International Double Taxation in IRS: Lis Pendens and Material Competence in CAAD Process 828/2014-T

Case No. 828/2014 - T

Applicants: A…

Respondent: Tax and Customs Authority

Subject Matter: Personal Income Tax. International Double Taxation

Arbitral Award

I – Report

1. The taxpayer A…, TIN …, and his wife B…, TIN … (hereinafter "Applicants"), submitted, on 19 December 2014, a request for establishment of a Collective Arbitral Tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Tax Arbitration, hereinafter "LRTA"), in which the Tax and Customs Authority is the Respondent (hereinafter "TCA" or "Respondent").

2. The Applicants request an arbitral pronouncement on the illegality of the Personal Income Tax (IRS) assessment for the year 2010, in the total amount of €97,635.21 (including €743.28 in compensatory interest), and request the annulment of the said assessment. They indicate a witness.

3. The request for establishment of the arbitral tribunal was accepted by the Honourable President of CAAD and automatically notified to the TCA on 22 December 2014.

4. Pursuant to the provisions of Article 6(2)(a) and Article 11(1)(b) of the LRTA, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the appointment within the applicable timeframe, and notified the parties of this appointment on 10 February 2015.

5. The Collective Arbitral Tribunal was constituted on 25 February 2015; it was properly constituted. The question of the Tribunal's material jurisdiction in light of the provisions of Articles 2(1)(a), 5, 6(1), and 11(1) of the LRTA (as amended by Article 228 of Law No. 66-B/2012, of 31 December) shall be examined and decided below.

6. Pursuant to Articles 17(1) and (2) of the LRTA, the TCA was notified on 25 February 2015 to present its reply.

7. The TCA submitted its reply on 7 April 2015, raising substantive defenses and alleging the total lack of merit of the Applicants' request. In this reply, it also requested a waiver of witness testimony, given the nature of the disputed issues.

8. The Arbitral Order of 7 April 2015 notified the Applicants to present, if they wished, a reply to the exceptions raised by the TCA.

9. The Applicants submitted on 16 April 2015 this reply to the substantive matters raised by the TCA.

10. By Arbitral Order of 24 April 2015, which initially fixed the date and time for the meeting provided for in Article 18 of the LRTA, everything contained in the reply presented by the Applicants on 16 April 2015 that exceeded the scope defined by Article 571(2) of the Code of Civil Procedure (hereinafter "CCP"), applicable by force of Article 29 of the LRTA, was deemed unwritten. For this reason, examination by the Tribunal of the motion presented by the Respondent, in which it fundamentally pointed out this exceeding of procedural limits in the reply presented by the Applicants on 16 April 2015, was rendered moot.

11. The meeting provided for in Article 18 of the LRTA, rescheduled by Arbitral Orders of 5 May 2015 and 14 May 2015, took place on 22 June 2015.

12. At this meeting, the Respondent dictated into the record a motion clarifying its interpretation regarding the delimitation of the subject matter of the claim, attaching documents in support of its position. In light of this, the Applicants were given a period to comment on the TCA's motion, followed by successive periods for arguments and counter-arguments.

13. The witness listed by the Applicants did not appear at the meeting of 22 June 2015, and their contribution was dispensed with.

14. Subsequently, the Applicants submitted their Arguments on 3 July 2015, and the Respondent submitted its Counter-Arguments on 1 September 2015.

15. By Arbitral Order of 13 September 2015, the deadline initially fixed in the record of the meeting of 22 June 2015 was extended, exercising the power provided for in Article 21(2) of the LRTA.

16. The proceeding does not suffer from nullities that would prevent examination of the merits of the case, once the substantive matters raised by the Respondent have been resolved.

17. The TCA proceeded to designate its representatives in the proceedings and the Applicants submitted a power of attorney, with the Parties thus being properly represented.

18. The Parties have legal standing and capacity and have legitimacy, pursuant to Articles 4 and 10(2) of the LRTA and Article 1 of Ordinance No. 112-A/2011, of 22 March.

