VAT on Subsidies: Article 6(5)(c) of the Portuguese VAT Code – CAAD Ruling 337/2015-T

ARBITRAL DECISION

I – REPORT

A – PARTIES

A… - … - …, LDA., tax identification number …, with headquarters at Street …, Building … no. …, … Floor, Office …, in … hereinafter referred to as the Applicant or tax obligor.

TAX AND CUSTOMS AUTHORITY (which succeeded the General Directorate of Taxes by virtue of Decree-Law no. 118/2011, of 15 December) hereinafter referred to as the Respondent or TA.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD, and the Arbitral Tribunal was duly constituted on 07-09-2015, to examine and decide the subject matter of the present proceedings, and was automatically notified to the Tax and Customs Authority on 07-09-2015.

The Applicant did not proceed with the appointment of an arbitrator, wherefore, in accordance with the provisions of no. 1 of article 6 and subparagraph b) of 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 Deontological Board designated Excellency Dr. Paulo Ferreira Alves, with the appointment being accepted in accordance with the legally foreseen terms.

On 27-07-2015 the parties were duly notified of this designation, having expressed no wish to refuse the appointment of the arbitrators, in accordance with article 11 no. 1, subparagraphs a) and b), of the Regulations of the Arbitral Regime (RJAT) and Articles 6 and 7 of the Deontological Code.

In accordance with the provision of subparagraph c) of 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 is duly constituted on 07-09-2015.

The meeting provided for in article 18 of the RJAT was duly held with the attendance of both parties on 10-12-2015, at the premises of CAAD.

The arbitral tribunal is duly constituted. It is materially competent, in accordance with articles 2, no. 1, subparagraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have legal capacity and standing, are legitimate, and are legally represented (articles 4 and 10, no. 2, of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are not affected by defects that would invalidate them.

B – THE REQUEST

1. The herein Applicant seeks a declaration of illegality of the tax assessment acts relating to Value Added Tax, nos. … and …, which fixed a total tax and interest payable of 1,121.32 € (one thousand one hundred and twenty-one euros and thirty-two cents).

C – GROUNDS FOR THE REQUEST

1. In support of its request for arbitral adjudication, the Applicant alleged, with a view to obtaining a declaration of illegality of the tax assessment acts relating to Value Added Tax, nos. … and …, in summary, the following:

2. The Applicant carries out professional training activities in the years 2010, 2011, and 2012, various professional training activities included in the Operational Program Human Potential (POPH), which implements the application of community policy on economic and social cohesion in Portugal for the period 2007-2013, which has been publicly certified since 2002.

3. On 12-11-2014, the Applicant was notified of a tax inspection report, relating to the fiscal year 2010, pursuant to which the Applicant should have paid VAT on the receipt of subsidies attributed by the European Social Fund (ESF), insofar as these constituted "subsidies to price."

4. One cannot, however, agree with such tax treatment of the operations in question, as it is manifestly illegal.

5. Indeed, POPH aims to stimulate the growth potential of the Portuguese economy, as results from Resolution of the Council of Ministers no. 86/2007.

6. In the development of its professional training activity within the scope of POPH, the Applicant executed various professional training projects financed by the European Social Fund (ESF).

7. The herein Applicant alleges that within the scope of the projects in question in the present proceedings, the following expenses were considered eligible:

i) Expenses with trainees - expenses with remuneration of those in training, allowances, food, transport and accommodation, as well as other expenses with trainees, namely insurance and expenses for dependent care;

ii) Expenses with trainers - expenses with remuneration of permanent or occasional internal trainers and external trainers, as well as expenses with trainers charged by entities under a service provision contract with the beneficiary, and also expenses with accommodation, food and transport of trainers, where applicable;

iii) Expenses with other personnel assigned to the project - expenses with remuneration of technicians, management personnel, administrative staff, as well as consultants, socio-cultural mediators and other personnel, employed or under service provision arrangement, involved in the stages of conception, preparation, development, management, monitoring and evaluation of the project, as well as expenses with accommodation, food and transport of such personnel, where applicable;

iv) Rents, leases and depreciation - expenses with the lease or depreciation of equipment directly related to the project, and expenses with the rent or depreciation of the facilities where the project takes place, as well as leases or depreciation of vehicles for the transport of trainees and other project participants, in accordance with the eligibility rules of Annex 1 to this Dispatch, which is an integral part thereof;

v) Direct expenses with the preparation, development, monitoring and evaluation of projects - expenses with the preparation of needs assessments, project publicity, selection of trainees and other participants, acquisition, preparation and reproduction of didactic resources, acquisition of books and documentation, expenses with pedagogical materials, with displacements carried out by the group within the scope of the respective project and also those arising from the acquisition of specialized technical services related to the evaluation of the projects and their overall results, with the exception of those provided for in the previous subparagraph;

vi) General project expenses - other expenses necessary for the conception, development and management of the projects, namely current expenses with energy, water, communications, consumable materials and non-durable goods, general equipment maintenance and installation expenses, expenses with legal consultations and notarial fees and with technical and financial appraisals;

vii) Expenses with the promotion of thematic meetings and seminars - expenses with the promotion of meetings, seminars, workshops, awareness-raising activities and other similar activities, namely expenses with the organization and with the speakers;

viii) Expenses with the Promotion and Coordination of the Integrated Training Application Candidacy - expenses demonstrably related with the promotion and coordination of the Integrated Training Application Candidacy, namely expenses with remuneration, accommodation, food and transport of management, technical, administrative and other personnel employed or under service provision arrangement of the Social Partner."

