CAAD Arbitration on VAT Liquidations 2010-2013: Compensatory Interest and Undue Guarantee Indemnity

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (presiding arbitrator), Dr. A. Sérgio de Matos and Dr.ª Maria Isabel Guerreiro, appointed by the Deontological Council of the Administrative Arbitration Centre to constitute the Arbitral Tribunal, constituted on 24-07-2015, hereby agree as follows:

1. Report

A… – …, Lda.", Tax Identification Number …, hereinafter referred to as the Claimant, with registered office at Rua …, no. …, … Vila Nova de Gaia, has, pursuant to the provisions of subsection a) of article 2.º, no. 1 and articles 10.º et seq. of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter "LFTA") in conjunction with subsection a) of article 99º and subsection d) of article 102º, no. 1, both of the Tax Procedure and Process Code (TPPC), presented a request for constitution of a collective arbitral tribunal, with a view to declaring the illegality of the following VAT assessments and compensatory interest, relating to the years 2010 to 2013:

a) VAT Assessment no. …, relating to period 201001 to 201003, in the total amount payable of € 12,014.23;

b) Compensatory Interest Assessment no. …, relating to period 201001 to 201003, in the total amount payable of € 2,161.90;

c) VAT Assessment no. …, relating to period 201004 to 201006, in the total amount payable of €16,658.41;

d) Compensatory Interest Assessment no. …, relating to period 201004 to 201006, in the total amount payable of €2,831.47;

e) VAT Assessment no. …, relating to period 201007 to 201009, in the total amount payable of €14,449.90;

f) Compensatory Interest Assessment no. …, relating to period 201007 to 201009, in the total amount payable of € 2,310.54;

g) VAT Assessment no. …, relating to period 201010 to 201012, in the total amount payable of €23,987.07;

h) Compensatory Interest Assessment no. …, relating to period 201010 to 201012, in the total amount payable of € 3,596.09;

i) VAT Assessment no. …, relating to period 201101 to 201103, in the total amount payable of € 22,592.84;

j) Compensatory Interest Assessment no. …, relating to period 201101 to 201103, in the total amount payable of €3,164.24;

k) VAT Assessment no. …, relating to period 201104 to 201106, in the total amount payable of €29,942.51;

l) Compensatory Interest Assessment no. …, relating to period 201104 to 201106, in the total amount payable of € 3,891.71;

m) VAT Assessment no. …, relating to period 201107 to 201109, in the total amount payable of € 33,479.34;

n) Compensatory Interest Assessment no. …, relating to period 201107 to 201109, in the total amount payable of €4,013.85;

o) VAT Assessment no. …, relating to period 201110 to 201112, in the total amount payable of € 14,583.92;

p) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201110 to 201112, in the total amount payable of € 1,603.03;

q) VAT Assessment no. …, relating to period 201201, in the total amount payable of € 18,744.27;

r) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201201, in the total amount payable of € 2,006.92;

s) VAT Assessment no. …, relating to period 201202, in the total amount payable of € 12,623.18;

t) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201202, in the total amount payable of € 1,311.42;

u) VAT Assessment embodied in document no. 2014…, relating to period 201203, in the total amount payable of € 23,306.86;

v) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201203, in the total amount payable of € 2,344.73;

w) VAT Assessment embodied in document no. 2014…, relating to period 201204, in the total amount payable of € 14,663.20;

x) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201204, in the total amount payable of € 1,423.73;

y) VAT Assessment embodied in document no. 2014…, relating to period 201205, in the total amount payable of € 12,095.24;

z) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201205, in the total amount payable of € 1,135.95;

aa) VAT Assessment embodied in document no. 2014…, relating to period 201206, in the total amount payable of € 4,506.45;

bb) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201206, in the total amount payable of € 407.92;

cc) VAT Assessment embodied in document no. 2014…, relating to period 201207, in the total amount payable of € 14,718.12;

dd) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201207, in the total amount payable of € 1,289.29;

ee) VAT Assessment embodied in document no. 2014…, relating to period 201208, in the total amount payable of € 6,212.70;

ff) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201208, in the total amount payable of € 520.84;

gg) VAT Assessment embodied in document no. 2014…, relating to period 201209, in the total amount payable of € 16,872.25;

hh) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201209, in the total amount payable of € 1,353.47;

ii) VAT Assessment embodied in document no. 2014…, relating to period 201210, in the total amount payable of € 16,751.52;

jj) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201210, in the total amount payable of € 1,292.39;

kk) VAT Assessment embodied in document no. 2014…, relating to period 201211, in the total amount payable of € 14,335.97;

ll) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201211, in the total amount payable of € 1,057.32;

mm) VAT Assessment embodied in document no. 2014…, relating to period 201301, in the total amount payable of € 15,819.66;

nn) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201301, in the total amount payable of € 1,062.73;

oo) VAT Assessment embodied in document no. 2014…, relating to period 201302, in the total amount payable of € 16,704.21;

pp) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201302, in the total amount payable of € 1,067.23;

qq) VAT Assessment embodied in document no. 2014…, relating to period 201303, in the total amount payable of € 69,334.10;

rr) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201303, in the total amount payable of € 1,020.19;

ss) VAT Assessment embodied in document no. 2014…, relating to period 201304, in the total amount payable of € 13,384.95;

tt) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201304, in the total amount payable of € 764.22;

uu) VAT Assessment embodied in document no. 2014…, relating to period 201305, in the total amount payable of € 7,701.07;

vv) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201305, in the total amount payable of € 415.22;

ww) VAT Assessment embodied in document no. 2014…, relating to period 201306, in the total amount payable of € 13,435.50;

xx) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201306, in the total amount payable of € 675.82;

yy) VAT Assessment embodied in document no. 2014…, relating to period 201307, in the total amount payable of € 15,943.65;

zz) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201307, in the total amount payable of € 751.31;

aaa) VAT Assessment embodied in document no. 2014…, relating to period 201309, in the total amount payable of € 13,539.06;

bbb) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201309, in the total amount payable of € 546.01;

ccc) VAT Assessment embodied in document no. 2014…, relating to period 201310 to 201310, in the total amount payable of € 15,941.05;

ddd) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201310, in the total amount payable of € 592.22;

eee) VAT Assessment embodied in document no. 2014…, relating to period 201311, in the total amount payable of € 18,436.02;

fff) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201311, in the total amount payable of € 622.27;

ggg) VAT Assessment embodied in document no. 2014…, relating to period 201312, in the total amount payable of € 15,671.33;

hhh) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201312, in the total amount payable of € 475.72;

