Process: 592/2017-T

Date: May 2, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 592/2017-T) addresses VAT assessment corrections totaling €90,571.01 and €8,738.73, plus compensatory interest, imposed on A…, LDA. for tax periods 2012-06T and 2013-03. The case centers on alleged unrealized operations ('operações não realizadas') involving intra-Community supplies. The Portuguese Tax Authority (AT) challenged VAT exemptions claimed under Article 14 of RITI (Regime do IVA nas Transações Intracomunitárias) for invoices issued to customers in other EU Member States. During an external inspection procedure, AT identified invoices where the taxpayer failed to provide adequate proof that goods were physically removed from Portuguese territory to another Member State, a fundamental requirement for VAT exemption on intra-Community supplies. Specifically, for one invoice relating to an alleged sale of tractors, the taxpayer responded to AT's evidence request by submitting documentation of a purchase contract (not a sale) with a Chinese supplier, claiming the deal fell through due to non-payment. The AT inspector concluded this documentation was irrelevant, as it related to the taxpayer's intended acquisition of goods, not the disputed sale for which the VAT-exempt invoice had been issued. The arbitral tribunal, constituted under Decree-Law 10/2011 establishing the tax arbitration framework (RJAT), held a hearing on April 3, 2018, with witness testimony. The case illustrates how Portuguese tax law requires substantive proof of actual transaction completion, not merely formal invoice issuance, to qualify for VAT exemptions. The burden of proof rests on taxpayers to demonstrate that operations actually occurred as invoiced and meet all statutory conditions for exemption.

Full Decision

ARBITRAL DECISION

The arbitrators Counselor Jorge Lopes de Sousa (arbitrator-president), Dr. Marisa Isabel Almeida Araújo and Dr. Hélder Faustino (arbitrator members), designated by the Deontological Council of the Centre for Administrative Arbitration to constitute the Arbitral Tribunal, constituted on 24-01-2018, agree as follows:

1. Report

A…, LDA., legal entity no…, with registered office in… – …, …-... …, hereinafter referred to as the "Claimant", came pursuant to article 2(1)(a) and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT"), to present a request for arbitral pronouncement seeking declaration of illegality of tax assessment acts no. 2016…, in the amount of €90,571.01, and 2016…, in the amount of €8,738.73, relating to Value Added Tax (VAT), referring to the periods 2012 06T and 2013 03 and related compensatory interest assessments nos. 2016…, in the amount of €14,223.37, and 2016…, in the amount of €1,116.64.

The AUTHORITY FOR TAX AND CUSTOMS is named as Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Authority for Tax and Customs on 09-11-2017.

Pursuant to the provisions of article 6(2)(a) and article 11(1)(b) of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable deadline.

On 04-01-2018 the parties were duly notified of this designation and did not express any intention to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11(1)(a) and (b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of article 11(1)(c) of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 24-01-2018.

On 27-02-2018, the Authority for Tax and Customs submitted a response in which it argued that the request should be judged dismissible.

On 03-04-2018, a hearing was held at which witness evidence was produced and it was decided that the case would proceed with written submissions.

The Parties submitted arguments.

The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2(1)(a) and 10(1) of Decree-Law no. 10/2011, of 20 January, and is competent.

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

The case is not affected by nullities.

2. Matter of Fact

2.1. Proven Facts

In compliance with External Service Order nos. OI 2015… and OI2015…, an external inspection procedure was developed by Tax Inspection Division II (DIT II), of the Finance Directorate of …, covering the years 2012 and 2013 – of the Claimant;

In the said inspection action, a tax inspection report was drawn up which is contained in document no. 7 attached to the request for arbitral pronouncement, the content of which is reproduced herein, and which states, among other things, the following:

TAX INSPECTION REPORT

I - CONCLUSIONS OF THE INSPECTION ACTION

From the external inspection procedure, concerning the years 2012 and 2013, corrections unfavorable to the taxpayer resulted, as described and justified in Chapter III of this report.

