Summary
Full Decision
ARBITRAL DECISION
The arbitrators Counselor Jorge Lopes de Sousa (arbitrator-president), Dr. Maria Alexandra Mesquita and Dr. Nuno Miguel Morujão (arbitrator-members), designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 20-07-2017, agree as follows:
1. Report
A…, S.A. (hereinafter "A…" or "Claimant"), holder of the unique registration number in the Commercial Registry Office of Lisbon –… Section and collective person identification number n.º…, with registered office at Rua …, …, …-… Lisbon, came, pursuant to subsection a) of article 2.º, n.º 1, and articles 10.º et seq. of Decree-Law n.º 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT"), to submit a request for arbitral pronouncement on the legality of the tax acts contained in the periodic VAT declarations relating to the periods of 01/2015, 02/2015 and 03/2015, respectively submitted on 13-02-2015, 17-03-2015 and 04-05-2015, as well as on the legality of the decision dismissing the hierarchical appeal n.º …2016….
The Claimant further requests the restitution of the amount of € 156.922,05 relating to VAT not deducted, plus legal interest calculated from the date of submission of the respective periodic declarations relating to the periods of 01/2015, 02/2015 and 03/2015, that is, from 13-02-2015, 17-03-2015 and 04-05-2015, respectively, until the date of effective restitution.
The Respondent is the TAX AND CUSTOMS AUTHORITY.
The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 03-05-2017.
Pursuant to the provisions of subsection a) of article 6.º, n.º 2, and subsection b) of article 11.º, n.º 1, of the RJAT, in the wording introduced by article 228.º of Law n.º 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.
On 29-06-2017, the parties were duly notified of such designation and did not manifest a wish to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11.º, n.º 1, subsections a) and b) of the RJAT and articles 6.º and 7.º of the Deontological Code.
Thus, in accordance with the provision of subsection c) of article 11.º, n.º 1, of the RJAT, in the wording introduced by article 228.º of Law n.º 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 20-07-2017.
On 03-10-2017, the Tax and Customs Authority submitted its answer defending that the request should be judged as unfounded.
By order of 03-10-2017, a hearing was waived and it was decided that the proceedings continue with written submissions.
Only the Claimant submitted submissions.
The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2.º, n.º 1, subsection a), and 10.º, n.º 1, of Decree-Law n.º 10/2011, of 20 January, and is competent.
The parties are duly represented, enjoy legal personality and capacity, and have standing (articles 4.º and 10.º, n.º 2, of the same decree-law and article 1.º of Administrative Order n.º 112-A/2011, of 22 March).
The proceedings do not suffer from any nullities.
2. Factual Matter
2.1. Established Facts
Based on the documents submitted with the request for arbitral pronouncement, the following facts are considered established:
a) The Claimant is a collective person, a credit institution covered by the General Framework for Credit Institutions and Financial Companies approved by decree-law n.º 298/92, of 31 December.
b) The Claimant was and is a mixed taxpayer for VAT purposes, given that its activity comprises on the one hand i) taxable operations, which confer the right to deduct tax (movable financial leasing), and on the other ii) operations subject to VAT but exempt from tax, which do not permit VAT deduction (financing operations and credit granting).
c) On 19-02-2015, the Claimant submitted, via Internet, the periodic VAT declaration relating to January 2015 – which was later replaced by the declaration submitted on 02-04-2015 (document n.º 1 submitted with the request for arbitral pronouncement, the contents of which are given as reproduced);
d) On 17-03-2015, the Claimant submitted, via Internet, the periodic VAT declaration relating to February 2015 (document n.º 2 submitted with the request for arbitral pronouncement, the contents of which are given as reproduced);
e) On 04-05-2015, the Claimant submitted, via Internet, the periodic VAT declaration relating to March 2015 (document n.º 3 submitted with the request for arbitral pronouncement, the contents of which are given as reproduced);
f) The Claimant deducted, in the periodic declarations relating to the periods of January, February and March 2015, VAT on the basis of the calculation of the provisional pro rata, corresponding to the final pro rata for the fiscal year 2014;
g) In those declarations, the Claimant, in determining the calculation of the pro rata, excluded from the numerator and denominator of the fraction the financial amortizations relating to financial leasing contracts and the values of disposal/write-off by destruction of leased assets, thereby reducing its pro rata from 59% [final value for 2014 (and provisional for 2015), according to the criterion followed by the Claimant] to 18% [final value for 2014 (and provisional for 2015), adopting the criterion imposed by the Tax and Customs Authority (document n.º 5 submitted with the request for arbitral pronouncement, the contents of which are given as reproduced, whose values are not contested by the Tax and Customs Authority);
h) The Claimant began to disregard from the numerator and denominator the financial amortizations relating to financial leasing contracts and the values of disposal/write-off by destruction of leased assets, by virtue of the position adopted by the Tax and Customs Authority in Circular Letter n.º 30108, of 30.01.2009, sanctioned by the Director General and followed by the Inspection Services in inspections of the Claimant in prior fiscal years;
i) If the calculation of the final pro rata for 2014 were to be made including the financial amortizations relating to financial leasing contracts, and the values of disposal/write-off by destruction of the leased assets, the pro rata would shift from 18% to 59%, and consequently VAT inferior by € 156.925,04 would be due;
j) On 17-06-2015, the Claimant filed a voluntary claim regarding the aforementioned assessments, which was assigned the number …2015… and was dismissed on 16-12-2015 (document n.º 4 submitted with the request for arbitral pronouncement, the contents of which are given as reproduced);
k) The Claimant filed a hierarchical appeal of the decision dismissing the voluntary claim which was dismissed by order of 31-01-2017, issued by the Director of VAT Services, in which she manifests agreement with an Opinion that is contained in document n.º 4 submitted with the request for arbitral pronouncement, the contents of which are given as reproduced, in which is stated, among other things the following:
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17. Having analyzed the claim (pages 265 to 282 of the claim file), the competent Services considered that:
The issue under analysis in these proceedings does not relate to the existence of any error in the completion of the declaration, but rather to an alleged error in determining the pro rata or deduction percentage;
The determination of the deduction percentage made by the taxpayer is in perfect accordance with the rules of Community and internal law, so it does not appear that the Appellant has grounds for the claim formulated;
This is a matter regarding which the Tax Authority has already pronounced itself through Circular Letter n.º 30108/2009, in whose instructions, although contemplating the doctrine already advocated by the former DGCI, the aim was to disseminate the correct interpretation to be given to article 23º of the VAT Code with respect to credit institutions that carry out, among others, Leasing and ALD activities;
From reading the aforementioned Circular Letter, it is concluded that the determination of the final deduction percentage previously mentioned (18%) was made in perfect accordance with the terms provided therein;
The deduction percentage initially determined does not result from the application of n.º 4 of article 23º of the VAT Code, but rather is based on the application of the real allocation method, through the use of a specific objective allocation criterion, taking into account the values involved in the operations developed by the Appellant in the context of Leasing and ALD activities;
In the situation in question, we are before operations that have underlying movable financial leasing contracts. The object of this type of contracts is not the transfer of property, but rather the transfer, by the lessor, of the use of assets acquired by it (or financing for its acquisition), receiving, in return, consideration (rent), plus VAT;
From a tax perspective, financial leasing constitutes a service provision subject to tax, in accordance with the provisions of n.º 1 of article 4º of the VAT Code;
In the case of leasing operations, there is no doubt that the respective consideration is realized in the rents earned by the entity assuming the contractual position of lessor;
However, it cannot be overlooked that these leasing operations (Leasing and ALD) constitute (among others) a form of credit, so the activity of the lessor entity is, in substance, the provision of financing, whose remunerative consideration is constituted, essentially, by interest and other charges included in the rents;
It should be borne in mind that, in this matter, one of the objectives of the legislator was to ensure compliance with the principle of fiscal neutrality, in the aspect of the principle of equality which, in the concrete case, is embodied in the fact that it is ensured equivalent tax treatment, in the sense of equal burden, in relation to whoever acquires an asset through a financial leasing contract, as opposed to another who acquires it directly;