The Claimant further seeks a declaration of illegality of the following VAT assessments and compensatory interest, relating to the year 2014:

a) VAT Assessment embodied in document no. 2014…, relating to period 201402, in the total amount payable of € 1,260.28;

b) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201402, in the total amount payable of €49.69;

c) VAT Assessment embodied in document no. 2014…, relating to period 201403, in the total amount payable of € 1,029.54;

d) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201403, in the total amount payable of € 35.60;

e) VAT Assessment embodied in document no. 2014…, relating to period 201404, in the total amount payable of € 5,338.50;

f) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201404, in the total amount payable of € 160.29;

g) VAT Assessment embodied in document no. 2014…, relating to period 201406, in the total amount payable of € 1,715.30;

h) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201406, in the total amount payable of € 35.64;

i) VAT Assessment embodied in document no. 2014…, relating to period 201407, in the total amount payable of € 5,270.87;

j) Compensatory Interest Assessment embodied in document no. 2014…, relating to period 201407, in the total amount payable of € 85.52;

k) VAT Assessment embodied in document no. 2014…, relating to period 201409, in the total amount payable of € 342.62.

The request for constitution of the arbitral tribunal was accepted by the President of the Administrative Arbitration Centre and notified to the TAX AUTHORITY AND CUSTOMS SERVICE on 08-05-2015.

Pursuant to the provisions of subsection a) of article 6.º, no. 2 and subsection b) of article 11.º, no. 1 of the LFTA, the Deontological Council appointed as arbitrators the signatories, who communicated acceptance of their appointment within the applicable period.

On 09-07-2015, the parties were notified of this appointment and expressed no intention to challenge the appointment of the arbitrators, in accordance with the combined provisions of article 11.º, no. 1, subsections a) and b) of the LFTA and articles 6.º and 7.º of the Deontological Code.

Thus, in conformity with the provisions of subsection c) of article 11.º, no. 1 of the LFTA, the collective arbitral tribunal was constituted on 24-07-2015.

The Tax Authority and Customs Service raised exceptions of partial lack of fitness of the arbitration petition and partial material incompetence of the Arbitral Tribunal.

By order of 29-09-2015, the expert report produced in arbitration case no. 530/2014-T was ordered to be joined to the file.

By order of 06-10-2015, the meeting provided for in article 18.º of the LFTA was dispensed with and it was decided that the proceedings would continue with written submissions.

The parties submitted written submissions.

The arbitral tribunal was duly constituted.

The parties have legal capacity and standing (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) and are properly represented.

The proceedings are not affected by any defects.

2. Exception of Partial Lack of Fitness of the Arbitration Petition

The Tax Authority and Customs Service raises an exception which it designates as "partial lack of fitness of the arbitration petition", which is based on the following:

– The Claimant seeks to contest the additional VAT assessment no. …, relating to period 201001 to 201012, in the total amount payable of € 23,987.07 as well as the compensatory interest assessment no. …, relating to the same period, in the total amount payable of € 3,596.09 [see subsections g) and h) of the preamble of the arbitration petition];

– however, it happens that, with respect to the period in question, the inspection procedure resulted, in addition to the corrections now being discussed, in other corrections based on different grounds, no longer related to improper application of the reduced rate, but rather relating to improper deductions of tax, in the amount of € 6,535.20, as shown in the Tax Inspection Report at pages 8 and 9;

– the corrections that are partially at the origin of the assessments above identified are not challenged, so the Arbitral Tribunal will not be able to assess the legality of the assessments in the portion proportional to the correction since no defect is attributed to it;

– there is, therefore, an absolute lack of indication of the basis of the claim and of the legal grounds sustaining the petition filed;

– such unintelligibility has as a consequence the partial lack of fitness of the initial petition, which, in turn, determines the nullity of the proceedings in that part, pursuant to article 186.º, no. 1 of the Civil Procedure Code applicable ex vi article 29.º, no. 1, subsection e) of the LFTA;

– thus, given that there is an incurable procedural defect in this segment of the petition, the Respondent should be absolved of the claim, as follows from articles 576.º, no. 2, and 577.º, subsection b) of the Civil Procedure Code, ex vi article 29.º, no. 1, subsection e) of the LFTA.

The Claimant responded in its submissions stating that:

– the claimant clarifies that it is only challenging the corrections related to the application of the maximum rate to prosthetic material, and is not seeking to challenge other corrections that may have arisen from the tax inspection report and that form part of the said additional assessment;

– if the Claimant said nothing about that correction, raising no argument to contest it, it is precisely because it accepts that correction;

– therefore, there is no exception of partial lack of fitness of the arbitration petition.

The lack of fitness of the initial petition is provided for in article 98.º of the TPPC as an incurable defect in the tax judicial proceeding and is defined in article 186.º of the Civil Procedure Code, these norms being subsidiarily applicable by virtue of the provisions of article 29.º, no. 1, subsections c) and e) of the LFTA.

As follows from subsection a) of article 186.º, no. 2, regarding the basis of the claim, lack of fitness occurs only when the basis is absent or unintelligible.

However, pursuant to article 186.º, no. 3, "if the defendant contests, despite raising the lack of fitness on the grounds of subsection a) of the preceding number, the claim is not upheld when, after hearing the plaintiff, it is found that the defendant has reasonably interpreted the initial petition".

In the present case, it is manifest that there is no complete absence of basis of the claim, since the Claimant indicates the reasons why it believes that the acts it challenges should be declared illegal.

Therefore, given that lack of fitness due to absence of basis of the claim can only exist when none is invoked or when it is unintelligible, it cannot be concluded that lack of fitness exists.

In any case, from the explanation given by the Claimant, that it does not seek to annul the assessments in the part where it attributes no defect to the corrections on which they rest, it is evident that the Tax Authority and Customs Service correctly interpreted the arbitration petition when concluding that the Arbitral Tribunal will not be able to "assess the legality of the assessments in the portion proportional to the correction in question since no argument was presented tending to attribute any defect to it", since it is evident that, precisely, the Claimant does not seek to have the legality of the assessments assessed in the part where it attributes no defect to them, only seeking such assessment in the parts to which it attributes a defect.

There is, therefore, no lack of fitness of the initial petition which, moreover, would never justify absolution of the claim, since this, as a consequence of partial lack of fitness, is only justified when it has as a corollary the exclusion from the proceedings of one of the defendants.

The exception of lack of fitness of the arbitration petition is therefore dismissed.

