Summary
Full Decision
CAAD: Tax Arbitration
Process No. 241/2015
Subject: VAT – Item 2.6.
Arbitral Decision
REPORT
A… – MEDICAL ARTICLES, LDA, Tax Identification Number …, with registered office at Rue …, in …, came, in accordance with article 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as LFATM), to request the constitution of a Singular Arbitral Tribunal, in which the Tax and Customs Authority is named as defendant, hereinafter TA or Respondent, with a view to obtaining a ruling on the illegality and consequent annulment of VAT assessment acts and compensatory interest.
The application for the constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and automatically notified to the TA on 9 April 2015.
In accordance with the provisions of subsection c) of paragraph 1 of article 11 of the LFATM, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Singular Arbitral Tribunal was constituted on 19 June 2015.
The TA responded, arguing that the application should be dismissed.
The meeting referred to in article 18 of the LFATM and the submission of final arguments were dispensed with, given the nature of the matters contained in the case file.
The Arbitral Tribunal is properly constituted and is materially competent, in accordance with subsection a) of paragraph 1 of article 2 of the LFATM.
The parties have legal personality and capacity, are properly qualified, and are represented (article 4, and paragraph 2 of article 10 of the LFATM and article 1 of Regulation No. 112/2011, of 22 March).
There are no nullities, exceptions, or preliminary questions that impede immediate consideration of the merits of the case.
FACTUAL MATTERS
Based on the elements contained in the case file and the administrative process attached to the case file, the following facts are considered proven:
The Applicant's business purpose is the wholesale trade and distribution of prosthetic devices, orthopedic equipment, dental implants of all types, instruments, devices, surgical-medical articles and sanitary products of all types.
In compliance with Service Order Nos. OI2014… and OI2014… issued by the Finance Directorate of Porto, on 17 April 2014, the company/Applicant was subject to a tax inspection;
According to the Respondent, the inspection procedure resulted from corroborating evidence of a widespread practice consisting of the improper application of the reduced rate of tax in the assessment of VAT on internal transfers of dental implants and related material (that is, goods which manifestly do not fall within any of the items of the I List attached to the respective code, as they are usually traded if they form part of a unique unit);
Applying the aforementioned interpretation, the TA issued the following VAT assessment acts and compensatory interest:
Additional VAT Assessment No. … (period 1003T), in the amount of €1,833.07 (one thousand eight hundred and thirty-three Euros and seven cents);
Additional VAT Assessment No. … (period 1006T), in the amount of €1,819.42 (one thousand eight hundred and nineteen Euros and forty-two cents);
Additional VAT Assessment No. … (period 1009T), in the amount of €853.56 (eight hundred and fifty-three Euros and fifty-six cents);
Additional VAT Assessment No. … (period 1012T), in the amount of €1,015.42 (one thousand and fifteen Euros and forty-two cents);
Additional Compensatory Interest Assessment No. … (period 1003T), in the amount of €322.22 (three hundred and twenty-two Euros and twenty-two cents);
Additional Compensatory Interest Assessment No. … (period 1006T), in the amount of €301.67 (three hundred and one Euros and sixty-seven cents);
Additional Compensatory Interest Assessment No. … (period 1009T), in the amount of €133.02 (one hundred and thirty-three Euros and two cents);
Additional Compensatory Interest Assessment No. … (period 1012T), in the amount of €148.00 (one hundred and forty-eight Euros);
Additional VAT Assessment No. … (period 1103T), in the amount of €1,654.66 (one thousand six hundred and fifty-four Euros and sixty-six cents);
Additional VAT Assessment No. … (period 1106T), in the amount of €2,331.21 (two thousand three hundred and thirty-one Euros and twenty-one cents);
Additional VAT Assessment No. … (period 1109T), in the amount of €2,125.98 (two thousand one hundred and twenty-five Euros and ninety-eight cents);
VAT Assessment Statement No. 2014 … (period 1112T), in the amount of €2,768.56 (two thousand seven hundred and sixty-eight Euros and fifty-six cents);
Additional Compensatory Interest Assessment No. … (period 1103T), in the amount of €224.85 (two hundred and twenty-four Euros and eighty-five cents);
Additional Compensatory Interest Assessment No. … (period 1106T), in the amount of €293.29 (two hundred and ninety-three Euros and twenty-nine cents);
