Process: 82/2016-T

Date: September 4, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 82/2016-T) addresses whether the Portuguese Tax Authority unlawfully denied the deduction of fiscal losses in an IRC assessment for 2011. The claimant company filed a substitute tax return for 2011 on April 12, 2013, declaring taxable profit of EUR 128,145.57. After being notified by the Tax Authority of discrepancies regarding deductible losses, the company filed a substitute return for 2010 on April 24, 2013, declaring a tax loss of EUR 56,901.77. The Tax Authority issued an official IRC assessment for 2011 totaling EUR 35,864.36, refusing to deduct the 2010 tax loss contained in the substitute declaration. The claimant argued that the tax losses were properly determined on an accounting basis and should have been accepted for deduction against 2011 taxable income. The company challenged the assessment through administrative complaint (dismissed August 18, 2015) and hierarchical appeal (tacitly dismissed by November 16, 2015). The arbitration request filed February 15, 2016, was deemed timely under Article 10 of RJAT. The claimant sought annulment of the assessment and restitution of EUR 35,864.36 plus compensatory interest under Article 43 LGT and Article 61 CPPT from May 13, 2015. The central legal issues include: the timeliness and validity of substitute tax declarations for establishing deductible losses; whether the Tax Authority properly verified the prerequisites for the assessment; and the taxpayer's entitlement to compensatory interest for alleged overpayment. The case illustrates the procedural framework for challenging IRC assessments in Portugal through gracious procedures before seeking arbitral or judicial review.

Full Decision

Arbitral Decision

Report

1.1 "A…, Ltd.", hereinafter referred to as the "Claimant", Tax Identification Number…, with registered office at Rua …, No. …-…, …, municipality of …, requested the establishment of a single arbitral tribunal under the combined provisions of Article 2, No. 1, subparagraph a) and Article 10, both of Decree-Law No. 10/2011, of January 20 (Legal Regime for Arbitration in Tax Matters, hereinafter only referred to as "RJAT") and Articles 1 and 2 of Ordinance No. 112-A/2011, of March 22, in which the Tax and Customs Authority (AT) is the Respondent.

1.2 The request for arbitral pronouncement, presented on February 15, 2016, concerns the decision of tacit dismissal of the hierarchical appeal filed following the dismissal of the administrative complaint (Case No. …2015…), relating to the official assessment of corporate income tax (IRC) No. 2014 … for the fiscal year 2011, in the amount of EUR 35,864.36, in the scope of which, to the taxable profit of EUR 128,145.57, contained in the replacement tax return filed on April 12, 2013, the tax loss from fiscal year 2010, in the amount of EUR 56,901.77, contained in the replacement tax return filed on April 24, 2013, was not deducted.

1.3 It further requests condemnation of the Respondent to restitution of the said amount, plus the respective compensatory interest, in accordance with Article 43 of the General Tax Law (LGT) and Article 61 of the Code of Tax Procedure and Process (CPPT), from the date of the wrongful payment of tax, that is, May 13, 2015, until the date of processing of the respective tax credit note.

1.4 The Claimant elected not to appoint an arbitrator.

1.5 The request for establishment of the arbitral tribunal was accepted by the President of CAAD and notified to the AT on February 16, 2016.

1.6 The undersigned was appointed by the President of the Deontological Council of CAAD as arbitrator of the single arbitral tribunal, in accordance with the provisions of Article 6 of RJAT, and acceptance of the appointment was communicated within the applicable period.

1.7 On April 13, 2016, the Parties were notified of such appointment and did not object to it, in accordance with the combined terms of Article 11, No. 1, subparagraphs a) and b) of RJAT and Articles 6 and 7 of the Deontological Code of CAAD.

1.8 Thus, in conformity with the provision of subparagraph c) of No. 1 of Article 11 of RJAT, the single arbitral tribunal was established on April 29, 2016.

1.9 The Respondent was notified by arbitral order of April 29, 2016, to, in accordance with Article 17, No. 1 of RJAT and within a period of 30 days, submit its response and, if so desired, request the production of additional evidence.

1.10 It was further notified to, within the same period, submit the administrative proceeding file (PA) referred to in Article 111 of CPPT.

1.11 On May 27, 2016, the Respondent submitted its response, defending itself by opposition and arguing for the dismissal of the request for arbitral pronouncement.

1.12 On the same date, it attached a copy of the said PA.

1.13 Considering that the Parties did not request the production of any evidence beyond that which the Claimant attached to the request for arbitral pronouncement, the Arbitral Tribunal, in light of the principles of autonomy in the conduct of proceedings, celerity, simplification and procedural informality, inherent in No. 2 of Articles 19 and 29 of RJAT, by order of May 27, 2016, dispensed with the holding of the meeting provided for in Article 18 of the same decree, having also decided that the proceeding continue with optional written pleadings, to be presented successively by the Respondent.

1.14 On May 30, 2016, the Parties were notified of such order, and the Respondent, on June 27, 2016, presented its pleadings and formulated its respective conclusions.

1.15 On June 9, 2016, the Claimant submits that it incorporates by reference all that was previously alleged in its initial petition.

1.16 The date of September 8, 2016 was further set for the rendition of the respective final arbitral decision.

2. Preliminary Matters

2.1 The Parties possess legal capacity and standing, are properly represented and found to be regular (Articles 4 and 10, No. 2 of RJAT and Article 1 of Ordinance No. 112-A/2011, of March 22).

2.2 Regarding the timeliness of the request for arbitral pronouncement, the following should be noted:

On August 18, 2015, the Claimant was notified of the decision dismissing the administrative complaint, which examined the merits of the matter, against which it filed a hierarchical appeal on September 17, 2015, that is, within the period provided for in No. 2 of Article 66 of CPPT.

Pursuant to No. 5 of this Article, hierarchical appeals shall be decided within a maximum period of 60 days, which shall be counted from the date of remission of the proceeding to the competent body to hear it, as per No. 1 of Article 198 of the Administrative Procedure Code, applicable by virtue of subparagraph c) of Article 2 of CPPT.

