Process: 459/2015-T

Date: August 30, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

This arbitral decision from CAAD (Administrative Arbitration Center) addresses the challenge by A... Lda against additional VAT assessments and compensatory interest covering seventeen tax periods from July 2011 to July 2012. The dispute centers on the regularity of invoices issued by supplier B... Unipessoal, Lda for hide purchases used in shoe production. The Portuguese Tax Authority (AT) disallowed VAT deductions claimed by the taxpayer, arguing that the supplier's invoices were false because B... neither produced nor acquired merchandise domestically or internationally, lacked adequate business infrastructure and employees for the reported volume of operations, and conducted financial transactions exclusively in cash despite substantial amounts involved. The claimant contested these assessments through arbitration under Decree-Law 10/2011 (RJAT), arguing that the invoices represent genuine commercial transactions. The taxpayer presented evidence including bearer cheques proving payment, fax records of merchandise requisitions sent prior to invoice issuance, warehouse entry documentation, and testimony that the supplier provided hide samples at the claimant's premises for analysis before purchase. The claimant argued that AT's burden of proof was not satisfied, as the Tax Authority relied exclusively on indicators collected from the supplier's activities without adequately investigating the claimant's own business operations and documentation. The taxpayer contended that even the Inspection Report acknowledged B... sold some hides, meaning blanket disallowance of all invoices was unjustified without specific evidence of falsity for each transaction. The case illustrates the evidentiary standards required when tax authorities challenge invoice authenticity, particularly regarding whether indicators of irregularity at the supplier level automatically invalidate all transactions with clients, or whether authorities must corroborate such indicators through examination of the purchasing taxpayer's specific business records and operational circumstances.

Full Decision

ARBITRAL DECISION

REPORT

On 20 July 2015, A…, Lda, taxpayer no. …, with registered office at Rua …–…, …, …, …-… …, hereinafter identified as Claimant, submitted a request for arbitral pronouncement with the intervention of a single arbitral tribunal, pursuant to the provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter designated LRAT), in conjunction with Article 102 of the Code of Tax Procedure and Process (CTPP).

In the said request for arbitral pronouncement, the Claimant seeks to have the Arbitral Tribunal declare the illegality and consequent annulment of the following acts of additional VAT and Compensatory Interest assessments:

a) Assessment No. … relating to VAT for period 2011/07;

b) Assessment No. … relating to compensatory interest on the preceding assessment;

c) Assessment No. … relating to VAT for period 2011/08;

d) Assessment No. … relating to compensatory interest on the preceding assessment;

e) Assessment No. … relating to VAT for period 2011/09;

f) Assessment No. … relating to compensatory interest on the preceding assessment;

g) Assessment No. … relating to VAT for period 2011/10;

h) Assessment No. … relating to compensatory interest on the preceding assessment;

i) Assessment No. 2013 … relating to VAT for period 2011/11;

j) Assessment No. 2013 … relating to VAT for period 2011/12;

k) Assessment No. 2013 … relating to VAT for period 2012/01;

l) Assessment No. 2013 … relating to VAT for period 2012/02;

m) Assessment No. 2013 … relating to VAT for period 2012/03;

n) Assessment No. 2013 … relating to VAT for period 2012/04;

o) Assessment No. 2013 … relating to VAT for period 2012/05;

p) Assessment No. 2013 … relating to VAT for period 2012/06;

q) Assessment No. 2013 … relating to VAT for period 2012/07.

The request for constitution of the arbitral tribunal was accepted on 22 July 2015 by His Excellency the President of CAAD and, subsequently, notification of the Tax and Customs Authority (hereinafter identified as Respondent Entity) was effected.

The Claimant did not proceed to nominate an arbitrator, whereupon, pursuant to Article 6, No. 1 of the LRAT, the undersigned was designated by the President of the Deontological Council of CAAD to constitute the present single arbitral tribunal, with the nomination being accepted in accordance with the legal provisions.

On 18 September 2015, the Parties were notified of this designation, and expressed no objection to it, pursuant to the combined provisions of Article 11, No. 1, paragraphs a) and b) of the LRAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of paragraph c) of No. 1 of Article 11 of the LRAT, the arbitral tribunal was constituted on 6 October 2015.

On 11 November 2015, the Respondent Entity submitted its Reply, having previously attached the administrative file.

On 19 January 2016, the meeting pursuant to Article 18 of the LRAT took place and witness testimony was heard, following which written submissions were presented by the Parties.

By order dated 13 May 2016, the Respondent Entity was directed to effect the annexation of the documents attached to the Claimant's Complaints (which did not form part of the administrative file) and to effect the annexation of a complete copy of the Inspection Report issued in the name of the Claimant.

On 31 May 2016, the Respondent Entity annexed to the file the documents referred to above.

The Claimant supports its request for annulment of the contested acts on the ground that the invoices relating to supplies from its supplier "B… Unipessoal, Lda." are genuine and evidence real supplies of hides for shoe production, with no illegality or simulation therein, and therefore the VAT deduction that these invoices evidence is legal and appropriate.

Furthermore, it argues that the indicators collected by the Tax Administration relate only to the activity of B… and companies linked to it, and that all indicators collected from the Claimant point to the veracity and regularity of the operations evidenced by the invoices that were disregarded as a cost.

For the Claimant, the Tax Administration, in collecting strong and sufficient indicators that certain invoices do not correspond to real transactions, cannot rely solely on evidentiary elements collected only from the activity of the alleged issuer of such invoices and proceed to an extrapolation of such indicators to justify the disregard of all invoices from that issuer that appear in the accounting records of the taxpayer subject to inspection. For the Claimant, from the moment it is recognized in the Inspection Report that there are indicators that B… sold some hides, the indicators of falsity can only be considered strong and sufficient if they can be corroborated by factual observations made by analysis and inspection of the activity of the client company, which claims to have carried out real transactions and insists on the consideration as genuine of the invoices issued by the suspect entity. Thus, for the Claimant, the Tax Administration failed to satisfy the burden of proof incumbent upon it.

The Claimant maintains that the records it made available demonstrate that the operations recorded in the invoices are real and that it had no knowledge of any infringement on the part of B…, pursuant to Articles 3 and 4, No. 19 of the VAT Code, with no simulated agreement existing, and that it did not know whether the tax was remitted to the State Treasury by B….

To support this, the Claimant alleges the provision by the supplier, at the Claimant's premises, of samples of hides, which were subject to analysis, always at its premises, with a view to their respective acquisition.

