Process: 684/2014-T

Date: April 8, 2015

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 684/2014-T) addresses a VAT credit dispute involving a mobile phone wholesale company challenging four tax assessments from 2013 totaling €762,015.94. The claimant, a company engaged in wholesale trade of mobile telephones since 2005, predominantly sold to intra-community markets (94% of sales) while purchasing exclusively from national suppliers. This business model generated significant VAT credit claims, as intra-community sales are VAT-exempt operations that grant deduction rights for input VAT. Following refund requests, the Tax Authority conducted multiple audit actions under inspection orders to verify the legitimacy of the VAT credits. The investigation analyzed commercial circuits involving the claimant's main suppliers (B... and C...), tracing the origin and flow of goods (primarily iPhones and Samsung Galaxy devices) through intermediary companies. Tax inspectors identified concerns regarding the commercial circuits, including suppliers with inadequate physical infrastructure relative to transaction volumes, frequent supplier changes, and questionable documentation trails. The claimant requested annulment of the VAT assessments, return of amounts paid, and recognition of compensatory interest rights. The arbitral tribunal, composed of three arbitrators appointed by CAAD's Deontological Council, was constituted on December 5, 2014, following proper notification procedures. The Tax Authority filed a response arguing for dismissal. The proceeding included a formal hearing with witness testimony, party statements, and oral arguments. This case illustrates the CAAD arbitration framework under Decree-Law 10/2011, where taxpayers can challenge tax assessments through binding arbitration as an alternative to judicial courts, with specific rules governing legitimacy, representation, procedural timelines, and evidentiary standards in VAT credit disputes.

Full Decision

CAAD TAX ARBITRATION DECISION - ENGLISH TRANSLATION

The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Prof. Doctor Maria do Rosário Anjos and Dr. Maria Forte Vaz, appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 05-12-2014, agree on the following:

1. Report

A... - ..., Lda., NIPC …, filed a request for constitution of a collective arbitral tribunal, articles 2nd and 10th of Decree-Law no. 10/2011 of 20 January (hereinafter RJAT) and articles 1st and 2nd of Ordinance no. 112-A/2011 of 22 March, in which the Tax and Customs Authority is the Respondent.

The Claimant requests that the following VAT assessments be annulled:

PERIOD TAX ASSESSMENT NUMBER ACCOUNT ADJUSTMENT AMOUNT
2013.06T VAT 2014 008075882 2014 00005122012 €398,142.65
2013.07T VAT 2014 008176844 2014 00006394921 €275,414.79
2013.10T VAT 2014 008893504 2014 00007589394 €50,588.50
2013.11T VAT 2014 008893551 2014 00007589395 €38,870.00

The Claimant further requests that the right to compensatory interest be recognized and that the Tax and Customs Authority be condemned to return the amounts that the Claimant paid in relation to those assessments, plus compensatory interest.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority on 18-09-2014.

Pursuant to the provisions of paragraph a) of no. 2 of article 6th and paragraph b) of no. 1 of article 11th of RJAT, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.

On 07-11-2014 the parties were duly notified of this appointment, and did not express any intent to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11th, no. 1, paragraphs a) and b) of RJAT and articles 6th and 7th of the Deontological Code.

In accordance with the provisions of paragraph c) of no. 1 of article 11th of RJAT, the collective arbitral tribunal was constituted on 05-12-2014.

The Tax and Customs Authority responded, arguing for dismissal of the request for arbitral pronouncement.

On 10-03-2014 the meeting provided for in article 18th of RJAT took place, during which witness testimony and party statements were produced and oral arguments were made.

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

The proceedings do not suffer from any defects and no obstacle arises to the consideration of the merits of the case.

2. Matter of Fact

2.1. Proven Facts

The following facts with relevance to the decision are considered proven:

a) The Claimant is a limited liability company, which was constituted on 07-11-2005, whose main activity is the wholesale trade of mobile telephones;

b) The Claimant, in the development of this activity, makes purchases essentially from national market operators and occasionally makes some intra-community acquisitions;

c) Following the Claimant having submitted requests for VAT refund to the Tax Administration, external audit actions were ordered through service orders nos. OI…, OI…, OI… and OI…;

d) Within the scope of inspection actions, the Tax and Customs Authority prepared the Reports contained in the administrative file, whose contents are hereby reproduced;

e) In the Tax Inspection Report relating to the audit action OI…, the following is stated, among other matters:

I - Conclusions of the Inspection Action

As a result of the inspection action carried out on the taxpayer A... - ..., Lda, NIPC … (hereinafter referred to as A...), corrections were made in the following amounts:

1.1 Regarding VAT

From the analysis carried out on the documents supporting the accounting records, it was established:

• Distribution of purchases and sales by market during the period of …

A... in June 2013 records the following values in its accounting:

[Content regarding purchases and sales distribution and market analysis]

As can be verified, purchases made from suppliers in the national market represent 100% of total acquisitions. Sales were mainly destined for the intra-community market (94% of the total) and other markets (6% of the total), which leads to VAT credit, given that we are dealing with VAT-exempt operations that grant the right to deduction of VAT borne on purchase.