1. The Applicant paid the trainees various expenses including remuneration, allowances, food, transport and accommodation, as well as other expenses, namely insurance and expenses for dependent care.

2. The Applicant alleges that in these circumstances, the trainees had no, nor did they have, any cost for the training, regardless of the type thereof.

3. That is, neither the trainees, nor the ESF, nor any other entity paid the Applicant any sum that could be considered as price, particularly for VAT purposes.

4. On the contrary, as can be seen, it was the Applicant itself who paid the trainees.

5. The subsidies attributed to the Applicant thus constitute subsidies to production and cost structure, but not to price.

6. As is clearly evident from the fact that these training activities not only are not the counterpart to the payment of any price, but provide for the existence of payments to the trainees themselves.

7. All of this because, bearing in mind the aforementioned objectives of POPH, these training activities carried out do not aim at the provision of any services to third parties by private entities, but rather at the pursuit of the social and employment policies intended by the State and the European Union, which for this purpose makes use of private entities.

8. Indeed, the specific legislation of POPH, in Normative Dispatch no. 4-A/2008, of 24 January, expressly distinguishes "public financing" from possible "revenues" of the projects.

9. In the cases concretely in question, however, considering the types of training in question, the Applicant was absolutely prohibited from charging the trainees anything whatsoever.

10. Namely, the Applicant could not charge, nor did it in fact charge the trainees any sum related to attendance of the training courses or with the pedagogical materials necessary for the same.

11. Obviously, the subsidies attributed take into consideration the number of participants and the hours of training effectively provided, insofar as the execution of the projects depends immediately on the existence of trainees.

12. But this does not mean, in absolute terms, that the subsidies attributed were subsidies to price.

13. Indeed, considering that the execution of these training projects establishes the payment of allowances and expenses to the trainees, it is evident that the project must take into consideration the concrete number of trainees in each project, under penalty of making it impossible to execute those sums.

14. The issue is that the attribution of subsidies does not result from the Applicant's availability to provide the training activities, but rather from the concrete execution of determined training activities, with determined characteristics and determined beneficiaries.

15. Thus, the subsidies attributed do not aim at participating in the payment of the "price" owed for the services provided by the Applicant, in order to maintain it at a value considered accessible for the beneficiaries, but rather aim to subsidize the concrete realization of the projects, causing private parties - such as the herein Applicant - to substitute entirely the State and the European Union in the execution of social and employment policies.

16. For this very reason, none of the projects in question in the tax inspection report under analysis generated "revenues" for the Applicant.

17. On the question of the exigibility of costs, it further emphasizes that it was POPH that defined the maximum value that could be paid by the Applicant to the trainers.

18. Being certain that, if the Applicant paid the trainers a value lower than the maximum established, then the subsidy would be only the corresponding to the value effectively paid.

19. All of this when it is certain that all eligible costs for financing had to be properly documented, under penalty of not being accepted.

20. Indeed, for proper framing of the issue, it should further be taken into account that the Applicant obtained no profit from the training activities here in question.

21. The case concretely in question, as we have seen, not only is it not the price that is subsidized, but rather the costs, but also the subsidies attributed are calculated exclusively based on the expenses effectively incurred within the scope of the project, whether with its execution or with payments to the trainees.

22. On this matter, it should be noted that in 2011, the Applicant was subject to POPH inspection on the projects executed in the fiscal year 2010, namely on the project …-POPH …/…, which gave rise to the report.

23. With regard to compliance with tax obligations, POPH considered that the Applicant - Ensured the correct treatment of VAT borne on acquisitions of goods and services; and TA - Complied with its tax obligations, having its contributory status regularized (CIT, Social Security, PIT, CIT and VAT); - Complied with the VAT exemption applicable to service provision activities that had professional training as their object or proved to have exercised the right to opt for taxation (waiver of exemption).

24. Further, from the report under analysis it is possible to verify without any margin for doubt that the total cost of the project is exactly equal to the public financing obtained, verifying once again the non-existence of revenues emerging from those projects.

25. That is, the project was 100% supported with public financing.

26. From the foregoing it results thus that a considerable part of the subsidies received by the Applicant were directly delivered by the Applicant to the trainees, with the express mention that they originated from the ESF.

27. Being evident that the payment of such sums is in no way related "to the price of each operation," especially since the respective amounts are fixed by law.

28. From the foregoing it results equally that it should be considered, in the inspection report, as "subsidy to price" the amounts attributed to the Applicant and which it delivered to the trainees because they were sums to which the same, under the terms of the law, were entitled as subsidies, allowances and/or expenses.

29. Now, in fact, the Applicant did not pay any VAT on the subsidies received.

30. And for this very reason, moreover, it is not possible to find a single reference to the actual receipt of the VAT in question by the Applicant, being certain that it is on the Tax and Customs Authority that the burden falls to prove the payment of this tax.

31. The Applicant argues that the assessment object of the present request appears to suffer from absolute lack of substantiation.

32. In truth, when such assessment is analyzed it is absolutely impossible for any recipient to know what facts it is based upon.

33. From the outset, it is noted that the Assessment makes no sufficient reference to a concrete and identifiable tax inspection report.

34. Furthermore, it is noted that the Assessment in question does not identify the legal provisions applicable, on the basis of which it would have been issued.

