Process: 151/2016-T

Date: November 30, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

In Process 151/2016-T, the CAAD arbitral tribunal examined a VAT dispute between a Swiss company (A... S.A.) and the Portuguese Tax Authority concerning a €138,660.15 VAT assessment for Q4 2011. The company operated in Portugal through a branch providing multilingual customer support services (help-desk) to various group entities until January 2013. The dispute arose when the Tax Authority, during inspection of a VAT refund request for period 13.03T, requested the highest-value invoice from 2011. The company submitted a document showing a €646,244 service fee invoiced to A... S.A. (London) marked as subject to reverse charge, without VAT charged. The Tax Authority assessed Portuguese VAT at 23% (€148,636.12), concluding the transaction was subject to Portuguese VAT under Article 6(6)(b) of the VAT Code because the invoice lacked mandatory elements required by Article 36(5) CIVA. The company contested this assessment on multiple grounds: (1) the document was merely an internal draft mistakenly provided during inspection; (2) EU VAT Directive place-of-supply rules for B2B services are mandatory and non-derogable, requiring taxation where the customer is established (UK); (3) the reverse charge mechanism applied, with the UK purchaser self-assessing VAT; (4) the Tax Authority failed to prove Portuguese VAT jurisdiction applied; and (5) invoicing errors cannot override substantive VAT Directive provisions determining the place of taxation. The case raises fundamental questions about the evidential weight of draft documents in tax assessments, the application of EU harmonized place-of-supply rules versus national invoice formality requirements, burden of proof in cross-border VAT cases, and whether procedural compliance deficiencies can transform the territorial scope of VAT liability in international B2B service transactions between VAT-registered businesses.

Full Decision

ARBITRATION DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Clotilde Celorico Palma and Emanuel Vidal Lima, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitration Tribunal, hereby decide:

I – REPORT

On 14 March 2016, A… S.A., a legal entity governed by Swiss law, with registered office at Rue…, …, …, Switzerland, registered in the Commercial Register of …, under no. CH-…, filed a request for constitution of an arbitration tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the acts of assessment of VAT no. 2015…, in the amount of € 138,660.15 and of Compensatory Interest no. 2015…, in the amount of € 15,453.95, performed by reference to the fourth quarter of 2011 of (at the time) A… S.A. – BRANCH IN PORTUGAL, taxpayer no. … .

To support its request, the Claimant alleges, in summary, that:

the document that "served as the basis" for the assessments in question was solely and exclusively a draft, an internal document of the Claimant, delivered by mere oversight during a tax inspection;

the rules for determining the place of service supply, arising from the VAT Directive and its Implementing Regulation, are rules that are not subject to derogations, arising either (i) from the will or inability of taxpayers in the issuance of invoices or in the preparation of their accounting elements or, equally, (ii) from the will of the Tax Administration in the choice of applicable internal rules;

the Tax Administration failed to prove that the operation in question was subject to Portuguese VAT;

from the applicable regulatory framework, taking into account the relevant connecting elements and the facts known both to the Claimant and to the Tax Administration, the taxation of the operations in question in the present Arbitration Request clearly results in the United Kingdom, self-assessed by the purchaser;

in the present case, it was verified and this was proven, was a supply of services between two VAT taxpayers, in which the purchaser is for these purposes established in the United Kingdom, where the VAT is due and self-assessed by the purchaser;

nothing more exists than an error of the Claimant in its relationship with the Tax Inspection – materialized by the sending of a document that was not the one requested by that entity –, and the error of the Tax Administration in assessing national VAT to an operation not subject to it, because it was outside the tax jurisdiction of the Portuguese State.

On 15-03-2016, the request for constitution of the arbitration tribunal was accepted and automatically notified to the Tax Administration.

The Claimant did not proceed to nominate an arbitrator, wherefore, pursuant to the provisions of paragraph a) of article 6(2) and paragraph a) of article 11(1) of the RJAT, the President of the Deontological Council of CAAD appointed the signatories as arbitrators of the collective arbitration tribunal, who communicated their acceptance of the appointment within the applicable time limit.

