Process: 22/2017-T

Date: December 7, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Case 22/2017-T addresses VAT regularization when debtors become insolvent under Portuguese tax law. The taxpayer, A... S.A., provided services to private entities that subsequently entered insolvency proceedings, leaving €1,192,902.69 in unpaid invoices including €59,017.35 in VAT. In July 2010, the company regularized this VAT in its favor through its periodic VAT declaration under Article 78(7)(b) of the Portuguese VAT Code, which permits adjustment for bad debts in insolvency. The Tax Authority issued an ex officio assessment denying this regularization, arguing that Article 78(11) requires prior communication to the insolvent purchaser before adjustment can occur. The arbitral tribunal suspended proceedings to refer preliminary questions to the CJEU regarding whether EU VAT neutrality principles and Article 90 of Directive 2006/112/EC permit such restrictive national requirements. The CJEU ruled in December 2018 that the neutrality principle and Articles 90 and 273 of the VAT Directive do not preclude national legislation requiring suppliers to communicate VAT cancellation to insolvent purchasers before adjusting the taxable amount, even when this affects the supplier's ability to recover VAT on unpaid debts. This decision clarifies that Member States may impose procedural requirements for VAT adjustment in insolvency situations, provided these ensure proper coordination between the supplier's downward adjustment and the purchaser's deduction rectification, balancing tax neutrality with administrative control mechanisms.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. A. Sérgio de Matos and Dr.ª Ana Teixeira de Sousa (arbitrator members), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 07-09-2017, agree as follows:

1. Report

A..., S.A., holder of tax identification number ..., with registered office in ..., Place ..., ..., (hereinafter referred to as "Applicant"), came, under Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "RJAT"), to submit a request for arbitral pronouncement aimed at the declaration of illegality of the ex officio VAT assessment no. ..., of 02-09-2014, relating to the period of July 2010, in the amount of € 59,017.35 and of the assessment of compensatory interest no. ..., of 02-09-2014, in the amount of € 9,216.41, as well as reimbursement of the amount paid plus indemnificatory interest.

The Applicant further requests the declaration of illegality of the decision refusing the hierarchical appeal submitted following the decision refusing the gracious complaint, within the scope of case no. ...2015... .

The respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

A Single Arbitral Tribunal was requested to be constituted, being subsequently found that the value of the case requires the intervention of a Collective Tribunal, which led the President of the Deontological Council to appoint as arbitrators the undersigned, who communicated their acceptance within the legal period.

On 21-08-2017 the parties were duly notified of this appointment, having manifested no intention to refuse the appointment of the arbitrators, in accordance with the combined terms of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 07-09-2017.

The Tax Authority and Customs Authority submitted a response in which it argued that the request should be dismissed.

By order of 08-09-2017 a hearing was dispensed with and it was decided that the case should proceed with written submissions.

The Applicant submitted no submissions and the Tax and Customs Administration referred to what it had stated in its Response.

The arbitral tribunal was regularly constituted, in light of the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of the RJAT, and is competent.

By judgment of 16-11-2017 it was decided to suspend the proceedings and make a preliminary reference to the CJEU, in which the following questions were raised:

Do the principle of neutrality and article 90 of Council Directive no. 2006/112/EC, of 28-11-2006, preclude national legislation such as that contained in article 78, no. 11, of the Value Added Tax Code, interpreted to the effect that adjustment of the tax is not permitted, in cases of non-payment, before communication of the cancellation of the tax to the purchaser of the goods or services, who is a taxable person, for the purposes of rectifying the deduction initially made?

In the affirmative, do the principle of neutrality and article 90 of Council Directive no. 2006/112/CE preclude national legislation such as that contained in article 78, no. 11, of the Value Added Tax Code, interpreted to the effect that adjustment of the tax is not permitted, in cases of non-payment, when communication of the cancellation of the tax to the purchaser of the goods or services, who is a taxable person, is not made until the end of the period provided for the deduction of the tax, under article 98, no. 2, of the Value Added Tax Code?

By judgment of 06-12-2018, the CJEU pronounced itself declaring:

The principle of neutrality and articles 90° and 273° of Council Directive 2006/112/EC, of 28 November 2006, on the common system of value added tax, should be interpreted to mean that they do not preclude national legislation such as that at issue in the main proceedings, which provides that the reduction of the taxable amount of value added tax (VAT), in case of non-payment, cannot be made by the taxable person unless he has previously communicated his intention to cancel the whole or part of the VAT to the purchaser of the goods or services, who is a taxable person, for the purposes of rectifying the deduction which that person was able to make.

By order of 06-12-2018 it was decided to lift the suspension of proceedings, proceeding to final decision.

The parties are duly represented, possess legal capacity and standing (articles 4 and 10, no. 2, of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March).

The case does not suffer from any nullities.

2. Factual Matters

2.1. Established Facts

On the basis of the elements contained in the case file and the administrative tax proceedings attached to the record, the following facts are considered established:

  • The Applicant's purpose is the operation and management of municipal public services for drainage, treatment and final disposal of wastewater from the Integrated Pollution Control System of ...(SID...);

  • The Applicant is a VAT taxable person, not exempt, falling within the normal regime, with the obligation to present the periodic VAT declaration monthly.

  • In the course of its activity, the Applicant provides services to public and private entities;

  • In 2010, following analysis of overdue credits, the Applicant determined that the amount of € 1,192,902.69 – including VAT – was owed by insolvent private entities, as follows in the following table:

  • These amounts related to services provided by the Applicant to those entities and which were invoiced to those entities;

  • The invoices were not paid and the Applicant bore the value of the VAT that it had assessed;

  • In August 2010, the Applicant submitted the periodic VAT declaration for the period of July 2010, where it regularised the above-identified VAT, in the amount of € 59,017.35, in its favour;

  • On 21-03-2014 the Tax Inspection Services of the Finance Directorate of ... initiated a partial tax inspection to the 2010 tax year of the Applicant, pursuant to service order no. OI2014...;

  • On 08-05-2014, the scope of the inspection became general;

  • On 07-08-2014, the Applicant was notified of the Final Inspection Report contained in the Tax Administrative Proceedings, the contents of which are reproduced as follows (pages 162 et seq. of the file named "Gracious Complaint A... 2.pdf") in which, among other things, the following is stated:

2 Value Added Tax (VAT)

2.1 VAT on bad debts

In the year 2010, more specifically in the VAT period 2010/07, the Taxable Person regularised VAT in its favour, based on credits considered bad debts in insolvency proceedings, in the amount of 59,017.35 EUR, as the amount entered in field 40 of the Periodic VAT Declaration for the said period (Annex: File 24.pdf - page 1).

