Process: 502/2014-T

Date: December 19, 2014

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Case 502/2014-T addressed whether a taxpayer could retroactively change its VAT deduction method and the tribunal's competence to review assessments. Party A, a mixed taxpayer under Article 23 of the Portuguese VAT Code, initially used the pro rata deduction method for VAT on parking lot operations from 2004-2008. After reviewing procedures, Party A recorded additional VAT deductions in March 2008 and April 2009 declarations, claiming tax incurred from May 2004 onwards under the direct allocation method. The Tax Authority issued additional assessments totaling €391,474.35 plus €69,459.77 in compensatory interest, arguing the taxpayer could not retroactively apply a different deduction method. Party A invoked the 4-year general deadline under Article 98(2) and Article 22(2) timing provisions, claiming the deductions were made within legal timeframes after invoice receipt. A jurisdictional dispute arose, with the Tax Authority arguing CAAD lacked competence because the administrative review denial involved only arithmetic corrections without legality assessments of the underlying tax acts. Party A countered that the denial decision effectively analyzed assessment legality, bringing it within CAAD's jurisdiction. The core legal questions concerned: whether changing deduction methods constitutes an error under Article 78(6) allowing retroactive correction; whether the 4-year Article 98(2) deadline governs method changes or only initial deduction rights; and whether CAAD arbitration tribunals can review assessment legality when challenged through reclamação graciosa denials that reference but don't explicitly assess the underlying acts' legality. Party A sought annulment of assessments and compensatory interest under Articles 43 of the General Tax Law and 61 of the Tax Procedure Code.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 502/2014-T

Subject: VAT – illegality of assessment; compensatory interest.

  1. Report

Party A, with taxpayer number …, filed a request for constitution of a collective arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFATM), in which the TAX AUTHORITY AND CUSTOMS SERVICE is the respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Service on 28-07-2014.

In accordance with the provision of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the LFATM, the Ethics Council designated as arbitrators the undersigned, who communicated acceptance of the appointment within the applicable period.

On 12-09-2014 the parties were duly notified of this appointment, and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with the combined provision of article 11, no. 1, paragraphs a) and b), of the LFATM and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provision of paragraph c) of no. 1 of article 11 of the LFATM, in the wording introduced by article 228 of Law No. 66-B/2012, the Arbitral Tribunal was constituted on 29-09-2014.

The Tax Authority and Customs Service filed a response, raising the exception of incompetence of the Arbitral Tribunal.

By order of 06-11-2014, the holding of the meeting provided for in article 18 of the LFATM was dispensed with and it was determined that the proceedings would proceed with optional written arguments.

The Applicant presented arguments with the following conclusions:

  1. As demonstrated above, in the decision denying the administrative review, the Tax Authority actually proceeds to analyze the (il)legality of the assessment acts in question.

  2. Moreover, in the request for arbitral pronouncement, Party A requested that the illegality of the assessment acts in question be assessed (mediate object), and the illegality of the Tax Authority's decision to deny the administrative review presented (immediate object).

  3. The reasoning presented by the Tax Authority is vague and contradictory.

  4. The general deadline of 4 years provided for in no. 2 of article 98 of the VAT Code applies to the case, being the legal deadline for Party A to claim the VAT to which it is entitled.

  5. The Applicant deducted the tax in question in accordance with no. 2 of article 22 according to which deduction must be made in the declaration of the period or of a period subsequent to that in which the receipt of the invoices took place.

  6. In fact, the present Applicant deducted the tax in question, incurred in the months of May 2003 to December 2007 – reflected in the periodic declaration of March 2008 – and the tax incurred in the year 2008 – reflected in the periodic declaration of April 2009 –, at a time after the issuance of the invoices and within the deadline for exercising the right to deduction, which is 4 years, fully complying with the provisions of articles 22 and 98 of the VAT Code.

IN THESE TERMS, and in the other respects of Law that Your Excellencies will duly supply, this Illustrious Arbitral Tribunal should:

Declare the exception raised by the Tax Authority unfounded and therefore unproven;

Annul the Dispatch of partial denial here in question, as illegal;

and, conclusively,

Annul the additional VAT assessments in the total amount of € 391,474.35 (€ 320,863.60 relating to the year 2008 and € 70,610.75 relating to the year 2009) and compensatory interest in the total amount of € 69,459.77, as illegal;

And, likewise,

Condemn the Tax Authority and Customs Service to reimburse the amount unduly paid, plus the compensatory interest due, in accordance with and for the purposes of articles 43 of the General Tax Law and 61 of the Code of Tax Procedure and Process.

The Tax Authority and Customs Service presented arguments with the following conclusions:

I. The present arbitral instance is materially incompetent to rule on the present case.

II. Contrary to what the Applicant insists, the dispatch of partial denial, issued following the conclusion of the inspection procedure and here reviewed, does not contain an assessment of the legality of the additional assessments made by the Respondent.

III. In fact, the part of said additional assessments that were subject to assessment through a legality appraisal were so through the assessment of the administrative review, which was partially granted.

IV. Thus, what is pending assessment within the scope of the present arbitral instance are these "arithmetic corrections" to which the Applicant alludes throughout the entire request and which consist of the non-acceptance of deduction right regularizations recorded in the periodic declarations of March 2008 and April 2009, relating to tax incurred from May 2004 to December 2007.

V. For this reason, it is important to note that there was not, nor is there, in the act now reviewed any assessment regarding the legality of the said assessment acts, since the partial denial of the administrative review did not assess the legality of any tax assessment act, consisting only in the "non-acceptance of VAT deduction" by the improper application of the deduction method while a mixed taxpayer,

VI. The act in question is duly reasoned, insofar as it refers to the amount of VAT, subject to the additional assessments, which was not annulled, as well as to the applicable legal provisions that did not allow the regularization sought by the present Applicant.

VII. In truth, the Applicant as the recipient of the act was able to know its cognitive and evaluative path, allowing it to know what reasons led the Administration to its practice, thus not verifying the alleged lack of reasoning.

