Reduced VAT Rate on Dental Implants and Abutments for Implantology | CAAD 286/2015-T

ARBITRAL DECISION

CAAD: Tax Arbitration

Process No. 286/201-T

Subject: VAT - reduced rate, implants and pillars for dental implantology

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), José Nunes Barata and Susana Maria Afonso Claro, appointed by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 5 May 2015, A… - …, Lda., legal entity no. …, with registered office at Rua …, no. …, … floor, room …, … Porto, filed a petition for constitution of an arbitral tribunal, under 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, abbreviated as RJAT), seeking the declaration of illegality of the following acts, which total € 116,398.30 in tax and € 9,934.93 in compensatory interest:

VAT Assessment No. …, for the period 201001 to 201003, in the total amount payable of € 4,056.47, with the voluntary payment deadline expiring on 28 February 2015;

Compensatory Interest (JC) Assessment No. …, for the period 201001 to 201003, in the total amount payable of € 723.72, with the voluntary payment deadline expiring on 28 February 2015;

VAT Assessment No. …, for the period 201004 to 201006, in the total amount payable of € 5,542.04, with the voluntary payment deadline expiring on 28 February 2015;

Compensatory Interest Assessment No. …, for the period 201004 to 201006, in the total amount payable of € 933.49, with the voluntary payment deadline expiring on 28 February 2015;

VAT Assessment No. …, for the period 201007 to 201009, in the total amount payable of € 4,838.08, with the voluntary payment deadline expiring on 28 February 2015;

Compensatory Interest Assessment No. …, for the period 201007 to 201009, in the total amount payable of € 766.67, with the voluntary payment deadline expiring on 28 February 2015;

VAT Assessment No. …, for the period 201010 to 201012, in the total amount payable of € 4,898.63, with the voluntary payment deadline expiring on 28 February 2015;

Compensatory Interest Assessment No. …, for the period 201010 to 201012, in the total amount payable of € 726.88, with the voluntary payment deadline expiring on 28 February 2015;

VAT Assessment No. …, for the period 201101 to 201103, in the total amount payable of € 5,756.12, with the voluntary payment deadline expiring on 28 February 2015;

Compensatory Interest Assessment No. …, for the period 201101 to 201103, in the total amount payable of € 800.49, with the voluntary payment deadline expiring on 28 February 2015;

VAT Assessment No. …, for the period 201104 to 201106, in the total amount payable of € 10,883.77, with the voluntary payment deadline expiring on 28 February 2015;

Compensatory Interest Assessment No. …, for the period 201104 to 201106, in the total amount payable of € 1,403.86, with the voluntary payment deadline expiring on 28 February 2015;

Assessment No. … (NA), for the period 201107 to 201109, in the total amount payable of € 6,081.96, with the voluntary payment deadline expiring on 28 February 2015;

Compensatory Interest Assessment No. …, for the period 201107 to 201109, in the total amount payable of € 723.17, with the voluntary payment deadline expiring on 28 February 2015;

Assessment No. …, for the period 201110 to 201112, with a correction value in the amount of € 3,407.11;

VAT Assessment No. …, for the period 201201 to 201203, with a correction value in the amount of € 2,221.38;

VAT Assessment No. 2014…, for the period 201204 to 201206, in the total amount payable of € 8,420.56, with the voluntary payment deadline expiring on 9 February 2015;

Compensatory Interest Assessment No. 2014…, for the period 201204 to 201206, in the total amount payable of € 748.39, with the voluntary payment deadline expiring on 9 February 2015;

VAT Assessment No. 2014…, for the period 201207 to 201209, in the total amount payable of € 16,002.50, with the voluntary payment deadline expiring on 9 February 2015;

Compensatory Interest Assessment No. 2014…, for the period 201207 to 201209, in the total amount payable of € 1,262.66, with the voluntary payment deadline expiring on 9 February 2015;

VAT Assessment No. 2014…, for the period 201210 to 201212, in the total amount payable of € 8,398.95, with the voluntary payment deadline expiring on 9 February 2015;

Compensatory Interest Assessment No. 2014…, for the period 201210 to 201212, in the total amount payable of € 578.03, with the voluntary payment deadline expiring on 9 February 2015;

VAT Assessment No. 2014…, for the period 201301 to 201303, in the total amount payable of € 84.72, with the voluntary payment deadline expiring on 9 February 2015;

VAT Assessment No. 2014…, for the period 201304 to 201306, in the total amount payable of € 13,156.67, with the voluntary payment deadline expiring on 9 February 2015;

Compensatory Interest Assessment No. 2014…, for the period 201304 to 201306, in the total amount payable of € 643.05, with the voluntary payment deadline expiring on 9 February 2015;

VAT Assessment No. 2014…, for the period 201307 to 201309, in the total amount payable of € 8,132.65, with the voluntary payment deadline expiring on 9 February 2015;

Compensatory Interest Assessment No. 2014…, for the period 201307 to 201309, in the total amount payable of € 316.39, with the voluntary payment deadline expiring on 9 February 2015;

VAT Assessment No. 2014…, for the period 201310 to 201312, in the total amount payable of € 10,772.93, with the voluntary payment deadline expiring on 9 February 2015;

Compensatory Interest Assessment No. 2014…, for the period 201310 to 201312, in the total amount payable of € 308.13, with the voluntary payment deadline expiring on 9 February 2015.

