Process: 303/2013-T

Date: July 31, 2014

Tax Type: IVA

Source: Original CAAD Decision

Summary

This arbitral decision (Process 303/2013-T) addresses a VAT regularization claim by a Portuguese public entity seeking to recover €90,445.55 in allegedly excess VAT paid during 2008 and 2009. The claimant, a municipality subject to the normal monthly VAT regime, conducted an internal review and concluded it had incorrectly applied VAT deduction methods for mixed-use resources. The entity performs both authority functions (excluded from VAT under Article 2(2) of the VAT Code) and commercial operations (subject to VAT), making it a mixed taxpayer. The claimant argued it should have applied the pro rata method for common resources used across all municipal activities, and the actual allocation method with objective criteria for resources used simultaneously in water distribution services (taxable) and wastewater/waste treatment (non-taxable). After filing a substantiated request for official review on 28 December 2012, the Deputy Director-General of the Tax and Customs Authority rejected the claim on 26 July 2013. The Tax Authority contested the arbitral tribunal's jurisdiction ratione materiae, arguing that the claimant failed to identify specific self-assessment acts (concrete periodic VAT declarations) subject to challenge. Instead, the claimant merely referenced tax years without specifying which monthly declarations contained errors. The Authority invoked Article 2 of the RJAT and Article 10(2)(b), emphasizing that arbitral proceedings require identification of definite acts being challenged. The procedural objection raised fundamental questions about whether a general request for VAT regularization covering entire tax years, without identifying specific periodic returns, constitutes a valid reviewable act under Portuguese arbitration law governing tax disputes.

Full Decision

CAAD TAX ARBITRATION DECISION

Claimant: A

Respondent: Tax and Customs Authority

Subject Matter: VAT: Regularization/deduction of VAT paid in excess

I

REPORT

  1. On 23 December 2013, A, with the Tax Identification Number …, and with registered office at …, hereinafter referred to as the "Claimant", came to request the constitution of an arbitral tribunal, in accordance with and for the purposes of the provisions of Article 10 of Decree-Law No. 10/2011 of 20 January (hereinafter the RJAT) and to present the request for arbitral decision.

  2. In the request for arbitral decision, the Claimant chose not to designate an arbitrator.

  3. Pursuant to subsection (a) of Article 6(2) and subsection (b) of Article 11(1) of the RJAT, the Deontological Council, on 10 February 2014, designated as arbitrators the undersigned, who accepted the office within the legally established period.

  4. In accordance with the provisions of subsection (c) of Article 11(1) of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 13 December, the arbitral tribunal was constituted on 25 February 2014.

  5. The subject matter of the arbitral decision is the request for official review of VAT self-assessment, presented by the Claimant on 28 December 2012, for regularization/deduction of VAT paid in excess in the years 2008 and 2009 (in the total amount of € 90,445.55), which was rejected by order of the Deputy Director-General of the Tax and Customs Authority, dated 26 July 2013.

  6. The Claimant requests that the tribunal declare illegal the act of self-assessment in question, with the consequences arising therefrom, namely the annulment of the decision on the request for official review presented and, consequently, permitting the deduction of the amount of VAT paid in excess during the years 2008 and 2009, in the total amount of €90,445.55.

  1. The Claimant's position

7.1. The Claimant is a public legal entity that is subject, for VAT purposes, to the normal monthly regime.

7.2. In pursuing its functions, the Claimant carries out a vast set of operations within the scope of its authority powers, which are excluded from VAT subjection, under the provisions of Article 2(2) of the VAT Code.

7.3. The Claimant also carries out a set of operations that are not within the scope of its authority powers, and are therefore subject to VAT under the general terms of the law.

7.4. Within the scope of an internal review of procedures, the Claimant verified that, in its view, it had paid VAT in excess in its activities in the years 2008 and 2009, insofar as it only deducted the tax incurred in the acquisition of certain resources, by application of the actual allocation method.

7.5. The Claimant concluded that the correct deduction methods were not applied, in particular, in the following situations:

a) For resources of "mixed" use (i.e., resources used indiscriminately for the municipality's activity as a whole, whether subject or not subject to VAT, commonly also referred to as "common resources"), the respective VAT incurred could be deducted partially (through the pro rata method); and

b) With respect to resources simultaneously allocated to the provision of water distribution services (taxed and conferring deduction rights), wastewater treatment and waste treatment (these services being not subject to VAT, and therefore not conferring deduction rights), the respective VAT could also be deducted partially, in this case through application of the actual allocation method, with objective criteria that permit determining to what extent such resources are used in taxed activity (i.e., in water distribution).

