CAAD Case 395/2018-T: VAT Rate Applicable to GCM Sales Not Meeting Legal Conditions and Purposes

ARBITRAL DECISION[1]

The arbitrator, Dr. Sílvia Oliveira, appointed by the Ethics Council of the Administrative Arbitration Center (CAAD) to form the Single Arbitral Tribunal, constituted on 29 October 2018, decided as follows:

REPORT

A..., LDA., a commercial company with the single number of legal entity and registration in the Commercial Registry no..., with registered office at ... no..., Km ..., in ..., ... (hereinafter referred to as "Claimant"), submitted a request for arbitral ruling and constitution of a Single Arbitral Tribunal, on 19 August 2018, pursuant to the provisions of article 4 and number 2 of article 10 of Decree-Law no. 10/2011, of 20 January [Legal Regime of Arbitration in Tax Matters (RJAT)], in which the Tax and Customs Authority (hereinafter referred to as "Respondent") is the respondent party.

The Claimant states that having been "(...) notified of the VAT assessment statements and respective interest on arrears, referring to the periods 201412T, 201512T, 201612T and 201706T, from which results a total amount payable of EUR 9,131.19 (...)" and not accepting "(...) said corrections, as they suffer, among other things, from the defect of illegality (...)" it came to submit "(...) the present request for constitution of the arbitral tribunal", requesting the annulment of the tax acts in question.

1.3. The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 20 August 2018 and notified, on the same date, to the Respondent.

1.4. Given that the Claimant did not proceed to appoint an arbitrator, pursuant to the provisions of article 6, number 1 of RJAT, the undersigned was appointed as arbitrator, on 9 October 2018, by the President of the Ethics Council of CAAD, the appointment having been accepted within the legally foreseen time and terms.

1.5. On the same date, the Parties were duly notified of this appointment, and did not express any intention to refuse it, in accordance with the combined provisions of article 11, number 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Code of Ethics.

1.6. Thus, in conformity with the provision in paragraph c) of number 1 of article 11 of RJAT, the Arbitral Tribunal was constituted on 29 October 2018, and an arbitral order was issued on the same date directing the Respondent to, pursuant to the provisions of article 17, number 1 of RJAT, submit its Response, within a maximum period of 30 days and, if it wished, request the production of additional evidence.

1.7. Additionally, it was further stated in that arbitral order that the Respondent should remit to the Arbitral Tribunal, within the Response period, a copy of the administrative file.

On 27 November 2018, the Respondent submitted its Response, having defended itself by way of exception and challenge and concluded that "(...) the (...) request for arbitral ruling should (...) be judged wholly without merit".

On the same date, the Respondent attached to the file the respective administrative file.

On 30 November 2018, both Parties were notified of the arbitral order of 29 November 2018 with the following content:

"Taking into consideration the fact that matter of exception relating to the value of the case has been raised in the Response submitted by the Respondent on 27 November 2018" and "the fact that the position of the Parties is fully defined in the File and supported by means of documentary evidence attached, this Arbitral Tribunal sees no utility in holding the meeting provided for in article 18 of the Legal Regime of Tax Arbitration (RJAT), as the Response to the exception may be given within the time for written submissions.

Thus, pursuant to the principles of the Arbitral Tribunal's autonomy in the conduct of proceedings, of celerity, simplification and procedural informality (articles 19, number 2, and 29, number 2, of RJAT), as well as taking into account the principle of limitation of useless acts provided for in article 130 of the Code of Civil Procedure (CPC), applicable by virtue of the provisions of article 29, number 1, paragraph e) of RJAT, this Arbitral Tribunal decided:

• To waive the holding of the meeting referred to in article 18 of RJAT;

• To determine that the proceedings proceed with optional written submissions, to be presented within a successive period of 10 days, with the time period for submissions by the Claimant commencing with the notification of this order and the time period for submissions by the Respondent commencing with the notification of the Claimant's submissions;

• To notify the Claimant to, if it so wishes, pronounce itself within the said period of 10 days on the exception raised by the Respondent;

• To set 18 January 2019 as the date for pronouncement of the arbitral decision".

In the same order, the Claimant was further warned that, until the end of the period referred to in the previous point, it should proceed to the payment of the subsequent arbitral fee.

The Claimant submitted submissions on 10 December 2018, including therein also the defence relating to the exception of the value of the case (raised by the Respondent), to the effect of understanding that despite "the value indicated by the Claimant result[ing] from the sum of the assessments received following the inspection procedure", "the Claimant has nothing to oppose that the value of the case be corrected to EUR 7,514.19, instead of the EUR 9,131.19 that it indicated in its Initial Petition, provided that, as a consequence, the assessment in the amount exceeding the EUR 2,668.14 referred to by the Tax Authority is annulled, or that, at the limit, a new assessment be sent so that the Claimant can make its payment or exercise its right of defence with respect to that specific assessment" since it states that "(...) the Claimant cannot be obliged to acknowledge that in said assessment there were two distinct amounts, relating to different tax processes or facts and that therefore it would have to challenge the assessment of EUR 2,668.14 separately from EUR 2,842.77".

With regard to the actual submissions, the Claimant presents arguments identical to those contained in the request for arbitral ruling, stating that "the essentiality of this case hinges on the commercialisation of coloured and marked diesel fuel", "or rather, on the legally defined conditions for the sale of such diesel", concluding that "given that the VAT assessment, (...) is subordinated to the assessment of Excise Tax (...)" then "(...) if in the (...) principal case – it is proven that the coloured and marked diesel was commercialised in compliance with the legally provided rules, then there cannot be any VAT assessment" "or (...) if it is proven that the norm in question (...) is unconstitutional, then we have that the basis of this assessment (...) completely collapses, thus causing and as a consequence, all and any liability of the Claimant herein to fall".[2]

Thus, the Claimant reiterates that "(...) the coloured and marked diesel does not cease to be so if some requirements in its sale are not complied with", being that "(...) the holder of the microchip card does not cease to be a beneficiary merely because the registration in the TPA/POS was not carried out at that precise moment or because, by oversight, the invoice was not issued with a Tax ID but only as a final consumer", "which is why the State cannot, and must not, profit from a 10% increase in VAT, it should only apply what is provided in RGIT and not the tax assessment that the Tax Authority knows is not due".

