VAT Exemption and Competition Distortion: CAAD Arbitration Case 274/2016-T on Lack of Reasoning

ARBITRAL DECISION

Process No. 274/2016-T

The arbitrators Counsellor Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. José Nunes Barata and Prof. Dr. Nina Aguiar (arbitrators), appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, constituted on 25-07-2016, agree as follows:

1. Report

A…, (hereinafter referred to as A… or "Claimant") legal entity No. …, with registered office in …, …, in the city of …, came, under the provisions of arts. 2, No. 1, subparagraph a) and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters - RJAT), to file a request for arbitral determination with a view to annul the following additional VAT assessments and compensatory interest:

Additional VAT assessments (cf. doc. No. 2):

• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. 2015 … (set-off No. 2015…); and
• No. 2015 … (set-off No. 2015…).

Assessments of compensatory interest (cf. doc. No. 2):

• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. 2015… (set-off No. 2015…); and
• No. 2015 … (set-off No. 2015…).

The Claimant also contested an additional Corporate Income Tax assessment, but following the Arbitral Tribunal's decision that the cumulative application was illegal, it opted to contest only the VAT assessments and compensatory interest.

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of the Center for Administrative Arbitration and automatically notified to the Tax Authority and Customs Authority on 24-05-2016.

In accordance with the provisions of subparagraph a) of No. 2 of article 6 and subparagraph b) of No. 1 of article 11 of the RJAT, in the version introduced by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

On 08-07-2016 the parties were duly notified of this appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, No. 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of subparagraph c) of No. 1 of article 11 of the RJAT, in the version introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 25-07-2016.

The Tax Authority and Customs Authority responded defending that the claim should be judged unsubstantiated.

On 04-01-2017, a hearing took place in which witnesses were examined and it was agreed that the proceedings would continue with written submissions.

Only the Claimant presented submissions.

The arbitral tribunal was regularly constituted in accordance with the provisions of arts. 2, No. 1, subparagraph a), and 10, No. 1, of Decree-Law No. 10/2011, of 20 January, and is competent.

The parties are duly represented, enjoy legal personality and capacity, are entitled parties and are represented (arts. 4 and 10, No. 2, of the same instrument and art. 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from defects and there are no exceptions or obstacles to the examination of the merits of the case.

2. Statement of Facts

2.1. Proved Facts

On the basis of the documents contained in the file and documents attached to the request for arbitral determination, the following facts are deemed proved:

a) The Claimant A… is a public-interest cooperative constituted by public deed executed on 22-01-1999, with bylaws published in the Official Gazette No. … - IEI Series, of …-12-2000.

b) The Claimant is also a legal entity under public law;

c) The Claimant was created at the initiative of the Municipal Council of…, in the form of a Cooperative Business (legal entity under public law);

d) The Claimant has 65 cooperative members, with the Municipal Council of … being its principal member (with 12,000 shares), the others being various associations, other entities and several individuals;

e) The Claimant is registered for the following activities:

– Principal CAE … OTHER SPORTS ACTIVITIES. N.E.

– Secondary CAE … OPERATION OF ENTERTAINMENT VENUES AND RELATED ACTIVITIES

– Secondary CAE … PROVISION OF CATERING SERVICES FOR EVENTS

– Secondary CAE … OTHER HUMAN HEALTH ACTIVITIES, N.E

f) The Claimant has its social registered office in … and employs approximately one hundred employees, distributed across the various facilities under its management;

g) Its field of activity is directed along two fundamental axes:

– Management of the municipal sports park, falling under its responsibility in the year under analysis, the Pavilion…, the Swimming Complex, the…, Recreational and leisure outdoor swimming pools, the Swimming Pools of…, the Athletics Track…, the Municipal Sports Pavilion of…, the Pavilion …(…), the Sports Pavilion of…, the Pavilion of the …, the Municipal Pavilion … - … and the Gymnasium Pavilions of Primary Schools 2,3 of…, …, …and…;

• Promotion and encouragement of sports practice in the Municipality of…, privileging equal opportunities for access to non-competitive sports, developing socio-sports animation projects and occupation of free time and leisure;

h) The Claimant also administratively manages B…, a service aimed at all athletes, whether or not integrated into the federated system and/or the school system;

i) In the context of the management of the municipal sports park and the promotion and encouragement of sports practice in the Municipality of…, A… develops several projects aimed at achieving its objectives, such as:

Curriculum Enrichment Project

It is a project complementary to the educational curriculum, which includes Primary Schools of Basic Education and allows A…, through teachers licensed in physical education, to give weekly classes of physical and sports initiation to all students of schools in the Municipality.

Sports Holidays

Aimed at children aged between 7 and 14 years, A… develops a project for occupation of young people's free time during periods of interruption of school activity - Easter, Summer and Christmas. Taking advantage of the sports facilities it manages and the physical education teachers in its service, it seeks to provide occupation for young people in each of the periods, with sports and recreational activities.

j) For VAT purposes, it is a taxpayer subject to the tax, mixed with pro rata, under the terms of subparagraph a) of No. 1 of article 2 of the VAT Code (CIVA), under the normal monthly periodicity regime;

k) A tax inspection action was carried out on the Claimant under Service Order OI2015…, concerning the year 2011;

l) The Claimant was notified to exercise the right to be heard, based on a Draft Tax Inspection Report, and in that exercise presented the text contained in document No. 2, attached to the request for arbitral determination, the content of which is deemed reproduced herein, in which, among other things, it requested the examination of a witness, as it "considers it essential to the discovery of material truth, in particular to the clarification of the alleged facts".

m) The Tax Authority and Customs Authority did not proceed to examine the witness;

n) In that inspection the Tax Inspection Report was prepared which is contained in the administrative file, the content of which is deemed reproduced herein, in which it states, among other things, the following:

III - DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETICAL CORRECTIONS TO THE TAXABLE AMOUNT

"1. From the analysis of the operational characteristics of the taxpayer and all activities developed by it, from the accounting records and corresponding documentation supporting the transactions carried out, we detected the following irregularities:

III -1. VAT

III - 1.1 PROVISION OF SERVICES AND VAT CHARGED

1. From the analysis of the income recorded by the taxpayer in the sub-accounts … - Provision of Services - Service A - Domestic Market and … - Provision of Services - Service B - Domestic Market, we verified that A… is responsible for the management of the municipal sports park, falling under its responsibility, in addition to the Pavilion…, the Swimming Complex, the …- Recreational and leisure outdoor swimming pools, the Swimming Pool of…, the Athletics Track…, several sports pavilions (…, …, …, of…, and…) and the Gymnasium Pavilions of some schools in the municipality.

