Summary
Full Decision
ARBITRAL DECISION
The Arbitrators Carlos Cadilha (President Arbitrator), Marisa Almeida Araújo and Isaque Marcos Ramos (Assistant Arbitrators), designated by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree as follows:
I – Report
1. A... - MANAGEMENT OF OPEN REAL ESTATE INVESTMENT FUNDS, S.A., with tax identification number..., with registered office at...—...—..., ...-..., ..., management company and representative of the OPEN REAL ESTATE INVESTMENT FUND B..., with tax identification number..., with registered office at the same location, hereby requests the constitution of an arbitral tribunal, pursuant to the provisions of articles 2, no. 1, paragraph a), and 10 of Decree-Law no. 10/2011, of 20 January, to assess the legality of the tax acts relating to the additional assessment of VAT and the assessment of compensatory interest, in the total amount of €111,371.46, as well as the act of deemed rejection of the administrative review filed against these assessment acts, further requesting the condemnation of the Tax and Customs Authority to pay indemnity interest.
The request is based on the following grounds.
The Requestor is an open real estate investment fund which, in the scope of its activity, purchases, sells and leases real estate, holding, for that purpose, CAE numbers 68100 and 68200.
On 27 October 2005, it delivered to the Tax Authority a declaration of commencement of activity in which it declared its intention to register as a mixed taxable person for VAT purposes, taking into account that, in the scope of its current activity, it simultaneously performs operations that confer the right to VAT deduction and operations that do not confer that right, such as the operation of shopping centres, parking facilities and management of real estate with and without waiver of the VAT exemption.
However, the Tax Authority classified the Fund under the exemption regime provided for in article 9 of the VAT Code, by completing Field 5 of Table 10 of the declaration relating to supplies of goods and/or services that are exempt and do not confer the right to deduction.
In 2017, following the opening of an inspection procedure, the Tax Authority proceeded with the ex officio alteration of the registration, with effect from 1 January 2013, including the Requestor in the normal VAT regime.
In the Tax Inspection Report drawn up in the course of the same inspection action, it was concluded that the following corrections should be made: (a) assessment of VAT on the acquisition of construction services, in the amount of €79,643.57, due to the failure to apply the reverse charge rule to these operations; (b) deduction of VAT on the acquisition of construction services, in the amount of €10,080.41, also on the basis of failure to apply the reverse charge rule; (c) VAT adjustment in violation of article 78, no. 7 of the VAT Code, in the amount of €16,892.87.
With regard to the assessment of VAT on the acquisition of construction services, the Tax Authority argued that the Fund was registered as an exempt taxable person when the correct classification would be as a taxable person under the normal VAT regime, and therefore the reverse charge rule referred to in article 2, no. 1, paragraph j) of the VAT Code would apply to it, provided that we are dealing with the acquisition of construction services whose acquirer is a VAT taxable person in Portugal and performs operations that confer the right to deduction.
Concluding that it was not the responsibility of the service providers to assess the VAT, but that of the Fund as the acquirer of construction services, the fact that the tax was improperly assessed by the suppliers not preventing the obligation, given that those entities may obtain a refund of the tax.
The Requestor maintains, however, that its tax registration situation regarding the VAT regime is not its responsibility but solely due to the incorrect classification by the tax authorities in the exemption regime, so the Requestor only failed to self-assess the tax on construction services due to an error exclusively attributable to the Tax Authority.
And thus, the additional assessment with the stated grounds violates the fundamental principles of legal certainty and protection of legitimate expectations, as well as the principles of proportionality, justice and good faith referred to in articles 55 of the LGT and 46 of the CPPT, constitutionally enshrined in articles 2 and 266 of the Constitution.
Furthermore, there is an illegality due to double collection, in violation of article 205 of the CPPT, since the tax assessed and paid by the construction service providers becomes equally enforceable against the Fund, with not only the identity of the nature of the tax but also the temporal coincidence as to the period of taxation being verified.
