Process: 310/2014-T

Date: November 26, 2014

Tax Type: IVA

Source: Original CAAD Decision

Summary

In Process 310/2014-T, company A... S.A. challenged additional VAT assessments totaling €19,525.78 for 2009, issued by the Portuguese Tax Authority (AT) based on the application of indirect methods under Article 90 of the VAT Code. The central issue involved both the jurisdiction of the CAAD Arbitral Tribunal and the substantive legality of applying indirect methods based on alleged transfer pricing violations. The Tax Authority raised a preliminary exception arguing that Ordinance 112-A/2011, Article 2(b) expressly excludes from arbitral jurisdiction claims relating to determination of taxable base by indirect methods. The Claimant argued that indirect methods were improperly applied because all necessary accounting documentation was available for direct determination, no accounting irregularities existed, and the transfer pricing documentation file requirement under Article 63 of the Corporate Income Tax Code was inapplicable given the company's turnover fell below the legal threshold. Furthermore, the Claimant contested that transfer pricing rules from corporate income tax law cannot serve as grounds for VAT corrections via indirect methods, especially since VAT legislation in 2009 did not incorporate transfer pricing provisions. The AT justified the indirect assessment based on significant productivity decline compared to sector benchmarks and the related-party nature of all transactions with parent company B..., arguing that absence of transfer pricing documentation prevented verification of arm's length pricing. The Claimant also challenged the calculation methodology, particularly the arbitrary use of median profitability ratios, and invoked Article 100 of the Tax Procedure Code regarding non-existence of taxable events and burden of proof allocation.

Full Decision

Arbitral Decision

Tax Arbitration Proceeding

Process No. 310/2014 – T

Subject Matter: VAT – Application of Indirect Methods – Jurisdiction of the Arbitral Tribunal

The Arbitrator Dr. Filipa Barros (single arbitrator), designated by the Deontological Council of the Centre for Administrative Arbitration ("CAAD") to constitute the Singular Arbitral Tribunal, established on 4 June 2014, decides as follows:

I. REPORT

The company A... S.A, legal entity no. …, with registered office in the Industrial Zone of …, hereinafter "Claimant", hereby requests, pursuant to the provisions of Article 2, no. 1, letter a), Article 10 and following of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT"[1], the constitution of an Arbitral Tribunal to rule on the illegality and consequent annulment of additional VAT assessments nos. …, totaling €19,525.78 relating to the year 2009, issued by the Tax and Customs Authority, resulting from the application of indirect methods for determining the taxable base, pursuant to Article 90 of the VAT Code.

To substantiate its claim, the Claimant considers, in essence, that the legal prerequisites for the application of indirect methods are not met, as all necessary elements were made available to provide direct and exact proof and quantification of the taxable base. It further disagrees with the assessment criteria used, emphasizing the arbitrariness in the choice of the median for calculating presumed profit.

In this regard, it alleges that no irregularities were detected in the accounting, with the exception of the failure to submit a transfer pricing file, a requirement which, in any case, would not be applicable to it given that its turnover falls below the legal threshold. In this context, it opposes the relationship alleged by the Tax Authority and Customs Authority (hereinafter AT) between the violation of Article 63 of the Corporate Income Tax Code and the presumed underpricing of the Claimant associated with the fact that the parent company of the group resorts to outsourcing to third parties.

Consequently, the Claimant understands that the maintenance of the corrections underlying the additional VAT assessments is illegal, as it does not meet the requirements for recourse to indirect methods, and even if such recourse is considered justified, the criteria and values for fixing the taxable base would be unacceptable, invoking, in this regard, the non-existence of a taxable event, pursuant to no. 1 of Article 100 of the Code of Tax Procedure (CPPT).

On 1 April 2014, the request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and immediately notified to the Respondent in accordance with law.

The Claimant did not proceed to appoint an arbitrator.

