facts mentioned in the Inspection Report (ascertained in criminal inquiry) "... from approximately July 2011, the account of C… (son), began to be operated as if it were the account of the Company, and thus began to be because then D… (Father) and wife, were afraid that their personal accounts might be attached, which also allows concluding that until then it was these accounts that were being used as if they were company accounts". "And, this, ... in accordance with the declarations made and which were not put in issue by the Claimant in the present proceedings", having in that conformity, by simple calculation, been deducted from the amounts deposited in the accounts, the income declared "... either by the company or by its shareholder D…(Father), to conclude, seeing no other income exists in the household, so the income considered to be omitted".
vv) And this omitted income "... was assigned to the company, taking into account the declarations referred to, the descriptions of the transfers ascertained in the investigation, the use of the company for the provision of services by its shareholder D… and the fact that he does not maintain asset separation" and "not ... as the Claimant seems to make believe, solely and exclusively from the fact that shareholder D… used the premises of the Claimant".
ww) The reason for taxation, by withholding, as capital income, of the amount of 78,616.15 euros is justified by the fact that there is no "justification for its use within the scope of the company's activity, this amount remaining in the legal sphere of the holders of the bank accounts".
xx) And because such amount was deposited in bank accounts that are not held by the company (but rather held by the shareholders and their son who qualified to be "legal sphere of the family") it was considered that it constituted "... capital income invested in the company, by advances on account of profits, under the terms of paragraph h) of No. 2 of Article 5 of CIRS."
yy) Regarding the invoked illegality of violation of the inquisitorial principle and pursuit of material truth, it refers that "... the Respondent proceeded throughout the entire inspection procedure, in clear respect for the pursuit of the principle of discovery of material truth by carrying out all necessary measures for the same", so much so that "... it resulted from the exercise of the right to hearing, ... that the Claimant brings to the fore no probative means that may sustain its arguments, does not indicate what probative means the AT could use to demonstrate its allegations, which are incompatible with the evidence provided by the AT, which also results from information obtained from the criminal inquiry record that determined the carrying out of the inspection procedure".
zz) Concluding that "failing the Claimant to bring any means of proof, or any indicator that could sustain its allegations, one cannot understand how the inquisitorial principle could lead the Respondent to "investigate," "elements," which were not found to have any support in the facts".
aaa) Regarding the invoked illegality in the assessment of compensatory interest, it refers that "it follows from the corrections made by the AT that the Respondent assessed tax in an amount lower than that legally owed, the delay in delivery of the tax being attributable to the taxpayer, under the terms of No. 1 of Article 35 of LGT"
bbb) Lastly, regarding the invoked illegality in the decision of the administrative appeal, it understands that "... the same should be judged unproven for all the reasons of fact and law that are above referred to".
ccc) It argues for the non-verification of any illegality, either at the level of the contested assessments, or at the level of the grounds of the conclusions of the inspection report, with the maintenance of the assessments in the legal order.
II - QUESTIONS FOR THE TRIBUNAL TO RESOLVE
In accordance with Articles 123 and 124 of CPPT the TAS will review the defects raised by the Claimant in the following order:
1. First, the invoked lapse of the right to assess;
2. Next, the invoked lack of grounds of the Personal Income Tax and compensatory interest assessment acts;
3. Third, the lack, the alleged incongruence and insufficiency of the inspection conclusion report;
4. Fourth, the alleged error concerning the assumptions of fact and law;
5. Then, the invoked violation of the inquisitorial principle and pursuit of material truth;
6. Next, the invoked illegality of the assessment of compensatory interest;
7. And lastly, the illegality of the decision of the administrative appeal.
It appears to us that what is truly at issue in this dispute concerns two aspects, namely:
1. The fact that in the grounds of the inspection conclusion report (which is also the grounds of the assessment acts) evidence obtained in Criminal Inquiry Process nº …/2013… TDLSB was used, in the essential matters, especially the statements of the defendant. This evidence, obtained in criminal proceedings follows the regime of prohibition of evaluation, before being produced and analyzed at trial (Article 355 of CPP). This, it is understood, applies even to statements of defendants that have been produced before a judicial officer (No. 2 of Article 355 of CPP). Furthermore, defendants in criminal proceedings only have the duty to answer truthfully, as to their identity (paragraph b) of No. 3 of Article 61 of CPP). And even if it were evidence already filtered by a judge at trial, that evidence would have to be evaluated in light of the regime of Article 421 of CPC (extraprocessual value of evidence) and No. 3 of Article 355 of CC, that is, only evidence obtained in the statement of a party and in arbitration can be considered valid in another process.
