Process: 613/2014-T

Date: February 23, 2015

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 613/2014-T addressed critical questions regarding VAT deduction rights for Portuguese municipalities and the competence of arbitral tribunals to hear self-assessment disputes. A Municipality claimed it had paid excess VAT totaling €674,602.25 for the 2007-2008 tax periods, arguing it incorrectly applied only the pro-rata deduction method based on Tax Authority Circular Notice 61137/1987. The municipality contended this interpretation prevented it from simultaneously using the direct allocation method for resources exclusively dedicated to taxable operations (such as water supply services), resulting in lower deductions than legally permitted under Article 20 of the VAT Code. The Tax Authority raised multiple jurisdictional exceptions, arguing the arbitral tribunal lacked material competence under Article 2(1)(a) and 4(1) of the RJAT (Legal Regime for Arbitration in Tax Matters). The TA asserted that requests for VAT recovery confirmation constitute administrative acts not subject to arbitral review per Article 97(a) of the CPPT, that the claimant failed to identify specific assessment acts being challenged, and that the 2014 request regarding 2007-2008 periods was untimely. This case highlights fundamental tensions between municipal VAT deduction methodologies, the scope of tax arbitration jurisdiction in Portugal, and procedural requirements for challenging self-assessments. The dispute centers on whether municipalities can combine deduction methods and whether arbitral tribunals established under Decree-Law 10/2011 have authority to review self-assessment acts where taxpayers claim overpayment, raising important precedential questions about access to arbitral justice for VAT disputes involving local government entities.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 613/2014-T

Subject: VAT, right of deduction; jurisdiction of the arbitral tribunal

The arbitrators, Counselor Jorge Manuel Lopes de Sousa (Arbitrator-President), Professor Doctor João Ricardo Catarino and Doctor Emanuel Vidal de Lima, appointed by the Ethical Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 24 September 2014, agree as follows:

I - REPORT

MUNICIPALITY …, Tax Number …, with registered office at …, …, pursuant to the provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "LRAT"), submits a request for arbitral pronouncement requesting the total annulment of the VAT self-assessment acts relating to the periods from January to December 2007 and 2008, for alleged payment of excess tax, in the amount of €674,602.25 [Docs. 1 to 24, attached with the request].

The CLAIMANT did not proceed to appoint an arbitrator, and therefore, under Article 6, paragraph 2, subparagraph a) of the LRAT, Counselor Jorge Lino and the two last signatories were appointed by the President of the Ethical Council of CAAD to form this collective Arbitral Tribunal, having accepted the appointment within the prescribed period and other legal terms.

On 07-11-2014, the parties were duly notified of this appointment, having manifested no intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of Article 11, paragraph 1, subparagraphs a) and b) of the LRAT and Articles 6 and 7 of the Ethical Code.

Thus, in accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 24 September 2014 and notification of its constitution took place on the same date.

Having the Tax Authority been notified of the replacement of Counselor Jorge Lino, arbitrator-president, by Counselor Jorge Lopes de Sousa, it submitted by request presented on 11 November 2014, raising questions of an ethical nature, concerning the nexus and stability of the appointment, on the effects of eventual cessation of impediment (Article 605, paragraph 2 of the Civil Procedure Code), as well as regarding the possibility of scrutiny of any eventual circumstances that may constitute impediment of the substitute arbitrator. By dispatch of 4 February 2015, the President of the Ethical Council of CAAD definitively appointed Counselor Jorge Lopes de Sousa to replace Counselor Jorge Lino, in accordance with and under Article 8, paragraph 1 of the Ethical Code of CAAD.

On 16 December 2014, the Tax Authority and Customs Authority (TA) submitted a Response, arguing that the request for arbitral pronouncement should be judged inadmissible, raising several exceptions.

On 16 December 2014, by dispatch, the Claimant was invited to discuss, within 10 days, the matter of an exceptional nature put forward by the TA.

By dispatch of 7-1-2015, the meeting provided for in Article 18 of the LRAT was waived, and the parties were given the opportunity to submit, if they wished, final written arguments.

None of the parties submitted arguments.

To support its request, the Claimant alleges in summary and with relevance that:

a) The claimant had been deducting VAT incurred in mixed-use resources using only one deduction method: the percentage deduction method or pro rata.

b) In the years in question it deducted only the VAT borne in the acquisition of such mixed-use resources, that is, those that are used simultaneously in carrying out operations that confer the right to deduction and operations that do not confer that right, through the application of the percentage deduction method or pro rata, calculating definitive pro ratas in each of those years.

c) For which reason it self-assessed VAT improperly through deduction lower than due in the periodic declarations from January to December of the tax periods comprised in the years 2007 and 2008.

d) And that, although it had acquired resources that were exclusively dedicated to carrying out taxable operations (such as water supply), which would have allowed it the integral deduction of VAT incurred with such acquisitions, under Article 20 of the VAT Code, it only proceeded to deduct VAT under the pro rata method, in accordance with the interpretation of the TA on the matter, set out in Circular Notice No. 61137, of 9 July 1987, which required municipalities to adopt only one of the deduction methods: pro rata or actual allocation.

e) An interpretation that, the claimant argues, obliged it to adopt only one of the deduction methods, as it refers in Article 23 of p. i. when stating that "the choice of the pro rata method excluded the possibility of (combined) application of the actual allocation method and vice versa".

f) For which reason the Claimant alleges it did not deduct the VAT incurred in resources dedicated exclusively to taxable operations using the direct allocation method, by adopting exclusively the pro rata method.

g) So that it now argues that such error in self-assessment results from the failure to fully deduct the VAT borne either in the acquisition of mixed-use resources, or in the acquisition of goods and services used exclusively in taxable operations, in the years 2007 and 2008, which led to the payment to the state of excess VAT in the amount of €336,317.34 and €338,284.91, respectively.

