IRC Additional Assessment Annulled for Lack of Legal Reasoning and Factual Grounds (CAAD 75/2017-T)

ARBITRAL DECISION

I. REPORT

1. On 19 January 2017, the company "A…, Lda.", NIPC…, filed a petition for the constitution of a sole arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), with a view to declaring the illegality of the act assessing Corporate Income Tax No. 2016…, in the amount of € 744.44 and, likewise, against the act assessing compensatory interest No. 2016…, in the amount of € 106.01.

2. In accordance with article 6(1) of the RJAT, the Deontological Council of the Arbitration Centre designated the arbitrator undersigned, notifying the parties.

3. The tribunal is regularly constituted to examine and decide on the subject-matter of the case.

4. The allegations sustaining the petition for arbitral pronouncement of the Claimants are, in summary, as follows:

4.1. In the additional Corporate Income Tax assessment notified, not all of its grounds, whether factual or legal, are explicitly stated, only resulting therefrom that it concerns Corporate Income Tax for the fiscal year 2011, namely municipal surcharge in the amount of € 744.14.

4.2. That is, from the additional Corporate Income Tax assessment act only results the identification of the period, the amount to be paid and the means of recourse, with no identification resulting regarding the corrections that would have been at the origin of the tax assessment, allegedly deficient.

4.3. Similarly, the concrete legal provisions under which the tax and the Compensatory Interest are assessed are not identified.

4.4. Thus, it should be concluded that the assessment act now notified is totally incomprehensible to a normal recipient and, naturally, also to the present Claimant.

4.5. Now, there rests upon the Tax and Customs Authority the legal duty to make express reference to the reasons of fact and applicable legal provisions, and the reasoning that does not contain this reference is always insufficient and results in the annulment of the act.

4.6. Only by making express reference to the elements listed in article 77(2) of the General Tax Law will proper compliance with the law be achieved, which is why the services cannot omit the factual elements and applicable legal provisions, prejudicing the possibilities of defense of the taxpayer, as they indeed do prejudice in the present case.

4.7. The duty of reasoning or substantiation of any administrative or tax act has two associated purposes: (i) on the one hand, to inform the respective recipient of the reasons or motives that led to the taking of a decision in a certain sense; and (ii) on the other hand, to allow control to be exercised over the legality of the decision and the validity of the reasons underlying a particular concrete decision.

4.8. However, the tax and compensatory interest assessment notified to the Claimant is, as has been demonstrated, deficient regarding the necessary substantiation, factual and legal, whereby it is tainted with a defect of form, due to lack of substantiation, and should be annulled accordingly (cf. article 135 of the Code of Administrative Procedure).

4.9. And against what is expounded cannot be invoked the substantiation effected by way of reference to a previous Tax Inspection procedure.

4.10. Firstly, because there is not even any reference to any concrete document containing that same substantiation, that is, there is no reference to a concrete Tax Inspection Report, nor is the respective Tax Inspection procedure identified.

4.11. However, even if it were admitted that the assessment acts in question could be substantiated by some other external document, without the need for compliance with the minimum substantiation requirements required by article 77(2) of the General Tax Law, one would still have to require express reference in the assessment acts themselves to that same document, which did not occur.

4.12. This principle, enshrined in article 77(1) of the General Tax Law, also results from article 63(1) of the Complementary Procedure Regime for Tax Inspection, which makes the substantiation of tax or tax-related acts dependent on the conclusions of the Tax Inspection Report by way of "adherence to or agreement with these."

4.13. That is, even when substantiation by adherence or agreement is admitted, it is required that the author expressly refer to and identify the report, opinion, information or proposal with which he expresses this same agreement (cf. articles 63 of the RCPIT, 77(1) of the General Tax Law and 125(1) of the Code of Administrative Procedure).

4.14. Now, in the assessment act that also constitutes the subject of the present petition for arbitral pronouncement there is no reference, express or implied, to Tax Inspection Report or any other concrete document, whereby, given that the legally required substantiation does not appear in the act itself – that is, the demonstration of the presuppositions on which the assessment depends – it also cannot be understood, in the present case, that this has been complied with by reference to another document, which is not identified.

4.15. The assessment act in question is illegal, by omission of the legally required substantiation, thus violating articles 268(3) of the Constitution of the Portuguese Republic and 77 of the General Tax Law, and should be annulled accordingly (cf. article 135 of the Code of Administrative Procedure).

4.16. On the other hand, the time limits for assessment of taxes provided for in articles 45(1) and 45(4) of the General Tax Law have been exceeded.

4.17. In fact, where an act of Corporate Income Tax assessment for the fiscal year 2011 is concerned, the right of the Tax and Customs Authority to assess this tax expired on 31 December 2015.

4.18. Whereby the expiration of the right to assessment contends with the legality in concreto of the additional assessment by arising from an incorrect application, made in the assessment act, regarding a concrete tax situation, which determines the annulment of that same act, whereby, having the assessments whose legality is also contested not been validly notified to the Claimant within the legal time limit, the right of the Tax and Customs Authority to do so expired, in accordance with article 45(1) of the General Tax Law.

4.19. Having failed to take care the Tax and Customs Authority to promote the practice and valid notification of the assessment acts in analysis to the Claimant within the legally provided time limit, the legal order, guided by the aforementioned principles of certainty and security, sanctions it through the illegality of the acts performed whose annulment is necessary and is hereby requested (cf. article 135 of the Code of Administrative Procedure).

4.20. The duty of substantiation of tax acts results from article 268(3) of the Constitution of the Portuguese Republic, as well as from article 77 of the General Tax Law.

4.21. In the case at hand, the Tax and Customs Authority limits itself to listing mere conclusory statements which, as is pacifically and unanimously stated in doctrine and jurisprudence, do not represent the legally required substantiation.

4.22. Throughout the Tax Inspection Report, on the assumption that this has any relationship with the Corporate Income Tax and Compensatory Interest assessment act that constitutes the subject of the present case, the Tax Inspection Services of the Finance Department of Lisbon, limit themselves to stating that the difference between the amounts deposited in the bank accounts and the amounts declared for tax purposes constitutes undisclosed income from tax returns – which is refuted as being false.

