VAT Tax Simulation in Financial Leasing Contracts: CAAD Arbitration Decision 3/2016-T

ARBITRAL DECISION

I – Report

1. On 5.01.2016, the Claimant, A…, S.A., taxpayer no. …, with registered office at Rua…, …, …-…Lisbon, requested the CAAD for the constitution of an arbitral tribunal, under the terms of art. 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as "LFATM"), in which the Tax and Customs Authority is the Respondent, with a view to the annulment of the Value Added Tax Assessment no. 2015…, relating to the period of March 2012, from which resulted, after corrections to the assessment initially notified to the Claimant, an amount payable in the total sum of € 26.450,00 as well as the corresponding assessment of compensatory interest, from which resulted an amount payable of € 3.087,04 and furthermore the assessment of default interest relating to the alleged delay in payment of the amount corresponding to the tax assessment, from which resulted an amount payable of € 540,63.

The Claimant, alleging to have paid the amount corresponding to the tax assessment as well as the compensatory and default interest, further petitions the condemnation of the Tax and Customs Authority to refund the amount of € 26,450,00 relating to the assessment now in question, as well as the interest which it considers to have been unduly paid, in the total value of € 3.627,67, plus the due indemnatory interest and furthermore "default interest accrued and to accrue, if applicable".

1. The request for constitution of the arbitral tribunal was accepted by His Excellency the President of the CAAD and notified to the Tax and Customs Authority.

Under the terms and for the purposes of article 6, no. 1, of the LFATM, by decision of the President of the Deontological Council, duly communicated to the parties within the legally applicable periods, the signatory was appointed as arbitrator, who communicated to the Deontological Council and to the Center for Administrative Arbitration the acceptance of the appointment within the regularly applicable period.

The Arbitral Tribunal was constituted on 23-03-2016.

1. Verifying the non-existence of any situation provided for in art. 18, no. 1, of the LFATM, which would make necessary the arbitral meeting provided for therein, the holding thereof was dispensed with, on the grounds of the prohibition of performance of unnecessary acts.

The holding of submissions was furthermore dispensed with, under the terms of art. 18, no. 2, of the LFATM, "a contrario".

1. The grounds presented by the Claimant, in support of its claim, were, synthetically, the following:

Illegality of the Correction and Assessments Challenged by violation of art. 19, no. 3, of the Value Added Tax Code (hereinafter "VAT Code")

The TA instituted against the Claimant an inspection procedure related to a financial lease contract, executed on 28 March 2012, between the Claimant, in the capacity of financial lessor, and the company B…, Lda., ("B…" or "Customer"), in the capacity of financial lessee, and by understanding that we were in the presence of a simulated operation, it considers that the Claimant proceeded to the undue deduction of VAT that it incurred in the acquisition of the equipment that it gave on financial lease to the Customer, under the terms of no. 3 of art. 19 of the VAT Code ("VAT Code"), and proceeded to the correction of that tax, in the amount of € 26.450,00.

Regarding the acquisition of the Equipment, article 1, no. 4 of the General Conditions of the financial lease contract provides that "the Lessee declares that it has freely chosen the leased asset and the respective supplier and has negotiated directly with the latter the brand, model, respective technical or usage specifications, delivery period and conditions thereof, the price and other applicable aspects mentioned in the Special Conditions of the present contract" and, under the terms of article 4, no. 1 of the General Conditions of the Contract, "the entire process of selection of the leased asset regarding its technical characteristics, warranties, delivery period, price and other sales conditions, was developed directly between the lessee and the supplier".

B… thus chose the leased asset and the respective supplier – C…, Lda., taxpayer no. …. ("C…") – with whom it agreed the price and conditions of delivery of the Equipment, information which it provided to the Claimant for the performance of the Contract.

The Claimant acquired from C…, on 27 March 2015, at the request and according to the instructions of B…, the Equipment for the total value of € 141.450, of which € 115.000,00 as price and € 26.450,00 as VAT at the rate of 23%, with B… confirming in writing and under the terms of the Contract the receipt and installation of the Equipment in its facilities, the Claimant proceeded to the payment of the remainder of the price to C….

