CAAD Case 269/2018-T: False Invoices, Burden of Proof & Article 23 CIRC in IRC Tax Disputes

ARBITRAL DECISION

The arbitrators Dr. Alexandra Coelho Martins (Presiding Arbitrator), Prof. Dr. Paulo Jorge Nogueira da Costa, and Dr. Luís Oliveira (Arbitrator Members), designated by the Deontological Council of the Administrative Arbitration Center ("CAAD") to constitute the present Arbitral Tribunal, constituted on 6 August 2018, agree as follows:

REPORT

A..., S.A., corporate entity number ..., with registered office at Rua ..., no. ..., room ..., ...-... Porto, Lisboa, hereinafter referred to as the "Claimant", filed a request for constitution of a Collective Arbitral Tribunal and for arbitral pronouncement, pursuant to Article 10 of the Legal Regime for Arbitration in Tax Matters ("RJAT"), approved by Decree-Law No. 10/2011, of 20 January, with a view to declaring the illegality and consequent annulment of the assessments for Corporate Income Tax ("IRC") and corresponding compensatory and default interest, relating to the fiscal years 2010, 2011, 2012 and 2013, which resulted in a total amount payable of € 8,720,786.64.

The Respondent is the Tax and Customs Authority ("AT").

As grounds for the annulment request, the Claimant alleges the following defects, of a formal and substantive nature:

• Omission of essential formalities due to absence of substantive reasoning indicating false invoicing and consequent illegal reversal of the burden of proof;

• Violation of the principles of good faith, proportionality and justice, and prohibition of arbitrary conduct;

• Error regarding factual and legal assumptions;

• Non-existence of taxable fact.

Subsidiarily and without conceding, the Claimant further considers that, in case of well-founded doubt regarding the existence and quantification of the taxable fact, the assessments should be annulled pursuant to Article 100 of the Code of Tax Procedure and Process ("CPPT").

The Claimant attached 16 (sixteen) documents and did not request witness testimony.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and followed normal proceedings, namely with notification to the AT on 1 June 2018.

In accordance with Articles 5(3)(a), 6(2)(a), and 11(1)(a) of the RJAT, the Deontological Council of CAAD designated as arbitrators of the Collective Arbitral Tribunal the signatories hereto, who communicated acceptance of their assignment within the applicable period.

On 16 July 2018, the parties were notified of this designation and did not oppose it, in accordance with Articles 11(1)(a) and (b) and 8 of the RJAT, and Articles 6 and 7 of the CAAD Code of Ethics.

The Collective Arbitral Tribunal was constituted on 6 August 2018, as communicated by the President of the Deontological Council of CAAD, pursuant to Article 11(1)(c) of the RJAT.

On 28 September 2018, the Respondent submitted its reply requesting dismissal and consequent absolution of all claims, with the legal consequences thereof.

To this end, the Respondent emphasizes that the IRC corrections are properly substantiated, both factually and legally, in the Tax Inspection Report ("RIT"), demonstrating strong indications of the use of false invoices that do not support real operations and effective transactions (acquisitions) of goods.

In this context, it argues that it is not prohibited from using all means of proof, including information from judicial entities, such as those obtained in the tax fraud inquiry process no. .../12... T..., or from other AT services and from evidence collected through inspection procedures carried out on the invoice issuer and invoice recipients from the same issuer, pursuant to Articles 13(b), 29(1)(a) and 29(3) of the Supplementary Regime of Tax and Customs Inspection Procedures ("RCPITA").

The Respondent concludes that strong indications of false invoicing have been demonstrated, capable of undermining the legal presumption of truthfulness contained in Article 75 of the General Tax Law ("LGT"), indications that the Claimant failed to contest, by virtue of its allegations having no minimal evidentiary support. Once the legal requirements legitimizing the corrections to the taxable income declared by the AT are verified, the burden of proof regarding the truthfulness of the operations fell upon the Claimant (Article 74 of the LGT), which, however, it did not produce, neither in the inspection procedure nor in the present arbitral action.

The Respondent called two witnesses and, on 4 October, attached the administrative file ("PA").

By order of 8 October 2018, the Arbitral Tribunal determined that the meeting provided for in Article 18 of the RJAT be held, with examination of the witnesses indicated by the Respondent. In a separate petition, the Claimant requested consideration of the (non-)utility of witness testimony, as well as holding of the meeting provided for in said article, which the Tribunal maintained on the grounds of its possible contribution to the discovery of material truth.

On 12 November 2018, said meeting was held, at which the AT witnesses B... and C... were heard.

The Tribunal notified the parties for successive written submissions, with a deadline of 10 days fixed, and designated 5 February 2019 as the deadline for issuance of the arbitral decision, advising the Claimant to pay the subsequent arbitration fee by that date, pursuant to Article 4(3) of the Fees Regulation in Tax Arbitration Proceedings ("RCPAT"), and to communicate such payment to CAAD.

Both parties submitted submissions and maintained the positions of their initial pleadings.

The Claimant added that the AT, in its Reply, made use of new allegations and elements never previously communicated to the taxpayer. It argues that it was established by witness testimony that non-declaring operators were only identified by the AT through the Claimant's tax returns, through its conduct in accordance with regulations and transparency, which evidenced the alleged fraud. It argues that the fact that the witnesses called by the AT were involved in police action led them to breach the principle of impartiality and material truth. It concludes that the purchases are properly documented, in accordance with Article 42(1)(g) of the IRC Code, and that the AT merely questions the expense on the grounds of "the person presenting for sale assuming an identity different from the true one," that is, on the basis of physical and effective interposition of a person, which does not constitute grounds for disregarding the cost, as it is merely the exercise of a mandate without representation.