II – Substantive Basis: Factual Matters

II.A. Facts Deemed Proven

a) The Applicants submitted on 9 June 2011 the Personal Income Tax return for the year 2010 – declaring, in Annex J, income derived from work performed in Greece: a total of €268,816.22 earned and €54,337.09 paid in Greece, for purposes of application of Article 81 of the Personal Income Tax Code.

b) This return resulted in Assessment No. 2011…, with an amount of tax payable of €42,881.28.

c) Against the Applicants, there is, at the Finance Service of ... – 2, an execution proceeding No. … 2011 …, relating to the assessment for 2010, for the amount of €42,881.28 plus €7,680.53 in interest and €965.92 in costs, totaling €51,527.73.

d) On 11 December 2012, the Applicants had already submitted, within the scope of this execution, a request for ex officio revision of a tax act, pursuant to Article 78 of the General Tax Law, seeking to obtain annulment of the Personal Income Tax assessment for that year of 2010 – arguing fundamentally that they no longer resided in Portugal from the end of January 2009 (until August 2014), and that the assessment was based on the submission, by a "business manager," "in breach of the taxpayer's instructions," "through manifest lapse, forgetfulness or excess of diligence," of a Personal Income Tax return for the year 2010, when in that year the Applicants earned income exclusively in Greece and paid the due taxes there.

e) This request for revision of a tax act was denied on the grounds of "untimeliness," "negligent conduct of the taxpayer," and "absence of double collection," by Order of the Director of the Department of International Relations – the draft having been subject to prior hearing of the Applicants on 14 March 2014.

f) The denial was made final by order of the Deputy Director-General of 16 September 2014, and was communicated to the Applicants by the Finance Directorate of Porto on 13 October 2014.

g) On 19 November 2013, and given that the Applicants did not present proof of the tax paid in Greece, the DSRI issued an order requiring a correction to Assessment No. 2011…..

h) The Finance Directorate of Porto notified the Applicants to exercise prior hearing rights through letter No. …, of 13 December 2013, and the Applicants exercised this right by email of 16 January 2014.

i) By virtue of the correction to Assessment No. 2011…, the tax credit for international double taxation was removed, which ended up being embodied in the Additional Assessment No. 2014…., presented on 3 November 2014.

j) As a result of this correction, the Applicants received on 3 November 2014 a Personal Income Tax assessment for the year 2010, in the total amount of €97,635.21 (including €743.28 in compensatory interest), calculated on income of €268,816.22. This assessment was accompanied by a statement of account adjustment, with a reversal of €42,881.28 relating to the same year of 2010 (the amount initially fixed and already subject to an execution proceeding), resulting in a balance of €54,753.93.

k) This Additional Assessment gave rise to a new execution proceeding, No. … 2014 ….

l) The Applicants did not inform the TCA of the change in their residence when they left for Greece in late January 2009, admitting that this was the circumstance that contributed to the submission of the return relating to 2010 income, as if they were residents in Portugal, although the income was obtained outside Portuguese territory.

m) Only in December 2012 did the Applicants change their tax residence to Greece.

n) The Applicants presented various documents proving payment of taxes in Greece, including a certificate (of 28 August 2013) of the absence of debts to the Greek State.

II.B. Facts Deemed Unproven

a) Based on the documentary evidence available in the proceedings and unanimously accepted by the parties, we deem unproven, and with interest for the decision of the case, only the following:

a. The payment by the Applicants of income taxes for the year 2010 in Greece, in the manner required by Circular Letter No. 20124, of 9 May 2007, from the Department of International Relations Services of the TCA, and in accordance with the instructions for completing Annex J of Form 3 of the Personal Income Tax Return.

b. Payment in Greece of €54,337.09 as income taxes for the year 2010.

