VAT on Dental Prostheses Under Verba 2.6 CIVA Annex: CAAD Arbitration on Additional Assessments

ARBITRAL DECISION

REPORT

1. On 29 May 2015, A…, Lda, with registered office at Praceta …, no. …, Unit …, …-…, hereinafter referred to as the Claimant, requested the constitution of an arbitral tribunal and filed a request for an arbitral award, pursuant to section (a) of article 2(1) and section (a) of article 10(1) of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as RJAT), in which the Tax and Customs Authority (hereinafter referred to as AT) is named as Respondent.

2. The Claimant is represented in the present proceedings by its representative, Dr. B…, and the Respondent is represented by the legal practitioners, Dr. C… and Dr. D….

3. The request for constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and notified to the Respondent on 16 June 2015.

4. By means of the request for constitution of the arbitral tribunal and for an arbitral award, the Claimant seeks the annulment of the acts of additional assessment of Value Added Tax (VAT) relating to the year 2010, and respective compensatory interest, identified as follows:

a) Additional VAT assessment no. …, relating to the period 2010/03 Q, in the amount of € 2,084.84 (two thousand, eighty-four euros and eighty-four cents);

b) Additional VAT assessment no. …, relating to the period 2010/06 Q, in the amount of € 3,336.26 (three thousand, three hundred and thirty-six euros and twenty-six cents);

c) Additional VAT assessment no. …, relating to the period 2010/09 Q, in the amount of € 2,956.27 (two thousand, nine hundred and fifty-six euros and twenty-seven cents);

d) Additional VAT assessment no. …, relating to the period 2010/12 Q, in the amount of € 6,238.13 (six thousand, two hundred and thirty-eight euros and thirteen cents);

e) Compensatory interest assessment no. …, relating to the period 2010/03 Q, in the amount of € 376.53 (three hundred and seventy-six euros and fifty-three cents);

f) Compensatory interest assessment no. …, relating to the period 2010/06 Q, in the amount of € 569.27 (five hundred and sixty-nine euros and twenty-seven cents);

g) Compensatory interest assessment no. …, relating to the period 2010/09 Q, in the amount of € 470.13 (four hundred and seventy euros and thirteen cents);

h) Compensatory interest assessment no. …, relating to the period 2010/12 Q, in the amount of € 939.31 (nine hundred and thirty-nine euros and thirty-one cents).

1. Having verified the formal regularity of the request submitted, pursuant to section (a) of article 6(2) of the RJAT, and as the Claimant did not proceed to appoint an arbitrator, the undersigned was appointed by the President of CAAD's Ethics Council.

2. The Arbitrator accepted the appointment made, the arbitral tribunal having been constituted on 7 September 2015, at the registered office of CAAD, located at Avenida Duque de Loulé, no. 72-A, in Lisbon, as per the minutes of constitution of the arbitral tribunal that were drawn up and are attached to the present file.

3. The Respondent, after being duly notified, submitted its response on 7 October 2015.

4. On 2 November 2015, the Tribunal, with a view to assessing the usefulness of producing the witness evidence requested in the initial claim, notified the Claimant to indicate, in view of the position assumed by the Respondent in its response, whether it intended to maintain the production of witness evidence, and the Claimant, in response, through the pleading filed on 5 November 2015, waived the testimony of the witnesses it had listed.

5. On 13 January 2016, the Tribunal, by order, notified the parties to state their position on whether or not to hold the meeting provided for in article 18 of the RJAT, as well as on the need for submission of written arguments.

6. In response to this order, the parties, first the Respondent, through the pleading filed on 14 January 2016, and then the Claimant, through its pleading of 18 January 2016, waived the holding of the meeting provided for in article 18 of the RJAT, as well as the submission of written arguments.

7. Accordingly, on 15 February 2016, the Tribunal, by order, set 7 March 2016 for the issuance of the arbitral award, and warned the Claimant that it should proceed to pay the subsequent arbitration fee, pursuant to article 4(3) of the Regulation of Costs in Tax Arbitration Proceedings, and communicate such payment to CAAD.

8. On 4 March 2016, the Tribunal, by order, extended the time limit for the award by a further two months, pursuant to article 21(2) of the RJAT, setting 7 May 2016 for the issuance of the arbitral award.

The Claimant sustains its request, in summary, as follows:

The Claimant supports the request for annulment of the act of additional assessment of Value Added Tax (VAT) relating to the year 2010, on the ground that it is vitiated by illegality, due to error as to the legal premises, inasmuch as:

a) "It has always been the understanding of the claimant as well as of all companies engaged in the same activity [commercialization of dental implantology articles, of which dental implants, abutments and connector pieces stand out], and which have direct contact with it, that the products in question [intended for dental clinics and dentists who perform dental implantology] are fully classified under item 2.6 of List I attached to the VAT Code, which provides for taxation at the reduced rate (…)", insofar as this item applies to "orthopedic devices, medical-surgical belts and medicinal stockings, wheelchairs and similar vehicles, operated manually or by motor, for disabled persons, devices, artifacts and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or the treatment of fractures and lenses for sight correction, as well as orthopedic footwear, provided that prescribed by medical prescription (…)".

b) The Claimant states that the correction made by the AT (which it considers illegal) was based on the content of the Binding Information resulting from the Dispatch of 2007.05…, issued in Case …, which, on the one hand, not only "has no force of law, nor can it override the law itself", but on the other hand, its underlying application "must be considered abusive, since the legal text is perfectly clear, in that it does not restrict its application to prostheses that fully replace a limb or human organ, it suffices that it replaces in part that limb or organ for it to be taxed at the reduced rate.", and furthermore, it appears somewhat outdated, in that it refers "to 2007 (…) when dental implantology was in its infancy, which implies some lack of knowledge about the way it is practiced, which justifies the tenor of such information".