On 27 December 2018, the Respondent submitted its written submissions to the effect of stating that:

"With regard to the matter of exception relating to the value of the case (which corresponds to the amount of 7,514.19€) and the doubts raised in the Claimant's submissions regarding the VAT assessment relating to the period 201412T, we consider it relevant to attach to the file documents 1 and 2 attached" since "(...) it is clear from the consultation of such documents that the VAT assessment relating to the period 201412T that the claimant attached to the file, corresponds to the statement of the assessment made by the Tax Inspection on 02/04/2018 (corrective statement) (...) in replacement of the assessment that was made by the Claimant itself on 14/02/2015 (periodic statement of the taxpayer) (...) from which results an additional assessment of 2,668.89€";

"With respect to the matter of fact and the legal questions that constitute the object of this case, the Claimant's submissions do not present elements capable of altering the position assumed by the (...) Respondent in the Response (...)" whereby "(...) the understanding followed by the (...) Respondent regarding the controversial issue, remains valid", concluding in favour of the lack of merit of the request for arbitral ruling.

Given that documents were attached by the Respondent with its submissions, the Claimant was notified of the arbitral order of 7 January 2019 to, if it so wished, in the context of the principle of contradiction, pronounce itself on the content of said documents.

The Claimant submitted a request on 16 January 2019, to the effect of reiterating that "(...) it has nothing to oppose that the value of the case be corrected to EUR 7,514.19, instead of the EUR 9,131.19 that it indicated in its Initial Petition, provided that, as a consequence, the assessment in the amount exceeding the EUR 2,668.14 referred to by the Tax Authority is annulled, or that, at the limit, a new assessment be sent so that the Claimant can make its payment or exercise its right of defence with respect to that specific assessment", further requesting "(...) if the value of the case is corrected, its notification for payment of the amount of EUR 153, instead of a new fee of EUR 459, prior to the pronouncement of the final decision" with the statement that "as to the rest, it refers to what was stated in the submissions".

CAUSE OF ACTION

2.1. The Claimant states that "(...) has as its main activity the distribution and commercialisation of liquid fuels in the Portuguese market, among which is included the distribution of coloured and marked diesel fuel, commonly referred to as 'green diesel', which is intended for holders of the card issued by the Directorate-General for Agriculture and Rural Development (DGARD)".

2.2. The Claimant further clarifies that "(...) was subject to an inspection action, carried out by the Directorate-General for Customs, which covered the financial years 2014 to 2017, having it been found that allegedly 58,860.54 litres of coloured and marked diesel were commercialised without customer identification in the invoice; that allegedly 32,072.53 litres were commercialised to non-holders of the electronic card of GCM and further that 373.97 litres of GCM were commercialised without the respective registration in the electronic control system (TPA/POS)".

2.3. The Claimant "(...) not agreeing with the content of the Final Report challenged its conclusions, as well as and consequently the assessments resulting therefrom (...)" in the matter of Excise Tax and Road Sector Contribution (case no. 73/2018-T), which is why it understands that until "(...) an arbitral decision is pronounced (...)" in that case "(...) this case should be suspended, since it can be proven (...) that (...) the tax assessments - were not correctly determined, the amount of VAT allegedly missing will also have to be corrected", since "(...) there is no legal basis whatsoever for the collection of VAT from the Claimant".

2.4. The Claimant states that it intends "(...) the Tax Authority, following the tax inspection of the Claimant, to proceed with additional VAT assessments for the financial years 2014 to 2017", intending "(...) to apply the normal rate of 23% to the value of the Excise Tax on Petroleum and Energy Products and the Contribution for the Road Sector determined by the Anti-Fraud Customs Services Division (...)" .

2.5. The Claimant understands that "given the legal framework applicable to the present case there is no doubt that there was not at the date of the facts (as there is not today) in our legal order, a norm that, like what occurs in the Excise Tax matter, imposes in the value added tax field a consequence identical to that imposed in that tax".

2.6. In this context, the Claimant understands that "(...) in the first place, we must consider that the Code of Value Added Tax does not contain a regime similar to that of the Code of Excise Duties on Consumption, being characterized absolutely by the absence of any norm regulating the use of that product, contrary to that law, which restricts and regulates commercialisation to holders of a microchip card" and that "as for coloured marked diesel, the same has never been part of the Code of VAT limiting itself to insert this product in the list of products applicable to the intermediate rate".

2.7. Additionally, the Claimant argues that "(...) such regime was contained in Order no. 234/97, of 4 April, which established the obligation of assessment of Excise Tax and VAT, by the differences in rates applicable to the two types of diesel, with the Code of Excise Duties on Consumption incorporating in its article 93, number 5 of CIEC the regime that was contained in that Order, with the difference of having eliminated any reference to VAT".

And, having said Order been "(...) declared as suffering from organic unconstitutionality, both by the Plenary of the Supreme Administrative Court, and by the Constitutional Court (…)", "(...) between the period that elapsed between the publication and the revocation of Order no. 234/97, of 4 April, there never existed a legal regime that – with constitutional validity - would dispose on the regime of Excise Tax and VAT in cases of non-compliance with the rules for the sale of coloured marked diesel (…)", and "(...) such fact was, for purposes of Excise Tax, remedied with the entry into force of the State Budget of 2007 (…)" but "(...) such did not happen in the VAT field".

2.9. The Claimant further understands that "(...) the Excise Tax does not form part of the taxable base of VAT, not being subsumed in art. 16, number 5, paragraph a), since the taxable events are distinct, with the Excise Tax being upstream of VAT" whereby it understands being "(...) necessary to conclude that the solution provided for in Order no. 234/97, of 4 April for the value added tax and for the excise tax on petroleum and energy products is today provided only for the latter taxes".

Thus, for the Claimant, "the taxation of coloured marked diesel at a VAT rate different from that provided for in the law, as a consequence of irregular commercialisation of such product, lacks prior legal basis, in accordance with the fiscal reserve of law, pursuant to articles 165, number 1, paragraph i) and 103, number 2, of the Constitution of the Portuguese Republic", reiterating the Claimant that "in the present case that legal basis does not exist and even if it were understood that there is a gap here, the fiscal reserve of law prohibits analogical integration, so article 93, number 5 of CIEC cannot be applied in the VAT field".

"Moreover, the Tax Authority itself did not effect any change to the VAT rate included in the invoice issued by the claimant to its clients, maintaining here the rate of 13%, only applying the rate of 23% to the positive difference between the level of taxation of road diesel and the level of taxation applied to coloured marked diesel in the Excise Tax field".