Non-compliance with this period presumptively constitutes dismissal of the appeal, as per No. 5 of Article 57 of LGT, and this occurred by at least November 16, 2015.

Thus, as the request for arbitral pronouncement was presented on February 15, 2016, it is timely, as the 90-day period provided for in subparagraph a), No. 1, of Article 10 of Decree-Law No. 10/2011, of January 20, was observed, counted in accordance with subparagraph d), No. 1 of Article 102 of CPPT (formation of the presumption of tacit dismissal) and subparagraph e) of Article 279 of the Civil Code, by referral from subparagraph a), No. 1 of Article 29 of the same decree-law and No. 1 of Article 20 of CPPT.

2.3 The proceeding is not vitiated by nullities.

2.4 No other circumstances exist that prevent examination of the merits of the case.

3. Position of the Parties

3.1 Of the Claimant

  • On April 12, 2013, it filed the Tax Return Model 22, relating to fiscal year 2011, "with a tax loss declared in the amount of EUR 128,145.57".

  • On April 19, 2013, it was notified of the correction to the amount of deductible tax losses for that fiscal year by the AT, "indicating, among other things, that the tax loss declared in the amount of EUR 128,145.57 would correspond to a corrected tax loss in the amount of EUR 0.00".

  • The AT issued the contested assessment note "supposedly because the value of the tax loss deducted by the claimant and contained in the said Tax Return Model 22, relating to the tax period of 2011, did not correspond to the elements contained in the Tax Authority's database".

  • On April 24, 2013, and in light of the said notification, "it filed a Tax Return Model 22 relating to the tax period of 2010 with a tax loss declared in the amount of EUR 56,901.77".

  • That the tax loss declared, in the amount of EUR 128,145.57, relating to fiscal year 2011, "should not have been considered in its entirety by the Tax Authority for the issuance of the assessment now contested".

  • That the tax loss declared, in the amount of EUR 56,901.77, relating to fiscal year 2010, "should have been accepted by the Tax Authority and consequently deducted in the determination of tax payable by the claimant relating to the tax period of 2011".

  • That the tax losses aforementioned "were determined on an accounting basis by the Claimant, as is evident from the respective accounting statements for the years 2010 and 2011".

  • That the prerequisites upon which the enforceability of the assessment depends were not proven, therefore "it is manifest that no tax fact occurred, whereby the payment required from the defendant is illegal and unenforceable".

  • Otherwise, "one would have to conclude that the Tax Authority could require payment of the amount in question regardless of the demonstration and verification of the legally established prerequisites, as occurs in the present case, thereby freely creating taxes, which is inadmissible".

  • Therefore, the assessment act contested "constitutes the creation of a genuine tax or special contribution not permitted by law (Article 103/2 of the CRP and Articles 4/2 and 8 of the LGT)".

  • The act in question is null "and of no effect due to lack of authority and for having created taxes or special contributions not permitted by law", in accordance with Article 133, No. 2, subparagraphs a) and d) of the Administrative Procedure Code (CPA) and Articles 103, No. 2 and 165, No. 1, subparagraph i) of the Constitution (CRP).

  • No legal provision is indicated and does not exist to substantiate the quantification of the amount determined.

  • The act lacks substantiation, violating the provisions of Article 268, No. 3 of the CRP and Article 36 of CPPT.

  • It does not meet the substantiation requirements referred to in Article 77 of the LGT.

  • The quantification of the tax fact raises well-founded doubts, whereby the assessment act should be annulled under Article 99, No. 1, subparagraph a) and 100 of CPPT.

  • The AT violated the constitutional principles of confidence, certainty and legal security, legality and retroactivity of tax law, provided "among others in Articles 12 of the LGT, 12 of the Civil Code and 103, No. 3 of the CRP".

  • In light of the error of law on the part of the AT, "in that it proceeded to an IRC assessment incorrectly obliging the Defendant to pay a sum three years after the tax fact", it argues for the complete success of the request for arbitral pronouncement, with the consequent reimbursement of the sums wrongfully paid, plus the compensatory interest owed.

On June 9, 2016, notified to plead in writing, if so desired, it submits that it incorporates by reference all that was previously alleged in the initial petition.

3.2 Of the Respondent

Defending itself by opposition, the AT invokes the following arguments:

  • Since the annulment of the IRC assessment is the Claimant's claim, it invokes no provision of the IRC Code that it considers to have been violated by the AT, whether at the level of subjective or objective incidence, or at the level of determination of taxable matter as well as the regime respecting the deduction of tax losses.

  • The Claimant merely invokes the nullity of the act "as well as alleging the violation of constitutional norms in a generic and often decontextualized manner without specifying how such violation is reflected in the tax assessment act".

  • Invoking the vice of abuse of authority and the violation of the essential content of a fundamental right, provided for in No. 2 of Article 133 of the 1991 Administrative Procedure Code (CPA), as causes of the act's nullity.

  • That the vice of abuse of authority would occur when an organ of the tax administration exercises a competence attributed to the judicial function, citing in this regard Legal Advisor Jorge Lopes de Sousa, in his "Code of Tax Procedure and Process", Volume II, Áreas Publishing House – 6th Edition/2011, p. 329.

  • Which is manifestly not the case, since it is the mission of the AT to administer taxes, customs duties and other tributes, see Article 2 of Decree-Law No. 118/2011, of December 15.

  • Regarding the alleged nullity due to violation of the essential content of a fundamental right as well as lack of substantiation, it transcribes an excerpt from the Supreme Administrative Court (STA) decision of May 25, 2011 (Case No. 091/11) summarized as follows:

"I – As a rule, the vices of administrative and tax acts imply their mere voidability, with nullity occurring only when any essential element of the act is lacking, when the law expressly determines it, or when the circumstances referred to in the various subparagraphs of No. 2 of Article 133 of the CPA are verified, specifically when there is violation of the essential content of a fundamental right.

II – The substantiation of the tax assessment act does not constitute a fundamental right, or even a right analogous to rights, freedoms and guarantees, and its absence or insufficiency does not imply the absence of an essential element of the act, and therefore cannot generate the act's nullity(…)".

