VAT Invoice Requirements Under Article 36(5) of the Portuguese VAT Code – CAAD Case 323/2016-T

ARBITRAL DECISION

The Arbitrator Dr. Filipa Barros (sole arbitrator), appointed by the Deontological Council of the Administrative Arbitration Center ("CAAD") to form the Sole Arbitral Tribunal, constituted on 31 August 2016, decides as follows:

I. REPORT

The company A… S.A., legal entity no. …, with registered office at Avenue … no. …-…, …, …-…, …, hereinafter "Claimant", comes, pursuant to the provisions of article 2, no. 1, paragraph a), and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT"[1], to request the constitution of an Arbitral Tribunal to rule on the illegality and consequent annulment of the VAT assessments, relating to the periods 1507M, 1508M and 1509M, issued against nos. …, … and …, in the total amount of €37,354.68, relating to VAT improperly deducted.

To support its request, the Claimant considers, in summary, that the invoices issued by its suppliers B… Lda. (hereinafter B…) and C… comply with the formal requirements provided for in article 36 of the VAT Code and in the corresponding community law provision that preceded and established it, specifically article 226 of Directive 2006/112/EC (hereinafter DVAT).[2]

The Claimant argues that in the case of invoices issued by company B… (totaling 6 invoices) the denominations used do not appear vague or imprecise, but rather reflect the nature of the services provided – namely, the provision of highly specialized work that ensures a set of user portability procedures between networks – and allow for the determination of the formal elements necessary to determine the applicable rate.

With regard to the alleged absence of reference in the invoice to the quantity of services provided, the Claimant considers that the indication of the number "1" in the field relating to quantity represents a measure which, in the case of services and not the supply of goods, allows for precise determination of the temporal extension used, which for this purpose is "one month". It is further noted that the invoices in question, combined with the respective supporting files prepared between the parties to determine the value to be invoiced monthly, allow for the identification of the respective measurement by reference to the extension of the period in which the services were provided.

Additionally, the Claimant considers it makes no sense for the requirement imposed by the Tax and Customs Authority (hereinafter TA) under paragraph c), no. 5 of article 36 of the VAT Code relating to the obligation to affix the unit price of services in the text of the issued invoice. To this end, it appeals to the letter of the law, from which it follows that invoices must contain the reference to the "price, net of tax, and other elements included in the taxable amount", these requirements being fully met in the case of the invoices questioned in the proceedings.

On the basis of the same arguments, relying on the jurisprudence of superior courts and the judgments of the CJEU, it argues for the sufficiency of the mentions made in the invoice issued by supplier C… (only one invoice), regarding the quantity of services provided and their usual denomination, noting that, in particular, as to the non-indication of the date of service provision in the invoice, such formalism would be required only in cases where the date of service provision does not coincide with the date of invoice issuance, there being no reason in the present situation to question the observance of the provision in paragraph f) of no. 5 of article 36, since the invoice is dated.

The Claimant concludes by stating that the objective of these rules is to ensure that the TA effectively supervises tax obligations, allowing for the identification of the operation in sufficient detail so that the proper tax consequences may be drawn, and there is, in the present case, no legal support for the interpretation advocated by the TA, imposing on the taxpayer compliance with additional formal requirements that would undermine the exercise of the right to deduction, the essential pillar of VAT operation.

On 1 July 2016, the request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and immediately notified to the Respondent in accordance with legal provisions.

The Claimant did not appoint an Arbitrator.

Thus, pursuant to the provisions of no. 1 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, by decision of the Honorable President of the Deontological Council, duly communicated to the parties, within the legally prescribed timeframes, the undersigned was appointed arbitrator of the Sole Arbitral Tribunal, and communicated to the Deontological Council and to the Administrative Arbitration Center the acceptance of the appointment within the timeframe stipulated in article 4 of the Code of Ethics of the Administrative Arbitration Center.

In accordance with the provision of paragraph c), no. 1, of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Sole Arbitral Tribunal was constituted on 31 August 2016, followed by the relevant legal procedures.

The Respondent, duly notified for this purpose, presented its answer in which it contests the admissibility of the request for arbitral ruling.

To this end, it argues that the seven documents identified in the Tax Inspection Report (hereinafter TIR) do not meet the legal requirements imposed by article 36, no. 5, paragraphs b), c) and f), combined with the provision of no. 2, paragraph a) and no. 6 of article 19 of the VAT Code and, consequently, the VAT amounts inherent to the same documents are deemed to have been improperly deducted. The right to deduction, precisely because it constitutes a cornerstone of the common VAT system cannot be exercised without verification of the respective requirements, being a consequence of the very mechanism of the tax and the purposes pursued that the document – the invoice – respects the legally prescribed requirements, with the requirement of such formalism constituting a true substantial requirement of the right to VAT deduction, incapable of substitution by any other means of proof.

The Respondent bases its position on the provision of article 226 of the DVAT, additionally emphasizing the guidance issued by the extensive jurisprudence of the CJEU, the STA and arbitral tribunals operating at CAAD that reinforce the interpretation made during the inspection procedure. Consequently, and contrary to what the Claimant states, this is not a matter of imposing supplementary conditions that might have the effect of rendering the exercise of the right to deduction pointless, but of ensuring that, in the present case, the invoices comply with the mandatory mentions, bearing in mind that the requirement for full compliance with the formalism legally imposed regarding invoice issuance constitutes a legislative option aimed, in particular, at avoiding tax evasion, with such formalities assuming a nature ad substantiam and not merely ad probationem.

The Respondent concludes by contesting the admissibility of all defects alleged against administrative action.

On 5 January 2017, the meeting provided for in article 18 of the RJAT was held, at which, among other things, the examination of the witness called by the Claimant, Mr. D… took place (see Minutes of the Meeting of the Sole Arbitral Tribunal).

Written submissions were presented by the Claimant, followed by the submissions of the Respondent.

In the submissions presented, the parties reiterated in substance the positions defended in their respective pleadings, as summarized below.

