Process: 185/2014-T

Date: October 24, 2014

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 185/2014-T addressed VAT deductibility for a Portuguese municipality that requested a €302,401.45 VAT refund in May 2013. The dispute centered on €98,437.36 in VAT deductions related to resources from 2008-2009 that the municipality claimed were exclusively allocated to taxable activities, specifically exploitation of commercial facilities, leasing operations, and distribution services. Portuguese municipalities operate under a mixed regime: they perform both activities excluded from VAT under Article 2(2) of the VAT Code (powers of authority) and taxable commercial operations subject to VAT. Following a tax inspection covering 2010-2013, the Tax Authority proposed corrections totaling €133,039.92, including the contested €98,437.36 relating to 2008-2009 deductions made in September-October 2012 periodic declarations. The municipality accepted partial corrections (€34,602.56) involving duplicate invoicing, misallocated resources used for exempt activities, and improper service deductions, but contested the rejection of deductions for resources it maintained were directly and exclusively associated with its taxable commercial activities. The arbitral tribunal, constituted under the RJAT (Legal Regime for Arbitration in Tax Matters), examined whether the municipality properly demonstrated exclusive allocation of these resources to taxable operations and whether the timing and documentation of the deductions complied with Portuguese VAT law. The case illustrates critical issues in VAT deductibility for public entities: the requirement to segregate resources between taxable and non-taxable activities, the burden of proof for exclusive allocation, proper timing of deduction claims, and the interaction between public authority functions and commercial operations for VAT purposes.

Full Decision

ARBITRAL DECISION

I – REPORT

On 25 February 2014, A, a legal entity governed by public local law, tax identification number ..., with registered office in ..., submitted a request for the constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the rejection of the VAT refund request submitted in the periodic declaration of May 2013.

To support his request, the Applicant alleges, in summary, that after a review he conducted of his VAT procedures, he verified that he bore excess VAT in the acquisition of certain resources directly associated with taxable activities of A, namely the exploitation of B, leasing of ... and distribution of ... - year 2009, and therefore, as these resources were exclusively allocated to the performance of taxable operations, A was entitled to deduct all the VAT incurred in the acquisition of such resources.

On 27 February, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Applicant failed to appoint an arbitrator, and therefore, pursuant to the provisions of subparagraph a) of Article 6(2) and subparagraph b) of Article 11(1) of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 11 April 2014, the parties were notified of these appointments and neither party expressed any intention to refuse any of them.

In accordance with the provisions of subparagraph c) of Article 11(1) of the RJAT, the collective Arbitral Tribunal was constituted on 05 May 2014.

On 03 June 2014, the Respondent, duly notified for that purpose, filed its reply, defending itself by exception and by challenge.

The Applicant, duly notified for that purpose, made written submissions regarding the exceptions raised by the Respondent in its reply, arguing for their dismissal.

Subsequently, both parties having been notified for that purpose, communicated that they dispensed with the holding of the meeting referred to in Article 18 of the RJAT, and therefore the holding of the first meeting of the Arbitral Tribunal, in the terms and for the purposes of the provisions of Article 18 of the RJAT, was dispensed with, given that, in this case, none of the purposes legally assigned to it were present, and the arbitral process is governed by the principles of procedural economy and the prohibition of useless acts.

Subsequently, the Applicant and the Respondent submitted, successively, their respective written submissions, in which they maintained and developed the positions previously assumed and defended in their pleadings.

The Arbitral Tribunal is materially competent and is duly constituted, in accordance with Articles 2(1)(a), 5 and 6(1) of the RJAT.

The parties have legal personality and capacity, are legitimate parties, and are duly represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011 of 22 March.

The process is not affected by any nullities.

Accordingly, there is no obstacle to the consideration of the merits of the case.

All being considered, it is incumbent upon us to render

II. DECISION

A. FACTS

A.1. Facts Proven

  1. The Applicant is a legal entity governed by public local law, whose activities consist of the performance of its municipal attributions in the most diverse areas of activity, being classified, for purposes of Value Added Tax ("VAT"), under the normal monthly regime.

  2. In the performance of its attributions, the Applicant performs a broad set of operations within the scope of its powers of authority, which are excluded from VAT subjection under the provisions of Article 2(2) of the VAT Code.

  3. The Applicant also performs a set of operations, whether transfers of goods or provision of services, which are not encompassed within the scope of its powers of authority, and are therefore subject to VAT under the general terms of the Tax Code.

  4. In May 2013 the Applicant requested a VAT refund in its periodic declaration in the amount of €302,401.45.

  5. Following that refund request, the Applicant was subject to an external tax inspection procedure covering the years 2010, 2011, 2012 and January to May 2013.

