Summary
Full Decision
ARBITRAL DECISION
I – REPORT
A..., LDA., collective entity no. ..., with registered office at Rua ... ..., ...-... Lisbon (hereinafter abbreviated as the "CLAIMANT"), submits, pursuant to the provisions of article 2(1)(a) and article 10, both of Decree-Law no. 10/2011 (RJAT – Legal Framework for Tax Arbitration), of 20 January, a request for the constitution of an arbitral tribunal for assessment of the legality of VAT assessment acts (i) nos. 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018... and 2018...; (ii) of interest assessment acts nos. 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018... and 2018...; (iii) and also of the corresponding account settlement demonstration acts nos. 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018..., 2018... and 2018..., amounting to a total value of €28,307.07.
The request for constitution of the Tribunal was accepted and, in conformity with articles 5(3)(a), 6(2)(a) and 11(1)(a) of the RJAT, the Ethics Council of the Administrative Arbitration Centre (CAAD), by order of 2018/09/28, designated the undersigned as arbitrator, the appointment being accepted within the legally established period.
The parties were duly notified of the designation, to which they raised no objection in accordance with the combined provisions of articles 11(1)(b) and (c) and 8 of the RJAT and 6 and 7 of the CAAD Code of Ethics.
The Claimant opted not to designate an arbitrator and, in conformity with the provision of article 11(1)(c) of the RJAT, the singular Arbitral Tribunal was constituted on 19/10/2018.
By order of 25/11/2018, since there was no need to assess exceptions or require additional evidence, the meeting provided for in article 18 of the RJAT was dispensed with, and the parties were notified to submit written submissions if they wished, which they did.
The Arbitral Tribunal is regularly constituted and materially competent to assess and decide the subject matter of the proceedings.
The parties have judicial personality and capacity and possess standing, in accordance with the provisions of articles 4 and 10(2) of the RJAT and article 1 of Order no. 112-A/2011, of 22 March.
No questions were raised that would prevent assessment of the merits of the claim and the proceedings do not suffer from any nullities, the conditions being met for a final decision to be rendered.
ON THE CLAIM
The Claimant, in its claim, requested the constitution of an arbitral tribunal in tax matters, with a view to obtaining a declaration of illegality of the aforementioned tax assessment acts for VAT, performed as a consequence of corrections made following a partial-scope inspection procedure carried out on VAT and Corporate Income Tax, with reference to the years 2014 and 2015.
Through the present request for arbitral pronouncement, the Claimant contests the tax acts insofar as they are consequent to the correction made to deductible VAT for the years 2014 and 2015, that is, insofar as such acts reflect the disregard of the "... VAT mentioned in two invoices issued, one in each year, in the amounts of €6,014.50 and €10,005.00".
What the Claimant contests is the "correction that was based on the understanding that only VAT mentioned in invoices that comply with all formal requirements prescribed by article 36(5) of the VAT Code can be considered deductible, requirements which the Tax Inspection Services considered were not met in the present case, because the descriptions in the invoices issued by company B..., LDA. were not sufficiently specific".
However, the CLAIMANT understands that the correction made was based on an error regarding the respective legal prerequisites, "inasmuch as it attributed to said articles 19 and 36 of the VAT Code a scope which, in the concrete case, not only proves to be at odds with Union Law (as this has been interpreted and established by the Court of Justice of the European Union, "CJEU"), but also conflicts with the case-law that has been established by this arbitral body".
"The question to be decided submitted to this Arbitral Tribunal shall be confined, simply, to determining whether the invoked articles 19(2)(a) and 36(5) of the VAT Code allow (or do not allow) the correction effected in relation to the CLAIMANT, having regard to the ratio and structural objectives pursued by such legal norms in the context of Union law on VAT calculation".
Account must be taken of both national case-law and the case-law of the EU Court of Justice, where it has been admitted that formal non-compliance prescribed for invoice issue is not capable of prejudicing the exercise of the right to deduction of tax by the purchaser, and that it should be permitted for the omission to be subsequently remedied by proof of the requirements on which the exercise of such right to deduction depends through the means of evidence at its disposal.
This case-law obliges the AT that, once the material prerequisites for the exercise of the right to VAT deduction by the respective purchaser of the goods or services have been demonstrated, to recognize and admit the exercise of the right to deduction.
Indeed, the Claimant, despite the generic character of the descriptions contained in the invoices in question, managed to attach "to the inspection procedure a detailed description of the services provided by the entities (and implicit in the invoices issued by it), as well as hundreds of supporting documents of their performance and content".
Consequently, "having the Tax Inspection Services proceeded otherwise (i.e., understanding that, notwithstanding the elements presented by the CLAIMANT during the inspection procedure, the provisions of articles 19(2)(a) and 36(5) of the VAT Code prejudiced the right to deduction exercised by the CLAIMANT), they erred in relation to legal prerequisites, vitiating the correction made to deductible VAT for the years 2014 and 2015 and, to that extent, the acts performed thereunder suffer from the vice of illegality which the Tribunal must declare".
