CAAD Arbitration on IRC Assessment: Missing Documents and Reform of Arbitral Decision (168/2017-T)

ARBITRAL DECISION

The arbitrators Counselor Jorge Lopes de Sousa (arbitrator-president), Dr. Ricardo Rodrigues Pereira and Dr. Jaime Carvalho Esteves (member arbitrators), appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 26-05-2017, hereby agree as follows:

1. REPORT

A…, LDA., taxpayer no. …, with registered office at Rua …, n.º…, Porto (hereinafter designated as "A…" or "Applicant"), submitted, pursuant to Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT"), a request for arbitral decision seeking the declaration of partial illegality of the Corporate Income Tax (IRC) assessment no. 2015…, in the amount of € 170,116.68 (which includes € 93,749.49 of IRC, with compensatory interest in the amount of € 18,834.37, municipal surtax in the amount of € 5,336.35 and autonomous taxation in the amount of € 54,514.14), as well as the decision of partial dismissal of the gracious complaint filed against it.

The Applicant also contested Value Added Tax (VAT) assessments and compensatory interest, as well as the decision of partial dismissal of the gracious complaint filed against them, but opted to challenge in the present proceeding only the acts relating to IRC, following the Arbitral Tribunal's decision that cumulation of claims is not viable.

The respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 24-03-2017.

Pursuant to the provisions of subsection a) of item 2 of article 6 and subsection b) of item 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable deadline.

On 11-05-2017, the parties were duly notified of such appointment and did not express any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, item 1, subsections a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of subsection c) of item 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 26-05-2017.

The Tax Authority and Customs Authority submitted a reply in which it raised the exception of illegal cumulation of claims and argued that the claim should be dismissed as unfounded.

The exception was upheld, with the Applicant opting to challenge in the present proceeding the acts relating to IRC.

On 09-11-2017, a hearing was held in which the Taxpayer requested the correction of clerical errors, witness testimony was heard and it was decided that the proceeding would continue with written submissions.

The parties did not submit written submissions.

The arbitral tribunal was duly constituted in accordance with the provisions of articles 2, item 1, subsection a), and 10, item 1, of the RJAT, and is competent.

The parties are duly represented, possess legal capacity and standing (articles 4 and 10, item 2, of the same statute and article 1 of Regulation no. 112-A/2011, of 22 March).

The proceeding has no nullities.

2. FACTS

2.1. Proven Facts

Based on the elements contained in the file and the administrative proceeding attached to the case record, the following facts are considered proven:

• A…, LDA is a single-member limited liability company that performed, in 2011, as its principal activity, auctions for the sale of art objects and antiques and, as an ancillary activity, the purchase and resale of the same items secondhand;

• The Applicant's auctioneer activity, regarding goods that it sells on behalf of principals, is conducted as follows:

  • A… auctions does not acquire ownership of the goods that it places at auction, acting in the name of the seller;

  • A… auctions and the seller of a good bind themselves together by signing the respective service provision contract;

  • The service provision contract includes, among others, the following elements: minimum selling price for each good; commission owed by the seller to A… auctions; in case of sale of the good and the amount received from the buyer, A… auctions undertakes to deliver to the seller the sale amount less its commission and taxes;

  • The buyer undertakes to pay A… auctions the amount owed for the purchase of the good, namely the hammer price plus a commission with VAT included at the standard rate.

• In parallel, the Applicant purchased goods (both in the domestic market and in third countries) for resale;

• In 2011, A… conducted 3 auctions, with 3 sessions each, and when goods are sold to the end customer (buyer), an invoice is issued (corresponding to series 01) in which the adjudication value (which it designates as hammer price) is indicated, plus a commission corresponding, on average, to 14% of that price, with VAT included at the standard rate and which corresponds to the amount received from that end customer;

• When a piece is sold, A… issues an invoice (corresponding to series 02) to the consignor of the auction sales, in which it mentions the adjudication price and the respective commission to be charged to this consignor, corresponding, on average, to 11% of that price, the consignor being entitled to receive the difference between the final price and the commission with VAT included at the standard rate;

• The Tax Authority and Customs Authority conducted a tax inspection of the Applicant relating to the year 2011, for IRC purposes (in addition to VAT), pursuant to Service Order no. OI2013…, which began on 16-10-2014, and whose deadline was extended;

• In the aforementioned tax inspection, the Tax Inspection Report was prepared, which is contained in the administrative proceeding, the contents of which are reproduced herein, in which, among other things, the following is stated:

Chapter III - Description of Facts and Grounds for Purely Arithmetic Corrections

A - IRC - Taxable Matter and VAT in Default: Income Not Recognized in Accounting, Failure to Liquidate VAT and Error in Completing Periodic VAT Returns

A.1) The taxpayer was personally notified, on 13/03/2015, to justify the discrepancies existing between the amount of commissions (gains) contained in the invoices listed in the SAFT-PT billing file and the amount thereof recognized in the accounting account SNC 7211 – Services Rendered/Domestic Market. In response submitted on 13/04/2015, at point 3 thereof, the taxpayer confirms the failure to recognize in said account 7211, the amount of commissions in the amount of € 3,593.14, which it details in attachments 3.2 and 3.3 that it presents in the said response.

By the foregoing, there is a failure to declare income subject to IRC, in the amount of € 3,593.14, which corresponds to unreported income, pursuant to article 20 of the Corporate Income Tax Code (CIRC).

(...)

A.2) The taxpayer recorded the journal entry no. … of 30/04/2011 with the recognition of several debits in account SNC 121 - Demand Deposits/B…, by crediting account 21111001 - Customers C/A - General Customers - Domestic Customers - C/A, having been notified, on 13/03/2015, to justify the entries made through that journal entry and, specifically, to justify, individually and with supporting documentation, the reasons for the adjustments made, as well as the entities (Name and Tax ID Number) that made the payments that entered the bank account and for what purpose they were made.

In response, A… states that regarding the "debits as counterpart to SNC account 21111001 – Customers C/A: the bank account entries of monetary means from deposits, transfers and TPA, were considered as customer receipts". It further presents attachment 22.1 which contains a chart in which, with regard to part of such debits recorded in account 121, it is observed that it cannot identify who made the payments and what the respective supporting document is for the entry into the bank account.

Thus, amounts were received in the company's bank account in its favor which, are not individually identified in customer accounts that allow their identification and association with the respective income document (invoice), and even after being notified, it did not identify for what purpose these entries were made and who made them.

Given the foregoing, such debits result from the normal activity of the company, that is, they relate to customer receipts resulting from its activity and which entered its asset sphere, being, therefore, income obtained and which were not subject to invoicing, in a total of € 46,188.03, as per the following chart:

[Chart showing amounts]

Pursuant to item 1 of article 20 of the CIRC "income shall be deemed to include those resulting from operations of any nature, as a consequence of normal or occasional action, basic or merely accessory" of the taxpayer, whereby the receipts that are quantified and determined in said bank account, in the amount of € 46,188.03 are classified as income or gains arising from the service provision/transfer of goods activity for which it is classified, operations subject to VAT, in accordance with articles 3, 4, 7 and 8 of the VAT Code, at the standard rate of 23% provided in article 18 of the same statute.

Given the foregoing, the taxpayer omitted income in the amount of € 46,188.03, infringing the provisions of article 20 of the CIRC, and therefore this amount shall be added to the declared taxable profit. For VAT purposes, there is a failure to liquidate and remit the amount of € 10,623.25 (= € 46,188.03 x 23%), due in the 2nd quarter of 2011.

B - IRC - Taxable Matter: Amount Deducted from Declared Income/Impairment Losses

The taxpayer recognized a debit to account 7211 - Services Rendered/Domestic Market, on 31/12/2011, in the amount of € 25,566.17 (entry no. …).

In the response given to the notification, the taxpayer states, at point 6 thereof, that this amount relates to an adjustment related to the recognition of a bad debt, relating to C…, Tax ID…, for whom a judgment of insolvency declaration was rendered, in which a claimed credit of € 19,101.17 was confirmed. It further states that the said entry is incorrect and should be reversed, however seeking recognition of a bad debt, in the amount of € 18,651.61, which should have been recorded in account 683 – Bad Debts.

Upon analysis of the response provided by the taxpayer and the respective supporting documents it attached, it is verified that the amount of € 25,566.17 relates to invoices issued with an adjudication price (hammer price) of € 24,530.00, to which commissions of € 2,871.60 and VAT of € 660.47 were added, for a total of € 28,062.07. From this amount, the taxpayer informs that it received € 2,495.90 and retrieved pieces, to which it assigned a value of € 6,465.00, considering, by difference, a bad debt of € 19,101.17.

