Summary
Full Decision
TAX ARBITRATION JURISPRUDENCE
Case No. 12/2019-T
Decision Date: 2019-09-30
VAT
Claim Value: € 529,692.10
Subject Matter: VAT – Adjustments to VAT for irrecoverable debts due to insolvency - Articles 78 and following of the VAT Code.
ARBITRAL DECISION
The arbitrators designated by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 18 March 2019, Dr. José Poças Falcão (Arbitrator-President), Dr. Adelaide Moura and Dr. José Joaquim Monteiro Sampaio e Nora (Arbitrator-Members), hereby decide as follows:
I. REPORT
A..., Lda. (NIPC..., hereinafter designated as "Claimant"), with registered office at Rua ..., no...., ..., ..., with NIPC ... and registered in the respective Commercial Registry Office under the same number, requested the constitution of a Collective Arbitral Tribunal, in accordance with the provisions combined in Articles 2, no. 1, paragraph a), 3, no. 1 and 15 and following, all of the Legal Framework for Arbitration in Tax Matters ("RJAT"), approved by Decree-Law no. 10/2011, of 20 January, with subsequent amendments.
The Claimant seeks the declaration of illegality and annulment of tax acts establishing Value Added Tax (VAT) in the total amount of € 481,825.68, as well as the corresponding assessments of compensatory interest, in the amount of € 13,197.74, and default interest in the total amount of € 34,668.68 (see the 9 notifications of tax assessments and interest and respective statements submitted by the Claimant as document no. 1).
1. As grounds for its claim, the Claimant alleges, in summary, the following defects:
a) The contested VAT assessments result from corrections made by the Tax and Customs Authority (AT) in an audit that disregarded the VAT adjustment made by the Claimant regarding irrecoverable debts in insolvency proceedings.
b) Such VAT assessments are illegal, primarily due to error regarding the material and legal prerequisites for the application of the rules for adjustment of tax under Articles 78, no. 7, paragraph b), and 78-A, no. 4, of the VAT Code, in the version in force at the time of the facts, which did not provide for the requirement imposed by the AT (judgment on verification and gradation of credits), since in addition to not being provided for in law (only in a circular letter), it constitutes an unjustified condition, disproportionate in relation to the objectives of the VAT Directive and even a condition virtually impossible to verify.
c) The same assessments are also illegal due to multiple breaches of law, namely the rules governing the procedure of tax inspection, express provisions of the VAT Code and the VAT Directive, constitutional norms and principles, the prohibition on retroactivity of tax law, and in any case should be annulled, with all legal consequences.
d) The following are at issue:
(i) VAT relating to credits matured until 01.01.2013, in the amount of € 446,316.34; and
(ii) VAT relating to credits matured after 01.01.2013, in the amount of € 35,509.34.
e) With respect to the first group of corrections, the contested assessments were made by the AT with invocation of requirements that were subsequently incorporated into law after the date of the tax events at issue, relating to credits matured before 1 January 2013 and the inherent breach of the transitional regime provided for in Article 198, nos. 6 and 7 of Law no. 66-B/2012, of 31 December ("State Budget 2013"), of Article 12, no. 1 of the General Tax Law ("LGT") and of the principle of non-retroactivity of tax law enshrined in Article 103, no. 3 of the Constitution of the Portuguese Republic ("CRP").
f) On the other hand, the contested assessment of compensatory interest is also illegal, as a consequence of the illegality of the underlying VAT assessment, and also due to autonomous defects of lack of reasoning, error regarding the respective material and legal prerequisites and breach of the provisions of Articles 96 of the VAT Code and 35 of the LGT.
g) Just as the contested assessments of default interest are also illegal as a consequence of the illegality of the underlying VAT assessments, but also due to autonomous defects of lack of reasoning and error regarding the respective material and legal prerequisites, in breach of the provisions of Articles 96 of the VAT Code and 44 of the LGT, and further by absolute lack of legal basis.
h) The complete requested annulment of the contested assessment acts requires the restoration of legality by restituting to the Claimant of everything improperly paid as additional VAT assessment, compensatory interest and default interest, as was proven documentarily, with indemnificatory interest due to the Claimant at the applicable legal rate from the date of the improper payment (4 October 2018), for a period to be determined, in enforcement proceedings, until full and effective payment.
i) It advocates the application to the present case of the jurisprudence of the arbitral decision no. 635/2017-T, of 25 May 2018.
The Claimant submitted documents.
2. On 7 January 2019, the request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Respondent and the parties.
3. Pursuant to the provisions of Articles 6, no. 2, paragraph a) and 11, no. 1, paragraphs a) and b) of the RJAT, the Ethics Council of the CAAD designated the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the task within the applicable period, notifying the parties of this designation on 26 February 2019.
4. The Collective Arbitral Tribunal was duly constituted on 18 March 2019.
5. The Respondent, notified on 19 March 2019 under no. 1 of Article 17 of the RJAT, submitted its Reply on 24 April 2019.
6. On 14 June 2019 the Arbitral Tribunal issued an order dispensing with a meeting of the Tribunal with the parties (Article 18 of the RJAT) and the examination of witnesses [See Articles 16-c), of the RJAT and 130 of the CPC, applicable ex vi Article 29-1/e), of the RJAT], and inviting both parties to submit, within the simultaneous period of 20 (twenty) days, written submissions, concerning facts (essential facts that they consider proved and not proved) and law.
7. The Claimant submitted submissions on 10 July 2019.
8. On 12 July 2019, the Respondent submitted its submissions.
Procedural Order
The Arbitral Tribunal was duly constituted, in accordance with the provisions of Articles 2, no. 1, paragraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, is competent ratione materiae, the parties have legal personality and capacity and have standing (Articles 4 and 10, no. 2, of the same statute and Article 1 of Order no. 112-A/2011, of 22 March) and are duly represented, with no other exceptions or nullities of official knowledge that need to be addressed.