2. Furthermore, there does not exist in the case, (nor was invoked by the AT) the presumption of No. 4 of Article 6 of the Personal Income Tax Code.
On the other hand, the AT bases itself on the fact that there does not exist a bank account (Article 63C of LGT) held by the company, dedicated exclusively to receipts and payments of income and expenses of the Claimant, finding out, however, (once again through merely indicative evidence obtained in the criminal inquiry process) that there were bank accounts of the managing shareholders and of a son of theirs, which were used for that purpose, but not exclusively. And faced with this factuality, it concludes: "in these terms, the income obtained deposited in the identified bank accounts and which remained in the legal sphere of the family, were obtained by its managing shareholders, constituting capital income invested in the company, namely advances on account of profits, under the terms provided for in Article 5, No. 2, paragraph h) of CIRS".
That is, having considered that this income would be subject to Corporate Income Tax (in the sphere of the company), the assumption is made that only because they remain in one or more bank accounts whose holder is not the company, this entails that they constitute income of the holders of the bank accounts. Now, this reasoning – which resembles a presumption - must be confronted, from the outset, with the legal regime of the irregular deposit (ordinary "bank deposit") established in Articles 1205 and 1206 of the Civil Code.
III. PROVEN AND UNPROVEN FACTS.
GROUNDS
Regarding the facts, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and discriminate between proven and unproven matters (as per Article 123, No. 2, of CPPT and Article 607, No. 3 of CPC, applicable by reference of Article 29, No. 1, paragraphs a) and e), of RJAT).
In this way, the facts relevant to the judgment of the case are chosen and delineated in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of law (as per former Article 511, No. 1, of CPC, corresponding to current Article 596, applicable by reference of Article 29, No. 1, paragraph e), of RJAT).
Thus, taking into consideration the positions assumed by the parties and the documentary evidence joined, the following facts were considered proven, with relevance for the decision, the facts listed below, indicating the respective documents (proof by documents), as grounds.
PROVEN FACTS
1. On 27 September 2010, the managing shareholder of the Claimant, D… initiated activity in his own name, falling within the exemption regime under the terms of Article 9 of CIVA and the simplified taxation regime as provided for in Article 28 of CIRS, having declared for the years under analysis, income of category B (independent work income - tutorials) in the amounts of 86,092.75 euros, 32,156.38 euros and 35,903.75 euros, respectively – page 67 of the PA joined by the Respondent with its response;
2. On 07 March 2013 the Tax Inspection Services of the Lisbon Service Directorate issued Service Order nº 012013… for the accreditation of two tax inspectors for an external, general inspection procedure, for the year 2011, relating to the Claimant – as per Article 39 of the apa; Article 4.1 of the response and first part of point II.1 of the inspection report – page 64 of the PA joined by the AT with its response;
3. On 03 July 2014 the external inspection action began with the signature of the Service Order by the managing shareholder D…, with NIF…, having been concluded with the sending to the Claimant of Office nº…, of 20 November 2015, to, if it so wishes, exercise the right to prior hearing on the draft tax inspection report (CTT Record RD … PT), having exercised that faculty – as per Article 40 of the apa; Article 12 page 11/24 of the AT's response and pages 59 and 60 of the PA joined by the AT with its response;
4. On 30 December 2015 the final version of the Tax Inspection Report was sent to the Claimant, by Office nº…, of 30-12-2015 (CTT Record RD … PT), stating that "in the near future, the AT services will proceed with the notification of the respective assessment, which will contain the means of reaction, as well as the payment period if applicable" – as per Article 40 of the apa; Article 12 - page 11/24 of the AT's response and sheets 73 and 74 of the PA joined by the AT with its response.