According to the elements consulted (exhibited and collected), the regularised VAT relates to the following entities:

(i) B..., SA (TAX ID/NIPC...), in the amount of 14,989.22 EUR;

(ii) C..., LDA (TAX ID/NIPC...), in the amount of 5,278.88 EUR;

(iii) D..., LDA (TAX ID/NIPC...), in the amount of 1,345.03 EUR;

(iv) E..., LDA (TAX ID/NIPC...), in the amount 3,519.56 EUR;

(v) F..., SA (TAX ID/NIPC...), in the amount of 41.19 EUR;

(vi) G..., LDA (TAX ID/NIPC...), in the amount of 14,099.93 EUR;

(vii) H..., SA. (TAX ID/NIPC 501233326), in the amount of 12,479.58 EUR;

(viii) I..., LDA, in the amount of 7,253.97 EUR.

Under paragraph b) of no. 7 of article 78 of the VAT Code, the Taxable Person may deduct the tax relating to credits considered bad debts in insolvency proceedings when such insolvency is declared.

The period for adjustment of the tax relating to these credits is four years, to be counted from the finality of the insolvency judgment, by virtue of article 94 and no. 2 of article 98 of the VAT Code.

By virtue of the provision of no. 11 of article 78 of the VAT Code, it is essential to communicate the adjustment of the tax to the purchaser of the goods or services (the communication is made to the representative(s) who, in the case of insolvency, shall be the Insolvency Administrator), for the purpose of rectifying the deduction initially made.

It is that, in relation to the credits on the customers identified above, the requirement referred to in the preceding paragraph was not fulfilled, that is to say, the adjustment of the tax (VAT) was not communicated to the purchasers.

To prove the requirements provided for in paragraph b) of no. 7 of article of article 78 of the VAT Code, the Taxable Person should also have in its possession the certificate from the court, which proves that the insolvency judgment became final, since only thus does it become definitive, as well as proof of having claimed the credits and/or the respective amount recognized. From the documents consulted (exhibited and collected) it was verified that this certificate was not requested and that none of the documents exhibited refers to, or proves, that the credits were even claimed and/or recognized. It follows from all of the above that VAT was unduly deducted (adjusted) on the basis of bad debts, in the year 2010, more specifically in the VAT period 2010/07, in the amount of 59,017.35 EUR.

There results from the foregoing a correction to the tax in the context of VAT, in the VAT period 2010/07, in the amount of 59,017.35 EUR, adverse to the Taxable Person.

  • Following the inspection, the Tax Authority and Customs Authority issued on 02-09-2014 the additional VAT assessment no. ..., relating to period 1007, in the amount of € 59,017.35;

  • The Applicant, on 28-10-2014, proceeded to pay the VAT assessment and the respective interest;

  • On 27-02-2015, the Applicant filed a Gracious Complaint seeking annulment of the said assessment, which was dismissed by an order referring to the reasoning of an opinion whose contents are reproduced as follows, in which it is stated, among other things, the following:

Normative Framework

  1. The CIVA permits the rectification or adjustment of tax included in credits held over customers, provided the requirements set out in article 78 are met.

  2. It results from the ITR and the complaint itself at issue, for the purposes of characterizing the adjustments made by the tp., paragraph b) of no. 7 and no. 11, both of article 78, whose wording was as follows:

(...)

7 - Taxable persons may further deduct the tax relating to credits considered bad debts:

a) (...)

b) In insolvency proceedings when such insolvency is declared,

(...)

11 - In the case provided for in no. 7 and paragraph d) of no. 8, the purchaser of the good or service, who is a taxable person, is communicated the total or partial cancellation of the tax, for the purposes of rectification of the deduction initially made.

  1. These rules aim to mitigate the prejudice to suppliers resulting from non-payment of debts by their customers, since they must deliver the VAT to the State even without having received it from their customers, allowing the recovery of VAT on bad debts, by meeting certain conditions.

  2. It is also important to note that the adjustment of tax in favour of the tp. can only be exercised until the expiry of four years after the birth of the right to deduction or overpayment of tax, that is, from the moment when the requirements are met to benefit from the mechanism of recovery of VAT on bad debts, as provided for in article 98, no. 2, of the CIVA.

Analysis - error in the interpretation of paragraph b) of no. 7 of article 78 of the CIVA

  1. The tp argues that this rule only requires that bad debts relate to debtors whose insolvency has been declared, being illegal the requirement of the TIS, as a condition for the adjustment of VAT, of a certificate proving the finality of the judgment declaring the insolvency and the recognition of credits.

  2. This mechanism of deduction/adjustment of tax, by imposing that insolvency has been declared, prevents the deduction of the previously assessed VAT being obtained without the existence of a final court decision.

  3. Since a choice of the tp is at stake, as there is no obligation to adjust the tax, it must be equipped with elements that allow confirmation of its validity. And since a condition of the existence of a court process is imposed, and considering the proper procedure of insolvency proceedings, the tp should be in a position to demonstrate, when it adjusts the VAT in its favour, that its credit was recognized and not paid, since only thus does it demonstrate its existence and its bad debt status.

  4. Failing to prove through a Court certificate that the judgment became final, since only thus does it become definitive, it fails to demonstrate the bad debt status of the credit and failing to prove recognition of the credits it fails to prove their existence. It is not a matter of imposing requirements beyond the rule, but merely of validating the conditions underlying the adjustment of tax in favour of the tp., the claimant not being right on this point.

