Process: 239/2018-T

Date: January 3, 2019

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration case (239/2018-T) addresses the controversial application of Portugal's Special Regime for Taxation of Second-Hand Goods to intra-Community vehicle acquisitions. The claimant, a motor vehicle trader, purchased used vehicles from EU suppliers under the general intra-Community regime (VAT-exempt supplies) and resold them in Portugal applying the VAT margin scheme. The Portuguese Tax Authority challenged this practice through additional VAT assessments totaling €560,589.84 for 2012-2013, arguing the margin regime was improperly applied since vehicles were acquired under the general regime, not as second-hand goods from taxable persons. The taxpayer raised three main defenses: (1) inadequate substantiation of the assessments, (2) incorrect disqualification of the margin regime application under Decree-Law 199/96, and (3) expiry of the statutory limitation period (caducidade) since assessments were notified in 2018 for 2012-2013 tax periods. The limitation period defense is particularly significant, as Portuguese law generally provides a four-year period for tax assessments, potentially suspended by criminal investigations. This case illustrates critical compliance issues for Portuguese vehicle traders importing from EU markets, highlighting the incompatibility between acquiring vehicles under the intra-Community general regime and subsequently applying domestic margin taxation. The decision has broader implications for understanding how criminal proceedings affect administrative tax limitation periods and the proper application of special VAT regimes in cross-border used goods transactions.

Full Decision

ARBITRAL DECISION (Consult full version in PDF)

The arbiters José Poças Falcão (president), Francisco Nicolau Domingos and Álvaro Caneira, designated by the Deontological Council of the Centre for Administrative Arbitration (CAAD) to form the Arbitral Tribunal, agree as follows:

I. Report

  1. A..., LDA, legal entity no...., with registered office at ... of ..., no...., ..., ...-... ... (hereinafter referred to as "Claimant"), submitted a request for arbitral pronouncement and constitution of an arbitral tribunal, pursuant to the provisions of Article 4 and No. 2 of Article 10 of Decree-Law No. 10/2011, of 20/01 (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as "LRAT"), in which the PORTUGUESE TAX AND CUSTOMS AUTHORITY (hereinafter referred to as "Respondent" or "TA") is the Respondent.

  2. In the said request for arbitral pronouncement, the Claimant seeks to have the Arbitral Tribunal annul the acts of additional assessment of Value Added Tax (VAT) and compensatory interest, relating to various tax periods of the years 2012 and 2013, in the total amount of € 560,589.84, of which € 475,449.90 pertains to tax and € 85,139.94 to interest (Doc. 1). As a consequence of said annulment, it requests the condemnation of the Tax Administration to reimburse the amount it considers to have been unduly collected, plus the corresponding indemnatory interest counted in accordance with legal terms.

  3. The questioned assessment acts are based on factual elements established during a tax inspection, which, according to the understanding expressed in the Inspection Report (RIT), indicate erroneous application of the Special Regime for Taxation of Second-Hand Goods in the transmission, in national territory, of vehicles acquired in the EU market under the general regime of intra-community transactions, undue VAT deduction and tax regularizations without adequate legal basis.

  4. In the circumstances detailed in the said Report, it would have been prohibited for the Claimant to apply that special regime of margin taxation, and the tax due for the sale of the aforementioned vehicles in the domestic market should have been assessed based on their respective sale value, and it was also prohibited from making the deductions it made.

  5. As the basis of the request, presented on 09-05-2018, the Claimant alleges, in summary, that:

  • the questioned tax acts of additional VAT assessment are vitiated by illegality, for lacking adequate substantiation as to the factual and legal reasons underlying them;

  • the tax facts to which the said assessment acts relate are based on erroneous qualification and quantification, due to incorrect disregard of the application of the Special Regime for Second-Hand Goods, regulated by Decree-Law No. 199/96, of 18/10.

and

  • the assessments in question, relating to tax facts occurring in the years 2012 and 2013, notified on 05-01-2018, were made after the expiry of the statute of limitations period.

  1. In response to the matters raised, the TA took the position that this request for arbitral pronouncement was unfounded, considering that the questioned tax acts should be maintained in the legal system and, accordingly, that the Tribunal should rule for the absolution of the Respondent entity.

  2. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and duly notified to the Respondent.

  3. The Claimant did not appoint an arbiter, so, pursuant to Article 6, No. 2, subparagraph a), of the LRAT, the signatories were designated as arbiters by the President of the Deontological Council of CAAD, with the appointments being accepted within the legally prescribed terms and timeframes.

  4. The parties have legal personality and capacity, are legitimate and are represented, in accordance with Articles 4 and 10 of the LRAT and Article 1 of Ordinance No. 112-A/2011, of 22/03.

  5. Thus, in accordance with the provision of subparagraph c) of No. 1 of Article 11 of the LRAT, as amended by Article 228 of Law No. 66-B/2012, of 31/12, the Arbitral Tribunal was constituted on 18-07-2018.

  6. The Arbitral Tribunal, being duly constituted, is materially competent, pursuant to Article 2, No. 1, subparagraph a), of the LRAT.

  7. There are no nullities and no preliminary questions or objections have been raised, so nothing prevents judgment on the merits, and thus the present proceeding is ready for the final decision to be rendered.

  8. Given the knowledge resulting from the procedural documents submitted by the Parties, which is deemed sufficient for the decision, the Tribunal, by order of 20-10-2018, decided to waive the hearing referred to in Article 18 of the LRAT, as well as the production of witness evidence, and invited the Parties to make written submissions. By the same order, 14-01-2019 was set as the deadline for rendering and notifying the final decision.

  9. On 12-11-2018, the Respondent submitted its written submissions reaffirming, in essence, the position previously taken in the response, and on 12-12-2018 the Claimant did likewise.

