CAAD Case 35/2018-T: VAT Deduction Under Articles 78(6) and 98(2) of the Portuguese VAT Code

ARBITRAL DECISION

The Arbitrators Fernanda Maças (Arbitrator President), Nuno Cunha Rodrigues and Paulo Lourenço, designated by the Ethics Council of the Centre for Administrative Arbitration (CAAD) to form the Collective Arbitral Tribunal, constituted on 5 April 2018, agree as follows:

I – REPORT

A..., SA, legal entity no. ..., with registered office at ..., no. ..., ...-... Lisbon, hereinafter designated as Claimant, came, under Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (RJAT), to present a request for an arbitral decision seeking the declaration of illegality of the additional assessments numbers 2017..., in the amount of € 1,002,954.51 (one million two thousand nine hundred and fifty-four euros and fifty-one cents), 2017..., in the amount of € 1,196,367.83 (one million one hundred and ninety-six thousand three hundred and sixty-seven euros and eighty-three cents) and 2017..., in the amount of € 702,127.76 (seven hundred and two thousand one hundred and twenty-seven euros and seventy-six cents), plus the corresponding interest, all in a total of € 3,265,009.15 (three million two hundred and sixty-five thousand and nine euros and fifteen cents).

By application of 16 April, the Claimant requested, under article 63 and, as well as if that be the case, of articles 64 and 65 of the CPTA, to which is added article 265 no. 2 of the CPC (applicable ex vi article 29 of the RJAT), that it also be:

a) declared the illegality of, and consequently annulled, the VAT assessment acts (i) in the amount of € 27,847.02 with number 2017..., to which corresponds the tax enforcement process no. ...2018..., (ii) in the amount of € 712,237.17, with number 2016..., to which corresponds the tax enforcement process no. ...2018..., and (iii) in the amount of € 1,158,412.19, with number 2016..., to which corresponds the tax enforcement process no. ...2018..., and likewise that the illegality of, and consequently annulled, the assessment acts of the corresponding interest numbers 2018... (€ 2,428.29), 2018... (€ 1,411.83) and 2018... (€ 2,296.26), for the same reasons and grounds contained in the initial petition with respect to the primitive VAT assessments and the corresponding interest;

b) the TA consequently condemned to compensate the Claimant for the damages resulting from the provision of undue guarantees with respect to these new VAT assessments and interest and corresponding tax enforcement processes (Documents nos. 13 to 18 annexed hereto), this indemnification calculated based on the costs incurred with the provision of these guarantees until their release.

The RESPONDENT is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD on 29 January 2018 and, on the same date, automatically notified to the Tax and Customs Authority.

Pursuant to the provision in subsection a) of no. 2 of article 6 and subsection b) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.

On 15 March 2018 the parties were duly notified of this designation, having not manifested any intention to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11 no. 1 subsections a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provision in subsection c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 5 April 2018.

The Tax and Customs Authority responded by arguing that the request should be judged unfounded.

By order of 4 July 2018 a hearing was dispensed with and it was decided that the proceedings would continue with written pleadings.

Only the Claimant presented pleadings reiterating the arguments of law as to the merits of the case invoked in the Arbitral Request.

The arbitral tribunal was regularly constituted, in accordance with the provision in articles 2 no. 1 subsection a), and 10 no. 1 of Decree-Law no. 10/2011, of 20 January, and is competent.

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

The Respondent raised the exception relating to the value of the case and requested by the Claimant the supervening futility of the dispute and the enlargement of the request, matters which will be analysed after establishment of the facts.

The proceedings do not suffer from any nullities.

II – STATEMENT OF FACTS

II.1 ESTABLISHED FACTS

With relevance to the assessment and decision of the matters raised, the following facts are established and proven:

• The Claimant is a commercial company which, in the exercise of its activity, provides postal services, performing mail and parcel service in Portugal and also express service in Spain and Portugal;

• Furthermore, the Claimant also provides services of a financial and telecommunications nature, carrying out postal collection of securities;

• The Claimant, until the end of 2014, carried out operations that confer the right to deduction and others that do not confer such a right, deducting the VAT borne in accordance with a general pro rata;

• Until the end of 2014, the Claimant did not charge VAT on operations relating to postal collection of securities, having regard to the content of binding information no. 1604, of 17 June 2007;

• The Claimant requested in 2015 confirmation from the TA in order to maintain the exemption with respect to postal collection of securities operations, having obtained a response contrary to its claims, as evidenced by binding information no. 9022;

• The Claimant assessed and paid VAT relating to postal collection of securities operations, with respect to the years 2013 to 2014, in the amount of € 1,896,563.71 (one million eight hundred and ninety-six thousand five hundred and sixty-three euros and seventy-one cents);

• As a consequence of the assessment, the Claimant proceeded to a comprehensive review of the VAT deduction procedure with respect to the years previously mentioned, in order to recover the tax which it had deducted less in accordance with the new framework;

