Process: 99/2018-T

Date: October 22, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 99/2018-T) addresses the tax credit for international double taxation under Article 81 of the Portuguese IRS Code. The taxpayer declared capital income of €116,807.48 earned in the United Kingdom in 2013, with foreign withholding tax of €12,828.97, supported by UK bank documentation. The Portuguese Tax Authority (AT) rejected this declaration, demanding correction to show €135,701.86 income and zero foreign tax paid, arguing that foreign tax withholding must be certified by the foreign tax authority per Circular Letter 20/022 from 2000, not merely proven by bank documents. The taxpayer contested additional assessments totaling €16,761.63, arguing that bank documentation from paying institutions is sufficient proof under Article 81 of the IRS Code and the Portugal-UK Double Taxation Convention. The taxpayer also alleged material error, claiming the AT incorrectly assumed amounts were in British pounds rather than euros. The core legal issue is whether administrative circulars requiring foreign tax authority certification bind taxpayers, or whether bank-issued documents suffice to prove foreign withholding tax and qualify for the double taxation credit. The taxpayer asserted that court jurisprudence supports accepting bank documentation and that the AT could have used information exchange mechanisms under Article 25 of the Portugal-UK Convention to verify the information if doubts existed, rather than automatically rejecting the credit claim.

Full Decision

ARBITRAL DECISION

PARTIES

Claimant: A..., NIF..., resident at ..., no..., ...-... Lisbon

Respondent: TAX AND CUSTOMS AUTHORITY (AT)

I. REPORT

On 12 March 2018, the Claimant submitted to CAAD a request for arbitral pronouncement (RAP) requesting, under the Legal Framework for Arbitration in Tax Matters (RJAT), the constitution of a singular arbitral tribunal (SAT).

THE REQUEST

The Claimant requests the consequent annulment of "... acts of additional assessment of Personal Income Tax (IRS) no. 2017..., additional assessment of compensatory interest no. 2017..., and the respective statement of account reconciliation, all relating to the year 2013 ... from which resulted a balance to pay of € 16,761.63".

It petitions, in the first place, the annulment of the decision that rejected the gracious claim it lodged against the aforementioned acts, on 26 September 2017 and which was notified to it on 20 December 2017.

THE CAUSE OF ACTION

The Claimant, because it presented on 09.04.2015 a Personal Income Tax (IRS) Form 3 – Annex J – regarding income earned in 2013, where 116,807.48 euros of capital income appears, earned in the United Kingdom and withholding tax values of 12,828.97 euros, having paid the resulting assessment,

and because the values declared by the Claimant are supported by documents issued by the United Kingdom banking entities,

does not agree with the notification that the Respondent made to it on 06 April 2017, inviting it to correct the aforementioned declaration, in the sense that the amount of income to be declared would be 135,701.86 euros and the foreign tax paid to be considered would be 0.00 euros, since this value does not correspond to what is stated in the bank documents in its possession.

The Claimant understands that the position of the AT, which results from Circular Notice no. 20,022 of 19 May 2000, in the sense of only considering the withholding of foreign tax if proved by the foreign tax authority, does not bind individuals, sufficing instead, in order for the right to a tax credit for international double taxation to function, that the value of the income and the withholding tax are proved by document issued by the banking institutions that pay the income and carry out the withholding of the tax.

And for the reason that this is the sense of the uniform decisions of the courts. On the other hand, the AT could, if it had doubts as to the truthfulness of the values contained in the documentation issued by the foreign paying banks, make use of, namely, the information exchange regime provided for in Article 25 of the Convention to Avoid Double Taxation concluded between Portugal and the United Kingdom.

The Claimant further points out a situation of material error in the assessment, when the AT departs from the consideration that the values declared in Form 3 of the IRS would be expressed in sterling pounds and not in euros, which is at odds with the literal wording of the documents issued by the paying banks.

The cause of action may be considered summarized in the following passage from the RAP: "... the documents presented by the Claimant appear to be sufficient to support the right to deduction from the tax collection under Article 81 of the IRS Code", insofar as they contain the income earned, duly quantified and characterized within the category of capital income and likewise the computation of the withholding of foreign tax.

OF THE SINGULAR ARBITRAL TRIBUNAL (SAT)

The request for constitution of the SAT was accepted by the President of CAAD and automatically notified to the AT on 14-03-2018.

By the CAAD Deontological Council, the signatory of this decision was appointed arbitrator, with both parties being notified thereof on 04.05.2018. The parties did not express any intention to refuse the appointment, pursuant to Article 11, no. 1, paragraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

The Singular Arbitral Tribunal (SAT) has been, since 24.05.2018, regularly constituted to examine and decide the subject matter of this dispute (Articles 2, no. 1, paragraph a) and 30, no. 1, of the RJAT).

All of these acts are documented in the records contained in the Case Management System which are hereby considered reproduced.

On 24-05-2018 the AT was notified in accordance with and for the purposes of Article 17-1 of the RJAT. It responded on 28.06.2018 and attached the file in computer files identified as "RG....pdf", "1(rec ...(1).pdf)" and "2(rec ... pdf)".

On 28.06.2018, because the Claimant enrolled two witnesses, it was invited to indicate whether it maintained an interest in their examination, in light of the AT's response and if affirmative to refer to the facts to which they should give testimony.

On 09.07.2018 the Claimant reiterated its interest in producing witness testimony, via Skype, and indicated the facts contained in paragraphs 10 to 12 of the RAP to be the subject of the proof to be produced (that is, the witness testimony was intended to attest what documents 11, 12 and 13 attached to the RAP refer to);

The meeting of parties under Article 18 of the RJAT, with prior hearing of the enrolled witnesses, took place on 13.09.2018 as documented in the minutes attached to the Case Management System on that same day. Since the witnesses would express themselves in English and because the Claimant presented an interpreter, B..., given the elements and qualifications that the latter stated to possess, the Tribunal appointed him to the position, after he identified himself and swore to faithfully translate the questions and answers that were posed.

