IRC Arbitration: Tribunal Competence, Madeira Tax Losses & Taxpayer Declaration Presumption (CAAD 90/2014-T)

CAAD TAX ARBITRATION DECISION - ENGLISH TRANSLATION

I – Report

1. On 6.02.2014, A..., UNIPESSOAL, LDA, legal entity no. ..., with headquarters in the Building …, Funchal, filed a request with CAAD for the constitution of an arbitral tribunal, pursuant to article 10º of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority is the Respondent, seeking the annulment of the corporate income tax assessment act no. 2013 ... and compensation no. 2013 ..., of 23.10.2013, as well as the compensatory interest assessment act no. 2013 ... and the default interest assessment act no. 2013 ..., all relating to the 2012 fiscal year, in the total amount of 30,585.02 €.

2. The request for constitution of the arbitral tribunal was accepted by the Esteemed President of CAAD and notified to the Tax and Customs Authority.

Pursuant to the provisions of no. 1 of article 6º of RJAT, by decision of the President of the Ethics Council, duly communicated to the parties within the legally applicable time limits, the undersigned was appointed arbitrator, who communicated acceptance of the appointment to the Ethics Council and to the Administrative Arbitration Center within the regularly applicable time limit.

The Arbitral Tribunal was constituted on 8.04.2014.

1. The meeting provided for in article 18º of RJAT took place on 3.07.2014, at 14:00 hours.

2. The grounds presented by the Claimant in support of its claim are, briefly, the following:

4.1. On 31.05.2013, the Claimant submitted the Corporate Income Tax Return Model 22 for the fiscal year 2012.

4.2. This return resulted in a Corporate Income Tax assessment no. 2013 ..., dated 20.06.2013, with tax losses of € 2,549,238.41 and no tax payable, since in 2012 special payments on account of € 70,000.00 were made and withholdings at source of € 7,124.45 were suffered.

4.3. Upon being alerted by the Tax Authority (hereinafter AT) that the return in question contained lapses, and because it still had the time available for that purpose, the Claimant decided to make use of the power provided for in article 122º, nos. 1 and 2 of CIRC and submit an amended return for 2012.

4.4. On 25.07.2013, the Claimant submitted an amended Corporate Income Tax Return Model 22 for the fiscal year 2012, which was accepted and identified by no. ....

4.5. In field 313 of this amended Model 22 return ("taxable income") the Claimant entered the amount of € 2,771,670.16.

4.6. In field 314 ("deductible tax losses") the Claimant entered the amount of € 36,412,922.85 since it had this total amount of losses available for purposes of deduction from profits, which were accumulated over the fiscal years of 2007, 2009, 2010 and 2011.

4.7. From the profit calculated in 2012, tax losses of € 2,078,752.62 were deducted, as recorded in field 320 of the amended Model 22 return, a value which corresponds to 75% of the taxable income of the fiscal year.

4.8. After submission of the amended Model 22 return and notification of the assessment identified in the preceding article, the claimant was notified by AT of the notice dated 13.08.2013 and entitled "Correction to the value of deductible tax losses – Period 2012".

4.9. In this notice, AT invokes the provision of article 90º, no. 10 of CIRC and alleges that the value of tax losses "evidenced in the model 22 return for the period 2012, does not correspond to the elements contained in the database of the Tax and Customs Authority and will be subject to correction in the respective assessment".

4.10. AT further informed that "Of this correction you may file a gracious complaint or judicial challenge within the terms and time limits provided for in article 137º of CIRC, when notification is notified to you".

4.11. Upon receiving this notice, the Claimant took steps with AT in order to obtain the justification for the refusal to deduct the tax losses indicated in the amended Model 22 return for fiscal year 2012.

4.12. In response to its request for justification, on 21.10.2013 the Claimant received from the Assessment Division of the Corporate Income Tax Services Department an electronic mail message with the following information:

"1. The periodic income returns model 22, relating to the periods of 2010 and 2011, were sent on 2013-03-25 and 2013-03-27, respectively, outside the legal time limit and are recorded centrally.

1. Given that said returns show a result lower than the value calculated in the first assessment, carried out ex officio by the tax administration, pursuant to sub-paragraph b) of no. 1 of article 90º of the Corporate Income Tax Code, they do not meet the same conditions to be assessed."

The Corporate Income Tax Services Department further informed: "4. With regard to the income return for 2012, the tax loss recorded in field 320 of table 09 will be corrected to the value of 95,415.76 € resulting from the sum of the remaining tax loss of 5,904.42 € from 2007 and 89,511.34 € from 2009."

4.13. From the content of this electronic mail message, the Claimant understood that the correction to the taxable base for 2012 results from AT's refusal to accept the deduction, in this fiscal year, of the amount of tax losses from the fiscal years of 2010 and 2011 due to the fact that ex officio assessments were made as a result of the untimely submission of the Corporate Income Tax Return Models 22 for these two fiscal years.

4.14. In fact, the Model 22 returns of 2010 and 2011 were not filed by 31 May 2011 and 2012, respectively.

4.15. The fact that the periodic Model 22 Corporate Income Tax returns for 2010 and 2011 were not filed, respectively, by 31.05.2011 and 31.05.2012 and that, as a consequence, ex officio Corporate Income Tax assessments were made, does not imply that the returns have become devoid of effect, in particular with respect to tax losses verified and declared in these two fiscal years.

4.16. In fact, in light of the rules of tax law, it is not clear how the deduction of losses actually verified can be made impossible by virtue of the income returns for the fiscal years in which they occurred having been filed beyond the normal time limit, giving rise to ex officio tax assessments.

4.17. The Claimant does not disagree with the making of these ex officio tax assessments, since the respective conditions were indeed fulfilled, contesting only that these ex officio assessments have the effect of preventing the deduction, in the fiscal year 2012, of losses actually verified in prior years.

4.18. If AT does not directly question the existence of the losses, it cannot prevent the taxpayer from proceeding to their deduction within the space of time delimited by the legislator.

4.19. It is not because there is an ex officio Corporate Income Tax assessment resulting from delay in filing the income return that automatically nullifies the losses and the right to proceed to their carrying forward within the space of time defined in law.

4.20. Moreover, no tax provision is apparent that provides that the right to loss carryforward depends on filing the income return by 31 May.

4.21. To allow ex officio assessments to prevail over the taxpayer's returns is to subvert the most elementary principles of tax law, namely, those of taxation of companies by actual income and that presumptions in tax matters are always rebuttable.

4.22. As a consequence of the foregoing, tax losses duly included in the Model 22 return for 2012, carried forward from a period between 2007 and 2011, should be deductible from the profit earned in fiscal year 2012, as the claimant did.

4.23. And even if the ex officio assessments for 2010 and 2011 are maintained, the Corporate Income Tax assessment now challenged should be annulled because it suffers from error regarding its factual assumptions.

Moreover,

4.24. The amended Model 22 return for fiscal year 2012 that identifies the total tax losses and those actually deducted was filed on 25.07.2013, that is, within the time limit provided for in art. 122º, no. 2 of CIRC.

4.25. It was precisely the inclusion of the losses in this amended return that motivated the issuance of the notice dated 13.08.2013 by which AT informed that, since the values of the losses allegedly did not correspond to the elements contained in the database, it would proceed to corrections in the Corporate Income Tax assessment.

4.26. For purely formal reasons, and outside the law, AT ignored the reality and the "solidarity between various fiscal years" imposed by Tax Law, disregarding losses that were declared to AT by means of filing a Model 22 return deemed "recorded centrally".

4.27. AT does not question the actual occurrence of these losses, rejecting their carryforward in 2012 merely because ex officio assessments already existed.

4.28. There is no doubt that the amended Model 22 return for 2012, submitted on 25.07.2013, was filed within the time limit provided for in article 122º, no. 2 of CIRC and, as such, enjoys the presumption of truthfulness and good faith established in article 75º, no. 1 of the General Tax Law, which implies a reversal of the burden of proof from the taxpayer to AT.