The Tax and Customs Authority (AT), in turn, having been duly notified for that purpose, presented a Response in which it defends the total lack of merit of the request for arbitral pronouncement.
It considers that "the invoices issued... do not comply with the formal requirements expressly provided for in items 6) of Article 226 of the VAT Directive, and b) of paragraph 5 of Article 36 of the VAT Code, due to insufficient mandatory invoice content elements, particularly the descriptions of service provision with the laconic mention of "Other works" and "Logistical support".
Thus, the service provisions invoiced to the Claimant are evidenced by documents that do not contain a breakdown of the specifically provided services, unit quantities and their totals, and cannot be considered for the purposes of exercising the right to VAT deduction.
Contrary to the Claimant, it considers that the correction in question is not based on a mere formalistic requirement, but on a true requirement of substance inherent in the need to prove the deductibility of VAT supported by the service provisions invoiced, because, in the absence of said mentions on the invoice, the AT cannot know which service provisions the invoices specifically pertain to.
Therefore, it was incumbent on the Claimant to prove the substantive conditions required for the exercise of the right to deduction (the burden of proof of the substantive conditions of the right to deduction falls on the taxpayer, pursuant to article 74(1) of the General Tax Law), which did not occur.
Furthermore, the evidence produced by the Claimant during the exercise of the right to be heard, and on which it relies within the scope of the present request for arbitral pronouncement, does not allow corroboration of the conclusions it draws from those documents nor allows demonstration of the services provided.
In the first place, the invoices issued do not contain the elements provided for in said legal norms, making it impossible to validate and justify the services listed by the Claimant, namely whether they were invoiced, for what amounts, unit quantities and respective unit values.
Such elements possessed paramount importance in order to determine whether the total values shown on the invoices correspond to the services which the Claimant alleges were provided.
On the other hand, the service acquired from B... is invoiced only once during the year and refers to the service provided in the previous year.
Having consulted the accounting documents of the company issuing the invoices, namely the current account statements, it was established that the invoices for 2014 and 2015 were recorded in the accounting as having been paid in a single cash payment.
Furthermore, the Claimant did not present, despite the wealth of documentation it attached, proof of the effectiveness of the services provided in light of the inconsistencies detected during the inspection procedure, as it did not contain relevant complementary information to the invoices, leaving the Respondent unable to assess the additional elements necessary to verify the substantive requirements relating to the exercise of the right to deduction.
Thus, inasmuch as the invoices issued do not contain a correct description of the services provided, as well as the respective price, quantity and date of their performance, and the Claimant does not have a bank account recorded in the accounting with cash payments of materially relevant amounts, they do not allow the Respondent to control the invoices, namely at the level of VAT deduction as well as the correct allocation of expenses to each financial year.
For this reason..., it is concluded, in a clear and evident manner, that there is insufficient differentiation of the services actually provided in the invoices issued pursuant to article 36 of the VAT Code, which prevents control of the substantive prerequisites of the right to deduct the tax, provided for in articles 19 and 20 of the same legal instrument.
Given the foregoing, the arbitral claim does not merit allowance, even having regard to the case-law of the Court of Justice in the same sense when applied to the concrete case.
Written submissions were presented by the parties, in which they reiterated, in essence, the positions and grounds they had defended in their respective initial pleadings.
II. CASE MANAGEMENT
The Arbitral Tribunal is materially competent and regularly constituted, pursuant to articles 2(1)(a), 5 and 6(1) of the RJAT.
The parties have judicial personality and capacity, are properly represented and show standing, (cf. articles 4 and 10(2) of the RJAT and article 1 of Order no. 112-A/2011 of 22 March).
The proceedings do not suffer from any nullities nor are there any exceptions to assess, therefore a decision must be rendered.
III. GROUNDS FOR DECISION
MATTERS OF FACT
Proven Facts
The Claimant is a limited liability company registered to carry on the activity of "other human health activities" – CAE 086906, since 1998-01-02;
Its corporate purpose, as per the 2107 Registration, consists of "provision of health information services, seminars, conferences and publications, occupational health, occupational safety, health and safety activities".
The Claimant never requested the VAT refund that stands in its favor in the records, due to lack of knowledge.
The Claimant was subject to an external inspection action, of partial scope, in the area of VAT and Corporate Income Tax, beginning on 2017/09/21, with the Final Report being notified to it on 2018/03/20, through Letter no. ... of the Tax Inspection Service of Lisbon.
With regard to VAT, according to the IR, it was verified that the taxpayer declares itself exempt from VAT for clinical activity, and subject to taxation for service provision, among others, those relating to occupational safety and publication of weekly medical articles in magazines, and telenovelas.
Notwithstanding the activity developed generating active operations exempt and taxed under VAT, the Claimant deducted the tax charged to it in full, without observance of article 23 of the VAT Code and, consequently, article 20(1) of the same legal instrument.