Analysis - violation of the principles of pursuit of material truth and inquisitorial

  1. The claimant states that when the TIS questioned the existence of insolvency decisions they should have officially contacted the competent courts to provide the necessary certificates and information, in compliance with the provision of article 6 of the RCPIT ("The inspection procedure aims at the discovery of material truth, the tax administration being required to officially adopt adequate initiatives for this purpose") and article 58 of the General Tax Law ("The tax administration must, in the procedure, carry out all necessary steps to satisfy the public interest and discover material truth").

  2. The tp thus intends to place on the Tax Administration the burden of confirmation, with third parties, of the values declared by itself, when, as indicated above, neither the complaint nor the ITR (nor the report itself drawn up by J...) contains the identification of the court proceedings relating to the insolvency of these debtors.

  3. The inquisitorial principle imposes on the Tax Administration the carrying out of necessary steps even if not requested by the tp, whilst the principle of material truth, which concretizes the inquisitorial principle within the scope of the inspection procedure, setting as an objective the discovery of material truth, imposes the investigation of the correct compliance with tax obligations by taxable persons and, on the basis of that investigation, the collection of elements that allow assessment of the possible existence of irregularities.

  4. The TIS are obliged to carry out all steps which, according to an objective criterion, are useful to the ascertainment of the truth, but in no way are they obliged to carry out all possible or steps imposed on the taxable persons themselves.

  5. Thus, it would not be the responsibility of the TIS to bear the burden of proof of the non-existence of the tax facts the tax relating to which it considered unduly deducted by the taxpayer nor the burden of fulfilling the formalities imposed on the tp, rather it falls on the taxpayer itself to bear the burden of proof of the existence of the tax facts on which it based the deduction it declared.

  6. Otherwise, it would be sufficient, ultimately, for the tp to enter in the declarations the values it saw fit, that in case of inspection the TIS would have to take steps with possible suppliers to validate the entered values!

  7. The TIS verified the failure to meet the formal requirements for and adjustment of the tax in favour of the tp carried out in the period 2010/07, requirements that should have been verified at that date, therefore it does not appear that there is a violation of any of the principles invoked by the tp.

Analysis - error in the interpretation of no. 11 of article 78 of the CIVA

  1. The tp argues that the rule provided for in no. 11 of article 78 of the CIVA imposes a "mere communication", being a "mere formality" whose non-compliance can only be punished with a fine, not being a condition of validity of VAT adjustment.

  2. This position has, in our view, no legal support. In fact, no. 11 of article 78 of the CIVA determines that, for there to be a deduction of the VAT relating to credits falling within no. 7 of the same article, which are the ones under discussion, the debtor, if he is a taxable person, must be communicated the total or partial cancellation of the tax, for the purposes of rectification of the deduction initially made.

  3. It is not a matter of a possibility, but rather of a requirement, of a prerequisite for the adjustment in favour of the tp to be accepted, a rule which aims to prevent a taxable person from adjusting in its favour tax initially deducted by its customer, without the latter being obliged to adjust in favour of the State the same amount, and these State credits then being considered in the liquidation of the debtor's assets.

  4. Based on VAT being a system of fractional payments aimed at taxing final consumption, transactions between taxable persons are, in principle, neutral, that is, the assessment of tax on the supplier's invoices allows customers to deduct the same amount. The legislator's requirement aims to maintain the chain of transactions essential to the functioning of the VAT system, so that there are no deductions of tax that is not supported by another operator and allowing this requirement of formalities to combat tax evasion.

  5. Only with communication to the purchasers, so that they are obliged to adjust the tax in favour of the State in the same amount, such obligation not existing in the absence of that notification, is why for the tp to exercise the power which the law permits it to recover VAT on bad debts, it is imposed the obligation to communicate the use of such power to the purchaser.

  6. See that the report itself by J... which supported the VAT adjustments identified above, states that "A... should immediately proceed with the notification to the insolvency administrator for each case, informing of the VAT adjustment".

  7. Although not defining the form of communication, it should be supported by suitable elements that allow the tp to demonstrate that the recipient obtained knowledge, thus fulfilling the burden of proving the right to the deduction invoked, under article 74 of the LGT.

  8. In the absence of communication to the purchasers, the prerequisites for VAT adjustment in favour of the tp were not met.

Analysis - Adjustment and request for revocation of the assessment

  1. Despite contesting the requirements imposed for VAT adjustment, namely the certificate of the insolvency decision with mention of credits and written communication to debtors, the tp states that these do not condition the validity of VAT adjustment and that thus they can be complied with later.

  2. To this end, it attaches certificates of insolvency decisions (it attaches only one certificate relating to case no. .../08...TBGMR, in which the insolvent is H..., SA., NIPC..., protesting to attach the remaining documents) and copies of the communications addressed to the debtors, requesting the annulment of the additional VAT assessment on the grounds that the alleged defects have been remedied.

  3. The claimant will also be wrong here, as the conditions for VAT adjustment should have been met on the date it was recorded in the DP, that is, 2010/07.

  4. With regard to the certificates, the only one that the claimant attaches is one of an insolvency proceeding closed in 2009 with the approval of the insolvency plan, according to which the A... credit was reduced to 68,159.71€.

  5. A new insolvency process was identified in 2009 for this customer (case no. .../09...TBGMR), and it appears to us that it would be in relation to this that the tp should have had the certificate, a situation which highlights the need to support adjustments with court certificates, as only thus is the existence and quantification of the credit and its bad debt status demonstrated.

  6. The claimant further attaches to the case the communications made under no. 11 of article 78 of the CIVA to the debtors and their insolvency administrators, made in January and February 2015.

  7. Even if with these communications all requirements for VAT adjustment were considered to be met, the claimant could not deduct tax in one period and only later meet the conditions for doing so; this would be like deducting today the tax on a purchase it will make only next year, subverting the VAT system's operation.

  8. Only with the fulfillment of all the required conditions would the tp be in a position to adjust the VAT in its favour, which it would have to do in a DP subsequent to that fulfillment, which does not undermine the basis of the correction promoted by the TIS as to the DP of 2010/07.

  9. It is also important to note that, according to the data ascertained, these are insolvency proceedings in which the judgments were handed down before 2010:

  10. The normal evolution of these proceedings means that some, such as that of the company D..., LDA., are already closed, which makes the communications now made ineffective.

