Summary
Full Decision
ARBITRAL DECISION (see full version in PDF)
The arbitrators Dr. José Pedro de Carvalho (arbitrator-president, appointed by the other arbitrators), Professor Doctor Clotilde Celorico Palma and Dr. Emanuel Augusto Vidal Lima, appointed by the Claimant and the Respondent, respectively, to form the Arbitral Tribunal, constituted on 19-08-2016, agree as follows:
I – REPORT
On 20 May 2016, A..., S.A., holder of the collective person identification card and tax identification number no. ..., with registered office at ..., no. ..., ...-..., Lisbon, at the date of the facts referred to as B..., S.A., filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, briefly referred to as LRAT), seeking, as the principal claim, the annulment of the act of implicit rejection of the hierarchical appeal, filed with reference to VAT for the fiscal year 2012, as well as of the VAT assessments nos. 2015 ..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015... and of the acts assessing compensatory interest nos. 2015... to 2015..., in the total amount of € 1,964,154.82, with the necessary legal consequences, namely the recognition of the right to compensation for guarantee wrongfully provided.
As a subsidiary claim, the Claimant requests the partial annulment of the aforementioned assessment acts, on the basis of the value of the indemnities actually paid by the clients, with the VAT considered being included in the value already debited and actually collected.
To substantiate its request, in addition to verification of formal defects of lack of substantiation of the assessments and omission of essential legal formality (prior hearing before assessment), the Claimant alleges, in summary, that VAT is not due for the operations underlying the assessments it contests, since, in its view, they do not have underlying them the performance of any service.
The Respondent is the Tax and Customs Authority (TA).
On 23-05-2016, the request for constitution of the arbitral tribunal was accepted and automatically notified to the TA.
The Claimant proceeded to appoint an arbitrator, having designated Her Excellency Professor Doctor Clotilde Celorico Palma, pursuant to article 11/2 of the LRAT. Pursuant to no. 3 of the same article, the Respondent appointed as arbitrator His Excellency Dr. Emanuel Vidal Lima.
The arbitrators appointed by the parties were appointed and accepted their respective duties.
Pursuant to no. 6 of article 11 of the LRAT, it was designated by the arbitrators appointed by the parties, to preside over the Arbitral Tribunal, His Excellency Counselor Jorge Lopes de Sousa, who, within the applicable deadline, also accepted the duty.
In accordance with the provisions of paragraph c) of no. 1 of article 11 of the LRAT, the collective Arbitral Tribunal was constituted on 19-08-2016.
By order of His Excellency the President of the Deontological Council of CAAD of 21-09-2016, a request for recusal of the Arbitrator-President, His Excellency Counselor Jorge Lopes de Sousa, was granted, and the notification of Their Excellencies the Deputy Arbitrators was ordered so that they might appoint a new Arbitrator-President.
Their Excellencies the Deputy Arbitrators appointed as president His Excellency Dr. José Pedro Carvalho, who, within the applicable deadline, accepted the duty, having been appointed on 12-10-2016.
By order of 17-10-2016, at the request of the latter, the deadline for the Respondent to present its reply was extended until 31-10-2016.
On 31-10-2016, the Respondent presented its Reply defending itself by way of denial.
On 09-02-2017, the meeting provided for in article 18 of the LRAT took place, where witnesses presented at the hearing by the Claimant were examined and it was decided that the proceeding continue with successive written submissions.
The Parties presented submissions, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.
Considering that this Tribunal found it necessary in the case to make a preliminary ruling to the Court of Justice of the European Union (CJEU), the parties were heard on the question to be referred, and their respective pronouncements were considered in the text of the questions presented.
The arbitral tribunal, in compliance with the provisions of article 267 of the Treaty on the Functioning of the European Union which establishes: "whenever a question of that nature is raised in proceedings pending before a national court or tribunal whose decisions are not subject to judicial review provided for by domestic law, that court or tribunal is obliged to refer the question to the Court", determined the referral of the case for a preliminary ruling to the Court of Justice of the European Union (CJEU).
The parties were heard on the question to be referred, and their respective pronouncements were considered in the text of the questions presented.
By order of 08-01-2017, it was decided to suspend proceedings and to refer to the Court of Justice of the European Union (CJEU) the following preliminary questions:
"1) Are articles 2, no. 1, paragraph c), 64, no. 1, 66/1/a), and 73, all of Directive 2006/112/EC, to be interpreted as meaning that Value Added Tax is due by a telecommunications operator (television, internet, mobile network and fixed network) for collection from its customers, in the event of termination of a contract with an obligation to remain for a specified duration (loyalty period), due to a cause attributable to the customer, before such duration is completed, of a predetermined amount, equivalent to the value of the basic monthly fee owed by the customer under the contract, multiplied by the number of monthly instalments outstanding until the end of the loyalty period, being that when the said amount is invoiced, and regardless of its actual collection, the operator had already ceased providing the service, and provided that:
the amount invoiced has as contractual purposes to deter the customer from breaching the loyalty period to which he committed himself and to compensate for losses that the operator suffered, with the breach of the loyalty period, namely for the loss of profit that it would have earned if the contract had remained in force until the end of that period, as well as for the hiring of lower rates, the provision of equipment or other offers, free or at reduced price, as well as with advertising and customer acquisition expenses;
the contracts with a loyalty period that were acquired had a remuneration, for the acquirers, higher than that of contracts without loyalty acquired by them, the amount of remuneration of the acquirers, in each case (that is, in contracts with and without loyalty) being calculated on the basis of the value of the monthly fees set in the acquired contracts;
the amount invoiced is qualifiable, according to national law, as a penalty clause [?]
Is the failure to verify any, or some, of the paragraphs of the first question capable of altering the answer to the same?"
The CJEU issued the Judgment of 22 November 2018, in Case C-295/17, which determines:
"For these reasons, the Court of Justice (Fifth Chamber) declares:
1) Article 2, no. 1, paragraph c), of Council Directive 2006/112/EC, of 28 November 2006, on the common system of value added tax, is to be interpreted as meaning that the predetermined amount, received by an economic operator in the event of early termination of the contract by its customer, or for a cause attributable to that customer, of a contract for the provision of services which provides for a minimum period of commitment to the contract, which amount corresponds to the amount that that operator would have received for the remainder of that period if that termination of the contract had not occurred, which falls to the referring court to verify, is to be regarded as the remuneration of a service provided for consideration and, as such, subject to that tax.
2) The following are not decisive for the classification of the predetermined amount in the contract for the provision of services, of which the customer is a debtor in the event of early termination of that contract: the fact that the fixed amount is intended to deter customers from failing to comply with the minimum period of commitment to the contract and to compensate for the loss that the operator suffers as a result of that failure, the fact that the remuneration received by a commercial agent for the conclusion of contracts which provide for a minimum period of commitment to them is higher than that provided for in the context of contracts which do not provide for such period, and the fact that the said amount is qualifiable, under national law, as a penalty clause."
