Summary
Full Decision
ARBITRAL DECISION
CAAD: Tax Arbitration
Process No. 725/2014-T
1. REPORT
A..., taxpayer No. ..., with tax domicile at ..., postal box ..., ... Faro, hereinafter "Claimant", filed a request for the constitution of a Single Arbitral Tribunal, pursuant to Articles 5, 6 No. 2 paragraph a) and 10 No. 1 paragraph a) and No. 2, all of Decree-Law No. 10/2011, of 20 January, hereinafter designated "RJAT"[1].
The Claimant seeks the declaration of illegality and consequent annulment of the self-assessment of Corporate Income Tax (IRC) No. 2007 ..., of 19 February 2007, reported to the year 2004, in the amount of € 48,903.60, following the decision of (partial) dismissal rendered in Hierarchical Appeal No. ...2012..., on 26 June 2014. The Claimant further petitions for the annulment of the respective compensatory interest and the condemnation of the Tax Authority to pay the costs of the proceedings.
In support of its claim, the Claimant alleges, in essence, the following defects:
(a) Omission by the Tax Authority ("TA") of the right to prior hearing in the imputation of the status of joint and several liable party, as manager of assets or rights, for the IRC debt of B... (original taxpayer, hereinafter "B") and, likewise, omission of the right to hearing before the conclusion of the tax inspection procedure and the IRC assessment act.
According to the Claimant, such omissions represent a violation of the principle of participation of interested parties in administrative decisions, enshrined in Articles 267 No. 5 of the Portuguese Constitution ("CRP"), 100 of the Administrative Procedure Code ("CPA"), 60 of the General Tax Law ("LGT") and 60 of the Complementary Regime for Tax Inspection Procedure ("RCPIT");
(b) Lack of competence of the Finance Directorate of Faro to order the internal inspection action that determined the tax assessment act of IRC for "B", whereby the inspection procedure suffers from illegality in light of the provisions of Article 16 No. 3 of the IRC Code;
(c) Lack of notification to the Claimant of the IRC assessment act within the limitation period, i.e., until 31 December 2008, and lack of notification of the same act to B itself within the said period, in accordance with the provisions of Article 45 No. 1 of the LGT;
(d) Illegality in the quantification of the capital gain on immovable property obtained by B, as the TA did not apply the regime limiting the taxable income to 50%, contained in Article 43 No. 2 of the Personal Income Tax Code ("IRS"), to that non-resident entity [B], which constitutes discriminatory treatment violating the provisions of Article 63 of the Treaty on the Functioning of the European Union ("TFUE");
(e) Illegality in the quantification of the capital gain subject to taxation due to non-consideration of expenses incurred by B with the acquisition and disposal of the corresponding immovable property (including Property Transfer Tax, Stamp Duty and notarial expenses); and
(f) Illegality, by error of fact and law, in the application of the regime provided in Article 44 of the IRC Code, with the erroneous assumption of the tax patrimonial value as the realization value.
The Ethics Council of the Center for Administrative Arbitration, in accordance with Article 6 No. 1 of the RJAT, appointed Alexandra Coelho Martins as arbitrator of the Single Arbitral Tribunal, the Tribunal having been constituted on 24 December 2014.
The TA answered by way of exceptions, raising the incompetence of the Arbitral Tribunal to hear the limitation period defect invoked, as this concerns a matter pertaining to the effectiveness of the assessment act ("non-enforceability") and not to its legality and validity, in accordance with the provisions of Article 2 of the RJAT and Regulation No. 112-A/2011, of 22 March.
Alternatively, the TA raises the exception of lis pendens, given that tax execution opposition proceedings No. .../12....BESNT, filed by the Claimant in the Administrative and Tax Court (TAF) of Sintra, are pending. It contends that there is identity of parties, claims, and grounds of action relating to the part of the arbitral claim based on defects generating "[non-]enforceability of the debt".
Additionally, the TA considers that the matter relating to the lack of prerequisites for the Claimant's joint and several liability under Article 27 of the LGT and the alleged lack of notification within the limitation period constitute prejudicial questions that should determine the suspension of the present proceedings until final judgment in the opposition proceedings.
By counter-pleading, the TA sustains that B was regularly and validly notified, for exercise of the right to prior hearing, of the Tax Inspection Report ("RIT") and the self-assessment of IRC, through postal registration addressed to its tax representative, dispatched to the latter's tax domicile in 2007, i.e., within the limitation period (cf. Articles 38 and 39 of the Tax Procedural Code - CPPT).
In its view, notifications or citations of joint and several liable parties or subsidiary liable parties are not relevant for the purpose of calculating the limitation period for the right to assess, which pertains to the sphere of the original taxpayer of the tax legal relationship (cf. Articles 21 and 22 of the LGT).
On the other hand, the law does not provide for the exercise of the right to prior hearing that precedes the assessment with respect to the tax liable party, even if joint and several, since the tax facts capable of generating the assessment concern another party. As for the exercise of the right to prior hearing on the imputation to the Claimant of the status of joint and several liable party, this is a matter that exceeds the scope of arbitral jurisdiction.
The TA further adds that the Claimant intervened in the act of disposal of the immovable property generating the capital gain as an attorney-in-fact, resulting from the terms of the power of attorney that the Claimant meets the requirements to be considered a manager of assets or rights of B and, therefore, a joint and several liable party since the mandate encompasses "all necessary powers to, in our name and as if we were acting in our own capacity, do, perform, execute and sign any of the following acts, deeds and things" (cf. Article 27 of the LGT).
With regard to the competence for the tax inspection procedure, the TA defends the competence of the Finance Director of Faro, as this is the area where B's tax representative had its domicile (parish of ...). Furthermore, that entity does not appear in the order published in the Official Gazette that designates the taxpayers to be inspected by the central services, whereby, according to the TA, the Claimant erred, on this point, in a manifest misinterpretation of Article 16 No. 3 of the IRC Code and Article 16 No. 1 paragraph b) of the RCPIT.
In the matter of quantification, the TA emphasizes that B's income was not determined as if it were an individual taxpayer. In IRC, the consideration of only 50% of the capital gain obtained would result in more favorable treatment compared to resident taxpayers or those with a permanent establishment to which the capital gain is attributable. For IRC purposes, the capital gain is only considered at half its value when the conditions provided in Article 48 of the IRC Code are met, i.e., when reinvestment occurs, a condition that is not satisfied.
Regarding the non-consideration of expenses and charges incurred, the TA notes that the Claimant failed to fulfill the burden of proving them, which is why they were not considered.
Finally, regarding the alleged error in the application of the regime of Article 44 of the Personal Income Tax Code, the TA agrees with the reasoning of the hierarchical appeal decision, according to which the demonstration of the effective price should have been carried out and requested in accordance with Article 129 of the IRC Code, which did not occur, in addition to the fact that the sales deed is not suitable to rebut the presumption contemplated in Article 44 No. 2 of the Personal Income Tax Code.
The TA concludes by supporting the exceptions raised and by partial absolution from the proceedings. In the remaining part, it requests the suspension of the proceedings due to the pendency of a prejudicial question in opposition proceedings to execution. Alternatively, it argues for the dismissal of the arbitral action and, without conceding, to the extent that there is excess in the determination of the taxable income, sustains that only a partial annulment of the assessment should take place, in the respective proportion.
The Claimant filed a response to the exceptions in accordance with the principle of contradictory proceedings.
On 8 April 2015, a meeting of the Single Arbitral Tribunal took place at the CAAD headquarters, in accordance with the terms and objectives provided in Article 18 of the RJAT, including contradictory debate on the exceptions raised, the consideration of which was deferred to the final decision. Having heard both parties, a deadline was granted for submissions and for the arbitral decision.
The Claimant and Respondent submitted their arguments in writing, maintaining, in essence, the arguments set forth in the pleadings.
2. ISSUES TO BE DECIDED
First and foremost, it is necessary to address the preliminary issues raised by the TA relating to the incompetence of the Arbitral Tribunal and lis pendens and to decide on the request for suspension based on the alleged pendency of a prejudicial matter.
