IRC and VAT: Burden of Proof, Cost Deductibility and Statute of Limitations (CAAD 226/2013-T)

CASE NO. 226/2013-T

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Dr. Clotilde Celorico Palma and Dr. Júlio Tormenta, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 4-12-2013, agree as follows:

A – Report

A, NIPC ..., filed a request for the constitution of a collective arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as RJAT), in which the TAX AND CUSTOMS AUTHORITY is the Respondent.

The Petitioner seeks an arbitral decision on the legality of:

– the additional Value Added Tax assessments identified with the numbers ...39, ...41, ...43, ...45, ...47, ...49 and ...51, in the amount of € 62,187.83 (sixty-two thousand, one hundred and eighty euros and eighty-three cents) and the respective Compensatory Interest assessments, identified with the numbers ...38, ...40, ...42, ...44, ...46, ...48 and ...50, in the total amount of € 10,868.61 (ten thousand, eight hundred and sixty-eight euros and sixty-one cents), referring to the periods 200802, 200804, 200805, 200806, 200807 and 200809 and 200810; and

– the additional Corporate Income Tax assessment No. 2012...., in the amount of € 65,520.44 (sixty-five thousand, five hundred and twenty euros and forty-four cents) and respective Compensatory Interest and Default Interest assessments, identified, respectively, with the numbers 2012 ... and 2012...., in the amounts of € 8,111.01 (eight thousand, one hundred and eleven euros and one cent) and € 22.10 (twenty-two euros and ten cents), all relating to the fiscal year 2008, resulting from Service Order No. ....

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 30-09-2013.

Pursuant to the provisions of paragraph a) of section 2 of Article 6 and paragraph b) of section 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal Councillor Jorge Lopes de Sousa (President), Prof. Dr. Clotilde Celorico Palma and Dr. Júlio Tormenta, who communicated their acceptance of the appointment within the applicable period.

On 13-11-2013 the parties were duly notified of this appointment and did not manifest their intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of Article 11, section 1, paragraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision in paragraph c) of section 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the collective arbitral tribunal was constituted on 04-12-2013.

The Tax and Customs Authority filed a response.

On 29-1-2014, the meeting provided for in Article 18 of the RJAT was held and on 20-2-2014 witness testimony was taken, with agreement that written submissions would be filed within 10 days.

The Parties filed submissions.

The arbitral tribunal was duly constituted and is competent.

The parties have legal personality and capacity and are legitimate (Articles 4 and 10, section 2, of the same statute and Article 1 of Ordinance No. 112-A/2011 of 22 March).

The case does not suffer from defects and no exceptions have been raised nor is there any obstacle to consideration of the merits of the case.

B. Positions of the Parties

B.1. Position of the Petitioner

To support its request, the Petitioner argues in summary as follows:

1. The request for arbitral decision is intended to declare the illegality of the acts of additional Value Added Tax assessments (hereinafter referred to as VAT), identified with the numbers ...39, ...41, ...43, ...47,...49 and ...51, in the amount of € 62,187.83 (sixty-two thousand, one hundred and eighty-seven euros and eighty-three cents) and the respective Compensatory Interest assessments, identified with the numbers ...38, ...40, ...42, ...42, ...46, ...48 and ...50, in the total amount of € 10,868.61 (ten thousand eight hundred and sixty-eight euros and sixty-one cents) referring to the periods 200802, 200804, 200805, 200806, 200807, 200809 and 200810, see Doc. 1 attached to the initial petition.

2. The Petitioner also challenges the legality of the additional Corporate Income Tax assessment (hereinafter referred to as CIT) No. 2012...., in the amount of € 65,520.44 (sixty-five thousand, five hundred and twenty euros and forty-four cents) and respective Compensatory Interest and Default Interest assessments, in the amounts of € 8,111.01 (eight thousand, one hundred and eleven euros and one cent) and € 22.10 (twenty-two euros and ten cents) totalling an amount of € 73,653.55 for the fiscal year 2008, see Doc. 2 attached to the initial petition.

3. In compliance with Service Order No. OI... issued by the Finance Directorate of Lisbon, a general and external inspection action was initiated relating to the fiscal year 2008.

4. In the fiscal year 2008, the accounting reality of the Petitioner underwent various vicissitudes which included a change of Official Accountant and invoicing program, as referred to in Articles 19 to 30 of the initial petition. From these vicissitudes, it resulted that the Petitioner presented account extracts for the period from January to August 2008 and account extracts with only the accounting movements from September to December 2008. The account extracts for the period from September to December 2008 did not contain the opening balance as of 1 September corresponding to the closing balance of 31 August 2008, see Articles 23 and 24 of the initial petition. These two types of extract were used by the Tax Inspection Services (hereinafter referred to as IT).

5. From the inspection carried out adjustments resulted (in favor of the State) in the VAT and CIT sphere, as per the Tax Inspection Report attached to the initial petition as Doc. 9, whose contents are hereby fully reproduced for all legal purposes. In the VAT sphere, the corrections by the AT were based on credit notes, debit notes and expenses with non-deductible tax, see Article 36 of the initial petition. More specifically and by way of tax improperly deducted by virtue of credit notes issued in duplicate – due to the change of invoicing program – the corrections amounted to € 62,187.83 (sixty-two thousand, one hundred and eighty-seven euros and eighty-three cents).

6. The corrections in the CIT sphere were based on the omission of revenues, infringing the provisions of Article 17 of the CIT Code, non-compliance with Article 34 of the CIT Code (CIT article at the time of the disputed facts) for purposes of provisions/adjustments of accounts receivable, depreciations and excess reintegrations for tax purposes and non-deductible costs for tax purposes due to non-compliance with the requirement of indispensability provided in Article 23 of the CIT Code, see Articles 38, 41, 42 and 43 of the initial petition.

7. The amount now challenged in the CIT sphere in the amount of € 73,653.55 is based on corrections to the taxable income for the fiscal year 2008, as referred to above, giving rise to the determination of a corrected taxable base of € 260,540.27, see Doc. 2 attached to the initial petition. The decomposition of the corrected taxable base is as follows, see point A.2.6 of the TIR:

8. From the corrections made, the Petitioner also alleges:

Revenues – € 113,727.70

8.1. The amount of € 113,727.70 which constitutes a correction to the taxable base will result from the difference between the amount (€ 1,121,160.59) resulting from the sum of the balance of account 72 (Provision of Services according to the Chart of Accounts) recorded in the two sets of accounting account extracts existing in the case files, attached as Docs. 12 and 13 to the initial petition and in the final analytical trial balance (€ 1,007,432.89), which served as the basis for completing the tax return model 22 for CIT purposes for the fiscal year 2008, attached to the initial petition as Doc. 14, see Articles 68 and 69 of the initial petition.

8.2. The difference determined of € 113,727.70 is due to the fact that there are credit notes issued in August 2008 and other documents, which were not recorded in the account extracts delivered to the AT (Docs. 12 and 13 attached to the initial petition) but which were recorded in the form of an aggregating movement appearing in the final analytical trial balance (Doc. 14 attached to the initial petition), see Articles 29 and 30 of the initial petition. The decomposition of the amount of € 113,727.70 corresponding to the aggregating movement is found in Doc. 15 attached to the initial petition.

Reversal of Provisions – € 46,772.50

8.3. The amount of € 46,772.50 concerns a reversal of the balance of provisions from the previous year (2007) which from an accounting standpoint gave rise to movements between balance sheet accounts. Thus, the balance sheet accounts used for purposes of reversal were accounts 218 – Doubtful Collection Customers – and account 28 – Adjustment of Accounts Receivable (provision account), not affecting costs in account 69 and revenues in account 79 resulting from this reversal of provisions, see Article 85 of the initial petition. It further alleges that the effect on CIT would be nil due to the fact that from an accounting standpoint the impact on results would be nil, since the amount to be recorded in accounts 69 and 79 of the Chart of Accounts would be the same, thus complying with the provision of Article 34 of the CIT Code, as is the case for companies B (subsequently B2), an insolvent company, and C with respect to which debt forgiveness was granted, see Articles 88 to 91 of the initial petition.