• Following the inspection action to which corresponds the service order no. OI2017..., of 12 April 2017, the TA did not accept the deductions made with retroactive effects and proceeded to the respective corrections, additionally assessing the VAT improperly deducted, with respect to the years 2013 and 2014;

• The Claimant did not make payment of the additional assessments within the voluntary payment period, for which reason the corresponding tax enforcement processes were instituted;

• The Claimant presented objections to the enforcement with respect to the aforementioned enforcement processes, with those based on the additional assessments 2017... and 2017... being judged well-founded, in the amounts, respectively, of € 1,196,367.83 (one million one hundred and ninety-six thousand three hundred and sixty-seven euros and eighty-three cents) and € 702,127.76 (seven hundred and two thousand one hundred and twenty-seven euros and seventy-six cents);

• With respect to the two VAT assessments in the amounts of € 1,196,367.83 and € 702,127.76 respectively, the Claimant became aware of them through notifications of the corresponding interest assessments (Documents nos. 4 and 5) and the corresponding summons to tax enforcement (Documents nos. 2 and 3).

• The Tax Authority proceeded to annul the additional assessment no. 2017... and the assessment of default interest no. 2017..., in the amounts, respectively, of € 1,196,367.83 and € 231,182.65, following the objection presented by the Claimant in the tax enforcement processes;

• The Tax Authority likewise proceeded to annul the additional assessment no. 2017... and the assessment of default interest no. 2017..., in the amounts, respectively, of € 702,127.76 and € 132,376.40, following the objection presented by the Claimant in the tax enforcement processes;

• The tax and default interest assessments nos. 2017... and ..., in the amounts, respectively, of € 1,196,367.83 and € 231,182.65, relating to the VAT period 2014/01, have an annulment date of 2018-01-26 (document no. 1 attached with the application presented by the Respondent, following an order of the Tribunal of 8 October 2018, which is hereby reproduced for all legal purposes);

• The request for constitution of the Arbitral Tribunal is dated 5 April 2018;

• On 3 February 2018 (counting with the legal extension of 5 days) the A... were summoned for three new tax enforcement processes, once again (i) without the assessments under enforcement having been notified to them, (ii) without having been given the opportunity to make voluntary payment, without default interest, before the coercive collection processes were initiated (iii) and without ever having been indicated the means and deadlines for defence against the assessments under enforcement. Namely:

i) Tax enforcement process no. ...2018..., for collection of VAT assessment in the amount of € 27,847.02 (Document no. 4), and respective interest;

ii) Tax enforcement process no. ...2018..., for collection of VAT assessment in the amount of € 712,237.17, and respective interest (Document no. 5)

iii) Tax enforcement process no. ...2018..., for collection of VAT assessment in the amount of € 1,158,412.19, and respective interest (Document no. 6);

• The Claimant presented bank guarantees with a view to suspending the tax enforcement processes which were brought against it and corresponding to the VAT assessments being challenged and corresponding interest (see documents 13 to 18, presented by the Claimant);

The proven facts were based on the position of the parties freely assessed by the Tribunal, the documents which were attached to the proceedings by the Claimant and the Respondent, including the case file.

II.2. UNPROVEN FACTS

With relevance to the decision, there are no facts which should be considered as unproven.

III – STATEMENT OF LAW

III-1. MATTERS TO BE DECIDED

A) Preliminary Matters

a. Value of the Case

In the present case, the Respondent entity raised, in its response, as a preliminary matter, that the Tribunal should fix as the value of the action the amount contained in the additional VAT assessment no. 2017..., in the amount of € 1,002,954.51 relating to the period of December 2013 (point 1 of the response), since the other assessments, namely the VAT assessment in the amount of € 1,196,367.83, and the VAT assessment in the amount of € 702,127.76, as well as the assessment of the respective compensatory interest, relating to the periods of January and February 2014, had been annulled following the objection presented by the Claimant against the corresponding tax enforcement processes.

Let us see.

In determining the value of the case, regard should be had to the moment at which the action is brought, in accordance with article 299 no. 1 of the CPC, subsidiarily applicable by virtue of the provision in article 29 no. 1 subsection e) of the RJAT.

By way of adaptation to arbitral proceedings of article 259 no. 1 of the CPC, the instance is initiated by the commencement of the action and this is considered to be brought, commenced or pending, as soon as the request for constitution of the Arbitral Tribunal is received at the CAAD secretariat.

Thus, in the words of Jorge Lopes de Sousa, "the modifications in value that may arise from the revocation, ratification, reform or conversion of the tax act whose illegality was raised or from withdrawal or reduction of claims are irrelevant".

According to the same Author, "Similarly, eventual enlargements of the primitive request which are considered admissible will not imply a change in the value of the case, as they are development or consequence of the primitive request (article 265 no. 2 of the CPC), such as, for example, increase derived from indemnificatory interest or indemnification for undue guarantee" (See Guide to Tax Arbitration, 3rd ed., Almedina, Coimbra, p. 155).

