Process: 252/2018-T

Date: May 15, 2019

Tax Type: IRC IVA

Source: Original CAAD Decision

Summary

CAAD arbitration process 252/2018-T addressed IRC and IVA corrections arising from inventory discrepancies in a Portuguese company dealing with apple concentrate. The Tax Authority applied Article 86 of the IVA Code, which presumes acquisition and transmission of goods when inventory values decrease without proper documentation. The taxpayer reported a final inventory value of €1,239,932.11 for 2012, but then declared an initial inventory of only €241,873.93 for 2013, creating a discrepancy of €848,786.34. In August 2013, the company made accounting corrections through journal entry no. 57, eliminating apple concentrate from inventory and arguing this correction invalidated the presumption of accuracy under Article 75(2)(a) of the LGT. The company claimed the reduction resulted from sales delivered in 2013 and reprocessing needs, not undeclared sales. The Tax Authority maintained that the presumption in Article 86 applied, treating the inventory reduction as presumed sales subject to IRC and IVA. The administrative review partially accepted the taxpayer's position regarding the inventory value adjustment. The core legal issue centered on whether the taxpayer's subsequent accounting corrections and explanations sufficiently rebutted the statutory presumption, or whether the Tax Authority correctly applied direct assessment methods based on the declared inventory values without resorting to indirect taxation methods under Article 90 of the LGT.

Full Decision

ARBITRAL DECISION

The arbiters Judge José Poças Falcão (presiding arbiter), Dr. Hélder Faustino and Dr. José Joaquim Monteiro Sampaio e Nora (member arbiters), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, agree as follows:

I. REPORT

  1. On 18 May 2018, A..., LDA. (previously designated B..., LDA.), Tax Identification Number ..., with registered office at ..., ...-... ..., ... (hereinafter the Claimant), submitted a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraph 1, subparagraph a), and paragraph 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (hereinafter, abbreviated as RJAT), as amended by article 228 of Law no. 66-B/2012, of 31 December, with a view to the pronouncement of this tribunal regarding:
  • Assessment of the legality of the decision of partial acceptance of the administrative review request submitted with a view to annulling the tax assessment acts for Corporate Income Tax (IRC) and Value Added Tax (IVA), as well as the tax assessment acts for IRC and IVA.

The Claimant attached 33 (thirty-three) documents.

The Respondent is AT – Tax and Customs Authority (hereinafter, Respondent or AT).

  1. In essence, the Claimant alleges that:

The Respondent bases the decision to alter the taxable matter on the application of the presumption provided in article 86 of the VAT Code.

In applying said provision, the Respondent assumes as a known fact the final inventory value for 2012, corresponding to € 1,239,932.11.

However, the Respondent raises doubts about that same fact by acknowledging in the inspection report a discrepancy regarding the final inventory value for 2012, declared by the Claimant, and the initial inventory value for 2013, in the amount of € 241,873.93, indicated by the Claimant, which resulted from a correction made by the latter to the inventory value, eliminating any existence of apple concentrate in inventory as of 31/12/2012 – 01/01/2013.

The Claimant, in the year 2013, identified the existence of a accounting error in the indication of the final inventory value for 2012, and, through journal entry no. 57, of August 2013, proceeded with the correction of inventories and its rectification in the IES of 2013, which precludes the possibility of applying the presumption of accuracy provided in article 75, paragraph 2, subparagraph a) of the LGT, regarding the inventory value indicated in the IES of 2012.

The Respondent accepted, in the context of the administrative review, the alteration of the final inventory value for 2012, considering that there had been sales of apple concentrate in 2012 that were only delivered in 2013 and the need for reprocessing of apple concentrate and, consequently, a reduction in the inventory value of € 848,786.34.

Faced with two values for the same factual situation and in light of the corrections made to one of the values, the prerequisites of the presumption of sale of inventoried goods cannot be considered to be met.

  1. The request for constitution of an arbitral tribunal was accepted by the President of CAAD and followed its normal procedure with notification to AT on 21 May 2018.

  2. The Claimant did not appoint an arbiter, so, pursuant to the provisions of article 6, paragraph 2, subparagraph a) and article 11, paragraph 1, subparagraph a) of the RJAT, the President of the Deontological Council of CAAD appointed as arbiters of the collective Arbitral Tribunal the undersigned, who communicated acceptance of the appointment within the applicable period.

4.1. On 10 July 2018, the Parties were notified of such appointment and did not express any intention to refuse the appointment of the arbiters, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs b) and c), of the RJAT and articles 6 and 7 of the CAAD Deontological Code.

4.2. Thus, in accordance with the provisions of article 11, paragraph 1, subparagraph c) of the RJAT, the collective Arbitral Tribunal was constituted on 30 August 2018.