The Claimant submits three requests, namely:

i) The request for partial annulment of VAT assessment acts;

ii) The request for annulment of the decision refusing the revision requests, on grounds of alleged violation of law due to errors in factual and legal assumptions;

iii) Recognition of the right to restitution of VAT assessed and paid in excess in the years 2007 and 2008, in the total amount of €336,317.34 and €338,284.91.

The TA, in its response, and immediately, raises the exception of lack of material jurisdiction, with various grounds, specified in Articles 8 to 112 of its Response, alleging, as far as it is concerned, in summary:

i) The illegality of the equating of the revision procedure with the gracious complaint, the limits of the binding nature of the TA and the consequent lack of material jurisdiction of the Arbitral Tribunal to assess the request that is the object of the dispute sub judice, in accordance with Article 2, paragraph 1, subparagraph a) and 4, paragraph 1, both of the LRAT and Articles 1 and 2, subparagraph a), both of Regulation No. 112-A/2011;

ii) That the Claimant's request is for confirmation or validation of the recovery of VAT allegedly paid in excess, so that what is at issue is an administrative act in tax matters which, by not assessing or discussing the legality of the assessment act, cannot be subject to judicial review, in accordance with the provisions in subparagraph a) of paragraph 1 of Article 97 of the CPPT;

iii) That the Claimant does not proceed to identify concretely any assessment act relating to the year 2007 and 2008, or any Model C Declaration of VAT self-assessment substitution, which has the effect of violating Articles 2, paragraph 1, subparagraph a), paragraph 2, subparagraph b) of Decree-Law No. 10/2011, of 20 January, wherefore the exception exists that translates into the non-existence of reviewable subject matter in arbitral proceedings;

iv) That the request, formulated only in 2014 with respect to the financial years 2007 and 2008, is untimely.

1. Clearing

The arbitral tribunal was regularly constituted and its material jurisdiction is challenged.

The parties have legal personality and capacity and are legitimate (Articles 4 and 10, paragraph 2, of the same statute and Article 1 of Regulation No. 112-A/2011, of 22 March).

The proceedings do not suffer from defects of nullity and no questions have been raised that may prevent assessment of the merits of the case.

2. Exceptions

The Tax Authority and Customs Authority raised five exceptions, which it designated as lack of material jurisdiction of this Arbitral Tribunal on the grounds that:

a) The request for a declaration of illegality of an assessment act was not preceded by a gracious complaint, but only by a request for revision of the tax act;

b) The Claimant only requested that VAT deduction be confirmed in the amounts indicated, as, moreover, it refers in Article 33 of the request for arbitral pronouncement, not having requested the annulment of any self-assessment act; for this reason, the refusal decision in question was motivated by the subsumption of the specific case under the discipline of paragraph 6 of Article 78 of the VAT Code, having concluded, consequently, to non-compliance with the two-year period for corrections by the taxable person; only in arbitral proceedings does the Claimant petition for the declaration of illegality of the "self-assessment acts"; in the official revision procedure, the legality of any assessment act was not assessed; for which reason we are faced with an administrative act in tax matters which, by assessing or discussing the legality of the assessment act, cannot be subject to judicial review, in accordance with the provisions in subparagraph a) of paragraph 1 of Article 97 of the CPPT and, correspondingly, does not fall within the jurisdiction of arbitral tribunals, because its process is alternative to the judicial review process;

c) No specific assessment act relating to the year 2007 or 2008 is identified that is being challenged, nor is any Model C declaration (self-assessment declaration of substitution) identified for any tax period of those years; the years 2007 and 2008 are mentioned as those in which the alleged illegality to be remedied would have occurred, intending in relation to those years, that the right to deduction of tax be recognized which, according to the Claimant, by error, would have been deducted in shortfall, given its nature as a mixed-type taxable person; the Claimant has divided its request into three aspects – partial annulment of VAT self-assessments, annulment of the acts of refusal of official revision and authorization of deduction; in the request for constitution of the arbitral tribunal there must appear the "identification of the act or acts subject of the request for arbitral pronouncement", which, in the case of the present proceedings, does not occur; by not knowing which "self-assessment acts" to review, it equally ignores the defects which the Claimant concretely attributes to each of them; in these circumstances, the existence of an exception (dilatory) is verified that translates into the non-existence of reviewable subject matter in arbitral proceedings;

d) Assuming that the object of the request is the self-assessment acts "relating to the periods of January to December 2007 and 2008", it happens that the legally defined period for challenging such acts in arbitral proceedings is clearly exceeded;

e) The request formulated by the Claimant is directed at condemning the Tax Administration to recognize the right to VAT deduction which (allegedly) it deducted in shortfall, which has no place in the present arbitral instance;

II - GROUNDS

1. Proven Factual Matter

Based on the elements in the proceedings, the following essential facts are considered proven, with relevance for assessing the merits of the request:

a. The Claimant is a legal entity under public law in the form of a "Local Authority" or "Local Administration" that pursues various attributions and activities, which is also configured as a VAT taxpayer under the normal monthly regime, duly registered as such in the respective tax registry with the TA, although it carries out operations that confer the right to deduct tax borne upstream, VAT-exempt operations (incomplete exemption) that do not confer such right to deduction, as well as operations outside the scope of the tax;

b. In the financial years 2007 and 2008, the Claimant, in compliance with the provisions of Article 23 of the VAT Code, adopted the percentage deduction method or pro rata as its rule deduction method for VAT, having calculated a definitive pro rata of 10%, which it applied to VAT capable of deduction;

c. In compliance with the provisions of Regulation 375/2003, of 10 May, the Claimant submitted, by electronic data transmission, the periodic VAT declarations referred to in subparagraph c) of paragraph 1 of Article 29 of the VAT Code, within the periods referred to in paragraph 1 of Article 41 of the same Code, having effected the respective self-assessment of tax in each period;

