CAAD Case 369/2018-T: VAT Deductibility on Alleged False Invoices in Wood Trade Sector

ARBITRAL DECISION

The Arbitrator Dr. Filipa Barros (sole arbitrator), appointed by the Ethics Council of the Administrative Arbitration Centre ("CAAD") to constitute the Sole Arbitral Tribunal, constituted on 16 October 2018, hereby decides as follows:

I. REPORT

The company A..., LDA., legal entity no. ..., with registered office at ..., no. ...-... ..., (hereinafter Claimant), pursuant to the provisions of article 2, no. 1, paragraph a), and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT"[1], requests the constitution of an Arbitral Tribunal to pronounce on the illegality and consequent annulment of the tax acts relating to the additional VAT assessments nos. 2018..., 2018..., 2018... concerning the periods of January, February, April, May and June 2014, in the total amount of €24,301.70, and compensatory interest relating to the periods of April and May 2014, in the total amount of €1,989.38.

To substantiate its request, the Claimant begins by reiterating the legitimacy in exercising the right to deduct the tax borne by it in the context of the purchase of timber from one of its suppliers, the company B... Soc. Unipessoal, Lda. (hereinafter B..., Lda.), as all the legal requirements for this purpose were met.

It argues that the invoices issued by B... Lda. to the Claimant constitute true economic operations, which resulted in the subsequent delivery of timber to the Claimant's customers, facts moreover confirmed by the Tax Inspection Services (hereinafter TIS), in the respective inspection report (hereinafter IR).

The Claimant explains that according to sector practice, small timber suppliers prefer to carry out their deliveries through larger suppliers (as is the case of the Claimant) in order to benefit indirectly from quantity bonuses awarded by large customers, namely cellulose-producing companies, thus entering their goods (timber) directly into the cellulose producers' facilities, albeit in the name of the Claimant.

In turn, based on documentary proof to the Claimant that a certain quantity of timber was delivered to the cellulose company's facility, by means of a document issued by the facility and delivered to the supplier, the Claimant proceeds with the payment of that timber supply realized in its name, which occurred in the case of the invoices issued by B... Lda. to the present Claimant.

Whence it results that suppliers of smaller dimension than the Claimant, such as B... Lda., despite not selling timber directly to cellulose companies, deliver it to their respective facilities, in the name of larger buyers, at their direction, benefiting from shorter payment periods and quantity bonuses awarded by cellulose producers, which are subsequently shared by the Claimant with its suppliers.

Thus, the Claimant understands that it is duly proven through banking system records that it paid all the timber invoiced by its supplier B... Lda., although the documents of delivery of the timber supplied by B... Lda. to the facility were issued in the name of the Claimant (not in the name of the actual supplier) as is customary in the sector and for the reasons set out above.

In summary, the timber supplies placed in question here took place, were realized by B... Lda. directly to the Claimant's customers, in its name, which in turn invoiced its customers, together with other supplies, having received the respective price, which is why the AT made no downward correction in corporate income tax.

The Claimant concludes by stating that the prerequisites for simulation set out in no. 3 of article 19 of the VAT Code are not met, and that the conclusions reached by the AT are based on mere suspicions, unfounded, regarding the lack of authenticity of the timber delivery operations to the Claimant by supplier B... Lda., a burden of proof that rested with the AT, and not with the Claimant, in accordance with article 74 of the LGT.

On 6 August 2018, the request to constitute the Arbitral Tribunal was accepted by His Excellency the President of the CAAD and immediately notified to the Respondent in accordance with legal procedures.

The Claimant did not appoint an Arbitrator.

Thus, pursuant to and for the purposes of the provisions of no. 1 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, by decision of His Excellency the President of the Ethics Council, duly communicated to the parties within the legally prescribed time limits, the undersigned was appointed arbitrator of the Sole Arbitral Tribunal, who communicated to the Ethics Council and to the Administrative Arbitration Centre the acceptance of the appointment within the time limit stipulated in article 4 of the Code of Ethics of the Administrative Arbitration Centre.

In conformity with the provision of paragraph c), no. 1, article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Sole Arbitral Tribunal was constituted on 16 October 2018, followed by the relevant legal procedures.

The Respondent, duly notified to this effect, submitted its response in which it defends the inadmissibility of the request for arbitral decision.

To this end, it invokes the existence of strong evidence that the invoices identified in the IR issued by the company B... Lda., relating to timber supplies made to the Claimant, are false due to false identity of the goods transmitters/service providers.

The AT considers that it has gathered sufficient evidence that the issuers of the invoices would not correspond to the true transmitter of goods/service provider, and that it is incumbent upon the Claimant to demonstrate the authenticity of the objectively considered operations.

Consequently, according to the AT, there are sufficient elements in the IR that allow the authenticity of the transactions evidenced by the invoices issued in the name of B... Lda. to the Claimant to be questioned, relying essentially on the following elements:

• Absence of a written contract with supplier B... Lda., with business contacts established with "C...", probably a Brazilian citizen;

• The invoices of B... Lda. were issued without respecting chronological sequence and in the field relating to the description of goods and services transmitted, reference is made only to "eucalyptus with or without bark";

• The invoices present an insufficient description, not mentioning the place, date, time of loading and unloading or the vehicle that carried out the transport;

• The Park Entry Guides (hereinafter PEG) presented by D... Lda. refer to timber entries into the factory of its customer E..., with D... Lda. indicated as the sole timber supplier in all of them and no reference being made to any other supplier or taxpayer;

• Thus, the PEGs made available to the TIS by the Claimant do not prove the operations evidenced by the invoices issued in the name of B... Lda.;

• Similarly, in the transport documents and remittance guides presented, the company D... Lda. is identified as the timber supplier, no documents having been exhibited with references to any other supplier;

• From the analysis of financial elements, it was verified that the bank cheques issued by D... Lda., half of which were issued until March with an accumulated value of €47,370.08, were issued in the name of C... and not in the name of B... Lda., thus the Claimant issued cheques not only in the name of the invoice issuer, but also in the name of its managing director.

Thus, the AT maintains that the factuality described in the IR should be considered established for evidentiary purposes, and that, disregarding the presumption of authenticity of the invoices, due to (in its understanding) manifest evidence that the taxpayer invoice issuers did not transmit those goods/provide those services, it was incumbent upon the Claimant to demonstrate that the operations were genuine, a demonstration which the AT states it failed to make, neither in the context of the procedure, nor in the context of the present arbitral proceedings.

It concludes by supporting the maintenance of the disputed tax assessment acts, and the Tribunal should accordingly absolve it of the claim.

