CAAD Decision 325/2017-T: VAT Incidence & Burden of Proof Rules

Process: 325/2017-T

Date: December 11, 2017

Tax Type: IVA

Summary

CAAD Arbitral Decision 325/2017-T addresses the annulment of an additional VAT assessment of €1,691,845.53 imposed on a Portuguese public research institute (A...) for Q4 2012. The case arose from an external tax inspection following the institute's 2012 restructuring, which involved assuming contractual positions with international publishers for scientific content provision. The dispute centers on objective VAT incidence and burden of proof issues. The applicant transitioned from VAT exemption (Article 9 CIVA) to Article 53 exemption in December 2012, before moving to the normal quarterly regime in 2014. The arbitral tribunal, constituted under Decree-Law 10/2011 (RJAT), examined whether the Tax Authority properly characterized the institute's transactions as taxable supplies. The case illustrates key principles of Portuguese VAT law: the objective incidence rules determining what constitutes taxable economic activity, and the allocation of evidentiary burdens in challenging tax assessments. The applicant also sought compensatory interest (juros indemnizatórios) pursuant to Articles 43 of the LGT and 61 of the CPPT, available when tax authorities unduly collect amounts later found undue. The proceeding followed standard CAAD procedures with written submissions, witness testimony, and oral arguments, demonstrating the accessible alternative dispute resolution mechanism for Portuguese taxpayers contesting VAT liquidations without requiring advance payment.

Full Decision

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (presiding arbitrator), Dr. José Coutinho Pires and Prof. Doctor Elísio Brandão (arbitrators), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 21-07-2017, agree as follows:

1. REPORT

A… NIPC…, with registered office at Av. …, …, …-… Lisbon (hereinafter referred to as "A…" or "Applicant"), has, under Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT"), submitted a request for arbitral pronouncement seeking the annulment of the additional VAT assessment relating to the 4th quarter of 2012 (2012T), in the total amount of 1,691,845.53.

The Applicant further requests compensatory interest.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The request for establishment of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 16-05-2017.

In accordance with the provisions of subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

On 06-07-2017 the parties were duly notified of this appointment and did not express any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of subparagraph c) of paragraph 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 21-07-2017.

The Tax and Customs Authority responded, contending that the request should be ruled unfounded.

On 20-11-2017, a hearing was held at which witness testimony and oral arguments were presented.

On 30-11-2017, the Applicant submitted written arguments, with orders being made for their removal from the file, because, in summary, at the hearing oral arguments had been chosen, which were presented.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraph 1, of Decree-Law no. 10/2011, of 20 January, and has jurisdiction.

The parties are duly represented, possess legal standing and capacity, are legitimate and are represented (articles 4 and 10, paragraph 2, of the same decree and article 1 of Order no. 112-A/2011, of 22 March).

The proceedings are free from nullities and there are no exceptions nor any obstacle to the examination of the merits of the case.

2. FACTUAL MATTERS

2.1. Established Facts

Based on the elements contained in the proceedings and in the administrative file attached to the case, the following facts are considered established:

a) An external tax inspection was carried out on the Applicant relating to the year 2012 in which the Tax Inspection Report was prepared, which is contained in document no. 2 attached with the request for arbitral pronouncement, the content of which is hereby reproduced, in which it states, among other things, the following:

II.3.1. CHARACTERIZATION OF THE TAXABLE PERSON

A… (hereinafter referred to only as "A…" or "taxable person") is a public institute of special regime, in accordance with law, integrated into the indirect administration of the State, supervised by the Ministry of Science, Technology and Higher Education and endowed with administrative and financial autonomy and its own assets, which began operations in August 1997.

The activity developed by A… had as its object the support for research in science, technology and innovation, in all areas of knowledge.

In 2012, with the publication of Decree-Law no. 45/2012, of 23 February, inserted in the purpose of "rationalization of state structures and better utilization of its human resources" the restructuring of A… began with the integration of the mission and part of the attributions of another entity also under state supervision, T... (which had the responsibility for coordinating public policies for the Information Society in Portugal).

Subsequently, in March of the same year, through the approval of Council of Ministers Resolution no. …/2012, it was determined that A… would further expand its scope of action, becoming actively involved in … (…), a project managed by B… (hereinafter referred to only as "B…"). This project had as its object the provision of scientific contents acquired from international publishers, in an aggregated manner, to the Portuguese scientific community, and this intervention, as stated in the said resolution, involved the assumption of the contractual position of B… in the contracts executed with all publishers responsible for supplying the contents that … (…) made available.

The new Statutes of A… were published on 16 May 2012, through Order no. 149/2012.

Later, on 31 December 2012, Decree-Law no. 266-G/2012 was published, which introduced further changes to the Organic Law of the Ministry of Education and Science, including new attributions for A…, with the integration of the mission and part of the competencies of B….

With this change, with regard to the specific situation of … (…), A…, in addition to maintaining the contractual position it had already assumed with the publishers feeding its database, also became responsible for the coordination and management of the same (which had previously been the responsibility of B….

(...)

Tax Framework

In terms of VAT registration, the taxable person initiated its activity in the VAT exemption regime (article 9) and altered it on 02-05-2008 (adding Intra-Community Acquisitions of Goods). On 11-12-2012 it altered the reason for exemption (it became subject to article 53 of the VAT Code) and thus remained until 04-02-2014, when it moved to the current quarterly normal regime, classified as "Mixed" with actual allocation (pro-rata).

Compliance with Declaration Obligations

In verifying compliance with declaration obligations, based on the tax framework at the beginning of the present action, it was found that the taxable person submitted the tax declarations to which it was obligated, as a rule within the periods provided by law, although, in the specific case of periodic VAT declarations, they were not settled due to the divergences that are under review.

(...)

II.3.2. ACTIVITY DEVELOPED

During the period under review, the mission attributed to A…, provided for in Decree-Law no. 152/2007 ("development, financing and evaluation of institutions, networks, scientific infrastructure, equipment, programs, projects and human resources in all domains of science and technology, as well as the development of international scientific and technological cooperation") was expanded with the publication of Decree-Law 55/2013, now incorporating the "coordination of public policies in science and technology, and also the development of national scientific computing resources, promoting the installation and use of advanced means and services and their articulation in networks".

The activity developed aimed essentially at supporting the scientific community through different financing instruments (namely doctoral and post-doctoral scholarships, R&D projects, awards, etc.) directed at scientists, research teams and R&D centers.

Currently the main lines of action are:

I. Financing for science

II. Research projects;

III. Advanced training (Doctoral scholarships, post-doctoral scholarships and other types of scholarships, in an investment of around 50 M€/year - period 2010-2015).

IV. Scientific employment;

V. Research institutions;

VI. International Cooperation (A… ensures international partnerships with the USA, participation of the national scientific community in bilateral and multilateral research programs, and contributions to international scientific organizations).

VII. Information Society;

VIII. … and Network Science, Technology and Society;

IX. Other support to the Scientific Community and to Scientific Culture;

(...)

II.3.3. ANALYSIS OF THE SITUATION

The present action was opened for validation of the classification of the taxable person in VAT, as a result of incompatibilities detected between the amounts recorded in the periodic declarations submitted and the tax exemption regime in which the taxable person was inserted.

At the beginning of the period under review (01 January 2012), A… was a VAT taxable person but classified under the exemption regime, in accordance with articles 9 (until 01.03.2012) and subsequently 53 (until 04.02.2014), both of the VAT Code, and submitted periodic declarations in which it indicated amounts in fields 20 and 24 - VAT to deduct as a result of tax borne with the acquisition of fixed assets and services.

Now, these exemptions are classified as "incomplete" in that they do not result in the levying of tax on active operations but neither does the right to deduct VAT borne with the acquisition of goods and services necessary for their performance exist.

And the taxable person, by recording the amount of VAT borne with the acquisition of goods and services in fields 20 and 24 (VAT to deduct), generated the aforesaid situations of incompatibility that persisted until the moment it again altered its classification in VAT, moving to the quarterly normal regime (04.02.2014).

Consequently, all the periodic VAT declarations that were submitted in the periods preceding this change to the normal regime, due to this incompatibility, became non-settled.