d. Following an internal procedure review, the Claimant found that, in calculating the deduction pro rata, it had included amounts that did not correspond to the consideration arising from actual transfers of goods and provision of services, such as direct taxes collected by it, which should not influence said pro rata calculation, as well as it had included in the pro rata amounts relating to supplies and services provided with respect to water supply in which, in its understanding, the VAT incurred should have been wholly deducted;

e. The Claimant submitted two requests for official revision under Article 78 of the General Tax Law, on 2 and 24 November 2011, of the VAT self-assessments made, with reference to the years 2007 and 2008 [Docs. 26 and 27 attached with the request];

f. Such revision requests were refused by dispatch of the Deputy Director General of 30 April 2014, issued in Notice No. …, of 6 May 2014, of the Taxation and Collection Division of the Finance Directorate of Braga, notified to the Claimant on 8 May 2014, alleging it had paid excess VAT in the amount of €336,317.34 and €338,284.91 [Doc. 25 attached with the request];

g. The mentioned dispatch expressed agreement with Information No. ..., a copy of which is in the administrative file, the content of which is deemed reproduced, in which the following is stated in conclusion:

  1. Official revision of a VAT assessment cannot prejudice the imperativeness of the norms that set the periods for exercise of the right to deduction.

  2. The rules of the institute of official revision cannot prevail against those provided in the VAT Code for exercise of the right to deduction, otherwise they would be emptied of content and, consequently, of effectiveness.

  3. The right to deduction ceases to exist if the formal requirement of timeliness is not observed.

  4. The Claimant has no freedom to choose, within the period referred to in paragraph 2 of Article 98 of the VAT Code, the moment to exercise the right to deduction of the tax.

  5. Only in cases where the VAT Code does not establish a special period is the right to deduction able to be exercised within the period provided in paragraph 2 of Article 98 of the VAT Code.

  6. Being, in the case under analysis, the periods for exercise of the right to deduction established in Articles 22 and 23 of the VAT Code already exceeded, and being confirmed that the supporting documents relating to the passive operations in question were recorded in the Claimant's accounting in due time, the correction of the deducted tax can only be admitted based on paragraph 6 of Article 78 of the VAT Code.

  7. Paragraph 6 of Article 78 of the VAT Code establishes a special period for exercise of the right to deduction of two years for corrections in favor of the taxpayer, which after being exceeded leads to preclusion of that right.

  8. Having the Claimant submitted, in November 2011, the requests for official revision where it requests the "additional" deduction of tax borne in the years 2007 and 2008, the period for exercise of that right has been exceeded.

  9. In light of the above, the present request should, unless better advised, be refused, since the right to deduction of the VAT in question has been precluded.

h. Dissatisfied with the refusal dispatch, the Claimant lodged the present request for arbitral review on 6 August 2014.

2. Grounds for Factual Matter

The facts were given as proven based on the documents joined to the proceedings and indicated with respect to each of the points of factual matter.

3. Reasoning

The Tribunal's conviction regarding factual matters is founded on the documents joined and not challenged by the opposing party, combined with the clear acceptance of the factual reality alleged by the appellant.

4. Facts Not Proven

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

5. Issue of Lack of Jurisdiction of Arbitral Proceedings to Assess the Legality of Self-Assessment Acts, Following Requests for Revision of Tax Acts

The jurisdiction of arbitral tribunals functioning at CAAD is, first of all, limited to the matters indicated in Article 2, paragraph 1, of Decree-Law No. 10/2011, of 20 January (LRAT).

In a second line, the jurisdiction of arbitral tribunals functioning at CAAD is also limited by the terms in which the Tax Administration was bound to such jurisdiction by Regulation No. 112-A/2011, of 22 March, since Article 4 of the LRAT establishes that "the binding of the tax administration to the jurisdiction of tribunals constituted in accordance with the present law depends on a regulation by the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered".

In light of this second limitation of the jurisdiction of arbitral tribunals functioning at CAAD, the resolution of the jurisdiction question depends essentially on the terms of this binding, because, even if one is faced with a situation that can be framed in that Article 2 of the LRAT, if it is not covered by the binding, the possibility of the dispute being jurisdictionally decided by this Arbitral Tribunal will be precluded.

In subparagraph a) of Article 2 of this Regulation No. 112-A/2011, expressly excluded from the scope of the binding of the Tax Administration to the jurisdiction of arbitral tribunals functioning at CAAD are "requests relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account that have not been preceded by recourse to the administrative channel in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process".

The express reference to the preceding "recourse to the administrative channel in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process" should be interpreted as referring to cases where such recourse is mandatory, through the gracious complaint, which is the administrative means indicated in those Articles 131 to 133 of the CTPP, to whose terms reference is made. In fact, from the outset, it would not be understood that, it not being necessary prior administrative review "when its foundation is exclusively a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration" (Article 131, paragraph 3, of the CTPP, applicable in cases of withholding at source, by force of the provisions of paragraph 6 of Article 132 of the same Code), the arbitral jurisdiction would be precluded because this administrative review, which is understood to be unnecessary, was not conducted.

In the case at hand, the annulment of the VAT self-assessment acts relating to the financial years 2007 and 2008 is requested, as well as the annulment of the act refusing the requests for official revision.

Thus, it is important, first of all, to clarify whether the declaration of illegality of acts refusing requests for revision of the tax act, provided for in Article 78 of the General Tax Law, is included in the competencies attributed to arbitral tribunals functioning at CAAD by Article 2 of the LRAT.

In fact, in this Article 2, there is no express reference to these acts, contrary to what occurs with the legislative authorization on which the Government based itself to approve the LRAT, which refers to "requests for revision of tax acts" and "administrative acts that involve assessment of the legality of assessment acts".