The Claimant further states that "for purposes of Excise Tax the liability provided for in art. 93, number 5 of CIEC is applicable", "but such liability, for the reasons pointed out, does not, and cannot, reflect in the VAT rate", since "(...) although at this date the new wording of item 2.3 of List II attached to the Code of VAT is in force, such cannot immediately entail the application of the rate of 23% to coloured marked diesel commercialised by the Claimant".

The Claimant further reiterates that "the right to rate reduction should be maintained if the requirements for its attribution are satisfied – that is to say, acquisition of diesel by the holder of a microchip card – and if there is evidence that such requirements were respected, even if the formalities provided for in the law have not been complied with", which is why it understands that "being formalities ad probationem, the same can be replaced by other means of proof".

"Now, if such is true as to the application of CIEC, it must also be true as to the application of VAT, as the Tax Authority well knows that such tax is not due, and that the assessment of the same violates the principle of capacity to pay" since "if the GCM was sold to holders of the benefit and if through the analysis of the documents of DGADR and SIBS one arrives at the conclusion that it was indeed, how can the Tax Authority justify the assessment of VAT at the rate of 23%?"

And, the Claimant reiterates, "that coloured marked diesel does not cease to be so if some requirements in its sale are not complied with" since "the holder of the microchip card does not cease to be a beneficiary merely because the registration in the TPA/POS was not carried out at that precise moment or because, by oversight, the invoice was not issued with a Tax ID but only as a final consumer", "which is why the State cannot, and must not, profit from a 10% increase in VAT due to formalities that allegedly were not complied with by the Claimant".

In these terms, the Claimant concludes that "it should therefore be applied what is provided in RGIT and not the tax assessment that the Tax Authority knows is not due (...)" and that, as a consequence "(...) if the tax is not due, compensatory interest will also not be due, which is hereby already alleged".

The Claimant further clarifies that "(...) was notified of the VAT assessment statements and respective interest on arrears, referring to the periods 201412T, 201512T, 201612T and 201706T, from which results a total amount payable of EUR 9,131.19 (...)", but states that "(...) does not accept the said corrections, as they suffer, among other things, from the defect of illegality (...)".

The Claimant concludes the arbitral request requesting that "(...) the present request for constitution of the arbitral tribunal (...)" be "(...) considered to have merit, consequently annulling the tax acts, which is hereby requested, with the due legal consequences".

RESPONSE OF THE RESPONDENT

By Exception – on the value of the case

3.1. In this context, the Respondent states that "in the request for constitution of the arbitral tribunal the Claimant indicates that from the statements of VAT assessment and respective interest on arrears (…) results a total amount payable of 9,131.19€ and seems to suggest the existence of a divergence between the amount of the tax found to be outstanding in the course of the tax inspection referred to above and the amount that came to be assessed."

3.2. In this respect, the Respondent states that "(...) what results from the Final Inspection Report and the respective correction documents (DC) drawn up by the Tax Inspection (IT) of the Finance Directorate of ... (…) is the proposal for assessment of a total amount in VAT of 6,938.09€, attributable to the last quarter for the years 2014, 2015 and 2016 and to the second quarter for the year 2017 (…)".

3.3. The Respondent clarifies that "in conformity with the DCs drawn up by IT, the following tax corrections in VAT and interest on arrears were notified to the Claimant, for delay in the assessment of the amount of VAT due":

3.4. And, according to the Respondent, "it is this value of 7,514.19€ that results from the statements of VAT assessment and respective interest on arrears (…) and that is in conformity with the inspection report and the DCs drawn up by IT (…) that corresponds to the amount whose annulment is sought".

3.5. Thus, in this matter the Respondent concludes that "taking into account that the value of the case should correspond to the amount that is intended to be annulled and that based on the content of the notifications issued for payment of the tax, in the report of the inspection action and other attached documents, this amount is 7,514.19€, this should be the value considered attributable as the value of the case".

By challenge

3.6. In this context the Respondent states that "on 05/05/2017 the Northern Operations Division of the Anti-Fraud Customs Services Division (DON/DSAFA) initiated an inspection action (no. OI2017...) with A..., Lda., aiming, in the matter of Excise Tax on Petroleum and Energy Products (ISP), to verify compliance with the rules for commercialisation of coloured and marked diesel (GCM) at the Claimant's service station (…), in the period between 01/01/2014 and 05/05/2017" and that "in the course of that inspection (…) situations of irregular commercialisation of GCM were identified, embodied in: sales of GCM without the invoice that titles the sale transaction identifying the purchaser (name and/or tax identification number); sales of GCM to customers not holding a microchip card/beneficiary; and sales of GCM without registrations in the POS terminal in the electronic control system".

3.7. The Respondent understood that the sales of GCM identified were "carried out in violation of the provisions of number 5 of article 93 of the Code of Excise Duties on Consumption (CIEC), approved by Decree-Law no. 73/2010, of 21 June and of numbers 8, 5 and 6 of Order no. 361-A/2008, of 12 May" whereby "consequently, in the course of the inspection action no. OI2017..., a total amount of Excise Tax and Road Sector Contribution of 28,988.93 € was determined and proposed (…) for assessment, for non-compliance with the rules for commercialisation of GCM established in the Code of Excise Duties on Consumption (CIEC) and in the order relevant to the regulation of applicable norms".

3.8. The Respondent clarifies that "the now Claimant was notified to effect the payment of the Excise Tax and Road Sector Contribution owed (…) and having not effected payment within the due time, the fiscal enforcement proceeding no. ...2017..., was initiated on 06/12/2017, for purposes of coercive collection".

3.9. "The Claimant challenged that assessment of Excise Tax, with the case no. 73/2018-T proceeding before that tribunal, an arbitral decision of total lack of merit of the request having been pronounced on 26/11/2018".

3.10. "With respect to the VAT outstanding, DON/DSAFA forwarded the inspection report to the Finance Directorate of ..., for purposes of assessment of the tax owed" and "given the conclusions of the Report (…), the Tax Inspection Service of the Finance Directorate of ... initiated, on 28/02/2018, the internal inspection procedure relating to Service Orders nos. OI2018..., OI2018..., OI2018... and OI2018..., having determined that the normal VAT rate (…) should be applied to the transactions in question, and to include the Excise Tax and Road Sector Contribution values in the taxable base of VAT (…)".

