Process: 783/2014-T

Date: September 21, 2015

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 783/2014-T) involves a challenge by a pastry products company against an IRC assessment of €91,795.12 for fiscal year 2010. The tax dispute centers on €306,910.38 in inventory write-offs for perishable goods that the Tax Authority disallowed. The company, which produces and sells bread and cakes to catering and trading companies, argued that losses of quickly degrading merchandise (pastry, semi-frozen products, eggs, cream) are normal and recurring in their business activity. The taxpayer sent write-off communications to the Tax Office with 5-day advance notice, including detailed lists of quantities and values to be destroyed. However, the Tax Authority rejected these deductions under Article 38 of the Corporate Income Tax Code (CIRC), noting that: (1) communications were not certified by any independent person, (2) there was no evidence that shelf-life periods had expired for many finished products, and (3) supporting documentation was not properly maintained in tax records. The company's defense argued that literal compliance with Article 38 CIRC was impossible given the nature of their perishable goods business, and that they complied to the maximum extent feasible. The case examines the tension between strict documentary requirements for inventory write-offs and the practical realities of businesses dealing with highly perishable products. The arbitral tribunal heard witness testimony confirming the recurring nature of inventory losses and the regular return of unsold products by customers exceeding shelf-life limits, raising important questions about proportionality and reasonable interpretation of tax compliance obligations for specific business sectors.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Arbitrator President), Nuno Maldonado de Sousa and Luís Menezes Leitão, appointed by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree as follows:

1. Report

On 24 November 2014, A… Food Products Commerce, Ltd., Tax Number …, with registered office at …, n.º …, …, …, filed a petition for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the assessment act for Corporate Income Tax (IRC) and compensatory interest relating to the fiscal year 2010, in the total amount of €91,795.12.

To substantiate its petition, the Claimant alleges, in summary, that the factual assumptions of Article 38 of the Corporate Income Tax Code (CIRC), as applied in the assessment against which it protests, are not met, and that, even if they were, in view of the concrete circumstances of its activity, literal compliance with that provision would be impossible, and the Claimant has, to the extent possible, complied therewith.

On 24-11-2011, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant failed to appoint an arbitrator, wherefore, pursuant to the provisions of paragraph a) of Article 6(2) and paragraph a) of Article 11(1) of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 15-11-2015, the parties were notified of these appointments and expressed no intention to challenge any of them.

In accordance with the provisions of paragraph c) of Article 11(1) of the RJAT, the Collective Arbitral Tribunal was constituted on 30-01-2015.

On 02-03-2015, the Respondent, duly notified for this purpose, filed its reply, defending itself solely by way of challenge.

On 07-05-2015, the hearing referred to in Article 18 of the RJAT took place, where the witnesses presented by the Claimant were examined, and the period referred to in Article 21(1) of the RJAT was extended at that time.

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

A period of 30 days was set for the issuance of the final decision, following the submission of arguments by the AT.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2(1)(a), 5 and 6(1) of the RJAT.

The parties have legal capacity and standing, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March.

The proceedings are not affected by any nullities.

Thus, there is no obstacle to the examination of the merits of the case.

Having considered all of the foregoing, it is necessary to render judgment.

2. Decision

3. Factual Matters

3.1.1. Facts Determined to be Proven

The following facts were established in these proceedings:

A. The Claimant is a commercial company whose principal activity is the production and sale of pastry products, namely bread and all types of cakes, and its production is intended to be marketed, for the most part in packaged form. [1st RI[1] and PA1[2], p. 4].

B. The Claimant's customers are catering companies or food product trading companies. [1st RI and PA, p. 4].

C. The Claimant has its registered office at … – …]. [2nd RI; PA1, p. 3].

D. The Claimant is subject to the normal VAT regime, on a monthly basis. [3rd RI and PA1, p. 4].

E. A tax inspection action was conducted by the AT[3] on the Claimant, pursuant to the service order identified as OI 20140 …, which covered the fiscal year 2010, and its report states, among other things, that: [4th and 5th RI]

a. In the fiscal year 2010, the Claimant recorded losses on inventory/adjustment of stock relating to write-offs of merchandise in the amount of €306,910.38; [PA1, p. 6]

b. The products, quantities and values are similar in each write-off and the write-off communications are not certified by any person independent of the company's management bodies; [PA1, p. 6]

