Process: 698/2014-T

Date: August 3, 2015

Tax Type: IVA

Source: Original CAAD Decision

Summary

In arbitral decision 698/2014-T, the CAAD examined whether a Dutch company (A... B.V.) registered for VAT in Portugal properly documented VAT credit adjustments for 2009 under Article 78(5) of the Portuguese VAT Code (CIVA). The Tax Authority challenged regularizations totaling significant amounts, arguing the taxpayer failed to prove acquirer knowledge of credit note rectifications as legally required. The claimant operated retail sales of sports articles through wholesale and franchising arrangements with Portuguese customers. During a 2010 external inspection covering 2009 VAT, the AT identified two problematic practices: credit notes confirmed by customers but regularized when received rather than when issued, and credit notes supported only by delivery acknowledgments without signed confirmations. For customer C..., the company relied on debit notes issued by the customer itself as proof of acknowledgment. The taxpayer argued the Tax Authority improperly restricted legally acceptable means of proof and violated the inquisitorial investigation principle under Articles 55 and 58 of the General Tax Law (LGT) and Articles 5-6 of the Tax Inspection Procedure Regulation. The case centered on whether acknowledgment of receipt documents, debit notes from customers, and other alternative evidence satisfy Article 78(5) CIVA's requirement to prove acquirer knowledge or tax reimbursement. The arbitral tribunal, constituted on December 3, 2014, conducted hearings with witness testimony and written pleadings. This decision addresses fundamental questions about documentary proof standards in VAT regularizations, the scope of tax authority discretion in accepting evidence, and procedural rights of foreign companies in Portuguese tax arbitration. The case illustrates tensions between formal proof requirements and substantive tax justice, highlighting how administrative practices may conflict with broader legal principles governing tax assessment and the duty of proportionality in tax enforcement actions.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Miguel Patrício and Clotilde Celorico Palma, designated by the Deontological Council of the Administrative Arbitration Center to form an Arbitral Tribunal, hereby decide as follows:

I – REPORT

On 29 November 2014, A... B.V., with registered seat in ..., the Netherlands, registered in Portugal for VAT purposes with tax identification number ..., hereinafter also referred to as the Claimant, filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, briefly referred to as RJAT), seeking the declaration of illegality of the following VAT assessment acts relating to the year 2009:

To support its request, the Claimant alleges, in summary:

i. That the Tax Authority restricted, through administrative means, the legal means of proof for the purpose of meeting the requirements laid down in Article 78 of the VAT Code, having equally violated the principle of inquisitorial investigation, deriving from Articles 55 and 58 of the General Tax Law and Articles 5 and 6 of the Tax Inspection Procedure Regulation, as well as the duty of proportionality in its action; and

ii. That it possesses suitable documents to provide the proof required by Article 78, No. 5 of the VAT Code, whereby it may carry out regularizations made in its favor in the tax periods in question.

On 01-10-2014, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to appoint an arbitrator, wherefore, under the provisions of subparagraph a) of No. 2 of Article 6 and subparagraph a) of No. 1 of Article 11 of the RJAT, the President of the Deontological Council of the Administrative Arbitration Center designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 18-11-2014, the parties were notified of these designations and did not express any intention to challenge any of them.

In accordance with the provision in subparagraph c) of No. 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 03-12-2014.

On 26-01-2015, the Respondent, duly notified for that purpose, submitted its defense, relying solely on contestation.

Following various vicissitudes related to the choice and appointment of an interpreter, on 26-05-2015, the hearing referred to in Article 18 of the RJAT was held, where the witnesses presented by the Claimant were examined.

Having been granted a period for the submission of written pleadings, the same were submitted by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the pronouncement of the final decision, following the presentation of pleadings by the Tax Authority.

The period referred to in Article 21/1 of the RJAT was, in accordance with No. 2 of the same article, extended.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, No. 1, subparagraph a), 5, and 6, No. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Regulatory Ordinance No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Accordingly, there is no obstacle to consideration of the merits of the case.

Having reviewed all the foregoing, it is appropriate to issue

II. DECISION

A. FACTUAL MATTER

A.1. Facts Found to be Proven

  1. The Claimant is a company incorporated under Dutch law, registered, at the date of the tax acts subject to the present arbitral proceedings, and since 1 January 2002, at the 3rd Tax Office of Lisbon, as a non-resident taxable person with no permanent establishment in the national territory, for the exercise of the activity of retail trade in sports articles, camping and related goods, corresponding to Economic Activity Classification 47640.

  2. Under Service Order No. OI2010..., the Claimant was subject to an external tax inspection procedure of limited scope, initiated on 9 October 2014, aiming at the analysis of VAT for the year 2009.

  3. In the course of the said inspection procedure, the Tax Authority verified that the Claimant carries out a commercial activity of selling sports articles of the brand "...", under the form of wholesale sales or franchising arrangements.

