CAAD Case 371/2018-T: Deductibility of Expenses and Invoice Requirements in IRC Corporate Tax

ARBITRAL DECISION

I. Report

1. The legal entity A..., Lda., with tax identification number ... (hereinafter referred to as the "Claimant"), with registered office at ..., ...-... ..., filed, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, i.e., the Legal Regime for Arbitration in Tax Matters ("RJAT"), a request for the constitution of an Arbitral Tribunal, in order to have declared illegal the act of assessment of Corporate Income Tax ("IRC") for the 2014 financial year, with the Tax and Customs Authority ("Respondent" or "AT") being the respondent.

A) Constitution of the Arbitral Tribunal

1. Pursuant to the provisions of paragraph a) of Article 6(2) and paragraph b) of Article 11(1) of the RJAT, the Ethics Council of the Centre for Administrative Arbitration ("CAAD") appointed as arbitrator of the single tribunal the undersigned, who communicated acceptance of the assignment within the applicable period, and notified the parties of this appointment on 29 August 2018.

2. Thus, in accordance with the provisions of paragraph c) of Article 11(1) of the RJAT, and through the communication of the President of the Ethics Council of CAAD, the Single Arbitral Tribunal was constituted on 16 October 2018.

B) Procedural History

1. In the request for arbitral decision, the Claimant petitions for the illegality of the act of additional IRC assessment for 2014, with compensation number 2018... and compensatory interest relating to the period of 2014, in the total amount of Euro 28,638.72.

2. The AT presented a reply, petitioning for the dismissal of the request for arbitral decision, on the grounds that there is no defect consisting of a violation of law, requesting that the tax act under analysis, as it does not violate any legal or constitutional provision, be maintained in the legal order.

3. By order of 28 March 2018, the Single Arbitral Tribunal, pursuant to the provisions of paragraph c) of Article 16 of the RJAT, decided, without opposition from the parties, that it was not necessary to hold the meeting referred to in Article 18 of the RJAT, as a result of the simplicity of the questions at issue, as well as considering that it had at its disposal all the necessary elements to make a clear and impartial decision.

4. The present Arbitral Tribunal decided, in accordance with Article 18(2) of the RJAT, that it was not necessary to produce oral arguments or to hear witnesses, as the positions of the parties were perfectly defined in their respective pleadings, and set 5 April 2019 as the deadline for the arbitral decision.

5. The Arbitral Tribunal was properly constituted and is competent to examine the questions indicated (Article 2(1)(a) of the RJAT), the parties have legal personality and capacity and have full standing (Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March). No defects have occurred and no exceptions were raised, so nothing prevents judgment on the merits.

6. The present case is thus in a position for a final decision to be rendered therein.

II. Question to be Decided

1. The central question to be examined and decided regarding the merits of the case, as is apparent from the procedural documents of the parties, is whether the expenses incurred with the purchase of goods from supplier B..., Sole Proprietorship, Lda. ("B..., Lda.") should be deductible for IRC purposes in the sphere of the Claimant.

III. Determination of the Facts and Grounds Therefor

1. Having examined the documentary evidence produced, the present tribunal finds proven, with relevance to the decision of the case, the following facts:

I. The present Claimant conducts its economic activity in the field of buying and selling timber.

II. In the 2014 financial year, the Claimant had recorded in its SNC accounts relating to acquisition of inventories 14 invoices issued by supplier B..., Lda., with an accumulated value of Euro 129,961.26.

III. According to the evidence available, the present Claimant made payment to supplier B..., Lda. by bank cheque.

IV. Additionally, in that same financial year, the present Claimant proceeded to deliver and subsequently invoice timber to its customers, on which the due Value Added Tax ("VAT") was charged.

V. Regarding that financial year, the Claimant was subject to an external inspection action carried out by the Tax Inspection Services of the Finance Directorate of....

VI. It should be noted in this respect that this inspection action arose following communications made by the Finance Directorate of ..., after identifying the Claimant as a customer of company B..., Lda., which was identified by that service as an issuer of "false invoices."