The two indicated witnesses, C... and D..., were heard, via Skype, with the intervention of the appointed interpreter, on the factual matter of paragraphs 10 to 12 of the RAP (that is, regarding the content of documents 11, 12 and 13 attached to the RAP);

The parties produced written final arguments. On 25.09.2018 the Claimant argued and on 09.10.2018 the Respondent counter-argued, with both parties maintaining the positions already assumed.

At the meeting of parties the date for the pronouncement of the final decision was scheduled.

PROCEDURAL PREREQUISITES

Legitimacy, capacity and representation – The parties are legitimate, enjoy legal personality and judicial capacity and are represented (Articles 4 and 10, no. 2, of the RJAT and Article 1 of Regulatory Order no. 112-A/2011, of 22 March).

Principle of contradictory – The AT was notified in accordance with paragraph n) of this Report. All procedural documents and all documents attached to the proceedings were made available to the respective counterparty in the CAAD Case Management System. Both parties were always notified of their attachment.

Dilatory exceptions – The arbitral procedure does not suffer from nullities and the request for arbitral pronouncement is timely since it was presented within the prescribed deadline in paragraph a) of no. 1 of Article 10 of the RJAT, as results from the fact that the Claimant presented the request for pronouncement on 05.02.2018 and was notified of the decision rejecting the gracious claim on 20.12.2017 (as alleged in paragraph 21 of the RAP and as per Document 1 attached with the RAP), timeliness that the AT does not challenge.

SUMMARY OF THE CLAIMANT'S POSITION
(in 95 articles constituting the RAP and in 115 paragraphs constituting the written arguments)

The Claimant came to summarize in Part I of its arguments its position, expressing the following:

1 – "... the quaestio decidenda here at issue is simple and nothing is concealed — it is only a matter of appreciating the (il)legality of the AT's action at the moment it seeks to deny the Claimant the right to a tax credit for international legal double taxation, provided for in Article 81 of the IRS Code and, in light of that, annul the additional assessments", since "... the Claimant had irreproachable conduct, declaring all income earned abroad and the respective tax withheld at source in its Personal Income Tax Form 3 (IRS) declaration for the year 2013 (Annex J), and kept all the supporting documentation to attest such amounts ... which was later reinforced by clarifying and unequivocal witness testimony".

2 – And it continues to state: "The AT accepted the income but rejected the tax credit, because in its view the declarations of the foreign banks were not sufficient proof to demonstrate the payment of tax abroad", a conclusion which results from the fact that "... after presentation of the respective Form 3, the AT began by saying that the Claimant was obliged to present a document authenticated by the Foreign Tax Authority (in this case, the United Kingdom)", which gave rise to the additional assessments here at issue.

3 – But, "already in the course of these proceedings, the AT came to raise doubts as to the truthfulness of the documentary evidence produced, thus seeking to deny the increasingly strong evidence of the Claimant's irreproachable conduct, but without complying at any time with any procedural and processual requirements to argue the falsity of the documents and always accepting them for one purpose (e.g. to prove the income), and rejecting them to serve as evidence of the payment of tax, all based on the fact that Circular Notice no. 20,022, of 19 May 2000 allegedly requires a certificate authenticated by the foreign tax authority in question".

4 – However, it continues to state "... in this case, the amount of tax paid abroad was fully proved by the bank documentation, as well as by the testimony of the witnesses", being that "... on other occasions of a nature identical to the present, the judicial and arbitral courts, ... annulled the additional assessments arising from the fact that the AT did not accept, illegally and illegitimately, the bank proofs presented by the taxpayers", referring to the judgment of the Central Administrative Court South handed down in case no. 3/13.5BELRS, on 23 February 2017 and to the arbitral decision adopted in CAAD Case no. 83/2014-T

5 - "Particularly because if any doubt remained — which manifestly is not the case — the AT should always have proceeded to clarify it through the vast range of fiscal information exchange mechanisms at its disposal, either through the Convention to Avoid Double Taxation concluded between Portugal and the United Kingdom, or through the law and European Directives that provide for and regulate the use of mutual assistance mechanisms between the different tax authorities", since "... such mechanisms do not consist of a mere power capable of being used by the AT according to criteria of opportunity or convenience, but represents an authentic functional power or, in other words, a "power-duty" for the discovery of material truth in the pursuit of the public interest",

6 – It concludes that "... having provided to the AT unequivocal proof of the amount of income earned abroad in 2013 and the respective tax withheld at source, this entity could not disregard such proof without more, being instead obliged, in light of the principle of legality, good faith, the inquisitorial principle and the pursuit of material truth, to make use of the information exchange means at its disposal, should it wish to obtain any additional confirmation from its foreign counterparts", "however, at no time did the AT abandon the inadmissible posture of denial and passivity it adopted".

7 – It adds that the AT: "... instead of acting in accordance with those principles that govern its action, recognizing what was fully demonstrated by the Claimant" "... accepted the income, denied the credit, and, instead of questioning the foreign tax authorities for clarification on any aspect it considered relevant, went on to justify and ground its actions posteriori, ... denying the evidence in complete disregard of the principle of legality".

It considers that the impugned assessments suffer from a defect of form, due to lack of reasoning, not indicating the norm that serves as their basis and the calculation method, not being clear, sufficient and congruent in fact and in law.

