CAAD Case 15/2018-T: VAT Deduction Rights on Goods Not Owned by the Taxpayer

ARBITRATION DECISION – CENTRE FOR ADMINISTRATIVE ARBITRATION (CAAD)

The arbitrators Dr. Jorge Lopes de Sousa (President-Arbitrator), Professor Doctor Pedro Soares Martínez and Dr. Alexandre Andrade (Arbitrator Members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 20-03-2018, hereby agree as follows:

1. Report (consult full version in PDF)

A... LDA, with registered office in ..., ...-... ..., ..., holder of the single collective person identification number ... (hereinafter designated as "Claimant" or "A..." or "A..."), filed a request for the constitution of a collective arbitral tribunal, in accordance with Decree-Law no. 10/2011 of 20 January (hereinafter RJAT), in which the TAX AND CUSTOMS AUTHORITY is the respondent.

The Claimant requests that the legality of the tacit rejection of the administrative complaint filed against the VAT assessments for the monthly periods from January to December 2013, identified under nos. 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., and the legality of such assessment acts be reviewed.

The Claimant further seeks the condemnation of the Tax Authority to pay compensation for the expenses incurred and to be incurred with the guarantee provided in the tax enforcement proceedings instituted for the coercive collection of the amounts assessed.

The request for the constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority on 11-01-2018.

Pursuant to the provisions of subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of the RJAT, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned signatories, who communicated acceptance of the appointment within the applicable period.

On 28-02-2018, the parties were duly notified of this appointment and did not manifest their wish to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

In accordance with the provisions of subparagraph c) of paragraph 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 20-03-2018.

The Tax and Customs Authority filed a response, contending that the claims lack merit.

By order of 01-05-2018, it was decided to dispense with the meeting provided for in article 18 of the RJAT and that the proceedings should continue with submissions.

Only the Claimant submitted written submissions.

The Tribunal is competent and was regularly constituted.

The parties have legal personality and capacity, are legitimate and are duly represented (articles 4 and 10, paragraph 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities.

2. Statement of Facts

2.1. Proven Facts

The following facts are deemed proven as having relevance to the decision:

• The Claimant is engaged in the provision of services for the production of plastic products, marketed by other companies in the multinational group to which it belongs, namely the B... Group, an activity it has exercised in Portugal for approximately two decades;

• The Claimant carries out its activity under a Manufacturing Services Agreement ("Tolling Agreement" attached to the Administrative Complaint filed with the Initial Request as Annex 1, the content of which is reproduced), concluded with C... S.A. ("C..."), a group company based in Switzerland, in December 1997;

• As set out in that Manufacturing Services Agreement, the Claimant undertakes to manufacture the products in conformity and in accordance with the instructions and specifications provided by C..., and is bound to comply with the brand quality standards through the use of know-how, designs, standards and other requirements issued by C... (Article 2 of the cited Agreement);

• The plastic product manufacturing process begins with the acquisition of raw materials and components by C..., in its own name, which are subsequently imported by the Claimant, which incorporates them into the finished products it manufactures for C..., so that the latter can, ultimately, proceed with their sale under the A... brand;

• The Claimant presents itself to the Portuguese customs authority in the capacity of "importer of record", acting on behalf of C..., because the latter does not have any structure of human and technical means to enable it to carry out imports in Portugal;

• In order to clear the aforementioned raw materials and components through customs, the Claimant contracted in its own name the company D..., Lda. ("D...") as Official Customs Broker, with the costs of this service provision being re-invoiced to C...;

• All raw materials and components that make up the finished product, work-in-progress products and finished products are the property of C... (Article 4.1 of the cited Agreement);

• The agreed value for the manufacturing services provided by the Claimant corresponds to costs and expenses incurred, plus a fee equivalent to 15% of their value, as per Article 6 of the mentioned Manufacturing Services Agreement;

• The Claimant provides product storage services in Portuguese territory to E... S.A. and to C..., which include the storage of products produced either by the Claimant and other companies in the B... Group or by companies not part of it;

• It is under a Warehousing Services Agreement, concluded between the Claimant and C... in 1997, that the Claimant provides warehousing, handling, truck loading and dispatch guide issuance services to C..., with respect to raw materials, components and finished products that are the property of C... (Article 2.1 of the "Warehousing Services Agreement", attached to the complaint filed as document no. 1 with the Initial Request);

• All goods used and manufactured throughout the production chain, including raw materials, components, finished products and other goods necessary for production, are stored in the Claimant's facilities, both in ... and in a rented warehouse in ..., ... – with C...'s goods being physically separated from the others;

• The value of the warehousing service covers all costs and expenses related to the warehousing services provided under the Warehousing Services Agreement, to which is added a profit margin of 10% thereon (Article 6 of said contract);

• In connection with the warehousing services provided, the Claimant sometimes contracts transportation services in its own name, but on behalf of other entities in the Group, subsequently re-invoicing them to C...;

• In this specific case, the transportation of goods from their origin to the place of discharge in ... is the responsibility of the respective supplier, and the Claimant may contract the transportation itself in exceptional situations, with the charge being re-invoiced to C...;

• The Claimant is subject to the monthly periodicity regime and is a "full" VAT taxable person, in that it carries out exclusively operations conferring the right to deduct VAT;

• The services invoiced to C... under the Manufacturing Services Agreement represent more than 90% of the operations carried out by the Claimant;

• The Tax and Customs Authority conducted a tax inspection of the Claimant, relating to VAT, under Service Order OI2016..., in which it drew up the Tax Inspection Report contained in pages 70 et seq. of the document designated «Annex 1 - VAT Complaint 2013 p. 431-617.pdf», filed with the request for arbitral pronouncement, the content of which is reproduced, in which, among other things, the following is stated:

1.4 - BRIEF DESCRIPTION OF THE CONCLUSIONS OF THE INSPECTION ACTION

In the following table are summarized the corrections in the context of VAT, relating to VAT not conferring the right to deduction in the year 2013:

[...]

