Process: 166/2018-T

Date: December 2, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This tax arbitration case (Process 166/2018-T) addresses whether a Portuguese company can deduct self-assessed VAT on intermediation commission invoices totaling €100,000 issued by a non-resident entity. The claimant, A... S.A., challenged the Tax Authority's (AT) disallowance of VAT deductions on four invoices from B..., a non-resident intermediary, for commission services related to export contracts with Angolan companies totaling €2.5 million. The AT issued an assessment demanding €23,000 in additional VAT plus €1,775.32 in compensatory interest, which the claimant paid under enforcement to avoid more severe collection measures. The core dispute centers on whether the claimant met the requirements for VAT deduction under articles 19 and 20 of the Portuguese VAT Code. The claimant argues that the intermediation services were essential to securing export contracts exempt under article 14(1)(a) of the VAT Code, and therefore the principle of VAT neutrality requires allowing deduction. The AT rejected the deduction, claiming insufficient proof of actual service provision and inadequate documentation demonstrating the causal link between commissions paid and business obtained. The claimant counters that the AT's documentary requirements are excessive and unrealistic for commercial operations in foreign markets like Angola, where such intermediation is standard practice. The case highlights tensions between formal proof requirements and substantive economic reality in cross-border VAT transactions, particularly regarding burden of proof allocation and the application of EU VAT Directive principles of neutrality and substance over form in Portuguese tax law.

Full Decision

ARBITRAL DECISION

I. Report

1. On 03-04-2018, the company A..., S.A. filed a request for the constitution of a sole arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFATM), with a view to declaring the illegality of the tax acts assessing VAT and the corresponding compensatory interest, relating to the period 2015/12.

2. In accordance with article 6, section 1 of the LFATM, the Deontological Council of the Arbitration Centre appointed the arbitrator now signing, notifying the parties.

3. The tribunal is duly constituted to examine and decide on the subject matter of the proceedings.

4. The allegations supporting the request for arbitral pronouncement of the Claimant are, in summary, as follows:

4.1. The assessment challenged resulted from arithmetic corrections made during a Tax Inspection, with Service Order OI2016..., relating to the financial year 2015, whose Final Report was notified in April 2017.

4.2. This assessment resulted in additional tax of €23,000 plus interest of €1,775.32, which created a total debt of €24,775.32, which was paid within the scope of a tax enforcement process (from which increases resulted) in order to prevent more serious collection proceedings and in the impossibility of presenting a bank guarantee for the legal amount.

4.3. The said self-assessment assessment considers this amount due by disregarding the right to deduct VAT self-assessed by the claimant on four invoices issued to it by a non-resident entity which totalled the amount of €100,000.

4.4. This transaction is based on an amount invoiced by the non-resident entity B..., with the non-resident NIF assigned ..., relating to intermediation commissions for negotiations and contracts concluded with the Angolan group C....

4.5. Group C... comprises at least three companies which in the years prior to 2015 supplied equipment and services to the claimant in the amount of €2,500,000.00 (two million five hundred thousand euros).

4.6. The exports carried out to those Angolan companies only took place because, during their negotiation, commissions were agreed with the respective intermediaries.

4.7. A... took steps to be able to liquidate the value of the agreed commissions, and it is certain that, by email dated 2015-05-30, the said manager sends the invoices in question.

4.8. Subsequently, some messages were exchanged between the mentioned representatives of both companies, precisely with respect to the tax treatment of the invoices, particularly regarding the matter of double taxation.

4.9. The claimant's main activity is the installation of machines and industrial equipment (CAE 33200).

4.10. The activity it carries out is subject to VAT, being framed in the normal monthly periodicity regime, which gives it the right to deduct VAT charged on invoices issued to it.

4.11. However, the AT proceeded to disregard the validity of the four invoices mentioned above for VAT purposes, so as not to grant the right to deduct VAT borne in various services that were invoiced to it.

4.12. The disregard of these invoices resulted for the claimant in a correction in the amount of VAT due in the period at issue here of €23,000, to which interest was added (and penalties).