5. On 10 March 2016 the Claimant was notified of the withholding tax computation note – assessment of Personal Income Tax (Withholding Tax) nº 2016 … in the amount of € 16,902.47 and also of the act of assessment of compensatory interest with the same number, in the amount of € 2,652.53, for a total of € 19,555.00, relating to the fiscal year 2011 – Article 2 of the apa, document nº 1 joined with the apa and page 82 of the PA;
6. On 07 July 2016 the Claimant submitted an administrative appeal which took the number …2016…, which came to be rejected by order of 19 October 2016 of the Chief of the Administrative Justice Division of the Finance Directorate of Lisbon – as per Articles 3 and 4 of the apa; document nº 1 joined with the apa and sheets 84 to 97 of the PA joined by the AT with its response;
7. It appears from the aggregated taxpayer information joined by the AT that the Claimant has as its address Rua … nº … … and the Claimant on its website indicates as its location Rua … nº … …, with 13 rooms on the 1st floor – as per documents joined by the AT on the date of the hearing of parties and joined as annex to the counter-allegations.
8. The Claimant does not possess, as formal holder, a bank account for exclusive use for its receipts and payments, with bank accounts held by its shareholders and managers and the son of both being used for that purpose, since it had the balance of its bank accounts attached by Social Security – as per position generally accepted by the parties in the PPA, in the response and in the allegations and counter-allegations and page 68 of the PA joined by the AT with its response;
9. The inspection report refers to the following regarding the matters of the present process:
III.2. — Description of the facts and legal framework
The Directorate of Fraud Investigation Services and Special Actions (DSIFAE) sent to the Tax Inspection Services a copy of the information nº …/2012, which has as an annex the information from the Financial Information Unit (UIF) of the Judicial Police, where the taxpayer "A…, Lda.", NIPC…, is targeted, and the following taxpayers (all with tax residence at Rua…—…—…, …-… São Domingos de Rana) regarding whom the following is stated:
D…, NIF…, managing shareholder of A…, Lda., exercises professional activity as a tutor and is holder of two demand deposit bank accounts at E… with nos …/2010… and …/2010.. .
It should be noted that, the account nº …/2010… shows movements recorded in the year 2011 and in the first two months of the year 2012, with in 2011, a credit balance of 247,411.36 € and a debit of 248,594.72 € of which 22,946.00 euros were transferred to the account nº …/2010…, held by B… .
...
In 2012, the recorded movements are insignificant, showing a debit and credit of 2,265.52 € and 2,259.10 €, respectively.
B…, NIF —…, managing shareholder of the previously identified company, wife of D…, and holder of the demand deposit bank account at E… with no …/2010… .
During the inspection action, we were informed by the managing shareholder that the transfers made to the account held by B… were used to make payments of company expenses.
B…, NIF —…, student, son of the taxpayers previously identified, and holder of the demand deposit bank account at E… with no …/20010… .
On 25 May 2015, within the scope of Criminal Inquiry Process …/2013 …TDLSB the Criminal Tax Cases Division heard in Defendant Interrogation Record, Mr. D…, B… and C…, having subsequently requested from the Public Prosecutor's Office authorization for extraction of a certificate from the interrogation records of the defendants referred to above.
On 1 July 2015, the request was authorized, the Criminal Tax Cases Division having sent to the Tax Inspection Services, copies of the Interrogation Records.
Having analyzed the Records, we found that D… stated and it appears in the Interrogation Record, that "...approximately in July 2011 when the A… franchising went wrong, the F… attached the family home, a property in Alentejo and the IRS refunds, they thought their accounts would be attached and opened an account in the name of their son, C…, to which all customers began to make payments for services provided by A… ."
Furthermore, in accordance with the declarations made, the bank account with no …/20010… held by C… is operated by D… (father) as if it were the company's account, showing on the credit side in the years under analysis (2011, 2012 and 2013) the sum of the company's income and the category B income obtained by D… in the exercise of his professional activity as a tutor, in the global amounts of 130,463.10 euros, 300,454.92 euros and 155,906.66 euros.
...
Indeed, the Financial Information Unit of the Judicial Police further found from the analysis made to the debit movements:
• that the checks deposited were issued by individuals, to bearer or to the order of D…;
• that the transfers were equally ordered by individuals with accounts in various banks, with descriptions such as "enrollment", "payment", "A…, "monthly fee", "mathematics" "tutorials i', etc.