The Respondent counter-replied, reiterating the verification of strong and well-founded indications of false invoicing. It considers that the witnesses objectively corroborated the facts contained in the RIT and rejects that the Reply contains new elements or new arguments, as it merely invokes the factuality set forth in the RIT.

The Respondent raised, at this point, the untimeliness of the Claimant's submissions, presented on 26 November 2018, and requests their withdrawal, based on Article 139(3) of the Code of Civil Procedure ("CPC"). However, this position does not take into account the provision of paragraph 5 of the same article, according to which the procedural act is admissible within the first three business days following the end of the period, without prejudice to necessary adaptations to arbitral proceedings with respect to payment of the fine. Given that notification for submissions occurred on 12 November 2018, with a fixed period of 10 days, 26 November (Monday) corresponds to the third business day thereafter, wherefore the Tribunal denies the request for withdrawal.

By order of 28 January 2019, in view of the complexity of the issues raised, the deadline for issuance of the decision was extended, pursuant to Article 21(2) of the RJAT.

Both parties subsequently attached documents, namely the Arbitral Decision issued in case no. 207/2018-T, relating to VAT matters, and the submissions of the corresponding Appeal filed by the Claimant to the Supreme Administrative Court ("STA").

CASE MANAGEMENT

The Tribunal has been regularly constituted and is competent ratione materiae, given the nature of the case object (cf. Articles 2(1)(a) and 5 of the RJAT).

The request for arbitral pronouncement is timely, as it was presented within the period provided for in Article 10(1)(a) of the RJAT.

The parties have legal capacity and standing, have legitimate interest, and are properly represented (cf. Articles 4 and 10(2) of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March).

LEGAL REASONING

FACTUAL BACKGROUND

For the purposes of this decision, the following facts are deemed proved:

The commercial company A..., S.A., hereinafter also referred to as "Claimant" or "A...", corporate entity number ..., was incorporated on 13 October 2009, in the form of a limited liability company, having been transformed into a corporation on 23 September 2010. It has its registered office at Rua ..., no. ..., ...,...–... Porto, the competent local tax office being the Tax Service of Porto..., and its activities are carried out at Rua ..., nos. ... to ..., also in Porto – cf. Tax Inspection Report including the respective annexes, also referred to as "RIT", contained in the PA, and document 2 (permanent certificate of A...) attached with the request for arbitral pronouncement ("ppa").

The object of the Claimant is "recycling of precious metals, trade in precious metals, trade in precious stones and trade in second-hand goods", having commenced its activity for tax purposes on 1 January 2010. It declared as its principal activity "obtaining and initial processing of precious metals" – CAE 24410 – and as secondary activities "retail trade of second-hand articles in specialized establishments" – CAE 47790 – and "retail trade of watches and jewelry articles in specialized establishments" – CAE 47770 – cf. RIT and document 2 (permanent certificate of A...) attached with the ppa.

The Claimant maintains organized accounting, according to the System of Accounting Standardization ("SNC"), and is subject to the general IRC taxation regime – cf. RIT.

The Claimant submitted, within the legally prescribed deadline, periodic income declarations model 22 for the fiscal years 2010, 2011, 2012 and 2013 and, equally, annual simplified business information declarations ("IES") for the same fiscal years – cf. documents 3 (models 22) and 4 (IES) attached with the ppa and RIT.

Between the years 2010 and 2013, the Claimant registered and declared acquisitions of goods from, among others, the following suppliers:

• D..., Lda. ("D...")
• E... Unipessoal, Lda. ("E...")
• F..., Lda. ("F...")
• G... Unipessoal, Lda. ("G...")
• H... ("H...")
• I..., Lda. ("I...")
• J... Unipessoal, Lda. ("J..., Lda")
• K...

– cf. RIT.

In 2013, the Claimant also accounted for in-kind contributions of fine gold by K..., L... and M... – cf. RIT.

Between the years 2010 and 2013, the suppliers D..., H... and J..., Lda. did not deliver tax returns, and therefore did not report any sales made to the Claimant. The other suppliers identified above – F..., G... and I... – having submitted tax returns (or some, as in the case of I...), did not report the realization of sales to the Claimant – cf. RIT.

The pre-printed invoices documenting the sales transactions of goods by suppliers D..., E..., F..., H... and G... to the Claimant were printed at the printing shop N... Lda., and ordered by O... (managing partner of G...) or by H..., being generally delivered to the jewelry shop of the latter located on rua da ..., in Lisbon – cf. RIT and testimony of witnesses.

In the years 2010 and 2011, the company P... Lda. provided precious metal refining services to the Claimant in the amounts of € 4,065.56 and € 58,004.34 – cf. document 16 attached with the ppa.

In the years 2012 and 2013, the company Q..., Unipessoal, Lda. provided precious metal refining services to the Claimant in the amounts of € 231,285.86 and € 167,371.08 – cf. documents 14 and 15 attached with the ppa.