Having regard to the issuance of the Judgment by the CJEU, the suspension of proceedings determined by the decision notified on 10-05-2017 was declared terminated and the Parties were notified so that, if they wished, in light of the same decision they exercise their right to be heard.
The claimant presented a Motion on 07-12-2018 with attachments of documents and the Respondent on 13-12-2018.
Taking into account that the rules of procedural law are not automatically applicable to the arbitral proceeding, but should instead be mediated by the principles inherent in arbitral jurisdiction, namely, and in the case at hand, the principles of informality, material truth and obtaining a decision on the merits within a reasonable time, the attachment of the documentation presented by the Claimant in its motion presented on 10 December was admitted, and the Respondent was given the opportunity to, if it wished, exercise its right to be heard in relation to the same.
The Respondent pronounced itself in Motions presented on 12-12-2018 and 07-01-2019.
On 16-01-2019 the Respondent presented a Motion requesting the attachment to the record of the Arbitral Award issued in process 596/2017-T, in which the Claimant sought a declaration of illegality of the additional VAT assessments for the year 2013, there being, therefore, absolute identity, both of the relevant factual situation and of the fundamental question of law to be decided with the present case.
The Claimant presented Motions on 17-01-2019 and 28-01-2019.
The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, paragraph a), 5 and 6, no. 2/b), of the LRAT.
The parties have judicial capacity and standing, are legitimate and are legally represented, in accordance with articles 4 and 10 of the LRAT and article 1 of Ordinance no. 112-A/2011, of 22 March.
The proceeding is not vitiated by any nullities.
II. FACTS
II.1. The following facts are established as proven:
In the context of VAT, the Claimant is, and was at the date of the tax facts at issue herein, subject to the normal monthly periodicity regime, and is, as it was at that date, a taxable person that carries out VAT-taxable operations.
The Claimant was subject to an inspection procedure conducted by the Large Taxpayers Unit, authorized by service order no. OI2014..., of general scope.
The inspection was initiated on 1 April 2014 and concluded on 20 November 2014.
On 2 September 2014, by order of the Head of the Division of Inspection of Non-Financial Companies II (DIEF II), by delegation of powers published in the Official Gazette – II Series, no. 246, of 2013-12-19, the extension of the deadline for conclusion of the inspection procedure by a further three months was authorized, with the taxable person being notified via Office no. ... of 02-09-2014, in accordance with no. 4 of article 36 of the Supplementary Regime of Tax Inspection Procedure.
The inspection action resulted in corrections to the taxable basis for corporate income tax purposes that are not contested by the Claimant in the present proceedings, and were subject to voluntary regularization.
The Claimant was notified of the draft report to exercise its right to be heard, via office no. ..., of 26 November 2014.
From the Tax Inspection Report (TIR), presented on 03-11-2016, the contents of which are taken as reproduced (cf. pp. 106 to 143 of the Administrative File (AF), the following is noted, among other things:
"B..., with registered office at ..., ... in Lisbon, was established on 22 March 1991 and has as its main activity the provision of mobile telecommunications services.
Additionally, the company may provide other telecommunications services: public use telecommunications; provision of fixed telephone service, establishment and provision of a public telecommunications network and provision of virtual private network services, being licensed by the Institute of Communications of Portugal ("ICP"), now ICP – National Communications Authority ("ANACOM").
On 27 January 2014 it changed its company name to A..., SA."
"III.2. VAT
III.2.1. Corrections to VAT Assessed
III.2.1.1. Indemnities for breach of contractual loyalty period - € 1,812,195.35
B..., in the context of contracting with its customers, entered into service provision contracts, more precisely, mobile voice service provision contracts, data service provision contracts – internet on mobile, mobile broadband and wi-fi internet and fixed voice service provision contracts, within the scope of which minimum periods of contractual validity were established as well as the indemnities to be paid by the customer in the event of deactivation of products and services, at its initiative, before the agreed period had elapsed, as detailed below.
Mobile Voice Service Provision by B...
The mobile voice service allows making and receiving national, international and roaming communications, and sending and receiving written messages ("SMS" – short message service) and multimedia messages ("MMS" – multimedia message service) and accessing emergency numbers through a number or numbers included in a national or international telephone numbering plan.
The contract provides for the following regarding this service:
"8.1. These Specific Conditions come into effect on the date of accession to the service and remain in force for the period of one month automatically renewable for equal periods, unless either Party terminates, by valid communication, with a minimum of 15 (fifteen) days' notice prior to the end of the term or renewal.
8.2. For renewal purposes, these Specific Conditions are deemed to have commenced on the first day of the month B...
and the CUSTOMER may agree on the provision of the service for a minimum period of validity, indicated in the Form. On expiry of the agreed minimum period of validity, these Specific Conditions are renewed for successive periods of 1 (one) month, unless either Party terminates in accordance with the provisions of Condition 8.1.
8.4. In the event of termination of these Specific Conditions by the CUSTOMER or for a reason attributable to the same, before the agreed minimum validity period is completed, initial or subsequent, B... shall be entitled to receive an indemnity calculated as follows: (minimum validity period – number of months during which the services were active) x (value of the agreed monthly fee).
8.5. The existence of a minimum validity period may derive from the offer of promotional conditions, from investment costs in the acquisition of equipment, whenever the accession to the service implies the provision of equipment essential to its provision, as well as from service activation costs and also from acquisition, and the CUSTOMER may at any time, through the customer support service 1696, consult at www.B... .pt or B... store, obtain information on when the agreed minimum validity period is concluded and also the exact value that it will have to pay by way of indemnity for early termination of these Specific Conditions, which will correspond to the value of the agreed monthly fee, multiplied by the number of months that will be outstanding to complete the mentioned minimum validity period."
Data Service – Internet on Mobile, Mobile Broadband and Wi-Fi Internet by B...
With regard to the data service, which includes, in particular, i) Internet on Mobile service, which allows data communication, access to the Internet via mobile (hereinafter "Internet on Mobile"); ii) access to the Internet in Mobile Broadband service, which allows data communications, access to the Internet and sending/receiving written messages (SMS) (hereinafter "MBB"); and iii) access to the Internet via wireless (Wireless Lan Public) in areas of public access (Hot Spot) through WI-FI technology (Wireless Fidelity – Wireless Lan), (hereinafter "Wi-Fi").
With regard to the Provision of data service, the following is provided:
"9.1. These Specific Conditions come into effect on the date of accession to the service and remain in force for the period of one month automatically renewable for equal periods, unless either Party terminates, by valid communication, with a minimum of 15 (fifteen) days' notice prior to the end of the term or renewal.
9.2. For renewal purposes, these Specific Conditions are deemed to have commenced on the first day of the respective month.