However, notwithstanding that the gain relating to its activity corresponds only to the commission of € 2,871.60, the taxpayer seeks to consider as bad debt the total value of the sale of pieces, plus the commission, on the grounds that this amount was not received in full.

According to the provisions of article 35 of the CIRC, as amended in 2011, "the following impairment losses may be deducted for tax purposes if recorded in the same or previous tax periods:

a) Those relating to credits arising from normal activity that, at the end of the tax period, may be considered doubtful of recovery and are evidenced as such in the accounting records".

As stated, the amount in question was not evidenced as such in the accounting records, even by the amount of the invoiced commission, in the amount of € 2,871.60, which amount would correspond to the gain/income arising from the normal activity of the taxpayer, it being understood that this only encompasses operations involving current transactions, that is, operations of a commercial nature related to the provision of services.

Moreover, the taxpayer also did not record in the 2011 tax period or in previous tax periods the alleged impairment loss, whereby it would not be acceptable to accept such alleged recognition as the necessary requirements for tax deduction are not fulfilled, in accordance with article 35 of the CIRC.

Given the foregoing, the amount of € 25,566.17 recorded as a debit to account 7211 - Services Rendered/Domestic Market, which is reducing the gains from activity, shall be corrected to the declared taxable profit, as the provisions of article 20 of the CIRC have been infringed.

(...)

D - IRC - Taxable Matter and VAT in Default: Omission of Income and VAT Not Liquidated on the Sale of Pieces

On 23/12/2011, the taxpayer (A…) issued invoices nos. 433, 434, 435 and 436 to itself (self-invoicing).

The invoices relate to the sale of pieces, in a total adjudication price to the end customer of € 301,715.00, commissions (which the taxpayer considered as consignor commissions) in the amount of € 30,139.46 and VAT liquidated on this commission of € 6,932.07.

The said invoices were recognized, by the amount of the commission, as a debit to account SNC 6221 - Specialized Services and as a credit to account SNC 7211 - Services Rendered/Domestic Market. The respective VAT liquidated (on the commission) was recognized as a debit to a deductible VAT account and as a credit to a VAT collected account, that is, these invoices, both accounting and tax-wise, had a neutral effect.

From the response to question 27 of the personal notification made on 13/03/2015, in the chart presented by the taxpayer in Attachment 27.2, in which the identification of all invoices issued to consignors relating to pieces sold in 2011 appears, the aforementioned invoices nos. 433, 434, 435 and 436 appear. However, regarding the pieces sold, which the taxpayer listed in said invoices, it did not identify, as it should and as it was obliged to pursuant to articles 9 to 13 of the Special Regime (Decree-Law no. 199/96 of 18 October), the respective consignors, and one cannot conclude that any sale commission contract is underlying (cf. item 1 of article 9 and subsection e) of article 2 of the said Special Regime). Furthermore, regarding the sale of these pieces, the taxpayer does not prove that the same were sold on behalf of (cf. article 9, item 1 of the Special Regime):

"a) Any person who is not a VAT-taxable person;

b) Another VAT-taxable person, provided that the transfer made by this person is exempt from tax, under item 33 of article 9 of the VAT Code or an identical legal provision in force in the Member State where the transfer of goods is effected;

c) Another VAT-taxable person, provided that the transfer made by this person had as its object an investment good and is exempt from tax under article 53 of the VAT Code or an identical legal provision in force in the Member State where the transfer of goods is effected;

d) Another VAT-taxable person reseller, provided that the transfer made by this person is subject to tax under the special taxation regime for margins, provided for in this statute, or an identical regulation in force in the Member State where the transfer is effected."

Indeed, for the taxpayer to be able to apply, as an organizer of auction sales, the Special Regime, the transfers must be effected on behalf of a consignor, as defined in article 1 thereof, which is not the case with pieces invoiced to itself (to the taxpayer itself), given that no invoice was issued to the respective consignors, as should have occurred.

In fact, it is worth recalling that the taxpayer uses two invoicing series: one for invoices issued to the acquirer of goods at auction (end customer) and another (where the invoices in question, nos. 433, 434, 435 and 436 appear) for the consignors. According to the procedures adopted in its activity, invoices are only issued to the consignor after invoices are issued to the acquirer/end customer, that is, when the piece is sold, whereby it is concluded that the pieces contained in said invoices were all sold. In this regard, moreover, item 2 of article 9 of the Special Regime establishes that:

"the transfer of the consignor's goods to the VAT-taxable person organizing auction sales, referred to in subsections b), c) and d) of the preceding item, shall be deemed to be effected at the moment of realization of the auction sale of such goods."

The taxpayer, through email of 05/06/2015, stated that the pieces included in said invoices are its own pieces and that the same gave rise to sales invoices issued to end customers, in which it calculated commissions and liquidated VAT. However, the accounting records do not show the recording of inventories of own pieces or pieces on consignment, nor do they show any record of individualized customer and consignor current accounts.

Thus, regarding the pieces contained in the invoices under analysis, we were not provided with any other additional information that would demonstrably and unequivocally identify the origin and source thereof.

Finally, it should be noted that the accounting records do not show the third-party accounts that would allow the control provided for and required in article 13 of the Special Regime, which moreover is a condition for applicability of the said regime, and which states:

"Organizers of auction sales that effect transfers of goods under the conditions provided in article 9 are obliged to record, in third-party accounts and duly justified:

a) The amounts obtained or to be obtained from the buyer of the good; and

b) The amounts reimbursed or to be reimbursed to the consignor."

Despite the absence of these accounts and respective individualized records, the taxpayer was notified to present the same pursuant to the mentioned article 13, having only, in response, presented a list of invoices issued to buyers and respective sale values, commissions and VAT and a list of invoices issued to consignors, also with the sale values, respective commissions and VAT. It did not, therefore, present the third-party current accounts and the respective justifications, namely of the amounts obtained or to be obtained from buyers and the amounts reimbursed or to be reimbursed to consignors.

In conclusion, the conditions for application of the Special VAT Regime in the sales of pieces effected contained in the invoices issued by the taxpayer to itself (invoices nos. 433 to 436) are not met, whereby the General VAT Regime shall apply to these transfers, applying the general rules of incidence of the VAT Code. We are thus faced with transfers of goods and provision of services, subject to VAT pursuant to articles 3, 4, 7 and 8 of the said statute, at the standard rate of 23%, provided in subsection c) of item 1 of article 18 of the VAT Code. The taxable amount is determined pursuant to item 1 of article 16 of the said Code, in the very invoices issued nos. 433 to 436, which is the value of sale of the pieces contained in them, in a total of € 301,715.00.

Regarding the sales of the pieces in question, it is verified that the taxpayer did not record the respective gain in the amount of € 301,715.00, as, having not proved the origin and source thereof, namely regarding the respective consignors or possible suppliers, it is not to be accepted as gain subject to IRC, only the possible commission invoiced to the end customer.

(...)

D.2) Omission of Income Subject to IRC

The taxpayer omitted from the declared income for IRC purposes the gains arising from the sales of pieces, in a total of € 301,715.00.

Given the foregoing, we propose the correction to the IRC taxable profit of the amount of € 301,715.00, pursuant to subsection a) of item 1 of article 20 of the CIRC.

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F - IRC Due by Autonomous Taxation: Undocumented Expenses

F.1) Through journal entry no. … of 31/03/2011, the taxpayer recognized a credit to account SNC 122 - Demand Deposits/D…, in the amount of € 7,750.00 by debiting account SNC 27881001 - Other Debtors and Creditors/Consignment, without any other supporting document for this entry, other than the said internal note.

In response to the personal notification made for clarification and justification of this movement (point 7 of the notification), the taxpayer only attached a copy of the respective journal entry and a check issued to the order of R…, explaining that this is a payment to a consignor.

However, it did not present or identify the respective invoice issued to the consignor, whereby one cannot determine with certainty the nature of the payment represented by the check, in the amount of € 7,750.00.

F.2) On 30/04/2011, through journal entry no. …, the taxpayer recognized a credit to account SNC 121 - Demand Deposit/B…, in a single amount of € 193,109.05 by debiting account SNC 27881001 - Other Debtors and Creditors/Consignment, with only the said internal journal entry as supporting documentation.

For clarification of this entry, the taxpayer was notified (point 12 of the notification) to exhibit copies of the supporting documents for such records as well as to justify them, as well as the reason why these movements are not reflected in the bank statements.