The Claimant further invokes the fact that the goods transport vehicle covered the kilometres necessary to carry out certain transports as evidence that it would be without foundation to assert that all invoices issued by that company are false, there being no strong indicators of the falsity of all invoices from B…, and requiring a more thorough inspection work to seek strong and certain indicators of falsity at the level of purchasing taxpayers in order to find and separate those whose invoices were false from those for which there were no serious indications in that regard.

And for the Claimant, these indicators are non-existent as will be demonstrated by: payment of these invoices through bearer cheques, demonstrative of the reality of payment of the operations; the existence of merchandise requisitions proved to have been sent by fax prior to supply and invoice issuance; the existence of records of merchandise entry into warehouse; and the fact that the Claimant can justify with the characteristics of its production method the inconsistencies invoked in the Inspection Report.

The Respondent Entity maintains the legality of the contested assessments, given that it was found in the course of inspection and inquiry actions carried out on B… that this company, not being a hide producer, also never acquired merchandise, either in the national market or in the external market, and therefore could not promote its sale, nor could the invoices issued by it evidence genuine commercial transactions. For the Respondent Entity, the corporate structure of B…, whether as regards facilities or in terms of employees, was not such as to allow for the exercise of an economic activity with this volume of business.

Furthermore, the Respondent Entity invokes that the financial flows between the entities involved in transactions carried out by B… were always effected in cash, despite the large amounts involved, the same occurring in the case of the Claimant – cheques cashed over the counter.

In support of the non-deduction of tax included in invoices issued by B… and which were entered into the accounts by the Claimant, the Respondent Entity invokes the following inconsistencies and inconsistencies: i) no raw materials as described in invoices B… appear in the final inventory of 2011 of the Claimant, although one of the invoices (invoice no. …), dated 21.12.2011, states that the place of loading of the merchandise was at the supplier's premises, unloading at the client's address at ten o'clock on that same date and transport was effected by vehicle …-…-…, when the merchandise in that invoice was recorded as entering inventory in January 2012, although in accounting terms it was included in December 2011 expenses; ii) although the final inventory of 2012 amounted to around 2 million euros, those acquired from B… had no significant representation; although the Claimant possesses a computer system with capacity to manage all inventory management, it was demonstrated that inventory control was carried out through manual cards and when cards relating to invoices from B… were requested, the Claimant only produced cards relating to black aniline and brown aniline, as it reported that the others had been eliminated as they no longer held balances; black aniline hide representing approximately 52% of the total hide allegedly acquired from B…, after the warehouse card relating to it was requested, it showed an outgoing shipment of 5,000 feet to C…, a subcontractor of the Claimant, on 25.11.2011, when the current account of the latter, as a subcontracted supplier, to whom raw material is debited for supply of finished product, showed no accounting entry in 2011 and when the only invoice issued by the Claimant to C…, over a period of two years – from January 2011 to December 2012 – was issued on 25.02.2012, and the type of hide debited did not correspond to the warehouse card presented (black aniline hide B…); Credit Note …/12/…, dated 05.04.2012, issued by the Claimant to C…, as its subcontractor, relating to the return of excess hides, finished product, does not indicate the return of any black aniline hide feet.

For the Respondent Entity, from the combination of Article 342, No. 1 of the Civil Code with No. 1 of Articles 74 and 75 of the LGT, it follows that it is the responsibility of the Tax Administration to bear the burden of proof of verification of the indicators or assumptions of taxation and it is the responsibility of the taxpayer to prove the existence of the tax facts alleged as the basis of its right. This means that the presumption ceases when the records or accounts, although organized in accordance with law, suffer from errors, inaccuracies, or there are founded indicators that they do not reflect the actual taxable matter, this provision covering the case where the accounts present indicators that those expenses did not occur, because they do not evidence genuine transactions.

The Respondent Entity believes it is not necessary to provide direct proof of simulation and fraud, it being sufficient an administrative judgment of adequacy between the facts and assessments on which the administration claims, formally, to base its action and the result of that judgment to the effect that it appears to it that a deduction of tax has been declared that proves to be improper. That is, because the Tax Administration bears the burden of proof of verification of the legal assumptions binding its action, it is incumbent on it, in the case of an additional VAT assessment due to non-recognition of deductions declared by the taxable person, the burden of proving that the legal assumptions are verified that legitimize its action. Once this proof is made, it was the responsibility of the Claimant to bear the burden of proof of the facts it alleges as the basis of its right to deduce the VAT from the invoices under consideration, which in the view of the Respondent Entity it failed to prove.

PLEADINGS

The Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, No. 1, paragraph a), 5 and 6, all of the LRAT.

The parties have legal personality and capacity, are legitimate, and are properly represented, pursuant to Articles 4 and 10 of the LRAT and Article 1 of Order No. 112-A/2011, of 22 March.

No nullities are found to exist, and the merits of the petition must be determined.

SUBJECT MATTER OF ARBITRAL PRONOUNCEMENT

The question is placed before the Tribunal of whether the Claimant improperly deducted the VAT relating to invoices from B….

FACTS

Facts Established:

a) The Claimant is a taxable person subject to the general regime for determination of taxable profit in Corporate Income Tax, for the activity of Shoe Manufacturing (CAE…), qualifying as a taxable person for VAT subject to the normal regime with monthly periodicity (cf. page 2 of the Inspection Report, attached with the administrative file);

b) Pursuant to Service Order No. OI2012…, of 8 October 2012, the Claimant was subject to a tax inspection procedure, of partial scope (Corporate Income Tax and VAT) for the years 2011 and 2012, subsequently expanded to General as it proved necessary to conduct a global analysis of the tax situation (cf. page 2 of the Inspection Report, attached with the administrative file);

c) The said Service Order was issued following an inspection action carried out on company B…, taxpayer no. …, as it was considered that there were strong indicators that the invoices issued by this company do not evidence real economic operations (cf. page 2 of the Inspection Report, attached with the administrative file);

d) With respect to the supplies and acquisitions of the Claimant, attributed to B…, the Inspection Report shows that they are integrated into the accounts of the Claimant, for the financial years 2011 and 2012, invoices from which the following amounts result (cf. page 7 of the Inspection Report, attached with the administrative file):

Financial Year Taxable Base VAT Assessed Total
2011 €77,645.68 €17,858.50 €95,504.18
2012 €107,579.20 €24,743.22 €132,322.42

e) From the Inspection Report, which is deemed to be fully reproduced, it results that "(…) with respect to the invoices attributed to B…, Lda, the Tax Authority, as a result of inspection and investigation actions carried out, concluded that the same did not have as their basis genuine operations, given that B…, in reality, never bought or sold hides, not a single foot of hides" (cf. page 8 of the Inspection Report, attached with the administrative file).

f) The Report contains the following conclusions regarding the activity of B…:

"1. From the observation made of the premises used by B…, Lda., and subsequently by D…, Lda., there was no evidence of the movement that companies supposedly selling more than eleven million euros of merchandise would presume, such as entry and exit of clients, suppliers and vehicles, regular presence of managers and employees. On the contrary, the door and gates of the premises of B…, Lda., and D…, Lda. are permanently closed and inside is found an employee, and even this one with infrequent character.

