Summary
Full Decision
ARBITRAL DECISION
The arbitral tribunal, constituted with a single arbitrator on 02-03-2015 at CAAD – Centre for Administrative Arbitration in accordance with the legal regime established by Decree-Law no. 10/2011 of 20 January[1], for which the arbitrator from the Centre's list, Nuno Maldonado Sousa, was designated by the respective Deontological Council, hereby issues the following arbitral decision.
1. REPORT
1.1 Constitution of the Arbitral Tribunal
A..., Lda., NIPC..., with registered office at Rua..., no...., ..., ..., and B..., Lda., NIPC..., with registered office at Rua..., no...., ..., filed a petition for constitution of the arbitral tribunal, in accordance with the combined provisions of Articles 2 and 10 of the RJAT and Articles 1 and 2 of Ordinance no. 112-A/2011 of 22 March, in which the Tax and Customs Authority[2] is a respondent. The petition for constitution of the arbitral tribunal was presented in a joint application, whereby the Petitioners invoked coalition and joinder of claims.
The petition for constitution of the arbitral tribunal was accepted by the President of CAAD on 19-12-2014 and notified to the Tax and Customs Authority on 19-12-2014.
Pursuant to the provisions of Article 6, no. 1, and Article 11, no. 1, paragraph b) of the RJAT, the Deontological Council designated the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the appointment within the applicable period and notified the parties of this designation on 10-02-2015. In accordance with the rule set out in Article 11, no. 1, paragraph c) of the RJAT, the arbitral tribunal was constituted on 02-03-2015.
1.2 The Petitioner's Claim
The claim formulated in the Initial Petition[3] comprises:
(i) With respect to Petitioner A..., Lda., the annulment of the assessment dated 06-10-2014 for Corporate Income Tax (IRC) no. 2014..., relating to the fiscal year 2010, with the amount to be paid of € 5,039.19 and the corresponding adjustment no. 2014..., dated 08-10-2014;
(ii) With respect to Petitioner B..., Lda., the annulment of the assessment dated 20-10-2014 for Corporate Income Tax (IRC) no. 2014..., relating to the fiscal year 2010, with the amount to be paid of € 4,985.18 and the corresponding adjustment no. 2014... dated 29-10-2014;
(iii) The reimbursement to both of the amounts paid as tax, plus interest until complete and full repayment.
They contend that the assessments are affected by illegality:
(i) By virtue of the application in those acts of Ordinance no. 170/2002 of 28 February, authorized for this purpose by the provision of no. 2 of Article 8 of Decree-Law no. 55/2008 of 26 March, which suffers from organic unconstitutionality by violation of the provisions of Articles 103, no. 2, and 165, no. 1 of the Constitution of the Portuguese Republic, in the interpretation made thereof; or, in another line of reasoning,
(ii) By virtue of the existence of a "hierarchical conflict of norms" between the aforementioned provision of DL 55/2008 and Ordinance 170/2002, i.e., we have the "ordinance of regulation directly contradicting the Decree-Law which it is intended to regulate".
1.3 The Position of the Tax Authority
The Tax and Customs Authority responded by upholding "the legality and constitutionality of the assessments" and argued for the dismissal of the claim, contending that Ordinance 170/2002 does not exclude or repeal the benefit sought by the Petitioners, but merely does not regulate it, and that neither no. 2 of Article 8 of DL 55/2008, nor the Ordinance to which it refers, constitute innovative norms that extinguish a tax benefit created by law.[4], and are consequently not subject to the test of constitutionality as the Petitioners contend.
1.4 Evidence and Arguments
The Tax Authority and the Petitioner did not request the production of any evidence beyond the documentary evidence they brought to the file. The parties did not consider necessary the meeting provided for in Article 18 of the RJAT and dispensed with making arguments.
1.5 Preliminary Assessment
The arbitral tribunal was regularly constituted and has jurisdiction ratione materiae in accordance with the provisions of Article 2, no. 1, paragraph a) of the RJAT.
The Parties possess legal personality and capacity (that of the Tax Authority being in accordance with the discipline contained in Article 4, no. 1 of the RJAT and 10, no. 2 of the same legislation and Article 1, paragraph a) of Ordinance no. 112-A/2011 of 22 March), are legitimate and are regularly represented.
