Process: 38/2018-T

Date: October 31, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral award (Process 38/2018-T) addresses the VAT treatment of inventory losses following a share transfer in a Portuguese retail grocery business. The Tax Authority conducted an inspection of A... Lda. for 2013, discovering significant inventory discrepancies: closing inventory of €279,302.50 in 2012 dropped to nil opening inventory in 2013 after new partners acquired the company on January 25, 2013. The inspection revealed the new accountant separated records between old and new management, creating accounting discontinuity. The Tax Authority applied Article 19(3) of the CIVA (VAT Code), which presumes that inventory decreases not properly justified constitute taxable supplies, resulting in additional VAT assessments of €38,208.64 plus compensatory interest of €4,886.51 for tax period 201303T. The claimant paid these amounts under the PERES debt reduction program to avoid enforcement proceedings, then challenged the assessments through tax arbitration. Key legal issues include: whether inventory losses triggered the VAT presumption of supply; proper documentation requirements for inventory variations; the burden of proof in challenging tax presumptions; and entitlement to indemnity interest for amounts paid under allegedly unlawful assessments. The case illustrates how Portuguese tax law treats unexplained inventory reductions, particularly during ownership transitions, and the procedural rights available to taxpayers contesting VAT assessments at CAAD, including recovery of amounts paid plus interest when assessments are deemed unlawful.

Full Decision

ARBITRAL AWARD

The Sole Arbitrator Dr. Ana Luísa Ferreira Cabral Basto (sole arbitrator), appointed by the Deontological Council of the Administrative Arbitration Centre ("CAAD") to constitute the Sole Arbitral Tribunal, established on 5 April 2018, decides as follows:

1. Report (consult full version in PDF)

A..., LDA., legal entity no. ..., with registered office at Street ..., no. ..., ...-... ..., parish of ..., municipality of ..., district of Porto, hereinafter referred to as the Claimant, filed an application for constitution of a Sole Arbitral Tribunal, pursuant to Decree-Law no. 10/2011 of 20 January (hereinafter RJAT), in which the TAX AND CUSTOMS AUTHORITY (hereinafter also referred to as TA) is the Respondent.

The Claimant seeks declaration of the illegality of the decision denying the Administrative Appeal no. ...2017..., filed pursuant to Articles 68 et seq. of the Tax Procedure and Process Code (hereinafter CPPT), with a request for annulment of the additional Value Added Tax (VAT) assessments for the tax period 201303T (assessment no. 2016...), in the amount of € 38,208.64, and of the compensatory interest for the corresponding period (assessment no. 2016...), in the amount of € 4,886.51, as well as declaration of illegality and annulment of the aforementioned tax assessment acts for additional VAT and compensatory interest. The Claimant further seeks a ruling condemning the TA to reimburse the amounts unduly paid, bearing in mind that the Claimant, in order to prevent the institution of tax enforcement proceedings, adhered in December 2016 to the Special Programme for Debt Reduction to the State (PERES), approved by Decree-Law no. 67/2016, of 3 November, plus indemnification interest owed to the Claimant, from the date of payment of each instalment until full and complete payment.

On 29 January 2018, the application for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and immediately notified to the Respondent in accordance with legal provisions.

The Claimant did not proceed to appoint an Arbitrator.

Thus, pursuant to the provisions of Article 6, paragraph 1, and Article 11, paragraph 1, subparagraph b) of the RJAT, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties within the legally prescribed timeframes, Dr. Ana Luísa Ferreira Cabral Basto was appointed Arbitrator of the Sole Arbitral Tribunal, who communicated to the Deontological Council and to the Administrative Arbitration Centre the acceptance of the appointment within the timeframe stipulated in Article 4 of the Deontological Code of the Administrative Arbitration Centre.

In compliance with Article 11, paragraph 1, subparagraph c) of the RJAT, the Sole Arbitral Tribunal was established on 5 April 2018, followed by the relevant legal procedures.

The Tax and Customs Authority responded, defending the lack of merit of the request for arbitral award.

On 11 September 2018, the first hearing of the Arbitral Tribunal took place at the CAAD headquarters, pursuant to Article 18 of the RJAT, during which the witnesses indicated by the Claimant were heard: B..., C... and D... . The representative of the Respondent stated that she did not require the witnesses listed in her response.

The parties presented arguments.

2. Preliminary Matters

The Tribunal is competent and was regularly constituted.

The request for arbitral award is timely, as it was submitted within the timeframe provided in Article 10, paragraph 1, subparagraph a) of the RJAT.

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

The proceedings do not suffer from nullities, and no exceptions have been raised.

3. Factual Matters

3.1. Proven Facts

With relevance for the decision, the Tribunal deems the following facts to be proven:

  • The Claimant is a limited liability commercial company registered in the Commercial Register since 29 September 1966, with the business activity of "retail grocery trade, representations, commissions and consignments" (see copy of commercial certificate, attached to the file as Doc 6 of the application for constitution of Arbitral Tribunal).

