VAT Deduction Rights Mixed Taxable Person

Process: 143/2016-T

Date: November 15, 2016

Tax Type: IVA

Summary

This CAAD arbitration case (Process 143/2016-T) addresses VAT deduction rights for mixed taxable persons, specifically a Portuguese municipality performing both VAT-exempt activities and taxable operations like water distribution. In 2010, the municipality incorrectly failed to deduct input VAT on mixed-use resources due to the regime's complexity, instead only deducting VAT on resources exclusively allocated to taxed operations. After discovering the error through a 2014 specialized review, the municipality filed a pedido de revisão oficiosa (request for administrative review) seeking recovery of €114,406.63 in excess VAT paid, which was dismissed. A subsequent recurso hierárquico (hierarchical appeal) under article 80 of the General Tax Code was also rejected in December 2015. The municipality then initiated CAAD arbitration arguing that article 78(2) of the General Tax Code attributes self-assessment errors to tax authorities, and that the right to VAT deduction under article 22 VATC and article 98(2) can be exercised within four years. The claimant emphasized this was an error of legal characterization, not accounting negligence, as invoices were properly recorded. The case centers on whether mixed taxable persons can recover unclaimed VAT deductions through administrative review procedures and whether municipalities can apply the pro rata deduction method under articles 20 and 23 VATC for expenses serving both exempt and taxable activities.

Full Decision

ARBITRATION AWARD

The arbitrators Fernanda Maçãs (President Arbitrator), Carlos Lobo and Nuno Miguel Morujão, appointed by the Deontological Council of the Centre of Administrative Arbitration to form the Arbitral Tribunal, constituted on 20/5/2016, decide as follows:

I. REPORT

The taxpayer A…, with the NIPC … (hereinafter "Claimant"), presented, on 9/3/2016, 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 of Arbitration in Tax Matters, hereinafter "LFATM"), in which the Tax and Customs Authority (hereinafter "TCA" or "Respondent") is named Respondent.
The Claimant requests an arbitral ruling on the request for declaration of illegality of the VAT self-assessment act relating to the periodic declaration of December 2010, with its consequent annulment, with all legal consequences, namely the declaration of illegality and annulment of the act of dismissal of the request for administrative review and of the subsequent hierarchical appeal submitted by the Claimant, the condemnation of the TCA to reimburse VAT in the amount of € 114,406.63 and corresponding indemnity interest, and the condemnation of the TCA to compensate the Claimant for the expenses resulting from the litigation, with legal representative fees to be settled in execution of judgments.
The request for constitution of the Arbitral Tribunal was accepted by the Director of the CAAD and automatically notified to the TCA, on 10/3/2016.

a. The Claimant did not proceed to appoint an arbitrator, whereby, pursuant to the provision in subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of the LFATM, with the wording introduced by article 228 of law no. 66-B/2012, of 31 December, the President of the Deontological Council appointed as arbitrators of the Collective Arbitral Tribunal the undersigned, who communicated acceptance of the office within the applicable period.

b. On 4/5/2016, the parties were notified of the appointment of the arbitrators, and neither party raised any objection.

c. In accordance with the provisions of subparagraph c) of paragraph 11 of the LFATM, the Collective Arbitral Tribunal was constituted on 20/5/2016.

d. In these terms, the Arbitral Tribunal is regularly constituted to appraise and decide the object of the proceedings.

To substantiate the request for arbitral ruling, the Claimant alleges, in summary:

Municipalities carry out operations outside the scope of VAT (e.g. police activities), operations subject to VAT but exempt from this tax, which do not confer the right to deduct the tax (e.g. lease of real property), and still operations subject to and not exempt from VAT (namely the activity of distributing water to inhabitants).

In 2010, due to manifest complexity of the VAT regime, the Claimant inadvertently adopted an incorrect interpretation of applicable law, whereby i) it did not deduct any VAT regarding mixed-use resources and ii) it deducted solely the VAT from resources exclusively allocated to taxed operations, resorting to direct allocation (at that time erroneously designated real allocation), provided for in articles 20 of the VAT Code (hereinafter VATC) and 168 of the VAT Directive (hereinafter "VATD") (79th PI).

Thus, in 2014, following a procedure review service performed by a specialized entity, the Claimant submitted a Request for Administrative Review relating to delivery of excess tax payment, arising from the non-deduction of VAT incurred on the acquisition of goods and services for mixed use (in 2010), which was dismissed in its entirety. Not conforming with the dismissal of the Administrative Review Request, the Claimant submitted a Hierarchical Appeal, pursuant to article 80 of the General Tax Code. On 14/12/2015, the Claimant was notified of the dismissal of the hierarchical appeal submitted with reference to 2010 (2nd to 4th PI).

"The situation at hand stems from an error committed in the calculation of self-assessed tax by the Claimant, as it did not report, as it was entitled to, amounts of tax to be deducted" (80th PI).

"Thus, the calculation of VAT carried out in the periodic declaration for December 2010 resulted in the payment of excess tax, as the amounts of tax that should be deducted under article 23 of the VATC and the VAT Directive were not offset against the tax assessed on active operations, using the pro rata method". That is, "this error resulted in the delivery of excess tax payment to the State, that is, tax which, in light of applicable legal rules, should not have been paid by the Claimant" (82nd PI).

In that regard, article 78 paragraph 2 of the General Tax Code provides that "notwithstanding the legal burdens of complaint or challenge by the taxpayer, errors in self-assessment are deemed attributable to the services" (83rd PI).

Whereby, "having verified an error in the self-assessment of tax for 2010 – which resulted in the delivery of excess tax to the State by the Claimant – this error shall, by express provision, based on legal fiction, be attributable to the services" (84th PI).

Now "the right to VAT deduction should be exercised within the framework of article 22 of the VAT Code, arising, pursuant to paragraph 1, "at the moment when the deductible tax becomes due"" (87th PI), but "when it becomes apparent that the tax actually deducted is less than or greater than the amount that would have been due, the taxable person may proceed to its correction" (88th PI), under article 184 of the VATD, according to which "the deduction initially effected is subject to regularization when it is higher or lower than the deduction to which the taxable person was entitled". "And it is precisely through this faculty granted to the taxable person that time periods are established, within which it corrects its deduction right, with article 98 paragraph 2 of the VAT Code – according to which the right to deduction may be exercised within a period of four years..." (89th PI).

Also article 78 of the VATC "is concerned with the possibility of exercising the right to deduction, establishing different rules and periods for the exercise of that right, depending on whether we are dealing with the granting of discounts, the issue of inaccurate invoices, the correction of material or calculation errors or the existence of uncollectible debts" (90th PI).

In the case under analysis, during 2010 "the Claimant did not exercise the right to deduction of VAT relating to goods and services acquired simultaneously for the performance of operations that confer the right to VAT deduction and operations that do not confer such right, plus residual situations relating to goods and services entirely used in operations that confer the right to VAT deduction" (93rd PI).

"Notwithstanding, the corresponding invoices were recorded in the Claimant's accounting" (94th PI). Indeed, "there was no error in accounting/records (since the invoices were correctly and timely recorded) nor any inaccuracy in the invoices (as they were issued in accordance with the rules of article 36 VATC). Negligent or untimely conduct is not, in this way, attributable to the Claimant" (97th PI). "On the contrary, it is an error in the determination of the VAT regime (error of law) applicable to the deduction of tax on passive operations, in light of the guidance of the TCA, whereby, lacking better designation, it constitutes an error of characterization or of law" (98th PI).

"The choice not to deduct VAT on common costs was due to the manifest complexity of the regime, inducing an inadvertent incorrect interpretation" (95th PI); "…fearing that it was deducting more than would be permitted, the Claimant, with limited administrative resources, opted not to deduct VAT on mixed-use resources at all" (96th PI)."

"The error in characterization is, therefore, what results from an incorrect interpretation or application of law giving rise to erroneous tax calculation. In the concrete case, the non-deducted VAT became tax paid in excess due to the fact that the Claimant guided its tax conduct in conformity with an incorrect interpretation of the text of article 23, not having deducted VAT on common costs (contrary to what it should have done in light of the Directive and the correct interpretation of article 23 of the VAT Code). It is, therefore, an error in the assumptions as to which deduction regime would be applicable" (99th PI).

An error that was prejudicial to the Claimant "for much longer than four years (which is the period of expiration of the exercise of the deduction right, under paragraph 2 of article 98 of the VATC), since … only from 2010 onwards did it deduce VAT, with the support of an external specialized entity, and for that reason suffered losses (for prior years) that will never be properly compensated" (100th PI).

Even if it were understood that the Claimant's error in characterization would be covered by the regime of paragraph 6 of article 78 of the VATC, applicable in case of material and calculation errors, the limitation of two years established in that rule for the exercise of the deduction right is restricted to regularization through declarative means (through the submission of a VAT replacement declaration, which is subject to automatic computer processing, lacking any verification by the TCA, except for formal congruence of declared elements), with the four-year period of article 98 paragraph 2 of the VATC remaining for cases of review through administrative means (106th PI).