F. The majority of the products included in the inventory write-offs relate to finished products, produced and packaged in the company, with an established shelf life, but with no evidence that this period had expired; [PA1, p.7]

G. The Claimant sent, with 5 days' notice, the corresponding write-off communications to the Tax Office in the area where the write-offs would take place, together with detailed lists showing the quantities and values of the goods to be written off; [PA1, p.7]

a. The supporting documentation for the write-offs is not part of the tax documentation process; [PA1, p.7]

b. Copies of all requests sent to the Tax Office relating to the write-offs are included in the proceedings; [PA1, p.7]

H. It concludes that the corrected taxable profit determined by purely arithmetical corrections to the taxable matter for the fiscal year 2010 is:

TAXABLE RESULT 2010
Declared Taxable Result €70,585.64
Amount to be Corrected €306,910.38
Corrected Taxable Result €377,496.02

[PA1, p.13]

I. It also concludes with respect to VAT that the Claimant did not pay into the State treasury the tax that should have been assessed with respect to inventory adjustments/write-offs, in the amount of €36,934.62; [PA1, pp.14-15]

J. The tax inspection report was subject to a confirmation order by the Team Leader and agreement by the Division Chief, acting under authority delegated by the Deputy Director of Finance, which determined the alteration of the tax loss/taxable profit/taxable matter as proposed [13th RI; doc. 1 RI, pp. 2-3].

K. In the fiscal year 2010, the Claimant recorded losses on inventory/adjustment of stock relating to write-offs of merchandise in the amount of €306,910.38 € [7th RI; PA1, p. 6].

L. The Claimant sent to the Tax Office of the area where the write-offs would take place the corresponding write-off communications, together with detailed lists showing the quantities and values of the goods to be written off. [8th and 49th RI; PA1, p.7].

M. The write-off communications sent by the Claimant to the Tax Office stated the scheduled date and time and the list of goods to be destroyed and written off. [49th RI; PA2, pp. 3-31].

N. The Claimant was notified of the Corporate Income Tax assessment for the fiscal year 2010 made on 11-09-2014, from which resulted an amount payable by 12-11-2014 in the sum of €91,795.12, which includes €10,463.87 of compensatory interest for the period from 04-06-2011 to 20-08-2014. [16th RI and its doc. 2].

O. In the Claimant's activity, losses of merchandise, namely pastry cakes, semi-frozen products, eggs and cream that quickly degrade and spoil or exceed quality and shelf-life limits, are normal and recurring. [28th-30th RI and witness testimony].

P. In the Claimant's activity, there are items that are returned by customers because they were not sold by them within their respective shelf-life periods [31st RI and witness testimony].

Q. The Claimant makes inventory adjustments for losses of easily and quickly perishable merchandise on a regular and periodic basis [32nd RI, witness testimony].

R. The inventory adjustments recorded by the Claimant, which resulted in a deduction in calculating taxable profit, corresponded to the communications referred to in the documents contained in pages 3 to 16 and 19 to 31 of part 2 of the administrative proceedings. [34th RI; PA1, p. 7 and PA2, pp. cited].

S. The Claimant recorded these losses accounting-wise as inventory losses (shortages) by moving accounts 38 and 68 [39th RI, witness testimony].

T. With respect to the destruction of the merchandise referred to in the preceding point and dated 26-06-2010, minutes were drawn up, which were signed by the persons identified therein as having witnessed it [35th, 45th and 51st RI; PA2, p. 17].

U. The witnesses who signed the aforementioned document dated 26-06-2010 are identified therein as the managers of the Claimant B… and C… [41st R-AT[4]; PA2, p. 17].

V. In each of the fiscal years between 2008 and 2011, the Claimant declared inventory adjustments whose values ranged between €270,000.00 and €320,000.00, representing between 17.00% and 24.79% of the total of opening inventory plus purchases [RIT[5], p. 5].

W. In the case of fiscal year 2010, the Claimant now declared inventory adjustments in the amount of €320,200.98 which represent 18.10% of the total of opening inventory plus purchases [RIT, p. 6].