III - DESCRIPTION OF THE FACTS AND GROUNDS OF THE ARITHMETIC CORRECTIONS

A…, being a public institute integrated into the structure of the State that had as its social object the financing of research in science, technology and innovation, in all areas of knowledge, developed an activity that, due to its nature, did not fall within the species typified in article 1 of the VAT Code - Real scope, insofar as it cannot be considered a transfer of goods, a provision of services, an import or an intra-community operation and which, consequently, fell outside the scope of the tax.

This fact made A… a non-taxable person, in VAT.

However, despite being aware of this situation, as was possible to ascertain through the statement included in a proposal for internal amendment of the VAT regime, presented to the Board of Directors of this entity, dated 18.07.2012, where it is stated that: "The activity carried out by A… does not confer the right to deduct VAT borne, given that they are operations outside the scope of the tax", A… incorrectly concluded that it performed exempt operations ("(...) therefore the exemption regime applies to it").

Now, operations that, by their nature, are outside the scope of the tax, are not subject to VAT, while those that benefit from any type of exemption require their subjection to the tax.

As a result of this interpretive lapse, the taxable person submitted a declaration of commencement of activity on 01.04.1999, in which it indicated that its classification in VAT was "Exempt in accordance with article 9". This declaration remained valid until mid-2012, when the taxable person submitted a declaration of amendments but only to alter the reason for exemption (coming to be classified under article 53 of the VAT Code).

In terms of declarations and tax computation, non-subjection and incomplete exemption (which includes exemptions under articles 9 and 53 of the VAT Code) would not generate divergences since they result in non-levying and non-deduction of VAT, therefore the lapse would not cause prejudice to the State.

Based on this presumption, A… always developed its activity without computing VAT or submitting any periodic declaration.

This situation changed during the period under review when, following the determinations of the State that promoted modifications regarding the obligations and rights attached to A…, it adopted different procedures and promoted different classifications in VAT that led to the inconsistencies that are the subject of the present analysis.

Objectively, the taxable person that, until then, had not yet submitted any periodic VAT declaration, submitted a periodic declaration for the period 1212T (no. …).

But, as has already been stated, the periodic declarations submitted for the periods until 1403T (the moment when it ceased to be classified under the exemption regime) did not produce any effects because they remained in the state of "non-settled" due to incompatibility between the amounts recorded and the VAT regime of the taxpayer. It is noted, however, that the tax to be paid to the State was paid (attached voucher).

To ascertain the tax legitimacy of the amounts recorded, a more detailed analysis was undertaken of the periodic declaration in question (1212T) which, in summary, presented the following amounts:

A. VAT Levied

Beginning with the tax to be levied, the account statements for VAT made available by the taxable person revealed that the amounts recorded were based on internal operations and intra-community acquisitions of goods:

The existence of active operations immediately raised the need for supplementary clarifications since the taxable person, until then, apparently only carried out operations outside the scope of VAT.

Analyzing the entries made in account #243132, it was possible to ascertain that there were operations of two distinct natures:

I. Internal operations subject to the normal rate (€ 671,003.31);

II. Intra-community acquisitions (€ 2,313,706.86);

Internal Operations Subject to Normal Rate

A. Operations designated "Reg VAT Levied"

In the account statement for VAT levied (#account 24332), relating to 2012, three operations were recorded (designated as "REG VAT LEVIED"), in the total amount of € 343,640.20, which were not supported by invoices.

To understand what was recorded and to ascertain the legitimacy of the tax treatment granted, additional clarifications were requested on the nature of the operations and copies of the supporting documents.

The taxable person submitted the attached documents and justified the existence of active operations with the need to comply with the determinations of the State, contained in specific legislation subsequently published, as it appears justified in the proposal for internal amendment of the VAT classification: "Considering that Council of Ministers Resolution no. 32/2012, of 15 March, determines the transfer of the contractual position for A… of the contracts executed between B… (B…) and the international publishers of scientific contents to be made available under … (…), it is necessary to proceed with the implementation and amendment of procedures with respect to the VAT regime, since the operations to be carried out - invoicing to using entities as previously practiced by B… - have VAT levying and confer the right to deduction. In accordance with the opinion of the Tax Advisor, A… should alter its VAT regime to mixed taxable person, insofar as it will develop operations that require VAT levying and confer the right to its deduction, together with others that do not confer that right. In the activities/projects that confer, fully or partially, such right, the provisions of article 23 of the VAT Code should be applied, which consists of deducting VAT by applying an objective criterion of actual allocation that allows identifying each of the activities developed".

Project …

As was previously stated, … (…) was created in 2004 with the purpose of providing the national teaching and research community with scientific contents online through payment of the said accesses, by users who so requested, in which the technical, operational and administrative management of the project, as per protocols with the responsible entities, was ensured, from its beginning until 2013, by B… (B…).

In 2012, with Council of Ministers Resolution no. 32/2012, it was determined that A… would assume the contractual position of B… in the contracts executed with international publishers that feed the database made available for consultation, being authorized for that purpose to incur an expenditure of € 11,689,000.00.

It was also determined that this expenditure would be entirely financed through the transfer of funds in favor of A…, from different sources, in the same amount.

A… should also propose to B… the formalization of a partnership that would ensure that the latter would continue its activity of technical, administrative and operational support to the … project.

It was in this sense that, in April 2012, a protocol was executed between A… and B…, which would govern the terms of collaboration between these entities in the framework of operation, planning, development and management of … (…), for the period between April 2012 and 31 December 2012, which defined a set of obligations:

Ø Obligations of B…:

a) Ensure the operation, technical and administrative support, planning, development and management of … (…);

b) Guarantee content management services, electronic services and the operation and maintenance of the Front and Backoffice of …;

c) Maintain and develop communication, dissemination and training activities;

d) Guarantee national and international representation and appropriate partnerships;

e) Produce the necessary studies and management and operation control reports;

B… commits itself to execute what is provided in the preceding paragraph while respecting the terms of the Technical and Financial Annex to this protocol and allocating for this purpose the necessary resources for its implementation.

B… also collaborates with A… by providing all technical and administrative collaboration that may be requested of it in this regard, namely, but not exclusively, in the assistance and support for conducting procurement processes for goods and services, namely of the contents made available in …, in the production of cost distribution maps and in the control and validation of invoices from publishers.

Ø Obligations of A…:

A… assumes ownership of the contracts with the publishers … (…) ensuring the respective charges.
A…, within the limits of its budgetary availability, bears the charges associated with the development of the activities identified in the Technical and Financial Annex to this protocol, through the granting of an annual subsidy to B….
The subsidy to be granted in application of no. 2, in the year 2012 has the following reference value: 526,103€ (five hundred and twenty-six thousand one hundred and three euros);
The amount of subsidies to be granted in subsequent years will be agreed between the parties by the end of the year immediately preceding the year to which they refer;

In light of the above and the analysis of all documents presented, the following was concluded:

-> Council of Ministers Resolution no. 32/2012 determined that A… would assume the contractual position of B… in the contracts executed with the publishers that supply the contents of …;

-> The attributions granted to A… in 2012, regarding …, translated exclusively into the financing of expenses for the acquisition of contents, insofar as it was only authorized to incur charges (€11,689,000.00 for the year 2012) to meet the acquisition of contents and benefited from the transfer of funds, in the same amount, exclusively allocated to this purpose.

-> The partnership executed between A… and B… determined the obligations of each entity, within the scope of the … project, but did not remove its effective operation from B…;

-> The provision of services (provision of scientific contents online) to end customers (users) continued to be carried out by B… in 2012;

-> The financing of this charge was conducted with the channeling of funds from different sources, made available specifically for this purpose:

Ø € 2,000,000 recorded in "Other Allocations for Support to Higher Education" (ODAES) of the Directorate-General of Higher Education;

Ø € 1,707,988, corresponding to the withholding value relating to projects 07788 and 07790 of T… (T…);

Ø € 1,481,012 of own revenues collected by B… under the provision of services to third parties;

Ø € 1,819,234 to be borne by public higher education institutions

Ø € 1,180,766 of the budget of A…;

Ø € 3,500,000 from FEDER (upon approval of the application to the System of Support for Administrative Modernization - SAMA);

However, based on these premises and on the documents presented by A…, it was not possible to determine which operations were taxable, subject to tax at the normal VAT rate, that was recorded by the taxable person.

The taxable person only stated that the operations in question were based on "Council of Ministers Resolution 32/2012 no. 1 subsection d)" and attached copies of the documents that served as support for the recording thereof.