In the years 2014 and 2015, the deducted amounts were respectively €7,711.17 and €11,133.35;
These amounts of deducted tax also pertain to the two invoices under examination in the present proceedings, issued by B..., LDA, in the amount of €6,489.57 and €10,265.16, respectively, with the remaining amount referring to VAT contained in other invoices for the purchase of consumables such as water, electricity and telecommunications among others.
The invoices in question pertain to services provided throughout the entire year of 2013 and 2014, and have no. 112, of 10/01/2014, in the amount of €26,150.00, VAT charged of €6,014.50, with the description "Other works"; and no. 230, of 29/01/2015, with the total amount of €43,500.00, and VAT charged of €10,005.00, with the description "logistical support" (page 51/113 and page 52/113 of Annex I to the Report).
The Claimant recorded the said invoices as having been paid in cash, in a single payment, crediting account 111 - "Cash" and debiting accounts 243222 - "VAT deducted" and 281 - "Expenses to be recognized" (Annex 2-pages 60 and 70/113).
According to the Inspection Report attached to the Administrative File, "the accounting of C... reflects in its records the registration of various invoices, of considerable amounts, issued by company B..., LDA.
The invoices identified have dates between 2013 and 2016 and generic descriptions such as "Logistical support", "Other works" and "Accounting and management".
In light of this situation, the managing partner of C... was notified to justify and identify the services acquired, as well as the corresponding amounts and supporting documents for payment of the respective invoices.
In the response ... the taxpayer enumerated, as per Annex 4, services in the area of consultancy, support and research in various projects, such as, among others:
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Health Education articles for client companies: D..., Lda (Group E...: Magazines in paper and online Telenovelas and TV ...).
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Health education activities also integrated activities in F..., Lda and G..., SA, with the provision of contents and formatting for materials promoting health and safety in the workplace.
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Support in the production and continuous review of technical documents, also participating in the preparation of executive summaries of projects and in documentary strategy and consultancy for the accreditation process of G..., SA, by the Directorate General of Health (DGS).
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Preparation of careful reports and infographics strategy consultancy.
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Planning of national training action projects for the staff of G..., SA.
Payments to B..., Lda were made throughout the year, or paid in phases and depending on payment from clients, agreed credit and the availability of payment by C... and were assured by the cash fund that was managed by accounting, with ongoing account settlements or at year-end.
All consultancy services from B... to C... for advice and strategies in the field of Occupational Safety were recorded as credits for account settlement.
Despite the partner of C... having stated what type of services were provided by B..., he presented no document that would prove, broken down by type of service and unit value, the services that were provided, so that they could be validated and its indispensability understood for obtaining the revenues."
The AT disregarded the amounts of VAT that were deducted corresponding to the two invoices mentioned above, respectively €6,014.50 and €10,005.00, amounts which, having been improperly deducted, were charged through the assessments now contested, plus interest.
The Claimant attached, both during the inspection procedure and in the course of this action, a CD-Rom containing various information on supporting documentation which it claims to be descriptive of procedures and documents relating to the actions developed by B... over the respective annual periods, a matter of fact which was not challenged by the opposing party.
Facts Not Proven
There are no material facts found in the proceedings for assessment of the subject matter of the present arbitral request that are considered not proven.
Reasoning/Motivation for the Decision on Matters of Fact
The judge (or arbitrator) does not have the duty to pronounce on all alleged matters of fact, but rather the duty to select those relevant to the decision, having regard to the cause of action supporting the claim formulated by the claimant, and to decide whether to consider it proven or not proven (article 123(2) of the Tax Procedure Code and article 607(3) of the Code of Civil Procedure, applicable by force of article 29(1)(a) and (e) of the RJAT).
Furthermore, in accordance with the principle of free assessment of evidence, the Tribunal must base its decision regarding the evidence produced in its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the proceedings, and in accordance with its life experience and knowledge of people and the environment.
In the present case, the Tribunal formed its conviction based on the critical analysis of the documents presented by the parties, which were not challenged, and on the copy of the administrative instructing file presented by the AT, also taking into account that none of the alleged matters of fact were contested or challenged.
Thus, having regard to the positions assumed by the parties, what article 110 of the Tax Procedure Code provides, the documentary evidence and the administrative file attached to the record, the facts listed above are considered proven, as relevant to the decision.
Matters of Law
After fixing the facts considered relevant, it is necessary to delimit the subject matter of the claim formulated in the present arbitral proceedings, which the Claimant itself did expressly when it states that "it intends, through the present request for arbitral pronouncement, to contest the tax acts identified insofar as they are consequent to the correction made to deductible VAT for the years 2014 and 2015, that is, insofar as such acts reflect the disregard of VAT".
