Summary
Full Decision
ARBITRAL DECISION
I – REPORT
Municipality of A..., legal entity no. ... (hereinafter referred to as "Municipality" or "Claimant"), with registered office at Rua ..., no. ..., ...-... ..., has, pursuant to Article 2, paragraph 1, letter a) and Articles 10 and following of the Legal Framework for Tax Arbitration, provided for in Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December (hereinafter abbreviated as "RJAT") and Articles 1 and 2 of Ordinance No. 112-A/2011 of 22 March, submitted a request for an arbitral decision to annul the decision rejecting the Administrative Appeal No. ...2017... and, consequently, to order the Tax Authority to recognize the VAT credit of €31,029.45 and the corresponding compensatory interest.
The respondent is the Tax and Customs Authority (hereinafter referred to as "TA" or "Respondent").
The request for constitution of the arbitral tribunal, presented on 28/03/2018, was accepted by the Esteemed President of the Administrative Arbitration Centre (CAAD) on 29/03/2018 and automatically notified to the Respondent in accordance with the applicable regulations.
Pursuant to the provisions of paragraph 2, letter a) of Article 6 and paragraph 1, letter b) of Article 11 of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the Deontological Board of CAAD designated the undersigned as arbitrator of the singular arbitral tribunal, who confirmed acceptance of the assignment within the legal timeframe.
On 21/05/2018, both parties were duly notified and did not express, within the applicable timeframe and manner, any intention to refuse the appointment of the arbitrator (Article 11, paragraph 1, letters a) and b) of the Legal Framework for Tax Arbitration (RJAT), in conjunction with Articles 6 and 7 of the Deontological Code).
In accordance with the provisions of Article 11, paragraph 1, letter c) of the RJAT, the Arbitral Tribunal was constituted on 12/06/2018.
Duly notified, the Tax and Customs Authority submitted a response in which it defended, in addition to raising matters of exception (dilatory), the non-merits of the claim and submitted a copy of the administrative file.
Given the exception raised by the TA, the principle of contradiction was upheld, and the Claimant submitted a response to that matter on 03/09/2018.
The meeting referred to in Article 18 of the RJAT was dispensed with, and the process proceeded to optional written submissions, which the Claimant presented on 04/10/2018.
On 25/10/2018 the parties were notified that the final decision would be rendered by 26/11/2018.
The Claimant substantiated its claim, summarizing its position as follows:
(i) The Claimant is a legal entity governed by public law, classified for VAT purposes under the normal quarterly regime. The Municipality both performs operations subject to VAT (e.g. water supply to residents) and operations exempt from this tax (e.g. rental of social housing).
(ii) In the year 2013 the Municipality deducted tax incurred in the acquisition of certain resources directly related to water supply to residents based on the application of the actual allocation method.
(iii) The Claimant ascertained, in relation to the year 2013, taking into account Articles 19, 20 and 23 of the VAT Code, that it had improperly limited the exercise of the right to VAT deduction incurred, thereby bearing tax that, according to the rules of the VAT Code, would be recoverable. Specifically, during 2013, it had improperly limited, according to the Claimant, its right to VAT deduction incurred in the acquisition of "common" resources (i.e., resources used simultaneously in taxed and non-taxed activities – whose VAT is recoverable by the pro rata method or based on objective criteria). In this context, it calculated VAT to be additionally deducted by the pro rata method in the amount of €17,547.65.
(iv) The Claimant further ascertained that, during 2013, it had improperly limited, according to its position, its right to VAT deduction incurred on certain resources entirely allocated to taxed operations (whose VAT is fully recoverable). The Claimant calculated VAT to be additionally deducted by the actual allocation method of €13,481.80.
(v) On 29/01/2016 the Claimant submitted a replacement periodic return for the 4th quarter of 2013 (the initially filed return having been submitted on 06/02/2014), determining a VAT credit in its favor in the amount of €31,029.45.
(vi) With a view to confirming the value of said VAT credit and its use for the purposes of offset, the Claimant presented on 10/05/2016 a request to the Tax Service of ... which the TA transformed into an Administrative Appeal, and on 29/12/2017 the Municipality was notified of its rejection.
(vii) The Claimant initially raises the insufficient and unclear reasoning of the TA's decision rejecting the Administrative Appeal in question.
(viii) On the merits, the Claimant alleges that in 2013 it bore excess VAT that was deductible.
(ix) The Claimant, for the 4th quarter of 2013, submitted a replacement return with a change in the deduction method which resulted, according to the Claimant, in a VAT credit that the TA does not recognize.
(x) The Claimant contends that, pursuant to Article 22, paragraph 2 of the VAT Code, it may deduct VAT at a time subsequent to when the invoices were received, within the timeframe provided in paragraph 2 of Article 98 of the VAT Code.
