Process: 228/2018-T

Date: October 30, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This 2018 CAAD arbitral decision addresses whether Municipality A could retroactively change its VAT deduction method for 2013 from real allocation to pro-rata calculation. The municipality initially used the real allocation method to deduct VAT on water supply activities but later claimed it had unduly limited deductions on common resources by €11,474.04. In 2016, it submitted a replacement declaration for Q4 2013 seeking this additional deduction. The Tax Authority rejected the claim, arguing that while the deduction was substantively valid, it was time-barred because changes to deduction methodology must be made in the final declaration of the relevant year. The arbitrator analyzed the distinction between original deductions (exercisable within the four-year period under Article 98(2) CIVA), regularizations based on definitive pro-rata calculations (subject to special deadlines), and impermissible retroactive method changes. The tribunal found that the municipality's claim constituted an unauthorized retroactive change of deduction method rather than a delayed exercise of an existing right. Portuguese law allows taxpayers to choose deduction methods when the right arises, but prohibits subsequent retroactive modifications. The decision clarifies that the four-year general limitation period does not override specific procedural deadlines for VAT adjustments, upholding the principle that deduction method choices are binding and cannot be altered retrospectively to optimize tax positions.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The arbitrator Raquel Franco, appointed by the Deontological Council of the Administrative Arbitration Centre to constitute the Arbitral Tribunal established on 16-07-2018, decides in the terms and on the grounds that follow:

1. Report

On 03-05-2018, Municipality A..., with registered office at Rua ..., ...-... ..., Tax Identification Number ..., filed a request for constitution of a single arbitral tribunal, in accordance with 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 only as RJAT), in which the Tax and Customs Authority is the respondent.

The request for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD and automatically notified to the Tax and Customs Authority on 10-05-2018.

Pursuant to the provisions of point a) of section 2 of article 6 and point b) of section 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the undersigned as arbitrator of the single arbitral tribunal and notified the parties of such appointment on 25-06-2018.

Accordingly, in compliance with the provision of point c) of section 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the single arbitral tribunal was constituted on 16-07-2018, followed by the pertinent legal procedures.

2. Sanitation

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, section 1, point a), and 10, section 1, of DL No. 10/2011, of 20 January, and is competent.

The Parties are duly represented, are legitimate and enjoy legal personality and capacity (all in accordance with articles 4 and 10, section 2, of the same instrument and article 1 of Order No. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

3. Positions of the Parties

In the request for arbitral decision, as well as subsequently in the pleadings, Municipality A... presented the arguments listed below.

It is a legal entity governed by public law, classified, for VAT purposes, under the normal quarterly regime.

Some of the activities it carries out are excluded from VAT liability in accordance with the provisions of section 2 of article 2 of the VAT Code, but, in addition to these, the Municipality also performs a set of operations, whether transfers of goods or provision of services, which are subject to VAT under the general rules of the tax. It is therefore a mixed taxable person.

During the course of 2013, it deducted the tax incurred in the acquisition of resources directly related to the distribution of water to residents (an activity fully subject to VAT), having applied the real allocation method.

Subsequently, in the context of an internal review of procedures for 2013, it understood that it had unduly limited its right to deduct the VAT incurred in the acquisition of "common resources," having assumed as costs amounts of tax that would, in its view, be recoverable. According to its calculations, the amount in question was € 11,474.04.

In 2016, the Claimant then made the deduction of the VAT incurred with the acquisition of common resources, having submitted a replacement declaration on 18 January 2016, with reference to the fourth quarter of 2013, in which it determined a VAT credit of € 11,474.04.

Although the Tax Authority did not oppose the substantive basis relating to the deductibility of VAT, it understood that the right to deduction was, in this case, exercised outside the time limit, since this is a change in the method of calculating the deductible VAT that should have been made by the last declaration of the year to which it pertains.

The Claimant reacts by stating that, in this case, this is not a regularization of tax resulting from the calculation of the definitive deduction percentage, nor the correction of tax initially deducted, but rather an additional original deduction of VAT that had not been made at the time of recording the invoices that support it.

Furthermore, it states that taxable persons can make the deduction of tax in any period subsequent to the receipt (and respective accounting) of the invoices, naturally having to do so within the time limit provided for in article 98 of the VAT Code and within the four-year period counted from the birth of the right to deduction.