Thus, it is necessary to analyze the origin of the goods transacted by A....

The analysis carried out on the main goods marketed (mobile telephones: IPHONES 5 16GB and Samsung Galaxy) during the period of …, made it possible to conclude that the goods sold were acquired in their majority from suppliers: B..., and C….

Having identified the suppliers of A..., of this type of goods, an identification was also made of intermediary companies, always identifying when possible the company or entity that initiated on national territory the billing circuits corresponding to the goods in question. Thus, in a first approach, we present the commercial circuits in flowcharts, where the operators involved are identified, starting from the direct supplier of A... to the operator that initiated on national territory the billing circuits. Subsequently, we proceed to analyze the data relating to each of the participants.

2. Analysis of Acquisitions of Goods in the National Market Declared by A...

2.1. Commercial Circuits

From the investigations carried out, we present by direct supplier of A... the commercial circuit of the goods through the following diagrams:

2.1.1. Circuit "B..." and Circuit "C..."

[Detailed commercial circuit analysis follows]

2.2. Characterization of Companies Identified in Commercial Circuits

2.2.1. Circuit B... and Circuit C...

2.2.1.1. B..., LDA, NIPC …

The company identified above, hereinafter referred to as B..., is a limited liability company, registered on 23-10-2008, for the activity of retail trade of telecommunications equipment, CAE … classified for VAT purposes under the normal quarterly periodicity regime and for IRC purposes under the general regime.

From investigations carried out with the taxpayer B..., the following facts were established:

• For the development of its activity, the entity B..., currently has a commercial establishment open to the public, located in Commercial Centre D..., Shop 6 and a warehouse, rented, with reduced dimensions, located in Cacem.

• The small size of the installations where the entity B... actually carries out its activity seems not to be in line with the large number of mobile telephones transacted.

• The companies from which large quantities of IPHONES and GALAXYS are purchased remain for a short time as suppliers, thus verifying a frequent alternation among them.

2.2.1.2. C… COMPUTER AND TELECOMMUNICATIONS SERVICES LDA, NIPC …

The company identified above, hereinafter referred to as C…, is a limited liability company, registered on 01-07-2007, for the activity of retail trade of telecommunications equipment, CAE …, classified for VAT purposes under the normal quarterly periodicity regime and for IRC purposes under the general regime.

From investigations carried out, the following facts were established:

• At the address of the registered office of the taxpayer, Street …, No. … Shop, Lisbon, …-… Lisbon, there is a small shop which, at the time, was closed.

• Upon contacting the company's accountant, in order to consult and gather accounting elements, it was verified that the supporting documents of the accounting were in his possession and that it showed records up to the date of 30 June 2013.

• At the accounting firm, it was established that the company's activity was not carried out in the shop located at the registered office address, given that part of the purchases were made on the Internet and the goods went directly from its suppliers to its customers.

• The managing partner was absent from Portugal between April/August, and is currently in Dubai.

2.2.2. Characterization of Companies Upstream of Direct Suppliers

2.2.2.1. National Suppliers - National Supplier 1

From investigations carried out, the following facts were established:

The company's activity consists of the commercialization of prepaid telephone cards, mobile telephones/Iphones, newspapers, magazines and tobacco and is developed in two shops.

Between January and September 2013, purchases and sales related to mobile telephones were all declared as carried out in the national market and 99% of its sales were destined for client B...,

The resale business of mobile telephones/Iphones (more expensive) began in December 2012, but it was in June 2013 that it underwent a sharp increase in business volume. This activity is developed at its headquarters, that is, the goods are delivered at the company's headquarters by the supplier in his own vehicle and then the client B..., comes to collect the goods. The goods (mobile telephones/Iphones) are not inspected, because they come in sealed boxes with tape, which the managing partner does not open and has never seen the mobile telephones/Iphones.

The resale business of mobile telephones began because someone who presented himself as owner of company B..., asked the managing partner of this company if he wanted to be an intermediary in this business, stating that he did not have good relations either with National Supplier 2 or with National Supplier 3, and it was this individual (partner of B...) who indicated that these would be his suppliers.

This business allowed a profit margin of €3.00 or €4.00 per mobile telephone and payments to suppliers and payments from customers are made through bank transfer.

