Fifty Years of the Tax Constitution (IV): The Prohibition of Retroactive Tax Laws and the Rise of Financial Contributions (1997–2008)

1. The 4th constitutional revision of 1997 and the revival of the constitutional question

With the 4th Constitutional Revision, enacted by Constitutional Law no. 1/97, of 20 September, Portugal witnessed — in J. J. Gomes Canotilho's phrase — the “revival of the constitutional question”, bringing the cycle of democratic transition to a close and strengthening the catalogue of citizens' guarantees vis-à-vis public authorities.

In the specific sphere of Tax Law, the 1997 Revision introduced two far-reaching amendments that radically reshaped jurisprudential debate over the ensuing decades. On the one hand, it effected the express textual constitutionalisation of the prohibition of tax retroactivity in Article 103(3) of the Constitution of the Portuguese Republic; on the other hand, in Article 165(1)(i), it gave autonomous constitutional recognition to the tertium genus of financial contributions in favour of public entities, whose parliamentary statutory reserve — confined to their general regime — was textually fixed by that same revision.

2. The doctrinal and jurisprudential turning point of Article 103(3) of the CRP

The addition of paragraph 3 to Article 103 of the Constitution — formally stipulating that no one may be compelled to pay taxes that have not been created in accordance with the Fundamental Law, that are retroactive in nature, or whose assessment and collection are not carried out in accordance with the law — was intended to bring a definitive end to the long jurisprudential cycle grounded in the fluid balancing of legitimate expectations. The case law of the Constitutional Court consecrated this turning point in Ruling no. 172/2000, delivered by the 2nd Section on 22 March 20001, when reviewing the interpretative provision contained in Article 28(7) of Law no. 10-B/96, which sought retroactively to bar the deductibility of tax charges in already completed tax years. In holding unconstitutional the retroactivity attributed to the non-deductibility of municipal surcharges (derramas) under Corporate Income Tax (IRC), the Court proclaimed that “[t]he explicit constitutional prohibition of retroactivity in tax matters cannot be interpreted (…) as though the constitutional text had not been amended and still derived merely from general principles”, establishing that Article 103(3) enshrines a “strong guarantee of objectivity and self-binding of the State by Law”. The prohibition of retroactivity thus moved from a fluid principle dependent on the subjective test of arbitrariness to an objective, mandatory, and automatically applicable rule of guarantee.

From that point onwards, the principle of non-retroactivity of tax laws acquired explicit constitutional dignity, and the collection of a retroactive tax became unconstitutional by direct breach of an express rule of guarantee, regardless of whether the legislature invoked public interest grounds or whether an intolerable infringement of the taxpayer's individual expectations was demonstrated. More broadly, in its threefold refraction (creation in accordance with the Constitution, non-retroactivity, and assessment and collection in accordance with the law), Article 103(3) enshrined a reinforced principle of tax legality and a subjective guarantee analogous in nature to fundamental rights, freedoms, and guarantees (Articles 17 and 18 CRP), which is not exhausted in a defensive right of resistance at the enforcement stage, but directly binds both the legislature and the Tax Administration itself. The 1997 Revision and the judgment delivered in Ruling no. 172/2000 thus vindicated the protective positions that had been maintained in dissenting opinions since the Court's creation in 1983.

Once the prohibition became automatic, the core problem shifted to the rigorous delimitation of the concept of retroactivity, calling upon the Constitutional Court to pinpoint the moment of formation of the taxable event (facto tributário), distinguishing between instantaneous taxable events and taxable events of successive formation, in Rulings nos. 63/2006, of 24 January, and 196/2006, of 15 March2. In the first of those judgments, the Plenary declared with general binding force the unconstitutionality of levying the Special Contribution (Contribuição Especial) on urban licensing procedures initiated prior to its entry into force, emphasising, with support from legal scholarship, that “the key to determining retroactivity lies (…) in locating the birth of the tax, which is the formation of the taxable event — not any subsequent moment, such as the assessment act”. It was established that no breach of Article 103(3) occurs “where the taxable event is instantaneous and took place while the new law was in force, or where, being of successive formation, it took place entirely while the new law was in force”; conversely, unconstitutional retroactivity arises whenever the instantaneous factual prerequisite chosen by the rule (in that case, property value appreciation measured at the time of the licensing application) was consummated prior to the entry into force of the statute creating the charge, even if the building permit is issued subsequently.