There are therefore no nullities that vitiate the proceedings.
Thus, there is no obstacle to examination of the merits of the case and a decision is warranted.
2. DECISION
2.1 Matters of Fact
2.1.1 Facts Deemed Proven
In these proceedings the following facts have been established:
A. Petitioner A..., Lda., was notified of the assessment dated 06-10-2014 for Corporate Income Tax (IRC) no. 2014..., relating to the fiscal year 2010, with the amount to be paid of € 5,039.19 and the corresponding statement of account adjustment with compensation no. 2014..., dated 08-10-2014, resulting in the tax payable in the amount of € 4,844.06, with payment deadline of 05-12-2014 (1st RI[5], docs. 1 and 2).
B. Petitioner B..., Lda., was notified of the assessment dated 20-10-2014 for Corporate Income Tax (IRC) no. 2014..., relating to the fiscal year 2010, with the amount to be paid of € 4,985.18 and the corresponding statement of account adjustment with compensation no. 2014... dated 29-10-2014 resulting in the tax payable in the amount of € 4,791.56, with payment deadline of 29/12/2014 (1st RI, docs. 3 and 4).
C. The assessments referred to in A. and B. are based on the conclusions contained in the tax inspection reports (2nd and 3rd RI, docs. 6 and 8 and PA1[6], p. 47 and PA2, p. 43).
D. In the tax inspection report conducted on Petitioner A..., Lda., the following statement of facts and law can be read, among all else that is contained therein (PA2, pp. 23-29):
a. The taxpayer classified under CAE 1111 "Cereal Cultivation" is engaged in corn production.
b. In proceeding with the analysis of the IRC form 22 submitted by the taxpayer with reference to the year 2010, it was found that the taxpayer marked field 5 of table 03.4 and field 245 of table 8.1, as a result of which it benefited, under IRC, from the reduced rate of 10% pursuant to Article 43 of the Tax Benefits Statute (EBF), having benefited from the regional development incentive.
In fact, Article 43, no. 1 provided that: "To companies directly and principally engaged in an economic activity of an agricultural, commercial, industrial or service provision nature in interior areas, hereinafter designated 'beneficiary areas', the following tax benefits are granted:
(…)
c. However, attention must also be paid to the provision in no. 7 of the same Article 43, which determined that: "The definition of the criteria (…) as well as all regulatory norms necessary for the proper implementation of this article shall be established by ordinance of the Minister of Finance".
The ordinance in question is no. 170/2002 of 28 February, which provides in its Article 2 that "The following economic activities may benefit from the aforementioned incentives, with the exception of the following: Agriculture and fishing, identified respectively in sections A and B of the Portuguese Classification of Economic Activities – CAE (…)".
d. It so happens that "A..., Lda." pursues an agricultural activity contained in section A of the CAE (principal CAE 01111 – Cereal Cultivation), and therefore does not meet the legal requirements to benefit from the regional development incentive.
e. Accordingly, for IRC purposes, with respect to the fiscal year 2010, a correction to the tax assessment in the amount of €4,291.48 is required (…).
E. In the tax inspection report conducted on Petitioner B..., Lda., the following statement of facts and law can be read, among all else that is contained therein (PA1, pp. 23-29):
a. The taxpayer classified under CAE 1111 "Cereal Cultivation" is engaged in corn production.
b. In proceeding with the analysis of the IRC form 22 submitted by the taxpayer with reference to the year 2010, it was found that the taxpayer marked field 5 of table 03.4 and field 245 of table 8.1, as a result of which it benefited, under IRC, from the reduced rate of 10% pursuant to Article 43 of the Tax Benefits Statute (EBF), having benefited from the regional development incentive.
In fact, Article 43, no. 1 provided that: "To companies directly and principally engaged in an economic activity of an agricultural, commercial, industrial or service provision nature in interior areas, hereinafter designated 'beneficiary areas', the following tax benefits are granted:
(…)
c. However, attention must also be paid to the provision in no. 7 of the same Article 43, which determined that: "The definition of the criteria (…) as well as all regulatory norms necessary for the proper implementation of this article shall be established by ordinance of the Minister of Finance".
