Process: 24/2019-T

Date: June 3, 2019

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 24/2019-T) addresses the procedural consequences when the Portuguese Tax Authority revokes a VAT assessment after arbitration proceedings have commenced. The taxpayer challenged an additional VAT assessment of €29,830.91 plus interest of €4,432.95 for period 2014/10, claiming violations of VAT deduction rights and principles of neutrality and proportionality. However, after the arbitral tribunal was constituted on March 26, 2019, the Deputy General Director revoked the contested assessment on April 12, 2019. The Tax Authority argued for termination of proceedings due to supervening futility of the dispute (inutilidade superveniente da lide) under Article 277(e) of the Civil Procedure Code, applicable subsidiarily per Article 29(1)(e) of RJAT. The tribunal agreed that revocation of the contested act eliminated the principal object of arbitration, rendering any decision on legality pointless. Regarding the subsidiary claim for compensation for damages from providing an undue guarantee, the taxpayer had secured a lien on inventory to suspend tax enforcement. The Tax Authority contested this claim, arguing Article 53 of the General Tax Code only applies to bank guarantees or equivalent, not liens, and that the taxpayer failed to prove or quantify any actual damages. The decision illustrates important procedural principles in Portuguese tax arbitration: the supervening futility doctrine when the underlying tax act is revoked during proceedings, and the limited scope of compensation rights for guarantee costs, which require both proof of pecuniary guarantee and quantifiable damages.

Full Decision

ARBITRAL DECISION

REPORT

On 15/01/2019, A..., LDA, a legal entity with the tax identification number..., with registered office at Rua ..., ..., ... no...., ...-... ..., filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (RJAT), and Articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, requesting the declaration of illegality of the additional VAT assessment notice no. 2018... and respective interest, relating to the period 2014/10, in the amounts of €29,830.91 and €4,432.95, respectively, and furthermore the condemnation of the Tax Authority to reimburse the amount of damages resulting from the provision of undue guarantee, which it does not quantify.

  1. To support its request, the Claimant alleges that the aforementioned additional assessment "is based on erroneous factual and legal premises concerning the right to VAT deduction, and violates the principles of neutrality and proportionality that should govern the application of this tax".

  2. The request for constitution of an arbitral tribunal was accepted on 15 January 2019 and automatically notified to the Tax Authority.

  3. The President of the CAAD Deontological Board appointed the undersigned as sole arbitrator on 2019/03/06, who duly communicated his acceptance.

  4. On the same date the parties were notified of the appointment and did not manifest any intention to refuse.

  5. The Respondent did not submit a response regarding the principal issue of illegality of the contested tax act, instead seeking:

a. "Regarding the principal request, the Tribunal should declare the termination of the proceedings due to supervening futility of the subject matter of the dispute, under paragraph e) of Article 287 of the CPC, applicable subsidiarily under paragraph e) of Article 29 of the RJAT,

b. Since the tax act now contested was subject to revocation at a moment after the constitution of the Arbitral Tribunal, thereby satisfying the Claimant's claim.

c. The Sole Arbitral Tribunal was constituted on 26/03/2019 and on 27/03/2019 a writ was issued notifying the Tax Authority to submit its Response under and in accordance with Article 17 of the RJAT.

d. By order of the Deputy General Director, of 12/04/2019, the tax act now contested was revoked, as per the information and order attached as document no. 1, this information having been notified to the Claimant as per document no. 2 attached hereto.

e. With the revocation of the contested act at a date after the constitution of the arbitral tribunal, that is to say, while the arbitral proceedings were pending, the request for arbitral pronouncement lost its principal object, with no utility whatsoever in the requested pronouncement.

f. In these terms, the Arbitral Tribunal should declare the proceedings terminated due to supervening futility of the subject matter of the dispute regarding the principal request".

  1. Additionally, the Respondent maintains that there is no grounds for payment of any compensation, as this is not due, since in the concrete case there was no damage suffered by the Claimant in tax enforcement through the payment of a bank guarantee or other equivalent means, and, since the lien is not a guarantee equivalent to a bank guarantee, Article 53(1) of the General Tax Code is not applicable to the case.

  2. The Tribunal was constituted on 2019/03/26 and has material jurisdiction, considering the provisions of Article 2, section 1, paragraph a) and Article 30, section 1 of the RJAT.

  3. The parties have legal personality and capacity and are legitimate (Article 4 and Article 10, section 2 of the RJAT, and Article 1 of Ordinance 112-A/2011, of 22 March).

  4. The proceedings do not suffer from defects of nullity

DECISION

I - Factual Matter

Proven Facts

i. By order of the Deputy General Director, of 12/04/2019, the contested tax act was revoked, as per the information and order attached by the Tax Authority;

ii. The Claimant was notified of the revocation of the act, also as per copy of the notification letter attached with the Response.

iii. The revocation occurred already after the constitution of the Arbitral Tribunal, whose constitution was on 2019/03/26.

iv. It is not discernible from the case file what the nature and value of the damages suffered by the Claimant with the provision of guarantee provided in the form of a lien on assets in its inventories to suspend the tax enforcement resulting from the contested assessment.

