CAAD Case 195/2018-T: VAT Assessment Annulled Due to Failure to Comply with External Tax Inspection Formalities

ARBITRAL DECISION

REPORT:

A..., L.DA, holder of the single registration and identification number for a legal person ..., with headquarters at ..., no. ...–..., ...-... Matosinhos, hereinafter referred to as the Claimant, filed a request for constitution of an arbitral tribunal in tax matters and a request for arbitral pronouncement, pursuant to the provisions of paragraphs 1 and 2 of Article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter abbreviated as LFATM), requesting the declaration of illegality of the tax assessment act for Value Added Tax (VAT) and compensatory interest, relating to the year 2013, in the total amount of €14,193.18, of which €12,017.52 relates to the tax and €2,175.66 relates to compensatory interest, with the consequent reimbursement to the Claimant of the amount unduly paid and the corresponding indemnification interest.

To support its request, it alleges, in summary:

• in the context of inspection procedures opened to the companies "B..., L.DA" and "C..., L.DA", the Claimant was notified, in August 2017, to send several accounting documents;

• a request which the Claimant complied with;

• in response, the Claimant was notified, in November 2017, of the draft corrections to the inspection report;

• the Claimant exercised the right to prior hearing, which was not accepted;

• having consequently been notified of the inspection report with the corrections that gave rise to the issuance of the contested assessment;

• contrary to the qualification given by the Tax Authority, the inspection action carried out on the Claimant assumed an external character;

• the Tax Authority did not comply with the formalities provided for external inspection procedures, which determines the voidability of the contested assessment;

• any other interpretation would violate the constitutional principles of legal certainty and protection of legitimate expectations;

• The Claimant attached 4 documents and did not call any witnesses.

In the request for arbitral pronouncement, the Claimant chose not to appoint an arbitrator, whereby, pursuant to Article 6, paragraph 1 of the LFATM, the undersigned was appointed by the Ethics Council of the Administrative Arbitration Centre, the appointment having been accepted in the legally prescribed manner.

The arbitral tribunal was constituted on 4 July 2018.

Notified in accordance with and for the purposes of Article 17 of the LFATM, the Respondent presented its response, alleging in summary:

• insofar as the clarifications sent by the Claimant following the notification made in August 2017 had reflexive effects on the Claimant's tax and legal situation, an internal mandate was issued, which was at the origin of the procedure carried out on the Claimant;

• the inspection action was carried out exclusively at the Tax Authority's offices, through formal analysis and consistency checking of the declared elements, contained in the computer system and in the clarifications provided by the Claimant;

• whereby the procedure assumed an external character;

• if the Tax Authority, when initiating the procedure, already has at its disposal all the elements it deems necessary to support the corrections it proposes to make, there is no justification for opening an external procedure to repeat the evidence-gathering activities at the premises of the taxpayers;

• even if the procedure had been improperly qualified as internal, the tax did not become time-barred and the taxpayer had access to the same means of defence as it would have had under an external procedure;

• whereby the contested assessment is not affected by any illegality;

• the prerequisites for condemning the Tax Authority to pay indemnification interest are not present;

Concluding, thus, that the arbitral request filed is without merit.

The Respondent attached a copy of the administrative file and did not call any witnesses.

Given the position assumed by the parties and there being no need for additional production of evidence, the holding of the meeting referred to in Article 18 of the LFATM was dispensed with, as well as the presentation of submissions.

CASE MANAGEMENT:

The Arbitral Tribunal was regularly constituted and is materially competent.

There are no nullities that invalidate the proceedings.

The parties have legal standing and capacity and are legitimate; there are no defects in representation.

There are no nullities, exceptions or preliminary questions that prevent the tribunal from deciding on the merits and which it must address ex officio.

III. QUESTIONS TO BE DECIDED:

Given the positions assumed by the parties, the following are the questions to be decided by this tribunal:

• whether the inspection action carried out on the Claimant should be qualified as external; and

• if the answer is in the affirmative, whether the violation of the procedural rules relating to external inspection actions determines the voidability of the subsequent assessments.

IV. FACTUAL MATTER:

Proven Facts

With relevance to the decision to be delivered in the present case, the following facts were established as proven:

1. Following the inspection actions carried out on the companies "B..., L.DA" and "C..., L.DA", the Tax Authority concluded that between the Claimant and these two companies there was cross-invoicing that did not correspond to any actual transaction;

2. In the context of the inspection actions referred to in point 1) above, the Tax Authority notified the Claimant, by letter dated 24/08/2017, to submit accounting documents and provide clarifications regarding the invoices issued to the company "C..., L.DA" and issued by the company "B..., L.DA" to the Claimant;

