CAAD 278/2014-T: VAT Burden of Proof and Right to Deduct Tax – Regularization Upheld

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 278/2014 – T

Subject Matter: VAT – Burden of Proof; Right to Deduction of Tax

The Arbitrator Dr. Filipa Barros (sole arbitrator), designated by the Ethics Council of the Administrative Arbitration Centre ("CAAD") to constitute the Sole Arbitral Tribunal, constituted on 28 May 2014, hereby decides as follows:

I. REPORT

The company A –, with registered office …, with share capital of €1,190,000,000.00 hereinafter "Claimant", hereby, pursuant to the provisions of article 2, no. 1, paragraph a), article 5, no. 3, paragraph a) and article 10, no. 1, paragraph a), all of Decree-Law No. 10/2011, of 20 January, hereinafter referred to as "RJAT"[1], requests the constitution of an Arbitral Tribunal to rule on the illegality and consequent annulment of the additional VAT assessments Nos. … and … and the compensatory interest assessments Nos. … and …, of 26 February 2013, relating to the fiscal year 2010.

To support its request, the Claimant alleges in summary that the additional VAT assessments and compensatory interest assessments relating to the fiscal year 2010 result from the non-acceptance by the Tax and Customs Authority of VAT regularization movements in its favour supported by the supporting documents Nos. …, … and …, on the grounds that the Claimant failed to demonstrate that the recipient became aware of the reduction in the value of the VAT that had previously been assessed to them.

Now, the Claimant considers that the maintenance of the corrections underlying the additional VAT assessments is illegal in light of the provisions of number 5 of article 78 of the VAT Code, since it was demonstrated, during the Right to be Heard proceedings, through supporting documents duly submitted, that the purchaser became aware of the rectification or that they were reimbursed the tax, in accordance with the requirements of the said legal provision.

On 25 March 2014, the request to constitute the Arbitral Tribunal was accepted by His Excellency the President of CAAD and immediately notified to the Respondent in accordance with legal provisions.

The Claimant did not appoint an Arbitrator.

Thus, pursuant to and for the purposes of the provisions of no. 1 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, by decision of His Excellency the President of the Ethics Council, duly communicated to the parties, within the legally prescribed time limits, Dr. Filipa Barros was designated as arbitrator of the Sole Arbitral Tribunal, who communicated acceptance of the appointment to the Ethics Council and to the Administrative Arbitration Centre within the time period stipulated in article 4 of the Code of Ethics of the Administrative Arbitration Centre.

In accordance with the provisions of paragraph c), of no. 1, of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Sole Arbitral Tribunal was constituted on 28 May 2014, followed by the pertinent legal procedures.

On 4 July 2014, the Respondent, duly notified for this purpose, submitted its response defending itself by means of an objection and seeking the total dismissal of the claim.

Subsequently, both parties, having been notified for this purpose, communicated to the case file that they waived the holding of the meeting referred to in article 18 of the RJAT, so that the holding of the first meeting of the Arbitral Tribunal, in accordance with and for the purposes of the provisions of article 18 of the RJAT, was dispensed with, given that, in this case, none of the purposes legally entrusted to it were present, and that the arbitration proceedings are governed by the principles of procedural economy and prohibition of the performance of unnecessary acts.

Simultaneously, the Claimant and the Respondent communicated to the Tribunal their intention to waive the submission of written pleadings.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimately constituted and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance No. 112-A/2011 of 22 March.

The proceedings are not affected by any nullities.

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

All having been considered, it is necessary to deliver a decision.

II. DECISION

A. MATTER OF FACT

A.1. Facts Established as Proven

The following facts are documentally proven and/or accepted by the parties in their respective pleadings:

1. The Claimant is a credit institution, subject to the supervision of the Bank of Portugal, which heads group B, a financial group, multi-specialized, focused on banking activity, equipped with a complete range of financial services and products for business, institutional and private clients;

2. The Claimant is subject to Value Added Tax (VAT), classified under the normal scheme, with monthly periodicity, conducting taxable operations that confer the right to deduction, and operations that do not confer the right to deduction, using the deduction methods provided for in articles 20 and 23, for the deduction of tax incurred in the conduct of taxable operations and of tax incurred in the acquisition of goods of mixed use, respectively;

3. In compliance with Service Order No. …, from 28-02-2012 to 9-03-2012, issued by the Large Taxpayers Unit, an external inspection procedure of general scope was initiated against the Claimant, relating to the year 2010, which, after two extensions, ended on 28 November 2012;