CONCLUSION

  1. In these circumstances, considering that in 2010/07 the tp did not meet the requirements to adjust in its favour the VAT on credits considered bad debts, there is nothing to point to the correction promoted by the TIS.

  2. The tp did not meet the conditions resulting from paragraph b) of no. 7 and no. 11 of article 78 of the CIVA, and no violation is identified of the principles of pursuit of material truth and inquisitorial by the TIS.

  3. The fulfillment of the conditions for tax adjustment at a date later than when it was promoted in the DP cannot lead to the annulment of the additional VAT assessment, which is legally supported.

  4. Once the requirements are met, the tp could promote the VAT adjustment in its favour in a declaration subsequent to the time when such occurred, with such power able to be exercised until the expiry of four years after the birth of the right to deduction, that is, from the moment when the requirements are met to benefit from the mechanism for recovery of VAT on bad debts, as provided for in article 98, no. 2, of the CIVA.

By all the foregoing, the claimant's arguments do not in our view succeed, and the additional VAT assessment in the amount of 59,017.35€, increased by compensatory interest in the amount of 9,216.41€, relating to the period 2010/07, should be maintained.

  • On 25-06-2015 it filed a Hierarchical Appeal of the decision refusing the Gracious Complaint, which was dismissed by order of 05-08-2016, which expresses agreement with an opinion whose contents are reproduced as follows, in which it is stated, among other things, the following:

A. Consideration

  1. In the wording in force at the time of the facts, paragraph b) of no. 7 of article 78 of the CIVA, established that "taxable persons may further deduct the tax relating to credits considered bad debts in insolvency proceedings, when such insolvency is declared",

  2. In order to be able to adjust in its favour those credits, that is, to recover the VAT that it assessed by virtue of the carrying out of taxable transactions, delivered to the State but not received from the respective purchaser, its bad debt status must be proven.

  3. The recognition of the credit by the courts constitutes an undisputed element of proof, hence it is essential that the taxable person creditor has in its possession the certificate issued by the competent Court which mentions; the declaration of insolvency; the finality of the judgment; and the recognition of the credit claimed by the creditor.

  4. These are prerequisites of the power to proceed with VAT adjustment, and since it is the Appellant who invokes the right to adjustment of those credits, the burden of proof of the constitutive facts rests on him, under no. 1 of article 74 of the LGT.

  5. In the absence of fulfillment of those prerequisites in the period subject to inspection, the Appellant's right to adjust the VAT relating to the value of credits considered bad debts did not come about, and the possibility of later presentation of proof elements for validation of the adjustment already made is foreclosed.

  6. The right provided for in paragraph b) of no. 7 of article 78 of the CIVA is exercised in a periodic declaration subsequent to the verification of those prerequisites, by the entry of the respective value in field 40 of the declaration, during the general four-year period provided for in no. 2 of article 98 of the CIVA, counted from the finality of the decision, since the CIVA does not establish a special period of limitation for the exercise of the right to adjustment of credits".

  7. In light of the above, the Appellant is not right when alleging violation of the principles of inquisitorial and material truth, and misinterpretation of paragraph b) of no. 7 of article 78 of the CIVA, by the TIS.

  8. With regard to the obligation of communication, to the purchaser of the goods or services, by the taxable person creditor, of its total or partial cancellation of the tax, for the purposes of rectification, by the purchaser, of the deduction initially made by him, this has express legal recognition in no. 11 of article 78 of the CIVA", thus constituting a legal prerequisite of the exercise of the right to adjust the tax.

  9. In the strict application of nos. 1 and 2 of article 22 and nos. 7 and 11 of article 78 of the CIVA, purchasers of goods or services deduct, in principle, the tax by reference to the moment when the respective invoice is issued and should adjust it until the end of the period following that of receipt of the communication, in field 41 of the periodic declaration.

  10. The State needs to safeguard the possibility of recovering the VAT that was presumably deducted by the debtor, through the mechanism of credit claims, permitted by the Insolvency and Business Recovery Code (CIRE).

  11. Therefore it has been the understanding of these services that this guarantee is only verified if the communication precedes the adjustment (although it is considered admissible a period until the end of the following tax period).

  12. It is also the understanding of these services that, given its purposes and the transactions it presupposes, on the part of the creditor and the insolvent, the adjustment of credits itself cannot occur after the liquidation of the debtor company. More precisely, the creditor's right of adjustment can only be exercised up to the commencement of liquidation of the insolvent estate (article 225 of the CIRE).

  13. It is thus concluded that the Appellant at the date of the adjustment did not demonstrate the bad debt status of the credits, through the exhibition of the essential documents for the birth of the right to adjustment, namely the certificate issued by the competent court with the mandatory mentions, nor did it demonstrate, timely, the fulfillment of the necessary and essential communication to the purchasers, required by no. 11 of article 78 of the CIVA.

  14. As we have seen, timely communication proves to be essential for the effectiveness of the adjustment.

  15. By sending the communications only on 2015-02-27 and 2015-02-12, the Appellant made it impossible for the State to require, effectively, the rectification of tax deducted by the taxable person debtor.

  16. To authorize that communication could be carried out not only after some months but even years, would mean, in any case, that the communication would occur at a moment when, presumably (having complied with the CIRE periods) the debtor company no longer existed.

  17. In formal terms, it is also to be added that, for communication to be valid and effective in fulfilling the purpose of binding the purchaser to the obligation of rectification of the deduction made, it is understood that it should contain the following elements: - identification of the taxable persons (with address and TAX ID), of the invoice (with number, date and amount), amounts adjusted (with breakdown of the taxable base and tax), proceeding under which the credit was considered bad (so that the taxable person purchaser can assess whether rectification of tax is due as a result of that communication) and the tax period in which the adjustment of credits will take place".

  18. These are necessary elements so that the purchaser, based on that document, knows of the adjustment of credits that will be made and its reason. Only thus can he correctly proceed with the rectification of tax that is required of him.

  19. In the case at hand, it appears that the communications which it exhibits a posteriori do not contain some of the essential elements, which even led the insolvency administrator of G..., Lda, to request clarifications from AT regarding the said communication (see pages 285 of the gracious complaint procedure).

