Summary
Full Decision
ARBITRAL DECISION (consult full version in PDF)
The arbiters Judge Counsellor Dr. Fernanda Maças (arbitrator-president), Prof. Doctor Fernando Araújo and Dr. José Coutinho Pires (arbitrators-members), designated by the Deontological Council of CAAD to form the Arbitral Court, agree as follows:
I. Report
1. A..., Real Estate Promotion Company, Sole Proprietor Limited Liability Company, with single identification number for legal persons and registration ..., with registered office at Street ..., no.... ..., ...-... ... (hereinafter A... or Claimant), filed a request for constitution of the collective arbitral tribunal under the terms of article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter LAMT), in which the Tax and Customs Authority (hereinafter TA) is respondent, with a view to challenging the final decision rendered in the Gracious Complaint process by the Tax Authority – Finance Directorate of ..., in the scope of process no. ...2017..., concerning VAT assessments and corresponding compensatory interest, better identified in the table below:
Document Identification
Compensation No.
Amount
VAT ...
...
€62,222.29
VAT ...
...
€235.02
VAT ...
...
€107.27
VAT ...
...
€266.86
Compensatory Interest ...
...
€4,023.13
Total
€66,854.57
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and followed its normal procedural course.
The collective arbitral tribunal was constituted on 17 August 2018.
2. To substantiate the claim, the Claimant alleges, in summary, the following:
That the failure to examine the documentation (only) attached to the Gracious Complaint – apparently because, as invoked under article 108 thereof, "the technician of the accounting office where the company's accounts are prepared (who was not the Certified Accountant at the time of the facts) responded to the TA in an uninformed manner, as already described in detail in the Right to Hearing, and now is the time to reestablish the facts and to demonstrate the material truth, which is basic to the most appropriate taxation in VAT and Corporate Income Tax" – taints this decision with insufficient substantiation;
She celebrated, in May 2014, a Framework Agreement with B... – which had not been attached in time to be considered in the Inspection Report – for the provision by B... of services in consultancy and studies in the real estate market and civil construction areas;
B... played a decisive role in the context of the obligation assumed by A... Real Estate towards A... Construction in the Service Provision Agreement concluded between them and effective from 01/01/2012, specifically regarding market research and consultancy in Kazakhstan for the construction of a 33 km motorway section;
In invoice no. 483/2014 of 21/11/2014, issued by company B..., only €50,000 concerned the commission for the sale of real properties sold by A... Real Estate, and "the payment of the remaining value (€220,000.00) refers to the amount associated with consultancy services, market prospection, advisory services and (especially) search for investors to provide capital for civil construction works", under the terms of Clause 7 of the Framework Agreement concluded in May 2014, which provided the following:
"1 – For the execution of the tasks (...) contracted, and whenever such tasks are implemented, the 2nd contracting party [A... Real Estate] shall pay to the 1st contracting party [B...] the following amounts:
a. The fixed amount of €50,000.00 (fifty thousand euros) as compensation, for the identification of clients acquiring products marketed by the 2nd contracting party (A... Real Estate), and provided that such acquisition exceeds €700,000.00 (seven hundred thousand euros);
b. A variable amount, to be determined when the tasks described in this contract are implemented, as compensation for the services actually provided.
2 – The amounts mentioned in subparagraph b) of paragraph 1 of this clause shall be determined by both parties. (...)."
The Claimant further alleged, in the Gracious Complaint proceeding, that therefore the VAT assessment and deduction on that amount, which was not included in the respective periodic declaration, must be made necessarily under the terms of article 78 of the VAT Code, with the substituting declaration being valid, without prejudice to any applicable penalty;
Also in the Gracious Complaint proceeding, the Claimant further alleged that what was important to do was to assess VAT at the standard rate on €270,000.00 (taxable base of €270,000.00 in field 3 and VAT assessed of €62,000.00 in field 4) and to deduct VAT at the standard rate on €220,000.00 in field 24 – that is, €50,600.00);
The decision in the Gracious Complaint did not substantiate the rejection of what had been invoked and attested with pertinent documentation, invoking that "In accordance with the Legislation in force (articles 125 of the CPA, 77 of the LGT and no.3 of article 263 of the CRP), the acts of the Tax Administration must be substantiated, and this substantiation cannot but be clear, congruent, and enclose the aspects, factual and legal, that permit understanding the cognitive and evaluative course pursued by the Administration for the determination of the act. (See Decision rendered on 12-03-2014 in the TCAF)."
3. The Respondent responded arguing, in summary, that:
The Respondent reproduces, from the Tax Inspection Report (TIR), the position of the Claimant herself as to the demonstration of the non-excessive nature of the commission charged by company B..., in invoice no. 483/2014 of 21/11/2014:
"having stated as to the abnormal or excessive amount character of the transaction, the following - sheet no. 50 in Annex:
The sale of two real properties in the amount of €1,810,000.00 was registered in account 7121.
"Under paragraph 8 of article 88 of CIRC, these expenses are not excessive commissions, since the commission was around 15% of the real properties.
It should be noted that the aforementioned real properties took 2 years to be sold, with great difficulty as is known to all in recent times due to the real estate crisis in properties of these amounts.
