Process: 278/2018-T

Date: February 12, 2019

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 278/2018-T) addresses the contested additional VAT assessments totaling €1,479,812.32 imposed on a Portuguese credit institution for tax years 2013-2014. The dispute centers on the bank's exercise of its right to deduct VAT (direito à dedução) as a mixed taxable person performing both exempt and taxable financial operations. The claimant made VAT corrections in its 2015 periodic declarations, applying specific real allocation criteria for various business activities including asset management, leasing process management, litigation management, recovered assets management, automatic payment terminals, securities custody, and project finance. The Tax Authority challenged these corrections through Service Order OI2017, arguing the deductions were improper and violated VAT deduction rules. The bank contested the assessments and compensatory interest through tax arbitration at CAAD, alleging the Tax Authority's position was based on illegal premises that restricted the legitimate exercise of VAT deduction rights and compromised the fundamental principle of VAT neutrality. The case involves critical issues regarding mixed taxable persons' ability to determine appropriate allocation methodologies for VAT purposes, the boundaries of the Tax Authority's power to restrict deduction rights, and the application of EU VAT principles of neutrality and proportionality in Portuguese tax law. The arbitral tribunal, constituted under RJAT provisions, examined whether the additional assessments legally restricted the bank's VAT deduction rights for expenses incurred in its economic activities during the relevant periods.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), A. Sérgio de Matos and Clotilde Celorico Palma, designated by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree on the following

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

On 4 June 2018, A... SA, Tax ID No...., with registered office at Rua ... ..., ...-... PORTO, filed a request for constitution of an arbitral tribunal, under 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 the declaration of illegality of the acts imposing additional VAT assessment No.s..., ..., ... and..., of 5 March 2018, of the acts demonstrating VAT assessment No. ... and 2018..., of 5 March 2018, of the acts demonstrating account reconciliation No. 2018... and 2018..., of 7 March 2018, as well as of the acts demonstrating VAT interest assessment No. 2018... and 2018..., of 5 March 2018, and of the acts demonstrating account reconciliation of VAT interest No. 2018... and 2018..., of 7 March 2018, both of 2015, in the amount of € 1,479,812.32.

To support its request, the Claimant alleges, in summary, that the tax acts imposing VAT assessment and compensatory interest are based on illegal premises concerning the exercise of the right to deduct VAT incurred by the Claimant for the purposes of its activity, during the years 2013 and 2014, restricting the exercise of such right and compromising the neutrality which constitutes the cornerstone of the discipline of that tax.

On 05-06-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant did not proceed to appoint an arbitrator, thus, under the provisions of paragraph a) of Article 6(2) and paragraph a) of Article 11(1) of the RJAT, the President of the Ethics Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 24-07-2018, the parties were notified of these designations, having manifested no intention to refuse any of them.

In accordance with the provisions of paragraph c) of Article 11(1) of the RJAT, the collective Arbitral Tribunal was constituted on 13-08-2018.

On 01-10-2018, the Respondent, duly notified for this purpose, filed its defence by way of objection.

Under the provisions of paragraphs c) and e) of Article 16 and Article 29(2), both of the RJAT, the holding of the meeting referred to in Article 18 of the RJAT was dispensed with.

Having been granted a period for submission of written submissions, the parties refrained from submitting them.

It was indicated that the final decision would be notified by the end of the period provided for in Article 21(1) of the RJAT.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2(1)(a), 5 and 6(2) 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 Ordinance No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

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

Having considered everything, it is necessary to render

II. DECISION

A. MATTERS OF FACT

A.1. Facts Established as Proven

The Claimant is a credit institution, classified for VAT purposes as a mixed taxable person, under the normal monthly periodicity regime.

In the course of its activity, the Claimant performs financial operations that fall within the exemption provision contained in Article 9(27) of the VAT Code, which do not confer the right to deduct this tax.

Simultaneously, the Claimant performs financial operations that, as they do not fall within the exemption provisions set out in Article 9(27) of the aforementioned VAT Code, confer the right to deduct this tax under general terms.

In this context, the Claimant acquires resources that are exclusively allocated to VAT-taxable operations not exempted by it (thus conferring the right to deduct VAT incurred), as it also acquires resources that are exclusively allocated to exempt operations carried out by it (which do not confer the right to deduct VAT incurred).

Additionally, the Claimant also acquires resources that are allocated simultaneously to both types of operations described above (mixed-use resources).