2. We verified, according to accounting records, that the taxpayer charges VAT, at the reduced rate (6%), at the intermediate rate (13%) and at the standard rate (23%), in the provision of services and sales related to the activities it develops in the Pavilion … (sale of tickets for performances, rental of various components of the Pavilion…, catering services, etc.), with the … (outdoor pools/aquatic park) (sale of tickets/entrance, rental of related equipment - parasol, deckchair, etc.), and with the outdoor swimming pool of … (entrance ticket, etc.).

3. The same does not occur with regard to other facilities, such as the services provided at the Swimming Complex (a facility that includes indoor pools and a gymnasium) and at the Track and in the Pavilions, where the same services provided are taxed differently, that is, we found that it is normal practice to issue invoices/cash sales with VAT at the reduced rate, when the customer is a legal entity/collective person, and that when it comes to provision of services where the end consumer is the general public (users), the taxpayer proceeds to issue "Cash Sales", with VAT exemption applying to them the exemption provided in subparagraph 8) of article 9 of the CIVA.

4. It is thus verified that the regime of VAT liability and/or exemption in the provision of services for sports practice is carried out by A… based on the characteristic of the user, that is, VAT exemption is applied in these provision of services, when carried out by persons (user - general public) who practise these activities.

5. Since the exemption in question can be applied to entities, provided it is for use by persons who practise the activities - Administrative Court of Law judgment of 2010-09-22, process 0427/10, it was not applied by the taxpayer.

6. In ANNEX III of the report we attach the description of the activities, namely swimming, gymnasium, dance academy and fitness, sports pavilions and track, as it appears on the website of A… - www.A....pt - activities which the taxpayer exempted under subparagraph 8) of article 9 of the CIVA

III-1.1.1 SWIMMING COMPLEX

1. In the documents issued by the taxpayer, for the provision of services carried out at the Swimming Complex, with various activities available to the public such as swimming classes, free swimming, gymnasium, (see ANNEX III), the taxpayer does not charge VAT if the customer is a user (general public), the justification for the non-application of the tax, whose obligation is provided in subparagraph e) of No. 5 of article 36 of the CIVA, being that set out in subparagraph 8) of article 9 of the CIVA, which states that VAT exemption applies to "provision of services carried out by non-profit organisations that operate establishments or facilities intended for the practice of artistic, sports, recreational and physical education activities by persons who practise these activities".

2. However, according to subparagraphs c) and d) of article 10 of the CIVA, for the purposes of VAT exemption, only those non-profit organisations that simultaneously: practise prices approved by public authorities or, for operations not susceptible to approval, prices lower than those required for similar operations by commercial enterprises subject to the tax; and do not enter into direct competition with taxpayers are considered as non-profit organisations.

3. In subparagraph d) of article 10 of the CIVA, one of the conditions to be satisfied for non-profit organisations to benefit from the exemption rules relating to such entities is established, that "they do not enter into direct competition with taxpayers subject to the tax". This provision of internal legislation makes use of the facility granted in subparagraph d) of the 1st paragraph of article 133 of the VAT Directive, granting Member States the possibility of establishing that exemptions "cannot be capable of causing distortions of competition to the detriment of commercial enterprises subject to VAT", with a view to complying with the principle of tax neutrality.

4. From the reconciliation of the text of the VAT Directive with case law, all studies point to the fact that the use of a global approach to each sector of activity seems to be what best ensures the neutrality of the tax and the legal certainty of the parties involved. Indeed, an individualised and purely case-by-case assessment could lead to the Tax Authority determining the taxation of operations carried out by a given non-profit organisation to prevent it from distorting competition in a sector of activity, while other non-profit organisations, without profit-making purpose, operating in the same sector would continue to benefit from exemption.

5. Thus, the occurrence of distortions of competition as a result of the exemption must be evaluated in relation to the activity in question, as such, operation of a swimming pool for the practice of classes, considered in the context of the sector in which it operates and in the context of the entire National Territory, and not specifically in relation to each non-profit organisation operating in that sector or each particular local market.

6. Accordingly, we find that the taxpayer does not meet the requirements necessary to apply the exemption provided for in subparagraph 8) of article 9 of the CIVA, since it is in direct competition with other taxpayers. In fact, the A… is in a situation of direct competition with other entities, and even in the city and municipality of … there are entities that have indoor swimming pools for sports and recreational practice and provide the same type of services, such as a hotel in the city or another in the parish of…, or gymnasia (at least two with indoor pool), or the "fire brigade pool" (operated by…) both also located in the city or the (also indoor) swimming pools in the parish of … also in the municipality (see point 111.1.1.2 Nos. 19, 20 and 21).

7. It is also verified that in addition to practices associated with swimming available at the A… Swimming Complex, this also provides services related to the practice of physical activity in the gymnasium, dance school and rhythmic expression, (see ANNEX III), finding that there is a situation of direct competition with the practice of modalities available in the various private gymnasia located not only in the country, but also in the municipality and in the city.

8. Given the above, the taxpayer is subject to taxation for the operations carried out at the Swimming Complex, in so far as it has been demonstrated that the carrying out of these operations leads to actual distortions of competition.

9. Given the foregoing, the taxpayer should have proceeded to charge VAT by applying the reduced VAT rate (6%), in accordance with subparagraph a) of No. 1 of Article 18 of the CIVA and item 2.15 of List I annexed to this code, until February inclusive and by applying the standard rate (23%) from 1 March onwards (in accordance with Law 55-A/2010 of December (State Budget 2011) and Circular Orders No. 30 122 of 2011-01-07 and No. 30 124 of 2011-02-14).

10. The calculation of the VAT charged values is detailed in the table attached in Annex IV, of which the summary is contained in the following table:

III - 1.1.2 ATHLETICS TRACK AND RENTAL OF OTHER FACILITIES (PAVILIONS)

1. In accordance with documents issued by the taxpayer, it rents the athletics track and other facilities, namely the various sports pavilions it operates, to persons wishing to practise sport (see ANNEX III), not charging VAT, as was found in the situation explained in the previous point, in cases where the end consumer/customer is a user (general public), justifying the non-application of the tax, whose obligation is provided in subparagraph e) of No. 5 of article 36 of the CIVA, by that set out in subparagraph 8) of article 9 of the CIVA. We verified from the procedures adopted by the taxpayer that this is a situation analogous to that described in the previous point (III-1.1), that is, the taxpayer does not meet the requirements necessary to be exempt from VAT, so the obligation to charge the relevant tax is provided in subparagraph e) of No. 5 of article 36 of the CIVA.

