VAT Deduction Rights Dispute: CAAD Arbitration on Additional VAT Assessments for 2012

ARBITRAL DECISION

Hereby agree the Arbitrators Counselor Maria Fernanda dos Santos Maçãs (Arbitrator President), Dr. Filipa Barros and Dr. Leonardo Marques dos Santos, appointed by the Deontological Board of the Centre for Administrative Arbitration ("CAAD") to form an Arbitral Court.

REPORT

On 11 July 2017, A… S.A., with the tax identification number …, with registered office in …, …, …, …-… … (hereinafter, "Claimant"), filed a request for constitution of an Arbitral Court, pursuant to the combined provisions of articles 2, no. 1, subparagraph a) and 10, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (hereinafter, abbreviated as "RJAT") and of articles 1 and 2 of Order no. 112-A/2011, of 22 March.

The request for arbitral pronouncement has as its object, according to the Claimant, the declaration of illegality and annulment of the acts for additional assessment of Value Added Tax ("VAT") and corresponding acts for assessment of compensatory interest and default interest relating to the financial year 2012, namely:

To substantiate its request the Claimant considers, in summary, that the tax acts for additional assessment of VAT and corresponding compensatory and default interest are invalid, insofar as they are based on erroneous factual and legal presuppositions concerning the exercise of the right to VAT deduction incurred by it for the purposes of its activity, grossly curtailing the exercise of such right and compromising the neutrality that constitutes the cornerstone of such tax.

In this context, the Claimant explains that it was created by Regional Legislative Decree no. …/2001/M, having as its object the "conception, promotion, construction and management of projects, actions and undertakings that contribute in an integrated manner to the economic, social, sports and cultural development of the municipalities of …, …, … and …" and in this context having the right "to use and administer assets of public domain of the Autonomous Region of Madeira that are or may become dedicated to the exercise of its activity".

Thus, in the course of its activity, it proceeded, from 2007 onwards, to the reconversion of the Port of …, with the project in question intended for the construction of a shopping centre composed of an underground car park with two floors, plus two surface floors intended for commercial stores.

It so happened that the area defined for the implantation of the shopping centre did not have the necessary facilities for the practice of the envisaged taxable commercial operations, namely due to the absence of roads and adjacent infrastructure.

Accordingly, the Claimant felt the need to carry out works to improve the road and roundabouts adjacent to the shopping centre and its respective car park, as a link for framing the commercial surface in the urban fabric, failing which would not be guaranteed adequate accessibility and safety for its visitors. The Claimant contends that the said accessibility improvements made the shopping centre more attractive to visitors and retailers, and facilitated the commercialization of the stores, with the amount of such investment being incorporated into the value of the fixed asset, namely a shopping centre.

Now, considering that the Claimant, since the beginning of the operation of the shopping centre in 2011, has exclusively carried out taxable operations conferring the right to VAT deduction (e.g. operation of the car park and cession for operation of the commercial stores), it has proceeded with the deduction of VAT on invoices connected with this shopping centre.

However, the Tax Inspection Services (hereinafter, "SIT") called into question the deduction of VAT incurred on works to improve the road and roundabouts carried out within the scope of the reconversion work of the Port of …, considering that "the road and roundabouts adjacent to this work and subject to improvement are public domain and property of the municipality of …, with no cession of spaces/infrastructure from A… to the municipality of …" concluding that deduction of the respective VAT is not possible "because such works are not associated with active operations, but rather with works of public interest".

The Claimant called into question the understanding advocated by the Tax and Customs Authority (hereinafter, "AT") in the context of a claim for administrative reconsideration; however, according to the latter, from the analysis of documents requested from A…, it is not possible to determine whether the VAT supported with the works to improve the Avenue and respective roundabouts is directly related to the obtaining of income subject to VAT – car park, stores and restaurants.

The Claimant refutes the criterion put forward by AT for assessing the relationship between income and expenses, and the corresponding right to deduction, on the grounds that it has no legal basis, in particular as provided in article 168 of the VAT Directive[1], transposed into domestic law by article 20, no. 1 of the VAT Code.

It argues that the expenses not only formed part of its general expenses, but also contributed to the obtaining of taxable income in the exercise of its economic activity by attracting visitors and infrastructure to a location which, otherwise, would not be eligible for the construction of a commercial surface.

It notes that its understanding is based on the position taken by the Court of Justice of the European Union (hereinafter, "CJEU") and by national courts, in extensive case law from which the following results:

• Exemption from a direct and immediate nexus between a given upstream operation and one or more downstream operations conferring the right to deduction, when the costs of the services in question form part of the general expenses of the taxable person and are, as such, constitutive elements of the price of the goods supplied or services rendered. Therefrom results, contrary to what is contended by AT, the unnecessary nature of documentary evidence to establish the relationship between expenses incurred and taxable income obtained, with the expectation of an increase in such income as a result of the carrying out of such expenses being sufficient.

• That services which may be a means of attracting visitors to a place where the taxable person plans to supply goods and/or services in the exercise of its economic activity, are to be considered services used for the needs of taxed activities, provided the requirement of the foregoing subparagraph is met.

Referring to the holistic sense of the project, the Claimant reminds that a shopping centre cannot function without its surrounding urban environment and it is certain that the works carried out are an integral part of the set of infrastructure necessary for the functioning, attractiveness and efficient operation of the commercial surface, with the Claimant having the right "to use and administer the assets of public domain of the Autonomous Region of Madeira that are or may become dedicated to the exercise of its activity", pursuant to article 3, subparagraph a) of Regional Legislative Decree no. …/2001/M.

Finally, and in accordance with the aforementioned principle of the uniqueness of the project, it presents various examples in which Doctrine and Case Law pronounce in favor of VAT deductibility in works or interventions carried out by private entities on assets for free use of public domain, considered indispensable for the pursuit of the economic activity of the taxable person.

The Claimant concludes by requesting the declaration of illegality of the additional VAT assessments and default and compensatory interest.

On 12-07-2017, the request for constitution of the Arbitral Court was accepted and automatically notified to AT.