As for the substantive issue to be decided, it consists of ascertaining the legality of the IRC assessment No. 2007 ..., of 19 February 2007, in the amount of € 48,903.60, arising from a capital gain on immovable property realized by company B in the financial year 2004.
3. FACTS
3.1. Proven Facts
The following facts, established in the proceedings, are relevant to the decision:
A. A..., the Claimant here, is a lawyer by profession, with an office, at the time of the facts, at Praça ..., No. ..., ..., ... Faro – cf. power of attorney with Hague Apostille, contained in the Administrative File ("PA"), pp. 35 to 38 of file PA8.
B. On 6 October 2003, the company B... under Gibraltar law, also referred to as "B" or "COMPANY", appointed the Claimant as its duly constituted attorney-in-fact, identifying him as a lawyer and granting him all necessary powers to: "in our name and as if we were acting in our own capacity, do, perform, execute and sign any of the following acts, deeds and things:
NAMELY:
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To sell, at such price and conditions as he may deem convenient, the Company's property, designated as lot ..., located in ..., ..., Portugal, by signing purchase and sale commitment agreements, receiving the respective price and giving receipt therefor, signing the purchase and sale deed and all and any documents necessary for the completion of the transaction.
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To file with the Land Registry Office of ... any acts of provisional and/or definitive registrations, as well as with the Finance Department and Municipal Council, as well as to enter into contracts for the supply of water, telephone, electricity and gas.
And we agree to ratify all that our attorney-in-fact may do or order, as a consequence of this act, which we declare valid for a period of one year from this date." – cf. power of attorney with Hague Apostille, pp. 35 to 38 of file PA8.
C. B was the holder of the identification number issued by the National Register of Legal Entities ..., qualifying as a non-resident entity without a permanent establishment in national territory – cf. copy of the Tax Inspection Report ("RIT"), pp. 33 to 37 of file PA2 and pp. 18 to 20 of file PA8.
D. On 13 February 2004, the Claimant, in representation of B, executed the public deed of sale of a lot of land for urban construction, designated as lot ..., registered in the matrix of the parish of ..., municipality of ..., under article ..., at the price of € 200,000.00 – cf. copy of the purchase and sale deed, pp. 41 to 45 of file PA2.
E. The said lot of land had been acquired in the year 2000, 8/9 undivided share by deed of 28 March 2000, at the price of 5,110,000$00 (€ 25,488.57), and the remaining 1/9 undivided share by deed of 27 September 2000, at the price of 638,750$00 (€ 3,186.07) – cf. copy of the purchase and sale deeds, pp. 46 to 53 of file PA2 and pp. 24 to 27 of file PA7.
F. B did not report any capital gain relating to the sale of the immovable property [lot of land], having failed to submit the IRC Form 22 for the financial year 2004 – cf. copy of the RIT, pp. 33 to 37 of file PA2.
G. Since 9 November 2004, C has been registered in the taxpayer registration system as tax representative of B – cf. pp. 18 to 34 of file PA8.
H. Following an internal inspection action to B, of limited scope [IRC] for the financial year 2004, determined by Service Order No. OI2006..., of 17 November 2006, issued by the Finance Directorate of Faro, a correction to the taxable income for IRC in the amount of € 195,614.40 was proposed – cf. copy of the Corrections Project of the Inspection Report, pp. 40 to 43 of file PA7.
I. On 11 January 2007, a notification order (No. ...) was sent by the Finance Directorate of Faro by letter, under postal registration RM ... PT, addressed to B, for exercise of the right to hearing on the Corrections Project of the Inspection Report, to the address Praça ..., ..., ... ... – cf. pp. 48 to 50 of file PA7.
J. In response to the notification order (No. ...) addressed to B, for exercise of the right to hearing, D, in the capacity of a lawyer with an office at the said address, informed, in writing, that he had not represented that company for a long time, having returned the respective notification – cf. p. 51 of file PA7.
K. On 11 January 2007, likewise, a notification order (No. ...) was sent by the Finance Directorate of Faro by letter, under postal registration RM ... PT, to the attention of tax representative C, for exercise of the right to hearing on the Corrections Project of the Inspection Report, to the address Rua ..., Lot ..., ..., ... ... – cf. pp. 1 to 4 of file PA8.
L. This notification order (No. ...) was returned with the indication "Moved" – cf. p. 3 of file PA8.
M. The Final Tax Inspection Report ("RIT") was issued, approved by order of 6 February 2007, in which the proposed correction to the IRC taxable income in the amount of € 195,614.40 was maintained, based on the grounds transcribed below:
"III. DESCRIPTION OF THE FACTS AND GROUNDS FOR PURELY ARITHMETICAL CORRECTIONS TO THE TAXABLE INCOME
In the financial year 2004, it was found that the taxpayer proceeded to the sale of the lot of land for urban construction registered in its matrix under article ...º, of the parish of ..., municipality of ..., having failed to file the income return Form 22, as required by Article 109º and sub-paragraph b) of No. 5 of Article 112º, both of the Corporate Income Tax Code (C.I.R.C.).
Given that the taxpayer is a non-resident entity without a permanent establishment and obtained income provided for in Article 10º of the Personal Income Tax Code (More Gains), we will proceed to determine the taxable income, as provided in No. 2 of Article 16º and Article 51º of the C.I.R.C..
The immovable property in question was acquired for valuable consideration in the amount of € 28,674.64 in accordance with stamp duty knowledge Nos. ... of 28/03/2000 (€ 25,488.57) and ... of 18/05/2000 (€ 3,166.07) issued by the Finance Service of ...-..., and the realization value was € 227,730.00, which corresponds to the tax patrimonial value resulting from the assessment carried out (annex 1), as provided in No. 2 of Article 44º of the Personal Income Tax Code, since the same is higher than that stated in the public deed executed on 12/02/04 at the 2nd Notarial Office of Faro (€ 200,000.00). Thus, the capital gain obtained in the financial year 2004, determined in accordance with the provisions of Articles 43º, 44º, 46º and 50º, all of the Personal Income Tax Code, was € 195,614.40 as demonstrated below:
[Table showing: Realization Value 227,730.00, Acquisition Value 28,674.64, Currency Deviation Coefficient 1.12, Capital Gain 195,614.40]
*Regulation No. 376/04, of 14 April
(…)
IX. RIGHT TO HEARING - GROUNDS
The taxpayer did not exercise the right to hearing provided for in Article 60º of the L.G.T. and Article 60º of the R.C.P.I.T.."
– cf. copy of the RIT, pp. 33 to 37 of file PA2 and pp. 5 to 8 of file PA8.
N. The Finance Directorate of Faro sent, on 8 February 2007, a notification order of the RIT (No. ...), by registered letter with return receipt, addressed to B at the address Praça ..., ..., ... ... – cf. pp. 9 to 12 of file PA8.
O. In response to the notification order of the RIT (No. ...), lawyer D, with an office at the address of destination, informed, in writing, that he had not represented that company for a long time, having returned the respective notification – cf. p. 13 of file PA8.
P. The Finance Directorate of Faro sent, on 9 February 2007, a notification order of the RIT (No. ...), by registered letter with return receipt, addressed to C, in the capacity of representative of company B, to the address Rua ..., Lot ..., ..., ... ... – cf. pp. 14 to 17 of file PA8.
Q. This notification order (No. ...) was returned with the indication "Not claimed" – cf. p. 17 of file PA8.
R. On 19 February 2007, a self-assessment of IRC was made to B, issued under No. 2007 ..., relating to 2004, in the amount of € 48,903.60, as shown in the following assessment calculation – cf. print of assessment calculation extracted from the TA's computer system at p. 39 of file PA2 and document 3 attached to the TA's response:
[Assessment calculation table]
S. On 3 December 2007, the demonstration of the self-assessment of IRC contained in the preceding point was dispatched, by registered mail, addressed to B's tax representative, C, to Rua ... No. ..., ..., ... ..., under postal registration RY ... PT – cf. documents 1 to 4 attached to the TA's response.
