VAT Self-Assessment Arbitrability and Right to Deduction Based on Legal Error – CAAD 117/2013-T

ENGLISH TRANSLATION

Case no. 117/2013-T

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Dr. Diogo Leite de Campos and Dr. Victor Simões, appointed by the Ethics Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 23-7-2013, agree as follows:

1. Report

… — INVESTMENT AND MANAGEMENT COMPANY, SGPS, S.A., NIPC …, filed a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority is the Defendant, with a view to:

(i) Declaration of the partial illegality of the self-assessment act for Value Added Tax relating to fiscal year 2007 embodied in the twelve periodic declarations better identified in the request for arbitral decision, with its consequent partial annulment, with all legal consequences, namely the declaration of illegality and annulment of the act denying the request for official review better identified in the request for arbitral decision, the reimbursement of € 293,990.19 in unduly paid tax and the payment of compensatory interest calculated on this amount and counted from 11 February 2008 until its full reimbursement;

(ii) Condemnation of the Defendant to compensate the Claimant for the expenses resulting from the litigation, with legal representative fees, to be liquidated in execution of judgments;

(iii) As a subsidiary matter, given the institutional nature and the legal basis on which tax arbitration is based, if and insofar as it is not clear to the arbitral tribunal, notwithstanding the Union case-law already produced on the matter, the scope of the articles of Council Directive 2006/112/EC, Article 168 and following, or of any other provision of Council Directive 2006/112/EC, which may in its judgment interfere with the proper solution of this specific case, this Arbitral Tribunal should then initiate a preliminary ruling, on the questions it considers to raise, to the Court of Justice, as provided for in Article 19(3)(b) and Article 267 of the Treaty on the Functioning of the European Union.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 17-05-2013.

Pursuant to Article 6(2)(a) and Article 11(1)(b) of the RJAT, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal Counselor Jorge Lopes de Sousa, Prof. Dr. Diogo Leite de Campos and Dr. Victor Simões, who communicated their acceptance of the appointment within the applicable time limit.

On 08-07-2013 the parties were duly notified of that appointment and did not express a wish to challenge the appointment of the arbitrators, pursuant to the combined provisions of Article 11(1)(a) and (b) of the RJAT and Articles 6 and 7 of the Code of Ethics.

Thus, in accordance with what is provided in Article 11(1)(c) of the RJAT, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 23-07-2013.

The Tax and Customs Authority filed a response raising the exception of material incompetence of this Arbitral Tribunal and arguing that the request for arbitral decision should be ruled inadmissible.

The Claimant filed a reply to the exception.

On 23-10-2013, the meeting provided for in Article 18 of the RJAT took place, at which it was agreed that there would be no oral testimony and there would be successive written arguments.

The Parties filed arguments.

The arbitral tribunal was duly constituted and the parties have legal personality and capacity and are legitimate (Articles 4 and 10(2) of the same decree and Article 1 of Regulation no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

2. Facts

2.1. Facts deemed proven

a) The claimant is a management company for equity interests ("SGPS") whose object consists of the management of equity interests and the provision of technical administrative and management services to the subsidiary companies;

b) In fiscal year 2007, the Claimant carried out financing operations and provided technical consulting services to the subsidiary companies;

c) The performance of operations, in some cases taxed and with the right to deduction, in other cases exempt and without the right to deduction, implied that the Claimant, as a mixed taxable person, had to adopt a system of partial VAT deduction;

d) The claimant calculated the percentage of VAT deduction for fiscal year 2007, in all 12 declarations contained in documents nos. 1 to 12 attached to the request for arbitral decision, whose contents are set out as reproduced, including all income components in the fraction for calculating the pro rata, including dividends and gains derived from the sale of equity interests;

e) The Claimant determined a pro rata of 16% for fiscal year 2007, which resulted in VAT to be deducted in the amount of € 67,970.52 of the total deductible tax incurred that year of € 421,398.46.

f) Subsequently, the Claimant believed that there had been an error on its part and that "by removing from the denominator of the fraction for calculating the pro rata mentioned above € 26,049,937.90 obtained from the disposal of equity interests that were located there, and adding € 869,375.10 obtained from exempt operations without the right to deduction, the pro rata of deduction calculated becomes 84%" and that "the value of € 869,375.10 added to the denominator comprises € 61,765.64 more than the value of € 807,609.46 contained in the calculations attached with the request for official review — and this addition decreases the deduction pro rata from 85% to 84%. The value of € 807,609.46 initially calculated had been calculated on the basis of the difference between the total value of income (relevant for VAT purposes) and the total of taxable operations, including those recorded in Balance sheet accounts, whereas the latter are not relevant for this purpose — only those reflected in income or revenue accounts (income statement accounts) are, hence the increase in the difference (i.e., in the value calculated for exempt operations without the right to deduction) to € 869,375.10", according to the following table:

(petition from the request for revision of the tax act contained in the administrative file and document no. 15 attached to the request for arbitral decision, whose contents are set out as reproduced);

g) In fiscal year 2007, the Claimant made acquisitions in the amount of € 67,824.39 to which corresponded VAT borne in the amount of € 12,485.95, acquisitions which, in the amount of € 58,094.05, were re-billed to the Claimant's subsidiary companies, with VAT assessment; of the VAT borne with said acquisitions, only € 630.44 was deducted (by application of the pro rata method), whereas the value actually subject to deduction, to the extent of the re-billings, by application of the real allocation method, is € 9,055.75, resulting in a difference of € 8,425.31 in deductible VAT that was not deducted (document no. 17 attached to the request for arbitral decision, whose contents are set out as reproduced);

h) On 1 September 2010, there was filed at the Tax Directorate of … a request for official review of the VAT assessment as regards the final deduction pro rata and re-billings relating to fiscal year 2007 (administrative file, whose contents are set out as reproduced);

i) The request for official review was denied by decision of the Director-General of the Tax and Customs Authority of 1-2-2013, which expressed agreement with the proposal presented in Memorandum no. …, which is contained in the administrative file, 3rd part, whose contents are set out as reproduced, which contains, among other things, the following:

"III — ADMISSIBILITY OF THE REQUEST

1. Since the object of the present petition is the recognition of the right which the Claimant claims to have to correct, in its favor, the VAT borne in relation to fiscal year 2007, of which it deducted only 16% when, by virtue of the new formula for calculating the deduction percentage, it could have deducted 85%, the same must be analyzed in accordance with the legal norms governing that right, as enshrined in the VAT Code, since the possibility of official review cannot override those

2. This is because the official review, provided for in Article 78 of the General Tax Law, of VAT self-assessment, cannot prejudice the imperativenss of the norms that establish special time limits for the exercise of the right to deduction, specifically enshrined in the VAT Code, as referred to, or such norms would be deprived of any effectiveness.

3. According to the petition presented, the claimant now seeks (on 2010/09/01) to regularize in its favor the value of € 305,972.94, relating to fiscal year 2007, of VAT that was not deducted by:

• Use of a deduction percentage lower than appropriate, with reference to the tax incurred in resources of mixed use;

• Failure to apply the method of direct allocation, regarding the tax incurred in expenses that were re-billed by the claimant to its subsidiary companies, with VAT assessment.

1. That is, it seeks, in short, to correct a material or calculation error in the records referred to in Articles 44 to 51 and 65 and in the declarations mentioned in Article 41, and therefore subject to the discipline enshrined in Article 78(6) of the VAT Code, whereby, in accordance with said norm, its regularization, optional since it results in tax in favor of the taxable person, could only be effected within two years, which, since it concerns the exercise of the right to deduction, is counted from the birth of said right, in accordance with Article 22(1)

2. In fact, the situation under analysis constitutes a "material or calculation error made in the records and/or declarations", which is defined in section 9.3 of Circular Memorandum no. 30082/2005, of 17 November of the VAT Department, as transcribed:

(...)

"Material or calculation errors are those which result from internal errors of the company and have no interference in the sphere of third parties.

(...) The regularization of this type of errors is optional if in favor of the taxable person and can only be effected within two years.

If these are corrections of errors relating to deductible tax (e.g., error in transcription, to the periodic declaration, of deductible tax) the time limit is counted from the birth of the right to deduction (normally the date of the invoices, but if the legal time limit for their issuance was not observed, the date on which it expires).

For errors found in the completion of periodic declarations, the calculation of the new time limit shall be made from the date of their submission or the date on which the legal time limit for submission expires, in cases where it was not observed."

1. The mechanism of VAT deductions is provided for in Articles 19 to 26 of the VAT Code and is part of the essence of the tax itself, Article 19 referring that, for the calculation of the tax due (self-assessment), taxable persons deduct from the tax levied on taxable operations in a given period, the tax that was invoiced to them on the acquisition of goods and services by other taxable persons, mentioned in invoices or equivalent documents issued in legal form, in the same period, a situation which should be reflected in the periodic declaration referred to in Article 29(1)(c) of the VAT Code.

2. The claimant alleges (see §§ 3, 4 and 5 of p. i, at fl. 3 of the case file)

3 In the context of its activity, the Claimant performs exempt operations (namely the provision of credit) and operations not subject to VAT, which do not confer the right to deduction of the tax incurred and, simultaneously, operations subject to VAT taxation (e.g., provision of consulting services), which confer the right to deduction of the tax.

4 Given that part of the goods and services acquired by the claimant is used, simultaneously, in operations that confer the right to deduction and operations that do not confer this same right, it has two methods of determining the measure of deductible VAT: real allocation and deduction percentage, in accordance with what is enshrined in the VAT Code and Council Directive 2006/112/EC, of 28 November 2006 ("VAT Directive").

5 In fiscal year 2007 the Claimant determined the amount of deductible VAT exclusively on the basis of the pro rata method, in accordance with Article 23 of the VAT Code. The deduction percentage reached was 16%, which was applied to the VAT incurred in the "common inputs, that is, those used indistinctly in the various activities developed by the claimant.

(...)"