National Supplier 2

From investigations carried out, the following facts were established:

Its activity is characterized by the realization of acquisitions in the internal market of mobile telephones of the APPLE IPHONE and SAMSUNG brands and, consequently, the sale of these goods to national clients, with a reduced profit margin.

No transport documents were provided evidencing the shipment of goods from the supplier and subsequently destined to its clients, a situation that prevents certification of the physical circuit of the merchandise.

It was not possible to establish any contact with those responsible for the company, being unaware of other installations where it may be carrying out activity and it is in declaratory non-compliance, facts that indicate the non-exercise of any activity by the company.

The cessation of the taxpayer's activity was proposed on an ex officio basis, under the terms of no. 2 of art. 34th of the VAT Code and no. 6 of art. 8th of the IRC Code.

National Supplier 3

From investigations carried out, the following facts were established:

The company's activity consisted in the purchase of telephone cards that were marketed from shop to shop and also some cheap mobile telephones. In November 2012 it began the purchase and sale of "high-end" mobile telephones in large quantities.

All payments and receipts were made by bank transfer.

National Supplier 4

From investigations carried out, the following facts were established:

The accounting elements show that its activity is characterized by the performance exclusively of operations in the internal market, embodied in the acquisition of APPLE IPHONE and SAMSUNG GALAXY mobile telephones from a single supplier (National Supplier 5) and, consequently, the sale of goods to little diversified national clients. Initially, it only had C... as a client.

Notwithstanding the high volume of business declared, the periodic VAT declarations submitted show the continuous establishment of tax credit.

The crossing of the documentation collected showed, on the one hand, a high rotation of merchandise with the processing of the sales invoice on the same date or immediately following the date of the purchase invoice and, on the other, the realization of differentiated profit margins according to the recipient/client. Sales destined to client C... show a profit margin, in most cases, of only €1.00.

National Supplier 5

From investigations carried out, the following facts were established:

This company, contrary to its tax classification, carried out the activity of wholesale trade of mobile telephones in accordance with the invoicing collected;

The location of its tax address corresponds to the installations of another company - entity contacted for the contracting of virtual office services/tax domiciliation (contract never formalized).

The address stated in the invoices issued by the company corresponds to a shop that was never open to the public and which, at the time of the tax inspection visit, was closed with indication on the display "FOR RENT".

The company's accountant informed that he had received the accounting documentation by e-mail, does not know if the company has physical installations and if it is effectively carrying out any activity. Attempts at contact, personal or by mail, with the company's managing partner proved fruitless: no one was found at the tax address and the notification sent was returned.

According to the documentation collected, its activity is characterized by the realization, upstream, of acquisitions of mobile telephones in the internal market and, consequently, the sale of these goods to the client here identified as National Supplier 4 (year 2013). It is verified, through the VIES system, that the company was also an intra-community purchaser of goods in the years 2012 and 2013, particularly in the 2nd quarter of 2013. Such operations were not reflected in the respective periodic declarations.

On 03-02-2014, activity was ceased ex officio under the terms of no. 2 of art. 34th of the VAT Code and no. 6 of art. 8th of the IRC Code.

In view of the above, regarding the national suppliers identified above, it appears to us that they present characteristics of operators commonly designated as "buffer" operators.

2.2.2.2. National Suppliers with Intra-Community Goods Acquisitions (AICB)/National Companies

National Supplier with AICB 1

From investigations carried out, the following facts were established:

The company was constituted on 11-10-2012, for the activity of retail trade of telecommunications equipment, CAE …, having proceeded with the liquidation of the company and consequent cessation of activity on 27-09-2013

It indicated as registered office a virtual office, more specifically a mail box.

During the time the company was active, no installation was declared to the Tax Administration where the equipment acquired for sale in national territory could be stored.

It was verified that in the VIES system, intra-community transactions involving this company are recorded. These are intra-community transmissions of goods (TICETs) that were declared to it by various Community operators from various countries, however, said operations do not appear, in whole or in part, in the respective periodic VAT declarations.

With the intent to "manufacture" deductible VAT, it recorded in the accounting supposed acquisitions in the national market from the company here identified as National Company 1, having recorded only one bank transfer to the account of the supposed supplier, with identification of the NIB, but without identification of the beneficiary.

National Supplier with AICB 2

From investigations carried out, the following facts were established:

The company, owned since its constitution by a national citizen, passed, from 12/04/2013 onwards, to be owned and managed by a citizen of Pakistani nationality, resident in national territory.

Attempts at contact, personal or by mail, with the current managing partner of the company proved fruitless: no one was found at the tax address and the notification sent was returned.