9.3. B... and the CUSTOMER may agree on the provision of the service for a minimum period of validity, indicated in the Form. On expiry of the agreed minimum period of validity, these Specific Conditions are renewed for successive periods of 1 (one) month, unless either Party terminates in accordance with the provisions of Condition 9.1.
9.4. In the event of termination of these Specific Conditions by the CUSTOMER or for a reason attributable to the same, before the agreed minimum validity period is completed, initial or subsequent, B... shall be entitled to receive an indemnity calculated as follows: (minimum validity period – number of months during which the services were active) x (value of the agreed monthly fee).
9.5. The existence of a minimum validity period may derive from the offer of promotional conditions, from investment costs in the acquisition of equipment, whenever the accession to the service implies the provision of equipment essential to its provision, as well as from service activation costs and also from acquisition, and the CUSTOMER may at any time, through the customer support service 1696, or B... store, obtain information on when the agreed minimum validity period is concluded and also the exact value that it will have to pay by way of indemnity for early termination of these Specific Conditions, which will correspond to the value of the agreed monthly fee, multiplied by the number of months that will be outstanding to complete the mentioned minimum validity period."
Fixed Voice Service by B...
The fixed voice service allows making and receiving, at a fixed location, national and international calls and accessing emergency numbers through a number or numbers included in a national or international telephone numbering plan.
The contract provides for the following regarding this service:
"8.1. These Specific Conditions come into effect on the date of accession to the service and remain in force for the period of one month automatically renewable for equal periods, unless either Party terminates, by valid communication, with a minimum of 15 (fifteen) days' notice prior to the end of the term or renewal.
8.2. For renewal purposes, these Specific Conditions are deemed to have commenced on the first day of the respective month.
8.3. B... and the CUSTOMER may agree on the provision of the service for a minimum period of validity, indicated in the Form. On expiry of the agreed minimum period of validity, these Specific Conditions are renewed for successive periods of 1 (one) month, unless either Party terminates in accordance with the provisions of Condition 8.1.
8.4. In the event of termination of these Specific Conditions by the CUSTOMER or for a reason attributable to the same, before the agreed minimum validity period is completed, initial or subsequent, B... shall be entitled to receive an indemnity calculated as follows: (minimum validity period – number of months during which the services were active) x (value of the agreed monthly fee).
8.5. The existence of a minimum validity period may derive from the offer of promotional conditions, from investment costs in the acquisition of equipment, whenever the accession to the service implies the provision of equipment essential to its provision, as well as from service activation costs and also from acquisition, and the CUSTOMER may at any time, through the customer support service indicated, consult at www.B... .pt or B... store, obtain information on when the agreed minimum validity period is concluded and also the exact value that it will have to pay by way of indemnity for early termination of these Specific Conditions, which will correspond to the value of the agreed monthly fee, multiplied by the number of months that will be outstanding to complete the mentioned minimum validity period."
Based on the foregoing, it is inferred that, in the event the minimum contractual period established for the provision of the service is not fulfilled, B... is entitled to receive an indemnity from its customers calculated taking into account the number of months that were outstanding to complete the agreed period for the provision of the service, multiplied by the value of the respective monthly fee.
Accounting Treatment
With regard to accounting treatment, in accordance with NCRF 20 – Revenue, point 22 "Revenue shall only be recognized when it is probable that the economic benefits associated with the transaction will flow to the entity. However, when there is uncertainty about the collectability of an amount already included in revenue, the amount that is uncollectable, or the amount with respect to which recovery has ceased to be probable is recognized as an expense (...)".
Tax Classification
With respect to classification for purposes of Value Added Tax, it was found that the taxable person did not charge VAT on the indemnities collected from its customers in 2012 on the understanding that such indemnities fall outside the scope of the said tax.
Regarding this understanding, B... further added, through an email dated 18 November 2014, that: "In the course of its activity, B..., S.A., hereinafter in abbreviated form "B...", enters into contracts for the provision of mobile communications services, in which it is customary to establish favorable promotional conditions, with these conditions generally being associated with a counter-obligation: the undertaking assumed by the customer to remain bound by the contract for a specified minimum period of validity thereof. The failure, on the part of the customer, to comply with the contractual obligations to which it is bound, namely the failure to make timely payment, entails the payment of an indemnity to B... .
In the situation at hand there is no relation between the amounts owed to B... by way of indemnity and the performance of corresponding service provisions, since the obligation to indemnify derives from the contractual default of the customers, whose immediate effect is the suspension of the communications service by B... and the termination of the contract. Thus, it is the non-provision of services for the minimum period agreed that grounds the right to indemnity in the sphere of B... . On the one hand, the indemnity derives from the undeniable loss caused to B... by the non-continuation of the provision of communications services for a certain period of time, which would have generated turnover and profit for the company. On the other hand, the amount of indemnity to be received by B... does not give the "counterparty" the right to a service provision of any kind. In fact, the payment of the indemnity by the customers does not generate any reciprocal obligation on B..., with the amounts delivered to it being intended to compensate, as noted above, for the damage suffered as a consequence of contractual default, namely those relating to the initial investment implicit in the offer of favorable promotional conditions, underlying the loyalty contracts. Consequently, the indemnity in question is not subject to VAT taxation."
In this context, and to better clarify the legal-tax framework into which the question of fact should fit, article 562 of the Civil Code (CC) is cited, in which the general principle relating to the obligation to indemnify is found. It can be read as follows:
"Whoever is bound to repair a loss must restore the situation that would have existed if the event giving rise to the obligation to repair had not occurred." Attention is drawn to the fact that this general principle makes express mention of the term "loss", a circumstance to which we will return later.
It is now important, with a view to a fuller clarification of the problem under analysis, to make use of the doctrine relating to this matter, and since it proves relevant to the assessment at hand, we consider below the explanation given by Mário Júlio de Almeida Costa (Law of Obligations, 6th edition) concerning the penalty clause.
"The penalty clause is defined as a stipulation in which, in a legal transaction, namely in a contract, the parties fix the amount of indemnity in the event of its breach (article 810, no. 1). (...) the clause has a fixed value – no more and no less – whether the losses actually prove to be lower or higher than its amount. The law views it as anticipatory liquidation ('à forfait') of the losses, which the parties freely agree to, with only the reservation of imperative provisions. (...)
It is, therefore, a form agreed upon by the parties to compensate, indemnify, potential losses that may occur during the term of the contract.
We now observe what is stated by the same author, op. cit., regarding loss and, more specifically, with regard to the classification that distinguishes emergent loss and lost profits. (...)
As Professor Galvão Teles teaches, "Law of Obligations", 6th ed., p. 373, «Emergent loss is expressed as a devaluation of the patrimony, lost profits as its non-valorization. If the assets decrease or the liabilities increase, there is emergent loss (damnum emergens); if the assets cease to increase or the liabilities cease to decrease, there is lost profit (lucrum cessans). There is a loss in one case, frustration of a gain in the other.» Nevertheless, and recentering the observation now in progress from a fundamentally fiscal point of view, the core of the present question will be in verifying whether, underlying the indemnity, there is, or is not, a transfer of goods or provision of services, that is, whether it has an inherently remunerative character.
