Process: 529/2018-T

Date: March 29, 2019

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration case (529/2018-T) addresses the critical issue of time limits (caducidade) for exercising VAT deduction rights in Portugal, specifically involving a municipality as a mixed VAT taxable person. The municipality implemented a pro rata deduction system in 2015 and discovered it had under-deducted VAT in previous years (2012-2014). When attempting to correct the 2013 deductions through a replacement periodic declaration in September 2015, the Tax Authority initially accepted the adjustment but later, in 2017, issued an additional assessment of €19,283.84, arguing that deduction rights for 2012 and 2013 had lapsed. The central legal question concerns whether Article 23(6) of the VAT Code (allowing pro rata adjustments in the last periodic declaration of the year) or Article 98(2) (establishing strict deadlines for deduction) applies. The municipality argued that pro rata adjustments should be permitted beyond standard time limits, citing the principle of legal certainty and good faith, especially since the Tax Authority had previously validated the deductions during an earlier inspection. The case highlights the tension between the right to deduct input VAT (a fundamental principle of EU VAT law) and procedural time limits under Portuguese law. The decision would determine whether municipalities and other mixed taxable persons can retroactively apply corrected pro rata percentages to prior years or whether such adjustments are definitively barred after the submission deadline for the final periodic declaration of each fiscal year, representing a significant precedent for public entities managing complex VAT obligations.

Full Decision

ARBITRAL DECISION

Municipality of A... (hereinafter referred to as "Claimant"), with tax identification number ..., with registered office at ..., ...-..., in ..., presented, pursuant to the provisions of Articles 2, no. 1 a) and 10, no. 1 a) of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "LRATM"), and of Articles 1 and 2 of Order no. 112-A/2011, of 22 March, a request for constitution of an Arbitral Tribunal, with a view to obtaining a ruling on the rejection of the administrative appeal no. ...2018... and obtaining the consequent annulment of the tax act regarding the additional assessment of Value Added Tax ("VAT") no. ..., in the total amount of €19,283.84.

The request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and automatically notified to the Tax Authority (AT) on 29 October 2018.

The AT responded, arguing that the request should be ruled unfounded.

The meeting referred to in Article 18 of the LRATM was dispensed with, given the nature of the matter contained in the file, and the Parties were notified to submit final arguments (optional).

The Arbitral Tribunal is duly constituted and has material jurisdiction, pursuant to Article 2, no. 1, paragraph a) of the LRATM.

The parties possess legal standing and capacity, are legitimate and are represented (Article 4 and no. 2 of Article 10 of the LRATM and Article 1 of Order no. 112/2011, of 22 March).

There are no nullities, exceptions or preliminary questions that preclude immediate examination of the merits of the case.

STATEMENT OF FACTS

Based on the elements contained in the file and the administrative file attached to the case, the following facts are considered proven:

  • The Claimant is a public legal entity that pursues the public interest and, in this context, is entrusted with various assignments and activities, either strictly of public management or also activities that may compete with the private sector or private management;

  • The Claimant is a mixed VAT taxable person, simultaneously carrying out operations exempt from tax and subject and non-exempt operations, falling under the normal quarterly periodicity regime;

  • In the course of 2015, the Claimant implemented a system of VAT deduction, based on the criterion of the deduction percentage (pro rata) in relation to inputs of mixed use;

  • As a consequence of the aforementioned revision of the VAT deduction method, the Claimant found that the exercise of the right to deduction made in the years 2012, 2013 and 2014 had been lower than that to which it was legally entitled;

  • The Claimant proceeded to deduct the amounts of VAT resulting, essentially, from tax incurred related to the implementation of the pro rata criterion, by including the same in field 40 of the Periodic VAT Declaration ("PD") relating to the fourth quarter of 2014;

  • In the PD relating to the period 201412T, the Claimant requested full reimbursement of the accumulated credit in the amount of €98,455.48;

  • The Respondent partially approved the reimbursement requested by the Claimant, having rejected the reimbursement requested corresponding to the periods of 2012 and 2013;

  • The Claimant proceeded to rectify and replace the PD relating to the period 201412T, excluding therefrom the amounts relating to 2012 and 2013, with the reimbursement being requested and the remaining amount being paid;

  • With respect specifically to the amount determined with regard to the fiscal year 2013, following the indications of the tax inspection services (TIS), the Claimant proceeded, on 16 September 2015, to submit a replacement PD for the period 201312T, in which, by inclusion of the amount of €19,814.01 of tax incurred and not yet deducted, determined an additional deduction amount of €43,797.32 – as opposed to the previously identified amount of €23,983.31;

  • With respect to the period 201503T (in which tax payable to the state in the amount of €832.63 was determined), a new assessment was issued in the amount of €18,981.38, resulting from the difference between the tax previously determined to be paid (€832.63) and the excess to be carried forward (from prior period) resulting from the submission of the replacement PD for period 201312T (€19,814.01);

  • On 23 October 2017, the TIS initiated a new inspection procedure with the Claimant, which resulted in the correction of the amount included in field 40 of the replacement PD for period 201312T, submitted on 14 September 2015, in the amount of €19,283.84;