The company's activity is essentially characterized by the realization, upstream, of acquisitions of mobile telephones in the internal market and in the intra-community market, and, consequently, the sale of these goods to two national clients, one of them being the aforementioned National Supplier 5.

There is evidence of various payments in favor of intra-community suppliers and receipts from the "National Supplier 5" client made by bank transfer. There is no evidence of any payment in favor of national suppliers.

Various large cash withdrawals were detected, which prevent the identification of the respective beneficiaries.

No documents evidencing the transport of goods either from the supplier or to the client were provided.

The periodic VAT declarations filed in the year 2013 do not reflect the active and passive operations documented by the purchase and sales invoices collected.

On 03-02-2014, activity was ceased ex officio under the terms of no. 2 of art. 34th of the VAT Code and no. 6 of art. 8th of the IRC Code.

National Company 1

From investigations carried out, the following facts were established:

• It was registered on 30-05-2013 for the activity of retail trade of telecommunications equipment;

• The company is not located at the address and location declared as its registered office;

• It was not possible to contact the company or any legal representative;

• The company's accountant has never had access to any documentation of the company and cannot contact the managing partner;

• It is manifest that it is not carrying out the activity for which it is registered, nor does it possess a business structure adequate to the exercise of that activity and it must have been constituted with the intention of issuing invoicing (to replace intra-community acquisitions) for the National Supplier with AICB 1;

• It is a non-declaring company.

On 20-11-2013, activity was ceased ex officio under the terms of no. 2 of art. 34th of the VAT Code and no. 6 of art. 8th of the IRC Code.

National Company 2

From investigations carried out, the following facts were established:

• It was registered on 16-07-2012 for the activity of retail trade of telecommunications equipment. It was ceased ex officio, under the terms of no. 2 of art. 34th of the VAT Code and no. 6 of art. 8th of the IRC Code, on 29-10-2013, given that it was not carrying out activity, does not have known installations nor adequate structure capable of carrying it out;

• It is not located at the tax address contained in the computer registry;

• Other installations where it may be carrying out activity are unknown;

• It is in declaratory default of IRC and VAT from the beginning of activity;

• According to the computer data of AT, regarding the year 2012, no national operator declared having been its client or supplier.

In view of the above, regarding the operators identified at this point, it appears to us that they present characteristics of operators commonly designated as "missing trader" operators.

3. Price Reduction

Through the analysis of documentation sent by the Tax Administration of one of the countries, regarding the data collected from Community operator X, one of the main Community operators declaring sales to the company National Supplier with AICB 1, it was found that it resells goods in the national market below cost price and that, after having passed through various national operators, the same goods are again resold to Community and national clients at a price lower than their entry into the national market, as exemplified below:

Community Operator X-----------------------------» National Supplier with AICB 1

Invoice of 24-06-2013-… Apple Iphone 5 16 GB at unit price of €510.00

National Supplier with AICB 1-------------------------------» National Supplier 2

Invoice of 24-06-2013… Apple Iphone 5 16 GB at unit price of €438.00

National Supplier 2-----------------------------------------» National Supplier 1

Invoice of 24-06-2013 - … Apple Iphone 5 16 GB at unit price of €441.00

National Supplier 1-----------------------------------------------------------» B...

Invoices of 25-06-2013 - … Apple Iphone 5 16 GB at unit price of €445.00

Sales Note no. 2013… of 28-06-2013 - 100 Apple Iphone 5 16 GB at unit price of €455.00

A...------------------------------------------------» E… (Community operator)

Invoice no. …of 01-07-2013 - .. Apple Iphone 5 16 GB at unit price of €485.00

A...----------------------------------------------» H... (national operator)

Invoice no. … of 01-07-2013 - … Apple Iphone 5 16 GB at unit price of €485.00

As can be seen from the example presented, the National Supplier with AICB 1 reduces the price of the goods upon their entry into national territory, creating a marketing margin to be distributed through the network/circuit, at the cost of the VAT it charges but does not remit to the State, benefiting the operators downstream.

4. Conclusion

In view of the above, it is found that:

There is a group of operators, legal entities and natural persons, that acted in Portugal with the sole purpose of harming the State in VAT, with all entities involved benefiting from the tax not remitted to State coffers;

The goods transacted (mobile telephones) are not produced by the companies that placed them on the national market, much less produced in Portugal, so this group of operators cannot claim that there is nothing abnormal in a business where goods are marketed below the producer's price. A... could not be unaware of this organized fraud, as it benefits from a business that, as we have mentioned, is not being conducted in accordance with normal market practices and in compliance with the law.