The fact that the full amount of the rent paid by the lessee to the lessor constitutes the taxable amount on which VAT will be charged does not mean that the part of the rent corresponding to financial or capital amortization was included in the calculation of the deduction percentage together with the part corresponding to interest and other charges;
Primarily, because the rent constitutes the payment for the provision of financing to the lessor, being composed of two parts, capital or financial amortization which is nothing more than the repayment of the amount loaned and interest plus any charges, which constitute the lessor's remuneration;
From the perspective of the leasing operation as provision of financing, the acquisition value of the asset subject to the leasing contract corresponds to the financed capital which constitutes the component of financial amortization in the rent paid by the lessor to the lessee;
At the moment of acquisition of that same input, the taxpayer (lessor) exercised the right to full deduction of the amount of VAT invoiced by the supplier of the asset subject to the leasing contract, via the direct allocation method;
For which reason, since the real allocation method with objective allocation criteria applies to it, the part of the financial amortization included in the rent could not fail to be excluded from the calculation of the deduction percentage, since this is nothing more than the restitution of the capital financed/invested for the acquisition of the asset;
Similarly, in addition to the capital component included in the rents received under financial leasing contracts, the other amounts received by the taxpayer by way of disposal or indemnity by write-off of the leased assets, although residual, are intended exclusively for full or partial financial amortization of the capital subject to financing granted through the acquisition of the leased assets, and are therefore equally excluded from the calculation of the deduction percentage;
In light of the principle of neutrality on which the VAT system is based, it is easy to understand that the incidence of this tax on the entirety of the rent is the only way to ensure that the State recovers the value of the tax that was already deducted by the taxpayer;
The main activity of the lessor does not consist in the purchase and sale of assets, but solely in the provision of credit to third parties for the acquisition of those assets, even if it replaces the destinataries of the assets in the acquisition, reserving for itself the right of ownership. And from this activity it obtains, fundamentally, interest;
The inclusion in the ratio between (of) operations with and without deduction right of the component relating to capital restitution (financial amortization), as an integral part of the rent, causes an unjustified increase in the final deduction percentage given that it will be significantly and positively influenced (in the concrete case, an increase from 18% to 59%), by means of a mere restitution of financing, whose underlying asset was subject to VAT assessment and deduction at the moment of acquisition;
This fact will generate increased deductions for the taxpayer, relative to the generality of mixed-use inputs, by way of the use of a coefficient that, to that extent, presents itself as excessive, given the reality of taxable operations;
It becomes comprehensible that in the calculation of the aforementioned specific allocation coefficient, applicable in the situation in question, and in harmony with the Tax Authority's understanding, only the amount exceeding the value of costs used in taxed operations should be considered, since, through the direct allocation method, the VAT of the capital part is fully deducted;
It is only that differential amount (which, generically, corresponds to interest) that is connected with the costs of acquiring resources used indistinctly in operations with and without deduction right;
If this were not so, it would permit an artificial increase in the deduction of VAT incurred with the generality of goods or services with mixed use acquired by the taxpayer;
From the understanding advocated by the Tax Authority does not follow, thus, any restriction of the legitimate right to deduction, as the Appellant alleges. Rather, on the contrary, it upholds the inadmissibility of the exercise of illegitimate deduction right, to the extent that the eventual execution of the procedure defended here would put in question the fiscal neutrality inherent in the mechanics of VAT;
The pro rata method provided for in n.º 4 of article 23º of the VAT Code, which the Appellant seeks to have applied, has no merit for measuring the degree of use that the two categories of operations, with and without deduction right, make of the goods and services indistinctly allocated to them (mixed use), and instead an objective allocation criterion should be applied;
It is within the scope of the powers conferred on the Tax Authority by subsection b) of n.º 3 of article 23º of the VAT Code that the aforementioned Circular Letter n.º 30108/2009, here in question, fits, by providing a solution that permits avoiding the possibility of significant distortions occurring, when we are before taxpayers that carry out financial leasing operations and ALD;
As to the alleged fact that the procedure adopted by the Tax Authority violates the principle of deduction right and neutrality, inherent to the common VAT system (internal and Community rules), the same does not obtain, since n.º 5 of article 17º of the Sixth Directive (which corresponds to the current article 174º of the VAT Directive) permits Member States options regarding the determination of VAT on "promiscuous inputs", authorizing or requiring them to use certain specific VAT deduction methods when circumstances warrant it;
In consonance with that permission is the provision of n.º 2 and subsection b) of n.º 3 of article 23º of the VAT Code;
These rules governing the deduction right are contained in the directives that regulate the common VAT system, being also in consonance with the rules contained in the VAT Code;
The Tax Authority's position finds perfect reception both in the constitutional principles and in the spirit and principles governing the mechanism of exercising the deduction right, contained both in Community jurisdiction and in the national regulatory framework, which is nothing more than a transposition of Community legal norms;
In this regard, it should be clarified that the guidelines contained in point 9 of Circular Letter n.º 30108/2009 do nothing more than contribute to the practicability of the constitutional designs set forth in articles 103º and 104º of the Constitution of the Portuguese Republic, being a decisive factor for ensuring and protecting taxpayer confidence;
The Tax Authority's position, at no moment questions, either internal or Community rules relating to the deduction right, as already extensively clarified, never seeking to alter or violate the legal rules that gave it origin;
In these terms, having regard to the fact that the Appellant determined the deduction percentage following the understanding advocated by the Tax Authority in the aforementioned Circular Letter, it is not apparent that it has incurred in any error in its determination, by disregard, either of the amount corresponding to the capital component of rents from financial leasing contracts, or of the amount relating to disposals and indemnities by write-off of leased assets.
18. Thus, given that the grounds presented by the then Claimant lacked legal foundation, they did not merit acceptance for a favorable decision on the merits of the case, concluding in favor of dismissing the request.
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33. Now, the right to deduct VAT is a right that pertains to taxpayers of this tax, provided that the goods and services to which the tax to be deducted relates are used for the purposes of their own taxable operations.
34. From the general principles of the tax, in particular the objectives of neutrality and non-distortion of competition that underlie them, it follows that only to the extent that the inputs of the activities carried out are attributable to the pursuit of operations that permit the deduction of the tax borne upstream is the VAT contained in those inputs deductible.
35. According to Community case law, judgment of 18 December 2008 (Case C-488/07, Royal Bank of Scotland), the Court of Justice of the European Union (CJEU) demonstrated that subsections a) to d) of the third paragraph of n.º 5 of article 17º of the Sixth Directive (current article 173º n.º 2 of the VAT Directive) are intended to permit Member States to achieve more precise results in determining the extent of the right to deduct VAT borne upstream, taking into account the specific characteristics of the activities of the taxpayers.
36. More explicitly, in the judgment of 8 November 2012 (Case C-511/10, BLC Baumarkt), the CJEU noted that the possibilities contained in the third paragraph of n.º 5 of article 17º of the Sixth Directive (current article 173º n.º 2 of the VAT Directive) are intended to permit Member States to achieve more precise results in the calculation of the deduction pro rata, and may constitute, in cases where such is warranted, derogations to the pro rata determination rule established in article 19º of the aforementioned Sixth Directive (current articles 174 and 175 of the VAT Directive).