To substantiate its petition, the Claimant alleges, in summary, that the assessment acts, in addition to lacking proper grounds, are based on an incorrect interpretation and application of Article 18, No. 1, subsection a) of the VAT Code and item 2.6 of Annex List I to the Code, in that, essentially:

i. The "single implant unit" simply does not exist;

ii. The interpretation that the Tax and Customs Authority (AT) makes of item 2.6 of Annex List I to the VAT Code, by which it considers that the reduced VAT rate applies only to the "single implant unit," has no support in the literal wording of the norm;

iii. The said interpretation violates the principle of neutrality and the principle of free competition or non-discrimination;

iv. Council Directive 2006/112/EC, of 28 November 2006, is not directly applicable in the Portuguese legal order and no argument in support of the AT's thesis can be drawn from it or from the Combined Nomenclature.

On 08-05-2015, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Claimant did not appoint an arbitrator, whereupon, under the provision of subsection a) of No. 2 of Article 6 and subsection a) of No. 1 of Article 11 of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the applicable deadline.

On 09-07-2015, the parties were notified of these appointments and expressed no objection to any of them.

In accordance with the provision of subsection c) of No. 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 24-07-2015.

On 29-09-2015, the Respondent, duly notified for this purpose, filed its response, defending by exception and by contestation.

Under the provision of Article 421, No. 1 of the Code of Civil Procedure, applicable pursuant to Article 29, No. 1, subsection e) of the RJAT, the benefit of expert evidence produced in process 530/2014T of CAAD was accepted, as requested by the Claimant.

Having regard to the fact that, in this case, none of the legally established purposes applied, and taking into account the position taken by the parties, under the provision of Articles 16, subsection c), 19 and 29, No. 2 of the RJAT, as well as the principles of procedural economy and prohibition of useless acts, the meeting referred to in Article 18 of the RJAT was dispensed with.

Having been granted a deadline for submission of written submissions, these were presented by the parties, pronouncing on the evidence produced and reiterating and developing their respective legal positions.

A deadline of 30 days was fixed for rendering the final decision, after presentation of arguments by the AT.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, No. 1, subsection a), 5 and 6, No. 1, of the RJAT.

The parties have legal standing and capacity, are entitled to be parties and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March.

The process is free from defects of nullity.

Thus, there is no obstacle to the examination of the case.

Having seen all, it remains to deliver

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

1. Under external inspection orders No. OI2014… and OI2014…, VAT corrections were made for the years 2010 to 2013.

2. In the said inspection procedure, it was found that the Claimant effected internal transfers of various types of dental implants and related material, better described at ff. 78 to 784 of the PA, which are hereby incorporated herein,[1] having applied the reduced VAT rate.

3. In the context of that inspection procedure, corrections were also made concerning the application of the reduced VAT rate to the said transfers of goods.

4. The said corrections total the global amount of € 116,398.30, relating to VAT in arrears, for the tax periods of 2010 to 2013, to which amount compensatory interest is added.

5. The claimant was summoned in the context of the respective enforcement proceedings and timely requested the provision of a guarantee.

6. The Claimant paid the tax assessments for the following periods: VAT and Compensatory Interest for period 1206T; VAT and Compensatory Interest for period 1209T; VAT and Compensatory Interest for period 1212T; VAT for period 1303T; VAT and Compensatory Interest for period 1306T; Compensatory Interest for period 1309T, and Compensatory Interest for period 1312T, in the amount of tax and interest totalling € 49,920.00.

7. On 03-09-2015, the outstanding debt of the taxpayer was € 68,757.04, and the guaranteed amount was € 85,998.00, with respect to 3 suspended proceedings.

8. The Claimant is a limited liability company engaged in the trade of dental prosthesis materials, with particular emphasis on implants and related accessories.

9. The Claimant is classified under the general system of Corporate Income Tax (IRC) and the Normal quarterly periodicity system for VAT, having, in early 2013, switched to the normal monthly periodicity system.

10. In the exercise of its activity, in the periods to which the tax acts in question in this proceeding relate, the Claimant made acquisitions in the domestic and intra-Community markets, and its sales were channelled, almost entirely, to the domestic market.