It argues that the assessments further suffer from defects of violation of law by requiring "bound proof" which nos. 1 and 2 of Article 81 of the IRS Code do not require, and that the Circular Notice 20,022 of 19 May 2000 should be considered as not binding on individuals, as decided by the TCAN judgment cited in x) -4 above.

On the other hand, it considers that an error occurred in the quantification of income when the AT considered that certain interest paid by BNP was declared in Form 3 of the IRS in sterling pounds, when it was declared in euros.

It concludes by requesting the annulment of the decision rejecting the gracious claim, the annulment of the impugned assessments and their reimbursement.

SUMMARY OF THE RESPONDENT'S POSITION
(in 44 articles contained in the AT's Response and in 41 numbered paragraphs contained in the counter-arguments)

The AT advocates for the maintenance in the legal order of the acts impugned by understanding that they constitute a correct application of the law to the facts.

The AT first states in the Response that "...it challenges all the factual matter alleged by the Claimant, because it does not correspond to the truth, or because the intended legal effects cannot be drawn from it".

Subsequently, in short, it alleges in defense of its point of view what already appears in the reasoning of the decision rejecting the gracious claim, which results from the final part of no. 5 of the counter-arguments.

That is, the AT defends the following (express reasoning of the decision rejecting the gracious claim): "The Tax and Customs Authority proceeded to assess tax, resulting in the assessment(s) no. 2017 ... made on 18/04/2017, and based on the elements in this file and consulting the computerized data through the central information system, it is verified that the claimant's allegations are without foundation, given that:

After analysis of the case file it is found that: within the scope of a divergence process created on 14.04.2015 the taxpayer was notified to present the authenticated documents of the income and tax paid abroad by the tax authority of the country in question (United Kingdom), in accordance with letter no. ... of 20.01.2017. On 01.03.2017, the taxpayer responded via postal service enclosing the same documents that had been presented on 30.04.2015 and which presents in the context of the gracious claim process. These documents were already sent on 09.03.2017 to the IRS Service Directorate, which responded that the documents do not meet the requirements because they were not issued or authenticated by the tax authorities of the State of origin of the income (United Kingdom). Furthermore, the IRS Service Directorate noted that the claimant did not apply the exchange rate referred to in no. 2 of Article 23 of the IRS Code (that of 31.12.2013, information from the Bank of Portugal - 0.8337) to convert the income declared in Annex J, in accordance with pages 108 of the case file. Thus, in field 420 the amount of income is not 6,606.72, but rather € 7,925.78 (£ 6,606.72/0.8337); field 422 the amount of income is € 19,934.81 (£ 16,619.65/0.8337); field 423 the amount of income is not 90,090.60, but rather € 107,841.27 (£ 90,090.60/0.8337). Adding these amounts the total amounts to € 135,701.86.

"Now, for purposes of granting a tax credit for international legal double taxation it is necessary, under Circular Notice no. 20,022 of 19.05.2000 of the former Directorate of Tax Benefits Services, that the taxpayer present an original or authenticated document that proves the nature of the income, the amount, the tax paid abroad. The documents presented are bank documents do not meet the requirements set forth in this Circular Notice. The tax administration is bound by the generic guidelines contained in circulars, regulations or instruments of identical nature, regardless of their form of communication, aimed at the uniformization of the interpretation and application of tax rules, in light of the provision of Article 68-A of the General Tax Law. For that reason, the aforesaid Circular Notice being a generic guideline aimed at uniformizing the interpretation and application of tax rules, the services that make up the tax administration are bound by it. They are not bound by the judgment mentioned by the claimant".

"Lack of reasoning: there is no lack of reasoning of the tax act, since the documents presented by the claimant do not total the amounts declared in Annex "J" of the declaration no. 25 of Lot J4124 of the year 2013. In fact, the taxpayer did not carry out the exchange rate conversion as of 31 December 2013, since sterling pounds do not have legal tender in Portugal. There is, therefore, no defect of form".

"Compensatory interest: there was a delay in the assessment of part of the tax, with a causal nexus between the taxpayer's conduct and this delay. In fact, the taxpayer should have acted with the diligence of a "bonus pater familiae" and converted the values of interest and dividends declared in fields 420, 422 and 423 of the table 4 of Annex J. In these terms, the taxpayer's conduct consisted in the culpable omission of a duty of care". It concludes: "... the assessment of compensatory interest must be maintained, because the prerequisites of Article 35 of the General Tax Law and Article 91 of the IRS Code are met".

Specifically regarding the alleged defect of lack of reasoning, it states that the Claimant received it, as can be seen from the letter sent to it in the context of the divergence management procedure, attached to pages 2 of document no. 8 attached to the RAP, concluding that "... the reasoning resulting from the decision that led to the issuance of the tax assessment act is "clear, sufficient and congruent", fulfilling its objective", "so much so that the Claimant makes evident, with crystal clarity, from both its gracious claim and the present request for arbitral pronouncement having perfectly understood the cognitive path traveled by the tax administration services that led to the decision here accused of suffering from lack of reasoning", whereby the decision fulfilled "...fully the requirements provided for in no. 1, of Article 77 of the General Tax Law, proving to be reasoned through the exposition of the facts and legal grounds that motivated it".

As for the alleged defect of violation of law, under the heading "of the failure to attach the documentation that proves the payment of tax in the United Kingdom", it states: "in the situation at hand in the present case, it is easy to see that the Claimant did not succeed in proving what was incumbent upon it". "so much so that, the documents attached with the present request for pronouncement do not demonstrate the nature of the income in question nor do they prove the payment of tax in the United Kingdom", since it is a matter of "... copies of documents issued by banking entities, in which values are referred from which the origin is unknown", adding the fact "... that the banking entities are not recognized as having the nature of a tax authority, with competence to issue an authenticated document showing that the tax was paid in the State where the income was allegedly earned.