The Claimant made a correction in its favour – including, for this purpose, in field 40 of the periodic declaration for the month of March 2015, the amount of € 644,093.72 – which it considered deductible tax within its sphere, by virtue of the determination of a specific real allocation criterion for the asset management activity relating to its own portfolio of securities, for the years 2013 and 2014.

In the same periodic declaration, the Claimant made a correction of the amount of tax of € 236,087.67, referring to 1% of the specific allocation coefficient determined for the year 2014, by virtue of the variation of the provisional specific allocation coefficient to the definitive coefficient of the said year - (€ 244,442.66), as well as of the VAT incurred on the acquisition of diesel (€ 1,612.92) minus the tax relating to the correction of credit notes (€ 9,967.90).

In the periodic declaration of August 2015, the Claimant made a correction of the total amount of € 252,061.963, referring to:

  • determination of a real allocation criterion for VAT deduction in the area of management of leasing processes, ALD and credit contracts with retention of title ("CRP"), having corrected in its favour the amount of € 3,944.92, referring to the years 2013 and 2014;

  • determination of a real allocation criterion for the area of management of litigation ("DRCE - Litigation") having corrected in its favour the amount of € 203,403.17, referring to the years 2013 and 2014; and,

  • determination of a real allocation criterion for the area of management of recovered assets ("DRCE - Management of recovered assets"), having the Claimant made a correction in its favour of the amount of tax of € 44,713.87, also referring to the years 2013 and 2014.

In the periodic declaration of October 2015, the Claimant corrected in its favour the amount of tax of € 133,092.654, by virtue of the determination of a real allocation criterion for the VAT deduction specifically incurred, in the years 2013 and 2014, for the activity area of automatic payment terminals.

In the periodic declaration of December 2015, the Claimant made a correction in its favour of the amount of € 117,269.47, corresponding to the year 2014, referring to the determination of a real allocation criterion for the area of custody of securities, project finance and leasing, ceasing the tax incurred for the performance of these activities to be deducted in accordance with the specific allocation coefficient determined by it.

Under Service Order No. OI2017..., of 11-04-2017, the Claimant was subject to a general scope tax inspection procedure with reference to the year 2015, from which corrections in VAT in the amount of € 1,382,605.47 (€ 644,093.72 + € 236,087.67 + € 252,061.96 + € 133,092.65 + € 117,269.47) resulted, stemming from the corrections, which were considered to be improper.

After being notified of the Draft Tax Inspection Report, the Claimant exercised the corresponding right to a hearing.

The Tax Authority sent to the Claimant the Final Tax Inspection Report, pursuant to which it maintained in its entirety the previously presented tax correction proposals, thus issuing, as a consequence, the following tax acts:

A.2. Facts Established as Not Proven

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

A.3. Substantiation of the Proven and Unproven Matters of Fact

Regarding matters of fact, the Tribunal does not have to rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate between established and unestablished matters (see Article 123(2) of the CPPT and Article 607(3) of the CPC, applicable by virtue of Article 29(1)(a) and (e) of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delineated in accordance with their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see former Article 511(1) of the CPC, corresponding to current Article 596, applicable by virtue of Article 29(1)(e) of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110(7) of the CPPT, and the documentary evidence attached to the file, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Judgment of the TCA-South of 26-06-2014, rendered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".

No allegations made by the parties, presented as facts, consisting of strictly conclusive statements incapable of proof, whose truthfulness must be assessed in relation to the specific matters of fact consolidated above, were taken as proven or not proven.

B. ON THE LAW

The issue in the present arbitral tax proceedings concerns whether the Claimant was entitled, in the periodic declarations of March, August, October and December 2015, to deduct amounts of tax (VAT), determined by application of the pro rata and/or real allocation methods, incurred in 2013 and 2014, which, through oversight, it would not have deducted in the declarations of the corresponding periods.

Indeed, the Claimant itself expressly acknowledges that "The Claimant proceeded, in the year 2015, in the periodic declarations relating to the tax periods of March, August, October and December, to various VAT corrections in its favour, referring to corrections to the deductions of tax incurred in the years 2013 and 2014, in the context of the acquisition of mixed-use resources which, due to error, it did not deduct in accordance with the regime established by the VAT Directive and the Portuguese VAT Code."

A similar question was already addressed within the scope of arbitral proceedings No. 185/2014T and 549/2016T of CAAD, the latter being subject to a recourse by way of opposition of judgments to the STA, which in its judgment of 20-12-2017, rendered in case 0366/17, upheld the arbitral decision in question.

