Process: 549/2016-T

Date: February 6, 2017

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD arbitration process 549/2016-T addressed a Portuguese municipality's challenge to a VAT additional assessment of €82,314.52 for November 2010, relating to deduction rights on shared resource expenses from 2006-2007. The central issue concerned the municipality's interpretation of Circular Letter 61137/1987 regarding VAT deduction methodologies for local authorities. The municipality had applied only the real allocation method for water supply services while failing to deduct VAT on other mixed-use resources, believing it was required to choose exclusively between the pro rata method and real allocation method. Following an external audit, the municipality regularized €82,314.52 in excess tax paid. However, the Tax Authority subsequently proposed corrections of €14,905.21 for improper pro rata deductions and €67,409.31 for real allocation method applications in cultural and sports facilities. The case raised fundamental questions about the VAT neutrality principle's application to public entities, the compatibility of combining deduction methods, and the applicability of article 98(2) CIVA time limits and article 78 CIVA regularization mechanisms. The arbitral tribunal, constituted under RJAT (Decree-Law 10/2011), examined whether municipalities performing both sovereign functions and taxable activities can exercise full deduction rights on common expenses. This decision has significant implications for Portuguese local authorities' VAT compliance, particularly regarding the interpretation of deduction methodology flexibility and the temporal limits for regularization of unduly paid tax in mixed-activity contexts.

Full Decision

The Arbitrators José Pedro Carvalho (President Arbitrator), Cristina Coisinha and António Nunes dos Reis, appointed by the Deontological Council of the Administrative Arbitration Center to form an Arbitral Tribunal, hereby decide as follows:

ARBITRAL DECISION

I – REPORT

On 5 September 2016, Municipality A..., a legal entity of public law, tax identification number..., domiciled at..., ..., filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the act of additional assessment of Value Added Tax ("VAT") no.... with reference to the tax period of November 2010 (1011), in the amount of €82,314.52, and of the act of assessment of compensatory interest no. ..., in the amount of €8,524.63, as well as of the acts of dismissal of the administrative complaint and hierarchical appeal, which related to the same.

To substantiate its request, the Claimant alleges, in summary, that the tax acts of VAT assessment and compensatory interest assessment are based on incorrect factual and legal premises regarding the exercise of the right to deduct VAT incurred by the Claimant for the purposes of its activity during the years 2006 and 2007, restricting the exercise of such right and compromising the neutrality which is the cornerstone of the regulation of that tax.

On 07-09-2016, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant did not proceed to appoint an arbitrator, therefore, pursuant to the provision in subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of the RJAT, the President of the Deontological Council of the CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

On 10-11-2016, the parties were notified of these designations, and did not manifest any intention to refuse any of them.

In accordance with the provision of subparagraph c) of paragraph 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 25-11-2016.

On 11-01-2017, the Respondent, duly notified for this purpose, presented its response defending itself by contest.

Considering that, in this case, none of the purposes legally assigned to it were present, under the provisions of articles 16(c) and 29(2) of the RJAT, as well as of the principles of procedural economy and prohibition of useless acts, on 16-01-2017 the holding of the meeting referred to in article 18 of the RJAT was dispensed with, as well as the presentation of submissions by the parties, and a period of 30 days was set for the pronouncement of the final decision.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the examination of the merits of the case.

All considered, it is necessary to render

II. DECISION

A. FACTUAL MATTER

A.1. Facts Taken as Proven

1. The Claimant is a legal entity of public law which, in the scope of its activity, promotes the provision of municipal services whose legal framework is provided for in Decree-Law no. 305/2009, of 23 October.

2. The activity developed by it comprises operations that do not confer the right to deduct VAT incurred, as they are carried out within its powers of authority or fall within the scope of article 9 of the Code of that tax, as well as operations that are subject to VAT.

3. In this context, the Claimant deducted all VAT incurred with reference to the public water supply service on the basis of the calculation of a real allocation criterion.

4. With regard to the VAT incurred in the acquisition of the remaining resources of "mixed" use, and to the use of the pro rata deduction method, the Claimant did not deduct any tax.

