VAT Rate on Dental Implants and Abutments Sold Separately – CAAD Decision 154/2016-T

ARBITRAL DECISION

The arbitrators Adm. Councillor Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor Diogo Feio and Prof.ª Doctor Eva Dias Costa, designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 25-05-2016, agree as follows:

1. REPORT

A... UNIPESSOAL, LDA, NIPC..., a company with registered office on Rua..., no....,..., ...-..., ..., ..., ..., came pursuant to the provisions of articles 2.º, no. 1 paragraph a), and 10.º, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January, a diploma that approved the Legal Regime of Arbitration in Tax Matters ("RJAT"), to submit a request for constitution of an arbitral tribunal for the appreciation of the legality of the Value Added Tax (VAT) assessments nos. 2015..., 2015..., 2015..., 2015... and of the compensatory interest assessment no. 2015..., all made by reference to the year 2013, from which results a total amount payable of € 79,870.11.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 24-03-2016.

Pursuant to the provisions of paragraph a) of no. 2 of article 6.º and of paragraph b) of no. 1 of article 11.º of RJAT, the Deontological Council designated as arbitrators the undersigned, who communicated acceptance of the appointment within the applicable period.

On 10-05-2016, the Parties were notified of this designation, having not expressed any will to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11.º no. 1 paragraphs a) and b) of RJAT and articles 6.º and 7.º of the Deontological Code.

Thus, in accordance with what is prescribed in paragraph c) of no. 1 of article 11.º of RJAT, the collective arbitral tribunal was constituted on 25-05-2016.

The Tax and Customs Authority responded, defending the dismissal of the request for arbitral pronouncement.

By order of 22-06-2016 the holding of a meeting was dispensed with and it was decided that the process should proceed with submissions.

The Parties submitted their submissions.

The arbitral tribunal was properly constituted and is competent.

The parties have legal personality and capacity (articles 4.º and 10.º, no. 2, of the same diploma and article 1.º of Ordinance no. 112-A/2011, of 22 March) and are properly represented.

The process does not suffer from nullities.

2. MATTER OF FACT

2.1. Established Facts

The following facts are considered established:

· The Claimant is a company whose corporate purpose is the trade, importation, exportation and representation of products for application in the areas of medical-dental, medical-orthopaedic, surgical-dental, prosthetic-dental and laboratory work, implants, instruments and precision tools, as well as training in the aforementioned areas;

· The activity developed by the Claimant consists of the importation and subsequent marketing of materials and components intended for dental implantology exclusively of brand X...:

· Implantology replaces lost teeth through titanium dental implants and aesthetic porcelain crowns;

· The Claimant's clients are dentists or clinics specializing in dental medicine that work in implantology;

· The products sold comprise a large number of references, which range, for example, from titanium tweezers, burrs, screws and titanium implants of different sizes, to surgical kits;

· The Claimant commercializes everything necessary for the implantation into bone (non-visible part) of a dental implant. These materials are nothing more than artificial teeth roots, so as to provide a solid fixed base on which the crowns or prostheses will be fixed;

· For the implant to be finalized, the intervention of a prosthetist is necessary for the making and placement of the crowns or prostheses (visible part), consisting of this latter act, in the finalization of the implant of an artificial tooth;

· The Claimant applied the reduced rate to the majority of the materials marketed;

· Under the order for internal inspection no. OI2014..., the Tax and Customs Authority made corrections in the field of VAT, relating to the year 2013, in the global amount of € 79,870.11, relating to VAT which it considered to be owed because the reduced rate was applied, regarding the products referred to, which the Tax and Customs Authority understood to be subject to the normal rate.

· In the Tax Inspection Report which was drawn up in the course of that inspection, whose content is given as reproduced, the following is stated among other things:

3.1 VAT RATE APPLICABLE TO TRANSFERS OF DENTAL IMPLANTS AND OTHER CONNECTING OR FIXING PIECES OF DENTAL PROSTHESIS

The company A... - UNIPESSOAL, LDA, NIPC..., made an incorrect classification of the materials it commercializes intended for dental implant, given that:

• the implants applied in dental medicine are nothing more than mere osteointegrable metal roots in the maxilla (upper part of the mouth) or in the mandible (lower and mobile part of the mouth), intended to serve as support or anchorage of a structure of one or more artificial teeth (crown, bridge, etc.);

• the remaining components, parts, pieces and accessories (namely abutments, etc.), object of isolated, autonomous or separate transaction, in addition to not being prostheses, are not apt to fulfill, considered individually, the function of replacing a part of the body or the function of the dental organ (masticatory, verbalization and aesthetic function), from which it is concluded that the transfer of the said pieces (of connection or implantation of the prosthesis) are taxed at the normal rate, because they do not come within item 2.6 of list 1 attached to CIVA.

Pay attention to the definition of "dental prosthesis" as "fixed or mobile structure consisting of one or more artificial teeth, which replaces missing teeth)>" (see Portuguese Language Dictionary - with Orthographic Agreement, Porto Editora, available for consultation at the internet address: http://www.infopedia.pt/lingua-portuguesa/protese) to not understand the reason why dental implants, when transacted in isolation or in an autonomous manner, can be considered as prosthesis material and, consequently, be subsumed within the normative provision of item 2.6 of List 1 attached to CIVA.

In the context of the interpretation of rates it is equally important to refer to the principle of neutrality which should lead to situations materially identical being subject to the same rate, under penalty of creating distortions in the normal functioning of the market (see information no.°..., items 18, 19 and 20).

This situation will be rectified in the present inspection procedure with the subjection of all materials that make up the set of prostheses, to VAT at the normal rate, provided for in paragraph c) of no. 1 of article 18.º of CIVA, that is 23%, with respect to the years under analysis.

3.2 DETERMINATION OF THE VALUES OF VAT ASSESSED AS OWED

To determine the tax owed, in the years under analysis, a file was extracted from the SAFT-PT of those years, of all invoicing issued by the SP, including credit notes.

From the analysis carried out on the invoicing of A..., LDA, respectively, to the financial years 2011, 2012 and 2013, we found that all invoices on which VAT was assessed at the reduced rate referred to components, parts, pieces and accessories, namely pillars, abutments, etc., therefore, products whose sale should have been subject to the normal rate (ANNEX V - list of products at 6%).

