VAT on Inventory Losses: Rebutting the Presumption of Goods Transmission (CAAD 807/2014-T)

ARBITRAL DECISION

Tax Arbitration Proceedings

Case No. 807/2014 – T

The Arbitrator Dr. Filipa Barros (sole arbitrator), appointed by the Deontological Council of the Center for Administrative Arbitration ("CAAD") to constitute the Singular Arbitral Tribunal, constituted on 13 February 2015, decides as follows:

I. REPORT

The company A, Lda, NIPC ..., with headquarters in ..., hereinafter "Claimant", comes, under the terms of article 2, n. 1, paragraph a), article 10 and following of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT"[1], to request the constitution of an Arbitral Tribunal to pronounce on the illegality and consequent annulment of VAT assessments, in the total amount of € 36,934.62, relating to the year 2010, and of the corresponding compensatory interest.

To support its request, the Claimant considers, in summary, that within the scope of exercising its activity of production and wholesale sale of pastry products, namely bakery products and all types of cakes, it is frequent to carry out merchandise write-offs, due to production waste typical of the activity, to which are added articles returned by customers for not having been sold within their validity periods.

Therefore, despite the corresponding write-off communications being made which have always been sent to the finance service of the area of its headquarters, given the nature of rapidly perishable products in question, these cannot be carried out with the 15-day advance notice as established in article 38, n. 3, paragraph c) of the IRC Code.

Nevertheless, the Claimant argues that the food products contained in the write-off communications were destroyed and made unusable, such acts having been witnessed and signed by witnesses, and consequently the presumption of transmission of goods provided for in article 86 of the VAT Code is rebutted - a presumption iuris tantum - and the acts of additional VAT assessment relating to the year 2010, contained in the Tax Inspection Report, concerning the devaluations and write-offs in the amount of €36,934.62, should be annulled.

In support of the thesis of non-obligation to observe the 15-day period provided for in article 38, n. 3, paragraph c) of the IRC Code, the Claimant argues that merchandise losses do not correspond to exceptional devaluations, but rather are inventory adjustments, even by the character of regular and normal losses in question. Such inventory adjustments (recorded in account 684, sub-account 6842 write-offs) gave rise to corresponding deductions in the determination of taxable profit, being recognized in the taxation period, and therefore should not be framed in article 38 of the IRC Code.

On 11 December 2014, the request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of the CAAD and immediately notified to the Respondent in accordance with legal procedures.

The Claimant did not appoint an Arbitrator.

Thus, under the terms and for the purposes of the provisions of n. 1 of article 6 and paragraph b) of n. 1 of article 11 of the RJAT, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties, within the legally prescribed periods, Dr. Filipa Barros was appointed arbitrator of the Singular Arbitral Tribunal, who communicated to the Deontological Council and to the Center for Administrative Arbitration the acceptance of the appointment within the period stipulated in article 4 of the Deontological Code of the Center for Administrative Arbitration.

In accordance with what is provided for in paragraph c) of n. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Singular Arbitral Tribunal was constituted on 13 February 2015, following the pertinent legal procedures.

The Respondent, duly notified for this purpose, presented its response in which it defends the lack of merit of the request for arbitral pronouncement. To this end, it invokes that through the verification of the accounts (38 and 684) the Tax Inspection Services (SIT) found that in the year 2010 losses in inventories/regularizations of stocks write-offs were recorded in the amount of €306,910.38. However, from the analysis of accounting documents there was found non-compliance with article 38 of the IRC Code, regarding the compliance with prior formalities to be observed in a write-off. This fact implied the impossibility of proving the write-off, as well as the actual destruction/making unusable of the goods contained in the discriminating lists in question.

Thus, the Respondent believes that the legal requirements provided for in article 38, n. 3, paragraph c) of the IRC Code are applicable to the case in question, the legislator not having intended to protect any sector of activity, whereby the Claimant should have made the written notification of write-off with 15 days advance notice.

Furthermore, according to the Respondent's understanding, the requirements stated in article 38, n. 3, paragraph a) of the IRC Code were also not complied with, since in the absence of an independent entity that certifies that the food items written off in those quantities could not be commercialized or used in the production process, there is no justification of the facts that gave rise to the exceptional devaluations claimed.

In that measure, the AT questions the sustainability of the evidence presented by the Claimant, based on an internal document that does not observe the minimum 15-day advance notice legally required, signed and witnessed always by the same witnesses, maintaining a fortnightly regularity of values and types of goods, the procedures used not being apt to prove the actual destruction of merchandise, even more so when significant amounts of write-offs are at issue and of a regular nature.

On 25 March 2015, the first meeting of the arbitral tribunal was held, under the terms and with the objectives provided for in article 18 of the RJAT.

Four witnesses called by the Claimant were examined, namely Ms. B, Mr. C, Ms. D and Ms. E.

The Claimant requested the attachment to the case file of a document relating to invoices issued by F, which was admitted and a period was granted to the Respondent to exercise the right of contradiction.

Written arguments were presented by the Claimant, followed by arguments of the Respondent.

In the arguments presented the parties reiterated in essence the positions defended in their respective pleadings, in the terms subsequently summarized.

a) Arguments of the Claimant

The Claimant emphasizes that we are not within the scope of article 38 of the IRC Code, since the merchandise losses subject to the dispute constitute an inevitable reality of the activity it develops, given the vicissitudes of the production and distribution process.

According to the evidence produced, it should be concluded that the merchandise losses in question do not correspond to losses motivated by abnormal and exceptional circumstances.

They are not, therefore, exceptional devaluations caused by anomalous and sporadic facts, but rather normal merchandise losses given their special nature, which require destruction and periodic write-off.

Thus, the Claimant is not obliged to observe the fifteen-day advance period regarding the date of realization of the write-off, as required in article 38 of the IRC Code.

And even if it were – which is only conceived as a matter of reasoning hypothesis – it is established that it is materially impossible to respect it, due to the characteristics of the products and merchandise in question.

The Claimant further emphasizes that it was demonstrated the rapid and easily perishable nature of the products, a fact that determines the impossibility of prior notification of write-off with 15 days advance notice in relation to the making unusable/write-off of the merchandise.

