CAAD Case 59/2019-T: VAT Presumption, Burden of Proof & Goods Destruction – Taxpayer Challenge

ARBITRAL DECISION

The arbitrators Counselor Jorge Lopes de Sousa (arbitrator-president, appointed by the other Arbitrators), Professor Doctor Clotilde Celorico Palma and Doctor Emanuel Vidal Lima (arbitrators members, appointed by the Claimant and Defendant, respectively), to form the Arbitral Tribunal, constituted on 15-04-2019, agree as follows:

1. Report

A..., LDA., with tax identification number ..., with registered office in ..., ...-... ..., municipality of ..., district of Leiria, hereinafter designated as "A...", "Claimant", requested the constitution of an Arbitral Tribunal with a view to the annulment of the act of Liquidation of Value Added Tax (hereinafter "VAT") and the act of liquidation of Compensatory Interest, with number 2018... and number 2018..., respectively, in the amount of € 204,527.50 (two hundred and four thousand five hundred and twenty-seven euros and fifty cents) and € 30,707.14 (thirty thousand seven hundred and seven euros and fourteen cents), totaling € 235,234.64 (two hundred and thirty-five thousand two hundred and thirty-four euros and sixty-four cents) relating to the year 2014.

The defendant is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax Authority and Customs Authority on 30-01-2019.

The signatories communicated acceptance of the exercise of their functions within the applicable timeframe.

On 25-03-2019, the Parties were notified of the appointment of the arbitrators, having manifested no desire to object, in accordance with the combined provisions of article 11, no. 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Accordingly, in compliance with the provisions of subparagraph c) of no. 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 15-04-2019.

The Tax Authority and Customs Authority replied, raising the exception of untimeliness of submission of the request for constitution of the arbitral tribunal and defending the lack of merit of the request for arbitral ruling.

On 03-07-2019, a hearing was held in which testimonial evidence was produced and the Claimant submitted a request in which it responds to the issue of untimeliness raised by the Tax Authority and Customs Authority and, subsidiarily, requested expansion of the claim.

In that hearing it was decided that the proceedings would continue with simultaneous pleadings.

The Parties submitted pleadings.

The arbitral tribunal was duly constituted and is competent.

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

The proceedings do not suffer from nullities.

It remains to decide.

It is necessary to assess the exception of untimeliness of submission of the request for constitution of the arbitral tribunal.

2. Question of Untimeliness

The Tax Authority and Customs Authority raises the issue of untimeliness of submission of the request for constitution of the arbitral tribunal because, in summary, the Claimant submitted it after 90 days had elapsed from the end of the deadline for voluntary payment of the liquidations and identifies these as the object of the challenge.

The deadline for voluntary payment of the liquidations being challenged ended on 12-04-2018, as indicated therein.

On 03-08-2018, the administrative recourse procedure was initiated, whereby the Claimant filed the administrative recourse within the 120-day period provided for in no. 1 of article 70 of the CPPT.

As it results from the provision of subparagraph a) of no. 1 of article 10 of the RJAT, "the request for constitution of an arbitral tribunal is submitted" "within 90 days, counted from the facts provided for in nos. 1 and 2 of article 102 of the Code of Tax Procedure and Process, as to acts susceptible of autonomous challenge and, as well, from notification of the decision or the end of the legal deadline for decision of hierarchical appeal".

One of the acts susceptible of autonomous challenge is the decision on administrative recourse, as results from the provision of articles 95, nos. 1 and 2, subparagraph d) of the LGT and article 97, no. 1, subparagraph c), of the CPPT.

On the other hand, as results from the provision of article 2, no. 1, subparagraph a), of the RJAT, the object of the arbitral proceeding is the liquidation act and not the decision on administrative recourse, whereby the Claimant did not have to challenge this decision, merely confirmatory, but rather the liquidation acts confirmed.

Therefore, the deadline for submitting a request for constitution of an arbitral tribunal of liquidation acts for which administrative recourse was filed is 90 days counted from notification of the decision rejecting the administrative recourse and not from the end of the deadline for voluntary payment.

The decision on administrative recourse was notified to the Claimant by letter sent on 30-10-2018, received by the Claimant on 02-11-2018 (document no. 5 attached to the request for arbitral ruling).

The request for constitution of the arbitral tribunal was submitted on 29-01-2019, whereby it must be concluded that the submission was made within the legal deadline of 90 days, provided for in article 10, no. 1, subparagraph a), of the RJAT.

The exception of untimeliness is therefore without merit.

3. Factual Matter

3.1. Proven Facts

The following facts are considered proven:

A) The Claimant engages in the manufacture of wooden furniture and its corporate purpose relates to the industry and commerce of furniture items;

B) The Tax Authority and Customs Authority conducted an inspection of the Claimant, of partial scope (in respect of CIT and VAT), relating to the year 2014;

C) In that inspection, the Report contained in document no. 6 attached to the request for arbitral ruling was prepared, in which the following is mentioned, among other matters:

III. Description of the facts and grounds of the corrections merely arithmetic to the taxable matter

III.I. Development of the action

III.1.1. Preparation

In the context of preparation, programming and planning of the tax inspection procedure in accordance with no. 1 of art. 9 and art. 44 of the Complementary Regulation of the Procedure for Tax and Customs Inspection and under the Principle of collaboration, article 59 of the General Tax Law (LGT), - within the scope of this Service Order the SP was requested with respect to the fiscal years 2013 and 2014:

1. Analytical trial balances, before and after determination of results, relating to fiscal years 2013 and 2014.

2. Justification for the increase in the item variation in production inventories from 2013 to 2014 - extracts from the respective accounts as well as copies of the 3 most significant documents.

3. Justification for the decrease in Inventories from 2013 to 2014 - extracts from the respective accounts as well as copies of the 3 most significant documents.

4. Reason for the increase in Cash and bank deposits from 2014 to 2015 — extracts from the respective accounts as well as copies of the 3 most significant documents.

5. Supporting documents of the realization, by the shareholders in fiscal year 2014, of other equity instruments as well as capital contributions or other loans.

6. Justification for the significant increase in the Retained Earnings account from the fiscal year 2013 to 2014.

7. Documents supporting the entries made in the accounting of the accounts referred to above.

8. Account extract from your SUPPLIER "B..., SA", NIF:..., relating to the fiscal year 2014.

9. Account extract from your SUPPLIER "C..., Lda.", NIF:..., relating to the fiscal year 2014.

10. Explanation of the criterion for quantification and valuation of Products and Work in Progress in fiscal year 2014.

11. SAFT-PT file, relating to accounting and invoicing, relating to fiscal year 2014.

After analysis of the elements sent by the SP, a meeting was arranged with the managing partner of the SP at the premises of A...

