Process: 252/2015-T

Date: December 20, 2015

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 252/2015-T involved a challenge to additional VAT assessments totaling €55,358.32 for periods 2008-06T and 2008-09T, including default compensatory interest. The claimant, a Santarém-based company, filed for arbitration on April 14, 2015, after the Director of VAT Services dismissed their hierarchical appeal on December 29, 2014. The arbitral tribunal was constituted on June 26, 2015, under the Legal Regime for Arbitration in Tax Matters (RJAT). The claimant alleged multiple grounds for annulment: (a) insufficient reasoning in the assessment acts, which failed to explicitly explain the grounds for issuance; (b) violation of the right to prior hearing, as no notification was provided before assessments; (c) lack of competence, arguing the Director-General of Taxes issued assessments when competence belonged to the Head of Tax Service or Director of VAT Collection Services, citing unconstitutional amendments to Article 82 of the VAT Code; (d) deficient reasoning in the inspection report regarding why deducted VAT did not contribute to taxable operations; and (e) expiration of the statute of limitations, contending the four-year assessment period from January 1, 2009 expired before notification, with inspection actions failing to validly interrupt the limitation period. The claimant contested the tax authority's extension of limitations based on criminal inquiry NUIPC proceedings, arguing awareness occurred only after expiration, raising constitutional concerns regarding legal certainty. Substantively, the claimant argued deducted VAT corresponded to necessary business expenses, and downstream taxable operations' non-realization should not preclude deduction rights. The tribunal held hearings on October 16, 2015, hearing two witnesses, followed by written submissions. The claimant sought reimbursement of improperly paid tax plus indemnity interest under Article 43 of the General Tax Law.

Full Decision

ARBITRAL DECISION

I. REPORT

A…, Tax Identification Number (NIPC)…, with registered office at Rua…, No. … – Ground Floor, …, Santarém (hereinafter referred to only as Claimant), submitted on 14-04-2015 a request for constitution of a single arbitral tribunal, in accordance with articles 2º and 10º of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in conjunction with article 102º of the Tax Procedures Code (CPPT), wherein the Tax and Customs Authority (hereinafter referred to only as Respondent) is the defendant.

The Claimant requests the annulment, on grounds of its illegality, of the additional VAT assessments for the periods 2008-06T and 2008-09T, and respective default interest, totaling €55,358.32, as well as the order issued by the Director of the VAT Services on 29/12/2014, which dismissed the hierarchical appeal that had been filed by the Claimant with reference to said additional assessments. Consequently, the Claimant requests the condemnation of the Respondent to the reimbursement of the tax improperly paid, increased by the corresponding indemnity interest, in accordance with article 43º of the General Tax Law ("LGT").

The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD on 16-04-2015 and notified to the Tax and Customs Authority on that same date.

In accordance with the provisions of paragraph a) of article 6º, number 2, and paragraph b) of article 11º, number 1, of the RJAT, the Deontological Council appointed as arbitrator of the single arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable deadline.

On 11-06-2015 the Parties were duly notified of this appointment, having not expressed any intention to refuse the appointment of the arbitrator, in accordance with the combined provisions of article 11º, number 1, paragraphs a) and b) of the RJAT and articles 6º and 7º of the Deontological Code.

In conformity with the provision of paragraph c) of article 11º, number 1, of the RJAT, the single arbitral tribunal was constituted on 26-06-2015.

On 16/10/2015 the hearing held pursuant to article 18º of the RJAT took place in which the witnesses enrolled by the Claimant were heard, namely: C… and D…, and the Parties were granted a period of 20 days to present successive written submissions.

II. THE CLAIMANT'S REQUEST

In the present proceedings, the Claimant requests the annulment of the additional VAT assessments for the periods 2008-06T and 2008-09T, and respective default interest, totaling €55,358.32, as well as the order issued by the Director of the VAT Services on 29/12/2014, which dismissed the hierarchical appeal that had been filed by the Claimant with reference to said additional assessments. Should the claim for arbitral pronouncement be granted, the Claimant further requests the condemnation of the Respondent to reimbursement of the tax improperly paid, increased by the corresponding indemnity interest.