  6. This VAT refund requested by the Applicant was supported by the acquisition of resources directly associated with its activities subject to VAT, namely: exploitation of B, leasing of ... and distribution ... in the year 2009.

  7. The Applicant made the deduction of VAT incurred in the years 2008 and 2009 in the periodic declarations of September and October 2012, in the acquisitions that were directly associated with the activities mentioned in the previous point.

  8. Following the tax inspection, the Applicant, on 2 October 2013, was notified, through Official Notice No. ..., of 1 October 2013, of the draft tax inspection report, in which arithmetic corrections were proposed for VAT purposes in the amount of €133,039.92.

  9. These arithmetic corrections proposed result from the following situations:

a. VAT deducted on invoice No. ... dated 21/11/2011 - €3,927.66;

b. Corrections to field 40 of the periodic declarations of the 4th Quarter of 2010, 2011 and 2012, namely of the following situations:

i. VAT regularized associated with invoice No. .../2010, accounted for in duplicate - €3,067.70;

ii. VAT deducted associated with resources (i.e. goods or services) allocated to exempt or non-taxable activities - €21,289.37;

c. VAT deducted in services related to water and sanitation provided by C - €6,317.83; and

d. Correction of the deduction of tax relating to 2008 and 2009 - €98,437.36.

  1. Following these corrections, the Applicant exercised its right to be heard in accordance with the law, stating that it did not accept the correction relating to the situation described in subparagraph d. of the immediately preceding point, in the amount of €98,437.36, and accepted the corrections proposed described in subparagraphs a. to c., and proceeded to regularize the VAT in favor of the State, in the amount of €34,602.56, submitting for this purpose the respective substitute declarations.

  2. On 13 November 2013, the Applicant was notified, through Official Notice No. ... of 11 November 2013, of the final report of conclusions resulting from the tax inspection and in which the described corrections were maintained.

  3. On 28 November 2013, the Applicant received a "Statement of VAT Settlement", having been notified of the transfer of only part of the value of the requested refund, thus confirming that the amount of €98,437.36 was not accepted by the Tax Authority.

  4. The document referred to in the previous number had the following tenor:

[Document reference with table content as shown in original]

  1. The request for arbitral pronouncement that gave rise to the present case was submitted on 28 February 2014.
A.2. Facts Not Proven

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

A.3. Reasoning for the Proven and Unproven Facts

With respect to the facts, the Tribunal does not need to pronounce on everything that was alleged by the parties, but rather it has the duty to select the facts that matter for the decision and discriminate the proven facts from the unproven ones (cf. Article 123(2) of the CPPT and Article 607(3) of the CPC, applicable by virtue of Article 29(1)(a) and (e) of the RJAT).

In this manner, the pertinent facts for the judgment of the case are chosen and defined based on their legal relevance, which is established in consideration of the various plausible solutions to the question(s) of Law (cf. former Article 511(1) of the CPC, corresponding to the current Article 596, applicable by virtue of Article 29(1)(e) of the RJAT).

Thus, having considered the positions assumed by the parties, the documentary evidence and the procedural file attached to these proceedings, we have considered proven, with relevance to the decision, the facts listed above, which are furthermore consensually recognized and accepted by the parties.

B. LAW

Prior to consideration of the merits of the request formulated by the Respondent, the Tax Authority questions:

  • the competence of the Arbitral jurisdiction in relation to subject matter;
  • the existence of lis pendens with the arbitral process 303/2013T of CAAD.

Let us examine each of these issues.

The Tax Authority begins by stating that "Given that this is a partial rejection of a refund made by the Applicant upon submission of the periodic declaration relating to May 2012, there is no doubt that what is being challenged in these proceedings does not constitute a tax act of assessment, self-assessment, withholding at source or payment on account capable of being reviewed by this arbitral jurisdiction."

It is thus necessary, first and foremost, to determine whether the matter in question falls within the scope of competence of tax arbitral jurisdiction.

Article 124 of Law No. 3-B/2010, of 28 April, authorized the Government to legislate "in order to institute arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters", so that the tax arbitral process would constitute an alternative procedural means to judicial challenge and to the action for recognition of a right or legitimate interest in tax matters.

Decree-Law No. 10/2011, of 20 January (RJAT), implemented the aforementioned legislative authorization with a narrower scope than was initially foreseen, notably not providing for an alternative competence to that of the action for recognition of a right or legitimate interest in tax matters, and "instituted tax arbitration limited to certain matters, listed in its Article 2", making the binding effect of the tax authority dependent on "an ordinance of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered".

