IRS Simplified Tax Regime: Unlawful Classification Challenged at CAAD (772/2014-T)

ARBITRAL DECISION

CLAIMANT: A..., NIF No. …, resident in …, …, 4th Floor, …-… Porto.

RESPONDENT: Tax and Customs Authority (hereinafter referred to as AT) represented by Dr. B… and Dr. C…, as per the appointment order of the General Director of AT, dated 09-11-2014.

I – REPORT

1. The CLAIMANT submitted a request for arbitral determination, wherein it states that the same has as its object the declaration of illegality of the assessment acts for the following taxes:

· Assessment of Personal Income Tax (IRS), in the amount of € 12,766.60, relating to the year 2012;

· Assessment of Personal Income Tax (IRS), in the amount of € 15,616.18, relating to the year 2013.

1. The CLAIMANT presents as justification for the joinder of claims the fact that such assessment acts resulted from the incorrect classification of the Claimant by the Tax Administration under the simplified taxation regime occurring in 2012, with the taxpayer being subject to that regime for a minimum period of 3 years (2012, 2013 and 2014), to which is added the fact that the decisions to be rendered fundamentally depend on the assessment of the same facts and the corresponding legal classification.

2. The Claimant ultimately petitions that this Arbitral Tribunal make a determination

To the effect that the present requests for declaration of illegality of the assessment acts should obtain a fully favorable decision.

1. The CLAIMANT submitted a Request for constitution of the Arbitral Tribunal on 18-11-2014, which was accepted by the Esteemed President of CAAD on 20-11-2014, leading to notification of AT, in compliance with no. 3 of art. 10 of the Legal Framework for Arbitration in Tax Matters (hereinafter RJAT).

2. The RESPONDENT came to pronounce itself for the maintenance of the assessment acts in question (documents sent with the Administrative Record).

3. Having the CLAIMANT chosen not to appoint an arbitrator, pursuant to the provisions of no. 1 of article 6 of the RJAT, the signatory was appointed sole arbitrator by the Deontological Council of the Center for Administrative Arbitration on 15-01-2014, an appointment that was duly accepted and notified to the parties who did not object to the said appointment.

4. The Sole Arbitral Tribunal was constituted on 02-02-2015, combining the provision in subsection c) of no. 1 with no. 8 of article 11 of the RJAT, wherefore on 04-02-2014 the AT was notified to, in accordance with and for the purposes of the provisions in nos. 1 and 2 of article 17 of the RJAT, submit its Reply and the corresponding administrative record;

5. Which occurred on 05/03/2015;

6. Having been scheduled on 25/03/2015 the meeting provided for in art. 18 of the RJAT, the same took place on 10/04/2015, from which minutes were drawn up, which contain:

9.1. The clarification of the CLAIMANT that the request for constitution of the Arbitral Tribunal falls within the terms of subsection a) of no. 1 of article 2 of the RJAT;

9.2. The maintenance by the RESPONDENT of everything previously stated by it;

9.3. The setting of the date of 28-07-2015 for the pronouncement of the arbitral decision;

II – PRELIMINARY MATTERS

1. The tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, subsection a), 5, no. 2 and 6, no. 1 of the RJAT.

2. The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.

3. The joinder of claims presented by the CLAIMANT complies with the provisions of no. 1 of article 3 of the RJAT.

4. The proceeding does not suffer from any defects that would invalidate it.

III - POSITION OF THE PARTIES

III.A - IN SUPPORT OF THE REQUEST FOR CONSTITUTION OF THE ARBITRAL TRIBUNAL

The CLAIMANT presents, with relevance to sustain the request for constitution of this Arbitral Tribunal, in summary that:

1. Since 01-01-1986 it has been registered for the exercise of the activity of Official Accountant Technician, having on 24-03-2014 delivered a declaration of changes indicating as primary activity that of Statutory Auditor, with the other activity becoming secondary.

2. It was, between 2001 and 2010, subject to the organized accounting regime by obligation.

3. In the year 2011 it was notified of the classification under the simplified regime, and it was recognized by AT that in that fiscal year the organized accounting regime should be maintained.

4. On 31-05-2013 it submitted its income tax return for the fiscal year 2012, composed of annexes A, C (declared taxable profit in the amount of € 65,654.88), F and H, with the same showing the status of being incorrect, being notified by official letter of 10-06-2013 of the central error "C70 – incompatibility between the annex delivered and option in record" (the income from category b – self-employed work – should have been declared in annex B).

5. On 17-06-2013 it questioned the competent tax service by registered letter with return receipt regarding the Simplified Regime, fixed for the three-year period 2012-2014.

6. By official letter No. …, of 03-09-2013, it was notified that its request could not be granted, because in the fiscal year 2010 the annual gross amount of income was less than 150,000.00 euros and no election was made for the organized accounting regime provided for in no. 4 of article 28 of the CIRS, thus becoming framed in the simplified regime for the three-year period from 2011 to 2013, but, for reasons they are unaware of, that classification was changed to the three-year period from 2012 to 2014, with the organized accounting regime being maintained in the year 2011, requiring that its income tax return relating to the year 2012 be corrected.

7. Not agreeing, it filed a Gracious Complaint, alleging that pursuant to no. 5 of art. 28 of the CIRS, the classification is made in either regime for minimum periods of three years, and therefore the cycles of 2001-2003, 2004-2006, 2007-2009, 2010-2012 were generated, only leaving that regime when there is an unequivocal manifestation of will, materialized in the presentation of a declaration of changes, which did not occur, whereby AT cannot consider that, as soon as the turnover is less than € 150,000.00, the taxpayers, if they do not make an election, fall into the simplified regime, requesting the classification under the organized accounting regime for IRS 2012.

8. By official letter No. …/…-…, of 11-09-2013, it was notified of the order for preliminary rejection of the Gracious Complaint considering that this is not the proper means for the intended purpose, since it intended the annulment of an administrative act and not of a tax act.