(...)

III - DESCRIPTION OF FACTS AND GROUNDS OF PURELY ARITHMETIC CORRECTIONS TO TAXABLE MATTER

(...)

III.2- VAT

1 - Sales to taxpayers belonging to Another Member State

A… throughout the years 2012 and 2013, issued various invoices for recipients based in other Member States, exempting the respective operations, in accordance with article 14 of RITI. Intra-Community transfers of goods are considered:

– Removal of goods from national territory, with destination to another Member State of the European Union;

  • Carried out for consideration;

  • Carried out in accordance with the provisions of article 3 of CIVA;

  • Carried out by taxpayers registered for VAT purposes in their respective Member State.

Pursuant to article 14(a) of RITI, the following are exempt from tax: "Transfers of goods, carried out by a taxpayer referred to in article 2(1)(a), dispatched or transported by the seller, by the buyer or on their behalf, from national territory to another Member State with destination to the buyer, when the latter is a natural or legal person registered for value added tax purposes in another Member State, which has used the respective identification number to carry out the acquisition and is covered by a system for taxation of intra-Community acquisitions of goods." (bold and underlined by us)

Because, with regard to some invoices related to intra-Community transfers of goods, there were doubts regarding proof of the removal of the goods from National Territory to Another Member State, on 6 November 2015, the taxpayer was notified to:

With regard to the invoices mentioned in table 3, please present

  • Documents evidencing the removal of goods from National Territory to another Member State or third country, as well as confirmation of receipt of goods by the recipient;

  • Proof of receipt of the invoices."

On 20 November 2015, in response to the notification, it was concluded that, with regard to line 1 of the table (invoice no. 134), line 4 of the table (invoice no. 247), line 5 of the table (invoice no. 249), line 6 of the table (invoice no. 250), line 7 of the table (invoice no. 276), and line 8 of the table (invoice no. 277), the doubts regarding the removal of goods from National Territory to another Member State or third country were clarified.

In Annex 8 are copies of the notification made on 6 November 2015 to the taxpayer and a copy of the response to the notification, regarding point 5, dated 20 November 2015.

We proceed below to the analysis of the remaining invoices.

The taxpayer was notified to present

"- Documents evidencing the removal of goods from National Territory to another Member State or

third country, as well as confirmation of receipt of goods by the recipient;

  • Proof of receipt."

In response to the notification, A… replied "With regard to the invoice aforementioned above, please find attached various documents of the transfers totaling 30% of the total value of the "Sales Contract" no. ... concluded with supplier B… CO Ltd.

By the search carried out it was possible to reach the following conclusion:

We never received the respective order because we did not have the possibility of paying the remaining 50%, thus the contract was rendered void".

Attached, A… enclosed a copy of a contract for 37 tractors "... …", from China in the amount of 777,000 US dollars, and proof of bank transfers in the amount of 266,460 US dollars to B… CO Ltd. That is, what A… attaches is a contract in which it intends to acquire 37 tractors "... FT904" and intends to demonstrate that the acquisition did not occur due to lack of payment. But what is at issue is a sale of tractors carried out by A… and not a purchase.

Pursuant to article 23(1)(b) of RITI, in conjunction with article 7 of RITI and article 3 of CIVA and also article 29(1)(b) of CIVA, the invoice is issued when there is a transfer of goods, that is, the onerous transfer of tangible goods in a manner corresponding to the exercise of the right of ownership.

Now, if A…, Lda issued the invoice on 16-06-2012, it is because it transferred the goods contained therein. And accounting-wise, the invoice is recognized as Sales – it was recorded in a sub-account of 71 - Sales.

To benefit from VAT exemption, it must meet the requirements established by law. And the non-application of the tax must be invoked, as already mentioned in article 36(5)(e) of CIVA).

