Process: 56/2015-T

Date: August 24, 2015

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 56/2015-T involves Municipality A's challenge to the rejection of a VAT self-assessment claim for €101,361.60 relating to the 2009 tax year. The municipality discovered it had unduly restricted its right to deduct VAT on mixed-use assets (common resources used for both taxable and non-taxable activities under its public authority powers). In December 2013, the municipality requested official review of VAT periods from January to December 2009. The Tax Authority rejected this request in May 2014, arguing that the time limits for exercising the right to deduction under Articles 22 and 23 of the VAT Code had expired, and that the special two-year period for adjustments under Article 78(6) of the VAT Code had also lapsed. The Authority emphasized that deduction methods are within taxpayers' discretion and that the official review mechanism cannot circumvent VAT regularization deadlines. The hierarchical appeal was rejected in November 2014, with the Tax Authority stating the alleged error could not be attributed to it, as the separation of activities and deduction criteria are exclusively within the taxpayer's knowledge and discretion. The municipality then filed for arbitral tribunal in February 2015 under the RJAT regime. The arbitral tribunal was constituted in April 2015, with material jurisdiction confirmed under Article 2(1)(a) of the RJAT for public law entities contesting VAT acts.

Full Decision

ARBITRAL AWARD

The Arbitrators José Pedro Carvalho (Arbitrator President), João Ricardo Catarino and António Nunes dos Reis, appointed by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree on the following:

I – REPORT

On 3 February 2015, Municipality A…, a local public law entity, with tax identification number …, with registered office at …, …-…, …, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of 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 rejection of the VAT self-assessment act for December 2009, corresponding to an amount of tax which it considered had been overpaid in the sum of €101,361.60, and of the request for official review and respective hierarchical appeal, which it presented regarding the same matter.

To support its request, the Claimant alleges, in summary, that, following an internal review of the procedures adopted, it concluded that, over the years, it had unduly restricted the exercise of its right to deduction relating to VAT incurred on mixed-use assets, also designated as "common assets," and had therefore borne VAT which, according to the rules of this tax, would be recoverable, which it now seeks to have corrected.

On 24 February 2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax and Customs Authority.

The Claimant did not appoint an arbitrator, therefore, pursuant to the provisions of paragraph 2(a) of article 6 and paragraph 1(b) of article 11 of the RJAT, the President of the Ethics Council of the CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 26 March 2015, the parties were notified of these appointments and manifested no objection to any of them.

In accordance with the provisions of paragraph 1(c) of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 13 April 2015.

On 12 May 2015, the Respondent, duly notified for that purpose, filed its response defending itself by way of exception and impugning the claim.

The Claimant, duly notified for that purpose, submitted written observations regarding the exceptions raised by the Respondent in its response, arguing for their dismissal.

Subsequently, given that there was no need for additional evidence production beyond the documentary evidence already incorporated in the proceedings, the parties had submitted observations, to the necessary extent, on the matter of exceptions, and that in arbitral proceedings the general procedural principles of procedural economy and prohibition of useless acts apply, pursuant to paragraphs (c) and (e) of article 16 of the RJAT, the holding of the meeting referred to in article 18 of the RJAT was dispensed with and the parties were given the opportunity to, if they wished, submit written submissions, which they did not do.

By order of 30/06/2015, a period of 30 days was set for submission of the final decision in these proceedings.

The Arbitral Tribunal has material jurisdiction and is properly constituted, pursuant to articles 2, paragraph 1(a), 5 and 6, paragraph 1, of the RJAT.

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

The proceedings are not affected by any nullities.

All things considered, we proceed to issue the following decision:

II. DECISION

FACTUAL MATTERS

A.1. Facts Established as Proven

  1. By petition of 27-12-2013, the Claimant requested, pursuant to article 78 of the General Tax Law, the official review of the "(self-)assessment of VAT effected in excess in the periodic declarations of this tax, for the periods from January to December 2009, and consequent payment of excessive tax liability in the amount of €101,361.60…".

  2. By order of 26-05-2014, of the Deputy Director-General for VAT (with delegation of authority), set out in Report no. …, of 19-05-2014, the request was rejected.

