Retroactive personal income tax provisions
Certainty of the law
RULING Nº 399/2010
27 of October of 2010
The prohibition on fiscal retroactivity that is enshrined in the Constitution only encompasses the authentic, specific or perfect retroactivity of the fiscal law. At least where direct income taxes are concerned, this concept does not cover situations in which the tax-related fact the new law is seeking to regulate did not occur entirely under the old law, but rather continues to be formed when the new law is in force.
This case involved a request by the President of the Republic for the abstract post hoc review of norms that permit the imposition of an increased rate of tax on income which private individuals earned at a moment in time prior to the entry into force of the norms in question.
These norms are included in laws that were passed as part of the Stability and Growth Pact (PEC), and were intended to respond to the current financial situation and the urgent need to reduce the deficit and the costs of the accumulated public debt, by securing increased fiscal income – an intention which the petitioner did not question in its own right. The question of constitutionality was whether it was admissible to apply the increased rate to income that had been earned before the laws entered into force.
The Court emphasised that the Constitution clearly prohibits the retroactivity of fiscal law, but that the sense of that prohibition is not unequivocal. In its most recent jurisprudence on fiscal matters the Court has considered that the form of retroactivity which is forbidden is only specific or authentic retroactivity – i.e. that which takes the shape of the application of a new law to earlier tax-related facts (earlier than the entry into force of the new law).
In the present Ruling the Court was dealing with norms that apply to tax-related facts which did not produce all their effects under the previous law. This means that there was no authentic retroactivity in this case.
The tax on the income of individual persons (IRS) is a direct tax that is based on tax-related facts which come about successively, and the tax-related fact that is subject to taxation only becomes complete on the last day of the tax period. The tax-related fact that gives rise to the payment of the tax is complex and its temporal element is configured as a lasting one, which means that this is a periodic tax in which each specific income that is received is not taxed in its own right, but instead it is the whole of the various incomes that are received in a given year on which the tax is levied. In addition, for the purposes of the time limit on the right to levy the tax and its prescription, each fact that generates income when considered individually is not deemed to be an autonomous tax-related fact in its own right.
The Constitutional Court had already held that inauthentic retroactivity is not covered by the constitutional prohibition, and that in the case of periodic taxes, the possibility of passing laws during the course of a given tax period with the intention of producing effects in relation to the whole of that period must be admitted. Such laws must, however, be subjected to the tests of the principles of a state based on the rule of law, such as the test of the protection of trust.
With regard to the present case, there is no constitutionally protected expectation that the legislator must immediately make all IRS-related amendments by the 1st of January each year.
A variety of reasons led the legislator to make these amendments when the fiscal year was already underway, and given the current international economic/financial situation, it would not have been reasonable to think that the prevailing economic trend would not have any consequences. Nor is it possible to say that this measure was something that taxpayers could not have reasonably and objectively expected. What is more, it did not seem to the Court that the fact that the norms before it produced effects as of 1 January 2010 was either intolerable or unbearable for taxpayers.
The Court thus concluded that the norms whose constitutionality was under review in this Ruling pursue a constitutionally legitimate goal – that of securing fiscal revenue for the purpose of balancing the public accounts – were urgent and pressing, and, within the context of the announcement of combined measures to fight the deficit and the accumulated public debt, were not capable of affecting the principle of trust that is innate in a state based on the rule of law. In this light of all this, the Court was unable to find the norms unconstitutional.
The Ruling was the object of five dissenting opinions, one of which was partial.
See Rulings nos. 67/91 (9-4-1991), 172/00 (22-3-2000), 128/2009 (12-3-2009), and 85/2010 (3-3-2010).