5. Such circumstance resulted from the interpretation made by the Claimant of the position assumed by the Tax Authority in Circular Letter no. 61137, of 9 July 1987, concerning the methodology of VAT deduction by local authorities, whereby the Claimant understood that from it resulted that the taxable person would, necessarily, have to opt for one of the VAT deduction methods with reference to its inputs – pro rata method or real allocation method, whereby local authorities should, on the one hand, apply the VAT deduction methods regarding goods of mixed use (even if they were goods of exclusive use) and, on the other hand, were obliged to opt for a single deduction method, whereby the option for pro rata excluded the possibility of (combined) application of real allocation and vice versa.

6. Following a procedure review carried out by an external entity, an incorrectness in the exercise of the deduction right was reported, with reference to the years 2006 and 2007, as the Claimant had only deducted, until that date, the VAT incurred with reference to the public water supply service on the basis of the calculation of a real allocation criterion, not deducting any tax in the acquisition of the remaining resources of mixed use.

7. The deduction of tax lower than that to which the Claimant was entitled resulted in the declaration and payment of a higher amount in the global amount of €82,314.52, for the years 2006 and 2007.

8. That amount, relating to the periods in question (2006 and 2007), were subject to regularization in field 40 of the Claimant's periodic declaration, relating to the period of November 2010.

9. The Claimant proceeded, in the same declaration, to regularize in favor of the State amounts of tax due and not assessed, with reference to the years 2006 and 2007, in the amount of €2,891.95.

10. Following an internal Tax Inspection carried out with the Claimant, the Tax Authority proposed the following VAT corrections, on the basis of situations of improper tax deduction that it considered to be verified:

i. €14,905.21, relating to VAT of mixed-use resources deducted by the pro rata deduction method;

ii. €67,409.31, relating to the application of the real allocation method in the deduction of VAT incurred in the areas of culture (cinema-theater) and sport (sports facilities).

11. Upon notification of such decisions, the now Claimant exercised, in writing, its Right of Prior Hearing.

12. The Tax Authority did not heed the arguments raised therein, having issued the corresponding Tax Inspection Report and proceeded to its notification via Letter no. ... of 12 August 2013, based on the non-applicability of the period provided for in paragraph 2 of article 98 of the VAT Code, as well as of the regularization mechanism of article 78 of the VAT Code.

13. The Tax Inspection Report contains, among other things, the following:

i. "In accordance with paragraph 1 of article 22 of the VAT Code, the right to deduction arises at the moment when the deductible tax becomes due in accordance with the rules of articles 7 and 8 of the VAT Code. That is, the taxable person acquires the right to deduct the tax borne from the moment it is invoiced the price of the goods acquired or services provided.

Paragraph 2 of article 22 of the VAT Code provides that the deduction of tax must be effected in the declaration of the period or of a subsequent period to that in which the receipt of invoices, equivalent documents or VAT payment receipt that forms part of the import declarations or VAT payment receipt occurred, without prejudice to the possibility of corrections legally provided for in article 78 of the VAT Code.

In paragraphs 3 and 4 of the same Code, other situations in which deduction is permitted are also described."

ii. "Now, in accordance with what was set out in sections III-4 and III-4.1, the moment of deduction is perfectly defined in accordance with the VAT Code, and it is not permitted for the taxable person to have absolute freedom in its determination"

iii. "Not having the taxable person complied, in time, with the periods for the deduction right established in articles 22 and 23 of the VAT Code and being verified that the documents supporting the tax, which it now intends to deduct, are, and were timely registered in the accounts, in accordance with what was set out above, it can only resort to the mechanism provided for in article 78 of the VAT Code.";

iv. "In view of the above, the amount of tax included in field 40 – regularizations in favor of the taxable person in the periodic declarations of 2011 and 201109T, in the total amount of €188,859.98, are improper due to non-compliance with articles 22 and 23 of the VAT Code, and it is therefore proposed that they be subject to correction, in the context of the present inspection procedure."

14. The Claimant was notified of the act of additional VAT assessment no.... in the amount of €82,314.52, and of correlative compensatory interest no. ..., in the amount of €8,524.63.

15. The Claimant filed, on 20 February 2014, an Administrative Complaint against the aforementioned acts of additional VAT assessment and correlative compensatory interest.

16. The Claimant was notified of the decision of dismissal which fell on the Administrative Complaint, via Letter no. 2015..., of 6 January 2015.