  3. In this decision, it was concluded, among other things, that:

"(...) 147. Given that, in the case under analysis, the periods for the exercise of the right to deduction established in articles 22 and 23 of the VAT Code have already expired, and confirming that the supporting documents relating to the passive operations in question were registered in the Claimant's accounting in due time, the correction of the tax deducted can only be admitted on the basis of paragraph 6 of article 78 of the VAT Code.

  1. Paragraph 6 of article 78 of the VAT Code establishes a special period for the exercise of the right to deduction of two years for adjustments in favour of the taxpayer, and after this period expires, it leads to the loss of that right.

  2. Given that the claimant presented, in December 2013, the request for official review in which it seeks the additional deduction of tax borne in 2009, the period for the exercise of that right has already expired. (...)."

  3. By petition of 01-07-2014, the Claimant filed a hierarchical appeal of that decision, in which it ultimately sought that the amount of VAT of €101,361.60 be considered deductible, with reference to the year 2009.

  4. By order of 30-11-2014 of the Deputy General Director, set out in Report no. 2427, of 17-10-2014, the rejection of the hierarchical appeal filed was determined.

  5. The deciding entity considered, among other things, that:

"(...) the alleged error invoked by the appellant could never be attributed to the Tax Authority, because the deduction or non-deduction of tax and the respective methods and criteria are exclusively within the discretion of taxpayers, depending, in fact, on discretionary choices and knowledge inherent to the management of the taxable activity which are only within the reach of the taxpayer itself, namely the separation by sectors of activity where the acquired goods and services are used.

(...) the request for review of the tax act cannot override the regulations governing the right to regularization of this tax. In other words, a taxpayer that, under the VAT Code, can no longer regularize the self-assessed VAT, cannot achieve the same result through the official review provided for in paragraph 1 of article 78 of the General Tax Law and paragraph 1 of article 98 of the VAT Code. (...) under penalty of these regulations being deprived of any practical effect, losing their raison d'être and that right, in practice, being able to be exercised, in many situations, through the mechanism of official review within the four-year period established in paragraph 1 of article 78 of the General Tax Law."

  1. The Claimant is a local public law entity whose activity consists of pursuing its municipal functions in the most diverse areas of activity, and is classified, for purposes of Value Added Tax ("VAT"), under the normal monthly regime.

  2. In pursuing its functions, the Claimant carries out a vast set of operations within the scope of its powers of authority, which are excluded from VAT liability under paragraph 2 of article 2 of the VAT Code.

  3. The Claimant also carries out a set of operations, whether transfers of goods or provision of services, which are not within the scope of its powers of authority, and are therefore subject to VAT under the general terms of the Code governing this tax.

  4. Throughout the periods of the year 2009, the Claimant submitted monthly periodic VAT declarations in which it did not proceed to any deduction of the amount of VAT relating to mixed-use assets, which are indiscriminately used for carrying out operations that do and do not confer the right to deduction of VAT.

  5. Subsequently, in 2013, after a review of the VAT procedures adopted, the Claimant verified that, given the non-deduction of VAT concerning mixed-use assets, it had paid, in its view, excessive tax to the State for the year 2009 in the amount of €101,361.60.

  6. The request for constitution of the present Arbitral Tribunal was presented on 03 February 2015.

A.2. Facts Established as Not Proven

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

A.3. Reasoning of the Proven and Not Proven Factual Matters

Regarding the factual matters, the Tribunal does not need to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish between proven and not proven matters (cf. article 123, paragraph 2, of the Tax Procedure Code and article 607, paragraph 3 of the Civil Procedure Code, applicable by virtue of article 29, paragraph 1, subparagraphs (a) and (e), of the RJAT).

In this way, the facts pertinent to the judgment of the case are chosen and circumscribed according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (cf. former article 511, paragraph 1, of the Civil Procedure Code, corresponding to current article 596, applicable by virtue of article 29, paragraph 1, subparagraph (e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the Tax Procedure Code, the documentary evidence and the administrative procedure file joined to the proceedings, as well as the witness evidence produced at the meeting referred to in article 18 of the RJAT, the facts listed above were considered proven, with relevance to the decision.