The refining services were provided in the context of the transformation and recycling of metal acquired by the Claimant, in the form of "gold dust" or "gold artifacts", into pure gold ("fine gold"), with a fineness (percentage of gold) of 999, which was subsequently supplied to its customers, mostly located outside the Portuguese market, particularly in Belgium (...) and in Italy (...), as investment gold – cf. RIT and testimony of witnesses.

Foreign customers paid the Claimant exclusively by international bank transfer – cf. document 13 attached with the ppa.

In August and September 2017, the AT initiated an inspection procedure of the Claimant, focusing on the years 2010, 2011, 2012 and 2013, authorized by external service orders nos. OI2012..., OI2013..., OI2013..., OI2013..., OI2017..., OI2017... and OI2017..., of general scope, with the exception of 2013, which covers only IRC and Value Added Tax ("VAT") – cf. RIT.

The inspection procedure was motivated by the following causes:

• Involvement of the taxpayer in the context of criminal inquiry process no. .../12...T..., which proceeded in the Central Department for Criminal Investigation and Action ("DCIAP") in Lisbon, and which concluded with an accusation order according to which, in the years 2010, 2011, 2012 and 2013, the Claimant "obtained undue patrimonial advantage, through reduction of the IRC taxable base and through undue VAT deduction, by reason of, among other expenses, having accounted for and considered as a tax expense invoices for purchases that do not correspond to any transactions";

• Communication from DSIFAE, after it was identified that the Claimant experienced a dramatic increase in intra-Community transmissions and exports in the years 2011 and 2012 and that there were inconsistencies between the values entered in its annual declaration and those contained in annexes O and P of third parties, with divergences verified with various suppliers that did not declare sales made to the Claimant;

• Integration into the Claimant's case of an event created by the Finance Department of Setúbal, after verification that the company R..., Unipessoal Lda. issued gold sales invoices to A... in May and June 2013, transmissions in which the obligation to settle VAT is the responsibility of the purchaser, but which the Claimant did not include in its supplier annexes; and

• By analysis of the VAT refund requests for the periods "2013 04, 2013 05, 2013 06, 2013 07, 2013 08 and 2013 09",

– as stated in the RIT.

In the context of this inspection activity carried out on the Claimant, the AT conducted various external procedures, accompanying the Judicial Police in searches, and collected accounting and non-accounting documents, with the inspection team's technical personnel speaking directly with various suppliers of the Claimant, such as J... and I... – cf. testimony of witnesses.

The criminal inquiry processes that covered the Claimant or some of its suppliers, particularly no. .../12...T..., which proceeded in the DIAP in Lisbon, from which instructional elements were extracted for the tax inspection procedure under analysis, were developed with mixed investigation teams, composed of Judicial Police agents and AT officials – cf. testimony of witnesses.

Among these instructional elements are the following statements given to the authorities – cf. PA:

H... – managing partner of E... and F..., also operating in individual capacity:

• knows the Claimant and company S... (T...) with which he conducted sales of gold/silver/dust;

• the customers and suppliers of E... are the same as those of O... whose identity he does not know;

• O... proposed to him the creation of the company E... to be managed in fact by the latter and to invoice up to € 100,000 per year, in exchange for payment of a monthly sum of € 500, which he transferred to Ukraine where H... resided between late September 2009 and 2011, having for that purpose signed a power of attorney conferring invoice authority on O...;

• created F... on his own initiative, with the intention of returning to Portugal;

• in late 2011 was contacted by a representative of the Claimant to inform him that they had invoices from him issued on dates prior to the start of his activity. Unaware, he approached O... who informed him that he had ordered some invoice books from F... to carry out said invoices;

• the only invoices he issued in individual capacity amount to approximately € 15,000 in artifacts/silver dust, executed in late 2012 and delivered in Lisbon;

• never invoiced the Claimant in the name of E... and F..., presuming that the invoices that exist were issued by O...;

U... – managing partner of J... Unipessoal, Lda.:

• invoices were issued to the Claimant on various occasions on almost every day between July and October 2013, always in the offices of S.... The content of the invoices was indicated jointly by T... and V..., date, amount and gold artifacts;

• the gold referred to in the invoices belonged to T... and V...;

• the invoices had 23% VAT and after issuing them he waited in the office for V... to go to the Claimant's office where he brought the payment;

• with regard to the invoices of S... they did not have VAT charged, mentioning "VAT on second-hand goods";

W... – managing partner of D... Unipessoal, Lda.:

• acquired the shares of this company 20 years ago, having presented the last invoice issued by the company on 29 September 2008;

• In 2010/2011, he began a collaboration with O... in opening in the latter's shop, receiving in exchange payment of daily lunch;

• gradually he remained in the shop and received a gratification without obligatory character, which was approximately € 75.00 per week;

• the volume of business of O... corresponds approximately to 1 kg of gold artifacts per month (€ 30,000);

• does not remember O... ever selling fine gold, nor of having melted gold/artifacts;

• never conducted any business with the Claimant or its managing partners K... and X..., nor does he know them personally;

• confronted with the invoices issued by his company to the Claimant, manifested ignorance of their true authorship, not corresponding to any commercial transaction conducted by him, does not recognize his handwriting, nor the parties to the invoices;

• knows the printing shop N... Lda., related to business conducted with O..., to whom he provided occasional services, such as collecting and delivering invoice books, however never ordered invoices at this printing shop in the name of his company (D...), nor does he recall having seen the books ordered by O... at that printing shop;

