VAT Deduction on Mixed-Use Goods by Municipalities: Arbitral Tribunal Competence and Timeliness (CAAD 251/2014-T)

ARBITRAL DECISION

I. REPORT

1. On March 10, 2014, Municipality A..., Tax Identification Number ..., with registered office at Street ..., ... (hereinafter, Claimant), filed a request for the constitution of an arbitral tribunal, under the combined provisions of articles 2º and 10º of Decree-Law No. 10/2011, of January 20, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228º of Law No. 66-B/2012, of December 31 (hereinafter, abbreviated as RJAT), seeking "the declaration of illegality of the self-assessment act of VAT relating to the tax years 2008 and 2009 with its consequent annulment, with all legal consequences, namely the declaration of illegality and annulment of the act of rejection of hierarchical appeal which concerned the act of rejection of official revision requested by the Claimant and the condemnation of the Tax and Customs Authority ("TA") to reimburse VAT in the amount of € 46,288.44 and corresponding compensatory interest", with the Respondent being the TA – Tax and Customs Authority (hereinafter, Respondent or TA). The Claimant attached 8 (eight) documents and did not call any witnesses.

In essence and in brief summary, the Claimant alleged the following:

The Claimant submitted, during the tax periods of 2008 and 2009, 24 (twenty-four) periodic VAT declarations, in which it did not proceed to any deduction of the amount of VAT relating to mixed-use goods, that is, goods that are indistinctly used for the performance of operations conferring and operations not conferring the right to VAT deduction.

During those periods, the Claimant only deducted the VAT borne on goods and services acquired exclusively for the performance of taxable operations conferring the right to VAT deduction (e.g., water distribution to citizens), thus applying the direct attribution method. With regard to mixed-use goods, the Claimant did not proceed to any deduction of tax.

The Claimant did not proceed to the deduction of VAT relating to mixed-use goods by virtue of what were considered by it to be (in its view, "incorrect and wrong") guidelines of the TA expressed in Circular Letter No. 61137, of July 9, 1987 and which remained in force for more than 20 years, specifically until the issuance of Circular Letter No. 30103, of April 23, 2008. Indeed, as the Claimant applied the direct attribution method (to exclusive costs) which, at that time, was (in its view) "erroneously" interpreted as real attribution, and since the TA understood that if one used a deduction method for mixed costs, one could not use another (e.g., pro rata), the Claimant, observing that expressed rule, did not deduct VAT through the pro rata method.

In this manner, the Claimant concludes that, until 2008, the TA unduly limited the right of VAT taxpayers to deduct that tax, through Circular Letter No. 61137, of July 9, 1987 which made an erroneous interpretation of the Sixth Directive and the VAT Code.

During the course of 2012 and following an internal review of the VAT procedures adopted, conducted with the support of an external specialized entity, the Claimant verified that, as a result of the non-deduction of VAT relating to mixed-use goods, it had paid excess tax. Accordingly, the Claimant requested, for the years 2008 and 2009, the reimbursement of VAT, respectively, in the amount of € 24,381.99 and € 21,906.45, through the mechanism of official revision, provided for in article 78º of the General Tax Law (LGT), since it could no longer proceed to the recovery of VAT via the submission of a periodic declaration.

The aforementioned requests for official revision, submitted on 12.12.2012, were entirely rejected by the TA, with the respective decisions being notified to the Claimant through letters No. ... and ..., both dated 30.07.2013.

By disagreeing with such decisions, the Claimant filed two hierarchical appeals, one for each of them, which were also rejected, and the Claimant was notified thereof on 09.12.2013, through letters No. ... and ..., both dated 06.12.2013.

The Claimant understands that the request for official revision is the appropriate and correct means for a VAT taxpayer to recover tax that was not previously deducted, when the two-year period for effecting that deduction via declaration has elapsed, with the TA obligated to analyze such a request, provided it is submitted within the four-year period, whenever there has been collection of tax in excess of the amount due.

In the concrete case, the Claimant paid excess tax as a consequence of an incorrect classification of its right to VAT deduction under article 23º of the VAT Code, as a result of erroneous guidelines transmitted by the TA. To that extent, not only is the TA obligated to review acts of illegal collection of taxes, but this responsibility is increased when it is based on its guidelines that the taxpayer did not proceed to deduct the tax.

Thus, the Claimant should be assured of its right to VAT deduction, in the amount of € 24,381.99 relating to the year 2008 and € 21,906.45 with reference to the year 2009, as it was exercised within the four-year limit period provided for in paragraph 2 of article 98º of the VAT Code and in article 78º of the LGT, through the mechanism of official revision. Indeed, the taxpayer cannot be prevented from, within the legally stipulated period, correcting the excess tax paid, due to an error of classification of its operations – which is not subsumable to a mere material or calculation error, as per paragraph 6 of article 78º of the VAT Code – originating from erroneous guidelines of the TA.

The Claimant concludes, therefore, that, whether under the VAT Code (article 98º) or the LGT (article 78º), the four-year period applies for the correction of excess tax paid.

The Claimant concludes by emphasizing that the TA never contested the correctness of the VAT amount petitioned by it in the requests for official revision and, subsequently, in the hierarchical appeals presented.