In view of the foregoing, the Respondent's position is not well-founded.

b. Supervening Futility of the Dispute

Notified of the response, the Claimant alleged, among other things, that the "TA had the duty, within the wide legal period granted to it before the communication of the constitution of the Arbitral Tribunal, to give notice in the arbitral proceedings: i) of the revocation/annulment of the VAT assessment in the amount of € 1,196,367.83, to which corresponded the tax enforcement process no. ...2017..., and to which corresponded, as revealed by corresponding interest assessment, the assessment number 2017...; ii) of the revocation of the VAT assessment in the amount of € 702,127.76, to which corresponded the tax enforcement process no. ...2017..., and to which corresponded, as revealed by corresponding interest assessment, the assessment number 2017...; iii) and of the revocation of the assessments of the corresponding compensatory interest numbers 2017... (on € 1,196,367.83) and 2017... (on € 702,127.76)."

However, only in its Response of 9 May 2018, already with the Arbitral Tribunal constituted, did the Respondent communicate that the above-identified VAT and compensatory interest assessments were annulled, "finally giving response to the request for clarification contained in the application of the A... sent to the proceedings on 13 April 2018, and notified to the TA on 16 April 2018."

The Claimant alleges that "The tax enforcement objection proceedings (whose initial petitions are attached hereto as Documents nos. 1 and 2) aimed solely at the extinction of illegal tax enforcement actions (for not being preceded by notification of the corresponding tax assessments), not the discussion and annulment of assessment acts, which were submitted for discussion in the declaratory and impugning proceedings for assessment acts, which is tax arbitration, which gave rise to the present arbitral process.

"Whereby", argues the Claimant, "these annulled assessments were, necessarily, by the initiative of the TA (...)".

"Whereby, all things considered, supervening futility of the dispute is envisaged with respect to the VAT and compensatory interest assessment acts above identified (VAT assessments no. 2017... – € 1,196,367.83 – and no. 2017... – € 702,127.76 –, and interest assessments no. 2017... – on € 1,196,367.83 – and no. 2017... – on € 702,127.76).

"Supervening futility of the dispute with respect to these identified assessments, but without prejudice to the liability for costs of he who gave rise to it (the TA)".

Let us see.

As results from the evidence, the Respondent, after being duly notified for that purpose by the Tribunal, by order of 8 October 2018, confirmed the ex officio annulment of the said assessments on 26 January 2018.

Thus, as the Claimant argues, the duty rested upon the respondent entity to, within the legal period granted to it before the communication of the constitution of the Arbitral Tribunal, provide that information in the arbitral proceedings. However, only in its Response of 9 May 2018, already with the Arbitral Tribunal constituted, did the Respondent deign to communicate that the above-identified VAT and compensatory interest assessments were annulled, without clarifying how or on what dates.

Furthermore, since the said assessments were annulled by the Respondent's own initiative, it follows as a consequence the supervening futility of the dispute with respect to the VAT and compensatory interest assessment acts above identified (VAT assessments no. 2017... – € 1,196,367.83 – and no. 2017... – € 702,127.76 –, and interest assessments no. 2017... – on € 1,196,367.83 – and no. 2017... – on € 702,127.76), with liability for costs borne by he who gave rise to it (the TA).

In such terms, the Claimant's argument as to the supervening futility of the dispute of the aforementioned assessments for which the Respondent is responsible is well-founded.

c. As to the Enlargement of the Request

In the application of 19 May, the Claimant also requested enlargement of the scope of the case since, among other things, "although annulling the abovementioned assessments, nonetheless what they represented of the corrections of the tax inspection to VAT for 2013, was not left without corresponding assessments".

"In fact, (...) the TA soon proceeded to issue new VAT and interest assessments, as the A... had the opportunity to report in documented fashion in the application sent to the proceedings on 13 April 2018 (and notified to the TA on 16 April 2018), in addition to maintaining the VAT assessment no. 2017..., in the amount of € 1,002,954.51, referenced in article 1 of the TA's Response.

"For the legal reasons invoked there, and which are hereby considered reproduced, the scope of the proceedings should be enlarged as requested, in order to comprise, for purposes of rendering a decision on the merits, in addition to the assessment of the VAT assessment no. 2017..., in the amount of € 1,002,954.51 (and the assessment of compensation for costs with guarantees), referenced in article 1 of the TA's Response, the following:

a) the assessment of the legality of the VAT assessment acts (superviseningly become known[1]) (i) in the amount of € 27,847.02 with number 2017..., to which corresponds the tax enforcement process no. ...2018..., (ii) in the amount of € 712,237.17, with number 2016..., to which corresponds the tax enforcement process no. ...2018..., and (iii) in the amount of € 1,158,412.19, with number 2016..., to which corresponds the tax enforcement process no. ...2018..., and likewise that the illegality be declared and consequently annulled the assessment acts of the corresponding interest numbers 2018... (€ 2,428.29), 2018... (€ 1,411.83) and 2018... (€ 2,296.26), whose declaration of illegality and annulment is requested for the same reasons and grounds contained in the initial petition with respect to the primitive VAT assessments and the corresponding interest;

b) the assessment of the request for condemnation of the TA to compensate the A... for the damages resulting from the provision of undue guarantees with respect also to these new VAT and interest assessments and corresponding tax enforcement processes (see Documents nos. 13 to 18 attached to the application sent by the A... to the proceedings on 13 April 2018), this indemnification calculated based on the costs incurred with the provision of these guarantees until their release."

The Respondent was notified to present any counter-arguments but said nothing.

Let us see.

Pursuant to the provision in article 63 no. 1 of the CPTA until the closure of the discussion in first instance, the scope of the proceedings may be enlarged to the impugnation of acts which may arise in the context or as a consequence of the procedure in which the impugned act is inserted. In turn, according to article 64 no. 1 of the same provision, "When, pending the proceedings, the impugned act is subject to administrative annulment accompanied or followed by new regulation, the author may request that the proceedings continue against the new act on the grounds of recurrence of the same illegalities..."

Considering the provisions in question and the circumstances which surrounded the practice of the new assessments, as well as the moment at which the request is made, the request for enlargement submitted by the Claimant is deemed well-founded, in the name of the principle of procedural economy and effective judicial protection.

In such terms, with the Claimant's argument being well-founded, the scope of the proceedings comprises:

a) Declaration of the illegality of VAT assessment no. 2017..., in the amount of € 1,002,954.51, and respective interest;

b) Declaration of the illegality of the VAT assessment acts (i) in the amount of € 27,847.02 with number 2017..., to which corresponds the tax enforcement process no. ...2018..., (ii) in the amount of € 712,237.17, with number 2016..., to which corresponds the tax enforcement process no. ...2018..., and (iii) in the amount of € 1,158,412.19, with number 2016..., to which corresponds the tax enforcement process no. ...2018..., and likewise that the illegality be declared and consequently annulled the assessment acts of the corresponding interest numbers 2018... (€ 2,428.29), 2018... (€ 1,411.83) and 2018... (€ 2,296.26).

B) As to the Merits

In the case at hand, the question arises as to whether the Claimant has the right to deduct, with retroactive effect, the tax borne in the context of its activity and not initially deducted, in the part relating to acquisitions of goods and services which can be directly attributed to the postal collection of securities operations which, in accordance with the new framework, became subject to tax.

The Claimant's understanding results from the circumstance, established as proven, that the TA modified the VAT regime of the Claimant with respect to "operations on securities", changing it from "exempt without right to deduction" to "subject with right to deduction", requiring the consequent retroactive payment of VAT relating to the year 2013 and subsequently limiting the right to deduction of the corresponding VAT.

The TA, in 2015, similarly modified the understanding relating to "postal collection of securities operations" and the Claimant, in that same year, assessed and paid, retroactively, VAT on "postal collection of securities operations" in the amount of € 1,896,563.71, with respect to the financial year 2013.

As was established as proven, until 2015 the Claimant had continued to proceed to the deduction of the VAT incurred in the generality of its activity using predominantly the pro rata deduction percentage methodology (general).

However, in that same year – 2015 – the Claimant reviewed the status of VAT deduction following analysis of (i) the direct allocation method and (ii) the actual allocation method, seeking, in this way, to implement the principle of VAT neutrality which allows to relieve taxable persons, as regards activities with right to deduction, of the VAT borne.

In this context, the Claimant intends to deduct the VAT borne in the years 2013 and 2014, in the part corresponding to the acquisition of goods and services directly allocated to the operations which, from the year 2015 onwards, became subject to tax.

Thus, the central matter sub judice consists in determining the temporal limit for the Claimant to proceed retroactively to the deduction of VAT in this case.

The Claimant and the TA disagree as to the understanding to be adopted.

The TA understands that the effectuation of the deduction of VAT borne in 2013, through a replacement declaration relating to December 2013, presented in 2015, cannot be made in view of the provision in the following articles of the CIVA: i) article 20; ii) article 22 no. 2; iii) article 23 no. 6; iv) articles 24 to 26; v) article 78 no. 6; and vi) article 98 no. 2.

Let us see:

Articles 20 and 24 to 26 of the CIVA deal with specific situations regarding the exercise of the right to deduction which are not verified in the present case. The first concerns operations which confer the right to deduction and the latter to adjustments which, in both cases, do not constitute a matter of controversy for the parties.

Remaining to be analysed are articles 22 no. 2; 23 no. 6; 78 no. 6 and 98 no. 2 of the CIVA.

Let us start with article 22 no. 2 of the CIVA.