c) It sustains its position by stating that "item 2 of List I attached to the VAT Code, cannot be subject to a restrictive interpretation as the Tax Authority intends, inasmuch as the item is clear in its interpretation. In the present case this item does not require restrictions inasmuch as the legislator applied the correct words in the drafting of the rule, so as to meet the intention of the law, [therefore] in no circumstance should the scope of this rule be reduced."

d) Continuing, in the sense that "such rule may be subject to a declarative interpretation (and not restrictive) since our legislator used in a manner adequate and correct all the words contained in the law, with exact equivalence between the meanings and the intention present in the law."

e) Further, it states that "by resorting to restrictive interpretation we would be calling into question a fundamental principle of our Constitution of the Portuguese Republic – the Principle of Equality, inasmuch as we would be faced with equal situations with different tax rates." Because, "the intention of the legislator in creating item 2 was not to benefit taxpayers at the expense of others, but rather in the face of equal situations to tax equally."

f) It further adds that "the legislator in creating item 2 of List I to the VAT Code, intended to tax at the same rate situations where the final product is the same, which in the present case culminates with implants, regardless of whether the final consumer acquired the products in a phased manner or in their entirety. The meaning and scope of the reduced rate applied in this domain should take into account the good rules of hermeneutics, considering not only the grammatical element, but also its content, reason for being and objectives pursued by item 2.6, resulting in a declarative interpretation." The Claimant further understands that "nothing in the letter of the law leads to restricting its application to situations of transmission of 'complete goods' of implants. Strictly speaking, it would be very difficult for the purchasers of these products, dental clinics, dentists to buy the prostheses in their entirety, in that most components are requested as they are placed on the patient."

g) The Claimant likewise states that "any of the articles commercialized (…) [by it], with the exception of tools for dentistry, are to be considered as prostheses, as such classified under item 2.6 of List I attached to the VAT Code, and their transmission is taxed at the reduced rate and not at the normal rate."

h) It further argues that "the said item 2.6 expressly contemplates as seen 'devices, artifacts, and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body", that is, the interpretation of the item that the Tax Authority made, in the said Binding Information [resulting from the Dispatch of 2007.05…, issued from Case no. …], must be considered abusive, since the legal text is perfectly clear, in that it does not restrict in its application the prostheses that fully replace a limb or human organ, it suffices that it replaces in part that limb or organ for it to be taxed at the reduced rate."

i) In conclusion, the Claimant states that, "given how implants are processed we can only conclude that the operations carried out by the claimant are in full correspondence with item 2 above referenced, and the reduced rate must be applied to all prostheses." Thus, "the disputed VAT assessments are vitiated by error as to the legal premises, due to erroneous interpretation of item 2.6 of List I to the VAT Code," and therefore, as a consequence, the "annulment of the additional VAT assessments, the compensatory interest assessments (…) relating to the year 2010, in the total amount of € 16,940.74" should be ordered.

III. In its Response the Respondent invoked, in summary, the following:

a) The Respondent understands, as regards the alleged error as to the factual premises, that "in accordance with item 2.6 of List I attached to the VAT Code, only the sale of prostheses, including dental prostheses, which are intended for the purpose provided therein, are subject to the reduced rate (…), and not the sale of connector pieces or materials of attachment or fixation of such prostheses, the sale of which should be taxed at the normal tax rate of the tax."

b) Indeed, the Respondent considers, following the understanding conveyed by the VAT Design Division of the VAT Services Directorate, that "prosthetic materials are only taxed at the reduced rate if they are intended for the purpose defined in the item, that is, to replace part of the body with deficiency or illness or its function.", which "implies, also, that goods consisting of parts, pieces and accessories of such prostheses are not covered by item 2.6, given that, in addition to not being prostheses, they are not capable of fulfilling, considered individually, the function of replacing a part of the body or its function."

c) It thus argues that "item 2.6 only covers the transmission of the article which, in itself, constitutes an artificial piece that replaces the organ of the human body or part thereof, that is, autonomously or unitarily.", and therefore "in the prosthesis by implant, the normal tax rate applies to the transmission of connector or fixation pieces, given that these, do not fulfil, in themselves, objectively, the function described in item 2.6 of List I attached to the VAT Code."

d) It thus considers, based on the evolution that the position of the VAT Design Division has undergone, that "when the taxable person invoiced the purchaser a set of goods consisting of prosthesis, implant and connector pieces, the reduced rate would be applicable. However, if only implants and connector pieces were transmitted, or both, being these considered as loose components, parts or pieces, the normal tax rate would apply."

e) To support its position, the Respondent relies on Community jurisprudence, namely by reference to the Judgments of 18 January 2001, case Commission v Spain, C-83/99, and to the Judgment of 17 January 2013, likewise in a case of Commission v Spain, C-360/11, regarding the application of reduced rates, alluding to the fact that "the purpose of the application of reduced VAT rates is, in particular, to reduce the burden borne by the final consumer in the acquisition of certain essential goods. Given that this type of goods is used essentially by professionals and entities in the health sector, which benefit from the exemption of the tax in the services they provide, the burden of these expenses is unlikely to fall on the final consumer."

