Portugal: Tax Residence Certification and Entitlement to Compensatory Interest Within a Relief at Source System

This article examines a decision of Portuguese Supreme Court on validity of Portuguese tax law requirement of a of residency issued by tax authorities for granting of tax treaty benefits. The first note goes to length of 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, Portuguese Ministry for Education) which should be more sensitive in respecting legality. Despite that, taxpayer had to undergo an incredibly lengthy procedure, with request of several documents, several data (some of them out of his sphere of knowledge) and - as mentioned in 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, costs associated with claiming treaty benefits are too burdensome in Portugal. Furthermore, this may have a deterrent effect on exercise of an economic activity in Portugal (if a resident in another jurisdiction is fully aware of onerous procedures he has to face, he may refrain from exercising his activity in Portugal). And there is always risk of not being able to overcome all procedural obstacles, leading him to double taxation. Even nowadays, we experience several cases of paying agents (some of them even part of state administration) that are not comfortable with immediately exempting taxpayer in accordance with domestic law and prefer to refer taxpayer immediately to reimbursement procedure - even when taxpayer provides ab initio all required documentation and information. In other cases, these paying agents simply remit question to competent service (international relations service) of Portuguese tax authority. Nonetheless, as this request does not fall within concept of binding ruling, tax authorities are not obliged to reply and, in most cases to author's knowledge, they effectively do not reply. In these cases, paying agent continues withholding amounts as there is no sanction for denying immediate application of treaty, even if immediate application (and immediate waiver) is foreseen by domestic law. Other systems face even worse problems. Even if Portuguese domestic law foresees a of direct application of treaty (relief at source), above-mentioned difficulties convert this de facto into a system (where refund is not ultima ratio for taxpayer but rule), which goes against express recommendation of OECD in Commentaries to Model. Under this system, taxpayer continues to face a procedural burden that, as evidenced in previous section, is disproportional with treaty entitlements he is claiming. In our view, if courts started apply a stricter scrutiny of these forms and procedures, maybe some of requests would be considered unlawful and, eventually, removed from these forms. Much effort is made concerning substantive dimension of treaties. The author believes that, at this time, one should start looking as well to what can be done at formal aspects connected with application of treaties, particularly in those cases where substantive and procedural dimension come so closely related as in residence certificates. One should surely not neglect need for source-state tax authorities to ascertain residence of taxpayer as a precondition of treaty access. Nevertheless, burden created should not go beyond what is strictly required for a sound determination of residence. This is even more acute in context of 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 creation of global taxpayer identification (or at least a simpler way to identify taxpayers active in different jurisdictions). The positive experience of VIES - VAT Information Exchange System - would be perfect inspiration for a global initiative. But ideal would be institution of a single taxpayer number, valid throughout globe. Once this identification was instituted, certification of residence would be much easier. Within OECD there was already a certificate of residence project, within TaxXML Business Analysis Sub Committee/OASIS Tax XML of residence working group, comprising representatives from both industry and government tax authorities. In a presentation done in 2007, it was already identified 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, United Kingdom and 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 author could not determine, those plans were not further implemented. This issue was then recovered en passant, in context of information consultative group on taxation of CIVs. It may be true that the administrative aspects of 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 priorities of tax authorities and governments across globe. It is unsure when such a project will receive wide consensus and be materialized. In any case, and despite that, author believes that new needs to be fully based on (automatic) exchange of information and purely based on digital systems.

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