Thus, pursuant to the provisions of no. 1 of Article 6 and letter b) of no. 1 of Article 11 of the RJAT, by decision of the Honorable President of the Deontological Council, duly communicated to the parties within the legally provided periods, the Honorable Dr. Filipa Barros was designated as arbitrator of the Singular Arbitral Tribunal, who communicated to the Deontological Council and to the Centre for Administrative Arbitration the acceptance of the appointment within the period stipulated in Article 4 of the Deontological Code of the Centre for Administrative Arbitration.

In accordance with the provisions of letter c), no. 1, Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Singular Arbitral Tribunal was established on 4 June 2014, followed by the pertinent legal procedures.

The Respondent, duly notified for this purpose, filed its reply in which it raises a defense by exception based on the incompetence of the Arbitral Tribunal ratione materiae. To this end, it invokes the provisions of letter b), Article 2 of Ordinance no. 112-A/2011, of 22 March ("Binding Ordinance"), according to which the following is excluded from arbitral jurisdiction: the competence to appreciate "claims relating to acts of determination of the taxable base and acts of determination of the tax base, both by indirect methods, including the decision of the revision procedure".

In the alternative, and by way of imputation, it maintains that the alleged error in the prerequisites for the application of indirect methods is not substantiated, as the tax inspection services proved the verification of the said prerequisites, and the Claimant gave consent to the application of indirect methods by putting forward an indirect quantification of its taxable base.

According to the Respondent, facts were verified that reveal a contributory capacity different from that declared, concerning the divergence between the profitability per employee of the Claimant and the ratio for the same sector of activity and organizational unit, which constitutes an accentuated decline in productivity compared to previous years without the Claimant having advanced any reasonable justification for this, or presented accounting documents, in particular, the transfer pricing file, or others, capable of proving the comparability of prices practiced as well as the costs attributed to invoiced services, also ruling out serious indications of underpricing.

It contests that the corrections made were based on the violation of the provisions of Article 63 of the Corporate Income Tax Code, with the reference made to the submission of the transfer pricing file being a means of proof, relevant insofar as the Claimant's sole customer is "B..." (related party) and is capable of demonstrating the comparability of the prices practiced, which, if it existed, would have allowed the AT to proceed with merely arithmetic corrections of the taxable base.

It likewise disputes the alleged error in the quantification of the taxable base, pointing to the fact that the Claimant failed to demonstrate the excess quantification, a burden that fell upon it pursuant to Article 100 of the CPPT, and that it did not bring any element for objective determination of the taxable base.

It concludes that the dilatory exception of incompetence should be upheld and, alternatively, that the action is unfounded.

On 15 October 2014, the first meeting of the arbitral tribunal was held, pursuant to and with the objectives provided for in Article 18 of the RJAT.

In the exercise of the right to be heard, the written reply presented by the Claimant to the exceptions invoked by the Respondent was admitted to the proceedings.

The Claimant alleges, in its reply to the exceptions, in essence and in summary:

"Contrary to what is stated by the AT, the correction was based on the violation of the transfer pricing rules under corporate income tax (art. 63 of the Corporate Income Tax Code) as results from the tax inspection report (see point 17 of the initial request).

In 2009 (year of correction), transfer pricing rules are not provided for in the VAT Code.

Thus, what is at issue is the total inadequacy/illegality of recourse to indirect methods to correct the taxable base under VAT based on the (alleged) violation of transfer pricing rules provided for in the Corporate Income Tax Code.

It is a fact that the claimant filed a request for revision of the taxable base pursuant to Article 91 of the General Tax Law.

And it resorted to this request, not because it agreed or conceded on the basis of the correction (transfer pricing), but only to safeguard a future defense and discussion on quantification.

To accommodate the claimant's request only to the question of the illegality of the recourse to indirect methods under VAT based on the violation of transfer pricing rules (more serious: under Corporate Income Tax), the reduction of the grounds of the claimant's request to this matter is requested. Finally, it should be noted that if the understanding is that the (illegal) recourse by the AT to indirect methods to effect corrections under VAT based on the violation of transfer pricing rules under Corporate Income Tax allows the AT to escape the binding nature of this learned arbitral tribunal on transfer pricing rules, an unlimited "escape valve" has been found for the AT to unlink itself from tax arbitration."

