CAAD 175/2016-T: IRC and IVA Non-Deductibility 2009 – Extraordinary Revision Appeal Under Art. 696(f) CPC

TAX ARBITRATION CASE LAW

Case No. 175/2016-T

Decision Date: 2024-02-07

CIT/VAT

Amount of Claim: € 113,083.18

Subject Matter: VAT and CIT – Fiscal Year 2009 – Non-deductibility (Articles 23 of CIRC and 19-3 of CIVA) - Extraordinary Review Appeal of the Award: the ground provided for in Article 696, paragraph f) of the CPC – Arbitral Decision (attached).

COLLEGIATE DISPATCH

A - BRIEF SUMMARY OF THE CASE SITUATION

In these proceedings, the Claimant and the Respondent are, respectively, A..., Lda. and the Tax and Customs Authority, before the arbitrators, Judge José Poças Falcão (presiding arbitrator), Professor Carlos Lobo (subsequently replaced, by resignation, by Mr. Dr. Jorge Carita) and Professor Diogo Feio (arbitrator members), appointed by the Ethics Council of the Administrative Arbitration Center ("CAAD") to form the Arbitral Tribunal, regularly constituted on 28-6-2016. The award issued on 20-3-2017[1] was notified to the parties and became final, which, judging totally unfounded the requests for annulment of various additional assessments for CIT, VAT and interest, maintained in the legal order the respective tax acts as well as the act of express rejection of the hierarchical appeal also subject to arbitral challenge.

Following the closure of the proceedings, the claimant filed an extraordinary review appeal of the aforementioned arbitral award, based essentially on the alleged incompatibility of this award with decisions, which also became final, in which it was a party and in which it obtained a decision annulling VAT for the year 2008 (Case No. 254/2015-T) and CIT also for 2008 (Case No. 3781/15.3BELBRS, of the Tax Court of Lisbon).

The aforementioned situation, in the learned perspective of the now appellant, would constitute grounds for review of the decision (in this case, the arbitral award to be reviewed issued by this Tribunal) pursuant to Article 293 of the CPPT, by fulfilling the requirements provided for in paragraphs c) and f) of Article 696 of the CPC.

Upon receiving notification of the filing of this extraordinary appeal, the following dispatch was issued: "As the CAAD has been notified by the now Appellant, A..., Lda., of the filing of an extraordinary review appeal of the award, which became final, issued on March 20, 2017, by the Collective Arbitral Tribunal composed of arbitrators José Poças Falcão (President), Carlos Lobo and Diogo Feio (Deputy Arbitrators), it is decided:

a) To declare the aforementioned Tribunal reconstituted; and
b) To order the notification of the now Respondent, Tax and Customs Authority, to exercise its right of reply within the period of 15 (fifteen) days, with respect to the requests for filing of the appeal submitted on 31-7-2023 and 18-8-2023.

The Tax and Customs Authority, following the aforementioned dispatch, opposed the admissibility of the appeal because, citing, "(...) the procedural requirements for an appeal for review of a decision are manifestly not met in the present case (...)".

B - GROUNDS FOR THE EXTRAORDINARY REVIEW APPEAL

It is well-known and we dispense with lengthy dissertations or extensions in their reasoning, that the decision of the Tribunal on the merits of the case, after becoming final, has binding force within and outside the proceedings within the limits set, in general, by Articles 580 and 581 of the CPC, without prejudice to the provisions of Articles 696 to 702 of the same CPC.

These latter articles (696 to 702) constitute the legal and/or procedural basis for filing an extraordinary appeal for review of the final decision, although always subject to a time limit (as a rule, the filing must occur before more than five years have elapsed since the decision became final - see Article 697-2 of the CPC).

It can be stated that this extraordinary appeal essentially serves to restore justice in cases where facts or situations supervening after becoming final emerge that flagrantly call into question the fairness of the decision and that justify, in some way, that it be imperative to affect, always in the most balanced manner possible, the fundamental values of legal certainty and security[2].

The Code of Tax Procedure and Process (see Article 293 of CPPT), like all procedural regimes of other branches of Law, admits the appeal for review, provided it is filed within four years after the decision to be reviewed becomes final and within thirty days of becoming aware of the facts or circumstances that form its basis.

As regards tax arbitration, there is certainly no valid reason for the inapplicability of the aforementioned review regime, even though, in this context, the principle of non-appealability of arbitral decisions or restriction of appeals is established [see Article 124-4/h) of Law No. 3-B/2010, through which the Assembly of the Republic granted the Government legislative authorization on which it based the approval of Decree-Law No. 10/2011 (Tax Arbitration Regime or, briefly, RJAT)].

And what then should be the regime for appeals for review of arbitral decisions in tax matters?

The answer to this question can be none other than that which results from the situation of an omission in the law, namely, the application of the regime provided for in Article 293 of CPPT, which is the norm subsidiarily applicable by virtue of Article 29-1 of RJAT.

Concluding, therefore, on the admissibility of an appeal for review of an arbitral tax decision, it is important to determine whether the ground now invoked by the appellant is or is not met, considering that both the becoming final and the filing within the four-year limit provided for in the aforementioned Article 293 of CPPT are evident and not subject to dispute by the parties (applicable, as seen, subsidiarily, in the version given by Law No. 118/2019), as well as the competence of the Arbitral Tribunal, now reconstituted, to admit (or not) the appeal.

Let us proceed.

It should be stated upfront that, as has been repeatedly affirmed for a long time by Jurisprudence (See, inter alia, Award of the Plenary of the 2nd Section of the STA, of 7-6-1995, appeal No. 5239, in DR – Appendix of March 31, 1997, pages 36-40 and Award of the STA – 2nd Section, of 23-4-1997, in DR – Appendix of 10-9-1997, p. 1094), the Tribunal does not have the duty to dissect and/or analyze the arguments put forward by the parties but has only and solely the duty to decide the legal question raised and to substantiate its decision.

