Process: 19/2017-T

Date: July 4, 2017

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 19/2017-T examined whether a hairdressing company could deduct €8,944.18 in VAT where invoices described purchases generically as 'mercadorias' without itemizing specific goods. The Portuguese Tax Authority (AT) disallowed deductions under Article 36(5) of the VAT Code (CIVA), requiring invoices to contain the quantity and usual denomination of goods transmitted and the net price exclusive of tax. The taxpayer argued that while invoices lacked itemization, supplementary documents (order notes, transport documents, goods receipt notes complying with Decree-Law 147/2003) provided the required detail to determine applicable VAT rates. The claimant invoked Article 19(2) and (6) CIVA combined with Article 36(5) CIVA, and cited EU Directive 2006/112/EC Article 226(6) and CJEU case C-512/14, asserting that the VAT neutrality principle requires deduction when material requirements are met, even if formal requirements are deficient. AT maintained that Article 36(5) CIVA mandates specific invoice content, and supplementary documentation cannot cure formal defects. This arbitration highlights the tension between strict invoice formality requirements under Portuguese VAT law and EU principles of fiscal neutrality, demonstrating how CAAD resolves disputes over whether complementary commercial documents can satisfy mandatory invoice elements for VAT deduction purposes.

Full Decision

TAX ARBITRATION DECISION

1 REPORT

1.1 – A…, Lda, with NIF: …, hereinafter referred to as the Claimant, Complainant in the tax procedure, above referenced, hereinafter referred to as "Claimant", came, invoking the provisions of numbers 1 and 2 of article 10 of Decree-Law no. 10/2011, of 20 January (hereinafter RJAT), of article 99 of the Code of Tax Procedure and Process (CPPT) and of number 1 of article 95 of the General Tax Law (LGT), to request the establishment of a Singular Arbitral Tribunal, with a view to challenging:

- The assessment of Value Added Tax, hereinafter (VAT), carried out by the Tax and Customs Authority (hereinafter AT), relating to the year: 2012, within the scope of an inspection procedure, based on Service Order, no. OI2016…;

- This procedure, which gave rise to a Tax Inspection Report, hereinafter RIT;

- Within the scope of the corrections made, in the context of VAT, a deficit amount of €8,944.18 was determined, configured by the AT as a non-deductible tax, plus compensatory interest (cfr doc 2, attached to the case file..)

1.2 Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed Maria de Fátima Alves as sole arbitrator, who communicated acceptance of the appointment within the applicable deadline:

- On 06-03-2017 the parties were duly notified of this appointment, and did not manifest any intention to refuse the arbitrator's appointment, in accordance with the combined provisions of article 11 no. 1 paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics,

- Therefore, the arbitral tribunal was constituted on 21-03-2017, in accordance with the provision of paragraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, in the wording introduced by article 228 of Law 66-B/2012, of 31 December.

1.3 The Claimant, in substantiating its request for arbitral decision, states, in summary, the following:

- The Claimant is a company dedicated to the provision of hairdressing and aesthetics services;

- The disputed VAT results from the procedure of the aforementioned inspection action, distributed throughout the quarters of the fiscal year 2012 (cfr., doc 02) and better identified on page no. 5 of the Application and in the RIT, attached to the case file);

-It alleges that this entire factual situation arises from invoices that do not meet the legal requirements set out in no. 5 of article 36 of the VAT Code, to support the deduction of tax, as provided for in paragraph a) of no. 2 and no. 6 of article 19 of the same legal instrument;

-Since the said invoices do not itemize the goods purchased;

-Only the generic term "goods" appears therein, which, according to the AT, "does not allow identification of the quantity and usual denomination of those goods, thus preventing access to the net price of the said tax"( doc 3, attached to the Application);

- However, the Claimant contends that it has the right to VAT deduction, because the same are legally supported, not only by nos. 2 and 6 of article 19 combined with paragraph a) of no. 5 of article 36, both of the VAT Code, but also by paragraph 6) of art. 226 of Directive 2006/112, of 28 November 2006, insofar as, with regard to the lack of itemization of acquired goods, the same are supplemented through details made in order notes, transport documents, as well as in goods receipt and dispatch notes, documents that allow the VAT rate to be determined;

