Summary
Full Decision
ARBITRAL DECISION
The arbitrators Councillor Maria Fernanda dos Santos Maças (arbitrator-president), Dr. Isaque Marcos Ramos and Dr. Filipa Barros, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 28 August 2018, agree as follows:
I – REPORT
A..., LDA. (hereinafter referred to as Claimant), legal entity no. ..., with registered office at ..., ...-..., ..., ..., has, pursuant to articles 2.º no. 1, subsection a) and 10.º et seq. of the Legal Framework for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by article 228.º of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "LBTA") and articles 1.º and 2.º of Ordinance no. 112-A/2011, of 22 March, submitted a request for an arbitral determination on the legality of the acts of additional assessment of Value Added Tax (VAT) relating to the monthly periods from January to December 2014 identified under nos. 2017 ..., 2017 ..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017... .
The Respondent is the TAX AND CUSTOMS AUTHORITY (hereinafter referred to as TCA).
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the TCA on 19-06-2018.
The Claimant did not proceed to appoint an arbitrator, wherefore, pursuant to the terms set forth in subsection a) of no. 2 of article 6.º and subsection b) of no. 1 of article 11.º of the LBTA, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.
On 06-08-2018, the parties were duly notified of this designation and did not manifest any wish to refuse the designation of the arbitrators, pursuant to the combined terms of article 11.º, no. 1, subsections a) and b), of the LBTA and articles 6.º and 7.º of the Deontological Code.
Thus, in compliance with the provision in subsection c) of no. 1 of article 11.º of the LBTA, the Arbitral Tribunal was constituted on 28-08-2018.
Duly notified, the TCA submitted a response in which it defended the dismissal of the request, presenting a counter-argument.
Because it was considered that the facts relevant to the decision have sufficient documentary support and the factual matter is not controversial, the meeting referred to in article 18.º of the LBTA was waived.
28 February 2019 was set as the date for pronouncement of the final decision.
The Claimant submitted written submissions, expressing itself on the evidence contained in the case file, reiterating and developing its legal positions.
The Respondent chose not to exercise this faculty.
Thus, the Claimant seeks a declaration of the illegality of the additional VAT assessments above identified, relating to the monthly tax periods from January to December 2014, in the total amount of € 1,624,709.25 with its consequent annulment, as well as the condemnation of the Respondent for indemnification of the expenses incurred by the Claimant and which it will incur with the bank guarantee provided in the amount of € 2,055,444.24, alleging, in summary, the following:
As a preliminary note, the Claimant states that the issue subject to the present request has been submitted several times to arbitration within the scope of CAAD, by the same taxpayer, discussing the same concrete case, with only the taxation periods varying;
The Claimant notes that the Inspection Report underlying the previous assessments reproduces ipsis verbis the factual framework and the reasoning found for the assessments now being challenged, and this consideration is important since, to date, all Arbitral Awards produced with respect to this same issue[1] have decided, unanimously, for the annulment of the additional assessments and for the consequent grant of the VAT refund requests submitted by the Claimant;
By way of framing the question, the Claimant begins by explaining that its corporate purpose is the provision of plastic product manufacturing services, commercialized by other companies in the multinational group to which it belongs – Group A... - an activity it has exercised in Portugal for approximately two decades;
The Claimant is an autonomous company with its own management, being responsible for the conduct and daily management of its activity, and holds decision-making power with respect to its personnel structure, salary policy, production plan and equipment acquisition;
The Claimant was the recipient of the additional VAT assessments identified above relating to the 2014 fiscal year, which resulted from corrections made by the TCA within the scope of actions brought by the Inspection Services of the Finance Directorate of ..., during the course of 2017, which determined the denial of the right to deduct VAT;
Since it began its activity, the Claimant adopted the same standard procedure regarding VAT – which it maintained in the fiscal year in question – deducting the tax supported in goods imports carried out within the scope of the execution of the Manufacturing Services Agreement (doc. no. 5 attached to the Grace Period Appeal, Annex II, in the PA) concluded with the company B..., S.A. (hereinafter referred to as B...), a company in the group headquartered in Switzerland, which, at times, gave rise to situations of VAT credit and respective refund requests;
The Claimant likewise deducted, as it had always done, the VAT supported with the transport and customs clearance of the imported goods it uses in the manufacture of final products, which constitutes its principal activity. In fact, such services are invoiced to B... and subject to VAT, in accordance with legal terms;
Notwithstanding adopting the same procedure repeatedly over 20 years of activity in Portugal, following VAT refund requests submitted by the Claimant, relating to the 2014 fiscal year, totaling €1,624,709.25, the Claimant saw its right to deduct such tax summarily suppressed, without the presentation of the slightest justification or support in the VAT Code, and contrary to what had always been the understanding of the TCA itself;
The Corrections Project thus presents three groups of corrections to VAT that would have been – in the TCA's thesis – deducted improperly: importation, transport and customs clearance of goods, in the respective amounts of € 1,533,936.15, € 76,941.53,54 and € 13,831.57;
The Claimant recalls that the goods in question are essential to the manufacture of certain A... products and that, without them, it would not be possible to carry out the manufacturing tasks necessary to comply with the agreement concluded with B...;
Wherefore, incomprehensibly, the Claimant found itself confronted with the TCA's opposition to the procedure it had always followed with respect to the collection and deduction of VAT, the TCA alleging, in accordance with the conclusions of the correction projects, that by reason of the ownership of the goods, the Claimant would have affected them to purposes other than those of its activity. Consequently, the denial of the right to deduction was based on argumentative criteria of a purely formal and extralegal nature, based on a matter of "ownership of goods" while, however, omitting the reason of science that justified the suppression of that right;
Contrary to such a thesis, see not only article 20.º of the VAT Code (VACC), which makes no express or implicit reference to ownership as a requirement for the exercise of the right to deduct, but also the understanding of the VAT Services Directorate (VVSD) already called upon to pronounce itself on the same issue and in the exact circumstances of the case under analysis (Information no. 2000), the VAT Directive, namely, its article 168.º and the jurisprudence of the Court of Justice of the European Union (CJEU), repeated and constant in this matter, e.g. judgment of 29 March 2012, handed down in case no. C-414/10;