This extraordinary appeal is based on paragraphs c) and f) of Article 696 of the CPC[3], applicable subsidiarily, as seen, to tax arbitration [see also Article 2-e) of CPPT].

From this norm results the admissibility of the review appeal when the final decision "is irreconcilable with the definitive decision of an international appellate body binding on the Portuguese State" or when "evidence is produced of which the party had no knowledge, or of which it could not make use (...) and which, by itself alone, is sufficient to modify the decision in a manner more favorable to the defeated party (emphasized or bolded).

Is it then, as is the case according to the grounds of the appeal, that a decision of the CJEU (Case No. C-642/11, of 21-1-2013), issued in the context or process of a preliminary reference invoked incidentally or ineptly by a Tax Court of First Instance (Case 3781/15.3BELRS) relating to a dispute in which the respective subject matter may have identical contours to the question that was decided in the present arbitral case, by leading or having led to a different solution, constitute grounds for the herein requested review?

Let it be stated from now on, decided and clearly, that the answer is negative.

In fact and in the first place, in the preliminary reference process[4] to the CJEU incidentally invoked, what is at issue is not the assessment of the merits of any case but only and exclusively the interpretative meaning of European law, in this case, Directive 2006/112/EC of the Council of 28-11-2006 (the so-called "VAT Directive")[5].

It should be noted or recalled that the preliminary reference appeal to the CJEU has as its object the submission to the CJEU by a Court of the national legal order of one or more questions with a view to the answer or answers by this European judicial instance, aimed at enabling the national Court to issue a decision in accordance with the Law of the European Union in the binding interpretation given to it by the CJEU.

The decision to be issued or issued by the CJEU in the context of a preliminary reference process does not therefore aim, clearly, to revoke judicial decisions issued by national Courts - See, in this sense, e.g., the Award of the Court of Appeal of Lisbon, in case No. 1832/16.9T8LSB.L2/6th Section, in www.dgsi.pt.

Therefore, it would not be correct to speak, in the circumstance, of "definitive decision of an international appellate body."

On the other hand still, it does not meet the requirement for review at issue, the circumstance that, in an action or proceeding, there has been a decision by an international instance without the clear and express concrete reference to some or some proceedings decided by the national legal order, implying in some way the sense of the decisions issued.

And, finally, the existence of the "evidence" supervening to which reference is made in paragraph c) of the aforementioned Article 696 of the CPC is neither alleged nor demonstrated, which would be, by itself alone, decisive or causal of the modification, in its favor, of the decision to be reviewed.

Well then: there is nothing that bears the nature or concept of evidence that has now been produced with minimum adequacy to bring about the possible review of the arbitral decision that became final.

Being that, as the Supreme Court of Justice has recently decided, a judgment or award cannot serve as grounds for an extraordinary review appeal because they are not evidence for purposes of Article 696-c) of the CPC – see Award of the STJ of 19-10-2022, Case No. 6940/19.6T8PRT-A.P1.S1 – 4th Section.

Thus it is that, moreover, in line with arbitral jurisprudence that if not unanimous, at least largely majority which in substance equally endorses, revealed, among others, in dispatches issued in CAAD cases Nos. 162/2019-T, 169/2019-T, 164/2019-T, 159/2019-T, 170/2019-T, 161/2019-T, 160/2019-T, 373/2018-T, the appeal now filed cannot be admitted and must be summarily rejected.

C - DECISION

Not being revealed, thus, the requirements met on which the request for review appeal filed by the Claimant is based, namely, the decisions cited by the Claimant as grounds or cause for the filing of this appeal, issued in case No. 254/2015-T of CAAD and in case No. 3781/15.3BELRS of the Tax Court of Lisbon and the award of the CJEU, issued on January 31, 2013, in the context of preliminary reference, in Case No. C-642/11, were not issued by an international appellate body nor was any evidence invoked and/or produced susceptible to permitting the review of the award issued and which became final, this extraordinary appeal is devoid of grounds and, in consequence, it is decided:

1. Not to admit the extraordinary review appeal filed by the Claimant;

2. To consider manifestly useless, as it is rendered moot by this decision (See Articles 130 and 608/2 of the CPC), the assessment of the other requirements provided for in the aforementioned Article 696/f) of the CPC and to which reference was made above incidentally, in particular whether the decision issued by the CJEU in the aforementioned case C-642/11 may be considered as a decision irreconcilable with the arbitral decision to be reviewed and binding on the Portuguese State for purposes of that norm.

Without costs, due to absence of legal provision for taxation of extraordinary review appeals in the context of tax arbitration.

Notify the parties.

Publish this decision in accordance with the provisions of Article 16, paragraph g) of RJAT.

Lisbon, February 7, 2024

The Collective Arbitral Tribunal,

José Poças Falcão
(Presiding Arbitrator)

Jorge Carita
(Arbitrator Member)

Diogo Feio
(Arbitrator Member)

CAAD: Tax Arbitration

Case No.: 175/2016-T

Subject Matter: CIT and VAT – Fiscal Year 2009 – Express Rejection of Hierarchical Appeals – Assessments – Lack of Substantiation – Reality of Transfers of Goods – Non-deductibility (Articles 23 of CIRC and 19-3 of CIVA) - Burden of Proof.