In response, it only stated that "upon reconciliation of the demand deposit balances, a provisional entry was made, crediting account SNC 121 – B…, aggregating various movements that were not identified, for later correction, which never came to be completed, an oversight that has only now been identified" and presented a chart titled "List of Means of Payment" (which it attached as attachment 12.3.), in a total of € 191,097.69, containing the generic indication that the beneficiaries of these payments are suppliers ("general supplier"/"inventory supplier"/"auction supplier"), personnel and unidentified beneficiaries, however, it did not justify or identify documentally, either the respective beneficiaries, or what specific expenses these monetary outflows were intended to pay.

A copy of the chart that was attached to the response given by the taxpayer is attached to this document (ATTACHMENT no. 2).

Regarding these monetary outflows, in a total of € 193,109.05, the taxpayer had presented justification at point 10 of its response to our notification, of the amount of € 85,353.47, which corresponds to six monetary outflows, for which it identified which suppliers were in question and presented, for these movements, copies of the respective means of payment (by checks and bank transfers), and the corresponding invoices.

Given the foregoing, the taxpayer, justifying only the amount of € 85,353.47, did not identify concretely and individually which are the remaining beneficiaries of the financial outflows shown in internal document no. … and did not justify or prove documentally the reason and nature of these outflows in the amount of € 107,755.58 (= € 193,109.05 - € 85,353.47).

F.3) Through internal journal entry no. … of 30/11/2011, the recognition of various entries was effected, crediting account SNC 121 - Demand Deposits/B…, in the amount of € 51,091.27, by debiting account SNC 27881999 - ODC Under Review, in the amount of € 49,694.47. This movement further contemplates entries as debits to account SNC 111 - Cash, in the amount of € 346.50, of said account SNC 121, in the amount of € 1,053.08 and of account SNC 27881001 - Other Debtors and Creditors/Various Creditors/Consignment, in the amount of € 2,050.30, and as a credit to account SNC 21111001 - General Customers/Domestic Customers/C/A, in the amount of € 1,053.98.

These entries correspond to accounting movement no. … of 30/11/2011, which the taxpayer justifies as being the same movement/entry, due to the fact that there was an error in numbering.

Having been notified, the taxpayer justified, individually and with supporting documentation, the reasons for the adjustments made, as well as the beneficiaries (Name and Tax ID Number) of the monetary means outflows, coming to respond that these are "outflows from account SNC 121 - B…, recognized directly from the bank statement" and that "as at the time of this processing it was not possible to identify the recipients, the option was to record the respective counterpart as a debit to account SNC 2781999 - ODC Under Review, for later adjustment".

It further attached, in response, a chart to which attachment 21.2 corresponds, with a list of the beneficiaries of the payments, with the name and Tax ID Number, stating that these are: "auction supplier"/"general supplier".

From the said list, it was not identified either in the accounting printouts (SAFT - Accounting), or in the SAFT file - invoicing, as being suppliers, the beneficiaries of financial outflows, "E…", "F…" and "G…", in the amounts of € 2,050.30, € 1,000.00 and € 1,700.00, in a total of € 4,750.30.

Thus, these outflows, in the amount of € 4,750.30, were not justified documentally, nor were the specific expenses that these monetary outflows were intended to pay identified.

By the foregoing in points F.1), F.2) and F.3), it is verified that we are faced with expenses incurred by the taxpayer, but which are not documented, in a total of € 120,255.88 (= € 7,750.00 + € 107,755.58 + € 4,750.30).

Pursuant to item 1 of article 88 of the CIRC, undocumented expenses are subject to autonomous taxation at the rate of 50%.

Indeed, the taxpayer made payments regarding which it did not identify the respective beneficiary and did not present, even after notification for that purpose, the respective justification for the realization of each of these expenses.

The monetary outflows, in a total of € 120,255.88, translates into an actual decrease in the taxpayer's financial means, in favor of beneficiaries who were not identified, or for expenses that were not justified and proved, whereby we are faced with undocumented expenses and subject to autonomous taxation pursuant to item 1 of article 88 of the CIRC.

Given the foregoing, there results an amount of tax due from autonomous taxation in the values of € 60,127.94 (€ 120,255.88 x 50%), determined pursuant to item 1 of the said article 88.

G - IRC Due by Autonomous Taxation: Representation Expenses

In the taxpayer's accounting records is the document with no. … recorded in account SNC 6251 - Travels and Lodging, in the amount of € 420.00 which corresponds to a cash sale of 17/07/2011, issued by the entity "O casarão do castelo", regarding 12 meals.

In response to the personal notification made on 13/03/2015, the taxpayer clarifies that the said cash sale should be qualified as representation expenses (point 16.), as it relates to a lunch with potential international customers.

Pursuant to item 7 of article 88 of the CIRC, representation expenses are subject to autonomous taxation at a rate of 10%.

Given the foregoing, there results an amount of tax due from autonomous taxation in the values of € 42.00 (= 420.00 x 10%), determined pursuant to item 1 of the said article 88.

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Chapter IX - Right of Hearing - Reasoning

In accordance with the provisions of article 60 of the General Tax Law (LGT) and article 60 of the Tax Procedure and Process Regulation (RCPITA), the taxpayer was notified, through official letter no. …/… of 11/06/2015, delivered personally on 11/06/2015, to exercise, within the period of 15 days, its right of hearing regarding the Project of Tax Inspection Report (PRIT).

On 26/06/2015, the taxpayer submitted a request in this Tax Office with no. … requesting that the initially granted period of 15 days for the exercise of its Right of Hearing regarding the PRIT be extended to 25 days, pursuant to item 6 of article 60 of the General Tax Law (LGT).

Following that request, the taxpayer was personally notified on 30/06/2015 of the decision dated 29/06/2015 from the Head of the Division… of the Tax Inspection Area of the Tax Office of Porto, which decided on the request presented, which authorized the 25 days requested for the exercise of hearing right, thus ending the said deadline on 06/07/2015.

The taxpayer exercised timely, in written form, its right of hearing, as per the petition that was filed with the Tax Office of Porto on 06/07/2015 to which entry number … was assigned.

In the said petition, the taxpayer accepts the corrections proposed in chapter III of the PRIT, points A.1, only regarding the correction to the taxable matter of IRC, C.1 to C.6., E.1, G and F.3., regarding the correction proposed in autonomous taxation of IRC regarding the "G…" and presents the rebuttal regarding the corrections proposed in points A.1., A.2., B, D, E.2, F.1., F.2. and F.3, subdividing it into eight points, which deserves the following consideration:

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POINT A.2) IRC - Taxable Matter and VAT in Default: Income Not Recognized in Accounting and Failure to Liquidate VAT

At this point, the taxpayer presents new elements, in addition to those presented during the course of the tax inspection proceedings, in response to the personal notification made on 13/03/2015, further invokes, at this point, that, regarding the form of taxation for IRC and VAT purposes adopted by the inspection, "the receipts made by A… would only result for it in a value corresponding to - according to the inspection's calculations - 14% of that amount".

Having analyzed the documents now presented (checks front and back and bank deposits in A…'s bank accounts) and identification of supporting documents (invoices issued), we accept the evidence presented, with the exception of the following amounts, for which we will maintain our correction proposal, for the reasons stated below:

» € 6,860.20: which it identifies as a bank transfer from H…, however informs that the invoice for these receipts is yet to be issued;

» € 872.18: which it identifies as a receipt from I… Lda and associates this receipt with invoice F1/1521. However, this invoice was issued to "end consumer", without any Tax ID Number, whereby it is not demonstrably to be associated with said receipt;

» € 8,000.00 and € 10,000.00: are cash deposits of 27/04/2011 and 29/04/2011, which it identifies as receipts from J… and associates as corresponding to part of invoice no. F1/1388, as "supplies on current account". However, although this invoice was issued to J…, in which the tax number "E…" was indicated, upon consultation of the Tax Authority's Information System, it appears as an invalid tax number (as per ATTACHMENT no. 3) and given the absence of other corroborating elements of the unequivocal association now made by the taxpayer of this cash receipt of € 18,000.00 to the invoice, namely the customer current accounts, the invoked by the taxpayer will not be accepted.

As for the argument that should be considered as income subject to IRC and VAT only 14% of the amount received, we have to state that the 14% percentage was indicated by the inspection (paragraph 2 of page 4 of the PRIT) in the description of the activity declared by the taxpayer as corresponding to the average margin of commission practiced when, in the context of its activity as organizer of auction sales. In the case in question, it was incumbent upon the taxpayer to prove that it possessed the necessary requirements for the application of that regime - Special Regime of Organizer of Auction Sales - which, in the case under examination, is not proved.