Thus, from this conclusion, we proceeded to the preparation of the tables that follow, constructed from the monthly values contained in the extracts of account ... - VAT Assessed General Operations—rate 6%, in each of the years here under analysis (2011, 2012 and 2013). (ANNEX VI)

After this monthly survey, we calculated the values assessed by quarter and proceeded to confirm the correspondence of those values with those entered by the SP in the respective "fields 2" (Tax assessed at the reduced rate) of the periodic VAT returns that the SP submitted, quarterly, in each of the three years covered by this inspection action, as well as the correspondence with the values we determined, from those, for the respective Tax Bases ('field 1").

Next, we applied to these tax bases the normal rate of VAT that should have been applied. This result was carried to a column of the table created for that purpose, from which we subtracted the value of tax already assessed at the reduced rate, resulting in the amount payable set out in the column "Correction - Field 2". Thus, through these tables, the VAT owed was calculated by the difference between the tax that, with respect to those invoices, should have been assessed at the normal rate, and that which was assessed at the reduced rate.

It should be noted that in the determination we made of the tax owed, we obviously considered sales returns, reflected in the respective credit notes issued, from which resulted tax in favor of the SP. We did so after confirmation, by sampling, of the necessary evidence of the knowledge thereof, on the part of the respective clients.

In this matter, moreover, it should be noted that the SP, from an accounting perspective, did not consider these values in the respective account ... — Regularizations of VAT in favor of the SP, instead taking these values as debits to the account ... — VAT Assessed, so that these values appear immediately influencing the values to be paid to the State contained in the respective "Fields 2", of the periodic declarations submitted, by subtraction from the value of the assessed VAT.

In our determination we obviously did not proceed in the same manner, so that the values to be corrected of VAT, resulting from regularizations in favor of the SP, appear properly differentiated in their own tables, however, calculated in the same manner, that is, we considered in favor of the taxpayer the difference between the normal rate applied to the value of the returns and the value of the reduced rate that the SP had already considered in their favor.

In summary, the procedure adopted for calculating the final value of the corrections to be made is derived from the quarterly difference determined between the two summary maps prepared for each year:

• Summary map of total quarterly invoicing;

• Summary map of total quarterly credit notes.

(...)

VIII - RIGHT TO A HEARING

Pursuant to no. 5 of art.° 38° of the Code of Procedure and Tax Process, approved by Decree-Law no.° 433/1999, of 26/10, the taxpayer was notified on 29/11/2014, to exercise, if desired, within the period of fifteen days, the right to a hearing on the draft conclusions of the report which was notified to him through Our Letter no°..., of 28/11/2014, pursuant to article 60° of the General Tax Law and article 60° of RCPIT — Supplementary Regime of Tax Inspection Procedure — ANNEX VII.

Consequently, the period granted for the exercise of the right to a hearing ended on 16 December 2014. On that same day, the right to a hearing was received by these Tax Inspection services of this Finance Directorate (ANNEX VII).

From its respective reading and analysis, emphasis is placed on the taxpayer's contestation regarding the alleged intention of the Tax Administration to, and we quote: "proceed with the correction of the VAT assessed in the years 2011 to 2013 (...) because these Inspection Services consider that it proceeded incorrectly with the application of the 6% rate in the sale of dental implant materials, because these are goods subject to the general rate of 23%". They add, and we continue to quote, that: "at the base of this decision is the assertion, grounded in recent understandings of the Tax Administration, that the implants and remaining components sold (...) for the purpose of replacing teeth within the scope of dental medicine activity, are not subsumed within the type of goods whose transfer benefits from a reduced rate under item 2.6 of List 1 attached to the VAT Code, namely because they do not embody "prosthesis materials or compensation materials intended to replace in whole or in part, any limb or organ of the human body"". And that, "being that the only basis for the projected correction, the Petitioner cannot manifestly conform to the same (...) first and foremost, because the understanding now embraced by the Tax Administration with regard to the classification of the activity developed by the Petitioner denotes a manifest and complete lack of knowledge of both the activity itself and the spirit of the norm embodied in the indicated item of the List attached to the VAT Code." (emphasis ours)

Now, just as the taxpayer alleges, the correction we propose does indeed affect the invoices relating to the sale of articles whose characteristics are not subsumed within those expressed in the said item 2.6 of List 1 attached to CIVA but not for "manifest and complete lack of knowledge of the activity itself and the spirit of the norm" because our correction is based on the understanding of the tax administration set forth in various binding opinions, being that the most recent one, (Information no.° ... of 04/08/2014 for clarification of the VAT rate applicable to the transfers of dental implants and other connecting or fixing pieces of the dental prosthesis - ANNEX III was, furthermore, requested by us, Finance Directorate of Lisbon, to DSIVA, on 06/06/2014 and that this request arose as a result of work to gather various elements and much information from a sample selected from among the economic agents operating in this sector, so that DSIVA could pronounce itself, once again, on this matter, revealing, on the part of the Tax Administration, a concern with the constant adaptation of the norms to the evolution resulting from the inevitable and desirable scientific and technological progress.

Now the taxpayer became aware of this work, first and foremost because, as part of it, there was a visit to its facilities, on 09/04/2014, within the framework of Order no° D/2014... . This visit thus aimed at the gathering of all the information we deemed important for the request for a new pronouncement on this matter, which we would make to DSIVA.

Thus, we requested from the SP various elements, including the catalog of products sold and we established a long conversation with the managers of A..., LDA, in order to obtain all possible information about the products sold, the process of application thereof, as well as the final objective of the application. We also had the opportunity to gather the SAF-T file of the invoicing so that we could become aware of the manner in which it is carried out, in particular, in terms of the products sold and the rates applied to them. We also requested, through notification, that they inform us about any requests made to the Tax Administration, concerning the classification of the company in the field of VAT. We also gathered copies of five invoices, previously selected, for analysis.

Thus, from what is set out, it does not seem to us serious the argument presented by the taxpayer that the Tax Administration acted with "manifest and complete lack of knowledge of the activity itself and the spirit of the norm."