A) Claimant's Submissions

The Claimant emphasizes the facts which it considers proven, specifying the clarifications provided by witness testimony. It reaffirms the existence of the service provisions as mentioned in the invoices issued by its supplier B…, as well as the absence of risk of loss of tax revenue in light of the collection of the corresponding tax at the maximum rate.

Bringing to bear the facts, it reiterates that the invoices from said supplier contain the identification of the services, the scope and extension thereof [from x to y of 2015], the monthly nature, the indication of the price net of tax, consequently, complying with all the requirements set out in no. 5 of article 36 of the VAT Code, as well as the provision of article 226 of the DVAT.

It argues that the applicable rules in the matter at hand enshrined in the DVAT (articles 168, 220 and 226) and in the VAT Code (nos. 2 and 6 of article 19 and no. 5 of article 36) are oriented towards a function of formal inspection of the invoice by the operator receiving it, but the national rule must be interpreted in light of the community provision, and cannot in any way conflict with the purposes provided for in the Directive, nor impose on the economic operator unreasonable or impractical requirements.

The Claimant supports its thesis on CJEU jurisprudence, which, according to its interpretation, places the problem of formal defects in invoices in the context of the importance of the right to deduction, citing several Judgments in which the CJEU accepts the faculty for Member States to impose measures that ensure the exact collection of the tax and its supervision by the TA, but limited to what is strictly necessary to achieve such objectives, without undermining the principle of VAT neutrality.

It concludes by stating that the same arguments should apply mutatis mutandis to the invoice issued by the supplier of civil construction works, C…, since in this case too the alleged omissions relating to the quantity of services provided/goods supplied, the date of service provision and the reference to the unit price, are invoked by the TA in an abusive and disproportionate manner to the purposes of control of fraud and tax evasion that the ratio of the law dictates.

B) Respondent's Submissions

In its final submissions, the Respondent reinforces the arguments invoked in its Answer and, additionally, considers that the examination of witnesses suffers from lack of utility for the proper decision of the case, given the absence of controversy over the facts relevant to the decision. In its view, it is a matter of law, translated into the lack of suitability of the accounting documents for the exercise of the right to deduction.

With regard to the formalities legally required in invoice issuance, it reinforces that these have an ad substantiam nature, therefore, they are not capable of substitution by witness testimony, or by other means of a documentary character unless these elements are specifically discriminated in the invoice itself.

In this context, the Respondent reiterates the legal arguments adduced in its answer, emphasizing that article 226 of the DVAT provides, without prejudice to the specific provisions provided for in the Directive, that mandatory mentions include, among others, the extension and nature of the services provided as well as the unit price, elements that are not duly evidenced in the invoices in question in the proceedings.

In turn, it invokes the CJEU's decision in Case C-368/09, of 15 July 2010, according to which "Member States may impose obligations that they consider necessary to ensure the exact collection of VAT and to prevent fraud, but this faculty cannot be used to impose invoicing obligations supplementary to those laid down, in particular, in article 226 of the said directive", concluding that the TA can – and must – require that invoice requirements respect the provision in number 5 of article 36 of the VAT Code and the provision laid down in article 226 of the DVAT.

Thus, relying on national jurisprudence as well as CJEU jurisprudence, the Respondent argues that the exercise of the right to deduction absolutely depends on verification of all substantive but also formal requirements, so as to guarantee the very neutrality of the tax, as provided for in the DVAT.

Finally, it states that the invoices in question do not contain the mandatory mentions provided for in no. 5 of article 36 of the VAT Code, since, being this a formality "ad substantiam", for proof of the corresponding facts, such mentions cannot be waived, nor can invoices be replaced by other means of proof, requesting, consequently, the rejection of the request for arbitral ruling.

II. CASE MANAGEMENT

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

The parties have standing and legal capacity, show themselves to be entitled and are regularly represented, (see articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).

The case does not suffer from nullities.

III. REASONING

1. Facts held as proven

The facts were held as proven on the basis of documents attached in the context of the administrative proceedings, the request for arbitral ruling, witness testimony and the answer presented by the TA, as indicated below.

1. The Claimant is a commercial company under Portuguese law, whose object is the provision of telecommunications services in the island territory of …;

2. The Claimant's activity comprises, with respect to the provision of telecommunications services, areas of great technical complexity, which necessarily presupposes technical expertise that is often ensured through recourse to external means;

3. In the exercise of its activity, the Claimant has 31 of its own workers and approximately 120 external workers hired through human resources outsourcing companies (testimony of the witness);

4. The use of auxiliary means and external service providers has proven to be the most efficient way to ensure assistance and maintenance of the high levels of technical requirement imposed by the activity pursued;

5. One of the Claimant's preferred external service providers is the company B…, whose object is the provision of specialized work;

6. During the period relating to the additional VAT assessments, external work was essentially provided and invoiced by company B… (testimony of the witness);

7. The invoicing of outsourcing services occurs on a monthly basis;

8. All invoices issued by supplier B… to the Claimant have as common description the following: "services provided at your company in the period from x to y by our employees";

9. To the common description, is added, as appropriate, specifically for accounting reasons, one of the following descriptions: "portabilities" / "commissions" / "outsourcing";

10. The expression "portabilities" is a common denomination in the lexicon of telecommunications operators to define services related to operator portability, consisting of the management of the user transfer procedure between networks, data processing and ensuring the efficiency of services regardless of the geographic location of users (testimony of the witness);

11. The expression "outsourcing" is an expression widely used by time and human resource providers (testimony of the witness);

12. The expression "commissions" is commonly used to designate the allocation of a variable benefit to the supplier, depending on the level of achievement of the objectives defined in the service provision contract (testimony of the witness);

13. The specific terms for determining the amount of each of the invoices issued relating to the designations "Portabilities", "Outsourcing" and "Commissions" result from the service provision contract and from the financial support IT files prepared by the parties, with a view to determining the monthly amount to be invoiced;

14. All invoices from supplier B… show as the quantity of service provided "1";

15. The work provided to the Claimant by B… is invoiced on a monthly basis;

16. All invoices from supplier B… show as unit value the amount of the service provided.

17. The work carried out by supplier B…, identified in the respective invoices, were subject to VAT at the normal rate in force in the Autonomous Region of … of 18%;