III – Substantive Basis: Legal Matters

III.A. Position of the Applicants

a) The Applicants allege that the notification they received on 13 October 2014 was not accompanied by provision for the exercise of the right to prior hearing, in violation of Article 60(3) of the General Tax Law.

b) The Applicants maintain that the return for 2010 income submitted by the "business manager" identifies income earned exclusively in Greece, and taxed there at net values (and not at gross values, as they would be in Portugal – hence, they allege, the disparities in values).

c) The Applicants point out that they never ratified the return submitted by the "business manager."

d) They further argue that, if perchance the "business manager" had mentioned in the return for 2010 income that the regime was one of "non-aggregation," this would suffice for the tax levied on the remaining income, not subject to autonomous taxation in Greece, to lead, through the application of Portuguese law itself, to a null assessment, with nothing for the Applicants to pay. This omission in the return by the "business manager" is what led, in the Applicants' view, the TCA to disregard the fact that the tax already withheld abroad was "independent."

e) The Applicants express surprise that in the correction of the Personal Income Tax assessment owed for 2010, notified to the Applicants on 13 October 2014 and embodied in the assessment presented on 3 November 2014, the tax already paid by them abroad for income earned in the same period was simply disregarded.

f) And this because they understand that, even if it were presumed that the Applicants resided in Portugal during the year 2010, the simple demonstration of the existence of income obtained abroad is sufficient to trigger the mechanisms designed to eliminate double taxation, as they result from the legal frameworks and applicable international conventions – namely, the granting of a tax credit that conditions the cumulative tax jurisdiction of the two countries.

g) But, they insist, the fact of not having resided in Portugal during the entire year of 2010 would be sufficient for them to be excused from submitting a return in Portugal for purposes of Personal Income Tax – being that, in their view, conclusive proof is made of their residence in Greece and of full payment of taxes due to the Greek State in that year of 2010, with no reason for the TCA to disregard this proof.

h) The Applicants allege that, if the situation created were to persist, double taxation would occur between Member States of the European Union, violating the conventional regime established between them (the Convention signed on 2 December 2002, approved by Resolution of the Assembly of the Republic No. 25/2002, of 4 April 2002, which entered into force on 13 August 2002), and also violating material reality and the principle of non-discrimination.

i) Regarding the "untimeliness" mentioned as the basis for the denial of the request for ex officio revision of a tax act, the Applicants acknowledge that they had exceeded the periods for administrative complaint due to the lapse created by the action of the "business manager" and by the absence of the Applicants themselves, between January 2009 and August 2014 – which is why they chose the path of requesting extraordinary revision.

j) Regarding the "negligent conduct" attributed to the "taxpayer," the Applicants insist that they never intended to omit or falsify any return, and least of all intended to obtain any patrimonial advantage, but rather were victims of an error by a "business manager."

k) As to the "absence of double collection" also mentioned as grounds for the denial of the request for ex officio revision of a tax act, the Applicants insist that the actual absence of the Applicants from national territory between January 2009 and August 2014 removes the return obligations for 2010 to 2014, removing the regime for elimination of double taxation through the granting of a tax credit. And they conclude that, in light of the principles of free movement of workers between Member States of the European Union and in light of the prevalence of mechanisms for preventing double taxation, the existence of two distinct legal orders does not prevent the occurrence of true double collection.

l) The Applicants understand that, in light of the materiality of their situation in 2010, they could only be taxed in Greece, either under Article 16(1) of the Personal Income Tax Code, or under Articles 4(1) and (2) and 15 of the Convention for the Avoidance of Double Taxation between Portugal and Greece. And that, consequently, the view held by the TCA in the proceeding that led to the assessment of 3 November 2014 illegitimately deprives the Applicants of access to the applicable legal regime.

m) The Applicants conclude their initial petition with a double request: 1) annulment of the assessment in question; b) extinction of the execution proceeding No. … 2014 … relating to the Personal Income Tax assessment for 2010 that is pending at the Finance Service of ... – 2.

n) In taking a position on the exceptions presented by the Respondent (and in the usable part of this position, given the content of the Arbitral Order of 24 April 2015), the Applicants maintain that:

a. There is no ineptitude of the initial petition

b. There is no unimpeachability of the administrative act, understanding that the argument that the fixing of residence is the subject of a definitive administrative act would be prohibitive of an examination of the grounds of the assessment by an adjudicatory entity (such as the present Tribunal)

c. There is no lis pendens, because in their view it is precisely in arbitral proceedings that the issue of the assessment act that conditions the very execution proceeding should be decided, with the former logically preceding the latter; also refusing identity of causes of action based on the fact that there are two distinct assessments (even if one is additional to the other), and two distinct executions

d. There is no absolute incompetence by violation of material jurisdiction rules, the Applicants clarifying that they truly only intend for the annulment of the disputed assessment to be decreed, with the extinction of the execution being only a necessary consequence of this annulment.