  1. On 1 October 2018, the Respondent, duly notified for this purpose, submitted its Reply in which it specifically contested the arguments raised by the Claimant, concluding that the present action is unfounded.

5.1. In essence and also briefly, it is important to extract the most relevant arguments on which the Respondent grounded its Reply, namely:

The Claimant did not prove that the amount of correction was due to reprocessing operations, basing its evidence on hypothetical assessments, on reports and scientific works whose applicability to the specific case remained unproven.

The Respondent, faced with the existence of a discrepancy in inventories, subsumes it within the provision of article 86 of the VAT Code.

Also regarding the arguments invoked by the Claimant as to the possibility of a presumed determination of taxable matter by indirect methods, the Respondent had already pronounced itself in the administrative review context.

Indeed, given the facts established, there would be no impossibility of direct and exact proof and quantification of the indispensable elements for the correct determination of taxable matter, since the mere arithmetic correction made resulted exclusively from the verification of the Claimant's accounting elements.

As the Claimant states, the Respondent questioned the value of the inventory indicated in the IES of 2012, which benefited from the presumption of accuracy and good faith provided in article 75, paragraph 1 of the LGT.

The determination of taxable matter was carried out directly, considering exclusively the value of the final inventory of apple concentrate existing at the end of the year 2012 which was not considered as initial inventory in 2013, with the correction being made by the difference between the two values, without application of any of the criteria provided in article 90 of the LGT.

As the presumption provided in article 86 of the VAT Code is a presumption capable of being rebutted, it is not clear how the same could support any indirect assessment.

As the presumption was not rebutted by the Claimant, the correction was based solely on the inventory value of the apple concentrate declared for the year 2012 and the factual finding, admitted by the Claimant itself, that the apple concentrate no longer existed in the company, with the respective valuation being made on the basis of the value attributed by the Claimant itself.

5.2. The Respondent did not request the production of evidence and proceeded to attach the administrative file (hereinafter, PA) to the case.

  1. By order of 12 October 2018, the Parties were notified of the decision of the collective Arbitral Tribunal to dispense with the holding of the meeting referred to in article 18 of the RJAT, with 14 January 2019 fixed as the deadline for the rendering of the arbitral decision.

  2. The Respondent waived the submission of written pleadings. The Claimant submitted written pleadings on 8 November 2018, in which it reiterated the position previously assumed in its respective statements.

  3. The Respondent requested, on 15 November 2018, the untimeliness of the Claimant's pleadings, with the Claimant submitting a reply on 23 November 2018.

  4. By order of 3 December 2018, the Parties were notified of the decision of the collective Arbitral Tribunal to admit the written pleadings submitted by the Claimant.

  5. Some procedural vicissitudes contributed to the impossibility of concluding the case by the scheduled date, so, by order of 14 January 2019, the collective Arbitral Tribunal decided to extend, to the limit of two months, the deadline for concluding the case provided for in article 21, paragraph 1, of the RJAT, with 28 February 2019 fixed as the deadline for the rendering of the arbitral decision.

  6. In preparing the drafting of the final decision, some doubts arose regarding the factual matter, so, by order of 11 February 2019, the collective Arbitral Tribunal decided to reopen the proceedings and ordered the examination of the witnesses listed by the Claimant.

  7. The Respondent alleged on 27 February 2019 that, given that the reprocessing and the need to consider a loss from reprocessing are accepted, and no evidence production being deemed necessary regarding the reduction to be applied to inventory resulting from reprocessing, regarding its causes and effects, considering that the question to be decided amounts to a matter of law and that evidence production would constitute a futile proceeding, requesting the continuation of the case with a view to taking a final decision, but expressing availability for such proceeding, requesting, however, that one of the listed witnesses give evidence as an expert and that he be notified by the Arbitral Tribunal to appear at the aforementioned proceeding. The Claimant, notified to pronounce itself, made no allegations or requests within the determined period.

  8. By order of 13 March 2019, the Parties were notified of the decision of the collective Arbitral Tribunal regarding the request for examination of one of the listed witnesses in the capacity of expert; the Arbitral Tribunal will determine, at the moment of giving evidence and after preliminary examination of the witness, if appropriate, whether he should do so in the capacity of witness or in any other capacity. As for the request for notification by the Arbitral Tribunal, the request for notification of the witnesses indicated by the Claimant is denied.

  9. On 22 March 2019, a meeting was held at CAAD – Administrative Arbitration Centre for the examination of witnesses C... and D....

  10. The Claimant submitted written pleadings on 2 April 2019, in which it reiterated the position previously assumed in its respective statements. The Respondent submitted written pleadings on 22 April 2019, in which it reiterated the position previously assumed in its respective statements.