The fact that the operations recorded were based on part of the amount transferred by public higher education institutions (one of the funds allocated to financing the acquisition of scientific contents to feed …) does not, by itself, constitute any taxable operation.

However, because through the recording made, it was verified that VAT was levied on the base amount and, bearing in mind that the simple mention of VAT in any documents, even if improper, as provided in article 2, no. 1, subparagraph c), of the VAT Code promotes the subjective incidence of the issuer to the tax and generates the respective obligation to deliver the levied tax to the State coffers, as provided in no. 2 of article 27 of the VAT Code.

Thus, applying to the case in question, although the nature of the operations was not identified nor the reasons that led to the subjection to VAT, by levying tax, A… granted to the recipient the right to deduct VAT. Therefore, by adopting this procedure, regardless of the capacity in which it issued the document, A… became a taxable person and "VAT debtor", insofar as, to the right to deduction that the issued documents conferred, corresponds an obligation to pay.

Thus, in light of the above, the tax treatment given to these three operations, by the taxable person, will not be subject to correction in the present analysis, since, although the operations and the method of calculation thereof were not explicitly stated, VAT was levied on these, which was recorded, declared and paid, which appears to us correct since the taxable person is obligated to deliver to the State the tax levied even if improperly, in accordance with articles 2, no. 1 and 27, no. 2 of the VAT Code), that is, € 343,640.20.

B. Operation designated "Reg B…"

With regard to the last operation (designated "REG B…"), supported by invoice no. 1/2012 (annex vi), in the amount of € 1,450,681.00, plus VAT at the normal rate (€ 1,750,681.00), the description of which is identified as follows, it was possible to ascertain that A… intended to re-invoice B… the services that were initially invoiced by the latter to its end customers, in 2012:

Now, despite the arguments presented, without the existence of other legislation or contract, beyond those made available to us during the inspection acts, it is not apparent what the reason is why A… considers itself a creditor of the amounts invoiced by B….

Council of Ministers Resolution no. 32/2012 that supported this amendment determined the transfer to the budget of A…, among other funds: "(...) c) € 1,481,012 (one million, four hundred and eighty-one thousand and twelve euros), of own revenues collected by B… (B…) under the provision of services to third parties". Nothing is mentioned regarding the attribution to A… of any right over the amounts invoiced by B…, even in the operation of … (…).

The said Council of Ministers Resolution only authorized A… "3 - (...) due to the transfer of the contractual position for A…, of the contracts executed between B… and the publishers C…, D…, E…, F…, G…, H…, I…, J…, K…, L…, M…, O…, P…, Q…, R… and S… (Scientific), the realization of the expenditure inherent to the execution in 2012 of the said contracts up to the total amount of € 11,689,000.

And, to meet these expenses, the allocation of funds from various sources was determined up to their concurrence.

That is, from reading the resolution it follows that B… only ceased to intervene in the contracts for the acquisition of contents that feed … (through the transfer of the contractual position to A…) and was left with the task of transferring to A… a certain amount (€ 1,481,012.00) from its own revenues obtained from its activity, with the operation of the activity remaining with B…(in accordance with Council of Ministers Resolution 32/2012 and as agreed between the two entities in April 2012).

It is further added that the invoice issued in 2012 was not for the total amount to be transferred (€ 1,423,317.91) but for € 1,481,012.00 and, neither is it stated that the amount to be transferred by B… is intended as a transfer of part of its own revenues in favor of A… since only then would the description of the issued invoice be justified.

As has already been stated, in 2012, according to all documents analyzed, no elements were identified that would allow considering that the participation of A… in the … project was more than a merely financing activity.

Suffice it to see that the determination contained in Council of Ministers Resolution no. 32 of 2012 states that "B… (B…) has, also and from the beginning of the project, collaborated actively and closely with the Government in the pursuance of this project, ensuring its technical, operational and administrative management in accordance with the terms agreed with the responsible entities" and "(...) the transfer of the contractual position of B… to A… (A…)" and, in no. 5 "Determine that A… proposes to B… the formalization of a partnership that ensures that the latter continues its activity of technical, administrative and operational support to the b-on project."

Now, thus being, without authorization for the transfer of the operation of the activity but to realize a specific expenditure to meet the charges associated with the acquisition of contents from international publishers to feed …, the fact that one of the funds that the State decided to allocate, to finance the amount to be levied, comes from B… should not, by itself, constitute a transfer of the operation of part of the activity.

It is also important to bear in mind that, in fact, the amount that B… had to transfer represented only part of the amount received from the operation of this activity.

And, as was stated at the beginning of this report project, financing activity, without counterparts and substituting for the State, is an activity not subject to VAT because it falls outside the scope of the tax.

For this reason, the VAT that affected the amount (approximately) that B… was obligated to transfer to A… was improperly levied.

Thus, as was stated for the previously analyzed operations, the VAT levied, in the amount of € 327,363.11, even if improperly levied, should be delivered to the State.

Intra-Community Operations

The last item with relevance in the computation of VAT levied were intra-community acquisitions of goods.

Intra-community acquisitions of goods are operations subject to VAT and of mandatory declaration, in accordance with article 1 of the VAT Code and articles 25 and 30 of the Regulation on Intra-Community Transactions and the consultation of information available in the VIES system made it possible to identify the following transfers of goods/services in favor of the taxable person:

As can be seen from the list presented, the taxable person should already have submitted periodic VAT declarations in 2011 because, even being improperly classified under the exemption regime, as it exceeded € 10,000.00 in the first operation alone, it was excluded from the derogation provided for in article 5 of the Regulation on Intra-Community Transactions which dispenses with the obligation to levy VAT on intra-community acquisitions by exempt and non-taxable entities.

In 2012, through the only periodic VAT declaration submitted (1212T), the taxable person declared having carried out intra-community acquisitions in the amount of € 10,059,595.06, an amount that is higher than the transfers declared by intra-community suppliers in the VIES system.

The breakdown of the information retrieved from the VIES system made it possible to discriminate the acquisitions made by supplier and by quarter:

To clarify this divergence, additional clarifications were requested, namely the respective current account statements and supporting documents.

However, a document presented by the taxable person during the inspection acts was identified, entitled "Execution of charges with … in the years 2012 and 2013", where it is stated, for the year 201211:

· "In accordance with Council of Ministers Resolution no. 32/2012, of 15 March, it was determined that, in 2012, the contracts executed between B… and the publishers of scientific contents to be made available in … would pass to the responsibility of A…, and the realization of expenditure inherent to the execution thereof was authorized, estimated at 11,689,000€ (amount without VAT)"

· "Faced with the amounts invoiced by the Publishers, the revenues received for their support proved insufficient, so A… saw itself obligated to allocate successively more resources from its budget, in a total of 5,779,870.68€ (without VAT), than what was determined in subparagraph a) of no. 2 of the Council of Ministers Resolution for this purpose (1,180,766€)"

This document demonstrates that, in 2012, the taxable person executed expenditure with the publishers of contents … (intra-community suppliers) in the amount of € 10,955,619.20.

Thus, the base amount of intra-community acquisitions of goods and services, with reference to the period of 1212T, which should have been recorded in field 10 of the periodic VAT declaration and on which VAT should have been levied, was that amount and not the € 10,059,595.06 that were considered as the taxable base.

Consequently, we propose the correction of the taxable base of intra-community acquisitions by € 896,024.14 and of the tax to be levied in the amount of € 206,085.56 = (€ 10,955,619.20 - € 10,059,595.06) x 23%.

It should be noted that the information on the overall amount of intra-community acquisitions, retrieved from this document, is in accordance with the current account statements, by intra-community supplier, subsequently sent by email, on behalf of the taxable person, on 07-10-2016.

VAT Deducted

The deduction of tax borne in the computation of VAT due is a prerogative provided for in the VAT Code but only for the situations provided for in article 20 of the VAT Code, that is, when there is utilization, acquisition or importation of goods and services, by the taxable person, with a view to the realization of operations that confer the right to deduction.

In the declaration submitted by A… for the period 1212T, the following tax was deducted:

From the outset, due to the fact that the regime in which the taxable person was classified (general exemption regime in accordance with article 9 and subsequently article 53 of the VAT Code) exempts active operations from VAT, it already made impossible any deduction of tax borne in their pursuit, in accordance with article 20 of the VAT Code.