  1. The inspection actions carried out on the three suppliers of B…, Lda. concluded that they did not have capacity for the hide trade, that is, the invoices issued by these entities and accounted for by B…, Lda., as being from its suppliers, were fakes, that is, B… Lda., does not support the acquisition of a single foot of hide through a single genuine invoice, that is all invoices representative of acquisitions are staged, they are false.

It was also concluded that B…, Lda. never acquired hide from anyone, neither from insolvent companies nor from foreign companies, neither in Portugal, Spain, Italy or Tunisia, as it does not identify a single genuine supplier, any premises/warehouses or place of loading of hide, contacts, correspondence, credible payments, anything that demonstrates the actual acquisition of hide and that the size of the business makes it admissible.

  1. With respect to the employees appearing on the company's payroll, it was concluded that only E… has regular presence at its premises, the others never exercising any function there, they served to pretend that the company had many workers.

  2. As for the sales of B…, Lda., it was determined that:

· They issued invoices mentioning loadings on days when the Tax Authority technicians were present and verified the absence of the same loadings;

· For approximately seven months B…, Lda. appears to have moved more than one million feet of hide, valued at 1.7 million euros, from the private residence of a person who had no relationship with the company;

· B…, Lda. refers as means of transport of the hides, between its warehouse and the premises of its clients, a vehicle that did not travel even one-seventh of what it would have had to in order to cover the kilometres necessary for so many feet of hide delivered, and what it did travel was not in service of B…, Lda.;

· Furthermore, that same vehicle is mentioned in the sales invoices of B…, Lda., and it was verified that it had practically not circulated in the period in which the invoices claim it was used as a means of transport of hide;

· They issued invoices on days when F… was absent abroad, that is, when they would not have anyone to handle and transport the supposed hides to clients.

  1. As for the payments of clients, it appears that their cheques are, for the most part, cashed over the counter or, when deposited or those payments made by bank transfer, are immediately withdrawn from the account, losing the trail of the money.

  2. In summary, being in the presence of a company in whose premises there is no record of any hide trade activity, which did not have employees for handling and transport of hide, which never acquired a single foot of hide for sale and which never sold a single foot of hide, it must be concluded that an entire staging was set up to deceive, to trick, to defraud, to unlawfully enrich. In short, the company is nothing more than a deception, a farce" (cf. pages 82 to 84 of the Inspection Report, attached with the administrative file).

g) With reference to the Claimant, the following notably results from the Inspection Report "In the capacity of user of invoices from 'B…': A…, Lda" (cf. pages 93 et seq. of the Inspection Report, attached with the administrative file):

No raw materials as described in invoices B… appear in the final inventory of 2011, despite invoice no. … being dated 21.12.2011, in accordance with the elements contained therein, the place of loading being at the supplier's premises and the place of unloading at the client's address at 10:00 on 21.12.2011, and transport via vehicle …-…-….

(The raw material referred to in the invoice is recorded as entering inventory in January 2012, although in accounting terms its cost was recorded in accounts in December 2011, doc. ..., by the sub-account …- Raw Materials Purchases Domestic National, Standard Rate Deductible).

In the final inventory of 2012, the feet of hides in inventory that are indicated as having been acquired from B…, Lda, have no significant representation therein, which amounts to approximately 2 million euros (this is the indication of 116 feet of brown aniline and 292.75 feet of black aniline at a total value of €715.31).

3 - Copies, front and back, certified by the banking institution, of some of the means of payment used in these transactions were requested. The cheques used show on the reverse the identifying elements (as was expected) of B… Lda.

4 - It is also strange, with regard to invoice no. …, dated 21.08-2012 in the amount of 17.996,14, issued by "B…" with indications of place of loading: our premises; place of unloading: client address; on the date of 21.08.2012 and the registration number of the vehicle indicated …-…-… (initially registered by the company in the books with number… on 31.08.2012 and subsequently removed from accounting, and with respect to which the managing partner stated he consumed in production the hide indicated therein) the exchange of correspondence between "B…" and "A…, Lda" - namely the office memorandum of 17 September 2012 from which we extract the following: "We inform you that, improperly, an invoice dated in August was issued and sent to your company. For the reasons previously informed, we request that you do not consider it, as it has no official value ..."

It is not understood then what document accompanied the raw material. This only supports what was previously referred to in the report regarding the issuer.

5 - For closer control of inventories, at the level of raw materials, and as they informed us, so that failures in production do not arise, manual warehouse cards with records of entries and exits of hides are prepared, despite the company having an information system with capacity for this management, and to which we shall refer in point 10 of this report.

6 - For invoices from B… , Lda and at the date of the visit, we were informed that only cards relating to Brown Aniline and Black Aniline exist to date, the others having already been eliminated as they no longer held balances. "(…)

7 - Upon request of the warehouse card relating to Black Aniline hide (the most significant raw material in terms of these acquisitions), we were presented with the Black Aniline Hide Warehouse Card B… and to which we have to refer the following:

· On 25/11/2011 an outgoing shipment to C… of 5,000 feet of Black Aniline hide B… is indicated, when the current account of this subcontracted supplier, to whom raw material is debited for supply of finished product, C…, Lda (with registered office in the District of …) has no accounting entry in 2011;

· The invoice no. …/…, of the raw material debited to C… (the only invoice for this entity, from January 2011 to December 2012) to make shoes has only the date of 25.02.2012, and the type of raw material debited to that subcontractor does not correspond to that of the warehouse card presented (Black Aniline Hide B…), as it indicates hide quality and colors different from those they seek to justify as exits.