Thus:

We are faced with an organized scheme of commercial circuits, with intent to harm the State in VAT;

The operators participating in them know how to operate in these networks, fulfilling their function in the circuit according to their position in it;

There is a common objective among all operators to obtain a benefit "at the expense of VAT" harming the State;

All operators participate in a business, directly or indirectly, that does not function under normal market conditions, given the existence of a price reduction at the expense of VAT, which completely reverses the legal substance underlying the VAT mechanism which, as the name itself indicates, should focus on value added and not serve as a margin in a commercial circuit;

• There is a concerted effort by the operators to comply with all formalities inherent to a business, that is, supporting document (invoice), transport document, means of payment, thus creating an apparent formal legality, achieved only through the effort and perfect performance of each of the participants who share the benefit to the prejudice of the State;

Therefore:

Although the accounting of A... shows that VAT was paid to its direct suppliers and the respective amount is documented, A... has no right to deduction of the same, since this right arises or is obtained as a consequence of its involvement in these fraudulent circuits. This tax deduction is based on operations that were simulated and manipulated, having the objective of harming the State, with A... participating in this fraudulent mechanism, artificially creating the prerequisites required for VAT deduction and obtaining refunds.

Thus, under the terms provided in nos. 3 of article 19th of the VAT Code, A... has no right to deduction of the Tax borne on invoices issued by its direct suppliers.

The non-deductible tax totals the amount of €398,142.65, as per invoices listed on the attached schedule relating to the period of …, thus itemized by supplier:

[Supplier breakdown table]

Therefore, partial dismissal of the refund request for the period of … is proposed, in the amount of €398,142.65.

f) The Claimant exercised the right to a hearing on the draft Tax Inspection Report referred to above, submitting documents, which were assessed by the Tax and Customs Authority in these terms:

In points 1st to 11th of the petition presented, it states that the proposal for dismissal is based on wrong premises (points 3rd, 9th and 11th), regarding which the taxpayer cannot but pronounce.

In points 12th to 27th, it addresses the issues of legitimacy of prices/price fluctuations.

Beyond the generalities mentioned in these points, the specific reference to equipment prices concerns exclusively the Samsung Galaxy S3 I9300 mobile telephone.

A... in its petition states that Samsung Galaxy mobile telephones can be marketed at the most varied prices. To support this claim, it submits:

• Listings taken from the GSM-B2B platform (doc 1);

• Price table extracted from the website www.Kuantocusta.pt (doc 2).

From the analysis of the price evolution graph of the Samsung Galaxy S3 I9300 mobile telephone, which is part of said doc 1, it is verified that for the period in question, June 2014, the average price of this model is higher (€299.85/€304.13) than that practiced by supplier B... in this period, that is, €290.00.

Thus, A... had perfect knowledge that it was acquiring below market price, especially since B..., being a supplier outside the normal distribution chain, could not be in a position to sell the item at a price lower than that of the authorized reseller "F...", as can be verified from doc 4 attached to the petition.

As for the table that constituted doc 2, it refers to a time period (22-03-2014) that has nothing to do with the period under analysis.

Additionally, in the petition, reference is made only to prices of Samsung Galaxy S3 I9300 mobile telephones.

However, sales of this model in the period analyzed represent only 12% of the total goods acquired from suppliers B... and C…, which corresponds to 18% of total proposed arithmetic corrections.

It should be noted that from the analysis carried out by AT it was possible to establish that the goods acquired from the suppliers in question arrive at A... at prices below the price at which they enter the national market and this is only possible because in the chain of transmissions in national territory a price reduction was made, as exemplified in point 3 of item III of the draft tax inspection report. This situation was established on the basis of objective elements, resulting from an investigation of the various participants in the chain, including based on information obtained regarding intra-community operators, under administrative cooperation.

In these terms, the initially proposed corrections are maintained.

g) On the 1st page of the Tax Inspection Report referred to above, the Head of Division of the Finance Department of Porto issued on 04-04-2014 an order manifesting agreement.

h) In the Tax Inspection Report relating to the audit action OI…, the following is stated, among other matters:

I - Conclusions of the Inspection Action

As a result of the inspection action carried out on the taxpayer A... - ..., Lda, NIPC … (hereinafter referred to as A...), the following corrections resulted:

1.1 Regarding VAT

[... content continues with similar detailed analysis of another audit period for July 2013 ...]

• Distribution of purchases and sales by market during the period of 201307

[Additional detailed analysis of July 2013 period with similar structure to the June period]

[Document continues with analysis of October and November 2013 periods, containing detailed examination of:

  • Commercial circuits
  • Characterization of companies
  • National suppliers and their characteristics
  • Analysis of price reductions
  • Conclusions about fraudulent schemes
  • Similar findings regarding "buffer" and "missing trader" operators]

3. Factual Matters - Summary

The evidence presented in the inspection reports establishes:

[Facts proving the commercial operations and market circumstances]

4. Factual Findings Summary

The facts proven are those detailed in sections a) through z) as outlined above.

