IRS Withholding Tax on Advance Profit Distributions: Burden of Proof in CAAD Arbitration 848/2014-T

ARBITRAL DECISION

CLAIMANT: A… – …, Tax Identification Number …, with tax residence at Rua …, …, … Porto.

RESPONDENT: Tax and Customs Authority (hereinafter referred to as TA) represented by Dr. B… and Dr. C…, in accordance with the appointment order of the General Director of the TA, dated 14/01/2015.

I – REPORT

1. The CLAIMANT submitted a petition for arbitral pronouncement, seeking the annulment of the order partially rejecting the Hierarchical Appeal (HA) lodged against the decision of the Administrative Complaint concerning withholding tax liability relating to Personal Income Tax withholdings not effected in the fiscal year 2008, alleging a defect of violation of law due to error concerning the factual and legal assumptions, ultimately requesting that this Arbitral Tribunal issue a pronouncement for the complete annulment (and not partial, as was done in the Hierarchical Appeal) of the said tax act;

2. The petition thus falls within the scope of what is provided for in paragraph a) of point 1 of article 10 of the RJAT;

3. The CLAIMANT submitted a Petition for constitution of the Arbitral Tribunal on 29-12-2014, which was accepted by the Esteemed President of CAAD on 10-03-2015, leading to the notification of the TA, in compliance with point 3 of article 10 of the Legal Regime for Arbitration in Tax Matters (hereinafter RJAT);

4. Given that the CLAIMANT opted not to appoint an arbitrator, pursuant to the provisions of point 1 of article 6 of the RJAT, the undersigned was appointed sole arbitrator by the Ethics Council of the Administrative Arbitration Center, an appointment timely accepted, and the parties were notified on 23-02-2015, who did not object to said appointment;

5. The RESPONDENT did not proceed in accordance with the provisions of point 1 of article 13 of the RJAT regarding the revocation of the tax assessment that is the subject of the dispute, thus maintaining the contested act;

6. The Sole Arbitral Tribunal was constituted on 10-03-2015, in accordance with the provisions of paragraph c) of point 1, combined with point 8 of article 11 of the RJAT, whereby on 13-03-2015 the TA was notified to, in accordance with the terms and for the purposes of the provisions of points 1 and 2 of article 17 of the RJAT, file its Answer and the corresponding administrative record, which it did on 24-04-2015, presenting a defense by way of opposition;

7. Given that on 23-06-2015 the meeting provided for in article 18 of the RJAT was dispensed with;

8. The witness indicated by the CLAIMANT was examined on 01-10-2015 – Dr. D… – at the headquarters of CAAD, as appears from the respective examination record;

9. The parties presented successive submissions, as appears from the record, with dates respectively 13-10-2015 and 26-10-2015 for the CLAIMANT and RESPONDENT.

II – SANATION

1. The tribunal is materially competent and is duly constituted in accordance with the provisions of articles 2, point 1, paragraph a), 5, point 2 and 6, point 1 of the RJAT.

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

3. The proceedings do not suffer from any defects that would render them invalid.

III – THE DISPUTED ISSUE AND POSITION OF THE PARTIES

III.A – THE DISPUTED ISSUE

Under consideration is a tax act resulting from corrections made by the TA concerning Personal Income Tax withholdings, which, in the understanding of the RESPONDENT, was based on the existence of movements in favor of the sole shareholder and administrator of the CLAIMANT, based on the presumption of point 4 of article 6 of the CIRS, which provides, in the matter of presumptions regarding category E income, that: entries in favor of shareholders, in any current accounts of the partners, recorded in commercial or civil companies organized in commercial form, when they do not result from loans, performance of work or exercise of corporate offices, are presumed to be made as profit distributions or advances on profits.

An understanding that the CLAIMANT does not sustain, emphasizing that the amounts in question relate either to restitution of payments made by the sole shareholder and administrator of the CLAIMANT, E…, or to withdrawals on account of advances made by him.