It is "in this context that the mechanism of Administrative Review emerges as an additional guarantee for taxpayers when all other normal procedural means (e.g. gracious complaint, hierarchical appeal) are exhausted, without compromising the principle of legal certainty, as a reasonable period of expiration, of four years, is provided for, after which the legal-tax situation is permanently stabilized" (107th PI).

And it is an additional guarantee that is justified by the principle of equality and equitable and fair treatment, in a context in which the burden of self-assessing tax has been transferred to the taxpayer (which acts thus, materially, as if it were the TCA) and in which the TCA is permitted to correct such self-assessment precisely within a period of four years (108th PI).

Within the scope of the CAAD Award of 6/12/2013 (Proc. no. 117/2013-T), the panel of arbitrators states, with respect to a taxable person who by oversight had not proceeded to correct VAT deduction, based on an incorrect pro rata (since it had included in the denominator of that pro rata income not arising from the exercise of an economic activity, as is the case of the sale of equity interests) that "the error as to the application of certain legal regimes is neither material error nor calculation error, whereby it is manifest that the regime referred to in paragraph 6 of article 78 of the VATC cannot be applied to it. Namely, the error in the calculation of the pro rata is not a calculation error that can be framed in this rule because it embodies an error of law as to the applicable legal regime and not an error of arithmetic nature". Concluding, in light of all the foregoing, that "as the regime of said article 78 paragraph 6 is not applicable, and there is no special time limit for the exercise of the deduction right on the grounds of error of law, the general regime on this matter provided for in article 98 paragraph 2 of the VATC shall apply, which, as stated in the award of the Supreme Administrative Court of 18-5-2011, delivered in case no. 966/10, sets a maximum limit of four years that cannot be exceeded in any case" (emphasis of Claimant) (114th and 115th PI).

"In summary, and following the cited case law, the request for Administrative Review is the appropriate and correct means for the taxable person to recover the VAT that had not previously been deducted, when the period of two years has elapsed to effect such deduction through declarative means, with the TCA being obligated to analyze that review (submitted within the period – of four years) when there has been collection of tax higher than that due" (122nd PI).

"In light of all the foregoing, the Claimant can only understand it as ensuring its right to VAT deduction, in the amount of € 114,406.63 with respect to 2010, as requested within the maximum period of four years, provided for in paragraph 2 of article 98 of the VATC and in article 78 of the General Tax Code, through the mechanism of Administrative Review" (124th PI).

"It cannot be understood that the taxable person, due to an error in characterization of its operations, stemming from erroneous guidance from the TCA, be prevented from, within a period stipulated in law, correcting the tax paid in excess" (125th PI).

As regards the Community Law regime, it is important to note the content of the decisions of the CJEU in the cases Ecotrade SpA (Award of 8/5/2008, joined cases C-95/07 and C-96/07) and EMS Bulgaria (Award of 12/7/2012, case C-284/11).

In both cases the CJEU begins by sanctioning the period of expiration of the taxpayer's right to deduction, to then proceed to disregard it in application to the concrete cases, considering that it constitutes an inadmissible penalty in light of the Directive and the principle of neutrality (148th PI). "A more detailed analysis, however, allows identifying relevant differences between both cases: in the first (Ecotrade), we are faced with a taxable person who, by having incorrectly characterized the operation from the accounting perspective, failed to assess the tax owed and, concomitantly, to deduct it. In the second (EMS Bulgaria), we have a taxable person who, on the contrary, was aware of the accounting-tax characterization of the operation it had carried out and, consequently, the fact that it gave rise to the obligation to assess VAT, as well as to the right to deduct it, without having done so within the period" (146th PI).

But "what is important to note is that the Court always ends up confirming that deduction right beyond national periods of expiration in situations incomparably weaker than that of the Claimant" (148th PI).

"Before such a position of the CJEU, with even greater reason in the situation at hand, in which there occurred no violation of formal requirements and in which the tax conduct of the Claimant derived solely (to its detriment and none to the State) from the incorrect administrative guidance emanated by the TCA, it is imperative that the regularization of its deduction right be accepted" (149th PI).

"If nothing else – and there is (…) – it is an elementary requirement, given the circumstances of the case, of the principle of good faith. That is, this solution is equally (or additionally) recommended by the principle of protection of legitimate expectations" (150th PI).

"In view of the foregoing, such restriction could not prevail by incompatibility with the principle of neutrality and with Community Law, specifically with article 168 and following of the VAT Directive" (151st PI).

"It should also be added that the TCA in situations comparable to that of the Claimant has granted requests for administrative review and authorized VAT deduction, under the same legal framework which, moreover, has remained stable in recent years, whereby only the fiscal reason (invalid in itself) and no other can be behind the inexplicable change of position" (152nd PI).

"In this sense, the Tribunal cannot fail to consider that the position now advocated by the TCA, taking refuge in the untimeliness of the requests submitted, ignores its own characterization as to the methodology of deduction of "mixed-use" resources and, as well, the means through which the Report of the Working Group with clarifications regarding this matter was disclosed, translating such behavior as a clear violation of the principle of protection of legitimate expectations and the administrative duty to act lawfully and in good faith" (153rd PI).

"In fact, the TCA, in the exercise of its functions, must act with respect for the principles of equality, proportionality, justice, impartiality and good faith, weighing the fundamental values of law, designedly, the legitimate expectations created by its conduct and the objective to be achieved" (154th PI).

On 21/5/2015, the arbitral tribunal issued a notice order to the Director General of the TCA to, within 30 (thirty) days, submit a reply, attach a copy of the administrative file and, if it so wished, request the production of additional evidence.
The TCA offered a Reply, accompanied by the Administrative File, alleging, in summary:

Exception for incompetence of Arbitral Jurisdiction ratione materiae, by virtue of no prior recourse to the gracious complaint procedure:

According to article 2, subparagraph a) of ordinance 112-A/2011, the binding of the TCA to the jurisdiction of arbitral tribunals has as its object the consideration of claims relating to taxes whose administration is committed to it, referred to in paragraph 1 of article 2 of the LFATM (declaration of illegality of acts of tax assessment, self-assessment, withholding at source and advance payments), "with the exception of claims relating to the declaration of illegality of self-assessment acts, withholding at source and advance payments that have not been preceded by recourse to the administrative procedure as provided for in articles 131 to 133 of the Tax Procedure and Process Code".

"...Case law has supported the understanding that, given the administrative nature of the administrative review procedure, it is amenable to being equated to the provision of article 131, paragraph 1 of the TCPC for purposes of subsequent challenge of the respective dismissal decision" (18th Reply), "however, such equation is legally prohibited in arbitral jurisdiction, being excluded from the material competence of arbitral tribunals the consideration of claims relating to the declaration of illegality of self-assessment acts that have not been preceded by recourse to the administrative procedure as provided for in article 131 of the TCPC, but only by administrative review as provided for in article 78 of the General Tax Code" (19th Reply).

Additionally, "it is verified that, in the situation in question, the alleged "self-assessment acts" were not carried out in accordance with generic instructions issued by the TCA, whereby the mandatory precedence of gracious complaint would always have been necessary, as provided for in paragraph 1 of article 131 of the TCPC" (48th Reply).

On the other hand "the above-advocated understanding, (that disputes having 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 not preceded by gracious complaint as provided for in article 131 of the TCPC), 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 CRP), as well as legality (cf. articles 3, paragraph 2, and 266, paragraph 2, both of the CRP), as a corollary of the principle of indisposability of tax debts inherent to article 30, paragraph 2 of the General Tax Code, which bind the legislator and all activity of the TCA" (50th Reply).

"The binding of the TCA to necessary arbitral protection, in which the principle of irrevocability of decisions prevails, presupposes a limitation of situations in which it can fully decide whether or not to appeal an unfavorable judicial decision, that is, the power to choose between definitively renouncing the collection of a tax debt or adopting the behavior" (53rd Reply).

Incompetence of Arbitral Jurisdiction ratione materiae, by virtue of no appraisal having been made of the legality of any tax act:

The dismissal decision now being challenged limited itself to appraising the requirement of timeliness, that is, the legality of no tax assessment act was appraised (63rd and 65th Reply).

"...Only in arbitral jurisdiction does the Claimant conclude for the «illegality of the VAT self-assessment act relating to the periodic declaration of December 2010», requesting, consequently, the annulment of the administrative decisions and the restitution of the assessed VAT" (67th Reply).

Now "the request for arbitral ruling has as its immediate object the decision dismissing both the administrative review and the hierarchical appeal, not having as its mediate object any tax assessment act" (68th Reply; emphasis of Respondent).

"As such, we are dealing with administrative acts in tax matters which, by not appraising or discussing the legality of the assessment act, cannot be subject to judicial challenge, in accordance with the provisions of subparagraph a) of paragraph 1 of article 97 of the TCPC and article 2 of the LFATM" (76th Reply).

Untimeliness:

Assuming that the object of the request is the self-assessment relating to the period of December 2010, it happens that the period legally defined for challenging such act in arbitral jurisdiction is exceeded (85th Reply).

"Article 10 of the LFATM establishes, as to assessment/self-assessment acts, that the period for submitting the request for arbitral ruling is 90 (ninety) days, referring, as to the moment of beginning the count, to what is provided for in article 102, paragraphs 1 and 2 of the Tax Procedure and Process Code (TCPC)" (86th Reply).