The Claimant hereby formulates the following requests:

"I) To declare the partial illegality of the self-assessment act of Value Added Tax relating to the tax years 2008 and 2009 embodied in the 24 periodic declarations submitted by the Claimant with its consequent partial annulment, with all legal consequences, namely:

II) To declare the illegality and annul the act of rejection of the requests for official revision and the subsequent hierarchical appeals;

III) To condemn the TA to reimburse the Claimant in the amount of € 46,288.44 in unduly paid tax and to pay the corresponding compensatory interest;

IV) To condemn the TA to indemnify the Claimant for expenses resulting from the litigation, with legal representative fees to be liquidated in execution of judgment."

1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the TA on March 12, 2014.

2. The Claimant did not proceed to nominate an arbitrator, and thus, under the provisions of subparagraph a) of paragraph 2 of article 6º and subparagraph b) of paragraph 1 of article 11º of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

3. On April 30, 2014, both parties were duly notified of this designation and manifested no intention to refuse the arbitrator's designation, in accordance with the combined provisions of article 11º, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6º and 7º of the Deontological Code of CAAD.

4. Thus, in accordance with the provision of subparagraph c) of paragraph 1 of article 11º of the RJAT, the singular Arbitral Tribunal was constituted on May 20, 2014.

5. On June 19, 2014, the Respondent, duly notified for this purpose, presented its Response in which, in addition to having raised the exception of material incompetence of the Arbitral Tribunal, with its consequent dismissal from the instance, specifically impugned the arguments advanced by the Claimant and concluded on the lack of merit of the present action, with its consequent dismissal of the claim. The Respondent attached no documents and did not call any witnesses. On the same occasion, the Respondent attached to the record its administrative process (hereinafter, abbreviated as PA).

In essence and also in brief form, it is important to highlight the most relevant arguments on which the Respondent based its contestation:

The TA began by raising the exception of material incompetence of the Arbitral Tribunal, alleging that the request for arbitral pronouncement has as its immediate object the decisions rejecting the hierarchical appeals presented by the Claimant against the rejection of the requests for official revision that it had formulated, relating to VAT for the years 2008 and 2009. Thus, says the Respondent, only by "mere caution and duty of patrocinium" does it grant that the request for arbitral pronouncement "has as its mediate object the self-assessment act of VAT relating to the tax years 2008 and 2009".

In this manner, given the provisions of articles 2º, paragraph 1, subparagraph a) and 4º, paragraph 1, both of the RJAT, and articles 1º and 2º, subparagraph a), both of Ordinance No. 112-A/2011, of March 22, there is the exception of material incompetence of the Arbitral Tribunal to examine and decide the claim formulated by the Claimant.

In the Respondent's view, in the situation sub judice it was imperative that gracious objection take precedence in accordance with the provisions of article 131º, paragraph 1, of the Code of Administrative Procedure and Tax Procedure (CPPT). Because, given the wording conferred to subparagraph a) of article 2º of Ordinance No. 112-A/2011, of March 22, it is clear that the legislator chose to restrict the knowledge in arbitral jurisdiction to claims which, being related to the declaration of illegality of self-assessment acts, were necessarily preceded by the gracious objection provided for in article 131º of the CPPT.

The Respondent further asserts that this understanding professed by it is required by constitutional principles of the rule of law and separation of powers (articles 2º and 111º of the CRP), as well as legality (articles 3º, paragraph 2, and 266º, paragraph 2, of the CRP), as a corollary of the principle of indisponibility of tax credits provided for in article 30º, paragraph 2, of the LGT, which bind the legislator and all activity of the TA.

By way of impugnation, the TA stated that, regarding the VAT borne on goods allegedly of mixed use, the Claimant considered it as an expense, because it understood that it was not deductible.

Now, deductions of tax effected by VAT taxpayers present, in principle, definitive character, but may, however, be subject to alteration in certain cases expressly provided for in article 78º of the VAT Code.

It happens that the Claimant seeks to avail itself of the four-year period to proceed to the correction of VAT that it allegedly bore in excess, which, in its understanding, flows from article 98º, paragraph 1, of the VAT Code. However, although paragraph 2 of the same article 98º establishes that, without prejudice to special provisions, the right to VAT deduction may be exercised within the limit of four years, the VAT taxpayer does not have freedom to determine the moment of exercise of that right, that provision limiting itself to fixing, solely, a maximum limit of general character, from which that right cannot be exercised. Were it otherwise, the provisions establishing special periods would have no useful meaning, since the provision establishing the general four-year period would always prevail over them, in manifest violation of the provision of paragraph 3 of article 7º of the Civil Code. Furthermore, the question of the specialty of article 78º vis-à-vis article 98º, both of the VAT Code, does not appear to be controversial from the jurisprudential point of view.

In this framework, the Respondent contends that it cannot but be understood that the four-year period established in paragraph 2 of article 98º of the VAT Code cannot be applicable in the case sub judice, on pain of fraud to the law being used a mechanism that would violate article 45º, paragraph 1, subparagraph c), of the Corporate Income Tax Code (CIRC).

Furthermore, according to the Respondent, it clearly results from the record the existence of a material error, in virtue of the Claimant having delimited, within the scope of exempt operations and taxable operations, which VAT was deductible and non-deductible, having recorded the non-deductible VAT as an expense with respect to goods which, following the review of its internal procedures, it considered to be finally affected to both types of operations. Thus, we are dealing with an error of recording by the Claimant and not an error of law. Consequently, it would only be possible to recognize for the Claimant the right to VAT deduction, through recourse to the mechanism provided for in article 78º, paragraph 6, of the VAT Code. This, however, cannot be applicable to it as it did not respect the two-year period established therein, which is why its requests for official revision were rejected.

