Portugal: Tax Residence Certification and Entitlement to Compensatory Interest Within a Relief at Source System
Tax Treaty Case Law around the Globe, 2016
1 Pages Posted: 14 Aug 2020
Date Written: July 6, 2016
This article examines a decision of the Portuguese Supreme Court on the validity of the Portuguese tax law system requirement of a certificate of residency issued by the tax authorities for the granting of tax treaty benefits.
The first note goes to the length of the procedures. The issue sub judice refers to a simple and straightforward situation of application of tax treaties. And this application was even requested to a public/governmental entity (in casu, the Portuguese Ministry for Education) which should be more sensitive in respecting legality.
Despite that, the taxpayer had to undergo an incredibly lengthy procedure, with the request of several documents, several data (some of them out of his sphere of knowledge) and - as mentioned in the decision - several translations. This is still a paper-based process based on very repetitive tasks (the forms need to be done in triplicate and there is a limit of income streams that can be included in each form). The procedure is time-consuming, not only for taxpayers but also for paying agents and tax authorities. Clearly, the costs associated with claiming treaty benefits are too burdensome in Portugal. Furthermore, this may have a deterrent effect on the exercise of an economic activity in Portugal (if a resident in another jurisdiction is fully aware of the onerous procedures he has to face, he may refrain from exercising his activity in Portugal). And there is always the risk of not being able to overcome all the procedural obstacles, leading him to double taxation.
Even nowadays, we experience several cases of paying agents (some of them even part of the state administration) that are not "comfortable" with immediately exempting the taxpayer in accordance with domestic law and prefer to refer the taxpayer immediately to the reimbursement procedure - even when the taxpayer provides ab initio all the required documentation and information. In other cases, these paying agents simply remit the question to the competent service (international relations service) of the Portuguese tax authority. Nonetheless, as this request does not fall within the concept of "binding ruling", the tax authorities are not obliged to reply and, in most cases to the author's knowledge, they effectively do not reply. In these cases, the paying agent continues withholding the amounts as there is no sanction for denying the immediate application of the treaty, even if the immediate application (and the immediate waiver) is foreseen by domestic law. Other systems face even worse problems.
Even if Portuguese domestic law foresees a system of direct application of the treaty ("relief at source"), the above-mentioned difficulties convert this de facto into a "refund system" (where refund is not the ultima ratio for the taxpayer but the rule), which goes against the express recommendation of the OECD in the Commentaries to the Model. Under this system, the taxpayer continues to face a procedural burden that, as evidenced in the previous section, is disproportional with the treaty entitlements he is claiming. In our view, if courts started apply a stricter scrutiny of these forms and procedures, maybe some of the requests would be considered unlawful and, eventually, removed from these forms.
Much effort is made concerning the substantive dimension of treaties. The author believes that, at this time, one should start looking as well to what can be done at the formal aspects connected with the application of the treaties, particularly in those cases where the substantive and procedural dimension come so closely related as in the residence certificates.
One should surely not neglect the need for source-state tax authorities to ascertain the residence of the taxpayer as a precondition of treaty access. Nevertheless, the burden created should not go beyond what is strictly required for a sound determination of residence. This is even more acute in the context of the European Union, where this burden may lead to an obstacle to market access and create a serious hindrance to cross-border provision of services and other activities.
A first step is the creation of global taxpayer identification (or at least a simpler way to identify taxpayers active in different jurisdictions). The positive experience of the VIES - VAT Information Exchange System - would be the perfect inspiration for a global initiative. But the ideal would be the institution of a single taxpayer number, valid throughout the globe. Once this identification was instituted, the certification of residence would be much easier.
Within the OECD there was already a "certificate of residence project", within the TaxXML Business Analysis Sub Committee/OASIS Tax XML certificate of residence working group, comprising representatives from both industry and government tax authorities. In a presentation done in 2007, it was already "identified the certificate of Residence (CoR as a suitable initial project to explore Government-to-Government Interoperability" and that this could be implemented using XML language. The original idea would be to develop a test case with three jurisdictions (Canada, the United Kingdom and the United States), identifying consistencies and differences in order to reach a "common model". Many other documents of this subcommittee can be found online. There was even a final report, produced in 2007, but for reasons that the author could not determine, those plans were not further implemented. This issue was then recovered en passant, in the context of the information consultative group on the taxation of CIVs.
It may be true that "the administrative aspects of the application of tax treaties is a subject that is considered by most to be boring and un-challenging." Maybe they are not thrilling enough to trigger a comprehensive action project (such as BEPS). But they surely have a real impact on investors' decisions on expanding activity in a certain jurisdiction. Thus, it should be one of the priorities of tax authorities and governments across the globe.
It is unsure when such a project will receive wide consensus and be materialized. In any case, and despite that, the author believes that the new system needs to be fully based on (automatic) exchange of information and purely based on digital systems.
Keywords: Taxation, Tax Law, European Taxation
JEL Classification: K33, K34, F13, E62, D78, E62, F02, F23, F42, H20, H22, H23, H25, H26, H87, O19, O23, O24
Suggested Citation: Suggested Citation