Provisions Constituted Without Evidence of Collection Effort – € 15,599.12

8.4. The amount constituted concerns impairments related to receivables resulting from normal activity which may be considered as doubtful collection. Such impairments are fiscally deductible in accordance with what is provided in Articles 35 and 36 of the CIT Code, see Article 81 of the initial petition.

8.5. It further states that it clarified to the AT that it maintained strong business relationships with the debtor companies and therefore the collection effort was not very aggressive, having proven through email and payment notices that such measures were carried out, see Article 92 of the initial petition.

Receivables Provisioned Not Recognized in Accounts – € 45,559.16

8.6. The Petitioner states that in accordance with Article 34 of the CIT Code, the taxpayer may provision in full the value of debtor receivables when there is a pending legal action regarding them, which is no longer the case when, with respect to the total or partial amount of the receivable, a provision has already been constituted in prior years, see Articles 82 to 84 of the initial petition.

Indispensability of Costs – € 26,590.76

8.7. The Petitioner alleges that the IT raised doubts regarding the indispensability of costs incurred pursuant to Article 23 of the CIT Code.

8.8. Citing a Judgment of the Central Administrative Court of the North of 12.01.2012 in which the concept of indispensability is considered an indeterminate concept, which requires a case-by-case analysis for each cost incurred and borne by a taxpayer. Thus, the fiscal deductibility of a cost must be made based on the corporate activity, that is, based on the object of the company pursued by that taxpayer. In this way, the fiscal deductibility of a cost will depend on the causal relationship and justification with the company's activity, see Articles 94 and 95 of the initial petition. Taking into account the cited case law, it does not understand the position taken by the AT regarding the indispensability of costs incurred with the acquisition of films and books necessary for research and growth of its activity with the objective of improving its competitiveness mentioned above, considering its social purpose, see Articles 96 to 99 of the initial petition.

8.9. It further states that it does not understand why the cost incurred with the gift of a video to two customers with whom it maintains business relationships as well as other goods can be questioned by the AT under Article 23 of the CIT Code. Tax and accounting law contemplates the existence of representation expenses which namely relate to costs incurred by taxpayers with gifts to customers, which are nothing more than a form of customer loyalty and retention, see Articles 100 to 106 of the initial petition.

Tax Inspection Procedure

9.1. The Petitioner states that it was notified on 26-1-2012 of the commencement of the Tax Inspection which occurred on 22-7-2011, whereby the provision of Article 49, section 1, of the RCPIT (Supplementary Regime of Tax Inspection Procedure) was not observed, which establishes that "the external inspection procedure must be notified to the taxpayer or tax obligor with a minimum advance notice of five days prior to its beginning" (Articles 107 to 111 of the initial petition).

9.2. Therefore, the Petitioner understands that the notification made to it "suffers from a defect of formality," which "tainted the entire tax inspection procedure and subsequent assessment acts."

9.3. The Petitioner further argues that, even if not understood in this way, Article 36, section 2, of the RCPIT establishes that the procedure "is continuous and must be concluded within a maximum period of 6 (six) months from the notification of its commencement," whereby when the notification occurred the six-month period had already elapsed.

9.4. In these circumstances, the Petitioner understands that there was a disregard of "the freedoms, rights and guarantees of the taxpayer" and a violation of the principle of legality which is reflected in the "prohibition of payment of taxes that have not been established in accordance with the Constitution, which is part of individual guarantees, therefore having the applicable provisions a mandatory character (see Article 18 of the Constitution of the Portuguese Republic)."

9.5. The Petitioner further understands that "in accordance with the principle of legality, taxes can only be collected when the assumptions to which the law conditions the existence of a tax obligation are met, with observance of taxpayer guarantees established in law as a form of reaction, it being unlawful and illegal to proceed with derogations from such guarantees as acquired rights in force of certain law as this breaks the systematic unity of tax law" and that "having been issued the notice letter on 26.01.2012, strictly speaking not only had more than 6 (six) months already elapsed from the commencement of the tax inspection procedure, with total disregard for the norms of the R.C.P.I.T., but the tax ceased to be enforceable, as not all assumptions were met upon which the law makes the existence of a tax obligation dependent."

9.6. The Petitioner further argues that "even if notification was made before the expiration of the statute of limitations period, that is, on 26.01.2012, thus not being originally illegal, the reality is that, with the notification occurring much later after the commencement of the tax inspection procedure, it became materially ineffective, tainting, as previously stated, the entire procedure" and that, notification being a condition of effectiveness of the act, "for statute of limitations to apply, it is not sufficient to have the assessment act; it is also required that the certainty be evaluated that the act was not brought to the taxpayer's knowledge within that period" (Articles 125 and 126 of the initial petition).

Invalidity of Administrative Act

10.1. The Petitioner further understands that the notice letter communicating to it the commencement of the inspection should be substantiated, by virtue of the provision of Article 77 of the LGT, which did not occur (Articles 127 to 140) and that the substantiation of the TIR, regarding VAT assessments, does not prove transparent as they are based on a mere indicative table (Articles 141 to 145 of the initial petition).

10.2. The Petitioner further argues that, "given the fact that essential formalities were precluded at the commencement of the tax inspection procedure, all acts practiced thereafter, namely the additional assessments of V.A.T. and C.I.T. did not produce any effect" and that the V.A.T. assessments arising from that inspection, and in the amount referred to above, if considered to have been notified to the now Petitioner in due time, that is, within the due period, "became an invalid act, in that they did not prove transparent as they were based on a merely indicative table."

On the Statute of Limitations of the Tax

11.1. The Petitioner argues that since CIT is a periodic tax, the statute of limitations period is counted "from the end of the year in which the tax event occurred," but in section 2 exceptions are made for cases of error evidenced in the declaration or use of indirect methods and that, if agreeing with the position of the AT as to the corrections made, it cannot fail to consider that there is error evidenced in the matter of VAT, as well as in the matter of CIT, as the error was detected by the AT through a mere examination of the elements that made up the accounts, without any detailed or thorough analysis. Therefore, the Petitioner understands that the three-year period provided for in section 2 of Article 45 of the LGT would be applicable.

Compensatory Interest and Culpability Determination

12.1. The Petitioner argues that compensatory interest depends on a determination of culpability which, in this case, cannot be made, as the accounting errors are not imputable to it (Articles 152 to 161 of the initial petition).

B.2. Position of the Tax and Customs Authority

The Respondent filed its Response to the initial petition, in which it specifically contests the arguments raised, alleging the following, in summary:

In the CIT Sphere:

Revenues (Point A.2.1 of the TIR)

1.1. The Petitioner's invoicing was checked and compared with existing accounting records, and it was found that there are revenues in the amount of € 113,727.70 which were not considered in the net result of the fiscal year determined based on the trial balance which served as the basis for completing the Form 22 declaration for the fiscal year 2008. The amount of € 113,727.70 is explained by the difference between the amount of the balances of account 72 of the two sets of extracts – € 1,121,160.59 – and the amount of the balance of account 72 of the final analytical trial balance which served as the basis for completing the model 22 declaration – € 1,007,432.89. The difference determined of € 113,727.70 constitutes a violation of Article 17, section 3, paragraph b) of the CIT Code, see Articles 34 and 35 of the Response.