VIII. The present Applicant assumes the status of mixed taxpayer in accordance with and for the purposes provided for in article 23 of the VAT Code.

IX. Until 2008 - when it carried out a review of its procedures - the present Applicant limited the exercise of its right to deduction, regarding VAT incurred on resources directly allocated to the operation of the parking lots, an activity subject to and not exempt from tax, to the percentage determined according to the pro rata deduction method.

X. Subsequently, the present Applicant, following that review of procedures, recorded in the periodic declarations of March 2008 and April 2009, respectively, tax incurred from May 2004 to December 2007, considering that it has the right to deduction as a result of that change.

XI. What is at issue in the present case is the change in the method by which the right to deduction operates, applicable to taxpayers such as the Applicant, who intends that this change in the method by which it opted has retroactive effects.

XII. And this change does not fall within the concept of error provided for in art. 78 no. 6 of the VAT Code, so the Applicant cannot now claim that the change made has retroactive effects.

XIII. Regardless of whether the deadline provided for in no. 2 of article 98 of the VAT Code is considered as a general or special deadline, what is truly at issue in the present case is not the exercise of the right to deduction and any deadline inherent to it but, solely, the method used to exercise this right, regarding a mixed taxpayer, as is the case of the Applicant.

XIV. And, as to this fact, what is found is that the Applicant correctly carried out, throughout the years 2004 to 2008, the deduction of VAT relating to inputs in which it had incurred, using the method by which it had opted in accordance with article 23 of the VAT Code - the pro rata deduction method.

XV. By having changed its choice from the year 2009, it cannot, under penalty of subversion of the applicable legal norms, want the new method to be applied with retroactive effects, regularizing the deduction of the tax then effected.

XVI. Article 19 of the VAT Code states that, for the determination of the tax due (self-assessment), taxpayers deduct from the tax levied on taxable operations in a given period, the tax that was invoiced to them on the acquisition of goods and services by other taxpayers, mentioned in invoices or equivalent documents issued in legal form, in the same period, a situation that should be reflected in the periodic declaration referred to in paragraph c) of no. 1 of article 29 of the VAT Code.

XVII. Similarly, numbers 1, 2 and 3 of article 22 of the VAT Code must be taken into account, from which it follows that VAT deductions made by a VAT taxpayer are in principle of a definitive nature, being able, however, in certain cases expressly provided for in article 78 of the VAT Code, be subject to alteration.

XVIII. This Tribunal, in the context of case no. 91/2013-T, of 30-10-2013, and the Supreme Administrative Court, in the course of case no. 0966/2010, whose judgment was issued on 18-05-2011, understood that "(...) the deduction of tax cannot be made at any time, at the choice of the taxpayer, the useful scope of the rules referred to being that they indicate the appropriate moments for deduction precisely to exclude that it can be done at different moments, when such is not specially provided."

XIX. And even though " No. 2 of art. 92 of the VAT Code, by establishing that the right to deduction can only be exercised up to the limit of four years after the birth of the right to deduction, does not have the scope of granting the taxpayer the freedom to choose any moment within that period to effect the deduction, but rather to set a maximum limit that cannot be exceeded, even in cases where deduction can be made at different moments than those indicated in that art. 22."

XX. Thus, in light of the legislation applicable to the concrete case, it cannot but be understood that, both the two-year period established in no. 6 of article 78, and the four-year period provided for in no. 2 of article 98, both of the VAT Code, cannot be applicable in the case of the present proceedings, since we are not faced with any concrete correction, nor with a legal error regarding the exercise of the right to deduction.

Terms by which and with the learned supply of Your Excellencies should be judged the exception raised as founded, thus absolving the Respondent entity from the instance, or if otherwise understood, be judged the present request for arbitral pronouncement as unfounded, not proven, and, consequently, the Respondent absolved of all requests with the legal consequences.

The Arbitral Tribunal was regularly constituted.

The parties have legal personality and capacity and are legitimate (arts. 4 and 10, no. 2, of the same statute and art. 1 of Order No. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not suffer from any nullities.

  1. Factual Matters

a) Party A is a public legal entity engaged in the pursuit of municipal duties in the most diverse areas of activity, being framed, for VAT purposes, under the normal monthly regime;

b) In the course of 2012, Party A was subject to an external inspection procedure for the years 2008 and 2009;

c) On 11 October 2012, the Applicant was notified, by means of Office No. ..., of 9 October, of the draft Tax Inspection Report with arithmetic corrections in VAT amounting to a total of Euro 439,255.44 (Document No. 2 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);

d) The arithmetic corrections proposed in VAT resulted from the following situations:

i. Non-acceptance of VAT deduction made in the years 2008 and 2009, in the amount of, respectively, Euro 320,863.60 (three hundred twenty thousand eight hundred sixty-three euros and sixty cents) and Euro 70,610.75 (seventy thousand six hundred ten euros and seventy-five cents), related to the acquisition of goods and services allocated to the operation of parking lots (such goods and services having been acquired in prior years); the tax in question was incurred in the months of May 2004 to December 2007 and reflected in the periodic declaration of March 2008, as well as during the year 2008, this time reflected in the periodic declaration of April 2009;

ii. Non-acceptance of deduction (by the pro rata method) of VAT contained in invoices issued by companies B, S.A. (hereinafter B) and C, S.A. (hereinafter C) in 2008 (in the amount of Euro 2,456.26 – two thousand four hundred fifty-six euros and twenty-six cents) and 2009 (in the amount of Euro 15,612.49 – fifteen thousand six hundred twelve euros and forty-six cents); and

iii. Non-acceptance of VAT deduction from invoices issued in 2008, by D, E.M. and E, E.M., in the amount of Euro 29,712.34 (twenty-nine thousand seven hundred twelve euros and thirty-four cents).

e) In the Tax Inspection Report, the contents of which are hereby reproduced, the first correction referred to was justified as follows:

The deduction effected resulting from the retroactive alteration of the deduction method contained in the acquisition of goods and services (initially from the period 2004 to 2007 and, subsequently, from 2008) relating to the activity of operation of parking lots was effected, according to the taxpayer, under the provision of no. 2 of art. 98 of the VAT Code which provides that "the right to deduction (...) can only be exercised up to the expiration of four years after the birth of the right to deduction (...)".