T. On 10 February 2012, the Claimant was cited in tax execution proceedings No. ...2008..., running before the Finance Service of Sintra... (...), being imputed by the TA, joint and several liability with B for the payment of amounts of € 48,903.60, as amount owed for IRC of the year 2004, and € 15,763.00, as surcharge (default interest and procedural costs), totaling € 64,666.60. On that date, a certified copy of the executory title, the RIT, the assessment calculation and the order directing citation were sent to him – cf. citation note, debt certificate, Information, RIT and IRC assessment calculation, pp. 27 to 36 of file PA2.
U. The joint and several liability imputed to the Claimant is based on the Information of the Finance Service of Sintra ..., confirmed by order of 7 February 2012 of the Head of Finance Service, according to which the Claimant, by executing the sales deed of the lot of land in representation of B, acted as "manager of assets or rights of the non-resident company" and, pursuant to Article 27 of the LGT, is jointly and severally liable for the tax debts of that company – cf. pp. 29 to 32 of file PA2.
V. On 27 April 2012, the Claimant filed a petition for reconsideration seeking the annulment of the self-assessment of IRC No. 2007 ... and the consequent nullity of compensatory interest with grounds identical to those alleged in the present arbitral action – cf. pp. 2 to 49 of file PA3.
W. Notified of the draft dismissal of the petition for reconsideration, on 6 August 2012 the Claimant exercised the right to prior hearing, the petition having been dismissed on 17 August 2012, by order of the Senior Tax Officer, by delegation of the Deputy Finance Director in substitute capacity – cf. pp. 51 to 61 of file PA3, pp. 1 to 13 of file PA4 and pp. 21 to 51 of file PA9.
X. Not accepting the dismissal of the petition for reconsideration, the Claimant filed a hierarchical appeal which was partially granted by order of the IRC Services Director, on 26 June 2014, with respect to the non-consideration by the TA of acquisition expenses of the lot of land in question, specifically the Property Transfer Tax in the amount of € 2,876.47, concluding that the taxable capital gain would be € 192,746.93 – cf. file PA1, pp. 1 to 11 of file PA2, pp. 1 to 28 of file PA5 and document 1 attached to the arbitral claim.
Y. The Claimant filed opposition to tax execution proceedings No. ...2008... which runs against him in the Finance Service of Sintra .... The opposition proceedings run before the Administrative and Tax Court (TAF) of Sintra under No. .../12....BESNT, the State Attorney having been notified to answer by 24 September 2012 – cf. document 12 attached to the initial petition.
Z. On 17 October 2014, the Claimant filed a request for constitution of a Single Arbitral Tribunal – cf. electronic request in the CAAD system.
With respect to the proven facts, the Arbitral Tribunal's conviction was based on critical analysis of the documentary evidence indicated for each point of the facts, with the TA, from comparison of the documents attached to the response pleading (documents 1 to 4), showing solid indications of the dispatch, by registered mail, on 3 December 2007, of the notification of the demonstration of the self-assessment of IRC (registration No. RY ... PT), to B's tax representative.
It should be noted that the dispatch of the notification document of the IRC assessment is subsequent to the sending of various notification orders by the TA, relating to the same procedure, from the Corrections Project to the actual Inspection Report, with the TA consistently demonstrating the respective dispatch by postal route.
In this regard, it should further be noted that the fact that consultation with the Postal Service shows "Object not found" does not constitute even counter-evidence, as this reference relates solely to the circumstance that the Postal Service only has information in its mail tracking system - Track and Trace - up to 15 months, or 18 months in the case of physical archival.
3.2. Unproven Facts
No facts with relevance to assessing the validity of the IRC assessment were alleged that were not proven.
4. PRELIMINARY ISSUES
4.1. Absolute Incompetence of the Arbitral Tribunal
The TA argues the incompetence of the Arbitral Tribunal ratione materiae. For this purpose, it considers that the lack of notification of the assessment within the limitation period invoked by the Claimant constitutes a defect pertaining to the effectiveness and enforceability of the assessment act and not to its legality and validity, with such defect not falling within the scope of arbitral jurisdiction in tax matters, which is restricted to the assessment of the legality of tax acts, in accordance with the provisions of Article 2 of the RJAT and Regulation No. 112-A/2011, of 22 March.
We understand that, without prejudice to the fact that the lack of notification of the assessment act within the limitation period provided in Article 45 No. 1 of the LGT constitutes one of the exhaustive grounds for tax execution opposition proceedings (cf. Article 204 No. 1 sub-paragraph e) of the CPPT), this lack must be simultaneously understood as a cause of supervenient illegality of the assessment act (on the assumption that it was issued within the limitation period, as is the case here, as otherwise the act would be invalid ab initio).
In the same sense, we have examined the illustrative excerpt from the Arbitral Decision of 21 April 2013, in process No. 126/2014-T:
"After contradictory decisions, the Supreme Administrative Court came to understand in opposition appeal that, in cases where notification of the assessment was not effected and tax execution was instituted, there is a situation of ineffectiveness of the assessment act, which constitutes a ground for opposition falling within sub-paragraph i) of No. 1 of Article 204 of the CPPT and, when notification of an assessment act was effected, but the notification was effected after the limitation period for the right to assess had elapsed, there is a ground for opposition to tax execution falling within sub-paragraph e) of No. 1 of Article 204 of the CPPT (Plenary judgment of 20/01/2010, process No. 832/08).
Following this jurisprudence, it remains to know whether, in addition to being able to be invoked as a ground for opposition to tax execution, the lack of notification of the assessment before the limitation period expires can also be a ground for judicial challenge by implying supervenient illegality of the assessment act.
In addressing this issue, account must be taken of the regime provided for in Article 45 No. 1 of the LGT and the supremacy recognized to this Law by Article 1 of the CPPT, in stating that this Code applies "without prejudice to the provisions ... in the General Tax Law".
In fact, in that No. 1 of Article 45 it is established that "the right to assess taxes lapses if the assessment is not validly notified to the taxpayer within a period of four years", which implies that lack of notification in that period affects the right to assess, affecting its legality, which is indeed the regime in force at the time when the LGT was published, before the CPPT.
The said Article 1 of the CPPT, in referring to this Code not prejudicing what is provided in the LGT, is a general rule that limits the scope of all provisions of this Code, whereby it is concluded that the aforementioned sub-paragraph e) of No. 1 of Article 204 cannot be used to consider Article 45 No. 1 repealed, insofar as it confers invalidating effect to untimely notification.
However, the scope of sub-paragraph e) of No. 1 of Article 204 should be restricted and harmonized with Article 45 No. 1 of the LGT, insofar as it can be considered repealing thereof, maintaining the possibility of invoking in judicial challenge the illegality deriving from lack of notification within the limitation period.
However, the fact that Article 204 No. 1 of the CPPT explicitly allows the possibility of invoking untimeliness of notification as a ground for opposition to tax execution requires that it be understood that opposition can also be filed on this ground.
This means, therefore, that there will be a dual possibility of invoking untimeliness of notification in light of Article 45 No. 1, both as a ground for judicial challenge and as a ground for opposition, similar to what occurs with abstract illegality of the assessment and duplicate collection.
It is concluded from the above that the lack of notification of the assessment within the limitation period constitutes supervenient illegality of the assessment that was effected within that period, whereby there is no obstacle to its invocation as a ground for a claim for declaration of illegality of an assessment act, falling within Article 2 No. 1 sub-paragraph a) of the RJAT, since it was legislatively intended with the arbitral procedure to create "an alternative procedural means to the judicial challenge procedure" (Article 124 No. 2 of Law No. 3-B/2010, of 28 April)."
An identical position is supported by Counselor Jorge Lopes de Sousa in the Annotated and Commented Tax Procedure and Process Code[2], as shown in the excerpt transcribed:
"Indeed, in the aforementioned No. 1 of Article 45 it is established that 'the right to assess taxes lapses if the assessment is not validly notified to the taxpayer within a period of four years', which implies that lack of notification in that period affects the right to assess, affecting its legality, which is indeed the regime in force at the time when the LGT was published, before the CPPT.