On 10-05-2016, the parties were notified of these appointments, having not manifested any intention to refuse any of them.

In accordance with the provision in paragraph c) of article 11(1) of the RJAT, the collective Arbitration Tribunal was constituted on 25-05-2015.

On 29-06-2016, the Respondent, duly notified for that purpose, filed its reply defending itself solely by objection.

Given that in arbitration proceedings the general procedural principles of procedural economy and prohibition of useless acts apply, pursuant to the provisions of paragraphs c) and e) of article 16 and article 29(2), both of the RJAT, the holding of the meeting referred to in article 18 of the RJAT was dispensed with.

Having been granted a time limit for the submission of written statements, these were submitted by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

A deadline of 30 days was set for the pronouncement of the final decision, after the submission of statements by the Tax Administration.

The Arbitration Tribunal is materially competent and is regularly constituted, in accordance with articles 2(1)(a), 5 and 6(1) of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings are free from nullities.

Thus, there is no obstacle to the examination of the merits of the case.

All considered, it is necessary to render

II. DECISION

A. FACTS

A.1. Facts Established as Proven

1- The present Claimant is a company governed by Swiss law, with registered office and effective management in that country, which has as its corporate purpose the provision of services – namely through the internet – in the tourism and real estate sector, in particular short-term rental and maintenance of real estate, as well as the respective products and services, in Switzerland and abroad.

2- The present Claimant carried out its activity in Portugal, during the years 2011 to 2013, through a permanent representation (branch), A… S.A. – BRANCH IN PORTUGAL, having as its representative Mr. B…, taxpayer no. …, with tax domicile in the United Kingdom.

3- This Branch carried out a help-desk activity in Portugal, through which the Claimant provided, to various Group entities, customer support services, through the employment in Portugal of multilingual teams for providing clarifications and assistance thereto, through call center and email.

4- The remuneration scheme of the Portuguese Branch was based on a system of full compensation for costs incurred by it, plus a remunerative commission, with services being invoiced to each Group entity to which the customers belonged.

5- The Claimant's branch was subject to the general VAT regime with quarterly periodicity.

6- On 14 January 2013, the present Claimant closed the said branch.

7- In compliance with Service Orders no. OI2013… and no. OI2014…, an inspection action was carried out on the company "A…, S.A. Branch in Portugal", of partial scope – VAT - and covering the years 2011 and 2013.

8- The inspection procedure was carried out following internal analysis of the VAT refund request filed by the Claimant, relating to period 13.03T, in the amount of € 37,002.80.

9- Corrections resulted from the inspection action in the area of VAT, for the period 11.12T.

10- The correction made resulted in outstanding tax, in the total amount of € 148,636.12 (646,244.00 x 23%), for the period 11.12T.

11- This correction resulted from the internal analysis of the VAT refund request, relating to period 13.03T, in the amount of € 37,002.80, and the Claimant was asked by the Tax Inspection Services (SIT) for the highest value invoice issued in 2011.

12- In response, the Claimant sent the following document:

[Document referenced]

13- The Tax Inspection Services concluded that the said document evidenced an operation subject to VAT on national territory, in accordance with paragraph b) of article 6(6) of the VAT Code (CIVA), taking into account that the mentioned invoice did not contain all the elements required under article 36(5) of the CIVA.

14- From the Inspection Report (RIT), the following appears, among other things:

"From the analysis of the documents sent by the taxpayer, it was found that he proceeded to issue invoice no. …, of 31/12/2011, in the amount of € 646,244.00 (without VAT), with the indication of "This supply is subject to the reverse charge,", relating to "2011 Service Fee per Agreement Cost + 6%", issued to A… S.A., (London), without indication of the customer's TAX ID, as per photocopy of the said invoice. This operation is subject to VAT on national territory, in accordance with paragraph b) of article 6(6) of the CIVA, given that the purchaser of the service is not identified as a taxpayer (without the customer's TAX ID) in the mentioned invoice, not containing all the elements referred to in article 35(5) of the CIVA."