The scope of tax arbitral jurisdiction is thus delimited, in the first instance, by the provisions of Article 2 of the RJAT, which sets out, in its (1), the criteria for material distribution of competence, encompassing the review of claims directed at the declaration of illegality of acts of assessment of taxes.

Given the voluntary nature of submission to arbitral jurisdiction, in the second instance "the competence of the arbitral tribunals functioning at CAAD is also limited by the terms on which the Tax Authority bound itself to that jurisdiction, concretized in Ordinance No. 112-A/2011, of 22 March, since Article 4(1) of the RJAT establishes that "the binding of the tax authority to the jurisdiction of tribunals constituted under the terms of this law depends on an ordinance of the members of the Government responsible for the areas of finance and justice".

The cited Ordinance provides, in Article 2, that "The services and bodies referred to in the previous article bind themselves to the jurisdiction of the arbitral tribunals functioning at CAAD which have as their object the review of claims relating to taxes the administration of which is their responsibility referred to in (1) of Article 2 of Decree-Law No. 10/2011, of 20 January, with the exception of the following:...", indicated in the subsequent subparagraphs of the same article.

As has been noted, the Tax Authority and Customs Authority alleges that the acts of partial rejection of the refund are not covered by the competence of the arbitral tribunals in tax matters functioning at CAAD.

In this respect, and considering the legal framework outlined above, it must be concluded that the competence of the arbitral tribunals functioning at CAAD is not expressly provided for the review of the legality of acts rejecting refund requests of amounts paid in compliance with prior assessment acts.

However, in the case at hand, as is evident from the document reproduced in point 13 of the established facts, it was the Tax Authority and Customs Authority itself that performed an operation of accounting for VAT to be refunded which it denominated "VAT SETTLEMENT STATEMENT", to which it assigned a "SETTLEMENT NUMBER" and a "SETTLEMENT DATE", and stated, in the final part, that the Applicant "is hereby notified of the VAT settlement for the period to which the operations relate, as a result of which there is grounds for refund in the amount determined, as noted in the statement above" and "From the settlement effected, you may present, at the competent Tax Services office, a gracious appeal or judicial challenge in accordance with Articles 70 and 102 of the CPPT" (underlining ours).

That is to say: based on the documentary evidence available, it must be concluded that, in the concrete case, rightly or wrongly, an assessment act was performed. This act, embodied in the document notified to the Applicant comprising the statement of VAT settlement No. 2013 ..., dated 14-11-2013, will be the subject of these proceedings, falling within the prediction of subparagraph a) of Article 2 of the RJAT.

The legality of such an act – rightly or wrongly performed – is capable of being reviewed and falls directly within the scope of the competencies of the arbitral tribunals functioning at CAAD, and therefore the invoked exception of absolute lack of competence would have to be dismissed.

Even if this were not understood to be the case, it has long been established that taxpayers should not be prejudiced in the exercise of procedural rights when they are induced into error by acts of competent public entities, a rule which has explicit manifestations, for courts, in Articles 157(6) and 191(3) of the CPC of 2013 (former Articles 161(1), 198(3)) and for acts of the administration, in Article 7 of the CPA and Article 60(4) of the CPTA.

That is to say, it has been understood, in summary, that when a taxpayer is induced to use a certain procedural means by particular conduct of the Administration, the latter cannot seek to prevent knowledge of the merits of the request by sheltering itself behind the inadequacy of the procedural means whose use it itself, objectively, induced.

In the case, it is furthermore verified that there is legal doctrine, (JOSÉ XAVIER DE BASTO and GONÇALO AVELÃS NUNES), defending that "a refund contested by the tax administration is entirely equivalent to an assessment of tax and the means of reacting against this act of the administration, which denies or revokes a refund, are identical to those the law makes available to taxpayers to annul, in whole or in part, the assessment of tax", a thesis which is in keeping with the application, determined by Articles 22(11) and (13) of the CIVA, to acts rejecting refund requests of the means of administrative and contentious challenge of VAT assessment acts, provided for in Article 93 of that Code.

In this context, being the Tax Authority itself that in the notification identified the notified act as being a VAT settlement, inducing the Applicant to use a procedural means appropriate to its challenge, and it not being certain that such qualification is wrong (as it cannot fail to be understood when it is found that the appropriateness of such qualification is affirmed by two reputed university professors of tax law), in any case, by this route as well, the exception raised by the Tax Authority and Customs Authority would have to be judged without merit.

Regarding the exception of lis pendens, Article 580(1) of the Code of Civil Procedure provides that "The exceptions of lis pendens and of res judicata presuppose the repetition of a cause; if the cause is repeated while the prior one is still pending, there is lis pendens; if the repetition occurs after the first cause has been decided by a judgment which no longer admits ordinary appeal, there is res judicata."