1.2. The Petitioner on 17 April 2012 (pgs. 55 to 63 of Annex 4 to the TIR) sent an email to the Tax Inspection Services justifying the difference found with the issuance of credit notes dated 31 August 2008 resulting from payment agreements made as part of customer collection efforts. The Petitioner also sent a table entitled "relationship between CN in the system and in accounting," see Article 37 of the Response. The IT analyzed the information sent by the Petitioner again and found that with respect to the list of credit notes sent (from No. 1 to No. 15), for credit notes Nos. 6 and 7, there are no accounting records. Additionally, it found that with respect to the remaining credit notes, more specifically from No. 4 to No. 15, they do not appear in the accounts, show coincidence of numbering with the documents that were entered, some customers ceased activities on dates prior to the issuance of the credit note and there are no receivables appearing in the first extract prepared by the Official Accountant ... that support the credit notes, see Articles 36 to 41 of the Response.

1.3. It is also noted that with respect to Customer Cl the Petitioner would be the one owing that entity and not the other way around, proof of this was the payment of € 30,000 (as per checks issued) in 2008, see Article 43. Also with respect to another customer – B – it states that the Petitioner received € 4,975.79 having the same issued credit notes within agreements with doubtful collection customers, but in reality, if these receivables existed, they should only be considered uncollectible if they complied with the provision of Article 39 of the CIT Code. It concludes that as a result of the inspection procedure carried out, the credit notes presented by the Petitioner did not appear in the accounts, there were other credit notes with coincident numbering, there are credit notes that concern receivables that were not recognized and that most customers had ceased activity before 2008, see Articles 42 to 47 of the Response. It concludes that whether in the administrative appeal sphere and/or in the arbitral contentious sphere, the Petitioner submitted three copies of credit notes signed and stamped by customers, alleging that they are proof of their existence and that they were not considered individually but only in the final analytical trial balance thereby contributing to the net result of the fiscal year but that this does not conclusively prove that they contributed to the formation of the net result and the taxable result of the fiscal year 2008, whereby the positive adjustment is legal and complies with the applicable tax legal provisions in force at the time of the facts, see Article 48 of the Response. It further states that in the arbitral proceedings, in the initial petition, the Petitioner did not present any fact, ground or initial document, see Article 49 of the Response.

Provisions/Adjustments of Receivables (Point A.2.2 of the TIR)

1.4. It states that provisions intended to cover receivables arising from normal activity which may be considered as doubtful collection and are evidenced as such in the accounts may be deductible for tax purposes under the provision of Article 34, section 1, paragraph a) of the CIT Code, see Article 50 of the Response. In accordance with the Official Chart of Accounts (OCA), provisions constituted in each fiscal year are recorded by debit in an "Provisions of the Fiscal Year" account (account 67) by offset to the "Adjustment of Receivables Account" (account 28) whose balance represents the accumulated value of provisions for receivables. On the other hand, in accordance with Article 121 of the CIT Code read in conjunction with Ordinance 359/2000 of 20 June, taxpayers should constitute a fiscal file containing the Schedule 30 (Schedule of Provisions) which would demonstrate the constitution, increase or reduction thereof, the Petitioner not having such official schedule but rather another provision schedule of free format in which the constitution of a provision of € 137,865.95 is recorded which coincides with the amount recorded in the final analytical trial balance in account 671 regarding "Provisions of the Fiscal Year," see Articles 50 and 51 of the Response.

1.5. In the annual declaration – Simplified Business Information (IES) of 2007, a balance of € 46,772.50 is carried forward in account 28, see Annex 6 TIR, pgs. 2 and following) although the same account – account 28 – at the end of 2008, presents the value of provisions constituted in the fiscal year 2008 (€ 137,865.95) whereby it denotes the elimination of the balance of provisions constituted in years prior to 2008 in the amount of € 46,772.50. From this elimination in the amount of € 46,772.50 a revenue should have been recognized in the same amount in accordance with Article 34, section 2 of the CIT Code, which was not done and therefore should be considered a correction to the taxable base of that amount, see Articles 52 to 56 of the Response.

1.6. As to the amount of € 15,599.12 regarding customers listed in the table referred to in Article 56 of the Response, there is no evidence of collection attempts, therefore not meeting the conditions provided in section 1 of Article 35 of the CIT Code, whereby the provision constituted regarding these customers cannot be accepted fiscally, see Article 57 of the Response. There is also an amount of € 45,459.16 regarding provisions constituted under paragraph a) of section 1 of Article 34 of the CIT Code which concern customers not identified either in the final analytical trial balance or in the extracts presented to the IT, see Articles 57 to 61 of the Response. Regarding three customers: D; E and F, clarifications were provided by the Petitioner but which did nothing to alter the IT's conclusions regarding the positive adjustments to be made in the provisions sphere, see Articles 62 to 64 of the Response.

1.7. The Respondent states that the Petitioner argues whether in the administrative appeal sphere or in the arbitral contentious sphere, that the balance of the Provision for customers carried forward from 2007 in the amount of € 46,772.50 concerns two entities: C Portugal (€ 15,112.55) and B (€ 31,659.95). In the first case – C – the elimination was due to an agreement of debt forgiveness due to the strong likelihood that the debt that C had to the Petitioner would not be paid. In the second case – B (subsequently designated as B2, S.A.) – this commercial company was subject to an insolvency process in 2004 but which the Petitioner only became aware of in the fiscal year 2008, see Articles 67 and 68 of the Response. The AT does not subscribe to this position based on the documents presented in the administrative appeal sphere by the Petitioner, see Article 71 of the Response.

1.8. The Respondent states that the Petitioner argues whether in the administrative appeal sphere or in the arbitral contentious sphere, that the balance of the Provision for customers carried forward from 2007 in the amount of € 46,772.50 was eliminated using exclusively balance sheet accounts and for that reason, there being no impact at the level of the formation of the fiscal result of 2008, see Article 69 of the Response, a position with which it does not agree for the reasons set forth in Article 70 of the Response thus maintaining the positive adjustment of € 46,772.50.

1.9. Regarding the evidence of collection efforts for provisioned receivables – € 15,599.12 – it maintains the position that the positive adjustment should be made for the reasons set forth in Article 72 of the Response.

Depreciations/Reintegrations of the Fiscal Year (Point A.2.3)

1.10. The Respondent in Articles 75 to 80 of the Response and in particular in Article 77 thereof, identifies three types of situations marked with the letters a) b) and c) which give rise to positive adjustments in the declaration of model 22 due to the fact that the costs regarding depreciations and accounting reintegrations referenced with the letters a) b) and c) are not eligible as fiscal cost by violating respectively section 2, paragraph e) section 1 and paragraph c) section 1, all of Article 33 of the CIT Code as well as in the case of the situation marked with the letter c), the provision of Regulatory Decree No. 2/90 of 12 January, see Articles 75 to 80 of the Response. The Petitioner did not contest whether in the administrative appeal sphere or in the arbitral contentious sphere, the positive adjustment, see point 81 of the Response.

Costs/Expenses Not Deductible for Tax Purposes (Point A.2.4)

1.11. In the inspection carried out, documents were detected relating to expenses that do not constitute fiscally deductible cost the Petitioner having been notified under section 4 of Article 59 of the General Tax Law (LGT) to justify the same. The Petitioner for some cases validly justified the amounts and in others it was insufficient the same having also been a meeting between the IT and the Petitioner to clarify some outstanding issues, see Articles 82 and 83 of the Response.

1.12. Thus duplications were detected in the accounting of costs which amounted to € 15,172.24, expenses which the Petitioner could not demonstrate the indispensability thereof which amounted to € 8,289.13, expenses of a personal character which amounted to € 932.19 and receipts that did not contain the fiscal identification of the supplier or purchaser of the services which amounted to € 2,197.20 totaling € 26,590.76, respectively, see Articles 85, 86, 89 and 96 of the Response. In the administrative appeal sphere, the Petitioner, regarding the total amount of € 559.75 related to a video in the amount of € 480.00 and films and books offered in the amount of 79.75, contested the non-eligibility thereof as fiscal cost, the IT maintaining the amount of € 559.75 as a title of positive adjustment for lack of proof of the causal nexus thereof with the activity pursued by the Petitioner, see Article 99 of the Response.

