Process: 714/2014-T

Date: December 21, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitration case (Process 714/2014-T) concerns a Corporate Income Tax (IRC) assessment for fiscal year 2011 based on allegations of false invoicing. The Tax Authority issued an IRC assessment of €6,334.69 plus compensatory interest, which the taxpayer challenged through arbitration. The central dispute involves whether the Tax Authority provided sufficient evidence of false invoicing and whether procedural rights were respected. The taxpayer raised multiple grounds for annulment: (1) lack of proper substantiation of the tax assessments in violation of Article 268(3) of the Portuguese Constitution and Article 77 of the General Tax Law (GTL); (2) omission of the mandatory prior hearing right under Article 60(1)(a) GTL; (3) failure by the Tax Authority to meet its burden of proof under Article 74 GTL; (4) contradictions and conclusory statements in the inspection report; (5) errors in factual and legal assumptions; and (6) illegal assessment of compensatory interest since Article 35 GTL requires both delay and taxpayer fault. The taxpayer presented witness testimony to prove the reality of the invoiced services. The Tax Authority defended its position, arguing it gathered sufficient indicators (indícios) of false invoicing to shift the burden of proof to the taxpayer, and that the taxpayer failed to adequately demonstrate the services were genuine. The case illustrates the two-stage burden of proof framework in Portuguese tax law: the Authority must first present indicative evidence of irregularities, then the taxpayer must prove the reality of questioned transactions. Key legal protections include the constitutional requirement for reasoned administrative acts, mandatory prior hearing rights before reassessments, and strict conditions for imposing compensatory interest.

Full Decision

ARBITRAL DECISION

I. REPORT

A..., taxpayer number ..., with headquarters at Rua..., no. ..., …, ...-... ..., Santarém (hereinafter referred to as "Claimant"), submitted a request for arbitral pronouncement, in accordance with the provisions of subparagraph a) of no. 1 of article 2 and article 10, both of Decree-Law no. 10/2011, of January 20 (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as "LRATM"), in which the Tax and Customs Authority is requested (hereinafter referred to as TCA or Respondent), with a view to the annulment of the following acts:

  • Corporate Income Tax assessment no. 2013 ..., relating to the fiscal year 2011, from which resulted tax to be paid in the amount of €6,334.69;

  • Compensatory interest assessment no. 2013...;

  • Order issued by His Excellency the Chief of the Finance Service of the Finance Office of..., dated July 15, 2014, which determined the dismissal of the administrative complaint filed against the tax acts previously mentioned.

It further requests the condemnation of the Respondent Entity to the restitution of the amounts unduly paid, increased by the corresponding indemnity interest.

For this purpose, it alleges, in summary, the following defects:

a) The acts of assessment of Corporate Income Tax and compensatory interest are deficient as to the necessary substantiation, in fact and in law, being tainted with a formal defect, due to lack of substantiation, nor is express reference made to any other document containing it, contemporaneous with or prior to that same act, having been the same performed in violation of articles 268, no. 3 of the CRP and article 77 of the GTL, and should be annulled accordingly;

b) Unaware of all grounds underlying the assessment acts, the Claimant was not notified to exercise the right of hearing, in accordance with subparagraph a) of no. 1 of art. 60 of the GTL, which implies the annulment of the referred assessment acts, due to omission of an essential legal formality;

c) The Tax Inspection Conclusions Report lacks substantiation, given that in addition to being based on mere conclusive judgments, it is contradictory, for which reason the tax acts should be annulled;

d) The AT violated article 74 of the GTL, since it did not prove the constitutive facts of its right;

e) The correction underlying the assessment acts is based on errors regarding the factual and legal assumptions, for which reason they should be annulled;

f) The assessment of compensatory interest is illegal because the conditions set out in article 35 of the GTL are not met: delay in the assessment of tax and fault attributable to the taxpayer for that delay;

g) In accordance with articles 43 and 100 of the GTL, the legal requirements are met to determine the payment of indemnity interest in its favor;

h) The Order issued by His Excellency the Chief of the Finance Service of the Finance Office of..., which dismissed the administrative complaint, by maintaining the assessment act, is equally illegal, due to "judgment error," since it violated the same legal provisions of that assessment act, having been performed in error regarding the factual and legal assumptions, and should be annulled. On the other hand, by issuing a decision without hearing the witnesses brought forward by the Claimant, such decision is illegal due to deficient investigation, having violated the provisions of articles 266, no. 1 of the CRP and 58 and 72, both of the GTL. Such decision is equally illegal due to violation of the provisions of articles 268, no. 3 of the CRP and 77 of the GTL, due to failure to indicate the reasons that led to the decision not to examine the witnesses.

It attached eight documents and listed witnesses.

The arbitral tribunal was constituted on 2014-12-23, in accordance with the provisions of subparagraph c) of no. 1 of article 11 of the LRATM.

Notified for that purpose, the Respondent Entity filed a response, contesting the arguments of the Claimant, concluding in favor of the legality of the assessment acts and terminating by requesting that the request for arbitral pronouncement be judged without merit, with the legal consequences.

By the respondent entity the administrative proceedings and that of the administrative complaint were attached. It also attached another document.

On March 11, 2015, the first meeting of the Arbitral Tribunal was held at the headquarters of the CAAD, in accordance with the terms and for the purposes provided in article 18 of the LRATM. In this meeting, the Respondent Entity attached a document, with the Claimant not waiving the legal time limit for inspection, and a date was set for the examination of witnesses. The Claimant, by subsequent petition, attached to the proceedings document no. 8 which it had protested attaching.

On April 7, 2015 testimonial evidence was produced (as per examination minutes).

In the written submissions, the Claimant maintained its position in the request for arbitral pronouncement, developing it, noting that it proved the services rendered and events carried out.

The Respondent Entity maintained its position of the response, emphasizing that the testimonial evidence produced does not allow concluding the reality of the services.