f) In this sequence, the Respondent considers that "the conclusion of the Tribunal is, moreover, in line with the provision of article 11(4) of the General Tax Law (LGT) which prohibits analogical extension for gaps resulting from tax rules covered by the parliamentary law reserve of the Assembly of the Republic. Indeed, by virtue of the provision of article 103(2) and section (i) of article 165(1), both of the Constitution of the Portuguese Republic, exemptions and other tax benefits or incentives, which undoubtedly include cases of application of reduced rates under VAT, constitute matters covered by the parliamentary law reserve, and are accordingly subject to the prohibition of analogy.", to reinforce its position that "item 2.6 of List I, attached to the VAT Code, comprises, being taxed at the reduced rate, the '(...) devices, artifacts, and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body'".

g) Resorting to the rules of hermeneutics, it further argues that "article 11(1) of the LGT establishes that in determining the meaning of tax rules and in the qualification of facts to which they apply the general rules and principles of interpretation and application of laws are observed.", making reference, likewise, to article 9 of the Civil Code, to state that "To interpret a law is to determine its meaning and scope with which it should apply, that is, to determine its meanings and decisive scope.", further stating that "taking into account the literal element of the interpretation of the rule, that the legislator refers to prosthetic material and not to material for prosthesis (for application in a prosthesis), which indicates excluding connector or fixation pieces of prostheses, such as those transacted by the taxable person."

h) It continues, alluding that, "(…) it is important to distinguish the concept of implant from the concept of prosthetic material. [Thus] By 'prosthetic material' should be understood that which is intended or is fit for the replacement of a limb or organ of the human body, in whole or in part. Dental prostheses are intended to replace the dental apparatus, totally or partially. This replacement occurs not only physically but also in the replacement of its functions: chewing, verbalization, aesthetic function. In implant prosthesis, (…) the implant is the mode of fixation of the prosthesis. The prosthesis, constructed or made by a specialized technician, by reference to the patient for whom it is intended, consists of the piece called the crown (artificial tooth in porcelain), which is not provided by the taxable person. In fact, the implant (the mode of fixation of the prosthesis) does not benefit from the same tax treatment as the prosthesis, as happens, moreover, with the components used in the making of other prostheses."

i) It further adds that "(…) dental prostheses in general, regardless of the method of application, have, in their final destination, the same tax treatment, that is, the exemption provided in article 9 of the VAT Code, that is, as the Claimant refers, what is relevant here is the final product and it is that which benefits from the reduced rate. We must not forget that the prosthesis, in itself, can be the subject of commercialization in stages prior to being made available to the patient, in which case it is taxed at the reduced rate."

j) Further, it states that "item 2.6 applies, therefore, to the devices and prostheses in themselves, final product, in the case at hand, to the artificial tooth (prosthesis). This means that it does not apply to the goods transacted by the Claimant.", since these "(…) are not prosthetic material. Indeed, according to the opinion of the Dental Practitioners Association, referred to above, such goods serve as support for the dental prosthesis."

k) It continues by stating that "notwithstanding their application is generally used in dental medicine, they are, only, accessory or instrumental parts, which contribute to the final result of oral rehabilitation. It should be noted, again, that the Dental Practitioners Association itself considers prosthesis the crown, since it is this that replaces the tooth, in its chewing, verbalization and aesthetic function."

l) It makes reference to the "principle of neutrality deriving from the Treaty of Rome and is embodied in the VAT Directive (2006/112/EC), being systematically invoked by the Commission to oppose national legislations deemed incompatible with Community rules, as well as by the tax administrations and taxpayers of the various Member States, having been, numerous times, applied by the CJEU.", further stating that "if we are talking about neutrality regarding the taxation of different types of prosthesis we must compare the transmission of removable prosthesis with that of fixed prosthesis. And not with that of fixed prosthesis plus fixation and connector pieces.", and therefore understands that "It would be manifestly debatable any eventual comparison between the two types of prosthesis, either by their respective economic value, or by the way of meeting the needs for which they are intended, being not indifferent, from the consumer's point of view, to opt for one or the other. In this perspective, the principle of neutrality can come into crisis if different rates apply to the materials necessary for the making of each of the different types of prosthesis."

m) Concluding in the sense that "indeed, only the application of the same rate to the pieces, parts and accessories, in this case, the normal rate, ensures the neutrality of the tax, preventing any discriminatory treatment between the different types of prostheses.", seeking, as a consequence, the rejection of the request for arbitral award.

IV. Joinder of Issues

The Tribunal is competent and is properly constituted, pursuant to section (a) of article 2(1) and articles 5 and 6, all of the RJAT.

The parties have legal personality and capacity, are shown to be legitimate, are properly represented and the proceedings do not suffer from any nullities.

V. Factual Matters

For the conviction of the Arbitral Tribunal, with regard to the facts proven, the documents attached to the file, as well as the administrative proceedings, were relevant.

a. Facts Established as Proven

With relevance for the decision, the following facts are established as proven:

A. The claimant is a limited liability company, with share capital of € 200,000.00 and whose business purpose is "research, development, manufacturing, distribution and commercialization of dental medical products" (cf. permanent certificate with access code …-…-… attached to the administrative proceedings file);

B. Within the scope of its activity, the Claimant commercializes dental implantology articles, namely dental implants, abutments and connector pieces, intended for dental clinics and dentists who perform dental implantology. (Agreement of the parties).

