CAAD Case 638/2018-T: VAT Deduction Exclusion for Simulated Operations – Arbitral Decision

ARBITRAL DECISION

The arbitrator, Dr. Sílvia Oliveira, appointed by the Deontological Board of the Administrative Arbitration Centre (CAAD) to form the Singular Arbitral Tribunal, constituted on 26 February 2019, decided as follows:

1. REPORT

1.1

A..., Lda., legal entity no. ..., with registered office at Rua ..., no. ..., ..., in ... (hereinafter referred to as the "Claimant"), submitted a request for arbitral ruling and constitution of a Singular Arbitral Tribunal on 14 December 2018, pursuant to the provisions of article 2, no. 1, paragraph a) and article 10 of Decree-Law no. 10/2011 of 20 January [Legal Regime of Arbitration in Tax Matters (RJAT)], with the Tax and Customs Authority (hereinafter referred to as the "Respondent") as the respondent party.

1.2

The arbitral request concerns the following VAT assessments and compensatory interest:

1.3

The Claimant petitions in the arbitral request that it be "(…) deemed well-founded and thereby annul the tax assessment issued by the Tax Authority for lack of grounds and order the reimbursement to the claimant of the sum of €21,896.45 plus compensatory interest at the legal rate (…)", requesting, for purposes of evidence, the hearing of party statements and the examination of a witness.

1.4

The request for constitution of the Arbitral Tribunal was accepted by the Excellent President of CAAD on 17 December 2018 and notified to the Respondent on the same date.

1.5

Given that the Claimant did not proceed with the appointment of an arbitrator, pursuant to article 6, no. 1 of the RJAT, the undersigned was appointed as arbitrator on 6 February 2019 by the President of the Deontological Board of CAAD, with the appointment being accepted within the legally prescribed timeframe and terms.

1.6

On the same date, both parties were duly notified of this appointment and did not express any intention to refuse it, in accordance with article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

1.7

Thus, in accordance with the provisions of paragraph c), no. 1 and no. 8 of article 11 of the RJAT, the Arbitral Tribunal was constituted on 26 February 2019, with an arbitral order issued on 27 February 2019, notifying the Respondent to, in accordance with the provisions of article 17, no. 1 of the RJAT, submit a Response within a maximum period of 30 days and, if it wished, request the production of additional evidence.

1.8

Additionally, it was further stated in that arbitral order that the Respondent should submit to the Arbitral Tribunal, within the timeframe for the Response, a copy of the administrative file.

1.9

On 4 April 2019, the Respondent submitted its Response, defending itself by objection and concluding that the claim should be denied, as well as petitioning for the dismissal of witness evidence.

1.10

On the same date, the Respondent submitted to this Arbitral Tribunal a copy of the administrative file.

1.11

By arbitral order dated 8 April 2019, the Claimant was notified to "(…) within 5 days, indicate whether it maintains an interest in the examination of witness evidence and, if so, specify the paragraphs relating to the factual aspects regarding which it intends to produce such witness evidence."

1.12

On 12 April 2019, the Claimant submitted a request stating that "it maintains an interest in the production of witness evidence regarding the following points of the petition [which it identifies], for clarification and more detailed explanation of the facts inherent to these points. The evidence requested will be by means of party statements from B..., as such facts are within his direct personal knowledge, as he had direct involvement in them."

1.13

Accordingly, both parties were notified of an arbitral order dated 17 April 2019, with the following content:

"(…) This Tribunal decided, in accordance with the procedural principles set out in article 16 of the Legal Regime of Tax Arbitration (RJAT), concerning the autonomy of the arbitral tribunal in conducting the proceedings and determining the rules to be observed [paragraph c)] and the free conduct of proceedings set out in articles 19 and 29, no. 2 of the RJAT:

• To schedule the meeting (referred to in article 18 of the RJAT) for 20 May 2019 at 11:00, to be held at the facilities of CAAD in Lisbon, for the purpose of hearing the party statement regarding the facts identified by the Claimant in the request submitted and to decide on the possibility of dispensing with the submission of written pleadings. (…)".

1.14

On 20 May 2019, the arbitral meeting scheduled for hearing the party statement indicated by the Claimant was held at CAAD, in accordance with the provisions of article 18 of the RJAT, with audio recording of the statement given and for which the corresponding minutes were drawn up, which form an integral part of this file.

1.15

Within the scope of the aforementioned meeting, given that the parties did not waive the submission of written pleadings, the Tribunal notified the Claimant and the Respondent to submit, in succession, written pleadings within 10 days, with the arbitral decision scheduled to be rendered on 28 June 2019.

1.16

Finally, the Tribunal warned the Claimant that, until the date of rendering of the arbitral decision, it should proceed with payment of the subsequent arbitral fee, in accordance with the provisions of no. 3 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings and communicate this payment to CAAD (which it did on 23 May 2019).

1.17

On 27 May 2019, the Claimant submitted its written pleadings, reiterating the arguments presented in the arbitral request and concluding in the same terms.

1.18

On 6 June 2019, the Respondent submitted its written pleadings, reiterating the arguments presented in the Response and concluding in the same terms.

2. GROUNDS FOR CLAIM

2.1

The Claimant begins by stating in the arbitral request that "between the (…) claimant and the companies C... SA and D..., Lda., various service provision contracts were mutually executed, namely (…)" of "(…) elaboration of various catalogues for the said companies to submit applications to the (…) QREN (…) programme."