Additional Compensatory Interest Assessment No. … (period 1109T), in the amount of €246.03 (two hundred and forty-six Euros and three cents);
Statement of Compensatory Interest Account Settlement No. 2014 … (period 1112T), in the amount of €292.78 (two hundred and ninety-two Euros and seventy-eight cents);
VAT Assessment Statement No. 2014 … (period 1203T), in the amount of €1,786.38 (one thousand seven hundred and eighty-six Euros and thirty-eight cents);
VAT Assessment Statement No. 2014 … (period 1206T), in the amount of €903.76 (nine hundred and three Euros and seventy-six cents);
VAT Assessment Statement No. 2014 … (period 1209T), in the amount of €1,090.02 (one thousand and ninety Euros and two cents);
VAT Assessment Statement No. 2014 … (period 1212T), in the amount of €1,681.21 (one thousand six hundred and eighty-one Euros and twenty-one cents);
Statement of Compensatory Interest Account Settlement No. 2014 … (period 1203T), in the amount of €171.28 (one hundred and seventy-one Euros and twenty-eight cents);
Statement of Compensatory Interest Account Settlement No. 2014 … (period 1206T), in the amount of €77.45 (seventy-seven Euros and forty-five cents);
Statement of Compensatory Interest Account Settlement No. 2014 … (period 1209T), in the amount of €82.54 (eighty-two Euros and fifty-four cents);
Statement of Compensatory Interest Account Settlement No. 2014 … (period 1212T), in the amount of €110.34 (one hundred and ten Euros and thirty-four cents);
VAT Assessment Statement No. 2014 … (period 1303T), in the amount of €615.05 (six hundred and fifteen Euros and five cents);
VAT Assessment Statement No. 2014 … (period 1306T), in the amount of €592.30 (five hundred and ninety-two Euros and thirty cents);
VAT Assessment Statement No. 2014 … (period 1309T), in the amount of €67.15 (sixty-seven Euros and fifteen cents);
VAT Assessment Statement No. 2014 … (period 1312T), in the amount of €205.58 (two hundred and five Euros and fifty-eight cents);
Statement of Compensatory Interest Account Settlement No. 2014 … (period 1303T), in the amount of €34.37 (thirty-four Euros and thirty-seven cents);
Statement of Compensatory Interest Account Settlement No. 2014 … (period 1306T), in the amount of €27.06 (twenty-seven Euros and six cents).
The deadline for voluntary payment of the assessments expired on 31 December 2014 and on 2 January 2015.
There are no facts with relevance for the appreciation of the merits of the case that have not been proven.
This Tribunal based its conviction on the consideration of the documents presented to the case file by the Parties.
LEGAL MATTERS
The principal issue raised in the present proceedings is whether the "individual" transfer of crowns, implants and abutments should be taxed at the reduced rate of 6% as falling within the scope of item 2.6 of List I attached to the Value Added Tax Code (VAT).
To this end, the Applicant alleges in its application for the constitution of the Arbitral Tribunal the following:
The legislator, in creating item 2 of List I attached to the VAT Code, intended to tax at the same rate situations in which the final product is the same, which in the present case culminates with the implants, regardless of whether the end consumer acquired the products in a phased manner or in their entirety;
It has always been the understanding of the Applicant, as well as of all companies engaged in the same activity and with whom it has direct contact, that the products in question fall fully within item 2.6 of List I attached to the VAT Code, which provides for taxation at the reduced rate of "Orthopedic devices, medical-surgical belts and medicinal hosiery, wheelchairs and similar vehicles, manually or motor-operated, for persons with disabilities, devices, artifacts and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or the treatment of fractures and lenses for vision correction, as well as orthopedic footwear, provided prescribed by medical prescription, in the terms to be regulated by the Government within 30 days";
The meaning and scope of the reduced rate applied in this field should take into account the good rules of hermeneutics, considering not only the grammatical element, but also its respective context, reason for being and purposes pursued by item 2.6, and should result in a declarative interpretation;
Nothing in the letter of the law leads to restricting its application to situations of transfers of "complete" implant goods;
In all rigor, it is very difficult for the purchasers of these products, dental clinics, dentists can buy the prostheses in their entirety, as the majority of the components are requested as they are being placed in the patient;
In no circumstances can prostheses be applied to patients simultaneously.