The said Article 1 of the CPPT, in referring to this Code not prejudicing what is provided in the LGT, is a general rule that limits the scope of all provisions of this Code, whereby it is concluded that the aforementioned sub-paragraph e) of No. 1 of Article 204 cannot be used to consider Article 45 No. 1 repealed, insofar as it confers invalidating effect to untimely notification.
It must be restricted the scope of sub-paragraph e) of No. 1 of Article 204, harmonizing it with Article 45 No. 1 of the LGT, insofar as it can be considered repealing thereof, maintaining the incongruous regime of relevance of untimely notification to invalidate the preceding assessment act, which has as a corollary that this untimeliness, as illegality of the assessment, is a ground for judicial challenge, in accordance with Article 99 of the CPPT.
However, the fact that Article 204 No. 1 of the CPPT explicitly allows the possibility of invoking untimeliness of notification as a ground for opposition to tax execution requires that it be understood that opposition can also be filed on this ground.
This means, therefore, that there will be a dual possibility of invoking untimeliness of notification in light of Article 45 No. 1 of the LGT both as a ground for judicial challenge and as a ground for opposition, similar to what occurs with abstract illegality of the assessment and duplicate collection."
c) Conclusion on the Regime for Invoking Untimeliness of Notification of the Assessment
In summary, the procedural regime for the taxpayer's defense in these situations shall be as follows:
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If the taxpayer is notified of an assessment act outside the time limit set by Article 45 No. 1 of the LGT (or special period provided by law), it may file a judicial challenge based on this untimeliness of notification;
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If tax execution is instituted and notification of the assessment act was not effected, the taxpayer can always oppose the execution under sub-paragraph i) of No. 1 of this Article 204, invoking the ineffectiveness of the act, which prevents it from producing effects in relation to him and, therefore, the debt being enforceable; it is immaterial for this purpose whether the assessment act suffers from any defect, including that of untimeliness of assessment, as the issue of its legality is a matter of judicial challenge, to be filed when and if the act is notified;
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If execution was instituted and notification of the assessment act was effected, but the notification was effected outside the limitation period provided in Article 45 No. 1 of the LGT (or another special period that may be applicable), the taxpayer can oppose the execution under sub-paragraph e) of No. 1 of this Article 204, in addition to being able to challenge the assessment act.
In light of the reasons set forth, concluding that the defect of lack of notification of the tax act within the limitation period constitutes a cause that strikes the tax act itself with invalidity, albeit superveniently, the exception of incompetence of this Arbitral Tribunal ratione materiae is rejected.
4.2. Lis Pendens
Alternatively, the TA raises the exception of lis pendens, with respect to the defect of lack of notification of the self-assessment of IRC, given that opposition to tax execution proceedings No. .../12....BESNT is pending in the Administrative and Tax Court (TAF) of Sintra, in which that defect was likewise raised by the Claimant here.
The TA sustains, for this purpose, that there is identity of parties, claim, and ground of action relating to the part of the arbitral claim based on defect generating "[non-]enforceability of the debt", and should be partially absolved from the arbitral proceedings under the provisions of Article 89 No. 1 sub-paragraph i) of the Code of Administrative Court Procedure ("CPTA") and Articles 576 No. 2, 577 sub-paragraph i), 578, 580, 581 and 582 No. 1, all of the Civil Procedure Code ("CPC"), by referral of Article 29 No. 1 sub-paragraphs c) and e) of the RJAT.
Let us examine Article 581 of the CPC, which establishes the requirements of lis pendens and res judicata:
"1 — The cause is repeated when an action identical to another is brought with respect to the parties, the claim, and the ground of action.
2 — There is identity of parties when the parties are the same from the point of view of their legal capacity.
3 — There is identity of claim when the same legal effect is sought in both causes.
4 — There is identity of ground of action when the claim made in both actions proceeds from the same legal fact."
In this case, not only do the parties appear not to be the same from the point of view of their legal capacity, but certainly the legal effect sought in opposition to execution is different from that achieved with the judicial challenge procedure, with no risk of contradiction or duplication of decisions. In the case of opposition to execution, the legal effect sought is the extinction of the tax collection process, and in the case of challenge the annulment or declaration of nullity of the tax act. There is no overlap whatsoever.
This is also recognized by the jurisprudence of the Supreme Administrative Court, cited by way of illustration, in the Judgments of 26 April 2001 (Appeal No. 25324) and 19 September 2012 (Process No. 0472/12). The first refers that "With the challenge, one seeks the declaration of nullity or annulment of the tax assessment act, and with opposition to execution the extinction thereof, from which it results that the object of the one or the other is diverse. This alone is sufficient for us to conclude the non-existence of lis pendens between the opposition proceedings compared with the challenge proceedings since in the latter the legality of the assessment is discussed and in the former the legality of the execution with a view to its extinction".
And the second Judgment cited reinforces that "although the claims made in one and the other action are the same and the ground of action is identical, the party does not intervene in the two actions in the same legal capacity – as the party does so in the capacity of opponent in the opposition and as challenger in the challenge – there being no repetition of the cause. For in a situation such as that in the case at bar, there is no risk of contradiction or duplication of decisions, as the legal effect that is possible to obtain through opposition to execution – the extinction thereof in relation to the opponent – and the one sought by filing a judicial challenge – the annulment of the challenged tax act – are unmistakable, having, moreover, as object, diverse acts. There is no exception of lis pendens (...)"
Thus, not only do the Opponent and Challenger not assume the same legal capacity in both proceedings, as there is no identity of claim between a claim for declaration of illegality and annulment of a tax act, based on a defect rendering the tax act invalid, and another claim for extinction (or possibly suspension) of the coercive tax collection process, based on non-enforceability of the executory debt. By way of example, it suffices to note that the validity of a tax act is perfectly compatible with its simultaneous non-enforceability, in particular due to prescription of the tax debt.
The triple identity requisites of parties, claim, and ground of action are not therefore met, with the exception of lis pendens raised by the TA being judged inapplicable.
5. REQUEST FOR SUSPENSION OF ARBITRAL PROCEEDINGS FOR PREJUDICIAL QUESTION
The TA considers that the matter relating to the erroneous imputation of joint and several liability to the Claimant, due to lack of respective prerequisites under Article 27 of the LGT and, likewise, the alleged lack of notification within the limitation period constitute prejudicial questions that should determine the suspension of the present proceedings until final judgment in the opposition to execution proceedings.
In this regard, it should be recalled that a relation of prejudiciality exists when the decision of one case is dependent on the judgment of another already filed (cf. Article 272 No. 1 of the CPC), a condition that does not occur in this case.
In fact, beginning with the imputation of joint and several liability to the Claimant, this constitutes a matter relating to the enforceability of the tax debt and not the validity of the assessment act. Thus, regarding this imputation, the Arbitral Tribunal does not have jurisdiction to hear it, as it does not concern a question pertaining to the legality of the tax act. In this manner, as to this point, the proper means is opposition to execution proceedings and not the tax arbitral action, which over it has no cognizance powers.
And with respect to the questions of (in)validity of the tax act which is the object of the arbitral action, none of them are dependent on prior decision on the issue of imputation of joint and several liability to the Claimant, which stands on another plane. In conclusion, the alleged relation of prejudiciality of the problem (to be resolved in opposition proceedings) of imputation of liability to the Claimant is not identified within the validity of the IRC assessment act.
On the other hand, regarding the alleged lack of notification within the limitation period, this likewise does not depend on the analysis made within opposition to tax execution proceedings, whereby there is no reason to await decision in that process. This question, viewed as a defect of illegality of the assessment act, can and should be assessed in the proceedings that has [the assessment act] as its object, i.e., in the form of judicial challenge or in its alternative arbitral form.
In fact, if this question were prejudicial, it would be to opposition to execution proceedings and not to the present arbitral action.
