VAT Deduction Using Real Allocation Method for Mixed Taxable Persons – CAAD Case 297/2016-T

ARBITRAL DECISION

The Arbitrators Councilor Fernanda Maças (Arbitrating President), Dr. Fernando de Jesus Amado dos Santos and Dr. Filipa Barros, designated by the Deontological Council of the Center for Administrative Arbitration agree to form the Arbitral Tribunal:

I – REPORT

On 31 May 2016, A…, Unipessoal, S.A. EM, legal entity no. …, with registered office at Rua da…, no. …, …, …-… …, submitted a petition for constitution of an Arbitral Tribunal, pursuant to the combined provisions of articles 2, no. 1, paragraph a), 5, no. 3 paragraph a), 6, no. 2, paragraph a), and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as RJAT).

The petition for arbitral decision has as its mediate object, according to the Petitioner, the declaration of illegality of the additional VAT assessments no. … in the amount of €50,422.93, no. … in the amount of €6,742.51 and no. … in the amount of €12,788.18, as well as those relating to the respective compensatory interest no. … in the amount of €1,866.72, no. …, in the amount of €1,052.20 and … in the amount of €8,377.11, relating to the year 2011, which total €81,249.65 to be paid.

2.1. In turn, the immediate object of the petition is the decision denying the voluntary reclamation of such assessments.

On 01-08-2016, the petition for constitution of the arbitral tribunal was accepted and automatically notified to AT (Tax Authority).

The Petitioner did not proceed with the appointment of an arbitrator, whereby, pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of the CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the office within the applicable period.

On 20-07-2016, the parties were notified of these designations and did not manifest any intention to reject any of them.

In accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 01-08-2016.

To support its petition, the Petitioner alleges, in summary, that the assessment acts are based on an incorrect interpretation and application of paragraph a), of no. 1 of article 23 of the VAT Code (hereinafter CIVA), in that, in essence:

i. The Petitioner is a municipal public company in the process of liquidation, which by force of concession contracts concluded with its sole shareholder, the Municipality of …, undertook the provision of certain public services, as well as the operation of some economic activities that were previously carried out by the Municipality of ….

ii. The Petitioner is a taxable person who simultaneously practices operations subject to VAT taxation, which confer the right to deduction, exempt operations which do not confer the right to deduction of the upstream tax incurred and non-taxable operations, considered outside the concept of economic activity, for VAT purposes.

iii. Consequently, the Petitioner qualifies as a mixed VAT taxable person.

iv. In this sense, and for purposes of calculating deductible VAT, it followed the method of real allocation by breaking down the accounting of its activity into seven cost centers, namely: (i) housing park; (ii) municipal swimming pools and bathing areas; (iii) bus depot; (iv) sports park; (v) municipal market; (vi) Interpretation Center of …; and (vii) general costs.

v. Now, the AT challenged the procedure carried out by the Petitioner which involved the deduction of all VAT borne in the acquisition of inputs that it considered attributable to each of these cost centers, with the exception of the housing park where there was no deduction because the rents were exempt from VAT.

vi. According to the AT's understanding, given that non-economic activities are practiced in the cost centers of municipal swimming pools and bathing areas (free access to beaches by bathers), bus depot (use of the depot by passengers in embarkation and disembarkation) and sports park (free use of football fields by sports associations), the generality of costs concentrated there cannot benefit from the right to deduction, first and foremost, because objective criteria were not, in the AT's view, adopted that would allow determination of the degree of utilization of such goods and services in operations that confer the right to deduction and in operations that do not confer that right.

vii. Now, proceeding from these premises that within the referred cost centers economic activities and non-economic activities are conducted simultaneously, the AT incorrectly advocated a correction of the Petitioner's VAT deduction right based on the application of the pro rata method provided for in no. 4 of article 23 of the VAT Code.

viii. Indeed, according to the Petitioner's allegations, the question of the impossibility of applying the pro rata method provided for in article 173 of the VAT Directive to operations that fall outside the scope of VAT, as would be the case with free operations, is properly clarified by national doctrine and confirmed by the jurisprudence of the CJEU, whose sentences, in interpreting concepts present in the VAT Directive, are binding on national judicial bodies, including the Arbitral Tribunal.

ix. It further alerts that if merely hypothetically it were considered legitimate to use a global pro rata, the distortion would be significant, prejudicing the right to full deduction of inputs allocated to cost centers whose activity is wholly taxed, as indeed results from the Inspection Report, which did not challenge the inputs allocated to the cost centers "Municipal Market", "Interpretation Center of …" and "Common Costs".

x. Effectively, by including in the denominator the total amount of non-taxed subsidies - which relate either to public services provided free of charge or to the acquisition of equipment goods allocated to the respective activity – the AT, in the Petitioner's view, violates the provisions of no. 4 of article 23 of the VAT Code, causing a significant reduction in deductible VAT, contrary to the principle of proportionality.

xi. In these terms, the Petitioner considers that such assessments are manifestly illegal and should, without further ado, be annulled, as they are based on the global pro rata deduction method, which in addition to causing significant distortions in taxation, appears inapplicable given the type of operations carried out which include economic activities for VAT purposes and activities outside the scope of this tax, namely free operations.

xii. Furthermore, according to the Petitioner, the Inspection Report is deficient due to lack (and not merely insufficiency) of reasoning for the corrections that gave rise to the contested assessments, which would necessarily determine the total annulment of the referred additional assessments.

xiii. In this context, it notes that attached to the Inspection Report is a list of invoices which, according to the heading of such annex, constitutes "exemplification of invoices recorded in the accounting with mixed use and operations not resulting from an economic activity", with mere reference to this list without allegation of the reasons why it is understood that such inputs are used in operations that do not constitute an economic activity or used simultaneously in economic and non-economic operations, making it therefore impossible to understand the meaning of the corrections.

xiv. Now, the taxpayer cannot be placed in a position to defend itself with respect to irregularities imputed to it without knowing the reasons underlying them, as this would be contrary to the legal presumption of veracity of the data contained in the accounting records of taxpayers.

xv. Finally, on a subsidiary basis, the Petitioner invokes the expiration of the right to assess due to violation of the temporal scope of the inspection, relating to the exercise of 2011.