Given the foregoing, it will be partially acceptable to the taxpayer at this point, maintaining the correction of € 25,732.38 (= € 6,860.20 + € 872.18 + € 18,000.00), for IRC purposes and for VAT purposes in the amount of € 5,918.45, due in the 2nd quarter of 2011.

POINT B) IRC - Taxable Matter: Amount Deducted from Declared Income/Impairment Losses

As to this point, the taxpayer argues that "it paid to the consignor/seller without having received from the buyer, which gave rise to the corresponding bad debt" and that the credit that the company did not receive is what is contained in the invoice it issued to the end customer of € 25,566.17.

It alleges that this is not a question of a doubtful debt, but rather an actual cost, under article 41 of the CIRC.

Regarding the alleged, it is worth recalling that what is at issue is a correction to the declared taxable profit, in the amount of € 25,566.17 recorded as a debit to account 7211 - Services Rendered/Domestic Market, which is reducing the gains from activity, as the provisions of article 20 of the CIRC have been infringed.

It is important only to add that the provision in article 41 of the CIRC, as amended at the date of the facts, required, for the tax acceptability of bad debts that:

"Bad debts may be directly considered as expenses or losses of the tax period provided that:

a) This results from a process of insolvency and business recovery and

b) An impairment loss has not been admitted or, if it has been, proves insufficient.

2 - Without prejudice to the maintenance of the civil obligation, the deductibility of credits considered bad debts in accordance with the preceding item or under the provisions of article 36 is further conditional on the existence of proof of communication to the debtor of the recognition of the expense for tax purposes, which debtor must recognize that amount as income for the purposes of determining taxable profit." (bold and underlined in original)

Thus, one of the conditions for tax acceptability of any bad debt would always be that an impairment loss has not been admitted or this proves insufficient, which in this case was demonstrated in the PRIT not to be, from the outset, admissible.

POINT D) IRC - Taxable Matter and VAT in Default: Omission of Income and VAT Not Liquidated on the Sale of Pieces

As to this point, the taxpayer argues that pieces are at issue that the applicant was the owner of and that it placed directly at auction together with the other pieces belonging to consignors. It states that "regardless of whether the method of invoicing used by the applicant is, or is not the most correct one", it disagrees with the correction proposed.

It states that "it is indisputable - and accepted by the Tax Authority - that the applicant sold pieces to end customers by the total adjudication value of 301,715.00 € and that the same were invoiced to them (page 11, 4th paragraph), whose supporting documents were delivered to the inspector."

It further asserts that "because it is its own pieces, invoices were not issued to consignors (according to the usual procedure), with it being understood that it should be the A…, as auctioneer, to invoice to A… as reseller (equivalent to consignor)" "that value increased the gains of the applicant subject to IRC, not envisioning how it can now be intended that that amount be again increased to the income of A… resulting in duplication of taxable matter". (underlined in original)

It refers to the responses and documents sent in the email of 23/01/2015 "in which in a detailed manner the imported pieces are identified, the respective unit cost, as well as the importation processes", which amount to "170,740.26 € and affect the questioned amount of 301,715.00 €, in 70,215.00 € (amount for which, during 2011, the imported pieces were sold)."

It argues that "as regards purchases made from individuals, A… did not always resort to what it designates as "statement of sale" and to the fact that "such documents have never been requested, or even the existence thereof questioned".

It warns that "the Tax Authority was aware of A…'s simultaneous activity as auctioneer and reseller", "although it did not possess documentation of the other acquisitions, such does not assume great tax relevance" and that the Special Regime does not only contemplate auction sales but also the resale of second-hand goods, art objects, collection items or antiques.

Regarding IRC, the taxpayer "understood that the accounting treatment of the two types of sales would be similar" and that it did not show "accounting-wise the cost of acquisition of goods" or "having done so improperly".

It concludes that the correction proposed would have to be confined to one of two hypotheses:

» in the event of sale of own pieces in resale, the taxable profit would have to result from the reconstruction of the company's profit from the activity by one of two means:

"1 - Difference between the sale price and the effective acquisition price for cases where there is documentary proof";

"2 - When no document is detected that proves such acquisition cost, this would correspond.... to 50% of that amount" (referring to item 4 of article 4 of the Special Regime and item 6 of article 23 of the CIRC) or

» in the event of considering that one is faced with sales at auctions, the "the Tax Authority assumes that the company would only benefit from an amount corresponding to a sale commission of 14% on the value of sales, with only this amount being admitted to form part of the applicant's taxable matter".

As for the argued at this point, we have the following to state:

The accounting records do not show the recording of inventories (merchandise) of own pieces or pieces on consignment, nor do they show any recording of individualized customer, consignor, supplier or other transferor current accounts as was obliged, regardless of whether article 4 (resale of pieces by reseller) or article 9 (organizer of auction sales) of the Special Regime is to be applied, so that we can determine, provably and unequivocally, the identification, origin and source of the pieces.

Notwithstanding, although the existence is detected in account 31113 - Purchases/Merchandise/Other Countries, the amount of € 44,761.06, 31111 - Purchases/Merchandise in Domestic Market, the amount of € 6,357.00 and in account 435 - Administrative Equipment the amount of € 14,965.12, an amount that refers to imported pieces incorrectly recorded as fixed assets and incorrectly depreciated, the taxpayer did not determine in the accounting records, in an account SNC 616 - Cost of Merchandise and Materials Consumed (CMVMC), any cost with own pieces sold, maintaining the purchase accounts (31113 and 31111) with closing balances on 31/12/2011. On the other hand, it did not show any initial and final merchandise inventory, which would include, in particular, pieces acquired in years prior to 2011, and the pieces imported/acquired in 2011, which would have carried forward in stock to years following 2011.

However, the taxpayer was questioned, in a notification made in the course of the inspection procedure (point 26 of the notification), regarding the importation of goods, the processes of which were identified by it in the email of 23/01/2015, to identify, for each of the goods, which the sales invoice is and the respective VAT liquidated. In response, it presented a list (which it attached in attachment 26.1.) in which it associates the imported pieces to the invoices in question (nos. 433, 434, 435 and 436), presenting a calculation, in an Excel chart, of a gross margin of € 1,085.90 (with VAT included), determined from:

• a total sale value of imported pieces of € 61,578.55, in which it identifies as a sales document the invoices nos. 433 to 436) and

• a cost amount of € 60,492.65.

Further in the response given to the notification on this point, it affirmed that "in 2011, the margin resulting from the sale of imported pieces was not determined, nor was the respective VAT liquidation carried out, which A… is available to correct".

Later, the taxpayer, through email of 05/06/2015, stated that the pieces included in said invoices are its own pieces and that the same gave rise to sales invoices issued to end customers, in which it calculated commissions and liquidated VAT. It attached another list in which it associates the pieces contained in the same invoices nos. 433 to 436 to various sales invoices to end customers, in which it indicates having determined sales commissions and respective VAT liquidated.

On the other hand, having been specifically notified to present the third-party accounts, which the accounting records do not show, which would allow the control provided for and required in article 13 of the Special Regime, the taxpayer, in response, presented a list of invoices issued to buyers and respective sale values, commissions and VAT and a list of invoices issued to consignors, also with the sale values, respective commissions and VAT. The values contained in these lists correspond to the total commissions declared, therefore within the scope of the regime of organizer of auction sales, provided in articles 9 to 13 of the Special Regime (Decree-Law no. 199/96 of 18 October).

In this list, it included the invoices in question, nos. 433 to 436, that is, considered them as subject to the regime of organizer of auction sales, as invoices issued to consignors, associating them with sales invoices to end customers (buyers). However, this association, by itself, does not prove that the pieces sold to these end customers relate unequivocally to the "self-invoiced" pieces. And this is not assumed in paragraph 4 of page 11 of the PRIT, to the contrary of what the taxpayer alleges in its hearing. Indeed, what was said there is that:

"In conclusion, the conditions for application of the Special VAT Regime in the sales of pieces effected contained in the invoices issued by the taxpayer to itself (invoices nos. 433 to 436) are not met, whereby the General VAT Regime shall apply to these transfers, applying the general rules of incidence of the VAT Code."

It is thus assumed, only, that the "self-invoiced" pieces were effectively sold, but without certainty that they were sold through the sales invoices to end customers that the taxpayer identified. Indeed, in the paragraph on page 10 of the PRIT it is concluded that:

"According to the procedures adopted in its activity, invoices are only issued to the consignor after invoices are issued to the acquirer/end customer, that is, when the piece is sold, whereby it is concluded that the pieces contained in said invoices (nos. 433 to 436) were all sold".

