Process: 409/2017-T

Date: December 11, 2017

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision addresses procedural defects in VAT regularization procedures initiated by the Portuguese Tax Authority. The case involves additional VAT assessments for periods 201209T and 201212T, where the taxpayer challenged corrections made to field 40 of periodic VAT declarations. The central issue concerns notification requirements under Portuguese tax procedure law. The Tax Authority sent multiple notifications by registered mail to the taxpayer's tax address requesting documentation regarding VAT adjustments declared in field 40. All notifications were returned as 'unclaimed' by CTT (Portuguese postal service). Despite the lack of response, the Tax Authority proceeded to disregard the declared VAT amounts and issued additional assessments. The taxpayer contested both the assessments and the administrative appeal decision through CAAD arbitration under Decree-Law 10/2011. The case raises critical questions about the validity of notification procedures when registered mail is returned unclaimed, the application of the inquisitorial principle requiring tax authorities to actively investigate facts, and whether procedural defects can invalidate otherwise substantively justified VAT corrections. The decision examines the balance between taxpayer cooperation duties under Article 59 LGT and procedural safeguards, particularly notification requirements under RCPITA Articles 37-43, and their impact on the legality of subsequent tax assessments.

Full Decision

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. José Coutinho Pires and Dr. Paulo Lourenço (arbitrators-members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Court, constituted on 14-09-2017, agree as follows:

1. Report

A… LDA, with the NIPC … and headquarters at Rua …, …, r/c Esq. …-…, Cascais, (hereinafter referred to as the "Petitioner"), came, under Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "LRAT"), to present a request for arbitral ruling seeking the declaration of illegality of the additional VAT assessments relating to the periods of 201209T and 201212T, with nos. 2016 … and 2016 …, respectively, as well as the declaration of illegality of the decision of the administrative appeal no. …2016….

The AUTHORITY FOR TAX AND CUSTOMS is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Authority for Tax and Customs on 06-07-2017.

Under the terms of paragraph a) of No. 2 of article 6 and paragraph b) of No. 1 of article 11 of the LRAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral court the signatories, who communicated acceptance of the assignment within the applicable period.

On 30-08-2017, the parties were duly notified of this appointment, and did not manifest the intention to refuse the appointment of the arbitrators, in accordance with the combined terms of article 11, No. 1, paragraphs a) and b) of the LRAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provision in paragraph c) of No. 1 of article 11 of the LRAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral court was constituted on 14-09-2017.

The Authority for Tax and Customs responded by defending that the request should be judged without merit.

By order of 19-10-2017, a hearing was dispensed with and it was decided that the proceedings would continue with written submissions.

The Parties submitted arguments.

The arbitral tribunal was regularly constituted, in accordance with the provision of arts. 2, No. 1, paragraph a), and 10, No. 1, of Decree-Law No. 10/2011, of 20 January, and is competent.

The parties are duly represented, possess legal personality and capacity, are legitimate, and are represented (arts. 4 and 10, No. 2, of the same decree-law and art. 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities, and there are no exceptions or any obstacle to the consideration of the merits of the case.

2. Statement of Facts

2.1. Proven Facts

Based on the elements contained in the proceedings and in the administrative process attached to the case file, the following facts are deemed to be proven:

a) The Petitioner was subject to an inspection action qualified by the Tax and Customs Administration as internal, in compliance with Order of Service 2015… of the Financial Department of Lisbon, aimed at checking the elements declared in field 40 of the periodic VAT declarations for periods 1209T and 1212T;

b) In the course of that inspection action, a notification requesting clarification was sent to the Petitioner by mail No. …, dated 21-09-2015, by registered mail (RD…PT) to its tax address, the letter being returned by CTT with the indication "unclaimed";

c) From the aforesaid Office, the contents of which are reproduced, which states, among other things, the following:

Subject: Field 40 of the Periodic VAT Declaration(s) - 2012 - Request for Tax-Relevant Elements

Within the scope of the principle of cooperation provided for in art. 59 of the General Tax Law (LGT), approved by Decree-Law No. 398/98, of 17 December, and in articles 9 and 10 of the Supplementary Regime for the Procedure of Tax and Customs Inspection (RCPITA), approved by Decree-Law No. 413/98, of 31 December, you are hereby notified, in accordance with articles 37 to 43 of RCPITA, to, within the period of 15 (fifteen) days, send to the Financial Department of Lisbon - Tax Inspection Services - Department C - Division II - Team 24, located at Alameda dos Oceanos No. 55 - 1998-:

1. Analytical trial balances as of 31/12/2012, before and after the determination of results;

2. Detailed current account extract from account 2434 - VAT - Adjustments, and/or other current account extracts where the accounting movements relating to the adjustment(s) contained in field(s) 40 of the periodic declaration(s) are reflected;

3. Breakdown of the amount contained in field(s) 40 of the periodic declaration(s), taking into account the type of situation provided for in art. 78 of the Value Added Tax Code (CIVA);

4. Photocopies of the supporting documents for the ten highest-value movements relating to the amounts indicated in field(s) 40 of the periodic declaration(s), relating to the 2012 financial year, with the respective proof(s) in accordance with art. 76 of the CIVA.

d) A new letter for notification was sent to the Petitioner by registered mail on 29-01-2016 (RD…PT), addressed to its tax address, which was returned by CTT with the indication "unclaimed";

e) In this letter, the following is stated, among other things:

Subject: Field 40 of the Periodic VAT Declarations - 2012

By our Office No. …, of 21/09/2015, a copy of which is attached, a set of elements regarding the amounts entered in field 40 of the Periodic VAT Declarations of the year 2012 was requested from you.

As, to date, no response has been received to the aforesaid office, you are hereby notified to, within the period of 5 business days, in accordance with articles 37 to 43 of RCPITA, send to the Financial Department of Lisbon - Department C - Division II - Team 24, located at Alameda dos Oceanos No. 55 - 1998-027 Lisbon or to the email address indicated above:

Copy of the supporting documents for all amounts entered in field(s) 40 of the periodic declaration(s) of the year 2012.

It is hereby informed that the entry of amounts in field 40 of the Periodic Declarations corresponds, by nature, to the exercise of the right to deduction, and for this reason, the supporting documents must necessarily comply with the provisions of articles 19 to 25 and 78 of the CIVA.

Should the elements now requested not be sent within the period stated above or should they not comply with the provisions of articles 19 to 25 and 78 of the CIVA, the Tax Inspection Services will proceed to correct the amounts entered in field 40 of the periodic declarations of the year 2012.

f) Following the absence of response from the Petitioner, the tax inspection disregarded the amounts of tax entered in field 40 of the declarations under analysis, the Tax and Customs Administration sent the Petitioner the draft final report for the exercise of the right to a hearing, by mail No. …, dated 18-02-2016, by registered letter dated 16-02-2016, RD…PT, which was returned by CTT with the indication "unclaimed";

g) In that draft Tax Inspection Report, the contents of which are reproduced, the following is stated, among other things:

II.3.3. Accounting and Tax Analysis

II.3.3.1 – Notification: The taxpayer was notified by mail No. … of 21/09/2015 (ANNEX I), within the scope of the principle of cooperation provided for in article 59 of the General Tax Law (LGT) and in articles 9 and 10 of the Supplementary Regime for the Procedure of Tax and Customs Inspection (RCPITA), to send to these Services:

- Analytical trial balances as of 31/12/2012;

- Detailed current account extract from account 2434 - VAT - Adjustments;

- Breakdown of the amount contained in field(s) 40 of the periodic declaration(s), taking into account the type of situation provided for in art. 78 of the Value Added Tax Code (CIVA);

- Photocopies of the supporting documents for the ten highest-value movements relating to the amounts indicated in field(s) 40 of the periodic declaration(s), with the respective proof(s) in accordance with art. 78 of the CIVA.

The taxpayer did not respond to the notification.

The taxpayer was again notified by mail No. … of 29/01/2016 (ANNEX II), to, within the period of 5 business days, in accordance with articles 37 to 43 of RCPITA, send to these services, copies of the supporting documents for all amounts entered in fields 40 of the periodic declarations of the year 2012. It was also warned that, should the elements now requested not be sent within the period stated or should they not comply with the provisions of articles 19 to 25 and 78 of the CIVA, the Tax Inspection Services would proceed to correct the amounts entered in field 40 of the periodic declarations of the year 2012.

The taxpayer also did not respond to this second notification.

III DESCRIPTION OF THE FACTS AND GROUNDS OF THE PURELY ARITHMETIC CORRECTIONS

The taxpayer entered in field 40 of the periodic VAT declaration a total of 85,138.73€ in adjustments in its favor for the year 2012, in accordance with the following table:

[table content]

This entry corresponds to the deduction of tax (VAT). The deduction of tax is only possible in accordance with articles 19 to 25 and 78 of the CIVA, that is, it is only possible to deduct tax if the taxpayer is in possession of documentary evidence that permits such.