· Credit Note no. …/12/… of 5.04.2012, issued by A… Lda to C…, relating to the return of excess hide of the subcontracted finished product, does not refer to the return of any feet of black aniline hide.

· The invoice from B… with no. …, dated 21.12.2011, relating to 3,122.50 feet of Camel Aniline hide and 4,213.50 feet of Black Aniline, is entered in the accounts in December 2011 in the sub-account for Purchases, … - Raw Material Purchases, Domestic National, Standard Rate.

In accordance with the Aniline Black Warehouse Card presented, the value of this raw material was not taken into account in the final inventory of inventories of 2011, given that it shows nil inventory for that reference of hide, and considering that the final inventory of raw materials is prepared on the basis of information from these manual cards. That is, the raw material was not debited to C… in 2011, nor does it appear in the Inventory;

· On the manual raw materials card analyzed, this hide only enters the warehouse in January 2012;

· On 18/01/2012 it is indicated as delivered to G…, Lda of …, another subcontracted supplier, the quantity of 9,300.00 feet of Black Aniline Hide B…. However, invoices no. …/…/003 and …/12/…, on 25.02.2012 and 24.03.2012, respectively, to debit the raw material, refer to chamois skin almost in totality (different from aniline), and another hide also different from aniline, in reduced quantities, as well as those relating to varied colors.

The invoices referred to above represent the only transactions recorded in accounts with this client for raw material.

· To confirm that the type of hide sent to this shoe maker was not black aniline, its return note no. 2012… on 10.04.201, to which corresponds Credit Note …/12/… issued by A…, Lda, (returning varied colors and hide type quite different from aniline), in which the return of any feet of black aniline hide is not mentioned.

· The manual card records the entry of the quantity of 4,180.00 feet relating to invoice 2012… when the same invoice refers to 4,516.25 feet of hide (the corresponding computerized card records exactly the quantity indicated in that invoice).

  1. When asked for transport guides relating to the year 2011, we were informed that they had already been destroyed, so there is no possibility of proving other situations besides those underlying the documents issued by the company and that form part of its accounts, namely those recorded in the warehouse card presented.

9 - The warehouse card relating to Brown Aniline B… indicates that it was consumed internally by A… and, in part, delivered on 30.11.2011 to shoemaker H…, Lda. The internal production orders of the company, according to the information of the person responsible for that work area, no longer exist, given that, after the shoes are delivered to clients, they eliminate them (going to paper collection for recycling).

The subcontracted company, H…, Lda, works on a job basis, debiting only the work executed for shoe making, so it makes no discrimination of shoe colors, nor any reference to raw material worked.

Thus, little more can be analyzed from this manual card relating to the record of brown aniline from invoices B…, Lda. (It should be noted the non-existence of any other manual warehouse card for hides acquired from B…, Lda).

10 - The company has a computerized system that allows it to manage inventories, as well as the issuance of automatic invoicing of approved shipment plans based on production carried out. At the level of raw materials, it additionally uses manual records, auxiliary registers that allow it greater security to avoid stock outs and possible production line stoppages, as referred to therein. Upon request of the computerized card for article M… which corresponds to Black Cow hide, where the entries relating to invoices from B… were recorded as well as the other entries of black cow hide and the respective exits for internal and external production, we have the following to refer after analysis thereof:

a) In that M… card, the production orders throughout the year 2011 indicate consumption of 26,927.05 feet of hide. Purchases from various suppliers are 15,446.66 feet of hide and the inventory at the beginning of the year for this hide was 21,075.63. Now, these quantities were sufficient for production, making unnecessary the quantities indicated in the invoices from B… recorded on the card in 2011 (invoices no. 2011… and 2011…, totaling 12,254.50 feet of black aniline).

b) In the year 2012, purchases from various suppliers are 46,426.77 feet of black cow, and the production orders indicate consumption of 34,056.78, so such purchases are adequate thereto. It thus stands out that the quantity of 50,757.00 feet of black cow hide recorded relating to invoices from B… is totally unnecessary for production accounted for. (The company recorded in this year 2012 the quantity of 50,757.00 feet of black cow hide, included in which are 8,153.25 of invoice no. 2012…, of August 2012, which A…, Lda ultimately did not record in accounts).

c) In the year 2012, the following exits are indicated with the notation of doc. 1:

In April 10,400.25, in May 12,401.00 and in September 16,975.25. These negative movements in the M… card do not correspond to documents relating to production orders, and according to the person who performs this administrative function correspond to inventory adjustments, seeking to reconcile what is on the computerized card with actual inventory in the warehouse.

Now, there is a clear similarity of quantities between the aforementioned regularizations and invoices from B… . Let us see; 4,516.25 + 7,092.75 entries in February and March with regularization of 10,400.25 in April, 8,124.25 + 4,061.75 entries in April and May with regularization in May of 12,401.00, and 2,531 + 6,547.25 + 8,153.25 entries in June, July and August with regularization of 16,975.25 in September.

d) This situation of regularization is evident in the computerized M… card relating to hide …, year 2012. Thus, after the entry record in January of 3,122.50 feet, doc. 3085, from invoice no. … of B…, follows the regularization of 6,832.50, doc. 1. Now, in July of the previous year there also entered from B… 3,832.50 of this hide. In April enters 3,043.50, by invoice 2012…, doc. 318; in July enters 2,038.50 from invoice 2012…. doc. 404. In September the quantity of 5,000 is regularized, doc. 1.

In this card in 2011, the acquisition invoice of 1,072.291 feet was recorded, from another supplier, which was precisely the quantity necessary for the Production Orders with this hide and which indicate consumption of 1,069.11.

e) Also in the computerized M… –… card, they record the entry of 457 feet of hide on 30.07.2012, doc. 404 and 2,563.75 from invoice no. … of 30.07.2012 of B… doc. 405. The production orders recorded indicate consumption of 295.92 and the inventory balance indicated of 2,724.83 make clear that the quantity of the invoice from B… was totally unnecessary."