On the other hand, the taxpayer, in response to the notification we left with him during our visit (ANNEX III), stated that he had not made any request to the Tax Administration regarding the classification of his activity. He did, however, state that within the framework of a notification from Customs, he received a binding opinion, dated 11-05-2007, regarding the VAT rate to be applied in the transfer of dental products and equipment (ANNEX III — f1.4) in which the following can be read, in particular:

"3 - It has been the understanding of these Services that, with regard to dental implants, that item only covers the transfers of prostheses consisting in a single unit of implant, that is, implant + connecting pieces + tooth, so that the parts, pieces and accessories, when transacted separately, for lack of classification in the said item 2.5 of List 1 attached to CIVA, are taxed at the rate of 21%."

Our observation: The said item 2.5 is currently item 2.6. The rate of 21% was, at that time, the normal rate.

He justifies, on the other hand, that "The criterion for the application of the rates of VAT (reduced or normal) in the transfers of goods made by the company is based on what is described (in that) binding opinion" that is:

• "When it comes to dental components such as a single component (with all the connection pieces and other elements included) intended to replace a limb intended to replace a member of the human body is always applied the reduced rate of 6%, indicated in item 2.6 of List 1, attached to the VAT Code;"

"As for the remaining items, such as devices, individual pieces, etc., when invoiced apart from the implants, are always invoiced at the normal rate of 23% in accordance with article 18.° of the VAT Code, since they do not come within the item above".

From the content of this response, we infer that the taxpayer demonstrates, after all, total agreement with the understanding of always (and not 'recent' - as the SP alleges), of the DSIVA, on this matter, since it states that it acts in accordance with the same.

Now, contrary to what the taxpayer thus expresses, two of the five invoices for which we requested clarifications in the aforementioned notification (invoices nos. ... and...), do not contain complete implants (implant + connecting pieces + tooth), but only mention screw-implant, however, the taxpayer assessed VAT on those goods at the reduced rate.

This is, then, a clear example of the practice adopted and which only demonstrates that the taxpayer does not, after all, apply the VAT rate in accordance with the rules it explains in its response to our notification.

Thus, given everything that has been said, we conclude that in the exercise of the right to a hearing no new elements were presented that contradict or invalidate the conclusions previously drawn, so we propose that the corrections contained in our Draft Report be maintained, in accordance with the reasons set out.

· After the inspection, the Tax and Customs Authority issued the VAT assessments relating to the year 2013 nos. 2015..., 2015..., 2015..., 2015... and the compensatory interest assessment no. 2015..., which are contained in documents nos. 1 to 5 attached with the request for arbitral pronouncement, whose contents are given as reproduced;

· The Claimant submitted a request for administrative review of the aforementioned assessments, which was dismissed by order of 30-12-2015 (document no. 6 attached with the request for arbitral pronouncement, whose content is given as reproduced);

· Subsequently, and for the collection of the amounts assessed as Tax and Compensatory Interest, from the periods covered by the present Request for Arbitral Pronouncement and also from other periods, the Tax Enforcement Proceedings nos. °...2015..., ...2015..., ...2015..., ...2015..., ...2015..., ...2015..., ...2015..., ...2015..., ...2015... and ...2015... were initiated (documents nos. 13 to 22 attached with the request for arbitral pronouncement, whose contents are given as reproduced);

· On 18-06-2015, the Claimant made payment of the sums indicated in the aforementioned assessments (document no. 29 attached with the request for arbitral pronouncement, whose content is given as reproduced);

· On 14-03-2016, the Claimant submitted the request for arbitral pronouncement which gave rise to the present process.

2.2. Substantiation of the Decision on the Matter of Fact

The facts were established as proven on the basis of the documents attached with the request for arbitral pronouncement and on the administrative file.

2.3. Unestablished Facts

The Claimant argues that «having the AT, of its own initiative, proceeded to compensate partially the amounts additionally assessed as tax - thus depriving the Claimant of the amounts that were owed to it by the State -, it is now incumbent on it to rectify this situation, with payment required of the compensated amounts and, as well, of the amounts subsequently paid in the execution proceedings instituted, plus indemnificatory interest calculated on this amount, from the date of the compensation».

The Claimant indicates as proof of what it affirms document no. 29 attached with the request for arbitral pronouncement, whose content is given as reproduced, as well as documents nos. 1 to 5.

From the aforementioned document no. 29, it is noted that, on 18-06-2015, the amounts assessed which are at issue in the present process were paid, in the total amount of € 79,870.11.

As far as possible compensations are concerned, it is not clear from the said document nor from documents nos. 1 to 5 attached with the request for arbitral pronouncement (partially illegible), whether they occurred and on what dates, nor does the Claimant indicate which and when the compensations it alludes to will have occurred, nor was its amount included in the amount it indicated for the present process.

From what is set out, it is not considered proven that compensations were made relating to the assessments that are being challenged in the present process.

3. MATTER OF LAW

The question that is the object of the present process is to determine which VAT rate is applicable to material used in dental prostheses.

List I attached to VAT includes among goods and services subject to the reduced rate, the following item:

«2.6 - Orthopaedic apparatus, medical-surgical bands and medicinal stockings, wheelchairs and similar vehicles, operated manually or by motor, for disabled persons, apparatus, artefacts and other prosthesis or compensation material intended to replace, in whole or in part, any limb or organ of the human body or for the treatment of fractures and lenses for the correction of vision, as well as orthopaedic footwear, provided that prescribed by medical prescription, in the terms to be regulated by the Government within 30 days».

The question of legality that is raised with respect to the VAT assessments for the year 2013, is to determine whether the reduced rate provided for in this item 2.6. of List I attached to the Code of Value Added Tax (CIVA) is only applicable, as to dental implants, when complete implants are transacted or whether this rate is also applicable to the transactions of the components of the implants (crown, implant and pillars) when they are the object of separate transactions.