Referring to the concrete situation of importation, the Claimant stresses that the VAT Code, as well as the VAT Directive which informs it, do not require for the tax to be related to a deductible activity that there be any "acquisition" – much less in the case of importation of goods – which is a taxable event in itself – independent of any transaction underlying, or not, the importation operation;
Should there be doubts about the compatibility of article 20.º of the VACC, in the TCA's interpretation, with the VAT Directive, such should be the subject of a preliminary reference to the CJEU, pursuant to article 267.º of the Treaty on the Functioning of the European Union (TFEU);
The position of the TCA, as regards the (non) deductibility of VAT supported by the Claimant, translates not only into an illegitimate appropriation of amounts that do not fall to it to assess or retain under any legal title, but also transforms the tax into a veritable cost of the activity it develops, causing unjustified harm to the Claimant and putting into question the neutrality of VAT;
Such conduct by the TCA contravenes the operation of the tax intended by the legislator, as results from the Community basis of the tax and all the settled jurisprudence of the CJEU, in matters of the right to deduct VAT, establishing the rule of deduction of VAT supported upstream, for business purposes, as a fundamental rule of operation of the tax (situations in which the same rule can be set aside should be absolutely exceptional), and violates the principle of proportionality (articles 2.º and 266.º, no. 2 of the Constitution of the Portuguese Republic - CPR);
Furthermore, the TCA did not present in the correction projects or in the Final Report, in a clear and consistent manner, the reasons and legal reasoning supporting the position adopted, in violation of articles 268.º, no. 3 of the CPR and 77.º, no. 1 of the General Tax Law (GTL), thereby prejudicing the Claimant's right of defense;
In fact, the TCA failed to comply with the duty to justify why the VAT deduction was disregarded in the case under analysis, instead it established an unfounded and illegal presumption – absence of legal ownership of the goods imported, transported and customs cleared by the Claimant - to justify an alleged non-deductibility of the VAT in question, without explaining what are, in concrete terms, the reasons of fact and law for so deciding, allowing the Claimant to know such reasons and challenge them, in accordance with the most elementary of guarantees of defense, legally and constitutionally protected;
Moreover, notwithstanding the Claimant having been regularly notified to exercise its right to be heard, the arguments and requests of the Claimant were totally ignored, meriting no response whatsoever from the TCA, consequently, the Claimant was not truly heard, namely as regards the legal basis for the assessments in question, in clear violation of the provision in article 60.º of the GTL;
In the case at hand, the TCA invoked the criterion of "ownership" in circumstances identical to those in which it considered such criterion irrelevant (case underlying Information no. 2000 above mentioned), thereby treating identical situations differently, in clear violation of the principle of equality – article 13.º of the CPR – to which administrative authorities are expressly bound (articles 266.º, no. 2 of the CPR and 55.º of the GTL);
Now, according to the Claimant, all the formal and material requirements legitimizing the right to deduct VAT are met, and it is certain that, both in the importation of goods, and in transport and customs clearance services, the tax supported is in fact directly related to the VAT taxable activity developed by the Claimant, namely: the manufacture of final A... brand products, in which it uses, as mere components, the goods imported in question in the case file;
The Claimant concluded, requesting a declaration of illegality of the assessment acts, and consequently their annulment, as they suffer from a defect of form and violation of law, as well as the condemnation of the TCA, pursuant to article 53.º of the GTL, to the payment, by way of indemnification, of the expenses incurred by it and which it will incur with the guarantee provided to stay the fiscal enforcement proceedings instituted on the basis of the contested assessments.
In turn, the Respondent came in response, by counter-argument to allege, in summary:
All the activity of the Claimant, whether the production of A... brand products, whether the storage of the same and the raw materials necessary to the manufacturing process, is carried out under an agreement designated "Manufacturing Services Agreement", concluded with B..., a company with registered office in Switzerland;
The Claimant also provides storage services to C... Lda., and to D... S.A.;
The Claimant deducted an amount of tax due on the importation of goods that are not its property and that are not inputs of its activity since it is merely a service provider (of molding and assembly of raw materials and production components) to B...;
In fact, according to express admission by the Claimant its main client is B... representing the respective invoicing more than 90% of its business volume;
Moreover, all raw materials and components that incorporate the finished product, and the finished product itself, are property of B..., bearing the risks inherent in such raw materials, components and finished product exclusively on its account;
B... is registered in Portugal for VAT purposes, marketing the said products either in the internal market or in the external market, in the capacity of a taxable person under Portuguese tax;
Thus, as all imported goods are property of B..., and are never accounted for at their net amount by the Claimant, the remuneration of the said service provisions does not integrate the value of the imported goods;
There cannot be a deduction of tax supported upstream that is not connected with a taxable operation downstream;
The importation of the goods to which the tax in question in the present case relates is connected with the sale of the final product made by B... either in the internal market or in the intra-community market, and not with the operations carried out by the Claimant;
Although nothing is required in the VAT Directive regarding the requirement of ownership of goods, the tax that is associated with the acquisition of the said goods, whether in the external market or in the internal market, must be associated with the amount (taxable value) of the said acquisitions, which is not the case;
The mechanism of VAT deductions is provided for in articles 19.º to 26.º of the VACC and is part of the essence of the tax itself, with article 19.º stating that, for the determination of the tax due (self-assessment), taxable persons deduct from the tax levied on taxable operations in a given period, the tax that was invoiced to them in the acquisition of goods and services by other taxable persons, mentioned in invoices or equivalent documents issued in legal form, in the same period, a situation that should be reflected in the periodic statement referred to in subsection c), of no. 1 of article 29.º of the VACC;
In the case at hand, the Claimant is subject to the rules governing the right to deduct provided for in the VACC;
Should, therefore, the arbitral request be dismissed, for lack of merit.