Indeed, on 30 March 2012, the Claimant ordered the payment of € 100.232,50, by bank transfer which was completed on 3 April 2012, to the bank account indicated by C… in the invoice issued by the alienation of the Equipment, with the IBAN….

It was, therefore, within the scope of an operation like hundreds of others that it performs within the scope of its activity that the Claimant acquired from C… (chosen by B…) the Equipment (also elected by B…), at the price negotiated between both (C… and B…), at the moment when B… attested having received the same Equipment.

The Claimant thus deems the correction effected regarding this tax entirely illegal and consequently the assessments here in question, since the VAT incurred within the scope of the acquisition of the Equipment given on lease by the Claimant to B… is entirely deductible by the Claimant, under the terms and for the purposes of the provisions in articles 19 and following of the VAT Code.

Illegality of the Inspection Procedure

In the case at issue, the TA formally classified the inspection procedure as an inspection procedure of an internal nature, under the terms of article 13 of the RCPIT, but, although masked under the guise of an inspection procedure of an internal nature, the TA conducted a true external inspection procedure – it performed material acts typical of inspection procedures of an external nature -, from which resulted corrections and tax and interest assessments, without however complying with the legal formalities to which it was bound within the scope of such external procedure, which taints this with illegality, with such illegality projecting itself onto the assessments which are challenged here.

It happens that the TA – by initiating an internal inspection procedure, but performing material acts of external inspection procedure – did not comply with the legal formalities provided for in articles 46 and 49 of the RCPIT, specifically applicable in the context of external inspection procedure.

On the other hand, regarding the duration of the inspection procedure, article 36, no. 2 of the RCPIT provides that "The inspection procedure is continuous and must be completed within a maximum period of six months from the notification of its initiation", and may, under the terms of no. 3 of the same legal provision, "be extended by two further periods of three months", inter alia, in "tax situations of special complexity resulting, namely, from the volume of operations (...)" and in this case, and as mentioned above, the Claimant was notified in January 2014 for the provision of additional information and documents to the TA, without any further legal formality being complied with, such constituting the first material acts of external inspection, from which the counting of the legal period for duration of the inspection procedure should commence.

Thus, and given that the Final Report was notified to the Claimant on 12 August 2015, having elapsed almost a year and a half from the commencement of the performance of material acts of inspection, the present inspection procedure is also illegal by non-compliance with the legally established period of six months.

Being the inspection procedure illegal, by omission and violation of the norms set out above, it is necessarily illegal the Final Report that concludes it, and this cannot but be considered to make illegal the assessments now challenged because they are founded on procedural acts which are themselves illegal, for which reason the assessments of compensatory and default interest are also illegal, and such assessments of interest would in any case, and in any event, be illegal for not being demonstrated that there was culpability or that the delay in assessment is in any way attributable to the Claimant.

Furthermore, the assessment of compensatory interest and the assessment of default interest applied by the TA would suffer from illegality, by violation of the provisions of articles 35, no. 1, and 43, no. 5, of the General Tax Law, inasmuch as their conditions of application are not verified in the case at issue.

1. The ATA – Tax and Customs Administration, called upon to make submissions, contested the claim of the Claimant, defending itself by impugnation, in summary, with the following grounds:

Regarding the alleged Illegality of the Correction and Assessments Challenged by violation of art. 19, no. 3, of the VAT Code.

The controversial assessments originate in the tax inspection procedure, of an internal nature and partial scope, concerning the VAT of the period of March 2012, determined by directive of 26-02-2015 and carried out under the Service Order no. OI2015… by the Tax Inspection Services (SIT) of the Finance Directorate of…, because, within the scope of such procedure, it was concluded that, on 28-03-2012, the said company entered into, with the now Claimant, a financial lease contract with no. … regarding equipment that never existed.

As mentioned above, within the scope of the inspection procedure carried out on the taxpayer B…, Lda., with NIF …, under the Service Order no. OI2014…, of 31-01-2014, it was found that, on 28-03-2012, this entity had entered into a financial lease contract with the Claimant to which corresponds no. ….

Equally, within the scope of that inspection procedure, it was verified that such equipment had been supposedly acquired by the Claimant, having as supporting document the invoice no. …/12, of the company C…, Lda., dated 27-03-2012.