B. ON THE LAW

i. Matters of Exception

a)

The Tax Authority begins, as a preliminary matter prior to the examination of the merits of the case, by questioning the material jurisdiction of the Arbitral Tribunal to examine the claim for restitution to the Claimant of the VAT assessed in the amount of €162,258.38, on the grounds that no request for administrative reconsideration was previously filed.

In the view of the Respondent, "in the situation sub judice (...), the mandatory precedence of a request for administrative reconsideration under the terms of paragraph 1 of article 131 of the Tax Procedure Code was always required."

The Tax Authority grounds its understanding on article 2(a) of Ordinance 112-A/2011, of 22 March, which excludes from the disputes cognizable by arbitral tribunals operating in the CAAD, the "Claims relating to the declaration of illegality of self-assessment acts, withholding acts and advance payment acts that have not been preceded by resort to the administrative procedure in accordance with articles 131 to 133 of the Tax Procedure Code".

The Tax Authority considers that, in light of this rule, the same should be understood in its literal sense, excluding from the scope of tax arbitral jurisdiction the claims relating to the declaration of illegality of self-assessment acts that have not been preceded by administrative reconsideration in accordance with the aforementioned rules of the Tax Procedure Code.

However, all of the Tax Authority's arguments on this matter ultimately amount to sustaining that it was the legislator's intention to restrict the jurisdiction of the tax arbitral tribunal, with respect to the examination of illegalities of self-assessment acts, solely to situations in which there is a request filed in accordance with articles 131 to 133 of the Tax Procedure Code, because that is what the text of the interpreted rule says.

With all due respect, we cannot discern, among the reasons offered by the Tax Authority, a substantive reason that explains the rationality of the understanding it maintains. Indeed, we cannot discern any material foundation – and the Tax Authority provides nothing in that sense – for which, given the conditions and specificities of each of the gracious remedies in question, the legality of self-assessment acts should not be cognizable in arbitral proceedings, in the same way that tax tribunals are bound by them.

On the other hand, even a literalist reading of the rule in question, if properly contextualized, does not inexorably lead to the result defended by the Tax Authority in these proceedings.

Indeed, the expression used by such rule is parallel to the rule of article 131/1 of the Tax Procedure Code itself, which should be understood as a realization of the assumed, and peacefully recognized, legislative intention that tax arbitral proceedings constitute an alternative procedural means to judicial impugning proceedings.

The rule of subparagraph (a) of article 2 of Ordinance 112-A/2011, of 22 March, should also be understood as explained by the circumstance that, in its absence – and given the tenor of article 2 of the RJAT – it would be possible to directly impugn self-assessment acts, without precedence of prior administrative decision. In other words: considering that under the RJAT, any prior administrative intervention was not necessary to arbitral impugning of a self-assessment, the content of the ordinance should be interpreted as equating – in this matter – the tax arbitral process with the judicial impugning process and not, as would result from the position sustained by the Tax Authority, going from 80 to 8, taking an impugnability that is broader than that possible in Tax Tribunals, and transmuting it into a more restricted one.

Thus, we see no reason – and, once again, the Tax Authority provides no support in that sense – to interpret one rule differently from the other, especially since the wording of the rule in Ordinance 112-A/2011, of 22 March, turns out to be less restrictive than that of the Tax Procedure Code, in that it does not include the expression "mandatorily," nor does it refer to "administrative reconsideration" but to "administrative procedure". Hence, it is possible to read the letter of the law itself in a sense that only the examination of claims relating to the declaration of illegality of self-assessment acts, withholding acts and advance payment acts that have not been preceded by resort to an administrative procedure in terms compatible with articles 131 to 133 of the Tax Procedure Code is excluded from the scope of tax arbitral jurisdiction.

And this is the reading we subscribe to, in the wake of the Award handed down in case 48/2012T of the CAAD[1], and subsequent arbitral jurisprudence, including the Award handed down in case 117/2013T, also of the CAAD[2], cited by the Tax Authority itself with respect to other matters, where one can read, among other things, that "the interpretation based exclusively on the literal wording that the Tax and Customs Authority defends in the present case cannot be accepted, since in the interpretation of tax rules the general rules and principles of interpretation and application of laws are observed (article 11, paragraph 1, of the General Tax Law) and article 9, paragraph 1, expressly prohibits interpretations based exclusively on the literal wording of the rules in stating that 'the interpretation should not be limited to the letter of the law', but should, rather, 'reconstruct from the texts the legislative thought, especially taking into account the unity of the legal system, the circumstances in which the law was drawn up and the conditions specific to the time in which it is applied'."

