Process: 85/2017-T

Date: September 29, 2017

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD arbitral decision 85/2017-T addresses a critical VAT refund dispute involving a Portuguese public higher education institution that filed declarations under an incorrect legal framework. The taxpayer, conducting both taxable and exempt operations as a mixed taxable person, initially applied a deduction percentage method resulting in lower VAT deductions than legally permitted. Following legislative amendments harmonizing the Portuguese VAT Code (CIVA) with EU directives and external consultation, the entity identified it could claim higher deductions and made supplementary deduction requests.

The Tax Authority rejected these claims following a 2016 inspection covering 2011-2015, issuing additional assessments totaling €216,085.48 including compensatory and default interest. The central legal question concerned which limitation period applied: the 2-year period under Article 78(6) CIVA for material or calculation errors, or the 4-year period under Article 98(2) CIVA for errors of law.

The arbitral tribunal relied on Supreme Administrative Court precedent (case 01427/14, June 28, 2017) establishing that errors of law—misapplication of legal frameworks rather than computational mistakes—fall under the 4-year limitation period of Article 98(2) CIVA. This distinction is crucial for taxpayer rights in recovering excess VAT payments.

The case highlights how mixed taxable persons must carefully apply deduction methodologies. When taxpayers incorrectly interpret applicable legal provisions regarding their right to deduct input VAT, this constitutes an error of law, not a material error. Such errors allow taxpayers to rectify declarations and claim refunds within four years from the right's accrual, rather than the restrictive two-year window for simple calculation mistakes. This decision reinforces taxpayer protections when legal complexity or legislative changes create uncertainty about proper VAT treatment, particularly benefiting public entities like educational institutions with complex operational structures combining commercial and non-commercial activities.

Full Decision

ARBITRAL DECISION

The arbitrators Dr. José Poças Falcão (arbitrator-president), Dr. Filipa Barros and Dr. Paulo Lourenço, appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 30 March 2017, hereby agree as follows:

1. Report

A…, legal entity no…, with registered office at … Street and …, in …, hereinafter abbreviated as A… or Applicant, came, pursuant to paragraph a) of article 2(1) and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January (RJAT), to request the constitution of the Collective Arbitral Tribunal in order to seek the declaration of illegality and annulment of additional VAT assessments (2016…, 2016…, 2016…, 2016…, 2016…, 2016… and 2016…), compensatory interest (2016… and 2016…) and default interest (2016…, 2016…, 2016…, 2016…, 2016… and 2016…), all in the total amount of € 216,085.48 (two hundred and sixteen thousand and eighty-five euros and forty-eight cents). It further requests that, as a consequence of the aforesaid annulment, the AT be condemned to reimburse the Applicant the amount of €164,342.58, with compensatory interest, at the legal rate, from 25-10-2016 (the date on which it made the payment) until full reimbursement.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AUTHORITY AND CUSTOMS AUTHORITY on 31 January 2017.

In accordance with the provisions of paragraph a) of article 6(2) and paragraph b) of article 11(1) of RJAT, the Ethics Council appointed as arbitrators the signatories hereof, who communicated acceptance of the appointment within the applicable period.

On 15 March 2017, the Parties were notified and did not express any intention to reject the appointment of the arbitrators, in accordance with the combined provisions of article 11(1), paragraphs a) and b) of RJAT and articles 6 and 7 of the Ethics Code.

Thus, in conformity with the provision in paragraph c) of article 11(1) of RJAT, the collective arbitral tribunal was constituted on 30 March 2017.

The Tax Authority and Customs Authority replied on 10 May 2017 and, by order of 9 July of the same year, the meeting provided for in article 18 of RJAT was dispensed with and the continuation of the proceedings for submissions was decided.

The Parties submitted their submissions.

The arbitral tribunal was regularly constituted.

The parties have legal personality and capacity, are legitimate (articles 4 and 10(2) of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not suffer from any nullities.

