Process: 301/2018-T

Date: January 30, 2019

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 301/2018-T) addresses two critical VAT issues: the denial of VAT deduction rights based on supplier fraud allegations, and the application of the presumption of transfer of goods under Article 86 of the Portuguese VAT Code (CIVA). The taxpayer, a forestry exploitation company, challenged additional VAT assessments totaling €83,291.70 for the 2014 tax year. The Tax Authority refused VAT deduction on invoices from a supplier flagged for issuing false invoices and not remitting collected VAT to the State, arguing the taxpayer knew or should have known of the supplier's fraudulent practices and inadequate business structure. Additionally, the Authority assessed VAT on tangible fixed assets that decreased in book value, presuming their transfer under Article 86 CIVA. The taxpayer argued that the VAT neutrality principle protects bona fide purchasers absent objective evidence of knowledge of fraud, that the supplier's invoices were included in periodic VAT declarations suggesting tax was delivered to State coffers, and that the Tax Authority failed to identify specifically which assets were transferred or when. The case raises fundamental questions about the burden of proof in VAT fraud cases, the scope of the neutrality principle protecting innocent taxpayers, the evidentiary requirements for rebutting legal presumptions of asset transfers, and whether direct assessment methods were properly applied versus indirect methods required under Article 88 of the General Tax Law (LGT). The decision has significant implications for taxpayers' due diligence obligations regarding suppliers and the Tax Authority's evidentiary burden in VAT fraud cases.

Full Decision

ARBITRAL DECISION

I – Report

  1. A..., LDA, NIF..., with registered office at ..., Rua ..., no...., ...-... ..., ..., hereby requests the constitution of an arbitral tribunal, pursuant to the provisions of articles 2.º, no. 1, paragraph a), and 10.º of Decree-Law no. 10/2011, of 20 January, to examine the legality of the tax acts of additional VAT assessment, relating to the year 2014, in the total amount of € 83,291.70.

The request is grounded on the following terms.

The Tax Authority refused the right to VAT deduction on invoices issued by supplier B..., Unipessoal, Lda, on the grounds that, within the scope of an inspection procedure, that supplier was flagged as a user of false invoices in the years 2013 and 2014 and did not deliver to the State coffers the tax collected from its customers, concluding therefrom that the Claimant had or should have known that the supplier did not have an adequate business structure capable of exercising the declared activity.

However, the first of these conditions does not obtain, since the invoices in question contributed to the VAT taxable base in favor of the State, as stated in the periodic declarations of the supplier, whereby the tax must be deemed to have been effectively delivered to the State coffers and will only not have been so through the undue deduction of VAT in relation to transactions that do not correspond to real operations.

On the other hand, the Report fails to demonstrate that the supplier did not have a structure adequate to the exercise of the activity, nor does it demonstrate that the services covered by the invoices deemed false were not effectively performed.

It should be noted that the principle of VAT neutrality imposes the protection of the right to deduction when there are no objective elements demonstrating that the taxpayer knew or should have known that, with its acquisition, it was participating in VAT fraud.

The Tax Authority further assessed VAT on the assets that comprise tangible fixed assets based on the presumption referred to in the second part of article 86.º of the VAT Code, according to which the assets acquired, imported or produced that are not found in any of the places where the taxpayer exercises its activity are presumed to be transferred.

However, the Tax Inspection Report does not identify which assets were transferred or when they were subject to transfer, whereby the factual basis of the presumption cannot be considered proven.

In conclusion, the Claimant contends that the additional assessments suffer from error as to the qualification of the facts with regard to undue VAT deduction and error in the application of the presumption relating to the transfer of assets, whereby the corrections to the taxable matter could only be effected by indirect methods, as provided for in paragraph a) of article 88.º of the General Tax Code.

The Tax Authority, in its response, maintains that the Claimant had been assessing VAT on timber transactions at the rate of 23% when it had already been aware, since mid-June 2014, that the applicable rate was 6%, due to the legislative amendment that occurred in 2013, which should have determined the rectification of the invoices issued by its suppliers.