Until 2003 inclusive, article 22 no. 2 of the VAT Code provided as follows:

"2 — Without prejudice to the possibility of correction provided for in article 71, the deduction must be made in the declaration of the period in which receipt of the invoices, equivalent documents or VAT payment receipt that forms part of the import declarations occurred."

This regime was modified at the end of 2003, following the amendment introduced by article 33 of Law no. 107-B/2003 of 31 December, with article 22 no. 2 of the CIVA ceasing to impose that the general rule of deduction should occur in the period of receipt of invoices.

Thus, article 22 no. 2 now has the following wording, still in force:

"2 - Without prejudice to the provision in article 71, the deduction must be made in the declaration of the period or of a period subsequent to that in which receipt of the invoices, equivalent documents or VAT payment receipt that forms part of the import declarations occurred".

This is an amendment which is understood in a clear manner.

Article 22 no. 2 has, since 2004, granted permission, as a general rule, to operate the deduction in a period subsequent to that of receipt of the invoice, without specifying the temporal limit, that is the number of subsequent VAT periods during which that deduction can be made.

From 2004 onwards, the legislator allowed the deduction of VAT to be carried out not only in the declaration of the period of receipt of the documents, but also in a declaration of "a subsequent period", without any restriction, and it cannot be overlooked that, in doing so, the legislator expressed itself in adequate terms.[2]

In other words, article 22 no. 2 of the CIVA establishes, since 2004, the moment from which the deduction of VAT can be effected, leaving open the possible final term of the deadline for proceeding to that deduction.

Which does not mean that this temporal limitation does not exist, as we shall see below.

Remaining to be analysed is the provision in article 23 no. 6 of the CIVA[3] which, in accordance with the TA's understanding, would oppose the possibility of VAT deduction within the period of 4 years, in accordance with article 98 no. 2 of the CIVA.

Article 23 of the CIVA regulates the exercise of deduction at the first moment at which it is possible to do so. In the specific case of article 23 no. 6, the legislator created a deduction mechanism by account based on provisional figures, namely those from the previous year, as well as their conversion as soon as the final figures for the year in question are determined.

In a different manner, in articles 78 no. 6 and 98 no. 2 of the CIVA, what is at issue are the corrections to the deductions initially made in accordance with article 23 (and, possibly, article 22) of the CIVA.

Having reached this point, it is important to ascertain whether the application of article 78 no. 6 of the CIVA takes place in this case or whether, differently, the general or residual period of 4 years provided for in article 98 no. 2 of the CIVA should be applied for exercising the possibility of VAT deduction.

It is thus sought to ascertain whether the CIVA determines any temporal limitation to the deduction of VAT for the purposes of the provision in article 22 no. 2 of the CIVA.

Article 78 no. 6 of the CIVA establishes the following:

"the correction of material errors or calculation errors in the record referred to in articles 44 to 51 and 65, in the declarations mentioned in article 41 and in the guides or declarations mentioned in subsections b) and c) of no. 1 of article 67 is discretionary when it results in tax in favour of the taxable person, but may only be made within the period of two years, which, in the case of exercising the right to deduction, is counted from the birth of the respective right in accordance with no. 1 of article 22, being mandatory when it results in tax in favour of the State."

Thus, a period of two years is provided for, counted from the birth of the right to deduction, for exercise of the respective right, in the situations provided for in article 78 no. 2 of the CIVA.

This is one of the "special provisions" to which the opening part of article 98 no. 2 of the CIVA alludes, in which the maximum period of four years after the birth of the right to deduction is not applicable, but rather two years.

As results from the literal wording of that no. 6 of article 78 of the CIVA, it is applicable only to "correction of material errors or calculation errors"[4], including in periodic declarations.

As was stated in the award no. 117/2013 of the CAAD, there will be a material error in filling in the amount of deductible VAT in a declaration when it was intended to write a certain amount and, by carelessness or oversight, a different amount ended up being written, or when the error in filling in the declaration results from a prior error of the same type that exists in the accounts or in some document that serves as the basis for exercising the right to deduction.

On the other hand, the association of the calculation error with the material error which is made in this no. 6 of article 78 of the CIVA, similar to what happens in other norms (such as article 249 of the Civil Code, article 667 of the CPC of 1961 and article 614 of the CPC of 2013), reveals that the calculation errors to which it is intended to refer will be of this type, namely arithmetic errors in the operations of calculating the amount to be deducted.

There will be a calculation error when the arithmetic operations to determine the amount of deductible VAT were poorly carried out, in the declaration itself or in some of the documents on which it was based.

Now, in the case at hand, the errors which were committed were neither material errors nor calculation errors, but rather errors motivated by (i) the TA itself which, following the alteration of the understanding it held, proceeded to retroactive assessment, in 2015, of VAT relating to the year 2013 relating to "postal collection of securities operations" and operations on securities which changed from "exempt without right to deduction" to "subject with right to deduction" and (ii) the fact that the Claimant reviewed the status of VAT deduction following analysis of the (a) direct allocation method and (b) actual allocation method.