  • The Claimant exercises its business in a leased property, located on the ground floor of Street ... no. ..., ...-... ..., with a useful area of 162 m2, not possessing any other sales space, warehouse, or storage area.

  • On the date of its registration, and with the company name "E...", the share capital was in the amount of € 10,000.00, divided into two equal shares of € 5,000.00 each, belonging to the partners, husband and wife, F... and G..., the latter share of which was subsequently assigned to H... .

  • By private deed, executed on 25 January 2013, the shares of the Claimant were assigned to I... and J... (husband and wife) at a price equal to the nominal value thereof, in the amount of € 10,000.00.

  • Through a written agreement, dated 25/01/2013, the new partners accepted the obligation and assumed the liability regarding debts that the Claimant had with suppliers and other creditors, in the total amount of € 31,630.53, as described (reproducing the table appearing on page 12 of the final tax inspection report, which reflects the agreement reproduced in Doc 11 of the application):

  • Pursuant to Service Order no. OI 2015..., of 16 November 2015, the Tax Inspection Services (TA) initiated a limited-scope inspection covering the values declared by the Claimant in respect of Corporate Income Tax (CIT) and VAT for the year 2013.

  • "Given the anomalies detected, which required a comprehensive analysis of the tax behaviour of company A..., Lda., the scope of that service order was changed to general, in accordance with Article 14, paragraph 1, subparagraph a) of the RCPIT [Supplementary Regime of Tax and Customs Inspection Procedures]" (see page 5 of the final tax inspection report).

  • "Pursuant to Article 15, paragraph 1 of the RCPIT, this change was notified on 24/05/2016 to company A..., Lda. represented by partner-manager I..." (see page 6 of the final tax inspection report).

  • On 1 July 2016, the Claimant was notified of the conclusion of the inspection procedure and notified of the draft tax inspection report (letter no. .../..., of 30 June 2016) and, if it so wished, to exercise, pursuant to Articles 60 of the General Tax Law and 60 of the RCPIT, the right to a hearing on the facts and grounds alleged by the TA to support the projected tax acts.

  • The Claimant exercised the right to a hearing and contended that the projected tax acts were illegal.

  • On 1 August 2016 the Claimant was notified of the final tax inspection report, by letter no..., dated 28 July 2016, from which the following facts and conclusions are highlighted:

"II.2.1.1 - DECLARED INVENTORY

In the years 2012 and 2013, company Mercearia A..., Lda. declared Costs with Inventory Sold and Consumed (CEVC) in the amounts of € 61,954.73 and € 229,716.98 respectively.

In table 05191-A of the annual IES statements filed for those years, the items underlying the CEVC determined are valued, as described:

It is noted that in 2012 closing inventory was declared in the amount of € 279,302.50 but in 2013 the opening inventory declared was nil. (…)

II.2.2 - WITH RESPECT TO VAT

The periodic VAT declarations filed by company A..., Lda. for the year 2013 mention the following values:

(...)

III - DESCRIPTION OF FACTS AND GROUNDS OF PURELY ARITHMETIC CORRECTIONS TO THE TAXABLE MATTER (…)

III.3 - MOVEMENT OF "OPENING" AFTER ASSIGNMENT OF SHARES

Following the assignment of shares carried out on 25/01/2013 the accounting of company A...e, Lda. was executed by accountant C..., with Tax ID no. ... .

This change caused an separation of the accounting records pertaining to the two managements in question and, in the movement of "opening", the new accountant used the values in the trial balance relating to January 2013 that was presented by the previous management.

In that movement of "opening" (Internal Document no. ... - Miscellaneous Operations), the following accounting entry was made:

III.3.1 - ACCOUNTING BEFORE AND AFTER THE ASSIGNMENT OF SHARES

However, this movement of "opening" did not restore accurately or continue with the values appearing in the trial balance provided by the previous management because:

  • the value of closing inventory in warehouse, of € 279,302.50, was ignored and cancelled, thus ceasing to appear as a debit entry in account 32 - Merchandise in Warehouse,

  • the sum of this inventory value and the amount of € 1,246.99, recorded in account 441 - Goodwill, which was also cancelled, totalling € 280,549.49, was recorded as a debit entry in account 2532 - Advances, causing the credit balance of the same to change from € 470,502.67 to € 189,953.18, (…)

III.6 - FACTS TO NOTE - ADVANCES

With respect to advances we have that:

  • the accounting (account 2532111 - Advances - Dr. F...) and the tax declarations (field A5698 of table 05111-A and field A0672 of table 063 of the IES) of company A..., Lda. indicate that F... made, up to the end of 2012, loans, in the nature of advances, to the company of which he was a partner and manager until January 2013, in the total amount of € 688,970.96,

  • in the month of January 2013 (before the assignment of shares), various accounting movements were processed intended to reflect the situation of company A..., Lda. at the date of the assignment of shares, carried out on 25/01/2013,

  • accordingly, account 2532111 - Advances - Dr. F... was recorded as a debit entry in the amount of € 218,468.29, with a corresponding credit entry to account 121 - Demand Deposits (which then had a nil balance),

