CAAD Case 191/2018-T: IRC and IVA Tax Assessment Methods – Burden of Proof for Direct Methods Application

ARBITRAL DECISION

The arbitrators Fernanda Maças (arbitrator-president), Miguel Patrício and Adelaide Moura (arbitrator-members), designated by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the Arbitral Tribunal, agree as follows:

I. REPORT

1. A..., Lda., NIF ..., with registered office at Rua do ... no. ..., ..., ... (hereinafter A... or Claimant) filed an application for constitution of a collective arbitral tribunal, pursuant to Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter RJAT), in which the Tax and Customs Authority (hereinafter AT or Respondent) is the respondent, with a view to examining the illegality of the tax assessment acts for Corporate Income Tax (IRC) and Value Added Tax (IVA) for the years 2012, 2013, 2014 and 2015, and corresponding compensatory interest.

2. The application for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Respondent.

2.1. The Claimant did not proceed to appoint an arbitrator, and therefore, pursuant to the provisions of paragraph (a) of article 6, paragraph 2 and paragraph (b) of article 11, paragraph 1 of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

2.2. The parties were duly notified of this designation and did not express their intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, paragraphs (a) and (b), of the RJAT and articles 6 and 7 of the Deontological Code.

2.3. Thus, in accordance with the provisions of paragraph (c) of article 11, paragraph 1 of the RJAT, the Arbitral Tribunal was constituted on 25 June 2018.

1. To substantiate the application, the Claimant argues, in summary, as follows:

After requesting the cumulation of claims, it first raises the expiration of the right to assess with respect to the corrections relating to the fiscal year 2012, on the grounds of violation of the provisions of paragraph 5 of article 45 of the General Tax Law (LGT), as amended by article 57 of Law no. 60-A/2005, of 30 December, which extends the expiration period to the end of the criminal proceedings (dismissal or final judgment), plus one year.

For the Claimant, the rationale of this rule does not permit the AT to promote additional tax assessments beyond the normal expiration period with respect to facts for which no criminal investigation was initiated.

The mere opening of an investigation proceeding does not permit the AT, without more, to proceed with the assessment of all and any taxes (in this case, income tax withholdings) without observance of the normal expiration period, it being necessary that there be identity between the facts investigated, and that justified the initiation of the investigation proceeding, and the facts that generate tax.

The Claimant concludes that, given that the AT, in the Tax Inspection Report (RIT) prepared, did not indicate the facts to which the investigation proceeding no. .../15...T9... refers, nor authorized its consultation, it remains unclear whether, in fact, the expiration of the 2012 assessment occurred or not.

In these terms, the AT must, in defense of its right to assess beyond the normal expiration period, provide proof that there is identity between the facts that led to the initiation of the investigation proceeding and those that constitute the basis of the assessment produced with respect to 2012.

The inspection of the Claimant took place simultaneously with inspection actions on its managing partner B... and the latter's spouse, C..., who voluntarily authorized access to all banking information relating to accounts held by them, which covered the same fiscal years 2012 to 2015, inclusive.

Within the scope of said inspections, the AT identified certain debit movements, checks issued, and credit movements, deposits and transfers, which required justification, and therefore proceeded, on 21/07/2017, to notify them (managing partner and spouse) to provide explanations.

The AT considered that the justifications provided were not credible or duly proven, concluding that, given that it was verified that there was a mixture of financial movements of a personal nature with those relating to the business activity of the Claimant, the amounts deposited in its bank accounts, whose explanation was not accepted, related to funds derived from income/gains of the Claimant, omitted from the financial statements and tax filings thereof.

It is from this point that the AT concludes that the amounts in question are derived from sales/services rendered carried out within the scope of the Claimant's activity, as follows:

• Gains susceptible to taxation were omitted for IRC purposes;

• IVA was not assessed on the omitted invoicing;

• The managing partner and spouse appropriated the values corresponding to the sales/services rendered omitted, although this aspect is only relevant to the other proceedings relating to personal income tax (IRS).

The amounts considered by the AT for taxation purposes (income omitted for IRC purposes and operations subject to IVA purposes), attributing them to sales/services rendered by the Claimant, amount to €62,556.25, €201,525.00, €207,179.20 and €124,420.94, for the fiscal years 2012 to 2015, respectively.

As regards IRC, the amounts deposited in the bank accounts of B... and spouse were added to the taxable results declared by the Claimant in the different fiscal years, in accordance with article 20 of the IRC Code, resulting in the following amounts of tax assessed:

As regards IVA, the amounts deposited in the bank accounts of B... and spouse were considered operations subject to IVA under paragraph (a) of article 1, paragraph 1 of the VAT Code (CIVA), resulting in additional IVA assessments, by applying the 23% rate, in accordance with paragraph (c) of article 18, paragraph 1 of said law, relating to the following periods:

The AT, in its RIT, did not demonstrate that it investigated the financial movements of B... and spouse, C..., with the necessary depth, nor did it present any fact, or even mere indication, that the movements at the basis of the taxation related to the Claimant.

The prerequisites for application of the regime of manifestations of wealth, governed by paragraph 1, paragraph (f), of article 87 of the General Tax Law (LGT), are met.

But the AT involved the Claimant, reflecting in it the consequences of what it investigated and determined regarding the taxpayers B... and spouse, C....

The AT concluded that the financial movements to the credit of the bank accounts held by them, not justified, related to "... funds derived from income/gains of the activity of A..., which were omitted from the financial statements and for tax purposes"

The AT did not introduce any type of proof, attaching elements that could, at least, provide a glimpse, even by presumption, that the amounts in question corresponded to sales/service rendered relating to the activity of the Claimant.