xvi. In this regard, it argues that the inspection originated in the existence of a VAT credit balance, constituted between the exercises of 2010 to 2013, which was the subject of a reimbursement request in the declaration of closure of the activity.

xvii. Pursuant to the referred Inspection Report, corrections were proposed in the amount of €50,422.93 relating to the following "corrected carry-forward from 2010 (47,529.90) + corrected VAT 2011 03Q (2,893.73)" with the AT clarifying in point 7, III.2 the following: "It should be noted that the calculations resulting from the economic exercise of 2010 only produce effects in the reduction of the tax credit ascertained, in that the missing tax can only be recovered taking into account the expiration of the right to assess provided for in art. 45 of the LGT".

xviii. Now, according to the Petitioner's defense, the AT's argumentation is unacceptable because the institute of expiration does not refer only to the right to proceed with additional assessments, but also aims to prevent corrections relating to the calculation of tax made by the taxable person as regards the value of VAT credit to be carried forward to subsequent exercises. It concludes by requesting the declaration of illegality of the corrections relating to the exercise of 2010, reflected in the exercise of 2011, in so far as by increasing the amount of tax due in that year, they have the effect of reducing the tax credit relating to the year of 2011.

The Respondent, duly notified for this purpose, submitted its reply invoking the following:

The position defended in the Inspection Report and reiterated here is based on the understanding that the Petitioner, being a mixed taxable person who uses the method of real allocation, simply created various cost centers where it aggregated activities by typologies, to thereby operate a cost allocation exercising the deduction right fully in some cases and not exercising that right at all in others (in the case of inputs allocated to the Housing Park cost center).

Thus, the Respondent considers that it is not possible to apply the method of real allocation in that there do not exist objective criteria that would allow determination of the degree of utilization of goods and services that confer the right to deduction.

The Respondent clarifies that the modulation of the right to deduction in the present case will imply that part of the tax is not deductible and another part will only be so in the percentage of 0.099, since it was borne in the acquisition of goods and services of mixed use, asserting that such percentage was not calculated pursuant to no. 4 of art. 23 of the VAT Code, but by recourse to objective criteria.

The Respondent also contests the alleged absence of reasoning of the tax act, emphasizing that article 77 of the LGT allows that the reasoning consist in a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that form part of prior procedures such as will be the case of tax inspection reports.

Consequently, it understands that sufficient elements were provided to the Petitioner, first and foremost, within the scope of the exercise of the right of hearing, with the notification of the draft inspection report, and subsequent adherence to the reasoning and conclusions of such report, in such a way that it was possible for the Petitioner to perfectly understand the cognitive and evaluative itinerary followed by the author of the act and subsequently to contest it thoroughly in its petition for arbitral decision, which otherwise would not have been submitted.

Without conceding, it further states that, should one admit the notification in question without having been accompanied by the reasoning of the act, it would be an irregular notification, in face of which the Petitioner could and should have requested a new notification with the reasoning and other requirements possibly omitted, pursuant to article 37 of the CPPT, and not having done so, one should conclude for the dismissal of this ground and for the legality of the assessment acts and their respective notification.

Finally, the AT contests the expiration of the right to assess alleged by the Petitioner, recalling that pursuant to article 45, no. 3 of the LGT, "in case any deduction or tax credit has been made, the expiration period is that of the exercise of that right", there being no legal support to consider that the AT is limited by the expiration period of the right to deduction in assessing the prerequisites for the existence of tax credit carried forward successively.

It concludes for the dismissal of the petition for arbitral decision.

On 16-10-2016, considering that, in this case, none of the purposes legally assigned to it were present, and having regard to the position taken by the parties, pursuant to the provisions of articles 16, paragraph c), 19 and 29, no. 2 of the RJAT, 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 RJAT was dispensed with, the parties being notified to submit successive written pleadings within a period of 15 days. Furthermore, the date of 1 February 2017 was set for delivery of the arbitral sentence.

1. The parties chose not to exercise the option to produce oral and written pleadings.

2. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT.

3. The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

4. The proceedings are not affected by nullities.

All considered, a decision must be rendered.

II - MATTERS OF FACT

A.1 - Facts established as proven:

The essential facts proven are as follows:

1. The Petitioner is a municipal public company that ceased its activity on 31-12-2015, and is presently in the process of liquidation;

2. The Petitioner is taxed for its main activity of "Public Administration" – activities of culture, sport, recreation, environment, housing and other social activities, except social security (CAE…);

3. In the course of the exercise of its activity, the Petitioner … – undertaking the provision of certain public services and the operation of some economic activities, which were previously carried out by the latter;

4. The activities developed include the creation, management and operation of sports and leisure spaces and equipment and bathing areas, as well as the organization of events and activities in these spaces and equipment;

5. Additionally, the Petitioner buys and sells real estate that it considered necessary for the pursuit of its statutory purposes, namely in the context of social housing projects framed in a policy of enhancing and leveraging community, national and regional synergies, in order to ensure the execution of housing programs;

6. The Petitioner met the requirements to be considered a mixed taxable person, in that it simultaneously conducted taxed activities, taxed albeit exempt activities and non-taxable activities for VAT purposes;

7. For VAT purposes, the Petitioner was registered as a mixed taxable person, declaring that it proceeded with the deduction of tax according to the method of real allocation, framed in the normal regime of quarterly periodicity, pursuant to paragraph b) of no. 1 of article 41 of the VAT Code;

8. The Petitioner proceeded with the determination of VAT values to be deducted based on six cost centers, separated in its accounting and identified in the following terms:

a) Housing Park;

b) Municipal Swimming Pools of Bathing Areas;

c) Bus Depot;

d) Sports Park;

e) Municipal Market;

f) Interpretation Center of ….