7.6. With a view to recovering the VAT paid in excess, the Claimant presented, on 28 December 2012, a properly substantiated request for official review, requesting authorization from the Tax Authority to effect the regularization/deduction of VAT paid in excess during the years 2008 and 2009, in the total amount of €90,445.55.

7.7. The Claimant was notified on 24 September 2013 of the rejection of the request for official review presented.

  1. The Tax and Customs Authority's position

The Tax and Customs Authority (hereinafter the Respondent or the TA), duly notified to that effect, contested the Claimant's position by way of exception, invoking the incompetence of the arbitral tribunal ratione materiae, pursuant to subsection (a) of Article 2 of Ordinance No. 112-A/2011 of 22 March, arguing that:

8.1. In the entire submission presented by the Claimant, no concrete tax assessment act is identified relating to the years 2008 and 2009 that is being impugned, nor any Model C declaration (self-assessment declaration of substitution), relating to any tax period of the mentioned years;

8.2. In effect, the years 2008 and 2009 are identified as those in which the alleged illegality that is intended to be remedied would have occurred, seeking that, in relation to the said years, the right to deduction of tax be recognized which, according to the Claimant, due to error may have been deducted deficiently, given its status as a mixed taxpayer;

8.3. The Claimant requests, therefore, that the tribunal declare the illegality of an act that does not exist;

8.4. Under Article 2 of the RJAT, the competence of arbitral tribunals comprises, among others, the assessment of claims relating to the "declaration of illegality of tax assessment acts, self-assessment, withholding at source and payment on account acts";

8.5. In this context, and given the provisions of Article 10(2)(b), in the request for constitution of an arbitral tribunal, there must appear the "identification of the act or acts being the subject matter of the request for arbitral decision", which does not occur in the present proceedings;

8.6. In effect, the Claimant did not identify any (concrete and definite) act of self-assessment of tax, limiting itself to indicating the years in which, in its view, the alleged illegalities that it intends to remedy would have existed;

8.7. What the Claimant intends is that, with respect to the years 2008 and 2009, the right to deduction of tax be recognized that would have been "allegedly" deducted deficiently, following an internal review of its procedures;

8.8. It is well known to all that VAT is self-assessed, in the sense that it is the taxpayer himself who calculates the tax owed and declares it to the administration (Articles 27 and 29 of the VAT Code);

8.9. Furthermore, this self-assessment of tax is effected through the submission of the periodic declaration (sent by electronic data transmission), the periodicity of which, monthly or quarterly, is determined by the turnover of the taxpayer (Article 41(1)(a) and (b)). In this way, in the concrete case at hand, the object (mediate) of the request for arbitral decision would, necessarily, have to correspond to one or more periodic tax declarations (those in which the legal discrepancies that are intended to be corrected are shown) and not, as results from the initial petition, two years of tax;

8.10. Thus, the tribunal will never be able to exercise the powers conferred upon it by law (namely, to declare the illegality of acts of self-assessment of taxes), since, beyond not knowing which "self-assessment acts" are to be reviewed, it also does not know the defects that, specifically, the Claimant imputes to each of them;

8.11. In these circumstances, there exists an exception (dilatory) which, translating itself into the non-existence of a reviewable object in arbitral proceedings, prevents the knowledge of the claim, and therefore should determine the discharge of the Respondent from the instance, given the provisions of Articles 576(1) and 577(a) of the Code of Civil Procedure, applicable ex vi Article 29(1)(e) of the RJAT;

8.12. On the other hand, translating the claim into the "annulment of the decision rejecting the request for official review presented and, consequently, permitting the deduction of the amount of VAT paid in excess during the years 2008 and 2009, in the amount of €90,455.55", there also occurs a dilatory exception, preventing the continuation of the proceedings;

8.13. In truth, the reviewable act that is the basis of the claim formulated by the Claimant would fall outside the material scope of tax arbitration, as established by the legislator of the RJAT. The claim formulated by the Claimant is directed at condemning the TA to recognize the right to deduction of VAT that (allegedly) it supported improperly;

8.14. The said claim has no basis in the present arbitral instance. In effect, the scope of competence of arbitral tribunals constituted under the provisions of the RJAT does not contemplate the possibility of assessment of claims tending toward the recognition of rights in tax matters. A circumstance that results from the letter of Article 2(1) of the RJAT which, as is known, defines the types of claims that may be assessed by arbitral tribunals in tax matters;