Furthermore, from the diligences carried out within the scope of that procedure, it was concluded that such equipment never existed. These proofs were based not only on the impossibility of physical verification of the equipment, but also on the fact that the company C…, Lda was without any activity since the year 2008, as per information provided by the company's audit firm; that the invoice was issued in a different program from the company's invoicing program, which was the … (S-i); that the payment of the invoice, by the banking institution, was made by transfer to the account of another taxpayer and not to the company's account or someone with a connection to it; in the justification given by the beneficiary taxpayer for the existence of the said transfer which does not relate to B…, Lda but another entity, D…, Lda, and in the information provided by the sole company in Portugal representative of the brand E… and furthermore in the refusal by B…, Lda to show the machine at the moment when it was requested.

For so being, not existing the asset identified in the invoice in question, the Respondent concluded that that invoice did not title a real operation, being thus in the presence of a simulated operation, for which reason, given that no. 3 of article 19 of the Value Added Tax Code provides that «No deduction may be made of tax that results from a simulated operation […]», by force of this legal provision, the VAT mentioned in that document cannot be deducted.

Furthermore, the simulation to which article 19, no. 3 of the VAT Code alludes appeals only to the sense of business without adherence to reality, for which reason the argument presented by the Claimant regarding the fact that the businesses in question are not simulated because it considers that the prerequisites of simulation provided for in article 240 of the Civil Code are not met is without merit.

Moreover, as is well known, it is the reiterated understanding of Community jurisprudence that the right to deduction may be barred not only when the seller participates knowingly in fraud but also in those cases where it has not taken all reasonable measures so as to avoid its participation in a fraudulent scheme.

It happening that, in the case at issue, given the factuality established, as well as the terms of the business conducted, a flagrant evidence is established: at the very least, the Claimant did not take care to take the measures that it had at its disposal to avoid its participation in fraud.

Regarding the alleged Illegality of the Inspection Procedure

Contrary to what is alleged by the Claimant, it is verified from the inspection report that, both by what is determined and recorded therein regarding the purposes and reasons, the scope and place of performance, and by its material content, the said inspection was, in fact, internal, because the inspection acts were performed exclusively in the services of the tax administration through the formal analysis and coherence of the documents, and not totally or partially, in facilities or dependencies of the taxpayers, obliged taxpayers or third parties with whom they maintained economic relations or another place.

In this manner, given that the procedure sub judice is of an internal nature, having regard to the place where it occurred, its initiation did not have to be communicated to the now Claimant, since only the external procedure depends on the credentialing of the officials tasked therewith (no. 1 of article 46 of the RCPITA) and the notification of its initiation (articles 49, 50 and 51, no. 1, all of the RCPITA), there being no obligation to communicate to the Claimant the initiation of the procedure, as we are in the presence of an inspection procedure of an internal nature, for which reason, it is to be concluded that the inspection procedure which was at the origin of the correction in analysis is not illegal.

Even if it were not so, as well noted by the Judgment of the Central Administrative Court of the South, 30-04-2014, issued in case no. 06580/13, "such deadline is of a merely ordering nature, and the sole consequence that results from its violation is that which results from no. 1 of article 46 of the General Tax Law: the period of expiry, which was suspended, ceases this effect, the period being counted from its initiation, or in other words, everything happens as if the inspection had not been made with the period of expiry running continuously and without any suspension.".

Contrary to what is alleged by the Claimant, compensatory interest is due, under the terms provided for in no. 1 of article 35 of the General Tax Law, from which it follows that those are due when, by fact attributable to the taxpayer, the assessment of part or all of the tax due or the delivery of tax to be paid in advance, or withheld or to be withheld within the scope of tax substitution, is delayed.

Furthermore, default interest is also due, not under the terms of no. 5 of article 43 of the General Tax Law, as suggested by the Claimant, but rather under the terms of article 44 of the same normative provision and of article 96, no. 2 of the VAT Code, as furthermore, duly evidenced in the notification of the demonstration of the assessment of interest and whose prerequisites are met – particularly, the non-payment of the tax within its respective legal period.