Now, the four-year period established in no. 2 of art. 98 of the VAT Code does not apply in these situations, since this norm regulates the period during which taxpayers may, at most, exercise the right to deduction, and must take into account the deadlines provided for in art. 22 of the same statute for the exercise of that right. Thus, the deadline in no. 2 of art. 98 of the VAT Code only applies in cases of accounting entry beyond the periods provided for in art. 22 of the VAT Code, but within the four-year period from the birth of the right to deduction.

In fact, no. 2 of art. 22 of the VAT Code establishes that "without prejudice to the provision of art. 78, deduction must be made in the declaration of the period or of a period subsequent to that in which the receipt of invoices, equivalent documents or receipt of payment of VAT took place".

In the concrete case, the documents were entered and the right to deduction was exercised by Party A (based on the application of pro rata) at the time of accounting for the operations.

It should also be noted that the two-year period provided for in no. 6 of art. 78 of the VAT Code also does not apply in this situation, being only applicable in situations of correction of material or calculation errors made in records or in periodic declarations; situations resulting from the ratification or substitution of already registered invoices or situations of cancellation or reduction of the VAT tax base. In fact, Circular Office No. 30082/2005, of 17 November of the DSIVA "VAT - Regularizations under article 71 of the VAT Code", in its point 8 establishes that the mechanisms of art. 78 of the VAT Code cannot be used in the "alteration of the deduction method of the tax in mixed taxpayers".

For the above reasons, there is no legal basis that supports the retroactive alteration of the deduction method of the tax supported on the acquisition of goods and services associated with the activity of operation of parking lots. In this regard, the recovery of VAT made by Party A, in the declarations for the periods 2008 and 2009, in the total amount of € 320,863.50 and € 70,610.75, respectively, is not accepted for tax purposes, the tax not being deductible. For this reason, a mere arithmetic correction is made, in VAT, in the period 2008 in the amount of € 320,863.60 and in the period 2009 in the amount of € 70,610.75.

f) The Applicant, by agreeing with the corrections proposed and described in point iii. above, immediately proceeded to regularize the VAT in favor of the State in the amount of Euro 29,712.34 (twenty-nine thousand seven hundred twelve euros and thirty-four cents), reflecting the said amount in field 41 (VAT regularizations) of the replacement declaration submitted for the period of March 2008;

g) On 7 November 2012, Party A was notified, by means of Office No..., of 6 November 2012, of the final tax inspection report, in which the corrections described in points i. and ii. of article 8 above were maintained (Document No. 4 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);

h) Following this, on 4 December 2012, Party A was notified of the additional VAT assessments and compensatory interest (Documents No. 5 to 8) and which amount, respectively, to € 409,543.10 (four hundred nine thousand five hundred forty-three euros and ten cents) and € 69,459.77 (sixty-nine thousand four hundred fifty-nine euros and seventy-seven cents), namely:

– additional VAT assessment No. ..., in the amount of € 323,319.86, relating to the period ..., with payment deadline of 31-01-2013;

– additional VAT assessment No. ..., in the amount of € 86,223.24, relating to the period ..., with payment deadline of 31-01-2013;

– compensatory interest assessment No. ..., in the amount of € 57,790.10, relating to period 0803, with payment deadline of 31-01-2013;

– compensatory interest assessment No. ..., in the amount of € 11,669.67, relating to period 0904, with payment deadline of 31-01-2013;

i) The Applicant filed an administrative review of the assessments referred to in the previous paragraph (Document No. 9 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);

j) On 28 March 2014, it was notified of the draft decision to completely deny the said administrative review presented (Document No. 10 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);

k) In exercising its right to prior hearing, the Applicant manifested its disagreement, in accordance with Document No. 11, attached with the request for arbitral pronouncement, the contents of which are hereby reproduced;

l) Adhering to part of the arguments of the Applicant, the Chief of the Division of Administrative and Contentious Justice of the Finance Department, under delegation of powers from the Director of Finance, issued a Dispatch of partial approval, in which annulled the corrections described in point ii of paragraph d) above, maintaining the corrections relating to VAT deducted, related to the resources acquired by Party A for the activity developed in the parking lots, in the amount of Euro 391,474.35 (three hundred ninety-one thousand four hundred seventy-four euros and thirty-five cents), being € 320,863.60 relating to the assessment relating to period 0803 and € 70,610.75 relating to the assessment relating to period ..., and denying, in this matter, the pretension of the present Applicant;

m) The dispatch referred to in the previous paragraph manifests agreement with an opinion which contains, among other things, the following:

Regarding the deadline for exercising VAT deduction by mixed taxpayers, we will analyze whether the regime provided for in no. 6 of article 78 of the VAT Code applies, or the general regime on this matter, which is established in article 98 of the VAT Code.

Article 98 of the VAT Code provides for the general regime of official revision and exercise of the right to deduction, establishing that "without prejudice to special provisions, the right to deduction or refund of excess tax paid can only be exercised up to the expiration of four years after the birth of the right to deduction or excess payment of tax, respectively".

On the other hand, no. 6 of article 78 of the VAT Code prescribes that, "the correction of material or calculation errors in the entry referred to in articles 44 to 51 and 65, in the declarations mentioned in article 41 and in the guides or declarations mentioned in paragraphs b) and c) of no. 1 of article 67 is optional when it results in tax in favor of the taxpayer, but can only be made within a period of 2 years, which, in the case of exercising the right to deduction, is counted from the birth of the respective right in accordance with no. 1 of article 22, being mandatory when it results in tax in favor of the State".