4. By Official Letter No. … of 28/11/2012, the Claimant was notified to make representations regarding the draft report of the Tax Inspection, relating to the fiscal year 2010;

5. The Claimant exercised the right to be heard, in writing, on 10 December 2012 (see document no. 2 of the Request for Arbitral Ruling);

6. Following the conclusion of the inspection procedure, the respective final report was drawn up, contained in Official Letter No. …, of 01-10-2013, through which corrections in the matter of VAT were proposed, in the amount of €6,612.42, where it was concluded, with reference to the credit notes, that:

"IX.3.1 VAT Regularizations (article 78 of the VAT Code)
(...)
For the remaining regularization movements, the bank continues to fail to demonstrate that the recipient became aware of the reduction in the value of the VAT that had previously been assessed to them and fails to exhibit any other document.
In these terms, the deduction effected as regularization of the tax assessed is considered improper, in the amount of €6,612.42, for failure to comply with the requirement provided for in article 78, no. 5 of the VAT Code."

1. Following the endorsement of the higher level of the conclusions of the inspection report, the following additional VAT assessments and compensatory interest assessments were determined:

1. On 03-06-2013, the Claimant submitted to the Finance Service of Porto 2 a petition seeking the suspension of tax enforcement proceedings No. 3182 …, simultaneously providing a bank guarantee for that purpose (see document no. 5 submitted with the Request for Arbitral Ruling);

2. On 25-07-2013, the Claimant filed a Gracious Complaint against the tax acts of additional assessment identified above, seeking confirmation of the receipt by the purchaser of the VAT regularization movements at issue, alleging in summary the following (see document no. 6, whose content is given as fully reproduced):

"Regarding the credit note movement …, the Claimant had submitted a copy of the respective postal receipt notice, which it again annexes as document no. 6, in the face of which it becomes indisputable that the purchaser became aware of the rectification.

On the other hand, regarding the movement contained in credit note no. …, the Claimant had likewise submitted suitable proof, embodied in a copy of the respective credit note sent to the purchaser in which the receipt stamp of the latter is affixed.

(...) Finally, it should be noted that regarding company C, the Claimant proceeded to issue, on 18-06-2012, 5 credit notes (NC … to …), which are identified in Annex 14 of the Inspection Report, whose second copies were sent via postal services, registered on 31-08-2012.

The receipt notices for the registered items dispatched were all received by the Claimant on 03-09-2012, as confirmed by consultation of the internal postal dispatch control map maintained by the Supply, Outsourcing and Assets Department, the area responsible for managing the mail of the Claimant (see print submitted as document no. 8).

However, due to conditions inherent to the existence of various movements relating to the same purchaser, the Claimant has not yet been able to locate the receipt notice relating to Credit Note …, and continues to make the necessary efforts for its location.

Notwithstanding the above, and given that the credit notes were dispatched all on the same date, and since the Claimant maintains an internal correspondence register, in which the date of receipt of the respective notice was identified, the Claimant considers it indisputable that the recipient became aware of the respective regularizations.

Given the above, receipt by the recipient of credit note … is considered proven."

1. By Official Letter No. …, of 27/12/2013, the Claimant was notified of the draft decision dismissing the Gracious Complaint (see PA, whose content is given as fully reproduced) with the Tax Authority sustaining the following:

"18. From the elements sent by the Claimant, relating to credit note no. …, the following deficiencies of proof were found, in light of the provisions of paragraph a) of no. 5 of article 36, combined with nos. 1 and 5 of article 78, both of the VAT Code:

· In the receipt notice, the space reserved for the indication of the postal code of the sender (A) is filled with the number of the credit note;

· In the credit note, the name, firm or corporate name and the registered office or domicile of the supplier of goods or service provider (that is, of the issuer) are not indicated, nor are there any elements evident that prove the receipt of the same by the purchaser;

· There is therefore no connection between the credit note and the alleged receipt notice presented, which would make it possible to prove unequivocally that purchaser C, S.A. became aware of the rectification, for less, of the value of the assessed tax.

1. Regarding credit note no. …, the Claimant considers that a copy of the respective credit note sent to the purchaser, in which the receipt stamp of the latter is affixed, constitutes suitable proof of receipt of the same by the purchaser.