Unproven Facts

There are no other facts that should be considered as unproven and that may have relevance to the decision.

Reasoning of the Proven and Unproven Factual Matter

  1. The Tribunal, with reference to the factual matter, does not have to rule on everything that was alleged by the parties, falling instead on it the duty to select the facts that matter for the decision and to distinguish the matters proven and unproven (see Article 123, section 2, of the CPPT and Article 607, section 3 of the CPC, applicable ex vi Article 29, section 1, paragraphs a) and e), of the RJAT).

  2. Thus, having regard to the positions assumed by the parties and the documentary evidence attached to the case file, it is considered proven the revocation of the act by the competent entity to do so, while the present arbitral action was pending.

II – MATTER OF LAW

Principal Request

1 The subject matter of the present proceedings is the assessment of the legality of the tax act for additional VAT assessment no. 2018... and respective interest, relating to the period 2014/10, in the amount of €29,830.91 and €4,432.95, which was effected as a result of a tax inspection carried out by the Tax Authority.

2 Having regard to the factual matter given as proven, the Deputy General Director of Taxes, in an order of 12 April of the current year, acting with delegated authority, issued, in an Information from the VAT Services, the following Order: "Agreed. I revoke the tax acts contested in the manner proposed."

3 This means that, with the revocation of the contested act while the action was pending, the request for arbitral pronouncement lost its principal object, with no utility whatsoever in the requested pronouncement.

4 Having this in mind, the decision of the Arbitral Tribunal can only be to declare the proceedings terminated due to supervening futility of the subject matter of the dispute regarding the principal request, as provided for in Article 277, paragraph e) of the CPC, subsidiarily applicable, having regard to the provision of Article 29, section 1, paragraph e) of the RJAT.

Subsidiary Request

Nevertheless, the Claimant, additionally, appealing to the provision of Article 53 of the General Tax Code, seeks to be reimbursed for the damages "resulting from the provision of undue guarantee" provided in the form of a lien on its inventories, to obtain the suspension of the tax enforcement that was meanwhile instituted for non-payment of the levied tax.

The Tax Authority contests the admissibility of the request because there was no damage whatsoever resulting from the provision of pecuniary guarantee, as a bank guarantee or other equivalent, since the Claimant provided guarantee in the form of a lien and, regarding that, Article 53 of the GTC is not applicable.

And, on the other hand, says the Tax Authority, the Claimant does not prove the existence of any resulting damage, which is not minimally specified nor quantified in the arbitral request.

Let us see.

The legal regime for the right to compensation for undue guarantee is contained in Article 53 of the GTC, which establishes the following:

Article 53

Guarantee in case of undue provision

1 - The debtor who, to suspend enforcement, offers a bank guarantee or equivalent will be indemnified totally or partially for the damages resulting from its provision, should he have maintained it for a period exceeding three years in proportion to the outcome in administrative appeal, impugnation or opposition to enforcement that have as their object the guaranteed debt.

2 - The period referred to in the preceding number does not apply when it is verified, in gracious reclamation or judicial impugnation, that there was error imputable to the services in the assessment of the tax.

3 - The indemnification referred to in section 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the indemnificatory interest rate provided for in this law and may be requested in the very process of reclamation or judicial impugnation, or autonomously.

4 - The indemnification for provision of undue guarantee will be paid by charging against the revenue of the tax of the year in which the payment was made.

For its part, for the procedural effectuation of this right, Article 171 of the CPPT provides that «the indemnification in case of bank guarantee or equivalent unduly provided will be requested in the process in which the legality of the enforceable debt is disputed» and that «the indemnification must be requested in the reclamation, impugnation or appeal or in case its ground is supervening within 30 days after its occurrence».

As has been the consistent understanding in the jurisprudence of CAAD, it is considered that the judicial impugnation process encompasses the possibility of condemnation in the payment of indemnification to the impugner for the provision of undue guarantee, deciding even that the arbitral process is also, in principle, a processually equivalent and adequate means to formulate such request, which is justified by evident reasons of procedural economy, since the right to indemnification for undue guarantee depends on what is decided regarding the legality or illegality of the assessment act.

Once the request for constitution of the arbitral tribunal and for arbitral pronouncement is filed, it will then be in the arbitral process that the "legality of the enforceable debt" will be discussed, whereby, as results from the express terms of that section 1 of the aforementioned Article 171 of the CPPT, it is also the arbitral process that is appropriate to assess the request for indemnification for undue guarantee.

In the case at hand, it is manifest that the errors underlying the VAT assessment are derived from a non-conforming interpretation and application of the law imputable to the Tax and Customs Authority which, by means of the revocation order, assumed the error justifying the emergence of the right to indemnification for provision of undue guarantee.

However, it is equally required under the cited legal terms that there has been provision of bank guarantee or equivalent and that this indemnification can only have as its value the amount of the costs of the effective provision which, even so, "...has as its maximum limit the amount resulting from the application to the guaranteed value of the indemnificatory interest rate provided for in this law...".