4.13. The inspection report concluded that the intermediation service provision in question is subject to VAT, by the combined effect of articles 2, section 1, paragraph e) and 6, section 6, paragraph a), both of the VAT Code, which the claimant does not contest.

4.14. Now, not contesting the applicability of the tax, the claimant understands that the provisions of article 19, section 1, paragraph c), of the same code are equally applicable, which determines that the taxable person has the right to deduct the VAT relating to the services provided for in the aforementioned paragraph e) of section 1 of article 2; and, likewise, contrary to what was mentioned by the inspection services, the present transaction meets the conditions of paragraph b), I), of section 1 of article 20 of the VAT Code.

4.15. From the examples presented relating to the claimant's invoicing to its clients in Angola, there is mention of exemption under paragraph a) of section 1 of article 14 of the VAT Code.

4.16. The claimant therefore considers it to have the right to deduct VAT, and the invocation of paragraph a) of section 1 of article 20 of the VAT Code is not correct.

4.17. This is because the requirements made by the inspection services, apart from not being immediately applicable here, demonstrate distance (and lack of knowledge) regarding the form and methods of obtaining and conducting commercial operations in foreign markets (namely and especially the Angolan market).

4.18. Indeed, we are not faced with a kind of public tender where the claimant, to prove the causal link between the operations and the respective amount, or even to see its deduction right recognised, would have to present a "comparative scheme of prices for similar services on the market" or explain "the selective process" that justifies the choice of this "supplier over others".

4.19. As mentioned, and as evidenced by the electronic messages exchanged between the claimant and C..., the commissions result from the operations carried out with that group.

4.20. And the amount in question is perfectly suited to the commission values practised, and, moreover, considering the Angolan market, it is an amount that will be below many others practised and considered appropriate to those involved in that market.

4.21. Since these are transactions between taxable persons, the claimant has the obligation to self-assess VAT (which it did), but simultaneously deduct that same tax, by application (among other things) of the principle of neutrality.

4.22. The possibility of exercising the deduction of the tax borne takes as its starting point the receipt by a taxable person of invoices issued in accordance with the legally required terms by its counterparty.

4.23. The complexity inherent in the invoicing regime and the limits imposed on deduction that have resulted from the action of the tax administrations of the Member States has led the CJEU to pronounce itself in successive decisions on this matter and in a very clear sense - that of the prevalence of substance over form, whenever necessary to ensure the neutrality of VAT.

4.24. It follows from article 168 of the VAT Directive that whoever is a VAT taxable person is the holder of the right to deduction, as the status of taxable person has inherent the exercise of the right to deduction.

4.25. As we have seen, the AT recognises that the claimant is a VAT taxable person, in which terms the subjective requirement enabling the right to deduction is met.

4.26. On the other hand, from paragraph a) of the same article 168 results the right to deduct VAT incurred in the acquisition of goods and services made to other taxable persons, provided that they are used for the purposes of its taxed transactions, with only goods and services being excluded from the right to deduction that create confusion between the personal sphere and the business sphere, as expressed by article 176 of the VAT Directive - the objective requirement of deductibility.

4.27. Now, also here the requirement is met, given that the service in question is an intermediation commission in business relating to the claimant's activity with Angolan clients.

4.28. These rules of the base document of VAT have translation in article 20 of the VAT Code, in which it is determined that the deductibility of VAT will occur provided that it is a cost inherent to the carrying out of its own taxed transactions or related to its activity.

4.29. Thus, when the AT states that the reason for the refusal of deductibility is that the claimant has not demonstrated its actual realisation, it is erring in legal interpretation, for what the law requires is that the services be related to its economic activity.

4.30. This means that the refusal of the right to deduct VAT determined by the AT is illegal, by violation of article 20, section 1, paragraph b) I), of the VAT Code.

4.31. What was incumbent on the AT was simply to verify whether, in light of the elements presented by the claimant, the absence of fraud was assured, translated into a cost not actually borne by the claimant for the production of its own taxable services.

4.32. When the AT understands that the exercise of the right to deduction is not possible in accordance with article 20 of the VAT Code, it is violating the VAT regime, in that, having the cost been incurred with VAT, what was incumbent on it was to demonstrate the existence of a fraudulent or abusive situation on the part of the claimant.