  • According to the Tax Inspection Report, "it is not possible to effect VAT deduction pursuant to Article 23 of the VAT Code with respect to the years 2012 and 2013", with deduction of pro rata adjustments only being possible until the submission of the last PD of the year in question, with the time limits provided for in no. 2 of Article 98 of the VAT Code and in no. 1 of Article 78 of the General Tax Law not being applicable in these cases, nor even the two-year period provided for in no. 1 of Article 131 of the Code of Administrative Procedure or in no. 6 of Article 78 of the VAT Code.";

  • The Claimant filed, on 4 May 2018, an administrative appeal, regarding the additional VAT assessment no. ... issued in the total amount of €19,283.84, relating to the period 12/2013;

  • On 27 June 2018, the Claimant was notified of the final decision rejecting the appeal filed;

  • On 18 January 2018, the Claimant paid the VAT resulting from the VAT assessment act no. ... .

PROVEN FACTS AND REASONING

The facts relevant to the judgment of the case were selected and identified based on their legal relevance, in light of the plausible solutions to the legal questions, pursuant to Article 596 of the Code of Civil Procedure, applicable ex vi Article 29, no. 1, paragraph e), of the LRATM.

With relevance to the decision, there are no other facts that should be considered unproven.

With respect to the proven facts, the Tribunal's conviction was based on critical analysis of the documentary evidence attached to the case.

STATEMENT OF LAW

The main issue raised in the present case concerns whether or not the act of additional VAT assessment, subject to the present petition, is illegal, with discussion as to whether the time limit provided in no. 6 of Article 23 or in no. 2 of Article 98 of the VAT Code applies to the exercise of the right to VAT deduction sought by the Claimant.

In this regard, the Claimant alleges, in summary, the following:

  • The amount of additional VAT deduction at issue here, reimbursed to the Municipality within the scope of the PD for period 201512T and, in the meantime, subject to correction embodied in the payment in favor of the State of an amount of €18,981.38, had already been subject to analysis and validation within the scope of the inspection action conducted by the TIS regarding the reimbursement requested in the PD for period 201412T, submitted on 6 February 2015;

  • Consequently, the Claimant seeks restoration of a situation that had already been subject to careful analysis and validation by the AT – this is, therefore, a second analysis – which is voidable for violation of the law, which goes against the principle of legal certainty in tax matters and, in truth, places in question the principle of cooperation (and good faith) in the actions of the tax administration (cf. provisions in Article 59 of the General Tax Law);

  • The AT bases its position on the incorrect interpretation of the provisions in no. 6 of Article 23 and 22, no. 2 of the VAT Code;

  • The rule is clear: when taxable persons determine the amount of deductible VAT in accordance with the actual allocation and/or pro rata methods – the latter, as in the case sub judice – used provisionally, they must, in the PD of the last period of the year, correct their provisional deduction, based on the values determined at year-end.

  • In fact, by allowing taxable persons to proceed with deduction based on provisional criteria (as the adjective itself indicates, not final), it would always be necessary to establish a time period to make the transition to final data, a period which the Portuguese legislator understood should be the last period of the year.

  • Such a temporal limitation also indicates a moment from which a deduction, made on the basis of a provisional criterion, will have to be corrected in accordance with the actual data produced by the taxable person's activities during the year in question;

  • However, additionally using this article to deprive a taxable person of the deduction of tax that is due considering the criteria at their disposal, significantly prejudices the neutrality of VAT, which is a basic principle thereof and constitutes another prescription, praeter inscribed in no. 6 of Article 23 of the VAT Code.

  • In truth, no. 6 of Article 23 of the VAT Code does not regulate the time limit (of expiration) for the exercise of the right to deduction, but rather Article 98, no. 2 of the VAT Code;

  • It is thus important to stress from the outset the understanding expressed by the STA in its Judgment of 28 June 2017, issued in case no. 01427/14, according to which: "the applicable time limit for claiming VAT paid in excess, in a situation that falls within the so-called legal error is four years, pursuant to the provisions of Article 98, no. 2 of the VAT Code";

  • By all the above, it is easy to verify that the conclusions that gave rise to the assessment in question have no support or basis in the VAT Code, namely in the invoked provision and that, in this sense, taint the assessment itself;

  • Notwithstanding, as already mentioned, the Claimant seeks not only to refute the conclusions that motivated the issuance of this VAT assessment, but also to demonstrate how the procedure carried out is in accordance with the VAT Code and national and community case law, as well as that the interpretation of the TIS is an attack on the most basic principles that guide VAT. Finally, it also seeks to emphasize that the value of credit to be carried forward identified by the Claimant in the PD 201512T results from information provided by the District Finance Directorate itself.