In any case, the refusal of the right to VAT deduction only occurred in relation to the second half of 2014, at a time when the Claimant was already aware of the irregular assessment of VAT, and in relation to operations in which the supplier of the goods did not deliver to the State coffers the tax assessed to the customer and was under suspicion for issuing false invoices.

Regarding the presumption of transfer of assets, the Administration verified a decrease in tangible fixed assets relating to basic equipment, in the amount of € 601,142.66, and an accounting entry relating to depreciation/amortization of the same tangible fixed assets, in the amount of € 321,640.90, permitting the conclusion that the book value of the assets is € 279,501.76, corresponding to the difference between those amounts, on which VAT is levied at the rate of 23%.

Having occurred this decrease in tangible fixed assets without the taxpayer having clarified this situation, it is to be presumed, in accordance with article 86.º of the VAT Code, that these assets were subject to transfer, and the corresponding tax is due.

As it is incumbent upon the taxpayer to provide real and objective proof of the facts that might rebut the presumption of the transfer of assets.

It concludes that the request is unfounded.

  1. The meeting referred to in article 18.º of the RJAT Rules was waived and, in the course of the proceedings, the parties were notified for optional submissions on successive deadlines.

In its submissions the Claimant expressed itself on the evidentiary results arising from the elements of the case and, moreover, maintained its previous position.

The Tax Authority did not submit counter-submissions.

  1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority in accordance with the applicable regulations.

Pursuant to the provisions of paragraph a) of no. 2 of article 6.º and paragraph b) of no. 1 of article 11.º of the RJAT Rules, as amended by article 228.º of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated their acceptance of the appointment within the applicable period.

The parties were duly and timely notified of this designation and did not manifest any intention to refuse it, in accordance with the combined provisions of article 11.º, no. 1, paragraphs a) and b), of the RJAT Rules and articles 6.º and 7.º of the Deontological Code.

Thus, in conformity with the provisions of paragraph c) of no. 1 of article 11.º of the RJAT Rules, as amended by article 228.º of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 4 September 2018.

The arbitral tribunal was regularly constituted and is materially competent, in light of the provisions of articles 2.º, no. 1, paragraph a), and 30.º, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are legally entitled and are represented (articles 4.º and 10.º, no. 2, of the same decree and 1.º of Ordinance no. 112-A/2011, of 22 March).

The case does not suffer from any nullities and no exceptions were raised.

It is incumbent upon us to examine and decide.

II - Legal Reasoning

Factual Matters

  1. The relevant facts for the decision of the case which may be considered established are the following:

  • The Claimant is engaged in the principal activity of forestry exploitation, which includes the provision of sylviculture and forest cleaning services, purchase and sale of timber and equipment for sylviculture and forestry exploitation;

  • The Tax Authority carried out an inspection procedure, authorized by Service Order no. OI 2017..., intended to verify compliance with tax obligations by the Claimant in relation to the financial year 2014;

  • Following the inspection procedure, arithmetic corrections were determined, for undue VAT deduction, in the amount of € 19,006.30, and presumption of transfer of assets, in the amount of € 64,285.40;

  • The Tax Inspection Report based the additional VAT assessment for undue tax deduction on the following grounds:

    - the Claimant recorded invoices for the acquisition of timber, from July to December 2014, at the rate of 23%, in the partial amounts indicated in the table appearing on page 44 of the Report, relating to supplier B..., Unipessoal, Lda;

- regarding this supplier, an inspection procedure took place by which it was found that the taxpayer used false invoicing in the years 2013 and 2014 and did not deliver to the State coffers the tax collected from its customers, among which was the Claimant;

- it also became clear in the procedure that the taxpayer had an inadequate business structure, which is revealed by the following facts: it was never possible to contact the managing partner by telephone, in person or by mail or through a certified accountant; all notifications were returned to the tax office by postal services; the company's registered office corresponds to a residential house that is uninhabited;

- the Claimant fully deducted the VAT, assessed at the rate of 23%, resulting from operations that do not correspond to real operations and which was not delivered to the State coffers;

