IN the earlier issue we had discussed two decisions from Spain. In the current issue, we first discuss two cases from the other country of the Iberian peninsula- Portugal. The fact situations in these two cases are not very complex. However, the court's decisions in these cases seem to have been influenced by revenue considerations.

The first case [Tribunal Central Admininstrativo- Sul Proc. 05071/11dt 06.05.2012] involved the tax treaty between Portugal and France. A French company rendered services to a Portuguese company through an employee. The French company paid the wages, bonus etc. of the employee who was stationed in Portugal. Subsequently, it charged the Portuguese company for the cost of wages etc. of the said person. The Portuguese company paid the same to the French company without deduction of tax at source as per the Portuguese domestic law.

In audit, the Portuguese tax authorities held that services were rendered in Portugal and for its failure to deduct tax at source the tax authorities assessed the Portuguese company for the tax (much like our treating the taxpayer as assessee in default).

Before the Central Administrative Tribunal, the taxpayer argued that the French company was entitled to avail of the benefits of the treaty between Portugal and France and that in terms of Article 7 of the treaty, profits from services was to be taxed only in France and Portugal cannot levy any withholding tax on the same.

The Court however held that the French company made the payment to the employee first and then invoiced the Portuguese company and hence the payment was not made for wages but was rather a reimbursement. The Court held that applicability of Article 7 of the tax treaty is restricted to profits and not to any other payments and hence Portugal was not prevented from applying its domestic law with respect to withholding obligations.

The decision was criticized and rightly so for the absence of any discussion in the judgement of the nature of the services, existence of PE or as to whether there is any income element in such reimbursement.

The other case from Portugal relates to Tax residency certificate, a topic that made such a splash in India that the government, had to beat a retreat in the face of orchestrated campaign about the proposal in the Finance Bill of the TRC to be in a particular form. It will therefore be instructive to study this case.

In this case decided by the Tribunal [Central Administrativo- Sul Proc. 05568/12], a Portuguese company made payment to a UK company and a Spanish company for services rendered. No tax was deducted at source. The Portuguese company did not have the forms necessary to claim the benefit of the double tax treaty. The Revenue assessed the Portuguese company for the default.

The taxpayer argued that both the UK based company and the Spanish company were residents of the UK and Spain and hence were entitled to the treaty benefits and hence no withholding was done.

On appeal, the Court held that Portugal has rules specifying the form in which application has to be made. The tax code referred to the form. Hence, the Court held that the form institutionalized specific means of fulfillment of the legal requirements and in absence of the same the treaty benefit could not be allowed.

Greek case

Another interesting case came from Greece. Countries passing through tough times often come up with extraordinary levies that are charged on all taxpayers including on the non-residents. In the Greek case, decided by the Administrative Court of Appeals (481/2012 dt 7.2.2012), the issue was the nature of such a levy.

The Greek government had imposed an extraordinary one off levy as contribution towards social responsibility and this was calculated with reference to the total income of corporate taxpayers if the total income exceeded 100,000 Euros. A US company having a PE in Greece also paid the contribution. The issue was whether such a levy was covered within the ambit of the Greece-USA tax treaty.

Article 2 of a standard tax treaty often contains a list of current taxes that are covered by the treaty and then a clause stating that the treaty shall apply to any other taxes of a substantially similar character imposed subsequent to the date of the signature of the treaty.

The Greek Court held that the levy was not a normal corporate tax but an extraordinary tax on high-income earners and hence it was not a ‘tax of substantial similar character'. The Court also held that the tax was not imposed on net income but that the net income was only the basis on which the levy was calculated and was the criterion to find out the ‘ability to pay'.

Again the decision was criticized for failing to recognize that the levy was in addition to the corporate tax and was substantially similar in that it was calculated on the same base on the same taxpayers. However, in the discussion, it was also pointed out that the OECD commentary on Article 2 itself in paragraph 5, states as follows:

“The Article does not mention "ordinary taxes" or "extraordinary taxes". Normally, it might be considered justifiable to include extraordinary taxes in a model convention, but experience has shown that such taxes are generally imposed in very special circumstances. In addition, it would be difficult to define them. They may be extraordinary for various reasons; their imposition, the manner in which they are levied, their rates, their objects, etc.

This being so, it seems preferable not to include extraordinary taxes in the Article. But, as it is not intended to exclude extraordinary taxes from all conventions, ordinary taxes have not been mentioned either. The Contracting States are thus free to restrict the convention's field of application to ordinary taxes, to extend it to extraordinary taxes, or even to establish special provisions.”

Here, it may be mentioned that the Greek treaty was based on the old model when the current paragraph 1 of the OECD model to the effect: ‘This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied' was not there. Therefore, it cannot be said that the decision of the Greek Court was entirely wrong.

An analysis of all the three cases would suggest that courts in these countries tend take into account revenue considerations with the risk of perhaps even stretching the logic. This is in stark contrast with the cases coming out of our Courts and Tribunals with nary a thought about the revenue implications.