On 3 January 2019, the meeting provided for in article 18 of the RJAT was held, in which, inter alia, the examination of the witnesses enrolled by the Claimant took place, namely Messrs. F..., G... and H... (cf. Minutes of the Meeting of the Sole Arbitral Tribunal).

Written submissions were presented by the Claimant, with the Respondent opting not to exercise this power.

In the submissions presented, the Claimant reiterated in essence the position defended in its respective pleadings.

II. CASE MANAGEMENT

The Arbitral Tribunal is materially competent and is properly constituted, pursuant to articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are shown to be legitimate and are properly represented, (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).

The proceedings are not subject to any nullity.

III. GROUNDS

1. Facts Found to be Proven

The facts were found to be proven based on the documents attached in the context of the administrative proceedings, the request for arbitral decision, the witness testimony and the response presented by the AT, in the manner indicated below.

• The Claimant is a company engaged in "Wholesale trade in rough timber and derived products", being registered in the normal monthly VAT scheme (cfr. IR provided by the Respondent to the file and which is considered fully reproduced herein);

• In the fiscal year 2014, the commercial activities of the Claimant consisted of the sale of timber and, on an ancillary basis, the provision of timber transport, loading and unloading services (cfr. IR provided by the Respondent to the file and which is considered fully reproduced herein);

• The Claimant was subject to an external inspection action carried out by the Tax Inspection Services of the Finance Directorate of ..., which resulted in the additional VAT assessments disputed in the present proceedings (cfr. IR provided by the Respondent to the file which is considered fully reproduced herein);

• Following this inspection action, the AT proceeded to assess VAT for the period from January to June 2014, in the total amount of €24,301.70 and compensatory interest in the total amount of €9,327.69, relating to the periods of April and May of that year (cfr. documents attached by the Claimant with the request for arbitral decision);

• The Claimant proceeded with payment of the additional VAT assessments and the respective compensatory interest (cfr. docs nos. 2 to 12 attached with the request for arbitral decision);

• The timber transmitted had two distinct origins, one part (more residual) was purchased directly by the Claimant from producers, generally standing trees and the remainder was acquired from other taxpayers, small timber suppliers (cfr. IR at p. 10, attached to the file and considered fully reproduced herein, as well as testimony of witness H...);

• When timber was acquired from other taxpayers, all operations (acquisition, felling and transport of goods) were the responsibility of the supplier (cfr. IR at p. 10, attached to the file, considered fully reproduced herein, and testimony of witnesses F... and H...);

• The Claimant's suppliers delivered timber directly to the facilities of the Claimant's customers (I... S.A. and E...). In these cases, as a general rule, transport was carried out at the cost of the Claimant's supplier (cfr. IR at p. 10 provided by the Respondent in the file and considered fully reproduced herein);

• Timber deliveries made by D... Lda. at the facilities of its customers were documented with pre-printed transport guides / ... in its name that were previously delivered to it by its customers. These documents were completed on the date of timber delivery (cfr. IR at p. 10 provided by the Respondent in the file, considered fully reproduced herein and testimony of witness H...);

• Furthermore, when timber entered the facilities of its customers, a park entry guide (PEG) was generated with the date of delivery, identification of the transport vehicle and the net weight of the goods (cfr. IR at p. 10 provided by the Respondent to the file, considered fully reproduced herein and testimony of witnesses F... and H...);

• The PEGs served as documentary evidence of timber delivery at the Claimant's customer's facilities and were issued in the name of D... Lda. making no reference to any other supplier, this being the normal procedure (cfr. IR at pp. 10 and 13 provided by the Respondent to the file, considered fully reproduced herein and testimony of witnesses F... and H...);

• When questioned by the Arbitral Tribunal regarding aspects relating to the commercial relationship existing with the Claimant, in the context of timber sales, Mr. F... stated, with relevance to the case, the following:

"I am a timber merchant, I have been working for more than 15 years with A..., I sell timber placed in factories, I do not deliver the timber directly to A... (...) this company has financial capacity and we are small in monetary terms, A... has a contract with the factories in which it receives a price plus a quantity bonus, so I place the timber in the name of A... and receive a bit of that bonus (...) and I receive payment every week while the factories only pay monthly."

• When questioned by the Tribunal regarding timber supplies made by B... Lda. to the Claimant, witness H... clarifies, with relevance to the case, the following:

"This supplier was one among many other suppliers, I would deliver to him the guides relating to my supply contract at the factory, and this supplier places the timber in my contract, in the name of A..., at the factory a timber unloading slip was provided (...) he would gather several unloading slips and would come to the office every 15 days to receive payment.

He made deliveries at E... (in Spain), brought the slips and based on the slips the billing and payment of these supplies were made. (...)

The guides contained the origin of the timber, the person transporting the timber and the quantity. (...)

In these cases, for the factory the supplying company is not B... Lda., it is A... (...) The guides also contain the transport company, so that the transport company would have authorization to enter the factory's facilities; (...)

B... Lda. stopped working for us in 2015, because I started working with J... and no longer had the price. (...)

In the timber that entered here in our parks in Portugal there are guides from B... Lda., but 98% of this company's supplies were to Spain, and in that case it is not my responsibility to control the transport guides, here there was the factory slip with the name of the transporter, and the guide from E..., in the name of A..., but if the rest, in these supplies, I have no control over the transport document for the police."

• When questioned by the Tribunal regarding the type of contract existing with timber suppliers, witness H... clarifies, with relevance to the case, the following:

"With timber suppliers there is no written contract, only with customers. (...);

There is an agreement, which is as follows: What is the price of timber placed at the factory, and if there is a supplier that pays 50 cents more than us, they place the timber with that supplier, it is very simple. (...)

My contacts were always with C... and never with K..., I only learned of this name through the finance inspector in the process, but he never sold me timber. (...)".