(xi) The Claimant contends that this is the interpretation which, in accordance with the letter of the law, and without any prejudice to the State, also results from the judgment of the CJEU of 8 May 2008, rendered in the context of cases C-95/07 and C-96/07, which establishes that the taxable person may be authorized to proceed with deduction, even if he had not done so at the time that right arose.
(xii) Thus, the Claimant understands, contrary to the TA's position, that the right to deduction may be exercised at a time subsequent to the date of invoice receipt, pursuant to Article 22 of the VAT Code, with the limit being the four-year period provided in Article 98 of that law.
(xiii) For these reasons, according to the Claimant, having exercised the right to VAT deduction within a two-year period, it acted in accordance with the law.
(xiv) This does not result, according to the Claimant, as the TA argues, that the Municipality opted to bear VAT in "excess"; what happened was that the Claimant, according to this, bore excess VAT in 2013 because it did not fully take advantage of the deduction methods that the law provides.
(xv) The Claimant, in 2013, incorrectly understood that VAT was not deductible, when it was, and, according to the position it supports, when taxable persons incur errors of law they have legitimacy to correct them. As was the case, through the submission of a replacement return.
(xvi) And if this were not the case, the very principle of fiscal neutrality, upon which VAT is based, would be at issue.
(xvii) Article 23 of the VAT Code, according to the Claimant, provides that mixed taxable persons must opt, in each concrete situation, for the method according to which they will effect the VAT deduction incurred, but it does not follow from the provision that the taxable person cannot revise the choice.
(xviii) Therefore, the Claimant concludes, being faced with an error of law that may be corrected, the provisions of paragraph 2 of Article 98 of the VAT Code are applicable.
(xix) The TA's thesis that the taxable person cannot retroactively alter the deduction method (Article 23, paragraph 6 of the VAT Code) is not valid, according to the Claimant, since such interpretation has no legal basis.
(xx) But, even if the interpretation were not as the Claimant proposes, the TA, according to the Claimant, should still accept the additional VAT deduction through the actual allocation method, there being, in this case, no retroactive alteration since it was the method previously applied.
(xxi) Furthermore, according to the Claimant, the TA argues that with the submission of the replacement periodic return, it declared VAT deductions that are not recorded in the accounting for that period, so the declared values become divergent from those recorded in the accounting.
(xxii) The Claimant maintains that there is no divergence.
(xxiii) Any other understanding would render impossible the possibility of correcting errors of law occurring in a different fiscal year, as the Claimant argues is the case.
(xxiv) Denying the right to deduction to a taxable person for having correctly and timely recorded the documents would favor taxable persons who did not have the same rigor in document recording, and would violate, according to the Claimant, the principle of equality provided in Article 5 of the General Tax Law.
(xxv) The Claimant further rejects the TA's argument that the deduction of tax presupposes the accounting record of the supporting document, which pursuant to Article 48, paragraph 1 of the VAT Code, must be carried out, at the latest, by the deadline for submission of the periodic return.
(xxvi) According to the Claimant, this provision relates to the accounting records of the documents that serve as the basis for the deduction of tax and has nothing to do with the timeframe that the taxable person has to carry out the deduction.
(xxvii) In view of the foregoing, the Claimant concludes that the TA's position has no legal merit.
(xxviii) On that basis, it petitions for compensatory interest.
For its part, the Respondent defends its position, summarizing it as follows:
(i) The Respondent raises exceptions and objections; as to the matter of exception, it alleges the material incompetence of the arbitral tribunal, since in light of Article 2 of Decree-Law No. 10/2011 of 20 January, the competence of arbitral tribunals comprises, among others, the examination of claims relating to "declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account" – cf. paragraph 1, letter a).
(ii) According to the Respondent, what the Claimant actually seeks is recognition of the tax credit that it allegedly claims to be entitled to for the year 2013.
(iii) This request, according to the TA, has no merit in the present arbitral proceeding since the scope of competence of arbitral tribunals constituted pursuant to Decree-Law No. 10/2011 of 20 January (RJAT) does not contemplate the possibility of examining requests aimed at recognizing rights in tax matters.
(iv) The TA argues that a material incompetence exception (dilatory) of the Arbitral Tribunal arises.
By way of objection, the Respondent contends that:
(v) Contrary to what the Claimant alleges, the act rejecting the administrative appeal in question does not suffer from the defect of lack of reasoning since it is supported by the information that forms an integral part thereof, where the factual and legal reasons that determined said act are amply demonstrated.
(vi) On the other hand, the Municipality of A... is a legal entity governed by public law classified, for VAT purposes, as a mixed taxable person, with quarterly periodicity, and within its functions, the now Claimant performs operations that fall outside the scope of application of the tax, as they result from its powers of authority – development of works, etc. – taxable operations within the scope of the tax, namely provision of services of various kinds – water supply etc. – and also tax-exempt operations without right to deduction – rental of social housing.