In any case, and even if the AT were correct regarding the non-acceptance of deductions inherent to the written-off merchandise for the purpose of determining the taxable matter in IRC, that does not mean that the same would have to occur regarding VAT.

Being that in this case it is VAT that is at issue. Whereby, even if one concluded in favor of the correctness of the corrections to the IRC taxable matter, due to non-compliance with the 15-day period, that does not mean that the impugned VAT assessments necessarily would have been correct. One thing is for the AT to assert that the Claimant did not respect the 15-day period, and to refuse the deduction from the taxable matter inherent to the written-off merchandise, another thing completely different would be to impute to the Claimant a VAT on products that it did not sell, and subject them to taxation under this tax.

Now, the presumption enshrined in article 86 of the VAT Code is capable of proof to the contrary, this matter being appreciated by Circular Office no. 35,264 of the Directorate of VAT Services in which it is provided that there is no legal obligation to proceed with any prior diligence or participation with the Fiscal Administration Services, the taxable person being able, nevertheless, to gather elements justifying the shortfalls in its inventories of destroyed or made unusable goods as a way to rebut the presumption provided for in the aforementioned provision, and should proceed with prior notification to the services of the facts relating to the write-off so that these, if they so deem, may exercise the due control.

In conclusion, the Claimant states that such diligences were ensured, being duly proven documentally and by witnesses, with the presumption provided for in article 86 of the VAT Code being set aside, and thus the request for declaration of illegality of the impugned additional VAT assessments should be judged to have merit.

b) Arguments of the Respondent

In the final arguments the Respondent reinforces the arguments invoked in the Response and, additionally, focuses on the facts and the production of witness evidence.

Regarding the type of products contained in the inventory write-off lists, it states that these are always the same varying only in quantities, with no detection of the presence of highly perishable products that would justify frequent removal.

On the other hand, there is no proof of the facts that led to the write-off, that is, a statement certifying that those food items in those quantities could not be commercialized or used in the production process, as the validity period had expired. It is emphasized that to prove the facts alleged there is never the intervention of any external entity, nor has the Claimant ever exhibited any proof of the existence of internal control procedures, that is, internal lists that were at the basis of that result of quantities.

With regard to the communications sent by the Claimant, it is reinforced that they are always made by the wife of one of the managing partners and witnessed by two managing partners, consequently these are not certified by any person independent of the management bodies of the company. Thus, an internal document that does not observe the minimum advance notice, often made after the actual write-off itself, cannot be considered apt to prove the actual destruction of merchandise, even more so when significant amounts of write-offs and regular character are at issue.

The Respondent doubts the realization of the write-offs, since it states that no witness witnessed the destruction of the goods in question, being strange the destruction of quantities, products and values of raw materials always similar, even regarding raw materials with a very extended validity period, such as sugar and flour. It also questions the method of determining quantities of destroyed packaging material, as there is no physical separation between the contents and the packaging with the material indistinctly deposited in a container.

The Respondent further questions the accounting treatment given by the Claimant, since taking into account the sector of activity in question, food waste should be considered normal waste inherent to the production process, and therefore would not be subject to any accounting treatment, as it is presumed that the selling price itself absorbs such losses.

Finally, and with regard to the invoices presented by the Claimant relating to the removals of waste by the Municipal Services of ..., despite recognizing the existence of these removals, it highlights the incongruity between the dates of the write-offs and the dates of the invoices issued by these services.

In these terms, it concludes that there was never any control over the contents of the waste containers collected at the Claimant's premises, whether regarding the identification of the goods, or regarding the quantity of merchandise, arguing for the maintenance of the corrections made by the SIT, and the inability of the Claimant to rebut the presumption contained in article 86 of the VAT Code, and considering verified the actual transmission of all goods contained in the write-off statements.

Considering the arguments produced by the parties, the main question to be decided in the present case is to ascertain whether the inventory losses subject to write-off are subject to the regime provided for in article 38 of the IRC Code, a provision that governs the prior formalities to be observed in a write-off, establishing that the write-off should be communicated with a minimum advance notice of 15 days, so that the AT can ascertain the nature and quantity of the goods destroyed, and the actual destruction, or whether, on the contrary, article 38 is not applicable to the case at hand, the taxable person being able to present alternative means of proving the destruction of goods contained in the write-off statements, and thus rebut the presumption of transmission of goods provided for in article 86 of the VAT Code.

II. CASE MANAGEMENT

The Arbitral Tribunal was regularly constituted.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (cf. articles 4 and 10, n. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).

III. REASONING

1. Facts established as proven

The facts were established as proven based on the documents attached in the context of the administrative proceedings, the documents attached with the request for arbitral pronouncement and documents attached subsequently, the response presented by the Tax and Customs Authority and, finally, in the testimony of witnesses at the points indicated.

1. The Claimant is a commercial company that exercises the activity of production and wholesale sale of pastry products, namely bakery products and all types of cakes. The finished products are, almost in their entirety, packaged for subsequent commercialization.

2. The vast majority of its clients are catering companies and retail trade companies of food products;

3. The Claimant has own production facilities in a factory building located at its headquarters;

4. In terms of VAT, the Claimant is classified in the normal monthly periodicity regime;

5. Under Service Order OI 2014..., the Tax Authority carried out an inspection action that focused on the year 2010;

6. It was verified, in this context, that the Claimant recognizes losses in inventories/regularizations of stocks, which are subject to accounting record by autonomization in accounts "#38 - Inventory Regularization" and "#684 - Losses in Inventories";

7. The accounting records of inventory regularization do not result from extraordinary facts, but rather from normal, constant and regular write-offs that are part of the Claimant's activity (testimony of witness B);

8. In the Claimant's activity, merchandise losses in the manufacturing and commercialization process are inevitable: products are left over because they present manufacturing defects and cannot be consumed, or because they quickly exceed validity periods, or because they are returned by retailers where they are placed on consignment or, because they result from waste inherent to the manufacturing process such as flours that are used so that doughs do not adhere to production tables and which falling on the floor cannot be reused, cinnamon and other condiments sprinkled on cakes whose excess is always made unusable (testimony of witnesses C and D);

9. In national terms, an average percentage of normal write-offs in the order of 25% to 30% is accepted in this sector of activity (testimony of witness C);