18. The work carried out by supplier C… is identified in a document "invoice/receipt", issued as "Various Works" with the description "remove flooring and install new, – metal framework between plasterboard walls, painting of cabinet door, shelf, baseboard, stainless steel, glass door lock, cabinet assembly";

19. The work carried out by supplier C… identified in the respective invoices was performed on the Claimant's premises in the Autonomous Region of …, specifically on the Island of … (testimony of the witness);

20. The work carried out by supplier C… identified in the respective invoices was subject to VAT at the normal rate of 18%, in force in the said Region;

21. C… is a small contractor working in the region to whom the Claimant awarded a contract (testimony of the witness);

22. The amount invoiced by contractor C… corresponds essentially to labor work, with a lock having been incorporated (testimony of the witness);

23. The invoice issued by supplier C… shows as unit value the amount of the service provided;

24. In the field relating to the date, the invoice issued by supplier C… contains the indication of "28/7/2015";

25. The Claimant is classified for VAT purposes under the normal regime on a monthly basis;

26. Following a refund request filed in the Periodic Declaration no. … of period 1510M, the Claimant was subject to an inspection procedure carried out by the Tax Inspection of …;

27. The inspection procedure is accredited by Service Order no. OI2016…, with Activity Code … – Control of VAT Refund Requests, with due diligence carried out under DI2016…, issued for validation of the refund requested in the Periodic Declaration 2015/10;

28. On the basis of the conclusions reached in the TIR, whose content is hereby fully reproduced, the TA made a series of purely arithmetic corrections to the total VAT deducted by the Claimant for the periods 1507M, 1508M and 1509M;

29. Pursuant to the TIR, the invoices that give rise to the right to deduction of the tax borne upstream, relating to supplier B…, totaling six invoices, and to supplier C…, only one invoice, (see page 10 of the Inspection Report) are not valid because they do not contain "either the quantity of services provided, or the usual denomination of the goods transferred or services provided, or the reference to the unit price, net of tax, of the elements included in the taxable amount";

30. In the case of the document issued by supplier C…, the report notes that "the nomenclature used does not allow us to determine whether we are in the presence of services provided (mere assembly) or also a transfer of goods (incorporation of the good/raw material in the service provision)" namely in the nomenclatures "install new" and "glass door lock (…)" adding that the document "does not present the date on which the goods were placed at the buyer's disposal or on which the services were performed";

31. Concluding that "the seven documents above identified do not meet the legal requirements imposed by article 36, no. 5, paragraphs b), c) and f), combined with the provision in no. 2, paragraph a) and no. 6 of article 19, all of the VAT Code, therefore the VAT amounts inherent to the said documents are deemed to have been improperly deducted. In light of the above, a technical correction of the tax in arrears – VAT – is proposed in the total amount of €37,354.68"

32. The Claimant was notified of the draft report to exercise its right to a hearing pursuant to article 60 of the General Tax Law and article 60 of the Regulations of Code of Tax and Administrative Procedure, within 15 days, by Office no. …, dated 1 February 2016;

33. The Claimant exercised its right to a hearing, in a timely manner, in writing, on 19 February 2016;

34. The Claimant was notified of the decision on the right to hearing, in the sense of its rejection;

35. On 14 March 2016, the Claimant was notified of the VAT assessments nos. …, … and …, in the total amount of €37,354.68;

36. On 13 June 2016, the Claimant filed the request for constitution of the Arbitral Tribunal that gave rise to the present proceedings (see electronic application to CAAD).

2. Facts not proven

No facts with relevance to the appreciation of the matter that were not proven were found.

3. Reasoning

With respect to the factual matter, the Tribunal does not have to rule on everything that was alleged by the parties, its duty being, rather, to select the facts that matter for the decision and distinguish the proven matter from the unproven (see article 123, no. 2, of the Code of Tax and Administrative Procedure and article 607, no. 3 of the Code of Civil Procedure, applicable ex vi article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the relevant facts for the judgment of the case are chosen and determined according to their legal relevance, which is established with regard to the various plausible solutions of the legal question(s) (see former article 511, no. 1, of the Code of Civil Procedure, corresponding to current article 596, applicable ex vi of article 29, no. 1, paragraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110, no. 7 of the Code of Tax and Administrative Procedure, the documentary and testimonial evidence and the administrative file attached to the case, the facts enumerated above were considered proven, with relevance to the decision.

4. Legal Matter

The issue to be decided in the present proceedings is to ascertain whether the VAT on the invoices issued to the Claimant by suppliers B… and C… should or should not be subject to deduction, taking into account the rules governing this tax in accordance with European Union law, its respective transposition at the internal level and the administrative and judicial interpretation that has been conducted on them, especially by the Court of Justice of the European Union (CJEU). In this respect, it will be important to analyze the issue of whether or not the necessary requirements are fulfilled for their deductibility, taking into account the interpretation of the provisions of articles 226 of the DVAT and articles 19, no. 2, paragraph a) and 36, no. 5 of the VAT Code.

In these terms, it is important to make some preliminary considerations regarding the nature and scope of the right to deduction.

4.1 Of the right to deduction

As is well known, VAT is an indirect tax of community origin, multiphase, which tendentially affects all acts of consumption.

The right to deduction is an essential element of the tax's operation, and must ensure its main characteristic – neutrality.

The mechanism of the right to deduction allows the taxable person to purge from its burden the VAT borne upstream, removing the cumulative effect and cascade taxation that characterized previous systems of consumption tax. Thus, the right to deduction is based on the so-called method of tax deduction, method of tax credit, indirect subtractive method or method of invoices.

In accordance with this method, and in compliance with the provision of article 19 of the VAT Code, through an arithmetic subtraction operation, from the tax determined on sales and service provisions (outputs) and identifiable in the respective invoices, the tax borne on purchases and other expenses (inputs) is deducted. As determined by the 2nd paragraph, of no. 2 of article 1 of the DVAT "In each transaction, VAT, calculated on the price of the good or service at the rate applicable to the said good or service, is chargeable, with prior deduction of the amount of tax that has directly affected the cost of the various elements making up the price".

