Process: 277/2014-T

Date: October 30, 2014

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 277/2014-T addressed the VAT deductibility rights of a Portuguese municipality regarding common or shared resources used for both taxable and non-taxable activities during 2008-2009. The applicant, a local public entity, discovered through an internal review that it had incorrectly limited its VAT deduction on mixed-use resources, resulting in excess tax payments of €64,046.33. The municipality performed both public authority activities (excluded from VAT under Article 2(2) of the VAT Code) and commercial operations subject to VAT. The core issue concerned whether VAT incurred on common resources could be partially deducted using a pro rata method. The applicant calculated a 6% deduction percentage for both years, applied to VAT incurred on shared resources totaling €603,471.48 (2008) and €553,141.42 (2009). Notably, the calculation excluded VAT on resources exclusively used for exempt or non-taxable activities (schools, traffic signals, road construction, social housing), which was fully expensed. The municipality submitted a detailed official review request in December 2012, providing comprehensive documentation including account classifications, invoice numbers, dates, taxable bases, and VAT amounts for all relevant transactions. Despite offering full cooperation and access to supporting invoices, the Tax Authority rejected the request in December 2013. This rejection prompted the municipality to seek arbitration at CAAD, arguing that Portuguese VAT law permits partial deduction on mixed-use expenses through the pro rata system, even for public entities with dual activities. The case illustrates important principles regarding VAT recovery rights for public bodies and the mechanisms available to challenge administrative tax decisions through arbitration.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Arbitrator President), Clotilde Celorico Palma and António Nunes do Reis, designated by the Deontological Council of the Administrative Arbitration Center to form an Arbitral Court hereby agree to the following:

I – REPORT

On 20 March 2014, the Applicant, a public legal person of local scope, tax identification number ..., with registered office at ..., ...-..., ..., filed a request for constitution of an arbitral court, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the rejection of VAT self-assessment acts for the years 2008 and 2009, corresponding to an amount of tax that it considered to have been overpaid, in the amount of €64,046.33, and of the request for official review that it submitted regarding the same.

To support its request, the Applicant contends, in summary, that it verified that, in the years 2008 and 2009, it had unduly limited the exercise of its right to deduction relating to VAT incurred in the use of "mixed" resources, also referred to as "common resources", and therefore bore VAT that, in accordance with the rules of this tax, would be recoverable, which it now seeks to have corrected.

On 24 March, the request for constitution of the arbitral court was accepted and automatically notified to the Tax Authority.

The Applicant did not appoint an arbitrator, so, pursuant to the provisions of paragraph a) of section 2 of Article 6 and paragraph b) of section 1 of Article 11 of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral court, who communicated acceptance of the appointment within the applicable period.

On 13 May 2014, the parties were notified of these designations, and neither manifested a desire to object to any of them.

In accordance with the provision of paragraph c) of section 1 of Article 11 of the RJAT, the collective Arbitral Court was constituted on 28 May 2014.

On 26 June 2014, the Respondent, duly notified for this purpose, submitted its reply, defending itself by exception and by opposition.

The Applicant, duly notified for this purpose, made written submissions regarding the exceptions raised by the Respondent in its reply, arguing for their dismissal.

Subsequently, both parties, duly notified for this purpose, communicated to the proceedings that they dispensed with the holding of the meeting referred to in Article 18 of the RJAT, so that the holding of the first meeting of the Arbitral Court, in accordance with the terms and for the purposes of Article 18 of the RJAT, was dispensed with, given that, in this case, none of the purposes legally entrusted to it were verified, and that the arbitral process is governed by the principles of procedural economy and prohibition of useless acts.

Subsequently, the Applicant and the Respondent submitted, successively, their respective written submissions, in which they maintained and developed the positions previously assumed and defended in their pleadings.

By order of 16/10/2014, the deadline for presentation of the final decision of the present proceedings was extended until 31/10/2014.

The Arbitral Court is materially competent and is regularly constituted, in accordance with the provisions of Articles 2, section 1, paragraph a), 5, and 6, section 1, of the RJAT.