In invoice no. 168, it was stated that it was exempt from VAT under article 6(8)(a) and (9) of CIVA. Article 6(8)(a) of CIVA states the following:

"8 - Notwithstanding the provisions of no. 6, the following operations are taxable:

a) Provision of services related to real property situated in national territory, including services provided by architects, by construction supervision companies, by surveyors and real estate agents, and those intended to prepare or coordinate the execution of real estate works, as well as the granting of rights of use of real property and the provision of accommodation services provided as part of hotel activity or other similar activities, such as camping sites".

And no. 9 of article 6 of CIVA states the following:

"9 - The provisions of article 6(b) in no. 6 do not apply with regard to the following operations:

a) Provision of services for transport of goods, with the exception of intra-Community transport of goods, for the distance traveled outside national territory,

b) Provision of intra-Community transport services of goods, when the place of departure occurs outside national territory,

c) Provision of services accessory to transport, which are materially executed outside national territory;

d) Provision of services consisting of work performed on tangible movable property and related surveys, when executed wholly or essentially outside national territory;

e) Provision of services carried out by intermediaries acting in the name and on behalf of another, when the operation to which the intermediation refers takes place outside national territory.

f) Provision of services of a cultural, artistic, scientific, sporting, recreational, educational and similar character, including fairs and exhibitions, not covered by article 7(e), including those of the organizers of such activities and provision of services ancillary to them, which do not take place in national territory.

g) Rental of a means of transport, which is not short-term, when the recipient is a person established or domiciled outside national territory.

h) Provision of telecommunications, radio or television broadcasting and electronic services, namely those described in Annex D, when the recipient is a person established or domiciled outside national territory."

Pursuant to article 36(5)(e) of CIVA (at the time of the facts)

5 - Invoices or equivalent documents must be dated, numbered sequentially and contain the following elements:

e) The justification for the non-application of the tax, if applicable;" (bold and underlined by us)

From the description contained in the invoices, it seems to us that the justification for the non-application of the tax does not apply, as we are dealing with the sale of goods and not the provision of services.

However, we will proceed to the analysis of whether the goods transferred are exempt from VAT under article 14(a) of RITI (intra-Community transfer of goods) or article 14(a) of CIVA (export).

For the application of the exemption provided in article 14(a) of RITI or article 14(a) of CIVA, the goods must leave national territory for Another Member State or outside the Community. The taxpayer provides no proof that the goods left National Territory.

Neither in RITI nor in the VAT Code is there any "temporal suspension" for the removal of goods from National Territory, as happens for example in sales made to a national exporter (in brief, article 6 of Decree-Law no. 198/90, of 19 June, provides for a regime of exemption from value added tax on sales of goods with value exceeding €1,000.00 made by a supplier to a national exporter, provided they are exported in the same state and within 60 days from the date of acceptance of the customs export declaration, however, if the seller does not have in his possession the certificate endorsed by the customs services, within 90 days from the issuance of the invoice, he must proceed to the collection of VAT).

The taxpayer should have proceeded to the collection and payment of VAT, in the amount of €112,039.20, to the State coffers, thus infringing the provisions of article 8(1)(a), article 27(1), and article 41(1)(b) of the VAT Code. The VAT rate to be applied is that contained in article 18(1)(b) of the VAT Code.

The taxpayer was notified to:

"- Documents evidencing the removal of goods from National Territory to another Member State or third country, as well as confirmation of receipt of goods by the recipient;

  • Proof of receipt."

In response to the notification, A… replied "The invoice issued by us relating to 6 GPS systems to our client C…, S.L, were included in tractors to which we had given notice but which we ultimately did not supply.

As the Suriname business ultimately did not fully materialize, this material was never supplied and remained in our facilities in stock".

As already previously stated, pursuant to article 23(1)(b) of RITI, in conjunction with article 7 of RITI and article 3 of CIVA and also article 29(1)(b) of CIVA, the invoice is issued when there is a transfer of goods, that is, the onerous transfer of tangible goods in a manner corresponding to the exercise of the right of ownership.

