Process: 29/2018-T

Date: September 27, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 29/2018-T) addresses the requirements for VAT regularization under Article 78 of the Portuguese VAT Code (CIVA), specifically concerning credit notes and the necessity of buyer notification. The taxpayer, A... S.A., challenged additional VAT assessments totaling €18,684.67 for 2012, arising from a tax inspection that questioned VAT regularizations made through credit notes. The Tax Authority (AT) argued that the taxpayer failed to prove purchaser notification or reimbursement as required by Article 78(5) CIVA. The core legal dispute centered on whether Article 78(5)'s strict requirements apply to all VAT regularizations or only to those involving contract modifications (annulments, price reductions, returns). The taxpayer contended that most regularizations involved duplicate invoicing errors—constituting 'inaccurate invoices' under Article 78(3) CIVA—not contract modifications under Articles 78(2), (4), (5), and (13). For duplicate invoices never communicated to buyers, the taxpayer argued no notification obligation exists for corrective credit notes. The distinction is critical: Article 78(3) allows regularization of inaccurate invoices without proof of buyer notification, while Article 78(5) requires such proof for contract-based adjustments. The taxpayer had partially paid the assessments (€12,174.09 contested as undue) and sought reimbursement plus compensatory interest. This case exemplifies the importance of properly characterizing VAT regularizations and maintaining appropriate documentation, particularly distinguishing between substantive transaction changes and administrative billing errors in Portuguese VAT compliance.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

I. REPORT

  1. On 24 January 2018, the commercial company A..., S.A., Tax ID No. ..., with registered office at ..., No. ... (hereinafter, Claimant), filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, paragraph a), and 10, nos. 1, paragraph a), and 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as LRAT), aiming at the declaration of illegality and partial annulment of acts of additional VAT assessment and compensatory interest nos. 2016..., 2016..., 2016..., 2016..., 2016..., 2016... and 2016..., relating to the year 2012, in the total amount of € 18,684.67.

The Claimant attached five (5) documents and did not request the production of any other evidence.

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

1.1. In essence and in brief summary, the Claimant alleged the following:

It was subject to an internal inspection procedure, of partial scope (VAT), covering various taxation periods of the year 2012, with the objective of controlling the value entered in field 40 of the periodic VAT declarations and assessing its legitimacy and compliance, from which resulted purely arithmetic corrections in the VAT assessment.

Specifically, the AT improperly considered regularized the VAT inherent to various credit notes issued by the Claimant, in the amount of € 16,596.88, by virtue of the absence of proof that the purchasers became aware of the regularization or were reimbursed the tax – as required by no. 5 of article 78 of the VAT Code – having proceeded to correct it.

According to the Claimant, a large part of the regularizations at issue here were not undertaken on the basis of nos. 2 and 5 of article 78 of the VAT Code, that is, we are at the antipodes of situations of annulment of sale or provision of services, reduction of its taxable value resulting from invalidity, resolution or reduction of the contract, namely, by return of goods or granting of allowances or discounts on already invoiced and recorded operations, and therefore nos. 4, 5 and 13 of article 78 of the VAT Code do not apply, relative to a large part of the regularizations undertaken and now disputed, so the compliance with the formalism imposed therein for the legitimation of the regularization is not required.

The Claimant filed a gracious appeal against the contested additional VAT and compensatory interest assessment acts, which was partially granted.

The Claimant seeks the partial illegality of the contested assessment acts, based essentially on the inadequacy of the position defended by the AT regarding the necessity of undertaking corrections for not having presented the proof referred to in no. 5 of article 78 of the VAT Code and also on erroneous quantification of VAT properly regularized in favor of the Claimant (identified in the Table on page 9 of the information underlying the partial granting of the gracious appeal).

The Claimant states that, in the present case, we are in the domain of inaccurate invoices, subsumable under no. 3 of article 78 of the VAT Code and not in the domain of alterations or annulment of taxable operations, subsumable under nos. 2, 4, 5 and 13 of the same article 78.

Therefore, says the Claimant, the duplicated issuance of invoices, subsequently accounted for, can only be subsumed in the concept of "inaccurate invoice" foreseen in no. 3 of article 78 of the VAT Code, since, by way of duplication, some of the requirements stipulated in no. 5 of article 36 of the VAT Code, specifically those foreseen in the respective paragraphs c) and d), were not suitably and adequately observed. In fact, the price (duplicated) and the amount of tax (equally duplicated) indicated in the invoices issued (subject to annulment through the issuance of a credit note) was not in accordance with the reality which those invoices should have recorded, insofar as that reality had already been reflected in the issuance of the invoices which were sent to the respective recipient and which, these indeed, were correct. The internal error consisted thus in the duplicated issuance of invoices intended to record the same factual reality. Furthermore, if the duplicated invoices were not brought to the knowledge of the respective recipient, neither did the credit note which subsequently annulled the said invoices have to be communicated and brought to the knowledge thereof.

The Claimant proceeded to payment of the contested additional VAT and compensatory interest assessments.

Not having the amounts received by the AT been duly legitimated, as the tax assessment acts of additional VAT and compensatory interest are shown to be vitiated by illegality, the AT's conduct constitutes an error imputable to its services resulting in the payment of undue VAT of € 10,813.79 and compensatory interest of 1,360.30 (calculated proportionally to the undue amount of tax), in a total of € 12,174.09.

Thus, the Claimant is creditor of the AT for the amount of € 12,174.09, to which are added accrued and accruing indemnity interest until the issuance of the respective payment means.