The taxpayer was notified by offices nos. … of 21/09/2015 and … of 29/01/2016 to send copies of the supporting documents for the amounts indicated in field 40 of the periodic declarations, relating to the 2012 financial year, with the respective proof in accordance with article 78 of the CIVA. Having not responded to any of the notifications, it is not proven that it has in its possession the documents that would allow it to exercise the right to deduction of the amounts entered in field 40 in the total amount of 85,138.73€.

h) After the final report was drawn up, it was sent to the Petitioner by mail No. …, dated 17-03-2016, by registered letter dated 17-03-2016, with RD…PT, which was returned by CTT with the indication "unclaimed";

i) On 23-03-2017, the Tax and Customs Administration issued the additional VAT assessments relating to the periods of 201209T and 201212T, with nos. 2016… and 2016…, in the amounts of €42,671.67 and €42,467.06, on which are added compensatory interest in the amounts, respectively, of €5,653.70 and €5,198.43;

j) The Petitioner filed an administrative appeal against the aforesaid assessments;

k) In the administrative appeal procedure, a draft decision to dismiss was prepared, which was notified to the Petitioner to exercise, if it so wished, the right to a prior hearing;

l) The Petitioner exercised the right to a prior hearing;

m) On 21-04-2017, an order dismissing the administrative appeal was issued, the contents of which are reproduced, and in which the following is stated, among other things:

3 - CAUSE OF ACTION AND CLAIM

The Appellant requests the annulment of the additional assessments in question, relating to the 3rd and 4th quarters of the year 2012, on the grounds that it was never notified of the reasons underlying the issuance of the assessments now in question.

It further alleges that despite having opted for electronic notifications, the fact is that it never received any notification from the AT, either through its electronic mailbox or through registered letter with receipt confirmation, informing it of the change in its tax situation, as the Law requires.

By means of a supplementary petition to the initial petition, the taxpayer brings to the case file the supporting documents for the adjustments in field 40.

4 - DESCRIPTION OF THE FACTS AND OPINION

The Appellant was subject to an internal inspection action, carried out by the inspection services of the Financial Department of Lisbon, for the purpose of controlling the elements declared in field 40 of the periodic VAT declarations in the year 2012 (see pp. 127 to 148).

And within the scope of the principle of cooperation enshrined in art. 59 of the General Tax Law (LGT), it was notified by mail No. …, of 21/09/2015 (pp. 127 to 130) to send to these Services the elements relating to the 2012 financial year, among them:

- Analytical trial balances as of 31/12/2012, before and after the determination of results;

- Detailed current account extract from account 2434 - VAT - Adjustments, and/or other current account extracts where the accounting movements relating to the adjustment(s) contained in field(s) 40 of the periodic declaration(s) are reflected;

- Breakdown of the amount contained in field(s) 40 of the periodic declaration(s), taking into account the type of situation provided for in art. 78 of the Value Added Tax Code (CIVA);

- Photocopies of the supporting documents for the ten highest-value movements relating to the amounts indicated in field(s) 40 of the periodic declaration(s), relating to the 2012 financial year, with the respective proof(s) in accordance with art. 78 of the CIVA.

This letter, registered on 2015-0-22 with no. RD … PT, and sent to the taxpayer's tax address – Rua …, No. …, …, in Cascais, was returned by CTT, with the indication of "Unclaimed" (pp. 128 to 130).

In view of this return, the services proceeded to send a new notification by registered letter on 2016-01-29 with no. RD … PT (pp. 131 to 134) requesting those elements, which letter was again returned by CTT with the indication of "Unclaimed" (pp. 133 and 134).

And, in this way, the inspection services proceeded to make corrections to field 40 of the periodic declarations relating to the periods of 201209T and 201212T, in the amounts of 42,671.67€ and 42,467.06€, respectively, because it was not proven that the TP had in its possession the documents that would allow it to exercise the right to deduction of the amounts entered in that field.

From the project of corrections of the tax inspection report, the TP was notified of its contents and for the purpose of exercising the right to a hearing provided for in art. 60 of the LGT and art. 60 of the Supplementary Regime for the Procedure of Tax and Customs Inspection (RCPITA), by mail No. …, 18.02.16, by registered letter and 2016.02.16 with no. RD … PT. (pp. 135 to 138)

Again, this letter was returned by CTT with the indication of "Unclaimed" (pp. 137 and 138), whereupon the competent Final Report was drawn up by the tax inspection services, making final the corrections initially proposed in the aforesaid project (pp. 139 to 144). And of this fact, the taxpayer was notified by mail No. …, of 17.03.16, by registered letter on 2016.03.17 with no. RD … PT (pp. 145 to 148), which letter was again returned by CTT with the indication of "Unclaimed" (pp. 147 and 148).

