Summary
Full Decision
ARBITRAL DECISION
The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Dr. Paulo Lourenço and Dr. Nuno Pinto Fernandes (arbitrators), designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 13-08-2015, agree as follows:
1. Report
A…, SA, with NIPC…, with registered office at…, …-… … (hereinafter abbreviated as "Claimant"), filed a request, pursuant to paragraph a) of article 2, paragraph a) of article 6(2) and paragraph a) of articles 10(1) and 10(2), of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter referred to as "RJAT"), for the constitution of an Arbitral Tribunal, seeking the declaration of illegality and annulment of the following VAT assessments and compensatory interest, relating to the year 2010:
a) no.…, corresponding to period 2010/05 in the amount of € 3,160.00 (and compensatory interest in the amount of € 565.16, assessment no.…);
b) no.…, corresponding to period 2010/09 in the amount of € 84,000.00 (and compensatory interest in the amount of € 13,909.48, assessment no.…);
c) no.…, corresponding to period 2010/10 in the amount of € 2,835.00 (and compensatory interest in the amount of € 460.12, assessment no.…);
d) no.…, corresponding to period 2010/11 in the amount of € 4,872.00 (and compensatory interest in the amount of € 774.18, assessment no.…);
e) no.…, corresponding to period 2010/12 in the amount of € 5,061.00 (and compensatory interest in the amount of € 787.02, assessment no.…).
Pursuant to the provisions of paragraph a) of article 6(2) and paragraph b) of article 11(1) of RJAT, in the version introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed the signatories as arbitrators, who communicated their acceptance of the assignment within the applicable deadline.
On 29-07-2015, the Parties were notified of this appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with article 11(1), paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.
Thus, in compliance with the provisions of paragraph c) of article 11(1) of RJAT, in the version introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 13-08-2015.
The Tax and Customs Authority presented a response in which it argued that the request for arbitral ruling should be judged unfounded.
On 17-11-2015, a hearing took place in which witness evidence was produced, and it was agreed that the proceedings would continue with written submissions.
The Parties presented their arguments.
The Claimant requests that, should the tribunal be inclined not to uphold the taxpayer's claims (on the matter of VAT deduction relating to services of economic and legal consultancy), a preliminary reference be made to the Court of Justice of the European Union to pronounce on the interpretation of the VAT Directive (art. 167 and 168 of Directive 2006/112/EC).
The Tax and Customs Authority declared it does not oppose the referral.
The Arbitral Tribunal was regularly constituted and is competent.
The parties have legal standing and capacity, are legitimate and are properly represented (articles 4 and 10(2) of the same statute and 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings are free from defects affecting their validity.
2. Factual Matters
2.1. Proven Facts
The following facts are considered proven:
a) The Claimant A…, SA, NIPC…, is a legal person under private law, constituted in the form of a joint-stock company, resident in national territory, with registered office at …-…, being registered in the activity of "Production of Sparkling and Fizzy Wines" to which corresponds the CAE 011022, retail trade in beverages, CAE 47250 and viticulture CAE 01210;
b) The Claimant is subject to the Normal VAT Regime with monthly periodicity;
c) An external inspection action was carried out on the Claimant, relating to the fiscal year 2010, through service order OI2014…, through which corrections were made regarding VAT, from which resulted the assessments here impugned;
d) In the Tax Inspection Report drawn up in that inspection action, whose content is given as reproduced, the following is mentioned, inter alia:
The general principles underlying the exercise of the right to deduction of VAT borne by taxpayers are provided for in articles 19 and 20, from which it follows that for VAT borne in the acquisition of goods and services to be deductible, these must be properly documented and have a direct relationship with downstream operations that confer this right.
As a general rule, all tax borne on goods and services acquired for the exercise of economic activities referred to in paragraph a) of article 2(1) of the VAT Code is deductible (with the exception of the situations set out in article 21), provided that it relates to supplies of goods and provisions of services that confer the right to deduction under article 20 of the VAT Code.
Thus, tax borne on the acquisition of goods or services exclusively allocated to operations which, embodying the concept of economic activity for VAT purposes, are either taxed, exempt with right to deduction, or non-taxed but conferring the right to deduction, entitles to full deduction.
Where tax is borne on the acquisition of goods or services exclusively allocated to operations that are exempt without right to deduction or operations that do not fall within the scope of economic activity for VAT purposes, the exercise of the right to deduction is not permissible.