ARBITRAL DECISION

I. STATEMENT OF FACTS

1. A…, Lda. (hereinafter, "B…"), with Tax Identification Number…, with registered office at …, …, ..., in …, came, pursuant to and for the purposes of Articles 1, paragraph a), of paragraph 1 of Article 2, paragraph 2 of Article 5, paragraph 1 of Article 6, paragraph 3, paragraph a) of paragraph 1 and paragraph 2 of Article 10, all of the Legal Regime of Tax Arbitration (hereinafter RJAT), to request a ruling on "the illegality of the criterion that determined the following additional VAT and CIT assessments for 2009 and the express rejection of the objections to these assessments, which were subject to hierarchical appeals with tacit rejection (...)":

a) Additional CIT Assessment for 2009 No. 2014…, of 12.12.2014, in the amount of €64,068.68, of which €54,306.22 is for tax and €9,760.24 for interest, with the respective set-off No. 2014…, of 17.12.2014, with demonstration of account settlement ID Document 2014… and demonstration of interest (Documents 1 to be attached and 2 and 3 protested to be attached);

b) Assessment No.…, for the period of 09.09, with the collection document number …, in the amount of €14,597.42;

c) Interest Assessment No.…, for the period of 09.09, with the collection document number …, in the amount of €2,937.08;

d) Additional Assessment No.…, for the period of 09.12 with the collection document number …, in the amount of €26,426.40;

e) Interest Assessment No.…, for the period of 09.12 with the collection document number …, in the amount of €5,053.60 (Documents 4 to 7, attached with the initial petition).

The Claimant further requests the condemnation of the Tax Authority to reimburse the Claimant "(...)of the amounts unduly paid and seized, plus compensatory interest accrued and accruing from the day following undue payment, until the date of issuance of the respective new credit, at the rate of 4% per annum, with the following values calculated to this date:

a) payment on account of CIT for 2009 made on 18.06.2015, in the amount of €7,920.00: interest calculated to this date €236.95;

b) installments in the context of the enforcement of VAT for 2009:
b.1) 1st, in the amount of €1,122.22, made on 22.10.2015, interest calculated to this date €18.20;
b.2) 2nd, in the amount of €1,123.43, made on 26.11.2015, interest calculated to this date €13.91;
b.3) 3rd, in the amount of €1,128.38, made on 28.12.2015, interest calculated to this date €10.02;
b.4) 4th, in the amount of €1,133.50, made on 29.01.2016, interest calculated to this date €6.09;
b.5) 5th, in the amount of €1,138.62, made on 29.02.2016, interest calculated to this date €2.35;

c) garnishment of credit in the context of tax enforcement of VAT for 2009, in the amount of €24,490.76, carried out on 09.11.2015, interest calculated to this date €346.23; all totaling €633.45.

1. It alleged, in essence and in summary:

Following an inspection procedure of the now Claimant A…, carried out by the General Direction of Finance of Lisbon, hereinafter Tax Authority/Lisbon, for the fiscal years 2008 and 2009, in December 2014, the aforementioned additional VAT and CIT assessments for 2009 were issued and notified to the here Claimant, the CIT with a deadline for voluntary payment until 16.02.2015 and the VAT assessments and respective interest until 28.02.2015. Documents 8 and 2 and 3 protested to be attached, 1, 4, 5, 6 and 7.

Disagreeing with them, on May 5, 2015, it filed a gracious objection to the VAT assessments and respective interest for 2009 and on May 13, 2015, to the CIT assessment for 2009;

Both gracious objections – VAT and CIT for 2009 – were expressly rejected by dispatches notified to the Claimant on September 25, 2015.

And the grounds for rejection of both gracious objections were similar, as set out in the rejection dispatches attached to the administrative proceedings which are hereby fully reproduced for all legal purposes, based on the following: the Tax Inspection Report (hereinafter RIT) meets the legal requirements of form and substance, so "it is on the claimant that the burden of proof of the existence of the transactions disregarded by the inspection services rests, with the basis in simulation, so that, having failed to achieve such objective, the tax assessment acts now objected to shall be maintained."

Disagreeing with the rejections, on October 23, 2015, the now Claimant filed a hierarchical appeal of both, reiterating the arguments raised in each of the gracious objections previously raised and which are hereby fully reproduced for all legal purposes, and which shall be developed below in the facts and law.

After the sixty-day period elapsed, the Tax Authority did not rule on the hierarchical appeals, with the consequences provided for in paragraph 5 of Article 66 of CPPT.

And, since the now Claimant understands that the assessments in question suffer from defects of form due to lack of substantiation, which undermine their validity, disagreeing, neither with the express rejection of the Gracious Objections, nor with the tacit rejection of the Hierarchical Appeals, requests at this date the constitution of an arbitral tribunal for assessment of the defects affecting the aforementioned assessments and express rejections of the gracious objections and tacit rejections of the hierarchical appeals, pursuant to paragraph a) of paragraph 1 of Article 10 of RJAT.

It also alleged that it made payment on account of CIT and VAT installments, the reimbursement of which it requests.

1. The Tax Authority, in its response, supported a position contrary to that presented by the Claimant, and in line with the position already assumed in the context of the gracious objection, concluded for the total lack of foundation of the claim.

2. The request for constitution of the Arbitral Tribunal was accepted by the esteemed President of CAAD and immediately notified to the Respondent in accordance with law.

3. Pursuant to and for the purposes of the provisions of paragraph a) of paragraph 2 of Article 6 of RJAT, by decision of the esteemed President of the Ethics Council, duly communicated to the parties within the prescribed periods, were appointed as arbitrators, Judge Dr. José Poças Falcão as president, and as members, Professor Carlos Lobo and Professor Diogo Feio, who communicated to the Ethics Council and the Administrative Arbitration Center their acceptance of the appointment within the period stipulated in Article 4 of the Code of Ethics of the Administrative Arbitration Center.

4. The Collective Arbitral Tribunal was constituted on 28-6-2016, in accordance with the requirement of paragraph c) of paragraph 1 of Article 11 of RJAT.

5. The meeting referred to in Article 18 of RJAT was held and witness testimony was heard at the hearing in accordance with the respective minutes.

6. Final submissions of the parties were presented in writing, within the periods and terms determined by the Tribunal, with their respective conclusions, in essence, being the same as those already alleged in their respective pleadings.