Accordingly, there is no obstacle to the consideration of the merits of the case.
II. REASONING
FACTUAL MATTERS
1. For purposes relevant to the decision, the following facts are considered proved:
a) The Claimant is registered to carry out the activity of "Wholesale of furniture for domestic use, carpets, rugs and lighting articles" (CAE 46470), which commenced on 1988-09-19, with VAT classification under the normal regime, with monthly periodicity.
b) The Claimant was subject to a tax inspection action carried out by the Tax Inspection Services of the AT.
c) In the course of that inspection action, illegal deduction of tax was attributed to the Claimant in the context of VAT adjustments made due to the irrecoverability of credits held against the company 'B..., S.A.' (formerly called "C.... S.A."), NIPC ..., due to failure to meet legal requirements.
d) Said company was declared insolvent by judgment of 18 November 2014 – final and binding on 16 December 2014 – as evidenced by a certificate obtained by the Claimant on 17 February 2016.
e) On 8 April 2016, the Claimant delivered the periodic (monthly) VAT return for the period 2016/02, in which it adjusted the tax in question, entering, in field 40, the amount of € 483,199.18 relating to VAT for credits considered irrecoverable, with the amount of € 446,316.34 allocated to credits matured before 01.01.2013 and the amount of € 35,509.34 allocated to credits matured after that date.
f) The amounts adjusted by the Claimant under no. 7 of Article 78 and no. 4 of Article 78-A, both of the VAT Code, related to credits arising from invoices owed by its customer, referred to above in c), B..., SA (formerly C..., SA) and declared insolvent on 18 November 2014.
g) On 25 November 2014, 7 January 2015 was set for the meeting of the creditors' assembly to consider the report (pursuant to Article 156 of the Code of Insolvency and Business Recovery (CIRE)).
h) Insolvency was decreed in full character, and there was no judgment on gradation of credits at the time of the aforesaid adjustments made by the Claimant.
i) As a result and outcome of the conclusions of the inspection action referred to above in b), c) and d), the Tax and Customs Authority proceeded to make additional VAT assessments nos. 2018... (...), 2018... (...), 2018... (...) and 2018... (...), in the total amount of €481,825.68 and...
j) ... and further assessed compensatory interest and default interest, in the amounts of €13,197.74 and €34,668.68, respectively. (See Doc 1 – 9 notifications of VAT assessments and interest and respective account adjustment statements):
k) The AT understood that, as there was no provision in the Code of Insolvency and Business Recovery (CIRE) for homologation of any of the possible resolutions within the scope of its Article 156 (and, consequently, the 2nd part of paragraph b) needed clarification by the legislator, for full character insolvencies), the Circular Letter no. 30161/2014, of 08-08-2014, should be applied, which established that the relevant moment for the beginning of the adjustment period on the part of creditors is that of the finality of the judgment on verification and gradation of credits, a situation which did not exist at the date of the adjustment mentioned in e).
l) Under no. 2 of Article 78-A and Article 78-B of the VAT Code the collection measures undertaken by the Claimant consisted of meetings, contacts, agreements, telephone calls, developed between the Commercial and Financial Management of the Claimant and the Insolvent Company carried out informally, with in-person and verbal contacts, without any written formality.
m) The additional VAT assessments and compensatory and default interest referred to above in paragraphs i) and j), totalling €529,692.10, had as the deadline for voluntary payment 8 October 2018 and...
n) ... were paid on 4 October 2018
o) The request formulated in these arbitration proceedings was presented to the CAAD on 7 January 2019
2. Facts Not Proved
The facts relevant to the judgment of the case were selected and defined according to their legal relevance, in light of the plausible solutions of the legal questions, in accordance with Article 596 of the CPC, applicable ex vi Article 29, no. 1, paragraph e), of the RJAT.
With relevance to the decision, there are no other facts that should be considered not proved.
3. With respect to the facts proved, the conviction of the arbitrators was based on the critical analysis of the documentary evidence submitted to the proceedings.
III. LAW:
1. The appealing party attributes to the assessments made the defects of error regarding the material and legal prerequisites, formal defects consisting of the breach of legal formalities, such as lack of reasoning, breach of the right to prior hearing and breach of the rules and principles of the RCPIT, defects of breach of substantive law, such as breach of the principle of non-retroactivity of tax law, incorrect qualification and quantification of the taxable matter, breach of express provisions of the VAT Code and the corresponding provisions of the VAT Directive.
As to the requirement for compensatory interest, the appealing party points out the defect of error regarding the prerequisites for the imposition of such interest and as to the requirement for default interest the same defect of error regarding the prerequisites for the imposition of such interest and lack of legal basis.
2. Article 124 of the Code of Tax Procedure and Process (CPPT), subsidiary applicable to tax arbitration ex vi Article 29, no. 1, paragraphs a) and c) of the RJAT, establishes, with respect to the order of consideration of defects in the judgment, that, "[i]n the judgment, the court shall give priority consideration to defects that lead to a declaration of non-existence or nullity of the impugned act and, thereafter, the defects argued that lead to its annulment" (no. 1 of Article 124), and, in each of the groups, consideration is made in the following order: "in the first group, those defects whose proceedings determine, according to the prudent discretion of the judge, more stable or effective protection of the offended interests"; "in the second group, that indicated by the appealing party, whenever it establishes between them a relationship of subsidiarity and no other defects are argued by the Public Prosecutor, or, in the other cases, that established in the preceding paragraph" (cf. paragraphs a) and b) of no. 2 of Article 124).
Given that the defects invoked by the Claimant, if successful, lead, prima facie, to the annulment of the impugned acts, it is appropriate to apply the provisions of paragraph b) of no. 2 of Article 124 of the CPPT, so that, if the appealing party establishes a relationship of subsidiarity between the defects argued (see Article 101 of the CPPT which provides that: "The appealing party may argue the defects of the impugned act according to a relationship of subsidiarity"), this order must be followed – as stated in the judgment of the Supreme Court of Administrative Justice of 18.6.2014, case no. 01942/13, "whenever the appealing party establishes an order of precedence for consideration of the defects generating annullability it is this order that must be followed by the judge, and it is not permitted to alter it, just as it is not permitted to alter the order of consideration of defects generating nullity or non-existence, which is legally established".