• confronted with the quantities of gold invoiced by his company, he says he never had such quantities, either in his possession or of people connected to gold that he knows, particularly O...;

• says he knows H... through O..., at whose request he made transfers through the ... in amounts approximately € 100.00 to € 200.00;

Y..., Owner of N... Lda.:

• confirmed the preparation of invoices for companies D..., E..., G..., H... and F...;

• O... was his regular customer and orders were placed by telephone and all material delivered to the jewelry shop of the latter, on Rua da ...;

• With regard to H..., it was he himself who requested his invoices and those of F...;

M... – attorney with powers to represent Z...:

• states that AA... is responsible for company Z... created in late 2011, formally incorporated by a citizen of Brazilian nationality, BB..., whom he met and had a trip scheduled to Brazil, not intending to return, and that, following incorporation of the company, passed a power of attorney to him. Said citizen received the sum of € 5,500 paid by AA...;

• the invoices of Z... company were delivered to him by AA... loose, without sequential order and from various series, totaling 400, with the intent to realize capital;

• delivered 100 of these invoices to CC... (of I...), who paid € 16,500 for them, of which € 3,500 were allocated to the attorney, Dr. DD.... The remaining 300 invoices were sold to Mr. ZZ... for € 45,000, which the latter did not pay;

• Z... never had a fixed place of operation, neither sold nor bought any gold to CC... (I...) or any other entity;

• is unaware of the annual invoicing volume of Z..., its customers, suppliers and forms of payment.

The cheques issued by the Claimant for payment of invoices from I... were normally cashed by CC..., who went to the bank accompanied by employee(s) of the Claimant, to whom he delivered the money after withdrawal "at the counter". Identical procedure was adopted with regard to cheques issued to J..., Lda., whose managing partner would normally cash them accompanied by an employee of company S... – cf. testimony of witnesses.

Following this inspection activity, after being notified of the Draft Report, with respect to which it exercised its right to be heard, the Claimant was notified of the Tax Inspection Report, including annexes, in which, in addition to VAT corrections not subject to the present action, the following adjustments to the Claimant's IRC taxable base are determined:

• 2010 – € 43,980.60
• 2010 – € 3,645,502.50
• 2010 – € 2,341,512.24
• 2010 – € 19,007,123.85

– cf. RIT.

The Tax Inspection Report, which is hereby deemed fully reproduced, was approved by order of the Director of Services on 28 December 2017, containing the following grounds:

"D.4 – DECLARATION OBLIGATIONS

[...]

D.4.2 – In respect of IRC

In the income declarations Mod/22 the following items stand out:

As can be verified in the years 2011 and 2012, the value of declared sales increased exponentially, having suffered a sharp decline in 2013 when compared to 2012.

[...]

D.5.2 – Annex P4

The list of suppliers is too large to include in the report, so only the most relevant were mentioned.

In the Annexes P delivered by A..., several suppliers were indicated, with the annual amount of operations conducted, exceeding € 25,000 (amount including VAT), which were investigated in inquiry processes .../12... T... or .../12... T..., which we now discriminate:

It was verified that the purchase values mentioned by A... were not declared by H..., F..., E... Unipessoal, Lda., V..., PP... Unipessoal Lda. and U... Unipessoal, Lda., representing non-declaring entities for tax purposes.

Beyond these companies, there are others that, although they are taxpayers in tax terms, either declare sales values to A... substantially lower than those declared by the latter, as is the case with GG..., or did not even mention A... in their tax declarations, as is the case with G..., Lda, MM... Unipessoal, Lda. and PP... Unipessoal, Lda.

[...]

E – EXTERNAL PROCEDURES

Given that the elements relevant for determining the taxpayer's tax situation were seized in the context of inquiry process no. .../12...T..., which proceeded in the Central Department for Criminal Investigation and Action – Lisbon, for which an accusation order was issued, these Services requested through official communications nos. 2017... and 2017..., of the Judicial Court of the District of …, Local Criminal Instance, and Court of …, in the …, respectively, authorization for their consultation and analysis, as well as of the remaining elements making up said process, considered relevant for tax purposes for the fiscal years under analysis, as well as extraction of photocopies of the necessary documents. The requested authorization was granted.

CHAPTER III – DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO THE TAXABLE BASE

A – ANALYSIS OF A..., SA'S ACCOUNTING

A.1 – ACTIVITIES CONDUCTED

The taxpayer operates in the precious metals buying and selling market, with acquisitions conducted essentially in the domestic market from companies and/or individual entrepreneurs.

Among its suppliers are found: X..., K..., EE..., Lda., GG..., KK..., LL..., HH..., H..., E... Lda., F... Lda., G... Lda., JJ..., MM... Lda., II... Lda., OO... Lda., U... Lda., I... and QQ..., which as mentioned in point D.5.2, were investigated in Inquiry processes .../12... T... or .../12... T....

Sales are conducted for the domestic market and intra-Community market.

The principal domestic market customer is company RR..., NIPC:..., which acquired essentially fine gold from it.

Intra-Community transmissions, non-existent in 2010, assume relevant weight in subsequent years, representing 26%, 73% and 82% of total declared sales in the years 2011, 2012 and 2013, respectively.