2. For in fact, it is verified from the provision of services provided (rental of facilities for the practice of activities related to sports practice, see ANNEX III) by the taxpayer that the requirements necessary to be exempt from VAT are not met, (as set out in subparagraphs c) and d) of article 10 of the CIVA), just as occurs in the situation identified in point III.1.1, since it is in a situation of direct competition with other taxpayers, in particular with VAT-subject entities that have venues (covered pavilions and/or football pitches or other venues) where sport is practised, establishments which exist in the national territory and also in the local market, which allow the practice of the same sporting activities. As is the case of the sports pavilions and the "Indoor" pavilions that exist throughout the country and not just in the city or municipality. Thus, and in accordance with the law, the taxpayer is subject to taxation for the provision of services in question, as indeed the carrying out of these operations leads to actual distortions of competition (see Nos. 18, 19 and 20).

3. The taxpayer has direct competitors in these provision of services, which it has wrongly exempted from tax, when the end consumer/customer is the general public (user).

4. Given the foregoing, being in the presence of provision of services related to the practice of physical and sporting activities and other public entertainments, the taxpayer should have proceeded to charge VAT (by applying the reduced rate (6%) (Item 2.15, of List I), in accordance with article 18, No. 1, subparagraph a) of the CIVA), until February inclusive and by applying the standard rate (23%) from 1 March onwards (in accordance with Law 55-A/2010 of December (State Budget 2011) and Circular Orders No. 30 122 of 2011-01-07 and No. 30 124 of 2011-02-14), in accordance with the calculation detailed in the table attached in Annex IV, of which the summary is contained in tables 3 and 4 presented below:

5. Regarding the corrections in question, both in point 1111.1.1 and in this point, it should be noted that A… on the website it has on the internet, www.A….pt, includes a page (…SPORTS - for information to citizens of the various existing and available sporting practices - federated sport, amateur or informal sport), identifying the various sports practices available in the municipality of … and the places where they can be practised, being identified in addition to the places made available by A…, the pavilions, gymnasia, gymnasia with indoor pool, hotels with indoor pool, thus including taxpayers subject to VAT (to which we refer throughout this report as being their competitors). Publicly assuming that there are thus several options in the municipality for the practice of different physical and sporting activities, because regardless of the space itself (as all facilities are different), these are the locations where these activities are practised and the services are provided that are the subject of these corrections, as it is considered that the verification of competition distortions should be made to the whole activity in question and not specifically in relation to a particular market (No. 1 of article 13 of the VAT Directive).

6. We therefore note that competition is found at the level considered as the local market as in the municipality and in other municipalities, …, …, or…, for example, because there are in these cities indoor swimming pools, pavilions, gymnasia, etc., for sports practice, which can be used by citizens from the peripheral parishes of the municipality of…, because the distance (or prices practised) may justify travel to neighbouring municipalities.

7. Add to this the fact that with each passing year competition increases, including within the municipality, as an example, in the year 2011 a new space opened, … Hotel & Spa Club, with venues for sports practice, such as indoor pool and indoor and outdoor spaces, open to the general public (not exclusively for guests).

The taxpayer's relationship with taxation/exemption for VAT purposes of the provision of services referred to in the two previous sub-points is not at all clear, because as we state, it charges VAT to taxpayers subject to the tax (when the end consumer is the user/general public exemption is applied), and it is found that from the second half of the year under review, it begins to exempt all of these provision of services, including those in which it previously used to charge VAT. It should be noted that this change of classification coincides with the legislative amendment that led to the increase in the VAT rate from 6% to 23% in the practice of physical and sports activities.

It is also found that on the taxpayer's website, in the section relating to "sports pavilions" more specifically in "usage fees", after the descriptions of the fees, it provides for the possibility of VAT incidence, by means of the following note "to the fees defined when justified is added VAT at the legal rate in force".

And it is further noteworthy and regarding the taxpayer's position on the classification of the services provided, the subject of the corrections listed below, the following:

It is found that the taxpayer does not make actual allocation, applying the pro rata to all VAT borne, both from the activity subject and from the exempt activity.

III-1.2 VAT CHARGED in default

1. The taxpayer, as referred to above, charged VAT at the reduced rate (6%) with respect to services provided related to the practice of physical and sports activities, in accordance with article 18, No. 1 a) of the CIVA and item 2.15 of List I annexed to the code (in invoices/cash sales issued when the end consumer was not the user/general public).

2. It should be noted that in accordance with Law 55-A/2010 of December (State Budget 2011) and Circular Orders No. 30 122 of 2011-01-07 and No. 30 124 of 2011-02-14), in item 2.15 of List I annexed to the VAT Code, the expression "practice of physical and sports activities" was deleted, and thus from 1 March 2011, these provision of services are subject to the standard rate (23%).

From the analysis of the billing relating to the practice of physical and sports activities, concerning the months of March, April and May, it is found that the taxpayer charged VAT at the reduced rate (6%) when it should have charged at the standard rate (23%), since we are in the presence of services provided related to the practice of physical and sports activities.

The calculation of the VAT charged in default is detailed in the table attached in Annex V, of which the summary is contained in table 5 presented below.

(...)

IX – RIGHT TO BE HEARD

(...)

1. After analysing all the points raised in the exercise of the right to be heard, we find that the taxpayer does not agree with the corrections proposed in the Draft Report, which is why we will highlight the points that require clarification:

2. With relevance to the current analysis, we begin by recalling that we are in the presence of a cooperative business (and not in the presence of the Municipal Council), the taxpayer under analysis is a cooperative business, that is, a public-interest cooperative with limited liability. In compliance with the Cooperative Code, Decree-Law No. 31/84, of 21.01, and applicable subsidiary legislation (article 9 of the Cooperative Code), the cooperative is a legal entity under private law, autonomous and independent, whose management and control lies with the members that comprise it.

3. It is found that the share capital of "A…" is subscribed by public entities (e.g.: Municipal Council of…), but also by cooperative members of a private nature, being these both natural and legal persons.

4. And even being a cooperative business participated in by a legal entity under public law and in a majority form (in the case in question it is the Municipal Council of…), it belongs to the cooperative sector and as such is an external business unit of the Public Administration, regulated by the Cooperative Code and may freely exercise any economic activity. It is emphasised that, as stated in article 7 of the said Code, the rules that regulate and guarantee the exercise of any activities developed by private companies or other entities of the same nature, as well as any other legal entities under private law without profit-making purposes, are applicable to cooperatives, with the adaptations inherent to the specificities resulting from this statute and complementary legislation.