2.2

According to the Claimant, the "creation, elaboration and execution of catalogues (…) implies and implied (…) various acts, namely, creation of corporate identity, design, photographic sessions, copyright (long or short texts, translations into various languages, production of digital content (digital catalogues), animations, video, creation of database of potential clients in countries where the events took place (trade fairs), sending of catalogues, even if digital to target clients, for the offering of company services in countries where the fairs took place, sending of invitations, creation of web platform for this purpose and the corresponding printing of catalogues (…)".

2.3

On the other hand, according to the Claimant, the following were also executed:

2.3.1

"Contract for the cession of warehouse space, by which the company C... would cede temporary space to [Claimant] for warehouse at the monthly value of €500.00 (…)" and,

2.3.2

"Contract for the exploitation of advertising spaces, by which the companies D... and C... ceded to [Claimant] the rights to exploit advertising on the banners and awnings of the trailers of the trucks of which they were the owners (…)".

2.4

The Claimant adds that "(…) as a consequence of the performance of such contracts, they were timely issued (…)" by the Claimant in 2014 and 2015, the invoices identified in the file, and the invoices were also issued by C... "(…) referred to in the respondent's report (…), which [gave rise to] the tax correction against which the claimant now objects."

2.5

In fact, according to the Claimant, the grounds invoked by the Respondent in the report that gave rise to the VAT assessments that the claimant contests in the request, in the total amount of EUR 21,896.45 (tax and interest), are illegal.

2.6

In this regard, the Claimant understands that "it is (…) unassailable that the invoicing (…)" issued, refuting that one is dealing with a "simulated transaction," as the Respondent understood, since the Claimant reiterates that all contractualized services with the identified companies and, consequently, invoiced to them were actually provided, with such services being duly documented.

2.7

Thus, for the Claimant, it is not lawful to conclude that "(…) one is dealing with simulated transactions between the companies in question" because "(…) none of the conclusions presented (…) are sufficient in themselves to conclude that there were no transactions between the targeted companies (…)".

2.8

And consequently, the Claimant does not agree with the conclusion reached by the Respondent that, both in 2014 and 2015, VAT deduction is improper because "(…) one is not in the presence of genuine transactions (…)".

2.9

Now, according to the Claimant, the AT did not present "(…) consistent argumentation that leads (…) to presume (…) that there was on the part of the (…) claimant, criminal conduct or illegitimate behavior," because the AT "(…) points to no conduct that can be considered illegitimate," "(…) nor even points out which simulated transaction it understands to have existed or been carried out" "and much less, the minimally consistent facts - which are not mere doubts - that support such assertion of simulated transaction."

2.10

In fact, the Claimant sustains that "contrary to the assertions of the AT in the report, the statements of taxpayers (…) are those that enjoy the presumption of truthfulness (…)" and, "where there are indications of false invoicing, the AT must prove that the indications of falsity are consistent, serious and revealing of a high probability that the invoicing [is] false."

2.11

The Claimant further reiterates that "when the AT disregards invoices that it deems false, the rules regarding the burden of proof contained in article 74 of the LGT apply, with the AT being required to prove that the legal presuppositions of its action are met and that the invoice operations do not correspond to reality."

2.12

In these terms, the Claimant understands that "(…) there is no violation whatsoever of the enumerated articles, whether from the CIVA, the RGIT or any other legal provision," therefore concluding that the VAT and interest assessments made by the Respondent should be annulled and the reimbursement of the total amount paid should be ordered, plus the respective compensatory interest.

3. RESPONDENT'S RESPONSE

3.1

The Respondent begins by stating that there were identified, "according to the tax inspection report, (…) inconsistencies between certain invoices issued, the contracts presented and the statements made (…), indicating that these were not real economic transactions, which justified the correction of deductions made on the basis of such invoices, in accordance with no. 3 of article 19 of the VAT Code."

3.2

The Respondent further states that the Claimant, in the arbitral request "(…) does not bring evidence of the reality of the transactions disregarded, which would permit challenging the facts and respective conclusions pointed out by the TIS, limiting itself, essentially, to argue that its accounting and respective statements enjoy the presumption of truthfulness and that the AT did not fulfill its burden of proof in order to cease that presumption."

3.3

Now, according to what the Respondent understands, "contrary to what is argued in the PI, the AT verified that the quantity of catalogues invoiced by the Claimant to D... Lda and to E... SA was not produced, as emerges from all the indications/facts contained in the Tax Inspection Report."

3.4

On the other hand, the Respondent argues that "as for the invoices issued to it by those entities and corresponding advertising space/exploitation contracts (…) inconsistencies and indications that these were not real economic transactions (…)" were detected, with the Respondent, in its Response, raising various questions by which it attempts to demonstrate/complement these indications.

3.5

Additionally, the Respondent understands that "also the invoices and credit note issued, to and from the entities in question, bringing the amounts owed by the Claimant closer to those it would have to receive, as well as the dates on which payment was effected in disagreement with the supposedly established payment terms, indicate that these were not real economic transactions between the entities involved," "there being indications that concrete operations declared and recorded by the Claimant do not correspond to reality (…)," concluding the Respondent that "(…) in accordance with the provisions of paragraph a) of no. 2 of article 75 of the LGT, the presumption of truthfulness contained in the normative statement of no. 1 of the same article ceases to apply."

3.6

In these terms, the Respondent cites no. 3 of article 19 of the VAT Code, in accordance with which "tax resulting from a simulated transaction cannot be deducted (…)," stating that "on the question of whether article 19, no. 3, of the VAT Code, is satisfied with mere indications or if it requires proof of simulation, the STA considers as requirements for the tax administration to be able to proceed with the additional assessment based on the existence of declared deductions exceeding those owed, (…) its subjective consideration, in its activity of control or inspection relating to compliance with taxpayer duties, that the latter have included in their statements a deduction superior to that which should be due; that such consideration be taken in an objective and materially substantiated manner (…)."

