Summary
Full Decision
ARBITRAL DECISION
CAAD: Tax Arbitration
Case No. 296/2015-T
Subject: VAT - reduced rate, dental implants and abutments intended for dental implantology
The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Clotilde Celorico Palma and António Nunes dos Reis, appointed by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree:
I – REPORT
On 6 May 2015, A…, Lda., legal entity No. …, with registered office at Avenue …, No. …, … Floor, offices … to …, …, filed a request for the establishment of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012 of 31 December (hereinafter abbreviated as LFATM), seeking the declaration of illegality of the following acts, totaling an amount to pay of € 269,447.66:
VAT Assessment No. …, relating to the period 201001 to 201003, in the total amount to pay of € 10,095.76, with the voluntary payment deadline ending on 28 February 2015;
JC Assessment No. …, relating to the period 201001 to 201003, in the total amount to pay of € 1,821.11, with the voluntary payment deadline ending on 28 February 2015;
VAT Assessment No. …, relating to the period 201004 to 201006, in the total amount to pay of € 8,130.01, with the voluntary payment deadline ending on 28 February 2015;
JC Assessment No. …, relating to the period 201004 to 201006, in the total amount to pay of € 1,385.44, with the voluntary payment deadline ending on 28 February 2015;
VAT Assessment No. …, relating to the period 201007 to 201009, in the total amount to pay of € 6,030.15, with the voluntary payment deadline ending on 28 February 2015;
JC Assessment No. …, relating to the period 201007 to 201009, in the total amount to pay of € 967.47, with the voluntary payment deadline ending on 28 February 2015;
VAT Assessment No. …, relating to the period 201010 to 201012, in the total amount to pay of € 13,784.05, with the voluntary payment deadline ending on 28 February 2015;
JC Assessment No. …, relating to the period 201010 to 201012, in the total amount to pay of € 2,072.52, with the voluntary payment deadline ending on 28 February 2015;
VAT Assessment No. …, relating to the period 201101 to 201103, in the total amount to pay of € 12,726.03, with the voluntary payment deadline ending on 28 February 2015;
JC Assessment No. …, relating to the period 201101 to 201103, in the total amount to pay of € 1,787.92, with the voluntary payment deadline ending on 28 February 2015;
VAT Assessment No. …, relating to the period 201104 to 201106, in the total amount to pay of € 9,282.43, with the voluntary payment deadline ending on 28 February 2015;
JC Assessment No. …, relating to the period 201104 to 201106, in the total amount to pay of € 1,210.53, with the voluntary payment deadline ending on 28 February 2015;
VAT Assessment No. …, relating to the period 201107 to 201109, in the total amount to pay of € 6,127.29, with the voluntary payment deadline ending on 28 February 2015;
JC Assessment No. …, relating to the period 201107 to 201109, in the total amount to pay of € 737.29, with the voluntary payment deadline ending on 28 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201110 to 201112, in the total amount to pay of € 20,212.35, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201110 to 201112, in the total amount to pay of € 2,230.55, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201201 to 201203, in the total amount to pay of € 11,313.67, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201201 to 201203, in the total amount to pay of € 1,136.94, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201204 to 201206, in the total amount to pay of € 15,397.06, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201204 to 201206, in the total amount to pay of € 1,390.37, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201207 to 201209, in the total amount to pay of € 12,177.81, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201207 to 201209, in the total amount to pay of € 978.22, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201210 to 201212, in the total amount to pay of € 29,308.91, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201210 to 201212, in the total amount to pay of € 2,058.85, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201301, in the total amount to pay of € 3,959.63, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201301, in the total amount to pay of € 267.73, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201302, in the total amount to pay of € 4,505.04, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201302, in the total amount to pay of € 289.80, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201303, in the total amount to pay of € 3,592.21, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201303, in the total amount to pay of € 219.27, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201304, in the total amount to pay of € 6,181.63, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201304, in the total amount to pay of € 355.65, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201305, in the total amount to pay of € 9,007.06, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201305, in the total amount to pay of € 489.58, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201306, in the total amount to pay of € 6,223.31, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201306, in the total amount to pay of € 315.76, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201307, in the total amount to pay of € 6,478.86, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201307, in the total amount to pay of € 308.14, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201308, in the total amount to pay of € 4,949.26, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201308, in the total amount to pay of € 219.12, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201309, in the total amount to pay of € 6,604.39, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201309, in the total amount to pay of € 269.24, with the voluntary payment deadline ending on 9 February 2015;
NA Assessment embodied in document No. 2014…, relating to the period 201310, in the total amount to pay of € 13,263.11, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201310, in the total amount to pay of € 498.54, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201311, in the total amount to pay of € 10,556.92, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201311, in the total amount to pay of € 360.95, with the voluntary payment deadline ending on 9 February 2015;
VAT Assessment embodied in document No. 2014…, relating to the period 201312, in the total amount to pay of € 17,626.58, with the voluntary payment deadline ending on 9 February 2015;
JC Assessment embodied in document No. 2014…, relating to the period 201312, in the total amount to pay of € 542.80, with the voluntary payment deadline ending on 9 February 2015.