With regard to the deduction of VAT on the acquisition of construction services, the Tax Authority refused the right to deduction on the grounds that the VAT was improperly assessed by the construction service providers, the reverse charge rule not having been applied, so the requirements for the application of the right to deduction referred to in article 19, no. 1, paragraph c) of the VAT Code are not met.
The Requestor argues that the interpretation adopted by the Tax Authority violates the principle of neutrality of this tax which, in the context of national legislation, results from the provision in paragraph a) of no. 1 of article 20 of the VAT Code, according to which taxable persons may deduct the tax that has been charged on goods or services acquired, imported or used by them for the purpose of carrying out VAT-taxable operations. Concluding that it appears to be disproportionate and contrary to the common VAT system to limit the right to deduct the tax incurred by the Fund in the acquisition of resources for the performance of its taxable operations, even though the assessment of VAT on these operations has, due to an excusable error, not followed the reverse charge regime.
The Requestor further considers it unlawful that the adjustment of VAT relating to bad debts is not recognised due to failure to comply with all the requirements mentioned in article 78 of the VAT Code, since it has provided proof of the declaration of insolvency of the debtor company, with a judgment having become final and binding, and that the acquirer was notified of the correction or that it was reimbursed for the tax.
The Tax Authority, in its response, argues that although the Requestor assumes that it is a mixed taxable person, simultaneously performing operations that confer the right to VAT deduction and operations that do not confer that right and proceeds to assess tax on operations subject to VAT taxation, it invokes an excusable error by the failure to assess the tax on the acquisition of construction services in light of its registration status as an exempt taxable person.
The authorities are not prevented from proceeding with the ex officio correction of the contributor's tax situation and, faced with the acquisition of construction services, cannot fail to apply the anti-abuse rule provided for in article 2, no. 1, paragraph j) of the VAT Code.
On the other hand, in this circumstance, there is no double collection since this situation could only occur if payment of the tax were owed by both the service provider and the acquirer, and the payment made, albeit improperly, may subsequently be reimbursed.
With regard to the alleged deduction of VAT on the acquisition of construction services, the Tax Authority argues that the deduction corresponds to the VAT improperly assessed by the construction service providers, in violation of no. 8 of article 19 of the VAT Code, and deduction would only be allowed if the Requestor had self-assessed the VAT on these operations, in application of the reverse charge rule, as provided for in article 19, no. 8 of the VAT Code.
As to the non-adjustment of VAT for bad debts, the Tax Authority argues that the certificate of finality of the judicial decision of insolvency is dated 16 August 2017, being subsequent to the date of completion of the procedure and of the tax adjustments and that the document intended to notify the acquirer of the services is not dated nor is it accompanied by proof of sending and, in any event, by 2017 the four-year period for exercising the right of adjustment had already expired.
2. Following the proceedings, the meeting referred to in article 18 of the RJAT was waived and the continuation of the proceedings was ordered for successive pleadings.
The Requestor analysed the factual matters in view of establishing the facts to be taken as admitted and as to the applicable law reiterated its previous positions.
The Tax Authority did not file a counter-reply.
3. The request for the constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority in accordance with the applicable regulations.
Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.
The parties were duly and timely notified of this designation and did not express any intention to refuse it, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.
Thus, in accordance with the provision in paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 7 November 2018.
The arbitral tribunal was properly constituted and is materially competent in accordance with the provisions of articles 2, no. 1, paragraph a) and 30, no. 1 of Decree-Law no. 10/2011 of 20 January.
The parties have legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2 of the same decree-law and 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings are free from nullities and no exceptions have been raised.
It is incumbent upon us to assess and decide.