VAT, as a tax on consumption and which corresponds, essentially, to the provisions of Council Directive 2006/112/EC (hereinafter Directive), aims to tax the consideration for taxable transactions and not the indemnification of losses that do not have a remunerative character.
The concept of service provision contained in the Directive is residual, in that service provision is understood as any provision that is not a transfer of goods.
Following this residual formulation the Directive gives examples of service provisions, including here "the obligation not to do or to tolerate an act or a situation," an obligation of negative content (not to perform a certain act).
In accordance with no. 1 of article 3 of the VAT Code, transfer of goods is generally considered to be the onerous transfer of tangible goods in a manner corresponding to the exercise of ownership rights, being considered, in accordance with no. 1 of article 4 of the VAT Code, as service provisions the operations carried out for consideration that do not constitute transfers, intra-community acquisitions or importations of goods.
Aligned with Community legislation, the concept of service provision given by article 4 has a residual character, being considered as service provisions the provisions carried out for consideration that do not constitute transfers or importations of goods.
VAT applies to all economic activity, which is nothing more than an operator providing services or transferring goods (except in certain particular cases) to the economic beneficiary, who will have to provide a certain counter-performance. There is, therefore, a synallagmatic link.
Thus, in accordance with the foregoing, the criterion to be adopted to discern whether a given indemnity is subject to VAT taxation will be related to the existence of a reposition of income, which compensates for an increase in patrimony not achieved as a result of the injury, that is, a remunerative character associated with the indemnity. And being so, they have underlying them an economic activity, a prerequisite for VAT taxation.
It is therefore necessary to assess whether the indemnity is intended to compensate for lost profits, that is, to restore the level of income that, as a result of a loss, the taxable person ceased to obtain.
In other words, it must be determined whether the payment aimed to restore the income that would have been obtained through the provision of services, had the customer not broken the contractual relationship.
In the situation at hand, that will be the reality in question, since the indemnity in dispute had that purpose, as can be seen from the contracts themselves, specifically from point 8.4 of the specific conditions of the mobile voice service provision contracts, and of the fixed voice service provision contracts and point 9.4 of the specific conditions of the data service provision contract – internet on mobile, mobile broadband and wi-fi internet in which the following can be read:
"In the event of termination of these Specific Conditions by the CUSTOMER or for a reason attributable to the same, before the agreed minimum validity period is completed, initial or subsequent, B... shall be entitled to receive an indemnity calculated as follows: (minimum validity period – number of months during which the services were active) x (value of the agreed monthly fee)."
Thus, to the extent that the remunerative character of the indemnity is apparent from the contract text itself, it should be considered that the same is subject to VAT.
In fact, from the very method of calculating the indemnity itself, it is inferred that this aimed to compensate B... for a loss of revenues on the assumption that, at the moment of the injury, it had "(...) a right to the gain that was frustrated, or rather, the holding of a legal situation which, if maintained, would have given it the right to that gain. - see judgment of the Supreme Court of Justice of 23/5/78., B.M.J. no 277; p. 258." Cf, Judgment (SCJ) no 04B3907 of 16.12.2004.
Also, the reason why B... justifies the existence of a minimum contractual validity period, specifically "(...) The existence of a minimum validity period may derive from the offer of promotional conditions, from investment costs in the acquisition of equipment, whenever the accession to the service implies the provision of equipment essential to its provision, as well as from service activation costs and also from acquisition (...)" reflect that the recovery of the investment will be guaranteed by the revenues obtained over the loyalty period or, if that is discontinued (via customer withdrawal), the return is maintained via the indemnity, since the same accommodates the revenues of the months outstanding to the end of the contract.
The same level of profit is thus guaranteed. B... did not suffer losses in the form of lost profits, because the indemnity was contractually fixed to incorporate those profits.
What B... seeks to restore is not the investment made – that remains as it was made – what it seeks, in fact, is to obtain revenues to recover that investment, from an economic perspective.
This goal is achieved through the existence of the loyalty period and when this is not complied with, the CUSTOMER is debited with an indemnity.
It is thus concluded that this indemnity is part of the concept of lost profits and as such is subject to VAT.
Corroborating the foregoing, the content of the information provided by B..., previously mentioned, is recalled: "Thus, it is the non-provision of services for the minimum period agreed that grounds the right to indemnity in the sphere of B... . On the one hand, the indemnity derives from the undeniable loss caused to B... by the non-continuation of the provision of communications services for a certain period of time, which would have generated turnover and profit for the company. (...)"
With the termination of the contract at the customer's initiative, before the contractually established period ended, B... saw its profits reduced by loss of revenue, which corresponds to a non-increase of its patrimony (via the amount received from its customers). There was no decrease in the existing patrimony (situation of emergent loss) but rather a non-increase of the same, by way of loss of revenue, as mentioned in the citation of Professor Galvão Teles, already cited above.
It is further added that, according to the allegations of the taxable person itself, the fact that these indemnities emerging from contractual relationships which on B...'s part constitute "(...) the establishment of favorable promotional conditions" and on the customer's part "the undertaking assumed (...) to remain bound by the contract for a specified minimum period of validity thereof", means that they arise in the context of the exercise of economic activity and concurrently are related to the provision of telecommunications services, which is B...'s activity.
To corroborate the position now advocated, we cite the Judgment of the Supreme Administrative Court (SAC) no 01158/11 of 31.10.2012, whose position unequivocally supports the understanding being upheld here: "In light of all of the foregoing, we conclude, in accordance with the learned Opinion of the Public Prosecutor's Office, according to which it is necessary to distinguish:
a) The indemnity paid by the insurer, "(...) intended to compensate for the loss caused by the loss of the good", the same should be considered as excluded from the objective scope of VAT, "to the extent that it does not assume the nature of consideration for the transfer of a good or provision of a service (articles 1 no. 1, 4 no. 1 and 16 no. 1 VAT Code)";
b) The amounts paid by the lessee to the lessor, being paid "complementarily to the lessor by the lessees do not have a compensatory nature (because they are not intended to compensate for losses and damages) but rather are grounded in the performance of contractually assumed obligations (in each of the categories of contracts in question). These contracts being of the nature of service provision contracts, those amounts represent, moreover, consideration for VAT-taxable operations".
It is concluded, therefore, that these indemnities aim to compensate for lost income and arise from the performance of contractually assumed obligations within service provision contracts, and thus represent consideration for VAT-taxable operations.