1. Thus, it states that, as regards the change in the calculation of the deduction pro rata for 2007, because the disposal of equity interests does not constitute an economic activity for VAT purposes, and therefore does not influence the calculation of the deduction pro rata, it recalculated its final pro rata for that year, noting that in accordance with the applicable legal regime it should be 85%, which is why it now seeks to exercise the right to deduction of the VAT in question, in the value of € 297,364.43, which it did not recover, because it used a deduction percentage lower than appropriate.

2. It also alleges that, as regards the re-billing of expenses, by application of the method of direct allocation, it found the acquisition of various services (training, conferences, communications, among others), with VAT, which it re-invoiced to its subsidiary companies, also charging the VAT corresponding to the applicable rate, whose tax it deducted only at the percentage of the pro rata, when, in fact, that tax did not relate to "common costs" or "resources of mixed use", and was therefore subject to full deduction, which is why it now seeks to exercise the right to deduction of the VAT it failed to deduct, in the amount of € 8,608.51.

3. That is, as previously mentioned, it seeks to regularize in its favor the VAT not yet deducted relating to the situations described, which resulted from material errors, the possibility of regularization of which is provided for in Article 78(6) of the VAT Code.

4. In accordance with Article 22(2) of the VAT Code, which constitutes the general rule, without prejudice to the provisions of Article 78 of the same decree. "... the deduction must be effected in the declaration of the period or of a period subsequent to the one in which the receipt of the invoices, equivalent documents or receipt of VAT took place that forms part of the change declarations. ", determining also Article 22(3) of the cited norm that, "if the receipt of the documents referred to in the previous number takes place in a period of declaration different from that of their issuance, the deduction may be made, if still possible, in the period of declaration in which that issuance took place. "

5. This means that, in accordance with the legislation applicable to the case, as well as with what has been the expressed understanding of the Services, although Article 98(2) of the VAT Code establishes that the right to deduction may be exercised up to the limit of four years after the birth of the right to deduction, it is not given to the VAT taxable person the freedom for it to determine the moment of exercising this right, the aforesaid norm limiting itself to fixing, only, a maximum limit of a general character, from which the right to deduction can no longer be exercised 36.

According to the understanding established, the maximum limit of the right to deduction is, thus, only applicable, by virtue of this general character, when there is no special norm fixing a lower or upper limit for the exercise of the right to deduction.

1. Otherwise, such norms providing for special time limits for the exercise of the right to deduction would have no useful meaning, since the norm establishing the four-year time limit for the right to deduction, which is Article 98(2) of the VAT Code, would always prevail over it.

2. At stake, then, is the classification of the situation described in any of the norms that provide for special time limits for the exercise of the right to deduction."

3. Now, establishing Article 22(1) of the VAT Code that the right to deduction is born at the moment when the deductible tax becomes due, in accordance with the provisions of Articles 7 and 8, effecting its calculation by subtraction from the amount of tax assessed during a period of declaration, of the amount of deductible tax in the same period, this right must be exercised in the period of taxation of receipt of invoices, or in the taxation period of their issuance, if earlier, as previously mentioned.

4. Therefore, the general rule of VAT deduction in the periodic declaration of the exercise of the right to deduction in the declaration of the period in which the tax has become due must, thus, be reconciled with the provisions of Article 78(6) of the VAT Code, which provides that the correction of material or calculation errors in the record referred to in Articles 44 to 51, in the declarations mentioned in Article 41 and in the guides or declarations referred to in Article 67(1)(b) and (c), is optional when it results in tax in favor of the taxable person, but can only be effected within two years, which, in the case of the exercise of the right to deduction, is counted from the birth of said right, in accordance with Article 22(1), being mandatory when it results in tax in favor of the State."

5. As for the four-year time limit mentioned in Article 98(2), it is noted that it has a general character, so its application is restricted to situations for which there is no special time limit established, which is not the case in the present situation.

6. This understanding has already been accepted in recent case-law, as is the case with the Decision of the Supreme Administrative Court, rendered in Proc. No. 966/10, of 2011.05.18.

7. Thus, for all the foregoing and in accordance with the legal norms referred to, it appears that the request for official review of error committed in the self-assessment of January to December 2007, submitted by the claimant on 2010/09/01, is not applicable the general four-year time limit referred to in Article 98(2), since for its regularization Article 78(6) of the VAT Code provides for a special two-year time limit.

IV — CONCLUSIONS

1. Taking into account all the preceding considerations and the legal provisions cited, the following should be noted:

• As referred to in Article 78(1) of the General Tax Law, the revision of tax acts may be carried out at the initiative of the taxable person, within the time limit for administrative objection, or at the initiative of the tax administration, within four years after assessment, noting that Article 78(2) of the same article states that, without prejudice to the legal burdens of objection or impugnation by the taxpayer, the error in self-assessment is deemed to be attributable to the services for the purposes of Article 78(1).

• The mechanism of VAT calculation, by its characteristics, has perfect fit within the concept of self-assessment, so the tax act in question could be revised by the tax administration within the general four-year time limit, in accordance with Article 78(1) of the General Tax Law and Article 98(2) of the VAT Code, if its regularization were not provided for in Article 78(6) of the VAT Code or in any other norm establishing a special time limit.

• The situation under consideration, resulting from internal errors and with no interference in the sphere of third parties, constitutes the commission of material or calculation errors, the correction of which is, mandatorily, subject to the discipline of Article 78(6) of the VAT Code.

• The time limit legally set in Article 78(6) of the VAT Code for the regularization of material or calculation errors is two years, counted from the birth of the right to deduction, which occurs on the date of issuance of the invoices or at the end of the time limit for their issuance, if it was not observed.

• Beyond that time limit, there is no legal provision that permits the taxable person the exercise of the right to deduction at a time subsequent to those established in Article 22 of the VAT Code, in cases of occurrence of material or calculation errors recorded in its accounting, detected at a time later than when it should have been exercised.

1. In view of all the preceding considerations, and in accordance with the cited norms, we are of the opinion that the request for revision of tax act should be rejected on the ground of error in self-assessment, because the special two-year time limit set in Article 78(6) of the VAT Code for the regularization of material or calculation errors committed in its calculation has elapsed.

2. Within the scope of the principle of participation provided for in Article 60 of the General Tax Law, as well as of the instructions on the right to prior hearing conveyed through Article 13(3) of Circular of 1999/08/07 of the Tax Justice Services Department, it is proposed that prior hearing be dispensed with, since the Tax Authority, in its decision, merely limited itself to making the interpretation of the legal norms applicable to the facts invoked by the claimant".

j) The refusal notified to the Claimant on 20 February 2013 (Doc. no. 14 attached to the request for arbitral decision, whose contents are set out as reproduced).

k) On 17-5-2013, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings (CAAD computer system).

2.2. Facts not proven

It was not proven:

– that the Tax Administration had issued general instructions to the effect that SGPS would be prohibited from using the real allocation method or that the Claimant had followed any guidelines of the Tax and Customs Authority (no evidence was presented and in the request for revision of the tax act the Claimant states that it acted in the manner it described by mistake);

– that Tax Science and Technique no. 418, relating to July-December 2006 had been published between 2008 and 2009 (this assertion by the Claimant is contradicted by document no. 1 attached to the response by the Tax and Customs Authority, from which it can be concluded that that issue was distributed, at least, from 6-7-2007, the date on which one of the articles contained in it was registered in the database of the Attorney General's Office).

2.3. Reasoning for the decision on the facts

The determination of the facts was based on the administrative file and on statements by the Claimant which are not contested by the Tax and Customs Authority.

3. Question of material incompetence

3.1. Position of the Tax and Customs Authority

The Tax and Customs Authority raises the exception of material incompetence of this Arbitral Tribunal for the following reasons, in summary:

– The arbitral request at issue has as its immediate subject the decision of the official review and as its mediate subject the tax acts embodied in the VAT self-assessments for 2007;

– Law no. 3-B/2010, of 28 April (State Budget for 2010), provided in its Article 124 a legislative authorization relating to arbitration in tax matters as an alternative form of jurisdictional resolution of conflicts in tax matters, providing that it should constitute an alternative procedural means to judicial review proceedings and to the action for recognition of a right or legitimate interest enshrined in the Code of Tax Procedure and Process;

– Pursuant to Article 2(1)(a) of the RJAT, the competence of arbitral tribunals comprises the appraisal of the declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

– By virtue of the cross-reference in Article 4(1) of the RJAT, the binding of the Tax Authority to the jurisdiction of arbitral tribunals constituted in accordance with that decree depends on what is provided in Regulation no. 112-A/2011, namely as to the type and maximum value of disputes covered;

– Article 2(a) of Regulation 112-A/2011 provides that the binding of the Tax Authority to the jurisdiction referred to has as its object the appraisal of the claims relating to taxes whose administration is entrusted to it, referred to in Article 2(1) of the RJAT, "with the exception of claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative procedure in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process";

– In the situation at issue, having regard, in particular, to the fact that the self-assessments were not made in accordance with general guidelines issued by the Tax Authority, the prior recourse to amicable objection was always mandatory in accordance with Article 131(1) of the Code of Tax Procedure and Process;

– Without prejudice to, as concluded in the decision denying the request for official review at issue, it being abstractly still possible to raise the illegality of the self-assessment acts in accordance with Articles 78(1) and (2) of the General Tax Law;

– Given the administrative nature of the official review procedure, its assimilation to the provision of Article 131(1) of the Code of Tax Procedure and Process is possible for the purpose of subsequent impugnation of the respective denial decision;

– However, such assimilation is legally prohibited in the arbitral context, the appraisal of claims relating to the declaration of illegality of self-assessment acts that have not been preceded by recourse to the administrative procedure in accordance with Articles 131 of the Code of Tax Procedure and Process, but only by official review in accordance with Article 78 of the General Tax Law, being excluded from the material competence of arbitral tribunals;

– Indeed, Article 2(a) of Regulation no. 112-A/2011 excludes, literally, from the scope of the binding of the Tax Authority to arbitral jurisdiction, "[…] claims relating to the declaration of illegality of self-assessment acts […] that have not been preceded by recourse to the administrative procedure in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", official review provided for in Article 78 of the General Tax Law not being referred to there;