II. CASE MANAGEMENT

The Arbitral Tribunal was regularly constituted and is competent ratione materiae, given the configuration of the object of the case (cf. articles 2, paragraph 1, subparagraph a) and 5 of the RJAT).

The request for arbitral pronouncement is timely, as it was submitted within the period provided in article 10, paragraph 1, subparagraph a), of the RJAT.

The parties have legal personality and capacity, have standing and are regularly represented (cf. articles 4 and 10, paragraph 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

The case is not affected by nullities and no exceptions or preliminary issues have been invoked that would prevent consideration of the merits, of which it is necessary to take cognizance.

III. REASONING

III.1. ON THE FACTS

§1. FACTS ESTABLISHED

The following facts are considered established:

a) B..., LDA., Tax Identification Number..., is a private limited company incorporated in 1996, whose corporate purpose is the manufacture of fruit juices, vegetable products, organic products, their respective concentrates, related activities, agricultural and fruit production; marketing of agricultural products, fruit products and bioestimulant and bioprotector products; provision of services in the agro-industrial and agricultural sector, design, installation and assembly of orchards; marketing of agricultural raw materials, namely fertilizers, manure, limestone, phytosanitary products and others; and marketing of plants [cf. document no. 2 attached to the Initial Pleading].

b) The activity with the greatest preponderance in the volume of business of the Claimant is the manufacture of fruit juices and their respective concentrates.

c) The shares of the Claimant are held respectively by: i) E..., Limited, with the equivalent entity number ..., with registered office in ..., Republic of Ireland, with a share of € 816,000.00 (eight hundred and sixteen thousand euros); and by ii) F... Limited, with the equivalent entity number ..., with registered office in ..., Ireland, with a share of € 9,000.00 (nine thousand euros).

d) F... Limited acquired the share of € 9,000.00 (nine thousand euros) in the capital of the Claimant in early August 2013, with the acquisition having been registered by Filing no. 23108, of 21 August 2013.

e) On the same date, F... Limited acquired the entire Capital of E..., Limited, coming to control directly and indirectly 100% (one hundred percent) of the capital of the Claimant.

f) F... Limited is a company governed by Irish law that is part of G..., Plc (G... Group), being a leading manufacturer, trader and distributor in the branded alcoholic beverages sector, particularly in Ireland, United Kingdom and United States, listed on the stock exchanges of Dublin and London, with apple concentrate processing plants in Ireland, United Kingdom and United States, in addition to the Portuguese plant of the Claimant.

g) By resolution of 1 August 2013, new management of the Claimant was appointed.

h) Simultaneously with the aforementioned acquisitions of shareholdings by the G... Group and with changes to the level of the management body, there was also a change in the production managers of the Claimant's plant.

i) In compliance with Service Order no. OI2016..., an external inspection action was conducted on the Claimant, initially opened as partial for IRC, having subsequently been extended in scope to include VAT and withholding taxes for the year 2012.

j) By letter of 31 March 2017, the Claimant was notified of the Draft Tax Inspection Report produced at the conclusion of the inspection action, with a period of 15 days being granted to submit a written response in the exercise of the prior hearing right.

l) On 18 April 2017, the Claimant submitted a written response in the exercise of the prior hearing right.

m) On 26 April 2017, the Claimant was notified of the Final Tax Inspection Report, which decided on the revision of taxable profit for IRC purposes, relating to the year 2012, based on the principle of profit periodization provided in article 18 of the IRC Code, in the amount of € 998,058.15, and VAT assessment based on the presumption contained in article 86 of the VAT Code, in the amount of € 229,553.37.

n) In accordance with the conclusions of the Final Tax Inspection Report, the Respondent established a discrepancy of € 998,058.15 between the final inventory of the year 2012 and the initial inventory of the year 2013, having presumed the sale of the missing goods in accordance with the provisions of article 86 of the VAT Code.

o) Consequently, the following assessments were issued, in the total amount of € 567,432.23 (five hundred and sixty-seven thousand four hundred and thirty-two euros and twenty-three cents):

• IRC assessment for the period 2012, no. 2017-..., in the amount of € 339,143.87 (three hundred and thirty-nine thousand one hundred and forty-three euros and eighty-seven cents);

• Assessment of compensatory and default interest on IRC for the period 2012, no. 2017-..., in the total amount of € 41,487.29 (forty-one thousand four hundred and eighty-seven euros and twenty-nine cents);

• VAT assessment for the period 2012/12, no. 2017-..., in the amount of € 205,943.79 (two hundred and five thousand nine hundred and forty-three euros and seventy-nine cents);

• Assessment of compensatory interest on VAT for the period 2012/12, in the amount of € 34,643.69 (thirty-four thousand six hundred and forty-three euros and sixty-nine cents);