This question was proficiently appreciated in the decision of CAAD rendered in the arbitral process no. 429/2014-T, of which the Reporter was, as to the question at issue, the Honourable Prof.ª Doctor Clotilde Celorico Palma, so that, with no new arguments to consider, the position taken there is adopted:

«(...) The interpretation of tax norms

As is known, article 11.º of the General Tax Law (LGT), prescribes that in the determination of the meaning of tax norms and in the qualification of the facts to which they apply the general rules and principles of interpretation and application of laws are observed. Now, no. 1 of article 9.º of the Civil Code is clear when it determines that interpretation should not only limit itself to the letter of the law (literal or grammatical element), but reconstruct from the texts the legislative thought (ratio legis), taking into account the unity of the system (systematic element), the circumstances in which the law was elaborated (teleological element) and the specific conditions of the time in which it is applied (historical element).

The first hermeneutic factor to which the interpreter may resort to achieve the true meaning and scope of application of legal texts is, then, that which corresponds to the literal or grammatical element.

As to the systematic element, it determines the interpretation of the norm in an integrated manner considering the other provisions that form the normative complex in which the norm to be interpreted is integrated.

With regard to the teleological element, "It consists of this element in the reason for being of the law (ratio legis), in the end pursued by the legislator in elaborating the norm. Knowledge of this end, especially when accompanied by knowledge of the circumstances (political, social, economic, moral, etc.,) in which the norm was elaborated or the socio-political-economic situation that motivated the legislative "decision" (occasio legis) constitutes assistance of the greatest importance for determining the meaning of the norm.

It suffices to recall that the clarification of the ratio legis reveals to us the "valuation" or weighing of the various interests that the norm regulates and, therefore, the relative weight of those interests, the choice among them expressed by the choice that the norm expresses".

Finally, according to the historical element, account must be taken of the historical context of the elaboration of the norm.

The interpretation of the norm in question should, then, attend to these elements of interpretation.

(...) The principle of VAT neutrality

As is known, VAT is an indirect tax of communitarian matrix, multiphase, which tends to reach all acts of consumption (general tax on consumption), with the respective neutrality being pointed out as its main characteristic.

It is customary to distinguish the neutrality of transaction taxes in relation to effects on consumption and production. There will be neutrality with respect to consumption, when the tax does not influence the choices of various goods or services by consumers. A tax will be neutral from the perspective of production, if it does not induce producers to changes in the way they organize their production process.

As Xavier de Basto notes, "Neutrality with respect to consumption depends exclusively on the degree of objective coverage of the tax and on the structure of the rates, with it being out of question to outline a consumption tax completely neutral. There will always have to be granted some exemptions (.....) and, probably, there will be differentiations in the rate applicable to different transactions of goods and provision of services".

In general terms, in accordance with the principle of neutrality, taxation should not interfere with economic decisions or in the formation of prices, implying the extension of the scope of application of this tax to all phases of production and distribution and to the sector of provision of services.

As Teresa Lemos emphasizes, neutrality can be viewed under various aspects: neutrality in relation to production circuits – the tax burden does not depend on the greater or lesser integration of economic circuits, neutrality with respect to the incidence of the tax on different products and sectors, insofar as the rate is uniform, neutrality in what relates to the choice of production factors—capital and labor, and neutrality with respect to consumer preferences – equal taxation of different products.

The principle of neutrality is set forth in the VAT Directives, being systematically invoked by the Commission to oppose national legislations deemed incompatible with the rules of Union Law, as well as by tax administrations and taxpayers of the various Member States, having been, numerous times, applied by the CJEU.

The application of the principle of neutrality should be taken into account in the essential phases of the life of this tax, such as rules of objective and subjective incidence, location, exemptions and the exercise of the right to deduction. We can say that this has been the principle most invoked by the Court to support its decisions, often appearing to us allied with the principle of equal treatment, uniformity and elimination of distortions of competition.

Thus, the CJEU has been concerned, in particular, as to the realization of the objectives of the common system, to guarantee the neutrality of the tax burden of all economic activities, whatever their objectives or results (which, as it emphasizes, is achieved through the mechanism of deductions that frees the businessman from the burden of the VAT that he paid in his acquisitions), to ensure to economic agents an equality of treatment, to achieve a uniform definition of certain elements of the tax and to guarantee legal certainty and facilitate actions aimed at its application.

From the start, the CJEU sought to draw the due consequences from the equality of treatment in VAT of similar activities and from the absence of impact of the extension of production and distribution chains on the amount of tax received by tax administrations.

It is in light of this basic principle that the tax should be interpreted and applied, so as to ensure a uniform system that guarantees sound competition in the space of the European Union.

(...) The application of reduced VAT rates

(...) The rules of the VAT Directive

In accordance with the rules of Directive no. 2006/112/CE, of 28 November, to which we now call VAT Directive or DVAT, taxable transactions are subject to tax at the rates and conditions of the Member State in which they are located. The normal VAT rate is fixed, in accordance with the provisions of articles 96.º and 97.º of the DVAT, in a percentage of the taxable value that cannot be less than 15% until 31 December 2015.

In accordance with the provisions of article 98.º of the DVAT, Member States may apply one or two reduced rates at a percentage that cannot be less than 5%. Reduced rates may only be applied to deliveries of goods and provision of services of the categories contained in Annex III of the VAT Directive, for example Annex H of the Sixth Directive (as last amended by Directive 2009/47/CE). In turn, in accordance with what is provided for in no. 3 of article 98.º, "When applying the reduced rates provided for in no. 1 to the categories relating to goods, the Member States may use the Combined Nomenclature to delimit precisely each category" (emphasis is ours). That is, the use of the Combined Nomenclature to delimit precisely each category is merely a possibility that, as such, may or may not be used for the purpose by the Member States.

The determination and definition of operations that may benefit from a reduced rate under these provisions of the VAT Directive are within the competence of the Member States.

It was with Directive 92/77/CEE, of the Council, of 19 October 1992, that community harmonization of VAT rates was carried out, with a view to the entry into force of the internal market, which occurred on 1 January 2003. Until that date, each Member State had full autonomy to fix the number of rates and their level.

As we mentioned, Annex III of the VAT Directive contains the list of transfers of goods and provision of services to which the reduced rates provided for in article 98.º can be applied, and contemplates, in its point 4, for the purposes that now interest us, the following realities: "Medical equipment, auxiliary material and other apparatus normally used to alleviate or treat deficiencies, for exclusive personal use of disabled persons, including their repair, as well as car seats for children".