17. The now Claimant exercised, on 26 January 2015, its right to appeal hierarchically from the aforementioned decision of dismissal and was notified, on 6 June 2016, via Letter no. 2016..., of 3 June 2016, of the decision of dismissal subscribed by the Deputy Director-General of the Tax Authority, which fell upon the hierarchical appeal aforementioned.

A.2. Facts Taken as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the Proven and Not Proven Factual Matter

With regard to the factual matter, the Tribunal is not required to pronounce on everything that was alleged by the parties, but rather it is incumbent upon it to select the facts that matter for the decision and to distinguish the proven matter from the not proven (see article 123, paragraph 2, of the CPPT and article 607, paragraph 3 of the CPC, applicable by virtue of article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and selected according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of Law (see previous article 511, paragraph 1, of the CPC, corresponding to current article 596, applicable by virtue of article 29, paragraph 1, subparagraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, the documentary evidence and the Administrative File attached to the case file, the facts listed above were considered proven, with relevance to the decision, which were moreover not contested by the parties.

B. AS TO THE LAW

The issue in these tax arbitration proceedings concerns whether it was legitimate for the Claimant, in the periodic declaration of November 2010, to deduct amounts relating to 2006 and 2007, relating to acquisitions of goods and services that it understood to be allocated to activities subject to VAT and which, by oversight, it would not have deducted in the declarations of the corresponding periods.

A similar issue has already been addressed in the scope of proceedings 185/2014T of the CAAD[1], whose reasoning will be followed very closely here.

In this regard, article 22 of the VAT Code provides that:

"1 - The right to deduction arises at the moment when the deductible tax becomes due, in accordance with what is established by articles 7 and 8, being effected by subtraction from the total amount of tax due by the taxable person's taxable operations, during a declaration period, of the amount of deductible tax, due during the same period.

2 - Without prejudice to the provisions of article 78, the deduction must be effected in the declaration of the period or of a subsequent period to that in which the receipt of invoices or VAT payment receipt that forms part of the import declarations occurred.

3 — If the receipt of the documents referred to in the preceding paragraph takes place in a declaration period different from that of their issue, the deduction can be effected, if still possible, in the declaration period in which that issue took place.

Whenever the deduction of tax that is due exceeds the amount due by the taxable person's taxable operations, in the corresponding period, the excess is deducted in the following tax periods.

5 — If, after 12 months relating to the period in which the excess began, there persists a credit in favor of the taxable person exceeding €250, such person may request its reimbursement."

As stated in the Judgment of the Supreme Administrative Court of 18-05-2011, rendered in proceedings 0966/10[2]:

"I – As a rule, established in article 22, paragraph 1, of the VAT Code, the deduction of tax should be effected in the declaration of the period in which the receipt of invoices, equivalent documents or VAT payment receipt that forms part of the import declarations occurred, however, allowing for the possibility of corrections provided for in article 71.

II – Thus, the deduction of tax cannot be effected at any moment, at the choice of the taxable person, and the useful scope of the aforementioned rules is precisely to exclude that such deduction can be made at different moments, when this is not specifically provided for.

III – Paragraph 2 of article 92 of the VAT Code, in 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 effect of granting the taxable person 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 the deduction can be effected at moments different from those indicated in that article 22.

IV – Beyond article 71, paragraph 6, of the VAT Code, there is no legal provision that can be interpreted as permitting the taxable person to exercise the right to deduction at a moment later than those resulting from this article 22 indicated, in cases where, due to an oversight in its accounting, it only detects that it had the right to deduction at a moment later than that in which it should have effected it."

That is, as a rule the deduction of tax must be effected, in accordance with what is provided for in article 22 of the VAT Code, in the "declaration of the period in which the receipt of invoices occurred. However, the right to deduction may be exercised at later moments", with article 98(2) of the VAT Code establishing a maximum limit of four years regarding the exercise of the right to deduction, a period which is configured as a general period, only applicable when a special period is not provided for, as is the case of that provided for in the respective article 78(6).

In this context, it is important to assess, in cases where, under provisions that specifically provide for it, the deduction is not effected in the declaration of the period in which the receipt of invoices occurred, whether or not the prerequisites for the application of the aforementioned periods are met, and if so, the exercise of the right to deduction may be accepted as legitimate.