C. For Value Added Tax (VAT) purposes, the Claimant is a taxable person pursuant to section (a) of article 2(1) of the VAT Code and classified under the normal monthly regime pursuant to section (a) of article 41(1) of the VAT Code, within the scope of the main activity of "Other wholesale trade in consumer goods, n.e.c." to which CAE code 46494 corresponds and the secondary activity of "Manufacture of Orthopedic Material, Prostheses, Medical-Surgical Instruments", to which CAE code 32502 corresponds (cf. administrative proceedings attached to the file);

D. Pursuant to an external inspection order – OI2014… – corrections were made in VAT, plus respective compensatory interest, of which the Claimant was notified in November 2014 (cf. administrative proceedings attached to the file);

E. The draft report of the Tax Inspection resulting from the inspection action indicated in C. was notified to the Claimant in November 2014, through Office no. …/… of 28.10.2014, also notifying it to exercise, if it so wishes, the right of hearing that is granted to it under the provision of article 60 of the General Tax Law (cf. folio 23 of the administrative proceedings attached to the file);

F. On 21.11.2014 the Finance Department of … addressed to the Claimant the Final Report of Tax Inspection, through Office no. …/…, of 2014.11.20. (cf. folios 44 and 45 of the administrative proceedings attached to the file);

G. On 29.05.2015 the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

VI. Facts Established as Not Proven

There are no facts established as not proven, because all facts relevant to the assessment of the request were established as proven.

VII. Legal Grounds

In the present proceedings, the fundamental question that arises is whether the transmission "individualized" of crowns, implants and abutments may be taxed at the reduced rate of 6%, as argued by the Claimant, by being subsumed within the provision of item 2.6 of List I attached to the Code of Value Added Tax (VAT Code), or whether, conversely, such rate applies only to transactions relating to complete implants, as argued by the Respondent.

In order to answer this question, it is necessary to determine the scope, extent and meaning of item 2.6 of List I attached to the VAT Code, analyzed in the Community and domestic context, which is precisely what we propose to do.

Let us see,

Value Added Tax

VAT is a complex tax, which, according to the teachings of Clotilde Celorico Palma[1] is "characterized, essentially, as an indirect tax of Community origin, multiphase, which tends to affect all acts of consumption through the indirect subtraction method".

It is, in fact, a tax on consumption, given its incidence at all phases of the economic circuit and for taxing every act of consumption (as opposed to special taxes on consumption).

It is "charged at all stages of production, (…) does not favor nor disadvantage the joining or separation of the operations of production units. Insofar as the taxable value is, in principle, the actual price of the transaction, and not a normal value"[2], and "aims to tax all consumption of material goods and services, covering its incidence all phases of the economic circuit, from production to retail, although the taxable base is limited to the value added at each phase"[3]. Indeed, this modus operandi promotes difficult manipulation of taxable values, reflecting and guaranteeing advantages in terms of fiscal neutrality, a characteristic, moreover, that represents it.

Indeed, neutrality must have expression in all essential phases of the life of this tax, notably, as regards the rules of objective and subjective incidence, localization, exemptions and the exercise of the right of deduction.

Now, as stated in the CAAD decision issued in case no. 429/2014 T, regarding the characterization and specification of the principle of neutrality, this principle "is embodied in the VAT Directives, being systematically invoked by the Commission to oppose national legislations deemed incompatible with the rules of European Union Law, as well as by the tax administrations and taxpayers of the various Member States".

Indeed, "the application of the principle of neutrality should be taken into consideration in the essential phases of the life of this tax, such as the rules of objective and subjective incidence, localization, exemptions and the exercise of the right of deduction. We can state that this has been the most invoked principle by the CJEU to substantiate its judgments, appearing to us many times allied to the principle of equality of treatment, uniformity and elimination of distortions of competition. Thus, the CJEU has been concerned, in particular, with the realization of the objectives of the common system, in ensuring the neutrality of the tax burden of all economic activities, whatever their objectives or results (…)" assuring "economic operators equality of treatment, achieving a uniform definition of certain elements of the tax and ensuring legal certainty and facilitating actions intended for its application".

Thus, in accordance with this fundamental principle, and as already alluded to, VAT should be interpreted and applied, internally and internationally, so as to ensure a homogeneous system that guarantees healthy competition in the space of the European Union.

The Application of Reduced VAT Rates at Community Level

Taking into consideration the matter which concerns us here – application of reduced VAT rates - we believe it is prudent to first state that the provision for reduced rates under VAT, in the domestic legal systems of each Member State, originates from the existing Community Directives on this matter.

Indeed, the most comprehensive questions related to VAT are provided for in the now in force Directive no. 2006/112/EC, of 28 November, (hereinafter referred to as VAT Directive), which provides the necessary guidance for the transposition, by Member States, of the rules of this tax, so that it may be harmonized in the Community space.

Now, as regards the application of the (normal and reduced) rates of VAT, we find that the VAT Directive in its articles 96 and 97 provides for the fixing of the rate at a percentage of the taxable value not less than 15% until 31 December 2015.

However, and in addition to the normal rate, the VAT Directive provides, likewise, in its article 98, on the one hand, that Member States may apply internally "one or two reduced rates" at a percentage which cannot, according to article 99 of the VAT Directive, be less than 5%, further providing, in this regard, that "Each reduced rate shall be fixed in such a way that the amount of VAT resulting from the application of that rate makes it normally possible to deduct all the tax in respect of which the right of deduction is conferred in accordance with articles 167 to 171 and 173 to 177.", and on the other hand, that such reduced rates should only apply "to the supply of goods and services in the categories listed in Annex III [not applying, however] to the services referred to in section (k) of article 56(1)", and that "when applying the reduced rates provided for in paragraph 1 to categories relating to goods, Member States may use the Combined Nomenclature to delimit precisely each category." (emphasis ours).

That is, Member States, if they so wish, may adopt, when transposing the Directive into their legal systems, the reduced rate of the tax, which must comply with EU law rules.

Now, with interest to the present case, taking into account that we are faced with a situation (or not) of application of reduced rate to dental implants, abutments and connector pieces, we can see that point 4 of Annex III of the VAT Directive provides that, for the supply of goods and services relating to "Medical equipment, auxiliary material and other devices normally used to alleviate or treat deficiencies, for the exclusive personal use of disabled persons, including their repair, as well as car seats for children" the reduced rates provided for in article 98 of the VAT Directive may be applied.