15- From the corrections made resulted the additional assessment of VAT relating to the period 2011-12-T, with no. 2015…, as well as the corresponding compensatory interest (with no. 2015…), in a total amount of € 154,114.10.

16- On 27-07-2015, the present Claimant objected to the respective assessments, in accordance with the provisions of articles 97 of the CIVA and articles 68 et seq. of the Code of Tax Procedure and Process.

17- The administrative objection, with no. …2015…, was dismissed by order of 7-12-2015, of the Chief of the Administrative Justice Division in substitution (who decided to maintain in their precise terms the assessments objected to).

18- Notified of that order, the Claimant filed the present arbitration claim.

19- The document contained in point 12 was not issued through certified software, and the Claimant did not proceed to communicate, by electronic means, any SAFT file relating to it, or the document itself.

20- The Claimant further issued the following documents:

a. Invoice no. …, of 31 July 2012 – which did not present the company's registered office in the United Kingdom to which the Claimant's branch had provided the service in 2011, but only the country and city;

b. Credit Note no. 1, of 31 July 2012 – which cancelled the said Invoice no. 1, of 31 July 2012;

c. Invoice no. …, of 31 July 2012 – which presented the customer's address incomplete;

d. Credit Note no. …, of 31 July 2012 – which cancelled the said Invoice no. …, of 31 July 2012;

e. Invoice no. …, of 31 July 2012 – with all correct elements.

21- The Claimant recorded the amount of € 646,244.00 in account 2721.1 – increase in revenue - and correspondingly in account 7213.1 – revenue from own service provisions of the entity's main objectives or purposes.

22- The Claimant did not record any revenue corresponding to the said amount in Account 21 – Customers.

23- In Journal 90, the Claimant made the entry …, corresponding to that increase in revenue.

24- In the accounting entries made in 2012, as a consequence of the issuance of invoice no. …, of 31 July 2012, the Claimant cancelled the said increase in revenue in accounts 2721.1 and 21112.1, and in Journal 70, where the said entry was made … .

A.2. Facts Established as Not Proven

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

A.3. Reasoning of the Proven and Not Proven Facts

Regarding the facts, the Tribunal does not have to rule on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate the proven facts from the not proven (see article 123(2) of the Code of Tax Procedure and Process and article 607(3) of the Code of Civil Procedure, applicable by force of article 29(1), paragraphs a) and e), of the RJAT).

Thus, the pertinent facts for the judgment of the case are chosen and selected in function of their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see former article 511(1) of the Code of Civil Procedure, corresponding to the current article 596, applicable by force of article 29(1), paragraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the Code of Tax Procedure and Process, the documentary evidence and the Administrative Process attached to the file, the above-listed facts were considered proven, with relevance to the decision.

B. LAW

As the Claimant rightly states, the first question that presents itself for decision in the proceedings is whether the document referred to in point 12 of the facts established as proven constitutes, or not, an invoice.

Indeed, as results from the facts above, the correction made by the Tax Administration in the assessment subject to the present arbitration action is based on the following:

"From the analysis of the documents sent by the taxpayer, it was found that he proceeded to issue invoice no. …, of 31/12/2011, in the amount of € 646,244.00 (without VAT), with the indication of "This supply is subject to the reverse charge,", relating to "2011 Service Fee per Agreement Cost + 6%", issued to A… S.A., (London), without indication of the customer's TAX ID, as per photocopy of the said invoice. This operation is subject to VAT on national territory, in accordance with paragraph b) of article 6(6) of the CIVA, given that the purchaser of the service is not identified as a taxpayer (without the customer's TAX ID) in the mentioned invoice, not containing all the elements referred to in article 35(5) of the CIVA."