4.23. This in a context in which the Claimant explained and demonstrated the reason for the use of the aforementioned bank accounts and explained that one of the partners engages in another professional activity for which he is remunerated.

4.24. On the other hand, the assessment act limits itself to additionally assessing municipal surcharge and compensatory interest.

4.25. Now, nowhere in the report of conclusions of the inspection action – if it has any relationship with this assessment act – is any mention made of the intention to assess municipal surcharge.

4.26. It was not possible for the Claimant to grasp the cognitive-functional path of the Tax Inspection Services as a result of which the corrections were made regarding Corporate Income Tax, since the services of the Tax and Customs Authority base the conclusions of the Tax Inspection Report only on mere extrapolations and conclusory statements.

4.27. As a result of this unsupported and undemonstrated analysis with clear violation of article 74 of the General Tax Law, which is invoked for all legal purposes, the Tax Inspection Services made corrections regarding Corporate Income Tax.

4.28. Therefore, it should be concluded that the Tax Inspection Services did not support, in the Tax Inspection Report, the facts on which they base themselves to conclude that the Claimant omitted income, whereby the assessment act practiced should be annulled.

4.29. On the other hand, the presumption of article 75(1) of the General Tax Law was disregarded, it not being a case for application of article 75(2)(a) of the same provision.

4.30. Therefore, it should be concluded that the Tax Inspection Services, by not explaining in the Report of Conclusions of the Inspection Action the conclusions on which they supposedly base themselves.

4.31. The assessment act performed should be annulled, if any relationship exists between the aforementioned report and this assessment act, which is unknown but speculated, out of caution.

4.32. The Tax and Customs Authority admits that the bank accounts identified, without prejudice to the respective holder, were allocated to the activity of the partner, whether through the Claimant or through his personal activity as a teacher.

4.33. Now, being such the case, and there being no evidence whatsoever of under-invoicing – because non-existent – it is manifest that the amounts therein contained, which do not find correspondence in the accounting of the Claimant, relate to other realities that are not income of the Claimant – at most of the partner.

4.34. The tax result was corrected through the presumption that the amounts deposited in the bank accounts relate to the activity of the Claimant – which does not correspond to the truth.

4.35. On this aspect, the Claimant cannot fail to allege that its elements and statements benefit from a presumption of truthfulness.

4.36. A presumption that was not shaken by the "presumptions" of the Tax and Customs Authority.

4.37. On the other hand, if the Tax and Customs Authority considered that the accounting of the Claimant did not merit credibility, namely for not reflecting the totality of invoicing, it should have resorted to taxation using indirect methods, processing the case and adapting the substantiation accordingly.

4.38. In the absence in the month of December 2011 of the patrimonial increase inherent in the practice of the contested assessment act, there is no income subject to taxation, with the necessary legal consequences.

4.39. Finally, even if the understanding of the Tax and Customs Authority could proceed, which is not granted, the truth is that the amounts determined are calculated in error, and the banking elements would imply a correction of smaller value.

4.40. Indeed, even if the Tax and Customs Authority were right in what it invokes, from the elements used it results that, in this concrete year, the "income" (always without conceding), would amount to a value lower than that determined in the conclusions of the inspection report, if any relationship exists between the aforementioned report and the assessment acts, which is not granted, and the assessment act is illegal also for this reason.

4.41. Finally, it must be stressed that, in accordance with the inquisitorial principle, enshrined in article 58 of the General Tax Law, the Tax and Customs Authority must, in the procedure, perform all necessary actions to satisfy the public interest and discover the material truth.

4.42. Now, throughout the inspection procedure (on the assumption that the Conclusions of the Tax Inspection Report present any relationship with the assessment acts in question) the Claimant always refuted the accusations and successively presented elements that contradicted the understanding of the Tax and Customs Authority.

4.43. Therefore, it must be concluded that the Tax Inspection Services violated the provision of article 58 of the General Tax Law and article 6 of the Complementary Regime for Tax Inspection, a violation which, given its contribution to the corrections made that underlie the issuance of the tax acts in question, cannot fail to taint them and lead to their respective annulment.

4.44. Article 35(1) of the General Tax Law, in the wake, moreover, of what was already established by the former article 83 of the Tax Procedure Code, provides that only "(...) compensatory interest is due when, due to a fact attributable to the taxpayer, the assessment of part or all of the tax due or the delivery of tax to be paid in advance, or withheld or to be withheld within the scope of tax substitution, is delayed."

4.45. It happens, however, that, at no time, in the act notified and now in question, did the Tax and Customs Authority manage to demonstrate, or even invoke, the presuppositions on which the assessment of compensatory interest depends, nor even invoking any legal provision under which it acted.

4.46. In view of the provision in articles 74(1) of the General Tax Law and 342(1) of the Civil Code, it is incumbent upon the Tax and Customs Authority to demonstrate and prove these facts constitutive of the right to assess compensatory interest, namely the fault of the taxpayer in any delay or postponement of the tax assessment.

4.47. Now, this fault must be considered or, at least, subject to consideration by the Tax and Customs Authority, and expressed in the substantiation of the tax acts.

4.48. This was not, however, what the Tax and Customs Authority did in the case sub judice, having instead limited itself to automatically requiring the said amount as compensatory interest, exceeding the legal formalities established for its assessment, thus tainting the tax acts of compensatory interest assessment in question with a defect of form, due to lack of substantiation, and with violation of law, for offense to the provision of article 35(1) of the General Tax Law.

4.49. Indeed, from the Compensatory Interest assessment notified to the Claimant and now in question there does not result the concrete demonstration of the fault of the taxpayer in the alleged delay in the tax assessment.

4.50. Moreover, the Final Tax Inspection Report containing no reference to compensatory interest, the ora Claimant was not given the opportunity to participate, in a prior hearing, in the decision to assess the same interest.

4.51. Thus, in compliance with article 267(5) of the CRP, article 60 of the General Tax Law provides for the obligation of the competent body of the Tax and Customs Authority to promote the hearing of the taxpayer involved on all relevant aspects, whether factual or legal, prior to the issuance of a final decision.