Having heard the parties, the Tribunal notified the Respondent and the Claimant to, in this order and successively, present written arguments relating to the reply to the exception presented by the Respondent in its reply.

The Tribunal decided that it would rule in an interlocutory decision on the matter relating to the exception invoked by the Respondent.

Accordingly, and having heard the parties, the Tribunal determined the postponement to a later date of the possible taking of witness testimony.

In view of the arguments produced by the parties and the exception raised, the following questions are to be decided:

  1. Preliminary question - Incompetence of this tribunal ratione materiae;

Should the exception invoked by the Respondent not be upheld, it shall be necessary to decide on:

  1. The error in the prerequisites for the application of indirect methods; and, finally,

  2. The excess quantification of the taxable base by indirect valuation criteria.

II. DISMISSAL OF DEFECTS IN PROCEDURE

The parties have legal personality and capacity, are legitimate and are properly represented, (cf. Articles 4 and 10, no. 2 of the RJAT and Article 1 of Ordinance no. 112-A/2011 of 22 March).

Exception or preliminary question: the material incompetence of the Arbitral Tribunal.

The AT raises, among other questions, that of the material incompetence of the Arbitral Tribunal to appreciate the claim of the Claimant.

And it bases its position on the fact that the subject matter of the proceedings is a request for arbitral ruling based on additional VAT assessments - to which the Claimant attributes the defect of illegality - using indirect methods, pursuant to Article 90 of the VAT Code, and letters b) and e) of no. 1 of Article 87 and letters a) and d) of Article 88 of the General Tax Law, a matter that is expressly excluded from the scope of the AT's binding to arbitral jurisdiction by the Binding Ordinance.

Given that the scope of the tribunal's material jurisdiction is a matter of public order and its knowledge precedes that of any other matter (Article 13 of the Code of Administrative Court Procedure applicable ex vi Article 29, no. 1, letter c) of the RJAT), and that the infraction of the rules of jurisdiction ratione materiae determines the absolute incompetence of the tribunal, which is cognizable ex officio [Article 16, nos. 1 and 2 of the CPPT applicable ex vi Article 29, no. 1, letters a) and c) of the RJAT], it is important to begin by appreciating the dilatory exception raised by the Respondent regarding the incompetence of the Arbitral Tribunal.

Let us, therefore, examine the facts, although only those specially relevant for the pronouncement of the decision regarding the material competence of the Arbitral Tribunal.

III. REASONING

1. Facts Deemed Proven

The following facts are documentally proven in the context of the administrative proceeding and/or accepted by the parties in their respective submissions:

  1. The Claimant carries out its activity in the sector of textile and clothing manufacture and confection.

  2. The confection services provided by the Claimant in 2009 were intended essentially for C... - , S.A. and relate essentially to the confection of pieces to order for which a price per piece executed is paid;

  3. The Claimant was subject to an external inspection action of general scope carried out in compliance with service order no. OI …, of 27.07.2012, relating to the financial year 2009;

  4. From the inspection report it appears that the Tax Inspection Services analyzed the Claimant's cost structure, the accounting elements and the pricing policy practiced with the related party C... and considered the following:

"the high weight of personnel costs, as well as depreciation of the year's costs, representing 81.6% and 8.1%, respectively, compared to the declared turnover contributed to the company presenting continued losses, so the profitability ratio is negative both (...) in 2009 and in previous financial years. (...) From this it can be inferred the existence of underpricing, since the services provided consist essentially of labor incorporated in finishing services for the sole customer "..." who holds full corporate control (sole administrator) and therefore can interfere with the pricing policy declared.