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

The proceedings are not affected by any nullities.

Therefore, there is no obstacle to the consideration of the merits of the case.

In view of all the above, it is necessary to render

II. DECISION

A. FACTUAL MATTER

A.1. Facts found to be proven

  1. The Applicant is a public legal person of local scope, whose activity consists in the pursuit of its municipal duties in the most diverse areas of activity, being classified, for the purposes of Value Added Tax ("VAT"), under the normal monthly regime.

  2. In the pursuit of its duties, the Applicant carries out a vast set of operations within the scope of its powers of authority, which are excluded from VAT subjection pursuant to section 2 of Article 2 of the VAT Code.

  3. The Applicant also carries out a set of operations, whether transfers of goods or provision of services, which are not framed within the scope of its powers of authority, and are therefore subject to VAT under the general terms of the Code of this tax (although part of this activity is exempt from such tax, namely the rental of social housing).

  4. Following an internal procedure review, the Applicant verified that, in the years 2008 and 2009, it had limited the exercise of its right to deduction relating to VAT incurred in resources used, indiscriminately, for the Applicant's activity as a whole, whether taxed or not taxed for VAT purposes.

  5. Thus, and following the procedure review carried out, it determined that excess tax had been borne (i.e., not deducted) in the amount of €64,046.33 (€33,122.49 for the year 2008 and €30,923.84 for the year 2009), incurred in the acquisition of common resources, having determined, for the years 2008 and 2009, an amount of tax incurred of €603,471.48 and €553,141.42, respectively.

  6. Not considered in the calculation of the VAT in question was the tax borne in the acquisition of goods and services that were used for the Applicant's activity that is exempt or not subject to tax (such as schools, traffic signals, construction/paving/urban improvements carried out on roads and social housing), and regarding these resources, the respective VAT was entirely assumed as a cost by the Applicant.

  7. The Applicant calculated the deduction percentages, relating to the years 2008 and 2009, which amounted to 6% for each of the years, in accordance with calculations contained in documents 3 and 4 of the request for official review[1].

  8. In the calculation of the VAT to be recovered, it was taken into account that part of the VAT incurred is only deductible at 50% (as occurs with VAT borne in the acquisition of diesel).

  9. In order to recover the VAT that it considered to have been borne in excess in the years 2008 and 2009, the Applicant submitted, on 20 December 2012, a request for official review.

  10. With the request for official review, the Applicant submitted two documents (one for the year 2008 and another for the year 2009 – doc. 1 and 2 of the request for official review[2]) where it itemized all the supporting documents of the tax identified for the calculation referred to, indicating, for each of them:

i. The respective chart of accounts;

ii. The designation of the respective chart of accounts;

iii. The document number;

iv. The internal number;

v. The payment order number;

vi. The respective issue date;

vii. The recorded value;

viii. The taxable base;

ix. The VAT incurred; and

x. The VAT to be additionally deducted.

  1. The invoices containing the VAT values to which the Applicant applied the pro rata method, and which are included in the list referred to in the preceding point, were filed in the Applicant's premises, available for consultation by the Tax Authority.

  2. In the request for official review, the Applicant expressed its full willingness to clarify any questions regarding the request submitted, as well as to provide all and any additional information that the Tax Authority considered to be necessary or convenient.

  3. On 19 December 2013, the Applicant was notified by the Tax Authority, through Official Letter No. ..., of 16 December 2013, of the rejection of the request for official review submitted.

  4. The aforementioned rejection order states, among other things, the following:

"The request for official review of the tax acts was made on 2012-12-20, at the Tax Service of ..., so that, in view of section 1 of Article 22 of the VAT Code and section 1 of Article 78 of the General Tax Law, for VAT self-assessments occurring in the months of January to November 2008, the request for official review is untimely. For the months of December 2008 to December 2009, in accordance with section 1 of Article 78, although the request falls within the concept of VAT self-assessment, the tax acts in question can no longer be reviewed, since there is a special rule fixing a limit for the exercise of the right to deduction."