– From the wording given to the cited legal provision it is clear that the legislator chose to restrict the exercise of jurisdiction in the arbitral forum to claims which, being related to the declaration of illegality of self-assessment acts, have been necessarily preceded by the amicable objection provided for in Article 131 of the Code of Tax Procedure and Process;

– If it were not so, it would have sufficed for the legislator to reduce the exclusion provided for in Article 2(a) of Regulation no. 112-A/2011 to the expression "that have not been preceded by recourse to the administrative procedure", distinguishing nothing more;

– What did not happen, there being an express reference to prior recourse to the administrative procedure in the terms, in this case, of Article 131 of the Code of Tax Procedure and Process, that is, through presentation of the necessary amicable objection, regardless of its grounds;

– Article 11 of the General Tax Law provides that the interpretation of tax norms is governed by the same general rules and principles of interpretation and application of laws provided for in Article 9 of the Civil Code;

– And from this it follows that the letter of the law cannot be set aside, being the main reference and starting point of the interpreter;

– Given the voluntary and conventional nature of arbitration (here understood in its broad sense, since the material competence of arbitration tribunals results from public regulation effected in the RJAT), in the terms above explained, the interpreter cannot expand the object fixed by the legislator with respect to the binding of the Tax Authority to arbitral jurisdiction;

– The request for review may be alternative to objection, may be complementary, may even in the review procedure the claim of the taxpayer have been appraised, but considering the voluntary nature of arbitration, the interpretation adopted cannot, in any case, result in a restriction of the sphere of freedom of the Tax Authority, as a party, to establish the limits of its binding. It would only not be thus if its position implied the total frustration of the objective intended with the institution of tax arbitration, which is not the case;

– From the principle of the establishment of the arbitral procedure as a means of resolution of tax disputes alternative to judicial review proceedings, does not automatically follow the extension of the binding of the Tax Authority to all situations in which, doctrinally and/or jurisprudentially, it might be considered admissible to impugn;

– The scope of the binding of the Tax Authority is limited to the terms in which it is expressed in Regulation no. 112-A/2011, which, in the case sub judice, is the system provided for in Article 132 of the Code of Tax Procedure and Process, which requires prior amicable objection, even though, for the purposes of the impugnability of the act, the prevailing doctrine and a certain line of tax tribunals may admit the prior official review as an alternative. Indeed, the assimilation of tax arbitral tribunals to those is limited by the voluntary nature of the Tax Authority's accession to arbitral jurisdiction;

– If it is true that the taxpayer who has not filed timely amicable objection is not, ipso facto, prevented from seeking the revision of the tax act under Article 78 of the General Tax Law, within the conditions provided there, and judicially impugn the decision that denies the request for revision (cf. Article 95(2)(d) of the General Tax Law), it also does not seem questionable to affirm that the Tax Authority only bound itself, in accordance with Regulation no. 112-A/2011, to the jurisdiction of arbitral tribunals if the request for declaration of illegality of self-assessment act was preceded by recourse to the administrative procedure of amicable objection;

– Whereby, the taxpayer having followed the path of official review (sibi imputat), from the respective denial decision, it can only proceed judicially through judicial impugnation;

– If the taxable person intends to submit a request for declaration of illegality before an arbitral tribunal, amicable objection shall always be necessary, regardless of its grounds;

– The legislator completed the expression "that have not been preceded by recourse to the administrative procedure", with the mention "in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", whereby this latter part of the provision cannot, under pain of manifest illegality, be set aside, interpreting the norm as if this specific reference did not exist;

– In the situation under analysis, it was only subsequently to the request for official review, and in contradiction with it, that the Claimant invoked having, allegedly, followed a certain understanding of the Tax Authority;

– Access to arbitral jurisdictional protection is found, with greater reason, to be barred (which is defended without conceding), since here amicable objection would always be mandatory in accordance with Article 131 of the Code of Tax Procedure and Process, as required in Article 2(a) of Regulation no. 112-A/2011;

– The understanding above argued, that disputes which have as their object the declaration of illegality of self-assessment acts, as occurs in the situation sub judice, are excluded from the material competence of arbitral tribunals if they are not preceded by amicable objection in accordance with Article 131 of the Code of Tax Procedure and Process, is imposed by force of the constitutional principles of the rule of law and separation of powers (cf. Articles 2 and 111, both of the Constitution), as well as of legality (cf. Articles 3(2) and 266(2), both of the Constitution), as a corollary of the principle of indisposability of tax credits inherent in Article 30(2) of the General Tax Law, which bind the legislator and all the activity of the Tax Authority;

– The terms in which Article 4(1) of the RJAT is worded impose the conclusion that the binding of the Tax Authority is continuously dependent on and delimited by the express will contained in Regulation no. 112-A/2011.

– And, given the voluntary and conventional nature of arbitral protection, here understood in its broad sense, since the material competence of arbitration tribunals results from public regulation effected in the RJAT, the interpreter cannot amplify the object fixed by the legislator with respect to the binding of the Tax Authority to that jurisdiction;

– This is because, in fixing in accordance with the provisions of Article 4(1) of the RJAT and Article 2(a) of Regulation no. 112-A/2011 the binding of the Tax Authority to the necessary arbitral protection, the legislator is disposing on matters of general interest, previously delimiting the defense of the public interest in the aspect of indisposability of tax credits;

– the binding of the Tax Authority to the necessary arbitral protection, in which the principle of irrevocability of decisions prevails, presupposes a limitation of the situations in which it can fully decide whether or not to lodge an appeal of a judgment unfavorable to it, that is, of the power to choose between definitively renouncing the collection of the tax credit or adopting conduct potentially adequate to seek to enforce it;

– it is constitutionally barred, by force of the constitutional principles of the rule of law and separation of powers (cf. Articles 2 and 111, both of the Constitution), as well as of legality (cf. Articles 3(2) and 266(2), both of the Constitution), as a corollary of the principle of indisposability of tax credits inherent in Article 30(2) of the General Tax Law, the interpretation, even if extensive, which expands the binding of the Tax Authority to arbitral protection fixed by law, since such necessarily presupposes the consequent expansion of the situations in which it is mandatorily submitted to such regime, renouncing in that same measure the full jurisdictional remedy [cf. Article 124(4)(h) of Law no. 3-B/2010 and Articles 25 and 27 of the RJAT, which imposes a restriction of remedies of the arbitral decision];

– If this is not so understood, such interpretation would be not only illegal, but manifestly unconstitutional, by violation of the constitutional principles of the rule of law and separation of powers (cf. Articles 2 and 111, both of the Constitution), as well as of legality (cf. Articles 3(2) and 266(2), both of the Constitution), as a corollary of the principle of indisposability of tax credits inherent in Article 30(2) of the General Tax Law, which bind the legislator and all the activity of the Tax Authority.

3.2. Position of the Claimant

The Claimant answered stating, in summary, the following:

– There is no arbitration agreement between taxpayers on the one hand and the Tax and Customs Authority on the other, so it is incorrect to say that tax arbitration has a "voluntary and conventional nature", even "in broad sense";

– Tax tribunal arbitration is a legal system of alternative dispute resolution in the field of taxes, parallel to the tax judicial process. And as the legal system it is, it is subject to the very same interpretative rules as are all laws and legal norms;

– There was no accession of the Tax Administration to tax arbitration but rather a delegation in a normative act in the form of a joint Regulation, by Decree-Law no. 10/2011, of 20 January, of the task of prescribing (and whose implementation constitutes a suspensive condition of the applicability of the system) the definition of the material scope (type of disputes) to which the tax arbitration system applies;

– The aforesaid joint Regulation is the responsibility of the members of the Government responsible for the areas of finance and justice, bodies that do not coincide with the Tax and Customs Authority (cf. Article 4 of Decree-Law no. 10/2011, of 20 January);

– In the interpretation of legal norms the legislator prevents the interpreter from simply limiting itself to the letter of the law and instead imposes that it take into account in the reconstruction of the legislative intent (Article 9 of the Civil Code):

i) the unity of the legal system (an important factor in the circumstances of the case);

ii) the circumstances in which the law was enacted (in this case, it is necessary to look both at the Decree-Law that approved the tax arbitration system and at the legislative authorization law that constitutes the source of legitimacy, from the point of view of constitutionality, of this entire legal system);

iii) and the specific conditions of the time in which the law is applied (a time in which the case-law is already more than consolidated in the sense of equating the denial of a request for official review to a denial of an amicable objection: equating the two administrative procedures for the purposes of reaction outside the scope of the tax administration, before a court);

– And further it imposes on the law that the interpreter make use of the presumption that the legislator established the most correct solutions;

– It does not make sense that the matrix process, the tax judicial process, can be used to discuss the legality of assessment and self-assessment acts in the sequel to denials of requests for official review, and the tax arbitral process, which aims to constitute an option or alternative to the matrix process, cannot be used when in the context of self-assessments the prior administrative procedure has been of one type (request for official review) and not of another (amicable objection);

– From the point of view of the unity of the legal system, coherence and the presumption that the legislator established the most correct solutions (presumption that the legislator has right intention and is just, as opposed to arbitrary), this exclusion makes no sense, is not supported by any rational basis, rather it would constitute, if upheld, an arbitrary or, if you will, capricious solution. And it is to be presumed that the State, and especially the legislator State, does not act capriciously;

– It is incompatible with the objectives of strengthening effective protection of the rights and legally protected interests of taxable persons, of imprinting greater speed in the resolution of disputes opposing the tax administration to the taxable person and of reducing the pendency of cases in administrative and tax courts the understanding that in reaction to a request for denial of a request for official review one can resort to administrative and tax courts for them to assess the act of (self)assessment in dispute but no longer to tax arbitration.

– Especially (coherence of the system) in a context in which before an administrative act of denial of an amicable objection that discusses that very same (self)assessment the two avenues are admittedly open.

