Process: 460/2018-T

Date: March 22, 2019

Tax Type: IRC IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 460/2018-T) addresses a restaurant operator's challenge to IRC (Corporate Income Tax) and IVA (VAT) assessments totaling €33,549.75 for fiscal year 2014. The claimant contested €12,130.12 in IRC assessments and sought reduction of IVA assessments by €21,419.63. The core dispute centered on two critical issues: first, whether the CAAD arbitral tribunal had material competence to review assessments based on indirect taxation methods; and second, whether the Tax Authority properly accounted for breakage allowances (quebras) and external self-consumption (auto consumo externo) in its calculations. The Tax Authority (ATA) raised preliminary exceptions arguing material incompetence, citing established jurisprudence that arbitral tribunals lack jurisdiction over determinations made through indirect methods applied during inspection OI2017. The claimant relied on TCA Sul Decision 633/13, which accepted overall reductions and external self-consumption of 15% for restaurant businesses. The claimant argued the Tax Authority erred by applying 55% profit margins without considering external self-consumption and breakages inherent to restaurant operations. The procedural history included witness examination hearings initially scheduled for February 21, 2019, postponed to February 28, 2019, where the claimant waived one witness. The case value was corrected to €33,549.75 during proceedings. The fundamental legal question involved whether challenging assessments derivative of indirect method determinations constitutes an improper procedural vehicle, or whether substantive errors in factual and legal premises—specifically regarding industry-standard breakage rates and staff consumption—could be adjudicated independently of the underlying methodology dispute.

Full Decision

ARBITRAL DECISION

I - REPORT

1 – A... Ltd (Restaurant B...) NIPC ..., with registered office in ..., ..., of the parish of ... and ..., of the municipality of Oeiras, area of the ... Finance Service of Oeiras, came pursuant to the provisions of paragraph a) of no. 1 of article 2, paragraph a) of no. 2 of article 5 and no. 1 of article 6, all of the RJAT, to present a request for arbitral pronouncement, with a view to assessing the legality of the assessments of Corporate Income Tax and Value Added Tax and respective compensatory interest, in accordance with the assessment notices attached to the file and which are hereby fully reproduced, all relating to the fiscal year 2014, with the Corporate Income Tax assessment, municipal surcharge and related compensatory interest, in the amount of € 12,130.12, in its view, wholly undue and the Value Added Tax assessment should, the amount determined by the ATA, be reduced to € 231,777.46, with the cancellation of € 21,419.63.

2 – The request for constitution of the arbitral tribunal was made without exercising the option to designate an arbitrator, being accepted by His Excellency the President of the CAAD and automatically notified to the ATA on 09/09/2018.

3 – Under the terms and for the purposes of the provisions of no. 2 of article 6 of the RJAT, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties within the legally applicable deadlines, Arlindo José Francisco was designated on 08/11/2018, in the capacity of arbitrator, who communicated to the Deontological Council of Administrative Arbitration the acceptance of the appointment within the legally stipulated deadline.

4 – The Tribunal was constituted on 28/11/2018 in accordance with the provisions contained in paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December.

5 – With its request the claimant seeks the declaration of illegality of the aforementioned assessments of Corporate Income Tax, Value Added Tax and compensatory interest in the terms and amounts already referred to, given that, in its view, there was an error in the factual premise, as the Tax Inspection Services did not take into account, in the determination carried out, external self-consumption, while they also committed an error in the legal premises by applying indirect methods, concerning self-consumption, when they could have resorted to the personnel records.

6 – It supports its point of view, in summary, by referring to Decision no. 633/13 – CT- 2nd Court of 11/07/2014 of the TCA South, which accepted overall reductions and external self-consumption of 15%, so this percentage or a higher one should have been considered by the Tax Inspection Services.

7 – It considers, lastly, that even if it were understood that there were grounds for corrections, these are undermined, given that work was done with profit margins of 55%, without taking into account external self-consumption, taking for granted certain facts without their corresponding match with the economic and tax reality of the company.

8 – For its part, the ATA, in its response, considers that its procedure does not suffer from any error and considers that there is no reason to support the claimant.