4.33. Otherwise, the structuring nature of the principle of neutrality in the VAT regime is called into question, which constitutes a fundamental principle of this regime, which means that it must override specific rules, and the rules of the VAT regime must be interpreted in a manner compatible with its fundamental principles, on pain of losing the coherence of the regime itself.

4.34. Thus, and based on the jurisprudence of the CJEU decisions, the claimant understands that the AT incorrectly interpreted the provisions of article 20, section 1, paragraph b) I), of the VAT Code, in that it considered that the cost incurred by the claimant with VAT that was charged to it on the invoices issued by its service provider was not deductible.

4.35. This VAT, having unequivocal relationship with the production of its income, must be subject to deduction, in accordance with paragraph b), of section 1 of article 20 of the VAT Code, given that it relates to transactions exempt under article 14.

4.36. It follows from the provisions of section 1 of article 43 of the General Tax Law the right to compensation through indemnity interest, calculated on the amount of the tax and corresponding compensatory interest unduly paid, and counted from the date of undue payment until the full refund thereof.

4.37. Since the defect affecting the assessments now challenged results from an error of the services (of law), and the claimant has paid the tax assessed here contested, it will be entitled to be paid indemnity interest, within the period and on the conditions set out in article 61 of the General Tax Code, that is to say, calculated until the actual refund of the tax (and corresponding compensatory interest).

5. In turn, the Respondent Tax and Customs Authority presented a reply, in which it defended itself, in summary, in the following terms:

5.1. In accordance with article 20, section 1 of the VAT Code, only the tax that has been charged on goods and services acquired, imported or used by the taxable person for the purposes of carrying out transfers of goods and provisions of services subject to VAT and not exempt therefrom may be deducted.

5.2. However, it is certain that it falls to the taxable person to prove the prerequisites upon which its right to VAT deduction depends.

5.3. Indeed, as follows from article 74 of the General Tax Law: the burden of proof of the right to taxation falls on the Respondent, whilst the burden of proof of the facts preventing that right falls on taxable persons.

5.4. Transposing to the case at hand, the Claimant sought to deduct the amount of €23,000.00, as expenses borne by it with commissions owed to the intermediary B... for the supply of equipment to group C....

5.5. However, such tax-preventing facts could only be accepted if the Claimant demonstrated the effectiveness of the intermediation operations.

5.6. Now, the Claimant failed to demonstrate the effectiveness of the intermediation operations of B..., either initially in the inspection procedure or subsequently in the informal complaint procedure.

5.7. Indeed, in the face of the indicia found by the Respondent, it was incumbent on the Claimant to fulfil the burden of proof that rested upon it by means of something more than the presentation of mere assertions – as it did in the course of the two procedures – and should instead have attached documents minimally suited to corroborate its assertions.

5.8. Only in the course of the informal complaint procedure did the Claimant attach printouts (so-called "prints") of email messages exchanged between it and the Angolan group C..., exchanged between 2015-03-12 and 2015-09-17.

5.9. However, no document or other evidence relating to the concrete contractual relationship between the Claimant and B... was attached there, as had also happened at an earlier time.

5.10. Wherefore, in the absence of proof minimally suited to demonstrate the right to deduction, the concrete and weighty indicia that led the Respondent not to accept the VAT deduction and to dismiss the informal complaint were obviously not dispelled.

5.11. Consequently, the decision to dismiss put in issue by the Claimant does not suffer from any error, whether in the area of facts or in the area of law.

5.12. Indeed, it fell to the Claimant the burden of proof of the effectiveness of the intermediation, it not being enough to create mere doubt about its truthfulness, as article 100 of the General Tax Code does not apply here.

5.13. For this it took something more than the attachment of correspondence between the Claimant and C..., when what is at issue here is the commercial relationship between the Claimant and B....

5.14. The absence of documentation relating to the relationship between the Claimant and B..., namely the complete lack of a direct exchange of correspondence between those two entities, in contrast with what is the common practice, the rules of experience and the indicia gathered by the Respondent, which reflect a very high probability that the intermediation operations did not take place.