11. The goods marketed by the Claimant were essentially medical devices used in the dental implantology sector, including, among others, dental implants and other prosthesis devices.

12. The Claimant's clients were dentists and dental technicians who worked in implantology and used the Claimant's products for oral rehabilitation of their respective patients.

13. Each tooth is an individual entity, typically consisting anatomically of a crown, root or roots, and periodontium.

14. All constituent parts of the tooth are inseparable, that is, one part cannot exist without the other.

15. Dental implantology is a surgical area of Dental Medicine dedicated to the placement of dental implants, that is, it is intended to replace lost teeth through titanium dental implants and crowns.

16. Dental prosthesis by dental implant consists of three elements: implant, abutment, and crown.

17. The implant is the structure positioned surgically in the jaw bone below the gum, with a view to fulfilling the function of the tooth root.

18. Dental implants are structures made of pure titanium, placed in the maxilla or mandible, which replace the root of a natural tooth which, for any reason, has been extracted.

19. Dental implants offer a safe and permanent solution for the replacement of one or more teeth, functioning as support pillars for unitary crowns and fixed or removable bridges, partial or total.

20. The abutment is a cylindrical structure inserted into the implant.

21. A crown is placed on the abutment, an artefact that allows replacement of the visible part of the tooth.

22. The crown is normally made by dental prosthesis laboratories and needs to be adjusted to the characteristics of the patient's dentition, so it is specifically produced for each case.

23. Whereas implants and abutments are mass-produced.

24. The nature and quality of implants and abutments does not change with their placement.

25. The implants and abutments traded by the Claimant could only be used within the scope of dental implantology, aimed at replacing, wholly or in part, the patient's tooth, and could not have any other purpose or use.

26. The surgical procedure for placement of a dental prosthesis typically involves three stages and may involve more than one intervener, as it encompasses surgical work, which must be done by a physician, and prosthesis fabrication work, which must be done by a prosthesis technician.

27. The first stage consists of the surgical burial of the dental implant levelled with the bone, but within the gum.

28. Following placement of the dental implant, the process of union of the dental implant to the bone, called "osseointegration," begins.

29. At the end of the "osseointegration" process, the dental implant needs to be exposed by removal of the overlying gum.

30. In a second stage, the surgeon verifies the implant to confirm whether osseointegration was successful and, if affirmative, places the fixation abutment which penetrates the gum.

31. In a third stage, following the healing process that delimits the space to be occupied by the implant, the dental crown (artificial tooth in porcelain or other material) is fabricated and placed on the osseointegrated dental implant.

32. Medical technique advises segmentation of the process into two phases: placement of the dental implant, in an initial phase, and placement of the abutment and crown.

33. Oral rehabilitation by dental implant makes it possible to confer or optimize the masticatory function of a patient who is partially or completely edentulous.

34. Alternatives to dental implant are rehabilitation of edentulous spaces in a fixed manner by performing bridges on teeth, which implies an invasive procedure of at least two teeth, or the use of removable prostheses supported solely by the mucosa.

35. Dental implants maintain the bone structure and facial aesthetics lost with the absence of teeth, and the integrity of adjacent teeth.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Justification of the Proven and Not Proven Factual Matters

With respect to the factual matters, the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts important for the decision and distinguish the proven from the not proven matters (cf. Article 123, No. 2, of the CPPT and Article 607, No. 3, of the CPC, applicable ex vi Article 29, No. 1, subsections a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and selected in function of their legal relevance, which is established in regard to the various plausible solutions of the question(s) of Law (cf. former Article 511, No. 1, of the CPC, corresponding to current Article 596, applicable ex vi Article 29, No. 1, subsection e), of the RJAT).

Accordingly, having regard to the positions assumed by the parties, in light of Article 110, No. 7 of the CPPT, the documentary evidence and the PA attached to the file, the following facts were considered proven, with relevance to the decision.

In particular, the facts established as proven in points 13 to 35 took into account the expert report produced in process 530/2014T of CAAD, beyond the remaining documentation contained in the PA and attached by the Claimant.

It should also be noted that, although in its arguments the Respondent stated that "the evidentiary elements attached to the file do not allow one to conclude with certainty that the materials in question here (...) cannot be used for another purpose," the fact is that in its response, the same Respondent acknowledged, as to the same materials, "having no other application than in dental medicine" as they are "pieces (...) that contribute to the final result of oral rehabilitation."

