IRC Arithmetic Corrections Challenged in CAAD Arbitration Case 112/2019-T

TAX ARBITRAL JURISPRUDENCE

Case no. 112/2019-T

Decision Date: 2019-10-04

IRC

Value of Claim: € 30,346.09

Subject Matter: IRC – Arithmetic Corrections

ARBITRAL DECISION

I – REPORT

1.3 A... – REAL ESTATE INVESTMENT COMPANY, LDA., legal entity no. ..., with registered office at ..., ... (hereinafter referred to as Claimant or Taxpayer), filed on 2019-02-21 a request for constitution of an arbitral tribunal, pursuant to the provisions of paragraph a) of no. 1 of articles 2, 5, no. 2, paragraph a), 6, no. 1 and 10, nos. 1 and 2, all of Decree-Law no. 10/2011, of 20 January (hereinafter referred to as RJAT) and of articles 1 and 2 of Order no. 112-A/2011, of 2 March, in which the Tax and Customs Authority (hereinafter designated as AT or Respondent) is summoned, with a view to declaring the illegality of the act denying the gracious appeal no. ...2018..., and consequently of the IRC assessment no. 2018..., relating to the year 2014, in the amount of 58,044.75 €, compensatory interest of 5,953.96 €, and demonstration of accounts reconciliation, totaling the global amount of 64,397.84 €.

1. The request for constitution of the Tax Arbitral Tribunal was accepted by His Excellency the President of CAAD, and immediately notified to the Respondent in accordance with legal procedures.

2. Pursuant to and for the purposes of the provision in paragraph a) of no. 2 of article 6 of RJAT, by decision of His Excellency the President of the Deontological Council, duly notified to the parties within the prescribed periods, the undersigned was designated as arbitrator, who communicated to that Council acceptance of the assignment within the period provided for in article 4 of the Code of Deontology of the Centre for Administrative Arbitration.

3. On 2019-04-09 the parties were notified of this designation, and neither party manifested the will to refuse the arbitrator's designation, in accordance with the combined provisions of article 11, no. 3, paragraphs a) and b) in the wording conferred upon them by Law no. 66-B/2012, of 31 December.

4. The singular arbitral tribunal was constituted on 2019-05-02 in accordance with the prescription of paragraph c) of article 11 of RJAT, in the wording conferred upon it by article 228 of Law no. 66-B/2012, of 31 December.

5. Duly notified to do so, through an order issued on the aforesaid date, the Respondent presented its reply on 2019-05-31, and on that same date, proceeded to attach the administrative file (PA).

6. By order issued on 2019-06-03, duly notified to the parties, which justified, among other things, the waiver of the meeting referred to in article 18 of RJAT, and indicating as the date for the rendering of the final decision and its notification to the parties the first of September of two thousand and nineteen, the parties were invited to present, if they so wished, written submissions.

7. As of 2019-06-24 the Claimant proceeded to attach its written submissions, and in turn, the AT proceeded to attach its submissions on 2019-06-26.

8. Through an order dated twenty-eight August of two thousand and nineteen, and for the reasons flowing therefrom, the period was extended, with final date of fifteen October of two thousand and nineteen, for the rendering of the judgment and its notification to the parties.

9. To support its claim, the Claimant invokes, in summary and with relevance for present purposes the following; (which is mentioned by transcription, given the circumstance that it is fundamentally a matter of conclusions extracted from tables contained in the request for arbitral pronouncement):

10.1. "The intention of this petition is to demonstrate that the values initially presented by the claimant were incorrect, due to an inaccurate determination of final inventories for 2013 and 2014, a fact for which the claimant hereby repents, it being essential to demonstrate with accuracy the cost of goods sold, which is given by the following formula – Opening Stock (EI) + Purchases of the Year – Closing Stock (EF).

The claimant presented an opening stock value of 2,303,409.67 Euros, which resulted from an incorrect calculation of the allocation of work-related expenses in years prior to 2014.

The tax authority, as a consequence of the inspection action, presents the following table of opening stock for 2014.

Thus, a discrepancy is verified between the values of opening stock presented by the claimant and the value presented by AT.

Now, based on the incorrect valuation of opening inventory, a difference in opening inventory of 302,260.69 Euros is calculated, which results from the differential between the 2,303,409.67 euros – value of opening stock presented by the claimant and the value of opening stock presented by AT - 2,001,148.98 euros.

However, the reason for this differential remained unclear, since neither the claimant nor the Tax Inspection Services managed to determine with accuracy the value of the opening inventory for 2014.

It is thus necessary to demonstrate the value of real property included in the opening inventory for 2014, but for better understanding, we must go back to the opening inventory for 2013 and allocate the expenses incurred on work during the year 2013, so as to determine what value the real property had at the end of 2013 and which transferred in stock to the year 2014.

Thus, it is important to analyze the following tables:

These would be the values of real property in stock at the beginning of 2014.

Based on the correct valuation of opening inventory, we calculated the difference in opening inventory in the amount of 156,341.40 Euros, resulting from the difference between the 2,303,409.67 Euros incorrectly presented by the claimant and the correct value of opening stock for the year 2014 – 2,147,068.27 Euros.