And it concludes: "...inevitably, the documentation attached either in the course of the procedure or to the present case will have to be considered irrelevant", "besides being simple copies, they are not documents issued by the UK tax authorities that would allow proof of taxation in that State", "whereby they do not prove that such income was there subject to effective taxation, that is, the documents do not demonstrate the value of the tax assessed and whether it was paid".

It further advocates for the dismissal of the request for compensatory interest on the ground that the ex officio correction does not suffer from any illegality.

II - QUESTIONS THAT THE TRIBUNAL MUST RESOLVE

The question to be decided which is considered to be pivotal will concern the evidential value of documents 11, 12 and 13 attached to the RAP and on which witness testimony was produced.

These are bank documents issued by the English banks (the entities paying the income) which express the values paid and the tax withheld at source, documents entirely similar to those that banking entities issue, in Portugal, to all residents who wish to include this type of capital income and mandatorily to all non-residents, so that they can prove, before, namely, the Tax Authorities, the values earned and the tax withheld. The documents in question, issued in London by banks based there, were presented by the Claimant to the Respondent, within the scope of the procedure for discussing divergences in the Form 3 declaration (see the final part of no. 3 of Article 119 of the IRS Code).

The non-valuation in terms of proof, by the Respondent, of the documents presented by the Claimant, by part of the AT, is limited merely to the finding of the fact that the AT followed what is contained in the generic guideline contained in Circular Notice 20,022 of 19.05.2000 of the former Tax Benefits Services Directorate.

Should it be concluded that the documents are suitable to prove the income and the tax withheld at source, it is necessary to appreciate the legal force of what is contained in Circular Notice no. 20,022 of 19.05.2000 of the former Tax Benefits Services Directorate, insofar as

it states there that "it should be required a document evidencing the amount of the income, its nature and the payment of tax, which should be issued or authenticated by the Tax Authorities of the respective State from which the income originates" and that the documents "must be originals, or authenticated photocopies, and, in case they are drawn up in English, French or German, do not need to be translated, nor converted to escudos, and in any event must accompany the IRS declaration".

Specifically, in this case the AT, in light of what is stated in the Circular Notice here in question, only discusses the following: "... the documents do not meet the requirements because they were not issued or authenticated by the tax authorities of the State of origin of the income (United Kingdom). Furthermore, the IRS Service Directorate noted that the claimant did not apply the exchange rate referred to in no. 2 of Article 23 of the IRS Code (that of 31.12.2013, information from the Bank of Portugal - 0.8337) to convert the income declared in Annex J, in accordance with pages 108 of the case file.

Therefore, specifically, there are two essential situations that must be clarified here:

Question of fact - Did the Claimant present its 2013 IRS declaration, expressing some of the values declared (income and tax withheld) in euros or in sterling pounds?

Question of law - In light of the current tax legislation in force, can the documents relevant to prove, before the AT, the income here in question (of capital) from a foreign source and the value of the tax withheld only occur if they were issued or authenticated by the tax authorities of the State of origin of the income?

III. ESTABLISHED AND UNPROVEN MATTERS OF FACT
REASONING

With regard to the factual matter, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather, has the duty to select the facts that matter for the decision and discriminate the proven matter from the unproven matter (in accordance with Article 123, no. 2, of the CPPT and Article 607, no. 3 of the CPC, applicable ex vi Article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and delimited in light of their legal relevance, which is established in consideration of the various plausible solutions of the question(s) of law (in accordance with the former Article 511, no. 1, of the CPC, corresponding to the current Article 596, applicable ex vi Article 29, no. 1, paragraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence attached and also the witness testimony produced, the following facts were considered proven, with relevance to the decision, the facts listed below, indicating for each point brought to the established matters, the means of proof that were considered relevant, as reasoning.

Facts Proved

  1. During the year 2013, the Claimant earned income from category E (capital) from the United Kingdom, in the total amount of € 116,807.48, with tax withheld at source being retained in the total amount of € 12,828.97, namely:

a) Interest in the total amount of £ 16,619.65 (corresponding to two accounts, one in the amount of £ 14,368.58, and another in the amount of £ 2,251.07) paid by E... and originating from the United Kingdom, with total tax being withheld at source in the amount of £ 3,323.92 (corresponding to two accounts, one in the amount of £ 2,873.71 and another in the amount of £ 450.21, respectively) – values expressed in sterling pounds in Document no. 11 attached to the RAP;

b) Interest in the amount of € 90,090.60 paid by F... and originating from the United Kingdom, with tax withheld at source in the amount of € 6,806.25 - values expressed in Euros in Document no. 12 attached to the RAP;

c) Dividends in the amount of € 6,606.72 paid by F... and originating from the United Kingdom, with tax withheld at source in the amount of € 2,023.04 - values expressed in euros in Document no. 12 attached to the RAP:

in accordance with Articles 9 and 10 of the RAP, Documents nos. 11, 12 and 13 in annex to the RAP, pages 26 to 37 of the file attached by the AT with the Response, designated as RG...pdf and testimony of witnesses C... and D...;

  1. On 09 April 2015 the Claimant, regarding the income earned in 2013, presented to the AT a Form 3 declaration, attaching an Annex J – income obtained abroad – capital income, having indicated: (1) - in field 420 of table 4, euros 6,606.72 as dividends or profits – without withholding in Portugal and euros 2,023.04 as tax paid abroad; (2) – in field 422 of table 4, euros 20,110.16 as income from the savings directive no. 2003/48/EC – remaining countries not covered by the transition period and euros 3,999.68 as tax paid abroad; (3) – in field 423 of table 4, euros 90,090.60 as other income referred to in no. 5 of Article 72 of the IRS Code, without withholding in Portugal, and euros 6,806.25 as tax paid abroad – in accordance with Article 9 of the RAP, Document no. 10 attached to the RAP and pages 26 to 37 of the file attached by the AT with the Response, designated as RG...pdf;