  • That the legal requirements for substantiation of tax acts are contained in Article 77 of the LGT, which provides that "substantiation may be made summarily and may consist of mere declaration of agreement with the grounds of previous opinions, information or proposals, which shall form an integral part of the respective act".

  • That, according to prevailing case law, "substantiation is sufficient when it enables a normal recipient to understand the cognitive and evaluative itinerary followed by the author of the act, that is, when the recipient can know the reasons that led the author of the act to decide in that manner and no other".

  • That the Claimant "has perfect knowledge of the content of the assessment act, since it was made following the filing of the various IRC Model 22 returns, including the replacement returns, in which the claimant determined the taxable profit and tax losses".

  • That, "both the Model 22 returns filed by the Claimant itself as well as the notification regarding the correction of the tax loss, allow one to identify and know, clearly and documentarily, the entire course pursued by the AT to arrive at the assessment value, making clear the cognitive and evaluative itinerary followed by the author of the decision, clarifying what led to deciding in one direction and no other".

  • That it is evident that the Claimant "had knowledge of the substantiation of the assessment act, which allowed it to contest it through the administrative complaint as well as in the present arbitral action".

  • That it makes no sense to reference Article 165 of the CRP, which addresses the matter relating to the relative reservation of competence of the Parliament.

  • The invocation of the principle of non-retroactivity of tax law is devoid of factual or legal support, when, in the present proceedings, it is not a matter of the application of new law, but merely the application of the regime for deduction of tax losses, provided for in Article 52 of the IRC Code, and in force in the year 2011, to tax facts relating to the same fiscal year, and the AT fully respected the statute of limitations period provided for in Article 45 of the LGT when it issued the contested assessment on December 9, 2014.

  • Regarding the alleged unconstitutionality violations by violation of the constitutional principles of confidence, certainty and legal security, legality and retroactivity of tax law, it transcribes an excerpt from the STA decision of September 28, 2011 (Case No. 0764/11) summarized in the following terms:

"(…) Now, as the Constitutional Court itself has been affirming in its most recent case law on tax matters, specifically in Decisions Nos. 128/2009 and 85/2010 and 399/10 of October 27, 2010, the retroactivity enshrined in Article 103, No. 3, CRP is only the genuine retroactivity.

As stated in that first decision: 'The retroactivity prohibited in No. 3 of Article 103 of the Constitution is the retroactivity proper or genuine. That is, it prohibits retroactivity that results in the application of new law to old facts (in this case, old tax facts, that is, preceding the entry into force of the new law).' Thus, for authentic or proper retroactivity to occur, it would be necessary for the norm to have been applied to a past fact, entirely conducted under the old law, which, as has been demonstrated, did not occur.

Similarly, there is no violation of the constitutional principle of protection of confidence, arising from the idea of a democratic rule of law (Article 2 of the Constitution of the Republic).

On this matter, the case law of the Constitutional Court (see Decisions 128/09 and 287/09) on the principle of legal security in the material aspect of confidence states that for the latter to be protected, two essential prerequisites must be met:

'a) The impairment of expectations, in an unfavorable sense, shall be inadmissible when it constitutes a mutation of the legal order with which the addressees of its norms cannot reasonably reckon; and further

b) When it is not dictated by the need to safeguard rights or interests constitutionally protected that must be considered as prevailing (recourse should be made here to the principle of proportionality, expressly enshrined with respect to rights, freedoms and guarantees, in No. 2 of Article 18 of the Constitution)'.

  • Also the invoked application of Article 100 of CPPT has no foundation whatsoever, "since the quantification of the amount of tax losses with a view to determining its taxable matter was, as the IRC Code requires, effected by the Claimant in the various Model 22 returns based on elements recorded in its accounting".

  • Regarding the correct interpretation of Article 100 of CPPT, it transcribes an excerpt from the decision of the Central Administrative Court of the South of May 10, 2011 (Case No. 04284/10) summarized in the following terms:

"The 'well-founded doubt' to which the said Article 100 of CPPT alludes, which implies the annulment of the contested act, cannot be based on the absence or inertia of proof by the parties, especially the contestant.

The latter should not limit itself to alleging facts that cast doubt on the existence and quantification of the tax fact.

It is incumbent upon it to prove such facts, notwithstanding that the judge, within its investigative powers, may also work to prove them.

Only through conclusive proof of such facts is it possible for such doubt to be grounded.

As also understood by A. José de Sousa and José da Silva Paixão, in Code of Tax Procedure, Commented and Annotated, 4th Edition, p. 292, note 7: "The contestant, therefore, bears the burden of alleging facts constituting the illegality of the tax act to be annulled"... And in note 10, p. 293: Notwithstanding the burden of proof of such facts that falls on the contestant (Article 342 of the Civil Code)"... The production of evidence is associated with allegation. Whoever must allege the facts also bears, in principle, the burden of producing the respective evidence'.

It was incumbent upon the contestant to allege such matter, as it partly did – cf. Articles 37 et seq. of its initial petition of judicial opposition – but also to prove it, moreover in accordance with the general rule on such matter of Article 342 of the Civil Code, which provides that "he who invokes a right bears the burden of proving the facts constituting the right alleged". A principle that today finds express recognition in Article 74 of the LGT.

(…) And not having furnished contrary proof, and not having raised serious, well-founded doubts about the conclusion drawn by the Tax Administration based on the above indications that such assessment relates to a simulated operation, the case must be decided against the contestant'.

  • The Claimant "had the burden of proving the alleged non-existence of the tax fact (all the more so because it was itself that determined the taxable matter in its returns) given the burden of proof regime contained in Articles 342 of the Civil Code and 74, No. 1 of the LGT".

  • There is no doubt whatsoever about the existence of the tax fact, specifically the amount of tax losses declared by the Claimant and contained in the AT's databases.

  • "The principle of declaration in the determination of taxable matter is in force in our tax legal system, provided for in Article 75 of the LGT, whereby the starting point of any correction shall always be the declaration and the elements contained therein, without prejudice to the AT bearing the responsibility for confirming elements declared by taxpayers".