8.15. The same results, equally, from the comparison between the law authorizing the legislature under which tax arbitration was instituted – namely when it referred therein that "The tax arbitral process must constitute an alternative procedural means to the process of judicial challenge and to the action for recognition of a right or legitimate interest in tax matters" (cf. Article 124(2) and (4)(b) of Law No. 3-B/2010 of 28 April) and that which, in fact, came to be established in the RJAT. From this results, unequivocally, that the legislator chose not to contemplate (in the RJAT) the possibility of assessment of claims tending toward the recognition of rights in tax matters. Consequently, the claim formulated could only have as its object the assessment of the (il)legality of one or more acts of tax assessment;

8.16. There thus occurs an exception (dilatory) of material incompetence of the arbitral tribunal;

8.17. In this sense, the CAAD has already pronounced itself, in decision No. 126/2013-T, in which it was concluded that, since the Claimant had not requested in the subsidiary claim any assessment of the legality of acts of tax assessment, self-assessment, withholding at source, payment on account or determination of the taxable matter, the Tribunal considers itself incompetent to know thereof;

8.18. Thus, in the terms set out above, we verify that there exists an exception (dilatory) which, embodied in the material incompetence of the arbitral tribunal, prevents the knowledge of the claim and therefore should determine the discharge of the Respondent from the instance, given the provisions of Articles 576(1) and 577(a) of the Code of Civil Procedure, applicable ex vi Article 29(1)(e) of the RJAT.

  1. The tribunal notified the parties to make submissions on the question of the incompetence of the arbitral tribunal ratione materiae, pursuant to subsection (a) of Article 2 of Ordinance No. 112-A/2011 of 22 March.

  2. The Claimant defended the competence of the arbitral tribunal, arguing, in summary:

10.1. Pursuant to Ordinance No. 112-A/2011, the Tax Authority binds itself to the jurisdiction of arbitral tribunals whose object is the assessment of claims relating to taxes whose administration is entrusted to them, with the exception, among other situations, of "claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative remedy, in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process";

10.2. Now, the analysis of the legality of the acts of self-assessment in discussion in the present proceedings was effectively preceded by recourse to the administrative remedy, insofar as a request for official review was presented by the Claimant, pursuant to Article 78 of the General Tax Law;

10.3. In fact, and as admitted by the CAAD itself in various decisions rendered, the request for official review should be equated with a grace period appeal;

10.4. In effect, since the Tax Authority has already pronounced itself on the possibility of altering or reviewing the self-assessment in question, it makes no sense for the Claimant to be obliged to appeal graciously against that same self-assessment (moreover, that is not the legally admissible remedy in the case at hand, but rather precisely the request for official review) so that, subsequently, it may resort to the CAAD to have the matter decided. It is further added that, both in the official review procedure and in the grace period appeal procedure, the Tax Authority examines the assessment being challenged and issues an opinion on that assessment, its legality and expediency;

10.5. Article 2(a) of Ordinance No. 112-A/2011 should therefore be interpreted in the sense of encompassing not only grace period appeals, but also requests for official review of tax acts which, for this purpose, should be equated with the grace period appeal;

10.6. There are, in fact, several CAAD decisions that confirm the binding of the Tax Authority to the jurisdiction of arbitral tribunals, in proceedings entirely similar to the present one and where this question was also raised and analyzed;

10.7. Thus, we highlight the decisions rendered by the CAAD within the scope of Cases 48/2012-T, 50/2012-T, 117/2013-T, 245/2013-T, as well as the Interlocutory Decision rendered in Case No. 141/2012-T.

II

Assessment

  1. It is necessary to know from the outset the question of the competence or incompetence of the arbitral tribunal to know of the present matter. Thus,

11.1. The present request for arbitral decision was deduced following notification to the Claimant of the decision rejecting the request for official review that it had presented on 28 December 2012, for regularization/deduction of VAT paid in excess in the years 2008 and 2009, in the total amount of € 90,445.55;

11.2. In the request for arbitral decision, the Claimant petitioned the tribunal to declare "illegal the act of self-assessment in question with the consequences arising therefrom, namely the annulment of the decision rejecting the request for official review presented and, consequently, permitting the deduction of the amount of VAT paid in excess during the years 2008 and 2009, in the total amount of €90,445.55";

11.3. It is important to note that the act being challenged in the present proceedings is the rejection of the request for regularization of deductible VAT, issued on 20 July 2013;