In this regard, Article 22 of the applicable CIVA (VAT Code) provides:

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

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

3 — If the receipt of the documents referred to in the previous number takes place in a declaration period different from that of their issuance, deduction may be made, if still possible, in the declaration period in which such issuance took place.

Whenever the deduction of tax due exceeds the amount of tax due on the taxable operations, in the corresponding period, the excess is deducted in the following tax periods.

5 — If, after 12 months relating to the period in which the excess began, credit in favour of the taxable person exceeding € 250 persists, it may request its refund."

With further relevance to the present case, Article 23(6) of the CIVA, as applied by the Tax Authority, provides:

"The deduction percentage referred to in paragraph b) of paragraph 1, provisionally calculated on the basis of the amount of operations carried out in the previous year, as well as the deduction made in accordance with paragraph 2, provisionally calculated on the basis of the objective criteria initially used for application of the real allocation method, are corrected in accordance with the final values relating to the year to which they refer, giving rise to the corresponding correction of deductions made, which must appear in the declaration of the last period of the year to which it relates."

The Claimant bases its claim on paragraph 2 of the transcribed Article 22 of the applicable CIVA, namely in the part in which it refers to "deduction must be effected in the declaration of the period or of a period subsequent to that in which the receipt of invoices or receipt of VAT payment forming part of the import declarations has occurred".

In this regard, the STA Judgment of 18-05-2011, rendered in case 0966/10, states:

"I – As a rule, established in Article 22(1) of the CIVA, VAT deduction must be effected in the declaration of the period in which the receipt of invoices, equivalent documents or receipt of VAT payment forming part of the import declarations has occurred, although the possibility of corrections provided for in Article 71 is admitted.

II – Thus, VAT deduction cannot be effected at any moment, at the choice of the taxable person, the useful scope of the aforementioned rules being that they indicate the appropriate moments for deduction precisely to exclude that this can be done at different moments, when this is not specially provided for.

III – Paragraph 2 of Article 92 of the CIVA, by establishing that the right to deduction can only be exercised up to the limit of four years after the birth of the right to deduction, does not have the scope of granting the taxable person the freedom to choose any moment within that period to effect the deduction, but rather to set a maximum limit that cannot be exceeded, even in cases where deduction can be effected at moments different from those indicated in that Article 22.

IV – Besides Article 71(6) of the CIVA, there is no legal provision that can be interpreted as permitting the taxable person to exercise the right to deduction at a moment subsequent to those indicated by Article 22, in cases where, due to an oversight in its accounting, it only detects that it had the right to deduction at a moment subsequent to when it should have effected it."

Further written in the aforementioned Judgment was:

"Community law, which takes precedence over internal law provided that the fundamental principles of the democratic rule of law are not violated (as is expressly established since the 2004 constitutional revision in Article 8(4) of the CRP and was already understood previously), points to the correctness of this interpretation. (...)

From this regulation, it is concluded that VAT deduction can only be effected outside the moments considered appropriate under conditions that will be set, which rules out the viability of a thesis that amounts to the attribution to the taxable person of the right to make the deduction when it sees fit, within the maximum period legally allowed."

That is, as a rule VAT deduction must be effected, in accordance with the provision of Article 22 of the CIVA, in the "declaration of the period in which receipt of invoices" has occurred.

The exception would be that deduction could be effected in a declaration "of a period subsequent to that", when, as the aforementioned STA judgment indicates, such is specially provided for, which is what happens in the cases provided for in Article 23(6), in which deduction must be effected in the "declaration of the last period of the year to which it relates."

Indeed, the provision of Article 22(2) in question, even in its present wording, only makes sense to exist, precisely, by proscribing the existence of discretion on the part of the taxable person in the choice of the period for proceeding with deduction. If not, as occurs in the interpretation sustained by the Claimant, the provision in question would lose any useful effect, since it would be limited to ruling out the deductibility of tax incurred in a period prior to its incidence, which would make no sense.

Thus, and in this manner, bearing in mind the hermeneutic criterion of the reasonable legislator, the interpretation to be made of the provision of Article 22(2) of the CIVA should be in the sense of imposing VAT deduction incurred in the declaration of the period in which receipt of invoices or receipt of VAT payment has occurred, permitting deduction in a subsequent period only in the circumstances in which Article 22 itself specifically provides for, namely in paragraphs 4 and 5, that is, in the case where the amount of tax to be deducted exceeds the amount of tax to be paid, or in other specially provided cases, such as Article 23(6) of the CIVA.