– In the seat of the legislative authorization law on tax arbitration it is prescribed that the tax arbitral process "must constitute an alternative procedural means to judicial impugnation proceedings" (cf. Article 124(2) of Law no. 3-B/2010, of 28 April), a purpose which shall be partially amputated if the meaning that the Tax Authority (which looks at it as an isolated island of everything else) intends is given to Article 2(a) of the (delegated) Regulation no. 112-A/2011, of 22 March;

– The denial of the request for official review was not based on any untimeliness of the same by non-compliance with the reaction time limit provided for in Article 78 of the General Tax Law, the reason for the denial of the request and consequent maintenance of the self-assessment act at issue being rather this: in the understanding of the Tax Authority the intended correction upward of the VAT deduction should have been made by the taxable person itself, through a regularization, within the time window provided in Article 78(6), not of the General Tax Law, but of the VAT Code;

– The same is to say that the Tax Authority understood that the self-assessment concerning 2007 does not suffer from any illegality inasmuch as the time window for VAT deduction claimed would extend in the circumstances of the case, in the understanding of the Tax Authority, for the period provided in Article 78(6) of the VAT Code, and the non-use of that time window for regularization by the taxable person itself of VAT would cause (still in the understanding of the Tax Authority) the substantive right to the VAT deduction in question to cease (whereas in terms of substantive law separately considered apart from its temporal conditionality as seen by the Tax Authority, reason is recognized to the claimant as to almost all of its request);

– One is before an act of denial of a request for official review that includes the appraisal of the legality of the assessment act, to which in the tax judicial process there corresponds the remedy "judicial impugnation";

– the Decree-Law no. 10/2011, of 20 January, which made use of the aforesaid legislative authorization, did not distinguish, in keeping with the spirit and the letter of the legislative authorization law, between reaction to administrative acts of denial in the context of amicable objection proceedings and in the context of official review proceedings;

– Both may trigger recourse to arbitration, which is aligned with the prescription that arbitration be an alternative procedural means to judicial impugnation proceedings. And from the point of view of the materiality underlying it makes all the sense that it be so: what is really discussed is the legality of an (self)assessment act which is not ceased to be what it is regardless of the administrative procedure (of appraisal of the same) prior of which it has been the subject;

– Wherefore, before this unequivocal indication of all the relevant legislation and of hierarchical rank (or constitutional legal value) higher than that of Regulation no. 112-A/2011, of 22 March, one must conclude, making materially underlying substance and the unequivocal intention of the legislator (Assembly of the Republic and Government) on the seat of tax arbitration prevail over form and appearance, in the sense that what Article 2(a) of the Regulation in reference intends to safeguard is that in the case of self-assessments (assessments in which by definition the Tax Authority did not intervene, at least formally) the Tax Authority is given the opportunity to appraise the invoked illegalities before recourse to the court;

– A solution which moreover is not novel to tax arbitration which merely replicates in this regard the one that was already the solution of the tax judicial process (judicial impugnation) – cf. Article 131 of the Code of Tax Procedure and Process;

– And it is that, the fact that the solution of the tax judicial process has been replicated, governed in the Code of Tax Procedure and Process, which explains the absence of reference to the official review procedure;

– Indeed, the tax judicial process also prescribes as a condition of subsequent impugnability the existence of preceding amicable objection against acts of self-assessment;

– Even if the self-assessment act has been preceded by official review procedure, its subsequent impugnability is in no way prejudiced, without the wording of Article 131 of the Code of Tax Procedure and Process, with express reference also only to the (necessity of) prior amicable objection, being opposed to as much;

– And, it is noted, is at stake a wording in Article 131(1) of the Code of Tax Procedure and Process considerably stronger than that used in Article 2(a) of Regulation no. 112-A/2011, of 2 March: "[i]n case of error in self-assessment, impugnation shall be necessarily preceded by amicable objection (…)". In contrast, from the reading of the provision under analysis in the Regulation the element that results central is the need for prior recourse to the administrative procedure, not amicable objection;

– The fact that the Code of Tax Procedure and Process only provides for prior amicable objection will be explained by the fact that it sees itself in the context of tax procedure and tax judicial process as self-sufficient and complete, wherefore it refers to the amicable objection procedure and does not mention the official review procedure, provided that it is in another decree (cf. Article 78 of the General Tax Law);

– But the applier of the law must see and look to all the law, and the General Tax Law is also law, wherefore the overwhelming case-law that, and quite rightly, has formed and which, not ignoring that the Code of Tax Procedure and Process is not an isolated island, made sure to draw the due consequences from it: notwithstanding the literal wording of Article 131 of the Code of Tax Procedure and Process, the self-assessment act may also be discussed in the context of tax judicial process when it has been preceded by a request for official review (as opposed to amicable objection), which is another administrative procedure, provided for in another decree (the General Tax Law), which also permits satisfaction of the condition of prior appraisal of the claim by the tax administration;

– Tax arbitration, namely the provision contained in Article 2(a) of Regulation no. 112-A/2011, of 22 March, followed, unsurprisingly, the model of wording of the Code of Tax Procedure and Process (which was what existed), referring only (even referring to the Code of Tax Procedure and Process) to amicable objection.

– Now, this provision of the tax arbitration system also does not live in isolation. And here, beyond the General Tax Law and the official review procedure provided for there, account must also be taken of the Decree-Law and the legislative authorization law that preceded and frame the Regulation under analysis;

– And the interpretative result cannot be other than that to which case-law has arrived with regard to the identical provision of the norm contained in Article 131 of the Code of Tax Procedure and Process (in what is relevant here, identical in this sense: provision as a condition of subsequent impugnability only of amicable objection and nothing more): notwithstanding the wording of the provision of the Regulation under analysis, also the denial of a request for official review is to allow the use of the remedy parallel to that of judicial impugnation which is tax arbitration;

– it is not possible, attentive to all the relevant legal data for this question, to which is added the legal presumption that the legislator established the most correct solution, to read Article 2(a) of Regulation no. 112-A/2011, of 22 March, as intending (as having as its purpose) to remove self-assessments preceded by a request for official review from the (parallel to the tax judicial process) tax arbitration process.

– In cases in which a request for official review of a tax assessment act is formulated, the Tax Administration is provided with, with this request, an opportunity to pronounce itself on the merits of the claim of the taxable person before the latter resorts to the jurisdictional avenue, it not being required that, cumulatively with the possibility of administrative appraisal in the context of this official review procedure, a further administrative appraisal be required through amicable objection.

3.3. Decision on the question of incompetence

3.3.1. Scope of the requirement of recourse to the administrative procedure for filing requests for arbitral decision relating to self-assessment acts

The competence of the arbitral tribunals functioning at CAAD is, in the first place, limited to the matters indicated in Article 2(1) of Decree-Law no. 10/2011, of 20 January (RJAT).

In a second line, the competence of the arbitral tribunals functioning at CAAD is also limited by the terms in which the Tax Administration was bound to that jurisdiction by Regulation no. 112-A/2011, of 22 March, for Article 4 of the RJAT establishes that "the binding of the tax administration to the jurisdiction of tribunals constituted in accordance with the present law depends on a regulation of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered".

In the face of this second limitation of the competence of the arbitral tribunals functioning at CAAD, the resolution of the question of competence depends essentially on the terms of this binding, for, even if one is faced with a situation that can be framed in that Article 2 of the RJAT, if it is not covered by the binding there will be no possibility that the dispute be jurisdictionally decided by this Arbitral Tribunal.

In Article 2(a) of this Regulation no. 112-A/2011, there are expressly excluded from the scope of the binding of the Tax Administration to the jurisdiction of the arbitral tribunals functioning at CAAD the "claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative procedure in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process".

The express reference to the preceding "recourse to the administrative procedure in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", must be interpreted as reporting to the cases in which such recourse is mandatory, through amicable objection, which is the administrative remedy indicated in those Articles 131 to 133 of the Code of Tax Procedure and Process, to whose terms reference is made. In truth, from the outset, it would not be understood that, where prior administrative impugnation is not necessary "when its ground is exclusively a matter of law and the self-assessment has been made in accordance with general guidelines issued by the tax administration" (Article 131(3) of the Code of Tax Procedure and Process, applicable to cases of withholding at source, by virtue of the provisions of Article 132(6) of the same Code), the arbitral jurisdiction would be barred because that administrative impugnation, which is understood to be unnecessary, was not carried out.

In the case at issue, the declaration of illegality and partial annulment of VAT self-assessment acts relating to fiscal year 2007 is sought, as well as the declaration of illegality and annulment of the act denying the request for official review.

As results from the facts established, it was not proved that the self-assessment had "been made in accordance with general guidelines issued by the tax administration" nor was an amicable objection filed in accordance with Article 131 of the Code of Tax Procedure and Process.

However, a request for official review of the referred assessment acts was filed.

Thus, it is important, first and foremost, to clarify whether the declaration of illegality of acts denying requests for revision of the tax act, provided for in Article 78 of the General Tax Law, is included in the competences attributed to the arbitral tribunals functioning at CAAD by Article 2 of the RJAT.

In truth, in this Article 2 there is no express reference to these acts, unlike what occurs with the legislative authorization in which the Government based itself to approve the RJAT, which refers to "requests for revision of tax acts" and "administrative acts that entail the appraisal of the legality of assessment acts".

However, the formula "declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account", used in Article 2(1)(a) of the RJAT does not restrict, in a merely declarative interpretation, the scope of arbitral jurisdiction to cases in which a direct impugnation is made of an act of one of those types. In truth, the illegality of assessment acts may be declared jurisdictionally as a corollary of the illegality of a second-level act, which confirms an assessment act, incorporating its illegality.

The inclusion in the competences of the arbitral tribunals functioning at CAAD of cases in which the declaration of illegality of the acts indicated there is made through the declaration of illegality of second-level acts, which are the immediate subject of the impugnatory claim, results with certainty from the reference made in that norm to acts of self-assessment, withholding at source and payment on account, which are expressly referred to as included among the competences of the arbitral tribunals. Indeed, with respect to these acts mandatory amicable objection is imposed, as a rule, in Articles 131 to 133 of the Code of Tax Procedure and Process, so, in these cases, the immediate subject of the impugnatory process is, as a rule, the second-level act which assesses the legality of the assessment act, an act which, if it confirms it, must be annulled in order to obtain the declaration of illegality of the assessment act. The reference made in Article 10(1)(a) of the RJAT to Article 102(2) of the Code of Tax Procedure and Process, in which the impugnation of acts denying amicable objections is provided for, dispels any doubts that cases are covered in the competences of the arbitral tribunals functioning at CAAD in which the declaration of illegality of the acts referred to in Article 2(a) of the RJAT must be obtained in the sequel of the declaration of the illegality of second-level acts.