As it was not possible to prepare the decision by the designated dates, the initial deadline was successively extended, by orders dated 2015.06.23, 2015.08.27, and 2015.10.27.

II. CASE DISPOSITION

The Arbitral Tribunal was regularly constituted and is materially competent, in accordance with the provisions of art. 2, no. 1, subparagraph a) of the LRATM.

The parties have legal personality and capacity, are legitimate and are regularly represented, in accordance with the provisions of articles 4 and 10, no. 2 of the LRATM and art. 1 of Ordinance no. 112-A/2011, of March 22.

The proceedings do not suffer from nullities and there are no exceptions that it is necessary to hear or that prevent the examination of the merits of the case.

III. ISSUES FOR DECISION

The issues to be decided in these arbitral proceedings are whether:

a) There is lack of substantiation of the tax acts of assessment of Corporate Income Tax and the corresponding act of assessment of compensatory interest above identified;

b) There was omission of an essential legal formality, provided in subparagraph a) of no. 1 of article 60 of the GTL;

c) Whether the AT collected sufficient indicative evidence to conclude that the invoicing of the service providers does not represent real operations;

d) If affirmative, whether the Claimant proved that the services invoiced correspond to real operations;

e) Whether there is lack of substantiation of the report of the Tax Inspection services;

f) Whether there is error regarding the factual and legal assumptions on which the above assessments were based;

g) Whether the assessment of the derrama is illegal;

h) Whether the assessment of the act of compensatory interest is equally illegal, due to formal defect, due to lack of substantiation;

i) Whether the Order issued by His Excellency the Chief of the Finance Service of..., which dismissed the administrative complaint of the above identified assessment acts is illegal.

IV. SUBSTANTIATION

A) In Fact

Based on the elements contained in the proceedings and the production of testimonial evidence, and, with interest for the decision, the following facts are given as proven:

  1. The Claimant constitutes an association of businesspeople of a private nature, without profit, which enjoys legal personality, having the following objectives:

"The defense, representation and promotion of the legitimate economic, professional and social interests of its members, as well as their rights, prestige and dignification:

a) Contribute to the harmonious development of the economic activities of its area, in the technical, economic, associative and cultural domains;

b) Launch the necessary initiatives and practice everything that may contribute to technical, economic and social progress, namely by promoting and creating common services;

c) Promote a spirit of solidarity, cooperation and mutual support among its members" [cf. Tax Inspection Report- pages 122 of the Tax Administrative Proceedings ("TAP") and Labor and Employment Gazette no. 14, of 15.04.2008, document no. 8 – file designated as A...Part 3 – attached by the Claimant];

  1. The Claimant began its activity on 1998.10.01, with the main CAE... – Activities of economic and employers' organizations and secondary CAE – Publishing of Magazines and other Periodic Publications, falling, under Corporate Income Tax, in the general regime with organized accounting as legally required, computerized and centralized at its headquarters. For VAT purposes, the Claimant falls within the normal regime of quarterly periodicity, qualifying itself as a mixed taxpayer, since part of its activity is exempt under article 9 of the VAT Code (cf. Tax Inspection Report - page 121 of TAP);

  2. With a view to achieving its objectives, the Claimant over the years has promoted initiatives such as events promoting the activities carried out by its members, street animations or revaluation of certain areas of traditional commerce, spreading and developing local commerce in the municipalities of its area of influence – ..., ..., ... and ...[cf. Tax Inspection Report- page 122 of TAP – file designated as PART.... and testimony of witness C...];

  3. Given the need for investment necessary for the realization of the mentioned street animation initiatives, the Claimant over the years 2008, 2009, 2010 and 2011, applied for public financial support within the framework of the B... "B..." program, instituted by Order no. .../2005 of the Minister of Economy and Innovation [cf. Tax Inspection Report- page 131 of TAP – file designated as PART..., document no. 8 attached by the Claimant and testimony of witness C...];

  4. The Claimant was subject to an external inspection action, of general scope, which focused on the fiscal years 2008, 2009, 2010 and 2011, carried out by the Tax Inspection Services of the Finance Directorate of Santarém, which culminated with the Report dated March 15, 2013 (cf. Tax Inspection Report – pages 209 and pages 118 onwards and TAP);

  5. The inspection action originated from External Service Orders nos. 0I2012.../... and OI2012..., with start on May 23 and 28, 2012 and concluded on 06-02-2013 (cf. Tax Inspection Report – page 120 of TAP);

  6. The inspection action was motivated by a request from the Department of Fraud Investigation and Special Actions (DFSA) with a view to the investigation of possible irregularities in the obtaining of public funds, following a communication from the General Directorate of Economic Activities (GDEA) (cf. Tax Inspection Report – page 121 of TAP);

  7. By letter no. ..., dated 2013.02.13, the Tax Inspection Services of the Finance Directorate of Santarém – Division…, Team...- sent to the Claimant the draft report for purposes of exercising its right of prior hearing (cf. Draft Tax Inspection Report and Tax Inspection Report – pages 118 and 145 of TAP);

  8. The Claimant did not exercise the right of hearing on the draft Tax Inspection Report mentioned in the previous number (cf. Draft Tax Inspection Report and Final Tax Inspection Report – pages 64 onwards and page 145 of TAP);

  9. It appears from the mentioned Tax Inspection Report, textually and expressly the following:

"III.2.-CORPORATE INCOME TAX

(…)

III.2.4.- Year 2011

[Content of inspection report regarding 2011]

"

  1. By letter no. ..., dated March 26, 2013, the Claimant was notified of the Final Tax Inspection Report, of the DPIT2 Division, Team ... of the Tax Inspection Services of the Finance Directorate of … (cf. Pages 118 to 171 and page 209 of TAP);

  2. The said notification contains the following:

"Be hereby notified, in accordance with article 62 of the RTIP Code, of the Tax Inspection Report, which is attached as an integral part of the present notification, relating to the Service Order above referenced.