At issue is the right to deduction of VAT supported by two invoices, duly identified above, whose description of the services provided is: on invoice no. 112 "Other works" and on invoice no. 230 "Logistical support", quantity 1, containing no other description or mention relating to the services specifically provided, both having been issued, as per the matters of fact, with reference to all services provided during each of the years in question. The payments of the amounts contained in the invoices were made in various installments throughout the year, however, the invoicing was global with the aforementioned descriptions.
Only after notification within the scope of the inspection procedure did the taxpayer present information relating to the allegedly provided services without specifically assigning which of them corresponded to the amount contained in each invoice, subsequently proposing to supplement the missing information through the provision of a list of services that could be classified in the areas of consultancy, support and research in various projects, such as services embodied in the preparation of articles for publication in weekly magazines; services embodied in the preparation of technical-scientific communications in PowerPoint format for presentations at public congresses and other scientific events and meetings; services embodied in the preparation of scientific research reports; services embodied in the evaluation of functionalities of IT applications and platforms; services embodied in the performance of various tasks in the scope of management consultancy.
In this manner, the question under examination in the present arbitral proceedings is centered on verifying the legal possibility of deduction of that VAT, in light of the applicable norms in accordance with European Union Law emerging from the Directives and the case-law of the community courts, as well as on verifying whether or not the requirements necessary for the respective deductibility are met, having regard to articles 226 of the VAT Directive and also articles 19(2)(a) and 36(5) of the VAT Code.
4.1 On the Right to Deduction
VAT can be characterized, in summary form, as an indirect tax, of general applicability to consumption insofar as it affects transfers of goods and provision of services, multiphase inasmuch as it applies to all operations from production or importation to the final consumer, and non-cumulative in that each stage of the economic circuit is taxed only on the value added at that stage, thus avoiding the cumulative effect.
This set of characteristics is complemented by neutrality, which is reflected in the rule that VAT is not an element of cost for taxpayers who act as tax collectors on behalf of the State, and which, by virtue of the deduction mechanism, will be borne entirely by the final consumer, making the number of phases that make up the economic circuit fiscally irrelevant.
Thus, the right to deduction is an essential element in the functioning of the tax.
The exercise of the right to deduction established in law allows the taxpayer to exclude from its burden the VAT it supported upstream, eliminating the cumulative effect that characterized previous systems of consumption taxation.
The legal institute of the right to deduct tax is essentially based on article 19 of the VAT Code, which provides as a general rule of the tax, without prejudice to exceptions or limitations expressly provided for, that "for the purposes of calculating the tax due, taxpayers shall deduct, in accordance with the following articles, the tax borne on taxable operations they carried out...". That is, to the tax calculated on sales and service provisions (outputs) and identifiable in the respective invoices, the tax borne on purchases and other expenses (inputs) is deducted. An equivalent determination is found in the second paragraph of article 1(2) of DIRECTIVE 2006/112/EC of 28 November 2006, which establishes that: "In each operation, VAT, calculated on the price of the good or service at the rate applicable to said good or service, is due, with prior deduction of the amount of tax that has directly borne the cost of the various components of the price".
For the purposes of VAT deduction, the indirect subtractive method is used, that is, tax-to-tax deduction is carried out. In the invoices of a given period, the tax supported on purchases during the same period is deducted from the tax charged on sales, independent of the sale of goods to which the deducted tax relates.
However, the law is not straightforward and in articles 19 to 25 of the VAT Code, we find the rules to be observed for the exercise of the right to deduct tax, the law fixing requirements of an objective nature, those relating to the type of expenses, requirements of a subjective nature, relating to the taxpayer, and requirements of a temporal order, which relate to the period in which it is possible to exercise the right to VAT deduction, being subject to cumulative verification at the moment of exercising the right to deduction.
It is emphasized that the objective requirements for exercising the right to VAT deduction are those relating to the tax borne, which must be evidenced by an invoice issued in legal form, in compliance with the general terms stipulated in the current article 36(5) of the VAT Code, of being Portuguese VAT, and those also relating to an expense which, by itself, grants the right to deduction of tax.
As subjective requirements for exercising the right to deduct tax, it is required, among others, that goods and services be directly connected with the performance of taxable economic activities, which means that the right to deduction does not exist when inputs are destined for exempt operations or situated outside the scope of VAT, as determined by both article 20(1)(a) of the VAT Code and article 168 of the VAT Directive itself.
Regarding formal requirements for exercising the right to deduction, the determination of article 178(a) of the VAT Directive applies, which establishes that the taxpayer "... must possess an invoice in compliance with articles 220 to 236, 238, 239 and 240".
Noting these dispositions, we observe that the formal importance of the supporting document in VAT is different from what applies to income taxes.
With regard to the elements that should appear on invoices, we should focus on article 226 of the VAT Directive and article 36(5) of the VAT Code.