As for the debit movements relating to the years under analysis, operations were recorded that total in the years 2011, 2012 and 2013, the amounts of 129,566.41 euros, 297,922.20 euros and 14,561 euros, respectively to each of the analyzed statements, the majority being related to transfers ordered via the internet in favor of the account holder.
The transfers made to the accounts of the parents of the holder of the account in question, were used for payment of various expenses, purchases and cash withdrawals via bank checks.
On 01-08-2011, 11 transfers were ordered in favor of individuals in the total of 6,166.48 euros, having been found that the recipients of the same provided services in 2011 to the company A… (category B income).
C… was also holder of a youth account, to which various monthly transfers were made with descriptions such as "catholic", "allowance", "food".
The Criminal Tax Cases Division requested from the Public Prosecutor's Office that it take steps with the Bank of Portugal, for the obtaining of information about which bank accounts were held and authorized to be operated by D…, B… and C… (son of both), as well as the sending of the movements contained in the said accounts.
In February 2015, the requested information was made available to the Tax Inspection Services for purposes of analysis and assessment of the tax situation of A…, Lda..
The UIF information referred to above, was based on the investigation by the Judicial Police of the bank movements recorded in the account held by C…, which proved to be incompatible with their profession as a student, moreover C… appears in the periodic income declaration of the parents (IRS Form 3) as a dependent with no income, instead reflecting the results of the activities of the company "A…, Lda" and the managing shareholder as a tutor.
Indeed, various credit and debit movements were identified that suggest on the one hand, payments to the company by virtue of the description of the transactions and on the other hand, payments in favor of individuals who provided services to it, it also being worth noting the fact that most of the credited funds were transferred in favor of personal accounts of the two shareholders of the mentioned A… .
Thus, having opened the service orders supra identified, it was further found that D… and his wife B…, jointly presented the Income Declaration - Model 3 of IRS for the years 2011, 2012 and 2013 with indication of category A income, dependent work income (Article 20 CIRS) paid by the company "A…, Lda." in the global amounts of 18,000.00 euros 13,317.52 euros and 17,748.24 euros, respectively.
It being noted that, on 27 September 2010, D… initiated activity in his own name, falling within the exemption regime under the terms of Article 9 of CIVA and the simplified taxation regime as provided for in Article 28 of CIRS, having declared for the years under analysis, income of category B (independent work income - tutorials) in the amounts of 86,092.75 euros, 32,156.38 euros and 35,903.75 euros, respectively.
...
However, considering that the only income obtained by the family comes from the provision of tutoring services, which includes those declared as service provision by the company and by the managing shareholder, with no other source being known, it is to be concluded, by comparison of the total entries in the known bank accounts and the total of declared income, that there was a significant omission of income in the years under analysis.
III.2.1. — Omitted income
2011
Thus, and to calculate the value of non-declared income, it was necessary to examine the bank statements held by D…, B… and C… . In order to facilitate the analysis and identification of the various participants, in the chapters that follow the taxpayers will be predominantly identified by their names.
...
As demonstrated, in the year 2011, the identified bank accounts were provisioned with a total amount of 337,72.46 euros.
Considering that, in this year, the company declared income in the amount of 102,596.78 € and that according to the existing elements, customers pay the owed amounts when the invoice is issued to them, then the company obtained receipts in the total of 126,194.03 € and, which corresponds to the totality of the invoice issued, or in another way to the sum of declared income with the VAT assessed.
Similarly, the managing shareholder declared, in his personal sphere, income (exempt from VAT) in the total of 86,092.75 euros.
Thus, by deducting the declared values from the credited amounts in the bank accounts, we are left with 125,436.54 euros, corresponding to the income obtained in 2011.
...
III.2.2. — Destination of the amounts deposited in bank accounts
The information collected, both from the declarations made, and from the analysis itself of the descriptions of the operations recorded in the bank statements (purchase 6385897.54 … Cascais, … pag.tsu, Sdd cob … …, Purchase … …, Payment taxes, Trf p/G…— shop…, … Check Deposit(s) OIC, Trf. p/ insurance calculation) demonstrates that the identified bank accounts served as company accounts, where not only were the received amounts deposited but also, in the same way, payments necessary for the operation of the business were made.
Thus, it became necessary to expand the analysis in order to determine which amounts were used in the business activity and which were, in fact, dedicated to the private sphere of the taxpayer and their family.