"Therefore, the request in question, formulated only in 2016, is untimely and the tribunal cannot take cognizance of it" (87th Reply).

As to the specific applicable legal discipline and the type of error that occurred:

"Deductions of tax effected by a VAT taxable person have, in principle, a definitive character, being able, however, in certain cases expressly provided for in article 78 of the VAT Code, to be subject to alteration" (103rd Reply).

It is provided in paragraph 6 of article 78 VATC "The correction of material or calculation errors in the record... can only be made within the period of two years..." (104th Reply).

Notwithstanding, "the Claimant intends to avail itself, in the case sub judice, of the period of four years to proceed to the correction of the VAT which as it alleges it bore in excess, which arises, in its understanding, from paragraph 1 of article 98 of the VAT Code" (105th Reply), "arguing it has incurred an error of law not subsumable within the discipline of paragraph 6 of article 78 of the VATC" (106th Reply).

Article 78 is special in relation to article 98, both of the VATC (109th to 115th Reply).

In this case, the two circumstances occur that lead us to the application of article 78 VATC and not of article 98: "(i) On the one hand, we are dealing with documents (invoices) already recorded in the accounting, whereby the VAT incurred therein was considered as an expense in accordance with article 23 paragraph 1 subparagraph f) of the Corporate Income Tax Code. Now, if it was considered as an expense, such is incompatible with the intention of the now Claimant to make that tax deductible in accordance with article 98 of the VAT Code, since, according to the provision of article 45 paragraph 1 subparagraph c) of the Corporate Income Tax Code such would not be deductible for purposes of determining taxable profit. Thus, the wider period of article 98 can only be applied to documents not recorded in accounting because the VAT incurred therein is not considered an expense for purposes of the Corporate Income Tax Code; (ii) On the other hand, in the present case any such error recurs to a material error since it refers to the calculation of the deduction pro rata of the tax, as to a mixed taxable person" (116th Reply).

"Whereby, in light of the legislation applicable to the concrete case, it cannot fail to be understood, as was correctly decided in the dismissal decision sub judice, that the period of four years established in paragraph 2 of article 98 of the VAT Code cannot be applicable to the concrete case..." (117th Reply).

Additionally, from what was set forth by the Respondent (notwithstanding the provision of article 23 VATC it did not deduct the VAT borne on common costs), it follows that we are dealing with "an error of recording by the Claimant and not an error of law, contrary to what the latter alleges in its request for arbitral ruling" (123rd Reply).

"By being so, it would only be possible to recognize the Claimant the right to VAT deduction, through recourse to the mechanism provided for in article 78, paragraph 6 of the VAT Code" (124th Reply).

As to the Awards cited by the Claimant, within the jurisdiction of the CJEU:

"In the Ecotrade case referred to by the Claimant, the principal conclusion that can be drawn therefrom is that the VAT Directive legitimizes that the period for taxable persons to make corrections to the tax be shorter than the period of expiration of the right to assess, provided that the principles of equivalence and effectiveness are respected" (137th Reply). "In this way, it seems obvious to us that the period of two years to proceed to the alleged correction of the self-assessment carried out does not make that right excessively difficult to fulfill for normally diligent taxable persons" (138th Reply).

In the EMS Bulgaria case, "the CJEU did not even consider that the period of deduction set by the legislation of that Member State violated community law" (141st Reply). "In reality, what ended up being discussed and decided, concretely, is that "failure to register for VAT purposes cannot deprive the taxable person of its right to deduction" and that "the principle of fiscal neutrality is opposed to a sanction consisting of refusing the right to deduction in case of late payment of VAT". A matter which is in no way relevant for purposes of the Claimant's claim" (142nd Reply). "That is, by way of conclusion, the right to deduction is always qualified by the CJEU as a right and not as a power-duty" (143rd Reply).

"Should the Tribunal come to consider that, in the case sub judice, the Claimant could, within the period of four years, proceed to the regularization of the assessed tax... then it is always necessary that the appraisal, substantiated as to fact and law, of the legality of such regularization be promoted" (144th Reply). "In summary, if... the... Tribunal decides for the application of article 98 of the VAT Code to the concrete case, it cannot, without more, decide for the deduction of the VAT..." (146th Reply). Rather "...must the Tribunal determine that the case be returned to the Tax Authority and it render a decision on the requested regularization" (147th Reply).

"Should it not understand thus..., the Tribunal availing itself of the decision of such question, it is necessary to note that from the factuality set forth it is verified that the Claimant failed to identify with precision the operations in question and demonstrate the validity of the calculations made with a view to quantifying the amounts demanded, especially since in the present case only a request for partial illegality is in question" (148th Reply), with the burden of proof falling upon it in accordance with paragraph 1 of article 74 General Tax Code and article 342 Civil Code (149th and 150th Reply).

"...Should it not be so understood... and the Tribunal consider the foregoing unsubstantiated, must it then, under penalty of nullity, establish the facts and law, as well as the evidence relevant for the appraisal of the request" (152nd Reply), being "necessary that the Claimant be called upon to make such proof and, in obedience to the principle of adversarial procedure, the Respondent be convoked to pronounce upon the same" (153rd Reply), being "...the TCA afforded the opportunity to appraise the amount indicated by the Claimant" (154th Reply).

On 27/6/2016, before the questions of exception raised by the Respondent, the Tribunal notified the Claimant to, if it so wished, exercise the right to respond within ten days.
On 24/7/2016 the Tribunal issued an order dispensing with the holding of the meeting provided for in article 18 of the LFATM, pursuant to the principles of the autonomy of the Tribunal in conducting the proceedings, and in order to promote dispatch, simplification and informality of same, see articles 19, paragraph 2 and 29, paragraph 2 of the LFATM. The date of 20/11/2016 was set as the deadline for rendering the arbitral decision.
The parties waived the holding of closing statements.

II. PRELIMINARY MATTERS

The parties have legal personality and capacity, as well as are beneficiaries of procedural standing (articles 4 and 10, paragraph 2, of the LFATM and article 1 of ordinance no. 112-A/2011, of 22 March).
The TCA proceeded to appoint its representatives in the proceedings and the Claimant attached a power of attorney, whereby the Parties are duly represented.
The proceedings do not suffer from nullities.
The TCA raises the following exceptions:

a. Of the incompetence of arbitral jurisdiction ratione materiae, by virtue of no prior recourse to the gracious complaint procedure.

b. Of the incompetence of arbitral jurisdiction ratione materiae, by virtue of no appraisal having been made of the legality of any tax act.

c. Of untimeliness.

III. FACTUAL MATTERS

With relevance for the appraisal and decision of the questions raised as to the merits, the following facts are taken as established and proven:

a. The Claimant is a legal person of public law, concretely a Municipality, mixed taxable person for VAT purposes, in that its activity comprises on the one hand i) taxable operations, which confer the right to deduct the tax (e.g. distribution of water to inhabitants), and on the other ii) operations not subject to VAT (e.g. police operations), as well as (iii) operations subject to VAT but exempt from the tax, which do not permit VAT deduction (e.g. lease of real property).

b. On 7/2/2014 the Claimant submitted, "in the terms and for the purposes of the provision in articles 78 and 98 of the VATC, and under article 78 of the General Tax Code", a Request for Administrative Review "of the VAT self-assessment carried out in excess in the periodic declarations of this tax, as to the periods of January to December 2010, and consequent payment of excess tax payment, in the amount of € 114,406.63...", which includes in annex document 1 of "demonstration of the calculation of the pro rata", where in the last line appears "Pro rata 61%". In that Administrative Review Request, the Claimant alleged that:

i. "Within the scope of an internal procedure review effected by the Claimant, the method of deduction used with reference to 2010 was reviewed, having proceeded to the determination of the percentage of deduction applicable to mixed-allocation inputs" (7th Request);

ii. "Additionally, in the course of the review effected, the Claimant identified inputs with respect to which, by error of characterization, there was no VAT deduction. However, it being verified that they ended up being entirely allocated to the performance of taxable operations[,] the respective deduction right subsists..." (8th Request);

iii. "Taking as basis the above set forth, the Claimant comes to exercise the right to additional VAT deduction in question, in the amount of € 114,406.63" (9th Request);

iv. It sustains that it is entitled to a period of four years to exercise the right to deduction, pursuant to paragraphs 1 and 2 of article 98 VATC, as well as paragraphs 1 and 2 of article 78 General Tax Code (16th and 17th Request);

v. It further requests that, under article 52 of the TCPC, should it be understood that the Administrative Review Request "does not constitute the appropriate means to achieve the intended purpose... the conversion of the... request to the procedurally adequate form" (18th Request).