  4. In the course of the same inspection procedure, the following investigative measures were undertaken:

a. Internally:

i. Circulation to some customers;

ii. Personal notification of the taxable person, represented by its agent, requesting clarifications and provision of documents, as well as other clarifications and documents via email, under the principle of cooperation provided for in Article 59 of the General Tax Law;

b. Externally (at the tax domicile of the agent and at the accounting office "B..., Ltd.");

i. Collection and analysis of summary maps supporting the completion of periodic declarations, prepared by the Certified Public Accountant;

ii. Collection and analysis of computer files containing all credit notes whose tax was regularized by the taxable person in the exercise of 2009, by tax period;

iii. Collection of proof that customers became aware of the rectifications made by A... (in field 40 of the respective periodic declaration);

iv. Consultation and analysis of these elements provided, namely, copies of credit notes by return, acknowledgments of receipt, debit notes of customer "C...", as well as copies of invoices that gave rise to the credits.

  1. Following the measures described, the Tax Authority determined that to comply with the requirement stipulated in No. 5 of Article 78 of the VAT Code, the Claimant adopted, as a rule, the following procedures:

i. Credit notes "confirmed by customers": regularization of credit notes confirmed (signed and stamped) by its customers, in the respective tax period in which they are received, regardless of the date on which the documents were issued;

ii. Credit notes "confirmed by customers, but not located": regularization of credit notes, regardless of whether it received back the respective document signed and stamped, using as supporting document for the regularization, acknowledgments of receipt signed and returned by customers, in which the numbers of the credit notes to which they refer are indicated, designating them as "confirmed but not located".

  1. With regard to customer C..., the procedure adopted by the Claimant was as follows: whenever a rectification occurred, the customer itself (C...) issued debit notes which, to the extent that they were confirmed by the services of ... AA... – Portuguese Branch (under the marketing agency contract concluded between this and the Claimant), gave rise to the issuance of credit notes by the Claimant, the latter considering the issuance of these debit notes by the customer as proof of the respective acknowledgment of receipt.

  2. The debit notes of C... referred to in the previous number also included, where applicable, other credit notes previously issued by the Claimant to customer C...

  3. In light of the measures undertaken, the Tax Authority understood that the Claimant carried out VAT regularizations arising from rectifications downward of the taxable amount or invoiced amount of transactions, without, in the Tax Authority's view, possessing proof that the purchaser became aware of the rectification or that it was reimbursed for the tax, in accordance with Article 78, No. 5, of the VAT Code, wherefore arithmetic corrections were proposed in the total amount of €255,546.90.

  4. Notified of the draft inspection report, the Claimant exercised its right to be heard, in which it submitted credit notes stamped, signed and returned to the taxable person by the respective customer, regarding a segment of the corrections, wherefore the amount of €16,799.89 was deducted from the amount of the correction proposed.

  5. Subsequently, the Claimant was notified of the tax inspection report, which concluded with arithmetic corrections of VAT in the amount of €238,747.01, which, in turn, gave rise to the assessments now contested.

  6. Among the corrections now called into question are the following types of situations, in the total amount of €224,902.87:

i. EUR 208,221.66 - Credit notes issued to customer C..., in the terms referred to above in 6;

ii. EUR 8,380.88 - Credit notes issued to customer C... relating to return of goods; and

iii. EUR 8,300.33 - Credit notes identified with the symbol "#".

  1. In 2009, the Claimant proceeded, in the terms referred to above in 6, to the regularization of the VAT contained in the credit notes issued to customer C..., with the total value of VAT regularized in question in the present proceedings amounting to EUR 208,221.66, as detailed below:

  2. The corrections relating to credit notes issued to customer C... for return of goods correspond to the following documents:

  3. The Claimant did not have any document attesting to the acknowledgment of receipt by the customer of the credit notes referred to in the previous number, and the only documentation it had corresponded to the file sent by the transport company regarding the return of the goods to the Claimant, through the identification of the number of the "packing list" subject to return, a number which is also referred to by the Claimant when issuing the respective credit note.

  4. With its initial request, the Claimant submitted copies of the following debit notes of C...: 2153/0, 3223/0, 2076/0, 2085/0, 2450/0, 2070/0, 2152/0, 2068/0 and 2075/0, which are hereby deemed to be fully reproduced[1].

  5. The credit notes identified with the symbol "#" were recorded in the periods of February (amount - €44,561.00 [incl. €7,426.83 of VAT]; document date – 21/10/2008) and March 2009 (amount - €5,241.00 [incl. €873.50 of VAT]; document date – 19/11/2008).

  6. Credit notes No. 75004063 and No. 75004141 were never exhibited during the conduct of the inspection acts, having been presented during the right to be heard.

  7. As a result of the corrections referred to above, the now Claimant was notified of the additional VAT assessments and compensatory interest that are the subject of the present proceedings.

  8. The period for voluntary payment of the tax acts referred to above ended on 30 June 2014.

  9. On 25 June 2014, the Claimant made full payment of the tax acts referred to above.

A.2. Facts Found Not to be Proven

  1. The credit notes identified with the symbol "#" correspond to credit notes No. 75004063 and No. 75004141.

  2. The 2 documents referred to were recorded with the symbol "#" for the sole reason that they are credit notes issued manually and which, as such, do not follow the sequential numbering of the Claimant's credit notes issued by computer means.