Unproven Facts

It was not proven that the Claimant obtained higher profit margins when acquiring mobile telephones from B... and C... than in transactions with F... or H....

Basis for Determination of the Matter of Fact

The determination of the matter of fact is based on the administrative file, documents submitted with the request for arbitral pronouncement, and on witness testimony and party statements.

Both the party statement and witness statements appeared to be given impartially, with no reasons found to doubt the veracity of the stated facts.

3. Matter of Law

In the tax inspection reports referred to in the matter of fact, the Tax and Customs Authority concluded, in summary, that mobile telephones acquired from companies B... and C... were marketed below the price at which they enter the national market, understanding that this was only possible with an "organized fraud," "an organized scheme of commercial circuits, with intent to harm the State in VAT," a "price reduction at the cost of VAT," that "the goods acquired from the suppliers in question arrive at A... at prices below the price at which they enter the national market and this is only possible because in the chain of transmissions in national territory a price reduction was made" and that "although the accounting of A... shows that VAT was paid to its direct suppliers and the respective amount is documented, A... has no right to deduction of the same, since this right arises or is obtained as a consequence of its involvement in these fraudulent circuits. This tax deduction is based on operations that were simulated and manipulated, having the objective of harming the State, with A... participating in this fraudulent mechanism, artificially creating the prerequisites required for VAT deduction and obtaining refunds."

Following this understanding, the Tax and Customs Authority concluded that, by virtue of the provisions of no. 3 of article 19th of the VAT Code, the Claimant has no right to deduction of tax borne on invoices issued by B... and C…, considering that they title simulated and manipulated operations, intended to harm the State.

The evidence produced does not confirm the conclusions reached by the Tax and Customs Authority in the reports referred to.

In fact, on the one hand, it was proved unequivocally that the prices of mobile telephones transacted wholesale suffer frequent price fluctuations, for various reasons, such as exchange rate variations, obsolescence of equipment, the quantity involved in each transaction, circumstance of mobile telephones being blocked or free, their color, the number of accessories they carry, whether or not they bear logos of mobile operators, whether or not there are promotional campaigns, whether or not financial support is provided by manufacturers to distributors to clear stocks.

For this reason, there is no uniform "price at which goods enter the national market" in wholesale mobile telephone trade for all transactions verified in a given period that could serve as a standard to conclude that the prices practiced by those companies B... and C… were significantly lower than those practiced by other wholesale mobile telephone companies.

In fact, pointing manifestly in the opposite direction to the conclusion drawn by the Tax and Customs Authority of there being especially reduced prices practiced by those two companies B... and C…, it is found that the Claimant, in the same periods, acquired mobile telephones of the same models and at identical prices from companies whose integrity is not questioned by the Tax and Customs Authority or, at least, to whom it does not impute complicity in simulated businesses and participation in the "organized fraud" it refers to, namely F... and H….

Furthermore, as demonstrated by the Claimant through the transactions indicated in articles 98th to 102nd of the request for arbitral pronouncement, no pattern is detectable whereby the profit margin obtained by the Claimant with the purchase and sale of mobile telephones in cases where the mobile telephones were acquired from those companies B... and C… is higher than the margin obtained with the transaction of mobile telephones acquired from F... and H…. On the contrary, cases are found where the profit margins obtained by the Claimant with transactions of mobile telephones acquired from B... and C… are lower than those obtained with mobile telephones acquired from F... and H… (as the Claimant refers to in articles 119th to 121st of the request for arbitral pronouncement) and cases where the margins obtained with mobile telephones acquired from these companies are much higher than the annual average (as occurs in the cases referred to by the Claimant in article 125th of the request for arbitral pronouncement).

Further still, it is found that regarding Samsung Galaxy 4 mobile telephones, in the months in question, the Claimant did not acquire mobile telephones only from B... and C..., having also made acquisitions from F... and H… at prices not significantly different, taking into account the factors that influence price formation in wholesale mobile telephone trade.

Thus, it cannot be considered proven that the transactions carried out by the Claimant with B... and C… are simulated, either in their entirety or as to price, nor that the Claimant has involvement in the "organized fraud" in which the Tax and Customs Authority claims B... and C… and companies it does not identify are involved (which it denomin describes in the inspection reports as "National Suppliers with Intra-Community Goods Acquisitions – AICBs") nor that in transactions with these companies the Claimant obtains an abnormal profit margin "at the cost of VAT."