• VAT assessment for the period 2013/01, no. 2017-..., in the amount of € 13,335.39 (thirteen thousand three hundred and thirty-five euros and thirty-nine cents);

• Assessment of compensatory interest on VAT for the period 2013/01, in the amount of € 3,041.70 (three thousand and forty-one euros and seventy cents);

• VAT assessment for the period 2013/02, no. 2017-..., in the amount of € 5,971.27 (five thousand nine hundred and seventy-one euros and twenty-seven cents);

p) On 20 October 2017, the Claimant submitted an Administrative Review requesting the annulment of the following assessments:

• IRC for the period 2012, no. 2017-..., in the amount of € 339,143.87 (three hundred and thirty-nine thousand one hundred and forty-three euros and eighty-seven cents);

• VAT for the period 2012/12, no. 2017-..., in the amount of € 205,943.79 (two hundred and five thousand nine hundred and forty-three euros and seventy-nine cents);

• VAT for the period 2013/01, no. 2017-..., in the amount of € 13,335.39 (thirteen thousand three hundred and thirty-five euros and thirty-nine cents);

• VAT for the period 2013/02, no. 2017-..., in the amount of € 5,971.27 (five thousand nine hundred and seventy-one euros and twenty-seven cents);

• Respective interest assessments.

q) On 26 December 2017, the Claimant was notified of the draft partial acceptance of the Administrative Review submitted, which reduced from € 998,058.15 (nine hundred and ninety-eight thousand and fifty-eight euros and fifteen cents) to € 149,271.81 (one hundred and forty-nine thousand two hundred and seventy-one euros and eighty-one cents) the addition to taxable profit for 2012 and granting acceptance to the accounting in 2012 of expenses relating to the exercise of 2011.

r) On 10 January 2018, the Claimant exercised its prior hearing right.

s) On 19 February 2018, the Claimant was notified of the order of partial acceptance issued by the Head of Division of the Finance Directorate of ..., under delegation of authority.

t) Consequently, the taxes to be assessed relating to € 149,271.81 would correspond to a total of € 71,650.47 (seventy-one thousand six hundred and fifty euros and forty-seven cents), itemized as follows:

• IRC - € 37,317.95 (thirty-seven thousand three hundred and seventeen euros and ninety-five cents);

• VAT - € 34,332.52 (thirty-four thousand three hundred and thirty-two euros and fifty-two cents).

u) Following the Respondent's final decision in the Administrative Review process, the following assessments were issued:

• IRC assessment, compensation no. 2018-..., in the amount of € 92,735.72 (ninety-two thousand seven hundred and thirty-five euros and seventy-two cents);

• VAT assessment for the period 2012/12, no. 2018-..., in the amount of € 10,722.94 (ten thousand seven hundred and twenty-two euros and ninety-four cents);

• Assessment of compensatory interest on VAT for the period 2012/12, in the amount of € 34,643.69 (thirty-four thousand six hundred and forty-three euros and sixty-nine cents);

• Assessment of compensatory interest on VAT for the period 2012/12, in the amount of € 1,803.80 (one thousand eight hundred and three euros and eighty cents) [cf. documents no. 14 to 20 attached to the Initial Pleading].

v) On 18 May 2018, the Claimant submitted the present request for constitution of an arbitral tribunal.

w) During the previous management of the Claimant, before the entry of the G... Group, in 2012 there was a continuous deterioration of the production equipment, with no investment in the acquisition and maintenance thereof, due to the financial difficulties the company already revealed and which led to the entry of the G... Group about a year later.

x) For the maintenance of the characteristics of apple concentrate defined in its technical datasheet, storage of this product must be done at a temperature equal to or less than 10°C.

y) Prior to the year 2012 and throughout this year, the Claimant's cold storage chamber had a damaged temperature stabilizer, so it could not guarantee a storage temperature for apple concentrate equal to or less than 10°C.

z) Due to the failure of the temperature stabilizer of the cold storage chamber, during the period of failure of this stabilizer, apple concentrate storage was done at room temperature, when the storage chamber doors were opened, or at a higher temperature.

aa) Between April 2012 and October 2012, the average temperature in the district of ... was always equal to or greater than 20°C, with the temperature at the plant location (...) being very close to that recorded in ....

bb) During August 2012, there was no sale or dispatch of apple concentrate.

cc) In 2012, the apple concentrate stored in the cold chamber was frequently at a temperature equal to or greater than 20°C.

dd) The problem that occurred in 2012 in the cold chamber was not resolved, at least until 2013.

ee) These storage conditions accelerate the loss of the parameters of apple concentrate defined in the product technical datasheet, namely, with regard to the turbidity, transparency, color and some microbiological characteristics defined in the product technical datasheet.