The operation of acquisition of equity interests in an operation whose outputs are the obtaining of profits that translate into dividends and, possibly, capital gains, that is, in operations outside the scope of the tax, the VAT incurred in expenses connected with the said acquisition of equity interests is not deductible under article 20(1) of the VAT Code.
This position is contained in circular letter 030103 of 23/4/2008, relating to new rules for determining the right to deduction by mixed taxpayers, with an example given in section III, in the context of the application of article 23 of the VAT Code;
"By way of example:
A taxpayer, in the context of a process of acquiring a financial interest in another company, contracted the services of legal advice from a law firm. Since mere holding of equity interests does not constitute an economic activity for VAT purposes, the VAT associated with the inputs that permitted its holding is not susceptible to being deducted."
In the concrete case, we are facing an activity outside the scope of the tax, having consequences both at the level of taxable person - non-collection of tax on active operations - alienation of equity interests and obtaining capital gains, receipt of dividends, etc. - and in the impossibility of deducting the tax borne upstream (neutrality of the tax).
The acquisition by the entity of 80% of the share capital of company C…, SA did not result in an increase in active operations subject to VAT. The two entities have:
– Distinct products, which do not compete with each other, in view of the fact that they are intended for different market segments;
– Differentiated own facilities
– Distinct brands;
– Do not proceed to consolidation of accounts;
Proposed Correction
Given the situation described and its respective legal framework, the following is concluded:
– The mere holding of equity interests does not constitute an economic activity for VAT purposes. The VAT associated with the inputs that permitted its acquisition is not susceptible to deduction under article 20 of the VAT Code.
– The right to deduction is an essential element of the functioning of the tax, and must ensure its main characteristic - neutrality, which in the case under analysis is not verified in view of the fact that downstream income is outside the scope of the tax - VAT
In view of the above, it is verified that the taxpayer improperly proceeded to deduct VAT in the amount of €84,000.00, recorded in account SNC … - VAT - Deductible - Rate 21%, in the month of September 2010. (see annex no. 7)
III.5.2 OTHER EXPENSES NOT ACCEPTED: OTHER SERVICES CONTRACTED RELATING TO THE ACQUISITION OF EQUITY INTERESTS
In the analysis of the most significant expenses recorded in the fiscal year, the following documents were also noted: (photocopy of the documents under analysis is presented in annex no. 8)
From the analysis of the supporting documents for these accounting entries, it is verified that they were all issued by B… - Law Firm, RL. From the description of the first three invoices, there is a generic description of "fees", with the services actually provided not being identified. However, in the course of the action, the taxpayer provided as a supporting document for the accounting of these expenses, a photocopy of the financial advisory contract (annex no. 9) entered into with this law firm. This contract was entered into with the entity B… - Law Firm, RL in the context of the process aimed at acquiring 80% of the share capital of C…, SA.
In another invoice, in the amount of 6,900.00€, the service provided is indicated, making reference to the acquisition from Engineer D… - which was found to relate to services provided for the acquisition of own shares, from the previous shareholder Engineer D…. The purchase of these 6,000 shares, representing 2.5% of the share capital, was made by the taxpayer on 21/12/2010 for 500,000.00€, as shown in model 4 and its accounting records.
Accounting and Tax Framework: CIT and VAT
In view of the facts verified, we conclude that these expenses present the same characteristics as those analyzed in the previous section, as we are dealing with services contracted by the taxpayer for the acquisition of financial interests. Thus, these should have been included in the acquisition cost of the financial interests and do not meet the requirements for accounting recognition as an expense nor for its tax deductibility under CIT in the fiscal year 2010.
Thus, the framework under CIT and VAT is the same and already set out. In view of the situation described and legal framework thereof, it is proposed to disrecognize for purposes of accepted tax expenses in the amount of €30,400.00, as well as correction of improperly deducted VAT in the amount of € 6,284.00.
(...)
III.5.5- FAILURE TO ASSESS VAT
The taxpayer recorded in the account…-maintenance with deductible VAT the following invoices whose photocopies have already been presented in annex no. 10, issued by s.p. E… with the designation "F...":
It should be noted that the taxpayer deducted the VAT assessed in these documents by the issuer of the documents.
In view of the services provided which are invoiced, it is verified that we are facing civil construction services.