To support its claim, the Claimant imputes to the acts identified various defects that will result in their voidability, namely:

a) the lack of reasoning of the acts of assessment "(…) in that they did not explicitly set forth, in a congruent and comprehensible manner, all the grounds that determined their issuance, with only a set of values being indicated, and that was conducted without recourse to indirect methods, mentions that did not allow the Claimant to understand the underlying motivation thereof. There was not, in any part, any express reference made to any other document containing such reasoning." – cf. points (ii) and (iii) of the conclusions of the Submissions.

b) the omission of an essential legal formality embodied in the failure to comply with the right of the Claimant to prior hearing, who, prior to the assessments, was not notified to exercise it.

c) the lack of competence of the author of the act in that the contested assessments were conducted "(…) by the Director-General of Taxes, when, in reality, the one with competence to conduct them was the Head of the Tax Service of the area of the taxpayer's residence or the Director of VAT Collection Services. Indeed, the wording of article 82º of the VAT Code as amended by article 2º of Decree-Law No. 102/2008, of 20 June, has already been considered unconstitutional in that the legislative authorization that gave rise to such wording was expired and did not permit the alteration of competence for the conduct of assessments, but merely the renumbering and alteration of references." – cf. points (vii) and (viii) of the conclusions of the Submissions.

d) the lack of reasoning of the inspection report in that "(…) the Tax Inspection Services allege that the tax assessed by B… and borne by the Claimant does not contribute to the realization of operations subject to tax and not exempt therefrom, for which reason, pursuant to articles 19º and 20º of the VAT Code, the respective deductibility cannot be accepted. However, it is not possible to understand – because this is not explained to the Claimant – what the logical reasoning was that presided over the allegation in question, limiting itself to issuing a conclusive judgment on this matter. The tax administration limited itself to, in a single paragraph, concluding in that sense, without explaining, as was incumbent upon it, the reasons underlying what it asserts in categorical fashion." – cf. points (xi) to (xiii) of the conclusions of the Submissions.

e) the lapse of the right to assessment once that "The VAT now assessed by the tax administration concerns amounts of tax deducted by the Claimant in the periodic declarations submitted for the second and third quarters of the year 2008, and it was concluded that the limitation period for the right to assessment began to run on 1 January 2009 and terminated on 1 January 2013, the inspection action having had no effect on the interruption of the limitation period, in that it extended for more than six months. Accordingly, it was demonstrated that the State's right to the additional assessment regarding amounts of tax deducted in the periodic declarations submitted for the second and third quarters of the year 2008 has already lapsed, in that the act of additional assessment was not notified to the Claimant within the four years following the beginning of the calendar year following the year in which the requirement arose." – cf. points (xxxvii) and (xxxviii) of the conclusions of the Submissions.

With regard to any extension of the limitation period for the right to assessment by application of number 5 of article 45º of the LGT, given the institution of the inquiry process NUIPC …/2012…DSTR, the Claimant alleges that it became aware thereof only after the said limitation period had been completed. And only from this moment could such fact be attributed the legal effect provided for in number 5 of article 45º of the LGT – extension of the limitation period for the right to assessment until one year after the filing or final judgment of the sentence – under penalty of the norm in question being unconstitutional for violation of the principles of legal certainty and protection of legitimate expectations inherent to the Rule of Law, as enshrined in article 2º of the Constitution of the Portuguese Republic (CRP).

f) the error regarding the factual and legal premises with respect to the VAT deducted by the Claimant. Indeed, the tax deducted by the Claimant based on the invoices listed by the Respondent corresponds to expenses necessary for the development of its activity and which, besides being indispensable, are assumed as normal and proportional in the context in which they occurred. The fact that the taxable operations downstream were not realized does not exclude the right to deduction of the tax. Furthermore, the Respondent itself did not justify the reason why it understood that the tax assessed by the issuer of the invoices identified in the inspection report did not contribute to the realization of operations subject to tax and not exempt therefrom.

g) the lack of reasoning and the omission of an essential legal formality of the assessment of default interest in that the Claimant was not granted the right to prior hearing with reference to a possible assessment of default interest since the draft conclusions sent to the Claimant for purposes of prior hearing contained no reference to the possible assessment of default interest. Furthermore, as a prerequisite for the assessment of interest (pursuant to article 35º of the LGT) is the fault of the taxpayer for the delay in the assessment of the tax, the Respondent neither alleged nor proved any facts that would allow the conclusion that the delay or postponement of the assessment of the VAT in question is imputable to the Claimant.

h) the insufficient evidence and lack of reasoning of the order dismissing the hierarchical appeal in that, having been requested the conduct of evidence-gathering measures – namely the examination of witnesses – the same were entirely omitted. The decision not to conduct the requested evidentiary measures is not reasoned, nor is it justified. This conduct of the Respondent implies the illegality of the decision on the hierarchical appeal due to insufficient evidence (violation of articles 58º and 72º of the LGT) and due to lack of reasoning (violation of article 77º of the LGT).

