Process: 71/2017-T

Date: September 19, 2017

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 71/2017-T addresses a VAT dispute concerning the proper identification of the taxable person when a managing partner provides services allegedly using company equipment. The applicant company challenged an additional VAT assessment of €1,192.33 plus €88.06 compensatory interest for Q4 2013, raising multiple procedural and substantive grounds for annulment. The central legal issues include: (1) insufficient reasoning in the assessment notice violating Article 77 of the General Tax Law and Article 268(3) of the Portuguese Constitution; (2) incorrect identification of the taxable person, with the Tax Authority claiming the company provided taxable services when the partner acted personally without using company equipment; (3) errors in factual assumptions regarding the timing and nature of services; (4) violation of the inquisitorial principle through inadequate investigation; (5) competence defects under Article 87 of the VAT Code; and (6) improper assessment of compensatory interest without prior hearing or adequate reasoning. The applicant argued that bank accounts, while in the company's name, were allocated to the partner's personal teaching activity, and services were provided in the partner's own physical space without company resources. The Tax Authority's failure to properly allocate income across tax periods and its reliance on unsubstantiated assumptions constituted grounds for annulment. The case exemplifies fundamental requirements for valid VAT assessments in Portugal: explicit legal and factual grounds, proper reasoning allowing taxpayers to understand and challenge assessments, correct identification of the taxable person, and compliance with procedural safeguards including the right to prior hearing for compensatory interest.

Full Decision

ARBITRAL DECISION

I – Report

  1. On 19.01.2017, the Applicant, A…, Lda, person with corporate number…, with registered office at street…, no.…, …, requested the CAAD for the establishment of an arbitral tribunal, pursuant to Article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as "RJAT"), in which the Tax and Customs Authority is the Respondent, with a view to the annulment of the additional VAT assessment and respective compensatory interest, no. 2016…, relating to the 4th quarter of 2013, from which resulted a total value payable of € 1,280.39, of which € 1,192.33 is tax and € 88.06 is compensatory interest, and further, of the decision relating to the administrative review filed against those acts.

  2. The request for establishment of the arbitral tribunal was accepted by His Excellency the President of the CAAD and notified to the Tax and Customs Authority.

Pursuant to Article 6, section 1 of the RJAT, by decision of the President of the Deontological Council, duly communicated to the parties within the legally applicable time limits, the signatory was appointed as arbitrator, who communicated to the Deontological Council and to the Centre for Administrative Arbitration the acceptance of the appointment within the regularly applicable time limit.

The Arbitral Tribunal was constituted on 9-04-2017.

  1. Given the absence of any situation provided for in Article 18, section 1 of the RJAT, which would make necessary the arbitral meeting provided therein, the holding of the same was dispensed with, on the basis of the prohibition against performing useless acts.

  2. The grounds presented by the Applicant in support of its claim were, briefly, the following:

  • The additional VAT assessment notified does not explicitly set out all its grounds, whether legal or factual, with only resulting therefrom that it concerns VAT for the period of December 2013.

  • The specific legal provisions under which the tax and compensatory interest were assessed are also not indicated.

  • The tax and customs authority has a legal duty to make express reference to the reasons of fact and applicable legal provisions, and that reasoning which does not contain this reference is always insufficient and results in the voidability of the act.

  • Having failed to do so, the assessment in question is illegal, due to omission of legally required reasoning, thus violating Articles 268, section 3, of the Constitution of the Portuguese Republic and Article 77 of the General Tax Law.

  • Furthermore, the reasoning of the conclusions of the tax inspection report, in the event that they embody the motivation of the act of assessment of tax and compensatory interest sub judice, which is not conceded and is only raised out of caution, is neither congruent nor clear, such that, also in this case, the tax acts in question should be considered as not reasoned and, consequently, be annulled.

  • The Respondent itself admits that the bank accounts identified, without prejudice to their respective holder, were allocated to the activity of the partner, whether through the applicant, or through their activity as a teacher, but appears to intend that the applicant used equipment of the applicant for the provision of services on a personal title, which did not occur.