Conclusion: Having regard to the analysis of the elements available in A…, Lda, it was not possible for us to verify the use in production of the raw materials indicated in invoices issued by B… Unipessoal, Lda. On the contrary, the elements analyzed allow the conclusion that those raw materials were not necessary for production."

h) Each shoe model corresponds to a technical file with indication of the material necessary for its production, used for calculating the total quantity of material necessary for production of each specific order (testimony of witness I…);

i) Each lot of a given product is accompanied by a manual card from which results the identification of the product, the identification of the supporting document, the date of entry and exit, the quantity entered and exited, the description and carrying out of inventory (cf. testimony of witness I… and docs 3 to 5 attached with the arbitral petition);

j) If the lot of the product is finished, the manual card is eliminated; creating a new card for the product with a new lot (cf. testimony of witness I…);

k) The manual cards are permanently updated; the computerized record is generally done at the end of the season, requiring correction entries to be made (testimony of witness I… and Doc. 7 - attached with the administrative file sent on 31 May 2016);

l) Aniline can have various designations as a finished product, as the color can be altered in finishing (for example to become lighter or darker) (testimony of witness I…);

m) Black aniline can be designated namely as Jamaica, Venus, Cow Black, Pale Black, Colorado (testimony of witness I…);

n) Brown aniline can be designated namely as Camel, Legno, Castore, Sand, Sabia, Terra, Marron, Stone, Vison (testimony of witness I…);

o) When a production order is made, the quantity of aniline to be used is not automatically deducted from the system (testimony of witness I…);

p) Purchase orders are generally made once various orders have been gathered, after calculating the products and quantities necessary for production and consulting the warehouse "stock" (testimony of witness I…);

q) The employee responsible for determining the merchandise to be ordered and for separating the product to be assigned to production of a given order was never confronted with the absence of merchandise whose entry was recorded in the respective manual card (testimony of witness I…);

r) Certain products – such as black and brown aniline – are ordered in quantities greater than those immediately necessary, as they are base products used in most of the footwear (testimony of witness I…);

s) The ordering of quantities greater than those necessary for production is also justified by the fact that some merchandise has very long delivery periods – 4 to 8 weeks, which is characteristic of merchandise from other countries such as Italy, and by the need to ensure the capacity to produce unexpected orders and cover shortfalls (testimony of witness I…);

t) Purchase orders are made in the form of a requisition, sent to suppliers generally by fax (cf. testimony of witness J… and witness I…);

u) The hides are received in the warehouse of the Claimant, where an employee verifies whether the quantity received corresponds to the quantity stated in the invoice (cf. testimony of witness J… and witness I…);

v) The invoice is subsequently sent to an employee of the Claimant who confirms that the quantity stated in the invoice corresponds to the quantity ordered and only then is it sent to the Treasury for payment (cf. testimony of witness I…);

w) Payments to suppliers are made, generally, by cheque, issued in their name, on the 25th of each month (cf. testimony of witness J…);

x) Summer footwear generally must be delivered between March (shoes) and April (sandals) and winter footwear between late July (shoes) and September/October (boots and booties) (testimony of witness I…);

y) Generally, approximately 1,500 pairs of shoes are produced per day – between own production and subcontracted work – and 3,000 to 6,000 feet of hide per day are necessary;

z) B… was a supplier of hides to the Claimant in the financial years 2011 and 2012 of aniline (cf. testimony of witness J… and witness I…);

aa) In the financial years 2011 and 2012, payments were made to B… (cf. testimony of witness J… and witness I…);

bb) In 2011 the Claimant purchased 176,150 feet of hide identical to that acquired from B… (Doc. 12 - attached with the administrative file sent on 31 May 2016);

cc) C… is a subcontractor of the Claimant (cf. testimony of witness I…);

dd) The subcontractors of the Claimant generally only invoice labor, being provided the raw material (cf. testimony of witness I…);

ee) The merchandise sent to subcontractors, as in the case of C…, is accompanied by a manual transport guide, which serves to debit that product from the respective card (cf. testimony of witness I…);

ff) When subcontractors are not in a position to deliver the models produced within the contracted periods, the Claimant takes on the production or delivers it to other subcontractors (cf. testimony of witness I…);

gg) In these situations where the raw material left the warehouse to be delivered to a given subcontractor, which is identified on the product card, the card in question is generally not updated if the raw material is used by the Claimant when it subsequently assumes production or when it is used by another subcontractor to whom production is ultimately assigned (cf. testimony of witness I…);

hh) The aniline-type hide invoiced to subcontractors – G…, K… and C… – in 2012 totaled 17,089.72 feet (Doc. 10 - attached with the administrative file sent on 31 May 2016);

ii) The Claimant has its activity closed before year end – generally closes before Christmas – for staff holidays, having closed between 19 and 30 December 2011 (cf. testimony of witness I… and holiday schedule – Doc. 10 - attached with the administrative file sent on 31 May 2016);

jj) There is merchandise received in January, the invoice for which was issued in mid-December, with entry being recorded in the manual product card only when it is actually received, as is the case with Invoice 2011…, the entry record of which is from early January 2012 (cf. testimony of witness I… and Doc. 3 attached with the request for arbitral pronouncement);

kk) Black aniline is the hide most used in production, being necessary approximately 50,000 feet per season, that is, approximately 100,000 feet per year, with brown aniline also being among the most used products (cf. testimony of witness I…);

ll) In the year 2012, there were substantial purchases of aniline – approximately 180,000 feet, which were adequate to the needs of production, there being additional orders determined by the need to remedy product shortages, which is necessary in greater quantity when there are shortages for the production of boots and booties as is characteristic of the winter season (cf. testimony of witness I… and Doc. 11 - attached with the administrative file sent on 31 May 2016);

mm) Between August and December 2012, purchases of black hide were 41,676 feet (cf. Doc. 11 - attached with the administrative file sent on 31 May 2016);

nn) Between August and December 2012, invoices were issued for approximately 16,028 pairs of shoes with black hide (cf. Doc. 12 - attached with the administrative file sent on 31 May 2016);

oo) Between August and December 2012, purchases of brown hide from other suppliers were 10,271 feet (cf. Doc. 13 - attached with the administrative file sent on 31 May 2016);

pp) Between August and December 2012, invoices were issued for approximately 1,533 pairs of shoes with brown hide (cf. Doc. 14 - attached with the administrative file sent on 31 May 2016);

qq) Due to the quantity of product necessary for production in the final months of 2012, the black and brown aniline purchased at the beginning of that season from B… would already have been consumed in production by the end of that same year (cf. testimony of witness I…);

rr) Following the inspection action, the Claimant was notified of the following assessment acts:

· Assessment No. … relating to VAT for period 2011/07;

· Assessment No. … relating to compensatory interest on the preceding assessment;

· Assessment No. … relating to VAT for period 2011/08;