7. In the course of the proceedings, the Claimant presented, on 24-11-2016, a request for condemnation of the respondent for bad faith litigation.

8. The Respondent was notified of the request for condemnation for bad faith litigation and made statements on it as set out in the minutes of witness testimony hearing of 25-11-2016 and the document attached in that hearing.

9. The proceedings suffered some procedural incidents that led to an extension, pursuant to Article 21-2, of the legal period for conclusion of the arbitration.

Preliminary Matters

1. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, paragraph 1, paragraph a), 5 and 6, paragraph 1 of RJAT.

2. The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of RJAT and Article 1 of Ordinance No. 112-a/2011, of March 22.

3. The proceedings do not suffer from nullities, and no exceptions were raised, it being necessary to assess and decide the merits of the claim:

II. SUBSTANTIATION

A. FACTUAL MATTERS

A.1. Proven Facts

1. The now complainant is a limited liability company that declared the beginning of activity on 2002-09-11 with Classification of Main Economic Activity – CAE No. 43290 - Other Construction Works, and is subject to the general taxation regime for Corporate Income Tax (CIT) purposes and, for Value Added Tax (VAT) purposes, under the normal regime with quarterly periodicity since 2012-01-01.

2. In compliance with Service Orders Nos. 012012… and 012013…, the complainant was subject to an external general-scope inspection procedure for the years 2008 and 2009.

3. The action began on 2013/06/07 for the year 2009 and was concluded on 2014/10/17.

4. As a result of the aforementioned inspection action, corrections were made in the context of CIT (correction of taxable profit) and VAT unduly deducted, in the amount of €41,023.82, for the year 2009...

5. and were consequently issued, the tax assessments and compensatory interest assessments involved in the present case and identified below;

6. The Tax Authority supported in the inspection report and consequent decision for additional assessment the understanding that it is on the complainant that the burden of proof of the existence of the transactions disregarded by the inspection services rests, with the basis in simulation, so that, having failed to achieve such objective, the tax assessment acts now objected to shall be maintained, thus expressly rejecting relief of the gracious objection above.

7. The following were the summary conclusions of the aforementioned inspection action:

7.1 - VAT • Tax Shortfall

7.2 - CIT • Adjustment to Taxable Profit

1. The Tax Authority, following and as a consequence of the aforementioned inspection action of the Claimant company, as reflected in the report incorporated in the administrative proceedings file of which a copy is in these proceedings, proceeded with the following assessments for fiscal year 2009:

a) Additional CIT Assessment for 2009 No. 2014…, of 12.12.2014, in the amount of €64,068.68, of which €54,306.22 is for tax and €9,760.24 for interest, with the respective set-off No. 2014…, of 17.12.2014, with demonstration of account settlement ID Document 2014… and demonstration of interest;

b) Assessment No.…, for the period of 09.09, with the collection document number …, in the amount of €14,597.42;

c) Interest Assessment No.…, for the period of 09.09, with the collection document number …, in the amount of €2,937.08;

d) Additional Assessment No.…, for the period of 09.12 with the collection document number …, in the amount of €26,426.40;

e) Interest Assessment No.…, for the period of 09.12 with the collection document number …, in the amount of €5,053.60;

For a total of €49,014.50 (Documents 4 to 7).

1. In the years 2008 and 2009, "B…" Lda. (hereinafter, "B…"), Tax ID…, which is indicted as the issuer of false invoicing, issued in favor of the Claimant A… the following invoices:

Year 2008

Year 2009

1. With respect to the aforementioned company "B…", the following facts were established in inspection proceedings carried out by the Office of…:

a) "B…" has its registered office at… and its operational facilities consisted only of a room at…, in….

b) Its personnel consisted solely of its manager, Mr. C… and a secretary, Ms. D….

c) The operational equipment that the company used in its activity consisted of some administrative equipment of little relevance and two light passenger vehicles.

d) According to its accounting records, all the goods sold (stainless steel sheets) to its customers, which includes "B…", were purchased from its alleged supplier E…, Tax ID… with registered office at….

e) This company did not sell any goods to B… nor did it receive any payment from it.

f) In the accounting of "B…" there is no evidence that it resorted to third parties to store or transport the products/merchandise allegedly sold. Neither was any proof provided that goods had been transported from the facilities of its alleged supplier E… to its facilities.

g) The invoices issued by "B…" [including those mentioned above in 13.] state that the goods were transported from its facilities to the address of its customers.

h) No evidence was obtained that any merchandise was transported by order of B…; neither was a single transport guide found or provided by B… or by the customers.

i) Moreover, "B…" stated, through a fax sent to A… on 2008-01-01, that "all transportation of merchandise occurs at our expense and responsibility, or by a company contracted by B…, Technical Insulation, but with costs to be borne by us"; it stated, in the same fax, that transportation was carried out by "F…, Lda., Tax ID… However, "F…" was with closed activity - in terms of VAT, since 2000-04-20, pursuant to Article 33, paragraph 1, paragraph b) of CIVA (at the time) and, in terms of CIT, since 2009-12-31. Also, as was proven in the inspection action carried out by the Finance Department…, there is no record in the accounting of the company of any payments to third parties for transportation services.

1. On 22-10-2015, the Public Prosecutor [DIAP – 2nd Section of the District of Lisbon North] sent to the District Direction of Finance of Lisbon a certificate extracted from the criminal inquiry process No. …/12.OIDLSB, proving that in those inquiry proceedings the now Claimant, A…, Lda., G…, manager thereof and C…, partner and manager of B…, Lda., are all defendants, being accused by the Public Prosecutor, in material authorship and in continuous form, of the commission of crimes of qualified tax fraud...