3.1.2. Facts Determined Not to be Proven

In point 44 of its RI, the Claimant affirmed that the merchandise listed in the schedules attached to the write-off notification requests and to the respective destruction minutes were destroyed and not marketed. The Claimant produced no evidence regarding the actual destruction of the merchandise it claims to have written off, as no testimony was given by any of the parties involved in the aforementioned communications. This assertion of fact brought by the Claimant is in some way challenged by the AT in its Response (points 66 to 72), where it argues that the procedures used by the Claimant do not permit such an assertion, since they are not structured to ensure rigorous identification and control of the destroyed materials. It supports its position on experience gained on 13-10-2012, when tax inspectors D… and E… visited the company as a result of a prior request submitted by the Claimant to verify the write-off of pastry products, and they found the existence of several garbage containers on the premises and that within them products were indiscriminately mixed, making it impossible to compare the products and their respective quantities existing within the plastic containers with the list sent by the taxpayer to the tax office, and they also obtained information from the company manager C… that this is how they typically gather the waste so it can be collected by municipal services in 1,000-liter containers. The information from the aforementioned inspectors constitutes document no. 1 attached with the R-AT, which was not challenged. Also, witness F…, a graduate in biological and food engineering who carries out product control for the Claimant, stated that excesses of products and improper raw materials constitute waste, separated daily for deposit in special containers for fortnightly removal by Municipal Services. It is evident that the methodology used does not permit verification of which products were destroyed at the exact moment when this technically occurs. Having produced no evidence in support of its version, it is not possible to consider this matter as established (nor the contrary). An exception is made for the write-off of products conducted on 26-06-2010, reported in a document contained in PA2 (p. 17), whose authenticity was not challenged by the AT.

In point 67 of the RI, the Claimant states that the communications relating to write-offs form part of the tax documentation process. The AT expressly challenges this assertion in point 18. The Claimant adds (point 68) that the AT had access to the documents during the inspection action and extracted copies thereof. By examining the administrative proceedings, it appears that they contain copies of the requests, with signs of having been extracted from copies in the Claimant's accounting files (note the numbering and traces of stamps in PA2, pp. 3-31, particularly pp. 6, 7 and 9). However, it cannot be stated with the necessary certainty that such documents were part of the tax documentation process organized pursuant to Article 130 of the CIRC, or any other filing folder of the Claimant. In any case, the Claimant, intending to demonstrate what it alleged, should have attached the Tax Documentation Process in question, which would have clarified any doubt.

3.1.3. Formation of the Court's Conviction Regarding Proven Facts

The tribunal's conviction was based on the documentary evidence in the proceedings and on the position taken with respect to each fact by the parties in their pleadings, duly identified[6].

In particular, the following elements were also relevant regarding the following facts:

  1. Fact K: The witnesses G…, H… and I…, who has been the Claimant's official accountant for more than 10 years, testified in the same sense and with knowledge on the subject.

  2. Fact L: Witnesses G… and H… testified in a consistent manner, with knowledge on the matter.

  3. Facts M and O: Witness I…, who had knowledge of the subject, testified in the manner stated.

4. Legal Matters

Contrary to the framing done by the AT, the Claimant does not challenge the legality of the assessments in question in the present proceedings on the basis of the defect of lack of reasoning, but rather contests the conformity of the aforementioned tax acts with the law, by reason of errors in their factual and legal assumptions.

Indeed, the Claimant does not challenge the exposition of the decision-making process followed by the AT in the acts against which it protests, but rather, grasping and understanding it, disagrees with it, alleging, in sum, that the process of applying the law to the facts undertaken therein was incorrect.

Let us see if it is correct.

In the part relating to decision-making reasoning, and to the extent relevant to the present proceedings, following what is set out in point E.d. of the facts above determined as proven, the RIT contains the following:

"However, such period becomes too short to allow the Tax Administration Services to proceed with on-site verification of such write-offs, whereby the taxpayer should comply with the period stipulated in Article 38 of the CIRC, used to make such communications in analogous cases.

Thus, it became impossible to verify the corresponding write-offs, as well as the actual destruction/write-off of the goods listed in the detailed statements of those write-offs.

It should also be noted that these adjustments do not form part of the tax documentation process pursuant to Article 130 of the CIRC.