9 – It supports its point of view, in summary, defending itself by exception, invoking the material incompetence of the tribunal regarding the application of indirect methods, since the disputed assessment acts have their reasoning based on an inspection action no. OI2017..., in which indirect methods were applied and, as has been settled, the ATA is not bound by arbitral jurisdiction regarding acts of determination of taxable matter by indirect methods.

11 – On the other hand, it considers that the procedural means used is improper, and illegalities arising from the determination of taxable matter by application of indirect methods cannot be invoked in the challenge to the assessment acts that are subsequent to it.

12 – Finally, and in challenge, it considers that the claimant has not brought to the file any documents that would allow it to demonstrate the alleged facts, referring to the reasoning contained in the respective administrative process and stated in the inspection proceedings, the disputed assessment acts deserving no censure.

II – CASE MANAGEMENT

The Tribunal was regularly constituted and is abstractly competent, the parties have legal personality and capacity, are shown to be legitimate and are regularly represented in accordance with articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

In light of the defendant's response, the tribunal issued on 19/01/2019 the following order: "Notify the claimant to, within five days, express an opinion, if it so wishes, regarding the waiver of the meeting referred to in article 18 of the RJAT and the examination of witnesses, under the terms proposed by the defendant."

On 25/01/2019 the claimant expressed its position in the sense of not opposing the waiver of the meeting referred to in article 18 of the RJAT, but not waiving the examination of the witnesses called, while at the same time responding to the exceptions of the defendant concluding for their lack of merit in the same way as decided in process 694/2014 of the CAAD.

On 31/01/2019 the Tribunal issued the following order: "For clarifications, procedural processing and examination of the witnesses called and to be presented by the claimant, I designate the 21st of February next, at 10:30 a.m.".

On 05/02/2019 the defendant expressed its opposition to the examination of the witnesses, considering itself to be in the presence of an useless act, prohibited by law, as per article 130 of the CPC.

On 06/02/2019 the Tribunal issued the following order: "In light of the ATA's request of 05/02/2019, the Tribunal, having regard to the provisions contained in paragraphs c), d), e) and f) of article 16 and no. 1 of article 19, both of the RJAT, decides to maintain the activities set out in the order of 31/01/2019, for the 21st of this month at 10:30 a.m., also considering that these activities are not exhausted by the examination of witnesses."

On 21/02/2019 the claimant, invoking health reasons, requested the postponement of the examination of witnesses by 5 days, a request which the Tribunal granted, rescheduling the activity for 28/02/2019, at 14:30 hours.

On 28/02/2019 the examination of witnesses took place, with the claimant waiving the hearing of Mr. C... and, before the start of the activity, the Tribunal requested clarifications regarding the amount indicated by the claimant for the value of the case, the same being corrected to 33,549.75, without opposition from the parties.

The defendant was invited to express itself on the claimant's allegations regarding the exceptions, declaring to maintain everything it had said opportunely in its response.

The witnesses were heard on the issues previously agreed upon, responding to the questions posed by the parties. Finally, the parties, with the agreement of the Tribunal, waived the production of oral or written arguments.

The process does not suffer from nullities, it being considered that the conditions are met for a final decision to be issued.

III - REASONING

1 – Issues to be decided:

a) To verify and declare or not the merit of the exceptions invoked by the defendant and draw the respective consequences.

b) In case of lack of merit of the exceptions, to verify whether the assessments in question suffer from illegality due to error in the factual and legal premises, invoked by the claimant and consequently annulled, or whether, on the contrary, they should be maintained in the legal order as the defendant intends by not suffering from the errors invoked.

2 - Factual Matters:

The factual matter considered relevant and proven on the basis of the elements in the file is the following:

a) The claimant has as its main activity "Restaurants CAE 56107" and secondary activity "Bars CAE 56302", for which it is assessed for Corporate Income Tax under the general scheme and Value Added Tax under the quarterly scheme, by the Finance Service of Oeiras....

b) The inspection action originated from the order of OI2017... of 25 May 2017 from the DF of Lisbon, with a view to controlling the cafeteria and restaurant sector, concerning the year 2014, in respect of Corporate Income Tax and Value Added Tax.

c) The assessments of Corporate Income Tax and Value Added Tax and respective compensatory interest challenged here result from the aforementioned inspection procedure as per the assessment notices attached to the file, notified to the claimant on 19 June 2018.

d) From the aforementioned procedure it resulted that the ATA proceeded to determine, by indirect methods, the taxable matter of Corporate Income Tax and Value Added Tax from which the aforementioned assessments and those challenged here resulted.

e) With regard to the taxable matters determined as stated above, the claimant has not proven that it filed any request for review of the taxable matters fixed and already referred to.

f) The witness evidence presented was limited to reproducing what was argued in the issues indicated for pronouncement, without bringing anything new to the respective argument.