9. On 16-10-2013, it filed an Administrative Appeal of the rejection of the gracious complaint, alleging that the non-acceptance of its income tax return constitutes a tax act, arising from an erroneous classification, subject to review by AT in the gracious complaint that it filed.

10. By official letter No. …/…-… of 05-05-2014, it was notified of the rejection of the administrative appeal on the grounds that the classification under the regime for determining business income does not constitute a tax act for the purposes of article 68 of the CPPT (gracious complaint procedure), but only a decision rendered by AT whose means of contesting is the administrative appeal procedure established in article 66, no. 1 of the CPPT.

11. The said official letter No. …/…-… further clarified that based on Circular No. 5/2007, of 2007-03-13, to taxpayers covered by the organized accounting regime by legal obligation, the minimum period of 3 years of permanence in the regime provided for in no. 5 of article 28 of the CIRS (in the wording of Law No. 53-A/2006) does not apply, since that taxation does not result from a manifest will expressed by the organized accounting, only proceeding with the taxpayer's request if the classification in IR under the organized accounting regime in the fiscal years after 2007 resulted from choice, whereby having the taxpayer in the fiscal year 2011 calculated income less than € 150,000.00 and not having exercised the express choice of taxation by organized accounting for 2012, the classification under the simplified regime for the fiscal year 2012 was correct.

12. On 27-01-2014 the taxpayer was notified to proceed with voluntary submission of model 3 declaration relating to the year 2012, which she did on 14-02-2014.

13. On 12-06-2014 she proceeded to submit the declaration relating to 2013, in view of AT's intransigence and the need to comply with her tax obligation and avoid more serious consequences.

14. As a consequence of the submission of the declarations, the Claimant was notified to pay the amounts resulting from the assessment of IRS relating to the year 2012, in the amount of € 12,766.60 (assessment No. 2014 …), and from the assessment of IRS relating to the year 2013, in the amount of € 15,616.18 (assessment No. 2014 …).

THE CLAIMANT SETS FORTH WHY IT DOES NOT AGREE WITH THESE ASSESSMENTS:

REGARDING THE YEAR 2012

1. As she had been taxed in IRS under the organized accounting regime since 01-01-2001, by obligation, and continued in the years 2001, 2002, 2003, 2004, 2005 and 2006, in 2007 she was classified under the accounting regime, given the value of services rendered in 2006, and given the amendment introduced by Law No. 53-A/2006 to no. 5 of article 28 of the CIRS, she initiated a minimum period of permanence of three years under the accounting regime, that is, she initiated the three-year period 2007-2009 and, in 2010, initiated the three-year period 2010-2012, as she met the conditions for doing so based on the income declared in the immediately preceding fiscal year (2009).

2. That it is true that in 2011 she calculated income less than € 150,000.00, but that the value for the fiscal year 2011 – 2nd year of the minimum permanence cycle in the accounting regime initiated in 2010 – could not determine a change in classification to the organized accounting regime, since the minimum period of permanence initiated in that year of 2010 had not been completed, whereby, since it is the 2nd year of the minimum period of three – 2010 and 2012 – it is irrelevant whether the value of income obtained in 2011 exceeds or does not exceed any of the limits in no. 2 of the same article.

3. She sustains her interpretation in no. 5 of art. 28 of the CIRS, in the wording of Law 53-A/2006, since the minimum period of permanence in either regime is of three years, renewable for equal periods, except if the taxpayer communicates the change in the regime by which she is covered.

4. AT reclassified her under the simplified taxation regime in 2012, based on the income of 2011, second year of the minimum cycle of three years that she initiated in 2010, with no other justification for the change in the taxation regime being known.

5. Article 28 of the CIRS, with respect to the change in taxation regime, contains rules relating to the cessation of the simplified regime in no. 6 and does not contain an identical rule for exiting the accounting regime within the minimum period of three years.

6. In 2011 already no. 5 of art. 28 of the CIRS established that "the minimum period of permanence in either of the regimes referred to in no. 1 is of three years, renewable for equal periods, except if the taxpayer communicates, in accordance with subsection b) of the preceding number, the change in the regime by which she is covered", whereby nothing is provided in the law regarding the cessation of the organized accounting regime while the minimum cycle of 3 years lasts.

7. AT's understanding that taxpayers covered by the accounting regime by legal obligation are not subject to the minimum period of permanence in the regime, since that taxation did not result from a manifest will expressed by the accounting, based on circular No. 5/2007, of 13/03, is not enshrined in the law and such interpretation did not take into account the amendment introduced to article 28, no. 5 of the CIRS by Law 53-A/2006 regarding the minimum period of permanence of three years, either in the general accounting regime or in the simplified taxation regime.

8. She did not have to make any election in 2012 – as AT contends – because the minimum period of 3 years was running, whereby she did not present any declaration of election for the accounting regime in that year of 2012, since the fact that in the year 2011, second year of the minimum period of three years, she earned income less than any of the limits provided for in no. 2 of art. 28 did not oblige her to exercise any election and, in its absence, to be taxed under the simplified regime in 2012.

9. The legislator of the State Budget/2007, in creating a minimum period of three years of permanence in either regime – simplified or accounting – intended to create a minimum period of stability in her form of taxation for at least 3 years, namely in the accounting regime, certainly evaluating that once accounting is adopted, this entails certain costs that are not irrelevant and therefore would not have created a regime of cessation of taxation by the accounting regime identical to that of cessation when taxed under the simplified regime.

10. The only exception that ends the minimum period of 3 years is that found in no. 6 of the same article 28, regarding the cessation of the simplified regime and the mandatory movement of the taxpayer to the accounting regime, which may occur at any time within the three-year cycle, as can be deduced from the rule, when the respective conditions are met, but the same does not occur in the opposite direction, that is, there is no identical rule for the cessation of the effectiveness of taxation under the accounting regime during the minimum cycle of three years that is running.

11. The law establishes that when the taxpayer is taxed under the simplified regime, by lack of election for the accounting regime or by legal requirement, is obligatorily reclassified under the accounting regime, for having exceeded the limits of no. 2, combined with no. 6 of the same article 28, in a single year by more than 25% (which may even be the 1st year of the three-year period) or in any amount in two consecutive years. In this case and only in this case is the minimum period of permanence of three years possibly not completed.