The managing shareholder, during the inspection procedure, informed that the amounts transferred to the account of his wife, B…, were used to make the payments necessary for the operation of the tutoring center.
In fact, if we consider that these accounts served as a destination for the receipts of the company, we will also have to take into account that A… had to meet its payment obligations and that for that purpose the bank accounts were also used.
In this way, we will take into account the accounting records made by the accounts technique. That is, for this purpose, we will take into account the fact that, accountingly, all payments were recorded by counterpart of an account 11 - cash, thus being able to assess that the entries made to the credit side of that account correspond to the payments made by A… to meet its obligations. The declaration of the managing shareholder should be noted, a copy of which is attached to this draft report, in which he informs the accounting services
.. "namely to TOC H…, which should make all accounting movements via cash or shareholder loan, since A…Lda, has its bank accounts attached by Social Security (...)".
During the period under analysis, there is a transfer between accounts, with the credits on B's account coming from accounts that are provisioned by A's receipts… .
On the other hand, following this methodology, it is also found that only in 2012 are the amounts transferred to B's account sufficient to make the company's payments, so in the analysis made we took into account the possibility that funds from the remaining bank accounts had been used.
III.2.3 - Calculation of the corrections
To calculate the non-declared income, it was necessary to examine the bank statements made available by the Criminal Tax Cases Division held by D…, B… and C… .
As reported below, it was assumed by the managing shareholder B… that the bank account held in the name of his son C…, was operated in the years 2011, 2012 and 2013, by the category B income obtained by him and subject to assessment under IRS, as well as by the receipt of invoices issued by the company A… .
Under No. 12 of Article 90 of CIVA are exempt from the tax 'lessons taught in person on matters of school or higher education.
Considering that, the activity developed by "A…", consists of academic orientation and guidance, but without recognition by the competent ministry, the classes taught either individually or in groups, do not benefit from VAT exemption, because they do not fit the framework of No. 10 nor No. 12, both of Article 9 of CIVA.
As for lessons taught by the managing shareholder in person, in accordance with the understanding of the Tax Administration, benefit from exemption provided that there is no intervention by any third party.
Now, the managing shareholder provides services in the premises belonging to A…, benefiting from all the logistical support of the company, so there is effectively the intervention of a third party, and, consequently, cannot benefit from exemption
Furthermore, the company and the managing shareholder did not maintain asset separation, since personal bank accounts were used to carry out payments and receipts relating to the business activity developed, having thus not given compliance with the provision of Article 630-C of LGT.
III.2.3.3. Regarding withholding taxes
In the course of point III.2.2 we demonstrated that for part of the amounts deposited in the analyzed bank accounts we did not find justification for its use in the legal sphere of the company, since it was not used in the company's payments.
The ascertained amounts remained, therefore in the bank accounts of the managing shareholders and his son or were used by them for purposes unrelated to the company, within the scope of their particular and family needs.
That is, the family obtained income, coming from the company, higher than that declared under IRS. We recall, at this moment, that when considering the payments made by the company, we already deducted from the final value the payments recorded for the salaries of the managing shareholders.
Thus, it remains for us to exclude from these amounts the value declared by the managing shareholder, D…, as income from his professional activity, which he declared to exercise on his own account and which he included in annex B (professional income) of the income declaration model 3 of IRS. In these terms we have:
[calculation table follows in original]
The analysis made to the bank accounts and to the declarations made by the managing shareholder, demonstrates that the account of C… was mainly used as a pass-through account, from which the amounts were mainly channeled to the parents' accounts, with the declarant themselves having declared that the account was not even operated by him.
Within the scope of Criminal Inquiry Process …/2013… TDLSB, which is taking place in the Lisbon Finance Directorate, authorization was requested from the Public Prosecutor's Office for extraction of a certificate from the interrogation record of defendant D…, B… and C… (son of both), the request being authorized on 1 July 2015, a copy of which is attached to this Draft Report.
When questioned the defendant, D…, on "Who had authorization to operate your son C's… accounts?
He answered that it was himself who had the codes to operate these accounts, his son had no access, nor ever had to these accounts."
"Who made these transfers from your son's account C…, to your account and your wife's, Mrs. B…?