III.1.2. Visit to the SP's registered office

With the objective of complying with the Service Orders referred to above, the corresponding Notice Letter sent by mail was delivered, and we traveled to the location identified as the company's registered office.

At the SP's registered office, as planned, it was possible to meet with managing partner Mr. D... and communicate the reason for our visit: regularization of inventories carried out in 2014. Mr. D... informed that the SP's activity consisted of the manufacture of domestic furniture, medium-low range, by order for small and medium-sized shops throughout the Country.

Regarding the regularization of inventories, Mr. D... explained, in line with what he had already informed us by email (Annex no. 1), that after physical count a large discrepancy had been verified between the values found and the value of Inventory recorded in the accounting, as such, it was necessary to proceed to their regularization by the value of the differences.

Documents supporting the valuations of inventories in each of the analyzed items (raw materials, finished products and products and work in progress) were verbally requested from the SP (through its managing partner).

Regarding the matter of the previous paragraph, the SP sent personally to our services in digital format, on 2017-06-29, the final inventory of 2014. This document, by itself, evidently, does not quantify the need to proceed to regularization of assets in this amount nor justifies the values regularized in each of the items: € 150,000.00: Raw materials - Account 331; € 267,000.00: Finished products - Account 3411; € 472,250.00: Products and work in progress - Account 361.

In order to understand the inventory regularization and its valuation, a meeting was held on 5 November 2017 at the SP's registered office, in the presence of the managing partner, two elements of the company that provides accounting services to the SP (E... Lda, - one of whom is Mr. F...) and the team leader – G.... During the meeting, a record of statements was prepared with the deposition of Mr. D...– which we reproduce below

"A... has its own catalog of domestic furniture, in melamine, medium-low range. Its customers are small and medium-sized shops throughout the Country. It produces according to the orders received, always keeping some finished product in stock (for example: Customers ordered 10 wardrobes and A... produced 15 wardrobes).

The purchases of raw materials were at that time, fiscal year 2014, made according to a forecast sustained in the previous period (by previous period understand a week).

Regarding the regularization of stocks, carried out in 2014:

The inventories were uncontrolled for several years. Thus, it was necessary to carry out a physical count of the actual existing stocks, to create conditions for better stock management, thereby ceasing A... from buying palettes of raw materials and starting to buy as needed - almost piece by piece, thereby freeing up space in the industrial building with the objective of leasing it.

On 31-01-2014:

The value of raw materials inventory of € 150,000.00 corresponds to the difference between what existed in the accounting and what actually existed - after physical count and valuation at acquisition cost.

The value of finished products inventory of € 267,000.00 corresponds to the difference between what existed in the accounting and what actually existed - after physical count and valuation at production cost.

The value of products and work in progress inventory of € 472,250.00 corresponds to the difference between what existed in the accounting and what actually existed - after physical count and valuation at production cost.

Part of the products and work in progress, and of the finished products, were deposited in a container for recycling (container of ...) because they were found to be damaged or obsolete. There is no document referring to these outputs.

In the cost of production is included a percentage of the cost of raw materials, a percentage of personnel costs and a percentage of supplies and external services, a percentage that the managing partner cannot stipulate with exactness.

In any case, a list of products and work in progress and finished products was made, which was valued and delivered to accounting for subsequent recording.

In relation to Internal Note no. ... of 31-01-2014, which served as the basis for the regularization of inventory accounts, there are no supporting elements. The values presented result from the difference between inventories and the physical count of each of the items.

Currently, and also in 2014, the catalogs of manufactured products have a duration of two/three years. Previously the duration was about eight years.

The net commercialization margin is around 10%, and can fluctuate up or down according to market conditions."

After the meeting at the SP's registered office, two other meetings took place, with the aim of the SP justifying through documents the regularizations carried out, at the premises of the Financial Management of ...:

• On 16 November - with the presence of Mr. D..., Mr. F... and team leader G... the outcome was to schedule another meeting.

• On 27 November - with the presence of Mr. D..., the Certified Accountant (CC) Mr. H... and team leader G... In which the SP undertook, in the short term, to deliver a reasoned explanation for the inventory regularization carried out in 2014.

On 07-12-2017 at 16:42, an email from the managing partner of the SP was received in our mailbox, with the subject: Supplementary Statements (Annex no. II, the content of which we transcribe below:

III.1.3. Supplementary Statements of the SP

"This serves to come, in reference to the Record of Statements, signed on 05 November 2017, and meeting at the Financial Management of ... on 27 November 2017, in which the signatories were inspector I... and myself, D..., as manager of the company A...

• J..., Lda, NIPC:..., to explain in more detail the events, in order for a correct analysis of the situation.

The activity of company A..., Lda., until the end of fiscal year 2001, operated normally, with small variations in sales volume or increases or slight reductions, because the market remained stable until that year of 2001.

As is known, this sector operated in a seasonal manner, with periods of sales decline and others of great demand, which allowed companies, with financial power and adequate warehouses, to "stock" products in low sales periods in order to maximize sales in months of great demand.

This was always the case until 2001, industrialists in this sector not having realized that the market was entering a major crisis caused from the beginning of the century by the arrival in Portugal of large retail chains in this sector such as K..., P..., among others. Then, by the biggest crisis of the last hundred years in the Civil Construction sector and by the change in the way of building, in which the furniture becomes more of a decorative element, than an element of storage utility, because new constructions were already being made with the conception of having embedded in that construction much of the furniture such as for example wardrobes, fixed countertops, etc.

Having happened all these major changes simultaneously or, at least in following years, the industrialists in this sector of the region, accustomed to momentary crises, which normally did not last more than two years, continued to make production for stock in the perspective of a short to medium-term recovery.

When they realized late that this crisis was completely different from all the others, they committed a double error which was to enter into desperation in the price war, because they thought that in this way they would be able to sell the product.

As everyone thought the same way and as what was happening was a drastic reduction in consumption, sales did not increase in quantity, but decreased in value, due to the reduction in price, continuing to produce instead of slimming down the companies, which they had never done during their existence.

In the face of this disorientation appeared a new setback which was the revolution of the models. Then, they had to start everything anew, catalogs and customers, because traditional shops practically all went to insolvency, notably those of the Indian traders and later the large shops such as ... and ..., among others.

Entrepreneurs had to adapt to leaving furniture in series and entering, essentially, into custom-made furniture, with companies not being prepared and adequate for such purpose. On the other hand, the large existing stocks of the previous catalogs, became quickly obsolete, only taking advantage of some pieces for the new furniture for interior areas and backs.

This is how A..., which normally came out with a catalog every 5 years, already in desperation, comes out with a catalog in the year 2002 (...), in 2003 (...), in the year 2004 (2004), in 2007 (...), 2008 (...), 2009 (...). From 2011 to 2016, already with a very deep crisis and without the possibility of investing in catalogs, they used the brochures made in their own company, in the photocopier, while they had toner.