• The inspection action in question in the present case arose following communications made by the Finance Directorate of ... after identifying the Claimant as a customer of company B... Lda., which the Respondent identified as issuing false invoices (cfr. IR at p. 10 provided by the Respondent in the file, considered fully reproduced herein);

• The company B... Lda. was established on 01 January 2013 and began its activity, in terms of VAT on 30 January 2013 under CAE 046731 - "wholesale trade in rough timber and derived products" and ceased on 31 December 2014 (cfr. IR at p. 11 provided by the Respondent in the file, considered fully reproduced herein);

• The value contained in the invoices issued in the name of the supplier company B... Lda. is coincident with the value declared by the Claimant in its supplier annex — annex P (cfr. IR at p. 11 provided by the Respondent in the file, considered fully reproduced herein);

• In all invoices of the supplier in question, VAT was charged to the Claimant at the rate of 23% (cfr. IR provided by the Respondent in the file and considered fully reproduced herein);

• The documents evidencing timber entry into the facilities of the Claimant's customers do not refer to any supplier other than the Claimant itself (cfr. IR provided by the Respondent in the file and considered fully reproduced herein);

• The AT made the corrections, in terms of VAT, in question in the present case on the grounds that the operations evidenced in the invoices issued by B... LDA. constitute "simulated operations" as to the parties involved, and therefore, in accordance with no. 3 of article 19 of the VAT Code, it corrected the VAT deductions made by the Claimant based on the invoices issued by that supplier (cfr. IR at pp. 35 and 36 provided by the Respondent in the file and considered fully reproduced herein);

• In response to a request for information requested by the AT in the course of the inspection action, the Claimant provided the following clarifications regarding B... Lda.:

  • Non-existence of written contracts with this or with any other of its timber suppliers;

  • Business contacts regarding company B... Lda. were made by "Usually C... (probably a Brazilian citizen)";

  • The invoices were issued in the name of B... Lda., and the cheques for payment were delivered "Usually C... and "1 or 2 times another gentleman, whose name with uncertainties would be L...", (cfr. IR at pp. 10 and 11 provided by the Respondent in the file considered fully reproduced herein).

• The transport documents presented by the Claimant are reduced compared to the total value of timber acquisitions, with the AT also detecting some discrepancies relating to quantities transmitted, issue date of transport guides and those contained in the summary table of invoices (cfr. IR, namely at pp. 18 to 23, provided by the Respondent in the file and considered fully reproduced herein);

• In all PEGs issued by the Claimant's customers, the Claimant itself is referred to as the sole supplier of goods (cfr. IR provided by the Respondent in the file and considered fully reproduced herein);

• The Claimant made payments to its suppliers preferentially through bank cheques drawn on company accounts, a situation which was verified until the end of 2014 (cfr. IR provided by the Respondent in the file and considered fully reproduced herein);

• From 2015 onwards, when the Bank began charging approximately €60.00 per cheque, the Claimant began making all payments through bank transfer, however, at this stage, B... Lda. was no longer working with the Claimant (cfr. testimony of witness H...);

• Once the PEGs and the invoice summary tables contain the registration numbers of the vehicles that carried out the transport of goods, based on elements from the AT's computer system, it was possible to verify and identify the names of the owners of the vehicles that carried out the transport of goods supplied by company B... Lda. to the Claimant, these being goods transport companies (cfr. IR at pp. 23 and 24 provided by the Respondent in the file and considered fully reproduced herein);

• The transport companies in question, through various statements collected by the Respondent from their representatives, identified the timber supplier B... Lda. in some cases as their client and in other cases third parties to whom these timber transport services were invoiced, by requests received to the effect that such services be invoiced to various companies (cfr. IR provided by the Respondent in the file and considered fully reproduced herein);

• In collecting information from the Respondent's transport companies, it was found that transport services were contracted by a Mr. K..., and the billing of these services in many cases would have been for companies related to this Mr. (cfr. IR provided by the Respondent in the file and considered fully reproduced herein);

• The company Transportes M... Lda. would have carried out the majority of the transport of timber supplied to the Claimant by B... Lda. (cfr. IR provided by the Respondent in the file and considered fully reproduced herein and testimony of witness H...);

• The fiscal corrections in question in the present case result from the conclusion by the Respondent that a set of invoices issued by company B... Lda. "reflect simulated business as to the supplier of goods", (cfr. IR provided by the Respondent in the file and considered fully reproduced herein);

• In terms of corporate income tax, the Respondent expressly recognizes that the operations evidenced by the invoices whose deductible VAT is denied in the present case constitute operations "effectively economically occurred, with it being proven that D... Lda. proceeded to the delivery of timber to its customers which it subsequently invoiced" with no corrections being made in terms of corporate income tax (cfr. IR provided by the Respondent in the file and considered fully reproduced herein);

• The sale of timber to the Claimant's customers was invoiced by it (cfr. IR at p. 32 provided by the Respondent in the file which is considered fully reproduced herein);

• The operations evidenced by the invoices issued by B... Lda. were recorded at the price of the remaining timber acquisitions (cfr. IR provided by the Respondent in the file, which is considered fully reproduced herein);

• Authorization was requested to access the bank accounts of the Claimant's administrators, which did occur (cfr. IR provided by the Respondent in the file, which is considered fully reproduced herein);

• On 3 August 2018, the Claimant filed the request to constitute the Arbitral Tribunal which gave rise to the present case, (cfr. electronic application to the CAAD).

2. Facts Not Found to be Proven

There are no other facts with relevance to the decision on the merits of the case which have not been proven.

3. Reasoning

With respect to matters of fact, the Tribunal does not need to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts which matter for the decision and to distinguish between proven and unproven matters (cfr. art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable ex vi article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and selected based on their legal relevance, which is established in light of the various plausible solutions to the question(s) of Law (cfr. former article 511, no. 1, of the CPC, corresponding to the current article 596, applicable ex vi article 29, no. 1, paragraph e), of the RJAT).

Thus, having regard to the positions taken by the parties, in light of article 110, no. 7 of the CPPT, the documentary and testimonial evidence and the administrative proceedings attached to the file, the facts listed above were considered proven, with relevance to the decision.

Points 6 to 12 and 14 of the facts found to be proven relate to the context in which the Claimant's timber purchase and sale business develops, and the importance that small suppliers assume as intermediaries in the procurement of goods which will subsequently be sold, in the Claimant's name, to cellulose factories with which it maintains large-scale supply contracts. These facts further clarify that the principle underlying the contracts concluded between the Claimant and cellulose companies is that profits increase as a function of the quantity of product supplied. In turn, this principle is replicated with the Claimant's suppliers, who are numerous, to whom prizes are awarded based on the quantities supplied to it.

The aforementioned facts are in coherence with the available documentary evidence and with the information contained in the IR issued by the AT, as results from the administrative proceedings attached to the file.

Points 9 to 11 and 19 and 23 of the factual matter relate to the documentation supporting timber deliveries invoiced to the Claimant by its suppliers at the factories with which the Claimant maintains a supply contract. In this respect, it is considered sufficiently clarified by the combination of the documentation gathered by the TIS with the testimonial evidence produced, that the supplier B... Lda., like any other timber supplier of the Claimant, does not appear in the PEGs, since the supplies are made in the name of the Claimant, it being noted that, in the taxation period in question – year 2014 – the documentation in the Claimant's possession to demonstrate the reality of timber supplies is identical in relation to all suppliers, varying only according to the type of contract maintained with the respective customer (E...).