II - Reasoning
Findings of Fact
4. The facts relevant to the decision of the case which may be taken as admitted are as follows.
A) The Fund managed and administered by the Requestor is an open real estate investment fund which, in the scope of its activity, purchases, sells and leases real estate, holding, for that purpose, CAE numbers 68100 and 68200;
B) On 27 October 2005, the Fund delivered to the Tax Authority a Declaration of Commencement of Activity in which it declared its intention to register as a mixed taxable person for VAT purposes, taking into account that, in the scope of its current activity, it simultaneously performs operations that confer the right to VAT deduction and operations that do not confer that right, such as the operation of shopping centres, parking facilities and management of real estate with and without waiver of the VAT exemption;
C) The Tax Authority classified the Fund under the exemption regime provided for in article 9 of the VAT Code;
D) The Requestor was registered under the regime provided for in article 9 of the VAT Code from 20 November 2002;
E) In the course of its activity, the Fund simultaneously performs operations subject to tax that confer the right to deduction and operations exempt from tax that do not confer the right to deduction;
F) The Requestor was subject to a duly accredited external inspection action pursuant to Service Order no. 2016..., commencing on 20 November 2016, aimed at analysing the particularities of the activity carried out with reference to the year 2015;
G) In the course of that inspection action, the Fund was notified of the Draft Tax Inspection Report, dated 17 June 2017, in relation to which it exercised the right to be heard on the adjustments proposed by the Tax Authority;
H) On 1 August 2017, the Fund was notified of the Tax Inspection Report which maintained the previous understanding, concluding that the following adjustments should be made, in the total amount of €108,623.37:
a) VAT not assessed on the acquisition of construction services, in the amount of €79,643.57, due to the failure to apply the reverse charge rule to these operations;
b) VAT improperly deducted on the acquisition of construction services, in the amount of €10,080.41, also on the basis of failure to apply the reverse charge rule for the assessment of VAT in these operations;
c) VAT adjusted, relating to bad debts, with failure to comply with no. 7 of article 78 of the VAT Code, in the amount of €16,892.87;
I) With regard to the classification of the taxable person's operations for VAT purposes concerning construction services and the assessment of VAT on the acquisition of those services, the Tax Inspection Report states the following:
II.1.1.2 Classification of the taxable person's operations for VAT purposes - construction services
Having analysed the services invoiced to the Fund by the various construction service providers, we found that they proceeded to assess VAT in the invoices issued in the year 2015, on the grounds that the Fund was registered as an exempt taxable person in the Tax Authority database. However, as previously explained, although due to inertia on the part of the Fund and its incorrect classification, in this specific case, we are dealing with a taxable person under the normal VAT regime.
For these taxable persons, paragraph j) of no. 1 of article 2 of the VAT Code imposes the reverse charge rule, when the following conditions are cumulatively met:
- If there is an acquisition of construction services;
- The acquirer is a VAT taxable person in Portugal and here performs operations that confer, in whole or in part, the right to VAT deduction.
(…)
It is thus concluded that the two conditions for the application of the reverse charge rule are met, and therefore it would be incumbent on the acquirer of the construction services (the Fund) to assess the aforementioned tax on the invoices issued by the construction service providers.
III.1.1.3 VAT not assessed on the acquisition of construction services - €79,643.57
It follows from what has been stated in the previous point that the various service providers should not have assessed VAT, since the true debtor of the tax is the Fund, as the acquirer of construction services.
The fact that the suppliers have assessed tax and that assessment is not due does not prevent the assessment of the tax and the respective payment from falling on the Fund, considering that those entities may obtain a refund of the aforementioned tax from the Tax Authority.
With regard to the VAT improperly deducted on the acquisition of construction services, the Tax Inspection Report considers the following:
"The Fund deducted the VAT assessed by the construction service providers in the various invoices issued by the service providers, relating to the operations concerning the real estate for which it assessed tax, having declared the deduction of the amount of the tax in the periodic declarations in the four quarters of 2015."
(…).
J) With regard to the failure to comply with no. 7 of article 78 of the VAT Code, the Tax Inspection Report bases the adjustment on the following grounds:
(…)
In order to be able to proceed with the adjustment as mentioned, the Requestor must be in possession of a judicial certificate, as referred to in article 38, no. 2 of the CIRE, stating that the company to which it is a creditor was declared insolvent, with a judgment having become final and binding, and only in this way will the taxable person be in a position to prove that the requirements appropriate to the VAT adjustment are met. The contributor must be in possession of proof that the claimed credits are recognised".
In this specific case, it is found that the requirements mentioned in the previous points are not met, and therefore, not meeting all the prerequisites referred to, the Fund cannot proceed with the adjustment of the tax."