Accordingly, the exception of incompetence of the Arbitral Tribunal, invoked by the Tax Authority, should not be sustained.

b)

Next, the Tax Authority argues the incompetence of Arbitral Jurisdiction ratione materiae, given that, in the request for official review and subsequent hierarchical appeal, the legality of any tax assessment act was not examined.

The Respondent contends that "the Claimant, in the request for official review and in the subsequent hierarchical appeal, did not request the annulment of any self-assessment act." "Given that the decisions of rejection now being impugned were motivated by the subsumption of the case to the regulation of paragraph 6 of article 78 of the VAT Code, having consequently concluded that the Claimant did not meet the two-year deadline for implementing the corrections envisaged."

Once again, we do not find that it is right.

Indeed, in the very first paragraph of the decision on the request for official review, one reads (emphasis ours):

"By petition submitted on 2013-12-27, the claimant requests, in accordance with the terms and for the purposes set forth in articles 78° and 98°, both of the VAT Code (CIVA) and in article 78° of the General Tax Law (LGT), the review of the tax act of (self-)assessment, alleging excessive payment, in the periodic declarations of VAT filed for the periods of January to December 2009, in the amount of €101,361.60."

Also in section 2.1 of the report on which the rejection of the hierarchical appeal subsequently filed by the Claimant is based, one reads (emphasis ours): "On 2013-12-27, the appellant filed a request for official review (OR … 2014 …), concerning the self-assessment and payment of VAT, effected in excess in the periodic declarations relating to the year 2009, in the amount of €101,361.60".

The transcribed passages are sufficient, we believe, to demonstrate that both in the request for official review and in the subsequent hierarchical appeal, the legality of the Claimant's self-assessment act for VAT for the month of December 2009 was indeed submitted for examination by the Tax Authority, which, being an act notoriously of the Tax Authority's personal knowledge, the latter cannot claim to be unaware of.

As stated in the Award of the CAAD handed down in case 117/2013T[3], "although the operative part of the decision rejecting the request for review of the self-assessment act does not pronounce on the legality of the latter, it ends up admitting, in the reasoning, that the claim of the now Claimant could have been granted if it had been formulated within the deadline provided for in article 78, paragraph 6, of the VAT Code, which entails that the self-assessment act is illegal."

Thus, and for all the foregoing, this exception should also not be sustained.

c)

Finally, before presenting the discussion on the merits of the case, the Tax Authority argues the untimeliness of the direct impugnation of the VAT assessment acts, as the 90-day period counted from the expiration of the legal deadline for voluntary payment has long expired.

The Tax Authority correctly points out that "the "timeliness" of the request could only be founded on the existence of some gracious remedy of the self-assessment act in which a decision had been handed down denying/rejecting the claims formulated therein by the taxpayer (which would constitute a second-instance act)."

The Tax Authority further considers that the request for official review submitted by the Claimant did not concern the legality of any self-assessment, with the Claimant requesting only authorization for the regularization of VAT for the periods indicated by it, and therefore would be incapable of affecting the deadline for impugning the aforementioned self-assessments.

Relevant to the resolution of the question at hand will be, then, to determine whether the request for official review (gracious remedy) submitted by the Claimant and the subsequent hierarchical appeal actually concerned the impugned self-assessment act and its legality, or whether, on the contrary, they had exclusively a different subject matter.

Now, the answer to this question cannot but go in the first of the indicated directions, as has already been set out, it being clear that both the request for official review and the hierarchical appeal that followed it not only concerned the self-assessment act indicated by the Claimant but also examined its legality, confirming it by, in the Tax Authority's view, the deadline within which it would be permitted to exercise the right to make the corrections it advocated having elapsed.

