Process: 131/2018-T

Date: November 27, 2018

Tax Type: IUC

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 131/2018-T) addresses VAT regularization requirements under Article 78(5) of the Portuguese VAT Code concerning credit notes issued for advance payments in the hotel industry. A... S.A., a hotel operator, challenged VAT assessments totaling €12,028.58 arising from credit notes issued to regularize advance payments when final invoices were generated. The Tax Authority argued the company failed to provide proof that service recipients were aware of the credit notes or reimbursed for the VAT, as required by Article 78(5). The claimant contended that recipients were effectively informed and reimbursed because final invoices reflected the full service price with VAT calculated on the total amount, charging only the difference after deducting advances. The case raised significant questions about the interpretation of EU VAT Directive 2006/112/EC Article 90(1) regarding VAT base reduction when advances are regularized. The claimant requested a preliminary ruling from the CJEU on whether the Directive applies when credit notes cancel advance invoices and final invoices charge only the balance. This decision is crucial for hospitality sector operators using reservation systems requiring advance payments, as it clarifies documentation requirements for VAT regularization and the interplay between Portuguese law and EU VAT Directive provisions in cross-border interpretation scenarios.

Full Decision

ARBITRATION DECISION (consult full version in PDF)

I. REPORT

  1. A..., S.A., a legal entity no...., with registered office at Street ..., no...., ..., ..., in ..., requested the constitution of an arbitration tribunal in tax matters by raising a request for arbitration ruling against the act of express dismissal of a gracious complaint and, consequently, against the acts of assessment of Value Added Tax (VAT) and default interest, relating to various taxation periods of the year 2014 (Docs.1 to 6). As a consequence of said annulment, it requests the condemnation of the Tax Administration to reimburse the amount which it considers was unduly charged, in the total amount of € 12,028.58, plus the corresponding compensatory interest counted in accordance with legal terms.

  2. The questioned assessment acts are based on factual elements, established during tax inspection proceedings, which, according to the express understanding in the Tax Inspection Report (RIT), indicate a violation of the rule in no. 5 of article 78 of the VAT Code. According to the said Inspection Report, these are VAT regularizations in favor of the Claimant, based on credit notes issued with the purpose of annulling the tax relating to amounts initially invoiced as advances.

  3. In the said circumstances, according to the same Report, it would be prohibited for the Claimant to regularize in its favor the amount of tax initially assessed on those advances, given that it did not have in its possession, at the time of regularization, proof that the recipients had become aware of the credit note or that they had been reimbursed for the tax paid.

  4. As the basis for the request, filed on 20-03-2018, the Claimant alleges, in summary, that the decision dismissing the gracious complaint is vitiated by lack of reasoning and, with regard to the questioned VAT assessments and interest, that the legal requirements on which they are based are not met.

  5. In this sense, the Claimant alleges that the recipients of the services became aware and were effectively reimbursed for the tax to which the credit notes issued relate. In fact, according to its allegation, the final invoices relating to those services were issued at the total price of the service provided, on which the corresponding VAT was calculated. However, only the difference between the total price and the total amount of the advance, with the respective tax, was charged to the client.

  6. Considering, furthermore, that this concerns the application of Community regulations, namely, no. 1 of article 90 of Directive no. 2006/112/EC, of the Council, of 28/11, the Claimant requests that, before ruling on the merits, the following question be referred to the CJEU (and others, to be defined by the Tribunal), by way of preliminary ruling (cf. art. 267 of the Treaty on the Functioning of the European Union (TFEU)) "Does the provision in no. 1 of article 90 of Directive 2006/112/EC apply to a credit note issued for the purpose of regularizing an advance made by a private client at a moment preceding the performance of the service, when this credit note is issued when the service is performed to cancel the initial invoice, being issued a final invoice at the total price but with only the difference between the total invoiced price and the amount of the advance being charged?"