The Claimant did not proceed to appoint an arbitrator, and therefore, pursuant to article 6, no. 2, subparagraph a) and article 11, no. 1, subparagraph a) of RJAT, the President of the Deontological Board of CAAD appointed the signatories as arbitrators of the collective Arbitral Court, who communicated acceptance of the task within the applicable period.

On 05-09-2017, the parties were notified of such appointments, having manifested no desire to refuse any of them.

In accordance with the provisions of article 11, no. 1, subparagraph c) of RJAT, the collective arbitral court was constituted on 26-09-2017.

On 30-10-2017, the Respondent, duly notified for that purpose, presented its reply defending itself by exception and by impugnation.

In the context of its defense by exception, it raises from the outset two exceptions:

• The material incompetence of the Arbitral Court to hear the request formulated by the Claimant;

• The expiration of the right of action.

As to the first of these exceptions, AT contends, in summary, material incompetence of the Arbitral Court by arguing that since the Claimant is domiciled in …, consequently in the Autonomous Region of Madeira ("RAM") and the tax in question, VAT, constitutes a regional own revenue, the fiscal competence for the assessment of such tax belongs to the Regional Government, in the terms that result from article 1, no. 1 of Decree-Law no. 18/2005, of 18 January, and article 13, no. 1, subparagraph a) of Law no. 13/98, of 24 February ("Law of the Finances of the Autonomous Regions").

Indeed, according to the Respondent, pursuant to article 1 of Order no. 112-A/2011, of 22 March, the "General Directorate of Taxes (DGCI) and the General Directorate of Customs and Special Consumption Taxes (DGAIEC)" bound themselves to the jurisdiction of the Arbitral Courts operating at CAAD, and it is true that through Decree-Law no. 118/2011, of 15 December, AT succeeded to the attributions of the General Directorate of Taxes, the General Directorate of Customs and the General Directorate of Computing and Support to Tax and Customs Services.

Accordingly, it contends that the only body of the Ministry of Finance that is bound to the jurisdiction of Arbitral Courts under RJAT is AT.

On the other hand, it states that the Regional Directorate for Tax Affairs ("DRAF") "is the central service of the direct administration of the Autonomous Region of Madeira, abbreviated as RAM, to which subparagraph a) of no. 6 of article 5 of Regional Regulatory Decree no. 4/2012/M, of 9 April, refers, which has the mission to ensure and administer taxes on income, on expenditure, on consumption, on assets and other legally provided taxes, as well as to execute the policies and tax guidelines defined by the Regional Government of Madeira, in accordance with articles 140 and 141 of Law no. 130/99, of 1 August, namely the assessment and collection of taxes that constitute the Region's revenue".

To conclude, it understands that, in legal-procedural terms, as DRAF is not a procedural subject for purposes of tax arbitrability, the additional VAT assessment indicated as the object of the Request for Arbitral Pronouncement is a regional own revenue, falling within the scope of administration of RAM, resulting therefrom the material incompetence of the Arbitral Court to hear on the illegality of the said act, the Respondent should accordingly be absolved of the action.

With reference to the exception of expiration of the right of action, the Respondent understands, in summary, that the true and only request for pronouncement formulated by the Claimant was that of annulment of the tax acts of additional VAT assessments, with the corresponding restitution of unduly paid tax and payment of indemnificatory interest. In other words, the Claimant never requested the annulment of the act of dismissal of the administrative reconsideration.

Now, being the attack directed exclusively at the tax acts of assessment, it is clearly apparent that the legally defined period of 90 days has been exceeded for their impugnation in arbitral proceedings, counted from the day following the end of the period for voluntary payment of the tax obligation, pursuant to article 10 of RJAT, in conjunction with article 102, nos. 1 and 2 of the Tax Code of Procedure and Process ("CPPT").

Thus, given that the deadline for payment of the tax in question in the case occurred on 24-08-2016 and that the request for constitution of the Arbitral Court was only presented on 11-07-2017, it is concluded that the request formulated is untimely and the court cannot hear it.

Effectively, having exceeded the period for direct impugnation (of the primary act), the timeliness of the request could only be based on the existence of some means of gracious impugnation of the assessment act where a decision denying totally or partially the claims formulated therein by the tax subject had been issued.

It happens that, in the view of the Respondent, notwithstanding the fact that allusion was made to the dismissal of the administrative reconsideration, it was not expressly requested the annulment of the order that dismissed it. Moreover, given that the powers of cognition of the Court are limited by the request, the Court is prevented from appreciating and declaring the illegality and consequent annulment of the assessment act, for being untimely, the AT should therefore be absolved of the action.

In the context of its reply, and by impugnation, AT defended a position contrary to that presented by the Claimant concerning the deductibility of VAT incurred in the works for improvement of Av. …, in the …, and in the respective roundabouts.

According to its point of view, the Claimant was granted, within the scope of its corporate purpose, the authorization for execution and implementation of the Northern Quay of …, together with B…, having been agreed the construction and operation of that zone (cfr. Annex I of Regional Legislative Decree no. …/2014/M) which includes car park, other stores, leisure zones and built restaurants.

AT understands that the Claimant improperly deducted VAT incurred on works to improve Av. … and respective roundabouts, considering that such works do not contribute to the carrying out of transmissions of goods or provision of services subject to VAT. Concretely, AT states that Av. … concerns an asset of municipal public road domain and that the works in question would serve not the infrastructure of the Northern Quay, but rather the various road connections in progress at the date of and to the port of ….

It considers that the intervention carried out on the said Avenue is not justified, nor is it within the scope of the competences attributed to the Claimant, which did not have the right to use such asset of a public nature, pursuant to article 3, subparagraph b) of Regional Legislative Decree no. …/2001/M.

Contending for the dismissal of the request for arbitral pronouncement, AT further adds that the Claimant carried out the works without having contracted an economic viability study, as from the documents presented it is not possible to determine whether the VAT supported in the same is directly related to the obtaining of income subject to VAT (car park, stores and restaurants), and in its opinion the tax acts put into dispute in the main request should be maintained.