  2. In field 14 of table 8 of Form 3, referred to in the previous number, no indication is given of the sending to the AT of any documents - in accordance with Document no. 10 attached to the RAP and page 26 of the file attached by the AT with the Response, designated as RG...pdf;

  3. With the date of 20 January 2017, the AT sent a letter to the Claimant with the following content: "Following analysis of the documents sent to this Tax Service, it is found that these do not meet the requirements of Circular Notice no. 20022, of 19/05/2000, were not issued/authenticated by the tax authorities of the State of origin of the income. You are hereby notified, for within a period of 15 days, to present the supporting documents of the income/tax paid abroad, in 2013, issued or authenticated by the tax authorities of the United Kingdom, declared in Annex J" – in accordance with Article 4 of the RAP, Document no. 5 attached to the RAP and Article 7 of the AT's Response;

  4. On 01 March 2017 the Claimant delivered to the AT a petition wherein it states the following: "In the year 2013, I earned capital income from the United Kingdom in the total amount of € 116,807.48, with tax withheld at source in the total amount of € 12,828.97 (as per Annex J attached as document no. 3 attached hereto). In fact, I obtained from the financial institution F... the information that I earned dividends in the amount of € 6,606.72 and that I received income from other securities in the amount of € 90,060.60, to which corresponded tax withheld at source in the amount of € 2,023.04 and € 6,806.25, respectively (as per document attached as document no. 4 attached hereto). The remaining foreign source income was paid by the financial institution E..., having earned income in the amount of € 20,110.16, to which corresponded tax withheld in the amount of € 3,999.68 (as per document attached as document no. 5 attached hereto). By comparison between Annex J of the IRS Form 3 declaration of the year 2013 and the two aforementioned documents I properly stated, in the proper place, the foreign source income earned and the respective tax supported by me. Notwithstanding the efforts made by the applicant to obtain all the required documentation, it was not possible for me in this short period of time to obtain documentation from the Tax Administration of the United Kingdom. However, it was through the attached documents that I learned of the income I obtained and the tax I paid abroad, which enabled me to fully comply with my tax obligations for the year 2013. There being no legal rule that imposes the presentation of bound proof, the documents issued by F... and E... are suitable and adequate means of proof to demonstrate the income I earned and the tax I bore abroad. Thus, the documents now presented confirm the elements declared in Annex J of the IRS Form 3 declaration of the year 2013. Should the AT see fit, I place no objection to the AT requesting additional information from the Tax Administration of the United Kingdom, whether within the scope of the information exchange established in Article 25 of the Convention to Avoid Double Taxation concluded between Portugal and the United Kingdom, whether within the scope of the Directive providing for the Automatic Exchange of Information, so as to, should it wish, reconfirm what is already confirmed by the aforementioned financial institutions" – in accordance with Article 5 of the RAP and Documents nos. 6 and 7 attached to the RAP

  5. Also on 01 March 2017 the Claimant delivered to the AT, jointly with the petition referred to in the previous item, the documents attached in annex to the RAP with nos. 11 to 13, from which the computation of income obtained in the United Kingdom and tax paid there may be ascertained, documents and withholdings at source referred to in point 2. above - in accordance with Article 5 of the RAP, Documents nos. 6 and 7 attached to the RAP and pages 37 to 40 of the file attached by the AT with the Response, designated as RG...pdf;

  6. On 06 April 2017 the Claimant was notified that "the sum of the Amount of Income to be considered in Annex J is in the amount of € 135,701.86 and the Tax Paid Abroad is € 0.00, whereby ... a correction document must be drawn up and collected in conformity" – in accordance with Article 6 of the RAP, Document no. 8 attached to the RAP and pages 106 and 107 of the file attached with the AT's Response, designated as ...pdf;

  7. With the final payment date of 01 June 2017, the Claimant was notified, on a day of the month of May 2017 not specifically determined, of the additional Personal Income Tax (IRS) assessment no. 2017..., additional compensatory interest assessment no. 2017..., and the respective statement of account reconciliation, all relating to the year 2013, from which resulted a value to pay of € 16,761.63 – in accordance with Article 3 of the file and documents nos. 2, 3 and 4 attached to the file;

  8. On 26 September 2017 the Claimant presented a gracious claim requesting the annulment of the tax acts referred to in the previous item, was notified on 16 November 2017 of the draft decision, to exercise the right of prior hearing, a right which it exercised on 27 November 2017, and was notified on 20 December 2017 of the decision rejecting the gracious claim, with the following reasoning: "The Tax and Customs Authority proceeded to assess tax, resulting in the assessment(s) no. 2017... made on 18/04/2017, and based on the elements in this file and consulting the computerized data through the central information system, it is verified that the claimant's allegations are without foundation, given that:

After analysis of the case file it is found that: within the scope of a divergence process created on 14.04.2015 the taxpayer was notified to present the authenticated documents of the income and tax paid abroad by the tax authority of the country in question (United Kingdom), in accordance with letter no. ... of 20.01.2017. On 01.03.2017, the taxpayer responded via postal service enclosing the same documents that had been presented on 30.04.2015 and which presents in the context of the gracious claim process. These documents were already sent on 09.03.2017 to the IRS Service Directorate, which responded that the documents do not meet the requirements because they were not issued or authenticated by the tax authorities of the State of origin of the income (United Kingdom). Furthermore, the IRS Service Directorate noted that the claimant did not apply the exchange rate referred to in no. 2 of Article 23 of the IRS Code (that of 31.12.2013, information from the Bank of Portugal - 0.8337) to convert the income declared in Annex J, in accordance with pages 108 of the case file. Thus, in field 420 the amount of income is not 6,606.72, but rather € 7,925.78 (£ 6,606.72/0.8337); field 422 the amount of income is € 19,934.81 (£ 16,619.65/0.8337); field 423 the amount of income is not 90,090.60, but rather € 107,841.27 (£ 90,090.60/0.8337). Adding these amounts the total amounts to € 135,701.86.