(…).
K) The Requestor attached a certificate dated 16 August 2017 certifying that the judgment on verification and ranking of credits of 19 February 2012, handed down in the insolvency proceedings of C..., Unip, Lda., became final and binding on 19 October 2012;
L) The Requestor attached an undated declaration intended to communicate the VAT adjustment and the cancellation of the tax to D..., Unip, Lda. and to the insolvency administrator;
M) The Tax Authority issued the following assessment acts:
- Assessment for the period 03Q/2015, corresponding to the Statement of Account Adjustment no. 2017..., in the amount of €17,233.75;
- Assessment for the period 06Q/2015, corresponding to the Statement of Account Adjustment no. 2017..., in the amount of €30,844.22;
- Assessment for the period 09Q/2015, corresponding to the Statement of Account Adjustment no. 2017..., in the amount of €34,428.18;
- Assessment for the period 12Q/2015, corresponding to the Statement of Account Adjustment no. 2017..., in the amount of €26,117.22;
- Assessment for the period 03Q/2015 (Compensatory Interest), corresponding to the Statement of Account Adjustment no. 2017..., in the amount of €891.43;
- Assessment for the period 06Q/2015 (Compensatory Interest), corresponding to the Statement of Account Adjustment no. 2017..., in the amount of €1,277.71;
- Assessment for the period 09Q/2015 (Compensatory Interest), corresponding to the Statement of Account Adjustment no. 2017..., in the amount of €1,082.83;
- Assessment for the period 12Q/2015 (Compensatory Interest), corresponding to the Statement of Account Adjustment no. 2017..., in the amount of €1,502.64;
N) The Requestor paid the aforementioned assessments;
O) On 29 January 2018, the Requestor filed an administrative review against the assessment acts;
P) On 28 May 2018, the presumption of deemed rejection of the said administrative review was formed.
The Tribunal formed its conviction as to the established facts based on the documents attached to the petition and in the administrative proceedings attached by the Tax Authority with its response.
Matters of Law
Assessment of VAT on operations for the acquisition of construction services
5. The Requestor argues that the Fund which it manages intended to register as a mixed taxable person for VAT purposes in the declaration of commencement of activity and, due to an error attributable to the authorities, came to be included in the exemption regime provided for in article 9 of the VAT Code, a situation that was only remedied following an inspection procedure, when the Tax Authority proceeded with the ex officio alteration of the registration, with effect from 1 January 2013.
In this context, the Requestor understands, in light of the provision in article 32, no. 1 of the VAT Code, that it was not incumbent on it to submit a declaration of changes, since, from the date of filing the declaration of commencement of activity, there was no alteration to any of the elements contained in the declaration, and therefore the Fund only failed to self-assess the tax relating to construction services by virtue of being in an exemption regime due to a fact that is exclusively attributable to the Tax Authority.
It concludes, in that sense, that the correction of the assessment made in the Tax Inspection Report, placing on the Fund the obligation to pay tax, in application of the reverse charge rule, pursuant to article 2, no. 1, paragraph j) of the VAT Code, violates the principles of legal certainty and protection of legitimate expectations, as well as the principles of proportionality, justice and good faith.
However, it is important to bear in mind, as noted in the judgment of the STA of 26 October 2016 (Case no. 01654/15), that validation by the Tax Authority of the declaration of commencement of activity submitted by the taxable person does not prevent the classification for VAT purposes from being altered subsequently in accordance with the principles of procedure governing the pursuit of the public interest, and particularly the principle of legality, justice and material truth (article 55 of the LGT). It being that, as also observed in that judgment, the possibility of altering the taxable person's tax situation, in particular to adapt the VAT regime to the economic activity actually carried out, has as its only limit the statute of limitations for the right to assess to which article 45 of the LGT refers.
This line of case law cannot fail to be applied to the situation in which the Tax Authority, based on the elements contained in the declaration of commencement of activity, comes to assign the contributor a regime different from that which was declared.
Even if an erroneous qualification of the applicable legal regime occurred at an initial moment, this does not prevent the Tax Authority from proceeding with the ex officio alteration of the tax situation when it has the necessary elements to do so.