On 01-11-2017 the Court notified the Claimant to respond to the matter of exception within a period of 10 days and, in the same period, to specify the articles relating to factual aspects of the arbitral request relative to which it intended to produce witness evidence.

On 14-11-2017 the Claimant came to respond to the exceptions raised by AT, therein contending (i) for the material competence of the Arbitral Court for the underlying request for pronouncement, and (ii) sustaining the timeliness of its presentation.

Regarding the first exception, the Claimant notes, in summary, that the additional VAT assessments it received were issued by the Collection Area of the Tax Authority headquartered in Lisbon, and not by AT-RAM, with its logo even being inserted therein, and therefore the binding to the jurisdiction of arbitral courts cannot be questioned.

It additionally reminds that article 61 of Organic Law no. 2/2013, of 2 September 2013, which approves the Law of the Finances of the Autonomous Regions, establishes the incompetence of Regional Governments to assess national character taxes, as is the case with VAT, being also by this fact unambiguous that it was AT itself that issued the assessment acts in question.

As to the exception of expiration of the right of action, the Claimant alleges that the affirmation that it did not request the annulment of the act of dismissal of the administrative reconsideration is fallacious. Indeed, it considers that it is apparent from the written submission that alongside requesting the illegality of the tax assessment act, it did not refrain from contesting the immediate act of dismissal of the administrative reconsideration, with numerous references being made to the grounds for dismissal of the administrative reconsideration throughout the entire written submission.

Finally, it refutes the understanding of AT based on the case law delivered by superior courts and by CAAD itself, according to which the assessment act has underlying, at least tacitly, the request for declaration of illegality of all subsequent acts and whose validity is affected by such declaration, which also includes the act of dismissal of the administrative reconsideration.

In its application, the Claimant made no reference to the factual aspects of the arbitral request relative to which it intended to produce witness evidence.

On 24-11-2017 the Court reiterated the request, made through the Order of 01-11-2017, for the Claimant to specify the articles relating to factual aspects of the arbitral request relative to which it intended to produce witness evidence, granting a period of five days for that purpose.

On 09-12-2017, given the circumstance that the Claimant had not specified the articles relating to factual aspects of the arbitral request relative to which it intended to produce witness evidence, the Court dispensed with the holding of the meeting provided for in article 18 of RJAT, under the principles of autonomy of the Court in conducting the process, and in order to promote celerity, simplification and informality thereof ex vi articles 19, no. 2 and 29, no. 2 of RJAT.

The parties were further notified to, within a period of ten days, declare whether they intended to produce arguments and, if affirmative, whether these would take the form of oral or written.

In the event of written arguments, these should be produced within a period of fifteen days, in a successive manner, from notification of the order.

The parties opted not to exercise the faculty of producing oral or written arguments.

The Arbitral Court is materially competent and is regularly constituted, pursuant to articles 2, no. 1, subparagraph a), 5 and 6, no. 1 of RJAT.

• The parties have legal personality and capacity, are entitled and are legally represented, pursuant to articles 4 and 10 of RJAT and article 1 of Order no. 112-A/2011, of 22 March.

• The process does not suffer from nullities.

Everything considered, it is necessary to pronounce a decision.

PRELIMINARY MATTERS AND DISMISSAL OF DEFECTS

Incompetence of the Arbitral Court

As mentioned, the Respondent, in its reply, invoked the absolute incompetence of this court. Indeed, the Respondent understands that the Claimant has registered office in …, and therefore since VAT, in this particular case, is a revenue of RAM, the assessment is within the scope of administration of the Autonomous Region of Madeira. Thus, since the only body of the Ministry of Finance that is bound to the jurisdiction of courts constituted under the aegis of CAAD is AT, this Court would be materially incompetent.

In response to such a matter of exception, the Claimant contended that the additional VAT assessments it received were issued by the Collection Area of the Tax Authority headquartered in Lisbon, and not by AT-RAM, with its logo even being inserted therein, and therefore the binding to the jurisdiction of arbitral courts cannot be questioned.

It additionally reminded that article 61 of Organic Law no. 2/2013, of 2 September, which approves the Law of the Finances of the Autonomous Regions, establishes the incompetence of Regional Governments to assess national character taxes, as is the case with VAT, arguing that, also by this fact, it would be unambiguous that it was AT itself that issued the assessment acts in question.

Now, the issue raised by the Respondent has already been the object of analysis by doctrine and case law, with arguments and decisions existing in both senses.

As regards the particular case, in order to take a position regarding the issue in question, it is important to analyze Order no. 112-A/2011, of 22 March ("Order of Binding"), which established the terms of the binding of the Tax Administration to the jurisdiction of CAAD, the Law of the Finances of the Autonomous Regions and the General Tax Law (hereinafter, "LGT").

Indeed, article 2 of Order no. 112-A/2011, of 22 March, determines that the services and bodies referred to in article 1 (which includes DGCI) bind themselves to the jurisdiction of the arbitral courts operating at CAAD in cases where the "appreciation of claims relating to taxes whose administration is entrusted to them" is at issue.

Therefrom, it is important to assess, first and foremost, whether the administration of VAT is – in this case – entrusted to AT, even as the tax concerns taxable persons resident in RAM.

Indeed, although one may discuss what should be considered included in the concept of administration, for the purposes of article 2 of Order no. 112-A/2011, of 22 March, the assessment of the tax is surely encompassed in such concept. In this sense, José Casalta Nabais states that "tax competence concerns the administration or management of taxes, translated into the assessment, evaluation and collection of taxes" (José Casalta Nabais, Tax Law, Coimbra: Almedina, 2010, p. 251).

Thus, with the administration of VAT being entrusted to AT (and not to DRAF), a fact which becomes evident from AT having been the one to assess the tax, the requirements provided for in the Order of Binding are met, and this Court is competent to resolve this dispute.

It is not amiss to recall that the assessment acts not only identify AT – Tax Authority, Collection Area, but are also signed by the Director-General of AT. Being the identification of the authority that performs the act a mandatory mention, pursuant to article 151, no. 1 of the Code of Administrative Procedure, AT made the act its own, with all the procedural consequences that this implies, namely subjection to the jurisdiction of CAAD.

