Process: 747/2015-T

Date: May 25, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitral decision concerns a taxpayer's challenge to the Tax Authority's denial of capital loss carryforward from 2013 to 2014. The claimant sought to carry forward capital losses on securities from 2013 to offset capital gains in 2014 under Article 55 of the IRS Code (CIRS). The Tax Authority denied the carryforward, arguing that the claimant's election for non-aggregation of investment income in the 2013 tax return eliminated the right to carry forward losses under Article 55(6) as then written. The claimant attempted to correct this choice, claiming the aggregation option in 2014 was intended, but the Tax Authority noted the correction deadline under Article 59(3)(b)(II) had expired. The CAAD arbitral tribunal confirmed its jurisdiction under the Administrative Arbitration Regime (RJAT) to hear the dispute. The case highlights the critical interaction between annual tax treatment elections (aggregation vs. separate taxation) and multi-year loss carryforward rights, demonstrating how procedural choices in one tax year can irreversibly affect tax benefits in subsequent years.

Full Decision

Arbitral Decision

Claimant: A…

Respondent: TAX AND CUSTOMS AUTHORITY

I - REPORT

  1. A…, (hereinafter referred to as the Claimant) taxpayer no. …, with tax residence at …, …, filed on 14 December 2015, a petition for the constitution of an arbitral tribunal, pursuant to the provisions of paragraph a) of no. 1 of article 2 and article 10, no. 1 and 2, both of Decree Law no. 10/2011, of 20 January (hereinafter referred to as RJAT), and of articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, in which the Tax and Customs Authority is requested (hereinafter referred to as AT or Respondent), with a view to the declaration of illegality and consequent annulment of the decision denying the administrative appeal, filed against the Personal Income Tax (IRS) assessment no. 2015 ..., in the amount of 1,594.42 €, relating to the year 2014.

  2. The petition for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 22 December 2015 and was immediately notified to the Respondent in accordance with legal provisions.

  3. In accordance with and for the purposes of paragraph a) of no. 2 of article 6 of RJAT, by decision of His Excellency the President of the Deontological Council of CAAD, duly notified to the parties, within the prescribed timeframes, the undersigned was appointed as arbitrator, who communicated to the Deontological Council and to the Centre for Administrative Arbitration his acceptance of the assignment within the timeframe stipulated in article 4 of the Code of Ethics of the Centre for Administrative Arbitration.

  4. The Singular Arbitral Tribunal was constituted on 23 February 2016, in accordance with the prescription of paragraph c) of no. 1 of article 11 of RJAT.

  5. An arbitral order was rendered on 2016/04/04, duly notified to the parties, which justified the waiver of holding the meeting referred to in article 18 of RJAT and granted them the opportunity to submit written arguments.

  6. In support of its request, which it summarized and announced from the outset in the sense of being "recognized the right to carry forward the Capital Losses on Securities determined in 2013 to the income of the same nature determined in 2014" and from what can be extracted from its petition for arbitral decision, the Claimant makes various considerations about the rules for determination of taxable income, in particular regarding aggregation (article 22 of CIRS), objecting to the interpretation carried out by AT, with respect to no. 6 of article 55 of CIRS, to conclude with the condemnation of the "Tax and Customs Authority to the revision of the tax act".

  7. AT, in its response, upholding a position contrary to that presented by the Claimant and, in accordance with the position already assumed by it in the administrative appeal, emphasizes the fact that the Claimant opted for non-aggregation in the income statement, relating to the year 2013, which eliminates the possibility of carry-forward, given the wording at that time of no. 6 of article 55 of CIRC, to which it adds the fact that, at the date of the administrative appeal filed by the Claimant, the deadline for correction/amendment of the statement sought by the latter had already expired, pursuant to paragraph II of paragraph b) of no. 3 of article 59 of CIRS.