1.13. In the arbitral proceedings in the initial petition the Petitioner did not present any fact, ground or additional document, see Article 100 of the Response.

Other (Point A.2.5 of the TIR)

1.14. Debits were detected in revenue accounts more specifically in account 72 – € 3,097.04 – and in account 7374 – € 1,628.94 for which there is insufficient justification. There was also a record as title of costs with vehicle insurance in account 622235 in the amount of € 682.05 without documentary support, whereby there is a positive adjustment of € 5,408.03. On the other hand, a correction favorable to the Petitioner was detected for the entry of three invoices in duplicate in the amount of € 11,949 and of wrongful entry of € 1,067.24 totaling € 13,016.24. The value of correction in favor of the Petitioner of € 7,608.21 results from the difference between the amount of the positive adjustment (in favor of the State) of € 5,408.03 and corrections in favor of the Petitioner of € 13,016.24 having not been contested in the administrative appeal sphere nor in the arbitral contentious sphere, see Articles 101 to 106 of the Response.

In the VAT Sphere

Credit Notes (Point A.3.1 of the TIR)

1.15. Tax improperly regularized in favor of the Petitioner by not having in its possession evidence that the purchaser became aware of the rectification and thereby infringing the provision of Article 78 of the VAT Code. The Petitioner did not contest in the administrative appeal sphere nor in the arbitral contentious sphere the positive adjustment, see Articles 108 to 110 of the Response.

Debit Note 5/2008 (Point A.3.2 of the TIR)

1.16. The debit note 5/2008 of 25 June was issued without VAT being assessed by the Petitioner on the ground that the transaction would be exempt from VAT under paragraph c) of section 30 of Article 9 of the VAT Code. The IT considers that a transaction not exempt from VAT is at issue on the basis set forth in Article 112 of the Response, whereby VAT should be assessed in the amount of € 630 not being contested in the administrative appeal sphere nor in the arbitral contentious sphere, the positive adjustment, see Articles 111 to 114 of the Response.

Expenses with VAT Tax Not Deductible (Point A.3.3 of the TIR)

1.17. There is a positive adjustment of € 1,556.29 resulting from the adjustment made in the CIT sphere as title of Costs Not Deductible for Tax Purposes (Point A.2.4 of the TIR) for the same violating the provision of Articles 19 to 21 of the VAT Code, not being contested in the administrative appeal sphere nor in the arbitral contentious sphere, the positive adjustment, see Articles 115 to 117 of the Response.

Other (Point A.3.4 of the TIR)

1.18. There is a VAT correction in favor of the taxpayer of 2,509.20 resulting from the corrections for CIT purposes mentioned in point A.2.5 – Other as well as a positive adjustment of €104.33 relating to the undue deduction of VAT in the rental of a light vehicle infringing the provision of paragraph b) of section 1 of Article 21 of the VAT Code, not being contested in the administrative appeal sphere nor in the arbitral contentious sphere, the positive adjustment, see Articles 119 to 122 of the Response.

Values Declared – Periodic Declarations (Point A.3.5 of the TIR)

1.19. The IT detected divergences between the values recorded in the accounts and the values declared for the fiscal year 2008 either at the level of tax assessed or at the level of deductible tax having presented in pgs. 23 and 24 of the TIR a summary table of all corrections for VAT purposes, including those referred to above, having determined a tax due of € 62,187.53 (€ 62,222.53 - € 17.35 - €17.35), see Article 123 of the TIR.

Autonomous Taxation (Point A.4.1 of the TIR)

1.20. The Petitioner presented in model 22 relating to the fiscal year 2008, autonomous taxation in the amount of € 2,986.78, not having presented any breakdown of the amounts supporting the calculation made for purposes of autonomous taxation. The IT taking into account the proposed corrections, made a new calculation of autonomous taxation, having determined a new amount of € 6,302.80, giving rise to a positive adjustment of € 3,316.02, not being contested in the administrative appeal sphere nor in the arbitral contentious sphere, the positive adjustment proposed, see Articles 124 to 128 of the Response.

Of the Inspection Procedure

2.1. The statute of limitations period of 4 years, provided for in Article 45, section 1, of the LGT, is applicable, counted from the beginning of the civil year following the year in which the tax events occurred (Articles 18 to 20 of the Response).

2.2. This period is suspended with the notification of the service order, which occurred on 8-12-2008, pursuant to Article 46, section 1, of the LGT (Articles 21 and 22 of the Response).

2.3. The commencement of the inspection occurs with the signing of the service order, pursuant to Article 51 of the RCPIT and not with the notification provided for in Article 49 of the same (Articles 22 to 26 of the Response).

2.4. The conclusion of the inspection occurs on the date of notification of the diligence note, which was signed on 30-5-2012 (Articles 27 and 28 of the Response).

2.5. The statute of limitations period of three years is not applicable, as there are no errors evidenced in the declaration (Articles 29 to 31 of the Response).

B.3. Submissions

1. In the written submissions, the Petitioner regarding the corrections proposed by the IT in the CIT and VAT sphere, again argued what had already been raised in the initial petition.

2. In its written submissions, the Respondent again stated what had already been argued in the Response bringing to bear an exhaustive analysis of Doc. 15 attached to the initial petition.

3. From the analysis of Doc. 15, the Tax and Customs Authority states that:

3.1. It is a journal entry dated 31 August 2008, to which the number 80.038 was assigned with no documentary support for the entries and movements, containing only in the "descriptions of entries" mere references to some credit notes.

3.2. The document was never presented during the inspection procedure.

3.3. The Petitioner with Document No. 15 intends to indicate which entries justify the difference of €113,727.70 determined by the IT, resulting from the comparison between the sum of the extracts used in the inspection procedure and the values declared for tax purposes that appear in the final analytical trial balance.

3.4. The movements entered by debit to account 72 – "Provision of Services Domestic Market" justify the difference determined by the IT, that is, € 113,727.70.

3.5. Upon issuance of credit notes in which there is a reduction of the taxable base subsequent to the issuance of the invoice, account 72 is debited as well as a VAT payable account (meaning a reduction of VAT to be paid to the State) by offset to credit of a customer account.

3.6. The amount of € 113,727.70 is decomposed by various debits to account 72 by offset to credit of a customer account and by debit of the VAT – Payable account. In Article 53 of the written submissions are identified the customers that were recorded by offset to credit. In Articles 54 to 60 of the written submissions an exhaustive analysis is carried out regarding each entry that was made in the accounts recording the customer accounts (offset to credit) identified in Article 53 of said submissions.