As is also generally known, the 'Chinese market' is the one that has had interest in this type of property and real estate agencies operating in these mediations charge somewhat higher commissions, so that the transaction is carried out with sales values as high as possible, which the 'Portuguese market' would certainly not be willing to pay." ";
The Respondent understands that "the act is substantiated when, by the motivation adduced, it is apt to reveal to a normal recipient the reasons of fact and of law that determine the decision, enabling him to react effectively through legal avenues against the respective injury", and that this occurred, as "the Claimant understood perfectly the sense and scope of the act", as revealed in the Gracious Complaint proceeding and the arbitral pronunciation request;
The Respondent invokes that the services referred to in invoice no. 483/2014 of 21/11/2014, issued by company B..., "are all related to the sale of real properties in Portugal to Chinese clients, and as well stated both in the TIR and in the GC, although they are not exclusively commissions, they are nonetheless services related to operations that do not confer the right to deduction (sale of real properties)";
It further adds that "this conclusion, that the services described there refer to the services provided in that invoice, is not departed from by the reason that the same provider and the same recipient provided and were recipients of other consultancy services (not included in that invoice)";
In any case, as the Respondent underscores, the provision of paragraph 5 of article 36 of the VAT Code, invoked in the TIR and in the Gracious Complaint decision, already dispensed with the examination of relationships between the parties that had no expression in the said invoice;
The Respondent also questions: "if it is as the Claimant alleges, why did it never invoice the expenses incurred with the consultancy services it alleges to have acquired and which it alleges are included in that invoice?";
In any case, the Respondent reiterates, "even if those services were included in the invoice which, despite making an exhaustive description of the services provided, does not include them, as clearly observed both in the TIR and in the GC, such services would not confer the right to deduction, by evident breach of paragraph 5 of article 36 of the CIVA." – "As well as, it should be added, by disrespecting also, the obligation to maintain organized accounting that permits the correct determination of the tax (VAT)";
Concludes, therefore, that "If both the CAAD, and the Administrative and Tax Courts and the CJEU, have ruled in the sense of it not being acceptable to deduce tax, referring to services and goods, not sufficiently described in the invoice or in elements external to which it refers, when such lack does not permit the correct determination of the tax, in the case, not allowing the nexus to be established with the activity that confers the right to deduction, even fewer doubts should remain when, as in this case, the description of the services provided carried out in the invoice permits the exact opposite, that is, a clear and unequivocal nexus with the activity that does not confer the right to deduction";
Finally, the Respondent alleges that if doubts persist, the issue should be submitted to the consideration of the CJEU through a preliminary ruling reference.
4. The meeting provided for in article 18 of the LAMT was waived, under the principles of the Court's autonomy in conducting the process and to promote its speed, simplification and informality. Furthermore, 17 February 2019 was fixed as the deadline for delivery of the Arbitral Decision.
5. The parties did not produce written pleadings.
II. Preliminary Ruling
5.1. The arbitral tribunal was regularly constituted and is materially competent, as provided in article 2, paragraph 1, subparagraph a) and article 4, both of the LAMT.
5.2. The parties enjoy legal personality and judicial capacity, are legitimate and are represented (articles 4 and 10, paragraph 2, of the same instrument and articles 1 to 3 of Ordinance no. 112-A/2011, of 22 March).
5.3. The proceeding is not affected by nullities and there is no obstacle to the examination of the merits of the case.
It falls to decide.
III. On the Merits
III-1. Factual Matters
6. Proven Facts
6.1. The following facts relevant to the decision are considered proven:
The claimant is a sole proprietor company, registered for the exercise of the activity of Real Estate Promotion ("to acquire, transfer, and build any type of real property for this purpose, to carry out commercialization, management, and administration of and/or in real estate projects, to develop marketing and advertising actions of projects of the same nature. To conduct market studies, provide consultancy in the real estate, architecture and engineering areas, to operate and/or give operation, under any legally admissible formula, real estate projects, to participate in public tenders for granting the operation of real properties and, incidentally, the purchase and sale of real property and the resale of those acquired for this purpose"), with CAE 41 100;
A... Real Estate has as sole shareholder company C... SGPS, SA, which is seated in ..., ..., ..., ... ...-... ..., which, in turn, also holds A... Construction, Ltd (hereinafter referred to as A... Construction), seated in the same location;
Regarding VAT, the Claimant falls under the normal regime with quarterly periodicity, being a mixed taxable person, with actual apportionment of goods and services, by virtue of simultaneously practicing taxed operations (consultancy) and exempt operations (leasing and purchase and sale of real properties);
The Claimant was the subject of a general scope inspection action, determined by service order no. OI2016..., for the year 2014, carried out by the Tax Inspection services of the Finance Directorate of ..., from which resulted the assessments of Value Added Tax (VAT) and Compensatory Interest (CI), corresponding to, among others, the various compensations better identified in the table above;
The Claimant was notified to exercise the right to prior hearing, which it exercised out of time;
The Claimant filed a Gracious Complaint, which was rejected;
In the rejection decision, it was concluded that invoice no. 483/2014 of 21/11/2014, issued by company B..., to A... – Real Estate Promotion Company, sole proprietor limited liability company, concerned payment of commissions for the acquisition of clients of Chinese nationality that were reflected in the transfer, in the year 2014 (November month), of the real property with registration article no. ... of the parish of Lisbon –... for the value of €1,060,000.00, to nationals of the People's Republic of China with the Tax ID Numbers ... and ...;
And it was also concluded that
"– Thus, having in mind that the taxable person falls under subparagraph a) of paragraph 1 of article 2 of the CIVA and since the service provider in question (commission) has no seat, permanent establishment or domicile in national territory, it falls to the acquirer (taxable person) to proceed with the assessment of VAT, at the rate of 23% in accordance with the provision of article 18 of the same instrument.