The Claimant concludes by petitioning for the payment of compensatory interest for not having received, in time, the credit to which, according to its argument, it would have been entitled.

In the Reply presented, and subsequently in the counter-pleadings, the Tax Authority argues that the deduction sought by the Claimant should have been effected monthly or quarterly on the basis of a provisional pro rata, to be regularized in the periodic declaration of December of each year. It is thus its understanding that the change in the method of deducting tax and the retroactive application of a deduction method find no legal support, and the choice of the deduction method can only be made at the moment when the right to deduction arises under the conditions provided in section 1 of article 20, section 1 of article 22, and article 23 of the VAT Code.

As regards section 2 of article 98 of the VAT Code, the Respondent understands that, although this establishes that, without prejudice to special provisions, the right to deduction may be exercised up to the limit of four years, the VAT taxable person does not have freedom to determine the moment of exercise of that right, such provision limiting itself to fixing only a general maximum time limit, beyond which that right cannot be exercised. To interpret it otherwise, it argues, would mean that the provisions that establish special time limits would have no useful purpose, as they would always be overridden by the provision establishing the general four-year time limit, in manifest violation of the provision in section 3 of article 7 of the Civil Code.

2. Factual Matters

2.1. Proven Facts

The following facts are considered proven:

  • Municipality A... is a legal entity governed by public law, classified, for VAT purposes, under the normal quarterly periodicity regime.

  • Within its attributions, the Claimant carries out operations that fall outside the scope of the tax, as they result from its powers of authority, taxable operations within the scope of the tax, and also tax-exempt operations.

  • The Claimant declared, throughout 2013, the performance of operations that confer the right to deduction and operations that do not confer such right.

  • In the declaration for the 4th quarter of 2013, it calculated the deductible tax using the real allocation method of all goods and services, as provided for in point a) of section 1 and in section 2 of article 23 of the VAT Code.

  • The Municipality was the subject of an inspection procedure entitled OI2014..., from which VAT corrections resulted in a total value of € 8,305.74.

  • Fiscal irregularities were detected in VAT with the grounds described in chapters III and V of the respective Tax Inspection Report (RIT), which are extracted in the part relevant to the present case:

"III.6 REAL ALLOCATION OF GOODS AND SERVICES

Following the water supply, the taxable person deducted essentially tax related to the acquisition of a service provision "... reading and collection of water, sewage and solid and urban waste..." from an external entity ("B... Individual Ltd.") the tax thus deducted was in the global amount of €3,753.60. (...) IN SUMMARY, In consideration of the acquisition of the service provision from taxable person B... Ltd., Municipality A... obtained revenues with different classifications for VAT purposes, one subject to VAT (water supply), another subject to and exempt from tax (waste removal) and another resulting from powers of authority (sewage). Notwithstanding this fact, the taxable person deducted all VAT supported by this acquisition of services.

III.6.1 ACCOUNTING AND TAX CLASSIFICATION (...) III.6.2 TAX CORRECTION

Municipality A... deducted all VAT supported by the acquisition of services from B... Ltd. When questioned to indicate the criterion used, the taxable person indicated that it used the real allocation system provided for in section 2 of article 23 of the VAT Code and that it considered a VAT deduction percentage of 100.00%. Since the inputs acquired/consumed are allocated simultaneously to activities subject to VAT, to exempt activities or not resulting from an economic activity, the determination of the amount of deductible tax must be effected in accordance with the rules of article 23 of the VAT Code. Since the degree of allocation or use of the goods was not (as demonstrated in the preceding points) used entirely in activities subject to VAT and not exempt from it, it is proposed, in accordance with the provisions of section 2 of article 23 of the VAT Code, its alteration in accordance with the grounds described in the following points.

METHOD PROPOSED FOR DETERMINATION OF DEDUCTIBLE VAT

As a criterion for determining deductible VAT, it is proposed that its distribution be effected based on the amounts of invoicing effected to residents, as shown in the following calculations.