1. The Petitioner bore 100% of the VAT relating to the cost center "Housing Park";

2. The Petitioner deducted 100% of the VAT incurred in acquisitions that it considered attributable to each of the remaining cost centers;

3. The deduction method adopted by the Petitioner – real allocation – was based on the provisions of paragraph a) of no. 1 of article 23 of the VAT Code and no. 2 of the same article, combined with the circumstance of simultaneously conducting economic activities and non-economic activities;

4. The Petitioner remained in VAT credit for successive periods, throughout the exercises of 2010 and 2013;

5. Due to the closure of the activity, the Petitioner requested the reimbursement of the VAT credit balance existing in the periodic statement 2014 12Q, which triggered the need for verification by the Tax Inspection services of the prerequisites relating to the granting of such reimbursement;

6. Within the scope of assessing the legitimacy of the reimbursement, an external inspection procedure was opened embodied in OI 2015… of 6 May 2015, beginning on 09 June 2015 and concluding on 10 July 2015;

7. After the completion of the referred inspection procedure, corrections were proposed, for VAT purposes, and additional tax assessments relating to periods 1103Q, 1106Q and 1109Q, in the amount of €69,953.62, as well as assessments of compensatory interest in the amount of €11,296.03, for a total of 81,249.65;

8. The VAT correction relating to period 1103Q in the total amount of €50,422.93 relates to the sum of the corrected carry-forward of the tax credit ascertained in 2010 in the amount of €47,529.90 and the corrected VAT of 2011 03Q in the amount of €2,893.73;

9. From the arithmetic corrections resulted the denial of the VAT reimbursement request made relating to the application of the method of real allocation by the Petitioner, on the grounds that there did not exist objective criteria that would allow determination of the degree of utilization of goods and services that confer the right to deduction;

10. In the report drawn up by the Tax Inspection Division, on 10-07-2015, which is given as fully reproduced, the following is stated, among other things:

"11. With regard to the deduction of the tax borne, the taxable person uses as a rule of distinction by cost centers, bearing the VAT in full in the cost center of the housing park, but deducting in full the values inherent to the remaining cost centers.

1. Subject to a better opinion, the criterion supported for the tax deduction is strongly impacted by the creation of the referred cost centers, which does not seem to be the best solution for the present case.

2. In fact, the taxpayer assumes that, given that in all cost centers there are activities that are subject to VAT (with the exception of the housing park), the generality of costs for all activities concentrated there benefit from the right to deduction.

3. Ignoring in this aspect the mandatory distinction between economic activities and other activities not resulting from economic activities, which require, pursuant to the provisions of no. 2 of the same article, real allocation, based on objective criteria, which allow determination of the degree of utilization of such goods and services (our emphasis).

4. In reality, if one analyzes the constitution, for example, of the cost centers "Bus Depot" and "Sports Park" we can verify that the particularities of the activities conducted there are of a social and recreational nature, not being sufficient for a commercial activity with tax collection, such as in the case of a bar rental (in the bus depot), to legitimate the entire deduction of tax borne in the acquisition of goods and services necessary for its maintenance.

5. Similarly, the collection of tax by the partial rental of some hours of use of the municipal pavilion …, will certainly not be capable of legitimizing the deduction of all VAT borne in the maintenance of the football fields and multisport courts of the municipality.

6. Also in the cost center "Swimming pools and bathing areas", the same scenario occurs. In that cost center the deduction of tax occurs in its entirety, despite common costs should be distributed. As a blatant example of mixed use of services between taxed and non-taxed activities is the payment for beach assistance services that occurs both within the swimming pool complex and in the various beaches of the municipality. In its essence, the proportional deduction of the tax borne for the maintenance of surveillance on the beaches, being a public service with no charge to the user, could not occur.

7. Attached is a list of various documents where the situation described is evident (years 2010 and 2011). Copies of those documents and other documents in the same circumstance are an integral part of the Work Evidence process where the mixed use of goods and services is demonstrated in the company's taxed activity and in non-taxed activity. (...).

8. According to the instructions transmitted in Circular Notice 30,103, of 23-04-2008, the definition of effective rates of utilization of goods of mixed use should be based on objective criteria, determining in consequence of the degree, proportion or intensity of use "... of each good or service that result from economic activity subject to VAT and operations that do not result from it, through objective criteria"(...).

9. It is our understanding that the lack of discrimination of a criterion defined by the taxable person by reason of knowledge of the business "...adapted to the situation and concrete organization of the taxable person to the nature of its operations in the context of the overall activity conducted and to the goods or services acquired for the needs of all operations, integrated or not in the concept of relevant economic activity" (point V3 of the referred circular notice) determines that it be the AT that promotes the referred definition, and consequently proportional distribution for the intended purpose.

10. Taking into account the existence of municipal subsidies intended to cover the operational costs of the social activities conducted by that entity, it was decided to use the deduction right ratio based on the allocation of the referred subsidies, evidenced accountably in the subdivision accounts of account 75 – Subsidies to operations. In the limit, the amounts received from the municipal entity are nothing more than revenues capable of supporting the actual costs of the activities conducted, thus restoring the budget necessary to meet the expenses incurred in maintaining those activities.

11. (...)

12. In this sense, those amounts, by not being inserted in the field of operations that confer the right to deduction pursuant to article 20 of the VAT Code, will necessarily be taken into account in determining the amounts to be considered deductible for tax purposes.

13. It should be noted that, given that part of the activity in which the entity effectively practices real allocation (the housing park) the subsidies allocated by the IRNH intended for the cost-sharing of the social rents of the housing estates managed by the entity "…" will not be taken into account. In reality, a broader assumption of "non-taxed subsidies" would determine a lower proportion of tax to be deducted, promoting a double cut in the entity's deductive capacity, given that the expenses inherent to social housing estates effectively do not provide any tax deduction of tax in the legal sphere of the taxpayer in question.

III.2 – VAT Corrections

1. (...)

2. The AT must therefore calculate the percentage of deduction, compatible with the activity conducted by the taxable person.

3. It is therefore proposed to apply the formula referenced in no. 4 of article 23 of the VAT Code, albeit in adapted form, taking into account the proposed exclusion of subsidies relating to social housing.

4. (...)

5. The percentage of tax deduction should therefore contain, in the numerator, the annual amount of operations subject to tax, while in the denominator should appear the amount of non-taxed subsidies;

6. The values to be considered for purposes of deduction shall be 0.099 for the economic exercises of 2010 and 2011 in accordance with the table below:

(...)."