35. It concludes thus that the assessment in question suffers from absolute lack of substantiation, in manifest violation of nos. 1 and 2 of article 77 of the General Tax Law (LGT).

36. Without prejudice to the foregoing, even if such assessment emerged from the aforementioned inspection report, the latter presents manifestly insufficient substantiation that does not allow the Applicant to properly understand the reasons that determined the issuance of the assessment.

37. In truth, it concludes that the substantiation presented by the DGCI is clearly insufficient and unclear, a defect which under article 153 no. 2 of the Administrative Procedure Code (CPA) is applicable to tax proceedings, by reference of article 2 subparagraph d) of the Tax Procedure Code (CPPT) is equivalent to absolute lack thereof.

38. Further, the Applicant alleges that in accordance with article 16, no. 5, subparagraph c), of the VAT Code (CIVA), the taxable amount of service provision subject to tax.

39. It appears thus that such rule of the CIVA refers exclusively to operations carried out by VAT obligors, which have as counterpart the payment of a price.

40. Thus, for the value of subsidies to be included in the price, it is necessarily required that there previously exists a "price" that is the counterpart of the service provision.

41. From the foregoing it results thus, as correctly stated, that a "subsidy to price" can only exist when a price is charged by the beneficiary of the subsidy to third-party purchasers of the goods or services.

42. In the case in question, however, it is noted that not only does the Applicant not charge any price, but it is prohibited from charging it and, furthermore, it also makes payments to the trainees, in the name of the authority that grants it the subsidy.

43. However, in the case concretely under analysis, it is noted that the Applicant did not charge, nor receive, any price for the training activities carried out within the scope of POPH.

44. Further, it is noted that the Applicant is legally prohibited, under Regulatory Decree no. 84/2007, of 10 December, from charging any price to the trainees, namely for attendance of the training activities and for pedagogical materials.

45. For which reason, the activities developed by the Applicant within the scope of the projects in question are not even classifiable within the CIVA, which determines the objective basis of taxation.

46. As is plain to see, the sums received by the Applicant relating to expenses with trainees and delivered to them are not the counterpart to any service provision.

47. On the contrary, the sums corresponding to expenses with trainees relate exclusively to expenses with remuneration of those in training, allowances, food, transport and accommodation, as well as other expenses with trainees, namely insurance and expenses for dependent care.

48. That is, they relate exclusively to sums that the trainees have, under the terms of law, the right to receive, as the counterpart to attendance of the training activities, serving as an incentive for such attendance for the pursuit of the social policies aimed at by the State.

49. It is thus noted that the sums received by the Applicant within the scope of POPH (i) do not correspond to any price for the training activities carried out, (ii) are not determined taking exclusively into account the number of participants and hours of training, and (iii) include values, relating to allowances, remuneration and subsidies that must be delivered in their entirety to the trainees.

50. On the contrary, such subsidies constitute, in that measure, true subsidies to investment, which are not taxed under VAT.

51. The Applicant further argues for lack of substantiation of the assessment acts here challenged for violating article 77 of the LGT.

D – RESPONSE OF THE RESPONDENT

1. The Respondent, duly notified for that purpose, presented its response in a timely manner in which, in brief summary, it alleged the following:

2. The delimitation of the subject matter of the proceedings set forth in the request for arbitral adjudication, corrections were made under VAT with reference to 12 tax periods, in the total amount of € 144,242.55.

3. Following notification of the final tax inspection report, the Applicant was notified of the respective tax assessment acts for tax and compensatory interest, which has only as its object the additional VAT assessment and the respective compensatory interest assessment for the period of April 2010.

4. Without prejudice to what is stated in the following section of the present pleading, it is necessary here from the outset to challenge what has been systematically alleged by the Applicant that in the present proceedings we are faced with a subsidy to production and cost structure.

5. Indeed, such fact is not only not demonstrated and proven by itself, but the contrary results from the record, for, as was concluded in the tax inspection procedure, it is unequivocal that the subsidies in question are attributed with reference to the volume of services provided, pursuant to article 16, no. 5, subparagraph c) of the VAT Code.

6. The Applicant points out in the arbitral request the defect of lack of substantiation of the tax assessment acts already identified above.

7. There can be no doubt that the Applicant, because duly notified of the substantiation of the final tax inspection report in question, cannot but have understood the presuppositions concretely taken into account by the author of the assessment act and the reasons why the taxed values were reached, that is, the Applicant has elements to understand the cognitive and evaluative path followed in the additional assessment acts notified.

8. The Respondent alleges, and without conceding, further that, if one were to admit that in the case at hand the notifications in question were made without having been accompanied by the substantiation of the respective act, it would be an irregular notification.

9. But the irregularity committed does not extend to the act notified, transforming it into an illegal act susceptible to annulment, but merely conditions the effectiveness of the tax act transmitted, which, as a result, will only begin to produce all its effects from the moment the notification is made in the form determined by law.

10. And in view of the lack or insufficiency of notification, the Applicant could and should have requested new notification with the substantiation or other requirements that were omitted and/or requested the issuance of a certificate containing them.

11. The lack of communication of the grounds of the assessment act is not to be confused with the lack of substantiation of the act – as the Applicant does – being that while the latter constitutes a defect that invalidates the administrative act and is susceptible to determining its annulment, provided that requested within the legal periods for that purpose, the former, because it is situated already outside the act, can only defer the beginning of the appeal period, provided that the provision of article 37 of the CPPT is observed.

12. Thus, notification is not an intrinsic element of the act and, therefore, is not a requirement of its validity, but merely a condition of its effectiveness.