With the changes that were introduced by Decree-Law no. 21/2007, of 29 January to the VAT Code, in civil construction work, the assessment of VAT became the responsibility of the acquirers or recipients of those services, when these are configured as VAT taxpayers with the right to total or partial deduction of the tax
For better understanding, we reproduce paragraph j) of article 2(1) of the VAT Code:
"... 1 - Taxpayers of the tax are:
(...)
j) Natural or legal persons referred to in paragraph a) that have a place of business, permanent establishment or domicile in national territory and that carry out operations that confer the right to total or partial deduction of the tax, when they are acquirers of civil construction services, including remodeling, repair, maintenance, conservation and demolition of immovable property, on a contracting or subcontracting basis..."
It results from this norm and which is clarified in section 1.2. of Circular Letter no. 30101 (Letter that issued clarifications on the application of the reverse charge rule) that for the application of the rule of reversal of the taxable person, that is, for an acquiring entity to be obliged to assess tax, two requirements must be met:
– There is a provision of civil construction services; and
– The acquiring entity is a VAT taxpayer that can exercise the right to deduct the tax borne in whole or in part.
In order to determine if a given operation is subject to this reverse charge regime, the two exemplificative lists attached to Circular Letter no. 30101, of 24 May and Ordinance no. 19/2004, of 10 January should be consulted.
The notion of civil construction service was clarified in section 1.3 of the said circular letter, from which it is taken that:
"Services of civil construction are considered to be those that have as their object the execution of a work, encompassing the whole set of acts that are necessary for its implementation.
On the other hand, work must be understood as any work of construction, reconstruction, expansion, alteration, repair, maintenance, rehabilitation, cleaning, restoration and demolition of immovable property, as well as any other work that involves a construction process, whether of a public or private nature."
The norm of the VAT Code relating to the taxable person in question is comprehensive, in the sense that it includes all civil construction services, with the annex to the circular letter presenting examples of works to which the reverse charge rule applies.
In view of the description of the works (invoiced), it is verified that we are facing civil construction services, and the VAT, in view of the legal framework presented, should be assessed by the acquirer of the service, in this case, the taxpayer who is a taxpayer under the Normal Regime. That is, in the invoices under analysis the taxpayers did not comply with the reverse charge rule to which they were legally bound.
Thus, in the documents recorded by the taxpayer, tax was improperly assessed by the service provider due to failure to apply the norm (article 2(1) paragraph j) of the VAT Code). However, such procedure (the assessment of VAT by the service provider) does not relieve the acquiring entity of the obligation to carry out self-assessment given that the requirements for its application were verified.
As a result of the failure to assess, the taxpayer with the recognition of these invoices improperly calculated a VAT credit in its favor.
From the above, it is concluded that, under paragraph j) of article 2(1) of the VAT Code, the taxpayer under analysis had the obligation to assess the VAT that is shown to be due and which amounts to the following value:
Note: The VAT improperly assessed in the invoices recorded does not confer the right to deduction by the acquirer, however, by the assessment proposed in this report, the taxpayer would have the right to deduct the tax, given that the subjective requirements defined in article 20 of the VAT Code were verified. Thus, given that the value of the deductible VAT in question is the same, simultaneously with the assessment now corrected, the deduction of VAT already made by the taxpayer is accepted.
III.6 CONCLUSION
From the irregularities mentioned in the preceding sections, the following results:
(...)