This wording is similar to that of the previous Annex H of the Sixth Directive added by the aforementioned Directive 92/77/CEE (meanwhile revoked), which covered the following operations: "Medical equipment and other apparatus, normally used to alleviate or treat deficiencies, for exclusive personal use of disabled persons, including their repair and car seats for children", the main difference being the subsequent expansion of its scope which came to contain "auxiliary material".

It follows from what is set out that the possibility of applying a reduced rate of tax is just that: a faculty that the Member States may or may not use. However, should they make use of such a possibility, they should do so in accordance with the norms of EU Law. On the other hand, it is important to note that the different goods and services to which the Member States can apply reduced rates of tax are limited to specific situations, resulting from a consensus position among them, in which it is recognized that they are goods or services whose social, educational, or cultural character leads them to be considered as of first necessity, as is the case, for the purposes that now occupy us, of health.

It should be noted that in its recitals the VAT Directive states that, "a VAT system achieves the greatest degree of simplicity and neutrality if the tax is collected in the most general possible manner" (recital 5) and that "it should, even though the rates and exemptions are not completely harmonized, lead to competitive neutrality, in the sense that, in the territory of each Member State, goods and services of the same type are subject to the same tax burden, regardless of the extent of the production and distribution circuit" (recital 7).

(...) The rules of CIVA

The VAT Code provides in no. 1 of its article 18.º the following tax rates:

"a) For imports, transfers of goods and provision of services contained in list I attached to this diploma, the rate of 6%;

b) For imports, transfers of goods and provision of services contained in list II attached to this diploma, the rate of 13%;

c) For the remaining imports, transfers of goods and provision of services, the rate of 23%."

With respect to the applicability of rates, in accordance with the provisions of article 18.º of CIVA, the normal VAT rate applies whenever the good or service in question does not fall within one of the two reduced rates provided for in Lists I and II attached to the Code.

Where there is a grouping of various goods forming a distinct commercial product, it should be taken into account that, when they do not undergo changes in nature nor lose their individuality, the rate corresponding to them applies, or, if different rates apply, the highest one (article 18.º, no. 4, of CIVA).

In the situation under analysis is at issue item 2.6. of List I, which represents the transposition at the level of internal law of the said point 4 of Annex III of the DVAT, in the terms of which the application of the reduced VAT rate is determined to the following goods: "2.6. Orthopaedic apparatus, medical-surgical bands and medicinal stockings, wheelchairs and similar vehicles, operated manually or by motor, for disabled persons, apparatus, artefacts and other prosthesis or compensation material intended to replace, in whole or in part, any limb or organ of the human body or for the treatment of fractures and lenses for the correction of vision, as well as orthopaedic footwear, provided that prescribed by medical prescription, in the terms to be regulated by the Government within 30 days." (emphasis is ours).

As is known, the general rate of tax only applies where there is no application of reduced rates. On the other hand, for the purpose of applying the tax rate it is important to ascertain whether we are faced with a single operation or with main and ancillary operations.

Indeed, when an operation comprises various transfers of goods and/or provision of services, the question arises of whether it should be considered as a single operation or as several distinct and independent provisions that should be appreciated separately.

This question is of special importance, from the perspective of VAT, particularly for the purposes of applying the tax rate and the provisions relating to exemptions.

(...) The jurisprudence of the CJEU

The community jurisprudence on the application of reduced VAT rates is not very abundant. However, we can highlight some fundamental ideas that guide it, appearing to us sufficiently elucidatory for the purpose.

In accordance with the understanding of the CJEU, the principle of fiscal neutrality also includes two other principles frequently invoked by the Commission: that of VAT uniformity and elimination of distortions of competition.

The CJEU has come to emphasize that the principle of fiscal neutrality implies that all economic activities should be treated in the same manner. The same applies to economic operators that carry out the same operations.

Similar provision of services, which are therefore in competition with each other, should not be treated differently from the VAT perspective.

As the Advocate General Juliane Kokott notes in her conclusions presented in the TNT Case, the principle of fiscal neutrality opposes merchandise or similar provision of services, which are therefore in competition with each other, being treated differently from the value added tax perspective (no. 43). In this context, she notes that "The principle of fiscal neutrality, which is at the basis of the common system of tax and should be taken into account in the interpretation of exemption norms, does not allow economic operators that carry out the same operations to be treated differently in matters of the collection of value added tax. (...) It includes the principle of elimination of distortions of competition resulting from differentiated treatment from the value added tax perspective (...) " (no. 59).

The CJEU has also clarified that the delimitation of goods and services that may benefit from reduced rates should be effected in function of objective characteristics. Thus, in its Decision of 23 October 2003, Case Commission v. Germany, the CJEU came to strengthen the objective character of the situations in which the application of reduced VAT rates is allowed, concluding that, where goods or services are similar and are in competition with each other, it is not admissible that they be treated discriminatorily.

That is, in accordance with the jurisprudence of the CJEU, the institution and maintenance of distinct VAT rates for similar goods or services are only admissible if they do not violate the principle of fiscal neutrality inherent in the common system of VAT, in the respect of which Member States must transpose the community rules.

Just as the CJEU makes a point of emphasizing, it follows from the community rules that the determination and definition of operations that may benefit from a reduced rate are within the competence of the Member States. As the Commission has come to emphasize in its reports on reduced rates, one of the greatest problems in the application of rates consists precisely in the optional character of such application and in the absence of common definitions for the categories of goods and or services covered.

However, in spite of this, in the exercise of this competence the Member States must respect the principle of fiscal neutrality. Now, as we have seen, this principle opposes, in particular, merchandise or similar provision of services, which are therefore in competition with each other, being treated differently from the VAT perspective, so that the said products must be submitted to a uniform rate.

Since the reduced rate is the exception, the fact that its application is limited to concrete and specific aspects, is consistent with the principle according to which exemptions or derogations should be interpreted in strict terms, as long as the principle of neutrality of the tax is not violated.

Indeed, the application of one or two reduced rates is a possibility recognized to Member States by way of derogation from the principle according to which the normal rate is applicable. Now, it follows from settled jurisprudence that provisions that have the character of derogation from a principle should be subject to strict interpretation, while not ceasing to guarantee that the derogation does not become without useful effect.