  • The Claimant made accounting entries resulting in the decrease of tangible fixed assets, in the amount of € 601,142.66, recorded in account 4.3.3.131 – acquisitions basic equipment, and the decrease of accumulated depreciation, in the amount of € 321,640.90, recorded in account 4.3.8.3 – basic equipment;

  • The Tax Inspection Report emphasized the circumstance that the taxpayer, when notified for that purpose, did not justify and clarify the accounting entry;

  • The Tax Inspection Report characterized this accounting entry as corresponding to the transfer of assets or dedication to purposes other than the company's activity, by virtue of the presumption provided for in article 86.º of the VAT Code;

  • Based on this presumption, an additional VAT assessment was determined in the amount of € 64,285.40, calculated at the rate of 23%, on the net book value of € 279,501.76 (corresponding to the difference between the amounts of € 601,142.66 and € 321,640.90).

The Tribunal formed its conviction as to the factual matters proven on the basis of the administrative file submitted by the Tax Authority.

Legal Matters

  1. Introductorily, the Claimant refers to the general requirements for the reasoning of the tax act in order to conclude that, in the present situation, the question to be decided is placed at the level of substantive validity, in order to ascertain whether the reasons specifically invoked by the Tax Authority justify the practice of the acts of additional tax assessment.

Nevertheless, the Claimant ultimately asserts that the corrections made "suffer from manifest defects in substantive reasoning, due to failure to subsume the factual situations under the cited rules", which - according to what it states - necessarily results in a defect of lack of formal reasoning.

It is known, however, that our legal system does not recognize a substantialist conception of the duty to reason, reducing the requirement of reasoning to the manner of formal externalization of the administrative act, and not to substantive validity as to its content or prerequisites.

On the other hand, since an erroneous legal subsumption of the facts is at issue - as is alleged - the question is placed, not at the level of lack or insufficiency of reasoning, but in error as to the prerequisites of law, which falls within a defect of violation of law, and which relates to two distinct aspects: the right to VAT deduction and the presumption of transfer of assets.

These, then, are the questions that merit clarification.

Undue VAT Deduction

  1. The Tax Authority refused the right to deduct VAT incurred on the acquisition of goods carried out within the scope of the Claimant's economic activity, invoking article 19.º, no. 4, of the VAT Code, based on two prerequisites: in the inspection procedure directed against the supplier of the goods subject to deduction it became apparent that that entity did not have an adequate business structure; the Claimant fully deducted the VAT, improperly assessed at the rate of 23%, and the tax was not delivered to the State coffers due to the use, by the supplier of the goods, of documents that do not evidence real operations.

The right to deduct tax, governed in articles 167.º to 192.º of the VAT Directive and, in domestic law, in articles 19.º to 25.º of the VAT Code, consists essentially of the right of a taxpayer to deduct from the tax incurred on a certain taxable operation the tax which it has incurred in the acquisition of goods or services intended for the accomplishment of that operation. As the tax is based on a system of fractional payments intended to tax final consumption, the deduction of tax paid in the intermediate operations of the economic circuit is inherent to the proper functioning of the system and evidences the neutrality of the tax. As a fundamental principle of the VAT system, the right to deduction, in principle, cannot be limited and is exercised immediately in relation to all taxes which have burdened the operations carried out upstream (judgment of the CJEU of 8 May 2013, Case no. C-271/12).

The right to deduction is recognized in article 19.º, no. 1, of the VAT Code and subject to the conditions defined in no. 2. In turn, nos. 3 and 4 establish restrictions on the right to deduction as follows:

"3 – Tax resulting from a simulated operation or an operation in which the price shown on the invoice is simulated cannot be deducted.

4 - Tax resulting from operations in which the supplier of goods or provider of services does not deliver to the State coffers the tax assessed to the customer cannot be deducted either, when the taxpayer has or should have knowledge that the supplier of goods or provider of services does not have an adequate business structure capable of exercising the declared activity."