10. The Claimant has continuous operations, producing even on Sundays and holidays;

11. In the year 2010 the Claimant recorded merchandise write-offs in the amount of € 306,910.38;

12. The Claimant sent to the finance service of the area of its headquarters the corresponding write-off notifications having attached the discriminating lists with the quantities and valuation of the goods to be written off;

13. Such write-off notifications are prepared based on the daily production records entered in the computer system (testimony of witness E);

14. The person responsible for each shift should enter in the factory occurrence sheet all mishaps, production accidents or relevant information relating to the manufacturing process, the quantities lost that justify the write-offs and the valuation of production waste (testimony of witness E);

15. The drivers who distribute the products to customers deliver to the administrative services, daily, the record of returned merchandise which, in turn, are subject to computer input and subsequently serve as the basis for the preparation of write-off statements (testimony of witness E);

16. The write-offs of merchandise contained in the notifications were always witnessed by two managing partners of the Claimant;

17. The collection of waste identified in the write-off statements is generally done on Saturday morning, being collected by the municipal services of ... which enter the company premises and proceed to remove the 1100 Liter waste containers, in accordance with the indications and supervision of the Claimant (testimony of witnesses D and E);

18. The write-off notifications were never made with the minimum advance period of 15 days;

19. It is not possible to determine in concrete terms, with 15 days advance notice, the quantity and type of products that will be subject to write-offs/waste (testimony of witness D);

20. The nature of the manufactured products is rapidly perishable, not being viable to maintain within the factory, for 15 days, spoiled products, or returned by customers, under penalty of non-compliance with food safety rules and serious risks of contamination of other products in good condition (testimony of witness D);

21. Ideally, the removal of waste from raw materials and finished products should occur with a maximum periodicity of 5 days (testimony of witness D);

22. Under the terms of dispatch no. DI2012... the Tax Authority opened a procedure to verify the destruction of the goods, finding the following:

23. "On October 13, 2012, at 11:00 a.m., at the company headquarters (...) we verified the existence at the site of several trash cans and we highlight the fact that in the interior of the same products were indistinctly mixed, thereby making impossible the comparison of the products and their respective quantities existing inside the plastic containers, with the list sent by the taxable person to the finance service", and that "on the date and time indicated in the write-off notification, the truck of the Municipal Services of ... which should transport the industrial waste not usable to the landfill, was not at the company headquarters".

24. Having the Tax Authority questioned the managing partner Mr. G, on the impossibility of carrying out the identification of the type and quantities of goods, in a statement, this replied "being that the way he usually puts together the waste so that they can be collected by the municipal services, in containers of 1,000 liters";

25. The municipal services of ... carry out waste collections fortnightly at the Claimant's factory facilities, using containers of about 1100 Liters capacity, suitable to the nature of the waste to be collected;

26. The invoicing issued by the municipal services of ... is monthly and includes the provision of the following services: removals of merchandise and unusable products contained in the write-off statements, removal of paper and cardboard for recycling not included in the write-off statements, garbage not contained in the write-off statements and water supplies;

27. Following an email sent by the Tax Authority on 15 April 2015, addressed to the Intermunicipal Water and Waste Services of ... and ..., the latter clarified the following: "following analysis of the situation with several teams that carried out waste collection at the company, it is verified that both the collection of undifferentiated waste (3rd, 5th and Saturday, between 6:00 a.m. and 1:00 p.m.) and the collection of packaging (Thursday evening) are carried out outside the company. The exception is the collection of paper/cardboard, which is carried out on Thursday between 6:00 a.m. and 1:00 p.m., and in which the vehicle enters the company to collect the containers."

28. It results from the Tax Inspection Report, which is part of the administrative file, the content of which is given as reproduced, moreover, the following:

"The taxable person sent, with 5 days advance notice, the corresponding write-off notifications to the finance service of the area where the write-offs were to occur, attaching the discriminating lists with the quantities and valuation of the goods to be written off. However, such a period becomes inadequate, in the sense of allowing the Tax Administration services to carry out on-site verification of such write-offs, whereby the taxable person should comply with the period stipulated in article 38 of the CIRC, used to make such notifications in analogous cases.

So it became impossible to prove the corresponding write-offs, as well as the actual destruction/making unusable of the goods contained in the discriminating lists of these write-offs.

(...)

Given that such expenses are not considered to be comprovably essential for the realization of income subject to tax or for the maintenance of the productive source, in accordance with article 23 of the CIRC, the required requirements stipulated in article 28 of the CIRC not having been complied with, in order for such adjustments to be considered as an expense of the taxation period, they must be added to the taxable result of the 2010 financial year, their amount being € 306,910.38 (see annex I).

It is noted that copies of all the requests sent to the finance service relating to the write-offs are attached to the file.

And, consequently, given that such inventory adjustments cannot be considered as an expense of the period, the corresponding VAT should be levied, in accordance with article 86 of the VAT Code, taking into account that combined with paragraph a) of n. 1 of article 1 of the VAT Code, unless proof to the contrary, goods that are found in any of the places where the taxable person exercises their activity are presumed to be acquired and goods acquired, imported or produced that are not found in any of these places are presumed to be transmitted";

1. From point IX of the aforementioned report the following corrections are proposed for the year 2010, in IRC:

1. In VAT it was considered that the company did not deliver to the State treasury the tax that should have been levied, in the year 2010, regarding inventory adjustments/write-offs in the total amount of €36,934.62, in accordance with the monthly map attached to the PA, which is given as fully reproduced;

2. The Claimant's position is based on Circular Office no. 35,264 issued by the Directorate of VAT Services;

3. The Claimant was notified of the additional VAT assessments for payment on 30 November 2014 and respective interest;

4. The Claimant was notified to exercise the right of hearing on the Draft Tax Inspection Report, but did not exercise it;

5. On 10 December 2014, the Claimant filed the request for constitution of the Arbitral Tribunal that gave rise to the present case. (cf. electronic request to CAAD).

2. Facts not proven

Of the facts of interest for the decision of the case, subject to impugnation, those not contained in the factual description above were not proven.