Concluding for the grant of the arbitral pronouncement claim, as the Claimant requests, the contested acts of assessment should be annulled, as well as the order dismissing the hierarchical appeal, with the consequent condemnation of the Respondent to reimburse the Claimant for the tax and default interest improperly paid, increased by indemnity interest at the legal rate applicable.

III. THE RESPONDENT'S RESPONSE

In its response, the Respondent came to contradict the allegations of the Claimant, concluding for the dismissal of the arbitral pronouncement claim, responding to each of the points raised by the Claimant as follows:

a) the lack of reasoning of the acts of assessment invoked by the Claimant is not sustained in that in the assessment notes sent to the Claimant, expressly contained in the table with the heading "Reasoning", there is the indication that this is an "Additional assessment made based on correction conducted by the Tax Inspection Services". In that measure, there is no doubt that the acts in question result from the determination conducted by the tax inspection services and that were communicated to the Claimant via the conclusions report sent to the Claimant. On this matter the Supreme Administrative Court (STA) already ruled, in its judgment of 09/05/2001, delivered in case No. 025832, which concluded that: "An act of additional assessment based on a report of the tax inspection services should be considered reasoned, even if it does not make express reference thereto, if it situates itself, undoubtedly, in the respective legal and factual framework, perfectly clear, enlightening and duly notified."

Furthermore, if it were admitted that there were a non-existence or insufficiency of reasoning, it would be incumbent on the Claimant to make use of the expedient provided for in article 37º of the CPPT and request notification of the elements it considered to be lacking, which did not occur.

b) the omission of an essential legal formality invoked is not sustained in that, under number 3 of article 60º of the LGT, prior hearing of the taxpayer is dispensed with before assessment whenever the taxpayer has been called to participate in any prior phase of the procedure. Now, the draft conclusions were sent to the Claimant so that it would comment, under article 60º of the LGT and article 60º of the Tax Inspection Procedures Code (RCIPT), and it opted not to do so. Thus, having been granted the right to hearing during the inspection procedure, there was no place for new hearing at a moment prior to assessment.

c) there is no defect of lack of competence of the author of the act. Decree-Law No. 102/2008, of 20 June, was approved in the Council of Ministers within the period fixed by law of authorization, and it is irrelevant, for purposes of determining the lapse of the legislative authorization, the moment of its promulgation, countersignature and subsequent publication. Furthermore, the legislative authorization was sufficiently broad to permit this type of adjustments, and was not called into question by the alteration introduced regarding competence for the conduct of additional VAT assessments.

d) the lack of reasoning of the conclusions report invoked is unjustified in that the final report sent to the Claimant is properly reasoned, with no contradiction or obscurity present therein. The report is complete, making known the path followed by the author of the decision, containing all the elements that the Claimant could need to understand and comprehend the corrections made to it. The demonstration that the Claimant was sufficiently clarified with respect to the corrections made results from the fact that it filed a gracious claim, appealed hierarchically from the decision dismissing the gracious claim, and, finally, filed the present arbitral pronouncement request. And, if indeed it felt insufficiently clarified, the Claimant could have made use of the expedient of article 37º of the CPPT and requested notification of the lacking elements.

e) the lapse of the right to assessment does not occur in that this period was suspended with the institution, on 27/07/2012 (that is, still within the limitation period for the right to assessment), of the inquiry process NUIPC …/2012…DSTR, by application of number 5 of article 45º of the LGT.

f) the error regarding factual and legal premises alleged does not merit grant because, in that it concerns tax borne in services acquired by the Claimant for production of events that were not invoiced to its members, the right to deduction is expressly excluded by means of number 1 of article 20º of the VAT Code (CIVA). Indeed, "(…) the existence of a direct and immediate relationship between an upstream operation and one or more downstream operations with a right to deduction is necessary for the right to deduction of upstream VAT to be recognized to the taxable person. After all, if deduction of VAT were permitted in the case of realization of operations outside the scope of the tax, one would be permitting the deduction of VAT by the final consumer, and with that, the total relief of consumption that is intended to be taxed." – cf. points 31 and 32 of the Submissions.

Furthermore, from the testimony of the witnesses enrolled, it was proven that the goods and services acquired from B… would have served to organize free and public street animation activities, and it is therefore not possible to make a "(…) causal nexus between the acquisition of those inputs and the realization of operations taxed downstream, for which reason, pursuant to article 20º of the CIVA, the VAT incurred in the said acquisitions is not and never could be deductible" – cf. points 39 and 40 of the Submissions.

g) the lack of reasoning and the omission of an essential legal formality of the assessment of default interest alleged is unjustified because from the inspection report it results demonstrated that the postponement of the assessment of the tax is a direct consequence of non-compliance by the Claimant with the legal provisions applicable to its concrete tax situation, there being therefore a nexus of imputability of the conduct. The right to default interest on the part of the State exists whenever there is fault – whether resulting from intentional conduct or merely negligent – and it will suffice a judgment of imputation that exists in the present proceedings. Finally, the assessments of default interest are adequately reasoned, containing all the legal elements required.