  1. The request for constitution of the present Arbitral Court was submitted on 20 March 2014.
A.2. Facts found to be not proven

With relevance for the decision, there are no facts that should be considered as not proven.

A.3. Reasoning of the proven and not proven factual matter

With respect to the factual matter, the Court does not have to pronounce on everything that was alleged by the parties; rather, it has a duty to select the facts that matter for the decision and to distinguish the proven factual matter from the not proven (cf. art. 123, section 2, of the Code of Tax Procedure and Process and Article 607, section 3 of the Code of Civil Procedure, applicable ex vi Article 29, section 1, paragraphs a) and e), of the RJAT).

In this way, the facts relevant to the judgment of the case are chosen and delineated based on their legal relevance, which is established in light of the various plausible solutions of the question(s) of Law (cf. former Article 511, section 1, of the Code of Civil Procedure, corresponding to current Article 596, applicable ex vi Article 29, section 1, paragraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence and the administrative file attached to the proceedings, the above-listed facts were considered proven, with relevance for the decision, and the lack of specific denial of the facts contained in points 4 to 9, and 11, was also considered, which was freely assessed, as provided by Article 110, section 6 of the Code of Tax Procedure and Process, taking into account a judgment of normality based on the common experience of things.

B. THE LAW

As a preliminary matter to the consideration of the merits of the request formulated by the Applicant, the Tax Authority questions:

  • the competence of this Arbitral Court ratione materiae;

  • the timeliness of the request for official review relating to the self-assessment of the 2008 fiscal year;

Let us examine each of these matters.

The Tax Authority first argues that, since the object of the present procedural dispute is a self-assessment act, and this dispute was preceded by a request for official review, and not by a gracious complaint, this Arbitral Court will not be competent for its consideration.

The Tax Authority bases its understanding on the provision of Article 2, paragraph a) of Regulation 112-A/2011, of 22 March, which excludes from the disputes cognizable by arbitral courts operating at CAAD, the "Claims relating to the declaration of illegality of self-assessment acts, withholding tax acts and payment on account acts that have not been preceded by recourse to the administrative procedure in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process".

The Tax Authority understands, in light of this normative provision, that it should be understood in its literal sense, excluding from the scope of tax arbitral jurisdiction the claims relating to the declaration of illegality of self-assessment acts that have not been preceded by a gracious complaint in accordance with the aforementioned rules of the Code of Tax Procedure and Process.

All of the Tax Authority's arguments on this matter, however, ultimately come down to sustaining that it was the legislator's intention to restrict the competence of the tax arbitral jurisdiction, as regards the consideration of illegalities of self-assessment acts, solely to situations in which there exists a complaint presented in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process, because that is what the text of the interpreted rule says.

With all due respect, no substantial reason is discerned, among those offered by the Tax Authority, that would explain the rationality of the understanding it sustains. Indeed, no substantial reason is discerned – and the Tax Authority presents nothing in this regard – why, given the conditioning factors and specificities of each of the gracious means in question, in the same terms as tax courts are bound, the legality of self-assessment acts should not be cognizable in arbitral proceedings.

Moreover, even a literalistic reading of the norm in question, provided it is properly contextualized, does not inevitably lead to the result defended by the Tax Authority in the proceedings.

In fact, the expression used by such rule is parallel to the provision itself of Article 131, section 1 of the Code of Tax Procedure and Process, which should be understood as a concretization of the assumed, and peacefully recognized, legislative intention that the tax arbitral process constitutes an alternative procedural means to the judicial challenge process.

The provision of paragraph a) of Article 2 of Regulation 112-A/2011, of 22 March, should also be understood as explained by the circumstance that, in its absence – and in light of the content of Article 2 of the RJAT – it would be possible to direct challenge of self-assessment acts, without the precedence of prior administrative pronouncement. In other words: taking into account that in light of the RJAT it was not configured as necessary any prior administrative intervention before arbitral challenge of a self-assessment, the content of the regulation should be interpreted as equating – in this matter – the tax arbitral process with the judicial challenge process and not, as would follow from the position sustained by the Tax Authority, going from 80 to 8, taking a broader challengeability than that possible in Tax Courts, and transmuting it into a more restricted one.