As provided for in the DVAT, the VAT Code determines, as a general rule, the deductibility of the tax due or paid by the taxable person in the acquisition of goods and services made from other taxable persons.

Expressly stated cases of exclusion from the right to deduction are exceptional and relate to specific cases enumerated by the national legislator in exhaustive terms, in accordance with what is established in the DVAT, depending on the type of expenses in question.

The rules for the exercise of the right to deduction of the tax contemplate objective requirements, more linked to the type of expenses, subjective requirements, relating to the taxable person, and temporal requirements, relating to the period in which it is possible to exercise the right to VAT deduction, which must be verified simultaneously to exercise the right to deduction.

As objective requirements for the exercise of the right to VAT deduction we have, in particular, the fact that the tax borne must appear on an invoice issued in legal form (that is, it must comply, in its requirements, with the terms generally provided for in current article 36, no. 5, and article 40 of the VAT Code), that it is Portuguese VAT, and that the expense, in itself, confers the right to deduction of the tax (that is, it should not be an expense excluded from the right to deduction, as provided for in article 21 of the VAT Code).

As subjective requirements for the exercise of the right to tax deduction, it is determined, in particular, that the goods and services must be directly related to the development of an economic activity. Indeed, in accordance with the DVAT, in article 168 (partially transposed by article 20, no. 1, paragraph a), of the VAT Code), the taxable person may deduct the VAT borne in the Member State in which it is established, on the transfer of goods and provision of services, as well as assimilated operations in intra-Community acquisitions of goods and imports located there, provided that "the goods and services are used for the purposes of its taxed transactions (…)" (emphasis added).

Note that the CJEU admits the possibility of VAT deduction even if there is no effective realization of taxable operations, in the case of such operations, due to facts beyond the entity's will, not being effectively realized, resulting in the liquidation of the company. It is further noted that this rule, in accordance with the rules of European Union law, requires that there be a causal link between the acquired good or service (input) and the taxed output, so that VAT is capable of being deductible. That is, the VAT borne upstream in a given operation is only deductible to the extent that it can be related downstream to an operation actually taxed, the relationship being assessed based on the allocation and inclusion of the cost borne in the price of the taxed operation.

With respect to VAT deduction regimes, the CJEU has considered that the right to deduction forms an integral part of the mechanism of the tax itself, which cannot in principle be limited, and is exercised in relation to the totality of taxes that affected upstream operations, further emphasizing that "any limitation of the right to deduction has an impact on the tax burden and must be applied in the same way in all Member States. Consequently, only derogations expressly provided for in the Directive are permitted"[3].

It should further be noted that any limitation of the right to deduction must observe the principles of proportionality and equality, which presupposes a balanced weighing of the benefits derived from the measure and the sacrifice it implies[4].

4.2 Of the formal requirements for the exercise of the right to deduction

Pursuant to article 178, paragraph a) of the DVAT, the taxable person "… must possess an invoice in conformity with articles 220 to 236, 238, 239 and 240". The concept of "invoice" must therefore be interpreted by reference to the combined provisions of articles 226 and 231 of the DVAT.

Note that the formal importance of the supporting document in VAT exceeds that which applies in income taxes. However, such importance will necessarily be more limited in a context of reverse charge since we are not in the presence of a tax passed on by third parties, but rather the tax due by the recipient himself, so the risk inherent in tax evasion is equally reduced.

With regard to the elements that must appear in invoices, article 226 of the DVAT reads as follows:

"Without prejudice to the specific provisions laid down in this Directive, the only mentions that must mandatorily appear, for VAT purposes, on invoices issued in application of articles 220 and 221 are as follows:

1. The date of issue of the invoice;

2. The sequential number, based on one or more series, that identifies the invoice in a unique manner;

3. The VAT identification number, […], under which the taxable person carried out the delivery of goods or provision of services;

4. The VAT identification number of the acquirer or recipient […];

5. The name and complete address of the taxable person and of the acquirer or recipient;

6. The quantity and nature of the goods delivered or the extent and nature of the services provided;

7. The date on which the delivery of goods or provision of services was effected or completed […];

8. The taxable amount for each rate or exemption, the unit price net of VAT, as well as discounts and other possible bonuses, if not included in the unit price;

9. The VAT rate applicable;

10. The amount of VAT to be paid, except where a special regime applies for which this Directive excludes such mention."

Transposing these rules to the VAT Code, article 36, no. 5 of this legal instrument determines that invoices must contain the following elements:

"a) The names, trading names or company names and the address or domicile of the supplier of goods or service provider and of the recipient or acquirer, as well as the corresponding tax identification numbers of the taxable persons;

b) The quantity and usual denomination of the goods transferred or of the services provided, with specification of the elements necessary to determine the applicable rate;(…)

c) The price, net of tax, and other elements included in the taxable amount;

d) The applicable rates and the amount of tax due;

e) The reason justifying the non-application of the tax, if applicable;

f) The date on which the goods were placed at the acquirer's disposal, on which the services were performed or on which payments prior to the performance of the operations were made, if that date does not coincide with the date of issue of the invoice."

It follows, therefore, from this provision, moreover, as held in Case C-368/09, of 15 July 2010, of the CJEU, that "it is not permissible for Member States to make the exercise of the right to VAT deduction conditional on the fulfillment of requirements relating to the content of invoices that are not expressly provided for in the provisions of the DVAT. This interpretation is equally corroborated by article 273 of this Directive, which provides that Member States may impose obligations that they consider necessary to ensure the exact collection of VAT and to prevent fraud, but that this faculty cannot be used to impose invoicing obligations supplementary to those laid down, in particular, in article 226 of the said Directive". This means that, according to CJEU jurisprudence, although this provision allows Member States to adopt certain measures, these should not, however, go beyond what is necessary to achieve this purpose and cannot, therefore, be used in such a way as to systematically undermine the right to VAT deduction, which is a fundamental principle of the common VAT system[5].