In the present case, the Requestor recognises that the Fund, in the scope of its activity, simultaneously performs operations that confer the right to VAT deduction and operations that do not confer that right, such as the operation of shopping centres, parking facilities and management of real estate (article 17 of the petition), and does not dispute that, by virtue of paragraph j) of no. 1 of article 2 of the VAT Code, taxable persons are those who have in the national territory a place of business, a permanent establishment or residence and who perform operations that confer the total or partial right to tax deduction, whether acquirers of construction services (article 32 of the petition). It seeks, however, that, having been initially classified in an exemption regime, it should remain indefinitely in that regime, even though this may imply the disregard of the rules that would be legally applicable and give rise to situations of inequality in relation to other contributors who carry out the same type of activity.
It is evident in every respect that the Tax Authority is not prevented from proceeding with the ex officio alteration of the applicable regime when it is not appropriate to the economic activity developed and promoting the corrections in taxation that the new tax classification may justify and, above all, is not prevented from making that alteration in the context of an inspection procedure which is precisely aimed at observing tax reality and the fulfilment of tax obligations by the taxable person.
And there is no violation of the principle of legal certainty and protection of legitimate expectations therein.
It must first be noted that the principles of legal certainty and protection of legitimate expectations are parameters of normative constitutionality, with the burden falling on the interested party to raise the question of constitutionality in a procedurally appropriate manner, identifying the norm or normative interpretation that is susceptible to violating the constitutional principles (article 72, no. 2 of the CPTA). As there is no provision in our legal system for a constitutional appeal, it is not possible to review the violation of fundamental rights by a judicial decision or administrative action.
As the Requestor has not identified the norm or normative interpretation that may have violated the stated principles, the aforementioned judgment of the Constitutional Court no. 363/92 has no application in this case.
Be that as it may, the guarantee of legal certainty inherent to the rule of law corresponds, in a subjective aspect, to an idea of protection of the confidence of individuals with regard to the continuity of the legal order. And the protection of the confidence of individuals with regard to the maintenance of a certain legal regime is essentially expressed in the right not to have their expectations legitimately formed as to the permanence of a given legislative framework or course frustrated, provided that those expectations are legitimate.
It is clear that a taxable person who performs – as it recognises – operations that are subject to tax and operations that are exempt from it cannot reasonably count on the maintenance of an exemption regime that does not correspond to its tax situation merely because the Tax Authority made an incorrect tax classification of its activity at a first moment.
All the considerations previously expounded also demonstrate that there is no violation of the principles of proportionality, justice and good faith.
6. The Requestor further alleges that, as a result of the requirement of tax on the basis of the application of the reverse charge rule, double collection occurs, since the VAT had already been assessed and paid by the service providers. It invokes in this connection the provision in no. 1 of article 205 of the CPPT, according to which "there will be double collection for the purposes of the preceding article when, a tax being paid in full, another of the same nature is required from the same or a different person, relating to the same taxable fact and to the same period of time".
The norm merely clarifies what is meant by double collection for the purpose of being invoked as grounds for opposition to enforcement of execution, referred to in paragraph g) of article 204. It is understood, however, that this ground may also be invoked in judicial challenge proceedings, in application of the provision in article 99 of the CPPT, when it is susceptible to affecting the legality of the assessment act.
It becomes clear, however, that double collection does not occur in the circumstances of the case.
The Fund was called to assess the tax on construction services by application of the reverse charge rule (reverse charge), which is aimed, as a measure to combat tax fraud in risk sectors - such as construction services -, to subject to tax, not the supplier of goods or service provider, but the acquirer or recipient who, if the legal requirements are met, may deduct it.
When the tax becomes enforceable against the recipient of the service provision due to having previously been assessed and paid in disregard of the rule in paragraph j) of no. 1 of article 2 of the VAT Code, this does not mean that another person is being required to pay a tax of identical nature relating to the same taxable fact. As emphasised in the judgment of the STA of 27 February 2013 (Case no. 11079/12), the requirement of a second payment by necessity of correcting the tax situation can only justify that the first payment made, being undue, may subsequently be reimbursed, through the appropriate means of challenging and reviewing the tax act.