4.29. This means that, in the present case, all the content of the amended Model 22 return for 2012, filed on 25.07.2013, is presumed to be truthful and made in good faith unless proven otherwise by AT, which did not occur, so there can be no obstacle to the use of these amounts for purposes of deduction from taxable income.

4.30. If AT disagreed with the values of tax losses entered by the Claimant in the amended Model 22 return filed on 25.07.2013, it was obliged to convert this amended return into a gracious complaint and, therefore, could not have immediately proceeded to an additional Corporate Income Tax assessment for 2012 pursuant to art. 59º, no. 5 of CPPT.

4.31. The subject matter of the complaint would be the assessment made on the basis of the Model 22 return initially submitted on 31.05.2013, which, as became evident from the amended return filed on 25.07.2013, did not reflect the true tax situation of the Claimant.

4.32. What AT was not legally authorized to do was advance immediately to an additional Corporate Income Tax assessment for fiscal year 2012 on the grounds of disagreement with the taxpayer without first converting the amended return into a gracious complaint, as required by article 59º, no. 5 of CIRC.

4.33. By acting in this manner, AT omitted the performance of a mandatory act, which constitutes a procedural defect with invalidating effect on the final decision, which materializes in the additional assessment now challenged, pursuant to article 135º of the Administrative Procedure Code.

4.34. The model 22 returns relating to the fiscal periods of 2010 and 2011, even if considered untimely, if they do not constitute grounds for the annulment of the ex officio assessments made by AT should, at least, serve as grounds for the correction of these ex officio assessments if we are still within the 4-year limitation period for the right to assess, as is the case herein, which is required by the constitutional principle of taxation of actual profit of companies and by the inquisitorial principle established in art. 58º of the General Tax Law.

4.35. If even with the submission of the income returns for 2010 and 2011, AT still considered them to be insufficient, it should have carried out the useful steps to clarify the facts or requested the submission of additional elements, which it did not do.

4.36. AT could not disregard the losses declared with respect to fiscal years 2010 and 2011 without previously demonstrating that the returns did not reflect the true tax situation of the Claimant, proof which was never provided in clear violation of the principle of the right to be heard.

4.37. Thus, there is a procedural defect in the assessment, which should lead to the annulment of the tax act.

4.38. Another reason why AT's thesis cannot prevail is because it transforms the presumptions on which indirect methods are based into irrebuttable, subverting the rule of article 73º of the General Tax Law, since an ex officio assessment based on indirect methods must give way before the demonstration, in whatever form it takes, that the assumptions on which it is based do not conform to the reality of the taxpayer – which is precisely what occurs in the case sub judice.

4.39. What, transposed to the present case, means that AT cannot fail to recognize tax losses when these were declared by the taxpayer, even if after the normal time limit of no. 1 of article 120º of CIRC, even having already carried out the ex officio assessments.

4.40. Wherefore, the assessment acts are tainted by error in their factual assumptions since they do not represent the situation of the taxpayer, which constitutes a cause of invalidity thereof.

4.41. In light of all the factual and legal arguments presented, the assessment act cannot remain in the legal order.

1. The ATA – Tax and Customs Administration, called upon to respond, contested the Claimant's claim, defending itself by contestation and by exceptions. In its defense by exception, the Respondent alleged, in summary, the following:

5.1. The Claimant has its headquarters in the Free Trade Zone of Madeira – in the Building …, in Funchal, Autonomous Region of Madeira.

5.2. The subject matter of the present arbitral decision request is the declaration of illegality of the corporate income tax assessment act no. 2013 ... and compensation no. 2013 ..., of 23.10.2013, as well as the compensatory interest assessment act no. 2013 ... and the default interest assessment act no. 2013 ..., all relating to fiscal year 2012, in the total amount of € 30,585.02.

5.3. With respect to the Autonomous Region of Madeira, the tax administration was subject to regionalization.

5.4. Pursuant to article 112º, no. 1, sub-paragraph b) of the Political-Administrative Statute of the Autonomous Region of Madeira approved by Law no. 13/91 of 5 June, the Corporate Income Tax constitutes fiscal revenue of the Region.

5.5. Decree-Law no. 18/2005, of 18 January, transferred to the Autonomous Region of Madeira the tax powers previously attributed to the Finance Department of the Autonomous Region of Madeira.

5.6. Regional Legislative Decree 27/2008/M, of 3 July, approved the organic and functional adaptation of national tax legislation to the Autonomous Region of Madeira, having determined, in particular, that a set of powers provided for in CIRC to the Minister of Finance and the DGCI be understood to refer to the regional secretary with responsibility for finance and the Regional Directorate of Tax Affairs.

5.7. Among the powers that came to be understood to refer to the Regional Directorate of Tax Affairs was that provided for, at that time, in article 82º, sub-paragraph b) of CIRC (current article 89º) regarding the power for assessment.

5.8. Pursuant to article 15º of this decree it was established that the legislative adaptation made by it is made without prejudice to the provisions of article 46º of Regional Regulatory Decree no. 29-A/2005/M, of 31 August, decree that approved the organization of the Regional Directorate of Tax Affairs.

5.9. Being that article 46º of Regional Regulatory Decree no. 29-A/2005/M, of 31 August, provided, in its turn, in its no. 1, that "Until all the logistical means necessary for the exercise of the full scope of the powers and duties provided for in articles 1º and 2º of this decree are in place, the DGCI, through its departments and services, will continue to carry out the administrative procedures necessary for the exercise of the duties and powers transferred to the Autonomous Region of Madeira, including those relating to the assessment and collection of taxes that constitute own revenue of the Autonomous Region."

5.10. This decree was subsequently repealed by Regional Regulatory Decree no. 2/2013/M which in no. 1 of its Article 12º (under the heading "Cooperation and mutual collaboration of the Tax and Customs Authority (AT) and the Regional Directorate of Tax Affairs") provides: "Until all the logistical means necessary for the exercise of the full scope of the duties and powers provided for in article 2º of this decree are in place, the AT, through its departments and services, will continue to ensure the carrying out of the administrative and computer procedures necessary for the exercise of the duties and powers transferred to RAM, including those relating to the assessment and collection of taxes that constitute own revenue of RAM."

5.11. Bound to the jurisdiction of the administrative tribunals constituted under the aegis of CAAD, as far as tax arbitration is concerned, are the services that, since the reorganization resulting from Decree-Law no. 118/2011, of 15 December, compose the Tax and Customs Authority, pursuant to the Decree-Law, with no provision being made for the binding of the regionalized tax administration.

5.12. Therefrom results the incompetence of the arbitral tribunal.

Moreover,

5.13. Procedural legitimacy derives from the quality of party to the material relationship, resulting therefrom the interest to sue in court, as well as to exercise the right to be heard regarding the claim presented.

5.14. The Respondent in the present request and arbitral decision is not party to the material relationship since it is not the active subject of the tax since the Claimant has its headquarters in the Free Trade Zone of Madeira and the tax administration of its headquarters or domicile is regionalized.

5.15. In addition, the subject matter of the arbitral claim is an assessment of Corporate Income Tax, a tax that constitutes revenue of the Autonomous Region of Madeira, so that any decision to be delivered in these proceedings could only produce its effects in relation to the tax administration of the Autonomous Region of Madeira, with consequent loss of fiscal revenue to the Autonomous Region.

5.16. In these terms, the arbitral tribunal is not legally enabled to issue a decision on the merits regarding the claim presented, rendering necessary the dismissal of the arbitral proceedings.

By contestation, the Respondent further alleged, again in summary, the following:

5.17. The determination of taxable base shall be made on the basis of the declarations of taxpayers, "provided that they present them in accordance with the terms provided for in law" (art. 59º, no. 2 of CPPT).