Now the error as to the application of certain legal regimes – which may be attributed to the Claimant – does not constitute either a material error or a calculation error, whereby it is clear that the regime of the said no. 6 of article 78 of the CIVA cannot be applied to it.

Specifically, the calculation error of the pro rata is not a calculation error classifiable under this norm because it consubstantiates an error of law regarding the applicable legal regime and not an error of an arithmetic nature.

Finally, it would not be admissible, in light of the principle of neutrality, for the TA to proceed, in 2015, to the retroactive assessment of VAT – taking into account the change of opinion that had occurred in the meantime – while not admitting, concomitantly, that the taxpayer could proceed to the deduction of the corresponding VAT.

Thus, and knowing that article 22 no. 2 of the CIVA leaves open the possible final term of the deadline for proceeding to VAT deduction and not being applicable the regime of article 78 no. 6, nor there existing any special temporal limit regime for exercising the right to deduction on the basis of an error of law, the general regime contained in article 98 no. 2 of the CIVA will be applicable to this deduction.

Article 98 no. 2 of the CIVA is a general, open provision, which covers all situations of insufficiency or shortfall in VAT deduction, which are not temporally regulated by another special norm, as happens with article 78 no. 6 of the CIVA.

Consequently, article 22 no. 2 of the CIVA, it is reiterated, should be interpreted in conjunction with the following norms:

• Article 78 no. 6 of the CIVA – which establishes the period of two years for situations of shortfall in VAT deduction more easily detectable ("correction of material errors or calculation errors");

• Article 98 no. 2[5] – which establishes the general or residual period of 4 years, for all other situations while preserving special provisions which establish another period, as happens with article 78 no. 6 of the CIVA;

It is certainly the case that the matter sub judice could be analysed in light of the compliance of national law with the provision in Council Directive no. 2006/112/CE, of 28 November 2006, on the common system of value added tax (hereinafter VAT Directive). The question is whether the period of four years, provided for in article 98 no. 2 of the CIVA, complies with the VAT Directive.

The conclusion shall be anticipated: article 98 no. 2 of the CIVA complies, in a clear and unequivocal manner, with the provision in the VAT Directive.

Let us see.

Article 167 of the VAT Directive determines, regarding the right to deduction, that this arises at the moment when the deductible tax becomes due.[6]

This norm fixes the moment at which the right to VAT deduction is born which, in principle, will be the moment from which VAT can be deducted (dies a quo), or the moment before which deduction cannot be made.

Further on, article 179 of the Directive determines the moment during which deduction can be carried out in the following terms:

"The taxable person effects the deduction by subtracting from the total amount of tax due in respect of the tax period the amount of VAT in respect of which, during the same period, the right to deduction has arisen and is being exercised in accordance with article 178. However, Member States may require taxable persons who carry out the occasional transactions referred to in article 12 to exercise the right to deduction only at the moment of supply."

The VAT Directive does not, at all, intend to impose on the legislation of Member States a single or exclusive moment for VAT deduction as the tax period in which the right was born.

There is, therefore, no requirement that national law determines, as a rule, residually or with any other scope, the exercise of the right to deduction in the VAT period in which that right was born.

This understanding was, moreover, accepted by the Court of Justice of the European Union in various case law.

Thus, in the award EMS-Bulgaria Transport OOD[7], the CJEU considered that the right to deduction forms an integral part of the VAT mechanism and cannot in principle be limited (see paragraph 44).

Nevertheless, in this same award, the CJEU recalled that the possibility of exercising the right to deduction without temporal limits contradicts the principle of legal certainty, which requires that the tax situation of the taxable person, in view of its rights and obligations towards the Tax Administration, not be indefinitely capable of being called into question (citing for this purpose, the award Ecotrade, of 8 May 2008, cases C-95/07 and C-96/07, Rep., p. I-3457).

The CJEU notes, in the same judgment, that in the context of self-assessment, "a prescription period whose expiry leads to the penalisation of the insufficiently diligent taxpayer, who did not claim the VAT deduction up front, making him lose the right to deduction, cannot be considered incompatible with the regime set by the VAT directive, provided that, on the one hand, that period applies equally to analogous rights in tax matters based on internal law and those based on Union law (principle of equivalence) and, on the other, it does not make it impossible in practice or excessively difficult to exercise the right to deduction (principle of effectiveness)".

It is therefore considered that article 98 no. 2 of the CIVA complies with the VAT Directive, corresponding to a general and open provision, which covers all situations of insufficiency or shortfall in VAT deduction, which are not temporally regulated by another special norm, as happens with article 78 no. 6 of the CIVA, thus respecting the principle of effectiveness.

This understanding is moreover supported by abundant case law both of the STA and of the CAAD.