II. Factual Matters

  1. With relevance to the assessment of the issues raised in the present request for arbitral pronouncement, the following factual elements stand out, based on the procedural documents submitted by the Parties, particularly in the Inspection Report, which, not being subject to dispute, are considered proven by documentation:

15.1. The Claimant is a commercial company whose corporate purpose is the business of "Trade in Light Motor Vehicles," corresponding to CAE code 45110.

15.2. For VAT purposes, the Claimant was classified under the normal quarterly regime between 22-02-2011 – the date on which it commenced activities – and 31-12-2013, having, after this date, moved to the normal monthly frequency regime.

15.3. During the period between 29-11-2016 and 29-11-2017, the Claimant was subject to an external inspection procedure developed by the Tax Inspection Services of the Finance Division of ... pursuant to Service Orders Nos. O12016... and O12016....

15.4. Said inspection action, of partial scope in accordance with Article 14, No. 1, subparagraph a), of the Complementary Regime for the Tax and Customs Inspection Procedure (RCPITA), focused on monitoring the motor vehicle trading activity carried out by the Claimant and, in temporal terms, during the years 2012 and 2013.

15.5. Based on elements obtained from the Claimant's accounting records, the Tax Inspection Services ascertained that the activity carried out by it in those years consisted mainly of acquiring motor vehicles from reseller companies based in other Member States of the European Union – namely, Belgium, Germany, the Netherlands, Austria, Denmark, Spain, France, Italy and Luxembourg – with a view to their subsequent sale, in national territory, to private customers.

15.6. From the analysis of invoices issued by the selling companies, the Inspection Services verified that those invoices contained, regarding the VAT taxation regime applicable, that the vehicles were shipped to the Claimant under the general regime of intra-community exchanges and were intra-community supplies exempt from said tax in the Member State of the supplier.

15.7. Following the legalization of the vehicles with the TA's Customs Services, the latter verified, through the analyzed documentation, that, when they were resold in national territory, the Claimant always issued the respective invoices to customers, levying VAT under the margin regime, in accordance with the Special Regime for Second-Hand Goods, approved by Decree-Law No. 199/96, of 18/10.

15.8. In compliance with the provisions of Article 6 of the aforementioned decree-law, the issued invoices contain the mandatory mention "VAT - Second-Hand Goods."

15.9. Acting in accordance with this, the Claimant, in its periodic declarations, calculated the amount of VAT to be paid to the State by recording the VAT charged values that had been recorded in its accounting, which, as mentioned above, were calculated under the special margin regime.

15.10. According to the understanding expressed in the Inspection Report, such procedure has no legal basis. Application of that special regime would only have been permitted if the supplies had been made by the reseller taxpayer in the Member State of origin under that special regime, mentioning such choice in the invoicing issued by it. In that case, the acquisition of the vehicle would not have been subject to VAT in Portuguese territory and, when it was resold in Portugal, the special regime for second-hand goods could have been applied, unless the national reseller opted for the rules of taxation under the general VAT regime.

15.11. As the requirements for application of the special regime for second-hand goods were not met, it was an obligation of the taxpayer, now the Claimant, to levy and deduce VAT at the time of intra-community acquisition of the goods, and subsequently, when the vehicles were resold in national territory, to proceed with the assessment of VAT in accordance with the rules of the general regime.

15.12. According to the Inspection Report: "The result of that erroneous application of the second-hand goods regime by A... to its active operations, instead of applying the rules of the general regime as was its obligation, resulted in a failure to levy and remit VAT to the State treasury."

15.13. With respect to the situation described, it is concluded in the Inspection Report that: "Thus, given the amount of VAT levied by the taxpayer in its periodic declarations, the following corrections will be made in the context of this tax, relating to failure to levy VAT at the standard rate on invoiced operations, with consequent failure to remit the tax to the State, by violation of Articles 19, 27 and 41, all of the VAT Code (CIVA)."

15.14. In the same inspection action, according to what is stated in the respective Report, it was further found that the Claimant proceeded to make undue deduction of VAT that it considered to be included in the amount of Vehicle Tax (ISV) charged by the TA's Customs Services at the time of legalization of the vehicles acquired in the EU market.

15.15. With respect to this undue deduction of VAT, supposedly contained in the amount of Vehicle Tax levied, the situation verified by the tax inspection services based on the Claimant's accounting, is detailed in the Inspection Report in the following terms: "The taxpayer, upon regularizing the vehicles acquired from its intra-community suppliers with the TA's customs services, had Vehicle Tax values charged through Customs Declarations (DAV), calculated in accordance with legal terms for the legalization of those vehicles. Now, for the periods 1203T to 1303T, A... appears to have understood that the Vehicle Tax amounts charged by customs services would include VAT, because, at the end of each quarter, it decided to calculate the total Vehicle Tax it had paid in that period and then divided that amount by 1.23, so as to determine a supposed VAT included in that Vehicle Tax amount.

It is precisely these values, determined as explained above, that the taxpayer recorded in its accounting, registering them in account 2432331 for the periods 1203T to 1303T."

15.16. Verifying, thus, the non-existence of VAT owed or paid by the Claimant with the customs services within the scope of the Customs Declarations, the Tax Services made the following corrections, in the context of VAT, by undue deduction of tax in violation of Article 19, No. 1, of the respective Code:

15.17. In the same inspection action it was further found that the Claimant proceeded to deduct VAT relating to the acquisition of civil construction services which, in violation of the reverse charge rule provided for in Article 2, No. 1, subparagraph j), of the VAT Code, was invoiced to it by its respective suppliers.