1. On 29 January 2016, the Petitioner proceeded with the payment of the amount of €82,020.30, corresponding to the tax contained in the contested assessments, plus interest and other charges;

2. Given the additional assessments issued by the AT, on 29 January 2016, the Petitioner filed a voluntary reclamation in which it contested the corrections proposed in the report made by the Inspection Services of the Finance Directorate of …, regarding the use of the pro rata method for deduction of VAT incurred in its mixed inputs, through which a deduction percentage of 0.099 was ascertained;

3. On 17 March 2016, the Petitioner was notified, by Notice no. …, issued by the Finance Directorate of …, of the express denial of the voluntary reclamation filed;

4. The Notice of notification of the denial decision of the voluntary reclamation contains the following mention: "With regard to the voluntary reclamation related to the subject matter mentioned above, filed by the T.P. –A…, UNIPESSOAL S.A. E.M. NIPC: …, we hereby inform you that it has been denied, pursuant to the dispatch contained in the information from these Services, a copy of which is attached.

Against this decision, hierarchical appeal may be lodged within 30 days, counting from notification, addressed to the Honorable Minister of Finance, as provided for in no. 2 of art. 66 of the Code of Procedure and Tax Process (CPPT) or alternatively submit judicial challenge, within three months, after notification, in accordance with no. 1 al. e) of art. 102 of that provision.

(...)"

1. On 31 May 2016, the Petitioner filed the petition for constitution of the Arbitral Tribunal that gave rise to the present proceedings (cf. the electronic petition to the CAAD).

A.2 - Facts established as not proven

With relevance to the decision on the main petition, there are no other facts to consider, proven or not proven.

A.3 - Reasoning of the factual matters proven and not proven

With respect to matters of fact, the Tribunal does not have to pronounce itself on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and discriminate between proven and non-proven matters (cf. art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable ex vi article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delimited as a function of their legal relevance, which is established with attention to the various plausible solutions of the legal question(s) (cf. previous article 511, no. 1, of the CPC, corresponding to current article 596, applicable ex vi article 29, no. 1, paragraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties in their respective pleadings, in light of article 110, no. 7 of the CPPT, the documentary evidence and the PA joined to the file, the above-listed facts were considered proven, with relevance to the decision.

III - ON THE LAW

A.1 - On the expiration of the right to assess

It is necessary, first and foremost, to decide the question of the expiration of the assessment relating to the VAT correction relating to the tax credit ascertained by the Petitioner in the exercise of 2010, in the amount of €47,529.20, in that its granting precludes the analysis of the others.

As results from the Inspection Report "the VAT corrections made to the economic exercise of 2010 only produce effects in the reduction of the tax credit ascertained, in that the missing tax cannot be recovered having regard to the expiration of the right to assess provided for in article 45 of the LGT."

It should further be noted that the reimbursement request was made with the periodic statement of 2014 12Q, due to the closure of the respective activity, and has its origin in successive carry-forwards of deductible VAT from the period of 2010 09Q.

Now, article 45 of the LGT provides in its no. 1 that the right to assess taxes expires when the assessment is not validly notified to the taxpayer within 4 years, further providing in no. 4 that with respect to VAT this period is counted from the beginning of the civil year following the year in which the tax becomes due.

VAT is based on a tax credit mechanism according to which the tax due to the State is determined through the deduction of the upstream tax borne by the taxable person from the tax that this person collects downstream. In this sense, article 22, no. 1 of the VAT Code provides "the right to deduction arises at the moment the deductible tax becomes due, in accordance with the provisions of articles 7 and 8, being effected by subtraction from the total amount of tax due for taxable operations of the taxable person, during a tax period, the amount of deductible tax due during the same period."

Thus, to the State will be delivered the difference between the amount that was levied on downstream taxable operations (VAT collected on sales or service provision) and upstream taxable operations (VAT borne on purchases). The tax credit mechanism is intended to ensure the neutrality of VAT, as a structuring principle, frequently invoked by the jurisprudence of the CJEU, preventing cumulative taxation and ensuring taxation at the final consumer.

Pursuant to article 27 of the VAT Code, when tax in favor of the State is ascertained, it must be paid with the periodic statement; in turn, article 22 states that if there is tax in favor of the taxable person, the excess is deducted in the following declarative period, with carry-forward of that excess taking place, as results from nos. 4 and 5 of the referred legal provision:

"4 - Whenever the deduction of tax to which there is entitlement exceeds the amount due for taxable operations in the corresponding period, the excess is deducted in the following tax periods.

5 - If, after 12 months relating to the period in which the excess began, a credit in favor of the taxable person persisting above (euro) 250, this may request its reimbursement."

Therefore, as the Respondent refers, citing Patrícia Noiret da Cunha, in Value Added Tax, annotated, Higher Management Institute, 2004, p. 332, "The system resembles a current account between the tax administration and the taxable person, with the characteristics of carry-forward to the following periods."

Both carry-forward and reimbursement, as forms of materializing the exercise of the right to deduction, presume a periodic settlement of accounts between the State and the taxpayer, whose moment is uncertain, depending on the volume of business of the latter, the type of operations and the vicissitudes of the activity conducted. Now, the establishment of expiration periods that would be exhausted as a function of the dates on which taxable operations are practiced would bring to VAT an element of insecurity wholly contradictory to the objective that its periodization serves, a reason which largely explains the drafting that the legislator gave to article 45 of the LGT.[1]

Thus, when there is a correction by the AT, it can have as its object the VAT collected by the taxable person in downstream operations, as well as the VAT deducted within the scope of the exercise of the respective activity, as occurred in the case at hand. Only with respect to the tax collected by the taxable person in its outputs are the notions of taxable event and due date applicable with which article 45 of the LGT constructs the rules of expiration relating to taxes of single obligation. Therefore, as refers Sérgio Vasques, "The VAT that the taxable person incurs in its inputs is not generated in its sphere nor is it due to it, constituting rather a credit that this person can mobilize against the state by exercising the right to deduction. The special rule contained in article 45, no. 4 of the LGT, appealing to the due date of the tax, cannot therefore apply to cases in which the intervention of the administration has as its object deductible VAT, whether this results from the performance of downstream operations, whether it results from regularizations made pursuant to the law".[2]

It follows from the provisions of no. 8 of article 22 of the VAT Code that reimbursements are made "when due", that is, after confirmation that in the period to which the reimbursement request refers the total deduction of tax to which there is entitlement exceeds the amount due for all taxable operations. To effect this confirmation, the AT may make corrections to the taxpayers' statements, relating to the period of time to which the reimbursement refers, and may also require them to provide additional documents and information, as follows from the provisions of no. 10 of the same article.