12. This did not occur since from 2001 she had been taxed, even if by obligation, under the accounting regime until 2006, in which the periods in the general accounting regime were of one year, having initiated in 2007 and in 2010 minimum periods of taxation of three years in the accounting regime.

13. Thus, the regime by which she should be taxed in 2012, the last year of the minimum period of three years, initiated in 2010, is that of organized accounting, the regime with which she initiated in 2010 the minimum period of three years, by force of her income declared in 2009.

14. Whereby regarding the year 2012 the reclassification under the simplified taxation regime carried out by AT lacks legal foundation, reason for which the assessment of IRS that was effected based on the income determined by application of the rules of that regime results in being illegal and should be annulled in its entirety, as well as the corresponding compensatory interest.

REGARDING THE ASSESSMENT OF THE YEAR 2013

1. By having classified the Claimant under the simplified taxation regime, AT did so for the three-year period of 2012, 2013 and 2014, only being able the Claimant to elect in March of 2015 to remain in that regime by saying nothing, or for the organized accounting regime by delivering for that purpose a declaration of changes, fact which gave rise to the assessment of IRS that is being challenged.

2. The Claimant said nothing, since, being under way, in AT's view, a 3-year cycle in the simplified regime, any election exercised before March of 2015 would always be absolutely ineffectual and inefficacious, namely in March of 2013, to make effective the taxation of the year 2013 under the organized accounting regime, since no. 5 of art. 28 of the CIRS stipulates, in the wording given by Law 53-A/2006 that the minimum period of permanence in either regime referred to in no. 1 is of three years.

3. Being the Claimant certain that the taxation regime applicable in 2012 is that of accounting, the last year of the minimum period of permanence in either regime, and being such regime, in accordance with the law, renewable for a new period of 3 years, she understood that it would only be incumbent upon her to adopt in March of 2013 one of the following attitudes:

4. Not to manifest herself, which was equivalent to electing the accounting regime, faced with the certainty that the same would be automatically renewed if she said nothing to the contrary;

5. To deliver a declaration of changes, if she desired taxation under the simplified regime for 3 years and met the conditions for exercising such election.

6. The decision on classification in the legal regimes is attributed exclusively to the taxpayers, with no possibility of AT imposing a classification contrary to the desire manifested by them, even if such manifestation consists of declaring nothing to maintain the regime heretofore in effect, that is, the taxpayers are those who will have, in light of the applicable rules, to choose the desired regime, without need for any intervention by AT.

7. AT, as a result of the erroneous classification of the Claimant under the simplified regime in 2012, given the obligation of permanence in either regime for a minimum period of 3 years, concluded, equally erroneously, that the year 2013 would have to constitute the 2nd year of the three-year period in the simplified regime and proceeded to carry out the assessment of IRS for the year 2013 based on income determined in accordance with the rules of the simplified regime, an assessment which thus proves to be erroneous and must be annulled in its entirety.

III.B - RESULTS FROM THE REPLY OF THE RESPONDENT

III.B.1 - DEFENSE BY EXCEPTION

The RESPONDENT defends itself by exception, considering to be relevant in summary, with regard to the material competence of this Arbitral Tribunal, that:

1. The same is incompetent in terms of subject matter, since the claim seeks to obtain a declaration of illegality of the administrative act that determined the inclusion of the CLAIMANT in the simplified taxation regime, requesting that the assessments of IRS relating to the years 2012 and 2013 reflect the situation of legal obligation to classification in organized accounting, in which the CLAIMANT considers herself included since the year 2001.

2. What is confronted is the regime for determining business and professional income of article 28 and following of the CIRS, in Chapter II of the CIRS – 'Determination of Taxable Income', which frames and develops the rules for determining business and professional income establishing the conditions in which the classification in the simplified regime or organized accounting regime should be applied, maintained, renewed or extended.

3. Within the scope of the material competence criteria of the arbitral tribunals of the RJAT, the object of this dispute cannot be qualified as an act of fixing the taxable matter that gives rise to the assessment of a tax for the purposes of subsection b) of no. 1 of article 2 of the RJAT, and much less as a tax act, by subsection a) of no. 1 of article 2, insofar as it does not apply a set of factors, objective or subjective, that lead to the assessment of the corresponding tax, being located 'upstream' of the fixing of the taxable matter or of the tax act.

4. The competence of this Arbitral Tribunal is determined by the claim and cause of action in which it is based, expressed in the initial petition, not depending on either the legitimacy of the parties or the merit of the action, constituting the violation of the rules of absolute competence of the tribunal as to subject matter, an exception of abatement which, if verified, prejudices the consideration of the remaining questions raised in the initial petition and the absolution of the RESPONDENT.

5. Article 13 of the CPTA, combined with articles 16 of the CPPT and 101 and following of the CPC establish that the infringement of the rules of competence as to subject matter and hierarchy determine the absolute incompetence of the tribunal, which may be raised by the parties and should be raised by the tribunal at any stage of the proceeding, as long as there has been no judgment with res judicata effect rendered on the merits of the case.

6. The claim only concretizes the declaration of error of the Tax Administration in the assumptions for application of the regime for taxation of business and professional income of the claimant with the proper means for challenging these acts being not judicial challenge but special administrative action, cf. subsection p) of no. 1 of article 97 of the CPPT and article 46 and following of the CPTA, as per the decision in case No. 118/2012–T of CAAD, which addresses the same subject matter in discussion in the present proceeding[1].

7. Concluding that because the act of the tax administration being scrutinized does not integrate the acts foreseen in subsections a) and b) of no. 1 of article 2 of the RJAT, the Arbitral Tribunal should deem the exception invoked of absolute incompetence of the arbitral forum, as to subject matter, to be well-founded, reject the request for arbitral determination, and absolve AT of the action.