37. For that purpose, added the CJEU in n.ºs 22 and 23 of the same judgment, that in the absence of indication in the Sixth Directive of the ways of giving effect to the provision of the third paragraph of n.º 5 of its article 17º (current article 173º n.º 2 of the VAT Directive) it falls to the Member States to institute methods and rules for the calculation of the pro rata of deduction of VAT paid upstream, taking into account the systematics of the aforementioned n.º 5 and the principle of fiscal neutrality on which the common VAT system is based.
38. In the judgment of 21 February 2008 (Case C-425/06, Part Service, n.º 57, fifth indent) it is expressly stated the recognition that the component of financial leasing rents relating to the portion of capital amortization spent in the acquisition of the asset and, in itself, devoid of economic profitability, has nothing to do with the effective remuneration earned by financial lessors.
39. Articles n.ºs 2 and 3 of article 23º of the VAT Code, transposed into the internal legal system on the basis of the aforementioned Sixth Directive, provide that, when a taxpayer carries out distinct economic activities or when the application of the general pro rata based on the volume of business may lead to significant distortions, the Tax Authority may require it to effect the deduction according to the real allocation of all or part of the goods and services used, on the basis of other allocation criteria more adequate, which permit determining the degree of use of those goods and services in operations that confer deduction right and in operations that do not confer that right and imposing, if necessary, special conditions.
40. It is thus verified that, pursuant to n.º 3 of article 23º of the VAT Code, which is based on the faculty conferred in subsection c) of the third paragraph of n.º 5 of article 17º of the aforementioned Sixth Directive (current article 173º n.º 2 of the VAT Directive), the Tax Authority can impose the adoption of other more adequate criteria to permit assessing, with greater rigor, the degree of allocation of goods and services of mixed use, by taxpayers that also carry out financial leasing operations, as is the case of the Appellant.
41. Now, as was upheld in the Opinion supporting the appealed order, the determination of the final deduction percentage (18%) was made in accordance with the terms provided in Circular Letter n.º 30108/2009, and thus the determination of the deduction percentage made by the taxpayer is in perfect conformity with Community and internal law rules.
42. It is not, thus, unknown to the Appellant that the methodology used in the disputed self-assessments was imposed by the aforementioned Circular Letter n.º 30108/2009.
43. For which reason, the Appellant's claim is grounded in a judgment of illegality with respect to the administrative instructions advocated in the Circular Letter, as to the requirement that, in financial leasing activity, in the calculation of the deduction percentage of tax borne on mixed goods, the financial amortization component of rents should be disregarded.
44. The Appellant understands that the capital component of rents invoiced under Leasing contracts must be included in the value of operations for VAT purposes, which would be a necessary consequence of the fact that, pursuant to subsection h) of n.º 2 of article 16º of the VAT Code, the entire amount of "rent received or receivable from the lessee" constitutes the taxable amount on which VAT is to be charged. Considering it illegal for the Tax Authority to divide the components of rents derived from financial leasing contracts for the purpose of applying the partial deduction regime.
45. It should be noted that the deduction methodology (previously) imposed by the Tax Authority, specifically the exclusion of the rent amortization component for the purpose of calculating the deduction right, does not fall within the scope of the general deduction pro rata provided in n.º 4 of article 23º of the VAT Code, but rather within the scope of the real allocation method, which permits, pursuant to n.ºs 2 and 3 of the same provision, that special conditions be imposed on the deduction relating to mixed-use assets, specifically when the application of the general pro rata causes significant distortions in taxation, as is the case.
l) The Tax and Customs Authority issued Circular Letter n.º 30108, of 30-01-2009, with the following content:
Subject: VAT - Deduction Right. Rules for the determination of the deduction right by credit institutions when they simultaneously carry out Leasing or ALD activities.
For the information of the Services and other interested parties, and with a view to disseminating the correct interpretation to be given to article 23º of the VAT Code regarding its application by credit institutions that exercise, among others, Leasing or ALD activities, it is communicated that, by my order of 2009.01.30, issued in the Opinion n.º 106, of 19 January 2009, of the Office of the Sub-Director-General of the VAT Management area, the following was determined:
1. Circular Letter n.º 30103, of 2008.04.23, from the Office of the Sub-Director-General of the VAT Management area, proceeded to the dissemination of generic instructions in order to standardize the interpretation to be given to the amendments introduced to article 23º of the VAT Code, to ensure the correct classification of the various activities in light of the new provisions, to establish the procedures to be followed in determining the deduction of the tax and, still, to clarify the criteria to use, when recourse is had to real allocation in determining the quantum of tax to be deducted and whenever mixed-use goods and services are at issue.
2. In accordance with the aforementioned instructions and following the rules of article 23º of the VAT Code, to determine the deductible tax contained in goods and/or services of mixed use, the method of percentage or pro rata is applied supplementarily, except when operations not resulting from an economic activity are at issue, in which case real allocation is mandatory. In the other cases, real allocation is optional, though the Tax Administration may nevertheless impose that allocation method when the application of the pro rata leads to significant distortions in taxation (n.º 3 of article 23º).
3. In the case of use of real allocation, mandatory or optional, and according to n.º 2 of article 23., the taxpayer in order to determine the degree of allocation or use of goods and services to the realization of operations that confer deduction right or of operations that do not confer that right, must resort to objective criteria, and in any case, the determination of such objective criteria must be adapted to the situation and concrete organization of the taxpayer, to the nature of its operations in the context of the overall activity carried out and to the goods or services acquired for the needs of all operations, whether or not integrated in the concept of relevant economic activity.
4. The criteria adopted may be corrected or altered by the DGCI, with the proper factual and legal grounds, or, if the case may be, to cease the use of the method, if significant distortions in taxation are found to occur.
5. In the specific case of financial entities that also develop Leasing or ALD activities, the combined practice of credit granting operations and taxed leasing operations, including financial leasing, implies, when there are goods and services acquired that are jointly used in both, the necessity of resorting to the provisions of article 23º of the VAT Code for determination of the portion of the tax borne, which is capable of deduction right.
6. In light of the prior wording of article 23º of the VAT Code, within the scope of the application of the real allocation method, whenever it was not viable to apply allocation in the calculation of deductible VAT relating to mixed-use goods, the solution found and followed by the Services as being the one that most approached the desired neutrality, was in the sense of applying a proportion between the two types of operations, in order to determine, as approximately as possible, the allocation of inputs to each of them. However, the application of n.º 4 of article 23º of VAT was not at issue here, but the determination of deductible tax through the application of a specific pro rata, since previously the method used had been real allocation.
7. In light of the current wording of article 23., real allocation is the method that, based on objective allocation criteria, best adjusts to the determination of deductible VAT in mixed-use goods and services.
8. In that sense, considering that the determination of deductible VAT according to the application of the general pro rata established in n.º 4 of article 23º of the VAT Code is susceptible of causing unjustified advantages or disadvantages due to the lack of coherence of the variables used therein, that is, may lead to "significant distortions in taxation", the taxpayers that within financial activities practice Leasing or ALD operations, must use, pursuant to n.º 2 of article 23º of the VAT Code, real allocation based on objective criteria that permit determining the degree of use of those goods and services, in order to determine the amount of VAT to be deducted relative to the set of activities.
9. In the application of the real allocation method, pursuant to the foregoing and whenever it is not possible to apply objective criteria for allocation of common costs, a specific allocation coefficient must be used, taking into account the amounts involved, and only the annual amount corresponding to interest and other charges relating to Leasing or ALD activity should be considered in the calculation of the deduction percentage. In this case, the percentage aforementioned does not result from the application of n.º 4 of article 23º of the VAT Code.
m) On 02-05-2017, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.
2.3. Grounds for Establishment of Factual Matter
The established facts are based on the documents submitted by the Claimant with the request for arbitral pronouncement.
There is no dispute regarding the factual matter.