It should be noted that, in accordance with No. 2 of art. 62 of RCPITA, the final report of the inspection procedure must be notified to the taxpayer by registered letter. That is, the law does not require that notification in the inspection procedure and of the final report be made with receipt confirmation. And in this way, any notification made by the inspection services, including that of the final report, was in accordance with what is stipulated by law.

As already mentioned, the letters were all sent to the taxpayer's tax address contained in the computer system – Rua …, No. …, …., …-… Cascais (p. 126).

And the fact that the TP opted for electronic notifications does not oblige the AT to always use that means, especially since RCPITA does not refer to that means of notification, and in this way, the notifications made do not suffer from any illegalities.

In the supplementary petition to the initial petition submitted on 2016.10.04, untimely, it is alleged that the assessments now in question should have been made in accordance with No. 3 of article 87 of the CIVA, the Tax Authority should have opened a tax inspection procedure in accordance with article 2 of the Supplementary Regime for Tax and Customs Inspection (RCPITA), following the legal procedures inherent to an internal or external inspection procedure, which it clearly did not do.

Notwithstanding the untimeliness of the aforesaid supplementary petition, it is always stated that, as already mentioned, the assessments now appealed were issued on the basis of corrections made by the tax inspection services, within the scope of an internal inspection action, in compliance with what was determined in order of service no. 012015… of 18.09.2015, of partial scope in accordance with paragraph b) of No. 1 of art. 14 of RCPITA.

Article 78 of the CIVA determines the adjustments that should be made when there are changes to the VAT initially levied, resulting from taxable operations (transfers of goods or provision of services) documented in invoices. However, these VAT adjustments should only be made if that tax initially levied in invoices has already been recorded and included in Periodic Declarations submitted to the AT.

In the event that there is a situation that determines a correction to the VAT levied on the invoice, issuing a credit note with the respective adjustment of the VAT in that document, the tax should only be included in the adjustment field if the amount initially levied on the invoice has already been included in a Periodic Declaration submitted to the AT on an earlier date.

On the other hand, article 78 of the CIVA also determines that it is only possible to make an adjustment in its favor if it has in its possession the proof that the purchaser became aware of that adjustment or that it was refunded the tax, until the deadline for submission of the periodic declaration in which it will make the adjustment. If it does not have this proof by that deadline, the supplier loses the right to make the adjustment in its favor of that VAT, and it is not possible to submit a replacement declaration.

Now, although some documents were brought, the following is noted:

With the initial petition, the following documents were brought:

• Extracts from account 243416631321 and 243412213211 (01-07-2012 to 30-09-2012);

• Various credit notes and extracts from account 63 and the extract relating to the determination of VAT for the period;

• Extracts from account 243412113211 and 24342231321 11 (01-10-2012 to 31-12-2012);

• Various credit notes and extracts from account 63;

With the supplementary petition to the initial petition, photocopies of barely legible account extracts and credit notes were brought.

The corresponding invoices were not brought, nor the analytical trial balances as of 31/12/2012.

Also, there were not brought to the case file, the proof that the purchaser (or purchasers) became aware of the adjustments, in the provision of services in which the invoices and credit notes were issued to customers, in accordance with what is determined in No. 5 of art. 78 of the CIVA, moreover, an essential requirement for the adjustment to be made in favor of the taxpayer.

This is because adjustment in favor of the State is always mandatory, while adjustments in favor of taxpayers are optional, whose recognition requires a more careful consideration.

No. 1 of art. 74 of the General Tax Law (LGT) establishes the rule of "whoever alleges must prove", placing on the interested parties the burden of proof of the facts that interest the support of their position.

The facts should only be considered proven when they are determined with absolute certainty, which is why the failure to provide proof or its insufficient provision cannot fail to influence the merits of the claim.

It is also worth noting that the appellant did not indicate any other address other than that contained in the computer system and to which it was notified within the scope of the inspection action.

It should also be noted that, as the requirements of No. 1 of article 43 of the LGT are not met in this case, the consideration of the right to indemnatory interest is prejudiced.