He answered that it was himself, they made transfers to their personal accounts, to face commitments and expenses. He added that he always tried his best to pay his debts to the tax authority and to social security".
When questioned the defendant, C… "did you know that your parents used accounts in your name to deposit money from services provided through the company "A…, Lda.? He answered that he did not know."
In these terms, the income obtained deposited in the identified bank accounts and which remained in the legal sphere of the family, were obtained by its managing shareholders, constituting capital income invested in the company, namely advances on account of profits, under the terms provided for in Article 5, No. 2, paragraph h) of CIRS.
In accordance with Articles 98 and 101 of CIRS this income is subject to withholding on a definitive basis, by the company that places it at their disposal, at the liberatory rate provided for in Article 71 No. 3, paragraph c) of CIRS.
According to the described throughout the report, the bank accounts were used for the company's receipts and payments and simultaneously for payments of private and family expenses, with the business assets becoming confused with the private assets. In this way, exact distribution of the amounts used by the various months turns out to be a task of high difficulty, so we will consider for purposes of preparing the respective correction document, the omission that occurred in the last tax period of each year, considering the absence of detriment from this procedure for the taxpayer.
The failure to assess the withheld tax constitutes a violation of the described articles, incurring punishment under the terms of No. 1 of Article 114 of RGIT.
10. On 20 February 2017 the Claimant delivered to CAAD the present request for arbitration ruling (ppa) – entry register in CAAD's SGP of the request for arbitration ruling.
UNPROVEN FACTS
There is no other factuality alleged that was not considered proven and that is relevant for the resolution of the procedural dispute.
OTHER GROUNDS
We do not see that the statements of the party of the managing shareholder B…, brought anything relevant to the process. The only relevant fact would be to ascertain in which room the managing shareholder exercised, in person, the activity of tutor. However, both the no. of premises …, and no. … B, both at Rua …, in …, are indicated, documentally, as the address or location of the Claimant.
In a perspective of ascertaining which tax regime applies to income obtained by the managing shareholder in his individual activity as a teacher/tutor, the question does not seem to be of great relevance to the object of this process, inasmuch as, be it in what location the said managing shareholder exercises the activity, it is understood, in person, such does not affect that the income thus obtained, whether the activity is exercised physically in the premises of the Claimant, or in his home, or in another location, be taxed under Personal Income Tax.
IV. REVIEW OF THE QUESTIONS FOR THE SINGULAR ARBITRATION TRIBUNAL (TAS) TO RESOLVE
Lapse of the right to assess
The Claimant begins by invoking the lapse of the AT's right to assess the tax invoking Article 45 Nos. 1 and 4 of LGT, referring that "... being at issue an act of assessment of Personal Income Tax for the year 2011, but concretely wrongly assigned to the month of December 2011, the right of the Tax and Customs Authority to assess this tax would lapse, in principle, on 31 December of the year 2015".
But without foundation.
In fact, as stated in the inspection report, the inspection procedure and the assessment here at issue, resulted from evidence obtained in Criminal Inquiry Process nº …/2013 …TDLSB. The Claimant did not indicate whether it had already been dismissed or whether the res judicata of the judgment had occurred, for which reason, being at issue the year 2011 and the assessment here in discussion having been notified in March 2016, the right to assess did not lapse under the terms of No. 5 of Article 45 of LGT.
The invoked lapse of the right to assess is therefore without merit.
Defect of lack of grounds of the Personal Income Tax and compensatory interest assessment acts
We do not see how the Claimant can sustain that the assessment is incomprehensible to a normal recipient and to the Author (Article 15 of the apa). Let us see:
1. It was notified on 03.07.2014 of the draft inspection report, for prior hearing, a faculty which it exercised, where withholding tax assessment is discussed (No. 3 of the proven matters);
2. It was notified on 30.12.2015 of the final inspection report, with critical analysis of its participation in the prior hearing (No. 4 of the proven matters). In the notification office the following is stated: "... in the near future, the AT services will proceed with the notification of the respective assessment, which will contain the means of reaction, as well as the payment period if applicable";
3. On 07.07.2016 the Claimant submitted an administrative appeal against the Personal Income Tax and interest assessment. From the content of the appeal it is not noted that it did not understand perfectly the reason for the assessments. The same can be said regarding the request for arbitration ruling. In both disputes it demonstrated a perfect understanding of what was at issue.