  • That the taxable matter, in accordance with Article 16 of the IRC Code, is, as a rule, "determined on the basis of the taxpayer's declaration, without prejudice to its control by the Tax Administration, which allows companies to be taxed on their actual effective profit, calculated on the basis of their accounting, in accordance with the constitutional principle of taxation on actual profit enshrined in Article 104, No. 2 of the CRP".

  • That the model of partial dependence of tax law on accounting law, enshrined by the legislator in the IRC Code, implies that "the starting point for determining tax profit is the accounting result, with accounting performing an instrumental function, but the accounting result is subject to tax corrections arising from the rules that the IRC Code imposes, as results from Articles 17 and 89"

It concludes by arguing for the complete dismissal of the request for arbitral pronouncement and absolution of the Respondent, since the contested assessment is not vitiated by any vice, as the AT merely applied the existing legal norms to the facts at issue, fully complying with the legal discipline defined by the legislator.

Regarding the compensatory interest requested, the Respondent argues for the dismissal of the request, since the assessment in question conforms to the applicable legal regime.

On June 27, 2016, it presented pleadings and formulated its conclusions, reiterating all it said in its response, arguing for the complete dismissal of the requests for arbitral pronouncement with the consequent absolution of the proceeding.

4. Subject Matter of the Dispute

Given that the Claimant's claim relates to the non-deduction of tax losses from fiscal year 2010, in the amount of EUR 56,901.77, from the taxable profit determined by it for fiscal year 2011, in the amount of EUR 128,145.57, in conformity with Article 52 of the IRC Code, the question constituting the thema decidendum is whether the replacement tax return Model 22, relating to fiscal year 2010, filed late (beyond the period provided for in No. 2 of Article 122 of the IRC Code), benefits from the presumption of truth established in Article 75 of the LGT.

5. Substantiation

5.1 Established Facts

With relevance to the appreciation and decision of the substantive issues raised, the following facts are established and proven:

5.1.1 On May 31, 2011, the Claimant filed the IRC Model 22 return (…-…-…) relating to fiscal year 2010, having determined a taxable profit of EUR 3,746.94 (pp. 391/393 of PA).

5.1.2 This return gave rise to assessment No. 2011 … of June 27, 2011, in the amount of EUR 189.34 to be refunded (pp. 394/396 and 410).

5.1.3 Relating to fiscal year 2010, the Claimant filed three replacement Model 22 returns, as follows discriminated:

Date of Receipt Identification of Return Tax Loss for Tax Purposes Pages of PA
April 5, 2013 …-… -… EUR 4,620.76 412 to 414
April 12, 2013 …-… -… EUR 210,792.84 415 to 417
April 24, 2013 …-… -… EUR 56,901.77 78 to 82

5.1.4 All said returns are in the status of "Doc. Non-Liquidatable" (p. 390).

5.1.5 On May 30, 2012, the Claimant filed the IRC Model 22 return (…-…-…) relating to fiscal year 2011 (pp. 398/402), in which it declares the taxable profit of EUR 32,050.23 (box 07 – field 778), the deductible tax losses in the amount of EUR 325.43 (box 09 – field 303), the deducted tax losses in the amount of EUR 325.43 (box 09 – field 309) and the taxable matter of EUR 31,724.80 (box 09 – field 311).

5.1.6 This return gave rise to additional assessment No. 2012 … of June 19, 2012, in the amount of EUR 422.98 to be paid (pp. 404/405).

5.1.7 On April 12, 2013, the claimant filed a replacement Model 22 return (…-…-…) relating to fiscal year 2011 (pp. 71/75) in which it declares the taxable profit of EUR 128,145.57 (box 07 – field 778), the deductible tax losses in the amount of EUR 211,118.26 (box 09 – field 303), the deducted tax losses in the amount of EUR 128,145.57 (box 09 – field 309) and the taxable matter of EUR 0.00 (box 09 – field 311).

5.1.8 The deductible tax losses, in the amount of EUR 211,118.26, correspond to the tax losses contained in the Model 22 replacement return relating to the year 2010, filed on April 12, 2013, in the amount of EUR 210,792.84 and to the tax losses deducted, contained in the Model 22 return relating to fiscal year 2011, filed on May 30, 2012, in the amount of EUR 325.43 (EUR 210,792.84 + EUR 325.43 = EUR 211,118.26).

5.1.9 By consultation of the AT's database, it was verified that the fiscal results (taxable profits and tax losses) contained in the IRC Model 22 returns relating to fiscal years 2006 to 2011 are as follows: (p. 16)

Fiscal Year Taxable Profit Declared Loss Loss Deduction (€) Loss Deduction (Years) Losses to Report
2006 EUR 0.00 EUR 85.87 EUR 0.00 ---------------------- EUR 85.87
2007 EUR 0.00 EUR 13,875.57 EUR 0.00 ---------------------- EUR 13,961.44
2008 EUR 13,636.01 EUR 0.00 EUR 13,636.01 2006 and 2007 EUR 325.43
2009 EUR 8,066.77 EUR 0.00 EUR 0.00 ---------------------- EUR 0.00
2010 EUR 3,746.94 EUR 0.00 EUR 0.00 ---------------------- EUR 0.00
2011 EUR 128,145.57 EUR 0.00 EUR 0.00 ---------------------- EUR 0.00

5.1.10 By communication of April 15, 2013, the AT informed the Claimant of the non-correspondence of the value of the deducted tax loss with the elements contained in its (the AT's) database and, likewise, of its consequent correction in the assessment to be issued.

More precisely, the following was stated (p. 56):

"SUBJECT: Correction to the Value of Deductible Tax Losses – Period of 2011

Pursuant to No. 10 of Article 90 of the IRC Code, the Tax and Customs Authority proceeded to control the tax losses indicated in the periodic income return Model 22.

The value of the tax loss deducted in accordance with Article 52 of the IRC Code, evidenced in the Model 22 return of the period of 2011, does not correspond to the elements contained in the database of the Tax and Customs Authority and will be subject to correction in the respective assessment, as evidenced in the annexed table (…).