VII. The said inspection action resulted in various corrections to the Claimant's taxable income, in relation to both VAT and IRC, which were based on verification of indications that the invoices issued by supplier B..., Lda. were false, due to false identity of the transferor of goods / service provider.

VIII. Following verification of such indications, the Inspection Services requested that bank secrecy be lifted, and the Claimant agreed to that request.

IX. Following the lifting of bank secrecy, not only of the Claimant but also of company B..., Lda., the Inspection Services verified that some of the bank cheques issued were issued in the name C..., and not of B..., Lda.

X. Additionally, some of these cheques were drawn at the counter of a branch of a bank located in ..., a locality where the Claimant's commercial premises are situated.

XI. Also during the inspection, the Claimant was requested to provide supporting documentation in order to try to establish the objective veracity of the operations in question, namely:

a) Photocopy of contracts concluded with that entity;

b) Identification of the person(s) with whom commercial contacts were established on behalf of the said company;

c) Identification of the persons who delivered the invoices;

d) Identification of the persons to whom cheques were delivered for payment;

e) Transport documents relating to invoices issued by the said companies.

XII. In response, the Claimant referred to the elements presented in the context of the inspection action for the 2013 financial year and clarified the following:

a) There were no written contracts with any of those suppliers;

b) Commercial contacts were established with C... (the Claimant having stated that it would be "probably a Brazilian citizen");

c) The invoices in the name of B... Lda. and the cheques for payment were delivered by or to C... and "...1 or 2 times another gentleman, whose name with uncertainties would be D..."; and further,

e) It presented the transport documents relating to invoices issued by the said companies.

XIII. Additionally, the Inspection Services proceeded to analyse the invoices issued by supplier B..., Lda. to the Claimant, having observed the following:

a) They were issued without respecting their numerical and chronological sequence (invoice no. 229 was issued on 24 January and invoices no. 211 and 218 bear the issue date of 31 January and 13 February, respectively);

b) In the field relating to the description of goods / services transferred, reference is made solely to eucalyptus with or without bark;

c) In none of the invoices is mentioned the date on which the goods were placed at the disposal of the Claimant;

d) Nor is it mentioned in any of the invoices the place, date and time of loading and unloading and the vehicle that carried out the transport;

e) In all invoices there appears the pre-printed expression "VAT INCLUDED AT THE RATE OF 23%" and VAT was charged at the normal rate, notwithstanding the goods transferred being subject to the rate of 6% from 1/1/2013;

f) From the handwriting contained in the invoices, it can be seen that they were issued by more than one person.

XIV. Having concluded, following the analysis of the elements provided by the Claimant, that the same failed to prove that the invoices issued by supplier B..., Lda. were not false invoices, the Inspection Services proceeded to correct the taxable profit for the 2014 financial year, as a consequence of the disregard of expenses incurred with the acquisition of goods from supplier B..., Lda.

XV. This correction resulted in the issuance of additional IRC assessment No. 2018..., as well as the assessment of compensatory interest, in the total value of Euro 28,638.72, regarding which the Claimant, in order to contest their legality in arbitral proceedings, provided suitable security for this purpose.

XVI. Dissatisfied with these assessments, the Claimant is now requesting the present Arbitral Tribunal to decide on the illegality of the above-mentioned additional IRC assessment and, consequently, that any amount improperly withheld or paid be returned to the Claimant, as well as costs of undue security.

1. The conviction of the present tribunal regarding the facts given as proven resulted from the documents attached to the case file and consisting of the uncontested arguments of the parties, as specified in the points of the factual matter set out above.

2. There is no factual matter relevant to the decision of the case given as unproven.

IV. Law

A) Legal Framework

1. Given that the legal question to be decided in the present case requires interpretation of the relevant legal texts, it is important, first of all, to list the rules that make up the relevant legal framework, as of the date of occurrence of the facts.

2. In this sense, given the subject matter of the present case, Article 23 of the IRC Code must be considered, which provided, as of the date of the facts, the following:

"1 - For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer in order to obtain or ensure income subject to IRC are deductible. (...)

3 - The deductible expenses referred to in the preceding paragraphs must be documented, regardless of the nature or medium of the documents used for this purpose.