B. LAW

i. On the Exception

The Respondent begins by alleging that the examination of the petition for recognition of rights implicit in what is alleged in (...) points 3 to 12, and therefore covered by the petition for arbitral pronouncement, does not fall within the scope of the competencies of the Arbitral Tribunals, since "there is no legal support that would allow condemning acts of a nature other than those resulting from the powers set out in the RJAT, even if they would constitute a consequence, at the execution level, of the declaration of illegality of assessment acts," as it "follows from the provision of Article 24 of the RJAT, that the definition of the acts in which the execution of arbitral decisions should be concretized is, in the first place, the responsibility of the AT, with the possibility of recourse to tax courts to coercively require execution, in the context of the process for execution of arbitral awards, provided for in Article 146 of the CPPT and Articles 173 and following of the Code of Procedure in Administrative Courts," wherefore the "material incompetence of the Tribunal for examination of the petition identified above constitutes a dilatory exception that prevents its examination, leading to the dismissal of the instance as to the claim in question, in accordance with the provision of Articles 576, No. 2, 577, subsection a) of the Code of Civil Procedure (CPC), applicable ex vi Article 29, No. 1, subsection e) of the RJAT."

It is considered, however, that the AT is not correct on this matter.

Indeed, as the same Respondent itself acknowledges,[2] "In the petition, the Claimant confines itself to the competencies proper to the present arbitral jurisdiction."

Now, the competence of the Tribunal is assessed in accordance with the petitions formulated, and it is certain that, if the tribunal exceeds the scope thereof, the issue raised will not be one of competence, but of excess (or lack thereof) of pronouncement.

Being, confessedly, the Tribunal competent for examination of the petitions formulated, the exception of incompetence raised must therefore fail.

ii. On the Merits of the Case

The issue in the present proceeding is to determine whether the interpretation that the Tax and Customs Authority makes of item 2.6 of Annex List I to the VAT Code is acceptable, by means of which it considers that the reduced VAT rate applies only to what it designates as the "single implant unit."

Indeed, the AT understands that it should be considered that "goods consisting of pieces, parts and accessories of those prostheses are not covered by item 2.6, given that, in addition to not being prostheses, they are not capable of fulfilling, considered individually, the function of replacing a part of the body or its function"[3].

For the AT, "item 2.6 covers only the transfer of the article that, in itself, constitutes an artificial piece that replaces the organ of the human body or part thereof, that is, 'autonomously or unitarily'"[4].

From the AT's perspective, "the titanium implant and abutment are merely components, each performing the function for which they were designed, of support and fixation of the prosthesis, but which, per se, objectively considered, neither perform nor replace the function of the dental organ."[5]

Moreover, the AT considers that "the legislator refers to prosthesis material and not to material for prosthesis (for application in a prosthesis), which indicates the exclusion of prosthesis connection or fixation pieces, such as those traded by the taxpayer."[6]

Thus, still from the same perspective, the reduced VAT rate now in question would refer solely to "'complete goods' understood as those which, by themselves, can replace an organ or member of the human body and not any elements which are used individually in the process of replacement"[7], "products specifically designed for the correction or compensation of deficiencies or for the replacement, total or partial, of organs or members of the human body"[8], wherefore "In the case at hand, now in discussion, the question should be focused on determining whether the different pieces that make up a fixed dental prosthesis, at the stage of commercialization, should be subject to the reduced VAT rate."[9], being that, always in the opinion of the AT, "if we are talking about neutrality regarding the taxation of different types of prosthesis we must compare the transfer of the removable prosthesis with that of the fixed prosthesis. And not with that of the fixed prosthesis plus fixation and connection pieces."[10]

It should be stated, preliminarily, that the understanding obstinately maintained by the AT is not subscribed to, at its various levels.

Indeed, this understanding is not subscribed to, first and foremost, with regard to a suggested conditioning of the application of the reduced rate to the final phase of the chain of transfers of the goods in question, excluding from the scope thereof the "commercialization phase." It is understood that the circumstance that the Claimant is an intermediary, and, as such, sells such goods not to its final recipient, but to professionals who, in turn, will sell them, applying them, to the final recipients, does not exclude it from the scope of application of the reduced rate, since nothing in the law permits supporting such a restriction.

Equally not subscribed to is the understanding of the AT, according to which dental implants and abutments would be "pieces, parts and accessories" of prostheses, not being "capable of fulfilling, considered individually, the function of replacing a part of the body or its function," being "merely components, each performing the function for which they were designed, of support and fixation of the prosthesis."

Indeed, such an understanding appears contradictory in its own terms, and it is not apparent how it is that, considering that it is inherent to the prosthesis "the function of replacing a part of the body or its function," one can consider, as the AT does, that implants and abutments are mere means "of support and fixation of the prosthesis," since without the implants and abutments, the remaining part of what may be – for the AT – the prosthesis, will likewise not be capable of ensuring individually "the function of replacing a part of the body or its function," wherefore fundamentally... there would be no prosthesis. That is: according to the thesis sustained by the AT, there would be no fixed dental prostheses, since each of the elements that comprise it, considered and applied individually (it being certain that their joint application, all at once, would be clinically prohibited), would not be capable of ensuring the replacement of the bodily function which they jointly intend to fulfill.