o) In the final arguments presented on 3 July 2015, the Applicants oppose what they understand to be an illegitimate partition of the total assessment of €97,635.21 into two portions, that of the initial assessment of €42,881.28 and that of the Additional Assessment of €54,753.93.

p) In these arguments, the Applicants emphasize the fact that they were deficiently informed throughout the entire proceeding that led from the initial assessment of €42,881.28 to the final assessment of €97,635.21.

q) Insisting on the fact that they presented the documentation they consider sufficient to prove the taxation of income, the Applicants maintain that they were not notified of the alterations to the assessment except through the letter of 13 October 2014, which in their view violates Article 60(3) of the General Tax Law.

r) And they reiterate that it is against the single assessment presented to them on 3 November 2014, with the total amount of €97,635.21, that they present this request for arbitral pronouncement.

s) On the other hand, they again emphasize that the alleged exception of unimpeachability cannot be accepted, under penalty of removing reviewability from an administrative decision.

t) Ending the arguments with arguments opposed to the ideas of lis pendens and prejudiciality.

III.B. Position of the Respondent

a) In its reply, the Respondent begins by delimiting the subject matter of the request for arbitral pronouncement, arguing that what is at issue is exclusively the Additional Assessment No. 2014…., in the value of €54,753.93, plus €738.99 in compensatory interest.

b) In fact, the Respondent underlines that Assessment No. 2011…., with an amount of tax payable of €42,881.28 plus €9,353.44 in compensatory interest, is neither can be the subject of the present request for arbitral pronouncement, insofar as it already gave rise to a request for ex officio revision that was denied for untimeliness, with this denial not giving rise to any reaction on the part of the Applicants, having thus become consolidated in the legal order.

c) The Respondent then invokes what it considers a dilatory exception capable of rendering the proceeding null, insofar as it alleges the ineptitude of the initial petition, based on what it says is a contradiction between the request and the cause of action presented by the Applicants.

d) On the one hand, it observes, the cause of action is the fact that the Applicants resided in Greece during the year 2010, which would excuse them from submitting a return for purposes of taxation; on the other hand, the request is for the annulment of the assessment act No. 2014…., in the value of €54,753.93, and simultaneously the extinction of the execution proceeding No. … 2014 ...

e) Now between cause of action and request there would exist an irreconcilable contradiction: the assessment now disputed (No. 2014….) is only an additional act in relation to Assessment No. 2011…., and it is only this latter, not the former, that has anything to do with the place of residence in 2010. The latter, the Additional Assessment, rests exclusively on the fact that the Applicants did not prove the payment, as tax, of the €54,337.09 that they allege they paid in Greece.

f) Thus, alleges the Respondent, if the cause of action centers on the place of residence in 2010 and not on the disregard of any "tax credit" – due to lack of proof – the annulment of the Additional Assessment cannot be requested, which results exclusively from the aforementioned disregard.

g) If this were the case, infers the Respondent, we would be faced with a nullity of the proceeding and the Respondent should be immediately absolved of the instance (Article 576(2) of the CCP, applicable by force of Article 29(1)(e) of the LRTA).

h) Should this first exception not be deemed well-founded, the Respondent advances a second exception, that of unimpeachability of the administrative act.

i) In fact, the TCA insists that it is solely the lack of proof of payment of the tax, and not the proof of residence in Greece, that motivates and justifies the Additional Assessment No. 2014…., wherefore the question of residence must be considered insufficient to justify the annulment of this assessment.

j) As to the very question of residence, the Respondent points out the fact that, the deadline for gracious or contentious reaction against the decision denying the request for ex officio revision of Assessment No. 2011…. having expired without any action on the part of the now Applicants, the question of residence, which was alleged in that request and was grounds for the denial order, became consolidated and was definitively decided.