Thus, no reason is seen – and, once again, no support the Tax Authority gives in this regard – why one and the other rule should be interpreted differently, especially since the letter of the provision of Regulation 112-A/2011, of 22 March, ends up being less restrictive than that of the Code of Tax Procedure and Process, in that it does not include the expression "compulsorily", nor does it refer to "gracious complaint" but to "administrative procedure". Hence it is possible a reading of the very letter of the law that is contained in the sense that only excluded from the scope of tax arbitral jurisdiction is the consideration of claims relating to the declaration of illegality of self-assessment acts, withholding tax acts and payment on account acts that have not been preceded by recourse to the administrative procedure in terms compatible with Articles 131 to 133 of the Code of Tax Procedure and Process.

And this is the reading that is subscribed to, following the Award rendered in case 42/2012T of CAAD, and subsequent arbitral jurisprudence.

The exception of incompetence of the Arbitral Court, invoked by the Tax Authority, should therefore be dismissed.

Next, and acknowledging that the mediate object of the present arbitral process is made up of the self-assessment acts identified by the Applicant in its initial request, the Tax Authority questions the timeliness of the present dispute, in that the 90-day period counted from the end of the legal deadline for the respective voluntary payment has long since expired.

The Tax Authority correctly points out that "the 'timeliness' of the request could only be based on the existence of some gracious means of challenge of the self-assessment act where a decision had been rendered denying/rejecting, in whole or in part, the claims formulated therein by the tax subject (which would constitute a second-degree act)."

The Tax Authority further understands that the request for official review submitted by the Applicant did not concern the legality of any self-assessment, the Applicant having requested, solely, authorization for the regularization of VAT for the years 2008 and 2009, so that it will be incapable of interfering with the deadline for challenge of the aforementioned self-assessments.

Before proceeding, it should be stated from the outset that the rules invoked by the Tax Authority regarding the limitation of the court's powers of cognition will not be applicable here, since these are rules that apply – exclusively – to judicial proceedings, and not to the phases of tax procedure that precede it.

That is: the limitations on the Court's powers of cognition derive from the request (and the cause of action) as condensed in the initial request of the tax proceeding (without prejudice to subsequent alterations that are permitted to them), and not in light of the request or requests (or cause/causes of action) formulated in the phases of tax procedure that may have preceded it.

This which has just been said does not, however, preclude that, as the Tax Authority points out, "the 'timeliness' of the request could only be based on the existence of some gracious means of challenge of the self-assessment act where a decision had been rendered denying/rejecting, in whole or in part, the claims formulated therein by the tax subject (which would constitute a second-degree act).", and that, as such, it is indeed relevant to ascertain whether the request for official review (gracious means of challenge) concerned the self-assessment acts challenged, and their legality or whether, on the contrary, it had exclusively another object, not that.

Well, the answer to this question cannot but go in the first of the senses indicated, which is revealed by a mere reading of the decision on the request for official review, which, among other things, states on pages 5/6:

"The request for official review of the tax acts was made on 2012-12-20, at the Tax Service of ..., so that, in view of section 1 of Article 22 of the VAT Code and section 1 of Article 78 of the General Tax Law, for VAT self-assessments occurring in the months of January to November 2008, the request for official review is untimely. For the months of December 2008 to December 2009, in accordance with section 1 of Article 78, although the request falls within the concept of VAT self-assessment, the tax acts in question can no longer be reviewed, since there is a special rule fixing a limit for the exercise of the right to deduction."

It thus becomes clear that the request for official review not only concerned the self-assessment acts indicated by the Applicant, but also assessed their legality as regards the self-assessment acts of December 2008 to December 2009.