3. Exception of Partial Material Incompetence of the Arbitral Tribunal

The Tax Authority and Customs Service contends that the Arbitral Tribunal is materially incompetent to assess statements of VAT account adjustments and compensatory interest and that the Claimant seeks the assessment of the legality of acts of this type, namely the acts listed in subsections p), r), t), v), x), bb), dd), ff), hh), jj), ll), nn), pp), rr), tt), vv), xx), zz), bbb), ddd), fff), hhh), relating to the years 2010 to 2013, and in subsections a), b), d), e), f), h), i) and j), regarding the year 2014.

The Tax Authority and Customs Service understands, in summary, that, by virtue of article 2.º of the LFTA and Ordinance no. 112-A/2011, of 22 March, the Arbitral Tribunal only has competence to assess the legality of acts of the types indicated therein, which do not include statements of account adjustments containing assessment acts, but rather compensation acts.

The Claimant responds in its submissions stating, in summary, that it does not contest the statements of account adjustments, but rather the additional assessments it refers to in the documents it identifies with the numbers of the statements of account adjustments.

It is evident that the documents referred to in those subsections are not compensatory interest assessments, but rather statements of account adjustments, which have underlying previous VAT assessments and compensatory or default interest assessments [the documents numbered …, 2014…, 2014…, 2014… and 2014…, listed under subsections b), d), f), h) and j) relating to the year 2014, refer to default interest assessments], whose numbers are indicated in each of those documents.

However, the Claimant argues that it intends to have the legality of the compensatory interest assessments contained in those documents assessed and not the statement of account adjustment made therein.

In truth, in the arbitration petition the Claimant states that it seeks the arbitral tribunal to rule on the legality of the assessments hereinafter identified, relating to the years 2010 to 2014 (article 1.º of the arbitration petition) and lists in articles 2.º and 8.º various VAT and compensatory interest assessments which it identifies by their number and others, those indicated in the subsections referred to by the Tax Authority and Customs Service, which it identifies with an indication having this structure: "Compensatory Interest Assessment embodied in document no. ....., relating to period ......, in the amount of ................, and whose voluntary payment deadline ended on ...."

The numbers of the documents indicated are those of the respective "statement of account adjustment" in which references are made to the numbers of previous VAT assessments and compensatory or default interest assessments.

At the end of the arbitration petition the Claimant requests the "declaration of illegality of the assessments in question" and not of any of the statements of account adjustments and in the submissions it presented clarifies that it seeks the declaration of illegality of the compensatory interest assessments referred to in the account adjustment documents whose numbers it indicates.

The formula indicated, "Compensatory Interest Assessment embodied in document", although not the most adequate to express the Claimant's intention, since the numbers of the assessments are contained in the documents indicated, is compatible with such intention.

On the other hand, the Claimant provides an explanation for the fact that it has not attached the assessments indicated in the said account adjustment documents, which is that they were only notified to it through these documents, which is not contradicted by the Tax Authority and Customs Service which, obviously, being documents issued by it, will have perfect knowledge of the full content of the assessments indicated in those account adjustment documents and of the notifications it made and failed to make.

Thus, given that there is no sacramental formula for expressing the intention to annul the assessments referred to, it must be concluded that the Claimant's claims for declaration of illegality relate to the assessments indicated in the documents it identifies.

Therefore, this is a matter whose assessment falls within the competence of the arbitral tribunals operating at the Administrative Arbitration Centre, as indicated in article 2.º, no. 1 of the LFTA.

The exception of incompetence is therefore dismissed.

4. Factual Matters

4.1. Proven Facts

The following facts are deemed to be proven:

• The Claimant is A… - …, Tax Identification Number …, commenced its activity on 2008-11-26, and is registered for VAT purposes under the normal regime with monthly periodicity from 2012-01-01 (and under the normal regime with quarterly periodicity until then), and is taxed under the Corporation Income Tax regime, with reference to the tax period 2010, under the general system for determining taxable profits, provided for in Section II of Chapter III of the Corporation Income Tax Code (CITC), within the scope of the activities of "non-specialised wholesale trade" (principal) and "wholesale trade in pharmaceutical products" (ancillary), to which correspond the CAE (Rev.3) 46900 and 46460, respectively;

• The Claimant is engaged in the trade of dental prosthetic material, with special emphasis on implants and accessory material;

• In the course of its activity, the Claimant makes purchases on the domestic and external markets, with its sales being channelled, almost in their entirety, to the domestic market;

• The articles commercialised by the Claimant are essentially medical devices used in the implantology sector, including dental implants and other prosthetic devices;

• The Claimant's customers are dentists and dental technicians who work in implantology and use the Claimant's products for oral rehabilitation of their respective patients;

• The Claimant, on the implants and abutments sold, applies the VAT rate of 6% pursuant to item 2.6 of List I annexed to the Value Added Tax Code;

• The facts referred to in the expert report attached to the file are deemed proven, the contents of which are reproduced, namely the following:

– If only one implant is placed, its function will be to replace a single tooth. The osseointegrated implant can be rehabilitated with a crown (fixed prosthodontics on implant). If two or more implants are placed, their function may be to rehabilitate an edentulous space from two teeth to a complete dental arch, in fixed or removable form;

– A dental implant is a structure generally threaded, similar in form to the root of a single-rooted tooth, whose surface is prepared for osseointegration. It has a collar (the region closer to the bone surface), where structures such as impression or healing abutments, or prosthodontic components, are coupled.

– A dental implant is composed of the implant body and the implant collar. Within the implant, there is a cavity which will, in most cases, have a threaded area.

– A dental implant is prepared to be rehabilitated prosthodontically. For this, it may have an internal or external connection. When the connection is internal, the prosthesis has a component that fits into the interior of the implant. When the connection is external, the implant itself has a connection (often hexagonal) that fits into the prosthesis.

– The prosthodontic parts of a dental implant are what allow an implant to have masticatory and functional importance and are essential for an implant to be rehabilitable. They serve for coupling (screwing or cementing) of single crowns, bridges, complete dentures or couplings for anchoring a removable prosthesis.

– One can differentiate between clinical dental crown (the part of the tooth that is covered by enamel) and anatomical dental crown (the part of the tooth visible in the mouth). There are also manufactured crowns (in metal, acrylic, composite resin or ceramic), which can be cemented on teeth and/or on implants (in the latter case it is possible to screw it rather than cement it).

– The dental crown has the function of restoring, as far as possible, the original form of a tooth, making it functional.

– Placement of the crown on an implant can be done within 72 hours after surgery (aesthetic or immediate loading, generally performed with provisional acrylic crowns), or within a period of no less than ten weeks, to ensure osseointegration of the implant before it is subjected to masticatory forces.

– Implants and their prosthodontic parts must be selected based on each clinical case;

– Prosthesis is understood to mean any component that does not form part of natural dentition and which aims to restore masticatory function, replacing missing teeth.