5.18. Where declarations are presented "in accordance with the terms provided for in law," they "are presumed to be truthful and made in good faith" (Art. 75º, no. 1 of the General Tax Law).

5.19. The presentation of the declaration "in accordance with law" must be understood as encompassing the time limits provided for in law.

5.20. If the declaration, however, is not presented within the legal time limit, the power to assess is returned to AT, falling to it to proceed with the assessment, under the provisions of sub-paragraphs b) and c) of no. 1 of article 90º of CIRC.

5.21. In the case at issue, in the absence of timely submission of the periodic returns, the power devolved to the Regional Directorate of Tax Affairs, without prejudice to the cooperation provided by AT.

5.22. It is necessary to conclude that when it proceeded with the ex officio assessments that are the subject of the present claim, the tax administration did no more than respond to a legal imperative.

5.23. As decided by the arbitral tribunal, also constituted under the aegis of CAAD, in case no. 10/2013-T "there shall be room for the presumption of truthfulness of declarations presented by taxpayers only when they are presented within the legally established time limit for such, as noted above. Now in the disputed case subject to arbitral decision, the periodic income return of Corporate Income Tax could not benefit from the presumption of truthfulness since it was presented outside the time limit".

5.24. The Claimant, acknowledging the fact of having presented the returns outside the time limit, without advancing a valid justification for the fact, continues to arrogate to itself the right to have its content deemed truthful, but does not present any proof of the actual occurrence of the losses it invokes.

5.25. With the ex officio assessments validly made, by indirect methods, in accordance with article 90º of CIRC, it fell to the Claimant to demonstrate the excess in the quantification, as results from the general rules of distribution of the burden of proof established in article 74º of the General Tax Law.

5.26. As to the constitutional principle of taxation by actual income, it should be noted that in no way is this affected in the case at issue since no proof was made of any excess in the quantification and, on the other hand, article 104º, no. 2 of the Constitution introduces a moderating element, the adverb "fundamentally".

5.27. It is manifest that the Claimant could have ensured its taxation in accordance with the actual income it alleges to have had, had it filed its periodic return on time, subjecting itself to the possibility of its tax situation being verified within the time that the law grants the tax administration to do so.

1. Notified of the response presented, the Respondent expressed itself regarding the exceptions raised, whether orally at the meeting provided for in article 18º of RJAT, or in the written submissions it presented, in summary, in the following terms:

6.1. The Respondent's argument invoking absolute incompetence of the arbitral tribunal is unfounded, and moreover its argument represents an attack on the principle of good faith that should guide relations between the administration and taxpayers.

6.2. In the present case, the act whose annulment the Claimant seeks was performed by AT and not by any service of RAM.

6.3. Just as the Respondent acknowledges in article 2º of its response, the subject matter of the arbitral decision request is the declaration of illegality of the corporate income tax assessment act no. 2013 ... and compensation no. 2013 ..., of 23.10.2013, as well as the compensatory interest assessment act no. 2013 ... and the default interest assessment act no. 2013 ..., all relating to fiscal year 2012, in the total amount of 30,585.02 €.

6.4. Now, a simple examination of Doc. No. 1 allows one to observe that the Corporate Income Tax assessment statement is signed by the Director-General of AT, José António de Azevedo Pereira.

6.5. Also appearing on it are the AT logo, the indication "Corporate Income Tax" and the address at Av. Engº Duarte Pacheco, 28, 1099-013, Lisbon, P.O. Box 10062 EC Campolide, 1072-083, Lisbon, where the Corporate Income Tax Services Department operates.

6.6. In the account settlement statements and compensatory and default interest assessments attached to the assessment notice, and which form an integral part thereof, there also appear the AT logo and identification and the indication of the "Collection Area", which operates at Av. João XXI, 76, 1049-065, Lisbon.

6.7. This means that the tax assessment act of assessment that is the subject matter of the arbitral decision request, pursuant to the provisions of article 2º, no. 1, sub-paragraph a) of RJAT, was performed by AT and not by a service of RAM.

6.8. With the arbitral decision request bearing on an act authored by AT, it is not clear how the Respondent can legally exempt itself from the jurisdiction of CAAD.

6.8. Were the Respondent's thesis to be upheld, the present contested act would always have to be annulled on the grounds of lack of competence of its author.

6.9. Moreover, there is no provision in the national legal system that has deprived AT of the right to assess Corporate Income Tax.

6.10. The power to assess and collect national taxes falls to services under the direct administration of the State, with the autonomous regions having merely a power – not an obligation - to create the tax services competent for the assessment and collection of taxes of which they are active subjects.

6.11. It happens that despite the legal provision of article 51º, no. 2, sub-paragraph a) of the Autonomous Regions Financial Law, such power granted to RAM has not been implemented.

6.12. The regional government itself foresaw, in article 12º, no. 1 of Regional Regulatory Decree no. 2/2013/M, that "Until all the logistical means necessary for the exercise of the full scope of the duties and powers provided for in article 2º of this decree are in place, the AT, through its departments and services, will continue to ensure the carrying out of the administrative and computer procedures necessary for the exercise of the duties and powers transferred to RAM, including those relating to the assessment and collection of taxes that constitute own revenue of RAM."

6.13. The content of article 51º, no. 4 of the Autonomous Regions Financial Law is thus understood, which provides that "National taxes that constitute regional revenues and regional taxes and fees should be identified as such to taxpayers in tax forms and documents, whenever possible, even if collected by the tax administration of the State".

6.14. Thus, the binding of AT to arbitral jurisdiction should be recognized in the present case since it was AT that performed the assessment act that is the subject matter of these proceedings and the power to assess Corporate Income Tax on taxpayers resident in RAM legally belongs to AT.

6.15. If this is not the case, which is only foreseen by mere caution of representation and without conceding, one would be faced with a notorious violation of the principle of equality, as well as an inadmissible and unjustified restriction on access to effective judicial protection (articles 13º and 20º of the Constitution).

6.16. In light of the foregoing, the exception of absolute incompetence should be considered entirely unfounded.

6.17. It is not true that AT is not party to the material relationship underlying the dispute and that it does not have legitimacy to be sued by means of arbitration, since it was the Respondent that made the Corporate Income Tax assessment act whose declaration of illegality was requested from the Arbitral Tribunal.

6.18. As the author of the challenged tax act, AT has a direct interest in defending itself since it is the active subject of the tax legal relationship established with the Claimant, as it is responsible for the assessment and collection of Corporate Income Tax.

6.19. It would be incongruous, not to say offensive to the most elementary rules of good faith, for AT to make a tax assessment and subsequently not be able to be called to court to pronounce on the illegality of an act that it itself performed.

6.20. There is, therefore, no passive illegitimacy of ATA and this exception should also be judged unfounded.

1. In the written submissions it presented, with respect to the merits of the case, the Claimant maintained, in essence, the positions already expressed in the initial petition.

The Respondent did not present submissions.

1. The tribunal is materially competent and is regularly constituted pursuant to RJAT.

The parties have procedural capacity and standing, are legitimate and are legally represented.

The proceedings do not suffer from vices that would invalidate it.

II – Relevant Factual Matter

1. The tribunal finds the following facts to be proven:

2. The Claimant is a commercial company licensed, since 10.10.2002, to carry on its business in the Free Trade Zone of Madeira.

3. On 31.05.2013, the Claimant submitted to the Tax and Customs Authority the Corporate Income Tax Return Model 22 for fiscal year 2012.

4. This return resulted in a Corporate Income Tax assessment no. 2013 ..., dated 20.06.2013, with tax losses of € 2,549,238.41 and no tax payable.

5. This tax act was communicated to the Claimant by the Tax and Customs Authority, Corporate Income Tax, Av. Engenheiro Duarte Pacheco, 28, 1099-013 Lisbon, with the notification signed by the Director-General of Taxes, José António de Azevedo Pereira.