Now, if A…, Lda issued the invoice on 20-09-2012, it is because it transferred the goods contained therein. And accounting-wise, the invoice is recognized as Sales – it was recorded in a sub-account of 71 - Sales.

To benefit from VAT exemption, it must meet the requirements established by law. And the non-application of the tax must be invoked, as already mentioned (article 36(5)(e) of CIVA).

The justification for the exemption invoked by A… is "article 14 of RITI".

For the application of the exemption provided in article 14(a) of RITI or article 14(a) of CIVA, the goods must leave national territory for Another Member State or outside the Community.

Neither in RITI nor in the VAT Code is there any "temporal suspension" for the removal of goods from National Territory.

The taxpayer should have proceeded to the collection and payment of VAT, in the amount of €11,575.20, to the State coffers, thus infringing the provisions of article 8(1)(a), article 27(1), and article 41(1)(b) of the VAT Code. The VAT rate to be applied is that contained in article 18(1)(b) of the VAT Code.

By failing to proceed to the collection and payment of VAT, in the amount of €123,614.00, with regard to invoices issued by A… to taxpayers belonging to Another Member State in which the goods did not leave national territory, the taxpayer infringed article 27(1) of the VAT Code.

2 - VAT deducted in an amount greater than that contained in the supporting document

In the analysis of the deductible VAT account statements it was found that A… deducted an amount greater than that contained in the invoice.

The VAT paid on the acquisition of the tractor was €4,810.00, however the taxpayer deducted the amount of €8,510.00 and recorded it in account 2432213 - At Normal Rate.

By deducting VAT higher by €3,700.00, thus infringing the provisions of article 19(1)(a) of the VAT Code.

(...)

III.3 - Summary of Increases to Net Result (IRC) and Missing VAT

(...)

The amount of the tax due, together with the respective periodic statement, must be paid by the 15th of the second month following the month to which the operations relate, as provided in article 27(1), in conjunction with article 29(1)(c) and article 41(1)(b).", all articles of the VAT Code.

The amount of the tax due, together with the respective periodic statement, must be paid by the 10th of the second month following the month to which the operations relate, as provided in article 27(1), in conjunction with article 29(1)(c) and article 41(1)(a).", all articles of the VAT Code.

The Claimant exercised the right to be heard on the draft Tax Inspection Report, arguing that, among other things, it issued the invoices referred to by the Authority for Tax and Customs before the business was concluded, but this was not concluded, and did not issue credit notes in error, with the goods referred to in the invoices never having entered national territory;

With the exercise of the right to be heard, the Claimant presented the documents and emails contained in document no. 7 attached to the request for arbitral pronouncement, the content of which is reproduced herein;

Following the exercise of the right to be heard, the Authority for Tax and Customs stated in the Tax Inspection Report the following, among other things:

From reading the emails, it appears that they relate essentially to C... S.L., although they were drafted by an employee of A…, Lda, Mr. G…, when signed by D.., it is in the name of C… or the Management of C….

Throughout the inspection procedure, Mr. D…, always gave the impression that C… was managed by a third party and that he had no connections to C….

However, from reading the emails, we find that the Manager of A… Lda also carries out acts of management/administration in C… SL.

And was already performing acts of management on 2 June 2012, as can be seen in the text of the email contained in pages 59 to 64 of Annex III, of the right to be heard. Date prior to the issuance of the two invoices:

(...)

That is, we are dealing with entities with special relationships. The manager of the A… Lda company has the power to exercise significant influence on the management decisions of C… SL.

(...)

In article 10 the taxpayer alleges that they did not receive the merchandise that was to be delivered by the suppliers, and that due to the unsustainable situation caused by the delay of more than 4 months in payments related to the equipment supply contract, they were forced to ask for these amounts directly from the client and prove to him, through reports of E…, that the material was ready since July 2012. It further alleges that they were placing in question the continuity of the agreement made by the parties.

It also argues that the merchandise was never received by us, and in turn was never dispatched, (Annex IV Pages 1/10).

(...)