III.B.2 - DEFENSE BY OPPOSITION

The RESPONDENT presents, with relevance to sustain the opposition to the request for constitution of this Arbitral Tribunal, in summary that:

1. Pursuant to no. 1 of article 28 of the CIRS, the determination of business and professional income is made either based on the application of the rules stemming from the simplified regime or based on accounting.

2. No. 5 of article 28 of the CIRS, in the wording of Law No. 109-B/2001, determined that: "The minimum period of permanence in the simplified regime is of three years, automatically renewable for equal periods, except if the taxpayer communicates, in accordance with subsection b) of the preceding number, the election for application of the organized accounting regime", from which concluding that taxpayers classified in the organized accounting regime by legal requirement, the period of permanence in that regime was only one year, not being renewable for an equal period.

3. Only with Law No. 53-A/2006 to no. 5 of article 28 of the CIRS did there come to be a "minimum period of permanence in either of the regimes referred to in no. 1 is of three years, renewable for equal periods, except if the taxpayer communicates, in accordance with subsection b) of the preceding number, a change in the regime by which she is covered".

4. Taking into account the amendments introduced by Law No. 53-A/2006 on 13 March 2007, Circular No. 5/2007 was issued by the Direction of IRS Services, clarifying that "To taxpayers who are covered by the regime for determining business and professional income based on accounting because they do not meet the requirements provided for in no. 2 of article 28 of the Income Tax Code, the minimum period of permanence provided for in no. 5 of the same article does not apply, since their classification does not result from a choice".

5. The now RESPONDENT sustaining then that "to taxpayers who are covered by the accounting regime by legal obligation, the minimum period of permanence in the regime does not apply, by virtue of that classification not having resulted from a choice for the organized accounting regime, but rather from legal requirement", whereby AT in altering the basis for determining the income of the CLAIMANT from classification in organized accounting in the year 2011 to the simplified regime in the year 2012, respected and complied with the applicable legal rules.

6. The RESPONDENT distinguishes with respect to no. 2 of article 28 of the CIRS and classification under the organized accounting or simplified regime two groups of taxpayers: those who exceeded in the immediately preceding fiscal period the annual gross amount of income of the category of 150,000.00 euros; from those who did not exceed 150,000.00 euros.

7. It states that the former are by legal requirement subject to the determination of income based on organized accounting, not being able to exercise any right of election for the simplified taxation regime; the latter, who did not exceed 150,000.00 euros are subject to the determination of income based on the simplified regime, however have the possibility of exercising the election for the determination of income in accordance with the rules of organized accounting (no. 3 of article 28 of the CIRS) and,

8. That election shall be made by the taxpayer either in the declaration of start of activity or "by the end of March of the year in which she intends to change the form of determining income, by submission of a declaration of changes" (no. 4 of article 28 of the CIRS).

9. Until the fiscal year 2010, inclusive, the limit for the provision of services was 99,759.58 euros, with the temporal application of the amendment introduced by the State Budget of 2010 to the wording of article 28, no. 2 of the CIRS, respecting the facts that constitute themselves during its effectiveness, that is, the income that serves as reference for the classification in the following year to that to which they relate (cf. Order rendered on 2011-11-03 by the General Director in information No. …/11, of DSIRS).

10. In the year 2011 the CLAIMANT was classified under the organized accounting regime by legal requirement and having obtained in that same year total income less than 150,000.00 euros, since in that year she obtained from the provision of services the amount of 146,334.53 euros, such fact had as consequence her direct and immediate inclusion in the simplified taxation method regime (article 28, no. 2 of the CIRS).

11. This would only not happen if the CLAIMANT had timely complied with the provisions of nos. 3 and 4, subsection b) of article 28 of the CIRS, that is, if in light of the income obtained in 2011 which determined her inclusion in the simplified regime, proceeded by the end of March 2012 to submit the declaration of change in the form of determining income, electing the application of the organized accounting regime to the determination of her taxable income.

12. Regarding the year 2013, the classification in the simplified regime is also correct and in accordance with the law, because the CLAIMANT also obtained income less than 150,000.00 euros in the year 2012 and did not exercise the election for taxation under the organized accounting regime for the fiscal year 2013 by submission of a declaration of changes to be delivered by the end of March 2013.

13. The illegality that the CLAIMANT alleges does not exist, since the assessments in question were made in accordance with the regime for determining taxation in which she was classified, taking into account article 28 of the CIRS, the income obtained in the years 2011 and 2012 and for not having presented by the end of March 2012 and March 2013 the declarations electing for taxation in accordance with the change in organized accounting that would have permitted it.

14. The fiscal administration guided itself thus by compliance with the applicable legal rules to the facts, since the CLAIMANT presented model B in the IRS declarations of 2012 and 2013, corresponding to the simplified taxation regime in which she was classified, with the challenged assessments being valid and legal and properly grounded in the administrative record, whereby it reproduces the responses of AT (gracious complaint and administrative appeal, as well as the Administrative Record attached) contained in the record.

IV - FACTS

There being no facts with relevance to the decision of the case not proven, the facts as proven are those resulting from the statements of the parties, not contested, and the documents attached to the record, being the following:

1. The Claimant has been since 01-01-1986 registered for the exercise of the activity "CAE 4015 – Official Accountant Technicians";

2. The Claimant exercises the activity of Statutory Auditor (ROC), subject to the organized accounting regime by obligation, between 2001 and 2010;

3. On 24-03-2014 she delivered a declaration of changes indicating as primary activity CAE 9010 – Statutory Auditors (ROC), with the other activity becoming secondary;

4. In the year 2010 the CLAIMANT obtained total income of 146,924.52 euros;

5. In the year 2011 the CLAIMANT obtained total income of 146,334.53 euros;

6. In the year 2011 the Claimant was notified of classification in the simplified regime with AT sustaining the fact that she had income less than 150,000.00 euros in 2010;

7. In the year 2011, the RESPONDENT maintained the CLAIMANT in the organized accounting regime, as it states in the Administrative Record: - for reasons we are unaware of (…) remaining in the accounting regime in the year 2011 and it also appears from the Administrative Record (pages 5/6 Reply which fell upon the administrative appeal, where there appears "fiscal year" 2011 and Regime of taxation in IR "accounting by legal requirement");