In terms of classification under the VAT Code, the indemnities in question constitute consideration for a service provision, subject and not exempt, in accordance with article 4, no. 1, the taxable event occurring and consequently the tax being due at the moment of invoice issuance, in accordance with article 8, no. 1, paragraph a), the taxable value being that of the indemnity, in accordance with article 16, no. 1, the rate of 23% being applicable, as provided for in article 18, no. 1, paragraph c), all of the VAT Code."
"In this sequence, it is necessary to proceed to the quantification of the taxable base distributed by months, and for this purpose, the following elements were requested from the taxable person (email of 17.10.2014): listing of all invoices issued to customers during the year 2012, with indication of their value and period of issuance; explanation of the composition and method of calculation of the amount invoiced to customers, arising from termination; confirm whether VAT was charged on these invoices and if not, justify its non-charging.
Following the request, two Excel files were provided, containing (i) all invoices issued in the year 2012, relating to indemnities for breach of the loyalty period and (ii) all invoices issued and which were "outstanding". These files contained, among others, the following fields: Contract Acct.; Invoice no.; Item; Reason Acct.; Amount in foreign currency; Currency; CI; Document date; Period; Entry date; Classification; Contract Acct.; Business Partner; Contract account denomination; Description; Supporting document; Reference.
From the analysis and computer processing carried out on the data provided by B..., it was possible to obtain a file with the following identifying elements for each record/invoice: invoice number and reference; date, period and invoice value; customer name and number; service description and VAT rate.
From this universe of duly organized data, the values by type/reason for indemnity were analyzed, of which those considered subject to tax were the ones contained in Annex I (p. 1) and which total the amount of € 1,812,195.35.
Given this, it should be noted in this context that the methodology used takes into account the content of article 75 of the General Tax Law (GTL), with the heading "Declaration and other elements of taxpayers", according to no. 1 of which "The declarations of taxpayers presented in accordance with the provisions laid down by law are presumed to be true and made in good faith, as are the data and calculations entered in their accounts or records, when these are organized in accordance with commercial and tax legislation", giving rise also to a special connection between the available elements and the results now obtained.
Thus, based on the data obtained from verification and validation carried out on the elements made available by the taxable person, it was possible to determine a total amount of € 7,879,110.21, corresponding to indemnities invoiced to customers, for which VAT was not charged, to which corresponds a total value of VAT owed, at the normal rate, of € 1,812,195.35 (Annex I and II)."
"In summary, in light of the foregoing, it is concluded that these indemnities are subject and not exempt from tax. Consequently, pursuant to no. 1 of article 4, article 8, no. 1, paragraph a), no. 1 of article 16, and paragraph c) of no. 1 of article 18, all of the VAT Code, outstanding tax was calculated in the total amount of € 1,812,195.35.
The following table presents a summary of the corrections in VAT, by tax period:
"Analyzing the respective document, it is incumbent upon us to inform that as regards the correction proposed in points III.1.1. and III.2.1., the taxable person comes to claim its disagreement, and thus the same points were reanalyzed. [...]
IX.2. VAT - Corrections to VAT Assessed
IX.2.1. Indemnities for breach of contractual loyalty period (Point III.2.1. of the Draft Report)
The correction proposed in point III.2.1 of the report draft totals € 1,812,195.35 arising from the failure to charge VAT on the indemnities invoiced for breach of the contractual loyalty period.
The taxable person came to present, in points 119 to 138 of the right to be heard, the objections to the proposed correction, with the grounds briefly indicated below.
On the Nature of the Contracts
(...) With regard to the subjection or not of the indemnities to VAT, it is first pointed out that subjection to VAT taxation has underlying it the performance of an economic activity and the existence of consideration. In this sense there is a synallagmatic contractual link, a prerequisite of an economic operation.
Thus, as already mentioned in point III.2.I., in the case of indemnities, the criterion to be adopted to assess subjection to VAT taxation will be related to the existence of a restoration of income, which compensates for an increase in patrimony not achieved as a result of the contractual breach, that is, a remunerative character associated with the indemnity.
In other words, it must be assessed whether the indemnity is intended to compensate for lost profits, that is, to restore the level of income that, by force of an external factor, the taxable person ceased to obtain, or whether it simply aimed to compensate or repair a loss caused. That is, the purpose and nature of the payment underlying the indemnity will determine its classification as remuneration consideration or as compensation for a loss caused. It can be stated that, for these cases of indemnities for contractual breach, only a case-by-case analysis of the substance of the operation can lead to understanding the scope of the indemnity and the contextualization of its remunerative or compensatory function, and consequently to the assessment of its subjection or not to VAT.
In these terms, it must be determined whether the payment aimed to restore the income that would have been obtained through the provision of services, had the customer not broken the contractual relationship.
Now, in the situation at hand, that will be the reality in question, since the indemnity in dispute had that purpose, as is apparent from the contracts "In the event of termination of these Specific Conditions, by the CUSTOMER or for a reason attributable to the same, before the minimum validity period is completed, B... shall be entitled to receive an indemnity calculated as follows: (minimum validity period – number of months during which the services were active) x (value of the monthly fee)."
From this clause emerges the remunerative character of the indemnity, since the same level of profit that would have been obtained is thus guaranteed. B... did not suffer losses in the form of lost profits, because the indemnity was contractually fixed to incorporate those profits.
What B... seeks to restore is not the investment made – that remains as it was made – what it seeks, in fact, is to obtain revenues to recover that investment, from an economic perspective. In the submissions presented in the right to be heard, the taxable person limited itself to claiming that these indemnities constitute a sanction/punishment imposed on its customers and aim merely to compensate for a loss and are not the consideration for any service provision or transfer of goods.
However, it failed to demonstrate or quantify what loss these are intended to compensate.
As has already been demonstrated, the value of the indemnity corresponds to the total revenue that B... would have earned had the contract remained in force until its final term. Therefore, it is entirely inadmissible to consider that the entire amount of the indemnity was intended to repair a loss. It would be equivalent to accepting that B... would obtain no profits from the mobile broadband internet access service provision contracts and multimedia television services that it enters into, that is, that all revenue earned was only to compensate for the investment made. This is not actually the case.
In this sense, even if the indemnities could contain a part of their value intended to repair a loss, the same was not presented or proven by the taxable person.
And in invoking that fact – the existence of loss – it falls to the taxpayer, pursuant to no. 1 of article 74 of the GTL, to bear the burden of proof of the constitutive facts. (...)
Given this, B... further came to present case law, specifically, the Tolsma Judgment, of 3 March 1994, in the context of Case C-16/93. This judgment pronounces on the concrete case of the performance of an activity consisting of playing music on a public road and its subjection to VAT. On this operation, the CJEU concludes that "the concept of service provision carried out for consideration, (...), does not encompass the activity consisting of playing music on a public road, with respect to which no remuneration is stipulated, even if the person concerned requests a monetary contribution and receives certain amounts whose amount is, however, neither determined nor determinable".