-The Claimant also alleges that, as the goods are described with high level of information detail regarding "sizes and quantities" references, the details are reserved for the documents accompanying the goods;

-Therefore, the Claimant does not understand why the AT disregarded the documentation supporting the goods acquisition operation, described in document 4 (attached to the case file), being that the documentation accompanying the circulation of goods is subject to compliance with the rules of Decree-Law no. 147/2003, of 11-07;

-It further adds that: "as regards the formal requirements relating to the exercise of VAT deduction, article 178, paragraph a) of Directive 2006/112, the same is subordinate to the possession of an invoice issued in accordance with article 226 of the same Directive"(Judgment of the Court of Justice of the European Union, of 15 September 2016, case no. C-512/14);

-Therefore, the CJEU declared that the fundamental principle of VAT neutrality requires that the deduction of this upstream tax be granted if the material requirements are met, even if the taxable persons have neglected certain formal requirements;

- Accordingly, the AT cannot, under article 219 of Directive 2006/112, only consider the formal aspect of invoices, and must also consider the complementary aspects provided by the Claimant (doc 2 and 5), when the documents alter the original invoice and make specific and unequivocal reference to it.

1.4 The Respondent, Tax and Customs Authority (hereinafter referred to as AT), submitted a Reply, from which it appears that the disputed tax acts do not suffer from any defect violating the Law, pronouncing itself for the dismissal of the complaint and for the maintenance of the questioned assessment acts, defending, briefly, the following:

- It challenges the formal completion of the said invoices, as they are not processed in a legal manner, as they should mandatorily contain: "the quantity and usual denomination of the goods transmitted and the net price of the tax, in light of what is established in no. 5 of article 36 of the VAT Code";

- It considers that the Claimant is classified, in the context of VAT, under the normal regime of quarterly periodicity, thus representing a taxable person who has the right to deduction, within the scope of the development of its main activity of Hairdressing, with CAE no. 96021;

- For which reason it was subject to an inspection procedure, carried out by the Directorate of Finance in Lisbon, within the scope of Service Order no. OI2016…, which culminated in the declarative review, in the context of Value Added Tax-VAT, relating to the year 2012;

- From said inspection action a Report was drawn up (RIT) which substantiates the non-deductible VAT, due to the fact that certain invoices, described in the RIT and on pages 2 and 3 of the AT's Reply, do not meet the formal requirements legally required in the context of VAT;

- Alleging that from the RIT it appears that: "only grants the right to deduction the tax mentioned in invoices and equivalent documents, when they are issued, respecting due legal form, in the name and in the possession of the taxable person. Article 20 no. 1 further provides that only the tax that has been borne on goods and services acquired, imported or used by the taxable person for the realization of the operations provided therein may be deducted".;

- Being that "the issuance of invoices or equivalent documents must comply with the requirements established in no. 5 of art. 36 of the VAT Code".;

- Considering, therefore, that the facts alleged by the Claimant, above described, in point 1.3 of this Decision, contained in point 6 of article 226 of Directive 2006/112/EC, of the Council, of 28 November 2006, are also substantiated in the doctrinal record concerning case no. 2976, with dispatch of the SDG of taxes, of 29-02-2012, when it indicates that invoices issued must, in accordance with the aforementioned point 6, contain the "quantity and nature of the goods delivered or extent of the services provided, so that they can be considered issued in legal form.;.