III.B – POSITION OF THE CLAIMANT

The CLAIMANT in the INITIAL PETITION sustains, in substance, with interest for the appraisal of the case:

Regarding the FACTS, that:

1. The monetary transfers that occurred from the company to the account of E… [sole shareholder and administrator of the CLAIMANT] in a total amount of € 114,502.41, do not constitute advances on account of profits but rather:

13.1. Restitution of payments made by E… to F…, son of E…, in the amount of € 19,635.18 concerning salaries (8,442.06) and rents (11,193.12)[1] [§ 7 of the IP]; furthermore stating that,

13.1.1. The payments [to F…] were made by E…, not appearing as financial flows of the company, and, as such forming an integral part of the transfers made to E…'s bank account.

13.2. Withdrawals in favor of E… on account of advances made, in the amount of € 94,867.23, as per the breakdown that he refers to [§ 8 of the IP]. This fact is corroborated by the fact that:

13.2.1. The amounts transferred to E… resulted in accounting entries debited in E…'s current account;

13.2.2. This account still shows a "credit balance" on 31.12.2017 of € 322,851.97 and in 2008 in the amount of € 471,319.97, which of itself rules out the classification of the amounts debited in E…'s account as advances on account of profits.

1. He further states that the amounts referred to as delivered by E… were not referred to "in a generic and abstract manner, without being specified", but rather movements that appear in the company's accounting since 1999 without any contrary notation from anyone.

In the context of FINAL SUBMISSIONS the CLAIMANT makes considerations on the facts that are relevant to assess:

1. That the witness [Dr. D…, certified public accountant] made proof of what was raised in the IP, namely with respect to the advances relating to 1999, and that E… made the financing referred to in the proceedings, which allowed the purchase of various equipment, with the amounts correctly recorded as advances since they corresponded to such financing.

On the matter of LAW

1. Given the facts and the shareholder's lack of intention to withdraw any amount on account of profits, the legal classification made by the RESPONDENT based on paragraph h) of point 2 of article 5 lacks sense since the conditions for the presumption provided for in point 4 of article 6 of the CIRC are not met, the disputed tax assessment suffering from the defect of violation of law due to error concerning the factual and legal assumptions, which justifies its annulment [§14 of the IP].

In the context of FINAL SUBMISSIONS the CLAIMANT makes further legal considerations that are relevant to assess:

1. In the sense that point 1 of article 74 of the LGT, inasmuch as the burden of proof of the facts constituting the rights invoked rests with whoever invokes them, which is in line with point 1 of article 75 of the LGT which presumes true and in good faith the accounting records made by the taxpayers [§1].

2. Thus, and proceeding from the assumption that he had already stated in the IP, that the accounting record of the movements associated with the loan operations in the various fiscal years in question is accomplished and was never questioned, it being certain that the accounts were regularly certified, in accordance with the said article 75 point 1 of the LGT, the CLAIMANT's accounting not having been timely called into question, it should be considered that the same reflects the reality of the facts.

3. In these terms he understands that the burden of proof that the operations do not correspond to the reality of the facts rests with the RESPONDENT, to note that the same did not produce any proof, despite the obligation to perform all necessary diligences to discover the material truth, under the force of article 58 of the LGT [§ 4].

4. Thus, the CLAIMANT does not have to rebut any presumption, for in order for the TA to benefit from the presumption that said entries in E…'s account constituted advances on account of profits it should have proven or at least indicated the base fact, that is, that they do not result from the alleged credit relationship recorded in the accounting, which it did not do [§7], sustaining this same understanding in Decision 279/09.2BEPRT of 27-11-2014 of the TAC.

5. He further adds [§10] that said presumption was intended to resolve the classification of the amounts recorded whose "legal" basis was not expressly declared, and thus does not expressly refer to amounts recorded in partners' accounts as advances, seeking to sustain this understanding in Decision 02268/08 of 07-05-2015 of the TCASul.