3.11. "In that sense, from the internal analysis carried out by IT of the Finance Directorate, with respect to the irregular sales identified in the report of DON/DSAFA, titled in the list of invoices that was attached to the IT report, a lack of VAT assessment of the value of 6,938.09€ was determined".

3.12. The Respondent sustains said assessment on the basis that "GCM can only be supplied or sold to holders of properly licensed service stations who are holders of automatic payment terminals (…)", "GCM can only be sold at service stations to beneficiaries of an exemption or reduced rate of Excise Tax who are holders of microchip/electronic cards (…) through which all transactions of coloured marked diesel are registered in the computer system managed by the Interbank Services Company (SIBS)" and on the fact that "such electronic cards [have been] instituted for purposes of control of the allocation of GCM to the legally provided purposes".

3.13. Now, according to the Respondent "such sales are mandatorily registered in the computer system, through the TPA terminals, at the moment they occur", and "the registration in the computer system, through the TPA terminals, of each service carried out, does not dispense with the issuance of the respective invoice or equivalent document, issued in the name of/with identification of the holder of the respective microchip card".

3.14. The Respondent further understands that "the owner or the legal responsible for the operation of the authorized posts for the sale of GCM is responsible for the payment of the amount of tax resulting from the difference between the level of taxation applicable to road diesel and the rate applicable to GCM (direct and objective responsibility):

• In relation to the quantities they sell and that are not properly registered in the electronic control system,

• As well as in relation to the quantities for which the corresponding invoices are not issued in the name of the cardholder".

3.15. In this context, the Respondent argues that "the sale of 57,860.54 litres of GCM (…) without the invoice that titles the sale transaction identifying the purchaser (without name and/or tax identification number), violates the legal provision that flows clearly and unequivocally from number 5, in fine, of article 93 of CIEC, in the wording given by the Law State Budget of 2015, (…) with the consequences clearly specified in the law".

3.16. "Similarly, the invoiced sale of 32,072.53 litres of GCM to non-holders of microchip card/beneficiary for its use, constitutes violation of the provisions of number 5 of article 93 of CIEC and of article 5 of Order no. 361-A/2008, of 12 May and constitutes reason for exigibility of the tax (differential between level of taxation of GCM and of road diesel)".

3.17. Thus, the Respondent reiterates that "the sale of 373.97 litres of GCM, without the operator having proceeded to the POS registration of those quantities in the electronic control system, violates the provisions of number 5 of article 93 of CIEC and of articles 5 and 6 of Order no. 361-A/2008 and constitutes reason for exigibility of the Excise Tax".

3.18. "In the VAT field, with VAT overlaying the Excise Tax, the tax relief established for GCM also encompasses the application of the intermediate rate in VAT on the supply of this product", "from which it results that the application of the intermediate VAT rate to supplies of GCM presupposes that the same are carried out with observance of the legal provisions relating to the benefit of the reduced Excise Tax rate, as established in CIEC and complementary legislation".

3.19. "And in so far as the intermediate VAT rate can only be applied when the legally defined purposes are satisfied and the respective conditions for commercialisation of GCM, non-compliance with such norms grants the Tax Authority the faculty to proceed to the additional assessment of the tax, applying to the sale price the difference between the VAT rate that was applied (13%) and the normal (23%)".

3.20. In these terms, the Respondent does not agree with the arguments presented by the Claimant when the latter considers that the "(...) norm of liability of the owners of service stations for payment of Excise Tax and of the respective VAT, which came to be incorporated in number 5 of article 93 of CIEC (…) was not transposed into the CIVA".

3.21. Indeed, the Respondent understands that "with all due respect, such thesis does not deserve acceptance, nor finds any basis in the legislative evolution in the matter of the regime for commercialisation of GCM" since "there are no doubts in the sense that the additional assessments of tax, due to improper use of the intermediate rate set out in item 2.3 of List II attached to CIVA, find general tax legitimacy, in particular in CIVA, lacking additional legitimacy or the superposition of a specific norm of liability of VAT taxpayers linked to the commercialisation of fuel" given that "in reality, such tax correction is, not only legitimate, but mandatory (…)".

3.22. The Respondent further states that the Claimant alleges "(...) the existence of a gap and the impossibility of its integration by way of interpretation and invokes the application, in identical terms, to the present case, of the arbitral decisions pronounced in cases nos. 145/2012-T and 741/2015-T", a position that the Respondent does not accept since it argues that "(...) at the date of the facts analysed in the context of those cases, item 2.3 of List II attached to CIVA, in the wording given by Law no. 64-B/2011, of 30 December, established the taxation at the intermediate rate of 2.3 - Petroleum, diesel and diesel for heating, coloured and marked and fuel oil and respective mixtures, referring only to GCM, properly so called" and that "such wording of item 2.3 of List II attached to CIVA, would come to be changed by Law no. 82-B/2014, of 31 December, then coming to refer not only to GCM, but also to its conditions of commercialisation and to the legally defined purposes (…)".

3.23. In this context, the Respondent understands that "such legislative intervention had (…) as its purpose to clarify the scope of said item, evidencing the interpretative character of the amendment, in the sense of applying the intermediate rate only in situations where commercialisation respects the conditions and purposes legally and regulatorily defined, as well as by the prerogative of the Tax Authority to proceed to the due corrections of the tax in accordance with the general terms of CIVA".

3.24. Thus, the Respondent understands that "there is not (…) any gap or omission, since currently that norm subordinates the taxation at the intermediate VAT rate to the conditionality established in article 93 of CIEC and other rules of commercialisation to which GCM is subject, transposing to the field of that tax the rules specifically applicable in the field of excise duties on consumption".

3.25. Additionally, the Respondent reiterates that "in a systematic and rational interpretation of the legal order, item 2.3 of List II cannot fail to be interpreted in the sense that GCM capable of being commercialised at the intermediate rate is, exclusively, that in which such commercialisation respected the conditions and purposes established in the law and in the orders that govern the matter".

3.26. Lastly, the Respondent further states that "as an element of interpretation of item 2.3 of List II attached to CIVA, it must be borne in mind that VAT is a tax harmonised at community level and its common regime is established through acts of community source, in particular directives (…)", "(...) of harmonization of VAT, in obedience to the principle of primacy of community law over national law and the principle of interpretation conforming national law to community law, under penalty of violation or non-compliance with community law by the Portuguese State", concluding that "(...) it does not seem that it would be admissible to any Member State the taxation at a reduced rate of road diesel, per se".