From the emails sent it seems to us that there was merchandise dispatched in containers MSCUT… and MSCUSE…. From the analysis of the emails in Annex IV, Annex III (Sheet 96), and Annex V it appears that the containers MSCUT… and MSCUS… relate to 20 tractors. It is possible that this is merchandise that left directly from China to the port of Paramaribe (Suriname).

(...)

AT at no point concluded that the invoice was improperly issued, what AT concluded is that there were two invoices issued, exempt from VAT, because the merchandise was intended for another Member State or third country.

Pursuant to article 23(1)(b) of RITI, in conjunction with article 7 of RITI and article 3 of CIVA and also article 29(1)(b) of CIVA, the invoice is issued when there is a transfer of goods, that is, the onerous transfer of tangible goods in a manner corresponding to the exercise of the right of ownership.

Clotilde Celorico Palma also tells us (Studies on Value Added Tax, Lisbon, Almedina, 2006, p.275) "the invoice is presented as a document intended to prove the assertion, by a merchant, of its credit against the client, due to a sale operation or provision of services." The Invoice "will be the document in which the seller makes the complete breakdown of the goods that it sells to the buyer and in which it indicates the expenses it incurred, as well as the advantages it grants in prices and the conditions of delivery and payment. (A. Filomeno de Sousa Leite, Compendium of Notions of Commerce, 2nd edition, p. 107, cited by Clotilde Celorico Palma, ibidem).

For the application of the exemption provided in article 14(a) of RITI or article 14(a) of CIVA, the goods must leave national territory for Another Member State or outside the Community. The taxpayer provides no proof that the goods left National Territory, therefore VAT must be assessed.

Following the inspection, the Authority for Tax and Customs issued VAT assessments nos. 2016…, in the amount of €90,571.01, and 2016…, in the amount of €8,738.73, relating to Value Added Tax (VAT), for the periods 2012 06T and 2013 03 and corresponding compensatory interest assessments nos. 2016…, in the amount of €14,223.37, and 2016…, in the amount of €1,116.64 (documents nos. 1 to 4 attached to the request for arbitral pronouncement, the content of which is reproduced herein);

On 04-01-2017, the Claimant filed an administrative appeal of the assessments which was assigned no. …2017… (document no. 5 attached to the request for arbitral pronouncement, the content of which is reproduced herein);

The administrative appeal was dismissed (document no. 5 attached to the request for arbitral pronouncement, the content of which is reproduced herein);

The company F… and the company C… SL entered into a contract between them whereby the latter obligated itself to supply equipment and machinery intended for the operation of a plantation with an area of 2000 hectares of the botanical species Millettia Pinanatta in Saramacca, SURINAM;

On 23-04-2012, the Claimant and company C… SL signed another contract in which the former obligates itself to supply and maintain the agricultural equipment and machinery as part of the aforementioned project in Suriname developed by F…, its client (document no. 7 attached to the request for arbitral pronouncement, the content of which is reproduced herein);

In this contract, the agreed price was €4,375,314.00, with it being stipulated between the parties that 30% would be paid in advance and the remaining 70% upon delivery of the material;

The Claimant applied 30% of the total price to the purchase of equipment and machinery from various suppliers, as well as to the reservation of the remaining items subject to the supply contract signed between C… SL and the Claimant;

The Claimant made orders with its suppliers of the machines and equipment intended to subsequently be dispatched to SURINAM;

The goods indicated in invoices nos. 168 and 243 were ordered by the Claimant from supplier B… Co. Ltd, with registered office in the People's Republic of China, in …, to be dispatched on behalf of C… SL to F…;

F… did not show signs of paying the price of the equipment ordered by the Claimant and, given the insolvency situation of C… SL, it took steps with F… to ensure that payment was made;

The Claimant maintained the expectation that payments would be made by F… and therefore provisioned the amounts of the two invoices and maintained the records in the accounts, expecting to receive the money transfer shortly;

Only later did the Claimant become aware that there were problems with F… and that payment would not be made;