  • as a result of these accounting operations, account 2532111 - Advances - Dr. F... came to show, on that date of 25/01/2013, a credit balance in the amount of € 470,502.67,(…)

  • with respect to the assignment of shares the new partners and managers state that "... for purposes of determining the value of the business, only the right to the lease was considered as an active component ..." and that "... the sellers did not inform the buyers of the existence of credits to be received from the company (advances), without any possibility of being reimbursed due to the absence of active assets ...", which illustrates the disregard of advances in the share assignment transaction as well as their extinction,

  • it is also relevant that, contrary to what was claimed by the new partners and managers of the company, after the assignment of shares, in the movement of "opening" of the "new" accounting, account 253201 - Advances – F... (= to account 2532111 in the previous accounting) was moved as a credit entry in the amount of € 470,502.67 (equivalent to the value reflected in the trial balance of the previous management), but was also moved as a debit entry in the amount of € 280,549.49, as a way of cancelling the existing balances on 25/01/2013 in account 3211 - Closing Inventory, in the amount of € 279,302.50, and in account 441 - Goodwill, in the amount of € 1,246.99.

Thus, account 253201 - Advances – F... came to reflect a credit balance in the amount of € 189,953.18,(…)

III.7 - FACTS TO NOTE - INVENTORY IN WAREHOUSE

With respect to inventory in warehouse we have that:

  • the accounting (account 3211 - Closing Inventory) and the tax declarations (field A5879 of table 05191-A of the IES) of company A..., Lda., relating to the year 2012, mention closing inventory in the amount of € 279,302.50,

  • this value is supported by an Inventory dated 31/12/2012, properly signed by the former partner and manager F... (…)

It is important to note that this inventory is subdivided:

  • into "Inventory as of 31/12/2012", in the amount of € 598.48 and

  • into "Stock Products Beyond Shelf Life / in Poor Condition for Consumption / Spoiled as of 31/12/2012", in the amount of € 278,704.02

  • on the other hand, the accounting (account 321 - Inventory - In Warehouse) and the tax declarations (field A5876 of table 05191-A of the IES) of company A..., Lda., relating to the year 2013, state that the opening inventory in that year is nil (= € 0.00),

  • there is therefore a discrepancy between the declared value of closing inventory for 2012 and the declared value of opening inventory for 2013, which should be equal as they reflect the same moment and patrimonial reality,

  • in addition to the accounting error, regarding which we have already expressed ourselves (see item III.6), it was found that the cancellation of the inventory value, appearing in the accounting at the date of the assignment of shares, is supported by minutes, dated 26/01/2013, signed by the new partners and managers, through which they state that "... they verified by physical analysis that there were no goods with quality for sale ..." and decide "... not to consider any inventory - initial stock for opening the store ..." and "... to inform accountant C..., so that she prepares the opening balance sheet for the year 2013 with the respective changes, now approved ...",

  • it must be noted that the date of 26/01/2013, mentioned in those minutes, does not appear plausible since, as the new partners and managers admitted, the value appearing in the 2012 accounting, as closing inventory, was not a component of the agreement relating to the assignment of shares of 25/01/2013, and therefore it must be considered that it was unknown on this date,

  • furthermore, the trial balance provided by the previous management bears the date of July 2014, which indicates that the new partners and managers did not have knowledge of the values recorded in the accounting and "inherited" from the previous management before that date,

  • thus, it appears that the minutes in question refer to the date of 26/01/2013 only for the purpose of resolving the issue of inventory that the new partners and managers encountered in 2014, even though its absence was factual,

  • all the more so since, as they themselves informed, "... the physical analysis of fixed assets was not performed because there was nothing that could be recovered/used. The decision to purchase the establishment was made on the assumption, unique, clear and objective, that the business was limited to the purchase, sole and exclusively, of the right to the lease and only this ...",

  • it can therefore be concluded that the preparation of that minutes was the alternative found to avoid recording inventory write-downs, and it also served, improperly, to reduce the value of advances owed as of the date of the assignment of shares (see item III.6),

  • in view of the cancellation of inventory that was processed, it was necessary to evaluate the justifications and evidence underlying it, in light of Article 86 of the VAT Code which establishes that "... unless proven otherwise, goods found in any of the places where the taxable person carries out his business are presumed to be acquired and goods acquired, imported or produced that are not found in any of those places are presumed to be transmitted ...",

  • given that it is factual, from the accounting entry processed, that on the date of assignment of shares and beginning of functions of the new management, the closing inventory recorded in the accounting and mentioned in the tax declarations was not in the store used for the conduct of business,

  • and since, from the moment of the accounting cancellation of that inventory, the accounting of company A..., Lda. began, in this respect, to reflect reality and, simultaneously, ceased to show a discrepancy capable of being framed in that provision, (…)

  • nevertheless, note the values declared by company A..., Lda. between 2004 and 2012:

  • as is evident, with the exception of 2005 and 2011, in all other years company A..., Lda. declared tax losses.