III – DESCRIPTION OF FACTS AND GROUNDS FOR MERELY ARITHMETIC CORRECTIONS TO THE TAXABLE AMOUNT

The normative provisions cited in this report are those in force on the date of the facts.

I - VAT RECORDED IN DOCUMENTS OF ASSESSMENT OF IMPORT DUTIES IN THE NAME AND ON BEHALF OF THIRD PARTIES

A... deducted, in the year 2013, the VAT recorded in the assessment records identified in the following tables:

[...]

In the analysis conducted on the DLTs, identified in the previous tables, it was verified that the invoices recorded therein, which are identified by the code "N380", state that:

• The imported goods invoiced in each of the invoices identify the client as being C..., SA (hereinafter designated C...) or G..., S.A.

• The address where the imported goods are to be delivered is: "A..., Lda - ... ...- ... ...-Portugal", except for the transfer to G....

In the following points we will analyze the facts having regard to the name of the client recorded in the import invoice of the goods:

A – G…, S.A.

In the careful and detailed reading of import invoice no. ..., which was issued in the name of F... in favor of its client G..., S.A, resident ..., it was verified that the same evidences the transfer "Steel MOLD for plastic injection NR ...-A (TU..., TU...)". In the same invoice there is no reference to the entity resident in Portugal (A...).

That is, the aforementioned import does not evidence any transaction in favor of A....

B – C... SA

The remaining import invoices identified in the tables above identified as client C..., SA, as already mentioned in this report.

Upon consultation of the Tax Authority database, it was verified that C..., SA - An entity resident in a third country (Switzerland) is registered in Portugal for VAT purposes without a permanent establishment, having been assigned the VAT identification number ... In the system it appears that A... was appointed its representative, in accordance with paragraph 2 of article 30 of the VAT Code.

C... (non-resident entity) declared in its VAT Periodic Declarations active operations subject to VAT at the standard rate (field 3), intra-community transfers (field 7) and exempt operations conferring the right to deduction (field 6).

Within the scope of the internal inspection procedure, which aimed at analyzing the legitimacy of the VAT refund request made by A... in the Periodic Declaration relating to the period 2015/07, the following situations were verified:

A. A... deducted the VAT recorded in the VAT assessment records relating to the import of products that are the property of C..., S.A - an entity resident in a third country (Switzerland), which is registered in Portugal for VAT purposes as a non-resident entity without permanent establishment, to which the VAT identification number 980.146.020 was assigned.

B. Issuance of invoices/Assessment Notices by A... to the client C..., SA (C...), an entity resident in Switzerland as:

i "freight incurred by A…, Lda (Portugal…) on Transactions of finished products to/from other European C… locations as attached." (emphasis ours),

ii "Charges of freight incurred by A..., Lda (Portugal…) on transactions of Bulk items from other European C… locations." (emphasis ours),

iii "Warehouse finish and shipping department cost including 10% of Mark-up -According to article 6 of the Warehouse Service Agreement established between the two parties." (emphasis ours).

Similar to what was verified in the prior inspection procedure already identified in this report, A..., in the year 2013, issued invoices of the same nature, as described in the following tables:

[...]

All invoices identified above have recorded "Not Subject to VAT in Portugal - Art. 6 no. 6 subparagraph a) of the VAT Code contrary - VAT Self-Assessment"

[...]

C..., in its capacity as a taxable person registered for VAT purposes in Portugal, makes intra-community acquisitions of goods (raw material), in accordance with article 3 of the Intra-Community Transactions VAT Regime (RITI) combined with paragraph 1 of article 8 of the same Decree;

The aforementioned acquisition of goods (raw material) is placed in the factory in ..., owned by A... and at the disposal of this entity, so that this entity provides the molding service provided for in the Tolling contract, which will be analyzed further on in this information. The raw material and the finished product are the property of C..., a non-resident entity but registered for VAT in national territory, and were respectively acquired or sold "using" the Portuguese tax identification number:

C..., in its capacity as a taxable person registered for VAT purposes in Portugal, makes transfers of goods to:

a. National territory:

b. The European market:

A... was appointed fiscal representative of C..., in accordance with paragraph 2 of article 30 of the VAT Code.

[...]

• A... contracted with C... to provide the services necessary to produce A... brand Products: This operation constitutes an onerous provision of services typified in subparagraph c) of paragraph 2 of article 4 of the VAT Code,

• C... (entity resident in Switzerland and registered for VAT purposes without permanent establishment in Portugal) is the owner of the raw materials and all materials necessary to produce the final product to be marketed under the A... brand - A... Products;

• Raw materials are acquired by C... using the Portuguese VAT identification number:

• Raw materials and finished products are stored in the factory in .... For said warehousing service, C... pays A... an amount provided for in the "Warehousing Service Agreement" contract.

• C... is the owner of the finished product – A... Products,

• The finished product is transferred onerous by C... using the Portuguese tax identification number to national territory and to the European market.

All costs related to the import of goods (initially incurred by A...) are re-invoiced to C....

[...]

In light of the above, we conclude that the imported goods described in tables I to XII, for which A... deducted VAT, are goods that are not its property and are therefore not used for the realization of the taxable operations related to the transfer of goods operations and/or service provisions of the Portuguese entity (A...).

Article 20 of the VAT Code provides that:

[...]

Accordingly, VAT recorded in documents evidencing the import of goods owned by C... was improperly deducted during the year 2013, in the amount of € 1,755,832.43, as described by tax period in the following table:

2 - VAT RECORDED IN DOCUMENTS RELATING TO THE TRANSPORT AND CLEARANCE OF IMPORTED GOODS IN THE NAME AND ON BEHALF OF THIRD PARTIES.

A... deducted VAT based on documents issued by companies that provide services for the transport of imported goods on behalf of C..., as demonstrated by tax period in the following tables:

[...]

In summary, with respect to the service provisions described above, VAT was improperly deducted in the total amount of € 86,665.69, as described by tax period in the following table:

[...]