That is, and in sum, the expression "of a period subsequent to that" used in Article 22(2) of the CIVA is not intended to permit the taxpayer to choose the period in which it wishes to deduct tax incurred, but rather to refer to situations in which the law itself allows/requires that such occur.

It is thus concluded that the reference to "subsequent period" made in Article 22(2) of the CIVA refers to situations in which, specially, the possibility of VAT deduction in a subsequent period is admitted (as is the case with Article 23(6) of the CIVA, which permits deduction of tax in the last declaration of the year to which it relates), being this the only interpretation consistent with the provision of Article 179 of Directive 2006/112/EC, of the Council, of 28 November 2006, on the common system of value added tax (VAT Directive), which provides that: "The taxable person effects the deduction by subtracting from the total amount of VAT due for the taxation period the amount of VAT in respect of which, during the same period, the right to deduction arose and is exercised pursuant to Article 178." (emphasis ours).

Therefore, in sum, the rule is that, except for specially provided exceptions, and in accordance with these, VAT deduction must be made in the periodic declaration corresponding to the period in which the VAT to be deducted was incurred, and not, freely, in any other subsequent declaration, since this is the appropriate manner to ensure that VAT is deducted in the same period in which it is incurred.

The case provided for in Article 23(6) of the CIVA constitutes one of these specially provided exceptions, and, in the words of the Claimant "The rule is clear: when taxable persons who do not determine the amount of VAT throughout the year deductible in accordance with the pro rata and/or real allocation methods, which are used provisionally throughout the year, must, in the periodic declaration of the last period of the year to which they relate, correct their provisional deduction, in accordance with the values determined at the end of the year."

That is, in these cases, of application of the pro rata and/or real allocation methods, the corrections to be made should operate in the last declaration of the year to which they relate, and not, as equally occurs with the moment fixed in Article 22(2) of the CIVA, in a subsequent declaration, there being, also in these cases referred to in Article 23(6) of the CIVA, no reason, on the contrary, to, contrary to the aforementioned STA case law, recognize the existence of discretion on the part of the taxable person in the choice of the period for proceeding with the corrections in question.

The Claimant submits that the provision of Article 23(6) of the CIVA "only establishes the legal regime for the determination of the amount of tax definitively deductible in light of the provisional deduction criteria adopted, in situations involving taxable persons who determine deductible tax in accordance with the pro rata and/or real allocation methods."

With all due respect, it is believed that this argument is not correct, since the aforementioned provision also fixes the period of the declaration in which the deduction, in these cases of correction, must appear, which is the declaration of the last period of the year to which it relates.

A distinct matter – and not incompatible – with such provision is the period for exercising the right to deduction, which corresponds to the period of time during which it is permitted for the taxable person to exercise the right to deduction that is due to it in a given period.

Thus, Article 98(2) of the CIVA, also invoked by the Claimant, establishes a maximum limit of four years for the exercise of the right to deduction, which does not prejudice, nor is incompatible with, the national and community obligation, duly recognized by the STA, that such exercise be effected in the declaration of the tax period resulting from the legal rules governing such matter.

To avail itself of the four-year period provided for in the aforementioned provision, the taxable person should have filed a replacement declaration or filed a request for official review within the respective period. Not having done so, not resorting to the channels provided for this purpose, it could not have done so in the periodic tax declarations as if it were a normal situation of VAT liquidation and deduction in the corresponding tax period. Indeed, replacement declarations are intended precisely to replace the corresponding declaration of the tax period in which an error of fact or law was detected, and the taxpayer may also resort to filing a request for review of the tax act. Thus, and because the taxable person did not resort to the appropriate procedures for this purpose, the application of the provision of Article 98(2) of the CIVA does not apply in the present case.

It is thus impossible to sustain the position of the Claimant in this matter, whether the decision in arbitral case 117/2013T of CAAD, invoked by the Claimant, or the arbitral and STA case law that has since emerged in that direction, since in those cases the deductions that the taxable persons sought to exercise, and were recognized, were disclosed in the declarations of the corresponding periods, as prescribed by Article 22(2) of the CIVA, replacement declarations having been filed or requests for official review of the tax acts.