The AT made presumptions without presenting substantiation and chose the form of direct taxation.

The tax acts are not properly substantiated, whether from the formal point of view, with the presentation of coherent and credible reasons, or from the substantive point, since the AT does not mention real and concrete situations that may support the conclusions drawn.

The AT, in the course of the inspection procedure, did not obtain factual elements that demonstrated or even seriously indicated the existence of the omission of those gains from the accounting records, with the consequent violation of article 74 of the LGT.

Given the reasons cited, the Claimant concludes that it is necessary to disregard the operations, sales and/or services rendered within the scope of the activity of the Claimant that the AT presumes were carried out, in the amounts of €62,556.25, €201,525.00, €207,179.20 and €124,420.94 and for the years 2012 to 2015.

1. In its Reply, the Respondent answered, by exception and on the merits, arguing that the application should be judged without merit.

In its defense by exception, the Respondent invokes the illegality of the cumulation of claims, in that the claims made relate to different tax assessment acts (IVA and IRC assessments) and do not depend on the application of the same principles or rules of law.

On the merits, the Respondent alleges, among others, that the company A..., LDA., hereinafter referred to as Claimant, engages in the rental of equipment for civil construction, the preparation of land for construction (earthworks, demolitions) and the construction of walls in masonry and old stone.

The volume of business declared by the Claimant was as follows:

The Finance Directorate of Porto/Division of Tax Criminal Proceedings was notified of a dispatch of the District Attorney's Office (DIAP) issued within the scope of proceeding no. ...15...T9..., from which, in summary, the following notably results:

"(...) there are suspicious movements of large sums of money, namely three checks in a total of €1,120,000.00, six transfers of €210,647.46, five of €205,000.00 among others which indicate that the account of suspects B... and spouse C... is being used to move funds resulting from the activity of company A... Lda."

"(...) I determine that investigations and the subsequent steps of these proceedings be processed under the regime of judicial secrecy, during the Investigation phase and for the maximum period legally permitted."

"(...) given the inspection action that is underway, and which should be carried out by the AT, these proceedings should be investigated with a mixed team, maintaining any investigation of tax crime to the charge of the AT."

Following Proceeding no. .../15...T9... and under the cover of Service Orders, inspection procedures were initiated for the fiscal years 2012 to 2015.

From the analysis of the accounting elements for said fiscal years, the Tax Inspection Services (SIT) determined the following:

As regards IRC

Income from Capital

The inspection action on A... took place simultaneously with inspection actions on managing partner B... and spouse, C.... The actions covered the fiscal years 2012, 2013, 2014 and 2015.

The managing partner and spouse, in the fiscal years 2012 to 2015, declare only Employee Income (Category A), obtained from A..., in the following annual amounts:

In 2015, which is the year in which the annual value of declared income is highest, the couple's monthly net income is less than €1,750, and the couple was refunded the entire amount of tax withheld relating to the dependent work income declared.

However, the financial statements of A... show that in that same fiscal year substantial financing was provided by managing partner B..., realized in the form of a current account, recorded in SNC account 25321.

SNC account 25321 showed a credit balance of €352,091.93 on 1 January 2012 and ends in 2015 with a credit balance of €1,088,612.00. The credit movements in said SNC account 25321 relate to direct payments to suppliers made by the managing partner and also to credit granted by him intended to cover cash flow shortages.

From 2012 to 2015, A... made substantial investments in the renewal of machines/equipment for transport that it rents in pursuing its activity, having only resorted to financing from said managing partner.

In the fiscal years 2012 and 2013, SNC account 111 Cash shows monthly balances of very high value, which means that the payments made by A... were much lower than the bank withdrawals made.

In fiscal years 2014 and 2015, the same account shows, in almost all months, negative balances and of very high value, which indicates the omission of income.

From the analysis of the bank statements of the accounts of the managing partner and spouse, there emerge financial movements associated with A....

In short, the management of A...'s financial resources was carried out in a manner that was not sufficiently clear and precise, and the bank records reveal a mixture of movements of a personal nature with those of a business nature, and the credits in the bank accounts of the managing partner and spouse relate to funds derived from income/gains of the activity of A..., which were omitted from the financial statements and for tax purposes.

Corrections to the Taxable Base

In the fiscal year 2012, the taxpayer did not declare €62,556.25.

In the fiscal year 2013, the taxpayer omitted €12,000.00 of income associated with the sale of a vehicle.

In the fiscal year 2013, the taxpayer did not declare the amount of €201,525.00 associated with funds credited to the bank accounts of the managing partner and spouse.

In the fiscal year 2014, the taxpayer did not declare the amount of €207,179.20 associated with funds credited to the bank accounts of the managing partner and spouse.

In the fiscal year 2015, the taxpayer did not declare the amount of €124,420.94 associated with funds credited to the bank accounts of the managing partner and spouse.

As regards IVA

Failure to Assess IVA

The undeclared income (omitted income) by the Respondent in the fiscal years 2012 to 2015 constitute operations subject to IVA under paragraph (a) of article 1, paragraph 1 of the CIVA, resulting in additional IVA assessments, at the rate of 23%, under paragraph (c) of article 18, paragraph 1 of the CIVA, in the following amounts:

As to the alleged expiration of the right to assess for the year 2012, raised by the Claimant in its petition for arbitral pronouncement, the Respondent argues that following the initiation of investigation proceeding no. .../15...T9..., the period for conclusion of the inspection procedures was suspended, pursuant to paragraph (c) of article 36, paragraph 5 of the Regulations on Tax Procedures and Administrative Litigation (RCPITA), and the managing partner B... was notified of this fact through letter no. ..., of 5/4/2017.