Of the merely arithmetic corrections made to the taxable matter and/or tax, without recourse to indirect assessment, whose grounds are contained in the said 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 period, if applicable.

From the present notification and its respective substantiation no complaint or contestation lies" (cf. Tax Inspection Report - Pages 118 to 171 and page 209 of TAP);

  1. As a result of the said inspection action, the Tax Inspection Services considered that the amount of €29,073.20, received on 17-05-2011, in the fiscal year 2011, as reimbursement for the realization of the initiatives of dynamization of local commerce within the framework of the "B…" program - Application no./Project no. ..., constitutes a patrimonial increment obtained for free, in accordance with the previous article 48 of the CITC, adding to Q07 of Form 22 of Corporate Income Tax, for having failed to comply with the rules of allocation of subsidies, given that the same would have been "influenced by the fiction of operations and values (…) was not used in the pursuit of the statutory purposes of the association, since it would have been applied in the payment of invoices that present strong indications of respecting operations, in whole or in part, fictitious" (cf Tax Inspection Report – pages 143 and 144 of TAP);

  2. Following the corrections mentioned in the previous number, an additional Corporate Income Tax assessment no. 2013 ... was issued on 2013-07-24, from which resulted tax to be paid of €6,334.69 and an assessment of compensatory interest no. 2013..., in the amount of €193.81, giving rise to the Statement of Account Adjustment no. 2013 ... (Cf. Documents nos. 2, 3 and 4 attached with the request for arbitral pronouncement, the contents of which are given as fully reproduced);

  3. On 2013-12-19, within the framework of the tax enforcement proceedings no. ...2013..., the Claimant proceeded to pay the above additional assessment, in the amount of €6,140.88, benefiting from the waiver of payment of compensatory interest (cf. Document no. 11 attached with the request for arbitral pronouncement and page 75 of the complaint proceedings);

  4. The Claimant filed an administrative complaint on 2014.01.28 (Cf. Page 1 of the complaint appendix);

  5. On the complaint there fell the Order of the Chief of the Finance Service of..., of 15.07.2014, of the following tenor:

"Considering the information at pages 92 to 100 and 108, which now become an integral part of the present decision order, in accordance with no. 1 and 2 of article 77 of the General Tax Law, I maintain the dismissal of the request, in accordance with and on the grounds contained in the draft decision, becoming the same decision final.

In compliance with the provision in no. 6 of article 77 of the General Tax Law, NOTIFY the complainant, sending it a copy not only of the present order but also of the information underlying it"(Cf. Page 109 of the complaint appendix);

  1. The Claimant was notified of the said order on 2014.07.17 (Cf. Pages 109 to 111 of the complaint appendix);

  2. The present request for arbitral pronouncement was entered into the CAAD computer system on 2014.10.15, (cf. CAAD computer system);

  3. The Claimant applied to the System of Incentives for Commerce Modernization Projects (hereinafter referred to as "B…") – 4th phase, Action C, to which was attributed Application no. 2009/..., with a commercial promotion project for the urban center of ...(cf. Document no. 8 attached by the Claimant –file designated as A... part 4);

  4. Following its approval, the Claimant entered into the Financial Incentives Concession Contract no. 2009/... relating to the investment project no. ..., approved within the framework of the 4th phase of B…-Action C, signed by IAPMEI, on 01.09.2009 (cf. Document no. 8 attached by the Claimant –file designated as A..._part 2);

  5. Under the terms of the said contract, it was granted a financial incentive, in the maximum amount of 58,146.40, taking the form of non-reimbursable incentive, corresponding to the application of the rate of 60% on eligible expenses (cf. Document no. 8 attached by the Claimant – file designated as A..._part 2);

  6. On 2010.12.23, an application for authorization to extend the deadline for submission of the Request for Final Payment relating to the Contract of Financial Incentives 2009/... - approved within the framework of the 4th phase of B…-Action C was submitted to the General Directorate of Economic Activities (GDEA) by the Claimant (cf. Document no. 8 attached by the Claimant –file designated as A..._part 2);

  7. That deadline which was granted until the end of the month of February 2011, considering the reasons therein explained (cf. Document no. 8 attached by the Claimant – file designated as A... _part 2);

  8. On 2010.12.27, the form relating to the Request for Payment against presentation of invoice relating to the Contract of Financial Incentives 2009/... - approved within the framework of the 4th phase of B…-Action C was submitted to the GDEA, presented by the Claimant (cf. Document no. 8 attached by the Claimant –file designated as A..._part 2);

  9. On 2011-03-01, an Application for Final Payment relating to the Contract of Financial Incentives 2009/...- approved within the framework of the 4th phase of A…-Action C was submitted to the GDEA, presented by the Claimant (cf. Document no. 8 attached by the Claimant –file designated as A..._part 1);

  10. On 17.05.2011, was paid to the Claimant, under the terms of the mentioned Contract of Financial Incentives no. 2009/... – B… – 4th phase, the amount of €29,073.20, as reimbursement of eligible expenses (cf. page 143 of TAP – Tax Inspection Report);

  11. Within the framework of the applications submitted by the Claimant a set of actions for dynamization of local commerce are proposed, describing what is intended to be done in each one of these and after the applications are approved there is always an entity responsible for the allocation of financial support, in the case of "B…", it has always been IAPMEI and GDEA (testimony of witness C...);

  12. To receive the amounts approved by the applications, the Claimant had to prove the realization of the actions, showing that they had equipment, photographs, posters and gifts that they offered (testimony of witness C...);

  13. After the realization of the dynamization actions, the companies providing services within the framework of the funded projects / applications invoiced and the Claimant had to liquidate and only then did they submit the request for reimbursement of payment, already with the invoice and receipt accounted for (testimony of witness C...);