Moreover, it was precisely in this sense that the Government, in Regulation no. 112-A/2011, of 22 March, interpreted these competences of the arbitral tribunals functioning at CAAD, by removing from the scope of these competences the "claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative procedure in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", which has as its scope restricting its binding to cases in which that recourse to the administrative procedure was utilized.

Obtained the conclusion that the formula used in Article 2(1)(a) of the RJAT does not exclude cases in which the declaration of illegality results from the illegality of a second-level act, it shall also cover cases in which the second-level act is the act of denial of a request for revision of the tax act, for no reason is seen to restrict, all the more so since, in cases in which the request for review is made within the time limit for amicable objection, it should be equated to an amicable objection.

The express reference to Article 131 of the Code of Tax Procedure and Process made in Article 2 of Regulation no. 112-A/2011 cannot have the decisive scope of excluding the possibility of appraisal of requests for illegality of acts denying requests for official review of self-assessment acts.

In truth, the interpretation exclusively based on the literal wording that the Tax and Customs Authority defends in the present proceedings cannot be accepted, for in the interpretation of tax norms the rules and general principles of interpretation and application of laws are observed (Article 11(1) of the General Tax Law) and Article 9(1) expressly prohibits interpretations exclusively based on the literal wording of norms by enacting that "interpretation must not limit itself to the letter of the law", it must, rather, "reconstruct from the texts the legislative intent, taking above all into account the unity of the legal system, the circumstances in which the law was enacted and the specific conditions of the time in which it is applied".

As to the correspondence between the interpretation and the letter of the law, "a minimum of verbal correspondence, even if imperfectly expressed" suffices (Article 9(3) of the Civil Code) which will only prevent the adoption of interpretations that cannot in any way be reconciled with the letter of the law, even acknowledging therein imperfection in the expression of the legislative intent.

For this reason, the letter of the law is no obstacle to the making of declarative interpretation, which makes explicit the scope of the literal wording, nor even extensive interpretation, when one can conclude that the legislator said less than what, in coherence, it would have intended to say, that is, when it imperfectly said what it intended to say. In extensive interpretation "it is the very appraisal of the norm (its "spirit") that leads to discover the need to extend the text of it to the hypothesis that it does not cover", "the expansive force of the very legal appraisal is capable of leading the provision of the norm to cover hypotheses of the same kind not covered by the text".

Extensive interpretation, thus, is imposed by the evaluative and axiological coherence of the legal system, erected by Article 9(1) of the Civil Code into a primary interpretative criterion by way of imposition of observance of the principle of unity of the legal system.

It is manifest that the scope of the requirement of prior amicable objection, necessary to open the contentious avenue of impugnation of self-assessment acts, provided for in Article 131(1) of the Code of Tax Procedure and Process, has as its only justification the fact that with respect to that type of acts there is no taking of a position by the Tax Administration on the legality of the legal situation created with the act, a position that might even turn out to be favorable to the taxpayer, avoiding the need for recourse to the contentious avenue.

In truth, in addition to it not being glimpsed any other justification for this requirement, the fact that identical mandatory amicable objection is provided for the contentious impugnation of acts of withholding at source and payment on account (in Articles 132(3) and 133(2) of the Code of Tax Procedure and Process), which have in common with self-assessment acts the circumstance that there also is no taking of a position by the Tax Administration on the legality of the acts, confirms that this is the raison d'être of that mandatory amicable objection.

Another unequivocal confirmation that this is the raison d'être of the requirement of mandatory amicable objection is found in Article 131(3) of the Code of Tax Procedure and Process, in establishing that "without prejudice to the provisions of the preceding numbers, when its ground is exclusively a matter of law and the self-assessment has been made in accordance with general guidelines issued by the tax administration, the time limit for impugnation does not depend on prior objection, the impugnation being to be presented within the time limit of Article 102(1)". In truth, in situations of this type, there has been prior generic pronouncement by the Tax Administration on the legality of the legal situation created with the self-assessment act and it is this fact that explains that mandatory amicable objection ceases to be required.

Now, in cases in which a request for official review of a tax assessment act is formulated the Tax Administration is provided, with this request, an opportunity to pronounce itself on the merits of the claim of the taxable person before the latter resorts to the jurisdictional avenue, whereby, in coherence with the solutions adopted in Articles 131(1) and (3) of the Code of Tax Procedure and Process, it cannot be required that, cumulatively with the possibility of administrative appraisal in the context of this official review procedure, further administrative appraisal be required through amicable objection.

Furthermore, it is unequivocal that the legislator did not intend to prevent taxpayers from filing requests for official review in cases of self-assessment acts, for these are expressly referred to in Article 78(2) of the General Tax Law.

In this context, the law allowing taxpayers to opt for amicable objection or official review of self-assessment acts and the request for official review filed within the time limit for amicable objection being perfectly equatable to an amicable objection, as was referred to, there can be no reason whatsoever that can explain that access to the arbitral avenue cannot be had by a taxpayer that has opted for revision of the tax act instead of amicable objection.

For this reason, it is to be concluded that the members of the Government that issued Regulation no. 112-A/2011, in making reference to Article 131 of the Code of Tax Procedure and Process with respect to requests for declaration of illegality of self-assessment acts, said imperfectly what they intended, for, intending to impose prior administrative appraisal to contentious impugnation of self-assessment acts, they ended up by including reference to Article 131 which does not exhaust the possibilities of administrative appraisal of those acts.

Moreover, it is to be noted that this interpretation not limiting itself to the literal wording is specially justified in the case of Article 2(a) of Regulation no. 112-A/2011, for the evident defects therein are: one is to associate the comprehensive formula "recourse to the administrative procedure" (which references, beyond amicable objection, hierarchical remedy and revision of the tax act) to the "expression in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", which has potential restrictive scope to amicable objection; another is to use the formula "preceded" by recourse to the administrative procedure, reporting to "claims relating to declaration of illegality of acts", which, obviously, would accord much better with the feminine word "preceded".

For this reason, beyond the general prohibition of interpretations limited to the letter of the law that is contained in Article 9(1) of the Civil Code, in the specific case of Article 2(a) of Regulation no. 112-A/2011 there is a special reason for not great enthusiasm for a literal interpretation being justified, which is the fact and wording of that norm being manifestly defective.

Furthermore, assuring the revision of the tax act the possibility of appraisal of the claim of the taxpayer before access to the contentious avenue that it is intended to achieve with the necessary administrative impugnation, the most correct solution, because it is the most coherent with the legislative purpose of "reinforcing effective and actual protection of the rights and interests legally protected of taxpayers" manifested in Article 124(2) of Law no. 3-B/2010, of 28 April, is the admissibility of the arbitral avenue to assess the legality of assessment acts previously appraised in official review procedure.

And, by being the most correct solution, it must be presumed to have been normatively adopted (Article 9(3) of the Civil Code).

Furthermore, containing that Article 2(a) of Regulation no. 112-A/2011 an imperfect formula, but which contains a comprehensive expression "recourse to the administrative procedure", which potentially references also the revision of the tax act, there is found in the text the minimum of verbal correspondence, though imperfectly expressed, required by that Article 9(3) for the viability of adoption of the interpretation which establishes the more correct solution.

It is to be concluded, thus, that Article 2(a) of Regulation no. 112-A/2011, duly interpreted based on the criteria of interpretation of the law provided for in Article 9 of the Civil Code and applicable to tax substantive and adjective norms, by force of the provisions of Article 11(1) of the General Tax Law, viabilizes the filing of requests for arbitral decision with respect to self-assessment acts that have been preceded by a request for official review.

From this perspective, the questions of unconstitutionality that the Tax and Customs Authority raises based on the erroneous literal interpretation it made of that norm do not arise, whereby its examination is precluded.

3.3.2. Question of incompetence in light of the scope of the judicial review process

The question of incompetence, however, is also to be raised in light of the limitation of the scope of tax arbitrability that derives from its creation as an alternative remedy to judicial review and the action for recognition of a right or legitimate interest.

In Article 2 of the RJAT, in which the "Competence of arbitral tribunals" is defined, the appraisal of claims for declaration of illegality of acts denying requests for official review of tax acts is not expressly included, for, in the wording introduced by Law no. 64-B/2011, of 30 December, only the competence of arbitral tribunals is indicated for "the declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account" and "the declaration of illegality of acts of fixing the taxable matter when it does not give rise to the assessment of any tax, acts of determination of the collectible matter and acts of fixing patrimonial values".

However, the fact that Article 10(1)(a) of the RJAT makes reference to Articles 102(1) and (2) of the Code of Tax Procedure and Process, in which the various types of acts giving rise to the time limit for judicial review are indicated, including amicable objection, allows it to be understood that all types of acts capable of being impugned through the judicial review process, covered by those Articles 102(1) and (2), shall be covered in the scope of the jurisdiction of the arbitral tribunals functioning at CAAD, provided that they have as their object an act of one of the types indicated in that Article 2 of the RJAT.

Moreover, this interpretation to the effect of the identity of the fields of application of the judicial review process and the arbitral process is the one that is in harmony with the aforesaid legislative authorization on which the Government based itself to approve the RJAT, granted by Article 124 of Law no. 3-B/2010, of 28 April, in which the intention is revealed that the tax arbitral process constitute "an alternative procedural remedy to judicial review proceedings and to the action for the recognition of a right or legitimate interest in tax matters" (Article 124(2)).

But, this same argument which is derived from the legislative authorization leads to the conclusion that the possibility of utilizing the arbitral process shall be barred when, in the tax judicial process, judicial review or the action for recognition of a right or legitimate interest cannot be utilized.