The regime in question is thus not incompatible with the understanding that the exercise of the right to deduct VAT is a fundamental right that ensures the neutrality of VAT, and should only be restricted in exceptional situations.

Indeed, as the Court of Justice of the European Union has successively emphasized, and as results from the wording of Articles 167 and 179(1) of the VAT Directive, the right to deduction is exercised, in principle, during the same period in which it arose, that is, at the moment when the tax becomes due. However, in accordance with the provisions of Articles 180 and 182 thereof, the taxable person may be authorized to proceed with VAT deduction, even though it has not exercised its right during the period in which such right arose, without prejudice to the observance of certain conditions and rules laid down by national regulations (see, in this regard, Judgment of 8 May 2008, Case C-95/07, Ecotrade, Coll., p. I-03457, nos. 42 and 43).

That is, taxable persons 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 such right arose. However, in that case, their right to deduction becomes dependent on certain conditions and modalities laid down by the Member States.

In this context, the CJEU has noted that the possibility of exercising the right to deduction without time limits contradicts the principle of legal certainty, which requires that the tax situation of the taxable person, given its rights and obligations with respect to the Tax Authority, not be indefinitely susceptible to being challenged, thus rejecting the thesis that the right to deduction, like the right to liquidation, cannot be associated with a period of limitation. In this regard, the CJEU invokes the principles of effectiveness and equivalence.

With respect to the first, it notes that the period of limitation provided for cannot, by itself, make the exercise of the right to deduction practically impossible or excessively difficult; as for the second, it has analyzed whether in the situations submitted to its consideration there is an equivalence between the period of limitation granted to taxable persons and the period granted to the Tax Authority to make corrections, having concluded, including, that this principle is not contravened by the fact that, in accordance with national regulation, the Tax Authority has, to require payment of VAT due, a longer period than that granted to taxable persons to request its deduction (see, Ecotrade case, already cited, nos. 43 to 49).

As it notes, although Member States have the power to adopt, under Article 273 of the VAT Directive, measures to ensure the correct collection of the tax and prevent fraud, these must not, however, go beyond what is necessary to achieve such objectives (principle of proportionality) and must not compromise the neutrality of VAT (see, in particular, Judgment of 21 October 2010, Nidera case, Case C-385/09, Coll., p. I-10385, no. 49). Now, neither the principle of proportionality nor the principle of neutrality are compromised by such a solution.

Indeed, it is in this context that, in national legislation, it is provided that, in particular, when material or calculation error occurs, that has occurred to the detriment of the taxable person, it can be corrected within the period fixed in Article 78(6) of the CIVA.

Other types of errors may be corrected by filing a replacement declaration, if such is still, according to legal terms, possible, or, if not, by filing a request for official review, in accordance with Article 78 of the LGT, provided that the corresponding prerequisites are also met, and that is the meaning of Article 98(2) of the CIVA, when it prescribes that "the right to deduction or refund of tax paid in excess can only be exercised up to four years after the birth of the right to deduction or payment in excess of tax, respectively", as the respective heading ("Official review and period for exercise of the right to deduction") and systematic placement (Chapter relating to "Guarantees of taxable persons", following the provision relating to "Hierarchical review, complaint and objection" and preceding the provision relating to "Annulment of the assessment") evidence.

Beyond these cases, supervening facts are also admissible, in accordance with the regime regulated by Article 78(2) of the CIVA. It must be well understood, however, that one thing will be an error (a discrepancy between the reality represented in the periodic declaration and reality – error of fact – or the 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.

In the present case, manifestly and confessedly, what occurred was, not the supervening occurrence of any fact, but rather an error – not material or calculation error – but of law, which would have translated into the qualification as non-deductible of tax which, a posteriori, the Claimant would have come to realize that, after all, would be deductible.

Thus, and as is clear, between the filing of the periodic declarations corresponding to the moment when the tax, subsequently understood as deductible, was incurred, and the filing of the periodic declarations where that same tax was deducted, no alteration in reality occurred (much less any of those described in Article 78(2) of the CIVA). What occurred was that the Claimant became aware that the legal classification it made of the tax incurred by it – as regards its deductibility – would not have been correct, that is, that it had incurred an error.

Thus, the error in question will not be correctable in accordance with Article 78(2) of the CIVA, firstly because such provision is not intended for the correction of errors, and thus will not be correctable in accordance with Article 78(6) of the same provision, since it is not a calculation error (it does not translate into the incorrect articulation of components of arithmetic operations), nor a material error (a discrepancy between what was written and what, manifestly, one wished to have written at the moment of writing).