Similarly, A... deducted the VAT recorded in the invoices issued by D..., Lda, NIPC..., referring to services provided in the context of customs clearance of imports, which are described by tax period in the following table:

[...]

With respect to the service provisions described above, VAT was improperly deducted in the total amount of € 19,302.47, as described by tax period in the following table:

[...]

Subsequently, the Taxable Person issued invoices, identified in tables no. XXIV and no. XXV, in favor of the client C..., S.A., to re-invoice the charges incurred and paid on behalf of the entity resident in Switzerland (which include VAT-subject expenses and VAT-exempt expenses).

The accounting entries made by A... are as follows:

[...]

A... re-invoices to C... the charges (excluding VAT) related to transport and any charges related to the imports of goods owned by C....

A... deducts the VAT recorded in the invoices issued by the service providers which are subsequently re-invoiced to C..., but excluded from VAT.

Once again, it should be noted that, according to the information provided by the Taxable Person, the imported goods (the owner is a non-resident entity) when transformed give rise to finished products of the brand 'A...' (owner non-resident entity) are sold by the non-resident entity to national territory, European Union territory and third country territory using the VAT identification number.

It is important to note that the non-resident entity declares the sales of finished products in its VAT periodic declaration for the respective tax period, filed in national territory in the capacity of non-resident taxable person without permanent establishment.

In light of the above, it is concluded that it is the non-resident entity that, in determining the sale price of the finished product, will include in the formation of the same the expenses incurred with:

• The acquisition of raw materials and other components:

• Transport of third-party goods: and

• Customs brokers.

Moreover, in the formation of the sale price of finished products, the expenses incurred with the production of 'A...' products plus the profit margin (added value) are also included, which is subject to VAT in accordance with article 1 of the VAT Code.

In light of the above, we conclude that A... improperly deducted VAT relating to the transport of imported goods and customs broker fees that are the property of C... (non-resident entity), because they were not intended for the realization of transfers of goods and provisions of services in the sphere of A..., in accordance with subparagraph a) paragraph 1 of article 20 of the VAT Code.

That is, VAT was improperly deducted, regarding the totality of the corrections proposed in point III.2, in the amount of € 105,968.16, as described by tax period in the following table:

[...]

IX - RIGHT TO BE HEARD

[...]

The Tax Inspection refutes accusations relating to the fact of omitting facts. All facts underlying the corrected matter are described in Chapter III and are those underlying the correction and are hereby given as fully reproduced and are a consequence of all facts known to the tax inspection.

For better clarification of the Taxable Person, the inspection reports cannot be identical, because the documents are different, the timing of the report preparation is different, and even the legislation can change from period to period.

The facts described in this report concern documents relating to VAT deducted in the year 2013, provided by the Taxable Person and taking into account the legislation in force on the date of the facts.

It is emphasized that the imported goods, property of C... and when transformed give rise to a finished product that will be sold in Portugal and outside Portugal by the same (C...). That is, the VAT inherent in the taxable operations underlying said deduction to be deductible will be in the sphere of C..., in accordance with article 20 of the VAT Code, a situation that has to be examined in the same.

Additionally, it should be noted that the inspection action carried out for the year 2012 was authorized by Service Order no. OI2016... and not by Service Order no. 012016..., as referred to by the Taxable Person in paragraph 2 of the document exercising the right to be heard. The current inspection procedure is the one authorized by Service Order OI201.... This is certainly just a typo by the Taxable Person.

We will then proceed in a detailed manner to analyze the allegations presented by the Taxable Person in the exercise of the right to be heard.

For better understanding we will use the identification/numbering used by the Taxable Person in the exercise of the right to be heard.

II - Conclusions of the draft corrections

a. Import of goods

The Taxable Person states in the document exercising the right to be heard, more specifically in the articles identified below the following:

• 10th to 12th - makes a description of some facts described in the Draft Report;

• 13th transcribes the last paragraph of section III.1 - "VAT RECORDED IN DOCUMENTS OF ASSESSMENT OF IMPORT DUTIES IN THE NAME AND ON BEHALF OF THIRD PARTIES" of the Draft Report.

In the section "II. Conclusions of the draft report" in the document exercising the right to be heard, the Taxable Person exercises, in fact, the contradiction regarding the facts and law underlying the correction described in the Draft Report, using the same reasoning recorded in the document exercising the right to be heard on the draft report prepared in the internal inspection action for the year 2012, authorized by Service Order no. OI2016....

Regarding the allegations presented by the Taxable Person, it is necessary to state that in Section III.1 of the Draft Report, pages 10 to 45, all facts known to the tax inspection (which are hereby given as fully reproduced) are described in detail, which underlie the understanding of these inspection services that the deduction of tax is improper.

The Taxable Person alleges in paragraph no. 15 that "(...) so that there is no doubt about the complete confusion on which ('Draft Report under review') rests, which is practically reduced to numerical tables with the "Accounting" of the amounts to be subtracted from the taxpayer, please be kind as to indicate directly, clearly and expressly which provision of the VAT Code is the basis for the proposal to exclude the right to deduction."

In light of the allegation, it is necessary to state that there is no confusion in the grounds recorded in the draft report. Furthermore, it is clarified that section III.1 is structured as follows:

• Identification, by tax period (12 tax periods correspond to 12 Tables), of the documents that gave rise to the VAT deduction (pages 10 to 18); Description of the accounting of the documents identified in the tables described above and confirmation that all documents were declared in the Periodic Declaration (PD) for the corresponding tax period;

• Description of the import procedures underlying the documents subject to import and the corresponding VAT deduction;

• Correspondence between VAT assessment documents and Single Import Documents with invoices issued by the supplier of the Imported goods (12 tax periods – 12 tables) - Pages 19 to 26.