4.52. However, Law No. 16-A/2002, of 31 May, introduced a new wording to the aforementioned article 60(3) of the General Tax Law, now providing that "(...) having the taxpayer been previously heard in any of the phases of the procedure referred to in subparagraphs b) to e) of article 60(1), his hearing before the assessment is dispensed with, except in case of invocation of new facts on which he has not yet pronounced."

4.53. In the concrete case, the Tax and Customs Authority did not take care to safeguard either the letter or the ratio of the combined provisions of articles 267(5) of the Constitution of the Portuguese Republic, 60(1)(a) and (e) and 60(3) of the General Tax Law and 45 of the Code of Tax Procedure and Process.

4.54. Therefore, the Compensatory Interest assessment should also be annulled sub judice, by pretermission of essential legal formality in the scope of the tax procedure that gave it rise.

4.55. On the other hand, so that there remain no doubts whatsoever about the invoked pretermission of essential legal formality, it is important to note that the aforementioned change to the wording of article 60(3) of the General Tax Law, in no way diminished the meaning and scope of the right of hearing.

4.56. In fact, the limitation imposed only operates in cases where the person affected by the decision to be pronounced has already pronounced himself on all relevant aspects, factual and legal – which is not the case.

4.57. The Compensatory Interest assessment in analysis is also illegal, not only by reason of its lack of substantiation and violation of law, but also by pretermission of another essential legal formality, namely by violation of the provision in articles 267(5) of the Constitution of the Portuguese Republic and 60(1)(a) and 60(3) of the General Tax Law.

4.58. Whereby, in accordance with and for the purposes of article 135 of the Code of Administrative Procedure, the same should, also for this reason, be annulled.

4.59. By maintaining in force in the legal order the contested assessment acts, the Head of Division acted in error as to the factual and legal presuppositions, and the defects imputed to the assessment acts are transmitted to the decision itself that maintains them, which is hereby invoked for all legal purposes.

4.60. On the other hand, it is verified that the Head of Division does not pronounce itself on all the questions raised by the Claimant, thus violating the provision of article 56 of the General Tax Law.

4.61. Therefore, the aforementioned Decision of the Head of Division should be annulled because practiced with offense to the applicable legal norms and principles (cf. article 135 of the CPA).

1. For its part, the Respondent Tax and Customs Authority presented a response, in which it defended itself, in summary, in the following terms:

5.1. Service order 0I2013… was opened for the fiscal year 2011, by inspection proposal No. PIP2012… of 10 August 2012, following the information from the Financial Information Unit (UIF) of the Judicial Police, which refers to the practice of suspicious banking operations, namely operations carried out in a current account opened at a branch of B… on … in 01-07-2011, held by C… aged 19 years, and related to the commercial activity developed by the company "A…, Lda", the now Claimant, belonging to the parents.

5.2. Service Orders OI2014…/…, for the years 2012 and 2013, were opened following inspection proposal No. PIP2014… of 13 February 2014, in which the extension of the inspection procedure to the fiscal years 2012 and 2013 was proposed as the continuation of suspicious banking operations was noted.

5.3. The Claimant initiated activity on 08 May 2000, being registered in the Finance Service Cascais-… (…) for the activity "other educational activities, n.e.c." to which corresponds the CAE 85593.

5.4. The activity developed by "A…, Lda." consists essentially in school support and preparation (private lessons) for secondary school and higher education entrance exams and language courses, but without recognition by the competent ministry.

5.5. D… exercised the functions of manager at the time of the facts, providing services to the Claimant which, in accordance with receipts issued by him, consisted of lessons taught personally on matters of secondary and higher education, which he declares as exempt from VAT, in accordance with article 9(12) of the VAT Code.

5.6. In accordance with the statements made, the bank account with number …/… held by C… is managed by D… (managing partner of the Claimant) as if it were the company's account.

5.7. The Financial Information Unit of the Judicial Police further ascertained from the analysis carried out to the credit movements that the checks deposited were issued by private individuals, bearer or to the order of D… and that the transfers were ordered by private individuals with accounts in various banks, with descriptions such as "registration", "payment", "A…", "installment", "private lessons", etc.

5.8. The transfers made to the accounts of the parents of the account holder in question were used to pay various expenses, purchases and cash withdrawals through over-the-counter checks.

5.9. The Division of Fiscal Criminal Cases requested from the Public Prosecutor's Office that it make inquiries with the Bank of Portugal to obtain information about which bank accounts were held and authorized to be managed by D… (partner and manager), E… (partner and manager) and C… (son of the managing partners), as well as the sending of the movements contained in the aforementioned accounts.

5.10. Various credit and debit movements were identified which suggest, on the one hand, payments to the company by reason of the description of the transactions, and on the other hand, payments in favor of individuals who provided services to it, and it is still worth noting the fact that most of the credited funds were transferred in favor of private accounts of the two partners of the aforementioned A….

5.11. It was further ascertained that D… and his wife E… jointly submitted the Income Declaration - Form 3 of Personal Income Tax for the fiscal years 2011, 2012 and 2013 with the indication of income from category A – income from dependent work (article 2 of the Personal Income Tax Code) – paid by the company "A…, Lda." in total amounts of 18,000.00 euros, 18,317.52 euros and 17,748.24 euros, respectively.

5.12. On 27 September 2010, D… started activity as a sole trader, falling within the exemption regime in accordance with article 9 of the VAT Code, and in the simplified taxation regime as provided for in article 28 of the Personal Income Tax Code, having declared for the fiscal years in analysis, income from category B (independent work income – private lessons) in amounts of 86,092.75 euros, 32,156.38 euros and 35,903.75 euros, respectively.

5.13. Having analyzed the income declarations, it is noted that "A…, Lda." presented in Corporate Income Tax, in the years 2011, 2012 and 2012, the following values:

5.14. In the period between 2007 and 2014, the taxpayer presented the following fiscal results:

5.15. When questioned about the reason(s) for the successive presentation of negative results, the managing partner justified himself with the franchising of A… which went wrong.

5.16. The managing partner, during the inspection procedure, informed that the amounts transferred to the account of his wife, E…, were used to make the necessary payments for the functioning of the tutoring center.