First the implant is placed and only after it has been verified that there is no rejection of it can the abutment and connecting pieces be placed.
It being common knowledge that the prosthesis is not implanted all at once. It is performed in phases since it is delicate work, and depends on the patient's adaptation to each component;
The majority of the components are made to measure, which justifies their purchase in phases as they are being applied.
In current medical terminology, a prosthesis is considered the artificial piece or device used to replace a limb, an organ, or part of it, such as, for example, dental prosthesis, ocular, articular, cardiac, vascular prosthesis, etc;
As stated, for example, in the Portuguese Language Dictionary of Porto Editora, prosthesis is the "replacement of an organ of the body or part of it, by an artificial piece";
Or also, according to the same dictionary, an "apparatus or artificial piece that replaces an organ of the body or part of it";
It is thus verified that a prosthesis is not only the set of implant + connecting pieces + tooth, but that any of the aforementioned components is itself, and only by itself, a prosthesis;
That is, any of the articles commercialized by the Applicant, with the exception of dentistry tools, are to be considered as prostheses, as such falling within item 2.6 of List I attached to the VAT Code, with their transfer taxed at the reduced rate and not at the normal rate;
Therefore, with the exception of tools, all other articles commercialized by the Applicant (implants, abutments and connecting pieces) should be considered as prostheses, with their transfer to be taxed at the reduced rate;
And these are not acquired together by its clients, solely because the aforementioned prostheses cannot be applied simultaneously;
First the implant is placed and only after it has been verified that there is no rejection of it can the abutment and connecting pieces be placed;
Therefore, it does not make sense, to avoid financial expenses with the constitution of stocks, that its clients acquire, simultaneously, all the prostheses that they will have to place in their patients;
Indeed, it is not even understood that the question should be raised, given that the aforementioned item 2.6 expressly contemplates, as has been seen, "devices and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body";
That is, the interpretation of the item that the Tax Authority made, in the aforementioned Binding Information, must be considered abusive, since the legal text is perfectly clear, in not restricting its application to prostheses that wholly replace a human limb or organ, it sufficing that it replaces that limb or organ in part for it to be taxed at the reduced rate;
In fact, no clinic or dentist acquires complete prostheses for each client, all at once, also for the simple reason that, when treatment is initiated, there is not yet absolute certainty of the number of teeth that need to be replaced, of the number of implants, abutments or connecting pieces that will need to be applied;
In view of the above and considering how implants are processed we can only conclude that the operations carried out by the Applicant are in full correspondence with item 2.6 above mentioned, and the reduced rate should be applied to all prostheses;
Only in this way is the principle of neutrality and the principles of generality, equality, legality and material justice respected.