  20. Thus has been the understanding in case law, that a formality unduly fulfilled, which appears to be "ad substantiam", prevents the legality of the VAT adjustment made by the creditor, and consequently the granting of the appeal. And let it not be alleged, as the appellant does, that this interpretation violates the principles of legality, proportionality and legal certainty and security, since such obligation results directly and immediately from the law and the consequence of its non-compliance - the illegality of the "adjustment" made - is appropriate in the event of breach of the legal requirements on which the legality of the rectification depends, not appearing to be either disproportionate or unexpected, hence we do not see any violation of the mentioned constitutional principles."

  21. In short, the understanding is reiterated that the legal conditions of paragraph b) of no. 7 and no. 11 of article 78 of the CIVA were not met at the moment of recovery of the tax relating to credits considered bad debts, concluding that the assessments do not suffer from any illegality, and it is proposed to maintain the decision under appeal.

  • In the insolvency proceeding relating to B..., SA, the judgment declaring insolvency became final on 28-05-2008 and the case was still pending on 24-03-2015 (page 36 of the administrative file relating to gracious complaint 2);

  • In the insolvency proceeding relating to C..., LDA, the judgment declaring insolvency became final on 22-01-2008 and the closure of the case occurred on 07-01-2011 (page 16 of the administrative file relating to the hierarchical appeal);

  • In the insolvency proceeding relating to D..., LDA, the judgment declaring insolvency became final on 23-04-2008 and the closure of the case occurred on 08-02-2013 (page 57 of the administrative file relating to gracious complaint 2);

  • In the insolvency proceeding relating to E..., LDA, the judgment declaring insolvency became final on 04-06-2009 and the case was already closed on 04-02-2015; (page 73 of the administrative file relating to gracious complaint 2);

  • In the insolvency proceeding relating to F..., SA, the judgment declaring insolvency became final on 31-07-2006 and the case was still pending on 16-02-2015 (page 79 of the administrative file relating to gracious complaint 2);

  • In the insolvency proceeding relating to I..., LDA, the judgment declaring insolvency became final on 31-07-2006 and the case was still pending on 13-02-2015 (page 81 of the administrative file relating to gracious complaint 2);

  • In the insolvency proceeding relating to G..., LDA, the judgment declaring insolvency became final on 18-01-2006, the Insolvency Plan was approved and approved by a final judgment on 06-09-2007 and the case was closed on 02-10-2007 (page 88 of the administrative file relating to gracious complaint 2);

  • In the insolvency proceeding relating to H..., SA, the judgment declaring insolvency became final on 31-12-2009 and the case was still pending on 20-02-2015 (page 51 of the administrative file relating to the hierarchical appeal);

  • The Applicant, in 2015, sent communications regarding the VAT adjustment to the debtors and to their respective insolvency administrators;

  • On 06-01-2017, the Applicant submitted the request for arbitral pronouncement which gave rise to the present case.

2.2. Unproven Facts and Reasoning of the Decision on the Factual Matters

The established facts are based on the administrative proceedings.

There are no facts relevant to the decision of the case that have not been proved.

3. Legal Matters

In the year 2010, in the VAT period 2010/07, the Applicant adjusted VAT in its favour, based on credits considered bad debts in insolvency proceedings, in the amount of 59,017.35.

The Tax Authority and Customs Authority understood that the adjustment was not admissible because:

– the adjustment of the tax had not been communicated to the purchaser of the goods or services, represented by the respective insolvency administrators, in accordance with the provision of no. 11 of article 78 of the VAT Code; and

– the Applicant did not have in its possession "a certificate from the court, which proves that the insolvency judgment became final, since only thus does it become definitive";

– the Applicant did not have proof that the credits were claimed and/or recognized in the insolvency proceedings.

The Applicant attributes to the challenged assessment the following defects:

  1. Error in the interpretation of paragraph b) of number 7 of article 78 of the VAT Code, in the wording in force at the time the Applicant proceeded with the VAT adjustment;

  2. Violation of the principles of pursuit of material truth and inquisitorial within the scope of the tax inspection procedure, as provided for in terms of article 6 (principle of material truth) of the Supplementary Rules on Tax Inspection Procedures (RCPIT), article 58 of the LGT (inquisitorial principle), paragraph e) of article 69 of the Code of Tax Procedure (CPPT) (inquisitorial principle) and article 104 (supplementary steps) of the Code of Administrative Procedure (CPA);

  3. Error in the interpretation of number 11 of article 78 of the VAT Code, in the wording in force at the time the Applicant proceeded with the VAT adjustment;

  4. Violation of the principle of proportionality to which the Tax Authority is bound under article 266 of the CRP and article 55 of the LGT.

  5. Violation of the principle of VAT neutrality underlying Directive 2006/112/EC.

3.1. Question of Error in the Interpretation of Paragraph b) of Number 7 of Article 78 of the VAT Code, in the Wording in Force at the Time the Applicant Proceeded with the VAT Adjustment

In 2010, paragraph b) of no. 7 of article 78 of the CIVA had the following wording:

7 - Taxable persons may further deduct the tax relating to credits considered bad debts:

b) In insolvency proceedings when such insolvency is declared.

The Applicant argues that

– "this rule did not impose, as a condition of validity of VAT adjustment, that VAT taxable persons be holders (i) of documentary proof of the insolvency proceeding or, even, (ii) that the insolvency decision had become final";

– "they should have accepted that the documents which were exhibited to them at the time of inspection - and which are referred to in the inspection report - allowed them to prove the legal requirements of paragraph b) of number 7 of article 78 of the VAT Code".

– "proof of the existence of recognized credits could be made through any means, the AT being required to take steps, as they demonstrated they had the ability to do in the context of these proceedings;

– "a posteriori, as the Applicant did, by attaching the said certificates to these proceedings, and whose analysis was not carried out by that Directorate".

As can be seen, in the wording in force in 2010, deduction of the tax relating to credits considered bad debts in insolvency proceedings when such insolvency was declared was permitted.