6. In the same notification it states that the taxpayer "May file a complaint or challenge within the terms and time limits established in articles 137º of CIRC and 70º and 102º of CPPT, counted continuously after the date of this notification, which is deemed effected at the moment when the recipient accesses the electronic mailbox or, in case of failure to access it, on the 25th day after its sending".

7. With issuance date of 1.06.2013, a notification was sent to the Claimant by the Tax and Customs Authority, signed by the Director of Corporate Income Tax Services, Helena Pegado Martins, communicating the existence of the following error in the Model 22 return "D7E ANNEX –C COMPLETED AND TAXABLE BASE NULL".

8. Following this communication, on 25.07.2013, the Claimant submitted an amended model 22 return to ATA, which was accepted and identified by no. ....

9. From the comparison between the two returns result the following differences:

8.1- The first return shows a net result for the period of – 2,634,390.56 € while the second shows a positive result of 2,658,546.30 €.

8.2- The first return shows in field 724 ("Corporate Income Tax and other taxes on profits") the value of zero while the second shows a value of 27,970.71 €.

8.3- The first return shows tax losses of 2,549,238.41 €, while the second shows a value of zero tax losses.

8.4- The first return shows zero taxable income while the second shows 2,771,670.16 € of taxable income.

8.5- The first return shows zero deductible tax losses, while the second shows 36,412,922.85 € of deductible tax losses.

8.6- The first return shows zero deducted tax losses while the second shows 2,078,752.62 €.

8.7- The first return shows zero taxable base while the second shows 692,917.54 €.

8.8- The first return shows zero tax collected while the second shows 27,716.70 €.

8.9- The first return shows zero special payment on account while the second shows 70,000.00 €.

8.10- The first return shows zero withholdings at source while the second shows 7,124.45 €.

8.11- The first return shows zero amount to recover while the second shows 7,124.45 € amount to recover.

1. After submission of the amended Model 22 return, the Claimant was notified by AT of the notice dated 13.08.2013, signed by the Director of Corporate Income Tax Services, Helena Pegado Martins, communicating the correction to the value of deductible tax losses, for the period of 2012, from 2,078,752.62 € to 0.00 €.

2. AT further informed that "Of this correction you may file a gracious complaint or judicial challenge within the terms and time limits provided for in article 137º of CIRC, when notification is notified to you".

3. Upon receiving this notice, the Claimant took steps with AT in order to obtain the justification for the refusal to deduct the tax losses indicated in the amended Model 22 return for fiscal year 2012.

4. In response to its request for justification, on 21.10.2013 the Claimant received from the Assessment Division of the Corporate Income Tax Services Department an electronic mail message authored by the Head of Division, Bruno Lagos, with the following information:

"1. The periodic income returns model 22, relating to the periods of 2010 and 2011, were sent on 2013-03-25 and 2013-03-27, respectively, outside the legal time limit and are recorded centrally.

1. Given that said returns show a result lower than the value calculated in the first assessment, carried out ex officio by the tax administration, pursuant to sub-paragraph b) of no. 1 of article 90º of the Corporate Income Tax Code, they do not meet the same conditions to be assessed.

2. You may file a complaint or challenge said ex officio assessments within the terms and conditions referred to in article 137º of the Corporate Income Tax Code.

3. With respect to the income return for 2012, the tax loss recorded in field 320 of table 09 will be corrected to the value of 95,415.76 € resulting from the sum of the remaining tax loss of 5,904.42 € from 2007 and 89,511.34 € from 2009."

4. As a result of this understanding, the Tax and Customs Administration, through the Directorate-General of Taxes, made the assessments now contested, which consist of a corporate income tax assessment act no. 2013... and compensation no. 2013 ..., of 23.10.2013, as well as a compensatory interest assessment act no. 2013 ... and a default interest assessment act no. 2013 ..., all relating to fiscal year 2012, in the total amount of 30,585.02 €.

5. The model 22 return for fiscal year 2010 was filed on 25.03.2013 and the return relating to fiscal year 2011 was submitted to AT on 13.12.2011 and replaced by another on 27.03.2013.

6. In the model 22 return relating to fiscal year 2010, a tax loss of 31,397,671.29 € was presented.

7. In the first model 22 return for 2011, a tax loss of 36,882,683.53 € was presented and in the second the tax loss of 4,925,740.22 €.

8. In both cases, the failure to submit the return on time led AT to carry out ex officio Corporate Income Tax assessments, pursuant to the provision of article 90º, no. 1, sub-paragraph b) of CIRC, having, with respect to 2010, been issued the ex officio assessment no. 2011 ..., dated 30.11.2011 and with respect to 2011 the ex officio assessment no. 2012 …, dated 20.11.2012, from which no tax payable resulted.

9. Facts not proven:

With interest for the decision of the case, it was not proven that in the fiscal periods of 2010 and 2011 the Claimant had tax losses.

1. The tribunal's conviction regarding the decision on the factual matter was based, with respect to the facts considered proven, on the documents submitted by the Claimant as documents 1 to 12, not contradicted by the elements contained in the administrative file, nor challenged by the Respondent.

The proof of fact number 1 results from document no. 1 and from the positions of the parties expressed in the pleadings; The proof of fact number 2 results from document number 2; The proof of fact number 3 results from document number 3; The proof of fact number 4 results from document number 3; The proof of fact number 5 results from document number 3; The proof of fact number 6 results from document number 4; The proof of fact number 7 results from document number 5; The proof of facts contained in number 8 results from documents numbers 2 and 5; The proof of fact number 9 results from document number 6; The proof of fact number 10 results from document number 6; The proof of fact number 11 results from document number 7; The proof of fact number 12 results from document number 7; The proof of fact number 13 results especially from document number 1 – notice of assessment addressed to the Claimant by the Tax and Customs Authority, Corporate Income Tax, Av. Engenheiro Duarte Pacheco, 28, 1099-013 Lisbon, and signed by Director General of Taxes José António de Azevedo Pereira, but also from all other documents that support the proof of facts nos. 2 to 12 and that demonstrate the involvement of the Respondent in all acts of the procedure that preceded the assessments in question; The proof of fact number 14 results from documents numbers 8, 9 and 10; The proof of fact number 15 results from document number 9; The proof of fact number 16 results from documents number 8 and 10; The proof of fact number 17 results from documents numbers 11 and 12.

The decision regarding the factual matter not proven rests on the absence of production of proof regarding such matter, without prejudice to what will be said below regarding the burden of proof of such facts.

III – Applicable Law

Exception of Absolute Incompetence of the Tribunal

1. At issue in the present proceedings are tax assessment acts performed by AT.

The Respondent, however, referring to the fact that Corporate Income Tax was one of the regionalized taxes, invoking articles 225º and 227º, no. 1, sub-paragraph i) of the Constitution, article 107º, article 112º, no. 1, sub-paragraph B) of the Political-Administrative Statute of the Autonomous Region of Madeira, approved by Law no. 13/91, of 5 June, Regional Legislative Decree 27/2008/M of 3 July, article 12º of Regional Regulatory Decree no. 2/2013/M, sustains the incompetence of the Arbitral Tribunal.

The Respondent sustains that with respect to arbitral tribunals, constituted under the aegis of CAAD, "the binding of the regionalized tax administration is not provided for, since this does not form part of the AT- Tax and Customs Authority, the successor entity to DGCI and DGAIEC, pursuant to the provisions of the aforementioned Decree-Law no. 118/2011, of 15 December".

Let us examine this.

1. Pursuant to article 2º, no. 1, sub-paragraph a) of Decree-Law no. 10/2011, of 20 January, the competence of arbitral tribunals comprises the examination of claims tending "To the declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account."

In accordance with article 4º, no. 1 of the same decree "The binding of the tax administration to the jurisdiction of tribunals constituted in accordance with the present law depends on an order of the government members responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered."