5.15. Furthermore, when the Claimant itself acknowledges that "commissions were agreed" (see article 14 of the p.i.).

5.16. As regards indemnity interest, in accordance with article 43 of the General Tax Law, indemnity interest is only due when the error in question is attributable to the Respondent.

5.17. Therefore, in the light of all the elements brought into the Administrative Process, naturally no error on the prerequisites existed, since no conclusion could be reached, or drawn (that is, dispelled the indicia found), other than the one reached by the Respondent.

5.18. Even if the Singular Arbitral Tribunal were to conclude that the intermediation was effective, obviously such understanding could only result from the assessment of the witness evidence to be produced at a hearing by the Claimant, since the documents supplied to date do not allow the minimally corroboration of what it asserts, in the face of common practice, the rules of experience and the indicia gathered by the Respondent.

5.19. Consequently, it must be concluded that the error on the prerequisites is a consequence of the inertia of the Claimant itself, since only in the jurisdictional forum did it resolve, once and for all, to comply with a burden that rested upon it from the inspection procedure and to which it never gave heed until the moment it decided to resort to the CAAD.

5.20. As such, the Claimant should not be assisted with any compensation by way of indemnity interest, on pain of thus being rewarded for inertia and expenditure of means.

6. On 11-10-2018, the parties submitted a joint request, in which they requested the use of evidence recorded in the course of process No. 167-2018-T, whereby the hearing session originally scheduled for 08-10-2018, at 15:00, and subsequently rescheduled for 11-10-2018, at 15:00, at the request of the Claimant, was rendered without effect.

7. On 11-10-2018, an arbitral order was issued, granting the said request and notifying the parties to submit successive arguments within 15 days for each of the parties.

8. The parties submitted written arguments, in which they reiterated what was previously alleged.

II – Proven Facts

9. Based on the documentation attached to the file and the assessment by the Arbitral Tribunal of the evidence recorded in the course of process No. 167-2018-T, relating to the testimony of witnesses D... and E..., the following facts are considered proven:

9.1. The claimant's main activity is the installation of machines and industrial equipment (CAE 33200).

9.2. The activity it carries out is subject to VAT, being framed in the normal monthly periodicity regime, which gives it the right to deduct VAT charged on invoices issued to it.

9.3. The assessment subject to challenge in the present request resulted from arithmetic corrections made during a Tax Inspection, with Service Order OI2016..., relating to the financial year 2015, whose Final Report was notified in April 2017.

9.4. This assessment resulted in additional tax of €23,000 plus interest of €1,775.32, which created a total debt of €24,775.32, which was paid within the scope of a tax enforcement process.

9.5. The self-assessment assessment considers this amount due by disregarding the right to deduct VAT self-assessed by the claimant on 4 invoices issued to it by a non-resident entity which totalled the amount of €100,000.

9.6. This transaction relates to an amount invoiced by the non-resident entity B..., with the assigned non-resident NIF....

9.7. Group C... comprises at least three companies which in the years prior to 2015 supplied equipment and services to the claimant in the amount of €2,500,000.00 (two million five hundred thousand euros).

9.8. By email dated 2015-05-30, the person responsible for C... sent the Claimant the invoices relating to B....

9.9 Messages were exchanged between those responsible for C... and the claimant, with respect to the tax treatment of the invoices, particularly regarding the matter of double taxation.

III – Unproven Facts

10. Having not found the witness evidence presented to be sufficient to convince the Tribunal of the existence of an effective intermediation relationship, the Tribunal does not consider the following facts to be proven:

10.1. The exports carried out to those Angolan companies only took place because, during their negotiation, commissions were agreed with the respective intermediaries.

10.2. The commissions result from the operations carried out with that group.

10.3. The amount in question is perfectly suited to the commission values practised, and, moreover, considering the Angolan market, it is an amount that will be below many others practised and considered appropriate to those involved in that market.

10.4. The relationship between the claimant and group C... occurred through intermediation carried out by the company B....

IV – On the Law

11. In terms of Law there is only to examine two issues: the possible illegality of the VAT assessment acts and compensatory interest and the possible right to indemnity interest on the part of the claimant.