However, the formula "declaration of illegality of tax assessment acts, self-assessment, withholding at source and payment on account" used in subparagraph a) of paragraph 1 of Article 2 of the LRAT does not restrict, in a mere declarative interpretation, the scope of arbitral jurisdiction to cases where an act of one of those types is directly challenged. In fact, the illegality of assessment acts can be declared jurisdictionally as a corollary of the illegality of a second-degree act, which confirms an assessment act, incorporating its illegality.

The inclusion in the competencies of arbitral tribunals functioning at CAAD of cases where the declaration of illegality of the acts indicated there is made through the declaration of illegality of second-degree acts, which are the immediate object of the impugnatory claim, results with certainty from the reference made in that norm to self-assessment acts, withholding at source and payment on account, which are expressly referred to as being included among the competencies of arbitral tribunals. In fact, with respect to these acts, the necessary gracious complaint is imposed as a rule, in Articles 131 to 133 of the CTPP, so that, in these cases, the immediate object of the impugnatory process is, as a rule, the second-degree act that assesses the legality of the assessment act, an act that, if it confirms it, must be annulled to obtain the declaration of illegality of the assessment act. The reference made in subparagraph a) of paragraph 1 of Article 10 of the LRAT to paragraph 2 of Article 102 of the CTPP, which provides for the challenge of acts refusing gracious complaints, removes any doubts that arbitral tribunals functioning at CAAD cover cases where the declaration of illegality of the acts referred to in subparagraph a) of that Article 2 of the LRAT must be obtained following the declaration of illegality of second-degree acts.

Indeed, it was precisely in this sense that the Government, in Regulation No. 112-A/2011, of 22 March, interpreted these competencies of arbitral tribunals functioning at CAAD, by excluding from the scope of these competencies "requests relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account that have not been preceded by recourse to the administrative channel in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", which has the effect of restricting its binding to cases where this recourse to the administrative channel was used.

Having reached the conclusion that the formula used in subparagraph a) of paragraph 1 of Article 2 of the LRAT does not exclude cases where the declaration of illegality results from the illegality of a second-degree act, it will also encompass cases where the second-degree act is the refusal of a request for revision of the tax act, as there is no apparent reason to restrict, all the more so since, in cases where the revision request is made within the period of the gracious complaint, it should be equated to a gracious complaint. [1]

The express reference to Article 131 of the CTPP made in Article 2 of Regulation No. 112-A/2011 cannot have the decisive scope of precluding the possibility of assessment of requests for illegality of acts refusing official revision requests of self-assessment acts.

In fact, the interpretation exclusively based on literal wording that the Tax Authority and Customs Authority defends in the present proceedings cannot be accepted, because in the interpretation of tax norms the general rules and principles of interpretation and application of laws are observed (Article 11, paragraph 1, of the General Tax Law) and Article 9, paragraph 1, expressly prohibits interpretations exclusively based on the literal wording of the norms by establishing that "interpretation must not be limited to the letter of the law", instead it must "reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied".

As for the correspondence between the interpretation and the letter of the law, only "a minimum of verbal correspondence, even if imperfectly expressed" is required (Article 9, paragraph 3, of the Civil Code), which will only prevent interpretations that cannot in any way be reconciled with the letter of the law, even recognizing in it imperfection in the expression of legislative intention.

Therefore, the letter of the law is not an obstacle to making declarative interpretation, which explicates the scope of the literal wording, nor even extensive interpretation, when it can be concluded that the legislator said less than what, in coherence, it would have intended to say, that is, when it said imperfectly what it intended to say. In extensive interpretation "it is the very assessment of the norm (its 'spirit') that leads to discovering the need to extend its text to the hypothesis that it does not cover", "the expansive force of the proper legal assessment is capable of leading the provision of the norm to cover hypotheses of the same type not covered by the text". [2]

Extensive interpretation, thus, is imposed by the evaluative and axiological coherence of the legal system, erected by Article 9, paragraph 1, of the Civil Code into a primordial interpretative criterion via the imposition of observance of the principle of unity of the legal system.

It is manifest that the scope of the requirement of prior gracious complaint, necessary to open the contentious channel for challenge of self-assessment acts, provided for in paragraph 1 of Article 131 of the CTPP, has as its sole justification the fact that with respect to that type of acts there is no taking of a position by the Tax Administration on the legality of the legal situation created with the act, a position that might even turn out to be favorable to the taxpayer, avoiding the necessity of recourse to the contentious channel.

In fact, beyond not discerning any other justification for this requirement, the fact that an identical necessary gracious complaint is provided for contentious challenge of withholding at source and payment on account acts (in Articles 132, paragraph 3, and 133, paragraph 2, of the CTPP), which have in common with self-assessment acts the circumstance that there is also no taking of a position by the Tax Administration on the legality of the acts, confirms that that is the reason for being of that necessary gracious complaint.

Another unequivocal confirmation that this is the reason for being of the requirement of necessary gracious complaint is found in paragraph 3 of Article 131 of the CTPP, in establishing that "notwithstanding the provisions of the preceding paragraphs, when its foundation is exclusively a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration, the period for challenge does not depend on prior complaint, with the challenge to be presented within the period of paragraph 1 of Article 102". In fact, in situations of this type, there was a prior generic pronouncement by the Tax Administration on the legality of the legal situation created with the self-assessment act and it is this fact that explains why the necessary gracious complaint ceases to be required.

Now, in cases where a request for official revision of an assessment act is formulated, the Tax Administration is provided with this request, an opportunity to pronounce itself on the merits of the taxpayer's claim before the latter has recourse to the jurisdictional channel, so that, in coherence with the solutions adopted in paragraphs 1 and 3 of Article 131 of the CTPP, it cannot be required that, cumulatively with the possibility of administrative assessment within the scope of that official revision procedure, a new administrative assessment be required through gracious complaint. [3]

On the other hand, it is unequivocal that the legislator did not intend to prevent taxpayers from formulating requests for official revision in cases of self-assessment acts, since these are expressly referred to in paragraph 2 of Article 78 of the General Tax Law.

