International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Local Insights

The increase in compensatory interest under GAAR: an unconstitutional penalty?

Sponsored by


Francisca Marabuto Tavares of Morais Leitão reviews Portugal’s controversial application of GAAR rules, and considers whether compensatory interest application could be unconstitutional.

The application of the general anti-abuse rule (GAAR) to transactions considered tax abusive, as provided for in article 38, no. 6, of the Portuguese General Tax Law, entails three tax consequences:

  • The evident payment of the omitted tax;

  • The consideration as a tax infraction for failure to assess and timely pay the tax due, the fine of which varies. In case of willful misconduct, it is between the value of the missing instalment and its double, and, in case of negligence, between 15% and half of the missing tax; and

  • The application of compensatory interest calculated at the rate of 19% per year (the current legal rate of 4% plus 15%), to run from the time of the tax default (failure by the taxpayer to pay the tax spontaneously) until the date on which the additional tax assessment is issued.

The final point raises several constitutional doubts, as well as doubts as to compliance with EU law.

Starting with the last of these angles: Council Directive 2016/1164 of July 12, 2016 (which inspired the 2019 reform of the GAAR) does not provide for any increase in interest or penalty in this context. And EU law, when referring to harmonised areas, should enshrine solutions that are similar, if not equal, in all member states, while complying with the principle of proportionality, which seems to be clearly undermined by this solution.

On the other hand, the idea that compensatory interest is intended to compensate the state for any delay in paying the tax for which the taxpayer is responsible is now firmly established by Portuguese doctrine and court decisions. But it is doubtful that this was the essence of the compensatory interest associated with the GAAR. The arithmetic speaks for itself: a rate of 19% per year goes beyond a merely compensatory function and can only intend to sanction and penalise the taxpayer, as if this were a normal criminal infraction.

Firstly, there is the general principle of ne bis in idem. By applying the compensatory interest, the taxpayer will be judged and penalised more than once for the same act. This manifests through tax infraction proceedings and a compensatory interest rate that takes on a sanctioning nature.

Secondly, this interest goes far beyond the taxpayers’ ability to pay, which contradicts the principle of equality provided for in article 13 of the Portuguese Constitution. An illegal improper penalty is applied when the interest rate and the consolidated amount to be paid no longer corresponds to that ability to pay.

Thirdly, as this is a true sanction, at no time could the guarantees that are legally associated with criminal proceedings be subtracted from this case. This refers to, for example:

  • The limits of the applicable fine or its waiver or reduction;

  • The possibility of suspending the tax infraction proceeding; or

  • The responsibility for the delay in assessment and payment of the tax required, in general, by the compensatory interest mechanism.

It remains to be seen whether the same sanction would be provided for the tax administration itself in cases where it must return the taxes paid by the taxpayers.

more across site & bottom lb ros

More from across our site

PwC publishes detailed accounts of its behaviour in the tax scandal in Australia, while another tax trial looms for pop star Shakira.
The winners of the ITR Europe, Middle East, and Africa Tax Awards 2023 have been announced!
The winners of the ITR Asia-Pacific Tax Awards 2023 have been announced!
Mauro Faggion appeared cautiously optimistic as the European Commission waits to see whether all 27 member states will accept its proposal.
The global minimum rate also won’t entirely stop a race to the bottom, according to a tax director speaking at an ITR conference in London.
The country’s tax authorities are not interested in seeing transfer pricing studies any more, it was claimed at an ITR industry conference in London.
The controversial measure is being watered down after criticism from the European Central Bank.
More than 600 such requests were made in 2022, while HMRC has also bolstered its fraud service, it has been revealed.
The General Court reverses its position taken four years ago, while the UN discusses tax policy in New York.
Discussion on amount B under the first part of the OECD's two-pronged approach to international tax reform is far from over, if the latest consultation is anything go by.