Such two issues shall thus be examined:

A) On the illegality of the VAT assessment acts and compensatory interest

12. The first issue to examine consists in the investigation of the possible illegality of the VAT assessment acts and compensatory interest. At this point, it is necessary to examine whether, as the claimant asserts, the acts performed implied a violation of the principle of neutrality applicable in the VAT context, as imposed by Council Directive 2006/112/EC of 28 November 2006, on the common system of value added tax (VAT Directive):

Article 168 of the VAT Directive states:

"Where goods and services are used for the purposes of the taxed transactions carried out by them, the taxable person shall have the right, in the Member State in which he carries out those transactions, to deduct from the amount of tax for which he is liable the following amounts:

a) VAT due or paid in that Member State in relation to goods supplied or to be supplied to him and in relation to services supplied or to be supplied to him by another taxable person;

b) VAT due in relation to operations assimilated to supplies of goods and supplies of services, in accordance with paragraph a) of article 18 and article 27;

c) VAT due in relation to intra-Community acquisitions of goods, in accordance with article 2, section 1, paragraph b), sub-paragraph i);

d) VAT due in relation to operations assimilated to intra-Community acquisitions, in accordance with articles 21 and 22;

e) VAT due or paid in relation to goods imported into that Member State".

In implementation of the said Directive, article 20 of the VAT Code provides:

"1 - Only the tax that has been charged on goods or services acquired, imported or used by the taxable person for the purposes of carrying out the following transactions may be deducted:

a) Transfers of goods and supplies of services subject to tax and not exempt therefrom;

b) Transfers of goods and supplies of services consisting of:

I) Exports and transactions exempt in accordance with article 14;

II) Transactions carried out abroad which would be taxable if carried out in national territory;

III) Supplies of services whose value is included in the taxable base of goods imported, in accordance with paragraph b) of section 2 of article 17;

IV) Transfers of goods and supplies of services covered by paragraphs b), c), d) and e) of section 1 and by sections 8 and 10 of article 15;

V) Transactions exempt in accordance with sections 27) and 28) of article 9, when the recipient is established or domiciled outside the European Community or which are directly linked to goods intended to be exported to countries not belonging to the same Community;

VI) Transactions exempt in accordance with article 7 of Decree-Law No. 394-B/84, of 26 December.

2 - However, the tax relating to transactions giving rise to the payments referred to in paragraph c) of section 6 of article 16 does not confer the right to deduction".

Regarding the burden of proof of the facts constituting the right to deduction, article 74, section 1, of the General Tax Law provides: "The burden of proof of the facts constituting the rights of the tax administration or of the taxpayers falls on whoever invokes them".

It falls, therefore, to the Claimant, the burden of proof of the right to deduction, that is to say, of the effectiveness of the intermediation operations of B..., in the transaction concluded between the Claimant and group C....

It is verified, through the documentary evidence presented, that the invoices issued by B... (Document No. 4 submitted by the Claimant) have as description "Management fee AI1", "Management fee AI2", "Management fee AI3" and "Management fee AI4".

The only indication that the invoices present regarding the relationship between the Claimant and group C... is handwritten and signed by "F...", it being presumed that the signature corresponds to F..., who sent emails on behalf of the Claimant (See Documents Nos. 8 and 9 submitted by the Claimant), so the handwritten indications on the invoices of B... will have been made by the Claimant.

There is no other documentation that can prove the existence of a relationship between the Claimant and B... or between B... and group C....

As regards the witness testimony, the witnesses failed to convince the Tribunal that B..., a company based in Dubai, had any involvement in the transaction concluded between the Claimant and group C... in Angola.

It being certain that, according to the testimony of the witnesses, it was group C... that sought a supplier, having allegedly through an individual person, in Angola, (Mr G...) entered into contact with the Claimant.

It was not demonstrated that the invoices in question correspond to an intermediation service (nor do the invoices themselves refer to it), that the Claimant contracted with B... for such a service, that the said Mr G... is an employee or partner of the said company, or that there was any intermediation, since the relationship described by the witnesses more resembles an informal recommendation of a company by an individual person, and not any type of business.