5.17. From the analysis of accounting records, taking into account the fact that all payments were entered by counterpart of an account 11 – cash, we can infer that the entries made to the credit of that account correspond to the payments made by A… to meet its obligations, demonstrating that the bank accounts served as accounts of the company, where not only were the received amounts deposited but were, in the same way, made necessary payments to the functioning of the business.

5.18. From the analysis carried out to bank statements held by D…, E… and C…, it was possible to extract the following conclusions.

5.19. In the year 2011, the bank accounts identified were provisioned with a total amount of 337,724.46 euros.

5.20. Considering that, in this fiscal year, the company declared income in the amount of 102,596.78 € and that according to the available elements, customers pay the amounts owed when invoices are issued to them, then the company obtained receipts in the total of 126,194.03 €, which corresponds to the totality of the invoicing issued, or in another way to the sum of the declared income with the VAT charged.

5.21. Similarly, the managing partner declared, in his personal sphere, income (exempt from VAT) in the total of 86,092.75 euros.

5.22. Thus, deducting the declared amounts from the credited amounts in the bank accounts, we are left with 125,436.54 euros, corresponding to the omitted income in 2011.

5.23. The omitted income, corresponding to private lesson service provision for which no invoices or receipts were issued, are subject to Corporate Income Tax and should be added to the taxable profit declared in each of the fiscal years under study.

5.24. The Claimant was notified to exercise the right of hearing, which was considered in the final report.

5.25. Not agreeing with the additional assessment now contested, the Claimant filed a request for reconsideration, which was denied.

5.26. It happens, however, that it is important to distinguish the substantiation of acts, which consists in the reasons of fact and law that support them, from the act of notifying this substantiation to the taxpayer, and that notification may occur with the assessment act or, as is the case herein, occur at a time prior to the assessment act because effected with the notification of the final report of the tax inspection.

5.27. That is, the factual and legal substantiation of the disputed assessments is contained in the tenor of the final report of the tax inspection, a fact that the Claimant cannot be unaware of since the notification of the report expressly mentions that it will give rise to the issuance of assessments, against which he may react via administrative or contentious means.

5.28. But even if it were not so, that is, even if the Claimant were not notified of the final report, the Claimant could still, in accordance with article 37 of the CPPT, request from the AT that it notify him of the substantiation of the disputed assessments, which it did not do.

5.29. In contradiction to the Claimant, we are not faced with substantiation subsequent to the assessment act nor could the Claimant be unaware that the corrections promoted by the tax inspection would give rise to those assessments, with the factual and legal grounds explained in the final report.

5.30. In accordance with article 60(1)(a) of the General Tax Law, it is verified that the Claimant was notified in accordance with article 60(1)(e) of the same legal provision, that is, the ora Claimant was notified to exercise the right of prior hearing before the conclusion of the tax inspection report.

5.31. Paragraph 3 of the same legal provision provides that "having the taxpayer been previously heard in any of the phases of the procedure referred to in subparagraphs b) to e), his hearing before the assessment is dispensed with (…)".

5.32. In accordance with article 77 of the General Tax Law and article 153 of the CPA, it refers to the tax inspection report, herein giving as fully reproduced the reasons of fact and law contained in the substantiation of the tax inspection report, taking into account that "the information provided by the tax inspection are reliable, when substantiated and based on objective criteria, in accordance with the law", as provided for in article 76(1) of the General Tax Law.

5.33. As for the content of the substantiation of the disputed assessments in the present case, the same is in compliance with article 77(2) of the General Tax Law.

5.34. The applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax required by article 77(2) of the General Tax Law, as well as the means of recourse, are mentioned in the collection documents / assessment notes.

5.35. The aforementioned collection documents / assessment notes are considered notified via CTT, on 18-01-2016, regarding the assessment of compensatory interest, and on 10-02-2016, regarding the additional VAT assessment, in accordance with article 36 and articles 39(9) and (10) of the CPPT (cf. pages 69, 70, 75 and 76 which are attached to the present case).

5.36. The Claimant was validly notified, in accordance with article 36 of the CPPT and article 77 of the General Tax Law, and that results perfectly from the notifications made regarding the origin of the disputed assessments in the present case.

5.37. Thus, there is no defect of lack of substantiation and the tax assessment act is not voidable because the mere irregularity, or lack, of notification of the grounds does not generate invalidity of the tax assessment act, given that that is subsequent and external to this, and the illegality of the notification is different from the illegality of the notified act.

5.38. It should further be noted that, notwithstanding the aforementioned, notification is a condition of efficacy of the assessment and not a condition of validity, in accordance with article 77(6) of the General Tax Law, since notification of tax acts is a distinct and subsequent act to the act notified, and cannot, therefore, the defects of the notification affect the validity of the act, but only its efficacy, in accordance with article 36(1) of the CPPT.

5.39. In accordance with what is stated above, the defect of lack of substantiation of the Corporate Income Tax and compensatory interest assessment should be judged groundless.

5.40. With regard to the alleged expiration of the right to assessment, the Claimant is not correct, since the legal time limit contained in article 45(1) of the General Tax Law was extended in accordance with article 45(5) of the same legal text due to the right to assessment relating to facts regarding which a criminal inquiry was instituted.

5.41. In accordance with what is stated above, the expiration of the right to assessment due to lack of legal basis should be judged groundless.

5.42. The Tribunal does not see in what respect the AT could have violated the provision of article 77 of the CPPT, the substantiation of fact and law of the disputed corrections being clear, coherent and sufficient, whereby the defect of lack of substantiation of the final report should be judged groundless.

5.43. Regarding the alleged errors as to the factual and legal presuppositions, it is important to clarify that, contrary to what is alleged by the Claimant, the Tax Authority based itself on the elements it had available and from an easily perceptible logic concluded regarding the proposed corrections.

5.44. In accordance with article 75 of the General Tax Law, the presumption of truthfulness ceases when the declarations, accounting or records reveal omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent the knowledge of the real taxable matter of the taxpayer.

5.45. As set forth in the report of the inspection action, undeclared income was ascertained, taking into account the bank deposits and the fact that no invoices or receipts were issued regarding the service provision in question in the present case, whereby the presumption of truthfulness ceases.