Indeed, the principle of effectiveness requires that national legislation, as well as the administrative procedures adopted by Member States, do not make it, in practice, impossible or excessively difficult to exercise the rights conferred by the community legal order. The CJEU pronounced itself in this sense in the Judgment delivered in Case C-25/03[6], which states "(…) it is settled jurisprudence that the requirement, for the exercise of the right to deduction, of elements other than those listed in article 22, no. 3, paragraph b), of the Sixth Directive must be limited to what is necessary to ensure the collection of value added tax and its supervision by the Tax Administration. Furthermore, these elements must not, by their number or technical nature, make it impossible in practice or excessively difficult to exercise the right to deduction (Judgment of 14 July 1988, Jeunehomme and EGI, 123/87 and 330/87, Reports, p. 4517, no. 17). Likewise, the measures that Member States have the possibility of taking, pursuant to no. 8 of article 22 of the same Directive, to guarantee the exact receipt of the tax and prevent fraud should not exceed what is necessary to achieve those objectives. They may not therefore be used in a way that undermines the neutrality of VAT, which constitutes a fundamental principle of the common VAT system established by community legislation on the matter (Judgments of 21 March 2000, Gabalfrisa and others, C110/98 to C147/98, Reports, p. I1577, no. 52, and of 19 September 2000, Schmeink & Cofreth and Strobel, C454/98, Reports, p. I6973, no. 59)."

Thus, within the framework of the jurisprudence outlined, the issue of determining in which circumstances formal defects in the invoice should jeopardize the right to deduct the tax existing at the level of the underlying legal relationship has always been raised, considering especially the importance of the principle of neutrality in the application of VAT.

Now, in the proceedings outlined above, which incidentally do not exhaust the analysis of the issue relating to the content of invoices in the field of VAT application, a uniform understanding emerges that associates the formal requirements of invoices to the purposes of tax collection and its effective supervision by the Tax Administration of Member States, admitting the thesis that the existence of formal defects does not by itself and automatically determine the denial of the exercise of the right to deduction. Indeed, in this respect, reference is made to the statement made by Attorney General Sir Gordon Slynn according to which "an invoice that meets the conditions constitutes the title of access to the right to deduction, subject to the tax administration subsequently demonstrating that it is false; if the invoice does not meet the conditions, it may be that the taxable person is in a position to prove the existence of the transaction and that its supplier has declared the tax paid upstream, but if the invoice is incomplete in an essential aspect, it is for the taxable person to prove its right to deduction."[7]

Consequently, following the referred jurisprudence, for formal defects to jeopardize the exercise of the right to deduction it is necessary that the capacity for correct tax collection and supervision be eliminated, in such a way that the tax administration is not in a position to know the material reality underlying the case in light of the evidence presented to the proceedings by the taxable person.

5. Application to the present case

The central issue that arises in the proceedings at hand revolves around whether the invoices issued to the Claimant by company B… (totaling six invoices) and by supplier C… (only one invoice) would or would not be formally valid, for the purposes of exercising the right to deduction, in light of the legal requirements provided for in paragraph a) of no. 2 of article 19 of the VAT Code, combined with no. 5 of article 36 of the same Code, also considering the provision of article 226 of the DVAT.

It is therefore important to analyze, in light of the said legal provisions, the issue of compliance with the legal requirements necessary for VAT deductibility.

In this respect, the TA alleges, among other things, that, as regards the invoices issued by supplier B…, "there is a failure to specifically and precisely identify the quantity of services provided" since "the quantity 1.00 appears imprecise and erroneous reinforced by the fact that it does not specify which unit was used in the said quantity" (…) it further states that "the denominations used to identify the services provided (Portability; Commissions; Outsourcing) appear very imprecise and vague, not allowing for the rigorous identification of the specific services that were provided, which combined with the inaccurate presentation of the quantity and unit price prevents the effective validation of the services provided".

Referring to the document issued by supplier C…, the TA considered that "there is a failure to clearly identify the nature of the services provided and the possible incorporation of material in the services provided (hours, days, weeks, linear meters, square meters, etc.)." "(….) the nomenclature used also does not allow us to determine whether we are in the presence of services provided (mere assembly) or a transfer of goods (incorporation of the good/ raw material in the service provision)" (…) "no unit price is presented, only the gross total amount being presented" (…) "and the document does not present the date on which the goods were placed at the buyer's disposal or on which the services were performed."

In its conclusions, the TA adds that "the validity/legality of the VAT assessment promoted in the said invoices by the corresponding suppliers was never questioned, but rather, the exercise of the right to deduction of VAT borne by the inspected taxable person was questioned" due to failure to comply fully with the formalism legally imposed regarding invoice issuance, it being therefore unacceptable to accept written statements, or alleged witness testimony or the discrimination of the work that may be attached to the case, since "the law is very clear in requiring that such discrimination be made in the invoice itself and not in separate attached documents".

Thus, what is at issue in the case is compliance with paragraphs b), c) and f) of number 5 of article 36 of the VAT Code.

With regard to the alleged failure to comply with the provision of paragraph b) of no. 5 of article 36 of the VAT Code, one cannot speak of a pure and simple omission of the legal reference imposed, but rather of the sufficiency or not of such reference.

Indeed, as the TA itself expressly acknowledges and results from the factual matter established, all invoices contain mentions, albeit generic, of the type of services to which they relate and indicate a quantity in the case of invoices relating to supplier B… through the number "1" with reference to the monthly duration of the services.

In the case of the invoice issued by supplier C…, the reference to quantity appears in an incipient manner in the designation used for "glass door lock", referring the invoice text to the possibility of being a single supply "one lock", a fact that was corroborated by witness testimony.