Declared Tax Loss Corrected Tax Loss
EUR 128,145.57 EUR 0.00

With best regards (…)".

5.1.11 On December 9, 2014, additional assessment No. 2014…, which is the subject of the present request for arbitral pronouncement, was made in the amount of EUR 35,864.36 (document 1 of initial petition and p. 50 of PA).

5.1.12 On December 17, 2014, account adjustment No. 2014… was made in the amount of EUR 35,441.38, payable by February 16, 2015, resulting from the deduction of the tax relating to assessment No. 2012…, of June 19, 2012, in the amount of EUR 422.98 (pp. 406/407).

5.1.13 The said amount of EUR 35,441.39 was paid in the tax enforcement proceeding No. …2015… on May 13, 2015 (document 3 of initial petition).

5.1.14 On April 8, 2015, an administrative complaint was filed (Case No. …2015…), in accordance with Articles 68 et seq. of CPPT, concerning the legality of the above assessment (document 2 of initial petition and pp. 62/68 of PA).

5.1.15 On April 10, 2015, the Claimant submitted two documents (accounting statements) numbered 5 and 6, which it had protested to provide in the administrative complaint (pp. 84/388).

5.1.16 By letter No. … (registration: RD … …PT) of the Administrative Justice Division of the Finance Directorate of …, of July 7, 2015, the Claimant's appointed representative was notified of the draft dismissal order of the said complaint of July 3, 2015 as well as to exercise, if so desired, the right of prior hearing provided for in Article 60 of the LGT (document 4 of initial petition and pp. 420/424 of PA).

5.1.17 On August 13, 2015, an order dismissing the administrative complaint was issued, which was notified to the said representative by letter No. … (registration: RD … PT) of the same Finance Directorate services.

5.1.18 On September 17, 2015, a hierarchical appeal was filed (document 6 of initial petition and pp. 22/29 of PA) with a view to annulling the dismissal order issued in the administrative complaint and, consequently, annulling the contested additional assessment.

5.2 Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

5.3 Motivation

Regarding matters of fact, the Tribunal is not required to pronounce on all that was alleged by the parties; rather, it bears the duty to select the facts that matter for the decision and to discriminate between proven and unproven matters [(see Articles 123, No. 2 of CPPT and 607 of the Code of Civil Procedure (CPC), applicable by virtue of Article 29, No. 1, subparagraphs a) and e) of RJAT)].

Thus, the Tribunal's conviction was founded on the documentary evidence attached to the file as well as on the positions assumed by the parties.

5.4 Law (Substantiation)

Questions to decide:

  • Of the illegality of the assessment made; and
  • Of the request for payment of compensatory interest.

Of the illegality of the contested assessment -

Pursuant to No. 2 of Article 122 of the IRC Code, "The self-assessment from which tax superior to that due or tax loss inferior to the actual may result can be corrected by means of a replacement return to be filed within one year counting from the expiration of the legal deadline".

The expiration of the legal deadline for filing the periodic income return (Model 22), for taxpayers not adopting a tax period different from the calendar year, is the last day of the month of May, regardless of whether that day is a business day or not, see the provision of No. 1 of Article 120 of the IRC Code.

Thus, the Model 22 replacement returns relating to fiscal year 2010, filed by the Claimant on April 4, 12, and 24, 2013, with tax losses of EUR 4,620.76, EUR 210,792.84 and EUR 56,901.77, respectively, cannot correct the taxable profit of EUR 3,746.94 declared by it on May 31, 2011, since they were filed after May 31, 2012, that is, outside the one-year period counting from the expiration of the legal deadline.

Thus the AT's procedure in not proceeding to the assessment of the same is not subject to any censure, as referred to in 5.1.4 of the factual findings above.

As for the Model 22 replacement return (5.1.7 above), relating to the year 2011, since it results in tax inferior to that determined in the self-assessment made in the Model 22 return filed on May 30, 2012 (5.1.5 above), that return would have the virtue of correcting this self-assessment, see No. 2 of the said Article 122.

However, the tax loss, deductible pursuant to Article 52 of the IRC Code, in the amount of EUR 211,118.26, contained in box 09 – field 303 of the replacement return, was legally disregarded as concerns the amount of EUR 210,792.84, for not being contained in the AT's database, since the Model 22 replacement return (5.1.3 above and pp. 415 to 417 of PA) relating to fiscal year 2010 was filed outside the period provided for in No. 2 of Article 122 of the IRC Code.

As a consequence, the tax loss deducted, in the amount of EUR 128,145.57, contained in box 09 – field 309 of the same replacement return, should be ignored by the AT, as it effectively was.

For the same reasons (non-observance of the period provided for in the said normative), the tax losses, in the amounts of EUR 4,620.76 and EUR 56,901.77, contained in the Model 22 replacement returns relating to the said fiscal year 2010, filed on April 5, 2013 (5.1.3 above and pp. 412/414 of PA) and April 24, 2013 (5.1.2 above and pp. 78/82 of PA), respectively, cannot motivate any corrections in the self-assessment of IRC relating to fiscal year 2011.

Thus, the documentary evidence (accounting statements) brought to the present proceedings is irrelevant, with a view to determining the tax loss for fiscal year 2010, when what is under discussion is the result of fiscal year 2011.

The additional assessment, which is the subject of the present request for arbitral pronouncement (5.1.11), was made by the AT on December 9, 2014, pursuant to No. 1 of Article 99 of the IRC Code, by virtue of correction made in accordance with No. 10 of Article 90 of the same code. Indeed, this provision states: "The Tax and Customs Authority proceeds to additional assessment when, after tax is assessed, it is required, by virtue of correction made in accordance with No. 10 of Article 90 (…) superior tax to that assessed".

It is thus proven that the prerequisites upon which the enforceability of the assessment depends are met.