Thus, there being, in fact and contrary to what the Tax Authority suggests, a "gracious remedy of the self-assessment act" in this case the request for official review and the subsequent hierarchical appeal, in which a "decision was handed down denying/rejecting, in whole or in part, the claims formulated therein by the taxpayer," and the present request for arbitral decision having been presented within the legally prescribed period by reference to the last of those acts, the present dispute should be considered timely.

There is, at this point, no obstacle to the examination of the merits of the case.

ii. On the Merits of the Case

The substantive issue submitted to this Arbitral Tribunal concerns determining whether or not the Tax Authority was right in its decision on the request for official review submitted by the Claimant and in the subsequent hierarchical appeal, where it was understood that the situation at hand does not fall within the scope of articles 98 of the VAT Code and 78 of the General Tax Law but rather within the scope of article 78, paragraph 6 of the VAT Code.

Let us examine this.

Article 98 of the VAT Code provides:

"1 — When, for reasons attributable to the administration, tax superior to that due has been assessed, official review shall be conducted in accordance with article 78 of the general tax law.

2 — Without prejudice to special provisions, the right to deduction or refund of tax paid in excess may only be exercised up to the expiry of four years after the birth of the right to deduction or overpayment of tax, respectively."

In turn, article 78 of the same Code provides, among other things, that:

"(...) 2 — If, after registration referred to in article 45 has been effected, the operation is annulled or its taxable value reduced as a result of invalidity, rescission, cancellation or reduction of the contract, by the return of goods or the grant of rebates or discounts, the supplier of the goods or provider of the service may effect the deduction of the corresponding tax by the end of the tax period following the one in which the circumstances determining the annulment of the assessment or the reduction of its taxable value occurred.

(...) 6 — The correction of material errors 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 returns or declarations mentioned in subparagraphs (b) and (c) of paragraph 1 of article 67 is optional when it results in tax in favour of the taxpayer, but may only be effected within a period of two years, which, in the case of the exercise of the right to deduction, is counted from the birth of the respective right in accordance with paragraph 1 of article 22, being mandatory when it results in tax in favour of the State."

As results from the transcribed rules, national legislation allows that, notably when a material error or calculation error occurs, to the detriment of the taxpayer, it may be corrected within the period fixed in article 78/6 of the VAT Code.

Other types of errors may be corrected by submitting a replacement declaration[4], if this is still, under the legal terms, possible, or, if not, by means of a request for official review, in accordance with article 78 of the General Tax Law, provided that the corresponding prerequisites are also met, which, moreover, follows directly from the provision of article 98 of the VAT Code, transcribed above.

We do not subscribe, therefore, to the thesis that a request for official review, under article 78 of the General Tax Law, concerning legal error or factual error in VAT self-assessments, may only be effected within the period fixed in paragraph 6 of article 78 of the VAT Code[5]. Indeed, in the situation regulated by such rule – correction of material errors or calculation errors – it will not even be necessary to formulate any request for official review, since that rule of article 78/6 of the VAT Code integrates its own provision for error correction, motivating the corresponding procedure, with no relation existing between this and the request for official review regulated in article 78 of the General Tax Law, to which article 98 of the VAT Code expressly refers.

In addition to the correction of material errors or calculation errors, supervening facts will also be considered under the regulation of paragraph 2 of article 78 of the VAT Code. It must, however, always be borne in mind that one thing is an error (a discrepancy between the reality represented in the periodic declaration and the reality – factual error – or the law) and another thing is the supervening occurrence of a fact (an alteration in reality), which entails an alteration in the tax to be borne or deducted, and it is to these latter situations that the said rule of article 78/2 of the VAT Code refers.

In the present case, manifestly, what occurred was not the supervening of any fact but, rather, an error – not material or calculation – but of applicable law, which would have resulted in the failure to determine the taxable amount in the terms in which, given the facts that, in reality, occurred and were known to the Claimant, and the applicable law, it should have been.

It is not a case, contrary to what the Tax Authority contends (cf. article 115 of the Response), of "a material error" that refers to "the calculation of the VAT deduction pro-rata for a mixed taxpayer." This would be the case, and the Tax Authority would be right, if, in fact, the Claimant had deducted tax with respect to the acquisition of mixed-use assets, applying a pro-rata which, ultimately, it deemed incorrect. However, in the case sub iudice, and as results from point 10 of the facts established as proven, the Claimant did not proceed to any deduction of the amount of VAT relating to mixed-use assets.