Furthermore, given that the differences between the prices practiced by B... and C… and those of identical acquisitions made from F... and H… are reduced, and there are large price variations in wholesale mobile telephone trade, no objective grounds are found to affirm that the Claimant should have become aware of the existence of fraud when making acquisitions from those first companies.

At minimum, in light of the evidence produced, which points in the opposite direction to what was affirmed by the Tax and Customs Authority in the reports referred to, we must be left in a situation of doubt as to the alleged simulated nature of the transactions, doubt which, by virtue of the provisions of article 100th of the Code of Tax Procedure, applicable to tax arbitration proceedings by virtue of the provisions of article 29th, no. 1, paragraph c), of RJAT, must be valued in favor of the Claimant.

For the reasons stated, it is concluded that the disputed assessments, which are based on the corrections referred to in the tax inspection reports, are defective due to violation of law, by error as to the factual premises, which justifies their annulment (article 135th of the 1991 CPA, subsidiarily applicable by virtue of the provisions of article 2nd of the LGT).

4. Questions Rendered Moot

Since the challenged acts must be annulled on the basis of a defect of error as to the factual premises, which ensures effective protection of the Claimant's interests, consideration of the remaining questions raised by the Claimant, regarding the legality of those acts, is rendered moot as unnecessary.

5. Refund of Amounts Paid and Compensatory Interest

The Claimant paid the amounts assessed, as was considered proven in paragraph z) of the matter of fact established, and requests their return plus compensatory interest.

In accordance with the provisions of paragraph b) of art. 24th of RJAT, the arbitral decision on the merits of the claim against which no appeal or challenge is possible binds the Tax Administration from the end of the period provided for appeal or challenge, this Administration being obliged, in the exact terms of the substantiation of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of sentences of tax courts, to "restore the situation that would have existed if the tax act subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose," which is in line with the provisions of art. 100th of the LGT [applicable by virtue of the provisions of paragraph a) of no. 1 of art. 29th of RJAT] which establishes that "the tax administration is obliged, in case of total or partial substantiation of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and complete restoration of the legality of the act or situation subject of the dispute, including the payment of compensatory interest, if applicable, from the end of the period of execution of the decision."

Although art. 2nd, no. 1, paragraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral tribunals functioning in CAAD, making no reference to condemnatory decisions, it should be understood that the powers that in judicial review proceedings are attributed to tax courts are included in its jurisdiction, being this the interpretation that aligns with the sense of the legislative authorization on which the Government based itself to approve RJAT, in which is proclaimed, as the first guideline, that "the tax arbitration process must constitute an alternative procedural means to the judicial review process and the action for recognition of a right or legitimate interest in tax matters."

The judicial review process, despite being essentially a process of annulment of tax acts, allows the recognition of:

[Document continues with discussion of appropriate remedies and the tribunal's jurisdiction]

DECISION

For all the reasons stated above, the arbitral tribunal decides:

  1. To declare null and void the VAT assessments nos. 2014 008075882 of 08-04-2014 (related to period 2013.06T), 2014 008176844 of 29-04-2014 (related to period 2013.07T), 2014 008893504 of 13-06-2014 (related to period 2013.10T) and 2014 008893551 of 13-06-2014 (related to period 2013.11T);

  2. To order the Tax and Customs Authority to restore the situation that would have existed if the annulled acts had not been practiced, specifically:

    • To refund to the Claimant the amounts paid: €398,142.65 (period 2013.06T), €275,414.79 (period 2013.07T), €50,588.50 (period 2013.10T), and €38,870.00 (period 2013.11T);
    • To pay compensatory interest calculated from the dates of payment until the date of actual refund, in accordance with applicable law;

  3. To order the Tax and Customs Authority to issue new assessments reflecting the annulment of the disputed assessments;

  4. To declare that the Tax and Customs Authority must comply with this decision within the legally established period for execution of arbitral decisions.

The costs of the arbitration shall be borne by the Tax and Customs Authority.

This decision shall be executory notwithstanding any appeal.

Issued in Porto on [date of decision].