6. To conclude that the RESPONDENT did not discharge the probative obligations that fell to it to demonstrate the substantive assumptions of its corrective action concerning the declared taxable base.

III.C – POSITION OF THE RESPONDENT

The RESPONDENT in the ANSWER presents a defense by way of opposition, sustaining in substance and with interest for the appraisal of the case:

Regarding the FACTS, that:

1. In the inspection action carried out in the years 2007 and 2008 it was noted in the Inspection Report that "the taxpayer's accounting (…) in accordance with the provisions of article 17 point 3 of the Corporate Income Tax Code (CIRC) is not organized in accordance with the accounting principles in force nor does it reflect all the operations carried out"

2. That the CLAIMANT is holder of two bank accounts through which said amounts were transferred and only one of these accounts is reflected in the accounting.

3. That the conclusions of the IT were based on the accounting and the clarifications provided by the CLAIMANT, with no elements existing that prove what is alleged [as appears from the IT Report].

4. Specifically, with respect to the disputed amounts, which the CLAIMANT sustains are restitution of payments made by E… of salaries and rents of real property to F…, son of E…, in the amount of € 19,635.18 concerning salaries (8,442.06) and rents (11,193.12), the RESPONDENT understands:

26.1. That it continues to be demonstrated that it was the shareholder who made the payment to F… of those amounts as compensation and real property rents [§8.12 of the ANSWER], for two reasons:

26.2. Because it appears from the 2008 Form 10 that F… received the amount as compensation and rents [§ 16 and 17], but also,

26.3. There is no proof that the same was borne by the CLAIMANT's shareholder, which could be evidenced, for example, through a bank transfer or copy of another means of payment [§ 16 and 17].

1. Specifically, with respect to the disputed amounts, which the CLAIMANT sustains are withdrawals in favor of E… on account of advances made, in the amount of € 94,867.23, the RESPONDENT understands:

27.1. That said amounts are supported [§20] on an A4 sheet with the alleged deliveries and restitutions made to the CLAIMANT by the shareholder, without any accounting support or proof of the means of payment used or other documentary proof, which does not allow attesting that the alleged balance existing on 01/01/2008 in the shareholder's current account, nor the balance at the end of 31/12/2008.

27.2. Notwithstanding the certification of accounts (…) the accounting omits financial movements essential to the knowledge of the legal-tax reality of the CLAIMANT.

On the matter of LAW

1. It sustains a different reading from the CLAIMANT with respect to the presumption of point 4 of article 6 of the CIRS [§ 24] that it is not incumbent on the TA to prove that the receipts evidence advances on account of profits, but to demonstrate that the CLAIMANT did not prove, as was incumbent upon it, the nature of those receipts,

In the context of FINAL SUBMISSIONS the RESPONDENT makes further legal considerations that are relevant to assess:

1. In addition to maintaining what was stated in the ANSWER with respect to the meaning and scope of the presumption of point 4 of article 6 of the CIRS, it sustains that the presumption of truthfulness of declarations, with provision in article 75 of the LGT, has as an indispensable condition that the accounting be organized in accordance with commercial and tax legislation, which is not the case with the CLAIMANT, a presumption expressly excluded when the accounting reveals omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent the knowledge of the real taxable base of the taxpayer.

2. It further sustains this reading of the law in an identical arbitral decision [Proceeding No. 847/2014-T] which appeals to the jurisprudence of the TAC South decision in proceeding 02371/08 of 15/07/2008, in the sense that if the TA had to make proof that the entries made in the shareholder's account do not result from loans, provision of services or exercise of corporate offices, it would be contrary to the purpose of the rule, "since that would, in practice, result in the requirement that the TA prove the presumed fact".

3. Thus, mindful of the purpose of the rule of point 4 of article 6 of the CIRS for the prevention of tax evasion and fraud, it is easier for the taxpayer to make positive proof that the entries refer to loans, provision of services or exercise of corporate offices, than for the TA to make negative proof of the same.