From the above table, the total VAT supported related to activities subject to and not exempt from VAT is calculated at €1,477.79. The remaining tax supported (€2,275.81 = 1,189.14 € + 1,086.67 €) relates to operations exempt from tax or resulting from powers of authority. From the criterion of real allocation of goods and services of mixed use, described in the preceding points, a settlement in favor of the State results in the value of €2,275.81 in the fourth quarter of 2013 (201312T).

IX RIGHT TO BE HEARD IX.2.1 REAL ALLOCATION OF GOODS AND SERVICES

Municipality A... proposes that the VAT supported in the acquisition of services from the company "B... Ltd." be distributed according to the percentages of total expenses supported per service by municipality A....

Based on the elements obtained, it was verified that the service provider only calculates the value of water consumed, with the amount of sewage and solid waste service provisions being administratively determined based on pre-defined variables in the municipality's tariffs and fees regulation. Taking this fact into account, the criterion proposed by the taxable person should be accepted. In this sense, it is proposed to alter the value of the correction proposed in the point "III.6 REAL ALLOCATION OF GOODS AND SERVICES" to the value of €750.72.(...)"

  • From the analysis of the right to be heard presented by Municipality A... a reduction of the amount of tax proposed in points III.6 "REAL ALLOCATION OF GOODS AND SERVICES" and V.3 "ESTIMATED VAT SHORTFALL" resulted.

  • To correct the detected irregularities, the taxable person presented replacement declarations in which it increased the total value of € 8,305.74 of tax in favor of the State.

  • On 18.01.2016 the Claimant submitted, for the last period of 2013, a periodic replacement declaration (DP), in which it determined a VAT credit of € 11,474.04, which was converted into a request for administrative review.

  • The Finance Directorate of ... dismissed the request for administrative review, and that decision was notified to the Municipality on 04.02.2018.

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been established as proven.

2.3. Justification for the Establishment of Factual Matters

The facts were established as proven on the basis of documents attached to the request for arbitral decision, in the administrative proceedings and in facts stated by the Parties in their respective procedural submissions regarding which there is no dispute.

As regards factual matters, the Tribunal does not have to rule on all that is alleged by the Parties; rather, it has the duty to select the facts that matter to the decision and to distinguish between proven and unproven matters (cf. article 123, section 2, of the CPPT and article 607, section 3 of the CPC, applicable ex vi article 29, section 1, points a) and e) of the RJAT).

The facts are selected in accordance with their legal relevance, which is determined based on the various possible solutions to the case (cf. the previous article 511, section 1, of the CPC, current 596, applicable ex vi article 29, section 1, point e) of the RJAT).

Having regard to the positions assumed by the Parties, the facts stated above, which are relevant to the decision, are considered proven.

3. Legal Matters

The question raised in the case presented to this tribunal by the Claimant is whether a taxable person may, within the four-year period provided for in section 2 of article 98 of the VAT Code, (i) alter the method used to calculate deductible VAT in past tax years and (ii), if, as a result, any tax credit in its favor is calculated, whether it has the right to request it from the Tax Authority.

Article 19 of the VAT Code establishes that, for the calculation of tax due, taxable persons, broadly speaking, deduct from the tax charged on taxable operations in a given period, the tax that has been invoiced to them in the acquisition of goods and services from other taxable persons, which should be mentioned in invoices or equivalent documents issued in legal form, in the same period, a situation that should be reflected in the periodic declaration referred to in point c) of section 1 of article 29 of the VAT Code.

As a rule, the deduction of tax should be effected, in accordance with the provision of article 22 of the VAT Code, in the "declaration of the period in which the invoices were received. However, the right to deduction may be exercised at later moments," with article 98, section 2, of the VAT Code establishing a maximum limit of four years for the exercise of the right to deduction (general time limit, applicable only when there is no special time limit provided for, as is the case with that provided for in its article 78, section 6, of the VAT Code). In this regard, it is also important to emphasize that, in the context of this tax, the exercise of the right to deduction is fundamental to ensure VAT neutrality, and should only be restricted in exceptional circumstances. The Court of Justice of the European Union (CJEU) has emphasized that the right to deduction is exercised, in principle, during the same period in which it arose, that is, at the moment when the tax becomes due. However, in accordance with the provisions of articles 180 and 182 of the VAT Directive, the taxable person may be authorized to proceed with the deduction of VAT even if he has not exercised his right during the period in which that right arose, without prejudice to certain conditions and rules established by national regulations (see, in this sense, the Judgment of 8 May 2008, Case C-95/07, Ecotrade, Coll., p. I 03457, nos. 42 and 43). On the other hand, and despite the importance of the right to deduction, the CJEU itself admits that it has a temporal limit and cannot, for reasons of legal certainty, be exercised indefinitely.