15.18. From this it follows that the Claimant could not "make the deduction of VAT borne on the invoices identified above, pursuant to No. 8 of Article 19 of the VAT Code, by virtue of not having proceeded with the assessment and payment of that tax as was its obligation, which is why the following corrections will be made in the context of VAT by undue deduction of VAT:"

15.19. Beyond the situations described above, it is extracted from the Inspection Report that the Claimant proceeded to make VAT regularizations in its favor in the periods 1206T and 1303T. From the analysis of the taxpayer's accounting and respective supporting documents, the Inspection Services verified that "both regularizations were carried out solely on the basis of internal documents and without providing any explanation justifying the reason why the taxpayer had proceeded with their regularization. Thus, as the reason underlying those VAT regularizations in favor of the taxpayer is not demonstrated, the following corrections will be made in the context of VAT, by violation of Art. 78, No. 6, of the VAT Code:"

15.20. With the substantiation outlined above, which, to a large extent, was chosen to be transcribed, corrections in the context of VAT were made, which gave rise to the assessment acts now impugned, contained, in summary, in the following table:

15.21. On 30-11-2017, the Claimant was notified, in accordance with Articles 60 of the General Tax Law (LGT) and 60 of the Complementary Regime for Tax and Customs Inspection Procedure (RCPITA), to exercise its right to be heard.

15.22. In exercising its right to be heard, materialized on 15-12-2017, the Claimant contested the proposed VAT corrections relating to the considered undue application of the margin regime in the transaction of vehicles it acquired in the EU market and transmitted to buyers in national territory, as well as the regularization in its favor relating to the period 1303T.

15.23. Regarding the corrections relating to erroneous application of the margin regime in the sale of vehicles that were transferred to it by suppliers established in other Member States of the European Union, the Claimant alleged the difficulty of interpreting the mentions contained in the invoicing issued by them, assuming that all vehicles acquired from intra-community reseller taxpayers would be covered by the margin regime upon their resale in national territory.

15.24. Regarding the VAT regularization in its favor occurring in the period 1303T, the Claimant alleged that it amounted to merely a reclassification of accounts – debit to account 243411 and simultaneously credit to account 24345 – with no effect on the calculation of VAT to be paid to the State.

15.25. Having appreciated the allegations made by the taxpayer in the exercise of its right to be heard, the Tax Services understood that they should maintain the corrections proposed in the Inspection Report, and the Claimant was notified, by registered letter with return receipt, on 02-01-2018 of the Final Tax Inspection Report, by means of Official Communication No..., dated 29-12-2017, from the Finance Division of ....

15.26. It is further concluded in the Inspection Report that "The facts described in this report lead to the conclusion that the taxpayer erroneous applied the Special Regime for Second-Hand Goods, when selling the vehicles acquired under the general regime of intra-community acquisitions.

For this reason, A... evaded the obligation to levy and remit VAT to the State treasury, in the amounts of €37,660.02, €195,504.78, €268,972.38 and €665,667.46, respectively, in the years 2012, 2013, 2014 and 2015, and these values may be even higher, in accordance with what is described in items 3.B) and 3.C).

The facts described in this report lead to the conclusion that in the context of VAT, A... did not remit to the State treasury the totality of the tax that was legally required of it, a fact that constitutes the commission of the crime of breach of trust, provided for in Article 105 of the Tax Crime Statute (RGIT), and therefore it is proposed that this report be sent to the Criminal Investigation Team for purposes of instituting any investigation proceedings."

15.27. By favorable order of the Head of the Tax Inspection Division of the Finance Division of ..., the proposal of 09-12-2016 of the Head of the Team was accepted to the effect that "Given the facts established and described in this report, which evidence the commission of the crime of tax fraud, this report shall be sent to the Criminal Investigation Team, in accordance with Article 35 of the Tax Crime Statute and for purposes of Article 40 of the same Code."

15.28. For the institution of investigation proceedings, the Tax Inspection Service, through internal note No..../2016, dated 12-12-2016, sent said report to the Criminal Investigation Team for the institution of investigation proceedings.

15.29. However, and based on the factuality and substantiation contained in the Inspection Report, VAT assessments resulting from the corrections proposed therein were made on 30-12-2017, and these were notified to the Claimant on 05-01-2018.

III. Matters of Law

  1. The Claimant imputes to the impugned assessments the following defects:

a) Lack of substantiation, alleging, with respect to this defect, that "the tax act of additional VAT assessment here in question is already unlawful, for lacking adequate substantiation as to the factual and legal reasons underlying said additional VAT assessments. Indeed, the Inspection Report did not include, in a clear and sufficient manner, the necessary substantiation that would allow a normal recipient – the bonus pater familiae to which No. 2 of Article 487 of the Civil Code refers – to know of the factual and legal reasons justifying the tax corrections made, a key prerequisite for their maintenance in the legal order."

b) Erroneous qualification and quantification of the tax facts, due to incorrect disregard of the application of the second-hand goods regime. Alleging the difficulty in interpreting the mentions contained in the invoices issued by its respective suppliers, the Claimant understands that: "to require the claimant to demonstrate that VAT was levied under the margin regime in the countries of origin of the used vehicles, given the difficulties previously pointed out, such an undertaking in itself would be a violation of the principle of proportionality, especially since we are dealing with a harmonized tax that complies with EU requirements, namely the VAT Information Exchange System (VIES), whereby the TA could have requested the provision of information necessary to establish the material truth, which it did not do, limiting itself in the response to the right to be heard to refer (pgs. 20/23 of the Inspection Report) that the claimant made intra-community acquisitions, without having investigated their implications with the corrections in question."

c) Statute of limitations for the right to assess, due to the lack of valid notification of the impugned assessments within the period provided for in Article 45, No. 1, of the LGT, with the prerequisites for extension of that period not being met, pursuant to No. 5 of the same article.

  1. Considering, on the one hand, the principle set forth in Article 130 of the Code of Civil Procedure (CCP), aimed at avoiding the performance of useless acts, and on the other hand, the provision of Article 124 of the Tax Procedure Code (TCPT), which requires the priority assessment of defects that may lead to a more stable or effective protection of the interests violated, we will first proceed to the analysis of the factual matter relating to the statute of limitations for the right to assess, as it may result in the uselessness of examining the remaining defects.