It was during this period that 95% of the companies in this sector in the region and in the region of ... went to insolvency, this one even more so than the region of Pataias.

In the face of this scenario and in the face of the pressures from all entities that collaborated with the company, from credit insurance, suppliers, ... and all financial institutions, the company never had the possibility of transforming the existing unsaleable furniture into scrap without accumulating substantial losses, because that would immediately cause the company to collapse.

Regarding invoicing, this has been declining throughout the years, having amounted in 2002 to a value above 1,500,000.00 euros, having gradually declined until 2011, to 800,000.00 euros. From 2012 onwards, to date, invoicing has always been between 500,000.00 euros and 600,000.00 euros. What the company managed to do was control all costs in order to be able to survive at this level of invoicing.

It is hoped, however, that this effort has not been futile and that, from 2018 onwards, it may begin to rise slowly, but gradually.

I would like to follow up on everything that has been said.

All the inventories of the lines ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., among others, that exist of Finished Products and Work in Progress in fiscal year 2011, for the purpose of freeing up space, a small part was kept in Finished Products and Work in Progress, another small part was taken advantage of for Raw material and all the rest was left as Work in Progress in the hope of taking advantage of some of that material.

We acknowledge that, in this year of 2011, we should have drastically devalued the inventory to the extent that we dismantled most of the finished product stock, taking advantage of residually some material for raw materials and the rest for Work in Progress, which in the following years was found to be, almost in its entirety, worthless material.

Only in 2012 do we have more concrete data on what was taken advantage of from this line of Finished Products and Work in Progress.

Of the value of the 2011 inventory of Finished Products, we found that about 48% was considered waste and of the inventory of Work in Progress, about 85% in 2011, was considered to have no utility. Thus, specifying, the value presented of Finished Products and Work in Progress on 31.12.2011, was 270,228.99 euros and 475,039.42 euros respectively, giving a value loss of 745,268.41 euros, considering an approximate value over the years of Raw materials, hardware fittings obsolete, melamine sheets with moisture, cut wood, among others, we calculated a loss of inventory in Raw materials of about 150,000.00 euros.

The total of the approximate losses calculated (this value is always an approximate value) amounts to the sum of the three values of 270,228.99 euros, 475,039.42 euros and 150,000.00 euros, totaling 895,268.41 euros.

Considering that, in these last 15 years, about 95% of the companies in this sector have ceased operations, we believe we have to encourage and praise this type of company that, although having reduced some jobs, remained in operation, causing no damage to the Public Treasury.

In this way, recognizing that fiscal year 2011, did not present a true and appropriate image of the company, only as far as the facts and for the reasons indicated above, solely for the purpose of survival, because we believe and believe in this project. We believe we do not deserve any penalty from the Tax Authority."

III.1.4. Analysis of the Supplementary Statements (DC's) of the SP

The broad and unfounded allegations of the SP do not find support in tax norms, and as such are not admissible, as they lack substantiation in reliable documents that are based on facts and exact calculations. However, we will make some brief comments to contextualize them.

The SP says at the beginning of its DC's that "The activity of company A..., Lda., until the end of fiscal year 2001, operated normally". However, in 2001 the SP's inventory already reached € 769,271.27, having increased relative to the previous year (fiscal year 2000) € 51,500.00.

The SP also says that "the market was entering a major crisis caused from the beginning of the century by the arrival in Portugal of large retail chains in this sector such as K..., P..., among others". Well, "K..." entered Portugal in the year 2004 and at that time the SP already had in inventory the value of € 1,221,196.96, a value much higher than that of its sales but nonetheless continued to produce, for "stock", according to what it informs us.

The SP says in the DC's that "they committed a double error which was to enter into desperation in the price war ..., sales did not increase in quantity, but decreased in value, due to reduction in price" but consulting the period between the years that the SP references [2001-2012] it is verified that in those fiscal years the commercialization margins rise.

Then the SP focuses its attention on the value of the inventory of fiscal year 2011 (fiscal year in which inventory reduces in value € 3,518.95), when we are examining inventory regularizations carried out in January 2014, reflected in the accounting of the SP in fiscal year 2014 and with tax implications in respect of VAT in fiscal year 2014.

Moreover, already the first time justification was requested for the decrease in Inventories from 2013 to 2014, the SP, in an email sent to our services, exposed the following "Decrease related to correction of inventories from previous periods taking into account the lack of control in physical counts, for more than 10 years. Taking into account the complexity in its execution, only in 2013 was it proceeded to the physical inventory of assets that should be recorded at the end of 2013. The value of the assets were valued at values that had nothing to do with their value, because market value breaks were never considered, as well as unsaleable products".

And why were market value breaks never considered, as well as unsaleable products in the fiscal years in which they, allegedly, occurred? There are proper accounting and tax mechanisms for that.

On the other hand the SP, in the term of statements already referred to, recognizes that "In any case, a list was made of products and work in progress and finished products that was valued and delivered to accounting for subsequent recording".

What is verified is that the company in 2014 carries out, in accordance with what is recorded in the documents of its accounting and which are reflected in the tax declarations delivered to the AT, a regularization of the inventory accounts in fiscal year 2014, which represents a reduction thereof in the amount of € 889,250.00 and is unable to prove how it arrived at the values determined after physical count, as well as what the destination/whereabouts of those finished products, products and work in progress and raw materials. It is important to note that this value [€ 889,250.00] compared to the final inventory of fiscal year 2013 [€ 1,329,998.27] represents a decrease in its value of over 66.5%.

III.2. Inventory Regularization Carried Out by the SP

In all fiscal years of the SP, a management report is presented to the partners, the Balance Sheet on 31 December, the statement of results by nature and the annex of the period ended. Fiscal year 2014 was no exception, all these elements were presented to the partners and signed by the two managing partners. As well as the respective tax declarations were delivered signed by the certified accountant who ensures the technical regularity of the tax declarations that he signs and, logically, of the accounting for which he is responsible, guaranteeing the realization of the material truth of the declarations.