Consequently, the expiration period for the right to assess taxes was also suspended, pursuant to paragraph 1 of article 46 of the LGT.

It should be noted that, during the inspection procedure, in the various meetings with the managing partner and the certified accountant, as well as in the RIT, the facts mentioned in the investigation were not indicated given that, by dispatch of the Public Prosecutor's Office of ..., it was decreed that the same was under judicial secrecy, under the provisions of paragraph 3 of article 86 of the Criminal Procedure Code.

As to the determination of omitted operations, the Respondent alleges, in summary, "that the facts determined during the inspection procedures, at the Claimant and B... and C..., described on pages 8 to 15 of the RIT, namely:

• the irregularities identified in the financial circuits of the company, with non-compliance with the stipulated in article 63 of the LGT and the abnormal balances shown in SNC account 111 Cash, demonstrative of the lack of clarity, accuracy and credibility of the same;

• the very significant number of movements identified in the analysis of the accounts held by B... and C..., as being associated with A... (loans granted by the partner and repayment thereof, payments to suppliers, checks issued to individuals associated with entities related to the company, a very significant number of checks issued to bearer, of amount exceeding €1,000, a procedure atypical of a personal account);

• the lack of credible proof of the few justifications presented for the various cash deposits and transfers, identified in the personal accounts, are demonstrative that the same related to "funds derived from income/gains of the activity of A..., which were omitted from the financial statements and for tax purposes."

The Respondent concludes that the Claimant hides "in generic and abstract considerations about alleged violations of principles or even suggesting the mechanisms that the AT should have initiated to apply indirect taxation methods."

"Rather, it was necessary to present means of proof and to specifically contravene the corrections made by the AT, which are supported and result from numerous and proven diligences with various institutions, clearly shown in the Administrative Process now attached, see by way of example the summary contained in the Information at page 162 of File 2 of the AP, whose contents are here considered to be entirely reproduced."

"Regarding the quantification of capital income, it is stressed that it was carried out in a direct and exact manner, as the amounts of €62,556.25, €201,525.00, €207,179.20 and €124,420.94, added to the income declared for the fiscal years 2012, 2013, 2014 and 2015, respectively, resulted from the sum of credits (deposits and transfers) detected monthly, in the personal bank accounts, held by the couple, whose origin was not justified, verifying that the amounts were not estimated or presumed, and therefore the conditions provided for in article 87 of the LGT, necessary for indirect evaluation, were not met."

1. The Claimant exercised the right of reply in relation to the exception matter, defending its lack of merit.

2. By dispatch of 29 December, the meeting contemplated in article 18 of the RJAT was dispensed with and 23 December 2018 was designated for pronouncement of the Arbitral Decision, a deadline extended, by dispatch of 19 December 2018, to 25 February.

3. The parties did not produce written submissions.

II. CASE MANAGEMENT

The arbitral tribunal was regularly constituted and is materially competent, as provided for in article 2, paragraph 1, paragraph (a) and article 4, both of the RJAT.

The parties have legal capacity and standing, are duly represented (articles 4 and 10, paragraph 2, of the same law and articles 1 to 3 of Ordinance no. 112-A/2011, of 22 March).

Notified for such purpose, the now Claimant responded to the exception of non-cumulation of claims raised by the AT.

The AT raised, in its reply, an exception of non-cumulation of claims, on the ground that there is "an obstacle to cumulation arising from the special regime provided for in article 3 of the RJAT."

In the view of the AT, "the fact that the claims result from the same inspection action does not imply that we are dealing with the possibility of cumulation provided for in article 3, paragraph 1, of the RJAT, given that the claims made in these proceedings relate to different tax assessment acts, more specifically to assessments of IRC and IVA, and do not depend on the application of the same principles or rules of law."

In its defense, the AT invokes what was expended in the arbitral decision handed down in proceeding no. 73/2014-T, namely, with greater relevance, the following excerpt: "when more than one assessment act is challenged, only in the cases indicated in article 3, paragraph 1, of the RJAT, will there be the possibility of cumulating claims when their merit depends essentially on the assessment of the same factual circumstances and on the interpretation and application of the same principles or rules of law.

In the case at hand, different acts are challenged, of IVA and IRC assessment, and as to the latter tax, in addition to illegalities that result from the facts alleged for IVA purposes relating to sales of goods, there are others relating to representation expenses, which have nothing to do with those.

Thus, it is not possible to cumulate the claim for declaration of illegality of the IVA assessment acts with the claim for declaration of illegality of the IRC assessment act, to the extent that it relates to correction of the taxable base derived from representation expenses."

The AT also invokes, in support of its position, what was decided in the arbitral decision handed down in proceeding no. 757/2015-T: "Analyzing paragraph 1 of article 3 of the RJAT, we find that the cumulation of claims is admitted provided that the merit of the claims depends essentially on the assessment of the same factual circumstances and on the interpretation and application of the same principles or rules of law, a rule that follows from article 104 of the CPPT and which requires the simultaneous satisfaction of two requirements, the assessment of the same factual circumstances and the application of the same principles or rules of law. It should be said that, although we may be dealing with the same or similar factual circumstances for both claims, the truth is that the same principles or rules of law are not applicable to them, in the case of IVA, the provisions of the CIVA apply and in the case of IRC, those of the CIRC. Hence, this tribunal understands that the conditions required by the normative under analysis are not cumulatively satisfied, and consequently the cumulation of the claims made by the claimant is not admissible."