  • In truth, pursuant to Article 22, which addresses the moment and modalities of the exercise of the right to deduction, establishes, in its literal terms, in its no. 2, that "deduction must be effected in the declaration of the period or of a period subsequent to that in which the receipt of the invoices or receipt of payment of the VAT that forms part of the import declarations has occurred";

  • The use of the preposition "of" (de), instead of "from the" (do) – the latter, contraction of the preposition "of" (de) with the definite article "the" (o), indicates a precise and determined reference – aims at the legislator's purpose in not defining which the tax period is, but rather a tax period, in this case, subsequent;

  • Nor would any other interpretation make sense, because otherwise there would be a conflict with the prescriptive sense (permissive sense, with reservation of special provisions of which Article no. 6 of Article 78 of the VAT Code is an example) contained in Article 98, no. 2, of the VAT Code, which would be emptied of any reach or meaning;

  • In this context, taxable persons are not required to deduct the VAT incurred in the tax declaration of the period in which they receive the corresponding invoice nor in the immediately subsequent period. Article 22, no. 2, of the VAT Code provides a permission for deduction in a subsequent period, imposing no deadline for taxable persons to exercise such right;

  • The imposition of this deadline is found later in no. 2 of Article 98 of the VAT Code, which is, moreover, in line with the general rules on expiration of taxes, set out in the General Tax Law, which naturally safeguards special provisions (deadlines) of which the provision in Article 78, no. 6, of the VAT Code is an example for the specific situation provided therein (which is not at issue here, both the AT and the Claimant agree);

  • The deadline that is applicable to the Claimant to effectively exercise its right to deduction in full is the four years established in no. 2 of Article 98 of the VAT Code, since it does not appear applicable either the special deadline provided in no. 6 of Article 78 of the same tax code, since the incorrect deduction made by it was not due to a "material or calculation error" (and on this the Challenging Party and AT agree), nor the deadline established in no. 6 of Article 23, because there is not a correction of the provisional deduction percentage to the final one, under the same deduction method, but rather a situation that falls within the so-called legal error;

  • Thus, the Challenging Party considers that what is set out in no. 2 of Article 98 of the VAT Code has automatic and independent application from any other procedural rule – being only conditioned to the existence of that same right, pursuant to the terms set out in Articles 19 to 26 of that tax code, and to the possible applicability of a special provision that in the concrete case sets it aside (non-existent in the case), as the legal text itself expressly safeguards;

  • According to Article 98 of the VAT Code, the four-year deadline applies to "the right to deduction or reimbursement of tax paid in excess", and the Claimant's right to deduction of VAT incurred must be respected, especially because, in the Tax Inspection Report, the accuracy of the amount of tax deducted by the Claimant is not contested, with the TIS validating its legitimacy materially and formally;

  • In this regard, attention is drawn to the two CAAD decisions: (1) the Judgment of 7 October 2015, issued in case no. 01455/12 and (2) the Judgment of 28 June 2017, issued in case no. 01427/14;

  • Also relevant is the Judgment of 7 October 2015, issued in case 01455/12, pursuant to which the STA held that "all restrictions on the right of deduction must be interpreted restrictively and reduced to the minimum";

  • In this context, it was noted that "while it is true that Member States are not prevented from establishing time limits for the expiration of the right to deduction (because the principle of legal certainty requires this, which demands that the tax situation of the taxable person, given his rights and obligations vis-à-vis the Tax Administration, not be indefinitely susceptible to challenge), such deadline cannot make the exercise of the right to deduction practically impossible or excessively difficult (principle of effectiveness) (Among many others, the judgments – of 27 February 2003, C-327/00, no. 55; – of 30 March 2006, C-184/04, no. 45; – of 11 October 2007, C-241/06, no. 52)";

  • Finally, attention is also drawn to the very important understanding expressed by the STA in its Judgment of 28 June 2017, issued in case no. 01427/14, pursuant to which, regarding the determination of the time limit applicable to the revision of tax act of self-assessment of VAT in situations in which the taxpayer did not proceed to the deduction of VAT permitted, through the pro rata method, the Counselor Judges of the STA held that "[t]he application of the deduction methods relating to goods of mixed use is legally complex, such that the error resulting from the application of this legal regime constitutes neither a material error nor a calculation error";

  • In this sequence of events, the Counselor Judges stated that "(…) the Tax Authority and Customs, through the VAT Service Directorate, [in Circular Office no. 30081/2015, of 17 November] clearly separated what it considered to be material or calculation errors, confining them basically to mechanical operations (transcription or registration errors in the periodic declaration) from the non-mechanical ones, that is, those that imply interpretation of the law for the use of VAT deduction methods (namely, change of the deduction method for the tax of mixed taxable persons, or pro rata determination)";

  • Moreover, the Counselor Judges peremptorily concluded that "the time limit applicable for claiming VAT paid in excess, in a situation that falls within the so-called legal error is four years, pursuant to the provisions of Article 98, no. 2 of the VAT Code";

  • Thus, the deduction made by the Claimant in the PD of 201312T, corresponding to the fiscal year 2013, in the total amount of €43,797.39, appears timely pursuant to no. 2 of Article 98 of the VAT Code and should consequently be declared illegal and the VAT assessment, which rests on the opposite conclusion (untimeliness of the deduction) formulated by the TIS, should be annulled.