The inspection report, which was the subject of contradiction, meets the requirements of No. 2 of Article 77 of LGT, for which reason there is no defect of lack of grounds of the Personal Income Tax and interest assessment acts here contested, for which reason the request lacks merit regarding this ground.
Lack, incongruence and insufficiency of grounds of the inspection conclusion report
One may disagree with the inspection report, but, given what was stated regarding the previous defect raised, we do not see how one can sustain that it is incongruent or less clear.
Regardless of whether or not the conclusions of the inspection report are correct, the fact is that the reasons of fact and law sustaining the corrections carried out by the AT, at the level of VAT, Corporate Income Tax and withholding taxes, are indicated with some depth.
There is one aspect that is open to question. Considering it proven that the managing shareholder exercised the activity of teacher/tutor in his own name, no effort was made to ascertain (in concrete, through questioning the entities that paid those fees) the income he obtained in that activity, in 2011. In this aspect, it appears that the Claimant has some reason when it raises this question in Article 77 of the request for arbitration: "why did the Tax and Customs Authority not consider that such difference (of the balance of the various accounts – the amounts declared in the income declarations in Corporate Income Tax and Personal Income Tax) corresponds to remuneration, not of the Author, but of the shareholder for the exercise of his professional activity as a teacher?".
Only this question would be more appropriately framed in the analysis of the defect raised of "error concerning the assumptions of fact and law".
The fact that it was considered that the income subject to withholding is relating to December 2011, benefits the Claimant, inasmuch as the compensatory interest will be counted for a shorter period of time, as is stated in the inspection report (see page 18 – sheets 70 verso of the PA).
One may assert that there is some interest (which is not seen, in concrete) for the Claimant in the AT, by months, considering what was or was not income subject to Corporate Income Tax and simultaneously distributed to shareholders, but we do not see that this has the virtual capacity to be considered, by itself, "essential to the Author's defense" as is alleged in Article 86 of the request for arbitration.
The request therefore lacks merit in this part.
Error concerning the assumptions of fact and law.
It appears to us that the Claimant has reason, in a situation in which the presumption of No. 4 of Article 6 of the Personal Income Tax Code is not even invoked, which it affirms in Articles 117 and 118 of the request for arbitration:
"Indeed, if the Tax and Customs Authority admits that the bank accounts are dedicated to the activity, then it seems proper that it conclude that all financial resources not used, are within the sphere of the Claimant, not having been distributed.
What cannot be is to consider that the amounts represent income omitted by the Claimant and simultaneously distributed profits".
In fact, without there being or without invocation of the existence of any "entries in favor of the shareholders" (No. 4 of Article 6 of the Personal Income Tax Code) at the level of accounting, it is very questionable to conclude that a certain bank account balance is the property of its holder, in the concrete situation of this process, where it is admitted that such accounts served to receive and pay amounts of the Claimant company. We do not see how the intention of the shareholders to spend that amount, at least globally, in the payment of their personal life expenses was ascertained.
Then there is another vulnerability that appears to be determinative in the level of reasoning expounded in the inspection report, in the part transcribed in Article 44 of the request for arbitration:
"... the income obtained deposited in the identified bank accounts and which remain in the legal sphere of the family, were obtained by its managing shareholders, constituting capital income invested in the company, namely advances on account of profits, under the terms provided for in Article 5, No. 2, paragraph h) of CIRS" (as per page 18 of the Inspection Report Conclusions – sheets 70 verso of the PA)".
First, the "legal sphere of the family" would remain affected by any balance of any bank account, of which the Claimant were holder, since it could be operated, just as the ones at issue in this process, by the managing shareholders and could be so for the same expenses.
We believe that a correspondence is made between "legal sphere of the family" and "family property" since the bank accounts have as holders the managing shareholders and the son of both. Hence it having been considered that the balance in December 2011 was capital income of the managing shareholders, solely because these are amounts deposited in bank accounts that do not have the company as holder.
The nature of the bank deposit contract (irregular deposit – Articles 1205 and 1206 of the Civil Code) will not allow this reasoning.