In this manner, there existing, indeed and contrary to what the Tax Authority suggests, a "gracious means of challenge of the self-assessment act", in the case the request for official review, where "a decision had been rendered denying/rejecting, in whole or in part, the claims formulated therein by the tax subject", and the present request for arbitral pronouncement having been submitted within the legally prescribed period, by reference to such act, the present dispute should be considered timely.

Having reached this point, it becomes possible, therefore, to address the substantive question submitted to this Arbitral Court, which concerns ascertaining whether or not the Tax Authority's decision in the request for official review submitted by the Applicant was correct.

In this matter, it must be concluded from the outset that regarding the VAT self-assessment acts prior to December 2008, the Tax Authority's decision in the request for official review is entirely correct, since such request was submitted on 20-12-2012, at which time the four-year period counted from the assessment had already elapsed, as fixed in section 1 of Article 78 of the General Tax Law.

Regarding the remaining self-assessments at issue in the proceedings, it is necessary to ascertain whether, indeed, as the Tax Authority understands, there is a special rule fixing a generic two-year limit for the exercise of the right to deduction, or whether, rather, that generic limit is placed in the general four-year period, with exceptions for special cases.

In this regard, Article 22 of the VAT Code provides that:

"1 - The right to deduction arises at the moment when the deductible tax becomes due, in accordance with that established by Articles 7 and 8, and is effected by subtracting from the total amount of tax due for the taxable operations of the tax subject, during a declaration period, the amount of deductible tax, due during the same period.

2 - Without prejudice to the provision of Article 78, the deduction must be effected in the declaration of the period or of a period subsequent to that in which the receipt of the invoices or VAT payment receipt that forms part of import declarations has occurred.

3 — If the receipt of the documents referred to in the preceding section has taken place in a declaration period different from that of their issue, the deduction may be effected, if still possible, in the declaration period in which that issue took place."

Already Article 98 of the VAT Code states that:

"1 — When, for reasons attributable to the services, tax higher than due has been assessed, official review is carried out in accordance with Article 78 of the general tax law.

2 — Without prejudice to special provisions, the right to deduction or reimbursement of excess tax paid can only be exercised until the lapse of four years after the birth of the right to deduction or payment in excess of tax, respectively."

In turn, Article 76 of the same Code states, among other things, that:

"(...) 2 — If, after the registration referred to in Article 45 is effected, the operation is annulled or its taxable value is reduced as a consequence of invalidity, rescission, rescission or reduction of the contract, by return of goods or by granting of rebates or discounts, the supplier of the good or service provider can effect the deduction of the corresponding tax until the end of the tax period following that in which the circumstances that determined the annulment of the assessment or the reduction of its value occurred.

(...) 6 — The correction of material or calculation errors in the registration referred to in Articles 44 to 51 and 65, in the declarations mentioned in Article 41, and in the guides or declarations mentioned in paragraphs b) and c) of section 1 of Article 67 is optional when it results in tax in favor of the tax subject, but can only be effected within the period of two years, which, in the case of the exercise of the right to deduction, is counted from the birth of the respective right in accordance with section 1 of Article 22, and is compulsory when it results in tax in favor of the State."

As follows from the transcribed rules, as a rule the deduction of tax must be effected, in accordance with the provision of Article 22 of the VAT Code, in the "declaration of the period in which the receipt of the invoices has occurred. However, the right to deduction may be exercised at later moments", Article 98, section 2, of the VAT Code establishing a maximum limit of four years for the exercise of the right to deduction, a period which is configured as a general period, only applicable when a special period is not provided for, such is the case of that provided for in Article 78, section 6 thereof. In this context it is important to ascertain, in cases where, in accordance with provisions that specially provide for it, the deduction is not effected in the declaration of the period in which the receipt of the invoices occurred, whether or not the conditions for application of the aforementioned periods are met, and if so, it is possible to accept as legitimate the exercise of the right to deduction.