– It is further noted that the taxable person cannot deduce the assessed tax by virtue of the activity actually developed and relatively to which the provision of services in question is destined being the sale of real properties, operations which are subject to Municipal Tax on Onerous Transfers of Real Property – IMT, exempt from VAT under the provision of no. 30 of article 9 of the CIVA.
– In light of the foregoing, the amount of €62,100.00 (€270,000.00 x 23%) is to be assessed, which should be reflected in field 24 of the Periodic VAT Declaration of the 4th quarter of 2014, the taxable person having therefore breached articles 27 no. 1 and 41 no. 1 subparagraph b) of the CIVA.
Regarding invoice no. 483/2014 of 21/11/2014, issued by company B..., to A... – Real Estate Promotion Company, sole proprietor limited liability company, we have that the invoice, in the amount of €270,000.00, makes no reference to a framework agreement between the companies above-mentioned, nor to other services provided regarding assessment and consultancy activities;
Rather it expressly concerns, and in summary:
· the payment of commissions for the acquisition of clients interested in obtaining residence authorizations;
· the creation of technical sheets of the real properties to ensure conformity with legal and regulatory requirements;
· the preparation of promotional materials for each real property;
· the development of promotional activities in China;
· the sending of individual correspondence to identified potential interested parties;
· the provision of transportation for potential clients between their origin in China and destinations;
· the organization of visits to Portugal for potential buyers, with provision of necessary services (opening of accounts, legal and notarial services, obtaining tax identification numbers, medical insurance, etc);
· the carrying out of prior legal and financial diligences;
· the preparation of documents;
· the creation and maintenance of internet platforms;
· post-sale services;
· procedures leading to the issuance of the residence authorization.
6.2. Unproven Facts
No other facts relevant to the decision of the case were proven, in particular that the importance referred to in invoice no. 483/2014 of 21/11/2014, issued by company B..., could be decomposed into two components, one relating to real estate intermediation services, exempt from VAT, and another referring to consultancy services, subject to VAT payment, due within the framework of a Framework Agreement between that company and the Claimant.
Nor was it proven that, whatever relevance that might have for the decision of the present case, B... played "a decisive role in the context of the obligation assumed by A... Real Estate towards A... Construction in the Service Provision Agreement concluded between them and effective from 01/01/2012, specifically regarding market research and consultancy in Kazakhstan for the construction of a 33 km motorway section", as alleged by the Claimant in paragraph 96 of its Initial Petition.
6.3. Substantiation of the Determination of Factual Matters
The court is not required to rule on all details of the factual matters alleged by the parties, with the duty lying with it to select the facts that are relevant to the decision and to distinguish the factual matter it considers proven and to declare that which it considers not proven (see article 123, paragraph 2, of the CPPT and article 607, paragraph 3 of the CPC, applicable ex vi article 29, paragraph 1, subparagraphs a) and e), of the LAMT).
In this manner, the facts pertinent to the judgment of the case are selected and conformed according to their legal relevance, which is established with regard to the various solutions for the object of the dispute under applicable law (article 596, paragraph 1 of the CPC, applicable ex vi article 29, paragraph 1, subparagraph e), of the LAMT).
Thus, having regard to the positions taken by the parties, in light of article 110, paragraph 7 of the CPPT, and to the documentary evidence which, moreover, is in the administrative process itself, the facts listed above were considered proven, with relevance to the decision. Account is also taken of the doctrine contained in the Decision of the Administrative Court of South Region of 26-06-2014, rendered in process 07148/13, regarding the probative value of the tax inspection report, admitting that "it may have probative force if the assertions contained therein are not impugned".
Allegations made by the parties of merely conclusive nature were not given as proven or unproven, even if presented as facts, by being incapable of proof.
III.2. Legal Matters
7.1. Questions to be Decided
The questions to be decided in the present proceedings are the following:
I) Alleged insufficiency of substantiation of the acts of VAT assessment and compensatory interest;
II) Alleged deductibility for VAT purposes of part of the amount incurred in invoice no. 483/2014 of 21/11/2014, issued by company B..., to the Claimant, as it corresponds to remuneration for services provided in activities subject to VAT payment.
I – Regarding Substantiation
The thoroughness and exhaustiveness of the demonstrations and calculations contained already in the TIR, and thereafter in the decision on the gracious complaint, appear to correspond to the fulfillment of the requirements on which the verification of the substantiation duty depends – besides which, before this, confirm observance by the Respondent of the inquisitorial principle to which it is subject under articles 58 of the LGT and 6 of the RCPITA, with no indication being found that the TA omitted any evident effort, or refused any clearly required diligence, in the correct investigation of the factual reality on which its decisions were based.
It has been understood in doctrine and jurisprudence that substantiation, also because of the imperative of clarity, should be simple, without ceasing to be complete.
This implies that, if the substantiation is already completely formulated at a particular stage of a procedure or process, it is more than unnecessary, by redundancy, to repeat it: it can even be counterproductive, converting itself into a laborious reformulation of everything already said, of everything already argued, of everything already documented – presumably contributing to information entropy through excess, resulting, in the end, in misinformation and vulnerability of he to whom the information should primarily serve, which is its recipient: this the solution enshrined in article 77 of the LGT.
In this same sense, it has been recognized already, in tax arbitration proceedings, that "when the tax act (additional tax assessment, for example) arises in the sequence and as a consequence of an inspection proceeding carried out by the Tax Administration, the dialectic or dialogue which necessarily establishes itself between the taxpayer and the tax inspection must, in principle, make difficult the non-fulfillment or even deficient fulfillment of this duty to substantiate to the extent that the final decision is constructed over the course of this process with the participation of the taxpayer"[1].