No. 3 relates to simulated operations, while no. 4 prevents the deduction of VAT in situations of non-existence or inadequacy of the supplier's business structure to the activity developed when the supplier has not delivered to the State coffers the tax assessed.

As is noted by legal doctrine, for the limitation contained in this no. 4, "it is not required that the acquiring taxpayer has knowledge of the supplier's fraudulent intention not to deliver the tax to the State coffers, but only that it knows or should know that the latter does not have adequate conditions to pursue the declared activity", understanding that "the principle of VAT neutrality imposes the protection of the right to deduction when there are no objective elements demonstrating that the taxpayer knew or should have known that, with its acquisition, it was participating in VAT fraud". This conclusion is reached in accordance with the jurisprudence of the CJEU (judgment of 6 July 2006, Case C-439/04), whereby "when it is verified that the acquiring taxpayers have undertaken the measures that could reasonably be required of them to ensure that their operations did not constitute fraud, they must be able to rely on the legality of those operations without running the risk of losing their right to deduct VAT paid upstream" (cf. Alexandra Martins/Lídia Santos, in "VAT Code and RITI – Notes and Comments", coordinated by Clotilde Celorico Palma and António Carlos Santos, Almedina, 2014, pages 242 and 243).

In the present case, the Tax Authority refused the right to deduct VAT, in relation to operations for the acquisition of goods, on the grounds that it found, in an inspection procedure specifically directed at the economic activity of the supplier, that the latter used false invoicing in the years 2013 and 2014 and did not deliver to the State coffers the tax assessed. And also because it became apparent in that same procedure that the company does not have an adequate business structure, with relevance being attributed, to reach this conclusion, to the facts stated in the last item of paragraph D) of the factual matters.

Pursuant to article 74.º, no. 1, of the General Tax Code, "the burden of proving the facts constitutive of the rights of the Tax Authority or of taxpayers falls on whoever invokes them". Since the refusal of the right to VAT deduction is at issue, it is incumbent upon the Tax Authority, as a result of this rule of substantive evidential law, to prove the facts that give concrete effect to the limitation of the right to deduction in accordance with the aforementioned provision of article 19.º, no. 4, of the VAT Code, namely, the non-delivery to the State coffers of the tax assessed by the supplier of goods and the knowledge (or duty to know) that the supplier did not have an adequate business structure.

In the concrete case, this proof was gathered, as we have seen, through an inspection procedure in which the Claimant is not a party and to which it could not have had access when it sought to exercise the right to deduct VAT. And, as has been stated, it is not required – for the purpose of applying no. 4 of article 19.º - that the acquiring taxpayer has knowledge of the supplier's fraudulent purpose, but that it knew or should have known that the latter does not have the adequate conditions for the exercise of the declared activity. However, as to this point, what results from the Tax Inspection Report is that the managing partner of the supplier was not contactable, nor was it possible to effect notifications by mail and the company's registered office corresponded to a normally uninhabited residential house.

Nothing permits the conclusion, however, that any of these factual indicators was also within the knowledge of the Claimant and, in any case, no proof is made that the Claimant had or should have had knowledge of the non-existence or inadequacy of the supplier's business structure.

As such proof was not made, a situation of uncertainty as to the relevant facts is reached which must be resolved to the detriment of the party on whom the burden of proof rests (articles 346.º, final part, of the Civil Code, and 414.º of the Code of Civil Procedure).

The Inspection Report also emphasizes the circumstance that VAT was deducted at the rate of 23%, when in the second half of 2014, the reduced rate of 6% was already in force for that type of transaction. This reasoning, however, has no bearing on the analysis of the case, since what is at issue is merely the fulfillment of the requirements upon which the right to deduction depends. In the case of invoice inaccuracy there is only place for the proper mechanism of regularization referred to in article 78.º of the VAT Code.

The arbitral request is well-founded as to this point.