To substantiate its claim, the Applicant argues, in summary, that the assessment acts are based on an incorrect interpretation and application of Article 18, No. 1, paragraph a) of the VAT Code and item 2.6 of List I attached to the Code, in that, in essence:
A "single implant unit" simply does not exist;
The interpretation that the Tax and Customs Authority (TCA) makes of item 2.6 of List I attached to the VAT Code, through which it considers that the reduced VAT rate applies only to the "single implant unit," has no support in the literal element of the norm;
This interpretation violates the principle of neutrality and the principle of free competition or non-discrimination;
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 TCA's thesis can be derived therefrom or from the Combined Nomenclature.
On 8 May 2015, the request for establishment of the arbitral tribunal was accepted and automatically notified to the TCA.
The Applicant failed to appoint an arbitrator, therefore, pursuant to Article 6, No. 2, paragraph a) and Article 11, No. 1, paragraph a) of the LFATM, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.
On 9 July 2015, the parties were notified of these appointments, and neither expressed any objection.
In accordance with Article 11, No. 1, paragraph c) of the LFATM, the collective Arbitral Tribunal was constituted on 24 July 2015.
On 29 September 2015, the Respondent, duly notified for this purpose, filed its response defending itself solely through challenge.
Pursuant to Article 421, No. 1 of the Code of Civil Procedure, applicable under Article 29, No. 1, paragraph e) of the LFATM, the use in the present case of expert evidence produced in case 530/2014T of CAAD, requested by the Applicant, was allowed.
Considering that none of the statutory purposes were served in this case, and taking into account the position taken by the parties, pursuant to Articles 16, paragraph c), 19 and 29, No. 2 of the LFATM, as well as the principles of procedural economy and prohibition of useless acts, the holding of the meeting referred to in Article 18 of the LFATM was dispensed with.
Having been granted a period for the presentation of written submissions, the same were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.
A period of 30 days was set for the issuance of the final decision, after the submission of arguments by the TCA.
The Arbitral Tribunal is materially competent and is regularly constituted, under Articles 2, No. 1, paragraph a), 5 and 6, No. 1, of the LFATM.
The parties have legal personality and capacity, are legitimate and are legally represented, under Articles 4 and 10 of the LFATM and Article 1 of Regulation No. 112-A/2011 of 22 March.
The case does not suffer from any nullities.
Thus, there is no obstacle to the consideration of the merits of the case.
Having reviewed everything, it is necessary to render
II. DECISION
A. FACTUAL MATTERS
A.1. Facts Found Proven
Under the external inspection orders – OI2014… and OI2014… – corrections were made regarding VAT, relating to the years 2010 to 2013, of which the Applicant was notified on 22 November 2014.
In the inspection procedure, it was found that the Applicant made internal transfers of various types of dental implants and related material, better described on pages 92 to 148 of the Case File, which are hereby incorporated by reference[1], and applied the reduced VAT rate.
In the course of that inspection procedure, corrections were made regarding the application of the reduced VAT rate to said transfers of goods.
The said corrections amount to € 38,039.97 for the 2010 fiscal year; € 48,348.07 relating to 2011; € 68,197.43 for 2012, and € 92,948.40 relating to 2013.
The Applicant was cited in the respective enforcement proceedings and timely requested the provision of security.
The Applicant is a limited liability company engaged in the trade of dental prosthetic material, with particular emphasis on implants and accessory material.
The Applicant is subject to the general taxation regime under Corporate Income Tax and the Normal quarterly VAT regime, having in early 2013 moved to the normal monthly VAT regime.
In the exercise of its activity, in the periods to which the tax acts in question in this case relate, the Applicant made acquisitions in the national and intra-Community markets, with its sales channeled, in their vast entirety, to the domestic market.