5. The taxpayer alleges in the exercise of the right to be heard that the Tax Administration's reasoning is not correct with respect to point "I - CONCLUSIONS OF THE DRAFT REPORT REGARDING VALUE ADDED TAX".

6. Thus and as it alleged during the inspection action that took place in the year 2010, it states that "it does not understand, nor conceive, the present correction for VAT purposes, as in its view, it meets all the requirements inherent to tax exemption under article 9 subparagraph 8 of the CIVA", now as stated in this report, the taxpayer does not meet the requirements inherent to exemption in the operations carried out by it, because the condition of not being able to enter into direct competition with any market operator is not verified, as provided in article 10 of the CIVA, for the purposes of exemption, only non-profit organisations that do not enter into direct competition with taxpayers are considered.

7. The taxpayer alleges that "in the operations it carries out, it does not enter into direct competition with any market operator, because there is no operator in the market that provides equal services", "first and foremost because there is no other Swimming Complex and Sports Centre in the market", "that has similar physical conditions". We remind that for VAT purposes, the provision of services is subject to taxation and the provision of services that are the subject of the corrections set out in this report are services which as we have verified are provided by various entities as set out in item III of this report. It is evident that, as the taxpayer alleges, there are no identical facilities to its own in the market, but that does not in itself conclude that the services provided subject to correction in this report (swimming classes, free swimming, gymnasium...) cannot be provided in different spaces from this "Swimming Complex and Sports Centre". The facilities of the other entities being different allow for the provision of the same type of services (as we are referring to entities that have swimming pools, gymnasia, pavilions...), as occurs in the case in question, with the taxpayer being in competition with private entities for the services it provides.

8. In this regard, it is found that the taxpayer charges VAT in these provision of services, because when the customer in question is a legal entity/collective person the issue of the competent invoice or cash sale is with VAT at the reduced rate (6%), a situation which gave rise to the correction for VAT purposes as set out in item III - 1.2, because the VAT rate applicable to these provision of services changed and from March of the year 2011 onwards they are taxed at the standard rate (23%).

9. Now if the provision of services in question in the corrections proposed really formed part of the framework described by the taxpayer in the exercise of the right to be heard, this situation would not occur because the requirements inherent to tax exemption would be, according to what was stated by the taxpayer, met, however the practice evidences what is set out in the proposed corrections of this report, that is, as the taxpayer is in a situation of direct competition with taxpayers, it is subject to taxation for the operations in question, whether the customer in question is a legal entity or the general public (users), as we are in the presence of services provided (all of them related to the practice of physical and sports activities) provided by other entities of a private nature subject to the tax.

10. It should be clarified that all the doctrine referred to in the exercise of the right to be heard regarding the VAT exemption in question (circular order, binding information), since the taxpayer is a cooperative business, does not apply.

11. The taxpayer further alleges, as it alleged during the inspection action in the year 2010) that "with respect to the rental of the athletics track and other facilities, as it is a leasing contract, such an operation would always be exempt from VAT by force of the provision in No. 29 of article 9 of the CIVA". As verified during the course of the inspection action and in accordance with the documents issued and exhibited by the taxpayer, we are not in the presence of any leasing contract (nor were any ever presented at any point). We are rather in the presence of a set of services in which the taxpayer makes available to the user (individual or group), which translates into access to the sports space (which includes the venue for sports practice, the changing room, etc.), that is, the service in question is a whole set that allows the practice of physical and sports activities to users for a certain time (normally translated as the use of the space per hour for which a fee is charged, called "usage fee").

12. We are thus not in the presence of property leasing, as referred to in the exercise of the right to be heard, but rather in the presence of services provided related to the practice of physical and sports activities. And as verified in the course of the current inspection action, the taxpayer evidences in the invoices and cash sales it issues with the competent tax charge (when the customers are collective taxpayers – a situation that also occurs in the operations subject to correction, carried out at the Swimming Complex and set out in this item, in No. 11), subject to taxation for VAT purposes under article 9 subparagraph 8 of the CIVA.

13. It is also found that the taxpayer charges VAT in these provision of services when the customer in question is a legal entity/collective person, as the issue of the competent invoice or cash sale is with VAT at the reduced rate (6%), a situation which also gave rise to the correction for VAT purposes as set out in item III - 1.2, because the VAT rate applicable to these provision of services changed and from March of the year 2011 onwards they are taxed at the standard rate (23%).

14. By way of conclusion, the occurrence of competition distortions as a result of the exemption must be evaluated in relation to the activity in question as such, considered in the context of the sector in which it operates and in the context of the entire National Territory, and not specifically in relation to each non-profit organisation operating in that sector or each particular local market. And in the provision of services subject to correction as set out in item III -1 VAT of this report, the taxpayer is in competition at the level considered as the local market, as being the municipality itself as well as neighbouring municipalities such as…, …, or…, for example, as there are in these cities indoor swimming pools, pavilions, gymnasia, etc., for sports practice, which can be used by citizens. Add to this the fact that with each passing year competition increases, including within the municipality.

15. Regarding point "II - CONCLUSIONS OF THE DRAFT REPORT REGARDING CORPORATE INCOME TAX", it does not agree with the corrections proposed, now as provided in No. 5 of article 7 of the Corporation Tax Statute, the subsidies and financial support or of any other nature attributed by the State are only exempt from Corporate Income Tax if they are attributed under the terms of the law.

16. From the analysis of the contracts in question it is found that the financial transfers, as a result of the Cooperation Agreement as well as the Cooperation Protocol entered into between the taxpayer and the Municipality of…, with a view to financing the charges resulting from its implementation, result from a direct agreement established between the parties, that is, they are not regulated by any legal standard that defines the conditions of their attribution and therefore do not fall within the Corporate Income Tax exemption provided for in the Corporation Tax Statute, so the taxpayer could not deduct the same in the calculation of taxable profit the amount of 1,100,642.70 €,

17. Neither from the Cooperation Protocol nor from the Cooperation Agreement does there appear the legal standard that identifies that the same were carried out under a municipal regulation that implements the respective underlying Law of Bases for the attribution of financial support, a regulation that would have conferred on it the quality of financial support granted under the terms of the Law.

18. Moreover and with the purpose of clarifying, nothing prevents municipal authorities from constituting instrumental entities intended for the good performance of their duties, even if by resorting to the business route and appealing to private entities. For we remind that, in accordance with legal provisions, it is not acceptable for private entities (including cooperative businesses) to be associated with the satisfaction of public needs without implementing procedures that safeguard compliance with the principles of competition, transparency and equality.