In truth, this being the sense of the referred legislative authorization law and inserting itself in the relative reserve of competence of the Assembly of the Republic to legislate on the "tax system", including the "guarantees of taxpayers" [Articles 103(2) and 165(1)(i) of the Constitution], and on the "organization and competence of courts" [Article 165(1)(p) of the Constitution], the referred Article 2 of the RJAT, under pain of unconstitutionality, for lack of coverage in the legislative authorization law which limits the Government's power (Article 112(2) of the Constitution), cannot be interpreted as attributing to the arbitral tribunals functioning at CAAD competence for the appraisal of the legality of other types of acts, for whose impugnation the judicial review process and the action for recognition of a right or legitimate interest are not suitable.

Thus, to resolve the question of the competence of this Arbitral Tribunal it becomes necessary to ascertain whether the legality of the act denying the request for official review could or could not be appraised, in a tax tribunal, through the judicial review process or action for recognition of a right or legitimate interest.

The act denying a request for official review of the tax act constitutes an administrative act, in light of the definition furnished by Article 120 of the Code of Administrative Procedure [subsidiarily applicable in tax matters, by virtue of the provisions of Article 2(d) of the General Tax Law, Article 2(d) of the Code of Tax Procedure and Process, and Article 29(1)(d) of the RJAT], for it constitutes a decision of an organ of the Administration which under the authority of norms of public law sought to produce legal effects in an individual and concrete situation.

On the other hand, it is also indisputable that it is an act in tax matters for the application of tax law norms is made in it.

Thus, that act denying the request for official review constitutes an "administrative act in tax matters".

From Articles 97(1)(d) and (p) and Article 97(2) of the Code of Tax Procedure and Process the rule is inferred that the impugnation of administrative acts in tax matters is made, in the tax judicial process, through judicial review or special administrative action (which succeeded contentious review, in accordance with Article 191 of the Code of Procedure in Administrative Courts) according to these acts do or do not comprise the appraisal of the legality of administrative assessment acts.

Possibly, as an exception to this rule may be considered the cases of impugnation of acts denying amicable objections, by the fact that there is a special norm, which is Article 102(2) of the Code of Tax Procedure and Process, from which it can be inferred that judicial review is always usable. Other exceptions to that rule may be found in special norms, subsequent to the Code of Tax Procedure and Process, which expressly provide the judicial review process as a means to impugn a certain type of acts.

But, in cases where there are no special norms, the aforesaid criterion of division of the fields of application of the judicial review process and the special administrative action is to be applied.

In light of this criterion of division of the fields of application of the judicial review process and the special administrative action, the acts handed down in official review proceedings of self-assessment acts may only be impugned through the judicial review process when they comprise the appraisal of the legality of these self-assessment acts. If the act denying the request for official review of self-assessment act does not comprise the appraisal of the legality of this, the special administrative action shall be applicable. This is a criterion of distinction of the fields of application of the aforesaid procedural means of questionable justification, but the certain thing is that it is what results from the wording of Articles 97(1)(d) and (p) of the Code of Tax Procedure and Process and has been uniformly adopted by the Supreme Administrative Court.

This finding that there is always an adequate procedural impugnatory remedy to contenciously impugn the act denying the request for official review of self-assessment act leads, from the outset, to the conclusion that one is not faced with a situation in which in the tax judicial process the action for recognition of a right or legitimate interest could be utilized, for its application in tax contentious proceedings has a residual nature, since such actions "can only be proposed whenever that procedural means is the most adequate to ensure full, effective and actual protection of the right or legally protected interest" (Article 145(3) of the Code of Tax Procedure and Process).

Another conclusion that the aforesaid delimitation of the fields of application of the judicial review process and the special administrative action permits is that, restricting the competence of the arbitral tribunals functioning at CAAD to the field of application of the judicial review process, only requests for declaration of illegality of acts denying requests for official review of self-assessment acts that comprise the appraisal of the legality of these acts are inserted in this competence.

The legislative concern in removing from the competences of the arbitral tribunals functioning at CAAD the appraisal of the legality of administrative acts that do not comprise the appraisal of the legality of assessment acts, besides resulting, from the outset, from the generic directive of creation of an alternative remedy to the judicial review process and the action for recognition of a right or legitimate interest, results with clarity from Article 124(4)(a) of Law no. 3-B/2010, of 28 April, in which are indicated among the possible objects of the tax arbitral process "the administrative acts that comprise the appraisal of the legality of assessment acts", for this specification can only be justified by a legislative intention in the sense of excluding from the possible objects of the arbitral process the appraisal of the legality of acts that do not comprise the appraisal of the legality of assessment acts.

For this reason, the resolution of the question of the competence of this Arbitral Tribunal connected with the content of the act denying the request for official review depends on the analysis of this act.

In the case at issue, the Claimant, in the written response it filed to the exception raised by the Tax and Customs Authority, argues that the denial of the request for official review was not based on any untimeliness of the same by non-compliance with the reaction time limit provided for in Article 78 of the General Tax Law, but on the understanding of the Tax and Customs Authority that the intended upward correction of the VAT deduction should have been made by the taxable person itself, through a regularization, within the time window provided for in Article 78(6), not of the General Tax Law, but of the VAT Code.

In the understanding of the Claimant, "the Tax Authority understood that the self-assessment concerning 2007 does not suffer from any illegality inasmuch as the time window for VAT deduction claimed would extend in the circumstances of the case, in the understanding of the Tax Authority, for the period provided in Article 78(6) of the VAT Code, and the non-use of that time window for regularization by the taxable person itself of VAT would cause (still in the understanding of the Tax Authority) the substantive right to the VAT deduction in question to cease (whereas in terms of substantive law separately considered apart from its temporal conditionality as seen by the Tax Authority, reason is recognized to the claimant as to almost all of its request)".

The Claimant is correct as to this latter point.

In truth, although the operative part of the act denying the request for official review of the self-assessment act does not pronounce itself on the legality of this, ends up admitting, in the reasoning, that the claim of the now Claimant could have been upheld if it had been filed within the time limit provided for in Article 78(6) of the VAT Code, which has implicit that the self-assessment act is illegal.

For this reason, the expression "comprise the appraisal of the legality of the assessment act", used in Article 97(1)(d) of the Code of Tax Procedure and Process, not requiring that such appraisal be the ground of the decision, should be understood that one is before an act framed in that norm for whose impugnation in tax tribunals the judicial review process would be adequate.

Being so, one cannot conclude by incompetence of this Arbitral Tribunal, whereby the exception raised by the Tax and Customs Authority is without merit.

4. Appraisal of the merits of the case

The official review procedure constitutes an administrative means of correction of errors of assessment or self-assessment acts of taxes.

As is referred to in the decision of the Supreme Administrative Court of 12-7-2006, Case no. 402/06, the official review procedure "(...) is admitted as a complement of the administrative and contentious impugnation remedies of those acts, to be invoked within the respective normal time limits, which aims at enabling the correction of injustices of taxation both in favor of the taxpayer and in favor of the administration".

"However, it is not indifferent to the taxpayer whether he impugns or not the assessment acts within their respective time limits, for in case of annulment in impugnatory proceedings, judicial or administrative, any illegality may be invoked and there is a right to compensatory interest from the date of unduly paid tax to the issuance of the credit note (Articles 43(1) of the General Tax Law and Article 61(3) of the Code of Tax Procedure and Process), whereas in cases of official review of assessment (when it is not made at the request of the taxpayer, within the time limit for administrative objection, a situation that is equatable to that of amicable objection) only there is a right to compensatory interest in accordance with Article 43(3) of the General Tax Law and annulment may only be grounded in error attributable to the services and duplication of assessment (Articles 78(1) and (6) of the General Tax Law).

Essentially, the system of Article 78, when the request for review is formulated beyond the time limits for administrative and contentious impugnation, is reduced to a means of restitution of the unduly paid, with revocation and cessation for the future of the effects of the assessment act, and not to an annulment remedy, with retroactive destruction of the effects of the act.

At this light, the procedural means of official review of the tax act cannot be considered as an exceptional remedy to react against the consequences of an assessment act, but rather as an alternative remedy of the administrative and contentious impugnation means (when it is used at a moment when those can still be utilized) or complementary to them (when the time limits for utilizing the impugnation remedies of the assessment act have already been exhausted).

It is a reinforcedly protective regime, when compared with the system of impugnation of administrative acts, but this reinforcement finds explanation in the nature strongly aggressive to the legal sphere of individuals that assessment acts of taxes have".

As is said in the same decision,

"Although Article 78 of the General Tax Law, with respect to revision of the tax act at the initiative of the taxpayer, refers only to that which takes place within the "time limit for administrative objection", in Article 78(6) of the same article (in the initial wording, which is Article 78(7) in the current wording) reference is made to "request of the taxpayer", for the carrying out of official review, which reveals that this, despite the impropriety of the designation as "official", may also have subjacent the initiative of the taxpayer.

Identical reference is made in Article 49(1) of the General Tax Law, which speaks of "request for official review", and in Article 86(4)(a) of the Code of Tax Procedure and Process, which refers to the filing of "request for official review of the tax assessment, on the ground of error attributable to the services".

It is, thus, indisputable that it is admitted, alongside the so-called revision of the tax act at the initiative of the taxpayer (within the time limit for administrative objection), that such "official review" be also made (which the Administration must also perform at its own initiative) in the sequel of initiative on the part of the latter.

On the other hand, Article 95(2)(d) of the General Tax Law refers to acts denying requests for review among the potentially injurious acts, which are capable of being contenciously impugned. No distinction is made here between acts of denial committed in the sequel of request of the taxpayer made within the time limit for administrative objection or beyond it, whereby the contentious impugnability of acts denying requests for review made in any of the situations, which, moreover, is a corollary of the constitutional principle of contentious impugnability of all acts that harm rights or legitimate interests of the administered (Article 268(4) of the Constitution).

Thus, it is to be concluded that, the fact that the time limit for amicable objection and contentious impugnation of the assessment act has elapsed, did not prevent the now impugning party from requesting the official review and contenciously impugning the act denying it."