The first of these norms establishes:
"Without prejudice to the specific provisions laid down in this directive, the only particulars that must necessarily appear, for VAT purposes, on invoices issued in application of articles 220 and 221, are the following:
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The date of issue of the invoice;
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A sequential number, based on one or more series, that identifies the invoice uniquely;
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The VAT identification number, [...], under which the taxpayer carried out the supply of goods or provision of services;
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The VAT identification number of the customer or recipient [...];
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The name and complete address of the taxpayer and of the customer or recipient;
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The quantity and nature of the goods supplied or the scope and nature of the services
provided;
- The date on which the goods were supplied or the services were provided
[...];
- The taxable amount for each rate or exemption, the net unit price of VAT, as well as
any discounts and other bonuses, if not included in the unit price;
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The VAT rate applicable;
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The amount of VAT payable, except in the case of application of a special scheme for
which this directive excludes such a mention."
For its part, article 36(5) of the VAT Code, which essentially replicates the norms of article 226 of the Directive, as regards the elements that should be contained in invoices, states:
"a) The names, registered names or corporate designations and the registered office or domicile of the goods supplier or service provider and of the recipient or purchaser, as well as the corresponding VAT identification numbers of the taxpayers;
b) The quantity and usual designation of the goods transferred or services provided, with specification of the elements necessary to determine the applicable rate;(...)
c) The price, net of tax, and other elements included in the taxable value;
d) The applicable rates and the amount of tax due;
e) The reason justifying non-application of the tax, if applicable;
f) The date on which the goods were made available to the purchaser, on which the services were performed or on which payments prior to the performance of operations were made, if that date does not coincide with the date of issue of the invoice."
Citing the decision rendered in Case no. 716/2016-T, "It follows, therefore, from these dispositions, as indeed sufficiently supported within the scope of Case C-368/09, of 15 July 2010, of the CJEU, that 'it is not legitimate for Member States to associate the exercise of the right to VAT deduction with the fulfillment of prerequisites relating to the content of invoices which are not expressly provided for in the provisions of the VAT Directive. This interpretation is also corroborated by article 273 of this directive, which provides that Member States may impose obligations they consider necessary to ensure the accurate collection of VAT and to prevent fraud, but that this power cannot be used to impose invoicing obligations additional to those laid down, in particular, in article 226 of said directive'.
This means that, in accordance with the CJEU case-law, although this provision allows Member States to adopt certain measures, these should not, however, go beyond what is necessary to achieve that objective and may not, therefore, be used in such a way as to systematically undermine the right to VAT deduction, which is a fundamental principle of the common VAT system.
Indeed, the principle of effectiveness requires that national legislation, as well as the administrative procedures adopted by Member States do not make, in practice, impossible or excessively difficult the exercise of rights conferred by community legal order. The CJEU pronounced itself in this sense in the Judgment rendered in Case C-25/03, which states "(…) it is settled case-law that the requirement, for the exercise of the right to deduction, of elements on the invoice beyond those set out in article 22(3)(b) of the Sixth Directive must be limited to what is necessary to ensure the collection of value-added tax and its inspection by the tax authorities. Furthermore, these elements must not, by their number or technical character, make it impossible in practice or excessively difficult to exercise the right to deduction (Judgment of 14 July 1988, Jeunehomme and EGI, 123/87 and 330/87, Collection p. 4517, no. 17).
Furthermore, the measures that Member States have the possibility of taking, pursuant to article 22(8) of the same Directive, to ensure accurate receipt of the tax and prevent fraud must not exceed what is necessary to achieve those objectives. They may not therefore be used in a way that undermines the neutrality of VAT, which constitutes a fundamental principle of the common VAT system established by community legislation in the matter (judgments of 21 March 2000, Gabalfrisa and others, C110/98 to C147/98, Collection, p. I-1577, no. 52, and of 19 September 2000, Schmeink & Cofreth and Strobel, C454/98, Collection, p. I-6973, no. 59)."
Thus, within the scope of the case-law enunciated, the problem has always been raised of determining the circumstances under which formal defects in the invoice should jeopardize the right to deduct the tax existing at the level of the underlying substantive relationship, considering particularly the importance of the principle of neutrality in the application of VAT.
However, in the processes aforementioned, which moreover do not exhaust the analysis of the issue relating to the content of invoices in the field of VAT application, a uniform understanding emerges that associates the formal requirements of invoices to the purposes of tax collection and its effective inspection by the tax authorities of Member States, admitting the thesis that the existence of formal defects does not in itself and automatically determine the denial of the exercise of the right to deduction.
In effect, in this regard, reference is made to the statement made by Advocate General Sir Gordon Slynn, according to which "an invoice that meets the conditions constitutes a title to access the right to deduction, subject to the tax administration subsequently demonstrating that it is false; if the invoice does not meet the conditions, it may happen that the taxpayer is able to prove the existence of the transaction and that its supplier has declared the upstream tax paid, but if the invoice is incomplete in an essential aspect, it is incumbent on the taxpayer to prove its right to deduction."
Therefore, following the aforementioned case-law, for formal defects to undermine the exercise of the right to deduction, it is necessary that the capacity for correct collection of tax and inspection be removed, such that the AT would not be in a position to know the underlying material reality in light of the elements of evidence brought to the proceedings by the taxpayer."