No. 6 of article 78, by providing a two-year period counted from the birth of the right to deduction, for exercise of that right, is a special provision, to which the initial part of no. 2 of article 98 of the VAT Code alludes, where the maximum deadline of four years after the birth of the right to deduction is not applicable, but rather two years.

The literal wording of no. 6 of article 78 is that it applies only to corrections of material or calculation errors, including in periodic declarations.

Error regarding the application of certain legal regimes does not constitute a material error or calculation error, it being evident that the regime provided for in no. 6 of article 78 of the VAT Code cannot be applied. The pro rata calculation error is not a calculation error that can be framed in this norm because it constitutes a legal error regarding the applicable legal regime and not an error of an arithmetic nature.

We also refer to the Circular Office of 17-11 of the DSIVA, regarding regularizations under article 71 of the VAT Code, current 78, whose understanding regarding the scope of application of article 78 is that the mechanisms provided for in this article cannot be used in situations of alteration of the deduction method of the Tax in mixed taxpayers, in the determination of the pro rata, as well as in VAT regularizations on real estate and other assets in fixed assets or relating to the allocation of real estate to purposes other than those for which they are intended.

Not being applicable the regime of no. 6 of article 78 for the reasons referred to above, nor existing any special temporal limit for the exercise of the right to deduction based on legal error, the general regime on this matter contained in no. 2 of article 98 of the VAT Code shall apply.

Now "No. 2 of the said legal statute, by establishing that the right to deduction can only be exercised up to the limit of four years after the birth of the right to deduction, cannot have the scope of granting the taxpayer the freedom to choose any moment within that period to effect the deduction, but rather, to set a maximum limit that cannot be exceeded, even in cases where deduction can be made at different moments than those indicated in article 22, maximum limit this that, as results from the initial part of that no. 2, will apply when there is no special rule that sets a lower or upper limit".

Thus, the claimant is not right, because no. 2 of article 98 of the VAT Code cannot be applied to the case sub judice.

As for the copy of the RIT (Tax Inspection Report), presented in exercise of the right to prior hearing, at pages 226 to 230, in which the AT admitted the deduction of the tax supported less than two years, based on no. 6 of article 78 of the VAT Code, the claimant considers that there is a clear contradiction between similar situations.

The principle of equality requires the AT, in its relations with individuals, to treat them equally, not favoring, benefiting, or prejudicing them. This means that the AT is obliged to treat identically the administered persons who are in similar situations and to apply different treatments to those who are in substantially different situations.

This principle requires only that the AT does not carry out discriminatory action and not that it maintains indefinitely a same interpretation of tax rules.

In the case sub judice there is no clear violation of this principle, because we understand that no. 6 of article 78 VAT Code is not applicable, as we have demonstrated above, but no. 2 of article 98 of the said statute is applicable.

To prove the taxation of the provision of services within the scope of its urban waste collection and urban cleaning activity, it provides the receipt guide No. ... of 2008-10-23, at page 392, where there is mention of VAT included at the legal rate, and recorded in accounting at pages 396 and 398, with entries in the respective accounts. We were able to determine that VAT was charged, from the analysis we made of the said accounts. The contracts entered into between the claimant and B and C, attached to the records at pages 232 to 251, contain mention that VAT accrues at the legal rate in force, see page 249.

Article 39 of the VAT Code provides for situations in which the taxpayer can only mention in invoices the price with inclusion of the tax and the applicable rates.

In light of the above, we understand that the request should be partially granted, in the amount of € 2,456.26, for the year 2008 and € 15,055.12, for the year 2009, maintaining the following additional assessments, for the years 2008 and 2009, as shown below.

n) The dispatch referred to in the previous paragraph was notified to the Applicant by Office No. ..., of 30-06-2014 (Document No. 1 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);

o) Despite the partial approval of the administrative review presented, which will result in the partial annulment of the additional assessments, in the amount of Euro 18,068.75, corresponding to the corrections described in point ii. of paragraph d) above, the Tax Authority did not annul the respective compensatory interest which had been calculated on the annulled amount;

p) The Applicant operates parking lots located ..., being charged with paying the VAT due on the amounts charged for the rental of parking spaces (article 22 of the request for arbitral pronouncement);

q) Until the year 2008 (inclusive), the Applicant used only the pro rata method in the deduction of VAT incurred in the acquisitions of goods and services necessary for its activity (including the VAT on resources directly associated with the activity developed in the parking lots it operated);

r) As a result of a review it carried out of its VAT procedures, the Applicant understood that it was bearing excess VAT in the acquisitions referred to in the previous paragraph, insofar as, these being resources exclusively allocated to the realization of taxable operations (specifically, the rental of parking spaces), it would have the right to deduct all VAT incurred in the acquisition of such resources (e.g. works, equipment and other operating expenses) and not only in the percentage of pro rata;

s) In this context, the Applicant made, regarding the years 2008 and 2009, the deduction of the value of VAT incurred, and which had not yet been deducted, in the acquisitions of goods and services used in the activity developed in the parking lots (Euro 320,863.60 – three hundred twenty thousand eight hundred sixty-three euros and sixty cents – in 2008 and Euro 70,610.75 – seventy thousand six hundred ten euros and seventy-five cents – in 2009);

t) For purposes of the deduction referred to in the previous article, the Applicant also took into account the maximum deadline of 4 (four) years (cf. Document No. 12 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced) for VAT recovery provided for in no. 2 of article 98 of the VAT Code (namely, the acquisitions that gave rise to the said deduction occurred in the period between May 2004 and December 2008);

u) On 21-07-2014, the Applicant filed the request for arbitral pronouncement that gave rise to the present proceedings.

2.1. Facts Not Proven

There are no potentially relevant facts for the decision that have not been given as proven.

2.2. Reasoning of the Decision on Factual Matters

The facts given as proven appear in the administrative file attached with the Response and are alleged by the Applicant without contradiction by the Tax Authority and Customs Service.