8. On 31-05-2013 the Claimant submitted her income tax return for the fiscal year 2012, composed of annexes A, C (declared taxable profit in the amount of € 65,654.88), F and H, with the same showing the status of INCORRECT;

9. By official letter issued on 10-06-2013, the CLAIMANT was notified of the central error "C70 – INCOMPATIBILITY BETWEEN THE ANNEX DELIVERED AND OPTION IN RECORD" (the income from category B – self-employed work – should have been declared in annex B);

10. On 17-06-2013 the CLAIMANT by registered letter with return receipt questioned the competent tax service about her classification in the Simplified IRS Regime for the three-year period 2012-2014;

11. By official letter No. …, of 03-09-2013, the Claimant was notified that her request could not be granted;

12. Dated 24/07/2013 and registered on 29/07/2013, the CLAIMANT filed a Gracious Complaint regarding her classification in the simplified taxation regime;

13. By official letter No. …/…-…, of 11-09-2013, the Claimant was notified of the order for preliminary rejection rendered in the scope of the Gracious Complaint, since this was not the proper means for the intended purpose, since the taxpayer's request aimed at the annulment of an administrative act and not of a tax act.

14. On 16-10-2013 the CLAIMANT filed an Administrative Appeal of the rejection of the gracious complaint;

15. By official letter No. …/…-…, of 05-05-2014, the CLAIMANT was notified of the rejection of the administrative appeal.

16. The same official letter No. …/…-…, of 05-05-2014 clarifies, based on circular No. 5/2007 of 2007-03-13, the terms of the classification of the CLAIMANT in the simplified regime;

17. On 27-01-2014 the taxpayer was notified to proceed with voluntary submission of the IRS declaration relating to the year 2012,

18. Which she did on 14-02-2014.

19. The declaration relating to 2013 was delivered on 12-06-2014.

20. Subsequently the Claimant was notified to pay the following amounts:

20.1. From the assessment of IRS for 2012, in the amount of € 12,766.60 (assessment No. 2014 …);

20.2. From the assessment of IRS for 2013, in the amount of € 15,616.18 (assessment No. 2014 …);

V – PRELIMINARY ISSUES

V.A – EXCEPTION INVOKED BY THE RESPONDENT

Considering the defense by exception contained in the record and reproducing the summary that is presented supra (III.B.1 - DEFENSE BY EXCEPTION), it alleges in summary the RESPONDENT, with relevance to sustain the exception of competence of this Arbitral Tribunal that:

1. This is incompetent as to subject matter, since the claim seeks to obtain a declaration of illegality of the administrative act that determined the inclusion of the CLAIMANT in the simplified taxation regime in the terms of article 28 and following of the CIRS which frames and develops the rules for determining business and professional income establishing the conditions in which the classification in the simplified regime or organized accounting regime should be applied, maintained, renewed or extended

2. The CLAIMANT requesting that the assessments of IRS relating to the years 2012 and 2013 reflect the situation of legal obligation to classification in organized accounting, whereby the object of the dispute cannot be qualified as an act of fixing the taxable matter that gives rise to the assessment of a tax for the purposes of subsection b) of no. 1 of article 2 of the RJAT, and much less as a tax act, by subsection a) of no. 1 of article 2, insofar as it does not apply a set of factors, objective or subjective, that lead to the assessment of the corresponding tax, being located 'upstream' of the fixing of the taxable matter or of the tax act.

3. The claim seeks the declaration of error of the Tax Administration in the assumptions for application of the regime for taxation of business and professional income of the CLAIMANT with the proper means for challenging these acts being not judicial challenge but special administrative action, cf. subsection p) of no. 1 of article 97 of the CPPT and article 46 of the CPTA, as per the decision in case No. 118/2012–T of CAAD, which addresses the same subject matter in discussion in the present proceeding.

V.B - ASSESSMENT AND DECISION ON THE EXCEPTION INVOKED

1. The CLAIMANT submitted a request for constitution of an arbitral tribunal stating that the same has as its object the declaration of illegality of the assessment acts for the following taxes:

· Assessment of Personal Income Tax (IRS), in the amount of € 12,766.60, relating to the year 2012;

· Assessment of Personal Income Tax (IRS), in the amount of € 15,616.18, relating to the year 2013.

1. The CLAIMANT ultimately petitions that this Arbitral Tribunal make a determination to the effect that the requests for declaration of illegality of the assessment acts should obtain a fully favorable decision.

2. Sustaining the CLAIMANT at the meeting held in accordance with art. 18 of the RJAT, which took place on 10/04/2015, that the request for constitution of the Arbitral Tribunal falls within the terms of subsection a) of no. 1 of article 2 of the RJAT, which determines that the competence of arbitral tribunals comprises the consideration of the declaration of illegality of acts of assessment, self-assessment, withholding at source and payment on account;

3. It is thus important, to assess the exception of material incompetence of this arbitral tribunal, to verify whether the question at issue is susceptible to being considered under subsection a) of no. 1 of article 2 of the RJAT.

4. The RESPONDENT affirms in its reply that the claim merely concretizes the declaration of error of the Tax Administration in the assumptions for application of the regime for taxation of business and professional income of the CLAIMANT.

5. That is, AT knows that what is at issue in the request for constitution of this Arbitral Tribunal is the declaration of illegality of the assessments at issue, sustained from the perspective of the CLAIMANT (which remains to be considered) in the error of the Tax Administration in the assumptions for application of the regime for taxation of business and professional income of the CLAIMANT.

6. In summary, this Arbitral Tribunal finds itself faced with the need to assess the existence or not of an error of law, and it is important to note that any violation of the applicable legal principles or norms constitutes illegality and consequently a defect of the assessment act[2],

7. Among these defects stands out the error regarding the legal assumptions whenever in the execution of the act there has been erroneous interpretation or application of the legal norms, such as the norms of objective and subjective incidence and those that establish the tax rates or that grant exemptions or other tax benefits or those that determine the taxable matter[3].