However, despite the classification in the said exemption regime, the taxable person considered itself to have legitimacy to deduct part of the VAT borne with the acquisition of contents for … because it assumed that part of the funds received to finance the project (coming from B…, Higher Education institutions and the Community Fund SAMA) would be eligible as subject operations.

And, based on that presumption, it calculated the relative weight of the said subject operations over the totality of the financing and applied the coefficient ascertained to the amount of tax borne for the computation of deductible VAT.

Consequently, the amount recorded in field 20 of the submitted periodic declaration, as deductible VAT (with the acquisition of fixed assets), was € 1,390,958.28.

However, as was stated in the initial part of this chapter, the elements and clarifications presented by the taxable person, during the present action, did not allow identifying any taxable active operation included in the intervention of A… in the … project in 2012.

The analysis performed on the activity developed only allowed identifying the nature of mere financing, at the account and decision of the State and without counterparts.

The fact that A… considered as subject to tax part of the funds transferred for financing expenses with …, also could not merit any acceptance because it was not demonstrated that they were any of the situations provided for in article 1 of the VAT Code.

Therefore, because they do not come within the provisions of article 20 of the VAT Code, the € 1,390,958.28 declared in field 20 of the submitted periodic declaration for the period 1212T, as deductible tax, cannot contribute to the computation of the tax to be delivered to the State coffers.

(...)

VIII – RIGHT OF HEARING

(...)

During the new exercise by the taxable person (Entry no. 2016…), based on three points and supported in the respective annexes which, after having been considered, gave rise to the following findings that I am obliged to report:

In the first point, the taxable person addressed the classification in VAT, stating: "Since the discrepancy between the classification of the requesting entity in the exemption regime of article 53 of the VAT Code and the amounts declared in the periodic declaration relating to the last quarter of 2012 was obvious and resulted from the periodic declaration itself in the face of the elements available to those services, the Tax Authority should immediately exercise its duty to correct the assessment and alert the applicant accordingly.

Thus, we immediately request that the now applicant confirm that the situation was detected from the date of presentation of the said declaration so that, consequently, it is not subject to any charge, fine or interest relating to any amount of tax that may be levied as a result of this inspection examination.

On the other hand, it is not true that the applicant maintained the classification under the exemption regime under article 53 of the VAT Code when it presented the periodic declaration relating to the 4th quarter of 2012. In fact, a declaration of amendments OC…, received on 2012-12-11, was submitted via the internet, in which it was declared in the respective fields that A…, Tax Identification No. …, began to practice operations that confer the right to deduction and operations that do not confer that right, indicating the pro-rata of 58% (See Annex 1)".

Now, the classification made, in tax terms, as well as the information contained in the submitted declarations is the responsibility of the taxable person. The divergences that were registered and that could be consulted by the Tax Authority were known by the taxable person itself that, if it wished, could have immediately rectified the situation.

The Tax Authority can, subsidiarily, if the irregularity persists, promote its rectification but needs to ascertain what the incorrect situation is (in the case in question it would be to determine whether the information in the taxpayer registry would be incorrect or the declared amounts) through a specific procedure, namely a tax inspection, as came to occur.

Requesting the exoneration of any increases that may result from the rectification of any irregular situation caused by errors or omissions caused by the taxable person itself lacks legal foundation to legitimate it.

Precisely because the divergences were triggered immediately after the submission of the first periodic declaration and persisted when the following submissions (until the change in the VAT classification) were made, remaining all in the non-settled status, without the taxable person having taken any rectification, it confirms that there was a repeated practice of the tax infraction.

In the third paragraph, the taxable person contests the classifications identified by arguing that "(...), it is not true that the applicant maintained the classification under the exemption regime under article 53 of the VAT Code when it presented the periodic declaration relating to the 4th quarter of 2012" but contradicts itself in the face of the declaration of amendments it attaches which, on the first page, in the last box - "VAT Classification Calculated", in the classification field, indicates "exemption Art. 53 to take effect from 2012-03-01".

It should be noted that until that date, the taxable person was classified under the exemption regime, in accordance with article 9 of the VAT Code.

In the second point, the taxable person described the premises considered and the calculation of the VAT levied computation.

It should be noted that, during the inspection acts, when the analysis of VAT levied was carried out, the operations recorded were verified and, although not all were properly documented, all were justified. The irregularity identified did not have as its basis the calculation of the computation of the tax but the nature of the operations actually carried out (operations outside the scope of VAT subjection).

Based on the elements analyzed, a conclusion was reached different from the premise adopted by the taxable person for the calculations made: "The VAT levied evidenced in the periodic declaration relating to 201212", whose taxable base corresponds to € 2,917,405.71, was computed in accordance with Council of Ministers Resolution (Council of Ministers Resolution no. 32/2012)". As was stated in chapter III of the report project, Council of Ministers Resolution no. 32/2012 only authorized A… to carry out taxable passive operations with the acquisition of contents for … - …(upon assuming the contractual position in the existing contracts with publishers) and promoted the financing of the expenses to be borne with transfers and allocation of funds from different sources (operations outside the scope of VAT).

Council of Ministers Resolution no. 32/2012 did not authorize A… to operate the activity of … … (indeed, it states that it is the responsibility of B… from the beginning of the project) nor to carry out any other active operation that is subject to tax.

Thus, the levying of tax that occurred was improper but, as explained previously, when levied on a VAT taxable person, it should be delivered to the State coffers.

In the third and last point, which concerns intra-community operations", the taxable person stated: "The explanatory note invoked in the project report to support the fixing of the amount of intra-community operations (integrated as Annex IX pages 36) was misinterpreted given that it refers to financial flows that support the budgetary recording of revenues, which differs from the perspective underlying the moments of VAT levying and deduction.

(...)

Additionally, it is appropriate to clarify that not all acquisitions made from international publishers represent, as was supposed, intra-community operations since those publishers have national representatives (EX. U…) issuing the corresponding invoices already with VAT included, so their consideration as intra-community operations represents a redundancy in the levying of VAT.

Enclosed are invoices issued by U… (Annex 3, as well as the respective current account statement (Annex 4)".

The interpretation made by the Tax Authority of the explanatory note (provided by the taxable person during the inspection acts) results from the provisions of Council of Ministers Resolution no. 32/2012 itself insofar as the Government only authorizes A… to incur expenditure inherent to the contracts executed with international publishers specifically identified in no. 3, up to the total amount of € 11,698,000.00.

Thus, in compliance with what is provided in the Council of Ministers Resolution, any funds actually spent by A… under the … project would have to be necessarily used to meet the contracts executed with international publishers identified.

If, as is now stated by the taxable person, part of the amounts to be paid to the contracted publishers were settled through representatives based in Portugal, then, when clarifications were requested about intra-community acquisitions and about the divergences from what was contained in the VIES system, the taxable person should have identified which entities were involved and the respective amounts invoiced.

And, to justify the difference between the expenditure executed (€ 10,955,619.20) and the total amount of intra-community acquisitions declared in the submitted periodic declaration for the period 1212T (€ 10,059,595.06), the taxable person enclosed invoices issued by the supplier "U… SA" and the respective current account statement.

The analysis performed on the documents received and the clarifications obtained from the said entity made it possible to ascertain that, in 2012, this supplier invoiced A… for contents to be made available on … ("IEL Complete - Year 2012"), in representation of the international publisher "IEEE".

However, the amount of the 4 invoices sent, in which each identifies a payment of 25% of the annual amount, after being subject to the exchange rates identified by the taxable person (to calculate the amount of imputation), do not coincide with the amounts recorded and evidenced in the attached statement. Moreover, there are three other entries, in the total amount of € 27,333.52 for which no justification was presented.

Thus, even considering the exchange rate identified by the taxable person (which is higher than the exchange rate of the date of the operation), only payments in the amount of € 725,917.07 are justified (which would be € 706,721.16 if the exchange rate of the date were applied, obtained from the Bank of Portugal).

It is further added that, as was stated by the taxable person itself "The amounts referenced in the said explanatory note in the executed column (without VAT), correspond to revenue amounts recorded in the budget of A… by source of financing", that is, they correspond to the total spent (without VAT) that was financed.

That is, in addition to intra-community acquisitions (€ 10,059,595.06), the taxable person only managed to justify spending incurred with 10

Thus, the documents presented by the taxable person alters the proposed corrections of the taxable base from € 896,024.14 to € 305,847.66 and, as the Council of Ministers Resolution only authorizes A… to incur expenses with the acquisition of contents from international publishers, they should be, in the absence of information proving otherwise, considered as such (subject to the VAT rate in effect on the date of the facts, of 23%).