3.27. As for the question of the Claimant defending that the Excise Tax that was assessed to it after the fact, as well as the Road Sector Contribution assessed together should not be included in the taxable value of VAT, since they do not imply any alteration to the value of the consideration obtained by the purchaser of that product, the Respondent understands that "(...) to admit the non-inclusion of the additionally assessed Excise Tax and Road Sector Contribution, following the detection of irregularities in the commercialisation of GCM, in the taxable value of VAT, would correspond to favoring tax fraud and evasion and would translate itself into a loss of VAT revenue for the State that finds no justification".

3.28. In these terms, the Respondent concludes its Response to the effect of arguing that should "(...) the impugned assessment be maintained in the legal order".

CASE MANAGEMENT DECISION

4.1. The request for arbitral ruling is timely, because submitted within the period provided for in paragraph a), of number 1, of article 10 of RJAT.

4.2. The Tribunal is materially competent and is regularly constituted, pursuant to article 2, number 1, paragraph a), articles 5 and 6, all of RJAT.

4.3. The parties have capacity and jurisdiction to sue, are legitimately pursuing the request for arbitral ruling and are duly represented, pursuant to the provisions of articles 4 and 10 of RJAT and article 1 of Order no. 112-A/2011, of 22 March.

4.4. No procedural nullities were identified.

4.5. The Respondent raised the exception regarding the value of the case which will be considered at the end of this decision.

4.6. There are no other exceptions to be decided.

MATERIAL FACTS

Of the facts found to be proven

5.1. The Claimant is a limited partnership company, governed by the general regime in respect of Corporate Income Tax (IRC) and the normal quarterly regime in VAT, which engages in the retail sale of fuels for motor vehicles, in a specialized establishment (CAE 47300).

5.2. An inspection action (OI 2017...) was carried out on 05/05/2017, by the Northern Operations Division of the Anti-Fraud Customs Services Division (DON/DSAFA), the objective of which was to determine whether the commercialisation of coloured and marked diesel (GCM) at the Claimant's service station (identified as post of ... – POS ...), in the period between 01/01/2014 and 05/05/2017, was carried out in accordance with the provisions of number 5 of article 93 of the Code of Excise Duties on Consumption (CIEC), pursuant to which such product can only be acquired by holders of electronic card instituted for purposes of control of its use.

5.3. Following said inspection carried out by DON/DSAFA, the following irregularities in the sale of GCM were identified:

5.3.1. Sales without customer identification in the invoice, totalling 57,860.64 litres;

5.3.2. Sales to customers not holding a microchip card, totalling 32,072.53 litres; and,

5.3.3. Sales without the respective registration in the electronic control system (TPA/POS), totalling 373.97 litres.

5.4. As a result of the sales of GCM identified above, a debt of Excise Tax and Road Sector Contribution was determined, totalling EUR 28,988.93, with the Respondent understanding that there was also a lack of VAT assessment.

5.5. In compliance with service orders nos. OI2018..., OI2018..., OI2018... and OI2018..., issued by the Tax Inspection Services (SIT) of the Finance Directorate of ... on 28-02-2018, with a ruling of the same date, a partial-scope inspection action was carried out at the Claimant's service station, relating to the financial years 2014, 2015, 2016 and 2017, with the objective of determining whether the commercialisation of GCM at said service station of the Claimant was carried out in accordance with the provisions of number 5 of article 93 of the Code of Excise Duties, which provides that such product can only be acquired by holders of electronic card instituted for purposes of control of its use.

5.6. The inspection action referred to in the previous point commenced on 28/02/2018 and terminated on 02/03/2018.

5.7. As a result of said inspection, the SIT proposed that VAT be assessed in the total amount of EUR 6,938.09, resulting from the application of a rate of 10% (resulting from the difference between the VAT rate applied – 13% and the normal VAT rate – 23%) on the quantities of GCM in irregular situation (see point 5.3., above) with the VAT differences being attributed to the last quarter, for the years 2014, 2015 and 2016 and to the second quarter for the year 2017 (amounts expressed in Euros):

5.8. The Claimant challenged the assessment of Excise Tax before CAAD (case no. 73/2018-T), an arbitral decision of total lack of merit of the request having been pronounced on 26/11/2018.[4]

5.9. The Claimant was notified, through Registered Letter no..., of 06/03/2018, of the Draft Corrections to the Inspection Report (RIT) and to, within 15 days, exercise its right of hearing regarding said Draft Corrections in VAT matters.

5.10. The Claimant exercised its right of hearing in writing on 22/03/2018 (case no. 2018...), therein stating that it disagreed with the content of the report produced by the Customs services, challenging, as a consequence, both its conclusions and the assessments resulting therefrom, further arguing that the legislation provides for no additional VAT assessment.

5.11. The SIT notified the Claimant of the Final Report of Conclusions, through Letter no. ..., of 12/04/2018, pursuant to which they reiterated the rationale described in Chapter III of the Draft Report, understanding that it is "(...) unequivocal that the rate of 13% (…) can only be applied, in supplies of petroleum and coloured marked diesel, when commercialised in the conditions and for the purposes legally defined (…)", and that "(...) when commercialisation is not carried out in such conditions, it does not comply with what is provided for in said item, nor in any other item that is part of Lists I and II attached to the VAT code", concluding that "(...) the VAT rate to apply is that provided for in paragraph c) of number 1 of article 18 of CIVA (23%)", thus maintaining the content of the project of corrections and, consequently, the respective VAT assessments.

5.12. The Claimant was notified of the following VAT correction documents relating to the corrections made by SIT in the respective periodic statements as a consequence of the conclusions derived from the inspection action carried out (amounts expressed in EUR):

5.13. The Claimant was notified of the following VAT assessments and interest on arrears (amounts expressed in EUR):

5.14. In the assessment relating to the period 201412T (no. 2018...) only the amount of EUR 2,668.89 should be considered since only this amount concerns the correction that resulted from the RIT and that is the object of analysis in this arbitral request, in conformity with point 5.12., above.

5.15. The total amount of VAT and interest on arrears resulting from the corrections made by SIT amounts to EUR 7,514.19 and will be this the value of the economic utility of the arbitral request (see final part of this decision).

5.16. The Claimant did not effect payment of the tax assessments and interest identified in points 5.13. and 5.14., above.