3.8

Now, "being VAT deduction a right of the taxable person who bore the tax, since it gives him the possibility to recover the tax he bore in the acquisition of goods or services, (…) it shall not fall to the administration the burden of proof of the non-existence of the tax facts whose tax it fundamentally considered deducted illegally by the taxpayer, but shall fall to the taxpayer himself the burden of proof of the existence of the tax facts on which he based the deduction he declared."

3.9

Thus, the Respondent reiterates, "when the act of additional VAT assessment is based on the non-recognition of deductions declared by the taxpayer, it falls to the administration only the proof of the verification of the legal presuppositions that legitimize its action (…) and to the taxpayer the burden of proof of the existence of the tax facts it alleged as the basis for its right to tax deduction in accordance with article 19 of the CIVA."

3.10

Additionally, the Respondent states that "from article 75 of the LGT results the existence of a legal presumption of truthfulness or veracity of the statements presented by the taxpayer to the AT and of the data contained in its accounting and records when in accordance with commercial and tax legislation," therefore "(…) only when the AT previously proves that there are well-founded indications of deficient accounting or that this and/or documents that serve as its support do not reflect the actual taxable matter of the taxable person, is it exigible that the taxpayer prove or demonstrate the possible error of the AT in the quantification or in the total or partial disregard of the taxable matter. The same burden falls, in principle, on the taxpayer if the presuppositions listed in article 75-2 of the LGT are verified (…)."

3.11

And, according to the Respondent, "in the case of false invoices (…)" the AT can demand, "with respect to such invoices, the VAT, notwithstanding the fact that they do not correspond to operations or transactions actually carried out."

3.12

Finally, as regards the witness evidence indicated by the Claimant in the arbitral request, the Respondent understands that "(…) given the nature of the matter in dispute, it is not foreseen that the respective examination is necessary, since there are no facts that do not result from documents and, on the other hand, it is essentially a matter of law."

3.13

Nevertheless, "(…) should it be understood that it is not appropriate to dispense with the production of witness evidence (…)" the Respondent came to request that the Arbitral Tribunal notify "(…) the Claimant to indicate which facts it intends to see proven by means of witness evidence that are not susceptible to documentary proof."

4. PRELIMINARY RULING

4.1

The request for arbitral ruling is timely, since it was presented within the timeframe provided in paragraph a), no. 1, article 10 of the RJAT.

4.2

The Tribunal is materially competent and is regularly constituted in accordance with article 2, no. 1, paragraph a), articles 5 and 6, all of the RJAT.

4.3

The parties have legal personality and legal capacity, are properly interested in the request for arbitral ruling and are duly represented, in accordance with the provisions of articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March.

4.4

There are no exceptions or nullities that require attention.

5. FACTUAL MATTERS

5.1

Preliminarily, as regards factual matters, it is important to note that the Tribunal does not have to rule on everything that was alleged by the parties, with the duty falling to it to select the facts that matter for the decision and distinguish the proven matters from those not proven [cfr. article 123, no. 2, of the Code of Tax Procedure and Process (CPPT) and article 607, nos. 3 and 4, of the Code of Civil Procedure (CPC), applicable ex vi article 29, no. 1, paragraphs a) and e), of the RJAT].

5.2

In this way, the facts relevant to the judgment of the case are chosen and limited in function of their legal relevance, which is established having regard to the various plausible solutions of the question(s) of law.

Proven Facts

5.3

The Claimant is a limited liability company that commenced its activities on 10 January 2007, engaging in the following activities:

5.4

The Claimant is classified, for IRC purposes, under the normal tax regime and, for VAT purposes, under the normal quarterly regime.

5.5

The Claimant presented a copy of a contract for the exploitation of advertising spaces, concluded with the company C..., Lda. (C...), NIPC..., on 1 January 2014, by which C... ceded to the Claimant "the rights for commercial exploitation of advertising spaces, corresponding to the banners or awnings of the trailers of the trucks of which it is the owner and/or legitimate possessor, with or without semi-trailer, which are assigned to the placement of advertising (…)," with the production of advertising canvases and/or banners falling to the responsibility of the Claimant.

5.6

The monthly price for the exploitation of the contractually agreed upon advertising spaces was EUR 2,000.00, to which was added the VAT amount at the current rate, with such amount to be invoiced quarterly.

5.7

The term of validity of the said contract for exploitation of advertising spaces was 2 years, beginning on 1 January 2014 and ending on 31 December 2015.

5.8

An amendment was made on 20 January 2014 to the contract for exploitation of advertising spaces concluded between the Claimant and C..., by which it was agreed that the responsibility for the cost and production of advertising canvases/banners, according to the characteristics and dimensions of each space assigned for that purpose, was that of C....

5.9

The contract for exploitation of advertising spaces concluded between the Claimant and C... was terminated on 2 June 2015, with effect from 30 January 2015, on the grounds that the clients of C... "did not accept that the trucks in service use advertising from a company other than C... itself."

5.10

Following the conclusion of the said contract for exploitation of advertising spaces with C..., the following invoices were issued by this entity to the Claimant in 2014 and 2015:

5.11

The Claimant presented a copy of a contract for the exploitation of advertising spaces, concluded with the company D..., Lda. (D...), NIPC..., on 1 April 2014, by which D... ceded to the Claimant "the rights for commercial exploitation of advertising spaces, corresponding to the banners or awnings of the trailers of the trucks of which it is the owner and/or legitimate possessor, which are assigned to the placement of advertising (…)," with "the production of the banners (…) falling to its responsibility."