It is also found that the recording of values for inventory adjustments is not a matter unknown to the company, as in 2005 and 2006 losses were recorded in the amounts of € 7,769.30 and € 5,249.40 respectively, contradicting the thesis alleged by the former partner and manager.

This points to the non-existence of other losses worthy of recording or, if they existed, being considered normal and, consequently, not being recorded separately, affecting the cost of inventory sold and, consequently, results only through the inventory determined at the end of each year,

  • furthermore, the description of products allegedly rendered unsuitable for commercialisation extracted from the inventory of 31/12/2012 refers essentially to product groups, as exemplified:

which, by omission of specific information on each item (such as batch number and expiration date), makes it impossible to determine, which would be possible in certain cases, from the manufacturer, the loss that is now alleged.

In this connection, given everything that has been stated, it is considered that it has not been duly demonstrated:

  • the criteria underlying the preparation of the inventory of 31/12/2012 and that it does not correspond to any physical inventory,

  • that the inventory classified as "Stock Products Beyond Shelf Life / in Poor Condition for Consumption / Spoiled as of 31/12/2012" actually had that nature,

  • the existence of the losses allegedly occurring between 2004 and 2012,

or,

  • that such inventory was demonstrably destroyed and/or rendered unusable and was therefore not intended for commercialisation,

therefore it is considered that no sufficient evidence was presented to rebut the presumption of transmission of goods, provided in Article 86 of the VAT Code.

III.7.1 - VAT IN DEFAULT - YEAR 2013

Thus, given that such inventory appeared in the accounting and in the tax declarations of the year 2012, it must be considered that it was transmitted up to the moment of the assignment of shares and transfer of management to the new partners that occurred on 25/01/2013 (in the same sense as the judgment dated 14/02/2007 by the Central Administrative Court South, in case 01484/06).

Accordingly, for the period 2013/03T, taking into account the description of the items and their respective value, VAT should be assessed due from the transmission of the inventory in question, in the amount of € 42,165.35, as follows:

  • (…) with respect to the measures taken in the course of the inspection action, it is important to note that the insistence (and not repetition) in the clarification of facts considered relevant to the matter at issue was essentially due to the lack of response and/or the vague responses given by the former partner and manager,

  • therefore, the necessary measures were taken so that the parties involved had the opportunity to properly clarify the transaction in question and could present the evidence supporting their allegations,

  • moreover, with respect to inventory, it is the accounting itself and the tax declarations that reflect discrepancies regarding the accounting value associated with the inventory of 31/12/2012 (and in the case of the IES for 2012 it was presented after the date of the assignment of shares), (…)

  • given this, with respect to the VAT assessment proposed as a result of the presumption of transmission of inventory recorded in the accounting, pursuant to Article 86 of the VAT Code, it is our responsibility to immediately refute that the report produced contains any analysis, conclusion or value judgment regarding the years 2004 to 2012, as the inspection action carried out was aimed solely at the year 2013 and it is with respect to this year that this report concerns,

  • the Tax Authority is attributed the alleged conviction that company A..., Lda. did not, at the date of the assignment of shares, have the inventory recorded in the accounting, and for this purpose reasons are pointed out that do not result from the conclusions set forth in the report prepared, therefore they can only aim to corroborate such "accusation" such as:

  • because it did not purchase the inventory,

  • because it did not have space to store it,

  • because if it had it, it would not need to buy every year, and

  • because public health reasons opposed,

  • as is evident, the reference to the fact that the inventory recorded in the accounting of company A..., Lda. was not purchased appears for the first time, which is, to say the least, strange given that in the period from 2004 to 2012 purchases of merchandise were recorded and declared in the total amount of € 2,538,333.59,

  • remaining to be clarified, given the description in the inventory of 31/12/2012, how they proceed to identify and associate the inventoried goods to the recorded purchases so as to draw such conclusion, (…)

  • thus, it is considered that those responsible for company A..., Lda. failed to furnish the proof required by Article 86 of the VAT Code".

  • As a result of the notification of the additional VAT assessments for the tax period 201303T (assessment no. 2016...), in the amount of € 38,208.64, and of the compensatory interest for the corresponding period (assessment no. 2016...), in the amount of € 4,886.51, the Claimant filed, pursuant to Articles 68 et seq. of the CPPT, an administrative appeal requesting the annulment of the disputed tax acts, which was decided by a notice of denial sent by registered mail with proof of receipt, signed on 31 October 2017.

3.2. Unproven Facts and Reasoning of the Factual Matters

  • The factual circumstances relevant to the judgment of the case were selected and delineated based on their legal relevance, in light of the plausible solutions of the legal questions, pursuant to the combined application of Articles 123, paragraph 2, of the CPPT, 596, paragraph 1 and 607, paragraph 3 of the Code of Civil Procedure, applicable ex vi Article 29, paragraph 1, subparagraphs a) and e) of the RJAT.