And that is the premise from which the Tax Inspection Report starts, when it states that "the fact that the various suppliers have assessed tax and that assessment is not due does not prevent the assessment of the tax and the respective payment from having to be made by the Fund, considering that those entities may obtain a refund of the aforementioned tax from the Tax Authority".
The request is without merit on this ground, regardless of the grounds invoked.
Deduction of VAT on the acquisition of construction services
7. The Requestor alleges the illegality of the correction made due to improper deduction of VAT on the acquisition of construction services, considering that it is contrary to the principle of neutrality of the common VAT system to limit the right to deduct the tax incurred in the acquisition of services for the performance of its taxable operations, even though the VAT, due to an excusable error, was not assessed by the Fund in application of the reverse charge rule.
The right to deduct tax, governed in articles 167 to 192 of the VAT Directive and, in domestic law, in articles 19 to 25 of the VAT Code, essentially consists of the right of a taxable person to deduct from the tax charged on a certain taxable operation the tax incurred in the acquisition of goods or services intended for the performance of that operation. Based on the tax being a system of fractional payments intended to tax final consumption, the deduction of tax paid in intermediate operations in the economic circuit is inherent to the very functioning of the system and evidences the neutrality of the tax. As a fundamental principle of the VAT system, the right to deduction, in principle, cannot be limited and is exercised immediately in relation to all taxes that have been levied on upstream operations (judgment of the CJEU of 8 May 2013, Case no. C-271/12).
As was set out at an earlier stage, the aforementioned reverse charge rule applies to the enumerated list of operations which, with regard to construction services, has practical application in article 2, no. 1, paragraph j) of the VAT Code, which subjects to subjective incidence "natural or legal persons (…) who have a place of business, a permanent establishment or domicile in the national territory and who perform operations that confer the total or partial right to tax deduction, when they are acquirers of construction services (…)".
The right to deduction is recognised in article 19 of the VAT Code, which contains two provisions especially applicable to reverse charge situations and which are transcribed below:
1 - For the purpose of calculating the tax due, taxable persons shall deduct, in accordance with the following articles, from the tax charged on the taxable operations they have carried out:
a) The tax due or paid for the acquisition of goods and services from other taxable persons;
b) The tax due on the importation of goods;
c) The tax paid for acquisitions of goods or services covered by paragraphs e), h), e), h), i), j) and l) of no. 1 of article 2;
d) (…)
(…)
8- In cases where the obligation to assess and pay the tax falls on the acquirer of goods and services, only the tax assessed by virtue of that obligation confers the right to deduction.
It follows from these provisions that there is a right to deduction for services to which paragraph j) of no. 1 of article 2 of the VAT Code refers, thus covering situations where the tax is paid by the acquirer of services. No. 8, in turn, specifies that, where the acquirer of services is obliged to pay the tax, only the tax assessed by virtue of that obligation confers the right to deduction.
In the present case, as has been seen, the tax was improperly assessed by the service providers, as the reverse charge rule referred to in the aforementioned provision of article 2, no. 1, paragraph j) of the VAT Code was not applied. And, in that way, there is no right to deduction, which would only occur if the tax had been assessed by the Fund and only to the extent that the deduction corresponded to the tax that, in that conditionality, would be assessed by the acquirer of services.
The Requestor argues that the refusal of the right to deduction violates the principle of neutrality of the common VAT system, since it is only due to an excusable error that the VAT was not assessed by the Fund in application of the reverse charge rule. But, as we have seen, the initial error in the classification of the applicable VAT regime is of no relevance to the case. The point is that the Tax Authority proceeded with the ex officio alteration of the VAT regime and determined the correction of the tax assessment with regard to construction services, placing the obligation to pay on the Fund. And as the tax was improperly assessed by the service providers, it is clear that it is not for the acquirer of services to proceed with the deduction of the tax.