c) VAT
– Non-deductible VAT - €90,284.00 to be distributed among the following periods in 2010:
Failure to assess VAT - €9,644.00 to be distributed among the following periods in 2010:
( [1] )
e) Following the inspection, the Tax and Customs Authority issued the following VAT assessments and compensatory interest relating to the year 2010:
a) no.…, corresponding to period 2010/05 in the amount of € 3,160.00 (and compensatory interest in the amount of € 565.16, assessment no.…);
b) no.…, corresponding to period 2010/09 in the amount of € 84,000.00 (and compensatory interest in the amount of € 13,909.48, assessment no.…);
c) no.…, corresponding to period 2010/10 in the amount of € 2,835.00 (and compensatory interest in the amount of € 460.12, assessment no.…);
d) no.…, corresponding to period 2010/11 in the amount of € 4,872.00 (and compensatory interest in the amount of € 774.18, assessment no.…);
e) no.…, corresponding to period 2010/12 in the amount of € 5,061.00 (and compensatory interest in the amount of € 787.02, assessment no.…);
f) The Claimant produces and commercializes wines and sparkling wines, with the operation, in essence, of its own brand of sparkling wines, designated "G…";
g) The Claimant also holds various equity interests in companies of the same nature, namely H…, SA, and in Company C…, SA (entity that operates the sparkling wine brand "I…"), in this case with holding of a controlling interest;
h) I… is equally a well-known sparkling wine brand, located in an area very close to the Claimant and being the leading company in the national sparkling wine market (testimony of witnesses J… and K…);
i) In 2010, the Claimant studied and set up the operation with a view to acquiring a controlling position in the capital of Company C…, SA, holder of the production and commercialization of sparkling wine I…;
j) The acquisition was motivated primarily by the fact that the Claimant's survival depended on the superior quality of its products in relation to those of I… and the Claimant feared that, if Company C…, SA were acquired by another competitor who raised the quality of I…'s products, the survival of the Claimant itself could be at stake, due to that company's production capacity being much greater than that of the Claimant (testimony of witnesses K… and L…);
k) With the acquisition of capital of Company C…, SA, the Claimant also aimed to obtain and did obtain advantages with the implementation of coordinated and joint operational management of both national sparkling wine brands, which it came to implement through the following:
– transfer from the Claimant to I… of sparkling wines of medium and low range, which allowed the Claimant to dedicate itself to the implementation of high-end products, specializing in these and increasing their quality (testimony of witnesses J… and L…);
– entry into foreign markets, in which I… already had market by practicing low prices, making known therein the Claimant's products, taking advantage of penetration in those markets that I… already had, which was relevant for the Claimant because the national market was saturated and had suffered reduction due to the economic crisis (testimony of witnesses J…, K… and L…);
– coordination and pursuit of synergies and cost reduction in the production phase, at the level of human resources (sharing and reduction of personnel), logistics, accounting and administration (testimony of witnesses J…, K… and L…);
– part of the production of G…, of the medium and low range products, to be carried out in the facilities of I…, since that company, unlike the latter, already had its capacity saturated (testimony of witnesses J… and K…);
– concentration of purchases of both companies, in pursuit of economies of scale, in relation to all suppliers, namely in bottles, corks and labels (testimony of witness J…);
l) In setting up the operation, the Claimant made use of specialist services, namely M… (for economic and financial advice) and B… – Law Firm, RL (for the legal part), which were important for the completion of the acquisition (testimony of witness L…);
m) These suppliers provided the services due and issued the respective invoices, which were paid by the Claimant (testimony of witnesses K… and L…);
n) The Claimant deducted, in the periodic declarations, the VAT contained in the invoices mentioned, in the amount of € 84,000.00 for services from M… and € 6,284.00 in relation to the Law Firm;
o) That operation was successful, with the acquisition of shares in Company C…, SA (testimony of witnesses J…, K… and L…);
p) The Claimant contracted various civil construction services from E…;
q) In the invoices issued by the supplier E…, VAT was added to the price of the service, with the Claimant paying that VAT by not detecting that it should not do so and subsequently deducting it (testimony of witness N…)
r) On 18-05-2015, the Claimant presented the request for arbitral ruling that gave rise to the present proceedings.
2.2. Unproven Facts
It was not proven that the civil construction services supplier E… delivered to the State the VAT that the Claimant paid to it.
No evidence was presented that such delivery had been made.
2.3. Reasoning for the Determination of Factual Matters
The probative judgments in the Tax Inspection Report and in the documents attached to the request for arbitral ruling and which form part of the administrative proceedings and, at the points indicated, in the testimony of the witnesses, who appeared to testify with impartiality and with knowledge of the facts they mentioned.
3. Legal Matters
3.1. Question of VAT Deduction Borne in Connection with Acquisition of Advisory Services Related to Purchase of Shares in C..., SA
The Tax and Customs Authority understood that the Claimant improperly deducted VAT, in the amounts of € 84,000.00 and € 6,284.00, respectively in relation to consultancy services contracted from G…, SA and B… – Law Firm, RL, for the acquisition of financial interests in C…, SA.
The essential reasoning for such understanding by the Tax and Customs Authority was that
– «the operation of acquisition of equity interests in an operation whose outputs are the obtaining of profits that translate into dividends and, possibly, capital gains, that is, in operations outside the scope of the tax, the VAT incurred in expenses connected with the said acquisition of equity interests is not deductible under article 20(1) of the VAT Code»;
– «since mere holding of equity interests does not constitute an economic activity for VAT purposes, the VAT associated with the inputs that permitted its holding is not susceptible to being deducted»;
– «in the concrete case, we are facing an activity outside the scope of the tax, having consequences both at the level of the taxable person - non-assessment of tax on active operations - alienation of equity interests and obtaining capital gains, receipt of dividends, etc. - and in the impossibility of deducting the tax borne upstream (neutrality of the tax)»;
– The acquisition by the entity of 80% of the share capital of company C…, SA did not result in an increase in active operations subject to VAT. The two entities have:
– Distinct products, which do not compete with each other, in view of the fact that they are intended for different market segments;
– Differentiated own facilities
– Distinct brands;
– Do not proceed to consolidation of accounts;».