It is also important to bear in mind that the taxable person requested (and was granted) an extension of the response period to "gather all information necessary for the full clarification of the tax situation that was the subject of said inspection", so it is legitimate to infer that, if there were other elements that could justify or mitigate the difference that persists, these would have been presented together with the said right of hearing.

b) The Applicant exercised the right of hearing on the project Tax Inspection Report, in the terms contained in part 3 of the administrative file, whose content is hereby reproduced, in which it states, among other things, the following, regarding intra-community transactions:

Intra-Community Operations

The explanatory note invoked in the project report to support the fixing of the amount of intra-community operations (integrated as Annex IX pages 36) was misinterpreted given that it refers to financial flows that support the budgetary recording of revenues, which differs from the perspective underlying the moments of VAT levying and deduction.

Thus, this interpretation led the Tax Authority to establish a "presumption" of intra-community operations in the amount of € 10,955,619.20 that does not correspond to reality and should be corrected.

The amounts referenced in the said explanatory note in the executed column (without VAT), correspond to revenue amounts recorded in the budget of A… by source of financing and not to expenses with intra-community operations.

Enclosed are invoices issued by U… (Annex 3), as well as the respective current account statement (Annex 4).

Intra-community operations in the amount of € 10,059,595.06 are set out in Annex 5, by supplier and by order of payment.

c) On the Tax Inspection Report the Team Leader issued an opinion contained in its initial pages, whose content is hereby reproduced, in which it states, among other things, the following:

– I confirm the content of this report, as well as the conclusions and arithmetic corrections in terms of VAT, relating to the year 2012, it being noteworthy the following:

It is properly substantiated and explained in the Tax Inspection Report that the taxable person was improperly classified under the VAT Exemption regime (article 9 and article 53 in 2012) and that the activity actually carried out by the taxable person during the year 2012 is not subject to VAT, because it does not fall within no. 1 of article 1 of the VAT Code.
Thus the reclassification of the taxable person in VAT was promoted by the Tax Inspection Services, to non-taxable person, that performs intra-community acquisitions, effective 01/01/2012, through the completion of an Official Amendment Slip and its submission to the Directorate of System Reclamations and Consultations. [1]
It was ascertained the improper deduction of VAT in the declaration submitted by the taxable person for 2012.12T, in the total of 1,390,958.28 and the non-levying of VAT relating to expenses incurred with the acquisition of contents from international publishers in the total of 70,344.96;
The taxable person exercised the prior hearing right referred to in articles 60 of the General Tax Law and of the Complementary Regime of Tax and Customs Inspection, having its arguments been analyzed and partially accepted in the part in which it supported them with documentary evidence, a fact reflected in the final report.

d) Following the inspection the Tax and Customs Authority issued an assessment in the amount of € 3,065,307.12, plus compensatory interest in the amount of € 475,794.30, regarding which the Applicant submitted a request for correction, which was granted (document no. 3 attached with the request for arbitral pronouncement, the content of which is hereby reproduced);

e) Subsequently, the Tax and Customs Authority issued the VAT assessment in the amount of € 1,461,303.24 (assessment document no. …, which corresponds in the execution document no. …) (documents 1/10 and 1/11 attached with the request for arbitral pronouncement), to which were added in the execution late payment interest of € 2,982.26 and charges of € 4,935.38, totaling € 1,469,220.88;

f) The Tax and Customs Authority also issued the assessment of compensatory interest in the amount of € 221,360.92, (assessment document no. …, which corresponds in the execution document of identification…) (documents 1/6 and 1/7 attached with the request for arbitral pronouncement), to which were added in the execution late payment interest of € 451.76 and charges of € 811.97, totaling € 222,624.65;

g) The amount of € 1,461,303.24 corresponds to the sum of the amounts indicated in the Team Leader's Opinion: «improper deduction of VAT in the declaration submitted by the taxable person for 2012.12T, in the total of 1,390,958.28 and the non-levying of VAT relating to expenses incurred with the acquisition of contents from international publishers in the total of 70,344.96» "(1,390,958.28 + 70,344.96 = 1,461,303.24);

h) The amounts of these assessments were paid on 14-03-2017 (document no. 1 attached with the request for arbitral pronouncement, the content of which is hereby reproduced);

i) On 11-12-2012 the Applicant presented to the Tax and Customs Authority, via the Internet, the Declaration of Amendment of Activity whose copy is contained in document no. 5 attached with the request for arbitral pronouncement, the content of which is hereby reproduced, in which, among other things, it states in the fields "VAT CLASSIFICATION CALCULATED" and "TYPE OF OPERATIONS":

j) On 21-11-2016, the Tax and Customs Authority prepared the Official Amendment Slip contained in part 4 of the administrative file, the content of which is hereby reproduced, in which it states, among other things, that the Applicant "carries out intra-community acquisitions", with classification as of 01-01-2012, and includes the following information:

The taxpayer was subject to an inspection regarding the year 2012 (OI2016…) and it was found that it was improperly classified under the VAT exemption regime (in accordance with article 9° and subsequently 53°, both of the VAT Code) when the activity carried out was not subject to VAT and only carried out intra-community acquisitions.

In the analysis conducted it was found that A…, a public institute integrated into the structure of the State, until the beginning of 2013, had as the object of its activity only the financing of research in science, technology and innovation, in all areas of knowledge, an activity that does not fall within the species typified in article 1 of the VAT Code, therefore it is requested that the following classifications be collected:

· From 01-01-2012 to 31-12-2012 - intra-community acquisitions of goods and services (the remaining activity developed is not subject to VAT).

· From 01-01-2013 onwards, quarterly normal regime due to the change in the activity developed and the turnover of the activity subject to VAT exceeding € 10,000.00, in accordance with article 53 of the VAT Code.

k) … (…) was provided by B… (hereinafter "B…") since 2004 and provided access to international scientific contents in the research area, functioning as a purchasing hub, aggregating the demand of national consumers, most of a public nature (higher education institutions), to present to international suppliers of such contents, obtaining economies of scale and achieving lower costs (testimony of witness V…);

l) Until 2011, B… executed with each of the content suppliers present in … contracts that regulated the provision of those same contents to the covered scientific community;

m) As a consequence of the Government's decision, publicized by Council of Ministers Resolution no. 32/2012, of 15 March, to integrate B… into A…, a protocol was drawn up between these entities, in April 2012, and a memorandum of understanding, in May 2012, on communication procedures between them (testimony of witnesses V… and W…, annex V to the Tax Inspection Report and document no. 7 attached with the request for arbitral pronouncement, the content of which is hereby reproduced);

n) In 2012, B… continued to perform technical, operational and administrative functions under the control of A…, but the ownership of the contracts executed by the former with international suppliers was transferred to the ownership of A…, which began to ensure its management, following a contract transferring the contractual position of B… (testimony of witnesses V… and W… and document no. 8 attached with the request for arbitral pronouncement, the content of which is hereby reproduced);

o) B… provided direct support to the user, management of computer identification and carried out entries and exits of users, but who contracted with the publishers was A… and who decided whether new users were admitted was A… (testimony of witnesses V… and W…);

p) Both B… and A… charged users, with what was charged by B… being transferred to A…, as a result of invoice issued with no. 12/00001 by the former to the latter, in the amount of € 1,423,317.91 + VAT of € 327,363.12 = € 1,750,681.03 (testimony of witnesses V…, W… and X…, Annex VI to the administrative file and document no. 6 attached with the request for arbitral pronouncement, the content of which is hereby reproduced);

q) The suppliers of the contents were the international publishers, which national users accessed directly after access was negotiated by the persons responsible for …, there being no such contents in the servers of B… (testimony of witnesses V… and W…);

r) In 2012, A… did not have human resources with technical experience to perform the technical management of …, so it was agreed that services would be provided by B… to A…, through remuneration, which in 2012 was set at € 526,103.00 (testimony of witnesses W… and X… and clause 3, no. 3, of the Protocol between the Applicant and B…);

s) B… acted in the name of A…, being this which made decisions relating to the functioning of … (testimony of witness W…);

t) The contents to which access has already been paid remain available even if the contracts cease for the future, the right of active access being that of A… (testimony of witness W…);

u) In the year 2012, the Applicant carried out intra-community transactions in the total amount of € 10,059,595.06 (annex V to the exercise of the right of hearing contained in the administrative file, the content of which is hereby reproduced and testimony of witness X…);

v) On 15-05-2017, the Applicant submitted the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Unproven Facts and Grounds for the Factual Determination

The established facts are based on the documents provided by the Applicant and in the administrative file.