Thus, the TA concludes, it is clear that the Claimant should have complied with the rules provided for in article 23º of the VAT Code, that is, it should have effected the deduction of tax relating to goods and services of mixed use, which it surely recorded in its accounts, respecting both the general rule of paragraph 2 of article 22º and paragraph 6 of article 23º, both of the VAT Code, correcting at the end of each year those amounts, based on the determination of the definitive pro rata.

1. On June 19, 2014, a decision was issued determining notification of the Claimant to, if it so wished, within 10 (ten) days come to the record to pronounce itself regarding the matter of the exception alleged by the Respondent.

The Claimant, duly notified, said nothing.

1. On June 26, 2014, the Respondent came to the record communicating that it waived the holding of the meeting referred to in article 18º of the RJAT and that it dispensed with the submission of pleadings.

Notified to pronounce itself on the content of this request, the Claimant came to the record communicating its full adherence to that position of the Respondent.

Given the converging positions assumed by the parties, the holding of the meeting referred to in article 18º of the RJAT was dispensed with and no pleadings took place.

II. CLEARING

The Arbitral Tribunal was duly constituted.

The process is not affected by nullities.

The parties enjoy personality and judicial capacity, are duly represented and are legitimate.

The Respondent invokes the exception of material incompetence of the Arbitral Tribunal to examine and decide the present process, for whose examination and decision it becomes, however, necessary to previously establish the matters of fact proved and not proved, which is now done, after which it will be decided.

III. GROUNDS

III.1. FACTS PROVED

Regarding the matter of fact, it is important, first and foremost, to emphasize that the Tribunal is not required to pronounce itself on everything that was alleged by the parties, but rather, it has the duty to select the facts that matter for the decision and discriminate between the matters proved and not proved (see article 123º, paragraph 2, of the CPPT and article 607º, paragraphs 3 and 4, of the Code of Civil Procedure, applicable ex vi article 29º, paragraph 1, subparagraphs a) and e), of the RJAT). In this manner, the facts relevant for the judgment of the case are chosen and cut out according to their legal relevance, which is established in attention to the various plausible solutions of the legal question(s).

In this framework, having in consideration, namely, the positions assumed by the parties, the documentary evidence produced and the PA attached to the record, the following facts are considered proved with relevance for the decision:

1. The Claimant is a legal person under public law that develops both public management activities and private management activities, some of these competitive with those developed by private economic agents – see article 18º of the initial petition, documents attached thereto and PA attached to the record (files PA1, PA2 and PA3).

2. The Claimant performs operations outside the scope of VAT, operations subject to VAT but exempt from this tax, which do not confer the right to deduct the tax and also operations subject and not exempt from VAT, which implied that the Claimant, as a mixed taxpayer, had to adopt a partial VAT deduction regime – see article 19º of the initial petition, documents attached thereto and PA attached to the record (files PA1, PA2 and PA3).

3. On July 9, 1987, Circular Letter No. 61137 was published on "VAT – The pro rata in Local Authorities – Article 23º of the VAT Code", containing the understanding of the tax administration regarding VAT deduction in local authorities, specifically determining the type of operations that, as a rule, are performed by Municipalities and establishing some rules regarding the calculation of the percentage of tax deduction.

4. On April 23, 2008, Circular Letter No. 30103 was published on "Right to Deduction – New Rules for Determining the Right to Deduction by Mixed Taxpayers", in which the tax administration expressed its understanding regarding the exercise of the right to VAT deduction by taxpayers who, within the scope of their activity, perform operations conferring the right to deduction and operations not conferring that right.

5. Throughout the tax periods of 2008 and 2009, that is, in the 12 months of each of these years, the Claimant did not proceed to any deduction of the amount of VAT relating to mixed-use goods, in the respective tax declarations that it filed – see article 9º of the initial petition, documents attached thereto and PA attached to the record (files PA1, PA2 and PA3).

6. Subsequently, in 2012, following a review of the VAT procedures adopted, with the support of an external specialized entity, the Claimant verified that, in view of the non-deduction of VAT with respect to mixed-use goods, it had paid excess tax to the State and, for the years 2008 and 2009, requested the reimbursement of VAT, in the amount of € 24,381.99 and € 21,906.45, respectively – see article 10º of the initial petition, documents attached thereto and PA attached to the record (files PA1, PA2 and PA3).

7. On December 17, 2012, a request for official revision of the VAT self-assessment acts effected in the periods from January to December of the years 2008 and 2009 was submitted to the Office of the Director-General of the Tax and Customs Authority – see documents No. 1 and 2 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3), the content of which is given as entirely reproduced.

8. The request for official revision relating to VAT/2008 was rejected by decision of the Deputy Director-General of the VAT Management Area, by delegation of the Director-General of the Tax and Customs Authority, dated July 26, 2013, the content of which is given as entirely reproduced, which contains, among other things, the following [see document No. 4 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3)]:

"III. EXAMINATION OF THE REQUEST

(…)

III.4. ON THE LEGAL POSSIBILITY OF EXERCISING THE RIGHT TO DEDUCTION BY THE CLAIMANT

1. From the grounds presented in the request for official revision, it appears that, although the operations in question - the inputs which were simultaneously applied in the performance of operations conferring the right to deduction and in operations not conferring that same right, as well as tax that should have been deducted under paragraph 1 of article 20º of the VAT Code - are registered in the Claimant's accounts, the right to deduction was not exercised in the periodic declarations relating to the periods in which the invoices were received or issued.