II. PRELIMINARY EXAMINATION
The Arbitral Tribunal is materially competent and was duly constituted.
The parties enjoy legal capacity and standing and are legally represented (articles 4.º and 10.º, no. 2, of the same instrument and article 1.º of Ordinance no. 112-A / 2011, of 22 March). The proceedings contain no nullities.
There are no other circumstances that preclude knowledge of the merits of the case.
III. DECISION
1. Factual Matters
Findings of Fact
The following facts are considered proven:
The Claimant is engaged in the provision of plastic product manufacturing services, commercialized by other companies in the multinational group to which it belongs, exercising its activity in Portugal for approximately two decades;
The Claimant develops its economic activity in five central areas: primarily, the provision of plastic product manufacturing services, commercialized by other companies in the multinational group to which it belongs – Group A...; secondarily, the provision of storage services, the sale of waste, the sale of packaging and the purchase in its own name, but on account of other companies in the group, of goods transport services;
In concrete terms, the Claimant develops its activity under a Manufacturing Services Agreement ("Tolling Agreement" – as per doc. no. 5 attached to the grace period appeal), concluded with B... a company in the group headquartered in Switzerland, in December 1997;
It follows from that Manufacturing Services Agreement that the Claimant undertakes to manufacture the products in conformity and under the instructions and specifications provided by B..., being bound to respect the brand's quality standards, through the use of know-how, designs, standards and other impositions issued by B..., (as per article 2.º of the "Tolling Agreement");
All raw materials and components that incorporate the final product, all products in progress and finished products are property of B... (as per no. 1 of Clause 4.º of the "Tolling Agreement");
The agreed value for the provision of manufacturing services by the Claimant corresponds to the costs and expenses incurred, plus a fee equivalent to 15% of its value (as per clause 6.º of the "Tolling Agreement");
The process of manufacturing plastic products begins with the acquisition of raw materials and components, by B..., in its own name, being subsequently imported by the Claimant, in Portugal, which incorporates them in the final products it manufactures for B..., so that the latter can, ultimately, proceed to their disposal under the A... brand;
With respect to this aspect of the production chain, the Claimant presents itself at the Portuguese customs as the "importer of record", acting on account of B..., by virtue of the latter not having any structure of human and technical resources that would enable it to carry out imports in Portugal;
For that purpose, namely, to proceed with the customs clearance of the raw materials and components referred to, the Claimant hired, in the concrete case, in its own name, the company E... Lda. ("E...") as Official Customs Broker, with the costs of the provision of this service being rebilled to B...;
The Claimant provides storage services for products in Portuguese territory to D... S.A. (hereinafter "D...") and to B..., which include the storage of products produced, both by the Claimant and by other companies in Group A..., and by companies that are not part thereof;
Likewise, it is under a Warehousing Services Agreement – "Warehousing Services Agreement" – (document no. 6 attached to the Grace Period Appeal, Annex II. 1st part), concluded between the Claimant and B..., in 1997, that the Claimant provides warehousing, handling, truck loading and dispatch guide issuance services to B..., with respect to raw materials, components and finished products that are property of B...;
All goods used and manufactured throughout the production chain, including raw materials, components, finished products and other goods necessary for production, are stored in the Claimant's facilities, whether in ..., or in a warehouse leased in ...— with B...'s goods being physically separated from the remainder;
The value of the warehousing service covers all costs and expenses related to the warehousing services provided under the Warehousing Services Agreement, to which a profit margin of 10% on the same is added (cf. clause 6.º of the "Warehousing Services Agreement");
In strict connection with the warehousing services provided, the Claimant sometimes proceeds to contract transport services in its own name, but on account of other entities in the group, subsequently proceeding to rebill them to B...;
In the concrete case, the transport of goods, from their origin to the place of discharge in ..., is the responsibility of the respective supplier, the Claimant being able to contract the transport itself in exceptional situations, with the charge being rebilled to B...;
The Claimant is subject to the monthly periodicity regime and is a full VAT taxable person, to the extent that it exclusively practices operations with the right to deduct VAT;
The services invoiced to B... under the Manufacturing Services Agreement correspond to more than 90% of the operations carried out by the Claimant;
Following the VAT refund requests made by the Claimant relating to the periods of July and October 2015, the TCA conducted inspection of such taxation periods, supported by Service Orders no. 012015..., of 10 September 2015, and no. 012015..., of 11 December 2015;
Subsequently, the TCA opened new Service Orders, going back in time to the limitation period for the right to assess, starting with the year 2012, proceeding through the year 2013 and the year 2014, here in question;
The inspection action for the year 2014, here in question, was based on the same TCA Memorandum, of which the Claimant was notified - i.e., Memorandum no. ... of 10-11-2015 – and respective responses and clarifications provided by the Claimant on 30-11-2015 to the Tax Inspection Services;
The Tax Inspection Report issued by the Finance Directorate of ..., attached with the administrative process, which is given as fully reproduced, is based on the reports of the inspection actions undertaken with respect to the VAT periods of July and October 2015, varying only in the amounts (cf. doc. no. 7 – Inspection Report relating to VAT of July 2015 – doc. no. 8 – Inspection Report relating to VAT of October 2015 – and doc. no. 11 – Inspection Report relating to VAT for the year 2015, excluding the periods of July and October – attached to the Grace Period Appeal, Annex II);
The Corrections Project relating to 2014 prepared by the Tax Inspection Services of the Finance Directorate of ... concludes with respect to the VAT supported by the Claimant in the importation of goods, in the following terms: "In view of the foregoing, we conclude that the imported goods described in tables I to XII, with respect to which F... deducted VAT relate to goods that are not its property and therefore are not used for the realization of taxable operations [sic.] related to the operations of transmissions of goods and/or provision of services of the Portuguese entity (F...)" (...)"In this manner, VAT inscribed in the documents of importation of goods owned by B..., during the year 2014, was improperly deducted, in the amount of € 1,533,936.15." (cf. Annex II, Grace Period Appeal, of the Corrections Project attached as doc. no. 11);