· Assessment No. … relating to compensatory interest on the preceding assessment;

· Assessment No. … relating to VAT for period 2011/09;

· Assessment No. … relating to compensatory interest on the preceding assessment;

· Assessment No. … relating to VAT for period 2011/10;

· Assessment No. … relating to compensatory interest on the preceding assessment;

· Assessment No. 2013 … relating to VAT for period 2011/11;

· Assessment No. 2013 … relating to VAT for period 2011/12;

· Assessment No. 2013 … relating to VAT for period 2012/01;

· Assessment No. 2013 … relating to VAT for period 2012/02;

· Assessment No. 2013 … relating to VAT for period 2012/03;

· Assessment No. 2013 … relating to VAT for period 2012/04;

· Assessment No. 2013 … relating to VAT for period 2012/05;

· Assessment No. 2013 … relating to VAT for period 2012/06;

· Assessment No. 2013 … relating to VAT for period 2012/07.

ss) The Claimant filed gracious objections and lodged hierarchical appeals in which it questioned the legality of the contested assessments (cf. Docs. 1 and 2, attached with the request for arbitral pronouncement).

The facts established are based on the Inspection Report, on the documents attached to the administrative file and with the arbitral petition, on the testimony of witness J… - administrative officer in the treasury of the Claimant - who testified truthfully, with conviction and certainty regarding the procedures relating to payments made by the Claimant, in which she participated directly in the periods under consideration, and regarding the procedures relating to orders and receipt of merchandise, which she knows by virtue of her presence in the company and of knowing the procedures and employees responsible, and also on the testimony of witness I… – administrative officer of the Claimant, responsible for orders and preparation of production orders, who testified truthfully, with conviction and certainty regarding the procedures of the Claimant relating to purchase orders, recording of merchandise and production orders in which she participated directly in the periods under consideration.

Facts Not Established

Of the facts with interest for the decision of the case, appearing in the request for arbitral pronouncement and in the reply, all subjects of concrete analysis, those not appearing in the factuality described above were not established.

ON THE LAW

As stated, the Tribunal is called upon to assess the legality of the contested assessments, which directly relates to the right of the Claimant to deduct the VAT borne on acquisitions of hides from "B…" during the financial years 2011 and 2012.

The Tax Administration maintains that the invoices accounted for by A…, Lda for acquisition of hide from company B… do not constitute any commercial transaction, that is, that these are simulated operations, and therefore in accordance with No. 3 of Article 19 of the VAT Code, the Claimant could not have deducted the tax relating to these simulated acquisitions.

The right to deduct tax borne constitutes one of the cornerstones of the functioning of VAT, which is why this right should not, in principle, be limited if exercised in relation to tax that has been charged on operations carried out upstream.

Only this mechanism ensures that taxation reaches at each stage of the economic circuit only the value of goods or services added at that stage. If this mechanism did not exist, the tax would be a type of cascade and cumulative tax in which there would be, at each stage of the economic circuit, successive taxation of the value added in the previous stage and the value not added. The deduction is thus an element of the structure of the functioning of this type of tax. And simultaneously, it also corresponds to a right of the taxable person who bore the tax, insofar as it affords him the possibility of recovering the tax he bore in the acquisition of goods and services.

However, the right to deduction does not constitute an absolute right, and it is admitted that Member States may establish rules for its exercise or even refuse it when fraudulent or abusive situations occur.

Thus, "the VAT Directive allows for the introduction of rules that exclude the right to deduction of tax borne whenever a direct relationship is not established between the tax borne and the carrying out of operations taxed downstream, that is, acquisitions made are not intended for the carrying out of an economic activity within the meaning of Article 9 of the VAT Directive, when the tax does not underlie the carrying out of any taxable operation, because it does not result from a transfer of goods or provision of services effected for valuable consideration by a taxable person acting in that capacity, and in general, whenever it results from fraudulent or abusive operations. In this context, and especially having in view this latter case, are the provisions laid down in Article 19, Nos. 3 and 4 of the VAT Code." (LANÇA, Cidália - Measures to Combat Fraud Provided for in VAT Legislation, in Studies in Memory of Prof. Doctor J. L. Saldanha Sanches, Vol. IV, Coimbra, 2011, p. 154).

Only tax relating to actual transfers of goods or provisions of services confers the right to deduction (cf. No. 1 of Article 20 of the VAT Code). Whence No. 3 of Article 19 of the VAT Code provides that "no deduction may be made of tax resulting from a simulated operation or in which the price stated in the invoice or equivalent document is simulated."

This conception that the right to deduction presupposes that VAT has charged actual provisions of services or transfers of goods is widely recognized by case law which states that "The right to deduct VAT paid upstream can only exist, according to the very nature of things, with respect to tax effectively borne in economic operations effectively occurring. Otherwise we would be faced with a mere intellectual or virtual archetype and not with a tax that aims to generally reach real consumption of goods and services at the various stages of the economic circuit. The inadmissibility of deduction of tax relating to simulated operation or in which the price is simulated, affirmed positively in No. 3 of Art. 19 of the VAT Code, thus corresponds to a forced or necessary conclusion resulting from the very nature of the tax, whose formal clarification is justified only for reasons of clarity (cf. Ruling of the Supreme Administrative Court, in Case: 026635, of 17-04-2002).

As it is necessary for the exercise of the right to deduction that tax effectively borne in operations also effectively carried out is at issue, the invoice is a fundamental element of evidence. When invoices are disregarded by the Tax Administration, it is incumbent upon the Administration to demonstrate that there are serious indicators that the operation stated in the invoice does not correspond to reality, at which point the burden of proof regarding the veracity of the transaction shifts to the taxable person.

The Tax Administration does not have to prove the falsity of the invoices, but must allege facts that translate a high probability that the operations referred to in the invoices are simulated, thereby undermining the legal presumption of veracity of the declarations of taxpayers and the data appearing in their accounts, enshrined in Article 75 of the General Tax Law (cf. SARMENTO, Joaquim Miranda and MARQUES, Paulo – VAT – Current Problems, Coimbra, 2014, p. 188).