2. Regarding the same credit note and in light of the provisions of paragraph a) of no. 5 of article 36, combined with nos. 1 and 5 of article 78, both of the VAT Code, we consider that there is insufficient proof, for the following reason:

· The new element of this credit note (in comparison to the one previously analyzed) is the supposed receipt stamp of the same, but neither can it serve as proof of how "D, LDA" became aware of the rectification carried out by the Claimant, since it also fails to comply with what is established in no. 5 of article 78 of the VAT Code.

1. As for credit note no. …, it is the Claimant itself that acknowledges being unable, to date, to find the respective receipt notice and is currently continuing to make the necessary efforts for its location."

1. On 14-01-2014, the Claimant exercised the respective Right to be Heard (see document no. 8, submitted with the Request for Arbitral Ruling, whose content is given as fully reproduced), stating, in summary, the following:

"Regarding credit note no. …, (...) the fact that the space of the receipt notice reserved for the indication of the postal code of the sender is filled with the number of the credit note proves to be irrelevant for the concrete admissibility or otherwise of the VAT regularization, in accordance with no. 5 of article 78 of the VAT Code.

In effect, what the applicable legal provision in this regard imposes is that the taxpayer be able to prove that the purchaser became aware of the rectification of the tax effected or that they were reimbursed the tax assessed. And such proof may be made through any document from which it is possible to infer the awareness by the purchaser of the rectification effected or the reimbursement of the assessed tax (...).

Furthermore, in the postal notice the Taxpayer and the Purchaser are perfectly identified with the indication of the latter's address, the number of the credit note sent, facts that make it easy to relate the receipt notice to the notification to the Purchaser of the VAT regularization effected through the document that supports it. In effect, there remained no doubt that the number of the credit note identified in the receipt notice presented (NC…) corresponds to the number of the credit note identified in the supporting document (…), a fact which will moreover be confirmed by the identity of the purchaser identified in the credit note in question and the Recipient identified in the corresponding Receipt Notice.

Thus, (...) such receipt results unequivocally from the signature of the corresponding receipt notice (with the fields relating to delivery, legible name, date and signature being marked/filled).

(...) when requests for information about the present correction were made by the tax inspection services during the course of the inspection action, second copies of that document were printed, and the same were printed, by oversight, on regular paper, instead of as occurs for all invoices, credit notes, or equivalent documents, being printed on the letterhead paper of the Respondent. Only that fact motivated the absence of reference to the name, firm or corporate name and the registered office or domicile of the issuer.

(...) However, so that there remain no doubts as to the admissibility of the regularization in favour of the Respondent, in accordance with the provisions of no. 5 of article 78 of the VAT Code, copies of the current account of the client in question are submitted, which make it possible to prove the reimbursement of the assessed tax (See Document No. 1).

Regarding credit note no. …:

(...) should be annulled in light of the submission of the client extract mentioned in article 15 of the present right to be heard, in that the same contains the movements underlying the regularization of the credit note in question, resulting proven, in accordance with no. 5 of article 78 of the VAT Code, that the purchaser was reimbursed the tax initially assessed.

Regarding credit note no. …:

(...) it is verified that it corresponds to the original of the credit note (the duplicates are always identified as such) on the other hand, it will be unavoidable that a receipt stamp be affixed to the said document, which aims precisely to serve as a record of receipt of the same by the recipient, so it is not understood why the services propose its non-acceptability (...). Furthermore, it is necessary to explain the concrete situation underlying the issuance of the credit note in question: invoice no. … originally issued supported the payment of the early termination of the leasing contract relating to the vehicle with registration … entered into with E, S.A. (E), and originally acquired from D, LDA. (D).

Upon processing the termination, the amount received was, by oversight, invoiced to D - Invoice …, of 25/10/2008 – which would subsequently be canceled through the credit note in question – NC …, 03/11/2008 – see client extract submitted as document no. 2. Both the invoice and the credit note were sent to D and the originals returned by the latter, noting the affixing of the receipt stamp of correspondence on the credit note presented.

Having been an oversight, naturally the Respondent received nothing from D as payment of the termination and consequently nothing was reimbursed to D.

Similarly, nothing was recorded by D, hence it proceeded to return the originals, both of the invoice and the credit note, as they concerned a contract that did not concern it.

The termination of the contract would be correctly invoiced to E on 03/11/2008 through the issuance of invoice …, in accordance with the extract of the contract submitted as Document No. 3.