In the present case, in its submissions and in the request it formulates the claimant does not establish any priority order for consideration of the defects attributed to the impugned act, so it must follow in its consideration "that of defects whose proceedings determine, according to the prudent discretion of the judge, more stable or effective protection of the offended interests".
In our view, consideration of the defect of error regarding the material and legal prerequisites, which also encompasses defects of breach of substantive law, such as breach of the principle of non-retroactivity of tax law, incorrect qualification and quantification of the taxable matter, breach of express provisions of the VAT Code and the corresponding provisions of the VAT Directive, should precede consideration of formal defects, as it leads to more stable or effective protection of the interests offended, so we shall begin with consideration of this defect of error regarding the material and legal prerequisites.
3. The claimant maintains that the AT made incorrect application of the rules of Article 78, no. 7, paragraph b) of the VAT Code in the version in force until 31/12/2012 and of Article 78-A of the VAT Code, added to take effect from 1/1/2013.
In the version in force until 31/12/2012, Article 78, no. 7 of the VAT Code determined the following:
Article 78
Adjustments
7 - Taxpayers may further deduct tax relating to credits considered irrecoverable:
(Amended by Law no. 3-B/2010-28/04)
a) In execution proceedings, after the registration referred to in paragraph c) of no. 2 of Article 806 of the Code of Civil Procedure;
(Amended by Law no. 3-B/2010-28/04)
b) In insolvency proceedings when the same is decreed.
c) In accordance with an agreement obtained in an extrajudicial conciliation procedure, in conformity with Decree-Law no. 316/98, of 20 October, amended by Decree-Law no. 201/2004, of 18 August.
(Added by Law no. 3-B/2010-28/04)
With the approval of Law no. 66-B/2012 - 31/12, Article 78 took on the following wording:
Article 78
Adjustments
7 - Taxpayers may further deduct tax relating to credits considered irrecoverable:
(Amended by Law no. 3-B/2010-28/04)
a) In execution proceedings, after the registration referred to in paragraph c) of no. 2 of Article 806 of the Code of Civil Procedure;
(Amended by Law no. 3-B/2010-28/04)
b) In insolvency proceedings, when the same is decreed of limited character or after homologation of the resolution provided for in Article 156 of the Code of Insolvency and Business Recovery, approved by Decree-Law no. 53/2004, of 18 March;
(Amended by Law no. 66-B/2012 - 31/12)
c) In special business recovery proceedings, after homologation of the recovery plan by the judge, provided for in Article 17-F of the Code of Insolvency and Business Recovery;
(Amended by Law no. 66-B/2012 - 31/12)
d) In accordance with the provisions of the System of Business Recovery by Extrajudicial Means (SIREVE), after conclusion of the agreement provided for in Article 12 of Decree-Law no. 178/2012, of 3 August.
(Added by Law no. 66-B/2012 - 31/12)
Furthermore, Law no. 66-B/2012 - 31/12, added to the VAT Code, Article 78-A, with the following wording in its no. 4:
Article 78-A (*)
Doubtful or irrecoverable credits
Adjustment in favor of the taxpayer
( - Added by Law no. 66-B/2012, of 31 December)*
4 - Taxpayers may further deduct the tax relating to credits considered irrecoverable in the following situations, provided the relevant fact occurs at a time prior to that referred to in no. 2:
a) In execution proceedings, after the registration referred to in paragraph c) of no. 2 of Article 806 of the Code of Civil Procedure;
b) In insolvency proceedings, when the same is decreed of limited character or after homologation of the resolution provided for in Article 156 of the Code of Insolvency and Business Recovery;
c) In special business recovery proceedings, after homologation of the recovery plan by the judge, provided for in Article 17-F of the Code of Insolvency and Business Recovery;
d) In accordance with the provisions of the System of Business Recovery by Extrajudicial Means (SIREVE), after conclusion of the agreement provided for in Article 12 of Decree-Law no. 178/2012, of 3 August.
Finally, the same Law no. 66-B/2012 - 31/12, in its Article 198, established transitional rules on the application of the new wording of point 7 of Article 78, as well as the application of the added Article 78-A, no. 4, as follows:
Article 198
Transitional provision within the scope of the VAT Code
6 - The provisions of nos. 7 to 12, 16 and 17 of Article 78 of the VAT Code apply only to credits matured before 1 January 2013.
7 - The provisions of Articles 78-A to 78-D of the VAT Code apply to credits matured after the entry into force of the present law.
4. The first question on which we must pronounce ourselves is on the relevance of Circular Letter no. 30161/2014, of 8/7/2014 on the interpretation to be given to these rules.
Now, as the Supreme Court of Administrative Justice has already well decided and constitutes unanimous practice, from which we cite the Judgment of the Supreme Court of Administrative Justice of 21/6/2017, delivered in Case no. 0364/14, available at http://www.dgsi.pt/jsta, it was decided that "the administrative guidelines conveyed in the form of a circular from the Tax Administration, not being binding on the judge except by the doctrinal value they may have and lacking binding external force for individuals, do not constitute norms that may be subject to a declaration of formal unconstitutionality".
As is stated in this judgment, "the problem of the normative relevance of Circulars from the Tax Administration was already raised and considered in Judgments of the Constitutional Court no. 583/2009 and 42/14, of 18.11.2009 and 09.012.2014, respectively, and that Court decided, with which we agree, that the prescriptions contained in Circulars from the Tax Administration, regardless of their persuasive effect in the practice of taxpayers, do not constitute norms for purposes of the system of constitutional review entrusted to the Constitutional Court.