The Claimant concludes its initial pleading by requesting the following:

"For which reason the Arbitral Tribunal should:

Consider the disputed assessments partially illegal, consisting of such defect in the reasoning that we have set out above and which we reiterate here, sanctioning such illegality with the legal consequence of partial annulability of the contested assessment acts and the maintenance of the values resulting from the various self-assessments undertaken by the here Claimant in the taxation periods of 2012, increased by the corrections accepted by the Claimant;

Order the partial refund of the tax additionally assessed and here contested (in the meantime paid, cf. docs. nos. 4A, 4B, 4C, 4D, 4E, 4F and 4G) and also the assessment and payment of the respective indemnity interest that here the Claimant considers due, since from payment (undue) and until the pronouncement of the decision of Your Excellencies (which we hope will be favorable) will be disbursed of relevant amounts that are theirs and whose availability is not enjoyed by themselves.

Thus may Justice be done!"

  1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on 30 January 2018.

  2. The Claimant did not proceed to appoint an arbitrator, and therefore, pursuant to the provision of no. 1 of article 6 and paragraph a) of no. 1 of article 11 of the LRAT, the President of the CAAD Deontological Board appointed the signatory as arbitrator of the singular Arbitral Tribunal, who communicated acceptance of the appointment within the applicable period.

  3. On 14 March 2018, the Parties were duly notified of this appointment and manifested no intention to refuse the arbitrator's appointment, pursuant to the combined provisions of article 11, no. 1, paragraphs b) and c), of the LRAT and articles 6 and 7 of the CAAD Code of Ethics.

  4. Thus, in conformity with the provision of paragraph c) of no. 1 of article 11 of the LRAT, the singular Arbitral Tribunal was constituted on 4 April 2018.

  5. On 10 May 2018, the Respondent, duly notified for such purpose, filed its Response in which it specifically impugned the arguments raised by the Claimant and concluded for the dismissal of the present action, with its consequent absolution from the claim.

The Respondent attached no documents nor requested the production of any other evidence.

6.1. In essence and also briefly, it is important to extract the most relevant arguments upon which the Respondent based its Response:

Although the Claimant filed the request for arbitral pronouncement of the tacit dismissal of the gracious appeal filed, an express dismissal decision was subsequently handed down in that procedure.

The statements that bind companies have a legal form and must be emanated by holders of the right of representation thereof, so that an email between two officials without such rights does not constitute legal proof that the company recognizes a VAT regularization.

In accordance with the understanding that the Claimant itself accepts, the documents that can be accepted for the purposes of no. 5 of article 78 of the VAT Code are those specified in Circular Letter no. 33129, of 02/04/1993 and in Binding Information Proc. no. 6770.

On the other hand, to say that regularizations foreseen in no. 3 of article 78 of the VAT Code are not subject to the provisions of its no. 5 is manifestly wrong and has no legal support whatsoever.

Although it is in this argument that the Claimant bases the greater part of its argumentation, it is manifest that the provision of no. 5 of article 78 of the VAT Code applies to any of the tax regularizations in favor of the taxpayer foreseen in that article, including those relating to bad debts, since what the norm seeks to prevent – that a taxpayer corrects in its favor tax that the recipient of the invoices does not correct in favor of the State – is transversal to any of the reasons for those corrections.

Not suffering the disputed assessments from any error, of fact or of law, the request for recognition of the right to indemnity interest should be dismissed, as the legal requirements for the recognition of such right are not met.

The Respondent thus concludes its pleading:

"In these terms and in the matter of law, which your excellencies will most learnedly supply, a decision should be handed down that judges the present request for arbitral pronouncement to be dismissed for lack of proof and, consequently, absolves the Respondent, in the terms requested above, with all due and legal consequences."

6.2. Subsequently, the Respondent attached to the record the respective administrative file (hereinafter, abbreviated as AF).

  1. On 31 May 2018, a ruling was issued waiving the holding of the meeting referred to in article 18 of the LRAT, granting a period for the submission of written arguments and fixing 28 September 2018 as the deadline for the pronouncement of the arbitral decision.

  2. No arguments were submitted by the Parties.

II. CASE MANAGEMENT

The Arbitral Tribunal was duly constituted and is competent.

The process is not marred by nullities.

The parties enjoy personality and judicial capacity, are duly represented and are legitimate.

There are no exceptions or any preliminary questions that prevent the examination of the merits and of which it is necessary to take cognizance.

III. REASONING

III.1. ON FACTS

§1. PROVEN FACTS

The following facts are considered proven:

a) The Claimant is classified, in the context of VAT, under the normal regime with monthly periodicity since 01.01.2011. [cf. document no. 3 with the BI and AF attached to the record]

b) In the context of VAT, the Claimant filed, in the period of 2012, the respective Periodic Declarations, according to the following table, with field 40 of the filed declarations showing the values contained in the following table [cf. document no. 3 with the BI and AF attached to the record]:

[table follows in original]

c) Under Service Order no. OI2015..., the Claimant was subjected to an internal inspection action, of partial scope (VAT), covering the period of 2012, which was carried out within the scope of the project "analysis of field 40 of the periodic VAT declaration", with the objective of controlling the value entered by taxpayers in field 40 of the periodic VAT declarations and assessing its legitimacy and compliance. [cf. document no. 3 with the BI and AF attached to the record]

d) Within that inspection action, the Claimant was notified to send to the Tax Inspection Services the following documents [cf. document no. 3 with the BI and AF attached to the record]:

  • Analytical balance sheets as of 31/12/2012;

  • Detailed current account statement of account 2434 – VAT – Regularizations;

  • Breakdown of the value contained in field(s) 40 of the periodic declaration(s), taking into account the type of situation foreseen in article 78 of the VAT Code;

  • Photocopy of the supporting documents of the ten highest-value transactions relating to the values indicated in field(s) 40 of the periodic declaration(s), with the respective proof in accordance with article 78 of the VAT Code.