The procedural/processual context is not, in short, indifferent for assessing in concreto the adequacy of the substantiation produced. As is concluded in another arbitral decision, "The possibility of nullity due to lack of substantiation should, from the outset, be ruled out, as it is quite evident the existence of an administrative process with attachment of evidentiary elements, functioning of the adversarial process, substantiation, conclusions [...] That is, all the decision-making orders that led to the assessment contested or to the confirmation of its correctness were preceded by service reports containing all the grounds, factual and legal, necessary to the full understanding of how the value was calculated [§] Thus, it is verified that the act was practiced in a procedural context capable of permitting its recipient to know the reasons of fact and of law [...] "[2].
From which it follows that it is settled understanding in arbitral jurisprudence itself that the reference to "succinct exposition" in article 77, 1 is to be taken literally: "what matters is that, even if summarily or succinctly, the premises of the act are known and all the determining motives of the decision-making content are referred to"[3]
The same reasons of economy and rationalization of means, added to the awareness that substantiation develops, not infrequently, "dialogically" over the course of the process, have led jurisprudence to recognize that excessively detailed substantiation can be the contrary of that which is teleologically aimed at with a true substantiation – dispensing with minutiae even where they notoriously would not further contribute to information sharing between administration and taxpayers, in a kind of "diminishing marginal returns" effect of the information itself. From which it follows that reference to principles, to regimes, or to normative frameworks, can dispense with the complete enunciation of everything that corresponds to those principles or those regimes or those normative frameworks.
As jurisprudence establishes: "In personal income tax assessment acts, given their nature as a 'mass process', the Administration's duty to substantiate is fulfilled in a 'standardized' and 'computerized' manner, but without being able to fail to observe the provision of paragraph 2 of article 77 of the LGT or to call into question the purposes of the right to substantiation."[4].
The Law also admits it. Let us recall the establishment of this same principle in paragraph 3 of article 153 of the CPA: "In the resolution of matters of the same nature, any mechanical means may be used that reproduces the grounds of the decisions, provided that this does not involve a diminution of the guarantees of those interested."
It should be noted that, for a matter of equality of arms, knowledge of the cognitive, evaluative and volitional course that culminated in the choice of the assessment values, and not others, falls to the entity that authored the act, being inconceivable that it fall on the taxpayer the burden of enunciating himself the arguments substantiating the impugned act, to then be able to accept or contradict them: such is the sense of the substantiation duty established generically in article 268 of the Constitution and in article 77 of the LGT. In return, account cannot fail to be taken that the discernment of the specific recipient of the substantiation is an element to be weighed to assess whether or not the substantiation afforded him, in concreto and in those precise circumstances – and not in others more remote or abstract – the formulation of a conscious judgment on the advisability of accepting or impugning, graciously or contentially, the act.
In fact, substantiation also involves an assessment by its efficacy, or rather, by the "impression of the recipient" – not in the sense of it dispensing with the verification of the objective requirements of its verification (even because it is not only the protection of the recipient's interests, the "guarantee function" of substantiation, that is at stake, with the very transparency and objective correctness of the decision-making process, the "endogenous function" of substantiation[5], also at stake), nor in the psychologist sense of referring to an inquiry into the subjective states of conviction of the recipient (which would be impossible), but rather in the sense that such substantiation have its clarity evaluated by the standard of the average declaratee or of the concrete declaratee if this has more information than the average declaratee – as results from the general principle established in article 236, 1 and 2, of the Civil Code.
In fact, in our understanding, this general principle of the "impression of the recipient" which confers autonomy on the formal question of substantiation, which is essentially a question of access to information regarding the motives that led the Administration to act as it did, the reasons on which it based its action – and which must be separated from that other material dimension of substantiation, which refers to the substantial validity of the act, concerning the correspondence of those motives to reality, and the sufficiency of that correspondence to legitimize the concrete administrative action[6].
Being that it is in the formal plane – demarcating it in turn from the theme of notification, which does not merge with it[7] – that one independently inquires about the fulfillment of the substantiation duty, remitting material questions to the examination of the merits.
As is lapidarily established in an arbitral decision, "In the case under examination, it is verified that the Respondent Tax Authority made known, through the inspection report, the substantiation by which, in that authority's perspective, the Claimant could not but include in the taxable value for VAT purposes the value relating to the subsidy in question. [§] Now, from the tenor of the inspection report underlying the VAT and CI assessment, there result expressly, sufficiently and congruently the reasons of fact and of law on which such positioning of the Tax Authority is based. [§] Whether or not these presuppositions and reasons contributed by the Tax Authority to the inspection report are substantively valid is a question that has to do with the merits and no longer with the form and which, therefore, raises itself in another dimension of which it is not incumbent, at this point, to know. [§] In this case, the criterion (well or ill) traced by the Tax Authority is evidenced."[8].
Let us admit, by contrast, that it would not be reasonable to infer from this that every legal reaction of the taxpayer would reveal, ipso facto, the "impression of the recipient" demonstrative of the sufficiency of the substantiation – even for the elementary reason that understanding a substantiation is not accepting that substantiation, nor even considering it true, adequate or complete. As has been observed already in arbitration proceedings, "This argument, as presented, is without merit and could even lead, in theory, to the inadmissibility of the invocation (or to the irrelevance of the consideration) of the defect of lack of substantiation of acts if the taxable person resorted to the Courts (whether arbitral or judicial). The fact of presenting a request for arbitral pronouncement does not permit demonstration, by itself, that the act was duly substantiated"[9].