3. Motivation

The conviction of the Tribunal in establishing the factual framework above was founded on the Administrative File, on the documents that instructed the procedural documents of the parties and on the testimony of witnesses called by the Claimant, namely of the testimonies above identified, which were credible to us in light of what was intended to be clarified.

4. Matters of Law

The question to be decided is whether the regime of exceptional devaluations provided for in article 38 of the IRC Code is applicable to goods in the Claimant's inventory, the case being discussed whether the Claimant would be obliged to carry out prior notification with 15 days advance notice regarding the date of realization of the write-off of its merchandise subject to waste.

If this question is answered in the affirmative, that this provision applies to the case at hand and that there was a breach of the prior notification period, there will still be a need to inquire about the correlation between the breach of article 38 of the IRC Code and the verification of the legal presumption provided for in article 86 of the VAT Code, under which goods acquired, imported or produced that are not found in any of the places where the taxpayer exercises their activity are presumed to be transmitted.

Let us examine each of the questions above identified.

1) Should the daily waste resulting from raw materials, finished products and packaging material made unusable, arising from the Claimant's manufacturing and commercialization activity, submitted to periodic write-offs, be framed in the fiscal regime of article 38 of the IRC Code, on the heading of "exceptional devaluations"?

The AT considers that due to non-compliance with article 38 of the IRC Code[2], a provision that governs the prior formalities to be observed in a write-off, it became impossible to prove the write-off of merchandise contained in the write-off statements prepared by the Claimant, as well as the actual destruction and making unusable of these goods. Faced with such finding, merchandise devaluations cannot be considered as an expense of the period, and the corresponding VAT should be levied, in accordance with article 86 of the VAT Code.

With all due respect, we do not believe this to be the better understanding.

At issue is the interpretation of article 38 of the IRC Code, which provided as follows:

"Article 38 Exceptional Devaluations

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

2 - For the purposes of the foregoing, the taxable person must obtain the acceptance of the General Tax Administration, by means of a duly reasoned statement, to be submitted by the end of the first month of the taxation period following the occurrence of the facts that determined the exceptional devaluations, accompanied by documentation proving the same, namely the decision of the competent management body that confirms those facts, justification of the respective amount, as well as an indication of the destination to be given to the assets, when the physical write-off, dismantling, abandonment or making unusable of these does not occur in the same taxation period.(Amended by Rectification Decree no. 67-A/2009 - 11/09) (See note 1)

3 - When the facts that determined the exceptional devaluations of the assets and the physical write-off, dismantling, abandonment or making unusable occur in the same taxation period, the net fiscal value of the assets, corrected for any recoverable values may be accepted as an expense of the period, provided that:(Amended by Rectification Decree no. 67-A/2009 - 11/09)

a) The physical write-off, dismantling, abandonment or making unusable of the goods is proven, through the respective statement, signed by two witnesses, and the facts that originated the exceptional devaluations are identified and proven;

b) The statement is accompanied by a discriminating list of the elements in question, containing, with respect to each asset, the description, the year and the cost of acquisition, as well as the net accounting value and the net fiscal value;(Amended by Rectification Decree no. 67-A/2009 - 11/09)

c) The finance service of the area where these goods are located is notified, with a minimum advance notice of 15 days, of the place, date and time of the physical write-off, dismantling, abandonment or making unusable and the total of the net fiscal value of the same.

4 - The provisions of paragraphs a) to c) of the preceding article must also be observed in the situations provided for in n. 2, in the taxation period in which the physical write-off, dismantling, abandonment or making unusable of the assets is to take place.(Amended by Rectification Decree no. 67-A/2009 - 11/09)

5 — The acceptance referred to in n. 2 is the responsibility of the finance director of the area of the headquarters, actual management or stable establishment of the taxable person or of the director of the Tax Inspection Services, in the case of companies included within the scope of their attributions.

6 — The documentation referred to in n. 3 must be included in the fiscal documentation file, under the terms of article 130."

In the case at hand, the Claimant does not even challenge the allegation of the Respondent regarding non-compliance with the 15-day advance period for prior notification in relation to the write-off of merchandise, presenting concrete and credible elements that allow demonstrating the existence of circumstances inherent to the activity itself that prevent it from ensuring such a period.

Consequently, the inventory losses resulting from daily production or surpluses due to manufacturing defects or due to the return of unsold products by Claimant's customers acting under the consignment regime, are write-offs which, from an accounting perspective, result from the destruction of goods of the current asset, and not goods of tangible fixed assets.

Now, in this regard, we follow closely the recent jurisprudence issued by the CAAD[3] in the context of a case in all respects similar to that of the present case. After a comprehensive explanation of the origins of article 38 of the IRC Code, which dates back to the previous article 10 of Decree-Regulation no. 2/90, of 12 January under the heading "exceptional devaluations of fixed asset elements", the Arbitral Tribunal concluded that the regime provided for in article 38 of the IRC Code is not intended for the identification and verification of facts that originate economic losses of inventory goods. Now, in the case at hand, just as in the case concerned with the aforementioned Court Decision, we are unquestionably dealing with raw materials intended for the production of pastry products and finished products that were not commercialized, or because they deteriorated in the course of the manufacturing process or because they were returned and their respective validity periods expired.

Thus, goods from inventory are at issue, and not goods from the Claimant's tangible fixed assets, or goods from non-current assets.

Article 38 of the IRC Code enshrined a special regime for the recognition of expenses arising from abnormal or exceptional events over fixed asset elements, not being applicable at all to the write-off of inventory goods.

Moreover, it should be noted that article 38 of the IRC Code, in force from the 2010 financial year onwards, and applicable to the exceptional devaluation of assets provided for in paragraph c) of n. 1 of article 35 of the IRC Code (currently repealed), which allows the consideration as a fiscally deductible expense of "exceptional devaluations verified in tangible fixed assets, intangible assets, non-consumable biological assets and investment properties".

As the aforementioned Arbitral Jurisprudence states, which we follow, the entry into force of the so-called IRC Reform confirms this scope of applicability, insofar as it maintains exceptional devaluations (now framed as impairment losses) circumscribed to the recoverable value of fixed assets. So much so that the current article 31-B of the IRC Code (by repeal of article 38) has the heading "impairment losses in non-current assets".