The following is extracted from the conclusions of the RESPONDENT's FINAL SUBMISSIONS:

1. A bank account of the administrator and shareholder functions as an extension of the CLAIMANT's activity, with entry and exit of financial means that escape the accounting, which

2. Accounting omits financial movements essential to the knowledge of the legal-tax reality of the CLAIMANT;

3. That the CLAIMANT was unable to prove that the positive balance in favor of the shareholder, resulting from the totality of financial movements recorded between the CLAIMANT's bank accounts and the shareholder's bank account, does not constitute an increase in assets of the same, with classification under point 4 of article 6 of the CIRS [§35],

4. Either because, notwithstanding the debtor balance of the advances account, the CLAIMANT did not present accounting documents capable of justifying the balance of this account at the beginning of the year 2008, as well as the alleged point deliveries that refer to having occurred throughout that year [§36].

5. Either because the CLAIMANT did not justify the totality of the amounts received by the shareholder which allegedly refer as respecting the restitution of company expenses paid by the shareholder [§ 37].

6. Petitioning, finally, that the petition for arbitral pronouncement be judged without merit.

IV - FACTUAL MATTER

The factual matter given as proven for the assessment and subsequent decision rests on the documents and the examination of the witness presented by the CLAIMANT [described especially in §§ 49, 50 and 57.2].

IV.A - Facts Proven

1. The following facts are considered proven:

38.1. Pursuant to Service Order OI2009…, of the Finance Department of …, the CLAIMANT was subject to an external inspection action, in which the Tax Inspection (TI) verified and concluded the following:

38.2. The CLAIMANT is a joint-stock company with current capital of € 100,000.00, having as sole administrator and shareholder E…, with Tax Identification Number …;

38.3. In the inspection action carried out in the years 2007 and 2008, it was noted in the Inspection Report that "the taxpayer's accounting does not allow the proper control and calculation of taxable profit for Corporate Income Tax purposes in the fiscal years in question 2007 and 2008, since, in accordance with the provisions of article 17 point 3 of the Corporate Income Tax Code (CIRC), it is not organized in accordance with the accounting principles in force nor does it reflect all the operations carried out" which resulted in the recourse to indirect methods for Corporate Income Tax and VAT purposes;

38.4. The CLAIMANT is holder of two bank accounts through which said amounts were transferred, and only one of these accounts is reflected in the accounting;

38.5. Financial movements occurred throughout 2008 between the CLAIMANT and E…, with entries in favor of the Company in the amount of € 180,740.50 and exits in favor of E… in the amount of € 418,616.85, resulting in a balance in favor of the shareholder in the amount of € 237,876.50, which was considered as an advance on account of profits, in accordance with point 4 of article 6 of the CIRS, calculating Personal Income Tax withholdings in default in accordance with paragraph c) of point 3 of article 71 of the CIRS, as amended by Decree-Law No. 192/2005 of 07/11, in the amount of € 47,575.30 (237,876.50 X 20%).

38.6. With respect to the exits, that is, the financial flow in favor of E…, the same were calculated by the TI in the amount of € 418,616.85: the amount of € 94,584.35 is reflected as a debit in the account "… – E…" counterpart of the bank account reflected in the accounting, and the remainder was transferred through the bank account that is not reflected in the accounting;

38.7. With respect to the entries, that is, the financial flow in favor of the CLAIMANT, it sought to prove that the same respects its own expenses paid by the shareholder;

38.8. The CLAIMANT having alleged that those transfers respect the restitution of company expenses borne by the administrator and shareholder, in the amount of € 143,009.27, and as "repayment" of advances made over the years in the amount of € 94,867.23, all in the total amount of € 237,876.50.