With respect to the transport services acquired by the Claimant in the same scope of activity, the Corrections Project concludes as follows: "In view of the foregoing, we conclude that SP improperly deducted VAT relating to the transport of imported goods that are property of B..., which are described in the previous point. In this manner they are not intended for the realization of the transmissions of goods and provision of services subject to Tax and not exempt therefrom, pursuant to subsection a) no. 1 of art.º 20.º of the VAT Code." (...) "In sum, with respect to the provision of services above described [transport] VAT was improperly deducted in the total amount of € 76,941.53" (cf. Corrections Project cit., p. 49);
With respect to the customs broker services, the Corrections Project concludes as follows: "With respect to the provision of services above described [customs broker] VAT was improperly deducted in the total amount of € 13,831.57" (cf. Corrections Project cit., p. 57);
Notified of the correction projects relating to the year 2014, the Claimant did not formally exercise the respective Right to Be Heard, since it had systematically manifested its disagreement with the TCA with respect to four other distinct inspections (cf. exercise of the Right to Be Heard attached to the Final Inspection Report attached as doc. no. 12 to the Grace Period Appeal — Annex II);
The Claimant was notified of the Final Inspection Report in which all the indicated corrections were maintained, concluding for the non-deductibility of VAT in the amounts of € 1,533,936.15 with reference to the VAT supported with the importation of goods under the Manufacturing Services Agreement, € 76,941.53 relating to the VAT supported with their transport and € 13,831.57 relating to the VAT supported with the provision of customs broker services (cf. Annex II, 3rd Part, Grace Period Appeal, Final Inspection Report for the year 2014, attached thereto as doc. no. 12);
The Claimant was notified of the additional VAT assessments relating to the monthly periods from January to December 2014, identified under the numbers 2017..., 2017..., 2017..., 2017 ..., 2017..., 2017..., 2017..., 2017..., 2017 ..., 2017... 2017..., 2017..., accompanied by account reconciliation statements;
The Claimant made no payment of the VAT assessed by the TCA with respect to the periods in question in the year 2014 (€ 125,137.76, € 120,640.95, € 36,699.59, € 129,387.25, € 220,385.64, € 138,408.53, € 159,208.16, € 105,155.22, € 120,992.89, € 273,838.43, € 91,687.55, € 103,167.28), totaling the amount of € 1,624,709.25.
Upon expiration of the set payment period, 10 fiscal enforcement proceedings were instituted against the Claimant under nos. ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017... and ...2017..., intended for the coercive collection of the assessed amounts;
On 26-07-2017, the Claimant provided a bank guarantee that was required of it, in the amount of € 2,055,444.24 to suspend the aforementioned fiscal enforcement proceedings (cf. doc. no. 14 attached to the Grace Period Appeal, the content of which is given as reproduced);
On 31-08-2017, with reference to the said additional VAT assessments, the Claimant submitted a Grace Period Appeal;
On 25-03-2018 the Claimant was notified of the dismissal of the Grace Period Appeal submitted;
On 18-06-2018 the request for constitution of an Arbitral Tribunal was received.
1.2. Findings of Fact Not Proven
Among those alleged, relevant to the decision, none went unproven.
1.3. Reasoning on Factual Matters
With respect to the factual matters, the Tribunal need not pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish the proven matter from the unproven (articles 123.º, no. 2, of the Code of Tax Procedure and Process – CTPP– and 607.º, no. 3 of the Code of Civil Procedure – CCP –, applicable ex vi article 29.º, no. 1, subsections. a) and e) of the LBTA).
Thus, the facts pertinent to the judgment of the case are chosen and defined according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of law (cf. former article 511.º, no. 1, of the CCP, corresponding to current article 596.º, applicable ex vi article 29.º, no. 1, subsection e) of the LBTA).
Thus, having regard to the positions assumed by the parties, in light of article 110.º, no. 7 of the CTPP, the documentary evidence and the administrative process attached to the case file, the facts were considered proven, with relevance for the decision, those listed above, taking into account that, as stated in the judgment of the Central Administrative Court of the South, dated 26-06-2014, handed down in case 07141/13 (Catarina Almeida e Sousa), "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".
In particular, the facts given as proven above identified in subsections c) to z) took into account the provisions in the parties' pleadings as well as in the documents submitted by the Claimant, and also the Tax Inspection Report. The remaining factual matters result from the documentation contained in the PA, considering that the facts listed are not of a controversial nature, with the main matter under discussion being confined to a question of essential law: to assess the illegality or not of the tax acts now subject to review for alleged disregard of the right to deduct VAT supported in 2014 with the operations of importation, customs clearance and transport of goods used by the Claimant for its manufacturing activity of products for commercialization under the "A..." brand.
2. Matters of Law
2.1. On the Defect of Violation of Law Invoked by the Claimant
Notwithstanding the Claimant attributes various defects to the tax acts in question, this Arbitral Tribunal will, pursuant to article 124.º of the CTPP, first assess the defect of violation of law raised and, in particular, the violation of articles 20.º of the VAT Code and 168.º of Directive 2006/112/CE of the Council, of 28 November 2006 (cf. §.202.º to §.222.º of the Request for Constitution of the Arbitral Tribunal).
Thus, it follows from the established factual matter that at issue in the present case is the answer to a single question, which boils down to whether it is legally permissible for a VAT taxable person to exercise the right to deduct the tax supported in connection with operations relating to goods owned by third parties.
It should be noted that this question was already raised, in identical terms, in arbitral proceedings nos. 410/2016-T (José Baeta de Queirós), 548/2017-T (Jorge Lopes de Sousa) and 286/2018-T (José Poças Falcão) and decided in terms which are considered adequate, both as to the direction and the reasoning, for which the said Jurisprudence will be followed closely.