On the other hand,

It must further be added that, contrary to what is petitioned by the Claimant, even if the present claim were declared substantiated, which is admitted only with caution and by duty of advocacy, no indemnatory interest would be owed to it since the respective prerequisites under the terms provided for in no. 1 of article 43 of the General Tax Law are not met, namely, the necessary prerequisite of the existence of error attributable to the services, for the reason that the Respondent, given the information it had, not contradicted by the Claimant, once bound by the principle of legality, could not have acted otherwise.

1. The tribunal is materially competent and is regularly constituted under the terms of the LFATM.

The parties have legal personality and capacity, are legitimate and are legally represented.

The process suffers from no vices that would render it invalid.

1. It is necessary to resolve the following issues:

a) Whether the tax assessment act and the compensatory and default interest which are the subject matter of the present process are illegal.

b) Whether in the event that the claim for annulment is upheld the Claimant has the right to the reimbursement of the amounts paid and indemnatory and default interest thereon.

II – The relevant facts of the case

2. The TA instituted against the Claimant an inspection procedure related to a financial lease contract executed between the Claimant, in the capacity of financial lessor, and the company B…, Lda, in the capacity of financial lessee.

3. In this context, the Claimant was notified on 29 January 2014 of the Office no. …, of 27 January 2014, to remit to the Finance Directorate of … in writing and within a period of 10 days the following elements:

(i). Copy of the financial lease contract executed between the Claimant and B…;

(ii). Copy of the invoice for purchase of the equipment which is the subject of the financial lease contract; and

(iii). Indication of the period in which the VAT incurred in the acquisition of the equipment which is the subject of the financial lease contract was deducted by the Claimant.

1. In response to the notification by the TA, the Claimant provided the clarification and delivered the requested documents which it accompanied with the receipt document of the equipment which is the subject of the financial lease contract issued by B….

2. Following the documents and clarification provided, the TA prepared and notified the Claimant, on 20 March 2015, of the draft tax inspection report from which appears, in particular, the following:

[Content not provided in source document]

1. The correction to the taxable matter as a result of the conclusions of the inspection procedure initially gave rise to the additional VAT assessment no. 2015 … promoted and notified by the TA to the Claimant from which resulted the value of € 1.293.921,48 as tax payable by the Claimant until 7 October 2015, but subsequently the TA proceeded to its correction by means of the issuance of a new assessment and statement of account adjustment, within the scope of which there was proceeded to the reversal of € 1.267.471,48 (corresponding to the difference between the tax initially assessed – in the amount of € 1.293.921,48 – and the amount of tax effectively to be assessed following the correction to the taxable matter effected by the TA within the scope of the tax inspection procedure which was fixed at € 26.450,00.

2. Also regarding compensatory and default interest, there were initially assessed € 151.016,58 as compensatory interest and € 26.447,20 as default interest, which were subsequently corrected by the TA to € 3.087,04 and € 540,63.

3. The Claimant proceeded to voluntary payment of € 26.450,00 of VAT, on 7.10.2015, as well as to the payment of compensatory interest in the amount of € 3.087,04, on 21.12.2015, and furthermore to the payment of default interest in the amount of € 540,63 on 21.12.2015.

4. The Claimant has engaged, since 1991, in activity in the banking and financial sector in Portugal.

5. Within the scope of this activity, the Claimant entered into, on 28 March 2012, a moveable financial lease contract with B…, relating to an industrial machine brand E…. model: …, with a duration of 60 months and option for the lessor to purchase at the end of the Contract.

6. For the use of the Equipment, B… undertook to payment of advance monthly rent.

7. For guarantee of performance of this obligation to payment of rent by B…, the representatives of B… – F… and R… – presented blank promissory notes subscribed and guaranteed by them.

8. Regarding the acquisition of the Equipment, article 1, no. 4 of the General Conditions of the Contract provides that "the Lessee declares that it has freely chosen the leased asset and the respective supplier and has negotiated directly with the latter the brand, model, respective technical or usage specifications, delivery period and conditions thereof, the price and other applicable aspects mentioned in the Special Conditions of the present contract".

9. Under the terms of article 4, no. 1 of the General Conditions of the Contract, "the entire process of selection of the leased asset regarding its technical characteristics, warranties, delivery period, price and other sales conditions, was developed directly between the lessee and the supplier".

10. Under the terms of the Special Conditions of the Contract and no. 2 of article 4 of the General Conditions: "The Lessor grants a power of attorney to the Lessee, which accepts it, to proceed with the receipt of the leased asset".