5.12

The monthly price for the exploitation of the contractually agreed upon advertising spaces was EUR 833.33, to which was added the VAT amount at the current rate, with such amount to be invoiced quarterly.

5.13

The term of validity of the said contract for exploitation of advertising spaces was 18 months, beginning on 1 April 2014 and ending on 30 September 2015.

5.14

D... sent a letter to the Claimant, dated 30 October 2015, in which it requested "the settlement of accounts between the balance of our current account (…)" (which on that date amounted to EUR 27,675.00) and the balance of the Claimant's current account (which on that date matched the balance of D...'s current account), alleging for this purpose that "since our company is undergoing a special revitalization process (…) it will not be possible for us to settle your current account in any other way."

5.15

Following the conclusion of the said contract for exploitation of advertising spaces with D..., the following invoices were issued by this entity to the Claimant in 2014 and 2015:

5.16

The Claimant presented a copy of a contract for the cession of warehouse space, concluded with C..., on 1 January 2015, by which the company C... would cede to the Claimant "the temporary occupation of a space, with all that is comprised in it, which forms part of the urban property corresponding to a Warehouse (…)" with this space being intended "for the storage of Banners and other materials."

5.17

The monthly price for the cession and temporary occupation of the space identified in the previous point was EUR 500.00, to which was added the VAT amount at the current rate.

5.18

The term of validity of the said contract for cession of warehouse space was 6 months, beginning on 1 January 2015 and ending on 30 June 2015.

5.19

Following the conclusion of the said contract for cession of warehouse space with C..., the following invoice was issued by this entity to the Claimant in 2015:

5.20

In 2015, the Claimant also recorded credit note no. 3 of 23-10-2015, issued by the company C... to the Claimant, in the amount of EUR 11,000.00 (value without VAT), plus VAT in the amount of EUR 2,530.00, referring to the cancellation of invoice no. 413 of 16-06-2014 (see point 5.10., supra) and commercial discount on invoices no. 634 of 29-06-2015 (see point 5.10., supra) and no. 635 of 30-06-2015 (see previous point).

5.21

The Claimant elaborated, in the years 2014 and 2015, various catalogues on paper and in digital format, both for C... and for D....

5.22

The creation, elaboration and execution of the catalogues on paper involved, namely, the creation of corporate identity, design, photographic sessions, translation of texts into various languages, production of digital content, animations, videos, creation of database of potential clients in countries where the fairs took place, sending of such catalogues, even if digital, to target clients for the offering of company services in countries where the fairs took place, sending of invitations, creation of web platform for this purpose and the corresponding printing of an indeterminate quantity of catalogues.

5.23

Following the provision of services referred to in the previous point, the Claimant issued the following invoices in 2014 and 2015 to D... and to C...:

5.24

The Claimant was subject to an inspection action in matters of IRC and VAT, relating to the years 2014 and 2015, following the inspection action carried out on the company E..., S.A. and the company D..., Lda.

5.25

The inspection action carried out on the Claimant was authorized through External Order DI2017..., of 11-05-2017, from the Finance Directorate of ..., whose extension of competencies (to the district of ...) was requested from the Finance Directorate of ... and authorized by the competent services (Order no. ..., of 02-06-2017).

5.26

The inspection action carried out on the Claimant began on 01-08-2017, with, on 17-01-2018, the Order from the Finance Directorate of ... referred to in the previous point being converted into a Service Order for the year 2014 (OI2018...) and into a Service Order for the year 2015 (OI2018...).

5.27

The Claimant was notified of the Service Orders identified in the previous point on 18-01-2018, through Official Letter no. ..., of 17-01-2018.

5.28

On the same date, the Claimant was notified of the extension of the inspection action for a period of 3 months.

5.29

On 12-04-2018, the Claimant was notified, through Official Letter no. ..., of 12-04-2018, of the second extension of the said inspection action for a further period of 3 months.

5.30

The inspection acts identified in the previous points were considered concluded on 30-07-2018, with the sending of the diligence note through Official Letter no. ... of the same date.

5.31

From the inspection action carried out on the Claimant, the result in matters of IRC and VAT was merely arithmetic corrections.

5.32

As regards the corrections in VAT, which gave rise to the tax assessments that are the object of this arbitral request, the same resulted from the fact that the Tax Inspection Services (SIT) considered that the Claimant improperly deducted VAT in the years 2014 and 2015 in the amount of EUR 9,135.00 and EUR 7,475.00, respectively, as detailed below:

5.33

The Claimant was notified, through Official Letter no. ..., of 11-07-2018, of the draft Tax Inspection Report (RIT), as well as to exercise within 15 days the right to a hearing on the content thereof.

5.34

The Claimant did not exercise the right to a hearing, so the proposed corrections were maintained, with the Claimant being notified, through Official Letter no. ..., of 30-07-2018, of the final version of the RIT.

5.35

In accordance with what is described in the RIT, the SIT identified inconsistencies (i) in the invoices issued by the Claimant and to it by the companies C... and D..., (ii) in the service provision contracts concluded between the Claimant and those companies, as well as in (iii) the statements made within the scope of the inspection procedure by the Claimant, by C... and by D....