e) The Claimant proceeded to deliver all those elements, which constitute Annex 1 of the Tax Inspection Report. [cf. document no. 3 with the BI and AF attached to the record]

f) By the analysis of the said account statement 24342, delivered by the Claimant, the Tax Inspection Services verified that the Claimant accounted in that account for the amounts broken down by taxation period, and that confrontation thereof with the values entered in field 40 of the respective periodic declarations revealed no materially relevant anomalies. [cf. document no. 3 with the BI and AF attached to the record]

g) Subsequently, the Tax Inspection Services requested the Claimant to send copies of the credit notes considered of most relevant value, which were delivered by the Claimant, constituting Annex 2 of the Tax Inspection Report. [cf. document no. 3 with the BI and AF attached to the record]

h) Following the analysis of those credit notes, the Tax Inspection Services understood that they do not comply with some requirements arising from the VAT Code, namely because the majority of them do not have the Tax ID Number of the acquiring entity and some do not mention which initial invoice they are annulling, and further, from the circularization made to two of the clients, the Tax Inspection Services verified that they did not account for the credit notes. [cf. document no. 3 with the BI and AF attached to the record]

i) Furthermore, the Tax Inspection Services could not understand what internal and external annulments are, having also verified that all the said credit notes sent by the Claimant do not comply with what is legally stipulated, that is, "once the right to regularization arises, in accordance with no. 5 of art. 78 of the VACC, for this to be effected, the taxpayer will have to have in its possession proof that the Entities became aware of the regularization or were reimbursed the tax". [cf. document no. 3 with the BI and AF attached to the record]

j) For that reason, the Tax Inspection Services considered improperly regularized the VAT inherent to the aforementioned credit notes, in the amount of € 31,332.88, and, consequently, in the Draft Tax Inspection Report, proposed corrections to the value declared by the Claimant in field 40 of the periodic VAT declarations, relating to the year 2012, as follows [cf. document no. 3 with the BI and AF attached to the record]:

[table follows in original]

k) The Claimant was notified for the exercise of the right to be heard, through letter no. ... of 18.12.2015, registered with the CTT no. RD ... PT, which it exercised, with the Tax Inspection Services verifying that the majority of the missing information/elements were now in accordance with the respective provisions of the VAT Code; however, relative to the values contained in the following table, the Tax Inspection Services understood that it continued to be lacking the proof that the entities became aware of the regularization or were reimbursed the tax, as required by no. 5 of article 78 of the VAT Code [cf. document no. 3 with the BI and AF attached to the record]:

[table follows in original]

l) Thus, from the said inspection action resulted corrections in the VAT assessment, in the amount of € 16,596.88, in the exact terms of the table contained in the previous proven fact, with the respective correction documents being elaborated for assessment purposes. [cf. document no. 3 with the BI and AF attached to the record]

m) In that sequence, the following additional VAT and compensatory interest assessments were issued [cf. documents nos. 2A, 2B, 2C, 2D, 2E, 2F and 2G with the BI]:

[table follows in original]

n) On 4 May 2016, the Claimant made timely and complete payment of the aforementioned additional VAT and compensatory interest assessments. [cf. documents nos. 4A, 4B, 4C, 4D, 4E, 4F and 4G with the BI]

o) On 1 September 2016, the Claimant filed a gracious appeal against the aforementioned VAT and compensatory interest assessments, which was registered under process no. ...2016..., at the Tax Office of Cascais..., forwarded to the Finance Directorate of Lisbon. [cf. AF attached to the record]

p) In the course of its instruction, the AT notified the distinguished Counsel of the Claimant to present the following elements [cf. pages 295 of the AF attached to the record]:

  • Statements of the Clients account (current account) of the Claimant's accounting, relating to client B..., S.A. and for the fiscal years 2011 and 2012, marking therein the credit note no. ...-... and the annulled invoices, as well as the invoicing which replaced it;

  • Accounting records (statements of the "VAT charged" account and/or journal entries) evidencing the accounting of VAT charged relating to the five annulled invoices of highest value.

q) In consequence of that notification, the distinguished Counsel of the Claimant sent the following documentation [cf. pages 297 and 298 of the AF attached to the record]:

  • Current account statement of client B..., S.A., relating to the year 2011/2012, with identification of the credit note no. ... -... and of all annulled invoices [cf. pages 299 to 305 of the AF attached to the record];

  • Invoice ...-..., of 31.12.2012, in the amount of 66,472.56 €, which replaced the previously annulled ones, but with a different value due to the existence of adjustments made in the meantime [cf. pages 306 and 307 of the AF attached to the record];

  • Proof of payment of VAT in the various taxation periods of 2011 and 2012, there at issue [cf. pages 308 and 309 of the AF attached to the record];

  • Periodic VAT declarations, sent via the Internet and accounting statements of the Claimant relating to the invoicing and VAT determination for the months of July 2011, August, September, October and December 2012 [cf. pages 310 to 338 of the AF attached to the record];

  • Excel files with the invoicing relating to the months of July 2011, August, September, October and December 2012, with client B..., S.A. identified as client ... [cf. page 339 of the AF attached to the record].

r) Once the instruction of the gracious appeal was completed, the respective draft decision was prepared, with the Claimant and its distinguished Counsel being notified for the exercise of the right to be heard, through letters dated 20.09.2017, registered with the CTT no. RD ... PT, from the Finance Directorate of Lisbon, which the Claimant did not exercise. [cf. pages 345 to 347 of the AF attached to the record]

s) On 24 October 2017, the Head of Division of the Administrative Justice Division of the Finance Directorate of Lisbon, by subdelegation, issued a ruling granting partial dismissal of the gracious appeal, based on the Information dated 12 October 2017, contained therein, in which the following is stated, among others [cf. pages 349 to 354 of the AF attached to the record and document no. 1 attached to the BI]:

[text of ruling follows in original]

t) The Claimant and its distinguished Counsel were notified, through letters dated 26.10.2017, registered with the CTT no. RD ... PT, from the Finance Directorate of Lisbon, of the decision granting partial dismissal of the gracious appeal. [cf. pages 355 to 357 of the AF attached to the record and document no. 1 attached to the BI.]