Presumption of Transfer of Assets

  1. The Claimant further contests the VAT assessment on the assets that comprise tangible fixed assets based on the presumption that such assets are not located at the place where it exercises its activity and have been transferred or dedicated to purposes other than the company's corporate purpose. To this end it argues that the Tax Authority, treating as transferred the assets acquired, imported or produced that are not located at any of the places where the taxpayer exercises its activity, does not carry out proof of the factual basis of the presumption referred to in article 86.º of the VAT Code, since it is unknown which assets are at issue or when they were subject to transfer.

What results from the factual matters deemed established is that the Claimant made accounting entries resulting in the decrease of tangible fixed assets, in the amount of € 601,142.66, and the decrease of accumulated depreciation, in the amount of € 321,640.90, it being known that these are entries relating to basic equipment. According to the Tax Inspection Report, the Claimant did not justify these accounting entries, whereby it was considered that the transfer of assets or dedication to purposes other than the company's activity was verified, by virtue of the presumption provided for in article 86.º of the VAT Code. There was thus an additional VAT assessment, calculated at the rate of 23%, on the net book value of € 279,501.76, corresponding to the difference between the amounts of € 601,142.66 and € 321,640.90.

The aforementioned provision of the VAT Code prescribes:

"Save for proof to the contrary, assets found at any of the places where the taxpayer exercises its activity are presumed to have been acquired and assets acquired, imported or produced that are not found at any of those places are presumed to have been transferred."

This is, therefore, a legal presumption iuris tantum which can be rebutted by proof to the contrary.

Presumptions presuppose the proof of a known fact (basis of presumption) from which an unknown fact is inferred (article 349.º of the Civil Code). As a presumption established by law is concerned, it does not itself constitute a means of proof, that is, a means intended to form conviction as to the reality of a fact, but rather a means of dispensing with the proof of the presumed fact. Based on an instrumental fact given as proven, the judge may infer, by virtue of the legal presumption, another fact for which there is no direct proof. In this context, it is incumbent upon the party to prove the instrumental fact so that from it can be inferred, by legal presumption, the presumed fact (cf. Teixeira de Sousa, "Proof in Civil Procedure", undated (photocopied), pages 5-6).

In the case, the Tax Authority did not carry out proof of the instrumental fact, confining itself to drawing the inference of the occurrence of the transfer of assets from the accounting entry which resulted in a decrease of tangible fixed assets and fixing the net value of the transferred assets through the accounting balance between the value of the decrease and the value of depreciation.

Even though, as a rule, data and findings entered in the taxpayer's accounts are to be presumed true (article 75.º, no. 1, of the General Tax Code), the fact is that the instrumental fact serving as the basis for the presumption cannot be considered proven merely through a simple accounting review, since the basis of the presumption translates, in accordance with the law, into the non-existence, at any of the places where the taxpayer exercises its activity, of the assets acquired, imported or produced. In the circumstances of the case, it was therefore necessary to demonstrate that the assets comprising the tangible fixed assets were acquired, imported or produced and that those assets were not located at the places where the taxpayer exercises its activity.

It is also not sufficient, for the purpose of proving the instrumental fact, the mere allegation that the taxpayer, when notified for that purpose, did not come forward to clarify or justify the accounting entries relating to the tangible fixed assets. The taxpayer's lack of cooperation in clarifying its tax situation only allows the presumption that the data and findings entered in the accounts are true to be rebutted (article 75.º, no. 2, paragraph b), of the General Tax Code). But from this it cannot be concluded that the accounting entries – which cannot even be considered reliable – allow it to be proven that the assets were not located at the places where the taxpayer exercises its activity.

The instrumental fact from which the presumed fact was to be inferred cannot, therefore, be considered proven, which prevents the legal presumption from operating.

For all the foregoing, the request is well-founded also on this point.

III – Decision

Accordingly, it is decided to judge the arbitral request to be entirely well-founded and to annul the tax acts of VAT assessment, relating to the year 2014, for undue VAT deduction, in the amount of € 19,006.30, and presumption of transfer of assets, in the amount of € 64,285.40.

IV. Value of the Case

The value of the case is fixed at the amount of € 83,291.70, which corresponds to the value of the assessment which it was sought to contest.