The error in question – an error of law – as has been recognized for some years by case law both arbitral and of the state tax tribunals, will be correctable in accordance with Article 98(2) of the CIVA, by means of filing a replacement declaration or request for review of the tax act, observing the 4-year period provided therein and not through the deduction of the tax in periodic declarations relating to subsequent periods, even if filed within this period.

That is: the correction of the situation, in light of all the above, would always have to occur by reference to the periodic declaration in which the tax to be deducted must appear, as fixed in Article 23(6) of the CIVA, if, and under the conditions in which, legally the alteration thereof – by the taxpayer's initiative or, officially, by the Tax Authority, even at the request of the latter – can take place, that is, by means of filing the corresponding replacement declarations or by filing a request for official review.

The legal regime in question, thus interpreted, will not therefore entail any violation of the principle of VAT neutrality, as the Claimant contends, but rather the contrary, since it is from the very principle of neutrality that the obligation derives that VAT incurred be deducted, as a rule, in the period in which it was incurred, and exceptionally, in the periods specially provided for such cases, without in any case granting discretion to the taxable person in the choice of the period to proceed with the corrections in question.

The possibility of, in accordance with what has been set out above (that is, at the limit, by means of filing a request for review of the VAT self-assessment tax act of the period in which the deduction should have appeared, omitted due to error of fact or law), the taxpayer making its right to deduction effective during the 4-year period (provided for in Article 78(1) of the LGT and Article 98(2) of the CIVA), does not make the exercise of such right practically impossible or excessively difficult, nor place the taxpayer in a situation of inequality with other taxpayers, or with the Tax Authority, with no violation thus being verified, it is believed, of the constitutional principles of equality and/or the primacy of European law, contrary to what the Claimant contends.

Considering, then, that Article 23(6) of the CIVA does not authorize the Claimant to, in the periodic declarations of March, August, October and December 2015, deduct amounts of tax (VAT), determined by application of the pro rata and/or real allocation methods, incurred in 2013 and 2014, which, through error, it would not have deducted in the declarations of the corresponding periods imposed by that Article 23(6) of the CIVA, and that Article 98(2) of the CIVA refers, not to a generic period for exercising the right to deduct VAT in the periodic declarations of each of the periods covered by the 4-year period provided therein, but to the exercise of such right by means of filing a replacement declaration or request for official review of the tax act (to which Article 78 of the LGT refers) relating to the period of the tax declaration in which the deduction, through error, was not disclosed, the present arbitral action should be judged entirely ungrounded.

The Claimant lastly suggests, on a subsidiary basis, a request for preliminary ruling, suggesting the following tenor:

"Articles 167 et seq. and Articles 184 et seq. of Directive No. 2006/112/EC of the Council, of 28 November 2006, as well as the principles of neutrality and equivalence must be interpreted to the effect that:

1 - They preclude Portuguese VAT legislation from implementing different periods for the correction of analogous (or identical) tax rights based on Union law, specifically the possibility of correction of the right to deduct VAT for calculation or material error within the period of 2 (two) years and for error of law within the period of 4 (four) years?

2 - Given the existence of these two different periods for the exercise of analogous (or identical) rights, should it be made possible, in either situation (material or calculation error or error of law), to correct the deduction within the longest legal period provided (i.e., 4 years) so as not to compromise the neutrality of the VAT system and the equality of taxable persons subject to this tax?"

As results from the substantiation set forth above, it is manifest that the questions formulated would in no way contribute to the resolution of the present case.

Thus, with no doubt on the part of this Tribunal as to the conformity of the solution adopted with community law, as likewise stated in the preceding substantiation, no preliminary ruling was made.

C. DECISION

For these reasons, this Arbitral Tribunal decides to render the arbitral claim entirely ungrounded and, in consequence:

  • Dismisses the Respondent from the claim, maintaining the tax acts subject to the present arbitral action;

  • Condemns the Claimant in the costs of the proceedings, fixed below.

D. Value of the Proceedings

The value of the proceedings is fixed at € 1,479,812.32, in accordance with Article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of Article 29(1) of the RJAT and Article 3(3) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at € 19,890.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the claim was entirely ungrounded, in accordance with Articles 12(2) and 22(4), both of the RJAT, and Article 4(5) of the aforementioned Regulation.

Notify accordingly.