In this assessment, the taxable matter, in the amount of EUR 128,145.57, resulting from the taxable profit of equal amount, contained in the Model 22 replacement return of fiscal year 2011, filed by the Claimant on April 12, 2013 (5.1.7 above), was considered, which enjoys the presumption of truth established in No. 1 of Article 75 of the LGT. It is incumbent upon the Claimant to prove the alleged non-existence of the tax fact (all the more so because it was itself that determined the taxable matter in its returns), given the burden of proof regime contained in Articles 342 of the Civil Code and 74, No. 1 of the LGT, and which it failed to do.

The Claimant alleges that the assessment act suffers from various vices that lead to:

Nullity, in accordance with the provisions of subparagraphs a) and d), No. 2 of Article 133 of the Administrative Procedure Code of 1991, for abuse of authority and violation of the essential content of a fundamental right; or

Annulment, in accordance with Article 135 of the same code, for lack of substantiation, provided for in Article 77 of the LGT and No. 3 of Article 268 of the CRP and by the existence of well-founded doubts in the quantification of the tax fact, in accordance with Article 100 of CPPT.

It further alleges the violation of the constitutional principles of legality, non-retroactivity of tax law and confidence as well as certainty and legal security.

It must be said from the outset that the Claimant is not correct, since the contested act is not vitiated by any vice nor by any violation of these or other constitutional principles.

Thus, as regards the vice of abuse of authority:

As stated by Freitas do Amaral, "Abuse of authority is the vice consisting of the performance by an organ of the Administration of an act included in the attributions of the legislative or judicial power".

The contested act was performed by the Tax and Customs Authority, pursuant to Article 99/1 of the IRC Code, an entity to which it falls to ensure the assessment and collection of taxes, specifically IRC, in accordance with the organizational structure of the Tax and Customs Authority provided for in Decree-Law No. 118/2011, of December 15, and which resulted from the merger of the General Directorate of Taxes, the General Directorate of Customs and Special Consumption Taxes and the General Directorate of Informatics and Support to Tax and Customs Services.

Thus, the vice of abuse of authority invoked by the Claimant is not verified.

As to the alleged lack of substantiation and violation of the essential content of a fundamental right:

According to the same author, "The substantiation of an administrative act consists in the explicit statement of the reasons that led its author to perform that act or to endow it with certain content".

Thus, substantiating an administrative act "consists in indicating, concretely, the reasons of law and fact by which the decision was taken in a particular direction".

For Vieira de Andrade, "(…) the duty of express substantiation obligates the administrative body to indicate the facts and legal reasons that determined it to perform that act, externalizing, in its decisive features, the internal procedure of formation of decisional intent".

As stated by Diogo Leite de Campos and others, "With respect to substantiation, the Constitution guarantees the administered the right to express and accessible substantiation of all administrative acts (a concept in which tax acts are inserted, in light of the provision of Article 120 of the CPA) that affect rights or legally protected interests (Article 268, No. 3) (…).

In tax matters, the duty of substantiation of the decisions in tax procedure proceedings and tax acts is made concrete in Article 77 of the LGT.

As the Supreme Administrative Court has understood, the legal and constitutional requirement of substantiation is aimed, primarily, at allowing interested parties to know the reasons that led the administrative authority to act, so as to enable them a conscious choice between acceptance of the legality of the act and its contentious challenge.

To achieve such objective, substantiation must provide the recipient of the act with the reconstitution of the cognitive and evaluative itinerary pursued by the authority that performed the act, so that one can clearly know the reasons for which it decided in the way it decided and not differently (…).

Substantiation must consist, at minimum, of a succinct exposition of the facts and legal grounds that motivated the decision, or of a declaration of agreement with the grounds of previous opinions, information or proposals, including those that form part of the tax audit report".

In the same sense, see, among many others, the following Supreme Administrative Court decisions:

Decision of May 6, 2015 (Case No. 0291/13): "In cases where the law does not impose special substantiation requirements (as required in cases of 'special relationships' – Article 77, No. 3 of the LGT, taxation by 'indirect methods' – Article 77, Nos. 4 and 5 of the LGT, 'administrative violation of bank secrecy' – Article 63-B, No. 4 of the LGT or 'reversal against subsidiary liable persons' – Article 23, No. 4 of the LGT), compliance by the Tax Administration with the duty to substantiate is assessed in light of the provisions of Nos. 1 and 2 of Article 77 of the LGT and attending to the purposes pursued by the duty of substantiation".

Decision of September 9, 2015 (Case No. 01173/14): "The AT has the legal duty to substantiate assessment acts (see Article 268 of the CRP, as well as Articles 21 of the Tax Code, 125 of the CPA and 77 of the LGT). Substantiation, even if made by referral or summarily, cannot fail to be clear, congruent and to contemplate the aspects, of fact and law, that allow knowledge of the cognitive and evaluative itinerary pursued by the Administration for the determination of the act".

And decision of May 25, 2011 (Case No. 091/11): "As a rule, the vices of administrative and tax acts imply their mere voidability, with nullity occurring only when any essential element of the act is lacking, when the law expressly determines it, or when the circumstances referred to in the various subparagraphs of No. 2 of Article 133 of the CPA are verified, specifically when there is essential violation of a fundamental right. The substantiation of the tax assessment act does not constitute a fundamental right, or even a right analogous to rights, freedoms and guarantees, and its absence or insufficiency does not imply the absence of an essential element of the act, and therefore cannot generate the act's nullity (…)".

For this Arbitral Tribunal, the documents contained in the proceeding, specifically the notification of the demonstration of assessment No. 2014 … relating to IRC of 2011 – the contested assessment (5.1.11 of the factual findings above), the communication regarding the correction to the value of deductible tax losses for fiscal year 2011 (5.1.10), the notification of the demonstration of assessment No. 2011… (5.1.2) as well as the Model 22 returns, initial and replacement (5.1.5 and 5.1.7), are sufficient for the Claimant to have been properly informed of the contested assessment act.

Thus, neither do the vices of lack of substantiation and violation of the essential content of a fundamental right, invoked by the Claimant, exist.

As to well-founded doubts in the quantification of the tax fact:

The assessment act was based on the taxable profit, in the amount of EUR 128,145.57, contained in the Model 22 replacement return of fiscal year 2011, filed by the Claimant on April 12, 2013 (5.1.7 above), and the Claimant has not proven, as was incumbent upon it, the alleged non-existence of the tax fact (all the more so because it was itself that determined the taxable matter in its returns), given the burden of proof regime inherent in Articles 342 of the Civil Code and 74, No. 1 of the LGT.