The Respondent did not challenge the verification of neither the requirements of an objective nature nor the requirements of a subjective nature. The question to be decided must therefore be contained in verifying the observance or non-observance of the formal requirements of the invoices issued by company B..., LDA, as an essential prerequisite of the right to VAT deduction borne by the Claimant, and whether such formal compliance respects what emerges from the combined interpretation of article 19(2)(a) of the VAT Code, article 36(5) of the same Code, and article 226 of the VAT Directive.
The AT alleges, moreover, that, "... in light of the legal regime explained, it appears that the invoices issued by company B... do not comply with the formal requirements expressly provided for in items 6) of article 226 of the VAT Directive, and b) of paragraph 5 of article 36 of the VAT Code, due to insufficient mandatory invoice content elements, particularly the descriptions of service provision with the laconic mention of "Other works" and "Logistical support".
In fact, the invoices, according to the AT, not containing "the correct description of the services provided, as well as the respective price, quantity and date of their performance, and the Claimant not having a bank account recorded in the accounting with cash payments of materially relevant amounts, do not allow the Respondent to control the invoices, namely at the level of VAT deduction as well as the correct allocation of expenses to each financial year".
Therefore, "the issuance of invoices by B... with the generic mention of "Logistical support" or "Other Works" without observance of the legal requirements provided for in paragraph 5 of article 36 of the VAT Code, does not allow acceptance of the deduction of the corresponding VAT by virtue of the provision of article 19(2)(a) of the VAT Code, it being impossible to validate the indispensability of the services mentioned in the invoices, the type of services provided, the number of hours and the unit value".
To the contrary, the Claimant argues that although the invoices have an overly generic description, however, with the complementary information provided during the exercise of the right to be heard in the context of the procedure, the AT was in possession of all the other elements that allow it to control and inspect the collection of tax.
From the matters of fact proven, it is established that in exercising the right to be heard the Claimant delivered to the AT documentation which it intended to be the justification of the services provided.
In fact, observing the invoices whose copies are attached to the administrative file confirms that, as the AT understands, the mentions of "logistical support" and "other works" are excessively generic, vague and insufficient to specify which services were actually provided, at what times the provision of the service occurred, so as to safely validate the collection of tax. However, both invoices indicate that these are service provisions.
But will these allegations be sufficient to prevent the exercise of the right to deduct the tax borne?
Article 19 of the VAT Code only allows deduction of tax evidenced by "invoices issued in legal form", with article 36(5) being the norm that defines which elements invoices must contain, invoices being considered issued in legal form those containing, among other elements, the quantity and usual designation of services provided, with specification of the elements necessary to determine the applicable rate, as well as the date on which the services were performed.
This is not entirely coincident with the VAT Directive, which in its article 226 requires that invoices must necessarily contain, among other things, "the scope and nature of the services provided", and "the date on which ... the provision of services was performed or completed".
Following the understanding of the Judgment rendered in Case 411/2014-T, which in turn reflects the case-law of the decisions of the CJEU, it is established that "...as it appears, contrasting the two normative segments pointed out, the national norm performs an imperfect transposition of the community norm, since, unlike this, it does not distinguish, as to the type of mention to be placed on the invoice or equivalent document, between goods and services. Indeed, while the community norm refers to goods involved in the invoiced transaction being mentioned, in addition to their nature, by their quantity, and services being mentioned by their scope, the national norm provides that both goods and services should be mentioned by their usual designation and quantity.
This distinction, however, should be considered sufficient to conclude that, at least, the concept of quantity employed by the provision of article 36(5)(b) of the VAT Code cannot assume the same meaning when goods are involved and when services are involved.
Indeed, while the former, by their material nature, will always, by definition, be directly measurable, services are not always so. Hence the VAT Directive has employed different terms with respect to one and the other object of transactions subject to VAT.
Finally, and also with regard to interpretive factors to be taken into account, it should also be noted that both the community norm and the national norm do not state that the descriptive mention of goods or services must be precise or specific. On the contrary: the terms employed ("nature", "usual designation"), directly refer to generic expressions that, encompassing the concrete operations practiced, apply to a diversity of related operations, which with them share the "nature" or are capable of being covered by the same usual designation.
One cannot fail to take into account here, on the one hand, the specificity of VAT, which leads to it intervening in practically all economic transactions that are realized in the European space, so that, naturally, in the conception of the respective legal regime there will have been concern not to create formalities, beyond the strictly necessary, which impede the operationality and capacity of economic agents to act. For what matters now, this concern will be reflected, among other things, in the admissibility that they employ in the description of their respective invoices, expressions that, generically identifying the goods or services supplied, are capable of being used repetitively, so as to minimize bureaucratic work (and necessarily, impeding economic activity) necessary to the fulfillment of the tax obligation that now concerns us.