13. Being that, having the Applicant received the notification, nothing prevented it from availing itself of the faculty of no. 1 of article 37 of the CPPT, to equip itself with all the data it needed to clarify itself about the legality of the appealed act, for there is no doubt that only the lack of substantiation of the act constitutes preterition of legal formality.

14. The lack of use of that faculty will have as a consequence, in the first place, the impossibility of invoking the defect of form for lack of substantiation as the cause of claim, in this case, of the arbitral request; with the consequent judicial challenge against the act whose substantiation has not been communicated to the taxpayer.

15. The lack of communication of the grounds of an act only determines the voidability of that communication act, since it does not conflict with the validity, but only with its effectiveness.

16. As results from the substantiation that underlies the tax inspection report, the Applicant is registered for tax purposes with the secondary activity of "Professional training," being an entity accredited in the field of training, for what is relevant here, since 06/08/2008, by the Directorate General of Employment and Labor Relations (DGERT).

17. It further adds that, although the service provision activities related to the Applicant's training activity were exempt from VAT in accordance with no. 10 of article 9 of the VAT Code, the Applicant waived the exemption, under article 12 no. 1 subparagraph a) of the VAT Code, as the Applicant itself confirmed during the initial procedure (cf. pages 5 and 6 of the tax inspection report).

18. Being that the waiver of VAT exemption gives rise to the obligation to pay tax on all taxable operations and the right to deduct the general amount of tax borne on the acquisition of goods and services related to its operations.

19. The Respondent argues that the tax inspection services verified that the Applicant, in the year 2010 and within the scope of its training activity, received from the European Social Fund, within the scope of the Operational Program Human Potential (POPH).

20. Indeed, following the analysis of the subsidy application files identified above, the following was verified:

i) Certified modular training: in the approval decisions for these projects all information relating to the cost structure of the training is included, equally detailed by line items, as well as the amount requested by the beneficiary entity and respective approved amount; the financing entity proceeded to control and verification of the purpose to which the attributed subsidy is destined, namely the training activities and the number of trainees involved;

ii) Adult Education and Training Courses: the approval decisions present a summary of the projects, with their respective start and end dates, destined for a determined number of unemployed trainees; the granting of financing implies the integral compliance with the approved project by the beneficiary entity, in addition to other accessory obligations destined, namely, to the accounting and technical-pedagogical control of the execution of the subsidized training activities.

1. The Respondent argues that thus, "it is verified that the approved financings are determined with reference to the training activities that the beneficiary entity will carry out, taking into account the number of participants and hours of training, that is, the subsidies are attributed, in an unequivocal manner, with reference to the volume of services provided, in accordance with the provision of article 16 no. 5 subparagraph c) of the CIVA."

2. And, the Applicant not having proceeded with such payment, it infringed the provision of articles 16, no. 5, subparagraph c) and 41 of the VAT Code, the tax inspection services having promoted the respective correction of the VAT owed, having, in determining the VAT owed values, considered that these are included in the amounts received.

3. It happens, however, that in the request for arbitral adjudication (relating to only one of the twelve periods in question), the Applicant argues that the subsidies attributed constitute subsidies to production and cost structure and not subsidies to price.

4. On the other hand, despite what is alleged in the arbitral request, the Applicant failed to prove that the subsidies received were destined for itself, that is, had as their direct/immediate objective to subsidize its structure.

5. Being instead unequivocal – inclusive of the very facts alleged by the Applicant and the documentary evidence joined by it in the arbitral request – that, under article 16, no. 5, subparagraph c) of the VAT Code, we are faced with subsidies that are attributed with reference to the volume of services provided, with the tripartite relationship required also existing.

6. Following analysis of the subsidies received, the tax inspection services concluded that the approved financings are determined with reference to the training activities that the beneficiary entity carries out, taking into account the number of participants and hours of training, that is, that the subsidies are attributed, in an unequivocal manner, with reference to the volume of services provided, in accordance with the provision of article 16, no. 5 subparagraph c) of the VAT Code.

7. The approval of the project by POPH, this document thus demonstrates that control analysis and verification was carried out by the financing entity of the purpose for which the attributed subsidy is destined, namely the training activities and number of trainees involved.

8. In light of the foregoing, no other conclusion can be reached than as in the inspection proceedings, that is, the approved financing is determined with reference to the training activities that the beneficiary entity carries out, taking into account the number of participants and hours of training, that is, the subsidy is attributed in an unequivocal manner, with reference to the volume of services provided.

9. What determines, consequently, the taxation of such subsidies under VAT, under article 16, no. 5, subparagraph c) of the VAT Code.

10. Given this, it is important thus to conclude that what is alleged, especially in articles 30 and 40 of the request for arbitral adjudication, is not true, for we are not faced with subsidies to production and cost structure, but rather with a "subsidy to price" and thus taxable under VAT.

11. Notwithstanding the evidence that we are not faced with a subsidy to operations, but to price, and thus taxed under VAT, in view of what has been exhaustively alleged by the Applicant in the arbitral request, it is necessary to provide the following additional clarifications, so that no doubts remain.

12. The Respondent argues based on the jurisprudence of the arbitral award rendered in case no. 111/2014-T, and on community jurisprudence, especially the award rendered in case C-180/00, case "OPW," understands that in order to be faced with a subsidy, certain presuppositions must be met.