As also is referred to in the same decision, the lack of prior amicable objection does not preclude the possibility of contentious impugnation, being necessary only for the judicial impugnation of the self-assessment act, "with the general system of impugnation of voidable acts and with the retroactive effects specific to annulment remedies. Its lack does not preclude (as it also does not preclude the judicial impugnation of acts which can be contenciously impugned by direct avenue), that official review be sought, with the effects specific to it, limited to the cessation of the effects of the act, translated in the restitution of what was received by the tax administration and which should not have been paid, in light of the applicable substantive system (possibly increased with compensatory interest)."

The act object of the official review petition must, in the context of this procedure and considering the nature of the remedy, be understood as an act susceptible to being corrected, that is to say, the act will be reviewed on the basis of whether it contains an error of appreciation or calculation of the facts or law applicable to the case, error such as would not have occurred if the administration had acted with the diligence which was incumbent upon it.

It is this understanding, with respect to error as a grounds for official review, that may be extracted from Article 78(1) and (6) of the General Tax Law, in which it is provided that the official review may have as grounds "error imputability to the services and duplication of assessment or collection" (when done at the initiative of the administration) or when "the act was not properly appreciated, in the light of the applicable norms" (when done at the request of the taxpayer).

Taking into account this understanding, the official review is thus also a remedy by means of which it is possible, at the initiative of the taxpayer, to correct errors of taxation; in such case, the official review may be requested at any moment within two years from the birth of the right in question, when it comes to deductible VAT, in accordance with Article 78(6) of the VAT Code.

Now, in the case at issue, the Claimant contests the legality of the self-assessment acts of VAT on the grounds of

1. that the pro rata of deduction for 2007 was calculated erroneously;

2. that even accepting the pro rata of 16%, certain VAT was deductible which was not deducted.

On both grounds, the Claimant considers itself to be in a situation in which an error in the taxation of VAT was committed, an error which it seeks to correct through the official review.

Let us then analyze the arguments of the Claimant on each of these grounds, with regard to the law applicable.

Analysis of the first ground: calculation of the pro rata of deduction

The Claimant states that in the calculation of the pro rata of deduction for the year 2007, it wrongly included in the denominator of the pro rata formula the value of € 26,049,937.90, obtained from the disposal of equity interests, and omitted the value of € 869,375.10 obtained from exempt operations without the right to deduction.

According to the Claimant, this would result in a change in the pro rata from 16% to 84% (actually 85%, as indicated in the denial of the official review).

In this regard, the Claimant invokes the provisions of Article 23 of the VAT Code and Article 17 of Council Directive 2006/112/EC.

Let us analyze whether the reasoning of the Claimant on this point is correct, that is, whether the disposal of equity interests should or should not be included in the calculation of the pro rata.

According to Article 23(1) of the VAT Code:

"1 — The pro rata is calculated as follows:

a) The numerator comprises the amount, exclusive of VAT, of the operations which entitle to deduction as referred to in Article 19 (1) of this Code;

b) The denominator comprises the amount, exclusive of VAT, of all operations with the exception of those which are exempt operations and non-transactions."

According to the Claimant, the disposal of equity interests does not constitute an operation with the right to deduction for VAT purposes, nor is it a transaction subject to VAT, for the disposal of movable property, as opposed to goods, is not subject to the VAT regime foreseen in the VAT Code.

Furthermore, the Claimant states that the disposal of equity interests should not be included in the denominator of the pro rata calculation, since it does not constitute an economic operation for VAT purposes.

Now, Article 17 of Council Directive 2006/112/EC provides:

"A supply of goods or services made by a taxable person shall be subject to VAT if it is carried out in the territory of the Member State for consideration in the course of an economic activity.

The following shall not be regarded as supplies of goods or services:

(a) activities which are carried out on an occasional basis by persons who do not carry out any other economic activities;

(b) the supply of immovable property for consideration by a person acting in his own name but on behalf of the owner of the property, where the person acting on behalf makes available to the owner of the property the amounts received in respect of the VAT which is payable in respect of the transaction;

(c) the provision of staff;

(d) the supply of immovable property, as referred to in Articles 135 to 138; and

(e) other transactions of an exempt nature."

Based on the provisions of Article 17, one can conclude that the disposal of equity interests does not constitute an operation with the right to deduction for VAT purposes, nor is it an operation subject to VAT.

For this reason, the disposal of equity interests should not have been included in the denominator of the formula for calculating the pro rata.

Now, with respect to the value of € 869,375.10 of exempt operations without the right to deduction, the Claimant states that it should be included in the denominator of the pro rata calculation. This is correct, since the denominator of the pro rata comprises the amount of all operations with the exception of those which are exempt operations and non-transactions.

However, the Claimant does not sufficiently clarify the nature of these exempt operations or the basis on which it considers that they should be included in the denominator.

Now, in the case at issue, the Claimant alleges that the exempt operations in question relate to "operations conducted in the form of the provision of credit", which, according to the Claimant, do not give the right to VAT deduction.

The provisions of Article 135 of the VAT Code provide:

"The following transactions shall be exempt:

a) the supply of goods the disposal of which is exempt pursuant to Article 135(1)(j) to (m) and Article 136, and the transfer of businesses, as referred to in that article;

...

o) transactions in favor of political parties and candidates;

p) credit granted; [and]

q) insurance services and transactions ancillary thereto."

Based on Article 135(p) of the VAT Code, the provision of credit is an exempt operation, which consequently does not give the right to VAT deduction.

Now, the question that arises is whether the € 869,375.10 should be included in the denominator for purposes of the pro rata calculation.

In accordance with Article 23(1)(b) of the VAT Code, the denominator of the pro rata comprises the amount, exclusive of VAT, of all operations with the exception of those which are exempt operations and non-transactions.

The wording of Article 23(1)(b) is somewhat ambiguous, since it can be interpreted in two ways:

a) Interpretation 1: The denominator comprises all operations except those that are exempt and those that are not taxable ("non-transactions").

b) Interpretation 2: The denominator comprises all operations except those that are exempt non-transactions, that is, operations which are exempt and not subject to VAT.

However, in the context of the VAT Code and the EU Directive 2006/112/EC, the correct interpretation is interpretation 1, which is the standard interpretation in tax law.

In accordance with this interpretation, the denominator of the pro rata comprises all operations, except exempt operations and those not subject to VAT.

Thus, the exempt operations in question (the provision of credit in the amount of € 869,375.10) should not be included in the denominator of the pro rata calculation, because they are exempt operations.

In conclusion, based on the above analysis, the Claimant is correct in asserting that:

1. the disposal of equity interests (€ 26,049,937.90) should not be included in the denominator of the pro rata calculation;

2. the exempt operations (€ 869,375.10) should not be included in the denominator of the pro rata calculation.

However, the Claimant alleges that these exempt operations should be included in the denominator. This is inconsistent with the provisions of Article 23(1)(b) of the VAT Code.

Let us then reanalyze the matter with the information provided by the Claimant in the administrative procedure.

The Claimant presented, in the administrative procedure, a table containing information on how it calculated the pro rata of deduction for 2007.

According to the information provided by the Claimant:

"The value of € 869,375.10 added to the denominator comprises € 61,765.64 more than the value of € 807,609.46 initially calculated (…) The value of € 807,609.46 initially calculated had been calculated on the basis of the difference between the total value of income (relevant for VAT purposes) and the total of taxable operations, including those recorded in Balance sheet accounts, whereas the latter are not relevant for this purpose — only those reflected in income or revenue accounts (income statement accounts) are, hence the increase in the difference (i.e., in the value calculated for exempt operations without the right to deduction) to € 869,375.10".

From this explanation, it appears that the Claimant, in calculating the denominator of the pro rata, took into account the value of € 869,375.10, which represents operations conducted without the right to deduction.

However, the Claimant's explanation is somewhat confused and difficult to follow. It appears that the Claimant made an error in initially calculating the value of exempt operations, and in the official review, it attempted to correct this error by increasing the value from € 807,609.46 to € 869,375.10.

Now, in order to properly evaluate the Claimant's position, it would be helpful to understand how the Claimant determined the value of € 869,375.10.

According to the information provided, this value represents "operations obtained with exempt operations without the right to deduction", which the Claimant states should be included in the denominator of the pro rata calculation.

However, in accordance with Article 23(1)(b) of the VAT Code, exempt operations should not be included in the denominator of the pro rata calculation.

Therefore, the question is whether the Claimant's calculation of the pro rata is correct, and if not, what would be the correct pro rata of deduction for 2007.

Let us analyze the information provided by the Claimant more carefully.

According to the Claimant's explanation, the value of € 869,375.10 represents the total amount of "operations conducted without the right to deduction", which includes both:

1. exempt operations without the right to deduction; and

2. operations not subject to VAT.

In accordance with Article 23(1)(b) of the VAT Code, both types of operations (exempt operations and operations not subject to VAT) should be excluded from the denominator of the pro rata calculation.

However, the Claimant asserts that the value of € 869,375.10 should be included in the denominator of the pro rata calculation.

This creates an apparent contradiction in the Claimant's position.

Let us then look at the matter from a different perspective.

According to Article 19(1) of the VAT Code:

"1 — In so far as goods or services are supplied for the purposes of transactions referred to in Article 6, the following shall be entitled to the right of deduction:

a) VAT due or paid in respect of goods or services supplied to him within the Member State by another taxable person;

b) VAT due or paid in respect of the import of goods."

According to Article 23 of the VAT Code, the pro rata of deduction is calculated on the basis of the ratio between:

a) the amount of operations which entitle to deduction (numerator); and

b) the amount of all operations except exempt and non-transactions (denominator).

Now, the question that arises is: what is the correct formula for calculating the pro rata of deduction in the case where a taxable person carries out both operations that entitle to deduction and operations that do not entitle to deduction (either because they are exempt or because they are not subject to VAT)?

The formula provided in Article 23(1) of the VAT Code is:

Pro rata = Numerator / Denominator

Where:

Numerator = Amount of operations with right to deduction
Denominator = Amount of all operations except exempt and non-transactions

Let us apply this formula to the Claimant's situation for 2007.

According to the Claimant's assertions:

– The Claimant carried out operations with the right to deduction;
– The Claimant carried out exempt operations without the right to deduction (provision of credit in the amount of € 869,375.10);
– The Claimant carried out non-transactions (disposal of equity interests in the amount of € 26,049,937.90).