Highlighting the non-existence of a relation of prejudiciality between the judicial challenge process and the tax execution process, the Supreme Administrative Court has understood that the vicissitudes of the tax execution process do not constitute a prejudicial question to the challenge process "where what is at issue is the legality of an assessment act which, by definition, is prior to the constitution of the executory title and differentiated from the procedural procedures inherent in the execution process. On the contrary, the illegality of the assessment act may determine the extinction of the execution process, so it is in the best interest of the challenger for its swift conclusion" – cf. Judgment of 3 September 2014, Process No. 0201/14. Arriving at the identical conclusion see the Judgment of 4 July 2014, Process No. 1770/13.
To this effect, the aforementioned arbitral decision (process No. 126/2012-T) also pronounces: "the allegation that, if in that invoked opposition process it is judged that notification was made outside the limitation period for the right to assess, the present proceedings will lose utility, has no correspondence with reality, as in this proceedings other illegalities are imputed to the challenged act and, on the other hand, if in the present proceedings the illegality of this act is declared, whatever the ground of illegality, it will be the opposition to tax execution proceedings that will lose utility, as the execution must be judged extinct (Article 270 No. 1 of the CPPT).
There is therefore no basis for suspension of the present proceedings, based on alleged pendency of opposition to tax execution proceedings, with the question instead arising as to whether the opposition should be suspended due to the pendency of the present proceedings, a question which, naturally, does not need to be examined here."
It should be noted that in addition to the absence of a relation of prejudiciality that would justify suspension of this arbitral action, opposition to it would be the objective of expedition underlying the creation and functioning of arbitral jurisdiction, which admittedly appears in the preamble of the RJAT: "The introduction in the Portuguese legal system of arbitration in tax matters, as a form of alternative jurisdictional conflict resolution in the fiscal domain, aims at three main objectives: on the one hand, to strengthen the effective protection of rights and legally protected interests of taxpayers, on the other hand, to bring greater expedition to the resolution of disputes between the tax administration and the taxpayer and, finally, to reduce the backlog of cases in the administrative and tax courts."
For the reasons set forth, the request for suspension of the proceedings filed by the TA is rejected.
6. ON THE MERITS
6.1. Regarding Formal Defects: Omission of Right to Prior Hearing
(a) Omission of Right to Hearing in the Imputation of the Status of Joint and Several Liable Party
The Claimant defends that the fact that he was not notified to exercise the right to prior hearing before the imputation of the status of joint and several liable party for the IRC debt violates the principle of participation of interested parties. Without prejudice to the intrinsic merit of this argument, such a question concerns the determination of the prerequisites for joint and several liability, a matter that does not affect the validity or existence of the tax act, but its production of effects in relation to the Claimant. Thus, such a matter is outside the scope of cognizance powers of this Arbitral Tribunal, given the provisions of Article 2 No. 1 of the RJAT, and must be examined in the proper forum of opposition to tax execution proceedings.
(b) Omission of Right to Hearing Before Conclusion of the Inspection Procedure and the IRC Assessment Act
The Claimant further invokes that he was not notified by the TA at any time in the context of the inspection procedure that preceded the IRC assessment in question, nor was he directly notified of the respective tax assessment, much less granted a deadline for voluntary payment thereof.
It is important to first analyze the capacity in which the Claimant intervenes in this tax legal relationship, which, as stated in the tax execution proceedings, is not that of original taxpayer, but that of joint and several liable party, derived from the purported action as manager of assets or rights of a non-resident entity, falling within Article 27 of the LGT.
Article 18 No. 3 of the LGT defines as taxpayer in the tax legal relationship "the natural person or legal entity, the assets or the organization de facto or de jure that, pursuant to law, is bound to fulfill the tax obligation, whether as direct taxpayer, substitute or liable party."
The category of tax liable party thus arises alongside that of the direct taxpayer[3], i.e., the original taxpayer with respect to whom the tax fact occurred, from which it is distinguished. The liable party arises obliged to fulfill another's tax obligation, i.e., of the principal debtor as provided in Article 22 of the LGT, with its nature being different from the tax obligation of the original taxpayer with respect to whom the legal type was fulfilled.
Sérgio Vasques notes on tax liability that: "the liable party arises obliged to fulfill the tax obligation insofar as the direct taxpayer is not shown capable of satisfying it and because the liable party, by virtue of its functions, is in a position to influence its behavior or is charged with supervising it in some way. The tax liable party, thus notes Pasquale Russo, showing itself foreign to the tax fact and responding in that exact sense for another's debt, guarantees with its assets the fulfillment of the tax obligation insofar as the declaration of that fact or the preservation of the direct taxpayer's assets depends on its action." – cf. Manual of Tax Law, 2011, Almedina, p. 349.
In concrete terms, regarding Article 27, Sérgio Vasques notes that it is an objective liability, i.e., independent of fault, occurring as soon as there is non-payment of "contributions and taxes" in the course of its functions – cf. work cit. p. 357.
Also, António Lima Guerreiro sustains that "action in the name and on behalf of the non-resident, together with non-payment of taxes owed, is the constitutive fact of joint and several liability that this provision regulates." – cf. General Tax Law Annotated, Rei dos Livros Publisher, 2000, p. 154.
It should further be noted that distinct from tax liability is that of joint and several liability which Article 21 of the LGT contemplates.
This latter is applicable when the tax fact prerequisites are met with respect to more than one person, in which case all are jointly and severally liable for fulfillment of the tax debt. We are in the domain of plurality of original taxpayers or direct taxpayers and not in the framework of tax liability (whether joint and several or subsidiary), whose constitutive effects are conditioned by various exogenous factors ulterior to the assessment act, such as, in this specific case, action in the name and on behalf of the non-resident, together with non-payment of taxes owed by the latter.
Both Article 60 of the LGT and Article 60 of the RCPIT provide for the exercise of the right to prior hearing before assessment or before conclusion of the tax inspection report. This is a right of the greatest relevance and which not only materializes the principle of citizen participation in the formation of decisions or deliberations that concern them, as established in Article 267 No. 5 of the CRP, but also constitutes an expression of the fundamental principle of contradictory procedure (audi alteram partem) which cannot be alienated in the decision-making procedure for acts imposing duties and charges, also reflected in Article 100 of the CPA, in the version in force at the time of the facts.
However, the exercise of the right to prior hearing provided in Article 60 of the LGT and Article 60 of the RCPIT refers to the original taxpayer, the direct taxpayer or the inspected entity and not to derivative taxpayers who are called, at a later moment, into the tax legal relationship by the supervenient verification of conditions constitutive of tax liability.
Accordingly, the law does not provide for the right to hearing of the joint and several liable party at a moment prior to assessment, either because it concerns tax facts relating to another party, or because at that moment he (the liable party) is not yet endowed with that status of tax liable party, whereby he lacks legitimacy.
In fact, pursuant to Article 9 No. 2 of the CPPT, "The legitimacy of joint and several liable parties results from the requirement in relation to them of the fulfillment of the tax obligation or of any tax duties, even if jointly with the principal debtor."
Jorge Lopes de Sousa likewise argues that the legitimacy of joint and several liable parties "is only recognized when the requirement of fulfillment of the tax obligation or of any tax duties is made in relation to them". Thus, "their legitimacy will not exist during the pendency of the tax procedure leading to assessment of the tax to which the liability pertains and only comes to exist after the decision of that tax assessment procedure, aimed at assuring them the possibility of complaint and challenge of the act from which their liability derives, these rights being assured by No. 4 of Article 22 of the LGT.
Notification for payment is a condition of the effectiveness of the assessment act of the tax in relation to the joint and several liable party (Articles 77 No. 6 of the LGT and 36 No. 1 of the CPPT) and, once it is effected, this party must be recognized the right to react against the act, capable of affecting its legal sphere." – cf. Annotated and Commented Tax Procedure and Process Code, Volume I, 6th edition, 2011, Áreas Publisher, p. 122.