  • The services in question were provided by its partner on a personal title in its own physical space without, for such purpose, having used the equipment of the Applicant.

  • On the other hand, the alleged (but non-existent) taxable services did not occur only in the last tax period of the respective calendar year, the assumptions on which the Respondent based itself.

  • It is the Respondent itself that assumes this in the report of conclusions of the inspection action, by stating that the allocation of income to each of the months was complex.

  • It is not, therefore, to be admitted the taxation of the applicant for services that were not provided and much less in that concrete tax period, such that it is evident the error regarding the assumptions of fact, the assessment act being illegal, also for this reason, which is invoked for all legal purposes.

  • Throughout the inspection procedure the Applicant always refuted the accusations and successively presented elements that contradicted the understanding of the Respondent.

  • As has been recognized by the generality of doctrine, the failure to investigate the necessary elements for the discovery of material truth constitutes a violation of the inquisitorial principle, by violation of Articles 58 of the LGT and 6 of the RCPIT and taints with illegality the tax act issued in that sequence, such that, also on this basis, the tax acts should be annulled.

  • The tax act is also illegal due to violation of Article 87 of the VAT Code, in that the assessment act in question was practiced by the Director-General of the Tax and Customs Authority, from which there is no evidence of the existence of any delegation or subdelegation of powers.

  • Indeed, Decree-Law no. 102/2008, of 20 June, which amended Article 87 of the VAT Code, exceeded the terms of the legislative authorization under which it was approved, such that it is unconstitutional due to violation of Articles 112 and 165 of the Constitution, with the necessary non-applicability of the competence rules in question, such that it should be considered competent for this purpose the Head of the Tax Office Service or the Director of the VAT Collection Direction, in accordance with the original wording of the current Article 87 of the VAT Code.

  • Consequently, also on this basis, the tax acts should be annulled, due to a defect of relative incompetence.

  • Given the provision of Article 95 of the VAT Code "The assessments referred to in Articles 87 and 88 may be aggregated by calendar years in a single collection document"

  • However, as many assessment acts must be practiced as there are tax periods in question but it appears to result from the VAT assessment act that such did not occur, with the ATA, as it appears, having practiced the assessment act only by reference to the month of December, thus violating the provisions of the aforementioned legal provisions, which also constitutes grounds for annulment of the tax acts.

  • The assessment of compensatory interest is further illegal due to lack of reasoning and due to violation of Article 267, section 5, of the Constitution of the Portuguese Republic and Article 60, section 1, subsection g) and section 3, of the General Tax Law.

  • On the one hand, the act in question contains only the calculation base, the rate and the period considered, being silent as to any reference to the reasons why such interest was assessed, in particular the concrete fault of the taxpayer in the delay in paying the tax, which violates Article 35, section 1 of the LGT and is grounds for annulment of this tax act.

  • On the other hand, as the Final Tax Inspection Report does not contain any reference to compensatory interest, the applicant was not given the opportunity to participate, in a prior hearing, in the decision to assess such interest, which constitutes a violation of Article 60 of the LGT and is also grounds for annulment of this tax act.

  • In the decision that addressed the administrative review, the Division Chief did not rule on all issues raised by the applicant since, as regards errors regarding the legal assumptions, it merely reproduces the elements contained in the Tax Inspection Report, not ruling on the specific illegalities pointed out, which violates Article 56 of the LGT.

  • Consequently, the aforementioned decision should be annulled because it was practiced in violation of the applicable norms and principles.

  1. The ATA – Tax and Customs Administration, called upon to submit a response, contested the Applicant's claim, defending itself through an objection, in summary, with the following grounds:

  • The factual and legal reasoning of the disputed assessments is contained in the content of the final inspection report, a fact that the Applicant cannot be unaware of since the notification of the report expressly mentions that it will result in the issuance of assessments, against which it may react through administrative or contentious means.

  • But even if not so, that is, even if the Applicant were not notified of the final report, it could still, under Article 37 of the CPPT, request the AT to notify it of the reasoning for the disputed assessments, which it did not do.