With regard to the alleged omission of the right to hearing, the Respondent considers that there would be no place for the same, pursuant to number 3 of article 60º of the LGT, because the Claimant was called to participate in the inspection procedure, although it opted not to do so.

h) there is no insufficient evidence and lack of reasoning of the order dismissing because "(…) the allegations of the Claimant have no factual support whatsoever, in that, in the Information from the VAT Services that forms the basis of the order dismissing the hierarchical appeal, at page 21, under the heading «On the request for examination of witnesses under the provisions of article 72º of the LGT and article 50º of the CPPT», the question referred to is precisely analyzed." – cf. point 47 of the Submissions.

Finally, and without prejudice to understanding that the Claimant's request does not merit grant, the Respondent requests that, should reason be given, albeit partially, to the Claimant, it not be condemned to payment of indemnity interest and to the costs of the proceedings, considering that in light of the information it had available, it acted in a manner bound by the applicable legal principles and norms. The fact that the Claimant opted not to exercise its right to prior hearing, bringing to the proceedings elements that could justify a different framework, prevented the Respondent from being able to make a different decision, and it is therefore not imputable to it the situation caused.

IV. CLARIFICATION OF ISSUES

The Arbitral Tribunal was regularly constituted and is competent.

The Parties possess tax and judicial capacity and are legitimate (articles 4º and 10º, number 2, of the same statute and article 1º of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and no obstacle to the examination of the merits of the case is raised.

V. FINDINGS OF FACT

A. Proven Facts

The following facts are considered proven:

  1. The Claimant is an association of businesspeople, of a private character, without profit purposes that enjoys legal personality which extends to the legal entities and individuals who conduct their activity of an economic nature in the municipalities of …, …, … and ….

  2. The Claimant has as its objectives the "defense, representation and promotion of the legitimate economic, professional and social interests of its members, as well as their rights, prestige and dignity" – cf. article 3º of the By-laws.

  3. The Claimant is framed in the general regime of organized accounting, by legal requirement, for purposes of Corporate Income Tax (IRC).

  4. With respect to VAT, the Claimant is framed in the normal quarterly regime, configuring itself as a mixed taxable person because part of its activity is exempt from VAT under article 9º of the VAT Code (CIVA).

  5. In the conduct of its activity, the Claimant provides to its members services related to their respective economic activities, providing clarifications and advising on what proves to be necessary.

  6. The Claimant also organizes sessions clarifying legislation and procedures to be adopted by members.

  7. Within the scope of its activities, the Claimant organizes and promotes cultural animation events with a view to revitalizing local commerce in the various municipalities in which it operates: …, …, … and….

  8. The Claimant represents, promotes and defends the interests of its members with public agencies and official entities, whether municipal or central.

  9. The Claimant also provides services – of information, clarification, advisory – to non-members through payment of a fee for the services.

  10. The services charged to non-members are all invoiced with VAT added.

  11. The services provided to third parties are all invoiced with VAT.

  12. The Claimant only does not assess VAT on membership fees and quotas paid by members.

  13. The activities of cultural animation and street animation are provided for the general benefit of the commercial zone, with no compensation being charged to the beneficiaries of the event.

  14. These street animation activities are conducted with reference to specific holidays, such as Mother's Day, Father's Day, St. Martin's Day, Christmas, etc.

  15. The same activity is, generally, organized in the same manner for the four municipalities in which the Claimant operates.

  16. In the year 2008, the Claimant subcontracted the services of the entity B…, Tax Identification Number…, for the conduct of street animation and cultural animation activities.

  17. The Claimant was subject to a tax inspection of general scope, with focus on the years 2008, 2009, 2010 and 2011.

  18. The inspections were based on External Service Orders Nos. OI2012… and OI 2012…, dated 17/04/2012 and 25/05/2012, respectively.