In this context, consider the following Ruling of the Supreme Administrative Court, delivered on 17 February 2016, in Case No. 0591/15: "the TA, in order to make corrections resulting from non-acceptance of the deduction of VAT mentioned in the invoices, with respect to which it considered that the transactions mentioned therein do not correspond to reality, did not have to prove the existence of a simulated agreement (existence of divergence between the declaration and the negotiatory will of the parties by force of agreement between the declarer and the declaratee, with the intent to deceive third parties – see art. 240 of the Civil Code) to satisfy the burden of proof incumbent upon it. Rather, it sufficed for it to prove the factuality that led it to not accept the respective deduction of tax, factuality that must be capable of undermining the presumption of veracity of the operations appearing in the records of the taxpayer and their supporting documents, only then becoming incumbent on the taxpayer the burden of proof of the right it claims (the right to exercise the right to deduct VAT) which is not recognized by the TA, that is, the burden of proof that the operations were actually carried out. (from www.dgsi.pt – Underlining ours).

It is thus important to determine whether the Tax Administration demonstrated and proved the factuality that led it to not accept the deduction of tax, that is, whether it alleged and proved facts that translate a high probability that the operations referred to in the invoices issued by B… are simulated.

The contested assessments are based on facts determined in the course of the inspection action carried out by the Tax Administration, which appear in the report resulting from that inspection, where the cognitive and evaluative path followed is contained, and where the inspection procedures carried out and the elements on which it was based are identified.

However, no document accompanies the Inspection Report that permits support of the facts alleged, nor was any other proof produced.

The facts alleged with reference to B… result from the transcription of the conclusions of the Inspection Report relating to that latter entity, and which do not form part of the administrative file attached to the present proceeding, which also does not include the annexes and documentation, which are presumed to support the conclusions reflected therein. It is thus from a file to which this tribunal did not have access that the Tax Administration extracted the facts underlying the conclusion that the invoices in question do not relate to services effectively provided.

Already with reference to the inconsistencies and incongruities invoked with respect to the Claimant, no document accompanies the Inspection Report that permits support of the facts alleged, nor was any other proof produced. There are no copies of the manual and computerized cards referred to in the Report, there are no copies of the invoices and credit notes identified – not even of the invoices deemed "false" - nor is there reference in the Report that it is accompanied by Annexes, resulting from the elements attached the Correction Notices, VAT and Corporate Income Tax Annexes and Notice of Infraction.

In sum, there is no documentary support that permits following the conclusions of the Report.

Thus, it cannot be considered that the Tax Administration demonstrated the factuality that led it to disregard the acquisitions whose VAT was deducted, factuality that must be capable of undermining the presumption of veracity of the operations appearing in the records of the taxpayer and their supporting documents, having regard to the principle of declaration and veracity of records prevailing in tax matters, only then becoming incumbent on the taxpayer the burden of proof that the operations were actually carried out.

The indicators required of the Tax Administration can be obtained not only from the records of those who archived and accounted for the documents in question, but also from elements external to those records. But only before the demonstration of these concrete indicators – so that they may be controlled by the tribunal – does the presumption of veracity of the operations appearing in the records and their supporting documents cease, becoming incumbent on the taxpayer the burden of proving that such operations actually occurred. And in the present case, the Tax Administration did not prove the indicators it invoked.

In this sense, consider the following Ruling of the Supreme Administrative Court, delivered in Case No. 026635, on 17-04-2002: "(…) in the perspective that matters for the concrete case, there are two legal requirements of administration action: the subjective consideration, in its activity of control or inspection relating to compliance with the duties of taxpayers, that these have appeared in their declarations a deduction greater than that which should have been or which is greater than that resulting from the application of the law regulating them; that such consideration is taken in a substantiated manner. By using, however, the expression '... when it substantively considers that they contain... a deduction greater than owed', the legislator intends to demonstrate the requirement not only of the existence of a formal declaration supporting its subjective judgment (consideration), but also the necessity that such judgment be equivalent to the result of a factual-legal assessment, substantial or materially, correct. It is not enough that the administration says it is convinced, but also that it says why it became convinced and that this result can be objectively assessed and controlled by the tribunal in light of appropriate criteria. And being so, in order to issue its judgment on whether the administration's consideration should be considered materially substantiated, the tribunal cannot limit itself merely to the existence of formal substantiation and the elements externalized therein, contrary to what the appealed ruling understood, but will have to form its own probative judgment regarding the correspondence to factual-legal reality of the elements on which the administration said it bases its consideration and assess then whether this should be considered correct. The administration will thus bear the burden of proving, also in tribunal, sufficient factual presuppositions, among those affirmed in the substantiation of the act, so that the tribunal can judge whether the administrative judgment should be considered, objectively and materially, substantiated. (cf. Ruling of the Supreme Administrative Court, delivered in Case No. 026635, of 17-04-2002, from www.dgsi.pt – Underlining ours).

No. 1 of Article 76, No. 1 of the General Tax Law provides that "the information provided by tax inspection has probative value when substantiated and based on objective criteria, in accordance with the law". Already No. 2 of Article 115 of the Tax Procedure Code provides that "official information only has probative force when properly substantiated in accordance with objective criteria". Given that this provision is considered applicable to the inspection report (to the contrary, the Ruling of the Central Administrative Court South delivered in Case No. 07141/13, on 26 June 2014, from www.dgsi.pt), it has been the understanding of case law that the substantiation referred to relates to objective and external elements that prove the assertions made by tax inspection (cf. Ruling of the Central Administrative Court South delivered in Case No. 04223/10, of 23-04-2015). These external elements that would permit verifying the assertions made in the Report are practically non-existent in the present proceeding.

Thus, the Respondent Entity failed to prove the facts it alleged to demonstrate the high probability that the operations referred to in the invoices are simulated.

Furthermore, the probative value of the inspection report would always be conditioned by application of the principle of contradiction, under penalty of direct violation of art. 20, No. 4 of the Constitution of the Portuguese Republic, which postulates an equitable tax judicial proceeding and subordinate to criteria of legality, which requires full equality of arms between both parties, as is moreover recognized by art. 98 of the General Tax Law (Ruling of the Central Administrative Court South, delivered in Case No. 07148/13, from www.dgsi.pt).

Both through documents attached on a gracious basis and which form part of the administrative file, and through documents attached with the arbitral petition and through the testimony of witnesses presented, the Claimant demonstrated the regularity of its operation and justified the alleged inconsistencies invoked in the Report. In sum, the evidence offered by the Claimant succeeded in instilling doubt as to the veracity of the information contained in the inspection report, whose probative insufficiency is manifest.