After proceeding to the appreciation of the accounting documents of fiscal year 2014, and accounting documents from previous fiscal years (more specifically all fiscal years up to fiscal year 1999), analysis, supplemented by the crossing of elements available in the AT's computer system, it is verified that:

III.2.1. VAT not liquidated relating to Raw Materials l Products and Work in Progress l Finished Products

According to its accounting, the SP on 31-01-2014 proceeded to regularize the inventory accounts by making various accounting entries through INTERNAL NOTE No. ... of 31/01/2014 (image below) [document and account extracts in Annex no. 5]:

As is verified by the accounting entries, no Expense accounts were used and consequently the Results of the fiscal year were not affected. However, the SP did not proceed to liquidate the VAT corresponding to this operation nor issued the respective invoice as provided for in articles 27 and 29 of the VAT Code. Specifically:

Subparagraph f) of no. 3 of article 3 of the Value Added Tax Code (VAT Code) provides: "(...)[The following are also considered transmissions of goods] the permanent assignment of goods of the company, to own use of its owner, of the staff, or in general to purposes other than the company itself, as well as their free transmission, when, with respect to those goods or the elements that constitute them, there has been total or partial deduction of the tax (...)";

Subparagraph b) of no. 2 of article 16 of the VAT Code establishes that the taxable value of the transmissions made under subparagraph f) of no. 3 of article 3 of the VAT Code is "(...) the acquisition price of the goods or of similar goods, or, in its absence, the cost price, at the time of realization of the operations". Moreover, in accordance with no. 4 of article 7 of the same code "In the transmissions of goods and provision of services referred to, respectively, in subparagraphs f) and g) of no. 3 of article 3 and in subparagraphs a) and b) of no. 2 of article 4, the tax is due and payable at the moment in which the assignments of goods or provision of services provided therein take place".

Moreover, article 86 of the VAT Code still provides "Except to the contrary proof, goods found in any of the places where the taxable person carries on activity are presumed to be acquired and goods acquired, imported or produced which are not found in any of those places are presumed to be transmitted".

Therefore, by the terms of the articles referred to above, the value to be considered for purposes of VAT liquidation, will be equal to the price reflected in inventory at the moment of realization of the operations, that is, its value on the date of 2014/01/31, by applying the VAT rate provided for in subparagraph c) of no. 1 of article 18 of the same code.

(...)

D) The Claimant exercised the right to hearing on the draft of the Tax Inspection Report, alleging, among other matters, the following:

1. Indeed, and according to the facts and documents presented, the taxpayer understands that conclusive proof was made of the realization of destruction and deterioration of various goods over the years and the difference in values in the inventory from fiscal year 2013 to fiscal year 2014.

2. Moreover, the taxpayer further states that the employees of the same were witnessing the destruction of some goods, the deterioration of others and finally, that the inventory count in 201% was real and effective, referring only to goods that were in inventory at that time.

3. Indeed, case law and administrative doctrine have understood that, for the purposes of overcoming the presumption, all means of proof available to the taxpayer should be admitted, whether documentary or testimonial.

4. Thus, the employees may at any time testify, with the Tax Authority and Customs Authority and when it finds it convenient, and confirm the reasons mentioned above as justifications for the inventory values being so different from 2013 to 2014.

5. And they may also confirm that the goods lacking were not subject to paid alienation to others".

E) Following the exercise of the right to hearing, the Tax Authority and Customs Authority stated, among other matters, the following:

IX. Right to Hearing (DA)

In accordance with the provisions of article 60 of the LGT and article 60 of the RCPITA, the draft report with the conclusions of the Inspection was sent to the fiscal address of the SP, by registered letter [Official Letter no..) of 2018/01/11.

(...)

Under the Law, when we are faced with shortfalls, the assets must cease to be part of the inventories, as such the respective value should be considered as an expense of the period, this type of accounting entries - with relevance in tax matters, are not recorded in the accounting and/or reflected in the tax declarations of the respective fiscal years.

(...)

The presumption invoked is made in the strict legal terms, therefore to the difference in value found the VAT rate in force is applied. It should be noted that only raw materials are valued at acquisition cost. In deposition Mr. D... informed that "The value of inventory of products and work in progress and finished products corresponds to the difference between what existed in the accounting and what actually existed after physical count and valuation at production cost."

(...)

The inventory regularization carried out in fiscal year 2014 reaches the value of € 889,250.00, it makes no sense for the SP to now allege that the same "is due to facts from several previous years, namely 2010, 2011, 2012, 2013" when from fiscal year 2009 to fiscal year 2013 a downward trend is materialized, in the value of inventories, in the amount of € 134,982.45. That is: In the years mentioned, not only did the inventory not increase but it actually reduced its value.

In deposition Mr. D... informed that "Part of the products and work in progress, and of the finished products, were deposited in a container for recycling (container of ...) because they were found to be damaged or obsolete. There is no document referring to these outputs". Just as there are no files with proof evidencing the destruction of "inventory items that had no value because they were considered unsaleable, obsolete or damaged", namely destruction or scrapping certificates signed by credible witnesses.

(...)

are waste tracking guides with code 030105, from the European Waste List (EWL), referring to "sawdust, chips, planing tapes, wood, chipboards and veneers, [not containing hazardous substances]". As is observable, even by visual examination of each of the guides, they do not refer to the destruction of raw materials, products in the course of manufacture or finished products, so much so that they are not valued and there is no field in the guide for such purpose. On the other hand, by their regularity (dates, quantities, characteristics) the guides present nothing exceptional, it is verified, rather, that they are part of the normal functioning of the production process of the claimant.

Regarding the flooding that occurred in the facilities of the SP, due to a heavy storm that occurred on 13 November 2011, as can be inferred from the analysis of the participation (Doc 18), the following items are found in the damage description field: air conditioning, roof, raw materials. It is also determined that none of these items is presented valued and/or quantified.

In reading the confirmation of the inspection (Doc 19), one can read in the field referring to the deposition of the insured (SP) "The affected goods are currently drying expecting its recovery". Therefore, if the claimant "suffered damage to inventoried products, due to flooding that occurred in its facilities", which does not result evident from the analysis of the documentation presented, it was necessary to proceed to that classification in the fiscal year of occurrence and in the applicable legal determinations.

In the sinister of April 2013, as per Doc. 20 - report of claim, is entered in the field "detailed description of the occurrence (causes and consequences)": STRONG WINDS PULLED OUT THE PAVILION TILES. Also Doc 21 - Confirmation of the inspection - reports the wind's action on the roof structure/tiles. Therefore, as is verified, by the documents provided by the claimant, this claim did not affect the inventory goods.

(...)

Citing part of what is reported in the lower half of page 12 of this report "the company in 2014 carries out, in accordance with what is recorded in the documents of its accounting and which are reflected in the tax declarations delivered to the AT, a regularization of the inventory accounts in fiscal year 2014, which represents a reduction thereof in the amount of € 889,250.00 and cannot prove [to date has not presented any evidence to the contrary of this reality] how it arrived at the values determined after physical count, as well as what the destination/whereabouts of those finished products, products and work in progress and raw materials".

(...)

It should be noted that the testimonial evidence procedure is not provided for either in article 60 of the LGT or in article 60 of the RCPITA. However, in accordance with article 72 of the LGT, it is to the instructing body that ultimately falls, the option for the evidentiary means necessary to the discovery of material truth, not being bound to the initiative of the interested parties. Moreover, it does not seem plausible to us that the witnesses could present documentary justifications of the responsibility of the claimant which the claimant itself could not present.