It should be noted that what is stated above does not conflict with the Judgment of the Supreme Administrative Court of 28 October 2009, Process No. 742/09, as the civil law basis on which the figure of the joint and several liable party for another's debts may rest, does not derogate or set aside the specific tax regime explained above, based on Articles 9 No. 2, 22 and 27 of the LGT.
It results from the above that the Claimant was not notified by the TA in the context of the inspection procedure that preceded the IRC assessment which is the object of this action, nor should he have been, as he lacked legitimacy, not falling within the subjective scope of Articles 60 of the LGT and 60 of the RCPIT.
It should be noted that such conclusion is not extended to the lack of participation in the formation of the decision that imputed to the Claimant the status of joint and several liable party. However, this matter falls within the powers of assessment of another Tribunal, which is not this one.
As for the allegation that he was not directly notified of the IRC assessment, it is emphasized that, together with the citation, a certified copy of the executory title, the RIT, the assessment calculation demonstration, and the order directing citation were given to the Claimant, whereby on this point there is no omission of formalities or any irregularity to be pointed out to the TA.
Likewise, the allegation by the Claimant that he was not granted a deadline for voluntary payment of the debt does not hold, as the liability (in this case joint and several) for payment of IRC only arose after that deadline had elapsed. In other words, the liability regime necessarily implies, in its genesis, that the deadline for voluntary payment had elapsed without the principal liable party or direct taxpayer having paid the tax, whereby the Claimant's argument does not hold.
Therefore, the essential formality of prior hearing of the Claimant was not omitted in the context of the inspection procedure that preceded the IRC assessment act, as the Claimant lacked procedural and/or substantive legitimacy, which only accrued to him at a later moment, when imputation of the status of tax liable party.
This position does not limit the constitutionally enshrined rights of the Claimant, from the moment the TA intends to invest him with the status of liable party and, thereby, of derivative taxpayer in the tax legal relationship. However, this matter exceeds the assessment of the legality and validity of the tax act, which is the only thing at issue here.
It should also be noted that it results from the procedure already completed that notification for exercise of the right to prior hearing was dispatched to B, through its tax representative. Non-receipt of the notification due to failure to fulfill the duties of cooperation, in this case, communication of changes of tax domicile by B's tax representative, is not opposable to the TA, as provided in Article 43 No. 2 of the CPPT.
Accordingly, the allegation of formal defect due to omission of the right to hearing is rejected.
6.2. Regarding Formal Defects: Lack of Competence
The Claimant invokes the invalidity of the inspection action due to the defect of lack of competence of the Finance Directorate of Faro to conduct the same, in violation of Article 16 of the RCPIT and Article 16 No. 3 of the IRC Code, and consequently considers the resulting assessment act illegal.
It appears that, in addition to the alleged procedural invalidity defect not being necessarily an invalidating defect of the assessment act, and will not be if the purpose or interest that the procedural rule seeks to protect has been achieved, the Claimant's position is based on erroneous premises.
In fact, the tax domicile of B in Portugal was that of its tax representative, as being a non-resident entity without a permanent establishment in national territory, it was obliged to appoint a representative resident in Portugal, in accordance with Article 19 No. 4 of the LGT, which, in the capacity of representative, must comply with Portuguese fiscal ancillary obligations, naturally at its own address (of the representative), as no other exists in Portugal for tax purposes.
Article 19 No. 4 of the LGT, under the heading "Tax domicile", provides: "Foreign resident taxpayers, as well as those who, although resident in national territory, leave it for a period exceeding six months, as well as legal entities and other legally equivalent entities that cease activity, must, for tax purposes, appoint a representative resident in national territory."
Since the residence of tax representative C is located in the parish of ..., in ..., this is unquestionably within the territorial area of competence of the Finance Director of Faro.
With respect to competence for the practice of tax inspection acts, Article 16 of the RCPIT provided, at the time of the facts:
"Article 16
Material and Territorial Competence
- The following services of the Tax Administration Department are competent to practice tax inspection, pursuant to law:
(a) The tax inspection services departments which, pursuant to the organization of the Tax Administration Department, make up the operational area of tax inspection, regarding taxpayers and other obligated parties to be inspected by the central services;
(b) The regional peripheral services, regarding taxpayers and other obligated parties with domicile or tax office in their territorial area;
(c) The local peripheral services, regarding taxpayers and other obligated parties with domicile or tax office in their territorial area
- Taxpayers designated by the General Director of Taxes are inspected directly by the central services, as well as those appearing in an order published in the Official Gazette."
According to this provision, the regional peripheral services (read the Finance Directorate of Faro) are competent to conduct tax inspection of taxpayers with domicile (that of the tax representative in the case of non-resident taxpayers and those lacking a permanent establishment in Portugal) in its territorial area (i.e., in the district of Faro).
As for the competence of the central services, No. 2 expressly determines that these inspect taxpayers designated by the General Director of Taxes or appearing in an order published in the Official Gazette, no more. B is clearly not covered by either of these categories, whereby inspection competence rests with the regional or local peripheral service, contrary to what the Claimant argues.
What has been set forth is not refuted by the discipline on methods and competence for determining taxable income, contained in Article 16 No. 3 of the IRC Code, transcribed below:
"3. The determination of taxable income in the context of direct assessment, when effected or subject to correction by the services of the Tax Administration Department, is the responsibility of the finance director of the area of the seat, actual management or permanent establishment of the taxpayer, or of the director of the Tax Prevention and Inspection Services in cases subject to corrections made by it in exercise of its functions, or by official to whom competence is delegated by any of them."
The interpretation of this rule must be combined with the provisions of Article 16 of the RCPIT, which is subsequent to Article 16 of the IRC Code, as both address competence for determining corrections to taxable income. In this context, with the Tax Prevention and Inspection Services being integrated into the central services, and these having competence attributed only in the case of taxpayers designated by the General Director of Taxes or in the case of taxpayers appearing in an order published in the Official Gazette, which is manifestly not the case, then the tax domicile of non-resident taxpayers without a permanent establishment must be that of their tax representative, which is equivalent to the seat or establishments located in Portugal, with the finance director of the respective area being competent.
It should further be noted that even if the interpretation advocated by the Claimant were to be understood (which we do not accept), the lack of competence to conduct the inspection procedure, it is stressed, which was internal, does not appear capable of, by itself, affecting the validity of the assessment act issued by the competent body, the General Director of Taxes.
6.3. Regarding the Defect of Lack of Notification of the Assessment Act Within the Limitation Period
(a) Lack of Notification to B Within the Limitation Period
Article 38 No. 3 of the CPPT provides that notifications not covered by No. 1, as well as those relating to tax assessments resulting from taxpayer declarations or corrections to taxable income that have been subject to notification for the purpose of the right to hearing, are made by registered letter.
In turn, Article 39 No. 1 of the CPPT provides that notifications made in accordance with No. 3 of the preceding article (38) are presumed made on the third day following the date of registration, or on the first business day following that, when that day is not a business day.
It was proven that the assessment calculation demonstration was, in accordance with legal provisions, sent by the TA by registered mail to B's tax representative, to the address in the respective registry, on 3 December 2007, being presumed, in accordance with Article 39 No. 1 of the CPPT, that notification was made on the third day following the date of registration, i.e., on 6 December 2007.
In fact, the TA fulfilled the burden of demonstrating the constitutive facts of its right, in compliance with the provisions of Article 74 No. 1 of the LGT, facts that, in this context, concern the dispatch, in accordance with legal provisions (by registered mail, to the tax representative of the non-resident entity without permanent establishment), of the notification of the IRC assessment. The Claimant did not succeed in demonstrating imperative or extinctive facts to that right.
In the same sense as what is now advocated, see the Judgment of the Supreme Administrative Court of 12 January 2012, rendered in Process No. 0331/113, from which the following excerpt is drawn:
"In this sequence, it is verified that, as a rule, within the scope of the CPPT, notifications by registered letter are presumed made on the 3rd business day following the date of registration or on the 1st business day following that, when that day is not a business day (Article 39º, No. 1 of the CPPT).