On the other hand, respect for the principle of contradictory proceedings, on which tax litigation is based, implies that it is the entity that assesses the tax that should respond for any vices of legality that may result therefrom, which would not occur if DRAF were to respond for an assessment made by the Collection Area for VAT of AT.

This understanding, that the administration of VAT is not entrusted to DRAF, is moreover in line with article 15, no. 1 of the Organic Law of the Tax Authority and Tax Affairs of the Autonomous Region of Madeira (Regional Regulatory Decree no. 14/2015/M, of 19 August), which states that "[u]ntil all the logistical means necessary for the exercise of the fullness of the attributions and competences provided for in article 2 of this diploma are installed, AT, through its departments and services, continues to ensure the conduct of procedures in administrative and computing matters necessary for the exercise of the attributions and competences transferred to the Autonomous Region of Madeira, including those relating to the assessment and collection of taxes that constitute own revenue of the Autonomous Region of Madeira.".

But moreover, even if the administration of the tax were entrusted to RAM, the lack of such information in the assessments cannot lance the guarantees of taxpayers.

Indeed, without prejudice to article 1, no. 3 of LGT referring to "other public entities legally incumbent with the assessment and collection of taxes (…)" integrating the tax administration, it is article 18, no. 2 of LGT that clarifies that when "the active subject of the tax relationship is not the State, all documents issued by the tax administration shall mention the denomination of the active subject". Article 61, no. 4 of the Law of the Finances of the Autonomous Regions further provides that "national taxes that constitute regional revenues and regional taxes and fees should be as such identified to taxpayers in forms and tax forms, whenever possible, even if they are collected by the tax administration of the State".

It should be noted that pursuant to article 51, no. 4 of Organic Law no. 1/2007, of 19 February (Law of Finances of the Autonomous Regions) with the heading – "Regional Administrative Competences" – it was provided that: "[n]ational taxes that constitute regional revenues and regional taxes and fees should be as such identified to taxpayers in forms and tax forms, whenever possible, even if they are collected by the tax administration of the State." (the wording of the current Law of the Finances of the Autonomous Regions and that which was in force at the date of the facts is the same).

In this context, the argument used by the Claimant, that the additional VAT assessments it received were issued by the Collection Area of the Tax Authority headquartered in Lisbon, and not by AT-RAM, becomes particularly impressive.

Especially when there are normative provisions that demonstrate that the administration of VAT is the responsibility of AT. Indeed, to give some examples:

• Article 28, nos. 1, 2 and 7 of the VAT Code determines that "1 – Whenever the assessment of the tax or compensatory interest is made at the initiative of the services, without prejudice to the provisions of article 88, the taxable person is notified to effect the respective payment at the legally authorized collection locations, within the period referred to in the notification, which cannot be less than 30 days from such notification.

2 – In the case provided for in the foregoing number and in the absence of payment within the period established therein, a certificate of debt is drawn up by the General Directorate of Taxes in the terms and for the purposes set forth in article 88 of the Tax Code of Procedure and Process.", in accordance with article 41, nos. 6 and 7 "6 – For taxable persons who start an activity or cease to fall within the provisions of no. 3 of article 29, the volume of business for the purposes provided for in no. 1 is established in accordance with their forecast for the current calendar year, after confirmation by the General Directorate of Taxes.

7 – Without prejudice to the provisions of no. 2, the change of periodicity only takes place at the initiative of the General Directorate of Taxes, which, for that purpose, notifies the taxable person of the date from which the said change of periodicity takes effect 88."

• Article 88, no. 1 of the VAT Code provides that: "[i]f the periodic return provided for in article 41 is not submitted, the General Directorate of Taxes, based on the elements it has available relating to the taxable person or the respective sector of activity, proceeds to official assessment of the tax, which has as its minimum limit a value equal to six or three times the guaranteed minimum monthly remuneration, respectively, for the taxable persons referred to in subparagraphs a) and b) of no. 1 of that article".

That is, even if the competence to administer VAT did not fall to AT, but to DRAF – which does not appear to be the case – the acts produced point, effectively, to the fact that the competence to assess (and administer the tax) belonged to AT, with the assessment of VAT being signed by the Director-General of AT. Thus, the Claimant should not see its guarantees lanced as a result of the assessment act not correctly identifying the entity responsible therefor.

Or, alternatively, if it were not understood thus, i.e., if it were considered that the competence to assess the tax is that of DRAF, the fact that the assessment was, effectively, carried out by AT (collection area / Value Added Tax) would imply the nullity of the assessment act pursuant to article 161, no. 2 of CPA.

In sum, the alleged incompetence does not obtain, which is declared, finding the alleged exception to be devoid of merit.

Expiration of the Right of Arbitral Action

On the other hand, the Respondent also invokes the expiration of the right of action, arguing that the true and only request for pronouncement formulated by the Claimant was that of annulment of the tax acts of additional VAT assessments, with the corresponding restitution of unduly paid tax and payment of indemnificatory interest, and never the annulment of the act of dismissal of the administrative reconsideration.

This exception should likewise be considered devoid of merit.

Indeed, in the request for constitution of an Arbitral Court, in article 3 the Claimant indicates that "the present request is timely insofar as the date on which the notification of the decision to dismiss the administrative reconsideration lodged by the Claimant against the above-identified acts of assessment was carried out is 12 April 2017 (…), with the 90-day period for constitution of an arbitral court being counted from that date (i.e., the period terminates on 11 July 2017)".

That is, it is apparent from this written submission that the Claimant, in discussing the illegality of the tax assessment act (mediate act), did not refrain from contesting the immediate act of dismissal of the Administrative Reconsideration.

Indeed, throughout the said request for constitution of the Arbitral Court there are numerous references to the grounds for dismissal of the administrative reconsideration presented.

As was concluded, inter alia, in the Judgment of the Supreme Administrative Court ("STA"), of 28 October 2009, delivered in the scope of case no. 0595/09, "[a]dministrative reconsideration has as its object an assessment act. In cases where administrative reconsideration is expressly dismissed, the object of the process of judicial impugnation is, formally and directly, the act of dismissal, which maintained the assessment that was the object of the reconsideration, but the real object of the impugnation, the act whose legality is at issue to be determined, is the assessment act that was maintained by the act of dismissal of the reconsideration".