1. By article 1º of Order no. 112-A/2011, of 22 March, the Respondent bound itself to the jurisdiction of the arbitral tribunals functioning at CAAD which, pursuant to article 2º "have as their object the examination of claims relating to taxes whose administration is entrusted to it referred to in article 2º of Decree-Law no. 10/2011, of 20 January", the tax act sub judice not being covered by any of the exceptions provided for in sub-paragraphs a) to d) of this article.

2. In accordance with article 140º of the Political-Administrative Statute of the Autonomous Region of Madeira (Law no. 13/91 of 5 June with the amendments introduced by laws 130/99 of 21.08 and 12/2000 of 21.06):

"The regional administrative powers, matters to be exercised by the regional government and administration, comprise:

a) The capacity of the Autonomous Region of Madeira to be the active subject of taxes collected therein, whether of regional or national scope, pursuant to the following number;

b) The right to delivery, by the State, of fiscal revenues that should belong to them;

By its turn, pursuant to no. 2 of the same article "The capacity of the Autonomous Regions to be active subjects of taxes collected therein comprises:

a) The power of the regional Governments to create the tax services competent for the assessment, collection and charging of taxes of which it is active subject;"

1. Symmetrically, article 39º of the first Autonomous Regions Financial Law (Law no. 13/98 of 24 February) provided

"The regional administrative powers, in tax matters to be exercised by the regional governments and administrations, comprise:

(…)

b) The capacity of the Autonomous Regions to be active subjects of taxes collected therein, whether of regional or national scope, pursuant to no. 2 of this article;

c) The right to delivery, by the State, of fiscal revenues that should belong to them, in accordance with no. 1 of article 10º;"

By its turn, pursuant to no. 2 of the same article "The capacity of the Autonomous Regions to be active subjects of taxes collected therein comprises:

a) The power of the regional Governments to create the tax services competent for the assessment, collection and charging of taxes of which they are active subjects;"

1. Pursuant to article 1º, no. 1 of Decree-Law no. 18/2005 of 18 January "The duties and tax powers are transferred to the Autonomous Region of Madeira which in the scope of the Finance Department of the Autonomous Region of Madeira and of all Services dependent thereon were being exercised in the territory of the Region by the Government of the Republic, without prejudice to (…)".

And, pursuant to no. 2 of the same legal provision "It falls to the Regional Government of the Autonomous Region of Madeira to exercise the full scope of the powers provided for in the Constitution and in law with respect to own fiscal revenues, practicing all acts necessary for their administration and management".

Also in accordance with no. 2 of the same decree "By regional regulatory decree an organism shall be created for the purpose of carrying out in the Autonomous Region of Madeira the duties and powers entrusted to the Finance Department of the Autonomous Region of Madeira, dissolved by this decree in accordance with the provisions of no. 3 of the preceding article."

On the other hand, pursuant to article 4º, no. 1 of the same decree "Pending the creation of the new regional organism, the organizational structures of the Finance Department of the Autonomous Region of Madeira shall be maintained, with the respective personnel functionally assigned to the Regional Secretariat of Planning and Finance".

1. By Regional Regulatory Decree no. 29-A/2005/M, of 31.08, the Regional Government approved the organic structure of the Regional Directorate of Tax Affairs, providing, in no. 1 of article 1º, that "The Regional Directorate of Tax Affairs, abbreviated as DRAF, is the department of the Regional Secretariat of Planning and Finance which has as general duties, with respect to own revenues of the Autonomous Region of Madeira, to practice all acts necessary for their administration and management of taxes on income, on expenditure and on property and other taxes legally provided for (…)."

However, it was established in article 46º, no. 1 of the same decree that "Until all the logistical means necessary for the exercise of the full scope of the powers and duties provided for in articles 1º and 2º of this decree are in place, the DGCI, through its departments and services will continue to ensure the carrying out of the administrative procedures necessary for the exercise of the duties and powers transferred to the Autonomous Region of Madeira, including those relating to the assessment and collection of taxes that constitute own revenue of the Autonomous Region of Madeira."

1. On the other hand, pursuant to article 17º, no. 1 of Organic Law 1/2007, of 19 February, "Each Autonomous Region's revenue comprises the corporate income tax:

a) Due by legal entities or equivalent entities that have headquarters, actual management or stable establishment in a single region".

In accordance with article 51º, no. 1 of the same law "The regional administrative powers, in tax matters, to be exercised by the respective regional governments and administrations, comprise:

a) The capacity of the Autonomous Regions to be active subjects of the taxes collected therein, whether of regional or national scope, pursuant to no. 2.

b) The right to delivery, by the State, of the fiscal revenues that should belong to them, in accordance with the provisions of articles 14º and subsequent"

By its turn, pursuant to no. 2 of the same article "The capacity of the Autonomous Regions to be active subjects of taxes collected therein comprises:

a) The power of the regional Governments to create the tax services competent for the assessment, collection and charging of taxes of regional scope;"

On the other hand, it should be noted that pursuant to no. 4 of article 51º of the same Law "National taxes that constitute regional revenues and regional taxes and fees should be identified as such to taxpayers in tax forms and documents, whenever they are collected by the State tax administration".

1. By Regional Legislative Decree no. 27/2008/M, of 27.05.2008, the Legislative Assembly of the Autonomous Region of Madeira carried out the Organic and functional adaptation of national tax legislation to the Autonomous Region of Madeira, determining, in particular, that "the legislative references made in articles (…) 82º, sub-paragraph b)(…) of the Corporate Income Tax Code (…) are understood to refer to the Regional Directorate of Tax Affairs."

However, article 15º of the same decree reserved that "The legislative adaptation made by this regional legislative decree is made without prejudice to the provisions of article 46º in Regional Regulatory Decree no. 29-A/2005/M, of 31 August, decree that approved the organization of the Regional Directorate of Tax Affairs" which is equivalent to establishing that the DGCI, through its departments and services continued to ensure the carrying out of the administrative procedures necessary for the exercise of the duties and powers transferred to the Autonomous Region of Madeira, including those relating to the assessment and collection of taxes that constitute own revenue of the Autonomous Region of Madeira.

1. Organic Law no. 1/2010, of 29 March came to amend Organic Law no. 1/2007, modifying sub-paragraph a) of no. 2 of article 51º restoring wording identical to that contained in the Political-Administrative Statute of the Autonomous Region of Madeira and of the first Autonomous Regions Financial Law, above set forth. In fact, it was again provided in this sub-paragraph that "The power of the regional Governments to create the tax services competent for assessment, collection and charging of the taxes of which they are active subjects".[3]

2. Regional Regulatory Decree no. 2/2013, of 28.12.2012, which approved the Organic Law of the Regional Directorate of Tax Affairs provides in its no. 3 that:

"-It falls in particular to the DRAF and with respect to own fiscal revenues:

a) To ensure the assessment and collection of taxes on income, on property and on consumption and other taxes that it is charged with administering, as well as collecting and charging other revenues of the Region or of legal entities of public law".

However, following the path of Regional Regulatory Decree 29-A/2005 and Regional Legislative Decree 27/2008/M, it is established in article 12º, no. 1, that "Until all the logistical means necessary for the exercise of the full scope of the duties and powers provided for in article 2º of this decree are in place, the AT, through its departments and services, will continue to ensure the carrying out of the administrative and computer procedures necessary for the exercise of the duties and powers transferred to RAM, including those relating to the assessment and collection of taxes that constitute own revenue of RAM"

1. As Sérgio Vasques writes "It is important to bear in mind that which the legislator forgot when enacting the Autonomous Regions Financial Law, that our major taxes nowadays are not truly assessed and collected by the peripheral services of the tax administration, as they were until the last century, but rather self-assessed and paid by the taxpayers themselves through a system managed by the central services of the administration. This anachronism of the Autonomous Regions Financial Law and the political-administrative statutes gives rise to various uncertainties in the establishment of regional powers in tax matters, in particular with respect to Madeira, where a process of regionalization of the tax administration was carried out with the most harmful results through Decree-Law 18/2005, of 18 January, Regional Legislative Decree no. 27/2008/M, of 3 July, and Regional Regulatory Decree no. 29-A/2005/M, of 31 August"[4].