  • It is not proven that the inventory reflected in the accounting and in the tax declarations for the year 2012, in the amount of € 278,704.02, up to the moment of the assignment of shares and transfer of management to the new partners that occurred on 25 January 2013, qualify as "Stock Products Beyond Shelf Life/in Poor Condition for Consumption".

3. Legal Matters

  • Pursuant to Article 86 of the VAT Code, the TA may presume as transmitted goods acquired, imported or produced that are not located in any of the places where the taxpayer carries out his business. Consequently, the presumption of transmission arises from verification of the fact that the goods are not in places related to the conduct of business.

  • In light of this provision, and with relevance for the present proceedings, the question arises whether the TA can presume the transmission of goods based on the discrepancy between the value declared of closing inventory for the year 2012 (€ 279,302.50) and the value declared of opening inventory for the year 2013 (€ 0), which should be equal as it reflects the same moment and patrimonial reality of the Claimant.

  • In fact, as found by the TA, the accounting (account 3211 - Closing Inventory) and the tax declarations (field A5879 of table 05191-A of the IES) of the Claimant, relating to the year 2012, mention closing inventory in the amount of € 279,302.50, and this value is supported by an Inventory dated 31 December 2012, which is subdivided into (i) "Inventory as of 31/12/2012", in the amount of € 598.48 and (ii) "Stock Products Beyond Shelf Life / in Poor Condition for Consumption / Spoiled as of 31/12/2012", in the amount of € 278,704.02. Note that this recognition appears in a document named "Inventory" signed by the former partner and manager F... .

  • Moreover, the TA also found that the cancellation of the inventory value, appearing in the accounting at the date of the assignment of shares, carried out on 25 January 2013, is supported by minutes dated 26 January 2013, signed by the new partners and managers, through which they state that "they verified by physical analysis that there were no goods with quality for sale" and decide "not to consider any inventory - initial stock for opening the store". It is precisely in this context, of the aforementioned assignment of shares carried out on 25 January 2013, that the cancellation of the closing inventory value in warehouse, of € 279,302.50, occurs, which ceased to appear as a debit entry in the account "32 - Merchandise in Warehouse", with the adjustment of the "inventory" balance being offset by the balance of account "2532111 – Dr F..." which, after the adjustment of the Cash account balance, was € 470,502.67 (notwithstanding the remaining balance of account "2532111 – Dr F..." not having been allegedly cancelled, by mere oversight, in 2013, by offsetting the retained earnings account, having only been so later, in 2015).

  • In light of this reality, it is noted, immediately, that the discrepancy found does not result from an inventory verification process by the TA, and in the present case, the Tax Inspection Services did not conduct any procedures for physical verification and confirmation of inventory.

  • On this particular aspect it is important, for example, to highlight the following understanding contained in the judgment of the Central Administrative Court South relating to case no. 428/13.6BECTB: "Article 86 of the VAT Code provides that 'Except where proven otherwise, goods found in any of the places where the taxable person carries out his business are presumed to be acquired and goods acquired, imported or produced that are not found in any of those places are presumed to be transmitted'. If a taxpayer is subject to an inspection action in which the TA proceeds with physical verification or counting of inventory and finds a lack of correspondence between the physical inventory and the accounting records presented to it, it may avail itself of the presumption provided in Article 86 of the VAT Code, presuming the transmission of missing goods and assessing the tax due. However, that legal presumption does not benefit the TA if it is based solely on verification and comparison of the values entered in the accounting and extra-accounting records of the taxpayer, that is, on facts recorded in the accounting".

  • As follows from the learned judgment, "If a taxpayer is subject to an inspection action in which the TA proceeds with physical verification or counting of inventory and finds a lack of correspondence between the physical inventory and the accounting records presented to it, it may avail itself of the presumption provided in Article 86 of the VAT Code, to which it is now important, presuming the transmission of missing goods and assessing the tax due".

  • It should be noted, however, that in the case of the aforementioned judgment "the inspection encountered the accomplished fact that 2 other companies were operating in the premises of the impugned party, and there was, in addition to a temporal impossibility, also a physical impossibility", a reason that would have led the inspection to disregard the obligation to ascertain the lack of inventory "in the warehouses, it being certain that [in the case of the aforementioned judgment] the insolvency administrator came to confirm in the file that in fact inventory was located in those premises, which he only did not list because he considered that it did not have commercial value". Now, "the TA cannot intend to maintain the act as valid, even if the TA disagrees with the subjective reasons that led to such action, resulting from all that has been stated that error occurred in the factual assumptions".

  • In the case in question, the same factual assumptions do not apply, immediately because the Claimant acknowledges that "The balance of account 32111-Inventory appearing in the balance sheets presented by the Claimant over the years is overstated in that amount due to accounting errors resulting from the fact that losses due to normal breaks, thefts and shortages, normal in this type of business, were not recorded over the years" (see allegations of the Claimant).