19. And as previously stated, the taxpayer deducted in the calculation of taxable profit the full amount of the Cooperation Protocol and Cooperation Agreement as subsidies, considering that the inherent charges were all charges of the part of the activity subject.

20. Note: In the document presented by the taxpayer for the exercise of the right to be heard, point III does not exist, proceeding from point II to IV.

21. Finally, it alleges in point "IV - LEGAL AND TAX CONSEQUENCES OF THE PROJECTED CORRECTIONS", "should the Tax Administration ultimately understand that this claimant does not meet the requirements necessary to be exempt from VAT and operates the corrections to be stated in its inspection project, it should equally proceed to the update of the pro rata".

22. The taxpayer deducted, through the use of the pro rata, the tax borne with the acquisition of goods and services in the respective periodic declarations, respecting the general rule referred to in No. 2 of article 22 of the CIVA, correcting the provisional values in accordance with the definitive values of the year in question, in accordance with No. 6 of article 23 of the CIVA.

23. The deduction of the tax (although carried out partially, based on article 23 of the CIVA) is implemented by the taxpayer in its accounting and reflected in the periodic declarations. Finding that the documents supporting the tax which it now seeks to deduct are (and were timely) recorded in the accounting, it is understood that there is no alternative but to resort to the mechanism provided for in No. 6 of article 78 of the CIVA.

24. It follows from No. 6 of article 78 of the CIVA that "the correction of material errors or calculation errors in the registration referred to in articles 44 to 51 and 65, in the declarations mentioned in article 41, can only be carried out within a period of two years, which in the case of the right to deduction is counted from the inception of the respective right in accordance with No. 1 of article 22, and is compulsory when it results in tax in favour of the State.

25. Given the foregoing, we are of the opinion that the intended right to deduction of VAT and consequent update of the pro rata for the year under review has lapsed, as the two-year period provided for in No. 6 of article 78 of the CIVA has already elapsed.

26. It should further be noted and in this regard that the taxpayer applied the pro rata to all VAT borne, both from the activity subject and from the exempt activity.

27. As we began by stating in the analysis of this Exercise of the Right to be Heard, all of its points were analysed, proceeding with the clarifications of the points that required such clarification.

28. Given the foregoing, the corrections proposed in the Draft Report are to be maintained.

o) Following the inspection, the following VAT assessments and compensatory interest were issued:

Additional VAT assessments (cf. doc. No. 2):

• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. 2015 … (set-off No. 2015…); and
• No. 2015 … (set-off No. 2015…).

Assessments of compensatory interest (cf. doc. No. 2):

• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. 2015 … (set-off No. 2015…); and
• No. 2015 … (set-off No. 2015…).

p) The Claimant presented witnesses to be examined in the inspection procedure, but the Tax Authority and Customs Authority did not proceed to their examination;

q) For the services provided by A… to the population, a fee is charged, defined in the fee schedule set by the Municipality of…, it being for the Claimant here to define the price to charge users for the services provided;

r) The fees to be charged by the claimant in the management of the municipal sports park are discussed, approved and annually fixed by the Municipality in Municipal Assembly;

s) There is no operator in the local geographic market and in the municipality of … in general that provides services equal to those provided by the Claimant globally considered;

t) There is no other sports park in the local geographic market and in the municipality of … such as that operated by the Claimant;

u) The size of the facilities operated by the Claimant are incomparable with any others, enabling the provision of services to more than six hundred thousand (600,000) users, numbers unattainable by any other equipment/facility in the market where it operates;

v) The Claimant operates a modern swimming complex with unparalleled dimensions in the municipality, consisting of three heated indoor swimming pools;

w) In addition to normal aquatic sports activities, it develops activities that are not practicable in the competitive market, as it allows the practice of competitive swimming, synchronised swimming and water polo.

x) With respect to Water Polo, the Claimant's Swimming Complex is used by … for training in this sport because the swimming pools operated by it ("fire brigade pools" referred to in the inspection report) do not have sufficient depth for this purpose;

y) The claimant, through the operation of the swimming pools and pursuing its duties, promotes the practice of sport and high-level competition by the population through the provision of services closely related to the practice of sport or physical education, doing so as seen above, on an exclusive basis, because thanks to the unique structure and physical conditions in the municipality of which it is endowed, the claimant allows its users the practice of sporting modalities not practised by any other taxpayer in the municipality;

z) The services provided by the "... & SPA of the Hotel of…" and the "… Hotel & Spa Club" in the parish of … are directed at providing its users with complete well-being in an environment of great tranquility in a space comprised of only one indoor heated swimming pool of small dimensions (15 metres x 6 metres), jacuzzi, saunas and Turkish bath, hydro-massage rooms and underwater massage, Scottish shower, Vichy shower and a relaxation and SPA treatment area;

aa) The service provided by the Claimant, taking into account the duties and objectives it pursues, is directed at promoting sports practice;

bb) With regard to the fire brigade pools and the swimming pools in the parish of…, of dimensions much smaller than those operated by the Claimant here, they do not allow the practice of all the activities carried out by the Claimant;

cc) In the Fire Brigade Swimming Pools, VAT was not charged in 2011 (document No. 11 attached to the request for arbitral determination, of which the content is deemed reproduced);

dd) In the swimming pools of … VAT was not charged in 2014 (document No. 10 attached to the request for arbitral determination, of which the content is deemed reproduced);

ee) With regard to the athletics track and pavilions used by the Claimant, there are no other sports facilities in the market of the municipality of … with similar characteristics and conditions, namely there is no other athletics track;

ff) On 02-12-2015, the Claimant made payment of the sum assessed (document No. 9 attached to the request for arbitral determination, of which the content is deemed reproduced);

gg) On 26-01-2016, the Claimant submitted the request for constitution of the arbitral tribunal which gave rise to the present proceedings.

2.2. Unproved Facts

It was not proved that the Claimant paid the sums assessed in the VAT assessments and respective compensatory interest, nor that they were collected by set-off.

The Claimant presented no proof that payments had occurred in any form, nor even alleged when and how they occurred.

2.3. Grounds for the Determination of the Statement of Facts

The proved facts are based on the documents submitted by the Claimant with the request for arbitral determination, on the administrative file and on the testimony of the witnesses examined, who appeared to testify with impartiality on the facts about which they pronounced.