– A provisional prosthesis will have as many provisional abutments as the implants supporting it, material in which the provisional teeth are made (typically acrylic) and may have an internal metallic reinforcement. A definitive prosthesis will have definitive abutments equal in number to the implants supporting it, an infrastructure of a resistant material (typically metal or zirconia) and a restorative material (typically ceramic or acrylic). There are also cases of removable prostheses on implants which, instead of abutments, have specific couplings for retention on the implants.

– A prosthodontic component may be a crown, an abutment, or another component necessary for the fabrication of a prosthesis. A prosthesis must contain within itself all the constituent parts that allow it to perform its function.

– There is biocompatibility between the implant elements, prosthesis and the patient's oral tissues.

The components of the dental implant may have other uses, as they can serve for orthodontic traction.

– Prosthodontic components can generally only be used together with their respective implant.

– Oral rehabilitation with implants makes it possible to confer or optimise the masticatory function of a partially or totally edentulous patient. The improvements in quality of life relate to mastication capacity, improving chewing, aesthetics and self-confidence. Before the emergence of dental implants it was only possible to rehabilitate edentulous spaces in a fixed manner by means of bridges on teeth, which involved an invasive procedure on at least two teeth. With dental implants it is possible to rehabilitate small and large edentulous areas without compromising adjacent teeth and in a fixed manner, thus avoiding removable dentures, whose retention, in cases of significant bone resorption, often becomes a problem, in addition to being able to cause diminishment of taste.

– In cases of total edentulation, where complete dentures present major retention problems, implants have provided an answer for which no solution existed with conventional treatments, significantly increasing the quality of life of patients.

• The Scientific Committee of the Dental Association issued the Opinion contained in document no. 7 attached with the arbitration petition, the contents of which are reproduced, in which it is stated, among other things, the following:

Dental implants are medical devices placed in the bone of the jaws with the objective of carrying out oral rehabilitation of edentulous patients, restoring function and aesthetics of the patients and consequently their health.

These devices, dental implants, serve as support for dental prostheses which without their placement would not be viable.

The clinical procedure that allows placement of a prosthesis in this type of rehabilitation includes, in a general manner, the placement of the implant, of a connecting piece between the prosthesis and the implant. All procedures may be performed at a single time or in a phased manner, depending on the clinical case in question, following analysis by the dentist.

Thus, and from the above, there are no doubts that all devices necessary for the clinical procedure that culminates in the placement of the dental prosthesis on implants should be considered as an integral part thereof. Without any one of these components, as stated, the placement of the respective prosthesis could never be carried out.

• The opinion contained in document no. 6 attached with the arbitration petition is reproduced, in which it is stated, among other things, the following:

– The tooth is an organ that is part of the stomatognathic system which in its entirety performs the function of chewing, speaking, swallowing, smiling and has a tactile function;

– Each tooth making up this system has specific functions of incising, cutting, grinding the constituent elements of food;

– Each tooth is an individuality, commonly being anatomically composed of crown, root or roots and periodontium;

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

– The implant-supported prosthesis has as its ultimate objective the substitution of an organ;

– Thinking of "complete apparatus" becomes a contradiction in terms, a lack of understanding about the specificity of this rehabilitation process, with discrimination and burden in the rehabilitation of an organ in relation to others;

– The substitution of an organ or part thereof constitutes the basis for application of a certain criterion. It does not seem reasonable that, when the process is different, in achieving the same objective, the criteria should be different, taking into account that the elements in question have only this function, exclusively, and it is impossible to use them for another function or objective (unlike other types of prostheses where materials may be used for purposes other than the prosthesis itself),

– The prosthetic materials used in the construction of an implant-supported prosthesis are intended to replace an organ;

• The opinion that constitutes document no. 8 attached with the arbitration petition issued by the Dental Association is reproduced;

• Following the issuance of Service Orders no. OI2014… and OI2014…, an inspection was carried out on the Claimant, regarding VAT for the years 2010, 2011, 2012 and 2013;

• In the Tax Inspection Report prepared following that inspection, the "reason for the action" is stated as follows:

Given the obtaining, by these Tax Inspection Services, of corroborating evidence of a widespread practice embodied in the improper application of the reduced tax rate in the assessment of VAT on internal transfers of dental implants and other connecting or fixing pieces of the dental prosthesis (i.e. goods that manifestly do not fall within any of the items of List I annexed to the Value Added Tax Code, as they are usually transacted without forming part of a single unit) and given that the elements declared by the taxpayer for VAT purposes showed the assessment of tax, at least with respect to a very significant portion of active operations, at a rate different from the normal rate, and that the goods whose transfer constituted presumably its principal activity corresponded to the material in question, credentials (service orders) no. OI2014… and OI2014… were issued on 2014-03-11, following a proposal drawn up for this purpose on 2014-02-21.

• In the Tax Inspection Report of that inspection, the Tax Authority and Customs Service understood that improper VAT deductions and failure to assess tax had occurred, stating, among other things, the following:

III-1.2) Failure to assess tax

III-1.2.1) Due to improper application of the reduced rate

III-1.2.1.1) On internal transfers of dental implants and other connecting or fixing pieces of the dental prosthesis

Following the analysis of elements provided in the course of inspection activities, in particular the detailed accounting extracts concerning VAT assessed, with a view to monitoring the tax in favour of the State mentioned in the declarations to which articles 29.º, no. 1, subsection c) and 41.º, no. 1 of the Value Added Tax Code refer, with respect to the settlement periods comprised in the years covered by the scope (temporal coverage) of the external tax inspection procedures in question, as well as the documents supporting the entries or accounting records evidenced in such extracts (notably, the invoicing issued by the taxpayer), we find that the taxpayer carried out, in the years 2010 to 2013, among other things, internal transfers of various types of dental implants and other connecting or fixing pieces of the dental prosthesis, having applied, in the assessment of tax with respect to such active operations, the reduced rate referred to in article 18.º, no. 1, subsection a) of the Value Added Tax Code.

In Annex A are evidenced, with respect to the items in question, the documents supporting (invoices or equivalent documents) the corresponding internal transfers (number and date), the references, the quantities, the descriptions, the taxable values (unit and total, with respect to each item), the VAT assessed by the inspected entity (at the reduced rate) and the accounting treatment given (number and date of the respective entry).

Although in the invoicing issued by the inspected entity it has not expressly indicated (whether item by item or globally) any item of the lists annexed to the Value Added Tax Code under which it had applied, in the assessment of tax with respect to the active operations in question, a rate different from the normal rate referred to in article 18.º, no. 1, subsection c) of the said Code (i.e. in the situations under analysis, the reduced rate), we admit that item 2.6 of List I may be in question.