However, that is neither the case, nor are similarities evident with the situation under scrutiny, since the case under debate has underlying it the performance of an economic activity consisting of the provision of communications services. Note that the indemnities in question here have a pre-determined amount and as such have a character of onerous nature associated with them.
In summary, the payments made for contractual breach are due within the framework of the remuneration responsibility of the acquirer of the service and not as compensation for a loss caused to the service provider, and thus, in light of all the foregoing, it is concluded that these indemnities are part of the concept of lost profits and as such are subject to VAT.
On VAT Recovery
The taxable person understands, in paragraphs 132 to 135, that the amounts of indemnity debited have as "(...) recipients, in their majority, customers who do not have the nature of VAT taxable persons (individuals), being that, (...), their payment is almost never effected (...)", therefore the amounts that the TA is assessing "(...) would, in large part, be recovered after six months (...)", and the VAT of other customers would equally be recoverable by application of articles 78 and 78-A, both of the VAT Code, concluding that the State's revenue would not be prejudiced.
Before this allegation, the taxable person seems to maintain that the additional assessment is devoid of utility, since if it had charged VAT and delivered to the State, given the low collection rate and the possibility contained in article 78, it would have already recovered it.
The taxable person deduces this allegation on the basis of a hypothetical situation, let us see, for when it states "(...) the amounts (...) assessed by the complainant, would, in large part, be recovered (...)", yet the TA never considers situations that are not actual ones. Moreover, it is disregarding the financial effect in the State's sphere, arising from the delivery of the tax and subsequent recovery, and finally seems to disrespect the conditions that the law imposes for these regularizations.
Let us then see how the VAT Code regulates, in article 78, the rectifications/regularizations of the tax, establishing certain conditions for taxable persons to be able to effect the deduction/regularization that proves necessary.
Thus and regarding the matter of interest to the case, article 78 provides the mechanism for VAT recovery (i) on bad debts (article 78 no. 7) (ii) as well as on debts in arrears (article 78 nos. 8 to 10).
However, the reference that the taxable person makes to this recourse, seems to suggest that the whole process is automatic, when, however, the VAT Code provides, as already mentioned, the need to meet various legal requirements, in order for VAT regularization to be made on credits, being preceded by the assessment of the VAT itself, a situation that in the case under analysis has not yet occurred.
For this purpose, the taxable person must effect VAT regularizations, in Field 40 of the respective Periodic Declarations, relating to VAT recovery relating to arrears credits in accordance with paragraphs a), b), c) and d) of no. 8 of article 78 of the VAT Code.
The taxable person must also present the proper certifications of the Official Auditor, in accordance with the provisions of no. 9 and 10 of article 78 of the VAT Code. In the said certifications should be described the amount of uncollected credits, the amount of tax to be regularized, as well as the confirmation that the taxable person has made proper efforts for recovery of the credits in question.
Moreover, in accordance with the new wording of no. 10 of article 78, certification by Official Auditor must be effected for each of the periods in which the regularization was made and until the end of the deadline established for delivery of the periodic declaration or until the date of delivery thereof when this occurs outside the deadline.
The reference that the taxable person makes to article 78-A of the VAT Code is not applicable in the period analyzed, since this article was added by Law no. 66-B/2012 of 31 December, and no. 7 of article 198 - Law no. 66-B/2012 of 31 December - Transitional Provision in the context of the VAT Code – provides that "The provisions of articles 78-A to 78-D of the VAT Code apply to credits due after the entry into force of this law", and so only for the periods initiated in 2013 does this mechanism apply.
Now, in this case, neither was the VAT assessed nor are the conditions for regularization proven.
If and when B... comes to meet the prerequisites for possible regularization in accordance with the cited article 78 of the VAT Code, the exercise of that right is ensured through the legally provided procedures, if it has proceeded to the delivery of the tax to the State coffers.
Thus it is that, without need for further consideration, none of the prerequisites for VAT regularization under article 78 of the VAT Code are gathered in this case.
On the Calculation of the Amount of Tax to be Assessed
Finally, comes the taxable person, paragraphs 136 to 138, to argue that the amount of the correction that the TA determined is incorrect, since "...the VAT would always constitute a component of the amount collected, and never an element that would be added to this value", presenting as ground the content of the Corina Hrisi Tulica Judgment, issued on 7 November 2013, in the context of the joined cases C-249/10 and C-250/12 of the CJEU. In the words of the CJEU "when the price of a good has been determined by the parties without mention of VAT and the supplier of the said good is the debtor of the VAT due on the taxed transaction and if the supplier does not have the possibility of recovering the VAT requested by the tax administration from the acquirer, it should be considered that the agreed price already includes VAT" Thus, B... seeks that, "if by mere hypothesis, which is not conceded (...) it had to charge VAT on the indemnities for breach of the contractual loyalty period debited to its customers in the year 2012, the amount of tax to be delivered to the State could not exceed € 1,473,329.55".[...]
Notwithstanding the taxpayer's allegations, this judgment comes to clarify that "when a contract of sale has been entered into without mention of VAT, in the hypothesis that the supplier, according to national law, cannot recover from the acquirer the VAT subsequently required by the tax administration, to consider that the entire price, without deduction of VAT, constitutes the base to which VAT applies would have the consequence of VAT burdening that supplier and therefore colliding with the principle that VAT is a tax on consumption, which should be borne by the final consumer. (...) On the other hand, this would not occur if the supplier had, according to national law, the possibility of adding to the agreed price a supplement corresponding to the tax applicable to the transaction and recovering it from the acquirer of the good."
Thus, it is essential to verify whether suppliers of goods/service providers have, or do not have, by virtue of national law, the possibility of recovering from acquirers, in addition to the agreed price, the VAT required by the tax administration. (...)
It is also noted, with regard to the shifting of the tax, that in accordance with the understanding contained in Information no. 1233, of 02-03-90, of the VAT Services, "It is possible for a taxable person to whom tax has been officially assessed to proceed to invoice it to the recipient of the good or service".
Moreover, it is not without contradiction that B... defends the non-subjection to tax of these indemnities, and simultaneously defends, when attacking the quantification, that the tax is included in the amount collected.
For if that were so, we would be faced with tax assessed and not delivered, but the TA considers that such is not the case. In summary, B... argues (i) that the indemnities in question are not subject to VAT, (ii) that this assessment is useless given the various VAT recovery schemes provided for in article 78 of the VAT Code and (iii) that the improper quantification of the tax calculated by the TA, on the grounds that it considers the VAT already to be included in the amount collected.
In light of what the TA has stated, it is concluded that the claimant's pretension regarding the quantification of the amount of tax assessed is not accepted.
Considering all that has already been said, the correction of € 1,812,195.35 is maintained."
On 05-05-2015, the Claimant presented to the Tax and Customs Authority (Tax Office of ...), for the purpose of suspension of enforcement proceedings, bank guarantee no. ..., issued by C..., S.A., in the amount of € 2,493,091.42.