In the same sense, the Judgment of the STA, of 16 November 2011, delivered in case no. 0723/11 determines that "the process of judicial impugnation instituted following and because of express dismissal of an administrative reconsideration has as its immediate object such dismissal itself and as its mediate object the assessment act whose annulment is aimed at finally."

See, likewise, the Judgment of the Central Administrative Court of the South ("TCA/S") dated 17 March 2016, delivered in the scope of case no. 08998/15, which appreciates even an appeal lodged against a decision of CAAD regarding the same exception. In this judgment of the TCA-S, it is mentioned that "the period to impugn (the 90-day period that the Appellant had to formulate the request for arbitral constitution), in situations where there was administrative reconsideration followed by express decision, is counted from the notification of such latter decision and not from the end of the period for voluntary payment of the assessment", adding that "there is a close relationship and interdependence between the mediate and immediate objects and that the appreciation or interpretation of the request in these situations cannot fail to take account of these circumstances of fact and law" and emphasizing that "as is equally recognized in the judgment appealed from, the question of the existence of the reconsideration, even if not expressly translated in the formulation of the request [which was not even the case for the Claimant], was not olympically ignored by the Appellant".

Counselor Jorge Lopes de Sousa states in this regard that "with the formation of tacit dismissal or where there is notification of express dismissal of administrative reconsideration, taxpayers always have a period of 90 days for purposes of submission of the request for arbitral pronouncement." (Jorge Lopes de Sousa, Guide to Tax Arbitration – Commentary on the Legal Framework for Arbitration in Tax Matters, Coimbra: Almedina, 2017, p. 163).

The arbitral decision of CAAD delivered in case no. 592/2016-T, of 11 May 2017, also addressed the issue of knowing: "[b]ut what happens if the taxpayer, having administratively reclaimed the assessment act, and seen that reconsideration dismissed, comes, taking advantage of the period counted from that dismissal, to impugn the assessment, without simultaneously requesting the annulment of the order that dismissed it? (…) For AT, as seen, the result is the expiration of the right of action. Not of the right of action against the decision to dismiss the administrative reconsideration – this would be within the period – but of the right of action against the assessment act. The correct argumentation of AT is alluring, but it does not seem to us that it leads to the adequate solution. As was seen, the mere impugnation of the act of dismissal of administrative reconsideration would be entirely inconsequential, as it would not drag along the erasure of the assessment act. Two acts should therefore, in strictness, be impugned – immediately, that of dismissal of reconsideration; mediately, that of assessment. But what the court would appreciate would be, above all, the grounds opposed to the assessment, because without this, for the reasons exposed, no effective jurisdictional protection would be given to the rights of the impugner. The act of dismissal of the reconsideration, having done no more than maintain, administratively, that of assessment, would fall by itself, as the vices of the assessment transmit themselves to it – as a secondary act, it will be illegal for not having recognized, as it should, the illegality of the assessment. From all this it results that the relevance of the act of dismissal of administrative reconsideration has to do, more than with its (il)legality, with the fixing of the period for impugnation of the assessment. Consequently, the petition in which only the declaration of illegality of the assessment is requested, without formulating the same request regarding the dismissal of the reconsideration (despite, in this case, having broadly referred to it and exposed the grounds for its illegality), suffers only from an imperfection which, moreover, the court could have invited to be corrected, under the provisions of article 18, subparagraph c), of RJAT.".

Dismissal of Defects

The process does not suffer from nullities, the arbitral court is regularly constituted and is materially competent to hear and decide on the request, consequently verifying the conditions for the final decision to be pronounced.

MATTER OF FACT

Facts Taken as Proven

The essential facts proven are as follows:

• The Claimant was created by Regional Legislative Decree no. …/2001/M, having as its purpose the pursuit of ends of public interest and corporate purpose the conception, promotion, construction and management of projects, actions and undertakings that contribute in an integrated manner to the economic, social, sports and cultural development of the municipalities of …, …, … and …;

• In the course of the exercise of its activity, in accordance with the same Decree, the Claimant may use and administer the assets of public domain of the Autonomous Region of Madeira that are or may become dedicated to such activity;

• The Claimant was granted authorization for execution and implementation of the Northern Quay of …, together with B…;

• In the scope of the same project, the Claimant assumed the function of construction and economic operation of that zone;

• From 2007 onwards, the Claimant proceeded to the so-called "Reconversion of the Port of…", a name by which the intervention became known, which consisted of the reconversion of public space and adjacent infrastructure and the western waterfront of …;

• Additionally, the reconversion project was intended for the construction of a shopping centre, composed of an underground car park with two floors, plus two surface floors intended for commercial stores;

• The area defined for the implantation of the shopping centre did not have, at the date, access roads and adjacent infrastructure;

• The Claimant proceeded, on its own initiative, to carry out works to improve Avenida …, in …, and roundabouts adjacent to the shopping centre and its respective car park, with a view to ensuring accessibility and commercial valorization of its project;

• The works carried out by the Claimant on the roads and roundabouts adjacent to the shopping centre incided on assets of public domain, property of the Municipality of …;

• In the year 2012, Av. … was a municipal road, integrating the so-called municipal public road domain;

• The operation of the shopping centre began in 2011, developing in two aspects:

  • Operation of the car park;
  • Cession for operation of commercial stores;

• In the operation of the shopping centre exclusively taxable operations with the right to VAT deduction are carried out;

• The Claimant has proceeded with the deduction of VAT incurred on invoices connected with the shopping centre;

• The Claimant was the subject of an inspection procedure OI no. 2016…, of 26-04-2016, which took place between 02-05-2016 and 11-05-2016, focusing on VAT for the year 2012;

• Following the conduct of the said inspection procedure, the SIT communicated to the Claimant through letter no. …, of 16 June 2016, that it had proceeded to improper deduction of VAT in the amount of €189,380.43;

• In the report drawn up by the Tax Inspection Services of the Directorate of Finances of …, which is given as entirely reproduced, there appears, among other things, the following:

"During the period of 2012, the T.P. deducted VAT relating to the work of "reconversion of the port of…". However, we verified that part of such deductions concern the works for improvement of the road and roundabouts.