c. On 20/8/2014 the TCA replied to the Claimant, dismissing the Administrative Review Request. In that reply the TCA alleged that:

i. Paragraph 2 of article 78 of the General Tax Code invoked by the Claimant refers to the mandatory recourse to the "procedure provided for in article 131 of the TCPC, with the time limit of 2 years after presentation of the assessment";

ii. Concluding that "it cannot fail to be considered as untimely the above-mentioned review request, given that... article 23 paragraph of the VATC limits to the last periodic declaration of each year, the deduction with the definitive deduction coefficients, prescribed by the pro rata method, therefore, the regularization in favor of the taxable person had as its period the month of February... of the following year". Thus, "the period for complaint, being that we are dealing with an error in self-assessment, is, under paragraph 1 of article 131 of the TCPC, of 2 years";

iii. Coming the taxable person "only now, in 2014, ... to claim the right to VAT deduction, making use of the figure of the request for administrative review provided for in article 78 of the General Tax Code, when, in our opinion... the claim here in question would necessarily have to go through the figure of the gracious complaint to which article 131 of the TCPC refers, within the periods provided therein...";

iv. "In that sense, the analysis of the merits of the regularization sought by the taxable person is not proceeded with, by evident uselessness".

d. On 10/12/2015 the Claimant submitted a Hierarchical Appeal to the dismissal of the TCA. In that Appeal, besides seeking essentially what was set forth in the initial Administrative Review Request, the following allegations are to be highlighted:

i. In the past the VAT deduction regime was complex, raising doubts for diverse actors – designedly the Claimant – as to the deductibility of Tax on mixed costs (11th and 12th of Appeal). Until the State Budget for 2008 a "greater definition by the TCA of certain rules as to the exercise of the deduction right in Municipalities" came about (14th Appeal);

ii. Until then, "being [the Claimant] a municipality of small dimensions and with limited resources, and given the uncertainties as to the applicability of a regime of great complexity, it did not proceed to the deduction of VAT on that type of mixed-use resources" (13th Appeal);

iii. With respect to the VAT of inputs whose deduction is sought by the taxable person, "the corresponding invoices were recorded in the accounting of the Appellant" (40th Appeal); "in fact, the choice not to deduct VAT on common costs was due to the erroneous guidance emanated by the TCA and the incorrect application of the Portuguese rules (e.g. article 23 of the VATC) in light of the community system, as to the method of deduction to be adopted regarding these costs" (41st Appeal). "Thus, fearing it was deducting more than would be permitted, the Appellant, with limited administrative resources, opted not to deduct VAT on mixed-use resources at all" (42nd Appeal);

iv. It is in this context "that the mechanism of Administrative Review arises, with the Appellant considering it to be the only additional guarantee when all other normal procedural means (e.g. gracious complaint, hierarchical appeal) are exhausted" (44th Appeal), with the Claimant citing case law of the Supreme Administrative Court (47th to 51st Appeal) to sustain that "the Request for Administrative Review is the appropriate and correct means for the taxable person to recover the VAT that had not previously been deducted, when the period of two years has elapsed to effect such deduction through declarative means, with the TCA being obligated to analyze that review (submitted within the period – of 4 years) when there has been collection of tax higher than that due" (52nd Appeal);

v. "In the case at hand, the Appellant paid excess tax as a consequence of an incorrect characterization of its right to VAT deduction in light of article 23 of the VAT Code, due to erroneous guidance transmitted by the TCA" (53rd Appeal), and "therefore, not only is the TCA obligated to review acts of illegal collection of taxes as that responsibility will be increased when, based on its guidance, the taxable person did not proceed to the deduction of the tax" (54th Appeal);

vi. "Furthermore, from the procedure adopted, no prejudice resulted to the State, as the delay in deduction that would have prejudiced someone was the Appellant..." (57th Appeal);

vii. To conclude with the request for annulment of the decision dismissing the Request for Administrative Review, and consequently, consider deductible the amount of VAT self-assessment of € 114,406.63, relating to the fiscal year 2010, embodied in the 12 monthly periodic declarations submitted (after 57th Appeal).

e. On 14/12/2015 the Claimant was notified of the dismissal of the Hierarchical Appeal, following the lapse of the prior hearing period granted to it which it did not exercise (54th of the Reply to the Appeal). In the reply to the Hierarchical Appeal the following aspects alleged by the TCA are to be highlighted:

i. "It is understood that, in the situation presented, the period of four years provided for in paragraph 2 of article 98 of the VATC and in paragraph 1 of article 78 of the General Tax Code is not applicable, nor even the period of two years provided for in paragraph 1 of article 131 of the TCPC or in paragraph 6 of article 78 of the VATC" (12th of the Reply to the Appeal), given that the "omission of deduction of tax borne with common costs, does not constitute an error, but a legitimate and common option among mixed taxable persons... thus avoiding the administrative, economic, technical and logistical costs necessary or inherent to the inquiry into the tax capable of deduction" (13th of the Reply to the Appeal), further emphasizing that the justification of the alleged error is "insufficient and even contradictory" (26th of the Reply to the Appeal). "In this way, in these cases, it is not legitimate for the taxable person to come invoke that an error occurred when the periodic declarations presented materialize an option not to deduct VAT that it could eventually deduct", citing to sustain that understanding a 2005 circular letter and an opinion of the Centre of Tax and Customs Studies and Research of 2013 (14th to 16th of the Reply to the Appeal);

ii. The TCA considers that "the retroactive application of a method of deduction can only be effected, under paragraph 6 of article 23 VATC, up to the declaration of the last period of the year to which it relates, without it being viable the gracious complaint provided for in paragraph 1 of article 131 of the TCPC, given the non-existence of an error in self-assessment" (18th of the Reply to the Appeal);

iii. Concluding that there is no error in self-assessment, it is revealed as impossible to seek the review of the tax in accordance with paragraph 1 of article 98 VATC and paragraph 1 of article 78 General Tax Code, nor is there grounds for the gracious complaint provided for in paragraph 1 of article 131 of the TCPC (22nd of the Reply to the Appeal);

iv. Even if there were error, the situation could only be protected by the request for gracious complaint, in accordance with article 131 of the TCPC (29th and 30th of the Reply to the Appeal);

v. Additionally, the error alleged by the taxpayer cannot be qualified as "error in self-assessment", for purposes of paragraph 2 of article 78 General Tax Code, as it is prior to self-assessment, relating to operations practiced upstream (31st to 34th of the Reply to the Appeal). The self-assessment is not even incorrect, as it is in conformity with the accounting records of the Appellant; for these to be errors in self-assessment, these would only occur in the periodic declaration "as is the typical case of errors of transcription of invoices or of records to the fields of the periodic declarations of tax" (35th to 36th of the Reply to the Appeal);

vi. Paragraph 2 of article 78 of the General Tax Code concerns the attributability to the services due to the transfer of functions of tax assessment to individuals, since otherwise taxpayers could not react against an act of their authorship (37th to 39th of the Reply to the Appeal). But in the case in question, "even if the tax had been assessed by the State and not self-assessed by the taxable person, it would reflect, in the same way, the accounting records of the deduction right elaborated by the Appellant. That is, the VAT assessment here challenged would have been made with the same content, even if there were no burden of self-assessment". "Thus the error in self-assessment referred to in paragraph 2 of article 78 of the General Tax Code is the error that only occurs in the operation of self-assessment of tax, the concept not being extensible to prior errors that come to be reflected in the filling of the periodic declaration of tax presented by the taxable person" (40th and 41st of the Reply to the Appeal);

vii. It sustains that the deduction of Tax is a right wholly at the disposition of the taxpayer, and that the TCA cannot substitute the taxpayer in the exercise of that right, citing to that effect case law of the Supreme Administrative Court (23rd to 25th of the Reply to the Appeal);

viii. Thus, being "to be noted that, having been considered that, as alleged, the pretensions of the Claimant did not have legal viability, no investigative diligence was proceeded with aimed at the establishment of the facts that support the requests, designedly as to what concerns the methodology of establishment of the values that it intends to regularize", it concludes by dismissing the Hierarchical Appeal (53rd and 55th of the Reply to the Appeal).

There are no facts, with relevance for appraisal of the merits of the case, that have not been proven.
Substantiation of the factual matters:

The proven factuality was based on critical appraisal of the position assumed by each of the parties, as well as critical analysis of the documents attached to the proceedings, whose authenticity and veracity were not challenged by either party.

The documents attached to the proceedings by the Claimant do not demonstrate – considered in isolation, or in conjunction with its allegations – that any illegality existed in the self-assessment.

In addition to four documents relating to the challenges that preceded the request for arbitral ruling, the Claimant attached the following documents to the proceedings:

i) Document 5: Listing of "mixed-use inputs and deductible VAT 2010" containing the detail "of expenses with mixed-use inputs, as well as the respective deductible VAT, resulting from the application of the pro rata deduction method" (10th PI), in which the following totals are verified:

Taxable base: 1,260,089.50 €;

VAT: 174,310.20 €;

VAT to be deducted: 106,329.22 €.

ii) Document 6: "Map of pro rata calculation 2010", "considering, in the numerator, the annual amount, tax excluded, of operations that give rise to deduction in accordance with paragraph 1 of article 20 and, in the denominator, licensing revenues and fees, as well as income earned from waste management and performance of subdivision and works services" (see 11th PI), where in the last line appears:

Pro rata: 61%.

iii) Document 7: "Listing of inputs exclusively allocated to the performance of taxable operations and deductible VAT 2010", "with respect to which, by error of characterization, there was no VAT deduction" (12th PI), in which the following totals are verified:

Taxable base: 40,278.69 €;

VAT: 8,077.41 €;

VAT to be deducted: 8,077.41 €.