3. The variable geometry of the statutory reserve and financial contributions

In parallel with the temporal protection of the taxpayer, the third jurisprudential phase was marked by the consecration of the tax tertium genus and the consequent affirmation of the variable geometry of the parliamentary statutory reserve. With the autonomisation of financial contributions in Article 165(1)(i) of the 1997 constitutional text — an approach reconfirmed and consolidated in the 2001 and 2004 Constitutional Revisions — the constituent legislature overcame the classical dualist model that strictly opposed taxes to fees.

Following national legal scholarship, the Constitutional Court embraced this intermediate category, holding that financial contributions “constitute a tertium genus of fiscal revenues, which may be qualified as collective fees”, insofar as they share the nature of taxes by lacking a direct individualised consideration, yet resemble fees in that they aim to remunerate public services enjoyed by a specific group of subjects or to compensate costs caused by them3.

The landmark judgment in this domain was Ruling no. 365/2008, delivered by the 2nd Section on 2 July 20084, concerning levies collected by regulatory agencies from economic operators in their respective sectors. Examining the regulatory and supervisory fees of the Media Regulatory Authority (ERC), the Court established the doctrine of the variable geometry of the parliamentary reserve, recognising that “with respect to fees and financial contributions, only the definition of their general regime must comply with that reserve of competence, whereas the concrete creation of this type of tribute, unlike taxes, may be effected by governmental legislative decree without the need for parliamentary authorisation”, distinguishing the exhaustive reserve applicable to taxes (Article 103(2) and the first part of Article 165(1)(i)) from the framework reserve applicable to commutative and paracommutative tributes (Article 165(1)(i), in fine). Once the elementary principles and rules of sectoral taxation are satisfied in a primary legislative norm, room is opened for intervention by regulatory power, provided that a just group-commutative cause is respected and the charge falls upon subjects maintaining a relationship of responsibility or benefit with the targeted public services.

It is important to note that, although the initial formulation of Ruling no. 365/2008 might have suggested that prior enactment of the general regime by the Assembly of the Republic constituted an indispensable condition precedent (ato-condição) for the creation of contributions, the Constitutional Court — after still requiring in Ruling no. 152/2013 that the contribution be created by a parliamentary statute sufficiently outlining some of its essential elements while permitting its fleshing-out by simple decree-law or ministerial order — subsequently clarified this doctrine in Plenary Ruling no. 539/20155. In that judgment, the Plenary established that “the absence of approval of a general regime for financial contributions by the Assembly of the Republic cannot prevent the Government from approving the creation of individualised financial contributions in the exercise of concurrent legislative competence”. While categorically rejecting the condition-precedent thesis — which would have converted the omission of the general regime into an undue full parliamentary reserve — the Court held that the governmental creation of specific contributions, in the absence of that framework statute, requires the form of a legislative act (simple decree-law, enacted under concurrent competence), subject to the powers of parliamentary scrutiny and termination provided for in Article 169 of the CRP.

4. Deepening procedural and judicial guarantees of the taxpayer

Finally, this third phase of jurisprudential construction witnessed a notable deepening of taxpayers' procedural and judicial guarantees vis-à-vis the administration. The Plenary of the Constitutional Court, in Rulings nos. 160/2007, of 6 March, and 442/2007, of 14 August6, clarified the reach of effective judicial protection and due process (Articles 20(1) and (4) and 268(4) CRP) in tax litigation. In the first judgment, the Plenary held that the judicial nature of tax enforcement proceedings implies that all conflicts of interest arising therein, including decisions taken by the tax administration, “shall always be reviewed, within the proceedings themselves, by the tax judge”, and that administrative tax liability reversal (reversão) against subsidiary debtors avoids violating the judicial reserve and effective judicial protection only because it is preceded by a prior hearing and is open to full judicial review through opposition to enforcement (configured as “a mini-declaratory action grafted onto the tax enforcement proceedings”); in Ruling no. 442/2007, in turn, the Plenary declared unconstitutional the administrative lifting of banking secrecy without the taxpayer's consent or prior judicial authorisation merely because the taxpayer had filed an administrative claim or judicial challenge, holding that it created a chilling effect and violated the right to a fair administrative and judicial procedure7.