(vii) The Claimant opted for the method of deduction of total actual allocation, which entails the deduction of tax incurred in the acquisition of goods and services exclusively attributed to taxed activities with right to deduction.
(viii) On 14 January 2014 the Claimant submitted a declaration of change of activity in which it requested the alteration of the deduction method from total actual allocation to the method of partial actual allocation deduction, the latter allowing for the deduction of tax borne upstream through attribution to each activity sector and, as regards inputs of goods and services indistinctly used in the various sectors, resorting to a deduction percentage or pro rata, or alternatively by recourse to another objective criterion that better reflects that use.
(ix) According to the Respondent, the Claimant, which in the Respondent's view deducted a lower amount of tax than it was entitled to, submitted, on 29 January 2016, a replacement periodic return for the 4th quarter of 2013, in which it determined a tax credit in its favor in the amount of €31,029.45.
(x) But, according to the Respondent, even if the Claimant understands that it has legitimacy to deduct the tax and that it did so at the time and within the timeframe provided, the Claimant's understanding is, according to the Respondent, not correct.
(xi) Since, being faced with an alteration of the deduction method that the Claimant had opted for, it is not, therefore, a material error or calculation error recorded therein, nor an error of law, the Claimant cannot avail itself of those legal provisions to enable it to effect any adjustment of the tax previously deducted.
(xii) According to the Respondent, contrary to what the Claimant understands, the moment for the exercise of the right to deduction is provided for in the VAT Code, and it is not permitted to the taxable person to choose at will the moment of its realization.
(xiii) The mechanism of VAT deductions is provided for in Articles 19 to 26 of the VAT Code and forms part of the essence of the tax itself, with Article 19 stating that, for the calculation of tax due (self-assessment), taxable persons deduct from the tax levied on taxable operations in a given period the tax charged to them in the acquisition of goods and services by other taxable persons, mentioned in invoices or equivalent documents issued in legal form, in the same period, a situation that should be reflected in the periodic return referred to in paragraph 1, letter c) of Article 29 of the VAT Code.
(xiv) Pursuant to paragraph 1 of Article 22 of the VAT Code, "The right to deduction arises at the moment the deductible tax becomes due, in accordance with the provisions of Articles 7 and 8, effected by subtraction from the total amount of tax due on taxable operations of the taxable person, during a declaration period, of the amount of deductible tax, due during the same period," and in paragraph 2 of said provision it is established that "Without prejudice to the provisions of Article 78, deduction must be effected in the return of the period or a subsequent period in which the invoices or receipt of VAT payment forming part of import declarations were received."
(xv) Finally, in paragraph 3 of Article 22 of the VAT Code it is determined that, "if the receipt of the documents referred to in the preceding paragraph takes place in a declaration period different from that of their issuance, deduction may, if still possible, be effected in the declaration period in which that issuance took place."
(xvi) Thus, according to the Respondent, tax deductions effected by a VAT taxable person are, in principle, of a definitive character, being able, however, in certain cases expressly provided for in Article 78 of the VAT Code, to be subject to alteration.
(xvii) Paragraph 6 of Article 78 of the VAT Code provides that "The correction of material or calculation errors in the records referred to in Articles 44 to 51 and 65, in the returns mentioned in Article 41 and in the guides or returns mentioned in letters b) and c) of paragraph 1 of Article 67 is optional when it results in tax in favor of the taxable person, but may only be effected within two years, which, in the case of the exercise of the right to deduction, is counted from the birth of that right in accordance with paragraph 1 of Article 22, being mandatory when it results in tax in favor of the State."
(xviii) Notwithstanding all the foregoing, particularly given that the right to deduction and the possibility of correction of material errors has specific legal regulation, the Claimant, according to the Respondent, seeks to rely, in the present case, on the four-year period to correct the VAT that it alleges it bore in excess, which according to its understanding flows from paragraph 2 of Article 98 of the VAT Code.
(xix) Although paragraph 2 of Article 98 of the VAT Code establishes that, without prejudice to special provisions. That is, the norms that provide for special periods would make no sense whatsoever, since the norm establishing the general four-year period would always prevail over them, in manifest violation of the provision in paragraph 3 of Article 7 of the Civil Code. Furthermore, the question of the specialty of Article 78 vis-à-vis Article 98, both of the VAT Code, does not appear to be even controversial for this Tribunal.
(xx) The segregation of costs associated with specific activity sectors of a mixed taxable person – as in the case of the Claimant – must be carried out at the moment of exercise of the right to deduction or, at most, in accordance with paragraph 6 of Article 23 of the VAT Code, and allegations of error based on cost segregations carried out only subsequently are, according to the Respondent, unacceptable.
