Process: 400/2017-T

Date: October 31, 2017

Tax Type: IVA

Source: Original CAAD Decision

Summary

In this landmark CAAD arbitral decision (Process 400/2017-T), the tribunal ruled comprehensively in favor of a taxpayer's right to deduct VAT despite irregularities committed by its suppliers. The Tax Authority had issued additional VAT assessments totaling €1,354.12, denying deductions on two grounds: one supplier failed to remit collected VAT to the State Treasury, and another improperly charged VAT while subject to an exemption regime. The tribunal established critical precedent by holding that Article 19(4) of the Portuguese VAT Code (CIVA) is an exceptional provision that places the burden of proof squarely on the Tax Authority. To deny VAT deduction rights under this article, the Authority must demonstrate that the taxpayer knew, or should have known through reasonable due diligence, about the supplier's non-compliance. The court emphasized that the claimant satisfied all primary requirements for VAT deduction: the services were genuinely provided, invoices were properly issued, and full payment including VAT was made. Since the Tax Authority failed to prove the taxpayer's knowledge or negligent ignorance of the suppliers' irregularities, the denial of deduction rights was deemed illegal. This decision reinforces the fundamental principle that a taxpayer's right to deduct input VAT depends on their own good faith compliance, not on subsequent actions or omissions by suppliers beyond their knowledge or control. The tribunal ordered full annulment of the assessment acts and reimbursement with compensatory interest, aligning with established CAAD and Supreme Administrative Court (STA) jurisprudence that protects bona fide taxpayers from liability for third-party tax fraud or non-compliance.

Full Decision

ARBITRAL DECISION

1. REPORT

1.1 A…, LDA., taxpayer number and legal entity number …, with registered office at Rua …, …, in Lisbon, came, under article 2, no. 1, subsection a) of Decree-Law no. 10/2011, of 20 January (hereinafter RJAT) and Administrative Rule no. 112-A/2011, of 22 March, to request the constitution of an arbitral tribunal.

1.2 The Respondent in the proceedings is the TAX AND CUSTOMS AUTHORITY.

1.3 The Ethics Council of the Administrative Arbitration Centre (CAAD) appointed the undersigned to form the Single Arbitral Tribunal, notifying the parties accordingly, and the Tribunal was constituted on 31 August 2017.

1.4 The request for arbitral pronouncement has as its subject the additional VAT assessments relating to periods 201504 and 201506 better identified in the Claimant's request, which gave rise to an accounting adjustment in favour of the State in the total amount of €1,354.12.

1.5 The Claimant invokes the illegality of the assessment acts alleging that the Tax Authority never questioned that the services invoiced which gave rise to the VAT deductions were actually provided and that the Claimant paid in full such invoices, including the VAT, whereby, even if the latter was improperly assessed by the taxable person or was not remitted by the latter to the State Treasury, as the Tax Authority alleges, all the requirements for the right to deduction are met in the Claimant's sphere.

1.6 The TAX AND CUSTOMS AUTHORITY responded, defending itself by contestation, maintaining the assessments in question based on no. 4 of article 19 of the VAT Code.

1.7 Notified of the Tribunal's intention to dispense with the meeting of the arbitral tribunal provided for in article 18 of the RJAT, as well as of the submissions, the parties did not come forward to object.

2. PRELIMINARY MATTERS

The Tribunal was regularly constituted and is competent.

The parties have legal personality and judicial capacity, are legitimate and are regularly represented.

The proceedings do not suffer from any defects which would invalidate them.

3. FINDINGS OF FACT

With relevance to the decision on the merits, the Tribunal considers the following facts to be proved:

1) The Claimant was subject to an internal inspection;

2) As a result of that inspection, the tax inspection services concluded that the Claimant did not have the right to deduction which it had effected relating to the invoice-receipts of taxable person B…, because the VAT assessed by this taxable person and paid by the Claimant had not been remitted to the State Treasury;

3) Also as a result of that inspection, the services considered that the Claimant did not have the right to deduction which it had effected relating to the invoice-receipts issued by taxable person C…, because such VAT had been improperly assessed by the said taxable person.

Facts Not Proved

No other facts with relevance to the appraisal of the merits of the case were alleged by the parties that were not proved.

Reasoning of the Decision on the Findings of Fact

The conviction about the facts stated as proved was based on the submissions of the Claimant and the Respondent not contradicted by the opposing party, supported by the documentary evidence submitted both by the Claimant and by the Respondent, whose authenticity and correspondence with reality were also not questioned.

4. LEGAL MATTERS - ISSUES TO BE DECIDED

The issue to be decided is simply whether the Claimant has the right to deduction of VAT assessed by the two identified taxable persons in the services provided by them or whether, on the contrary, having regard to the provision invoked in no. 4 of article 19 of the VAT Code, the Claimant loses the right to deduction.

The answer seems to us to be of enormous simplicity. The Claimant, in fact, did not question that the services which gave rise to the invoices were actually provided, nor that the Claimant had not paid them.

Whereby the Claimant fulfilled the burden that rested upon it: to demonstrate the satisfaction of the requirements for the right to deduction.