On the Statute of Limitations for the Right to Assess

  1. From the procedural documents, established as proven by documentation and not contested by the Parties, it is extracted that

  • the tax facts that underlie the impugned assessments relate to Value Added Tax and to various quarterly periods of the years 2012 and 2013.

  • the assessments, according to the corresponding supporting schedules, were made on 30-12-2017, and

  • were notified to the Claimant, by registered letter with return receipt, which was delivered to it on 05-01-2018.

  1. It is, then, in light of the facts outlined above that divergent positions of the Parties are raised, which merit detailed analysis.

Position of the Claimant

  1. Regarding the invoked defect of statute of limitations for the right to assess, the Claimant alleges, in the petition for arbitral pronouncement indicated above, that: "67 – Pursuant to No. 1 of Article 45 of the LGT: 'The right to assess taxes lapses if the assessment is not validly notified to the taxpayer within four years, when the law does not set another period.'

68 – Thus, the statute of limitations period for the assessment of taxes provided for in No. 1 of Article 45 of the LGT is 4 years, a period within which the TA must also validly notify taxpayers, except in cases where the law itself provides for a different period.

69 – In turn, No. 4 of that legal provision provides that the said statute of limitations period is counted, for single-obligation taxes, from the date on which the tax fact occurred, except for VAT, where that four-year period is counted from the end of the civil year following the year in which the tax became due.

70 – It should be noted that one of the exceptions, which involve an extension of the statute of limitations period, is enshrined in No. 5 of Article 45 of the LGT, where it is established that 'Whenever the right to assess relates to facts for which a criminal investigation has been instituted, the period referred to in No. 1 is extended until the dismissal or final judgment of the sentence, plus one year.'

71 – Now, the assessments in question, notified on 05.01.2018, were made after the expiration of the statute of limitations period of 4 years, which had already ended on 31.12.2016 and 31.12.2017, respectively, for VAT of the years 2012 and 2013, in accordance with the following map (Doc. 12):

72 – Given that only in the tax inspection report is reference made to the institution of a criminal investigation for the years 2012 and 2013 (pgs. 2/3 of the Inspection Report), it is important to determine whether such a reason is a basis for considering the statute of limitations period validly suspended and, timely, the assessment and notification of the VAT in question made.

73 – From the outset, it can be stated that the prerequisites were not met for the statute of limitations period to be considered suspended and within it to be validly made the additional assessments and compensatory interest on VAT and respective notifications in the total amount of €560,589.84 (€475,449.90 + €85,139.94).

74 – In fact, from the outset, one of the prerequisites for the extension of the statute of limitations period is lacking, which requires an identification of the facts underlying the tax assessment act and the criminal investigation, that is, there must be a correspondence between the facts subject to criminal investigation and the facts that constitute the basis for the corrections that gave rise to the additional assessments, so it is necessary to determine whether such corrections are related to the matter subject to investigation.

75 – Indeed, the Court of Appeal decision of 18.01.2012, rendered in proceeding 00670/08.1BEBRG, already considered that "for this extension of the statute of limitations period to occur, it is imperative that the tax facts underlying the assessment(s) in question have been subject to investigation in the context of criminal proceedings and that a criminal investigation has been instituted with respect to them 'This makes sense, because, if there is not the required identity of the facts investigated in the context of the criminal proceedings and those that constitute the premise of the assessment, it is not apparent how the pendency of that process can affect the exercise of the right to assess taxes.' [see Court of Appeal decision of 22 April 2010]."

76 – For this reason, it is required that the tax facts underlying the assessment have been subject to investigation in the context of a criminal investigation, in such a way that the pendency of such investigation affects the exercise of the right to assess taxes.

77 – In other words, the extension of the statute of limitations period for the right to assess taxes, referred to in No. 5 of Article 45 of the LGT, will only operate if it is demonstrated that that right was, effectively and concretely, conditioned by the outcome of the criminal investigation, as emerges, furthermore, from the preparatory work (update of the Stability and Growth Program submitted by the XVII Constitutional Government of December 2005) for the amendment of the regime governing the statute of limitations for the right to assess taxes, in order to provide that, with the correct assessment of the tax depending on facts established in a criminal investigation, that period is extended until the dismissal or final judgment of the respective sentence, plus one year.

78 – In fact, the TA, which seeks the prevalence of No. 5 of Art. 45 of the LGT, failed to prove or demonstrate that the correct assessment of VAT depended on facts to be established in a criminal investigation, because, pursuant to No. 1 of Article 74 of the LGT, it was the TA that bore the burden of such proof.

79 – Effectively, the Inspection Report does not even demonstrate anything regarding the facts underlying the criminal investigation instituted at the end of 2016 (on 2016.12.12), and properly, it is legitimate to consider whether anything was at issue that had to do with VAT given the mere observation that 'Note that for purposes of counting the statute of limitations period for the right to assess of the years 2012 and 2013, a criminal investigation was instituted under case number NUIPC .../2016... I..., for which reason the said counting will follow the rule defined in Art. 45, No. 5 of the General Tax Law (LGT)'.

82 – However, that Inspection Report also does not clarify why it was necessary to resort to the expedient of instituting a criminal investigation as to which the claimant was constituted a defendant on 21 April 2017, and it is still unknown today any development, including whether it was dismissed or what type of investigative steps were taken, beyond those normally carried out by the TA in the context of the inspection action which aimed at the additional VAT assessments, which were notified on 05.01.2018.

83 – In fact, in the Inspection Report (pg. 2) it is mentioned that "Service Orders Nos. OI2016... and OI2016... ran between 2016/11/29 and 2017/11/29," notwithstanding the fact that they were issued on 10/02/2016, when the criminal investigation (NUIPC .../2016... I...) was only instituted on 12.12.2016.