Given all the above, the Respondent considers the requirements for the regularization of the tax in its favour to be met, since, as is amply demonstrated, the putative purchaser never actually made any payment of the value underlying the invoice improperly issued. Consequently, it never bore any VAT in relation to the billed service. Similarly, there would be no reimbursement of tax to effect since the same had not been borne by the identified purchaser. In any event, it is verified that the identified purchaser became aware of the operations sub judice, which were communicated to them through the sending of the respective supporting documents, the originals of which the latter returned because they concerned operations that did not concern them. (...) On the other hand, even if proof of awareness by the Purchaser were lacking, and as has been demonstrated, given that the same did not bear any tax in relation to the operation in question, the requirement of reimbursement should necessarily be considered satisfied."

1. On 31-01-2014, by Official Letter No. … issued by Her Excellency the Head of Division of the Large Taxpayers Unit (see PA, whose content is given as fully reproduced), the Claimant was notified, within the scope of a cooperation request, under article 59 of the General Tax Code, to submit a set of elements for proving the VAT regularization in favour of the Claimant:

"1. Copy of the original and duplicate of invoice no. …, of 2008-10-25, issued to D, LDA., whose VAT amount regularized was €1,707.54, as well as the respective return letter.

1. Copy of the original and duplicate of credit note no. …, sent to D, LDA., of 2008-11-03, which cancels the document referred to in the preceding point, as well as the respective return letter.

2. Supporting documents of all accounting entries relating to the invoice and credit note referred to above.

3. With respect to credit note no. …, issued to client C, S.A., whose VAT amount regularized was €2,567.51, taking into account what is stated in point 23 of the Gracious Complaint petition, regarding the steps taken by Your Excellencies for the location of supporting documents proving that the client became aware of the respective rectification, it is requested that, should the same already be in your possession, you proceed with their submission."

1. On 10-02-2014, the Claimant submitted a response to the request from the Tax Authority, stating in summary the following (see document no. 8 submitted with the Request for Arbitral Ruling, whose content is given as fully reproduced):

"1. (...) Given the above and having the Respondent presented supporting documents from which the reimbursement of the tax results, it is not understood the insistence on the submission of documentation from which the awareness by the purchaser of the regularization effected results.

1. Proceeding to the requested documentation, issued to D, LDA (...), attached hereto (Document No. 1) are supporting documents of all accounting entries relating to invoice … and credit note no. …, as well as extract of contract no. … relating to the vehicle disposed of. It should be noted that the credit note originally presented corresponds to the original thereof. It should furthermore be noted that, as appropriately informed during the Right to be Heard proceedings, the issuance of the invoice in favour of D was improper, since it was not that entity that was the purchaser of the automobile whose sale the invoice evidences. The receipt of the invoice and credit note by D, and return of the said documents was corroborated to us by the same, which informed us that it had already provided that same clarification to the Tax Authority.

2. With respect to the request relating to credit note no. …, issued to client C, S.A., it was not possible to obtain proof of receipt of the credit note relating to the regularization of the tax by the client. However, reiterating the above stated in point 1, namely that the VAT regularization in favour of the taxpayer may be effected when the latter has in its possession a document from which the restitution of the tax to the client results, and having the now Respondent submitted a client extract where it can be proven, without margin of doubt, that the client was reimbursed the corrected tax, in that the said document contains the movements underlying the regularization of the credit note in question, the provision of the applicable legislation shall be deemed to be complied with. Additionally, attached hereto (document no. 2) is supporting documentation of the accounting entry relating to credit note no. …."

1. By Official Letter No. … of 28-11-2013, within the scope of a cooperation request, D was notified to submit to the Tax Authority the supporting documents of the VAT regularization in favour of the State resulting from the issuance of credit note no. … by A (see PA);

2. On 05-12-2013, D responds by e-mail, informing the following: "it did not receive Credit Note No. … of 2010-11-03 from our supplier A, S.A. Following receipt of your Official Letter, we requested from A, S.A. a second copy of the respective Credit Note, which has not yet been received by us." (See PA at p. 156.);

3. Subsequently, a second clarification procedure was initiated by the Tax Authority regarding the situation with D, and this entity clarified by e-mail of 14-01-2014 the following:

"Following the analysis of the 2nd copy of the Credit Note and the 2nd copy of the respective invoice, we conclude that:

1. A, S.A. improperly issued an invoice to D;

2. Since the invoice was improper to D, the latter returned the invoice to A;

3. A issued and sent to D a credit note to regularize the invoice improperly issued;

4. D returned the Credit Note to A, since both the initial invoice and the credit note were improper to D". (See Response to the Request for Arbitral Ruling);

5. By Official Letter No. … of 13-03-2014, issued by delegation of authority, by Her Excellency the Head of Division of the Large Taxpayers Unit, the Claimant was notified of the decision to dismiss the Gracious Complaint submitted (see document no. 11, submitted with the Request for Arbitral Ruling, whose content is given as fully reproduced).