The active operations related to this work consist essentially of the operation of the car park and cession of exploitation of commercial stores.

The road and roundabouts adjacent to this work and subject to improvement are public domain and property of the Municipality of …, with no cession of spaces/infrastructure from SDM to the Municipality of … having been verified.

Given this, and in view of the provisions of article 20 of CIVA "only tax that has incided on goods and services acquired, imported or used by the taxable person for the carrying out of the following operations may be deducted: a) transmissions of goods and provision of services subject to tax and not exempt from it (...)" the VAT deducted from the works of improvement of the road and roundabouts cannot be accepted fiscally, as such works are not associated with active operations, but rather with works of public interest".

(...)

• Within the scope of the SIT report, corrections were proposed in VAT, and additional tax assessments relating to the periods 1201T, 1203T, 1204T, 1207T and 1209T in the amount of €189,380.43, as well as assessments of compensatory interest in the amount of €24,074.67;

• On 22-08-2016 the Claimant proceeded to payment of all the tax acts of assessment of VAT and compensatory and default interest;

• On 15-12-2016, the Claimant lodged an administrative reconsideration under no. …2016…, against the acts of assessment of VAT and respective interest supporting its argument on:

  • The indispensability of the cost and non-autonomization of costs connected with the construction of the undertaking;
  • The pursuit by the Claimant of taxable operations that confer the right to deduction.

• On 12-04-2017 the Claimant was notified by the Tax Authority and Tax Affairs of the Autonomous Region of Madeira of the decision to dismiss the reconsideration it had lodged;

• On 11-07-2017 the Claimant lodged the request for constitution of the Arbitral Court that gave rise to the present process.

Facts Taken as Not Proven

With relevance to the decision of the main request, there are no other facts to consider, proven or not proven.

Substantiation of the Proven and Not Proven Matter of Fact

Regarding the matter of fact, the Court does not have to pronounce on everything that was alleged by the parties, with it being incumbent, rather, with the duty to select the facts that matter for the decision and discriminate the proven from the not proven matter (cfr. article 123, no. 2, of CPPT and article 607, no. 3 of the Code of Civil Procedure (hereinafter, "CPC"), applicable ex vi article 29, no. 1, subparagraphs a) and e) of RJAT).

Accordingly, the facts pertinent to the judgment of the case are chosen and delimited in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of Law (cfr. previous article 511, no. 1 of CPC, corresponding to the current article 596 applicable ex vi article 29, no. 1, subparagraph e) of RJAT).

Thus, taking into consideration the positions assumed by the parties in their respective written submissions, in light of article 110, no. 7 of CPPT, the documentary evidence and the Administrative Procedure ("PA") files attached to the case, were considered proven, with relevance to the decision, the facts above listed.

In particular, the facts taken as proven above identified in points 9 to 17 took into account the provisions of the tax inspection report. The remaining factuality results from the documentation contained in the PA, the written submissions of both parties and the documents submitted by the Claimant, considering that such facts are not of a controversial nature, with the main matter in dispute being circumscribed to an essential matter of law: to determine the illegality or otherwise of the tax acts now impugned for alleged disregard of the right to deduction of VAT incurred on the works to improve Av. …, which the Claimant carried out on its own initiative, by way of the characterization of such expenses as "general expenses" that contributed to the valorization of the fixed asset shopping centre and to the obtaining of taxable income derived from its commercialization.

By way of exception, the Respondent further invokes the material incompetence of the Arbitral Court and the expiration of the right of action, the assessment of which, in both cases, passes through the interpretation of the pertinent legal norms, considering the facts taken as proven above listed.

OF THE LAW

Of the Deduction of VAT

The right to deduction of VAT is a fundamental pillar of the tax that, as a rule, should not be limited.

In the words of Alexandra Martins, "the right to deduction constitutes a central foundation of the common VAT system and aims to free taxable persons from the burden of the tax within the scope of their economic activities, so as to ensure that fiscal neutrality «whatever the ends or results of such activities, on the condition that the said activities are themselves subject to VAT»." (Alexandra Martins, Deconstructing Dogmas: The Right to Deduction and Exemptions, VAT Notebooks 2016, Coimbra: Almedina, 2016, p. 29).

In this sense, the Court of Justice of the European Union (hereinafter, "CJEU") has consistently sustained that "the system of deductions aims to free completely the entrepreneur from the burden of VAT due or paid within the scope of all its economic activities. The common VAT system thus ensures neutrality as to the tax burden of all economic activities, whatever the ends or results of such activities, provided that the said activities are, in principle, themselves subject to VAT (v., in particular, judgment Eon Aset Menidjmunt, C‑118/11, EU:C:2012:97, no. 43 and case law referred to)." (Judgment of the CJEU of 22 October 2015, delivered in case C-126/14, Sveda, ECLI:EU:C:2015:712).

As Ben Terra and Julie Kajus state, in light of the VAT Directive, the tax supported by the taxable person in the acquisition of goods and services for the exercise of its activity should be deductible, except if the goods acquired or the services rendered are exempt from VAT or their use is not intended for commercial purposes. In the exact words of Ben Terra and Julie Kajus, which are transcribed here "no deduction is permitted for goods and services supplied based on Article 132 of the VAT Directive (exempt transactions) or used for non-business purposes (unless treated as general costs, i.e. subservient to business purposes)" (Ben Terra and Julie Kajus, European VAT Directives – Introduction to European VAT 2016, Vol. I, IBFD, p. 1225).

Note, however, that by purposes unrelated to the business, one should not understand those which, although related to the activity of the taxable person, do not have a direct relationship with certain outputs, but those which are not incorporated into an economic activity.