Thus, and with relevance for the present case, article 19.º no. 1 of the VAT Code provides:
"1 - For the determination of the tax due, taxable persons shall deduct, in accordance with the following articles, from the tax levied on the taxable operations they have carried out:
a) The tax due or paid for the acquisition of goods and services from other taxable persons;
b) The tax due on the importation of goods;
(…)".
On the other hand, pursuant to article 20.º of the same legal code:
"1 - Only the tax that has been levied on goods or services acquired, imported or used by the taxable person for the realization of the following operations may be deducted:
a) Transmissions of goods and provision of services subject to the tax and not exempt therefrom;
(…)".
The VAT Directive, for its part, provides, in its article 168.º:
"When goods and services are used for the purposes of their taxable operations, the taxable person shall have the right, in the Member State in which such operations are carried out, to deduct from the amount of the tax for which he is liable the following amounts:
a) The VAT due or paid in that Member State in relation to goods that have been or will be delivered to him and in relation to services that have been or will be provided to him by another taxable person;
(…)
e) The VAT due or paid in relation to goods imported into that Member State."
As the Court of Justice of the European Union has repeatedly stated, the right to deduct the tax constitutes one of the essential elements of the functioning of the common VAT system and cannot, in principle, be limited. Let us invoke for this purpose, and by way of merely exemplificatory reference, the Judgment of that Court, dated 15/09/2016 and handed down in the course of case C‑516/14 (Barlis 06 — Investimentos Imobiliários e Turísticos SA)[2] - and which resulted, precisely, from a preliminary reference procedure raised by CAAD. It was written in the said Judgment, with abundant jurisprudential references:
"37. It should be recalled that, according to settled case-law of the Court of Justice, the right of taxable persons to deduct from the VAT for which they are liable the VAT due or paid on goods acquired and services provided to them upstream constitutes a fundamental principle of the common VAT system established by Union legislation (judgment of 13 February 2014, Maks Pen, C‑18/13, EU:C:2014:69, no. 23 and case-law cited therein).
38. The Court of Justice has repeatedly held that the right to deduction of VAT provided for in Articles 167 et seq. of Directive 2006/112 is an integral part of the VAT mechanism and cannot, in principle, be limited. That right is immediately exercised in relation to the totality of the taxes which have burdened the transactions effected upstream (see, to that effect, judgment of 13 February 2014, Maks Pen, C‑18/13, EU:C:2014:69, no. 24 and case-law cited therein).
39. The system of deductions aims to free the entrepreneur entirely from the burden of VAT due or paid in connection with all his economic activities. The common VAT system thus ensures neutrality as to the tax burden of all economic activities, whatever the purpose or outcome of those activities, provided that the said activities are, in principle, themselves subject to VAT (judgment of 22 October 2015, PPUH Stehcemp, C‑277/14, EU:C:2015:719, no. 27 and case-law cited therein)" – the emphasis is ours.
In Doctrine, and referring to the right to deduct as the "cornerstone of the value added tax system" since it is this that allows the taxable person to expunge from its burden the VAT supported upstream, not reflecting it as an operational cost of its activity, eliminating the cumulative or cascading effect and providing for the economic neutrality of the tax, see, for example, Xavier de Basto, A tributação do consumo e a sua coordenação internacional, CCTF no. 164, Lisbon, 1991, p. 41 and Clotilde Celorico Palma, Introdução ao Imposto sobre o Valor Acrescentado, Cadernos IDEFF, no. 1, Almedina, 5th edition, July 2011, pp. 17 to 29. In the Jurisprudence of CAAD, and referring to the right to deduct as an "essential element of the functioning of the tax, which should ensure its principal characteristic – neutrality", for example, the Arbitral Decision handed down in the course of case no. 148/2012-T (Benjamim Silva Rodrigues).
However, the exercise of the right to deduct 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 requirements of a formal, temporal, subjective and objective nature – cf. in the national Jurisprudence, for example, the Judgment of the Supreme Administrative Court dated 03/07/2013 and handed down in case 01148/11 (Pedro Delgado) and the Judgment of the Central Administrative Court of the South, dated 06/04/2017 and handed down in case 07097/13 (Ana Pinhol).
In the case at hand, only the fulfillment of the objective requirements is in question, and it is therefore on these that we shall dwell in greater detail.
Thus, within the national legislative framework, and as results from no. 1 of articles 19.º and 20.º of the VAT Code, in the determination of the tax due, taxable persons may only deduct from the tax levied on the taxable operations they have carried out, the tax that has been levied on goods or services acquired, imported or used by that same taxable person for the realization of the operations referred to in article 20.º of the same Code.
On this matter, and as results from the Judgment of the CJEU dated 6 September 2012 and handed down in case C-496/11, §.36.º to §. 41.º (Portugal Telecom SGPS) the right to deduct depends, first and foremost, on the existence of a direct and immediate relationship of the goods and services acquired with the whole of the economic activity developed by the taxable person, in the sense that, in the absence of that relationship, that right is summarily refused, regardless of further investigation.
On a second level, there must also be a specific relationship between the good or service acquired and those operations which, framed in the global activity of the same taxable person, can be classified strictly as taxable operations.
In fact, the right to deduct the VAT that was levied on the acquisition of goods or services upstream presupposes that the expenses incurred with their acquisition have formed part of the constitutive elements of the price of the taxable operations downstream with the right to deduction – cf., to this effect, for example, the Judgment of the CJEU dated 26 May 2005 and handed down in case C-465/03, §. 34 and §.35 (Kretztechnik AG), the Judgment dated 8 June 2000 and case C-98/98, §.29 and §.30 (Midland Bank plc) and the Judgment dated 22 February 2001 and handed down in case 408/98), §.25, and 26.º (Abbey National plc) – on this matter, in national doctrine, for example, Clotilde Celorico Palma, Introdução (…), Ob. Cit., p. 159 and Valente Torrão, Código do Imposto sobre o Valor Acrescentado Anotado, Almedina, Coimbra, 2005, p. 126).