Member States may not, in particular, interpret the concepts used in Annex III of the Directive in a selective manner so that, without regard to objective criteria, different treatment is granted to identical realities. Indeed, while it is certain that the determination of operations subject to a reduced rate of VAT is within the competence of the Member States, with no abstract definitions being available for this purpose in community legislation, the principle of neutrality must be respected. Thus, a taxation at reduced rates of tax that, being selective, violates the fundamental characteristics of fiscal neutrality, objectivity and uniform taxation rate, would be contrary to the principles of EU Law, and would not allow subgroups to be instituted within a taxable activity, with the aim of applying different taxation rates to them, with no objective reason justifying such difference in treatment.

In particular, the principle of objectivity requires the application of one and the same rule to taxable operations of the same nature, there being a presumption of similarity when the operations in question correspond to different variants of one and the same taxable operation included in one of the categories of Annex III of the VAT Directive.

It is also important to note in this context that the question of composite services versus independent services was subject to appreciation by the CJEU in some decisions.

In this regard, it follows from article 2.º of the VAT Directive that each operation should normally be considered distinct and independent.

However, in certain circumstances, various formally distinct services, capable of being carried out separately and thus giving rise, in each case, to taxation or exemption, should be considered as a single operation when they are not independent.

This happens, for example, when, at the conclusion of an analysis even if merely objective, it is verified that one or several services constitute a main service and that the other service or services constitute one or several ancillary services that share the tax treatment of the main service.

In this context, it is settled jurisprudence by the CJEU that "…there is a single service in particular in the case where one or several elements should be considered the main service, whereas, conversely, one or several elements should be considered ancillary services that share the same tax treatment as the main service. A service should be considered ancillary in relation to a main service when it does not constitute for the clientele an end in itself, but a means of benefiting under the best conditions from the main service of the service provider".

It can also be considered that there is a single operation when two or several elements or acts supplied by the taxpayer are so closely linked that they form, objectively, a single indissociable economic operation whose decomposition would be artificial in nature.

Thus, the CJEU emphasizes that "…when an operation is constituted by a set of elements and acts, all circumstances in which the operation in question develops should be taken into consideration, to determine, on the one hand, whether there is the presence of two or more distinct services or a single service, and, on the other, if, in the latter case, this single service should be qualified as a provision of services"; and that "The same applies [that is, there is a single service] when two or several elements or acts supplied by the taxpayer to the consumer … are so closely connected that they form, objectively, a single indissociable economic service whose decomposition would be artificial in nature".

But the position of the CJEU on the question of the fragmentation of the main service into various elements does not end there, having continued, over the years, to be subject to requests for preliminary rulings, in particular in the framework of the Part Service Case.

Indeed, it was the understanding of the CJEU in the said process that

"51…it follows from article 2º of the Sixth Directive that each operation should normally be considered distinct and independent.

1. However, in certain circumstances, various formally distinct services, capable of being carried out separately and thus giving rise, in each case, to taxation or exemption, should be considered as a single operation when they are not independent.

2. This happens, for example, when, at the conclusion of an analysis even if merely objective, it is verified that one or several services constitute a main service and that the other service or services constitute one or several ancillary services that share the tax treatment of the main service (…) .

Now, in face of the jurisprudence of the CJEU just enunciated and which, over the years, has come to be settled, where there are main and ancillary services, economically indissociable, a single VAT regime will apply, corresponding to that of the main service, namely for the purposes of applying the tax rates.

This was the case in the Commission/France Case, in which the application of the reduced rate of VAT to electricity, specifically to the subscription of electricity, was under analysis.

For the Commission, should it be considered that subscription was a supply, the application of a reduced rate of VAT to the subscription of energy network services and a normal rate to any other supply of energy would violate the principle of neutrality inherent in the Sixth Directive. Indeed, according to its understanding, even if it were a supply, the same rate should apply to the subscription and to any other consumption of electricity, in accordance with the principle of neutrality.

In accordance with the conclusions of Advocate General Siegbert Alber presented on 10 October 2002, subscription could only be considered an autonomous service in case it were a service that should be distinguished from the actual supply of natural gas and electricity.

The CJEU, with respect to the accusation raised on a subsidiary basis relating to the violation of the principle of uniformity of the tax rate, came to invoke the following:

"88. The principle of fiscal neutrality would be violated if French tax legislation were such that equal services, which are in a relationship of competition, were treated differently in value added tax matters.

1. As already explained, subscription and the supply of natural gas and/or electricity embody, for the great majority of end consumers, an integrated service that covers the provision of services and the supply of goods (27), and not distinct services. It is only the price of the service that is divided into two parts, which are the amount of the subscription and the variable value to be paid depending on the quantity of consumption.

(…)

1. Furthermore, this tax regime may violate the principle of fiscal neutrality. Indeed, different tax rates apply to equal services."

It was thus in this context that the CJEU decided in favor of the French Republic.

The same reasoning was adopted by the CJEU in its Decision of 3 April 2008, Case Finanzamt Oschatz, concluding that a connection line was not distinct from the distribution of water, and should be applied the same reduced rate of VAT of electricity. As was emphasized,

"40. Although the Sixth Directive does not contain the definition of water distribution/supply, nor does it follow from its provisions that this concept should be subject to different interpretations depending on the annex in which it is mentioned. Being the individual connection line indispensable for making water available to the public, as follows from no. 34 of this decision, it should be considered that it is equally covered by the concept of water supply mentioned in category 2 of annex H of the Sixth Directive."

Still in the same sense, cite the Decision of the CJEU of 10 March 2011, Proc.s appended C 497/09, C 499/09, C 501/09 and C 502/09, where the scope of the expression «food products» that appeared in its annex H, category 1, of the Sixth Directive was at issue, again for the purposes of applying the reduced rate of VAT. As the Court began by emphasizing there would be to ascertain "…whether, from the VAT perspective, the various activities in question in each of the main proceedings should be treated as separate taxable operations or as single complex operations composed of various elements" (n. 51).