Thus, it is here that we must seek the factual and legal grounds of the tax act in question, and jurisprudence has been established in the sense that:

"In contentious proceedings of mere legality, as is the case with judicial review proceedings, the court must base its ruling on the legality of the act under review as it occurred, assessing its legality in light of the contextual reasoning that is part of the act itself, being prevented from assessing reasons of fact and law that are not included in that reasoning, whether these are chosen by the court or invoked subsequently in the course of the contentious proceedings."[1].

As results from the above reasoning, the Tax Administration based its tax demand on paragraph b) of article 6(6) of the CIVA, which provides:

"6 - The following supplies of services are taxable: (...)

b) To a person who is not a taxable person, when the supplier has in the national territory the place of business from which the services are supplied, a permanent establishment, or, in the absence thereof, the domicile."

Taking into account the provision in article 74/1 of the General Tax Law, which states "It is the Tax Administration that bears the burden of proof of the occurrence of the legal requirements (binding) of its actions, namely if aggressive (positive and unfavorable)" [2].

Thus, for the tax demand of the Tax Administration to be legal, it will be necessary to consider it demonstrated that a supply of service was performed by the Claimant to "A person who is not a taxable person", in the amount of € 646,244.00, it being accepted that the Claimant had "in the national territory ... a permanent establishment".

Now, saving due respect to other opinions, it is considered that the correction made by the Tax Administration, and in question in the present arbitration proceedings, incurred an error regarding its factual requirements.

Indeed, the only evidence that the Tax Administration collected and on which it intends to base the tax demand formulated in the assessment subject to the present arbitration action is the document contained in point 12 of the facts established as proven.

However, such a document must be considered insufficient to properly meet the burden of proof that, in this case, lay with the Tax Administration.

Effectively, the document in question – despite being initially presented by the claimant itself to the Tax Administration as such – cannot be considered an invoice, contrary to what the Tax Administration assumes.

For, to begin with, as the Tax Administration itself recognizes, it lacks too many elements characteristic of such a type of document for one to be able, with minimal certainty, to state that it is an invoice.

On the other hand, examining the facts established as proven, it is found that the revenue mentioned in the document in question was accounted for as such, debiting account 2721.1 – Increase in Revenue (in which the customer does not appear identified), in exchange for a credit to account 7213.1 – Revenue from Service Provisions –, as is proven by documents attached to the proceedings, which are part of the Administrative Process at pages 111, 113, 117 and 184.

Only when the Claimant, in 2012, issued the final invoice (invoice no. …, of 31 July 2012), did it end up translating confirmation of the revenue accounted for in account 7213.1, and in such invoice the customer is duly identified, and the respective amount was not accounted for as revenue since the supply of services concerns 2011, and was thus duly treated in that accounting year of 2011, as mentioned.

This is confirmed by the accounting entry made in 2012: a debit to account 21, allowing the complete identification of the true customer (the Group company with registered office in the United Kingdom), in exchange for a credit to account 2721.1, allowing the regularization of this account (it is paid off), as is evident from documents attached to the proceedings, which are part of the Administrative Process at pages 185 and 186.

Thus, it is concluded that with the document issued in 2011 (Invoice 0001) the Claimant intended to portray the supply of services performed in that year and which had to be attributed to the accounting year to which it pertains – 2011 and that such document issued in 2011 only served to support the accounting entry as revenue of the value of the supplies of services performed in 2011, as shown by the elements of the Claimant's accounting.

It is not thus proven, in light of the facts established, as was necessary for one to be able to confirm the legality of the assessment made, that any other service whatsoever was supplied by the Claimant in 2011, other than that evidenced by its invoice no. 3, of 31 July 2012, nor, much less, any service to "A person who is not a taxable person".

This conclusion is not opposed by the objection raised by the Tax Administration, in the arbitration proceedings, according to which, referring to the document contained in point 12 of the facts established, "the present Claimant failed to prove that the said document did not enter the accounting, nor that it was not subject to use by its holder.".