  • Moreover, having the applicant been notified of the tax inspection report, this fact enabled it to have effective and exhaustive knowledge of the grounds for the assessment, which is inferred from the arguments alleged by the applicant in the present administrative review.

  • On the other hand, the reasoning of the acts of disputed assessment, as well as of the tax inspection report, is express, clear, sufficient and congruent.

  • Thus, the defect of lack of reasoning of the VAT assessment acts and compensatory interest should be judged groundless.

  • With regard to lessons taught by the managing partner on a personal title, according to the understanding of the Tax Administration, they benefit from exemption provided that there is no intervention by any third party, but the managing partner provides services in the premises belonging to A…, benefiting from all the logistical support of the company, such that there is effectively an intervention by a third party, and therefore cannot benefit from exemption.

  • Furthermore, the company and the managing partner did not maintain patrimonial separation, since personal bank accounts were used for making payments and receipts relating to the business activity carried out, and therefore the provision of Article 63-C of the LGT was not complied with.

  • Regarding the alleged errors regarding the factual and legal assumptions, it is necessary to clarify that, contrary to what the Applicant alleges, the Tax Authority based itself on the elements at its disposal, to conclude from an easily understandable logic the proposed corrections.

  • It was assumed by the managing partner B… that the bank account held in the name of his son C…, was operated in the years 2011, 2012 and 2013, by the category B income earned by him and subject to assessment under the IRS, as well as by the receipt of invoices issued by the company A….

  • From approximately July 2011, the account of C… (son), began to be operated as if it were the company's account, and that it became so because then B… (Father) and spouse were afraid that their personal accounts could be seized, which also allows concluding that until then it was these accounts that were being used as if they were company accounts.

  • In view of this, a simple calculation was made, as set out above, in which deposits made to the accounts were deducted from declared income, both by the company and by its partner B…, since other income did not exist in the aggregate, such that they were considered to be omitted income.

  • And these were allocated to the company, taking into account the aforementioned declarations, the descriptive statements of the transfers determined in the investigation, the use of the company for the provision of services by its partner B… and the fact that he did not maintain patrimonial separation.

  • The Respondent proceeded throughout the entire inspection procedure, in clear respect for the pursuit of the principle of discovery of material truth by carrying out all necessary procedures for the same.

  • The Applicant alleges that throughout the entire inspection procedure it always "refuted the accusations and successively presented elements that contradicted the understanding of the Tax Authority", however, neither resulted from the same, nor results from the present proceedings, that it has managed to invoke even one argument, one fact or provided or indicated any evidence that could support the supposed "elements".

  • As the Applicant has failed to bring any means of proof, or any indicator that could sustain its allegations, it cannot be understood how the inquisitorial principle could lead the Respondent to investigate elements that had no factual basis.

  • Thus, it cannot be charged to the act the defect of illegality due to violation of the inquisitorial principle.

  • In the case at hand, we are faced with an additional VAT assessment, under Article 87 of the VAT Code, and not an ex officio assessment, under Articles 88 and 89 of the same code.

  • As regards the competence of the assessment act, the judgment of the Central Administrative Court South, Case: 01148/06, of 05-06-2007, is clear, which clearly determines that: "The assessment act is an act within the competence of the central services of the Directorate General for Taxes, and can, under DL 275-A/93, of 9/8, use computer means which includes the signature of the respective director-general (see Ordinance no. 797/99, of 15/9) (…)."

  • As for the alleged unconstitutionality of Decree-Law no. 102/2008, of 20-06, invoked by the applicant, it should be noted that it is not for the Tax Administration to rule on it, such assessment being within the competence of the Constitutional Court, under Articles 276 and following of the Constitution, with the Tax Administration being bound by the Principle of Tax Legality, under Article 8 of the LGT.

  • That is, the impugned act was practiced by a competent entity, and cannot be charged to it the defect of incompetence.

  • The Respondent ascertained and amply demonstrated the tax whose assessment was lacking during the year.