6. On 21-03-2014, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings. (see electronic submission to CAAD).

A.2. Facts Not Established

No facts with relevance to the consideration of the merits of the case were found that were not established.

A.3 Reasoning

The Tribunal's conviction in establishing the factual framework above was based on the documentation submitted to the case file, on the administrative instruction file and on the acceptance, or non-objection by the Tax Authority to the factual framework drawn by the Claimant in its request for arbitral ruling.

B. ON THE LAW

The tax acts subject to the consideration and decision of this Tribunal are solely the additional VAT assessments Nos. … and … and the compensatory interest assessments Nos. … and …, relating to the year 2010, in the total amount of €7,153.91, with the Claimant requesting the declaration of illegality of these tax acts, on the ground of violation of the provisions of no. 5 of article 78 of the VAT Code.

Let us proceed to the issue.

In the case at hand, the disputed question boils down to whether the VAT regularization movements effected in favour of the Claimant, supported on credit notes …, … and …, comply with the requirements provided for in no. 5 of article 78 of the VAT Code, having been proven that the purchasers became aware of the tax rectifications effected or that they were reimbursed the tax, or whether, on the contrary, as the Respondent contends, the respective deduction should be considered improper due to insufficient demonstration of the facts whose proof was incumbent upon the Claimant.

Now, the decision of the question depends on the analysis and interpretation of the provisions of no. 5 of article 78 of the VAT Code, which provides as follows:

"Where the taxable value of an operation or the respective tax is rectified downwards, the regularization in favour of the taxpayer may only be effected when the latter has in its possession proof that the purchaser became aware of the rectification or that they were reimbursed the tax, without which the respective deduction is considered improper."

It follows from the said legal provision that the Claimant could deduce the VAT contained in the credit notes Nos. …, … and …, if it had in its possession proof that the purchasers became aware of the rectification of the tax or, alternatively, that they were reimbursed the respective tax.

Now, in the domain of the interpretation of the said provision, it should first be noted that Value Added Tax (VAT) was introduced into the Portuguese tax system by Decree Law No. 394-B/84, of 26/12, which transposed the European Union Directive 77/388/EEC of the Council, of 17 May 1977 (Sixth Directive), which regulates, together with subsequent amendments, the uniform application of VAT in all Member States of the European Union.

VAT can be defined as an indirect tax both from a legal point of view (as it is classified in the General State Budget) and from an economic point of view, since it falls on expenditure, being transferable (the tax burden is transferable to the final consumer) and the respective taxable event has a transitory or accidental character. It is a general tax on consumption, insofar as it applies, in principle, to all supplies of goods and provisions of services with onerous characteristics (in accordance with article 1, no. 1, paragraph a) of the VAT Code).

Furthermore, it is a multi-stage tax because it applies to all phases of the economic circuit, from production to the final consumer, and non-cumulative, insofar as in each phase of the economic circuit it taxes only the value added, that is, the increase in value which the goods or services acquire in the phase in which they are found, thus avoiding the cumulative effect of tax on tax.

In addition to the characteristics referred to, VAT also has the characteristics of neutrality and generality.

As for neutrality, through the deduction mechanism, the tax will be borne entirely by the final consumer, making the number of phases that integrate the economic circuit fiscally irrelevant. It should be noted that the assessment of the tax is made by economic operators who proceed with self-assessment and pass on to the client the tax assessed upstream, and should use the indirect subtractive method in determining the value added in accordance with the provisions of article 19 of the VAT Code[2]. Under no. 2 of this provision, only tax mentioned in invoices issued in the legally prescribed form confers the right to deduction, such requirements being, moreover, those enshrined in article 36, no. 5, of the VAT Code. This requirement of the legislator aims to maintain the chain of deductions, which is the soul of the system, obstructing attempts to deduce tax not borne, thus countering tax evasion and making imperative the observance of the legally prescribed form in the issuance of documents, under penalty of the same not conferring the right to the said deduction. In turn, article 36, no. 6, establishes that "Return notes and other documents rectifying invoices must contain, in addition to the date and sequential numbering, the elements referred to in paragraph a) of the preceding number, as well as the reference to the invoice to which they relate and the particulars thereof that are the subject of alterations."