5 - PROPOSED DECISION

In view of the above, it is concluded that the additional assessments appealed are legal, and that the appellant's claim should be dismissed, due to insufficient proof of what was alleged.

6 - RIGHT TO HEARING

6.1 - With the instruction of the proceedings completed and the contested matter examined, the respective information was provided, and the corresponding draft decision on the claim was made on 2017.03.24 (pp. 149 to 151-verso).

6.2 - It was communicated by notification made to the appellant, in the person of its Representative, by registered letter on 2017.03.28 (see pp. 153 and 154), to exercise, in writing, the right to a prior hearing provided for in art. 60 of the General Tax Law, thus complying with what is established in No. 4 of that article and Law.

6.3 - For the exercise of that right, the period of 15 days was set, counted from the date of that notification.

6.4 - Reporting to the date of 2017.03.29 (p. 154) the notification is presumed to be effective on 2017-04-03, in accordance with the provision in No. 1 of art. 39 of the C.P.P.T.

6.5 - The period of 15 days to exercise the right to hearing ended on 2017.04.18.

6.6 - The written exercise of the right to hearing was sent to these services by registered letter on 2017-04-12 (p. 160), within the period granted to it.

7 - ARGUMENTS AND OPINION

The Appellant exercises its right to hearing, alleging the following:

• Attached 19 documents to the initial petition, thus fulfilling the burden of proof enshrined in No. 1 of art. 74 of the LGT;

• Did not present the Analytical Trial Balances because they have no relevance to the object of the appeal;

• Did not present any invoices, because they have no evidentiary relevance (...)

• Delivered with the administrative appeal the documents that allowed the AT to pronounce itself on the merits of the appeal, which cannot be said of the AT that did not do what was incumbent on it, since it did not pronounce itself on the evidential value of any of the documents sent (...) with the lack of substantiation of the respondent entity that does not pronounce itself on the legitimacy of the adjustments made.

It is part of the competencies of the AT, among others, to promote the correct application of the legislation and administrative decisions related to its attributions and to propose normative, technical and organizational measures that prove to be appropriate, and to inform taxpayers and operators about their respective tax and customs obligations and support them in the fulfillment thereof.

The administrative appeal procedure is by definition a legal institute with the objective of impugning the legality of an act performed by the Tax Administration, having as its purpose its re-examination by the competent decision-making body, aiming at the total or partial annulment of tax acts.

In fact, the administrative appeal filed by the taxpayer is intended to obtain a re-analysis of a certain situation by the Tax Administration. It is the normal means of resolving a dispute amicably between the taxpayer and the Tax Administration.

Before making a decision that is wholly or partially unfavorable to it, it has the right to be heard by the Tax Administration, since it may not agree with that conclusion. It is the application of the constitutional principle of participation, embraced by article 60 of the General Tax Law.

In the exercise of the right to hearing, the Appellant does not allege anything new that could condition the Tax Authority to a re-analysis of the question put in issue in the initial petition. Indeed, it merely questions the lack of relevance of the documents that were not presented.

Article 59 of the LGT, in its No. 1, establishes the duty of reciprocal cooperation between the organs of the AT and the taxpayers, having as its basis the presumption of good faith in the conduct of the taxpayer and the AT.

In the case in question, and because, on the one hand, it is the taxpayer who bears the burden of proof of its allegations and, on the other, the AT that bears the assessment of the allegations and evidentiary documents, it is also up to it to determine, within the scope of its competencies, whether the documents presented are or are not sufficient and whether or not they have evidentiary relevance.

Moreover, within the scope of its competencies, the AT must carry out all the necessary measures for the satisfaction of the public interest and the discovery of the material truth, not being subordinated to the initiative of the author of the request, in accordance with the inquisitorial principle enshrined in art. 58 of the LGT.

It will not be incumbent on the taxpayer to make considerations about the degree of relevance of the documents that should or should not be brought to the case file, but rather to cooperate with the AT by providing all clarifications and attaching the documents requested of it, since it is up to the latter to decide which documents are essential for the consideration of the request.

Despite the fact that the credit note constituting the aforesaid "Doc.9" is signed, allegedly by a representative of the purchaser (no stamp of the purchasing entity was affixed), the respective invoice was not attached, making it impossible to ascertain whether the elements contained in the credit note refer to the invoice in question.

As mentioned in the draft decision, the adjustments provided for in art. 78 of the CIVA are a faculty granted to the taxpayer and not an obligation, wherefore their recognition requires a more careful consideration.