  • Having not been able to allocate the portion corresponding to each of the periods, it would only have two options, to assess or not to assess the lacking tax, such that it had no other option than to assess the lacking tax, even if it could not carry out the parcels corresponding to each of the periods, and the choice for the last tax period of the year took into account the interests of the Applicant, which it sought to respect.

  • In truth, if the Respondent made a distribution based on whatever criterion determined, it could incur in the allocation to earlier periods, of tax that should only be assessed and would only be shown, by virtue of that, as due in later periods, thereby imposing on the Applicant the burden of payment of interest that would not be due if the periods and respective portions were completely determined, thus accepting the frustration of some interest to which it would be entitled, such that the Applicant cannot allege any harm with this action.

  • As for the reasoning of the assessment of compensatory interest, it follows from the corrections made by the AT that the Applicant assessed tax in an amount lower than legally due, being imputable to the taxpayer the delay in remitting the tax, under section 1 of Article 35 of the LGT.

  • Now, in the case at hand, it appears that the Applicant failed to comply with the provision of Article 27 of the VAT Code, given that it was found in the inspection action that there was VAT not assessed and not remitted to the State Treasury.

  • The Tax Administration is subject to the Principle of Tax Legality, under Article 8 of the LGT, as regards the rate, the calculation base and the period of time to which the compensatory interest refers.

  • Under the above terms, the illegality of the compensatory interest should be judged groundless, which was assessed under the provision of Article 35 of the LGT.

  • As for the alleged illegality of the decision that dismissed the administrative review now in question, it should be judged groundless for all reasons of fact and law referred to above.

  1. The tribunal is materially competent and is regularly constituted under the terms of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented.

The process is not affected by vices that would invalidate it.

  1. It is necessary to resolve the following issues:

a) Lack of reasoning of the acts of assessment of tax and compensatory interest or, if not understood as such, incongruence or insufficiency of the same.

b) Defect of violation of law of the assessments due to error in the factual and legal assumptions.

c) Illegality of the tax acts due to violation of the inquisitorial principles and the pursuit of material truth.

d) Defect of incompetence of the authors of the tax acts that are the subject of the process.

e) Illegality of the assessments due to violation of the provision of Article 95 of the VAT Code.

f) Illegality of the assessment of compensatory interest.

h) Illegality of the administrative review decision.

II – The Relevant Factual Matter

  1. With relevance to the resolution of the case, the following facts are considered proven:

  2. The Applicant was subject to an external inspection action of general scope, relating to the years 2011, 2012 and 2013.

  3. The Applicant has share capital of one hundred thousand euros, of which B… and D… are holders, each with a quota of fifty thousand euros, with management exercised by both partners.

  4. The activity developed by the Applicant consists essentially of school supervision and preparation for secondary school examinations and entrance to higher education, but without recognition from the competent ministry.

  5. B…, engages in the activity of tutor in his own name since 27 September 2010, framed under the exemption scheme under Article 9 of the VAT Code, and under the simplified taxation scheme under Article 28 of the Personal Income Tax Code, having declared for the years 2011, 2012 and 2013 the amounts of € 86,092.75, € 32,156.38 and € 35,903.75, respectively.

  6. In the inspection report the following is stated, in particular:

"For 2013, we have the following: 2013

Account no. … (son) a 155,906.66

Declared income

Proceeds declared in A… (includes VAT) b 114,818.87

Category B income declared by B… c 35,903.75

Total of undeclared income d=a-b-c 5,184.04

This year the bank account was supplied with 155,906.66 euros. Still using the same method, by deducting from the total of deposits to the bank account, the amounts received by the company (93,348.68 € of proceeds + 21,470.19 of assessed VAT) and by the managing partner, we are left with a total of omitted income of 5,184.04 euros"

  1. In the inspection report the following is further stated:

"(…) It was assumed by the managing partner B… that the bank account held in the name of his son C…, was operated in the years 2011, 2012 and 2013, by the category B income earned by him and subject to assessment under the IRS, as well as by the receipt of invoices issued by the company A….