Article 45, no. 3 of the LGT also clarifies the question by providing that in case any "deduction or tax credit has been made, the expiration period is that of the exercise of that right". Note that the reference to deduction and tax credit was introduced in no. 3 of the referred article by means of the State Budget Law for 2005.[3] Evidently, until the moment the taxable person exercises its right to reimbursement, the AT does not take knowledge of the facts relevant to being able to begin its corrective intervention.

The jurisprudence of the STA offers us the best explanation of this line of interpretation by referring to the following: "Besides there being no legal support for applying the expiration period of the right to assess to acts that assess requests for VAT reimbursement, as they are not acts that declare a tax obligation of the taxpayer in relation to the Tax Administration, it is not an identical situation that would justify the analogical application of the referred art. 45. In truth, the reasons for legal certainty that justify the temporal limitation of the possibility of effecting assessment acts do not apply with respect to acts of reimbursement refusal, as acts of refusal, as negative acts that they are, do not produce or declare any obligation for the taxpayer."[4]

In these terms, the four-year expiration period begins on the date of submission of the statement in which the right is exercised, even though the right may possibly have originated in deductible VAT ascertained at an earlier moment.

Now, as results from the evidence, although the right to deduction had formed in the exercise of 2010, the Petitioner exercises the right to reimbursement in the statement submitted for closure of activity, with the AT not being limited to observe the expiration period of the right to assess when it assesses the existence of the prerequisites for VAT reimbursement.

Consequently, the argument for dismissal based on expiration is unfounded, with the AT's position being correct as to this argument.

A.2 - As to the error in interpretation and application of article 23, no. 4, of the VAT Code

A.2.1 - Meaning and scope of the applicable norms

1. The general principles underlying the exercise of the right to deduction of VAT borne by taxable persons are provided for in articles 19, 20 and 22, which regulate the formal conditions, the nature of operations and temporal conditions respectively, of that right.

As to the formal conditions, the authenticity of the operations and their supporting documentation is advocated (cf. art. 19, no. 1, paragraph a), which states:

"1 - For the determination of the tax due, taxable persons deduce, pursuant to the following articles, from the tax incurred on the taxable operations they carried out:

a) The tax due or paid for the acquisition of goods and services from other taxable persons;…

2 - Only the tax mentioned in the following documents confers the right to deduction, in the name and possession of the taxable person:

As to the nature of operations, article 20 typifies the operations that the taxable person practices so that it can enjoy this right, determining in its no. 1 paragraph a) that:

"1 - Only the tax that has been incurred on goods or services acquired, imported or used by the taxable person for the purposes of carrying out the following operations may be deducted:

a) Transfers of goods and provision of services subject to tax and not exempt from it;…."

From this norm it is clear, the general principle that it is only possible to exercise the right to deduction of VAT borne in acquisitions when these contribute to obtaining transfers subject to taxation, without prejudice to also having regard to specific cases listed in it.

That is, with the exception of the situations listed in article 21 of the VAT Code, all tax borne in goods and services acquired for the exercise of an economic activity referred to in paragraph a) of no. 1 of article 2 of the VAT Code, provided that it relates to transfers of goods and provision of services that confer the right to deduction pursuant to article 20 of the VAT Code, including those which, although framed within the scope of economic activities referred to in article 2 of the VAT Code, are not considered located in national territory by virtue of the localization rules contained in article 6 of the VAT Code, being, however, qualified as operations that confer the right to deduction by paragraph b) of no. 1 of article 20 of the VAT Code.

Thus, full deduction of tax borne in the acquisition of goods or services exclusively allocated to operations that, integrating the concept of economic activity for tax purposes, are taxed, exempt with the right to deduction or still non-taxed which confer that right, pursuant to paragraph b), II, of no. 1 of article 20 of the VAT Code, confers the right to deduction.

Should the tax be borne in the acquisition of goods or services exclusively allocated to operations subject to tax, but without the right to deduction or to operations that for VAT purposes are not inserted in the exercise of economic activities, the exercise of the right to deduction is not admissible.

1. Article 23 applies to mixed taxable persons, that is, those who in their activity simultaneously practice taxable operations and non-taxable operations within the scope of VAT. In this case, the right to deduction presents some specificities, with a view to determining deductible tax relating to goods and/or services of mixed use, that is, goods and/or services used jointly in activities that confer the right to deduction, in activities that do not confer that right and also in activities outside the scope of the tax.

Thus, when goods or services are exclusively allocated to operations conferring the right to deduction of tax, presenting a direct and immediate relationship with those operations, the respective tax is subject to full deduction, pursuant to article 20 of the VAT Code.

With respect to goods or services exclusively allocated to operations subject to tax but exempt without the right to deduction or to operations that, although covered by the concept of economic activity, are outside the rules of the scope of the tax or still of operations not resulting from an economic activity, the respective VAT borne cannot be subject to deduction.

1. As to the methods of determining deduction with respect to goods or services of mixed use, according to paragraph a) of no. 1 of article 23 of the VAT Code, whenever the determination of deductible VAT relating to goods or services partially allocated to the performance of operations not resulting from the exercise of an economic activity is at issue, recourse to real allocation of the goods and services used is mandatory, based on objective criteria that allow determination of the degree of utilization of those goods or services in those and in the remaining operations, as provided for in no. 2 of the same article.

As to goods or services allocated to the performance of operations resulting from the exercise of an economic activity, part of which do not confer the right to deduction, paragraph b) of no. 1 of the same article 23 of the VAT Code establishes that deductible tax be determined by the use of a deduction percentage (pro rata), ascertained pursuant to no. 4 of the same article, without prejudice to the taxable person being able to opt for real allocation, pursuant to no. 2.

In case of use of real allocation, mandatory or optional, and still pursuant to no. 2 of article 23, the criteria to which the taxable person resorts to determine the degree of allocation or utilization of goods and services to the performance of operations that confer the right to deduction or of operations that do not confer that right may be corrected or altered by the DGCI, with the proper grounds of fact and law, or, if applicable, cease using the method, if there occurs significant distortion in taxation.

The referred corrections or alterations must be promoted by the competent inspection services, when, in the exercise of their respective competencies, they detect unjustified advantages in the exercise of the right to deduction, pursuant to the provisions of no. 3 of article 23.