And, in this way, and because the taxpayer did not bring, within the scope of the exercise of its right to hearing, the documents that were shown to be missing, it seems to us that the decision to dismiss should be maintained.

It is further proposed that a copy of this information be sent to Department A of the Tax Inspection of this Financial Department, in accordance with No. 2 of art. 63 of RCPITA.

8 - DECISION

In view of the above, it is concluded that the additional assessments in question are legal, and that the Appellant's claim should be dismissed.

n) On 06-07-2017, the Petitioner submitted the request for arbitral ruling that gave rise to the present proceedings.

2.2. Unproven Facts and Grounds of the Decision on the Facts

The proven facts are based on the administrative proceedings and on the documents attached to the request for arbitral ruling.

There are no facts relevant to the decision of the case that have not been proven.

3. Legal Matters

The Petitioner questions the legality of the dismissal of the administrative appeal and the legality of the disputed additional VAT assessments, imputing them with the vice of nullity due to non-compliance with essential legal requirements, illegality due to lack of legal grounds and errors in matters of fact and law.

3.1. Question of Lack of Notifications in Accordance with Legal Terms

The Petitioner states, in summary, the following:

– the Tax and Customs Administration should have carried out a compliance action at the Petitioner's premises, in accordance with nos. 1, 2 and 3 of article 87 of the CIVA;

– under the terms of No. 3 of article 29 of RCPIT, tax inspection can request from taxpayers the sending of "copies of documents and information relevant to the determination and control of their tax situation or that of a third party, but these requests must be made, in accordance with No. 4 of that article, by registered letter with receipt confirmation, which the tax inspection clearly did not do;

– having been returned the registered letters sent by the tax inspection, requesting copies of accounting documents, it is clear that the Petitioner did not become aware of the request and, naturally, could not have sent them;

– in accordance with No. 1 of article 41 of the CPPT, legal entities and partnerships are cited or notified in their electronic mailbox;

– the provision in question contains no exceptions, nor does it confer on the Tax and Customs Administration a power, or even a faculty, of option regarding notifications that can be made by postal means or by electronic means, as happens with other foreign tax legislation, whereby it can only be considered that article 41 has an imperative character, from which it follows that all tax notifications to partnerships that have opted for the electronic mailbox must be made through it;

– the obligation to opt for the electronic mailbox, imposed on partnerships must necessarily correspond, unless the law provides otherwise, the obligation of its use as the exclusive channel for promoting tax notifications, conferring, on the parties involved, security and predictability in their receipt;

– it would be poorly understood that partnerships had the burden of opting for the electronic mailbox, with the obligation of its regular opening and that the tax administration could, indiscriminately and without substantiation, send the notifications in the manner it deemed fit, obliging taxpayers to a redoubled duty of diligence to ensure the receipt of notifications, namely in cases such as that described in which, due to inactivity, the partnership has its physical facilities closed.

– the notifications were made in non-compliance with the legal forms provided, which determines their nullity;

– for this reason, the tax inspection could not disregard, without more, the VAT Adjustments entered in Field 40 of the Periodic Declarations.

The Tax and Customs Administration, in its Response, states the following, in summary:

– the fact that the Petitioner opted for electronic notifications does not prevent the AT from using postal notification, and that postal notification is the only one provided for in the Supplementary Regime for Tax and Customs Inspection (RCPIT), not being permissible, in the course of an inspection action, to make notifications to the taxpayer other than those made in accordance with the legal terms provided for that purpose;

– in accordance with No. 2 of art. 62 of RCPITA, the final report of the inspection procedure must be notified to the taxpayer by registered letter, with no requirement in the law regarding registered letter with receipt confirmation, as the Petitioner claims;

– No. 1 of art. 41 of the CPPT states that "Legal entities and partnerships are cited or notified in their electronic mailbox or in the person of one of their administrators or managers, at their headquarters, at their residence or in any place where they are found.";

– given that there is no requirement in the law for notifications in the course of the inspection procedure, as well as notifications of the project of corrections and final report, to be made by registered letter with receipt confirmation, it is necessary to conclude that all notifications made by postal means, with registration with CTT, to the Petitioner's tax address, are in compliance with the law.

– it must be concluded that all notifications made to the Petitioner were made in the manner legally required, to the taxpayer's tax address contained in the register: Rua …, No. …, …, …-… Cascais.

As results from the evidence produced, the notifications made in the inspection procedure were made by registered letters addressed to the Petitioner's tax address, which were returned, whereby it is certain that it did not become aware of the notifications contained in those letters, for submission of documents.