Pursuant to section 12 of Article 9 of the VAT Code, there are exempt from tax "the provision of services consisting of lessons taught on a personal title on subjects of school or higher education".

Given that the activity developed by "A…", consists of school supervision and orientation, but without recognition from the competent ministry, the lessons taught either individually or in groups, do not benefit from the VAT exemption, because they do not fall within section 10 or section 12, both of Article 9 of the VAT Code.

Now, the managing partner provides services in the premises belonging to A…, benefiting from all the logistical support of the company, such that there is effectively an intervention by a third party, and therefore cannot benefit from exemption.

Furthermore, the company and the managing partner did not maintain patrimonial separation, since personal bank accounts were used for making payments and receipts relating to the business activity carried out, and therefore the provision of Article 63-C of the LGT was not complied with."

  1. It may further be read in the report regarding the Value Added Tax for the year 2013, the following:

"Taking into account the case at hand, and the values previously calculated for omitted income, the corrections in the context of VAT are those presented below:

"VAT 2011 2012 2013

Omitted tax base (…) (…) 5,184.04

Lacking tax (…) (…) 1,192.33

Given the high difficulty in distributing exactly the value of the lacking VAT across the various quarters, we will consider for purposes of drawing up the respective correction document, the omission that occurred in the last tax period of each year, considering the absence of harm from this procedure to the taxpayer"

  1. In exercising the right to a hearing for which it was previously notified prior to the final inspection report, the Applicant, in particular, stated:

"once again it is reaffirmed and if the inspection has doubts it can and should move to the location, which is the space where the taxpayer B… teaches, in individual terms, not company terms, the mathematics lessons, which is independent, with its own and only access, which is not confused with any other, of the premises where A… LDA, carries out its activity, where several teachers teach several subjects of secondary education;"

  1. In the assessment of the right to a hearing, the Respondent did not rule on this point of the Applicant's participation, with no reference appearing to any visit to the location, though stating, however, that:

"The taxpayer does not invoke facts and much less evidence, that call into question the analysis of income made in the draft report.

The single argument that at this level deserves mention is that the omitted income should be allocated, on a personal title, to the manager of the taxpayer and not to the taxpayer (with the consequence that, if the allocation is made on a personal title to the manager, there is no place for VAT). However, this argument cannot be accepted, because the truth is that the manager of the taxpayer provided the services that generated the income within the scope of the activity of the taxpayer using its means."

  1. From the notification of the final inspection report, addressed to the Applicant on 4.01.2016, the following is stated, in particular:

"By this means is/are notified, under Article 62 of the RCPIT, of the Tax Inspection Report, which is attached as an integral part of this notification, relating to the Service Order referred to above.

Of the merely arithmetic corrections made to the taxable matter and/or tax, without resorting to indirect assessment, the grounds for which are contained in the aforementioned Report. In the short term, the AT services will proceed with the notification of the respective assessment, which will contain the means of defense, as well as the payment deadline, if applicable.

Against this notification and its reasoning, there is no possibility of administrative review or objection."

  1. From the notification of the assessment act that is the subject of this process, made by the Respondent on 12.01.2016, the following appears, by way of reasoning: "assessment made based on correction made by the Tax Inspection Services."

  2. On 12.07.2016 the Applicant filed an administrative review against the acts of assessment "sub judice", the content of which is contained in the administrative file which is hereby fully reproduced.

  3. The administrative review was dismissed by a decision of the Division Chief (In substitution) E… (by subdelegation), decision, the content of which is contained in the administrative file which is hereby fully reproduced, was notified to the Applicant, via postal service, on 5.12.2016.

With interest to the resolution of the case there are no unproven facts.

  1. The tribunal's conviction regarding the factual matter considered proven was based on the documents contained in the file, submitted by the parties and contained in the administrative file, which were not subject to objection by the parties.