Furthermore, this customer makes transfers/bank transfers, throughout the year, of amounts exceeding those invoiced, as is evident from the accounting. In fact, the clients account accumulates credit balances (DOC III), meaning that the amounts received exceed those invoiced, with that credit balance subsequently being canceled by a credit entry to account 26827001 "advances – ...(...)."

The report further states that, "although the answer 'yes' to the following question appears in table 11 of the Financial and Economic Statement submitted by the s.p.: is documentation relating to transfer prices practiced organized? The truth is that it does not possess any document relating to transfer prices (...) having sent scarce and inconclusive elements, in that the sample of prices indicated as comparable is very small (2 products/references) both of the s.p. and of third parties (...) these entities being subcontracted by the .... In addition to indicating prices practiced in different years, that is 2009 (s.p.) and 2010 (of the companies serving as a comparison benchmark), we cannot effectively confirm comparability.(...).

Thus, not following the rules contained in the Corporate Income Tax Code, regarding transfer prices, making it impossible to determine the taxable base through direct valuation, we resort to activity indicators (ratios), in this case, R18 = profitability per employee to presume business volumes (...).

And in conclusion, in the report of the Tax Inspection Services it is stated:

"For all that has been said throughout this report it is found that we are facing the possibility of direct and exact determination of the taxable base referred to in Article 88 of the General Tax Law (...). Thus, the accounting not reflecting the true patrimonial situation and due to the lack of elements provided by the s.p., it is not possible for us to determine the taxable base directly, which is why alternatively we resort to indirect methods, using the activity ratio (R18 median of the organizational unit) to presume business volume, maintaining the corrections already contained in the Draft Tax Inspection Report". (cf. doc. no. 13, which is given as fully reproduced, together with the Request for Arbitral Ruling);

  1. Faced with the impossibility of quantifying directly and exactly the taxable base, under corporate income tax and VAT, for the financial year 2009, the Tax Inspection Services considered the prerequisites provided for in letters b) and e) of no. 1 of Article 87 and letters a) and d) of Article 88, both of the General Tax Law, to be met, having proceeded to determine it using indirect methods, pursuant to Article 90 of the General Tax Law in conjunction with Article 57 of the Corporate Income Tax Code and Article 90 of the VAT Code, (cf. Administrative Proceeding);

  2. Consequently, the Claimant's taxable base was subject to correction in the amount of €97,629.05, resulting from the difference between the declared turnover and the presumed turnover (234,261.74 – 136,632.69), correcting the taxable profit for corporate income tax purposes in the amount of €9,080.39 (in view of the declared tax loss of €88,548.66) and fixing the VAT shortfall in a total amount of €19,525.78, pursuant to Article 90 of the VAT Code.

  3. By Official Letter no. … of 13.03.2013, the Claimant was notified to exercise the Right to Prior Hearing to the Draft Inspection Report.

  4. On 02.04.2013 the Claimant presented its defense in a Right to Prior Hearing, alleging, in summary, the following:

  5. Regarding the question of the justification for the low ratio (R18) of personnel costs/services provided, A... clarified that the company's situation was due to (i) the commitment undertaken with the Municipal Council of …, by force of the protocol concluded (attached to the Report) for the maintenance of jobs, the violation of which involved an obligation to pay substantial compensation, associated with (ii) the severe crisis in the textile sector and (iii) the debt/subsidy contracted with IAPMEI whose reimbursement terms were in October 2009;

  6. With respect to the failure to submit a transfer pricing file, it emphasized that it is not obliged to possess a fiscal documentation process in that its turnover is €136,633, so it falls below the legal threshold "thus it falls to the tax administration to bear the burden of proof that the prices practiced with entities in special relationships (related operations) differ from what would normally be agreed in the absence of such special relationships." (cf. request for arbitral ruling);

  7. By Official Letter … of 16-04-2013, issued by the Honorable Director of Finance of …, the Claimant was notified, on 08-05-2013, of the Final Definitive Report, in which it was decided to maintain the values proposed in the Draft Report. (cf. Administrative Proceeding).