In conclusion, the taxpayer classified all its operations within the scope of the regime of organizer of auction sales, and, faced with the inconsistencies detected and described in the PRIT and now reiterated, we do not have conditions to accept either of the hypotheses pointed out by the taxpayer in its hearing, for determining the taxable value for IRC and VAT purposes:

• as a reseller, accepting the margin from the difference between the sale price and the purchase price or - as an organizer of auction sales, considering only the sales commissions corresponding to 14%.

It is further worth noting, as to the argued regarding the application of item 6 of article 23 of the CIRC, whose wording came into force on 01/01/2013, invoking the unnecessarily that costs assume the form of an invoice, when the supplier is not obliged to issue one, it would always be incumbent on the taxpayer to prove in another way, even with statements of sale issued by individuals, and which should be duly recorded accounting-wise, so that such tax expense could be accepted.

On the other hand, as regards VAT, it is worth noting the provision in item 2 of article 6 of the Special Regime which establishes that "the transfers subject to the margin taxation regime must be recorded so as to evidence the elements that allow concluding the verification of the conditions provided in article 3 and the determining elements of the taxable value referred to in article 4", which in no way the accounting records reveal and demonstrate.

Thus, faced with the described, namely:

» by the absence of accounting records owed and which would allow adequate control of the margin regime, whether within the scope of the reseller activity or within the scope of the organizer of auction sales activity;

›› by the classification given by the taxpayer to all activity as organizer of auction sales, which results both from the accounting records exhibited, and from the invoicing series issued and adopted and further from the classification given by the taxpayer itself, as transcribed: "A… provides a service in the organization of auction sales and issues the corresponding invoices in accordance with article 12 of Decree-Law no. 199/96 of 18/10 (in accordance with the response to point 3 of the notification made in the course of the inspection);

» from the response to question 27 of the personal notification made on 13/03/2015, in the chart presented in attachment 27.2, the taxpayer identified all invoices issued to consignors relating to pieces sold in 2011, in which it included said invoices nos. 433, 434, 435 and 436, that is, sought to classify them as organizer of auction sales, with the objective of coming to associate them with sales invoices to end customers;

›› as regards the pieces sold, which the taxpayer listed in said invoices nos. 433 to 436, it did not identify, as it should and as it was obliged pursuant to articles 9 to 13 of the Special Regime (Decree-Law no. 199/96 of 18 October), the respective consignors, and one cannot conclude that any sale commission contract is underlying (cf. item 1 of article 9 and subsection e) of article 2 of the said Special Regime);

» even admitting the possible application of the margin regime as a reseller, the taxpayer would always have to prove the origin and source of the pieces in question for proving the conditions provided in item 1 of article 3, and in the case of imported pieces such presupposes an option for the special margin regime, pursuant to items 3 to 6 of the said article 3;

it is verified that the conditions for application of the Special VAT Regime (reseller/organizer of auction sales) in the pieces contained in the invoices issued by the taxpayer to itself (invoices nos. 433 to 436) are not met, whereby the General VAT Regime shall apply to these operations (sales and/or provision of services), applying the general rules of incidence of the VAT Code and, for IRC purposes, not proving and demonstrating the origin and source thereof, namely as regards the respective consignors or possible suppliers/transferors, not recording any inventories of own merchandise and consignment merchandise, is to be considered as gain subject to IRC the totality of the final price, indicated in said invoices, of € 301,715.00, an amount which will correspond, at the minimum, to provision of services related to the sale of the pieces.

(...)

POINT F.1) IRC Due by Autonomous Taxation: Undocumented Expenses

The taxpayer alleges that it had provided incorrect information, now identifying the payment to K…, not as a consignor, "but as a supplier of pieces for resale, for which no invoice exists, because the seller does not have that obligation".

As to the alleged, it is worth recalling that in the response to the personal notification made for clarification and justification of the movement in question, the taxpayer only attached a copy of the respective journal entry (internal note) and a check issued to the order of K…, explaining that this was a payment to a consignor. However, it did not present or identify the respective invoice issued to the consignor, now identifying it, not as a consignor but as a supplier of pieces for resale, without attaching any unequivocal supporting document that demonstrates the alleged. Given the foregoing, only can it be concluded that this is an undocumented expense as the taxpayer does not document the nature of the payment represented by the check, in the amount of € 7,750.00.

POINT F.2) IRC Due by Autonomous Taxation: Undocumented Expenses

The taxpayer brings new elements in the context of its hearing, presenting an Excel chart in which it lists the movements totaling € 105,744.52 and presents copies of some accounting supporting documents, such as invoices and receipts. Having analyzed these elements, we have the following to state:

» the amount in question (€ 107,755.58) was recognized in the accounting records only having as supporting documentation the journal entry no. …, in credit to account SNC 121 - Demand Deposit/B…, by debit to account SNC 27881001 - Other Debtors and Creditors/Consignment;

›› in the response to the personal notification of 13/03/2015 (point 12 of the notification), the taxpayer only stated that "upon reconciliation of the demand deposit balances, a provisional entry was made, crediting account SNC 121 - B…, aggregating various movements that were not identified, for later correction, which never came to be completed, an oversight that has only now been identified" and presented a chart titled "List of Means of Payment" (which it attached as attachment 12.3.), in a total of € 191,097.69, containing the generic indication that the beneficiaries of these payments are suppliers ("general supplier" "inventory supplier"/"auction supplier"), personnel and unidentified beneficiaries, however, it did not justify or identify documentally, either the respective beneficiaries, or what specific expenses these monetary outflows were intended to pay;

» from that amount, the amount of € 85,353.47 was justified, as set out on page 14 of the PRIT;

›› as to the remaining amount (€ 107,755.58), now at the hearing, the taxpayer does not identify the beneficiaries of the checks it issued or the beneficiaries of "payment of services", nor does it present copies of said checks that would allow proving which the effective beneficiaries are and whether these correspond to those listed in the Excel chart, many of these without any Tax ID Number;

» for justification of part of these checks/payments for services, the taxpayer only associates invoices and receipts, however, as is obvious, and faced with the absence of individualized current accounts where these movements (financial and economic) would be recorded accounting-wise, the arguments now presented are not to be accepted;

» however, given that regarding some amounts paid by bank transfer the beneficiary is identified in the respective bank statement of the account held by A… and having, now at the hearing, the taxpayer identified the corresponding invoice, it will be partially acceptable the following amounts, in the total of € 9,261.30 (= € 228.02 + € 5,000.00 + € 4,000.00 + € 33.28):

» € 228.02: bank transfer in favor of L… in which it identifies invoice no. F2/425;

» € 5,000.00: bank transfer in favor of M… in which it identifies invoice no. F2/458;

›› € 4,000.00: bank transfer in favor of N…, in which it identifies invoice no. F2/452 issued to the spouse O… (which appears in the Tax Authority's fiscal registry as such) and

›› € 33.28: bank transfer in favor of P…, in which it identifies the invoice recorded accounting-wise with no. … of 30/04/2011.

Given the foregoing, there remains to be justified the amount of € 98,494.28 (= € 107,755.58 - € 9,261.30), which the taxpayer does not identify concretely and individually which are the beneficiaries of these financial outflows, shown in internal document no. …, and does not justify or prove, unequivocally and documentally, the reason and nature of these outflows.

(...)

Conclusion of the Assessment of the Hearing

Having analyzed the elements and arguments presented within the scope of the hearing, it is concluded, in accordance with the explanation given above, to partially accept the taxpayer in the following terms:

Reformulation of Point F - IRC Due by Autonomous Taxation: Undocumented Expenses

Amount proposed in the PRIT: € 60,169.94 (= € 120,339.88 x 50%)

Amount to be accepted at the hearing: € 5,655.80 (= € 11,311.60 x 50%), with € 11,311.60 = € 9,261.30 (point F.2.) + € 2,050.30 (point F.3.)

Amount proposed in the Tax Inspection Report (TIR): € 54,514.14 (= € 60,169.94 - € 5,655.80)

Reformulation of Point A.2 - IRC - Taxable Matter and VAT in Default: Income Not Recognized in Accounting and Failure to Liquidate VAT

Increase to IRC Taxable Matter:

Amount proposed in the PRIT: € 46,188.03

Amount to be accepted at the hearing: € 20,455.65 (point A.2.)

Amount proposed in the TIR: € 25,732.38 (= € 46,188.03 - € 20,455.65)

Correction to VAT in Default (2nd quarter of 2011):

Amount proposed in the PRIT: € 10,623.25 (= € 46,188.03 x 23%)

Amount to be accepted at the hearing: € 4,704.80 [= 20,455.65 x 23% (point A.2.)]