As stated in the Judgment of the South Central Administrative Court of 30 November 2017, Proc. No. 1081/09.7BELRS: "In article 20 of the VAT Code, limitations to the right to deduction are established, by determining that only VAT charged in the acquisition of goods or services acquired, imported or used by the taxable person for the purposes of carrying out its own purposes (e.g. corporate purpose) may be deducted. If with respect to certain goods or services the company acts as a final consumer it cannot, obviously, benefit from the deduction of the tax. In other words, this rule is intended to ensure that the tax that charged upstream certain goods and services is only deductible if they were used to obtain income subject to downstream taxation. Specifically, paragraph a), section 1, grants the right to deduct VAT supported upstream that is realised in the acquisition of goods and services intended for the purposes of taxable transactions, that is, goods and services must be directly related to the exercise of the taxable person's activity. These are, therefore, "inputs" for business purposes, operating through the VAT deduction mechanism the compulsory transfer downstream of the tax paid upstream. Such right to deduction equally subsists, provided that there is a direct and immediate link with the overall economic activity developed by the taxable person, to the extent that it confers such link (see South Central Administrative Court Judgment-2nd Section, 6/11/2012, proc.5637/12; Central Administrative Court Judgment-2nd Section, 2/7/2013, proc.6505/13; Central Administrative Court Judgment-2nd Section, 14/11/2013, proc.5173/11; Central Administrative Court Judgment-2nd Section, 8/1/2015, proc.8165/14; F. Pinto Fernandes and N. Pinto Fernandes, VAT Code Annotated and Commented, Rei dos Livros Publishers, 4th edition, January 1997, page 511; Clotilde Celorico Palma and Others, VAT Code and RITI, Notes and Comments, Almedina, 2014, page 250 et seq.; Clotilde Celorico Palma, Introduction to Value Added Tax, IDEEFF Notebooks, No. 1, 2nd edition, Almedina, 2006, page 159). Reverting to the case of the proceedings, it is manifest that the requirements for the right to deduct tax (VAT) on the part of the impugning/respondent company are not met, given that the services acquired by it and subject to the refund request (costs of the nature "Other Goods and Services" identified above) are not directly related to the exercise of the taxable person's activity, have no direct and immediate link with the overall economic activity developed by the taxable person and, finally, although no less important, were not used to obtain income subject to downstream taxation."

To have the right to deduction, it would be necessary that the goods or services invoked as the basis for that right are used downstream by the taxable person for the purposes of its own taxed transactions and that, upstream, the goods or services are supplied or provided by another taxable person.

In the concrete case, it was not proven that the intermediation service acquired from B... was necessary for the claimant to be able to develop its activity. Indeed, it does not even result from the documents attached that an intermediation service was acquired, the invoices issued by B... referring only to an "administrative fee" (or management fee), it not being possible to verify, with certainty, what service is actually involved.

Although we understand that, given the service provided, which the Claimant entitles "business facilitation", the existence of documentation (e.g. contracts) exchanged between the parties is not necessary, the fact is that the witness testimony presented does not demonstrate that B... had involvement in this transaction, since the witnesses only demonstrate knowledge of the existence of an individual person, who spoke with group C... (and not with the Claimant), it not being clear in what terms that person, who was in Angola, would have a relationship with a company based in Dubai.

As it is not demonstrated that there is an intermediation operation effectively carried out by company B..., which made possible the carrying out of transactions between the Claimant and group C..., it cannot be considered that the requirements for deductibility are met.

B) On the right to indemnity interest

Since there is no foundation for the annulment of the VAT assessments, the request regarding compensatory interest is also without merit for that reason.

V – Decision

For the reasons set out above, the request for annulment of the VAT assessments and compensatory interest, in the total amount of €24,775.32, is judged to be without merit.

The value of €24,775.32 (value indicated and not disputed) is fixed for the proceedings and the value of the corresponding arbitration fee is fixed at €1,530.00 in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings.

Costs borne by the claimant entity.