11.4. Law No. 3-B/2010 of 28 April, which approved the State Budget for 2010, contains in Article 124 a legislative authorization relating to arbitration in tax matters, as an alternative form of judicial resolution in tax matters, providing that the said arbitration constitutes an alternative means to the process of judicial challenge and to the action for recognition of a right or legitimate interest established in the CPPT;

11.5. In the exercise of the said legislative authorization, the Government approved Decree-Law No. 10/2011 of 20 January (known as the RJAT), which regulates tax arbitration;

11.6. In accordance with the provisions of Article 2(1)(a) of the RJAT, the competence of arbitral tribunals comprises the assessment of the declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account;

11.7. Article 4(1) of the RJAT provides that "the binding of the tax administration to the jurisdiction of tribunals constituted under the terms of the present law depends on an ordinance of the members of the Government responsible for the areas of finance and justice". Consequently, the Government published Ordinance No. 112-A/2011;

11.8. In that sequence, Article 2(a) of the said ordinance provides that the binding of the TA to arbitral jurisdiction has as its object the assessment of claims relating to taxes whose administration is entrusted to them, referred to in Article 1 of the RJAT, "with the exception of claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative remedy in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process";

11.9. From what has been said, it follows that, in the present situation, the mandatory precedence of a grace period appeal was always required, in accordance with the provisions of Article 131(1) of the CPPT;

11.10. Without prejudice to the fact that, as was concluded in the decision rejecting the request for official review under consideration, it is still, abstractly, possible to raise the illegality of acts of self-assessment, pursuant to Articles 78(1) and (2) of the General Tax Law;

11.11. The jurisprudence has followed the understanding, which is not questioned, that, given the administrative nature of the official review procedure, it is capable of being equated with the provisions of Article 131(1) of the CPPT for purposes of subsequent challenge of its decision of rejection;

11.12. However, this equation is legally prohibited in arbitral proceedings, and the assessment of claims relating to the declaration of illegality of acts of self-assessment that have not been preceded by recourse to the administrative remedy, in accordance with Article 131 of the CPPT, but only of official review, in accordance with Article 78 of the General Tax Law, is excluded from the material competence of arbitral tribunals;

11.13. Article 2(a) of Ordinance No. 112-A/2011 literally excludes from the scope of the binding of the TA to arbitral jurisdiction, "….claims relating to the declaration of illegality of acts of self-assessment (…) that have not been preceded by recourse to the administrative remedy, in accordance with Articles 131 to 133 of the CPPT", and does not refer here to the official review provided in Article 78 of the General Tax Law as a valid exception to that exclusion first stated.

11.14. From the wording given to the cited legal provision, it is evident that the legislator chose to restrict the knowledge in arbitral jurisdiction to claims that, being related to the declaration of illegality of acts of self-assessment, have been necessarily and only preceded by the grace period appeal provided in Article 131 of the CPPT;

11.15. Moreover, if this were not so, it would be enough for the legislator to have reduced the exclusion provided in Article 2(a) of Ordinance No. 112-A/2011 to the expression "that have not been preceded by recourse to the administrative remedy", distinguishing nothing further;

11.16. However, the legislator chose to include the express reference of prior recourse to the administrative remedy in the terms, in this case, of Article 131 of the CPPT, that is, by way of presentation of a necessary grace period appeal, regardless of its grounds;

11.17. From the interpretive elements available, no other interpretive solution is reached for the situation sub judice than one that considers that the TA, in accordance with Ordinance No. 112-A/2011, only bound itself to the jurisdiction of arbitral tribunals when the request for declaration of illegality of an act of self-assessment had been preceded by recourse to the administrative remedy of grace period appeal;

11.18. And when reference is made to recourse to the administrative remedy of grace period appeal, it is intended to refer only to the means provided in Articles 131 to 133 of the CPPT, given the literal element and, consequently, inescapable, of Article 2(a) of Ordinance No. 112-A/2011, without prejudice, as has already been referred, to the jurisprudential understanding that, given the administrative nature of the official review procedure, it is possible to equate it with the provisions of Article 131(1) of the CPPT for purposes of subsequent challenge of its decision of rejection before common tax tribunals;

11.19. Given the voluntary and conventional nature of arbitration (here understood in its broad sense, since the material competence of arbitration tribunals results from public regulation effected in the RJAT), in the terms set out above, the interpreter cannot enlarge the object established by the legislator regarding the binding of the TA to arbitral jurisdiction;

11.20. In this sense, reference can be made to the arbitral decision of 9 November 2012, rendered in Case No. 51/2012-T, in which it is stated:

"The request for official review may be alternative to the appeal, may be complementary, may even in the official review procedure the taxpayer's claim have been assessed, but considering the voluntary nature of arbitration, the interpretation adopted cannot, in any case, translate itself into a restriction of the sphere of freedom of the TA, as a party, to establish the limits of its binding. This would only not be so if its position implied the total frustration of the object intended with the institution of tax arbitration, which is not the case.