Now, in the field of sufficiency as to the quantity and denomination of the goods transferred / services provided, we follow the position defended by the Arbitral Tribunal in Case no. 411/2014-T of 27 March 2015 according to which, appealing to a hermeneutic perspective, the mentions in the invoices should have a generic character taking into account, in particular, the following:

1. The literal element of the rule, in particular the use of the words "nature" and "usual denomination";

2. The transnational nature of VAT and the purpose of this tax for economic transactions in the space of the Union, little compatible with excessive formalism;

3. The possibility of repetitive use of expressions so as to reduce bureaucratic work;

4. The functionalization of formal requirements to the needs of supervision and control by the tax administration;

5. The fact that the Directive itself presents an abstract description of services, the national rule being an expression of a community regulation that is positioned upstream; and finally we add,

6. The position that has been repeatedly assumed by CJEU jurisprudence with regard to the wording of article 226, no. 6 of the DVAT, according to which the extent and nature of the services provided must be specified, but it is not necessary that the specific services provided be described exhaustively.[8]

Note that, at the level of national jurisprudence also, in the Decision of the Administrative Court of Appeal – South of 07-01-2004, delivered in Case 0479/03, it was written that "The designation of the quantity and usual denomination of the goods transferred or services provided must be indicated in the invoice in such a way that the Administration can effectively supervise the tax obligations."

That is, the requirement of form of invoicing at the VAT level, relating to "the designation of the quantity and usual denomination of the goods transferred or services provided", will be aimed at, as pointed out, ensuring "that the Administration can effectively supervise the tax obligations" allowing "the identification of the transaction in sufficient detail so that the proper consequences regarding the tax (its incidence, subjects, rate, collection, refunds, etc.) may be drawn".

This functionalization of the formalities now in question cannot justify the total omission of minimum requirements that allow for the identification of the specific legal-tax treatment of the transaction, however, this Tribunal considers, following moreover the jurisprudence of the CJEU, that the degree of requirement in the description of invoices should not be disproportionate, for the purposes of exercising the right to deduction, in light of the purposes of identification of the transaction and control of fraud and tax evasion.

Consequently, from the perspective of neutrality, given that in substance the taxable person has the right to deduction, it will be important to know whether in the specific case any incompleteness of the invoice may jeopardize the purposes of correct tax collection and effective control of the transactions.[9]

Thus, the weighing of the functional value attributed to the formal requirements of invoices led the CJEU to consider that "(…) although an invoice does indeed have an important documentary function due to the fact that it may contain verifiable data, there are circumstances in which the data may be validly proven through other means than an invoice and in which the requirement to have an invoice in all respects in conformity with the provisions of Directive 2006/112 would have as a consequence to jeopardize the right to deduction of a taxable person.[10]

Appealing to a more flexible approach than that which has been used by national jurisprudence, the CJEU admits that the substance of operations, once proven, prevails over invoice defects, when elements provided for in the internal law of Member States are at stake, and to the limited extent that the VAT Directive allows its introduction. The Court goes further, even admitting that the substance of operations prevails over invoice defects relating to elements typified in the VAT Directive, provided that no fraud risk is created.[11]

Given the reality of the case, if doubts existed as to the nature of the services provided by invoices from supplier B…, such doubts would easily be overcome using the supporting documents prepared by the parties and the "Valued Accounting Reports" that form part of the administrative file.

Indeed, as the TA itself well identified in the TIR, what is at issue is a provision of specialized personnel transfer services, in the "Outsourcing" modality (a business management figure that appeared in Portugal in the early 1980s and is today widely known and used) through which the Claimant externalizes tasks within its business scope to other service providers who develop them at the facilities of the first, making the technical staff of the provider available for the purposes and functions agreed between the parties. This legal relationship and the service provision in question is, in the view of this Tribunal, sufficiently reflected in the description used by the supplier "Services provided at your company in the period from 01 to 31 of ___ of 2015, by our employees". Such services provided at the Claimant's facilities are accompanied by the expressions "Portabilities" or "Commissions", these perhaps colored by the language of the telecommunications sector or, alternatively, clearly, simply and commonly "Outsourcing".

It is further noted that, where doubts may arise as to the concrete reality that the invoices intend to demonstrate and as to the usual denomination of the services provided, the witness for the Claimant clarified the meaning of the expression "portability" – "a common denomination in the lexicon of telecommunications operators to define services related to operator portability, consisting of the management of the user transfer procedure between networks, data processing and ensuring the efficiency of services regardless of the geographic location of users."[12] In the same manner, the meaning of the expression "commissions" was clarified – "used to designate the allocation of a variable benefit to the supplier, depending on the level of achievement of the objectives defined in the service provision contract"[13].

With respect to the mention of the quantity of services provided by reference to its temporal extension – one month – an element common to all invoices from supplier B…, as well as the unit price which corresponds to the gross value of the services provided, influenced according to the TA, by the erroneous presentation of the quantity "1", it is considered that these elements sufficiently comply with the requirements imposed by paragraph b) of no. 5 of article 36 of the VAT Code.

Indeed, starting from the analysis of the letter of paragraph b), of no. 5 of article 36 of the VAT Code, which finds direct correspondence in point 6 of article 226 of the VAT Directive "the only mentions that must mandatorily appear, for VAT purposes, on invoices issued in application of articles 220 and 221 are as follows (…) 6) The quantity and nature of the goods delivered or the extent and nature of the services provided".

In this respect it has been noted by jurisprudence that the national rule operates an imperfect transposition of the community rule, since unlike this, it does not distinguish, as to the type of mention to be made on the invoice or equivalent document, between goods and services.[14] Thus, while the community rule states that the goods involved in a invoiced transaction should be mentioned, in addition to their nature, by their quantity, and that services should be mentioned by their extent, the national rule provides that both should be mentioned by their usual denomination and quantity. Consequently, it must be understood that the concept of quantity used by paragraph b) of no. 5 of article 36 of the VAT Code cannot assume the same meaning when goods are involved and when services are involved.

In this sense, the said jurisprudence admits the use of other variants of measurement, or even the omission of the reference to quantity, taking into account the specificities of the operations, especially since while goods, by their material nature, will always, by definition, be directly measurable, services will not always be.

Now, in the context of services provided, the indication of the monthly extent thereof, associated with the documents attached to the case to complement the invoices issued, allows the TA to carry out its functions of controlling tax fraud and evasion through the cross-referencing of relevant information.