11. Under the terms of no. 3 of article 3 of the General Conditions of the Contract: "with the receipt of the documents mentioned in the preceding number the Lessor is authorized to pay the leased asset to the supplier".

12. Under the terms of no. 1 of article 3 of the respective General Conditions, the Contract, although entering into force on the date of its execution, would only produce effects after delivery to the Claimant by B… of some documents, among which "the «receipt and acceptance document» of the leased asset and respective invoice, duly completed, dated and signed by it, certifying that the leased asset was delivered to it in good condition and in accordance with the conditions negotiated with the supplier thereof".

13. On 27 March 2012 the Claimant proceeded to the payment of € 41.217,50 in two tranches – of € 20.000 and € 21.217,50 -, as advance payment on price.

14. On 27 March 2012, B… issued and communicated to the Claimant the receipt and acceptance document of the leased asset in its facilities under the terms of the Contract, in the context of which B… declared "to have received on 27/03/2012 the equipment mentioned above ["Industrial Machines. Brand: E…. Model: ... New"] and that the same was duly delivered and installed by the Supplier and corresponds to the requirements and specificities required by the Lessee, accepting it definitively, without restrictions or reservations, authorizing A…, S.A. to the Payment of the final invoice issued by the Supplier".

15. On 30 March 2012, the Claimant ordered the payment of € 100.232,50, by bank transfer which was completed on 3 April 2012.

16. The said bank transfer was effected to the bank account indicated by C… in the invoice issued by the alienation of the Equipment with the IBAN….

17. Under the terms of no. 5 of article 4 of the General Conditions of the Contract, "The non-delivery of the leased asset by the supplier or its non-conformity with that stated in the Special Conditions do not relieve the Lessee of its obligations to the Lessor, nor do they grant any right to it against the latter, it being incumbent upon it to require of the supplier any indemnification to which it is entitled, under the terms of the law".

18. Under the terms of no. 5 of this article 4 of the General Conditions that "it shall be incumbent upon the Lessee to exercise any action or right against the supplier for non-performance thereof regarding the leased asset," and that "for this purpose, and given the provisions in the preceding numbers regarding the responsibility of the Lessee for the selection of the supplier and for the ordering of the leased asset, the Lessor subrogates, hereby, the Lessee in all possible rights regarding the supplier".

19. The Contract was punctually and fully performed by B… until the month of March 2015, which proceeded to timely payment during three years of all the rents of the Contract that became due until the said date, in a total of 37 monthly rents.

20. The Claimant deducted the VAT incurred with the acquisition of the Equipment which is the subject of the Contract, in the amount of € 26.450,00.

With interest for the decision of the cause, there are no unproven facts.

1. The Tribunal's conviction regarding the decision of the facts of the case was based on the documents contained in the process, as well as the pleadings submitted, it being noteworthy that no divergence occurs between the parties regarding the facts of the case, their disagreement being confined to the matters of law.

III - The Applicable Law

1. Given that the claimant imputed various vices to the tax acts challenged it is necessary to determine the order of consideration of the same, and the order of article 124 of the CPPT should be observed, applicable by force of article 29, no. 1, al. a) of the LFATM[1].

The substantiation of any of the vices invoked by the claimant will lead to the annulment of the tax act. However, the illegality resulting from violation of art. 19, no. 3, of the VAT Code is that which will lead to the "most stable or effective protection of the offended interests" inasmuch as its possible substantiation will prevent the renewal of the act, which does not occur with the annulment resulting from the illegality of the inspection procedure.

In conformity, the Tribunal will first consider the vice of violation of law, by the alleged infraction of art. 19, no. 3, of the VAT Code.

1. Article 19, no. 3, of the Value Added Tax Code provided, as worded at the date of the facts, that:

"No deduction may be made of tax that results from a simulated operation or in which is simulated the price stated in the invoice or equivalent document."

Under the terms of article 11, no. 2 of the General Tax Law:

"Whenever, in tax norms, terms proper to other branches of law are employed, the same should be interpreted in the same sense that they have therein, unless otherwise results directly from the law."

It is thus necessary to begin by investigating the concept of simulation in civil law, the branch from which it originates.