  7. In response to the request made, the Tax and Customs Authority (AT) ruled in the sense of the unfoundedness of this request for an arbitration ruling, maintaining the tax acts contested in the legal order and, in accordance therewith, for the acquittal of the Respondent entity.

  8. The request for constitution of the arbitration tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority.

  9. Under the terms of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20/01, as amended by article 228 of Law no. 66-B/2012, of 31/12, the Deontological Council appointed the signatory as arbitrator of the sole arbitration tribunal, who communicated acceptance of the appointment within the applicable period, having duly notified the parties.

  10. Having been duly notified of such appointment, the parties did not express any will to refuse the appointment of the arbitrator, in accordance with the combined terms of article 11, no. 1, paragraphs a) and b) of the Arbitration Regulations (RJAT) and articles 6 and 7 of the Deontological Code.

  11. Thus, in compliance with the provision in paragraph c) of no. 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31/12, the sole arbitration tribunal was constituted on 01-06-2018.

  12. Regularly constituted, the arbitration tribunal is materially competent, in view of the provision in articles 2, no. 1, paragraph a), of RJAT.

  13. The parties have legal personality and capacity and are entitled (arts. 4 and 10, no. 2, of RJAT, and art. 1 of Ordinance no. 112-A/2011, of 22/03).

  14. There are no nullities and no prior questions or exceptions were raised, so nothing prevents judgment on the merits, the present proceedings being thus in conditions for the final decision to be rendered.

  15. In view of the knowledge that derives from the procedural documents submitted by the parties, which is deemed sufficient for the decision, the Tribunal decided to dispense with the meeting to which article 18 of RJAT refers.

II. FACTUAL MATTER

  1. With relevance for the assessment of the issues raised in this request for an arbitration ruling, the following factual elements stand out, based on the elements contained in the record, in particular of the RIT, which, not being contested by the Parties, are deemed to be documented as proved:

16.1. A..., S.A. (A...), is a VAT taxable person, classified under the normal scheme, with monthly periodicity, which has as its object, among other activities, the hotel industry, catering, tourist enterprises and similar activities, activities which it carries out by means of several operational units located in national territory.

16.2. The various hotel units, which form part of A...'s activity, as is usual in the sector, use a service reservation system, and the vast majority of VAT regularizations in favor of the taxable person stem from the regularization of advances made by clients relating to such accommodation reservations or events.

16.3. At the moment of receiving the advance, A... proceeds to issue the respective invoice, in compliance with the provision in paragraph b) of no. 1 of article 29 of the VAT Code.

16.4. Considering that, as follows from paragraph c) of no. 1 of article 8 of the VAT Code, the tax is chargeable at the moment the payment is made, for the amount of the receipt, the Claimant shows the amount of VAT assessed in field 4 of the respective periodic declarations.

16.5. Subsequently, when the service is provided, A... proceeds to issue a credit note to regularize the advance contained in the initial invoice and to issue a new invoice for the total price of the service provision, reporting the VAT assessed in field 4 of the periodic declaration relating to the period of issuance of the final invoice and, in field 40, the amount of VAT to be regularized contained in the credit note issued.

16.6. In the period from 09-09-2015 to 15-02-2016, the Claimant was subject to an inspection action, which focused on various taxation periods of 2014 and 2015, in respect of VAT, under the Service Order (OS) no. OI2015..., of 20-08-2015.

16.7. Said inspection action had as its object the control of VAT regularizations in favor of the taxable person, declared in field 40 of the periodic VAT declarations, for the periods of 2014 and 2015.

16.8. Considering that, when regularizing the tax in its favor, the Claimant did not have in its possession the proof provided for in no. 5 of article 78 of the VAT Code in relation to several credit notes, the Tax Administration, based on the factuality and reasoning contained in the RIT, carried out the following VAT and interest assessments (Docs.2 and 3):

[details of assessments]

16.9. Said additional assessments result from the disregard of the regularizations, in favor of the taxable person, of the tax included in the following credit notes:

[list of credit notes]

16.10. As stated in the RIT, "the taxable person was requested for elements in order to prove whether VAT was assessed in relation to the invoices in which the advances are deducted. Analyzing the extract from account 243 and the PMS and POS listings, it appears that the VAT of the final invoices is shown as assessed for the total value of the services provided..."