In this context, the law expressly permitting taxpayers to opt for the gracious complaint or for official revision of self-assessment acts and being the request for official revision formulated within the period of the gracious complaint perfectly equatable to a gracious complaint, as stated, there can be no reason that can explain that a taxpayer who has opted for revision of the tax act instead of a gracious complaint cannot have access to the arbitral channel.

Therefore, it is to be concluded that the members of the Government who issued Regulation No. 112-A/2011, in making reference to Article 131 of the CTPP with respect to requests for declaration of illegality of self-assessment acts, said imperfectly what they intended, because, intending to impose prior administrative assessment to contentious challenge of self-assessment acts, they ended up including reference to Article 131 that does not exhaust the possibilities of administrative assessment of these acts.

Moreover, it is to be noted that this interpretation not restricting itself to literal wording is especially justified in the case of subparagraph a) of Article 2 of Regulation No. 112-A/2011, due to evident imperfections: one is associating the comprehensive formula "recourse to the administrative channel" (which references, besides the gracious complaint, hierarchical recourse and revision of the tax act) to the "expression in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", which has potential restrictive scope to the gracious complaint; another is using the formula "preceded" by recourse to the administrative channel, referring to "requests relating to the declaration of illegality of acts", which, obviously, would correspond much better with the feminine word "preceded".

Therefore, beyond the general prohibition of limited interpretations to the letter of the law contained in Article 9, paragraph 1, of the Civil Code, in the specific case of subparagraph a) of Article 2 of Regulation No. 112-A/2011 there is a special reason for not justifying great enthusiasm for a literal interpretation, which is the fact and the wording of that norm is manifestly defective.

Moreover, by assuring that revision of the tax act provides the possibility of assessment of the taxpayer's claim before access to the contentious channel that is intended to be achieved with the necessary administrative challenge, the most correct solution, because it is the most coherent with the legislative design of "reinforcing the effective and real protection of the rights and legally protected interests of taxpayers" manifested in paragraph 2 of Article 124 of Law No. 3-B/2010, of 28 April, is the admissibility of the arbitral channel for assessment of the legality of assessment acts previously assessed in revision procedure.

And, because it is the most correct solution, it must be presumed to have been normatively adopted (Article 9, paragraph 3, of the Civil Code).

On the other hand, by that subparagraph a) of Article 2 of Regulation No. 112-A/2011 containing an imperfect formula, but which contains a comprehensive expression "recourse to the administrative channel", which potentially also references revision of the tax act, the minimum verbal correspondence is found in the text, although imperfectly expressed, required by that paragraph 3 of Article 9 for the viability of adopting the interpretation that enshrines the most correct solution.

It is to be concluded, thus, that Article 2, subparagraph a) of Regulation No. 112-A/2011, properly interpreted on the basis of the criteria for interpretation of law provided for in Article 9 of the Civil Code and applicable to tax substantive and procedural norms, by force of the provisions of Article 11, paragraph 1, of the General Tax Law, makes viable the submission of requests for arbitral pronouncement with respect to self-assessment acts that have been preceded by a request for official revision.

6. Issue of Lack of Jurisdiction of this Arbitral Tribunal to Assess the Legality of Self-Assessment Acts Preceded by a Request for Official Revision Whose Decision Does Not Involve Assessment of the Legality of Those Acts

In Article 2 of the LRAT, in which the "Jurisdiction of arbitral tribunals" is defined, the assessment of claims for declaration of illegality of acts refusing requests for official revision of tax acts is not expressly included, since, in the wording introduced by Law No. 64-B/2011, of 30 December, only the jurisdiction of arbitral tribunals is indicated for "the declaration of illegality of tax assessment acts, self-assessment, withholding at source and payment on account" and "the declaration of illegality of acts establishing taxable matter when it does not give rise to assessment of any tax, acts of determination of collective taxable matter and acts establishing patrimonial values".

However, the fact that subparagraph a) of paragraph 1 of Article 10 of the LRAT makes reference to paragraphs 1 and 2 of Article 102 of the CTPP, in which the various types of acts giving rise to the period for judicial challenge are indicated, including the gracious complaint, lets it be understood that all types of acts susceptible to being challenged through the judicial challenge process will be encompassed within the scope of the jurisdiction of arbitral tribunals functioning at CAAD, covered by those paragraphs 1 and 2, provided that they have as object an act of one of the types indicated in that Article 2 of the LRAT.

Indeed, this interpretation in the sense of the identity of the fields of application of the judicial challenge process and the arbitral process is the one that is in harmony with the mentioned legislative authorization on which the Government based itself to approve the LRAT, granted by Article 124 of Law No. 3-B/2010, of 28 April, in which the intention is revealed that the tax arbitral process constitutes "an alternative procedural means to the judicial challenge process and the action for recognition of a right or legitimate interest in tax matters" (paragraph 2).

But, this same argument that is extracted from the legislative authorization leads to the conclusion that the possibility of use of the arbitral process will be precluded when, in the tax judicial process, the judicial challenge or the action for recognition of a right or legitimate interest cannot be used.

In fact, being this the sense of the mentioned legislative authorization law and being inserted in the relative reserve of legislative competency of the Assembly of the Republic to legislate on the "tax system", including the "taxpayer guarantees" [Articles 103, paragraph 2, and 165, paragraph 1, subparagraph i), of the CRP] [4], and on the "organization and jurisdiction of courts" [Article 165, paragraph 1, subparagraph p), of the CRP], the aforementioned Article 2 of the LRAT cannot, under penalty of unconstitutionality, for lack of coverage in the legislative authorization law that limits the Government's power (Article 112, paragraph 2, of the CRP), be interpreted as attributing to arbitral tribunals functioning at CAAD jurisdiction for assessment of the legality of other types of acts, for whose challenge the judicial challenge process and the action for recognition of a right or legitimate interest are not appropriate.