A.3. Reasoning of the Factual Matter Proven and Not Proven

With respect to the factual matter, the Tribunal does not have to pronounce on everything that was alleged by the parties, it being rather the case that it has the duty to select the facts that matter for the decision and to distinguish the proven from the unproven matter (cf. Article 123, No. 2 of the Tax Procedure Code and Article 607, No. 3 of the Civil Procedure Code, applicable pursuant to Article 29, No. 1, subparagraphs a) and e), of the RJAT).

Accordingly, the facts pertinent to the judgment of the case are chosen and defined according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of law (cf. previous Article 511, No. 1, of the Civil Procedure Code, corresponding to the current Article 596, applicable pursuant to Article 29, No. 1, subparagraph e), of the RJAT).

Accordingly, having regard to the positions assumed by the parties, in light of Article 110/7 of the Tax Procedure Code, the documentary evidence and the procedural file joined to the record, the facts listed above were deemed to be proven, with relevance for the decision.

In particular: the fact referred to under point 6 contains mention of the verification of the debit notes issued by C... by the services of ... AA... – Portuguese Branch, which was what resulted from the testimonial evidence produced, and the existence of the marketing agency contract is already found in the inspection report; the fact referred to in point 7 is found, confessedly, in Article 66 of the initial request; the fact referred to in point 14 was found in the right to be heard exercised by the Claimant in the inspection procedure, was transcribed on p. 16 of the inspection report, and is also found in Article 91 of the initial request.

The facts found not to be proven are due to the absence of proof that would permit, with the necessary certainty, taking them as established.

With regard, in particular, to the first of those facts (not proven), apart from the Claimant's allegation, nothing else points, with the due certainty, in the direction of the correspondence in question, and that the rectification in question occurred due to alleged error, which is not understandable, especially insofar as the credit notes presented as being at the basis of that do not contain any mention of VAT, from which it follows that the error, if it occurred, would require the "effort" of calculating the VAT that corresponded to the "gross" amount of the document incorrectly recorded, and from which, if this is what was intended by the Claimant, it did not consist.

Accordingly, the mere coincidence of dates and amounts, confronted with the tardy and unexplained presentation of the documents in question, is not deemed, in the concrete context of the evidence produced, sufficient to overcome the reasonable doubt which the burden of proof requires to be overcome.

Finally, in its pleadings the Claimant enumerates an extensive list of facts (points i. to xxxii.) many of which have no correspondence in its initial request, which is why, having regard to the provisions of Articles 5/1, 522/1/a), 572, 573 and 588/1 (a contrario), all of the Civil Procedure Code, they do not form part of the factual record established.

B. LAW

No preliminary issues arise regarding the merits of the case, so it is appropriate to consider the merits directly.

At that level, there are three situations that this Tribunal is called upon to consider, namely:

i. That relating to credit notes issued to C..., in accordance with the procedures described in points 6 and 7 of the facts proven, containing tax in the amount of €208,221.66;

ii. That relating to credit notes issued to C... relating to return of goods, containing tax in the amount of €8,380.88; and

iii. That relating to credit notes identified with the symbol "#", containing tax in the amount of €8,300.33.

Let us examine them, then.

Article 78, No. 5 of the VAT Code provides, in the applicable wording, that:

"When the taxable amount of an operation or the respective tax undergoes a rectification downward, the regularization in favor of the taxable person may only be effected when the latter has in its possession proof that the purchaser became aware of the rectification or that it was reimbursed for the tax, without which the respective deduction is deemed to be improper."

This is the provision in question in the present proceedings, the corrections against which the Claimant objects having been based on the understanding that the deductions made by the Claimant were illegitimate, because the latter did not have "in its possession proof that the purchaser became aware of the rectification or that it was reimbursed for the tax".

This is what it is therefore appropriate to ascertain, that is, whether the Claimant had, or did not have, in its possession, proof that the purchaser of the products sold by it became aware of the rectification, or that it was reimbursed for the tax.

First and foremost, and in view of the arguments presented by the parties in their respective procedural documents, it is necessary to clarify the normative content of the evidentiary requirement in question.

In fact, the Claimant, throughout its initial request and subsequent pleadings, states that "the VAT Code does not define which means of proof are legally admissible for the purpose of demonstrating that the purchaser became aware of the rectification of the operation", "wherefore, since Article 78 of the VAT Code does not regulate which specific means of proof are to be presented by taxable persons, the principle of free admissibility of means of proof shall apply, provided that they enable the verification of the requirements laid down in No. 5 of the said legal provision."

For its part, the Tax Authority and Customs Authority, in its pleadings, sustains the understanding that Article 78, No. 5 of the VAT Code "requires a formality ad substantiam", which "is not dispensable by any other type of proof".

On this matter, it should be stated that the provision in question does not make express reference to any means of proof, as the Claimant begins by noting. However, a less superficial reading of the normative text shows that, in fact, the same refers to documentary proof. Indeed, by using the expression "has in its possession proof that...", the provision will, without question, be referring to documentary proof, given that that will be the only means of proof which, by being, by nature, objectified, is capable of being possessed.

What the provision in question does not do, however, is require a specific type of document for proof of the circumstances to which it refers. That is: if, in fact, the provision in question imposes that the taxable person possess documentary proof "that the purchaser became aware of the rectification or that it was reimbursed for the tax", it does not, on the other hand, impose a specific type of document for that proof.