Notified to respond to said exception, the now Claimant came to say, in summary, that "the assessment of the claim does not involve the assessment of any specific rules of each of those taxes but, only, the grounds invoked by the AT to conclude the existence of omitted sales."

Examination and decision is required.

In this regard, article 3, paragraph 1, of the RJAT, provides that "The cumulation of claims, even if relating to different acts and the joinder of claimants are admissible when the merit of the claims depends essentially on the assessment of the same factual circumstances and on the interpretation and application of the same principles or rules of law."

In turn, article 104 of the CPPT provides that the cumulation of claims is admissible in case of identity of the nature of the taxes, of the grounds of fact and of law invoked and of the court competent to decide.

In the understanding of the Respondent, although the Claimant's claims result from the same inspection action, they relate to different tax assessment acts (IRC and IVA), and therefore do not depend on the application of the same principles or rules of law, which is why the requirement of coincidence or identity between them is not satisfied.

In reply, the Claimant came to argue that the legal prerequisites on which the cumulation of claims depends are satisfied, because it understands that "the grounds of the IRC and IVA assessments, which are sought to be annulled, are based on the identification of the same facts, namely the detection of financial movements entering the bank accounts of the partners not justified, and the framework that the AT came to make thereof." The Claimant adds that "the assessment of the claim does not involve the assessment of any specific rules of each of those taxes, but, only, the grounds invoked by the AT to conclude the existence of omitted sales, as well as the direct and unequivocal manner in which it validated mere indications that such omission could have occurred."

Upon examination, the Arbitral Tribunal finds that, in the present case, the IRC and IVA assessments sought to be annulled are based on the same factuality which is a condition for the possible merit or lack of merit of all claims of the Claimant.

It is further added that, as has been understood by the doctrine, said identity of fact need not be absolute: "The facts will be essentially the same when the claims of the claimant are common [...] in such a way that it can be concluded that, if proved as alleged in respect of one act, there will exist factual support wholly or partially necessary for the merit of the claims of all the claims" (Jorge Lopes de Sousa in "Commentary to the Legal Regime of Tax Arbitration", in: Guide to Tax Arbitration, 2013, p. 147).

In the same sense, and with greater detail, Fernando Lança Martins refers (in "The cumulation of claims in the tax arbitration process", in: Tax Arbitration, no. 1, 2014, p. 28), "to assess the identity of the relevant facts, it will therefore be necessary to consider the factuality from which, in the understanding of the taxpayer, results the illegality of the acts that are the subject of the proceeding.

In this context, it will be necessary to consider the material elements of the tax facts underlying the contested tax acts or the action of the Tax Administration in the tax procedure underlying the issuance of such acts.

Insofar as, to assess the legality of both tax acts, it is necessary to consider a single material reality transversal to the various tax facts in question, or a single procedural action of the Tax Administration from which the various tax acts in dispute result, the matter of fact to be assessed to determine the illegality of such acts may be essentially the same.

Thus, the probative measures necessary to assess the legality of one of the acts may be used to assess the legality of another act that is the subject of the proceeding, thereby enhancing the uniformity of decisions regarding the same matter of fact in benefit of the legal certainty that should guide the resolution of disputes within the scope of the tax arbitration process."

Now, in the case at hand, it is verified that the factual circumstances underlying the various assessments are essentially the same, given that, as the Claimant states in its response to the exception, "the AT considered, to carry out [such] assessments [...], that the value corresponding to those financial movements corresponded to sales not recorded in the accounting records and in the tax returns submitted." And, as the Claimant also correctly states, "given that these are omitted sales, the AT drew the effects in two different tax categories, namely IRC, because these are gains that influenced taxable profit, and IVA, because they imply subjection to this tax."

Indeed, it is clear that the omission of sales contested by the Claimant was the reason that gave rise to the tax effects in the context of IRC and IVA. And if said omission is not admitted, it will, at the same time, have consequences in the context of IRC and IVA. For which reason it can be concluded here that the matter of fact to be assessed to determine the (il)legality of the various assessment acts in question (in other words, that the "factual support" for the assessments) is essentially the same.

It should be further noted that the invoked arbitral decision handed down in proceeding no. 73/2014-T did not oppose cumulation on the basis of the grounds that have been referred to here, since it was stated therein that "it is evident that the claim for declaration of illegality of IVA and IRC assessments, for not having verified sales that the Tax and Customs Authority presumed to have occurred, is not incompatible with the claim for declaration of illegality of assessment for expenses made to be connected with the obtaining of income or gains or maintenance of the source of production, since the two illegalities can exist concomitantly." It happens, however, that in the case underlying said arbitral decision, "different acts were challenged, of IVA and IRC assessment, and as to the latter tax, in addition to illegalities that result from the facts alleged for IVA purposes relating to sales of goods, there are others relating to representation expenses, which have nothing to do with those. [...]. Thus, it is not possible to cumulate the claim for declaration of illegality of the IVA assessment acts with the claim for declaration of illegality of the IRC assessment act, to the extent that it relates to correction of the taxable base derived from representation expenses." (emphasis added). [Arbitral Decision handed down in Proceeding no. 73/2014-T, of 11/7/2014].