k) In fact, adds the TCA, it is not the subject of the present request for arbitral pronouncement that express decision denying the request for ex officio revision – which is understandable because, in the absence of gracious or contentious reaction, the decision becomes a definitive and effective administrative act in the legal order: thus, unimpeachable.

l) Being thus, the deadlines for appeal of the ex officio revision decision having expired, the Respondent understands that there can be no reopening of the issue of the Applicants' place of residence in 2010 – under penalty of, otherwise, violating the legal certainty inherent in a definitively consolidated administrative act.

m) Insofar as the Applicants center their request on the question of residence and wish to attack with it the express denial of the request for ex officio revision, the Respondent understands that they demonstrate an intention to challenge an unimpeachable act – with such intention constituting a new dilatory exception, also entailing the absolution of the instance (Article 278(1)(e) of the CCP, applicable ex vi Article 29(1)(e) of the LRTA).

n) Should this second exception not be deemed well-founded, the Respondent advances a third exception, that of lis pendens.

o) Given the subject matter of the present request for arbitral pronouncement, it is observed that the cause of action coincides with that presented in the judicial opposition raised within the scope of the execution proceeding – the question of the place of residence in 2010. Moreover, they are the same subjects, and in both cases the request is for the annulment of the Personal Income Tax assessments for 2010 and the extinction of the execution proceedings.

p) Such coincidence would fulfill the requirements of Article 581 of the CCP and would determine the consequence of Articles 580 and 582 of the CCP, all applicable by force of Article 1 of the Code of Administrative Procedure: that is, lis pendens which, affecting the proceeding initiated subsequently (which is the present proceedings), would constitute in it an exception preventing the continuation of the proceeding, determining the absolution of the instance (Article 89(1)(i) of the Code of Administrative Procedure, applicable ex vi Article 29(1)(c) of the LRTA).

q) The TCA requests that, should lis pendens not be deemed verified, at least a suspension of the instance should proceed given the manifest prejudiciality between the present action and that which will result from the execution proceeding No. … 2011 …, and that the decision reached within the scope of this may, via the effect of res judicata, impact not only Assessment No. 2011…. but also the Additional Assessment No. 2014…., subject of the present proceedings, and in the corresponding execution proceeding No. … 2014 … (Article 272 of the CCP, applicable ex vi Article 29(1)(e) of the LRTA).

r) The Respondent advances a fourth and final exception, that of absolute incompetence by violation of material jurisdiction rules.

s) In fact, it alleges, by requesting the extinction of the execution No. … 2014 … relating to the Personal Income Tax assessment for 2010 that is pending at the Finance Service of ... – 2, this request clearly exceeds the jurisdiction of the present Arbitral Tribunal, which cannot decide matters raised in execution proceedings, either by application of the provisions of Articles 151 et seq. of the Code of Tax Procedure, which reserves such matters exclusively to the judicial forum, or by application "a contrario" of the reading of arbitral jurisdiction fixed in Article 2(1) of the LRTA.

t) For this request formulated by the Applicants, the present Arbitral Tribunal is materially incompetent, it being only for the execution forum to promote the extinction of such proceeding should the assessment act on which it is based be annulled – and only then.

u) This fourth and final exception would likewise determine absolution of the instance, by referral of Article 29(1)(e) of the LRTA to Articles 96(a), 99(1), 278(1)(a), and 577(a) of the CCP.

v) By way of objection, the Respondent argues that not only the documentation presented does not comply with minimum admissibility requirements as sufficient proof of the payment of €54,337.09 of income taxes in Greece (being documents issued by the alleged employer entity, and not by the Greek tax authorities), but from the reading of the documents themselves it does not result at all clearly what amounts were actually paid to the Greek tax creditor.

w) The Respondent also contests that there was no notification for exercise of the right to prior hearing in the proceeding that led to the Additional Assessment No. 2014…., invoking letter No. …, of 13 December 2013, and the exercise of this right by the Applicants through email of 16 January 2014.

