Without prejudice to the relevance of the discussion regarding the VAT refund process in companies that fall outside the extractive industry sector, as well as the constraints thereon to their daily operations, this article will focus on the special regime of VAT regularisation applicable to companies in the extractive industry sector.
The choice of this sector is justified by the fact that it has a special regime, it has the largest portion of VAT credit, as well as by the fact that its operations are predominantly exports with large amounts of VAT to receive from the State.
The new Value Added Tax Refund Regulations (hereinafter “RRIVA”), approved by the Decree No. 78/2017 of 28 December, has a chapter that addresses the special refund regime applicable to the mining and oil & gas companies. Hence, according to Article 18 of the RRIVA, the companies that operate in the mining and oil & gas sector in the production stage and whose exports represent at least 75% of sales of the previous year, qualify for the special regime. However, this framework is not automatic, thus the taxpayer has to request it before the tax administration.
After being included in the special regularization regime, the taxpayer must observe the rules for issuing regularization notes established in article 20 of the RRIVA, particularly the need to obtain a previous endorsement from the Reimbursement Services Directorate. We can look into the constraints of prior “endorsement” in a future article.
Once the taxpayer, included in the special regularization regime, has the notes duly endorsed, whenever purchasing goods and services, it must pay the net amount of the invoice and issue a regularization note for the VAT assessed, in favour of his supplier. The regularization note issued to the supplier gives him the right to regularize the amount of VAT assessed and not paid by the purchaser.
According to Article 21 of the RRIVA, the requirements of eligibility to benefit from the VAT special regularization regime are:
- application addressed to the General Taxes Directorate;
- Confirmation of the taxpayer’s eligibility by the Minister of Industry and Trade;
- Agreements for the supply of goods, for export; and
- List of goods and services to be acquired, indicating the supplier name and Tax ID (NUIT) and that the goods and services to be acquired are intended exclusively for the applicant taxpayer.
This means that, according to the legislation in force, in order to benefit from this regime the eligible companies shall meet the requirements above. As such, if the law does not refer any other requirements to authorize inclusion of the taxpayer in the special regime, the tax administration shall not refuse such authorization if not based on the failure to fulfil one of the requirements mentioned in paragraphs a) to d) above.
Any vicissitudes that may occur in the sphere of the taxpayer, such as additional assessments made by the tax administration in relation to the VAT itself and/or other taxes, irregularities regarding the level of compliance with its tax obligations, etc. should not, therefore, serve as grounds for the non-authorization of the inclusion in the special VAT regime, because the law does not establish that.
Obviously, this article does not intend to advocate for non-compliance with legally established tax obligations, nor to question the corrections and additional assessments, eventually carried out by the tax administration, but rather to emphasize that the authorization process for the special VAT refund regime is not the proper place or proceeding to discuss and resolve these types of issues. Moreover, the law (mainly under Law No. 2/2006 of 22 March, which approves the General Tax Law and Decree No. 19/2005 of 22 June, which approves Tax Audit Procedures Regulations), provides for a number of mechanisms to ensure that the tax administration can verify the taxpayer’s level of compliance with tax obligations and collect any tax debt that may exist, and even foresees coercive means for this purpose.
Thus, by way of conclusion, the VAT regularization mechanism is welcome and is intended to respond to a long-standing concern of mining and oil & gas companies that bear large sums of input VAT without any output VAT in the initial stages or during production when the extracted products are exclusively intended for export, which obviously creates cash flow problems for these companies.
Although this mechanism was approved in 2017, many companies in the extractive industry are not yet using it, either due to lack of awareness of the mechanism or due to difficulties in completing the eligibility process, so a more pragmatic approach in terms of creating awareness of this special regime and in reviewing applications is recommended, otherwise the mechanism will not achieve the intended results.