In the same sense as has been argued here, see, for example, the arbitral decision handed down in proceeding no. 209/2015-T: "within the scope of the legal regime of tax arbitration, and having regard to the provisions of paragraph 1 of article 3 of its respective Legal Regime, the admissibility of the cumulation of claims appears not to be already dependent on the nature of the taxes (regardless of the interpretation subscribed to regarding article 104 of the CPPT), rather making it dependent on the "identity of situations and legal questions to be assessed."

The norm under examination makes the possibility of cumulation of claims dependent on the satisfaction of two requirements, themselves also cumulative: (i) that the merit of the claims depends essentially on the assessment of the same factual circumstances and, (ii) that the merit of the claims depends essentially on the interpretation and application of the same principles or rules of law.

For the sake of brevity, it should be borne in mind that the rules for cumulation of claims have underlying reasons of procedural economy advising, as has been said, for the speedy resolution and the sound objective of avoiding contradictory decisions.

Thus, where the assessment of the same facts is involved, the cumulation of claims would, as a general rule, be justified, on the assumption that the questions of law (potentially distinct before different taxes) are not themselves the subject of controversy.

"This is the scope of article 3, paragraph 1, in not requiring an absolute identity of questions of fact and of law but only an identity as to what is essential" [see arbitral decision handed down in proceeding no. 720/2014-T, of 23/3/2015]. [...]. Descending to the specific case, the truth is that the claim for annulment made by the Claimant, whether as to additional IRC assessments or IVA had its origin in the same inspection action carried out by the AT [...] irregularities will have been detected with impact in the context of IVA and IRC, which will be at the origin of the additional assessments that the Claimant challenges in the present petition for arbitral pronouncement.

Therefore, without need of any further considerations, and in light of what has been said, it is concluded that the cumulation of claims made by the Claimant is legal, and consequently the exception of illegality thereof raised by the AT in its reply is without merit." [Arbitral Decision handed down in Proceeding no. 209/2015-T, of 27/4/2016].

In conclusion, and having regard to what has been set forth above, it is concluded that the merit of the claims in question here depends essentially on the same factual circumstances (and on the interpretation and application of the same principles or rules of law), and therefore, there also being identity of the court competent to decide on those, nothing prevents, in light of what is provided for in article 3, paragraph 1, of the RJAT, the intended cumulation of the claims.

The proceeding is not affected by nullities and there is no obstacle to the examination of the merits of the case.

III. MERITS

III.1. Proven Facts

The following facts are considered proven:

In the Tax Inspection Report, which is hereby reproduced for the proper purposes, it is stated, in summary, as follows:

"The company A..., LDA., hereinafter referred to as A..., specifically, engages in the rental of equipment for civil construction, the preparation of land for construction (earthworks, demolitions) and the construction of walls in masonry and old stone.

The corporate purpose is building construction.

The company has a varied range of machines for rental (excavators, hammers, rotary equipment, compressors, concrete mixers, cranes, trucks, etc.) and the service provided also includes the service of operating the equipment.

The volume of business declared was as follows:

(...)"

III.2. CORPORATE INCOME TAX (IRC)

III.2.1. CORRECTIONS TO THE TAXABLE BASE

III.2.1.1. YEAR 2012

III.2.1.1.1. OMITTED INCOME

(...) in the fiscal year 2012, the taxpayer did not declare the amount of €62,556.25, associated with funds credited in the bank accounts held by the partner and spouse, between the months of January and March, and therefore we propose this increase, to the taxable result declared, in accordance with article 20 of the IRC Code.

(...)

III.2.1.2. YEAR 2013

III.2.1.2.1. OMITTED INCOME

a) Concealment of income associated with sale of vehicle

The taxpayer sold the motor vehicle, ..., registration..., to D..., NIF..., having issued invoice no. 39/2013, of 2013/03/01, for the amount of €2,000, and calculated a bookkeeping and tax gain of said amount, given that the vehicle, at the date of sale, was already fully depreciated.

From the lifting of banking secrecy, effected within the scope of the inspection action, to partner B..., to the fiscal year 2013, credited by Service Order No. 012016..., namely from the analysis of the credit movements registered in the bank account at ..., checking account no. ..., held by him and by spouse, C..., it was determined that on 8 April 2013, a deposit was made in the amount of €14,000, and the origin of this amount was justified, with the receipt of the amount from the sale of the vehicle identified above, as confirmed by email of 25 September 2017.

In light of the above, we verified that the taxpayer did not issue the invoice for the sale of the vehicle for the actual sale value thereof, having thus declared income lower than obtained, in the amount of €12,000, calculated as follows:

b) Concealment of income associated with funds credited to bank accounts of

Given the omission of income identified (...) in the fiscal year 2013, the taxpayer did not declare the amount of €201,525, associated with funds credited in the bank accounts held by the partner and spouse, and therefore we propose this increase, to the taxable result declared, in accordance with article 20 of the IRC Code.

(...)

III.2.1.3. YEAR 2014

III.2.1.3.1. OMITTED INCOME

Given the omission of (...) in the fiscal year 2014, the taxpayer did not declare the amount of €207,179.20, associated with funds credited in the bank accounts held by the partner and spouse, and therefore we propose this increase, to the taxable result declared, in accordance with article 20 of the IRC Code.

(...)

III.2.1.4. YEAR 2015

III.2.1.4.1. OMITTED INCOME

Given the omission of income (...) in the fiscal year 2015, the taxpayer did not declare the amount of €124,420.94, associated with funds credited in the bank accounts held by the partner and spouse, in that fiscal year, and therefore we propose this increase, to the taxable result declared, in accordance with article 20 of the IRC Code.