  1. Question of Incompetence of the Arbitral Tribunal

The Tax Authority and Customs Service raises an exception of incompetence of this Arbitral Tribunal to assess the request for VAT regularization, for knowledge of the request for arbitral pronouncement.

Since questions of incompetence are logically matters of priority knowledge, as recognized in article 13 of the Code of Procedure in Administrative Courts, the question of incompetence raised will be addressed first.

The Tax Authority and Customs Service argues, in sum:

– the "arithmetic corrections" object of the act of partial denial of the administrative review do not involve the assessment of the legality of any tax assessment act;

– these "arithmetic corrections" are based on the fact that the Respondent intends to regularize its right to deduction at a moment when it is not permitted to do so;

– thus, and taking into account the most recent jurisprudence of this Tribunal, the present arbitral instance is materially incompetent to rule on the present case;

– the dispatch of partial denial, at issue in the present proceedings, does not contain an assessment of the legality of the additional assessments made by the Respondent, following the conclusion of the inspection procedure to which the Applicant was subject;

– the part of said additional assessments that were subject to assessment through a legality appraisal were so through the assessment of the administrative review, then presented by the Applicant, which was partially granted, proceeding to the partial revocation of said additional assessments;

– what is pending assessment within the scope of the present arbitral instance are these "arithmetic corrections" to which the Applicant alludes throughout the entire request and which consist of the non-acceptance of deduction right regularizations recorded in the periodic declarations of March 2008 and April 2009, relating to tax incurred from May 2004 to December 2007;

– see also, by way of conclusion, what the Applicant refers to at the end of its petition when, in article 83, it comes to say that: "Thus, and in full conformity with the said article 22 (norm that supports the moment when taxpayers can exercise their right to deduction), there is no doubt as to the legitimacy and timeliness of the deduction made by Party A, in the years 2008 and 2009, and here in question, relating to VAT supported in excess in the years 2004 to 2008.";

– for this reason, it is important to note that there was not, nor is there, in the act now impugned any assessment regarding the legality of the said additional assessment acts - mediate object of the present request for arbitral pronouncement - which only carried out "arithmetic corrections" relating to an incorrect exercise of the right to deduction by the Applicant;

– see what was decided, in the recent arbitral judgment, issued in the context of case no. 299/2013-T, in which, curiously, the Applicant is the same, but was involved the denial of a request for official revision, where one can read:

"Thus, it is manifest that it does not fall within the scope of these competencies to issue authorizations nor to assess the legality or illegality of decisions denying requests for authorization for VAT deduction or its regularization. Thus, the incompetence of this Arbitral Tribunal to assess the request for authorization for regularization formulated by the Applicant is manifest, so the incompetence raised by the Tax Authority and Customs Service in articles 25 and 26 of its Response proceeds, as to this pretension.";

– thus, in the case at issue, after careful analysis of the grounds that support the arbitral decision referred to above, the same reasons that led this Tribunal to declare itself materially incompetent proceed, since the partial denial of the administrative review, now reviewed, did not assess the legality of any tax assessment act, consisting only in the "non-acceptance of VAT deduction" by the improper application of the deduction method as a mixed taxpayer.

The Applicant pronounced itself on this exception in its arguments, saying, in sum the following:

– the request for arbitral pronouncement presented by Party A does indeed involve the assessment of the (il)legality of assessment acts performed by the Tax Authority, as expressly stated in the initial petition submitted;

– the Applicant intends that the additional VAT assessment acts and compensatory interest (mediate object of the request) identified in the request presented be declared illegal and which were practiced by the Tax Authority;

– the request for arbitral pronouncement in question was motivated by the partial denial of the administrative review presented against the assessments in question, a denial that constitutes an administrative act in tax matters, which is subject to review through judicial impugnation as well as through arbitration, insofar as it involves the assessment of the (il)legality of assessment acts;

– following the denial of the administrative review, the Applicant chose to submit a request for arbitral pronouncement, under the provision of paragraph a) of no. 1 of article 2 of the LFATM and articles 2, no. 1 and 3, both of Order No. 112-A/2011, of 22 March;

– the request for arbitral pronouncement can be presented regarding acts subject to independent impugnation (cf. article 10 of the LFATM, instituted by Decree-Law No. 10/2011, of 20 January);

– the decision of partial denial of the administrative review necessarily determines the prior assessment of the legality of the assessments in question;

– in fact, the decision of the Tax Authority in administrative review necessarily required the analysis of the legality of the additional assessments in question, since it was these assessments that, in turn, motivated the submission of said administrative review.

The competence of the arbitral tribunals functioning in CAAD is, first and foremost, limited to the matters indicated in article 2, no. 1, of Decree-Law No. 10/2011, of 20 January (LFATM).

This norm states that the competence of the arbitral tribunals comprises the assessment of the following claims:

a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of determination of taxable matter when it does not give rise to the assessment of any tax, of acts of determination of aggregate taxable matter and of acts of fixing property values; (wording of Law No. 64-B/2011, of 30 December)

Beyond the direct assessment of the legality of acts of this type, the competence of the arbitral tribunals functioning in CAAD also includes the competence to assess acts of second or third degree that have as their object the assessment of the legality of acts of those types, namely acts that decide administrative reviews and hierarchical appeals, as is apparent from the express references made in article 10, no. 1, paragraph a), of the LFATM to no. 2 of article 102 of the Code of Tax Procedure and Process (which refers to judicial impugnation of decisions of administrative reviews) and to the "decision of the hierarchical appeal".

In the case at issue, assessment acts were practiced by the Tax Authority and Customs Service, the administrative review has as its object the assessment of the legality of these acts and the Applicant requests that these assessment acts and the decision denying the administrative review that assessed their legality be declared illegal, so it is not apparent what grounds there are for the raised incompetence.

Nor is it apparent how this situation can be confused with that which was the object of case no. 299/2013-T in which no assessment act had been practiced by the Tax Authority and Customs Service and a request for official revision of self-assessment acts was formulated which was denied for untimeliness and the taxpayer there formulated a request for authorization for VAT deduction.