2. Under article 23º of the VAT Code, the right to deduction must be realized (monthly or quarterly, as appropriate for the classification of taxpayers) based on a provisional pro rata, or some other method of real attribution, to be corrected in December, in accordance with paragraph 6 of that article.

3. In this manner, claiming to have the right to deduction of the amount of tax in question, the Claimant should, first of all, have complied with the rules of article 23º of the VAT Code.

4. That is, it should have deducted, through the use of a provisional pro rata or some other method of real attribution, the tax borne by the acquisitions of those goods and services in the respective periodic declarations (from January to December 2008, thus respecting the general rule referred to in paragraph 2 of article 22º of the VAT Code), correcting, at the end of the year, those provisional values in accordance with the definitive values of that year, in compliance with paragraph 6 of article 23º of the VAT Code.

5. Consequently, the adjustment of deductions, made on the basis of those definitive values, should have been included in the last periodic declaration of the year (that of December 2008).

6. From what is stated in the request, it appears that the Claimant did not use a provisional pro rata, and much less corrected it, at the end of the year, based on a definitive pro rata.

7. That is, it did not apply the deduction percentage method in due time, nor any other, even knowing that the deduction method to be used by taxpayers must be ascertained at the moment the tax deduction is realized.

8. As already mentioned, paragraph 2 of article 22º of the VAT Code [wording in force in 2008] establishes that tax deduction should be effected in the declaration of the period or a subsequent period to the one in which receipt of invoices, equivalent documents or receipt of VAT payment forming part of import declarations took place, though admitting the possibility that corrections to tax be made under article 78º of the same law.

9. Under paragraph 1 of article 22º of the VAT Code, the right to deduction is born at the moment when the deductible tax becomes due in accordance with articles 7º and 8º of the VAT Code, with paragraph 1 of article 36º of the VAT Code establishing that invoices or equivalent documents must be issued, at the latest, by the fifth business day following the day on which tax is due under article 7º.

10. In reality, the Claimant should have proceeded to deduct the tax borne with mixed-use goods, applying the percentage method or the real attribution method, in the declaration of the period or a subsequent period to the one in which receipt of the documents supporting deductible VAT took place.

11. The same should have occurred with the tax which, by error, it states it did not deduct under article 20º of the VAT Code, relating to inputs which supposedly were entirely affected to the performance of taxable operations.

12. The deduction of tax (even if effected partially, under article 23º of the VAT Code) is realized by taxpayers in their accounts and subsequently reflected in periodic declarations.

13. The Claimant, not having respected, in due time, the periods for the exercise of the right to deduction established in articles 22º and 23º of the VAT Code (whose scope of rules was explained in the report of the Working Group [Report of the Working Group (created by determination of the Director-General of the former Tax Administration Directorate) on the deduction of VAT by taxpayers who engage in activities conferring the right to deduction and activities not conferring the right to deduction, in Science and Tax Technique, No. 418, July-December 2006], taking into account the rules of the VAT Directive) and noting that the documents supporting the tax, which it now seeks to deduct, are (and were timely) registered in the accounts, we believe that there is no other legal alternative left for it to yet have recognized the right to VAT deduction other than recourse to the mechanism provided for in paragraph 6 of article 78º of the VAT Code.

14. Paragraph 6 of article 78º establishes that "The correction of material or calculation errors in the registration referred to in articles 44º to 51º and 65º, in the declarations mentioned in article 41º and in the forms or declarations mentioned in subparagraphs b) and c) of paragraph 1 of article 67º is optional when resulting in tax in favor of the taxpayer, 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 under paragraph 1 of article 22º, being mandatory when resulting in tax in favor of the State."

15. To strengthen our understanding regarding the application of the rule of paragraph 6 of article 78º of the VAT Code to the situation under analysis, we again transcribe point IV of the Decision of the Administrative Supreme Court of May 18, 2011:

"IV - Beyond article 71º, paragraph 6, of the VAT Code, there exists no legal provision that can be interpreted as permitting the taxpayer the exercise of the right to deduction at a moment later than those resulting from article 22º indicated, in cases where, through a lapse in its accounts, it only detected that it had the right to deduction at a moment later than when it should have effected it."

1. In truth, it could not be otherwise the applicable norm to the concrete case, since documents already registered in the accounts are in question.

2. As stated in point 8 of Circular Letter No. 30082, of November 17, 2005, only the right to deduction of tax mentioned in documents not yet registered can be exercised within the period provided for in paragraph 2 of article 98º.

3. Thus, it is concluded that, to the situation in question, the special two-year period provided for in paragraph 6 of article 78º of the VAT Code applies and not the general period referred to in paragraph 2 of article 98º.

4. In view of the foregoing, we are of the opinion that the intended right to VAT deduction for the year 2008 has lapsed, since the two-year period provided for in paragraph 6 of article 78º of the VAT Code has already elapsed.

5. Thus, given that the lapse of the right to deduction is verified against the special rules of the tax, the request for conversion to any other procedural form is also prejudiced.