In the bank deposit of currency (irregular deposit) the property of the deposited money belongs to the depositary, as the bank may use it, consuming it (see annotations 9 and 11 to Article 1205 of CC in Annotated Civil Code by Abílio Neto, 1996, page 774).
The holders of the bank account, within the scope of the right of the depositor to see the deposited amounts returned, can yes operate it according to the contracted terms (joint accounts or solidary accounts). And this operation would always occur or could occur (by managers), in the case of the records, if the bank account had the Claimant company as holder.
We thus verify that the consideration of these amounts as capital income distributed to shareholders, stems from an erroneous assumption of fact which is, in essence, to consider (implicitly) that the balance of the bank accounts – which is admitted to be used for credits and debits of the company – is the property of its holder, thus there was distribution of income. We cannot endorse this understanding, even if implicit, in the concrete case of these records.
Even if it were not so, there still occurs another vulnerability regarding the collection of evidence (of the facts) which is stated textually in the inspection report.
As was already referred to above, in the essential matters, the evidence that grounds the preparation of the inspection report, was obtained in Criminal Inquiry Process nº …/2013… TDLSB, especially the statements of the defendant.
This evidence, obtained in criminal proceedings, follows the regime of prohibition of evaluation, before being produced and analyzed at trial (Article 355 of CPP). This, it is understood, applies even to statements of defendants that have been produced before a judicial officer (No. 2 of Article 355 of CPP).
Furthermore, defendants in criminal proceedings only have the duty to answer truthfully, as to their identity (paragraph b) of No. 3 of Article 61 of CPP).
And even if it were evidence already filtered by a judge at trial, that evidence would have to be evaluated in light of the regime of Article 421 of CPC (extraprocessual value of evidence) and No. 3 of Article 355 of CC, that is, only evidence obtained in the statement of a party and in arbitration can be considered valid in another process.
The use of statements of the defendant, placed in written records, in criminal proceedings, with the nature of an admission (regarding facts admitted that may be prejudicial to him), cannot be used in other judicial proceedings (No. 3 of Article 355 of CC).
It appears to us that the reasons that prevent this use in judicial proceedings should be understood to apply in administrative and gracious tax procedures, including the inspection procedure.
In this circumstance, it appears to us that there is error concerning the assumptions of fact (divergence between the reality and the matters of fact used in the inspection report, in the part in which the managers of the company were considered, implicitly, as owners of the balance of the bank accounts in disregard of the regime of Articles 1205 and 1206 of CC) and error concerning the assumptions of law or at least, error of law regarding the facts (error in the interpretation and application of legal norms, in the part in which evidence was collected in dissonance with Article 355 of CPP, with Article 421 of CPC and with No. 3 of Article 355 of CC).
Wherefore the request for arbitration must proceed.
Since one of the defects charged to the grounds of the inspection report and to the grounds of the assessment acts obtains, it would become pointless to review the other defects adduced: violation of the inquisitorial principle and pursuit of material truth; illegality of the assessment of compensatory interest and illegality of the decision of the administrative appeal.
V - RULING
On the grounds and for the reasons set out above, it is decided:
1. To declare as procedent the request for declaration of illegality of the tax assessment acts for Personal Income Tax (withholding taxes) nº 2016 … in the amount of € 16,902.47 and also of the act of assessment of compensatory interest with the same number, in the amount of € 2,652.53, for a total of € 19,555.00, relating to the fiscal year 2011.
2. To declare as procedent the request for declaration of illegality of the administrative appeal nº …2016… of 19.10.2016, adopted by the AT, and which was notified to it on 21.10.2016, the procedure it filed against the assessments referred to above, proceeding to its annulment.
Value of the case: in accordance with the provision of Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings (and paragraph a) of No. 1 of Article 97A of CPPT), the value of the case is fixed at 19,555.00 euros.
Costs: under the terms of the provision of Article 22, No. 4, of RJAT, the amount of costs is fixed at € 1,224.00 according to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, charged to the Respondent.
Notify.
Lisbon, 18 September 2017
Singular Arbitration Tribunal (TAS),
Augusto Vieira
Text prepared by computer in accordance with the provision of Article 131, No. 5, of CPC, applicable by reference of Article 29 of RJAT.
The wording of this decision follows the spelling prior to the Orthographic Agreement of 1990.
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