5.17. No other facts capable of affecting the decision on the merits of the request were proven.

Rationale regarding the material facts

5.18. As regards the proven material facts, the conviction of the Arbitral Tribunal was based, beyond the free assessment of the positions assumed by the Parties (on the matter of fact), on the content of the documents attached, by both Parties, to the file, as well as on the analysis of the administrative file remitted by the Respondent.

Of the facts not proven

• The Claimant did not present proof in order to establish that the sales of GCM identified in the RIT were carried out in the conditions and for the purposes legally defined, in order to permit the irregularities identified in the RIT to be set aside, respecting said sales of GCM:

  • Without customer identification in the invoice (totalling 57,860.64 litres);
  • To customers not holding a microchip card (totalling 32,072.53 litres); and,
  • Without the respective registration in the electronic control system (TPA/POS) (totalling 373.97 litres).

• No adequate clarification was obtained from the Parties in order to relate the additional amount referred to in the VAT assessment no. 2018..., of 19-04-2018 (relating to the period 201412T), in the amount of EUR 1,617.00 with the corrections underlying the arbitral request, whereby this part of said VAT assessment will not be considered for purposes of the arbitral request (see point 5.14.).

• No other facts were found to be not proven with relevance for the arbitral decision.

LEGAL ISSUES

6.1. In the context of the arbitral process under analysis, the central question regarding which the Claimant and Respondent present absolutely opposed understandings consists in ascertaining whether the acts of VAT assessment and interest on arrears, the object of the arbitral request, suffer or do not suffer from illegality.

6.2. In this matter, it should initially be noted that at the genesis of the VAT assessments, the object of the arbitral request, is an inspection action carried out on the Claimant, in the context of Excise Tax and Road Sector Contribution, from which resulted assessments of tax and interest on arrears in the total global amount of EUR 30,450.94.

6.3. The Judgment of the Supreme Administrative Court no. 000500705, of 05-12-2006, states that "the challenge to the Excise Tax assessment is a prejudicial cause in relation to the challenge to the VAT assessment when the taxable base of this assessment is constituted by the sum of the amounts of the invoices increased by the value of the respective Excise Tax, being necessary to conclude that the annulment of the Excise Tax assessment also and necessarily implies the annulment of the VAT assessment that was effected in relation to that taxable base".

6.4. In this context, it should be noted that the Excise Tax and Road Sector Contribution assessments were the object of an autonomous arbitral request (Case 73/2018-T, of 24-11-2018), pursuant to which it was decided to conclude "(...) in favour of the legality of the assessment now challenged (...)" having regard to the arguments which, in summary, are here transcribed:

"(...)

1. For relevant extrafiscal reasons, fuels may be subject to supply at a reduced rate. This is the case of diesel intended for uses expressly provided for in article 93 of the Code of Excise Duties.

2. In order to ensure the use of this fuel only for the purposes that justify the grant of the tax benefit, and to prevent situations of fraud and evasion, the diesel supplied to users at a reduced Excise Tax rate has a specific colour and a specific fiscal mark.

3. The use of coloured and marked diesel is, pursuant to number 3 of the article above referred to, conditioned to certain economic activities (…).

4. Besides the colour and marking and limitations as to its use, the commercialisation of the product in question is subordinated to a set of conditionalities established, not only in said article 93 of CIEC, but also in Order no. 117-A/2008 of 08/02 and, in particular in Order no. 361-A/2008, of 12/05.

5. Among the conditionalities established in said Order 361-A/2008, the following stand out, for the relevance they have in the situation under analysis:

(...)

1. Coloured and marked diesel is a product of conditional sale, whose availability in the national market can only be carried out by oil companies that have concluded with the State, represented by the Directorate-General for Agriculture and Rural Development (DGADR), a contract for that purpose (…).

2. Coloured and marked diesel can only be supplied or sold to holders of properly licensed service stations who are holders of terminals (…) (POS).

(…)

1. Coloured and marked diesel can only be sold at service stations to beneficiaries of an exemption or reduced Excise Tax rate who are holders of microchip cards issued for the purpose by DGADR, through which all transactions of coloured and marked diesel are registered in the computer system managed by the Interbank Services Company (SIBS).

2. The sales referred to in the previous number are mandatorily registered in the POS terminals at the moment they occur.

(...)

1. The registration in the computer system, through the POS terminals, of each service carried out, does not dispense with the issuance of the respective invoice or equivalent document, issued in the name of the holder of the respective microchip card.

(...)

1. On the other hand, and in accordance with number 5 of article 93 of the Code of Excise Duties, in the wording in force at the time of the occurrence of the facts referred to in the present case (…), coloured marked diesel can only be acquired by holders of the electronic card instituted for purposes of control of its allocation to the destinations referred to in number 3, being responsible for the payment of the amount of tax resulting from the difference between the level of taxation applicable to road diesel and the rate applicable to coloured marked diesel, the owner or the legal responsible for the operation of the authorized posts for sale to the public, in relation to quantities they sell and that are not properly registered in the electronic control system, as well as in relation to quantities for which the corresponding invoices are not issued in the name of the cardholder.

2. In the situation under analysis, it is verified that the Claimant (…) sold (…) coloured marked diesel to holders of electronic card and issued the corresponding invoices but without the identification of the purchaser appearing in the same, as required by law, instead referring only to being a final consumer.

3. This irregularity in the commercialisation of the product excludes the tax benefit provided for in number 1 of article 93 of the Code of Excise Duties and determines the application of taxation at the normal level, defining as the passive subject of the tax obligation the owner or the legal responsible for the operation of the service station that supplied the coloured marked diesel in violation of the applicable legal rules (cf. CIEC, articles 93, number 5 and 4, number 2, paragraph h).

4. The obligation that falls on the owner or legal responsible for the operation of a fuel service station that proceeds to the retail sale of coloured marked diesel, as regards the issuance of an invoice in the name of the holder of the card results directly from the law and cannot raise any doubts. In the present case, the passive subject did not observe a legal requirement that is clear, which he had the obligation to know and whose consequences are clearly specified in the law.

5. In the same legal norm is typified, with great clarity, the liability of the owner or legal responsible for the operation of fuel posts regarding quantities of GCM that they sell and that are not properly registered in the electronic control system, as well as those that are carried out to consumers who are not holders of the card of beneficiaries" (underlined by us and by the signatory of the partially transcribed arbitral decision).