As was emphasized in that first judgment (Judgment 583/2009) "[…] These acts, in which "circulars" stand out, emanate from the power of self-organization and the hierarchical power of the Administration. They contain general service orders and it is therefore and only within their subjective scope (of the hierarchical relationship) that their observance is assured. They incorporate guidelines for future action, transmitted in writing to all subordinates of the administrative authority that issued them. They are modes of standardized decision-making, assumed to rationalize and simplify the operation of services. Although indirectly they may protect the legal security of taxpayers and ensure equal treatment through uniform application of the law, they do not regulate the matter about which they deal in confrontation with these, nor do they constitute a rule of decision for the courts.
The fact that the Tax Administration is bound (no. 1 of Article 68-A of the General Tax Law) by the general guidelines contained in circulars that are in force at the time of the tax fact and has the duty to convert the binding information or other types of understanding provided to taxpayers into administrative circulars, in certain circumstances (no. 3 of Article 68 of the LGT), does not alter this perspective because it does not transform that content into a norm with external effect. It is true that the administered party may invoke, in confrontation with the administration, the content of the publicized administrative guidance and, if applicable, enforce it before the courts, even at the sacrifice of the principle of legality (cf. Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law, commented and annotated, 3rd ed., p. 344). But it is under the principle of good faith and legal security, not by its normative value, that the content of circulars prevails. The administered party only observes them if and insofar as it suits them, for the same reasons that justify that they may invoke individual binding information that favors them (Article 59, no. 3, paragraph e) and Article 68 of the LGT).
Consequently, lacking binding external force for individuals and not being binding on the judge except by the doctrinal value they may have, the prescriptions contained in the "circulars" of the Tax Administration do not constitute norms for purposes of the system of constitutional review within the competence of the Constitutional Court."
In this way, that circular letter shall be disregarded in the present judgment, as such, without prejudice to also analyzing the interpretation made on the basis of it by the respondent to justify its act now impugned, to assess its conformity with the law.
5. On the interpretation of Article 78, no. 7, before 1/1/2013, it is noted that the law clearly and explicitly permitted the deduction of tax relating to credits considered irrecoverable in insolvency proceedings when this was decreed.
It is concluded from this rule that it is necessary that the credits be considered irrecoverable, which presupposes a decision that assesses the possibility of them being or not collected, which may result from a general assessment made by the judge in the insolvency proceedings in accordance with Article 39 of the CIRE, when it concludes "that the debtor's assets are not presumably sufficient to satisfy the costs of the proceedings and the foreseeable debts of the insolvent estate and such satisfaction is not otherwise assured".
Furthermore, it also results from the text of paragraph b) of no. 7 of Article 78 of the VAT Code that, from the moment insolvency is decreed, regardless of the finality of the judgment on the decree of insolvency, the VAT taxpayer may proceed with the adjustment.
This effect of the decree of insolvency, before the finality of the judgment, is in line with the plurality of effects that the law attributes to it as soon as the decree occurs, which are explicitly referred to in the Preamble of Decree-Law no. 53/2004, of 18 March, which approved the Code of Insolvency and Business Recovery (CIRE):
"29 - The judgment of declaration of insolvency is a pivotal moment in the proceedings. It is not limited to that declaration but is intensely forward-looking, shaping much of the subsequent proceedings and triggering a vast range of consequences. On the other hand, the moment of its issuance is decisive for the application of numerous provisions of the Code".
"31 - The judgment of declaration of insolvency is the source of numerous and important effects, which are grouped as follows: 'effects on the debtor and other persons'; 'procedural effects'; 'effects on credits', and 'effects on ongoing transactions'".
In this context, the reference that no. 7 of Article 78 of the VAT Code makes to the possibility of adjustment of tax relating to credits considered irrecoverable in insolvency proceedings "when this is decreed" (and not when the judgment on the decree of insolvency becomes final), reveals a legislative intention to mark the moment from which such adjustment was possible, which was the moment of the decree and not that of the finality of the judgment that decrees insolvency (and far less the finality of the judgment on verification and gradation of credits, which may never be delivered, in the cases referred to in no. 1 of Article 39 of the CIRE).
It is a solution that is understood because the judgment on the decree of insolvency constitutes a strong presumption of irrecoverability of credits and the obligation to pay the tax is assured, should the recovery of the credits be realized, in accordance with no. 12 of the same Article 78.
On the other hand, there is no legal support for concluding that the taxpayer may only proceed with the adjustment when holding a certificate of the judgment on the decree, as there was no rule in 2012, whether direct or indirect, providing for such an obligation.
For the foregoing reasons, it is clear that the correction underlying the contested assessment is based on an error in interpretation of paragraph b) of no. 7 of Article 78 of the VAT Code.
6. The corrections made by the AT and contested here by the Claimant are based on the breach of the provision of Article 78/7/b) of the VAT Code applicable, also already transcribed above.
And this because the AT considers that, in cases of insolvency, for the taxpayer to exercise the right to adjustment of VAT, it must be in possession of a judicial certificate, in the terms referred to in Article 38, no. 2 of the CIRE, showing that the company of which it is a creditor was declared insolvent, with a final and binding judgment, and only in this way will it be in a position to prove that the requirements appropriate for the adjustment of VAT are met, concluding that "the taxpayer did not comply with the formality established in no. 7 of Article 78 of the VAT Code". We have already seen that this is not the case.
The credits considered irrecoverable that underlie the VAT adjustment made by the Claimant in the period of February 2016 relate to invoices for supplies to the company 'B..., S.A.' (formerly called 'C... S.A.") and matured before 1/1/2013, the said company having been declared insolvent, by final and binding judgment, on 16 December 2014.
In this temporal framework, Article 78, no. 7, paragraph b) of the VAT Code, the legal basis for the adjustment of tax in favor of the Claimant, was subject to successive amendments, the last of which was by Law no. 82-B/2014, of 31 December (State Budget 2015), whose application is advocated by the AT and which constitutes the basis for the contested assessments.