It follows, a contrario, from the foregoing, that the acquisition of a good or a service for private purposes, unrelated to the exercise of an economic activity, or the importation of a good for the same private purposes, does not allow the deduction of the VAT supported in the respective operation, even if that good is subsequently used in the exercise of an economic or business activity.
Now, in the case under examination, no doubts whatsoever were raised as to the fact that the tax supported by the Claimant was supported in connection with an importation operation that falls within its economic (taxable) activity within the meaning of subsection c) of no. 2 of article 4.º of the VAT Code.
Nor are any facts invoked which may indicate the exercise of illicit activities or fraud or tax avoidance.
This indeed results, crystal-clear, from the dismissal dispatch of the Grace Period Appeal where the TCA expressly recognizes that the Claimant "brings [the goods] into national territory in order to then produce the products".
What, in fact, the TCA places in question is only the verification of the "direct and immediate relationship" of these operations with the whole of the economic activity developed by the taxable person. In fact, in the dismissal dispatch of the Grace Period Appeal it is expressly stated:
"Now, the essential question in the case under analysis is related to the primary fact that the claimant is not the acquirer of the goods (of the raw material), goods which it merely brings into national territory in order to then produce the products (…) but on account and order of the non-resident company, this being the actual acquirer of that same raw material.
For VAT to be deductible, the operations carried out upstream must have a direct and immediate relationship with the downstream operations with the right to deduction.
Thus, the right to deduct the VAT that was levied on the acquisition of goods or services upstream presupposes that the expenses incurred with their acquisition have formed part of the constitutive elements of the price of the taxable operations downstream with the right to deduction.
In the case at hand and as is amply explained in the inspection report, the inputs never generate outputs in the sphere of the Portuguese entity and now claimant" – the emphasis is ours.
Already in the Conclusions of the Inspection Report, one can read (p. 40):
"In view of the foregoing, we conclude that the imported goods described in tables I to XII, with respect to which F... deducted VAT relate to goods that are not its property and therefore are not used for the realization of the taxable operations related to the operations of transmissions of goods and/or provision of services of the Portuguese entity" – emphasis ours.
It thus follows from the reasoning of the tax acts in question that, for the TCA, the fact that the Claimant imported the goods on account of a third entity – goods which it merely transforms within the scope of a contract for services and which, therefore, never come into its patrimony – makes impossible the right to deduction, by the Claimant, of the tax it supported. For the TCA, such fact prevents the verification, in this case, of a direct and immediate relationship between the good and the service acquired and the taxable operations of the Claimant.
Let it be said from the outset that the Tax Authority is without reason.
As results from the established factual matter, the tax in question in the present case results from the acquisition of goods (raw materials) which, within the scope of a service contract, will be transformed giving rise to taxable operations - having the nature of provision of services within the meaning of subsection c) of no. 2 of article 4.º of the VAT Code - and which consist, precisely, in the delivery of the produced/assembled goods to the owner of the work. These operations will be taxable or exempt (complete exemption) depending on whether they are intended to be consumed/used in the territory of the European Union or for exportation.
In material terms, the operation at hand is nothing more than the execution of a service contract with materials supplied by the owner of the work (operation assimilated to provision of services by subsection c) of no. 2 of article 4.º of the VAT Code). The only particularity lies in the fact that the delivery of those materials by the owner of the work is not carried out in national territory, but rather sent from a third country, giving rise to an importation which constitutes a taxable event under subsection d) of no. 1 of article 2.º, of the VAT Directive and article 1.º, no. 1, subsection b), of the VAT Code.
Moreover, the taxable person for that importation operation is, in this case, the Claimant, a conclusion that is drawn from the combination of customs legislation and the standards applicable to VAT:
Subsection b) of no. 1 of article 2.º of the VAT Code provides that taxable persons are "natural or legal persons who, in accordance with customs legislation, carry out imports of goods";
Subsection c) of no. 1 of article 7.º of the VAT Code (in terms similar to the second paragraph of no. 1 of article 71.º of the VAT Directive) establishes that, in importations, the tax is due and becomes due "at the moment determined by the provisions applicable to customs duties, whether or not such duties are owed or other community impositions established under a common policy";
Pursuant to no. 12 of article 4.º, of the Community Customs Code (CCC) and article 5.º, no. 19, of the Union Customs Code (UCC), the person responsible for the payment of customs duties is designated as the "debtor". In concrete terms, the person of the debtor coincides with the person who submits the customs declaration;
When a person submits a customs declaration in its own name, but on account of another person ("indirect representation", as per articles 5.º, no. 2, of the CCC and 18.º, no. 1, of the UCC), the person who completes the customs declaration is the declarant (cf. article 4.º, no. 18, of the CCC and article 5.º, no. 15, of the UCC) and is also considered as debtor of the tax (cf. articles 201.º of the CCC and 77.º, no. 3, of the UCC);
However, it should be stressed, such specificity in no way affects the right to deduct the tax and the general rule contained in subsection b) of no. 1 of article 19.º, of the VAT Code applies, pursuant to which taxable persons have the right to deduct the VAT due or paid on the importation of goods.
This same understanding is substantially supported in the Opinion of Professors Xavier de Basto and Odete Oliveira attached to the case file where it is stated (pp. 14 et seq.):
"In the situation under analysis, the specificity is only that the delivery of the materials by the owner of the work to the maker (contractor) does not occur directly in national territory, but rather reaches it after crossing the territorial borders of Portugal and also of the Customs Union. And this presents several consequences, which we must analyze in order to conclude well.
First, the occurrence of an importation, which the VACC defines as a taxable operation in view of the application of the destination principle in international commerce to which the tax is subject, and whose definition is made by national tax legislation in conjunction with the Customs Code (a Community Regulation).