8. Now, in the present case, the assessment of the possible error of law is embodied in determining whether the RESPONDENT proceeded to the correct interpretation of the norms of article 28 of the CIRS, as it contends, or proceeded to their erroneous interpretation and consequent application, as the CLAIMANT contends.

9. Whereby the matter is subsumed to the competence of this Arbitral Tribunal.

10. The RESPONDENT further alleges that the proper means for challenging these acts, which do not involve the consideration of the legality of assessment acts and which are also not acts of fixing the taxable matter or taxable base, is not judicial challenge but special administrative action, cf. subsection p) of no. 1 of article 97 of the CPPT and article 46 and following of the CPTA.

Let us see if it is correct:

1. Under discussion is the classification of the CLAIMANT under the simplified taxation regime under IRS, which constitutes, in accordance with article 87 of the LGT, a form of indirect assessment, and,

2. In accordance with no. 3 of article 86 of the LGT, indirect assessment is not susceptible to direct contentious challenge, except when it does not give rise to any assessment, which is not the case, since it gave rise to two assessments.

3. The same is to say that the CLAIMANT could not contenciously challenge the subjection to the simplified regime, but rather had to await the final assessment to attack such subjection, in accordance with the principle of unitary challenge, ex. vi., articles 66 of the LGT and 54 of the CPPT.

4. It results from these provisions that except when they are immediately injurious to the rights of the taxpayer or there is an express provision to the contrary, the interlocutory acts of the proceeding are not susceptible to autonomous contentious challenge, without prejudice to being able to invoke in the challenge of the final decision any illegality previously committed[4].

5. Regarding the acts of indirect assessment the rule of non-autonomous contentious challenge was adopted, opposite to the provision for direct assessment. The acts of indirect assessment are inserted in a proceeding that ends with the assessment of a tax and only the final act thereof is contenciously challengeable[5].

6. In invoking the RESPONDENT the need for a special administrative action, in accordance with subsection p) of no. 1 of article 97 of the CPPT and article 46 of the CPTA, we would have to see if we are thus faced with acts immediately injurious to the rights of the taxpayer or for which there is an express provision to the contrary in the terms of article 54 of the CPPT.

7. Now not only does the RESPONDENT not invoke provision in this sense, but in addition the act itself – the classification in the simplified taxation regime under IRS of the Claimant – would have, in accordance with article 54 of the CPPT to have an immediately injurious effect on the rights of the taxpayer, which clearly it does not, since what injures her legal sphere are the final acts of assessment, with the opposite principle operating, that of unitary challenge.

8. It would be different if there were no assessment taking place, e.g., due to null or negative taxable matter or covered by exemption[6], which is not the case.

9. We have therefore that the decision of the tax administration to proceed to assessment of the taxable matter through indirect methods is not contenciously challengeable on an autonomous basis, only being able to be attacked in challenge of the assessment act that is based on such assessment, or in challenge of this same assessment if no taxable matter comes to be determined that permits an assessment (no. 3 of art. 86 of the LGT)[7]

10. Thus, as is well sustained in Arbitral Decision No. 97/2012 of this Center for Arbitration, the immediate, objective, direct lesion of the interests of the claimants is verified through a final administrative act by AT in the form of a tax assessment operation preceded by an interlocutory act – classification in the taxation regime. What injures the patrimonial sphere of the taxpayer is the result of a final act – assessment – and not of an interlocutory act.

Whereby the exception of material incompetence of this Arbitral Tribunal raised by AT is unfounded, it thus being incumbent to consider the merits of the claim.

VI - ASSESSMENT OF THE LEGALITY OF THE IRS ASSESSMENT[8]

1. The CLAIMANT submitted a request for arbitral determination raising the declaration of illegality of the assessment of IRS for 2012 in the amount of € 12,766.60 (assessment No. 2014 …) and of the assessment of IRS for 2013 in the amount of € 15,616.18 (assessment No. 2014 …), totaling a global amount of € 28,382.78, illegality resulting from an erroneous classification of the same in the simplified taxation regime.

2. Basically what constitutes the divergence and must be considered is the question, namely whether, as the RESPONDENT contends, permanence in one of the regimes – organized accounting – lasts for a period of three years, in accordance with no. 5 of article 28 of the CIRS, only when it results from a choice by the taxpayer, and not when the same is imposed by law (§§ 33 and 34 of the RESPONDENT'S REPLY).

It is important here to provide a summary of the applicable legal provisions. Thus,

1. In accordance with no. 1 of article 28 of the CIRS, the determination of business and professional income may be made either based on the application of the rules stemming from the simplified regime or based on organized accounting, except in the case of the imputation provided for in article 20, which is not the case.

2. Classified in the simplified regime in the fiscal years at issue (2012 and 2013) are the taxpayers who, in the exercise of their activity do not exceed in the immediately preceding fiscal period an annual gross amount of income of that category of € 150,000 (no. 2 of article 28 of the CIRS, in the wording given by Law No. 3-B/2010-28/04).

3. The taxpayers covered by the simplified regime may elect the determination of income based on accounting (no. 3 of article 28 of the CIRS).

4. The said election shall be formalized by the taxpayers in the declaration of start of activity or by the end of March of the year in which they intend to change the form of determining income, by submission of a declaration of changes (no. 4 of article 28 of the CIRS).

5. In the years in question, in accordance with no. 5 of article 28 of the CIRS the minimum period of permanence in either regime is of three years (Wording of Law 53-A/2006-29/12).

6. In the years in question, in accordance with no. 5 of article 28 of the CIRS the minimum period of permanence of three years in either regime is renewable for equal periods, except if the taxpayer communicates (in accordance with subsection b) of no. 4) a change in the regime by which she is covered.