The AT alleges, in turn, succinctly, the following:

  • The Claimant considered the VAT incurred on inputs, allegedly of mixed use, an expense, because it understood that it was not deductible;

  • In the Claimant's own words "(…)the additional VAT deduction (…) resulted from the implementation of the deduction percentage criterion (pro rata) in relation to inputs of mixed use, the calculation of which was performed pursuant to no. 4 of Article 23 of the VAT Code (…)" (cf Article 13 of the administrative file);

  • Thus, as the Tax Inspection concluded, "since doubts arose about the deduction of pro rata adjustments outside the respective year, that is, about the possibility of applying the tax deduction provided for in Article 23 of the VAT Code to adjustments relating to the years 2012 and 2013, and taking into account what is provided in no. 6 of Article 78 of the VAT Code, circular office no. 30082/2005 information no. 1842/2012 and opinions of the VAT community, we questioned the VAT Services whether the deduction relating to the application of pro rata to the years 2012 and 2013 is covered by the provisions of no. 6 of Article 78 of the VAT Code or by another legal norm. The response of the VAT Services to the question raised goes in the direction that it is not possible to effect VAT deduction pursuant to Article 23 of the VAT Code with respect to the years 2012 and 2013, for the reasons which we transcribe below from information no. 1405 of 22/05/2015 of the VAT Service: "19 - "the four-year deadline provided for in no. 2 of Article 98 of the VAT Code and in no. 1 of Article 78 of the General Tax Law is not applicable, nor even the two-year deadline provided for in no. 1 of Article 131 of the Code of Administrative Procedure or in no. 6 of Article 78 of the VAT Code. 20- The situation described, of omission of deduction of tax incurred with common costs, does not constitute an error, but rather an option or legitimate and common practice among mixed taxable persons. In fact, it is frequent that mixed taxable persons do not deduct any tax relating to common costs, thereby avoiding the administrative, economic, technical and logistical costs necessary or inherent to the investigation of tax liable to deduction. 21- This is an option that falls within the scope of the autonomy of action permitted by the tax and is materialized in the self-assessment made by the taxable person. Thus, in these cases, it is not legitimate for the taxable person to claim an error when it did not deduct VAT that it could eventually deduct. 22- Indeed, circular office no. 30,082/2005 states, in point 8, by reserving that the mechanisms provided for in Article 78 may not be used in situations of "alteration of deduction of tax in mixed taxable persons", from which it is deduced that such situations are framed in Article 23 of the same Code. 23- This understanding was conveyed in the aforementioned opinion of the Tax Council no. 41/2013, of 2013-10-04, authored by Dr. Cidália Lança, namely in points 18 and 20, with the agreeing opinion of the Director of the Tax Council Center of 2013-10-08. 24- In that opinion it was understood that the alteration of the method of tax deduction and the retroactive application of a deduction method do not find protection either in no. 6 of Article 78, or in any other provision of the VAT Code, insofar as this option can only be made under the conditions of no. 1 of Article 20, no. 1 of Article 22 and Article 23 of the VAT Code 25- Although it is a more favorable understanding than that expressed in this opinion, it has been admitted that the retroactive application of the deduction method can be carried out pursuant to no. 6 of Article 23 of the VAT Code, that is, up to the declaration of the last period of the year to which it relates, without it being viable to claim the administrative appeal provided for in no. 1 of Article 131 of the Code of Administrative Procedure, given the absence of an error in self-assessment. 26- Although no. 6 of Article 23 of the VAT Code literally refers to the correction of percentages (pro rata) and deduction criteria (actual allocation) calculated provisionally, it is admitted that taxable persons, in that periodic declaration, proceed to the application or alteration of the deduction method, assuming overall provisioning of the deduction relating to mixed goods until the submission of the last periodic declaration of the year. 27- In these terms, submitting this understanding to the facts described by the Finance Department of Vila Real, only the deduction percentage relating to mixed use goods can be applied with respect to the year 2014, pursuant to no. 6 of Article 23 of the VAT Code. It is not possible to use such methods with respect to the years 2012 and 2013 based on the periodic declaration of period 2014-12T.";

  • According to what is mentioned in paragraph d) of point 3.3 of chapter II of the Inspection Report, the taxable person deducted in period 2013.12T, through a replacement declaration submitted on 14.09.2015, the amount of €19,283.84 relating to pro rata adjustments and also €530.17 which concerns deductions for acquisition of goods whose VAT deduction is 100%;

  • However, as previously presented, and according to the information provided by the VAT Service Directorate, deduction of pro rata adjustments is only possible until the submission of the last PD of the year in question, with the deadlines provided for in no. 2 of Article 98 of the VAT Code and in no. 1 of Article 78 of the General Tax Law not being applicable in these cases, nor even the two-year deadline provided for in no. 1 of Article 131 of the Code of Administrative Procedure or in no. 6 of Article 78 of the VAT Code;

  • For the reasons presented in the preceding paragraph, the TIS proceeded to correct the amount in field 40 of the replacement PD of 2013.12T, submitted on 14.09.2015, in the amount of €19,283.84, and that after the corrections made will result in field 40 of the PD only the amount of €622.13;

  • The understanding of the AT, supported by doctrine and case law, is that the alteration of the method of tax deduction and the retroactive application of a deduction method do not find any legal support, and that the choice of the deduction method can only be made at the moment the right to deduction is constituted under the conditions provided in no. 1 of Article 20, no. 1 of Article 22 and Article 23 of the VAT Code;