We also do not agree with the Tax Authority's inference, according to which "the errors contained in self-assessment acts constitute material errors, since they are internal errors of the Claimant, in the valuation of what should constitute deductible and non-deductible VAT, determined accountantly and reported, to that extent, in the respective periodic declaration of the tax." (cf. article 126 of the Response).

Indeed, as stated in the Award handed down in case 117-2013T of the CAAD, already referred to, "there is a material error in the filling in of the amount of VAT deductible in a declaration when one intended to write a certain amount and, through inadvertence or lapses, ended up writing a different amount or when the error in filling in the declaration results from a prior error of the same kind that exists in accounting or in some document that serves as the basis for the exercise of the right to deduction. There is a calculation error when the arithmetic operations to determine the amount of VAT deductible were performed incorrectly, in the declaration itself or in any of the documents on which it is based. (...) The error in the application of certain legal regimes constitutes neither material error nor calculation error, so it is manifest that the regime of said paragraph 6 of article 78 of the VAT Code cannot be applied to it."

What occurred, then, was that the Claimant realized, meanwhile, that in the self-assessments it had effected, by disregard of the applicable legal regime, it did not proceed to the deductions which it was lawful for it to make.

Accordingly, the error in question will not be correctable under paragraph 6 of article 78 of the VAT Code, since it is neither a calculation error (it does not result in the incorrect linking of components of arithmetic operations), nor a material error (a discrepancy between what was written and what, manifestly, was intended to be written at the moment it was written).

The correction of the situation in these proceedings (legal error in self-assessment), given all the foregoing, 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, the legal correction of this – by the taxpayer's initiative or, officially, by the Tax Authority, even if at the taxpayer's request – can legally take place.

And it was precisely this that occurred, concerning the Claimant's self-assessment for the period of December 2009, with respect to which a request for official review was presented, under the conditions legally admitted, as has been seen above.

This will not be a case – or, at least, it has not been established that it is – of the exercise of the right to deduction at times later than those resulting from article 22 of the VAT Code, and therefore, to the extent established so far, it is not a matter of application of the doctrine of the Award of the Higher Administrative Court of 18-05-2011, handed down in case 0966/2010[6], cited by the Respondent, which, moreover, we subscribe to[7]. Indeed, only to the extent that the Claimant is seeking to review the self-assessment of December 2009 on the basis of tax that became deductible on a date not covered by that period, would the deduction occur in violation of article 22 of the VAT Code, a situation which, however, does not form the basis of the tax acts at issue in the present case.

We also do not endorse the understanding of the decision on the hierarchical appeal (not supported, it should be said, in the arbitral proceedings), according to which "the alleged error invoked by the appellant could never be attributed to the Tax Authority, because the deduction or non-deduction of tax and the respective methods and criteria are exclusively within the discretion of taxpayers, depending, in fact, on discretionary choices and knowledge inherent to the management of the taxable activity which are only within the reach of the taxpayer itself, namely the separation by sectors of activity where the acquired goods and services are used."

We confine ourselves here, rather, to the concept of error for purposes of article 78 of the General Tax Law, which has been recurrently affirmed by jurisprudence as encompassing factual error and legal error, which is incompatible with the aforementioned understanding of the Tax Authority.

Indeed, first and foremost, the Claimant is, in this case, assessed not for having recorded certain entries in its accounting records but for having effectively carried out taxable transactions in a volume superior to deductible transactions. Hence, the error in assessment should be measured not against the Claimant's accounting records but against reality as it occurred and the law applicable to it.

On the other hand, the fact that, objectively, the error in self-assessment may not be concretely attributable to the Tax Administration, which is fundamentally what the Tax Authority seeks to report with the transcribed phrase, will not be relevant, since the law, in paragraph 2 of article 78 of the General Tax Law, creates a fiction of attributability to the administration of error in self-assessment.