The articles marketed by the Applicant were essentially medical devices used in the implantology sector, including dental implants and other prosthetic devices.
The Applicant's customers were dentists and dental technicians who worked in implantology and used the Applicant's products for oral rehabilitation of their respective patients.
Each tooth is an individual unit, being commonly composed anatomically of crown, root or roots and periodontium.
All constituent parts of the tooth are inseparable, meaning one part cannot exist without the other.
Implantology is a surgical area of Dentistry dedicated to the placement of dental implants, namely destined to replace lost teeth through titanium dental implants and crowns.
Dental implant prosthetics consist of three elements: implant, abutment and crown.
The implant is the structure surgically positioned in the alveolar bone below the gingiva, aimed at fulfilling the function of the tooth root.
Dental implants are structures of pure titanium, placed in the maxilla or mandible, which replace the root of a natural tooth that, for any reason, was extracted.
Dental implants provide a safe and permanent solution for the replacement of one or more teeth, functioning as support pillars for single crowns and fixed or removable bridges, partial or total.
The abutment is a cylindrical structure inserted into the implant.
A crown is placed on the abutment, an artifact that allows replacement of the visible part of the tooth.
The crown is normally elaborated by dental prosthetic laboratories and needs to adjust to the characteristics of the patient's dentition, therefore it is specifically produced for each case.
Whereas implants and abutments are mass-produced.
The nature and quality of implants and abutments do not change with their placement.
The implants and abutments transacted by the Applicant could only be used within the scope of implantology, aiming at the replacement, in whole or in part, of the patient's tooth, and could not have any other purpose or use.
The surgical procedure of placing dental prosthetics typically involves three stages and may involve more than one intervener, as it includes surgical work, which must be done by a physician and prosthetic work, which must be done by a prosthetic technician.
The first stage consists of the surgical burial of the dental implant leveled with the bone, but within the gingiva.
After the placement of the dental implant, the process of integration of the dental implant to the bone begins, called "osseointegration" or "osteointegration."
At the end of the "osseointegration" process, the dental implant needs to be exposed through removal of the overlying gingiva.
In a second stage, the surgeon verifies the implant to confirm whether osseointegration was successful and, if so, places the fixation abutment that penetrates the gingiva.
In a third stage, once the healing process that defines the space to be occupied by the implant is complete, the dental crown (artificial tooth in porcelain or other material) is fabricated and placed on the osseointegrated dental implant.
Medical technique recommends segmentation of the process in two phases: placement of the dental implant, in an initial phase, and, subsequently, placement of the abutment and crown.
Oral rehabilitation by dental implant allows providing or optimizing the masticatory function of a patient partially or totally edentulous.
The alternatives to dental implants are rehabilitation of edentulous spaces in a fixed manner by performing bridges over teeth, which implies an invasive procedure of at least two teeth, or the use of removable prostheses supported only by the mucosa.
Dental implants maintain the bone and facial esthetics structure that is lost with the absence of teeth, and the integrity of adjacent teeth.
A.2. Facts Not Found Proven
With relevance to the decision, there are no facts that should be considered as not proven.
A.3. Substantiation of Proven and Unproven Factual Matters
Regarding the factual matters, the Tribunal does not need to pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and discriminate between proven and unproven matters (cf. Article 123, No. 2, of the Tax Code of Procedure and Article 607, No. 3 of the Civil Code of Procedure, applicable under Article 29, No. 1, paragraphs a) and e), of the LFATM).
Thus, the facts relevant to the judgment of the case are selected and defined according to their legal relevance, which is established in relation to the various plausible solutions of the legal question(s) (cf. previous Article 511, No. 1, of the Code of Civil Procedure, corresponding to current Article 596, applicable under Article 29, No. 1, paragraph e), of the LFATM).
Thus, taking into account the positions assumed by the parties, in light of Article 110, No. 7 of the Tax Code of Procedure, the documentary evidence and the Case File attached to the records, the facts listed above were considered proven, with relevance to the decision.
In particular, the facts found proven in points 11 to 33 took into account the expert report produced in case 530/2014T of CAAD, beyond the remaining documentation in the Case File and attached by the Applicant.
It should also be noted that, notwithstanding the Respondent stating in its submissions that "the evidence attached to the records does not allow us 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 recognized that these materials "have no other application than in dental medicine" because they are "pieces (...) that contribute to the final result of oral rehabilitation."