  14. The request for payment of eligible expenses under the approved incentives was dependent on the assessment by the GDEA and after verifying that it was in order the IAPMEI proceeded to pay the financial incentives (testimony of witness C...);

  15. Each application has a single company responsible for the services to be provided in each one of them and all services provided within the framework of the Application/Project no. 2009/... – B… – 4th phase were provided and invoiced solely by company F..., Ltd. (testimony of witnesses C... and H... documents nos. 7 and 8 attached by the Claimant);

  16. D..., F..., Ltd. and E... were the companies that provided services to the Claimant within the framework of the financial incentives granted under B… (testimony of witnesses C... and H...);

  17. E... did not provide any service to the Claimant within the framework of the said Application/Project no. 2009/… – … – 4th phase (testimony of witnesses C... and H...);

  18. Within the framework of the said Application/Project no. 2009... – B… – 4th phase the actions of dynamization of local commerce were carried out on Father's Day, Mother's Day, Children's Day, dried fruit fair, in the Urban Center of … (testimony of witnesses C... and H... and document no. 8 attached by the Claimant);

  19. Initially the actions of dynamization of Gastronomic Week and Fall Festival were planned, but were replaced by the action "...", previously authorized by the GDEA (testimony of witness C... and document no. 8 attached by the Claimant);

  20. Some initiatives and dynamization actions are specific to some municipalities, but other actions such as "Father's Day", "Children's Day", "Mother's Day", "Valentine's Day" are carried out in all municipalities covered by the Claimant (testimony of witnesses C... and H..., document no. 8 attached by the Claimant);

  21. The Mascots were the same in the municipalities covered by the Claimant (testimony of witness C...);

  22. In the failures of the companies providing services to the Claimant, the employees of the latter restructured the services of the Claimant and filled those gaps, for example, when the animators hired by those companies failed to attend the events, the employees of the Claimant replaced them in their actions, went to distribute flyers, herbal plants or if it was necessary to carry out some task that was not foreseen, all employees of the Claimant executed it in a team if necessary (testimony of witnesses C... and H...);

  23. The Claimant provided all its facilities to the service-providing companies so they could store their material or set up dressing rooms for the animators to dress (testimony of witnesses C... and H...);

  24. The employees of the Claimant made and still make the assessment of needs, both in terms of training and dynamization actions, namely to select the square or street where the actions of dynamization of local commerce will be carried out, "which is what people like", as they are the ones who know the reality of the companies and the Claimant's suppliers do not have teams that go to the site "to carry out studies, diagnostics and assessments of needs" (testimony of witnesses C... and H...);

  25. The Claimant possessed at the time a magazine, printed in typography, now an computerized newsletter, which was distributed to its Members, other Associations and public entities, in which companies made advertising (testimony of witnesses C... and H...);

  26. It was the animators of the companies hired by the Claimant within the framework of each application/project financed under B… that took photographs during the actions and as they did not know the municipalities, in some situations it was found by the General Secretary of the Directorate that there were photographs that were mixed up in the files and drew attention, even because they had a guide with obligations to which they were bound (testimony of witness C...);

  27. The Secretary of the Claimant also took photographs of the mentioned dynamization actions (testimony of witness C...);

  28. For the Claimant to receive the payments of the incentives, the companies providing the services that executed the actions of dynamization of local commerce lent money to the Claimant because if the latter did not receive the amounts, they also would not receive payment for their invoices (testimony of witnesses C... and H...);

  29. When the Claimant received the amounts under B…, the return of the amounts advanced by those companies was proceeded with, which was a practice of all Associations (testimony of witness

  30. In the year 2011, the Claimant issued the following invoices to company D...:

[Invoice details]

(cf. Tax Inspection Report – page 137 of TAP);

  1. In the same year, it also issued the following invoices to company E...:

[Invoice details]

(cf. Tax Inspection Report – page 137 of TAP);

  1. E...was hired to carry out the actions of dynamization of local commerce, within the framework of which they hired animators and bought the necessary materials (testimony of witness C...);

Unproven Facts

No other facts were proven, the non-proof of which is relevant to the decision to be rendered.

The proven factuality was based on the administrative proceedings, the documents attached to the proceedings, which were not contested, as well as the position of the parties expressed in the pleadings and testimony of the witnesses listed by the Claimant, as noted in each one of the points of the matter of fact.

Indeed, witness C..., has been an employee of the Claimant for 26 years, currently performs the functions of general secretary of the latter, has followed various actions of dynamization of local commerce approved under B… and other programs of financial incentives, specifically, followed the actions of dynamization of local commerce of the urban center of …, approved within the framework of the application/project no. ...- B… – 4th phase.

Witness H... has worked for the Claimant since the year 2007, as an administrative, and has likewise followed the various actions of dynamization of local commerce approved under B… and other programs of financial incentives, promoted by the Claimant.

The testimony of the said witnesses was given in a clear and convincing manner, having reported to the Arbitral Tribunal their knowledge of the facts.

B) In Law

Regarding the lack of substantiation of the acts of assessment of Corporate Income Tax and compensatory interest

The Claimant invokes that in the acts of assessment of Corporate Income Tax and compensatory interest that were notified to it the grounds of fact and law that were at the origin of their issuance are not explicitly stated, as required by article 268, no. 3 of the CRP and art. 77 of the GTL, indicating only a set of values, without any reference to their nature and origin, not being perceptible to a normal recipient and to it.

Adding that, even if it is admitted that the assessment acts can be substantiated in some external document, it is certain that from the assessment acts, object of the present pronouncement, there is no reference, express or implicitly, either to the Tax Inspection Report ("TIR") or to another document contemporaneous or prior to those, for which reason, being tainted with a formal defect, due to lack of substantiation, they should be annulled accordingly.