With regard to the value of purchases, there is no reservation, as what appears in the AT report is accurate.

As for closing inventories, there are differences in their valuation, which it is important to clarify.

Although the real property included in the closing inventory for 2014 coincide with the data in the AT registry, there are differences in the valuation of closing inventories, which result from corrections to the allocation of work-related expenses in the year 2013, which in turn influenced the value of opening stock and closing stock for 2014.

The Tax Inspection Service (SIT), during the inspection action, identified the incorrect determination of closing inventories for 2013 and 2014, as appears from the SIT report; however, they failed to identify what the correct values were in order to calculate the exact corrections to be made to taxable income.

We can thus verify through the following table that this difference was considered by the tax inspection service.

And, had they proceeded to make corrections to the allocation of expenses and work to real property, they would have reached the conclusion that is reflected in the following table:

Thus, and based on corrected opening stock, the cost of goods and materials consumed was calculated at 1,305,127.76 Euros, as demonstrated in the following table:

In the Tax Inspection Service report there is a line item of other expenses, with reference to Municipal Tax on Onerous Real Estate Transfers (IMT).

As to this line item, it is important to note that, by error, an IMT refund of 6,095.44 Euros was considered.

Now, the refund of IMT paid previously should be considered as income, in accordance with Article 20 of CIRC.

In light of the above and the corrections to existing errors, we consider the following:

Thus, and once the due corrections have been made, we consider that the claimant should be refunded the amount of 30,346.09 Euros, as demonstrated in the following table:

10.2. The Claimant concludes its initial petition requesting that the request for arbitral pronouncement be considered "well-founded and proven, with the consequent annulment of the tax act being challenged, giving rise to an assessment that takes into account the above corrections" and "the AT be condemned to refund to the claimant the amount of € 30,346.09 (thirty thousand three hundred and forty-six euros and nine cents) paid in excess".

1. As mentioned, on 2019-05-31 the Tax and Customs Authority proceeded to attach the PA and presented its reply where, fundamentally, in brief summary and with relevance herein, it defends the following (which is likewise mentioned, in the same manner, and mostly by transcription, given the circumstance that it is fundamentally a matter of conclusions extracted from tables contained in the reply):

"In light of the grounds described in the inspection report, the taxable profit declared was subject to correction as follows:

DECLARED TAX LOSS -30,595.92 €

CORRECTIONS 271,186.75 €

TAXABLE PROFIT 240,590.83 €

The total value of corrections resulted from the sum of the following amounts:

• 256,996.70 € - correction of the cost of goods sold (CMV) from 1,461,852.94 € to 1,202,856.19 €

• 6,095.00 € - amount improperly recorded as expense, relating to an IMT refund

• 6,095.00 € - income from the IMT refund not recorded.

In order to request the annulment of the assessment, the Claimant, in its gracious appeal, requested correction of the CMVMC relating to corrections to opening inventory and closing inventory for 2014 to € 126,787.05, challenging the amount of € 258,996.75.

Notwithstanding, the Claimant Company has now presented a new series of calculations, the values of which it wishes to see reflected in the IRC assessment act.

In this regard, it is important to note that, contrary to what is alleged in points 8 and 9 of the PI, the values contained in the presented table are not values calculated by AT, but rather the value of real property calculated by the company as of 31-12-2013, according to the inventory table presented to Tax Inspection, which constitutes Annex 1 of the inspection report.

This means that Tax Inspection accepted as correct the valuation contained in the stock table presented to it.

It should also be noted that the company has, over time, presented different inventory values, as detailed below:

• Opening Stock declared in IES and accounting: € 2,303,409.67;

• Opening Stock declared in the inventory table presented to Tax Inspection: € 2,001,148.98;

• Opening Stock it wished to be recognized in the Gracious Appeal: € 1,314,418.03;

• Opening Stock it wishes to be considered herein: € 2,147,068.27.

III.1.1. Values declared for IRC purposes

III.1.2. Analysis of Income – Sales – account 71

In this line item, the inspection services found recorded sales of various real properties, for the total amount of €1,485,000.00, with supporting documentation being the respective deeds:

• Other Income – account 78

Regarding this line item, the SIT verified that the total of 151,000.00 relates to:

• € 100,000.00, partial advance payment of the price and deposit for the sale of a real property supported by a promise to purchase and sell contract, which subsequently did not materialize;

• € 10,000.00 sale of light goods vehicle, Invoice no. 3/2014;

• € 18,000.00 rental of ... lot 1 block A and B. This real property is under real estate leasing, at the date the leasing contract was with B...;

• € 23,000.00 rental of the Warehouse ... lot ...

III.1.3. - Analysis of Expenses – Cost of Goods Sold and Materials Consumed

With regard to the value declared as cost of goods sold and materials consumed, the SIT verified that the value amounts to € 1,461,852.94, as per Annex 1 of the tax inspection report (RIT).