- Reason for which the legislator was exacting, as provided in no. 6 of art. 19 (VAT Code)" for purposes of the exercise of deduction, invoices or equivalent documents containing the elements provided for in article 36 of the same legal instrument are considered issued in legal form;

- That, in this case, the absence of such mandatory requirements makes it impossible to deduct the tax mentioned in the invoices, (annex 2);

- The Claimant alleges that the evidence elements contained in Document 4, attached to the Application, allow dispelling doubts as to the supply of goods;

- However, after analyzing the documents referred to, there is no reference whatsoever to the invoices, which are crossed out with a pen, as they lack the necessary security for the exercise of the right to deduction, and it should also be considered that, in the case of documents not processed by computer, there is no reference to the necessary authorization, which disrespects the provisions of art. 3 and following of Decree-Law no. 147/2003, of 11/07-Regime of Goods in Circulation (in the wording then in force);

- In light of the facts contextually referred to, the Respondent can and must require that the requirements of the invoices respect the provisions of no. 5 of art. 36 of the VAT Code and the provision of art. 226 of the VAT Directive;

- Being that invoices, issued in accordance with the terms of the law (no. 5 of art. 36 of the VAT Code), must be complied with cumulatively, as they constitute a formality "ad substantiam";

- In the case in question, none of the disputed invoices makes reference to any supplementary document (order notes, transport documents, warehouse receipt and dispatch notes, etc.);

- Now, although it is admitted that reference may be made to annexes that itemize the goods in question, the reference must be made in the invoice itself, under penalty of making it impossible to know of such documents, running the risk of the security required for the right to exercise deduction, guaranteed by the formalism provided for in the aforementioned no. 5 of art. 36 of the VAT Code;

- Following Xavier de Bastos, in the context of VAT, such documents are, like a check on the Treasury, "as they give the recipient who is a taxable person the right to deduct the VAT contained therein";

- From the importance of this formal criterion, the formality "ad substantiam" is derived, without which the faculty to exercise the right of deduction of the tax succumbs (see point 54 of the Reply. .

1.5 The meeting provided for in article 18 of the RJAT was dispensed with, as it is a matter already sufficiently debated, both in the case file and in the jurisprudence, understanding that this Tax Arbitral Court considers it unnecessary to have final submissions, and dispensed with the examination of witnesses;

- The Court, in compliance with the provisions of article 18, no. 2 of the RJAT, set, provisionally, until 04-07-2017, for the pronouncement of the arbitral decision.

2 ISSUES FOR DECISION

2.1 In light of what is set forth in the above paragraphs, regarding the parties' submissions and the arguments presented, the main issues to be decided are the following:

- The allegation made by the Claimant regarding the illegality of the VAT assessments relating to the periods: 1203T; 1206T; 1209T, and 1212T and respective compensatory interest, in the total of €8,944.18 (doc 1, attached to the case file).

- The formal requirements of the invoice in the context of VAT.

3 FINDINGS OF FACT

3.1 In matters of fact, relevant to the decision to be given, this Court finds the following facts to be established, in light of the elements existing in the case file:

- The Claimant presented evidence elements contained in documents nos. 1, 2, 3, 4 and 5, attached to the Application, which are deemed fully reproduced for all legal purposes;

- The Respondent presented evidence elements, contained in the VAT Code, Doctrine and jurisprudence, substantiated in the Reply and in the RIT.

4.1.1 SUBSTANTIATION OF THE FACTS PROVEN

- The facts found as proven are based on the documents attached to the request for arbitral decision of the above-mentioned Application, on the RIT and on the Reply presented by the AT, which are deemed fully reproduced for all legal purposes.

3.1.2 FACTS NOT PROVEN

- There are no facts deemed as not proven, as all facts considered relevant to the assessment of the request were proven.

4 LEGAL GROUNDS

4.1 The Court is materially competent and is regularly constituted, in accordance with articles 2 no. 1, paragraph a), 5 no. 2, paragraph a), 6 no. 1, 10 no. 1, paragraph a) and no. 2 of the RJAT:

- The parties have legal personality and capacity and are legitimate, ex vi, articles 4 and 10, no. 2, of the RJAT and article no. 1 of Ordinance no. 112-A/2011, of 22 March;

- The process does not suffer from nullities;

- There being no preliminary question on which the Court should pronounce itself.