Given that such expenses are not considered 'demonstrably indispensable for the realization of income subject to tax or for the maintenance of the income-producing source', pursuant to Article 23 of the CIRC, and since the requirements stipulated in Article 28 of the CIRC have not been met, for such adjustments to be considered as an expense of the tax period, they must be added back to the Taxable Result of fiscal year 2010, with their amount being €306,910.38 (See Annex I).

It is noted that copies of all requests sent to the Tax Office relating to write-offs are found in the working papers attached to the proceedings."

As appears most clearly from reading the RIT, the AT's decision is based fundamentally on the application to the case of Article 38 of the CIRC, in force at the time of the facts, and on the Claimant's non-compliance with either the period fixed in Article 38(3)(c) concerning the notification of the write-offs performed, or the documentation obligation imposed by Article 38(6) thereof, from which it concluded that the assumptions of Articles 28 and 23 of the CIRC had not been met.

The text of Article 38 of the CIRC at issue in the present proceedings was as follows:

"Article 38
Exceptional Devaluations

1 — Exceptional devaluations referred to in paragraph c) of Article 35(1) arising from abnormal causes duly proven, namely disasters, natural phenomena, exceptionally rapid technical innovations or significant adverse changes in the legal context, may be accepted as impairment losses.

2 - For the purposes of the preceding paragraph, the taxpayer must obtain acceptance from the Directorate-General of Taxes, by means of a duly reasoned statement, to be submitted by the end of the first month of the tax period following that in which the facts occurred that determined the exceptional devaluations, accompanied by supporting documentation thereof, namely the decision of the competent management body confirming those facts, justification of the respective amount, as well as indication of the destination to be given to the assets, when the physical write-off, dismantling, abandonment or write-off thereof does not occur in the same tax period.

3 - When the facts that determined the exceptional devaluations of assets and the physical write-off, dismantling, abandonment or write-off thereof occur in the same tax period, the net book value of the assets, adjusted for any recoverable amounts, may be accepted as an expense of the period, provided that:

a) The physical write-off, dismantling, abandonment or write-off of the goods is proven through the respective minutes, signed by two witnesses, and the facts that gave rise to the exceptional devaluations are identified and proven;

b) The minutes are accompanied by a detailed list of the items in question, containing, for each asset, the description, the year and cost of acquisition, as well as the net book value and the net tax value;

c) It is communicated to the tax office of the area where such goods are located, with a minimum of 15 days' notice, the place, date and time of the physical write-off, dismantling, abandonment or write-off and the total net tax value thereof.

4 - The provisions of paragraphs a) to c) of the preceding paragraph shall also be observed in the situations provided for in paragraph 2, in the tax period in which the physical write-off, dismantling, abandonment or write-off of the assets is to be carried out.

5 — The acceptance referred to in paragraph 2 is the responsibility of the director of taxes of the area of the registered office, effective management or permanent establishment of the taxpayer or of the director of the Tax Inspection Services, in the case of companies falling within the scope of their responsibilities.

6 — The documentation referred to in paragraph 3 must form part of the tax documentation process, pursuant to Article 130."

As the reading of the legal provision under analysis reveals, it is directed at situations qualified as "exceptional devaluations", referred to in paragraph c) of Article 35(1) of the CIRC ("found in tangible fixed assets, intangible assets, non-consumable biological assets and investment properties"), arising from abnormal causes ("disasters, natural phenomena, exceptionally rapid technical innovations or significant adverse changes in the legal context").

Now, in light of the factuality determined in the present proceedings, and already in the RIT itself, it is evident that we are not dealing with "exceptional devaluations" as understood by the provision applied by the AT in the tax act being challenged.

Indeed, the RIT already stated that the Claimant conducted write-offs regularly, and that the products, quantities and values are similar in each write-off.

Also in its Response, and with respect to the aforementioned write-offs, the Respondent in this proceedings acknowledges, for example, "their constancy (alleged destruction – always situated at the same values and types of goods), and conduct on a fortnightly basis, regardless of any change in daily schedule – calendar – holidays – public holidays." (point 48), which is, it is believed, incompatible with the exceptional character manifestly presumed by Article 38 of the CIRC applied in the tax act in crisis in this proceedings.