84 – In that sense, it is evident that there was a total perversion of the objective of the rule enshrined in No. 5 of Article 45 of the LGT, insofar as it was merely instrumental to justify the unlawful and illegal extension of the statute of limitations period, disregarding the following principles enshrined in the Administrative Procedure Code (applicable by virtue of Article 2 of the LGT): of equality, proportionality, justice and reasonableness, and good faith (Articles 6, 7, 8 and 10).

85 – Thus, with the prerequisites of No. 5 of Article 45 of the LGT not being demonstrated, the extension of the statute of limitations period enshrined therein cannot operate, and the additional assessments here impugned were made and notified beyond the statute of limitations period, being therefore illegal, cf. Decision in Proceeding No. 199/2015-T, of 18.11.2015, of CAAD.

86 – On the other hand, it must also be borne in mind that the facts underlying the additional VAT assessments made by the TA, by violation of Articles 19, 27, No. 1 and 41 of the VAT Code, are not capable of constituting the commission of any tax crime, namely the tax fraud provided for and punishable under Article 103 of the Tax Crime Statute."

...

Position of the Respondent

  1. Taking a position on what is alleged by the Claimant in the matter of statute of limitations for the right to assess, the Respondent considers that "the statute of limitations period for the right to assess was respected as regards the VAT assessments in question, so the Claimant's annulment petition must fail, because from the analysis of the evidence submitted to the case file it is notoriously evident that the notification of the assessment sub judice was perfect, valid and effective, as it was timely carried out in compliance with the statute of limitations period provided for in No. 1 of Art. 45, which in accordance with No. 5 of the same provision, validly suspended."

  2. Developing the position it assumes, the Respondent alleges that "64. – By virtue of Law No. 60-A/2005, of 30/12/2005 (State Budget Law for 2006) which came into force on 1/1/2006, a new No. 5 was added to Art. 45 of the LGT, which provides that whenever the right to assess relates to facts for which a criminal investigation has been instituted, the period referred to in No. 1 of that provision is extended until the dismissal or final judgment of the sentence, plus one year.

  3. – This provision was, moreover, applicable to the statute of limitations periods in progress on the date the Law No. 60-A/2005 came into force, pursuant to the transitional law rule enshrined in No. 2 of that Law; in the same sense, the decision rendered by the Supreme Administrative Court on 02/07/2008 is clear, in the context of proceeding No. 0343/08.

  4. – In its literal construction, the rule provided for in No. 5 of Art. 45 of the LGT is clear, explicitly referring to a necessary identity of facts, that is, identity between the tax fact and the criminal fact, and moreover, in the same sense points the jurisprudence of the Supreme Administrative Court.

  5. – Thus, the Supreme Administrative Court decision of 11 May 2016, rec. 1071/14, established that "The counting of the statute of limitations period for the right to assess taxes pursuant to Art. 45, No. 5, of the LGT, only occurs if the tax assessment act and the criminal investigation refer to the same facts," and the decision of 3 November 2016, rec. 1407/15, where it was established, citing earlier jurisprudence, that "(...) the counting of the statute of limitations period for the right to assess taxes pursuant to Art. 45, No. 5, of the LGT, only occurs if the tax assessment act and the criminal investigation refer to the same facts."

  6. – It is noted that it is not even required, for purposes of the extension of the statute of limitations period for the right to assess provided for in No. 5 of Art. 45 of the LGT, alongside an "objective identity" between the tax fact and the fact subject to criminal investigation, a subjective identity, between the defendant or perpetrator and the taxpayer, an understanding that results from the Supreme Administrative Court decision of 06/12/2017, in the context of proceeding No. 073/16.

  7. – Now, in the case sub judice, contrary to what is alleged by the Claimant, the burden of proof does not rest on the TA regarding the prevalence of No. 5 of Art. 45 of the LGT.

  8. – It is not understood why its reasoning would not point in the same direction with respect to the alleged applicability of the special regime contained in Decree-Law 199/96, of 18 October, except for the verification of its objective condition of applicability: the objective identity of the facts, in the terms already explained, being evident, in light of the auto of complaint attached to the case, that it is verified, it not being plausible that the Claimant allege any legal circumstance as to the date on which it had knowledge of its institution, or its constitution as a defendant, facts that have no legal relevance nor, furthermore, purport to criminally qualify the facts or deem the institution of the investigation as a subterfuge, in which the TA cannot agree.

  9. – And, being the case, as the right to assess relates to facts for which a criminal investigation is still ongoing, instituted on 12/12/2016 (Investigation proceeding No...../2016...I...), the investigation is therefore not concluded, the four-year period provided for in No. 1 of Art. 45 has not run, which is extended until the dismissal or final judgment of the sentence, plus one year, which, in the case sub judice, means that the statute of limitations period is still running."

  10. – Thus, it is evident that at the time the Claimant was notified of the disputed assessments in question, the statute of limitations period for the right to assess had not yet run, since this was extended until the dismissal of the investigation or final judgment of the sentence, plus one year, for which reason it has not yet been completed.

  11. – This means that, in accordance with the cited provisions, the statute of limitations period for the right to assess was respected as regards the VAT assessments in question, so the Claimant's annulment petition must fail, because from the analysis of the evidence submitted to the case file it is notoriously evident that the notification of the assessment sub judice was perfect, valid and effective, by being timely carried out in compliance with the statute of limitations period provided for in No. 1 of Art. 45, validly suspended pursuant to No. 5 of that same provision.

On the Assessment of the Issue

  1. Thus, having set forth the positions of the Parties on the matter of statute of limitations for the right to assess, centered on the extension of its period, pursuant to Article 45, No. 5, of the General Tax Law (LGT), it is necessary to assess the petition in this aspect.