(xxi) Indeed, at the time of exercise of the right to deduction, the Claimant did not segregate accounting costs associated with its different activity sectors, there being no error in the omission of tax deduction. And if this is the case when taxable persons seek to regularize tax when the legal requirements for the right to deduction are no longer met, such as timeliness, then by a fortiori it is also the case when such regularization is based on alteration of the method used to exercise that right.
(xxii) Therefore, given the applicable legislation in the present case, according to the Respondent, it cannot be understood otherwise than that the four-year period established in paragraph 2 of Article 98 of the VAT Code cannot be applicable in the case of the present proceedings.
(xxiii) Thus, according to the Respondent, what is evident is that the Claimant should have complied with the rules provided in Article 23 of the VAT Code, that is, it should have effected the deduction of tax relating to goods and services of mixed use, which it certainly recorded in its accounting, respecting both the general rule of paragraph 2 of Article 22 of the VAT Code and paragraph 6 of that Article 23, correcting at the end of each year these amounts.
(xxiv) The Respondent concludes by requesting the rejection of the request for an arbitral decision.
(xxv) As to the request for payment of compensatory interest, and even if the request were well-founded: the Respondent concludes that the Claimant's position is not correct, there being, in the present case, no "error attributable to the services." The law did not provide for objective liability, but rather liability linked to the fault of the services. In the present case, there is no evidence of any error attributable to the services in the decision to reject the claim, so the request for payment of compensatory interest is rejected as unfounded.
The Claimant responded to the matter of exception raised by the TA, contending that:
(i) The Claimant seeks that the decision rejecting the Administrative Appeal No. ...2017... be declared illegal, with all the legal consequences flowing therefrom – among which that the VAT credit of €31,029.45 in favor of the Municipality be recognized, which was analyzed and denied by the TA in the course of said Administrative Appeal and not the recognition of a right.
(ii) The recognition of the credit by the TA, according to the Claimant, is an effect that is in a relationship of prejudiciality, arising as a consequence of that declaration of illegality.
(iii) In fact, the request for an arbitral decision in question was motivated by the rejection of the Administrative Appeal filed, a rejection that constitutes an administrative act in tax matters, which is subject to judicial review, as well as by arbitration, to the extent that it involves examination of the (il)legality of assessment acts.
(iv) With the filing of the Administrative Appeal, the Municipality requested that the TA pronounce itself on the (il)legality of a self-assessment act, in order to ascertain the legitimacy of the existing VAT credit.
(v) In this sense, the Claimant concludes that it must be concluded that this Arbitral Tribunal is competent.
II – PROCEDURAL ORDER
Given that the question of the tribunal's incompetence has been raised and this is a matter prejudicial to the decision on the merits or substance of the case, a decision must be made.
Article 124 of Law No. 3-B/2010 of 28 April authorized the Government to legislate "to establish arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters. Decree-Law No. 10/2011 of 20 January (RJAT) implemented that legislative authorization with a narrower scope than initially provided, not contemplating in particular alternative competence to that of action for recognition of a right or legitimate interest in tax matters, and "established tax arbitration limited to certain matters, listed in its Article 2," making the binding nature of the Tax Administration dependent on "an ordinance of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered"[1].
The scope of tax arbitral jurisdiction is thus delimited, in the first place, by the provisions of Article 2 of the RJAT which sets out, in paragraph 1, the criteria for material distribution of competence, covering the examination of claims aimed at the declaration of:
a) illegality of acts of tax assessment, self-assessment, withholding at source and payment on account; and
b) illegality of acts determining the taxable base when it does not give rise to the assessment of any tax, of acts determining the taxable income and of acts fixing patrimonial values.
Given the voluntary nature of submission to arbitral jurisdiction, in a second place "the competence of the arbitral tribunals operating in CAAD is also limited by the terms in which the Tax Administration bound itself to that jurisdiction, materialized in Ordinance No. 112-A/2011 of 22 March, since Article 4, paragraph 1 of RJAT establishes that "the binding of the tax administration to the jurisdiction of the tribunals constituted under this law depends on an ordinance of the members of the Government responsible for the areas of finance and justice"[2].
Ordinance No. 112-A/2011 of 22 March provides, in Article 2, that "The services and organisms referred to in the preceding article bind themselves to the jurisdiction of the arbitral tribunals operating in CAAD that have as their object the examination of claims relating to taxes whose administration is entrusted to them referred to in paragraph 1 of Article 2 of Decree-Law No. 10/2011 of 20 January, with the exception of the following:...", indicated in the subsequent paragraphs of that article, which includes in letter c), for what is relevant to this case, "Claims relating to customs duties on importation and other indirect taxes levied on goods subject to import duties;".