Patrícia Noiret Cunha further states that article 20, no. 1, subparagraph a) of the VAT Code referred to above "requires that the goods and services acquired must be dedicated to the economic activity carried out by the taxable person. Secondly, the goods and services acquired and whose tax is intended to be deducted should not be excluded from the exercise of the right to deduction" further adding that "to deduct the VAT supported on the goods or services received, the taxable person must use them for purposes of its taxable operations. This means that the goods and services must be necessary for effective management and correct development of the company, taking into account the circumstances of the particular case, in particular the nature of the goods and services acquired, their value and quantity." (Patrícia Noiret Cunha, Value Added Tax – Annotations to the Code of Value Added Tax and to the VAT Regime in Intra-Community Transactions, Coimbra: Superior Institute of Management, 2004, pp. 315 and 316).

Accordingly, the non-deductibility of VAT should be considered only in exceptional situations or when VAT is not incurred in the context of the economic activity of the taxable person. It is, therefore, on this paradigm that it is important to analyze the issue.

In light of article 20, no. 1, subparagraph a) of the Code of Value Added Tax (hereinafter, "VAT Code") it is determined that "[o]nly the tax that has incided on goods or services acquired, imported or used by the taxable person for the carrying out of the following operations may be deducted:

• Transmissions of goods and provision of services subject to tax and not exempt from it;".

On the other hand, article 168, subparagraph a) of Council Directive 2006/112/EC of 28 November 2006 ("VAT Directive") establishes that: "[w]here goods and services are used for the purposes of its taxed operations, the taxable person has the right, in the Member State in which it carries out such operations, to deduct from the amount of tax for which it is liable the following amounts:

• The VAT due or paid in that Member State in relation to goods supplied or to be supplied to it and in relation to services supplied or to be supplied to it by another taxable person;".

From article 20, no. 1 of the VAT Code are excluded the "acquisitions not intended for business purposes". "Where acquisitions are not intended for business purposes, the taxable person cannot proceed with the respective deduction in accordance with article 20 of CIVA." (Emanuel Vidal Lima, Value Added Tax – Commented and Annotated, Porto Publisher, 9th ed., 2003, p. 366).

Now, the Claimant has as its corporate purpose the "conception, promotion, construction and management of projects, actions and undertakings that contribute in an integrated manner to the economic, social, sports and cultural development of the municipalities of…, …, … and …" and in the course of its activity reconverted the Port of … through the construction of a shopping centre (cfr. article 2 of Regional Legislative Decree no. …/2001/M).

In the case in question, the Claimant proceeded to the construction of adjacent infrastructure on Avenida ….

According to the argument explained by the Claimant, the VAT incurred on works for improvement of the road and roundabouts in the proximity of the commercial establishment constitute investment expenses with a view to the exercise of the economic activity of the taxable person, that is to say of the Claimant.

Thus, the VAT, being incurred in the acquisition of services that are intended to be used for pursuing the ends of the taxable person's taxed operations, i.e., incorporated in the activity, is deductible.

Neither the law, nor the structuring principles of VAT, require that the VAT supported be directly related to the obtaining of VAT-subject outputs.

Nor is it required that the VAT to be deducted be directly related to a specific output, but be incorporated into the economic activity of the taxable person.

On the other hand, it is incumbent on the taxable person to assess the operations that are relevant for the pursuit of its economic activity and its scope. It is not incumbent on AT to intermeddle in the management powers of the Claimant and determine what should or should not be considered as an investment expense related to the economic activity, that is, with the upstream operation.

The CJEU has even been defending that an indirect relationship between the good or service in which VAT was incurred and the operations produced downstream (the economic activity of the taxable person) is sufficient for the latter to be deductible.

Indeed, note the judgment of the CJEU of 14 September 2017, delivered in case no. C-132/16 which "[r]esults from article 168 of Directive 2006/112 that insofar as the taxable person, acting in that capacity at the moment it acquires a good or service, uses that good or service for the needs of its taxed operations is authorized to deduct the VAT due or paid in relation to the said good or service (v., in this sense, judgment of 22 October 2015, Sveda, C‑126/14, EU:C:2015:712, no. 18).

According to constant case law, the existence of a direct and immediate relationship between a given upstream operation and one or more downstream operations conferring the right to deduction is, in principle, necessary for that the right to deduction of VAT paid upstream is recognized to the taxable person and to determine the extent of such right. The right to deduction of VAT that incided on the acquisition of goods or services upstream presupposes that the expenses made with their acquisition formed part of the constitutive elements of the price of the taxed operations downstream conferring the right to deduction (judgments of 29 October 2009, SKF, C‑29/08, EU:C:2009:665, no. 57, and of 18 July 2013, AES‑3C Maritza East 1, C‑124/12, EU:C:2013:488, no. 27).

It was, however, also admitted a right to deduction in favor of the taxable person, even in the absence of a direct and immediate relationship between a given upstream operation and one or more downstream operations conferring the right to deduction, when the costs of the services in question form part of the general expenses of the latter and are, as such, constitutive elements of the price of the goods supplied or of the services rendered by the same. Such costs have, in effect, a direct and immediate relationship with the whole of the economic activity of the taxable person (v., in particular, judgments of 29 October 2009, SKF, C‑29/08, EU:C:2009:665, no. 58, and of 18 July 2013, AES‑3C Maritza East 1, C‑124/12, EU:C:2013:488, no. 28)." (underlined in original) (Judgment of the CJEU of 14 September 2017, delivered in case no. C-132/16, Iberdrola Inmobiliaria Real Estate Investements, EU:C:2017:683, paragraphs nos. 27, 28 and 29).

Alexandra Martins states in this respect that "the CJEU satisfies itself with an indirect nexus, provided it is demonstrated that the inputs integrate the ultimate objective of pursuit of an activity (output) that confers the right to deduction or insofar as it confers it." (Alexandra Martins, Deconstructing Dogmas: The Right to Deduction and Exemptions, VAT Notebooks 2016, Coimbra: Almedina, 2016, p. 32).

In the particular case, the works for improvement of the roads and roundabouts in question are essential for customers of the shopping centre to be able to access the location, being, in this manner, vital that the said infrastructure exist for the Claimant to be able to develop its economic activity.