Now, pursuant to the provisions of item 2.6 of List I annexed to the Value Added Tax Code (corresponding to item 2.5 in the wording prior to Decree-Law no. 102/2008, of 20 June), the reduced VAT rate referred to in article 18.º, no. 1, subsection a) of the respective Code only covers "...devices, apparatus and other prosthetic or compensatory material intended to replace, wholly or in part, any limb or organ of the human body..." (emphasis is ours).

It should be noted that, with respect to implants applied in dental medicine, these are nothing more than mere metallic roots (generally in commercially pure titanium) osseointegrable in the maxilla (upper part of the mouth) or in the mandible (lower and mobile part of the mouth) intended exclusively to serve as support or anchor for a structure of one or more artificial teeth (crown, bridge, etc.).

Firstly, it suffices to consider the very definition of "dental prosthesis", as "a fixed or removable structure consisting of one or more artificial teeth that replaces missing teeth", to not understand how dental implants, when transacted in isolation or in an autonomous manner, can be considered as prostheses.

On the other hand, unless the dental implants were transacted together (i.e. in a single unit) with the connecting pieces and the tooth or set of artificial teeth (i.e. implant + connecting pieces + tooth), they do not appear to be capable of substituting, supplying or rehabilitating the functions of the disabled organ or organs of the body (tooth or teeth in the missing), whether at the level of articulation, aesthetics or mastication. It should be noted that the implant does not even replace the part of the tooth corresponding to the root, as the dental root does not only perform the function of fixing the tooth to the alveolar bone, but rather ensures multiple functions which manifestly are not pursued by the implant, so it cannot be considered that this replaces that.

And identical understanding should be adopted with respect to the remaining components, parts, pieces and accessories (in particular "abutments", screws, etc.) performing complementary functions of connecting or fixing the dental prosthesis and object of isolated, autonomous or separate transaction (i.e. not forming part of a single unit as above stated).

Consequently, it is manifest that the goods in question transacted by the inspected entity (dental implants and other connecting or fixing pieces of the dental prosthesis) are not subsumable to the normative provision of item 2.6 of List I annexed to the Value Added Tax Code (i.e. do not meet the conditions necessary for the respective classification under the said item), given that, in addition to not being prostheses, they are not able to fulfil, perform or ensure, individually considered (i.e. by themselves) and at the moment of the occurrence of the taxable event (i.e. at the moment of the corresponding internal transfer), the functions of the dental organ.

In truth, the remaining goods covered by item 2.6 of List I annexed to the Value Added Tax Code are, themselves, products or objects which, at the moment of the occurrence of the event that determines subjection to tax, are already in a phase in which they can be used, when acquired for the purposes of overcoming a human disease or deficiency (namely: orthopaedic apparatus, medical-surgical girdles and medicinal stockings, wheelchairs and similar vehicles for disabled persons, lenses for correction of vision and orthopaedic footwear, in the latter case provided it is prescribed by medical prescription).

In this manner, it is manifest that the rational element of the norm in question resides precisely in the application of the reduced rate only to deliveries of goods specifically designed for the correction or compensation of deficiencies or for the substitution, total or partial, of organs or limbs of the human body - in accordance, moreover, with the principle established in subsection 4) of Annex III of Council Directive 2006/112/CE of 28 November 2006, relating to the common VAT system (commonly called the VAT Directive).

In truth, only the application of a reduced VAT rate to final products, susceptible of being used directly by the end consumer, is justified, given the purpose of the reduced rates of the tax, which aim to relieve and thus make more accessible to the end consumer - i.e. the one who ultimately bears the burden of the VAT - certain goods considered particularly necessary. In particular, the purpose of applying reduced VAT rates is to reduce the burden borne by the end consumer in the acquisition of certain essential goods, and it is certain that the burden of acquiring medical devices will hardly be borne directly by the end consumer, given that these goods are mainly used by professionals and entities in the health sector in the provision of services; which, in turn, may benefit from exemption from the tax.

And, as is known, the delimitation of the objective scope of the disputed item should be effected by the application of the principle of restrictive interpretation, given that cases of taxation at reduced rates, as exceptions to the application of the normal VAT rate, constitute derogations from the general regime of the tax. It is further added that, as this is a matter covered by parliamentary reserve [see articles 103.º, no. 2 and 165.º, no. 1, subsection i) of the Constitution of the Portuguese Republic], it is legally prohibited to resort to analogical integration (see article 11.º, no. 4 of the General Tax Law).

Furthermore, only the application of the same rate (in this case, the normal rate) to the various materials, components, parts, pieces and accessories used in the elaboration or construction of each of the different types of prosthesis safeguards the principle of neutrality of the tax, preventing any discriminatory treatment - under penalty of distortions in competition at the intermediate stages of the circuit – between the so-called prostheses fixed by implant and the remaining dental prostheses (for example, removable artificial dentures), without prejudice to them having the same tax treatment at the final destination (i.e. incomplete or simple exemption provided for in article 9.º of the Value Added Tax Code).

Furthermore, equivalent doctrine has been repeatedly adopted and widely publicised by the VAT Services Directorate (VSD), in particular in no. 3 of the binding information provided in Case no. T120 2005093, with the agreeing order of the Deputy Director-General of Taxes, substituting for the Director-General, of 2007-05-15 and in the binding information provided in Case no. 2883, with the agreeing order of the Deputy Director-General of Taxes, legal substitute of the Director-General, of 2011-12-20.

In accordance with this, the procedure adopted by the inspected entity, embodied in the application of a VAT rate different from the normal rate for purposes of assessment of the tax due on internal transfers of dental implants and other connecting or fixing pieces of the dental prosthesis, lacks any legal basis, due to lack of classification of such goods within any of the lists annexed to the Value Added Tax Code, in particular in item 2.6 of List I, so that the internal transfers of those goods are liable to VAT at the normal rate, pursuant to the provisions of article 18.º, no. 1, subsection c) of the respective Code.

It should further be noted that, with the exception of invoices cancelled due to improper issuance (which were not even recorded in the accounting, without prejudice to occasionally having been subject to accounting entry and subsequent reversal - either through symmetrical entry or, as occurred from period 1209, through reverse entry covered by the credit note issued for that purpose, as per Annex B), we consider that any ratifications of taxable values should not contribute to the determination of the bases for settlement of the tax corrections proposed herein. In truth, a different solution would be equivalent, in practice, to fictioning regularisations of tax amounts in favour of the inspected entity whose prior assessment this never ensured, and it is certain that, on the other hand, these Tax Inspection Services cannot substitute themselves for the taxpayer in the effectuation of tax regularisations in its favour which, pursuant to the applicable legal norms (see article 78.º of the Value Added Tax Code), are merely optional and always conditioned on the observance of specific requirements (in particular of a temporal order).