It follows from this rule that it is necessary that the credits be considered bad debts, which presupposes a decision assessing the possibility of them being or not being recoverable, which may result from a generic judgment made by the judge of the insolvency proceeding under article 39 of the CIRE, when concluding "that the debtor's assets are presumably not sufficient to meet the costs of the proceeding and the foreseeable debts of the insolvent estate and such satisfaction is not otherwise guaranteed".

However, it also follows from the text of paragraph b) of no. 7 of article 78 of the CIVA that, from the moment insolvency is declared, regardless of the finality of the declaration judgment, the VAT taxable person may proceed with the adjustment.

This effect of the declaration of insolvency, before the finality of the decision, is in harmony with the plurality of effects that the law attributes to it as soon as the declaration occurs, which are explicitly referred to in the Preamble to Decree-Law no. 53/2004, of 18 March, which approved the Insolvency and Business Recovery Code (CIRE):

"29 - The judgment declaring insolvency represents a crucial moment in the proceeding. It is not limited to that declaration but is intensely prospective, shaping much of the subsequent proceeding and triggering a vast array of consequences. On the other hand, the moment of its delivery is decisive for the application of countless norms of the Code".

"31 - The judgment declaring insolvency is a source of numerous and important effects, which are grouped as follows: 'effects on the debtor and other persons'; 'procedural effects'; 'effects on credits', and 'effects on ongoing transactions'".

In this context, the reference that no. 7 of article 78 of the CIVA makes to the possibility of adjustment of the tax relating to credits considered bad debts in insolvency proceedings "when this is declared" (and not when the declaration judgment becomes final), reveals a legislative intention to mark the moment from which that adjustment was possible, which was the moment of declaration and not the moment of finality of the judgment declaring insolvency (and far less the moment of finality of the judgment of verification and ranking of credits, which may not even be delivered, in the cases referred to in no. 1 of article 39 of the CIRE).

It is a solution that can be understood from the fact that the declaration of insolvency constitutes a strong presumption of bad debt status of the credits and that the obligation to deliver the tax is assured, should the recovery of the credits come to pass, in accordance with no. 12 of the same article 78.

On the other hand, there is no legal support for concluding that the taxable person can only proceed with the adjustment when he is in possession of a certificate of the declaration judgment, as there was, in 2010, no rule that directly or indirectly provided for such obligation. In particular, no. 16 of the same article 78, which the Tax Authority and Customs Authority invokes in these proceedings, established, in the wording in force in 2010, that "the documents, certificates and communications referred to in nos. 8 to 11 of this article must be incorporated in the fiscal documentation process provided for in articles 121 of the IRC Code and 129 of the IRS Code", so that, if the conclusion were to follow that such certificate is a requirement of adjustment, the consequence would have to be that such incorporation was not necessary in the case of no. 7, as that number was not mentioned, only coming to be so in the wording introduced by Law no. 82-B/2014, of 31 December.

It is therefore concluded that the Applicant is right in arguing that the correction underlying the challenged assessment is based on an error of interpretation of paragraph b) of no. 7 of article 78 of the CIVA.

3.2. Question of Violation of the Principles of Pursuit of Material Truth and Inquisitorial Within the Scope of the Tax Inspection Procedure, as Provided for in Terms of Article 6 (Principle of Material Truth) of the Supplementary Rules on Tax Inspection Procedures (RCPIT), Article 58 of the LGT (Inquisitorial Principle), Paragraph e) of Article 69 of the Code of Tax Procedure (CPPT) (Inquisitorial Principle) and Article 104 (Supplementary Steps) of the Code of Administrative Procedure (CPA)

This question raised by the Applicant is related to the obtaining of certificates of the finality of the decisions declaring the insolvency of the Applicant's debtor companies.

Since it has been decided that obtaining these certificates was not a requirement of the adjustment, the question of whether the Tax Authority and Customs Authority should have taken steps to obtain the certificates becomes moot, as it would be futile (article 130 of the Code of Civil Procedure subsidiarily applicable, by virtue of the provision of paragraph e) of no. 1 of article 29 of the RJAT).

3.3. Error in the Interpretation of Number 11 of Article 78 of the VAT Code, in the Wording in Force at the Time the Applicant Proceeded with the VAT Adjustment

The correction underlying the challenged assessment is also based on the failure to meet the requirement provided for in no. 11 of the same article 78, so that that error of interpretation of no. 7 is not sufficient to conclude for the annulment of the challenged assessment.

In fact, when an act has more than one foundation, each with the potential to, by itself, ensure the legality of its decision content, it is irrelevant that one of them is illegal, since "the court, to annul or declare the nullity of the questioned decision, issued in the exercise of the bound activity of the Administration, cannot content itself with the finding of the invalidity of one of the foundations invoked, since only after verification of the failure of all of them is the court enabled to invalidate the act".

Thus, it is necessary to assess whether the challenged assessment has legal support in no. 11 of article 78 of the CIVA.

In the wording in force in 2010, no. 11 of article 78 of the CIVA established the following:

11 - In the case provided for in no. 7 and paragraph d) of no. 8, the purchaser of the good or service, who is a taxable person, is communicated the total or partial cancellation of the tax, for the purposes of rectification of the deduction initially made.

The Applicant argues that "it is a mere formality, imposed by article 78 of the VAT Code, with no form being stipulated – written or oral" and "cannot be interpreted as a condition of validity of VAT adjustment", as it is not a requirement ad substantiam, with communication being able to be made at a later time, which occurred in the case at hand, so that the assessment should be revoked.

However, the Supreme Administrative Court held, in the judgment of 25-06-2015, delivered in case no. 0288/14, that "communication to the purchaser of the good or service who is a VAT taxable person of the intention of the creditor to proceed with the cancellation of the VAT contained in the bad debt credit in insolvency proceedings constitutes a legal requirement on which the legality of the "adjustment" by the creditor depends and must be made, in case of insolvency of the debtor, to the appointed insolvency administrator and that "a formality unduly fulfilled, which appears to be "ad substantiam", prevents the legality of the VAT adjustment made by the creditor and consequently the granting of the appeal".

As the Tax Authority and Customs Authority rightly points out, the rule of no. 11 of article 78 of the CIVA aims to prevent a taxable person from cancelling tax that was deducted by its customer, without the latter being obliged to adjust, in favour of the State, the same amount.