Article 581 of the same instrument further provides:

"1 - A cause is repeated when an action identical to another is brought as to the parties, the claim and the cause of action.

2 - There is identity of parties when the parties are the same from the point of view of their legal status.

3 - There is identity of claim when in both causes the intention is to obtain the same legal effect.

4 - There is identity of cause of action when the claim made in the two actions proceeds from the same legal fact. In real actions, the cause of action is the legal fact from which the real right derives; in constitutive and annulment actions it is the concrete fact or the specific nullity invoked to obtain the intended effect."

First and foremost, it must be borne in mind that, insofar as it is the Tax Authority that invokes the exception now in question, it would be incumbent on it to demonstrate the prerequisites thereof, which, as results from the norms transcribed above, consists in the "repetition of a cause", which occurs "when an action identical to another is brought as to the parties, the claim and the cause of action".

Now, in tax actions of a challenging nature, as is known, the cause of action is the illegality of the challenged tax act. Thus, identity of claim and cause of action would only be verified between the present action and process 303-2013T of CAAD, if the challenged tax act were the same and the illegalities invoked were also equal. A situation which, it is repeated, it would be incumbent on the party invoking lis pendens to demonstrate.

Examining the evidence made available, it is verified that process 303-2013T of CAAD has as its object the VAT self-assessments of the applicant, for the years 2008 and 2009, and the decision on a request for official revision thereof, while in these proceedings what is at issue is an act of settlement of the amount of VAT refund relating to the period of 2013/5, reproduced partially in the facts above.

Accordingly, and for the reasons above, without demonstrating an identity of the claims and causes of action of the present process and process 303-2013T of CAAD, the raised exception of lis pendens should be dismissed.

Having arrived at this point, it is incumbent upon us to assess the merits of the case that is now presented for us to resolve.

In this matter, it is therefore necessary to verify whether it was legitimate for the Applicant, in the periodic declarations of September and October 2012, to deduct amounts relating to 2008 and 2009, relating to acquisitions of goods and services which it understood to be wholly allocated to activities subject to VAT and which, through an error, it would not have deducted in the declarations of the corresponding periods.

To this end, Article 22 of the CIVA provides:

"1 - The right to deduction arises at the moment the deductible tax becomes due, in accordance with what is established by Articles 7 and 8, being effected by subtracting from the total amount of tax due on the taxable operations of the taxpayer, during a tax period, the amount of deductible tax, due during the same period.

2 - Without prejudice to the provision of Article 78, the deduction must be made in the declaration of the period or of a later period in which the receipt of the invoices or receipt of payment of VAT which forms part of the import declarations took place.

3 - If the receipt of the documents referred to in the previous number takes place in a tax period different from that of their issuance, the deduction may be made, if still possible, in the tax period in which that issuance took place."

As stated in the Administrative Supreme Court judgment of 18-05-2011, rendered in process 0966/10, cited by the Tax Authority:

"I – As a rule, established in Article 22(1) of the CIVA, the deduction of tax should be made in the declaration of the period in which the receipt of the invoices, equivalent documents or receipt of payment of VAT which forms part of the import declarations took place, although the possibility of corrections provided for in Article 71 is admitted.

II – Thus, the deduction of tax cannot be made at any moment, at the choice of the taxpayer, the useful scope of the cited norms being that they indicate the appropriate moments for the deduction precisely to exclude that this can be done at different moments, when this is not especially provided for.

III – Article 92(2) of the CIVA, when establishing that the right to deduction can only be exercised up to the limit of four years after the birth of the right to deduction, does not have the scope of granting to the taxpayer the freedom to choose any moment within that period to make the deduction, but rather to fix a maximum limit that cannot be exceeded, even in cases where the deduction can be made at moments different from those indicated in Article 22.

IV – Beyond Article 71(6) of the CIVA, there is no legal provision that can be interpreted as permitting the taxpayer to exercise the right to deduction at a moment later than those resulting from this Article 22 indicated, in cases where, through an error in his accounting, he only detects that he had the right to deduction at a moment later than that in which he should have made it."

That is, as a rule, the deduction of tax should be made, in accordance with what is provided for in Article 22 of the CIVA, in the "declaration of the period in which receipt of the invoices took place. However, the right to deduction can be exercised at later moments", with Article 92(2) of the CIVA establishing a maximum four-year limit for the exercise of the right to deduction, a deadline which is configured as a general deadline, applicable only when a special deadline is not provided for, as is the case with that provided for in Article 78(6). In this context, it is important to assess, in cases where, pursuant to provisions that specially provide for it, the deduction is not made in the declaration of the period in which receipt of the invoices took place, whether or not the prerequisites for application of the said deadlines are met, and in that case, one can accept as legitimate the exercise of the right to deduction.