Thus, in the award of the Supreme Administrative Court (STA) of 18-5-2011, rendered in case no. 966/10, although it concerned a situation of fact prior to 2004, it was considered that the maximum limit of four years cannot be exceeded in any case for VAT deduction, in light of article 98 no. 2 of the CIVA, when there is no special temporal limit regime for exercising the right to deduction on the basis of an error of law.[8]

In the award of 28-06-2017, rendered in case no. 01427/14, the STA pronounced itself regarding the CIVA in force since 2004 in a case in which a self-assessment error was at issue and in which a request was made for revision of the VAT self-assessment tax act, concluding by the application of the period provided for in article 98 no. 2 of the CIVA.

In this award it was recognised that:

"(...) the situation under consideration does not fall within the so-called material error or calculation error, but rather in the so-called error of law as sustained by the appellant. For this reason, the period for submitting the request for revision, in the context of VAT (...) was four years and not two, whereby the present appeal merits allowance. From the foregoing, it follows that the appellant's argument is well-founded when it sustains that the applicable period for claiming the deduction of excess tax paid is that provided for in article 98 no. 2 of the CIVA, that is, four years and not the period of two years, provided for in article 78 no. 6 of the same statute, given that the latter is limited to the correction of material errors or calculation errors."

More recently, the award of the TCAS of 28.09.2017, rendered in case no. 263/16.0BELLE, followed the understanding of those STA awards considering that:

"the corrections in question correspond to rectifications of the pro rata calculation method and changes in the concomitant application of pro rata with the actual allocation method. For this reason, the same are based on errors of law and not mere material errors. That is, there are errors in the calculation of the percentage method applied by the taxpayer in determining the deductible tax, errors which relate to the segregation of activities, with the classification thereof and the identification of the applicable deduction percentage. (...) Whereby it is necessary to reiterate the doctrine established in the Award of the STA of 28.06.2017, P. 01427/17, according to which, '[the] applicable period for claiming the VAT paid in excess, in a situation classifiable as the so-called error of law, is four years, in accordance with the provision in article 98 no. 2 of the CIVA'. Whereby the applicable prescription regime for the case corresponds to the period of four years, provided for in the provision of article 98/2 of the CIVA (period for revision of self-assessment)."

Also in the CAAD, in the award rendered in case no. 85/2017, of 29 September 2017, the Arbitral Tribunal decided that:

"(...) article 78 no. 6 of the VAT Code refers to the "correction of material errors or calculation errors" in accounting records and in periodic declarations, in favour of the taxable person, which may be carried out within the period of two years, counted, in the case of exercising the right to deduction, from the birth of the respective right, in accordance with no. 1 of article 22 of the VAT Code." The same award added that it can be concluded that "(...) that, being an error of law, the period for recovering the overpaid tax is 4 years (general period for exercising the right to deduction or reimbursement of the overpaid tax) and not 2 years (special period for tax deduction) (...) by application of the provision in article 98 no. 2 of the VAT Code."

For which reason it is concluded that, in the matter sub judice, the errors which were committed were neither material errors nor calculation errors, but rather errors motivated by (i) the TA itself which, following the alteration of the understanding it held, proceeded to retroactive assessment, in 2015, of VAT relating to the year 2013, relating to "postal collection of securities operations" and operations on securities which changed from "exempt without right to deduction" to "subject with right to deduction" and (ii) the fact that the Claimant reviewed the status of VAT deduction, following critical review of the segregation methodology of the deductible amounts in concrete terms and the application of the (a) direct allocation method and (b) actual allocation method.

Consequently, the deduction of VAT is legal within the general period of 4 years provided for in article 98 no. 2 of the CIVA.

It is therefore understood that the assessments whose declaration of illegality is requested and the decision dismissing the administrative claim that maintained them suffer from error in the legal presuppositions, by error of interpretation of article 98 no. 2 of the CIVA, in conjunction with article 22 no. 2 of the same Code, a defect which justifies their annulment.

C) Indemnification for Damages Resulting from Undue Provision of Guarantee

The Claimant further requested payment of the corresponding indemnification for undue provision of guarantee, invoking the provision in article 53 of the LGT, for the purpose of obtaining suspension of the tax enforcement processes with a view to the impugnation of the tax acts of assessment of the tax and compensatory interest being challenged.

Article 171 of the CPPT guarantees indemnification in case of a bank guarantee or equivalent improperly provided, which may be requested in the proceedings in which the legality of the enforceable debt is contested, it being necessary to understand that arbitral proceedings is also the proper procedural means for deducing this claim inasmuch as it may have for object the assessment of claims relating to the declaration of legality of acts of assessment of taxes (article 2 no. 1 subsection a) of the RJAT).