• Identification of documents issued by A... in favor of C..., to debit the value of charges, excluding VAT, related to freight incurred by the first entity on behalf of the second. That is, the freight values that gave rise to VAT deduction, relating to finished products (property of C...) are debited to C... (non-resident entity without permanent establishment). The reason is unknown why VAT was not likewise invoiced to the non-resident entity, since the latter is registered in national territory and files the respective Periodic Declarations;

• Identification of documents relating to "Charges of freight incurred by A… (Portugal…) on transactions of bulk item from other European C… Locations",

• Identification of Assessment Notices issued by A... in favor of C.... As "Warehouse finish and Shipping department cost including 10% ok Mark-up - According to article 6 the warehouse agreement established between the two parties;

• Transcription of responses to the notification made by our office no. ..." (pages 38 to 44);

• Summary of operations related to the import of goods owned by C..., which we hereby transcribe:

• A... contracted with C... to provide the services necessary to produce A... brand Products. This operation constitutes an onerous provision of services typified in subparagraph c) of paragraph 2 of article 4 of the VAT Code.

• C... (entity resident in Switzerland and registered for VAT purposes without permanent establishment in Portugal) is the owner of the raw materials and all materials necessary to produce the final product to be marketed under the A... brand – A... Products

• Raw materials are acquired by C... using the Portuguese tax identification number for VAT purposes:

• Raw materials and finished products are stored in the factory in .... For said warehousing service, C... pays A... an amount provided for in the "Warehousing Service Agreement" contract.

• C... is the owner of the finished product – A... Products,

• The finished product is transferred onerous by C... using the Portuguese tax identification number to national territory and to the European market.

In light of the above, we conclude that in the sphere of the Portuguese entity – A...- the acquisition of imported goods:

• Did not contribute to the formation of the price of the Service Provisions carried out at the request of C...;

• Did not give rise to sales of finished products to national territory, intra-community territory and third countries;

• Did not result in sales of goods in the same condition as they were acquired to national territory, intra-community territory and third countries.

In the analysis conducted on the Single Import Documents, it was verified that the invoices recorded therein, which are identified by the code "N380", state that the purchaser of the imported goods is C....

In accordance with paragraph 1 of article 20 of the VAT Code (transcribed on page 36 of the Draft Report), VAT can only be deducted that has been incurred on goods or services acquired, imported or used by the taxable person for the realization of the following operations:

• Transfers of goods and provisions of services subject to tax and not exempt therefrom;

• Exports.

Taking into account what is described in section III.1 of the Draft Report and now in the Final Report, the acquisition value of imported goods did not contribute to the realization of transfers of goods and provisions of services subject to tax, as provided for in subparagraph a) paragraph 1 of article 20 of the VAT Code combined with subparagraph c) of paragraph 2 of article 4 of the VAT Code.

In light of the foregoing, the allegations presented lack legal basis.

b. Transport Services

The Taxable Person in article 16 transcribes partially two paragraphs recorded in Section III.2-"VAT RECORDED IN DOCUMENTS RELATING TO THE TRANSPORT AND CLEARANCE OF IMPORTED GOODS IN THE NAME AND ON BEHALF OF THIRD PARTIES", in the Draft Report:

• "In summary, with respect to the service provisions described above [transport] VAT was improperly deducted in the total amount of € 73,591.44 (...)" (cf. Draft report page 55, as referred to by the Taxable Person in the exercise of the right to be heard):

• "In summary, with respect to the service provisions described above [customs broker] VAT was improperly deducted in the total amount of € 19,302.47, (cf. Draft corrections p.69.) ".

First, it is necessary to state that in the paragraph recorded on page 55, which we hereby transcribe:

"In summary, with respect to the service provisions described above VAT was improperly deducted in the total amount of € 73,591.44, as described by tax period in the following table",

the amount € 73,591.44 was improperly recorded when the amount € 86,665.69 should have been recorded, as shown in the table to which it refers. Furthermore, it is informed that the total value of the corrections recorded in table I of the Draft Report refers to the correct amount (€ 86,665.69).

The correction proposed in section III.2 begins on page 55 and ends on page 71 of the Draft Report. On page 70 of the Draft Report the provision of the VAT Code on which the correction proposal is based is indicated:

"In light of the above, we conclude that A... improperly deducted VAT relating to the transport of imported goods and customs broker fees that are the property of C... (non-resident entity), because they were not intended for the realization of transfers of goods and provisions of services in the sphere of A..., in accordance with subparagraph a) paragraph 1 of article 20 of the VAT Code."

That is, the paragraph described above concerns the totality of the corrections proposed in section III.2, as described by tax period in the table included on page 71.

In accordance with paragraph 1 of article 20 of the VAT Code (transcribed on pages 44 to 45 of the Draft Report), VAT can only be deducted that has been incurred on goods or services acquired, imported or used by the taxable person for the realization of the following operations:

• Transfers of goods and provisions of services subject to tax and not exempt therefrom;

• Exports.

Taking into account what is described in section III.2 of the Draft Report and now in the Tax Inspection Report, the acquisition value of imported goods and services connected thereto (expenses related to transport, customs broker fees) did not contribute to the realization of transfers of goods and provisions of services subject to tax, as provided for in subparagraph a) paragraph 1 of article 20 of the VAT Code.

In light of the foregoing, the allegations presented lack legal basis.

III- Characterization of operations and proper application of VAT.

The Taxable Person in articles 20 to 27 provides a brief summary of the contractual clauses provided for in the "Manufacturing Services Agreement" and "Warehousing Agreement" contracts.

The Taxable Person acknowledges that all imported goods are the property of C... (cf article 24), which justifies the issuance of the invoice for the acquisition of the goods by their supplier in the name of C... and not of A....

A... was contracted by C... to provide a molding and assembly service of raw materials and production components (property of C...) placed by order of C... in the Factory in ..., for the first entity to provide the service provision already described in this report. For said service provision, A... is remunerated by C..., in accordance with what is provided for in the "Manufacturing Services Agreement".

Thus, the acquisition value of imported goods is not an input of A... (in fact, there is not and could not be any record in the accounting of the net value of the import of goods), but rather of C..., since it is this entity that imports the goods and will proceed with the sale of finished products and possibly of some imported goods.