(...)

III.3. VALUE ADDED TAX (IVA)

III.3.1. TAX NOT ASSESSED

III.3.1.1. IMPROPERLY DEDUCTED IVA

III.3.1.1.1. YEARS 2012, 2013, 2014 AND 2015

In the fiscal years 2012 to 2015, the taxpayer improperly deducted IVA, pursuant to article 21 of the CIVA, in the expenses recorded relating to:

Conservation and Repair of Light Passenger Vehicles

(...) the taxpayer improperly deducted the IVA, contained in the documents supporting the services provided by supplier E..., SA, NIPC..., relating to charges for conservation and repair of passenger cars, pursuant to paragraph (a) of article 21, paragraph 1 of the CIVA, recorded in SNC account 2432317, and included in field 24 (Other Goods and Services) of the respective IVA periodic declarations. in the amounts identified below:

A.1. Year 2012

Total of €307.01

A.2. Year 2013

Total of €268.02

A.3. Year 2014

Total of €967.94

A.4. Year 2015

Total of €636.45

Diesel Fuel Consumption

In the years under review, expenses associated with fuel consumption, namely diesel, constitute the main item of Supplies and External Services (...)

(...) the taxpayer deducted the IVA, in full, in approximately 99% of diesel acquisitions recorded in the year 2012 and 98% in the years 2013 to 2015 (...)

Paragraph 1 of article 21 of the CIVA excludes the right to deduct IVA contained in "Expenses relating to fuels normally usable in motor vehicles, with the exception of diesel acquisitions, liquefied petroleum gases (LPG), natural gas and biofuels, the tax on which is deductible in the proportion of 50%, unless it is goods to be listed below, in which case the tax relating to consumption of diesel, LPG, natural gas and biofuels is fully deductible:

i) Heavy passenger vehicles;

ii) Vehicles licensed for public transport, except rent-a-car;

iii) Machines consuming diesel, LPG, natural gas or biofuels, as well as machines that have registration assigned by the competent authorities, provided that, in any case, they are not registered vehicles; (Amended by Law no. 66-B/2012, of 31 December)

iv) Tractors with sole or predominant use in carrying out cultural operations inherent to agricultural activity;

v) Goods transport vehicles with weight exceeding 3,500 kg; - ,"

(...) the documents supporting the acquisitions made from suppliers:

• F..., Lda - SNC account 22111002211228, which shows records of acquisitions between January 2012 and August 2015 made at the gas station, located at Avenida da ..., in ...;

• G..., SA, SNC account 22111002211543, which shows records of acquisitions between August and December 2015 - made at the gas station, located at Rua ..., in...;

do not contain all the mandatory information, pursuant to paragraph 5 of article 36 of the CIVA, completed, as the field intended for identification of the registration plate is blank. It is thus noted that these documents supporting the deduction of IVA do not allow assessment of the verification of the conditions for the exercise of the right to full deduction thereof made by the taxpayer.

Given the exclusion of the right to deduct diesel acquisitions, provided for in paragraph (b) of article 21, paragraph 1, and the fact that the taxpayer's fleet of automobiles has various light cargo and passenger vehicles, it is noted that the taxpayer improperly deducted 50% of the tax contained in said documents supporting diesel acquisition.

(...) the taxpayer improperly deducted IVA, in fiscal years 2012 to 2015, in the amounts of €4,217.20, €8,515.56, €7,796.55 and €6,639.33, respectively, as follows broken down by tax period.

III.3.1.1.2. YEAR 2013

(...) from the cross-check between the purchase values declared by the taxpayer (...) and the sales values declared by suppliers (...), a discrepancy was identified relating to supplier H..., Lda, NIF..., SNC account 22111002211019, in the value of €10,029, motivated by the fact that the taxpayer, in the month of October 2013, recorded invoice no. 4992, from said supplier, for the value of €11,114.38 (document with identifier...) when the value thereof was €1,114.38, having improperly deducted IVA and declared in the periodic declaration, in field 24 (Other Goods and Services), the amount of €1,875.34 (...)

(...) in the months of August and September, the taxpayer improperly deducted IVA, contained in 3 invoices, in the value of €162.84, relating to expenses with "accommodation provision" in the months of July, August and September, issued by entity I..., LDA, NIPC..., pursuant to paragraph (d) of article 21, paragraph 1 of the CIVA, recorded in SNC account 2432317, and included in field 24 (Other Goods and Services) of the respective IVA periodic declarations (...)

III.3.1.2. FAILURE TO ASSESS IVA

The undeclared income by the taxpayer in fiscal years 2012, 2013, 2014 and 2015 (...) constitute operations subject to IVA under paragraph (a) of article 1, paragraph 1 of the CIVA, resulting in additional IVA assessments, at the 23% rate, pursuant to paragraph (c) of article 18, paragraph 1 of the CIVA, in the amounts calculated below:

III.3.1.2.1. YEAR 2012

III.3.1.2.2. YEAR 2013

III.3.1.2.3. YEAR 2014

III.3.1.2.4. YEAR 2015

b) The personal accounts of the administrator/partner and spouse had movements incompatible with declared income.

III.2. Unproven Facts

There are no facts relevant to the assessment of the case that have not been proven.

