Tax Arbitration Case Note: Modelo 40 Declarations and VAT Calculation in Portugal

Introduction

A recent decision from the Portuguese Centre for Administrative Arbitration (CAAD) provides important guidance on two key tax issues: (1) the evidentiary value of Modelo 40 bank transaction data in tax audits, and (2) the correct method for calculating VAT when the taxpayer has not charged it to final consumers.

The case, Processo n.º 1049/2025-T, involved a taxpayer operating a retail business under the simplified IRS regime who declared zero income for 2023, despite receiving €159,352.75 in payments through bank accounts, TPA terminals, and transfers.

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The Facts

The taxpayer, registered under CAE 47123 (non-specialized retail trade at markets and mobile sales units), was subject to:

• Simplified IRS regime (Article 28(1)(a) CIRS)

• Normal VAT regime, quarterly periodicity (since February 2022)

During an inspection, the tax authority (AT) cross-referenced the taxpayer’s Modelo 3 IRS declaration (showing zero income) with:

• Modelo 40 declarations submitted by banks

• TPA transaction records

• Social media advertising of sales

This revealed €159,352.75 in payments received across two bank accounts.

The AT issued:

The taxpayer challenged the assessments, raising three main arguments:

1. The AT had used indirect assessment without procedural safeguards

2. The AT violated the inquisitorial principle by not seeking bank secrecy waivers

3. The VAT should have been calculated “by inside” (including VAT within the amounts received) rather than “by outside” (adding VAT on top)

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The Legal Issues

1. Direct vs. Indirect Assessment

The taxpayer argued that using Modelo 40 data to reconstruct income constituted indirect assessment, which requires specific statutory conditions under Articles 87-88 LGT.

The AT maintained this was a mere technical/arithmetic correction – a form of direct assessment under Article 83(1) LGT.

The Tribunal’s Analysis:

The tribunal examined whether the correction required any presumption or probabilistic judgment. The Modelo 40 data provided:

• Exact amounts credited to the taxpayer’s accounts

• Third-party origin (banks, not AT-generated)

• Objective verifiability euro by euro

The tribunal concluded:

“The correction based on objective data provided by third parties (Modelo 40/TPA payment flows and transfers) that allows direct, objective and exact determination of omitted income constitutes technical correction (direct assessment) and not indirect assessment, the taxpayer’s lack of collaboration being irrelevant.”

Key Distinction:

• Indirect assessment = using presumptions, samples, or probabilistic methods when exact quantification is impossible

• Direct assessment = using objective, exact data to quantify income precisely

Held: The correction was properly classified as direct assessment.

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2. The Inquisitorial Principle

The taxpayer argued the AT should have:

• Requested bank secrecy waivers (Article 63-B LGT)

• Obtained detailed bank statements

• Investigated the specific nature of each transaction

The AT responded that the taxpayer was repeatedly notified but failed to respond.

The Tribunal’s Analysis:

While the inquisitorial principle (Articles 58 LGT, 6 RCPITA) requires the AT to pursue material truth, it does not oblige the AT to exhaust all possible investigative means when:

• Sufficient objective evidence already exists

• The taxpayer has been given opportunities to provide explanations

• The taxpayer remains silent

The AT had notified the taxpayer:

• Twice (April 14, 2025) – requesting bank statements and explanations

• Once (May 22, 2025) – granting the right of hearing on the draft inspection report

All without response.

Held: No violation of the inquisitorial principle. The AT was not required to seek bank secrecy waivers when existing data already permitted exact quantification.

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3. VAT Calculation: “By Outside” vs. “By Inside”

The most significant aspect of the decision concerned VAT calculation methodology.

The taxpayer had:

• Not charged VAT to final consumers

• Not issued invoices with VAT

• Sold to an indeterminate universe of consumers through markets and social media

The AT applied a 23% VAT rate “by outside” – i.e., on top of the total amounts received:

The Tribunal’s Analysis:

Applying CJEU jurisprudence (Cases C-249/12 and C-250/12, Tulică and Plavošin), the tribunal held:

“When the taxpayer has not passed on nor documented VAT with final clients and retroactive collection appears impossible, the total amount received must be considered as already including the tax ‘by inside’, under penalty of violating the VAT neutrality principle.”