As follows:

i) The supplier of imported goods issues an invoice to C... (in its capacity as customer), which is identified in box 44 in the Single Import Document;

ii) A... presents itself to the Customs Authority as being the Importer and pays the respective VAT. However, the actual Importer is C... (entity registered for VAT purposes as a non-resident entity without permanent establishment), since it is the owner of the goods which will subsequently transfer the finished product onerous in national territory, using the Portuguese tax identification number;

iii) A... deducts the VAT paid at the Portuguese Customs. Requests the refund of VAT paid at Customs, when the importer is C..., registered for VAT without permanent establishment in Portugal;

iv) A... provides the molding service provided for in the Tolling contract, for which it is remunerated. However, in the remuneration of the service provision, the value of imported goods is not included nor could it be, since it is not the owner thereof;

v) In the right to be heard, it continues to be understood why it is not explained why C... does not import directly;

Furthermore, it is informed that after the situation was detected by these Inspection Services, A... ceased to present itself at Customs to pay VAT and make the "import".

The Taxable Person alleges that in article 168 of the VAT Directive the right to deduct VAT does not "(...) make any reference related to the ownership of imported goods. " (article 33 of the document exercising the right to be heard").

Considering the allegation, it becomes necessary to frame the operation in light of said directive:

Let's see:

i. Article 14, paragraph 1, of this directive provides:

«'Delivery of goods' means the transfer of the power to dispose of a tangible asset as owner.» (emphasis ours)

The owner of the imported goods is always C....

ii. Article 24, paragraph 1, of the same directive provides:

«'Supply of services' means any operation that does not constitute a delivery of goods.» (emphasis ours).

As previously demonstrated, the goods were never delivered by C... to A..., in the sense that the latter could exercise the right of ownership so that they could be used for the purposes of its taxable operations (service provisions).

Thus, there cannot be an upstream deduction that does not generate a downstream operation in the sphere of A.... For if it were, any Taxable Person could deduct VAT from a document issued in their name, even if there were no subsequent taxable operations that incorporated that Value.

So much so, that paragraph 2 of article 72 of the VAT Directive provides that the taxable amount is determined:

"As regards the supply of services, by an amount not less than the expenses incurred by the taxable person in the execution of the service provision." (emphasis ours.)

The value of the import of goods is not an expense that contributes as a positive component in the formation of the price of the service provision made by A... (as already demonstrated). Therefore, said import does not generate taxable operations in the sphere of A... and, consequently, the right to deduct tax in the sphere of A... is barred, in accordance with subparagraph a) paragraph 1 of article 20 of the VAT Code.

Note that, if there were no limits to the deduction of VAT, any entity that had in its possession a document in its name with the invoicing of a good/service in its name that did not generate a subsequent taxable operation would be in a position to exercise the right to deduction (according to the interpretation of the Taxable Person).

Properly speaking, if tax functioned the way the Taxable Person intends, with respect to the acceptance of the right to deduct VAT, the principles of tax security and equal taxation between Taxable Persons would be put in crisis.

Absent better opinion, the Taxable Person interprets the word "used" recorded in paragraph 1 of article 20 of the VAT Code in a broad sense when it must be interpreted in a narrow sense. Thus, considering the allegations of the Taxable Person, any good that is used by Taxable Persons, even if supplied by their client (expense incurred by the client), VAT can be deducted by the service provider, which is at minimum absurd because it contradicts the method and philosophy of the calculation of Value Added Tax.

What the legislator intended with the mention of the word "used" was to allow the deduction of VAT from operations that do not evidence acquisitions for definite ownership, namely "leases", whose expenses/costs enter into the formation of the price of the service provision/goods that will be transferred by the Taxable Person and consequently are taxable downstream.

Considering the objective facts described above, which demonstrate that the Taxable Person does not have the right to deduct the tax paid relating to the imports of goods from C..., because it does not meet the requirements expressly provided for in article 168 of the VAT Directive, the VAT deduction made is improper.

For this deduction of VAT would put in crisis the regime of fiscal neutrality, because, as already mentioned, there is no downstream operation of transfer of goods in the sphere of A... and the value of imported goods does not enter into the formation of the price of the service provision. Thus, the right to deduct VAT on imported goods and expenses related thereto is ruled out in accordance with subparagraph a) paragraph 1 of article 20 of the VAT Code.

[...]

• Following the inspection action, the Tax and Customs Authority issued VAT assessments for the monthly periods from January to December 2013, identified under nos. 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., as well as the respective account adjustment statements, which were filed with the request for arbitral pronouncement, the contents of which are reproduced;

• On 14-07-2017, the Claimant filed an administrative complaint against the aforementioned assessments;

• The Claimant did not proceed to make any payment of the VAT assessed by the Tax Administration with respect to the monthly periods from January to December 2013 (€ 155,361.79, € 172,595.54, € 198,892.91, € 96,620.52, € 109,673.71, € 72,392.40, € 221,332.97, € 90,431.50, € 155,519.63, € 182,412.10, € 142,286.52, € 264,280.99), totaling € 1,861,800.58;

• Tax enforcement proceedings were instituted for the coercive collection of the amounts assessed;

• On 15-05-2017, the Claimant provided a bank guarantee to suspend the aforementioned tax enforcement proceedings (page 186 of the document «Annex 1 - VAT Complaint 2013 p. 431-617.pdf», the content of which is reproduced)

• The administrative complaint was not decided until 10-01-2018, the date on which the Claimant filed the request for arbitral pronouncement that gave rise to this proceeding;

• By letter dated 14-03-2018, the Claimant was notified of the decision to reject the administrative complaint (document no. 5, filed with the Claimant's submissions, the content of which is reproduced).

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Reasoning for the determination of facts

The facts were determined on the basis of the documents filed with the request for arbitral pronouncement.