The ordinance in question is no. 170/2002 of 28 February, which provides in its Article 2 that "The following economic activities may benefit from the aforementioned incentives, with the exception of the following: Agriculture and fishing, identified respectively in sections A and B of the Portuguese Classification of Economic Activities – CAE (…)".
d. It so happens that "B..., Lda." pursues an agricultural activity contained in section A of the CAE (principal CAE 01111 – Cereal Cultivation), and therefore does not meet the legal requirements to benefit from the regional development incentive.
e. Accordingly, for IRC purposes, with respect to the fiscal year 2010, a correction to the tax assessment in the amount of €4,245.01 is required (…).
2.1.2 Facts Deemed Not Proven
No other facts with relevance to the decision of the case were alleged.
2.1.3 Reasoning on Proven Matters of Fact
The tribunal's conviction was based on the documentary evidence in the file, duly identified[7].
2.2 Matters of Law
In the manner in which the Arbitral Tribunal views the matter, in light of the claim and the cause of action, the principal issue to be resolved consists of determining whether the norm of Article 2, paragraph a) of Ordinance 170/2002 is applicable within the scope of the regional development benefits established by the Tax Benefits Statute[8] in its Article 43[9]. If the answer is affirmative and the taxpayers pursuing economic activity in the agricultural sector are effectively excluded from the scope of application of those benefits, it is necessary to ascertain the conformity with the Constitution of the norm of Article 8, no. 2 of DL 55/2008, which invokes Ordinance 170/2002 to regulate the matter, as this question was expressly raised by the Petitioners.
It is necessary to examine the discipline of the sources of law and to affirm that in the complexity of the modern legal system, the organ holding executive power frequently has need to render the provisions of formal legislation executable, and does so through regulatory norms that engage in dialogue with concrete situations and establish connection with the organs of administration and with the organization of the State itself. These commands which are materially laws are issued in the exercise of the Government's regulatory power, which has the characteristic of being exercised "in obedience to existing laws but is not confused with these"; more than that, these regulatory norms have a subordinate character, as they exist for the "proper implementation of laws"[10].
Those principles affirmed by general legal theory have express realization in the CRP, which in its Article 112, no. 7 traces the discipline of the relationship between legislative sources and regulations, requiring the subordination of regulatory norms to legislative norms. The idea of subordination is affirmed by the need to identify in the regulatory instrument the laws within whose scope it is circumscribed.
In this regard, it must be borne in mind that from the constitutional norm under analysis results a "scale of binding of regulatory activity", i.e., the freedom to determine the content of regulatory norms varies according to the matter at hand, within the constitutional framework, whether it be understood as falling within the reserve of law, the relative reserve or in matters of concurrent competence between the National Assembly and the Government. The scale defined in these terms determines that in cases where the Constitution provides that only through law of the National Assembly, or by its delegation, may a certain matter be regulated, there exists for regulatory power a "material legal reserve", only strictly executive and instrumental regulations being admissible[11]. Knowing that in the case at hand one is within the scope of the competence reserved to the National Assembly, albeit relative (165, no. 1-i), the regulatory norms under analysis will certainly be of this type.
It is further necessary to affirm that "it constitutes a general principle of our legal order that, when a norm bears an interpretation consistent with the Constitution and another inconsistent with it, the one that is compatible with constitutional precepts should be adopted."[12]. This is after all an "emergence of the principle of reduction of invalid acts and consecration of the prevalence of a principle of interpretation of norms – to the extent possible – in conformity with the Constitution"[13].
Let us now examine the law generically applicable to the situations in these proceedings.
In the wording resulting from Law no. 53-A/2006 of 29 December, Article 43 of the EBF [14],[15] provided:
Article 43. Tax Benefits Relating to Regional Development
1 - To companies directly and principally engaged in an economic activity of an agricultural, commercial, industrial or service provision nature in interior areas, hereinafter designated "beneficiary areas", the following tax benefits are granted:
a) The rate of Corporate Income Tax (IRC), provided for in no. 1 of Article 80 of the respective Code, is reduced to 15% for entities whose principal activity is located in beneficiary areas;
b) In the case of installation of new entities whose principal activity is located in beneficiary areas, the rate referred to in the preceding number is reduced to 10% during the first five fiscal years of activity;
c) Reinvestment reserves and depreciation relating to investment expenditures up to € 500,000, excluding those relating to the acquisition of land and light passenger vehicles, of Corporate Income Tax taxpayers who exercise their principal activity in beneficiary areas may be deducted, for purposes of determining taxable profit, with an increase of 30%;
d) The compulsory social charges borne by the employing entity relating to net job creation, for indefinite periods, in beneficiary areas are deducted, for purposes of determining taxable profit, with an increase of 50%, once only per worker hired by that entity or by another entity with which there exist special relationships, in accordance with Article 58 of the Corporate Income Tax Code;
e) Tax losses determined in a given fiscal year in accordance with the Corporate Income Tax Code are deducted from taxable profits, if any, of one or more of the seven subsequent fiscal years.