  8. The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1 paragraph a), 5 and 6 no. 1 of RJAT.

  9. The parties have legal capacity and standing, are legitimate and are properly represented (articles 3, 6 and 15 of CPPT, ex vi of article 29 no. 1 paragraph a) of RJAT).

  10. The proceedings are not subject to any nullities and no exceptions were raised.

  11. There is, therefore, no obstacle to the examination of the merits of the case.

II - GROUNDS FOR DECISION

A. MATTER OF FACT

A1. Facts established as proven

i. Following notification of the additional Personal Income Tax assessment no. 2015 …, relating to the year 2014, the Claimant filed on 27 July 2015, an administrative appeal with the Tax Office of … …, which was assigned no. …2015…,

ii. dated 12/08/2015 and through official letter no. …/…/2015, the Claimant was notified of the draft decision regarding the administrative appeal, with indication for the exercise of the right to be heard provided in article 60 of the General Tax Law,

iii. on 26/08/2015 the Claimant exercised his right to be heard and submitted it to the competent tax services,

iv. in exercising his right to be heard, the Claimant stated, among other things, that he intends to correct the text [of the administrative appeal] "which, by mistake, does not correspond to what was intended, that is, contrary to what is stated there, the option exercised in 2014 regarding the aggregation of income of category G is correct"

v. under official letter no. … of 24/09/2015 issued by the Financial Directorate of …/Tax Office of … …, the Claimant was notified of the order denying the administrative appeal in full,

vi. on 14/12/2015, a petition for arbitral decision was filed with CAAD which gave rise to the present proceedings.

A.2. Facts established as not proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Grounds for the matter of fact established as proven and not proven

With respect to the matter of fact, the Tribunal need not rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the facts proven from those not proven [(cf. art. 123, no. 2 of CPPT, and article 670 of the Code of Civil Procedure, applicable ex vi of article 29, no. 1, paragraph a) and e) of RJAT)].

Thus, the facts relevant to the determination of the case are selected and determined according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of law (cf. article 596 of CPC, applicable, ex vi of article 29, no. 1, paragraph e) of RJAT).

Thus, having regard to the positions assumed by the parties, the documentary evidence attached to the case file and the PA attached, the facts listed above are considered proven as relevant to the decision.

B. MATTER OF LAW

One may start from the definition of taxable income in the context of Personal Income Tax (IRS) as the value on which the tax rate will apply, in order to determine the amount to be assessed.

Taxable income will thus correspond to the sum of income from the various categories earned by the taxpayer, in each year, which, after legal deductions have been made, will determine the tax to be paid.

Once the net income of each of the categories is determined, the principle of taxation of global net income requires that the respective aggregation be carried out.

According to the provision of article 22 of CIRS, taxable income in IRS is "that which results from the aggregation of income from the various categories earned in each year, after the deductions and deductions provided for in the following sections have been made".

Thus translating in practice the aggregation, in the sum of the net income from the various income categories, in order to obtain the global net income, without prejudice to the application of article 55 of CIRS which creates rules for the transferability of losses between the various categories, in the terms provided therein.

At the time of the underlying facts, article 55 no. 1 of CIRS read as follows: "without prejudice to the provisions of the following numbers, the negative net result determined in any income category is deductible from the set of net income subject to taxation."

Unlike the current wording (introduced by article 2 of Law no. 82-E/2014, of 31 December) which conditions the deduction of the negative result to the positive net results of the same income category, at that time, the device in question provided for the deduction of losses "negative net result determined in any income category", enshrining the principle of intercommunicability of categories, which in truth also in practice was blurred given what its various numbers provided, "although no. 1 of article 55 enshrines the opposite principle – the intercommunicability of categories – the following numbers of the article make such principle impossible, in a solution that is difficult to articulate with taxation on real income and the unity of the tax"[1].

On the other hand, no. 6[2] of article 55 of CIRS provided as follows: "the negative balance determined in a given year, relating to the operations provided for in paragraphs b), e), f) and g) of no. 1 of article 10, may be carried forward for the following two years, to income of the same nature, when the taxpayer opts for aggregation".