Lisbon, 12 February 2019

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(A. Sérgio de Matos)

The Arbitrator Member

(Clotilde Celorico Palma)

Frequently Asked Questions

Automatically Created

What is the right to deduct VAT (direito à dedução) under Portuguese tax law and how can it be exercised?
The right to deduct VAT (direito à dedução) under Portuguese tax law allows taxable persons to deduct input VAT incurred on goods and services used for their taxable economic activities. For mixed taxable persons like banks performing both exempt and taxable operations, deduction is exercised through allocation methodologies. Resources exclusively used for taxable operations generate full deduction rights, while those for exempt operations do not. Mixed-use resources require specific allocation criteria or pro-rata calculations. The deduction is exercised through periodic VAT declarations (declarações periódicas), where taxpayers claim input VAT in field 40. Portuguese law, aligned with EU VAT Directive provisions, permits real allocation methods based on actual use when these more accurately reflect economic reality than standard pro-rata calculations.
Can the Portuguese Tax Authority (AT) issue additional VAT assessments for restricting the right to VAT deduction?
Yes, the Portuguese Tax Authority can issue additional VAT assessments (liquidações adicionais) when it determines that taxpayers have improperly exercised their right to VAT deduction. These assessments typically result from tax inspections (ações de inspeção tributária) where the AT examines periodic declarations and challenges deduction methodologies. In this case, the AT issued additional assessments totaling €1,479,812.32 through Service Order OI2017, rejecting the bank's specific allocation criteria for various business activities. However, such assessments must comply with legal requirements and respect fundamental VAT principles including neutrality and proportionality. Taxpayers can challenge these assessments through administrative procedures or tax arbitration at CAAD, arguing the assessments are based on illegal premises that unlawfully restrict legitimate deduction rights.
How does the principle of VAT neutrality apply to the exercise of deduction rights in Portugal?
The principle of VAT neutrality (princípio da neutralidade) is fundamental to Portuguese VAT law and requires that VAT not constitute a cost for taxable persons conducting economic activities. This principle ensures businesses can deduct input VAT related to taxable outputs, preventing cascading taxation and competitive distortions. For mixed taxable persons, neutrality requires allocation methodologies that accurately reflect actual use of resources between taxable and exempt activities. Restrictions on deduction rights must respect this principle and cannot arbitrarily deny deductions for VAT genuinely incurred for taxable operations. The Tax Authority's power to challenge deduction methodologies is limited by the need to preserve VAT neutrality, and assessments that compromise this cornerstone principle may be deemed illegal through arbitration proceedings.
What is the procedure for challenging additional VAT assessments through CAAD tax arbitration in Portugal?
Challenging additional VAT assessments through CAAD (Centro de Arbitragem Administrativa) involves filing a request for constitution of an arbitral tribunal under RJAT (Legal Framework for Arbitration in Tax Matters - Decree-Law 10/2011). The taxpayer must submit the request within 90 days of notification of the contested acts, identifying the illegal assessments and supporting legal grounds. The process includes: (1) filing the arbitration request identifying contested acts and amounts; (2) automatic notification to the Tax Authority; (3) constitution of the arbitral tribunal (single or collective, with arbitrators designated by CAAD's Ethics Council if parties don't appoint); (4) Tax Authority's written defense; (5) optional hearing and written submissions; and (6) final arbitral decision within statutory deadlines. CAAD arbitration provides an alternative to judicial tax courts, offering specialized expertise in tax matters with binding decisions subject to limited appeal grounds.
What are the legal consequences of illegal VAT assessments and compensatory interest under Portuguese law?
Illegal VAT assessments under Portuguese law must be annulled, with taxpayers entitled to reimbursement of amounts paid plus compensatory interest (juros compensatórios). When arbitral tribunals or courts declare assessments illegal, the Tax Authority must reverse the liquidations and related account reconciliations (notas de cobrança). If the taxpayer paid the contested amounts, reimbursement includes compensatory interest calculated from payment date until refund, currently at the legal rate established annually. Conversely, if assessments are upheld, taxpayers owe the assessed VAT plus compensatory interest from the original due date. The illegality may stem from procedural defects, incorrect legal interpretation, or violation of fundamental principles like VAT neutrality. Declaration of illegality prevents enforcement measures and eliminates tax debt, restoring taxpayers to their pre-assessment position and vindicating their legitimate exercise of deduction rights under Portuguese and EU VAT law.