For its part, the TA alleges, in summary, the following:
According to item 2.6 of List I attached to the VAT Code, subject to the reduced rate are "Orthopedic devices, medical-surgical belts and medicinal hosiery, wheelchairs and similar vehicles, manually or motor-operated, for persons with disabilities, devices, artifacts and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or the treatment of fractures and lenses for vision correction, as well as orthopedic footwear, provided prescribed by medical prescription, in the terms to be regulated by the Government within 30 days.";
Prosthetic materials are only taxed at the reduced rate if they are intended for the purpose defined in the item, that is, for the replacement of a part of the body with deficiency or illness or its function;
Such interpretation also implies that goods consisting of parts, pieces and accessories of those prostheses are not covered by item 2.6, given that, in addition to not being prostheses, they are not able to perform, considered individually, the function of replacement of a part of the body or its function;
Item 2.6 only covers the transfer of the article which, in itself, constitutes an artificial piece that replaces an organ of the human body or part of it, that is, autonomously or unitarily;
In dental implant prostheses, the normal rate of tax is applied to the transfer of connecting or fixing pieces, given that these, do not fulfill, in themselves, objectively, the function described in item 2.6 of List I attached to the VAT Code;
Considering that situations of taxation at the reduced rate constitute exceptions to the application of the normal VAT rate and, by virtue of this, represent a deviation from the application of the general regime of the tax, the Court of Justice of the European Union (CJEU) has been guided, in this matter, by the application of the principle of strict interpretation;
Bearing in mind this premise of interpretation, and as regards the present case, item 2.6 of List I, attached to the CIVA, which are taxed at the reduced rate, comprise "(…) devices, artifacts, and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body";
Thus, starting from the literal element of the rule, it should be noted that it is not sufficient to be faced with "devices, artifacts and other prosthetic or compensatory material", it being necessary that these goods are able to replace, in whole or in part, any limb or organ of the human body;
In this sense, it is important to distinguish the concept of implant from the concept of prosthetic material;
By "prosthetic material" should be understood that which is intended or able to replace a limb or organ of the human body, in whole or in part;
Dental prostheses aim to replace the dental apparatus, in whole or in part. This replacement occurs not only physically but also in the replacement of its functions: chewing, verbalization, aesthetic function;
As clarified by the Dental Practitioners Association, in an opinion of 20 February 2013, under the heading "Medical Devices – regulation", "dental prosthesis constitutes a custom-made medical device intended to restore the masticatory and aesthetic function of lost or fractured teeth, playing a fundamental role in the field of oral rehabilitation.";
And it goes on, concerning the concept of implant, saying: "[i]t is clarified that the dental implant is a medical device for single use to which the above-described purposes are attributed supporting oral rehabilitation, referred to in point t) of article 3 of Decree-Law No. 145/2009, of 17 June, serving as support for the dental prosthesis, requiring elements designated connectors – connecting pieces – also these specific accessories with medical purpose."
"When a given oral rehabilitation occurs (…), this will result in the need to place a connecting piece and a prosthesis, in periods that may be temporally distinct. And likewise in the case of deterioration of one of those components which, already existing there, may need replacement without the remaining elements being eliminated or discarded".
In the implant prosthesis, now under discussion, and as derives from the very concept, the implant is the method of fixation of the prosthesis. The prosthesis, constructed or elaborated by a specialized technician, by reference to the patient to whom it is intended, consists of the piece designated by crown (artificial tooth in porcelain), which is not provided by the taxpayer;
In reality, the implant (the method of fixation of the prosthesis) does not benefit from the same tax treatment as the prosthesis, as happens, moreover, with the components used in the elaboration of the other prostheses;
It should be noted that dental prostheses in general, regardless of the method of application, have, in their final destination, the same tax treatment, that is, the exemption provided in article 9 of the CIVA, or as the Applicant refers, what is relevant here is the final product and it is that which benefits from the reduced rate;
We cannot forget that the prosthesis, in itself, can be an object of commercialization in stages prior to being placed at the disposal of the patient, in which case it is taxed at the reduced rate;
In fact, the issue should be centered on whether item 2.6 of List I is intended to tax at the reduced rate the transfer of prostheses, whatever their type, or whether the legislator intended to cover here, also, the sale of all types of fixation devices that are not prostheses, are manufactured in series and which, when considered in isolation, namely at the time of their transfer by suppliers such as the taxpayer, do not replace a limb or an organ of the human body;
Note further, with regard to the literal element of the interpretation of the rule, that the legislator refers to prosthetic material and not to material for prosthesis (for application in a prosthesis), which indicates the exclusion of connecting or fixation pieces of prostheses, such as those traded by the taxpayer;
Still with reference to the wording of item 2.6, see that the rule restricts the application of the reduced rate to goods that are, themselves, fit for the function of replacing a limb or organ of the human body;