3. Points of Law

The Claimant did not charge VAT in the provision of services it carries out in the swimming pools, in the athletics track and in the sports pavilions, based on subparagraph 8) of article 9 of the CIVA, which establishes exemption for "provision of services carried out by non-profit organisations that operate establishments or facilities intended for the practice of artistic, sports, recreational and physical education activities by persons who practise these activities".

However, the application of this exemption is subject to the conditions referred to in article 10 of the CIVA, which establishes the following:

For the purposes of exemption, only non-profit organisations that simultaneously:

a) In no case distribute profits and their governing bodies do not have, either directly or through an intermediary, any direct or indirect interest in the results of the operations;

b) Maintain record-keeping covering all their activities and make it available to the tax authorities, in particular to prove the foregoing subparagraph;

c) Practise prices approved by public authorities or, for operations not susceptible to approval, prices lower than those required for similar operations by commercial enterprises subject to the tax;

d) Do not enter into direct competition with taxpayers.

These rules are a corollary of article 133 of Directive No. 2006/112/CE of the Council, of 28-11-2006, which establishes in its subparagraph d), that "exemptions cannot be capable of causing distortions of competition to the detriment of commercial enterprises subject to VAT".

In the case at issue, the Tax Authority and Customs Authority understood that the requirement of subparagraph d) was not met, considering that the Claimant "is in direct competition with other taxpayers. In fact, the A… is in a situation of direct competition with other entities, and even in the city and municipality of … there are entities that have indoor swimming pools for sports and recreational practice and provide the same type of services, such as a hotel in the city or another in the parish of…, or gymnasia (at least two with indoor pool), or the "fire brigade pool" (operated by…) both also located in the city or the (also indoor) swimming pools in the parish of … also in the municipality".

The Tax Authority and Customs Authority understood the same regarding the services provided at the athletics track and in the pavilions, saying that it "is in a situation of direct competition with other taxpayers, in particular with VAT-subject entities that have venues (covered pavilions and/or football pitches or other venues) where sport is practised, establishments which exist in the national territory and also in the local market, that allow the practice of the same sporting activities. Such as the case of sports pavilions and the "Indoor" pavilions that exist throughout the country and not just in the city or municipality. Thus and in accordance with the law, the taxpayer is subject to taxation for the provision of services in question, as indeed the carrying out of these operations leads to actual distortions of competition".

The Tax Authority and Customs Authority further added in the Tax Inspection Report that "competition is found at the level considered as the local market as well as in the municipality and in other municipalities, …, …, or …, for example, because there are in these cities indoor swimming pools, pavilions, gymnasia, etc., for sports practice, which can be used by citizens from the peripheral parishes of the municipality of…, because the distance (or prices practised) may justify travel to neighbouring municipalities" and "that with each passing year competition increases, including within the municipality, as an example, in the year 2011 a new space opened, … Hotel & Spa Club, with venues for sports practice, such as indoor pool and indoor and outdoor spaces, open to the general public (not exclusively for guests)".

Following the exercise of the right to be heard, the Tax Authority and Customs Authority states that "it is evident that, as the taxpayer alleges, there are no identical facilities to its own in the market, but that does not in itself conclude that the services provided subject to correction in this report (swimming classes, free swimming, gymnasium...) cannot be provided in different spaces from this "Swimming Complex and Sports Centre". The facilities of the other entities being different allow for the provision of the same type of services (as we are referring to entities that have swimming pools, gymnasia, pavilions...), as occurs in the case in question, with the taxpayer being in competition with private entities for the services it provides".

3.1. Order of Examination of Defects

The Claimant imputes to the VAT assessments and compensatory interest contested the following defects:

– lack of grounds;

– Insufficiency of the facts alleged by the Tax Authority to support the assessments;

– Disregard of evidence procedures aimed at discovering material truth;

• Violation of the norms on the regime of VAT exemption.

Article 124 of the Code of Administrative Procedure establishes rules on the order of examination of defects in judicial review proceedings, which are subsidiarily applicable to arbitral proceedings by force of the provision in article 29, No. 1, subparagraph c), of the RJAT.

In the case of defects giving rise to voidability, subparagraph a) of No. 2 of that article 124 establishes that priority should be given to examining the defects whose establishment would, in the prudent judgment of the adjudicator, provide more stable or effective protection of the interests violated.

The defect of lack of grounds is a defect of form which, in case of annulment, does not necessarily prevent the renewal of the annulled act, with elimination of the defect.

However, although the defect of lack of grounds does not ensure more effective protection of the claimant's rights, its priority examination may be necessary in situations where the lack of grounds affects the very possibility of the tribunal understanding the actual content of the contested act, as to its factual or legal presuppositions. In fact, the examination of the defects of violation of law depends on ascertaining the factual and legal grounds of the contested act, so that the precise lack of knowledge of the decision's motivation may be an insuperable obstacle to examining the defects of violation of law. [1]

The question of lack of grounds is connected with that of the sufficiency of the facts alleged to support the assessments, so it is convenient to address them concurrently.

3.1.1. Irrelevance of Grounds Provided Afterwards

In a judicial review of mere legality, as is provided for in the RJAT for arbitral tribunals functioning in the Center for Administrative Arbitration, in which the sole objective is the declaration of illegality of acts of the types provided in subparagraphs a) and b) of No. 1 of its article 2, the legality of the contested act must be assessed as it occurred, with the grounds used in it, other possible grounds being irrelevant.

On the other hand, since knowledge of the grounds is necessary to effectively ensure the right of judicial review of unlawful acts, guaranteed by article 268, No. 4, of the Constitution, to assess the sufficiency of the grounds, one must attend only to the content of the contested act and the express references contained therein, as required by No. 3 of the same article, which establishes that "administrative acts are subject to notification to the interested parties in the form provided by law, and require express and accessible grounds when they affect legally protected rights or interests".

Thus, as is settled jurisprudence, the relevant grounds are only those contemporaneous with the act, which precede or accompany the act and which appear directly or by reference from it, grounds provided afterwards being irrelevant, including those invoked in the judicial review proceedings.

In the case at issue, the grounds of the contested assessments, beyond what appears from them, is what appears from the Tax Inspection Report.

3.1.2. Questions of Lack of Grounds and Sufficiency of Grounds to Support the Assessments

The right to grounds of administrative acts, of which assessments are a special type, has support in article 268, No. 3, of the Constitution, which establishes that "administrative acts are subject to notification to the interested parties in the form provided by law, and require express and accessible grounds when they affect legally protected rights or interests".

Article 77 of the General Tax Law implements the content of grounds of tax acts establishing, among other things, that "the grounds of tax acts may be provided in summary form, and must always contain the applicable legal provisions, the classification and quantification of the tax facts and the operations for calculating the taxable matter and the tax".