As to the amount of € 156.922,05, the Tax and Customs Authority does not contest that it is correctly determined in document n.º 5 submitted with the request for arbitral pronouncement.
3. Legal Matter
Article 173º of Directive n.º 2006/112/CE of the Council, of 28-11-2006, establishes the following, insofar as is relevant here:
Article 173º
1. With respect to goods and services used by a taxpayer to effect both operations with deduction right, referred to in articles 168º, 169º and 170º, and operations without deduction right, deduction shall be permitted only in respect of the part of VAT proportional to the amount relating to the first category of operations.
The deduction pro rata is determined, in accordance with articles 174º and 175º, for the set of operations carried out by the taxpayer.
2. Member States may take the following measures:
(...)
c) Authorize or require the taxpayer to effect the deduction on the basis of the allocation of all or part of the goods and services;
Article 23º of the VAT Code establishes the following, insofar as is relevant in the present proceedings:
Article 23º
Methods of deduction relating to mixed-use goods
1 - When the taxpayer, in the exercise of its activity, carries out operations that confer deduction right and operations that do not confer that right, pursuant to article 20º, the deduction of tax borne in the acquisition of goods and services that are used in carrying out both types of operations is determined as follows:
a) Where it concerns a good or service partially allocated to the realization of operations not resulting from the exercise of an economic activity provided for in subsection a) of n.º 1 of article 2º, the tax not deductible as a result of such partial allocation is determined pursuant to n.º 2;
b) Without prejudice to the foregoing provision, where it concerns a good or service allocated to the realization of operations resulting from the exercise of an economic activity provided for in subsection a) of n.º 1 of article 2º, part of which does not confer deduction right, the tax is deductible in the percentage corresponding to the annual amount of operations that give rise to deduction.
2 - Notwithstanding the provision of subsection b) of the foregoing number, the taxpayer may effect the deduction according to the real allocation of all or part of the goods and services used, on the basis of objective criteria that permit determining the degree of use of those goods and services in operations that confer deduction right and in operations that do not confer that right, without prejudice to the Director-General of Taxes coming to impose special conditions on it or to cease that procedure in the event that it is verified that they cause or may cause significant distortions in taxation.
3 - The tax administration may require the taxpayer to proceed in accordance with the foregoing number:
a) When the taxpayer carries out distinct economic activities;
b) When the application of the process referred to in n.º 1 leads to significant distortions in taxation.
4 - The deduction percentage referred to in subsection b) of n.º 1 results from a fraction that comprises, in the numerator, the annual amount, VAT excluded, of operations that give rise to deduction pursuant to n.º 1 of article 20º and, in the denominator, the annual amount, VAT excluded, of all operations carried out by the taxpayer resulting from the exercise of an economic activity provided for in subsection a) of n.º 1 of article 2º, as well as untaxed subsidies that are not equipment subsidies.
The Claimant is a credit institution that simultaneously carries out financial leasing activity.
It is a mixed taxpayer for VAT purposes, carrying out taxable operations – specifically those relating to movable financial leasing (financial leasing and ALD) - and exempt operations – specifically credit granting.
Circular Letter n.º 30108 established, for this type of institution that simultaneously carries out this type of activities, a special regime relating to the exercise of the deduction right, on the understanding that "the determination of deductible VAT according to the application of the general pro rata established in n.º 4 of article 23º of the VAT Code is susceptible of causing unjustified advantages or disadvantages due to the lack of coherence of the variables used therein, that is, may lead to 'significant distortions in taxation'" (point 8).
On the one hand, that regime consists, in the first instance, in requiring, with respect to mixed-use goods, deduction according to real allocation, pursuant to article 23º, n.º 2, of the VAT Code, "on the basis of objective criteria that permit determining the degree of use of those goods and services, in order to determine the amount of VAT to be deducted relative to the set of activities".
In the second instance, still, according to point 8, "in the application of the real allocation method", it is established that "whenever it is not possible to apply objective criteria for allocation of common costs, a specific allocation coefficient must be used, taking into account the amounts involved, and only the annual amount corresponding to interest and other charges relating to Leasing or ALD activity should be considered in the calculation of the deduction percentage" (point 9).
In sum, the special regime provided in Circular Letter consists of requiring to these type of taxpayers deduction according to "real allocation", which should be carried out in two ways:
– preferentially, "on the basis of objective criteria that permit determining the degree of use of those goods and services, in order to determine the amount of VAT to be deducted relative to the set of activities";
– whenever such is not possible, the "real allocation" shall be carried out using a "specific allocation coefficient", which is determined by calculating the deduction percentage solely on the basis of the annual amount corresponding to interest and other charges relating to Leasing or ALD activity, and not, as would result from the application of n.º 4 of article 23º, on the basis of "all operations carried out by the taxpayer resulting from the exercise of an economic activity".
3.1. Positions of the Parties
The Claimant, in the disputed assessments, applied the rule contained in point 9 of the aforementioned Circular Letter, having in the calculation of the pro rata of deduction relating to mixed-use goods excluded from the numerator and denominator of the fraction of rents from financial leasing contracts the financial amortizations and the values of disposal/write-off by destruction of leased assets, which contains the meaning that it understood that it was not possible for it to apply, pursuant to point 8 of Circular Letter, the real allocation method on the basis of objective criteria that permit determining the degree of use of those goods and services, in order to determine the amount of VAT to be deducted relative to the set of activities.
Nevertheless, the Claimant challenged the assessments by way of voluntary claim and, thereafter, hierarchical appeal, arguing, in sum, the following:
– being financial leasing operations subject to VAT at the full value of the rents, pursuant to subsection b) of n.º 2 of article 16º of the VAT Code, there is no foundation for the amount of financial amortizations and indemnities not to be included in the volume of business for the purpose of determining the pro rata;
– in light of the national provisions that transposed the VAT Directive into the national legal system (specifically the VAT Code), no prerogative is conferred on the Tax and Customs Authority intended for altering the method of calculating the deduction percentage of VAT authorized for mixed-use goods, since the national legislator did not avail itself of the faculty that the CJEU understands to be at the disposal of Member States to limit the values to be inserted in the numerator and denominator of the fraction and n.ºs 2 and 3 of article 23º of the VAT Code only enable the Tax Authority to impose special conditions within the scope of deduction according to real allocation;
– the Judgment of the CJEU issued in the Banco Mais case does not determine whether or not Portuguese law (article 23º of the VAT Code) provides mechanisms that permit the Tax and Customs Authority to impose other VAT deduction methods for mixed-use goods and services and that the VAT Code does not contain any rule (including n.º 2 of article 23º) that corresponds to article 17º, n.º 5, third paragraph, subsection c) of the Sixth Directive;
– for that reason, being true that the Sixth Directive permits the national legislator to authorize or require the taxpayer to effect the deduction on the basis of the use of all or part of goods and services, the national legislator nonetheless preferred not to avail itself of that possibility;
– not even is enshrined in article 23º of the VAT Code the power of the Tax Authority, before a taxpayer that opts for the pro rata method, to impose conditions on it regarding the deduction percentage, so the doctrine contained in the Judgment of the CJEU in the Banco Mais case has no concrete application with respect to the tax acts here in question;
– the Tax and Customs Authority does not demonstrate, in concrete terms, the occurrence of "significant distortion in taxation", authorizing the alteration of the VAT deduction method adopted by the Claimant.