7. It is important to bear in mind that indirect assessment is subsidiary to direct assessment, in accordance with no. 1 of article 85 of the LGT, a legal assumption that seeks to embody the constitutional principle of taxpaying ability[9], reason for which article 28 of the CIRS grants the taxpayer the possibility of electing the organized accounting regime to the detriment of the simplified regime (no. 2 of article 81 of the LGT).

8. In identical sense the Judgment in Proc. 959/06, of 15/12/2007, of the Supreme Administrative Court pronounced itself regarding article 53 of the CIRC in stating that the simplified taxation regime, being of a voluntary character, does not contend with the constitutional principle of taxation of companies fundamentally by actual income.

9. In equal sense the STA pronounced itself on 7-01-2010 in Process 0906/09, on 17/3/2011 in Process 56/10, and on 28/11/2012 in Process 0709/12, in the embodied idea that the simplified regime, created with the 2000 tax reform, constitutes a non-binding regime, valid only for those who have not elected the organized accounting regime.

10. Identical reasoning sustains Saldanha Sanches, as very well referred to in Process 252/2013-T of CAAD:

"The simplified regime always has as its presupposition an election by the taxpayer who renounces her subjective right to be taxed based on accounting. And, by proceeding to an estimate of the costs she will support and declare, elects the standardized deduction. We thus have one of those situations in which the law attributes relevance to her will and in which she can elect the regime she considers most favorable.

A regime of 'fiscal choice' which, precisely by allowing the taxpayer's election of the regime most favorable to her could lead to situations of taxation contrary to the regime of taxation according to taxpaying ability".

Let us now move to the analysis of the question that sustains the distinct classification carried out by the RESPONDENT as against what is sought by the CLAIMANT:

1. Is it the case, as the RESPONDENT contends, that permanence in the organized accounting regime for a period of three years, in accordance with no. 5 of article 28 of the CIRS, only occurs when it results from election by the taxpayer for the organized accounting regime, and not when the same is imposed by law (§§ 33 and 34 of the RESPONDENT'S REPLY)?

2. Or put another way, is it the case that the legal imperative of no. 5 of article 28 of the CIRS of permanence in the organized accounting regime for a period of three years does not exist when the taxpayer is in that regime by legal requirement?

3. Were it thus, if a taxpayer had income in accordance with no. 6 in the year 2015 in 2016 would be obligatorily in the organized accounting regime; if in 2016 she had income below the amount provided for in no. 2 of article 28 would already fall in the simplified regime unless she came to exercise the election for the organized accounting regime.

4. We thus need to assess whether AT's premise has normative foundation, and from there draw inferences for the case sub judice, since in the circular in which it seeks to ground its action it came to consider the idea that as the subjection to the organized accounting regime is by legal requirement the period of permanence in this for three years does not occur.

5. It is important here to make a reading of article 9 of the Civil Code which establishes the general rules on legal interpretation:

6. Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied.

7. However, the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

8. In fixing the meaning and scope of the law, the interpreter shall presume that the legislator established the most appropriate solutions and knew how to express his thought in appropriate terms.

Let us thus proceed, in light of these criteria, to the analysis of the provision in question:

1. Being certain that the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed, it is convenient to recall the precise terms of no. 5 of article 28 of the CIRS:

The minimum period of permanence in either of the regimes referred to in no. 1 is of three years, renewable for equal periods, except if the taxpayer communicates, in accordance with subsection b) of the preceding number, a change in the regime by which she is covered (Wording of Law 53-A/2006-29/12).

1. We have that what emerges from no. 5 of article 28 is the obligation of permanence of three years in either regime – simplified or organized accounting – it not having been in any moment established that permanence in the organized accounting regime for three years would only be mandatory if it resulted from an election by the taxpayer.

2. Such premise does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed, as required by no. 2 of article 9 of the CC.

3. Thus the legislator does not say, in any passage of the text of the law, that the period of permanence in either regime is of three years except if the classification in the organized accounting regime results from legal requirement.

4. Instead the legislator says more: it says that the minimum period of permanence (…) is of three years, renewable for equal periods.

5. To which it adds in support of the taxpayer's will, and only hers, that there will be no renewal only if she does not so wish, when it provides: except if the taxpayer communicates (…) a change in the regime by which she is covered.

6. Contrary to what the RESPONDENT contends, it follows from the same regime that at the moment of its entry into force if there is no express manifestation in accordance with subsection b) of no. 4 for another regime the taxpayer becomes ope legis classified in the regime in which she finds herself, from which she cannot leave by election for three years, since this period is imposed, as the norm is imperative, whether the taxpayer was classified in the organized accounting regime or in the simplified regime.

7. Returning to the example supra if a taxpayer had income in accordance with no. 6 in the year 2015 in 2016 would be obligatorily in the organized accounting regime; if in 2016 she had income below the amount provided for in no. 2 of article 28 she would remain in that regime (organized accounting) as well as in the year 2017 by force of no. 5 of article 28; she would not fall into the simplified regime nor could she change to it; at most she could come to exercise the election for the simplified regime to be effective after that period of three years, i.e. in 2018; but if she did not exercise that election automatic renewal for an equal period of three years would occur since what prevents renewal is the contrary election of the taxpayer.

8. Thus the only situation where will is not relevant, that is there is no possibility of classification by will of the taxpayer, since it results from law, is in accordance with no. 6 of the same article 28 which imposes the organized accounting regime, however

9. Seeking the legislator to meet the principle of taxpaying ability, the general regime of taxation.

10. The RESPONDENT was thus unable to clarify to this Arbitral Tribunal the reasoning that permits extracting from the wording of no. 5 of article 28 its conclusion (in §§ 33 and 34) that taxpayers covered by the organized accounting regime by legal requirement are not subject to the obligation of permanence in that regime for three years, since that permanence – three years – is mandatory and renewable except if the taxpayer does not so wish manifesting it in accordance with the law.

11. Thus once the taxpayer is classified in the organized accounting regime in 2007 whether by exercise of her own right, by electing or because the law so requires her she must remain in that regime for three years. More still,

12. Even not meeting at the end of that three-year period the terms of permanence in the organized accounting regime by legal requirement she will remain in another period of three years by virtue of there being an automatic renewal since the law is clear in determining that:

The minimum period of permanence in either regime (…) is of three years renewable for equal periods except if the taxpayer communicates (…) a change in the regime by which she is covered.