3. Statement of Law

The Claimant A... LDA (A...) deducted the VAT recorded in the VAT assessment records relating to the import of products that are the property of C..., S.A. (C...), an entity resident in a third country (Switzerland), registered in Portugal for VAT purposes as a non-resident entity without permanent establishment.

A... contracted with C... to provide the services necessary to produce A... brand products, and provides these services, which in the Tax Inspection Report was considered to be «an onerous provision of services typified in subparagraph c) of paragraph 2 of article 4 of the VAT Code».

C... is the owner of the raw materials and all materials necessary to produce the final product to be marketed under the A... brand - A... Products.

The finished product is transferred onerous by C... using the Portuguese tax identification number to national territory and to the European market.

The Tax and Customs Authority understood that the imported goods «for which A... deducted VAT are goods that are not its property and are therefore not used for the realization of taxable operations related to operations of transfers of goods and/or service provisions of the Portuguese entity (A...)».

The Tax and Customs Authority understood that the Claimant could not deduct VAT incurred by the Claimant in the import of goods that it uses in the production of products it manufactures in the course of its activity nor the VAT incurred by the Claimant with the transport and clearance of those imported goods that it uses in the manufacture of finished products.

The issue that is the subject matter of the proceedings is whether the Claimant can deduct the VAT that it deducted, which was effectively incurred by the Claimant, but which relates to operations concerning goods that do not belong to it.

This issue was raised in absolutely identical terms in arbitral proceedings nos. 410/2016-T and 548/2017-T and was decided therein in terms that are considered adequate and well-reasoned, and whose reasoning will be followed closely, in essence.

3.1. The right to deduct VAT by the importer of goods that is not their owner

The right to deduct VAT aims to ensure that «a taxable person of the tax only pays the State the VAT that results from the balance between the amount of VAT it calculates on the taxable operations it carries out downstream and the amount of VAT it bears on the acquisitions upstream».

«The deduction regime aims to completely free the businessman from the burden of VAT, whether due or paid, in the context of all his economic activities, and also, minimizing, as far as possible, the financial burdens caused by the management of the tax. The common system of value added tax thus ensures perfect neutrality as regards the tax burden of all economic activities, whatever the purposes or results of those activities, provided that said activities are themselves subject to VAT».

«The CJEU has persistently affirmed that the right to deduction is an integral part of the VAT mechanism and cannot, in principle, be limited».

«However, the exercise of the right to deduct VAT borne on upstream transactions in business goods and services is not an absolute and unconditional right. The VAT Directive, in articles 176, 177 and 395, permits restrictions to this right for reasons of legal certainty, for cyclical reasons and with the objective of combating fraud or tax evasion or simplifying the collection of the tax. Limitations on the right to deduction affect the level of the tax burden and should therefore be applied similarly in all Member States. Consequently, exceptions are only authorized in cases expressly provided for by the VAT Directive».

«To trigger the deduction mechanism, it is necessary that a taxable person, acting in that capacity, makes the acquisition of a good or a service, or proceeds with the import of a good».

For the exercise of the right to deduction, it is required that, in accordance with article 2 of the CIVA, it is a taxable person that uses in its economic activity the goods and services whose borne tax it wishes to deduct.

The Claimant has the status of taxable person not only with the provision of article 2, paragraph 1, subparagraph a), but also in subparagraph b) of the same paragraph, since it carries out production activities and service provision activities and makes imports of goods in accordance with customs legislation.

In fact, the Claimant provides services under a manufacturing contract, with the nature of a contract for work, denominated a "Tolling Agreement", whose materials are totally or essentially supplied by C... As the owner of the work and imported by the Claimant.

The VAT whose deduction is questioned concerns imported goods that are not the property of the Claimant.

XAVIER DE BASTO and ODETE OLIVEIRA, in an opinion reproduced in the arbitral decision rendered in proceeding no. 410/12016-T, state the following:

"In the situation under analysis, the specificity is only that the delivery of materials by the work owner to the contractor (builder) does not occur directly in national territory, but reaches it after crossing the territorial boundaries of Portugal and also of the Customs Union. And this presents various consequences, which we must analyze to better conclude.

"First, the fact that an import occurs, which the CIVA defines as a taxable operation in light of the application of the destination principle in international trade to which the tax is subject, and whose definition is made by national fiscal legislation in conjunction with the Customs Code (a Community Regulation)."

"The second consequence is that the entity considered as the importer – taxable person in the import – is the one defined by customs legislation by reference made in subparagraph b) of paragraph 1 of article 2 of the CIVA, which considers as the importer the person appearing as recipient in the import document, insofar as article 4, paragraph 18 of the Community Customs Code (CCC) considers as "declarant" the person making the customs declaration in their name or the person on whose behalf the declaration is made, and article 201, paragraph 3, 1st paragraph of the CCC states that the debtor is the declarant."

"Recall in this regard that although the VAT Directive considers that VAT on imports can be paid by a taxable person or by a mere debtor (article 21, paragraph 2 of the Sixth Directive), the Portuguese legislator did not adopt the same solution, but instead always considered the importer as a taxable person, sometimes only with the nature of "debtor" of the tax for the application of the destination principle (subparagraph b) of paragraph 1 of article 2 of the CIVA), since in the others, that importer, if taxable person, is already covered by subparagraph a) of the same number and article. Note that, according to constant jurisprudence of the CJEU, "VAT on imports and customs duties present essential comparable features insofar as they give rise to the fact of importation into the EU and the subsequent introduction of goods into the economic circuit of the Member States. Parallelism that is confirmed by the fact that article 71, paragraph 1, second subparagraph, of the VAT Directive authorizes Member States to link the tax event and the chargeability of VAT on imports to the tax event and the chargeability of customs duties" [This is the doctrine of Judgment C-273/12, of 11 July 2013, no. 41, and the reference therein to Judgments C-343/89, of 6 November 1990, no. 18 and C-230/08, of 29 April 2010, nos. 90 and 91: "In this respect, it must be remembered that VAT on imports and customs duties present essential comparable characteristics, the tax event of which is importation into the Union and the subsequent entry of goods into the economic circuit of the Member States. This parallelism is, moreover, confirmed by the fact that article 71, paragraph 1, second subparagraph, of the VAT Directive authorizes Member States to link the tax event and the chargeability of VAT on imports to customs duties (see, in particular, Judgments of 6 December 1990, Witzemann, C‑343/89, Reports, p. I‑4477, no. 18, and of 29 April 2010, Dansk Transport og Logistik, C‑230/08, Reports, p. I‑3799, nos. 90 and 91)".