The requirement of express grounds "has a triple rational justification: to enable the interested party to choose consciously between complying with the act or contesting it, to ensure proper consideration of administrative decisions and to permit effective control of administrative activities by the courts". [2]

The Supreme Administrative Court has consistently held that the grounds of the administrative or tax act is a relative concept, which varies according to the type of act and the circumstances of the particular case, but that the grounds are sufficient when they allow a normal recipient to understand the cognitive and evaluative path followed by the author of the act to make the decision, that is, when he may know the reasons why the author of the act decided as it did and not differently, so as to be able to trigger administrative or judicial review mechanisms. [3]

In accordance with article 153, No. 2, of the Administrative Procedure Code, subsidiarily applicable under article 2, subparagraph c), of the General Tax Law, "it is equivalent to lack of grounds the adoption of grounds that, due to obscurity, contradiction or insufficiency, do not concretely clarify the motivation of the act".

The grounds of an administrative act through conclusive judgment, through a vague and merely conclusive expression, is not true grounds, as it does not concretely clarify its motivation, as has been settled jurisprudence of the Supreme Administrative Court. [4]

In the case at issue, the Claimant argues that

– both regarding the swimming pools, and the athletics track, and the other sports pavilions, the Tax Administration in its report does not ground nor explain why the services provided by other market operators enter into competition with the services provided by the claimant;

– and because it does not indicate what concrete services are provided in competition;

– under what similar physical conditions such services are provided;

– whether or not other market operators are or are not exempt entities,

It is manifest that the Claimant is correct as to the insufficiency of the Tax Inspection Report on which the contested VAT assessments rest, as to the points it raises on this matter of the possibility of competition distortion, which is essential to support the assessments.

Firstly, the "hotel in the city" nor the "other in the parish of …" nor the "gymnasia (at least two, with indoor pool)" are identified, so although the Claimant seeks to make guesses about the entities to which they would refer, one cannot but conclude that vague expressions are being used which do not satisfy the grounds requirements.

On the other hand, the Tax Authority and Customs Authority does not clarify what the characteristics of the services provided by each of the entities it understood to be competitors are nor what the prices of the services provided are, nor why it understood that there was the possibility of the exemption practised by the Claimant could cause competition distortion.

To be able to conclude on the existence of competition distortion it would be necessary to know the concrete services provided and prices practised by the entities that the Tax Authority and Customs Authority considers competitors, as they may be distinct services with distinct prices, aimed at different types of public. In the case at issue, it resulted from the evidence produced that none of the swimming pools in the municipality of … have the characteristics of the Claimant's nor is there another athletics track, so the reason why the Tax Authority and Customs Authority understood that the provision of services by the Claimant could cause competition distortion is not explained.

Moreover, to demonstrate that there is a distortion of competition caused by the VAT exemption that the Claimant applied, it would be necessary to clarify whether the other entities that the Tax Authority and Customs Authority may have considered competitors did not practise exemption for similar services, because if all practised exemption, no distortion would be related to the application of the exemption by the Claimant.

To this is added that, as clarifies subparagraph d) of article 133 of Directive No. 2006/112/CE of the Council, of 28-11-2006, the distortions of competition sought to be avoided refer only to "commercial enterprises subject to VAT", so it would be necessary to clarify whether all entities considered as competitors are commercial enterprises.

Now, at least one of the entities used by the Tax Authority and Customs Authority to assert the possibility of competition distortion, which is the …, is a sports, cultural and recreational association of recognised public utility by ministerial order published in the Official Gazette II Series, No. …, of … July 1981, page …, and it was proved that it did not charge VAT for the services it provided in the fire brigade pools.

This alone suffices to conclude that, on the one hand, the Tax Inspection Report on which the contested assessments were based is insufficiently grounded and, on the other, that it was not demonstrated that the VAT exemption practised by the Claimant caused competition distortion.

Moreover, by force of article 100, No. 1, of the General Tax Law, to justify the annulment of assessments, it is sufficient that there are well-founded doubts about the correspondence to reality of the facts on which it was based, which is reduced to the fact that such doubts are procedurally equated to error on the factual presuppositions.

Given the foregoing, the contested assessments suffer from defects of lack of grounds and error on the factual presuppositions which justify their annulment [article 163, No. 1, of the Administrative Procedure Code, subsidiarily applicable under article 2, subparagraph c), of the General Tax Law].

3.2. Questions of Knowledge Made Prejudiced

As the assessments are to be annulled on the basis of violation of law, the examination of the other issues raised becomes prejudiced, as it is futile.

4. Request for Restitution of Sums Paid, Annulment of Collection Acts and Indemnitary Interest

The Claimant requests that it be reimbursed "all and any sums that have been delivered for payment of the official assessments now at issue, plus the respective indemnitary interest" and that "all and any collection acts be annulled, in particular set-off operations".

Furthermore, the Claimant requests that it be paid indemnitary interest.

As results from the statement of facts as determined, it was not proved that the Claimant paid the sums assessed in the VAT assessments and the respective compensatory interest, nor that they were collected by set-off.

In fact, the Claimant presented no proof that payments occurred in any form, nor even alleged when and how they occurred.

Thus, as it was not proved that payments occurred in any form, the requests for restitution of sums paid and annulment of set-off acts are unsubstantiated.

Since indemnitary interest depends on the occurrence of payment of tax indebted (article 43, No. 1, of the General Tax Law), the lack of proof of payment implies the unsubstantiation of the request for indemnitary interest.

However, the unsubstantiation of these requests decided herein does not prejudice the effective exercise of the rights that the Claimant may have which are ascertained in execution of the judgment.

5. Decision

Accordingly, the arbitrators of this Arbitral Tribunal agree to:

a) Adjudicate the request for arbitral determination as substantiated regarding the declaration of illegality of the following VAT assessments and compensatory interest:

Additional VAT assessments (cf. doc. No. 2):

• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. 2015 … (set-off No. 2015…); and
• No. 2015 … (set-off No. 2015…).

Assessments of compensatory interest (cf. doc. No. 2):

• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. … (collection document No. …);
• No. 2015 … (set-off No. 2015…); and
• No. 2015 … (set-off No. 2015…).

b) Annul the aforementioned assessments;

c) Adjudicate as unsubstantiated the requests for restitution of sums, annulment of set-off acts and indemnitary interest and absolve the Tax Authority and Customs Authority thereof, without prejudice to the rights that may be demonstrated in execution of this judgment.