16.11. In the same Report it is concluded that, "In situations where the VAT regularization results from deduction of the advance in the final invoice, it is considered that the buyer became aware of the annulment carried out when receiving the final invoice. In situations where a credit note is issued, which aims to annul an invoice, the taxable person must have in its possession proof that the buyer became aware of the rectification, as provided in no. 5 of art. 78 of the VAT Code, proof which was not presented by the taxable person for the credit notes mentioned in the following table..."

16.12. Therefore "Without the taxable person having in its possession written confirmation made by its clients that they received communication evidencing the amount of VAT rectified, or that they were reimbursed for the respective tax, the provisions established in no. 5 of art. 78 of the VAT Code are not deemed to be complied with, making the respective tax regularization improper. In view of the foregoing, it is concluded that the requirements set out in no. 5 of article 78 for the regularization in favor of the taxable person to be carried out are not met."

16.13. Following the notification of the additional tax and interest assessments mentioned above, and despite having made the respective payment (Doc.4), the Claimant, on 19-06-2016, filed a gracious complaint (Doc.5).

16.14. This complaint was dismissed in its entirety, by dispatch of 13-12-2017, of the Head of Division of the Finance Directorate of..., issued under delegation of authority.

16.15. The decision in question, notified to the Claimant by letter of 17-12-2017, is based essentially on the factuality contained in the Tax Inspection Report, in the sense that "the complainant did not present conclusive proof that some buyers of the services provided became aware of the rectification or that it was reimbursed for the tax, making the respective VAT regularizations improper."

  1. There are no facts relevant to the decision that have not been proved.

III. ON THE CUMULATION OF CLAIMS

  1. This request for an arbitration ruling relates to various official VAT assessments. However, given the identity of the tax facts, of the tribunal competent to decide and of the grounds of fact and law invoked, the tribunal considers that nothing prevents, in view of the provisions of articles 3 of RJAT and 104 of the Code of Administrative Tax Procedure (CPPT), the cumulation of claims.

IV. ON THE LAW

  1. In the present case, the key question is whether, regarding the regularizations in question, the Claimant complied with the provision in article 78, no. 5, of the VAT Code, as the Claimant contends, or whether, differently, the requirements established in the said rule are not met, as is the understanding of the Respondent.

Position of the Respondent

  1. The position of the Respondent is essentially expressed in the Tax Inspection Report, and it is on the factuality and conclusions contained therein that the decision dismissing the gracious complaint duly filed by the Claimant is based.

  2. In fact, the following is extracted from the RIT (Doc. 1 attached to the record):

[details of RIT]

  1. As referred to above, it is in view of the factuality detailed in the RIT and the conclusions expressed therein that the decision dismissing the gracious complaint - which constitutes the immediate object of this request for an arbitration ruling – is based.

  2. This position is likewise expressed in the Respondent's Answer, which rules that the claim should be judged unfounded, reaffirming therein that "The difference between the Claimant and Respondent in the present case is based on the applicability or not of no. 5 of art. 78 of the VAT Code to tax regularizations in favor of the taxable person, arising from the issuance of credit notes whose issuance aims to annul the amounts initially invoiced as advances, when the entirety of the service is later invoiced and tax is assessed on the entirety of the price and not on the difference between this and the amount initially paid as an advance.

Notwithstanding what is alleged by the Claimant, it is manifestly established that the taxable person cannot regularize the tax initially assessed as an advance in its favor, if it does not have in its possession at the time of such regularization proof that the buyer of the goods/recipient of the services became aware of the credit note or has been reimbursed for the tax paid."