4 - In the case of expenses incurred or borne by the taxpayer with the acquisition of goods or services, the supporting document referred to in the preceding paragraph must contain, at least, the following elements:

a) Name or company name of the supplier of goods or service provider and of the acquirer or recipient;

b) Tax identification numbers of the supplier of goods or service provider and of the acquirer or recipient, whenever they are entities with residence or stable establishment in national territory;

c) Quantity and usual denomination of the goods acquired or the services provided;

d) Value of the consideration, in particular the price;

e) Date on which the goods were acquired or on which the services were provided. (...)

6 - When the supplier of goods or service provider is required to issue an invoice or legally equivalent document under the terms of the VAT Code, the supporting document for the acquisition of goods or services provided for in paragraph 4 must necessarily assume that form." (emphasis added).

1. Indeed, the disputed question of the present case, as we shall set out below, will focus especially on deciding whether the expenses incurred with the purchase of goods from supplier B..., Lda. meet the requirements necessary to be deductible for IRC purposes in the sphere of the Claimant, in light of Article 23 of the IRC Code.

2. Assuming particular relevance for the case in question, it is also necessary to analyse Article 74(1) of the General Tax Law ("LGT"), which deals with the burden of proof, providing that "The burden of proving the facts constitutive of the rights of the tax administration or of taxpayers falls on whoever invokes them."

3. In turn, Article 75 of the LGT should also be cited, paying particular attention to the wording of paragraph a) of its paragraph 2:

"1 - Declarations of taxpayers presented in accordance with the terms provided by law, as well as the data and calculations recorded in their accounts or records are presumed to be true and made in good faith, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends.

2 - The presumption referred to in the preceding paragraph does not apply when:

a) The declarations, accounts or records reveal omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent knowledge of the real taxable income of the taxpayer" (emphasis added).

1. With this legal framework in mind, we shall now turn to the arguments presented by the Parties.

B) Arguments of the Parties

1. In the present request for arbitral decision, the Claimant alleges, in summary, that the IRC assessment that is now sought to be annulled suffers from illegality, due to improper application of the provisions of Article 19(3) of the VAT Code and Article 23(4) of the IRC Code, applicable to simulated transactions.

2. In support of its position, the Claimant argues that the AT failed to prove that the invoices issued by supplier B..., Lda. constituted false invoices, having inverted the burden of proof in a manner incompatible with what the legislator determined.

3. Thus, according to the Claimant, the corrections made by the AT were based on "mere suspicions, inconclusive indications," based almost exclusively on the conduct of third parties, not attributable to the Claimant.

4. The Claimant further argues that it cannot be attributed to it the fact that B..., Lda. did not remit the VAT that should have been charged in the invoices issued to the Claimant, just as it cannot be attributed to it the fact that the managers of that company withdrew the deposited amounts for an unknown destination, or the fact that it did not include in the invoices the place, date and time of loading and unloading or the vehicle that carried out transport of the goods.

5. It further alleges that it is impossible to carry out subsequent proof that B..., Lda. was the supplier of the timber that it delivered to its customers.

6. For its part, the Respondent, duly notified to that effect, presented its Reply in which, in summary, it sustained its main thesis that there are well-founded indications that the invoices issued by supplier B..., Lda. are false, and that the Claimant failed, with the elements made available, to demonstrate the contrary.

7. Indeed, the Respondent proposes that the acquisitions from B... Lda. were only supported by invoices, which do not contain elements relating to transport nor any other element that would allow control of the physical circuit of the goods.

8. Additionally, in order to demonstrate the correspondence between these invoices and the merchandise transacted with its customers, the Claimant presented internal documents prepared in the company, which, the Respondent proposes, do not present credibility, since they do not establish any link with the supplier in question.

9. Additionally, the Respondent gathered a set of evidentiary elements, through its contact with the companies that provide merchandise transport services that had supposedly provided transport services to company B..., Lda., with all the testimonies referring to the same facts, or very similar situations.