13. For which reason, also for this reason, it is important to conclude that it is difficult to be faced with a subsidy to production and cost structure, for the subsidies attributed did not have as their design the Applicant as the final recipient of the subsidy (situation in which there would exist only a bilateral relationship, as occurs in subsidies to structure/production);

14. For the Applicant is, yes, as has been seen, the subsidized entity, a tax obligor in this case in the area of training, which provides concrete services to third parties in light of the specific objectives pre-determined by the entity granting the subsidy.

15. Indeed, we are faced with a subsidy directly related to the price of the operations to be carried out by the subsidized operator, having been specifically paid to the operator so that it provides a good or provides a determined service.

16. In summary, the subsidies received are destined for the concrete provision of determined specific training service provision activities, depending on the respective type in question.

17. Indeed, and as concerns the relief only in the attribution of the subsidies of "ineligible costs," note that the amount paid by the public organism to the Applicant constitutes the counterpart so that it provides a determined training service to a third party – there is a direct nexus between the service provided and the countervailing value received.

18. The Respondent concludes in the sense that one cannot but conclude that all arguments of the Applicant are without merit, and one cannot thus conclude differently to what was determined in the inspection procedure, for no defect can be charged to the correction sub judice.

E – FACTUAL SUBSTANTIATION

1. Before proceeding to the examination of these issues, it is necessary to present the factual matter relevant to its understanding and decision, which was made based on the documentary evidence and taking into account the facts alleged.

2. As to the relevant factual matters, this tribunal considers proven the following facts:

3. The Applicant was notified on 12-11-2014 of an external tax inspection procedure of general scope, relating to the fiscal year 2010, authorized by Service Order no. OI2014….

4. The Applicant was notified of Value Added Tax assessment acts nos. … relating to period 1004 which fixed a tax payable of 953.50€ and of the act no. … which fixed interest payable of 167.82€.

5. The Applicant was registered for the fiscal period of 2010 in the general corporate income tax regime (IRC), and for VAT purposes in the normal regime with monthly periodicity.

6. The Applicant is registered for tax purposes with the primary activity of "Other business consultancy and management activities" and with the secondary activity of "Professional Training," having waived the VAT exemption for this latter activity.

7. The Applicant is an entity accredited in the field of training since 06/08/2008, by the General Directorate of Employment and Labor Relations (DGERT), under the terms of Decree-Law no. 210/2007 of 29 May.

8. The Applicant received the European Social Fund (ESF) within the scope of Regulatory Decree 84-A/2007, of 10 December and of Dispatches nos. 18227/008 and 18223/2008, through … -POPH …/2008, the subsidy in the amount of 5,720.98€ in the month of April 2010.

F – FACTS NOT PROVEN

1. Of the facts with interest for the decision of the case, contained in the challenge, all objects of concrete analysis, those not contained in the factuality described above were not proven.

G – ISSUES TO BE DECIDED

1. Given the positions of the parties assumed in the arguments presented, the central issue to be decided is the following, which must thus be examined and decided:

a) The one alleged by the Applicant, declaration of illegality of the tax assessment acts for additional Value Added Tax, nos. ….

H – LEGAL MATTER

1. Given the positions of the parties assumed in the pleadings presented, the central issue to be decided by this arbitral tribunal consists of deciding whether the tax assessment act:

2. In light of what is petitioned by the applicant, the same seeks to have decreed the annulment of the Value Added Tax no. … relating to period 1004 which fixed a tax payable of 953.50€, tax which was fixed as a result of the inspection action of the TA with the number OI2014….

3. From the inspection action no. OI2014…, resulted corrections under VAT for the period 2010.1 to 2012.12, however, in light of what is petitioned by the Applicant and the value attributed to the case, this arbitral tribunal is only competent to decree the annulment as to the period of 2010.04, and as to the subsidy … -POPH …/2008, in the amount of 5,720.98€, to which the VAT rate of 20% was applied.

4. Based on the logical argumentation and the corrections made by the TA, the Applicant received the subsidy in the amount of 5,720.98€ and in this amount VAT at the 20% rate is already included, and thus the Applicant should have delivered to the state the VAT owed in the amount of 953.50€.

5. Within the scope of the inspection action and of the report issued by the TA, the latter considered that the Applicant's operations are included within the scope of article 9 no. 10 of the CIVA, however, the Applicant, having once waived the exemption under article 12 no. 1 subparagraph a) of the CIVA, and taking into account the tax treatment under VAT and the type of subsidies received within the scope of the POPH program, the Respondent understands that the tax obligor was obliged to proceed with the VAT payment upon receipt of the subsidy.

6. It further states that the subsidy attributed within the scope of the Human Potential Operational Program (POPH), is constituted in a "subsidy to price," provided for in article 16, no. 5 subparagraph c) of the CIVA.

7. And in determining the VAT owed values it will be considered that these are included in the amounts received.

8. Given the positions of the parties assumed in the pleadings presented, the central issue to be decided by this arbitral tribunal consists of deciding i) whether the Applicant's operations are framed in the exemption provided for in article 9, no. 10 of the CIVA, and whether it has the right to said exemption under article 12 no. 1 subparagraph a) of the CIVA, ii) and what is the modality of the subsidy received.

9. It results from article 9, no. 10 of the CIVA, respectively as concerns exemptions on internal operations, "Are exempted from tax:

10 - Service provision activities that have as their object education, as well as transmissions of goods and service provision activities related thereto, such as the provision of accommodation and food, carried out by establishments integrated into the National Education System or recognized as having analogous purposes by the competent ministries;".