The Claimant alleges that the doctrine of the transcribed Judgment does not apply to the case sub iudice, insofar as the aforementioned judgment concerns a case prior to the entry into force of the amendment introduced to article 22(2) of the VAT Code by Law 107-B/2003, of 31-12, which gave it the present wording, set out above.

With all due respect, it is not considered possible to subscribe to such a thesis, which would be based on the understanding that, with that amendment, the legislator intended to grant the taxable person discretion as to the moment of the VAT deduction borne.

Effectively, and as was written in the aforementioned Judgment:

"Community law, which has primacy over internal law as long as the fundamental principles of a democratic rule of law are not violated (as established since the 2004 constitutional revision, expressly in paragraph 4 article 8 of the CRP and previously understood), points to this interpretation being correct.

(...)

From this regulation, it is concluded that the deduction of tax can only be effected outside the moments considered appropriate under conditions to be fixed, which excludes the viability of a thesis that reduces to the attribution to the taxable person of the right to effect the deduction when it sees fit, within the maximum period legally admissible."

Furthermore, the analysis of the normative content of article 22 of the VAT Code, in its entirety, reinforces the idea that the legislator for the 2004 budget did not intend to depart from what was imposed by the community regulation.

In fact, the very provision of paragraph 2 of article 22 in question, even in its current wording, only makes sense to exist, as, precisely, by excluding the existence of a discretion of the taxable person in the choice of period to effect the deduction. Were it not so, as in the interpretation sustained by the Claimant, the aforementioned rule would lose any useful effect, as it would only exclude the deductibility of tax borne in a period prior to its incidence, which would make no sense.

Thus, and in this manner, bearing in mind the hermeneutical criterion of the reasonable legislator, the interpretation to be made of the provision of article 22(2) of the VAT Code should be in the sense of continuing – as previously – to impose the deduction of the tax borne in the declaration of the period in which receipt of invoices or VAT payment receipt occurred, permitting only the deduction in a later period, under the circumstances in which the article itself specifically provides for it, namely in paragraphs 4 and 5, that is, in the case where the amount of tax to be deducted exceeds the amount of tax to be paid.

That is, and in summary, the use of the expression "of a subsequent period to that" used in paragraph 2 of article 22 of the VAT Code is not intended to permit the taxpayer to choose the period in which it wants to deduct the tax borne, but rather to refer to situations in which the law itself permits/requires such to occur, such as the cases of paragraphs 4 and 5 of the same article.

It is concluded, thus, that the reference to "subsequent period" made in paragraph 2 of article 22 of the VAT Code relates to the situations in which, specifically, the possibility of the deduction of tax in a subsequent period is admitted, and this is the only interpretation in accordance with the provisions of article 179 of Directive 2006/112/EC, of the Council, of 28 November 2006, on the common system of value added tax (VAT Directive), which provides that: "The taxable person effects the deduction by subtracting from the total amount of tax due in respect of the taxation period the amount of VAT in respect of which, during the same period, the right of deduction arose and is exercised in accordance with article 178." (emphasis ours).

That is, in summary, the rule is that the deduction of VAT must be made in the periodic declaration corresponding to the period in which the VAT to be deducted was borne, and not, freely, in any other subsequent periodic declaration, as this is the way to ensure that VAT is deducted in the same period in which it is borne.

It is not sustainable to uphold the Claimant's position on this matter, what was decided in the arbitral proceedings 117/2013T of the CAAD[3], since there the deductions which the Claimant sought to exercise, and were recognized, were reported in the declarations of the corresponding periods, as prescribed by article 22(2) of the VAT Code. Moreover, such also occurred in situations analogous to those of the Claimant, in which other municipalities proceeded to correct the tax declarations of the due periods, and were recognized as legitimate to do so, in arbitral proceedings[4].

The regime in question is not incompatible with the understanding that the exercise of the right to deduction of VAT is a fundamental right that ensures the neutrality of VAT, and should only be restricted in exceptional situations.

Indeed, as the Court of Justice of the European Union has repeatedly emphasized, and as results from the wording of articles 167 and 179(1) of the VAT Directive, the right to deduction is exercised, in principle, during the same period in which it arose, that is, at the moment when the tax becomes due. However, in accordance with the provisions of the respective articles 180 and 182, the taxable person may be authorized to effect the deduction of VAT, even though it has not exercised its right during the period in which that right arose, without prejudice to compliance with certain conditions and rules fixed by national regulations (see, in this sense, Judgment of 8 May 2008, Case C-95/07, Ecotrade Case, Reports, p. I 03457, nos. 42 and 43).