Note, under this angle, that the Tribunal does not pronounce itself on the doctrinal construction on which the equation of the official review procedure, by initiative of the taxpayer, to the grace period appeal procedure is based, for purposes of judicial challenge. It simply holds that from the principle of the establishment of the arbitral procedure as a means of resolution of tax disputes alternative to the judicial challenge procedure, does not automatically follow the extension of the binding of the TA to all situations in which, doctrinally and/or jurisprudentially, such challenge is considered admissible".

And it is concluded in this arbitral decision that:

"In sum, the scope of the binding of the TA is circumscribed in the terms in which it is expressed in Ordinance No. 112-A/2011, which, in the case sub judice, is the regime provided in Article 132 CPPT, which requires prior grace period appeal, even though, for purposes of challengeability of the act, the prevailing doctrine and a certain current of judicial tax tribunals may admit in the alternative prior official review. In effect, the equation of tax arbitral tribunals to those is limited by the voluntary nature of the TA's adhesion to arbitral jurisdiction";

11.21. In this way, just as is referred to in the arbitral decision just cited, if it is true that the taxpayer who has not presented a timely grace period appeal is not, ipso facto, prevented from requesting the review of the withholding act under Article 78 of the General Tax Law, within the conditioning provided therein, and challenging judicially the decision that rejects the request for review (cf. Article 95(d) of the General Tax Law), it also does not seem questionable to state that the TA only bound itself, in accordance with Ordinance No. 112-A/2011, to the jurisdiction of arbitral tribunals if the request for declaration of illegality of an act of self-assessment had been preceded by recourse to the administrative remedy of grace period appeal;

11.22. Therefore, given that the Claimant followed the path of official review (sibi imputat), of its decision of rejection, it may only follow judicially through judicial challenge;

11.23. In this sense, as Jorge Lopes de Sousa concludes correctly, in Code of Tax Procedure and Process, Vol. II, Áreas Editora, 6th edition, pages 65, 409 and 410, respectively:

"Article 2 of DL No. 10/2011 limits the activity of arbitral tribunals to the assessment of claims listed in its Article 2 […] However, that diploma makes the binding of the tax administration to the jurisdiction of tribunals dependent on an ordinance of the members of the Government responsible for the areas of finance and justice (Article 4(1)), so that activity is conditioned by the terms in which the binding is concretized.

[…]

In addition to the possibility of challenging before tribunals decisions of grace period appeals, starting from the implementation of arbitration in tax matters, operated by DL No. 10/2011 of 20 January and by Ordinance No. 112-A/2011 of 22 March (the DGCI and the DGAIEC bound themselves only from 1-7-2011), taxpayers may request the constitution of arbitral tribunals, to obtain the declaration of illegality of acts of self-assessment, as results from Article 2(a) of that Decree-Law. In accordance with the provisions of Article 2(a) of Ordinance No. 112-A/2011 of 22 March, with respect to acts of self-assessment, the Tax Administration only bound itself to the jurisdiction of arbitral tribunals if the request for declaration of illegality had been preceded by recourse to the administrative remedy, that is, by a grace period appeal.

Therefore, if the taxpayer intends to present a request for declaration of illegality before an arbitral tribunal, the grace period appeal will always be necessary regardless of its grounds";

11.24. It should further be noted that Ordinance No. 112-A/2011 was approved and published after extensive and copious jurisprudence that affirmed that, given the administrative nature of the official review procedure, it is possible to equate it with the provisions of Article 131(1) of the CPPT for purposes of subsequent challenge of its decision of rejection;

11.25. Now, if the legislator did not provide, in Article 2 of that ordinance, for the official review procedure as being equatable to recourse to the administrative remedy, particularly a grace period appeal, for purposes of accessing the request for arbitral decision, it was certainly because it did not intend to do so;

11.26. It is not intended to restrict the interpretation to its literal element, but rather to extend it, as the law commands, to the remaining interpretive elements, in this case, "…to reconstitute from the texts the legislative thought, taking particularly into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied" (see Article 9(1) of the Civil Code);