  8. On 21-05-2013 the Claimant filed, pursuant to and for the purposes of Article 91 of the General Tax Law, the Request for Revision of the Taxable Base, opposing the fixing of the taxable base in corporate income tax and VAT, relating to the year 2009, by indirect methods, requesting the appointment of an expert to represent it in the Revision Commission, as well as an independent expert; (cf. doc. no. 18 together with the request for Arbitral Ruling);

  9. Pursuant to the Minutes of the Meeting to Consider the Request for Revision of the Taxable Base, of 14-06-2013, it was considered that "in light of the analysis of the grounds and data contained in the file, in particular the Tax Inspection Report, the request for revision filed by the taxpayer and the arguments produced by both experts during the meeting, it was not possible to reach an agreement pursuant to Article 92, no. 1 of the General Tax Law." (cf. Administrative Proceeding).

  10. By decision dated 25-09-2013, the Honorable Director of Finance concluded that:

(cf. Final Decision of the Request for Revision and Fixing of the Tax Base, document no. 18, together with the Request for Arbitral Ruling, the contents of which are given as fully reproduced).

  1. On 31-03-2014, the Claimant made the request for constitution of the Arbitral Tribunal that gave rise to the present proceeding. (cf. electronic request to CAAD).

2. Facts Not Proven

No facts with relevance to the appreciation of the matter of the exception were found that were not proven.

3. Reasoning

The Tribunal's conviction in establishing the factual framework above was based on the documentation attached to the proceedings by the parties and on the instructing administrative proceeding.

B. ON THE LAW

The tax acts subject to appreciation are only the additional VAT assessments nos. …, totaling €19,525.78 relating to the year 2009, issued by the Tax and Customs Authority, resulting from the application of indirect methods for determining the taxable base, pursuant to Article 90 of the VAT Code.

The Respondent invoked a dilatory exception of material incompetence of the Tribunal the upholding of which precludes knowledge of the merits of the question. The scope of tax arbitral jurisdiction is delimited, in the first place, by the provisions of Article 2 of the RJAT which sets forth, in its no. 1, the criteria for material distribution.

Pursuant to the said provision, the jurisdiction of arbitral tribunals includes the appreciation of the following claims:

"a) Declaration of illegality of acts assessing taxes, self-assessment, withholding at source and payment on account;

b) Declaration of illegality of acts fixing the taxable base when it does not give rise to the assessment of any tax, of acts determining the taxable base and of acts fixing patrimonial values;" (wording of Law no. 64-B/2011, of 30 December)

The appreciation of the jurisdiction of the arbitral tribunal involves a judgment on the suitability of the procedural means used by the Claimant to the case sub judice, having regard to the provisions of Article 2, no. of the RJAT, the fields of application defined for the process of judicial review (Articles 97, 102 and 100 of the CPPT) and also the Binding Ordinance, Ordinance no. 112-A/2011, of 22 March.

In effect, given the voluntary character of submission to arbitral jurisdiction, Article 4, no. 1 of the RJAT provides that the binding of the tax administration depends on regulation contained in an ordinance.

The said Binding Ordinance established the conditions and limits of binding having regard to the specificity of the matters and the amount involved.

With relevance to the situation in question, the following are excluded from the appreciation of arbitral tribunals, in accordance with the aforementioned ordinance, claims relating to "acts of determining the taxable base and acts of determining the tax base, both by indirect methods, including the decision of the revision procedure" – (cf. Article 2, letter b) of the Binding Ordinance under the heading "Subject Matter of the Binding").

Let us now examine the subsuming of the Claimant's claim to the legal framework described.