  • Whereby taxable persons must deduct VAT incurred "in the declaration of the period or of a period subsequent to that in which the receipt of the invoices or receipt of payment of the VAT that forms part of the import declarations has occurred" up to "after four years from the birth of the right to deduction", seeking thus to avail itself, in the case sub judice, of the four-year deadline to proceed with the correction of VAT assessed in excess, which in its view flows from Article 98 of the VAT Code;

  • It is determined in no. 1 of Article 98 of the VAT Code that, "when, for reasons attributable to the services, tax higher than due has been assessed, official revision shall be proceeded with pursuant to Article 78 of the General Tax Law";

  • However, it is provided in no. 2 of that legal provision that "without prejudice to special provisions, the right to deduction or reimbursement of tax paid in excess can only be exercised until four years after the birth of the right to deduction or payment in excess of tax, respectively";

  • Thus, not only did the Claimant not formulate any request for official revision, but also, as safeguarded by Article 98 itself of the VAT Code, the possibility of applicability of the official revision mechanism does not prejudice the specificities inherent to the functioning of the tax itself;

  • Indeed, although no. 2 of Article 98 of VAT establishes that, without prejudice to special provisions, the right to deduction can be exercised up to the limit of four years, the VAT taxable person does not have the freedom to determine the moment of exercise of that right, such provision limiting itself to setting only a maximum limit of a general character, beyond which that right can no longer be exercised;

  • In the case at hand, the Claimant does not seek to exercise the right to deduction, because it has already been exercised in due time in the respective periodic declarations, based on documents of support that were already registered in the accounting records, nor does it even seek the regularization of the tax for the existence of any error, but rather that it be recognized the possibility of retroactively modifying the deduction method used in its capacity as a mixed taxable person;

  • Indeed, what actually occurred was that the taxable person proceeded to the retroactive application of pro rata to the years 2012 and 2013, effecting its regularization, through its registration in Field 40 of the periodic VAT declaration relating to the last quarter of 2014, thus not complying with the deadline stipulated in no. 6 of Article 23 of the VAT Code, with the rule of Article 98 of the same Code not being applicable;

  • In sum, if, perchance, the present Tribunal decides in favor of the application of Article 98 of the VAT Code to the concrete case, it cannot, without further ado, decide in favor of the VAT assessment being in excess, as the Claimant petitions in paragraphs b) and c) of the final prayer;

  • In this sense, given the circumstance that knowledge of this issue has been prejudiced by the decision taken in the inspection proceedings, the Tribunal should determine that the case be returned to the Tax Authority and that it render a decision on the requested regularization.

Given the foregoing, regarding the position of the Parties and the arguments presented, in order to determine whether the VAT assessment act is or is not illegal, it is important to verify what is the applicable legal deadline for the exercise of the right to deduction, in the concrete case.

Let us see what should be understood.

VAT is a general tax on consumption, in which the transfers of goods, the provision of services, imports and intra-community acquisitions of goods are taxed, falling on expenditure.

Under the general regime, VAT is a tax on consumption in which the amount owed by each taxable person is determined through the so-called tax deduction method, tax credit or indirect subtractive method.

Pursuant to Article 19 of the VAT Code, "for the determination of the tax due, taxable persons shall deduct, pursuant to the following articles, from the tax incurred on the taxable operations they have carried out", the tax due or paid for the acquisition of goods and services from other taxable persons.

According to no. 1 of Article 20 of the same Code, only the tax that has been incurred on goods or services acquired, imported or used by the taxable person for the realization of the operations referred to in its paragraphs a) and b), namely, "transfers of goods and provision of services subject to tax and not exempt from it" can be deducted.

In turn, Article 22, no. 1 and 2 of the VAT Code determine the following:

"1 - The right to deduction arises at the moment the deductible tax becomes due, according to what is established by Articles 7 and 8, effected by subtraction from the total amount of the tax due on the taxable operations of the taxable person, during a declaration period, of the amount of deductible tax, due during the same period.

2 - Without prejudice to what is provided in Article 78, deduction must be effected in the declaration of the period or of a period subsequent to that in which receipt of the invoices or receipt of payment of the VAT that forms part of the import declarations has occurred. (Wording of Decree-Law no. 197/2012, of 24 August, with effect from 1 January 2013)"

It thus follows from the articles mentioned that the right to VAT deduction must be exercised in the declaration of the period or of a period subsequent to that in which the receipt of the documents has occurred, without prejudice to what is provided in Article 78 of the VAT Code.

Article 78 of the VAT Code, under the heading Adjustments, provides the following:

"1 - The provisions of Articles 36 et seq. must be observed whenever, after the invoice is issued, the taxable amount of an operation or the respective tax is subject to rectification for any reason. (Wording of Decree-Law no. 197/2012, of 24 August, with effect from 1 January 2013)

2 - If, after the registration referred to in Article 45 has been made, the operation is canceled or its taxable value is reduced as a consequence of invalidity, resolution, rescission or reduction of the contract, by the return of goods or by the grant of discounts or rebates, the supplier of the goods or provider of the service may effect the deduction of the corresponding tax until the end of the tax period following the one in which the circumstances that determined the cancellation of the assessment or the reduction of its taxable value occurred.

3 - In cases of inaccurate invoices that have already given rise to the registration referred to in Article 45, rectification is mandatory when there is tax assessed below the proper amount, being able to be carried out without any penalty until the end of the period following that to which the invoice to be rectified relates, and is optional when there is tax assessed above the proper amount, but can only be carried out within the period of two years.