The Applicant alleges that the doctrine of the transcribed Judgment will not apply to the case sub iudice, since the said judgment deals with a case prior to the entry into force of the amendment introduced in Article 22(2) of the CIVA, by Law 107-B/2003, of 31-12, which gave it the current wording, set out above.

With due respect, it is not considered possible to subscribe to such a thesis, which would rest on the understanding that, with that amendment, the legislator intended to grant to the taxpayer a discretion as to the moment of the VAT deduction made by him.

In fact, and as was written in the judgment in question:

"Community law, which has primacy over internal law provided that the fundamental principles of the democratic rule of law are not violated (As has been, since the constitutional review of 2004, expressly established in Article 8(4) of the CRP and was previously understood.), points in the direction of this interpretation being correct.

(...)

From this regulation, it is concluded that the deduction of tax can only be made outside the moments considered adequate under conditions to be established, which rules out the viability of a thesis that amounts to granting to the taxpayer the right to make the deduction when it sees fit, within the maximum period legally admissible."

Moreover, analysis of the normative content of Article 22 of the CIVA, as a whole, reinforces the understanding that the legislator for the 2004 budget law did not intend to depart from what was imposed by the Community regulation.

In fact, the norm itself in Article 22(2) in question, even in its present wording, only makes sense to exist, as indeed it does by proscribing the existence of discretion on the part of the taxpayer in choosing the period to proceed with the deduction. Otherwise, as occurs in the interpretation sustained by the Applicant, the norm in question would lose all useful effect, since it would merely serve to exclude the deductibility of tax borne in a period prior to its incidence, which would make no sense.

Thus, and in this manner, bearing in mind the hermeneutical criterion of the reasonable legislator, the interpretation to be made of the norm of Article 22(2) of the CIVA should be in the sense of continuing – as previously – to require the deduction of tax borne in the declaration of the period in which receipt of the invoices or receipt of payment took place, licensing the deduction only in a later period, in the circumstances in which the article itself specially provides for.

It is concluded, thus, that the reference to "later period" made in Article 22(2) of the CIVA refers to situations in which, specially, the possibility of deduction of tax in a later period is admitted, being this the only interpretation in keeping with the provision of Article 179 of Directive 2006/112/EC, of the Council, of 28 November 2006, on the common system of value added tax (VAT Directive), which provides that: "The taxable person makes the deduction by subtracting from the total amount of the tax due for the tax period the amount of VAT in relation to which, during the same period, the right to deduction arose and is exercised by virtue of the provision of Article 178." (underlining ours).

That is, in summary, the rule is that the deduction of VAT must be made in the periodic declaration corresponding to the period in which the VAT to be deducted was borne, and not, freely, in any other subsequent periodic declaration, since this is the appropriate manner to ensure that VAT is deducted in the same period in which it is borne.

It must, always and in any case, be borne in mind that the exercise of the right to deduction of VAT is a fundamental right which ensures the neutrality of VAT, and should only be restricted in exceptional situations.

Indeed, as the Court of Justice of the European Union has successively emphasized, and as is evident from the wording of Articles 167 and 179(1) of the VAT Directive, the right to deduction is exercised, in principle, during the same period in which it was constituted, that is, at the moment the tax becomes due. However, in accordance with the provisions of Articles 180 and 182, the taxpayer may be authorized to proceed to the deduction of VAT, even if it has not exercised its right during the period in which that right was constituted, without prejudice to compliance with certain conditions and rules established by national regulations (see, in this sense, Judgment of 8 May 2008, Case C-95/07, Ecotrade, Reports, p. I 03457, nos. 42 and 43).

That is, taxpayers may, in situations that justify it, be authorized to proceed to deduction, even if they have not exercised their right during the period in which that right arose. However, in that case, their right to deduction becomes dependent on certain conditions and modalities established by the Member States.

In this context, the CJEU has noted that the possibility of exercising the right to deduction without temporal limits contradicts the principle of legal certainty, which requires that the tax situation of the taxpayer, having regard to its rights and obligations in relation to the Tax Administration, not be indefinitely subject to being called into question, and therefore does not accept the thesis according to which the right to deduction, like the right to assessment, cannot be associated with a statute of limitations. To this end, the CJEU invokes the principles of effectiveness and equivalence. With respect to the former, it notes that the statute of limitations provided for cannot, by itself, make practically impossible or excessively difficult the exercise of the right to deduction, as for the latter, it has come to analyze whether in the situations submitted to it there is equivalence between the statute of limitations granted to taxpayers and the statute of limitations granted to the Tax Administration to proceed with corrections, having concluded, even, that this principle is not contradicted by the fact that, in accordance with national regulation, the Tax Administration has, to demand the collection of VAT due, a longer deadline than that granted to taxpayers to request its deduction (cf., Ecotrade case, already cited, nos. 43 to 49).