Thus:

3.6.1. The debit movement to account 7211 in the amount of € 25,000 concerns credit note 11 relating to G, a customer that had ceased its activity in 2004 and that does not appear in the first account extract delivered by the Official Accountant ..., information contained in the table presented in pg. 10 of Point A.2.1 of the TIR;

3.6.2. The debit movement to account 7211 in the amount of € 2,731 concerns credit note 8 relating to C but in accordance with the Petitioner's accounts what existed was a debt of the Petitioner to C in the amount of € 2,482.85, information contained in the table presented in pg. 10 of Point A.2.1 of the TIR;

3.6.3. The debit movement to account 7211 in the amount of € 75,503.92 concerns credit note 5 relating to H, a customer that does not appear in the first account extract delivered by the Official Accountant ..., information contained in the table presented in pg. 10 of Point A.2.1 of the TIR;

3.6.4. The debit movement to account 7211 in the amount of € 88.28 concerns credit note 14 relating to customer I, a customer that had ceased its activity in 2007 and that does not appear in the first account extract delivered by the Official Accountant ..., information contained in the table presented in pg. 10 of Point A.2.1 of the TIR;

3.6.5. The debit movement to account 7211 in the amount of € 4,301.91 concerns credit note 13 relating to customer J, a customer that does not appear in the first account extract delivered by the Official Accountant ..., information contained in the table presented in pgs. 9 and 10 of Point A.2.1 of the TIR;

3.6.6. The debit movement to account 7211 in the amount of € 6,101.62 has as offset debit movements to the VAT – Payable account of € 1,238.28 and credit movements of customer accounts. The customers recorded offset to credit in the total of € 7,339.90 are: K – 5,461.20; L – € 660.51 and M – €1,218.19 in which the only description is "miscellaneous regularizations";

3.7. There are entries regarding which it is not known what the direct offset is, see Articles 61 to 63 of the written submissions.

3.8. Additionally there are entries with the description – "miscellaneous regularizations" – in which customer accounts are credited as offset to the Shareholders account and the VAT – Payable account, which may indicate that these are accounting entries that have to do with balance sheet cleanup, see Article 64 of the written submissions.

3.9. As a consequence of the analysis of Document No. 15, the Respondent states that the issuance of credit notes to grant debt forgiveness is not fiscally/accounting acceptable, being more correct to recognize customers of "Doubtful Collection" and regarding them constitute the respective provision, which would be deductible fiscally in accordance with the applicable fiscal rules in force, see Articles 65 and 66 of the written submissions.

3.10. From the analysis of Document No. 15 it was not proven that the debt of the customers, for which credit notes were issued, was previously recognized in the accounts questioning that, without debt, why the issuance of credit notes. And why the issuance of credit notes for customers that had already ceased activity prior to the issuance thereof, see Articles 67 and 68 of the written submissions.

C. Findings of Fact

C.1. Facts Considered Proven

a) The Petitioner A (A) has the ...:

b) The Petitioner began its activity of "Advertising Agencies" – CAE 73110, on 29-12-1995 (Tax Inspection Report attached to the initial petition as document No. 9, whose contents are hereby reproduced, hereinafter "TIR");

c) For purposes of Value Added Tax, the company is a tax subject framed in the normal monthly regime (TIR);

d) The Petitioner is obligated to maintain organized accounts (TIR);

e) In compliance with Service Order No. ..., issued by the Finance Directorate of Lisbon, SIT – Tax Inspection Services – Division VI, opened on 25-07-2011, an external inspection procedure was carried out with respect to the Petitioner, of general scope, relating to the year 2008 (TIR);

f) The external inspection procedure commenced on 08-02-2012, and on that date the managing partner of the Petitioner was notified (TIR and document with the designation "Notifications of Inspection Procedure" attached with the response);

g) The Official Accountant responsible for the company's accounts in 2008 was, according to the Directorate-General of Taxes databases, N (TIR);

h) However, in the year 2008, the accounts were in charge, until August 2006, of the company: O, represented by the technician ... (TIR);

i) From September 2008, the contract with that company was terminated and P was contracted (hereinafter "P") (TIR);

j) It was the first Official Accountant who fulfilled the declarative obligations and who proceeded with the closing of the accounts for the fiscal year 2008, as the company P refused to close them, in light of errors and omissions in the accounting entries relating to the months prior to September 2008 (TIR);

k) The organization of the accounts changed in September, coinciding with the change of accounting company (TIR);

l) The extracts for September to December 2008 present the accounts without opening balances, the accountant of P having limited himself to entering the documents relating to that period, without transferring the data existing in the accounts on 31 August 2008 (TIR);

m) P disregarded the accounting work carried out in the first eight months of the year, modified the organization of the journals and adopted a chart of accounts which presents some differences, namely in the headings relating to third parties, or in the breakdown of cost and loss accounts (TIR);

n) Thus, the Petitioner presented account extracts relating to the period of January to August 2008 and account extracts with only the accounting movements of September to December 2008;

o) The account extracts for the period from September to December 2008 did not contain the opening balance as of 1 September corresponding to the closing balance of 31 August 2008 (Articles 23 and 24 of the initial petition);

p) The closing of the accounts for the fiscal year 2008 was carried out by the Official Accountant ..., who, for that purpose, combined the amounts appearing in the two sets of extracts, those prepared in the first half of the year, under his supervision, and those prepared in the second half, by the other accounting company, the result of this work serving as the basis for the completion of the tax declarations sent by the company (testimony of witnesses ... and ...);

q) In accordance with the declarations presented, in the year 2008 the Petitioner company presented a fiscal profit of € 8,900.74 (TIR);

r) In the year 2008, the Petitioner submitted periodic VAT declarations, presenting, in all periods, tax to be paid to the State;

s) The final trial balance resulting from this work presents differences in relation to the sum of the amounts in the extracts (TIR);

t) The Tax Inspection examined the company's invoicing and compared it with existing records, finding that there are € 113,727.70 of revenues not considered in the value of the net result of the fiscal year determined by the trial balance that served as the basis for completing the model 22 declaration, in that the sum of account 72 of the two sets of extracts presents a total of €1,121,160.59, while in the final trial balance this amount is €1,007,432.89;

u) On 17 April 2012, an email was sent to the Tax and Customs Authority from the Petitioner indicating that they had found an explanation for there being revenues not considered in the declarations filed, being that it related to the existence of credit notes not considered in the accounts, dated 31 August 2008 and issued as a result of agreements made in connection with collection efforts to customers;

v) Attached to the email, the Petitioner submitted a table entitled "relationship between CN in the system and in accounting," with the following contents:

[Table with customer designations and credit note information]

w) There are no accounting records relating to credit notes Nos. 6 and 7 of the table of the preceding paragraph;

x) Credit notes Nos. 4 to 15, in addition to not appearing in the accounts, show coincidence of numbering with the documents that were entered;

y) Some of the customers mentioned in these credit notes referred to ceased their activity on dates prior to the issuance of the document and the majority do not even appear in the first existing extract, as shown in the following table:

z) With respect to customers for which accounting records exist (in the extracts), the following is found:

aa) With respect to C, the records and documents existing demonstrate that A was indebted to this company and that, in fact, made a payment of €30,000.00 in 2008;

bb) With respect to B, from the opening balance, the company received €4,975.79 of the amount owed.

cc) The Petitioner stated that it issued credit notes presented as part of agreements with doubtful collection customers;

dd) The provision schedule for doubtful collection existing and presented does not follow the official model, demonstrating only the constitution of €137,865.95 of provisions in the year, an amount which coincides with the amount presented in the final trial balance, in account 671, regarding provisions of the fiscal year (TIR);

ee) From the prior year a balance would be carried forward (in account 28) of € 46,772.50, relating to provisions, as mentioned in the annual declaration filed for the fiscal year 2007 (TIR and its annex 6);

ff) In the year 2008, the value of the previously constituted provisions disappears, with the account for recording the total provisions existing (28) showing only the value of provisions constituted in the year, not considering the balance of provisions constituted in the prior year in the amount of € 46,772.50 (TIR);

gg) The elimination of previously constituted provisions was not recorded as revenue (TIR);

hh) The Tax and Customs Authority understood that no evidence was found that measures were taken for the collection of amounts owed, in the following situations of provisions made by the Petitioner as relating to doubtful collection receivables, whereby it made a correction to the taxable base of the Petitioner in the amount of € 15,599.12: (TIR)

[Table with customer information and amounts]

ii) The Tax and Customs Authority understood in the TIR that the following receivables for which provisions were constituted were not evidenced in the Petitioner's accounts: (TIR)

[Table with customer information and amounts]

jj) In light of the facts referred to in the preceding paragraphs, regarding provisions, the Tax and Customs Authority made the following corrections to the taxable base of the Petitioner: (TIR)

[Table with provision adjustments]

kk) The Tax and Customs Authority understood that the totality of depreciations carried out could not be accepted as a tax cost for the year 2008, having made corrections in the following terms: (TIR)

Regarding the first depreciation, the Tax and Customs Authority made the correction by understanding that it was carried out after the maximum period of useful life of the asset, as defined in Article 33, section 2 of the CIT Code, in violation of the provision of Article 33, section 1, paragraph d) of the Code.