The disregard of the tax loss contained in box 09, field 309, of the same return, of equal amount, to be deducted pursuant to Article 52 of the IRC Code, was due to the fact that the Model 22 replacement return of fiscal year 2010 was filed outside the period provided for in No. 2 of Article 122 of the IRC Code (5.1.3 above).

And the same applies to the tax losses, in the amounts of EUR 4,620.76 and EUR 56,901.77, contained in identical returns relating to the same fiscal year, filed on April 5, 2013 (5.1.3 above) and April 24, 2013 (5.1.2 above).

Thus, presuming the Claimant's returns to be true and made in good faith, see the provision of No. 1 of Article 75 of the LGT, there remain no doubts about the quantification of the tax fact as concerns the taxable profit in the amount of EUR 128,145.57.

And the same applies to the amount of losses to be deducted, since the Claimant was duly notified of the correction made (5.1.10).

Thus, there are no grounds for resorting to Article 100, No. 1 of CPPT, according to which "Whenever the evidence produced results in well-founded doubt about the existence and quantification of the tax fact, the contested act shall be annulled".

Finally, as to the violation of constitutional principles of legality, non-retroactivity of tax law and confidence as well as certainty and legal security:

The principle of legality, provided for in No. 2 of Article 103 of the CRP, constitutes the foundational principle concretizing the rule of law, expressing the subordination of Public Administration and, more precisely, of the Tax and Customs Authority. As stated by Elisabete Louro Martins, "The principle of legality should be understood in two distinct dimensions, whereby a first dimension requires that administrative action, even if in conformity with law, have foundation in a law previously approved in accordance with the formal and material rules provided for in the Constitution (reservation of law), and a second dimension that prohibits any tax act being performed that contravenes the existing law (preference of law)".

The principle of tax legality is provided for in Article 8 of the LGT, as follows:

"1 – Subject to the principle of tax legality are the incidence, the rate, tax benefits, guarantees of taxpayers, the definition of tax crimes and the regime of tax breaches.

2 – Also subject to the principle of tax legality are:

a) The assessment and collection of tributes, including periods of prescription and statute of limitations;

b) The regulation of the figures of substitution and tax liability;

c) The definition of ancillary obligations;

d) The definition of sanctions of a non-criminal tax nature;

e) The rules of tax procedure and process".

Thus, as stated in the Supreme Administrative Court decision of April 26, 1995 (Case No. 16187), the principle of legality in tax matters "means that they can only be created by law, which must contain the essential elements (incidence, rate, tax benefits and guarantees of taxpayers) for the definition of the tax situation of individuals, and the said domains cannot be left to the mercy of Administrative Power for it to define them through regulation and much less through an administrative act".

The additional assessment under consideration was made pursuant to No. 1 of Article 99 of the IRC Code, this code having been approved by Article 1 of Decree-Law No. 442-B/88, of November 30, by use of the legislative authorization granted to the Government by Law No. 106/88, of September 17, and in accordance with subparagraphs a) and b) of No. 1 of Article 201 of the CRP, and based on the competence provided for in subparagraph b), No. 1 of Article 198 of the same diploma.

The principle of non-retroactivity of tax law is embodied in Article 103, No. 3 of the CRP, constituting a manifestation of the principle of legal security or protection of confidence in tax matters, with the aim of preventing the application of a norm fiscally unfavorable to the taxpayer to past facts.

However, the retroactivity prohibited is the genuine, proper or authentic one, that is, that which consists in the application of new law to old tax facts (prior, therefore, to the entry into force of the new law).

Thus, the invocation of the principle of genuine, proper or authentic non-retroactivity of tax law, or false, improper or inauthentic, has no foundation in the case sub judice, since the law in force during that period was applied to the tax facts (assessment act) relating to fiscal year 2011.

As to the constitutional principle of legal security, in the material aspect of confidence, it should be noted that for this to be protected, two essential prerequisites must be met:

"a) The impairment of expectations in an unfavorable sense shall be inadmissible when it constitutes a mutation of the legal order with which the addressees of its norms cannot reasonably reckon; and further

b) When it is not dictated by the need to safeguard rights or interests constitutionally protected that must be considered as prevailing (recourse should be made here to the principle of proportionality, expressly enshrined with respect to rights, freedoms and guarantees in No. 2 of Article 18 of the Constitution)".

As is evident, no violation of the constitutional principle of legal security, arising from the idea of a democratic rule of law (Article 2 of the Constitution of the Republic), is apparent.

In paragraph 39 of the request for arbitral pronouncement, the Claimant alleges the statute of limitations on the right to make the assessment, "In this respect, there is clearly an error of law on the part of the Tax Authority, in that it proceeded to make an IRC assessment wrongfully obliging the Defendant to pay an amount three years after the tax fact".

Neither is the Claimant correct on this point, since, as the Claimant itself states in Article 1 of the said request for arbitral pronouncement, the assessment being validly notified on December 9, 2014, the statute of limitations period provided for in Article 45 of the LGT was observed.

By all of the foregoing, we find that the additional IRC assessment No. 2014…, of fiscal year 2011, is not vitiated by any vice and should be maintained in the legal order.

Regarding the request for compensatory interest -

Being this request dependent on the success of the prior request, as that one is unsuccessful, this one is also unsuccessful, with no condemnation of the AT in the payment of compensatory interest.

6. Decision

In view of the foregoing, it is decided:

a) To judge the request for annulment of the order of the Head of the Administrative Justice Division of the Finance Directorate of …, of August 13, 2015, issued in the administrative complaint proceeding No. …2015…, as unsuccessful;

b) To judge the request for annulment of the additional IRC assessment No. 2014 …, relating to fiscal year 2011, as unsuccessful;

c) To judge the request for payment of any compensatory interest as unsuccessful; and

d) To condemn the claimant to payment of the costs of the arbitral proceeding in the amount of EUR 1,836.00, see No. 1 of Article 527 of the CPC.