In light of the above, we propose corrections to the tax due in the amounts shown in the following tables:

• The Tax Inspection Report referred to was notified to the Claimant on 21-11-2014;

• Following the inspection, the Tax Authority and Customs Service drew up the following assessments:

[Details of individual assessments as listed above in the Report section]

• Subsequently, the Claimant was notified of the following VAT and default interest assessments relating to the year 2014:

[Details of individual assessments for 2014 as listed above in the Report section]

• The Claimant was cited in the executive proceedings shown in document no. 3 attached with the arbitration petition, the contents of which are reproduced, which have as their object the collection of the amounts assessed above;

• On 17-04-2015, the Claimant filed a request for provision of guarantee in the fiscal execution proceedings referred to (document no. 4 attached with the arbitration petition, the contents of which are reproduced);

• On 06-05-2015, the Claimant filed the arbitration petition that gave rise to the present proceedings.

4.2. Substantiation of the Factual Decision

The facts were deemed proven on the basis of the documents attached with the arbitration petition and in the administrative file, in addition to statements made by the Claimant regarding its activity which are not contested by the Tax Authority and Customs Service.

With respect to assessments whose existence and content are only revealed by statements of account adjustments, it is understood that these are sufficient proof of their existence, as the authenticity of those documents is not raised and they have full probative value as to the facts they relate (article 371.º of the Civil Code).

4.3. Unproven Facts

4.3.1. It was not proven what facts and legal grounds may have underlain the VAT and default interest assessments relating to the year 2014, as there is no record in the file of any inspection procedure or any other act that makes them known. The Claimant itself states it does not know such basis, in article 10.º of the arbitration petition in which it states that "although there is no substantiation for the additional assessments relating to the year 2014, the claimant believes them to be adjustments relating to the corrections themselves of the years 2010 to 2013".

4.3.2. It was not proven that the Claimant had provided guarantee to suspend the fiscal execution proceedings instituted for collection of the amounts assessed. Only a document was attached in which the provision of guarantee was requested, but none that proves it was actually provided.

4.3.3. It was not proven that the Claimant had paid the amounts to which the assessments whose declaration of illegality is sought relate, as no supporting document was presented.

5. Legal Matters

5.1. Assessments relating to the year 2014

As mentioned in the substantiation of the decision on factual matters, there is no knowledge of the factual and legal grounds on which the VAT and default interest assessments relating to the year 2014 rested.

On the other hand, the fact that the substantiation relating to such assessments was not notified to the Claimant does not mean it does not exist, so one cannot conclude that those assessments lack substantiation.

In this context, it is evident that the Claimant does not even mention having used the procedural means that the law provides to it, in article 37.º of the TPPC, to remedy the lack of notification of the substantiation of the tax acts.

Thus, as the Claimant attributes to these VAT and default interest assessments relating to the year 2014 only defect of violation of law, due to error by the Tax Authority and Customs Service regarding the classification of the situation in item no. 2.6 of List I annexed to the Value Added Tax Code, and there being no element that proves that the assessments referred to have underlying the same factual situation and the same legal understanding that the Tax Authority and Customs Service assumed in the Tax Inspection Report underlying the assessments relating to the years 2010 to 2013, it must be concluded that it is not demonstrated that those assessments relating to the year 2014 suffer from any defect.

Thus, the arbitration petition is dismissed with respect to the VAT and default interest assessments relating to the year 2014.

5.2. VAT Assessment no. … and Compensatory Interest Assessment no. …

The Tax Authority and Customs Service raised, with respect to the VAT Assessment no. … and the Compensatory Interest Assessment no. …, relating to the period 201010 to 201012, in the amounts payable of € 23,987.07 and € 3,596.09, respectively, the question of their partial non-challenge, as those amounts also had as presupposition a correction derived from improper deduction of tax, in the amount of € 6,535.20, whose legality the Claimant does not question.

The Claimant, in its submissions, expressly states that it accepts this correction derived from improper deduction of tax.

Thus, as the Claimant filed a request for declaration of illegality of those assessments without any restriction, the arbitration petition must be deemed dismissed, in the part proportional to the said correction in the value of € 6,535.20 as to both assessments.

5.3. Question of the Applicable VAT Rate

List I annexed to the VAT Code includes among the goods and services subject to the reduced rate, the following item:

"2.6 - Orthopaedic apparatus, medical-surgical girdles and medicinal stockings, wheelchairs and similar vehicles, manually or motor-operated, for disabled persons, devices, apparatus and other prosthetic or compensatory material intended to replace, wholly or in part, any limb or organ of the human body or for the treatment of fractures and lenses for correction of vision, as well as orthopaedic footwear, provided it is prescribed by medical prescription, subject to regulation by the Government within 30 days".

The question of legality raised with respect to the assessments relating to the years 2010 to 2013 is whether the reduced rate provided for in this item 2.6 of List I annexed to the Value Added Tax Code applies only, with respect to dental implants, when complete implants are transacted or whether that rate also applies to transactions of implant components (crown, implant and abutments) when they are the object of separate transactions.

This question was competently assessed in the Administrative Arbitration Centre decision issued in arbitration case no. 429/2014-T, of which Professor Dr. Clotilde Celorico Palma was the Reporter, regarding the question in question, so, there being no new arguments to consider, the position assumed there is adopted:

"(...) The interpretation of tax norms

As is known, article 11.º of the General Tax Law prescribes that in determining the meaning of tax norms and in qualifying the facts to which they apply the general rules and principles of interpretation and application of laws are observed. Now, article 9.º, no. 1 of the Civil Code is clear when it determines that interpretation should not merely confine itself to the letter of the law (literal or grammatical element), but should reconstitute from the texts the legislative intent (ratio legis), having regard to the unity of the system (systematic element), the circumstances in which the law was enacted (teleological element) and the specific conditions of the time in which it is applied (historical element).

The first hermeneutical factor to which the interpreter may resort to reach the true meaning and scope of application of legal texts is, therefore, that which corresponds to the literal or grammatical element.

As regards the systematic element, it determines the interpretation of the norm in an integrated manner, considering the other provisions forming the normative complex in which the norm to be interpreted is integrated.