u) The Claimant issued credit note ...-..., dated 31.12.2012, in the total amount of € 80,059.50, including VAT in the amount of € 14,970.48, to B..., S.A., for complete annulment of the following invoices: [detailed list follows in original]

v) Such credit note was issued due to internal error of the Claimant, consisting of the duplicated issuance of invoices, not even having been sent to the client, just as the respective invoices annulled by it had not been sent. [cf. pages 196 and 196 verso of the AF attached to the record]

x) In the taxation period 2011/07, within the scope of which are comprised the invoices ...-1152257 of 31/07/2011 in the amount of 829.89€ and ...-1151353 of 22/07/2011 in the amount of 12,488.76€, the total value of invoicing issued by the Claimant and the value declared as taxable base in field 3 of the respective periodic declaration is coincident [cfr. document no. 5 attached to the BI.]

w) The Claimant issued credit note ...-214707, dated 26.03.2012, in the total amount of € 492.17, including VAT in the amount of € 92.03, to C..., S.A., for partial annulment of invoice ...-1162168, of 29/02/2012, in the amount of € 8,295.29. [cf. pages 19 to 199 and 200 to 214 of the AF attached to the record]

y) Between 24 and 26 August 2016, there was an exchange of email messages between elements of the Claimant and of C..., S.A., within the scope of which was confirmed both the sending by the Claimant and the receipt and accounting registration by C..., S.A. of the credit note ...-214707. [cf. pages 215 and 215 verso of the AF attached to the record]

z) The Claimant issued credit note ...-214814, dated 18.06.2012, in the total amount of € 3,790.34, including VAT in the amount of € 708.76, to D..., Ltd., for partial annulment of the following invoices: [detailed list follows in original]

aa) The partial annulment of those invoices and, therefore, the issuance of such credit note was due to internal error of the Claimant. [fact accepted by agreement]

bb) The company D..., Ltd. was declared insolvent by judgment handed down on 29.04.2013 and final as of 27.05.2013, in the scope of process no. .../13...TBALQ that was conducted before the Judicial Court of the Comarca of Lisbon North (Vila Franca de Xira, Central Instance, Commercial Section) and which was instituted on 13.03.2013. [cf. pages 233 to 242 of the AF attached to the record]

cc) On 24 January 2018, the Claimant filed the request for constitution of an arbitral tribunal that gave rise to the present process. [cf. procedural management information system of the CAAD]

§2. FACTS NOT PROVEN

With relevance for the appraisal and decision of the case, it did not result proven that the company D..., Ltd. received and accounted for the credit note ...-214814, dated 18.06.2012, in the total amount of € 3,790.34, including VAT in the amount of € 708.76.

§3. REASONING AS TO FACTUAL MATTER

As regards the proven factual matter, the conviction of the Tribunal was based on the facts articulated by the Parties, whose adherence to reality was not challenged, in the documents and in the respective administrative file attached to the record.

As regards the unprovable factuality, it was thus considered by virtue of the non-existence of any probative elements capable of proving it.

III.2. ON LAW

The Claimant impugns, partially, the acts of additional VAT and compensatory interest assessment nos. 2016..., 2016..., 2016..., 2016..., 2016..., 2016... and 2016..., relating to the year 2012, resulting from the corrections made by the AT to the VAT regularizations relating to the taxation periods 201203, 201206, 201209 and 201212.

Specifically – as follows from the content of the request for arbitral pronouncement – the corrections aimed at are those relating to the disregard by the AT of the credit notes ...-214969 (as to the invoices not comprised in the "Table on page 9 of the information supporting the partial granting of the appeal", namely those relating to the taxation period 201107), integrated in the taxation period 201212, ...214707, integrated in the taxation period 201203 and ...-214814, integrated in the taxation period 201206, to which the proven facts u) to bb) allude.

The Claimant bases its legal disagreement relative to the aforementioned corrections made by the AT on the argument that "nos. 4, 5 and 13 of art. 78 of the VACC do not have applicability here, relative to a large part of the regularizations undertaken and now disputed, and therefore the compliance with the formalism imposed therein for the legitimation of the regularization is not required"; the Claimant further alleges, as to the taxation period of 201212, that there exists "erroneous quantification of the VAT properly regularized in [its] favor (…) and identified in the Table on page 9 of the information supporting the partial granting of the appeal (…)".

Having said this, the appraisal of the present case requires, first and foremost, that we invoke article 78 of the VAT Code which, in the version in force at the time of the facts and in the part that is relevant to consider here, provides as follows:

Article 78

Regularizations

1 – The provisions of articles 36 and following must be observed whenever, once the invoice or equivalent document is issued, the taxable value of an operation or the respective tax comes to be corrected for any reason.

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, resolution, rescission or reduction of the contract, by the return of goods or by the granting of allowances or discounts, the supplier of the good or provider of the service may effect the deduction of the corresponding tax until the end of the taxation period following that in which the circumstances occurred that determined the annulment of the assessment or the reduction of its taxable value.

3 – In cases of inaccurate invoices which have already resulted in the registration referred to in article 45, the correction is mandatory when there is tax charged at less, and may be effected without any penalty until the end of the period following that to which the invoice to be corrected pertains, and is optional, when there is tax charged at more, but may only be effected within the period of two years.

4 – The purchaser of the good or recipient of the service who is a taxable person of the tax, if he has already effected the registration of an operation relative to which his supplier or provider of service proceeded to annulment, reduction of its taxable value or correction for less of the invoiced value, corrects, until the end of the taxation period following that of the receipt of the correcting document, the deduction effected.

5 – When the taxable value of an operation or the respective tax is corrected for less, the regularization in favor of the taxpayer can only be effected when this has in its possession proof that the purchaser became aware of the correction or was reimbursed the tax, without which the respective deduction is considered undue.