x) Concluding the TCA with the position that, even should the exceptions by it invoked not be accepted, even so the present action should be judged to lack merit, with the Respondent being absolved of the request.

y) In the motion dictated into the record of the meeting of 22 June 2015, the Respondent insisted that in the present proceedings only the Additional Assessment No. 2014…, in the value of €54,753.93 plus compensatory interest, can be examined, and not Assessment No. 2011…, in the amount of €42,881.28 plus compensatory interest, given that there was no reaction by the Applicants to the decision denying ex officio revision.

z) In the same motion, the Respondent requests comparison of the assessment statements No. 2011… and No. 2014…, which in its view prove that the value of €97,635.21 results directly from the elimination, in field 18, of the value of €54,337.09 that had been credited in the first of those assessments.

aa) In the final counter-arguments presented on 1 September 2015, the Respondent insists that the Applicants were notified to exercise the right to prior hearing as early as with letter No. …, of 13 December 2013, which informed them of the beginning of the process of correction of Assessment No. 2011….

bb) In the remainder of the counter-arguments, the Respondent reiterates arguments already raised in its reply, with particular emphasis on the enumeration of dilatory exceptions.

III.C. Issues to be Decided

III.C.1 Exceptions

III.C.1.A Ineptitude of the Initial Petition

It is upon the party claiming the ownership of a right that the burden falls to allege the facts from whose proof it is possible to conclude the existence of the right – Cf. Article 5 of the CCP.

When there is a lack of or is unintelligible indication of the request or the cause of action, or when there is contradiction between the latter and the former, or when causes of action and requests that are substantially incompatible are cumulated, the dilatory exception of ineptitude of the initial petition occurs – Cf. Articles 186, 278, 576(1) and (2), 577, and 578 of the CCP.

Insofar as in fact only the Additional Assessment No. 2014…., of €54,753.93 (+ €738.99 in interest), can be the subject of arbitration, since Assessment No. 2011…., of €42,881.28 (+ €9,353.44 in interest), became consolidated through failure to appeal the ex officio revision decision, what is now at issue in these proceedings is no longer the effects of residence abroad for the Applicant for purposes of application of the preventive regime for double taxation (which has already been ruled out), but solely the proof of the actual payment of tax abroad that would permit Portugal to eliminate double taxation through the granting of a tax credit (through imputation of income).

In fact, the cause of action, analyzed from the request for arbitral pronouncement presented, rests on the fact of residence abroad, and not on the disregard of the tax credit in the Additional Assessment, due to lack of proof of payment. The question of residence is thus not sufficient for the request for annulment of the Additional Assessment.

That is: the question of residence and the question of proof of income in Greece are basically two facets of the same circumstance. The request, which aims at the annulment of the Additional Assessment, rests fundamentally on that residence in Greece and on the question of taxes paid there – and on an alleged difficulty in proving them. There is thus no contradiction whatsoever.

The exception is unfounded.

III.C.1.B Unimpeachability of the Act

Although in fact an express denial of the request for ex officio revision presented by the requerents in the administrative proceeding has occurred, the subject of the arbitral request is not this but rather the tax assessment; thus, the express denial act became consolidated through failure of timely challenge, becoming an unimpeachable administrative act (decided case) to block or prevent, in the name of legal certainty, the reopening of the debate concerning tax residence at the date of the tax debt generating events.

If this were not so, it would render the administrative act leading to the Additional Assessment non-reviewable. Moreover, it is not a matter of reopening the issue of residence in Greece, which is indeed abundantly proven and documented – but only of examining the proof made of payments of taxes in Greece, in the forms and in the amounts indicated.

This exception is also unfounded.

III.C.1.C Lis Pendens or Prejudiciality

The exceptions of lis pendens (and res judicata) presuppose the repetition of a cause; if the cause is repeated while the previous one is still pending, lis pendens is present; if the repetition is verified after the first cause has been decided by a judgment admitting no ordinary appeal, res judicata is present.