It also emphasized that, "As it follows from the jurisprudence of the Court of Justice, when an operation is constituted by a set of elements and acts, all circumstances in which the operation in question develops should be taken into consideration, to determine, on the one hand, whether there is the presence of two or more distinct services or a single service and, on the other, if, in the latter case, this single service should be qualified as a delivery of goods or as a provision of services"(n. 52).

(...)

Application to the concrete case

(...)

It is important to note that the meaning and scope of the reduced rate applied in this field should consider the good rules of hermeneutics, taking into account not only the grammatical element, but also its context, reason for being and purposes pursued by item 2.6, and should result in a declaratory interpretation (...).

Now, from the outset, the letter of the provision seems to indicate that dental implants fall within the said list, being we faced with prosthesis material intended to replace an organ of the human body, in the case, the dental apparatus.

Indeed, nothing in the letter of the law leads us to restrict its application to situations of transfers of "complete implant goods" in the sense that the AT wishes to convey.

Furthermore, it follows from the facts established as proven that such concept does not exist as such, there being instead implants consisting of the three pieces that we now discuss – crown, implant and pillar, which, according to surgical technique, are introduced in phases into the patient's mouth, thus giving rise, as a whole, to an implant. In reality, these three pieces are inseparable and unusable except for the composition of an implant as a composite prosthesis.

Not existing such "complete implant goods" in the sense that the AT wishes to convey, the understanding of the Tax Administration ends up by denying the benefit of the reduced rate to this type of prostheses, thus calling into question, without an acceptable rational motive, the ratio legis that presided over the inclusion of this item in the terms in which it is drafted – the protection of public health. Indeed, to accept such an understanding would introduce arbitrary discriminatory treatment between different dental prostheses. On the one hand, prostheses composed of a single piece would benefit from the reduced rate of 6%, on the other hand, "composite" prostheses would be taxed at the normal rate. Such fact is discriminatory, violating, first and foremost, in particular, the provisions of articles 5.º, no. 2 and 7.º, no. 3 of the LGT. Indeed, in accordance with the provision of the first provision, of heading "Purposes of taxation", taxation respects the principles of generality, equality, legality and material justice. In turn, in accordance with the provisions of article 7.º, no.3, "Taxation does not discriminate any profession or activity nor prejudices the practice of legitimate acts of a personal nature, without prejudice to exceptional increases or benefits determined by economic, social, environmental or other purposes".

But we would be essentially faced with an intolerable violation of the principle of neutrality that governs this tax at the level of Union Law, treating equal goods differently without any acceptable rational motive, a fact that violates the rules that govern this tax as well as all the jurisprudence of the CJEU to which we have alluded.

As is known, in accordance with the provision of no. 2 of article 11.º of the LGT, whenever, in tax norms, terms proper to other branches of law are employed, they should be interpreted in the same sense as that which they have there, unless another follows directly from the law. In turn, in no. 3 of the said provision it is determined that, where doubt persists on the meaning of the norms of incidence to be applied, account should be taken of the economic substance of the tax facts. Now, what the community legislator, the European Commission and the jurisprudence of the CJEU determine is that, in the use of the concepts employed for the purposes of applying reduced rates, Member States should take account of the economic effects in question so as not to call into question the essential principle of neutrality of the tax.

That is, to accept the understanding conveyed by the AT in the concrete case we would have a difference in treatment for identical realities resulting not from the VAT Directive but from a deficient application of the same by the Tax Administration.

It is certain that derogation norms, as is the case of the norm that enables Member States to apply reduced rates of tax, should be applied restrictively, but we should not confuse this fact with selective application, a completely distinct reality that calls into question the most basic characteristics of the tax.

In this context, it is also important to emphasize that the invocation, on the part of the AT, of the argument of the Combined Nomenclature is not warranted, because this Nomenclature was created for statistical purposes and for the application of the common customs tariff and has no relevance in matters of classification of goods and services for VAT purposes in Portugal.

The only case in which the CIVA resorts to the Combined Nomenclature to define the scope of the tax regime of goods is provided for in its article 14.º, no. 1, paragraph i), for the purposes of determining the regime of exemption (complete or zero rate), in accordance with which are exempt "deliveries of supply goods placed on board military vessels classified by code 8906 00 10 of the Combined Nomenclature, when they leave the country with destination to a port or anchorage situated abroad", a provision not applicable in the situation at issue.

While it is certain that, in accordance with what is provided for in article 98.º, no. 3, of the DVAT, Member States can use the Combined Nomenclature to delimit precisely each category subject to the reduced rate, it is equally certain that the Portuguese legislator did not adopt this option.

That is, for VAT purposes it is irrelevant the classification that the implants, crowns and pillars merit in the Combined Nomenclature.

Now, in this context, it is important once more to emphasize that, as was proven, the three "pieces" now at issue – implant, crown and pillar – cannot be used separately, being especially designed and manufactured for the production of a piece that is designated by implant. Indeed, contrary to what the AT alleges, there does not exist the single implant piece in the factual sense that it wishes to give it, but only the implant constituted, as such, by implant, crown and pillar, pieces inseparable with a view to this reality.

It is all too evident that the fact that such pieces are marketed separately, such as in the case cited, the simple fact that segregated invoicing occurs (with separate codes) or autonomous (in separate invoices) cannot affect the classification and qualification for VAT purposes, with form being allowed to prevail over substance.

In reality, what is at issue in the present case and was proven is subsumed in the legal provision of item 2.6 of List I attached to CIVA, consisting of "…apparatus, artefacts and other prosthesis or compensation material intended to replace, in whole or in part, any limb or organ of the human body".

And, to emphasize again, the ratio legis that leads the legislator to adopt the application of the reduced rate of VAT in such situations – the protection of public health – is exactly the same that leads us to this interpretation.

To note, finally, that, from the jurisprudence cited above, even if supposedly there existed, as the AT alleges, "complete implant goods" in the sense that it wishes to convey, we would still have to recognize that the crown, the pillar and the implant would configure themselves as a single piece or, ultimately, even if erroneously not thus understood, as ancillary pieces, and as such, should be taxed at the reduced rate, following the treatment of the main operation.

That is: whether only by resorting to the community rules or by simple application of good hermeneutic rules, the result is the same – it can only be concluded that in item 2.6 of List I attached to CIVA are included both implants consisting of a single piece and composite implants.