Position of the Claimant

  1. For its part, the Claimant argues that from the procedure adopted by it in the cases shown in the RIT there is no evidence that there was an actual "reimbursement" to the client followed by new charging of the same amount, clarifying that:

"At the moment of issuance of the credit note there is no place for a "material/physical reimbursement" (return to the client of the price initially advanced) followed by new charging of that amount, but instead a second charging of the amount corresponding to the difference between the total price of the service provision and the amount of the advance.

In practical terms, the return of the amount initially charged followed by new charging does not materialize, although operationally the issuance of the credit note creates and formalizes the client's right to a credit, a credit that is materialized at the moment of actual service provision by its deduction from the total amount to be paid by the client!

The client is not called upon to confirm having been reimbursed for the value initially paid, inasmuch as in operational terms such reimbursement does not happen, since at no moment was the client charged twice the same amount resulting in the obligation to reimburse the amount initially charged, as evidenced by information obtained from the issuance of the initial invoice, the credit note and the final invoice, which are sent enclosed as Doc. no. 11. As can be verified through the analysis of Doc. no. 11, when the final invoice is issued the client only pays the difference between the value of that final invoice and the advances previously made and annulled by credit note."

ON VAT ON ADVANCES

  1. In accordance with article 29, no. 1, paragraph b), of the VAT Code, the taxable person is obliged to issue an invoice for each transfer of goods or provision of services, regardless of the quality of the buyer of the goods or recipient of the services, even if they do not request it, as well as for payments made to it before the date of transfer of goods or provision of services.

  2. It follows from article 8, no. 1, of the same Code, that "whenever the transfer of goods or provision of services gives rise to the obligation to issue an invoice under article 29, the tax becomes chargeable:

  • if the deadline for issuance is met, at the moment of its issuance;

  • if the deadline is not met, at the moment it expires.

  1. However, paragraph c) no. 1 of the said article 8 establishes that if the transfer of goods or provision of services gives rise to payment, even if partial, the tax becomes chargeable at the moment of receipt of that payment, for the amount received.

  2. For its part, article 36, no. 1, paragraph c), of the said Code, provides that the issuance of the invoice must be carried out on the date of receipt, in the case of payments relating to a transfer of goods or a provision of services not yet made - as is the case with advances - or when the payment coincides with the moment when the tax is due under article 7 of the VAT Code.

  3. From the elements of the proceedings, in particular the RIT, it is clear that the Claimant, regarding the advances made by its clients, has been complying with the legal norms referred to above.

  4. Thus, there having been advances and consequent VAT assessment, when the operation is completed – transfer of goods or provision of services, as appropriate – an invoice must be issued, in compliance with legal form, and the following may be done regarding the VAT assessment:

  • On the difference between the value of the final invoice and the value of the advance, or;

  • On the total value of the operation, in the final invoice.

  1. If the taxable person opts to assess VAT on the total value of the operation, it may regularize the tax in its favor and, if so, the buyer – if it is a VAT taxable person – must regularize the VAT in favor of the State, observing in this option the provision in article 78 of the VAT Code, namely the conditions set out in no. 5 and no. 14 of that regulation.

ON VAT REGULARIZATION

  1. However, the supplier of the goods or services may only carry out the regularization in its favor when "it has in its possession proof that the buyer became aware of the rectification or that it was reimbursed for the tax, without which the respective deduction is deemed improper."

  2. It is noted that the said rule makes no reference to the type of proof relevant for this purpose, but it can be inferred that it should be documentary proof capable of being in the possession of the taxable person.

  3. Because this is a matter not free from doubts, the AT itself disclosed, through Circular Letter no. 33 129, of 02-04-1993, the following understanding:

"Having been posed to this Service, with some frequency, the question of which documents constitute the means of proof referred to in no. 5 of art. 71 of the VAT Code, as amended by Decree-Law no. 198/90, of 19.06, the following understanding is disclosed:

  1. No. 2 of art. 71[i] of the VAT Code addresses cases in which the taxable amount is reduced, after the registration of transfers of goods and provision of services made by the taxable person. The supplier or service provider may rectify the tax previously assessed in excess, until the end of the tax period following the one in which the circumstances that determined the rectification occurred.