11....against them, having been brought an accusation based, among other facts, on the issuance by B… in favor of A… of the invoices referenced above in 9., which would document non-existent commercial transactions [fictitious invoices] [see certificate attached by the respondent with the response];

1. The Public Prosecutor did not accuse B…, Lda., because the closure of its liquidation had occurred and is registered and such is a cause for extinction of the criminal proceeding (see also cited certificate).

2. The Claimant filed a gracious objection against the following act of additional VAT assessment and compensatory interest already mentioned:

1. It alleged, for that purpose:

• Following the tax inspection for the fiscal years 2009 and 2010, to which the complainant was subject, it was considered that the VAT relating to invoices issued by the company B…, Lda., Tax ID…, was unduly deducted.

• The complainant was notified of the inspection report (see document on pages 22 to 30), which culminated with the decision to make corrections in terms of VAT for fiscal year 2009, due to the verification of the existence of facts corresponding to simulated transactions.

• The decision to proceed with the correction of the taxable matter and consequent additional VAT assessment for the periods of 200909T and 200912T, [subject of the present objection], was based exclusively on facts established by the Finance Department of…, within the scope of the inspection action against company B…, Lda.

• Based on the facts established regarding company B…, within the scope of the inspection action carried out by the Finance Department of…, the Finance Department of Lisbon concluded that company A…, here the complainant, had been an active party in a simulated transaction, i.e., that A… and company B… had, intentionally and in collusion, issued false statements, with the intent to deceive the Tax Administration.

• In the Tax Authority's view, the complainant did not prove the existence of the commercial operations that are documented in the invoices.

• The complainant considered that the assessments now challenged do not respect the rules for apportionment of the burden of proof, as it believes that it is the Tax Authority that bears the burden of proof that such operations did not exist and not the complainant.

1. The gracious objection was rejected by dispatch of 22-9-2015;

2. The claimant then filed a hierarchical appeal of that dispatch which, on 18-3-2016 [date of presentation of the present request for arbitral ruling] had still not been decided [tacit rejection];

3. The Claimant made a payment on account of the additional CIT assessment for 2009 in the amount of €7,920.00; and...

4. ..., with respect to the amount subject to enforcement of VAT for 2009, made 5 installment payments totaling €5,769.15; and

5. Sums were garnished for it by the Tax Authority from the Company H… in the amount of €24,490.76.

A.2. Unproven Facts

It is not proven:

• that the Claimant acquired the merchandise referred to in the invoices mentioned in 9. and 11. of the proven facts.

A.3. Substantiation of the Factual Matters Deemed Proven and Unproven

It should be noted preliminarily that the Tribunal does not have to pronounce itself on everything alleged by the parties, being incumbent upon it, rather, the duty to select the facts that matter for the decision and discriminate between proven and unproven matters [(see Article 123, paragraph 2 of CPPT and Articles 607 of the CPC, applicable by virtue of Article 29, paragraph 1, paragraphs a) and) of RJAT)].

Thus, the facts pertinent to judgment in the case are selected and delineated based on their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (see Article 596 of the CPC, applicable by virtue of Article 29, paragraph 1, paragraph e) of RJAT).

Accordingly, taking into account the positions assumed by the parties, the documentary evidence presented in these proceedings, a copy of the administrative file attached and the testimonial evidence produced, the facts listed above are deemed proven, with relevance for the decision.

The Tribunal considered that the Tax Authority fulfilled its burden of proof to "contradict" or "undermine" the presumption of truthfulness of the operations recorded in the writing or accounting of the Claimant (see Article 75 of the LGT) and the respective supporting documents [in this case, the invoices].

It would be incumbent upon the Claimant, subsequently, to prove the harmony between what was documented and reality.

This burden, however, was not met since the Claimant did not prove the actual performance of the documented transactions.

In fact, the conclusions drawn from the inspection report resulting from the combination of the elements of proof and lack thereof collected are integrated into a legally unassailable logic in that no evidence whatsoever, even circumstantial, is found of the actual acquisition of the merchandise, namely, the concrete specification of the works and customers of A… to which the panels were destined, who and when transported them, payments or invoicing of the same to those customers, transport guides, etc.

On the other hand, it was neither forbidden nor would it have been forbidden to the Tax Authority to resort to elements obtained through cross-examination together with other taxpayers [in this case, B…, Lda.] to extract therefrom indicia of the existence of simulated transactions or the existence of false invoicing (see, e.g., Award of the TCAS of 26-6-2014 – Case No. 07141/2013).

Furthermore, in the judicial context, the documents attached and exhibited during the witness testimony hearing [which make no mention of refrigerated panels 80 mm (code…) "purchased" from B… in the year 2009 in accordance with invoices Nos.…, …, …, …, …, …, …, …, … and…] and the testimonial evidence [witness I… is the wife of the managing partner of the Respondent; witness J… is a refrigeration technician, in charge of maintenance of refrigeration compressors, without connection to the area of purchase of refrigeration panels which, as he stated, "only saw at the works" and J… who, despite only seeing the panels at the works, stated that B… was one of the suppliers of the Claimant A…, contradicting the testimony of witness I…], were not sufficiently credible or enlightening so as to avoid serious doubts about the reality of the facts and always, at the limit, the consequence that the documented commercial transactions did not take place (see Article 414 of the CPC: "Doubt about the reality of a fact (...) is resolved against the party to whom the fact is advantageous").

B. AS TO THE LAW

Issues to be Decided

The issues to be assessed and decided, as has already been partly indicated in the substantiation of the factual matters, are reduced to the following:

1st To whom does the burden of proof of circumstantial evidence of simulation in the issuance and consequent accounting of invoices [indicia of the existence of false invoices] belong;

2nd To whom does the burden of proof of such simulated invoicing belong;

3rd The issue of the request for condemnation of the Tax Authority for bad faith litigation.