The same Ordinance, in its first article, as the TA indicates, binds:
"the following services of the Ministry of Finance and Public Administration:
a. The General Directorate of Taxes (DGCI); and
b. The General Directorate of Customs and Special Excise Duties (DGAIEC)".
Objectively, the binding to arbitral tribunals, in tax matters, operating in CAAD, as stated above, is delimited in accordance with Article 2 of the RJAT, in conjunction with Article 2 of Ordinance No. 112-A/2011 of 22 March.
The tribunal's competence is ascertained by the delimitation that results from the cause of action and the claim formulated by the claimant. Considering the factual description and the respective legal subsumption exercised by the Claimant throughout its petition, we must conclude that the scope of its petition lies in the examination of the legality of the act in question. In fact, the Claimant, in its initial petition, bases its claim on the annulment of the decision rejecting the Administrative Appeal No. ...2017... and, consequently, if that claim is successful, the consequences that it believes flow therefrom, namely, according to its understanding, the recognition of the VAT credit of €31,029.45, be it the respective compensatory interest. But, as results from the statement, the object of the case is the examination of the legality of the act in issue.
Therefore, considering that the claim formulated is expressly based on the request for annulment of the decision rejecting the appeal in question in the proceedings, we must conclude that what is at issue is the examination of the legality of acts encompassed within the delimitation resulting from the articulation of Articles 2 of the RJAT and 2 of Ordinance 112-A/2011, which permits us to conclude that this arbitral tribunal is materially competent.
In view of the foregoing, the parties enjoy legal personality and capacity, are legitimate as to the request for an arbitral decision, are duly represented, and the tribunal is competent, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011 of 22 March.
As no other matter of exception is to be examined and the proceedings are not subject to any nullities, it is necessary now to decide the merits of the case.
III. MERITS
1. MATTERS OF FACT
1.1. Facts Proven and Not Proven
It is incumbent upon the tribunal to select the facts that matter for the decision of the case and to distinguish the matters that are proven from those that are not proven (in accordance with Article 123, paragraph 2, of the Tax Procedural Code and Article 607, paragraph 3 of the Civil Procedure Code, applicable by virtue of Article 29, paragraph 1, letters a) and e), of the RJAT).
Thus, the facts pertinent for judgment of the case are chosen and delimited according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (in accordance with former Article 511, paragraph 1, of the Civil Procedure Code, corresponding to the current Article 596, applicable by virtue of Article 29, paragraph 1, letter e), of the RJAT).
Thus, taking into account the positions assumed by the parties, the documentary evidence joined to the proceedings, the following facts are considered proven, as being relevant to the decision.
a) The Claimant is a legal entity governed by public law classified, for VAT purposes, as a mixed taxable person, with quarterly periodicity.
b) The Claimant performs operations that fall outside the scope of application of the tax, as they result from its powers of authority – development of works, etc. – taxable operations within the scope of the tax, namely provision of services of various kinds – water supply etc. – and also tax-exempt operations without right to deduction – rental of social housing.
c) Upon its declaration of commencement of activities, the Claimant opted for the method of deduction of total actual allocation, which entails the deduction of tax incurred in the acquisition of goods and services exclusively attributed to taxed activities with right to deduction.
d) On 14 January 2014 the Claimant submitted a declaration of change of activity in which it requested the alteration of the deduction method.
e) Based on the alteration of the deduction method, on 29 January 2016, the Claimant submitted a replacement periodic return for the 4th quarter of 2013, in which it determined a tax credit in its favor in the total amount of €31,029.45, corresponding to the deduction of VAT incurred in the acquisition of "common" resources (i.e., resources used simultaneously in taxed and non-taxed activities – whose VAT is recoverable by the pro rata method or based on objective criteria). In this context, VAT to be additionally deducted by the pro rata method was calculated in the amount of €17,547.65 and, also, an additional deduction by the actual allocation method of €13,481.80 was calculated relating to certain resources entirely allocated to the performance of taxed operations (whose VAT is fully recoverable).
f) The initially filed return had been submitted on 06/02/2014.
g) The TA had conducted, through service order No. OI 2014..., an inspection procedure for the fiscal year 2013, of which the Claimant was notified of the Tax Inspection Report on 07/01/2016 where corrections were made.
h) On 10/05/2016 the Claimant filed a request with the Tax Service of ... with the purpose of confirming the value of said VAT credit and its use for the purposes of offset, which the TA transformed into an Administrative Appeal, numbered ...2017..., and on 29/12/2017 the Municipality was notified of its rejection with the grounds described in the document joined to the proceedings.
i) The Claimant filed a request for an arbitral decision on 28/03/2018.
No other facts with relevance to the decision of the case were proven, considering the possible legal solutions.
There are no facts determined to be unproven.