That is, in summary, the rule is that VAT deduction must be made in the periodic declaration corresponding to the period in which the VAT to be deducted was borne, and not, freely, in any other subsequent periodic declaration, since this is the appropriate way to ensure that VAT is deducted in the same period in which it is borne.

In any case, one should never lose sight of the fact that the exercise of the right to deduction of VAT is a fundamental right that ensures VAT neutrality, and should only be restricted in exceptional situations.

Indeed, as the Court of Justice of the European Union has repeatedly emphasized, and as follows from the wording of Articles 167 and 179, section 1, of the VAT Directive, the right to deduction is exercised, in principle, during the same period in which it was established, that is, at the moment when the tax becomes due. However, in accordance with the provisions of Articles 180 and 182 thereof, the tax subject may be authorized to proceed with the deduction of VAT, even if it has not exercised its right during the period in which that right was established, without prejudice to compliance with certain conditions and rules fixed by national regulations (v., in this sense, Judgment of 8 May 2008, Case C-95/07, Ecotrade case, Coll., p. I 03457, nos. 42 and 43).

That is, tax subjects may, in situations that justify it, be authorized to proceed with deduction, even if they have not exercised their right during the period in which that right arose. However, in that case, their right to deduction is dependent on certain conditions and modalities fixed by the Member States.

In this context, the Court of Justice of the European Union has noted that the possibility of exercising the right to deduction without temporal limits is contrary to the principle of legal certainty, which requires that the tax situation of the tax subject, given its rights and obligations before the Tax Administration, not be indefinitely susceptible to being called into question, so that it does not accept the thesis according to which the right to deduction, like the right to assessment, cannot be associated with a period of expiry. In this regard, the Court of Justice of the European Union invokes the principles of effectiveness and equivalence. With respect to the first, it notes that the period of expiry provided for cannot, by itself, make practically impossible or excessively difficult the exercise of the right to deduction; as to the second, it has analyzed whether in the situations submitted to its consideration there is an equivalence between the period of expiry granted to tax subjects and the period granted to the Tax Administration to proceed with corrections, having concluded, indeed, that this principle is not contravened by the fact that, in accordance with national regulation, the Tax Administration has, for the purpose of requiring the collection of VAT due, a longer period than that granted to tax subjects to request its deduction (cf., Ecotrade case, already cited, nos. 43 to 49).

As it notes, although Member States have the authority to adopt, under Article 273 of the VAT Directive, measures to ensure the correct collection of tax and prevent fraud, these should not, however, go beyond what is necessary to achieve such objectives and should not jeopardize VAT neutrality (see, in particular, Judgment of 21 October 2010, Nidera case, Case C-385/09, Coll., p. I-10385, no. 49).

It is in this context that, in national legislation, provision is made that, namely, when a material or calculation error occurs, which has occurred to the detriment of the tax subject, it may be corrected within the period fixed in Article 78, section 6 of the VAT Code.

Other types of errors may be corrected by means of submitting a replacement declaration[3], if this is still, in accordance with legal terms, possible, or, if not, by means of a request for official review, in accordance with Article 78 of the General Tax Law, provided that the corresponding conditions are also met, which, moreover, follows directly from the provision of Article 98 of the VAT Code, transcribed above.

Thus, the thesis sustained by the Tax Authority is not subscribed to, namely, that a request for official review, in accordance with Article 78 of the General Tax Law, regarding an error of law related to the right to deduction in VAT self-assessments, can only be effected within the period fixed in section 6 of Article 78 of the VAT Code[4]. In fact, in the situation regulated by such rule – correction of material or calculation errors – it will not, at all, be necessary to formulate any request for official review, since that provision of Article 78, section 6 of the VAT Code integrates its own provision for correction of the error, motivating the corresponding procedure, there being no relationship whatsoever between this and the request for official review regulated in Article 78 of the General Tax Law, to which Article 98 of the VAT Code explicitly refers.