Article 29, nos. 3 and 4, of the Supplementary Regulation for the Tax Inspection Procedure (RCPIT) establishes the following:

3 - Tax inspection may also, taking into account its necessity and the principle of proportionality, proceed with the following prospective or information measures:

a) Send to taxpayers, as well as to any other public or private entities, questionnaires regarding data and facts of a specific nature relevant to the definition and control of their tax situation or that of third parties, which must be returned after being duly completed and signed;

b) Request from the entities referred to in the previous paragraph the sending of copies of documents and information relevant to the determination and control of their situation or that of a third party, namely invoices, transport documents, accounting records and copies or extracts of acts and documents from notarial cartories, property registers and other official services.

4 - The requests and requisitions referred to in the previous number shall be made by registered letter with receipt confirmation, setting for their fulfillment a period of not less than 10 days.

In light of this No. 4, it is manifest the pretermission of a legal formality of the inspection procedure, as the requests for documents made by the Tax and Customs Administration to the Petitioner were not sent by registered letter with receipt confirmation, but by simple registered letter.

As is well-established jurisprudence, "all procedural formalities provided for in law are essential, only becoming non-essential if, despite them, the end that the law aimed to achieve with their imposition is achieved." ([1])

In the case in question, the Petitioner did not become aware of the contents of the letters, which were returned, and the burden of proof that the Petitioner had access to them lies with the Tax and Customs Administration.

On the other hand, only for cases of notification by registered letter, and not also those in which registered letter with receipt confirmation is required, is there provided in article 43, No. 1, of RCPIT a presumption of notification in cases of return.

For this reason, the notifications provided for in those nos. 3 and 4 of article 29 of RCPIT cannot be considered made, nor can the invalidity of those notifications sent to the Petitioner in the inspection procedure for submission of documents be remedied.

This pretermission of legal formality, which had the potential to influence the subsequent Tax Inspection Report, which ended up being made without the documents and information that the Tax and Customs Administration intended to obtain from the Petitioner, constitutes a procedural vice that has repercussions on the final act of the inspection procedure and on the subsequent assessments that were issued based on that Report.

For this reason, the contested assessments as well as the decision of the administrative appeal that upheld them must be annulled.

3.2. Question of the Illegality of the Assessments due to Violation of the Inquisitorial Principle and Error Regarding the Factual Premises

The Petitioner imputes to the Tax and Customs Administration a violation of the inquisitorial principle, set forth in article 58 of the LGT, which establishes that "the tax administration must, in the procedure, carry out all measures necessary for the satisfaction of the public interest and the discovery of the material truth, not being subordinated to the initiative of the author of the request."

But it also states, under this framework, that the judgment made by the Tax and Customs Administration is correct in that it was not "proven that the TP had in its possession the documents that would allow it to exercise the right to deduction of the amounts entered in that field" (article 43 of the request for arbitral ruling), which is reduced to the imputation of a vice due to error regarding the factual premises, as it is imputed an error in the appraisal of the evidence. The imputation of this vice is confirmed in article 45 of the request for arbitral ruling in which the Petitioner states that it is not permissible "that the tax inspection presume that the VAT Adjustments in favor of the taxpayer do not meet the legal requirements and disregard the corresponding tax deduction."

The Petitioner is correct regarding both questions that are encompassed within these grounds of the request for arbitral ruling.

In truth, regarding the violation of the inquisitorial principle, it is manifest that, in view of the return of the letters, the Tax and Customs Administration should have carried out measures to investigate the facts that it considered necessary to determine the correctness of the adjustments made by the Petitioner, including carrying out a compliance action at the Petitioner's premises, as provided for in No. 3 of article 87 of the CIVA, but, at the very least, seek to make notification in accordance with legal terms, namely of a personal nature, as provided for in article 40 of RCPIT.

Thus, it must be concluded that the Tax and Customs Administration did not carry out all the measures necessary for the discovery of the material truth, whereby its conduct violates article 58 of the LGT.

On the other hand, it is also clear that the Tax and Customs Administration, in the substantiation of the assessments, errs in the appraisal of the evidence, as, following the return of the letters it sent in order to obtain documents and information from the Petitioner, it could not conclude that "having not responded to any of the notifications, it is not proven that it has in its possession the documents that would allow it to exercise the right to deduction of the amounts entered in field 40 in the total amount of 85,138.73€."