The evidence produced clearly contradicts this factual premise on which the Tax and Customs Authority based the correction made regarding improper VAT deduction.
In fact, it was proven that the operation of acquisition of capital in C…, SA was not aimed at mere holding of the interests and the inherent possibilities of eventual obtaining profits that translate into dividends and capital gains, but rather embodied an operation connected with the productive and commercial activity of the Claimant, aimed at ensuring its own survival, through the elimination of the possibility of competition [paragraph j) of the factual matters determined], as well as obtaining advantages of economies at the level of production and commercial, with the possibility of penetration into new markets [paragraph k) of the factual matters determined].
The case law of the CJEU, in particular the judgment of 06-09-2012 of the Court of Justice of the European Union delivered in case no. C-496/11, does not support the position adopted by the Tax and Customs Authority, in particular, regarding the exclusion of the right to reimbursement of VAT borne with expenses relating to the acquisition of equity interests that constitute general expenses of taxpayers, connected with the totality of their economic activity. ( [2] )
That judgment states ( [3] ): «the right to deduction is equally admitted in favor of the taxable person, even in the absence of a direct and immediate nexus between a given upstream operation and one or several downstream operations conferring the right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constitutive elements of the price of the goods it supplies or of the services it provides. These costs have, in effect, a direct and immediate nexus with the totality of the economic activity of the taxable person».
Thus, mere acquisition of equity interests, intended for holding and enjoyment, through the potential obtaining of dividends and capital gains, is not considered an economic activity for VAT purposes ( [4] ) ( [5] ). However, the acquisition of equity interests aimed at preventing the company's survival from being affected by potential competitors, the expansion of the company's activity in new markets and the reduction of production costs clearly falls within the global economic activity of the company, with potential effects on the formation of prices of the goods it produces and commercializes. One is not, in this case, facing mere acquisition of equity interests, the acquisition thereof as an end in itself, aimed at enjoying the direct pecuniary benefits that can result from their mere holding (dividends and capital gains), but rather facing acts of management aimed at ensuring and developing the Claimant's global economic activity.
For this reason, the case law of the CJEU relating to situations of «mere acquisition and holding of equity interests» does not apply to the situation at hand, in which it was proven that the acquisition of equity interests was intended to ensure the Claimant's survival, and to promote the expansion of the commercialization of its products in new markets and the obtaining of cost reduction, which came to be realized.
This understanding is, moreover, consistent with the principle of neutrality of VAT and with its nature as a tax on consumption and not as a tax on the income of companies that supply goods of consumption to the public.
Being so, in light of the said CJEU case law, the Claimant had the right to deduct the VAT borne with the consultancy expenses in question.
Because the CJEU case law on this matter is clear, the preliminary reference suggested by the Claimant is dispensable. In fact, in the CILFIT case, the CJEU concluded that preliminary reference is not necessary when the question is irrelevant, when community law is clear and when there is already a precedent in European case law (Judgment of 6 October 1982, CILFIT case, Case no. C-283/81). In the case at hand, the CJEU case law on the deductibility of VAT borne in connection with the acquisition of goods or services connected with the global economic activity of taxpayers is clear.
For this reason, the acts impugned are vitiated by a violation of law, due to error regarding the factual premises as to the purpose of the acquisition of the equity interests, and due to error regarding the legal premises, in particular article 20(1), paragraph a), of the VAT Code, interpreted in harmony with the said CJEU case law, which justifies their annulment (article 135 of the Code of Administrative Procedure of 1991), in the parts corresponding to this correction.
3.2. Question of the Failure to Assess VAT Relating to the Acquisition of Civil Construction Services
3.2.1. Positions of the Parties and Interpretation of the Act
The Tax and Customs Authority understood that the Claimant should have assessed VAT in relation to civil construction services provided by E…, because, «with the changes that were introduced by Decree-Law no. 21/2007, of 29 January to the VAT Code, in civil construction work, the assessment of VAT became the responsibility of the acquirers or recipients of those services, when these are configured as VAT taxpayers with the right to total or partial deduction of the tax».