The Tax and Customs Authority, in its answer, defends the following, in sum:
– what is discussed and intended to be verified is whether or not there was error in the self-assessment of Tax;
– being true that the wording of n.º 2 of article 23º of the VAT Code does not prevent the objective criterion from being determined in accordance with the deduction percentage allocated to all resources of the now Claimant, it is equally true that this criterion had to reflect only the amount of income from its taxable activity (interest) under penalty of subverting the neutrality that presides over the entire system that enshrines the deduction right;
– for which reason, following Circular Letter n.º 30108/2009 (aimed at clarifying the correct method to adopt, in the absence of the objective criteria imposed by the real allocation method, for all economic operators of the aforementioned activity, methodology supported by diverse CJEU case law), the procedure adopted by the Claimant in the self-assessments of tax was the correct one;
– what occurs is that at a later moment to the submission of the tax declarations, the Claimant intended to abandon that criterion which it used regarding the exercise of the deduction right of tax borne on mixed-use resources, coming to recalculate a deduction percentage of 59%, using the same pro rata deduction method but including the total value of the rent, without expunging the part relating to capital amortization;
– being called upon to decide in final instance a dispute opposing Banco Mais to the Public Treasury, the High Administrative Court submitted the following preliminary ruling question to the CJEU:
"In a financial leasing contract, in which the customer pays the rent, this being composed of financial amortization, interest and other charges, should that rent paid enter, in its full sense, into the denominator of the pro rata, or instead should only interest be considered, since these, are the remuneration, the profit that the activity of banking obtains from the leasing contract?"
– as a consequence of which that Court decided that "in these circumstances, the calculation of the deduction right in application of the method based on the volume of business, which takes into account the amounts relating to the part of rents that clients pay and that serve to compensate the availability of vehicles, leads to determining a deduction pro rata of VAT paid upstream less precise than that resulting from the method applied by the Public Treasury, based only on the part of rents corresponding to interest that constitutes the consideration for the financing and management costs of the contracts borne by the financial lessor, since these two activities constitute the essential use of mixed-use goods and services intended for carrying out financial leasing operations for the automobile sector".
– inasmuch as the common VAT system must ensure perfect neutrality regarding the tax burden of all economic activities, the CJEU came to consider that article 17º, n.º 5, third paragraph, subsection c) of the Sixth Directive: "...should be interpreted to mean that it does not preclude a Member State, in circumstances such as those of the main proceedings, from requiring a bank that carries out, in particular, financial leasing activities to include, in the numerator and denominator of the fraction that serves to establish a single and same pro rata of deduction for all its mixed-use goods and services, only the part of rents paid by customers, within its financial leasing contracts, that corresponds to interest, when the use of those goods and services is primarily determined by the financing and management of those contracts, which it falls to the referring court to verify.";
– on the same matter the High Administrative Court has also pronounced itself, by Judgment of 29/10/2014, issued in the course of case n.º 01075/13, 2nd Section, where it was expressly decided: "Banks, whose type of business also passes through the execution of Leasing and ALD contracts, e.g. of motor vehicles, must include in the numerator and denominator of the fraction that serves to establish a single and same pro rata of deduction for all mixed-use goods and services, only the part of rents paid by clients within those contracts, that corresponds to interest".
– the arbitral jurisdiction is bound by the interpretation made by the CJEU, which is the guarantor of the interpretation and uniform application of EU law in the territory of all Member States, regarding article 17º, n.º 5 of the Sixth VAT Directive (current article 173º, n.º 2 of Directive n.º 2006/112 CE), at issue in these proceedings, since article 23º of the VAT Code proceeded to its transposition into our internal law.
3.2. Appreciation of the Issue
The Claimant carries on economic activity, as defined in subsection a) of article 2º, n.º 1, of the VAT Code, which is taxed (specifically, financial leasing, classifiable in n.º 1 of article 4º of the VAT Code), as well as exempt economic activity (specifically, credit granting, pursuant to n.º 27 of article 9º of the VAT Code).
As a rule, VAT borne by the taxpayer in the acquisition of means used exclusively in its own economic activity and taxed is fully deductible, and VAT borne in the acquisition of means used only in exempt activity or not provided for in subsection a) of n.º 1 of article 2º of the VAT Code cannot be deducted [article 20º, n.º 1, subsection a), of the VAT Code and article 168º of Directive n.º 2006/112/CE of the Council, of 28-11-2006].
In the case in question, it concerns the deduction of VAT relative to goods used indifferently both in taxed activity (as is the case with financial leasing), as well as in exempt economic activity of the Claimant (as occurs with credit granting).
With respect to mixed-use means, used indifferently "to effect both operations with deduction right (...) and operations without deduction right, deduction shall be permitted only in respect of the part of VAT proportional to the amount relating to the first category of operations" (article 173º n.º 1, of Directive n.º 2006/112/CE of the Council, of 28-11-2006).
Where it concerns a good or service allocated to the realization of operations resulting from the exercise of an economic activity provided for in subsection a) of n.º 1 of article 2º "the tax is deductible in the percentage corresponding to the annual amount of operations that give rise to deduction", pursuant to subsection b) of n.º 1 of article 23º of the VAT Code.
This percentage of deductible tax, or "deduction pro rata", results, as a rule, from a fraction that includes in the numerator, the total amount of annual volume of business, net of VAT, relating to operations that confer deduction right and in the denominator, the total amount of annual volume of business, net of VAT, relating to operations included in the numerator and to operations that do not confer deduction right (article 174º of Directive n.º 2006/112/CE and 23º, n.º 4, of the VAT Code).
The deduction pro rata is determined annually, being fixed in percentage and rounded to the immediately higher unit and is applicable provisionally, to a given year calculated on the basis of operations from the previous year or estimated provisionally, by the taxpayer, in accordance with its forecasts, under the control of the administration (article 175º, n.ºs 1 and 2, of Directive n.º 2006/112/CE and n.ºs 6, 7 and 8 of article 23º of the VAT Code).
But the taxpayer may opt for "effecting the deduction according to the real allocation of all or part of the goods and services used, on the basis of objective criteria that permit determining the degree of use of those goods and services in operations that confer deduction right and in operations that do not confer that right, without prejudice to the Director-General of Taxes coming to impose special conditions on it or to cease that procedure in the event that it is verified that they cause or may cause significant distortions in taxation" (n.º 2 of article 23º of the VAT Code). [1]
The use of this real allocation method, in principle optional, shall become mandatory if the Tax Administration determines it, which it may do, specifically, "when the application of the process referred to in n.º 1 leads to significant distortions in taxation" [subsection b) of n.º 3 of article 23º]. The Tax Administration may also impose "special conditions".
Through the aforementioned Circular Letter n.º 30108, of 30-01-2009, the Tax Administration understood that with respect to "credit institutions when they simultaneously carry out Leasing or ALD activities", "the determination of deductible VAT according to the application of the general pro rata established in n.º 4 of article 23º of the VAT Code is susceptible of causing unjustified advantages or disadvantages due to the lack of coherence of the variables used therein, that is, may lead to 'significant distortions in taxation'", for which it made use of the faculty provided for in n.º 3 of article 23º of the VAT Code, determining that these taxpayers use "real allocation" (point 8).
According to points 8 and 9, the "real allocation" should be made in two ways:
– if possible, "real allocation on the basis of objective criteria that permit determining the degree of use of those goods and services, in order to determine the amount of VAT to be deducted relative to the set of activities" (point 8 of that Circular Letter);
– if it is not "possible to apply objective criteria for allocation of common costs, a specific allocation coefficient must be used, taking into account the amounts involved, and only the annual amount corresponding to interest and other charges relating to Leasing or ALD activity should be considered in the calculation of the deduction percentage" (point 9 of that Circular Letter); in this case, the application of the percentage that would result from the application of n.º 4 of article 23º is excluded.