III.3. Justification for the Determination of Factual Matters

The tribunal need not pronounce on all details of the factual matters alleged by the parties, but has the duty to select the facts relevant to the decision and discriminate the matter it considers proven and declare that which it considers unproven (see article 123, paragraph 2, of the CPPT and article 607, paragraph 3 of the CPC, applicable ex vi article 29, paragraph 1, paragraphs (a) and (e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are selected and shaped according to their legal relevance, which is established in light of the various solutions for the subject of the dispute under applicable law (article 596, paragraph 1 of the CPC, applicable ex vi article 29, paragraph 1, paragraph (e), of the RJAT).

Thus, having regard to the positions taken by the parties, in light of article 110, paragraph 7 of the CPPT, and the documentary evidence which moreover is contained in the administrative proceeding itself, the facts listed above were considered proven, with relevance to the decision.

III.4. MATTERS OF LAW

The Claimant comes before this tribunal seeking annulment of the IRC and IVA assessments, as well as corresponding compensatory interest, for the years 2012, 2013, 2014 and 2015, in the amounts at issue.

As emerges from the proven factual matters, such assessments correspond to the conclusions drawn by the AT, as per the RIT prepared as a consequence of the inspection procedure contained in Annex 1.

With respect to IRC, the Claimant contests the part of the assessments that results from the corrections introduced by the AT in the tax returns of the Claimant and which appear identified in the RIT as "omitted income"; as regards IVA, the Claimant contests those appearing in the RIT as "Failure to Assess IVA" (Annexes 6 to 45).

The Claimant presents as the grounds of the present application for annulment the expiration of the right to assess for the fiscal year 2012 – on the understanding that, "if it is not concluded for such identity [between the facts that led to the initiation of the investigation proceeding and those that constitute the basis of the assessment made with respect to 2012], [the assessment should] be annulled, on the grounds that the AT's right to assess the tax is barred, and thus the determination of IRS withholdings for the tax period 2012 beyond the normal expiration period of four years is manifestly illegal" – and, further, violation of the duty to provide grounds, on the understanding that "the AT did not introduce any type of proof, attaching elements that [...] could, at least, provide a glimpse, even by presumption, that the amounts in question corresponded to sales/services rendered relating to the activity of the Claimant," concluding, in summary, the Claimant that "no reasons were presented as to why the AT decided in this manner and not in another."

Lastly, the Claimant alleges that the AT, in the course of the inspection procedure, "did not obtain factual elements that demonstrated or even seriously indicated the existence of the omission of those gains from the accounting records" and that the AT did not satisfy the burden of proof that lay upon it (given that the Claimant understands that the AT was not in the "possession of facts with which it could have built the legally required substantiation").

The Respondent contests the allegations of the now Claimant, stating, in summary, that there is no verification of the invoked expiration of the right to assess and that, as to the determination of omitted operations, they "are thoroughly evidenced [in] the diligences undertaken which were considered necessary to obtain credible documentary evidence from the supposed debtors." The Respondent further adds that the now Claimant has not presented, "neither in the course of the inspection procedure nor now in the arbitral proceeding, any justification or facts that contradict the framework made by the AT," concluding, in short, that "the services acted correctly and so the assessments now challenged should be upheld."

Even though no request for payment of compensatory interest was made by the Claimant, the Respondent also takes the opportunity, in its reply, to allege that, where "error imputable to the services in the issuance of the challenged assessments" is not verified, "the [possible] request for payment of compensatory interest is without merit."

Examination and decision is required.

a) As to the alleged expiration of the right to assess

In this regard, the Claimant alleges that, "if it is not concluded for [the] identity [between the facts that led to the initiation of the investigation proceeding and those that constitute the basis of the assessment made with respect to 2012], [the assessment should] be annulled, on the grounds that the AT's right to assess the tax is barred, and thus the determination of IRS withholdings for the tax period 2012 beyond the normal expiration period of four years is manifestly illegal."

It is verified, however, that the Claimant is not correct, given that, as demonstrated by the reading of the AP appended to the proceedings (PA1), the suspension of the period for conclusion of the inspection procedures (see article 46 of the LGT) was dated 3/11/2016 and the managing partner B... was notified of this fact through letter no. ..., of 5/4/2017.

As can be seen from the reading of said AP appended, it appears clear that there is a relationship between the inspection orders initiated (and suspended) on 3/11/2016 and the investigation proceeding no. .../14...T9... (under judicial secrecy). The facts under investigation are, as can be understood from reading a copy of the dispatch of the Public Prosecutor where said investigation was decreed (see PA1), the same as those that determined the inspection procedures that are at the origin of the assessments now challenged.

In light of the above, it is concluded that the allegation of the now Claimant is without merit.

b) As to the determination of omitted operations

In this regard, the now Claimant alleges that – as mentioned above – "the AT did not introduce any type of proof, attaching elements that [...] could, at least, provide a glimpse, even by presumption, that the amounts in question corresponded to sales/services rendered relating to the activity of the Claimant," and therefore the "duty to provide grounds" would not be "satisfied."

The Claimant further alleges, refusing the AT's action, that "rather than the certainty shown by the AT that led it to opt for direct taxation, the legislator, regarding the definition of the regime of manifestations of wealth and before the same circumstances, recognized the need to frame it as an effective indirect taxation method." In other words, the Claimant considers the direct method used by the AT improper and inadequate.

After examining the present proceedings, it is found, without any room for doubt, that the accounting of the Claimant suffers from errors, inaccuracies and omissions that confirm the lack of truthfulness thereof and that justify the position of the AT in opening inspection procedures.