1. That is with this legislative amendment the legislator clearly opted for permanence in the organized accounting regime whether its classification resulted from a prior election by the taxpayer or resulted from the obligation to be classified in it.

2. The organized accounting regime constitutes the regime that goes to meet the constitutional principle of taxpaying ability with constitutional densification only being able to be in that sense – of taxation by the organized accounting regime – and not the inverse since that is the default regime with indirect assessment being subsidiary to direct assessment in accordance with no. 2 of article 85 of the LGT.

3. This Arbitral Tribunal thus subscribes to the Decision in Process 252/2013-T when it sustains its position on another decision of this "Center for Arbitration in Process No. 97/2012-T where it was written:

"The legislator of the State Budget/2007 in creating a minimum period of three years of permanence in either regime – simplified or accounting – intended in our view to create a minimum period of stability in her form of taxation for at least 3 years in the accounting regime, certainly evaluating that once accounting is adopted this entails certain costs that are not irrelevant and therefore would not have created a regime of cessation of taxation by the accounting regime identical to that of cessation when taxed under the simplified regime."

1. We can thus verify that there is no legal foundation whatsoever that would justify in any way that the CLAIMANT had been classified in the simplified regime; the same should have continued classified in the organized accounting regime in 2012.

2. With respect to the year 2013 the same imperative exists that is the CLAIMANT should be taxed under the regime in which she is classified during the period of three years whereby when the RESPONDENT carried out the classification in 2012 in the simplified regime in accordance with no. 5 of article 28 it imposed upon the CLAIMANT permanence in the same also in 2013 and 2014 whereby it is not seen how the imperative of classification for the three-year period of the CLAIMANT in the simplified regime that no. 5 of article 28 of the CIRS imposes would be exceeded as alleged by the RESPONDENT in its reply in §§ 48.

3. Differently if the classification of the CLAIMANT had been carried out in the organized accounting regime for three years in 2007 in accordance with no. 5 of article 28 of the CIRS thus would she have been taxed in 2013 as the same demonstrated since she would have been in the three-year period of 2007 to 2009 renewed from 2010 to 2012 renewed from 2013 to 2015 since as is repeated in accordance with the law the minimum period of permanence in either regime (…) is of three years renewable for equal periods except if the taxpayer communicates (…) a change in the regime by which she is covered.

4. In summary after the legislative amendment whose effectiveness occurred from 2007 the classification in the organized accounting regime whether by election or obligation would have determined that the CLAIMANT was taxed by that regime in the years in question relating to the fiscal years 2012 and 2013.

5. Not having been effected by the Tax Authority the correct legal classification of the tax fact it cannot be maintained the assessment object of challenge due to illegality (ex. vi. subsection a) of article 99 of the CPPT) a defect embodied in an error of law consisting of the erroneous interpretation of no. 5 of article 28 of the CIRS.

6. It is certain that the RESPONDENT contends that the CLAIMANT "presented and correctly model B in the IRS declarations of the years 2012 and 2013" however we know it she did so in the precise terms in which the now RESPONDENT had determined she proceed since her requests were not granted by this one the responsibility thus not falling on the CLAIMANT as results from the facts established for the error of classification in the simplified regime.

7. Accordingly contrary to what the Tax Authority contends it cannot this Arbitral Tribunal fail to annul the assessments of IRS relating to the fiscal years 2012 and 2013 in the terms petitioned annulment of these assessments which presupposes the annulment of the corresponding compensatory interest as also requested.

VII - DECISION

In light of the foregoing this Singular Tribunal decides to deem the request for annulment of the assessment acts for IRS as follows discriminated well-founded as well as the corresponding compensatory interest:

· From the assessment of IRS for 2012, No. 2014 …, in the amount of € 12,766.60

· From the assessment of IRS for 2013, No. 2014 …, in the amount of € 15,616.18

VIII - VALUE OF THE PROCEEDING

€ 28,382.78 (Twenty-eight thousand three hundred and eighty-two euros and seventy-eight cents).

IX – COSTS

In accordance with the provisions of the Regulation of Costs in Tax Arbitration Proceedings the costs are fixed at € 1,530.00 to be borne by the RESPONDENT

Lisbon, 20 July 2015

Text prepared by computer in accordance with art. 131, no. 5 of the CPC, ex VI art. 29, no. 1 subsection e) of the RJAT with blank on the reverse of each sheet and maintaining spelling prior to the last orthographic agreement.

The Arbitrator

Henrique Curado

[1] Emphasis is placed on the different classification of this proceeding whose request for constitution of the arbitral tribunal was formulated "with a view to obtaining a declaration of illegality of the act of fixing the taxable matter of the Claimant through the simplified taxation regime, requesting that the assessment of IRS for the year 2011 reflect the option for organized accounting effected by the Claimant through a Declaration of Changes delivered and received by the financial services…" cf. §4 of the Report of the Arbitral Decision.

[2] Cf. Guide to Tax Arbitration, CAAD, Almedina, 2013, annotation at pages 170.

[3] Ibid., previous note.

[4] Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, LGT Annotated Almedina, 2012, in annotation to art. 86, note 1.

[5] Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, LGT Annotated Almedina, 2012, in annotation to art. 86, note 4.

[6] Cf. Guide to Tax Arbitration, CAAD, Almedina, 2013, annotation at pages 136.

[7] Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, LGT Annotated Almedina, 2012, in annotation to art. 86, note 9.

[8] Adherence is given insofar as there is identity of cause of action to the reasoning set forth in the scope of tax arbitration of CAAD-T in the decisions of cases numbered 97/2012-T and 252/2013-T.

[9] The principle of taxpaying ability constitutes in accordance with no. 1 of article 4 of the LGT a presupposition and criterion of taxation which seeks to embody (in its negative aspect) the constitutional principle of equality of article 13 of the CRP.