10. In this context, the facts presented by the transport companies confirm the indications found by the Finance Directorate of ... in an inspection action carried out at company B... Lda., namely:

a) The business owner of the buying and selling of timber, and contact person for service providers, appears to be a Mr. E...;

b) None of the suppliers identified C... or any other Brazilian citizen as the owner of the business or as the person who established commercial contacts or made payment.

1. Additionally, from the analysis of the elements made available in the context of the lifting of bank secrecy, and the conclusions drawn from the inspection actions carried out at the company that issued the invoices, the Respondent concludes that, although payments were made by cheque, it is not possible to know who is the real and actual beneficiary of the payments made, given that bank deposits were followed by unjustified withdrawals making it impossible to follow the financial circuit and identify the true beneficiary of the deposited amounts.

2. The Respondent further proposes that it was verified during the inspection that the Claimant issued several bank cheques not in favour of the company that issued the invoices, but rather in favour of its managing partner – C....

3. In this sense, and based on the analysis of the bank accounts and financial circuits of the company made by the Tax Inspection Services of Aveiro, the Respondent reiterates its conviction that B... Lda. is not the real and actual owner of the business that appears in the invoices issued to the Claimant.

4. Arguing, to this effect, that all indications point to the fact that the real and actual owner of the business is E....

5. The Respondent thus concludes that all the steps taken, in particular with all (known) transport companies, as well as the analysis of transport documents and bank movements and respective supporting documents, demonstrate that the company B..., Lda. marks the beginning of a documentary flow, that is, "was created with the intention of issuing invoices, thus substituting for the individuals who did not issue invoices for the sale of timber from their properties and also to conceal the identity of the true owner of the business."

6. In addition to the facts stated above, the Respondent indicates as "strong and reliable indications" that demonstrate absence of economic structure for the carrying out of the operations documented by the issued invoices, the following facts:

"1) Upon consultation of information contained in the AT database no record was found indicating the existence of purchases of timber from third parties by B..., Lda.;

1. B... Lda. is not listed as owner of any rustic property or any other land that would allow it to engage in the activity of silviculture or forestry exploitation;

2. The provision of services for cutting and trimming timber requires a significant amount of labour and specialized equipment, which B..., Lda. did not possess;

3. Neither is it known that any service for cutting and trimming timber was acquired from third parties by the identified issuer;

4. It did not possess any type of structure (warehouses, storage facilities, depots, etc.), nor operational and technical capacity nor workers in its employ to carry out economic operations of the dimension revealed by the issued invoices."

1. It further added that it was only confirmed that the Claimant delivered timber to its customers whom it subsequently invoiced, it not having been proven that it was B..., Lda. that proceeded to deliver timber, since all the documents presented (GEP, transport guide, albarán, CMR, ...) that accompanied the merchandise to its customers' depots were issued in the name of the Claimant.

2. In this way, the AT argues that the Claimant failed to establish correspondence between its sales and the purchase invoices recorded in the accounts documented by invoices in the name of the taxpayer B..., Lda.

3. Alleging that the existence of strong indications that undermine the credibility of the operations documented by the invoices issued by B..., Lda. has been demonstrated, the Respondent thus proposes that the well-founded doubt makes it impossible to consider the amounts contained in the invoices in question as deductible expenses.

4. Sustaining this position with the transcription of a Judgment of the esteemed Central Administrative Court, which provides that "it is not imperative that the Administration effect direct proof of simulation, since, as in many other cases, it will be necessary to resort to indirect proof, to "indicative facts, from which it will seek to extract, with the aid of the rules of common experience, of science or technique, an inference regarding the facts indicated. The conclusion or proof is not obtained directly, but indirectly, through a judgment of normal relationship between the indication and the subject matter of proof" (Alberto Xavier, Concept and Nature of the Tax Act, p. 154)."

5. Finally, the Respondent concludes that the act of additional assessment, in dispute in these proceedings, does not suffer from any defect that would call into question its legality and validity, for which reason there is no basis for payment of any compensatory interest.

C) Assessment by the Tribunal

1. As a preliminary matter, it should be noted that, in the eyes of this Arbitral Tribunal, the question to be decided relates to whether there are sufficiently strong indications that would indicate that the invoices issued by supplier B..., Lda. are false and, as such, expenses therewith should not be deductible for IRC purposes.