  • For purposes of this analysis, it is equally important to refer to the understanding contained in the judgment dated 9 February 2017, relating to case no. 885/07.0BELSB, under which "the discrepancy underlying Article 80 [current Article 86] of the VAT Code presupposes the inventorying of goods, from which to conclude that goods are missing (physically) compared to accounting records". And in the case of this judgment, "such a situation does not occur, as no discrepancy is evident between the physical inventory of goods (which the TA did not undertake) and the accounting records that would allow the TA to conclude that goods are missing (physically) and from there extrapolate to presume their transmission. (…) Consequently, the presumption arising from Article 80 of the VAT Code could never operate here, and we consider it even contradictory the reasoning followed by the inspection report. But even if this were not the case and, by hypothesis, it were admitted that the conditions for applying Article 80 of the VAT Code were met, the correction made (and the subsequent additional assessment) could still never be maintained, as it is evident that the Impugned Party had rebutted the presumption by proving the contrary".

  • And here, once again, notwithstanding the apparent similarity of the case with the present proceedings, it should be noted that "The products recorded as losses (…), because they were damaged, outdated or beyond the expiration date, were placed in the warehouse of the Impugned Party located in Laranjeiro", and that, in this case (subject of the judgment dated 9 February 2017, relating to case no. 885/07.0BELSB), "During the inspection period, the Tax Inspection Services did not conduct any physical count of the Impugned Party's inventory, nor did they visit the Impugned Party's warehouse located in Laranjeiro".

  • Contrary to the situation set forth in the aforementioned judgment, the truth is that the Claimant acknowledges that it incurred, annually and over several years ("over the 52 years of the Claimant's business activity", as it states in its allegations), in inventory losses that it did not recognise in accounting and which, as of 31 December 2012, amounted to € 278,704.02, notwithstanding the absence, at the date of the facts, of a permanent inventory system and the adoption of physical count procedures.

  • In this regard, in practical terms, it is not even possible for the TA, at the date of the inspection procedure, to conduct any verification of the products comprising that inventory. And it results from the Claimant's own statements and the testimonies heard by this Tribunal, particularly the statements made by Mr. B... (at the date of the facts, an employee of the Claimant, with the professional category of "Cashier"), that losses due to normal breaks, thefts and shortages did in fact exist, in addition to the so-called "abnormal breaks" (resulting from extraordinary/abnormal facts, such as damage to a freezer, prolonged power outage, etc.).

  • In fact, it is to be agreed with the TA that, "given that such inventory appeared in the accounting and in the tax declarations of the year 2012, it must be considered that it was transmitted up to the moment of the assignment of shares and transfer of management to the new partners that occurred on 25/01/2013" (see final tax inspection report), however, unless proven otherwise.

  • That is, "It resulting from the fact that on the date of assignment of shares and beginning of functions of the new management the closing inventory recorded in the accounting and mentioned in the tax declarations was not in the store used for the conduct of business and that from the moment of the accounting cancellation of that inventory, the accounting of the Claimant began, in this respect, to reflect reality and, simultaneously, ceased to show a discrepancy capable of being framed in the aforementioned Article 86 of the VAT Code, it was incumbent upon the Claimant to rebut the presumption arising from that provision with respect to the aforementioned inventory" (see allegations of the Respondent).

  • Thus, without doubt as to the applicability of Article 86 of the VAT Code, it is important to ascertain whether, in fact, the Claimant assembled the necessary evidence to rebut the presumption contained in this provision.

  • First of all, the Claimant argues that "The data in the Annual Declaration/IES allows for the conclusion that at least in the period 2009/2012 the Claimant made purchases exclusively to support its sales" (see allegations of the Claimant). For which reason, in the period 2009 to 2012, the Claimant will not have made purchases to support sales (as extracted from point 140 of the facts alleged in the application for constitution of Arbitral Tribunal).

  • On the other hand, and contradictorily, the Claimant argues that the inventory recorded in the accounting was not purchased, although in the period 2004 to 2012 purchases of merchandise were recorded and declared in the total amount of € 2,538,333.59.

  • Apart from the contradiction, the legal presumption resulting from Article 86 of the VAT Code cannot be compatible with the principle that it does not apply when inventories remain unchanged or practically unchanged. In this regard, reference is made to the judgment of the Central Administrative Court South, dated 14 February 2007, relating to case no. 01484/06:

  • "(…) the fact that [the] amount of inventory remains unchanged since 1995 does not authorise the conclusion or natural presumption that such a legal presumption could only function for this year, it being well known that in the field of principles nothing prevented such inventory value from remaining unchanged in these three years".

  • Concluding that, "In light of the provision of Article 80 of the VAT Code, except where proven otherwise, goods found in any of the places where the taxpayer carries out his business are presumed to be acquired and goods acquired, imported or produced that are not found in any of those places are presumed to be transmitted, in the absence of such proof to the contrary, such presumption, albeit rebuttable, cannot fail to function, since whoever has a legal presumption in their favour is excused from proving the fact to which it leads, and it can only be destroyed by proof of the contrary in accordance with Article 350 of the Civil Code, a mere doubt or suspicion not being sufficient in the context of counter-evidence as the Learned Judge of the Court of First Instance appears to have admitted, as this only applies in cases of the existence of a presumption merely natural, which can be set aside by counter-evidence so as to make such facts doubtful, in accordance with Article 346 of the same Code" (see judgment of the Central Administrative Court South, dated 14 February 2007, relating to case no. 01484/06).