Thus, for example, in the Award of the Higher Administrative Court of 14-12-2011, handed down in case 0366/11[8], one can read that "Although a claim against the self-assessment act was not filed within the deadline provided for in article 131 of the Tax Procedure Code, the interested party could still request the tax administration to officially review the act under the provisions of paragraph 4 of article 78 of the General Tax Law, since the law creates a fiction that errors in self-assessment are attributable to the administration."

Accordingly, not endorsing the understanding that, in this case, there is a special rule generically fixing a two-year limit for the correction of factual or legal errors in VAT self-assessment, including those related to the exercise of the right to deduction, but rather that such limit is situated in the general four-year deadline prescribed by the rule of paragraph 2 of article 98 of the VAT Code, and that in the case there is no situation of specificity (namely, calculation or material error), we conclude for the illegality of the decisions, founded on that understanding, on the request for official review and the hierarchical appeal, subject matter of the present case, and accordingly the corresponding arbitral claims should be sustained.

The Claimant further petitions in these proceedings for the condemnation of the Tax Authority to refund the tax unduly paid in the amount of €101,361.60 and to pay the respective compensatory interest.

In this regard, however, the arbitral request cannot be sustained.

As results from the proven and not proven facts, it was not established in the first place, since, in that respect, nothing was alleged, that the amount of tax to be refunded to the Claimant was that which it claims or any other amount.

Accordingly, the Tribunal cannot determine what the concrete value of the tax unduly paid by the Claimant is, the request for refund formulated cannot be sustained, and we must conclude, as the Tax Authority suggests in its Response, that "in light of the annulment of the administrative decisions [of the hierarchical appeal and the request for official review], the Tribunal should determine that the proceedings are returned to the Tax Authority and that it pronounce on the requested regularization."

Indeed, this follows, first and foremost, from the obligation of the Tax Authority "to perform the tax act legally due in substitution for the act subject matter of the arbitral decision," enshrined in subparagraph (a) of paragraph 1 of article 24 of the RJAT, as well as from the very annulling effect of the present decision, which, removing from the legal order the decision acts of the request for official review and the subsequent hierarchical appeal, and those dependent thereon, causes the procedure to return to the phase immediately prior to the decision on that request, with the Tax Authority having the legal duty to decide on it.

The Claimant further petitions that the Tax Authority be condemned to reimburse the Claimant for all expenses resulting from the dispute, including legal fees, to be liquidated in execution of the judgment.

The aforementioned claim, in the context of the petition with which it culminates, is absolutely devoid of any foundation, whether factual or legal.

Moreover, in Tax Tribunals, reimbursement of legal fees is assured by costs awarded against a party, while in tax arbitral proceedings, such costs are not provided for, and accordingly, non-reimbursement of the same is a consequence of the taxpayer's choice to resort to arbitral proceedings.

This request should therefore also not be sustained.

C. DECISION

For these reasons, this Arbitral Tribunal rules that the arbitral claim is partially sustained and, in consequence,

a) Annul the order rejecting the Request for Official Review, of 26-05-2014;

b) Annul the order rejecting the Hierarchical Appeal, of 30-11-2014;

c) Rule that the remaining arbitral claims are not sustained;

d) Condemn the parties to bear the costs of the proceedings, in the amount of €3,060.00, in proportion to their respective extent of defeat, fixing at €1,530.00 the share to be borne by the Claimant and €1,530.00 the share to be borne by the Respondent.

D. Case Value

The case value is fixed at €101,361.60, in accordance with article 97-A, paragraph 1, (a), of the Tax Procedure Code, applicable by virtue of subparagraphs (a) and (b) of paragraph 1 of article 29 of the RJAT and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective extent of defeat as fixed above, in accordance with article 12, paragraph 2, and article 22, paragraph 4, both of the RJAT, and article 4, paragraph 4, of the cited Regulation.

Notification is ordered.

Lisbon

24 August 2015

The Arbitrator President
(José Pedro Carvalho - Rapporteur)

The Arbitrator Member
(João Ricardo Catarino)

The Arbitrator Member
(António Nunes dos Reis)

[1] Available for consultation at https://caad.org.pt/tributario/decisoes/.

[2] Ibid.

[3] Available for consultation at https://caad.org.pt/tributario/decisoes/.