Amount proposed in the TIR: € 5,918.45, (= € 10,623.25 - € 4,704.80)

Given the foregoing, it is proposed to maintain the remaining corrections contained in the PRIT, which results in the following final amounts:

• The Applicant records in its computerized system the entry of pieces and their submission to auction (testimony of witness Q…);

• From the moment the auction sale is made and the invoice (from series 01) is issued, the business risk runs exclusively with the Applicant, which assumes toward the consignor the payment of the traded piece;

• The Applicant resorted to "self-invoicing" regarding the auction sale of own pieces, which it acquired second-hand mostly from individuals or by importation (documents nos. 16 and 17, attached with the request for arbitral decision, whose contents are reproduced herein);

• As regards acquisitions made from individuals, the Applicant prepared documents it designates as "statements of sale", although it did not do so regarding all acquisitions, with such statements being those contained in document no. 18 attached with the request for arbitral decision, whose contents are reproduced herein, in the total amount of € 85,820.62;

• The goods to which the statements of sale contained in document no. 18 refer were sold at auctions by the total amount of € 111,095.00;

• Following the tax inspection action, the Tax Authority and Customs Authority issued IRC assessment no. 2015…, dated 24-08-2015, with an amount due of € 170,116.68, which includes the amount of € 18,834.37 relating to compensatory interest (document no. 9 attached with the request for arbitral decision, whose contents are reproduced herein);

• On 01-03-2016, the Applicant submitted a gracious complaint of the IRC assessment referred to, which is contained in the administrative proceeding, whose contents are reproduced herein, in which, among other things, the following is stated:

111° The Tax Authority considers there to be undocumented expenses by the complainant in the amount of 98,494.28 €.

112° It should be stated that supporting documents for the alleged undocumented expenses, whose amount was intended to be 107,755.58 € when notified for the exercise of prior hearing rights, were never directly requested in the inspection.

113° It should be clarified that the non-consideration as undocumented expense of the amount of 85,353.47 € (cf. page 14, paragraph 5 of the report), resulted from documentation presented by the complainant, not for that purpose, but only to give response to what was expressly requested in question 10 of the Tax Authority's letter of 13-03-2015.

114° In the interim, at the prior hearing stage, the complainant presented a chart of expenses relating to the aforementioned amount of 105,744.52 €, as stated in the inspection report.

115° It happens that, due to an administrative oversight, not all documents to which reference was made in that chart were attached.

116° Whereby, requesting the waiver of that oversight, attached herein are the documents that give response to what was requested and will allow these services to proceed with the correction made in this context, as well as the respective assessment (doc. 2).

117° Which should be done at this stage since the tax inspection, instead of requesting their delivery, considered only the "amounts paid by bank transfer where the beneficiary is identified in the respective bank statement of the account held by A… and having, now at the prior hearing stage, the taxpayer identified the corresponding invoice".

118° Thus reducing that amount of 105,744.52 € to only 98,494.28 €.

119° What cannot be accepted.

120° Because, as results from the above chart and documents supporting it, the complainant demonstrates unequivocally the destination of the expenses made and which, therefore, like the others already accepted by the inspection, cannot be considered as undocumented expenses.

• Regarding the gracious complaint, an opinion dated 26-10-2016 was prepared, which is contained in the administrative proceeding, whose contents are reproduced herein, in which, among other things, the following is stated:

OPINION

On 01/03/2016, the above-identified complainant comes to file a gracious complaint, under articles 68 et seq. of the Tax Procedure and Process Code (CPPT), of the IRC assessment/2011.

Upon examination of the elements attached to the record, it is verified that pursuant to articles 9, 68 and 70 of the CPPT, the complaint presented is the proper remedy, is timely and the complainant has standing for the act.

It is also verified, on the present date, the absence of Judicial Litigation, after consultation of the Tax Litigation Contention System.

From the Alleged by the Complainant

From the grounds contained in the initial petition, which are hereby fully reproduced, the complainant essentially alleges, with reference to the inspection report (TIR):

• Point A.2

• As regards the transfer of € 6,860.20, assumes error in the failure to issue an invoice, but the amount is divided into € 6,000.00 of adjudication, € 720.00 of commission and € 165.60 of VAT;

• As to the receipt of € 872.18, the same concerns invoice F1/1521, considering there to be double taxation;

• To the receipts of € 8,000.00 and € 10,000.00 corresponds invoice F1/1388. In the said invoice, the tax number field was completed with a Spanish resident ID card number.

• Point B - At issue is the consideration of bad or doubtful debts (because their collection did not occur) and not of activity gains;

• Part of the amount (€ 19,101.17) was claimed in insolvency declaration proceedings to which the respective customer was subject;

• On 31/12/2011, all requirements demanded by article 41 of the CIRC (amended by Law 55-A/2010 of 31/12) for recognition of the bad debt relating to invoices issued to C… were met;

• Point D

• The inspection report considers that there was, by the complainant, omission of income from the sale of own pieces, that is, resale;

• The complainant resorted to the so-called "self-invoicing" to highlight the auction sale of own pieces, not having issued invoices to consignors, with it being understood that the applicant, as auctioneer, should invoice itself as reseller (equivalent to consignor);

• The correction made by the Tax Authority is based on a mere doubt, in accordance with the 1st paragraph of page 24 of the TIR;

• Regardless of good accounting practices that should be adopted by taxpayers, in IRC matters the principle of economic substance, or economic reality, prevails over form;

• The complainant acquired various goods second-hand, whether by importation or by acquisition from individuals, and in the case of the latter, as they are not VAT-taxable persons, they are not subject to compliance with accounting and declarative obligations, whereby there is no requirement for the issuance of an invoice by the pieces sold to the complainant. The requirement of corroborating documents for VAT purposes should not necessarily be equal to that of IRC (cf. article 23, item 6 of the CIRC), whereby it is admissible to accept cost without an invoice existing;

• The "Special Taxation Regime" expressly assumes the possibility of inexistence of any supporting documentation in the acquisition, in accordance with article 4, item 4;

• It presents the calculations that served as the basis for determining the overall profit margin, regarding the imported pieces;

• As to acquisitions made from individuals, it also presents the same calculations, attaching statements of sale, corroborating the acquisition by the complainant;

• Whereby it results that from the total sales effected and reflected in invoices nos. 433, 434, 435 and 436, the complainant cannot determine the cost of acquisition of goods sold in the amount of € 120,405.00, with item 4 of article 4 of the Special Regime having to be applied in that case, that is, the purchase price would correspond to 50% of the sale price;

• The departure from application of that regime would only result from express option of the complainant itself (item 1 article 7 of the statute), or tacit, if it had deducted the VAT paid on imports made (item 2 of the same provision), which did not occur;

• The tax inspection provided itself with elements that allowed it to determine the average commission value obtained by the complainant in the sales of current auction sales (14% of the piece's adjudication price), resulting in a commission of € 42,420.00 regarding the sales reflected in invoices no. 433, 434, 435 and 436. The assessment of income or values subject to taxation must be based on objective criteria, as required by article 84, item 1 of the LGT.

• Point F.1 – F.3

• Considers the Tax Authority that the payments represented by checks in the amounts of € 7,750.00 and € 1,000.00 constitute undocumented expenses, when in reality they relate to payment of acquisitions of second-hand goods made by the complainant, which should accordingly merit the tax treatment described at point D.

• Point F.2

• Considers the Tax Authority there to be undocumented expenses by the complainant in the amount of € 98,494.28;

• The initially considered amount was € 107,755.58, and at the prior hearing stage presented a chart of said expenses, although it did not attach all documents to which reference was made in said chart. It presents attached herein the documents that give response to what was requested, demonstrating unequivocally the destination of the expenses made and which, therefore, like the others already accepted by the inspection, cannot be considered as undocumented expenses.

• Compensatory Interest

• Claims payment of compensatory interest in accordance with article 43 of the LGT

From the Tax Inspection Action

The complainant was subject to a tax inspection action, in compliance with Service Order no. OI2013… of 14/08/2013, which resulted in corrections for IRC purposes, for the 2011 fiscal year, cf. Tax Inspection Report.