The listings prepared by the Claimant (Documents 5, 6 and 7), are not apt to, by themselves, serve as pertinent documentary evidence of the illegality of the self-assessment.

Indeed, Documents 5 and 7 cannot serve as evidence without being accompanied by copies of the corresponding supporting documents of suppliers (invoices or equivalents), and accounting records and VAT periodic declarations, which would allow verification of the VAT treatment afforded. In the same way, the map of Document 6 would have to be corroborated by the accounting (trial balance) of the Claimant.

On the other hand, such elements – which were not attached to the proceedings – would only permit judgment that VAT was borne and was not deducted. From them would not flow, thus, any elements of proof that would permit conclusion to the effect of the illegality of the self-assessment.

IV. EXCEPTIONS

In accordance with the provision of article 608 of the Code of Civil Procedure in force, applicable by force of the provision of article 22 of the LFATM, "(…) the judgment first rules on the procedural matters that may determine the dismissal of the instance, according to the order imposed by their logical precedence" with the judge to "resolve all questions that the parties have submitted to its appraisal, except those whose decision is prejudiced by the solution given to others (…)".
In these terms, it becomes necessary to appraise and decide beforehand, in the present arbitral proceedings, the preliminary questions of exception, beginning with those relating to the competence of the Tribunal, as provided for by article 13 of the Code of Administrative Procedure and Tax Procedure.

III.1 OF THE INCOMPETENCE OF ARBITRAL JURISDICTION RATIONE MATERIAE, BY VIRTUE OF NO PRIOR RECOURSE TO THE GRACIOUS COMPLAINT PROCEDURE

The TCA sustains, in summary, that article 2, subparagraph a) of ordinance 112-A/2011, of 22/3, by means of which it became bound to arbitral jurisdiction, excludes claims relating to the declaration of illegality of self-assessment acts that have not been preceded by recourse to the administrative procedure, as provided for in articles 131 to 133 of the TCPC. An understanding that, for the TCA, beyond the literal element, 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 CRP), as well as legality (cf. articles 3, paragraph 2, and 266, paragraph 2, both of the CRP), as a corollary of the principle of indisposability of tax debts inherent to article 30, paragraph 2 of the General Tax Code, which bind the legislator and all activity of the TCA" (50th Reply). "Indeed, the binding of the TCA to necessary arbitral protection, in which the principle of irrevocability of decisions prevails, presupposes a limitation of situations in which it can fully decide whether or not to appeal an unfavorable judicial decision, that is, the power to choose between definitively renouncing the collection of a tax debt or adopting the behavior" (53rd Reply).

The Claimant did not exercise the right to respond which was afforded to it regarding the exception, but in the preliminary issue set forth in the PI substantiates the competence of the arbitral tribunal to consider the situation sub judice by invoking article 2 paragraph 1 subparagraph a) of the LFATM "the competence of arbitral tribunals comprises the consideration of the following claims: a) the declaration of illegality of acts of tax assessment, self-assessment, withholding at source and advance payments", describing summarily the unfolding of events, from the declaration of self-assessment in 2010, to the procedure review, request for administrative review (expressly dismissed) and its grounds, and subsequent hierarchical appeal (expressly dismissed) and its grounds.

Let us examine.

I. The competence of the arbitral tribunals functioning in the CAAD is, in the first instance, bounded by the matters indicated in article 2, paragraph 1, of decree-law no. 10/2011, of 20/1 (LFATM). In a second instance, the competence of the arbitral tribunals functioning in the CAAD is also limited by the terms in which the TCA was bound to that jurisdiction by ordinance no. 112-A/2011, of 22/3, since article 4 of the LFATM establishes that "the binding of the tax administration to the jurisdiction of tribunals constituted under the terms of the present law depends on an ordinance of the members of Government responsible for the areas of finance and justice, which establishes, designedly, the type and maximum value of the disputes covered".

In face of this second limitation of the competence of arbitral tribunals functioning in the CAAD, the resolution of the question of competence depends essentially on the terms and nature of this binding, as, even if one is dealing with a situation framed in that article 2 of the LFATM, if it is not covered by the binding, it will be precluded the possibility of the dispute being jurisdictionally decided by this Arbitral Tribunal. That is, "the scope (…) of arbitral proceedings restricts itself to questions of legality of acts of the types referred to in article 2 [of the LFATM] that are covered by the binding that was made in Ordinance no. 112-A/2011 (…)", see Award of the Court of Administrative Appeals of 28/4/2016 (case 09286/16, reporter: Anabela Russo).

II. It happens that in subparagraph a) of article 2 of ordinance no. 112-A/2011, expressly excluded from the scope of the binding of the TCA to the jurisdiction of arbitral tribunals functioning in the CAAD are the "claims relating to the declaration of illegality of self-assessment acts, withholding at source and advance payments that have not been preceded by recourse to the administrative procedure as provided for in articles 131 to 133 of the Tax Procedure and Process Code". That is, comparing the ordinance of binding with the LFATM, the former is more demanding than the latter, by adding a requirement to delimit abstractly the object of the binding of the TCA to arbitral jurisdiction.

III. As to the nature of the ordinance, there are those who understand that therein resides fundamentally an act of decision by the Administration, of manifestation of voluntary consent to the binding to the LFATM, and in the restrictions to the object a "concrete limitation", although "manifested in terms of generic provision" (cf. was the majority understanding in Award 236/2013 of 22/4/2014, or 364/2014 of 19/12/2014, both of the CAAD). There are on the other hand those who let transpire a more regulatory (normative) understanding of the ordinance (majority case law).

Notwithstanding the existence of suggestive elements for both positions, and despite the ordinance containing different parts with distinct natures (article 1 of the binding to the CAAD more concrete, and article 2 of the object of the binding with more general and indeterminate tendency), we consider that the regulatory character of the ordinance stands out, especially as to the object of the binding, which projects itself on all disputes to be resolved through tax arbitration. And in that measure, that part of the ordinance configures itself as an administrative regulation, which integrates into the LFATM.

IV. What has been said before serves to parameterize the selection of interpretive criteria. Given the nature of the ordinance, a subjectivist orientation should be adopted, with the meaning of the normative text that better corresponds to the real thought of the "legislator" being to prevail, in which the teleological element, the purpose of the established provision, is privileged.

Now what lacks special interpretive effort is the requirement of "administrative procedure" necessary (prior), "as provided for in articles 131 to 133 of the Tax Procedure and Process Code".

Immediately, in obedience to those same "terms", provided for in article 131 TCPC, the requirement of prior administrative procedure shall only be applicable to cases in which such recourse is obligatory, through gracious complaint. Indeed, in the case of self-assessments, gracious complaint is required, but only in cases of errors not based exclusively on matters of law, and in which self-assessments have been made in accordance with generic guidance issued by the tax administration (see paragraph 1 and paragraph 3 of article 131 TCPC)[1].

The useful sense of the ordinance, faced with what is established in the LFATM, the will of the legislator, was to assure that the taxpayer does not recur to the Tribunal "(…) before any taking of position of the administration on the situation created with the act of the taxpayer (…) as it is not yet detectable any dispute"[2]|[3]. Thus it is understood that cases provided for in article 131 paragraph 3 TCPC are excluded from the requirement of complaint, given that in those the TCA has already pronounced, a priori, through "generic guidance".

V. Returning to the request for arbitral ruling, the same appears as culmination of a process initiated with a request for administrative review, expressly dismissed, followed by a hierarchical appeal, which was also expressly dismissed.

In the case sub judice the taxpayer did not resort, therefore, to a "gracious complaint", rather it resorted directly to the administrative review request, and did so more than two years after the declaration of self-assessment. But what truly matters is that, in cases in which a request for administrative review of a tax act is formulated, the TCA is equally afforded an opportunity to pronounce on the merits of the taxpayer's claim, before it resorts to the judicial route.

Therefore, by "consistency with the solutions adopted in paragraphs 1 and 3 of article 131 of the TCPC, it cannot be required that, cumulatively with the possibility of administrative appraisal within the scope of that administrative review procedure, a new administrative appraisal through gracious complaint be required. On the other hand, it is unequivocal that the legislator did not intend to prevent taxpayers from formulating requests for administrative review in cases of self-assessment acts, as these are expressly referred to in paragraph 2 of article 78 of the General Tax Code. In this context, permitting the law expressly that taxpayers opt for gracious complaint or for administrative review of self-assessment acts and being the request for administrative review submitted within the period of gracious complaint perfectly comparable to a gracious complaint[4] (…) there can be no reason whatsoever that can explain that access to arbitral jurisdiction be denied to a taxpayer that has opted for review of the tax act instead of gracious complaint" [5].

VI. In light of the foregoing, it is concluded[6] that ordinance no. 112-A/2011, by expressly referring to article 131 of the TCPC as to requests for declaration of illegality of self-assessment acts, stated imperfectly what it intended. Intending to impose the necessary administrative appraisal to the contentious challenge of self-assessment acts, it ended up by making express reference to article 131, forgetting that this route does not exhaust the possibilities of administrative appraisal of those acts. The interpretation embraced is the interpretation that better translates the will of the "legislator" and that collides with no constitutional principles, nor puts in crisis the "indisposability of tax debts".