B. THE LAW
The question at issue is whether the interpretation that the Tax and Customs Authority makes of item 2.6 of List I attached to the VAT Code is acceptable, through which it considers that the reduced VAT rate applies only to what it designates as the "single implant unit."
Indeed, the TCA understands that one should consider 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."[2]
For the TCA, "item 2.6 only covers 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.'"[3]
In the TCA's view, "the titanium implant and the abutment are only components, each performing the function for which they were designed, of support and fixation of the prosthesis, but which, in themselves, objectively considered, do not perform nor replace the function of the dental organ."[4]
Furthermore, the TCA considers that "the legislator refers to prosthetic material and not material for prosthetics (for application in a prosthesis), which indicates the exclusion of connecting or fixing pieces of prostheses, such as those transacted by the taxpayer."[5]
Thus, still from the same perspective, the reduced VAT rate in question would relate solely to "'complete goods' as those which, by themselves, can replace an organ or limb of the human body and not any elements that are used individually in the process of replacement,"[6] "products specifically designed for the correction or compensation of deficiencies or for the replacement, total or partial, of organs or limbs of the human body,"[7] so that "In the case at hand, now in discussion, the question should be focused on whether the different pieces that compose a fixed dental prosthesis, at the stage of commercialization, should be subject to the reduced VAT rate."[8], and that, always in the TCA's opinion, "if we are talking about neutrality regarding the taxation of different types of prostheses, we must compare the transfer of the removable prosthesis with that of the fixed prosthesis. And not with that of the fixed prosthesis plus fixing and connecting pieces."[9]
This Tribunal does not subscribe to, at its various levels, the interpretation stubbornly maintained by the TCA.
Indeed, this interpretation is not subscribed to, firstly, in what concerns the 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 its scope the "commercialization phase." It is understood that the fact that the Applicant is an intermediary, and, as such, sells such goods not to their final recipient but to professionals who, in turn, will sell them, applying them, to final recipients, does not exclude it from the scope of application of the reduced rate, since nothing in the law allows such restriction to be sustained.
Neither is the TCA's interpretation subscribed to, 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 "only components, each performing the function for which they were designed, of support and fixation of the prosthesis."
Indeed, this interpretation appears to be contradictory in its own terms, and it is not apparent how, if it is considered that it is proper to prostheses "the function of replacing a part of the body or its function," one can consider, in the manner the TCA 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 is – for the TCA – the prosthesis, will likewise not be capable of ensuring individually "the function of replacing a part of the body or its function," and thus, in essence, there would be no prosthesis. That is: according to the thesis sustained by the TCA, there would be no fixed dental prostheses, since each one of the elements that compose it, considered and applied individually (and it is certain that their joint application at once would be clinically prohibited), would not be capable of ensuring the replacement of the bodily function that they aim, jointly, to fulfill.
Thus, it is judged that implants and abutments should not be considered "additions" of fixation and connection, in that they do not add anything to the prosthesis, firstly because without them the prosthesis does not exist.
Thus, it is considered that the prosthesis, as an object destined 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 ensemble, as a whole, that ensures "the function of replacing" a tooth, and not merely one of those elements, disconnected from the others. On the other hand, what is established is that implants and abutments ensure the replacement of part of the tooth – the root – and thus, even in the reading presented by the TCA, according to which "item 2.6 only covers 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), they should be considered as falling within said item 2.6. This conclusion is not hindered by the fact, mentioned in the Expert Report, that the root "does not only perform the function of fixing the tooth to the alveolar bone, but rather ensures multiple functions that, manifestly, are not pursued by the implant," since if only those artifacts that completely replace all functions of the missing part of the human body were to be considered as prostheses, practically no prostheses would exist, if any exist at all, given that it is normal that, given their artificial character, the prosthesis, by definition, does not exactly replace, in all its functions, the missing part of the human body.
Neither is the interpretation suggested by the TCA subscribed to, namely that the implant and the abutment would, in essence, be mere materials acquired for the fabrication of the prosthesis. It is considered, rather, that those goods are already finished parts of the prosthesis itself, since they have no other purpose, application or utility than their insertion into the human body, in order to ensure "the function of replacing" a tooth, and that, 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. In fact, it is not apparent how one could sustain that either the implant or the abutment, properly finished, could be equated, for example, with raw titanium that is to be transformed into the former, or any other element, raw material, or component that, through a process of transformation, or even assembly, is to become the prosthesis. On the contrary, it is considered that, whether the implant or the abutment, properly finished, are parts of the final prosthesis, and the process of their implantation in the human body, with a view to the replacement of the tooth, is not a process of transformation, or even assembly, but truly a process of application of the prosthesis in that same body, in accordance with the medically necessary procedures for this purpose.