It is also important to mention, furthermore, in this regard, and always in accordance with the principle of neutrality that characterizes VAT, considerations 5 and 7 of the VAT Directive, which provide that "(5) A VAT system achieves the greatest degree of simplicity and neutrality if the tax is levied in the most general manner possible and its scope covers all stages of production and distribution, as well as the supply of services. Accordingly, it is in the interest of the internal market and the Member States to adopt a common system that applies equally to the retail trade." and that "(7) The common VAT system should, even though rates and exemptions are not completely harmonized, lead to competitive neutrality, in the sense that, within the territory of each Member State, goods and services of the same kind are subject to the same tax burden, regardless of the length of the production and distribution circuit."

Community Jurisprudence on the Application of Reduced VAT Rates

The jurisprudence of the Court of Justice of the European Union (CJEU) existing on the application of reduced rates of VAT, has come to sustain the understanding that the principle of fiscal neutrality, which includes that of VAT uniformity and the elimination of distortions of competition, implies, on the one hand, not only that all economic activities should be treated in the same way[4], but also, on the other hand, that all economic operators carrying out the same operations should be treated equally[5], that is, it must always be present when reduced VAT rates are introduced and applied.

In fact, since the application of reduced rates is an exception to the rule – for the rule is, as is known, the application of the normal rate – they should be interpreted in a strictly manner, as pointed out in the CJEU Judgment of 18 January 2001, issued in case no. C-83/99, Commission v Kingdom of Spain.

And, as emphasized in the CAAD decision, of 18.06.2014, issued in case 171/2013-T, this (strict) form of interpretation "is not equivalent to restrictive or restricted interpretation. The CJEU jurisprudence uses the word 'strict' (in English, 'strictly', in French 'de manière stricte' and in Castilian 'estrictamente'), whose meaning is 'precise', 'rigorous' (Dictionary of Contemporary Portuguese Language, Academy of Sciences of Lisbon, Verbo, Volume I, 2001). In reality, the literal or rigorous correspondence with the text of the rule does not imply a restriction of its meaning, typical of restrictive interpretation based on the assumption that the text said more than was intended to be said, but rather the election of a meaning that the text directly and clearly bears, since that [meaning] is the one that corresponds to legislative intent (cf. João Baptista Machado, "Introduction to Law and Discourse of Legitimation", Almedina, 2010, 18th reprint, pp. 185 and 186. In strict or declarative interpretation, 'the literal sense, or one of the literal senses, covers what, definitively, is established to be what it intends to express" (cf. Oliveira Ascensão, the Law. Introduction and General Theory, Almedina, 10th Ed., 1999, p.418)."

Thus, we can ascertain that the CJEU, in this regard, understands that a declarative interpretation should be made, as the Claimant rightly refers to in its request for constitution of this arbitral tribunal, and not a restrictive one as advocated by the AT.

Moreover, this CAAD decision further states, as regards this matter, which we accompany for transparency in exposition that: "Now, if there is any special principle of interpretation in the field of application of reduced VAT rates, such a principle can only be that of integral and rigorous respect for the meaning (or meanings) verbally possible of the expressions contained in the law (principle of strict or declarative interpretation). On the contrary, it appears inadmissible to consider a principle that takes as a general rule that the legislator was betrayed by the words he used, revealed a misuse of his language and expressed more than he intended (supposed principle of restrictive interpretation)."

Complementarily, we believe it is appropriate to refer, for its importance, some considerations on the matter at hand, in the context of the CJEU, and which are contained in case no. 429/2014-T of CAAD which assessed a situation very similar to the present case, namely:

"in accordance with the jurisprudence of the CJEU, the institution and maintenance of distinct VAT rates for similar goods or services are only admissible if they do not violate the principle of fiscal neutrality inherent in the common VAT system, in respect of which Member States must transpose the Community rules[6].

As the CJEU makes a point of emphasizing, it follows from the Community rules that the determination and definition of the operations that may benefit from a reduced rate are the responsibility of Member States. As the Commission has stressed in its reports on reduced rates, one of the greatest problems of the application of rates consists, precisely, in the optional character of such application and the absence of common definitions for the categories of goods and or services covered. [7]

However, in the exercise of this competence Member States must respect the principle of fiscal neutrality. Now, as we have seen, this principle opposes, in particular, that similar goods or service supplies, which are therefore in competition with each other, be treated differently from a VAT standpoint, so that said products should be subject to a uniform rate."

Continuing this judgment, to the effect that "Since the reduced rate is the exception, the fact that its application is limited to specific and concrete aspects is consistent with the principle that exemptions or derogations must be interpreted in strict terms, provided that the principle of neutrality of the tax is not violated."

Moreover, specifically, to what concerns us, this CAAD judgment further states that "(…) Member States cannot, in particular, interpret the concepts used in Annex III of the Directive in a selective manner so that, without regard to objective criteria, different treatment is granted to identical realities. Indeed, since it is true that the determination of the operations subject to reduced VAT rate is the responsibility of Member States, with no abstract definitions for this purpose in Community legislation, it is necessary that the principle of neutrality be respected. Thus, it would be contrary to the principles of EU Law a taxation at reduced rates of the tax that, being selective, violates the fundamental characteristics of fiscal neutrality, objectivity and uniform rate of taxation, not permitting that subgroups be created within a taxable activity, with the intention of applying different tax rates to them, with no objective reason justifying such difference in treatment."