It is certain that throughout the amendments to the regime of exceptional devaluations, the legislator maintained the regime established in 2005: (i) the identification and verification of abnormal causes, (ii) notification with 15 days advance notice and (iii) the write-off statement of goods signed by two witnesses and accompanied by a detailed list of these goods. However, this regime is not applicable to the making unusable of current assets and it is of these goods that the case in question deals.

Indeed, as emerges from Accounting and Financial Reporting Standard (NCRF) 18, inventory goods are those "held for sale in the ordinary course of business activity or in the process of production for such sale". Also constitute inventory "materials or consumables to be applied in production processes or in the provision of services".

A fact that neither the Claimant nor the Respondent ignores, as the economic losses are recorded in accounts "#38 - Inventory Regularization" and "#684 - Losses in Inventories".

Added to this is the mention to the terms "merchandise" and "stocks" highlighted in various documents brought by the Parties to the case file, being the case of the inspection report relating to the acts practiced in 2010. Now, NCRF 1 classifies such goods as a current asset, insofar as they are held with the purpose of trading in an economic cycle of up to 12 months. This accounting framework is fully accepted by the IRC Code, which in n. 3 of article 17 provides that accounting must:

"a) Be organized in accordance with accounting standardization and other legal provisions in force for the respective sector of activity, without prejudice to compliance with the provisions provided for in this Code."

Therefore, the systematic insertion of the regime of exceptional devaluation of article 38 and its reference to the deduction of impairment losses of "tangible and intangible fixed assets" contained in article 35, complements this framework, and leads us to conclude, similarly to the recent Court Decision of the CAAD, whose understanding we recommend, the following:

• That the IRC Code does not contain (now and at the time of the facts) a specific regime for the recognition of losses in inventory goods;

• The regime provided for in article 38 of the IRC Code is strictly applicable to fixed assets, excluding inventory goods from its provision;

• Article 38 is not applicable regarding the identification and verification of facts that originated the regular economic losses in inventory goods;

• The write-off of inventory goods should be based on criteria that allow ascertaining their existence, proving their concrete realization, so as to rebut (or not) the presumption of transmissibility of goods;

• Such criteria do not require strict observance of the regime contained in article 38 of the IRC Code.

Moreover, as regards the regular nature of the inventory losses determined by the Claimant, see the position adopted by the jurisprudence of the Central Administrative Court of the South, which has also been defended in other Court Decisions: "Normal write-offs are those verified with some regularity and result from the exercise of activity, because inherent to the production process and/or handling of goods; abnormal write-offs are those of unforeseen, extraordinary occurrence and resulting from facts unrelated to the exercise of activity (accidents, thefts, fires)"[4].

On the other hand, the AT itself clarified, for VAT purposes, in Circular Office no. 35,264, of 24/10/1986, regarding the requirements of evidence on the non-transmission of goods that have been made unusable or destroyed, namely due to manufacturing defects or obsolescence, that there is no legal obligation to proceed with any prior diligence or participation with the Fiscal Administration Services, in the manner previously provided for in the cited article 24-A of the Transaction Tax Code.

From this it follows immediately, that where there are adjustments to be made to the value of inventories, due to normal write-offs inherent to the taxable person's own production process, which are subject to accounting record, it will be important to identify the reason underlying the write-off and prove its quantitative value and subsequent write-off. However, such verification does not necessarily pass through compliance with a minimum and prior period of 15 days, or the signature of a write-off statement by two witnesses, as the Respondent argues.

Therefore, and in line with the understanding set out by the STA, it is necessary, on the one hand, to ascertain, according to objective criteria, the existence of material loss of the goods identified by the Claimant, contained in the write-off statements and, on the other, to determine to what extent such losses or write-offs are proven in reasonable terms[5].

Now, in the case in question, it results from the evidence that the Claimant proved, in reasonable terms, the inventory write-offs determined based on concrete circumstances that result from its production process and commercialization of goods.

2) Could the non-compliance with the requirements provided for in article 38 of the IRC Code regarding the conditions to be observed in the write-off of inventory goods result in the verification of the presumption of transmission of goods established in article 86 of the VAT Code?

As we mentioned, the Respondent's argument regarding the application to the case at hand of article 38 of the IRC Code does not hold, and the accounting and fiscal framework above stated applicable to the write-off of inventory goods must be considered.

The tax inspection report - which forms the basis of the tax act whose annulment is requested by the Claimant - begins by identifying the reason for carrying out this inspection act: due to "having found the impossibility of concrete ascertainment of the number and nature of the goods subject to destruction/making unusable and not having been able to attend to the write-off of the same".

However, it is evident that the inspection act did not concern itself with analyzing the effectivity of the losses and their respective write-off. Having been satisfied with the finding that "the requests were not made with the minimum period of 15 days". Hence, it concludes that "it became impossible to prove the corresponding write-offs, as well as the actual destruction/making unusable of the goods contained in the discriminating lists of goods in question". Based on non-compliance with article 38 of the IRC Code, the inspection report concludes that "such inventory adjustments cannot be considered as an expense of the period, and the corresponding VAT should be levied, in accordance with article 86 of the VAT Code".

In this sense, and due to non-compliance with the prior and minimum period of 15 days, the inspection report founds both the lack of proof of write-offs and the actual making unusable of goods, in the regime of article 38 of the IRC Code from which, without more, it gives rise to the presumption of transmissibility of goods.

Now, as already mentioned, the write-off of inventory goods is not governed by article 38 of the IRC Code, there being no tax provision that requires prior notification of write-offs and that this be in a certain minimum number of days.

Therefore, as already mentioned, the SIT founded their conclusions regarding the verification of the presumption of transmission of goods provided for in article 86 of the VAT Code, in a generic and not applicable fact to the Claimant – non-compliance with the prior formalities to write-off provided for in article 38 of the IRC Code, in particular the 15-day prior notice period regarding the date of realization of periodic write-offs of goods.

Furthermore, it happens that the AT, in the exercise of its competence to oversee the compliance of taxpayers' actions with the law, acts in the exercise of strictly bound powers, subject to the principle of legality, and it is incumbent on it the burden of proof of the existence of all the conditions of the additional assessment act, namely proof of the verification of the conditions that determined the corrections that support the assessment.