2 - The following are conditions for benefiting from the tax benefits provided in the preceding number:
a) The determination of taxable profit be made using direct valuation methods;
b) They have their tax situation regularized;
c) They do not have outstanding wages;
d) They do not result from a spin-off carried out in the two years preceding the benefit.
3 - The following acquisitions are exempt from the payment of municipal tax on transfer of immovable property:
a) By young persons, aged between 18 and 35 years, of real property or autonomous fraction of urban real property located in beneficiary areas, intended exclusively for their own first and permanent residence, provided that the value on which the tax would be levied does not exceed the maximum values for housing at controlled costs, increased by 50%;
b) Of real property or autonomous fractions of urban real property, provided they are located in beneficiary areas and permanently devoted to the activity of the companies.
4 - The exemptions provided for in the preceding number shall only apply if the acquisitions are duly reported to the tax service of the area where the immovable property to be acquired is located, by means of a statement to the effect that the declarant has not previously benefited from an identical benefit.
5 - The exemptions provided for in no. 3 are dependent on authorization from the deliberative organ of the respective municipality.
6 - For purposes of this article, beneficiary areas are delimited in accordance with criteria that give special attention to low population density, compensation or fiscal shortfall indices and inequality of social, economic and cultural opportunities.
7 - The definition of the criteria and the delimitation of beneficial territorial areas, in accordance with the preceding number, as well as all regulatory norms necessary for the proper implementation of this article shall be established by ordinance of the Minister of Finance.
8 - The tax benefits provided for in this article are not cumulative with other benefits of an identical nature, without prejudicing the choice of a more favorable one.
From the norms of this article it is possible to retain that tax benefits are granted to companies directly and principally engaged in economic activity of an agricultural nature in interior areas (no. 1). It is also clear that, insofar as it matters here, this benefit consists of the reduction of the Corporate Income Tax rate to 15% (no. 1-a) or to 10% during the first five fiscal years of activity in the case of installation of new entities (no. 1-b). Conditions for the granting of benefits were set forth immediately (no. 2), namely (i) that the determination of taxable profit be made using direct valuation methods; (ii) the companies in question have their tax situation regularized; (iii) they do not have outstanding wages; (iv) and they do not result from a spin-off carried out in the two years preceding.
However, not all the elements necessary for the effective verification of the benefits were immediately determined; the EBF left the definition of the delimitation criteria and the geographical determination of beneficiary areas to an ordinance of the Minister of Finance. It did not, however, fail to set the guiding principles for those criteria.
The EBF further attributed capacity to the Minister of Finance to issue the regulatory norms necessary for the proper implementation of the norms that constitute the tax benefits relating to regional development.
In an initial analysis that would have been made at the time of entry into force of the EBF one would have said that for contributor companies that directly and principally exercised an economic activity of an agricultural nature to be able to benefit from the tax benefits relating to regional development, it would suffice that they complied with the conditions set forth and that their activity was exercised in an interior area that would come to be considered a "beneficiary area". There would be only to await the determination of the so-called "beneficiary areas", which the Minister of Finance would have to make, having been granted regulatory power for that purpose, a power extended to the issuance of mere implementing norms.
In the meanwhile, Decree-Law 55/2008 of 26 March introduced into the legal order the regulatory norms necessary for the proper implementation of the measures for accelerated recovery of Portuguese regions suffering from interior region problems. To this end it relied on no. 7 of Article 39-B, renumbered as 43, of the Tax Benefits Statute, in the following terms:
Article 1. Purpose
This decree-law is intended to establish the regulatory norms necessary for the proper implementation of the measures for accelerated recovery of Portuguese regions suffering from interior region problems, under no. 7 of Article 39-B of the Tax Benefits Statute, approved by Decree-Law no. 215/89 of 1 July.