5.36

The Respondent understood in the RIT that the invoices issued, both by the Claimant (see point 5.23., supra), and by C... (see point 5.10. and point 5.19., supra) and by D... (see point 5.15., supra) raise doubts as to whether they titulate genuine transactions, as follows:

"Analysis of invoices to and from E... SA:

Through official letter no. ... of 2017-08-03, we notified A... Lda to present the documents of the costs of the production of the catalogues and to explain why there is no invoice for the rental of the trucks for the 2nd semester of 2015, since the contract has a duration of two years, beginning on 01-01-2014.

• With respect to the cost documents for the production of the canvases, invoices were presented for purchases from a printing company, but which in no way justified the elaboration of the said catalogues.

A... Lda then came to argue that the catalogues did not have success, so they had to be elaborated through digital support, that is, at the fairs, advertising would be conducted through digital support on monitors.

• With respect to the fact that there is no invoice for the 2nd semester of 2015 for the truck rental, A... Lda presented us with a document of termination of the contract by E..., because the clients of the latter did not accept advertising from another company on the trucks of E.... The termination took effect from 30-01-2015.

In the same notification, we also requested the terms of the transaction related to truck rental for conducting an advertising campaign.

The company sent us an advertising contract signed by both parties, in which it was mentioned that it consisted of the production of truck canvases with advertising for A... Lda and that it was the responsibility of the latter to produce the canvases.

Thus, we requested the documents to support the cost of producing them.

A... Lda sent us an amendment to the contract whereby the responsibility for producing the canvases passed to E... SA.

However, from the analysis of E... SA's accounting, we found no costs for this purpose.

Thus, through official letter no. ... of 2017-11-03, we notified E... SA to exhibit the documents supporting the costs of producing the canvases.

In response, E... SA explains that the banners are an integral part of the trailers, whether by renting or leasing, and that the advertising referred to in the amendment to the contract was carried out by an employee serving C..., as is normal in such situations.

On 2018-03-21, via email, we requested the following additional clarifications from A... Lda:

Since the catalogues did not succeed at the fairs and there was a need to conduct advertising through digital support, we asked if 40,000 catalogues were actually produced, if not, how many?

In response dated 2018-04-07, they explained that the production of paper catalogues was suspended at some point (it is difficult to determine when), because as time progressed in carrying out the projects it was concluded that they quickly became outdated, and for that reason there was a change in marketing strategy investing in the digital format.

We analyzed the bank transfers, the support of the means of payment and receipt of the invoices (…) identified above (…) we concluded the following:

• The due date mentioned in the invoices issued by A... Lda is immediate and the due date mentioned in the invoices issued by E... SA is 30 days;

• Although the invoices issued by E... SA are prior to those issued by A... Lda, E... SA makes the payment before A... Lda;

• A... Lda makes the payment of the invoices on the same day or a few days after E... SA makes the payment, despite the due date and dates of the invoices being prior;

• Invoice no. 413 issued by E... SA (of 16-06-2014), which was recorded in 2015 by A... Lda, was cancelled by credit note no. 3, however, invoice no. 634 (of 29-06-2015) was partially paid and cancelled for the remainder. Should invoice no. 413 not have been paid? And should invoice no. 634 have been fully cancelled?

Conclusion:

• there are no costs in E... SA's accounting for the production of the banners;

• the explanations given by E... SA and A... Lda regarding the termination of the truck rental contract, when it states that this contract was cancelled because the clients of E... SA did not accept advertising from other entities other than suppliers and the inconsistency verified by the issuance of the credit note that cancels older invoices and not more recent ones are not acceptable;

• the payments and receipts are not in accordance with the due date;

• the issuance of credit note no. 3 only served to settle the account of the client of E... SA;

• the fact that the catalogues were not produced in their entirety, which contradicts the description of the invoices and the proposals attached to the same issued by A... Lda.

We conclude that the invoices issued between these two companies do not correspond to genuine transactions, although the financial circuit exists, the invoices issued by E... SA to A... Lda only served to eliminate the effect of the issuance of invoices to E... SA, thus allowing it to receive 100% of the eligible expenses for investment purposes.

Analysis of invoices to and from D... Lda:

In the contract for exploitation of advertising spaces, it is described that D... Lda has responsibility for the production of the banners on the trucks. We analyzed the bank transfers, the support of the means of payment and receipt of the invoices (…) identified (…)" and "analyzed the means of payment and receipt, we concluded the following:

• The due date mentioned in the invoices issued by A... Lda is 30 days and the due date mentioned in the invoices issued by D... Lda is 30 days;

• D... Lda owes EUR 27,675.00 as of 31-10-2015 and A... Lda owes EUR 27,675.00 as of 31-10-2015;

• On 30-10-2015, D... Lda sends a letter to A... Lda requesting the settlement of accounts, since the amount owed between the two companies is the same, for the reason that D... Lda is undergoing a revitalization process at that date and it is not possible to make any payment.

Conclusion:

• there are no expenses in D... Lda's accounting for the production of the banners;

• the settlement of accounts carried out between the two companies;

• on 2018-03-21, via email, we requested clarifications from A... Lda to explain:

• If with respect to the catalogues produced, there was or was not acceptance of the same and if there was a need to resort to digital advertising, similar to what occurred with the client E... SA. If so, were the 50,000 catalogues produced in their entirety, if not, how many.

• If with respect to A... Lda's advertising on the trucks of D..., they encountered the same difficulties with the advertising on the trucks of E... in the sense that the clients of E... did not accept advertising from other clients.

In response sent on 2018-04-07, that the work done on paper would have been approximately 10% and work was done in digital format.

Regarding the advertising on the trucks of D... Lda, A... Lda states that this service only ended due to the PER process that it itself has.