1.2. Reasoning on Matters of Fact
The proven facts, as to which there is no dispute, are based on the documents submitted by the Claimant with the request for an arbitral decision and the administrative file submitted by the Respondent.
2. MATTERS OF LAW
2.1. Principal Issues
From what is petitioned by the Claimant result the following substantive issues to be examined in this proceeding, which we list below:
a) Lack of reasoning in the decision rejecting the Administrative Appeal;
b) The right to VAT deduction;
c) The right to compensatory interest.
The Claimant indicating an order of subsidiarity in the attribution of defects to the impugned decision, this order shall be observed in its examination, as follows from letter b) of paragraph 2 of Article 124 of the Tax Procedural Code, applicable to tax arbitral proceedings by virtue of Article 29, paragraph 1, letter c), of the RJAT.
It must be decided:
a) Lack of reasoning in the decision rejecting the Administrative Appeal
The obligation to provide reasons for acts, as a constitutional and legal requirement, which the Respondent does not deny.
In accordance with Article 77 of the General Tax Law, the decision on proceedings is always reasoned by means of a brief statement of the factual and legal reasons that motivated it, and the reasoning may consist of a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those contained in the tax inspection report (paragraph 1).
Article 77, paragraph 2, of the General Tax Law states that the reasoning of tax acts may be effected summarily, and must always contain the applicable legal provisions, the characterization and quantification of the tax facts and the operations for determining the taxable base and the tax.
From the factuality described and from the legal subsumption exercise carried out by the Claimant, the duty to provide reasons was, in fact, fulfilled, the description being clear and comprehensible and, to such an extent, that the Claimant faced no obstacle in exercising its right of reply, impugning and invoking legal issues related to the interpretation of the applicable legal norms.
In this way, it is concluded that the act does not suffer, in any of its aspects, from lack of reasoning, even if provided by reference or in a summary manner, since it is clear, coherent and contemplated the aspects, both factual and legal, which the Claimant fully understood and, accordingly, exercised its right of reply without any obstacle to its defense.
b) The right to VAT deduction
There being no conflict as to the matters of fact, the crux of the issue that arises is the legal characterization of the alleged "error" that the Claimant contends in order to submit the replacement return for the 4th quarter of 2013.
The Claimant is a legal entity governed by public law classified, for VAT purposes, as a mixed taxable person, and, as is proven, altered the deduction method and which led to it submitting the replacement return in question in the proceedings with a VAT credit in the total amount of €31,029.45.
Under the legislation in force at the date of the facts, Article 22 of the VAT Code provides:
1 - The right to deduction arises at the moment the deductible tax becomes due, in accordance with the provisions of Articles 7 and 8, effected by subtraction from the total amount of tax due on taxable operations of the taxable person, during a declaration period, of the amount of deductible tax, due during the same period.
2 - Without prejudice to the provisions of Article 78, deduction must be effected in the return of the period or a subsequent period in which the invoices or receipt of VAT payment forming part of import declarations were received.
(…)
As to the methods of deduction relating to mixed-use goods, Article 23 of the VAT Code provides:
1 - When a taxable person, in the course of his activity, performs operations that confer the right to deduction and operations that do not confer this right, in accordance with Article 20, the deduction of tax borne in the acquisition of goods and services that are used in the performance of both types of operations is determined as follows:
a) In the case of a good or service partially attributed to the performance of operations not arising from the exercise of an economic activity provided in letter a) of paragraph 1 of Article 2, the tax not deductible as a result of that partial attribution shall be determined in accordance with paragraph 2;
b) Without prejudice to the provision in the preceding letter, in the case of a good or service attributed to the performance of operations arising from the exercise of an economic activity provided in letter a) of paragraph 1 of Article 2, part of which does not confer the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations giving rise to deduction.
2 - Notwithstanding the provision in letter b) of the preceding paragraph, the taxable person may effect deduction in accordance with the actual allocation of all or part of the goods and services used, on the basis of objective criteria that allow determining the degree of use of these goods and services in operations conferring the right to deduction and in operations not conferring this right, without prejudice to the General Directorate of Taxes being able to impose special conditions on it or cause this procedure to cease if it is found that they provoke or may provoke significant distortions in taxation.
(…)
As to alterations, paragraph 6 of Article 78 of the VAT Code provides that they may be subject to alteration at a later time in the situations provided therein:
(…)
"6 - The correction of material or calculation errors in the records referred to in Articles 44 to 51 and 65, in the returns mentioned in Article 41 and in the guides or returns mentioned in letters b) and c) of paragraph 1 of Article 67 is optional when it results in tax in favor of the taxable person, but may only be effected within two years, which, in the case of the exercise of the right to deduction, is counted from the birth of that right in accordance with paragraph 1 of Article 22, being mandatory when it results in tax in favor of the State."