Having the Claimant determined in his 2013 IRS statement (Form 3) a negative net income in category G, specifically arising from "the paid disposal of partnership interests" - paragraph b) of no. 1 of article 10 of CIRS, it seems that there are no doubts as to the admissibility of carrying forward these losses for the following two years being dependent on the explicit option for aggregation.

It would have been necessary, in our understanding, a voluntary act of the taxpayer that embodied the choice for aggregation, in the conditions referred to, under no. 6 of article 5 in the sense that "the negative balance determined in a given year, relating to the operations provided for in paragraphs b), e), f) and g) of no. 1 of article 10, may be carried forward for the following two years, to income of the same nature, when the taxpayer opts for aggregation", an option which moreover is verified in other situations namely those provided in articles 22, no. 3, 71, nos. 6 and 7, and 72, no. 8 (wording at that time) together with others intended for "non-habitual residents", where aggregation by option of the taxpayer is provided.

In the present proceedings, at issue are the capital losses determined by the Claimant in the year 2013 relating to income of category G (income obtained with "paid disposal of partnership interests") and the claim for their carry-forward to income of the same nature obtained by him in the year 2014.

Finding from the documents submitted by the Claimant and the attached administrative file that; (i) in the income statement – form 3 – with reference to the year 2014, the Claimant having determined a capital loss, indicated in table 9 of the respective Annex G to opt for non-aggregation, and (ii) having determined in the year 2014 a capital gain indicated in table 9 of Annex G the option for aggregation, the Claimant will have no reason whatsoever regarding his claim to see "recognized the right to carry forward the capital losses determined in 2013", for subsequent years, namely in 2014, since the legally appropriate moment for purposes of the possibility of exercising carry-forward for subsequent years, regarding capital losses on securities, should have been the year in which they were determined, that is, in 2013, at which time, as noted, the Claimant did not opt for aggregation, as is clear from his income statement and its annexes.

One thus subscribes to, in this manner, and without need for other considerations, the position of AT, in the segment in which it affirms that, having the Claimant determined in the year 2013 a capital loss regarding income of category G and having opted for non-aggregation, through the declaration in that sense made in field 9 of Annex G of Form 3 of the IRS, eliminated the legal possibility of carrying forward in the following two years the capital losses determined in 2013, given what was then provided in no. 6 of article 55 of CIRS.

C. DECISION

In accordance with the foregoing, this Singular Arbitral Tribunal decides as follows:

to declare the petition for annulment of the Personal Income Tax assessment no. 2015 ..., relating to the year 2014, wholly without merit,

to condemn the Claimant to pay the costs of the proceedings.

D. VALUE OF THE CASE

In accordance with the provisions of article 296, nos. 1 and 2 of the Code of Civil Procedure, approved by Law no. 47/2013, of 26 June, 97-A) no. 1, paragraph a) of the Code of Tax Procedure and Process, and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at 1,594.42 €.

E. COSTS

In accordance with articles 12, no. 2, 22, no. 4 of RJAT, and articles 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings, and Table I attached hereto, the amount of costs is set at 306.00 €, to be borne by the Claimant.

NOTIFY

Document prepared by computer, in accordance with article 131 of the Code of Civil Procedure, applicable by referral of article 29, no. 1, paragraph e) of the Legal Regime for Arbitration, with blank verses, and revised by the arbitrator.

The drafting of this decision is governed by the spelling prior to the 1990 Orthographic Agreement.

Lisbon, twenty-five of May of two thousand and sixteen

The Arbitrator

(José Coutinho Pires)

[1] J.L. Saldanha Sanches, Manual de Direito Fiscal, 3rd Edition, Coimbra Editor, 2007, p.333.

[2] Repealed by Law no. 82-E/2014, of 31 December.