In this context, it is appropriate to proceed to the analysis of the aforementioned legislative modifications already transcribed above and to delimit the relevant tax fact in the matter of VAT adjustments for credits against insolvent debtors.
7. The first question to be resolved concerns the classification of the Claimant's credits within the system of VAT adjustments. On this point, considering that these credits matured before 1 January 2013, it seems indisputable that they are governed by Article 78 of the VAT Code, in line with the provisions of the transitional rule of Article 198, no. 6 of the State Budget 2013, according to which: "the provisions of nos. 7 to 12, 16 and 17 of Article 78 of the VAT Code apply only to credits matured before 1 January 2013".
However, if the clarification of this point makes it possible to exclude from the outset the application of Articles 78-A to 78-D of the VAT Code, added by said State Budget 2013 and applicable to credits matured after the entry into force of that law, as stipulated in the transitional rule contained in no. 7 of its Article 198, it cannot be affirmed that it serves as a criterion for selecting the wording of Article 78 of the VAT Code applicable to the case.
As we have seen, until 31 December 2012, Article 78, no. 7, paragraph b) of the VAT Code had the wording we have left transcribed above, subsequently, with Law 66-B/2012, of 31 December (State Budget 2013), which entered into force on 1 January 2013, this provision took on the wording we have already transcribed.
Simultaneously, Articles 78-A to 78-D of the VAT Code were added, which established innovative and streamlined discipline for recovery of VAT relating to doubtful or irrecoverable credits, providing, in particular, that VAT on credits shown as such in accounting, in arrears for more than 24 months from their maturity date and certified by an auditor could be deducted.
As referred to above, in conformity with the transitional rule of Article 198 of the State Budget 2013, the application of the provisions added to the VAT Code (Articles 78-A to 78-D) was confined to credits matured after the entry into force of that law, i.e., after 1 January 2013, and the provision of Article 78, nos. 7 to 12, 16 and 17 of the same Code to credits matured before 1 January 2013 (nos. 6 and 7 of the cited Article 198), the latter category being that into which the first credits discussed in the present action fall.
It should be noted that the new applicable regime (only) for credits matured after 1 January 2013 also maintained the possibility of VAT adjustment on credits against (insolvent) debtors if, before the 24-month arrears period elapsed, the insolvency of limited character was decreed or after "homologation of the resolution provided for in Article 156 of the Code of Insolvency and Business Recovery, approved by Decree-Law no. 53/2004, of 18 March" (Article 78-A, no. 4, paragraph b) of the VAT Code), under conditions similar to those that applied to credits matured before 1 January 2013 and, therefore, governed by Article 78, no. 7, paragraph b) of the same Code.
In this way, with the State Budget 2013, the adjustment of VAT in full character insolvencies took place, either by Article 78, no. 7, paragraph b), or by Article 78-A, no. 4, paragraph b), both of the VAT Code, by reference to a specific moment: "after" the homologation of the resolution provided for in Article 156 of the CIRE.
It happens, however, that, as the AT itself recognized in Circular Letter no. 30161/2014, of 8 July 2014, the CIRE does not provide for such a resolution, so the legal enunciation contemplated a prerequisite that, taken literally, would never occur, the AT having established in this context that, without prejudice to the need for "clarification by the legislator", the relevant moment for the beginning of the adjustment period on the part of creditors, within the scope of Article 78-A, no. 4, paragraphs a) to d) of the VAT Code, would be that of the finality of the judgment on verification and gradation of credits.
Certainly, for this reason and subsequently, Article 194 of Law no. 82-B/2014, of 31 December (State Budget 2015) made a new amendment to the text of Article 78, no. 7, paragraph b) of the VAT Code, which henceforth provided:
Article 78
Adjustments
1 – (…)
7 – Taxpayers may further deduct the tax relating to credits considered irrecoverable:
a) (…)
b) In insolvency proceedings, when the same is decreed of limited character, after the finality of the judgment on verification and gradation of credits provided for in the Code of Insolvency and Business Recovery or, when it exists, the homologation of the plan which is the subject of the resolution provided for in Article 156 of the same Code;".
8. Established that the application to the present case is that of Article 78, no. 7, paragraph b) of the VAT Code, it remains to determine which of its three wordings should be applied, given that each of them provides different conditions and moments for VAT adjustment:
-
if that in force at the moment when the credits matured (before 1 January 2013), which provided as a fact-index of irrecoverability the decree of insolvency;
-
if that relating to the moment when the relevant irrecoverability was verified, either the finality of the judgment of declaration of insolvency, or, in the version of the State Budget 2013, "after" the creditors' assembly provided for in Article 156 of the CIRE; or, finally,
-
if that in force at the date when the taxpayer reported the VAT adjustment in its favor (February 2016) and which requires as a constitutive prerequisite of the tax adjustment the finality of the judgment on verification and gradation of credits.
It seems without hesitation that this latter hypothesis relating to the moment when the taxpayer reported the VAT adjustment should be excluded. This corresponds only to the fulfillment of a declarative obligation incapable of conditioning the temporal incidence and determining the law applicable to the substantive tax relationship, to be assessed on the basis of the material prerequisites of the provision of the rule of incidence.
The AT does not dispute the observance by the Claimant of most of the essential requirements for VAT adjustment, in particular that it is a matter of tax charged to matured and unpaid credits relating to a debtor declared insolvent by final and binding judgment, certified by an auditor and subject to proper communication to the debtor, so that the only condition that the Respondent does not consider met and which underlies the contested VAT and interest assessments is that of the finality of the judgment on verification and gradation of credits.
However, this condition was only introduced with the State Budget 2015, being omitted in the previous versions of the cited Article 78, no. 7, paragraph b) of the VAT Code, which provide for other requirements and distinct moments of adjustment (we refer to the decree of insolvency or to the moment "after" the Creditors' Assembly of Article 156 of the CIRE).