The transaction was not completed and the Claimant suffered a loss of the 30% advance it had made;

The Claimant could not pay for the remaining goods acquired from Chinese suppliers and these did not dispatch them;

The tractors ... and 6 auto-pilot GPS systems were never dispatched to the client of C… SL, because the remaining price (70%) was not paid and the suppliers retained the equipment;

No machinery acquired by the Claimant to be dispatched directly to F… ever entered national territory;

The Claimant issued invoices to C… SL, without VAT because the machines ordered would be dispatched to the client of C…. SL., F…, as soon as the remaining price was received;

On 09-11-2017, the Claimant presented the request for arbitral pronouncement that gave rise to the present case.

2.2. Unproven Facts and Grounds for Fixing the Matter of Fact

There are no facts relevant to the decision of the case that have not been proven.

The proven facts are based on the documents attached by the Claimant to the request for arbitral pronouncement and on the administrative file and witness evidence.

The witness evidence confirmed what is alleged by the Claimant regarding non-supply of the goods referred to in invoices nos. 168 and 243.

3. Matter of Law

The Claimant issued two invoices relating to the transfer of goods to its client C… SL, with registered office in Spain, without having assessed VAT.

In invoice no. 168 relating to the supply of 36 tractors, it was stated that it was exempt from VAT under article 6(8)(a) and (9) of CIVA.

These provisions relate to the provision of services and not the sale of goods.

The Authority for Tax and Customs understood that the exemptions provided in article 14(a) of RITI or article 14(a) of CIVA could not be applied, because the goods must leave national territory for Another Member State or outside the Community and the Claimant "provides no proof that the goods left National Territory".

With regard to invoice no. 243, relating to 6 "Auto Pilot" systems (which from the evidence produced results in GPS systems intended to be installed in tractors that were never supplied), the justification for the exemption invoked by the Claimant is "article 14 of RITI".

Also in this case, the Authority for Tax and Customs understood that the exemption does not apply because "the goods must leave national territory for Another Member State or outside the Community".

The Claimant argues that none of the transfers of goods were completed, as the business was not fully concluded, in light of the failure to pay by the company located in Suriname to which the goods were intended.

The Authority for Tax and Customs concluded that the transfers were completed because invoices were issued ("if A…, Lda issued the invoice on 16-06-2012, it is because it transferred the goods contained therein"; "and A…, Lda issued the invoice on 20-09-2012, it is because it transferred the goods contained therein"), because they were recorded "in a sub-account of 71 - Sales".

The clarifications provided by the Claimant during the tax procedure and in the administrative appeal, as well as the documentary and witness evidence presented, lead the Arbitral Tribunal to form the conviction that the transfers were not completed, for the reasons invoked and explained by the Claimant.

The fact that invoices were issued does not mean that the corresponding transfers were completed, as is a notorious fact, verifiable daily by the Authority for Tax and Customs and by the Courts.

Moreover, in the context of VAT, invoices being issued before operations are completed, frequent situations arise in which invoices must be cancelled or corrected, as is expressly mentioned in article 78(2) of CIVA, for situations in which VAT was assessed in the invoices.

There being no transfer, we are faced with a situation of non-existence of the tax event, in which there is no factual basis for taxation.

Furthermore, in arbitral proceedings, as in judicial review proceedings, founded doubt regarding the existence of the tax event suffices to justify annulment, as follows from article 100(1) of CPPT subsidiarily applicable, by virtue of the provisions of article 29(1)(c) of RJAT.

From the foregoing, it must be concluded that the disputed assessments, having been based on the assumption that the transfers were completed, are affected by error as to the factual prerequisites justifying their annulment, pursuant to article 163(1) of the Code of Administrative Procedure, subsidiarily applicable, by virtue of the provisions of article 2(c) of the General Tax Law.

The assessments for compensatory interest have as their prerequisites the respective VAT assessments (article 35(8) of the General Tax Law), and therefore are affected by the same defect.