Indeed, following the same, it was possible to determine, with respect to the Claimant, the managing partner B... and spouse, C..., that, as per the factuality described in the RIT contained in the appended AP and by way of mere examples: i) there are irregularities in the company's financial circuits and abnormal balances in SNC account 111 Cash; ii) there is a high number of credit financial movements with the justification of "Yet To Be Identified"; iii) there is a very high number of movements identified in the analysis of accounts held by said managing partner and spouse as being associated with A... (namely, there is a very significant number of checks issued to bearer, of amount exceeding €1,000); iv) there is lacking proof for various cash deposits and transfers identified in the personal accounts of those in question, which appeared to be, from the AT's perspective, and despite the justifications given by the above parties, demonstrative that such deposits related to "funds derived from income/gains of the activity of A..., which were omitted from the financial statements and for tax purposes."

From the above, two conclusions can be drawn:

A) That, contrary to what the Claimant alleges, the AT carried out various investigative measures aimed at gathering proof elements that would allow it to contradict the presumption of truthfulness of the accounting of the now Claimant, as well as the justifications presented by the taxpayers in question. Merely by way of example: it notified, in writing, the managing partner B... and spouse, C..., on 21/7/2017, so that they could justify the financial movements under suspicion; and requested documentation understood as relevant to the investigation, such as is the case of the current account statements of A..., Lda., and of said partner thereof, requested from (because reflected in the accounting of) J..., Lda..

From the above, it is concluded that the presumption of truthfulness of the accounting of the Claimant does not hold, given that there were demonstrated (and were not satisfactorily contradicted) omissions, errors and inaccuracies that permit the conclusion that the said accounting does not reflect the real taxable matter of the taxpayer (see article 75, paragraph 2, paragraph (a), of the LGT).

B) That it is the AT itself who, in the RIT (whose position is wholly assumed and reaffirmed by the Respondent), states that the irregularities detected "leave[s] doubts as to its adherence to reality."

Such "doubts," with natural translation in the capacity to prove and quantify the taxable matter, could point to the use of indirect methods. As stated, for example, in the Court of Appeal of the Northern Court (Acórdão do TCA-Norte de 29/9/2016 (proc. 00375/05.5.BECBR)), "paragraph 4 of article 77 of the LGT determines that the decision of taxation by indirect methods shall specify the reasons for the impossibility of direct and exact proof and quantification of the taxable matter and shall also indicate the criteria used in the evaluation of the taxable matter, requirements which [will have to be] satisfactorily met in the inspection report, [permitting to know which] the reason for the use of such methods and likewise the criterion elected for indirect evaluation and the manner in which the corrected values were determined."

In this regard, reference may also be made to articles 87, paragraph 1, paragraph (b), and 88, of the LGT (this latter article identifies exhaustively the cases that permit recourse to exceptional indirect methods).

However, and despite said "doubts," the AT understood, in the case now under examination, that it was not impossible to prove and quantify directly and exactly the taxable matter, and has consequently proceeded, by direct methods, to the corrections that gave rise to the IRC and IVA assessments now in question.

It is then necessary to verify whether such corrections could be carried out using direct methods, as the Respondent argues.

In this regard, it should be borne in mind that, as stated, for example, in the Court of Appeal of the Southern Court (Acórdão do TCA-Sul de 17/3/2016 (proc. 6556/13)), "the law is clear on the legislator's preferential option, leaving no doubt that the law assumes as a last resort recourse to indirect evaluation, relegating it to situations in which it is entirely impossible to quantify directly and exactly the taxable matter, through data declared by the taxpayer or provided by third parties."

In that sense, it is concluded that only with clear and unequivocal demonstration that direct and exact quantification of the taxable matter is not possible (or that through direct methods the same is not possible), may one proceed to another evaluation procedure such as indirect evaluation and, in particular, to the application of article 89-A of the LGT (relating to manifestations of wealth) – an article that was invoked by the Claimant in its initial petition.

Thus, it becomes necessary to determine whether, in the present case, it was possible (or not) to prove and quantify directly and exactly the taxable matter.

Now, observing the elements brought to the proceedings and, in particular, the RIT on which the Respondent bases its reply, it is verified that the AT demonstrates fully the existence of omissions, errors and inaccuracies in the accounting of the Respondent, but, save for a single exception (the credit movement in SNC account 25321 in the amount of €275,000, relating to payment made to supplier K..., Lda., and associated with the Claimant's purchase of a Ferrari vehicle...), does not demonstrate that the same can justify the use of direct methods.

See, by way of example, the following conclusions of the AT in the RIT that served as the basis for the assessments in question: i) "two credit records were identified [...], determining that the financial circuit is not properly documented [...], which leaves us doubts as to its adherence to reality" (emphasis added); ii) "in all fiscal years, various checks were identified, namely from the company's bank account at ... of ... and ..., issued to bearer and of amount equal to or exceeding €1,000 [...], although the financial movement is supported by a check [...] the same does not permit us to identify the respective beneficiary. The taxpayer justifies this procedure with the fact that it makes many cash payments, including salaries" (emphasis added); iii) "in fiscal years 2014 and 2015, the account [SNC 111 Cash] shows, in almost all months, negative balances and of very high value, a fact entirely out of step with reality, and indicative of the omission of income." (emphasis added); iv) "the irregularities identified in the company's financial circuits, namely non-compliance with the provisions of article 63 of the LGT and the abnormal balances shown in SNC account 111 Cash show that the same are not clear and precise, leaving doubts as to their adherence to reality." (emphasis added).