1. Pursuant to no. 4 of article 23, the deduction percentage ascertained by taxable persons pursuant to paragraph b) of no. 1 of article 23 results from a fraction that comprises, in the numerator, the annual amount, tax excluded, of operations that give rise to deduction pursuant to no. 1 of article 20, and in the denominator, the annual amount, tax excluded, of all operations carried out by the taxable person resulting from an economic activity provided for in paragraph a) of no. 1 of article 2, as well as of non-taxed subsidies that are not equipment subsidies.

The norm contained in no. 4 of article 23 applies exclusively to operations resulting from an economic activity when, simultaneously with operations that confer the right to deduction, taxable persons also conduct operations that do not confer that right and ascertain the amount of tax to be deducted by applying a deduction percentage (pro rata), pursuant to paragraph b) of no. 1 of the cited article.

Thus, it should be understood that, for purposes of calculating the pro rata of deduction, the annual amount to be entered either in the numerator or in the denominator of the fraction does not include operations not resulting from the exercise of an economic activity, as these are previously subject to real allocation, pursuant to paragraph a) of no. 1 of article 23.

Equally, also not to be considered in the numerator of the fraction are all those operations that, although resulting from the exercise of an economic activity, do not confer the right to deduction pursuant to no. 1 of article 20. Among these assume particular importance the operations carried out by public legal persons within their powers of authority, which, although in large part capable of being subsumed in the concept of economic activity for VAT purposes, are subject to the rule of non-subjection contained in no. 2 of article 2 of the VAT Code, except if their non-subjection causes distortion of competition.

A.2.2 - Application to the case at hand

The central question at hand revolves around ascertaining which method is legally most appropriate for calculating VAT, considering the classification and characterization of the Petitioner for VAT purposes as a mixed taxable person.

In summary terms, we can say that the Petitioner argues that the application of real allocation, pursuant to article 23, no. 1, paragraph a), and no. 2 of the VAT Code, is the methodology that best adapts to its circumstances and not the formula referenced in no. 4 of article 23 of the VAT Code (pro rata) applied by the AT.

It is thus important to assess the legality of the additional tax assessment acts that put into question the right to deduction of VAT incurred by the Petitioner through the application of the method of real allocation to mixed inputs.

The Petitioner is a municipal company that is part of the local business sector, taking the form of a joint-stock company, having as its purpose the development of activities of general interest, which in some cases assume a public-administrative nature (social housing, urban and environmental requalification, social promotion), and in others a business nature, operating, managing and conceding activities in a market regime.

The method of real allocation is based on the deduction of VAT according to the actual use of mixed goods or services, which presumes the separation of deductible VAT within the scope of total VAT borne by the taxable person, through the allocation of inputs to each of the activities (activities that confer the right to deduction and activities that do not confer that right), not necessarily in individualized correspondence with a particular output, but in any case, with specific outputs grouped by sectors, and based on the use of objective criteria, as provided for in article 23, no. 2 of the VAT Code.

Precisely because the method of real allocation imposes greater requirements on supporting accounting information, but also because it allows a higher level of rigor as to the amount of VAT the taxable person is entitled to deduct, the dominant doctrine accompanied by the jurisprudence of the higher courts understands that it would be desirable that all taxable persons opt for this method, whenever possible, in preference to the pro rata method. This method, despite its greater ease of application, remains a form of indicative calculation.[5]

The VAT Code provides that deduction using the method of real allocation should be based on objective criteria that allow determination of the degree of utilization of those goods and services in operations that confer the right to deduction and in operations that do not confer that right. In this respect it is important to note that the national legislator never specifies the technique appropriate to the use of the method of real allocation, referring to the option of the taxable person, which, as a rule, will be in a better position to decide on the most appropriate way to proceed with the separation of its activities, the identification of the costs it incurs and the accounting distribution according to the operations it practices. However, by means of Circular Notice no. 30103 of 23-04-2008, the AT offers some pointers for better application of real allocation, indicating by way of example objective criteria based on physical assumptions such as area occupied, number of personnel assigned, payroll, among others.

In this sense, one cannot speak of a distribution method more appropriate for the deduction of mixed inputs, especially because this should be based on a case-by-case analysis. However, whatever cost method is followed, the practical application of real allocation presumes the existence of a relationship between the acquisitions of goods and services made by the taxable person and the corresponding active operations.

Naturally, the referred connection between costs and revenues should be supported in documents evidencing the active and passive operations, as well as in appropriate accounting segregation of the activities conducted. Thus, "by allocating to taxed products the expenses related to them, a zone is created within the company (real perspective) where the full deduction of VAT borne can be made".[6]

In the case at hand, being the Petitioner a mixed taxable person, and considering the universe of operations conducted, it proceeded with the identification of its business areas and, from an accounting standpoint, constituted cost centers for each of the referred areas, proceeding with segregated accounting registration of active and passive operations according to the sector to which they related.

On the other hand, it was proven that by way of the referred accounting allocation, the Petitioner deducted all the VAT it considered attributable to the cost centers allocated to taxable activities (municipal swimming pools and bathing areas, bus depot, sports park, municipal market and Interpretation Center of …) and did not deduct any VAT incurred in the acquisition of goods or services intended for the housing park, in which exempt revenues are earned.

In this context, in the analysis made of the Petitioner's actions, the AT understood to question the application of the method of real allocation by considering that in the cost center bus depot and sports park social and recreational character activities are conducted "not being sufficient to a commercial activity with tax collection" (point 15 of the Report) and that in swimming pools and bathing areas "a blatant mixed use of services is verified between taxed and non-taxed activities" as in the case "of the payment for beach assistance services that occurs both within the swimming pool complex and in the various beaches of the municipality, being a public service with no charge to the user such could not occur." (point 17 of the Report).

To support its position, which goes through the application to the Petitioner of a global pro rata, the AT attaches a list of invoices, which did not receive individual treatment or sectoral quantification, being, however, referred to in general terms as being connected with "mixed use and or with operations not resulting from an economic activity".

Furthermore, despite stating in the Inspection Report that the creation of cost centers "does not seem to be the best solution for the present case", due to the alleged absence of indication of objective criteria to support the deduction of VAT, the Respondent does not support its conclusions on quantitative or material criteria that would allow concluding a differentiated treatment of these costs, from the perspective of VAT to be deducted.