This value is determined as follows:

CMVMC = Opening Inventories + Purchases – Closing Inventories

a) Opening Inventories

At the beginning of 2014 and as appears in the AT registry, the claimant's assets consisted of the following real properties:

According to the values recorded in the accounting records, as well as in the annual declaration presented, the opening inventory for 2014 amounts to € 2,303,409.67, thus verifying a difference of € 302,260.69.

This inventory value and in accordance with the 2013 trial balance, corresponds to the following assets:

• 32101 – Real Property – Main € 1,403,409.67

• 32102 – Warehouse ..., lot ... – € 900,000.00

                                                              € 2,303,409.67
  

According to the 2013 inventory table (Annex 1 of RIT), in the final value is included a real property of € 184,664.14, whose sale occurred in 2012, (Annex 2) that is, the opening inventory for 2014, is influenced by a real property whose sale occurred in a previous year, so, if from the value declared by the taxpayer, now claimant, the real property already sold is deducted, an inventory of € 2,118,745.50 is reached.

This value is, however, higher than the value calculated in the previous table, by €117,596.60, which, despite the clarifications provided by the certified accountant, was not possible to verify, so the SIT considered the value calculated and contained in the previous table (€ 2,001,148.98).

b) Purchases

According to the accounting records, as well as the data contained in the AT registry, the SIT calculated that the Claimant acquired the following real properties:

The Claimant added the amount of € 50,508.34, which according to accounting records/documents relate to expenses with the real properties sold. Thus, purchases total the amount of € 535,508.34.

c) - Closing Inventories

The following are the real properties included in the closing inventory for 2014, which coincide with the data contained in the AT registry (Annex 3 of RIT):

From the analysis carried out, the SIT verified that the real property identified as article ... (lot... no...), fraction B was acquired in 2014 for the amount of € 100,000.00, with the taxpayer incorrectly valuing it at € 143,263.94, thus verifying a difference of € 43,263.94, that is, the correct inventory value amounted to €1,333,801.13.

Thus and based on the corrected opening stock, the SIT calculated a cost of goods sold and materials consumed of € 1,202,856.19, as per the detailed table - annex 4 of RIT.

Comparing this value with that declared by the taxpayer of € 1,461,852.94, it is concluded that € 258,996.75 was improperly considered as an expense, whereby under article 23 of CIRC, the same was added for purposes of calculating taxable profit.

This difference results in part from the incorrect determination of closing inventories for 2013 and 2014, as well as from the incorrect valuation assigned to real properties acquired and sold in 2014:

d) - Other Expenses

Municipal Tax on Onerous Real Estate Transfers (IMT)

From the analysis carried out, it was further verified that the claimant considered as expenses € 6,095.44, whose supporting document refers to an IMT refund - Municipal Tax on Onerous Real Estate Transfers.

Since it is an IMT refund, the same cannot be considered as an expense.

Thus, when an IMT refund previously paid is involved, the same must be considered as income, in accordance with article 20 of CIRC.

In light of the above, and following the elements collected and analyzed by the SIT, the following corrections were made:"

1. The AT concludes its reply in the sense of the "inadmissibility of the present request for arbitral pronouncement, with the Respondent being absolved of the claims, with all legal consequences".

2. The Singular Arbitral Tribunal is materially competent and is regularly constituted, in accordance with the provisions of articles 2, no. 1, paragraph a), 5 and 6 of RJAT;

3. The parties have legal personality and capacity, are duly and legally represented (articles 3, 6 and 15 of the Code of Procedure and Tax Process, pursuant to article 29, no. 1 paragraph a) of RJAT:

4. No exceptions were raised that should be known;

5. The case does not suffer from nullities;

6. There is thus no obstacle to the consideration of the merits of the case.

II – GROUNDS

A. MATTER OF FACT

A.1. Facts established as proven

With relevance for the assessment and decision of the issue raised, the following facts are established and taken as proven:

1- The Claimant has as its corporate purpose "real estate investments, real estate promotion, civil construction, property divisions, public works, purchase and sale of real property and resale of property acquired for that purpose, real estate management, real estate rental";

2- Being classified for VAT purposes in the exemption regime (article 9 of CIVA) and for IRC purposes under the general regime;

3- Based on Declaration Form 22 – IRC and Annex A of the annual declaration of accounting and tax information, the Claimant recorded a tax loss for the fiscal year 2014 of 30,595.92 €.

4- In the context of Service Order number OI 2016... of 22/01/2016 issued by the Tax Inspection Services of the Finance Department of ..., the Claimant was subject to an inspection procedure of external nature, initially of partial character (IRC), subsequently having its scope been altered to general with focus on the fiscal year 2014;

5- In the Tax Inspection Report, the following can be read, among other things:

III. DESCRIPTION OF THE FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS

Based on the income declaration Form 22-IRC and Annex A of the annual declaration of accounting and tax information, the values mentioned therein were compared with the accounting records, and no differences were found between the declared values and the accounting records.