As it notes, although the Member States have the discretion to adopt, under the provision of Article 273 of the VAT Directive, measures to ensure the correct collection of the tax and prevent fraud, these should not, however, go beyond what is necessary to achieve such objectives and should not undermine the neutrality of VAT (see, in particular, Judgment of 21 October 2010, Case Nidera, Case C‑385/09, Reports, p. I‑10385, no. 49).

It is in this context that, in national legislation, it is permitted that, notably, where a material or calculation error has occurred to the detriment of the taxpayer, the same can be corrected within the deadline fixed in Article 78(6) of the CIVA.

Other types of errors may be corrected by the submission of a substitute declaration, if such is still, under legal terms, possible, or, if not, by means of a request for official revision, under the terms of Article 78 of the LGT, provided that the corresponding prerequisites are also met.

Beyond these cases, supervening facts are also admissible, under the terms regulated by Article 78(2) of the CIVA. It must, however, be borne well in mind that one thing will be an error (a discrepancy between the reality represented in the periodic declaration and reality – error of fact – or the law) and another thing is the supervening occurrence of a fact (an alteration in reality), which entails an alteration in the tax to be borne or deducted.

In the present case, manifestly, what occurred was, not the supervention of any fact, but rather an error – not material or calculation, as the Tax Authority qualifies it – but of law, which will have resulted in the qualification as non-deductible of tax that, subsequently, the Applicant came to realize that, after all, it would be.

Thus, and as can plainly be seen, between the submission of the periodic declarations corresponding to the moment in which the expenses, subsequently understood as deductible, were borne, and the submission of the declarations in which those same expenses were deducted, no alteration in reality occurred (much less any of those described in Article 78(2) of the CIVA). What occurred was that the Applicant became aware, in the meantime, that the legal framework it had made of the expenses incurred by it – as to their deductibility – would not have been the correct one, that is, that it had labored in error.

In this manner, the error in question will not be correctable under the terms of Article 78(2) of the CIVA, first and foremost because such provision is not intended for the correction of errors, and will not be correctable under the terms of Article 78(6) of the same article, since it is not a calculation error (does not result in the incorrect articulation of components of arithmetic operations), nor a material error (a discrepancy between what was written and what, manifestly, one wanted to have written at the moment one wrote it).

The correction of the situation, in light of all the above, would always have to occur by reference to the periodic declaration in which the tax to be deducted was borne, if, and under the conditions in which, legally, the alteration of this – by the taxpayer's initiative or, officially, by the Tax Authority, albeit at the latter's request – can take place, that is, by means of the submission of the corresponding substitute declarations or the presentation of a request for official revision.

Considering, then, that Article 22(2) of the CIVA does not authorize the Applicant to, in the periodic declarations of September and October 2012, deduct amounts relating to 2008 and 2009, relating to acquisitions of goods and services which it understood to be wholly allocated to activities subject to VAT and which, through oversight, it would not have deducted in the declarations of the corresponding periods, the present action should be judged entirely without merit.

C. DECISION

In these terms, this Arbitral Tribunal decides:

a) Judge entirely without merit the request for arbitral pronouncement and, in consequence, maintain the challenged tax act;

b) Condemn the Applicant to pay the costs of the proceedings, in the amount of €2,754.00, taking into account the amount already paid.

D. Value of the Proceedings

The value of the proceedings is fixed at €98,437.36, in accordance with Article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of Article 29(1) of the RJAT and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €2,754.00, under Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Applicant, since the request was entirely without merit, in accordance with Articles 12(2) and 22(4) of the RJAT and Article 4(4) of the cited Regulation.

Let it be notified.

Lisbon

24 October 2014

The President Arbitrator

(José Pedro Carvalho - Reporting Arbitrator)

The Arbitrator Member

(Clotilde Celorico Palma)

The Arbitrator Member

(Filipa Barros)

[1] The Tax Authority also formulated, by manifest error, in points 16 to 31 of its reply, another preliminary issue to the consideration of the merits, but withdrew it, appropriately, in a point prior to its submissions.

[2] The question of the lack of competence of the arbitral tribunals has been addressed in several arbitral proceedings judged within the scope of CAAD, such as in processes nos. 48/2012, 73/2012 and 76/2012, the arbitral decisions of which were rendered on 06.07.2012, 23.10.2012 and 29.10.2012, (available at www.caad.org.pt).