In the case at issue, assessment acts were practiced and the Applicant intends to see their legality assessed so the situation falls squarely within paragraph a) of no. 1 of article 2 of the LFATM.

On the other hand, in light of the reference made in paragraph a) of no. 1 of article 10 of the LFATM to no. 2 of article 102 of the Code of Tax Procedure and Process it is unquestionable that, when an administrative review is presented, the deadline for submitting a request for arbitral pronouncement is counted from the decision denying the administrative review.

In this context, it is irrelevant whether the administrative review has or has not addressed the legality of the assessment acts, as the declaration of illegality of assessment acts is directly requested.

Moreover, given the relation of alternativness between the arbitral tax process and the judicial impugnation process, intended by no. 2 of article 124 of Law No. 3-B/2010, of 28 April, which authorized the Government to approve the LFATM, it is not apparent how the content of the decision of the administrative review (unlike what happens with the decision of the request for official revision) can influence the arbitrability of the disputes, as the judicial impugnation process is always the appropriate procedural means for impugnation of administrative review decisions in the tax courts, as literally follows from no. 2 of article 102 of the Code of Tax Procedure and Process, so it is not apparent how its content can have any relevance to remove the arbitrability.

This is sufficient to conclude that there is no obstacle to the assessment of the legality of the assessment acts that are the object of the request for arbitral pronouncement.

In these terms the exception raised by the Tax Authority and Customs Service is unfounded.

  1. Order of Assessment of Vices

In accordance with the provision of article 124 of the Code of Tax Procedure and Process, subsidiarily applicable by virtue of the provision of article 29, no. 1, of the LFATM, as no vices are imputed to the acts whose annulment is requested that lead to the declaration of non-existence or nullity, nor a relation of subsidiarity indicated, the order of assessment of the vices should be that which, according to the prudent discretion of the judge, provides most stable or effective protection of the rights offended.

In the case at issue, the Applicant imputes to the acts vice of lack and deficiency of reasoning and vice of violation of article 98, no. 2, of the VAT Code, combined with no. 2 of article 22 and no. 6 of article 78 of the same Code.

The vice of lack of reasoning, being of a formal nature, provides less stable and effective protection than the vice of violation of substantive law, so this vice should be assessed first, leaving for the end, if necessary, the assessment of the vice of lack of reasoning.

  1. Vice of Violation of Article 98, No. 2, of the VAT Code

5.1. Terms in Which the Question is Posed

Until the year 2008 (inclusive), the Applicant used only the pro rata method in the deduction of VAT incurred in the acquisitions of goods and services necessary for its activity (including the VAT on resources directly associated with the activity developed in the parking lots it operates, this being a taxable activity for VAT purposes).

In 2008, the Applicant understood that it had the right to deduct all VAT (and not merely a percentage) incurred in the acquisition of resources related to its parking lot operation activity (works, equipment and other operating expenses), so in the periodic declaration of March 2008 it deducted from the tax it had borne between May 2004 and December 2007 and, in the periodic declaration of April 2009, it deducted all VAT borne during the year 2008.

The Tax Authority and Customs Service understood that the four-year period established in no. 2 of art. 98 of the VAT Code "does not apply in these situations, since this norm regulates the period during which taxpayers may, at most, exercise the right to deduction, and must take into account the deadlines provided for in art. 22 of the same statute for the exercise of that right. Thus, the deadline in no. 2 of art. 98 of the VAT Code only applies in cases of accounting entry beyond the periods provided for in art. 22 of the VAT Code, but within the four-year period from the birth of the right to deduction" and "in the concrete case, the documents were entered and the right to deduction was exercised by Party A (based on the application of pro rata) at the time of accounting for the operations" (Tax Inspection Report).

In its arguments, the Tax Authority and Customs Service essentially maintains this thesis, invoking in its support the judgment of the Supreme Administrative Court of 18-05-2011, issued in case no. 0966/10.

The Applicant argues, in sum, that from the combination of article 98, no. 2, of the VAT Code with articles 22, no. 2, and 78, no. 6, of the same Code results the possibility of deducting VAT up to the end of the 4-year deadline from the birth of the right.

5.2. The Alteration of the Legal Regime for Exercise of the Right to Deduction

The invocation by the Tax Authority and Customs Service of the said judgment of the Supreme Administrative Court issued in case no. 0966/10 is not justified, because although the judgment is from 2011, it applied the VAT regime in force in 2003, as expressly stated in it.

Now, the regime in force in 2003 was substantially different from that after 01-01-2004, regarding the possibility of exercise of the right to deduction, in light of the alteration introduced by Law No. 107-B/2003, of 31 December, in article 22, no. 2, of the VAT Code.

In fact, in the wording in force until this legislative alteration, article 22, no. 2, of the VAT Code, established that "Without prejudice to the possibility of correction provided for in article 71, deduction must be made in the declaration of the period in which the receipt of invoices, equivalent documents or receipt of VAT payment that forms part of the import declarations took place" (wording of Decree-Law No. 166/94, of 9 June).

In light of this 1994 wording, there was no legal support to affirm that, outside the cases provided for in special norms, the VAT taxpayer could exercise the right to deduction in declarations of subsequent periods, as was understood in the Supreme Administrative Court judgment of 18-05-2011, issued in case no. 0966/10, which applied the legislation in force in 2003, as expressly stated in it.

In the wording given to that no. 2 of article 22 by Law No. 107-B/2003, of 31 December), the following was established: "Without prejudice to the provision of article 71, deduction must be made in the declaration of the period or of a period subsequent to that in which the receipt of invoices, equivalent documents or receipt of VAT payment that forms part of the import declarations took place".

The enormous difference lies in the possibility of VAT deduction not only in the declaration of the period of receipt of the documents, but also in a declaration "of a subsequent period", without any restriction.