(...)

As a precaution, it is important to note that we are in the Right to Hearing phase and article 100 of the Code of Tax Procedure and Process applies in a later phase of the process - Of the tax judicial process.

It is further informed that there is no founded doubt about the operation under analysis, the accounting and tax assumptions used are appropriate, no proof was presented by the claimant that contradicts the corrections proposed in this report.

(...)

The claimant alleges, but mere allegation is not enough. The SP did not produce sufficient proof, more specifically, did not produce any proof that invalidates the correction proposed in this report.

F) Following the inspection, the Tax Authority and Customs Authority issued VAT liquidation no. 2018..., relating to period 2014 3T, in the amount of € 204,527.50, and the respective compensatory interest liquidation no. 2018..., in the amount of € 30,707.14, indicating 12-04-2018, as the date of the end of the deadline for voluntary payment (documents nos. 1 and 2, attached to the request for arbitral ruling, the content of which is reproduced);

G) The Claimant filed administrative recourse of the referred liquidations (document no. 3 attached to the request for arbitral ruling, the content of which is reproduced);

H) The administrative recourse was rejected by order of 26-10-2018, which manifests agreement with an information contained in document no. 5 attached to the request for arbitral ruling, the content of which is reproduced, in which the following is stated, among other matters:

Brief Analysis Summary

1. The AT availed itself of the provision of article 86 of the VAT Code:

"Article 86

Presumption of acquisition and transmission of goods

Except to the contrary proof, goods found in any of the places where the taxable person carries on activity are presumed to be acquired and goods acquired, imported or produced which are not found in any of those places are presumed to be transmitted."

1. This is a presumption juris tantum, that is, valid until contrary proof, or rather, this is a rebuttable presumption.

2. It was incumbent on the claimant to bring into the proceedings evidence that justified that difference in values in the 2014 inventory, something it did not do until now.

3. The TIT ascertained VAT lacking on the value of the difference between 1,329,998.27 (final inventory of 2013) and 466,888.64 (initial inventory 2014), that is, on 889,250.00, to which the rate of 23% was applied.

4. This correction does not entail changes to the CIT for that fiscal year.

5. The claimant presented and presents no documentary proof that supports its arguments.

From the lack of justification and the pretermission of an essential formality

1. The claimant considers that the tax acts, commonly called liquidation in crisis, are not properly justified.

2. A notification was issued, for the period in question, attached to the proceedings by the claimant, where it can be read: "Liquidation made based on correction made by the Tax Inspection Services."

3. The claimant was aware of the inspection action, was notified to exercise the right to hearing and notified of the final report (RIT).

4. The notification of the RIT contains the following mention: "Shortly, the AT services will proceed to notify the respective liquidation, which will contain the means of defense, as well as the deadline for payment, if applicable."

5. The claimant comes to contradict itself in points 8 and 22 of the petition: in fact the document that titles the tax act contains mention of the corrections of the Tax Inspection, clearly identifying the period of the tax.

6. Finally, it was notified to exercise the right to hearing in the context of the inspection procedure.

7. As it itself admits at point 39 and following of the petition.

8. Therefore, in accordance with article 60, no. 3 of the LGT, the formality whose pretermission is invoked is complied with.

9. Thus it is demonstrated that there is no lack of justification of the liquidation in question, nor pretermission of an essential formality.

From the inapplicability of article 86 of the VAT Code

1. The claimant here comes to allege that the goods missing from the 2014 inventory were destroyed, but does not attach credible proof.

2. The lists now presented as having been drawn up on the date of destruction of the goods come to contradict the declarations of the managing partner of the company to the TIT, on 06.11.2017.

3. In these declarations another reason is raised: "Part of the products and work in progress, and of the finished products, were deposited in a container for recycling (container of ...) because they were found to be damaged or obsolete. There is no document referring to these outputs."

4. It now comes to allege that the products mentioned in the said lists are included in the waste tracking guides that it again attaches hereto.

5. The declarations presented are waste tracking guides with code 030105 (European list of waste) relating to "sawdust, chips, planing tapes, wood, chipboards and veneers (not containing hazardous substances)".

6. From analysis of the said guides, we observe the impossibility of supporting the claimant's arguments in these documents.

7. As for the claims pointed out, once again, we observe that they do not relate to the goods in question, as can be verified from reading the inspection confirmation documents.

8. All these documents had been analyzed by the TIT and we fully corroborate the analysis of the services in this case.

9. Therefore, the claimant failed to prove the destination given to the goods that are missing from the 2014 inventory.

10. The application of article 86 of the VAT Code is correct.

11. We reiterate that this rule aims at combating fraud and tax evasion, since omissions in inventories are closely related to omissions in purchases and sales and therefore, escape from taxes - CIT and VAT.

12. An unrecorded sale results in the inflation of inventory, since the transmitted goods are not removed from the company's stock or assets.

13. It is incumbent on the claimant to prove the destination given to the goods, for example, through scrapping certificates that although not being obligatory, would always be a precautionary measure that would assure the proof that is now required.

14. The claimant limits itself to raising doubts about the destination of the goods without, however, proving it definitively and without margin for doubt.

15. To that end, see the excerpt from the judgment of TCA South of 10/07/2015, in Case no. 07692/14: "In this measure, to avert any eventual tax contingencies, it is indispensable to make real and "objective proof of the facts in order to rebut the presumption of acquisition or transmission of goods, as the case may be, or other occurrences, such as theft of goods or destruction or scrapping of goods that are the object of scrapping";

16. cited in the judgment of TCA South of 13.07.2016, in Case no. 07098/13, from which this excerpt is extracted: "It is thus verified that, as stated in the learned judgment, it is indispensable that the taxpayer make real and objective proof of the facts in order to rebut the presumption, namely of thefts, destruction or scrapping of the goods in question, and that it prove that the destination of the same was other than their sale."

17. And adds as to the hearing of witnesses: "Indeed, the testimony of the witnesses heard by itself, without the respective accounting and documentary support, is not enlightening as to the destinations of the goods and sufficient to overcome the legal presumption."

18. Matter which we will analyze next.

From the illegal denial of production of proof

1. Still regarding testimonial evidence, see the provision of article 72 of the LGT.

2. The factual matter to be proved, as stated above, does not admit the intended means of proof - only documentary proof allows the clarification of the true tax situation.