The Tax and Customs Authority concluded, in summary, that
– «in the documents recorded by the taxpayer, tax was improperly assessed by the service provider due to failure to apply the norm (article 2(1) paragraph j) of the VAT Code). However, such procedure (the assessment of VAT by the service provider) does not relieve the acquiring entity of the obligation to carry out self-assessment given that the requirements for its application were verified»;
– «as a result of the failure to assess, the taxpayer with the recognition of these invoices improperly calculated a VAT credit in its favor»;
– «from the above, it is concluded that, under paragraph j) of article 2(1) of the VAT Code, the taxpayer under analysis had the obligation to assess the VAT that is shown to be due (...)»;
– «Note: The VAT improperly assessed in the invoices recorded does not confer the right to deduction by the acquirer, however, by the assessment proposed in this report, the taxpayer would have the right to deduct the tax, given that the subjective requirements defined in article 20 of the VAT Code were verified. Thus, given that the value of the deductible VAT in question is the same, simultaneously with the assessment now corrected, the deduction of VAT already made by the taxpayer is accepted.»
The Claimant accepts that the invoices issued by E… relate to civil construction services and that the reverse charge rule is applicable, whereby «the service provider having improperly assessed the tax (due to failure to apply the norm mentioned above) and consequently the Claimant improperly calculated a VAT credit in its favor». The Claimant recognizes that «the invoices should have come without VAT and the Claimant would have had to deliver it to the State» (articles 60 to 62 of the request for arbitral ruling).
However, the Claimant understands that
– this error cannot result in a duplication of tax collected by the State's coffers, on pain of violation of the principle of neutrality of VAT (article 20 of the VAT Code) and the general principle of substance over form (article 55 of the LGT and article 11(3) of the LGT).
– that is, if the supplier, upon receiving the money for VAT paid by the Claimant, delivered it to the State, then the State was not harmed by this procedure, as it received the tax due, no longer by the Claimant, but via the supplier, who acts as a mandatary or manager of affairs (cf. articles 16 and 17 of the LGT);
– the supplier "E…" guaranteed to the Claimant that it delivered that VAT to the State and the reasoning, although without stating it peremptorily (a defect of reasoning that cannot be waived) suggests this very thing, through the note inserted on p. 34 of doc. no. 6;
– that note indicates that despite the VAT improperly assessed not conferring the right to deduction by the Claimant (acquirer of civil construction services), from the assessment proposed in the report, there would be deduction by the taxpayer (since the requirements of article 20 of the VAT Code are met);
– in these terms (and taking into account that the value of the deductible VAT in question is the same), the Tax Authority accepts the deduction of the tax already made by the Claimant.
The Claimant raises the issue of lack of reasoning of the «Note» included by the Tax and Customs Authority in the Tax Inspection Report, in which it states that «the VAT improperly assessed in the invoices recorded does not confer the right to deduction by the acquirer, however, by the assessment proposed in this report, the taxpayer would have the right to deduct the tax, given that the subjective requirements defined in article 20 of the VAT Code were verified. Thus, given that the value of the deductible VAT in question is the same, simultaneously with the assessment now corrected, the deduction of VAT already made by the taxpayer is accepted.»
However, it is understood that the Tax and Customs Authority understood that
– the VAT improperly assessed in the invoices recorded did not confer the right to deduction by the Claimant;
– however, by the assessment proposed in this report, the taxpayer would have the right to deduct the tax;
– this value of deductible VAT being the same and simultaneous with the assessment now corrected;
– the deduction of VAT already made is accepted (rather than that to which it would have been entitled as a result of the assessment now made).
There is no reference here to any possible delivery to the State of VAT assessed by the service provider, as indeed the Tax and Customs Authority states in its Reply.
3.2.2. Assessment of the Issue of Failure to Assess VAT
Article 2(1), paragraph j) of the VAT Code establishes that «taxpayers of the tax are (...) natural or legal persons referred to in paragraph a) that have a place of business, permanent establishment or domicile in national territory and that carry out operations that confer the right to total or partial deduction of the tax, when they are acquirers of civil construction services, including remodeling, repair, maintenance, conservation and demolition of immovable property, on a contracting or subcontracting basis».