But, in accordance with the general principle of the relevance of knowledge, by the declaratee, of the real will of the declarant, as established in paragraph 2 of article 236 of the Civil Code, it cannot be legally indifferent, for the assessment of the sufficiency of substantiation, the conduct of the declaratee that is revealing of the concrete, real, contextual understanding of that which was transmitted together with the decision. Doctrine affirms it, accepting that the duty to substantiate is fulfilled if, by the position it takes and arguments it uses, it is evident that the taxpayer grasped the reasons or motivations, of fact and of law, of the author of the act[10].
It is a matter of the "impression of the recipient", to borrow the civilian law category, that is at stake in this criterion of weighing as to the fulfillment of the requirements of substantiation, at least in its "guarantee" teleology; and this is perfectly embodied in the canonical formula of the jurisprudence of the superior courts: "According to the uniform jurisprudence of this STA, and considering the functionality of the institute of substantiation of administrative acts, that is, the instrumental purpose which it pursues, an act will be duly substantiated whenever a normal recipient can become aware of the sense of that same decision and the reasons that support it, permitting him to grasp the cognitive and evaluative course followed by the administrative entity, and to choose consciously between the acceptance of the act or the activation of the legal means of impugning"[11].
With regard specifically to the case in examination, the allegation of lack of substantiation concentrates on the following argument of the Claimant: "At this point the Tax Authority, after considering valid the documents presented in the Claimant's defense (as it did not refer to them being false), merely asserts that it does not analyze them because they altered nothing of the decision. But then the question is asked if it did not analyze them how can it conclude that they altered nothing of the decision? [...] Now if the entire decision suffers from a lack of substantiation, at this last point that lack is glaring, for one cannot understand what the reason for the attitude taken by the Tax Authority was, what its reasoning was to conclude as it concludes, when it itself admits that it did not analyze the documents."
There appears to exist, in this argument of the Claimant, a confusion between duty of substantiation and obligation of specified impugning of all allegations formulated and of all assertions of a merely conclusive character, even those that are not capable of proof, or those that do not correspond to proven facts, or to facts which, proven, are legally irrelevant – being that at stake here is a judgment of pertinence that lies upstream of the duty of substantiation, and which in no way affects the validity of a strictly legal substantiation, and which, as such, will be limited to that which is considered relevant and pertinent, for the Law, in the universe of all possible facts and arguments.
More concretely, having regard to the declaration obligations contained in article 36, 5, b) of the CIVA, one understands the unnecessariness of assigning legal relevance to unproven allegations relating to undocumented facts contradictory with the presented invoicing. Not analyzing those allegations was not shirking from substantiating – as substantiation should, and must, be limited to an area of legal relevance, carved out within the unrestricted universe of factuality.
In sum, and for the reasons that precede, we have that the tax acts impugned in the present proceedings are not afflicted with lack of substantiation.
II – Regarding Deductibility, for VAT Purposes, of Part of the Amount Incurred in Invoice No. 483/2014 of 21/11/2014, Issued by Company B..., to the Claimant, as it Corresponds to Remuneration for Services Provided in Activities Subject to VAT Payment.
II.A. It is well known that, for VAT purposes, as an indirect tax of Community matrix, multi-phase, which tends to reach every act of consumption, the right to deduction is the rule (article 19 of the VAT Code [CIVA], and article 178, a) of the VAT Directive [DVAT]), with limitations being the exception – being, in fact, the exercise of the right to deduction the emanation of a nuclear principle in VAT matters, the principle of neutrality. Thus, limitations to that exercise can only occur exceptionally and must be duly substantiated at the legislative level of EU Member States, this being the consensual orientation in European and national jurisprudence[12].
The exercise of the right to deduce VAT by VAT taxable persons is conditioned on the fulfillment of formal and material requirements.
The former concern the set of formalities to which the issuance of invoices must comply (article 36, 5 CIVA, article 226 DVAT), and the latter to the effectiveness of the operations and their connection with activities which, exercised by the taxable persons, confer such right (article 20, 1 CIVA, article 168 DVAT)[13].
Let us recall succinctly that, of the amount of €270,000.00 documented by the invoice, the TA understood that there remained to be assessed the amount of €62,100.00 (€270,000.00 x 23%), which should have been reflected in field 24 of the Periodic VAT Declaration of the 4th quarter of 2014, and was not – the taxable person having therefore breached articles 27, 1, and 41, 1, b) of the CIVA[14].
Having in mind that the Claimant falls under article 2, 1, a) of the CIVA, and since the service provider, and issuer of the invoice, has no seat, permanent establishment or domicile in national territory, it would fall to the acquirer of the service, the Claimant, to proceed with the assessment of VAT, at the rate of 23%, in accordance with the provision of article 18 of the CIVA.
It is recognized, in the very Request for Arbitral Pronouncement (RAP), that "The invoice concerns payment of commissions for the acquisition of clients of Chinese nationality, which were reflected in the transfer, in the year 2014 (November month), of the real property with registration article no. ... of the parish of Lisbon –... for the value of €1,060,000.00, to nationals of the People's Republic of China with the Tax ID Numbers ... and ... .".