Implants and abutments will not be, it is judged, "additions" of fixation and connection, in that they do not add anything to the prosthesis, first and foremost because without them the prosthesis does not exist.

Accordingly, it is considered that the prosthesis, as an object intended to ensure "the function of replacing" a tooth, by means of a fixed implant, comprises the implant, the abutment, and the artificial crown. It is this set, as a whole, that ensures "the function of replacing" a tooth, and not merely one of those elements, separated from the rest. On the other hand, what is established is that implants and abutments ensure the replacement of part of the tooth – the root – wherefore, even in the reading presented by the AT, according to which "item 2.6 covers only the transfer of the article that, in itself, constitutes an artificial piece that replaces the organ of the human body or part thereof" (emphasis ours), these should be considered as being covered by the said item 2.6. This conclusion is not impeded by the circumstance, referred to in the RIT, that the root "does not perform merely the function of fixating the tooth to the alveolar bone, but rather ensures multiple functions which, manifestly, are not pursued by the implant," since if only artefacts that entirely replace all the functions of the part of the human body replaced were considered prostheses, there would be practically no prostheses, if any existed at all, given that it will normally be the case that, given its artificial character, the prosthesis, by definition, does not replace exactly, in all its functions, the missing part of the human body.

Neither is the understanding, suggested by the AT, that the implant and the abutment would be, fundamentally, mere materials acquired for the fabrication of the prosthesis, subscribed to. It is rather considered that those goods are already finished parts of the prosthesis itself, since they have no other end, application or utility than their insertion in the human body, in order to ensure "the function of replacing" a tooth, and which, by their very nature, the prosthesis in question has no possibility of being "completed" except upon its implantation in the human body, and in the course of a process that extends substantially over time. Indeed, it is not apparent that one could sustain that, whether the implant or the abutment, properly finished, are equivalent to, for example, raw titanium that will be transformed into the former, or any other element, raw material, or component that, by means of a process of transformation, or even assembly, will become the prosthesis. On the contrary, it is considered that both the implant and the abutment, properly finished, are parts of the final prosthesis, and the process of their implantation in the human body, with a view to replacing the tooth, is not a process of transformation, or even assembly, but truly a process of applying the prosthesis in that same body, in accordance with the medically necessary procedures for that purpose.

Furthermore, disagreement is also expressed with the reading presented by the AT, regarding the text of the norm in question, when it states that "the legislator refers to prosthesis material and not to material for prosthesis (for application in a prosthesis), which indicates the exclusion of prosthesis connection or fixation pieces, such as those traded by the taxpayer." Indeed, it is understood that by referring to "prosthesis material," and not simply to "prosthesis," the legislator is precisely providing the opposite indication to that presented by the AT, wishing expressly not to confine itself solely to the prosthesis as a singular object ("complete good," in the AT's terminology).

This same understanding was already unanimously adopted, regarding a question entirely identical to that of the present case, in process 429/2014-T of CAAD[11], where it was considered in summary that:

"It is important to note that the meaning and scope of the reduced rate applied in this field should have regard to the good rules of hermeneutics, taking into account not only the grammatical element, but also its context, reason for being and purposes pursued by item 2.6, and should result in a declarative interpretation (and not restrictive, contrary to what the AT maintains).

Now, first and foremost, the wording of the provision seems to indicate that dental implants fall within the said list, being we are dealing with prosthesis material intended to replace an organ of the human body, in this case, the dental apparatus.

Indeed, nothing in the wording of the law leads us to restrict its application to situations of transfers of 'complete goods' of implant, in the sense that the AT wishes to convey.

Moreover, it results from the facts established as proven that such a concept does not exist as such, there being instead implants consisting of the three pieces now in question – crown, implant and abutment, which, in accordance with surgical technique, are introduced in phases into the patient's mouth, thereby giving rise, in their entirety, to an implant. In reality, these three pieces are inseparable and unusable except for the composition of an implant as a composite prosthesis.

Given that such 'complete goods' of implant do not exist, in the sense that the AT wishes to convey, the understanding of the Tax Authority ends up denying the benefit of the reduced rate to this type of prosthesis, thereby putting in question, without any rational and acceptable reason, the ratio legis that governed the inclusion of this item in the terms in which it is worded – the protection of public health. Indeed, if such an understanding were accepted, an arbitrary discriminatory treatment would be introduced between different dental prostheses. On the one hand, prostheses composed of a single piece would benefit from the reduced rate of 6%, on the other hand, 'composite' prostheses would be taxed at the normal rate. Such a fact is discriminatory, first and foremost infringing the provision of Articles 5, No. 2 and 7, No. 3 of the LGT (General Tax Law). Indeed, in accordance with the provision of the first provision, headed "Purposes of Taxation," taxation respects the principles of generality, equality, legality and substantive justice. In turn, in accordance with the provision of Article 7, No. 3, "Taxation does not discriminate any profession or activity nor prejudice the practice of legitimate personal acts, without prejudice to exceptional surcharges or benefits determined by economic, social, environmental or other purposes."