VAT gives the possibility of deducting tax previously borne for those who are integrated into the production chain and only in that sense is it understood as a tax that is neutral with regard to competition between undertakings. But the principle does not apply where the economic recipient of the tax is not its subject, in which case deduction is not allowed.
And, in that circumstance, the exercise of the right to deduction by the Fund can only take place at a later moment to the assessment of the tax itself, following the correction made by the Tax Authority.
This understanding is consistent in the case law of the CJEU. By way of example only, reference may be made to the judgment of that Court, dated 6 February 2014 and given in Case C 424/12, in which it was concluded:
"In the context of an operation subject to the reverse charge regime, in circumstances such as those in the main proceedings, Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, and the principle of fiscal neutrality do not preclude the recipient of the services from being deprived of the right to deduct the value added tax that it paid unduly to the service provider on the basis of an incorrectly issued invoice, including when it is impossible to correct that error, owing to the insolvency of that service provider".
The request is also without merit on this point.
Adjustment of VAT relating to bad debts
8. The Requestor further alleges that the failure to recognise the VAT adjustment relating to amounts considered uncollectible, based on failure to comply with the requirements of article 78, no. 1, paragraph b) and no. 11 of the VAT Code, is tainted with illegality, since, through documents nos. 7 and 8 attached to the petition, it was demonstrated that the judgment declaring the insolvency of the debtor company has become final and binding and the intention to adjust was communicated to the taxable person in respect of the tax, the acquirer of the goods or services.
The provisions in question, at the time of the facts, under the heading "Adjustments", provided as follows:
7 - Taxable persons may also deduct the tax relating to amounts considered uncollectible:
(…)
b) In insolvency proceedings, when the same is declared of a limited nature, after the judgment on verification and ranking of credits referred to in the Insolvency and Business Recovery Code becomes final and binding or, where applicable, the approval of the plan subject to the deliberation referred to in article 156 of the same Code;
(…)
11 - In the case provided for in no. 7 and in paragraph d) of no. 8, the acquirer of the good or service, who is a taxable person in respect of the tax, is notified of the total or partial cancellation of the tax, for the purposes of correcting the deduction initially made, such notification having to identify the invoices, the amount of the credit and of the tax to be adjusted, the proceedings or agreement in question, as well as the period in which the adjustment is made.
It becomes clear, in light of these provisions, that the deduction of tax relating to amounts considered uncollectible can only be exercised after the judgment on verification and ranking of credits has become final and binding and after notification to the acquirer of the goods or services who is a taxable person in respect of the tax of the details relating to the tax that is cancelled.
With regard to this latter aspect, the judgment of the STA of 25 June 2015 (Case no. 0288/14) came to recognise that "the notification to the acquirer of the good or service who is a VAT taxable person of the creditor's intention to cancel the VAT contained in the uncollectible debt in insolvency proceedings constitutes a legal requirement upon which the legality of the 'adjustment' by the creditor depends and must be made, in the case of insolvency of the debtor, to the appointed insolvency administrator".
In any case, we are dealing with requirements of the right to deduction which should be verified on the date on which the tax is to be deducted.
In the case in hand, the credit notes were issued on 22 April 2015 and the VAT was deducted from the tax assessed in the periodic declaration of 2015/06. The Tax Inspection Report makes no reference to the existence of documents evidencing the finality of the judgment and the notification made to the taxable person in respect of the tax, and the certificate of finality of the judgment, issued on 16 August 2017, and the notification to the taxable person, undated, which were attached to the petition, do not demonstrate that the aforementioned requirements for the deduction of the tax were met on the date on which the adjustment was requested from the Tax Authority.
Pursuant to article 74, no. 1 of the LGT, "the burden of proof of the facts constituting the rights of the tax authorities or of contributors falls on whoever invokes them", so, in this case, the omission of such proof must be valued against the Requestor.
9. Compensatory Interest
The Requestor also challenges the assessment of compensatory interest in relation to any of the tax assessment acts relating to VAT.
Pursuant to article 35, no. 1 of the General Tax Law, "compensatory interest is due when, due to a fact attributable to the taxable person, the assessment of all or part of the tax owed is delayed, or the delivery of tax to be paid in advance, or retained or to be retained under the framework of tax substitution".