5.46. Although the Claimant alleges error in the amounts determined, since the banking elements would imply a correction of smaller value, the Claimant presented no factual or legal grounds or evidence, in accordance with article 74 of the General Tax Law.

5.47. Regarding the municipal surcharge and the Claimant's argument that there is no reference in the Tax Inspection Report to municipal surcharge, it is emphasized that municipal surcharge is a municipal tax whose rate is set annually by the Municipalities and is levied on the taxable profit.

5.48. Having the Tax Administration determined the amount of € 99,218.41 of taxable profit, applying the reduced rate of 0.75%, relating to the year 2011, of the Municipality of Cascais, in which the registered office of the ora Claimant is located, the municipal surcharge is € 744.14.

5.49. The defect of violation of law due to error as to the factual and legal presuppositions should be judged groundless.

5.50. It is manifest that the entire inspection procedure, which preceded the additional assessment now challenged, sought material truth, and the Tax Inspection Services performed all actions they deemed necessary for its ascertainment, namely through the cross-referencing of information and cooperation with third-party entities, having also considered, with grounds, the "elements" brought to bear by the ora Claimant in the exercise, although untimely, of the right of hearing.

5.51. It resulted from the exercise of the right of hearing, as appears from the present case, that the Claimant brings to bear no evidentiary means that could support its argumentation, does not indicate what evidentiary means the AT could use to demonstrate its allegations, which are incompatible with the evidence produced by the AT, which also results from information obtained from the minutes of the criminal inquiry which determined the conduct of the inspection procedure.

5.52. Thus, the Inquisitorial Principle cannot have such a broad scope that it completely substitutes the obligations that fall on taxpayers, namely the obligation to present the necessary documents to demonstrate their claim.

5.53. It cannot thus be imputed to the act the defect of illegality by violation of the inquisitorial principle.

5.54. As for the substantiation of the assessment of compensatory interest, it follows from the corrections made by the AT that the Claimant assessed tax in an amount lower than legally due, being attributable to the taxpayer the delay in the delivery of the tax, in accordance with article 35(1) of the General Tax Law.

5.55. Regarding the delay in the tax attributable to the taxpayer and the consequent right to assess compensatory interest, what was said in the request for reconsideration is reiterated.

5.56. In accordance with article 35 of the General Tax Law, it provides that compensatory interest is "due when, due to a fact attributable to the taxpayer, the assessment of part or all of the tax due (…) is delayed."

5.57. Now, in the case at hand, it is verified that the ora Claimant did not comply with article 27 of the VAT Code, since it was found in the course of the inspection action that there was VAT not assessed and not delivered to the State Treasury.

5.58. The Tax Administration is subject to the Principle of Tax Legality, in accordance with article 8 of the General Tax Law, with respect to the rate, the calculation base and the period to which the compensatory interest refers.

5.59. The assessment of compensatory interest states that it concerns "Interest calculated in accordance with article 96 of the VAT Code and articles 35 and 44 of the General Tax Law, due to the delay in the assessment of part or all of the tax or due to the delay or insufficiency of payment, due to a fact attributable to the taxpayer."

5.60. In accordance with what is stated above, the illegality of the compensatory interest, which was assessed in accordance with article 35 of the General Tax Law, should be judged groundless.

1. On 31 May 2017, an arbitral order was issued, designating 19 June at 15 hours for the examination of the witnesses enrolled by both parties.

2. On 16 June 2017, the Claimant requested that the witness E… be examined as a party statement, and the use, in the present case, of the evidence produced in arbitral case 69/2017-T, which is pending at this arbitration center, with the consequent extraction of a certified copy of the minutes of the examination of 6 June 2017, as well as a copy of the recording of the depositions made.

3. On 19 June 2017, at 15 hours, the meeting provided for in article 18 of the RJAT took place.

8.1. The Respondent having not opposed the allegations of the Claimant, in accordance with article 421 of the Code of Civil Procedure, the Arbitral Tribunal determined the use of the evidence produced.

8.2. The Respondent dispensed with the examination of its witness.

8.3. The parties were notified to, in order and successively, present written arguments within a period of 10 days, with the time period for the Respondent to begin counting with the notification of the joining of the arguments of the Claimant.

8.4. The Arbitral Tribunal designated up to 30 September 2017 for the purpose of issuing the arbitral decision.

1. The Claimant presented written arguments, where it reaffirmed what was previously alleged.

9.1. The Respondent presented written arguments, where it reaffirmed what was previously alleged and pronounced itself regarding the deposition made by E….

9.2. The Respondent joined to the case, with the arguments, two documents, to prove that, in the private lesson activity, allegedly exercised personally, a fraction which is property of the Claimant was used.

1. On 21 September 2017, an arbitral order was issued extending the deadline for the decision by two months on the grounds of the special complexity of the case, in accordance with article 21(2) of the RJAT.

2. On 9 October 2017, an arbitral order was issued, requesting the Claimant to submit a new power of attorney and to ratify all the proceedings in these case files, which was done.

II – FACTS PROVEN

1. Service order 0I2013… was opened for the fiscal year 2011, by inspection proposal No. PIP2012… of 10 August 2012, following the information from the Financial Information Unit (UIF) of the Judicial Police, which refers to the practice of suspicious banking operations, namely operations carried out in a current account opened at a branch of B… on … in 01-07-2011, held by C… aged 19 years, and related to the commercial activity developed by the company "A…, Lda", the now Claimant, belonging to the parents;

2. Service Orders OI2014…/…, for the years 2012 and 2013, were opened following inspection proposal No. PIP2014… of 13 February 2014, in which the extension of the inspection procedure to the fiscal years 2012 and 2013 was proposed as the continuation of suspicious banking operations was noted;

3. The Claimant initiated activity on 08 May 2000, being registered in the Finance Service Cascais-… (…) for the activity "other educational activities, n.e.c." to which corresponds the CAE 85593;

4. The activity developed by "A…, Lda." consists essentially in school support and preparation (private lessons) for secondary school and higher education entrance exams and language courses, but without recognition by the competent ministry;

5. D… exercised the functions of manager at the time of the facts, providing services to the Claimant which, in accordance with receipts issued by him, consisted of lessons taught personally on matters of secondary and higher education, which he declares as exempt from VAT, in accordance with article 9(12) of the VAT Code;

6. A criminal inquiry …/2013…TDLSB being in progress, on 1 July 2015 a request for extraction of certified copy from the case file was authorized, and the Division of Fiscal Criminal Cases sent to the Tax Inspection Services copies of the Minutes of Interrogation, in which D… stated that "approximately in July 2011, when the franchising of A… went wrong, F… seized the family home, a property in the Alentejo and the IRS refunds, they thought their accounts were going to be seized and opened an account in the name of their son, C…, to where all clients began to make payments for the services provided by A…".