Indeed, this Tribunal considers that for the purposes of ensuring effective control of the tax revenue resulting from the service provisions in question, what would matter would not so much the mere inscription on the invoice of a "unit of measurement" as a fulfillment of the formal requirement of extent / quantity and unit price applied, but the provision of useful information from which the variables underlying the construction of the value inscribed in the invoice result.

In the particular case of services, it is important to consider that "units of measurement" can take multiple configurations, not infrequently crossing diverse elements of both quantitative and qualitative nature, such as the number of hours, the number of tasks performed, the level of customer satisfaction, the achievement of set objectives, and it is quite reductive and potentially detrimental to the possibility of effective control not to admit supporting means of proof when the information contained in the invoice proves insufficient or inconclusive. It is not therefore a matter of substituting the invoice with another means of proof, however, if it is the case, it is a matter of clarifying the contours of the underlying material transaction through supporting information (in the case, financial information was chosen), which validates its description and ensures the qualification of the transactions at the legal-tax level.[15]

In sum, and for the reasons set out, the Tribunal considers that the invoices issued by supplier B… and the other means of evidence attached to the case allow for ensuring compliance with the requirements necessary for VAT deductibility, containing the indications which, within the jurisprudential criteria explained, are sufficient, in light of an interpretation conforming to community law of paragraphs b) and c) of no. 5 of article 36 of the Code.

As for the invoice issued by supplier C…, a single invoice, which concerns construction work carried out at the Claimant's facilities, on the Island of …, the TA considers that this document is not in line with the provision of paragraphs b), c) and f) in no. 5 of article 36 of the VAT Code, because it does not identify the quantity of services provided, or possible incorporation of material, because the nomenclature used does not allow for distinguishing whether we are in the presence of a service provision or a transfer of goods, and also because there is no specific mention of the date on which the services were provided.

As results from the evidence, the invoice issued by supplier C… contains the following mentions: "Various Works" – "remove flooring and install new, – metal framework between plasterboard walls, painting of cabinet door, shelf, baseboard, stainless steel, glass door lock, cabinet assembly". It is further noted that the unit price corresponds to the total gross amount of the operation, and the date mentioned is "28/7/2015".

Now, in light of the considerations previously made, and without departing from the principle that has been followed by CJEU jurisprudence, according to which formal requirements cannot be dissociated from the purposes of controlling payment of the tax due and the risks of loss of tax revenue, we consider that the invoice in question gives the minimum compliance with the provision of article 36, no. 5 of the VAT Code, for the purposes of enabling the exercise of the right to deduction. It should be emphasized that it is in light of the said purposes that this invoice must be analyzed, in order to ascertain whether the TA can refuse the right to deduction even though the taxable person possesses an invoice that does not strictly comply with all requirements of article 36, no. 5 of the said Code.

With respect to the qualification of the services provided, it is true that, as the TA states, the description in the invoice contains indications that could be interpreted in a double sense, of service provision or of service provision with material incorporation, in the case of "remove flooring and install new".

On the other hand, it is important to observe that the mentions in the invoice seek to give concrete effect to the work actually performed, as for example "painting of cabinet door, shelf, baseboard, stainless steel", "cabinet assembly". Thus, and with respect to the nature of the services in question, it is understood that the invoice description reasonably fulfills the objective of identifying the operations performed, it being certain that combined with the testimony of the Claimant's witness, it is clarified that in the set of services provided, there was supply of "one lock", in correspondence with the invoice text "glass door lock".

Note also that the witness corroborated in his testimony that the work in question was of a one-off nature, of short duration, information which combined with the invoice text – to repeat once more the type of tasks in question "painting of door, shelf, cabinet assembly, glass door lock (…)" – allow for drawing relevant consequences regarding the tax, namely, as to the short duration of the operation, as to incidence, location, taxable persons and applicable rates.

Indeed, despite the mentions relating to the services provided and material supplied not corresponding to the most perfect and desirable of descriptions, it seems to us that the expressions used result from common language, having an understandable meaning, particularly considering the small size of the provider, since, contrary to what the TA alleges, it would not be "so generic" as not to allow for bringing to light, in minimally reasonable terms, the specifications required by no. 5 of article 36 of the VAT Code as to "The quantity and usual denomination of the goods transferred or services provided, with specification of the elements necessary to determine the applicable rate".

Secondly, as to the requirement that the invoice does not contain a unit price, note that paragraph c) of no. 5 of article 36 of the VAT Code provides that invoices must contain the reference to the "price, net of tax and other elements included in the taxable amount", it being certain that this requirement, in the case of the invoice in the file, is fulfilled. It is further noted that the operations in question are not subject to different rates, whether it is service provisions or material supplies, nor in any circumstance would they be classifiable within the framework of the exemptions provided for in the VAT Code, it being important to highlight that the supplier subjected the total taxable value (gross price of the work developed) to the single applicable rate in the case, specifically the maximum rate of 18%, having therefore ensured the collection of the tax due.

Finally, the TA considers that the invoice does not specify the concrete date on which the services were provided, although the invoice indicates the date of 28/07/2015.

As the Claimant rightly points out, paragraph f) of no. 5 of article 36 of the VAT Code prescribes the obligation to affix the date of provisions when this does not coincide with the date of invoice issuance. Note that in the case at hand, it was an established fact that the services were of a one-off nature, of short duration, nothing leading to suppose, in light of the type of services provided, nor does the TA allege, that the event triggering the tax occurred in a period different from that to which the date of invoice issuance refers. In this respect, we follow Miguel Agrellos in stating that the requirement test cannot be indifferent to the circumstances of the specific case: "It is true that certain situations can raise greater difficulties such as ancillary provisions or cross-border transactions. But it is these situations that, due to their specifics, may in the specific case require additional effort to concretize. What makes no sense is to adjust the gauge by the disproportionately demanding criterion for the majority of transactions to which the normal rules of tax application apply."[16]