Let us proceed:

The Tax Authority believes that "(...) it is on the complainant that the burden of proof of the existence of the transactions disregarded by the inspection services rests, with the basis in simulation, so that, having failed to achieve such objective, the tax assessment acts now objected to shall be maintained."

The complainant intends to contradict this understanding with the conclusion that the assessments object of the present proceedings do not respect the rules for apportionment of the burden of proof since it would be the Tax Authority that bore the burden of proof that the invoiced operations did not exist.

In general terms and resulting from the provisions of Article 74 of the LGT - which constitutes a transposition into Tax Law of the provisions of Article 342-1 of the Civil Code - it can certainly be stated that it is incumbent upon the Tax Authority to bear the burden of proof of the facts constitutive of its right of action, namely, of its right to assess, demonstrating compliance with such burden in the substantive reasoning of the tax act.

Once the prerequisites for action of the Tax Authority have been demonstrated, it then falls upon the taxpayer to bear the burden of proof of the error of the Tax Administration in the assessment of the tax.

From Article 75 of the LGT, there results the existence of a legal presumption of truth or truthfulness of the declarations presented by the taxpayer to the Tax Authority and of the data contained in his accounting and records when in accordance with commercial and tax legislation.

Thus, only when the Tax Administration has previously proven that there are well-founded grounds for deficient accounting or that this and/or documents serving as its basis do not reflect the actual taxable matter of the taxpayer, will it be required of the taxpayer that he prove or demonstrate the possible error of the Tax Authority in the quantification or in the total or partial disregard of the taxable matter. An equal burden falls, in principle, upon the taxpayer if the requirements listed in Article 75-2 of the LGT are met (for example if he fails to comply with the obligations to clarify his tax situation).

Within the scope of Article 19, paragraph 3 of CIVA, the corrective decision must be based on "well-founded indicia", the burden of proof not being imposed upon the Administration as "proven proof" that behind the documents there is not the reality that they normally reflect and prove, well-founded indicia suffice to terminate the presumption in favor of the taxpayer enshrined in Article 75, paragraph 1 of the LGT, of truthfulness and good faith of the declarations issued by the same (taxpayer).

As in many other cases, recourse will have to be made to indirect proof, to indicia facts, from which an inference will be sought to be drawn, with the aid of the rules of common experience, science or technique, as to the facts indicated. The conclusion or proof is not obtained directly, but indirectly, through a judgment of the normal relationship between the indicia and the subject matter of proof.

In other words, as jurisprudence with which we agree, it will not fall upon the Tax Administration the burden of proof of the non-existence of the tax facts whose tax it considered unduly deducted by the taxpayer, but rather it falls upon the taxpayer himself the burden of proof of the existence of the tax facts upon which he based the deduction he declared.

Jurisprudence notes, in fact, that the burden of proof is distributed in a proceeding where the taxpayer challenges the action of the Tax Authority, disregarding operations embodied in certain invoices existing in the records of the former, in the sense that it falls upon the latter (Tax Authority) the burden of proof of the prerequisites for its action and upon the former (taxpayer) the burden of proof that the questioned operations actually took place. Or, in another formulation, where the Tax Authority obtains serious and credible indicia that a certain commercial operation documented by an invoice is not real, it falls upon the taxpayer the burden of proof of the truthfulness of that transaction; the Tax Authority does not have to demonstrate the falsity of the invoices, it being sufficient for it to demonstrate the consistency of such judgment, invoking facts that translate a high probability that the operations referred to in the invoices are simulated, a high probability capable of undermining the legal presumption of truthfulness of the declarations of the taxpayers and of the data contained in their accounting - Article 75 of the LGT. (see, e.g., Award of the TCAS of 4-6-2013 - Case No. 06478/13, in www.dgsi.pt).

Thus, where false invoicing is involved, the Tax Authority does not have to prove the falsity of the invoices; it is sufficient for it to demonstrate the indicia of falsity and that these are consistent, serious and revealing of a high probability that the invoices are "false" to fulfill its burden of proof.

That is: once this circumstantial proof is made, the law terminates the presumption of good faith credited to the taxpayer's declarations, documents, invoices and accounting and returns to him, specifically, the burden to prove the materiality of the operations underlying the indicated invoicing.

Or again, put another way: burdened with the proof of the truthfulness of the material operations underlying the "indicated invoicing", the efforts that the taxpayer must mobilize to undermine the indicia of falsity collected cannot fail to be demanding and without room for doubt. At a minimum, the proof required of the taxpayer must be as rigorous as that demanded of the Tax Authority to substantiate the indicia of falsity.

It is not sufficient for the taxpayer to generate mere doubt about the falsity of the invoices to succeed in his claim. Being burdened with the proof of the materiality of the operations, if doubt persists, it is resolved against the beneficiary (see Article 414 of the CPC).

In the arsenal of evidence available to the taxpayer, all means of proof are admissible, including testimonial evidence (Article 115/1 of CPPT). But if he intends to base his proof "only" on testimonial evidence to demonstrate the materiality of the invoiced operations, he will, acknowledging and understandably, face difficulties in doing so.

That is, and more specifically: faced with the proof of the circumstantial elements that lead to the conclusion of simulation of the operations described in the invoices, there then falls upon the taxpayer the burden of proof of the prerequisites upon which the right to deduction (of VAT paid upstream) depends, namely, the existence of the transactions and their quantitative expression.

In these terms, when the act of VAT assessment is based on the non-recognition of the deductions declared by the taxpayer, the Administration bears only the burden of proof of the verification of the legal prerequisites that legitimize its action, contained in Article 87, paragraph 1 of CIVA, and the taxpayer bears the burden of proof of the existence of the tax facts that he alleged as grounds for his right to deduct the tax pursuant to Article 19 of the same statute.

It is recalled in this regard that the principle of inquiry is established within the scope of the gracious tax procedure in Article 58 of the LGT and in accordance with it the Tax Authority must proceed with the proceedings it considers convenient for the discovery of material truth.