4 - The acquirer of the goods or recipient of the service who is a taxable person for this tax, if it has already effected the registration of an operation in relation to which its supplier or service provider has proceeded to cancel, reduce the taxable value or rectify for less than the amount invoiced, corrects, until the end of the tax period following the one of receipt of the rectified document, the deduction made.

5 - When the taxable amount of an operation or the respective tax is subject to rectification for less, the regularization in favor of the taxable person can only be made when the latter is in possession of proof that the acquirer became aware of the rectification or that was reimbursed the tax, otherwise the respective deduction is considered undue.

6 - The correction of material or calculation errors in the registration 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 taxable person, but can only be carried out within the period of two years, which, in the case of the exercise of the right to deduction, is counted from the birth of that right pursuant to no. 1 of Article 22, and is mandatory when it results in tax in favor of the State.

7 - Taxable persons may also deduct the tax relating to debts considered uncollectible:

a) In enforcement proceedings, after the registration referred to in paragraph b) of no. 2 of Article 717 of the Code of Civil Procedure;

b) In insolvency proceedings, when the same is decreed as limited in nature, after the final judgment of the sentence of verification and classification of credits provided for in the Code of Insolvency and Business Recovery or, when it exists, the approval of the plan subject to the deliberation provided for in Article 156 of the same Code;

c) In special business revitalization proceedings, after approval of the recovery plan by the judge, provided for in Article 17-F of the Code of Insolvency and Business Recovery;

d) Pursuant to the provisions of the Extraordinary Business Recovery System (SIREVE), after conclusion of the agreement provided for in Article 12 of Decree-Law no. 178/2012, of 3 August.

8 - Taxable persons may also deduct the tax relating to other credits provided that any of the following conditions is verified:

a) The amount of the credit does not exceed (euro) 750, VAT included, the default of payment extends beyond six months and the debtor is a natural person or taxable person carrying exclusively exempt operations that do not confer the right to deduction;

b) Credits are above (euro) 750 and below (euro) 8000, VAT included, when the debtor, being a natural person or a taxable person carrying exclusively exempt operations that do not confer the right to deduction, is listed in the electronic register of enforcements as a defendant against whom an enforcement proceeding was previously moved and is suspended or extinct for failure to find attachable assets;

c) Credits are above (euro) 750 and below (euro) 8000, VAT included, when there has been entry of an enforcement formula in summary judgment proceedings or recognition in a condemnation action and the debtor is a natural person or taxable person carrying exclusively exempt operations that do not confer the right to deduction;

d) Credits are below (euro) 6000, VAT included, being the debtor a taxable person with the right to deduction and have been recognized in a condemnation action or claimed in enforcement proceedings and the debtor has been served by publication;

e) Credits are above (euro) 750 and below (euro) 8000, VAT included, when the debtor, being a natural person or a taxable person carrying exclusively exempt operations that do not confer the right to deduction, is listed on the public access list of extinctions with partial payment or for failure to find attachable assets at the time of deduction.

9 - The total amount of the credits referred to in the previous number, the total amount of the tax to be deducted, the performance of collection measures by the creditor and the failure, total or partial, of such measures must be documented and certified by a chartered accountant, this person must also certify that the legal requirements for the deduction of tax relating to debts considered uncollectible are met pursuant to no. 7 of this article.

10 - The certification by a chartered accountant referred to in the previous number must be made for each of the periods in which the adjustment was made and until the deadline set for the submission of the periodic declaration or until the date of submission thereof, when it occurs outside the deadline.

11 - In the case provided for in no. 7 and in paragraph d) of no. 8, the acquirer of the goods or service, who is a taxable person for this tax, is notified of the total or partial cancellation of the tax, for purposes of rectification of the deduction initially made, this notification must identify the invoices, the amount of the credit and the tax to be adjusted, the proceeding or agreement involved, as well as the period in which the adjustment is made.

12 - In cases where the recovery of credits occurs, totally or partially, taxable persons are obliged to proceed with the payment of the tax, in the period in which its receipt occurred, without compliance, in this case, of the deadline provided in no. 1 of Article 94.

13 - When the taxable amount is subject to reduction, the amount thereof must be divided between consideration and tax, at the time of issuance of the respective document, if it is also intended to rectify the tax.

14 - In cases in which the obligation to assess and pay the tax is incumbent on the acquirer of goods and services and the corresponding amounts have not been included in the periodic declaration, originating the respective assessment and deduction or have been made outside the legally established deadline, the assessment and the deduction are accepted without any consequences provided that the taxable person submits the replacement declaration, without prejudice to the penalty that applies.

15 - The provisions of the previous number also apply to taxable persons who have the right to partial deduction of the tax, pursuant to Article 23, without prejudice to the additional assessment and payment of the tax and compensatory interest that appear to be due for the difference.

16 - The documents, certificates and communications referred to in nos. 7 to 11 must be part of the tax documentation process provided for in Articles 130 of the Corporate Income Tax Code and 129 of the Personal Income Tax Code.