Therefore, it must be concluded, in the various opinions issued by the VAT Department, by the application of the reduced rate to "complete devices", as opposed to transactions on parts, pieces and accessories, which do not perform the function described above, and which, as such, should be taxed at the normal rate of the tax, due to lack of inclusion in Lists I and II, attached to the CIVA;
In this sense, and contrary to what the taxpayer intends, it does not appear to have acceptance in the letter of the law the thesis that item 2.6 encompasses the commercialization of all types of pieces intended for the fixation of prostheses or their connection, rather than referring to the prosthesis itself, a finished product apt for the replacement of an organ or part of the human body;
Considering that we are analyzing the subsumption of a certain good to the content of List I attached to the VAT Code, it is of extreme relevance to consider what is provided in the Judgment rendered by the SAC, in the context of process 01689/13;
In fact, as results from the reading of the learned judgment, the items into which List I attached to the VAT Code is divided "are not susceptible to an extensive interpretation capable of including in each of them the products that in some way participate in the nature of those that the concept encompasses. (…) It follows from the above that any product that is not expressly and unequivocally contemplated in List I cannot benefit from the reduced VAT rate.";
The Applicant further alleges that the concept of complete device or unique implant unit does not appear in the item and that, as this does not exist in practice, the conclusion that would be drawn from the TA's position would be that reduced rate tax can never be applied to implant prostheses;
Item 2.6 restricts itself to "complete goods" understood as those which, by themselves, can replace an organ or limb of the human body and not any elements that are used individually in the replacement process;
And thus one arrives at what is understood to be the rationale of the rule, or the teleological element, that is, to tax at the reduced rate products specifically designed for the correction or compensation of deficiencies or for the replacement, total or partial, of organs or limbs of the human body;
Item 2.6 thus applies to devices and prostheses in themselves, the final product, in the present case, to the artificial tooth (prosthesis). This means that it does not apply to the goods traded by the Applicant;
In fact, the titanium implant and the abutment are only components, each performing the function for which they were designed, of support and fixation of the prosthesis, but which, per se, objectively considered, do not perform nor replace the function of the tooth organ;
Not withstanding their application is generally used in dentistry, they are, merely, accessory or instrumental pieces, which contribute to the final result of oral rehabilitation.
It is the Applicant itself that admits that there may even be situations in which the goods it commercializes may never come to be applied, which means that its effective function would never be realized, failing to fulfill the purpose to which it should be destined when connected to the remaining components;
It must be concluded that the transfer of the aforementioned pieces (connecting or implantation of the prosthesis) are taxed at the normal rate, due to lack of inclusion in any of the lists attached to the CIVA, namely item 2.6 of List I;
It should be noted that the principle of neutrality derives from the Treaty of Rome and is incorporated in the VAT Directive (2006/112/CE), being systematically invoked by the Commission to oppose national legislation deemed incompatible with the rules of EU law, as well as by the tax administrations and taxpayers of the various Member States, and having been, repeatedly, applied by the CJEU;
The principle of fiscal neutrality opposes differentiation in the taxation of goods or services of identical nature, being verified when the tax does not influence the consumer's choice;
Therefore, if we are talking about neutrality regarding the taxation of different types of prosthesis we must compare the transfer of the removable prosthesis with that of the fixed prosthesis. And not with that of the fixed prosthesis plus fixation and connecting pieces;
In fact, when the specialized technician acquires the most diverse materials or pieces to build a prosthesis, he does so at the normal rate of the tax. It is then questioned whether the sale, at the reduced rate, of the pieces necessary for the fixation of an implant prosthesis would not impose a distortion of competition, by violation of the neutrality of the tax, given the sale, at the normal rate, of the pieces necessary for the construction of a removable artificial denture;
Effectively, only the application of the same rate to the pieces, parts and accessories, in this case, the normal rate, guarantees the neutrality of the tax, preventing any discriminatory treatment between the different types of prostheses.
In view of the above, regarding the position of the Parties and the arguments presented, to determine whether or not the VAT assessment acts are illegal it will be necessary to verify what is the interpretation that should be made of item 2.6 of List I attached to the VAT Code, namely to know whether the reduced VAT rate should be applied to separate transactions of dental implants, abutments and connecting pieces.
Let us see what should be understood.
Interpretation of the Rules
It results from article 11 of the General Tax Law (LGT) that the interpretation of tax law should be carried out in accordance with the general principles of interpretation.
The general principles of interpretation are established in article 9 of the Civil Code (CC), in the following terms:
"1. Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative thought, taking above all into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied.