This legislation, beyond reaffirming multiple obligations imposed on companies in the statutes that discipline their activity[16] or already provided in the norms of Article 39B/43 of the EBF[17], introduced regulatory norms to:
(i) Attribute competencies to the structures responsible for granting and overseeing the incentives (Article 3);
(ii) Clarify the concept of location of principal activity (Article 2, no. 2);
(iii) Establish the consequences of compliance with information and registration obligations (Article 5, no. 1);
(iv) Set the criteria for determining beneficiary areas (Article 7);
(v) Determine the beneficial territorial areas for the facts verified in 2007 and 2008 (Article 6, no. 1);
(vi) Establish the method for determining beneficial territorial areas for subsequent years (Article 6, no. 2).
Decree-Law 55/2008 further established the following "final and transitional provisions":
Article 8. Community Provisions
1 - The provisions that prove necessary to ensure, throughout the implementation period, full respect for the decision of the European Commission regarding the incentives in question, in particular as regards their application to different economic activities, shall be the subject of a joint ordinance of the members of the Government in the areas of Finance and Labor and Social Solidarity.
2 - To the incentive measures regulated by this decree-law the rules established by Ordinance no. 170/2002 of 28 February shall apply, until approval of the ordinance referred to in the preceding number.
Let us now examine Ordinance 170/2002. This legislation was intended to establish rules regarding the incentives provided, insofar as it concerns us[18], in Articles 7 to 11 of Law no. 171/99 of 18 September[19],[20], which were, in summary and insofar as it concerns this matter, the application of the reduced rate of Corporate Income Tax, in the following terms:
Article 7
1 — The rate of Corporate Income Tax (IRC), provided for in no. 1 of Article 69 of the respective Code, is reduced to 25% for entities whose principal activity is located in beneficiary areas.
2 — The rate of Corporate Income Tax (IRC) is reduced to 15% for Corporate Income Tax taxpayers covered by the simplified taxation regime whose principal activity is located in beneficiary areas.
3 — The conditions for benefiting from the benefits provided in the preceding numbers are:
a) The determination of taxable profit be made using direct valuation methods or in accordance with the rules applicable to the simplified taxation regime;
b) They have their tax situation regularized;
c) They do not have outstanding wages;
d) The income statements be signed by an official accounting technician;
e) They do not result from a spin-off carried out as of the date of publication of this law.
4 — The principal activity is considered to be exercised in the beneficiary zones when the taxpayers have their registered office or effective management in those areas and more than 75% of their respective payroll is concentrated there.
It is already possible to affirm, as a first conclusion, that Ordinance 170/2002 was intended for a specific objective which was to regulate the benefits instituted by Law 171/99. Although the benefits have similar contours, it is unequivocal that the occasion for the law is different and that the EBF felt the need to subordinate the new measures to a different framework since it identified from the outset the eligible activities - economic activities of an agricultural, commercial, industrial or service provision nature – and established the guiding principles for the delimitation criteria which no longer pass exclusively through regional development but which should give special attention to low population density, fiscal shortfall or compensation indices and inequality of social, economic and cultural opportunities. In a manner different from that which the EBF later used, Law 171/99, certainly aware of the immediate inexecutableness of its commands, conferred regulatory competence to be exercised within 60 days, not only on the Minister of Finance but also jointly on the Minister of Planning, in the following terms:
Article 1
1 — This law establishes measures to combat human depopulation and to encourage accelerated recovery of interior zones.
2 — The Ministers of Planning and Finance shall regulate by ordinance, within 60 days, the criteria and delimitation of beneficial territorial areas, in accordance with the preceding number.
Let us now see how Ordinance 170/2002 regulated Law 171/99, in the part that concerns us.
Article 1. Purpose
This legislation is intended to establish the rules necessary for full respect for the decision of the European Commission regarding the incentives provided in Ordinance no. 56/2002 of 14 January and in Articles 7 to 11 of Law no. 171/99 of 18 September, as amended by Law no. 30-C/2000 of 29 December.