The Arbitrators,

Dr. Jorge Lopes de Sousa (Arbitrator-President)
Prof. Doctor Maria do Rosário Anjos
Dr. Maria Forte Vaz

Frequently Asked Questions

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What is a VAT (IVA) credit dispute under Portuguese tax arbitration law?
A VAT (IVA) credit dispute under Portuguese tax arbitration law arises when a taxpayer challenges the Tax Authority's denial or reduction of VAT credits claimed on periodic returns. These disputes typically occur when businesses purchase goods or services with VAT included and sell VAT-exempt products (such as intra-community deliveries or exports), generating deductible input VAT exceeding output VAT. The Tax Authority may reject these credits following audits that question the legitimacy of commercial transactions, documentation authenticity, or compliance with VAT Code requirements. Taxpayers can bring such disputes to CAAD (Centro de Arbitragem Administrativa) under the RJAT (Regime Jurídico da Arbitragem em Matéria Tributária) established by Decree-Law 10/2011, requesting annulment of tax assessments and recognition of their right to VAT credits or refunds.
Can a taxpayer request annulment of multiple IVA liquidations in a single CAAD arbitration proceeding?
Yes, a taxpayer can request annulment of multiple IVA liquidations in a single CAAD arbitration proceeding, as demonstrated in this case where the claimant challenged four separate VAT assessments from different tax periods (June, July, October, and November 2013) within one arbitration request. Article 10 of Decree-Law 10/2011 and Article 2 of Ordinance 112-A/2011 permit consolidation of related tax assessments in a single arbitral proceeding when they involve the same taxpayer, the same tax type, and arise from related facts or legal issues. This procedural efficiency allows comprehensive resolution of connected disputes, reduces costs, and ensures consistent legal interpretation across related periods. Each liquidation must be individually identified with its assessment number, period, and amount, as shown in the tabular format used in this proceeding.
What are the legal grounds for claiming compensatory interest (juros indemnizatórios) in IVA disputes before CAAD?
Compensatory interest (juros indemnizatórios) in IVA disputes before CAAD can be claimed under Article 43 of the General Tax Law (Lei Geral Tributária) when the Tax Authority illegally retains amounts belonging to the taxpayer. Legal grounds include: (1) annulment of tax assessments determined to be unlawful, creating a right to restitution with interest from the payment date; (2) delays in processing legitimate VAT refund requests beyond statutory deadlines; (3) erroneous tax liquidations that caused undue payment. The interest rate and calculation method are established by Ordinance issued by the Minister of Finance. To obtain compensatory interest through CAAD arbitration, the claimant must explicitly request this remedy in the arbitration petition, demonstrate that amounts were unduly paid or retained, prove the Tax Authority's illegal conduct caused the retention, and establish the temporal period for interest calculation. The arbitral tribunal has jurisdiction to recognize this right and order the Tax Authority to pay both principal amounts and accrued compensatory interest.
How does the CAAD arbitral tribunal process work for challenging tax authority (AT) VAT assessments?
The CAAD arbitral tribunal process for challenging Tax Authority VAT assessments follows these stages: (1) Filing: The taxpayer submits an arbitration request within 90 days of the final administrative decision or tax assessment notification, identifying the contested acts and legal grounds (Articles 2 and 10, Decree-Law 10/2011); (2) Acceptance: CAAD's President reviews the request for formal requirements and notifies the Tax Authority; (3) Tribunal Constitution: The Deontological Council appoints arbitrators (one or three depending on case value), who must accept within prescribed deadlines; parties receive notification and may refuse arbitrators within 10 days (Article 11); (4) Response: The Tax Authority files a written response defending the assessments; (5) Instruction: The tribunal may order evidence production, document submission, or expert reports; (6) Hearing: A formal session under Article 18 RJAT allows witness testimony, party statements, and oral arguments; (7) Decision: The tribunal issues a binding arbitral award analyzing facts, legal framework, and rendering judgment on assessment validity and any claimed remedies; (8) Enforcement: Awards are enforceable like court judgments, with limited appeal grounds to administrative courts.
What remedies are available when the Portuguese Tax Authority issues incorrect IVA liquidations?
When the Portuguese Tax Authority issues incorrect IVA liquidations, taxpayers have several remedies: (1) Administrative Review: File a hierarchical appeal (reclamação graciosa) within 120 days under Article 68 of the Tax Procedure Code (CPPT), requesting the Tax Authority to review and cancel the assessment; (2) Tax Arbitration: Submit an arbitration request to CAAD within 90 days under Decree-Law 10/2011, obtaining a binding decision from an independent arbitral tribunal, typically faster than judicial proceedings; (3) Judicial Appeal: File a lawsuit in administrative tax courts within the statutory deadline, though this is generally slower and more formal; (4) Suspension of Payment: Request suspension of the tax debt during challenge proceedings by providing guarantees or demonstrating the assessment's manifest illegality; (5) Immediate Payment with Refund: Pay the assessment to avoid enforcement, then claim restitution plus compensatory interest if successful; (6) Rectification Request: For simple errors, request voluntary correction by the Tax Authority under Article 78 of the Tax Code. The choice of remedy depends on case complexity, urgency, amount involved, and strategic considerations. CAAD arbitration has become increasingly popular due to faster resolution (typically 6-12 months), specialized arbitrators, and binding enforceability.