1. In accordance with article 12 no. 1 subparagraph a) of the CIVA:

"1 - May waive the exemption, opting for the application of tax to their operations:

a) Tax obligors who carry out service provision activities referred to in nos. 10) and 36) of article 9;"

1. This right of option, under article 12 no. 2 and 3, is exercised by means of filing, at any tax office or other legally authorized location, a statement of commencement or alterations, as the case may be, taking effect from the date of its presentation, for a minimum period of 5 years.

2. Given the position assumed by the parties, both agree that the Applicant's operations are subsumed in those provided for in article 9, no. 10 of the CIVA.

3. In these terms, the exemption of article 9, no. 10 of the CIVA, although it covers service provision activities related to the Applicant's training activity, does not apply to the Applicant once it has waived the exemption under article 12 no. 1 subparagraph a) of the CIVA.

4. In light of the foregoing, having the Applicant opted for the waiver of the exemption of article 12 no. 1 subparagraph a) of the CIVA, the same determines the obligation to pay tax on all taxable operations and the right to deduct the general amount of tax borne on the acquisition of goods and services related to its operations.

5. As to point ii) referred to above, it falls to this tribunal to decide as to the modality of the subsidy received by the Applicant from the European Social Fund within the scope of the Human Potential Operational Program (POPH).

6. Given the positions of the parties, the TA understands that it is a "subsidy to price" provided for in article 16, no. 5 subparagraph c) of the CIVA, while the Applicant argues that it is not a "subsidy to price," but rather a subsidy to production and cost structure (subsidy to operations, to functioning), and as such not subject or exempt from VAT.

7. In these terms let us examine the regime of subsidies provided for in the VAT Code and in the VAT Directive. It results from article 16, no. 5 subparagraph c) of the CIVA:

"5 - The taxable amount of transmissions of goods and service provision subject to tax, includes:

c) Subsidies directly related to the price of each operation, being considered as such those that are established in function of the number of units transmitted or the volume of services provided and are fixed prior to the realization of the operations."

1. For its part, the VAT Directive, provides in Chapter 2 (deliveries of goods and service provision), Title VII, "Taxable Amount," article 73, the following:

"For the deliveries of goods and to service provision, other than those referred to in articles 74 to 77, the taxable amount comprises everything that constitutes the consideration that the supplier or the service provider has received or should receive in relation to those operations, from the buyer, the recipient or a third party, including subsidies directly related to the price of such operations."

1. Faced with the foregoing, national and community legislation establishes that the taxable amount will only include subsidies that are related to the price of the operations of the tax obligor beneficiary of the subsidy.

2. The VAT Code, as against the Directive, introduces two conditions: first that the subsidies be established on account of the number of units transmitted or the volume of services provided, and second that they be fixed at a time prior to the realization of the operations.

3. On this subject, the Arbitral Award has already pronounced itself in case no. 111/2014-T[1]:

"The European Commission, in its first report on the functioning of the common VAT system (contained in document COM (83) 426 final, of 14 September 1983), understands that there are certain types of subsidies relatively to which it appears easy to decide on their inclusion in the taxable amount, enumerating the cases in which the amounts of subsidies (i) are determined with reference to the sale prices of goods or services supplied; (ii) or in function of the quantities supplied; (iii) or are destined to cover the costs of goods or services that are supplied free to the public.

However, concerning various other types of subsidies – namely those destined to cover deficits and operational subsidies – the Commission considers it extremely difficult to lean towards their inclusion (or not) in the taxable amount of the operations covered by VAT (as emphasized by RUI LAIRES and ISABEL VEGA MOCOROA cited above).

These latter are normally attributed to strengthen the economic situation of the subsidized entities, and not specifically referred to the prices practiced, although, adds the Commission, no substantial difference is found between these two types of subsidies. This finding, allied with the circumstance that one can with relative facility convert a subsidy directly referred to prices into another type of subsidy illustrates, according to the Commission, the fragility of a distinction based on a formal criterion and the inadequacy of the rules of the Directive (at the time Sixth Directive, 77/388/CEE).

In the Commission's second report on the functioning of the common VAT system (contained in document COM (88) 799 final, of 20 December 1988), a strict and literal interpretation is advocated, according to which the inclusion of the subsidy in the taxable amount depends on the concurrence of three cumulative conditions: (i) the subsidy constituting the consideration or part of the consideration; (ii) the subsidy being paid to the supplier of goods or service provider; and, finally, (iii) the subsidy being paid by a third entity.

For XAVIER DE BASTO "The logic of the inclusion of these subsidies in the VAT taxable amount can be questioned. Whether or not to include subsidies linked to operations is a matter of two ways of conceiving or rationalizing the value-added tax – the two faces of the tax: as a transactions tax (tax on business) or as a general consumption tax. (…) In truth, the inclusion of subsidies in the taxable amount only makes sense when VAT is viewed as a tax on business, "a business tax – destined, ultimately, to tax the respective value added. If subsidies are not included, the tax would not reach the value added, the value of production at factor costs – the subsidized business would be favored relative to the non-subsidized business. This is not, however, how the problem should be posed when faced with a consumption-type VAT" (…) In this logic, what should matter is the effective price, the expenditure of the consumer" – cf. "The Taxation of Consumption and its International Coordination," in Notebooks of Science and Technical Tax (164), 1991, p. 210.