As to the 2nd and 3rd depreciations, they relate to motor vehicles with value exceeding €29,927.87, for which a limitation on the deductible cost value is provided for in Article 33, section 1 e) of the CIT Code.

As for the 4th and 5th depreciations, the Tax and Customs Authority made the corrections by understanding that they were carried out at rates exceeding those provided in the tables of Regulatory Decree 2/90 of 12 January, in violation of the provision of Article 33, section 1 c) of the CIT Code. (TIR)

ll) In the Petitioner's accounts for the fiscal year 2008 there were duplications of the accounting of documents relating to costs, namely the following: (TIR)

[Table with duplication details]

mm) In the Petitioner's accounts for the fiscal year 2008, the following expenses were included as costs: (TIR)

[Table with expense details]

nn) The last document in the list that appears in the preceding paragraph refers to a journal entry that includes various invoices/receipts, from which the Tax and Customs Authority questioned the existence of expenses in the amount of €204.75, not having considered justified the following, relating to personal hygiene/beauty products: (TIR)

[Table with product details]

oo) The documents mentioned in the two tables that appear in the preceding paragraphs relate to expenses of a personal character, for purposes unrelated to the company's objectives, which did not contribute to the realization of taxable income or gains; (TIR)

pp) The Tax and Customs Authority also understood that the following expenses were of a personal character, for which the Petitioner presented explanations that the Tax and Customs Authority considered incongruous: (TIR)

[Table with expense details]

qq) The Petitioner indicated to the Tax and Customs Authority that the supermarket expenses [marked with the letter a) in the preceding list] relate to "fruits, milk, coffee, vegetables, olive oil, yogurts, etc., which at that time the company had available for consumption"; the invoices presented in addition to the expenses mentioned by the Petitioner include the purchase of potatoes, cod steaks, shampoo, toothbrushes and toothpaste;

The Petitioner indicated that the books and films purchased at UU, in the invoices also marked with the letter a), are for internal consumption as research material, but the Petitioner did not indicate which project (or client) required the research, whereby the Tax and Customs Authority understood that they could not be considered as tax costs; (TIR)

The Petitioner indicated that the expenses marked with a b) in the table of the preceding paragraph were necessary for the provision of a service to a client, for which invoice 2008.... was issued, accompanying which there is the respective budget (M-DM.2008....), which does not break down the costs listed, and relates to the holding of a Christmas cocktail – mystery dinner, the Tax and Customs Authority not having accepted as costs the expenses incurred on a date or time after 23-12-2008, when the event was held. (TIR)

rr) In the Petitioner's accounts for the fiscal year 2008 there were two entries whose supporting documents are receipts without fiscal identification of the supplier and/or purchaser of the services, which led the Tax and Customs Authority to make a correction to the taxable base of the Petitioner in the following amount: (TIR)

[Table with amount details]

ss) The Tax and Customs Authority also made corrections to the CIT taxable base relating to: (TIR)

– an entry by debit in account 72, in the amount of € 3,097.04, whose supporting document (document 50008, journal 32 of 31-5-2008) was understood not to be sufficient for its existence;

– entry by debit in account 7374, in the amount of € 1,628.94, supported by a journal entry (document 12001, of journal 1, of 31-12-2008);

– costs recorded as vehicle insurance in account no. 622235, in the amount of € 682.05, without documentary support;

tt) In the Petitioner's accounts documents were also found that were recorded with incorrect net values, namely with respect to the breakdown of cost in relation to deductible VAT, whereby the Tax and Customs Authority made corrections for CIT and VAT purposes in the following terms: (TIR)

[Table with correction details]

uu) The Tax and Customs Authority made favorable corrections to the Petitioner in the total amount of € 7,608.21, whereby the corrections made, in their entirety, relating to the CIT taxable base, were as follows: (TIR)

[Table with total corrections]

vv) In the Petitioner's accounts there were two credit notes that were issued for rectification for less of the taxable value (regularization of tax in favor of the taxpayer) without the Petitioner having in its possession proof that the purchaser became aware of the rectification, namely the following, regarding which the Tax and Customs Authority made corrections for VAT purposes: (TIR)

[Table with credit note details]

ww) The Petitioner issued debit note No. 5/2008, of 25 June, recorded in account 732 – Supplementary Income, in journal 50, under No. 60024, with the description "Room rental from January to June 2008," in the amount of € 3,000.00, without VAT assessment, the Tax and Customs Authority understanding that VAT was due at the rate of 21%, in the amount of € 630.00; (TIR)

xx) Regarding the documents referred to in the preceding paragraphs oo) to vv), on which it based the corrections to the CIT taxable base, the Tax and Customs Authority understood that the listed expenses did not serve the Petitioner's objectives, as they were the acquisition of goods or services which did not contribute to the realization of taxable operations, whereby the VAT referred to in the invoices in question was not deductible, and corrected the amounts of tax deducted in the periodic declarations, in the total of €1,556.29, in the following terms: (TIR)

[Table with VAT correction details]

yy) In light of the existence of duplicate invoice entries which justified correction of the CIT taxable base in favor of the Petitioner, the Tax and Customs Authority also made correction for VAT purposes in the following terms: (TIR)

[Table with VAT correction details]

zz) The Tax and Customs Authority also made a correction for VAT purposes in the amount of € 104.33, in the period ...M, relating to document No. ..., recorded in journal 21 on 31-7-2008, regarding the deduction of tax in obtaining a light vehicle service, by understanding excluded from the right to deduction this type of expense; (TIR)

aaa) The Tax and Customs Authority upon checking the periodic declarations filed, found various divergences between the amounts recorded in the accounts and those declared – either at the level of assessed tax, or of deductible tax, making the corresponding corrections, in accordance with the terms referred to in the tables that follow: (TIR)

[Tables with VAT declaration details]

bbb) The totality of the corrections made for VAT purposes was in the amount of € 62,187.83, in accordance with the table that follows, excluding those relating to the periods ...M and ...M, in which the correction to be made is less than 25 euros: (TIR)

[Table with VAT corrections by period]

ccc) In the model 22 declaration relating to the fiscal year 2008, the Petitioner presented as the result of the calculation of autonomous taxation the amount of € 2,986.78, but presented a breakdown of the amounts making up the operation; (TIR)

ddd) Taking as a basis the amounts recorded in the accounts and the corrections referred to, the Tax and Customs Authority arrived at the following value for autonomous taxation: (TIR)

[Table with autonomous taxation calculation]

eee) In light of the amount referred to in the preceding paragraph and the amount declared, the Tax and Customs Authority made a correction relating to autonomous taxation in the amount of € 3,316.02 (€ 6,302.80 – € 2,986.78) (TIR);

fff) The Petitioner was notified of the Tax Inspection Report on 12-7-2012 (document submitted by the Tax and Customs Authority with the designation "Notifications of Inspection Procedure");

ggg) Regarding the corrections referred to relating to VAT, the following additional assessments of this tax were made on 31-7-2012, in the total amount of € 62,185.83: ([1]) (document attached to the initial petition)

– No. ...39, in the amount of € 27,207.75, relating to period 0802;