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However, the legislator's thought that does not have in the letter of the law a minimum of verbal correspondence, albeit imperfectly expressed, cannot be considered by the interpreter.
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In determining the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most correct solutions and knew how to express his thought in adequate terms."
It is thus established that there are three elements of interpretation of the Law, namely: the literal element, the systematic element, the rational element and the historical element, in accordance with which item 2.6 of List I attached to the VAT Code should be analyzed, which provides as follows:
"Orthopedic devices, medical-surgical belts and medicinal hosiery, wheelchairs and similar vehicles, manually or motor-operated, for persons with disabilities, devices, artifacts and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or the treatment of fractures and lenses for vision correction, as well as orthopedic footwear, provided prescribed by medical prescription, in the terms to be regulated by the Government within 30 days" – Underlined by us.
Literal Element
Bearing in mind the literal element of the rule here under discussion, it will be important, first of all, to reconstruct the legislative thought through the words of the law which, in the case under analysis, determines that the reduced VAT rate be applicable "(…) to devices, artifacts and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body";
It is clear from the letter of the provision that prosthetic or compensatory materials intended for the replacement of part of the body with deficiency should be taxed at the reduced rate.
In accordance with the Portuguese Language Dictionary of Porto Editora, Prosthesis is the "replacement of an organ of the body or part of it, by an artificial piece" or an "apparatus or artificial piece that replaces an organ of the body or part of it".
As clarified by the Dental Practitioners Association, in an opinion of 20 February 2013, under the heading "Medical Devices – regulation", "dental prosthesis constitutes a custom-made medical device intended to restore the masticatory and aesthetic function of lost or fractured teeth, playing a fundamental role in the field of oral rehabilitation."
In accordance with the Portuguese Language Dictionary of Porto Editora, Implant (dental medicine) constitutes: "metal root which, after being placed inside the jawbone, ends up forming with it a unique structure, supporting an artificial crown or serving as a base for a fixed bridge."
Thus, it appears that dental implants fall within the scope of the reduced VAT rate applicable to goods described in item 2.6, in that they are intended to replace an organ of the human body, in this case, the dental apparatus.
This seems to be, also, the understanding of the Respondent in referring to dental implant prosthesis.
As is common knowledge, as the medical procedure for placing a dental implant is phased, the constitution of the implant can also occur in a phased manner.
For that reason, and as the ultimate purpose of the implant is always the same – the replacement of the dental apparatus – the other prosthetic material associated with the implant is also covered by the letter of the law.
In truth, and contrary to what is argued by the TA, nothing in the letter of the law leads us to restrict the application of the reduced VAT rate to situations of transfers of "composite" goods of implant + connecting pieces + tooth.
In this sense, in the arbitral decision handed down in process 429/2014-T, concerning the concept of "complete goods", the following is clarified:
"(…) such concept does not exist as such, existing rather implants constituted by the three pieces now in question – crown, implant and abutment, which, in accordance with surgical technique, are introduced in phases into the patient's mouth, thus giving rise, in their set, to an implant. In reality, these three pieces are inseparable and unusable except for the composition of an implant as a composite prosthesis."
Considering that the rule in question should be interpreted taking into account the other provisions that form the complex regulatory system in which the rule to be interpreted is integrated, considering the purpose intended by the legislator in elaborating the rule and the historical context of its elaboration, let us now examine the other elements of interpretation of a logical nature relating to item 2.6. List I attached to the VAT Code.
Systematic, Rational and Historical Elements
Item 2.6 of List I attached to the VAT Code must be interpreted taking into account the rules of Directive 2006/112/CE, of 28 November, hereinafter VAT Directive, which determines the goods to which the reduced VAT rates can be applied, the provisions of article 18 of the VAT Code and the case law of the CJEU and CAAD.
In fact, the VAT Directive established a general tax on consumption, indirect of Community matrix and multiphase, whose main characteristic is its neutrality.
The principle of neutrality, which has as its corollary the principle of non-discrimination, requires equal treatment of similar goods and determines that VAT should apply in the same way to all transactions, regardless of the extent of production and distribution chains.