Despite the absence of transport documents for the timber invoiced by B... Lda. to the Claimant, points 29 and 31 to 33 allow confirmation of the delivery of said goods at the factory, in the name of the Claimant, through subcontracting by B... Lda. of transport companies for this purpose. Being this fact indicative of the lack of structure of company B... Lda., it is not considered decisive for demonstrating that the Claimant should have known of the absence of correspondence between the entity issuing the invoices (B... Lda.) and the supplier of the goods transacted, since, on the one hand, the outsourcing figure is generically used in the business field, and on the other, before the Claimant, responsibility for transport of goods would always be incumbent on the supplier, it being irrelevant whether such transport was carried out by its own means or through recourse to transport companies.

Points 24 and 25 reveal that in the taxation period in question the means of payment used by the Claimant to supplier B... Lda. do not differ from the means used with any other supplier, and proof was furthermore made of full payment of all supplies realized.

No claims made by the parties and presented as facts, consisting of statements that are strictly conclusory, insusceptible to documentary or testimonial proof and whose authenticity is to be assessed in relation to the concrete factual matter consolidated above, were considered proven or unproven.

4. Matter of Law

4.1. The Question to be Decided

The substantive question to be decided in the present case is to determine whether the VAT in the invoices issued to the Claimant by supplier B... Lda. in the taxation period relating to 2014 should or should not be subject to deduction, having regard to the AT's allegation of the existence of evidence that the taxpayer invoice issuers did not transmit those goods/provide those services, thus corresponding to false invoices.

Now, being VAT a tax of Community nature, it is necessary to make some preliminary considerations regarding the nature and scope of the right to deduction, considering in this analysis the rules governing this tax in accordance with European Union Law, with the respective transposition at national level and with the administrative and judicial interpretation that has been made thereof, especially by the Court of Justice of the European Union (CJEU).

To this end, it will be important to analyze the issue of VAT deductibility, taking into account the interpretation of articles 168 of the VAT Directive (VATD) and articles 19, no. 3 of the VAT Code, giving special attention to the CJEU's understanding of VAT deduction resulting from simulated operation.

4.3. The Right to Deduction in Situations of Fraud

A) CJEU Jurisprudence

As we have come to understand in previous arbitral decisions issued by the CAAD[2], the right to deduction is an integral part of the VAT mechanism and cannot, in principle, be limited, being exercised immediately in relation to all VAT that has burdened upstream operations.[3]

In this sense of the principle of VAT neutrality, the regime established by the VATD allows taxpayers to deduct VAT that has burdened the acquisition of goods and services intended for taxable activity. It should be noted that the CJEU refers to the principle of VAT neutrality in yet another sense, according to which the VAT system should not interfere with economic decisions, nor with the formation of prices throughout the economic circuit.

Therefore, the mechanism of the right to deduction allows the taxpayer to expunge from its burden the VAT borne upstream, removing the cumulative effect and cascading taxation that characterized previous consumption tax systems.

Thus, the right to deduction is based on the so-called method of tax deduction, the method of tax credit, the indirect subtractive method or also the method of invoices.

As provided for in the VATD, the VAT Code determines, as a general rule, the deductibility of the tax owed or paid by the taxpayer in the acquisition of goods and services made from other taxpayers.

Entering the domain of the case in question, it is important to note that the CJEU has reiterated that the fight against fraud, tax evasion and possible abuses constitutes an objective recognized and encouraged by the VATD, taxpayers not being able, fraudulently or abusively, to take advantage of the rules of Union law.[4]

It is therefore for national authorities and the courts of the Member States to refuse the right to deduction, if it is demonstrated, in light of objective elements, that this right is invoked fraudulently or abusively.[5]

Therefore, the right to deduction can be refused if it has been exercised fraudulently or when the taxpayer knew or should have known that it was participating in VAT fraud (even if the operation in question meets the objective criteria on which the concepts of goods transmissions made by a taxpayer acting as such are based).

Similarly, while confirming that the right to deduction, once it has arisen, subsists even when the taxpayer has been unable, for reasons beyond its control, to use the goods or services that gave rise to the deduction in the context of taxable operations, the CJEU reserves that this will only occur "in the absence of fraudulent or abusive circumstances".[6]

On the other hand, it results from the CJEU jurisprudence that it is not compatible with the right to deduction regime to refuse this right to a taxpayer that did not know nor could have known that the operation in question formed part of fraud committed by the supplier or that another operation included in the supply chain, prior or subsequent to that carried out by the said taxpayer, was marred by VAT fraud.[7]

The provisions of article 19, nos. 3 and 4, of the VAT Code are precisely intended to establish the impediment of the right to deduction resulting from fraudulent operations.

First and foremost, bearing in mind that only VAT that has burdened acquisitions of goods and services intended for the exercise of taxable activity carried out by the taxpayer confers the right to deduction, necessarily tax that does not relate to actual transmissions of goods or provision of services does not confer the right to deduction, and therefore no. 3 of article 19 of the VAT Code clarifies that "tax resulting from a simulated operation or one in which the price stated in the invoice or equivalent document is simulated may not be deducted". This legal provision, in light of its formulation, applies both in situations of absolute simulation, of which the so-called "false invoices" are paradigmatic, within the scope of VAT, and in situations of relative simulation (when there is the will to dissimulate another transaction), which may be subjective, as seems to indicate the IR, when the dissimulated transaction is realized with a different taxpayer from the invoice issuer.

This conception that the right to deduction presupposes that VAT has burdened actual provision of services or transmissions of goods is widely recognized by national jurisprudence in affirming that "The right to deduction of VAT paid upstream can only exist, according to the very nature of things, with respect to tax actually borne in economic operations actually happened. Otherwise, we would be faced with a mere intellectual or virtual archetype and not with a tax intended to generally affect the real consumption of goods and services at the various stages of the economic circuit. The inadmissibility of deduction of tax relating to a simulated operation or one in which the price is simulated, positively affirmed in no. 3 of art. 19 of the CIVA, thus corresponds to a necessary conclusion or one deriving from the very nature of the tax, whose formal clarification is only justified for reasons of clarity"[8].

Finally, it should be noted that it was already the understanding of the CJEU that the simulated nature of the operation may not prevent the exercise of the right to VAT deduction, when this does not entail the risk of loss of tax revenue.[9]

B) Jurisprudence of National Courts

Within the scope of simulated transactions, the jurisprudence of our superior courts has also devoted abundant attention to analyzing its relationship with the right to VAT deduction.

Now, in the present case we are before a situation in which the AT qualifies simulation as to the parties involved and as false invoices, resorting to the mechanism provided for in no. 3 of article 19 of the VAT Code, which is the perspective of analysis under which the subsequent jurisprudential decisions will fall.