As for generality, it is a general tax on consumption that should be exactly proportional to the price of goods and services, in which the taxable value shall comprise everything that constitutes the consideration that the supplier or service provider has received or should receive in relation to the operations in question on the part of the purchaser or recipient.

The provision of article 29, no. 1, paragraph g) of the VAT Code is particularly relevant, as to the general obligation of taxpayers to maintain accounting records adequate for the assessment and supervision of this tax. It is thus explained that taxpayers are obliged to maintain organized accounting, and must likewise observe certain accounting obligations in order to obtain security and clarity in the recording of operations resulting from the application of the VAT Code and necessary to the calculation of the tax, as well as to permit its adequate supervision and inspection (see articles 44 to 52 of the VAT Code).

Consequently, both the deduction of VAT and its reimbursement are subject to certain conditionalities provided for in the VAT Code, which can be considered similar, and it is certain that also in this domain, the rules provided for by the national legislator must converge with the principles and rules postulated in the respective European Union regulation, enshrined in the Sixth Directive.

It should be noted that, pursuant to article 90, no. 1 of the Sixth Directive, in case of price reduction after an operation has been effected, "the taxable value shall be reduced accordingly, under the conditions fixed by the Member States".

Now, in article 78, no. 5 of the VAT Code, it is clear that the national legislator subordinates the rectification or reduction of the taxable value in relation to the value initially fixed in an invoice issued to certain requirements or conditions which aim to ensure the exact collection of VAT and to avoid situations of fraud in this tax. It follows from the said legal provision that the taxpayer, prior to the regularization, should obtain proof that:

a) The purchaser became aware of the rectification of the tax; or

b) The purchaser was reimbursed the tax;

Under penalty of the respective deduction being considered improper.

The burden of proof of the right invoked by the Claimant falls upon it, ex vi article 78, no. 5 of the VAT Code. In case the proof of this fact falls to the Claimant, in accordance with article 414 of the Code of Civil Procedure, in case of doubt, the case is resolved against the party to whom the fact is advantageous.

Well then, let us analyze in light of the legal provisions invoked the proof that was offered by the Claimant.

Regularization relating to credit note … – C, S.A.

As far as the regularization in question is concerned, it was established as proven that the Claimant submitted, both during the Right to be Heard proceedings and during the Gracious Complaint, a copy of the postal receipt notice. However, it happens that the receipt notice is improperly filled out, in that in the space reserved for the indication of the postal code of the sender, the number of the credit note is affixed. Furthermore, the credit note does not contain any indication as to the name, firm or corporate name of the issuer, that is, of the Claimant. In this sense, the Tax Authority suspects the lack of connection between the credit note and the receipt notice presented, considering that the same does not prove that the purchaser became aware of the rectification downwards of the value of the assessed tax.

It is true that in the case in question the Claimant used as one of the means of proof a credit note that would not pass the scrutiny of article 36, no. 6 of the VAT Code. However, it is important to note in this regard that the law confers the possibility of presenting any suitable elements that allow demonstrating knowledge at the opportune time of the rectification effected, by virtue of the issuance of the credit note, or that the purchaser was reimbursed the tax. As for this possibility, which will have to be duly balanced and weighed against other constitutionally guaranteed principles of combating tax evasion and fraud, the Tribunal understands that the taxpayer presented additional documents that filled this gap.

In this regard, it should be noted that, contrary to the Tax Authority's understanding, the postal receipt notice, despite containing an inaccuracy in the field relating to the postal code, clearly evidences the identification of the issuer, of the purchaser/recipient with the indication of the latter's address, of the number of the credit note sent, facts which make it easy to relate the receipt notice to the communication to the purchaser of the VAT regularization effected through the document that supports it. Furthermore, the signature of the receipt notice by the purchaser makes it possible to conclude that the correspondence was delivered to the premises of the recipient/purchaser, such that the latter is in a position to become aware of the content of the correspondence addressed to them.

The Claimant further submitted extracts of the current account of the purchaser, revealing the reimbursement of the assessed tax, being this a document of the accounting records of the Claimant whose accuracy is presumed, save proof to the contrary, which would always be incumbent upon the Tax Authority to present, which it did not do, from which the respective consequences may be drawn.