2. In any case, it results from the legislative pathway set forth above that AT never ceased to "ensure the carrying out of the administrative and computer procedures necessary for the exercise of the duties and powers transferred to RAM, including those relating to the assessment and collection of taxes that constitute own revenue of RAM", including under Regional Regulatory Decree no. 2/2013, in force at the time of the assessments sub judice, so that the Respondent has the necessary powers for the performance of the assessments in question, and it can still be considered that, unequivocally, the tax in question was subject to its administration.[5]

Thus being, since the tax acts were performed by the Respondent and the same has the competence for that purpose, administering the tax, there is no doubt that the tax acts in question are subject to arbitral jurisdiction pursuant to articles 2º, no. 1, sub-paragraph a) and 4º, no. 1 of RJAT and, further, articles 1º and 2º of Order no. 112-A/2011, of 22 March, the arbitral tribunal having competence.

Thus being, the dilatory exception in question is unfounded.

Passive Illegitimacy of AT

1. The Respondent further invokes the passive illegitimacy of ATA, alleging that it is not the active subject of the tax legal relationship, nor holder of the material relationship in dispute.

As Jorge Lopes de Sousa writes, in annotation to article 9º of CPPT "As results from no. 4 of this article 9º, all persons who have legitimacy to intervene in the tax procedure also have legitimacy to intervene in the tax judicial process" (TAX PROCEDURE AND PROCESS CODE Annotated and Commented, áreas Publisher, 2006, Vol. I, page 116).

In the case sub judice, we are faced with tax assessment acts performed by the Respondent, having competence for that purpose and administering the tax.

Now, since AT has legitimacy for the tax procedure, as indeed it accepted upon performing all acts thereof, including the assessment, and results from article 9º, no. 1 of CPPT, it cannot but be concluded that it has legitimacy for the tax arbitral process.

Moreover, this general principle also results from general administrative procedural law since, being at issue the challenge of an administrative act, passive legitimacy is conferred on the "legal entity of public law or, in the case of the State, the ministry to whose organs the challenged legal act is attributable" [6], which excludes the passive illegitimacy of an entity belonging to a legal entity other than the author of the act.

Moreover, as is clearly apparent, it would make no sense for legitimacy to judicially defend a tax assessment act to belong to someone other than its author, insofar as it is the one who performed it who is in the best position to defend the legality of its performance.

On this point, in fact, the AT's position appears to be contradictory, in assuming its legitimacy to perform the assessments sub judice and not considering itself a legitimate party to intervene in the proceedings in which such act is challenged.

We thus declare that AT holds, exclusively, passive legitimacy in the present action, judging the invoked exception of illegitimacy of this entity to be unfounded.

DO MERITS OF THE CASE

1. As the claimant has imputed various defects to the challenged tax acts, the order of examination of the same must be determined, observing the order of article 124º of CPPT, applicable by virtue of article 29º, no. 1, sub-paragraph a) of RJAT (See Jorge Lopes de Sousa, Commentary to the Legal Regime of Tax Arbitration, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, page 202).

The success of any of the defects invoked by the claimant will lead to the annulment of the tax act. However, the defect of violation of law is that which will lead to "the most stable or effective protection of the injured interests" to the extent that its possible success will prevent the renewal of the act, which does not occur with the annulment resulting from the other defects.

In conformity, the Tribunal will first examine the defect of violation of law.

1. As results from the evidence, in field 314 ("deductible tax losses") of the income return that it filed on 25.07.2013, for the fiscal period 2012, the Claimant entered the amount of € 36,412,922.85 which it alleged to have been accumulated over the fiscal years of 2007, 2009, 2010 and 2011.

The issue to be decided in the present proceedings relates to the question of whether or not the Claimant can deduct the tax losses allegedly accumulated in the years 2010 and 2011.

The Respondent understands that it cannot, basing itself on the fact that, with respect to such fiscal periods, the Claimant did not submit its tax returns within the legal time limit, and consequently ex officio assessments were issued.

1. The Respondent understands that because the Corporate Income Tax returns for 2010 and 2011 were filed outside the legal time limit implies the cessation of the presumption of truthfulness of the same and in consequence, it would fall to the Claimant to prove the actual occurrence of the deductible losses contained therein.

According to the Respondent, only declarations of taxpayers "presented in accordance with law" are presumed to be truthful, which would include the time limit for presentation of the declaration. Thus, if the declaration is presented outside the time limit, it is not presented "in accordance with law" and, in consequence does not enjoy the presumption of truthfulness.

1. The Claimant, differently, understands that the expression "presented in accordance with law" does not include the respective time limit, but that, if this is not understood, at least the declaration for the year 2011 was presented within one year from the end of the legal time limit.

Additionally, the Claimant understands that, even if it is understood that the expression "in accordance with law" includes the time limit, in the case at issue it will be relevant the fulfillment of the time limit for the year 2012 and not the fulfillment of the time limits for the fiscal periods of 2010 and 2011, since it is not the assessments for such fiscal periods that are at issue in the present proceedings.

1. On the ex officio assessments provided for in sub-paragraphs b) and c) of no. 1 of article 90º of CIRC, Rui Duarte Morais writes:

"Article 83º, no. 1, sub-paragraphs b) and c) provide that, in the absence of submission of the periodic income return (broadly speaking, the return in which the determination of the tax result for the preceding fiscal year is made), the tax administration shall proceed, ex officio, with the assessment, which shall be based on the total taxable base of the fiscal year most closely related which is determined (and from which no tax in arrears of a value less than the "minimum tax" to which taxpayers covered by the simplified regime are subject cannot result) or, failing such data, on the elements available.

We have doubts regarding the meaning of this ex officio assessment. We think that its objective is no more than to prevent possible expiry of the right to (any) assessment.

The amount thus fixed will, necessarily, be provisional (as, indeed, is also self-assessment, since it always remains subject to a possible later correction by the tax administration). In reality, it would make no sense for the ex officio assessment made in such terms to be deemed an adequate substitute for the declaration which the taxpayer did not make. Besides potentially resulting in an incomprehensible advantage for the defaulting taxpayer (being taxed on the basis of the result of a prior fiscal year could result in payment of less than what he would be obliged to, due to a positive evolution of the results of his business), it would mean abandoning any claim to base the taxation in question on the profit (result) actual or even normal of that taxpayer.

The failure of the taxpayer to comply appears to impose on the administration, in addition to proceeding ex officio to such a "provisional" assessment, the functional duty of, within the expiry period of such right, carrying out an inspection action aimed at determining what profit was obtained by that taxpayer in the fiscal year in question and also its current situation (Notes to the Corporate Income Tax Code, almedina, 2007, page 208, underlining ours)

We understand that, for proper interpretation and application of the regime in question, the principles of the inquisitorial and material truth should be specially weighed together, and on the other hand the principle of practicability, in its relation with the value of administrative efficiency constitutionally enshrined in article 267º, no. 5 of the Constitution of the Portuguese Republic. This weighing should, further, be made in light of the principle of taxation of actual profit of companies, a corollary of the principle of contributory capacity.

Additionally, consideration may still be given to the principle of proportionality, as well as the principle "ne bis in idem". This, to the extent that we understand that the application of the regime in question should not constitute, in practice, a penalty for the taxpayer, in addition to that resulting from the General Regime of Tax Violations.

In the case at issue, the delay in submission of tax returns for the fiscal periods of 2010 and 2011 legitimize the ex officio assessments provided for in article 90º, no. 1, sub-paragraph b) of CIRC, as well as the application of the sanctioning regime of RGIT.

On the other hand, as results from articles 75º, no. 1 of the General Tax Law, 59º, no. 2 of CPPT and 90º, no. 1, sub-paragraph a) of CIRC and jurisprudence has understood,[7] the failure to submit the taxpayer's declaration on time deprives the declarations presented by the taxpayer of the presumption of truthfulness, understood to mean that it was not presented "in accordance with law".