7. The bank account with number …/… held by C… is managed by D… (managing partner of the Claimant) as if it were the company's account;

8. The Financial Information Unit of the Judicial Police ascertained, through the analysis carried out to the credit movements that the checks deposited were issued by private individuals, bearer or to the order of D… and that the transfers were ordered by private individuals with accounts in various banks, with descriptions such as "registration", "payment", "A…", "installment", "private lessons".

9. The transfers made to the accounts of the parents of the account holder in question were used to pay various expenses, purchases and cash withdrawals through over-the-counter checks;

10. The Division of Fiscal Criminal Cases requested from the Public Prosecutor's Office that it make inquiries with the Bank of Portugal to obtain information about which bank accounts were held and authorized to be managed by D… (partner and manager), E… (partner and manager) and C… (son of the managing partners), as well as the sending of the movements contained in the aforementioned accounts;

11. In February 2015, the information requested was made available to the Tax Inspection Services for analysis and ascertainment of the tax situation of A…, Lda.;

12. C… is a student and appears in the periodic income declaration of the parents (Form 3 of Personal Income Tax) as a dependent with no income.

13. D… and his wife E… jointly submitted the Income Declaration - Form 3 of Personal Income Tax for the fiscal years 2011, 2012 and 2013 with the indication of income from category A – income from dependent work (article 2 of the Personal Income Tax Code) – paid by the company "A…, Lda." in total amounts of 18,000.00 euros, 18,317.52 euros and 17,748.24 euros, respectively.

14. On 27 September 2010, D… started activity as a sole trader, falling within the exemption regime in accordance with article 9 of the VAT Code, and in the simplified taxation regime as provided for in article 28 of the Personal Income Tax Code, having declared for the fiscal years in analysis, income from category B (independent work income – private lessons) in amounts of 86,092.75 euros, 32,156.38 euros and 35,903.75 euros, respectively.

15. Having analyzed the income declarations, the Tax Authority noted that "A…, Lda." presented in Corporate Income Tax, in the years 2011, 2012 and 2012, the following values:

1. In the period between 2007 and 2014, the Claimant presented the following fiscal results:

1. When questioned about the reason(s) for the successive presentation of negative results, the managing partner justified himself with the franchising of A… which went wrong, a fact also mentioned in the Minutes of Interrogation of Defendant;

2. The managing partner, during the inspection procedure, informed that the amounts transferred to the account of his wife, E…, were used to make the necessary payments for the functioning of the tutoring center;

3. From the analysis of accounting records, taking into account the fact that all payments were entered by counterpart of an account 11 – cash, it was ascertained that the entries made to the credit of that account correspond to the payments made by A… to meet its obligations, demonstrating that the bank accounts served as accounts of the company, where not only were the received amounts deposited but were, in the same way, made necessary payments to the functioning of the business;

4. From the analysis carried out to the accounts of D…, E… and C…, the Tax Authority extracted the following conclusions:

In the year 2011, the bank accounts identified were provisioned with a total amount of 337,724.46 euros.

Considering that, in this fiscal year, the company declared income in the amount of 102,596.78 € and that according to the available elements, customers pay the amounts owed when invoices are issued to them, then the company obtained receipts in the total of 126,194.03 €, which corresponds to the totality of the invoicing issued, or in another way to the sum of the declared income with the VAT charged. Similarly, the managing partner declared, in his personal sphere, income (exempt from VAT) in the total of 86,092.75 euros. (Annex 3)

Thus, deducting the declared amounts from the credited amounts in the bank accounts, we are left with 125,436.54 euros, corresponding to the omitted income in 2011.

The omitted income, corresponding to private lesson service provision for which no invoices or receipts were issued, are subject to Corporate Income Tax and should be added to the taxable profit declared in each of the fiscal years under study.

1. The Claimant was notified to exercise the right of hearing.

2. The Tax Authority made the following correction:

1. The Claimant filed a request for reconsideration, which was denied by order of the Head of Division (in a substitute capacity) notified by order of 21 October 2016.

III – FACTS NOT PROVEN

1. The amounts contained in the aforementioned bank accounts, which do not find correspondence in the accounting of the Claimant, relate to other realities that are not income of the Claimant.

IV – REASONING

The Tribunal based its conviction on the documents contained in the administrative case file, namely in the tax inspection report, having not considered witness testimony sufficient to overcome its probative force.

V – THE LAW

The following are the questions to be decided by the Arbitral Tribunal:

• The lack of substantiation of the Corporate Income Tax and compensatory interest assessment acts

• The expiration of the right to assessment;

• Error as to the factual and legal presuppositions;

• Illegality by violation of the inquisitorial principle and pursuit of material truth;

• The illegality of the compensatory interest assessment.

These questions will thus be analyzed:

1. LACK OF SUBSTANTIATION OF THE CORPORATE INCOME TAX AND COMPENSATORY INTEREST ASSESSMENT ACTS

It is verified that the Claimant was notified to, if it so wished, exercise the right of prior hearing regarding the draft tax inspection report, having even exercised this faculty.

Now, in accordance with article 60(3) of the General Tax Law, "having the taxpayer been previously heard in any of the phases of the procedure referred to in subparagraphs b) to e) of article 60(1), his hearing before the assessment is dispensed with, except in case of invocation of new facts on which he has not yet pronounced."

It is further verified that the Claimant was notified of the Tax Inspection Report, in which it is stated that it would be notified shortly of the aforementioned assessment.

As stated in article 76(1) of the General Tax Law, "the information provided by the tax inspection is reliable, when substantiated and based on objective criteria, in accordance with the law."