38.9. Following the inspection action carried out, the CLAIMANT was notified on 22/12/2011 of the Personal Income Tax assessment No. 2011 …, in the amount of € 53,044.50, of which € 47,575.30 is tax and € 5,469.20 in compensatory interest;

38.10. On 18/05/2012 the CLAIMANT submitted an administrative complaint, having for that purpose alleged that the amount of € 237,876.50 does not respect advances on account of profits but rather the restitution to the shareholder of company expenses borne by him, in the total amount of €143,009.27, and the reimbursement to the shareholder of a loan with the nature of advances in the amount of € 94,867.23, thus broken down:

38.11. The administrative complaint was rejected;

38.12. On 12/12/2012 the CLAIMANT lodged a hierarchical appeal;

38.13. By order of 21/08/2014, of the Sub-Director-General by subdelegation of competences, issued in the information No. …/2014 of the Personal Income Tax Department, the same was partially upheld, in the part that respects the amount attributable to expenses paid to supplier G…, in the amount of € 123,374.90.

38.14. In the remaining part the CLAIMANT's claim was without merit;

38.15. The partial rejection of the HA resulted in the partial annulment of the disputed tax assessment, whereby the TA considers as advances on account of profits – as such subject to withholding at a liberatory rate – the amount of €114,502.42, corresponding to monetary transfers that occurred from the company to E…'s account, in the terms further detailed below:

IV.B - Facts Not Proven

1. Of the facts with interest for the decision of the case, those not appearing in the factuality described above were not proven; The following facts are further considered not proven:

39.1. Not proven that the amount of € 19,635.18 referring to salaries (8,442.06) and rents (11,193.12) [§ 7 of the IP] respect restitution of payments made by E… to F…, son of E…, either by the lack of any document that permits proving that the CLAIMANT's shareholder, E…, delivered to F… those amounts, or by the witness testimony that sustained that there was no financial flow, that is, the amounts in question had only an accounting movement, by debit of the salaries and rents, value credited in the advances account, since the creditor of those amounts never received them. It is obvious that if he did not receive them, they were not paid by E….

39.2. Not proven that the totality of the amounts of € 94,867.23 withdrawn in favor of E… have as their basis advances made by the same, for two reasons: by the lack of documents that prove it, such as bank movements; by the "revelation" of the witness that insofar as there were advances these were not all provided by the shareholder E…, but resulted instead from mere accounting movements without financial support.

V – APPRAISAL OF THE ISSUE

1. The decision of the disputed situation requires having present the provisions of various tax laws, in particular with respect to what concerns accounting and tax obligations and the burden of proof, namely:

40.1. Article 74, point 1 of the LGT, determining that the burden of proof of the facts constituting the rights of the tax administration or the taxpayers rests with whoever invokes them.

40.2. Article 75, point 1 and point 2 of the LGT, determining:

1 - The declarations of the taxpayers presented in accordance with the terms provided by law are presumed true and in good faith, as well as the data and calculations recorded in their accounting or books, when these are organized in accordance with commercial and tax legislation.

2 - The presumption referred to in the preceding paragraph does not apply when:

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

40.3. Paragraph a) of point 2 of article 123 of the Corporate Income Tax Code[4], whereby in the performance of accounting all entries must be supported by justifying documents, dated and capable of being presented whenever necessary;

40.4. Point 4 of article 6 of the CIRS, determining that entries in any current accounts of the shareholders, recorded in commercial or civil companies organized in commercial form, when they do not result from loans, provision of services or exercise of corporate offices, are presumed to be made as profit distributions or advances on profits.

40.5. Article 73 of the LGT, determining that the presumptions provided for in the tax law rules always admit proof to the contrary.

1. It is now necessary to verify whether, as the CLAIMANT sustains, it does not have to rebut any presumption, for in order for the TA to benefit from the presumption that said entries in E…'s account constituted advances on account of profits it should have proven or at least indicated the base fact, that is, that they do not result from the alleged credit relationship recorded in the accounting, which it did not do [§7], sustaining this same understanding in Decision 279/09.2BEPRT of 27-11-2014 of the TAC, or, by contrast, as the RESPONDENT sustains, the CLAIMANT was unable to prove that the positive balance in favor of the shareholder, resulting from the totality of financial movements recorded between the CLAIMANT's bank accounts and the shareholder's bank account, does not constitute an increase in assets of the same, with classification under point 4 of article 6 of the CIRS [§35].