On the other hand, and also in the sense of the deliberately accepted generality of descriptive terms to be employed in the mandatory mention relating to goods or services provided in transactions subject to VAT, one should also consider the already detected functionalization of the formal requirement in question to the needs of inspection and control by the AT.
This circumstance should be properly combined, by way of the systemic element, with the level of abstraction employed by the regulation of the tax in question itself. Indeed, throughout the VAT Code itself and its respective annexes, the various types of services are always described in a more or less abstract manner, precisely taking into account their "nature" or "usual designation", depending on the relevance they have for the respective legal regime".
In this continuation, it is settled that non-compliance or inadequate compliance with the rules established in said norms on the elements that must appear on invoices, being of a formal nature, do not necessarily imply the removal of the right to deduction or even reimbursement.
Provided that the invoices allow the AT to perceive the underlying material reality of the service provision documented and in relation to it may exercise its powers of inspection, determine the rate and proceed with collection, it is not possible to remove the exercise of the right. In accordance with almost unanimous CJEU case-law "article 178(a) of the VAT Directive must be interpreted as precluding national tax authorities from refusing the right to deduction of value-added tax simply because the taxpayer possesses an invoice that does not meet the requirements required by article 226, paragraphs 6 and 7, whenever the authorities have all the information necessary to verify that the substantive requirements relating to the exercise of that right are satisfied".
From this reiterated case-law it can be deduced that substance prevails over form, and this reality can only be removed when the omission, lack or insufficiency of elements prevents verification of the substantive requirements with a view to tax control. This means that invoices lacking formal requirements can be supplemented with information that provides concrete elements enabling VAT control, remedying any formal defects.
It is proven that the Claimant delivered to the AT, still within the scope of the inspection procedure, a detailed list and information on the underlying operations that allow understanding with reasonable clarity the material truth underlying the invoices.
The same information was delivered to the Tribunal and from its reading it is possible to state, even consensually, that one knows the diverse nature of the service provision, it not being considered, on the other hand, inappropriate to state that it would be quite difficult to differentiate by invoice the work performed. This could constitute a bureaucratic burden that cannot be preventive of the exercise of the right, having regard to the principle of tax neutrality.
Hence the CJEU repeatedly reaffirms that in the transposition of the VAT Directive to national law, tax authorities cannot include norms or procedures that obstruct the exercise of the right to deduction, the so-called bureaucratic norms.
See in this regard the decision taken in Case C-368/09, of 15 July 2010, "it is not legitimate for Member States to associate the exercise of the right to VAT deduction with the fulfillment of prerequisites relating to the content of invoices which are not expressly provided for in the provisions of the VAT Directive. This interpretation is also corroborated by article 273 of this directive, which provides that Member States may impose obligations they consider necessary to ensure the accurate collection of VAT and to prevent fraud, but that this power cannot be used to impose invoicing obligations additional to those laid down, in particular, in article 226 of said directive".
On the Concrete Case
As results from the proven matters of fact, the Claimant delivered a range of information with the intention of remedying the omission of the elements expressly required by article 36(5) of the VAT Code, and which do not appear on the two invoices.
However, it is understandable that, even with all that information, the AT can invoke the impossibility of controlling the collected and deducted VAT.
In fact, as we have seen, if some defects arising from the omission or insufficiency of information to be contained on invoices can be remedied by complementary information, however, it must necessarily include elements that allow control over the service provided, its location, the time it relates to and what quantity and to whom it was provided. As decided by the Court of Administrative Appeals, "in the context of a service provision contract, the parties will use the rigor they deem appropriate, as far as measurement is concerned, but to obtain the deduction of value-added tax charged, invoices must allow reconstruction of what service was provided and what its cost was" (Court of Administrative Appeals Judgment, Case 1141/2016, of 04/10/2017).
In the complementary information delivered by the Claimant, the nature of the or service provisions throughout the annual periods can be established, but, even so, the complementary information does not allow determination of which services are concretely invoiced, what value corresponds to each provision or set of provisions in a given period, what value is being invoiced and corresponds to it, that is, which services are exempt and which are taxed.
We can grant that the Claimant achieved the objective of remedying the formal defect in the missing information on the invoices regarding the nature of the services provided, succeeding in demonstrating the requirements of an objective and subjective nature, but with that information it is not possible to determine or quantify anything in relation to each of the invoices. It is not possible to determine which period is involved and what quantity of services was provided and whether the services provided are those being invoiced. It is not possible to distinguish the taxed provided services from those that are exempt.
Now, this impossibility causes the AT to be unable to control the collection of tax due to the lack of information that would allow it to do so.