2. In this context, it is necessary, first of all, to make a critical analysis of the content of Article 74 of the LGT, which deals precisely with the matter of burden of proof, of salutary importance for the case.

Thus,

1. The general rule of burden of proof, expressed in that article, places the obligation to prove the facts constitutive of the rights of the tax administration or of taxpayers on whoever invokes them.

2. In this respect, it is necessary to ascertain what constitutes "sufficient" proof of the facts that would indicate that certain invoices were not carried out with the economic operators identified therein, for the purposes of corrections by the AT.

3. In this respect, the Judgment of the Central Administrative Court of the South, of 4/6/2013, Case No. 06478/13, cited, moreover, by the Respondent, provides that the AT does not have to demonstrate the falsity of the invoices, it being sufficient for it to evidence the consistency of that judgment, invoking facts that translate a high probability that the operations referred to in the invoices are simulated.

4. Being this probability capable of undermining the legal presumption of truthfulness of the declarations of taxpayers and the data contained in their accounts.

5. This is, moreover, the understanding that emanates from the interpretation of paragraph a) of Article 75(2) of the LGT, which causes the presumption of truthfulness that generally occurs in the declarations of taxpayers to fall in the face of well-founded indications that the same do not reflect or prevent knowledge of the real taxable income of the taxpayer.

6. Having reached this point, it is necessary for the present Arbitral Tribunal to take, thus, a position, namely in deciding whether the indications raised by the Respondent during inspection are, or are not, sufficient to fall within the concept of "well-founded indications," for purposes of Article 75 of the LGT already cited.

7. In this context, the present Tribunal carefully analysed the evidentiary elements raised by the AT during inspection, and found that these appear abundant and clear in their capacity to prove that the company B..., Lda. does not have the economic structure that would allow it to proceed with the supply of goods that the Claimant attributes to it, specifically for the following reasons cited in the AT's Reply:

"1) Upon consultation of information contained in the AT database no record was found indicating the existence of purchases of timber from third parties by B... Lda.;

1. B... Lda. is not listed as owner of any rustic property or any other land that would allow it to engage in the activity of silviculture or forestry exploitation;

2. The provision of services for cutting and trimming timber requires a significant amount of labour and specialized equipment, which B... Lda. did not possess;

3. Neither is it known that any service for cutting and trimming timber was acquired from third parties by the identified issuer;

4. It did not possess any type of structure (warehouses, storage facilities, depots, etc.), nor operational and technical capacity nor workers in its employ to carry out economic operations of the dimension revealed by the issued invoices."

1. Additionally, and based on all the elements cited resulting from inspection of the Claimant's and B..., Lda.'s own bank data, as well as the testimonies of the transport companies that would allegedly provide services to B..., Lda., it appears probable that the real beneficiary of the payments made, as well as the real service provider, is not the entity B..., Lda., but rather an individual named E...,

2. Who is not even mentioned by the Claimant when asked about the contact person at company B..., Lda., which appears to the present Tribunal improbable.

For which reason,

1. The present Arbitral Tribunal concludes that, given the foregoing, the well-founded indications that undermine the credibility of the operations documented by the invoices issued by B..., Lda. have been verified.

2. Indeed, from the proven facts and those alleged by the Claimant, it has not been demonstrated that the company B..., Lda. was the actual supplier of the timber that it received and subsequently sold to customers.

3. In fact, the Claimant proceeded to sell the raw timber to its customers, having charged VAT on the relevant invoices, but it was not possible to derive from the case file the correspondence between its sales and the purchase invoices recorded in the accounts documented by invoices in the name of the taxpayer B..., Lda.

4. It was equally demonstrated that the Claimant made payment for the services allegedly provided by B..., Lda. by bank cheque, but it is not possible to ascertain who is the real and actual beneficiary of the payments made.

5. In fact, given that bank deposits were followed by unjustified withdrawals, it is impossible to follow the financial circuit and identify the true beneficiary of the deposited amounts.

6. Additionally, the AT verified that the Claimant issued several bank cheques not in favour of the company that issued the invoices, but rather in favour of its managing partner – C..., which appears to demonstrate some confusion as to the real beneficiary of the payments.