In view of the foregoing, the arguments raised by the AT to question the application of the method of real allocation and justify the deduction of VAT based on a pro rata appear very vague and insufficiently demonstrated to be able to conclude with certainty whether such costs should be subject to full deduction or to apportionment.

In this sense, the criticisms presented by the Petitioner appear pertinent with respect to the sparse allegation of facts to support the corrections presented and the use of a global pro rata of 0.099% that questions the possibility of deduction of VAT even in cost centers whose deduction methodology was not questioned by the Tax Inspection Report.

If for the AT the objective criteria were not met in the creation of the cost centers presented by the Petitioner and in the sectoral segregation of the respective operations, it was incumbent on it to support its position by alleging economic and accounting reasons adequate to the reality of the taxpayer, so as to question the tax treatment adopted.[7]

It happens that in the file, that burden is not satisfied, the AT limiting itself in terms of reasoning to issuing poorly supported evaluative judgments, such as when it refers that "the criterion for deduction of tax is strongly impacted by the creation of the referred cost centers, which does not seem to be the best solution" (...); or when it says that "Attached is various documents where the situation described is evident(...)" (our emphasis).

It appears, in our view, not to satisfy the legal requirements the presentation of a list of documents, to thus, without more, justify a correction based on the pro rata method. At most, such a list would serve only to demonstrate – which was not done - possible cases of improper VAT deduction or, alternatively, present in reasoned fashion a new apportionment ratio in the business areas in which the criterion of allocation of mixed costs is considered incorrect.

Moreover, it is expressly provided for in article 23, no. 1, paragraph a), and no. 2 of the VAT Code that, in situations where the goods and services acquired are used, simultaneously, in operations that confer the right to deduction and operations that do not confer that right, the deduction of VAT borne in the acquisition of goods and services that are used in the performance of both types of operations is determined as follows: where a good or service is partially used in the performance of operations not resulting from the exercise of an economic activity, the non-deductible VAT must be determined in accordance with the method of real allocation, and within this scope objective criteria appropriate to the concrete situation should be used.

Consequently, by virtue of the legislative amendment to article 23 of the VAT Code,[8] with respect to mixed taxable persons, goods and services partially allocated to the performance of operations not resulting from an economic activity, the non-deductible tax, as a result of that partial allocation, is determined mandatorily by the method of real allocation.

The provisions of the VAT Code are in line with those contained in the VAT Directive and with the position adopted by the CJEU particularly importantly, for the case at hand, in the Securenta Judgment.[9] In this regard, the CJEU was called upon to pronounce itself on the appropriate apportionment criterion when inputs are simultaneously allocated to an economic activity and a non-economic activity. The Court stresses that "the Sixth Directive contains no provision relating to the methods or the criteria that the Member States must use in separating the amounts of upstream tax relating to economic activity from those relating to non-economic activity." However, it warns that Member States in the exercise of that power must ensure the objectives pursued by the Directive, not being able to contradict the principle of tax neutrality on which the common VAT system rests. Finally, the Court concludes that in view of earlier jurisprudence it is possible to conclude "from the Sofitam, Floridienne and Berginvest, Cibo Participations and EDM judgments that operations which do not fall within the scope of the Sixth Directive must be excluded from the calculation of the pro rata of deduction referred to in articles 17 and 19 of the Sixth Directive."[10] (Our emphasis)[11].

Thus, following the referred jurisprudence, with respect to the methods of deduction provided for in the referred article 23 of the VAT Code (pro rata and real allocation) when inputs are used simultaneously for taxed albeit exempt operations and non-taxed operations (activities outside the scope of the tax), taxable persons should proceed with the direct allocation of upstream expenses to each of these activities in order to deduct the VAT borne in operations that confer the right to deduction.

Now, being an established fact that the Petitioner conducts economic activities and other activities not resulting from economic activities, the non-deductible tax resulting from that partial allocation should be ascertained according to the method of real allocation, using objective criteria appropriate to the economic reality of the taxable person.

In summary, the AT incurs in error in the assumptions of fact and law, in that, contrary to its argument, it does not appear that the criteria adopted by the Petitioner for the separation of expenses by areas or sectors of activity are not objective. On the other hand, neither was there a demonstration that the expenses contained in the list of documents presented by the AT are partially related to operations that do not fall within the concept of economic activity.

In this conformity, it is understood that the AT could disagree with the criteria defined by the Petitioner to support the deduction of mixed costs, just as it could impose special conditions or cease such procedure in case it is proven that it causes or could cause significant distortion in taxation, pursuant to article 23, no. 2 of the VAT Code.

It could not, however, the AT impose a correction based on the application of global pro rata, which constitutes an illegality of the corrections effected and subsequent assessments, pursuant to articles 23, nos. 1 and 2 of the VAT Code. In this sense, the referred Circular Notice cited in the Inspection Report no. …, of 23 April 2008, is clarifying, according to which for purposes of pro rata calculation, "the annual amount to be entered either in the numerator or in the denominator of the fraction does not include operations not resulting from the exercise of an economic activity, given these are previously subject to real allocation".

Thus, the Petitioner is correct as to the illegality, due to error in its assumptions of fact and law, of the additional assessments under consideration.

Thus the arbitral petition with respect to the illegality of the denial of the voluntary reclamation is well-founded and, in this sequence, the additional VAT assessments no. … in the amount of €50,422.93, no. … in the amount of €6,742.51 and no. … in the amount of €12,788.18 must be annulled, as well as those relating to the respective compensatory interest no. … in the amount of €1,866.72, no. …, in the amount of €1,052.20 and…, in the amount of 8,377.11€, relating to the exercise of 2011.

B. Questions prejudiced

Proceeding the petition for arbitral decision based on the defect of illegality due to error in its assumptions of fact and law, which assures effective and stable protection of the Petitioner's rights, knowledge of the other defects that are imputed to the tax act in question is prejudiced.

In truth, it follows from the establishment of an order of knowledge of defects in article 124 of the CPPT that, judgment rendered for a defect that prevents the renewal of the contested act, there is no need to assess the others that are imputed to it. If it were always necessary to assess all defects it would be indifferent the order by which their knowledge would be made.

C. Payment of indemnificatory interest

As results from the factual matters established as proven, on 29 January 2016, the Petitioner proceeded with the payment of the amount of €82,020.30, corresponding to the tax contained in the contested assessments, plus interest and other charges.