In this sense, the AT is burdened with the demonstration of the factual situation that led it to disregard the inventory losses recorded by the Claimant in terms of shaking the presumption of truthfulness of the operations registered in the accounting and in the respective supporting documents that it enjoys in tribute to the principle of declaration and truthfulness of writing in force in our tax law – article 75 of the General Tax Law (LGT) - passing, from then on, to be the responsibility of the taxpayer the burden of proof that the writing is deserving of credibility.

Also for this reason articles 268 of the Constitution of the Portuguese Republic and 77 of the LGT enshrine the duty of express reasoning of acts practiced by the Administration, namely by the Tax Administration, when they affect rights and legally protected interests of individuals.

Now, although the tax act in question is sufficiently reasoned, in the sense that it is presented through a succinct and logical exposition of the facts and the legal rules on which it is founded, allowing its addressee to make, as indeed it did, a reconstitution of the cognitive and evaluative itinerary traveled by the deciding entity[6], the fact is that the AT, although it suspects the truthfulness of the write-off statements prepared by the Claimant, opts to base its doubts on purely formal criteria and in circumstances that, by themselves, reveal nothing about the artificial or merely unjustified nature of the inventory regularizations carried out by the Claimant.

Indeed, according to the SIT report, the AT based its conclusions that served as the foundation for the non-acceptance of the fiscal deductibility of costs in IRC and the additional VAT assessment, on the analysis of a set of elements and aspects that leave the question completely open as to whether we are faced with an actual situation of inventory write-offs, own to the Claimant's activity and materialized in the destruction of unusable or non-commercialized products.

The arguments used by the AT are vague and equivocal, let us see:

• Verification of monthly discriminating lists of merchandise to be written off, having found that the products, quantities and values are similar in each write-off;

• The write-off notification always being made by the wife of one of the managing partners and the witnesses always being two managing partners, with no certification by a person independent of the company's management bodies;

• Lack of evidence that the validity period of the products had expired and thus it was inevitable to make the products unusable;

• The taxable person only sent the write-off notifications with 5 days advance notice, such a period being inadequate for the AT to carry out on-site verification of the write-offs.

Now, although such investigations may constitute a starting point, it is certain that the AT has the possibility and the duty, in the exercise of its inspection powers, to analyze the concrete behavior of the taxpayer, determining, for example, the destination given to the unusable products, analyzing the adequacy of the computer records (whose existence was invoked by the Claimant's witnesses), which served as support for the regularization of all write-offs, as well as the correspondence with the quantities of product actually made unusable and not sold. Now, the SIT never questioned the Claimant's accounts, the truthfulness thereof being presumed in accordance with the LGT.

Independently of not observing on-site the physical write-off of merchandise at the Claimant's premises, internal documentary evidence was presented (monthly invoices for the year 2010 of the municipal services of ...), documentary evidence external to the Claimant's accounting (Office of SITARL) and also testimonial evidence that the destruction of merchandise occurs periodically, on Saturday, twice in each month, with the unusable products being taken in proper waste containers for waste treatment.

There are therefore no reasonable grounds to consider that the write-off of products identified by the Claimant in the write-off statements sent to the AT does not correspond to reality and, consequently, to set aside the presumption that such merchandise should be considered as transmitted for VAT purposes.

It remains for us, finally, to analyze the question in light of the provisions of article 86 of the VAT Code.

3) Framing the question within the scope of the presumption provided for in article 86 of the VAT Code

Under the terms of article 86 of the VAT Code, under the heading "Presumption of acquisition and transmission of goods", the following is provided:

"Unless proof to the contrary, goods that are found in any of the places where the taxable person exercises their activity are presumed to be acquired and goods acquired, imported or produced that are not found in any of these places are presumed to be transmitted."

Article 86 of the VAT Code clearly establishes a legal presumption iuris tantum, that is, capable of proof to the contrary. Indeed, article 73 of the LGT clearly states that the presumptions contained in tax incidence rules (as is the case) always admit proof to the contrary, in implementation of the constitutional principles in force in the fiscal domain.

In cases of legal presumption, refutable by proof to the contrary, there is an inversion of the burden of proof, leaving the one who has the legal presumption in his favor exempted from proving the fact to which the legal presumption leads (articles 344, n. 1 and 350, n. 1 of the Civil Code). In the case, given that the Tax and Customs Authority had the legal presumption of transmission of goods provided for in article 86 of the VAT Code in its favor, it was incumbent on the Claimant to prove that, despite the goods no longer being in its possession, it had not sold them to third parties.

According to the Claimant, full proof was made of the realization of the write-off of merchandise recorded as inventory losses in the amount of € 306,910.38, relying, for this purpose, on the following chain of main facts:

1. The Claimant is dedicated to the production and commercialization of pastry products and it is necessary to regularly and periodically carry out write-offs, due to a set of factors: product surpluses, production waste, validity periods; manufacturing defects, return of retailers to whom they are sold on consignment;

2. The write-offs are inherent to the Claimant's production process, normal and do not result from exceptional devaluations;

3. The products are rapidly perishable and to avoid contamination risks are daily placed in proper containers for subsequent collection by the municipal services of ...;

4. In accordance with the information entered by shift managers in the computer system, the Claimant prepares destruction statements, signed by two witnesses, from which lists the destroyed and made unusable goods and their respective quantities;

5. The write-off notifications are sent with 5 days advance notice regarding the date of destruction and, although this is a short period, the Claimant cannot, under penalty of breaching food safety rules, keep for longer perishable products in its premises;

6. The collection, transport and write-off of these products is carried out with the intervention of third parties (municipal services of ...), with the process being documented in the file the waste collection service throughout 2010, as well as an Office of SITAR of ..., which attests to the fortnightly procedure of waste removal at the Claimant's premises;

7. The waste collection for write-off is carried out on Saturday, with the Claimant having continuous operations.

Faced with the evidence produced, it is inequivocal that the Claimant's activity generates regular and significant waste, which can represent about 30% of billing.

With regard to the Respondent's allegation, that the Claimant did not make the prior notification with the due advance notice (having done so with pre-notice of only 5 days) and that the write-off statements are always prepared by the same witnesses and were never certified by entities independent of the company in order to prove the quantities written off and the actual destruction of merchandise, it is important to note, as we have already referred above, that none of these requirements is required by law.