The factual matter given as proven results from the documents attached to the file with the request, from the administrative process, as well as from the positions of the parties, with no controversy regarding them. The Tribunal gathers from the facts alleged by the parties those which it considers important for the appreciation and decision of the case (article 16, paragraph e) and article 19, both of the RJAT, no. 2 of article 123 of the CPPT and article 596 of the CPC).

We do not consider there to be facts with relevance to the decision to be issued that should be considered as not proven.

2 – Legal Matters

The issue to be decided first is whether the exception of material incompetence of the Tribunal, raised by the defendant in its response, is or is not well-founded, taking into account the provisions contained in no. 1 of article 608 of the CPC, which is transcribed: "Without prejudice to the provisions of no. 3 of article 278, the judgment decides, in the first place, on procedural issues that may determine the dismissal of the instance, according to the order imposed by their logical precedence."

The claimant expressed itself on this issue and considered that the exception should be declared to lack merit, since the issue submitted to the Tribunal is the assessment, which is a definitive act and that the acts carried out in the inspection action were opportunely contested by the claimant, thus the claimant's argument does not apply, so that what is at stake in the present file is not the acts that led to the determination of the taxable matter, but the taxable matter itself, a matter not excluded from the jurisdiction of the CAAD. To reinforce its point of view it makes reference to what was decided on similar matters in Process 694/2014 of the CAAD.

As has been seen, the defendant has not submitted counter-arguments, declaring that it maintained everything it had said in its response.

The competence of the Tribunal is a procedural prerequisite and depends on it the possibility and duty to pronounce on the merit or lack of merit of the claim, being a constraint on the appreciation of the merits of the action, in this way, in order to pronounce on the merit of the issue it is necessary that it has competence to do so.

Article 13 of the ETAF provides, applicable ex vi article 29, no. 1 of the RJAT, which is transcribed: "The scope of administrative jurisdiction and the competence of administrative courts, in any of their forms, is a matter of public order and its knowledge precedes that of any other matter." In turn, article 96, paragraph a) of the CPC determines the absolute incompetence of the Tribunal for infringement of the rules of competence by reason of the subject matter, and this can be raised by the parties and must be raised ex officio by the Tribunal.

The absolute incompetence of the Tribunal constitutes a dilatory exception, which prevents the Tribunal from knowing the merits of the case and the consequent dismissal of the instance, being within the ex officio knowledge (articles 577, paragraph a), article 576, no. 2 and article 578, all of the CPC).

The competence of Arbitral Tribunals results from the provisions contained in paragraphs a) and b) of no. 1 of article 2 of the RJAT, with the legislator imposing a prior binding of the ATA (no. 1 of article 4 of the RJAT), such binding occurring through Ordinance 112-A/2011 of 22 March.

From paragraph b) of article 2 of the aforementioned Ordinance, which is transcribed: "Claims relating to acts of determination of the taxable matter and acts of determination of the taxable matter, both by indirect methods, including the decision of the review procedure," results the unbinding of the ATA from the jurisdiction of Arbitral Tribunals, regarding acts of determination of taxable matter by indirect methods, as is the case here.

Although the claimant refers in the request and in the arguments that it seeks the declaration of illegality of the acts of assessment of Corporate Income Tax and Value Added Tax, it does not specify any defect in the assessments in question, rather it focuses on the inspection acts, namely the gross margin of 55.57% used by them, it disagrees that they have not taken into account, at least, a rate of 15% to compensate for the provision of meals to its employees and breakage and waste, attaching the decision 6332/13- CT – 2nd Court of 11/07/2014 of the TCA South, in which this percentage was considered. But all of this relates to acts prior to the assessments it seeks to have annulled, therefore to acts that led to the determination of taxable matters in respect of Corporate Income Tax and Value Added Tax by indirect methods and which were the basis for the said assessments.