III – The Applicable Law

  1. Having the impugning party imputed various defects to the impugned tax acts, it is necessary to determine the order of consideration of the same, and the order of Article 124 of the CPPT should be observed, applicable by force of Article 29, section 1, subsection a) of the RJAT (See Jorge Lopes de Sousa, Commentary on the Legal Framework for Tax Arbitration, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, page 202). (See JORGE LOPES DE SOUSA, Commentary on the Legal Framework for Tax Arbitration, in Guide to Tax Arbitration, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, page 202).

The validity of any of the defects invoked by the applicant will lead to the annulment of the tax act. However, the defect of violation of law is that which will lead to the "most stable or effective protection of the offended interests" in so far as its possible validity will prevent the renewal of the act, which does not occur with the annulment resulting from the other defects.

Accordingly, the Tribunal will first consider the defect of violation of law.

  1. The Applicant further contends that the services in question were provided by its partner on a personal title in its own physical space and without having used the equipment of the Applicant for such purpose.

The Respondent, in turn, contends that:

"With regard to lessons taught by the managing partner on a personal title, according to the understanding of the Tax Administration, they benefit from exemption provided that there is no intervention by any third party, but the managing partner provides services in the premises belonging to A…, benefiting from all the logistical support of the company, such that there is effectively an intervention by a third party, and therefore cannot benefit from exemption."

And that:

"Furthermore, the company and the managing partner did not maintain patrimonial separation, since personal bank accounts were used for making payments and receipts relating to the business activity carried out, and therefore the provision of Article 63-C of the LGT was not complied with."

Let us examine this.

In the inspection report it is stated, in the first place, the following:

"(…) It was assumed by the managing partner B… that the bank account held in the name of his son C…, was operated in the years 2011, 2012 and 2013, by the category B income earned by him and subject to assessment under the IRS, as well as by the receipt of invoices issued by the company A….

Pursuant to section 12 of Article 9 of the VAT Code there are exempt from tax "the provision of services consisting of lessons taught on a personal title on subjects of school or higher education".

Given that the activity developed by "A…", consists of school supervision and orientation, but without recognition from the competent ministry, the lessons taught either individually or in groups, do not benefit from the VAT exemption, because they do not fall within section 10 or section 12, both of Article 9 of the VAT Code.

Now, the managing partner provides services in the premises belonging to A…, benefiting from all the logistical support of the company, such that there is effectively an intervention by a third party, and therefore cannot benefit from exemption.

Furthermore, the company and the managing partner did not maintain patrimonial separation, since personal bank accounts were used for making payments and receipts relating to the business activity carried out, and therefore the provision of Article 63-C of the LGT was not complied with."

These assertions of the AT (maintained in the response) contain, in a clear manner, the affirmation that the services in question were provided by the managing partner of the Applicant on an individual title, although the AT considers that such services are not exempt from VAT, because there occurred the intervention of a third party, in this case the Applicant, and further because the company and the partner do not maintain patrimonial separation.

  1. In light of the VAT Code, the taxpayer in a concrete legal-tax relationship, arising from the provision of services subject to tax, under Articles 1 and 4 of the Code, is, save in exceptional situations which do not occur in this case, as is self-evident, the provider of those services, with no rule binding to the payment of tax for such services a legal person by virtue of such services having been provided, in whole or in part, in its premises or with use of its equipment.[1]

Thus, as is clear, the Respondent cannot claim that the services provided by B… be taxed in the legal sphere of the Applicant, by considering that the services provided by him are not exempt from tax. If such is the case, the Applicant should promote the taxation in the legal sphere of the latter, since in that case he will be the taxpayer in the legal-tax relationship in question. In the case before us, according to the version of the Respondent, the alleged tax event in question did not occur with the Applicant as the taxpayer, but rather B…, thus lacking legal basis for the assessment of the tax in question, as well as the respective compensatory interest.

It follows, thus, that the tax acts in question are affected by the defect of violation of law due to error in the legal assumptions, and the tax acts in question cannot but be annulled, thus making moot the consideration of the other defects invoked.

IV – Decision

Thus, the arbitral tribunal decides to judge the request for arbitral pronouncement totally well-founded and, consequently, annuls the additional VAT assessment and respective compensatory interest and further the decision relating to the administrative review filed against those acts.