Indeed, all the elements of interpretation of tax norms capable of being invoked for the purpose, as well as the characteristics of VAT and the interpretation that the CJEU has come to make of the same, lead us to conclude that, in the present case, the reduced rate of VAT provided for in item 2.6 of List I attached to CIVA should be applied to the transfer of the implants, crowns and pillars now under analysis, terms in which the Claimant is given reason».

From what was referred to, it is to be concluded that the disputed VAT assessments are affected by error on the assumptions of law, by erroneous interpretation of this item 2.6 of List I to CIVA.

The compensatory interest assessment is affected by the same defect of violation of law, since it has as its assumptions the corresponding VAT assessments.

4. Request for Payment of Compensated Amounts, Paid Sums and Indemnificatory Interest

The Claimant argues that «having the AT, of its own initiative, proceeded to compensate partially the amounts additionally assessed as tax - thus depriving the Claimant of the amounts that were owed to it by the State -, it is now incumbent on it to rectify this situation, with payment required of the compensated amounts and, as well, of the amounts subsequently paid in the execution proceedings instituted, plus indemnificatory interest calculated on this amount, from the date of the compensation».

As referred to in subparagraph N) of the matter of fact established and in point 2.3 of this decision, it was proven that, on 18-06-2015, the assessed amounts were paid, but not that compensations related to them were made.

4.1. Possibility of Appreciation in Tax Arbitration Proceedings of Requests for Reimbursement of Paid Tax and Indemnificatory Interest

In accordance with the provisions of paragraph b) of article 24.º of RJAT, the arbitral decision on the merits of the claim from which no appeal or challenge lies binds the Tax Administration from the end of the period provided for appeal or challenge, this being obliged, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and up to the end of the period provided for the voluntary execution of sentences of tax judicial tribunals, to restore the situation that would have existed if the tax act subject of the arbitral decision had not been taken, adopting the acts and operations necessary for the purpose», which is in keeping with what is prescribed in article 100.º of the LGT [applicable by force of the provisions of paragraph a) of no. 1 of article 29.º of RJAT] which establishes that «the tax administration is obliged, in case of total or partial merits of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject of the dispute, comprising the payment of indemnificatory interest, if applicable, from the end of the period of execution of the decision».

Although article 2.º, no. 1, paragraphs a) and b), of RJAT uses the expression «declaration of illegality» to define the competence of the arbitral tribunals functioning in CAAD, making no reference to condemning decisions, it should be understood that the competencies include the powers that in judicial challenge proceedings are attributed to tax tribunals, this being the interpretation that is in keeping with the meaning of the legislative authorization on which the Government based itself to approve RJAT, in which it proclaims, as the first directive, that «the tax arbitration process should constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters».

The judicial challenge process, despite being essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnificatory interest, as is inferred from article 43.º, no. 1, of the LGT, in which it is established that «indemnificatory interest is due when it is determined, in an administrative review or judicial challenge, that there was error attributable to the services from which results payment of the tax liability in an amount greater than that legally due» and from article 61.º, no. 4 of CPPT (as amended by Law no. 55-A/2010, of 31 December, which corresponds to no. 2 in the initial wording), which «if the decision that recognized the right to indemnificatory interest is judicial, the period of payment counts from the beginning of the period of its voluntary execution».

Thus, no. 5 of article 24.º of RJAT, in saying that «payment of interest is due, regardless of its nature, in the terms provided for in the general tax law and in the Code of Procedure and Tax Process», should be understood as allowing the recognition of the right to indemnificatory interest in the arbitration process.

On the other hand, the right to indemnificatory interest depending on the right to reimbursement of sums paid unduly, which are its calculation basis, the possibility of recognition of the right to indemnificatory interest is intrinsic in the possibility of appreciation of the right to reimbursement of those sums.

It is thus necessary to appreciate the request for reimbursement of the amounts unduly paid and of payment of indemnificatory interest.

4.2. Right to Reimbursement and Indemnificatory Interest

In the case at issue, it is manifest that, as a result of the illegality of the assessment acts, there is place for reimbursement of the paid tax, by force of the cited articles 24.º, no. 1, paragraph b), of RJAT and 100.º of the LGT, as this is essential to «restore the situation that would have existed if the tax act subject of the arbitral decision had not been taken».

As to indemnificatory interest, article 43.º, nos. 1 and 2, of the LGT establishes that «indemnificatory interest is due when it is determined, in an administrative review or judicial challenge, that there was error attributable to the services from which results payment of the tax liability in an amount greater than that legally due».

In the case at issue, it was the Tax and Customs Authority that made the disputed assessments, of its own initiative, so that the defects affecting them are attributable to it.

Thus, the Claimant has the right to indemnificatory interest at the legal supplementary rate counted from 18-06-2015 calculated on the sum of € 79,870.11, until complete reimbursement, in accordance with articles 43.º, nos. 1 and 4, and 35.º, no. 10, of the LGT, 61.º, nos. 2, 3, 4 and 5, of CPPT, and article 559.º of the Civil Code and Ordinance no. 291/2003, of 8 April.

5. DECISION

In these terms, this Arbitral Tribunal agrees in:

a) To rule that the request for arbitral pronouncement is granted;

b) To annul the VAT assessments and compensatory interest nos. 2015..., 2015..., 2015..., 2015... and 2015....

c) To rule that the request for restitution of the paid sums, in the global amount of € 79,870.11 is granted and to condemn the Tax and Customs Authority to effect the respective payment to the Claimant;

d) To rule that the request for payment of indemnificatory interest calculated on that sum, from 18-06-2015 until complete payment, is granted, in the terms referred to in point 4 of this decision.

6. VALUE OF THE CASE

In accordance with the provisions of article 306.º, no. 2, of the CPC, 97.º-A, no. 1, paragraph a), of CPPT and 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings the value of the case is fixed at € 79,870.11.

7. COSTS

In accordance with articles 12.º, no. 2, and 22.º, no. 4, of RJAT the amount of costs is fixed at € 2,448.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Tax and Customs Authority.

Lisbon, 01-09-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Diogo Feio)

(Eva Dias Costa)