Therefore, jurisprudence and administrative doctrine itself have understood that all means of proof at the disposal of the taxpayer must be admitted, for purposes of setting aside the presumption, the Claimant having brought the pertinent elements, including documentary and testimonial, to the proof of the correlation between the nature of its activity and the need to carry out periodic and regular write-offs of food waste and packaging/product accommodation material. It was also demonstrated that the removals are carried out by entities external to the Claimant, making use of 1100 Liter containers, with a charge for the waste collection service rendered an identical value throughout 2010[7].

In this context, it cannot fail to be considered verified the aforementioned write-off and, consequently, the presumption of article 86 of the VAT Code set aside by proof to the contrary, produced and acquired procedurally, concluding that the goods resulting from production and commercialization waste were in fact written off and not sold to third parties.

And, to set aside the legal presumption of transmission, we do not consider it exigible for the Claimant to hire an external certifying entity that demonstrates and justifies each inventory break identified in the write-off statements. Moreover, the Claimant demonstrated that it has a senior technician responsible for quality control and food safety, an employee of the Claimant, who is daily at the facilities (factory) controlling the entire production process (cf. testimony of witness Inês Raimundo). Furthermore, shift managers should verify the occurrence of write-offs, quantify and report them through computer means, so that the administrative services prepare the respective waste lists.

As the AT clarified in the context of a Binding Information Request on a matter similar to that of the present case[8], write-off destruction statements or insurance policies (in the case of thefts) are not required when "write-offs result from the normal exercise of activity not of extraordinary or unforeseen nature" (...) and account should be taken of the existence of (i) control systems, (ii) preparation of lists for identified and non-identified write-offs (iii) preparation of internal supporting documents to accounting records and (iv) the fact that write-offs do not deviate from reasonable limits for the production sector.

In other words, it is important to create in the judge the conviction that the elements in question were not sold to third parties, it being certain that there are no signs to embody such a hypothesis.

On the other hand, with the evidence produced, the Claimant sought the objective of rebutting the presumption provided for in article 86 of the VAT Code, by demonstrating the circumstances inherent to its activity and a substantial set of elements of evidence that attest, in reasonable terms, the volume of inventory write-offs declared, during the year 2010, in raw materials, finished products, as well as packaging material (as per testimony of witnesses C, D and E).

Furthermore, in these cases, it is accepted by the jurisprudence of our Superior Courts, the recourse to indirect evidence, that is, "indicative facts, from which an inference will be sought regarding the indicated facts, with the aid of the rules of common experience, science or technique. The conclusion or evidence is not obtained directly, but indirectly, through a judgment of normal relationship between the indication and the theme of proof".[9]

On the other hand, as noted above, the Respondent failed to shake the presumption of truthfulness that assists the elements and values declared by the taxpayer (cf. article 75, n. 1 of the LGT), added to the fact that the Claimant easily demonstrated all waste collections from production throughout 2010, counting on the intervention in this process of external entities unrelated (municipal company of waste collection and transport services and waste identified by the Claimant).

In this context, with the aforementioned presumption rebutted (as it was), it was incumbent on the Respondent to substantiate, in concrete terms, possible divergences in quantification and/or valuation of goods written off, and to establish the corresponding presuppositions of fact, so as to set aside the values declared by the taxable person (now Claimant), which benefit from the aforementioned presumption of truthfulness.

However, the Respondent limited itself to expressing surprise at the constancy of write-offs, finding it strange that the witnesses who sign the destruction statements are always the same, the impossibility of physical counting of goods, as these are indistinctly placed or "piled" in containers and, also, the fact that the Municipal Services of ... which should transport the waste did not appear at the time identified in the notification to the Finance Service.

Now, it happens that all these circumstances are usual, and directly resulting from the type of activity of the Claimant. A simple judgment of experience allows us to conclude that goods placed in 1100 Liter containers are naturally piled up, awaiting removal by companies specialized in waste treatment and that such goods will not be subject to commercialization.

It seems to us unreasonable to impose on the taxable person a different waste storage process from the one it has, or a labeling of the numerous waste, first of all, by the costs inherent to space and logistics that this process would involve. It would also seem difficult for us to subject the Municipal Services to compliance with schedules. These circumstances, combined with the other signs of the case, lead us to the conclusion that the Respondent failed to sufficiently shake the legal presumption of truthfulness of the values of write-offs declared by the Claimant.

The weakness of the elements brought by the Respondent stems especially from the weaknesses of investigation by the SIT in the course of the inspection process itself, which concentrated on the finding of non-compliance with the 15-day prior notice period regarding write-off.

Pure and simple, the Respondent considers that no write-off occurred due to the impossibility of identifying and quantifying goods placed in 1100 Liter containers and also, because at the time indicated in the write-off notification the Truck of the Municipal Services of ... was not at the company headquarters. Thus, it presumes transmitted the totality of the goods contained in the write-off lists despite, paradoxically, having notified the SITARL which confirm the occurrence of fortnightly removals.

Regarding quantification, the Respondent's main argument rests on the constancy of the monthly waste quantities which total 18.10% of the total initial stocks plus purchases.

Now, as mentioned above, these allegations present weaknesses, are vague and were rebutted convincingly by the Claimant.

Added to this is the fact, no less relevant, that, if such allegations were to be upheld, these would never translate into the total disregard of the write-off, as the Respondent argues, but only partial. And in this case it would be incumbent on the Respondent to determine the quantitative presuppositions of taxation, which, it is reiterated, could never correspond to the incidence of tax on the total value of write-offs that occurred.

Now, regarding quantification, the Respondent did not fulfill the burden that fell on it, regarding proof of the respective presuppositions of fact.

It is worth recalling in this regard that the Respondent did not proceed to the determination of any concrete elements that would allow a quantification, even if approximate, of the hypothetical divergences between the Claimant's write-off statements and the write-offs actually carried out, in the year 2010, opting instead to maintain, without foundation, that the write-offs realized and declared by the Claimant should be disregarded in their entirety, in an application of the legal presumption (article 86 of the VAT Code) to the totality of goods contained in the lists sent to the Finance Service.