(…)
Pursuant to Article 7, paragraphs 1 letters a) and b) of the VAT Code, the moment of tax becoming due, in transfers of goods, is the moment when goods are placed at the disposal of the acquirer and in provision of services, at the moment of their performance.
(…)
For its part, paragraph 2 of Article 98 of the VAT Code provides for a four-year period, provided that the requirements listed are met, namely:
1 - When, for reasons attributable to the services, tax has been assessed in excess of what is due, official review shall be undertaken in accordance with Article 78 of the general tax law.
2 - Without prejudice to special provisions, the right to deduction or refund of excess tax delivered may only be exercised up to the expiration of four years after the birth of the right to deduction or overpayment of tax, respectively.
(…)
As results from the transcribed content of paragraph 6 of Article 78 of the VAT Code, the provision is applicable to the correction of material or calculation errors, including in periodic returns.
In the present case, it is necessary to analyze the legal framework to be given to the type of "error" committed by the Claimant, in accordance with Article 78, paragraph 6 of the VAT Code and Article 98, paragraph 2 of the VAT Code.
On the matter at issue, there is abundant case law.
The judgment of the Supreme Administrative Court in case 1427/14, of 28-6-2017, and the decisions rendered by CAAD, in particular, in cases nos. 91/2013-T, 117-2013-T, 502/2014-T, 549/2016-T, 85/2017-T, 252/2017-T, 138/2018-T.
From the content of the decisions results a position that we adopt as to the deduction of additional VAT through retroactive alteration of the deduction method. Thus,
Following the judgment rendered in case no. 117-2013-T:
"Article 95-A, paragraph 2 (of the Tax Procedural Code) provides a concept of "material or manifest errors" indicating that it includes, "in particular, those resulting from anomalous functioning of the tax administration's computer systems, as well as unequivocal situations of calculation error, writing error, inexactitude or lapse".
The association of calculation error with material error made in this paragraph 6 of Article 78 of the VAT Code, similar to what happens in other norms (such as Article 249 of the Civil Code, Article 667 of the 1961 Code of Civil Procedure and Article 614 of the 2013 Code of Civil Procedure) reveals that the calculation errors to which it is intended to allude are of this kind, in particular, arithmetic errors in the operations for calculating the amount to be deducted.
(…) One would be faced with a calculation error, when the arithmetic operations to determine the amount of deductible VAT were wrongly performed, in the return itself or in any of the documents on which it was based".
In this way it is concluded, as is done in that decision, that "the error regarding the application of certain legal regimes does not constitute either material error or calculation error, so it is evident that the regime of the aforementioned paragraph 6 of Article 78 of the VAT Code cannot be applied to it. In particular, the error in calculation of the pro rata is not a calculation error that can be framed in this norm because it constitutes an error of law regarding the applicable legal regime and not an error of an arithmetic nature.
Thus, if the regime of the aforementioned Article 78, paragraph 6 is not applicable, and there is no other special time limit regime for the exercise of the right to deduction based on an error of law, the general regime on this matter contained in Article 98, paragraph 2, of the VAT Code will be applicable, which, as stated in the judgment of the Supreme Administrative Court of 18-5-2011, rendered in case no. 966/10, fixes a maximum time limit of four years that cannot be exceeded in any case".
To the same effect follows the Judgment of the STA in Case 1427/14, of 28-6-2017:
"The application of deduction methods relating to mixed-use goods is legally complex so that error resulting from the application of this legal regime does not constitute either material error or calculation error. Article 95-A, paragraph 2, of the Tax Procedural Code establishes that material or manifest errors are considered to be those resulting from anomalous functioning of the tax administration's computer systems, as well as unequivocal situations of calculation error, writing error, inexactitude or lapse. This concept includes (cf. Jorge Lopes de Sousa in Code of Tax Procedure and Process, Annotated and Commented, 6th ed. 2011) "all kinds of material lapses, which are situations in which the author of the act left written in it something that did not correspond to his will, such as, for example, incorrect indication of the name of the taxpayer or the tax at issue or arithmetic error in the calculation of the tax. This concept of material lapses also includes those arising from deficient functioning of the tax administration's computer system." Now in the disputed case it is the conviction of this Arbitral Tribunal that the "error" committed by the Claimant in carrying out the regularization of the tax after the last return of the last period of 2011 (that is, in the DP of 201203T) is an error of law, the legal regime provided for in paragraph 2 of Article 98 of the VAT Code being applicable, an understanding consistent with the STA in the aforementioned holding: "The applicable time period for claiming the VAT delivered in excess, in a situation that falls under the so-called error of law is four years, in accordance with the provisions of Article 98, paragraph 2 of the VAT Code".