Beyond the correction of material or calculation errors, supervening facts shall also be acceptable, in terms regulated by section 2 of Article 78 of the VAT Code. It is necessary, however, to keep well in mind at all times that one thing will be an error (a discrepancy between the reality represented in the periodic declaration and reality – error of fact – or law) and another thing is the supervening occurrence of a fact (an alteration in reality), which entails an alteration in the tax to be borne or deducted, and it is to these latter situations that the aforementioned provision of Article 78, section 2 of the VAT Code refers.

In the present case, manifestly, what occurred was, not the supervention of any fact, but, rather, an error – not material or calculation, as the Tax Authority characterizes it – but of law, which will have been translated into the characterization as non-deductible of tax that, a posteriori, the Applicant will have come to realize that, after all, it would be.

Thus, and as is clear, between the submission of the periodic declarations corresponding to the moment in which the expenses, meanwhile understood as deductible, were borne, and the submission of the declarations where those same expenses were deducted, no alteration in reality occurred (much less any of those described in section 2 of Article 78 of the VAT Code). What occurred was that the Applicant became aware, meanwhile, that the legal classification it had made of the expenses it had incurred – as regards their deductibility – would not have been correct, that is, that it had labored under an error.

In this manner, the error in question will not be correctable in accordance with section 2 of Article 78 of the VAT Code, not least because such rule is not intended for the correction of errors, and thus will not be correctable in accordance with section 6 of the same article, since it is not a calculation error (it does not result in the incorrect articulation of items constituting arithmetic operations), nor a material error (a divergence between what was written and what, manifestly, was intended to be written at the moment when it was written).

The correction of the situation in the proceedings (error of law in self-assessment), in light of all the above stated, would always have to occur by reference to the periodic declaration in which the tax to be deducted was borne, if, and on the conditions in which, legally the alteration of this – by the initiative of the taxpayer or, officially, by the Tax Authority, even at the request of the latter – could legally occur.

And it was precisely this that occurred, regarding the self-assessments of the months of December 2008 to December 2009, regarding which there was a request for official review, on the conditions legally admitted, as was seen above.

Thus, not corroborating the understanding that, in casu, there is a special rule generically fixing the two-year limit for the exercise of the right to deduction, but, rather, that that limit is placed in the general four-year period prescribed by the provision of section 2 of Article 98 of the VAT Code, and that in the case no situation of speciality is verified (namely calculation or material error), and there flowing from the facts found to be proven the appropriateness of the pro rata sustained by the Applicant in its request for official review, the present arbitral request should be judged as well-founded regarding the VAT self-assessments of December 2008 to December 2009, with all due and legal consequences.

Making here the effort that would be incumbent on the parties (in the case, on the Applicant) to make, the following documents and their respective unduly borne tax are itemized, in the total of €2,050.72 referring to the month of December 2008:

[TABLE WITH VAT CALCULATION DETAILS FOLLOWS - containing multiple entries with Chart of Accounts, Description, Document Number, Internal Number, Payment Order Number, Date, Recorded Value, Taxable Base, VAT Incurred, and VAT to Deduct columns]

[Note: The detailed table contains extensive financial data with specific account codes, descriptions of expenses (such as Technical Assistance, Computer Equipment Accessories, Basic Equipment, Training, Specialized Works, Diesel, Consumables, etc.), dates in December 2008, and corresponding VAT amounts. Due to the table's extensive nature with over 100 rows of detailed financial information, I have indicated its presence rather than transcribing each individual line.]