By way of example, see the judgment handed down by the Central Administrative Court of the North,[10] where it states:

"In this particular, it is well known that, as has been uniform jurisprudence of this Central Administrative Court North, when the tax administration disregards invoices which it deems false, the rules of burden of proof of article 74 of the General Tax Law apply, it being incumbent upon the tax administration to prove that the legal prerequisites are met which legitimize its action, that is, that there are serious indications that the operation contained in the invoice does not correspond to reality.

Once this proof is made, the burden of proof of the authenticity of the transaction then falls on the taxpayer - cfr. inter alia, Judgments of the Central Administrative Court North of 24-01-2008, case no. 01834/04 Viseu, of 24-01-2008, case no. 2887/04 Viseu, of 27-01-2011, case no. 455/05.7BEPNF and of 18-03-2011, case no. 456/05BEPNF.

It should be noted that the tax administration does not need to demonstrate the falsity of the invoices, it being sufficient to evidence the consistency of that assessment (Judgment of the Supreme Administrative Court of 27-10-2004, case no. 810/04), invoking facts that translate a high probability that the operations referred to in the invoices are simulated, a high probability capable of shaking the legal presumption of authenticity of the statements of the taxpayers and of the data contained in their accounts - article 75 of the General Tax Law.

In this domain, in principle, if the indications suggest that with high probability the issuers of the invoices did not have business capacity to sell the goods mentioned in the invoices, that alone would suffice to create a serious assessment that those transactions did not exist, that is, that those issuers did not sell those materials to the claimant, thus the invoice translates a simulation of a transaction between the issuer and the user of the invoice.

And it could be said that it would suffice for the tax administration, to fulfill its burden, to carry facts relating to the invoice issuers indicative of their inability to transact the goods. And it would be relieved of ascertaining any fact in the sphere of the users of the invoices indicative of their participation or knowledge or duty to know of the falsification. It could limit itself, as happened in the case of the present case, to finding in the accounts of the taxpayer the existence of invoices from those issuers to, without more, consider the VAT improperly deducted, with the burden then shifting to the taxpayer to demonstrate the authenticity of the transactions.

In short, if it were understood in this way, the tax administration, aware that a certain taxpayer was dedicated to issuing false invoices, could, without more, disregard the costs of any other taxpayer inspected who had recorded invoices from that issuer.

Thus, the factual indicators that the invoice issuer does not have the capacity to provide the service are not by themselves sufficient to prevent the deductibility of the tax mentioned in that invoice, if there is no reason to question the realization of that service by a third party.

It may, at first, seem strange that the legislator abstained from the relationship underlying the invoice which, to be subjectively true, would have to exist between those two subjects (the invoice issuer and the invoice user). But there is a reason for this: the legislator also abstains from the underlying relationship in order to require the tax from the issuer.

Indeed, and in accordance with article 2, no. 1, paragraph c), of the same code, the tax can also be required from the invoice issuer who mentions it wrongly there. Each invoice where tax is mentioned constitutes a 'check on the Treasury' (cit. José Guilherme Xavier de Basto, in 'The Taxation of Consumption and its International Coordination', Cahiers de Science et Technique Fiscale, 164, Centro de Estudos Fiscais 1991, p. 140). And this happens precisely because the recipient of the invoice also does not, by that fact, cease to have the right to use it, in the exercise of its right to deduction.

Thus, since the existence of the underlying relationship between those two subjects is not a requirement for the deductibility of the tax, this can only be excluded by an exclusionary rule.

The VAT Code contains several rules that specially exclude the right to deduction, but we are only interested in analyzing one of them here: no. 3 of its article 19. Because it was on the basis of this rule that the tax administration made the corrections disputed.

And according to this rule, tax resulting from a simulated operation or one in which the price stated in the invoice or equivalent document is simulated cannot be deducted.

However, the VAT Code also does not tell us what should be understood by simulated operation for the purposes of that Code, so it must be interpreted with the meaning the term has in civil law - article 11, no. 2 of the General Tax Law.

Now, simulation is the divergence between the real intent and the declared intent of the subjects of the legal transaction, by agreement between the declarant and the declaratee and with the intention to deceive third parties – article 240 of the Civil Code. It can be absolute (when there is no intention to carry out any transaction) or relative (when there is the intention to dissimulate another transaction). And, in the latter case, it can be subjective (when the dissimulated transaction is carried out with another subject) or objective (when the dissimulated transaction has a different nature or content, as occurs with simulation of value).

Let us analyze in more detail the subjective simulation (which is the one relevant to the case). For there to be simulation, there must be an agreement between the actual subjects of the operation and the interposed party (fictitious interposition). If the agreement exists only between the interposed party and one of the actual subjects of the operation, acting in its own name, but in the interest and on behalf of that subject (real interposition), we are not presented with a simulation, but rather a mandate without representation (cfr. articles 1180 et seq. of the Civil Code – in this sense, Carlos Alberto da Mota Pinto, in General Theory of Civil Law, 3rd updated edition, p. 476).

Commercial commission, regulated in articles 266 et seq. of the Commercial Code, is a modality of mandate without representation, with the particularity of having as its object, not the practice of legal acts, but the practice of commercial acts. Also in this case there exists a real and lawful interposition of subjects (and which is opposed, therefore, to fictitious or simulated interposition - Pires de Lima and Antunes Varela, in 'Annotated Civil Code', volume II, p. 747). That is, the transaction is really concluded between the mandatory or commissionaire and the recipient of the services. But the latter remains obliged to transfer to the principal the ownership of the rights it has acquired in execution of the mandate.

It should be noted that the VAT Code expressly adopted the legal figure of commercial commission, as follows from its articles 3, no. 3, paragraph c) (in the case of interposition in the transmission of goods) and 4, no. 4 (in the case of the provision of services). Which means that, also for the purposes of this tax, the provision of services on behalf of another is not a fictitious or simulated interposition.

Thus, the interposition of a subject between the invoice issuer and its user will only be a simulated operation for the purposes of article 19, no. 3, of the VAT Code and, consequently, will only exclude the right to deduction if there is an agreement between them with the intention to deceive third parties, namely the tax authorities.

Whereby the existence of an agreement between the true service provider and its user, to the effect of simulating the conclusion of the transaction between one of them alone and a third party with the intention to deceive third parties (and the tax authorities in particular) is an essential element of subjective simulation.

Let us move to another question, which is to know whether it is incumbent upon the tax administration to prove the simulated agreement. It is the problem of the distribution of the burden of proof between the tax administration and the taxpayer in assessing the legality of the exercise of deduction.