6. Value of the Case

In accordance with article 306, No. 2, of the Code of Civil Procedure and 97-A, No. 1, subparagraph a), of the Code of Tax Procedure and 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 287,237.46.

7. Costs

Under article 22, No. 4, of the RJAT, the costs are fixed at € 5,202.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Tax Authority and Customs Authority.

Lisbon, 09-02-2017

The Arbitrators

(Jorge Lopes de Sousa)

(José Nunes Barata)

(Nina Aguiar)
(Dissenting, as per attached declaration)

DISSENTING OPINION

I decided not to sign the judgment because I do not entirely agree with its grounds in aspects that I consider essential and that relate to the type and extent of grounds required for the assessment acts in question.

Article 10 of the CIVA is founded on the principle of VAT neutrality. The aim is to prevent exemptions granted to non-profit entities by virtue of that characteristic from having the effect of preventing or distorting competition.

For this purpose it is established that non-profit entities which, due to that quality, could benefit from VAT exemption, shall not be considered non-profit entities if they enter into direct competition with taxpayers.

The Court of Justice of the European Union has already pronounced several times on the question of when competition exists for the purposes of assessing exemptions related to non-profit persons.

In the judgment on the case Wight Council and Others [C‑288/07], the Court considered that the distortion of competition which different tax treatment may or may not lead to must be assessed by reference to the activity as such, and not by reference to a particular local market; and that the expression "may lead to significant distortions of competition" must be interpreted to mean that the rule covers not only situations of actual competition but also potential competition, provided that the possibility of a private operator entering the relevant market in question is real and not merely hypothetical.

In its decision on The Rank Group plc [combined cases C-259/10 and C‑260/10], the Court reached relevant conclusions on the notion of "existence of a distortion of competition". The Court states that:

• The principle of tax neutrality is particularly opposed to goods or similar provision of services, which are therefore in competition with each other, being treated differently from a VAT perspective (para. 32);

• It follows from this description of the said principle that the similarity of two provision of services has the consequence that they are in competition with each other (para. 33);

• Consequently, the existence of an actual situation of competition between two provision of services does not constitute an autonomous and supplementary condition for violation of the principle of tax neutrality if the provision of services in question are identical or similar from the consumer's perspective and meet the same needs of the consumer (para. 34);

• This consideration is also valid as regards the existence of a distortion of competition. The fact that two identical or similar provision of services which meet the same needs are treated differently from a VAT perspective implies, as a rule, a distortion of competition.

And concluding the Court:

• In light of the preceding considerations, the answer to the first question, subparagraphs b) and c), in case C‑259/10 is that the principle of tax neutrality must be interpreted to mean that a difference in VAT treatment of two provision of services identical or similar from the consumer's perspective and which meet the same needs of the consumer is sufficient to demonstrate a violation of this principle. Thus, such violation does not require that the actual existence of competition between the services in question or a distortion of competition caused by the said difference in treatment also be demonstrated.

To summarise – and recalling that the interpretation that the Court of Justice of the European Union makes of the terms used in European directives, as is the case with the VAT Directive, is binding in the interpretation of national rules – for the purposes of article 10 of the CIVA, for competition with taxpayers to exist, it is not necessary that such competition be actual and effective. It is sufficient that there are taxpayers with activities identical or similar from the consumer's perspective and which meet the same needs. And it is not necessary that this situation occurs by reference to the same local market, within the scope of which the competing entities operate.

The reason for this interpretation is obvious and is the only one consistent with the principle of tax neutrality: in the extreme, there may be no taxpayers subject to VAT exercising the same activity in the market in which the non-profit entity A operates because the exempt entity prevents competition from arising.

Transposing the doctrine of the Court of Justice to the concrete case, very briefly, the Tax Administration was only obliged to demonstrate that some of the services offered by the Claimant are offered by for-profit entities. In this sense, the characteristics of the Claimant's equipment are irrelevant to this analysis. The Claimant may operate an Olympic swimming pool. But if it offers water aerobics classes in that pool and if in the national market water aerobics is an activity available from for-profit entities, there is competition. It would not be necessary to prove that this activity is offered by a particular company in … or near …. Nor is it, in our view, necessary to require that, in a situation such as that in the case, the Tax Administration specify the characteristics of the competing activities. The activities are placed on the market under designations that identify them for the interested public. For example "baby swimming" or "power-combat" are sufficiently explicit designations of the characteristics of the activities offered and which in themselves also identify the target audiences. Finally, we also do not consider it necessary to require that the Tax Administration compare the prices practised, because the existence of differentiated or equal prices does not mean either that there is or that there is no situation of competition.

That said, we consider that the grounds of the inspection report contain vague expressions and ambiguous reasoning, not sufficiently concretised. Which is why we agree with the decision to consider the act violating the duty to give grounds and illegal in that sense, although considering that the required grounds would be very different from that which is expressed in the judgment.

9 February 2017

The Arbitrator

Nina Aguiar

[1] To this effect, inter alia, reference may be made to the following judgments of the Supreme Administrative Court: of 22-09-1994, process No. 32702; of 03-10-1995, process No. 35128, published in the Appendix to the Official Gazette of 30-4-98, page 7245; of 03-11-1999, process No. 41885; of 05-06-2000, of the Full Court, process No. 43085; of 28-03-2001, process No. 29685, published in the Appendix to the Official Gazette of 21-07-2003, page 2455; of 17-11-2010, process No. 1051/09.

[2] Judgment of the Supreme Administrative Court of 03-03-2004, process No. 0110/04.

[3] Essentially to this effect, reference may be made, inter alia, to the following judgments of the Supreme Administrative Court: of 04-11-1998, process No. 40618; of 10-3-1999, process No. 32796; of 06-06-1999, process No. 42142; of 09-02-2000, process No. 44018; of 28-03-2000, process No. 29197; of 16-03-2001, of the Full Court, process No. 40618; of 14-11-2001, process No. 39559; of 18-12-2002, process No. 48366.

[4] To this effect, reference may be made to the Judgments of the Supreme Administrative Court of 05-06-1991, process No. 12150, published in Appendix to the Official Gazette 30-09-93, page 653; of 26-06-1991, process No. 013435, published in Appendix to the Official Gazette of 30-09-93, page 377; of 17-03-1993, process No. 013339, published in the Bulletin of the Ministry of Justice No. 425, page 403; of 03-11-1999, process No. 041885, published in Appendix to the Official Gazette of 23-09-2002, page 6248; of 03-03-2004, process No. 0110/04; of 07-04-2005, process No. 0161/05; of 23-10-2008, process No. 0827/07.