11.27. In effect, it is reiterated, the legislator in Article 2(a) specifically completed the expression "that have not been preceded by recourse to the administrative remedy" with the express mention "in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", without having included therein the official review procedure, notwithstanding the abundant jurisprudence in that sense and despite having the faculty to, very simply, dispense with the mentioned final part of the said subsection;

11.28. It is a forced interpretation to conjecture that the legislator legislated in such an imperfect manner, forgetting this reference, when there was already vast jurisprudence and when it was already repeatedly followed by the TA's actions. Therefore, this latter part of the provision cannot, under pain of manifest illegality, be set aside, interpreting the rule as if this specific reference simply did not exist;

11.29. As is stated in the Opinion of the Ombudsman relating to amendments in the area of tax arbitration contained in the Bill for the State Budget for 2012, of 9 November 2011, authored by assessor Mariana Vargas "The Government confessedly intended that "Tax arbitration, as contemplated in the Tax Arbitration Regime [come] to present a narrower scope in relation to what appeared in the legislative authorization of the state budget for 2010, out of awareness that it was, and continues to be, an innovative experience that does not come without its risks" (citation of Sérgio Vasques, who was Secretary of State for Tax Affairs, taken from his text published in the October 2011 Newsletter of the CAAD, available at http://www.caad.org.pt/content/content/id/124/s/3)

11.30. In sum, given the foregoing, it is concluded that by force of what is provided in Article 2(a) of Ordinance No. 112-A/2011, disputes that have as their object the declaration of illegality of acts of self-assessment, as occurs in the situation sub judice, are excluded from the material competence of arbitral tribunals, if they are not preceded by a grace period appeal in accordance with Article 131 of the CPPT, regardless of whether it is mandatory in accordance with the cited provision or the taxpayer has opted for official review;

11.31. The understanding just advocated, that disputes that have as their object the declaration of illegality of acts of self-assessment, as occurs in the present situation, are excluded from the material competence of arbitral tribunals if they are not preceded by a grace period appeal in accordance with Article 131 of the CPPT, is imposed by force of the constitutional principles of the rule of law and separation of powers (Articles 2 and 111, both of the Constitution of the Republic), as well as of legality (Articles 3(2) and 266(2), also of the CRP), as a corollary of the principle of the indisposability of tax credits inherent in Article 30(2) of the General Tax Law, which bind the legislator and all the activity of the TA;

11.32. In effect, the terms in which Article 4(1) of the RJAT is drafted impose the conclusion that the binding of the TA is continuously dependent on and delimited by the will expressed in Ordinance No. 112-A/2011;

11.33. And, given the voluntary and conventional nature of arbitral protection, understood in its broad sense, since the material competence of arbitration tribunals results from public regulation effected in the RJAT, the interpreter cannot amplify the object established by the legislator regarding the binding of the TA to that jurisdiction. This is so because, in establishing, in accordance with the provisions of Article 4(1) of the RJAT and Article 2(a) of Ordinance No. 112-A/2011, the binding of the TA to necessary arbitral protection, the legislator is disposing of general interests, previously delimiting the defense of the public interest in the aspect of the indisposability of tax credits;

11.34. The TA only bound itself to have assessed by the CAAD claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account, provided that preceded by recourse to the administrative remedy (broad concept), but only, among those, those referred to (narrower scope) in Articles 131 to 133 of the CPPT, where official review is not found. Had the legislator intended the TA to bind itself to challenges of acts of second instance, consisting of rejection of official review, it would necessarily have had to say so in that legal provision, which it did not do. And not having done so, excluded from that binding is the assessment of illegalities that result from acts of rejection of review requests, as if it were a mandatory grace period appeal.

The interpretation cannot rest solely on the analysis of the literal element, but neither can it ever contradict it so openly. It cannot allow in through the window what did not enter through the door. In other words, in this concrete case, to consider that we can also require the TA to bind itself to challenges that result from acts of rejection of requests for official review, when it declared that it did not wish to bind itself on those terms.

The two acts are of a different nature and official review did not become converted into a grace period appeal only for purposes of access to the CAAD.