(…)

13 – When the taxable value is subject to reduction, the amount thereof shall be apportioned between consideration and tax, upon the issuance of the respective document, if it is also intended to correct the tax.

(…)

Having this provision of the VAT Code as its subject matter, the AT issued the following administrative instructions which are relevant to cite here:

The Circular Letter no. 33129/1993, of 2 April, from the DSCA, having for subject "VAT – Regularizations – Nos. 2 and 5 of art. 71 of the VACC" (provision subsequently renumbered, becoming article 78), adopts the following understanding:

"1. No. 2 of art. 71 of the VACC contemplates cases in which the taxable base is reduced, after the registration of transfers of goods and provisions of services effected by the taxpayer has been effected. The supplier or service provider may correct the tax previously charged at more, until the end of the taxation period following that in which the circumstances that determined the correction occurred.

  1. The regularizations set out in no. 2 of art. 71 of the VACC are a faculty granted to the taxpayer and not a requirement. However, whenever the taxpayer opts for such regularizations, it should heed the provision of no. 5 of the same article.

  2. In accordance with no. 5 of art. 71, the regularization of the tax in favor of the taxpayer may only be effected when this has in its possession proof that the purchaser became aware of the correction or was reimbursed the tax, without which the respective deduction will be considered undue.

  3. For the purposes of no. 5 of art. 71, the following documents issued by the client and in the possession of the supplier of the good or provider of the service are considered suitable, meeting the conditions set out therein:

a) Any one of the means of written communication - letter, letter, telex, facsimile, telegram - with express reference to the awareness of the VAT correction.

b) Return note or note of receipt of the check, with mention of the VAT regularization.

c) Photocopy of the credit note, after signature and stamp of the purchaser, constituting a document sent by him after becoming aware of the tax regularization to be effected.

  1. Without the taxpayer having in its possession written confirmation made by its clients that they received communication evidencing the amount of the corrected VAT, or that they were reimbursed the respective tax, the provisions established in no. 5 of art. 71 of the VACC are considered not to have been complied with, making the respective tax regularization undue."

The Circular Letter no. 30082/2005, of 17 November, from the DSIVA, having for subject "VAT – Regularizations under article 71 of the VACC" (provision subsequently renumbered, becoming article 78), contains, among others, the following guidance/administrative instruction:

"9.1 Regularizations foreseen in nos. 2 and 4 of art. 71

Encompasses situations in which the reduction or annulment of the taxable base results in corrections to the tax, whose regularization is not mandatory. If, however, the supplier taxpayer opts for regularization in its favor, under no. 2, it should do so until the end of the period following that in which the circumstances that gave rise to the regularization occurred, provided that, as required by no. 5 of the same art. 71, it has in its possession proof that the purchaser became aware of that correction or was reimbursed the tax.

In this case, as provided by no. 4 of the same article, the purchaser must proceed to the regularization of that tax, in favor of the State, until the end of the taxation period following that of the receipt of the correcting document issued by the supplier.

The values to be corrected, under these conditions, must appear in fields 40 and 41, as the case may be, of the periodic declaration of the taxation period in which the regularization is effected.

Should it not be effected within the prescribed period and in situations that result in tax in favor of the State, the regularization should take place in a replacement periodic declaration of the period in which, under no. 4 of article 71, it should have been made."

In light of article 78 of the VAT Code, we can group the situations in which there exists the faculty (and, eventually, the requirement) of regularization of the charged and deducted VAT, in the following manner (as systematized by Alexandra Martins and Pedro Moreira, "VAT Regularizations - The Subsequent Alteration of the Elements of the Operation, Material Error or Calculation Error and Error of Classification or Law", in A.A. V.V., Coordination by Sérgio Vasques, VAT Notebooks 2014, Coimbra, Almedina, 2014, pp. 61-62):

"i) The subsequent alteration of the objective and subjective conditions that presided over the realization of the operations, expressed in the annulment of the operation or in the reduction of its taxable value;

ii) The inaccuracy of the invoice or the material error or error in calculation in the transcription of its elements to the accounting or periodic VAT declarations of the taxpayers;

iii) The error of classification of the operation, reflected in the invoice or in the accounting of the taxpayers."

In the situation sub judice, in light of the factuality that resulted proven, no doubt whatsoever exists that we are not before a situation facti capable of being framed either in the first or in the third group of situations to which we allude, just as we are also not facing any material error or calculation error.

In fact, in the present case we are before inaccurate invoices which were, all of them, accounted for by the Claimant and by virtue of which there was tax charged at more.

As explained by João Canelhas Duro ("VAT Deduction, Regularizations and Revision of Self-Assessment", in A.A. V.V., Coordination by Sérgio Vasques, VAT Notebooks 2015, Coimbra, Almedina, 2015, p. 338), in accordance "with no. 3 of art. 78, in the case of 'inaccurate invoices', already accounted for, the correction is optional when there is tax charged at more and may be effected within the period of two years. In order for the self-assessment to be corrected with tax charged at more, the correction of the invoice is mandatory, so that the purchaser also proceeds to the regularization of the tax deducted (in excess) on the basis of that invoice.

The procedure of invoice regularization aims, not only to allow the taxpayer to 'recover' the VAT which it wrongfully paid to the State, but, also, especially when the purchaser is a taxable person, to provide safeguard, in equal measure, the regularization of the VAT deducted by the purchaser on the basis of the invoice which records the taxable operation (art. 78, no. 4), which depends on the timely communication of the regularization (art. 78, no. 5)."

In the present case, the Claimant opted to effect the correction of those invoices, by means of the issuance of the aforementioned credit notes (cf. article 29, no. 7, of the VAT Code), and the corresponding regularization of the self-assessed tax charged at more.