This understanding in no way interferes with article 73º of the General Tax Law, to the extent that proof is admitted on the part of the taxpayer of excess quantification, pursuant to article 74º, no. 3 of the same decree, which means that the taxpayer is granted the right to prove the truthfulness of the taxable base contained in its declaration not presented "in accordance with law", through the general means of proof.

1. What has just been said has relevance for the 2010 and 2011 assessments and is not directly at issue in the present proceedings, since the tax assessment sub judice relates to the fiscal period 2012.

The ex officio assessments of 2010 and 2011 could only indirectly influence the assessment of 2012, to the extent that the Claimant invokes having had tax losses in 2010 and 2011 which it would wish to deduct in 2012, but such tax losses were not considered in the ex officio assessments of 2010 and 2011, given the nature of the same.

1. Regardless of the question of whether, in this type of assessment, AT has (and if in all cases) "the functional duty of, within the expiry period of such right, carrying out an inspection action aimed at determining what profit was obtained by that taxpayer in the fiscal year in question" the following question must be answered: Do the ex officio assessments of 2010 and 2011 automatically have consequences in other fiscal periods?

In our view, no provision legitimizes, based on those ex officio assessments or on the delays of the taxpayer that originated them, the removal of the presumption of truthfulness of the taxpayer's declarations, with respect to another fiscal period, but only for the fiscal periods to which they relate.

For the taxpayer's declaration to enjoy the presumption of truthfulness, it must be presented "in accordance with law", as results from articles 75º, no. 1 of the General Tax Law and 59º, no. 2 of CPPT. And compliance with the law, as regards the time of presentation, is the time limit for the fiscal period in question.

We thus conclude that these facts, by themselves, do not remove the presumption of truthfulness of the Claimant's income return with respect to fiscal year 2012, provided that it was presented "in accordance with the terms provided for in law".

1. It is thus necessary to examine the income return(s) of the taxpayer with respect to the fiscal period in question.

In the case at issue, the Claimant filed an initial return on 31.05.2013, from which a tax loss of 2,549,238.41 € resulted, no tax being assessed or recovered.

In the amended return filed on 25.07.2013, a taxable profit of 2,771,670.16 € was calculated, deductible tax losses of 36,412,922.85 € (which had not been presented in the initial return), deducted tax losses in the amount of 2,078,752.62 (which consequently had not been presented in the initial return) and 692,917.54 € of taxable base from which a tax collection of 27,716.70 € resulted (by applying the 4% rate), special payment on account of 70,000.00 € (which was also not presented in the initial return) and withholdings at source of 7,124.45 € (which were also not presented).

The return ultimately presents Corporate Income Tax to recover of 7,124.45 € (field 362 of model 22) and a total to recover in the same amount.

According to the initial return there was no value to recover.

1. As decided by the arbitral tribunal, also constituted under the aegis of CAAD, in case no. 10/2013-T, invoked by the Respondent, "there shall be place for the presumption of truthfulness of declarations presented by taxpayers only when the same are presented within the legally established time limit for such".

The question that arises in the present proceedings is whether the Corporate Income Tax return model 22 whose presumption of truthfulness is in dispute is, in reality, an amended return of a primitive return presented within the legal time limit[8].

Article 59º of CPPT provides:

"(…)

No. 3- In the case of factual or legal error in the declarations of taxpayers, these may be amended:

(…)

b) Without prejudice to the contravention liability to which the case is subject, when from this declaration results tax superior or refund inferior to that previously calculated, in the following periods:

(…)

II) Until the end of the gracious complaint or judicial challenge period of the assessment act, for the correction of errors or omissions attributable to taxpayers from which results tax of an amount less than that assessed on the basis of the return filed;

No. 5- "In cases where the errors or omissions to be corrected result from disagreement between the taxpayer and the service in the qualification of acts, facts or documents invoked in an amended declaration presented within the legal period for gracious complaint, with relevance to the assessment of the tax or well-founded doubt as to the existence of such acts, facts or documents, the head of finance must convert the amended declaration into a gracious complaint of the assessment, notifying the taxpayer of the decision."

1. On the other hand, article 122º of CIRC provides, in the following terms:

"1- When tax lower than owed has been assessed or tax loss greater than the actual has been declared, an amended declaration may be presented, even if outside the legally established time limit, and the missing tax paid.

2- Self-assessment from which resulted tax greater than owed or tax loss less than the actual may be corrected by means of an amended declaration to be filed within one year from the end of the legal time limit"

1. In our view, the teleological element of the provisions in question points to a necessary relationship of at least intrinsic coherence between the amended return and the amended declaration, the law aiming to provide the taxpayer with the possibility of correcting errors committed in the return to be amended, materially basing, the amended return, on the return to be amended.

The regime allows for the filing of an amended return, but not of a new declaration unrelated to the prior one. If this were not the case, a means of extending the time limit for filing the income return would be found, it being sufficient for that purpose to formally present any declaration even if completely unrelated to the tax-legal reality and the material truth of the taxpayer.

1. The divergences between the returns, in the case sub judice, can be summarized as follows:

Save the absence of continuity between the two returns and the intense incoherence of the same, which results, immediately, from the circumstance that in the first return a negative net result of 2,634,390.56 € is presented and in the second a positive result of 2,658,547.30 € has been presented.

This incongruity alone would be sufficient to conclude that there is no minimum continuity between the two returns.

This is further reinforced by the incoherence between the returns, being highlighted among them the presentation in the second return of deductible tax losses in the amount of 36,412,922.85 € which did not appear in the first return.

1. On the other hand, in our understanding, for an amended return, pursuant to article 122º of CIRC, to be considered presented "in accordance with the terms provided for in law" for purposes of article 75º of the General Tax Law, it is necessary that the return which it aims to amend also have been.

It happens that the first return was not presented in accordance with law to the extent that, objectively, in accordance with the second return of the Claimant, the principle of good faith was not complied with in the first return, to the extent that the duty of truthfulness of the declaration was violated actively and intensely, a component of the obligations of loyalty and cooperation, inherent to the obligation to act according to good faith. [9]

In fact, article 48º, no. 2 of CPPT provides that "The taxpayer shall cooperate in good faith in the instruction of the procedure, explaining in a complete and truthful manner the facts of which he has knowledge (…)".

The Claimant omitted from the first return for 2012 facts that it had declared (tardily but "recorded centrally") in the returns for 2010 and 2011 (deductible tax losses) and which it came to declare in the second return for 2012, whereby, solely for this reason it is certain to conclude that the Claimant consciously violated the duties of cooperation and good faith.

On the other hand, according to the rules of experience it is not reasonable to admit that the Claimant was on 31.05.2013 convinced that it obtained a negative taxable profit of 2,634,390.56 €, taking into account that barely two months later it declared a positive result of 2,658,547.30 €.

Taking into account this factuality, one cannot accept that the second declaration of the taxpayer enjoys the presumption of truth to the extent that the same, not having been presented within the normal time limit, was only admitted as an amendment of a declaration which, according to the content of the one that would come to amend it, objectively violates in a positive manner the duty of truthfulness to which taxpayers are bound in their declarations to AT.

A different solution would amount to allowing an advantageous situation for the taxpayer that violates in an active manner the duty of truthfulness, by comparison with the taxpayer that only violates the duty of cooperation in an omissive manner, by filing its return belatedly, which is not acceptable, since the active violation of the duty of truthfulness is more serious than the violation of cooperation duties by omission.

1. Moreover, as António Menezes Cordeiro writes regarding the figure of «Tu quoque» "(…) functions, also, in the non-contractual field. It imposes there that whoever has established a right, formally correct, in a material legal situation that does not correspond to that desired by the legal order cannot, as a consequence thereof, exercise its position of manner unscathed. The possibilities of exercise are restricted or, even, suppressed – with the consequent extinction of the implied right"[10].