  • In light of the other elements analysed, the Claimant failed to demonstrate that, although the goods were no longer in its possession, it had not alienated them to third parties. On the other hand, it was extracted, for example, from the testimony of Mr. B... that, during the period preceding the assignment of shares, it was with little regularity that there was evidence of deteriorated products and that, frequently, the partner himself, his children or his wife took products from the establishment or, still managed to exchange products with suppliers.

  • As clarified by the TA in a Binding Information Request in Case no. A509-20090009, destruction records or insurance policies are not required (in the case of thefts) when "the losses result from the normal conduct of the business not taking on an extraordinary or unforeseeable nature" (...) and attention should be paid to the existence of (i) control systems, (ii) preparation of lists for identified and unidentified losses, (iii) preparation of internal documents to support accounting entries, and (iv) the fact that the losses do not deviate from reasonable limits for the production sector.

  • First of all, although the Claimant has alleged the existence, on the one hand, of "normal losses (those resulting from ordinary operational activity, such as broken eggs, spoiled fruit, loss of shelf life and other)" and, on the other, of "abnormal losses (those resulting from extraordinary/abnormal facts, such as damage to a freezer, prolonged power outage, etc.)" (see point 19 of the application for constitution of Arbitral Tribunal), the truth is that, due to the very absence of accounting records, based on internal control procedures that, at a minimum, would consist of physical inventory counts, it failed to even distinguish, materially and quantitatively, those that are "normal losses" from "abnormal losses", so as to be possible to adequately adapt to the concrete facts, i.e., the variations in inventory, the production of evidence necessary to rebut the presumption of transmission of goods resulting from the unexplained variation of inventory.

  • Similarly, it appears to this Tribunal that the elements produced in the proceedings, particularly those provided to the Tax Inspection Services that could represent evidence of the destination of goods that allegedly were not part of the Claimant's inventory, at the date of the facts analysed, such as invoices for air conditioning repair and maintenance, among others, constitute proof of ordinary business expenses of the store and do not evidence any situation causing losses from the deterioration of inventory.

  • On the other hand, given the complete absence of inventory control mechanisms adopted by the Claimant at the date of the facts, the allegation of the existence of losses based on a percentage is in itself infeasible, and the criterion underlying it has not been fully clarified.

  • Note that the admissibility of this criterion should result from the adoption of a set of procedures that allow substantiation of the assumptions of its admissibility and which, given the reality of the business in question (which should not be comparable with a "large supermarket") should allow, at a minimum, for example, specific information on each product subject to loss as a result of its deterioration (such as, for example, batch number and expiration date). For the inventory document presented in the course of the tax inspection is not enlightening regarding the nature of the loss, as it does not identify complementary details regarding the type of products in question that would readily allow inferring, for example, the deterioration of the good (with reference, among other elements, to the expiration date thereof, as mentioned).

  • In light of the foregoing, it is concluded that the disputed assessments do not suffer from a defect of violation of law, and it is to be judged that the arbitral request filed is entirely without merit.

4. Decision

Therefore, it is decided in this Arbitral Tribunal to judge the arbitral request filed as entirely without merit and, in consequence:

  • Absolve the Respondent from the request;
  • Condemn the Claimant in the costs of the proceedings, in the amount set out below.

6. Value of the Proceedings

The value of the proceedings is set at € 43,095.15, pursuant to Article 97-A, paragraph 1, subparagraph a), of the Tax Procedure and Process Code, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

7. Costs

The arbitration fee is set at € 2,142.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, as the request was entirely without merit, pursuant to Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the aforementioned Regulation.

Notify accordingly.

Lisbon, 31 October 2018

The Arbitrator

(Ana Luísa Ferreira Cabral Basto)