"It should therefore be concluded that Member States have no discretion with respect to the requirement of VAT on imports in accordance with customs legislation, according to article 204 of Regulation no. 2913/92, and it being certain, as recalled in the conclusions of Advocate General Juliane Kokott, in Case C-414/10, that "It is the doctrine of Judgment C-273/12, of 11 July 2013, no. 41, and the reference therein to Judgments C-343/89, of 6 November 1990, no. 18 and C-230/08, of 29 April 2010, nos. 90 and 91: "In this respect, it must be remembered that VAT on imports and customs duties present essential comparable characteristics, the tax event of which is importation into the Union and the subsequent entry of goods into the economic circuit of the Member States. This parallelism is, moreover, confirmed by the fact that article 71, paragraph 1, second subparagraph, of the VAT Directive authorizes Member States to link the tax event and the chargeability of VAT on imports to customs duties (see, in particular, Judgments of 6 December 1990, Witzemann, C‑343/89, Reports, p. I‑4477, no. 18, and of 29 April 2010, Dansk Transport og Logistik, C‑230/08, Reports, p. I‑3799, nos. 90 and 91)" and that "if the right to deduction aims to ensure that value added tax remains economically neutral for enterprises, the deduction of upstream borne tax cannot be denied unless we are faced with issues of fraud, evasion or abuse, the fight against which is a recognized and encouraged objective by the Sixth Directive, and there should remain no room for fraudulently or abusively being able to take advantage of the right of the Union, and as such, if a Tax Administration verifies that the right to deduction was exercised fraudulently, it can request, with retroactive effect, the restitution of the amounts deducted and it is incumbent on the national judge to refuse the benefit of the right to deduction if it is proven, with objective evidence, that this right is invoked fraudulently".

"In the situation at hand, such an issue does not arise, and it must be recognized, however, and as results from point 45 of the Conclusions of the same Advocate General, in the same proceeding that "With respect to the collection of value added tax on imports, it is, however, not discernible why in this case there would generally be a greater risk of fraud making it necessary to make the right to deduction, in any event, depend on the prior payment of value added tax on imports" and, further on, "Also the proof of import which, pursuant to article 18, paragraph 1, subparagraph b), of the Directive, the taxable person must present to be able to deduct upstream borne tax and which shows it as the debtor of value added tax and at least allows the calculation of the amount of tax due, reduces the possibility of fraud", a position recognized in the Judgment in points 30 and 33, with point 34 recognizing that "Indeed, the importation of a good constitutes a physical act that is certified and verifiable by the competent Administration, due to the presence of said good at customs" and that "the circumstance that the debtor of VAT on imports is also the holder of the right to deduct said VAT also does not appear to increase the risk of fraud or abuse compared to VAT.

On the contrary, as the European Commission argued, the circumstance that one and the same person is at the same time both the debtor of VAT and the holder of the right to deduction brings this situation closer to that which presents itself within the scope of the VAT self-assessment regime provided for by the Sixth Directive".

The importation of goods constitutes a tax event, in accordance with article 2, paragraph 1, subparagraph d), of the VAT Directive, and article 1, paragraph 1, subparagraph b), of the CIVA.

In article 201 of the VAT Directive it is established that «on import, VAT is due by the person or persons designated or recognized as debtors by the Member State of import» and in article 2, paragraph 1, subparagraph b), of the CIVA, it is referred that "Taxable persons are: b) Natural or legal persons who, according to customs legislation, make imports of goods."

In light of the CIVA, the importer acting according to customs legislation is always considered a taxable person, even when it already has previously the status of taxable person under subparagraph a) of paragraph 1 of article 2 of the CIVA, for carrying out an economic activity.

By virtue of the provision of article 71, paragraph 1, 2nd subparagraph, of the same Directive, "where imported goods are subject to customs duties [...], established under a common policy, the tax event occurs and the tax becomes chargeable at the moment when the tax event and the chargeability of those duties occur", which is in line with article 7, paragraph 1, subparagraph c), of the CIVA, which establishes that on imports the tax is due and becomes chargeable "at the moment determined by the applicable provisions on customs duties, whether or not such duties or other Community impositions established under a common policy are due".

The national legislator considers that, on import, the person responsible for the payment of the customs duties due is also the person responsible for the payment of VAT.

Now, in article 4, paragraph 12, of the Community Customs Code (CCC) (in force in 2013, the year to which the facts of the case pertain) ( [1] ), it is established that it is «Debtor: any person responsible for the payment of a customs debt».

When a person makes a customs declaration in their own name, but on behalf of another person ("indirect representation", under article 5, paragraph 2, of the CCC), the person who fills in the customs declaration is the declarant (4, paragraph 18, of the CCC) and is also considered a debtor of the tax, along with the indirectly represented person, as established in article 201, paragraph 3, of the CCC: «The debtor is the declarant. In the case of indirect representation, the person on whose behalf the customs declaration is made is also considered a debtor».

Thus, as stated in the opinion of XAVIER DE BASTO and ODETE OLIVEIRA filed with the request for arbitral pronouncement "it should then be concluded that Member States have no discretion with respect to the requirement of VAT on imports in accordance with customs legislation, according to article 204 of Regulation no. 2913/92".

Now, in accordance with article 19, paragraph 1, subparagraph b), of the CIVA, taxable persons have the right to deduct the tax due or paid on the import of goods. The deduction is made from the amount of tax of which they are debtors.

In this context, the fact that the Claimant is not the owner of the imported goods in respect of which it bore VAT does not preclude the right to deduction.