In the case at issue, even if the interpretation of article 122º that we sustain was not correct, there would be the occurrence of this modality of inadmissible exercise of legal positions, to the extent that, in such hypothesis, the right to present the amended declaration, even if it had been established in formally correct terms (the first return had been filed within the time limit), would rest on a material legal situation not corresponding to that desired by the legal order, because objectively, violative of the duty to act in accordance with good faith.

Also in this measure, because based on the positive violation of acting in accordance with good faith, it cannot be considered that the second declaration was presented in accordance with law, not enjoying, thus, the presumption of truthfulness and good faith provided for in article 75º, no. 1 of the General Tax Law.

1. Not enjoying the second declaration of the taxpayer, in the present case and for the reasons pointed out, the presumption of truthfulness, it fell to the Claimant the burden of (objective) proof of the deductible and deducted tax losses, according to the same declaration. However, from the proceedings no proof emerges in this direction, nor did the Claimant propose to make it.

Thus being, the invocation of illegality of the tax acts sub judice, on the grounds of violation of law, is unfounded.

1. The claimant further invokes the violation by the Respondent, in the administrative procedure, of the principle of the inquisitorial.

This constitutes one of the principles of the tax procedure (article 55º of the General Tax Law) and pursuant to article 58º of the General Tax Law it imposes that "The tax administration must, in the procedure, carry out all necessary steps to satisfy the public interest and to discover the material truth, not being subordinated to the initiative of the party to the action".

As was decided in the judgment of the Supreme Court of Administration of 21-10-2009, delivered in case no. 0583/09 "The inquisitorial principle is situated upstream of the burden of proof".

It is further sustained in this judgment that "the necessity / obligation of the Tax Administration to intervene in the use of the inquisitorial principle will always be related to the specific question at issue."

1. In the case at issue, there is the occurrence of a set of circumstances that deserve to be weighed for purposes of assessing respect for the inquisitorial principle.

AT in justifying the decision to not accept the tax losses in question invokes the untimely filing of the income returns for the periods of 2010 and 2011, not invoking suspicion of lack of correspondence to the reality of the losses presented by the Claimant and, despite alleging the belatedness of the returns, refers to them as being "recorded centrally".

On the other hand, AT made the assessment in accordance with the second return presented by the Claimant, only with the reservation of the non-acceptance of the deduction of the tax losses in question, for the reasons pointed out.

With respect to deductible tax losses, this second return is coherent with the returns (tardily but "recorded centrally") presented for the periods of 2010 and 2011.

1. From these facts of the tax procedure emerges a situation of objective doubt, about the actual occurrence of the tax losses in question, which should have been clarified in the tax procedure.

Thus, in our view, in the present case, it would be justified that AT carry out, prior to the assessment, complementary steps aimed at discovering the material truth, including, in the limit, an inspection of the Claimant. These steps seem to be especially justified, given the high amount of deductible tax losses presented by the claimant (and which may still be deducted in subsequent fiscal periods enjoying, in our understanding and in accordance with the above, will enjoy the presumption of truthfulness, if presented "in accordance with law").

The disparity of the two returns presented for fiscal year 2012 is another of the reasons that would point to the carrying out of a tax inspection in light of article 27º, no. 1, sub-paragraph d), "in fine", of the Supplementary Regime of Tax Inspection Procedure.

In this measure, the pursuit and satisfaction of the public interest imposed the carrying out of steps aimed at discovering the material truth.

In the same sense would point the principle of impartiality expressly mentioned in article 55º of the General Tax Law and constitutionally enshrined in article 266º, no. 2 of the Constitution of the Portuguese Republic.

1. The non-observance of legal duties by the Claimant, which was pointed out above, does not constitute grounds for exemption from observance of the inquisitorial principle by the Respondent. Those behaviors have unfavorable consequences for the Claimant in other areas, in particular in terms of presumption of truthfulness of the declaration and in the area of tax violation.

In fact, as Jorge Lopes de Sousa writes "In the case of individuals not complying with the cooperation duties which the law imposes on them, the tax administration is not dispensed from ascertaining the facts that interest the decision of the procedure, as derives from the principle of the inquisitorial, stated in article 58º of the General Tax Law, and is provided for in article 91º, no. 2 of the CPA."[11]

1. All weighed, it is considered that, in the present case, AT did not carry out in the procedure all the necessary steps to satisfy the public interest and to discover the material truth, having violated article 58º of the General Tax Law, which constitutes grounds for illegality of the tax act, as write Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa "(…) the failure by the tax administration to carry out steps which it is able to carry out or the failure to request from the interested parties the probative elements necessary for the instruction of the procedure constitutes a procedural defect, capable of implying the annulment of the decision taken therein"[12]

Thus being, the assessment acts under examination cannot remain in the legal order, imposing their annulment.

This prejudices the examination of the other procedural defect alleged by the Claimant consisting in the alleged omission of conversion of the amended declaration into a complaint, provided for in article 59º, no. 5 of the Code of Tax Procedure and Process.

IV – Decision

Thus, the arbitral tribunal decides:

a) Judge the dilatory exception of incompetence of the arbitral tribunal and the dilatory exception of illegitimacy, invoked by the Respondent, to be unfounded.

b) Judge the challenge to be well-founded, with the grounds indicated and, in consequence, declare the annulment of the challenged tax acts.

Value of the action: 30,585.02 € (thirty thousand five hundred and eighty-five euros and two cents) pursuant to the provision of article 315º no. 2 of CPC and 97º-A, no. 1, sub-paragraph a) of CPPT and 3º, no. 2 of the Regulation of Costs in Arbitration Proceedings.

Costs payable by the Respondent, in the amount of 1,836.00 €, pursuant to no. 4 of article 22º of RJAT.

Lisbon, CAAD, 26 September 2014

The Arbitrator

(Marcolino Pisão Pedreiro)

[1] As observed in the arbitral decision delivered in case 260/2013 of 6.05.2014 "From the analysis of this provision, it is verified that, legally and despite referring to being active subjects of the taxes collected therein, whether of regional or national scope, competence is only granted to the Autonomous Regions to create the tax services competent for the assessment, collection and charging of taxes of regional scope".

[2] Current article 90º of CIRC.

[3] Curiously, with the current Autonomous Regions Financial Law no. 1/2013 (entering into force on 1.01.2014) another amendment occurred at this point, with the reestablishment, in no. 2, sub-paragraph a) of Article 61º, of the wording of article 51º, no. 2, sub-paragraph a) of Law 1/2007.

[4] Manual of Tax Law, Almedina, 2011, page 324, note 522.

[5] In different sense, in a situation where the factual matter was, also, different see the decision delivered by the Arbitral Tribunal in case 89/2012-T, which can be consulted on the official website of CAAD, at www.caad.org.pt.

[6] Article 10º, no. 2 of CPTA.

[7] See Judgment delivered by the Arbitral Tribunal in case 10/2013-T of 5.07.2013 (which can be consulted at www.caad.org.pt) and Judgment of the Central Administrative Court North, of 30.03.2006, delivered in case 00272/04, 2nd Section which can be consulted at www.dgsi.pt).

[8] In contrast to the situation of the two judgments cited/referred to. In such cases, the matter in dispute was, in particular, the presumption of truthfulness of declarations outside the legal time limit and without being intended to amend another declaration.

[9] The Tribunal cannot formulate any opinion about the correspondence or lack of correspondence to reality of the second declaration to the extent that the parties did not produce any evidence regarding such matter.

[10] ON GOOD FAITH IN CIVIL LAW, Vol. II, Thesis Collection, Almedina, 1985, page 851.

[11] Tax Procedure and Process Code Annotated and Commented, Volume I, 2006, page 412.

[12] General Annotated and Commented Tax Law, 4th Ed., 2012, Written Encounters, page 488.