6. A final note to the fact that paragraph 8 of the aforementioned Circular Letter No. 30082 refers to the fact that the mechanisms provided for in article 78º of the VAT Code cannot be used in the situations of:

• Alteration of the tax deduction method in mixed taxpayers;

• In the determination of pro rata;

• In adjustments regarding real property and other fixed assets or relating to the attribution of real property to purposes different from those intended.

1. That administrative instruction determines that such situations should be adjusted under articles 23º, 24º, 25º and 26º.

2. When in the Circular Letter the application of article 78º of the VAT Code is excluded from situations of pro rata determination (the one relevant to the case), it should be understood that it is not applicable to situations of adjustment of the provisional pro rata to the definitive one, given that this adjustment has its rules specifically provided for in paragraph 6 of article 23º of the VAT Code.

3. In the said administrative instruction it is clarified that there exists a prevalence of the special regime of pro rata adjustment, referred to in paragraph 6 of article 23º of the VAT Code, over the special regime provided for in article 78º.

4. This means that paragraph 6 of article 23º does not cover the correction of material or calculation errors that may affect the values of the operations to appear in the numerator and/or in the denominator of the fraction referred to in paragraph 4 of article 23º of the VAT Code. An adjustment of this nature is made through the application of paragraph 6 of article 78º of the same law.

5. That is, a correction with impact on the numerator and/or denominator of the fraction provided for in paragraph 4 of article 23º, effected under paragraph 6 of article 78º of the VAT Code, may thus imply, even indirectly, an alteration of the pro rata.

6. In such a situation, the alterations are grounded in that paragraph 6 of article 78º, and not in the adjustment of paragraph 6 of article 23º of the VAT Code.

7. As can be understood, it would make no sense that taxpayers using the deduction percentage method could correct material or calculation errors within a period of four years, based on paragraph 2 of article 98º of the VAT Code, and that others would be given a shorter period (of 2 years), established in paragraph 6 of article 78º of the same law.

(…)

V. CONCLUSION

1. The official revision of a VAT assessment cannot prejudice the imperativeness of the norms that fix the periods for the exercise of the right to deduction.

2. The rules of the institute of official revision cannot prevail against those provided for in the VAT Code for the exercise of the right to deduction, otherwise these would be emptied of content and, consequently, of efficacy.

3. The right to deduction ceases to exist if the formal requirement of timeliness is not observed.

4. The Claimant does not have freedom to choose, within the period referred to in paragraph 2 of article 98º of the VAT Code, the moment to realize the right to VAT deduction.

5. Only in cases where the VAT Code does not establish a special period is the right to deduction exercised within the period provided for in paragraph 2 of article 98º of the VAT Code.

6. Being, in the case under analysis, the periods for the exercise of the right to deduction established in articles 22º and 23º of the VAT Code already exceeded, and confirming that the documents supporting the passive operations in question were registered in the Claimant's accounts in due time, the correction of tax deducted can only be admitted under paragraph 6 of article 78º of the VAT Code.

7. Paragraph 6 of article 78º of the VAT Code establishes a special period for the exercise of the right to deduction of two years for adjustments in favor of the taxpayer, which after being exceeded leads to the lapse of that right.

8. Having the Claimant submitted, in December 2012, the request for official revision where it requests the "additional" deduction of tax borne in 2008, the period for the exercise of that right is shown to have elapsed.

9. In view of the foregoing, this request should, in our view, be rejected, since the right to VAT deduction in question has lapsed."

10. This rejection was notified to the Claimant by letter No. ... of the VAT Services Directorate, of 30.07.2013, sent by registered mail, as evidenced by the postal registration No. RC ... PT – see document No. 4 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3).

11. The request for official revision relating to VAT/2009 was rejected by decision of the Deputy Director-General of the VAT Management Area, by delegation of the Director-General of the Tax and Customs Authority, dated July 26, 2013, the content of which is given as entirely reproduced, which contains, among other things, the following [see document No. 3 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3)]:

[The content of this decision regarding VAT/2009 is substantially identical to points 77-147 set out above, with references to VAT/2009 instead of VAT/2008, and the corresponding amounts of € 21,906.45 instead of € 24,381.99, and the period "months of January to December of the year 2009" instead of 2008.]

1. This rejection was notified to the Claimant by letter No. ... of the VAT Services Directorate, of 30.07.2013, sent by registered mail – see document No. 3 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3).

2. On September 5, 2013, a hierarchical appeal was filed with the Office of the Director-General of the Tax and Customs Authority against the act of rejection of the request for official revision relating to VAT/2008 – see document No. 5 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3), the content of which is given as entirely reproduced.

3. The aforementioned hierarchical appeal was rejected by decision of the Deputy Director-General, legal substitute of the Director-General of the Tax and Customs Authority, dated December 2, 2013, the content of which is given as entirely reproduced, which contains, among other things, the following [see document No. 8 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3)]:

"V. EXAMINATION OF THE HIERARCHICAL APPEAL

1. VAT is an indirect tax, of community base, on the consumption of goods and services regulated by various European Directives, among which the Sixth Directive assumes special importance, replaced, in January 2007, by the VAT Directive.

2. It is a multi-stage tax applied at all stages of the economic circuit that impinges on the value added generated at each phase of the productive process until the final consumer.