It was not proven that the total amount of intra-community transactions carried out by the Applicant in 2012 was higher than what results from Annex 5 to the exercise of the right of hearing (part 4 of the administrative file).

In fact, the Applicant stated that the amount of € 10,955,619.20 was the budgeted amount, which was corroborated by witness X…, the Applicant's Tax Advisor. On the other hand, in the said Annex 5 the referred transactions are listed and it was not proven that others exist.

The witnesses appeared to testify with impartiality and with personal knowledge of the facts they reported.

3. LEGAL MATTERS

3.1. Question of the Applicant's Classification Under the Exemption Regime or as a Mixed Taxable Person

In the Tax Inspection Report it is stated that:

In terms of VAT registration, the taxable person initiated its activity classified under the VAT exemption regime (article 9) and altered it on 02-05-2008 (adding Intra-Community Acquisitions of Goods). On 11-12-2012 it altered the reason for exemption (moved to article 53 of the VAT Code) and thus remained until 04-02-2014, when it moved to the current quarterly normal regime, classified as "Mixed" with actual allocation (pro-rata).

The Applicant contends that, in light of the Declaration of Amendment of Activity that it submitted, which is document no. 5:

– "it is not true what the Tax Inspection Report says that the taxable person moved to having the cadastral classification of "Mixed" only with the declaration presented on 04-02-2014";

– therefore "one of the grounds of the assessment based on the wrong premise that the applicant, in the 4th quarter of 2012, had the cadastral classification as exempt, falls away";

– in the Tax Inspection Report it is asserted "that A… was considered exempt given that in the field "VAT classification calculated" (page 1 at the bottom) it indicated that the classification was the exemption of article 53", but that in the field of the Declaration where this exemption is mentioned it includes the expression: "To take effect from 2012-03-01" and the "natural reading of this indication is that it was intended to inform that the exemption regime took effect from that date (from 2012-03-01) until the date of submission of the declaration in which, obviously, the exemption regime of article 53 would be absolutely incompatible with the mixed taxable person regime";

– "it would be totally contradictory and absurd to be indicating the classification of the taxable person under the exemption regime under article 53 of the VAT Code and, at the same time, presenting itself as a mixed taxable person that practices exempt operations that do not confer the right to deduction and operations that confer that right";

– "any interpretation of the declaration minimally tenable would have to consider:

a) Either that the declaration was wrong or had contradictory indications and, in that case, should have been subject to clarification, which was not done;

b) Or, as was more logical and rational, to consider that it was intended to mark in the completion of the declaration that the classification under the exemption regime of article 53 was what occurred between March and December 2012 and that, from this month, the classification would become that of a mixed taxable person, given that it would be absolutely impossible for the two classifications to apply simultaneously";

– "the inspection report does not mention the said declaration of amendments in the part of the text relating to the registration system, as can be concluded by analyzing the reproductions of information contained in the said system on pages 6 and 8 of the Tax Inspection Report in which it does not appear mentioned (only the declarations of 1999 04 01, 2012 03 01 and 2014 02 04 appear)";

– "the cadastral classification of the taxable person under the exemption regime was decisive in supporting the challenged assessment, both in the component of the disregard of the right to deduction in internal acquisitions and in the disregard of the right to deduction in intra-community acquisitions".

In fact, in the tables included on pages 6 and 8 of the Tax Inspection Report there is no reference to the Declaration of Amendment of Activities submitted on 11-12-2012, but it was mentioned in the part of the Tax Inspection Report relating to "Tax Framework", reproduced above.

However, it is clear that the Tax and Customs Authority made an error in interpreting the said Declaration of Amendment of Activities, as it concluded that the Applicant "initiated its activity classified under the VAT exemption regime (article 9) and altered it on 02-05-2008 (adding Intra-Community Acquisitions of Goods). On 11-12-2012 it altered the reason for exemption (moved to article 53 of the VAT Code) and thus remained until 04-02-2014, when it moved to the current quarterly normal regime, classified as "Mixed" with actual allocation (pro-rata)".

In fact, as the Applicant states, saying that the classification was "Exemption Art. 53" "To take effect from: 2012-03-01" and, concurrently, in the field "TYPE OF OPERATIONS" that it practiced "TRANSFER OF GOODS OR PROVISION OF SERVICES" "That confer the right to deduction: Yes" and "Exempt that do not confer the right to deduction: Yes", with actual allocation "Of part of the goods and services used: Yes" and the "PRO-RATA" of 58%, the interpretation of the said Declaration of Amendment of Activities, in terms of reasonableness and normality, had to be that it communicated that it was a mixed taxable person and that the reference to the exemption regime of article 53 of the VAT Code "To take effect from: 2012-03-01" referred to the period between this date and the date of submission of the Declaration.

Thus, the position taken by the Tax and Customs Authority contains an error on the factual premises by understanding that the Applicant, under the terms of the said declaration, did not assume the quality of a mixed taxable person and had the exemption regime provided for in article 53 of the VAT Code applicable to it.

3.2. Question of the Applicant's Classification in VAT Incidence and the Deduction Performed

As is stated in the Official Amendment Slip referred to in the established facts, the Tax and Customs Authority, following the inspection it carried out on the Applicant, understood that:

– the latter was improperly classified "under the VAT exemption regime (in accordance with article 9° and subsequently 53°, both of the VAT Code) when the activity carried out was not subject to VAT and only carried out intra-community acquisitions";

– "in the analysis conducted it was found that A…, a public institute integrated into the structure of the State, until the beginning of 2013, had as the object of its activity only the financing of research in science, technology and innovation, in all areas of knowledge, an activity that does not fall within the species typified in article 1 of the VAT Code";

– the classification in VAT should be the following:

– From 01-01-2012 to 31-12-2012 - intra-community acquisitions of goods and services (the remaining activity developed is not subject to VAT).

– From 01-01-2013 onwards, quarterly normal regime due to the change in the activity developed and the turnover of the activity subject to VAT exceeding € 10,000.00, in accordance with article 53 of the VAT Code.

Based on the premise that the activity carried out by the Applicant in 2012 was limited to "financing of research in science, technology and innovation, in all areas of knowledge" and "did not fall within the species typified in article 1 of the VAT Code - Real scope, insofar as it cannot be considered a transfer of goods, a provision of services, an import or an intra-community operation" the Tax and Customs Authority understood that the activity the Applicant developed was not subject to VAT and that the deduction of tax performed in the declaration submitted by the Applicant for the period 2012.12T was improper.

To conclude that the activity of the Applicant in 2012 was limited to the said financing, the Tax and Customs Authority based itself on Council of Ministers Resolution no. 32/2012, of 15 March, and on a protocol of April 2012 agreed between A… and B…, which is contained in Annex V to the Tax Inspection Report, making the following conclusions:

-> Council of Ministers Resolution no. 32/2012 determined that A… would assume the contractual position of B… in the contracts executed with the publishers that supply the contents of …;

-> The partnership executed between A… and B… determined the obligations of each entity, within the scope of the … project, but did not remove its effective operation from B…;

-> The provision of services (provision of scientific contents online) to end customers (users) continued to be carried out by B… in 2012;

-> The financing of this charge was conducted with the channeling of funds from different sources, made available specifically for this purpose:

The evidence produced contradicts these conclusions, namely that the provision of services that constitutes the provision of scientific contents online to end customers (users) had continued to be carried out by B… in 2012 on its own account, rather it being proven that it was carried out, with remuneration and within the framework of a contract, which constitutes the said protocol, on behalf of the Applicant, which was the party that negotiated with international publishers the access of national users and, following the transfer of the contractual position of B…, was the party that held the rights to make available to … users access to those contents. Therefore, it does not correspond to reality that it was B… which carried out the "operation" of the … project in the year 2012, as the Applicant began to carry it out following the implementation of the protocol referred to.

It was also proven that B… did not possess any contents in its own servers, so access to contents was carried out directly by users with international publishers, following the negotiation carried out by the Applicant and the prior contracts that were transferred to it by B….

It was also proven that the Applicant charged users directly for access to contents and that the charging that B… performed was transferred to the Applicant.