In the case in question, it is before a situation in which there is no dispute between the Parties as to the inability to use the real allocation method on the basis of objective criteria, the Claimant having used in the disputed assessments this "specific allocation coefficient" determined in the manner provided for in point 9, considering in the calculation of the deduction percentage only the annual amount corresponding to interest and other charges relating to Leasing or ALD activity, excluding from the numerator and denominator of the fraction the financial amortizations relating to financial leasing contracts and the values of disposal/write-off by destruction of leased assets.
Nevertheless, the Claimant defends that this method is illegal, for which the deduction pro rata should be determined pursuant to the provisions of n.º 4 of article 23º of the VAT Code, that is, the annual amount of the totality of financial leasing rents should be considered in the calculation of the deduction percentage and not merely the amount corresponding to interest and other charges relating to Leasing or ALD activity.
As the Tax and Customs Authority affirms, the CJEU pronounced itself on a situation of this type, relating to a banking institution that carries out financial leasing activities, which confer deduction right, and other financial activities, which do not confer such right.
In the judgment issued on 10-07-2014, in case n.º C-183/13 (Banco Mais), issued in the course of a preliminary ruling, the CJEU understood that article 17º, n.º 5, third paragraph, subsection c), of the Sixth Directive 77/388/CEE of the Council, of 17 May 1977 "does not preclude a Member State, in circumstances such as those of the main proceedings, from requiring a bank that carries out, in particular, financial leasing activities to include, in the numerator and denominator of the fraction that serves to establish a single and same pro rata of deduction for all its mixed-use goods and services, only the part of rents paid by customers, within its financial leasing contracts, that corresponds to interest, when the use of those goods and services is primarily determined by the financing and management of those contracts".
In the aforementioned subsection c) of the third paragraph of n.º 5 of article 17º of the Sixth Directive, corresponding to subsection c) of n.º 2 of article 173º of Directive n.º 2006/112/CE of the Council, of 28-11-2006, it is established that "Member States may" "authorize or require the taxpayer to effect the deduction on the basis of the use of all or part of goods and services".
The decisions of the CJEU issued in preliminary ruling have a binding character for the national courts, which is a corollary of the mandatory nature of the preliminary ruling provided for in article 267º of the Treaty on the Functioning of the European Union (which replaced article 234º of the Rome Treaty, prior article 177º) ( [2] ).
In line with what has been decided by the CJEU, the High Administrative Court understood already, in the judgment of 29-10-2014, issued in case n.º 0175/13, and "Banks, whose type of business also passes through the execution of Leasing and ALD contracts, e.g. of motor vehicles, must include in the numerator and denominator of the fraction that serves to establish a single and same pro rata of deduction for all mixed-use goods and services, only the part of rents paid by clients within those contracts, that corresponds to interest".
The Claimant questions this understanding saying, in sum, the following:
– "from mere reading of the provisions of the applicable national legal provisions (maxime of article 23º of the VAT Code) it can (and should) be ascertained that (contrary to what the CJEU came to give as certain, only and solely on the basis of what the Representative of the Portuguese State alleged in the proceedings) the same do not correspond to the mere verbatim transposition of the VAT Directive, not being thus, provided in our national legislation the possibility – conferred by the Directive, as the CJEU came to clarify, and which, naturally, is no longer questioned – of the Tax Authority being able to mitigate the pro rata";
– "That is, although it is admitted today that de iure constituendo, under the VAT Directive, Member States may opt not only to impose the use of a specific VAT deduction method relating to the so-called common costs for mixed taxpayers, as they may, indeed, in the case of the application of the pro rata method, require that certain items be, or not, considered in the numerator / denominator of the deduction percentage calculation formula, the truth is that, de iure constituto, such possibility was – at all – not followed by the Portuguese State which, although the Directive granted it such margin, chose to consecrate in our legal system (that is in the VAT Code) only the possibility of the Tax Authority imposing the use of a specific method (real allocation or pro rata)";
– "the CJEU, erroneously, gave as established that Portuguese Legislation (more specifically the VAT Code) transposed into our legal system what was provided in the Directive, that is, the possibility that it granted Member States to effectively mitigate the pro rata, being able to require the Taxpayer to include or exclude certain items from the formula";
– "it is not true that the provision contained in n.º 2 of article 23º of the VAT Code (combined with n.º 3) reproduces, in substance, the rule of determination of deduction right enunciated in article 17º, n.º 5, third paragraph, subsection c), of the Sixth Directive, which is a derogatory provision of the rule provided in articles 17º, n.º 5, first paragraph, and 19º, n.º 1, of that Directive.";
– "It is true that the Sixth Directive in article 17º (n.º 5, third paragraph, subsection c)), when it referred, precisely to the pro rata, opened the door to Member States so that they would authorize or require the taxpayer to effect the deduction on the basis of the use of all or part of goods and services. It happens, however, that the national legislator preferred not to open that door, enshrining nothing in the sense of granting its Tax Authority powers with that content";
– "at no moment, anywhere, is it discerned in this article 23º the mention or consecration of the power of the Tax Authority, before a taxpayer that opts for the pro rata method, to impose conditions on it regarding the deduction percentage. That is, beyond the precise instructions provided by n.º 4 of article 23º - and that are objective in the determination of that percentage – the legislator did not enable the Tax Authority to contradict the deduction percentage as it results from n.º 4";
– it is the interpretation made by the Tax and Customs Authority that "affects neutrality to the extent that (...) subjects the entirety of the rent to VAT and does not permit the deduction of the portion of capital amortization" and "causes distortion to the extent that if we think of a situation in which a certain company only realizes the Leasing activity (whether in Leasing or ALD) there is no doubt that the entirety of VAT borne on rents will be accepted";
– "beyond the portion of amortization at issue in these proceedings there is also the portion relating to disposal / write-off of written-off assets. A matter on which the CJEU has not pronounced itself";
– "the Tax Authority would not be enabled to apply or impose the application to the Claimant of a deduction coefficient different from the pro rata method, under penalty of violation of the provisions of articles 19º, 20º and 23º of the VAT Code and of the principles that characterize VAT (the principle of fiscal neutrality, the principle of equal treatment between taxpayers, the principle of legal certainty and the principle of protection of legitimate taxpayer confidence), as well as of the constitutional principles of separation of powers (articles 2º and 111º), of legality (article 112º, n.º 5) and of reserve of law (articles 103º and 165º, n.º 1, subsection i), all of the Constitution of the Portuguese Republic".
It appears that the Claimant is correct regarding the error of interpretation of Portuguese internal law that affects the CJEU's decision.
But, first of all, it is well to clarify some points.
From the outset, it is to be made explicit that, pursuant to article 267º of the TFEU [3], the competence of the CJEU in the scope of preliminary ruling is limited to "the interpretation of the Treaties", and the "validity and interpretation of acts adopted by the institutions, organs or bodies of the Union", for which it does not extend to the interpretation of article 23º of the VAT Code, to the extent that it embodies options of the national legislator in matters explicitly left by Directive n.º 2006/112/CE of the Council, of 28-11-2006, to its discretion.
On the other hand, it must be taken into account that subsection c) of n.º 2 of article 173º of Directive n.º 2006/112/CE of the Council, of 28-11-2006, is not a directly applicable provision, since it is directed to "Member States" "authorize or require the taxpayer to effect the deduction on the basis of the use of all or part of goods and services".
In a Rule of Law, in matters subordinated to the principle of legality and reserve of law [articles 103º, n.º 2, and 165º, n.º 1, subsection i), of the CRP] and 8º of the General Tax Law, the option for the application in our internal law of that discretionary norm of Directive n.º 2006/112/CE of the Council, of 28-11-2006, must be effected by way of legislation.