A.2 – PURCHASES SUPPORTED BY FALSE INVOICES

A... declared having conducted purchases from companies D... Unipessoal Society, Lda., E... Unipessoal, Lda., F..., Lda., G... Unipessoal, Lda., H..., I..., Lda., J..., Lda., and K..., all these entities strongly suspected of issuing false invoicing, as stated in the accusation order of inquiry process no. .../12...T..., whose characterization we now present.

A.2.1 – D..., Lda.

D... Lda. is a unipersonal limited liability company, which commenced operations on 1960-12-28 and ceased them for VAT purposes on 2009-10-15. It was registered for the activity of "other wholesale trade of consumer goods, not otherwise specified", CAE 46494. For VAT purposes it was subject to the normal quarterly regime and for IRC purposes to the simplified taxation regime until 2009-12-31, from which date it was subject to the general taxation regime.

It has its fiscal address on rua ..., no. ..., in Lisbon, since its cessation of operations. Until the cessation of operations, the fiscal address corresponded to the registered office at ..., no. ..., ..., in Lisbon.

It submitted all tax declarations to which it was legally obligated. However, it only declared, in 2008, a business volume of € 5,829.15, and in 2009 and 2010, a business volume of € 0.00.

Nevertheless, in the years 2008 to 2010, there are entities that declared having conducted significant acquisition amounts from D... Lda., among which A... which in 2010 declared having acquired from it amounts valued at € 21,372.00, despite D..., Lda. no longer effectively exercising any activity since 2008.

With regard to the invoice found in A...'s accounting, relating to point A.2.11 of this chapter, it was issued when D... Lda. had already ceased its operations and from examination of it one concludes that it belongs to a block of invoices requested from the Printing Shop "N... Lda.", ordered by O... and delivered to the jewelry shop of the latter located on rua da ..., in Lisbon. It is also apparent that, like other invoices issued in the name of D... Lda., it was filled out with handwriting similar to that of SS..., O...'s ex-wife.

The payment of this invoice was entered into accounting by A... through "Cash" account, having as supporting document a receipt. From the investigation conducted in the context of the inquiry process, no proof of payment of this invoice was found, neither in the accounting nor in the bank accounts held by A..., nor in the bank accounts held or co-held by D... Lda. or by its managing partner W.... This invoice was allegedly paid in cash.

The managing partner of D... Lda., W..., clarified, in an interrogation record of which a photocopy is attached in annex 2, not knowing K... nor the company A..., and never having conducted any business with them.

The manager of the printing shop, Y..., clarified in turn, in an interrogation record of which a photocopy is attached in annex 3, that these were ordered by O... and delivered to the jewelry shop of the latter, located on rua da ..., in Lisbon.

It was thus proven that the invoice issued in the name of D... Lda. to A... does not constitute a real and effective transaction between those two entities, being therefore false invoicing.

A.2.2 – E... Unipessoal, Lda.

E... Lda., with fiscal address on avenida ..., no. ..., ..., in Lisbon, commenced operations on 2009-09-24, with the principal CAE – 46480 "wholesale trade in watches and jewelry articles" and secondary CAE – 47770 "retail trade in watches and jewelry articles in specialized establishments".

It was subject for VAT purposes to the normal quarterly regime and for IRC purposes to the general taxation regime.

From 2011-01-01 onwards, it was subject for VAT purposes to the normal monthly regime.

Its sole shareholder is H..., to whom management functions were attributed.

E... Lda. only submitted the IRC income declaration for 2009. From that year on it submitted no further IRC income declarations.

For VAT purposes it submitted only two declarations for 2009 and three for 2010. From the 3rd quarter of 2010 (1009T) it submitted no further periodic VAT declarations.

Nevertheless, between 2009 and 2012, there are various entities that declare having conducted significant acquisition amounts from E... Lda., amounts that in no way correspond to the declarative situation of E... Lda. Among the entities that declared having conducted acquisitions from E..., Lda, is found A..., which in 2010 and 2011 recorded in its accounting invoices issued in the name of E... Lda., whose listing is presented in point A.2.11 of this chapter, in amounts of € 22,608.60 and € 2,186,080.00, respectively.

As for employees, E... Lda. does not appear as a payer of income.

The invoicing documents of E... Lda. are pre-printed, were requested from the printing shop "N... Lda. and all were filled out with handwriting similar to that of O....

In the receipts supporting the accounting entry of the payments of these invoices is the indication that payment was in cash. However, with respect to the two invoices issued in 2010, both of little significance when compared with those issued in 2011, two cheques from an account held by A... were associated, in amounts of € 9,232.00 and € 13,375.00, which were cashed "at the counter" by O....

Note the fact that the photocopy of the second cheque contained in A...'s accounting indicated the payee as G... Lda., indication that was crossed out with E... written in.

Also from analysis of the bank accounts held or co-held by E... Lda. or by its managing partner H..., no entry was detected during the period in which this invoicing was issued originating from A....

It results from the foregoing that the invoicing issued in the name of E... Lda. to A... does not constitute real and effective transactions between those two entities, being therefore false invoicing.

A.2.3 – F..., Lda.

F... Lda. with fiscal address on Rua..., no. ..., in Lisbon, commenced operations in "retail trade in watches and jewelry articles in specialized establishments", CAE 47770, on 2011-11-15.

It is subject for VAT purposes to the normal quarterly regime, and for IRC purposes to the general taxation regime.

It was incorporated with a capital of € 5,000 divided into two shares, one of € 50 belonging to E... Lda., and another of € 4,950 belonging to H..., being the latter designated as manager.