The second consequence is that the entity considered as importer – taxable person in the importation – is the one defined by customs legislation by reference made in subsection b) of no. 1 of article 2.º of the VACC, which considers as the importer the person who appears as the recipient in the importation document, to the extent that article 4.º, no. 18 of the Community Customs Code (CCC) considers as "declarant" the person who makes the customs declaration in his name or the person in whose name the declaration is made, and article 201.º, no. 3, 1st paragraph of the CCC says that the debtor is the declarant.
It should be recalled in this regard that although the VAT Directive considers that VAT on importation can be paid by a taxable person or by a mere debtor (article 21.º no. 2 of the Sixth Directive), the Portuguese legislator did not adopt the same solution, rather always considering the importer as a taxable person, sometimes only with the nature of "debtor" of the tax for application of the destination principle (subsection b) of no. 1 of article 2.º of the VACC), since in the remaining cases, that importer, if a taxable person, is already covered by subsection a) of the same number and article. It should be noted, moreover, that, according to settled case-law of the CJEU, "VAT on importation and customs duties present comparable essential features insofar as they give rise to the fact of importation in the EU and the consecutive introduction of goods into the economic circuit of Member States. Parallelism which is confirmed by the fact that article 71.º, paragraph 1, second subparagraph, of the VAT Directive authorizes the MS to link the taxable event and the exigibility of VAT on importation to the taxable event and the exigibility of customs duties" [This is the doctrine of Judgment C-273/12, of 11 July 2013, no. 41, and reference made therein to Judgments C-343/89, of 6 November 1990, no. 18 and C-230/08, of 29 April 2010, nos. 90 and 91: "to this effect, it must be recalled that VAT on importation and customs duties present comparable essential features, whose taxable event is importation into the Union and the subsequent entry of goods into the economic circuit of Member States. This parallelism is, moreover, confirmed by the fact that article 71.º, no. 1, second paragraph, of the VAT Directive authorizes Member States to link the taxable event and the exigibility of VAT on importation to customs duties (see in particular judgments of 6 December 1990, Witzemann, C‑343/89, Recueil, p. I‑4477, no. 18, and of 29 April 2010, Dansk Transport og Logistik, C‑230/08, Recueil, p. I‑3799, nos. 90 and 91)".
It should then be concluded that the MS have no discretion as regards the exigibility of VAT on importation in compliance with customs legislation, in accordance with article 204.º of Regulation no. 2913/92 (…)."
Furthermore, in the case at hand, the "direct and immediate link" of the goods and services acquired by the Claimant with the taxable operations it practices (or exempts with right to deduction) is evident.
In this regard, it is important to note that the CJEU has clarified that that direct and immediate relationship is not required with respect to each output individually considered, allowing that such connection is verified with respect to the activity of the taxable person globally considered – cf. for example, the Judgments handed down on 29 October 2009, in the course of case C-29/08, §.60.º (SKF) and 8 June 2000 and handed down in case C-98/98, §.23.º (Midland Bank) – in national doctrine, on this matter, for example, Xavier de Basto and Maria Odete Oliveira, "Desfazendo mal-entendidos em matéria de direito à dedução de Imposto sobre o Valor Acrescentado: As recentes alterações do artigo 23.° do Código do IVA", Revista de Finanças Públicas e Direito Fiscal, Year 1, 2008, p. 38.
Thus, in the absence of an operation-to-operation nexus, the right to deduction subsists if there is a direct and immediate connection with the whole of the economic activity developed, to the extent that such connection confers that right, that is, provided that there is that relationship between upstream acquisitions and the taxable activities of the taxable person - in this sense, the Judgments of the CJEU handed down on 27 September 2001, in case C-16/00, §.33.º (Cibo); on 18 July 2013, in case C-26/12, §.22.º (PPG Holdings); and on 22 October 2015, in case C-126/14, §.37.º (Sveda).
Also with relevance for the case at hand, is the decision handed down by the CJEU in Judgment dated 21 February 2013, in case C-104/12 (Wolfram Becker).
It was written there:
"22. Lastly, it follows from case-law that, in the context of the application of the direct relationship criterion which falls to the Tax Administrations and the national courts, it is incumbent upon them to take into account all the circumstances in which the operations in question were conducted (see, to that effect, Midland Bank judgment, already cited, no. 25) and to take into account only the operations which have an objective relationship with the taxable activity of the taxable person.
23. In fact, the obligation to take into account only the objective content of the operation in question is the most consistent with the objective pursued by the common VAT system, which aims to ensure legal certainty and facilitate the acts inherent in the application of that VAT (see, to that effect, BLP Group judgments, already cited, no. 24; of 9 October 2001, Cantor Fitzgerald International, C‑108/99, Recueil, p. I‑7257, no. 33; and of 29 October 2009, SKF, C‑29/08, Recueil, p. I‑10413, no. 47).
24. The Court of Justice, on the other hand, declared that it is also taking into account its objective content that the existence of a direct and immediate relationship between the goods or services used and a taxable operation carried out downstream or, exceptionally, a taxable operation carried out upstream should be established (see, to that effect, Midland Bank judgment, already cited, no. 32, and, by analogy, as regards the elements to be taken into consideration to demonstrate the stated intention of a taxable person to affect a particular good to an operation subject to VAT, judgment of 14 February 1985, Rompelman, 268/83, Recueil, p. 655, no. 24).
32. In this regard, it should be added that the circumstance that national civil law obliges a company such as that which is the subject of the main proceedings to bear the charges related to the defense of the interests of its organs in criminal proceedings is devoid of relevance for the interpretation and application of the provisions relating to the common VAT system. In fact, having regard to the objective regime of VAT created by that system, only the objective relationship between the services provided and the taxable economic activity of the taxable person is determinant (see, to that effect, judgment of 22 December 2010, RBS Deutschland Holdings, C‑277/09, Recueil, p. I‑13805, no. 54), under pain of seriously undermining the uniform application of Union law in this matter.
(…)
33. Consequently, (…) the existence of a direct and immediate relationship between a given operation and the whole of the activity of the taxable person with the aim of determining whether the goods or services were used by it "for the purposes of its own taxable operations", within the meaning of article 17.°, no. 2, subsection a), of the Sixth Directive, depends on the objective content of the good or service acquired by that taxable person."