Having regard to the tenor of the provision, in particular by providing, expressly, that in the absence of possession of the proof in question "the (...) deduction is deemed to be improper", as well as the matter regulated by it, one cannot fail to agree with the Decision of the Central Administrative Court of the South cited by the Tax Authority, in the sense that, without prejudice to what will be seen below, the proof in question must be documentary and cannot be substituted by any other means of proof, in particular testimonial.

Such a requirement will, moreover, be justified, not by any formalistic devotion of the type of tax in question, or of its regulation, but by the essentiality that the communication in question (or the material return of the tax) assumes for creating, in the legal sphere of the purchaser of the good or service sold by the taxable person, the obligation not to deduct the tax regularized by the latter, or, if in the meantime it deducted it, to deliver it to the State.

Thus, in summary, the proof that the taxable person who proceeds to a VAT regularization must possess must be documentary, being able, however, to consist in any document suitable to demonstrate "that the purchaser became aware of the rectification or that it was reimbursed for the tax".

What has just been said – regarding the exclusivity of the documentary means as proof of the purchaser's knowledge of the rectification – does not mean that testimonial proof is altogether inadmissible or irrelevant in the matter in question. In fact, as follows, in the first place, from Article 393, No. 3 of the Civil Code, the rules relating to legal proof "are not applicable to mere interpretation of the context of the document".

Given the foregoing, and with respect to the first group of situations to be considered, it appears that the documentary proof in the possession of the Claimant, in order to demonstrate "that the purchaser became aware of the rectification", consists of debit notes issued by the purchaser (in this case, C...) and credit notes issued by itself. These are, quite simply, the documents presented by the Claimant.

It appears, then, that the Claimant has in its possession documents intended to provide the proof in question, it remaining, therefore, to verify whether, in light of the factual context ascertained, such documents concretely prove "that the purchaser became aware of the rectification".

This suitability must, in fact, be assessed in concreto, verifying whether from the documents presented, and having regard to the context of their production, it can be ascertained or not that "the purchaser became aware of the rectification", with the necessary certainty to be able to affirm that in the sphere of the purchaser (in this case C...) of the good or service sold by the taxable person, the above-referred obligation was created not to deduct the tax regularized by the Claimant, or, if in the meantime it deducted it, to deliver it to the State.

Analyzed contextually from this perspective, it is concluded that the documentation that the Claimant has in its possession, regarding its customer C..., intended to demonstrate that this became aware of the rectifications by it undertaken, does not effect, in a conclusive manner, such demonstration.

In fact, what is ascertained is that the procedure of the Claimant with the customer referred to, where the documentation in question was produced, consisted in the latter drawing up debit notes of the amounts which, in its view, were owed to it, and subsequently, such debit notes, to the extent that they were validated by AA... – in the context of a contract concluded with the Claimant, which covered such functions – reflected in the credit notes issued by the Claimant.

The Claimant contends that, in this context, the debit notes issued by C... will be sufficient proof that this became aware of the rectifications by it undertaken, subsequently, by means of the credit notes.

It is not denied that, from an abstract point of view, the documentation in question (debit notes and credit notes) could constitute sufficient proof of the awareness necessary for the legitimacy of the rectification. However, it is considered that for this to be the case, it would be necessary for such documentation to be produced in a context in which it would be unequivocal, for both parties (taxable person and purchaser), that each debit note had always a corresponding debit note. It is not being postulated here that to each singular debit note there corresponds a single credit note, but, solely, that in the procedure in question each concrete amount debited would pass, automatically and unconditionally, to a credit note, regardless of whether this covered only one or several debit notes.

Now, in the case at hand, that is not what happens. In fact, the amounts debited by the Claimant's customer were subject to confirmation by (the services of AA... contracted by) the latter and were only accepted if, and to the extent, that it validated them.

Hence it will be manifestly clear, it is believed, that when issuing the debit note, the Claimant's customer could not have been certain that the amount debited would subsequently be credited, and as such – contrary to what the Claimant contends – such customer could not have the knowledge that the rectification subsequently carried out by the Claimant coincided with what was debited by it. It might, certainly, have had the expectation, and, in some way, the knowledge that the majority of the amounts debited by it would be subject to rectification, but not of the precise and concrete amount thereof.

The Claimant itself recognizes this, by stating that "after internally identifying the origin of the debit, if the same is correct, the credit note is issued"[3] and that "Credit notes are always equal to or less than debit notes, and never more".

Such that, in the concrete context in which we are operating, in order to be able to affirm, without any reasonable doubt, that the Claimant's customer was duly aware of the precise and concrete amount of the rectifications actually carried out by it, it would be necessary that, following the process of verification confessedly carried out by the services at the Claimant's disposal, the latter transmitted to it either the full approval of the debits, or the corrected amount which ultimately ended up constituting the credit note actually issued.

In the factual context ascertained, the truth is that the Claimant's customer, if confronted with such a question, would always be legitimate in arguing that in its legal sphere there did not arise the obligation not to deduct the tax regularized by the latter, or, if in the meantime it deducted it, to deliver it to the State, since by issuing its debit note it has, in the context of the concrete contractual relationship established, no guarantee that the amount debited by it is what is ultimately credited to it.