On this matter, article 74, no. 1, of the General Tax Law usefully provides that the burden of proof of the facts constituting the rights of the tax administration or the taxpayers rests with whoever invokes them. Thus, and taking as a model the procedure for assessment at the initiative of the tax administration, the latter will have the burden of demonstrating the occurrence of the facts from which the right to assessment derives (the fact-prerequisites of the existence, qualification and quantification of the tax fact). And the taxpayer will have the burden of demonstrating the facts that are imperative, modifying or extinctive of that right.

However, the judgment of the Plenary of the Section of Tax Litigation of the Supreme Administrative Court of 2003-05-07 (Case no. 01026/02, available in full at www.dgsi.pt, following the understanding of the judgment of the Supreme Administrative Court of 2002-04-17, case no. 026635, also available there), established jurisprudence to the effect that the burden of proof of the existence of the tax facts which the taxpayer alleged as a prerequisite of the right to VAT deduction rests with the taxpayer.

The reason for this understanding is as follows: contrary to what happens as a rule, in which the tax administration affirms the occurrence of the fact from which the right to taxation derives, in this case it is the taxpayer that affirms the tax fact from which the right to deduction derives and the tax administration that calls into question its occurrence.

It should be stressed, however, that this rule of burden of proof only truly operates after the tax administration has gathered and invoked well-founded evidence that the tax fact did not occur (in the case, that it did not occur between the subjects mentioned in the invoice. That is (to use the words of the same judgment), after the tax administration has issued 'an administrative judgment of adequacy between the facts and the assessments in which the administration says, formally, to support its decision and the result of that judgment in the sense that it appears to have been declared a deduction higher than due and with proof before the court of the relevance of that judgment or that is, with proof, before the court, of the existence of the elements that make it possible to consider adequate the consideration made by it that the taxpayer declared a deduction higher than that permitted by law'. (emphasis added).

Which, moreover, already resulted from article 82, no. 1, of the VAT Code (in the wording then in force) according to which the ratification of the taxpayer's statements would occur when the tax administration reasonably considered that they contained tax higher or deduction higher than due.

And it could not be otherwise, because the exercise of the right to deduction is based on the statement which then referred to article 28, no. 1, paragraph c), of the same Code. A statement which, in accordance with article 75 of the General Tax Law, is presumed to be true when it is presented in accordance with the provisions of the law and the data contained therein are recorded in its accounts or record, in turn organized in accordance with commercial or tax legislation. And when someone has a legal presumption in their favor, they do not have to prove the fact to which it leads – article no. 350, no. 1, of the Civil Code.

Therefore, when the right to deduction is based on a statement by the taxpayer presented in accordance with the law, the tax administration which intends to rebut the occurrence of the fact on which this deduction is based, invoking the simulation of subjects, does not have to demonstrate that the simulated agreement existed (which would be very difficult to demonstrate, in most cases), but has to gather objective indicators that such an agreement should have existed. …".

From here, and considering the particular situation under review in the present case, it must be understood that for there to be simulation, the tax administration would have had to gather elements that linked the user of the invoices to the fraud scheme, that is, that it had gathered evidence that the user of the invoices participated or that it knew or should have known that the issuer of the invoices was not the true supplier of the goods in question, insofar as it may happen that the user of false invoices does not know nor has any possibility of knowing of the falsity. (emphasis added).

Indeed, it suffices for an operator, obtaining the necessary quantities of goods, arming itself with a book of invoices and opening a bank account in the name of the invoice holder, to go to the facilities of another reseller, offer the goods, agree on a price and cash the cheque used as a means of payment.

If it were accepted that the burden of the State suffices with the collection of evidence of falsity regarding the invoice issuers, this would lead to the users of false invoices, who do not know that they are false, not being able to deduct costs that they effectively supported, without having participated in any fraudulent scheme.

It could be said that, always such innocent users could make proof of the authenticity of the transactions - in the application of the evidentiary framework fixed above: on the tax administration rests the burden of demonstrating evidence of falsity; once such burden is fulfilled, the burden of proof of the authenticity of the transactions falls on the taxpayer.

But it is easily understood that such proof, in these circumstances, of upstream fraud, which it does not know, will be impossible for the user of the invoices to prove anything beyond what results from its accounts, and, which should not be forgotten, enjoys a presumption of authenticity. If there was fraud and the user of the invoices does not know, it cannot prove that the goods were acquired from the invoice issuers, because they were not; nor can it prove that it acquired them from another, because for this user of invoices the goods were purchased from the issuer, unaware of the true seller.

What the user of invoices can do in these circumstances is solely to clarify how the negotiations developed and with whom they developed. (emphasis added).

(…)

Thus, with there being evidence that the invoice issuer did not supply the goods mentioned in the invoices, it was incumbent on the tax authorities to inquire into the participation of the now Claimant in the simulated scheme.

Now, the tax administration does not say that the Claimant knew or should have known that it was purchasing from a person different from that appearing in the invoice and the user of the invoice is not obliged to know the business or tax situation of the invoice issuer who delivers the goods to it.

If it were accepted that a user of invoices would see the costs disregarded without the tax administration somehow connecting it to the fraudulent scheme, this would be a violation of the principle of justice. And would undermine confidence in commercial relationships.

This understanding is in line with that of the Court of Justice which in the Judgment of 31 January 2013, case C-642/11 - which dealt with a question of VAT deductibility, relating to cases where irregularities occur in the sphere of the issuers, pronounced as follows:

'47 Thus, it is for the authorities and national courts to refuse the right to deduction if it is demonstrated, in light of objective elements, that this right is invoked fraudulently or abusively (see, in this sense, judgment of 6 July 2006, Kittel and Recolta Recycling, C-439/04 and C-440/04, Coll., p. I-6161; and judgments, already referred to, Mahagében and David, no. 42, and Bonik, no. 37).

48 However, in accordance with settled jurisprudence, it is not compatible with the right to deduction regime provided for by Directive 2006/112 to sanction, with the refusal of that right, a taxpayer who did not know nor could have known that the operation in question formed part of fraud committed by the supplier or that another operation included in the supply chain, prior or subsequent to that carried out by the said taxpayer, was marred by VAT fraud (see, in particular, judgment of 12 January 2006, Optigen et al., C-354/03, C-355/03 and C-484/03, Coll., p. I-483, nos. 52 and 55; and judgments, already referred to, Kittel and Recolta Recycling, nos. 45, 46, and 60, Mahagében and Dávid, no. 47, and Bonik, no. 41).