Having said this, it is prudent to note that the CJEU, among many other subjects interconnected with VAT, has examined some cases in which the question of composite supplies as opposed to independent supplies was discussed[8]. The understanding having been consistent in the jurisprudence of that Court that: "...there is a single supply namely in the case where one or more elements must be considered as the main supply, whereas, conversely, one or more elements must be considered as ancillary supplies that share the same tax treatment as the main supply. A supply must be considered ancillary to a main supply when it does not constitute for the clientele an end in itself, but a means to benefit in the best conditions of the supplier's main service"[9].

As appears from the CJEU Judgment of 27 October 2005, Case Levob Verzekeringen BV and OV Bank NV v Staatssecretaris van Financiën, Case C-41/04, it can be understood that we are faced with a single operation for VAT purposes when "two or more elements or acts supplied by a taxable person to a consumer, understood as an average consumer, are so connected that, from an economic standpoint, they objectively form a single whole whose separation would be artificial in nature".

A position likewise assumed in the CJEU Judgment of 21 February 2008, Case Part Service, Case C-425/06, according to which, making reference to the Levob Verzekeringen and OV Bank NV judgment states that "it may (…) be considered that a single supply is present when two or more elements or acts supplied by the taxable person are so closely linked that they form, objectively, a single indissociable economic supply whose decomposition would be artificial in nature."

Now, as regards the fragmentation of the main supply into various elements, we can see that the position of the CJEU[10] has been to the effect that, "50. (…) it follows from article 2 of the Sixth Directive that each transaction must normally be considered as distinct and independent (v. judgments, already cited, CPP, no. 29, and Levob Verzekeringen and OV Bank, no. 20).

51 However, in certain circumstances, several formally distinct supplies, susceptible of being carried out separately and thus giving rise, in each case, to taxation or exemption, must be considered as a single transaction when they are not independent.

52 This occurs, for example, when, following an analysis even if merely objective, it is found that one or more supplies constitute a main supply and that one or more other supplies constitute one or more ancillary supplies that share the tax destiny of the main supply (v., in this sense, judgments, already cited, CPP, no. 30, and Levob Verzekeringen and OV Bank, no. 21). In particular, a supply must be considered ancillary to a main supply when it does not constitute for the clientele an end in itself, but a means to benefit in the best conditions of the supplier's main service (judgment CPP, already cited, no. 30, and the circumstances of the main proceedings that gave rise to this judgment)."

Thus, and taking into account that there may be main and ancillary supplies, economically inseparable, it is the understanding of the CJEU that to the same should be applied, as regards the application of VAT rates, a single regime, corresponding to that of the main supply, in light of which we shall determine whether the sales of dental implants, such as those at issue here, should be considered, for purposes of application of the reduced rate, when these are situations of "individualized" transmission, as argued by the Claimant, or if on the contrary, only when these are "complete goods", as the Respondent understands.

Domestic Context

Now, in the domestic context, and given the divergent interpretation of the tenor of item 2.6 of List I attached to the VAT Code, it seems prudent to note, from the outset, that the meaning and scope of that item should take into account the good rules of hermeneutics, being, in this sequence of resorting, on the one hand, to the provision of article 11 of the General Tax Law, which, under the heading "Interpretation" provides, in its paragraph 1, regarding the determination of the meaning of tax rules and in the qualification of facts to which they apply, that the general rules and principles of interpretation and application of laws be observed, in its paragraph 2 that "whenever, in tax rules, terms proper to other branches of law are used, they should be interpreted in the same meaning as they have there, unless otherwise directly results from the law", and in its paragraph 3 that "if doubt persists about the meaning of the applicable incidence rules, account should be taken of the economic substance of the tax facts", and, on the other hand, to paragraph 1 of article 9 of the Civil Code, which determines that interpretation should not only be limited to the letter of the law (literal or grammatical element), but reconstruct from the texts the legislative intent (ratio legis), taking into account the unity of the system (systematic element), the circumstances in which the law was drawn up (teleological element) and the specific conditions of the time in which it is applied (historical element).

Thus, emphasizing the aforementioned regarding declarative interpretation above stated, the grammatical element, its context, the reason for being and, finally, the purpose carried out by item 2.6 of List I attached to the VAT Code, we will be forced to conclude that the national legislator intended, in the manner of the guidelines of the CJEU, which must, moreover, be followed by Member States, that a declarative interpretation, and not a restrictive one, be made of that item.

Thus, and in this sequence, providing item 2.6 of List I attached to the VAT Code, that subject to the reduced rate of VAT are the "Orthopedic devices, medical-surgical belts and medicinal stockings, wheelchairs and similar vehicles, operated manually or by motor, for disabled persons, devices, artifacts and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or the treatment of fractures and lenses for sight correction, as well as orthopedic footwear, provided that prescribed by medical prescription, (…)", (emphasis ours) it is possible to consider that dental implants fall within the said list, inasmuch as they are themselves considered as prosthetic material intended to replace an organ of the human body, in this case, the dental apparatus.

However, and because VAT is sometimes a complex tax, we shall determine what the true intention of the legislator is and the correct interpretation to be made of item 2.6 at issue.

Now, let us see,

The Rules of the VAT Code

The VAT Code provides in its article 18 that:

"1 - The tax rates are as follows:

a) For imports, supplies of goods and supplies of services listed in List I attached to this decree, the rate of 6%;

b) For imports, supplies of goods and supplies of services listed in List II attached to this decree, the rate of 13%;

c) For the remaining imports, supplies of goods and supplies of services, the rate of 23%. (Wording of Law no. 55-A/2010, of 31 December)

2 - Subject to the rate referred to in section (a) of paragraph 1 are the imports and supplies of art objects provided for in special legislation.

