Is the Portuguese tax authority overlooking accounting rules for biological assets? The presumptive taxation in agricultural activity.

Resumo

The Portuguese Tax Authority (TA) has been conducting audits targeting companies operating in the pig farming sector.  These audits frequently conclude that there are legal and economic reasons to disqualify financial statements that are the basis of taxable income computation and apply presumptive taxation methods to increase taxable income. The main reason for applying presumptive taxation is the alleged discrepancy between the margin ratios of audited companies and the sectoral average margins, which is interpreted as signs of omitted revenue and tax evasion.

This paper explores whether the tax audit procedures employed in the pig farming sector align with the accounting standards governing agricultural activities. Specifically, when presumptive taxation is based on differences between a taxpayer's margin and the margin of a sample of firms in the same sector, the financial accounts of audited and comparable firms require detailed scrutiny. This analysis should consider key elements such as fair value gains and losses, inventory measurement, and other sector-specific accounting traits to determine whether the margin formula regularly used by the TA to calculate tax profitability is appropriate for justifying presumptive tax adjustments. A comprehensive evaluation of these factors can help mitigate the frequent litigation that follows such tax audits.