Article 240, no. 1 of the Civil Code establishes the following:

"If, by agreement between the declarant and declaratee, and with the intention of deceiving third parties, there is divergence between the business declaration and the real will of the declarant, the business is said to be simulated."

In the words of Pedro Pais de Vasconcelos "Simulation is a bilateral divergence between will and declaration, which is agreed between the parties with the intention of deceiving third parties. (…)

There are three structural elements of simulation:

-agreement between the parties with the purpose of creating a false appearance of business (pactum simulationis);

-the divergence between declared will and actual will, that is, between the appearance created (externalized business) and the business reality (business actually concluded);

-Intent to deceive third parties."[2]

We are of the opinion that no interpretive element of tax law permits dispensing with any one of these elements.[3]

In the case of the financial lease contract the typical business reality presents itself as tripartite.

On one hand we have the financial lease contract between lessor and lessee, on the other the purchase and sale contract between the supplier and the lessor.

On this subject, FERNANDO GRAVATO DE MORAIS tells us:

"The typical scheme of the financial lease operation, considered globally, is as follows:

-in a first moment, the party interested in entering into the financial lease contract addresses itself to a given supplier, ascertaining the essential characteristics of the specific asset to be leased (thus choosing the thing) and establishing the conditions of acquisition of the concedent;

-then, it addresses itself to the credit institution (or the supplier has until in its forms of the financial lessor with whom it maintains more or less close collaborative relations) and completes a "proposal for financial lease contract", the text of which was previously prepared by that;

-subsequently, such institution, after reviewing and (possibly) approving the proposal, sends the text of the contract to the lessee, which signs it;

-once the business is concluded, the financial lessor acquires or orders the construction of the thing,

-the asset is then delivered by the supplier (directly) to the user, who subsequently subscribes "a receipt and conformity document of the equipment", which has the purpose of attesting the delivery of the asset and the non-existence of defects of the thing".[4]

Although the purchase and sale is concluded between the supplier and the lessor, under the terms of article 1 of Decree-Law no. 149/95, of 24 June the thing which is the subject of the contract is acquired or constructed by indication of the lessee, and under the terms of article 13 of the same Decree-Law this party "may exercise against the seller or contractor, when that be the case, all rights relating to the leased asset or resulting from the purchase and sale or construction contract".

In the case at issue, the factual grounds invoked by the Respondent may indicate collusion between the supplier of the machine and the lessee, with declarations of both at variance with reality with the intention of deceiving the Claimant, but not any divergence between the real will and the declared will on the part of the Claimant nor, as regards the latter, any other of the remaining structural elements of simulation.

And being at issue, as it is, a legal business -purchase and sale- concluded between the Supplier C… and the Claimant and not with the lessee B…, Lda, that is enough for it to be concluded that it is manifestly non-existent to have simulation.

Add to this, furthermore, that in the Portuguese legal system in force, regarding property transmission in the context of purchase and sale, the title system operates and not the mode system, as results, in particular, from articles 874, 879, 882 of the civil code. Thus, the valid conclusion of the purchase and sale contract between C… and the Claimant and the consequent transmission of property was not even dependent on the delivery of the thing which is the subject of the contract.

Moreover, as results from the financial lease contract concluded, it was agreed that delivery would be effected to the lessee and the latter declared that such delivery was made to it.

There is, thus, no indication that the Claimant had knowledge that the equipment in question had not been delivered to the lessee, nor did the Claimant allege this.

1. It is true that, in the response alleged the Respondent that:

"(…) it is the reiterated understanding of Community jurisprudence (…), that the right to deduction may be barred not only when the seller participates knowingly in fraud but also in those cases where it has not taken all reasonable measures so as to avoid its participation in a fraudulent scheme.

It happening that, in the case at issue, given the factuality established, as well as the terms of the business conducted, a flagrant evidence is established: at the very least, the Claimant did not take care to take the measures that it had at its disposal to avoid its participation in fraud", and article 19, no. 4 of the VAT Code provides that "Tax may also not be deducted that results from operations in which the transmitter of the goods or provider of services does not deliver to the coffers of the State the tax assessed, when the taxpayer has or should have knowledge that the transmitter of the goods or provider of services does not have adequate business structure capable of exercising the declared activity."