In sum, although Member States have the discretion to adopt, under the provisions of article 273 of the VAT Directive, measures to ensure the collection of tax and to prevent fraud, these must not go beyond what is necessary to achieve such objectives and must not jeopardize VAT neutrality (see, notably, the Judgment of 21 October 2010, Case Nidera, Case C-385/09, Coll., p. I-10385, no. 49).

Article 98, section 2 of the VAT Code provided, at the date of the relevant facts, the following:

Article 98 – Ex officio review and time limit for exercise of the right to deduction

1 – When, for reasons attributable to the services, tax in excess of that due has been assessed, ex officio review shall proceed in accordance with article 78 of the General Tax Law.

2 – Without prejudice to special provisions, the right to deduction or reimbursement of tax paid in excess may only be exercised within four years following the birth of the right to deduction or payment in excess of tax, respectively.

3 – No assessment shall be annulled when its value is less than the limit provided for in section 4 of article 94.

Section 1 establishes an obligation for ex officio review of tax assessed when, for reasons attributable to the services, tax in excess of that due has been assessed.

Section 2 establishes, in turn, and without prejudice to special provisions (namely those contained in article 78 of the VAT Code), that the right to deduction or reimbursement of tax paid in excess may only be exercised until four years have elapsed from the birth of the right to deduction or payment in excess of tax.

As regards the special provisions contained in article 78 of the VAT Code:

Section 2 – If, after the registration referred to in article 45 has been effected, the operation is cancelled or its taxable amount is reduced as a consequence of invalidity, rescission, cancellation or reduction of the contract, by the return of goods or by the granting of allowances or discounts, the supplier of the good or service provider may effect the deduction of the corresponding tax until the end of the tax period following that in which the circumstances determining the cancellation of the assessment or the reduction of its taxable amount occurred.

Section 3 – In cases of inaccurate invoices that have already resulted in the registration referred to in article 45, correction is mandatory when there is tax assessed in less, and may be effected without any penalty until the end of the period following that to which the invoice to be corrected relates, and is optional when there is tax assessed in excess, but may only be effected within two years.

Section 4 – The purchaser of the good or recipient of the service who is a VAT taxable person, if it has already made the registration of an operation in relation to which its supplier or service provider has proceeded with cancellation, reduction of its taxable amount or correction for less of the invoiced amount, shall correct, by the end of the tax period following the one in which the corrective document was received, the deduction effected.

Section 6 – The correction of material errors or calculation errors in the registration referred to in articles 44 to 51 and 65, in the declarations mentioned in article 41, and in the guides or declarations mentioned in points b) and c) of section 1 of article 67 is optional when it results in tax in favor of the taxable person, but may only be effected within two years, which, in the case of the exercise of the right to deduction, is counted from the birth of that right in accordance with section 1 of article 22, and is mandatory when it results in tax in favor of the State.

The situations in which there is the option (and, possibly, the obligation) to regularize the assessed and deducted VAT may be grouped as follows (cf. Alexandra Martins and Pedro Moreira, "VAT Regularizations - The Subsequent Alteration of the Elements of the Operation, the Material or Calculation Error and the Error of Classification or of Law," in AA. VV., Coordination by Sérgio Vasques, VAT Notebooks 2014, Coimbra, Almedina, 2014, pp. 61-62):

"i) The subsequent alteration of the objective and subjective conditions that governed the performance of the operations, reflected in the cancellation of the operation or the reduction of its taxable amount;

ii) The inaccuracy of the invoice or the material or calculation error in the transcription of its elements into the accounting or periodic VAT declarations of taxable persons;

iii) The error of classification of the operation, reflected in the invoice or in the accounting of taxable persons."