Analyzing the responses:

• not all catalogues were produced, of the 50,000 invoiced only 5,000 were produced, so the description of the invoices does not correspond to services rendered.

• the fact that the advertising on the trucks operated between 01 April 2014 and September 2015 does not make sense, since 96% of D... Lda's sales volume is for E... SA and D... Sul Lda in subcontracting regime and D... Sul Lda's sales volume is 80% for E... SA in subcontracting regime, thus the clients of D... Lda are those of E... SA, the same ones who did not want advertising on the trucks of other companies, other than E....

If E... terminated the advertising contract with A... Lda with effect from 30 January 2015, should D... Lda not have done the same?

We conclude that the invoices issued between these two companies do not correspond to genuine transactions, although the financial circuit is correct, the invoices issued by D... Lda to A... Lda only served to eliminate the effect of the issuance of invoices to D... Lda." (emphasis ours).

5.37

As a consequence, having the Respondent concluded in the RIT that one was in the presence of simulated transactions, it understood that it was not legitimate for the Claimant to deduct the VAT underlying the invoices issued, either by C..., or by D....

5.38

The Respondent corrected the quarterly VAT declarations of the years 2014 and 2015, from which resulted the tax assessments and interest that are the object of this arbitral request, identified below, in the total amount of EUR 21,896.45, which the Claimant came to contest here (amounts expressed in Euros – EUR):

5.39

In the meeting referred to in article 18 of the RJAT (held on 20 May 2019), confirmation was obtained from the Respondent that the Claimant had made payment of the assessments identified in the previous point.

Reasoning on the Factual Matters

5.40

As regards the proven factual matters, the conviction of the Arbitral Tribunal was based, in addition to the free assessment of the positions assumed by the parties (on matters of fact), on the content of the documents attached to the file by both parties, as well as on the party statements given and on the analysis of the administrative file submitted by the Respondent.

Unproven Facts

5.41

It was not proven that the services arising from the contracts whose copy was attached to the file, concluded between the Claimant and C... (identified in points 5.5. to 5.10. and 5.16. to 5.19., supra) and the Claimant and D... (identified in points 5.11. to 5.15., supra) were actually provided.

5.42

No other facts of relevance for the arbitral decision were found to be unproven.

6. LEGAL MATTERS

6.1

With the factual matters now established as proven, it is necessary to determine the law applicable to the underlying facts in accordance with the questions to be decided.

6.2

In this case, the requests formulated by the Claimant are aimed at annulling the VAT and interest assessments identified in the file in the total amount of EUR 21,896.45, on the grounds that such assessments are allegedly illegal, petitioning for reimbursement of the amount improperly paid, plus compensatory interest, calculated at the legal rate, from the date of payment until its complete restitution.

6.3

The Claimant supports its arbitral request on the fact that it understands the grounds invoked by the Respondent (in the RIT) and which gave rise to the VAT and interest assessments that it contests in the request, in the total amount of EUR 21,896.45, are illegal, refuting that one is dealing with a "simulated transaction," as the Respondent understood, since the Claimant reiterates that all contractualized services with the identified companies were actually provided, with the said services being duly documented.

6.4

Thus, the Claimant does not agree with the conclusion reached by the Respondent that, both in 2014 and 2015, VAT deduction is improper because "(…) one is not in the presence of genuine transactions (…)" since the Claimant argues that the AT did not present "(…) consistent argumentation that leads (…) to presume (…) that there was on the part of the (…) claimant, criminal conduct or illegitimate behavior."

6.5

In fact, the Claimant argues that "contrary to the assertions of the AT (…), the statements of taxpayers (…) are those that enjoy the presumption of truthfulness (…)" and "where there are indications of false invoicing, the AT must prove that the indications of falsity are consistent, serious and revealing of a high probability that the invoicing [is] false."

6.6

In these terms, the Claimant reiterates that if "(…) the AT disregards invoices that it deems false (…)" it will fall "(…) upon the AT to prove that the legal presuppositions of its action are met and that the invoice operations do not correspond to reality," which, according to the Claimant, the Respondent did not do throughout the entire process.

6.7

For its part, the Respondent supports its position (insofar as it is relevant to this arbitral request) on the fact that "(…) the quantity of catalogues invoiced by the Claimant to D... Lda and to E... SA was not produced, as emerges from all the indications/facts contained in the Tax Inspection Report" and, "as for the invoices issued to it by those entities [D... and C...] and corresponding advertising space/exploitation contracts (…) inconsistencies and indications that these were not real economic transactions (…)" were detected.

6.8

Thus, for the Respondent, "there being well-founded indications that concrete operations declared and recorded by the Claimant do not correspond to reality (…)," "(…) in accordance with the provisions of paragraph a) of no. 2 of article 75 of the LGT, the presumption of truthfulness contained in the normative statement of no. 1 of the same article ceases to apply" (emphasis ours).

6.9

On the other hand, the Respondent argues that, in accordance with the provisions of no. 3 of article 19 of the VAT Code, "tax resulting from a simulated transaction cannot be deducted (…)" stating that "(…) the STA considers as requirements for the tax administration to be able to proceed with the additional assessment based on the existence of declared deductions exceeding those owed, (…) its subjective consideration, in its activity of control or inspection relating to compliance with taxpayer duties, that the latter have included in their statements a deduction superior to that which should be due; that such consideration be taken in an objective and materially substantiated manner (…)" (emphasis ours).

6.10

In these terms, the Respondent concludes that "being VAT deduction a right of the taxable person who bore the tax (…) it shall not fall to the administration the burden of proof of the non-existence of the tax facts whose tax it fundamentally considered deducted illegally by the taxpayer, but shall fall to the taxpayer himself the burden of proof of the existence of the tax facts on which he based the deduction he declared" (emphasis ours).