Thus, it is considered that the alleged violation of Article 78, No. 5 of the VAT Code by the tax acts in question is not warranted, in the part relating to the matter analyzed above.

Still with respect to this first group of situations, the Claimant raises the question of the violation by the Tax Authority, in the course of the inspection procedure, of the principle of inquisitorial investigation, deriving from Articles 55 and 58 of the General Tax Law and Articles 5 and 6 of the Tax Inspection Procedure Regulation, as well as the duty of proportionality in its action.

This latter allegation (violation of the duty of proportionality) is not at all substantiated, in fact and in law, in the Claimant's procedural documents, and should therefore be dismissed without further ado.

With regard to the principle of inquisitorial investigation, Article 6 of the Tax Inspection Procedure Regulation, under the heading "Principle of Material Truth", provides that "The inspection procedure aims at the discovery of material truth, and the tax administration must, of its own motion, adopt the appropriate initiatives to that end."

On the other hand, Article 58 of the General Tax Law, under the same heading, provides that: "The tax administration must, in the procedure, perform all necessary measures for the satisfaction of the public interest and the discovery of material truth, being not bound by the initiative of the party requesting the action."

With respect to the principle in question, it was written in the Decision of the Central Administrative Court of the South of 07/05/2013:

"The principle of inquisitorial investigation is justified by the obligation to pursue the public interest imposed on the activity of the Tax Administration (Article 266, No. 1, of the Constitution, and Article 55, of the General Tax Law) and is a corollary of the duty of impartiality which must guide its activity (Article 266, No. 2, of the Constitution, and Article 55, of the General Tax Law). This duty of impartiality requires that the Tax Authority seek to bring to the procedure all evidence relating to the factual situation on which the decision will be based, even if they are intended to demonstrate facts whose proof is contrary to the patrimonial interests of the Administration. In conclusion, this principle requires the tax administration to perform all measures that appear necessary for the satisfaction of the public interest and the discovery of material truth. This means that all measures must be carried out even if they have not been requested, and thus do not depend on any procedural initiative of the taxable person (cf. Diogo Leite de Campos and Others, Annotated and Commented General Tax Law, 4th edition, Editora Encontro da Escrita, 2012, p. 488; João Fernando Damião Caldeira, The Tax Inspection Procedure - A Contribution to Its Understanding in Light of Fundamental Rights, University of Minho, 2011, p. 186 et seq.)."

The principle of inquisitorial investigation, as well as the correlative principle of material truth, to which the former is instrumental, will be an emanation of the more general principle of material justice, enshrined in Article 5, No. 2 of the General Tax Law, insofar as the latter will be realized more perfectly the more the factual situation ascertained in procedure or proceedings approaches reality.

The Tax Authority alleges that, in this case, the question of the violation of the principle of inquisitorial investigation does not arise, in the terms raised by the Claimant, because, being the requirement of documentary proof enshrined in Article 78, No. 5 of the VAT Code a formality ad probationem, the same cannot be substituted by any other means of proof.

It is considered, however, that it does not ultimately have reason.

The Tax Authority is correct when it suggests that, not having the taxable person documentary proof that "the purchaser became aware of the rectification", as required by No. 5 of the VAT Code, it is not up to it, the Tax Authority, to substitute itself for the taxable person in that proof.

What happens is that, in the case sub judice, the Claimant possesses documentary proof intended to prove "that the purchaser became aware of the rectification". Such proof, however, as demonstrated above, in the ascertained context of its production, is not conclusive, leaving room for legitimate doubts.

And as has also already been pointed out, the requirement of legal proof does not preclude the possibility of using other means of proof, regarding "mere interpretation of the context of the document", as follows, among other things, from Article 393, No. 3 of the Civil Code.

Furthermore, as has also been previously stated, Article 78, No. 5 of the VAT Code, properly understood, will require the taxable person to have documentary proof that the purchaser became aware of the rectification carried out by it, but does not impose a specific type of document for that proof. As then summarized, the proof that the taxable person proceeding to a VAT regularization must possess must be documentary, being able, however, to consist in any document suitable to demonstrate "that the purchaser became aware of the rectification".

Now, in this case, as the Claimant points out, the Tax Authority had the possibility of, without foreseeable difficulties, verifying whether, in fact, within the documentary framework presented by the Claimant, the purchaser of the goods sold by it – that is, C... – became aware or not of the rectifications carried out by the latter.

In fact, through the collection of evidence from C..., cross-referenced with information that the Tax Authority itself would already have, resulting from compliance with the various ancillary obligations incumbent upon it, it would be ascertainable with foreseeable ease whether, and to what extent, C... became aware of the rectifications carried out by the Claimant, and now in question.

It should be noted that this is not a matter of the Tax Authority substituting itself for the Claimant in any burden of proof that falls to it. In fact, as noted, the Claimant responded to such a burden, albeit not in a wholly conclusive manner. The doubts which, legitimately, arise from the documentation in the possession of the claimant would, however, be easily dissipated – one way or another – by cross-referencing information with the tax situation of C.... And nothing is foreseeable that would obstruct or hinder, to the instructing authority of the procedure such a measure which, it should be noted, is absolutely beyond the reach of the Claimant, on the one hand, and, on the other, only proves necessary in light of the doubts – legitimate, it is emphasized – raised by the Tax Authority regarding the documentation in the possession of the Claimant.