3. On 19/09/2017, the Claimant submitted the documents and provided the clarifications requested;

4. Insofar as the clarifications sent by the Claimant had reflexive effects on its tax and legal situation, the Tax Authority issued, on 04/10/2017, an internal mandate, which was at the origin of the procedure carried out on the Claimant;

5. By letter dated 30/10/2017, the Tax Authority notified the Claimant of the draft corrections to the inspection report and to exercise, if it so wished, the right to prior hearing within a period of 15 days;

6. It appears from the draft corrections to the inspection report that "in view of the findings, it was demonstrated that the invoices issued, whether by C... or by B..., did not correspond to actual transactions (and as such are false) and were only issued as a consequence of and in order to compensate the taxpayer for the issuance of its false invoice to C...";

7. Since the notification of the letter referred to in point 2) above, no further elements were requested by the Tax Authority from the Claimant;

8. The Claimant exercised the right to prior hearing;

9. By letter dated 23/11/2017 the Claimant was notified of the corrections resulting from the inspection action and its respective report;

10. The Tax Authority issued the additional assessment of VAT and compensatory interest no. 2017..., in the amounts, respectively, of €12,017.52 and €2,176.66;

11. The Claimant paid both assessments issued on 15/01/2018;

12. The request for constitution of the arbitral tribunal in tax matters and for arbitral pronouncement was presented on 13/04/2018.

Unproven Facts

No facts were found to be unproven with relevance to the present case.

Basis for the Factual Findings

The conviction regarding the facts established as proven was formed on the basis of the documentary evidence submitted by the parties, including the administrative file, indicated in relation to each of the points, whose correspondence to reality was not questioned, as well as the matters alleged and not contested.

V. ON THE LAW:

The questions to be decided in the present case relate to the interpretation of Article 13 of RCPITA and to the consequences of the violation of the procedural rules provided for the external inspection procedure.

Let us examine this.

Article 13 of RCPIT provided, in its original version, approved by Decree-Law no. 413/98, of 31/12, as follows:

"As regards the place of conduct, the procedure may be classified as:

a) Internal, when the inspection acts are carried out exclusively within the tax administration services through formal and consistency analysis of documents;

b) External, when the inspection acts are carried out, in whole or in part, at the premises or facilities of the taxpayers or other tax obligors, of third parties with whom they maintain economic relations or at any other place to which the administration has access."

This article maintained the same wording until 1 July 2016, the date on which, with the approval of Decree-Law no. 36/2016, of 1 July, it came to provide as follows:

"As regards the place of conduct, the procedure may be classified as:

a) Internal, when the inspection acts are carried out exclusively within the tax administration services through formal and consistency analysis of documents held by it or obtained in the context of the said procedure;

b) External, when the inspection acts are carried out, in whole or in part, at the premises or facilities of the taxpayers or other tax obligors, of third parties with whom they maintain economic relations or at any other place to which the administration has access."

It is therefore verified that from the entry into force of that DL 36/2016, within the scope of an internal inspection procedure, the documents to be analysed do not have to be limited to those already held by the Tax Administration, and may also include the analysis of documents obtained by it, provided that they are obtained "in the context of the said procedure."

First and foremost, it is important to verify whether the amendment to Article 13 of RCPITA made by DL 36/2016, of 1 July, can be applied to tax facts occurring before its entry into force, specifically, to tax facts occurring in 2013, as is the case in the present proceedings.

As is well known, except when it is attributed retroactive effect, law only applies to the future.

In the present case, the said DL 36/2016, of 1 July, makes no reference to its retroactive application, so it shall not be applied retroactively.

However, the law may be applied to facts occurring before its entry into force without this constituting true retroactivity.

This is the case with interpretive laws.

In this regard, Article 13 of the Civil Code provides that an interpretive law is integrated into the law being interpreted.

As taught by BAPTISTA MACHADO, in "Introdução ao Direito e ao discurso legitimador," Almedina, Coimbra, 1994, p. 246, "the reason why an interpretive law applies to facts and situations preceding it fundamentally resides in that it, coming to establish and fix one of the possible interpretations of the prior law with which the interested parties could and should have reckoned, is not susceptible of violating secure and legitimately founded expectations," being "of an interpretive nature those laws which, on points or questions in which the applicable legal rules are uncertain or their meaning is contested, come to establish a solution that the courts could have adopted."

Thus, "for a new law to be truly interpretive, two requirements are therefore necessary: that the solution of prior law be contested or at least uncertain; and that the solution defined by the new law be situated within the parameters of the controversy and be such that the judge or interpreter could reach it without exceeding the limits normally imposed on the interpretation and application of the law." – op. cit., p. 247.

Returning to the case at hand, before the publication of DL 36/2016, diverse case law ruled, deciding in one direction and another, on the classification of the inspection procedure as to the place of its conduct when the Tax Authority did not limit itself to conducting a formal and consistency analysis of the documents available in its databases but included in that analysis also documents obtained by it, either from the taxpayer himself or from third parties, following notification to that effect.