And not having the Respondent Entity demonstrated that the legal assumptions are verified that legitimate the action of the Tax Administration, that is, that there are serious indicators that the operations stated in the invoices described do not correspond to reality, the assessment of whether the Claimant succeeded or not in proving in tribunal the existence of the tax facts is rendered moot, determining in consequence the annulment of the contested acts.

DECISION

On these grounds, the petition for annulment of the assessment acts contested and the decisions denying the gracious objection procedures and hierarchical appeals that preceded the submission of the request for arbitral pronouncement are judged to be well-founded.

The value of the file is fixed at €43,622.49 (forty-three thousand, six hundred and twenty-two euros and forty-nine cents), pursuant to Article 97-A of the Code of Tax Procedure and Process, applicable by force of the provision in paragraph a) of No. 1 of Article 29 of the LRAT, and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

Costs in the amount of €2,142,000 (two thousand one hundred and forty-two euros), pursuant to Table I of the RCPAT, to be borne by the Respondent Entity, given that the present petition was judged well-founded, and in compliance with the provision in No. 2 of Article 12 and No. 4 of Article 22, both of the LRAT, and the provision in No. 4 of Article 4 of the said Regulation.

Notify.

Lisbon, 30 July 2016

[Text prepared by computer, pursuant to Article 131, No. 5 of the Code of Civil Procedure (CPC), applicable by reference to Article 29, No. 1, paragraph e) of the LRAT, with blank verses and revised by the undersigned].

The Arbitrator

(Ana Moutinho Nascimento)

Frequently Asked Questions

Automatically Created

What are the legal requirements for invoice regularity in VAT-taxable operations under Portuguese law?
Under Portuguese VAT law, particularly Articles 3 and 19(4) of the VAT Code (Código do IVA), invoices must document genuine economic transactions to support VAT deduction rights. The invoice must be issued by a legitimate supplier who actually provided the goods or services, contain all mandatory elements prescribed by law (including supplier and customer identification, tax numbers, description of goods/services, tax rates, and amounts), and correspond to real operations. The right to deduct input VAT under Article 19 requires that the taxpayer acted in good faith, without knowledge of irregularities in the supplier's tax compliance. Courts have established that the Tax Authority bears the burden of proving invoice falsity through strong and sufficient indicators, which may include evidence that the purported supplier lacked the operational capacity, resources, or merchandise to perform the transactions, engaged in irregular payment patterns (excessive cash transactions), or failed to remit collected VAT to the State Treasury.
Can a taxpayer challenge additional VAT assessments and compensatory interest through tax arbitration at CAAD?
Yes, taxpayers can challenge additional VAT assessments and compensatory interest through tax arbitration at CAAD (Centro de Arbitragem Administrativa) under Decree-Law 10/2011 of 20 January, which established the Legal Regime for Arbitration in Tax Matters (Regime Jurídico da Arbitragem em Matéria Tributária - RJAT). This arbitration mechanism provides an alternative to judicial courts for resolving tax disputes, offering a faster and more specialized resolution process. Article 2 of the RJAT defines the scope of arbitrable matters, which includes challenges to tax assessments, including VAT and associated compensatory interest. Taxpayers may request arbitration within 90 days following the tax assessment becoming final at the administrative level, in accordance with Article 10 of RJAT and Article 102 of the Tax Procedure and Process Code (Código de Procedimento e de Processo Tributário). The arbitral tribunal's decisions have the same legal force as judicial court decisions and are binding on both parties, with limited grounds for appeal.
What is the procedure for requesting arbitral pronouncement under Decreto-Lei 10/2011 (RJAT)?
The procedure for requesting arbitral pronouncement under Decree-Law 10/2011 begins with the taxpayer submitting a written request to CAAD within the legal deadline (90 days from when the contested act becomes final). The request must identify the contested administrative acts, state the factual and legal grounds for the challenge, and specify the relief sought. Under Article 6, the taxpayer may nominate an arbitrator or allow the President of CAAD's Deontological Council to designate one, creating either a single-arbitrator or three-arbitrator tribunal depending on the case value and complexity. Once accepted, CAAD notifies the Tax Authority, which must submit its reply and the complete administrative file within the prescribed timeframe. After the tribunal is formally constituted (Article 11), the parties have opportunities to present evidence, including documents and witness testimony during hearings held pursuant to Article 18 of RJAT. Following the evidentiary phase, parties may submit written final arguments before the tribunal issues its decision within the statutory deadline.
How does the Portuguese Tax Authority (AT) handle additional VAT assessments for multiple tax periods?
The Portuguese Tax Authority handles additional VAT assessments for multiple tax periods by conducting inspections that may cover several periods simultaneously, as authorized by the General Tax Law (Lei Geral Tributária) and the Tax Procedure Code. When irregularities are identified affecting multiple periods—such as systematic disallowance of invoices from a particular supplier across consecutive months—AT typically issues separate assessment notices (liquidações adicionais) for each affected tax period, each with its corresponding compensatory interest (juros compensatórios) calculated from when the tax should have been paid until the assessment date. These multiple assessments often stem from a single inspection report that documents patterns of non-compliance. Taxpayers receive individual notification for each assessment and have the right to challenge them collectively or individually through administrative complaint (reclamação graciosa), hierarchical appeal, or arbitration/judicial proceedings. The procedural economy principle generally allows consolidated challenges when assessments share common factual and legal grounds, as demonstrated in this case where seventeen assessment periods were challenged in a single arbitration proceeding.
What are the grounds for declaring the illegality and annulment of additional VAT assessments in Portugal?
Grounds for declaring the illegality and annulment of additional VAT assessments in Portugal include: (1) procedural violations, such as failure to provide proper notification, denial of the right to prior hearing (audiência prévia), or failure to adequately substantiate the assessment; (2) substantive errors, including incorrect application of VAT law, miscalculation of tax due, or erroneous factual determinations; (3) insufficient evidence, where the Tax Authority fails to meet its burden of proving the facts underlying the assessment with strong and sufficient indicators; (4) violation of taxpayer rights, including good faith principles when the taxpayer reasonably believed invoices were legitimate and lacked knowledge of supplier irregularities; (5) breach of proportionality, where blanket disallowance is applied without individualized analysis of each transaction's authenticity; and (6) errors in the inspection process, such as failure to examine relevant evidence provided by the taxpayer or reliance exclusively on indicators from third parties without corroborating investigation of the taxpayer's own operations. Successful annulment requires demonstrating that the contested assessment is illegal under applicable tax law or that the Tax Authority's decision-making process violated procedural or substantive legal requirements.