For this reason, it is important to note the provision of no. 5 of article 78 of the VAT Code, according to which, when the taxable value of an operation is corrected for less, the regularization in favor of the taxpayer can only be effected when this has in its possession proof that the purchaser became aware of said correction or was reimbursed the tax; under the terms of no. 13 of the same article, the amount of the reduction must be apportioned between the consideration and the VAT.

The law does not impose any limitation as to the means of proof that can be used for such purpose, so any suitable documentary support tends to be sufficient for such purpose, such as those listed in the aforementioned Circular Letter no. 33129/1993; on this matter, it is also important to note the following understanding of the AT set out in the binding information provided in process no. 6770, by ruling of 06.06.2014, of the SDG of VAT, by delegation of the Director General of the AT, in which it is, among others, stated that "it is possible to consider suitable 'email messages', provided that the requirements referred to in Circular Letter no. 33129/1993 are observed, namely in no. 4, paragraph a) '(…) documents issued by the client and in the possession of the supplier of the good or provider of the service (…) with express reference to the awareness of the VAT correction' and in no. 5".

In light of the above, let us now analyze the VAT regularizations effected by the Claimant in each of the taxation periods in question in these proceedings.

§1. Tax regularization relating to taxation period 201212

The tax regularization here at issue is that relating to credit note ...-214969, dated 31.12.2012, in the total amount of € 80,059.50, including VAT in the amount of € 14,970.48, issued to B..., S.A., for complete annulment of the invoices listed in proven fact u).

As resulted proven, that credit note was issued due to internal error of the Claimant, consisting of the duplicated issuance of invoices, not even having been sent to the client, just as the respective invoices annulled by it had not been sent (cf. proven fact v)).

Within the scope of the aforementioned gracious appeal, the AT recognized partial merit to the Claimant relative to the regularization based on this credit note, having excluded the invoices annulled relating to the taxation period 201107, for which it adduced the following reasoning: "Although the annulled invoices nos. 1151353 and 1152257 are included among the invoicing issued in that period, by the correct values, it is verified that the total invoicing issued (€ 291,548.20, without VAT) does not correspond to that declared as the taxable base in field 3 of the DP (€ 265,443.53), not the claimant submitting any clarification on that discrepancy" (cf. proven fact s)). However, the AT only accepted the tax regularization resulting from that credit note as to the invoices annulled which are discriminated in the "Table on page 9 of the information supporting the partial granting of the appeal", in the total amount of € 4,957.48 (cf. proven fact s)).

Relative to the aforementioned discrepancy of values mentioned by the AT as to the taxation period 201107, the Claimant came to provide the clarifications contained in article 52 of the request for arbitral pronouncement, stating there, among others, that "[the] file initially sent to the AT suffered from quantification errors. For such fact the here Claimant repents, and the file which was sent should be here considered replaced by the current file which is attached [document no. 5]. And thus being and departing from the reading of the informative set contained in Doc. no. 5 it is verified (…) that the supposed differences found by the AT are all identified and explained, and that the sales of July 2011 correspond (…) to the DP sent".

As resulted verified, from the analysis of document no. 5 attached to the request for arbitral pronouncement, in the taxation period 201107, there exists coincidence between the total value of invoicing issued by the Claimant and the value declared as the taxable base in field 3 of the respective periodic declaration (cf. proven fact x)); moreover, it is important to note that the AT does not impugn that document, nor does it question that the correct values are those now indicated therein by the Claimant.

Thus being, with nothing else being able to prevent such, the indicated invoices relating to the taxation period 201107, annulled by the credit note in question, should be considered for the purposes of tax regularization in favor of the Claimant.

The same applies to all the other invoices annulled by that same credit note (in addition, naturally, to those indicated in the "Table on page 9 of the information supporting the partial granting of the appeal"), as the position of the AT in the sense of their exclusion has no sustenance in light of the conclusive proof that was provided by the Claimant through the delivery of all the documentation that was requested of it by the AT, namely in the scope of the gracious appeal.

The request for arbitral pronouncement thus proceeds as to the correction which had as its subject the tax regularization relating to the taxation period 201212, regarding the credit note in question; consequently, examination of the other reasoning invoked by the Claimant is prejudiced, as being superfluous.

§2. Tax regularization relating to taxation period 201203

The tax regularization here at issue is that relating to credit note ...-214707, dated 26.03.2012, in the total amount of € 492.17, including VAT in the amount of € 92.03, issued to C..., S.A., for partial annulment of invoice ...-1162168, of 29/02/2012, in the amount of € 8,295.29 (cf. proven fact w)).

As resulted proven, between 24 and 26 August 2016, there was an exchange of email messages between elements of the Claimant and of C..., S.A., within the scope of which was confirmed both the sending by the Claimant and the receipt and accounting registration by C..., S.A. of that same credit note (cf. proven fact y)).

The AT does not impugn the occurrence of that exchange of email messages; what the AT alleges is that "the document presented cannot be considered as issued by the purchaser (that binds the acquiring entity), proving that it became aware of the correction of the tax and that, at the time of the regularization, was in the possession of the entity which effected the tax regularization in its favor (the now claimant)", because "the statements that bind companies have a legal form and must be emanated by holders of the right of representation thereof, whose confirmation is made, easily, through the permanent certificate. (…) an email between two officials without such rights, does not constitute legal proof that the company recognizes such regularization."

With all due respect, it appears to us that this position of the AT suffers from an excessive formalism that finds no support either in the letter or in the spirit of the law – to which we have already alluded – and which also has no correspondence with what results from the rules of common experience.

In fact, companies in general (of large, medium and small dimension), are, usually, organized in different internal departments, with specific competencies (human resources, financial, technical, commercial, etc.), which are responsible for the handling and daily conduct of all matters that fall within the respective functional scope; for the upper organs, that is, those responsible for the management/administration of the company, more structural functions are reserved, of supervision of the entire business structure and of conduct of the respective activity. Therefore, with all due respect, it has no place even to raise, much less to require, that it should be a manager/administrator to certify that the respective company received an invoice, a credit note or any other accounting document, above all when we are dealing with documents that, in the day-to-day life of the majority of companies, are issued in great numbers; it can even happen that it be a manager/administrator that does so, but the normal thing is that such passes through the employees to whom are entrusted tasks in the financial area.