Article 2. Scope
The following economic activities may benefit from the aforementioned incentives, with the exception of the following:
a) Agriculture and fishing, identified respectively in sections A and B of the Portuguese Classification of Economic Activities — CAE, as revised by Decree-Law no. 182/93 of 14 May;
b) Coal mining (groups 101, 102, 103 and 231 of the CAE), with respect to the incentives provided in Articles 8, 9 and 10 and paragraph b) of no. 1 of Article 11 of Law no. 171/99 of 18 September and in Ordinance no. 56/2002 of 14 January;
c) Transport (divisions 60, 61 and 62 of the CAE), with respect to the incentives provided in Article 7 of Law no. 171/99 of 18 September.
The framework for analysis has been traced – the constitutional discipline of regulations and the principle of interpretation consistent with the Constitution – let us see if it is possible to determine the meaning of the norms in the constitutional environment. If yes, it must be seen whether the assessments are legal in light of that meaning. If the answer is no, it must be examined whether the norms, in the interpretation given them by the Tax Authority, are constitutional.
Let us examine Ordinance 170/2002.
A simple reading of the norm that constituted the basis of the assessments leaves immediate doubt as to its current applicability to determine in 2010 which economic activities are eligible, as it refers to the so-called CAE Rev. 2, which prior to the introduction of Article 39-B/43 of the EBF on 29-12-2006 had already been altered by CAE-Rev. 2.1, pursuant to Decree-Law no. 197/2003 of 27 August. Although such a factor is not decisive, it portends the temporally restricted character of the norm.
But the decisive element is another; Article 112, no. 7 of the CRP requires that strictly executive and instrumental regulatory instruments, as are those that complement tax laws, expressly identify the laws they are intended to regulate. Ordinance 170/2002 does indeed comply with the constitutional requirement and indicates the enabling norm, except that this is only Law no. 171/99 and not the EBF. It does not thus seem possible that this ordinance directly regulates the norm of the EBF. Let us see how to understand it.
The legislation that regulates Article 43 of the EBF is in fact Decree-Law 55/2008 and this, complying with the cited constitutional provision, expressly indicates its enabling norm in its Article 1. This legislation fulfilled its regulatory function by creating the implementing norms necessary to the application of the benefits instituted by the EBF. Nevertheless, through a transitional norm (Article 8, no. 2) it sought that to the incentive measures created by Article 43 of the EBF the rules established by Ordinance no. 170/2002 of 28 February would be applicable.
It is necessary to understand what effect it sought to promote in the legal order with this norm. Several answers may be found and among the most obvious will be (i) it sought to restore the applicability of Ordinance 170/2002 and to make it applicable to the incentive contained in Article 43 of the EBF, repealing the benefit for certain activities; (ii) it sought to incorporate materially into its own normative structure regulatory norms that were contained in the ordinance and that had regulated an identical situation in the past, filling some gaps it considered itself to have in its own regulatory plan. Note that it used this same technique to define the beneficial territorial areas for the facts verified in 2007 and 2008, by incorporating the identification made in Ordinance no. 1467-A/2001 of 31 December (Article 6, no. 1).
The question will then be asked what useful meaning this incorporation has. The confrontation of the two regulatory regimes will answer that question; it incorporates all the regulatory rules it is authorized to address in matters for which it has not established its own discipline. An exhaustive analysis is not warranted here but note that in this circumstance are the definition of net job creation and of job positions linked to the realization of an investment (Article 3). All other provisions are expressly linked to specific enabling norms expressly identified. Note that in almost all articles it is repeated that "for the granting of the incentives provided in Article (…) of Law no. 171/99 of 18 September (…)". The same is furthermore done for the norm of Article 2 which begins by affirming its application to "the incentives mentioned in the preceding number" which are in fact and only those "provided in Ordinance no. 56/2002 of 14 January and in Articles 7 to 11 of Law no. 171/99.
There is no doubt as to the interpretation that must be adopted for the norm of Article 8, no. 2 of DL 55/2008; this sought to incorporate materially into its own normative structure regulatory norms that were contained in the ordinance and that had regulated an identical situation in the past, filling some gaps it considered itself to have in its own plan.
If it were otherwise, DL 55/2008 would be creating an ordinance formally inconsistent with constitutional precepts since it does not identify among its enabling norms, neither the EBF, nor DL 55/2008, as would be required by Article 112, no. 7 of the CRP.