For its part, the TA itself admits as possible that the issuer of the invoice, the company seated in Hong Kong, may eventually have provided other services to A... Real Estate, in accordance with the framework agreement concluded on 10/05/2014 between both companies, and further documentation presented. But it insists that:
the value reflected in the invoice in question makes no reference to such framework agreement, nor to other services provided regarding assessment and consultancy activities which would have been developed, or could have been developed, under such framework agreement;
the date of issuance of the invoice is coincident with the date of the transfer of the real property, and the invoice only details intermediation services related to the activity of purchase and sale of real properties in a very specific context;
the expense documented in the invoice is thus exclusively allocated to an activity exempt from VAT under article 9, 30 of the CIVA, being unable, therefore, the tax assessed in such operation to be deductible, by force of article 20, 1, a) of the CIVA, "a contrario".
In effect, the invoice in question only mentions, in its description, services related to the activity of purchase and sale of real properties developed by A... Real Estate, with it not resulting therefrom that, in the amount in question, are included services of another type, simply by the fact of the existence of a framework agreement with a certain payment clause:
whether because the services subsequently alleged and listed by the Claimant appear to be of an amount much superior to that which is documented in the invoice, and should presumably be documented by other invoices, and not by this one (and indeed the Claimant presents other invoices to document the execution of other contracts, namely that in effect between A... Real Estate and A... Construction from 01/01/2012 – for example invoice no. FT 2016A1/26, issued on 21/12/2016, in the amount of €24,415.50 = €19,850.00 + VAT);
whether because the Claimant itself recognizes, in the RAP, that, of the total of €270,000.00, €50,000.00 actually concerns commissions paid to B..., for intermediation in the real estate transaction – thus leaving to be assessed an amount of €11,500.00 of VAT – only disagreeing with the TA on the remaining €220,000.00 documented in the invoice (and which the Claimant defends as being a value concerning a service acquired in the sphere of its taxed assessment and consultancy activity).
Notwithstanding all that the Claimant affirms concerning the service provision agreement concluded between A... Real Estate and A... Construction, in terms of it encompassing "various tasks of a practical nature" entrusted to A... Real Estate, and taxed for VAT purposes, namely as "assessment services", the fact is that:
the invoice in question does not document it, nor even gives any indication of it;
the invoice in question was not issued by A... Real Estate to A... Construction, but rather by B..., to A... Real Estate, from which it appears perfectly normal that the invoice does not reflect, nor should reflect, the relationships between the two "A...", which are "inter alios" for B... – being unable, for that very reason, to constitute any proof about the effective relationships between the two "A...", even if it were to allude to them in some passage.
On the other hand, nowhere in the invoice is it possible to discern the "assessment services" intended for the "mega projects of Kazakhstan" that the Claimant mentions in detail in the proceedings, and which it alleges correspond to the €220,000.00 concerning the assessment and consultancy service acquired and allocated to the taxed activity of A... Real Estate – which would confer, for that reason, the right to deduction (of €50,600.00 of VAT at the standard rate).
Furthermore, and independent of the tenor of the invoice, we have as not proven that the issuer of the invoice had played "a decisive role in the context of the obligation assumed by A... Real Estate towards A... Construction in the Service Provision Agreement concluded between them" and referring to the mentioned "projects of Kazakhstan".
Item by item, line by line, the invoice enumerates the steps of the acquisition/intermediation that led, on the same date as the invoice, to the acquisition of the real property in Portugal.
Not even the slightest mention of the alleged "assessment services" which the issuer of the invoice supposedly had provided to the Claimant, apart from the specific transaction that the invoice documents.
Rather, the references in the invoice are limited, let us recall:
to payment of commissions for the acquisition of clients interested in obtaining residence authorizations;
to the creation of technical sheets of the real properties to ensure conformity with legal and regulatory requirements;
to the preparation of promotional materials for each real property;
to the development of promotional activities in China;
to the sending of individual correspondence to identified potential interested parties;
to the provision of transportation for potential clients between their origin in China and destinations;
to the organization of visits to Portugal for potential buyers, with provision of necessary services (opening of accounts, legal and notarial services, obtaining tax identification numbers, medical insurance, etc);
to the carrying out of prior legal and financial diligences;
to the preparation of documents;
to the creation and maintenance of internet platforms;
to post-sale services;
to the procedures leading to the issuance of the residence authorization.
In accordance with common rules of experience, what invoice no. 483/2014 of 21/11/2014 patently describes and documents is the complete procedure that led, on the date of the invoice, to the issuance of "Golden Visas", a procedure notoriously popular, at the time and still today, among Chinese citizens, such as those who were acquired, for the transaction, by the Hong Kong company.
The Claimant itself admitted it at the prior hearing, being able to read in the TIR: "It should be noted that the aforementioned real properties took 2 years to be sold, with great difficulty as is known to all in recent times due to the real estate crisis in properties of these amounts. As is also generally known, the 'Chinese market' is the one that has had interest in this type of property and real estate agencies operating in these mediations charge somewhat higher commissions, so that the transaction is carried out with sales values as high as possible, which the 'Portuguese market' would certainly not be willing to pay."
In this is consumed the totality of the items into which the invoice explicitly decomposes – and from which we are unable to descry, in the invoice, its division into two components, one relating to real estate intermediation services, exempt from VAT, and another allegedly concerning consultancy services, subject to VAT payment, due within a Framework Agreement between the invoice-issuing company and the Claimant.
Two components, therefore: one minutely detailed, the other wholly, inexplicably, omitted.
In the final analysis, if one were to accept that decomposition into two components, the invoice would breach the provision of article 36, 5, b) of the CIVA, by not adequately discriminating the quantity and denomination of the goods transferred or services provided – this being, as the TA underscores in its response, one of the essential elements for assessing the allocation of such good or service to the different activity sectors when one is in the presence of mixed VAT taxable persons, as is the case of the Claimant.