Indeed, and without need for further considerations, the document in question is, objectively and notoriously, unsuitable for tax use, given at the outset the manifest deficiencies that the Tax Administration itself points out to it, and in particular, given the absence of mention of the tax identification number of the person designated by the Tax Administration, "its holder".

Also lacking foundation is the objection, equally raised by the Tax Administration in the arbitration proceedings, regarding the invoice no. …, of 31 July 2012, according to which, "there is no element that reveals and allows identification that it refers to or alludes to the same supply of services of the so-called internal document, i.e., supplies of services performed in the year 2011, all the more so given that it is an intragroup service supply agreement, moreover it maintains the same vague and imprecise reference of the previous document "service fee per agreement".".

Indeed, and following the recent Judgment of the CJEU of 15 September 2016, Case C 516/14 (Barlis case)[3], cited by the Respondent itself, it is manifest that, in the present case, from the documentation and clarifications provided by the Claimant, and even from the specific characteristics of the Branch's activity, described in points 3 and 4 of the facts established as proven, the Tax Administration has the necessary elements to, based on the mentions contained in the said invoice no. …, of 31 July 2012, arrive at the materiality of the supply of services in question.

As stated in that Judgment:

"when the Tax Administration has the necessary data to know that the material requirements were met, it cannot impose supplementary conditions on the taxpayer's rights".

Note, moreover, that in the conclusions of the Advocate General of such proceedings, abundantly cited by the Tax Administration, it also appears that:

"First and foremost, it is not possible to describe a supply in an invoice in such detail that its private or economic nature results immediately from the description of the supply itself. If, for example, it is a pencil, even the most detailed description by the manufacturer, type, characteristics and condition of the pencil does not answer the question of whether it is actually used privately or in the context of an economic activity. To that extent, the right to deduction cannot be controlled on the basis of an invoice, since in principle any object of a supply can be used either for private purposes or for economic purposes. This applies even to supplies of services that appear to have a manifestly private character, such as, for example, going to the cinema, which in certain cases may be intended for the exercise of certain economic activities.".

And, further on, that:

"Precisely because the exercise of the right to deduction, under article 178(a) of the VAT Directive, depends, in principle, on the possession of an invoice that meets the conditions of article 226 of the same Directive, the requirements regarding the content of an invoice should not be exaggerated and must respect the principle of legal certainty. Indeed, in particular when the rules of Union law have financial consequences – as in this case the recognition or denial of the right to deduction –, the case law requires that their application be foreseeable for those concerned (25). 57. Thus, from the perspective of controlling the right to deduction of the recipient of the invoice, it does not appear that there are further requirements regarding the mentions in the invoice on the nature of a supply of services.".

Thus, and in light of the foregoing, as the impugned tax acts are deficient in their factual requirements, they must be annulled.

C. DECISION

In such terms, this Arbitration Tribunal decides to rule on the arbitration request as well-founded and, consequently,

a) Annul the acts of assessment of VAT no. 2015…, in the amount of € 138,660.15 and of Compensatory Interest no. 2015…, in the amount of € 15,453.95;

b) Condemn the Respondent in the costs of the proceedings, in the amount of €3,672.00.

D. Value of the Case

The value of the case is set at €154,114.10, in accordance with article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by force of paragraphs a) and b) of article 29(1) of the RJAT and article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is set at €3,672.00, in accordance with Table I of the Regulation on Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was totally well-founded, in accordance with articles 12(2) and 22(4), both of the RJAT, and article 4(4) of the said Regulation.

Notify.

Lisbon 30 November 2016

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator

(Clotilde Celorico Palma)

The Arbitrator

(Emanuel Vidal Lima)

[1] See, by way of example, Judgment of the STA of 26-02-2014, rendered in case 0951/11, available at www.dgsi.pt.

[2] See Judgment of the TCA-South of 16-01-2007, rendered in case 00911/03, available at www.dgsi.pt.

[3] Available at: http://curia.europa.eu/juris/liste.jsf?language=pt&td=ALL&num=C-516/14.