3.2. The right to deduct VAT by the service provider

Article 20, paragraph 1, of the CIVA, indicates the operations that confer the right to deduct VAT.

In its subparagraph a) it is established that «VAT that has been incurred on goods or services acquired, imported or used by the taxable person for the realization of the following operations may be deducted: a) Transfers of goods and supplies of services subject to tax and not exempt therefrom».

The right to deduct VAT borne with the import of such goods used for the purposes of the taxable operations of the taxable person is also clear in light of article 168, subparagraphs a) and e), of Directive no. 2006/112/EC of the Council, of 28-11-2006, which establishes the following:

Where goods and services are used for the purposes of its taxable operations, the taxable person has the right, in the Member State where it carries out these operations, to deduct from the amount of tax of which it is the debtor the following amounts:

a) VAT due or paid in that Member State in relation to goods delivered to it or to be delivered to it and in relation to services supplied to it or to be supplied to it by another taxable person;

(...)

e) VAT due or paid in relation to goods imported into that Member State."

In the case at hand, the goods were imported for the purposes of the Claimant's taxable operations, for without them the Claimant could not carry out its production activity.

The acquisition of services relating to the transport and clearance of the imported materials is also manifestly connected with this taxable activity of the Claimant.

The conditions for the exercise of the right to deduction are thus satisfied.

3.3. Questions of Knowledge Rendered Unnecessary

For the foregoing, the assessments impugned are vitiated by a breach of law, which justifies their annulment, article 163, paragraph 1, of the Administrative Procedure Code subsidiarily applicable in accordance with article 2, subparagraph c), of the LGT.

Since the request for arbitral pronouncement is to be judged well-founded on the basis of a breach of law, the knowledge of the other defects imputed to the assessments becomes unnecessary, being useless (article 130 of the Code of Civil Procedure).

4. Indemnification for Unwarranted Guarantee

The Claimant provided a guarantee to suspend tax enforcement proceedings instituted for the coercive collection of the assessments impugned and formulates a request for indemnification for the expenses it «incurred and will incur with the guarantee», in accordance with article 53 of the LGT.

Article 171 of the Tax Code of Tax Procedure (CPPT) establishes that «indemnification in the case of a bank guarantee or equivalent unwarranted provided shall be requested in the proceeding in which the legality of the enforceable debt is contested» and that «indemnification must be requested in the complaint, impugnation or appeal or if its ground is subsequent within 30 days of its occurrence».

Thus, it is unequivocal that the judicial review proceeding encompasses the possibility of condemnation for the payment of unwarranted guarantee and is even, in principle, the appropriate procedural means to file such request, which is justified by evident reasons of procedural economy, since the right to indemnification for unwarranted guarantee depends on what is decided about the legality or illegality of the assessment act.

The request for the constitution of the arbitral tribunal and for arbitral pronouncement has as a corollary that it will be in the arbitral proceeding that the «legality of the enforceable debt» will be discussed, whereby, as results from the express wording of that paragraph 1 of said article 171 of the CPPT, it is also in the arbitral proceeding that the appropriate forum to examine the request for indemnification for unwarranted guarantee.

The regime of the right to indemnification for unwarranted guarantee is contained in article 53 of the LGT, which establishes the following:

Article 53

Guarantee in case of improper provision

1. The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be indemnified in whole or in part for the loss resulting from its provision, if the debtor maintained it for a period exceeding three years in proportion to the pendency in administrative review, impugnation or opposition to execution that concern the debt guaranteed.

2. The period referred to in the foregoing paragraph does not apply when it is verified, in administrative complaint or judicial impugnation, that there was error attributable to the services in the assessment of the tax.

3. The indemnification referred to in paragraph 1 has as its maximum limit the amount resulting from the application to the guaranteed amount of the rate of indemnificatory interest provided for in this law and can be requested in the administrative complaint or judicial impugnation proceedings themselves, or separately.

4. Indemnification for provision of unwarranted guarantee shall be paid by set-off against the revenue of the tax for the year in which the payment was made.

In the case at hand, it is manifest that the errors underlying the VAT assessments and compensatory interest are attributable to the Tax and Customs Authority, since the corrections were initiated by it and the Claimant contributed in no way to those errors being committed.

For this reason, the Claimant has the right to indemnification for the guarantee provided.

In the absence of elements that permit determining the exact amount of indemnification, the condemnation shall have to be made with reference to what may be assessed in execution of the present decision, in accordance with the provision of article 609, paragraph 2, of the Code of Civil Procedure, subsidiarily applicable by virtue of article 29, paragraph 1, subparagraph e), of the RJAT.

5. Decision

Therefore, this Arbitral Tribunal hereby decides:

• To judge the request for arbitral pronouncement well-founded;

• To annul the VAT assessments nos. 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017...;

• To judge well-founded the request for condemnation of the Tax and Customs Authority to pay to the Claimant the indemnification to be assessed in execution of the present decision for the guarantee provided to suspend the tax enforcement proceedings instituted for the coercive collection of the amounts assessed.

6. Value of the Case

In accordance with articles 306, paragraph 2, of the Code of Civil Procedure and 97-A, paragraph 1, subparagraph a), of the CPPT and 3, paragraph 2, of the Costs Regulation in Tax Arbitration Proceedings, the case is valued at € 1,861,800.58.

7. Costs

In accordance with article 22, paragraph 4, of the RJAT, the amount of costs is fixed at € 24,480.00, pursuant to Table I attached to the Costs Regulation in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 05-06-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Pedro Soares Martínez)

(Alexandre Andrade)

[1] The Community Customs Code was approved by Regulation (EEC) no. 2913/92 of the Council, of 12-10-1992.

Regulation (EC) no. 450/2008 of the European Parliament and of the Council, of 23 April 2008, which approved the Modernized Customs Code, were only in force in 2013 as regards the provisions referred to in its article 188, paragraph 1, and those relating to fees and charges indicated in its article 30.