Furthermore, there is also disagreement with the interpretation presented by the TCA regarding the text of the norm in question, when it states that "the legislator refers to prosthetic material and not material for prosthetics (for application in a prosthesis), which indicates the exclusion of connecting or fixing pieces of prostheses, such as those transacted by the taxpayer." Indeed, it is understood that by referring to "prosthetic material," and not simply to "prosthesis," the legislator is, precisely, giving the opposite indication to that presented by the TCA, intending, expressly, not to be limited only to the prosthesis, as a singular object ("complete good," in the TCA's terminology).
This same interpretation was already unanimously adopted, regarding a question entirely identical to that in the present case, in case 429/2014-T of CAAD,[10] 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 take into account the good rules of hermeneutics, having regard not only to the grammatical element, but also to its context, reason and purposes pursued by item 2.6, and should result in a declarative interpretation (and not a restrictive one, contrary to what the TCA argues).
Now, from the outset, the text of the provision seems to indicate that dental implants fall within the said list, being we are faced with prosthetic material intended to replace an organ of the human body, in this case, the dental system.
Indeed, nothing in the text of the law leads us to restrict its application to situations of transfers of 'complete goods' of implant, in the sense that the TCA intends to convey.
Furthermore, it follows from the facts found proven that such a concept does not exist as such, existing 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, thus giving rise, as a whole, to an implant. In reality, these three pieces are inseparable and unusable except for the composition of an implant as a composite prosthesis.
Such 'complete goods' of implant, in the sense that the TCA intends to convey, not existing, the understanding of the Tax Administration ends up denying the benefit of the reduced rate to this type of prosthesis, thus calling into question, without an attainable rational reason, the ratio legis that led the legislator to adopt the application of the reduced VAT rate in such situations – the protection of public health. Indeed, if such 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. This fact is discriminatory, running counter, firstly, to the provisions of Articles 5, No. 2 and 7, No. 3 of the General Tax Law. Indeed, according to the provisions of the first mentioned, of the epigraph 'Purposes of taxation,' taxation respects the principles of generality, equality, legality and material justice. In turn, in accordance with Article 7, No. 3, 'Taxation does not discriminate against any profession or activity nor prejudice the practice of legitimate personal acts, without prejudice to exceptional increases or benefits determined by economic, social, environmental or other purposes.'
But we would be essentially faced with an intolerable violation of the principle of neutrality that governs this tax at the level of European Union law, treating equal goods in a dissimilar manner without any attainable rational reason, a fact that violates the rules governing this tax as well as all the case law of the CJEU to which we allude.
As is known, in accordance with No. 2 of Article 11 of the General Tax Law, whenever fiscal norms employ terms proper to other branches of law, these should be interpreted in the same sense as they have therein, unless otherwise directly provided by law. In turn, in No. 3 of said provision it is determined that, if doubt persists about the meaning of the norms of incidence to be applied, the economic substance of the tax facts should be heeded. Now, what the Community legislator, the European Commission and the case law of the CJEU determine is that, in the use of concepts employed for the purposes of applying reduced rates, Member States should heed the economic effects at issue so as not to undermine the essential principle of neutrality of the tax.
That is, if the interpretation conveyed by the TCA were accepted in the concrete case, we would have a difference in treatment for identical realities resulting not from the VAT Directive but rather from a deficient application thereof by the Tax Administration.
It is certain that derogation rules, as is the case with the rule enabling Member States to apply reduced rates of the tax, must be applied restrictively, but we should not confuse this fact with a selective application, a completely distinct reality that undermines the most basic characteristics of the tax.
In this context, it is also important to note that the invocation, by the TCA, of the argument of the Combined Nomenclature does not hold, because this Nomenclature was created for statistical purposes and application of the common customs tariff and has no relevance in the matter of classification of goods and services for VAT purposes in Portugal.
The only instance in which the VAT Code resorts to the Combined Nomenclature to define the scope of the tax regime of goods is provided in its Article 14, No. 1, paragraph i), for the purposes of determining the exemption regime (complete or zero rate), according to which "transfers of goods for supply aboard warships classified by code 8906 00 10 of the Combined Nomenclature, when leaving the country bound for a port or anchorage situated abroad" are exempt, a provision not applicable to the situation at hand.