To be specific, in a situation where the Tax Authority notified the taxpayer to submit certain elements and then proceeded to analyse them within its own facilities, the position was not unanimous that this constituted an internal inspection procedure; there were voices arguing in favour of the external character of such procedure.

DL 36/2016 came to put an end to such a question, determining that in these situations the procedure is internal.

Thus, as this is a contested question and since "the solution defined by the new law is situated within the parameters of the controversy and is such that the judge or interpreter could reach it without exceeding the limits normally imposed on the interpretation and application of the law," there is no doubt that the law now under analysis assumes an interpretive character, and is therefore applicable to facts occurring before its entry into force, without this representing retroactivity.

By this it is verified that, within the scope of an internal inspection procedure, the Tax Administration does not have to limit itself to analysing elements and documents held by it, but may notify taxpayers or third parties who relate to such taxpayers to submit elements and documents for analysis.

However, these elements and documents obtained subsequently must, as expressly follows from Article 13 of RCPITA, be obtained "in the context of the said procedure."

In the case at hand, the elements and documents on which the Tax Administration based itself to effect corrections in the context of VAT that were at the origin of the contested assessment were not obtained within the scope of the procedure carried out on the Claimant but rather within the scope of the inspection actions carried out on the companies "B..., L.DA" and "C..., L.DA".

Indeed, as appears from the proven facts – point 1 – following the inspection actions carried out on the companies "B..., L.DA" and "C..., L.DA," the Tax Authority concluded that between the Claimant and these two companies there was cross-invoicing that did not correspond to any actual transaction.

Thus, in the context of the said inspection actions, the Tax Administration notified the Claimant to submit certain accounting documents and provide clarifications, it being on the basis of these elements and clarifications that the Tax Administration determined the opening of an inspection procedure on the Claimant – cf. points 2 and 4 of the proven factual matter.

It so happens, however, that, after the submission, by the Claimant, of the elements and clarifications requested, no further elements were requested by the Tax Authority, and there was no further interaction with the Claimant – cf. point 7 of the proven factual matter.

Nor should it be said, as the Tax Administration does, that following the inspections carried out on the companies "B..., L.DA" and "C..., L.DA," namely following the submission, by the Claimant, of the elements and clarifications requested in the context of the said inspection actions, the documents were already "held" by the Tax Administration.

When the law refers to documents "held" by the Tax Authority, it does not mean elements that came to be held as a consequence of inspection procedures carried out on third parties, but rather documents that appear in the Tax Administration's databases as a consequence of the fulfilment of the declarative obligations by the taxpayers.

In the words of JOAQUIM FREITAS DA ROCHA, in RCPIT Annotated and Commented, Coimbra Editora, 1st Edition, p. 81, "the internal procedure is a kind of cadastral inspection, carried out within the inspection services themselves, making use of the elements declared by the taxpayers, and encompasses activity of mere verification in which the Administration merely verifies compliance by the taxpayers of their declarative duties. In such cases the Administration limits itself in particular to cross-checking, through the crossing of information available in its databases, whether the taxpayer complied or not with its duties and whether the elements declared coincide with the elements provided in the declarations submitted by other tax obligors with whom the taxpayer maintains or maintained relations. This is therefore not an activity that is properly supervisory, in the strict sense; it is an activity of formal verification to check the accuracy of what was formally declared by the taxpayer." (emphasis in original).

In the present case, the elements on which the Tax Administration based itself to effect the corrections that were at the origin of the contested assessment were elements collected from third parties prior to the opening of the procedure on the Claimant and not any elements available in its databases.

It being clear that it was the conduct of the Tax Administration with respect to the companies "B..., L.DA" and "C..., L.DA" that made it possible for it to proceed with the correction effected.

Nor should it be said, in the same way, that if the Tax Administration already had at its disposal the elements necessary to effect the corrections it proposes to make (by virtue of the fact that they were sent to the Tax Administration in the context of inspections carried out on third parties), "there is no justification for opening an external procedure to repeat the evidence-gathering activities at the premises or facilities of the taxpayers."

In this case, the Tax Administration would not have had to institute any external procedure. What was required of it was that, within the scope of the procedure opened on the Claimant, it collect, both from the Claimant and from the other companies involved, the elements and clarifications necessary.

And to do so the Tax Administration would not have to carry out any activities at the premises of the taxpayers; it would suffice to notify them to that effect, as, indeed, it did to the Claimant within the context of the inspection actions carried out on the companies "B..., L.DA" and "C..., L.DA."

What it cannot do is the Tax Administration make use of elements and documents collected within the scope of another inspection procedure to support the corrections made within the scope of the inspection procedure on the Claimant, with all evidence elements having to be produced within the scope of the respective procedure.