The principle of inquiry is justified by the obligation to pursue the public interest imposed on the activity of the Tax Administration (Article 266, paragraph 1 of the Constitution and Article 55 of the LGT) and is a corollary of the duty of impartiality that must guide its activity (Article 266, paragraph 2 of the Constitution and Article 55 of the LGT). This duty of impartiality requires that the Public Treasury seek to bring to the proceeding all evidence relating to the factual situation on which the decision will be based, even if they are intended to demonstrate facts whose proof would be contrary to the patrimonial interests of the Administration.

In conclusion, this principle obliges the tax administration to carry out all proceedings that appear necessary to satisfy the public interest and to the discovery of material truth. This means that all proceedings must be carried out even though they have not been requested, not depending on any procedural initiative by the taxpayer.

This principle of material truth is established in Article 6 of RCPIT and requires that the Tax Administration, within the scope of the inspection procedure, seek to collect the evidentiary elements that would later enable it to substantiate the tax act that comes to be carried out. It is a matter of investigating and determining the correct fulfillment of tax obligations by taxpayers and, based on that investigation, collecting elements that enable the establishment of the possible existence of irregularities.

In conclusion, the principle of material truth sets what should be the objective of the inspection procedure - the discovery of material truth. This principle is a concretization of the examined principle of inquiry (stated in Article 58 of the LGT as a general principle of tax procedure), being postulated by the public and unavailable nature of the tax legal relationship, thus encompassing, for this reason, its factual elements.

In particular and now as regards CIT, if in the determination of the taxable or taxable matter invoices were considered that did not translate real transactions (commonly called "false invoices"), obviously such invoices must necessarily be disregarded in the determination of such matter.

In fact, one of the obvious conditions for the fiscal acceptance of accounting expenditures, in particular for purposes of Article 23 of CIRC, lies in the need for actual proof of the expenses incurred. Expenses are only accepted fiscally if the taxpayer makes proof of the expenses incurred or the expenditures made.

Subsumption:

In the situation under consideration, what is verified is that the tax inspection collected solid indicia that the invoices in question would not reflect actual transactions between the Claimant and its apparent supplier or seller of refrigerated panels, B…, Lda., indicia which had, let us say, their most credible foundation in the circumstance that they integrated the invoices in question, as being simulated (commonly "false invoices"), the list of facts circumstantially criminal imputed to the Claimant A…, its manager, G… and the manager and partner of B…, C….

These indicia were sufficient to remove the presumption of truthfulness of the accounting of the claimant and, especially, the truthfulness and reality of the transactions reflected therein.

On the other hand, the Claimant was unable to prove, as was incumbent upon it, the reality of those transactions, by alleging and proving the specific end recipients of the goods identified in the invoices, the place of discharge, the vehicle or entity that transported them, the presentation of transport guides [considering that these are of mandatory issuance, in 3 copies, one for the shipper, another for the recipient and the third returns to the carrier, signed by the 3 participants (shipper, recipient and driver)].

In light of the aforementioned considerations, there is no doubt that the request for annulment of the assessments made by the Claimant lacks foundation and, consequently, the request for condemnation of the Tax Authority for reimbursement, with interest, of the payments made is also without foundation.

Bad Faith Litigation

The Claimant requested the condemnation of the Tax Authority for bad faith litigation.

Naturally, the lack of foundation of the claim that will be decreed prejudices the assessment of the issue.

It is noted by the Tax Authority, in response to the request submitted by the Claimant on 24-11-2016, that the moment for allegation and proof of the facts coincides with the moment of submission of the request for constitution of the arbitral tribunal, pursuant to Article 10, paragraph 2, paragraphs c) and d) of RJAT, namely, it did not comply with the deadline provided in Article 423-2 of the CPC.

Let us proceed:

As is established understanding in Jurisprudence "even if it is understood, as was done among others, in the Award of this STA of 31.01.2008 - Case No. 01442/03, that condemnation for bad faith can take place as long as the respective requirements are met – provided for in the CPC -, (...) it cannot be considered an action of bad faith the simple defense of a legal position, even if contrary to uniform and dominant jurisprudence." (see Award of STA, Case No. 01004/13, of 04-12-2013).

The Claimant considers that the Tax Authority litigated in bad faith since it defended itself in the Response to the present arbitral request reiterating the argumentation raised in the Response to case No. 254/2015-T, which was not accepted by the tribunal which judged the request for annulment of the assessments to have merit.

The respondent alleges that, on one hand, the "precedent rule" does not prevail in our system and, on the other, that the decision invoked has not even become final, since "(...) a Request for Uniformization of Jurisprudence was filed with the Supreme Administrative Court, which was the subject of an admission dispatch dated 07-12-2016, which is attached, under Article 423, paragraph 3 of the CPC, as Document No. 1. (...)".

Well then: condemnation for bad faith litigation, not being expressly provided for in tax arbitration (without prejudice to the Tribunal concluding, obviously, for the existence of pure and simple bad faith, especially of the prerequisites for condemnation if it had competence for such) must be restricted to situations in which it is demonstrated, in a manifest and unequivocal manner, that the party acted, conscious and voluntarily, with malice or gross negligence, displaying conduct manifestly reprehensible and censurable, directed at impeding the action of justice and frustrating the interest of the opposing party, by means of concealment or distortion of facts that it could not (or should not) ignore.

Moreover, the provisions of the CPC regarding bad faith litigation could never be applied to the Tax Authority, since the provision in Article 104 of the LGT is of a special norm nature.

Undoubtedly, one of the principles informing the arbitral process is procedural good faith, applicable, moreover, to the arbitrators, the parties and the representatives (see Article 16, paragraph f) of RJAT). But, as is obvious, nothing in the conduct of the Respondent would, it seems, be censurable, since it merely defended its interests and positions based on the legal reasoning it considered most appropriate, in terms, moreover, similar to what it has done in many other arbitral proceedings.