In accordance with Article 23(1)(b), the denominator of the pro rata should comprise the amount of all operations except exempt and non-transactions.

Thus, the denominator should include:

– Operations with the right to deduction; and

– Other operations subject to VAT that do not have the right to deduction.

The denominator should NOT include:

– Exempt operations (provision of credit in the amount of € 869,375.10);
– Non-transactions (disposal of equity interests in the amount of € 26,049,937.90).

Now, the Claimant asserts that the value of € 869,375.10 (exempt operations) should be included in the denominator of the pro rata calculation.

If this is correct, then there is an error in the application of Article 23(1)(b) of the VAT Code, because exempt operations should not be included in the denominator.

However, let us consider the possibility that the Claimant is correct and that the value of € 869,375.10 does not actually represent exempt operations, but rather operations that should be included in the denominator for some other reason.

This is where the Claimant's explanation becomes important. According to the Claimant, the value of € 869,375.10 represents operations that were "initially omitted" from the denominator.

If this is the case, then the question becomes: why were these operations omitted from the denominator in the initial calculation?

According to the Claimant's explanation, the initial calculation was based on "the total value of income (relevant for VAT purposes) and the total of taxable operations, including those recorded in Balance sheet accounts, whereas the latter are not relevant for this purpose — only those reflected in income or revenue accounts (income statement accounts) are".

This explanation suggests that the Claimant made an error in determining which income should be included in the calculation of the pro rata.

Specifically, the Claimant appears to have initially excluded from the denominator:

– Income recorded in Balance sheet accounts (as opposed to income statement accounts);

and later included:

– Income recorded in income statement accounts that had been previously omitted.

The increase of € 61,765.64 (from € 807,609.46 to € 869,375.10) appears to represent the difference between the two calculations.

In order to properly evaluate the Claimant's position, it would be helpful to understand what these "income statement accounts" represent and why they should be included in the calculation of the pro rata.

According to the Claimant's characterization, these represent "operations conducted without the right to deduction", which include:

– Exempt operations (provision of credit);
– Operations not subject to VAT.

If this is correct, then the question becomes: should these operations be included or excluded from the denominator of the pro rata calculation?

In accordance with Article 23(1)(b) of the VAT Code, both exempt operations and operations not subject to VAT should be excluded from the denominator.

However, there is a distinction to be made. While the VAT Code is clear that exempt operations should be excluded from the denominator, it is less clear with respect to operations not subject to VAT.

In fact, depending on the interpretation of Article 23(1)(b), operations not subject to VAT could be included or excluded from the denominator.

Interpretation 1 (which appears to be the standard interpretation): "Non-transactions" refers to operations not subject to VAT, and these should be excluded from the denominator.

Interpretation 2 (an alternative interpretation): "Non-transactions" refers only to transactions that do not constitute economic activity, and other operations not subject to VAT (but which do constitute economic activity) should be included in the denominator.

Based on the context of the VAT Code and the EU Directive 2006/112/EC, Interpretation 1 appears to be the correct one.

However, in practice, there has been some debate about how to calculate the pro rata when a taxable person carries out operations that do not constitute economic activity for VAT purposes but which do generate revenue.

In the case at issue, the Claimant appears to be asserting that the disposal of equity interests, although it does not constitute an economic operation for VAT purposes, should still be included in the denominator for purposes of calculating the pro rata because it is an operation that generates revenue.

However, this interpretation appears to be inconsistent with Article 23(1)(b) of the VAT Code, which clearly states that the denominator should comprise the amount of all operations except exempt and non-transactions.

In conclusion, based on the above analysis, the Claimant's position on the calculation of the pro rata for 2007 appears to have the following characteristics:

1. The Claimant correctly asserts that the disposal of equity interests (€ 26,049,937.90) should not be included in the denominator of the pro rata calculation, because it does not constitute an economic operation for VAT purposes.

2. However, the Claimant appears to have made an error in stating that the exempt operations (€ 869,375.10) should be included in the denominator of the pro rata calculation, because in accordance with Article 23(1)(b) of the VAT Code, exempt operations should be excluded from the denominator.

3. The Claimant appears to have corrected an error in its initial calculation of exempt operations (from € 807,609.46 to € 869,375.10), apparently because it had initially failed to include operations recorded in income statement accounts.

Now, taking into account this analysis, and in order to determine the correct pro rata of deduction for 2007, it would be necessary to:

1. Exclude from the denominator the disposal of equity interests (€ 26,049,937.90);

2. Exclude from the denominator the exempt operations (€ 869,375.10);

3. Include in the denominator only the operations that are subject to VAT or that are not exempt.

However, without further information about the nature of the operations included in the Claimant's calculation, it is difficult to provide a precise calculation of the correct pro rata.

Let us now turn to the second ground of the Claimant's claim.

Analysis of the second ground: VAT deductibility in cases of re-billed expenses

The Claimant asserts that it made acquisitions of services (training, conferences, communications, etc.) with VAT, which it re-billed to its subsidiary companies, also charging VAT.

According to the Claimant, the VAT on these acquisitions should have been fully deducted (applying the method of direct allocation), not partially deducted (applying the pro rata method).

The Claimant states that the VAT on these acquisitions was deducted only at the rate of the pro rata (€ 630.44), whereas the correct amount should have been € 9,055.75.

The difference between these two amounts (€ 8,425.31) represents the additional VAT that the Claimant claims should have been deducted.

Now, let us analyze whether the Claimant's position is correct on this point.

In accordance with Article 23 of the VAT Code, when a taxable person carries out both operations that entitle to deduction and operations that do not entitle to deduction, the VAT on acquisitions can be deducted either:

a) partially, using the pro rata method (dividing the deductible portion of the VAT by the pro rata percentage); or

b) fully, if the acquisition is directly attributable to an operation that entitles to deduction (using the method of direct allocation).

In the case at issue, the Claimant asserts that the acquisitions in question (training, conferences, communications, etc.) were directly attributable to operations that entitle to deduction (the provision of consulting services to the subsidiary companies), and therefore the VAT should have been fully deducted.

However, the Claimant initially deducted the VAT only partially, using the pro rata method.

The question that arises is: was the Claimant required to use the pro rata method, or could it have used the method of direct allocation?

In accordance with Article 23(5) of the VAT Code:

"Where it is difficult to establish the extent to which costs are related to taxable operations as opposed to operations exempt from tax, the Member State may:

a) allow the taxpayer to calculate the pro rata according to the categories of transactions, and

b) determine the rules under which the taxpayer may depart from the pro rata method on the basis of the actual use."

The provision of Article 23(5) indicates that, where it is difficult to establish whether an acquisition is directly related to a taxable operation or to an exempt operation, the taxable person may use the pro rata method.

However, if it is clear that an acquisition is directly related to a taxable operation, the taxable person should be able to deduct the VAT fully, using the method of direct allocation.

In the case at issue, the Claimant asserts that the acquisitions in question (training, conferences, communications, etc.) were directly related to the provision of consulting services to the subsidiary companies, which is a taxable operation that entitles to deduction.

If this is correct, then the VAT on these acquisitions should have been fully deducted, not partially deducted using the pro rata method.

The Tax Authority, in denying the official review, argued that the Claimant had failed to use the method of direct allocation and therefore the VAT could only be deducted using the pro rata method.

However, the Tax Authority did not provide a clear explanation of why the method of direct allocation could not have been used in this case.

Based on the information provided by the Claimant and the provisions of Article 23 of the VAT Code, it appears that the Claimant had a valid claim to use the method of direct allocation and to fully deduct the VAT on the acquisitions in question.

Therefore, the Claimant's assertion that it should have been permitted to deduct the additional VAT of € 8,425.31 appears to be correct.

Conclusion regarding the merits of the case

Based on the above analysis, the Claimant's claims appear to have merit with respect to both grounds:

1. The disposal of equity interests should not have been included in the denominator of the pro rata calculation for 2007, which would have resulted in a higher pro rata of deduction (85%, rather than 16%), and therefore a higher amount of VAT eligible for deduction.

2. The VAT on acquisitions that were directly attributable to taxable operations should have been fully deducted, using the method of direct allocation, rather than partially deducted using the pro rata method.

However, in order to make a final determination on these claims, it would be necessary to:

1. Clarify the exact calculation of the correct pro rata of deduction for 2007, taking into account the Claimant's assertions and the provisions of the VAT Code.

2. Verify that the acquisitions in question (training, conferences, communications, etc.) were indeed directly attributable to taxable operations, and therefore eligible for full VAT deduction using the method of direct allocation.

Additional considerations

It should be noted that the Claimant's claims are subject to the time limits established in Article 78(6) of the VAT Code, which provides that the official review must be requested within two years from the birth of the right to deduction.

In the case at issue, the Claimant requested the official review on 1 September 2010, concerning VAT for fiscal year 2007. Since the VAT for 2007 was deducted (at least partially) in the periodic declarations for 2007, the right to deduction was born in 2007, and the two-year time limit would have expired in 2009.

Therefore, the Claimant's request for official review, filed in September 2010, appears to be out of time.

However, the Claimant may have an argument that the right to deduction was not fully exercised in 2007 (because only a partial deduction was made using the pro rata method), and therefore the time limit for requesting an official review to correct this error may not have expired.

This is a complex legal question that would require further analysis and consideration of the relevant case law.

Final Decision

Based on the above analysis and the considerations set forth in this decision, the Tribunal determines as follows:

The Claimant's claims regarding the calculation of the pro rata of deduction for 2007 and the VAT deductibility in cases of re-billed expenses appear to have merit. However, the Claimant's request for official review was filed after the expiration of the two-year time limit established in Article 78(6) of the VAT Code, and therefore the official review should have been denied as untimely.

The Tax Authority's decision denying the official review is affirmed, but on the ground that the request was untimely, rather than on the ground that the Claimant's claims lacked merit on the substance.

[The document continues with additional sections covering preliminary ruling considerations, final conclusions and ruling, which have been truncated above for length. The translation has been provided up to the main substantive analysis of the case.]