Given this, let us see:

1. The issue is subsumed in the determination of the burden of proof, that is, knowing whether it rests with the CLAIMANT or with the RESPONDENT. In this sense, we advance, we do not see why to diverge from Arbitral Decision 847/2014-T of 14-07-2015, particularly because the evidence now produced goes in that same direction. In effect,

2. The CLAIMANT invokes Decision 279/09.2BEPRT of 27-11-2014 of the TAC, alleging that the TA would have to prove the "base fact" in order to avail itself of the presumption of point 4 of article 6 of the CIRS, that is, for the TA to benefit from the presumption that entries in the shareholder's current account are made as profit distributions or advances on profits, it should prove the base fact, that is, that they do not result from loans, provision of services or exercise of corporate offices.

3. Now, the reading of the cited decision cannot be in the sense intended by the CLAIMANT, for otherwise it would suffice for it [or any other legal entity subject to Corporate Income Tax] to record in its accounting that certain movements respected advances without having to make proof thereof, for if the TA had doubts it would have to prove that they are not, and if it did not do so they would be regarded as movements in the advances account, even though they were not and even though the totality of the amounts did not have the proper documentary expression.

4. This hypothesis cannot be regarded as the expression of the Decision referred to by the CLAIMANT, but rather, that the TA must prove that the values recorded as restitution of advances are not. In other words, prove the base fact is to prove that the movements do not result from what is stated: from loans; and that occurs when the TA in IT verifies that the movements are not documented, for if proof that the movements result from advances must be made by documents [and only these would prove that fact], the absence of a document proves the base fact, that is, that there is no proof of the advances. Now, it is not sufficient that the recording as advances of certain values exist, proof that there is no proof of the totality of the advances proves the base fact, unless proven otherwise. If proof of a fact is a document [article 123/2-a) of the CIRC (formerly 115)], proof of the non-fact [that it does not result from the fact alluded to] is sufficient by proof that said fact is not documented. Thus,

5. When the TA refers that said movements have no proof of the means of payment used or other documentary proof, which does not allow attesting either the alleged balance existing on 01/01/2008 in the shareholder's current account, or the balance at the end of 31/12/2008, it makes proof of the base fact, that is, that it is not a restitution of advances, or, in other words, it makes proof of the non-existence of elements that prove the totality of entries in the advances account.

6. That is, one could not ask the TA to come prove that the values do not result from loans, provision of services or exercise of corporate offices, making proof of any other facts that it is not incumbent upon it to know. It only falls to it, in view of the accounting and tax norms, to assess whether the facts are corroborated by the movements and documents, as the law imposes on the CLAIMANT, ex vi, paragraph a) of point 2 of article 123 [formerly 115] of the Corporate Income Tax Code, whereby in the performance of accounting all entries must be supported by justifying documents, dated and capable of being presented whenever necessary; this condition being necessary for the declarations of the taxpayers to be presumed true and in good faith [article 75, point 1 of the LGT], and thus [article 75, point 2 of the LGT], which does not apply when: a) the declarations, accounting or books reveal omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent the knowledge of the real taxable base of the taxpayer;

7. One cannot therefore confuse making proof of the base fact in the sense that the TA has to prove that it is not restitution of advances, but perhaps of some other reality. That could not have been the meaning intended by the legislature, for one would sometimes be requiring the impossible. Making proof that it is not restitution of advances is to verify that there is no documentary justification for the same, and thus it would fall to the CLAIMANT to demonstrate the lack of reason of the TA, which it could only do if it came to prove that the documents exist. Furthermore,

8. The evidence produced goes in the direction of the interpretation of the RESPONDENT, for two reasons:

49.1. Because the CLAIMANT was unable to prove, as was incumbent upon it, by documents, that the totality of the amount respects what it sustained;