However, neither did the Respondent invoke this norm in the grounds of the tax act of assessment of the tax (which from the outset would prevent the tribunal from considering such grounds, under penalty of violation of the principle of separation of powers), nor in the present process did it prove the facts comprising the normative provision, which, in all rigor, it did not even allege in a conclusive manner.

Thus being, this allegation of the Respondent also lacks merit.

In summary, not occurring simulation in the purchase and sale contract concluded between the Claimant and the company C…, Lda, which constituted the grounds for the performance of the tax assessment act on value added tax, cannot the same fail to be annulled, with the knowledge of the remaining questions susceptible to justify the annulment of the assessment in question being thus prejudiced.

1. Let us now consider the questions relating to compensatory interest and default interest assessed to the Claimant.

Article 24 of the LFATM establishes:

"1 - The arbitral decision on the merit of the claim with respect to which no appeal or impugnation is available binds the tax administration from the end of the period provided for appeal or impugnation, and this, in the exact terms of the substantiation of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary performance of decisions of tax judicial tribunals, alternatively or cumulatively, as the case may be:

a) (…);

b) Reestablish the situation that would exist if the tax act which is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for such purpose;

c) Review the tax acts which are in a relation of prejudiciality or dependence with the tax acts which are the subject of the arbitral decision, in particular as they are inscribed within the scope of the same legal relation of tax, albeit corresponding to distinct periodic obligations, altering or replacing them, in whole or in part;

(…)"

This article is in harmony with the norm of article 100 of the General Tax Law which establishes that "The tax administration is obliged, in case of full or partial substantiation of complaints or administrative appeals, or of judicial process in favor of the taxpayer, to the immediate and complete reestablishment of the situation that would exist if the illegality had not been committed, including the payment of indemnatory interest, under the terms and conditions provided by law."

From these norms it follows that, the tax assessment act on value added tax annulled, the tax assessment act on compensatory interest cannot fail to be annulled, as well as the default interest assessed.

Moreover, it will always be said that, article 96, no. 2 of the VAT Code establishing that "Whenever the tax assessed by the services or by the taxpayer is not paid until the end of the legal periods established, default interest is due under the terms of article 44 of the general tax law". Now, the Claimant not having failed to pay the tax within the legal period following the assessment, the default interest would always lack legal basis.

1. The Claimant furthermore came to petition the condemnation of the Respondent to refund the amounts paid corresponding to the assessment which is the subject of the present process, as well as the respective indemnatory interest.

In the case at issue, it is manifest that, following the illegality of the assessment acts, there is place for reimbursement of the tax, by force of the aforementioned articles 24, no. 1, alínea b), of the LFATM and 100 of the General Tax Law, as such is essential to "reestablish the situation that would exist if the tax act which is the subject of the arbitral decision had not been performed".

Regarding indemnatory interest, article 24, no. 5 of the LFATM, in establishing that "payment of interest, regardless of its nature, is due under the terms provided in the general tax law and in the Tax Procedure and Process Code" should be understood as allowing the recognition of the right to indemnatory interest in the arbitral process, it being incumbent upon it to consider this claim in light of article 43 of the General Tax Law, applicable by force of the provision in letter a) of no. 1 of article 29 of the LFATM.

Article 43, no. 1 thereof provides that "Indemnatory interest is due when determined, in informal review or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount superior to that legally due".

We support the understanding of Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa who sustain that "The error attributable to the services which performed the assessment is demonstrated when they proceed with informal review or judicial impugnation of that same assessment and the error is not attributable to the taxpayer."[5]

In the case "sub judice", the error which gave rise to the assessments, now annulled, not being attributable to the Claimant, the claim for condemnation of the Respondent regarding indemnatory interest cannot fail to be approved.

Thus, the Tax and Customs Authority must give execution to the present decision, under the terms of article 24, no. 1, of the LFATM, refunding the amounts paid by the Claimant relating to the annulled assessments, with indemnatory interest, at the legal rate.

Indemnatory interest is due from the date of payment until that of processing of the credit note, in which it is included (article 61, no. 5, of the Tax Procedure and Process Code).

1. The Claimant furthermore came to petition the condemnation of the Respondent to payment of "default interest, if applicable".