Given that, without more, there are no reasons not to accept that the documents submitted correspond to reality, and it should be considered as proven the correctness of the regularization in question.

Regularization relating to credit note … – C, S.A.

In the case at hand, the Claimant failed to submit the postal receipt notice. Instead, for this purpose, the means of proof used was the internal correspondence register, in which the date of receipt of the respective notice is identified as 3-09-2010. It is also established as proven from the Inspection Report the identification of 5 credit notes addressed to the same purchaser C, S.A. (N.C … to …), whose second copies were sent via postal services, registered on 31-08-2012. The internal postal services dispatch control map submitted by the Claimant makes it possible to verify that the registered items dispatched were received by the purchaser on 03-09-2012.

Now, regarding the said means of proof, the Tax Authority states that the taxpayer used proof elements drawn up by itself that do not make it possible to demonstrate the intervention and awareness of the purchaser.

However, in light of article 78, no. 5 of the VAT Code, it will be incumbent, alternatively, to determine whether the Claimant has been able to prove that the purchaser was reimbursed the tax, and thus determine whether the deduction effected as regularization of the tax is or is not improper.

In effect, as far as the instructions provided for in Circular Official Letter No. 33129/1993 are concerned, which discloses the administrative understanding regarding the documents that are considered suitable to satisfy the conditionalities enunciated in no. 5 of article 78, it should be noted that the requirements enshrined therein do not derive from the law, but are rather mere administrative instructions or guidelines that do not have binding effect for taxpayers.

On this matter, European Union case law has understood that the requirements imposed by the tax authorities of the Member States regarding the formalities to be observed by taxpayers before the tax authorities of the said Member States, for the purpose of proceeding, in case of price reduction after the operation has been effected, to a reduction of the taxable value, may not call into question the principles of VAT neutrality and proportionality. Such principles require "that the Member State permit the taxpayer to demonstrate through other means, before the national tax authorities, on the one hand, that it has taken the necessary steps in the circumstances of the specific case to ensure that the purchaser of the goods is in possession of the rectified invoice and that they have become aware of it, and on the other hand, that the transaction in question was actually carried out in accordance with the conditions set out in the said rectified invoice. (See Judgment Kraft Foods, case C–588/10 of the CJEU, 2nd Chamber of 26-01-2012).

As far as the evidence that may be used by taxpayers is concerned, the CJEU designates in particular the following "copies of the rectified invoice and reminder addressed to the purchaser of goods and services for the purpose of sending proof of receipt, evidence of payments or the presentation of accounting records that make it possible to identify the amount actually paid to the taxpayer by the purchaser of goods or services" (See Judgment Kraft Foods, case C–588/10).

Now, as the Tax Authority acknowledges in its response to the request for arbitral ruling, the Claimant submitted extracts of the current account relating to the purchaser and to the regularization of the credit note, as well as the corresponding accounting entries, which support proof of the reimbursement of the tax.

It should be noted that the mere qualification of a document as "internal to the company" should not, without more, prejudice the suitability of the same as an element of proof of the facts invoked by the taxpayer. Should the Tax Authority suspect the accuracy of the credit note issued by the taxpayer and of the accounting entries recorded with respect to the regularizations recorded in the current account extract of the purchaser in question, it should raise the question of the falsity of the documents.

On the other hand, from the Tax Inspection Report, there is a set of VAT regularization movements in favour of the taxpayer, relating to the same client C, S.A., where various other credit notes are indicated, all issued on the same date, regarding which no doubt was detected by the Tax Authority as to the adequacy of the respective documentary procedure, accounting and awareness of the transactions in question by the purchaser.

Moreover, the Tax Authority has the possibility, in the exercise of its inspection powers, to determine whether the regularization has or does not have a correspondence in the accounting records of the Claimant, and the falsity of the documents presented is susceptible to implying criminal liability of whoever issued them and of whoever used them, so that, also in this case, and given the concrete circumstances, the Tribunal sees no reasons not to accept that the set of evidence referred to corresponds to reality.

Regularization relating to credit note … – D, Lda.

As for credit note no. …, the considerations made in the preceding points essentially apply, relating to the possibility of the taxpayer presenting any suitable documents capable of demonstrating the awareness of the rectification by the purchaser or, alternatively, that they were reimbursed the tax.

In this regard, the Claimant submitted the original and duplicate of the respective credit note sent to the purchaser, containing the receipt stamp of the latter duly countersigned. However, the Claimant did not submit the postal receipt notice from the postal services, and consequently the Tax Authority suspects that the document may have been manually prepared by the Claimant itself, even though the falsity of the document was not raised.