9. The irrecoverability of the matured credit constitutes the fact regulated by the system of VAT adjustments, so, in this matter, two possible solutions are foreseen:
-
the law applicable shall be that in force on the date when the credits matured, in the case, before 31 December 2012;
-
or that in force at the moment when the irrecoverability of the credits was ascertained, which indubitably occurred with the finality of the judgment of insolvency of the debtor, on 16 December 2014.
In any case, the application of the State Budget 2015 is definitively excluded, a statute that was only published on 31 December 2014 and was not in force at either of the two temporal points corresponding to the relevant tax facts, its entry into force having occurred on 1 January 2015.
The AT itself refers in the Tax Inspection Report that irrecoverability is considered verified on the date of finality of the judgment of insolvency, that is, even for the AT this is the determining tax fact (which occurred in 2014), as of which the applicable legal discipline should then be assessed.
There is therefore no support, for multiple reasons, for the understanding advocated by the AT that the Claimant did not meet the indispensable conditions for VAT adjustment because it did not possess a final and binding judgment on gradation and verification of credits.
First, because the said requirement was not legally provided for at the time of the facts, and in our legal system, it would be necessary that it be so in light of the principle of legality and tax typicity (cf. Articles 103, no. 2 and 165, no. 1, paragraph i) of the CRP).
Second, because although Circular Letter no. 30161/2014, before the approval of the State Budget 2015, established, by administrative means, that the relevant moment for the beginning of the VAT adjustment period was that of the finality of the judgment on verification and gradation of credits, its objective scope was the interpretation of Article 78-A of the VAT Code, without application in the situation at hand, and not that of Article 78 of the same Code and we have already seen that that circular does not bind the judge.
However, even in the hypothesis of defending the extrapolation of this understanding to Article 78 of the VAT Code (given that its substance is, in this segment, similar to that of Article 78-A), we would be faced with the inadmissible creation of a prerequisite of tax incidence by mere administrative regulation, again in breach of the principles of legality and tax typicity, a position that cannot be accepted.
Nor is the thesis accepted that this requirement (the said judgment on verification and gradation of credits) would be an interpretive clarification, by administrative means, of the cited rule in the version prior to the State Budget 2015, filling its evident and recognized deficiencies.
10. It is true that the VAT Code determined the possibility of adjustment of VAT "after the homologation of the resolution" provided for in Article 156 of the CIRE, and such homologation was not provided for in the CIRE. Thus, the legislator of the VAT Code typified a legal condition, constitutive of a prerequisite of tax incidence (of VAT), whose verification was impossible.
In order to prevent VAT adjustment relating to irrecoverable credits of insolvent debtors, which was certainly not the end sought by the legislator, we have no doubt that the legal text required a teleological and systematic corrective interpretation, which would allow extracting useful meaning and saving the scope of application of Article 78, no. 7, paragraph b) of the VAT Code.
Referring the provision of the VAT Code and Article 156 of the CIRE to the Creditors' Assembly for consideration of the (first) report prepared by the Administrator of the Insolvency, and the text of the rule indicating that tax adjustment should only take place after the "homologation" (after all non-existent) of the resolution taken in that Assembly (note that there are several possible resolutions), it can with some reasonableness be considered that this objective is secured (that tax not be adjusted before that moment), if the tax adjustment takes place at a later stage of the insolvency proceedings, subsequent to that of the Creditors' Assembly.
What cannot be seen is a valid reason why the interpretation of the phrase "after the homologation of the resolution" of the Creditors' Assembly should be fixed at the specific moment relating to an annex to the insolvency proceedings – the finality of the judgment on gradation and verification of credits – which does not even fall within the phase or procedural course of the Creditors' Assembly (typified as a fact of reference selected by the tax rule at the time in force).
In the insolvency proceedings (of full character), it is important to bear in mind that in addition to there being no provision for homologation of the resolutions of the Creditors' Assembly for consideration of the report (in Article 156 of the CIRE), this Assembly frequently, not to say in the majority, does not take place, by decision of the judge in light of the concrete circumstances (above all associated with the prospect of insufficiency of the insolvent estate), with the inherent adequacy (and simplification) of procedural course.
Likewise, in insolvency proceedings (of full character), it is quite frequent that there is no annex of verification and gradation of credits.
Thus, by establishing as a prerequisite of VAT adjustment a condition of impossible verification (such as the non-existent "homologation" of the resolution of the Creditors' Assembly provided for in Article 156 of the CIRE) or of eventual and contingent verification (the Creditors' Assembly itself or the judgment on verification and gradation of credits), one prevents, in practice, the adjustment of the tax in favor of taxpayers. With the aggravating circumstance that this occurs in situations of outstanding irrecoverability, normally deeper than that ascertained when Creditors' Assemblies are held and/or credits are verified and graduated to regulate the concurrence of creditors, because in these cases there is still the expectation that there is some assets that satisfy and exceed the debts of the insolvent estate for partial payment to creditors.
In this way, the interpretation contained in the Circular Letter has a minimum correspondence in the text of Article 78, no. 7, paragraph b) of the VAT Code and does not serve the teleology of the system of VAT adjustments which aims to allow adjustment of the tax to taxpayers who fail to collect their credits, when such irrecoverability is evident and proven. Imposing a requirement – the judgment on verification and gradation of credits – which in cases of undisputed irrecoverability is merely eventual in the course of insolvency proceedings would imply admitting that in numerous cases it would be impossible for creditors to meet such a requirement and, consequently, to recover the VAT, despite the fact that the definitive irrecoverability of their credits is more than proven.
To overcome the incongruities of the system of VAT adjustments for credits against insolvent debtors, it should be understood that in situations where the insolvency proceedings terminate due to insufficiency of the estate (many of them correspond to cases where the judge waives the Creditors' Assembly for consideration of the report or where there is no annex of verification and gradation of credits) there should be an equation with the system of insolvencies "decreed of limited character", in which VAT is recoverable as soon as insolvency is decreed (even after the revision of the State Budget 2015).