In truth, the letters not having been received, there was no logical basis for concluding that the taxpayer did not have in its possession the documents referred to, but only that it did not even know that the Tax and Customs Administration intended that it present those documents.

Thus, the contested assessments suffer from vices of violation of the inquisitorial principle and of error in the appraisal of evidence that is reduced to error regarding the factual premises.

3.3. Questions of Prejudiced Knowledge

As the request for arbitral ruling should proceed on the basis of these vices, which ensure effective protection of the interests of the Petitioner, the consideration of the remaining questions raised is prejudiced, being useless (article 130 of the CPC).

4. Decision

In these terms, the members of this Arbitral Court agree to:

a) Judge the request for arbitral ruling to have merit;

b) Declare the illegality of the additional VAT assessments relating to the periods of 201209T and 201212T, with nos. 2016 … and 2016 …, respectively, as well as declare the illegality of the decision of the administrative appeal no. …2016….

5. Value of the Case

In accordance with the provision of art. 306, No. 2, of the CPC and 97-A, No. 1, paragraph a), of the CPPT and 3, No. 2, of the Regulation on Costs in Tax Arbitration Proceedings, the value of the case is set at €95,990.86.

6. Costs

In accordance with art. 22, No. 4, of the LRAT, the amount of costs is set at €2,754.00, in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Administration.

Lisbon, 11-12-2017

The Arbitrators

(Jorge Lopes de Sousa)

(José Coutinho Pires)

(Paulo Lourenço)

[1] In this sense, see the judgment of the Supreme Administrative Court of 06-10-2005, delivered in case no. 0500/05.

In the same line, see the judgments of the Supreme Administrative Court of 22-03-2006, case no. 01291/05, of 29-11-2006, case no. 0412/06, of 19-04-2012, delivered in case no. 0852/11.

Frequently Asked Questions

Automatically Created

What procedural defects can invalidate a VAT regularization by the Portuguese Tax Authority?
Procedural defects that can invalidate VAT regularization include improper notification to the taxpayer, failure to provide adequate opportunity for response, non-compliance with hearing rights under Article 60 LGT, and insufficient application of the inquisitorial principle. When notifications are returned unclaimed, the Tax Authority must take additional steps to ensure effective communication before proceeding with assessments. Failure to properly notify the draft report or to investigate facts beyond taxpayer-provided information may constitute invalidating procedural defects under Portuguese tax law.
How does the inquisitorial principle apply to VAT assessment procedures in Portugal?
The inquisitorial principle requires the Portuguese Tax Authority to actively investigate and establish relevant facts, not merely rely on taxpayer declarations or responses. Under Articles 58 LGT and 9-10 RCPITA, tax inspectors must pursue truth independently. This means that even when taxpayers fail to respond to requests for documentation regarding field 40 VAT adjustments, the Authority cannot automatically disregard declared amounts without conducting independent verification of the underlying transactions and supporting documentation.
What are the notification requirements for additional VAT liquidations under Portuguese tax law?
Notification requirements for additional VAT liquidations are governed by Articles 37-43 RCPITA and general administrative procedure rules. The Tax Authority must effectively notify taxpayers of inspection requests, draft reports, and assessment decisions. When registered mail is returned unclaimed, Portuguese law requires additional diligence, potentially including personal delivery, electronic notification if available, or public notice. The draft report notification is particularly critical as it triggers the right to a hearing under Article 60 LGT before final assessment.
Can a taxpayer challenge VAT adjustments for periods 2012 through CAAD arbitration?
Yes, taxpayers can challenge VAT adjustments for 2012 periods through CAAD arbitration, provided they file within the statutory limitation period. Under Decree-Law 10/2011 (LRAT), tax arbitration is available for disputes concerning VAT assessments and related administrative decisions. The fact that the tax periods date to 2012 does not preclude arbitration if the assessments were issued within the limitation period (generally four years under Article 45 LGT) and the arbitration request was filed timely after the administrative appeal decision.
What happens when the Tax Authority fails to follow proper procedure in VAT regularization cases?
When the Tax Authority fails to follow proper procedure in VAT regularization cases, the resulting assessments may be declared illegal and annulled, even if the substantive tax corrections were justified. Portuguese administrative law requires strict compliance with procedural guarantees, including notification rights, hearing rights, and the inquisitorial duty. Procedural defects affecting fundamental rights (such as inadequate notification preventing effective defense) typically result in annulment of the entire assessment, requiring the Tax Authority to restart the procedure correctly if still within limitation periods.