4.2 The request, subject of the present case, is the declaration of illegality of the VAT assessments relating to the quarterly periods, corresponding to the year 2012;

4.2.1 Condemnation of the AT to reimburse the amount of the tax relating to such assessments in the total amount of €8,944.18;

4.2.2 Condemnation of the AT to pay indemnificatory interest on the same amount.

4.3 The matter of fact is fixed, as contained in no. 3.1 above, and it is now important to determine the Law applicable to the underlying facts, in accordance with the issues for decision identified in no. 2.1 above, and it is certain that the central issue at stake in the present case, regarding which there are absolutely opposing understandings between the Claimant and the AT, consists of assessing whether the VAT invoices and complementary documents, as to their completion, respect the formalities of no. 5 of art. 36 of the VAT Code, so that it is permitted to deduct VAT, in accordance with no. 2 of article 19 of the same legal instrument.

4.4 Everything analyzed and, taking into account, on the one hand, the positions of the parties in confrontation, mentioned in points 1.3 and 1.4 above and, considering, on the other hand that the central issue to be decided is the verification of the legal requirements that necessarily rests on the formal completion of the disputed invoices, in accordance with no. 5 of art. 36 of the VAT Code, therefore it is incumbent upon this Court, in this context, to assess and render a decision.

5 ISSUE OF THE INTERPRETATION AND APPLICATION OF THE VAT SUBJECTIVE INCIDENCE NORM

5.1 Considering it to be undisputed in the doctrine that in the interpretation of tax laws the general principles of interpretation fully apply, which will be, only and naturally, limited by the exceptions and particularities dictated by the law itself being subject to interpretation. This is an understanding that has come to be welcomed in the General Tax Laws of other countries and which has also been incorporated in article 11 of our General Tax Law, which has indeed been frequently emphasized by the jurisprudence.

It is consensually accepted that, in view of grasping the meaning of the law, the interpretation resorts, a priori, to reconstructing the legislative intent through the words of the law, which means seeking its literal sense, assessing it and gauging it in light of other criteria, with the so-called elements of a logical, rational or teleological nature and of a systematic order intervening:

- With regard to the interpretation of tax law, the jurisprudence should be considered, in particular, the Judgments of the STA (Supreme Administrative Court) of 05-09-2012, case no. 0314/12 and of 06-02-2013, case 01000/12, available at www.dgsi.pt, the importance of the provisions of article 9 of the Civil Code (CC), as a fundamental element of legal hermeneutics;

- No. 2 of article 19 of the VAT Code provides that "only the tax mentioned in invoices and equivalent documents issued in legal form, in the name and in the possession of the taxable person, grants the right to deduction";

- Being that the issuance of invoices and equivalent documents must respect the requirements of no. 5 of art. 36 of the VAT Code;

- No. 1 of art. 20 of the VAT Code provides "that only the tax that has been borne on goods and services acquired, imported or used by the taxable person for the realization of the operations provided therein may be deducted";

- The formalistic character of VAT allows the prevention of tax evasion, whereby its respective formalities are ad substantiam and not merely ad probationem (cfr. Judgment of the STA, of 31-01-2008);

- Now, in this case, documents no. 4, duly analyzed, do not contain any references to the respective invoices, except those that are crossed out with a pen;

- So, as, in the case of documents not processed by computer there is no reference to the necessary authorization, whereby the provisions of articles 3 and following of Decree-Law no. 147/2003, of 11/7, Regime of Goods in Circulation, in the wording then in force, are not considered;

- As well as, the said documents were not in the possession of the Claimant (cfr. document no. 5, attached to the Application) thus violating the provisions of no. 5 of art. 6 of the aforementioned Decree-Law no. 147/2003, of 11/7), RBC, in the wording then in force.

- Therefore, the said invoices do not contain any identification of the quantity and nature of the goods, nor is any reference made to order notes, transport documents, warehouse receipt and dispatch notes, nor even any attached list that would allow the Tax and Customs Authority to review the VAT;

- Therefore, in light of the facts briefly set forth above, it is found that the invoices, not meeting the formalism provided for in article 36 of the VAT Code, cannot grant the right to deduction, as established in no. 2 of article 19 of the VAT Code.