Thus, to resolve the question of the jurisdiction of this Arbitral Tribunal it becomes necessary to determine whether the legality of the act refusing the request for official revision could or could not be assessed, in a tax tribunal, through the judicial challenge process or action for recognition of a right or legitimate interest.

The act of refusal of a request for official revision of a tax act constitutes an administrative act, in light of the definition provided by Article 120 of the Administrative Procedure Code [subsidiarily applicable in tax matters, by force of the provisions of Article 2, subparagraph d), of the General Tax Law, 2, subparagraph d), of the CTPP, and 29, paragraph 1, subparagraph d), of the LRAT], since it constitutes a decision of an organ of the Administration that, under public law norms, aimed to produce legal effects in an individual and concrete situation.

On the other hand, it is also unquestionable that it is an act in tax matters since the application of tax law norms is made in it.

Thus, that act of refusal of the request for official revision constitutes an "administrative act in tax matters".

From subparagraphs d) and p) of paragraph 1 and paragraph 2 of Article 97 of the CTPP is inferred the rule that the challenge of administrative acts in tax matters is made, in the tax judicial process, through judicial challenge or special administrative action (which succeeded the contentious recourse, in accordance with Article 191 of the Code of Process in Administrative Courts) according to whether these acts involve or do not involve assessment of the legality of administrative assessment acts. [5]

Possibly, as an exception to this rule, cases of challenge of acts refusing gracious complaints may be considered, by the fact that there is a special norm, which is paragraph 2 of Article 102 of the CTPP, from which it can be inferred that judicial challenge is always usable. [6] Other exceptions to that rule may be found in special norms, subsequent to the CTPP, which expressly provide for the judicial challenge process as a means to challenge a certain type of acts. [7]

But, in cases where there are no special norms, that criterion for distribution of the fields of application of the judicial challenge process and special administrative action is to be applied.

In light of this criterion for distribution of the fields of application of the judicial challenge process and special administrative action, acts issued in procedures for official revision of self-assessment acts may only be challenged through the judicial challenge process when they involve assessment of the legality of these self-assessment acts. If the act of refusal of the request for official revision of a self-assessment act does not involve assessment of the legality of this, the special administrative action will be applicable. It is a criterion of distinction of the fields of application of the said procedural means of questionable justification, but the fact is that it is what results from the wording of subparagraphs d) and p) of paragraph 1 of Article 97 of the CTPP and has been uniformly adopted by the Supreme Administrative Court. [8]

This finding that there is always an adequate procedural means of challenge to contenciously challenge the act of refusal of the request for official revision of a self-assessment act leads, immediately, to the conclusion that one is not faced with a situation in which in the tax judicial process the action for recognition of a right or legitimate interest could be used, since its application in tax contentious matters has a residual nature, since these actions "can only be proposed always when this procedural means is the most adequate to ensure full, effective and real protection of the right or legally protected interest" (Article 145, paragraph 3, of the CTPP).

Another conclusion that the said delimitation of the fields of application of the judicial challenge process and special administrative action permits is that, restricting the jurisdiction of arbitral tribunals functioning at CAAD to the field of application of the judicial challenge process, only requests for declaration of illegality of acts refusing requests for official revision of self-assessment acts that involve assessment of the legality of these acts are inserted in this jurisdiction.

The legislative concern to preclude from the competencies of arbitral tribunals functioning at CAAD the assessment of the legality of administrative acts that do not involve assessment of the legality of assessment acts, beyond resulting, immediately, from the general directive of creation of an alternative means to the judicial challenge process and the action for recognition of a right or legitimate interest, results with clarity from subparagraph a) of paragraph 4 of Article 124 of Law No. 3-B/2010, of 28 April, in which are indicated among the possible objects of the tax arbitral process "the administrative acts that involve assessment of the legality of assessment acts", since this specification can only be justified by a legislative intention to exclude from the possible objects of the arbitral process the assessment of the legality of acts that do not involve assessment of the legality of assessment acts.

Therefore, the solution of the question of the jurisdiction of this Arbitral Tribunal connected with the content of the act of refusal of the request for official revision depends on the analysis of this act.

In the case at hand, the reason invoked for the refusal of official revision was the untimeliness of the intended correction of the VAT assessment acts, in light of the legal regime that was understood to be adequate, which, obviously, does not imply assessment of the legality or illegality of any self-assessment act.

However, in light of the criterion for distribution of the fields of the judicial challenge process and special administrative action delineated by subparagraphs d) and p) of paragraph 1 of Article 97 of the CTPP, it is not necessary that the assessment of the legality of an assessment act be the ground of the procedural decision or that in the request formulated the assessment of the legality of an assessment act be requested, it sufficing that this act involve it, which, in this context, means that the challenged act includes a judgment on the legality of an assessment act, even if it is not its legality or illegality that is the ground of the decision. It would be different if the law had used other expressions, such as "assess" or "decide".

Now, in the case at hand, one cannot understand that the decision on the request for official revision includes the assessment of the legality of any assessment act, since, as appears from the text of the information on which the refusal decision was based, at no point is it stated whether the intended corrections were justified, in light of the substantive rules on exercise of the right to deduction.