III.1. VALUES DECLARED FOR IRC PURPOSES:

Statement of Results by Type (SNC)

Income and Expenses Year 2014

Sales and services provided 1,485,000.00 €

Cost of goods sold (CMVMC) -1,461,852.94 €

Other Income 151,000.00 €

Supplies and external services -27,555.86 €

Other expenses and losses -18,099.50 €

Interest and similar charges supported -129,365.62 €

Result before taxes -30,595.92 €

Income tax for the period 0.00 €

Net result for the period -30,595.92 €

Tax loss 30,595.92 €

III.1.2. Analysis of Income

• Sales – account 71

In this line item are recorded sales of various real properties, for the total amount of €1,485,000.00, with supporting documentation being the respective deeds:

Sales 2014

Date Article Fraction Value

10-01-2014 …(lot… no…) I 4th RTD 220,000.00 €

17-02-2014 …/…/… - 400,000.00 €

28-02-2014 … (lot … no…) B GF RTD 125,000.00 €

30-05-2014 … (lot… no.…) J 4th LFT 220,000.00 €

09-06-2014 … (lot… no…) E 2nd RTD 170,000.00 €

08-10-2014 … (lot…no…) D 1st LFT 170,000.00 €

23-12-2014 …(lot… no…) H 3rd LFT 180,000.00 €

Total 1,485,000.00 €

•          Other Income – account 78
  

The total recorded in this line item of € 151,000.00 relates to:

. € 100,000.00, partial advance payment of the price and deposit for the sale of a real property supported by a promise to purchase and sell contract, which subsequently did not materialize;

. € 10,000.00 sale of light goods vehicle, Invoice no. 3/2014;

. € 18,000.00 rental of the Warehouse ... lot ... block .... This real property is under real estate leasing, at the date the leasing contract was with B... Credit;

. € 23,000.00 rental of the Warehouse ... lot ...

From the analysis and procedures carried out, no irregularities were detected regarding the income declared for tax purposes.

III.1.3. - Analysis of Expenses

•          Cost of Goods Sold and Materials Consumed
  

The value declared as CMVMC amounts to € 1,461,852.94, as per Annex 1

This value is determined as follows:

CMVMC = Opening Inventories + Purchases – Closing Inventories

• Opening Inventories

At the beginning of 2014, as appears in the AT registry, the taxpayer's assets consisted of the following real properties:

Opening Stock 2014

Parish Article Fraction Value Notes

… …(lot… no…) A 165,793.35 € (*)

… …(lot… no…) A 168,007.78 € (*)

… …(lot… no…) B 144,900.69 € (*)

… … (lot… no…) D 185,915.77 € (*)

… … (lot… no…) E 187,263.69 € (*)

… …(lot… no…) I 249,267.70 € (*)

            Sub total                             1,101,148.98 €  

            Warehouse … lot …                          900,000.00 €      

TOTAL

2,001,148.98 €

(*) Values as per calculation table presented by the taxpayer (Annex 1)

According to the values recorded in the accounting records, as well as in the annual declaration presented, the opening inventory for 2014 amounts to € 2,303,409.67, thus verifying a difference of € 302,260.69.

This inventory value and in accordance with the 2013 trial balance, corresponds to the following assets:

• 32101 – Real Property – Main - € 1,403,409.67

• 32102 - Warehouse ..., lot ... – € 900,000.00

€ 2,303,409.67

According to the 2013 inventory table (Annex 1), in the final value is included a real property of

€ 184,664.14, whose sale occurred in 2012, (Annex 2) that is, the opening inventory for 2014, is

influenced by a real property whose sale occurred in a previous year, so, if from the value declared by the taxpayer

the real property already sold is deducted, an inventory of € 2,118,745.50 is reached.

This value is, however, higher than the value calculated in the previous table, by €117,596.60, which, despite

the clarifications provided by the certified accountant, was not possible to verify, so the value calculated and

contained in the previous table (€ 2,001,148.98) is considered.

• Purchases

According to the accounting records, as well as the data contained in the AT registry, the taxpayer acquired the following real properties:

Purchases 2014

Parish Article Fraction Value

… …(lot…no…) B 100,000.00 €

… …(lot… n…) H 133,000.00 €

… …/…/… - 85,000.00 €

Total 485,000.00 €

The taxpayer added the amount of € 50,508.34, which according to accounting records/documents relate to expenses with the real properties sold. Thus, purchases total € 535,508.34.

• Closing Inventories

The following are the real properties included in the closing inventory for 2014, which coincide with the data contained in the AT registry (Annex 3):

Closing Stock 2014

Article Fraction Value

…(lot… no…) A 165,793.35 €

…(lot… no…) B 143,263.94 €

…(lot1… no…) A 168,007.78 €

Lot … warehouse … 900,000.00€

Total 1,377,065.07 €

From the analysis carried out, it was verified that the real property identified as article... (lot... no...), fraction B was acquired in 2014 for the amount of € 100,000.00, with the taxpayer incorrectly valuing it at € 143,263.94, thus verifying a difference of € 43,263.94, that is, the correct inventory value amounted to €1,333,801.13.

Thus and based on the corrected opening stock, a cost of goods sold and materials consumed of € 1,202,856.19 was calculated, as per the detailed table annex 4.

Comparing this value with that declared by the taxpayer of € 1,461,852.94, it is concluded that € 258,996.75 was improperly considered as an expense, whereby under article 23 of CIRC, the same will be added for purposes of calculating taxable profit.