Thus, with nothing else being found that is able to prevent such, the request for arbitral pronouncement proceeds as to the correction which had as its subject the tax regularization relating to the taxation period 201203, regarding the credit note in question.

§3. Tax regularization relating to taxation period 201206

The tax regularization here at issue is that relating to credit note ...-214814, dated 18.06.2012, in the total amount of € 3,790.34, including VAT in the amount of € 708.76, issued to D..., Ltd., for partial annulment of the invoices listed in proven fact z).

As was proven, the partial annulment of those invoices and, therefore, the issuance of that credit note was due to internal error of the Claimant (cf. proven fact aa)).

However, it was not proven that the company D..., Ltd. received and accounted for the credit note in question (cf. facts not proven), and it was declared insolvent, as set out in proven fact bb).

The Claimant contends that we are here in a situation identical to that of the aforementioned credit note ...-214969, issued to B..., S.A., and therefore here also the proof to which no. 5 of article 78 of the VAT Code refers should not be required.

However, with all due respect, the Claimant is not correct, for two reasons: in the first place, the invoices to which the credit note in question pertains were sent to the client of the Claimant, which did not happen as to the invoices covered by that other credit note; in the second place, the annulment of invoices operated by the credit note here in question was merely partial, whereas the other referenced credit note proceeded to the complete annulment of the invoices covered thereby.

For this reason, the Claimant is not here dispensed from making the proof to which article 78, no. 5, of the VAT Code alludes; not having made it, that is, not having in its possession proof that D..., Ltd. became aware of the correction or was reimbursed the tax, the provisions contained in the said no. 5 are considered not to have been complied with, the tax regularization effected by the Claimant being undue.

The request for arbitral pronouncement thus does not proceed as to this reasoning.

§4. On the refund of the amount paid and on the payment of indemnity interest

The Claimant proved payment of the values contained in the contested tax acts (cf. proven fact n)) and petitions, as a consequence of the invoked partial annulability of the same, the condemnation of the AT to refund the amount improperly paid, in the total amount of € 12,174.09 (€ 10,813.79 of tax and € 1,360.30 of compensatory interest), accrued with the respective indemnity interest.

As results from the above, in fact the Claimant bore a tax burden higher than that legally owed, although not with the extent advocated by it, since the request for arbitral pronouncement only proceeds partially, specifically as to the corrections made to the VAT regularizations relating to the taxation periods 201212 (as to credit note ...-214969) and 201203 (as to credit note ...-214707), in the total amount of € 10,105.03, accrued with the corresponding compensatory interest.

Article 24, no. 1, paragraph b), of the LRAT provides that the arbitral decision on the merits of the claim that is not subject to appeal or impugnation binds the tax administration from the end of the prescribed period for appeal or impugnation, and that the latter, in the exact terms of the proceeding of the arbitral decision in favor of the taxpayer and until the end of the prescribed period for the spontaneous execution of decisions of the judicial tax courts, must restore the situation that would have existed if the tax act subject to the arbitral decision had not been carried out, adopting the acts and operations necessary for such purpose, which is in line with the provision of article 100 of the LGT (applicable by virtue of the provision of paragraph a) of no. 1 of article 29 of the LRAT) which establishes that "the tax administration is obliged, in case of total or partial proceeding of appeal, judicial impugnation or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject to the dispute, including the payment of indemnity interest, if applicable, from the end of the period for execution of the decision".

Although article 2, no. 1, paragraphs a) and b), of the LRAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning at the CAAD, making no reference to condemnatory decisions, it should be understood that the powers attributed to tax courts in judicial impugnation proceedings are comprised in its competencies, and this is the interpretation that is in line with the sense of the legislative authorization on which the Government based itself to approve the LRAT, in which it proclaims, as a first guideline, that "the tax arbitral process should constitute an alternative procedural means to the judicial impugnation process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial impugnation process, despite being essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnity interest, as may be inferred from the provision of article 43, no. 1, of the LGT and article 61, no. 4, of the CPPT.

Thus, no. 5 of article 24 of the LRAT, in saying that "the payment of interest, regardless of its nature, is due, under the terms provided in the general tax law and in the Code of Procedure and Tax Process", should be understood as permitting the recognition of the right to indemnity interest in the arbitral process.

On the other hand, the right to indemnity interest depending on the right to refund of amounts paid improperly, which are its basis of calculation, it is inherent in the possibility of recognition of the right to indemnity interest the possibility of appraisal of the right to refund those amounts.

Having said this, it is necessary to appraise the request for refund of the improperly paid amount and for payment of indemnity interest.

In the sequence of the partial illegality of the contested tax acts and, therefore, in the measure of the proceeding of the request for arbitral pronouncement, the AT must proceed to refund to the Claimant the total amount corresponding to the values of tax and compensatory interest paid illegally, by virtue of the provision of articles 24, no. 1, paragraph b), of the LRAT and 100 of the LGT.

On that total amount indemnity interest is due, under the terms of articles 43, no. 1, of the LGT and 61 of the CPPT, calculated (i) as to the corrections relating to the taxation period 201212, from the date of the decision on the gracious appeal, except in the part corresponding to the said invoices integrated in the taxation period 201107, in which they are calculated from this decision; and (ii) as to the corrections relating to the taxation period 201203, from the date of the decision on the gracious appeal, always until full refund.