Article 53 of the LGT furthermore admits that the debtor who offers a bank guarantee or equivalent to suspend tax enforcement will be indemnified wholly or partially for the damages resulting from its provision, if he has maintained it for a period exceeding three years, except where it is found in the judicial impugnation that there was error attributable to the services in the assessment of the tax, in which case the indemnification is not dependent on the period for which the guarantee was in force.

However, as was decided in the award of the STA of 24 October 2012 (Case no. 0528/12), only a bank guarantee can be understood as a guarantee for the intended indemnificatory purposes, bail, surety insurance or any other means capable of justifying the existence of expenses which may occur as an effect of the passage of time, referred to in article 199 no. 1 of the CPPT, and which have as maximum limit the guaranteed value of the default interest rate (article 53 no. 3 of the LGT).

As results from the evidence, to suspend the tax enforcement processes, the Claimant presented bank guarantees (see documents attached 13 to 18).

On the other hand, in the present case, it is clear that the declaration of illegality of the VAT and compensatory interest assessment acts is attributable to the Tax Administration, which, by its own initiative, practised them without legal support.

There is a violation of substantive law, consubstantiated in error in the legal presuppositions, attributable to the Tax Administration.

Thus, the requirements provided for in nos. 1 to 2 of article 53 are met, whereby the Claimant has the right to indemnification for the damages which result from the provision of improperly provided guarantees, calculated based on the costs incurred with the presentation of those guarantees until their release, all to be determined in execution of judgment.

IV – DECISION

In such terms, this Arbitral Tribunal decides:

• To judge unfounded the exception raised by the Respondent as to the value of the case;

• To judge well-founded the request for supervening futility of the dispute with respect to the VAT and compensatory interest assessment acts above identified (VAT assessments no. 2017... – € 1,196,367.83 – and no. 2017... – € 702,127.76 –, and interest assessments no. 2017... – on € 1,196,367.83 – and no. 2017... – on € 702,127.76), as a consequence of the revocation/annulment ex officio at the Respondent's initiative;

• To judge well-founded the request for an arbitral decision, with the consequent annulment of the following VAT assessments:

• VAT assessment no. 2017..., in the amount of € 1,002,954.51, and respective interest;

• VAT assessment in the amount of € 27,847.02 to which corresponds number 2017..., inserted in tax enforcement process no. ...2018...;

• VAT assessment in the amount of € 712,237.17, to which corresponds number 2016..., inserted in tax enforcement process no. ...2018...;

• VAT assessment in the amount of € 1,158,412.19, to which corresponds number 2016..., inserted in tax enforcement process no. ...2018..., and likewise the assessment acts of the corresponding interest numbers 2018... (€ 2,428.29), 2018... (€ 1,411.83) and 2018... (€ 2,296.26).

• To condemn the Respondent to pay indemnification for undue provision of guarantee in the amount to be fixed in execution of judgment;

• To condemn the Respondent to pay the costs of the present proceedings.

V – Value of the Proceedings

The value of the proceedings is fixed at € 3,265,009.15, in accordance with article 97-A no. 1 a) of the Code of Tax Procedure and Process, applicable by virtue of subsections a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

VI – Costs

The arbitration fee is fixed at € 41,616.00, in accordance with Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was entirely well-founded, in accordance with articles 12 no. 2 and 22 no. 4, both of the RJAT, and article 4 no. 4 of the said Regulation.

Let it be notified.

Lisbon, 11 January 2019.

The Arbitrator President

(Fernanda Maças)

The Arbitrator Member

(Nuno Cunha Rodrigues)

The Arbitrator Member

(Paulo Lourenço)

[1] And which in the explanations, by e-mail, of the TA, replaced the previous VAT annulled by the TA (see the application of the A... sent to the proceedings on 13 April 2018 and the documentation attached thereto).

[2] See article 9 no. 3 of the Civil Code.

[3] Which provides as follows: "6 - The deduction percentage referred to in subsection b) of no. 1 calculated provisionally on the basis of the amount of the operations carried out in the previous year, as well as the deduction made in accordance with no. 2, calculated provisionally on the basis of the objective criteria initially used for application of the actual allocation method, are corrected in accordance with the final values relating to the year to which they relate, giving rise to the corresponding adjustment of the deductions made, which must appear in the declaration of the last period of the year to which it relates."

[4] Article 95-A no. 2 refers to the concept of "material or manifest errors" indicating that it integrates, "in particular those resulting from the anomalous functioning of the computer systems of the tax administration, as well as unequivocal situations of calculation error, writing error, inaccuracy or oversight".

[5] Which determines the following: "2 - Without prejudice to special provisions, the right to deduction or reimbursement of overpaid tax may only be exercised up to the expiry of four years after the birth of the right to deduction or overpayment of the tax, respectively."

[6] See Article 167 of the VAT Directive: "The right to deduction arises at the moment when the deductible tax becomes due."

[7] See case C-284/11, of 12 July 2012.

[8] See, in like manner and citing this award, the decision of the CAAD in case 502/2014-T.