But we would be essentially facing an intolerable breach of the principle of neutrality that governs this tax at the level of European Union Law, treating equal goods differently without any rational and acceptable reason, a fact that violates the rules governing this tax as well as all the jurisprudence of the CJEU to which we have referred.

As is known, in accordance with the provision of No. 2 of Article 11 of the LGT, whenever fiscal norms employ terms proper to other branches of law, they should be interpreted in the same sense that they have there, unless otherwise follows directly from the law. In turn, in No. 3 of the said provision, it is determined that, if doubt persists about the meaning of the rules of incidence to be applied, regard should be had to the economic substance of the tax facts. Now, what the Community legislator, the European Commission and the jurisprudence of the CJEU determine is that, in the use of the concepts employed for purposes of application of reduced rates, the Member States should have regard to the economic effects in question in such a manner as not to put in question the essential principle of the neutrality of the tax.

That is, if the understanding conveyed by the AT in the concrete case were accepted, we would have a difference of treatment for identical realities resulting not from the VAT Directive but rather from a deficient application of the same by the Tax Authority.

It is certain that the rules of derogation, such as the rule that enables the Member States to apply reduced rates of tax, must be applied restrictively, but we must not confuse such a fact with selective application, a completely distinct reality that puts in question the most basic characteristics of the tax.

In this context, it is also important to note that the invocation, by the AT, of the argument from the Combined Nomenclature does not proceed, as this Nomenclature was created for statistical purposes and application of the common tariff and has no relevance in the matter of classification of goods and services for VAT purposes in Portugal.

The only case in which the VAT Code resorts to the Combined Nomenclature to define the scope of the tax regime of goods is provided for in Article 14, No. 1, subsection i), for purposes of determining the regime of exemption (complete or zero rate), in accordance with which there are exempt "transfers of goods for supplying placed on board warships classified by code 8906 00 10 of the Combined Nomenclature, when leaving the country with destination for a port or anchorage located abroad," a provision not applicable in the situation in question.

Being certain that, in accordance with the provision of Article 98, No. 3, of the VAT Directive, the Member States may use the Combined Nomenclature to delimit with precision each category subject to the reduced rate, it is equally certain that the Portuguese legislator has not adopted this option.

That is, for VAT purposes it is irrelevant the classification that implants, crowns and abutments merit in the Combined Nomenclature.

Now, in this context, it is again important to note that, as has been established, the three "pieces" now in question – implant, crown and abutment – cannot be used separately, being specially designed and manufactured for the production of a piece designated as an implant. Indeed, contrary to what the AT alleges, there does not exist a single implant piece in the factual sense that the AT wishes to give it, but only the implant consisting, as such, of implant, crown and abutment, pieces that are inseparable having in view this reality.

It is all too evident that the fact that such pieces are marketed separately, such as in the cited case, the mere fact of segregated invoicing (with separate codes) or autonomous invoicing (in separate invoices) cannot affect the classification and qualification for VAT purposes, allowing form to prevail over substance.

In reality, what is at issue in the present case and has been established subsumes itself in the legal provision of item 2.6 of Annex List I to the VAT Code, being embodied as "… apparatus, artefacts and other prosthesis material or compensation material intended to replace, wholly or in part, any member or organ of the human body."

And, to again emphasize, the ratio legis that leads the legislator to adopt the application of the reduced VAT rate in such situations – the protection of health – is exactly the same that leads us to this interpretation.

It should be noted, lastly, that, from the jurisprudence cited, even if there supposedly existed, as the AT claims, "complete goods" of implant, in the sense that the AT wishes to convey, we would always have to acknowledge that the crown, abutment and implant would be configured as a single piece or, at the very least, even if erroneously not so understood, as accessory pieces, and as such, should be taxed at the reduced rate, following the treatment of the principal operation.

That is: whether by recourse only to the Community rules or by simple application of the good rules of hermeneutics, the result is the same – one can only conclude that in item 2.6 of Annex List I to the VAT Code are included both implants consisting of a single piece and composite implants.

Indeed, all the elements of interpretation of the fiscal norms that can be invoked for this purpose, as well as the characteristics of VAT and the interpretation that the CJEU has been making thereof, lead us to conclude that, in the present case, the reduced VAT rate provided for in item 2.6 of Annex List I to the VAT Code should be applied to the transfer of implants, crowns and abutments now under analysis, in which terms the Claimant is correct.