As JORGE LOPES DE SOUSA notes (See Code of Tax Procedure and Process, 6th edition, ÁREAS, Publisher, Lisbon, 2011, p. 382.), in annotation to this provision, 'For the presumption provided in No. 1 of this article to be extracted, it is necessary that the notification has been effected in accordance with legal provisions, namely that the registered letter be sent to the domicile of the person to be notified'.
Regarding the assessment of IRC for the year 2004, with the TA observing the legal rules required for notification addressed to the tax representative to the domicile contained in its tax registry, this must be considered effected on 6 December 2007, a date when the 4-year period provided in Article 45 No. 1 of the LGT had not elapsed, whereby the alleged defect of supervenient illegality is not verified."
(b) Lack of Notification to the Claimant Within the Limitation Period
The Claimant contends that an interpretation of Article 45 No. 1 of the LGT in accordance with Articles 13 and 268 No. 2 of the CRP determines that, in addition to the direct taxpayer, the joint and several liable party must also be notified of the tax assessment within the 4-year limitation period, as a condition of effectiveness of its liability.
Given that notification of the assessment to the Claimant occurred only with citation in the tax execution proceedings on 10 February 2012, by that date, more than 4 years had elapsed from the tax fact, which dates to 2004.
However, the Claimant's thesis is not to be accepted, as, regarding the provisions of Article 45 of the LGT (according to which the right to assess taxes lapses if the assessment is not validly notified to the taxpayer within a period of four years), notification of the assessment pertains to the original taxpayer of the tax and not the liable party. Adopting this understanding, one can see the Supreme Administrative Court Judgments of 18 May 2005, Process No. 381/05, and 2 November 2005, Process No. 361/05.
Similarly, Jorge Lopes de Sousa refers, in this regard, to the following:
"The notification relevant for purposes of preventing lapse of the right to assess is that relating to the taxpayer, the original taxpayer of the tax, and not that of other subsidiary or joint and several liable parties.
In fact, lapse is prevented by the practice, within the legal period, of the act to which the right relates (Article 331 No. 1 of the Civil Code), whereby, once the act is validly practiced, prevention of lapse is definitive, if the act preventing it does not come to be annulled.
Under the LGT, the fact preventing lapse is notification of the taxpayer within 4 years (Article 45 No. 1) and, therefore, if that notification occurs, notification of any other person is not necessary to prevent lapse from occurring.
With respect to notifications or citations of joint and several liable parties or subsidiary liable parties, the law recognizing no relevance to them for lapse purposes, it is immaterial whether they occur after the end of that period" – cf. Annotated and Commented Tax Procedure and Process Code, Volume III, 6th edition, 2011, Áreas Publisher, p. 491.
In line with the position of the TA, it is necessary to distinguish between original taxpayers of the tax, regarding whom the tax fact prerequisites occur, and remaining tax liable parties who, jointly and severally or subsidiarily, are liable for another's debts, as results from careful reading of Articles 21 and 22 of the LGT.
In the case under consideration, it is necessary to distinguish the status of B, as original taxpayer of the tax legal relationship, from that of the Claimant, tax liable party for that non-resident entity's debt.
As emphasized by Saldanha Sanches, "the notion of taxpayer (the taxpayer of English literature) corresponds, in its essence, to a purely factual relationship: the concept of taxpayer is a concept that is necessarily and naturally somewhat imprecise" – cf. Manual of Tax Law, 3rd edition, 2007, Coimbra Publisher, p. 251.
The fact that the term "taxpayer" can generically contain also substitutes and liable parties, as is the case in Article 9 No. 1 of the CPPT, does not mean that the status of taxpayer in the tax legal relationship is identical for all indiscriminately. On the contrary, while the legal situation of the direct taxpayer is based on the sociological and pre-legal duty to contribute and capacity to pay, already the situation of third parties called to respond is premised on the duty to cooperate (in this sense, Vítor Faveiro, "The Status of the Taxpayer – The Person of the Taxpayer in the Social State of Law", 2002, Coimbra Publisher, p. 821).
The position adopted does not imply arbitrary decisions nor violation of the principle of equality and instead represents different treatment of distinct situations.
In this manner, the Claimant's interpretive process is not followed, concluding instead for the irrelevance of notification of the assessment to the tax liable party, for purposes of calculating the limitation period, Article 45 No. 1 of the LGT referring to notification of the direct taxpayer, original taxpayer and sole immediate recipient of the assessment act and not to notification of other taxpayers such as liable parties or tax substitutes. The Claimant's argument therefore fails, whereby it does not constitute an invalidating defect of the disputed IRC assessment.
6.4. Defects of Law Violation: Incompatibility of Article 43 of the Personal Income Tax Code with Article 63 of the TFUE
The Claimant considers that the IRC assessment is invalid due to violation of the freedom of movement of capital provided in Articles 63 and 65 of the TFUE and Article 8 No. 4 of the CRP, in light of the discriminatory nature of Article 43 No. 2 of the Personal Income Tax Code, which limits taxation of capital gains to 50% of the balance ascertained in the year for resident taxpayers, but does not provide such limitation for capital gains obtained by non-residents.
The Claimant advocates that the TA should have applied the regime limiting taxable income to 50%, contained in that Article 43 No. 2 of the Personal Income Tax Code, notwithstanding B being a non-resident entity without a permanent establishment in national territory.
It is based on the Hollmann Judgment of the Court of Justice of the European Union ("CJEU"), rendered on 11 October 2007, Process C-443/06, which held that Article 43 No. 2 of the Personal Income Tax Code is incompatible, in the context of taxation of natural persons to which, according to the Claimant, the situation of B is equivalent, by referral of Article 56 No. 1 of the IRC Code (current Article 51) according to which "Income not attributable to a permanent establishment located in Portuguese territory, obtained by non-resident companies and other entities, is determined in accordance with the rules established for corresponding categories for personal income tax purposes".
However, it is important to note in this respect that the TA did not determine B's taxable income as if it were an individual taxpayer, but rather determined its taxable income in accordance with the rules established for corresponding income categories, in this case income from capital gains obtained with the onerous transfer of immovable property, provided for in Article 10 of the Personal Income Tax Code, for purposes of its subsequent taxation in IRC.
And, regarding discrimination between resident and non-resident taxpayers, to which the aforementioned Hollmann Judgment refers, it is not apparent how the same can be raised in identical terms for IRC purposes. For resident taxpayers subject to IRC or those with a permanent establishment in Portugal are not taxed at only 50% of the balance of capital gains on immovable property, with these being taken into account in their entirety. Thus, not only does B not fall within Article 43 No. 2 of the Personal Income Tax Code, as it does not have the characteristic of being resident, but that treatment is not discriminatory vis-à-vis the general regime applicable to IRC resident taxpayers, as these are taxed considering 100% of the capital gain obtained with the onerous transfer of immovable property and not only 50% as would result if the Claimant's thesis were upheld.
In fact, in accordance with the general rules for determining taxable profit of resident IRC taxpayers who engage in commercial, industrial or agricultural activity as their main business, capital gains realized are considered income, as provided in Article 20 No. 1 sub-paragraph h) of the IRC Code, calculated in accordance with the provisions of Article 46 of the same Code, with the capital gain only being considered at half its value when the conditions provided in Article 48 of the cited instrument are met, inapplicable herein, as it requires reinvestment of the realization values.
In these terms, there is no defect of excess quantification of taxable income nor any discriminatory treatment of non-resident entities violating Community Law, whereby the allegation of the Claimant is rejected on this point.
6.5. Defects of Law Violation: Erroneous Quantification of Taxable Income Due to Non-consideration of Expenses Inherent to Capital Gain
According to the Claimant, the gain subject to taxation consists of the difference between the realization value and the acquisition value, and for this purpose, expenses necessary and actually incurred, inherent to acquisition and disposal (cf. Article 10 No. 1 sub-paragraph a) and Article 51 sub-paragraph a), both of the Personal Income Tax Code, by referral of Article 56 No. 1 of the IRC Code), must be considered. In this framework, the Claimant alleges that the TA did not consider any of the expenses incurred by B with the acquisition and disposal of the immovable property in question, except, in connection with the reconsideration made in the hierarchical appeal, the Property Transfer Tax borne.