4. Decision

On these grounds, the Arbitral Tribunal agrees to:

Uphold the request for arbitral pronouncement;

Annul the VAT assessments nos. 2016… and 2016… and the compensatory interest assessments nos. 2016… and 2016….

5. Value of the Proceedings

In accordance with the provisions of article 305(2) of CPC and article 97-A(1)(a) of CPPT and article 3(2) of the Regulation of €114,649.75.

6. Costs

Pursuant to article 22(4) of RJAT, the amount of costs is set at €3,060.00, in accordance with Table I appended to the Schedule of Costs in Tax Arbitration Proceedings, to be borne by the Authority for Tax and Customs.

Lisbon, 02-05-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Marisa Isabel Almeida Araújo)

(Hélder Faustino)

Frequently Asked Questions

Automatically Created

What are 'operações não realizadas' (unrealized operations) for VAT purposes in Portuguese tax law?
'Operações não realizadas' (unrealized or non-existent operations) in Portuguese VAT law refers to transactions that, despite being documented through invoices or other formal records, did not actually occur in economic reality. Under Article 3 of the Portuguese VAT Code (CIVA) and Article 7 of RITI, a taxable supply requires an actual transfer of goods corresponding to the exercise of ownership rights performed for consideration. Merely issuing an invoice under Article 29(1)(b) CIVA creates a presumption of a taxable transaction, but this presumption can be rebutted if the Tax Authority demonstrates the operation was fictitious, simulated, or never executed. For intra-Community supplies to qualify for VAT exemption under Article 14 RITI, taxpayers must prove: (1) physical removal of goods from Portuguese territory to another EU Member State, (2) the buyer is VAT-registered in another Member State and provided their VAT identification number, and (3) the transaction was actually performed. Failure to provide transport documents, delivery confirmations, or coherent evidence of the goods' movement results in disallowance of the exemption. The concept protects VAT neutrality by preventing tax advantages for paper transactions lacking economic substance.
Can the Portuguese Tax Authority (AT) disallow VAT deductions on invoices for operations deemed not to have taken place?
Yes, the Portuguese Tax Authority can and routinely does disallow VAT deductions and deny VAT exemptions on invoices for operations deemed not to have actually taken place. Under Article 19(2) and Article 20 CIVA, the right to deduct input VAT requires that the tax relates to goods or services actually used for taxable business activities. When AT inspection services determine through external audit procedures (as occurred in this case under External Service Orders OI 2015…) that invoiced operations are fictitious or lack substantiation, corrections are made pursuant to Article 78 of the General Tax Law (LGT) and Article 87 CIVA. The burden of proof framework is governed by Article 74 LGT and Article 75 LGT: while AT must present evidence justifying the correction, taxpayers bear the burden of proving fulfillment of legal requirements for exemptions claimed under Article 36(5)(e) CIVA. In intra-Community supply cases, taxpayers must affirmatively demonstrate physical goods movement via transport documents, CMR consignment notes, customs documentation, or delivery confirmations. Mere contractual documents or payment records are insufficient. AT inspectors issue Tax Inspection Reports (Relatório de Inspeção Tributária) detailing factual findings and legal grounds, leading to VAT assessment notices with compensatory interest calculated under Article 35 LGT. These assessments can be challenged through administrative appeals or, as in this case, CAAD arbitration proceedings under RJAT.
How does the CAAD arbitral tribunal assess evidence in VAT disputes involving alleged fictitious transactions?