  2. The regularizations set out in no. 2 of art. 71 of the VAT Code are a faculty granted to the taxable person and not an obligation. However, whenever the taxable person opts for such regularizations, it must comply with the provision in no. 5 of the same article.

  3. In accordance with no. 5 of art. 71, the regularization of tax in favor of the taxable person may only be carried out when the latter has in its possession proof that the buyer became aware of the rectification or that it was reimbursed for the tax, without which the respective deduction will be deemed improper.

  4. For the purposes of no. 5 of art. 71, the following documents issued by the client and in the possession of the supplier of the good or service provider are considered suitable, satisfying the conditions set out therein:

a) Any means of written communication - letter, official letter, telex, fax, telegram - with express reference to awareness of the VAT rectification;

b) Return note or check receipt note, with mention of the VAT regularization;

c) Photocopy of the credit note, after signature and stamp of the buyer, constituting a document sent by him after becoming aware of the tax regularization to be made.

  1. Without the taxable person having in its possession written confirmation made by its clients that they received communication evidencing the amount of rectified VAT, or that they were reimbursed for the respective tax, the provisions established in no. 5 of art. 71 of the VAT Code are not deemed to be complied with, making the respective tax regularization improper."

  2. From the rule and the administrative understanding transcribed above, it follows that, among other requirements, VAT regularization in favor of the taxable person presupposes that it has in its possession documentary proof that the buyer of the goods or recipient of the services became aware of the rectification or that it was reimbursed for the tax.

  3. In the present case, and as stated in the RIT, no proof elements were duly provided to the AT that the recipients of the services became aware of the rectification or that they were reimbursed for the tax in any of the forms referred to in the circular letter mentioned above.

  4. However, the Claimant argues that although in the final invoice issued to clients after the provision of the services it proceeded to assess VAT on the total value of the provision, it only charged clients the amount corresponding to that value deducted from the advances previously invoiced. That is, in the words of the Claimant, "when the final invoice is issued the client only pays the difference between the value of that final invoice and the advances previously made and annulled by credit note."

  5. This fact is duly proven through a copy of the final invoices that are part of the present proceedings (Doc.11), from which it can be extracted that, although in an unusual manner, clients were effectively "reimbursed" for the advances made through their deduction from the final cost of the services acquired.

  6. Thus, resulting in inequivocal terms, in view of the proof produced, that there was duplication of VAT assessments, on the value of the advances made and, subsequently, on the total value of the services, the questioned assessments should be subject to annulment with the consequent restitution of the amounts unduly charged.

ON THE RECOGNITION OF COMPENSATORY INTEREST

  1. In addition to the annulment of the assessments, and consequent reimbursement of the amounts unduly paid, the Claimant also requests that it be granted the right to compensatory interest, under article 43 of the General Tax Law (LGT).

  2. In fact, under the terms of the provision in no. 1 of the said article, compensatory interest shall be due "when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the tax services resulting in payment of the tax debt in an amount greater than legally due." In addition to the means referred to in the rule transcribed, we understand that, as follows from no. 5 of article 24 of RJAT, the right to the mentioned interest can be recognized in the arbitration proceedings and thus the claim is heard.

  3. The right to compensatory interest referred to in the above-mentioned rule of the LGT presupposes that tax has been paid for an amount greater than due and that this derives from an error, of fact or of law, attributable to the AT services.

  4. From all the circumstances set out above we conclude that the VAT assessments, whose annulment is now determined, result from an error attributable to the AT services which, bound by the inquisitorial principle, could and should have carried out the necessary steps to discover the material truth.