17 - The provisions of no. 8 do not apply when there are transfers of goods or provision of services whose acquirer or recipient was listed, at the moment of performance of the operation, on the public access list of extinctions with partial payment or for failure to find attachable assets."

Thus, with relevance to the appreciation of the case sub judice, it follows from the aforementioned article that the correction of material or calculation errors can only be effected within a period of 2 years. It has been understood that material or calculation errors are specifically arithmetic errors in the operations of calculating the amount to be deducted, in determining the amount of deductible VAT, in the declaration itself or in one of the documents on which it is based (Cf. Judgment of the STA, case no. 1427/14, of 28.06.2017, Decision of CAAD, case no. 138/2018-T, of 3.09.2018, Decision of CAAD, case no. 252/2017, of 20.11.2017, Decision of CAAD, case no. 117/2013-T).

Thus, an error of classification regarding the existence of the right to VAT deduction incurred in the acquisition of common resources (through pro rata application), as well as in the acquisition of goods and services directly destined for taxed operations, does not constitute either a material error or a calculation error, but rather a legal error (Cf. Judgment of the STA, case no. 1427/14, of 28.06.2017, Decision of CAAD no. 649/2017, of 28.05.2018) whereby it is evident that the regime of the aforementioned no. 6 of Article 78 of the VAT Code cannot be applied to it.

In truth, the error of the Claimant constitutes a legal error, that is, an error that concerns the existence and conditions of application of the applicable rules. As taught by Afonso Arnaldo and Tiago Albuquerque Dias, in "Afinal qual o prazo para deduzir IVA?, VAT Notebooks, 2014, Coimbra, Almedina, 2014" are classified as legal errors, by way of example, "situations in which there is incorrect determination of pro rata, motivated by an incorrect subsumption in the applicable rule of the operations that influence the calculation, namely, regarding the classification of an operation as taxed when it is exempt, (…) in which the taxable person, developing various activities, effects the deduction by using pro rata in a first moment and then uses the actual allocation method to effect the deduction of the tax exclusively destined to a certain activity, seeking to correct the deduction it made in the past based on the pro rata method."

Thus, not being applicable the regime of the aforementioned Article 78, no. 6 of the VAT Code, which concerns material or calculation errors, it is important to verify whether there is some legal basis that establishes the temporal limit for the exercise of the right to deduction based on legal error.

In this context, it is verified that Article 98 of the VAT Code, under the heading Official Revision and Deadline for Exercise of Right to Deduction, provides the following:

"1 - When, for reasons attributable to the services, tax higher than due has been assessed, official revision shall be proceeded with pursuant to Article 78 of the General Tax Law.

2 - Without prejudice to special provisions, the right to deduction or reimbursement of tax paid in excess can only be exercised until four years after the birth of the right to deduction or payment in excess of the tax, respectively.

3 - Annulment of any assessment does not proceed when its amount is below the limit provided in no. 4 of Article 94."

Following the rules applicable to the interpretation of legal norms, it is verified that, in the absence of a special legal basis applicable to the exercise of the right to deduction in case of legal error, the provision contained in no. 2 of Article 98 of the VAT Code emerges as the applicable legal basis.

It is thus four years the deadline for the exercise of the right to deduction, after the birth of the right to deduction.

In accordance with the case law already produced on this issue (Judgment of the STA, case no. 966/10, of 18.05.2011, Judgment of the STA, case no. 1427/14, of 28.06.2017, Decision of CAAD no. 117/2013, Decision of CAAD no. 649/2017, of 28 May 2018, Decision of CAAD no. 138/2018, of 3 September 2018), it is understood that the general regime applicable in this matter contained in Article 98, no. 2, of the VAT Code will apply, which sets a maximum limit of four years that cannot be exceeded in any case.

Also in light of European case law, no other meaning appears to be possible to extract from the norms under analysis, as the Court of Justice of the European Union (CJEU) has pronounced in favor of the prevalence of the principle of fiscal neutrality in the interpretation of the rules regarding the expiration of the right to deduction. In this regard, the CJEU decided in the Biosafe Judgment, case C-8/17, of 12 April 2018 that the common VAT system, as well as the principle of neutrality, oppose the legislation of a Member State, pursuant to which "the benefit of the right to deduction is refused on the grounds that the deadline laid down in that legislation for the exercise of this right is counted from the date of issuance of those initial invoices and has expired." In truth, the CJEU has tended to pronounce itself in the sense of being contrary to the VAT Directive the imposition of legal deadlines that prevent the exercise of the benefit of the right to VAT deduction by taxpayers.

In sum: the VAT deduction claimed by the Claimant, resulting from a legal error, can be effected within a period of 4 years, pursuant to no. 2 of Article 98 of the VAT Code.

Whereby it is concluded that the rejection of the administrative appeal presented by the Claimant based on the expiration of the right to deduction is illegal, due to error regarding the legal assumptions, and therefore the act of additional VAT assessment no. ... should be annulled, with compensatory interest being due as a result of the error attributable to the Respondent in the appraisal and subsumption of the facts to applicable law.

The Arbitral Tribunal is not obliged to appreciate all arguments alleged by the Claimant or the Respondent, when the decision is already determined by the solution already rendered, which is the case here, for which reason the remaining questions submitted to arbitral judgment are prejudiced from consideration.