[4] Cf. in this sense the Award of the Higher Administrative Court of 02-10-2010, handed down in case 0256/10, available at www.dgsi.pt.

[5] In this sense, cf. the Awards handed down in cases 117/2013T, 185/2014T and 277/2014T, all of the CAAD, available at https://caad.org.pt/tributario/decisoes/.

[6] Available at www.dgsi.pt.

[7] Cf., in that sense, the Award handed down in case 185/2014T of the CAAD (awaiting publication).

[8] Available at www.dgsi.pt.

Frequently Asked Questions

Automatically Created

Can Portuguese municipalities claim VAT deductions on mixed-use resources under public law?
Yes, Portuguese municipalities can claim VAT deductions on mixed-use resources under public law. As demonstrated in Process 56/2015-T, municipalities are classified under the normal VAT regime and carry out both operations excluded from VAT (under their powers of authority pursuant to Article 2(2) of the VAT Code) and operations subject to VAT. For mixed-use assets used indiscriminately for both taxable and non-taxable activities, municipalities have the right to deduct VAT proportionally, though they must correctly apply the deduction methods and criteria, which are within their exclusive discretion and depend on proper separation by sectors of activity.
What is the time limit for filing a VAT self-assessment review request with the CAAD arbitral tribunal?
The time limit for filing a VAT self-assessment review request with the CAAD arbitral tribunal depends on the underlying administrative deadlines. In Process 56/2015-T, the key issue was that the special two-year period under Article 78(6) of the VAT Code for adjustments in favor of the taxpayer had expired when the municipality sought to deduct 2009 VAT in a December 2013 request. After exhausting administrative remedies (official review and hierarchical appeal), the municipality filed with CAAD in February 2015. The request must be filed within the applicable administrative time limits, and CAAD requests cannot circumvent expired VAT regularization deadlines established in the VAT Code.
How does the CAAD assess the competence of arbitral tribunals in VAT disputes involving public entities?
CAAD assesses the competence of arbitral tribunals in VAT disputes involving public entities under Article 2(1)(a) of the RJAT (Legal Regime of Arbitration in Tax Matters). In Process 56/2015-T, the tribunal confirmed it had material jurisdiction over the municipality's challenge to VAT act rejections. Public law entities, including municipalities classified under the normal VAT regime, have standing to submit arbitration requests pursuant to Articles 2, 4, 5, 6, and 10 of the RJAT and Article 1 of Ordinance 112-A/2011. The tribunal's competence extends to reviewing the legality of rejections of VAT self-assessments, official review requests, and hierarchical appeals, though substantive time limits for exercising VAT rights remain applicable and are evaluated separately from procedural jurisdiction.
What are the rules for VAT recovery on shared resources used by public legal entities in Portugal?
The rules for VAT recovery on shared resources used by public legal entities in Portugal require proper application of deduction methods under the VAT Code. Public entities carrying out both taxable operations and operations excluded from VAT under their powers of authority (Article 2(2) of the VAT Code) must use appropriate criteria to separate activities and calculate pro-rata deductions. The right to deduction is subject to time limits under Articles 22 and 23 of the VAT Code, and corrections can be made under Article 78(6) within a special two-year period for adjustments in favor of the taxpayer. The Tax Authority has emphasized that deduction methods are exclusively within the taxpayer's discretion and depend on knowledge inherent to activity management, including proper separation by sectors where acquired goods and services are used.
What was the outcome of CAAD Process 56/2015-T regarding the EUR 101,361.60 VAT deduction claim?
While the complete outcome is not fully detailed in the excerpt provided, Process 56/2015-T shows that the municipality's €101,361.60 VAT deduction claim for 2009 faced significant procedural obstacles. The Tax Authority rejected both the official review (May 2014) and hierarchical appeal (November 2014), determining that the special two-year period under Article 78(6) of the VAT Code had expired when the December 2013 request was filed seeking deductions for 2009. The arbitral tribunal was constituted in April 2015 with confirmed material jurisdiction under Article 2(1)(a) of the RJAT. The central issue before CAAD was whether the time limits for exercising the right to deduction had expired and whether the official review mechanism could override VAT regularization deadlines, which the Tax Authority argued would deprive those regulations of practical effect.