Both the exception of lis pendens and that of res judicata aim to prevent the court from being placed in the alternative of contradicting or reproducing a previous decision – Cf. Article 580 of the CCP.

Not being, as is the case, the instance in which an action with the same subjects, requests, and causes of action was first brought extinguished, there is apparently lis pendens, whereby the arbitral proceeding would yield to the execution proceeding No. … 2011 …, which is prior to it.

However, it is not so.

In truth, although the requests formulated in one and the other action are the same and the cause of action is identical, the subject does not intervene in the two actions in the same legal capacity - since it does so in the capacity of opposing party in the opposition and in that of challenging party in the challenge (or in the request for arbitral pronouncement) – the cause is thus not repeated.

This is because, in a situation such as that of the present case, there is no risk of contradiction or repetition of decisions, since the legal effect that is possible to obtain through opposition to execution – its respective extinction as to the opposing party – and that aimed at by raising judicial challenge (or, equivalently, in the request for arbitral pronouncement) – annulment of the impugned tax act – are distinct, and moreover have different acts as their object.

The exception of lis pendens is likewise unfounded.

III.C.1.D Absolute Incompetence as to Matter

The Arbitral Tribunal is incompetent to decide directly on the extinction of an execution proceeding, as results a contrario from the provisions of Article 2(1) of the LRTA.

The infringement of absolute jurisdiction rules – such as those relating to jurisdiction ratione materiae – determines the absolute incompetence of the Tribunal and, consequently, entails absolution of the instance of the Respondent – cf. Article 99 of the CCP.

The Applicants, in reply to the exceptions raised by the Respondent, came to clarify that they truly only seek the annulment of the disputed assessment, improperly mentioning the extinction of the execution, when what they intended was to state that such extinction would ultimately result from that annulment.

It is not repugnant to accept this lapse and, to that extent, the consequent rectification of the true intention formulated in the request for arbitral pronouncement in the sense that the purpose sought – the request – is redirected to the examination of the legality or validity of the assessment which, should it be judged invalid, would necessarily entail ope legis, the extinction of the execution.

III.C.2 On the Merits

What is at issue in this proceeding is exclusively the legality of the Additional Assessment No. 2014…., in the value of €54,753.93, increased by compensatory interest.

For the rest, from the factual matters, proven and unproven, shall result, it is advanced, the total lack of merit of the request.

In terms of personal incidence, persons naturally residing in Portuguese territory and those who, even not residing, obtain income here are subject to Personal Income Tax, as provided for in Articles 14 and 16 of the Personal Income Tax Code.

Article 15(1) of the Personal Income Tax Code provides that "being persons residing in Portugal, Personal Income Tax is levied on the totality of income, including that obtained outside that territory."

In fact, it was demonstrated that the tax residence of the Applicants was only changed in 2012, [regardless of their motivations or reasons, always irrelevant, which they presented], having submitted in Portugal the Personal Income Tax returns for 2011 and 2012, with no consequence to the taxpayer-Tax Administration relationship the fact of not being directly the responsibility of the Applicants the acts or omissions of the "accountant/business manager" in breach of the Applicants' instructions.

Furthermore, and fundamentally for the present case – and this was fundamental and constituted an obligation of the Applicants – proof was not made of the payment of income taxes for the year 2010 in Greece, in the manner required by Circular Letter No. 20124, of 9 May 2007, from the Department of International Relations Services of the TCA and in accordance with the instructions for completing Annex J of Form 3 of the Personal Income Tax Return.

In truth, it is unknown what tax, in the year 2010, was actually paid in Greece. For the rest, it is unknown even whether the amounts withheld were delivered to the Greek tax authorities, as the country of source of the income.

Now, if we bear in mind that, as in this case, it is on the State of residence (Portugal) that the burden falls to eliminate double taxation, which is done through a method of imputation – that is, income from a foreign source is not exempt, since the State of residence taxes the taxpayer's global income, regardless of its origin, but deducts from the tax assessed the tax paid in the country of source – it becomes easy to understand that the amount of tax paid in the country of source is essential data for the mechanism of elimination to function.