7. Value of the Proceeding

In accordance with the provisions of Articles 306, No. 2 of the CPC, 97-A, No. 1, subparagraph a) of CPPT and 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at EUR 35,864.36.

8. Costs

Pursuant to Article 22, No. 3 of RJAT, the amount of costs is fixed at EUR 1,836.00, in accordance with Table I, annexed to the Regulation of Costs in Tax Arbitration Proceedings.

Let notice be given.

Lisbon, September 4, 2016.

The Arbitrator,

(Rui Ferreira Rodrigues)

Text prepared by computer, in accordance with the provisions of Article 131, No. 5 of the CPC, applicable by referral from Article 29, No. 1, subparagraph e) of RJAT.

[1] Diogo Freitas do Amaral, in "Administrative Law", Volume III, Lisbon 1989, p. 295.

[2] Ibid., pp. 254/255

[3] Decision of the Supreme Administrative Court of February 6, 1991 (Case No. 13085).

[4] José Carlos Vieira de Andrade, in "The Duty of Express Substantiation of Administrative Acts", Theses Collection, Almedina, p. 13.

[5] Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, in "General Tax Law", annotated and commented, 4th edition, 2012, Writing Meeting, pp. 675/676.

[6] In "The Burden of Proof in Tax Law", Coimbra Publisher, pp. 58/59.

[7] Rui Guerra da Fonseca, in "Commentary on the Portuguese Constitution", Volume II, Research Center of the Faculty of Law of the University of Lisbon, Almedina, pp. 870/871.

[8] Ibid., pp. 870/873.

[9] Decision No. 287/90 of the Constitutional Court of October 30 (Case No. 309/88).

Frequently Asked Questions

Automatically Created

Can tax losses from previous years be deducted in a substitute IRC declaration filed after the original deadline?
Yes, tax losses from previous years can be deducted in substitute IRC declarations, but strict timing requirements apply. Under Portuguese tax law, substitute declarations (declarações de substituição) must generally be filed within specific deadlines. In this case, the taxpayer filed a substitute declaration for fiscal year 2010 on April 24, 2013, after being notified of discrepancies by the Tax Authority regarding the 2011 assessment. The critical issue is whether this substitute declaration was filed within the legally permitted timeframe and whether it can validly establish deductible tax losses for carry-forward purposes. The deduction of prior-year losses is governed by IRC provisions allowing loss carryforward, but the losses must be properly declared and substantiated within the applicable limitation periods.
What are the legal requirements for filing a substitute tax declaration under Portuguese IRC rules?
Under Portuguese IRC rules, substitute tax declarations must comply with specific legal requirements established in the CIRC (Corporate Income Tax Code) and CPPT. A substitute declaration can be filed to correct errors or omissions in the original return, but timing is critical. Generally, substitute declarations filed before the start of tax inspection procedures are accepted without restrictions. After notification of inspection or assessment procedures, substitute declarations may face limitations. The declaration must contain accurate information, be properly supported by accounting records, and respect the statutory filing deadlines. In this case, the taxpayer filed substitute returns for both 2010 and 2011 in April 2013, and the validity of these filings—particularly the 2010 return filed after notification from the Tax Authority—was central to determining whether the tax loss could be deducted.
When is a taxpayer entitled to compensatory interest (juros indemnizatórios) for overpaid corporate income tax in Portugal?
Under Article 43 of the General Tax Law (LGT) and Article 61 of the Code of Tax Procedure and Process (CPPT), taxpayers are entitled to compensatory interest (juros indemnizatórios) when they have made payments exceeding the legally due amount and the excess results from actions imputable to the tax administration. The interest accrues from the date of the undue payment until the issuance of the tax credit note for restitution. In this case, the claimant requested compensatory interest from May 13, 2015 (the date of alleged wrongful tax payment) until restitution. Entitlement requires proving: (1) payment of tax exceeding the legal obligation; (2) the overpayment resulted from Tax Authority error or unlawful action; and (3) the taxpayer was not responsible for the overpayment. The rate and calculation method are established by law.
How does the CAAD arbitral tribunal handle disputes over official IRC tax assessments that fail to deduct fiscal losses?
The CAAD (Administrative Arbitration Center) handles IRC assessment disputes through arbitral tribunals established under the RJAT (Legal Regime for Arbitration in Tax Matters - Decree-Law 10/2011). The procedure involves: (1) filing an arbitration request within 90 days of the act being challenged; (2) appointment of arbitrator(s); (3) submission of the administrative file by the Tax Authority; (4) written response from the AT; (5) optional evidence production and hearings; and (6) final arbitral decision within the statutory timeframe. In this case, the tribunal examined whether the Tax Authority properly denied the deduction of fiscal losses from the 2010 tax year when calculating 2011 IRC liability. The arbitrators review both procedural compliance (timeliness of substitute declarations) and substantive tax law issues (validity of loss deduction claims), with full examination of the merits and power to annul unlawful assessments and order restitution with interest.
What is the procedure for challenging an IRC tax assessment through gracious complaint and hierarchical appeal before arbitration?
The procedure for challenging an IRC assessment in Portugal follows a hierarchical structure. First, the taxpayer must file a gracious complaint (reclamação graciosa) with the Tax Authority within 120 days of notification of the assessment (Article 70 CPPT). The AT must decide within a specific timeframe; if dismissed, the taxpayer can file a hierarchical appeal (recurso hierárquico) within 30 days to a superior administrative authority (Article 66 CPPT). The hierarchical appeal must be decided within 60 days; failure to do so results in tacit dismissal (Article 57(5) LGT). After tacit or express dismissal of the hierarchical appeal, the taxpayer has 90 days to either: (a) request arbitration before CAAD under Article 10 RJAT, or (b) file a judicial appeal to the tax courts. In this case, the claimant followed the complete gracious procedure—administrative complaint dismissed August 18, 2015, hierarchical appeal filed September 17, 2015, tacit dismissal by November 16, 2015—before timely filing for arbitration on February 15, 2016.