  19. The inspection measures began on 23 and 28 May 2012 and were all completed on 06/02/2013.

  20. The inspection report drawn up by the Respondent contains that, in the year 2008, B… issued the following invoices in the name of the Claimant:

[TABLE - invoices listed]

With respect to these invoices, the Respondent made the following corrections with the stated grounds (cf. page 8 of the inspection report):

[CORRECTIONS TABLE]

  1. The tax inspection report was notified to the Claimant by official letter No.…, of 26/03/2013.

  2. On 27/07/2012 an inquiry process NUIPC …/2012… was instituted against the Claimant, on suspicions of the practice of tax crime, as provided for and punished by article 104º of the General Tax Crimes Law (RGIT) with respect to VAT and IRC – Qualified Tax Fraud relating to the years 2008, 2009, 2010 and 2011.

  3. The Claimant was constituted as accused in the inquiry process identified in the preceding point on 29/04/2013.

  4. The additional VAT assessments and default interest contested were conducted on 20/08/2013.

  5. The Claimant filed a gracious claim of the VAT and default interest assessments identified which came to be dismissed.

  6. The Claimant filed a hierarchical appeal of the decision dismissing the gracious claim.

  7. The hierarchical appeal was dismissed by order of the Director of the VAT Services, notified to the Claimant on 14/01/2015.

  8. On 12/05/2014, the Claimant proceeded to payment of the additional VAT assessments and default interest, in a total of €55,358.22.

B. Facts Not Proven

No other facts with relevance to the arbitral decision were proven.

C. Substantiation of Findings of Fact

With respect to findings of fact, the tribunal need not pronounce itself on everything that was alleged by the parties; rather, it falls to it, the duty to select the facts that matter for the decision and to discriminate the proven matter from the unproven (cf. article 123º, number 2, of the CPPT and article 607º, number 3 of the Code of Civil Procedure (CPC), applicable by virtue of article 29º, number 1, paragraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delineated in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of Law (cf. preceding article 511º, number 1, of the CPC, corresponding to current article 596º, applicable by virtue of article 29º, number 1, paragraph e), of the RJAT).

Accordingly, taking into account the positions assumed by the parties, in light of article 110º, number 7 of the CPPT, the documentary evidence, the administrative proceedings joined to the record and the testimony of the witnesses enrolled by the Claimant, the facts listed above were considered proven, with relevance to the decision.

With respect to the testimonial evidence produced, it should be noted that the testimony given was considered serious and impartial in the eyes of the Tribunal, in that, along with the characteristics of spontaneity thereof, they proved logically structured and coherent, in particular the testimony of witness C…, general secretary of the Claimant since 1991, who demonstrated profound knowledge of the activity conducted by the Claimant.

VI. FINDINGS OF LAW

As mentioned above, in the arbitral pronouncement request, the Claimant contests the legality of the acts of VAT assessment and default interest for the periods 2008-06T and 2008-09T, alleging a series of defects which, should they be considered sustained, will result in the annulment of those acts, with the other legal consequences.

Article 124º of the CPPT, applicable by virtue of paragraph a) of number 1 of article 29º of the RJAT, establishes the order in which the judgment should examine the defects invoked by the challenging party, resulting from this order that, "(…) once the existence of a defect susceptible to leading to the elimination of the act from the legal order with effective protection of the legal position of the challenging party is recognized (notably, that prevents the renewal of the act with the same sense), the examination of other defects attributed to the impugned act is foreclosed, because, if it were necessary to always know of all defects attributed to the impugned act, the order of their examination would be indifferent"[1].

It has been the understanding of the Supreme Administrative Court – of which examples are the judgments of 07/12/2010, case No. 0569/10, of 22/03/06, case No. 0916/04, of 24/01/2007, case No. 0939/06, and of 06/07/2011, case No. 0355/11 – that the defects of violation of law (stricto sensu) should first be known, and only thereafter possible defects of form, because this will ensure more effective protection of the rights of taxpayers. This rule is not, however, absolute, and must be adjusted in function of the concrete elements of the situation at issue, for which reason logical considerations may require the priority examination of defects of form, without examination of defects of violation of law stricto sensu.

Having this framework in mind, the tribunal opts to analyze, in the first instance, the alleged lack of reasoning of the inspection report sent to the Claimant and which, in the understanding of the Respondent, adequately justifies the additional VAT assessment for the period 2008-06T in the amount of €44,541.00, and for the period 2008-09T in the amount of €2,272.48.

This is because, as will be concluded hereinafter, given that the inspection report is silent as to the factual reasons for refusal of deduction of the VAT borne by the Claimant, it is not possible for this tribunal to evaluate possible violation of law by incorrect application of article 20º of the VAT Code.

Let us see:

It is proven in the proceedings that the assessments identified were conducted by the Respondent based on what is alleged in the inspection report and transcribed above in point 20 of the proven facts.