ff) Reprocessing of apple concentrate was the mechanism necessary to regain the parameters of the technical datasheet, sometimes requiring a second reprocessing.

gg) Direct reprocessing of apple concentrate, without fresh fruit, involves a decrease of approximately 15% of the volume of concentrate being reprocessed, which is consumed in the reversal and repetition of the apple concentrate production process.

hh) During the year 2012, at least 25% of the total volume of apple concentrate, produced or in stock, was reprocessed, due to the failure of the cold machine and the lack of rapid turnover of stock during the year 2012 and especially during the month of August.

ii) Until at least the end of 2012, resort to reprocessing of apple concentrate was frequent.

jj) From September 2013 onwards, the new management of the Claimant initiated an investment program in the plant, aimed at improving the production process, organization, safety, health and hygiene at work and general working conditions.

ll) From 2013 onwards, the cold chamber failure was resolved through the acquisition of a new compressor and evaporators for the cold storage chamber, in an investment of approximately € 34,000.00.

mm) Until the acquisition of the new compressor and evaporators for the cold storage chamber, apple concentrate was rarely stored at a temperature equal to or less than 10°C, especially during the spring and summer months.

nn) In the context of the administrative review, the Respondent acknowledged the need for reprocessing of apple concentrate in 2012, which led to a decrease in product, not reflected in the inventory, having accepted that the value indicated in the IES of 2012 corresponding to the inventory of apple concentrate as of 31 December 2012 was overvalued by € 148,786.34.

oo) By invoice no. 148, dated 5 December 2012, 260,000.00 kg of apple concentrate was sold to H... Ltd., with the goods not being shipped immediately, so it was stated in the invoice that "with payment the transfer of ownership of the goods passes to the buyer".

pp) By invoice no. 149, dated 7 December 2012, 240,000.00 kg of apple concentrate was sold to H... Ltd., with the goods not being shipped immediately, so it was stated in the invoice that "with payment the transfer of ownership of the goods passes to the buyer".

qq) Between 13 February 2013 and 13 May 2013, approximately 500,000 kg of apple concentrate, valued at € 700,000.00, was shipped to H... Ltd., corresponding to the product sold and invoiced in 2012, corresponding to invoices 148 and 149.

rr) In the context of the administrative review, the Respondent acknowledged the sale in 2012 and delivery of product in 2013, not reflected in the inventory, having accepted that the value indicated in the IES of 2012 corresponding to the inventory of apple concentrate as of 31 December 2012 was overvalued by € 700,000.00.

ss) The initial inventory value in the year 2012 was € 1,726,164.35 (one million seven hundred and twenty-six thousand one hundred and sixty-four euros and thirty-five cents).

tt) This amount coincides with the value of "Finished and Semi-finished Product Inventories" for 2011, contained in Journal Entry no. 2, which is an integral part of the 2011 fiscal dossier.

uu) Of the inventories at the end of 2011 (corresponding to the initial stock of 2012) comprised 953,789.25 kg of apple concentrate.

vv) In the year 2012, the Claimant acquired 14,116,555.90 kg of apples.

ww) Part of the raw material invoiced in 2012 by the Claimant's suppliers refers to raw material already delivered in 2011.

xx) In 2012, only 12,424,222.70 kg of apples were available for production.

yy) The average production ratio of apple concentrate in 2012 was 6.48 kg of apples to 1 kg of concentrate.

zz) The apple concentrate produced has a sugar concentration level of 70 Brix.

aaa) In 2012, apple concentrate production was 1,880,250 kg.

bbb) In 2012, the Claimant sold 2,724,198.00 kg of apple concentrate.

ccc) In 2012, 2,224,198 kg of apple concentrate was shipped.

ddd) A discrepancy therefore persists between the final inventory value and the initial finished product inventory value indicated in the IES of 2012 and 2013 presented by the Claimant and the Respondent.

§2. FACTS NOT ESTABLISHED

With relevance to the assessment and resolution of the case, no material facts remain unestablished.

§3. JUSTIFICATION OF FACTUAL MATTERS

The pertinent facts for the resolution of the case were selected and defined based on their legal relevance, in light of plausible solutions to the legal issues, in accordance with the combined application of articles 123, paragraph 2, of the CPPT, 596, paragraph 1, and 607, paragraph 3, of the Code of Civil Procedure (CPC), applicable by virtue of article 29, paragraph 1, subparagraphs a) and e), of the RJAT.