[3] In the wording given by Law No. 64-B/2011, of 30 December. See the reasoning of the Arbitral Judgment in process no. 76/2012 already referred to.

[4] In this sense, the Arbitral Judgment, process no. 48/2012.

Article 2 of the RJAT determines that these tribunals have competence to review the following claims:

"a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of determination of taxable matter when it does not give rise to the assessment of any tax, of acts of determination of taxable income and of acts of determination of patrimonial values;

c) revoked (by Article 160 of Law No. 64-B/2011, of 30 December, which approved the State Budget for 2012).

[5] Extract from the Arbitral Judgment, process no. 48/2012.

[6] In this sense, the following judgments of the Administrative Supreme Court may be consulted:

– of the Administrative Litigation Division, of 5-5-1987, process no. 23205, published in AP-DR of 30-6-93, page 2272, in which it was held that, where the appellant may have been induced into error by the court, the allegation should be accepted that only by virtue of that error the deadline for submission of a certain document was not observed.

– of the Administrative Litigation Division, of 24-10-1996, process no. 39578, published in AP-DR of 15-4-99, page 7126, in which it was held that the period for hierarchical appeal should be considered to be the longer period than the legal one that was indicated in the publication of the act;

– of the Administrative Litigation Division, of 31-5-2005, process no. 46544, in which it was admitted, in generalized manner, that the recipients of acts cannot be prejudiced when they have been induced by the Administration;

– of the Tax Litigation Division, of 9-9-2009, process no. 461/09, relating to a case in which an error occurred in the indication of the period for submission of appeal.

Similarly, the following judgments of the Supreme Court of Justice may be consulted:

– of 11-5-1980, process no. 69125, published in Bulletin of the Ministry of Justice no. 301, page 364, in which it was held that the error in the indication of a period for contesting could not prejudice the cited person;

– of 5-5-1988, process no. 76482, published in Bulletin of the Ministry of Justice no. 379, page 558, relating to the indication of the period for payment of costs higher than the legal one;

– of 2-11-1989, process no. 78195, published in Bulletin of the Ministry of Justice no. 391, page 502, in which the submission of submissions was admitted within the maximum period provided for in the law, when in the notification the reference to the period that had been fixed by the judge, lower than that maximum, was omitted;

– of 7-10-1990, process no. 79323, and in which it was held that the provision of Article 198(3) of the CPC is nothing more than the manifestation of the general principle that no one should suffer any sanction or be procedurally prejudiced by facts or irregularities for which they are not responsible.

[7] Essentially in this sense, the judgment of the Administrative Supreme Court of 16-5-2007, process no. 740/06, may be consulted, in which it was held that the author of special administrative action who submitted the respective petition to the court that was indicated by the tax administration in the notification of the act that was challenged in that action cannot be held responsible for the costs of an incident of lack of competence of the court.

[8] Although not expressly referring to these norms, in the judgment of the Administrative Supreme Court of 10-2-2010, process no. 993/09, it was held, regarding incorrect notification made by the Tax Administration in a tax misdemeanor proceeding, in which a period for judicial challenge superior to the legal one was indicated, that the recipient could use that incorrect period, as this was requested by the right to effective judicial protection.

[9] In "What is the "adequate guarantee" for purposes of VAT refund?", published in Studies in Memory of Prof. Doctor J. L. Saldanha Sanches, volume IV, pages 276-277.

[10] Articles 11 and 13 of the CIVA, in the wording of Law No. 2/2010, of 15 March, establish the following:

"11 - Refund requests are rejected when the taxpayer does not provide the tax administration with elements that make it possible to assess the legitimacy of the refund, as well as when the deductible tax refers to a taxpayer with a non-existent or invalid tax identification number or that has suspended or ceased its activity in the period to which the refund relates.

(...)

13 - From the decision referred to in no. 11, an appeal lies, claim or judicial challenge, in the terms provided for in Article 93."

[11] Available at www.dgsi.pt.

[12] Cf. in this sense the Judgment of the Administrative Supreme Court of 02-10-2010, rendered in process 0256/10, available at www.dgsi.pt.

[13] Not being the situation at hand in the proceedings, it will always be stated that the thesis, sustained by the Tax Authority, that the request for official revision, under the terms of Article 78 of the LGT, in the case of an error of law related to the right to deduction in self-assessment of VAT, can only be made within the deadline fixed in Article 78(6) of the CIVA, is not accepted. Indeed, in the situation regulated by such provision – correction of material or calculation errors – it will not be at all necessary to formulate any request for official revision, since that norm of Article 78(6) of the CIVA integrates its own provision for correction of the error, with no relationship existing between this and the request for official revision regulated in Article 78 of the LGT. In this sense, cf. the Judgment rendered in process 117/2013T of CAAD, available at www.caad.org.pt.