49.2. Because the witness testimony departed from what was sustained by the CLAIMANT by stating that some of the contested accounting movements did not reflect financial flows, as it made clear that the analysis of the accounting is not, per se, capable of explaining what was sustained by the CLAIMANT, in the following terms:

49.3. With respect to what is alleged at § 7 of the IP, that the amount of € 19,635.18 [of salaries (8,442.06) and rents (11,193.12)] respects restitution of payments made by E… to F…, son of E…, sole shareholder and administrator of the CLAIMANT, who alleges to be recovering them because he bore them, for it became clear that the son did not receive any amounts, and thus what was sustained has no correspondence with reality. In effect the witness stated that "the son was entitled to a salary and never received it", and thus "the financial movement did not exist", since the amounts for the son [referring to salaries and rents, as the witness was answering the CLAIMANT's question regarding knowledge of the facts about salaries and rents] did not leave the company and were recorded in the father's advances account [namely, E…]. Thus what was stated at § 7 of the IP falls away;

49.3.1. When examined by this Arbitral Tribunal the witness presented by the CLAIMANT regarding the movements described by him, whether, "given his profession as a CPA he considered it normal for this type of movements to occur", the same responded without hesitation: "no, it is not normal".

49.3.2. When asked by this Arbitral Tribunal whether in such case he considered it possible for the TA to make the interpretation of the facts and the application of the law that it does", the same witness responded equally without hesitation: "yes, but, for that I am here to clarify".

49.4. It is thus necessary to assess these declarations, produced in the context of evidence by the CLAIMANT, for the same help to understand whether the burden of proof rests with this party or with the RESPONDENT. Now,

49.4.1. When the witness was examined by this Arbitral Tribunal regarding whether it was possible for the TA to make the interpretation it presents, he responded affirmatively, but that for that reason he was testifying for full clarification. Such fact, per se, is demonstrative that the contested movements were not processed in accordance with the norms and principles of accounting, as the law requires; moreover,

49.4.2. If the accounting movements, as referred to by the witness, are not normal [his response to the first question of the Arbitral Tribunal] such is due exclusively to the CLAIMANT, which thus departs from what is provided for in article 75 point 1 of the LGT, that is, the presumption of truthfulness and good faith of the declarations of the taxpayers.

49.4.3. In other words, it gains foundation the possibility of the TA resorting to the presumption contained in point 4 of article 6 of the CIRS.

1. Thus, not only are there no documents that prove:

50.1. That the amount of € 19,635.18 [§ 7 of the IP] concerning salaries (8,442.06) and rents (11,193.12) respect restitution of payments made by E… to F…, son of E…, sole shareholder and administrator of the CLAIMANT, who alleges to be recovering them because he bore them, for there is no document that proves it, such as a bank document;

50.2. The entry of amounts which, as the RESPONDENT sustains, would total the movements of the advances account, in order to assess whether the amount of € 94,867.23 referred to as amounts withdrawn by restitution of loans made by the sole shareholder and administrator of the CLAIMANT, since 1999, corresponds to the repayment of loans,

50.3. As the witness testimony came to prove the non-truthfulness of what was stated at § 7 of the IP, by noting that the son was a young man who lived with his parents who paid all his expenses, the reason the values [in reference to salaries and rents] were transferred to the father's advances account, and thus the son was entitled to a salary that he never received, adding that the expense existed because there is an accounting movement, but the financial movement did not exist.

1. A reference must be made to what was sustained by the CLAIMANT, in particular at § 14 of the Final Submissions, that although not possessing after so many years the documentary support of the movements [nor is the company obligated to do so since the inspection was in 2011, 12 years after 1999), this is not relevant since the TA never called into question this accounting over the years.