While it is certain that, in accordance with Article 98, No. 3, of the VAT Directive, Member States may use the Combined Nomenclature to define with precision each category subject to the reduced rate, it is equally certain that the Portuguese legislator did not adopt this option.
That is, for VAT purposes, the classification that implants, crowns and abutments deserve in the Combined Nomenclature is irrelevant.
Now, in this context, it is important once again to emphasize that, as was proven, the three 'pieces' now at issue – implant, crown and abutment – cannot be used separately, being specifically designed and manufactured for the production of a piece designated as an implant. Indeed, contrary to what the TCA alleges, there is no single implant piece in the factual sense it wishes to attribute to it, but only the implant consisting, as such, of implant, crown and abutment, inseparable pieces in view of this reality.
It is all too evident that the fact that such pieces are marketed separately, as in the case cited, the mere fact that segregated billing (with separate codes) or autonomous billing (in separate invoices) occurs 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 was proven is subsumed in the legal provision of item 2.6 of List I attached to the VAT Code, consisting of '...apparatus, artifacts and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body.'
And, to emphasize again, 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.
Finally, it should be noted that, from the case law cited, even if, as the TCA suggests, such 'complete goods' of implant were to exist, in the sense it intends to convey, we would still have to recognize that the crown, abutment and implant would constitute a single piece or, at the very least, even if erroneously not understood thus, as accessory pieces, and as such, should be taxed at the reduced rate, following the treatment of the main operation.
That is: whether only by resort to Community rules or by simple application of good hermeneutic rules, the result is the same – one can only conclude that in item 2.6 of List I attached to the VAT Code both implants consisting of a single piece and composite implants are included.
Indeed, all elements of interpretation of fiscal norms usable for this purpose, as well as the characteristics of VAT and the interpretation that the CJEU has been making of them, lead us to conclude that, in the present case, the reduced VAT rate provided in item 2.6 of List I attached to the VAT Code should be applied to the transfer of implants, crowns and abutments now under analysis, terms in which the Applicant is proven right.
In light of the above, it is concluded that the VAT assessments challenged are vitiated by error in their legal prerequisites, due to incorrect interpretation of item 2.6 of List I of the VAT Code."
Thus, it is concluded that the assessments subject to the present case are tainted by defects in their factual and legal prerequisites, as argued by the Applicant, and should, as such, be annulled in their entirety, thereby rendering moot the consideration of the remaining questions raised.
The Applicant combines with the request to annul the tax acts subject to this process, the request that it be "recognized the Applicant's right to compensation provided for in Articles 171 of the Tax Code of Procedure and 53 of the General Tax Law, under Article 13, No. 5, of Decree-Law 10/2011, should the security provided prove to be undue."
However, it is not established in this case that the Applicant has in fact provided any security.
As such, this request must fail.
C. DECISION
Thus, this Arbitral Tribunal decides to judge the arbitral claim presented as meritorious and, in consequence:
Annul the assessment acts subject to this process;
Condemn the Respondent in the costs of the process.
D. Value of the Case
The value of the case is fixed at € 269,447.66, under Article 97-A, No. 1, paragraph a), of the Code of Procedural and Process Procedure, applicable under paragraphs a) and b) of No. 1 of Article 29 of the LFATM and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The arbitration fee is fixed at € 4,896.00, under Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was entirely meritorious, under Articles 12, No. 2, and 22, No. 4, both of the LFATM, and Article 4, No. 4, of said Regulation.
Notify parties.
Lisbon
17 November 2015
The Presiding Arbitrator
(José Pedro Carvalho - Rapporteur)
The Arbitrator Member
(Clotilde Celorico Palma)
The Arbitrator Member
(António Nunes dos Reis)
[1] To accompany all mandatory notifications of this decision, other than those directed to the parties, who have personal knowledge of the documents in question.
[2] Cf. point 16 of the Response.
[3] Cf. point 24 of the Response.
[4] Cf. point 69 of the Response.
[5] Cf. point 53 of the Response.
[6] Cf. point 62 of the Response.
[7] Cf. point 64 of the Response.
[8] Cf. p. 10 of the Arguments of the TCA.
[9] Cf. point 86 of the Response.
[10] 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. Similarly, cf. the decisions in cases 530/2014 and 762-2014T, available on the same website.
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