Frequently Asked Questions

Automatically Created

Can Portuguese public entities deduct VAT on resources used for taxed activities?
Yes, Portuguese public entities can deduct VAT on resources used exclusively for taxed activities. Under Portuguese VAT law, when a public entity performs commercial operations subject to VAT (outside its powers of authority excluded under Article 2(2) of the VAT Code), it has the right to deduct input VAT on resources directly and exclusively allocated to those taxable activities. However, the entity must clearly demonstrate that the resources were not used for activities excluded from VAT subjection, such as governmental functions exercising public authority. The deduction right requires proper documentation, timely claims in periodic declarations, and proof of the direct link between the acquired resources and the taxable commercial operations performed by the public entity.
What are the rules for IVA deductibility on shared resources (despesas em recursos comuns) in Portugal?
Portuguese VAT law requires proportional deduction for shared resources (despesas em recursos comuns) used in both taxable and non-taxable/exempt activities. When resources cannot be directly attributed to exclusively taxable operations, the taxpayer must apply a pro-rata deduction method based on the proportion of taxable use. For public entities with mixed activities, this means calculating the ratio of taxable turnover to total turnover and applying it to input VAT on common resources. Resources exclusively allocated to non-taxable activities (such as public authority functions under Article 2(2) of the VAT Code) generate no deduction right, while resources exclusively for taxable activities allow full deduction. The taxpayer bears the burden of maintaining adequate records to justify the allocation methodology and demonstrate which resources are common versus exclusively allocated.
How does the CAAD arbitration process work for VAT refund disputes with the Portuguese Tax Authority?
The CAAD (Centro de Arbitragem Administrativa) arbitration process for VAT refund disputes follows the RJAT framework: (1) The taxpayer submits a request to constitute an arbitral tribunal within the legal deadline; (2) The Tax Authority is automatically notified; (3) Arbitrators are appointed by the parties or, if they fail to appoint, by the President of CAAD's Deontological Council; (4) Once constituted, the tribunal notifies the Tax Authority to file a reply defending its position; (5) Both parties may submit written observations and additional submissions; (6) Parties may waive the preliminary hearing if no procedural issues require resolution; (7) The tribunal reviews documentation, analyzes legal arguments, establishes proven facts, and issues a binding decision. The process emphasizes procedural economy, written submissions, and applies general administrative procedure and civil procedure rules subsidiarily under Article 29(1) of the RJAT.
What conditions must a public entity meet to claim a full VAT refund on exclusively taxed operations in Portugal?
To claim a full VAT refund on exclusively taxed operations, a Portuguese public entity must satisfy several conditions: (1) Demonstrate that the resources (goods or services) were acquired exclusively for activities subject to VAT, not for operations excluded under Article 2(2) of the VAT Code (public authority powers); (2) Maintain documentary evidence (invoices, contracts, accounting records) proving the direct and exclusive allocation to taxable operations; (3) Submit the deduction claim within the legally prescribed timeframe in the appropriate periodic VAT declaration; (4) Properly identify and segregate the specific taxable activities (such as commercial exploitation, leasing, or distribution services) to which the resources relate; (5) Ensure that substitute or corrective declarations, if needed, are filed to regularize any errors; and (6) Be prepared to substantiate the exclusive allocation during tax inspections or arbitration proceedings, bearing the burden of proof that no part of the resources was used for non-taxable governmental functions.
What was the outcome of CAAD Process 185/2014-T on IVA deductibility for common resource expenses?
Process 185/2014-T involved a dispute over €98,437.36 in VAT deductions that a Portuguese municipality claimed for resources from 2008-2009, allegedly exclusively allocated to taxable activities including exploitation of commercial facilities (B), leasing operations, and distribution services. The municipality originally deducted this VAT in periodic declarations from September-October 2012 and requested a refund of €302,401.45 in May 2013. Following a tax inspection, the Tax Authority rejected the €98,437.36 deduction while the municipality accepted other corrections totaling €34,602.56 related to duplicate invoices, misallocated resources used for exempt activities, and improper service deductions. The arbitral tribunal was constituted to decide whether the municipality properly demonstrated that these specific 2008-2009 resources were exclusively allocated to its taxable commercial operations rather than to activities excluded from VAT as public authority functions, examining both the substantive right to deduct and the procedural correctness of claiming deductions several years after the original acquisitions.