The Petitioner requests the reimbursement of the sums paid, plus indemnificatory interest at the legal rate until full reimbursement.

With respect to indemnificatory interest, in accordance with the provisions of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim from which no appeal or challenge may be lodged binds the Tax Administration from the expiration of the period provided for appeal or challenge, the latter being required, in the exact terms of the granting of the arbitral decision in favor of the taxable person and until the expiration of the period provided for the spontaneous execution of the sentences of the judicial tax tribunals, to "restore the situation that would exist if the tax act subject to the arbitral decision had not been carried out, by adopting the acts and operations necessary for that purpose", which is in harmony with the provisions of article 100 of the LGT [applicable by virtue of the provisions of paragraph a) of no. 1 of art. 29 of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial granting of voluntary reclamation, judicial challenge or appeal in favor of the taxable person, to the immediate and full restoration of the legality of the act or situation subject to the dispute, comprising the payment of indemnificatory interest, if applicable, from the expiration of the period of execution of the decision".

Although article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning in the CAAD, making no reference to condemnatory decisions, it should be understood that the competencies include the powers that, in judicial challenge proceedings, are attributed to tax tribunals, this being the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first directive, that "the tax arbitral process must constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge process, despite being essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnificatory interest, as can be inferred from article 43, no. 1, of the LGT, in which it is established that "indemnificatory interest is due when it is determined, in voluntary reclamation or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due" and from article 61, no. 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which states that "if the decision that recognized the right to indemnificatory interest is judicial, the payment period is counted from the beginning of the period for its spontaneous execution".

Thus, no. 5 of article 24 of the RJAT, by saying that "payment of interest is due, regardless of its nature, pursuant to the provisions of the general tax law and the Code of Procedure and Tax Process", should be understood as allowing the recognition of the right to indemnificatory interest in the arbitral process.

In the case at hand, in the consequence of the illegality of the VAT assessment acts due to the application of new calculation methods (application of a global pro rata), the Petitioner not only saw the reimbursement it had requested made impossible but had to pay the amount illegally assessed by the AT. To this extent, the Petitioner is entitled to reimbursement of the tax improperly paid, by virtue of the referred articles 24, no. 1, paragraph b), of the RJAT and 100 of the LGT, as this is essential to "restore the situation that would exist if the tax act subject to the arbitral decision had not been carried out", which should be determined in execution of judgments.

The substantive regime of the right to indemnificatory interest is regulated in article 43 of the LGT, which establishes, with respect to what is relevant here, that "Indemnificatory interest is due when it is determined, in voluntary reclamation or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due."

The illegality of the assessments is attributable to the Tax Administration, which denied on its own initiative the voluntary reclamation filed.

In normal terms, the Petitioner should be reimbursed pursuant to article 22 of the VAT Code, which did not happen due to the responsibility of the AT, whereby, consequently, the Petitioner is entitled to indemnificatory interest, pursuant to article 43, no. 1, of the LGT and 61 of the CPPT.

IV. DECISION

Therefore, this Arbitral Tribunal agrees:

To judge well-founded the petition for arbitral decision with respect to the petition for declaration of illegality of the denial of voluntary reclamation and, in this sequence,

To annul the additional VAT assessments no. … in the amount of €50,422.93, no. … in the amount of €6,742.51 and no. … in the amount of €12,788.18, as well as those relating to the respective compensatory interest no. … in the amount of €1,866.72, no. …, in the amount of €1,052.20 and …, in the amount of 8,377.11€, relating to the exercise of 2011;

To condemn the Respondent to the payment of indemnificatory interest, to be calculated on the amount of tax improperly paid, at the applicable legal rates, from the date of payment until the date of processing of the respective credit note.

V. Value of the case

The value of the case is set at €82,020.30 (eighty-two thousand and twenty euros and thirty cents) pursuant to article 97-A, no. 1, a), of the Code of Procedure and Tax Process, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

VI. Costs

The value of the arbitration fee is set at €2,754 pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the respondent (cf. article 22, no. 4, both of the RJAT, and article 4, no. 4, of the cited Regulation).

Let notification be made.

Lisbon, 10 January 2017

The Collective Arbitral Tribunal,

Fernanda Maças

(President)

Dr. Fernando de Jesus Amado dos Santos
(Member)

Dr. Filipa Barros

(Member)

[1] See, in this sense, Sérgio Vasques, Expiration of the Right to Assess, in VAT Notebooks 2016, Almedina.

[2] Cf. Sérgio Vasques (VAT Notebooks 2016).

[3] Law no. 55-B/2004, 30.12.2014.

[4] Cf. Judgment of the STA, case no. 0303/07, of 07/12/2007 and, in the same sense, the Arbitral Award no. 48/2015-T.

[5] Rui Manuel Pereira da Costa Bastos, The Right to Deduction of VAT, The particular case of mixed-use inputs, in IDEFF Notebooks, no. 15.

[6] In this sense, see Saldanha Sanches and João Taborda da Gama, "Prorata revisited: economic activity and VAT deduction in CJEU jurisprudence", Science and Tax Technique, 2006, no. 417.

[7] Also in this sense, Judgments of the CAAD, Case no. 70/2014, of 9 March 2014 and Case no. 15/2015 of 20 October 2015, among others.

[8] Law no. 67-A/2007, of 31/12 – State Budget Law for 2008.

[9] Judgment of the CJEU of 13 March 2008, Case C-437/06, (Securenta case) in which it is stated as follows: "The determination of the methods and the criteria for apportionment of the amounts of value added tax paid upstream between economic activities and non-economic activities, within the meaning of the Sixth Directive 77/388, relating to the harmonization of the legislation of the Member States concerning taxes on turnover, falls within the power of appreciation of the Member States which, in the exercise of that power, must have regard to the purpose and the economy of that directive and, as such, provide for a mode of calculation which objectively reflects the share of actual allocation of upstream expenses to each of these two activities. Member States are empowered to apply, where appropriate, either an apportionment key based on the nature of the investment, or an apportionment key based on the nature of the transaction, or any other appropriate key, without being required to limit themselves to one of these methods alone."

[10] See point 40.

[11] This position was subsequently reiterated in the Judgment of the CJEU of 6 September, Case C-496/11 (Portugal Telecom case).