Accordingly, it must be unequivocally affirmed that Article 43 does indeed have a regulatory legislation which is DL 55/2008 but it is without any basis to affirm, as does the Tax Authority, that the ordinance in question is no. 170/2002 of 28 February. By basing the assessments on Article 2 of the cited Ordinance, the Tax Authority erred in the determination of the applicable norm, violated the law, and rendered those tax acts illegal.
The raising of the unconstitutionality is thus rendered moot.
2.3 The Request for Reimbursement of Amounts Paid
The Petitioners also petition that the Tax Authority reimburse them for the value additionally assessed and paid with respect to the challenged assessments.
Pursuant to the provision of Article 100 of the LGT, "the tax administration is obliged, in case of full or partial allowance of complaints or administrative appeals, or of judicial proceedings in favor of the taxpayer, to immediate and complete restoration of the situation that would exist if the illegality had not been committed, including the payment of compensatory interest, in the terms and conditions provided by law." It appears clear that the taxpayer has the right to be reimbursed for the amounts paid, relating to assessments vitiated by illegality, so that its patrimony is restored to the amount it had at the moment prior to that payment.
It is necessary, however, to assess whether this Arbitral Tribunal enjoys jurisdiction to recognize this right or to order the Tax Authority to do so. For this it is necessary to bear in mind that (i) with the RJAT it was intended to reinforce effective protection of the rights and legally protected interests of taxpayers (preamble to Decree-Law no. 10/2011 of 20 January); (ii) the binding character of arbitral decisions for the Tax Authority has the extent of the exact terms of those same decisions (Article 24, no. 1 RJAT); (iii) the obligation of restoration by the Tax Authority is subordinated to the scope of the allowance of the claim itself (which may be full or partial) (Article 100 LGT).
The first interpretive element cited prevents conceiving any system that would prevent or hinder the arbitral decision from achieving its objective, which is the determination of the law in the concrete case. Protection of the rights of taxpayers is not satisfied with less, i.e., from the decision must result all consequences necessary to obtain legality. One cannot conceive that once the illegality of the tax act is declared the taxpayer would still have to resort to another forum to see declared its right to restoration of the situation.
On the other hand, the second element leads to consideration that inasmuch as arbitral decisions are binding on the Tax Authority in their exact terms (Article 24, no. 1 RJAT), this means that these must contain all elements necessary for the Tax Authority to, with complete exactitude, restore legality, and for this it is indispensable that the decision contain the precise limits and terms in which it judges.
The third element illustrates after all this necessity for exactitude or precision of the decision. By affirming that the obligation of restoration by the Tax Authority is subordinated to the scope of the allowance itself, the law (Article 100 LGT) creates a nexus of dependence between the decision and the obligation of restoration. Restoration is made to the extent that the claim is judged allowed. There is no restoration without allowance and the measure of allowance defines the measure of restoration. The necessity for this precision is entirely clear in cases of partial allowance. When partial allowance occurs how must the Tax Authority behave? The answer can only be one – in the exact terms and limits in which the decision was rendered, whether judicial or arbitral.
From the foregoing it results that the decision on restoration must be taken by the arbitral tribunal when it is requested to examine the issue.
The Petitioners have the right to complete restoration of the situation that would exist if the assessments had not been made, and therefore must be reimbursed for the amount they have paid.
2.4 Compensatory Interest
The Petitioners further request that the reimbursement of tax by the Tax Authority be increased by compensatory interest.
Questions are raised here concerning the jurisdiction of arbitral tribunals to decide on this matter, which were examined in the preceding point. The question is the same and the solution as well. This Arbitral Tribunal considers itself competent for the reasons invoked, to decide on this matter.
Pursuant to Article 43, no. 1 of the LGT, when there is overpayment of the tax obligation resulting from error attributable to the Tax Authority services, the taxpayer has the right to compensatory interest. In the same sense, the provision of Article 100 of the LGT provides for the payment of the same interest as a means to obtain the desired restoration of the situation.
In the concrete case and with respect to the additional amounts that the Petitioners have paid, they are owed compensatory interest, at the legal rate, on the amount of each of the three installments, in the amount of € 7,131.90 from the date on which each was satisfied respectively on 04-08-2014, 29-08-2014 and 19-11-2014. In any event, interest shall be calculated until complete reimbursement of the amount owed.