3. In fact, to that effect, refer António Lima Guerreiro in General Tax Law Annotated, Editor Rei dos Livros, 2001, pages 323 and following, in annotation to article 72 of the LGT: "The instructing body has the freedom of choice of the proof proceedings appropriate to the discovery of material truth (...) However, it is to the instructing body that ultimately falls, the option for the evidentiary means necessary to the discovery of material truth, not being bound to the initiative of the interested parties. It may, therefore, reject the proof proceedings requested by them, in the case of, on a founded basis, considering them to be devoid of interest for the resolution of the proceeding, without prejudice to the possibility of challenge or impugnation of the final decision of the proceeding by those harmed, on the grounds of violation of the inquisitorial principle."

4. This understanding is equally corroborated by Jorge Lopes de Sousa in Code of Tax Procedure and Process Annotated, 4th edition, Vislis Editors, 2003, in annotation to article 50: "It is to the instructing body that it falls to choose which means of proof to use to prove the facts whose knowledge is relevant to the decision, and may determine to the Interested parties the provision of information, the presentation of documents or things, submission to inspections and collaboration in other means of proof (art. 89, no. 1 of the CPA). However, the interested parties may attach documents and opinions and request the carrying out of useful proof proceedings for the clarification of facts with interest to the decision (art. 88, no. 2 of the CPA). However, the instructing body may not carry out the requested proceedings if it considers them unnecessary for the ascertainment of the facts that matter for the decision."

From the unconstitutionality of Decree-Law no. 102/2008, of 20 June

1. The claimant makes various considerations on the constitutionality of Decree-Law no. 102/2008, of 20 June.

2. It is not incumbent on the Tax Authority and Customs Administration to rule on the alleged unconstitutionality, given that this is not the proper place to discuss the same.

From the illegality of the liquidation of compensatory interest

1. The claimant contests the liquidation of compensatory interest, alleging that the fault of the taxpayer should have been appreciated, underlining that in the case under analysis such fault does not exist, considering as "proven the good faith subjective ethical, which precludes any judgment of fault".

2. It therefore invokes lack of justification of the "Liquidations of Compensatory Interest".

3. The compensatory interest provided for in article 35 of the LGT has the legal and indemnificatory nature (not punitive), aiming to indemnify the State for the prejudice by the delay in liquidation (objective element) imputable to negligent or willful conduct of the taxpayer, that is, it is necessary that fault imputable to the latter be verified (subjective element).

4. Compensatory interest has an indemnificatory nature, as expressed in article 562 of the CC, therefore, being a pecuniary obligation, the prejudice or the amount of damages to be indemnified is presumed in the amount of the interest, (which is designated by abstract assessment of damages), and the creditor is dispensed up to that amount, from the proof of the actual prejudice, in accordance with the provision of article 806 of the CC.

5. The obligation to pay these interest obeys the following requirements: voluntary fact, unlawful, culpable, harmful and existence of causal nexus between the fact and the damage. Basically, they are the same requirements of the obligation to indemnify based on liability for unlawful facts.

6. The periodic declaration of 14.03T delivered by the taxpayer suffered from omissions duly identified in the RIT, which resulted in the lack of liquidation of VAT for the regularization of inventory that had the effect of reducing the assessed tax.

7. The irregularities pointed out in the RIT, it should be stressed, translate a reprehensible, unlawful conduct, of the taxpayer, departing from a culpable action, because the same did not comply with the rules contained in articles 3, 7, 16, 18, 27, 29 and 86 of the VAT Code.

8. This is demonstrated in the RIT, where the legal norms violated by the taxpayer are discriminated, as well as the values that should have been determined and were not, within the deadline for submission of the periodic VAT declaration, of period 14.03T.

9. Thus, the requirements for the right to compensatory interest are met.

10. The conduct of the taxpayer resulted in an assessment of tax inferior to that due, therefore there was prejudice to the State.

11. In this way, compensatory interest is due by the claimant, for the reasons enumerated in the RIT. From testimonial evidence in the context of administrative recourse

12. In accordance with article 69, subparagraph e) of the CPPT, one of the rules of the administrative recourse procedure, is the limitation of the evidentiary means to documentary form and to official elements that the services have available, without prejudice to the entity with decision-making power, ordering other complementary proceedings.

13. This is therefore a special provision in that it results from the very nature of the administrative recourse process: simple and expeditious, and the petition of administrative recourse based merely on testimonial evidence invoked by the applicant should be rejected. What is required, is documentary proof - the hallmark of said administrative recourse process.

14. Indeed, it is not mandatory that the witnesses indicated be heard by applying the combined principles of two structuring principles of tax litigation, namely: the principle of written proof mitigated by manifestations of orality (notably within the scope of inspection acts) and the principle of free assessment of proof (margin of discretion that characterizes the action of the Public Administration in general).

15. Thus, giving preference to documentary proof, the instructing body does not consider this to be a complementary proceeding indispensable to the discovery of material truth, in strict compliance with the principles governing instruction, namely the principle of freedom of collection of proof and assessment of the means of proof (final part of number 1 of article 87 and number 2 of article 91, both of the Code of Administrative Procedure - CPA, applicable ex vi, subparagraph c) of article 2 of the LGT).

16. We are of the opinion that the factual matter to be proved, as stated above, does not admit the intended means of proof: only documentary proof allows the clarification of the true tax situation.

17. All the more so because, at this stage of the administrative proceeding, the proceeding requested by the claimant is not justified in light of the evidentiary elements already existing in the proceedings.

18. In this way, testimonial evidence will not be accepted as has been extensively justified above.

Conclusion

1. Having been notified of the right to hearing, the representative did not exercise it, having in the meantime the deadline for that purpose expired.

2. The claimant failed to rebut the presumption contained in article 86 of the VAT Code, whereby the corrections made are maintained and the crisis liquidation is considered legal.

3. I consider that the present administrative recourse should be rejected, maintaining the liquidation challenged in accordance with the foregoing points.

I) The decision to reject the administrative recourse was notified to the Claimant by letter received on 02-11-2018 (document no. 5 attached to the request for arbitral ruling, the content of which is reproduced);

J) From 2007/2008 onwards, a crisis occurred that affected the sale of furniture of the type sold by the Claimant, not only because of the entry into the Portuguese market of large international companies (such as K... ), but also because of the subsequent economic and financial crisis;

K) Before that crisis, the Claimant manufactured furniture in large quantities, sometimes 500 or 1000, because the greater the quantity the more profitable the production gave (testimony of witnesses L..., M... and H...);

L) It was frequent, before that crisis, that seasonal and specific crises would occur, at the end of which the furniture was sold (testimony of witnesses L..., M... and H...);

M) During these crises, the Claimant continued to produce, because it had to give work to its employees, storing the furniture until the crisis was overcome (testimony of witnesses L..., M... and H...);

N) The more companies could produce in low seasons, the more they had the possibility to earn in high seasons (testimony of witness H...);