Article 77(1) of the same instrument further adds that "the decision of procedure is always substantiated by means of a concise exposition of the reasons of fact and law that motivated it, and the substantiation may consist of a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that form part of the tax inspection report."

It further states in article 77(2) of the same provision that "the substantiation of tax acts may be carried out in a summary manner, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax."

As stated in the Decision of the Supreme Administrative Court of 2 July 2014, Case No. 01074/13: "It is incontrovertible that the Administration has the duty to substantiate the acts that affect the rights or legitimate interests of the administered – in harmony with the principle set out in article 268 of the CRP and adopted in articles 124 of the CPA and 77 of the General Tax Law. Now, as doctrine and jurisprudence have exhaustively repeated, the substantiation must be express, through a concise exposition of the factual and legal grounds of the decision; clear, allowing that, through its terms, the facts and law on the basis of which a decision is made may be grasped with precision; sufficient, enabling the taxpayer to have concrete knowledge of the motivation of the act; and congruent, so that the decision constitutes the logical and necessary conclusion of the reasons invoked as its justification. It is also undisputed that substantiation requirements are not rigid, varying according to the type of act and the concrete circumstances in which it was made, sufficing with the clear expression of the reasons that led to a particular deliberative decision. The determination of the scope of the substantiating declaration presupposes, therefore, the search for adequate content, which must be, in a broad sense, sufficient to formally support the administrative decision. Thus, substantiation must be understood as the obligation to express explicitly (directly or by reference) the reasons of fact and law that determined the deciding agent or body, clarifying its recipient of the reasons that motivated it and the reason for the decision sense, aiming to provide the administered with knowledge of the cognitive and evaluative path of the act. Thus, the act will be sufficiently substantiated when the administered, placed in his position as a normal recipient – the bonus pater familiae of which article 487(2) of the Civil Code speaks – may come to know the factual and legal reasons that are at its genesis, so as to enable him to choose, in an informed manner, to accept or not the act."

In accordance with the Decision of the Central Administrative Court of the North, of 24 May 2012, Case No. 00731/09.0BEPNF: "(…) substantiation must be contextual and integrated into the act itself (even though it may be in a referential manner), express and accessible (through a concise exposition of the factual and legal grounds of the decision), clear (so as to allow that, through its terms, the facts and law on the basis of which a decision is made may be grasped with precision), sufficient (allowing the recipient of the act concrete knowledge of its motivation) and congruent (the decision should constitute the logical and necessary conclusion of the reasons invoked as its justification), being equivalent to the lack of substantiation the adoption of grounds which, by obscurity, contradiction or insufficiency, do not concretely clarify the motivation of the act. Using the language of jurisprudence, the act is only substantiated if a normally diligent or reasonable recipient – a normal person – placed in the concrete situation expressed by the substantiating declaration and before the concrete administrative act (which will determine, depending on its diverse nature or type, a greater or lesser requirement of the density of substantiation elements) is in a position to know the functional (not psychological) cognitive and evaluative path of the author of the act, and therefore it is essential that the contextual discourse make him aware of the entire course of the apprehension and assessment of the factual and legal presuppositions that support the decision or the reasons why a decision was made in a certain sense and not in any other."

In accordance with article 77 of the General Tax Law and article 153 of the CPA, the Tax Administration refers to the Tax Inspection Report prepared by it.

It is verified that the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax required by article 77(2) of the General Tax Law, as well as the means of recourse, are mentioned in the assessment notes.

It is therefore perfectly possible, from the information made available by the Tax Administration, to understand the functional cognitive and evaluative path of the preparation of the act.

It appears, therefore, clear that, contrary to what the Claimant affirms, there is no lack of substantiation of the disputed assessments, and any normal recipient, especially after becoming aware of the tax inspection report, understands the reasons for those assessments.

In any case, what article 37 of the CPPT provides is that "if the communication of the decision in tax matters does not contain the legally required substantiation, the indication of the means of recourse against the notified act or other requirements required by the tax laws, the interested party may, within 30 days or within the time limit for reconsideration, appeal or challenge or other legal means that may result from this decision, if shorter, request the notification of the requirements that were omitted or the passage of a certified copy that contains them, exempt from any payment."

Notwithstanding notification being a condition of efficacy of the assessment and not a condition of validity, in accordance with article 77(6) of the General Tax Law, it is stressed that the Claimant opted to not even resort to this means.

It is verified, therefore, that there is no defect of lack of substantiation of the tax act.

1. EXPIRATION OF THE RIGHT TO ASSESSMENT

The Claimant further argues that the right to assessment of the tax has expired.

Article 45(1) of the General Tax Law indeed provides that "the right to assess taxes expires if the assessment is not validly notified to the taxpayer within a period of four years, when the law does not fix another."

Paragraph 4 of the same article adds that "in periodic taxes, the expiration period is counted from the end of the year in which the tax fact occurred and, in taxes of single obligation, from the date on which the tax fact occurred, except in the value added tax and income taxes when taxation is carried out by withholding at source as a final withholding, in which case that period is counted from the beginning of the following calendar year in which the tax fact occurred or the exigibility of the tax, respectively."

It happens, however, that the inspection report presented by the Tax Authority states that the inspection procedure took place in the scope of Criminal Case …/2013…TDLSB.

Now, as stated in article 45(5) of the General Tax Law, "whenever the right to assessment relates to facts regarding which a criminal inquiry was instituted, the period referred to in article 45(1) is extended until the closing or judgment by final order, plus one year."

Whereby we must understand, given the factual matters proven, that the expiration period is that provided for in article 45(5) of the General Tax Law and not that provided for in article 45(1) of the same provision.

There is, therefore, no expiration of the right to assessment.

1. ERROR AS TO THE FACTUAL AND LEGAL PRESUPPOSITIONS

The Claimant considers that there is error as to the factual and legal presuppositions of the assessments, because its income declarations were not considered truthful.

Article 75(1) of the General Tax Law indeed provides that "the declarations of taxpayers presented in accordance with the provisions of the law are presumed to be truthful and made in good faith, as well as the data and calculations entered in their accounting or records, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends."