That is, taxable persons may, in situations that justify it, be authorized to effect the deduction, even though they have not exercised their right during the period in which that right arose. However, in that case, their right to deduction is dependent on certain conditions and modalities fixed by the Member States.

In this context, the Court of Justice of the European Union has noted that the possibility of exercising the right to deduction without temporal limits contradicts the principle of legal certainty, which requires that the tax situation of the taxable person, given its rights and obligations vis-à-vis the Tax Authority, not be indefinitely susceptible to being called into question, and therefore does not accept the thesis that the right to deduction, like the right to assessment, cannot be associated with a statute of limitations. In this regard, the Court of Justice invokes the principles of effectiveness and equivalence. With regard to the former, it notes that the statute of limitations provided for cannot, by itself, make practically impossible or excessively difficult the exercise of the right to deduction, as to the latter, it has analyzed whether in the situations submitted to its consideration there is an equivalence between the statute of limitations granted to taxable persons and the period granted to the Tax Authority to proceed to corrections, having concluded, moreover, that this principle is not contradicted by the fact that, in accordance with national regulation, the Tax Authority has, to require the payment of VAT due, a longer period than that granted to taxable persons to request its deduction (see, Ecotrade Case, already cited, nos. 43 to 49).

As it notes, although Member States have the power to adopt, under the provisions of article 273 of the VAT Directive, measures to ensure the exact collection of the tax and prevent fraud, these should not, however, go beyond what is necessary to achieve such objectives and should not call into question the neutrality of VAT (see, in particular, Judgment of 21 October 2010, Nidera Case, Case C‑385/09, Reports, p. I‑10385, no. 49).

It is in this context that, in national legislation, it is permitted that, namely, if a material error or calculation error occurs, which has occurred to the detriment of the taxable person, it can be corrected within the period fixed in article 78(6) of the VAT Code.

Other types of errors may be corrected by the submission of a replacement declaration[5], if such is still, in accordance with legal terms, possible, or, if not, by means of a request for official review, in accordance with article 78 of the General Tax Code, provided that the corresponding requirements are also met[6], and this is the meaning of article 98(2) of the VAT Code, by prescribing that "the right to deduction or reimbursement of tax paid in excess can only be exercised until the expiration of four years after the birth of the right to deduction or payment in excess of tax, respectively", in accordance with its heading ("Official review and period of exercise of the right to deduction") and systematic framework (Chapter relating to "Guarantees of taxable persons", following the provision relating to "Hierarchical appeal, complaint and challenge" and preceding the provision relating to "Annulment of the assessment") make evident.

Beyond these cases, supervening facts are also admissible, in accordance with what is regulated by paragraph 2 of article 78 of the VAT Code. However, it must be borne in mind that one thing will be an error (a discrepancy between the reality represented in the periodic declaration and reality – factual error – or the law) and another thing is the supervening occurrence of a fact (an alteration in reality), which results in a change in the tax to be borne or deducted.

In the present case, manifestly and admittedly (see point 101 of the Initial Petition), what occurred was not the supervening nature of any fact, but rather an error – not material or calculation – but of law, which would have resulted in the qualification as non-deductible of tax which, subsequently, the Claimant would have come to realize that, after all, it would be.

Thus, and as can be seen, between the submission of the periodic declarations corresponding to the moment in which the expenses, meanwhile understood as deductible, were borne, and the submission of the declarations where those same expenses were deducted, no alteration in reality occurred (let alone any of those described in paragraph 2 of article 78 of the VAT Code). What occurred was that the Claimant became aware, meanwhile, that the legal framework it had made of the expenses incurred – with regard to their deductibility – would not have been correct, that is, that it had incurred an error.

In this manner, the error in question will not be correctable in accordance with paragraph 2 of article 78 of the VAT Code, already because such a provision is not intended for the correction of errors, and will not be correctable in accordance with paragraph 6 of the same article, since it is not a calculation error (it does not result in the incorrect articulation of parcels integral to arithmetic operations), nor a material error (a discrepancy between what was written and what, manifestly, was intended to have been written at the moment it was written).