  2. The Parties concur in the understanding that the general statute of limitations period for the exercise of the right to assess VAT is four years, counted from the end of the civil year following the year in which the tax became due (LGT, Article 45, Nos. 1 and 4, and VAT Code, Articles 7, No. 1 and 8, No. 1).

  3. In the case of these proceedings, the tax-generating facts, as well as its accrual, occurred in various tax periods of the years 2012 and 2013, and while the ex officio assessments were made on 30-12-2017, they were only notified to their recipient on 05-01-2018.

  4. In accordance with the provision of Article 45, No. 1, of the LGT, "the right to assess taxes lapses if the assessment is not validly notified to the taxpayer within four years..." In the case under analysis, there is no doubt that the right to assess would have already lapsed, pursuant to the provision transcribed, at the moment when the impugned assessments were notified to the Claimant.

  5. However, application of the said general period is subject to the reservation that no different period has been fixed by law.

  6. Now, with relevance to the case under analysis, the statute of limitations period provided for in Article 45, No. 5, of the LGT applies, insofar as the respective prerequisites are met.

  7. Introduced by Law No. 60-A/2005, of 30/12, the said provision establishes that: "Whenever the right to assess relates to facts for which a criminal investigation has been instituted, the period referred to in No. 1 is extended until the dismissal or final judgment of the sentence, plus one year."

  8. It is, then, from the extension of the statute of limitations period established in the provision transcribed above that the Respondent draws support to maintain that, in the case of these proceedings, the impugned assessment acts had been practiced within the statute of limitations period.

  9. Regarding the scope of application of the provision invoked by the Respondent as the basis for the timeliness of the assessments it made, it constitutes established jurisprudence, adopted in several arbitral decisions, that there must be a relationship between the possibility of exercising the right to assess and the pendency of the investigation proceedings, "in order to be able to state that the right to assess could not be exercised in the correct terms without knowledge of facts established in the investigation."

  10. This understanding, which is fully endorsed, is set forth in an arbitral decision rendered in proceeding 7/2016-T, whose substantiation, for its clarity and rigor, is transcribed below: "As results from the very text of this provision, by requiring that the right to assess relate to facts for which a criminal investigation has been instituted, for application of the extension of the period provided for in this Article 45, it is first necessary that it be proven that the right to assess is based on facts for which a criminal investigation has been instituted, which presupposes knowledge of the concrete facts that were the subject of the criminal investigation."

...

It is necessary, thus, that there be a relationship between the possibility of exercising the right to assess and the pendency of the investigation proceedings, in order to be able to state that the right to assess could not be exercised in the correct terms without knowledge of facts established in the investigation."

  1. The said decision proceeds, "In fact, in a teleological interpretation of the said Article 45, No. 5, of the LGT, which keeps in mind, alongside the interest in the collection of taxes, the interest of the taxpayer and the public interest in legal certainty, inherent in the institution of the statute of limitations for the right to assess taxes, and the constitutional principle of necessity in the restriction of taxpayers' guarantees, it cannot be understood that, by virtue of the fact that a criminal investigation has been instituted to ascertain the possible commission of any crime that may generate a tax debt, the right to assess with respect to any facts occurring in the same year is prolonged in the terms of that Article 45, No. 5. Indeed, this weighing of the conflicting interests of legal certainty and the collection of taxes must necessarily lead to the conclusion that the extended period only applies when the facts serving as the basis for the assessment are investigated in the criminal investigation, that is, when there was no other way for the Tax and Customs Authority to assess within the normal period, safeguarding all the conflicting interests."

  2. The said decision further adds that: "This conclusion regarding the restriction of the extension of the statute of limitations period for the right to assess to cases where the establishment of facts is necessary for the correct assessment of the tax is in consonance with the legislative intention expressly publicized by the Government on p. 30 of the December 2005 Update to the Stability and Growth Program 2005-2009, submitted to the Assembly of the Republic in line with the Draft State Budget Law for 2006 (in http://www.parlamento.pt/OrcamentoEstado/Documents/pec/pec2005-2009.pdf), in which the said provision came to be introduced in the LGT:

In the State Budget for 2006, the regime governing the statute of limitations for the right to assess taxes was altered (generally, for periodic taxes, 4 years counting from the year following the year in which the tax fact occurred, and for single-obligation taxes, counting from the date of occurrence of the tax fact) in order to provide that, with the correct assessment of the tax depending on facts established in a criminal investigation, that period is extended until the dismissal or final judgment of the respective sentence, plus one year. With this amendment, the aim is, essentially, to prevent those who are suspected or even accused of the commission of criminal acts of a tax nature from benefiting, by virtue of the lapse of the statute of limitations period, from the non-assessment of tax, with the inherent exemption from the obligation to pay it, by virtue of the commission of those criminal acts. The aim is thus the moralization of the tax legal system and a more effective fight against fraud and tax evasion;

  1. The decision thus concludes that: "It is, therefore, clear that, from the legislative perspective, the extension of the period referred to is only justified in situations in which 'the correct assessment of the tax (is) dependent on facts established in a criminal investigation'"

...

"Thus, the rational and historical elements of the interpretation point decisively in the direction that the extension of the period only occurs when the assessment could not have been made without the establishment of facts that came to be established in a criminal investigation, even if in the latter those facts do not lead to a criminal charge."

  1. In the same sense, it was concluded in an arbitral decision of 18-11-2015, rendered in proceeding No. 199/2015-T, that: "... the extension of the statute of limitations period for the right to assess taxes, referred to in Article 45/5 of the LGT, will only operate if it is demonstrated that that right was – effectively and concretely – conditioned by the outcome of the criminal investigation, thus meeting the preparatory work, pertinently recalled by the Claimant, and where one can read that the 'amendment of the regime governing the statute of limitations for the right to assess taxes [was] in order to provide that, with the correct assessment of the tax depending on facts established in a criminal investigation, that period is extended until the dismissal or final judgment of the respective sentence, plus one year'. Having reached this point, it must be noted that, being the TA the one seeking to benefit from the provision in question (the provision of No. 5 of Article 45 of the LGT), it would be the TA that, pursuant to Article 74/1 of the LGT, bore the burden of proving that, effectively and concretely, 'the correct assessment of the tax (is) dependent on facts established in a criminal investigation,' proof that was not only not made, but rather the opposite is indicated, insofar as the assessment was issued well before the conclusion of the criminal investigation (underline ours)......"