11.35. Thus, in the sequence and in consequence of all the foregoing, it is concluded that the arbitral tribunal is materially incompetent to assess and decide the claim being the object of the dispute sub judice, in accordance with Articles 2(1)(a) and 4(1), both of the RJAT and Articles 1 and 2(a), both of Ordinance No. 112-A/2011, which constitutes a dilatory exception preventing the knowledge of the merits of the case, in accordance with the provisions of Article 576(1) and (2) of the CPC, ex vi Article 2(e) of the CPPT and Article 29(1)(a) and (e) of the RJAT, which prevents the knowledge of the claim and the discharge of the TA from the instance, in accordance with Articles 576(2) and 577(a) of the CPC, ex vi Article 29(1)(a) and (e) of the RJAT;

11.36. Were this not to be understood in this manner, the interpretation is not only illegal, but manifestly unconstitutional, due to violation of the constitutional principles of the rule of law and separation of powers (Articles 2 and 111 of the CRP), as well as of legality (Articles 3(2) and 266(2), also of the CRP), as a corollary of the principle of the indisposability of tax credits (Article 30(2) of the General Tax Law), which bind the legislator and all the activity of the TA.

11.37. In conclusion:

· We are facing a reserve of the administration as results from the legislation above referred to;

· The reserve of the administration means that the judicial power (through common courts or arbitral tribunals) must strictly respect the decisions of the Administration;

· In this case it is a matter of interpreting an ordinance (generic administrative act) where the Administration (represented by the Minister of Justice and the Minister of Finance) decides to bind itself to the jurisdiction of tax arbitration, in the terms previously referred to.

· We are not, in this case, facing a simple interpretation of a regulatory norm (contained in an ordinance), but rather the interpretation of a manifestation of will, albeit manifested in terms of a generic provision;

· Therefore, in this case, the powers and duties of the Administration should be respected, as they result from the regulation that leads to self-binding in its strict terms;

· Article 9(2) of the Civil Code establishes that the interpreter cannot consider the legislative thought that does not have in the letter of the law the minimum of verbal correspondence;

· Article 9(3) of that provision establishes that in fixing the meaning and scope of the law, the interpreter will presume that the legislator established the most appropriate solutions and knew how to express his thought in adequate terms;

· This article excludes the possibility of corrective interpretation, and it is certain that to include in Article 2 of Ordinance 112-A/2011 Article 78 of the General Tax Law, a completely different diploma, constitutes an evident corrective interpretation;

· In the same sense go Articles 236, 237 and 238 of the Civil Code, as well as the arbitral decision of 9 November 2012, rendered in the scope of Case No. 51/2012-T: "The request for official review may be alternative to the appeal, may be complementary, may even in the official review procedure the taxpayer's claim have been assessed, but considering the voluntary nature of arbitration, the interpretation adopted cannot, in any case, translate itself into a restriction of the sphere of freedom of the TA, as a party, to establish the limits of its binding. This would only not be so if its position implied the total frustration of the objective intended with the institution of tax arbitration, which is not the case";

· Thus, this tribunal is materially incompetent to assess and decide the claim being the subject matter sub judice, in accordance with the provisions of Articles 2(1)(a) and 4(1), both of the RJAT, and Articles 1 and 2(a) of Ordinance No. 112-A/2011, which constitutes a dilatory exception preventing knowledge of the merits of the case, in accordance with the provisions of Article 576(1) and (2) of the Code of Civil Procedure ex vi Article 2(e) of the CPPT and Article 29(1)(a) and (e) of the RJAT;

· As a consequence, the exception of material incompetence raised by the TA is judged to be well founded, discharging the Respondent from the instance.

The knowledge of the remaining exceptions and of the merits of the case is thereby prejudiced.

DECISION

This arbitral tribunal decides:

I. To judge well founded the dilatory exception of incompetence of this tribunal ratione materiae invoked by the Respondent;

II. To discharge the Respondent from the instance (Article 278 of the Code of Civil Procedure);

III. To condemn the Claimant in the costs of the proceedings.

Value of the proceedings: €90,455.55 (ninety thousand, four hundred and fifty-five euros and fifty-five cents).

Costs charged to the Claimant in the amount of €2,754.00 (two thousand, seven hundred and fifty-four euros).