As has been the common understanding, compensatory interest owed pursuant to the aforementioned provision constitutes a remedy of a civil nature intended to compensate the Tax Authority for the loss of availability of an amount that was not assessed on time. As it is a remedy of a civil nature, it is only enforceable if there is a causal link between the action of the taxable person and the delay in assessment and this action is liable to censure on the grounds of fraud or negligence.
In the present case, it is found that the Fund delivered to the Tax Authority a declaration of commencement of activity in which it declared its intention to register as a mixed taxable person for VAT purposes, taking into account that it performs operations that confer the right to VAT deduction and operations that do not confer that right. The Fund was classified, however, under the exemption regime provided for in article 9 of the VAT Code and was registered in that regime from 20 November 2002.
The alteration of the taxable person's tax classification for VAT purposes was carried out on the ex officio initiative of the Tax Authority following an inspection procedure, with effect from 1 January 2013.
And although the Tax Authority argues, in the Tax Inspection Report, that it was the responsibility of the taxable person to deliver the declaration of changes, pursuant to article 32 of the VAT Code, the fact is that, according to that provision, the declaration of changes only takes place when there are changes in relation to any of the elements contained in the declaration of commencement of activity. And as the contributor declared its intention to register as a mixed taxable person for VAT purposes, as this was the classification corresponding to the exercise of its activity, it could not be imputed to it the registration in the exemption regime, nor was it required to proceed with the alteration to the normal regime if that was the regime that already appeared in the declaration of commencement of activity.
The correction of the tax with regard to the assessment of VAT on the acquisition of construction services arises, in this context, as a consequence of the ex officio alteration of the tax classification, and the delay in the assessment of the tax owed cannot be attributed to culpable conduct on the part of the taxable person.
It must be concluded, in these terms, that the lack of merit of the request for arbitral pronouncement as to that additional assessment is not determining of the recognition of the right to compensatory interest.
10. Indemnity Interest
10. The Requestor further requests the condemnation of the Tax and Customs Authority to pay indemnity interest, at the legal rate, calculated on the tax, until full reimbursement of the amount owed.
Condemnation to pay indemnity interest takes place, following a declaration of illegality of the assessment acts, pursuant to the provisions of articles 43, no. 1 of the LGT and 61, no. 5 of the CPPT.
In the case in question, only the compensatory interest relating to the assessment of VAT on the acquisition of construction services is considered illegal, so indemnity interest is only due on the amount annulled.
As the remainder of the arbitral request has been judged without merit, the condemnation to pay indemnity interest is also without merit on that part.
III – Decision
For these reasons, the decision is as follows:
a) to judge the arbitral request without merit insofar as it concerns the tax assessment acts relating to VAT and to maintain the decision to reject the administrative review;
b) to judge the arbitral request with merit insofar as it concerns compensatory interest in relation to the assessment of VAT on the acquisition of construction services and to annul the corresponding assessment;
c) to condemn the Tax and Customs Authority to reimburse the Requestor the amount of compensatory interest resulting from the assessment of VAT on the acquisition of construction services, plus indemnity interest until effective reimbursement;
d) to judge the arbitral request without merit insofar as it concerns the remaining assessments of compensatory interest.
Value of the Cause
The Requestor indicated as the value of the cause the amount of €111,371.46, which was not disputed by the Respondent and corresponds to the amount of the assessments which it was sought to challenge, and therefore the value of the cause is fixed at this amount.
Costs
Pursuant to articles 12, no. 2 and 24, no. 4 of the RJAT, and article 3, no. 2 of the Regulations of Costs in Tax Arbitration Proceedings and Table I annexed to that Regulation, the amount of costs is fixed at €3,060.00, which shall be borne by the Requestor and Respondent, in the proportion of 92% and 8% respectively.
Notification ordered.
Lisbon, 29 April 2019
The President of the Arbitral Tribunal
Carlos Fernandes Cadilha
The Arbitrator Member
Marisa Almeida Araújo
The Arbitrator Member
Isaque Marcos Ramos
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