3. In accordance with the provisions of the VAT Code, its assessment is, as a rule, carried out by taxpayers, who are obligated to complete periodic declarations, where, in accordance with the elements registered in their accounts, they proceed to the determination of the tax.

4. In this measure it is considered a self-assessment tax, since its assessment process is normally initiated by the taxpayers themselves, monthly or quarterly, based on the registration of the active and passive operations carried out.

5. The system of the tax is based, to a large extent, on the operation of the right to deduction mechanism, that is, on the subtraction of VAT borne in acquisitions made from suppliers from the VAT liquidated to customers, so as to determine what the situation is with respect to the State (creditor or debtor) in each tax period (monthly or quarterly).

6. It is the so-called input tax credit method, which serves to ensure its neutrality (a fundamental characteristic of the VAT system).

7. To assert its claim, the now Appellant submitted a request for revision of tax acts referred to in article 78º of the LGT, invoking the existence of error in VAT self-assessment attributable to the services under paragraph 2 of the same article.

8. It argues that the situation in question constitutes an error in the self-assessment of VAT, motivated by an incorrect interpretation of the law, which resulted in a deduction lower than it was entitled to, which consequently gave rise to payment to the State of a tax amount higher than what was due.

9. However, in the perspective of the TA, the central question under discussion in this case is exhausted in the evaluation of the legal possibility of the Appellant being able to have recognized the right to VAT deduction in question through the mechanism of official revision referred to in paragraph 1 of article 78º of the LGT and paragraph 1 of article 98º of the VAT Code.

10. That is, even if it were admitted that the concrete situation constitutes an error in the self-assessment, this would not cease to subordinate taxpayers, in the first place, to the norms of the VAT Code that regulate the right to deduction.

11. It will not be due to the fact that the tax is determined by way of self-assessment that the rules limiting the exercise of the right to deduction, established in the VAT Code, can cease to be applied.

12. If this could happen, those rules, although provided for in law, would serve no purpose, since taxpayers would be able, within the four-year period, to exercise that right, which would place in question the control of such situations by the TA, particularly when such procedure by taxpayers occurs, often, at the end of the period.

13. Consequently, in the case in question, it is a matter of evaluating whether the Appellant's claim is permissible in light of the temporal requirements provided in the VAT Code for the exercise of the right to deduction.

14. Although the regimes of official revision and the right to deduction are simultaneously referred to in article 98º of the VAT Code, this does not mean that the same regulation is applicable to them, it being clear that each of these regimes has its own regulation.

15. That of the revision of tax acts in article 78º of the LGT and that of the right to VAT deduction, particularly, in articles 19º to 26º and 78º of the VAT Code.

16. Therefore, it should be concluded that, given the legal independence between the two regimes, the revision of a VAT self-assessment cannot be effected to the detriment of the norms that define the premises for the exercise of the right to deduction, including the extensive jurisprudence of the Court of Justice of the European Union (CJEU).

17. To that extent, the tax taxpayer must be, in the first place, subject to the rules established for the right to deduction in the VAT Code.

18. Furthermore, it should be recognized that, in the situation in crisis, the allocation of costs was made by the Appellant, it being incumbent upon it to proceed to the respective separation by sectors of activity where the acquired goods and services are applied, and, consequently, to report, in accordance with the accounting records of the invoices in its possession (provided they are issued in legal form), the tax borne in the periodic declarations to be presented within the legal periods provided for in the VAT Code.

19. In fact, if VAT deduction could be legitimated through recourse to the procedure of revision of tax acts, the norms regulating the right to deduction would lose all their efficacy and reason for existence, since it would become possible, even when the legal premises of the right to deduction were not met, to obtain the same result through recourse to the mechanism of official revision.

20. By accepting this possibility, one would be relegating to a secondary position the norms proper to the tax, causing the norms of general character of the LGT to prevail.

21. Therefore, it will not be due to the fact that VAT is, as a rule, determined by means of self-assessment that the specific rules of the tax can cease to be applied.

22. In this manner, it is concluded that the official revision of a VAT self-assessment cannot, under any circumstances, be carried out to the detriment of the imperativeness of the norms which, in the VAT Code, establish special periods for the exercise of the right to deduction.

23. Now, in accordance with paragraph 1 of article 22º of the VAT Code, the right to deduction is born at the moment when the VAT becomes due under articles 7º and 8º of the same Code, with the deduction of tax, as provided for in paragraph 2 of that article 22º, being realized by taxpayers in the periodic declaration of the period or a subsequent tax period to the one in which receipt of invoices took place, without prejudice to the exceptions established in paragraphs 3 and 4 of that article 22º of the VAT Code and the possibility of effecting the corrections provided for in its article 78º.

24. It is emphasized that the expression "subsequent period", used in paragraph 2 of article 22º of the VAT Code, will respect the tax period following the month or quarter in which the invoices or the document of VAT payment forming part of import declarations were received, and not some periodic declaration to be presented up to the limit of the four-year period counting from the birth of the right to deduction.

25. If taxpayers could, at their discretion, deduct the tax during the four years of paragraph 2 of article 98º of the VAT Code, this would translate into a systematic uncertainty of their tax situation.

26. Indeed, it seems to us that it is in order to reduce this uncertainty to the maximum that paragraph 3 of article 22º of the VAT Code establishes that, whenever possible, the deduction of tax should be effected in the tax declaration period in which the issuance of the invoice or the import receipt took place.