The Claimant submitted a request for administrative reconsideration, to which it attached documents.
The request for administrative reconsideration was processed under no. ...2015..., with the Claimant being notified of the draft decision.
The request for administrative reconsideration was expressly rejected, by decision notified on 27-11-2015, via office no. ..., of 25-11-2015.
Against this decision, the Claimant filed on 23-12-2015 a hierarchical appeal, which was not subject to a decision within the legal deadline.
On 20-05-2016 the Claimant filed a request for constitution of the present arbitral tribunal.
The Claimant is a public company whose corporate purpose consists of the establishment, design, construction, management and operation of telecommunications networks and infrastructures, as well as the provision of telecommunications services and the transport and transmission of telecommunications signals.
In the course of its activity, the Claimant enters into service provision contracts with its customers for telecommunications, internet access, television and multimedia services.
In certain contracts that the Claimant enters into with its customers, the obligation is stipulated that the customer remain bound by the contract for a minimum period, with favorable promotional conditions being offered in these situations, in particular, the fixing of monthly fees of lower value.
Upon the conclusion of these contracts, the Claimant provides its customers with favorable promotional conditions, provided that they undertake to remain bound by such contracts, for a "minimum validity period", which may reach, at maximum, 24 months.
During the validity of the said period, it is customary for the Claimant to earn revenues that exceed the value of the basic monthly fee, which are provided under the same contract that provides for that "minimum validity period".
This procedure is common in the telecommunications sector in Portugal, being practiced by the vast majority of operators.
In this type of contract, the failure by the customer to comply with the contractual obligations to which it is bound - namely, the failure to pay the monthly fees due under the contract - generates, in that party's sphere, the obligation to pay a certain amount to the Claimant.
These contracts include clauses that provide for the obligation of the customer to pay an amount corresponding to the monthly fee multiplied by the number of months outstanding to complete that period, in the event of deactivation of services, before the contractual bond agreed, at the Claimant's initiative for a cause attributable to the customer.
The provision of services (telecommunications, internet access, television and multimedia), by the Claimant, is based on complex infrastructure whose assembly and maintenance imply demanding human and material investment, to which are added the human and administrative costs associated with customer acquisition and service activation.
Based on the value of the investment necessary for the provision of services, the Claimant determines a (minimum) number of contracts that must be entered into in order for its business rationale to be achieved.
In situations where contracts are breached by customers, the Claimant ceases to receive the return originally planned, which was assessed based on the compensation of the investments made.
In these situations of contract breach by customers, the Claimant activates the clause included in its contracts.
In situations of breach by the customer, the Claimant, at first, informs the customer of the need to regularize the amounts owed and warns that, in case of non-regularization, it will proceed to cancel the contracted services and debit the indemnity arising from the breach of the loyalty period, as provided for in the contracts.
Following this communication, and if the customer does not regularize the amounts owed, the Claimant proceeds to cancel definitively the contracted service provision.
After verification of the breach and the consequent cessation of the service provision, the Claimant proceeds to debit the amount it considers due in accordance with the terms provided in the contract, corresponding to the "Value of the monthly fee (...) multiplied by the number of months outstanding to complete that period".
The vast majority of the Claimant's customers, faced with the risk of debiting the amount in question, prefer to comply with the contracted conditions, maintaining the bond during the minimum validity period.
In situations where the breach persists, the Claimant has the right to collect the pre-fixed amount, without the need to resort to legal proceedings to prove and demonstrate the right to such amount, as regards the respective quantification.
In situations of breach of the minimum validity period, the Claimant issues invoices to its non-complying customers for the amounts debited in the terms referred to, without VAT assessment and with the express mention "Not subject to VAT".
In those invoices the Claimant mentions under the title of Billing Detail that it is "INDEMNITY FOR CONTRACTUAL BREACH – SERVICE".
The vast majority of the "indemnities" debited in this context relates to individual customers.
Only a small portion of the amounts relating to the amounts debited, in breach situations, are actually paid.
The Claimant, at the moment of issuance of the corresponding invoices, records the amounts respectively in the accounting item # 282 - Income to be recognized, and only recognizes these amounts, from an accounting perspective, as results, at the moment when its non-complying customer makes the payment of the invoiced amount.
In the monthly fees paid by the customer during the period in which the contracts were fulfilled, the Claimant charged VAT, which it timely delivered to the State.
II.2. Facts given as not proven
With relevance to the decision, there are no facts that should be considered as not proven.
II.3. Substantiation of proven and not proven facts
With regard to facts, the Tribunal does not have to rule on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven facts from unproven ones (cf. article 123, no. 2, of the Code of Tax Procedure and article 607, no. 3 of the Code of Civil Procedure, applicable by virtue of article 29, no. 1, paragraphs a) and e), of the LRAT).
Thus, the facts relevant to the judgment of the case are chosen and outlined according to their legal relevance, which is established in view of the various plausible solutions to the question(s) of Law (cf. previous article 511, no. 1, of the Code of Civil Procedure, corresponding to current article 596, applicable by virtue of article 29, no. 1, paragraph e), of the LRAT).
Thus, taking into account the positions taken by the parties, in light of article 110/7 of the Code of Tax Procedure, the documentary and testimonial evidence, and the Administrative File attached to the case, the facts listed above were considered proven, with relevance to the decision, taking into account that, as was written in the Judgment of the Court of Appeal of the South Circuit of 26-06-2014, issued in process 07148/13 [1], the "tax inspection report (...) may have probative force if the assertions contained therein are not contested".
No facts were given as proven or not proven that were redundant or incompatible with the facts given as proven, nor conclusive assertions or legal conclusions formulated by the parties.
III. ON THE LAW
III.1 The question to be decided
The present case concerns whether, in situations of breach of the minimum validity period of contracts, the amounts invoiced by the Claimant to non-complying customers by way of "INDEMNITY FOR CONTRACTUAL BREACH – SERVICE" are to be considered the consideration for service provision, for purposes of VAT subjection.
III.2 The classification made by the Claimant
As is apparent from the proven factual matter, based on contractual clauses, the Claimant invoiced amounts to its customers for breach of loyalty periods, with the corresponding amounts equal to the value of the monthly fee multiplied by the number of months outstanding to complete that period.
The Claimant did not charge VAT on the invoices thus issued.
Only partially were the amounts invoiced by the Claimant collected.