IV. DECISION

Having regard to what is set out above, this Arbitral Tribunal decides:

To judge the request for arbitral pronouncement partially well-founded;

To annul the acts of additional VAT and compensatory interest assessment nos. 2016..., 2016..., 2016..., 2016..., 2016..., 2016... and 2016..., relating to the year 2012, in the part corresponding to the corrections made to the VAT regularizations relating to the taxation periods 201212 (as to the aforementioned credit note ...-214969) and 201203 (as to the aforementioned credit note ...-214707);

To condemn the Tax and Customs Authority to refund to the Claimant the values of VAT and compensatory interest improperly paid, accrued with indemnity interest, under the legal terms;

To condemn both Parties to the payment of the costs of the process, in the proportion of their respective loss in the action.

VALUE OF THE PROCESS

In conformity with the provision of articles 306, no. 2, of the CPC, 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulations on Costs in Tax Arbitration Processes, the value of the process is fixed at € 12,174.09 (twelve thousand one hundred and seventy-four euros and nine cents).

COSTS

Under article 22, no. 4, of the LRAT, the amount of costs is fixed at € 918.00 (nine hundred and eighteen euros), under the terms of Table I attached to the Regulations on Costs in Tax Arbitration Processes, at the charge of the Claimant and of the Tax and Customs Authority in the percentages of 6.55% and 93.45%, respectively, which correspond to the values of the loss in the action of each of the Parties.

Lisbon, 27 September 2018.

The Arbitrator,

(Ricardo Rodrigues Pereira)

[1] As stated by Afonso Arnaldo and Tiago Albuquerque Dias ("After All what is the Period for Deducting VAT? Rules of Expiration and (In)Legal Certainty", in A.A. V.V., Coordination by Sérgio Vasques, VAT Notebooks 2014, Coimbra, Almedina, 2014, p. 44), "will be covered by these concepts of error (typically) situations in which the taxpayer makes a mistake when effecting an operation arithmetic, namely, when it intends to calculate the deductible tax contained in an invoice (with VAT included) of services from a supplier (calculation error), or, even effecting the calculation correctly, commits error in the entry of the amount of the tax to be deducted in the periodic declaration (material error)."

Frequently Asked Questions

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What are the requirements for VAT regularization through credit notes under Article 78 of the Portuguese VAT Code (CIVA)?
Under Article 78 of the Portuguese VAT Code (CIVA), VAT regularization through credit notes requires compliance with specific formalities depending on the nature of the correction. For contract-based modifications (annulments, price reductions, returns) under Articles 78(2), (4), (5), and (13), the taxpayer must prove that purchasers were notified of the regularization or reimbursed the tax, as mandated by Article 78(5). However, for inaccurate invoices under Article 78(3)—such as duplicate billing errors that were never communicated to buyers—the stricter notification requirements do not apply, as these constitute internal administrative corrections rather than substantive transaction modifications.
When is proof of buyer notification required for VAT adjustments under Article 78(5) of the CIVA?
Proof of buyer notification is required for VAT adjustments under Article 78(5) CIVA only when the regularization relates to substantive transaction changes: annulment of sales or services, reduction of taxable value from contract invalidity, resolution or reduction, returns of goods, or discounts/allowances on already invoiced operations. This requirement does not extend to corrections of inaccurate invoices under Article 78(3) CIVA, particularly when duplicate invoices were issued internally but never communicated to the purchaser. The taxpayer must demonstrate either that buyers were informed of the regularization or that the tax was reimbursed to them, but this obligation is limited to scenarios involving actual transaction modifications rather than administrative billing errors.
Does the obligation under Article 78(5) CIVA apply to corrections of inaccurate invoices that do not involve contract annulment or price reductions?
No, the obligation under Article 78(5) CIVA does not apply to corrections of inaccurate invoices that do not involve contract annulment or price reductions. Article 78(3) CIVA specifically addresses inaccurate invoices—those not complying with requirements in Article 36(5) CIVA regarding price or tax amount accuracy. Duplicate invoicing errors represent internal administrative mistakes rather than substantive transaction changes. When duplicate invoices were never communicated to buyers, neither the erroneous invoice nor the corrective credit note requires buyer notification. The stricter requirements of Article 78(5) apply exclusively to Articles 78(2), (4), (5), and (13) scenarios involving actual modifications to underlying commercial transactions, not to rectification of billing errors under Article 78(3).
Can a taxpayer challenge additional VAT assessments resulting from tax inspections through arbitration at CAAD?
Yes, taxpayers can challenge additional VAT assessments resulting from tax inspections through arbitration at CAAD (Centro de Arbitragem Administrativa). Under the Legal Regime of Arbitration in Tax Matters (RJAT - Decree-Law 10/2011), taxpayers may request arbitral tribunal constitution pursuant to Articles 2(1)(a) and 10(1)(a) to contest the legality of VAT assessment acts, including those arising from internal tax inspections. This arbitral route provides an alternative to judicial courts for resolving tax disputes. Taxpayers can seek declaration of illegality and annulment of assessment acts even after filing administrative appeals (gracious appeals), and may claim reimbursement of amounts paid plus compensatory interest if assessments are deemed illegal due to errors imputable to tax authority services.
What is the difference between VAT regularization for contract modifications and corrections of billing errors under Portuguese tax law?
Portuguese tax law distinguishes between VAT regularization for contract modifications (Articles 78(2), (4), (5), (13) CIVA) and corrections of billing errors (Article 78(3) CIVA). Contract modifications involve substantive transaction changes—annulments, price reductions, returns, discounts—affecting the underlying commercial operation. These require strict compliance with Article 78(5): taxpayers must prove buyers were notified or reimbursed. Billing errors under Article 78(3) involve inaccurate invoices that fail to meet Article 36(5) requirements (incorrect prices or tax amounts) due to administrative mistakes like duplicate issuance. When erroneous invoices were never communicated to buyers, corrections through credit notes do not require buyer notification, as no actual transaction modification occurred. This distinction is fundamental for determining applicable documentation requirements and the validity of VAT regularizations during tax inspections.