Specifically, the Claimant invokes Stamp Duty and other charges incurred. However, not only does the Claimant recognize that the acquisition deeds of the lot of land do not mention any payment of that tax, but also does not attach probative elements, documentary or otherwise, sustaining the assertion of payment of Stamp Duty and "other charges incurred", a burden that falls on him given the provisions of Article 74 No. 1 of the LGT, in line with the general principle of Article 342 of the Civil Code.
It should be noted that it is incumbent on the taxpayer to maintain, for a period of 10 years, the tax documentation process, which must be centralized in the premises of the tax representative when the taxpayer does not have its seat or actual management in national territory and does not have a permanent establishment located therein, as established in the then Article 121 of the IRC Code.
Moreover, it is not incumbent on the Tribunal to supply the burden of allegation and proof of constitutive facts of rights alleged by any of the parties, under penalty of violating the principle of equality of arms and essential procedural parity.
Regarding Stamp Duty on the sale of the immovable property, this constitutes a charge of the acquirer of the goods and not B (seller), pursuant to Article 3 No. 1 and No. 3 sub-paragraph a) of the Code of this tax, whereby it could not even be included in the calculation of the capital gain thereof.
Finally, regarding the allegation that the TA should conduct procedures to obtain the value of Stamp Duty paid in the acquisition of the immovable property and the value of notarial costs (Article 74 No. 2), the elements in the TA's possession were attached to the case and only show as a charge to be considered in the capital gain calculation the value of the Property Transfer Tax accepted in hierarchical appeal.
6.6. Defects of Law Violation: Erroneous Application of Article 44 No. 2 of the Personal Income Tax Code
In the situation at hand, the TA applied Article 44 No. 2 of the Personal Income Tax Code, pursuant to which the tax patrimonial value ("VPT") determined for purposes of assessment of municipal tax on onerous transfers of immovable property ("IMT") must be considered as realization value, when this is higher than the consideration declared by the parties. For this reason, the TA considered as realization value the VPT resulting from the assessment of the disposed immovable property, of € 227,730.00 and not the value of the deed, of € 200,000.00.
The Claimant refutes the application of this regime as he contends that the actual sale value is € 200,000.00 and fell short of that resulting from the assessment conducted by the TA, arguing that through the presentation of the notarial sales deed the presumption implicit in Article 44 No. 2 of the IRC Code is rebutted.
It is well known that presumptions enshrined in tax incidence norms always admit proof to the contrary, as affirmed by Article 73 of the LGT and constitutional jurisprudence (cf. Constitutional Court Judgments of 29 April 1997, No. 348/97; of 28 April 2003, No. 308/02, and of 21 June 2003, No. 211/03).
There is no question, therefore, of the possibility of the Claimant rebutting the presumption.
Additionally, and contrary to the understanding held by the TA, it is also not considered that the only way to rebut this presumption is through adoption of the procedure provided in Article 129 of the IRC Code, by referral of Article 31-A[4] No. 6 of the Personal Income Tax Code.
This Article 129 of the IRC Code has temporal restrictions that would mean that in the case of the liable party, in most cases, he could not access the procedure for rebuttal of the presumption, both due to lack of legitimacy, and on the other hand, because, once invested with the status of liable party, a very short 30-day deadline has (long) elapsed to count from the date on which the assessment (for IMT purposes) became final, to submit the appropriate request directed to the finance director.
For this purpose, the general regime of presumptions provided for in Article 64 of the CPPT must be invoked, which in its No. 1 provides: "The interested party wishing to rebut any presumption provided for in tax incidence norms should, in case it does not wish to use the means of petition for reconsideration or judicial challenge of the tax act based thereon, request the opening of proper contradictory procedures."
It is therefore admissible that the rebuttal of the presumption be made in petition for reconsideration or in action challenging the tax act based thereon, being that in the latter it cannot be left to understand that the action brought in arbitral jurisdiction is understood, which must assure the same means of defense as judicial challenge, which it assumes as alternative means.
As Jorge Lopes de Sousa emphasizes, "the procedure provided in this Article 64 is not mandatory in its use, whereby the interested party may in the petition for reconsideration or in the judicial challenge it files regarding the assessment act rebut any presumption applied therein." – Annotated and Commented Tax Procedure and Process Code, Volume I, 6th edition, 2011, Áreas Publisher, p. 589.
Already regarding the means of proof, without prejudice to generally being able to consider all means of proof admitted in law (cf. Article 72 of the LGT), it does not appear that the deed or sale document can constitute an apt means for this purpose. In fact, in the hypothetical normative situation, the presumption which the Claimant seeks to set aside applies precisely (and expressly) to prevail over the value stated in the purchase and sale contract (cf. Article 31-A No. 1 of the Personal Income Tax Code), whereby one cannot oppose the contract value which, when lower than the VPT, constitutes the premise (contained in the very hypothetical situation) of application of the presumption, to at the same time set aside that presumption.
If this were the case, the regime enshrined in Articles 31-A No. 1 and 44 No. 2 of the Personal Income Tax Code would have no field of application, as mere mention of the contract at value lower than the VPT would always set aside the application of the latter, leading to the absurd result of a norm emptied of application and devoid of any useful effect, which cannot at all be attributed to legislative scope, which is presumed to have enshrined the most correct solutions and expressed itself in adequate terms.
Regarding the claim made in Article 207 of the initial petition, it is emphasized that it is not incumbent on the Arbitral Tribunal to conduct probative procedures assisting the parties, especially regarding documents or information which the latter should have at their disposal. One must not forget that, in this specific case, and specifically regarding the realization or sale value, it was the Claimant who personally effected, in the name and representation of B, the purchase and sale contract, "receiving the respective price and giving receipt therefor", as appears from the power of attorney issued and transcribed in point B of the facts. To which is added that the failure to produce proof does not prevent the continuation of the process on the basis of proof produced, pursuant to the provisions of Article 19 No. 1 of the RJAT.
The Claimant does not have grounds in this matter, having failed to rebut the presumption in question.
In these terms, the formal and material invalidating defects invoked by the Claimant are not considered verified, with the tax assessment act of IRC which is the object of the present arbitral proceedings being maintained.
7. RULING
In light of the foregoing:
(a) The exceptions raised by the TA of lack of competence and lis pendens are judged inapplicable;
(b) The suspension requested by the TA for a prejudicial question is rejected;
(c) The claim for declaration of illegality and annulment of the self-assessment of IRC No. 2007 ..., relating to the year 2004, in the amount of € 48,903.60 and, likewise, the inherent compensatory interest, is judged dismissed.
Value of the case: in € 48,903.60, in accordance with the provisions of Articles 3 No. 2 and 3 of the Regulation of Costs in Tax Arbitration Proceedings ("RCPAT"), 97-A No. 1 sub-paragraph a) of the CPPT and 306 of the CPC.
Costs in the amount of € 2,142.00 at the charge of the Claimant, in accordance with Table I attached to the RCPAT, and with the provisions of Articles 12 No. 2 and 22 No. 4 of the RJAT; 4 No. 4 of the RCPAT and further with the general procedural rule on costs contained in Article 527 No. 1 and 2 of the Civil Procedure Code.
Let notification be made.
Lisbon, 15 June 2015
The Arbitrator,
Alexandra Coelho Martins
Text prepared by computer, pursuant to Article 131 No. 5 of the Civil Procedure Code (CPC), applicable by referral of Article 29 No. 1 sub-paragraph e) of the RJAT, with blank verses.
The wording of this decision is governed by traditional orthography.
[1] Acronym for Legal Framework for Tax Arbitration
[2] Volume III, 6th edition, 2011, Áreas Publisher, pp. 488 to 490
[3] And also of the tax substitute, which for this case is not relevant
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