Finally, we must make a final reference to the recent jurisprudence of the CJEU in the Barlis Judgment, regarding the importance of weighing the consequences of a violation of article 226 of the DVAT on the exercise of the right to deduction in light of the purposes pursued by the said rule.[17] Reinforcing its jurisprudence on formal defects, the Court states that the principle of VAT neutrality "requires that the refund of this tax paid upstream be granted if the substantive requirements are met even if the taxable persons have neglected certain formal requirements. Consequently, when the Tax Administration has the necessary data to know whether the substantive requirements have been met, it cannot impose supplementary conditions on the taxable person's right to deduct the tax which might have the effect of eliminating that right (see, in this sense, Judgments of 21 October 2010, Nidera Handelscompagnie, C‑385/09, EU:C:2010:627, no. 42; of 1 March 2012, Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wąsiewicz, C‑280/10, EU:C:2012:107, no. 43; and of 9 July 2015, Salomie and Oltean, C‑183/14, EU:C:2015:454, nos. 58, 59 and jurisprudence referred to therein)". And it specifies by adding "It follows that the Tax Administration cannot refuse the right to deduction of VAT by the mere fact that the invoice does not meet the requirements laid down in article 226, nos. 6 and 7, of Directive 2006/112, if it has all the data to verify whether the substantive requirements relating to this right are satisfied." (emphasis added). And finally, it states, in defense of the principle of proportionality, that "Member States are competent to provide for sanctions in the event of violation of the formal requirements relating to the exercise of the right to deduction of VAT." (…) "European Union law does not prevent Member States from applying, as appropriate, a penalty or a pecuniary sanction proportionate to the seriousness of the infraction, in order to punish the violation of formal requirements."

In sum, it appears to us that the formalities on which we have dwelt should be considered sufficiently met, since in the context of the services provided (whether by B… or by C…) the purposes highlighted by CJEU jurisprudence of identification of transactions at the legal-tax level, of ascertainment of their incidence, determination of the applicable rate, were assured, and the exact collection and proper supervision of the tax were not jeopardized.

Considering the invoices suitable to support the exercise of the Claimant's right to deduction, in compliance with paragraphs b), c) and f) of no. 5 of article 36 of the VAT Code, the tax acts in question in these proceedings must be annulled, on the grounds of violation of law.

6. Compensatory interest

The Claimant also petitioned for the condemnation of the Respondent in compensatory interest, accrued and accruing until the date of refund of the amounts of tax improperly assessed, considering that, in the present case, there was assessment of VAT in excess of the amount due due to error attributable to the services.

Pursuant to article 43 of the General Tax Law and article 61 of the Code of Tax and Administrative Procedure, "Compensatory interest is due when it is determined, in a grace period claim or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in excess of the legally due amount".

Error attributable to the administration is understood to be error that is not attributable to the taxpayer and is based on erroneous presuppositions of fact and law that are not the responsibility of the taxpayer. Thus, "the right to compensatory interest covers only one of the causes of responsibility of the tax administration, acting as such: that originated by the improper payment of taxes, which is attributable to it (…) the right to compensatory interest in favor of the taxpayer comes, as a general rule, from a duty of indemnification of the tax administration resulting from the forced unproductiveness of the amounts disbursed by the taxpayer."(see António Lima Guerreiro, General Tax Law Annotated, Rei dos Livros Publisher, p. 204 and 205).

Now, in the case at hand it is not demonstrated that the Claimant proceeded to pay any amount as a result of the assessments that are the subject of these proceedings.

It is therefore concluded that the Claimant's claim regarding the payment of compensatory interest is unfounded.

IV. DECISION

Accordingly, this Arbitral Tribunal rules on the admissibility of the arbitral request filed by the Claimant and, as a result:

a) Annuls the assessment acts that are the subject of these proceedings, in the total amount of €37,354.68;

b) As a result, orders the refund of that amount of VAT whose deduction was denied;

c) Condemns the Respondent in the costs of the proceedings.

V. VALUE OF PROCEEDINGS

The value of the proceedings is fixed at €37,354.68, pursuant to article 97-A, no. 1, a), of the Code of Tax and Administrative Procedure, applicable by force of paragraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulations of Costs in Tax Arbitration Proceedings.

VI. COSTS

The arbitration fee is fixed at €1,836.00, pursuant to Table I of the Regulations of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was entirely granted, pursuant to articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the cited Regulations.

Let notice be given.

Lisbon, 17 February 2017

The Arbitrator

(Filipa Barros)

[1] Acronym for Legal Regime of Tax Arbitration.

[2] Directive 2006/112/EC, of 28 November, published in OJ no. L 347, of 11 December 2006.

[3] See, in particular, Judgments of 6 July 1995, BP Soupergaz, C-62/93, no. 18, and of 21 March 2000, Gabalfrisa C-110/98 to C-147/98, no. 43, as well as of 6 July 2006, Kittel and Recolta Recycling, C-439/04 and C-440/04, no. 47.

[4] On this see Judgment of 11 July 1989, Schrader, C-265/87, no. 21 and Judgment of 19 September 2000, Ampafrance, C-177/99.

[5] See Judgments of 18 December 1997, Molenheide and others C-286/94, C-340/95, C-401/95 and C-47/96, no. 47.

[6] Judgment of 21 April 2005, Finanzamt Bergisch Gladbach, C-25/03, no. 80.

[7] Judgment of 14 July 1988, Lea Jeunehomme and EGI, C-123 and 130/87.

[8] Judgment of 15 September 2016, Barlis 06, C-516/14, no. 26.

[9] See Sérgio Vasques (2015) Value Added Tax, p. 344.

[10] Judgment of 1 March 2012, Polski Trawertyn, C-280/10, no. 47-49.

[11] See Sergio Vasques, p. 345.

[12] Point 10 of the factual matter.

[13] Point 12 of the factual matter.

[14] CAAD Judgment, Case no. 411/2014-T, 27 March 2015; Administrative Court of Appeal – South Judgment, Case no. 7282/14 of 10 July 2014.

[15] See in this sense STA Judgment Case no. 24857, of 24 May 2000.

[16] Miguel Agrellos, Paulo Pichel and André Mena Husgen, "Further on Invoice Formalities: Analysis of Portuguese Court Jurisprudence, VAT Notebooks 2016, p. 297.

[17] Judgment cited, Barlis 06, no. 37-48.