2. Matter of Fact

2.1. Proven Facts

The following facts are considered proven:

  • The Applicant is a legal person governed by public law whose principal activity is higher education and whose secondary activities are the practice of general clinical medicine and outpatient services, laboratory and clinical analysis, nursing, organ collection and banking, among other unspecified human health activities, in addition to engaging in accommodation and museum activities;

  • The Applicant is covered by the normal VAT regime, with monthly periodicity and carries out, within the scope of its activities, taxable operations and exempt operations, being, for that reason, considered a mixed taxable person;

  • The Applicant, being a mixed taxable person, carried out the deduction of VAT borne on the acquisition of goods and services based on the deduction percentage method or pro rata;

  • Following an alteration of procedures implemented, the Applicant, with the assistance of an external entity, began to deduct more tax, understanding that the method previously used represented a right to deduction inferior to what was legally permitted;

  • The Applicant, by means of the supplementary deductions made, requested the reimbursement of VAT in the periodic declaration relating to December 2015 (201512);

  • The Applicant was subject to a tax inspection carried out in 2016, pursuant to service order no. OI2016…, in relation to the years 2011, 2012, 2013, 2014 and part of 2015, resulting in the aforementioned additional assessments, including compensatory and default interest, in a total of € 216,085.48 (two hundred and sixteen thousand and eighty-five euros and forty-eight cents);

  • The Applicant made, on 25 October 2016, the payment of tax in the amount of € 164,342.58 (one hundred and sixty-four thousand three hundred and forty-two euros and fifty-eight cents).

2.2. Unproven Facts

There are no unproven facts.

2.3. Reasoning for the Determination of the Matter of Fact

The facts were considered proven based on the documents attached with the request for arbitral pronouncement and on the administrative proceedings.

3. Matter of Law

The contentious regime provided for in RJAT is of mere legality, aimed solely at the declaration of illegality of acts of the types provided for in paragraphs a) and b) of article 2(1) thereof.

Therefore, the legality of the impugned acts must be assessed as they were carried out, with the reasoning used in them, it being irrelevant whether other possible reasonings could serve as support for other acts with decision content totally or partially coinciding with the act carried out. Thus, reasonings invoked a posteriori, after the conclusion of the tax procedure in which the act for which the declaration of illegality is requested was carried out, are irrelevant, including those raised in the judicial proceedings.

The Applicant, as mentioned, carries out its activity in the field of higher education, providing supplementary services, from which results that some of them are exempt from VAT while others are subject to taxation.

As a consequence of a legislative amendment, intended to harmonize the VAT Code with the Community Directive, the Applicant made supplementary deductions of tax, understanding that this was permitted to it, from the outset, by the Directive, from the legislative amendment, by the VAT Code.

The Tax Authority and Customs Authority, in the Tax Inspection Report underlying the impugned assessments, understood, in summary, that taxable persons do not enjoy full freedom in determining the moment of exercise of their right to deduction, since article 98(2) of the VAT Code, cited by the Applicant, establishes only the limit to which the right to deduction may be exercised, not permitting the taxable person the freedom to determine the moment of exercise of that right.

In these terms, the question to be examined consists in knowing whether the position adopted by the Applicant is correct, which sustains the possibility of being able, during a period of 4 years, to exercise the right to deduction based on the new wording of article 23 of the VAT Code, bearing in mind the provisions of article 98(2) of the same legal instrument.

3.1. Applicable Legal Regime

The question object of the present request has already been the subject of decision by the superior courts, more specifically by the Supreme Administrative Court which, very recently, within the scope of proceedings 01427/14, handed down a judgment, dated 28 June 2017, in which it was stipulated that the applicable period for claiming VAT delivered in excess, in a situation encompassed by the so-called error of law, is of 4 years, in accordance with the provisions of article 98(2) of the VAT Code.

Fundamentally, according to the aforementioned judgment, everything comes down to knowing whether, in the particular case at hand, the controversial question concerns material or calculation errors or errors of law.

In the first case, according to established case law, the period of 2 years provided for in article 78(6) of the VAT Code applies, while in the second case, the period is 4 years, in accordance with the provisions of article 98(2) of the aforementioned VAT Code.