The material claim of the Claimant, as defined in the Request for Arbitral Ruling, is subsumed precisely in this hypothesis of exclusion. In effect, the request for annulment of the tax acts is grounded in the non-fulfillment of the legal prerequisites for the application of indirect methods and in the excess quantification of the taxable base, also by way of the application of indirect valuation criteria. In fact, the Claimant considers the recourse to indirect methods in the case in question to be illegal, calling into question the very legality of the quantification. Subsequently, the Claimant came to invoke the question of the legality of making corrections under VAT based on the alleged violation of transfer pricing rules.

Now, as has been the constant jurisprudence of this Tribunal, the Respondent is not bound to the Jurisdiction of CAAD with respect to the matters requested by the Claimant, which are the subject of the additional VAT assessments, made exclusively by recourse to indirect methods, and not by force of the violation of the transfer pricing regime, as clearly results from the administrative proceeding.

It may be said, moreover, that the subsequent alteration of the basis of the Claimant's claim merely as a result of the response to the exception of material incompetence invoked by the Respondent, in its Reply, to a request for "declaration of illegality of the recourse to the application of indirect methods under VAT based on the violation of transfer pricing under corporate income tax", constitutes a subsequent alteration of the instance, which finds no support in the instructing administrative proceeding, nor in the existence of new facts that have occurred during the pendency of the arbitral proceeding, or of which the Claimant only became aware at a date subsequent to the filing of the request for arbitral ruling, as provided for in Article 20, no. 1 of the RJAT.

Consequently, it is important to clearly identify the cause underlying the acts of additional VAT assessment, relating to the year 2009, the legality of which the Claimant challenges in its claim, it being certain that these acts are founded on the determination of the taxable base using the application of indirect methods.

As mentioned above, arbitral tribunals are prevented from appreciating claims that refer to the evaluation of the tax base by indirect methods and to the very decision of the revision procedure (the object of which concerns the prerequisites for application and the determination of the tax base by indirect methods). In effect, in the case of determination of the tax base by indirect methods the law provides its own procedure, with the assessment being made in accordance with the decision of said procedure (cf. no. 1 of Article 62 of the CPPT and Articles 91 and 92 of the General Tax Law). The current revision procedure also covers the very prerequisites for the application of indirect methods, unlike what occurred under the previous Tax Code of Procedure regime.

Thus, if the cause of the claim in the present action is precisely grounded in the error in the prerequisites for the application of indirect methods (including when the question of application results from an alleged violation of transfer pricing rules) and in the "adequacy" of the respective quantification, by disagreement with the ratios applied, then, there is no doubt that the appreciation of the acts of assessment in controversy, which materialize the final decision of the procedure, with such grounds, is excluded from the jurisdiction of this tribunal.

It is emphasized that the question that runs through the various submissions presented by the Claimant is always that of the illegality or "total inadequacy" of recourse to indirect methods to correct the taxable base under VAT, and in this regard, the Tax Inspection Report pointed to several reasons for the impossibility of quantifying directly and exactly the taxable base.

Consequently, the VAT assessment acts that are the subject of the present arbitral action were the direct and exclusive consequence of a decision taken in the context of the revision procedure which rejected the Claimant's claims, being excluded from arbitral tribunals the knowledge of that decision.

This position has been followed in several decisions[2] and results directly from the law, insofar as the AT ruled out such a possibility by expressly excluding from its binding to arbitral tribunals "claims relating to acts of determining the taxable base and acts of determining the tax base, both by indirect methods, including the decision of the revision procedure" as provided in letter b), Article 2 of Ordinance no. 112-A/2011, of 22 March.

With regard to what is invoked by the Claimant, namely that removing the matter in question from the scope of arbitration - in particular "the (illegal) recourse by the AT to indirect methods to make corrections under VAT, based on the violation of transfer pricing rules under corporate income tax" - would constitute an unlimited "escape valve" for the AT to unlink itself from this jurisdiction, it should be noted that what is at issue for appreciation of the question of incompetence is only the interpretation of letter b), Article 2 of Ordinance no. 112-A/2011, and the ascertainment of the intention underlying it.