As the Tax Authority mentions in its Response, the lien, for the purposes of these normative provisions, cannot be equated with a "bank guarantee or equivalent".

The equivalence of which both Article 53 of the GTC and Article 171 of the CPPT speak, has been understood as being that which implies for "the interested party the existence of expenses whose amount varies in function of the period of time during which it is maintained".

In truth, for the guarantee to be equivalent it must bring to the executed parties costs with its provision, which, in the case at hand seems not to happen, as much so that, as results from the factual matter given as proven, no amount of expenses inherent to the provision of guarantee in the form of a lien is indicated.

Therefore, the request for indemnification presented cannot succeed.

III – Costs of the Proceedings

In accordance with the provision of Article 22, section 4, of the RJAT, "the arbitral decision issued by the arbitral tribunal includes the fixing of the amount and the allocation among the parties of the costs directly resulting from the arbitral proceedings".

The basic rule on responsibility for the costs of proceedings is that the party that occasioned them should be condemned, understanding that the losing party occasions the costs of the proceedings, in the proportion in which it is losing (Article 446, sections 1 and 2, of the Code of Civil Procedure).

In the case at hand, the cause of termination of the proceedings appears to be supervening futility of the subject matter of the dispute, due to revocation of the contested acts, which, as has been seen, is imputable to the Tax and Customs Authority. Indeed, the revocation of the act occurred while the present proceedings were pending.

Thus, in this case, the provision of Article 536, section 3, of the CPC applies (applicable ex vi Article 29, section 1, paragraph e), of the RJAT), which determines that in cases of termination of proceedings due to impossibility or supervening futility of the subject matter of the dispute (excepting those provided for in the preceding sections), responsibility for costs falls to the plaintiff or claimant, unless such impossibility or futility is imputable to the defendant or respondent, in which case the latter is responsible for all costs.

It was the Tax Authority that occasioned the declaration of termination of proceedings due to verification of supervening futility in its continuation, given that it itself revoked the contested tax act while the arbitral proceedings were pending.

IV. Decision

Having regard to all the foregoing, the Arbitral Tribunal decides:

a) Declare the arbitral proceedings terminated due to supervening futility of the subject matter of the dispute since the tax act was annulled by the entity with authority to do so;

b) Reject the request for condemnation of the Tax Authority to payment of indemnification intended to reimburse the costs incurred by the Claimant with the provision of bank guarantee on the grounds that the case is not covered by the provision of Articles 53 of the GTC and 171 of the CPPT.

c) Condemn the Tax Authority to payment of costs.

V – Economic Value of the Proceedings

The value of the proceedings is fixed at Euros 34,263.86, under Article 97-A, section 1, paragraph a), of the CPPT, applicable by force of paragraphs a) and b) of section 1 of Article 29 of the RJAT and section 2 of Article 3 of the Regulation on Costs in Tax Arbitration Proceedings ("RCPAT").

VI. Costs

In accordance with the provision of Article 22, section 4, of the RJAT, the value of the arbitration fee is fixed at Euros 1,836.00, under Table I of the aforementioned Regulation, at the charge of the Respondent.

Let notification be made.

Lisbon 2019/06/03

The Sole Arbitrator

José Ramos Alexandre

Frequently Asked Questions

Automatically Created

What happens when the Portuguese Tax Authority revokes a VAT assessment after arbitration proceedings have already begun at CAAD?
When the Portuguese Tax Authority revokes a VAT assessment after CAAD arbitration proceedings have begun, the tribunal declares the proceedings terminated due to supervening futility of the dispute (inutilidade superveniente da lide). This occurs because the revocation eliminates the principal object of the arbitration request, making any judicial pronouncement on the legality of the now-revoked act pointless and without practical utility. The legal basis is Article 277(e) of the Civil Procedure Code, applicable subsidiarily to tax arbitration under Article 29(1)(e) of RJAT.
What is 'inutilidade superveniente da lide' (supervening uselessness of proceedings) in Portuguese tax arbitration?
Inutilidade superveniente da lide (supervening uselessness/futility of proceedings) in Portuguese tax arbitration refers to the termination of proceedings when the dispute's object ceases to exist after the case has been filed. In tax arbitration under RJAT, this typically occurs when the Tax Authority revokes the contested assessment during pending proceedings, eliminating the need for a decision on its legality. The tribunal must declare the proceedings terminated under Article 277(e) of the CPC, as there is no longer any practical utility in issuing a decision on an act that no longer produces legal effects.
Can a taxpayer challenge an additional VAT assessment through CAAD arbitration under the RJAT framework?
Compensation for costs of an undue guarantee when a tax assessment is subsequently revoked is governed by Article 53 of the General Tax Code (LGT). However, this right is narrowly interpreted: it applies only to bank guarantees or equivalent pecuniary guarantees, not to liens on assets. Additionally, the taxpayer must prove and quantify the actual damages suffered. In this case, the tribunal indicated that a lien on inventory does not qualify for compensation under Article 53, and the taxpayer failed to specify or quantify any damages, making the compensation claim inadmissible. The taxpayer bears the burden of proving both the nature of pecuniary guarantee and quantifiable financial harm.