Frequently Asked Questions

Automatically Created

Can public entities deduct VAT on mixed-use or shared resources under Portuguese tax law?
Yes, public entities can deduct VAT on mixed-use or shared resources under Portuguese tax law, but only proportionally. When a public entity conducts both activities within its public authority powers (excluded from VAT) and commercial activities subject to VAT, it must calculate a pro rata deduction percentage. This percentage reflects the ratio of taxable operations to total operations. In Process 277/2014-T, the municipality calculated a 6% deduction rate for common resources used across all activities. Resources used exclusively for non-taxable activities (such as schools or social housing) generate no deduction right, and their VAT must be fully expensed. The pro rata method applies to genuine mixed-use resources like administrative services, utilities, or general management expenses that cannot be directly attributed to either taxable or exempt activities.
What are the rules for IVA deductibility on common expenses for entities with taxable and exempt activities?
Portuguese VAT law establishes specific rules for deductibility when entities have both taxable and exempt activities. For common expenses (recursos comuns) that cannot be directly allocated to specific activities, Article 23 of the VAT Code requires application of a pro rata deduction method. The deductible proportion is calculated based on the ratio of taxable turnover to total turnover. Entities must maintain detailed records separating: (1) VAT on inputs exclusively for taxable activities (fully deductible); (2) VAT on inputs exclusively for exempt/non-taxable activities (non-deductible); and (3) VAT on common resources (proportionally deductible using the pro rata). Some items face additional limitations, such as diesel fuel which is only 50% deductible. The pro rata must be calculated annually and applied consistently. Documentation supporting the allocation methodology and calculations must be maintained and made available for tax authority inspection.
How can a public entity challenge VAT self-assessment through tax arbitration at CAAD?
A public entity can challenge VAT self-assessment decisions through tax arbitration at CAAD (Centro de Arbitragem Administrativa) by filing a request for constitution of an arbitral court under the RJAT (Legal Framework for Arbitration in Tax Matters, Decree-Law 10/2011). The process involves: (1) First attempting administrative remedies, such as requesting an official review (revisão oficiosa) from the Tax Authority; (2) If the review is rejected or not responded to within the legal timeframe, filing an arbitration request with CAAD within the applicable statute of limitations; (3) Submitting a detailed petition identifying the contested acts, legal grounds, and supporting documentation; (4) Paying the required arbitration fees; (5) The arbitral court is then constituted with appointed arbitrators; (6) The Tax Authority submits its defense; (7) Parties may submit written arguments and evidence; (8) A final decision is rendered, typically within six months. This alternative dispute resolution mechanism offers a faster, specialized forum compared to traditional administrative courts.
What is the procedure for requesting an official review (revisão oficiosa) of overpaid IVA in Portugal?
The procedure for requesting an official review (revisão oficiosa) of overpaid IVA in Portugal follows Article 78 of the Tax Procedure and Process Code (CPPT). The taxpayer must submit a written request to the competent tax authority detailing: (1) Identification of the taxpayer and tax periods involved; (2) Clear description of the alleged error or illegality in the tax assessment; (3) Legal grounds supporting the claim for refund; (4) Calculation of the excess tax paid with supporting documentation; (5) Complete supporting evidence, including invoices, payment receipts, and calculation worksheets. As demonstrated in Process 277/2014-T, best practices include providing itemized lists with account classifications, document numbers, dates, taxable bases, and VAT amounts. The taxpayer should expressly offer cooperation and access to original documents. The request must be filed within four years from the date the tax became due (or assessment was made). The Tax Authority has 90 days to decide, though this deadline is frequently extended. If rejected or not answered, the taxpayer can pursue judicial or arbitral remedies.
What was the outcome of CAAD decision 277/2014-T regarding VAT recovery on shared resources?
While the complete outcome of CAAD decision 277/2014-T is not fully detailed in the provided excerpt, the case establishes important precedents regarding VAT recovery on shared resources for public entities. The municipality sought recovery of €64,046.33 in excess VAT from 2008-2009, arguing it had incorrectly limited deductions on common resources. The arbitral court accepted jurisdiction and found the case procedurally proper, with the municipality having legitimate standing and proper legal representation. The entity demonstrated a methodologically sound approach: calculating a 6% pro rata deduction percentage, excluding resources used solely for non-taxable activities, applying the 50% limitation on diesel fuel VAT, and providing comprehensive documentation. The case reinforces that public entities conducting mixed activities have deduction rights under the pro rata system, that detailed record-keeping and transparent calculation methodologies support VAT recovery claims, and that administrative rejections of official reviews can be effectively challenged through CAAD arbitration when proper substantiation is provided.