Thus, it does not correspond to reality the premise on which the challenged assessment was based, in this part, which was that the Applicant had in 2012 an activity that was translated "exclusively into the financing of expenses for the acquisition of contents", which does not constitute economic activity for purposes of article 1, paragraph 1, of the VAT Code.

On the contrary, it was proven that the Applicant developed a provision to national users of access to contents of international publishers which constitutes activity of provision of services for purposes of article 4 of the VAT Code and even when that provision of services was carried out by B…, acting in its own name, but on behalf of the Applicant, B… is considered "successively, acquirer and provider of the service", by force of the provisions of article 4, no. 4, of the VAT Code.

In these terms, the challenged assessment contains defects of error on the factual premises and error on the legal premises, which justifies its annulment, in the part referring to the sum of € 1,390,958.28, which was improperly considered as deducted.

3.3. Question of VAT Not Levied Regarding Intra-Community Transactions

Regarding the intra-community transactions that the Applicant carried out in 2012 (namely payments to international publishers of scientific contents), VAT was levied based on the total amount of € 10,059,595.06, as results from annex V to the exercise of the right of hearing contained in the administrative file.

The Tax and Customs Authority understood, however, in the project Tax Inspection Report, that the total amount would be € 10,955,619.20, for being the amount indicated by the Applicant in an explanatory note as having been allocated from its budget, for payment of amounts invoiced by publishers, in view of the insufficiency of the revenues received.

The Applicant, in exercising the right of hearing on the project Tax Inspection Report, came to say that "the explanatory note invoked in the project report to support the fixing of the amount of intra-community operations (integrated as Annex IX pages 36) was misinterpreted given that it refers to financial flows that support the budgetary recording of revenues", in addition to presenting invoices from the company U… SA, which is a representative in Portugal of community publishers, in the amount of € 590,176.48 (this amount calculated by the Tax and Customs Authority as "amount of imputation, net of VAT, contained in the invoices of U…, calculated through the application of the exchange rate identified by the taxable person, or failing that the exchange rate of the day identified - Information from the Bank of Portugal").

The Tax and Customs Authority accepted this explanation regarding U… and, therefore, considered that this amount of € 590,176.48 should be deducted from the difference between the amount of € 10,955,619.20 and that of € 10,059,595.06 (€ 896,024.14) so that the amount of intra-community transactions regarding which VAT had not been levied would be € 305,847.66 (€ 896,024.14 - € 590,176.48).

Examining the appraisal made in the Tax Inspection Report regarding the exercise of the right of hearing, it is noted that the Tax and Customs Authority concludes that the amount paid would be the budgeted amount based on a statement of the Applicant of the following tenor: "The amounts referenced in the said explanatory note in the executed column (without VAT), correspond to revenue amounts recorded in the budget of A… by source of financing".

But, in fact, in addition to this statement not having been reproduced completely, as the Applicant included at the end the clarifying statement "and not expenses with intra-community operations", from the reference to amounts recorded in the budget one cannot conclude that expenses of the same amount were incurred.

On the other hand, the thesis of the Applicant was corroborated by witness X…, the Applicant's Tax Advisor, without it having been refuted.

Furthermore, the Tax and Customs Authority was unable to identify any payment that was made to intra-community content publishers, beyond those that the Applicant lists in Annex 5 to the document of exercise of the right of hearing.

The burden of proof of the existence of intra-community transactions that are the premise of the assessment rests with the Tax and Customs Authority, as these transactions are constitutive facts of the right to assessment that it exercised (articles 74, no. 1, of the General Tax Law and 100, no. 1, of the Code of Tax and Customs Procedure).

Therefore, the doubt about the existence of intra-community transactions beyond those identified by the Applicant, in the amount of € 305,847.66, must be procedurally valued against the Tax and Customs Authority, which procedurally amounts to the non-existence of these tax facts.

Therefore, the annulment of the assessment, in the respective part, is justified due to error on the factual premises, which constitutes a defect of violation of law.

Thus, the request for arbitral pronouncement on this question is well-founded.

3.4. Compensatory Interest

The assessment of compensatory interest has as its premise the assessment of VAT, therefore the defects that affect the latter also affect the assessment of compensatory interest.

Therefore, its annulment is justified for the same reasons.

3.5. Request for Annulment of Legal Charges Paid in Tax Execution

The Applicant further requests the annulment of the "legal charges" associated with the assessment, which is interpretable as relating to the late payment interest and charges paid in tax executions.

It is clear that within the jurisdiction of arbitral tribunals functioning in CAAD, defined in article 2 of the RJAT, does not include the appraisal of the legality of the assessment of legal charges levied in tax execution, therefore this question is not considered.

3.6. Questions of Prejudiced Jurisdiction

Being to be ruled as well-founded the request for arbitral pronouncement based on defects of violation of law, which ensure stable and effective protection of the interests of the Applicant, jurisdiction over the remaining questions raised is prejudiced, as being useless (article 130 of the Code of Civil Procedure).

4. COMPENSATORY INTEREST

The Applicant paid the assessed amount and further requests compensatory interest.

In harmony with the provisions of subparagraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim to which no appeal or objection is available binds the Tax Administration from the end of the period provided for appeal or objection, and the latter must, in the exact terms of the merit of the arbitral decision in favor of the taxable person and until the end of the period provided for spontaneous execution of decisions of tax courts, "restore the situation that would exist if the tax act that is the subject matter of the arbitral decision had not been made, adopting the acts and operations necessary for this purpose", which is in harmony with the provision of article 100 of the General Tax Law [applicable by force of the provision of subparagraph a) of paragraph 1 of article 29 of the RJAT] which establishes that "the tax administration is obligated, in case of total or partial merit of complaint, judicial objection or appeal in favor of the taxable person, to immediate and full restoration of the legality of the act or situation that is the subject matter of the dispute, including the payment of compensatory interest, if applicable, from the end of the period of execution of the decision".

Although article 2, paragraph 1, subparagraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral tribunals functioning in CAAD, making no reference to condemning decisions, it should be understood that the powers that in proceedings of judicial objection are attributed to tax courts are included in its jurisdiction, this being the interpretation that harmonizes with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the tax arbitration procedure must constitute an alternative procedural means to the procedure of judicial objection and to the action for recognition of a right or legitimate interest in tax matters".

The procedure of judicial objection, despite being essentially a procedure for annulment of tax acts, admits the condemnation of the Tax Administration to pay compensatory interest, as can be inferred from article 43, paragraph 1, of the General Tax Law, in which it is established that "compensatory interest is due when it is determined, in amicable settlement or judicial objection, that there was error attributable to the services from which resulted payment of the tax debt in an amount higher than legally due" and from article 61, no. 4 of the Code of Tax and Customs Procedure (in the wording given by Law no. 55-A/2010, of 31 December, which corresponds to no. 2 in the original wording), which states that "if the decision that recognized the right to compensatory interest is judicial, the period for payment is counted from the start of the period of spontaneous execution thereof".

Thus, no. 5 of article 24 of the RJAT, by stating that "payment of interest, regardless of its nature, is due in the terms provided in the general tax law and in the Code of Tax and Customs Procedure", must be understood as allowing the recognition of the right to compensatory interest in the arbitration procedure, as well as the reimbursement of the amount paid, which is the basis for calculating interest.

It is thus necessary to appraise the request for compensatory interest.

In the case in question, it is clear that, following the illegality of the assessment, there is occasion for payment of compensatory interest, as the illegality of the assessment act is attributable to the Tax Administration, which, on its own initiative, made it without legal support.

Consequently, the Applicant has the right to compensatory interest, in the terms of article 43, no. 1, of the General Tax Law and 61 of the Code of Tax and Customs Procedure, regarding the amount of taxes and compensatory interest that it paid. In accordance with articles 43, no. 1, of the General Tax Law and 61, no. 5, of the Code of Tax and Customs Procedure, compensatory interest is due only when to the tax debt, which includes compensatory interest, by force of the provision of article 35, no. 8 of the General Tax Law, therefore late payment interest and charges from tax execution paid by the Applicant do not enter into its calculation.

Compensatory interest will be paid from the date on which the Applicant made the payment (14-03-2017) until the full payment of the amount of tax and compensatory interest to be reimbursed, at the legal rate applicable in default, in accordance with articles 43, no. 4, and 35, no. 10, of the General Tax Law, article 61 of the Code of Tax and Customs Procedure, article 559 of the Civil Code and Order no. 291/2003, of 8 April.