As the Court of Administrative Appeals states in the Judgment of 17/02/2009 – Case 20593, "the invoice is not intended solely for use by the purchaser, but constitutes an essential element, also for the tax authority, being the document demonstrating the operations on which tax is borne. Thus, it is easy to understand that a valid invoice for VAT purposes would have to identify as completely as possible the purchaser and the seller, the merchandise, the price, and the date of the transfer. These are all elements relevant to allowing identification of the operation in a manner sufficient to permit the drawing of the due consequences as to the tax (its incidence, subjects, rate, collection, refunds, etc.). The lack of any of these elements can jeopardize the mechanism designed with the objective of collecting the tax. It is natural, therefore, that the legislator understood that, in order for the system, moreover complex, of VAT to function, to facilitate the control of subject and exempt operations, and to prevent tax evasion, it became necessary, not only the issuance of invoices or equivalent documents, in the form that each of the participants might deem fit, but their issuance with a content and rigor defined by law. Hence the requirement of legal form".
Although following the case-law of the CJEU, the national courts and the case-law of CAAD itself to the effect that the mere formal defect of an invoice, by itself, cannot restrict the right to deduct the tax borne on acquisitions of goods or service provisions, we understand, however, that the remedying of the defect is only achieved if from some additional information the proof is obtained that the invoices embody not only an economic activity connection that grants the right to deduction, but also that by the same information the exercise of the power entrusted to the tax administration by law to control the tax is guaranteed.
Indeed, this is precisely what the case-law of the community courts has based its decisions on when requiring that the elements to appear on invoices (encompassing here also the additional information attached after the intervention of the AT) must ensure the proper collection of the tax due and prevent fraud and evasion because only in this case will the right to deduction emerge from an invoice issued in legal form.
As understood in the CAAD Judgment 716/2016-T, "following said case-law, for formal defects to undermine the exercise of the right to deduction, it is necessary that the capacity for correct collection and inspection of tax be removed, such that the AT would not be in a position to know the underlying material reality in light of the elements brought to the proceedings by the taxpayer".
Indeed, in the opinion of this Tribunal, this is what occurs in the concrete case, since the additional information which aims to supplement the two aforementioned invoices only partially manages to remedy the omission or insufficiency of the mandatory elements required by article 36(5) of the VAT Code, and by articles 220 and 221 of the VAT Directive, because, even admitting that it is possible to prove the substance of the tax act, that is, the existence of service provisions, which in principle will grant the right to deduction, it fails to fulfill other important formal requirements whose omission prevents the AT from exercising its power to inspect the tax specifically collected on the invoice.
On the other hand, from what results from the proven matters of fact, we know through the Inspection Report attached to the administrative file that the Claimant "does not present in accounting the bank account and, in the records, the said invoices were recorded as having been paid in a single cash payment...", crediting account 111 - "Cash" and debiting accounts 243222 - "VAT deducted" and 281 - "Expenses to be recognized". That is, the AT cannot, even through other external means at its disposal, such as accounting, exercise its power to efficiently inspect the tax to be deducted.
Symptomatic of this statement is also what is contained in the Report regarding the fact that the Claimant makes payments for services provided by B... throughout the entire year, but with the available information it is not possible to determine which and which period they relate to, which could be possible to know if partial invoicing had occurred and not annual invoicing. Furthermore, the Claimant deducted all the tax contained in the invoices sub judice, notwithstanding the activity developed generating active operations exempt and taxed under VAT, without observance of article 23 of the VAT Code and, consequently, article 20(1) of the same legal instrument.
That is, the tax administration in the concrete case, not even availing itself of information external to the invoices, has means to be able to control the tax and its respective collection.
It should be retained that the case-law of the CJEU has been deciding favorably on the possibility of fulfilling some formal requirements of invoices in order not to obstruct the exercise of the right to deduct the tax borne, as was stated above, however, the same case-law always makes the verification cumulatively dependent on whether the available elements must allow the tax administration to have sufficient data for the exercise of the power to control payment of the tax due and risks of loss of tax revenue.
Therefore, in the opinion of this Tribunal, the AT is correct when it understands that, for the exercise of its power of control, the information that was delivered to it as intended to remedy a formal defect in the issuance of the invoices here in question is insufficient, whereby the arbitral claim can only be dismissed, since the invoices suffer from a defect due to violation of article 36(5) of the VAT Code.
Given all the foregoing, the analysis of other issues raised by both the Claimant and the Respondent is prejudiced.
IV. DECISION
Therefore, the Arbitral Tribunal decides to fully dismiss the arbitral claim formulated by the Claimant and, consequently, to maintain in the legal order the contested tax acts, as well as to condemn the Claimant to pay the arbitral fee due in this process.
V. VALUE OF THE PROCEEDINGS
The value of the proceedings is fixed at €28,307.07, in accordance with article 97-A(1)(a) of the Tax Procedure Code, applicable by force of article 29(1)(a) and (b) of the RJAT, and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.
Arbitral costs to be borne by the Claimant in the amount of €1,530.00, having regard to the provision of article 22(4) and article 12(2), both of the RJAT, in article 2, in article 3(1) and in paragraphs 1 to 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, as well as in Table I attached to said legal instrument.
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Lisbon, 11 March 2019
The Arbitrator of the Singular Tribunal
José Ramos Alexandre
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