With respect to the established factual matter, the Tribunal's conviction was based on the facts articulated by the Parties, whose correspondence to reality was not contested and therefore admitted by agreement, on the critical analysis of documentary evidence in the case file, including the administrative file, as well as on the testimony of witnesses C... and D..., heard by the members of the Arbitral Tribunal, who demonstrated knowledge of the factual situation existing in the company in the years 2012 and 2013 and testified with impartiality and in an enlightening manner, particularly regarding the difficulties in storing apple concentrate and the necessity of its reprocessing.

III.2. ON THE LAW

  1. The issue raised in the present case is whether the prerequisites are met for the application of two presumptions established in tax regulations and used by AT to determine the Claimant's taxable profit for the year 2012, in the amount of € 149,271.81, on the basis of which taxable profit AT additionally assessed IRC in the amount of € 37,317.95 (thirty-seven thousand three hundred and seventeen euros and ninety-five cents) and VAT in the amount of € 34,332.52 (thirty-four thousand three hundred and thirty-two euros and fifty-two cents), as stated in item t) of the facts established.

  2. Before we proceed with the analysis of the specific case, we shall begin by delimiting the scope of application of proof by presumptions, which consists of the situation where, starting from a certain fact, proof of the reality of one or another fact is reached by mere logical deduction. Therefore, a presumption consists of the deduction, the inference, the logical reasoning by which one proceeds from a fact that is certain, proven or known, and arrives at an unknown fact. In fact, this is the content of the legal definition of presumptions contained in article 349 of the Civil Code.

As the law also distinguishes, there are legal or conclusive presumptions (article 350 of the Civil Code) and natural, judicial or rebuttable presumptions (article 351 of the Civil Code), the former being those contained in a legal provision and the latter being those based on the practical rules of experience, on lessons learned through the (empirical) observation of facts, being rooted in this experiential knowledge the presumptions continuously used by the judge in the assessment of many factual situations.

Because they have different origins, the means of "destroying" the legal or conclusive presumption must be more rigorous, must require greater certainty that the presumed fact does not exist, whereas in the case of judicial or natural presumptions this will not be as demanding.

In any event and for what interests us here, the rules of burden of proof are maintained.

Thus, whoever seeks to benefit from proof by presumption of a certain fact has the burden of proving the fact from which the presumed fact can be inferred, and such proof may be made through any of the means of proof legally admissible.

It should be noted that the party prejudiced by the proof of the certain fact is not required to prove the contrary, but only to, by way of simple counter-evidence, act so as to make that fact doubtful, from which the presumption will then emerge.

Different is the situation of the party against whom the presumed fact is considered proven, because, once proof of the certain fact is made, if it is a judicial presumption, simple counter-evidence suffices (article 346 of the Civil Code), but proof of the contrary is required in the case of a legal presumption (article 347 of the Civil Code).

  1. Applying these principles to the case sub judice, with AT invoking two stipulated presumptions, it falls upon AT alone to prove the certain fact, with the burden falling on the Claimant to prove that the presumed fact did not occur.

  2. We shall begin with the presumption of accuracy of the inventory indicated in the IES of 2012, which in AT's view benefited from the presumption of accuracy and good faith provided in article 75, paragraph 1 of the LGT.

This provision states that "the declarations of taxpayers submitted in accordance with the provisions of law are presumed accurate and in good faith, as are the data and calculations entered in their accounting records or books, when these are organized in accordance with commercial and tax legislation".

However, immediately thereafter, paragraph 2 provides that "the presumption referred to in the preceding paragraph does not apply when: a) The declarations, accounting records or books reveal omissions, errors, inaccuracies or substantiated indications that they do not reflect or prevent knowledge of the real taxable matter of the taxpayer;"

Now, it is AT itself that, in the context of the administrative review, considers that the declarations contained in the IES of 2012 are not accurate, writing in that administrative review decision that "the determination of taxable matter was carried out directly, considering exclusively the value of the final inventory of apple concentrate existing at the end of the year 2012 which was not considered as initial inventory in 2013, with the correction being made by the difference between the two values, without application of any of the criteria provided in article 90 of the LGT".

For that reason, AT decided to reduce from € 998,058.15 (nine hundred and ninety-eight thousand and fifty-eight euros and fifteen cents) to € 149,271.81 (one hundred and forty-nine thousand two hundred and seventy-one euros and eighty-one cents) the addition to taxable profit for 2012 and granted acceptance to the accounting in 2012 of expenses relating to the exercise of 2011 (fact p) of the facts established).

Thus, the presumption that might be drawn from the IES of 2012 is foreclosed by the legal provision itself that establishes it, by stating that this presumption does not apply if the declarations reveal inaccuracies, as is the case here.

In this way, once the amounts of these declarations are corrected to other values, they are no longer covered by the presumption established in article 75, paragraph 1 of the LGT, because it is the provision itself that forecloses this presumption.