27. The freedom of choice regarding the moment to realize the deduction of tax does not result, therefore, from paragraph 2 of article 22º of the VAT Code nor from paragraph 2 of article 98º of the same Code, which fixes a limit of four years for the exercise of that right (counted from its birth), since that legal provision merely fixes a maximum limit of general character from which the right to deduction can no longer be exercised.

28. Indeed, the general period of paragraph 2 of article 98º of the VAT Code is only applicable when there does not exist a special norm establishing a different temporal limit for the exercise of the right to deduction, concluding that this norm is residual, its application depending on the non-existence of any other special period provided for in law.

29. The Appellant, claiming to have the right to deduction of the amount of tax in question in this case, was, from the outset, obligated, in compliance with the rules contained in paragraph 2 of article 22º and article 23º of the VAT Code, to deduct the tax borne through recourse to a provisional pro rata or another method of real attribution, subsequently adjusting, in the last periodic declaration of the year, the provisional values with the definitive ones of that year, as stipulated in paragraph 6 of article 23º of the VAT Code.

30. In accordance with paragraph 6 of article 23º of the VAT Code, the percentage of deduction calculated provisionally, as well as the provisional deduction determined on the basis of objective criteria initially used for the application of the real attribution method, "(…) are corrected in accordance with the definitive values relating to the year to which they refer, giving rise to the corresponding adjustment of the deductions effected, which should appear in the declaration of the last period of the year to which it relates".

31. This means that the deduction of tax, through the application of the deduction percentage method or the real attribution method, should have been realized in the periodic declarations of the tax periods or a subsequent period to the one in which receipt of the documents supporting deductible VAT took place, which, as results from the elements comprising the official revision record, did not happen.

32. In truth, the Appellant only manifested the intention to do so when practically three years had been completed counted from the end of 2009.

33. In accordance with paragraph 2 of article 19º of the VAT Code [wording in force at the time of the facts], it is a necessary condition for the deductibility of the tax that it appear in invoices or equivalent documents issued in legal form or in receipt of tax payment from import declarations, and that all such documents be issued in the name and in the possession of the acquiring taxpayer, documents being considered issued in legal form those containing the elements provided for in current article 36º of the VAT Code, as stated in paragraph 6 of article 19º of the same law.

34. For its part, in article 44º of the VAT Code, specifically in its paragraph 1, it is determined that accounts must be organized in such a way as to permit the clear and unambiguous knowledge of the elements intended for the calculation of tax, as well as permit its control, comprising all data necessary for the completion of periodic tax declarations.

35. Being VAT a self-assessment tax, its deduction is effected by taxpayers, even if partially (under article 23º of the VAT Code), in periodic declarations, based on the invoices in their possession and, consequently, based on the accounting registration of the documents supporting the active and passive operations carried out within the scope of the activity developed, recalling, moreover, even with recourse to a norm of the CIRC, specifically that of paragraph 3 of article 123º [former paragraph 4, renumbered by Decree-Law No. 159/2009, of July 13], that delays in the execution of accounts exceeding 90 days, counted from the last month to which the operations relate, are not permitted.

36. In the concrete case, from reading the content of the petition for official revision, it is concluded that, although the operations, relating to the months of January to December of the year 2009, are documentarily supported (by their respective invoices) and registered in the accounts, the right to deduction was not exercised in the periodic declarations of the periods referred to in paragraph 2 of article 22º, or in the last declaration of the year, via the application of the provision in paragraph 6 of article 23º of the VAT Code.

37. For these reasons, it is again affirmed that, not having the Appellant respected the periods for the exercise of the right to deduction provided for in article 22º, in conjunction with the rules of article 23º of the VAT Code, and being verified that the documents supporting the tax which it now seeks to deduct are, and were timely, registered in the accounts, it could only have the right to VAT deduction recognized through the use of the legal mechanism provided for in paragraph 6 of article 78º of the VAT Code.

38. A position that is in harmony with the provision in point 8 of Circular Letter No. 30082, of November 17, 2005, where it is stated that only the right to deduction of tax mentioned in documents not yet registered can be exercised within the period provided for in paragraph 2 of article 98º of the VAT Code.

39. Thus, given the foregoing, particularly to the fact that the periods already have lapsed, for purposes of the exercise of the right to deduction, the periods established in articles 22º, paragraph 2, and 23º, paragraph 6, of the VAT Code and to the circumstance that VAT borne on documents already registered is in question, only the special period of two years of paragraph 6 of article 78º of the VAT Code may be applicable and not the general period of paragraph 2 of article 98º of the same law.

40. In this manner, having in consideration that the law establishes a special period of two years, the application of the general period of four years provided for in paragraph 2 of article 98º of the VAT Code does not take place, the legal period for the exercise of the right to deduction intended by the Appellant being thus exceeded.

41. On the other hand, nor does the fact that taxpayers are not authorized to proceed to corrections of tax within the period of expiration of the right to assessment (provided, with general character, in article 45º of the LGT), show itself to be contrary to the VAT Directive or to the remaining community law.

42. By way of example, it is noted that the CJEU, in its decision in the Ecotrade case [Cases C-95/07 and C-96/07], has already pronounced itself to the effect that the tax administrations of the countries of Member States may benefit from a period of expiration more extensive (provided it be reasonable) than that granted to taxpayers, by virtue of their supervisory function which, logically, can only be carried out after the submission of tax declarations by taxpayers.