  5. Deciding thus, the other issues raised by the Claimant are rendered moot.

V. DECISION

Accordingly, and for the reasons stated, the Arbitration Tribunal decides:

  • To judge the request for arbitration ruling as founded;

  • To annul the VAT and default interest assessments identified in the petition;

  • To condemn the Tax and Customs Authority to reimburse the amounts unduly charged plus compensatory interest, counted in accordance with legal terms.

Amount in dispute: € 12,028.58

Costs: Under article 22, no. 4, of RJAT, and in accordance with Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, I set the amount of costs at € 918.00, to be borne by the Tax and Customs Authority.

Lisbon, 27 November 2018

The Arbitrator, Álvaro Caneira

[i] Renumbered by Decree-Law no. 102/2008, of 20 June, corresponding to the current article 78.

Frequently Asked Questions

Automatically Created

What are the requirements for VAT regularization through credit notes under Article 78(5) of the Portuguese VAT Code?
Article 78(5) of the Portuguese VAT Code requires taxpayers regularizing VAT through credit notes to possess proof that recipients were informed of the credit note or reimbursed for the tax paid. This provision implements strict documentation requirements to prevent improper VAT deductions. In practice, this means maintaining evidence such as acknowledgment receipts, reimbursement records, or accounting documentation showing the recipient's awareness and financial adjustment. The Tax Authority interprets this requirement strictly, particularly in inspection proceedings.
Can a taxpayer regularize VAT on advance payments when issuing final invoices that account for the full service price?
The disputed issue centers on whether issuing a final invoice for the full service price constitutes sufficient regularization when a credit note cancels the advance payment invoice. The taxpayer argued that charging only the net difference (total price minus advance already paid) while showing full VAT on the final invoice effectively informs and reimburses the client. However, the Tax Authority maintained that formal proof under Article 78(5) is required regardless of the commercial invoicing arrangement. This reflects tension between practical business operations in the hospitality sector and strict VAT compliance formalities.
What is the role of Article 90(1) of EU VAT Directive 2006/112/CE in Portuguese VAT credit note disputes?
Article 90(1) of EU VAT Directive 2006/112/EC permits reduction of the VAT base when, after a transaction is concluded, the taxable person obtains a reduction in price. This provision is fundamental to the case because it represents the EU law basis for VAT regularization on advances. The claimant requested a preliminary CJEU ruling to clarify whether this Directive provision applies when credit notes are issued to cancel advance invoices upon service completion, with final invoices charging only the balance. This question addresses whether Portuguese law's strict interpretation of proof requirements aligns with EU VAT principles of neutrality and proportionality.
What constitutes sufficient proof that recipients were informed of or reimbursed for VAT adjustments via credit notes?
Sufficient proof under Article 78(5) requires documentation demonstrating that service recipients either: (1) became aware of the credit note issued, or (2) were reimbursed for the VAT amount. The Tax Authority's strict interpretation demands explicit evidence beyond the mere commercial invoicing structure. In this case, the hotel operator's practice of issuing final invoices showing full service price with VAT while charging only the net difference was deemed insufficient without additional proof. Best practices include obtaining signed acknowledgments, maintaining correspondence confirming receipt of credit notes, or documentary evidence of financial reimbursement through accounting records or payment adjustments.
Can a preliminary ruling referral to the CJEU be requested in CAAD arbitration proceedings regarding VAT regularization?
Yes, CAAD arbitration tribunals can request preliminary rulings from the CJEU under Article 267 TFEU when questions of EU law interpretation arise. In this case, the claimant requested referral of questions regarding Article 90(1) of the VAT Directive's application to advance payment regularizations. Such requests are particularly relevant when Portuguese tax law implementation may conflict with EU principles. The arbitration tribunal must assess whether the question is necessary for rendering its decision and whether the interpretation is genuinely uncertain, following CJEU case law on preliminary ruling requirements including the acte clair doctrine.