In the years 2011 and 2012, F... Lda. complied with its declaration obligations, having submitted the competent IRC income declarations and periodic VAT declarations.

From the reading of those declarations the following items are extracted:

It indicated in the 2012 IES declaration as having the following suppliers and customers:

Nevertheless, in the years 2011 and 2012, there are entities that declared having conducted acquisitions from F... Lda., of values much higher than those declared by F..., Lda.. Among the entities that declared having conducted acquisitions from F..., Lda, is found A..., which in 2011 and 2012 recorded in its accounting invoices issued in the name of F..., Lda., whose listing is presented in point A.2.11 of this chapter, in amounts of € 662,480.00 and € 469,700.00, respectively. None of the invoices accounted for by A... was declared by F..., Lda. to the Tax Administration.

The invoicing documents of F... Lda. are pre-printed and were also requested from the printing shop "N... Lda. and all were filled out with handwriting similar to that of O....

Payments were made in cash or by cheque from an account held by A.... The two invoices with the lowest total value (no. 57 and no. 58), were paid through two cheques in amounts of € 9,884.00 and € 24,910.00, one cashed "at the counter" by O... and the other deposited in an account held by the same O.... These cheques were endorsed to him by H....

Invoice no. 61 has the indication that it was paid by cheques nos. ..., no. ... and no. ..., in the amount of € 30,000 each, however, in that period no cheques with those references and amounts were discounted from any of A...'s bank accounts.

From the foregoing, it is concluded that the invoicing issued in the name of F... Lda. to A... does not constitute real and effective transactions between those two entities, being therefore false invoicing.

A.2.4 – G... Unipessoal, Lda.

This is a limited liability company, whose sole shareholder and managing partner is O..., NIF....

In the taxpayer's view it is listed as the fiscal address of the company at the date of commencement of operations, rua ..., no. ..., ..., ..., having been changed on 2014-01-22 to rua da ..., nº..., Lisbon.

According to the AT's computer system, it commenced operations on 1997-11-03 in the activity of Retail trade in watches and jewelry articles in specialized establishments, CAE 47770.

For VAT purposes it was subject to the normal quarterly regime and for IRC purposes to the general regime.

It submitted periodic VAT and IRC declarations, with no declaration omissions.

In 2011, A... recorded in its purchases two invoices, listed in point A.2.11 of this chapter, issued by G... Lda., relating to fine gold, in total amount of € 332,542.50.

None of these invoices was recognized in G... Lda.'s accounting.

In A...'s accounting, the payments for these purchases were entered through "cash" account with no supporting proof of such payment being associated. Neither in the accounts of these, nor in the bank accounts of G... Lda. nor in the bank accounts held by O... was any financial movement detected that could be associated with this invoicing.

In G... Lda.'s accounting for this fiscal year, no accounting entry of purchase of fine gold, nor of gold dust nor any purchase of used gold from private individuals was detected.

W..., a collaborator of O..., stated in interrogation records of which a photocopy is attached in annex 2, that he does not remember O... ever having sold fine gold nor of having melted gold, with O...'s monthly sales amounting to approximately 1 kg of gold artifacts.

From the foregoing it is concluded that the invoicing of fine gold issued in the name of G... Lda. to A... in 2011 does not constitute real and effective transactions between those entities, being therefore false invoicing.

A.2.5 – H...

H... has his fiscal residence on rua ..., no. ..., in Lisbon. From 2011-07-07 to 2013-09-24, he was registered for the exercise, in individual capacity, of the activity of "retail trade in watches and jewelry articles in specialized establishments", CAE 47770, with secondary activity of "consultants", CIRS 1320. He was also registered for the exercise of activities in individual capacity in the periods from 2007-10-12 to 2009-01-28 and 2009-12-15 to 2009-12-31. In those periods he was subject to the normal quarterly regime for VAT purposes and simplified regime for personal income tax purposes.

In terms of relationships with tax relevance, H... presents the following:

In the period between 2008 and 2013, H... did not submit any periodic VAT declarations or personal income tax declarations to which he was legally obligated.

Nevertheless, in the period between 2008 and 2013, there are entities that declared having conducted significant acquisition amounts to H..., in the years 2010 to 2012. Among the entities that declared having conducted acquisitions to H..., is found A..., which in 2010, 2011 and 2012 recorded in its accounting invoices issued in the name of H..., in amounts of € 66,290.00, € 1,387,397.15, and € 4,101.16, respectively. This invoicing concerns gold dust and silver dust, with it being verified that in 2011 two invoices indicate it is fine gold.

There is no entity declaring having conducted any sale to H....

The invoicing documents of H... are pre-printed and these as well were requested from the printing shop "N... Lda.

However, the "Cash Sales" referring to 2012 are distinguished from the rest by having been requested only in September 2012, and by having a very different layout from the first ones.

From the visualization of these "Cash Sales", the following is concluded:

• Those relating to 2010 and 2011 were filled out with handwriting similar to that of O...;

• Whereas those concerning 2012 were filled out by H....

There is also another difference: the values invoiced in 2012 are considerably more modest than those invoiced in prior years.

In interrogation records of which a photocopy is attached in annex 4, H... stated that "the only invoices he issued to A..., in the name of H..., in individual capacity, total approximately € 15,000 in artifacts/silver dust, executed in late 2012, delivered at the shop of the ... in Lisbon.