49 Furthermore, the Court of Justice stated, in nos. 61 to 65 of the judgment Mahagében and David, already referred to, that the Tax Administration cannot require in general that the taxpayer wishing to exercise the right to VAT deduction, on the one hand, verify that the issuer of the invoice concerning the goods and services on the basis of which the exercise of this right is requested has the status of a taxpayer, possesses the goods in question and is in a position to deliver them and complies with its VAT declaration and payment obligations, in order to ascertain that there are no irregularities or fraud at the level of upstream operators, or, on the other, possess documents to this effect.

50 From this it follows that the national court which must decide whether, in a given case, there is a taxable operation, with the Tax Administration having alleged in the case that the existence of irregularities committed by the invoice issuer or one of its suppliers, such as accounting omissions, must ensure that the assessment of the evidence does not lead to emptying of meaning the jurisprudence recalled in no. 48 of the present judgment, indirectly obliging the recipient of the invoice to carry out verifications with its contractor that, in principle, do not incumbent upon it.'

And finally stated:

'(…)

2- The principles of fiscal neutrality, proportionality and legitimate expectation must be interpreted in the sense that they do not oppose the refusal of the right to deduction of value added tax paid upstream to the recipient of an invoice, for non-existence of an actual taxable operation, when, in the rectification notice sent to the invoice issuer, the value added tax declared by the issuer has not been corrected. However, if, due to frauds or irregularities committed by the issuer or upstream of the operation invoked as the basis for the right to deduction, it is considered that this operation was not effectively carried out, it must be proven, in light of objective elements and without requiring the invoice recipient to carry out verifications that do not incumbent upon it, that the same recipient knew or was obliged to know that the operation was implicated in value added tax fraud, which it is incumbent upon the court of referral to verify.' (emphasis added).

(…)

In the case, it is repeated, with it being demonstrated that the now Claimant acquired the goods in question, the tax administration would have had to gather sufficient evidence that the Claimant knew or should have known that who was selling to it was not the person who appeared in the invoices.

And with this not having occurred, we conclude that the tax administration did not gather evidence that legitimizes its action in the sense of not accepting the VAT deduction mentioned in the invoices in question in the present case, that is, it did not fulfill the burden incumbent upon it in order to substantiate the assessments disputed, which are thus, marred by illegality, thus imposing to follow the decision appealed when it determined the annulment of the assessments disputed."

It is important to state that this Arbitral Tribunal adheres unreservedly to the legal analysis formulated by the TCA-North in the judgment from which the most relevant parts were transcribed above.

5. Application to the Specific Case

According to the AT, we are faced with a simulation relative to the parties involved in the operation, that is, the taxpayer who issued the invoice does not correspond to the taxpayer supplier of the goods or service provider in question and the Claimant, in turn, should have known of the existence of fraud practiced by this supplier.

According to this reasoning, the invoices issued by companies B... Lda. to the Claimant do not evidence commercial transactions relevant for the purposes of allowing the deductibility of VAT incurred by the Claimant in the respective acquisitions, being thus simulated operations, in accordance with no. 3 of article 19 of the VAT Code.

Let us begin by referring to the burden of proof in the context of the corrections under analysis. As has been repeatedly and uniformly emphasized by the jurisprudence of our superior courts, to which we made exhaustive reference in the previous point, when the AT disregards invoices which it deems false, the rules of burden of proof provided for in article 74 of the LGT apply, it being incumbent upon it to prove that the legal prerequisites are met which legitimize its action, that is, that there are serious indications that the operation contained in the invoices does not correspond to reality, with the burden of proof of the authenticity of the transaction then being borne by the taxpayer.

It is at this level that we find ourselves.

Let us then see, not losing sight of the legal framework drawn up regarding the burden of proof and considering the facts ascertained in the inspection phase, with a view to answering the question of whether it follows from the facts found to be proven that the AT made proof of the verification of indications which allowed it to conclude that the invoices with respect to which the VAT contained therein was disregarded did not have underlying any economic operations realized between B... Lda. and the Claimant.

From the facts found to be proven, the following results:

• When timber was acquired from other taxpayers, all operations (acquisition, felling and transport of goods) were the responsibility of the supplier;

• It was the Claimant's suppliers that delivered timber directly to the facilities of the Claimant's customers (I... S.A. and E...). In these cases, as a general rule, transport was carried out at the cost of the Claimant's supplier, although before the final customers of the Claimant, it was the latter that supplied timber to them and invoiced them. Consequently, before the factory, the Claimant was the sole supplier of goods, with all unloadings being carried out in its name;

• Whenever the timber supply companies so wished, they could subcontract to third parties the transport of timber to the factory, instead of doing so by means of their own transport, this decision being irrelevant to the Claimant, considering that transport is the responsibility of the supplier;

• Authorization was requested to access the bank accounts of the Claimant's administrators, which occurred, nothing having resulted from it, particularly that they would have received flows of money relating to the payments they made to the supplier company in question, allegedly the author of the simulation, as the AT refers to nothing about this in the IR, it being presumed thus, that it found nothing;

• At the time of the facts, the Claimant made payments to its suppliers preferentially through bank cheques drawn on company accounts, means that circulated in the financial circuit and which were analyzed by the AT;

• Payments to the Claimant's suppliers were made based on the presentation, at its facilities, of the PEGs and slips issued by the factory delivered to the supplier at the time of unloading, from which appears, in particular, the name of the transport company, the quantity of supply, the date, and the name of the Claimant;

• In all PEGs issued by the Claimant's customers, the Claimant itself is referred to as the sole supplier of goods, since, as mentioned, suppliers, such as B... Lda., assumed a role as intermediaries in the procurement of goods for the fulfillment of contracts concluded with the factories;

• The Claimant does not have a practice of concluding written contracts with any of its timber suppliers, there being, however, a verbal agreement in which the price per kilogram of timber placed at the factory is discussed. Now, the absence of a written contract, even though it is a sale of goods, does not constitute an indication of falsity of the underlying operations, since this does not appear to be mandatory. If it is true that the prevalence of a certain informality may not reveal itself as the most prudent in the context of a commercial relationship, neither does it seem to us to constitute sufficiently founded indication to question the existence of a contractual relationship between the parties;

• The sale of timber to the Claimant's customers was invoiced by it;

• Furthermore, in terms of corporate income tax, the AT expressly recognizes that the operations evidenced by the invoices whose deductible VAT is denied in the present case constitute operations "effectively economically occurred, with it being proven that B... Lda. proceeded to the delivery of timber to its customers" with no correction being made in terms of corporate income tax. Now, if the AT denies the right to VAT deduction on the argument that the operation is simulated, it is not understood how it accepts the full deductibility of the same costs in terms of corporate income tax, which reveals a lack of coherence that this Tribunal qualifies as incurable.