The principle of neutrality is incorporated in the VAT Directives, being frequently invoked by the European Commission to oppose national legislation deemed incompatible with the rules of EU law, as well as by the tax administrations and taxpayers of the various Member States, having been, repeatedly, applied by the CJEU.
In truth, the CJEU has sought to guarantee the neutrality of the tax burden on 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 VAT paid on its acquisitions) - See, in particular, Judgments of 14 February 1985, Rompelman Case, Proc. 268/83, Rec., p. 655, para. 19, of 22 June 1993, Sofitam Case, Proc. C-333/91, Colect., p. I-3513, para. 10, and of 6 April 1995, BPL Group Case, Proc. C-4/94, Colect., p. I-983, para. 26.
From the outset, the CJEU sought to draw the due consequences from the equal treatment in VAT of similar activities and the absence of the impact of the extent of production and distribution chains on the amount of the tax received by the tax administrations.
Following this orientation, 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 can be applied, establishing in paragraph 4 the following:
"Medical equipment, auxiliary material and other devices normally used to alleviate or treat deficiencies, for exclusive personal use of persons with disabilities, including their repair, as well as automobile seats for children.".
Based on the aforementioned possibility, the Member States can either or not derogate from the principle according to which the normal rate is applicable, naturally limited to the list of transactions contained in Annex III of the VAT Directive, which cannot fail to respect the principle of fiscal neutrality.
It has been repeatedly argued by the CJEU that the introduction and maintenance of reduced VAT rates are only permissible if they do not violate the principle of fiscal neutrality inherent in the common VAT system, "which opposes the treatment of similar goods, which are therefore in competition with each other, in a different manner from the point of view of VAT" – See Judgment of 3 April 2008, Zweckverband zur Trinkwasserverorgung, process No. C-442/05 (paragraph 42); Judgment of 28 October 2003, Commission v. Germany, process No. C-109/02 (paragraph 20), among others.
As explained in the Judgments of the CJEU of 8 May 2003, Commission v Germany, process C-384/01, the application of reduced rates should be interpreted strictly, that is, a literal or declarative interpretation.
Furthermore, the CJEU has understood that in interpreting the VAT Directive, one should consider "not only its terms but also its context and the objectives pursued by the regulation in which it is integrated" – See Judgment of 3 April 2008, Zweckverband zur Trinkwasserverorgung, process No. C-442/05.
Following closely the understanding held by the CJEU, decisions have already been handed down at CAAD (Decision rendered in the context of process 171/2013-T, of 12 June 2014 and No. 429/2014-T, of 24 November 2014), on the question of whether the Portuguese legislator intended to restrict the application of the reduced rate, as the Respondent argues, to transactions involving complete implants or whether the reduced rate can be applied to transactions of implants, abutments and connecting pieces because they constitute dental implants when transferred separately.
In the aforementioned decisions, which we endorse, it is argued that "nothing in the letter of the law leads us to restrict its application to situations of transfers of "complete goods" of implant.
"As such "complete goods" of implant do not exist, in the sense that the TA intends to convey, the understanding of the tax administration ends up denying the benefit of the reduced rate to this type of prostheses, thus putting in question, without a reasonable rationale, the ratio legis that presided over the inclusion of this item in the terms in which it is worded – the protection of public health.
(…)
To be noted, finally, that, from the case law cited, even if they supposedly existed, such as the TA argues, "complete goods" of implant, in the sense that it intends to convey, we would always have to recognize that the crown, the abutment and the implant would constitute a single piece or, in any event, even if wrongly not thus understood, as accessory pieces, and as such should be taxed at the reduced rate, following the treatment of the main transaction." – Process 429/2014-T.
It is concluded from the above that item 2.6 of Annex I of the VAT Code should be interpreted strictly, since it constitutes a derogation from the general principle of taxation at the normal VAT rate, as encompassing the transactions involving complete implants or each of the components – crown, implant, abutments and connecting pieces, because they constitute dental implants when transferred separately.
Application to the Concrete Case
In view of the above, it is important to assess the legitimacy of the Applicant's claim, determining whether in the situation under judgment the reduced VAT rate contained in item 2.6 of Annex I of the VAT Code is or is not applicable.