With regard to payments, we verified that those for 2010 and 2011 were made in cash or by cheques from a bank account held by A..., whereas payments concerning invoicing issued in 2012 were made through bank transfers ordered by A... to an account held by H... at bank institution ....

With the exception of three, the recipient of said cheques was O..., in total amount of € 468,660. Some of these cheques were endorsed to him by H.... The remaining three cheques, dated September 2011, with total value of € 119,979, were cashed "at the counter" by H...

It is verified that in the case of H..., the values of the means of payment are materially relevant relative to the total invoiced, which points to O..., with H...'s connivance, having also used this entity to conceal transactions in gold dust that were actually his own.

It should be noted that some of these cheques, which A... entered in its accounting as being for payment of purchases from H..., were made payable to G... Lda.

From the foregoing it is concluded that:

• The invoicing of gold dust and silver dust issued in the name of H... to A... was controlled in fact by O... in 2010 and 2011.

• The two invoices intended to document acquisitions of fine gold and which are listed in point A.2.11 of this chapter, do not constitute real and effective transactions, being therefore false invoicing.

A.2.6 – I..., Lda. (I...)

The company I..., Lda. has its fiscal address on Rua..., ... and commenced operations on 2000-10-27. It is registered for the activity of "wholesale trade in watches and jewelry articles" – CAE 46480.

According to the AT's databases, it has as managing shareholder CC..., NIF..., and as partner WW..., NIF....

In 2012 and 2013, it submitted the periodic VAT declarations to which it was legally obligated, finding itself in a payment situation in 2012 but of reduced value, and in a tax credit situation in 2013 of considerably higher value.

With respect to IRC, it submitted the declaration mod.22 and annual accounting and tax information declaration for 2012, with declarations for 2013 missing.

In the annual declaration of 2012, the company indicated customers and suppliers, with the annual amount of internal operations conducted exceeding € 25,000 (amount including VAT). From the supplier listing, are found A..., SA and Z... - Unipessoal, Lda., NIPC..., the latter figuring as principal supplier.

With respect to 2013, although neither I... nor Z... submitted the annual declaration, it was verified in I...'s accounting that Z... continues to figure in 2013 as its principal supplier and A... as principal customer.

After analyzing the purchase and sales invoices of I..., it was concluded that, with the exception of fine gold in 2012, all other invoicing of I... to A... is supported in invoicing from company Z....

The following tables present the invoicing issued by I... to A..., in 2012 and 2013.

Supplies from I... to A..., contained in the latter's accounting:

Year 2012

Year 2013

Since the invoicing issued to A... has as its basis the invoicing from Z..., it is important to verify what the tax situation of the latter is, and the following has been verified:

• It is a company incorporated on 2012-03-12, and has as sole shareholder and managing partner BB..., NIF..., of Brazilian nationality;

• Indicated as registered office the .... no. ..., ...;

• On the same day as the company's incorporation and in the same notary office, BB... constituted attorney of the company, M..., to whom powers were conferred to "... open accounts in any bank or close them, debit or credit any bank accounts with any Banks or Banking Houses (...), request and sign cheques, ask for account balances, being able for that purpose to move any accounts that the principal may have in said Banks and in general practice and sign everything necessary for the proper execution of the mandate", that is, a power of attorney that confers powers to act on behalf of the company, as per power of attorney of which a photocopy is attached in annex 5.

• It is a non-declaring company for tax purposes, therefore the purchase and deductible VAT values mentioned by I... were not declared by Z....

• The activity of Z... was officially ceased by the AT on 2013-12-20, for the reason of having never exercised any activity, with the registered office being officially changed to the fiscal domicile of managing partner BB....

• There is no company or other entity declaring having conducted any sale/provision of services to Z....

• From analysis of the invoices issued by Z... to I..., several irregularities were detected that demonstrate invoicing manipulation, namely:

  • At least five types of handwriting are identified;

  • Invoices issued on dates prior to the date of the request at the printing shop. Note that the request date is 2012-08-02, as per photocopy attached in annex 6, on the invoices the date appears as 08/2012, as per photocopies of two invoices attached in annex 7 by way of example, and on the printing shop's invoice the date appears as 17/09/2012, as per photocopy attached in annex 8, with invoices issued with date of July 2012, as per photocopy of invoices nos. 009-A, 0013-A, 0016-A and 0018-A, of which a photocopy is attached by way of example in annex 9;

  • Several invoices were identified without correspondence with the sequential numbering criterion and respective chronology. There are indicated by way of example, invoice no. 9-A with date 12/07/2012 and invoice no. 8-A, with date 09/11/2012.

• Accounting-wise all payments related to supplies from Z... are recorded through cash account, that is, allegedly paid in cash, a usual procedure when dealing with non-existent operations.

• It is to be noted that we are speaking of a company that invoiced over 30 million euros solely to I.... However, from the voluminous banking documentation analyzed in the context of inquiry process .../12... T..., no means of payment associated with these transactions were detected.

• In interrogation records of which a photocopy is attached in annex 10, XX... confirms that he intervened in the deed of incorporation of Z..., with BB... receiving financial consideration, while XX... paid the costs of that deed. He further added that he is unaware of any invoicing from Z..., as he sold all invoices to CC... and ZZ... (nephew of CC...), invoices that had previously been delivered to him by AA..., loose, without any sequential order and from various series, with the objective of the accused realizing capital.