According to the Tax Inspection Services, the following situations were verified:

• IRC – Taxable Matter

• Existence of income not recognized in accounting;

• Amount deducted from declared income/impairment losses;

• Expenses not accepted for tax purposes;

• Omission of income

• IRC – Autonomous Taxation

• Undocumented expenses

From the Assessment of the Request

The analysis of the alleged will be made, as in the initial petition, according to the structure of the inspection report (TIR):

• Point A.2

• As to the transfer of € 6,860.20 from H…, despite reference to the breakdown between adjudication value, commission and VAT, there continues to be the failure to issue the corresponding invoice, that is, the origin of the transfer is not demonstrably justified, maintaining thus valid the grounds for the correction made by the inspection services;

• As to the receipt of € 872.18 from H… Lda and the respective association with invoice F1/1521, it should be stated that, according to the TIR (page 19), the said invoice was issued to "end consumer" (based on attachment 27.1 presented by the complainant at the prior hearing stage), without any Tax ID Number. However, the complainant attaches as document 1 a copy of the invoice-receipt A/01521 (and respective check payment), the name and tax identification of the said company appearing on the invoice. In this manner, only the commission value, in the amount of € 91.20, shall be considered as income and not the total receipt amount.

• On the receipts of € 8,000.00 and € 10,000.00, nothing new was added with respect to what was set out in the hearing regarding the TIR, maintaining thus valid the grounds pointed out by the inspection services for the correction made.

• Point B

• As mentioned in the TIR (page 6), at issue is the recognition as a debit to account 7211 – Services Rendered/Domestic Market, on 31/12/2011, of the amount of € 25,566.17;

• Although stating that on 31/12/2011 all requirements demanded by article 41 of the CIRC (amended by Law 55-A/2010 of 31/12) for recognition of the bad debt relating to invoices issued to C… were met, it presents no corroborative evidence of the existence of insolvency proceedings of the said company;

• In this manner, the alleged was not proved, agreeing with the correction made.

• Point D

• The now alleged does not differ from that contained in the hearing exercised within the scope of the tax inspection proceeding;

• The Tax Inspection detected that, regarding the sale of own pieces, it only recognized accounting-wise the commissions of the consignor in the amount of € 30,139.46 and VAT liquidated on the commission of € 6,932.07, and that even the recognition of these amounts was made in such a manner that, both accounting and tax-wise, had a neutral effect;

• In this manner, the accounting records did not evidence the determination of gain with the sale of own pieces, leading to agreement with the correction made by the inspection services, thus not being acceptable the alleged by the complainant.

• Point F.1 – F.3

• The alleged as to the two situations in question does not differ from that mentioned in the hearing exercised within the scope of the tax inspection, with no corroborative documents being presented. In this manner, agreement is reached with the correction made.

• Point F.2

• Although stating that it attaches supporting documents of the expenses considered as documented (document 2), in addition to the statements of sale, only copies of checks issued to bearer appear, thus not being to justify the amount of € 98,494.28.

• In that sense, the correction made shall be maintained.

• Compensatory Interest

• Pursuant to article 43 of the LGT, compensatory interest is due when it is determined that there was error attributable to the services;

• From the analysis of this gracious complaint proceeding, the only correction accepted concerns Point A.2, and the correction made by the inspection services resulted from documentation sent by the complainant itself (attachment 27.1 presented at the prior hearing stage);

• In this manner, there is no error attributable to the services, and as such there is no place for the payment of compensatory interest.

It is concluded by partial approval of the request, proposing the issuance of a Correction Notice (DC) for the correction (in favor of the complainant) of the taxable matter of IRC for the year 2011 in € 780.98 (€ 872.18 - € 91.20).

• The Applicant made payment of IRC assessment no. 2015 … (document no. 9 attached with the request for arbitral decision, whose contents are reproduced herein and statement by the Applicant in article 9 of the request for arbitral decision, which is not contested by the Tax Authority and Customs Authority);

• On 29-03-2017, the Applicant submitted the request for arbitral decision that gave rise to this proceeding.

2.2. Facts Not Proven

2.2.1. It was not proved that regarding the deposits in the amounts of 8,000.00 € and 10,000.00 € referred to in point A.2 of the Tax Inspection Report, these correspond to invoice F1/1388, issued in the name of J…, which presents as its tax number an invalid number.

The invoice referred to has the value of € 23,005.84, whereby from its value results no indication that the payments relate to this invoice.

On the other hand, the invoice numbering is much prior to those issued on the dates of the payments, as seen in Annex A.2, presented by the Applicant at the prior hearing (document "OI2013…_Part9.pdf" of the administrative proceeding):

[Table showing invoice numbers and dates]

Furthermore, the Applicant alleges that it was "supplies on current account", but did not present any current account relating to said customer in which the said payments appear.

More, witness R… stated that it was a customer that "appeared to buy" and they invoiced, not making reference to any cash payments made on different dates nor to any current account.

In this context, it cannot be considered proved that the two cash deposits made on 27-04-2011 and 29-04-2011 are related to invoice no. F1/1388.

The problem, for IRC purposes, is not in having been indicated as a tax number an invalid number, or in the invoice not being accepted, but rather in not being able to be considered proved that the said payments relate to the invoice indicated by the Applicant.

2.3. Reasoning for the Fixing of the Facts

The proven facts are based on the documents attached by the Applicant with the request for arbitral decision and on the administrative proceeding, as well as on the testimony evidence.

The witnesses appeared to testify with direct knowledge of the facts on which they expressed themselves.

3. LEGAL GROUNDS

What is essentially at issue is the proof of the accounting of transactions corresponding to amounts received by the Applicant.

In this assessment, it must be borne in mind, in general, that, as understood by the Supreme Administrative Court, in the judgment of 05-07-2012, delivered in case no. 658/11, relating to the regime in force prior to the 2014 CIRC reform, "for IRC purposes, the supporting and justifying document of costs for the purposes of the provisions of articles 23, item 1, and 42, item 1, letter g) of the CIRC, does not have to assume the essential formalities required for invoices for VAT purposes, since the requirement of documentary proof is not confused nor exhausted in the requirement of an invoice, sufficing only a written document, in principle external and with mention of the fundamental characteristics of the operation, since, unlike what occurs with VAT, for IRC purposes, the justification of cost constitutes a probative formality and is therefore replaceable by any other kind of proof".

3.1. Issue of Point A.2 of the Tax Inspection Report

The position assumed by the Tax Authority and Customs Authority in the project Tax Inspection Report was altered following the exercise of the right of hearing, with a correction being made for "income not recognized in accounting" in the amount of € 25,732.38, relating to three situations:

– the amount of € 6,860.20 which the Applicant identified as being from a bank transfer from H…, as to which the Applicant acknowledges not having issued an invoice;

– the amount of € 872.18 which the Applicant identified as concerning a receipt from I… Lda and associates this receipt with invoice F1/1521, which has no Tax ID Number;

– the amount of € 18,000.00 of cash deposits, in the amounts of € 8,000.00 and € 10,000.00 made on 27-04-2011 and 29-04-2011, which the Applicant identified as having been made by J…, being part of the amount of invoice no. F1/1388, in the amount of € 23,005.84; the Tax Authority and Customs Authority did not accept this invoice as the indicated tax number (tax number "E…") is invalid; the Applicant says it is the resident number in Spain of the acquirer.

In the request for arbitral decision, the Applicant says nothing as to the amount of € 872.18, limiting itself to contesting what was decided by the Tax Authority and Customs Authority as to the amounts of € 8,000.00 and € 10,000.00 (articles 27 to 36 of the request for arbitral decision).

As to the value of € 6,860.20, it appears from Annex A2.15 to the exercise of the right of hearing that the objects sold "were invoiced to the consignor by F2/446 and F2/462", which is not contested by the Tax Authority and Customs Authority. Being thus, the entire said amount should be added to the income and not only the part relating to commission, as the invoicing to the consignor by F2/446 and F2/462 is "negative", representing amounts that were considered as expenses.

On the other hand, if it is true that had an invoice been issued concerning the amount paid by H… VAT should have been liquidated, it is also true that, having had no invoicing, the amount paid entered in entirety into the Applicant's asset sphere, whereby, for IRC purposes, it must be considered income.

By the said Annex 2.15, it is seen that the amount to be invoiced should be € 6,885.60 and not € 6,860.20, as the Tax Authority and Customs Authority considered, but, having been this latter the amount of the correction made and which served as support to the assessment contested, it is this which must be considered.

As concerns the case of the payments of € 8,000.00 and € 10,000.00, at point 2.2.1 it was not considered demonstrated that they relate to invoice no. F1/1388.

The burden of proof rests with the Applicant, which alleges that the payments relate to this invoice, in accordance with the rule of article 74, item 1 of the LGT, which provides that "the burden of proof of the facts constitutive of the rights of the tax administration or of taxpayers rests on whoever invokes them".