The principle of VAT neutrality requires that VAT should not become a cost borne by the taxpayer. Since the taxpayer could not retroactively recover VAT from consumers (more than two years after sales, with unidentifiable customers), requiring the taxpayer to pay VAT “on top” would:

• Breach neutrality – make VAT an expense rather than a pass-through tax

• Violate EU law – contrary to CJEU guidance

• Disregard the nature of VAT as a consumption tax

The Correct Calculation:

Reduction: €6,853.44 (approximately 18.7% of the VAT assessment)

Held: Partial annulment of VAT assessments – reduced from €36,651.12 to €29,797.68.

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4. VAT Input Deduction

The taxpayer also claimed a right to deduct input VAT.

The Tribunal’s Holding: The right to deduct input VAT requires:

• Possession of valid invoices (Article 36 CIVA)

• Compliance with formal requirements (Articles 19-21 CIVA)

No invoices or supporting documents were presented. Claim rejected.

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5. Indemnity Interest

The taxpayer sought indemnity interest on all amounts.

The Tribunal’s Analysis:

• IRS portion: No error attributable to AT – no interest

• Maintained VAT portion: No error attributable to AT – no interest

• Annulled VAT portion (€6,853.44): Error attributable to AT – interest payable from payment date

The error was imputable to the AT because they had all elements to correctly calculate VAT “by inside” but failed to do so, committing an error of law.

Held: Indemnity interest payable only on the annulled VAT portion.

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Final Decision

The tribunal ruled:

Costs: €2,142.00 total – Requerente (taxpayer) bears €1,780.00; AT bears €362.00

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Practical Implications

For Taxpayers

1. Modelo 40 data is powerful evidence. Banks report your transactions directly to the AT. If you declare income significantly lower than what appears in your accounts, you face a high risk of correction – and proving the AT used a forbidden method is difficult.

2. VAT planning matters. If you sell to final consumers without charging VAT and cannot recover it retroactively, the AT may need to calculate VAT “by inside.” However, this requires demonstrating impossibility of recovery – which was proved here by the nature of the sales (indeterminate consumers, time elapsed).

3. Respond to notifications. The AT is not required to exhaust all investigative means when you remain silent. If you have explanations, provide them.

4. Document everything. Without invoices, there is no right to input VAT deduction.

For Practitioners

1. Challenge classification carefully. Taxpayers often argue indirect assessment, but courts distinguish based on whether the quantification requires presumption or probability. Modelo 40 data typically qualifies as direct evidence.

2. Consider the “by inside” VAT argument. This decision follows CJEU jurisprudence and should be considered whenever a taxpayer did not charge VAT and cannot recover it.

3. Indemnity interest may be partial. Even when the taxpayer obtains partial victory, interest may be limited to the annulled portion.

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Key Principles Summarized

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References

Case: Processo n.º 1049/2025-T (August 4, 2026)

CJEU Jurisprudence Applied: Cases C-249/12 and C-250/12 (Tulică and Plavošin)

Key Legislation:

• LGT Articles 58, 63-A(4), 63-B, 74, 75, 78, 79, 81, 83, 87-88

• CIRS Articles 28, 31

• CIVA Articles 19-21, 36, 53, 58

• RJAT Article 13

Domestic Case Law Cited:

• TCA Sul, 09-01-2025, Processo n.º 949/17.1BEALM

• TCA Sul, 18-04-2018, Processo n.º 8451/15

• TCA Norte, 13-07-2017, Processo n.º 01686/07.0BEVIS

• STA, 03-06-2015, Processo n.º 01509/14

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This case note is for informational purposes only and does not constitute legal advice. Taxpayers should consult qualified professionals regarding their specific circumstances.

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