And, in any event, the provision of Article 104, paragraph 1 of the LGT is not in any way verified, which establishes that the Tax Administration may be condemned, by the competent state Court, to a monetary sanction to be quantified in accordance with the rules on bad faith litigation "in case of acting in court against the tenor of binding information previously provided to the interested parties or its conduct in the proceeding diverge from that usually adopted in identical situations."

It happens that the Claimant bases this claim on the invocation of the provision of Article 542 of the current Code of Civil Procedure (and not on the provision of Article 104, paragraph 1 of the LGT), it is fitting to note that bad faith litigation presupposes an action of the party in proceedings, an illicit committed in the proceeding, so that, in this way, it is difficult to understand the consistency of a request for condemnation for bad faith litigation that precedes (bolded) the very arbitral intervention in proceedings of the party subject to the censure, in a true prognostication of the procedural pleading of the response. Then, as the Claimant bases this claim simply on the fact that the Tax Authority adopts in the end a certain normative interpretation (which was not accepted here), it should be noted that the sustaining of controversial theses in doctrine or the defense of interpretations, without great solidity or consistency, of the legal norms, does not in itself integrate bad faith litigation, as is consistently noted in jurisprudence (See, for example, the Awards of the Constitutional Court Nos. 442/91, of 20.11.1992, items 11 and 13, and No. 200/94, of 1.3.1994).

Thus, and without obscuring that procedural good faith constitutes a relevant principle shaping the arbitral process, applicable, moreover, to the arbitrators, the parties and the representatives (see Article 16, paragraph f) of RJAT), the claim for condemnation for bad faith litigation would always be manifestly unfounded.

C. DECISION

In accordance with the foregoing, the members of this Arbitral Tribunal agree in:

a) Judging totally unfounded the requests for annulment of the following assessments:

i) Additional CIT Assessment for 2009 No. 2014…, of 12.12.2014, in the amount of €64,068.68, of which €54,306.22 is for tax and €9,760.24 for interest, with the respective set-off No. 2014…, of 17.12.2014, with demonstration of account settlement ID Document 2014… and demonstration of interest;

ii) Assessment No.…, for the period of 09.09, with the collection document number …, in the amount of €14,597.42;

iii) Interest Assessment No.…, for the period of 09.09, with the collection document number …, in the amount of €2,937.08;

iv) Additional Assessment No.… for the period of 09.12 with the collection document number …, in the amount of €26,426.40;

v) Interest Assessment No.…, for the period of 09.12 with the collection document number …, in the amount of €5,053.60;

b) To maintain in the legal order the aforementioned tax acts, as well as the acts of express rejection of the gracious objection and of tacit rejection of the hierarchical appeal mentioned;

c) To judge without foundation or moot the request for reimbursement by the Tax Authority of the payments made by the Claimant; and

d) To judge without foundation the request for condemnation of the Tax Authority for bad faith litigation.

D. VALUATION OF THE CASE

In accordance with the provisions of Article 306, paragraphs 1 and 2 of the Code of Civil Procedure, approved by Law No. 47/2013, of June 26, Article 97-A, paragraph 1, paragraph a) of the Code of Tax Procedure and Process, and Article 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at €113,083.18.

E. COSTS

Pursuant to Articles 12, paragraph 2, 22, paragraph 4 of RJAT, and Articles 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached hereto, the amount of costs is set at €3,060.00, entirely at the expense of the Claimant.

Notify the parties.

[Text prepared in accordance with the 1990 Spelling Agreement, by computer, pursuant to Article 131 of the Code of Civil Procedure, applicable by remission of Article 29, paragraph 1 of the Legal Regime of Tax Arbitration, with blank lines and revised by the arbitrators making up the Collective Tribunal]

Lisbon, March 20, 2017

The Collective Arbitral Tribunal,

José Poças Falcão
(Presiding Arbitrator)

Diogo Feio
(Arbitrator Member)

Carlos Lobo
(Arbitrator Member)

[1] From this arbitral award an appeal for uniformization of jurisprudence was filed with the STA which, by award of 30-9-2020, in Case No. 518/17.6BALSB, decided not to take cognizance of that appeal.

[2] "It constitutes a safety valve of the system so as to enable the repair of a serious error or injustice committed in a reweighing of the decided matter" (Ricardo de Oliveira e Sousa, The Review of Judicial Decisions in the Portuguese Legal Order, in Journal "Judging On Line," July 2016).

[3] The possibility of review for incompatibility of the national decision with the decision of an international appellate body binding on the Portuguese State was an innovation of DL No. 303/2007 and derived from the need to address the problem of the lack of internal means for enforcement of decisions of the European Court of Human Rights (ECHR), as appears from the preamble to the cited statute, directed at cases in which a national decision that became final violated the European Convention on Human Rights (See Maria José Rangel de Mesquita, Introduction to the Contention of the European Union, Almedina, 2015, p. 219).

The STA, in an award of 2-7-2014, in case 0360/13, published in www.dgsi.pt, considered that an award of the CJEU issued in the context of a proceeding for failure to comply, brought against the Portuguese State, assumes a binding character for it and is susceptible to an appeal for review, the other requirements of the norm being met in Article 771-f) of the CPC then in force and corresponding to the current 696.

[4] The legal institute of preliminary reference is not an avenue of appeal but rather a special process of direct cooperation, intended to guarantee the uniformity of the legal effects of the norms of EU law throughout its territory (see Luísa Lourenço, The Preliminary Reference to the CJEU and the Advisory Opinions of the EFTA Court, in Journal Judging No. 35, 2018).

[5] See Article 167 of the TFEU (Treaty on the Functioning of the European Union).