The Respondent contests by alleging, in sum, that the above assessments are substantiated on the conclusions contained in the final report of the tax inspection, which was previously and validly notified to the Claimant.

Let us see.

As is well known, in accordance with the provision of art. 268, no. 3 of the CRP "administrative acts are subject to notification to interested parties, in the form provided by law, and require express and accessible substantiation when they affect rights or legally protected interests."

Article 125, no. 1 of the APC (in the version at the time of the facts) provides that "substantiation must be express, through a brief exposition of the grounds of fact and law of the decision, being able to consist in a mere declaration of concordance with the grounds of previous opinions, information or proposals, which will constitute in this case an integral part of the respective act."

In turn, article 77, no. 1 of the GTL prescribes that "the decision of the procedure is always substantiated by means of a brief exposition of the reasons of fact and law that motivated it, being able the substantiation to consist in a mere declaration of concordance with the grounds of previous opinions, information or proposals, including those that form part of the tax inspection report", establishing in its no. 2 that "the substantiation of tax acts may be carried out in summary form, should always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax."

Article 63, no. 1 of the RTPT also provides that "the tax acts or in tax matters that result from the report may be substantiated in its conclusions, through adhesion or concordance with these (…)."

From the established factuality it results that from the notification of the TIR it expressly appears that the Claimant will be notified of the "respective assessment" and that the grounds of the arithmetic correction made to the taxable matter are contained in that report and that from that "notification and respective substantiation no complaint lies."

It likewise results from the established factuality that from the notification of the act of assessment of Corporate Income Tax of the year 2011 it expressly appears that the substantiation was already transmitted.

The correction made to the Corporate Income Tax of the fiscal year 2011, in the amount of €29,073.20, resulted from the external inspection action to which the Claimant was subjected, for which reason the assessment acts, object of the present pronouncement, are substantiated on the conclusions contained in the TIR, which was previously and validly notified to the Claimant, taking thus knowledge of the grounds of those acts, as results from the established factuality, in accordance with the provision of no. 1 of art. 77 of the GTL and no. 1 of art. 63 of the RTPT, with no need thus to repeat in the assessment acts the grounds of the corrections previously notified within the framework of the inspection procedure. For which the duty of communication of the grounds of the said acts was complied with, in harmony with the requirement of no. 2 of art. 36 of the TPPT.

So much so that the Claimant did not fail to lodge a complaint and present the present request for arbitral pronouncement.

Moreover, the Claimant in the face of the lack of communication or the defective non-compliance of the duty of communication of the grounds of the assessment acts (which in the case of the proceedings did not occur), which contends with the validity of the act of notification and not with the legality of the notified act (and only the lack of substantiation and not the lack of notification of the substantiation of the assessment act is what constitutes a defect susceptible of generating the annulment of that assessment act) could make use of the faculty provided for in no. 1 of art. 37 of the TPPT, which provides that "If the communication of the decision in tax matters does not contain the substantiation legally required, the indication of the means of reaction against the notified act or other requirements required by tax laws, the interested party may, within 30 days or within the period for complaint, appeal or contestation or other judicial means that from this decision lies, if shorter, request the notification of the requirements that have been omitted or the passing of a certificate containing them, exempt from any payment". In this situation, the period for the complaint, appeal, contestation or other judicial means would be counted from the notification or delivery of the certificate that has been requested, in accordance with no. 2 of art. 37 of the TPPT.

Which did not happen.

In view of the foregoing, the formal defect of lack of substantiation alleged by the Claimant is without merit.

Regarding the omission of an essential legal formality

The Claimant, as a consequence of the previous defect alleged by it, that is, unaware of the grounds underlying the acts in question, because they do not appear in those acts, nor is there any express reference to another document contemporaneous or prior to the same acts, alleges that it was not notified to exercise the right of prior hearing, provided in subparagraph a) of no. 1 of article 60 of the GTL. For which reason, the violation of this norm will entail the annulment of the aforesaid assessment acts, due to omission of an essential legal formality.

Let us see.

It results from what was previously stated that the Claimant was notified of the grounds of the assessment acts object of the present pronouncement, contained in the conclusions of the TIR, following an external inspection procedure of which the Claimant likewise had knowledge.

And given the established factuality, the Claimant was notified of the draft of the mentioned TIR, to exercise its respective right of prior hearing, in accordance with subparagraph e) of no. 1 of article 60 of the GTL, not having the same exercised that right.

For which reason, in accordance with no. 3 of article 60 of the GTL, having been given the opportunity to the Claimant to pronounce itself on the TIR before its conclusions, its hearing is waived before the assessment, not having been violated the disposition contained in subparagraph a) of no. 1 of that norm.

In such terms the allegation of omission of an essential legal formality is likewise without merit.

Regarding the indicia collected

Under the heading "Introductory Considerations" the Claimant begins by alleging that the indicia collected by the Tax Inspection Services (TIS), "either isolated or globally", are not decisive to conclude in a founded manner of the non-existence of the operations titulated by the invoices in question or that the Claimant maintained a fraudulent relationship with its suppliers, as no elements or facts have been brought that are clear and unequivocally demonstrative of the non-existence of the services contained in those invoices, the decision of the AT being based on mere value judgments that have no adherence to reality. Thus, not only do the corrections rest on error regarding the factual and legal assumptions, but the decision of the AT violates the rules relating to the burden of proof, provided for in article 74 of the GTL and suffers from the defect of lack of legally required substantiation, violating the provisions of articles 268, no. 3 of the CRP and 77 of the GTL.

Although the Claimant further on in its petition devotes a chapter to the defects alleged (beginning by alleging the lack of substantiation of the Tax Inspection Report), taking into account the provision of article 124 of the TPPT, applicable subsidiarily by force of the provision of subparagraph a) of no. 1 of article 29 of the LRATM, let us appreciate the said first defect, because it is the one that best protects the interests of the latter.