Besides, the invocation of the principle of indisposability of tax debts will possibly be an oversight, as by deciding on its competence, relevant only as a procedural assumption, the Arbitral Tribunal is surely not practicing any act of disposition of a tax debt, in the sense of the invoked article 30 paragraph 2 General Tax Code.

Moreover, it is not even discernible what credit the TCA refers to, given that, in the present proceedings there are in question only VAT self-assessment acts that have already been paid by the taxpayer, and not the claim for collection of any tax debt. Indeed, there are already extinct, by payment, the debts that justified the self-assessments, and it is not alleged that any other debt of the TCA exists on the Claimant, related to the self-assessments in question.

This exception of incompetence therefore fails.

III.2 OF THE INCOMPETENCE OF ARBITRAL JURISDICTION RATIONE MATERIAE, BY VIRTUE OF NO APPRAISAL HAVING BEEN MADE OF THE LEGALITY OF ANY TAX ACT

The TCA further raises the exception of incompetence of the arbitral tribunals functioning in the CAAD to appraise the legality of self-assessment acts underlying the request for administrative review and subsequent hierarchical appeal, by virtue of not having previously appraised the legality of those self-assessment acts.

According to the TCA, "the act subject to arbitral ruling is embodied in the decision dismissing the hierarchical appeal subsequent to the request for administrative review, in which the Claimant sought, only, the recovery of the VAT assessed in excess" (61st of Reply). "Indeed, from the factuality set forth, it follows that the Claimant, in the request for administrative review and in the subsequent hierarchical appeal, did not request the annulment of any self-assessment act" (62nd of Reply). "Being that the dismissal decision now being challenged limited itself to appraising the requirement of timeliness of the request in light of the diverse arguments of the then Appellant (…), having concluded against the application of any of the periods provided therein" (63rd of Reply). "In the case in question, the grounds for dismissal was, therefore, the expiration of the right to effect the optional corrections provided in that rule" (64th of Reply). "That is, the legality of no tax assessment act was appraised" (65th of Reply). It emphasizes that "(…) only in arbitral jurisdiction does the Claimant conclude for the «illegality of the VAT self-assessment act relating to the periodic declaration of December 2010», requesting, consequently, the annulment of the administrative decisions and the restitution of the assessed VAT" (67th of Reply), whereby, "(…) the request for arbitral ruling has as its immediate object the decision dismissing both the administrative review and the hierarchical appeal, not having as its mediate object any tax assessment act" (68th of Reply; emphasis of Respondent).

Let us examine.

I. Initially, the taxpayer requested[7] to "be confirmed the deduction of VAT in the total amount of € 114,406.63", and for such purpose "the administrative review of the tax act of self-calculation of VAT carried out in the periodic declaration for December 2010"[8], a request that was expressly dismissed, as the TCA deemed the claim untimely. Subsequently, the taxpayer submitted a hierarchical appeal, whose request[9] consisted of "annul the decision dismissing the request for administrative review" and "consider deductible the amount of VAT self-assessment of € 114,406.63, relating to the fiscal year 2010, embodied in the 12 monthly periodic declarations submitted". Following the express dismissal of the hierarchical appeal, by virtue of the TCA having maintained its position as to the untimeliness of the administrative review request and without the Administration having proceeded to "any investigative diligence aimed at the establishment of the facts that support the requests, designedly as to what concerns the methodology of establishment of the values that it intends to regularize"[10], the taxpayer requested arbitral ruling, requesting[11]:

"I) Be declared the partial illegality of the act of self-assessment of Value Added Tax relating to the fiscal year 2010 embodied in the periodic declaration submitted [sic][12] by the Claimant with respect to December 2010, with its consequent partial annulment, with all legal consequences, designedly:

II) Be declared the illegality and annulled the act of dismissal of the request for administrative review and of the subsequent hierarchical appeal;

III) Be the TCA condemned to reimburse the Claimant in the amount of € 114,406.63, in improperly paid tax and to pay the corresponding indemnity interest;

IV) Be the TCA condemned to compensate the Claimant for the expenses resulting from the litigation (…)".

II. The comparison of the different requests of the taxpayer reveals different approaches to the same problem: the recovery of VAT borne with common costs. Being certain however, that in last analysis, the taxpayer acts always motivated by the will to obtain from the Treasury that tax borne.

III. According to the TCA, "the act subject to arbitral ruling is embodied in the decision dismissing the hierarchical appeal subsequent to the request for administrative review, in which the Claimant sought, only, the recovery of the VAT assessed in excess" (61st of Reply) and "(…) the request for arbitral ruling has as its immediate object the decision dismissing both the administrative review and the hierarchical appeal, not having as its mediate object any tax assessment act" (68th of Reply; emphasis of Respondent), but as has already been demonstrated, this statement is incorrect. Indeed, what is directly attacked by the taxpayer in the request for arbitral ruling is the original self-assessment act, and not any decision of the TCA relating to the request for administrative review and subsequent hierarchical appeal.

And this precision is relevant, as being in question the self-assessment act, we are primacially compelled to the analysis of that act and its eventual vices, and not to the decision acts of the administrative challenges and their eventual vices. In that sense, the Supreme Administrative Court has already pronounced, stating that "the real object of the challenge is the assessment act and not the act that decided the complaint, whereby it is the vices of the former and not of that order that are truly in crisis", see Award of the Supreme Administrative Court of 18/5/2011 (case 0156/11, reporter: António Calhau).

IV. Now the appraisal of the "partial illegality of the act of self-assessment of Value Added Tax relating to the fiscal year 2010 embodied in the periodic declaration submitted [sic][13] by the Claimant with respect to December 2010" does not depend – in logical terms – on the content of that petitioned by the taxpayer and decided by the TCA, in the administrative challenges before. Given the relation of the matters, the appraisal by the TCA to those challenges would have included the analysis to the self-assessment acts, should it have reached that point, if the challenges had been considered timely.

But whether from the putative illegality of the self-assessment act can result the consequences petitioned by the Claimant – annulment of the decisions rendered by the TCA relating to the request for administrative review and hierarchical appeal – is a distinct question.

One thing is to appraise the validity of the express dismissal of the claim to recover certain tax within the scope of the request for administrative review, which from the initial petition directs us to that request, another quite distinct is to know whether it is (or is not) legal the self-assessment act, which from the initial petition directs us only to the VAT declaration.

V. Agreement is had with the TCA when it states that, in its decisions to the administrative challenges, there was no concrete appraisal of legality of the self-assessment act, designedly an appraisal of the correspondence to reality of the values indicated by the Claimant, or any judgment, in positive or negative sense, on the substantial merits of the taxpayer's claims, taking only position on the timeliness of the request, faced with article 78 General Tax Code and articles 23, 78 and 98 VATC.

But that circumstance does not prejudice that such appraisal be now made, in arbitral jurisdiction. As, both in the request for administrative review as in the hierarchical appeal, the taxpayer invokes repeatedly article 78 General Tax Code (ex vi article 98 VATC), alleging that there was error in the self-assessment, which will have led to collection by the Treasury of tax in amount higher than that which would be due in light of law, with therefore the duty to revoke the illegal act, albeit with temporal limitations, by reasons of legal certainty[14]. On that alleged error, which precisely – in the view of the taxpayer – makes illegal the self-assessment act, both in the reply to the request for administrative review as in the reply to the hierarchical appeal, the TCA made its analysis and developed considerations, precisely by the relevance that such alleged error has, for the period of action of the taxpayer.

By repeatedly invoking article 78 General Tax Code, where is set forth immediately in paragraph 1 (transcribed in 12th of the administrative review request, p. 3) "the review of tax acts by the entity that practiced them may be effected by initiative of the taxable person…on grounds of any illegality" (our emphasis), the Claimant thus puts, clearly, in crisis the legality of the self-assessment.

In these terms, neither is the request for declaration of illegality of the self-assessment act unexpected, nor can it be said that the TCA was not afforded the opportunity to pronounce on the matter. Indeed, it is necessary to reiterate and emphasize that in fact, the TCA did come to do so, designedly in the Reply to the Hierarchical Appeal[15], where in function of the allegations of the taxpayer, it juridically developed the problem of the error in connection with the period of deduction of VAT.

Now if it is true that in the context in which it was made, the analysis by the TCA of the error invoked by the Claimant was instrumental for the appraisal of timeliness, it is no less true that the same question has autonomous relevance for purposes of the merits of the case.

VI. In the dismissal of the administrative review request the conclusion of the TCA was that the same was untimely and "in that sense, there was not proceeded[,] by evident uselessness, to the analysis of the merits of the regularization sought by the taxable person"[16]. In the dismissal of the hierarchical appeal it deemed that "as alleged, the claims of the taxpayer did not have legal viability", and as such "no investigative diligence was proceeded with aimed at the establishment of the facts that support the requests" of the taxpayer, "designedly as to what concerns the methodology of establishment of the values that it intends to regularize"[17]. If it was not more exhaustive and conclusive in its appraisal, it was by option, influenced by its judgment of untimeliness of the request.