"Now, for purposes of granting a tax credit for international legal double taxation it is necessary, under Circular Notice no. 20,022 of 19.05.2000 of the former Directorate of Tax Benefits Services, that the taxpayer present an original or authenticated document that proves the nature of the income, the amount, the tax paid abroad. The documents presented are bank documents do not meet the requirements set forth in this Circular Notice. The tax administration is bound by the generic guidelines contained in circulars, regulations or instruments of identical nature, regardless of their form of communication, aimed at the uniformization of the interpretation and application of tax rules, in light of the provision of Article 68-A of the General Tax Law. For that reason, the aforesaid Circular Notice being a generic guideline aimed at uniformizing the interpretation and application of tax rules, the services that make up the tax administration are bound by it. They are not bound by the judgment mentioned by the claimant".

"Lack of reasoning: there is no lack of reasoning of the tax act, since the documents presented by the claimant do not total the amounts declared in Annex "J" of the declaration no. 25 of Lot J4124 of the year 2013. In fact, the taxpayer did not carry out the exchange rate conversion as of 31 December 2013, since sterling pounds do not have legal tender in Portugal. There is, therefore, no defect of form".

"Compensatory interest: there was a delay in the assessment of part of the tax, with a causal nexus between the taxpayer's conduct and this delay. In fact, the taxpayer should have acted with the diligence of a "bonus pater familiae" and converted the values of interest and dividends declared in fields 420, 422 and 423 of the table 4 of Annex J. In these terms, the taxpayer's conduct consisted in the culpable omission of a duty of care". It concludes: "... the assessment of compensatory interest must be maintained, because the prerequisites of Article 35 of the General Tax Law and Article 91 of the IRS Code are met". – in accordance with Articles 8, 18 to 21 of the RAP and Documents nos. 9, 15 and 16 attached to the RAP;

  1. On a date not determined the Claimant proceeded to pay € 16,761.63 – in accordance with Article 17 of the RAP appreciated under nos. 6 and 7 of Article 110 of the CPPT because no specified challenge to the allegation of payment occurred;

  2. On 12 March 2018 the Claimant delivered to CAAD the present request for arbitral pronouncement (RAP) – in accordance with the entry record in the CAAD Case Management System of the request for arbitral pronouncement.

Facts Not Proved

There is no other factuality alleged that was not considered proven and that is relevant for the composition of the dispute.

The facts brought to the established matters are configured as being accepted, expressly or tacitly, by both parties (including what is referred to in 10., since if payment had not occurred the AT would have specifically contested the allegation). The witness testimony had reduced or no relevance, since it only corroborated the content of documents 11 to 13 attached to the RAP, documents already in the possession of the AT since the divergence procedure.

IV. APPRECIATION OF THE QUESTIONS THAT THE SINGULAR ARBITRAL TRIBUNAL (SAT) MUST RESOLVE

The SAT will first determine, the defect whose success determines, according to the prudent discretion of the adjudicator, the more stable or effective protection of the affected interests, as prescribed in Article 124, no. 2 of the CPPT, that is to say, in this case, the alleged "error of law" (violation of law) and alleged error in the quantification of the declared income.

The first question subject to disagreement in this case has to do with the ascertainment, in terms of material truth, as to whether the Claimant presented its 2013 IRS declaration, which is referred to in point 2 of the proven matters, expressing the values declared in Annex J, in euros or in sterling pounds. This was one of the reasons that led the AT to promote the additional assessment here in question.

Now, as resulted from the proof produced, see points 1 and 2 of the established factual matter, by force of the very literal wording of documents nos. 12 and 13 attached to the RAP, corroborated by the testimonies of the witnesses, it is configured as being evident that all values were declared in euros and not in sterling pounds.

The values of the income and the tax withheld in the United Kingdom to which document no. 11 attached to the RAP refers are, in fact, in terms of expression in the document, in sterling pounds (£ 16,619.65 of income and £ 3,323.92 of tax withheld), but these items appear in the declaration in Euros in field 422 of table 4 (20,110.16 euros of income and 3,999.66 euros of tax withheld), in accordance with point 2 of the established factual matter.

In fact, the value declared by the Claimant as income is higher than what the AT itself would consider correct, by application of the sterling pound to euro conversion rate it indicates (0.8337): the Respondent states that the value in euros would be 19,934.81 euros, but the Claimant declared 20,110.16 euros. There is, therefore, no objection to be made to the conversion rate of the English currency to Portuguese currency used by the Claimant.

It is thus found that an error occurred in the quantification of the income, since the values declared by the Claimant, regarding the income and the tax withheld in the United Kingdom, in the 2013 Form 3 declaration, were expressed in euros and not in sterling pounds.

Regarding the documents attached by the Claimant designated as documents no. 11 to documents no. 13 in annex to the RAP and which had already been delivered by the Claimant to the Respondent on 01 March 2017 (point 6 of the established facts), the only element that is put into question (besides the issue of the expression of income in sterling pounds or euros) is what is contained in the reasoning of the decision rejecting the gracious claim which refers to the following: "... the documents do not meet the requirements because they were not issued or authenticated by the tax authorities of the State of origin of the income (United Kingdom)", as appears from point 9 of the established factual matter.