Default interest in favor of the taxpayer is provided for in article 43, no. 5, of the General Tax Law, which establishes the following:

"In the period that elapses between the date of the end of the period of voluntary performance of judicial decision with res judicata force and the date of issuance of the credit note, regarding tax that should have been refunded by judicial decision with res judicata force, default interest is due at a rate equivalent to double the rate of default interest defined in the general law for debts to the State and other public entities".

This norm has a sanctionary and compulsory nature[6], being applicable when the Tax Administration does not give timely performance to the decision issued by the tribunal, with res judicata force, which imposed the obligation to refund paid tax.

It is manifest, therefore, that the unlawful omission which is the prerequisite of application of the norm has not occurred, nor could it yet have occurred.

In any case, and previously, it is to be noted that, as writes Jorge Lopes de Sousa "(…)the performance of the duty to execute and the consequences of its non-performance are situated downstream of the arbitral process, as the arbitral tribunals which function in the CAAD do not have executive competences, as results from article 2, no. 1, of the LFATM.[7]

For this reason, should the Administration not give performance to the duty to execute or perform that duty in terms different from those which the taxpayer considers to be appropriate, this will have to use the process of execution of judicial decisions, provided for in articles 173 and following of the Administrative Procedure Code, applicable by force of the provision in article 29, no. 1, letters a) and c) of the LFATM, and in articles 102 of the General Tax Law, and 146, no. 1, of the Tax Procedure and Process Code"[8]

Supporting this understanding, the material incompetence of the Arbitral Tribunal is declared as regards this claim and, in consequence, the Respondent is absolved of the instance in relation to this claim.

IV - Decision

Thus, the arbitral tribunal decides:

a) To decree the annulment of the acts of assessment of VAT and compensatory and default interest, which are the subject of the present process.

b) To condemn the Respondent to refund to the claimant the amounts paid with indemnatory interest at the legal rate, reckoned from the date of payment by the claimant until that of processing of the credit note.

c) To absolve the Respondent of the instance as regards the claim for condemnation in default interest.

Value of the claim: € 30.077,67 (thirty thousand, seventy-seven euros and sixty-seven cents), under the terms of the provision in article 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, letter a), of the Tax Procedure and Process Code and 3, no. 2, of the Regulation of Costs in Arbitration Processes.

Costs incurred by the Respondent, in the amount of € 1.836,00 (one thousand eight hundred and thirty-six euros) under the terms of no. 4, of article 22, of the LFATM.

Notification thereof.

Lisbon, CAAD, 12.09.2016

The Arbitrator

Marcolino Pisão Pedreiro

[1] See Jorge Lopes de Sousa, Commentary to the Legal Framework for Arbitration in Tax Matters, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, page 202.

[2] GENERAL THEORY OF CIVIL LAW, Almedina, 2012, 6th Edition, page 682.

[3] Without prejudice to our opinion that "tax simulation, although based in good part on the conceptual formulation of civil law, is necessarily a figure with specific features. From the outset, because for the occurrence of tax simulation, it becomes necessary that from the same results a distortion of the quantification of the tax obligation. The law expressly prohibits the performance of useless acts (article 57, no. 1 of the General Tax Law), for which reason the Tax Administration cannot declare for tax purposes a civil simulation, if from the same there has not resulted a distortion of the assessment of tax. The identical conclusion is reached by the application of the principle of efficiency of public administration (article 267, no. 5 of the Constitution of the Portuguese Republic)", as we wrote in the article "Some reflections on special regimes of simulation in Tax Law: VAT, Real Estate Transfer Tax and Corporate Income Tax", JOURNAL OF PUBLIC FINANCES AND TAX LAW, pages 143-144, In identical sense is pronounced João Ricardo Catarino in LESSONS OF TAXATION, Vol. II, Almedina, 2015, João Ricardo Catarino-Vasco Branco Guimarães (coord.), pages 68-69.

[4] MANUAL OF FINANCIAL LEASE, Almedina, 2006, pages 25-26.

[5] GENERAL TAX LAW, Annotated and Commented, Almedina, 4th Edition, 2012, page 342.

[6] In this sense Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, cited work, page 344.

[7] Commentary to the Legal Framework for Arbitration in Tax Matters, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, page 213.