This difference results in part from the incorrect determination of closing inventories for 2013 and 2014, as well as from the incorrect valuation assigned to real properties acquired and sold in 2014:

Article Fraction Acquisition Value (1) Accounting Value (2) Difference (1)-(2)

…(lot…no…) H 133,000.00 € 186,589.73€ 53,589.73€

…(lot… no…) J 167,000.00 € 246,571.88€ 79,571.88€

Total 300,000.00 € 433,161.61€ 133,161.61€

• Other Expenses

Municipal Tax on Onerous Real Estate Transfers (IMT) ...

From the analysis carried out, it was verified that the taxpayer considered as expenses € 6,095.44, whose supporting document refers to an IMT refund - Municipal Tax on Onerous Real Estate Transfers. Since it is an IMT refund, the same cannot be considered as an expense. When asked about this, the certified accountant stated it had been an oversight.

On this matter, it is appropriate to refer to the provision in no. 11 of NCRF no. 18 "11. The costs of purchasing inventories include the purchase price, import duties and other taxes (which are not subsequently recoverable from the fiscal authorities by the entity)", whereby IMT is thus capable of being added to the value of the cost of the real property.

Thus, when an IMT refund previously paid is involved, the same must be considered as income, in accordance with article 20 of CIRC.

III.2. CONCLUSION

In light of the above in this report, following the elements collected and analyzed, we determine that the following corrections are warranted:

DECLARED INCOME (1) - 30,595.92 €

CORRECTIONS

Cost of goods sold (CMVMC) improperly applied 258,996.75 €

Other expenses and losses improperly applied 6,095.00 €

Income not declared 6,095.00€

TOTAL CORRECTIONS (2) 271,186.75€

CORRECTED RESULT (1)+(2) 240,590.83 €

6- From the assessment resulting from the tax inspection, the Claimant presented a gracious appeal bearing number ...20018...,

7- Such appeal was denied by order of 2018-11-21, issued by the Head of the Tax Justice Division, by delegation, notified to the Claimant.

8- In the opinion that supported the dismissal of the gracious appeal the following can be read:

"In light of the grounds described in the inspection report, the DECLARED TAXABLE PROFIT was subject to correction as follows:

DECLARED TAX LOSS - 30,595.92 €

CORRECTIONS 271,186.75 €

TAXABLE PROFIT 240,590.83 €

The total value of corrections resulted from the sum of the following amounts:

• 258,996.70 € - correction of the cost of goods sold (CMV) from 1,461,852.94 € to 1,202,856.19 €

• 6,095.00 € - amount improperly recorded as expense, relating to an IMT refund

• 6,095.00 € - income from the IMT refund not recorded.

In summary, the appellant alleges erroneous quantification of taxable profit by understanding that the CMV is 1,335,065.89 € and not the amount of 1,202,856.19 € considered by the tax inspection.

In point 22 of the petition the appellant presents a table with the CMV calculation (page 8) which in its understanding should be considered for purposes of calculating taxable profit, the concept of which is defined in article 17 of CIRC.

The CMV is given by the following formula:

• OPENING STOCK (EI) + PURCHASES OF THE YEAR – CLOSING STOCK (EF)

According to values presented by the appellant:

• EI = 1,314,418.03 €

• PURCHASES = 514,860.49 €

• EF = 514,860.45 €

The CMV of 1,335,065.89 € is calculated.

However, from the analysis of document no. 4 (page 12) in which the appellant calculates the value of EI and EF, it is verified that in the calculation of the value of EI, the amount of 162,293.38 € relating to the real property corresponding to article ... fraction E of the Parish Union of ... and ..., a real property that was sold in 2012, and which therefore cannot be part of the EI value for 2014, is considered, thus deducting this amount, 162,293.38 €, from the value of EI stated by the company we have:

• EI = 1,152,124.65 € (1,314,418.03 € - 162,293.38 €)

• Purchases = 535,508.34

• EF = 514,860.49

• CMV = 1,172,772.50 (1,152,124.65 + 514,860.49)

that is, considering the data presented by the appellant, corrected only by the deduction of the value of the real property already sold in 2012, a CMV inferior to that considered by tax inspection is calculated, which would lead to the calculation of taxable profit of a value higher than the one that served as the basis for the challenged assessment"

9- The Claimant proceeded on 16/03/2019 to payment corresponding to the assessment in question.

10- On 2019-02-21 the Claimant filed with CAAD a request for arbitral pronouncement which gave rise to the present case.

2. Facts established as not proven

With relevance for the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the matter of fact established as proven and not proven

Regarding the matter of fact, the tribunal does not have to pronounce on everything that was alleged by the parties, but rather it has the duty to select the facts that matter for the decision and distinguish the proven from the not proven matter (see, article 123, no. 2 of CPPT, and article 670, no. 3 of CPC, applicable pursuant to article 29, no. 1, paragraphs a) and e) of RJAT.

Thus, the facts pertinent to the judgment of the case are chosen and delimited based on their legal relevance, which is established in light of the various plausible solutions to the (question(s) of Law (see article 596 of the Civil Code of Procedure, applicable pursuant to article 29, no. 1 paragraph e) of RJAT.

