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