The provision which the Respondent relies upon in support of its thesis is an exceptional provision. Whereby it was incumbent upon it to demonstrate the requirements for its application. Namely, that the Claimant knew (or, at the very least, was unaware with fault, with breach of due diligence) that 1) the taxable person B… had not remitted the assessed VAT to the State Treasury and 2) that taxable person C… was subject to the exemption regime and, therefore, should not have assessed VAT in the invoices corresponding to the services provided.

The Respondent not having furnished this proof, which was incumbent upon it, the corrections made and the accounting adjustment made have no support and are, as such, and without need for further consideration, illegal. This is the conclusion dictated by both the letter of the law and the most elementary common sense in the interpretation of the provisions in question and which corresponds to the prevailing understanding of the case law both of this CAAD and of the STA, of which, among many others, the decisions cited by the Claimant are examples; to which we hereby adhere without reservation.

5. DECISION

In these terms and with the reasoning above, it is decided:

To uphold entirely the claim of the Claimant and, consequently, to annul the assessment acts in question and the accounting adjustment made, on the grounds of breach of law, arising from error in the requirements.

To order the Respondent to reimburse the Claimant of the amounts which the latter has borne as a result of the assessments now annulled, together with compensatory interest calculated from payment until full and complete reimbursement at the legal rates in force.

* * *

The value of the case is set at €1,354.12 (one thousand three hundred and fifty-four euros and twelve cents), in accordance with the provisions of article 3, no. 2 of the Regulation on Costs in Tax Arbitration Proceedings (RCPAT), article 97-A, no. 1, subsection a) of the Code of Tax Procedure (CPPT) and article 306 of the Code of Civil Procedure (CPC).

The amount of costs is set at €306.00 (three hundred and six euros) under article 22, no. 4 of the RJAT and Table I attached to the RCPAT, to be borne by the Respondent, in accordance with the provisions of articles 12, no. 2 of the RJAT and 4, no. 4 of the RCPAT and 527 of the CPC.

Let notice be given.

Lisbon, 31 October 2017,

The Arbitrator,

(Eva Dias Costa)

Text prepared by computer, in accordance with article 131, no. 5 of the Code of Civil Procedure, applicable by reference under article 29, no. 1, subsection e) of the RJAT.

Frequently Asked Questions

Automatically Created

Can a taxpayer deduct VAT if the supplier did not remit the tax to the State?
Yes, a taxpayer can deduct VAT even if the supplier did not remit the tax to the State, provided the taxpayer acted in good faith. According to CAAD Process 400/2017-T, the right to deduction is maintained when the taxpayer proves that services were actually provided, invoices were received, and payment including VAT was made. The Tax Authority can only deny this right under Article 19(4) CIVA if it demonstrates that the taxpayer knew or should have known, with breach of due diligence, that the supplier failed to remit the VAT. Without such proof, the deduction right remains valid.
What does Article 19(4) of the Portuguese VAT Code (CIVA) say about the right to deduct?
Article 19(4) of the Portuguese VAT Code (CIVA) is an exceptional provision that allows the Tax Authority to deny the right to deduct VAT in specific circumstances involving supplier non-compliance. However, as established in this CAAD decision, applying this article requires the Authority to prove that the taxpayer had actual knowledge or negligent ignorance (breach of due diligence) regarding the supplier's failure to remit VAT or improper charging of VAT. The burden of proof rests entirely on the Tax Authority, not the taxpayer, given the exceptional nature of this limitation on deduction rights.
How does CAAD handle disputes over additional VAT assessments based on supplier non-compliance?
CAAD handles disputes over additional VAT assessments based on supplier non-compliance by applying a strict evidentiary standard that protects bona fide taxpayers. The tribunal requires the Tax Authority to prove the taxpayer's knowledge or culpable negligence regarding supplier irregularities. In Process 400/2017-T, CAAD annulled assessments where the Authority failed to demonstrate such knowledge, ruling that taxpayers who fulfill their own obligations—receiving genuine services, obtaining proper invoices, and making full payment—retain deduction rights. This approach aligns with consistent CAAD and Supreme Administrative Court jurisprudence prioritizing taxpayer protection over supplier accountability.
What are the legal requirements for exercising the right to VAT deduction in Portugal?
The legal requirements for exercising the right to VAT deduction in Portugal, as clarified in this decision, are: (1) the services or goods must be actually provided or delivered; (2) proper invoices must be issued showing the VAT charged; (3) the taxpayer must pay the invoices including the VAT amount; and (4) the taxpayer must act in good faith without knowledge or negligent ignorance of any supplier irregularities. The taxpayer bears the burden of proving the first three substantive requirements. If these are satisfied, the Tax Authority can only deny deduction by proving under Article 19(4) CIVA that the taxpayer knew or should have known of supplier non-compliance.
Can VAT deduction be denied when the tax was improperly charged by the supplier?
No, VAT deduction cannot be denied simply because the tax was improperly charged by the supplier, unless the Tax Authority proves the taxpayer knew or should have known about the improper charge. In Process 400/2017-T, CAAD ruled that when a supplier subject to a VAT exemption regime improperly charged VAT, the client taxpayer retained the right to deduct that VAT because the Authority failed to demonstrate the taxpayer's knowledge of the supplier's exempt status. The tribunal emphasized that Article 19(4) CIVA requires proof of actual or constructive knowledge, protecting taxpayers who act with reasonable due diligence from liability for supplier errors.