6.11

In this regard, it falls to the Arbitral Tribunal to analyze the request and decide which of the parties is right in the arguments it presents so as to be able to decide on the arbitral request, and for this purpose, taking into consideration the corrections made in matters of deductible VAT and the positions assumed by the parties, it will be necessary to determine:

6.11.1

Whether the Respondent presented sufficiently strong indications of the existence of simulation in the provision of services rendered, either by C..., or by D... to the Claimant, relating to the exploitation of advertising spaces and cession of warehouse space;

6.11.2

The burden of proof;

6.11.3

Whether the Claimant succeeded in demonstrating the truthfulness of the transactions titulated by the invoices identified in the file (issued by the companies D... and C...) and whether, if such transactions are real, the deduction of VAT borne by the Claimant is legal in light of the provisions of article 19, no. 3 of the VAT Code.

General Framework on VAT

6.12

Preliminarily, it should be noted that VAT (introduced into the Portuguese tax system by Decree-Law no. 394-B/84 of 26/12), can be defined as a general tax on consumption, in that it falls (in principle) on all transfers of goods and provision of services with onerous characteristics (cfr. article 1 of the VAT Code).

6.13

And it is equally characterized as a multiphase tax because it falls on all phases of the economic cycle, from production to the final consumer, not being cumulative, in that at each phase of the economic cycle it taxes only the value added, that is, the increase in value that goods or services come to have in the phase in which they find themselves, thus avoiding the cumulative effect of tax upon tax.

6.14

In addition to the characteristics pointed out in the two previous points, VAT also has the characteristic of neutrality since (by virtue of the deduction mechanism), the tax will come to be borne in its entirety by the final consumer, making it fiscally irrelevant the number of phases that make up the economic cycle.

6.15

Finally, it should be noted that the assessment of the tax is made by the economic operators who pass on the tax assessed upstream to the client, and the indirect subtractive method should be used in determining the value added, in accordance with the provisions of article 19 of the VAT Code.

6.16

In these terms, a tax act always has at its base a concrete factual situation, which is provided for, abstractly and typically, in tax law as generating the right to tax, with that concrete factual situation being defined as a tax fact, which only exists once all the legal presuppositions for such are verified.

6.17

In fact, the tax norms that contemplate the tax fact are those relating to real incidence (which define its objective elements), so that only with the practice of the tax fact does the tax obligation arise, since it is embodied in any transfer of goods or provision of services, on an onerous basis, that is carried out in the national territory (cfr. article 1 of the VAT Code).

6.18

Thus, the existence of the tax fact constitutes, therefore, a "sine qua non" condition of the determination of the taxable matter and of the assessment made.

6.19

On the other hand, pursuant to the VAT Code, the general obligation of taxable persons to have accounting appropriate for the determination and inspection of the tax derives from what is established in article 28, no. 1, paragraph g), thus explaining that the subjects who, in light of commercial and tax law, are obliged to have organized accounting, must also observe certain accounting obligations with the objective of obtaining security and clarity in the recording of transactions resulting from the application of the VAT Code and necessary for the calculation of the tax, as well as to allow its inspection.

6.20

And further, with respect to the specific VAT regime, it shall equally be said that the legislator resorts to presumptions that establish legal proof for certain particular facts, which imply a true inversion of the burden of proof and are explained by the nature of this tax.

6.21

Finally, given once again the specificity of VAT, it should also be noted that the Tax Authority cannot make alterations to the quantification of the tax base of this tax without it being demonstrated that omissions or inaccuracies have been made in the recording of purchases or in the recording of sales of the taxable person in question.

On the Alleged Existence of Simulated Transactions

6.22

In this regard, in the case under analysis, it will first be important to delimit the concept of "simulated transaction," and subsequently there will be a need to analyze and distribute the burden of proof in order to ascertain whether the parties have succeeded in demonstrating the facts they invoked, in the legally appropriate terms.

6.23

In accordance with the provisions of no. 3 of article 19 of the VAT Code, "tax resulting from a simulated transaction cannot be deducted (…)".

6.24

However, given that tax law provides nothing regarding the concept of "simulation," consideration must be given to the provisions of article 11, no. 2 of the General Tax Law (LGT), pursuant to which "whenever terms specific to other branches of law are employed in tax norms, they must be interpreted in the same sense that they have there, unless another meaning directly follows from the law" (emphasis ours).

6.25

Thus, in light of the aforementioned legal provision, if another meaning does not follow from tax law, the concept of "simulation" should be understood to have the same meaning that it has in the branch of law that created it, with the interpreter-applicator not having a general faculty to alter it.

6.26

In these terms, one should understand that the tax legislator adopted the term or concept in the same sense that it has in the branch of law that created it, that is, in Civil Law.

6.27

Now, the concept of simulation is defined in article 240, no. 1 of the Civil Code, in accordance with which one can read that "if, by agreement between the declarant and declaratee, and with the intention to deceive third parties, there is divergence between the negotial declaration and the real will of the declarant, the transaction is said to be simulated" (emphasis ours).

6.28

Thus, from what is set out in the said article of the Civil Code, there are three characteristic elements of simulation, as follows:

• The divergence between will and declaration;
• The agreement or collusion between the parties; and
• The intention to deceive third parties.