6.5. Having the Excise Tax and Road Sector Contribution assessments been considered legal, in the context of case no. 73/2018-T, given the norms in force at the date of the facts (although this decision was subject to appeal to the Constitutional Court (according to information from the Claimant in its submissions), having surpassed the controversy generated around the provisions of number 7 of Order no. 234/97, of 4 April, the organic unconstitutionality of which was decreed by Judgment no. 176/2010 of the Constitutional Court, pronounced by the Plenary, for violation of articles 103, number 2 and 165, number 1, paragraph a) of the Constitution (guidance that came to be followed in Judgments nos. 268/2010, 431/2011 and 391/2013), it is now necessary to analyse the legality of the VAT assessments and interest on arrears, the object of this arbitral request.

6.6. In this matter, the Claimant argues that "(...) the Code of Value Added Tax does not contain a regime similar to that of the Code of Excise Duties on Consumption, being characterized absolutely by the absence of any norm regulating the use of that product, contrary to that law, which restricts and regulates commercialisation to holders of a microchip card", stating that "as for coloured marked diesel, the same has never been part of the VAT Code limiting itself to insert this product in the list of products applicable to the intermediate rate".

6.7. In these terms, the Claimant understands that "(...) the taxation of coloured marked diesel at a VAT rate different from that provided for in the law, as a consequence of irregular commercialisation of such product, lacks prior legal basis, in accordance with the fiscal reserve of law, pursuant to articles 165, number 1, paragraph i) and 103, number 2, of the Constitution of the Portuguese Republic", reiterating that "(...) it must be observed that the diesel in question did not cease to be marked and coloured and came to be considered road diesel by the circumstance of allegedly not having complied with the formalities of Order no. 361-A/2008, of 12 May", since the Claimant understands that although "(...) for purposes of Excise Tax [be] applicable the liability provided for in art. 93, number 5 of CIEC", "(...) such liability (…) does not, and cannot, reflect in the VAT rate" (underlined by us).[5]

6.8. Thus, the Claimant argues that "(...) although at this date the new wording of item 2.3 of List II attached to the Code of VAT is in force, such cannot immediately entail the application of the rate of 23% to coloured marked diesel commercialised by the Claimant", since the Claimant understands that "(...) the State cannot, and must not, profit from a 10% increase in VAT due to formalities allegedly not complied with by the Claimant".[6]

6.9. To the contrary, the Respondent assumes and defends a position in total opposition to that assumed by the Claimant, since it understands that "given what is described in List II of the table attached to CIVA, (…), GCM is taxed in VAT at the rate of 13% (…)" when "commercialised in the conditions and for the purposes legally defined (…)", "from which it results that the application of the intermediate VAT rate to supplies of GCM presupposes that the same are carried out with observance of the legal provisions relating to the benefit of the reduced Excise Tax rate, as established in CIEC and complementary legislation" (underlined by us).

6.10. Indeed, the Respondent understands that "in so far as the intermediate VAT rate can only be applied when the legally defined purposes are satisfied and the respective conditions for commercialisation of GCM, non-compliance with such norms grants the Tax Authority the faculty to proceed to the additional assessment of the tax, applying to the sale price the difference between the VAT rate that was applied (13%) and the normal (23%)" (underlined by us).

6.11. Thus, the Respondent does not agree with the Claimant's position when the latter "invokes (…) the non-existence of prior legal basis for taxation in VAT at the normal rate of supplies of diesel, attributing responsibility for its payment, on a par with Excise Tax, to the holder of the service station, when the conditions for commercialisation provided for in the legislation relating to GCM are not complied with, namely, when invoices are not issued with identification of the purchaser (name and/or tax ID), when GCM is sold to customers not holding a microchip card (of beneficiaries) or when the refueling is not registered through the reading of the microchip card in the TPA/POS terminals" since the Respondent understands that "(...) such thesis does not deserve acceptance, nor finds any basis in the legislative evolution in the matter of the regime for commercialisation of GCM".

6.12. Additionally, the Respondent understands that "it would not even make sense for the legislator to provide, in CIVA, a special norm (…)" since "in the VAT field the special legal provision regarding tax liability of fuel resellers, holders of service stations, for tax resulting from the difference in taxation between road diesel and coloured marked diesel, became unnecessary, since (…) such liability results, since the revocation of Decree-Law no. 521/85, directly from the general norms of objective and subjective incidence provided for in CIVA, as well as the respective exigibility of the Tax", concluding that "such tax correction is, not only legitimate, but mandatory (…)".

6.13. Lastly, the Respondent further states that "the Claimant alleges the existence of a gap and the impossibility of its integration by way of interpretation and invokes the application, in identical terms, to the present case, of the arbitral decisions pronounced in cases nos. 145/2012-T and 741/2015-T" but, in this context, argues the Respondent that "(...) at the date of the facts analysed in the context of those cases, item 2.3 of List II attached to CIVA, in the wording given by Law no. 64-B/2011, of 30 December, established the taxation at the intermediate rate of "(...) Petroleum, diesel and diesel for heating, coloured and marked and fuel oil and respective mixtures", referring only to GCM, properly so called".

6.14. However, it reiterates, "such wording of item 2.3 of List II attached to CIVA, would come to be changed by Law no. 82-B/2014, of 31 December, then coming to refer not only to GCM, but also to its conditions of commercialisation and to the purposes legally defined (…)".

6.15. The Respondent understands that "such legislative intervention had, precisely, the purpose of clarifying the scope of said item, evidencing the interpretative character of the amendment, in the sense of applying the intermediate rate only in situations where commercialisation respects the conditions and purposes legally and regulatorily defined, as well as by the prerogative of the Tax Authority to proceed to the due corrections of the tax in accordance with the general terms of CIVA".

6.16. Thus, also in this context, the Respondent concludes that "there is not, thus, any gap or omission, since currently that norm subordinates the taxation at the intermediate VAT rate to the conditionality established in article 93 of CIEC and other rules of commercialisation to which GCM is subject, transposing to the field of that tax the rules specifically applicable in the field of excise duties on consumption".