On the other hand, according to the principle of free assessment of evidence, the tribunal bases its decision in relation to the evidence produced in its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the case and in accordance with its experience in life and knowledge of persons (see, article 607, no. 5 of the Code of Civil Procedure as amended by Law no. 41/2013, of 26 June)

Only when the probative force of certain means is pre-established by law (e.g., probative force of authentic documents (see, article 371, no. 3 of the Civil Code)) does the principle of free assessment of evidence not dominate the evaluation of the evidence produced.

Thus, taking into account the positions assumed by the parties, in light of article 110, no. 7 of CPPT, the documentary evidence of the Claimant, and the attached PA, the aforementioned facts are considered proven with relevance for the decision.

B. MATTERS OF LAW

Object and delimitation

• At issue and as a dispute between the parties are divergences regarding the opening and closing values of stock as calculated differently by each of them, despite the fact that the Claimant acknowledges "that the values initially presented (…) were incorrect, due to an inaccurate determination of closing inventories for 2013 and 2014 (…)" (see, article 6 of the request for arbitral pronouncement) and that "it presented an opening stock value of 2,303,409.67 Euros, which resulted from an incorrect calculation of the allocation of work-related expenses in years prior to 2014". (see, article 7 of the request for arbitral pronouncement).

With regard to the amount relating to the municipal tax on onerous real estate transfers, it should likewise be noted, according to the Claimant, that "by error an IMT refund of 6,095.44 Euros was considered" which "should be considered as income in accordance with Article 20 of CIRC" (see, articles 24 and 25 of the request for arbitral pronouncement)

• Given that the issue emerging from the present case fundamentally originates from the divergence between the parties regarding the calculation of values as a result of the inspection procedure to which the Claimant was subject, it would appear pertinent, and before addressing the substantive issue, to make still a very brief incursion into the Supplementary Rules of Tax Inspection Procedure (RCPIT) and, related to this, the burden of proof in tax law, without prejudice to a perfunctory reference regarding technical corrections.

Indeed:

As is understood from the Decision of the Supreme Administrative Court of 19/04/2017, "it follows from article 17 of CIRC and 75 of LGT that the determination of taxable profit is based on accounting or records organized in accordance with commercial and tax law, but may nonetheless be subject to correction by the AT if it contains errors or inaccuracies".

As is noted in the Tax Inspection Report, the reason for the inspection procedure underlying the case "arose in the context of tax control actions in the real estate sector.

Now,

As is also mentioned above, the claimant itself admitted an "inaccurate determination of closing inventories for 2013 and 2014," a fact which, by itself, would confer legitimacy to the inspection in question, and subsequent arithmetic corrections to taxable income, here challenged.

It is recalled that "the corrections that AT can make to taxable income can result from a direct assessment, through the collection and processing of data from declarations, verification of their content and corrections of any errors.

This type of assessment is thus based on the analysis of the taxpayer's declaration or elements of its accounting, giving rise to technical corrections (or purely arithmetic), since they do not involve a subjective judgment about the reality of the facts, or to corrections subject to a judgment of assessment.

Technical corrections are intended to correct income recorded in amounts lower than those shown in the issued invoices, to disregard costs or losses that cannot be shown to be indispensable for the achievement of income and gains subject to tax or for the maintenance of the income source, or deductions of tax relating to simulated operations, as well as deductions of tax referred to in invoices or equivalent documents that do not comply with the formal requirements legally required"

In the same sense, the Decision of the Supreme Administrative Court of 03/06/2015 can be seen, from which it is understood:

"I- The corrections introduced by the Tax Administration in the income declaration presented by the taxpayer, whether it has origin in the analysis of the own declaration and respective accounting documents supporting the taxpayer's own, whether they have origin in the analysis of the income declaration and respective accounting documents supporting the taxpayers with whom the appellant had business relations, these are technical corrections."

Applicable legal framework

Article 62 of the Supplementary Rules of Tax Inspection Procedure (RCPIT) provides under no. 1 that "for conclusion of the procedure a final report is prepared with a view to the identification and systematization of the facts detected and their legal and tax qualification", a report which "must be notified to the taxpayer" under the conditions provided for in no. 2 and which must contain, among other things, and for what is relevant here, the "description of the tax-relevant facts that alter the values declared or to be declared subject to taxation, with mention and attachment of the means of proof and legal grounds supporting the corrections made", as provided for in paragraph i) of no. 3 of article 62.

This paragraph i) (together with h)) will constitute the grounds for corrections that will serve as the basis for the RCPIT act, tax acts or matters relating to taxation that result from the inspection report.

A heightened caution is assumed herein in terms of substantiation, parallel to similar provision that derives from no. 1 of article 77 of the General Tax Law:

Article 77 – Substantiation and Effectiveness

"1. The decision of the procedure is always substantiated by means of a brief exposition of the grounds of fact and law that motivated it, and the substantiation may consist of a mere declaration of agreement with the grounds of prior opinions, information or proposals, including those which form part of the tax inspection report".