  2. This is also the orientation adopted in other arbitral decisions, as can be extracted from the decision rendered in proceeding 144/2014-T, in which the understanding is expressed that: "the extended period only applies when the facts serving as the basis for the assessment are investigated in the criminal investigation, that is, when there was no other way for the Tax and Customs Authority to assess within the normal period, safeguarding all the conflicting interests."

  3. This is also the sense of the jurisprudence of the Supreme Administrative Court, as can be seen in a decision of 06-12-2017, rendered in proceeding 073/16, "Thus, the provision provided for in No. 5 of Article 45 of the LGT results from the need to ensure a good decision on the matter of taxation, waiting for the outcome of the investigations or criminal proceedings in which the tax fact is under discussion. That is, the criminal investigation had as its subject the investigation of the possible commission of tax crimes related to the matter subject of the Tax Inspection and the subsequent assessment..."

  4. In the same sense, José Maria Fernandes Pires, Gonçalo Bulcão, José Ramos Vidal and Maria João Menezes state in General Tax Law – annotated and commented, 2015, p. 412, "No. 5 is intended to prevent the statute of limitations period from running while the criminal proceedings are pending, it being understood that, with the assessment dependent on a judgment to be rendered in the context of that proceeding, such assessment cannot be prejudiced by the delay in the judicial decision. For this purpose, the statute of limitations period is extended until the dismissal of the investigation or the final judgment of the sentence, plus one year".

  5. The impugned assessments were, therefore, made based on elements established from the outset in the inspection action carried out with the company, and are in no way conditioned by the outcome of the criminal investigation, as, moreover, results from its respective substantiation.

  6. Not diverging from the established jurisprudential understanding, it should be noted that, as alleged by the Claimant, it being the TA that seeks to benefit from the provision of Article 45, No. 5, of the LGT, it is on the TA that, pursuant to Article 74, No. 1, of the same Law, the burden of proving that, effectively and concretely, the correct assessment of the tax depended on facts established in a criminal investigation rests.

  7. Such proof was not made; rather, the opposite is indicated, in that the impugned assessments were, all of them, made before the criminal investigation was concluded, based on elements gathered in the inspection action, a circumstance that clearly demonstrates that in the case sub judice it is not possible to extend the statute of limitations period.

  8. Thus, and for the reasons stated, as the impugned assessments were issued after the expiration of the statute of limitations period, they are unlawful, by violation of the provision of Article 45, No. 1, of the LGT, and should, consequently, be subject to annulment.

Questions with Prejudiced Knowledge

  1. As the request for arbitral pronouncement is to be judged well-founded on the basis of the statute of limitations for the right to assess, the assessment of the remaining issues is prejudiced by being useless, except insofar as concerns the request for recognition of the right to indemnatory interest.

On the Right to Indemnatory Interest

  1. In addition to the annulment of the VAT assessments and compensatory interest, and the consequent reimbursement of amounts unduly paid, the Claimant also requests that it be recognized as having the right to indemnatory interest, pursuant to Article 43 of the LGT.

  2. Indeed, pursuant to the provision of No. 1 of the said article, indemnatory interest shall be owed "when it is determined, in amicable reclamation or judicial impugning, that there was an error attributable to the services that resulted in payment of the tax debt in an amount greater than legally due." In addition to the means referred to in the provision transcribed, we understand that, as results from No. 5 of Article 24 of the LRAT, the right to the aforementioned interest can be recognized in the arbitral proceeding and thus the petition is addressed.

  3. The right to indemnatory interest referred to in the provision of the LGT mentioned above presupposes that tax has been paid in an amount greater than that due and that such is derived from error, factual or legal, attributable to the TA's services.

  4. In the present case, even though it is recognized that no tax is owed, as the assessments to which it relates are vitiated by illegality, by violation of the statute of limitations period for the right to assess, thus determining the annulment of the respective acts, it does not necessarily follow that, at its origin, there is the error attributable to the services that determines such a right in favor of the taxpayer; on the contrary, what occurred was the commission of an infraction by the Claimant that gave rise to the assessments whose annulment is now determined.

  5. In this matter, account is taken of the orientation of the jurisprudence of the Supreme Administrative Court, which goes in the direction that the right to indemnatory interest provided for in No. 1 of Article 43 of the LGT presupposes that it be determined in the proceeding that in the assessment "there was an error attributable to the services," understood as "error in the factual or legal premises attributable to the Tax Administration."

  6. As results from the said jurisprudence, the expression "error attributable to the services" refers to "error" and not to "defect," which suggests that it wishes to address errors in the factual or legal premises that led the TA to an unlawful definition of the taxpayer's tax relationship, not considering formal or procedural defects which, though vitiating the act with illegality, do not necessarily imply an erroneous definition of that relationship. It thus results that only in cases of annulment based on defects relating to the tax relationship will there be indemnatory interest payable, such a right not being recognized in the case of annulment of an assessment act based solely on a statute of limitations defect for the right to assess.

V. Decision

In these terms, and with the grounds set forth, the Arbitral Tribunal agrees to:

a) Judge as well-founded the request for arbitral pronouncement, insofar as concerns the illegality of the additional VAT assessments and compensatory interest impugned, by virtue of the statute of limitations defect for the right to assess, determining their annulment with the due legal consequences;

b) Judge as unfounded the request for recognition of the right to indemnatory interest.

Value of the proceeding: €560,584.84.