Finally, it follows from the facts determined as proven that:

  • In the Claimant's activity, losses of merchandise, namely pastry cakes, semi-frozen products, eggs and cream that quickly degrade and spoil or exceed quality and shelf-life limits, are normal and recurring;

  • In the Claimant's activity, there are items returned by customers because they were not sold by them within their respective shelf-life periods;

  • The Claimant made inventory adjustments for losses of easily and quickly perishable merchandise on a regular and periodic basis;

  • The inventory adjustments recorded by the Claimant, which resulted in a deduction in the calculation of taxable profit, corresponded to the communications referred to in the documents on pages 3 to 16 and 19 to 31 of part 2 of the administrative proceedings.

  • The Claimant recorded these losses accounting-wise as inventory losses (shortages) by moving accounts 38 and 68.

In this context, there can be no doubt that the prerequisites for the application of the provisions of Article 38 of the CIRC in force at that time, and transcribed above, in particular paragraphs 3(c) and 6 thereof, have not been demonstrated. That is to say, in sum, we are not dealing with "exceptional devaluations" but rather with the elimination of perishable products resulting from the Claimant's normal production process, and not susceptible to reuse in that process.

It should be noted, moreover, that the AT itself, in the RIT, seems to acknowledge this very thing and to understand that the provisions in question would apply by analogy, by referring to the fact that "the taxpayer should comply with the period stipulated in Article 38 of the CIRC, used to make such communications in analogous cases." However, the AT provides nothing in support of this assertion and to substantiate such analogy, in terms that the prerequisites of such putative analogical application of the provisions in question could be considered demonstrated, and it is certain that, as was written in the Judgment of the Superior Administrative Court of 18/06/2015, delivered in case 0808/14[7], citing Professor José Carlos Vieira de Andrade, "it must, in principle, be the responsibility of the Administration to prove the verification of the legal prerequisites [binding] of its action, in particular aggressive [positive or unfavorable] action; in exchange, it will be up to the challenger to present sufficient evidence of the illegitimacy of the act, when those prerequisites appear to be verified. In other words still, it must be the Administration that bears the disadvantage of not having provided proof [of the court not being convinced] of the verification of the legal prerequisites that permit the Administration to act with authority [at least, when it produces unfavorable effects for private parties];".

Furthermore, it should also be noted that, in essence, the AT seems to acknowledge the factual framework underlying the accounting records made by the Claimant, that is, the actual occurrence of regular losses or shortages resulting from the perishability of the raw materials and products used by the Claimant in its production process, which, it may be said, will even be a notorious fact, given the sector of activity in which it operates. What the AT will fundamentally dispute is the quantification of such losses or shortages[8]. That is, from the very motivation of the inspection action, to the list of facts highlighted by it, everything points to the fact that what the AT would wish to question would not be whether or not the type of losses or shortages recorded occurred, indisputably – it is believed – ordinary or normal (as opposed to exceptional), but the quantity thereof, suspecting that the Claimant will declare and record shortages greater than those actually arising from its normal activity. Now, if that is the AT's understanding, as it seems it would be, that should obviously have been a different path followed by the AT[9].

In any case, as was written in the Judgment of the Superior Administrative Court of 04-09-2013, delivered in case 0164/12[10], "These are the grounds that the AT used to substantiate the aforementioned correction of the declared taxable profit and the consequent additional assessment. It is in light of these grounds, and exclusively in light of the same, that the legality of the additional assessment being challenged must be assessed, since for this purpose no other grounds can be considered than those that were expressed when the act was performed. In truth, in the context of contentious proceedings for mere annulment, as is the present case, and in which the petition is for annulment of the appealed act, the legality of this act must be assessed, in view of the defects asserted against it (the grounds of action invoked) or those that are known ex officio, in light of the grounds expressed by the Administration for the performance of the act and when the act was performed."

In light of this case law[11], the considerations formulated by the AT, now in the context of tax arbitration proceedings, according to which "there is no declaration/minutes from any independent entity attesting that those foods, in those quantities, could not be marketed or used in the production process, attesting that that shelf-life period would have expired, thereby justifying the write-off of the products" (point 40 of the Response), there is no "justification for the failure to introduce management measures to reduce, even if gradually, these wastages/destructions by opting, e.g., for purchases in smaller quantities." (point 55 of the Response), or "it was not at all proven: - The nature and quantity of the goods destroyed (which would be those listed in the list of goods sent); -That these were no longer in a condition to be marketed – that the shelf-life period had expired; -The actual destruction - such destruction was not proven due to the failure of the municipal services to appear at the location and time set, which moreover were always the same, and with a fortnightly frequency;" (point 71 of the Response), shall be irrelevant, since it was not in such circumstances of fact that the tax act in crisis in this arbitration proceedings was based.

