How to manage a tax dispute in Portugal
Multinationals are under greater scrutiny than ever in Portugal following the government’s decision to create a large taxpayers unit, so it is vital taxpayers act to reduce the risk of disputes and understand their resolution options.
Pedro Braz and Fernando Silva, of Garrigues – Taxand, offer International Tax Review’s readers their dispute management advice.
International Tax Review (ITR): What advice would you give to companies about how to reduce the risk of becoming involved in a tax dispute with the Portuguese tax authorities?
Pedro Braz (PB)(right): Taxpayers in Portugal can greatly reduce the risk of becoming involved in disputes with the authorities if they comply with the deadlines for filing all the declarations, since this is one of the main indicators used by the Portuguese tax authorities to identify inspection targets.
Different criteria are used for selecting taxpayers for inspections, such as: significant tax deductions or capital losses; certain mentions in the certification of accounts; discrepancies in the VAT and corporate declarations.
Another important aspect is compliance with the safekeeping of files and records.
Additionally, the assistance of a tax adviser from an early stage – before and during a tax inspection – is often important.
Requesting an advance binding ruling from the tax authorities before an inspection might be the best option to avoid risk in some dubious tax matters when it is not possible to rely on case law or administrative rulings to dissipate the doubts.
The recent possibility of presenting this request with urgency and its tacit deferral make it an even more useful instrument.
ITR: What options do Portuguese taxpayers have to resolve disputes with the authorities other than litigation? What are the positives and negatives of these options?
Fernando Silva (FS)(below): Portugal’s parliament recently approved a tax arbitration regime (Decree-Law nr. 10/2011, of January 20) as an alternative to litigation in judicial courts.
The main advantages of arbitration are the simplified procedure and the chance of obtaining a quicker decision – usually in no more than six months.
The taxpayer might also nominate an arbitrator that will be part of the arbitral court. However, the arbitration regime does not cover all kinds of litigation as some matters remain outside the scope of Decree-Law nr. 10/2011 and the authorities are not bound to arbitral proceedings in disputes relating to amounts of €10 million ($12.75 million) or more.
According to the Decree-Law, the Arbitral Court is not allowed to decide each case on grounds of fairness, which means that a decision must not, under any circumstance, violate the established law.
Another disadvantage is the reduced possibility to appeal arbitral decisions. In fact, the only appeals allowed are those to the Constitutional Court, in the case of application of an unconstitutional ruling, and to the Supreme Court, in case of inconsistency with other decisions.
The arbitral decision can also be objected to under certain conditions, such as inconsistency between the arbitral court’s reasoning and the decision or the omission of statement.
Despite being an alternative to litigation in judicial courts, taxpayers must also pay fees when going to arbitration. Nominating an arbitrator is expensive.
Taking into account the limitations on the right to appeal arbitral decisions, taxpayers should be cautious in opting for arbitration. A detailed analysis of each case and defence strategy must be made before doing so.
ITR: Are you seeing any trends in the types of dispute cases the Portuguese tax authorities are taking up, and those where they are succeeding in the courts?
PB: The Portuguese tax authorities have been increasing the inspection of large taxpayers, analysing the tax declarations presented, asking for presentation of additional documentation and checking the accounting of companies.
These inspections are mainly focused on VAT and corporate income tax, but international aspects of transactions and taxes under vehicles are also being subjected to further intense analysis.
The tax authorities have also increased the application of executive measures to recover tax debts.
In the Portuguese courts, the majority of litigation, following the tax authorities’ recent approach, has not been decided yet.
The courts are not recognising the prescription of taxpayer debts. Taxpayers are arguing that despite suspension and interruption causes, the period of limitation is finished and payment is no longer due. However, the courts are not recognising that the period of limitation is finished, considering that the causes of suspension and interruption of the period of limitation are more durable than taxpayers realise, and prevent the period of limitation from ending.
In line with the Portuguese tax authorities’ view, the courts are also recognising the possibility of extending responsibility for the payment of fines from a debtor company to the company’s respective managers and directors.
These areas are however, still being debated. The position of the judicial courts is sometimes reversible and further decisions might adopt the taxpayers’ position.
ITR: What do you think multinationals in Portugal can expect from the tax authorities in the future?
FS: In the next couple of years intra-group transactions will probably undergo further scrutiny not only regarding transfer pricing policies but also in the context of restructuring operations.
The strategy of the Portuguese tax authorities seems to be a significant increase in human resources and the implementation of different mechanisms to facilitate tax audits, namely through the mandatory use of certain software programmes.
Tax audits should continue to target certain sectors of the economy and large taxpayers, which are subject to permanent audits, with the creation of the Large Taxpayers Unit.
Audits will probably continue addressing VAT reimbursements and withholding taxes and we also expect the authorities’ focus to be on the detection of abusive transactions, looking closely at the transfer of income from and to tax havens and any transactions involving tax havens or trusts.
The use of specific anti-abuse provisions such as controlled foreign company rules is foreseen and the general anti-avoidance rule is expected to enter into action more frequently.
With the increased complexity of issues drawing the focus of the authorities we will probably see the rise of the alternative dispute resolution mechanism due to its swiftness and the possibility of the taxpayer appointing its own expert to take part in the dispute decision.