6.29

First, simulation presupposes that the external side of the negotial declaration (the declaration) and its internal side (the will) do not coincide, with, in general terms, this divergence between will and declaration possibly being absolute (in cases where the declarant, not wanting to execute any legal transaction, states that he wants to do so and executes some legal transaction) or relative (when the declarant, wanting to execute a legal transaction, states that he wants to and executes a different legal transaction).

6.30

In fact, the identification of the divergence, whether absolute or relative, presupposes the identification of the real will of the declarant and its comparison with the negotial declaration produced.

6.31

In these terms, in absolute simulation, under the guise of the declaration there is hidden not any negotial will, but rather the absence of any negotial will, but, conversely, in relative simulation, under the guise of the declaration there is hidden a negotial declaration divergent from it, the legal transaction that corresponds to the real will of the declarant, designated as the dissimulated transaction.

6.32

On the other hand, simulation also presupposes that (i) there is no error in the declaration (that is, that the declarant knows of the divergence between his declaration and his will) and that (ii) there is no mental reservation (that is, that the declaratee also knows of it).

6.33

However, the concept of simulation requires more than the simple awareness or representation of the declarant regarding the divergence between his will and his declaration, because for one to speak of simulation it is also necessary that there exist an agreement or a meeting of wills regarding the very simulation between the two subjects (declarant and declaratee).

6.34

Thus, a fraudulent agreement on the very divergence between one and the other is also a constitutive element of the concept of simulation.

6.35

In that agreement, which is designated as a simulating pact, a counter-declaration is manifested in which both parties declare their real will or their will to bind themselves in accordance with the simulated transaction.

6.36

Finally, and once it is verified that there is divergence between declaration and will, as well as agreement on it, for one to speak of simulation it is still necessary to verify whether or not there is fraudulent intent in the simulating pact, intended to deceive and harm third parties.

6.37

In this regard, when the simulating pact aims only at deception, but not at harming third parties, the simulation is said to be innocent, but the simulation will be qualified as fraudulent when the simulating pact is intended not only to deceive but also to harm those third parties.

6.38

Now, having analyzed, in general terms, all the requirements required by law for configuring an operation as simulated, it will be important to determine in the case under analysis:

6.38.1

Whether or not all the requirements of simulation are met in accordance with what is set out in the previous points; and

6.38.2

Whether the Respondent, in the course of tax inspection, collected indications of the existence of simulated transactions that are apt to bring into question the presumption of truthfulness that the Claimant's accounting enjoys.

6.39

In fact, it will be recalled that the Respondent states in the RIT that from the analysis of the invoices issued by C... and to C..., in light of the indications described there (see point 5.36., supra), it was possible for it to conclude that "(…) the invoices issued between these two companies do not correspond to genuine transactions, although the financial circuit exists (…)" because "(…) the invoices issued by E... SA to A... Lda only served to eliminate the effect of the issuance of invoices to E... SA, thus allowing it to receive 100% of the eligible expenses for investment purposes" (emphasis ours).

6.40

On the other hand, the Respondent also states in the RIT that from the analysis of the invoices issued by D... and to D..., in light of the indications described in the RIT (see point 5.36., supra), it was also possible for it to conclude that "(…) the invoices issued between these two companies do not correspond to genuine transactions, although the financial circuit is correct, the invoices issued by D... Lda to A... Lda only served to eliminate the effect of the issuance of invoices to D... Lda." (emphasis ours).

6.41

Now, it was understood by the SIT in the RIT that the Claimant made "deduction of VAT from invoices that do not correspond to genuine transactions in 2014 (…)" and in 2015, thus contravening the provisions of article 19 of the VAT Code.

6.42

Additionally, in the Response submitted within the scope of this arbitral process, the Respondent understood that the Claimant did not bring to the process "(…) evidence of the reality of the disregarded transactions, which would permit challenging the facts and respective conclusions pointed out by the SIT, limiting itself (…) to argue that its accounting and respective statements enjoy the presumption of truthfulness and that the AT did not fulfill its burden of proof in order to cease that presumption."

6.43

Thus, according to the Respondent, "there being well-founded indications that concrete operations declared and recorded by the Claimant do not correspond to reality (…) the presumption of truthfulness contained in the normative statement (…)" ceases to apply, with it falling to the taxpayer "(…) to demonstrate the truthfulness of its accounting elements and respective supports, with that presumption thus put in question, in light of those well-founded indications" (emphasis ours).

6.44

And, concluding the Respondent in the terms referred to in the previous point, it reiterates its position that one is dealing with false invoices, because citing the Judgment of the STA of 20-11-2002 (no. 01483/02), "accounting considers (…) documents issued in the proper legal form, but which do not correspond to any reality, because the operations that they were supposed to reflect (…) did not take place" (emphasis ours).

6.45

Thus, the Respondent considers that the VAT associated with the said invoices is not deductible in the sphere of the Claimant pursuant to the provisions of article 19, no. 3 of the VAT Code, understanding that the indications collected point to the fact that there were practiced, by the Claimant and with the Claimant, various simulated transactions leading to the practice of tax fraud.

6.46

Now, in light of what is set out above, let us analyze whether the facts described constitute "(…) well-founded indications (…)" that permit concluding as to the existence of simulated transactions and, in consequence, concluding as to the (il)legality of the VAT deductions falling upon the amounts relating to such transactions.

6.47

In this regard, as referred to in a Judgment of the TCAN of 11-04-2014 (no. 00142/08.4BEBRG), "(…) existing (…) indications of the falsity of invoices (…) such circumstance does not permit, on its own, concluding as to the existence of simulation (…)" because "accepting that a user of invoices sees costs disregarded without the tax administration in some way linking it to the fraudulent scheme would violate the principle of justice. And it would put into