O) With the 2007/2008 crisis, there was no market recovery, but the Claimant, as had happened in previous crises, continued to produce, convinced that it would be overcome (testimony of witnesses L..., M... and H...);

P) As the crisis continued, the Claimant could not sell much of its production, having destroyed furniture it had stored, which had already gone out of fashion or was damaged, using the parts that were not visible, such as drawer parts and backs (testimony of witnesses L..., M... and H...);

Q) Regarding destroyed or damaged furniture, waste and wood transports were carried out, in the years 2011, 2012 and 2013, by the companies Industries N..., SA and O..., SA, which received them, in the following quantities:

(guides contained in document no. 10 attached to the request for arbitral ruling and, with better legibility from the administrative proceedings relating to administrative recourse, the content of which is reproduced);

R) The normal waste of the company's activity is around 5.1% (document no. 11 attached to the request for arbitral ruling, the content of which is reproduced);

S) About 95% of the dozens of furniture production companies of the type produced by the Claimant located in its region (... and ...) were declared insolvent (testimony of witness H...);

T) The Claimant's sales dropped to about 1/3 of what it did before the crisis (testimony of witness H...);

U) The destruction of furniture manufactured by the Claimant occurred over several years, but was only reflected in accounting in 2014, by requirement of the Claimant's certified accountant (testimony of witness H...);

V) The Claimant did not account for the scrapping of furniture it carried out, because it would decrease the accounting value of its assets and affect its credibility with the banking sector and its ability to obtain financing (testimony of witness H... and document no. 7 attached to the request for arbitral ruling);

W) It was not possible to take advantage, for the production of new models, of all the furniture that the Claimant could not sell, because the wood was already cut and drilled to the measure of the furniture for which it was intended, and it was not possible to take advantage of it for that purpose (testimony of witness M...);

X) Flooding occurred in the Claimant's facilities and damage to the roof that resulted in damaged furniture (testimony of witnesses L... and M... and document no. 13 attached to the request for arbitral ruling);

Y) In fiscal year 2014, the Claimant proceeded to the regularization of inventories, based on actual and effective count and the determination of the acquisition value of the goods that were in stock;

Z) The company since 2009, recorded in its inventories a value well above normal for the industry sector (document no. 7 attached to the request for arbitral ruling, the content of which is reproduced);

AA) The average duration of the Claimant's inventories between 2009 and 2013 recorded a value above 1200 days and in value above 1.3 million euros and in the same period the sector average was below 350 days and 200 thousand euros in value (document no. 7 attached to the request for arbitral ruling, the content of which is reproduced);

BB) From that count resulted a sharp decline both in the quantities of goods in inventory and in their value, dropping from 1,329,998€ in 2013, to 466,889€ in 2014 (document no. 7 attached to the request for arbitral ruling, the content of which is reproduced);

CC) If the value of the inventory regularization (889,250€) is considered as additional sales of the company's activity in 2014, the Gross Margin (sales discounted from the cost of raw material consumed) would move from 50.1% to 79.2% and the relative weight of personnel costs would be 13.5% instead of the 32.4% recorded and other expenses would represent 5.4% of sales instead of the 12.9% recorded in the accounts (document no. 7 attached to the request for arbitral ruling, the content of which is reproduced);

DD) The company for a sales volume near the industry sector, recorded a Gross Margin better than the sector +3.0%, personnel costs above the sector +9.2% and expenses (Supplies and External Services) below the sector -5.2% (document no. 7 attached to the request for arbitral ruling);

EE) The Claimant provided mortgage guarantee to suspend the fiscal enforcements nos. ...2018... and ...2018..., instituted for coercive collection of the liquidated amount (document no. 14 attached to the request for arbitral ruling, the content of which is reproduced);

FF) On 29-01-2019, the Claimant submitted the request for constitution of the arbitral tribunal that gave rise to the present proceeding.

2.2. Unproven Facts and Justification of the Factual Matter Decision

It was not proven that the Claimant sold the furniture referred to in the inventory regularization carried out in 2014.

In fact, no proof was produced in the sense that finished and under construction furniture referred to in the regularization was sold, and on the contrary, all the testimonial evidence produced points to the fact that the furniture in question was not sold and, rather, was destroyed.

The witnesses L..., M... and H... appeared to testify with impartiality and with personal knowledge of the facts they reported.

It was not proven that the documents indicated as evidence elements do not correspond to reality.

As for the lists of furniture that the Claimant indicates as having been destroyed, the large amount of materials (about 143,000 kg) delivered to the companies Industries N..., SA and O..., SA suggests that it is not mere waste resulting from the Claimant's normal activity, corroborating the statements of witnesses L... and M..., who stated they included furniture that was destroyed.

In any case, if it is true that one cannot conclude that furniture was not sold without issuing the respective invoice, it is also true that all the testimonial evidence produced points to the fact that at least part of the furniture whose value underlies the VAT liquidation being contested was destroyed or suffered damage that rendered it unusable.

4. Matter of Law

4.1. Order of Knowledge of Vices

The Claimant imputes to the VAT liquidation acts and compensatory interest the following vices:

– insufficient justification;

– pretermission of right to hearing;

– inapplicability of article 86 et seq. of the VAT Code, having proved destruction of furniture;

– illegal denial of production of proof;

– incompetence of the Director-General of Taxes;

– illegality of the liquidation of compensatory interest, due to lack of fault;

Article 124 of the CPPT establishes rules on the order of knowledge of vices in judicial challenge proceedings, which are subsidiarily applicable to arbitral proceedings, by virtue of the provision of article 29, no. 1, subparagraph c), of the RJAT.

In the case of vices giving rise to annulability, subparagraph a) of no. 2 of that article 124 establishes that priority knowledge should be had of vices whose finding of merit, according to the prudent criterion of the decision-maker, determines more stable or effective protection of the interests offended.

The vices of lack of justification, pretermission of essential formality, illegal denial of production of proof and incompetence of the Director-General of Taxes, are of a formal and procedural nature, whereby, in case of eventual annulment on the grounds thereof, the possibility of renewal of the annulled act, with suppression of the vice, is not necessarily precluded.

In any case, if any vice that ensures stable and effective protection of the interests of the Claimant is judged to have merit, the knowledge of the remaining vices will be prejudiced, as is implicit in the establishment of an order of knowledge (because if it were always necessary to know of all, the order of their knowledge would be indifferent).

Thus, it is important to begin by assessing the vices of inapplicability of article 86 of the VAT Code, having proved destruction of furniture, a vice that is connected to that of illegality of the denial of production of proof.