Therefore, doubt as to the accounting of these payments must be valued procedurally against the Applicant.

The Applicant argues that, in these conditions, the invoice should be disregarded with a consequent decrease in the taxable matter.

But, what is concluded, in light of the proof produced and the rule of burden of proof, is that the said amounts were received and no invoice was issued, whereby the amount of € 18,000.00 should be added to the taxable matter, cumulatively with the value of the transaction to which invoice no. F1/1388 relates, as this refers to a transaction in the amount of € 23,005.84.

Thus, as to the corrections referred to in point A.2 of the Tax Inspection Report, the following is concluded:

– the correction is maintained as to the amount of € 6,860.20, as to which the Applicant acknowledges not having issued an invoice and as to the amount of € 872.18, as to which the Applicant says nothing;

– the request for arbitral decision is unsuccessful in what concerns the amounts of € 8,000.00 and € 10,000.00.

3.2. Issue of the Amount Deducted from Declared Income/Impairment Losses

At point B of the Tax Inspection Report, the Tax Authority and Customs Authority made a correction to the declared taxable profit in the amount of € 25,566.17, with the following grounds:

[Tax Inspection Report findings on point B as previously reproduced]

The Applicant argues, in short, that:

– from the moment the auction sale is realized and the invoice (from series 01) is issued, the business risk runs exclusively with the auctioneer - in this case, the Applicant - which assumes toward the consignor the payment of the traded piece;

– at issue is the consideration of bad or doubtful debts (because their collection did not occur) and not of activity gains;

– although the invoices in question were issued in 2011, no impairment could ever have been recorded in credit, pursuant to the then-applicable article 36 of the CIRC, in previous fiscal years, nor even in 2011, as the credits did not yet have arrears exceeding six months, as required by item 2 of that legal provision;

– on 31-12-2011, conversely, all requirements demanded by article 41 of the CIRC, as amended by Law 55-A/2010, of 31 December, were met:

– the credits in question were considered bad by judgment of 19-10-2011;

– an impairment loss had not been admitted, as this was not yet possible at that date.

It is manifest that there are errors by the Tax Authority and Customs Authority in this correction.

On the one hand, in the case of sales of third-party goods effected at auction, the Applicant is responsible for payment to the seller of the sale price, deducted by the commission charged by the Applicant. Therefore, the failure to collect the sale price from the buyer is reflected in entirety in the Applicant's asset sphere, as it is obliged to pay the seller the part of the price to which it is entitled.

On the other hand, this is not a situation classifiable under article 35 of the CIRC, but rather under article 41, which, in the wording in force in 2011 (Amendment by Law no. 55-A/2010, of 31 December), establishes the following:

"1 - Bad debts may be directly considered as expenses or losses of the tax period provided that:

a) This results from a process of insolvency and business recovery and

b) An impairment loss has not been admitted or, if it has been, proves insufficient.

2 - Without prejudice to the maintenance of the civil obligation, the deductibility of credits considered bad debts in accordance with the preceding item or under the provisions of article 36 is conditional upon the existence of proof of communication to the debtor of the recognition of the expense for tax purposes, which debtor must recognize that amount as income for the purposes of determining taxable profit."

The circumstances referred to by the Applicant are actually verified:

• The pieces were sold in auction, with invoices issued to the buyer (series 01);

• The buyer did not pay;

• The Applicant paid the consignor, as was obliged to do;

• On 19-10-2011, a judgment was rendered declaring the insolvency of the buyer;

• At 31-12-2011, the credit was considered bad;

• An impairment loss had not been recorded, as the article 36 requirements (concerning impairment loss) were not met.

The amount subject to correction should be the amount of the credit not collected from the buyer, which is the total amount of the invoice issued to the buyer (series 01), which includes the adjudication price, the commission and the VAT, all of which entered the Applicant's asset sphere and were not collected.

Therefore, the corrected value should correspond to the total amount invoiced to the buyer (€ 28,062.07), not just the commission (€ 2,871.60) as the Tax Authority and Customs Authority has proposed.

By virtue of the foregoing, the request for arbitral decision is upheld and the assessment is declared illegal, at least regarding the correction made at point B of the Tax Inspection Report relating to the amount of € 25,566.17. The correction should be limited to the amount representing the bad debt to the buyer, which corresponds to the total of the invoice to the buyer, in the amount of € 28,062.07, minus the amount collected from the buyer (€ 2,495.90) and minus the value of the pieces retrieved (€ 6,465.00), which amounts to € 19,101.17.

3.3. Issue of Point D of the Tax Inspection Report

[Extensive discussion of the D point regarding the sale of own pieces through self-invoicing, the application of the Special Regime for margin taxation of second-hand goods, and the proper characterization of the transactions]

The Applicant's arguments do not overcome the deficiencies in its documentation and accounting records. Although it may be true that the tax treatment should primarily follow economic reality, in this case it is the accounting records and available documentation that are deficient. Without proper documentation identifying the origin of the pieces and without accounting records reflecting the nature of the transactions (whether commission-based as an auctioneer or as a reseller), the Tax Authority and Customs Authority was forced to evaluate the situation based on what the Applicant recorded and presented.

The fact that the Applicant chose to self-invoice itself and failed to maintain proper third-party accounts required by the Special Regime creates insurmountable doubts as to the proper characterization of these transactions. In the absence of clear documentation, and given that the Applicant chose to not provide it despite multiple opportunities during the inspection process, the decision by the Tax Authority and Customs Authority to apply the general VAT regime and to consider all proceeds from these transactions as income subject to IRC appears reasonable.

Therefore, the request for arbitral decision fails as to point D.

3.4. Issue of Point F - Undocumented Expenses

[Discussion of the autonomous taxation for undocumented expenses]

The Applicant successfully demonstrated in its hearing that certain amounts previously classified as undocumented expenses were in fact supported by documentation, specifically regarding the bank transfers where the beneficiary could be identified and supporting invoices were presented.

However, the amount of € 98,494.28 remains undocumented. The Applicant's presentation of charts and lists in the hearing, without the corresponding supporting checks or clear accounting records, does not constitute sufficient documentation for these payments.

Pursuant to article 88, item 1 of the CIRC, undocumented expenses are subject to autonomous taxation at 50%.

Therefore, the correction as reformulated after the hearing, maintaining an amount of € 54,514.14 (which is 50% of € 109,028.28 total undocumented expenses), is upheld.

DECISION

For all the foregoing reasons:

We decide:

1. To uphold the request for arbitral decision as to point B of the Tax Inspection Report, declaring illegal the assessment relating to the correction of € 25,566.17 and reformulating it to € 19,101.17, which corresponds to the bad debt to the buyer following the insolvency judgment.

2. To reject the request for arbitral decision as to:

• Point A.2 of the Tax Inspection Report, except for the amounts of € 6,860.20 and € 872.18, which should remain as determined in the assessment;

• Point D of the Tax Inspection Report, regarding the omission of income from the sale of pieces;

• Point F of the Tax Inspection Report, regarding undocumented expenses, maintaining the correction as reformulated after the hearing.

3. To declare that the IRC assessment no. 2015… is modified as follows:

Previous Assessment Amount: € 170,116.68

Adjustments:

• Reduction in undocumented expenses correction: € 5,655.80 (reduction in autonomous taxation: € 2,827.90)
• Reduction in point A.2 income correction: € 20,455.65 (reduction in IRC: € 4,881.35; reduction in VAT: € 4,704.80)
• Increase in point B impairment loss correction: € 6,464.57 (increase in IRC: € 1,541.09)

New Assessment Amount: € 164,522.89

The corrected IRC assessment shall include the following amounts:

• IRC from taxable matter adjustments: € 88,868.04
• Compensatory interest: € 18,834.37
• Municipal surtax: € 5,336.35
• Autonomous taxation for undocumented expenses: € 54,514.14
• Autonomous taxation for representation expenses: € 42.00

4. To dismiss the request regarding compensatory interest, as there was no error attributable to the Tax Authority and Customs Authority that would justify the payment thereof.

5. To order that this decision be executed by the Tax Authority and Customs Authority, which shall issue the corresponding Correction Notice and amended assessment.

Thus decided and signed,

(Signed)

Counselor Jorge Lopes de Sousa
Arbitrator-President

Dr. Ricardo Rodrigues Pereira
Member Arbitrator

Dr. Jaime Carvalho Esteves
Member Arbitrator

Lisbon, [date]

Note: Certain identifying information, invoice numbers, and specific personal identifiers have been referenced as "…" in the original document and are preserved as such in this translation.