V. Costs

In accordance with articles 12.º, no. 2, and 24.º, no. 4, of the RJAT Rules, and 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached to that Regulation, the costs are fixed in the amount of € 2,754.00, which shall be borne by the Respondent.

Notify.

Lisbon, 30 January 2019

The President of the Arbitral Tribunal

Carlos Fernandes Cadilha

The Arbitrator Member

Cristina Aragão Seia

The Arbitrator Member

Olívio Mota Amador

Frequently Asked Questions

Automatically Created

Can the Portuguese Tax Authority deny VAT deduction rights based on a supplier being flagged for using false invoices?
Yes, the Portuguese Tax Authority can deny VAT deduction rights when a supplier is flagged for using false invoices, but only under specific conditions. The refusal must be supported by objective evidence that the taxpayer knew or should have known it was participating in VAT fraud. The VAT neutrality principle protects bona fide purchasers unless there are concrete elements demonstrating the taxpayer's knowledge or constructive knowledge of fraudulent activity. The mere fact that a supplier was under investigation or flagged for fraud is insufficient; the Authority must prove the taxpayer had actual or constructive knowledge of the irregularities at the time of the transactions.
What is the presumption of transfer of goods under Article 86 of the Portuguese VAT Code (CIVA)?
Article 86 of the Portuguese VAT Code (CIVA) establishes a legal presumption that goods acquired, imported, or produced that are not found in any of the places where the taxpayer exercises its activity are presumed to have been transferred (sold). This presumption triggers a VAT liability on the presumed transfer. The taxpayer bears the burden of rebutting this presumption by providing real and objective proof that the assets were not transferred, such as evidence of theft, loss, destruction, or continued existence in a different location. The Tax Authority must establish the factual basis for applying the presumption, including identifying the specific assets and demonstrating their absence from business premises.
Does the VAT neutrality principle protect a taxpayer who unknowingly participated in VAT fraud through a supplier?
Yes, the VAT neutrality principle protects a taxpayer who unknowingly participated in VAT fraud through a supplier, provided there are no objective elements demonstrating that the taxpayer knew or should have known of the fraudulent activity. This principle, rooted in EU VAT law, ensures that VAT deduction rights are preserved for innocent parties acting in good faith. The burden of proof rests with the Tax Authority to demonstrate the taxpayer's knowledge or constructive knowledge through concrete, objective evidence. Factors considered include the taxpayer's due diligence, commercial practices, price anomalies, and any red flags that should have alerted a reasonable businessperson to potential fraud.
What evidence must the Tax Authority provide to prove that a supplier lacked adequate business structure for its declared activity?
The Tax Authority must provide concrete, objective evidence demonstrating that a supplier lacked adequate business structure for its declared activity. This evidence should include: verification of physical premises and their suitability for the declared operations; documentation of human resources, equipment, and operational capacity; analysis of the supplier's ability to perform the services or deliver the goods invoiced; examination of the supplier's financial records and business transactions; and demonstration of discrepancies between declared activity and actual capacity. Mere allegations or suspicions are insufficient. The Authority must establish a factual foundation showing the impossibility or implausibility of the supplier conducting the business activities reflected in the invoices issued to the taxpayer.
Can VAT corrections based on the presumption of goods transfer be made through direct methods or must indirect methods under Article 88 of the LGT be used?
VAT corrections based on the presumption of goods transfer under Article 86 CIVA can be made through direct methods when the Tax Authority has concrete evidence of the decrease in tangible fixed assets and the taxpayer fails to provide adequate explanation. However, the taxpayer argued that such corrections could only be made through indirect methods under Article 88 of the General Tax Law (LGT), which applies when the tax base cannot be directly determined due to lack of reliable accounting records or documentation. The distinction is significant: direct methods require specific identification of the assets and transactions, while indirect methods involve estimation based on comparative or economic indicators. The proper methodology depends on whether the Tax Authority has sufficient concrete data to make direct assessments or must resort to estimation due to inadequate taxpayer records.