– No. ...41, in the amount of € 2,602.42, relating to period 0804;

– No. ...43, in the amount of € 8,514.39, relating to period 0805;

– No. ...45, in the amount of € 14,034.24, relating to period 0806;

– No. ...47, in the amount of € 8,447.75, relating to period 0807;

– No. ...49, in the amount of € 1,352.01, relating to period 0809;

– No. ...51, in the amount of € 27.27, relating to period 0810;

hhh) Regarding the corrections referred to relating to VAT, the following compensatory interest assessments were made on 31-7-2012, in the total amount of € 10,868.61: (document attached to the initial petition)

– No. ...38, in the amount of € 802.21, relating to period 0802;

– No. ...40, in the amount of € 4,609.66, relating to period 0802;

– No. ...42, in the amount of € 423.56, relating to period 0804;

– No. ...44, in the amount of € 1,357.64, relating to period 0805;

– No. ...46, in the amount of € 2,188.57, relating to period 0806;

– No. ...48, in the amount of € 1,289.61, relating to period 0807;

– No. ...50, in the amount of € 197.36, relating to period 0809;

iii) On 18-7-2012 the CIT assessment No. 2012 ... was prepared, a copy of which constitutes document No. 2 attached to the initial petition, whose contents are hereby reproduced, from which a value to be paid of € 73,653.55 results;

jjj) On 23-7-2012, assessments of compensatory interest and default interest were made with the numbers 2012 ... and 2012 ..., in the amounts of € 8,111.01 and € 22.10 respectively, relating to the assessment referred to in the preceding paragraph;

kkk) The Petitioner filed administrative appeals regarding the VAT and CIT assessments on 28-11-2012, which were dismissed) (documents Nos. 3 and 4 attached to the initial petition, whose contents are hereby reproduced);

lll) On 29-4-2013, the Petitioner filed hierarchical appeals of the decisions dismissing the administrative appeals (documents Nos. 5 and 6 attached to the initial petition, whose contents are hereby reproduced);

mmm) The hierarchical appeals were not decided within the 60-day period;

nnn) On 27-9-2013, the Petitioner filed the request for constitution of the arbitral tribunal which gave rise to the present proceedings;

ooo) Until the year 2008, the Official Accountant N was professionally well regarded, having that year personal problems that altered his professional behavior (testimony of witness ...);

ppp) For the closing of the accounts relating to the fiscal year 2008, the Petitioner had to use the Official Accountant N as the company P, which was engaged to handle the accounts from September 2008, refused to do the closing, alleging impossibility derived from the irregularities it found relating to the period that elapsed until August of that year (testimony of witnesses ... and ...).

C.2. Facts Not Proven and Rationale for Decision on Facts

1. The facts were determined to be proven based on the Tax Inspection Report and the administrative file and as to the points indicated, on the testimony of witnesses (testimony of witnesses ... and ...), who appeared to testify with impartiality and with knowledge of the facts about which they testified.

2. The Petitioner, in the administrative appeal sphere, states that the elimination of balances of provisions carried forward from prior years relating to receivables that are pending legal proceedings should not have tax effects, provided that the elimination of these balances is carried out among balance sheet accounts and under Article 34 of the CIT Code, see Articles 93 to 97 of the Hierarchical Appeal corresponding to Doc. 6 attached to the initial petition. It was not proven that the entity B was insolvent as nothing appears in the case file in this regard.

3. The IT in Point A.2.1 – Revenues of the TIR states that the amount of € 113,727.70 ([2]) was not considered in the net result of the fiscal year which served as the basis for completing the model 22 declaration for the fiscal year 2008, there thus being an omission thereof. The aforementioned value of € 113,727.70 results from the difference of the sum of account 72 of the two sets of existing extracts – € 1,121,160.59 – and the amount appearing in the trial balance – € 1,007,432.89 with this difference needing to be a correction to the taxable base and the same to be considered as a violation under paragraph b) of section 3 of Article 17 of the CIT Code. The Petitioner in Articles 68 and 69 of the initial petition, regarding the difference determined of € 113,727.70, identifies the documents that give rise to that difference – Docs. 12, 13 and 14 – justifying the same through the non-consideration of an aggregating movement – Doc. 15 – which has recorded the accounting entries of the various credit notes that did not appear in the account extracts delivered to the IT, see Article 70 of the initial petition.

Documents 12, 13 and 14 presented by the Petitioner as attachments to the initial petition appear in the administrative file which instructs the present case and correspond respectively to pgs. 10/47 to 25/47 Annex 3 of the administrative file, pgs. 26/47 to 47/47 Annex 3 of the administrative file and pgs. 2/47 to 8/47 Annex 3 of the administrative file. The aforementioned documents are the documents that support the amounts of € 1,121,160.59 and € 1,007,432.89 which are at the origin of the difference determined of € 113,727.70.

Regarding Document 15, which according to the Petitioner would justify the difference of € 113,727.70, it appears that in accordance with the evidence brought into the case file, the documentation supporting the movements by debit to account 7211 in the amount of € 113,727.70 cannot justify the debit movement to account 7211, due to the fact that in some cases the customers in question do not appear in the Petitioner's accounts, as they did not appear in the first extracts delivered by the Official Accountant ... and in other cases they had ceased their activity prior to the issuance of the credit note, as was proven in the inspection procedure and subsequently alleged by the Respondent, the Petitioner not having been able to prove otherwise. On the other hand, the debit movement of account 7211 with the description of "miscellaneous regularizations" without any other justification and without any documentary evidence cannot, in accordance with the tax rules in force, justify the reduction per se of the taxable profit of the Petitioner regarding the fiscal year 2008. Thus the correction of € 113,727.70 is to be maintained.

1. The adjustments proposed at the level of provisions are decomposed as follows:

[Table with provision adjustments]

Regarding the reversal of the balance of the provision in the amount of € 46,772.50 it is found that in the annual IES declaration of 2007 in the financial statement of Balance Sheet in the heading Depreciation and Adjustments, a value of € 46,772.50 is recorded, see pgs. 3/8 Annex 6 of the administrative file. On the other hand, in the annual IES declaration of 2008, in the financial statement of Balance Sheet in the heading Depreciation and Adjustments, a value of € 137,865.95 is recorded, see Annex 5 of the administrative file, an amount that "crosses" with the amount recorded in the "Provisions of the Fiscal Year" account (account 67) and in the "Adjustment of Receivables Account" (account 28) of the fiscal year 2008. Thus, the balance carried forward from 2007 in the amount of € 46,772.50 was eliminated through the use of balance sheet accounts, that is, account 218 – Doubtful Collection Customers and account 28 – Adjustment of Receivables, without passing through any result account, see Articles 53, 54, 66 and 67 of the Response and Article 88 of the initial petition.

In this way, the Tribunal finds it proven that the balance of the Provision carried forward from 2007 recorded in account 28 – "Adjustment of Receivables" was eliminated without using result accounts (accounts of class 6 and accounts of class 7) and thus there was no recognition of a revenue. The elimination movement of the provision balance carried forward from 2007 was carried out only among balance sheet accounts.

Regarding the amount € 45,459.16 relating to provisions constituted in 2008 recorded in the accounts in account 67 "Provisions of the Fiscal Year," in accordance with the schedule appearing in Article 60 of the Response and pg. 13 of Point A.2.2 of the TIR appearing in the administrative file, the Petitioner was not able to prove that the aforementioned amount had underlying its constitution receivables over customers that were recorded in its accounts.

Regarding the amount of € 15,599.12 relating to provisions constituted in 2008 and recorded in the accounts in account 67 "Provisions of the Fiscal Year," the Petitioner presented no evidence of collection effort regarding the receivables which gave rise to the constitution of the provision.