6 OTHER ISSUES RELATING TO THE LEGALITY OF THE ASSESSMENT ACTS

- Regarding the existence of other issues concerning the legality of the assessment acts, taking into account that it is inherent in the establishment of an order of knowledge of the vices, as provided in article 124 of the CPPT, that if the request for arbitral decision is based on vices that prevent the renewal of the disputed assessments, it is rendered moot, because useless, the knowledge of other vices, it does not appear necessary to address the other questions raised.

7 REIMBURSEMENT OF THE TOTAL AMOUNT PAID

- Pursuant to the provisions of paragraph b) of no. 1 of article 24 of the RJAT and, in accordance with what is established therein, the arbitral decision on the merits of the claim of which no appeal or challenge may be filed, binds the tax administration from the end of the period provided for for the appeal or challenge, and this must, in the exact terms of the acceptance of the arbitral decision in favor of the taxable person and until the end of the period provided for for the execution of sentences of tax judicial courts "Restore the situation that would exist if the tax act subject to the arbitral decision had not been carried out, adopting the acts and operations necessary for this purpose"

- These are legal commands that are in complete harmony with the provisions of article 100 of the LGT, applicable to the case, ex vi, of the provisions of paragraph a) of no. 1 of article 29 of the RJAT, which provides that "The tax administration is obliged, in case of full or partial acceptance of complaints or administrative appeals or judicial proceedings in favor of the taxable person, to the immediate and full reconstruction of the situation that would exist if the illegality had not been committed, with the payment of indemnificatory interest, in accordance with the terms and conditions provided for by law".

- The case contained in the present case file does not show the manifest application of the aforementioned rules, since as a result of the illegality of the assessment acts referenced in this case, there should, by force of these rules, be a reimbursement of the amounts paid, whether as title of the tax paid, or of the corresponding compensatory interest, as a way of achieving the reconstruction of the situation that would exist if the illegality had been committed.

8 OF THE RIGHT TO INDEMNIFICATORY INTEREST

- The declaration of illegality and consequent annulment of an administrative act confers on the recipient of the act the right to restitution of the situation in which it would have been before the execution of the annulled act.

- In the context of the assessment of the tax, its annulment confers on the taxable person the right to the return of the tax paid and, as a rule, the right to indemnificatory interest, in accordance with no. 1 of article 43 of the LGT and article 61 of the CPPT.

- However, in the disputed case, the Claimant does not have the right to indemnificatory interest, nor the right to the reimbursement requested, as there is no verification of the exercise of the right of VAT deduction, in accordance with the provisions of no. 2 of article 19 of the VAT Code, because the said invoices are not processed in a legal manner, since they do not mandatorily describe the quantity and usual denomination of the goods transmitted and the net price of the tax, in light of what is established in paragraphs b) and c) of no. 5 of article 36 of the VAT Code.

9 DECISION

In light of the foregoing, this Arbitral Court decides:

- To judge as unfounded the request for a declaration of the illegality of the VAT assessment, relating to the year 2012, distributed by the following periods: 1203T; 1206T; 1209T and 1212T, identified in the present case.

CASE VALUE: In accordance with the provisions of articles 306 no. 2 of the CPC and 97-A, no. 1 of the CPPT and article 3, no. 2 of the Regulations for Costs in Tax Arbitration Proceedings, the value of the case is set at €8,944.18 (eight thousand, nine hundred and forty-four euros and eighteen cents).

COSTS: In accordance with no. 4 of article 22 of the RJAT, the amount of costs is set at €918.00, in accordance with Table I, attached to the Regulations for Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Notify the parties.