No. 2 of this same provision expressly provides that "the substantiation of tax acts may be made in summary form, and must always contain the applicable legal provisions, the qualification and quantification of tax facts and the operations for calculating taxable income".

The technical corrections (or purely arithmetic) made by AT regarding the Claimant's taxable income resulted from a direct assessment based on documents, accounting elements and others provided by the Claimant or made available by it to the SIT (e.g. Form 22, IES annexes and others), with the purpose, as is understood from no. 1 of article 83 of LGT "of determining the value of income or assets subject to taxation."

• As results from the Tax Inspection Report partially transcribed in the part relevant here, AT proceeded to make corrections to the Claimant's taxable income in the terms explained there.

The first observation to be noted, and as already signaled, is that such calculation (corrections) was achieved through the use of direct assessment.

And, another issue that appears to be latent in the present case, emerges from the burden of proof and the substantiation of the conclusions reached in the tax inspection report.

In fact, the Claimant supports its thesis on the tables presented by it and the conclusions it draws therefrom, without, however, supporting them or presenting any documentary evidence that would serve as their basis, and it would certainly not be through any other means of proof (namely testimonial) that it would manage to demonstrate the accuracy of the calculations it presents with a view to undermining the correction to taxable income achieved by the SIT.

It appears that the binding to the principle of material truth to which AT is subject also in the scope of article 6 of RCPIT which states that "the inspection procedure aims at the discovery of material truth, with the tax administration adopting officially the appropriate initiatives to this objective", is not at issue.

Regarding the segment direct assessment, versus indirect assessment, the recent decision issued on 11-04-2019 by the Central Administrative Court South is invoked.

"1. The taxable profit of legal persons, such as the appellant, (and other entities mentioned in paragraph a) of no. 1 of article 3 of CIRC) is constituted by the algebraic sum of the result for the period and of the positive and negative variations in assets verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code (article 17/1 CIRC and 83/1 LGT)

1. But if declarations, accounting or records reveal omissions, errors, inaccuracies or founded indications that they do not reflect or impede knowledge of the real taxable income of the taxpayer, the presumption of truth and good faith credited to taxpayers' declarations and calculations entered in their accounting ceases (article 75/1, 2-a) LGT).

2. And if accounting unfaithfulness makes it impossible to prove and exactly quantify directly the essential elements necessary for the correct determination of taxable income (article 87/1 a) and 88 LGT) there is place for indirect assessment.

3. Not all omissions, imperfections or deficiencies in accounting lead to taxation by indirect methods. The law also requires that these "failures" be so serious that they make it impossible to prove and exactly quantify directly the essential elements needed for the correct determination of taxable income (Article 87/1, b) and 88 LGT).

4. If it is possible to reconstruct the essential elements for the exact determination of taxable income by working the known elements in a more rigorous manner, the AT cannot resort to indirect assessment".

Burden of proof

The fundamental rules on the burden of proof are contained in articles 74 and 75, no. 1 of LGT, with the primary rule being that stated in article 74, no. 1 of LGT, establishing that "the burden of proof of the facts constituting the rights of the tax administration or of the taxpayers falls on whomever invokes them."

The application of this rule is reduced to the fact that doubt about the reality of a fact is resolved against the party invoking it and to whom the fact is advantageous (see, article 414 of the Code of Civil Procedure).

It would thus fall, in our understanding, to the Claimant to allege and above all to prove documentarily how it arrived at the values it presents and which are reflected in the "tables" it presents.

If, indeed, article 75 of LGT establishes a legal presumption in favor of the taxpayer by providing that "the declarations of the taxpayers presented in accordance with the law are presumed to be true and in good faith, as well as the data and calculations entered in their accounting or records, when these are organized in accordance with commercial and tax law, without prejudice to the other requirements on which the deductibility of expenses depends", and that whoever has a presumption in their favor must prove the facts that are its prerequisites, but does not have to prove the fact to which it leads, as is expressed in article 350, no. 1 of the Civil Code, the truth is that this presumption ceases in the situations provided for in no. 2 of article 75 of LGT, specifically when "the declarations, accounting or records reveal omissions, errors, inaccuracies or founded indications that they do not reflect or impede knowledge of the real taxable income of the taxpayer" and "the taxpayer does not fulfill the duties that fall to it to clarify its tax situation, except where, under this law, the refusal to provide information is legitimate".

Now,

In the same manner as what was written in the arbitral decision, issued in the context of case no. 236/2014-T of 4 May 2015, issued in the context of CAAD, it would fall to evidently demonstrate that the Claimant itself, acknowledging the existence of deficiencies in its accounting records, as appears from the request for arbitral pronouncement, did not present any documentary evidence that could support the calculations it presents in the tables that appear in its petition.

Thus being so, and returning to the mentioned arbitral decision "(…) whenever paragraph a) of no. 2 of article 75 of LGT applies, the burden of proof of the facts declared or entered in its accounting or records on which there are evidentiary doubts shall fall on the taxpayer" whereby the doubts that in the court proceedings subsist about the matter of fact cannot be considered founded doubts for purposes of no. 1 of article 100 of CPPT (see thus Jorge Lopes de Sousa, Code of Procedure and Tax Process annotated and commented, vol. II, 6th ed., 2011, p. 133).