In fact, essentially to clarify this point, Information No. … on which the refusal dispatch was based, states the following:

– The Claimant, in the years in question, opted to deduct tax based on the pro rata and actual allocation methods, so that, being this an option of its own, its actions cannot be framed in a context of error (points 29 to 52 of Information No. ...);

– the regimes of revision of the tax act and of exercise and correction of errors in exercise of the VAT deduction right are distinct, with the regime of the former not able to prejudice the imperativeness of the CIVA norms (points 53 to 74 of the Information referred to);

– in light of the VAT Code, the correction intended by the Claimant could only be made within the period provided in paragraph 2 of Article 98 of the VAT Code if it did not fall under any norm providing a special period (points 75 to 87 of the Information referred to);

– to deduct the VAT in question, the Claimant should have exercised that right in the respective declarations, correcting at the end of each year the provisional values, with corrections being able to be made under Article 78 of the VAT Code, with the means provided in its paragraph 6 being the only one it could use, since that provided in Article 98, paragraph 2, only applies to documents not recorded, so that, not having the Claimant exercised the right to deduction within the two-year period, it precluded the right (points 88 to 114 of the Information referred to);

– scope of application of Article 23 of the VAT Code, methods of determination of deduction with respect to goods or services of mixed use and percentage of deduction provided in paragraph 4 of that article (points 115 to 133 of the Information referred to);

– particular situation of local authorities, stating that it is admissible that the amounts of consideration from taxes be included in the pro rata on the basis of turnover, but this does not prevent that, by option of the taxpayer or determination of the tax administration, the values be purged from the pro rata, the inputs dedicated to carrying out these operations then being the subject of direct allocation with application of suitable objective criteria; (points 134 to 149 of the Information referred to);

– the conclusions follow.

Thus, in the Information referred to, which embodies the grounds for the act of refusal of the requests for official revision, no reference is found to the concrete legality of the self-assessment acts, namely an assessment of the correspondence to reality of the values indicated by the Claimant or a judgment in a positive or negative sense on the substantial legality of the Claimant's claims, taking position only on the timeliness of the request, in light of Article 78 of the General Tax Law and Articles 23, 78 and 98 of the VAT Code.

The act of refusal limits itself to manifesting agreement with this Information.

Thus, it must be concluded that the act of refusal of the requests for official revision does not involve assessment of the legality of the self-assessment acts, since at no point is it stated whether the corrections that the Claimant intended to make have support in substantive law, with the refusal being based solely on the lack of a legal norm providing for the possibility of exercise of the right to deduction at the moment when the Claimant intended to exercise it.

Being thus, by what was stated above on the limitation of the competencies of arbitral tribunals functioning at CAAD to assessment of the legality of acts deciding requests for official revision that involve assessment of the legality of assessment acts, it must be concluded to the lack of jurisdiction of this Arbitral Tribunal to assess the legality of the act of refusal of the requests for official revision.

The lack of jurisdiction to assess the legality of the act of refusal of the request for official revision has as a corollary the lack of jurisdiction to assess the legality of the self-assessment acts that the Claimant refers to.

In fact, the immediate object of the request for arbitral pronouncement is the illegality of the act of refusal of the requests for official revision, with the illegality of the self-assessment acts being merely a mediate object of the request for arbitral pronouncement, which has as a consequence that the illegality of these acts can only be assessed through assessment of the illegality of the act of refusal of the requests for official revision (which would suffer from illegality if, assessing the legality of illegal self-assessment acts, it refused their revision by considering them legal). [9]

From the above, the exception of lack of material jurisdiction is verified, which is an obstacle to assessment of the merits of the case and justifies the absolution of the Tax Authority and Customs Authority from the instance [Articles 16, paragraph 1, of the CTPP and 278, paragraph 1, subparagraph a), of the Code of Civil Procedure, subsidiarily applicable by force of the provisions of Article 29, paragraph 1, subparagraphs c) and e), of the LRAT].

7. Questions of Prejudiced Knowledge

In accordance with the above, the exception of lack of material jurisdiction proceeds, so that an obstacle to assessment of the merits of the case is verified, remaining prejudiced, by being useless, the knowledge of the other questions raised in the proceedings.

III - DECISION

1. Decision

In these terms, the members of this Arbitral Tribunal agree on:

– To judge procedent the exception of lack of material jurisdiction of this Arbitral Tribunal to assess the requests formulated and to absolve the Tax Authority and Customs Authority from the instance.

2. Value of the Proceedings

In accordance with the provisions of Article 305, paragraph 2, of the Code of Civil Procedure and 97-A, paragraph 1, subparagraph a), of the CTPP and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at €674,602.25.

3. Costs

In accordance with Article 22, paragraph 4, of the LRAT, the amount of costs is set at €9,792.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, chargeable to the Claimant.

Lisbon, 23 February 2015

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(João Ricardo Catarino)

(Emanuel Augusto Vidal Lima)

[1] As was understood in the cited judgment of the Supreme Administrative Court of 12-6-2006, issued in case No. 402/06.

[2] BAPTISTA MACHADO, Lessons on Private International Law, 4th edition, page 100.

[3] Essentially in this sense, the judgments of the Supreme Administrative Court of 12-7-2006, issued in case No. 402/06, and of 14-11-2007, case No. 565/07, may be consulted.

[4] Although in Article 165, paragraph 1, subparagraph i), of the CRP, in which the relative reserve of legislative competency of the Assembly of the Republic is defined, reference is made to the creation of taxes and tax system, this norm should be integrated with the content of paragraph 2 of Article 103 of the same, in which it is stated that law determines incidence, rate, tax benefits and taxpayer guarantees, which constitutes an explication of the scope of the matters included in that reserve, as has been uniformly understood by the Constitutional Court.

By way of example, the following judgments of the Constitutional Court are indicated in this sense:

– No. 29/83, of 21-12-1983, published in the Bulletin of the Ministry of Justice No. 338, page 201 (especially, pages 204-205);

– No. 290/86, of 29-10-1986, published in Judgments of the Constitutional Court, 8th volume, page 421 (especially, pages 423-424);

– No. 205/87, of 17-6-1987, published in Judgments of the Constitutional Court, 9th volume, page 209 (especially pages 221-222);

– No. 461/87, of 16-12-1987, published in the Bulletin of the Ministry of Justice, No. 372, page 180 (especially page 197);

– No. 321/89, of 29-3-1989, published in the Bulletin of the Ministry of Justice, No. 385, page 265 (especially page 281).