  1. Let us then move to the second presumption used by AT, namely the presumption contained in article 86 of the CIVA, whereby the following is determined:

Article 86

Presumption of acquisition and transmission of goods

Except as otherwise proven, goods found in any of the places where the taxpayer exercises his activity are presumed to have been acquired, and goods acquired, imported or produced that are not found in any of those places are presumed to have been transmitted.

AT understands that, given the establishment of an additional profit of € 149,271.81 (one hundred and forty-nine thousand two hundred and seventy-one euros and eighty-one cents) and that the Claimant did not demonstrate that, during the year 2012, this value was altered, the same is true, so that it presumes that this profit, because it does not appear in the records of the Claimant, is presumed, by the fact that it does not appear in the initial inventory of 2013, as having been transacted and consequently the corresponding VAT was not paid and this profit was omitted for IRC taxation purposes.

  1. Certainly the value differences are significant and the subsequent history of the Claimant until its acquisition by another company reveal the existence of various difficulties of a financial nature reflecting on its production, as well as on the storage of finished product (facts established y), z), cc), dd) and ee) of the facts established), in addition to multiple incorrect accounting situations that are evident from those stated in the facts established in subparagraphs oo), pp), qq) and ww) of the facts established).

However, what has been said also reveals that the Claimant had the need to proceed with the reprocessing of the already produced apple concentrate so that it would regain the parameters necessary for its commercialization.

Now, that reprocessing is certain to have caused a decrease in the volume of apple concentrate subject to it, in an amount not specifically determined, and it is surprising that there would be no record of the quantities that were subjected to reprocessing and the quantities obtained through that means.

However, we are certain that these quantities were less than those existing previously and which resulted from the IES declarations relating to 31/12/2012, even after being rectified with the value of expenses relating to the exercise of 2011 (fact p) of the facts established).

Furthermore, there remains doubt as to whether the quantities of apple concentrate invoiced in 2012 but only shipped in the course of 2013 are also encompassed therein, as results from the facts established in subparagraphs oo), pp) and qq) of the facts established), although it appears that these values were already considered in the administrative review.

Now, the proof that there was a value of € 149,271.81 (one hundred and forty-nine thousand two hundred and seventy-one euros and eighty-one cents) of apple concentrate at the end of 2012, which AT considered as certain for the purpose of presuming values of alienation of apple concentrate in that year and which would not have been invoiced, fell upon AT itself to provide such proof.

However, the fact is that the evidence produced by the Claimant, particularly regarding the necessity and consequences of the reprocessing of the said apple concentrate, renders doubtful whether this value was in fact made available for transaction and that, consequently, its omission at the beginning of 2013 could result from any unrecorded transactions.

We have no doubt that some of this product would be available for such purpose, but the fact is that it was not possible to determine its exact quantity, but that which was considered as certain by AT was certainly not so, being smaller, but not knowing how much.

Similarly, we have no doubt that AT did not consider that there had been any alterations due to reprocessing operations, as it alleged that the present Claimant based its evidence on hypothetical assessments, on reports and scientific works whose applicability to the specific case remained unproven, as results from article 20 of its Reply.

However, this was not the understanding of this Arbitral Tribunal after the documentary evidence was produced and especially after the testimonial evidence listed and presented by the Claimant, which was considered sufficient to render doubtful the certain fact on which AT bases the application of the presumption of article 86 of the CIVA.

For that reason, the certain fact does not exist that would allow AT the use of the presumption of article 86 of the CIVA.

Consequently, the present challenge must be upheld and, consequently, the decision of partial acceptance of the administrative review must be annulled, in the part in which it maintains the correction of taxable profit of € 149,271.81 and which the Claimant challenges, which should have also been accepted in that part.

Consequently, the assessments in the amount of € 34,332.52 of VAT at the rate of 23% and the IRC assessment issued by AT by virtue of this profit correction motivated by the Tax Inspection Report and by the maintenance of this part of the profit by the administrative review decision must also be annulled.

RESTITUTION OF VALUES:

In its initial petition, the Claimant further requests that "the right of A. to restitution of the values already paid and to payment of indemnity interest be recognized, to be calculated in execution of judgment".

However, as results from the facts established, it is not proven that it made any payment of the assessed amounts challenged, which was indeed not even alleged.

For that reason, this request is judged unfounded, it being certain that, if there was any payment made by the Claimant following the assessments now annulled, the Claimant will always have the right to its restitution, as such payment is a consequential act of the same assessments.

IV. DECISION

Accordingly, this Arbitral Tribunal decides:

  • to judge the present challenge partially founded and proven and to declare annulled the decision of partial acceptance of the administrative review, in the part in which it maintains the correction of taxable profit of € 149,271.81 and which the Claimant challenges, which should have also been accepted in that part.