Note that article 78(6) of the VAT Code refers to the "correction of material or calculation errors" in accounting records and periodic declarations, in favor of the taxable person, which may be carried out within a period of two years, calculated, in the case of the exercise of the right to deduction, from the arising of the respective right, in accordance with article 22(1) of the VAT Code.

It seems all too evident that the legislative amendment made with respect to article 23 of the VAT Code results in the introduction of a direct allocation rule with regard to the exercise of the right to deduction, that is, it came to establish clearly and unequivocally that goods and services assigned to the exercise of a taxed activity give the right to full deduction, whereas goods and services which are assigned to the exercise of an exempt activity do not confer such right.

The deduction percentage which must be determined in relation to goods which are used indiscriminately in one and the other activity can only be carried out after the direct allocation referred to above is completed.

Now, since the practice of exercising the right to deduction was, until the legislative amendment, carried out without recourse to direct allocation, it is considered that compliance with such method may reveal an error of law and not merely a material or calculation error.

It is worth noting that article 95-A(2) of the Tax Code of Procedure and Process provides a concept of "material or manifest errors" indicating that it comprises, "in particular those resulting from abnormal functioning of the tax administration's IT systems, as well as unequivocal situations of calculation error, writing error, inaccuracy or omission".

The association of calculation error with material error made in this article 78(6) of the VAT Code reveals that the calculation errors referred to will be of this type, namely arithmetic errors in the operations of calculating the amount to be deducted.

This same question was also explored in a previous CAAD Decision, considering that we are "faced with a material error in filling in the amount of deductible VAT in a declaration when it was intended to write a certain amount and, through carelessness or omission, ended up writing a different amount, or when the error in filling in the declaration results from a previous error of the same type that exists in the accounting or in some document that serves as the basis for the exercise of the right to deduction. One is faced with a calculation error, when the arithmetic operations to determine the amount of deductible VAT were incorrectly performed, in the declaration itself or in some of the documents on which it was based".[1]

In light of the foregoing, the same Court understood that "the error as to the application of certain legal regimes does not constitute either a material error or a calculation error, so it is manifest that the regime of the aforementioned article 78(6) of the VAT Code cannot be applied to it. In particular, the calculation error of the pro rata is not a calculation error which can be encompassed in this rule because it embodies an error of law regarding the applicable legal regime and not an error of an arithmetic nature."

Thus, the determination of deductible VAT based on the new interpretation given to the provision of article 23 of the VAT Code implies recourse to qualified technicians, both with regard to the classification of operations within the scope of the subjection or exemption from tax, and with regard to the interpretation that must be given relative to the method of direct allocation, prior to the use of the pro rata.

All things considered, it can then be concluded that the Applicant's argument should proceed, since, being an error of law, the period for recovering the overpaid tax is 4 years (general period for the exercise of the right to deduction or reimbursement of tax delivered in excess) and not 2 years (special period for the deduction of tax), as the Tax Authority argues, by application of the provisions of article 98(2) of the VAT Code.

The Applicant made, on 25 October 2016 the payment of tax in the amount of € 164,342.58 (one hundred and sixty-four thousand three hundred and forty-two euros and fifty-eight cents).

Accordingly, the request for restitution of the amount paid, plus compensatory interest counted from the date of payment until actual and full reimbursement, should likewise succeed.

4. Decision

In these terms, the members of this Arbitral Tribunal hereby agree to:

  • Grant the request for arbitral pronouncement and annul the VAT assessments, compensatory interest and default interest identified above;

  • Grant the request for restitution of the amount paid, plus compensatory interest counted from the date of payment until actual and full reimbursement.

5. Value of the Proceedings

In accordance with the provision in article 306(2) of the CPC, 97-A(1)(a) of the CPPT and article 3(2) of the Regulations on Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 225,186.06 (two hundred and twenty-five thousand one hundred and eighty-six euros and six cents).

6. Costs

In accordance with article 22(4) of RJAT, the amount of costs is fixed at € 4,284.00 (four thousand two hundred and eighty-four euros) in accordance with Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, to be borne by the Tax Authority and Customs Authority.