It should be emphasized that the terms of the AT's binding to the Arbitral Tribunals operating at CAAD were not established by law, but were, instead, attributed to the ministers of Finance and Justice by law, a discretionary power to, in the exercise of their administrative competencies (through an ordinance, which has the nature of a regulatory act), define the binding of the tax administration to those Arbitral Tribunals. Consequently, the ordinary legislator can limit its existence in the exercise of its legislative discretion, as to the type and maximum value of the disputes covered, pursuant to Article 4 of the RJAT.

If this were not understood, it would mean permitting, through the said appreciation of the assessment acts, the judgment of a claim relating to "acts of determining the taxable base (...) by indirect methods" expressly prohibited by the Binding Ordinance, in particular by Article 2, letter b) cited above.

Indeed, such appreciation, were it to be admitted (which, it is reiterated, does not appear to be the case), would have to be limited to formal defects relating to the assessment acts, since the substantive matter and its reasoning, being covered by the revision procedure and its respective decision, cannot be known by arbitral tribunals.

The arguments invoked by the Claimant therefore have no legal support.

In view of the foregoing, it is concluded that the exception of incompetence raised by the Respondent is upheld.

The upholding of the dilatory exception of incompetence of the Tribunal precludes and prejudices the knowledge of the merits of the claim, leading to the absolution of the Respondent from the instance.

IV. OPERATIVE PART

a) In view of the foregoing, the exception of absolute incompetence ratione materiae is upheld and, consequently, the request for arbitral ruling is rejected, absolving the Respondent from the instance;

b) As a consequence, the Tribunal decides to conclude the proceedings, converting the interlocutory decision into an arbitral decision;

c) The Claimant is condemned to pay the costs (Article 22, no. 4, of the RJAT), which are fixed at the amount of €1,224.00 in accordance with the Table I attached to the Rules of Costs in Tax Arbitration Proceedings.

Value of the case: in accordance with the provisions of Article 306, no. 2, of the Civil Procedure Code and Article 97-A, no. 1, letter a), of the CPPT and Article 3, no. 1 and 2, of the Rules of Costs in Tax Arbitration Proceedings, the case is valued at €19,525.78.

Notify.

Lisbon, 26 November 2014

The Arbitrator

(Filipa Barros)

[1] Acronym for Legal Framework for Tax Arbitration.

[2] Arbitral Process no. 17/2012 –T, of 14 May 2012, Arbitral Process no. 52/2012-T of 22 October 2012, Arbitral Process no. 70/2012-T, of 31 October 2012, Arbitral Process no. 175/2013-T of 16 January 2013, among others.