• The day immediately following incorporation of the company, BB... returned to Brazil.

The invoices from Z... to I... permitted the latter to deduct VAT in substantial amounts, thus making I... constantly in a VAT credit position, despite Z... not delivering that same VAT to the State coffers and companies located downstream deducting VAT contained in invoices issued by I..., among which A... that requested VAT refunds.

From the foregoing, it is concluded that Z... is a non-existent company, being merely a business of selling invoices, an expedient created so that downstream other operators could conceal various fraud schemes and even request substantial VAT amounts from the State.

It was thus demonstrated that I...'s invoicing to A... could never be supported by Z...'s invoicing, clearly constituting false invoicing, whereby the amounts invoiced by I... in 2012, in total amount of € 1,785,812.24 to which VAT is added in total amount of € 410,736.82 and in 2013, in total amount of € 15,773,061.72 to which VAT is added in total amount of € 1,625,780.81, cannot be accepted for tax purposes.

A.2.7 – U... Unipessoal, Lda.

The company U..., Lda., has its registered office on Rua do ..., no. ..., in ... and is registered for the exercise of the activity of "manufacture of jewelry articles and other jewelry articles" – CAE: 32122.

From the beginning of its operations on 2001-05-16 and to the present date, it has been subject for VAT purposes to the normal quarterly regime and for IRC purposes to the general taxation regime.

Has as sole shareholder and managing partner AAA..., NIF....

Since 2007 it has submitted no declarations relating to VAT or IRC, the same occurring with respect to the annual accounting and tax information declaration. However, from consultation of the AT's database, it was verified that there are companies that declared being customers of U..., Lda., among which A..., which in 2013 declared having conducted acquisitions from it in the amount of € 4,475,117.00. Analyzed invoicing supporting this value, it concerns gold dust 800 for recycling, in which 23% VAT was charged in the amount of € 836,810.28 which U... did not remit and which A... deducted and requested refunds.

There are no companies mentioning having conducted sales to U..., Lda.

In social security records, no worker is recorded as employed by the company, nor has the company submitted any remuneration declarations.

It further appears that in this invoicing unit prices were manipulated, so that invoices would contain VAT, allowing A... to deduct it, namely the unit price without VAT is considerably lower than the quotation for gold in the international market, only being higher than the market value if we add the VAT to the unit price without VAT. In this way the invoice issuer receives a higher value, appropriating the respective VAT which it does not remit to the State coffers. In turn, A... in addition to gaining market share by attracting more suppliers also requests refunds from the State.

It happens that for gold dust the charging of VAT is the responsibility of the purchaser, the reverse charge rule should be applied. In the inquiry process where the data was collected it was demonstrated that both A... and U..., Lda, were aware that this practice was illegal, but despite this they used this expedient from which both benefited to the detriment of the State.

In addition to the conduct described evidencing that U..., Lda.'s invoicing to A... does not correspond to true transactions, the managing partner himself acknowledged, in interrogation records of which a photocopy is attached in annex 11, that all invoices from U..., Lda. are false as the company sold nothing.

It was thus demonstrated that all invoicing from U..., Lda. to A... is entirely false, whereby the amounts of € 3,638,306.93 and € 836,810.28 in IRC and VAT respectively cannot be accepted for tax purposes.

A.2.8 – Sales by K... as Private Individual

The following are registered in A...'s accounting, sales conducted by K... in the capacity of private individual:

A photocopy of the documents listed above is attached in annex 12.

In addition to sales to A..., also appear in the accounting of X... NIF ... (K...'s mother-in-law and whose business he also managed), purchases from K.... Considering sales to these two entities, K... allegedly sold 385,200.83 grs of precious metals and 383.51 carats of diamonds and brilliants in the amount of € 966,688.73 in the capacity of private individual, which is completely implausible. It is not credible that K... holds in his personal patrimony such a high quantity of precious stones and metals that reaches a value near € 1,000,000.

Furthermore, as better set forth in the following point, in A...'s accounting two declarations were recorded intended to prove that K... made a loan to A... through in-kind contributions, in this case 20,000 grs of fine gold, which only further reinforces the conclusion that the sales declared by him could not have occurred.

With respect to payment, the alleged sales were paid by cheque or bank transfer, as per the following table:

However, of the € 166,155.20 paid by A..., it was verified that € 133,000 had CCC... as final beneficiary, either through endorsement of cheques (case of the € 86,000 cheque), or through issuance of cheques from K...'s accounts immediately following bank transfers made by A....

As for the € 15,950 cheque issued by A... to order of K..., it was endorsed by the latter to BBB..., employee of DDD... Unipessoal Lda., one of A...'s suppliers. Thus K... was not the recipient of this cheque, but rather a third party without direct relation to the latter, whereby we can only conclude to the falsity of the transaction.

The combination of all the facts gathered demonstrates that the purchase invoices issued in K...'s name are fictitious documents that served to document simulated transactions that generated a fictitious cost in A...'s sphere.

These acquisitions from K... were relevantly accounted for as a tax cost, having thereby been deducted for IRC purposes and influenced the determination of taxable profit in amounts that are discriminated in the subsequent table:

A.2.9 – In-kind Contributions of K..., L... and M...

It was also found that four documents were accounted for by A..., of which a photocopy is attached in annex 13, where the company declares having received loans in fine