Such action will be all the more required as we are dealing with a tax regarding which fiscal neutrality is especially valued and pursued by the legislator, and that legal value will be strongly undermined if, as a result of the instructional deficit perpetrated, and contrary also to the material justice which legislatively it is desired to preside over taxation, there occurs an unjustified simultaneous taxation in the sphere of the Claimant and in the sphere of C....

Furthermore, given that the Claimant, as results from evidence already from the inspection procedure, had the practice of, with respect to other customers, having its credit notes confirmed (signed and stamped) by them or, alternatively, sending them by registered mail with acknowledgment of receipt, in which the numbers of the credit notes to which they refer are indicated, it would be incumbent to undertake complementary action to clarify the doubt as to whether the procedure concretely followed did not prove apt to actually ensure the awareness by the purchaser of the corrections carried out by the Claimant, which would be demonstrated by the non-deduction of the corrected tax, or by the refund of tax paid but in the meantime returned.

For as was written in the Decision of the Supreme Administrative Court of 03-09-2014, handed down in case 0718/14, the Tax Authority must "in accordance with the principle of inquisitorial investigation and the duty of reciprocal cooperation and collaboration with the taxpayer, request from it clarification of doubts and request from it additional or complementary elements of proof", provided that "facts have been alleged and means of proof offered" by the latter, and it is certain that if the Tax Authority is required to request clarification of doubts from the taxpayer itself, more pressing will it be for it to request such clarification from third parties, especially in cases in which the same is susceptible of resulting from compliance with declarative duties, or other ancillary duties of such third parties.

Also in the Decision of the Supreme Administrative Court of 21-10-2009, handed down in case 0583/09, it was summarized that:

"III – However, and in consequence of the principle of inquisitorial investigation, the Tax Authority can require from the taxpayer other proofs and effect, in light of such principle, the measures tending to demonstrate the application of such payments to that end.

IV – At the limit, it can carry out an inspection of the records of the contractor, a measure that is denied to the taxpayer.

V – The principle of inquisitorial investigation is situated upstream of the burden of proof."

In this latter decision, it was written that:

"The Tax Authority had the possibility of proceeding to an inspection of the records of that recipient, in order to ascertain the proof and the cause of such payments.

A possibility that was entirely denied to the appellant.

Having said this, it is possible to conclude that the Tax Authority could not simply refuse the supporting documents presented (...), without undertaking other measures that demonstrably only the Tax Authority could undertake, not being available and within the power of the taxpayer to perform.

And it is equally possible to conclude, in light of the question we raised previously, that the performance of such measures would not constitute an excessive burden for the administration.

The Tax Authority therefore acted wrongly in simply refusing the supporting documents presented (...), without inquiring into their destination, in the terms pointed out above."

By unjustifiably omitting the necessary and feasible measures intended to ascertain from the purchaser of the goods of the Claimant whether that party, in fact, became aware of the tax rectifications undertaken by the latter, now in question, as the Claimant contends that the documents in its possession reveal, or not, limiting itself to performing internal measures, and at the tax domicile of the agent and at the accounting office "B..., Ltd.", the Tax Authority violated the omission of a legal formality, by breach of Articles 6 of the Tax Inspection Procedure Regulation and 58 of the General Tax Law, which gives rise to the annullability of the final tax acts, in the part now in question.

With regard to the part relating to credit notes issued to C..., relating to return of goods, containing tax in the amount of €8,380.88 (cf. point 13 of the facts proven), the only documentation in the possession of the Claimant to satisfy the requirement in Article 78, No. 5 of the VAT Code corresponds to the file sent by the transport company regarding the return of the goods to the Claimant, through the identification of the number of the "packing list" subject to return, a number which is also referred to by the Claimant when issuing the respective credit note.

With respect to this group of situations, the Claimant itself admits, confessedly, that it "does not, as a rule, have any document attesting to the acknowledgment of receipt by the customer, since the latter does not receive the products" (cf. point 91 of the initial petition), and it is clear that the file of the transport company regarding the return of goods, in the context of fact alleged and ascertained, does not permit – manifestly – the conclusion that, subsequently to the return thereof, the purchaser became aware that there was a VAT regularization, and what its terms were.

This shortcoming is all the more imputable to the Claimant, in that, on the one hand, it admits the insufficiency of the elements it possesses to attest to the indispensable "awareness on the part of the customer" of the regularization, and, on the other, as proven and already mentioned, it had instituted, with respect to other customers, simple and effective procedures to comply with Article 78, No. 5 of the VAT Code.

Already in the course of the present arbitral proceedings, the Claimant submitted copies of debit notes numbered 2153/0, 3223/0, 2076/0, 2085/0, 2450/0, 2070/0, 2152/0, 2068/0 and 2075/0.

However, such documents are not suitable to prove "that the purchaser became aware of the rectification" carried out by the Claimant, in its credit notes enumerated in point 13 of the facts given as proven.