In fact, in this case, it is justified that the State of residence, Portugal, cease to collect tax on income obtained in Greece (through a deduction from revenue relating to international double taxation) only if, and to the extent, that income was subject to tax in the State of source.

Only if income obtained in Greece was subject to tax there is it justified that the State of residence, Portugal, relinquish part of the revenue to which it would be entitled, considering that Portugal taxes on the taxpayer's global income, regardless of its origin.

Therefore, it is not enough, for purposes of the right to the deduction provided for in Article 78 of the Personal Income Tax Code, to demonstrate that the employer entity, in Greece, withheld tax. It was imperative that it be demonstrated, which did not occur, that on the income earned in Greece a certain amount of tax had been paid.

Now, with the burden of proof of the facts constituting the right falling on the party invoking it (Article 74 of the General Tax Law and Article 342 of the Civil Code), it was on the taxpayer that the burden fell to demonstrate the right to deduct from revenue the amount relating to international double taxation, that is, the tax on income paid abroad (Article 81 of the Personal Income Tax Code).

For the rest, this is the case with the deduction relating to international double taxation, as it is with the remaining deductions from revenue, whether these be health, education, training expenses, charges with homes, with real estate, among others. It is the taxpayer's burden to demonstrate the respective expenses and charges.

In the case under examination, such burden was not fulfilled.

In fact, if a document relating to payment of tax in Greece had been attached and if, even so, the Portuguese Tax Administration had doubts, it would then be justified to exchange information. This not being the case, in the absence of any proof attesting to payment of tax, the Tax Administration cannot substitute itself for the taxpayer, diligencing for the obtaining ab initio of proof that it was the taxpayer's responsibility to bring to the return.

Note that, for proof of payment of tax in the State of source, it was not required to demand a specific document, as the law does not require a specific document. However, such proof would have to involve a document whose content (as to the quantum of tax paid) was validated by the Greek tax authorities.

In this regard, as to the document evidencing the tax paid, reference can be made, among others, to the judgments of the Administrative Court of Appeal, of 10/03/05 and 10/04/05, rendered in appeals Nos. 00382/04 and 00285/02 Braga, in whose summaries one can read, respectively, that:

• "For purposes of proof of payment of tax in Switzerland on labor income, the declaration of the Swiss tax authority in which it declares that the taxpayer paid as tax and by withholding at source a certain amount is sufficient";

• "The certificate issued by the employer entity attesting the value of the gross salary earned by the appellant in Germany, the amount of tax withheld, the identification of the Finance Department to which the employer entity proceeded with the liquidation of that withheld tax and the identification of the Finance Department where the taxpayer was assessed, such certificate authenticated by the latter tax authority and whose veracity is not questioned by the Portuguese Tax Administration, must be accepted as a document evidencing the tax already paid by the appellant in that country for purposes of application of the Convention between the Portuguese Republic and the Federal Republic of Germany for the Avoidance of Double Taxation approved by Law No. 12/82, of 3/06".

Examining even so the documents that were presented (disregarding their legal probative value), in no way does one arrive at the value of €54,337.09 that was presented in the return of income submitted on 9 June 2011 as corresponding to taxes paid in Greece in 2010.

In sum, a simple and quasi-mechanical application of the rule on burden of proof will always lead to the total lack of merit of the request of the Applicants, and to the corresponding absolution of the Respondent.

IV. Decision

In light of all the foregoing, this Collective Arbitral Tribunal decides:

a) To judge the request for arbitral pronouncement wholly to lack merit and, consequently,

b) To absolve the Respondent, the Tax and Customs Authority, of the request.

Value of the Proceeding

The value of the proceeding is fixed at €97,635.21, in accordance with the provisions of Article 97-A of the Code of Tax Procedure, applicable ex vi Article 29(1)(a) of the LRTA and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

Costs to be borne by the Applicants, in the amount of €2,754.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, and in compliance with the provisions of Articles 12(2) and 22(4), both of the LRTA.

Lisbon, 10 November 2015

The Collective Arbitral Tribunal,

José Poças Falcão
(President)

Guilherme W. d'Oliveira Martins

Fernando Araújo