5. DECISION

In these terms, this Arbitral Tribunal agrees to:

a) Rule the request for arbitral pronouncement well-founded;

b) Annul the additional VAT assessment in the amount of € 1,461,303.24 (assessment document no. …, which corresponds in the execution document no. …);

c) Annul the assessment of compensatory interest in the amount of € 221,360.92, (assessment document no. …, which corresponds in the execution document of identification…).

d) Not take jurisdiction over the request for annulment of charges assessed in tax execution;

e) Rule well-founded the request for compensatory interest and condemn the Tax and Customs Authority to pay to the Applicant compensatory interest, calculated on the amount of VAT and compensatory interest, from the date on which payment was made (14-03-2017) until the full payment of the amount of such sums, at the legal rate applicable in default, in accordance with articles 43, no. 4, and 35, no. 10, of the General Tax Law, article 61 of the Code of Tax and Customs Procedure, article 559 of the Civil Code and Order no. 291/2003, of 8 April.

6. VALUE OF THE PROCEEDINGS

In harmony with the provision of article 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, subparagraph a), of the Code of Tax and Customs Procedure and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 1,691,845.53.

7. COSTS

In accordance with article 22, no. 4, of the RJAT, the amount of costs is set at € 22,338.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Tax and Customs Authority.

Lisbon, 11-12-2017

The Arbitrators

(Jorge Lopes de Sousa)

(José Coutinho Pires)

(Elísio Brandão)

[1] The acronym "AIB" refers to "Intra-Community Acquisition of Goods" and the acronym "BAO" refers to "Official Amendment Slip".

Frequently Asked Questions

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What is the objective incidence of VAT (IVA) under Portuguese tax law?

The objective incidence of VAT (Incidência Objectiva do IVA) under Portuguese law, regulated by Article 1 of the VAT Code (Código do IVA - CIVA), encompasses: (1) supply of goods and provision of services performed in national territory for consideration by a taxable person acting as such; (2) intra-Community acquisitions of goods for consideration; and (3) imports of goods. The key elements are economic activity performed habitually and independently with the intention of obtaining income. Public entities are generally exempt under Article 2(1) but are subject to VAT when performing commercial or industrial activities in conditions of effective competition (Article 2(2)). Article 9 provides specific exemptions for certain public interest activities. The objective test focuses on the nature of the transaction itself, not the status of the entity, requiring analysis of whether activities constitute economic exploitation of goods or services in competitive market conditions.

Who bears the burden of proof in VAT disputes before the CAAD arbitral tribunal?

In VAT disputes before the CAAD arbitral tribunal, the burden of proof (ónus da prova) follows Article 74 of the LGT (Lei Geral Tributária) and Article 100 of the CPPT (Código de Procedimento e Processo Tributário). The Tax Authority bears the burden of proving the factual basis supporting tax assessment, including demonstrating that transactions fall within VAT objective incidence and that the taxable amount is correctly calculated. The taxpayer must prove facts that support exemptions, deductions, or other benefits claimed, as well as procedural irregularities or illegalities in the inspection process. However, when challenging additional assessments, if the Tax Authority fails to adequately substantiate the corrections made, the assessment may be annulled. The CAAD applies civil procedure rules subsidiarily (Article 29 RJAT), meaning each party must prove the facts favorable to their position. Documentary evidence presented in administrative files and inspection reports carries significant weight, but can be contradicted by taxpayer evidence.

How does the CAAD arbitration process work for challenging additional VAT assessments in Portugal?

The CAAD arbitration process for challenging additional VAT assessments follows Decree-Law 10/2011 (RJAT - Legal Framework for Tax Arbitration). The taxpayer submits an arbitration request within 90 days of notification of the tax act being contested, without needing to pay the tax in advance or provide guarantee (Article 10(2) RJAT). The CAAD President accepts the request and notifies the Tax Authority, which must respond within 30 days. The Deontological Council appoints a sole arbitrator (claims under €10,000) or three-member panel (higher amounts), which constitutes the tribunal. Parties may present written submissions, request witness testimony, and provide oral arguments at hearings. The tribunal issues a decision within 6 months (extendable). Arbitral decisions have the same effect as court judgments and are binding on both parties. Appeals are limited to the Court of Appeal on points of law only. The process provides faster resolution than administrative courts (typically 6-12 months vs. 3-5 years) and has become increasingly popular for VAT disputes.

Can a taxpayer claim compensatory interest (juros indemnizatórios) when contesting a VAT liquidation?

Yes, a taxpayer can claim compensatory interest (juros indemnizatórios) when successfully contesting a VAT liquidation under Article 43 of the LGT (Lei Geral Tributária) and Article 61 of the CPPT (Código de Procedimento e Processo Tributário). Compensatory interest is due when: (1) the Tax Authority collects taxes later determined to be undue or excessive; (2) there is illegal collection through distraint or other enforcement; or (3) liquidations are later annulled in administrative or judicial proceedings. The interest compensates taxpayers for the financial cost of having funds unduly retained by the State. It accrues from the date of payment until reimbursement, calculated at the legal interest rate for overdue tax credits. Importantly, compensatory interest is only payable if the tax was actually paid; it does not apply to mere assessments suspended pending litigation. In CAAD arbitration, the tribunal has jurisdiction to rule on compensatory interest claims as an accessory to the principal claim for annulment of the tax assessment.

What are the legal grounds for annulling an additional VAT assessment issued by the Portuguese Tax Authority?

Legal grounds for annulling an additional VAT assessment issued by the Portuguese Tax Authority include: (1) Substantive illegality - incorrect application of VAT incidence rules (Article 1 CIVA), improper denial of exemptions (Articles 9, 53 CIVA), errors in taxable amount calculation, or mischaracterization of transactions; (2) Procedural violations - breach of rights of prior hearing (Article 60 LGT), insufficient substantiation in the inspection report, failure to properly notify the taxpayer, or exceeding inspection powers; (3) Evidentiary deficiencies - Tax Authority's failure to adequately prove the factual basis for corrections, particularly when presumptive methods are used without proper justification; (4) Violation of assessment time limits - statute of limitations under Article 45 LGT (generally 4 years); (5) Double taxation - assessment of same facts already taxed; (6) Mathematical or manifest errors in calculation. The assessment must also comply with formal requirements including proper statement of reasons (fundamentação) explaining the legal and factual basis for corrections. Under Article 77 of the LGT, any illegality vitiating the tax act constitutes grounds for annulment through administrative claim, judicial challenge, or CAAD arbitration.

VAT Objective Incidence and Burden of Proof: CAAD Arbitration Case 325/2017-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

1. REPORT

2. FACTUAL MATTERS

2.1. Established Facts

2.2. Unproven Facts and Grounds for the Factual Determination

3. LEGAL MATTERS

3.1. Question of the Applicant's Classification Under the Exemption Regime or as a Mixed Taxable Person

3.2. Question of the Applicant's Classification in VAT Incidence and the Deduction Performed

3.3. Question of VAT Not Levied Regarding Intra-Community Transactions

3.4. Compensatory Interest

3.5. Request for Annulment of Legal Charges Paid in Tax Execution

3.6. Questions of Prejudiced Jurisdiction

4. COMPENSATORY INTEREST

5. DECISION

6. VALUE OF THE PROCEEDINGS

7. COSTS

Frequently Asked Questions

Tags

FRESH Legal Group

Table of Contents

VAT Objective Incidence and Burden of Proof: CAAD Arbitration Case 325/2017-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

1. REPORT

2. FACTUAL MATTERS

2.1. Established Facts

2.2. Unproven Facts and Grounds for the Factual Determination

3. LEGAL MATTERS

3.1. Question of the Applicant's Classification Under the Exemption Regime or as a Mixed Taxable Person

3.2. Question of the Applicant's Classification in VAT Incidence and the Deduction Performed

3.3. Question of VAT Not Levied Regarding Intra-Community Transactions

3.4. Compensatory Interest

3.5. Request for Annulment of Legal Charges Paid in Tax Execution

3.6. Questions of Prejudiced Jurisdiction

4. COMPENSATORY INTEREST

5. DECISION

6. VALUE OF THE PROCEEDINGS

7. COSTS

Frequently Asked Questions

Tags

FRESH Legal Group

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Table of Contents