Thus, as the elements that were at the origin of the corrections made were not obtained within the scope of the procedure carried out on the Claimant, the respective procedure cannot be qualified as internal.

Whereby it is verified that the procedure carried out on the Claimant assumed an external character.

Given this, RCPITA establishes specificities of external inspection procedures, notably with regard to notification of the beginning of the procedure (Article 49).

Specificities which, in the present case, manifestly were not complied with given the fact that the Tax Administration qualified the procedure as internal.

It is important, therefore, to analyse what are the consequences of non-compliance with these formalities.

In this regard, the Claimant invokes that such non-compliance determines the voidability of the assessment resulting from such procedure.

By contrast, the Tax Administration argues that such non-compliance does not have the capacity to determine the voidability of the assessment, invoking that the tax did not become time-barred, the taxpayer had access to the same means of defence as it would have had under an external procedure and there is no defect to the assessment.

In which it is correct.

Indeed,

The procedural rules provided in RCPITA for the external inspection procedure are intended to guarantee legal certainty and the rights of taxpayers.

Specifically, the obligation to issue a notification letter, with a minimum advance notice of five days before its commencement, is intended to prevent surprise inspections, whereby the omission of this formality can only generate the voidability of the procedure and of all subsequent acts in the event that the taxpayer did not have knowledge of the procedure and was not given the opportunity to intervene in it.

As has been argued both by legal scholarship and case law, "as regards the prior notification that Article 49, paragraph 1, of RCPIT requires to be made to the taxpayer in the external inspection procedure, even if the same had been omitted in the case sub judice, this omission would never have an invalidating effect on the inspection. This is because the taxpayer, the present Respondent, in no way saw diminished its rights or legitimate interests in participation. In truth, '[t]he lack of communication of the beginning of the procedure should, however, only generate invalidity if it is demonstrated that the interested party did not have knowledge of the procedure and its object, and that as a result of that lack of knowledge it cannot intervene in it in a timely manner. Thus, if the inspected taxpayer [...] was notified of the draft conclusions of the inspection report, the possible omission of notification of the notification letter is degraded to a mere irregularity, without invalidating effects' (JOAQUIM FREITAS DA ROCHA and JOÃO DAMIÃO CALDEIRA, op. cit., p. 270)." – cf. Supreme Administrative Court Decision of 29JUN2016, case no. 01095/15, in www.dgsi.pt.

In the case at hand, albeit the inspection has assumed, contrary to the qualification given by the Tax Authority, an external character, the truth is that, as proved, the Claimant was notified of the draft inspection report and to exercise the right to prior hearing, pursuant to Articles 60 of LGT and 60 of RCPITA, a right which it exercised – cf. points 5 and 8 of the proven factual matter.

Whereby it is concluded, as in the said Supreme Administrative Court Decision, that "the lack of prior notification provided for in Article 49 of RCPIT does not generate the voidability of the decision of the procedure, with such formality being degraded to a mere irregularity, without invalidating effects, if the interested party was given knowledge of the procedure and its object in time to participate in it and if it was given the legal possibility to exercise its right to prior hearing during the inspection procedure."

In this sense, see also the Supreme Administrative Court Decision of 08MAY2013, case no. 841/11, in www.dgsi.pt, cited in the Decision to which reference has just been made.

It is not seen how, as the Claimant argues, any other interpretation can be violating the constitutional principles of legal certainty and protection of legitimate expectations, since the Claimant had timely knowledge of the inspection procedure and had the possibility to intervene in it, as indeed occurred.

In view of all that has been set forth, as the tax did not become time-barred at the date of its assessment and the Claimant has asserted no other defect to the contested assessments, there is no illegality generating the voidability of the inspection procedure nor of the assessments that followed it, which should, therefore, be maintained in the legal order.

As there is no defect that affects the contested assessments, the Tax Authority is not obliged to pay to the Claimant any amount by way of indemnification interest.

VI. OPERATIVE PART

In view of the foregoing, the request filed is wholly without merit, and the Respondent is accordingly absolved.

The amount of the case is fixed at €14,193.18, pursuant to subparagraph a) of paragraph 1 of Article 97-A of the Tax Procedure and Process Code, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the LFATM and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The amount of the arbitration fee is fixed at €918.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, as well as paragraph 2 of Article 12 and paragraph 4 of Article 22, both of the LFATM, and paragraph 4 of Article 4 of the said Regulation, to be paid by the Claimant, as the unsuccessful party.

Record and notify.

Lisbon, 21 December 2018

The Arbitrator,

Alberto Amorim Pereira

Text prepared by computer, pursuant to paragraph 5 of Article 131 of the Code of Civil Procedure, applicable by reference of subparagraph e) of paragraph 1 of Decree-Law no. 10/2011, of 20/01.