D. Legal Issues

D.1. Question of Excusability and Burden of Proof of Quantification of Taxable Base

The Petitioner argues that, as the accounting errors are imputable to the Official Accountant who was in its employ in the fiscal year 2008, this is a situation of "excusable error."

The existence of accounting errors and declarations not imputable to the Petitioner may be relevant for purposes of any sanction liability (which is not at issue in the present case) and for compensatory interest, which presupposes fault of the taxpayer, but not for purposes of taxation, as what is at issue is determining what tax the Petitioner should have paid regarding the fiscal year 2008, in the VAT and CIT spheres.

In light of the principle of legality which must govern all activity of the Tax Administration (Articles 266, section 2, of the Constitution of the Portuguese Republic and Article 55 of the LGT), and of the principle of equality in the apportionment of public burden (Article 13 of the Constitution), the determination of taxable base must be carried out in light of the applicable legal rules, the existence of error, even if excusable, not being able to justify deviations from the norms on this matter.

Now, the rules regarding the apportionment of the burden of proof in the tax procedure are provided for in Article 75 of the LGT, in which it is established, as relevant herein, that "the declarations of taxpayers presented in accordance with the terms provided for in law are presumed to be true and made in good faith, as well as the data and computations recorded in their accounts or books, when these are organized in accordance with commercial and tax legislation, without prejudice to other requirements on which the deductibility of expenses depends," but the presumption does not apply when "the declarations, accounts or books reveal omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent the knowledge of the actual taxable base of the taxpayer."

These rules are applicable to the generality of taxpayers, regardless of whether they have the services of Official Accountants for compliance with their tax obligations.

Therefore, there is no legal support for excluding their applicability, in particular paragraph a) of section 2 thereof, as, resulting from the final part of this provision, what justifies the reversal of the rule of burden of proof is the real possibility that the Tax and Customs Authority may or may not be able to know with accuracy what the actual taxable base is.

Thus, even if the deficiency of the Petitioner's accounting entries is excusable, if it is not possible to achieve the result aimed at with the tax procedure for determination of taxable base, which is to know with accuracy the situation of the taxpayer, the doubts must be valued against the latter, who, with or without fault, did not comply with its tax obligations, and not against the tax administration which, because of that failure to comply, finds itself unable to carry out its activity with rigor.

It is on the basis of these rules regarding the burden of proof that the facts of the case must be assessed.

D.2. Question of Revenues Correction (Correction of CIT Taxable Base in the Amount of € 113,727.70)

The Tax Inspection, through examination of the Petitioner's invoicing and comparison with existing accounting records, found that there were revenues in the amount of € 113,727.70 which were not considered in the net result of the fiscal year determined on the basis of the trial balance which served as the basis for completing the Model 22 declaration for the fiscal year 2008. The difference is between the sum of account 72 balances of the two sets of extracts – € 1,121,160.59 – and the amount of account 72 balance of the final analytical trial balance which served as the basis for completing the model 22 declaration – € 1,007,432.89 [paragraph t) of the findings of fact].

The Petitioner does not dispute that this difference existed, arguing that it is due to the fact that there are credit notes issued in August 2008 and other documents, which were not recorded in the account extracts delivered to the Tax and Customs Authority, but which were recorded in the form of an aggregating movement appearing in the final analytical trial balance (Doc. 14 attached to the initial petition) and the decomposition of the amount of € 113,727.70 corresponding to the aggregating movement is found in Document No. 15 attached to the initial petition.

However, Document No. 15 attached to the initial petition does not permit the conclusion that the revenues referred to by the Tax and Customs Authority did not exist, as there were entries made by debit to account 7211 and appearing in that document totaling € 113,727.70 which have no documentary support whatsoever, as is the case with entries with the description of "miscellaneous regularizations." Additionally, there are also debits to account 7211 having as support the indication of the respective credit note, having been proven that, in some cases, there were no receivables of the Petitioner over the customers that gave rise to the credit note and, in other cases, the customer had already ceased its activity in periods prior to the issuance of the credit note.

In accordance with paragraph b) section 3 of Article 17 of the CIT Code (in its current version and at the time of the disputed tax facts)

"(...) the accounts must:

b) Reflect all operations carried out by the taxpayer and be organized in such a way that the results of operations and patrimonial changes subject to the general regime of CIT can be clearly distinguished from those of the others"

On the other hand, Article 115, section 3 of the CIT Code (at the time of the disputed facts and currently Article 123, section 2, of the CIT Code) establishes that:

"In the execution of the accounts the following should be observed in particular:

a) All entries must be supported by justifying documents, dated and capable of being presented whenever necessary; (...)."

In the disputed case these rules were not complied with, as the documents presented by the Petitioner and appearing in Document No. 15 do not reflect business reality, for the reasons referred to above.

In accordance with paragraph a) section 1 of Article 15 of the CIT Code, the taxable base for CIT purposes is obtained by deduction from the taxable profit of the amount of tax losses and tax benefits which are deductible from taxable profit. Taxable profit is calculated from the net result of the fiscal year and patrimonial changes positive and negative of the fiscal year not reflected in the result adjusted in accordance with CIT rules.

Now in the present case, faced with the finding, based on the Petitioner's accounting entries, of the existence of revenues which were not considered in the model 22 declaration, in the amount of € 113,727.70 (difference between the sum of account 72 balances of the two sets of extracts – € 1,121,160.59 – and the amount of account 72 balance of the final analytical trial balance which served as the basis for completing the model 22 declaration – € 1,007,432.89), it was not proven that there is justification for that difference, in light of the documents presented by the Petitioner to explain it.

Thus, it cannot be considered demonstrated that there is not the difference of € 113,727.70 relating to revenues which were not considered in the net result of the fiscal year, whereby, as the burden of proof as to these facts falls on the Petitioner, in light of the irregularities in its accounting [Article 75, section 2, paragraph a) of the LGT], the request for annulment of the CIT additional assessment cannot fail to be denied, in this part.

Moreover, as to this point, the question of negligence of the Petitioner's Official Accountant cannot excuse it, as the Petitioner found documents with which it sought to justify the difference referred to, with it being the case that, for the reasons indicated, relevance cannot be given to them for that purpose and, therefore, if these are the documents with potential to explain the difference referred to, the conclusion that the Tax and Customs Authority's action was correct in this point is reinforced.

On the other hand, the question of whether substance should prevail over form or violation of the principle of contributive capacity does not arise, as it was not demonstrated that reality is different from what was considered by the Tax and Customs Authority in making the correction referred to.

The request for arbitral decision is thus denied, in this part.

D.3. Question of Correction Relating to Reversal of Provisions from the Year 2007 (€ 46,772.50)

The amount of € 46,772.50 concerns the balance of "Adjustment of Receivables" (account 28) of the fiscal year 2007, which was eliminated in 2008.

The aforementioned amount of € 46,772.50 concerns two companies: C – € 15,112.55; and B – € 31,659.95 (Article 67 of the Response and Article 91 of the initial petition).

The amount for C was eliminated as a result of an agreement of debt forgiveness while that of B resulted from the knowledge that the Petitioner had in 2008 that the company Duvideo had been declared insolvent in 2004.

The Petitioner eliminated the balance of "Adjustment of Receivables" (account 28) of the fiscal year 2007 in the amount of € 46,772.50 by offset to another balance sheet account, account 218 – Doubtful Collection Customers, without using result accounts, as referred to in Article 66 of the Response, using the direct method. In fact, the Petitioner used the direct method, that is, did not use the indirect method which would have involved crediting account 796 – "Reductions of Provisions" (revenue account) and debiting account 28 – "Adjustment of Receivables" by € 46,772.50 and at the same time debiting account 692 – Uncollectible Receivables and crediting account 218 – Doubtful Collection Customers by the same € 46,772.50. The impact in terms of accounting results is nil...

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