Frequently Asked Questions

Automatically Created

What is the VAT presumption of acquisition and transmission of goods under Portuguese tax law?
Under Portuguese VAT law, specifically Article 19(3) of the CIVA (VAT Code), there exists a legal presumption regarding inventory variations. When a taxpayer cannot adequately justify decreases in inventory, the Tax Authority presumes those goods were acquired for business purposes and subsequently transmitted (sold) in taxable transactions. This presumption shifts the burden of proof to the taxpayer, who must provide credible documentation demonstrating that inventory losses resulted from non-taxable events such as theft, deterioration, expiration, or destruction. The presumption allows the Tax Authority to assess output VAT on the inventory decrease, treating it as if the goods were sold without VAT being charged. This mechanism prevents VAT evasion through artificial inventory write-offs and ensures tax neutrality. Taxpayers can rebut this presumption by maintaining rigorous inventory control systems, contemporaneous documentation of losses, police reports for theft, destruction certificates, and detailed explanations supported by credible evidence. The presumption is particularly scrutinized during ownership transitions when accounting practices change.
How are inventory losses treated for VAT purposes in Portugal?
Inventory losses in Portugal receive distinct VAT treatment depending on their nature and documentation. For Corporate Income Tax purposes, inventory losses may be deductible business expenses when properly substantiated. However, for VAT purposes, Article 19(3) CIVA creates challenges: unexplained inventory decreases trigger a presumption of taxable supply, requiring the business to account for output VAT even though no actual sale occurred and no VAT was collected. Legitimate inventory losses—such as goods destroyed, expired (common in grocery retail), stolen, or consumed for business purposes—do not generate VAT liability if adequately documented. Documentation requirements include: detailed inventory records showing opening/closing balances, purchase invoices, sales records, waste logs for expired goods, police reports for theft, and certificates of destruction. When inventory accounting shows significant unexplained gaps, particularly during ownership or management changes, tax authorities invoke the transmission presumption. The 162 m² retail space limitation in this case became relevant evidence, as the Tax Authority questioned whether such premises could physically accommodate the declared inventory levels, strengthening the presumption that goods must have been sold without proper VAT accounting.
Can a taxpayer challenge additional VAT assessments related to inventory losses through tax arbitration at CAAD?
Yes, taxpayers can challenge additional VAT assessments related to inventory losses through administrative arbitration at CAAD (Centro de Arbitragem Administrativa), as demonstrated in this case. The RJAT (Legal Regime of Tax Arbitration) - Decree-Law 10/2011 of January 20 - provides jurisdiction for CAAD to review tax assessment acts, including those based on inventory presumptions. To initiate arbitration, taxpayers must file an application within 90 days after exhausting prior administrative remedies (typically after denial of an administrative appeal under Articles 68 et seq. of the CPPT). The arbitration process offers several advantages: faster resolution than judicial courts (decision within 6 months), specialized arbitrators with tax law expertise, lower costs, and similar enforceability to court judgments. In inventory loss cases, arbitrators examine whether the Tax Authority properly applied Article 19(3) CIVA, whether the taxpayer provided sufficient evidence to rebut the presumption, and whether procedural rights were respected during the inspection. Claimants can seek complete annulment of assessments, reimbursement of amounts paid (as occurred here when the taxpayer paid under PERES to avoid enforcement), plus indemnity interest. The arbitral tribunal has full review powers over both factual determinations and legal interpretations, making CAAD an effective forum for contesting inventory-based VAT assessments.
What is the PERES program and how does it affect VAT debt repayment in Portugal?
PERES (Programa Especial de Redução do Endividamento ao Estado - Special Program for Debt Reduction to the State) was a temporary debt settlement program established by Decree-Law 67/2016 of November 3, allowing taxpayers to settle tax debts with the Portuguese State under favorable conditions. The program typically offered benefits such as: partial forgiveness of accrued interest, extended payment installments (up to 150 months in some versions), suspension of enforcement proceedings during program adherence, and protection from asset seizure while complying with payment terms. For VAT debts specifically, PERES enabled businesses facing liquidity constraints to regularize contested assessments without immediate full payment or enforcement action. In this case, the claimant adhered to PERES in December 2016 to pay the contested VAT assessment of €38,208.64 plus compensatory interest of €4,886.51, specifically to prevent tax enforcement proceedings (execução fiscal) that could have resulted in business closure or asset seizure. However, PERES adherence does not waive the right to contest the underlying tax debt's legality. Taxpayers can simultaneously participate in PERES (ensuring business continuity) while challenging assessments through administrative appeals or arbitration. If the challenge succeeds, amounts paid under PERES are refundable with indemnity interest, as specifically requested in this arbitration claim.
Are compensatory interest and indemnity interest applicable when contesting unlawful VAT assessments in Portugal?
Yes, both compensatory interest (juros compensatórios) and indemnity interest (juros indemnizatórios) apply in Portuguese VAT assessment contests, serving different purposes. Compensatory interest, governed by Article 35 of the LGT (General Tax Law), compensates the State for delayed tax payment when additional assessments are upheld. It accrues automatically from the original tax payment deadline until actual payment, at legally prescribed rates. In this case, the Tax Authority assessed €4,886.51 in compensatory interest on the €38,208.64 VAT assessment for period 201303T. Conversely, indemnity interest, governed by Article 43 of the LGT, compensates taxpayers for unlawful deprivation of funds when tax assessments are annulled or deemed illegal. When taxpayers successfully challenge assessments through administrative appeals, arbitration, or judicial proceedings, they are entitled to recover not only the principal amount paid but also indemnity interest from the payment date until full reimbursement. The rate equals that applied to compensatory interest, ensuring equitable treatment. In this arbitration, the claimant specifically requested indemnity interest on all PERES installment payments made from December 2016 onward, should the arbitral tribunal annul the assessments. This dual interest system balances State revenue protection with taxpayer rights, ensuring neither party benefits from delayed resolution of tax disputes. Indemnity interest recognition affirms that taxpayers should not bear financial costs when complying with subsequently invalidated tax demands.