As regards time limits, we have that, in the situation foreseen in i), the supplier of the good or service provider may effect the deduction of the corresponding tax until the end of the tax period following that in which the circumstances determining the cancellation of the assessment or the reduction of its taxable amount occurred; in the situation foreseen in ii), to the correction of the material or calculation error corresponds the two-year period provided for in section 6 of article 78 of the VAT Code; in the situation foreseen in iii), to the correction of the error of law corresponds the four-year period provided for in section 2 of article 98 of the VAT Code, by the non-existence of a special provision that covers it.

The present case does not fall within point i), so let us examine points ii) and iii).

Regarding the material or calculation errors referred to in point ii) above, it is important to begin by noting that the Tax Authority, through Office Circular No. 30082, of 17 November 2005, from the VAT Services Directorate, proceeded to the joint definition of what it understands by material or calculation errors, considering that these are "those that result from internal company errors and have no interference in the sphere of third parties. They normally consist of errors in the transcription of invoices into records or of records into the periodic declaration, and do not include" the following situations: "alteration of the method of deduction of tax in mixed taxable persons; calculation of pro rata and VAT regularizations on real property and other fixed assets or relating to the allocation of real property to purposes other than those for which they are intended."

In our view, a material error is one that occurs in filling in the amount of deductible VAT in a declaration, whether it originates from that operation or results from an error in a supporting document or even from accounting. On the other hand, we shall be faced with a calculation error when the arithmetic operations necessary to determine the amount of deductible VAT have been performed incorrectly, either in the declaration itself, or in some of the documents on which it is based, or even in accounting itself.

In the same sense, Afonso Arnaldo and Tiago Albuquerque Dias ("After All, What is the Time Limit for VAT Deduction? Rules of Expiration and (In)Legal Certainty," in AA. VV., Coordination by Sérgio Vasques, VAT Notebooks 2014, Coimbra, Almedina, 2014, p. 44) affirm that "the errors referred to in section 6 of article 78 of the VAT Code are reduced to situations in which the taxable person is mistaken in the materialization of the act of deduction or assessment, namely, by oversight in the transcription of values or for arithmetic reasons, i.e., in both situations minor and obvious errors.

Thus, the following situations are typically covered by these concepts of error: situations in which the taxable person makes a mistake in performing an arithmetic operation, namely when it seeks to calculate the deductible tax contained in an invoice (with VAT included) of services from a supplier (calculation error), or even, while performing the calculation correctly, makes an oversight in entering the amount of tax to be deducted in the periodic declaration (material error)."

And what about "classification error" or "error of law"? In the understanding of the above-cited authors, this type of error of law would occur in "situations in which, despite the correct representation of the factual reality, the taxable person is mistaken in determining the applicable rule." Whether because it was mistaken in the representation of the factual situation, or because it incorrectly applied the law to the underlying factual reality, the taxable person ends up assessing or deducting tax incorrectly, or in excess or in deficiency.

In these cases of classification error or error of law, if a tax regularization results in favor of the taxable persons, these may promote it within the general and supplementary four-year period provided for in article 98 of the VAT Code.

In the case sub judice, what occurs is that, in virtue of "an internal review of procedures," the Claimant concluded that it had been incorrectly applying the method of calculating deductible VAT inasmuch as there would be recoverable VAT within the scope of its activity, namely with regard to resources common to taxable and non-taxable activities, which was not being deducted and could be. This is therefore a classification error or error of law, as what occurs is an incorrect application of the law to the underlying factual reality. The error lies precisely in the qualification as non-deductible of tax which, a posteriori, the Claimant would have come to realize would, after all, be deductible.

Now, in these cases, the correction of the situation would always have to occur by reference to the periodic declaration in which the tax to be deducted was supported, if and to the extent that the alteration of this may legally occur. The regime of the aforementioned article 78, section 6, is not applicable, nor is there any special regime for the exercise of the right to deduction, so the general supplementary regime in force and provided for in article 98, section 2, of the VAT Code will be applicable, which allows the Claimant to do precisely what it did, correcting the error of law in the self-assessment.

Consequently, the act of dismissal of the request for administrative review (the replacement declaration was converted into that process) suffers from the vice of violation of law, due to error in the legal assumptions, embodied in the misinterpretation of article 98, section 2 of the VAT Code, combined with articles 22, section 2, 23, section 6, and 78, section 6, also of the VAT Code, which implies the declaration of its illegality and consequent annulment in the part in which it refused to recognize the tax credit in the amount of € 11,474.04, calculated by the Claimant in the periodic replacement declaration for the 4th quarter of 2013.