Only that, as stated in article 75(2) of the same provision, this presumption "does not apply when:

a) The declarations, accounting or records reveal omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent knowledge of the real taxable matter of the taxpayer;

b) The taxpayer fails to comply with the duties incumbent upon him to clarify his tax situation, except when, in accordance with this law, the refusal to provide information is legitimate;

c) The taxable matter of the taxpayer deviates significantly downward, without justified reason, from the objective indicators of activity of a technical-scientific nature provided for in this law.

d) The income declared under Personal Income Tax deviates significantly downward, without justified reason, from the income standards that may reasonably be expected to allow the manifestations of wealth evidenced by the taxpayer in accordance with article 89-A."

In accordance with article 63-C(1) of the General Tax Law, "taxpayers subject to Corporate Income Tax, as well as taxpayers subject to Personal Income Tax who have or must have organized accounting, are obliged to have, at least, one bank account through which only payments and receipts relating to the business activity developed must be managed."

Now, having verified the Tax Administration the existence of divergences between the amounts deposited and the income declared under Corporate Income Tax, the presumption referred to in article 75(1) of the General Tax Law ceases.

As stated in article 74(1) of the General Tax Law, "the burden of proof of the facts constitutive of the rights of the tax administration or of taxpayers rests on whoever invokes them."

On the one hand, in accordance with article 63-C of the General Tax Law, the Claimant should have had a bank account through which payments and receipts relating to its activity were exclusively managed.

And furthermore, the Claimant failed to prove that the income contained in the bank accounts was allocated to another activity than its own.

Therefore, the defect of violation of law due to error in the factual and legal presuppositions is groundless.

1. ILLEGALITY BY VIOLATION OF THE INQUISITORIAL PRINCIPLE AND PURSUIT OF MATERIAL TRUTH

It now falls to consider the allegation of illegality by violation of the inquisitorial principle and pursuit of material truth.

Article 58 of the General Tax Law indeed provides that "the tax administration must, in the procedure, perform all necessary actions to satisfy the public interest and discover material truth, and is not subordinated to the initiative of the author of the petition."

And article 6 of the Complementary Procedure Regime for Tax Inspection and Customs adds that "the inspection procedure aims at the discovery of material truth, with the tax administration adopting, of its own motion, the appropriate initiatives to that end."

As stated in the Decision of the Central Administrative Court of the South of 7 May 2013, case no. 06418/13, "The tax inspection procedure aims, as it could not but aim, as occurs in any administrative procedure, at the discovery of material truth. The inspection procedure, like any other administrative procedure, must be considered as an instrument that guarantees and ensures the effective respect for the fundamental rights and guarantees of taxpayers by the Tax Administration. One of the ways to effect and implement this respect for the rights and guarantees of taxpayers is through the principle of material truth as a way of implementing the principles of pursuit of the public interest and equality. This principle, enshrined in article 6 of the RCPIT, requires that the Tax Administration, within the scope of the inspection procedure, seek to gather the evidentiary elements that enable it later to substantiate the tax act that may be practiced. It is a matter of investigating and ascertaining the correct fulfillment of tax obligations by taxpayers and, on the basis of that investigation, gathering elements that enable the determination of the possible existence of irregularities. In conclusion, the principle of material truth sets out what should be the objective of the inspection procedure – the discovery of material truth. This principle is a concretization of the examined inquisitorial principle (stated in article 58 of the General Tax Law as a general principle of the tax procedure), being demanded by the public and indisposable nature of the tax-law relationship, thus encompassing, therefore, its factual elements (cf. Diogo Leite de Campos and Others, General Tax Law annotated and commented, 3rd. edition, Vislis Editors, 2003, p.554; João Fernando Damião Caldeira, The Tax Inspection Procedure - A contribution to its understanding in the light of Fundamental Rights, University of Minho, 2011, p.183 et seq.). In the case sub judice, the Tribunal does not perceive in what respect the action of the Tax Authority within the scope of the inspection procedure that substantiated the tax acts that are the subject of the present case may be considered as violating the examined inquisitorial and material truth principles, violations which are also not specified by the appellant."

We can verify that the action of the Tax Administration performed all necessary actions to proceed with the discovery of material truth, and the Claimant has not presented any proof of the facts it alleges.

Therefore, the violation of the inquisitorial principle and pursuit of material truth is groundless.

1. ILLEGALITY OF THE COMPENSATORY INTEREST ASSESSMENT

Finally, it falls to consider the question of the illegality of the compensatory interest assessment.

Article 35(1) of the General Tax Law indeed provides that "compensatory interest is due when, due to a fact attributable to the taxpayer, the assessment of part or all of the tax due or the delivery of tax to be paid in advance, or withheld or to be withheld within the scope of tax substitution, is delayed."

Paragraph 3 of the same article adds that "compensatory interest is calculated day by day from the end of the time limit for submission of the declaration, the end of the time limit for delivery of the tax to be paid in advance or withheld or to be withheld, until the remedy, correction or detection of the deficiency that caused the delay in assessment."

It further states in article 35(6) of the same provision that "for the purposes of this article, there is always considered to be delay in assessment when the tax return statements are submitted outside the legal time limits."

It was verified that the substantiation of the compensatory interest assessment flows from the corrections made by the Respondent, in which the Claimant assessed tax in an amount lower than legally due, being attributable to it the delay in the delivery of the tax, in accordance with the provision in article 35(1) of the General Tax Law.

In accordance with article 35(10) of the General Tax Law, "the rate of compensatory interest is equivalent to the rate of legal interest fixed in accordance with article 559(1) of the Civil Code."

Given the action of the Claimant, we must understand that there is no illegality in the compensatory interest assessment, which is due in accordance with article 35 of the General Tax Law.

VI – DECISION

The petitions for illegality of the Corporate Income Tax assessment act No. 2016…, in the amount of € 744.44 and, likewise, against the compensatory interest assessment act No. 2016…, in the amount of € 106.01, are judged to be groundless.

The case is assigned the value of € 850.15 (value indicated and not contested), and the corresponding arbitration fee value of € 306.00 in accordance with Table I of the Arbitration Fees Regulation for Tax Arbitration Procedures.

Costs borne by the Claimant.

Lisbon, 30 November 2017

The Arbitrator

(Luís Menezes Leitão)