6.17. In these terms, having summarily presented the positions assumed by the Parties, it is important to decide whether reason lies with:

6.17.1. The Claimant when it states that "(...) the liability provided for in art. 93, number 5 of CIEC", "(...) does not, and cannot, reflect in the VAT rate", concluding that "(...) although at this date the new wording of item 2.3 of List II attached to the Code of VAT is in force, such cannot immediately entail the application of the rate of 23% to coloured marked diesel commercialised by the Claimant", "(...) due to formalities allegedly not complied with by the Claimant" or if, on the contrary,

6.17.2. Reason lies with the Respondent when it argues that "(...) the application of the intermediate VAT rate to supplies of GCM presupposes that the same are carried out with observance of the legal provisions relating to the benefit of the reduced Excise Tax rate, as established in CIEC and complementary legislation" whereby "(...) the intermediate VAT rate can only be applied when the legally defined purposes are satisfied and the respective conditions for commercialisation of GCM (…)", and that "(...) non-compliance with such norms grants the Tax Authority the faculty to proceed to the additional assessment of the tax, applying to the sale price the difference between the VAT rate that was applied (13%) and the normal (23%)".

General VAT regime after 1 January 2015

6.18. Now, the VAT Code refers in its article 16 (Taxable value in internal operations), number 5, paragraph a) (in the wording in force at the date of the facts) that "the taxable value of supplies of goods and supplies of services subject to tax, includes taxes, duties, fees and other charges, with the exception of value added tax itself"

6.19. On the other hand, article 18 of the same Code (Tax rates), in the wording at the date of the facts, establishes in its number 1 that "the tax rates are as follows:

a) For (...) supplies of goods (…) contained in List I attached to this law, the rate of 5%;

b) For (...) supplies of goods contained in List II attached to this law, the rate of 13%;

c) For the remaining (...) supplies of goods (…), the rate of 23%" (bold text by us).

6.20. Now, List II attached to the VAT Code (in the wording given by Law no. 82-B/2014, of 31 December, in force from 1 January 2015) provides that, among other goods listed therein, are "Goods and services subject to the intermediate rate", the "petroleum and diesel, coloured and marked, commercialised in the conditions and for the purposes legally defined and fuel oil and respective mixtures" (2.3.) (underlined by us).

6.21. In this context, in accordance with the provisions of article 93 (Reduced rates) of the Code of Excise Duties on Consumption (CIEC), in the wording in force at the date of the facts:

"1 — Diesel, heating diesel and petroleum coloured and marked with the additives defined by order of the member of the Government responsible for the finances area are taxed with reduced rates.

2 — Coloured and marked petroleum can only be used for heating, lighting and in the uses provided for in number 3.

3 — Coloured and marked diesel can only be consumed by:

a) Stationary motors used for irrigation;

b) Vessels referred to in paragraphs c) and h) of number 1 of article 89;

c) Agricultural tractors, combine harvesters, motorised tillers, hand tillers, motorised harvesters, potato harvesters with traction, pea harvesters, forage harvesters for silage, tomato harvesters, swathes-conditioners, grape harvesters, trunk shakers for harvesting olives and other fruits, as well as other equipment, including that used for aquaculture activities and for fishing with seine nets, approved by order of the members of the Government responsible for the areas of finances, agriculture and the sea;

d) Passenger and goods transport vehicles on railways;

e) Fixed motors;

f) Autonomous refrigeration motors, installed in heavy goods transport vehicles for perishable goods, powered by separate fuel tanks, and which have ATP (Perishable Transport Agreement) certification, pursuant to terms to be defined in order of the members of the Government responsible for the areas of finances, agriculture and transport.

4 — Heating diesel can only be used as fuel for industrial, commercial or domestic heating.

5 — Coloured and marked diesel can only be acquired by holders of the electronic card instituted for purposes of control of its allocation to the destinations referred to in number 3, being responsible for the payment of the amount of tax resulting from the difference between the level of taxation applicable to road diesel and the rate applicable to coloured marked diesel, the owner or the legal responsible for the operation of the authorized posts for sale to the public, in relation to quantities they sell and that are not properly registered in the electronic control system, in relation to quantities for which the corresponding invoices are not issued in the name of the cardholder" (wording given by Law no. 82-B/2014, of 31 December) (bold and underlined text by us).

6.22. Recall also that the rules for commercialisation of GCM are provided for in Order no. 361-A/2008 of 12 May, pursuant to which it is stated that:

"1. This order establishes the rules for commercialisation of coloured marked diesel and the respective control mechanisms, with a view to the proper allocation of the product to the destinations that benefit from exemption or application of reduced rates of the tax on petroleum and energy products (Excise Tax), pursuant to the provisions of the Code of Excise Duties on Consumption, approved by Decree-Law no. 566/99, of 22 December, abbreviated as CIEC.

1. Coloured marked diesel is a product of conditional sale, the availability of which in the national market can only be made by oil companies that have concluded with the State, represented by the Directorate-General for Agriculture and Rural Development (DGADR), a contract for that purpose, in which they undertake to make available the retail sale of coloured marked diesel in the proportion of at least one service station for every 600,000 litres sold.

2. Coloured marked diesel can only be supplied or sold to holders of properly licensed service stations who are holders of point of sale (POS) terminals.

(…)

1. Coloured marked diesel can only be sold at service stations to beneficiaries of an exemption or reduced Excise Tax rate who are holders of microchip cards issued for the purpose by DGADR, through which all transactions of coloured marked diesel are registered in the computer system managed by the Interbank Services Company (SIBS).

2. The sales referred to in the previous number are mandatorily registered in the POS terminals at the moment they occur.

(…)" (underlined by us).

6.23. Now, from the combined analysis of all the diplomas referred to above, it results that, for VAT purposes, and from 1 January 2015, GCM that is not commercialised in the conditions and for the purposes legally defined will no longer be, for purposes of that tax, subject to the intermediate rate, coming instead to be subject to the normal rate, with the owner or the legal responsible for the operation of the authorized post for retail sale being responsible for the payment of the amount of tax resulting from the difference between the level of taxation applicable to road diesel (23%) and the rate applicable to coloured marked diesel (13%), in relation to quantities sold that have not been properly registered in the electronic control system, in relation to quantities for which the corresponding invoices are not issued in the name of the holder of the microchip card.

6.24. Indeed, contrary to the scenarios underlying the arbitral decisions nos. 145/2012-T and 741/2015-T, cited by the Claimant (the first concerning a request for annulment of additional VAT assessments and interest on arrears concerning 2009 and 2010 and the second a request for annulment of additional VAT assessments concerning 2013), from 1 January 2015 it is properly provided, in the VAT Code (item 2.3