Furthermore, it is to be clarified that the two sole deduction methods provided for mixed-use goods allocated to the realization of operations resulting from the exercise of an economic activity provided for in article 23º of the VAT Code are:
– the application of a "percentage corresponding to the annual amount of operations that give rise to deduction" [n.º 1 subsection b) with reference to n.º 4;
– "real allocation of all or part of the goods and services used, on the basis of objective criteria that permit determining the degree of use of those goods and services in operations that confer deduction right and in operations that do not confer that right" (n.º 2 of article 23º).
Pursuant to n.º 3 of the same article 23º, when the application of the method provided for in n.º 1 (which for those allocated to the realization of operations resulting from the exercise of an economic activity is the deduction percentage, as n.º 1, subsection b), refers] "leads to significant distortions in taxation", the Tax and Customs Authority may require the taxpayer to proceed in accordance with the provisions of n.º 2.
Thus, the question that arises is reduced to whether n.º 2 includes the possibility of determining real allocation through a deduction percentage.
In this n.º 2 only "real allocation of all or part of the goods and services used, on the basis of objective criteria that permit determining the degree of use of those goods and services in operations that confer deduction right and in operations that do not confer that right" is provided.
It is manifest that the determination of allocation on the basis of a percentage, whatever the form of determining it, does not constitute an objective criterion that permits determining the degree of allocation of goods or services. In fact, it is evident that on the basis of the value of rents, total or partial, one cannot determine, with objectivity, for example, which expenses for electricity or water or maintenance of elevators in buildings common to the activities of the two types that are allocated to the financial leasing activity.
That is, the application of a percentage, whatever it may be, does not permit "determining the degree of use of those goods and services in operations that confer deduction right" and, therefore, cannot constitute an objective criterion for the purpose of n.º 2 of article 23º.
Being thus, it must be concluded that the power granted to the Tax Administration by n.º 3 of article 23º does not include the possibility of imposing on the taxpayer the application of a deduction percentage.
Consequently, the deduction percentage method can only be used in situations where it is provided directly, in subsection b) of n.º 1 of article 23º, and this method is the one contained in n.º 4 of the same article.
And, pursuant to this n.º 4, this percentage is determined through "a fraction that comprises, in the numerator, the annual amount, VAT excluded, of operations that give rise to deduction pursuant to n.º 1 of article 20º and, in the denominator, the annual amount, VAT excluded, of all operations carried out by the taxpayer resulting from the exercise of an economic activity provided for in subsection a) of n.º 1 of article 2º, as well as untaxed subsidies that are not equipment subsidies".
For that reason, although Directive n.º 2006/112/CE of the Council, of 28-11-2006, permits the Portuguese State to "require the taxpayer to effect the deduction on the basis of the allocation of all or part of goods and services", it was not legislatively provided in the VAT Code the possibility of application of a deduction percentage different from that indicated in n.º 4 of article 23º of the VAT Code.
And, not having that possibility been legislatively provided, the Tax and Customs Authority cannot apply it, since it is subordinated to the principle of legality in all its actions (articles 266º, n.º 2, of the CRP and 55º of the General Tax Law) and made explicit in article 3º, n. 1, of the Administrative Procedure Code.
The latter statute, defining such principle, establishes that "the organs of the Public Administration must act in obedience to law and right, within the limits of the powers conferred on them and in conformity with their respective purposes". "Organs of Public Administration must act in obedience to law and right, within the limits of the powers conferred on them and in conformity with their respective purposes".
In light of this rule, the principle of legality has ceased to have "a formulation purely negative (as in the period of the Liberal State), to pass to having a positive formulation, constituting the foundation, criterion and limit of all administrative action". [4]
For that reason, not having legal support the use of the method provided for in point 9 of Circular Letter n.º 30108, of 30.01.2009, the imposition of its use by the Claimant is illegal.
With respect to the need for application of the method referred to by imposition of the principle of neutrality, neither the reasons are indicated nor demonstrated by the Tax and Customs Authority as to why such method is necessary to ensure "fair competition" or equality of all companies, being true that, from the perspective of the national legislator, the application of the pro rata provided for in n.º 4 of article 23º is the appropriate form to ensure the deduction right of all mixed taxpayers, in cases in which real allocation with objective criteria that permit determining the degree of use of those goods and services in operations that confer deduction right and in operations that do not confer that right is impossible.
On the contrary, as is explained in the Opinion of Professor Dr. José Xavier de Basto and Professor Dr. António Martins, submitted to the record, it appears that "the determination of the portion of VAT deductible by the method that the administration attempts to impose causes, itself, significant distortions of taxation, since both in the mode of constant leasing rents and of variable rents, and since interest is calculated and paid before capital amortization, the proportion of interest contained in the entirety of the rent fluctuates throughout the contractual period, causing fluctuations in the deduction percentage, which have nothing to do with different intensities of use of common inputs and that therefore must be judged arbitrary and without legal and economic foundation" and that "by the method imposed by the administration, the portion of VAT deductible is clearly misaligned with the purpose of the tax of freeing the entrepreneur from all VAT borne upstream, when it is true that downstream the rent was fully taxed".
But, even if the method provided for in point 9 of Circular Letter ensured more effectively the aforementioned principles, the lack of its provision in an instrument of a national legislative nature, in a matter in which no provision of European Union law is directly applicable, would always be an insurmountable obstacle to its application, by force of the principle of legality, in which is inserted that of the hierarchy of the sources of law, in light of which it is not constitutionally admissible that acts of a non-legislative nature be recognized "the power to, with external efficacy, interpret, integrate, modify, suspend or revoke any of its provisions" (article 112º, n.º 5, of the CRP), all the more so in a fiscal matter subject to the principle of fiscal legality, in which there is a matter inserted in the relative competence reserve of the Assembly of the Republic [articles 103º, n.º 2, and 165º, n. 1, subsection i), of the CRP].
In fact, the binding force of circulars and other resolutions of the Tax and Customs Authority of a general and abstract nature, publicized, is limited to the administrative order, since it results only from the hierarchical authority of the agents from which they proceed and from the duties of compliance of subordinates to whom they are directed. For that reason, the generic guidelines of the Tax and Customs Authority, specifically as to the interpretation of tax law, bind only the officials over whom the issuer has a superior position in the hierarchy, but these guidelines do not bind individuals, citizens or taxpayers, nor the courts, which must interpret and apply tax laws without any dependence on the criteria adopted by the Tax Administration through the aforementioned "generic orders, circulars and instructions" (article 203º of the CRP). [5] It is with this scope that n.º 1 of article 68º-A of the General Tax Law establishes that "the tax administration is bound by the generic guidelines contained in circulars, regulations or instruments of identical nature, regardless of their form of communication, aimed at standardizing the interpretation and application of tax rules".
This is in addition to the fact that, as decided by the CJEU, in the cited judgment of 10-07-2014, issued in case n.º C-183/13 (Banco Mais), subsection c) of n.º 2 of article 173º of Directive n.º 2006/112/CE of the Council, of 28-11-2006, does not preclude a Member State from requiring a bank that carries out, specifically, financial leasing activities to include, in the numerator and denominator of the fraction that serves to establish a single and same pro rata of deduction for all its mixed-use goods and services, only the part of rents paid by customers, within its financial leasing contracts, that corresponds to interest, "when the use of those goods and services is primarily determined by the financing and management of those contracts", which is inherent to the fact that it is not compatible with the rule referred to the imposition of a special deduction percentage in a generalized manner, independently of the actual use of goods and services.
For the foregoing, it is to be concluded that the imposition of use of the "specific allocation coefficient" indicated in point 9. of Circular Letter n.º 30108 suffers from the vice of violation of law, by offense of the principle of legality, and therefore the request for arbitral pronouncement proceeds.
Consequently, the disputed assessments, in which effect was given to that imposition, suffer from the vice of violation of law, by erroneous application of the method of calculation of the deduction pro rata, which justifies their annulment as well as of the decisions of the voluntary claim and hierarchical appeal that maintained them.