For this reason, the cancellation can only be regularly made when the taxable person who wishes to proceed with it has previously ensured that the communication to the purchaser of the good or service who is a taxable person has been made and can confirm that it was made, since only thus will it be ensured that the duty of rectification falls on the latter.

In any case, even if it were understood that such communication could be subsequent to the cancellation, the fulfillment of all the requirements of the "right to deduction" provided for in no. 7 of article 78 of the CIVA, including that provided for in no. 11, would always have to occur before the 4-year period provided for in article 98, no. 2, of the CIVA for the exercise of the right to deduction had elapsed. In fact, regardless of the strictness with which the expression is used, no. 7 of article 78 of the CIVA explicitly considers the cancellation of VAT on the basis of bad debt status of the credit to be the consequence of deduction (by saying "taxable persons may further deduct the tax relating to credits considered bad debts"), which will be justified by the deduction in the periodic declaration of the tax assessed by the taxable person and not paid by the purchaser being the way to effect the adjustment. And, since deduction is the way to effect the adjustment, it is subject to the maximum period of 4 years "after the birth of the right to deduction", in accordance with the provision of no. 2 of article 98 of the CIVA.

For this reason, since the cancellation occurred in July 2010, the Tax Authority and Customs Authority could surely conclude in September 2014, when it made the assessment, that the requirement provided for in no. 11 of article 78 had definitely not been met.

For this reason, the Tax Authority and Customs Authority correctly interpreted no. 11 of article 78 of the CIVA.

3.4. Question of Violation of the Principle of Proportionality Enunciated in Article 266 of the CRP and Article 55 of the LGT

From the principle of proportionality, which the action of the Tax Authority and Customs Authority must observe, by virtue of articles 266, no. 2, of the CRP and 55 of the LGT, it follows that appropriate behaviour must be adopted to the ends pursued and taxpayers' rights should only be affected to the extent necessary and in terms proportional to the objectives to be achieved (article 7, nos. 1 and 2, of the Code of Administrative Procedure).

The requirement to communicate the cancellation of the VAT to the purchaser of the goods or services or the person representing them does not appear to be disproportionate, as it is a step that is very easy to implement and of insignificant burden and has as its justification imposing on the debtor/purchaser the obligation of rectification of the VAT deduction made on the basis of the invoice issued by the Applicant, ensuring that there is no prejudice to the public purse resulting from the accumulation of that deduction with the one resulting from the cancellation for the creditor.

The Applicant invokes violation of this principle on the grounds that the Tax Authority and Customs Authority imposed more requirements on it than the law imposes and that communication to already closed companies is ineffective.

However, as regards communications, we are not faced with a requirement not provided for in the law, as it is explicitly stated in no. 11 of article 78 of the CIVA.

On the other hand, as stated, in line with the case law of the Supreme Administrative Court which was cited, communications should have been made in 2010 and should have been addressed to the respective administrators of the insolvencies, in the cases where the proceedings were pending.

Of the insolvency proceedings referred to in the record, only that relating to G..., LDA, was closed in August 2010, when the Applicant made the adjustment of the tax, but it was not proved that that company had ceased to exist, as an Insolvency Plan was approved by a final judgment on 06-09-2007.

For this reason, it cannot be concluded that communications would not have been relevant and effective if they had been made in August 2010, to the debtors and administrators of their respective insolvencies.

3.5. Violation of the Principle of VAT Neutrality Underlying Directive 2006/112/EC

The Applicant argues, in short, that the principle of neutrality underlying Directive no. 2006/112/EC requires that through the deduction of the VAT borne upstream, economic operators are relieved of the tax, not incorporating the costs of their activity.

The question of the compatibility of the regime provided for in no. 11 of article 78 of the CIVA with the principle of neutrality was decided in the affirmative by the CJEU in the judgment of 06-12-2018, delivered in case no. C-672/17, within the scope of the preliminary reference made in these proceedings:

The principle of neutrality and articles 90° and 273° of Council Directive 2006/112/EC, of 28 November 2006, on the common system of value added tax, should be interpreted to mean that they do not preclude national legislation such as that at issue in the main proceedings, which provides that the reduction of the taxable amount of value added tax (VAT), in case of non-payment, cannot be made by the taxable person unless he has previously communicated his intention to cancel the whole or part of the VAT to the purchaser of the goods or services, who is a taxable person, for the purposes of rectifying the deduction of the VAT amount which that person was able to make.

As has been peacefully understood in case law and is a corollary of the obligation of preliminary reference provided for in article 267 of the Treaty on the Functioning of the European Union (which replaced article 234 of the Treaty of Rome, former article 177), the case law of the CJEU has binding effect on national courts, when it has as its object questions of European Union law (in this sense, the following Judgments of the Supreme Administrative Court may be consulted: of 25-10-2000, case no. 25128, published in Appendix to the Official Journal of 31-1-2003, p. 3757; of 7-11-2001, case no. 26432, published in Appendix to the Official Journal of 13-10-2003, p. 2602; of 7-11-2001, case no. 26404, published in Appendix to the Official Journal of 13-10-2003, p. 2593).

The supremacy of European Union law over National law has support in no. 4 of article 8 of the CRP, which establishes that "the provisions of the treaties governing the European Union and the norms emanated from its institutions, in the exercise of their respective powers, applicable in the internal order, under the terms defined by European Union law, with respect for the fundamental principles of the democratic rule of law".

Thus, it must be concluded that the interpretation that the Tax Authority and Customs Authority made of article 78, no. 11, of the CIVA, which in point 3.3 of this judgment was considered correct, does not violate the principle of neutrality.

4. Requests for Reimbursement and Indemnificatory Interest

As follows from the foregoing, the challenged assessment has support in the failure to meet by the Applicant of the requirement provided for in no. 11 of article 78 of the CIVA, with reference to no. 7 of the same article for deduction of the tax relating to credits considered bad debts.

For this reason, the request for declaration of illegality of the challenged assessment must be dismissed.

The reimbursement of the tax paid depends on the illegality and annulment of the assessment, so, as its illegality is not declared, the request for reimbursement must be dismissed.