Lisbon, 31 July 2015

The Arbitrators

Manuel Macaísta Malheiros

Jaime Carvalho Esteves

Jorge Carita

Frequently Asked Questions

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What is the procedure for regularizing excess VAT paid on mixed-use resources in Portugal?
The procedure for regularizing excess VAT paid on mixed-use resources in Portugal involves filing a substantiated request for official review (revisão oficiosa) with the Tax and Customs Authority under Article 78 of the Tax Procedure and Process Code (CPPT). For public entities operating as mixed taxpayers, the regularization requires demonstrating that incorrect deduction methods were applied to common resources. The entity must show that mixed-use inputs should have been subject to the pro rata method (calculating the proportion of taxable to total turnover) rather than full exclusion or incorrect application of the actual allocation method (afetação real). The request must be properly documented with supporting evidence, including calculations showing the correct VAT deduction entitlement for the periods in question. If the Tax Authority rejects the request, the taxpayer may challenge the decision through administrative or arbitral proceedings, though specific self-assessment acts (periodic VAT declarations) must typically be identified as the object of the challenge.
Can a public entity under IVA normal monthly regime claim a deduction for VAT overpaid in prior years?
Yes, a public entity under the IVA (VAT) normal monthly regime can claim a deduction for VAT overpaid in prior years, but must follow specific procedural requirements. The entity must file a request for official review (pedido de revisão oficiosa) with the Tax and Customs Authority within the applicable limitation period, which is generally four years from the date the tax became payable under Article 98 of the Tax General Law (LGT). For self-assessed taxes like VAT, this period runs from the date of submission of the periodic declaration. The request must be substantiated with evidence demonstrating that excess VAT was paid due to incorrect application of deduction rules. However, a critical procedural requirement is identifying the specific self-assessment acts (concrete monthly or quarterly VAT returns) that are being challenged, not merely referencing tax years. Public entities with mixed activities must clearly demonstrate which periodic declarations incorrectly calculated deductions and provide the legal and factual basis for the claimed regularization.
How does the real allocation method (afetação real) apply to VAT deduction for public bodies?
The real allocation method (método de afetação real) applies to VAT deduction for public bodies when inputs can be objectively allocated to specific activities. Under Article 23 of the Portuguese VAT Code, when goods or services are used exclusively for taxable transactions conferring deduction rights, full VAT deduction is permitted. For public entities with mixed activities, the actual allocation method requires establishing objective criteria to determine the proportion of resources used in taxable versus non-taxable operations. For example, when a municipality uses resources simultaneously for water distribution services (taxable) and wastewater or waste treatment (non-taxable under Article 9 exemptions), it must apply objective criteria such as consumption meters, capacity utilization, or time allocation to calculate the deductible portion. This contrasts with common or mixed-use resources that cannot be objectively allocated, which must use the pro rata method based on the ratio of taxable turnover to total turnover under Article 23(2). Proper application requires documentation supporting the allocation criteria and consistent methodology across tax periods.
What is the legal basis for requesting an official review (revisão oficiosa) of VAT self-assessments under Portuguese tax law?
The legal basis for requesting an official review (revisão oficiosa) of VAT self-assessments under Portuguese tax law is Article 78 of the Tax Procedure and Process Code (Código de Procedimento e de Processo Tributário - CPPT). This provision allows taxpayers to request that the Tax Authority review and correct tax acts containing errors, whether favorable or unfavorable to the taxpayer. The request must be submitted within the limitation period established in Article 98 of the Tax General Law (Lei Geral Tributária - LGT), typically four years from the date the tax became payable. For self-assessed taxes like VAT, this runs from the declaration submission date. The request must be substantiated with evidence demonstrating the alleged error and the legal basis for correction. Under Article 78(1) CPPT, the Tax Authority has the power to review acts on its own initiative or upon taxpayer request. The decision on the review request is subject to challenge through hierarchical appeal, administrative proceedings, or judicial/arbitral proceedings under the applicable procedural rules, including the Legal Regime of Tax Arbitration (RJAT - Decree-Law 10/2011).
What are the consequences of applying incorrect VAT deduction methods to mixed-use inputs by public authorities?
The consequences of applying incorrect VAT deduction methods to mixed-use inputs by public authorities include both financial and compliance implications. Financially, incorrect application may result in either excess VAT payment (when deductions are understated) or VAT underpayment (when deductions are overstated). When excess VAT is paid due to failure to apply the pro rata method to common resources or incorrect application of the actual allocation method, the public entity loses cash flow and may need to pursue complex regularization procedures through official review requests. Procedurally, attempting to recover excess VAT requires identifying specific self-assessment acts (periodic declarations) that contain errors, not merely general references to tax years, as demonstrated in this case where the Tax Authority challenged the tribunal's jurisdiction. From a compliance perspective, incorrect methodology may trigger scrutiny during tax inspections, potentially resulting in corrections, interest charges under Article 35 of the Tax General Law, and penalties for negligent or intentional errors under Articles 114-116 of the Tax Offenses Regime (RGIT). Public entities must maintain proper documentation of allocation criteria and ensure consistent application of VAT deduction methods across periods to avoid these consequences.