The Tax Inspection Services came to correct the taxable matter of Corporate Income Tax, in the amount of €29,073.20, in the fiscal year 2011, for understanding that, not having complied with "the rules of allocation of subsidies, given that the same have been influenced by the fiction of operations and values", that amount received, within the framework of the Application no. 2009/... B…, constitutes a patrimonial increment obtained for free, in accordance with article 48 of the CITC (in the version in force at the time of the facts), given that it was not used in "the pursuit of the statutory purposes of the association, since it would have been applied in the payment of invoices that present strong indications of respecting operations, in whole or in part, fictitious" (bold ours).

In accordance with no. 1 of article 75 of the GTL, the declarations, as well as the data and calculations entered in the accounting or records of the taxpayer are presumed to be true and in good faith, that presumption of truthfulness ceasing, namely, in the face of the existence of founded indicia that such elements of the accounting or records do not reflect or prevent the knowledge of the real taxable matter of the taxpayer, as provided in no. 2 of the same norm.

As is well known, when the AT considers that the operations contained in certain invoices registered in the accounting of the taxpayer do not correspond to real operations, the rules of the burden of proof of article 74 of the GTL apply, with the burden falling on the former to prove that there are serious indicia that such operations do not correspond to reality, imposing that the facts collected, isolated or jointly, be sufficiently strong to undermine the credibility of its records. And only in the affirmative case does the burden of proof of the reality of the economic operations rest on the taxpayer (see, among others, the judgments of the Northern Tax Court of 30-04-2015, case no. 00599/10.3BEPNF and of the Southern Tax Court of 05-02-2015, case no. 08097/14).

Let us then see if the AT proved the verification of serious indicia that the invoices do not correspond to real operations.

As far as the Corporate Income Tax of the fiscal year 2011 is concerned, in accordance with the content of the TIR (page 20 and 21 – cf. no. 10 of the factual), "we witness the inflation of costs with the actions applying for public funding, to maximize the almost sole source of income of the Associations, which according to what has been transmitted to us, hardly will be able to meet their current expenses. If we analyze the sources of income of A…, we clearly see that it does not have the capacity to meet the part of the costs not participated in the initiatives in question, which we cannot forget, are at least 40%.

(…)

From the foregoing it appears that the AT considers that the invoices issued by the Claimant, in the fiscal year 2011, to companies D... and E… served to inflate the costs with the actions applying for public funding, maximizing the almost sole source of income of the Association, since it does not have the capacity to support the part of the costs of the initiatives not financed by the subsidies, within the framework of B…, in 40% of the expenses, and that the invoicing issued to E... served to mitigate the effects of the invoicing, with indications of titulating fictitious operations, issued by E....

The fact that the Associations are going through economic difficulties and that the Claimant does not have the capacity to "meet the part of the costs not participated in the initiatives in question" are far from being sufficiently sure indicia, which isolated or jointly with other indicia, allow, objectively and in light of common experience, to conclude that the services provided are fictitious, either those contained in the invoicing issued by the Claimant, or that issued by E....

The same applies with respect to the fact that the Claimant issued declarations of debt in favor of E... and the financial movements registered between them, since such an indication also does not allow concluding with a high and solid probability that the operations in question are not real, especially because it results from the factual that, at times, the suppliers themselves "would advance" the amounts to the Claimant, which would be subsequently returned to them after the receipt of the financial incentives.

It results from the factual that the amount received as reimbursement for the realization of the initiatives of dynamization of local commerce in the fiscal year 2011, respects the application/project no. 2009/... of the framework of the B… program. It likewise results from the established factuality that the actions of dynamization of local commerce developed within the framework of the said application, in the municipality of …, such as Father's Day, dried fruit fair, Mother's Day were carried out in the year 2010 and that the company that provided services to the Claimant within the framework of such application was F... and not E....

For which reason, the fact that the entry into the bank account of the Claimant of the financial incentive was verified in the fiscal year in question, which was granted under the terms of the mentioned Application, does not allow the AT to conclude that "the reason for being of these intrigues is the obtaining of subsidies, for the receipt of which there is a need to prove the payments co-financed, since the services provided by E... are not even related to the amount received by the Claimant in the fiscal year 2011, but rather those provided by company F....

Let us further see the other indicia collected by the Tax Inspection Services that led to consider that the invoicing issued by the service providers does not title real operations, because, in accordance with what is stated in the TIR, they respect all fiscal years, including that of 2011 (cf. no. 10 of the factual – pages 21 to 26 of the TIR).

As for the indication that the "financial movements inherent to those relationships, already previously described, respect to mere exchanges of payment, with no actual payments of the services in question being verified" such as stated above, by itself, objectively and analyzed in light of the rules of common experience does not allow concluding in a safe and solid manner that the invoicing issued by the service providers does not correspond to real operations. All the more so since the documents attached by the TIS respect the year 2008 and not 2011 (cf. annex 1 of the TIR).

As far as the indication of "the proofs of realization of the events having been manipulated", such an indication – elements that formed part of "some of the files/projects prepared and applying for subsidies" that were the subject of more detailed attention by the TIS, analyzed objectively and in light of the rules of common experience, does not allow concluding that the invoicing of the service providers does not correspond to real operations, nor that the actions of dynamization of local commerce did not take place, since from the documents attached by the TIS (Annex II) such conclusion cannot be drawn. All the more so because, as results from the factual, in accordance with the testimony of witness C..., some irregularities were detected, such as the exchange of photographs, having been asked for their rectification, which calls into question the credibility of such indication, constituting rather an indicator that errors may have existed in the preparation of the said files delivered to the competent authorities.

As far as the indication of the specimens of flyers, pamphlets or other means of advertising not reflecting "the expected characteristics in this type of products, such as the type of paper applied and even the printing and inks used for that purpose" besides not being supported even in any factuality, does not constitute any sure and consistent indication that would allow concluding that the events were not carried out and that the invoicing of the service providers does not correspond to real operations.