Also in the judgment of the CJEU above mentioned – Sveda – the Court understood that "the national court described the expenses associated with the capital goods in question in the main proceeding as being, in definitiveness, intended for the exercise of the economic activities planned by Sveda. According to the observations made by that court, which are based on objective elements of the proceeding submitted to it, the recreational trail in question can be considered a means to attract visitors with the objective of supplying them with goods and services, thanks to the sale of souvenirs, food and beverages, as well as the possibility offered to access paid entertainments and baths. Thereby, it seems to result from the said observations of the national court that Sveda acquired or produced the capital goods in question with the intention, confirmed by objective elements, of exercising an economic activity and acted accordingly as a taxable person in the sense of article 9, no. 1 of the VAT directive. According to constant case law, the existence of a direct and immediate relationship between a given upstream operation and one or more downstream operations conferring the right to deduction is, in principle, necessary for the right to deduction of VAT paid upstream to be recognized to the taxable person and to determine the extent of such right. The right to deduction of VAT that incided on the acquisition of goods or services upstream presupposes that the expenses made with their acquisition formed part of the constitutive elements of the price of the taxed operations downstream conferring the right to deduction (v., in particular, judgment SKF, C‑29/08, EU:C:2009:665, no. 57)." (underlined in original) (Judgment of the CJEU of 22 October 2015, delivered in case C-126/14, Sveda, ECLI:EU:C:2015:712, paragraphs nos. 22, 23 and 27).

Thus, and in sum, this Court considers that VAT should be deductible.

Indemnificatory Interest

In the request for arbitral pronouncement, the Claimant petitions for reimbursement of the unduly paid tax, plus indemnificatory interest.

Pursuant to article 24, no. 1, subparagraph b) of RJAT it results that "the arbitral decision on the merits of the claim for which there is no appeal or impugnation binds the tax administration […]: a) to restore the situation that would have existed if the tax act which is the object of the arbitral decision had not been carried out, adopting the acts and operations necessary for that effect;".

Now, article 100 of LGT – Effects of Decision Favorable to the Taxable Person – determines that the "tax administration is obliged, in case of total or partial merit of administrative reclamations or appeals, or of judicial proceeding in favor of the taxable person, to immediate and full restoration of the situation that would have existed if the illegality had not been committed, comprising the payment of indemnificatory interest, in the terms and conditions provided for by law".

Notwithstanding, the material scope of RJAT does not expressly foresee condemnatory decisions, since article 2, no. 1, subparagraph a) of RJAT refers only to "declaration of illegality", the case law of CAAD understands that it is integrated in the competence of arbitral courts the appreciation of requests for condemnation in the payment of indemnificatory interest.

In this sense, see the judgments of CAAD in cases no. 681/2016-T, of 15-09-2017; case no. 361/2014-T, of 18-12-2014; case no. 142/2012-T, of 26-04-2013 (all available at https://caad.org.pt/tributario/decisoes/).

Indeed, given that recourse to arbitration is an alternative method for resolution of disputes, in particular alternative in relation to judicial impugnation, it is stressed that being admissible in judicial impugnation to petition indemnificatory interest and, consequently, to condemn AT in its payment, nothing leads to it not being possible to condemn in the context of arbitration.

Article 43, no. 1 of LGT provides that: "[i]ndemnificatory interest is due when it is determined, in administrative reconsideration or judicial impugnation, that there was error attributable to the services that results in payment of the tax obligation in an amount greater than the legally due.".

Moreover, it results from article 24, no. 5 of RJAT the recognition of the right to indemnificatory interest when it provides that "[i]t is due the payment of interest, regardless of its nature, in the terms provided for by the general tax law and by the Tax Code of Procedure and Process.".

However, in order for indemnificatory interest to be due, it is necessary to verify four cumulative requirements which, in the words of Counselor Jorge Lopes de Sousa, refer to:

• "that there is an error in an act of assessment of a tax;"

• "that it be attributable to the services (directly or by way of generic guidelines);"

• "that the existence of such error be determined in a process of administrative reconsideration or of judicial impugnation;"

• "that from such error has resulted the payment of a tax obligation in an amount greater than the legally due." (Jorge Lopes de Sousa, Guide to Tax Arbitration – Commentary on the Legal Framework for Arbitration in Tax Matters, Coimbra: Almedina, 2017, p. 230).

Indeed, there was an error in the assessment act insofar as the taxable person's right to deduct the tax incurred was not taken into account, this error is attributable to the services resulting from an assessment by AT and, moreover, from the dismissal of an administrative reconsideration.

Following the illegality of the VAT assessment acts, AT should restore the amounts unduly paid by the Claimant in the amount of €213,455.10 in observance of the provision of article 100 of LGT above transcribed plus indemnificatory interest that is due from the date on which payment was made by the Claimant (22/08/2016) until the date on which the respective reimbursement takes place.

DECISION

Therefore, this Arbitral Court hereby agrees:

• To find meritless the exceptions of incompetence of the arbitral court and of expiration of the right of arbitral action raised by the Respondent;

• To find the request for arbitral pronouncement to be meritorious and to declare illegal the additional VAT assessments and corresponding acts of assessment of compensatory and default interest, with nos. 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, carried out by the Honorable Director-General of AT, by reference to the year 2012, in the total amount of €213,455.10 and, equally,

• To annul the said assessment and, consequently, to annul the tacit dismissal of the administrative reconsideration presented;

• To find the requests for reimbursement of the sum unduly paid and for payment of indemnificatory interest, from 22/08/2016, at the supplementary legal rate, on the amount to be reimbursed to be meritorious and to condemn AT to effect such payments.

Process Value

In accordance with the provisions of articles 306, no. 2, of CPC and 97-A, no. 1, subparagraph a), of CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Processes, the process is valued at €213,455.10 (two hundred and thirteen thousand, four hundred and fifty-five euros and ten cents).

Costs

Pursuant to article 22, no. 4, of RJAT, the amount of costs is fixed at €4,284.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Process, to be borne by AT.

Let it be notified.

Lisbon, 25 March 2018

The Arbitrators

(Fernanda Maçãs)

(Filipa Barros)

(Leonardo Marques dos Santos)

[1] Council Directive 2006/112/EC of 28 November 2006.