  • consequently, to declare annulled the assessments in the amount of € 34,332.52 of VAT at the rate of 23% and the IRC assessment in the amount of € 37,317.95 issued by AT by virtue of this profit correction motivated by the Tax Inspection Report and by the maintenance of this part of the profit by the administrative review decision, as well as the assessments of compensatory and/or default interest associated therewith.

  • to judge as unfounded for lack of evidence the request for restitution of values already paid, thereby absolving AT thereof.

  • to condemn the Claimant and AT in the costs of the case in the proportion of 1/10 for the former and 9/10 for the latter.

VALUE OF THE CASE:

In accordance with the provisions of articles 306, paragraph 2, of the CPC by virtue of article 29, paragraph 1, subparagraph e), of the RJAT, 97-A, paragraph 1, subparagraph a), of the CPPT by virtue of article 29, paragraph 1, subparagraph a), of the RJAT and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned a value of € 71,650.47 (seventy-one thousand six hundred and fifty euros and forty-seven cents).

COSTS

In accordance with the provisions of articles 12, paragraph 2, and 22, paragraph 4, of the RJAT, 4, paragraph 4, and in Table I attached to the Regulation of Costs in Tax Arbitration Proceedings and article 527, paragraphs 1 and 2, of the CPC by virtue of article 29, paragraph 1, subparagraph e), of the RJAT, the amount of costs is fixed at € 2,448.00 (two thousand four hundred and forty-eight euros).

Lisbon, 15 May 2019.

The Arbiters,

(José Poças Falcão)

(Hélder Faustino)

(José Joaquim Monteiro Sampaio e Nora)

Frequently Asked Questions

Automatically Created

What inventory corrections were challenged in CAAD arbitration process 252/2018-T regarding IRC and IVA?
The taxpayer challenged IRC and IVA assessments based on an €848,786.34 inventory discrepancy between the final 2012 inventory value (€1,239,932.11) and the initial 2013 inventory value (€241,873.93). The company had eliminated apple concentrate inventory through accounting correction journal entry no. 57 in August 2013, arguing this represented correction of accounting errors rather than unreported sales.
How does Article 86 of the Portuguese IVA Code apply to presumptions of acquisition and transmission of goods based on inventory discrepancies?
Article 86 of the Portuguese IVA Code establishes a legal presumption that inventory decreases not properly documented represent taxable acquisitions and subsequent transmissions of goods. When a taxpayer's final inventory for one year exceeds the initial inventory of the following year without adequate justification, the Tax Authority presumes undeclared sales occurred, subjecting the discrepancy value to VAT. This rebuttable presumption shifts the burden of proof to the taxpayer to demonstrate legitimate reasons for the inventory reduction, such as losses, obsolescence, or accounting errors.
Can a taxpayer correct inventory errors through accounting adjustments to rebut the presumption under Article 75(2)(a) of the LGT?
Yes, taxpayers can attempt to rebut presumptions through accounting corrections, but success depends on substantiation. In this case, the taxpayer argued that its August 2013 journal entry correcting inventory values invalidated the presumption of accuracy under Article 75(2)(a) of the LGT for the 2012 IES declaration. However, the Tax Authority maintained that mere accounting adjustments without concrete proof of the underlying reasons (such as documented reprocessing operations or delivery timing) were insufficient to overcome the statutory presumption under Article 86 of the IVA Code.
What was the outcome of the partial deferral in the gracious review (revisão graciosa) regarding the 2012 inventory value corrections?
The administrative review (revisão graciosa) partially accepted the taxpayer's position by acknowledging that corrections to the 2012 final inventory value were appropriate, recognizing that some apple concentrate sales in 2012 were only delivered in 2013 and that reprocessing needs affected inventory valuation. This partial deferral reduced the contested amount by €848,786.34. However, the Tax Authority maintained its position that the presumption under Article 86 of the IVA Code still applied to the remaining discrepancy.
How do discrepancies between final inventory (IES 2012) and initial inventory (IES 2013) affect IRC and IVA tax assessments by the Portuguese Tax Authority?
Discrepancies between final inventory reported in one year's IES and initial inventory in the subsequent year's IES trigger Article 86 of the IVA Code, creating a presumption of unreported sales. The Tax Authority uses direct assessment methods based on the taxpayer's own declared values, calculating the difference arithmetically. For IRC purposes, the presumed undeclared income increases taxable profit. For IVA purposes, the presumed sales trigger output VAT obligations. The Tax Authority argued this constituted direct assessment based on the company's accounting records, not indirect methods under Article 90 of the LGT, since the calculation relied exclusively on values the taxpayer itself had declared.