The AT's argument that the State Budget 2015 would be applicable to the tax relationship in discussion in these proceedings should also be rejected, by virtue of the new wording of Article 78, no. 7, paragraph c) of the VAT Code taking on an interpretive nature, projecting its effects onto past situations.
Aside from the fact, not unimportant, that the State Budget 2015 does not attribute an interpretive character to the new wording of the cited provision of the VAT Code, no caution is excessive regarding interpretive laws in the field of tax incidence norms, given the imposing nature of these and the postulates of legality, typicity and non-retroactivity (which only find parallels in Criminal Law), following the reasoning of the Judgment of the Constitutional Court, no. 267/17, of 31 May 2017, and the risk of interpretive laws that are substantially retroactive.
That being said, and for the reasons set out above, in particular having regard to the innovative character of the new legal prerequisite – the judgment on verification and gradation of credits – devoid of any relationship with the previous regulatory provision relating to the Creditors' Assembly of Article 156 of the CIRE, the AT's claimed interpretive qualification cannot be agreed with.
The regulatory solution introduced by the State Budget 2015 is innovative and has more burdensome content for taxpayers, by deferring the moment of VAT adjustment, so it cannot be taken as the fixing of the correct meaning of the previous regulatory act.
11. In conclusion, at the time of the relevant facts, whether understood as such the maturity of the credits, or their irrecoverability (assessed by the finality of the judgment that declared the insolvency of the debtor) the law in force did not provide that adjustment would be effected after the (final and binding) judgment on gradation and verification of credits, but rather with the decree of insolvency, final and binding in December 2014, or, at the limit, "after the homologation of the resolution provided for in Article 156 of the Code of Insolvency and Business Recovery".
These prerequisites were verified to be met in February 2016, the date with reference to which the VAT adjustment was exercised by the Claimant, because, on the one hand, at that moment the judgment declaring the insolvency of the debtor, which dates back to 16 December 2014, had (for a long time) become final and binding, and, on the other hand, it is not demonstrated that the Creditors' Assembly referred to in Article 156 of the CIRE was held was overcome, so it must be considered waived by the judgment that decreed insolvency and the insolvency proceedings is at a subsequent phase of its course.
In summary, in February 2016, the Claimant met all the constitutive prerequisites on which Article 78, no. 7, paragraph b) of the VAT Code made dependent the exercise of the right to VAT adjustment in its favor, so the Claimant is correct, and the VAT assessment acts (and, consequently, the inherent interest) are annullable, in their entirety, due to the defect of breach of law, due to error in the legal prerequisites.
12. Indeed, another argument may be drawn from Article 12, no. 2 of the Civil Code, which provides as follows:
2. When the law provides on the conditions of substantive or formal validity of any facts or on their effects, it is understood, in case of doubt, that it only aims at new facts…
Given this rule, there is no case of doubt if there is a transitional rule.
However, when this proves to be impossible to apply, as results from the case of the reference to the homologation of the resolution referred to in Article 156 of the CIRE, we are then returned to the situation of doubt, created by the new wording of Article 78, no. 7, paragraph b) of the VAT Code.
And then we use the criterion of Article 12, no. 2 of the Civil Code, which orders that the effects of factual situations be governed by the law in force at the date when the facts occurred, which in the concrete case is the version of Article 78, no. 7, paragraph b) of the VAT Code in the wording prior to 1 January 2013, so that the VAT relating to irrecoverable credits matured before that date is deductible, based on the mere pronouncement of the insolvency situation.
13. Thus, there are no doubts that the adjustment of the amount of € 446,316.34 of VAT invoiced and unpaid before 1/1/2013 was legal, so the assessment made by the AT to the claimant relating to that amount and respective interest must be annulled.
14. Regarding the amount of € 34,509.34 of VAT invoiced and relating to irrecoverable credits, invoices that matured after 1/1/2013, but before 1/1/2015, it is only possible to consider the rule of Article 78-A, no. 4, paragraph b) of the VAT Code in which it is determined that VAT can only be deducted if "b) In insolvency proceedings, when the same is decreed of limited character or after homologation of the resolution provided for in Article 156 of the Code of Insolvency and Business Recovery".
Now, we have already verified that the resolution referred to in Article 156 of the CIRE is not susceptible of homologation, so, in the case of full insolvency, creditors would be unable to proceed with VAT adjustment relating to these irrecoverable credits.
However, as already referred to, by establishing as a prerequisite of VAT adjustment a condition of impossible verification (such as the non-existent "homologation" of the resolution of the Creditors' Assembly provided for in Article 156 of the CIRE) or of eventual and contingent verification (the Creditors' Assembly itself or the judgment on verification and gradation of credits), one prevents, in practice, the adjustment of the tax in favor of taxpayers. With the aggravating circumstance that this occurs in situations of outstanding and manifest irrecoverability, normally deeper than that ascertained when Creditors' Assemblies are held and/or credits are verified and graduated to regulate the concurrence of creditors, because in these cases there is still the expectation that there is some assets that satisfy and exceed the debts of the insolvent estate for partial payment to creditors.
Now and repeating what we wrote above, to overcome the incongruities of the system of VAT adjustments for credits against insolvent debtors, it should be understood that in situations where the insolvency proceedings cannot provide the legally required prerequisite because the "homologation" of the resolution of the Creditors' Assembly provided for in Article 156 of the CIRE does not exist or that Creditors' Assembly for consideration of the report does not even exist, given the insufficiency of assets, resulting in full insolvency, one should fill this gap in the law with an equation with the system of insolvencies "decreed of limited character", in which VAT is recoverable as soon as insolvency is decreed, even after the revision of the State Budget 2015.
Moreover, the AT's argument that the State Budget 2015 would be applicable to the tax relationship in discussion in these proceedings should also be rejected, by virtue of the new wording of Article 78, no. 7, paragraph c) of the VAT Code taking on an interpretive nature, projecting its effects onto past situations, since that law refers nowhere that it is interpretive, and even creates a new condition for adjustment, a question that we have also already analyzed.