In fact, on the assumption that the legislator knew how to express its thought in appropriate terms, as must be presumed, by virtue of the provision of no. 3 of article 9 of the Civil Code, the use of the expression "of a subsequent period", without the definite article, and not "of the subsequent period" reveals that it is not even required that the VAT be deducted in the declaration of the period immediately following that of receipt of the documents, being permitted in the declaration of any subsequent period, without prejudice, naturally, to special and general limits, namely those in articles 78 and 92, no. 2.

Article 98, no. 2, of the VAT Code establishes that "without prejudice to special provisions, the right to deduction or refund of excess tax paid can only be exercised up to the expiration of four years after the birth of the right to deduction or excess payment of tax, respectively".

In the case at issue, we are not faced with a situation that can be framed in article 78, no. 6, of the VAT Code, which provides for a special deadline of two years for the correction of "material or calculation errors", including in periodic declarations, in the following terms: "the correction of material or calculation errors in the entry referred to in articles 44 to 51 and 65, in the declarations mentioned in article 41 and in the guides or declarations mentioned in paragraphs b) and c) of no. 1 of article 67 is optional when it results in tax in favor of the taxpayer, but can only be made within a period of two years, which, in the case of exercising the right to deduction, is counted from the birth of the respective right in accordance with no. 1 of article 22, being mandatory when it results in tax in favor of the State".

Article 95-A, no. 2, of the Code of Tax Procedure and Process provides a concept of "material or obvious errors" indicating that it includes, "namely those resulting from anomalous functioning of the information systems of the tax administration, as well as unequivocal situations of calculation error, writing, inaccuracy or lapse".

The association of calculation error with material error made in this no. 6 of article 78 of the VAT Code, similar to what occurs in other norms (such as article 249 of the Civil Code, article 667 of the Code of Civil Procedure of 1961 and article 614 of the Code of Civil Procedure of 2013) reveals that the calculation errors it is intended to allude to will be of this type, namely arithmetic errors in the operations for calculating the amount to deduct.

Thus, one would be faced with a material error in filling in the amount of deductible VAT in a declaration when one intended to write a certain amount and, due to carelessness or lapse, ended up writing a different amount or when the error in filling in the declaration results from an earlier error of the same type that exists in the accounting or in some document that serves as the basis for the exercise of the right to deduction.

One would be faced with a calculation error, when the arithmetic operations to determine the amount of deductible VAT were performed incorrectly, in the declaration itself or in some of the documents on which it is based.

Error regarding the application of certain legal regimes does not constitute either a material error or a calculation error, so it is evident that the regime of the said no. 6 of article 78 of the VAT Code cannot be applied to it. Specifically, pro rata calculation error is not a calculation error that can be framed in this norm because it constitutes a legal error regarding the applicable legal regime and not an error of an arithmetic nature.

Thus, not being applicable the regime of said article 78, no. 6, nor existing any special temporal limit regime for exercise of the right to deduction based on legal error, the general regime on this matter contained in article 98, no. 2, of the VAT Code shall apply, which, as is stated in the judgment of the Supreme Administrative Court of 18-5-2011, issued in case no. 966/10 (on this point with full current relevance), sets a maximum limit of four years that cannot be exceeded in any case.

In these terms it is concluded that the assessments whose declaration of illegality is requested and the decision denying the administrative review that maintained them suffer from error regarding the legal assumptions, by misinterpretation of article 98, no. 2, of the VAT Code, combined with articles 22, no. 2, and 78, no. 6, of the same Code, a vice that justifies its annulment [article 135 of the Code of Administrative Procedure, applicable by virtue of the provision of article 2 paragraph c), of the General Tax Law], to the extent that the assessments were not revoked.

  1. Vice of Impaired Knowledge

Given that the assessments and the decision denying the administrative review that are the object of the present proceedings must be annulled on the grounds of violation of law, the knowledge of the vice of lack of reasoning is prejudiced, being useless.

  1. Annulment of Compensatory Interest Assessment Related to Revoked Corrections

The Applicant also requests the annulment of the compensatory interest assessment.

Regarding the compensatory interest assessments relating to the assessments that are the object of the present proceedings, to the extent that they were not revoked, they are integrated into the tax debt (article 35, no. 8, of the General Tax Law), so their annulment is justified, as they are affected by the vices that affect the VAT assessments, which they presuppose.

As for the part of the compensatory interest assessments relating to the part of the VAT assessments that were revoked, they are affected by nullity, in accordance with article 133, no. 2, paragraph i), of the Code of Administrative Procedure.

  1. Compensatory Interest

The Applicant requests the condemnation of the Tax Authority and Customs Service to payment of compensatory interest due, in accordance with articles 43 of the General Tax Law and 61 of the Code of Tax Procedure and Process.

In accordance with the provision of paragraph b) of art. 24 of the LFATM the arbitral decision on the merits of the claim that is not subject to appeal or impugnation binds the tax administration from the end of the deadline provided for appeal or impugnation, and this, in the exact terms of the success of the arbitral decision in favor of the taxpayer and up to the end of the deadline provided for execution of the decisions of the judicial tax courts, "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been practiced, adopting the acts and operations necessary for that effect", which is in line with the provision of art. 100 of the General Tax Law [applicable by virtue of the provision of paragraph a) of no. 1 of art. 29 of the LFATM] which establishes that "the tax administration is obliged, in case of total or partial success of administrative review, judicial impugnation or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation that is the object of the dispute, including the payment of compensatory interest, if applicable, from the end of the deadline for execution of the decision".

Although art. 2, no. 1, paragraphs a) and b), of the LFATM uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning in CAAD, making no reference to condemning decisions, it should be understood that the powers that in judicial impugnation process are attributed to the tax courts are comprised in its competence, and this is the interpretation that is in line with the sense of the legislative authorization on which the Government based itself to approve the LFATM, in which it proclaims, as first directive, that "the arbitral tax process must constitute an alternative procedural means to the judicial impugnation process and to the action for recognition of a right or legitimate interest in tax matters".