Value of the action: € 1,280.39 (one thousand two hundred eighty euros and thirty-nine cents) under the provision of Article 306, section 2 of the CPC and 97-A, section 1, subsection a), of the CPPT and 3, section 2, of the Costs Regulation in Arbitration Proceedings.

Costs charged to the Respondent, in the amount of € 306.00 (three hundred six euros) under section 4 of Article 22 of the RJAT.

Notify accordingly.

Lisbon, CAAD, 19.09.2017

The Arbitrator

Marcolino Pisão Pedreiro

[1] Without prejudice to, if the version of the Respondent is accurate, there having occurred the tax event provided for in Article 4, section 2, subsection a) of the VAT Code, which establishes as deemed provision of services the use of company assets for own use by its owner, personnel, or in general for purposes unrelated to the company (with the taxable value provided for in Article 16, section 2, subsection c) of the code). However, it was not this tax event invoked by the Respondent for the practice of the tax act sub judice.

Frequently Asked Questions

Automatically Created

What happens when a VAT additional assessment lacks proper legal and factual grounds in Portugal?
When a VAT additional assessment lacks proper legal and factual grounds in Portugal, it violates Article 77 of the General Tax Law and Article 268(3) of the Portuguese Constitution. The assessment must explicitly state the factual basis and applicable legal provisions. Insufficient reasoning renders the assessment voidable and subject to annulment through administrative review or arbitration at CAAD. The Tax Authority must provide reasoning that allows taxpayers to understand the assessment's basis and exercise their right of defense effectively.
Can a company challenge a VAT assessment based on insufficient reasoning by the Portuguese Tax Authority?
Yes, a company can challenge a VAT assessment based on insufficient reasoning by the Portuguese Tax Authority. Article 77 of the General Tax Law requires tax acts to contain express reference to factual grounds and applicable legal provisions. Failure to provide adequate reasoning constitutes a formal illegality that renders the assessment voidable. Companies can contest such assessments through administrative review (recurso hierárquico) or by requesting arbitration at CAAD under the Legal Framework for Arbitration in Tax Matters (RJAT), as demonstrated in Process 71/2017-T.
How does CAAD arbitration handle disputes over VAT charged on services provided by a managing partner using company equipment?
CAAD arbitration handles VAT disputes over services provided by managing partners using company equipment by examining whether the company or the partner is the proper taxable person under Article 2 of the VAT Code. The analysis focuses on: (1) whether company equipment was actually used; (2) in whose name services were invoiced and received; (3) allocation of bank accounts and income; (4) the independent nature of the partner's activity; and (5) whether the Tax Authority properly investigated factual circumstances. The burden lies with the Tax Authority to substantiate its factual assumptions through adequate investigation, respecting the inquisitorial principle.
What are the legal consequences of the Tax Authority failing to comply with Article 77 of the General Tax Law on assessment reasoning?
The legal consequences of the Tax Authority failing to comply with Article 77 of the General Tax Law on assessment reasoning include: (1) the assessment being considered formally illegal and voidable; (2) violation of constitutional guarantees under Article 268(3) of the Portuguese Constitution; (3) grounds for annulment through administrative or arbitral review; (4) inability of the taxpayer to exercise effective defense rights; and (5) potential liability for reimbursement of improperly collected amounts plus compensatory interest. The reasoning requirement is essential to the validity of tax acts and cannot be remedied retroactively.
Who is the taxable person for VAT when a company partner provides services using the company's equipment?
The taxable person for VAT purposes when a company partner provides services using company equipment depends on the economic reality of the transaction. Under Article 2 of the VAT Code, if services are genuinely provided by the partner personally in an independent capacity, the partner is the taxable person, even if some company resources are incidentally used. However, if the company's equipment, infrastructure, and organization are substantially utilized, the company may be considered the service provider. Critical factors include: invoicing practices, client relationships, assumption of economic risk, and whether the partner acts within or outside the scope of company activity. The Tax Authority must prove its characterization through proper factual investigation.