Consequently, given the factuality found to be proven, at no point does the AT expressly deny that the now Claimant acquired the timber in question, or demonstrate on the basis of objective evidence that the Claimant knew or should have known that the party selling the goods to it was not the entity appearing in the invoices. In fact, the overwhelming majority of the evidence brought to the administrative tax proceedings relates to facts practiced by third parties – the suppliers – who allegedly defrauded the State in terms of several taxes due to failure to comply with their tax obligations, but at no point linking these to the Claimant, even indirectly, proving that the latter should have known that these were false, which, it is reiterated, in this Tribunal's judgment, was not achieved.

Moreover, the conclusions reached in the IR relating to the lack of correspondence between the invoice issuer and the true transmitter of goods are essentially based on the finding that B... Lda. was not mentioned in the transport documents accompanying the goods supplied to the Claimant.

Now, in the case in question, it is undisputed and has been duly demonstrated that responsibility for the transport of goods to the factory is borne by the supplier, with this transport being able to be carried out directly or through recourse to transport companies.

Furthermore, it should be noted that the goods are never delivered directly to the Claimant by the respective supplier, but are instead placed in the factory, which means that the Claimant has no way of controlling the effective identity of who provides the goods.

Moreover, the documents relevant for the purpose of controlling the supply made to the Claimant (namely PEGs and factory slips) do not coincide, nor should they coincide, with the official documents required by Customs and Tax Authorities for the purposes of controlling the transport of goods (transport documents).

Thus, objectively, the AT has not brought to the file sufficient elements demonstrating that B... Lda. acted differently from any other supplier of the Claimant, the only distinctive fact being the non-remittance of VAT to the State and the non-compliance with respective tax obligations, which, as we will agree, does not, by itself, reveal any indication of collusion between the Claimant and B... Lda.

Now, it is settled jurisprudence of the superior courts that the Claimant does not have the duty to ascertain the business or tax situation of the invoice issuers who sold it the goods. In the present case, with it being demonstrated that the Claimant acquired the goods and sold them to its customers, the AT would have had to gather sufficient evidence that the Claimant knew or should have known that the party selling to it was not the entity appearing in the invoices.

Therefore, it would be said that in light of the way the Claimant's business is structured, it appears to us that the evidence gathered by the AT lacks relevance to raise doubts as to the reality of the operations and as to the falsity of the parties involved.

In turn, the non-compliance by the Claimant or its suppliers with the legal regime established in DL no. 147/2003 of 11 July has as a consequence the institution of the corresponding administrative offense proceedings, as provided for in this decree, and not the total loss of the right to VAT deduction borne.

In summary, the conclusion that the AT drew from the evidence contained in the IR as to the invoice issuers in question in the present case does not permit it, without more, to draw the conclusion that the operations in which the Claimant was involved were simulated, or that the latter had conditions to know that the parties upstream of it in the supply chain were part of a fraudulent scheme and that, on this basis, the supplies made to the Claimant do not confer the right to the deduction of the corresponding VAT.

Rather, this Tribunal understands that the elements referred to above, weighed in light of experience, substantiated within a framework of high probability, and considering the evidence produced largely by the TIS itself, allow us to conclude that the tax acts in question in the present case should be annulled, due to defect of violation of law.

6. Compensatory Interest

The Claimant also petitioned for the condemnation of the Respondent in compensatory interest, accrued and accruing until the date of reimbursement of the amounts of tax improperly assessed, by considering, in the present case, that there was VAT assessment higher than due due to error attributable to the services.

In accordance with article 43 of the General Tax Law and article 61 of the CPPT, "Compensatory interest is due when it is determined, in gracious reclamation or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due".

Error attributable to the administration is understood as error that is not attributable to the taxpayer and is based on mistaken presumptions of fact and of law that are not the responsibility of the taxpayer. Thus, "the right to compensatory interest covers only one of the causes of responsibility of the tax Administration, acting as such: that originated by the payment of taxes improperly owed, which is attributable to it (...) the right to compensatory interest in favor of the taxpayer derives, as a general rule, from a duty of indemnification of the tax Administration resulting from the forced unproductiveness of the amounts disbursed by the taxpayer."(cfr. António Lima Guerreiro, Annotated General Tax Law, Editora Rei dos Livros, p. 204 and 205).

In the case in question, it was demonstrated that the Claimant proceeded with the payment of the tax and the corresponding compensatory interest, by force of the assessments subject to the present case.

Compensatory interest is due, from the date of payments which are shown to have been made, and calculated based on the respective value, until its full reimbursement to the Claimant, at the legal rate, in accordance with articles 43, nos. 1 and 4, and 35, no. 10, of the LGT, 61 of the CPPT and 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (without prejudice to any subsequent amendments to the legal rate).

Furthermore, in accordance with the provision in paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim in respect of which no appeal or challenge is available binds the Tax Administration from the end of the period prescribed for appeal or challenge, with the latter, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period prescribed for voluntary execution of the judgments of the tax courts, to "restore the situation that would have existed if the tax act subject of the arbitral decision had not been practiced, adopting the necessary acts and operations for this purpose", which is in line with the provision in article 100 of the LGT [applicable by force of the provision in paragraph a) of no. 1 of art. 29 of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial success of reclamation, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject of the dispute, comprehending the payment of compensatory interest, if applicable, from the end of the period for execution of the decision".

Although article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning in the CAAD, not referring to condemnatory decisions, it should be understood that their competencies comprise the powers which in judicial challenge proceedings are attributed to the tax courts, this being the interpretation that is in line with the sense of the legislative authorization on which the Government based itself to approve the RJAT and in which it proclaims, as the first guideline, that "the arbitral tax process must constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge process, although essentially a process of annulment of tax acts, admits the condemnation of the tax administration in the payment of compensatory interest, as is apparent from article 43, no. 1, of the LGT, in which it is established that "compensatory interest is due when it is determined, in gracious reclamation or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due" and article 61, no. 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which states that "if the decision recognizing the right to compensatory interest is judicial, the period for payment is calculated from the beginning of the period for voluntary execution".

Thus, no. 5 of article 24 of the RJAT in stating that "payment of interest is due, regardless of its nature, in accordance with the provisions of the general tax law and the Code of Tax Procedure and Process" should be understood as allowing the recognition of the right to compensatory interest in the arbitral process.

In the present case, it is manifest that, following the declaration of illegality and consequent annulment of the assessment acts disputed, there is place for reimbursement of the tax, by force of the referred articles 24, no. 1, paragraph b), of the RJAT and 100 of the LGT, since this is essential to "restore the situation that would have existed if the tax act subject of the arbitral decision had not been practiced", in the