In fact, the mere reference, in the concrete debit notes now presented, to the same invoices mentioned, equally, in the credit notes, do not demonstrate, by themselves and without more (without the contextually explanatory framing), the complete knowledge of the rectification operated in the latter, in such terms that, as mentioned above already, with the necessary certainty, one can affirm that in the sphere of C..., there arose the obligation not to deduct the tax regularized by the Claimant, or, if in the meantime it deducted it, to deliver it to the State.

Thus, and as follows from the exegesis of the provision of Article 78, No. 5 of the VAT Code already carried out above, not having the Claimant, in its possession, documentary proof that "attests to the awareness on the part of the customer" of the tax regularizations by it carried out, these must be judged illegitimate and, as such, this part of the arbitral request must fail.

The question of the violation of the principle of inquisitorial investigation by the Tax Authority does not arise here, because – and rightly – the Claimant did not raise it, and even if it had, in this part, the judgment previously made would not be transposable, in that in the present case, contrary to the previous one, the Claimant did not have – admittedly – any document presented at the time of the procedure as suitable to demonstrate "that the purchaser became aware of the rectification".

Finally, it is necessary to consider the question relating to credit notes identified with the symbol "#", containing tax in the amount of €8,300.33.

As follows from the facts proven and not proven, it was not ascertained that the credit notes identified with the symbol "#" corresponded to credit notes No. 75004063 and No. 75004141.

The factual foundation on which the Claimant based this part of its claim being lacking, the arbitral request must, naturally, fail in the corresponding part.

The Claimant joins with the request for annulment of the tax act subject to the present proceedings, the request for condemnation of the Tax Authority to pay indemnificatory interest on the amount paid by it as a result of the notification of the assessments now partially annulled.

A prerequisite for the award of indemnificatory interest is that the error in which the Tax Authority labored be imputable to it (cf. Article 43 of the General Tax Law).

In the case at hand, it is manifest that, in consequence of the illegality of the assessment acts, in the part of the arbitral request judged to have merit, for the reasons pointed out previously, there is grounds for reimbursement of the tax paid by the Claimant, pursuant to the provisions of Articles 24, No. 1, subparagraph b), of the RJAT and 100 of the General Tax Law, as this is essential to "restore the situation that would exist if the tax act subject to the arbitral decision had not been performed".

It is also clear from the record that the illegality of the impugned tax assessment acts declared is directly imputable to the Respondent, which, on its own initiative, performed them without legal support, following a tax procedure in which it did not properly observe the legal rules that bound it.

Thus, the Claimant is entitled to receive indemnificatory interest, in accordance with the provisions of Articles 43, No. 1, of the General Tax Law and 61 of the Tax Procedure Code, regarding the tax improperly paid by it.

Indemnificatory interest is due to the Claimant from the date on which it improperly made the payment of the tax obligation annulled by the present decision, until the full reimbursement of the amount paid, at the legal rate.

C. DECISION

Accordingly, this Arbitral Tribunal decides that the arbitral request is partially meritorious and, in consequence,

a) The assessment acts subject to the present proceedings are partially annulled, to the extent that they relate to the VAT contained in the credit notes listed in point 12 of the facts given as proven, in the amount of €208,221.66, and respective compensatory interest;

b) The Respondent is condemned to the return of the amount improperly paid by the Claimant, as a result of the part of the assessment acts annulled pursuant to the foregoing point, plus indemnificatory interest, calculated from the date of such payment until the date of its full restitution;

c) The remaining arbitral requests are judged to be without merit;

d) The parties are condemned to the costs of the proceedings, in the proportion of their respective defeats, set out below.

D. Case Value

The case value is fixed at €267,853.54, in accordance with Article 97-A, No. 1, a), of the Tax Procedure Code, applicable pursuant to subparagraphs a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €4,896.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in the proportion of their respective defeats, since the request was partially meritorious, in accordance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4, of the said Regulation, with €4,270.00 being the amount to be borne by the Respondent, and €626.00 the amount to be borne by the Claimant.

Let notification be made.

Lisbon

3 August 2015

The Presiding Arbitrator

(José Pedro Carvalho - Reporting Arbitrator)

The Arbitrator Member

(Miguel Patrício)

The Arbitrator Member

(Clotilde Celorico Palma)

[1] All legally mandatory notifications of the present decision shall be accompanied thereby, with the exception of those made to the parties in the proceedings, who have personal knowledge of the documents in question.

[2] Decision of the Central Administrative Court of the South, of 12-03-2012, handed down in case No. 05275/12, available at www.dgsi.pt, as is all further jurisprudence cited hereinafter without express attribution of source.

[3] Emphasis in original.