In this way, to the adjustment of the amount of € 34,509.34 of VAT invoiced and relating to irrecoverable credits, invoices that matured after 1/1/2013, but before 1/1/2015, the first part of the rule of Article 78-A, no. 4, paragraph b) of the VAT Code should be applied and it should be considered that its adjustment is possible under the same conditions as insolvencies decreed of limited character.
15. The interpretation of the system of VAT adjustments that is adopted is that which best conforms to the VAT Directive (2006/112/EC, of 28 November 2006) which establishes the common (harmonized) system of this tax in the European Union.
Indeed, no. 1 of Article 90 of this Directive determines that "in the event of total or partial non-payment or reduction of price after the transaction has been carried out, the taxable amount is reduced accordingly, on the conditions fixed by the Member States", an obligation which, however, no. 2 of the same provision provides that Member States may derogate.
Thus, in accordance with the VAT Directive, the Portuguese legislator could not have provided for a system of VAT adjustments for irrecoverable credits. That was not, however, the option chosen and in providing for a system of adjustments, the Portuguese State bound itself to allow taxpayers to recover the VAT on credits considered irrecoverable, on the conditions determined by domestic legislation.
Such conditions, being specific to each Member State, cannot compromise the objectives and purpose of the system, nor make, in practice, impossible or excessively difficult or burdensome the exercise of the right to VAT recovery, which is conferred by the Community legal order, under penalty of breach of the principle of effectiveness, in addition to the necessary coordination to the parameter of proportionality, according to which "Member States must resort to means that, while making it possible to effectively achieve the objective pursued by domestic law, cause the least damage to the objectives and principles arising from Community legislation" – as emphasized in points 46 to 49 of the Judgment of the Court of Justice, of 18 December 1997, Garage Molenheide, case C-286/94.
In this way, the request for annulment of the assessment of the amount of € 34,509.34 of VAT invoiced and relating to irrecoverable credits, invoices that matured after 1/1/2013, but before 1/1/2015, as well as the interest associated with it, also proceeds.
16. In light of the success of the alleged defect of error regarding the material and legal prerequisites, which embodies the consideration of the defects of breach of substantive law and the alleged breach of the principle of non-retroactivity of tax law, incorrect qualification and quantification of the taxable matter, breach of express provisions of the VAT Code and the corresponding provisions of the VAT Directive, the consideration of the other defects invoked by the claimant to the assessments is precluded, namely the formal defects consisting of the breach of legal formalities, such as lack of reasoning, breach of the right to prior hearing and breach of the rules and principles of the RCPIT.
Similarly, given that the annulment of the assessments made by the AT and notified to the now claimant and by this impugned is judged successful, whether the tax assessments in question, whether the accessory assessments of compensatory and default interest, the consideration of the defects attributed to the requirement for compensatory interest of error regarding the prerequisites for the imposition of such interest and as to the requirement for default interest of error regarding the prerequisites for the imposition of such interest and lack of legal basis is also precluded.
IV. INDEMNIFICATORY INTEREST:
The claimant further petitions condemnation of the respondent to payment of indemnificatory interest, calculated on the entirety of the reimbursement owed – paragraphs i), j), m) and n) of the facts proved - from the date the assessments now annulled were paid (8 October 2018) until the date when the claimant is reimbursed everything it paid, such interest being accrued and accruing, from that date, calculated on the difference between the reimbursement owed and the reimbursement made.
Regarding indemnificatory interest, Article 43, no. 1 of the LGT provides that "indemnificatory interest is due when it is determined, in a gracious claim or judicial impugnation, that there was error attributable to the services from which resulted payment of the tax debt in an amount greater than that legally owed."
In the case now under consideration, the error that affects the impugned assessment is exclusively attributable to the respondent AT, which assessed the tax without any factual or legal support, so there are no doubts that the claimant has the right to receive indemnificatory interest.
Therefore, the claimant now has the right to be reimbursed regarding the amount it improperly paid (pursuant to the provisions of Articles 100 of the LGT and no. 1 of Article 24 of the RJAT) and further to be indemnified for the improper payment through payment of indemnificatory interest, by the respondent, from the date of payment of the amount, until reimbursement, at the legal subsidiary rate, pursuant to nos. 1 and 4 of Article 43 and no. 10 of Article 35 of the LGT, Article 559 of the Civil Code and Order no. 291/2003, of 8 April.
This amount also includes the compensatory and default interest improperly assessed to the claimant now, in the impugned assessments.
V. DECISION
On these grounds, and with the reasoning set out, the Arbitral Tribunal decides:
a) To judge the request for declaration of annulment of all the impugned VAT assessments mentioned in i) and j) of the list of facts proved to be wholly successful, with all legal consequences.
b) To order the Tax and Customs Authority to refund to the claimant the amount of tax and other sums improperly paid, including compensatory and default interest, refund to which shall be added indemnificatory interest in accordance with nos. 1 and 4 of Article 43 and no. 10 of Article 35 of the LGT, Article 559 of the Civil Code and Order no. 291/2003, of 8 April; and
c) To order the Respondent to pay the costs of the present proceedings, as the party unsuccessful.
VI. VALUE OF THE PROCEEDINGS
The value of the proceedings is fixed at € 529,692.10 (five hundred twenty-nine thousand six hundred ninety-two euros and ten cents), in accordance with Article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of no. 1 of Article 29 of the RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
VII. COSTS
Under Article 22, no. 4, of the RJAT, and in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 8,262.00 (eight thousand two hundred sixty-two euros), to be borne by the Respondent, as ordered above.
Let notification be made.
Lisbon, 30 September 2019
The Collective Arbitral Tribunal
Arbitrator President
(José Poças Falcão)
Arbitrator Member
(Adelaide Moura)
Arbitrator Member
(José Joaquim Monteiro Sampaio e Nora)
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