As for indemnificatory interest, the right depends on "payment of the tax debt in an amount greater than that legally owed" (article 43, no. 1, of the LGT), which, in light of the foregoing, did not occur.

The requests for reimbursement and indemnificatory interest thus fail.

5. Decision

In these circumstances, the members of this Arbitral Tribunal agree to:

  • Dismiss the request for arbitral pronouncement;

  • Absolve the Tax Authority and Customs Authority of the requests.

6. Case Value

In accordance with articles 297, 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is valued at € 68,233.76.

7. Costs

Under article 22, no. 4, of the RJAT, the amount of costs is fixed at € 2,448.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Applicant.

Lisbon, 07-12-2018

The Arbitrators

(Jorge Lopes de Sousa)

(A. Sérgio de Matos)

(Ana Teixeira de Sousa)

Frequently Asked Questions

Automatically Created

What is the VAT regularization procedure when a debtor becomes insolvent under Portuguese tax law?
Under Portuguese tax law, VAT regularization for insolvent debtors is governed by Article 78(7)(b) and (11) of the VAT Code (CIVA). When a debtor enters insolvency proceedings, the creditor-supplier may adjust the VAT originally charged on unpaid invoices. However, Article 78(11) requires the supplier to communicate the VAT cancellation to the insolvent purchaser before making this adjustment in their periodic VAT declaration. This communication enables the purchaser to rectify any VAT deduction previously claimed. The supplier must document the insolvency declaration and meet timing requirements under Article 78(8), which limits adjustments to two years from invoice issuance or one year from the tax becoming due. Failure to comply with the communication requirement can result in Tax Authority assessments denying the regularization, as occurred in CAAD case 22/2017-T.
How does Article 90 of the VAT Directive 2006/112/EC apply to VAT adjustments in insolvency cases?
Article 90 of VAT Directive 2006/112/EC establishes the general principle that the taxable amount may be reduced when transactions are wholly or partially unpaid after the chargeable event. In insolvency cases, this provision supports the supplier's right to adjust VAT on bad debts to preserve fiscal neutrality. The CJEU ruling in case C-546/17 (arising from CAAD 22/2017-T) clarified that Article 90, read together with Article 273 (which permits Member States to impose obligations for proper VAT collection), does not preclude national legislation like Portuguese Article 78(11) that conditions VAT adjustment on prior communication to the insolvent purchaser. The Court recognized that such procedural requirements serve legitimate aims: ensuring the purchaser rectifies previously deducted VAT and preventing tax base erosion. While Article 90 protects the supplier's substantive right to adjust VAT, Member States retain discretion to establish reasonable procedural conditions that coordinate adjustments between supplier and purchaser, provided these don't render the right practically impossible to exercise.
What was the preliminary ruling (reenvio prejudicial) submitted to the CJEU in CAAD case 22/2017-T?
The preliminary ruling (reenvio prejudicial) submitted to the CJEU in CAAD case 22/2017-T posed two interconnected questions. First, whether the neutrality principle and Article 90 of Directive 2006/112/EC preclude Portuguese legislation (Article 78(11) CIVA) that prohibits VAT adjustment for non-payment unless the supplier first communicates the VAT cancellation to the insolvent purchaser for rectification of their deduction. Second, if communication is required, whether these EU provisions preclude national law that denies adjustment when communication occurs after expiration of the purchaser's deduction period under Article 98(2) CIVA (typically four years). The tribunal questioned whether imposing such procedural prerequisites violated VAT neutrality by forcing suppliers to bear VAT on transactions never paid. The CJEU, in its December 6, 2018 judgment (Case C-546/17), ruled that neither the neutrality principle nor Articles 90 and 273 preclude the communication requirement. The Court emphasized that Member States may establish procedural conditions ensuring proper VAT system functioning, including coordination between supplier adjustments and purchaser deduction rectifications, without violating fundamental EU VAT principles.
Can the Portuguese Tax Authority (AT) issue an official VAT assessment to deny regularization based on Article 78(11) of the Portuguese VAT Code?
Yes, the Portuguese Tax Authority possesses legal authority to issue ex officio VAT assessments denying regularizations based on Article 78(11) of the VAT Code when procedural requirements are not met. In CAAD case 22/2017-T, the AT issued assessment no. ... dated September 2, 2014, for €59,017.35, plus compensatory interest of €9,216.41, after determining the taxpayer had regularized VAT for insolvent debtors without first communicating the cancellation to those purchasers as mandated by Article 78(11). The Tax Inspection Services conducted a partial inspection that expanded to a general review of the 2010 tax year, documenting that while the debtor companies were indeed insolvent, the supplier had not fulfilled the communication prerequisite before claiming the adjustment in its July 2010 periodic declaration. This demonstrates the AT's systematic approach: verifying both substantive conditions (actual insolvency, unpaid invoices) and procedural compliance (communication requirement). The CJEU's subsequent validation of Article 78(11)'s compatibility with EU law reinforced the AT's assessment authority in these circumstances, confirming that Member States may enforce such procedural safeguards through administrative assessments.
What is the principle of fiscal neutrality and how does it protect creditors seeking VAT recovery in debtor insolvency proceedings?
The principle of fiscal neutrality, fundamental to EU VAT law, requires that traders in similar situations are not treated differently regarding VAT collection and that VAT should not burden businesses as an economic cost. In insolvency contexts, this principle protects creditors by ensuring they don't permanently bear VAT on transactions where payment is never received—VAT should be neutral to business operations. When a supplier invoices services including VAT but the purchaser enters insolvency without paying, fiscal neutrality demands mechanisms allowing the supplier to adjust the VAT liability, preventing the supplier from effectively financing tax on uncollected revenue. However, as clarified in the CJEU ruling related to CAAD case 22/2017-T, neutrality doesn't grant absolute, unconditional rights. Member States may impose reasonable procedural requirements—like Portugal's Article 78(11) communication obligation—that serve legitimate objectives: preventing double benefits, ensuring purchasers rectify deductions, and maintaining tax system integrity. The balance struck permits VAT recovery for genuine bad debts while preventing abuse, with procedural conditions acceptable provided they don't render rights illusory or excessively burdensome, thus preserving neutrality's protective function while accommodating administrative necessities.