Costs: Pursuant to Article 22, No. 4, of the LRAT, and in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €8,568.00 (eight thousand five hundred and sixty-eight euros), to be borne by the Respondent (TA).

Lisbon, 3 January 2019

The Arbitral Tribunal,

José Poças Falcão

(Arbitral Tribunal President)

Francisco Nicolau Domingos

(Member)

Álvaro Caneira

(Member)

Frequently Asked Questions

Automatically Created

What is the Special Regime for Taxation of Second-Hand Goods (Regime Especial de Tributação dos Bens em Segunda Mão) under Portuguese VAT law?
The Special Regime for Taxation of Second-Hand Goods (Regime Especial de Tributação dos Bens em Segunda Mão), regulated by Decree-Law No. 199/96 of 18 October, allows VAT taxation based on the profit margin rather than the full sale price. Under this regime, VAT is calculated on the difference between the sale price and purchase price, rather than the total transaction value. The regime applies to second-hand goods, works of art, collectors' items, and antiques acquired from non-taxable persons or under specific conditions. Invoices must contain the mandatory mention 'IVA - Regime Especial de Bens em Segunda Mão' (VAT - Second-Hand Goods). However, this regime cannot be applied to goods acquired under the general intra-Community regime where the supplier issued a VAT-exempt intra-Community supply. The margin scheme is designed for goods acquired without VAT deduction rights, not for professional cross-border acquisitions between VAT-registered traders under the general EU rules.
Can the Portuguese Tax Authority issue additional VAT assessments after the statutory limitation period (caducidade do direito à liquidação) has expired?
Portuguese tax law establishes a limitation period (caducidade do direito à liquidação) for issuing tax assessments, generally four years from the end of the year when the tax became due. Under Article 45 of the General Tax Law (Lei Geral Tributária), this period begins on 1 January of the year following that in which the tax should have been assessed. For 2012 tax periods, the limitation would normally expire on 31 December 2016; for 2013, on 31 December 2017. However, the limitation period may be suspended or interrupted by specific events, including the initiation of criminal proceedings (inquérito criminal) related to tax matters. Once the limitation period expires, the Tax Authority loses the legal right to issue additional assessments, and any assessments notified after expiry are null and void. Taxpayers can invoke caducidade as a defense in administrative appeals or tax arbitration proceedings at CAAD, potentially resulting in annulment of time-barred assessments regardless of their substantive merit.
How does a pending criminal investigation (inquérito criminal) affect the limitation period for VAT assessments in Portugal?
A pending criminal investigation (inquérito criminal) significantly affects VAT assessment limitation periods in Portugal through suspension mechanisms provided in tax procedural law. According to Article 45(4) of the General Tax Law (Lei Geral Tributária), the limitation period for tax assessments is suspended during the pendency of criminal proceedings related to tax crimes. This suspension prevents the limitation period from running while criminal authorities investigate potential tax fraud, evasion, or related offenses. The suspension continues until the criminal proceedings are definitively concluded through conviction, acquittal, or case dismissal. Consequently, criminal investigations can extend the Tax Authority's assessment powers well beyond the standard four-year period. In practice, when a tax inspection reveals facts potentially constituting criminal offenses, the Tax Authority may refer the matter to criminal authorities, effectively preserving their assessment rights. This intersection between criminal and administrative proceedings creates strategic considerations for both taxpayers and the Tax Authority, as criminal referrals can prevent time-bar defenses while criminal investigations proceed, sometimes for several years.
What are the legal consequences of incorrectly applying the VAT margin scheme to intra-Community acquisitions of second-hand vehicles in Portugal?
Incorrectly applying the VAT margin scheme to intra-Community acquisitions of second-hand vehicles in Portugal results in significant legal and financial consequences. When traders acquire vehicles from EU suppliers under the general intra-Community regime (VAT-exempt supplies), they must account for the acquisition under reverse-charge rules and cannot subsequently apply the margin scheme on resale. The correct treatment requires: (1) declaring the intra-Community acquisition with VAT due in Portugal on the full acquisition value; (2) exercising the right to deduct that VAT (if applicable); and (3) charging VAT on the full sale price when reselling domestically. Improper margin scheme application leads to: underpayment of VAT on acquisitions, improper VAT deductions, and incorrect taxation of sales. Tax Authority corrections typically involve: additional VAT assessments on the full value of sales (not just margins), disallowance of improperly claimed deductions, assessment of compensatory interest (juros compensatórios), and potential penalties. The cumulative tax burden can exceed the original VAT liability significantly. Additional consequences may include criminal referrals for tax fraud if the Authority suspects intentional evasion, reputational damage, and enhanced scrutiny of future transactions.
What remedies are available to taxpayers challenging additional VAT assessments through CAAD tax arbitration in Portugal?
Taxpayers challenging additional VAT assessments through CAAD (Centro de Arbitragem Administrativa) tax arbitration have several effective remedies under the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). Available remedies include: (1) Complete annulment of contested assessments based on substantive illegality, procedural defects, or expired limitation periods; (2) Partial annulment where only specific components are unlawful; (3) Condemnation of the Tax Authority to reimburse unduly collected amounts with indemnatory interest (juros indemnizatórios) calculated according to legal rates; (4) Declaration of rights regarding proper tax treatment and applicable regimes. Arbitration offers advantages over judicial appeals: faster resolution (decision within 6 months, extendable to 12 months), specialized arbitrators with tax expertise, lower costs than court proceedings, and equivalent legal effect to court judgments. Taxpayers can request arbitration within 90 days of notification of final administrative decisions. The arbitral tribunal has full jurisdiction to review factual and legal aspects, examine evidence, and substitute the Tax Authority's decision with its own assessment. Decisions are binding, final, and enforceable, though subject to limited court review for procedural irregularities. This mechanism provides robust protection for taxpayer rights while ensuring efficient dispute resolution.