But, as the TA also underscores in its response, "in the case, the description of the services provided carried out in the invoice permits the exact opposite, that is, a clear and unequivocal nexus with the activity that does not confer the right to deduction".
Moreover, if there were to persist the idea that there is a "hidden" part in the invoice, would be ruled out, by force of article 75, 2, a) of the LGT, the presumption established in article 75, 1 of the LGT – with the burden of proof as it is enshrined in article 74 of the LGT fully applying.
But it is precisely this rule of burden of proof, as it results from article 74, 1 of the LGT, or more broadly from article 342, 1 of the Civil Code, which we must apply to the case[15]: we have deemed unproven the allegation of a constitutive fact by the taxpayer – that of the invoice documenting the remuneration for services provided in activities subject to VAT payment, thus amounts deductible in VAT terms.
Now, in general terms, "Doubt about the reality of a fact and about the distribution of the burden of proof is resolved against the party to whom the fact benefits", in accordance with the provision of article 414 of the CPC.
II.B. The CJEU, through the collaborative mechanism of the preliminary ruling reference, has been continuously called upon to interpret and detail the rules and principles of European law concerning VAT regarding the conditions for the exercise of the right to deduce this tax, and the consequences of the non-compliance with formal requirements in the issuance of the invoices that support it.
Considering the Community harmonization that prevails in this domain, based on article 113 of the Treaty on the Functioning of the European Union, and in face of the applicability of European law, as established in article 8, 4 of the Constitution of the Portuguese Republic, governed by the parameters of primacy and uniform application, the reading of the national norms cannot fail to consider the interpretation of the European Court.
The right to deduction is the essential form for achieving the objective of tax neutrality, without which VAT would not be justified: "the deduction scheme aims to completely free the businessman from the burden of VAT due or paid in the course of all his economic activities. The common VAT system thus ensures, neutrality as to the tax burden of all economic activities, whatever their purpose or results, provided that such activities are, in principle, themselves subject to VAT"[16].
A constant jurisprudence of the CJEU affirms that, without prejudice to the important documentary function of the invoice, insofar as it may contain verifiable data, provided that the substantive requirements are fulfilled and demonstrated, non-compliance with the formalities cannot, in principle, lead to the suppression of the right to deduce VAT[17], reinforcing that this "ensures neutrality in the application of VAT, so it cannot be refused solely because taxable persons neglected certain formal requirements, when the substantive requirements have been fulfilled"[18].
In return, Member States have the faculty to adopt, under the provision of article 273° of the DVAT, measures to ensure the exact collection of the tax and prevent fraud, provided that one does not go beyond what is necessary to achieve such objectives and does not put into question the neutrality of VAT[19].
In the CJEU's interpretation, the requirement to have an invoice in all respects compliant with the provisions of the DVAT would have an unacceptable consequence: that of calling into question the right to deduction of the taxable person, when the data can be validly proven through other means than an invoice[20].
For VAT purposes, the right to deduction depends materially: 1) on the effective carrying out of the operations; and 2) on the connection – direct and immediate – of the goods and services acquired, and burdened with VAT, with the intention (confirmed by objective elements) of carrying out operations of transfer of goods and provision of services that confer such right, independently of whether these are carried out and whether they are or are not profitable[21].
This means that the CJEU regards with great breadth the fulfillment of substantive requirements of the right to deduction – but without neglect of the formal requirements, without which neither will the proof of the substantive requirements be made –.
Thus, it is not required that the VAT incurred be directly related to obtaining VAT-subject outputs, nor is it required that the VAT to be deducted be directly related to a specific output, it sufficing that it be incorporated into the economic activity of the taxable person, it being incumbent on the latter to evaluate the operations that are relevant to the pursuit of its economic activity and its scope, without administrative interference in the powers of management of the taxable person that may condition what should be considered, or not, as investment expense related to the economic activity, that is, with the upstream operation; even permitting an indirect relationship between the good or service in which VAT was incurred and the operations produced downstream (the economic activity of the taxable person) for it to be deductible[22].
However, none of this is done in disregard of formal requirements, and proof.
For the CJEU "the purpose of the mentions that must necessarily appear on the invoice consists in permitting the Tax Administrations to carry out controls of the payment of the tax due and, if applicable, of the existence of the right to deduce VAT", and it is in light of this purpose that it is important to analyze whether the invoices respect the requirements of article 226, 6, of the DVAT[23].
It should be noted that these requirements can be supplied through documents connected with the invoices, which may be equated to these, under the terms of article 219 of the said directive, in their capacity as documents that alter the initial invoice and make specific and unequivocal reference to it[24].
Thus, the CJEU concludes that article 178, a) of the DVAT must be interpreted in the sense of opposing the national tax authorities being able to refuse the right to deduce VAT by the mere fact of the taxable person possessing an invoice that does not comply with the requirements required by article 226, 6 of this directive, when those authorities have all the information necessary to verify whether the substantive requirements relating to the exercise of that right are satisfied[25].
Which means something that is elementary and we already know: that the exercise of the right to deduction supported in the operations of acquisition of goods and services from taxable persons is not a free or unconditional right, but rather depends on the verification of certain subjective and objective requirements. Although it is no longer sustained that the invoice is a formalityadsusbstantiam for the purpose of exercising the right to deduction[26], the non-compliance with certain formal requirements in the issuance of an invoice can be sufficiently serious to call into question that right to deduction, in the absence of other credible means of proof that attest to the materiality of the operation and prevent fraud and unlawful loss of tax revenue.