Thus, in the understanding of the Respondent, the tax assessed with reference to the services provided by B… in the year 2008 is not deductible "because it did not contribute to the realization of operations subject to tax and not exempt therefrom", given that the initiatives in question did not give rise to any invoicing to members or to any other beneficiaries.

And this is solely what is referred to by the Respondent.

As the Claimant well alleges, the paragraphs of the inspection report that sustain the contested VAT assessments – transcribed in point 20 of the list of proven facts – present a conclusive judgment without the Respondent presenting any supporting facts.

In truth, the inspection report is entirely silent on this matter, limiting itself to listing the invoices issued by the entity in question and their respective values, without making any concrete analysis of the services provided by B… and their relevance to the activity of the Claimant.

Contrary to the legal obligation of reasoning that falls upon the Respondent – under article 77º of the LGT, in concretization of article 268º of the Constitution – this entity refers to nothing concerning the "initiatives in question" and the "concrete revitalization action". It was the obligation of the Respondent to indicate what actions and initiatives it refers to in concrete – identifying them minimally, including the correspondence with the invoices listed – for subsequent framing of the corresponding right to VAT deduction.

To this is added further the fact that, as the Respondent itself declares, the VAT borne by the Claimant with reference to the invoices identified was not all the subject of deduction; this very fact results from the phrase "Of the VAT borne in part of the invoices the exercise of the right to deduction was recorded" (cf. page 8 of the inspection report).

In that measure, the correction conducted by the Respondent will not regard all the invoices listed in the table on page 7 of the inspection report, but only part, without being able to ascertain which part. Contrary to what would be required, the Respondent did not identify the invoices whose tax had been improperly deducted, nor justified – in face of the nature of the respective services which are not even described in the report – the reason why those services did not contribute to the realization of operations subject to tax and not exempt therefrom.

This aspect is all the more relevant since there was, on the part of the Claimant, a judgment regarding the deductibility of the tax borne in the services acquired from B…, which resulted in the understanding of the Claimant itself, that not all the VAT would be deductible. Going the Respondent further than the Claimant in this judgment of deductibility – refusing the complete deduction of the tax borne – there would have to be justification of this option to demonstrate, in concrete, that the judgment initially conducted by the Claimant would be incorrect and in what measure.

It happens that, the Respondent not justifying, in fact and in law, the conclusion it reaches, the Claimant does not have conditions to adequately defend itself and contradict the position of the Respondent, if it disagree with it.

The conclusion that the tax paid is not deductible is a conclusion of law that must be supported in elements of fact; and those elements of fact do not result from the inspection report since this is entirely silent on this matter, preventing the Claimant from apprehending the logical-factual reasoning conducted by the Respondent to refuse deduction of such tax.

Not having the Claimant sufficient elements to evaluate the legality of the decision of the Respondent, it cannot fully exercise its right to impugn the acts conducted. In the case at hand, the lack of reasoning of the acts puts, in fact, in question the right of defense of the Claimant. And this very fact results from the tenor of the initial petition in that, not knowing the reasons that led to the conduct of the acts of assessment, the Claimant elaborates a series of hypotheses and potential framings, without being able to react concretely to the decision of refusal of deduction of the VAT borne in said invoices.

It is added further that the fact that the Respondent does not distinguish, from the invoices listed, those that contain improperly deducted VAT, prevents the Claimant from evaluating the correctness of that decision and the calculations conducted. This is all the more relevant in that, in the quantification of the VAT improperly deducted, the Respondent will have committed errors that this Tribunal cannot justify.

Indeed, in the period 2008-09T – whose additional assessment amounts to €2,272.48 – the Respondent considered that the tax from invoices …-…, …-…, …-… and …-… was improperly deducted. Now, if we add the value of the tax regarding these invoices, as results from page 7 of the inspection report, we find that it amounts to €2,263.00 and not to the mentioned €2,272.48 that were the subject of additional assessment. The reason for this difference is not justified, being possible that there are also calculation errors in the tax assessed with reference to the period 2008-06T.

Also for this reason, the lack of reasoning prevents the Claimant from validating the decision of the Respondent.

For all of this, this Tribunal considers that the inspection report sent to the Claimant and on the basis of which the contested assessments were conducted does not fulfill the legal requirements of reasoning provided for in article 77º of the LGT in that it does not include "brief exposition of the factual and legal reasons" that motivated them, nor the adequate "quantification of the tax facts", not complying, accordingly, with the imposition of article 268º of the Constitution.