Starting from a declarative and not restrictive interpretation of item 2.6 of Annex I of the VAT Code, it is understood that dental implants constitute prosthetic material intended to replace the dental apparatus, as is, moreover, considered by the Respondent itself (See, among others, article 25 of the Response).
As prostheses, dental implants are intended to replace an organ of the human body.
However, the Respondent considers that the reduced VAT rate provided for therein is not applicable to the transfer of connecting or fixation pieces, invoking the principle of strict interpretation.
However, it is understood that considering what is provided in the letter of the Law, in its strictest sense - "(…) devices and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body", as well as its rationale – to tax at the rate products specifically designed for the correction or compensation of deficiencies or for the replacement, total or partial, of organs or limbs of the human body - there is no foundation whatsoever to distinguish between the taxation of the implant, the abutment, the crown and the connecting pieces, depending on whether their transfer is joint or separate.
Since implants are constituted by crown, implant and abutment which, in accordance with surgical technique, are introduced in phases into the patient's mouth (See http://www.omd.pt/docs/folhetos/folhetoomdimplantesdentarios.pdf), thus giving rise, in their set, to an implant or composite prosthesis, the joint or separate transfer of the implant components is not relevant for the purpose of determining the VAT rate applicable.
Otherwise, (…) we would essentially be faced with an intolerable violation of the principle of neutrality that governs this tax at the level of EU law, treating equal goods in a different manner without any reasonable rationale, a fact that violates the rules governing this tax as well as all the case law of the CJEU to which we have referred." - Decision No. 429/2014-T of CAAD.
Furthermore, in view of the legal wording, nothing indicates that such a restriction was included in the legislative thought, so as to exclude composite prostheses and not removable and detachable prostheses and/or to distinguish the VAT rate applicable depending on whether the invoicing or commercialization is separate or joint.
Moreover, the legislator's intention in creating a reduced VAT rate in item 2.6, which constitutes a social benefit, is present whether the commercialization of prostheses is joint or separate and is linked to the oral health of persons.
Finally, ), "even if they supposedly existed, such as the TA argues, "complete goods" of implant, in the sense that it intends to convey, we would always have to recognize that the crown, the abutment and the implant would constitute a single piece or, in any event, even if wrongly not thus understood, as accessory pieces, and as such should be taxed at the reduced rate, following the treatment of the main transaction.
That is: whether only by recourse to the Community rules or by simple application of the good rules of hermeneutics, the result is the same – one can only conclude that item 2.6 of List I attached to the CIVA includes both implants constituted by a single piece as well as composite implants."- Decision of CAAD, in process 429/2014-T.
Having regard to the above, it is concluded that the VAT assessment acts in question suffer from error regarding the assumptions of law, due to misinterpretation of this item 2.6 of List I attached to the VAT Code.
Consequently, the VAT assessment acts object of the present decision, as well as the compensatory interest assessments, as consequential acts, must be annulled.
DECISION
Under these terms this Arbitral Tribunal decides:
To rule entirely in favor of the application for annulment of the VAT assessment acts and compensatory interest assessments, object of the present arbitration process;
To condemn the Respondent to pay the costs of the present process, as the defeated party.
VALUE OF THE CASE
In accordance with the provisions of article 306, paragraph 2 of the Code of Civil Procedure, 97-A of CPPT and article 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings the value of the application is fixed at €23,808.23.
COSTS
Pursuant to the provisions of articles 12, paragraph 2 and 22, paragraph 4, both of the LFATM, and article 4, paragraph 4 of the Regulations of Costs of Tax Arbitration Proceedings, the arbitration fee is set at €1,224.00, in accordance with Table I of the aforementioned Regulations, to be charged to the Respondent, given the total lack of merit of the application.
Notify.
Lisbon, 11 September 2015
The Arbitrator
Magda Feliciano
(The text of this decision was prepared by computer, in accordance with article 131, paragraph 5, of the Code of Civil Procedure, applicable by reference of article 29, paragraph 1, letter e) of Decree-Law No. 10/2011, of 20 January (LFATM) with its wording governed by the spelling prior to the Orthographic Agreement of 1990.)
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