In light of the foregoing, it is concluded that the VAT assessments challenged are vitiated by error in their legal presuppositions, through erroneous interpretation of item 2.6 of Annex List I to the VAT Code."

It is concluded, accordingly, that the assessments that are the object of the present proceeding are vitiated by defects in their factual and legal presuppositions, as argued by the Claimant, and should, as such, be annulled in their entirety, and the examination of the remaining questions placed is thereby rendered moot.

The Claimant accumulates with the petition for annulment of the tax acts that are the object of the present proceeding, the petition that "the Claimant's right to compensatory interest counted from the date of (unlawful) payment of part of the tax be recognized, in accordance with Articles 43 and 100 of the LGT and, likewise, 61 of the CPPT," and that "the Claimant's right to indemnification provided for in Articles 171 of the CPPT and 53 of the LGT be recognized, ex vi Article 13, No. 5, of DL 10/2011, in case the guarantee provided is deemed unlawful."

It is a presupposition of the award of compensatory interest that the error committed by the AT be imputable to it (cf. Article 43 of the LGT).

In the case at hand, it is manifest that, as a consequence of the illegality of the tax acts that are the object of the present proceeding, for the reasons previously pointed out, there is basis for refund of the tax borne by the Claimant, by force of the provision of the said Articles 24, No. 1, subsection b), of the RJAT and 100 of the LGT, as such is essential to "restore the situation that would have existed if the tax act that is the object of the arbitral decision had not been carried out."

It is also clear in the file that the illegality of the act of tax assessment challenged is directly imputable to the Respondent, which, on its own initiative, carried it out without legal support, when the right to do so had already lapsed.

Based on the foregoing, the Claimant is entitled to receipt of compensatory interest, in accordance with the provision of Articles 43, No. 1, of the LGT and 61 of the CPPT.

Compensatory interest is due to the Claimant from the date of payment, until complete refund of the amount paid, at the legal rate.

As to indemnification for unlawful guarantee, it constitutes a matter that has already been the object of several decisions within the scope of arbitral jurisdiction, which can be seen, among others, in the decision of the arbitral process of CAAD, No. 1/2013T,[12] in terms that are now transcribed:

"In accordance with the provision of subsection b) of Article 24 of the RJAT, the arbitral decision on the merits of the claim to which no appeal or challenge is available binds the tax administration from the end of the deadline provided for appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for spontaneous execution of judgments of tax courts, 'restore the situation that would have existed if the tax act that is the object of the arbitral decision had not been carried out, by adopting the acts and operations necessary for such purpose.'

In the legislative authorization on which the Government based itself to approve the RJAT, granted by Article 124 of Law No. 3-B/2010, of 28 April, the principle proclamation of the institution of arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters is that 'the tax arbitration process should constitute an alternative procedural means to the process of judicial challenge and to the action for recognition of a right or legitimate interest in tax matters.'

Although Article 2, No. 1, subsections a) and b), of the RJAT uses the expression 'declaration of illegality' to define the competence of the arbitral tribunals that function in CAAD and does not make reference to constitutive (annulment) and condemnatory decisions, it should be understood, in harmony with the said legislative authorization, that its competencies include the powers that in judicial challenge proceedings are attributed to tax courts in relation to acts whose examination of legality falls within their competencies.

Although the process of judicial challenge is essentially a process of mere annulment (Articles 99 and 124 of the CPPT), condemnation of the tax administration can be pronounced therein to payment of compensatory interest and indemnification for unlawful guarantee.

In truth, although no explicit provision exists to that effect, it has been peacefully understood in tax courts, since the entry into force of the codes of the tax reform of 1958-1965, that a petition for condemnation in payment of compensatory interest can be cumulated in a judicial challenge proceeding with a petition for annulment or declaration of nullity or non-existence of the act, because in those codes reference is made to the right to compensatory interest arising when, in a gracious objection or judicial proceeding, the administration is convinced that there has been error of fact attributable to the services. This regime was later generalized in the Code of Tax Procedure, which established in No. 1 of its Article 24 that 'there shall be a right to compensatory interest in favor of the taxpayer when, in a gracious objection or judicial proceeding, it is determined that there was error attributable to the services,' subsequently, in the LGT, in whose Article 43, No. 1, is established that 'compensatory interest is due when it is determined, in a gracious objection or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than legally due' and, finally, in the CPPT, in which it was established, in No. 2 of its Article 61 (to which corresponds No. 4 in the wording given by Law No. 55-A/2010, of 31 December), that 'if the decision that recognized the right to compensatory interest is judicial, the deadline for payment is counted from the beginning of the deadline for its spontaneous execution.'