As stated by Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa[2], "the legal and constitutional requirement of reasoning aims, primarily, to permit the interested parties knowledge of the reasons that led the administrative authority to act, so as to allow them a conscious choice between acceptance of the legality of the act and its contentious impugnation. To achieve such objective, the reasoning must provide to the recipient of the act the reconstitution of the cognitive and evaluative path followed by the authority that conducted the act, in such manner that it may be clearly known the reasons why it decided in the manner it did and not differently."

If the Claimant was not given complete and integral knowledge of the factual and legal reasons that justified the conduct of such acts of assessment, it is not in conditions to evaluate the correctness of the decision of the Respondent, not being able to take a conscious choice with reference to such acts.

It is added further that the conduct of administrative acts based on conclusive judgments or by mere reference to generic and empty formulas, without the necessary factual concretization, is not legally acceptable, being in direct violation of the provision of article 77º of the LGT and article 268º, number 3, of the Constitution, as the Supreme Administrative Court refers in its judgments of 26/06/1991, case No. 13435 and of 17/03/2005, case No. 103/05.

As well stated by the Supreme Administrative Court in its judgment of 12/03/2014, case No. 01674/136, "The act will be sufficiently reasoned when the administered party, placed in the position of a normal recipient – the prudent family father (bonus pater familiae) of which article 487º number 2 of the Civil Code speaks – may come to know the factual and legal reasons that are at its genesis, in such manner as to permit it to choose, in an informed manner, between acceptance of the act or the activation of the legal means of impugnation, and so that, in this latter circumstance, the court may also exercise the effective control of the legality of the act, gauging its legal correctness in face of its contextual reasoning."

Now, as already mentioned, none of this occurs in the present case, the Respondent not having detailed in the inspection report that sustains the contested assessments the sufficient information so that both the Claimant and this Tribunal may gauge the legality of the corrections conducted, including the calculations that led to the determination and quantification of the contested assessments.

Given the foregoing, it remains for this tribunal to conclude for the verification of the lack of reasoning of the inspection report that sustains the contested assessments, in violation of the provision of article 77º of the LGT, for which reason the acts of assessment should be annulled as illegal, as should the order dismissing the hierarchical appeal.

Against this understanding does not prevail the allegation of the Respondent in the sense that the Claimant could have made recourse to the expedient of article 37º of the CPPT and that, not having done so, such defect would have been cured.

Indeed, contrary to what the Respondent seems to defend, the regime of article 37º of the CPPT grants the taxpayer a faculty for cases in which the communication of the act suffers from some deficiencies; it does not impose conduct upon it with a view to permit the Tax Authority to provide reasoning a posteriori to an act that is not duly reasoned. That is, it is an expedient to remedy deficiencies of the notification itself (and which calls into question its effectiveness, without necessarily contending with the validity of the act which is the subject of notification) and not omissions or insufficiencies of the act itself, as is the case in the present proceedings. To defend, moreover, such position would be to call into question the very regime of article 268º, number 3, of the Constitution.

Concluding for the annulment of the VAT assessments and respective default interest, and of the order dismissing the hierarchical appeal that was issued on the same, for violation of the provision of article 77º of the LGT, the examination of the remaining defects that the Claimant imputes to the acts in question is foreclosed, being useless in accordance with what is mentioned above.

It results from the proven facts that the Claimant proceeded to payment of the assessments now contested, in a total of €55,358.32, on 12/05/2014.

Pursuant to number 1 of article 43º of the LGT "Indemnity interest is due when it is determined, in a gracious claim or judicial impugnation, that there was error imputable to the services that results in payment of the tax debt in an amount superior to the legally due."

As stated by Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa[3], "Error imputable to the services that conducted the assessment is demonstrated when a gracious claim or impugnation of such assessment is proceeded to and the error is not imputable to the taxpayer (for example, there will be annulment due to error imputable to the taxpayer when the assessment is based on incorrect factual premises, but the error is based on an incorrect indication in the declaration that the taxpayer submitted)."

Now, in the concrete case, the Claimant's request for payment of indemnity interest is unequivocally justified in that the contested assessments are illegal due to a defect only imputable to the Respondent.

Thus, beyond the reimbursement of what was improperly paid, the Claimant further has the right to payment of indemnity interest, at the legal rate in force, on the amount indicated, counted from the date of payment until the date of processing of the respective credit note, in which are included – cf. article 43º of the LGT and number 4 of article 61º of the CPPT.

The request for waiver of payment of indemnity interest made by the Respondent does not prevail, accordingly.

VII. DECISION

In accordance with the foregoing, this Arbitral Tribunal decides:

A) To grant the arbitral pronouncement request and, in consequence, annul the additional VAT assessments for the periods 2008-06T and 2008-09T, and respective default interest, in a total of €55,358.32, as well as the order dismissing the hierarchical appeal regarding the same;

B) To condemn the Respondent to reimburse the Claimant of the amounts improperly paid, increased by indemnity interest at the legal rate in force from the date of payment until the date of processing of the respective credit note, in which are included.