From that, the burden of demonstration of the effective facts entered and the reasons underlying the adjustments made in the accounting falls on the Claimant, the bare doubt about the viability of its justification not being sufficient, for the purposes of no. 1 of article 100 of CPPT have their fulcral application when it is the Tax Administration that asserts the existence of tax facts and their quantification (see thus the decision of the Supreme Administrative Court of 26.2.2014, proc., 0955/11)".

• The Claimant, as mentioned, failed to prove the values it presents, not fulfilling the burden of proof which, in this case, fell upon it, given the noted cessation of the presumption, in light of the provision of no. 2 of article 75 of LGT.

On the other hand, we understand, and we are led to conclude, that within the scope of the inspection procedure AT observed the principles that inform the tax inspection procedure, inscribed in article 5 of the Supplementary Rules of Tax Inspection Procedure (RCPIT) and its action does not merit any censure in the factual situation underlying it, having culminated with the additional assessment made in the present case.

Issue of the request for replacement of the assessment here challenged

• Although only raised/requested in the written submissions, the Claimant requests "the annulment of the IRC assessment note no. 2018 ... for the fiscal year 2014, and that it be replaced by another which takes into account the corrections which were demonstrated in the initial petition".

The competence of the arbitral tribunals functioning under the aegis of CAAD is, in the first place, limited to the matters indicated in article 2, no. 1 of RJAT.

There it is stated that the competence of arbitral tribunals comprises the consideration of the following claims:

a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payments on account;

b) The declaration of illegality of acts determining taxable income when it does not give rise to the assessment of any tax, of acts determining taxable matter and of acts fixing patrimonial values (amended by Law no. 64-B/2011, of 30 December).

Beyond the direct consideration of the legality of acts of this type, the competence of arbitral tribunals functioning under the aegis of CAAD also includes competence to consider acts of second or third degree which have as their object the consideration of the legality of acts of those types, namely acts deciding gracious appeals and hierarchical appeals, as can be inferred from the express references made in article 10, no. 1, paragraph a) of RJAT to no. 2 of article 102 of CPPT (which refers to judicial challenge of decisions on gracious appeals under the wording prior to Law no. 82-E/2014, of 31 December) and to "the decision of the hierarchical appeal".

In this manner it is manifest that it does not fall within the scope of this competence to issue assessment notes replacing or regularizing assessments.

In fact, despite the understanding that has come to prevail, in harmony with long-standing uniform jurisprudence of the STA, that, following the declaration of illegality of assessment acts, rendered in judicial challenge proceedings, decisions condemning the payment of compensatory interest can be rendered, as well as, in light of the provision of article 171, no. 1 of CPPT, condemnation to the payment of indemnities for undue guarantee, the truth is that there is no legal support to permit condemnations of another type to be rendered, even if they are consequences, at an executive level, of the declaration of illegality of assessment acts.

In light of the above and without need for any other considerations, the singular arbitral tribunal does not have jurisdiction over the requested "replacement" of the assessment note underlying the present case.

Compensatory interest

The Claimant formulates, in its submissions, a request for compensatory interest provided for in article 43 of LGT.

As the request for arbitral pronouncement is not to be judged well-founded, it cannot be concluded that there is an absence of improper payments, nor a restitution of the amount paid, nor the payment of compensatory interest, in accordance with the provision of article 43, no. 1 of LGT.

III – DECISION

In light of what has been set forth, the Singular Arbitral Tribunal decides as follows:

a- To judge inadmissible the request for arbitral pronouncement formulated by the Claimant, with the Respondent being absolved therefrom,

b- To maintain in the legal order the tax acts which are the subject of the present case,

c- To condemn the Claimant to the payment of processing costs.

IV – VALUE OF THE CASE

In accordance with the provision in articles 296, no. 1 and 2 of the Code of Civil Procedure, approved by Law no. 47/2013, of 26 June, 97-A, no. 1, paragraph a) of the Code of Procedure and Tax Process, and article 3, no. 2 of the Regulation on Costs in Tax Arbitration Proceedings, the case is fixed at a value of 30,346.09 € (thirty thousand three hundred and forty-six euros and nine cents)

V – COSTS

In accordance with the provision in articles 12, no. 2, 22, no. 4 of RJAT and articles 2 and 4 of the Regulation on Costs in Tax Arbitration Proceedings, and Table I attached hereto, the amount of costs is fixed at 1,836.00 € (one thousand eight hundred and thirty-six euros).

NOTICE IS HEREBY GIVEN

Text prepared by computer, in accordance with the provision in article 131 of the Code of Civil Procedure, applicable by referral of article 29, no. 1, paragraph e) of the Legal Regime for Tax Arbitration, with blank verses and reviewed by the arbitrator.

[The wording of this decision is governed by the spelling prior to the Orthographic Agreement of 1990, except with regard to transcriptions carried out].

Fourth of October of two thousand and nineteen

The arbitrator

(José Coutinho Pires)