The same applies with respect to the indication of the "existence of duplication of costs inter-projects", since it does not allow concluding with certainty that the invoicing of the service providers does not correspond to real operations, especially because, encompassing the Claimant the municipalities of …, …, ... and …, there was naturally a need to carry out the same actions of dynamization of local commerce in the said municipalities, such as Mother's Day, Father's Day, Children's Day, by requirement of the associates themselves, as results from the factual, thus ruling out any credibility as an indication that the invoicing issued by the service providers does not title real operations.

As far as the indication that "the own inducement to the invoicing indicated as false by A..., in an attempt to approach/compensation of costs and tax to be paid into the State coffers" in the light of what was said above, the TIS did not collect indicia that translate with a strong probability that the services invoiced by the Claimant do not correspond to real operations. Indeed, such "indication" is nothing more than a conclusion not supported in any material factuality.

All the more so since it resulted from the factual that, whenever necessary, the employees of the Claimant executed the services lacking by the service providers, namely when the animators were absent, they proceeded to the distribution of flyers, thus providing administrative and logistical support to the events.

It likewise results from the factual that the Claimant provided its facilities to the service providers to store their material, for which reason it invoiced them for the provision of the facilities of the latter, for which it removes any credibility as an indicator of false invoicing.

Thus not relevant is the "installed capacity, human and technical, that A... should possess and present in order to be able to provide the services invoiced to the entities" pointed out by the TIS, nor by itself does it allow concluding with a high probability that the invoicing does not title real operations.

The same applies with respect to the "capacity for A... to meet the commitment undertaken before the B… program itself financing the part that belongs to it of the cost assumed by the different projects", because, as stated above, such an indication does not allow concluding, objectively and in light of common experience, with a high probability that the invoicing does not title real operations.

And it is not by the fact that there is a criminal process underway, in which the Claimant has not yet been tried and condemned that, naturally, by itself is not an indication that the services were not provided and that the actions did not occur, as the respondent entity argues.

As is evident, for the reasons set out above, the elements gathered by the AT – whether by themselves or together - are fragile, insufficient and little consistent, not resting on sufficiently secure indicia that would allow concluding that the invoicing of the service providers does not title real operations.

Being the correction of the additional Corporate Income Tax assessment of the fiscal year 2011 grounded in the consideration of the financial incentive, in the amount of €29,073.20, as a patrimonial increment obtained for free, in accordance with article 48 of the CITC (in the version in force at the time of the facts), since that amount would have been applied "in the payment of invoices that present strong indications of respecting operations, in whole or in part, fictitious" and was not used in the pursuit of statutory purposes, it was the AT that had the burden of proving the verification of the legal conditions that legitimize its action, that is, it was not demonstrated that the invoices issued by the service providers did not correspond to real operations.

For which reason, the additional Corporate Income Tax assessment, object of the present process of arbitral pronouncement, is illegal, due to violation of the provision of article 74, no. 1 of the GTL, and should, therefore, be annulled (article 135 of the APC, of subsidiary application ex vi article 29, no. 1, subparagraphs a) and d) of the LRATM). Consequently, the annulment of the tax determines likewise the annulment of the act of assessment of compensatory interest, since if that tax is not due, compensatory interest cannot be demanded.

Thus the appreciation of the other issues raised by the Claimant is prejudiced, having been declared the illegality of the above identified assessments, due to substantive defect that prevents the renewal of the acts, effectively ensuring the protection of the rights of the Claimant, in harmony with the requirement of article 124 of the TPPT, subsidiarily applicable by force of the provision of subparagraph a) of no. 1 of article 29 of the LRATM.

III. Regarding the Restitution of Tax Paid and Indemnity Interest

The Claimant further requests the restitution of the tax already paid, increased by the payment of indemnity interest.

Let us see.

Article 24, subparagraph b), no. 1 of the LRATM provides that the AT must "restore the situation that would have existed if the tax act object of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose", in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period set for the spontaneous execution of the sentences of the judicial tax courts, in the case that no appeal has been filed or the arbitral decision that fell on the merits of the claim has been contested.

Moreover, article 100 of the GTL - under the heading "effects of the decision favorable to the taxpayer" - already determines that the "tax administration is obliged, in case of total or partial success of administrative complaints or appeals, or of a judicial process in favor of the taxpayer, to the immediate and full restitution of the situation that would have existed if the illegality had not been committed, including the payment of indemnity interest, in the terms and conditions provided by law".

For which reason, in view of the provision of article 100 of the GTL and subparagraph b) of no. 1 of article 24 of the LRATM, it is unequivocal that in this case the Claimant is entitled to the restitution of the tax paid, following the declaration of illegality of the assessment acts, object of the pronouncement of the present proceedings.

Let us see regarding the request for payment of indemnity interest.

No. 5 of the cited article 24 of the LRATM also provides that "interest is due, regardless of its nature, in accordance with the provisions of the general tax law and in the Tax Procedure and Process Code". It results from the mentioned legal provision that in case of success of the arbitral decision in favor of the taxpayer there will be place for the payment of indemnity interest, in accordance with no. 1 and 2 of article 43 and article 100 of the GTL.

No. 1 of article 43 of the GTL establishes that indemnity interest is "due when it is determined, in administrative complaint or judicial contestation, that there was error attributable to the services from which resulted the payment of the tax debt in an amount higher than the legally due". Thus, as Jorge Lopes de Sousa tells us, in "Guide to Tax Arbitration", Almedina, March 2013, page 223, the right to indemnity interest depends on the verification of the following requirements:

"- that there is an error in an act of assessment of a tax;

  • that it be attributable to the services (directly or by way of generic guidance);

  • that the existence of that error is determined in a process of administrative complaint or judicial contestation;

  • that from that error resulted the payment of a tax debt in an amount higher than the legally due".