The documents in question are private documents executed in a foreign country. As to this type of documents Article 365, no. 1 of the Civil Code states: "authentic or private documents executed in a foreign country, in conformity with the law thereof, make proof as they would if drawn up in Portugal".

Nothing leads us to believe that a different legal form, provided for in the United Kingdom, exists for the paying entities of income to title the income paid and the tax withheld at source, so that beneficiaries can prove to third parties, including the tax authorities of other states, such values, since if it were otherwise, the issuing entities would have followed another formality.

In fact, similarly to what occurs in Portuguese tax legislation, insofar as it can be extracted (a contrario sensu applicable to holders of identical capital income, paid to non-residents in Portugal) from no. 3 of Article 119 of the IRS Code, a simple private document issued by Portuguese banks will suffice to fulfill the accessory obligation prescribed in paragraph b) of no. 1 of Article 119 of the IRS Code.

Even if one were to understand that the documents here in question should be authenticated in accordance with the regime of Article 440 of the Code of Civil Procedure (by force of no. 2 of Article 365 of the Civil Code), the truth is that, in accordance with Article 366 of the Civil Code, nothing prevents their evidential force from being freely appreciated here.

The Tax Authority did not challenge that the reproduction of the documents attached to the proceedings (in digital format) suffers from any inaccuracy, compared to the original (Article 368 of the Civil Code).

And, in fact, not only because Portuguese tax legislation appears to permit, for identical situations, that a simple issuance of a private document by the paying Portuguese entity suffices, but also because from the proof produced here (testimonial) and from the evaluation of the documents themselves, nothing justifies that they should not be considered as adequate proof of the facts they express; it must be concluded that the aforesaid documents constitute sufficient proof of the income earned by the interested party in the United Kingdom and of the tax withheld at source there, for purposes of the operation of the mechanism of Article 81 of the IRS Code.

In light of the content of the documents here in question and the proof produced, this SAT has no doubts whatsoever about their authenticity (requirement of no. 2 of Article 365 of the Civil Code), whereby they constitute sufficient proof of the facts they express, just as the same documents issued by Portuguese banks do for the same facts, issued to non-residents.

In fact according to the judgment of the Supreme Court of Justice (STJ) of 05.12.2002, case 02B3970, in www.dgsi.pt "the legalization of documents executed in a foreign country is not today a requirement of their authenticity, which is only rendered necessary when well-founded doubts arise about such authenticity".

Regarding what is stated in Circular Notice no. 20,022 of 19 May 2000, that it would be necessary for these documents to be issued or authenticated by the tax authorities of the United Kingdom, it is found that this has no support in the law, particularly in Article 440 of the CPC, nor would such requirement be compatible with the regime of no. 1 of Article 365 of the Civil Code, nor with the regime of no. 2 of Article 365 of the Civil Code, combined with the regime of Article 366 of the Civil Code.

For its part, the situation of the legal force of generic guidelines has already been appreciated by the TCAN, a decision to which this SAT must defer, under penalty of subjecting any decision to the contrary to the appeal of no. 2 of Article 25 of the RJAT.

In fact, citing nos. 49 and 50 of the RAP: "in this sense, the judgment of the Central Administrative Court South handed down in case n. 3/13.5BELRS, on 23 February 2017 ... (in the case at hand Circular Notice no. 20022, of 19 May 2000)": "[i]n any case administrative circulars do not bind taxpayers but only the respective services, and cannot [the Tax Authority] make evidentiary requirements not expressly provided for in the law (in this sense see among many others the judgment of this Central Administrative Court of 04.12.2007, handed down in Case n. 174/04), [whereby] there would always have to be concluded the illegality of the instructions conveyed by it"

And in the TCAN judgment of 14 March 2013, case n. 00997/12.8BEPRT: «In light of the primacy of law over guidelines (principle of legality), the rules established in the circulars of the Tax Administration must respect the legislative normative framework of reference - primary legal norms -, which prevails over them. And when they establish a normative sense that finds no reception in the legislative norm that they purportedly interpret, they are in fact derogating from it and creating invalid innovative legal norms».

In light of the foregoing, the evidentiary requirement not having support in law that the AT considered to be necessary to grant evidential effect to the documents presented, the request for annulment of the decision rejecting the gracious claim and for annulment of the additional assessments here impugned must proceed, because they are not in accord with Article 81 of the IRS Code (which does not provide for that regime), nor with the legal regime resulting from Article 440 of the CPC and Articles 365 and 366 of the Civil Code.

The alleged non-conformity with the law being considered as proceeding, as it is considered here, in the reading of the law here adopted, the appreciation of the other non-conformities adduced by the Claimant is prejudiced.

Reimbursement of amounts paid (tax and compensatory interest)

As a consequence of the aforesaid non-conformity of the assessment acts, reimbursement is due of the tax paid illegally and likewise of the compensatory interest, by force of Articles 24, no. 1, paragraph b), of the RJAT and 100 of the General Tax Law, because such is essential to «restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been performed».

For the foregoing, the request for reimbursement of the amount of € 16,761.63 proceeds.

As to any possible request for compensatory interest

The Claimant in the final part of the RAP requests the "... reimbursement of the tax improperly paid, increased by interest ...". The impugned assessments relate to Personal Income Tax (IRS) (tax) and relate to interest (compensatory).

In the RAP, it is verified that in Articles 84 to 95, the Claimant merely argues as to the illegality of the assessment of compensatory interest. The same it repeated in the context of arguments.