The correction of the situation, in view of all that is set out above, would always have to occur by reference to the periodic declaration in which the tax to be deducted was borne, if, and under the conditions in which legally the alteration thereof – by the initiative of the taxpayer or, officially, by the Tax Authority, even if at the request of the latter – can take place, that is, by means of the submission of the corresponding replacement declarations or the submission of a request for official review.

The legal regime in question, thus interpreted, will not therefore contain any violation of the principle of VAT neutrality, as the Claimant claims, but quite the opposite (since it is from the very principle of neutrality that the imposition arises that VAT borne is deducted, as a rule, in the period in which it was borne), and the possibility that, under the terms set out (that is, at most, by means of the submission of a request for review of the tax act of self-assessment of VAT of the period in which the deduction should have been made, omitted by factual or legal error), the taxpayer to assert its right to deduction during the period of 4 years (provided for in article 78(1) of the General Tax Code and in article 98(2) of the VAT Code), does not make practically impossible or excessively difficult the exercise of such right, and therefore, it is considered, no violation of the constitutional principles of equality and/or the primacy of European law is verified, contrary to what the Claimant alleges (see point 113 of the Initial Petition).

Considering, then, that article 22(2) of the VAT Code does not authorize the Claimant to, in the periodic declaration of November 2010, deduct amounts relating to 2006 and 2007 relating to acquisitions of goods and services that it understood to be entirely allocated to activities subject to VAT and which, by oversight, would not have deducted in the declarations of the corresponding periods, and that article 98(2) of the VAT Code refers not to a generic period for the exercise of the right to deduction of VAT in the periodic declarations of each of the periods covered within the 4-year period provided for therein, but to the exercise of such right by means of the request for official review of the tax act, to which article 78 of the General Tax Code refers, the present arbitral action should be judged entirely without merit.

*

C. DECISION

It is hereby decided by this Arbitral Tribunal:

a) To judge entirely without merit the request for arbitral pronouncement and, in consequence, to maintain the contested tax act;

b) To condemn the Claimant in the costs of the proceedings, in the amount of €2,754.00, taking into account what has already been paid.

D. Value of the Proceedings

The value of the proceedings is fixed at €90,839.15, in accordance with article 97-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of article 29 of the RJAT and of paragraph 2 of article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €2,754.00, in accordance with Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be borne by the Claimant, since the request was entirely without merit, in accordance with articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and article 4, paragraph 4, of the aforementioned Regulations.

Let it be notified.

Lisbon, 6 February 2017

The President Arbitrator

(José Pedro Carvalho - Reporting Arbitrator)

The Arbitrator Member

(Cristina Coisinha)

The Arbitrator Member

(António Nunes dos Reis)

[1] Available at www.caad.org.pt.

[2] Available at www.dgsi.pt.

[3] Available at www.caad.org.pt.

[4] See, in this sense, for example, what was decided in proceedings 277/2014T, 608/2014T and 56/2014T, all of the CAAD, available at www.caad.org.pt.

[5] See in this sense the Judgment of the Supreme Administrative Court of 02-10-2010, rendered in proceedings 0256/10, available at www.dgsi.pt.

[6] Not being this the situation in the case file, it should always be said that the thesis is not accepted, that the request for official review, in accordance with article 78 of the General Tax Code, in the case of legal error related to the right to deduction in self-assessment of VAT, can only be made within the period fixed in paragraph 6 of article 78 of the VAT Code. In fact, in the situation regulated by such provision – correction of material or calculation errors – it will not, at all, be necessary to formulate any request for official review, since that provision of article 78(6) of the VAT Code contains its own provision for error correction, with no relation between this and the request for official review regulated in article 78 of the General Tax Code. In this sense, see the Judgment rendered in proceedings 117/2013T of the CAAD, available at www.caad.org.pt, cited by the Claimant, as well as those already cited in proceedings 277/2014T, 608/2014T and 56/2014T, all of the CAAD.