Thus, although the Respondent collects some indicative facts capable of questioning, in part, the value of the inventory regularizations presented by the Claimant, it is certain that the instructional deficit would always subsist with the uncertainty regarding quantification (which could never be entire). Indeed, the AT is subordinated to the principle of inquisitorial and discovery of material truth, and should carry out all necessary diligences to the satisfaction of public interest and the discovery of material truth (cf. article 58 of the LGT).

It should also be noted that the administrative presumption of the quantum of the write-off is already within the domain of taxation by indirect methods, which the legislator elected as a method of quantification of the taxable matter clearly residual and exceptional (cf. articles 83, n. 2, 84 and 85, n. 1 of the LGT). And taxation according to indirect methods would always imply the observance, by the AT, of the respective provision especially provided for in the law, which did not happen (cf. articles 81, n. 1 in fine, 82, n. 3 and n. 4, 87, 88 and 90 et seq. of the LGT).

On the other hand, article 100, n. 1 of the CPPT tells us that, whenever from the evidence produced results founded doubt about the quantification of the tax fact, the impugned act should be annulled.

As mentioned above, the Claimant succeeded in explaining the internal and external procedures related to the manner of control and documentation of normal inventory write-offs and their write-off routines, ultimately presenting values of considerable write-offs, however below the sector average in which it operates.

On the contrary, the Respondent presented no criteria or methodology for quantifying the possible acceptable value of normal write-offs for this sector, having been clear the fortnightly removal of waste by the Municipal Services of ..., which carry out the transport and destruction of products made unusable by the Claimant during its manufacturing and commercialization process.

In the extreme, even if it were considered that (only) a situation of quantification uncertainty (and not, as we argue, an omission of the presuppositions of fact relating to the quantum) was at issue, it would be necessary to invoke, as stated, the application of the provisions of article 100, n. 1 of the CPPT, according to which, "Whenever from the evidence produced results founded doubt about the existence and quantification of the tax fact, the impugned act should be annulled".

Article 100, n. 1 of the CPPT is nothing more than the application of the general rule on the burden of proof in tax procedure stated in article 74, n. 1 of the LGT (identical to that provided for in article 342, n. 1 and n. 2 of the Civil Code) and which is in force in administrative litigation in general: "the burden of proof of the verification of the legal presuppositions (binding) of its action, namely if aggressive (positive and unfavorable); in return, it will be incumbent on the administered to present sufficient evidence of the illegitimacy of the act, when these presuppositions are shown to be verified"[10].

Regarding the burden of proof and its assessment, in the tax context, see several Court Decisions of the STA, in the sense above stated[11]. The Claimant, as stated, succeeded in proving factuality preventive of the right of taxation of the Tax and Customs Authority legally presumed, i.e., proved the write-off (article 342, n. 2 of the Civil Code).

It is also important to note that the Claimant acted under Circulars and Administrative Guidelines issued by the Tax and Customs Authority and, consequently, any conduct that is based on these administrative pronouncements has a more intense legal protection, under penalty of serious harm to the protection of the confidence embodied in an action in accordance with a position issued by the Tax Administration[12].

In conclusion, whether by a principle of protection of confidence, or by failure to meet the presuppositions of fact (quantitative) that fell to the Respondent (as we believe to be the case in the situation at hand), or by lack of certainty (non liquet) regarding the quantification of the tax fact, this rule on the burden of proof should be applied, deciding the question against the one who has the burden of quantification in cases where the assessment comes from the Tax and Customs Authority and not from the taxpayer[13].

In light of the foregoing, it is concluded that in this matter the Claimant is right, and the additional VAT assessments and compensatory interest should be annulled due to violation of law and error in the presuppositions.

IV - DECISION

Accordingly, the Singular Arbitral Tribunal decides:

a) To judge entirely the request for arbitral pronouncement to have merit; and

b) To annul the tax acts of additional VAT assessment and respective compensatory interest.

The value of the case is fixed at € 36,934.62, in accordance with the provisions of articles 3, n. 2 of the Regulation of Costs in Tax Arbitration Proceedings ("RCPAT"), 97-A, n. 1, paragraph a) of the CPPT and 306 of the CPC.

The amount of Costs is fixed at €1,836.00 under article 22, n. 4 of the RJAT and Table I attached to the Regulation of Costs in Arbitration Proceedings (RCPAT), with such amount being entirely borne by the Respondent (Tax and Customs Authority), in accordance with the provisions of articles 12, n. 2 of the RJAT and 4, n. 4 of the RCPAT.

Notify.

Lisbon, 15 July 2015.

The Arbitrator

(Filipa Barros)

[1] Acronym for Legal Regime of Tax Arbitration.

[2] This article was subsequently repealed by Law no. 2/2014 of 16 January.

[3] Arbitration Case no. 701/2014-T of 8 May 2015.

[4] Court Decision of the Central Administrative Court of the South, Case no. 6540/02 of 2 July 2002.

[5] See in this sense Court Decision of the STA, of 11 June 1997, Case no. 012610, 2nd Section.

[6] See in this sense Court Decision of the S.T.A. of 4/3/87, in Ads, 319-849.

[7] In this sense, see Arbitral Decision, Case no. 111/2013-T of 20 February 2014.

[8] Case A509 2009009, of 29 June 2009.

[9] Alberto Xavier, Concept and Nature of the Tax Act, Coimbra, 1972, p. 154.

[10] Vieira de Andrade, Administrative Justice (Lessons), 2nd. edition, Almedina, 2001, p.269.

[11] Court Decisions STA Cases no. 26,635, of 17.04.2002; no. 243/03, of 07.05.2003; no. 1568/03, of 24.03.2004; no. 810/04, of 27.10.2004, and the Court Decisions of TCA North, 1834/04 - Viseu, of 24.01.2008; 1203/09.8BEBRG, of 08.11.2012, and 383/08.4BEBRG, of 28.02.2013.

[12] Emelka Case, C-181/04 to C-183/04, of 14/09/2006 in which the CJEU addresses the problem of public acts that bind the State in its actions toward citizens, even if the legality of the decision is contestable.

[13] Jorge Lopes de Sousa, in CPPT, annotated and commented, Vol II, 6th edition, 2011, Áreas Editora, pp. 132 et seq.).