The Claimant, in the submissions it presented, formulated the following conclusions:
The present Request for Arbitral Pronouncement seeks the annulment of the VAT assessment acts nos. 2015..., 2015..., 2015..., 2015..., 2015..., 2015... 2015 ..., 2015..., 2015..., 2015..., 2015..., 2015... and the acts assessing compensatory interest nos. 2015... to 2015..., all relating to fiscal year 2012;
With regard to the assessment acts notified, these do not prove to be substantiated in legally adequate terms, specifically because they contain no mention either of the corresponding Tax Inspection Report or of any other document, thus violating the rules provided for in articles 268, no. 3 of the Constitution of the Portuguese Republic and 77 of the General Tax Law, which means the respective annulment is called for;
Moreover, there was no notification, in accordance with article 60, no. 1, paragraph a), of the General Tax Law, which consequently implies the annulment of the assessment acts, for omission of essential legal formality;
With regard to the assessment of the legality of the assessment acts contested, it is important to consider the classification, for VAT purposes, applicable to indemnities, from which it follows that indemnities should not be subject to taxation when they have a character of compensation for losses and damages;
Moreover, with reference to the classification of indemnities, for VAT purposes, it is important to note that a judgment as to the fulfillment of the concept of service provision, in its residual sense, will also depend on verification of the onerous character of the operation, the existence of a direct nexus between the service provided and the consideration received, and it is also necessary for there to be an act of consumption.
Now, in this regard, it is important to bear in mind that these amounts have solely a function of compensation for a real and effective loss caused to the Claimant, in situations of breach of the loyalty period;
It was demonstrated that the activity of the Claimant is based on complex infrastructure whose assembly and maintenance imply demanding human and material investment, to which are added the human and administrative costs associated with customer acquisition and service activation. And whose dimension is necessarily calculated based on its number of customers and the expectation of their remaining (at least) during the loyalty period;
For this reason, the Claimant, in certain service provision contracts that it enters into with its customers, proceeds to include a penalty clause, pursuant to which, in case of deactivation of services before the contractual bond agreed, the Claimant shall be entitled to receive an indemnity;
In fact, through the clauses contained in the contracts entered into with its customers, the Claimant seeks, on the one hand, to promote contract compliance and, on the other hand, in case of breach, to recover the losses caused in its sphere, associated with the investments made for the provision of contracted services;
The amounts debited by the Claimant, under the penalty clause in question, thus indisputably assume – alongside their compulsory function –, a markedly indemnificatory nature, of loss compensation, and as such, should not be considered within the scope of application of this tax;
Pursuant to applicable legislation, the obligation to indemnify covers two types of losses: (i) emergent losses ("prejudice caused"), arising from the decrease in the patrimony of the injured party and (ii) lost profits ("benefits that the injured party ceased to obtain as a consequence of the injury"), and both of said legal types of loss — contrary to what the tax administration seems to want to suggest — are part of the obligation to indemnify, in accordance with the provisions of article 564 of the Civil Code;
Contrary to what the tax administration wants to suggest, in the case at hand, lost profits appear only as a criterion for calculating an indemnity for losses, not assuming any remunerative character;
Assuming a compensatory function, in the case at hand, at the moment of payment of the indemnity, there is no synallagmatic relationship or reciprocal obligation between the Claimant and the customer, and thus it is not understood how the tax administration intends to suggest that the indemnity constitutes the consideration for any operation for purposes of VAT;
Thus it becomes evident that the indemnities for breach, debited by the Claimant to its customers, presuppose, as a prior and inviolable condition, that the main contractually stipulated obligations will not take place, that is, the monthly fees owed by the customer will not be paid, and consequently, no service will be provided;
And thus the understanding of the tax administration cannot proceed, according to which the indemnities for breach debited by the Claimant under the penalty clause constitute, still, a "consideration for service provision";
In fact, the consideration for the service provisions provided for in the contract was, instead, the monthly fees and, in particular, the amount relating to communications traffic paid by the customer during the period in which the same remained in force – that is, until the moment of breach and the consequent cancellation of services – and with regard to these monthly fees and, as well as, to communications traffic, the Claimant charged VAT, which it timely delivered to the State;
Thus, contrary to what seems to be argued by the tax administration, the debiting of indemnity for breach does not aim to remunerate any service, and the payment of such amount should be found outside the scope of application of this tax, especially since there is, in the case at hand, any act of consumption, which is essential to VAT subjection;
The Claimant thus does not accept that the tax administration, by making an arbitrary reading of the content of the concept of loss – contrary to the position of the CJEU – excludes from it the so-called "lost profits", in order thereby to want to appear to justify that such amounts have a remunerative character and not a compensatory character;
Moreover, it is also important to note that only a small portion of the amounts relating to the indemnities debited, in breach situations, are subject to payment;
It should further be noted that the procedures associated with the breach of the loyalty period and, as well, the terms and conditions for defining the value of the indemnities fixed in this context are regulated, by law and by rules emanating from the sector's regulatory entity, the ICP - National Communications Authority ("ICP-ANACOM") and, if any doubts were to arise regarding the appropriateness of the indemnities in question, the Supreme Court of Justice and the Court of Appeal of Lisbon have already ruled on this matter, specifically, by reference to the penalty clauses in question here;
Given the foregoing, the tax administration erred in not managing to respect the applicable legal norms, including those of European Law, regarding the definition of the scope of VAT;
Thus, the assessment acts now in question, which are the subject of the present request for arbitral pronouncement, must be annulled, because they were practiced in violation of the applicable legal norms and principles (cf. article 163 of the Code of Administrative Procedure);
Should it not be understood as such with regard to the non-subjection to VAT of the amounts now in question, and without conceding, annulment is requested of the partial assessment acts, on the basis of the value of the indemnities actually paid by the customers, with the VAT considered being included in the value already debited and actually collected;
With regard to compensatory interest, the prerequisites on which the respective assessments depend were not demonstrated, since the tax administration limited itself to demanding, in an automatic manner, an amount by way of compensatory interest, exceeding the legal formalities required for assessment, and in this sense, its annulment must be determined;
Finally, from the annulment of the assessment acts should result the payment of indemnity to the Claimant in order to compensate for the costs incurred with the guarantee provided, increased by legal interest calculated on those costs, and counted from the dates on which they were incurred until the date on which the withdrawal of the guarantee is authorized.
III.3 On formal defects
On lack of substantiation
The Claimant alleges that "the assessment acts notified, (...) do not prove to be substantiated in legally adequate terms, specifically because they contain no mention either of the corresponding Tax Inspection Report or of any other document, thus violating the rules provided for in articles 268, no. 3 of the Constitution of the Portuguese Republic and 77 of the General Tax Law, which means the respective annulment is called for".
As is known, and both parties acknowledge, substantiation is a requirement of tax acts in general, being a constitutional requirement (268 of the Constitution) and a legal one (article 77 of the General Tax Law).
Briefly, it can be said that it is now settled in national doctrine and case law that the required substantiation must meet the following characteristics:
Necessity: it must always start from the administration's initiative, with substantiations upon request not being admissible;
Timeliness: it must be contemporaneous with the practice of the act, substantiation cannot be deferred;
Clarity: it must be comprehensible to an average recipient, avoiding polysemous or profoundly technical concepts;
Completeness: it must contain all essential elements that were determining in the decision taken. This characteristic breaks down into two
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