Lisbon, 04-07-2017

The Arbitrator

Maria de Fátima Alves

(the text of this decision was prepared by computer, in accordance with article 131, no. 5 of the Civil Procedure Code, applicable by reference to article 29, no. 1 paragraph e) of Decree-Law 10/2011, of 20 January (RJAT), being its drafting governed by current orthography)

Frequently Asked Questions

Automatically Created

Can VAT be deducted on invoices that only describe goods generically as 'mercadorias' under Portuguese tax law?
Under Portuguese tax law, invoices describing goods generically as 'mercadorias' generally cannot support VAT deduction. Article 36(5) of the VAT Code (CIVA) requires invoices to contain the quantity and usual denomination of goods transmitted and the net price exclusive of tax. The Tax Authority considers generic descriptions insufficient to verify the correct VAT rate application. However, taxpayers may argue that supplementary documents (transport documents, delivery notes, order forms) complying with Decree-Law 147/2003 can provide the required specificity, invoking EU VAT neutrality principles established in CJEU jurisprudence (Case C-512/14) which prioritize substance over form when material requirements are met.
What are the mandatory invoice requirements under Article 36(5) of the Portuguese VAT Code (CIVA) for VAT deduction purposes?
Article 36(5) of the Portuguese VAT Code (CIVA) establishes mandatory invoice requirements for VAT deduction purposes. Invoices must contain: (1) the quantity of goods transmitted or services rendered; (2) the usual denomination of the goods or description of services; (3) the net price exclusive of VAT; (4) applicable VAT rates; (5) the amount of tax due; and (6) other elements specified in the provision. These formal requirements are strictly enforced by the Tax Authority, which considers invoices non-compliant if they lack itemized descriptions of goods. Failure to meet these requirements results in disallowance of input VAT deduction under Article 19(2) and (6) CIVA, even when the underlying transactions are genuine and commercial documentation exists.
How does Article 19(2) of the CIVA regulate the right to deduct input VAT in Portugal?
Article 19(2) of the Portuguese VAT Code (CIVA) regulates the right to deduct input VAT by establishing that taxable persons may deduct tax charged on goods and services acquired for their taxable business activities. This right is conditioned by Article 19(6) CIVA, which requires that deduction be supported by invoices or equivalent documents issued in legal form and held by the taxable person. The deduction is exercised in the tax period when the deductible tax becomes due, subject to formal and material requirements. Article 19(2) must be read in conjunction with Article 36(5) CIVA, which defines the mandatory invoice content. The Tax Authority interprets these provisions strictly, requiring full compliance with invoice formalities as a precondition for exercising the deduction right, though this interpretation faces challenges based on EU VAT neutrality principles.
What happens when the Portuguese Tax Authority (AT) disallows VAT deductions due to non-compliant invoices during a tax inspection?
When the Portuguese Tax Authority (AT) disallows VAT deductions due to non-compliant invoices during a tax inspection, it issues a Tax Inspection Report (Relatório de Inspeção Tributária - RIT) documenting the infractions. The AT reclassifies previously deducted input VAT as non-deductible, resulting in additional tax due plus compensatory interest (juros compensatórios) calculated from the original filing deadline. The taxpayer receives a liquidation notice demanding payment of the VAT deficit. Taxpayers can challenge these assessments through administrative complaint procedures under the Tax Procedure Code (CPPT) or directly through CAAD tax arbitration under Decree-Law 10/2011. The AT's position typically emphasizes strict compliance with Article 36(5) CIVA formalities, arguing that supplementary commercial documents cannot remedy invoice defects for VAT deduction purposes under Article 19(6) CIVA.
How does CAAD arbitration resolve disputes over VAT deductibility linked to invoice formalities in Portugal?
CAAD arbitration resolves VAT deductibility disputes linked to invoice formalities by examining whether invoices meet Article 36(5) CIVA requirements and whether supplementary documentation can cure formal defects. The arbitral tribunal evaluates the Tax Authority's inspection findings against the taxpayer's evidence, considering both Portuguese VAT Code provisions and EU Directive 2006/112/EC. Key considerations include: whether invoices contain mandatory elements (quantity, usual denomination, net price); whether complementary documents (transport documents, delivery notes) provide sufficient detail; and whether EU VAT neutrality principles require allowing deductions when material requirements are proven despite formal deficiencies. CAAD tribunals interpret CJEU jurisprudence (notably Case C-512/14) on whether substance should prevail over form, balancing strict Portuguese formality requirements against fundamental EU principles that deduction should be granted when substantive conditions are met and tax authorities can verify transaction legitimacy through alternative documentation.