The Constitutional Court has also understood that the reserve of legislative competency of the Assembly of the Republic comprises everything that is legislative matter and not just restrictions on rights (in this sense, the judgment No. 161/99, of 10-3-99, case No. 813/98, published in the Bulletin of the Ministry of Justice No. 485, page 81, may be seen).

[5] In the concept of "assessment", in a broad sense, all acts that are reduced to the application of a rate to a certain collective taxable matter are encompassed and, therefore, also acts of withholding at source (besides self-assessment and payment on account acts, which do not concern the decision of the present proceedings).

[6] In this sense, the judgment of the STA of 2-4-2009, case No. 0125/09, may be seen.

[7] An example of a situation of this type is that of Article 22, paragraph 13, of the VAT Code, in which the use of the judicial challenge process is provided for to challenge acts of refusal of reimbursement requests.

[8] In the sense that the appropriate procedural means for assessing the legality of an act deciding a procedure for official revision of an assessment act is the special administrative action (which succeeded the contentious recourse, in accordance with Article 191 of the CPTA) if in that decision the legality of the assessment act was not assessed, the judgments of the Supreme Administrative Court of 20-5-2003, case No. 638/03; of 8-10-2003, case No. 870/03; of 15-10-2003, case No. 1021/03; of 24-3-2004, case No. 1588/03; of 6-11-2008, case No. 357/08, may be seen.

Adopting the understanding that the judicial challenge process is the appropriate procedural means to challenge acts of refusal of gracious complaints that have assessed the legality of assessment acts, the judgments of the STA of 15-1-2003, case No. 1460/02; of 19-2-2003, case No. 1461/02; and of 29-2-2012, case No. 441/11, may be seen.

[9] Indeed, it is manifest that, having the self-assessment acts been made in 2007 and 2008, the request for arbitral pronouncement would be manifestly untimely if its immediate object were these acts.

Frequently Asked Questions

Automatically Created

What is the right to VAT deduction for municipalities under Portuguese tax law?
Under Portuguese tax law, municipalities have the right to deduct VAT incurred on acquisitions used for taxable operations in accordance with Article 20 of the VAT Code. For mixed-use resources serving both taxable and non-taxable activities, municipalities can apply the pro-rata deduction method based on the proportion of taxable operations. Additionally, for resources exclusively dedicated to taxable operations such as water supply services, municipalities are entitled to full VAT deduction using the direct allocation method. The legal debate in Case 613/2014-T centered on whether Tax Authority Circular 61137/1987 improperly restricted municipalities to using only one deduction method, or whether both methods could be applied simultaneously depending on resource allocation.
Does the CAAD arbitral tribunal have competence to rule on VAT self-assessment disputes?
The competence of CAAD arbitral tribunals to rule on VAT self-assessment disputes is governed by Article 2(1)(a) of Decree-Law 10/2011 (RJAT) and depends on whether the dispute involves reviewable assessment acts. In Case 613/2014-T, the Tax Authority challenged jurisdiction, arguing that requests for VAT recovery confirmation constitute administrative acts outside arbitral scope under Article 97(a) of the CPPT. The TA contended that without identification of specific assessment acts or substitutive self-assessment declarations, no reviewable subject matter existed for arbitral proceedings. The jurisdictional question turned on whether self-assessment corrections claiming overpayment fall within the arbitral tribunal's material competence to hear disputes about the legality of tax assessments.
How can a municipality challenge excess VAT self-assessments in Portugal?
A municipality can challenge excess VAT self-assessments in Portugal through several mechanisms. First, it can submit revision requests to the Tax Authority seeking correction of self-assessment errors under applicable procedural rules. If the TA refuses revision, the municipality may seek arbitral review under Decree-Law 10/2011, requesting annulment of self-assessment acts and recognition of restitution rights. The challenge must identify specific assessment acts and periods involved, comply with timeliness requirements, and demonstrate grounds for annulment such as legal error or incorrect application of deduction methods. Alternatively, municipalities can file substitutive VAT declarations correcting previous self-assessments, though disputes about the validity of such corrections may also require arbitral or judicial resolution under Articles 2 and 10 of the RJAT.
What was the outcome of CAAD Process 613/2014-T regarding VAT deduction rights?
The complete outcome of CAAD Process 613/2014-T regarding VAT deduction rights is not fully detailed in the available excerpt, which concludes during preliminary procedural matters. The case record shows that the Tax Authority raised multiple jurisdictional exceptions seeking dismissal of the municipality's request for annulment of VAT self-assessments totaling €674,602.25 for 2007-2008. The tribunal was constituted as a collective panel under Articles 6 and 11 of the RJAT, with the procedural phase addressing questions of material competence, timeliness, and the existence of reviewable assessment acts. The substantive question—whether municipalities may combine pro-rata and direct allocation deduction methods—required resolution of these preliminary jurisdictional issues before the tribunal could address the merits of the municipality's claimed overpayment.
What is the procedure for requesting arbitral review of VAT assessments under the RJAT?
The procedure for requesting arbitral review of VAT assessments under the RJAT (Decree-Law 10/2011) requires submission of a formal request to CAAD identifying the contested acts and legal grounds for annulment. Under Articles 2 and 10, taxpayers may challenge assessment acts by filing requests within applicable deadlines, optionally appointing an arbitrator or allowing appointment by the CAAD Ethical Council President. The tribunal constitution follows Article 6 and 11 procedures, with parties notified of arbitrator appointments and given opportunity to refuse under the Ethical Code. After tribunal constitution, the Tax Authority submits a response addressing exceptions and merits. Article 18 provides for optional hearings, with parties entitled to submit written arguments. The process must comply with timeliness requirements, identify specific reviewable acts, and fall within the tribunal's material jurisdiction as defined in Article 2(1)(a) for assessment act disputes.