Regarding the teleological element, "It consists in the reason for being of the law (ratio legis), the end intended by the legislator in elaborating the norm. Knowledge of this end, especially when accompanied by knowledge of the circumstances (political, social, economic, moral, etc.) in which the norm was enacted or the political-economic-social situation that motivated the legislative "decision" (occasio legis) constitutes a subsidy of the greatest importance in determining the meaning of the norm.

It suffices to recall that clarification of the ratio legis reveals the "valuation" or weighing of the various interests that the norm regulates and, therefore, the relative weight of those interests, the choice between them expressed by the choice that the norm expresses".

Finally, according to the historical element, the historical context of the elaboration of the norm must be ascertained.

The interpretation of the norm in question should, therefore, attend to these elements of interpretation.

(...) The principle of neutrality of VAT

As is known, VAT is an indirect tax of Community origin, polyphase in nature, which tends to affect every act of consumption (general tax on consumption), and the principle of neutrality is pointed out as its principal characteristic.

It is customary to distinguish the neutrality of transaction taxes with respect to their effects on consumption and on production. There will be neutrality with respect to consumption when the tax does not influence consumer choices among various goods or services. A tax will be neutral from the perspective of production if it does not induce producers to alter the form of organisation of their production process.

As noted by Xavier de Basto, "Neutrality with respect to consumption depends exclusively on the degree of objective coverage of the tax and the structure of rates, and it is out of the question to design a consumption tax that is completely neutral. Some exemptions must always be granted (.....) and, probably, there will be differentiations in the rate applicable to different transactions of goods and provision of services".

In general terms, according to the principle of neutrality, taxation should not interfere in economic decisions nor in price formation, implying the extension of the scope of this tax to all phases of production and distribution and to the service provision sector.

As Teresa Lemos points out, neutrality can be viewed from various aspects: neutrality in relation to production circuits – the tax burden does not depend on greater or lesser integration of economic circuits, neutrality vis-à-vis the incidence of the tax on different products and sectors, to the extent that the rate is uniform, neutrality as it relates to the choice of production factors - capital and labour, and neutrality regarding consumer preferences – equal taxation of different products.

The principle of neutrality is embodied in VAT Directives and is systematically invoked by the Commission to oppose national legislations deemed incompatible with the rules of European Union Law, as well as by the tax administrations and taxpayers of the various Member States, and has been applied innumerable times by the Court of Justice of the European Union.

The application of the principle of neutrality should be taken into account at the essential phases in the life of this tax, such as the rules on objective and subjective scope, location, exemptions and the exercise of the right to deduction. We can affirm that this has been the principle most invoked by the Court to substantiate its decisions, appearing to us many times allied with the principle of equal treatment, uniformity and elimination of competition distortions.

Thus, the Court of Justice of the European Union has been concerned, in particular, regarding the realisation of the objectives of the common system, in guaranteeing the neutrality of the tax burden on all economic activities, whatever their objectives or results (which, as it points out, is achieved through the deduction mechanism that frees the businessman from the burden of VAT he paid on his acquisitions), in ensuring economic agents with equal treatment, achieving uniform definition of certain elements of the tax and guaranteeing legal certainty and facilitating actions aimed at its application.

From the outset, the Court of Justice of the European Union sought to draw the proper consequences from the equal treatment in VAT of similar activities and the absence of the impact of the extension of production and distribution chains on the amount of tax received by the tax administrations.

It is in the light of this fundamental principle that the tax should be interpreted and applied, in order to ensure a uniform system that guarantees healthy competition in the European Union territory.

(...) The application of reduced VAT rates

(...) The rules of the VAT Directive

In accordance with the rules of Directive no. 2006/112/CE, of 28 November, to which we shall hereafter refer as the VAT Directive or VATD, taxable operations are subject to the tax at the rates and conditions of the Member State in which they are located. The normal VAT rate is fixed, pursuant to the provisions of articles 96.º and 97.º of the VATD, at a percentage of the taxable value that cannot be less than 15% until 31 December 2015.

In accordance with the provisions of article 98.º of the VATD, Member States may apply one or two reduced rates at a percentage that cannot be less than 5%. The reduced rates may only be applied to deliveries of goods and to provision of services in the categories set out in Annex III of the VAT Directive, ex. Annex H of the Sixth Directive (in the last wording given to it by Directive 2009/47/CE). In turn, in accordance with what is provided for in article 98.º, no. 3, "When applying the reduced rates referred to in no. 1 to categories relating to goods, Member States may use the Combined Nomenclature to delimit precisely each category" (emphasis is ours). That is, the use of the Combined Nomenclature to delimit precisely each category is a mere possibility which, as such, may or may not be used by Member States for this purpose.

The determination and definition of operations that may benefit from a reduced rate under these provisions of the VAT Directive are the competence of Member States.

It was with Directive 92/77/CEE of the Council, of 19 October 1992, that Community harmonisation of VAT rates was carried out, with a view to the functioning of the internal market, which occurred on 1 January 2003. Until that date, each Member State had full autonomy to set the number of rates and their level.

As we have stated, Annex III of the VAT Directive contains the list of deliveries of goods and provision of services to which the reduced rates provided for in article 98.º can be applied, and contemplates, in its point 4, for the purposes that now interest us, the following situations: "Medical equipment, auxiliary material and other apparatus normally used to alleviate or treat deficiencies, for the exclusive personal use of disabled persons, including their repair, as well as child car seats".

This wording is similar to that of the former Annex H of the Sixth Directive amended by the aforementioned Directive 92/77/CEE (since repealed), which covered the following operations: "Medical equipment and other apparatus, normally used to alleviate or treat deficiencies, for the exclusive personal use of disabled persons, including their repair and child car seats", the main difference being the later expansion of its scope which came to contain "auxiliary material".

It follows from the above that the possibility of applying a reduced tax rate is just that: a discretion that Member States may or may not use. However, should they make use of such possibility they must do so in accordance with the norms of EU Law. On the other hand, it is of interest to note that the different goods and services to which Member States may apply reduced tax rates are limited to specific situations, resulting from a consensual position among themselves, in which it is recognised that they are goods or services whose social, educational, or cultural character leads them to be considered as of first necessity, as is the case, for the purposes that now occupy us, of health.

It is worth noting that in its recitals the VAT Directive states that, "a VAT system achieves the greatest degree of simplicity and neutrality if the tax is levied in the most general possible manner" (recital 5) and that "It should, even though rates and exemptions are not completely harmonised, lead to competitive neutrality, in the sense that, in the territory of each Member State, goods and services of the same type are subject to the same tax burden, regardless of the length of the production and distribution circuit" (recital 7).