Lisbon, 29 September 2017

The Arbitrators

(José Poças Falcão)

(Filipa Barros)

(Paulo Lourenço)

[1] See, CAAD Arbitral Decision, Proceedings no. 117/2013-T, of 17/05/2013.

Frequently Asked Questions

Automatically Created

What happens when a taxpayer files VAT declarations under the wrong legal framework in Portugal?
When a taxpayer files VAT declarations under the wrong legal framework in Portugal, this constitutes an error of law rather than a material or calculation error. The taxpayer has the right to rectify these declarations and claim refunds of excess VAT paid within a 4-year limitation period under Article 98(2) of the Portuguese VAT Code (CIVA), as established by Supreme Administrative Court jurisprudence. The Tax Authority may challenge these corrections through inspections and issue additional assessments, but taxpayers can contest such decisions through administrative arbitration at CAAD. The key is demonstrating that the error involved misapplication of legal provisions governing VAT treatment, not simple computational mistakes.
How does the distinction between errors of law and material or calculation errors affect VAT refund deadlines under Portuguese tax law?
The distinction between errors of law and material or calculation errors is critical for VAT refund deadlines under Portuguese tax law. Material or calculation errors—simple computational mistakes or data entry errors—are subject to a restrictive 2-year correction period under Article 78(6) CIVA. In contrast, errors of law—misapplication or misinterpretation of legal provisions governing tax treatment—allow taxpayers to exercise their refund rights within 4 years under Article 98(2) CIVA. The Supreme Administrative Court established this differentiation in case 01427/14 (2017), recognizing that legal complexity and evolving legislation justify extended correction periods when fundamental legal framework issues arise, rather than mere computational errors.
Can a public entity recover excess VAT paid due to an incorrect legal classification of taxable activities?
Yes, a public entity can recover excess VAT paid due to incorrect legal classification of taxable activities, as demonstrated in CAAD decision 85/2017-T. When a public institution conducts mixed activities (both taxable and exempt operations) and initially applies an incorrect deduction methodology due to misunderstanding the applicable legal framework, this constitutes an error of law. The entity can rectify its declarations within the 4-year period established by Article 98(2) CIVA and claim refunds of overpaid VAT. This applies particularly when legislative amendments harmonizing Portuguese law with EU directives clarify previously ambiguous legal positions, allowing entities to adjust their VAT treatment retroactively within the statutory limitation period.
What are the time limits for claiming a VAT refund under Article 98(2) and Article 78(6) of the Portuguese VAT Code (CIVA)?
Article 98(2) of the Portuguese VAT Code establishes a 4-year limitation period for exercising the right to VAT deduction, calculated from the moment the right accrues. This applies to errors of law—situations where taxpayers misapply legal provisions governing VAT treatment. In contrast, Article 78(6) CIVA establishes a 2-year period for correcting material or calculation errors in VAT declarations. The critical distinction lies in the nature of the error: legal misinterpretation versus computational mistakes. Supreme Administrative Court jurisprudence (case 01427/14, 2017) confirmed that the 4-year period under Article 98(2) applies when taxpayers challenge the legal framework under which they filed declarations, providing broader protection for complex legal interpretation issues compared to simple arithmetic errors.
How does the CAAD arbitral tribunal handle disputes over additional VAT assessments and compensatory interest?
The CAAD arbitral tribunal handles disputes over additional VAT assessments and compensatory interest by conducting comprehensive legality reviews under the RJAT (Administrative Arbitration Legal Framework). The tribunal examines whether Tax Authority assessments comply with applicable law, analyzing the factual matrix established through inspection reports and taxpayer documentation. In cases like 85/2017-T, tribunals evaluate whether the Tax Authority correctly classified taxpayer errors and applied appropriate limitation periods. The tribunal may annul illegal assessments and order reimbursement of amounts paid, including compensatory interest from the payment date. CAAD operates under a mere legality regime, assessing administrative acts as performed without considering alternative justifications raised post-procedure.