The judicial impugnation process, although it is essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration to the payment of compensatory interest, as is apparent from art. 43, no. 1, of the General Tax Law, in which it is established that "compensatory interest is due when it is determined, in administrative review or judicial impugnation, that there was error attributable to the services from which resulted payment of the tax debt in an amount higher than that legally due" and of art. 61, no. 4 of the Code of Tax Procedure and Process (in the wording given by Law No. 55-A/2010, of 31 December, to which corresponds no. 2 in the initial wording), which states that "if the decision recognizing the right to compensatory interest is judicial, the deadline for payment is counted from the beginning of the deadline for its spontaneous execution".

Thus, no. 5 of art. 24 of the LFATM by saying that "payment of interest, regardless of its nature, is due, in accordance with the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process" should be understood as permitting the recognition of the right to compensatory interest in the arbitral process.

In accordance with article 43 of the General Tax Law, in the part applicable here, "compensatory interest is due when it is determined, in administrative review or judicial impugnation, that there was error attributable to the services from which resulted payment of the tax debt in an amount higher than that legally due".

In the case at issue, it is manifest that, following the declaration of illegality of the VAT assessment acts and compensatory interest, compensatory interest is owed for the illegality of those acts is attributable to the Tax Administration, which, by its initiative, practiced them without legal support.

This is a violation of substantive law, constituted in error regarding the legal assumptions, attributable to the Tax Administration.

Consequently, the Applicant has the right to compensatory interest, in accordance with article 43, no. 1, of the General Tax Law and article 61 of the Code of Tax Procedure and Process, calculated on the amount it paid unduly, at the rate of the legal interest provided for in article 559 of the Civil Code and, currently, in Order No. 291/2003, of 8 April (articles 43, no. 4, and 35, no. 10, of the General Tax Law).

  1. Decision

In accordance with the above, the Arbitral Tribunal agrees:

– to judge the exception of material incompetence of this Arbitral Tribunal unfounded;

– to judge the request for arbitral pronouncement as founded and annul the dispatch denying the administrative review and the VAT assessments, to the extent that they were not revoked, in the amounts of € 391,474.35 (€ 320,863.60 relating to the year 2008 and € 70,610.75 relating to the year 2009) and compensatory interest in the total amount of € 69,459.77;

– to condemn the Tax Authority and Customs Service to payment to the Applicant of compensatory interest in accordance with articles 43 of the General Tax Law and 61 of the Code of Tax Procedure and Process.

  1. Value of the Proceedings

In accordance with the provision of art. 315, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and Process and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 460,934.12.

  1. Costs

In accordance with art. 22, no. 4, of the LFATM, the amount of costs is set at € 7,344.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Applicant.

Lisbon, 19-12-2014

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Paulo Lourenço)

(António Martins)

Frequently Asked Questions

Automatically Created

What made the VAT (IVA) assessment illegal in CAAD decision 502/2014-T?
The applicant argued the VAT assessment was illegal because they exercised deduction rights within the legal timeframe. Party A contended that VAT incurred from May 2004 to December 2007 (deducted in March 2008) and VAT from 2008 (deducted in April 2009) fell within the 4-year deadline under Article 98(2) of the VAT Code and complied with Article 22(2) timing requirements. However, the Tax Authority maintained the assessments were legal, arguing the issue was not about exercising deduction rights within deadlines, but about improperly attempting to retroactively change from the pro rata deduction method to direct allocation method, which does not constitute a correctable error under Article 78(6).
What is the 4-year deadline for VAT deduction under Article 98(2) of the Portuguese IVA Code?
Article 98(2) of the Portuguese VAT Code establishes a general 4-year deadline for taxpayers to claim VAT deductions. According to Party A's arguments, this is the legal timeframe within which taxpayers can exercise their right to deduct input VAT. In this case, the applicant relied on this provision to justify deducting VAT incurred between May 2004 and December 2007 in the March 2008 periodic declaration, and VAT from 2008 in the April 2009 declaration, arguing all deductions fell within the four-year window from when the tax was originally incurred.
Can taxpayers claim compensatory interest (juros indemnizatórios) after an unlawful VAT assessment?
Yes, taxpayers can claim compensatory interest (juros indemnizatórios) following an unlawful VAT assessment. In Case 502/2014-T, Party A specifically requested that the Tax Authority be ordered to reimburse amounts unduly paid plus compensatory interest due, citing Articles 43 of the General Tax Law (Lei Geral Tributária) and Article 61 of the Tax Procedure Code (Código de Procedimento e de Processo Tributário). This remedy compensates taxpayers for financial losses resulting from illegal tax assessments, including the time value of money improperly collected by the tax administration.
How does Article 22(2) of the IVA Code regulate the timing of VAT deductions on received invoices?
Article 22(2) of the Portuguese VAT Code requires that deduction must be made in the declaration of the period in which receipt of invoices occurred, or in a subsequent period. This provision gives taxpayers flexibility regarding timing of VAT deductions. Party A argued they complied with this rule by deducting VAT after invoice receipt but within legally permitted timeframes. The applicant contended this allowed them to deduct tax incurred in earlier periods (May 2003 to December 2007) in the March 2008 declaration, and tax from 2008 in the April 2009 declaration, as these fell within subsequent periods following invoice receipt.
Is the CAAD arbitration tribunal competent to rule on the legality of VAT assessments challenged via reclamação graciosa?
The tribunal's competence was disputed in Case 502/2014-T. The Tax Authority raised an exception arguing CAAD lacked jurisdiction because the administrative review (reclamação graciosa) denial did not contain a legality assessment of the underlying VAT assessment acts—only arithmetic corrections regarding non-acceptance of VAT deduction regularizations. The Tax Authority maintained the denial didn't assess any tax assessment act's legality but merely addressed improper application of the deduction method. Party A countered that the denial decision effectively analyzed the assessment acts' legality, making it reviewable by CAAD. The tribunal's ruling on this jurisdictional question would determine whether CAAD arbitration can review substantive legality when administrative review denials reference but don't explicitly assess underlying acts.