Lisbon, 2 December 2018

The Arbitrator

(Luís Menezes Leitão)

Frequently Asked Questions

Automatically Created

Can a company deduct self-assessed VAT on invoices for intermediation commissions paid to non-resident entities?
Yes, a company can deduct self-assessed VAT on invoices for intermediation commissions paid to non-resident entities, provided it meets the requirements of articles 19 and 20 of the Portuguese VAT Code. The service must be subject to reverse-charge VAT under article 2(1)(e) and article 6(6)(a), and must be used for the company's taxed transactions or related to exempt export operations under article 14(1)(a). The right to deduction follows from the principle of VAT neutrality established in the EU VAT Directive and CJEU jurisprudence, which prioritizes substance over form when the taxpayer is a legitimate VAT taxable person using services for business purposes.
Who bears the burden of proof for the right to VAT deduction under Portuguese tax law?
Under Portuguese tax law, the burden of proof for VAT deduction rights initially rests on the taxpayer, who must demonstrate that conditions under articles 19 and 20 of the VAT Code are met through proper invoicing and evidence of business purpose. However, CJEU jurisprudence establishes that once the taxpayer shows it is a VAT taxable person receiving properly issued invoices for services used in taxed operations, the Tax Authority bears the burden of proving fraud, abuse, or that substantive requirements are not met. The principle of VAT neutrality prevents tax authorities from imposing excessive formal requirements that contradict economic substance, particularly when transactions occur between legitimate taxable persons in cross-border contexts.
What are the consequences of tax authorities disallowing VAT deductions on intermediation services?
When tax authorities disallow VAT deductions on intermediation services, the taxpayer faces immediate cash flow impacts from paying non-deductible VAT, plus additional assessments for previously claimed deductions, compensatory interest on unpaid amounts, and potential penalties. In this case, the disallowance resulted in €23,000 additional VAT, €1,775.32 in interest, and enforcement proceedings. The company must either pay the assessment or provide bank guarantees (often impossible for the amounts involved) to contest the decision. Beyond immediate financial consequences, disallowance of legitimate business expenses contradicts the VAT neutrality principle and may create competitive disadvantages, particularly for companies operating in international markets where intermediation services are standard commercial practice essential to securing export contracts.
How does the Portuguese tax arbitration tribunal (CAAD) evaluate the legitimacy of VAT deductions on cross-border service invoices?
The Portuguese tax arbitration tribunal (CAAD) evaluates VAT deduction legitimacy on cross-border service invoices by examining both formal compliance and substantive requirements. Formal requirements include proper invoice issuance under VAT Code provisions and correct self-assessment of reverse-charge VAT under articles 2(1)(e) and 6(6)(a). Substantively, CAAD assesses whether services relate to the taxpayer's taxed transactions or exempt exports under article 20(1)(b), applying EU VAT Directive principles established by CJEU jurisprudence. The tribunal weighs the principle of VAT neutrality and substance-over-form doctrine against the Tax Authority's documentation requirements, recognizing that commercial realities in foreign markets (particularly in jurisdictions like Angola) may not conform to rigid formal proof standards. CAAD considers whether the taxpayer demonstrated a genuine business purpose and causal connection between commissioned services and revenue-generating activities, while rejecting disproportionate evidentiary burdens that effectively deny legitimate deduction rights.
What documentation is required to support VAT deduction claims on commissions related to export contracts in Portugal?
To support VAT deduction claims on commissions related to export contracts in Portugal, companies should maintain: (1) properly issued invoices from service providers complying with VAT Code requirements, including VAT identification numbers; (2) contracts or agreements detailing intermediation services and commission terms; (3) correspondence demonstrating the intermediary's role in facilitating export transactions; (4) export documentation showing sales to foreign clients that the intermediary helped secure; (5) payment proof for both commissions and underlying export transactions; (6) evidence of the causal link between intermediation services and successful export contracts (such as email exchanges, meeting records, or introduction documentation); and (7) demonstrations that commission amounts align with market practices for the specific sector and geographic market. While Portuguese Tax Authority may request comparative pricing analysis or supplier selection justifications, CJEU jurisprudence and the principle of proportionality suggest that excessively formalistic requirements beyond substantive proof of legitimate business purpose should not defeat valid deduction claims.