On the other hand, regarding the facts underlying the issuance of the credit note, the Claimant provides an additional explanation, clarifying that it was a billing error, since the invoice issued no. … and credit note related to the payment of an early termination of a leasing contract entered into with another client – E, S.A.

For this purpose, the Claimant submits all the accounting entries relating to invoice …, of 2008-10-25, issued to D, Lda., as well as the original and duplicate of the credit note. It also submits an extract of the contract with E, S.A.

The said entries make it possible to confirm the following:

· Extracts of client D, Lda. of 25/10/2008, with the indication of the number of the credit note sent – NC … – and the reference to "cancellation of Invoice/…" / amount (10,245.25), relating to a vehicle with registration …;

· Extract of client E, S.A. of 25/10/2008 with indication of Invoice …, amount 10,245.25, relating to a vehicle with registration …

(See document no. 8 submitted with the Request for Arbitral Ruling and PA).

Moreover, the steps undertaken by the Tax Authority itself point in the direction of the improper issuance of the invoice directed to D, as in a second attempt to clarify the situation with D, this entity clarifies by e-mail of 14-01-2014 addressed to the Tax Authority "that following the analysis of the 2nd copy of the Credit Note and the 2nd copy of the respective invoice, we conclude that:

1. A, S.A. improperly issued an invoice to D;

2. Since the invoice was improper to D, the latter returned the invoice to A;

3. A issued and sent to D a credit note to regularize the invoice improperly issued;

4. D returned the Credit Note to A, since both the initial invoice and the credit note were improper to D".

Proof is therefore made as to the corrective procedures carried out by the Claimant, in relation to the oversight that was at the origin of the issuance of credit note no. ….

In effect, given that it was an invoice and a credit note that did not relate to D, nor were they recorded by the latter in its accounting, it appears natural, in light of the rules of common experience, that an oversight occurred in the first response to Official Letter No. … from the Tax Authority, to the effect that credit note no. … of 2010-11-03 sent by supplier A had not been received, such that a second copy was requested for that purpose.

In view of this factuality, it is pertinent to call upon some of the most representative case law on this subject, specifically, the considerations made with respect to the proof required by article 71, no. 5 of the VAT Code (current article 78, no. 5):

(...) "The burden of proof that the purchaser became aware of the rectification effected by the appellant, by virtue of the issuance of a credit note or that they were reimbursed the tax, was incumbent upon the appellant, and it is certain that such proof could have been made through any suitable document".

(...)

"The documents proving the purchaser's knowledge of the rectification or reimbursement of the tax should be contained in the accounting records of the taxpayer, namely it would be easy for the appellant to present a copy of the check possibly issued in favour of the purchaser for the reimbursement of the VAT resulting from the rectification or extract from the current account or bank account where that amount was shown."

In Judgment of the Supreme Administrative Court, of 16.02.2005, case no. 01006/04, available at www.dgsi.pt

In this sense, the evidentiary elements offered are consistent, and despite lacunae having been detected as to the compliance with the requirements provided for in article 36, no. 6 of the VAT Code, the Claimant promoted the obtaining of complementary proof elements that appear credible, and therefore the VAT regularization contained in credit note no. … should be accepted.

The arguments invoked by the Respondent therefore do not have legal support.

III. OPERATIVE PART

a) Given the above, the Tribunal hereby decides to rule in favor of the request for declaration of illegality and annulment of the additional VAT assessment acts and respective compensatory interest.

b) To condemn the Respondent to pay the costs (article 22, no. 4, of the RJAT), fixing these at the amount of €612.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings.

Value of the case: In accordance with the provisions of article 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and article 3, no. 1 and 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is valued at €7,153.91.

Notification to follow.

Lisbon, 10 November 2014

The Arbitrator

(Filipa Barros)

[1] Acronym for Legal Regime of Tax Arbitration.

[2] See in this sense Nuno de Sá Gomes, Manual de Direito Fiscal, I, Editora Rei dos Livros, 1996, p. 240 et seq.; Soares Martinez, Direito Fiscal, 8th edition, Livraria Almedina, 1996, p. 618 et seq.; J. L. Saldanha Sanches, Manual de Direito Fiscal, 3rd edition, Coimbra Editora, 2007, p. 24 et seq. and 411 et seq.