Frequently Asked Questions

Automatically Created

Can the CAAD Arbitral Tribunal review VAT assessments based on indirect methods under Portuguese tax law?
The jurisdiction of the CAAD Arbitral Tribunal to review VAT assessments based on indirect methods is limited under Portuguese law. Ordinance 112-A/2011, Article 2(b) expressly excludes from arbitral jurisdiction claims relating to acts of determination of taxable base by indirect methods, including decisions on revision procedures. However, the Claimant in this case argued that the dispute concerns the fundamental illegality of applying indirect methods based on corporate income tax transfer pricing violations (Article 63 IRC) to VAT matters, rather than merely challenging the quantification itself. This distinction is crucial: if the case involves whether the legal prerequisites for applying indirect methods were met at all, or whether it's illegal to use IRC transfer pricing rules as grounds for VAT corrections, it may fall within arbitral jurisdiction as a legality challenge rather than a quantification dispute excluded by the Ordinance.
What are the legal requirements for applying indirect methods to determine VAT taxable base under Article 90 of the IVA Code?
Under Article 90 of the Portuguese VAT Code (CIVA), indirect methods for determining taxable base may only be applied when specific legal prerequisites are met. The tax authority cannot resort to indirect assessment methods if all necessary elements are available to provide direct and exact proof and quantification of the taxable base. Generally, indirect methods require demonstration that: (1) accounting records are incomplete, non-existent, or contain irregularities that prevent direct verification; (2) the taxpayer failed to provide documentation requested during inspection; or (3) there are objective circumstances making direct determination impossible or unreliable. The burden is on the tax authority to prove these prerequisites are satisfied. Mere failure to submit certain documents (such as transfer pricing files) does not automatically justify indirect methods if other accounting records are complete and accurate. The taxpayer can challenge the application of indirect methods by demonstrating that complete documentation was available and no accounting irregularities existed that would prevent direct assessment.
Can the Portuguese Tax Authority use transfer pricing violations as grounds for presumed under-invoicing in VAT assessments?
The use of transfer pricing violations under corporate income tax law as grounds for presumed under-invoicing in VAT assessments is legally problematic under Portuguese tax law, particularly for tax years before transfer pricing rules were incorporated into VAT legislation. In 2009, transfer pricing provisions were contained in Article 63 of the Corporate Income Tax Code (CIRC) but not in the VAT Code. The fundamental principle is that each tax has its own legal framework and substantive rules. While the Tax Authority in this case argued that failure to provide transfer pricing documentation prevented verification of arm's length pricing with related party B..., thereby justifying indirect VAT assessment, the taxpayer contested this cross-application of IRC rules to VAT. The AT's position was that the transfer pricing file was relevant proof given that all transactions were with related parties, and its absence, combined with lower profitability ratios compared to sector benchmarks, constituted grounds for presuming underpricing. However, the taxpayer's defense emphasized that VAT taxable base should be determined under VAT-specific rules, and IRC transfer pricing violations cannot serve as the legal basis for VAT corrections via indirect methods.
How is the taxable amount calculated when indirect methods are applied to VAT in Portugal?
When indirect methods are applied to determine VAT taxable base in Portugal under Article 90 of the VAT Code, the calculation typically involves comparative analysis and presumptive techniques. In this case, the Tax Authority used sector-based profitability ratios and productivity benchmarks, specifically calculating the median profitability per employee for comparable businesses in the same sector and organizational structure. The AT identified a significant divergence between the Claimant's declared profitability per employee and the sector median, treating this as evidence of contributory capacity different from that declared. The tax authority then applied this median ratio to determine the presumed correct taxable base. However, the taxpayer challenged this methodology as arbitrary, particularly questioning why the median was selected rather than other statistical measures. Under Article 100 of the Tax Procedure Code (CPPT), once indirect methods are applied, the burden shifts partially: the taxpayer must demonstrate excess quantification and provide objective elements for proper determination of taxable base. The law requires that even under indirect methods, assessments must be reasonable, proportionate, and based on objective criteria rather than arbitrary choices.
What defenses can a taxpayer raise against additional VAT assessments resulting from indirect determination of taxable income?
Taxpayers have multiple defenses against additional VAT assessments resulting from indirect determination of taxable base under Portuguese law. First, they can challenge whether the legal prerequisites for applying indirect methods were met, arguing that complete accounting documentation was available for direct determination and that no irregularities existed preventing normal assessment procedures. Second, taxpayers can contest the specific calculation methodology employed, demonstrating that the criteria used (such as sector medians or productivity ratios) were arbitrary, inappropriate, or improperly applied to their specific circumstances. Third, under Article 100 of the Tax Procedure Code, taxpayers can invoke non-existence of the taxable event and provide objective elements showing the correct taxable base, though they bear the burden of proving excess quantification. Fourth, taxpayers can file a revision request under Article 91 of the General Tax Law to propose alternative quantification methods. Fifth, they can challenge the legal grounds for the indirect assessment, such as arguing that violations of corporate income tax transfer pricing rules cannot serve as basis for VAT corrections. Finally, taxpayers can raise jurisdictional defenses, arguing that certain disputes fall outside administrative or arbitral tribunal competence, though this is limited by Ordinance 112-A/2011 which excludes certain indirect method disputes from arbitration.