The Preamble of Decree-Law no. 21/2007, of 29 January, which introduced this rule in the VAT Code, clarifies the scope of this norm by stating the following:
Thus, through the reversal of the taxable person, it becomes the responsibility of the acquirers or recipients of those services, when configured as taxpayers with the right to total or partial deduction of the tax, to carry out the assessment of the VAT due, which may also be subject to deduction under the general terms. With this measure, it aims to preclude certain situations that result in harm to the public treasury, currently resulting from the arising of the right to deduction of VAT borne, without that tax reaching the State's coffers.
As CLOTILDE CELORICO PALMA teaches,
«The most common form of tax evasion consists in the invoicing of the delivery of goods by a VAT taxable person operator, who subsequently disappears without delivering the tax to the tax authorities, leaving the acquirer (also a VAT taxable person) with a valid invoice for purposes of deducting the tax. In this way, tax administrations do not receive the VAT charged on the sale of products, but have to recognize to the next operator in the chain of commercialization the right to deduct the tax borne upstream. In certain cases, this practice has evolved into a fraud referred to as missing trader intra-community fraud, which consists of intra-community fraud making use of fictitious operators and which constitutes an organized attack on the VAT system based on the abusive assessment of tax by operators when the supply of goods to a taxable person in another Member State is exempt from the payment of that tax. Moreover, it is common for this type of fraud to involve the supply in a chain of the same goods, which may circulate several times between Member States (the so-called «carousel fraud»), leaving the tax administration harmed multiple times in the payment of VAT on the same product. This type of fraud is also spreading to the provision of services.
Through the reverse charge mechanism or self-assessment, VAT is no longer assessed by the operator to the acquirer who is a VAT taxable person, with the latter assuming this obligation. In practice, acquirers (to the extent that they are normal taxpayers with full right to deduction) simultaneously declare and deduct the VAT, without actual payment to tax administrations. In this way, the theoretical possibility of fraud is eliminated». ( [6] )
The Parties agree on the application of this regime to the invoices for civil construction services provided by E…, whereby it must be concluded that they improperly included VAT assessment.
Having improperly assessed VAT in the invoices in question, the service provider is a taxable person subject to the mentioned tax [article 2(1), paragraph c) of the VAT Code], whereby it was obliged to deliver it to the State.
It was not proven, however, that it did so, and, although the Claimant states that «the supplier "E…" guaranteed to the Claimant that it delivered that VAT to the State», the fact is that it presented no proof thereof, with no witness having mentioned knowledge of the delivery of VAT by that supplier, with the witness only stating that it believes that supplier will have fulfilled its obligation to deliver the tax to the State, but without indicating any fact that would lead it to have such conviction.
Thus, the duplication of VAT payments to the State that the Claimant claims to exist cannot be considered proven.
In fact, what is proven, as regards payments and receipts by the State relating to the said civil construction services, is only that the Claimant received the VAT indicated in the invoices, by improperly exercising the right to deduction.
Therefore, before the assessment made by the Tax and Customs Authority, the situation that arises is one where the Claimant has in its possession the VAT amount improperly, whereby the effects of the deduction should be eliminated.
But, following the assessment now made, the Claimant would have the right to deduction of VAT, whereby the action of the Tax and Customs Authority, embodied in the assessment of the tax that the Claimant should have assessed without new possibility of VAT deduction (considering the right to deduction already exercised with the improper receipt), restores exactly, in substantive terms, the situation that should exist, in light of the evidence produced.
It is true that, having the Claimant improperly paid the VAT to the supplier, it will be harmed, as it will not be able to exercise the right to deduction in relation thereto.
However, it not having been proven that the VAT paid to the supplier was delivered to the State, it cannot be considered proven that the State was not harmed by the VAT deduction made by the Claimant, whereby it cannot be considered that either the principle of neutrality of VAT, which results from article 20 of the VAT Code, or the principle of the prevalence of substance over form, which is inferred from the invoked articles 11(3) and 55 of the LGT, was violated.
The request for arbitral ruling is thus unfounded on this matter.
4. Compensatory Interest
The Claimant also requests the annulment of the compensatory interest assessments.
Under article 35(1) and (8) of the LGT, «compensatory interest is due when, due to a fact attributable to the taxpayer, the assessment of part or all of the tax due is delayed or the delivery of tax to be paid in advance, or withheld or to be withheld under tax substitution», and «compensatory interest is incorporated into the tax debt itself, with which it is jointly assessed».
Thus, regarding the correction relating to VAT deduction that the Tax and Customs Authority considered improper, the VAT assessments being annulled, the compensatory interest assessments must also be annulled, as they have these as their premise, as these are vitiated by the same illegality that affects those.