Regarding the petition for condemnation in payment of indemnification for provision of unlawful guarantee, Article 171 of the CPPT establishes that 'indemnification in case of bank guarantee or equivalent unlawfully provided shall be requested in the proceeding in which the legality of the debt to be executed is disputed' and that 'indemnification must be requested in the objection, challenge or appeal or if its ground is subsequent within 30 days of its occurrence.'

Thus, it is unequivocal that the process of judicial challenge encompasses the possibility of condemnation in payment of unlawful guarantee and is even, in principle, the appropriate procedural means to formulate such petition, which is justified for obvious reasons of procedural economy, as the right to indemnification for unlawful guarantee depends on what is decided regarding the legality or illegality of the act of assessment.

The petition for constitution of the arbitral tribunal has as its corollary the fact that it is in the arbitral process that the 'legality of the debt to be executed' will be discussed, wherefore, as follows from the express wording of that No. 1 of the said Article 171 of the CPPT, it is also the arbitral process that is appropriate for examining the petition for indemnification for unlawful guarantee.

Moreover, the accumulation of petitions relating to the same tax act is implicitly presupposed in Article 3 of the RJAT, when it speaks of 'accumulation of petitions even though relating to different acts,' which makes apparent that the accumulation of petitions is also possible regarding the same tax act and the petitions for indemnification from compensatory interest and condemnation for unlawful guarantee are susceptible of being covered by that formula, wherefore an interpretation in this sense has, at the very least, the minimum verbal correspondence required by No. 2 of Article 9 of the Civil Code.

The regime of the right to indemnification for unlawful guarantee is found in Article 53 of the LGT, which establishes the following:

Article 53

Guarantee in Case of Unlawful Provision

1. The debtor who, to suspend execution, offers bank guarantee or equivalent shall be indemnified wholly or partially for the losses resulting from its provision, if he has maintained it for a period exceeding three years in proportion to the expiration in administrative appeal, challenge or opposition to execution which have as their object the debt guaranteed.

2. The deadline referred to in the preceding number does not apply when it is verified, in a gracious objection or judicial challenge, that there was error attributable to the services in the assessment of the tax.

3. The indemnification referred to in No. 1 has as its upper limit the amount resulting from the application to the guaranteed value of the compensatory interest rate provided for in this law and may be requested in the very process of gracious objection or judicial challenge, or autonomously.

4. The indemnification for provision of unlawful guarantee shall be paid by deduction from the revenue of the tax of the year in which the payment was made."

In the case at hand, it is manifest that the error of the act of assessment embodied in the assessments carried out illegally is, as stated, attributable to the Tax and Customs Authority, as the tax inspection and assessment were undertaken at its initiative and the Claimant in no way contributed to that error being committed.

Therefore, the Claimant is also entitled to indemnification for the guarantee provided.

However, the costs borne by the Claimants to provide the bank guarantee were not alleged and proven, wherefore it is impractical to fix here the indemnification to which the Claimants are entitled, which may only be effected in execution of this award.

C. DECISION

In view of the foregoing, this Arbitral Tribunal hereby decides to uphold the arbitral petition formulated and, in consequence:

a) Annul the assessment acts that are the object of the present proceeding;

b) Recognize the Claimant's right to compensatory interest counted from the date of payments of tax assessed in the assessments now annulled, until their respective restitution;

c) Recognize the Claimant's right to indemnification provided for in Articles 171 of the CPPT and 53 of the LGT, for provision of unlawful guarantee.

d) Condemn the Respondent in the costs of the proceeding.

D. Value of the Proceeding

The value of the proceeding is fixed at € 126,333.23, in accordance with Article 97-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by force of subsections a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at € 3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, given that the petition was entirely successful, in accordance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4, of the said Regulation.

Notification shall be made.

Lisbon

19 November 2015

The Presiding Arbitrator

(José Pedro Carvalho - Reporter)

The Arbitrator Member

(José Nunes Barata)

The Arbitrator Member

(Susana Maria Afonso Claro)

[1] To accompany all mandatory notifications of this decision, which are not addressed to the parties, who have personal knowledge of the documents in question.

[2] Point 14 of the Response.

[3] Cf. point 44 of the Response.

[4] Cf. point 52 of the Response.

[5] Cf. point 97 of the Response.

[6] Cf. point 81 of the Response.

[7] Cf. point 90 of the Response.

[8] Cf. point 92 of the Response.

[9] Cf. p. 13 of the Allegations of the AT.

[10] Cf. point 114 of the Response.

[11] https://caad.org.pt/tributario/decisoes/decisao.php?s_processo=&s_data_ini=&s_data_fim=&s_resumo=implantes&s_artigos=&s_texto=&id=431. In the same sense, cf. the decisions of processes 530/2014 and 762-2014T, available on the same website.

[12] Available at www.caad.org.pt.