3 - The rates referred to in sections (a), (b) and (c) of paragraph 1 are, respectively, of: (Wording given by article 2 of Law no. 14-A/2012, of 30 March)

a) 4%, 9% and 18%, in relation to the operations which, in accordance with special legislation, are considered to be carried out in the Autonomous Region of the Azores; (Wording given by Law no. 63-A/2015, of 30 June)

b) 5%, 12% and 22%, in relation to the operations which, in accordance with special legislation, are considered to be carried out in the Autonomous Region of Madeira. (Wording given by article 2 of Law no. 14-A/2012, of 30 March)

4 - In the supplies of goods consisting of an aggregate of various commodities, forming a distinct commercial product, the following rates apply:

a) When the commodities making up the sales unit do not undergo changes in their nature nor lose their individuality, the rate applicable to the overall value of the commodities is that which corresponds to them or, if different rates apply to them, the highest one;

b) When the commodities making up the sales unit undergo changes in their nature and quality or lose their individuality, the rate applicable to the whole is that which, as such, corresponds to it. (Wording of Law no. 82-B/2014, of 31 December)

5 - In the supplies of services relating to financial leasing contracts, the tax is applied at the same rate as would be applicable in the case of supply of goods given on financial lease.

6 - The rate applicable to the supplies of services referred to in section (c) of article 4(2) is the same as would be applicable in the case of supply of goods obtained after the execution of the work.

7 - To the supplies of services via electronic means, in particular those described in Annex D, the rate referred to in section (c) of paragraph 1 applies. (Wording given by article 2 of Decree-Law no. 186/2009, of 12 August, in effect from 1 January 2010)

8 - When not exempted, under article 13 or other decrees, to the imports of goods that are the subject of small consignments sent to private persons or that are contained in the personal luggage of travelers, subject to the flat-rate customs duty provided for in the preliminary provisions of the Common Customs Tariff, the rate referred to in section (c) of paragraph 1 applies, regardless of their nature.

9 - The applicable rate is that in force at the time the tax becomes due."

From a careful reading of this legal provision we can, on the one hand, ascertain that the normal VAT rate applies in a residual manner, i.e., whenever the good or service in question does not fall within one of the two reduced rates provided for in Lists I and II attached to the Code. However, and when applicable, it should be noted the exception provided for in article 18(4) of the VAT Code.

On the other hand, it is prudent to bear in mind, following what has already been mentioned, for purposes of applying the tax rate, whether we are faced with a single operation or with main and ancillary operations, whether the operation comprises only one or several distinct and independent supplies of goods and/or supply of services or not, which should be considered autonomously or not, inasmuch as the assessment of the same is critical for purposes of applying the tax rate.

Now, in the case at hand, given the factual matters established as proven, we will have to determine whether the reduced rate provided for in item 2.6 of List I attached to the VAT Code can be applied to the individualized supply of dental implants, abutments and connector pieces that are commercialized by the Claimant for delivery to dental medicine clinics.

In fact, as was understood in case 429/2014-T of CAAD, whose object of assessment is very similar to the present case and which we follow, it was found that the concept of supplies of "complete goods" of implant does not exist, as the AT seeks to uphold. There exist, yes, "implants consisting of three pieces which we are now dealing with – crown, implant and abutment, which, according to surgical technique, are introduced by phases into the patient's mouth, thus giving rise, in their entirety, to an implant. In reality, these three pieces are indivisible and unusable save for the composition of an implant as a composite prosthesis."

Thus, it seems to us rather unreasonable that the position defended by the AT to the effect that the application of the reduced VAT rate, provided for in item 2.6 of List I attached to the VAT Code, is not intended for the individualized supply of dental implants, abutments and connector pieces, not only because, on the one hand, there are no "complete goods" of implant -, but also because in accepting such treatment, it would fall into a blatant situation of discrimination among the different dental prostheses, and finally, because we are of the understanding that such requirement does not result from the law.

As is stated in case 429/2014-T, which we follow in its entirety "if such understanding [of the AT] were accepted, an arbitrary discriminatory treatment would be introduced among the different dental prostheses. On the one hand, prostheses composed of a single piece would benefit from the reduced rate of 6%, on the other hand, "composite" prostheses would be taxed at the normal rate. This fact is discriminatory, offending, from the outset, notably, the provisions of articles 5(2) and 7(3) of the LGT. Indeed, according to the provision of the first normative, with the heading "Purposes of taxation", taxation respects the principles of generality, equality, legality and material justice. In turn, according to the provision of article 7(3), "Taxation does not discriminate any profession or activity nor prejudice the practice of legitimate acts of a personal character, without prejudice to exceptional increases or benefits determined by economic, social, environmental or other purposes'."

Moreover, such understanding causes a violation of the principle of neutrality, since it treats in a totally different manner goods that are equal, with which we cannot in any way agree.

Furthermore, as regards the interpretation of rules, both at the domestic level (paragraphs 2 and 3 of article 11 of the LGT) it is understood that "whenever, in tax rules, terms proper to other branches of law are used, they should be interpreted in the same meaning as they have there, unless otherwise directly results from the law." and that "if doubt persists about the meaning of the applicable incidence rules, account should be taken of the economic substance of the tax facts.", and at the Community level, the Community legislator, the Commission and the jurisprudence of the CJEU have understood that, "in the use of the concepts employed for purposes of application of reduced rates, Member States should pay attention to the economic effects involved so as not to call into question the essential principle of neutrality of the tax."[11]

This means that, agreement with the understanding of the AT, in the present case, that, pursuant to item 2.6 of List I attached to the VAT Code, the reduced tax rate applies "only to the sale of prostheses, including dental prostheses, which are intended for the purpose provided therein, and not to the sale of connector pieces or materials of attachment or fixation of such prostheses, the sale of which should be taxed at the normal tax rate", would lead to a situation of pure discrimination, given the differentiated treatment of situations or identical realities.