Frequently Asked Questions

Automatically Created

What are the requirements for VAT regularizations in favor of the taxable person under Article 78 of the Portuguese VAT Code (CIVA)?
Under Article 78(5) of the Portuguese VAT Code (CIVA), taxable persons seeking VAT regularizations in their favor following downward rectifications of taxable amounts must meet specific evidentiary requirements. The taxpayer must possess proof demonstrating either: (1) that the acquirer/purchaser became aware of the rectification, or (2) that the taxpayer reimbursed the tax to the acquirer. These requirements ensure that VAT credit adjustments correspond to actual commercial corrections and prevent unjust enrichment where customers have already deducted input VAT. The law does not specify the exclusive form such proof must take, creating interpretative questions about acceptable documentary evidence. In practice, this has included signed and stamped credit notes returned by customers, acknowledgments of receipt, debit notes issued by customers recognizing the adjustment, and other commercial documentation establishing knowledge of the rectification.
Can the Portuguese Tax Authority (AT) administratively restrict the legal means of proof for VAT credit adjustments under Article 78(5) CIVA?
No, the Portuguese Tax Authority cannot lawfully restrict the legally admissible means of proof for VAT credit adjustments under Article 78(5) CIVA through purely administrative measures. Portuguese tax law operates under the principle of free proof assessment, meaning all legally admissible evidence may be used unless specific legislation requires particular formalities. The claimant in this case argued that the AT violated fundamental legal principles by administratively limiting acceptable proof methods. Such restriction would contravene Articles 55 and 58 of the General Tax Law (LGT), which establish the tax administration's duty to conduct thorough investigations and consider all relevant evidence. Additionally, Articles 5 and 6 of the Tax Inspection Procedure Regulation (RCPIT) require proportionality and comprehensive fact-finding. While the Tax Authority may evaluate evidence credibility and sufficiency, it cannot categorically exclude legally valid proof forms without express legislative authorization. Administrative interpretation cannot override statutory evidentiary frameworks.
How does the inquisitorial principle under Articles 55 and 58 of the LGT apply to VAT regularization disputes in Portugal?
The inquisitorial principle under Articles 55 and 58 of the Portuguese General Tax Law (LGT) imposes affirmative duties on the Tax Authority in VAT regularization disputes. Article 55 LGT establishes that tax administration must undertake all diligent investigative measures necessary to determine taxable facts and establish correct tax liability. Article 58 LGT requires the tax administration to prove facts constituting the tax obligation or determining the tax amount, while taxpayers must prove facts that create rights or support their claims. In VAT regularization disputes, this means the Tax Authority cannot simply reject taxpayer evidence but must actively investigate whether Article 78(5) CIVA requirements are met. The principle requires proportionate fact-finding, considering all available evidence, and cannot be satisfied through rigid formalistic interpretations that ignore substantive proof. This includes examining customer records, commercial documentation, accounting records, and other evidence establishing acquirer knowledge. The AT's duty extends to verifying whether alternative documentation sufficiently demonstrates compliance with legal requirements, rather than demanding specific proof forms not statutorily mandated.
What documents are considered sufficient to prove acquirer knowledge for IVA regularization purposes in CAAD arbitration?
Portuguese tax arbitration jurisprudence recognizes various documents as potentially sufficient to prove acquirer knowledge for VAT regularization purposes under Article 78(5) CIVA. Acceptable evidence includes: (1) Credit notes signed and stamped by customers and returned to the supplier, demonstrating direct acknowledgment; (2) Acknowledgments of receipt (avisos de receção) signed by customers identifying specific credit note numbers, even if the credit note itself was not returned; (3) Debit notes issued by customers to the supplier referencing the same transaction corrections, which constitute commercial acknowledgment of the adjustment; (4) Correspondence or communications from customers confirming awareness of rectifications; (5) Customer accounting records or declarations showing they processed the credit adjustments; and (6) Other commercial documentation establishing through reasonable inference that customers knew of and accepted the rectifications. The key criterion is whether the documentation credibly demonstrates the acquirer's actual knowledge of the rectification or that tax reimbursement occurred. CAAD tribunals generally apply the principle of free proof assessment, evaluating documentary evidence holistically rather than requiring exclusively specific forms. The adequacy of proof depends on case circumstances, business relationship nature, and whether the evidence substantively satisfies Article 78(5)'s underlying purpose of preventing unjust VAT credits where customers already claimed input tax deductions.
What procedural steps must a foreign company registered for VAT in Portugal follow to challenge IVA assessments before the CAAD?
Foreign companies registered for VAT in Portugal seeking to challenge IVA assessments before the CAAD (Administrative Arbitration Center) must follow specific procedural steps under the Legal Framework for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). First, the company files a request for constitution of an arbitral tribunal (pedido de constituição do tribunal arbitral) within the statutory deadline, identifying the contested tax acts and legal grounds. As demonstrated in this case, foreign companies must be represented by a fiscal representative or agent registered in Portugal. Second, the CAAD accepts the request and automatically notifies the Tax Authority. Third, parties may appoint an arbitrator; if the claimant does not, the CAAD's Deontological Council designates arbitrators for a collective tribunal. Fourth, parties have opportunity to challenge arbitrator appointments within applicable deadlines. Fifth, the tribunal is formally constituted upon arbitrator acceptance. Sixth, the Tax Authority submits its defense (contestação) after notification. Seventh, evidentiary hearings are conducted where witnesses testify and documents are examined. Eighth, parties submit written pleadings (alegações) commenting on evidence and developing legal arguments. Finally, the tribunal issues its decision within statutory timeframes. Foreign companies must ensure proper legal representation, timely submission of all procedural documents, compliance with Portuguese procedural rules, and payment of applicable arbitration fees.