As for the compensatory interest assessments corresponding to the correction based on the failure to assess VAT, the request for arbitral ruling being unfounded regarding the VAT assessment, it is also unfounded regarding the compensatory interest assessment.
5. Decision
The arbitrators hereby agree to:
a) Judge the request for arbitral ruling well-founded in the part corresponding to improperly deducted VAT and unfounded in the part relating to failure to assess VAT;
b) Annul in their entirety the VAT assessments no. … and compensatory interest assessments no.…, corresponding to period 2010/09, in the amounts of € 84,000.00 and € 13,909.48, respectively;
c) Annul in their entirety the VAT assessments no. … and compensatory interest assessments no.…, corresponding to period 2010/10, in the amounts of € 2,835.00 and € 460.12, respectively;
d) Annul partially the VAT assessment no.…, as to the amount of € 2,000.00, maintaining it as to the amount of € 1,160.00, and annul the compensatory interest assessment no. … as to the amount of € 357.70, maintaining it as to the amount € 207.46, assessments relating to period 2010/05;
e) Annul partially the VAT assessment no.…, as to the amount of € 1,449.00, maintaining it as to the amount of € 3,612.00, and annul the compensatory interest assessment no. … as to the amount of € 225.33, maintaining it as to the amount € 561.69, assessments relating to period 2010/12;
f) Maintain the assessment no.…, corresponding to period 2010/11 in the amount of € 4,872.00, and the compensatory interest assessment no.…, in the amount of € 774.18.
6. Value of the Case
In accordance with the provisions of article 306(2) of the Code of Civil Procedure and 97-A(1), paragraph a) of the Tax Procedure Code and 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 116,434.96.
7. Costs
In accordance with article 22(4) of RJAT, the amount of costs is set at € 3,060.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, charged to the Claimant in the proportion of 9.62% and charged to the Tax and Customs Authority in the proportion of 90.38%.
Lisbon, 07-01-2016
The Arbitrators
(Jorge Lopes de Sousa)
(Paulo Lourenço)
(Nuno Pinto Fernandes)
[1] There is a material error in the Tax Inspection Report in the sum of the tax base, which is € 46,200.00 and not € 26,844.00.
[2] Although that judgment was issued applying the regime of the 6th Directive (no. 77/388/EEC, of 17-5-1977) which was repealed by Directive no. 2006/112/CE of the Council, of 28-11-2006, which entered into force on 1-1-2007, the regime thereof is essentially similar to the preceding one, in what matters here, whereby the application of that case law should be made to the situation of these proceedings, both to facts occurring before and after this date. In fact, as has been peacefully understood by case law, it is a corollary of the obligation of preliminary reference provided for in article 267 of the Treaty on the Functioning of the European Union (which replaced article 234 of the Treaty of Rome, previous article 177), its binding character for national Courts when they have to decide questions connected with European Union law.
In this sense, the following judgments of the Supreme Administrative Court may be consulted: of 25-10-2000, case no. 25128, published in Appendix to the Official Gazette of 31-1-2003, page 3757; of 7-11-2001, case no. 26432, published in Appendix to the Official Gazette of 13-10-2003, page 2602; of 7-11-2001, case no. 26404, published in Appendix to the Official Gazette of 13-10-2003, page 2593.
[3] Citing prior case law of the CJEC adopted in the judgments Kretztechnik, no. 36, (Case no. C-465/03), and Investrand no. 24 (Case no. C-435/05), and SKF, no. 58 (Case no. C-29/08).
[4] In this sense, JOSÉ XAVIER DE BASTO and MARIA MODETE OLIVEIRA, The right to deduction of VAT in holding companies, in Taxation no. 6, page 8:
"... dividends, as well as the other rights associated with shares, constitute after all the content proper to the right of property, not involving that minimum of activity or economic decision that subjection to VAT implies or supposes". These share rights "are not the counterpart of an economic activity, result from mere ownership of an asset, the share; are not the counterpart of either taxed activity or exempt activity, being found outside the scope of application of VAT".
[5] Judgment of the CJEC Satam, S.A. (judgment of 22-6-1993, case no. C-333/91):
"Not constituting the counterpart of any economic activity, within the meaning of the Sixth Directive, the receipt of dividends does not fall within the scope of application of value added tax, so that dividends, which result from the holding of shares, are outside the system of deduction rights"
[6] TOC Magazine no. 118, January 2010, page 31.
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