Compensatory Interest

The Claimant also petitions for the payment of compensatory interest.

Pursuant to the provision in point b) of article 24 of the RJAT, the arbitral decision on the merits of the claim that is not subject to appeal or challenge binds the tax administration from the end of the time limit provided for appeal or challenge, and the latter must, in the exact terms of the grounding of the arbitral decision in favor of the taxable person and until the end of the time limit provided for the voluntary execution of decisions of tax courts, "reestablish the situation that would have existed if the tax act subject to the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose."

Although article 2, section 1, points a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating in CAAD, making no reference to condemnatory decisions, it should be understood that the competences include the powers that, in judicial challenge proceedings, are attributed to tax courts, and this is the interpretation that aligns with the meaning of the legislative authorization on which the Government relied to approve the RJAT, in which the first guideline proclaims that "the tax arbitration procedure should constitute an alternative procedural means to judicial challenge proceedings and to the action for recognition of a right or legitimate interest in tax matters."

Judicial challenge proceedings, despite being essentially a process for the annulment of tax acts, allow for the condemnation of the Tax Authority in the payment of compensatory interest, as can be inferred from article 43, section 1, of the General Tax Law, in which it is established that "compensatory interest is due when it is determined, in a request for administrative review or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount in excess of that legally due" and from article 61, section 4 of the CPPT (as amended by Law No. 55-A/2010, of 31 December, which corresponds to section 2 in the original wording), which states that "if the decision recognizing the right to compensatory interest is judicial, the payment period is counted from the beginning of the voluntary execution period."

Thus, section 5 of article 24 of the RJAT, in establishing that "payment of interest, regardless of its nature, is due in accordance with the terms provided for in the General Tax Law and in the Tax Procedure and Process Code" should be understood as allowing the recognition of the right to compensatory interest in the arbitration proceedings.

Pursuant to article 43 of the General Tax Law, in the part applicable here, "compensatory interest is due when it is determined, in a request for administrative review or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount in excess of that legally due."

In the concrete case, the Claimant presented a replacement declaration in which it indicated a credit in its favor due to changes in deductible VAT, this declaration being converted into a request for administrative review and this request being dismissed by the Tax Authority, on the ground that the taxable person would no longer be within the time limit to invoke the VAT credit.

In the concrete case, there is the illegality of the dismissal of the request for administrative review, due to error in the legal assumptions, in the part in which it did not consider the tax credit in the amount of € 11,474.04 in favor of the Claimant. The error is attributable to the Tax Authority, having proceeded to the incorrect interpretation of article 98, section 2, combined with articles 22, section 2, 23, section 6, and 78, section 6, all of the VAT Code, so the Claimant has the right, in accordance with the provision of articles 24, section 1, point b), of the RJAT and 100 of the General Tax Law, to compensatory interest, in accordance with the terms established in articles 43, section 1, of the General Tax Law and 61 of the CPPT, calculated at the rate resulting from section 4 of article 43 of the General Tax Law, until the date of processing of the respective credit note.

5. Decision

In accordance with the foregoing, this Arbitral Tribunal decides as follows:

  1. To decide favorably, on the grounds of error in legal assumptions, the petition for a declaration of illegality of the act of dismissal of the request for administrative review ...2017..., with its consequent annulment, in the part in which it refused to recognize the tax credit in the amount of € 11,474.04, calculated by the Claimant in the periodic replacement declaration for the 4th quarter of 2013, as well as, in the same segment, the additional VAT assessment No.....;

  2. To decide favorably the petition for condemnation of the Tax and Customs Authority to pay compensatory interest, in accordance with the law;

  3. To condemn the Tax and Customs Authority to pay the costs of the proceedings.

6. Value of the Proceedings

In accordance with the provision in articles 306, section 2, of the Civil Procedure Code, 97-A, section 1, point a), of the CPPT and 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 11,474.04 (eleven thousand, four hundred and seventy-four euros and four cents).