3. ARBITRAL DECISION
Considering the elements of fact and law gathered and set forth, the Arbitral Tribunal decides to judge the petition for arbitral pronouncement to be well-founded and in consequence:
I. To declare illegal the Corporate Income Tax assessment made on Petitioner A..., Lda., relating to the fiscal year 2010;
II. To declare illegal the Corporate Income Tax assessment made on Petitioner B..., Lda., relating to the fiscal year 2010;
III. To order the Tax and Customs Authority to reimburse to the Petitioners the amount they have paid on account of the additional assessments;
IV. To order the Tax and Customs Authority to pay to the Petitioners compensatory interest at the legal rate, calculated from the date on which they made payment of the additional assessments until complete reimbursement of the amounts to be restored in accordance with the preceding provision of this decision, calculated on that amount.
Case Value
In accordance with the provision of Article 306, no. 2 of the CPC, ex-vi Article 29, no. 1, paragraph e) RJAT and Article 97-A, no. 1, paragraph a) of the CPPT ex-vi Article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned a value of € 9,635.62.
Costs
Costs are borne by the party that has caused them, being understood that the losing party has caused them (Articles 527, no. 1 and 2 CPC).
In these proceedings and considering the cited rule, responsibility for costs lies entirely with the Tax and Customs Authority, as the losing party.
Pursuant to Article 22, no. 4 of the RJAT, the amount of costs is set at € 918.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, which is borne by the Tax and Customs Authority.
Lisbon, 21 September 2015
The Arbitrator,
(Nuno Maldonado Sousa)
[1] In this decision designated by the commonly used abbreviated form "RJAT" (Legal Regime for Arbitration in Tax Matters).
[2] In this decision also designated by the abbreviated form "Tax Authority" as is in widespread use.
[3] In this document also designated as "RI".
[4] Notably Articles 68 and 72 of the Tax Authority's Response.
[5] The acronym "R.I." is used to designate the initial petition presented by the Petitioner.
[6] The acronym "PA" is used to designate the administrative proceedings, with "PA1" and "PA2" corresponding to the files so designated.
[7] References in parentheses in 2.1.1.
[8] The acronym "EBF" is also used to designate the Tax Benefits Statute.
[9] This corresponds in fact to the "hierarchical conflict of norms" invoked by the Petitioners.
[10] José de Oliveira Ascensão – O Direito – Introdução e Teoria Geral. 3rd ed., Lisbon: FCG, 1983.
[11] J.J. Gomes Canotilho and Vital Moreira – Constituição da República Portuguesa anotada. Vol. II. 4th Ed., Coimbra: Coimbra Editora, 2010, pp. 75-76.
[12] Judgment of the Supreme Administrative Court of 01-04-2003, case 01837/02, reported by António Madureira, available at www.dgsi.pt.
[13] Carlos Lopes do Rego – Os recursos de fiscalização concreta na lei e na jurisprudência do Tribunal Constitucional. Coimbra: Almedina, 2010, pp. 285-307.
[14] The Tax Benefits Statute was approved by Decree-Law no. 215/89 of 1 July 1989. The cited wording of Article 43 results from the amendment made by Article 1 of Decree-Law no. 108/2008 of 26 June. Prior to the renumbering made by this legislation, these benefits were regulated under the former Article 39-B, with the same heading. Article 39-B in turn had been introduced by Article 83 of Law no. 53-A/2006 of 29 December (State Budget for 2007).
[15] This Article 43 of the EBF was subsequently repealed by Article 146, no. 1 of Law no. 64-B/2011 of 30 December (State Budget for 2012).
[16] Such as being legally constituted, having organized accounting and meeting the legal conditions necessary to the exercise of its activity.
[17] Such as being in a regularized situation with the tax administration, social security, and locating its principal activity in beneficiary areas.
[18] The same rules are also applicable to the incentives provided in Ordinance no. 56/2002, which creates factors for increase of the fiscal investment credit based, in particular, on regional development.
[19] Establishes measures to combat human depopulation and to encourage accelerated recovery of interior zones. It is also designated in this document by the abbreviated form "Law 171/99".
[20] As amended by Article 54 of Law no. 30-C/2000 of 29 December (State Budget for 2001).
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