With all the breadth it confers, the jurisprudence of the CJEU does not permit basic rules on proof and distribution of the burden of proof to be evaded, when upon them crucially depends the establishment of the economic materiality on which rest the very justice, and other purposes, of taxation.
IV. Decision
In harmony with the foregoing, this Arbitral Court agrees to:
Dismiss the request for annulment of the final decision rendered in the Gracious Complaint process by the Tax Authority – Finance Directorate of ..., in the scope of process no. ...2017...;
Dismiss the request for partial annulment of the additional VAT assessment no. VAT ... (compensation no....);
With the consequent maintenance in the legal order of the impugned tax acts of assessment.
VI. Value of the Proceeding
In harmony with the provision of article 97-A, paragraph 1, subparagraph a), of the Code of Procedure and Tax Process (CPPT) and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceeding is assigned the value of €62,100.00 (sixty-two thousand one hundred euros).
V. Costs
The value of the arbitration fee is fixed at €2,448.00, under the terms of Table II of the Regulation of Costs of Tax Arbitration Proceedings, under the terms of articles 12, paragraph 2, and 22, paragraph 4, both of the LAMT, and article 5 of the cited Regulation, to be paid by the Claimant.
Notify.
Lisbon, 21 January 2019
The Arbiters,
Fernanda Maças (Arbitrator President)
Fernando Araújo (Arbitrator Member)
José Coutinho Pires (Arbitrator Member)
[1] Process no. 131/2012 - T of CAAD.
[2] Process no. 124/2015 - T of CAAD.
[3] Process no. 131/2012 – T of CAAD.
[4] Decision of the STA of 17 June 2009, Proc. no. 0246/09. In the same sense, the Decisions of the TCA-South of 28 February 2012, Proc. no. 4893/11, and of 16 November 2004, Proc. no. 879/03.
[5] "It is aimed, therefore, not only that the individual becomes aware of the reasons by which the Administration decided in one way and not another; what is also intended is to impose on the Administration, by this means, a necessary explicit reflection and weighing of the reasons and arguments in confrontation, which the substantiation of the act must disclose, thus making transparent the administrative activity. From which it follows that it is not sufficient to say, in demonstration of the fulfillment of the duty to substantiate, that the administered reacted against the administrative act, revealing, with that reaction, to have grasped the scope and reasons of the act" - Process no. 39/2014-T of CAAD. See Process no. 355/2017-T of CAAD.
[6] Processes no. 394/2014 -T and no. 248/2016 - T of CAAD.
[7] The Supreme Administrative Court establishes it: "As this Supreme Court has been saying, one thing is the substantiation of the act and another is the communication of those grounds to the interested party: while that constitutes a defect susceptible of determining the annulment of the act that suffers from it, the non-compliance or deficient compliance with the duty to communicate the grounds cannot be reflected in the validity of the act communicated" – Decision of the STA of 16 November 2016, Proc. no. 0954/16.
[8] Process no. 338/2015-T of CAAD. And it is added in that same decision: "The substantiation that our legal order imposes as a condition of validity of the act that is intended to support, presents only a formal dimension, not a substantial one and is embodied in the explanation of the reasons apt to support the final decision."
[9] Processes no. 39/2014-T and no. 339/2017-T of CAAD.
[10] Diogo Leite de Campos, Benjamim Rodrigues and Jorge Lopes de Sousa, General Tax Law – Commented and Annotated, 3rd ed., pp. 381-382.
[11] Decision of the STA of 2 December 2010, Process no. 0554/10.
[12] See Processes no. 58/2017-T and no. 426/2017-T of CAAD.
[13] Process no. 96/2018-T of CAAD.
[14] The correction initially proposed for the period 2014/12T, in the amount of €108,222.29, had been reduced by €46,000.00 after the Claimant had regularized part of its situation with the submission of a new periodic VAT declaration for that 2014/12T period.
[15] See Process no. 592/2016-T of CAAD.
[16] Decision of the CJEU of 22/10/2015, Sveda, C-126/14.
[17] Decisions of the CJEU of 30/09/2010, Uszodaépito kft, C-392/09; of 21/10/2010, Nidera, C-385/09; of 01/03/2012, Kopalnia (or Polsky Trawertyn), C-280/10; of 27/09/2012, VSTR, C-587/10; of 8/05/2013, Petroma, C-271/12; of 18/07/2013, Evita-K EOOD, C-78/12; of 6/02/2014, SC Fatorie, C-424/12 and of 11/12/2013, Idexx Laboratories, C-590/13.
[18] Decision Uszodaépito kft, no. 38.
[19] Decision Nidera, no. 49.
[20] Decision Kopalnia., no. 48. Emphasis ours.
[21] Decisions of the CJEU of 21/03/2000, Gabalfrisa, C-110/98, nos. 45 to 47; of 14/02/1985, Rompelman, 268/83, nos. 19 to 24, and of 29/02/1996, INZO, C-110/94, nos. 16, 23 and 24.
[22] Process no. 426/2017-T of CAAD.
[23] See Decision Barlis - Decision of the CJ, of 15/09/2016, C-516/14, nos. 26, 27 and 28.
[24] Decision Barlis, no. 34. Emphasis ours.
[25] Decision Barlis, no. 43. Emphasis ours.
[26] See Decision Barlis, and Process no. 765/2016-T of CAAD.
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