Similarly, the considerations, equally presented by the AT at this venue, relating to the provisions of Regulation (EC) No. 178/2002, of 28 January (the basic regulation on European food safety) and Regulation (EC) No. 1069/2009, of 21 October (see points 75 et seq. of the Response), shall not be admissible, since such provisions do not form part of the grounds of law of the tax act whose legality it is now necessary to review.

Thus, lacking factual basis for the application of the provisions of Article 38 of the CIRC in force at the time, applied in the tax act which is the subject of this arbitration proceeding, that act must be considered illegal, and consequently the conclusions drawn in the RIT, and transcribed above, shall not be validated, wherefore the said act should be annulled, as petitioned by the Claimant.

5. Operative Part

For these reasons, this Arbitral Tribunal renders judgment wholly upholding the arbitration petition filed and, in consequence, annuls the assessment of Corporate Income Tax (IRC) and compensatory interest relating to the fiscal year 2010 of the Claimant, in the total amount of €91,795.12, which is the subject of the present proceedings.

6. Value of the Proceedings

The value of the proceedings is fixed at €91,795.12, pursuant to Article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of Article 29(1) of the RJAT and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

7. Costs

The arbitration fee is fixed at €2,754.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the AT, since the petition was wholly successful, pursuant to Articles 12(2) and 22(4), both of the RJAT, and Article 4(4) of the aforementioned Regulation.

Let notice be given.

Lisbon

21 September 2015

The Arbitrator President

(José Pedro Carvalho)

The Arbitrator Member

(Nuno Maldonado de Sousa)

The Arbitrator Member

(Luís Menezes Leitão)

[1] In this document, the abbreviation "R.I." is used to designate the initial petition submitted by the Claimant and "R.S." to reference its petition bringing subsequent facts to the proceedings.

[2] In this document, the abbreviation "PA." is used to designate the administrative proceedings attached to the case file.

[3] In this decision also designated by the abbreviated form "AT" as is in general use.

[4] In this document, the abbreviation "R-AT" is used to designate the response petition referred to in Article 17(1) of the RJAT.

[5] In this document, the abbreviation "RIT" is used to designate the tax inspection report.

[6] Cross-referenced in square brackets.

[7] Available for consultation at www.dgsi.pt.

[8] This is further evidenced in the findings conveyed by the AT, according to which "In each of the fiscal years between 2008 and 2011, the Claimant declared inventory adjustments whose values ranged between €270,000.00 and €320,000.00, representing between 17.00% and 24.79% of the total of opening inventory plus purchases." and "In the case of fiscal year 2010, the Claimant now declared inventory adjustments in the amount of €320,200.98 which represent 18.10% of the total of opening inventory plus purchases."

[9] If that were the case, the AT should have sought to determine, directly if possible, or indirectly if necessary, the quantity that it would believe best corresponded, in its view, to the tax reality of the Respondent.

[10] Available at www.dgsi.pt.

[11] Which is subscribed to, with the clarification that the distinction between "formal reasoning" and "substantive reasoning" should always be kept in mind, with the Tribunal being bound by the grounds (of fact and of law) on which the challenged act was based, but not by the reasoning used therein. Regarding the distinction between "formal reasoning" and "substantive reasoning", see the Judgment of the Administrative Court of Appeal - Southern Division of 19-06-2012, delivered in case No. 03096/09 (available at www.dgsi.pt), where, among other things, it can be read that "one thing is knowing whether the Administration made known the reasons that determined it to act as it did, the grounds on which it based its action, a question that falls within the scope of the formal validity of the act; another, quite different and situated already within the scope of the substantive validity of the act, is knowing whether those reasons correspond to reality and whether, if they do correspond, they are sufficient to legitimize the concrete administrative action".