Subsuming the said Jurisprudence to the case at hand, it results evident that the goods were imported by virtue of the Claimant's activity. Without those goods, the Claimant could not fulfill the service contract to which it committed itself. On the other hand, if the Claimant did not exercise its taxable activity, it would have no interest or advantage in the importation of the goods. The importation was not carried out outside the context of the Claimant's activity; on the contrary, it can only be contextualized in light of the needs of the Claimant's taxable activities.
In light of the foregoing, the conditions required for the Claimant to exercise the right to deduct the tax it supported and paid in the importations of the materials it uses in the manufacturing operations of the goods that it subsequently invoices are considered to be met.
Likewise, it also has the right to deduct the VAT that was invoiced to it, in legal terms, for the acquisition of transport services of the imported materials and their respective customs clearance.
The fact that the materials that gave rise to the deduction are not property of the Claimant is of no relevance for purposes of the exercise of the right to deduct. Such condition is not even mentioned or suggested in the national and community legislations nor in the jurisprudence of the Court of Justice, and therefore merits no further analysis.
As a consequence of the foregoing, the contested assessments, based on the understanding that the Claimant improperly deducted VAT, lack legal basis and should, therefore, be annulled.
2.2. Foreclosed Matters
Given that the request for an arbitral determination is based on the defect of violation of law, which ensures effective and stable protection of the Claimant's rights, the examination of the other defects attributed to it is foreclosed.
In fact, as is inherent in the establishment of an order of examination of defects, in the cited article 124.º of the CTPP, once a defect that prevents the renewal of the act under challenge is found to be well-founded, there is no need to examine the others attributed to it.
2.3. Indemnification for Unwarranted Guarantee
The Claimant provided a guarantee to suspend fiscal enforcement proceedings instituted for coercive collection of the contested assessments and submits a request for indemnification for the expenses it "incurred and will incur with the guarantee", pursuant to article 53.º of the GTL.
Pursuant to article 171.º of the CTPP, "indemnification in case of bank guarantee or equivalent unwarranted provided shall be requested in the proceedings in which the legality of the enforceable debt is disputed" and that "the indemnification must be requested in the appeal, counter-argument or recourse or if its basis is subsequent within 30 days after its occurrence".
Thus, it is unequivocal that the judicial challenge procedure encompasses the possibility of condemnation to pay for unwarranted guarantee and is even, in principle, the appropriate procedural means to submit such request, which is justified by obvious reasons of procedural economy, since the right to indemnification for unwarranted guarantee depends on what is decided on the legality or illegality of the assessment act.
The request for constitution of the arbitral tribunal and for arbitral determination has as its corollary that it will be in the arbitral proceeding that the "legality of the enforceable debt" will be discussed, wherefore, as results from the express wording of that no. 1 of the referred article 171.º of the CTPP, it is also the arbitral proceeding that is adequate to examine the request for indemnification for unwarranted guarantee.
The regime of the right to indemnification for unwarranted guarantee is contained in article 53.º of the GTL, pursuant to which:
1. The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be indemnified in whole or in part for the harm resulting from its provision, provided it has been maintained for a period exceeding three years in proportion to the decision in administrative recourse, challenge or opposition to enforcement that have as their object the guaranteed debt.
2. The period referred to in the preceding number does not apply when it is verified, in grace period appeal or judicial challenge, that there was error attributable to the services in the assessment of the tax.
3. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed amount of the rate of indemnificatory interest provided for in this law and can be requested in the grace period appeal or judicial challenge itself, or autonomously.
4. Indemnification for provision of unwarranted guarantee shall be paid by deduction from the tax revenue of the year in which payment was made.
In the case at hand, and as offers no doubts, the errors underlying the VAT assessments and compensatory interest are attributable to the Tax and Customs Authority, for the corrections were at its initiative and the Claimant in no way contributed to those errors being committed.
It is, therefore, manifest, the Claimant's right to indemnification for the guarantee provided.
As there are no elements that allow determining the exact amount of the indemnification, the condemnation must be made with reference to what is to be assessed in the execution of the present judgment, in accordance with the provision in article 609.º, no. 2, of the Code of Civil Procedure, subsidiarily applicable by virtue of the provision in article 29.º, no. 1, subsection e), of the LBTA.
3. Decision
In these terms, this Arbitral Tribunal agrees on:
Finding the request for arbitral determination well-founded;
Annulling the Value Added Tax assessments nos. 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., and 2017 ...;
Finding well-founded the request for condemnation of the Tax and Customs Authority to pay the Claimant the indemnification to be assessed in the execution of the present judgment for the guarantee provided to suspend the fiscal enforcement proceedings instituted for coercive collection of the sums assessed.
4. Value of the Proceedings
In accordance with the provisions of articles 306.º, no. 2, of the Code of Civil Procedure and 97.º-A, no. 1, subsection a), of the CTPP and 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €.1,624,709.25.
5. Costs
Pursuant to article 22.º, no. 4, of the LBTA, the amount of costs is fixed at €.21,420.00, in accordance with Table I appended to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Tax and Customs Authority.
Let it be notified.
Lisbon, 16 January 2019
The Arbitrators
Fernanda Maçãs (president)
Isaque Marcos Ramos (member)
Filipa Barros (member)
Text prepared by computer, in accordance with article 131.º, no. 5 of the CCP, applicable by reference from article 29.º, no. 1 subsection e) of the LBTA.
The writing of this arbitral decision is governed by the spelling prior to the 1990 Orthographic Agreement.
[1] Cf. Arbitral Award case no. 410/2016 –T regarding VAT of July and October 2015, Arbitral Award case no. 548/2017–T regarding VAT of 2012 and Arbitral Award case no. 15/2018 –T regarding VAT of 2013.
[2] All CJEU Judgments invoked in this arbitral decision can be consulted at https://curia.europa.eu.
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