VII. The substantiation of the request for arbitral appraisal is not entirely coincident with that of the administrative challenges, designedly as to the principles and case law of European union law, but that is not limited by the grounds invoked therein, being able to have as grounds any illegality of the tax act, see Award of the Supreme Administrative Court of 18/5/2011 (case 0156/11, reporter: António Calhau).

In light of the foregoing, this exception of incompetence is also unfounded.

III.3 OF UNTIMELINESS

Finally, the TCA further raises the exception of untimeliness. The TCA sustains, in summary, that coming the taxpayer to request the declaration of illegality "of the act of self-assessment of Value Added Tax embodied in the periodic declaration submitted by the Claimant with respect to December 2010, with its consequent partial annulment, with all legal consequences (…)", given that it relates to 2010 and considering that the request for arbitral appraisal dates to 2016, it shows "(clearly) exceeded the period legally defined for the challenge of such act in arbitral jurisdiction" (85th Reply), faced with the period of 90 days defined in article 10 of the LFATM.

The Claimant did not exercise the right to respond which was afforded it regarding the exception, but in the preliminary issue set forth in the PI substantiates timeliness by saying that the request for arbitral ruling arises in the sequence of the request for administrative review, "relating to the delivery of excess tax payment, arising from the non-deduction of VAT borne on the acquisition of goods and services for mixed use, in the year 2010, which was dismissed in its entirety"[18], which was succeeded by a hierarchical appeal, which was equally expressly dismissed, and notified to the taxpayer on 14/12/2015. Thus, counting the period of 90 days from "the notification of the decision (…) of hierarchical appeal" (see subparagraph a) of paragraph 1 of article 10 of the LFATM), the request for arbitral ruling presented on 9/3/2016 is timely[19].

Let us examine.

The object of a proceeding is comprised of the respective request and the cause of action, which relate in an indissociable manner. In the situation sub judice, the object of the proceeding transits from the object of the request for administrative review and subsequent hierarchical appeal, in which it is included. That is, despite being autonomizable, the object of this arbitral proceeding is extracted from the request for administrative review and subsequent hierarchical appeal, giving them continuity in what fundamentally constitutes the final claim of the Claimant: annul the self-assessment and recover the VAT allegedly paid in excess.

It is verified, thus, that the period of 90 days for recourse to the Arbitral Tribunal is initiated with the notification of dismissal of the hierarchical appeal, notified to the taxpayer on 14/12/2015.

Terms in which the exception of untimeliness fails.

There having not been raised subsequent questions that obstruct the appraisal of the merits of the case, the conditions are met for a final decision to be rendered.

V. MERITS

The central question to be decided turns on ascertaining whether the grounds underlying the Claimant's requests are well-founded, of:

i. Be declared the partial illegality of the act of self-assessment of Value Added Tax relating to the fiscal year 2010 embodied in the periodic declaration submitted by the Claimant with respect to December 2010, with its consequent partial annulment, with all legal consequences, designedly:

ii. Be declared the illegality and annulled the act of dismissal of the request for administrative review and of the subsequent hierarchical appeal;

iii. Be the TCA condemned to reimburse the Claimant in the amount of € 114,406.63, in improperly paid tax and to pay the corresponding indemnity interest;

iv. Be the TCA condemned to compensate the Claimant for the expenses resulting from the litigation.

Let us examine.

i. As to the illegality of the VAT self-assessment act

The Claimant substantiates the request for declaration of illegality of the VAT self-assessment act with an essential argument.

In the year 2010, due to the "manifest complexity of the regime in question", the Claimant "ended up inadvertently adopting an incorrect interpretation, whereby i) it did not deduct any VAT regarding mixed-use resources and ii) it deducted solely the VAT from resources exclusively allocated to taxed operations, resorting to direct allocation (at that time erroneously designated real allocation), provided for in articles 20 of the VAT Code and 168 of the VAT Directive" (79th PI). Thus, the Claimant deducted less VAT than it was entitled to. Now sustaining the Claimant that "the deduction in question is not configurable as an option or faculty of the Claimant, taxable person, but is a true power-duty inherent to the fundamental characterization of the structure and nature of VAT" (81st PI) (emphasis ours), we have then the violation of a duty, which makes illegal the self-assessment made by the taxpayer. In this way, the "calculation of VAT carried out in the periodic declaration for December 2010 resulted in the payment of excess tax, as the amounts of tax that should be deducted under article 23 of the VATC and the VAT Directive were not offset against the tax assessed on active operations, using the pro rata method. This error resulted in the delivery of excess tax payment to the State, that is, tax which, in light of applicable legal rules, should not have been paid by the Claimant".

In summary, according to the Claimant, an error in self-assessment was committed, attributable to the services (83rd and 84th PI), an error that was felt in the determination of the VAT regime applicable – error of characterization or "error of law" (98th, 99th and 101st PI) – which combined with the aforementioned "power-duty" of tax deduction, makes the self-assessment illegal.

Let us analyze.

I. The Taxable Person not only does not invoke concrete factuality capable of substantiating the commission of error in self-assessment, but the abstract allegation it develops in this regard in the arbitral request reveals itself to be contradictory.

Indeed, in such allegation only vaguely and generically is reference made to alleged contradictions and incorrect information from the TCA, which came to be left unspecified.

Thus the Claimant exposes in the Hierarchical Appeal: "in fact, the choice not to deduct VAT on common costs was due to the erroneous guidance emanated by the TCA and the incorrect application of the Portuguese rules (e.g. article 23 of the VATC) in light of the community system, as to the method of deduction to be adopted regarding these costs" (41st Appeal; emphasis ours). In the request for arbitral ruling, the Claimant also alleges vaguely that "...it is an error in the determination of the VAT regime (error of law) applicable to the deduction of tax on passive operations, in light of the guidance of the TCA, whereby, lacking better designation, it constitutes an error of characterization or of law" (98th PI; emphasis ours).

On the other hand, the very justification presented by the Claimant reveals itself to be contradictory as to the choice of procedures adopted. It appears in the documents attached to the proceedings that "within the scope of an internal procedure review effected by the Claimant, the method of deduction used with reference to 2010 was reviewed, having proceeded to the determination of the percentage of deduction applicable to mixed-allocation inputs" (7th Administrative Review Request)". It is also stated that "being [the Claimant] a municipality of small dimensions and with limited resources, and given the uncertainties as to the applicability of a regime of great complexity, it did not proceed to the deduction of VAT on that type of mixed-use resources" (13th Hierarchical Appeal), "…fearing it was deducting more than would be permitted, the Claimant, with limited administrative resources, opted not to deduct VAT on mixed-use resources at all" (96th PI).

In these terms, from what is set forth it follows that the allegation of error by the Claimant was "insufficient and even contradictory" (see 26th of the Reply to the Appeal): if on the one hand, the Claimant sustains there is an "error in the determination of the VAT regime (error of law) applicable to the deduction of tax on passive operations", it reiterates, on the other, that its conduct resulted from a choice motivated by the scarcity of resources and caution in the approach to applicable tax regime.

II. On the other hand, in the case sub judice[20] the Claimant does not identify concretely the provision(s) it applied incorrectly, beyond brief references to the content of some articles (19 to 23 VATC), choosing instead to invoke, repeatedly and in general, that is, in diffuse manner, the complexity of the entire regime inherent to the deduction right, without indicating concretely where that difficulty consists, nor how it was the cause of error in the application of law, which remains clouded.

Thus it does not identify the logical path where it erred in the application of the legal regime, the rule or rules from which emerges that its alleged difficulty.

Nor is it discernible that the regime in force is endowed with such complexity as would induce error in the possibility of VAT deduction relating to common costs of mixed taxable persons.

Having not been clearly identified and or justified the concrete difficulty in the application of the regime, the argument invoked by the Claimant is not deemed well-founded.

III. It behooves us additionally to appraise the alleged "power-duty" of VAT deduction.

The deduction is a right, not a duty, especially regarding the deduction of VAT on common costs by mixed taxable persons of Tax, in which the taxpayer ponders the relevance of the allocation of resources to the management and deduction of Tax, in function of the complexity of the operations in concreto.

As a right – and not as a power-duty – it is referred to in the law[21], in national case law[22], in community case law[23] and in doctrine[24]. When authors refer to the importance of the principle of neutrality, they do so to emphasize the safeguards with any restrictions to the right, without properly suggesting that the faculty be converted, as seems to us unreasonable, into a "power-duty". There does not exist a "power-duty", but rather a right of VAT deduction, that would permit but not obligate the Claimant, as mixed taxable person, to deduct the VAT from common costs, according to the method chosen, from among those legally provided. Therefore, the voluntary option not to deduct VAT relating to common costs is not capable of making illegal the self-assessment of corresponding VAT, nor of making the self-assessment act erroneous.