In no place does the Claimant pronounce itself, at least using the same explicit form as it used as to the assessments of Personal Income Tax and compensatory interest, as to any eventual request for compensatory interest.

The AT, in the implicit reading it made of this part, understood that the Claimant when it referred to "increased by interest" it was referring to a request for compensatory interest, as can be seen from what is written in Articles 40 to 44 of the response.

This SAT cannot pronounce itself on something that is not placed before it, in a clear and unequivocal manner, under penalty of pronouncement beyond the requested (nullity of the first part of paragraph b) of no. 1 of Article 28 of the RJAT).

This SAT considers, by the way the final request is shown to be deduced in the RAP, without previously adducing the facts and legal reasons that would justify the final request for condemnation of the AT for payment of compensatory interest, that the expression "increased by interest" placed immediately following the request for reimbursement of the tax improperly paid, refers only to the request for reimbursement of compensatory interest whose illegality in the assessment was adduced.

Whereby this SAT cannot appreciate the request for condemnation of the AT for payment of compensatory interest.

In any case, nothing will prevent the AT, in execution of judgment, ex lege and ex officio, from promoting the payment to the Claimant of compensatory interest, as a corollary of the annulment of the assessments here impugned.

V - OPERATIVE PART

On the grounds and with the reasoning set forth above:

  1. The request is deemed well-founded to declare the illegality of the decision rejecting the gracious claim referred to in the final part of point 9 of the established factual matter, which is hereby annulled, because it is non-conforming with the norm contained in Article 81 of the IRS Code and with the legal regime of private documents referred to in Article 440 of the CPC and Articles 365 and 366, both of the Civil Code;

  2. Consequently, for the same reasons and with the reasoning referred to in the previous item, the request is deemed well-founded to declare the illegality of the assessment acts referred to in point 8 of the established facts, which are hereby annulled;

  3. The request is deemed well-founded for reimbursement of the amount of 16,761.63 euros referred to in the final part of point 8 of the established facts;

  4. The SAT does not pronounce itself on any possible request for condemnation of the AT for payment of compensatory interest.

Value of case: in accordance with the provision of Article 3, no. 2, of the Costs Regulations in Tax Arbitration Proceedings (and paragraph a) of no. 1 of Article 97A of the CPPT), the case is assigned the value of € 16,761.63.

Costs: in accordance with the provision of Article 22, no. 4, of the RJAT, the amount of costs is fixed at € 1,224.00 in accordance with Table I annexed to the Costs Regulations in Tax Arbitration Proceedings, at the expense of the Respondent.

Notify.

Lisbon, 22 October 2018

Singular Arbitral Tribunal (SAT),

Augusto Vieira

Text drawn up by computer in accordance with the provision of Article 131, no. 5, of the CPC, applicable by referral of Article 29 of the RJAT.

The editing of the present decision is governed by the spelling prior to the 1990 Orthographic Agreement.

Frequently Asked Questions

Automatically Created

What is the tax credit for international double taxation under Article 81 of the Portuguese IRS Code?
The tax credit for international double taxation under Article 81 of the Portuguese IRS Code allows Portuguese tax residents to deduct foreign taxes paid on income earned abroad from their Portuguese IRS liability, preventing the same income from being taxed twice. The credit is limited to the lower of the foreign tax actually paid or the Portuguese tax attributable to that foreign income. This mechanism implements Portugal's obligations under double taxation conventions and ensures fair taxation of cross-border income.
Can foreign tax withholding be proven by bank documents instead of confirmation from the foreign tax authority?
This case directly addresses whether bank documents suffice to prove foreign tax withholding. The taxpayer argued that documentation from UK banking institutions showing income paid and tax withheld is adequate proof under Article 81 of the IRS Code and aligns with court precedents. The AT's position, based on Circular Letter 20/022, requires certification from the foreign tax authority itself. The arbitral tribunal must determine whether administrative guidance can impose requirements beyond statutory provisions and whether bank documents constitute sufficient documentary evidence.
Does the AT's Circular Letter 20/022 requiring foreign tax authority certification bind taxpayers?
No, the AT's Circular Letter 20/022 does not legally bind taxpayers. Administrative circulars and guidance are internal instructions for tax officials and cannot create obligations beyond those established by law and international conventions. The taxpayer correctly argued that Article 81 of the IRS Code and the Portugal-UK Double Taxation Convention establish the substantive requirements for the tax credit, and administrative interpretations cannot restrict rights granted by statute. Taxpayers can challenge administrative practices that exceed legal requirements through arbitration or judicial review.
How does the Portugal-UK Double Taxation Convention apply to income earned in the United Kingdom?
The Portugal-UK Double Taxation Convention allocates taxing rights between the two countries and provides relief mechanisms to prevent double taxation. Under the Convention, certain UK-source income may be taxed in the UK with withholding tax, while Portugal retains the right to tax its residents' worldwide income. Article 25 of the Convention establishes an information exchange mechanism allowing tax authorities to request verification of income and taxes paid in the other jurisdiction. Portugal must grant a tax credit for UK taxes properly paid on UK-source income under the Convention's provisions.
Can the Portuguese Tax Authority use information exchange mechanisms to verify foreign-source income and withholdings?
Yes, the Portuguese Tax Authority can use information exchange mechanisms established in Article 25 of double taxation conventions to verify foreign-source income and withholdings when doubts exist. The taxpayer argued that rather than automatically rejecting the credit claim, the AT should have requested information from UK tax authorities to confirm the amounts declared. This mechanism exists precisely to enable verification without placing impossible documentary burdens on taxpayers. The AT's failure to use available verification tools before issuing additional assessments may constitute improper administrative procedure, especially when the taxpayer provided substantive documentation from reputable financial institutions.