4.2. Questions of the Illegal Application of Article 86 of the VAT Code and of the Illegality of Denial of Proof

4.2.1. Terms in which the questions are posed

In the inspection conducted by the Tax Authority and Customs Authority, it understood, in summary, the following:

– "the company in 2014 carries out, in accordance with what is recorded in the documents of its accounting and which are reflected in the tax declarations delivered to the AT, a regularization of the inventory accounts in fiscal year 2014, which represents a reduction thereof in the amount of € 889,250.00 and cannot prove how it arrived at the values determined after physical count, as well as what the destination/whereabouts of those finished products, products and work in progress and raw materials. It is important to note that this value [€ 889,250.00] compared to the final inventory of fiscal year 2013 [€ 1,329,998.27] represents a decrease in its value of over 66.5%.

– the SP did not proceed to liquidate the VAT corresponding to this operation nor issued the respective invoice as provided for in articles 27 and 29 of the VAT Code.

– Subparagraph f) of no. 3 of article 3 of the Value Added Tax Code (VAT Code) provides: "(...)[The following are also considered transmissions of goods] the permanent assignment of goods of the company, to own use of its owner, of the staff, or in general to purposes other than the company itself, as well as their free transmission, when, with respect to those goods or the elements that constitute them, there has been total or partial deduction of the tax (...)";

– subparagraph b) of no. 2 of article 16 of the VAT Code establishes that the taxable value of the transmissions made under subparagraph f) of no. 3 of article 3 of the VAT Code is "(...) the acquisition price of the goods or of similar goods, or, in its absence, the cost price, at the time of realization of the operations". Moreover, in accordance with no. 4 of article 7 of the same code "In the transmissions of goods and provision of services referred to, respectively, in subparagraphs f) and g) of no. 3 of article 3 and in subparagraphs a) and b) of no. 2 of article 4, the tax is due and payable at the moment in which the assignments of goods or provision of services provided therein take place";

– moreover, article 86 of the VAT Code still provides "Except to the contrary proof, goods found in any of the places where the taxable person carries on activity are presumed to be acquired and goods acquired, imported or produced which are not found in any of those places are presumed to be transmitted";

– "as there are no files with proof evidencing the destruction of "inventory items that had no value because they were considered unsaleable, obsolete or damaged", namely destruction or scrapping certificates signed by credible witnesses";

– the Claimant "cannot prove [to date has not presented any evidence to the contrary of this reality] how it arrived at the values determined after physical count, as well as what the destination/whereabouts of those finished products, products and work in progress and raw materials";

– "It should be noted that the testimonial evidence procedure is not provided for either in article 60 of the LGT or in article 60 of the RCPITA. However, in accordance with article 72 of the LGT, it is to the instructing body that ultimately falls, the option for the evidentiary means necessary to the discovery of material truth, not being bound to the initiative of the interested parties. Moreover, it does not seem plausible to us that the witnesses could present documentary justifications of the responsibility of the claimant which the claimant itself could not present".

– Therefore, by the terms of the articles referred to above, the value to be considered for purposes of VAT liquidation, will be equal to the price reflected in inventory at the moment of realization of the operations, that is, its value on the date of 2014/01/31, by applying the VAT rate provided for in subparagraph c) of no. 1 of article 18 of the same.

In the exercise of the right to hearing on the draft of the Tax Inspection Report, the Claimant alleged, among other matters, the following:

– "the employees of the same were witnessing the destruction of some goods, the deterioration of others and finally, that the inventory count in 201% was real and effective", "the employees may at any time testify, with the Tax Authority and Customs Authority and when it finds it convenient, and confirm the reasons mentioned above as justifications for the inventory values being so different from 2013 to 2014" and

– "and they may also confirm that the goods lacking were not subject to paid alienation to others".

The Tax Authority and Customs Authority did not accept the production of the testimonial evidence suggested by the Claimant, understanding that it is inadmissible: "the testimonial evidence procedure is not provided for either in article 60 of the LGT or in article 60 of the RCPITA. However, in accordance with article 72 of the LGT, it is to the instructing body that ultimately falls, the option for the evidentiary means necessary to the discovery of material truth, not being bound to the initiative of the interested parties. Moreover, it does not seem plausible to us that the witnesses could present documentary justifications of the responsibility of the claimant which the claimant itself could not present".

Thus, essentially, the Tax Authority and Customs Authority understood that the Claimant carried out an inventory regularization in fiscal year 2014, with a reduction in the amount of € 889,250.00, "cannot prove how it arrived at the values determined after physical count, as well as what the destination/whereabouts of those finished products, products and work in progress and raw materials" and testimonial evidence is not admissible, only documentary proof.

With these grounds, the Tax Authority and Customs Authority applied the presumption provided for in article 86 of the VAT Code, considering transmitted all the goods referred to in said regularization, by not being found in its facilities.

4.2.2. Assessment of the Questions

The accounting regularization of inventories of goods is not, in respect of VAT (although it may, eventually, be so in respect of CIT, which is not relevant here), a tax fact subject to the application of VAT, because its application is limited to the facts referred to in article 1 of the VAT Code, which includes transmissions of goods, which are constituted by the facts indicated in article 3 of the same Code.

In this case, the Tax Authority and Customs Authority understood in the Tax Inspection Report that transmissions occurred that could be classified under the concept referred to in subparagraph f) of no. 2 of this article 3, that is, "the permanent assignment of goods of the company, to own use of its owner, of the staff, or in general to purposes other than the company itself, as well as their free transmission, when, with respect to those goods or the elements that constitute them, there has been total or partial deduction of the tax".

It is not clear in the Tax Inspection Report in which or which of the situations provided for here the Tax Authority and Customs Authority understood that the facts it ascertained are classified.

But, it is certain that it does not include in this concept of transmission goods of the company that are destroyed or have become unusable for having suffered damage.

However, the Tax Authority and Customs Authority concluded that all the goods referred to in the accounting regularization should be considered transmitted in the forms provided for in this subparagraph f) of no. 2 of article 3, by application of the presumption in article 86 of the VAT Code that "goods acquired, imported or produced which are not found in any of those places [in which the taxable person carries on activity] are presumed to be transmitted".

In fact, it was this type of transmissions, and not the realization of sales, that the Tax Authority and Customs Authority presumed to have occurred, as it explicitly reaffirms in its pleadings by saying that "as clearly results from the documents, the AT did not ascertain sales" (page 9).

The establishment of this presumption in article 86 of the VAT Code does not mean, contrary to what the Tax Authority and Customs Authority understood in the decision on administrative recourse and reaffirms in the present proceeding, that "it was incumbent on the claimant to bring into the proceedings evidence that justified that difference in values in the 2014 inventory, something it did not do until now".

In fact, even when the law provides a presumption unfavorable to the taxpayer, the tax administration is not relieved of the obligation to "carry out all proceedings necessary to the satisfaction of public interest and the discovery of material truth, not being subordinated to the initiative of the author of the