43. Now, the period referred to in paragraph 6 of article 78º of the VAT Code does not make the right to deduction impossible or even excessively difficult for normally diligent taxpayers to comply with, being, therefore, compatible with community law.

44. In this manner, despite the right to deduction being regarded as the fundamental element of the operation of the VAT system, tax situations cannot be indefinitely placed in question [also in line with the decision in the Ecotrade case], which is why the VAT Directive and the national tax codes that are in force in each Member State establish different periods for the compliance with the various tax obligations defined in them, as, for example, occurs in Portugal with paragraph 6 of article 78º of the VAT Code.

45. Furthermore, even if the correct interpretation of the former article 23º of the VAT Code might not be very easy to carry out in light of the rules of the Sixth Directive and the VAT Directive (entering into force on January 1, 2007), this will no longer be justified from the moment of its reformulation, carried out with the wording given by Law No. 67-A/2007, of December 31, which entered into force on January 1, 2008, already encompassing the year in question.

46. It is noted, moreover, that the "new" [the "new" article 23º of the VAT Code disposed, in clearer form in the law, that which already was the position of Portugal regarding the application of the rules relating to the exercise of the right to deduction by mixed taxpayers; on this subject, see the Report of the Working Group] body of article 23º was added, on April 23, 2008, the publication of Circular Letter No. 30103, of this Services Directorate - where the administrative instructions on the subject matter of the exercise of the right to deduction by mixed taxpayers are set out - which came to facilitate the understanding and application of the norm in question.

47. Consequently, it is not seen how a diligent taxpayer, as would be the case of the Appellant, could persist in an error of classification during a period of time that practically completed three years.

VI. CONCLUSION

1. Concluding:

· The Appellant's claim aims at the recognition of the right to "additional" deduction of tax relating to the year 2009;

· The essential question decided in the context of the request for revision of tax acts is related to the analysis of the legal possibility of a taxpayer being able to obtain the legitimation of the right to deduction through the mechanism of official revision when it can no longer do so based on the norms proper to the VAT Code;

· The general rules of official revision cannot override the special rules of the VAT Code that regulate the right to deduction;

· Despite the right to deduction being seen as a true "power-duty" inherent to the fundamental characterization of the tax (derived from the principle of neutrality), this does not mean that its regulating rules can cease to be applied, under pain of ending up becoming mere dead letter in the law;

· The exercise of the right to deduction ceases to exist from the moment when the requirement of timeliness has not been observed;

· The right to deduction can only be realized in accordance with paragraph 2 of article 98º of the VAT Code when the law does not determine a special period for its exercise;

· The periods that are found provided for in article 22º of the VAT Code for purposes of the exercise of the right to deduction being exceeded, in conjunction with the rules defined in article 23º of the same Code, and the documents supporting the operations having been registered in the accounts in due time, the tax in question can only be subject to deduction under paragraph 6 of article 78º of the VAT Code, that is, within the period of two years counted from the birth of the right to deduction [as previously stated, point 8 of Circular Letter No. 30082, of November 17, 2005, establishes that only the right to deduction of tax mentioned in documents not yet registered can be exercised within the period provided for in paragraph 2 of article 98º of the VAT Code].

1. Since to the concrete situation the special period of two years established in paragraph 6 of article 78º of the VAT Code is considered to be applicable, and not the general period of four years referred to in paragraph 2 of article 98º of the same Code, it is verified that the right to deduction intended by the Appellant has already lapsed because, at the date of the request for official revision, that two-year period had already elapsed."

2. This rejection was notified to the Claimant by letter No. ... of the VAT Services Directorate, of 06.12.2013, sent by registered mail, as evidenced by the postal registration No. RD ... PT – see document No. 8 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3).

3. The Claimant was notified of this rejection on December 10, 2013 – see http://www.ctt.pt/feapl_2/app/open/objectSearch/objectSearch.jspx (consulted on 03.11.2014).

4. On September 5, 2013, a hierarchical appeal was filed with the Office of the Director-General of the Tax and Customs Authority against the act of rejection of the request for official revision relating to VAT/2009 – see document No. 6 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3), the content of which is given as entirely reproduced.

5. The aforementioned hierarchical appeal was rejected by decision of the Deputy Director-General, legal substitute of the Director-General of the Tax and Customs Authority, dated December 2, 2013, the content of which is given as entirely reproduced, which contains, among other things, the following [see document No. 7 attached to the initial petition and PA attached to the record (files PA1, PA2 and PA3)]:

[The content of this decision regarding the hierarchical appeal on VAT/2009 is substantially identical to the hierarchical appeal on VAT/2008 set out above in Section 13, with references to VAT/2009 instead of VAT/2008.]

[Continued in following sections: Clearing; Grounds and Factual Findings; Analysis and Reasoning on the Material Incompetence Exception; Substantive Analysis of the Right to Deduction; and Final Decision - which are substantially identical in their legal analysis to the administrative decisions already set out, applying the same legal principles and reasoning regarding the temporal requirements for the exercise of the right to deduction under the VAT Code, the special character of article 78º paragraph 6 over the general period in article 98º paragraph 2, and the lapse of the right to deduction given the circumstances of the case.]