7. Costs

Pursuant to the provision in article 22, section 4, of the RJAT, the amount of costs is fixed at € 918.00 (nine hundred and eighteen euros), in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 30 October 2018

The Arbitrator

(Raquel Franco)

Frequently Asked Questions

Automatically Created

Can a Portuguese municipality change from the real allocation method to the pro-rata method for VAT deductions?
Portuguese municipalities cannot arbitrarily change from the real allocation method to the pro-rata method retroactively. Under Portuguese VAT law, the choice of deduction method must be made when the right to deduction arises, as established in Articles 20, 22, and 23 of the VAT Code (CIVA). Once a method is chosen and applied in the relevant tax period, it cannot be changed retroactively to recalculate deductions for prior periods. While municipalities as mixed taxable persons can use either method prospectively, any change must apply to future periods only. This decision confirms that the four-year limitation period in Article 98(2) CIVA for exercising deduction rights does not permit retroactive methodology changes, only delayed exercise of rights under the originally chosen method.
What constitutes an error of law in VAT deduction calculations under Portuguese tax law?
An error of law in VAT deduction calculations under Portuguese tax law occurs when a taxpayer misapplies legal provisions governing deduction rights, as distinguished from errors of fact or calculation. In this case, the Tax Authority and arbitral tribunal distinguished between: (1) legitimate delayed deductions of originally deductible amounts within the four-year period; (2) regularizations based on definitive pro-rata calculations subject to specific deadlines; and (3) impermissible retroactive changes to deduction methodology. The tribunal ruled that attempting to retroactively switch from real allocation to pro-rata method constituted a legal error because it violated the principle that deduction method choice is made when the right arises. The error was not in calculating amounts under a chosen method, but in attempting to apply a different method retrospectively to optimize tax positions.
How does the mixed VAT regime apply to Portuguese municipalities performing both taxable and exempt activities?
The mixed VAT regime applies to Portuguese municipalities that perform both taxable operations (such as water supply services subject to VAT) and operations outside VAT scope (powers of public authority) or exempt operations. Under Articles 20, 22, and 23 of the VAT Code, mixed taxable persons like municipalities must allocate input VAT between deductible and non-deductible portions. They can choose between: (1) the real allocation method (Article 23(1)(a) and 23(2) CIVA), directly attributing all goods and services to specific activities; or (2) the pro-rata method, applying a percentage based on the ratio of taxable to total turnover. This decision confirms municipalities must consistently apply their chosen method throughout the tax year, with regularizations made in the final declaration of that year using the definitive pro-rata percentage, and cannot retroactively change methods to reclaim additional deductions.
What is the difference between the real allocation method and the pro-rata method for VAT deductions in Portugal?
The real allocation method and pro-rata method are two distinct approaches for VAT deduction calculations in Portugal under Article 23 CIVA. The real allocation method (Article 23(1)(a) and 23(2)) requires taxpayers to directly attribute input VAT on goods and services to specific activities - fully deducting VAT on inputs used exclusively for taxable operations, and excluding VAT on inputs for exempt or out-of-scope activities. Common resources used for both must be allocated proportionally. The pro-rata method (Article 23(1)(b)) applies a single percentage based on the ratio of taxable turnover to total turnover, multiplying all input VAT by this percentage. Portuguese law allows mixed taxable persons to choose their method, but this choice must be made when deduction rights arise and applied consistently. The pro-rata is calculated provisionally throughout the year and regularized in December using definitive percentages.
Can a taxpayer request arbitral tribunal review of a VAT deduction method correction by the Portuguese Tax Authority?
Yes, taxpayers can request arbitral tribunal review of VAT deduction method corrections by the Portuguese Tax Authority under the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). This case demonstrates that municipalities and other taxpayers have standing to challenge AT decisions regarding VAT deduction methodology through the Administrative Arbitration Centre (CAAD). The tribunal has jurisdiction to review both substantive issues (whether deductions are legally valid) and procedural/timing issues (whether deductions were claimed within applicable deadlines). In this decision, while the tribunal confirmed its competence and that parties were properly represented with legal capacity, it ultimately ruled against the municipality on the merits. The arbitral process provides an alternative to judicial courts for resolving VAT disputes, including complex issues involving deduction method selection, timing of deduction exercise, and interpretation of limitation periods under the VAT Code.