Even if it were understood that paragraph b) of article 2 of Ordinance 112-A/2011 of 22 March does not exclude the appreciation by Arbitral Tribunals of assessment acts which have as their basis the use of indirect methods, it would still be necessary to use the mechanism of review of taxable matter provided for in article 91 of the LGT, a condition for challenge, as provided in no. 5 of article 86 of the same LGT, which in the case in question did not occur.

In fact, what is at stake here is the determination of taxable matter by indirect methods in respect of Corporate Income Tax and Value Added Tax for the year 2014, which produced the respective assessments and which are challenged here.

Now, considering that the ATA did not bind itself to arbitral jurisdiction, in the matter of indirect methods, this fact makes it impossible for the Tribunal to decide the present dispute, since we are faced with the exception of material incompetence of the Arbitral Tribunal.

The appreciation of the exception of impropriety of the procedural means is also prejudiced as unnecessary.

IV – DECISION

In light of the foregoing, the Tribunal declares:

a) That the dilatory exception of absolute incompetence of the Tribunal by reason of the subject matter is well-founded.

b) Dismisses the defendant from the instance.

c) Sets the value of the case at € 33,549.75, considering the provisions contained in article 299, no. 1 of the CPC, article 97-A of the CPPT and article 3, no. 2 of the RCPAT, and as was agreed at the meeting of 28/02/2019.

d) Sets the amount of costs, under no. 4 of article 22 of the RJAT, at € 1,836.00, in accordance with the provisions of Table I referred to in article 4 of the RCPAT, which are charged to the claimant.

Notify accordingly.

Lisbon, 22 March 2019

The single arbitrator,

Arlindo Francisco

Frequently Asked Questions

Automatically Created

What is the material incompetence of CAAD arbitral tribunals regarding indirect taxation methods under Portuguese law?
Under Portuguese law, CAAD arbitral tribunals have limited material competence regarding assessments based on indirect taxation methods. The Tax Authority argued that when assessment acts are grounded in inspection procedures applying indirect methods (métodos indiretos), the arbitral tribunal lacks jurisdiction to review the underlying determination of taxable matter. This exception is based on settled administrative law principles that indirect method determinations involve complex factual assessments beyond arbitral competence. However, taxpayers may argue that challenging subsequent assessment acts for substantive errors in factual premises (like failure to account for breakages) differs from challenging the indirect method application itself.
How are breakage allowances and external self-consumption (auto consumo externo) treated in IRC and IVA assessments for restaurant businesses?
In Portuguese tax law for restaurant businesses, breakage allowances (quebras) and external self-consumption (auto consumo externo) represent legitimate reductions from gross revenues for IRC and IVA purposes. External self-consumption refers to meals consumed by staff or provided to third parties without charge, which should not be taxed as commercial sales. The TCA Sul in Acórdão 633/13 accepted overall reductions of 15% for breakages and external self-consumption in restaurant operations. Tax inspectors must consider these industry-specific factors when determining taxable profits; failure to account for them may constitute an error in factual premises. The claimant argued that applying 55% profit margins without breakage adjustments distorts the economic reality of restaurant operations.
Can a taxpayer challenge IRC and IVA assessments based on indirect methods before the CAAD arbitral tribunal?
Taxpayers can challenge IRC and IVA assessments arising from tax inspection corrections by filing arbitration requests with CAAD under Article 2(1)(a) and Article 5(2)(a) of the RJAT (Legal Regime for Tax Arbitration). However, a critical procedural limitation exists: when assessments are based on indirect method determinations, the Tax Authority may raise material incompetence exceptions. The proper procedural vehicle and timing of challenges remain disputed—the Tax Authority argues that illegalities arising from indirect method determinations cannot be invoked in challenges to subsequent assessment acts. Taxpayers must demonstrate substantive errors in factual or legal premises independent of methodology disputes. Compensatory interest (juros compensatórios) calculated on additional assessments can also be challenged if the underlying tax liability is successfully contested.