IV. DECISION

Whereby the members of this Arbitral Tribunal agree in:

  • To rule that the request for declaration of illegality of the decision rejecting the administrative appeal no. ...2018... and the consequent VAT assessment act no. ... is well-founded;

  • To order the Respondent to pay compensatory interest;

  • To order the Respondent to bear the costs of the present proceedings, as the unsuccessful party.

V. VALUE OF PROCEEDINGS

In accordance with the provisions of Articles 315, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Administrative Procedure and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at €19,283.84.

VI. COSTS

Pursuant to Article 22, no. 4, of the LRATM, the amount of costs is set at €1,224, to be paid by the Respondent, in accordance with Table I of the aforementioned Regulation, given the full success of the request.

Lisbon, 29 March 2019

The Arbitrator,

(Magda Feliciano)

(The text of this decision was prepared by computer, pursuant to Article 131, no. 5 of the Code of Civil Procedure, applicable by reference from Article 29, no. 1, paragraph e) of Decree-Law no. 10/2011, of 20 January (LRATM), with its drafting governed by the spelling prior to the Orthographic Agreement)

Frequently Asked Questions

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What is the deadline for exercising the right to VAT deduction under Portuguese tax law?
Under Portuguese VAT law, the deadline for exercising the right to deduction is generally established in Article 98(2) of the VAT Code (Código do IVA). Taxable persons must exercise their deduction right by including deductible VAT in the periodic declaration for the period when the right arises, with a grace period extending until the submission of the last periodic declaration of the year in which the right arose. Additionally, Article 23(6) allows for pro rata adjustments in the final periodic declaration of each year. However, once these deadlines pass, the right to deduction lapses (caducidade), and late claims are generally rejected by the Tax Authority, as illustrated in this case involving 2012 and 2013 deductions claimed in 2015.
Can a municipality as a mixed VAT taxable person retroactively apply the pro rata deduction method for prior years?
Portuguese law permits municipalities and other mixed VAT taxable persons to use the pro rata deduction method for inputs of mixed use (serving both taxable and exempt activities). However, retroactive application to prior years faces significant limitations. While Article 23(6) of the VAT Code allows pro rata adjustments, these must be made within the final periodic declaration of the relevant year. The Tax Authority's position, as demonstrated in this case, is that once the deadline for submitting the last periodic declaration of a given year passes, the right to adjust or claim additional deductions for that year lapses under the caducidade rules. Municipalities cannot simply recalculate and apply corrected pro rata percentages to years already closed, even if the initial deduction methodology was incorrect or less favorable than legally permitted.
What happens when a VAT deduction is claimed beyond the legal time limit (caducidade) in Portugal?
When a VAT deduction is claimed beyond the legal time limit in Portugal, the principle of caducidade (expiry or lapse of rights) applies, resulting in the permanent loss of the right to deduct. The Tax Authority will reject such claims and may issue additional assessments to reverse any deductions improperly claimed for time-barred periods. In this case, the municipality's attempt to deduct €19,283.84 relating to 2013 (claimed in a 2015 replacement declaration) was rejected because it exceeded the deadlines established in Article 98(2) of the VAT Code. The Tax Authority argued that neither the two-year period in Article 78 of the General Tax Law nor other administrative procedure time limits can extend the specific VAT deduction deadlines. This strict interpretation means taxpayers must be vigilant about claiming deductions within the prescribed periods, as late claims result in definitive loss of deduction rights and potential assessments for any amounts already claimed.
How does the pro rata method work for VAT deduction on mixed-use inputs by public entities in Portugal?
The pro rata method for VAT deduction on mixed-use inputs by public entities in Portugal operates under Article 23 of the VAT Code. Mixed taxable persons (like municipalities) that incur expenses serving both taxable operations and exempt activities must calculate a deduction percentage (pro rata) based on the proportion of taxable turnover to total turnover. This percentage determines what portion of input VAT on mixed-use goods and services can be deducted. Taxable persons typically apply a provisional pro rata during the year, then adjust it in the final periodic declaration based on actual year-end figures pursuant to Article 23(6). However, this adjustment mechanism only functions within the same fiscal year. Public entities cannot retroactively revise the pro rata for closed years, even if they discover they used an incorrect methodology or percentage, as the right to adjust expires with the submission deadline for the last periodic declaration of each year.
Can prior year VAT adjustments be included in a later periodic VAT return under Portuguese law?
Portuguese VAT law generally does not permit prior year VAT adjustments to be included in later periodic returns once the deadlines established in Article 98(2) of the VAT Code have passed. While Article 23(6) allows pro rata adjustments, these must occur within the final periodic declaration of the same fiscal year. The Tax Authority's position, confirmed in this arbitration case, is that the specific deadlines for VAT deduction in the VAT Code take precedence over general administrative procedure time limits. Once the deadline for submitting the last periodic declaration of a given year passes, deductions relating to that year cannot be claimed in subsequent years' declarations. This contrasts with the municipality's argument that broader time limits (such as the two-year period in Article 78 of the General Tax Law) should apply. The strict application of caducidade means taxpayers must claim all deductions within the year they arise or forfeit the right permanently, making timely and accurate periodic declarations critical for preserving deduction rights.