By all that goes foregoing, the request for declaration of illegality of the VAT self-assessment act relating to the fiscal year 2010, embodied in the periodic declaration submitted by the Claimant with respect to December 2010, fails.

ii. As to the illegality of the act of dismissal of the request for administrative review and of the subsequent hierarchical appeal

Having become established that there is no error in self-assessment, the claim veiled in the request for administrative review and subsequent hierarchical appeal is not viable, reasons by which the cognizance of this question is prejudiced.

iii. As to the condemnation of the TCA to reimburse the Claimant in the amount of € 114,406.63, in improperly paid tax and to pay the corresponding indemnity interest

Having the Claimant failed to demonstrate the illegality of self-assessment, by logical precedence the cognizance of this question is prejudiced.

iv. As to the condemnation of the TCA to compensate the Claimant for the expenses resulting from the litigation

The Claimant further petitions that the TCA be condemned to compensate it for the expenses resulting from the present proceeding, with legal representative fees.

Let us examine.

The competence of the arbitral tribunals functioning in the CAAD is limited, under the provision of article 2 of the LFATM, to the declaration of illegality of acts of the types indicated therein and acts that rule on the legality of acts of those types.

Additionally, it is also possible in this arbitral jurisdiction to recognize the right to indemnity interest and to render condemnations in that matter.

It has also been understood, as basis on article 171 of the TCPC, that the arbitral proceeding constitutes an appropriate means to render condemnations in indemnification for undue security. However, there is no legal support that permits to include within the scope of the competencies of Arbitral Tribunals functioning in the CAAD condemnations for expenses with legal representative fees.

In this measure, the Tribunal refrains from ruling on this request.

VI. DECISION

Considering the diverse reasons set forth above in substantiation, the Tribunal decides:

a) To judge unfounded the exception of incompetence of arbitral jurisdiction ratione materiae, by virtue of no prior recourse to the gracious complaint procedure;

b) To judge unfounded the exception of incompetence of arbitral jurisdiction ratione materiae, by virtue of no appraisal having been made of the legality of any tax act;

c) To judge unfounded the exception of untimeliness;

d) To judge unfounded the request for declaration of illegality of the act of self-assessment of Value Added Tax relating to the fiscal year 2010 embodied in the periodic declaration submitted by the Claimant with respect to December 2010 and, consequently, to judge prejudiced the appraisal of the remaining requests;

e) Not to take cognizance of the request for condemnation of the TCA to compensate the Claimant for the expenses resulting from the litigation, for expenses with legal representative fees.

VII. VALUE OF THE PROCEEDINGS

In accordance with the provision of articles 306, paragraph 2, and 297, paragraph 2 of the Civil Procedure Code, article 97-A, paragraph 1, subparagraph a), of the TCPC and article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at...

Frequently Asked Questions

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How can a mixed taxable person (sujeito passivo misto) recover incorrectly unclaimed VAT deductions in Portugal?

A mixed taxable person in Portugal can recover incorrectly unclaimed VAT deductions by filing a pedido de revisão oficiosa (request for administrative review) within the four-year limitation period established in article 98(2) of the VAT Code. Under article 78(2) of the General Tax Code, errors in self-assessment are legally attributed to tax authorities. If the administrative review is denied, taxpayers can file a recurso hierárquico (hierarchical appeal) under article 80 of the General Tax Code, and ultimately challenge the decision through CAAD arbitration. The recovery is based on article 22 VATC which establishes when the deduction right arises, and article 184 of the VAT Directive which permits regularization when deductions are lower than entitled amounts.

What is the procedure for filing a pedido de revisão oficiosa for VAT self-assessments under Portuguese tax law?

The procedure for filing a pedido de revisão oficiosa for VAT self-assessments involves submitting a formal request to the Tax and Customs Authority identifying the self-assessment error and the tax period affected, supported by documentation proving excess tax payment. The request must be filed within applicable limitation periods (generally four years under article 98(2) VATC). The taxpayer must demonstrate the error in calculation or legal characterization that resulted in delivering excess tax to the State. If the administrative review request is dismissed, the taxpayer has the right to file a recurso hierárquico (hierarchical appeal) under article 80 of the General Tax Code. Following dismissal of the hierarchical appeal, the taxpayer may seek arbitral ruling through CAAD under the Legal Framework of Arbitration in Tax Matters (Decree-Law 10/2011).

Can municipalities deduct input VAT on expenses related to both exempt and taxable activities such as water distribution?

Yes, Portuguese municipalities acting as mixed taxable persons can deduct input VAT on expenses related to both exempt and taxable activities such as water distribution. Under articles 20 and 23 of the VAT Code and article 168 of the VAT Directive, mixed taxable persons must apply either direct allocation (real allocation) for resources exclusively used in taxable operations, or the pro rata deduction method for mixed-use resources serving both exempt activities (like property leasing) and taxable operations (like water distribution to inhabitants). The pro rata method calculates deductible VAT proportionally based on the ratio of taxable turnover to total turnover. Activities outside the VAT scope (like police activities) are excluded from this calculation. The complexity of this regime often leads to interpretation errors requiring specialized tax review.

What are the time limits and requirements for a hierarchical appeal (recurso hierárquico) following a denied VAT review request?

A recurso hierárquico (hierarchical appeal) following a denied VAT review request must be filed under article 80 of the General Tax Code. The appeal is directed to the hierarchically superior authority of the entity that dismissed the administrative review request. While the specific time limit is not detailed in this excerpt, it must be filed within the period established by the procedural tax law framework. The hierarchical appeal should contest the grounds for dismissal of the administrative review and present legal arguments supporting the taxpayer's entitlement to the claimed VAT deduction or refund. If the hierarchical appeal is dismissed, as occurred in this case on 14/12/2015, the taxpayer may then initiate arbitration proceedings before CAAD (Centre of Administrative Arbitration) within the applicable deadline under Decree-Law 10/2011.

What compensatory interest (juros indemnizatórios) can taxpayers claim when a VAT self-assessment is declared unlawful by CAAD?

When a VAT self-assessment is declared unlawful by CAAD, taxpayers can claim juros indemnizatórios (compensatory interest) on the amounts improperly paid or retained by the Tax and Customs Authority. These compensatory interests are calculated from the date of the undue payment until the date of actual reimbursement, applying the legal interest rate established by Portuguese tax legislation. In this case, the claimant specifically requested condemnation of the TCA to reimburse VAT in the amount of €114,406.63 plus corresponding indemnity interest. The legal basis for compensatory interest derives from the principle that taxpayers are entitled to compensation for the financial loss caused by the State's unlawful retention of amounts to which the taxpayer was entitled, particularly when the error is legally attributed to tax authorities under article 78(2) of the General Tax Code.

Mixed VAT Deduction by Municipalities: Official Review and Hierarchical Appeal at CAAD (143/2016-T)

Table of Contents

Summary

Full Decision

ARBITRATION AWARD

I. REPORT

II. PRELIMINARY MATTERS

III. FACTUAL MATTERS

IV. EXCEPTIONS

III.1 OF THE INCOMPETENCE OF ARBITRAL JURISDICTION RATIONE MATERIAE, BY VIRTUE OF NO PRIOR RECOURSE TO THE GRACIOUS COMPLAINT PROCEDURE

III.2 OF THE INCOMPETENCE OF ARBITRAL JURISDICTION RATIONE MATERIAE, BY VIRTUE OF NO APPRAISAL HAVING BEEN MADE OF THE LEGALITY OF ANY TAX ACT

III.3 OF UNTIMELINESS

V. MERITS

i. As to the illegality of the VAT self-assessment act

ii. As to the illegality of the act of dismissal of the request for administrative review and of the subsequent hierarchical appeal

iii. As to the condemnation of the TCA to reimburse the Claimant in the amount of € 114,406.63, in improperly paid tax and to pay the corresponding indemnity interest

iv. As to the condemnation of the TCA to compensate the Claimant for the expenses resulting from the litigation

VI. DECISION

VII. VALUE OF THE PROCEEDINGS

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Table of Contents

Mixed VAT Deduction by Municipalities: Official Review and Hierarchical Appeal at CAAD (143/2016-T)

Table of Contents

Summary

Full Decision

ARBITRATION AWARD

I. REPORT

II. PRELIMINARY MATTERS

III. FACTUAL MATTERS

IV. EXCEPTIONS

III.1 OF THE INCOMPETENCE OF ARBITRAL JURISDICTION RATIONE MATERIAE, BY VIRTUE OF NO PRIOR RECOURSE TO THE GRACIOUS COMPLAINT PROCEDURE

III.2 OF THE INCOMPETENCE OF ARBITRAL JURISDICTION RATIONE MATERIAE, BY VIRTUE OF NO APPRAISAL HAVING BEEN MADE OF THE LEGALITY OF ANY TAX ACT

III.3 OF UNTIMELINESS

V. MERITS

i. As to the illegality of the VAT self-assessment act

ii. As to the illegality of the act of dismissal of the request for administrative review and of the subsequent hierarchical appeal

iii. As to the condemnation of the TCA to reimburse the Claimant in the amount of € 114,406.63, in improperly paid tax and to pay the corresponding indemnity interest

iv. As to the condemnation of the TCA to compensate the Claimant for the expenses resulting from the litigation

VI. DECISION

VII. VALUE OF THE PROCEEDINGS

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