Frequently Asked Questions

Automatically Created

Can the Portuguese Tax Authority issue a VAT assessment based on a draft internal document provided by mistake during a tax inspection?
Portuguese Tax Authority may issue VAT assessments based on documents provided during inspection, but the CAAD tribunal must evaluate whether a document explicitly identified as a draft and allegedly submitted by mistake constitutes sufficient evidence. The Claimant argued the document was merely an internal draft provided inadvertently, not reflecting the actual taxable transaction. The determinative issue is whether substantive VAT liability can be established on defective documentation when the underlying economic reality and applicable EU VAT Directive place-of-supply rules point to different tax jurisdiction. Tax assessments must be grounded on reliable evidence proving the taxable event and Portuguese territorial jurisdiction, not solely on formal document deficiencies.
How are VAT place-of-supply rules applied to B2B service transactions between EU and non-EU established entities?
Under the EU VAT Directive and its Implementing Regulation, B2B services are generally taxed where the customer is established (Articles 44 and 196 VAT Directive). This is a mandatory rule not subject to derogation based on invoice deficiencies or accounting errors. When a Swiss supplier provides services to a UK-established VAT taxpayer, the place of supply is the UK, regardless of whether services are performed through a Portuguese branch. The Claimant argued these harmonized rules override national formality requirements under Article 36(5) CIVA. The Tax Authority's reliance on Article 6(6)(b) CIVA (applying Portuguese VAT when invoices lack required elements) conflicts with the primacy of EU place-of-supply rules, which determine territorial VAT jurisdiction independently of documentary compliance.
When is VAT on cross-border services self-assessed by the acquirer under the reverse charge mechanism in the UK?
Under UK VAT rules (implementing Article 196 EU VAT Directive), when services are supplied to a UK-established business registered for VAT, the reverse charge mechanism applies. The UK customer (acquirer) accounts for VAT through self-assessment rather than the supplier charging VAT. The supplier issues an invoice marked 'reverse charge' without VAT, and the UK customer declares both output and input VAT on its VAT return. In this case, the Claimant issued documentation indicating reverse charge application for services to A... S.A. (London), a UK VAT taxpayer. The Claimant argued this reflected the correct VAT treatment under EU law, with UK being the place of supply and taxation, making Portuguese VAT assessment legally unfounded regardless of invoice formality defects.
What are the legal consequences of submitting an incorrect document to the Portuguese Tax Authority during a tax audit?
Submitting incorrect or draft documents during Portuguese tax audits can trigger several consequences. Procedurally, taxpayers may face evidential challenges if inspectors rely on mistakenly submitted documents for assessments. However, taxpayers retain the right to contest assessments by demonstrating the actual facts and applicable law. The Claimant argued that even if the document was deficient, this cannot override mandatory EU VAT place-of-supply rules or shift tax jurisdiction to Portugal. Substantively, invoice deficiencies may trigger penalties under Article 36(5) CIVA, but cannot alter the fundamental determination of where VAT is due under EU law. The burden falls on the Tax Authority to prove Portuguese VAT applies based on the actual economic transaction, not merely formal document irregularities.
How does the CAAD arbitral tribunal evaluate the burden of proof in VAT assessments involving international service transactions?
The CAAD tribunal applies the burden of proof principle whereby the Tax Authority must demonstrate the factual and legal basis for VAT assessments, particularly in cross-border cases involving EU VAT Directive interpretation. The Claimant argued the Tax Authority failed to prove Portuguese territorial jurisdiction applied, having merely identified invoice formality defects without establishing that services were actually consumed or utilized in Portugal. In international service transactions between VAT taxpayers, tribunals examine: (1) connecting factors determining place of supply under EU rules; (2) whether the customer is established and VAT-registered elsewhere; (3) evidence of reverse charge application; and (4) whether national formality rules are being applied to circumvent mandatory EU place-of-supply provisions. The tribunal must ensure assessments respect EU law primacy and harmonized VAT rules.