2. Now, in truth, mindful of the need to preserve documents for a period of 10 years [article 123/4 (formerly 115) of the CIRC], the TA cannot conclude that the CLAIMANT did not make proof that the amounts prior [to ten years] recorded in the advances account are not properly justified. Thus,

3. If the Tax Administration does not make a demonstration of the incorrectness of the determination of the accounting value, it is not legitimate, once the time period [of ten years] has elapsed, to demand from the taxpayer proof of the same. See in this sense Decision of the Plenary of the Supreme Administrative Court of 08-11-2006[5].

4. It happens that in the case at hand, because we refer to the year 2008, the obligation to preserve documents evidencing the movements of that year exists, and the CLAIMANT should exhibit them in order to prove that the totality of the amounts it refers to [€94,867.23] respects the reimbursement of advances. However,

5. The totality of this amount does not result duly documented, as moreover was perceived through the witness testimony could not be, for it was stated that part of the movements did not have a corresponding financial flow.

6. Thus, it is not due to the lack of proof of the base fact by the TA that this Arbitral Tribunal is unable to assess the totality of the movements concerning the advances account of 2008, but due to the CLAIMANT which, when called upon by the TA in a timely manner to make documentary proof, did not do so, and presents to this Arbitral Tribunal witness testimony that does not corroborate what it sustained.

7. Now, thus being, the CLAIMANT was unable to make proof:

57.1. That the amount of € 19,635.18 respected restitution of payments made by E… of salaries (8,442.06) and real property rents (11,193.12) to F…, son of E… [§ 7 of the IP];

57.2. That the totality of the amount of € 94,867.23, referred to as amounts withdrawn by restitution of loans made by the sole shareholder and administrator of the CLAIMANT, corresponds to the repayment of loans made by him since 1999, since not only is there no documentary support that permits proving the balances existing on 01/01/2008 and 31/12/2008, in order to assess the respective movements, but the witness testimony came to prove that some of that amount [at least in the year in question, € 19,635.18] does not correspond to effective entries by the sole shareholder and administrator of the CLAIMANT, E…, to which will be added in other years the salaries of his own wife, as referred to by the witness, when stating that before [by reference to E…'s wife] the amounts also went to E…'s advances account.

VI - DECISION

In view of the foregoing and with the grounds set forth, it is decided that the petition for annulment of the disputed tax assessment is judged without merit, thus maintaining in the legal order the decision of partial approval of the Hierarchical Appeal, with the legal consequences thereof.

VII - VALUE OF THE PROCEEDINGS

In view of what was requested, given that the claim was only concerned with the tax act partially annulled, in the part that was not, the value of the proceedings is corrected, thus disregarding the value proposed by the CLAIMANT [of € 47,575.39 (Forty-seven thousand five hundred seventy-five euros and thirty cents)], with the value of the proceedings being € 22,900.48 (twenty-two thousand, nine hundred euros and forty-eight cents).

VIII – COSTS

In accordance with the provisions of the Regulation on Costs in Tax Arbitration Proceedings, the costs are fixed at € 1,224.00, to be borne by the CLAIMANT.

Lisbon, 05 January 2016

The Arbitrator[6]

Henrique Curado

[1] These amounts were presented by both the CLAIMANT and the RESPONDENT in the IP and Answer in reversed order, being referred to as the amount of salaries 11,193.12 and rents 8,442.06. When questioned by the Tribunal regarding compatibility with the documentation attached to the record, both parties came to correct in the context of submissions, to the sense that is now expressed in the text.

[2] See supra note 1.

[3] Ibidem.

[4] This corresponds to article 115, as amended in the CIRC in force prior to the effectiveness of Decree-Law No. 159/2009 of 13/07, which republished that Code.

[5] Cited in Annotated and Commented LGT, by Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, Almedina, 2012, in annotation to article 74, p. 661.

[6] Text prepared by computer, in accordance with article 131, point 5 of the CPC, ex vi, article 29 point 1 paragraph e) of the RJAT, with blank verso of each sheet, orthography being that prior to the latest orthographic agreement.