Thus, and still, in this context, in order to avoid further discrimination, it appears entirely reasonable the argument of the Claimant to the effect that "the legislator in creating item 2 of List I to the VAT Code, intended to tax at the same rate situations where the final product is the same, which in the present case culminates with implants, regardless of whether the final consumer acquired the products in a phased manner or in their entirety."

However, the argument presented by the AT to support its position which is limited to the Combined Nomenclature, which was, moreover, likewise used in case no. 429/2014-T, and which drew censure from the arbitral tribunal constituted to decide it, because it was understood that "this Nomenclature was created for statistical purposes and for the application of the common customs tariff and has no relevance in the classification of goods and services for VAT purposes in Portugal. The only case in which the VAT Code resorts to the Combined Nomenclature to define the scope of the tax regime of goods comes provided for in the respective article 14(1), section (i), for purposes of determining the regime of exemption (complete or zero rate), according to which are exempt the 'supplies of goods for provisioning placed on board warships classified by code 8906 00 10 of the Combined Nomenclature, when they leave the country for a port or anchorage situated abroad", device this not applicable in the situation at hand. Being certain that, in accordance with the stipulated in article 98(3) of the VAT Directive, Member States can use the Combined Nomenclature to delimit precisely each category subject to the reduced rate, it is equally true that the Portuguese legislator did not adopt this option. That is, for VAT purposes it is irrelevant the classification that implants, crowns and abutments deserve in the Combined Nomenclature."

Thus, following the understanding upheld in that judgment, the present tribunal understands that this argument of the AT should not be accepted.

In fact, and as we can see from the case at hand, the use or "unitary or individualized" transmission of dental implants, abutments and connector pieces, can be and is normally done within the scope of dental implantology, there being no, as already mentioned and determined in case no. 429/2014 T, the single piece "implant".

Thus, it is legitimate to consider that the individualized supply of dental implants, abutments and connector pieces falls within the legal provision of item 2.6 of List I attached to the VAT Code, constituting as "... devices, artifacts and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body".

And, as is mentioned in case no. 429/2014-T of CAAD "the ratio legis that leads the legislator to adopt the application of the reduced VAT rate in such situations – the protection of health – is exactly the same that leads us to this interpretation. It should be noted, lastly, that, from the jurisprudence cited above, even if supposedly there existed, as the AT claims, "complete goods" of implant, in the sense it seeks to convey, we would always have to recognize that the crown, the abutment and the implant would be configured as a single piece or, at worst, even though erroneously thus not understood, as ancillary pieces, and as such, should be taxed at the reduced rate, following the treatment of the main operation. That is: either only by resort to the Community rules or by simple application of the good rules of hermeneutics, the result is the same – one can only conclude that in item 2.6 of List I attached to the VAT Code are included both implants consisting of a single piece and composite implants. Indeed, all the elements of interpretation of tax rules that can be invoked for this purpose, as well as the characteristics of VAT and the interpretation that the CJEU has been making thereof, lead us to conclude that, in the present case, the reduced VAT rate provided for in item 2.6 of List I attached to the VAT Code should apply to the supply of implants, crowns and abutments now under analysis."

Given all of the above, the present tribunal understands that the Claimant's request should be accepted, concluding that the additional VAT assessment acts and respective compensatory interest disputed are illegal, being vitiated by error as to the legal premises, namely, by erroneous interpretation of item 2.6 of List I attached to the VAT Code, and therefore, as a consequence, the same should be annulled.

VIII. DECISION

For the factual and legal grounds set out above, it is hereby decided, thus, in favor of the request, the acts of additional VAT assessment and respective compensatory interest, here disputed, relating to the tax year 2010, in the amount of € 16,940.74 (sixteen thousand nine hundred and forty euros and seventy-four cents), should be annulled, as manifestly illegal.

Value of the Case

The value of the case is fixed at € 16,940.74 (sixteen thousand nine hundred and forty euros and seventy-four cents), pursuant to article 97-A(1), (a), of the Code of Civil Procedure applicable (CPPT), by force of sections (a) and (b) of article 29(1) of the RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

Costs to be borne by the Respondent, in accordance with article 12(2) of the RJAT, article 4 of the Regulation of Costs in Tax Arbitration Proceedings, and Table I attached thereto, which are fixed in the amount of € 1,224.00.

Notify thereof.

Lisbon, 6 May 2016

The Arbitrator

(Jorge Carita)

[1] In Introduction to Value Added Tax, IDEFF Notebooks, no. I, 5th Edition, p. 17.

[2] VAT Code and RITI, Notes and Comments, coordination and organization of Clotilde Celorico Palma and António Carlos dos Santos, 2014, Almedina, p. 24.

[3] Ibid., p. 25

[4] Cf. CJEU Judgment of 20 June 1996, case Wellcome Trust, Case C-155/94

[5] Cf. CJEU Judgment of 7 September 1999, case Gregg, Case C-216/97

[6] See, in that sense, the Judgment of 7 September 1999, Case Gregg

[7] Report of 13 November 1997 [COM (97) 559 final] and Report of 22 October 2001 [COM (2001) 599]

[8] See CJEU Judgment of 25 February 1999, Case CPP, issued in Case C-349/96.

[9] Ibid.

[10] CJEU Judgment of 21 February 2008, Case Part Service, Case C-425/06.

[11] CAAD Decision issued in case 429/2014-T.