Fifty Years of the Tax Constitution (III): Flexibilisation of the Economic Model and Openness of Tax Typicity (1989–1997)

1. The 1989 constitutional revision and the opening of markets

The Second Constitutional Revision, enacted by Constitutional Law no. 1/89, of 8 July, brought an end to the rigidity of the socialising economic constitution of 1976. By eliminating the principle of the irreversibility of nationalisations and creating a constitutional framework for the reprivatisation of the state-owned enterprise sector, the derived constituent power flexibilised the national economic model, adapting it to the demands of an open and competitive market economy progressively integrated into the European space.1

On the plane of tax doctrine and policy, this economic reconfiguration had far-reaching repercussions, as the emergence of new financial instruments and the growth of cross-border transactions exposed the ineffectiveness of the classical model of rigid tax typicity. It became necessary for the Constitutional Court to develop a hermeneutic reading capable of articulating the formal guarantees of the parliamentary statutory reserve with the substantive demands of material tax equality, preventing formalism from frustrating the taxation of real ability to pay.

2. The crisis of closed typicity and indeterminate legal concepts

The evolution of the principle of tax legality during this second phase was marked by the transition from the traditional doctrinal conception — championed by Alberto Xavier and defined by the requirement of closed typicity and an absolute statutory reserve that rejected the use of indeterminate concepts — to the model of sufficient determinability (Bestimmtheitsgrundsatz)2.

The jurisprudential turning point occurred in Ruling no. 756/1995, delivered by the 2nd Section on 20 December 19953, concerning the constitutionality of Article 6(12) of the former Capital Income Tax Code (Código do Imposto de Capitais), as applied to a commercial and financial product designed by the company Renault Gest, known as “Poupança-Renault”. Under that contractual arrangement, customers advanced sums towards the future purchase of motor vehicles, receiving in return a proportional discount on the final sale price of the vehicle. The tax administration assessed Capital Income Tax on those discounts, subsuming them under the charging provision covering “any other income derived from the mere application of capital”.

The challenging taxpayer argued that relying upon a taxing provision marked by such high indeterminacy violated the principle of typicity and the parliamentary statutory reserve enshrined in Article 106(2) of the Constitution, in the wording then in force. However, embracing the doctrinal contributions of J. L. Saldanha Sanches and Jorge Bacelar Gouveia4 on legal certainty and the functionality of the tax system, the Constitutional Court decided in Ruling no. 756/1995 not to hold the provision unconstitutional.

This decision rested upon a balancing exercise that would shape the ensuing decades, weighing the predictability of tax burdens against the efficiency of the tax system and the fight against tax fraud and evasion. As the Court expressly reasoned, “while determinability serves to protect taxpayers against arbitrariness on the part of the Tax Administration”, the use of broad and at times indeterminate concepts — “the only ones capable of ensuring the plasticity needed to adapt to the constant emergence of new situations” — finds full justification in “fulfilling the mandate of equality in a material sense, preventing the constant emergence of tax avoidance havens”. Holding that “harmonising these two realities” requires the tax norm to provide a reasonable standard of calculability without paralysing the effectiveness of the system, the Court concluded that a residual charging clause amenable to concretisation according to objective hermeneutic canons “is very far from placing an arbitrary power of concretisation in the hands of the administration”.

3. Full judicial reviewability of tax acts

Alongside the functional flexibilisation of typicity, this second phase was characterised by the strengthening of the guarantee of access to the courts and effective judicial protection for taxpayers vis-à-vis the administration, in compliance with Article 268(4) of the Constitution, in the wording introduced by the 1989 Revision. The Constitutional Court was called upon to purge from the pre-constitutional tax legal order provisions that vested the Treasury with powers to determine the taxable base shielded from judicial review.

The initial milestone in this normative purification movement was Ruling no. 437/1989, delivered by the 2nd Section on 15 June 19895. In that judgment, still decided under the text resulting from the 1982 Revision, the Court held materially unconstitutional § 3 of Article 138 of the former Industrial Tax Code (Código da Contribuição Industrial — CCI), a rule that barred any judicial appeal against decisions of the Minister of Finance in hierarchical administrative appeals concerning the determination of the taxable base.

Drawing upon the teaching of Alberto Xavier6 and the case law of the Supreme Administrative Court, the Court established that a ministerial decision fixing the taxable base constitutes a true definitive and enforceable administrative act adversely affecting the taxpayer's legal sphere, so that its unappealability squarely violated Article 268(3) (subsequently (4)) of the Fundamental Law. As Justice Cardoso da Costa aptly synthesised in his concurring opinion (in the companion Ruling no. 114/1989)7, the Court affirmed the “need to overcome, by virtue of the constitutional requirement of Article [268(3)], the obstacles to complete judicial review of the legality of external tax administrative activity that may still be found at the level of ordinary legislation”.