Value of the proceedings: In accordance with the provision of article 306º, number 2, of the Code of Civil Procedure and article 97º-A, number 1, paragraph a), of the CPPT and article 3º, number 2, of the Regulations for Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €55,358.32.

Costs: Pursuant to number 4 of article 22º of the RJAT, the amount of costs is fixed at €2,142.00, in accordance with Table I attached to the Regulations for Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Let this arbitral decision be registered and notified to the parties.

Lisbon, 20-12-2015

The Single Arbitrator

(Maria Forte Vaz)

[1] Cf. Jorge Lopes de Sousa, Guide to Tax Arbitration, Coord. Nuno Villa-lobos and Mónica Brito Vieira, Almedina, 2013, pages 202 and 203.

[2] Cf. General Tax Law, Annotated and Commented, Writing Meeting, 4th Edition, 2012, page 675.

[3] Work cited, page 342, note 2.

Frequently Asked Questions

Automatically Created

What were the additional VAT assessments challenged in CAAD process 252/2015-T?
The additional VAT assessments challenged in CAAD Process 252/2015-T concerned tax periods 2008-06T (second quarter) and 2008-09T (third quarter) of 2008, totaling €55,358.32 including default compensatory interest. The assessments resulted from the Tax Authority's denial of VAT deductions claimed by the taxpayer, with inspection services concluding the deducted tax did not contribute to taxable operations under Articles 19 and 20 of the VAT Code. The claimant challenged both the substantive assessments and the procedural decision dismissing their hierarchical appeal.
Can compensatory interest on VAT assessments be annulled through tax arbitration in Portugal?
Yes, compensatory interest (juros compensatórios) on VAT assessments can be annulled through tax arbitration in Portugal. Under the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011), CAAD arbitral tribunals have jurisdiction to review the legality of both principal tax assessments and accessory obligations including default compensatory interest. In Process 252/2015-T, the claimant specifically requested annulment of assessments 'and respective default interest.' When assessments are annulled, the associated compensatory interest automatically falls, as it is an accessory obligation dependent on the validity of the principal debt.
What is the procedure for filing a hierarchical appeal against VAT additional assessments in Portugal?
The procedure for filing a hierarchical appeal against VAT additional assessments in Portugal follows Article 102 of the Tax Procedures Code (CPPT). Taxpayers must submit the appeal to the hierarchically superior authority of the entity that issued the contested act. In VAT matters, this typically means appealing to the Director of VAT Services. In Process 252/2015-T, the claimant filed a hierarchical appeal against additional assessments, which was decided by the Director of VAT Services on December 29, 2014. After dismissal of the hierarchical appeal, the taxpayer may seek judicial review through administrative courts or, alternatively, request arbitration before CAAD within the statutory deadline, as occurred in this case on April 14, 2015.
Are taxpayers entitled to compensatory interest refunds when VAT assessments are annulled by CAAD?
Yes, taxpayers are entitled to indemnity interest (juros indemnizatórios) refunds when VAT assessments are annulled by CAAD, pursuant to Article 43 of the General Tax Law (LGT). This differs from compensatory interest (juros compensatórios) charged by the Tax Authority for late payment. Indemnity interest compensates taxpayers for improper retention of amounts paid under illegal assessments, calculated from payment date until reimbursement. In Process 252/2015-T, the claimant explicitly requested 'condemnation of the Respondent to reimbursement of tax improperly paid, increased by corresponding indemnity interest, in accordance with article 43º of the LGT.' The rate and calculation methodology for indemnity interest are established by ministerial order.
How does the CAAD arbitral tribunal review the legality of additional VAT liquidations from 2008?
CAAD arbitral tribunals review the legality of additional VAT liquidations from 2008 through comprehensive examination of procedural and substantive grounds under RJAT. In Process 252/2015-T, the tribunal analyzed: (1) formal requirements including reasoning sufficiency in assessment acts and inspection reports; (2) procedural guarantees such as the right to prior hearing; (3) competence of issuing authorities, including constitutional challenges to Article 82 of the VAT Code; (4) statute of limitations under Article 45 of the LGT, examining whether the four-year assessment period expired and whether inspection actions or criminal proceedings validly interrupted or extended limitations; and (5) substantive correctness of VAT deduction denials under Articles 19-20 of the VAT Code. The review includes documentary evidence, witness testimony, and written submissions from both parties.