Further according to this illustrious Professor, the solution of the Directive is far from being easy to apply. "It implies the distinction between subsidies "directly linked to the price" of the operations, to be included in the taxable base, and those of other natures, which do not count for the determination of that base. Given the diversity of situations that may occur, the distinction is not always easy. When the amount of subsidies is determined either by reference to the sale prices or the quantities sold ("compensatory indemnities"), it is clear that these are subsidies directly linked to prices. Nor will it raise doubts the non-inclusion of capital subsidies. Already, however, it may prove difficult to decide the issue as to other types of operational subsidies, which are paid to improve the economic position of businesses, but which are not calculated with reference to prices or quantities sold. This would be the case, for example, of the so-called "balancing subsidies," calculated a posteriori, to cover operational deficits, and of "operational subsidies," which constitute revenue supplements determined a priori, independent of the results of operations." – cf. cited work, p. 212.

CLOTILDE CELORICO PALMA notes that subsidies constitute "one of the gray areas of this tax" and that community legislation does not contain a definition of subsidy, "limiting itself to providing for the rule on their inclusion in the taxable amount of operations and the possibility of their inclusion in the calculation of the prorata". It adds that the "treatment of subsidies in VAT is not a matter entirely harmonized at the level of the various Member States, calling into question a uniform application of the common system and respect for the principle of neutrality of the tax" – in Public Entities and Value Added Tax – A Rupture in the Principle of Neutrality, Almedina, 2011, pp. 561 and 565.

In this framework of some indetermination, it is the case-law construction of the ECJ that provides us the (valid) interpretation of the VAT Directive and the criteria for deciding on the taxation of subsidies."

1. Within the scope of community jurisprudence, on subsidies, it has pronounced itself in the Awards Jurgen Mohr (C-215/94, of 29 February 1996) and Landboden-Agrardienste (C-384/95, of 18 December 1997), and especially in the OPW case[2].

2. The Court of Justice, within the scope of the OPW case, proceeded to the delimitation of the necessary presuppositions for the consideration of a subsidy in the taxable amount for VAT purposes. The CJ understands that the taxation of the subsidy implies the fulfillment of certain presuppositions.

3. These presuppositions which we now enumerate, in the same terms that the Arbitral Award composed it in case no. 111/2014-T, already did so, which is transcribed:

"First presupposition – that it be a subsidy granted by an authority in the context of a triangular relationship, i.e., that involves three parties (paragraph 10 of the OPW Award):

(a) The authority that grants the subsidy;

(b) The organism/tax obligor that benefits from it; and

(c) The buyer of the good or the recipient of the service respectively delivered or provided by the subsidized operator, clarifying that the operations in question are not those carried out for the benefit of the authority that grants the subsidy.

Second presupposition – that the subsidy be directly related to the price of the operations to be carried out by the subsidized operator (paragraph 12 of the OPW Award). For that purpose it is necessary that such subsidy be specifically paid to the operator so that it provides a good or provides a determined service.

Third presupposition – the price of the good or service must be determined, as to its principle, at the latest at the moment when the taxable event occurs (paragraph 13 of the OPW Award).

Fourth presupposition – the commitment to pay the subsidy assumed by the one who grants it has as a corollary the right to receive it recognized to the beneficiary when the taxable operation has been carried out by this (paragraph 13 of the OPW Award).

It is important to emphasize that the CJ expressly returns to the national court the proof of the existence of a direct nexus between the subsidy and the good or service in question (paragraph 14 of the OPW Award).

This relationship between the subsidy and the price must result in an unequivocal manner and after an analysis, case by case, of the circumstances at the origin of the payment of the consideration and requires that it be verified, in a first phase, that the buyers of the good or the recipients of the service benefit from the subsidy granted to the beneficiary thereof. Indeed, it is necessary that the price to be paid by the buyer or by the recipient (in this case the three municipalities) be fixed in such a way that it decreases in proportion to the subsidy granted to the seller of the good or the service provider. Conversely, it is not necessary that the price of the good or service – or a part of the price – be determined. It is sufficient that it be determinable.

It is the national court that has to assess whether, objectively, the fact that a subsidy is paid to the service provider allows it to provide a service at a price lower than it would require in the absence of that subsidy. It is not necessary that the amount of the subsidy correspond exactly to the reduction in the price of the good delivered, it being sufficient that the relationship between this and said subsidy, which may be fixed, be significant. However, it must be emphasized that the mere fact that a subsidy could have an influence on the prices of goods delivered or services provided by the subsidized organism is not enough to make it taxable (paragraphs 12, 14 and 17 of the OPW Award)."

1. Faced with the presuppositions mentioned above and by the position assumed by the jurisprudence within the scope of the arbitral award described, it results for the case sub judice, the indispensability of the verification of the said four presuppositions.

2. As to the first presupposition, the existence of a direct nexus between the subsidy and the services, in which results a triangular relationship, the same is fulfilled.

3. If we look, it is granted by an authority in the context of a triangular relationship between the European Social Fund (Human Potential Operational Program (POPH)) the Applicant (tax obligor beneficiary) the user/recipient of the service provided by the applicant.

4. The negative requirement is additionally verified that the operations, the courses are not carried out for the benefit of the authority that grants the subsidy.

5. As to the remaining presuppositions, they are equally fulfilled, as we can verify.

6. The subsidy is specifically paid by the European Social Fund to the Applicant so that it provides a determined service, and the same is directly related to the price of the operations to be carried out.