In the case in question, there is no doubt that the tax acts of assessment of Corporate Income Tax and compensatory interest, object of the present arbitral decision, came about due to an error attributable to the services, that is, error regarding the assumptions, given the considerations described above, and for which reference is made. From that error resulted the payment of the tax, as the matter given as proven.

For which reason, with all the requirements being met, the Claimant will be entitled to the payment of indemnity interest, which will be calculated and recorded in accordance with article 61 of the TPPT, that is, from the date on which the Claimant made the payment of the tax, calculated on the basis of the amounts paid until the date of complete reimbursement of the amounts paid, at the legal rate.

V. DECISION

In these terms and in the substantiation exposed, the present Arbitral Tribunal decides:

a) To judge well-founded the request for declaration of illegality of the act of assessment of Corporate Income Tax of the fiscal year 2011 and the respective act of assessment of compensatory interest, in the total amount of €6,334.69, with the consequent annulment of the same;

b) To condemn the Tax and Customs Authority to reimburse the Claimant for the amounts that it paid;

c) To condemn the Tax and Customs Authority to pay to the Claimant indemnity interest, at the legal rate, counted from the date on which it made the payment until the date of complete reimbursement of those amounts.

The value of the proceedings is fixed at €6,334.69, in accordance with the provision of subparagraph a) of no. 1 of article 97-A of the TPPT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings, as well as article 306 of the CPC.

Costs to be charged to the Respondent Entity, in the amount of €612.00, in accordance with the provision of no. 4 of article 22 of the LRATM and no. 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached to the same Regulation.

Notify.

Lisbon, December 21, 2015.

The Arbitrator,

Conceição Pinto Rosa

[Text prepared by computer, in accordance with article 131, no. 5 of the Civil Procedure Code, applicable by referral of article 29, no. 1, subparagraph e) of the LRATM]

Frequently Asked Questions

Automatically Created

What are the indicators of false invoicing (faturação falsa) under Portuguese IRC tax law?
Under Portuguese IRC law, indicators of false invoicing (indícios de faturação falsa) include circumstances suggesting that invoiced transactions do not correspond to real operations. These may include: inability to verify that services were actually performed; lack of documentary evidence supporting the claimed transactions; contradictions between invoices and operational reality; suspicious patterns in supplier relationships; absence of the means, personnel, or capacity to perform the invoiced services; and failure to demonstrate the business purpose or economic substance of transactions. The Tax Authority must identify specific, objective indicators rather than mere suspicions. These indicators serve as the basis for shifting the evidential burden to the taxpayer to prove the transactions were genuine.
Who bears the burden of proof when the Tax Authority alleges false invoicing in IRC assessments?
The burden of proof in false invoicing cases follows a two-stage framework under Portuguese tax law. Initially, Article 74 of the General Tax Law (GTL) requires the Tax Authority to prove the constitutive facts of its right to tax. In false invoicing allegations, the Authority must present sufficient indicative evidence (indícios) suggesting the invoices do not represent real operations. Once the Tax Authority establishes a prima facie case through objective indicators, the burden shifts to the taxpayer to prove the reality and business substance of the questioned transactions. The taxpayer must demonstrate through documentation, witness testimony, and other evidence that the services were actually rendered or goods delivered. This burden-shifting mechanism balances the Authority's investigative duties with the taxpayer's superior access to information about its own operations.
Can an IRC tax assessment be annulled for lack of proper legal and factual justification (fundamentação)?
Yes, an IRC tax assessment can be annulled for lack of proper substantiation (fundamentação). Article 268(3) of the Portuguese Constitution requires all administrative acts to be reasoned, and Article 77 of the GTL specifically mandates that tax assessment acts must state the factual and legal grounds supporting them. The substantiation must be sufficient to allow the taxpayer to understand the basis for the assessment and effectively exercise defense rights. A tax act lacking adequate explanation of the facts found, evidence relied upon, and legal provisions applied constitutes a formal defect (vício formal) that renders the act invalid. The substantiation requirement serves constitutional principles of transparency, accountability, and protection of taxpayer rights. Courts and arbitral tribunals will annul assessments that contain merely conclusory statements without explaining the reasoning process.
What rights does a taxpayer have to a prior hearing (direito de audição) before an IRC tax reassessment?
Portuguese taxpayers have a constitutional and statutory right to a prior hearing (direito de audição prévia) before IRC tax reassessments, guaranteed by Article 60(1)(a) of the General Tax Law. This right applies when the Tax Authority intends to issue an assessment act based on facts or legal conclusions different from those declared by the taxpayer. The prior hearing allows taxpayers to present their position, submit evidence, and contest the Authority's preliminary findings before a final decision is made. The Tax Authority must notify the taxpayer of the grounds for the intended assessment and provide a reasonable deadline for response. Omission of this procedural step constitutes an omission of an essential legal formality, a substantive defect that renders the subsequent tax act invalid and subject to annulment. This guarantee ensures administrative fairness and effective defense rights.
Are compensatory interest charges (juros compensatórios) valid when the taxpayer is not at fault for the delay in IRC settlement?
No, compensatory interest charges (juros compensatórios) are not valid when the taxpayer is not at fault for the delay in IRC tax settlement. Article 35 of the General Tax Law establishes two cumulative requirements for assessing compensatory interest: (1) there must be a delay between when the tax should have been paid and when it was actually assessed, and (2) this delay must be attributable to the taxpayer's conduct or fault. Both conditions must be satisfied. If the delay results from the Tax Authority's own inspection procedures, administrative processing times, or other factors not caused by the taxpayer's actions or omissions, compensatory interest cannot legally be charged. The taxpayer bears no responsibility for delays inherent in the Authority's verification processes. Assessments of compensatory interest that fail to demonstrate taxpayer fault are illegal and subject to annulment.