CAAD arbitral tribunals assess evidence in VAT disputes involving alleged fictitious transactions by applying standard civil procedural rules on evidence evaluation combined with specialized tax law principles. Under Article 16(1) RJAT, arbitral tribunals follow the substantive and procedural tax law framework, including burden of proof rules from Articles 74-76 LGT and Article 100 CPPT (Tax Procedural Code). The tribunal examines the entire evidentiary record, including tax inspection reports (which benefit from presumption of veracity under Article 76 LGT unless contradicted), documentary evidence submitted by both parties, and witness testimony taken at hearings as occurred on April 3, 2018 in this case. For intra-Community supply exemptions, tribunals scrutinize whether taxpayers provided: transport/shipping documents showing cross-border movement, proof of delivery to buyers in other Member States, VAT identification verification via VIES system, and commercial correspondence confirming the transaction's business reality. Tribunals evaluate document coherence—in this case, the tribunal would assess the taxpayer's submission of a purchase contract with a Chinese supplier when the disputed invoice documented a sale, finding such evidence irrelevant or even contradictory. Witness credibility, accounting record consistency, and business logic are weighed. The free evaluation of evidence principle (Article 607 Civil Procedure Code, applicable by analogy) permits tribunals to assess all proof comprehensively while respecting specific legal presumptions and documentary authentication rules.
What are the legal consequences of VAT liquidation corrections related to unrealized operations under Portuguese law?
VAT liquidation corrections related to unrealized operations under Portuguese law carry multiple legal consequences. First, AT issues additional VAT assessment notices (liquidações adicionais) under Article 87 CIVA and Article 45 LGT, recalculating tax due by: denying exemptions improperly claimed, treating exempt supplies as taxable at standard rates (23% or applicable reduced rates), and disallowing input VAT deductions on fictitious purchases. Second, compensatory interest (juros compensatórios) accrues automatically under Article 35 LGT from the date tax should have been paid until actual payment, calculated at the legal interest rate. In this case, compensatory interest totaled €14,223.37 and €1,116.64 for the respective periods. Third, where tax evasion intent is established, criminal penalties may apply under Articles 103-104 RGIT (General Regime for Tax Infractions), including fines of up to €45,000 or imprisonment for qualified tax fraud. Fourth, systematic fictitious invoicing may trigger VAT registration cancellation under Article 33 CIVA. Fifth, unjustified VAT refund claims based on non-existent operations may constitute subsidy fraud. Sixth, corrections impact corporate income tax (IRC) as non-deductible expenses under Article 23 CIRC increase taxable profit. Seventh, prescription periods under Article 45 LGT allow AT to assess corrections within four years (eight years for non-filed returns). Finally, taxpayers face collection enforcement procedures under Article 88 CPPT, including asset seizure, if assessments remain unpaid after voluntary payment deadlines expire.
How can taxpayers challenge VAT assessments and compensatory interest through CAAD arbitration proceedings?
Taxpayers can challenge VAT assessments and compensatory interest through CAAD (Centro de Arbitragem Administrativa) arbitration proceedings by filing requests under Decree-Law 10/2011 (RJAT - Legal Framework for Tax Arbitration). Under Article 2(1)(a) and Articles 10 et seq. RJAT, taxpayers may submit arbitration requests within 90 days from notification of the contested assessment (Article 10(1)(a) RJAT). The request must identify the contested acts (assessment notices and interest calculations), state factual and legal grounds, and include supporting documents per Article 10(2) RJAT. CAAD's President reviews admissibility and the Deontological Council designates a sole arbitrator (for amounts under €10,000) or three-member tribunal (higher amounts) within 5 days per Article 6 and 11 RJAT. Parties may challenge arbitrator appointments within 10 days under Article 11(1)(a) RJAT. Once constituted (as occurred January 24, 2018 in this case), the tribunal notifies AT to respond within 30 days under Article 17 RJAT. The tribunal may order hearings for witness testimony and expert evidence (as held April 3, 2018 here), followed by written submissions. Decisions must issue within 6 months (extendable to 12 months) per Article 21 RJAT. Arbitral decisions have binding effect equivalent to court judgments under Article 24 RJAT and are enforceable under Article 4 RJAT. Appeals to administrative courts are extremely limited, only for legal violations under Article 25 RJAT. CAAD arbitration offers advantages including speed, specialized arbitrators, and suspension of collection during proceedings under Article 146(1) CPPT if guarantee provided.