7. The Applicant submitted its application to the European Social Fund (Human Potential Operational Program (POPH)), by means of the presentation of a detailed project of the number of training activities and trainees involved, the respective calculated and itemized costs.

8. Under the terms of Regulatory Decree 84-A/2007, of 10 December and of Dispatches nos. 18227/008 and 18223/2008, which regulate the general regime of application of the European Social Fund (ESF), it results "The acceptance of the decision approving the candidacy by the beneficiary grants it the right to the perception of financing for the realization of the respective projects, under the terms of article 40 of Regulatory Decree 84-A/2007, of 10 December.[3]"

9. There is no doubt whatsoever that the subsidy is for the realization of the projects covered, thus being fulfilled the third presupposition.

10. It is further stated that if the Applicant does not carry out said services, it will have no right to receive the attributed amounts, for these were granted on the presupposition of the realization of such service provision.

11. As to the last presupposition, the commitment to pay the subsidy assumed by the one who grants it has as a corollary the right to receive it recognized to the beneficiary when the taxable operation has been carried out by this, the execution of the training service provision has reference the concrete number of trainee beneficiaries of these services.

12. As results from article 15, no. 1 of Dispatches nos. 18227/008 and 18223/2008, where it is fixed that "The beneficiary entity is obliged to present, by 15 February of each year, annual execution information, reported to 31 December of the previous year, on the physical and financial execution of the candidacy, in accordance with what is stipulated in no. 6 of article 40 of Regulatory Decree 84-A/2007, of 10 December."

13. It further prescribes no. 6 of article 40 of Regulatory Decree 84-A/2007, of 10 December "The beneficiary entities of multi-annual candidacies are obliged to provide to the management authorities, in the manner and with the frequency defined by them, the necessary information for the preparation of the annual report of the PO, namely information on the physical and financial execution of the project, the payment of expenses being conditioned on the provision of the same, except for a properly justified and accepted reason by the management authority."

14. Faced with the foregoing, it results that the attribution of the subsidy is made with reference to the training activities that the beneficiary entity (applicant) will carry out, taking into consideration the number of participants and hours of training.

15. The subsidy is made with reference to the volume of services effectively provided, thus being fulfilled the fourth presupposition.

16. In these terms, the fulfillment of the four presuppositions, stated within the scope of community and national jurisprudence, is verified.

17. It is concluded in the sense that the subsidy attributed by the European Social Fund within the scope of the Human Potential Operational Program, being this the manner in which the subsidy is attributed, and by fulfilling the determining conditions of the taxation provided for in the typology of "subsidies to price," the same subsumes to the provision pursuant to article 16, no. 5 subparagraph c) of the VAT Code.

18. It is further stated that the subsidy in the amount of 5,720.98€, here in question, is the final value, the same including VAT at the 20% rate in the amount of 953.50€, which is the subject of the assessment sub judice.

H.I – AS TO THE LACK OF SUBSTANTIATION OF THE ASSESSMENT

1. The Applicant petitions that the assessment object of the present arbitral request suffers from absolute lack of substantiation, in that the recipient cannot know what facts it is based upon, in manifest violation of nos. 1 and 2 of article 77 of the LGT.

2. It results from nos. 1 and 2 of article 77 of the LGT that "The decision of proceedings is always substantiated by means of a brief exposition of the reasons of fact and law that motivated it, being able the substantiation to consist of mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that integrate the tax inspection report.

3. 2 - The substantiation of tax acts may be effectuated in a summary manner, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax."

4. The additional VAT assessment in question results from corrections properly specified in the tax inspection report, of which the Applicant was duly notified.

5. In these terms, the Applicant's request is without merit.

I – DECISION

Accordingly, given all the foregoing, this Arbitral Tribunal decides as follows:

To declare without merit the request for a declaration of illegality of the tax assessment acts relating to Value Added Tax, Value Added Tax, nos. … and … which fixed tax and interest payable of 1,121.32 € (one thousand one hundred and twenty-one euros and thirty-two cents).

The value of the case is set at € 1,121.32 of the value of the assessment, taking into account the economic value of the case measured by the value of the tax assessments challenged, and in accordance therewith the costs are set at the respective amount of 306.00€ (three hundred and six euros), charged to the Applicant in accordance with article 12, no. 2 of the Regime of Tax Arbitration, of article 4 of the Regulations of the Tax Arbitration Court (RCPAT) and of Table I annexed to the latter. – no. 10 of article 35, and nos. 1, 4 and 5 of article 43 of the LGT, articles 5, no. 1, subparagraph a) of the RCPT, 97-A, no. 1, subparagraph a) of the CPPT and 559 of the Code of Civil Procedure (CPC)).

Notify.

Lisbon, 14 December 2015.

The Arbitrator

Paulo Renato Ferreira Alves

Text prepared by computer, under the terms of no. 5 of article 131 of the CPC, applicable by reference of subparagraph e) of no. 1 of article 29 of Decree-Law no. 10/2011, of 20/01.

[1] Available at www.caad.org.pt

[2] Case C-180/00, concerns a case in which the regional administration of Wallonia attributed an annual sum to a private nonprofit association, destined to promote agricultural, horticultural and agro-food products of that region. At issue was the question of whether operational subsidies that cover a diverse part of operational expenses, namely personnel remuneration, cost of facilities, cost of acquisition of necessary equipment and supplies and all other direct and indirect expenses related to the activity, should be understood as included in the VAT taxable base.

[3] As per no. 1 of article 14 of Dispatches nos. 18227/008 and 18223/2008.