7. Given the foregoing, and having made a careful judgment of the facts presented, the present Tribunal concludes that the Claimant failed to prove that the invoices issued by B..., Lda. constituted operations actually carried out with this company.

8. In this context, it is now necessary to consider the wording of Article 23 of the IRC Code, as of the date of the facts, in particular in its paragraphs 4 and 6, which provide for the obligation of expenses incurred by a given company to be supported by an appropriate document.

9. It should be noted, in this respect, that this appropriate document referred to in the preceding paragraph, in the case of being issued by VAT taxpayers, should be an invoice, thus complying with all formal requirements for this purpose.

10. In this respect, Article 36(5) of the VAT Code lists the mandatory elements to appear in invoices, namely:

"Invoices must be dated, numbered sequentially and contain the following elements:

a) The names, company names or company denominations and the registered office or residence of the supplier of goods or service provider and the recipient or acquirer subject to the tax, as well as the corresponding tax identification numbers;

b) The quantity and usual denomination of the goods transferred or the services provided, with specification of the elements necessary to determine the applicable rate; packaging not actually transacted must be subject to separate indication and with express mention that its return was agreed;

c) The price, net of tax, and the other elements included in the taxable amount;

d) The applicable rates and the amount of tax due;

e) The reason justifying the non-application of the tax, if applicable;

f) The date on which the goods were placed at the disposal of the acquirer, on which the services were provided or on which payments prior to completion of the operations were made, if that date does not coincide with that of issuance of the invoice." (emphasis added).

1. Considering the proven facts, the present Arbitral Tribunal concludes that the invoices issued by B..., Lda. to the present Claimant lacked some formal elements (namely the sequential numbering of the invoices, as well as the dates on which the goods were placed at the disposal of the acquirer).

2. Although no element is as important as the correct identification of the supplier, on which the aforementioned paragraph a) of the article provides, and which, in this case, was incorrectly carried out.

3. In fact, the AT proved, in its Reply, the existence of well-founded indications that the real identity of the supplier was not the company B..., Lda., contrary to what was identified in the invoices issued to the present Claimant, and the Claimant itself, as we have seen, failed to demonstrate the contrary.

For which reason,

1. The expenses incurred with the acquisition of goods documented by the invoices issued by the company B..., Lda. were not subject to deduction for IRC purposes.

In this context,

1. If in the Claimant's accounts were recorded costs relating to the invoices issued by the company B..., Lda., the necessary non-consideration of such costs meant, directly and consequently, the increase of that amount to the total results declared as obtained in the year in question.

2. Being that, in this scenario, the AT services had no other legal alternative than the one they produced, of being imposed, by Article 23 of the IRC Code, the non-consideration of costs with the acquisition of goods from the said supplier.

3. As such, it is the decision of the present Arbitral Tribunal that the tax act of additional IRC assessment contested in these proceedings does not suffer from any defect consisting of a violation of law.

Thus being,

1. The request for annulment of the above-mentioned assessment act is dismissed, and the request for the Respondent to be ordered to pay costs and other proceedings expenses is equally dismissed.

V. Decision

1. For these reasons, this Arbitral Tribunal decides to dismiss entirely the request for arbitral decision and absolves the Respondent of the claim, with all legal consequences.

VI. Value of the Case

1. The value of the case is fixed at Euro 28,638.72, under the terms of Article 97-A, paragraph 1, subparagraph a), of the Administrative Court Procedure Code ("CPPT"), applicable by virtue of subparagraphs a) and b) of Article 29(1) of the RJAT and Article 3(2) of the Regulation of Costs in Arbitration Proceedings in Tax Matters ("RCPAT").

VII. Costs

1. In accordance with the provisions of Article 22(4) of the RJAT, the value of the arbitration fee is fixed at Euro 1,530.00, under the terms of Table I of the aforementioned Regulation, to be borne by the Claimant, given the complete dismissal of the claim.

Notify parties.

Lisbon, CAAD, 3 April 2019

The Arbitrator

(Sérgio Santos Pereira)