Frequently Asked Questions

Automatically Created

Can Portuguese municipalities exercise the right to deduct VAT on shared resource expenses?
Yes, Portuguese municipalities can exercise the right to deduct VAT on shared resource expenses when these resources are used for both taxable and non-taxable activities. Under Portuguese VAT law (CIVA), municipalities performing mixed activities—including sovereign functions exempt from VAT and services subject to VAT—are entitled to deduct input VAT proportionally. The deduction can be calculated through the pro rata method (based on turnover ratios) or the real allocation method (based on actual usage attribution). The key principle is VAT neutrality, which ensures that taxable persons, including municipalities, are not burdened by VAT costs related to their taxable activities. However, the correct application of these methods and their potential combination has been subject to interpretation, as evidenced by process 549/2016-T.
What is the legal framework for VAT deduction on common expenses under Portuguese tax law?
The legal framework for VAT deduction on common expenses in Portugal is primarily governed by the VAT Code (CIVA). Article 22 CIVA establishes that the right to deduction arises when deductible tax becomes due and must be exercised in the declaration period following invoice receipt. For mixed-use resources, taxable persons can apply either the pro rata deduction method (calculating deductible VAT based on the proportion of taxable turnover to total turnover) or the real allocation method (attributing specific resources to taxable or non-taxable activities based on actual use). Article 78 CIVA provides for regularization mechanisms when the initial deduction differs from what was actually due. Article 98 CIVA establishes time limits for exercising deduction rights. Circular Letter 61137/1987 provided specific guidance for local authorities, though its interpretation regarding the exclusivity or compatibility of deduction methods has been contested. The overall framework seeks to implement the EU VAT Directive's neutrality principle.
How does the neutrality principle apply to VAT deductions for public entities in Portugal?
The neutrality principle is fundamental to VAT deductions for public entities in Portugal and constitutes a cornerstone of VAT regulation. This principle ensures that economic operators, including municipalities and other public entities, should not bear the final burden of VAT when they act as taxable persons in relation to their economic activities subject to VAT. For Portuguese public entities performing mixed activities—both sovereign functions (outside VAT scope) and taxable economic activities—the neutrality principle guarantees the right to deduct input VAT proportionally related to their taxable outputs. This prevents competitive distortions and ensures that VAT remains a tax on final consumption rather than on business inputs. In process 549/2016-T, the municipality argued that restricting its deduction rights would compromise this neutrality principle. The principle requires that public entities be treated comparably to private sector operators when performing similar taxable activities, ensuring that the method of deduction (whether pro rata or real allocation) accurately reflects the actual use of resources for taxable purposes.
What was the outcome of CAAD arbitration process 549/2016-T regarding additional VAT assessments?
While the complete decision text is not fully provided, the case file indicates that Municipality A challenged the Tax Authority's additional VAT assessment of €82,314.52 (plus €8,524.63 in compensatory interest) related to the tax period of November 2010, covering regularizations from 2006-2007. The municipality's position was that it had incorrectly under-deducted VAT due to a misinterpretation of deduction methodology rules, believing it could not combine pro rata and real allocation methods. After discovering this error through an external audit, the municipality regularized the excess tax paid in its November 2010 periodic declaration. The Tax Authority subsequently challenged both the methodology used and the timing of the regularization, proposing corrections totaling approximately €82,314.52. The municipality argued that the assessment was based on incorrect factual and legal premises that violated the neutrality principle. The arbitral tribunal's examination focused on whether the time limits in article 98(2) CIVA applied and whether the article 78 CIVA regularization mechanism was properly invoked.
What procedural steps are involved in challenging a VAT additional assessment through CAAD arbitration?
Challenging a VAT additional assessment through CAAD (Centro de Arbitragem Administrativa) arbitration in Portugal involves several procedural steps under the RJAT (Legal Framework for Arbitration in Tax Matters, Decree-Law 10/2011). First, the taxpayer files a request for constitution of an arbitral tribunal, specifying the contested acts and legal grounds. In process 549/2016-T, this occurred on September 5, 2016. The request is automatically notified to the Tax Authority. The parties may appoint arbitrators, or the CAAD Deontological Council designates them (as occurred here when the municipality did not appoint). The tribunal is formally constituted once arbitrators accept and no refusals are filed. The Tax Authority then submits its response defending the assessment. The tribunal may dispense with oral hearings if unnecessary for procedural economy, as occurred in this case. The arbitrators examine jurisdictional requirements (competence, legal personality, legitimacy, representation) and procedural validity before addressing the merits. A final decision must be issued within statutory deadlines, typically 30 days after the last procedural act. This arbitration route provides an alternative to traditional court litigation for tax disputes.