(...) The rules of the VAT Code

The VAT Code provides in article 18.º, no. 1 the following tax rates:

"a) For imports, deliveries of goods and provision of services set out in List I annexed to this instrument, the rate of 6%;

b) For imports, deliveries of goods and provision of services set out in List II annexed to this instrument, the rate of 13%;

c) For the remaining imports, deliveries of goods and provision of services, the rate of 23%."

With respect to the applicability of the rates, in accordance with article 18.º of the VAT Code, the normal VAT rate applies whenever the good or service in question does not fall within one of the two reduced rates provided for in Lists I and II annexed to the Code.

In the case of groupings of various goods forming a distinct commercial product, it must be taken into account that, when they do not undergo changes in nature nor lose their individuality, the rate that corresponds to them applies, or, if different rates apply, the highest rate (article 18.º, no. 4 of the VAT Code).

In the situation under analysis item 2.6 of List I is at issue, which represents the transposition at the level of internal law of the aforementioned point 4 of Annex III of the VATD, under which the application of the reduced VAT rate to the following goods is determined: "2.6. Orthopaedic apparatus, medical-surgical girdles and medicinal stockings, wheelchairs and similar vehicles, manually or motor-operated, for disabled persons, devices, apparatus and other prosthetic or compensatory material intended to replace, wholly or in part, any limb or organ of the human body or for the treatment of fractures and lenses for correction of vision, as well as orthopaedic footwear, provided it is prescribed by medical prescription, subject to regulation by the Government within 30 days." (emphasis is ours).

As is known, the general rate of the tax applies only if there is no application of reduced rates. On the other hand, for purposes of applying the tax rate it is important to ascertain whether we are dealing with a single operation or with principal and ancillary operations.

Indeed, when an operation comprises various deliveries of goods and/or provision of services, the question arises whether it should be considered as a single operation or as several distinct and independent services that should be assessed separately.

This question is of special importance, from the perspective of VAT, in particular for purposes of applying the tax rate and the provisions relating to exemptions.

(...) The jurisprudence of the Court of Justice of the European Union

Community jurisprudence on the application of reduced VAT rates is not very abundant. However, we can highlight some fundamental ideas that guide it, appearing to be sufficiently elucidatory for the purpose.

In accordance with the understanding of the Court of Justice of the European Union, the principle of fiscal neutrality also includes two other principles frequently invoked by the Commission: that of uniformity of VAT and elimination of competition distortions.

The Court of Justice of the European Union has come to emphasise that the principle of fiscal neutrality implies that all economic activities be treated in the same manner. The same is true for economic operators who effect the same operations.

Similar services, which are therefore in competition with each other, should not be treated differently from the perspective of VAT.

As noted by Advocate General Juliane Kokott in her conclusions presented in the TNT Case, the principle of fiscal neutrality opposes goods or services being similar, which are therefore in competition with each other, being treated differently from the perspective of value added tax (no. 43). In this context, she notes that "The principle of fiscal neutrality, which is the basis of the common tax system and must be taken into account in the interpretation of exemption rules, does not allow economic operators who effect the same operations to be treated differently in the collection of value added tax. (...) It includes the principle of elimination of competition distortions resulting from differentiated treatment from the perspective of value added tax (...)" (no. 59).

The Court of Justice of the European Union has also clarified that the delimitation of goods and services that may benefit from reduced rates must be effected based on objective characteristics. Thus, in its Judgment of 23 October 2003, Case Commission v. Germany, the Court of Justice of the European Union came to reinforce the objective character of the situations in which the application of reduced VAT rates is permitted, concluding that, where goods or services are similar and are in competition with each other, it is not permissible to treat them discriminatorily.

That is, in accordance with the jurisprudence of the Court of Justice of the European Union, the institution and maintenance of distinct VAT rates for similar goods or services are only admissible if they do not violate the principle of fiscal neutrality inherent in the common VAT system, in respect of which Member States must transpose Community rules.

As the Court of Justice of the European Union is keen to emphasise, it follows from Community rules that the determination and definition of operations that may benefit from a reduced rate are the competence of Member States. As the Commission has come to emphasise in its reports on reduced rates, one of the greatest problems in the application of rates lies precisely in the optional character of such application and in the absence of common definitions for the categories of goods and/or services covered.

Nevertheless, notwithstanding this, in the exercise of this competence Member States must respect the principle of fiscal neutrality. Now, as we have seen, this principle opposes, in particular, goods or services being similar, which are therefore in competition with each other, being treated differently from the perspective of VAT, so that the said products must be subject to a uniform rate.

Since the reduced rate is the exception, the fact that its application is limited to concrete and specific aspects is coherent with the principle that exemptions or derogations must be interpreted in strict terms, provided that the principle of tax neutrality is not violated.

Indeed, the application of one or two reduced rates is a possibility recognised to Member States by derogation from the principle under which the normal rate applies. Now, it follows from established jurisprudence that provisions having the character of derogation from a principle must be subject to strict interpretation, while not failing to ensure that the derogation does not become ineffective.

Member States will not be able, in particular, to interpret the concepts used in Annex III of the Directive in a selective manner so that, without attending to objective criteria, different treatment is granted to identical situations. Indeed, while it is true that the determination of operations subject to reduced VAT rate is the competence of Member States, with no abstract definitions for this purpose in Community legislation, it is incumbent to respect the principle of neutrality. Thus, it would be contrary to the principles of EU Law a taxation at reduced rates of the tax that, being selective, violates the fundamental characteristics of fiscal neutrality, objectivity and uniform taxation rate, not allowing sub-groups to be established within a taxable activity, with the intention of applying different taxation rates to them, where there is no objective reason justifying such difference of treatment.

In particular, the principle of objectivity requires the application of one and the same rule to taxable operations of the same nature, there being a presumption of similarity when the operations in question correspond to diverse variants of one and the same taxable operation included in one of the categories of Annex III of the VAT Directive.

It is also important to note in this context that the question of composite supplies versus independent supplies was the object of assessment by the Court of Justice of the European Union in some judgments.

In this regard, it follows from article 2.º of the VAT Directive that each operation should normally be considered distinct and independent.

However, in certain circumstances, several formally distinct supplies, susceptible of being performed separately and thus giving rise, in each case, to taxation or exemption, must be considered as a single operation when they are not independent.

This occurs, for example, when, at the conclusion of an analysis even if merely objective, it is verified that one or several supplies constitute a principal supply and that one or several other supplies constitute one or several ancillary supplies that share the tax destiny of the principal supply.

In this context, it is settled jurisprudence from the Court of Justice of the European Union that "...we are in the presence of a single supply in particular in the case where one or several elements must be considered the principal supply, while, conversely, one or several elements..."

[Document truncates here]