We emphasize, as results from the decision of CAAD rendered in case no. 138/2018-T, transcribing the Arbitral Award rendered in case no. 502/2014-T, that,
"In the wording given to that paragraph 2 of Article 22 by Law No. 107-B/2003, of 31 December), the following was established: "Without prejudice to the provisions of Article 71, deduction must be effected in the return of the period or a subsequent period in which the invoices, equivalent documents or receipt of VAT payment forming part of import declarations were received".
The huge difference lies in the possibility of deduction of VAT not only in the return of the period of receipt of the documents, but also in a return "of a subsequent period", without any restriction.
Indeed, on the assumption that the legislator knew how to express his thinking in adequate terms, as must be presumed by virtue of the provision in paragraph 3 of Article 9 of the Civil Code, the use of the expression "of a subsequent period", without the definite article, and not "of the subsequent period" shows that it is not even required that the VAT be deducted in the return of the period immediately following that of receipt of the documents, being permitted in the return of any subsequent period, without prejudice, naturally, to special and general time limits, in particular those contained in Articles 78 and 92, paragraph 2".
Article 98, paragraph 2, of the VAT Code establishes that "without prejudice to special provisions, the right to deduction or refund of excess tax delivered may only be exercised up to the expiration of four years after the birth of the right to deduction or overpayment of tax, respectively".
In the present case, as described, we are not faced with a situation that can be framed in Article 78, paragraph 6, of the VAT Code, in which a special period of two years is provided for the regularization of "correction of material or calculation errors", including in periodic returns, in the following terms: "the correction of material or calculation errors in the records referred to in Articles 44 to 51 and 65, in the returns mentioned in Article 41 and in the guides or returns mentioned in letters b) and c) of paragraph 1 of Article 67 is optional when it results in tax in favor of the taxable person, but may only be effected within two years, which, in the case of the exercise of the right to deduction, is counted from the birth of that right in accordance with paragraph 1 of Article 22, being mandatory when it results in tax in favor of the State".
Being the Claimant a legal entity governed by public law classified, for VAT purposes, as a mixed taxable person, which filed the replacement return with the grounds described, in accordance with the case law cited above, it results the understanding, which we adopt, that when an error material or of calculation, to the prejudice of the taxable person, occurs, it may be corrected within the period established by paragraph 6 of Article 78 of the VAT Code, and when an error of law occurs, as is the case in accordance with the reasoning described, which has been to the prejudice of the taxable person, it may be corrected within the four-year period, in accordance with the provision in paragraph 2 of Article 98 of the VAT Code.
Thus it is concluded that the rejection of the administrative appeal suffers from an error on the legal requirements, for error in the interpretation of Articles 78, paragraph 6 and 98, paragraph 2, of the VAT Code, which justifies its annulment.
The Arbitral Tribunal, in accordance with Articles 608, paragraph 2, 663, paragraph 2 and 679 of the Civil Procedure Code, by application of Article 29 of the RJAT, is not obligated to examine all the arguments alleged by the Claimant or the Respondent, when the decision is affected by the solution already rendered, as is the case in the proceedings, for which reason the remaining issues submitted to request for a decision are moot.
c) Compensatory interest
The Claimant further petitions for compensatory interest.
Having been demonstrated that the decision of the TA suffers from an error of law attributable exclusively to the Respondent by virtue of the provisions of Articles 61 of the Tax Procedural Code and 43 of the General Tax Law, the Claimant is entitled to compensatory interest due from the date of rejection of the administrative appeal until the date of issuance of the respective credit note, with the payment period counted from the date of commencement of the period for voluntary compliance with this decision (Article 61, paragraphs 2 to 5, of the Tax Procedural Code), all at the rate ascertained in accordance with paragraph 4 of Article 43 of the General Tax Law.
Given all the foregoing and the invoked legal norms, the claim of the Claimant is upheld.
IV. DECISION
Thus, this Arbitral Tribunal decides:
a. To find the request for an arbitral decision to be well-founded and to annul the decision rejecting the Administrative Appeal No. ...2017... with the legal consequences.
b. To order the Tax and Customs Authority to pay the Claimant compensatory interest, in accordance with Articles 24, paragraph 5, of the RJAT, 43, paragraph 1, of the General Tax Law and 61 of the Tax Procedural Code;
c. To order the Tax and Customs Authority to pay the costs of the proceedings.
V. VALUE OF THE PROCEEDING
In accordance with the provisions of Article 306, paragraph 2 of the Civil Procedure Code, Article 97-A, paragraph 1, letter a) of the Tax Procedural Code and Article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is set at €31,029.45.
VI. COSTS
In accordance with Article 22, paragraph 4 of the RJAT, the amount of costs is set at €1,836.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.
Let notice be given.
Lisbon, 13 November 2018
The Arbitrator,
Marisa Almeida Araújo
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