This orientation was subsequently reaffirmed in Ruling no. 312/19928, which declared the unconstitutionality of § 3 of Article 138 of the CCI under the new wording of Article 268(4) of the CRP resulting from the 1989 Revision. Shortly thereafter, in Ruling no. 233/1994, the Court examined the constitutionality of § 2 of Article 114 of the Industrial Tax Code, which empowered the administration to reclassify companies from Group A to Group B taxation whenever an examination of their accounts revealed the “impossibility of controlling the taxable base” or gave rise to “well-founded doubts as to whether the computed result corresponds to reality”. Following doctrinal contributions on judicial review of the Treasury's technical assessments9, the Court held unconstitutional, for combined violation of Articles 106(3) and 268(3) (later (4)) of the Constitution, the restrictive interpretation that confined judicial reviewability to a mere formal verification of factual prerequisites. It was established that the prerogative of assessing the taxable base does not constitute an area immune from judicial review — since the Constitution “does not institute any area of administrative activity from which the powers of the legislature and judicial control are excluded” — imposing upon the tax courts the power-duty to review the merits and substantive grounds of the administrative decision, on pain of denying effective judicial protection.

4. The boundary between taxes and fees and guarantees in tax enforcement

Throughout this period, the Constitutional Court maintained strict vigilance over the boundaries between the concepts of tax (imposto) and fee (taxa), striking down disguised taxes created by regulatory means. In Ruling no. 236/1994, decided by the Plenary on 16 March 199410, the Court declared unconstitutional the establishment, in favour of the municipality, of a “compensation charge” for parking space deficits11. Declaring the rule unconstitutional with general binding force, the Plenary held that “payment of the compensation charge in question neither confers a right to the individualised or actual use of any public parking area, nor even places the municipality under an obligation to create or maintain such areas”. Devoid of any synallagma or divisible consideration, the levy amounted to a true tax created by regulatory instrument, violating the statutory reserve and the legislative competence reserve of the Assembly of the Republic enshrined in Articles 106(2) and (3) and 167(o) of the original version of the Constitution12.

Conversely, review of the proportionality of the synallagmatic nature of fees was further addressed by the Plenary in Ruling no. 640/1995, of 15 November 199513, concerning the setting of toll rates on the Tagus Bridge by Ministerial Order no. 351/94. In this ruling, the Court clarified the parameters of judicial review over the quantification of fees, establishing that “where reciprocity or a synallagmatic relationship exists between the charge and a divisible service rendered (…) one is not faced with a tax”, rejecting the contention that merely exceeding economic cost distorts the figure. It thus settled that censorial intervention by the constitutional jurisdiction is reserved for cases of “intolerable disproportionality”, where one is confronted with “a fee of a manifestly disproportionate amount, wholly unrelated to the cost of the service provided”.

Finally, the year 1995 was marked by three major pronouncements safeguarding property guarantees, legitimate expectations, and the parliamentary reserve in tax procedure: Rulings nos. 410/1995, 451/1995, and 678/199514. In Ruling no. 451/1995, generalising the orientation established in Rulings nos. 494/1994, 516/1994, and 128/1995, the Plenary declared with general binding force the unconstitutionality of the rule contained in the first part of Article 300(1) of the Tax Procedure Code (Código de Processo Tributário — CPT), insofar as it mandated the total immunity from attachment by other courts of assets previously seized in tax enforcement proceedings. According to the Plenary, from the constitutional guarantee of the right to private property (Article 62(1) CRP) “one must surely extract the (likewise constitutional) guarantee of the creditor's right to the satisfaction of his claim”, so that absolute immunity from attachment in favour of the Treasury violated the principle of proportionality or prohibition of excess (Article 18(2) CRP) by practically nullifying the enforcement protection of ordinary creditors. In parallel, in Ruling no. 410/1995, the 2nd Section held unconstitutional, for breach of the principle of protection of legitimate expectations inherent in the rule of law (Article 2 CRP), the transitional rule of Article 2(1) of Decree-Law no. 215/89 (Statute of Tax Benefits), when interpreted as failing to safeguard under Personal Income Tax (IRS) temporary tax benefits whose entitlement had been acquired prior to 31 December 1988; and, in Ruling no. 678/1995, the Plenary declared with general binding force the organic unconstitutionality of Article 25 of Decree-Law no. 411/91, which assigned to the Public Prosecutor's Office the representation of social security institutions before the tax courts, for encroaching upon the parliamentary reserve governing the competence of the Public Prosecutor's Office (Article 168(1)(q) CRP).