4. Indemnitory Interest and Restitution of Amount Paid in Excess
The Claimant further requests the restitution of the amount of € 156.922,05 relating to VAT not deducted, and therefore assessed in excess, in relation to what should have been assessed applying the method of n.º 4 of article 23º of the VAT Code, plus legal interest calculated from the date of submission of the respective periodic declarations relating to the periods of 01/2015, 02/2015 and 03/2015, that is, from 13-02-2015, 17-03-2015 and 04-05-2015.[6]
The Tax and Customs Authority does not question the quantification effected by the Claimant.
In accordance with the provision of subsection b) of article 24º of the RJAT, the arbitral decision on the merits of the claim that is not subject to appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, and this Administration, in the exact terms of the procedural success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of the decisions of the tax courts "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose", which is in line with the provision of article 100º of the General Tax Law [applicable by force of the provision of subsection a) of n.º 1 of article 29º of the RJAT] which establishes that "the tax administration is required, in case of total or partial success of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation that is the subject of the dispute, including the payment of indemnitory interest, if the case may be, from the end of the period of execution of the decision".
Although article 2º, n.º 1, subsections a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral courts operating in the CAAD, not making reference to condemnatory decisions, it should be understood that the powers that, in judicial challenge proceedings, are attributed to the tax courts, are comprised within its competences, being this the interpretation that is in tune with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it is proclaimed, 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 recognition of a right or legitimate interest in tax matters".
The judicial challenge process, although essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnitory interest, as is apparent from article 43º, n.º 1, of the General Tax Law, in which it is established that "indemnitory interest is due when it is determined, in a voluntary claim or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount superior to the legally due" and article 61º, n.º 4 of the Tax Procedure and Process Code (in the wording given by Law n.º 55-A/2010, of 31 December, which corresponds to n.º 2 in the original wording), which "if the decision that recognized the right to indemnitory interest is judicial, the payment period is counted from the beginning of the period of its spontaneous execution".
Thus, n.º 5 of article 24º of the RJAT, in saying that "payment of interest is due, regardless of its nature, pursuant to the terms provided in the general tax law and in the Tax Procedure and Process Code", should be understood as permitting the recognition of the right to indemnitory interest in the arbitral process.
As the payment of indemnitory interest depends on the existence of an amount to be reimbursed, it falls within the competences of the arbitral courts operating in the CAAD to ascertain whether there is a right to reimbursement and to what extent.
It thus falls to examine the requests for restitution of the amounts paid plus indemnitory interest.
As a consequence of the illegality of the assessments, it is manifest that the Claimant is entitled to be reimbursed of the amounts which it paid unduly.
The substantive regime of the right to indemnitory interest is regulated in article 43º of the General Tax Law, which establishes, insofar as is relevant here, the following:
Article 43º
Undue Payment of Tax Obligation
1 – Indemnitory interest is due when it is determined, in a voluntary claim or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount superior to the legally due.
2 – It is also considered that there is error attributable to the services in cases in which, despite the assessment being effected on the basis of the declaration of the taxpayer, the latter followed, in its completion, the generic guidelines of the tax administration, duly publicized.
The error of the assessments is attributable to the Tax and Customs Authority, pursuant to n.º 2 of this article, since the guidelines of the Tax and Customs Authority were followed by the Claimant, duly publicized, through Circular Letter n.º 30108, of 30.01.2009.
Consequently, the Claimant is entitled to restitution of the amount unduly paid plus indemnitory interest, pursuant to article 43º, n.º 1, of the General Tax Law and 61º of the Tax Procedure and Process Code from the dates of the undue payments, until reimbursement.
Indemnitory interest is due at the supplementary legal rate, pursuant to articles 43º, n.ºs 1, and 35º, n.º 10 of the General Tax Law, article 24º, n.º 1, of the RJAT, article 61º, n.ºs 3 and 4, of the Tax Procedure and Process Code, article 559º of the Civil Code and Administrative Order n.º 291/2003, of 8 April (or other order that alters the legal rate), from the date of each undue payment until the respective reimbursement.
5. Decision
In these terms, the Members of this Arbitral Tribunal agree on the following:
a) To declare the request for arbitral pronouncement well-founded;
b) To annul the VAT assessments effected in the periodic declarations relating to the periods of 01/2015, 02/2015 and 03/2015, respectively submitted on 13-02-2015, 17-03-2015 and 04-05-2015, as well as the decision dismissing the hierarchical appeal n.º …2016…;
c) To condemn the Tax and Customs Authority to reimburse the Claimant of the amount of € 156.922,05, plus indemnitory interest calculated on each undue payment from the date it was effected until the respective reimbursement.
6. Value of the Case
In accordance with the provision of article 306º, n.º 2, of the Code of Civil Procedure and 97º-A, n.º 1, subsection a), of the Tax Procedure and Process Code and 3º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 156.922,05.
7. Costs
Pursuant to article 22º, n.º 4, of the RJAT, the amount of costs is fixed at € 3.672,00, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, borne by the Respondent.
Lisbon, 20-11-2017
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Maria Alexandra Mesquita)
(Nuno Miguel Morujão)
[1] The use of this method is mandatory if it concerns a good not used in the economic activity defined in subsection a) of n.º 1 of article 2º of the VAT Code.
[2] In this sense, among many, the following judgments of the High Administrative Court may be cited: of 25-10-2000, case n.º 25128, Appendix to the Official Journal of 31-1-2003, page 3757; of 7-11-2001, case n.º 26432, Appendix to the Official Journal of 13-10-2003, page 2602; of 7-11-2001, case n.º 26404, Appendix to the Official Journal of 13-10-2003, page 2593.
[3] This article 267º establishes that
"The Court of Justice of the European Union is competent to decide, by way of preliminary ruling:
a) On the interpretation of the Treaties;
b) On the validity and interpretation of acts adopted by the institutions, organs or bodies of the Union.
[4] FREITAS DO AMARAL, JOÃO CAUPERS, JOÃO MARTINS CLARO, JOÃO RAPOSO, PEDRO SIZA VIEIRA and VASCO PEREIRA DA SILVA, in Annotated Administrative Procedure Code, 3rd edition, page 40.
In similar sense, the first Author may be seen in Course of Administrative Law, volume II: "The law is not merely a limit to the action of the Administration: it is also the foundation of administrative action. This means that, nowadays, there is no free power of the Administration to do what it sees fit, except when the law forbids it; on the contrary, the rule prevails that the Administration can only do what the law permits it to do". (FREITAS DO AMARAL, Course of Administrative Law volume II, pages 42-43.
In identical sense, MARCELO REBELO DE SOUSA may be seen, Lessons of Administrative Law, 1999, volume I, page 84, which refers: "With the post-liberal State, in any of its three modalities, legality goes from external to internal. The Constitution and law cease to be merely limits to administrative activity, to become the foundation of that activity.
The logic of freedom or autonomy, which private individuals enjoy, which can do everything that the Constitution and law do not forbid, ceases to apply, for the primacy of competence to be affirmed, Public Administration can only do what is permitted to it by the Constitution and law, and in the exact terms in which they permit it.".
In this line the High Administrative Court has been uniformly deciding, as can be seen, for example, by the judgment of 13-11-2002, case n.º 047932.
[5] In this sense, MANUAL OF TAX LAW, Pedro Soares Martinez, Editions Almedina, Coimbra, 1st Reprint -1984, page 109 may be seen.
[6] The Claimant, by manifest lapse, indicates the date of 04-05-2014 relative to the assessment of period 3/2015, but the exact date is 04-05-2015, as is seen in document n.º 3 submitted with the request for arbitral pronouncement.
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