Frequently Asked Questions

Automatically Created

What are the legal requirements for deducting stock losses (quebras) under Article 38 of the Portuguese Corporate Income Tax Code (CIRC)?
Article 38 of the Portuguese Corporate Income Tax Code (CIRC) establishes strict requirements for deducting stock losses (quebras). Companies must provide prior written communication to the tax authorities (typically with advance notice) specifying the date, time, location, and detailed inventory of goods to be written off, including quantities and values. The write-off must either be witnessed by a tax authority representative or certified by an independent person outside the company's management. Complete supporting documentation must be maintained as part of the company's tax records. The taxpayer bears the burden of proving that losses actually occurred and that goods were genuinely destroyed or became unusable. These requirements aim to prevent fraudulent inventory deductions while allowing legitimate business losses.
Can a company challenge an IRC tax assessment on write-offs for breakage through CAAD tax arbitration?
Yes, a company can challenge an IRC tax assessment related to disallowed write-offs for breakage through the CAAD (Centro de Arbitragem Administrativa) tax arbitration system. As demonstrated in Process 783/2014-T, taxpayers may file a petition for constitution of an arbitral tribunal under the Legal Framework for Arbitration in Tax Matters (RJAT - Decree-Law No. 10/2011). The petition must be filed within the legal deadline and should specify the grounds for challenging the assessment, such as arguing that Article 38 CIRC requirements were met, that literal compliance was impossible due to business circumstances, or that the Tax Authority's interpretation was incorrect. CAAD arbitration provides an alternative to administrative and judicial appeals, typically offering faster resolution of corporate income tax disputes involving technical issues like inventory write-offs.
What happens when literal compliance with Article 38 CIRC documentation requirements is impossible due to the nature of the business activity?
When literal compliance with Article 38 CIRC documentation requirements is impossible due to the nature of business activity, Portuguese tax law principles of proportionality and good faith may apply. In Process 783/2014-T, the taxpayer argued that for highly perishable goods (pastry products, eggs, cream) that degrade rapidly and unpredictably, strict compliance with all formal requirements was impracticable. The company demonstrated partial compliance by sending advance communications with detailed lists and maintaining records. Courts and arbitral tribunals must balance the anti-fraud purposes of Article 38 against reasonable business operations. Taxpayers should document their compliance efforts, explain impossibility reasons, and provide alternative evidence of actual losses (such as witness testimony, business records showing returns from customers, and industry practice). However, the outcome depends on whether the tribunal accepts that impossibility justifies the deviation and whether sufficient alternative evidence proves the losses genuinely occurred.
How does the CAAD arbitral tribunal evaluate evidence of inventory losses in corporate income tax disputes?
The CAAD arbitral tribunal evaluates evidence of inventory losses in IRC disputes through comprehensive analysis of documentary evidence, witness testimony, and business circumstances. In Process 783/2014-T, the tribunal examined: (1) communications sent to the Tax Office showing scheduled write-offs with quantities and values; (2) company accounting records documenting €306,910.38 in inventory adjustments; (3) witness testimony confirming that losses of perishable merchandise were normal and recurring; (4) evidence of customer returns due to expired shelf-life; and (5) the nature of the business activity (perishable pastry products). The tribunal assesses whether losses are credible given the company's sector, whether documentation demonstrates genuine compliance efforts, and whether the taxpayer met the burden of proof. The tribunal also considers whether Tax Authority corrections were legally supported and whether formal deficiencies should invalidate otherwise legitimate business expenses. The standard requires substantial evidence that write-offs actually occurred and corresponded to real economic losses.
What are the consequences of failing to properly document stock write-offs for IRC purposes under Portuguese tax law?
Failing to properly document stock write-offs for IRC purposes under Portuguese tax law results in disallowance of the deduction and corresponding tax assessment. As illustrated in Process 783/2014-T, the Tax Authority corrected the company's taxable profit by adding back €306,910.38 in undocumented write-offs, increasing the corrected taxable result from €70,585.64 to €377,496.02. This triggered an IRC assessment of €91,795.12 including compensatory interest. Additionally, related VAT deductions may be disallowed (€36,934.62 in this case). The taxpayer faces the burden of challenging the assessment through administrative appeals or arbitration, incurring legal costs and uncertainty. Compensatory interest accrues from the original payment deadline until assessment. Repeated or intentional non-compliance could trigger penalties beyond mere tax correction. Companies must maintain rigorous documentation of all inventory write-offs, including independent certification, advance tax authority notification, detailed inventories, and proof of destruction to avoid these consequences and ensure deductibility of legitimate business losses.