Summary
Full Decision
ARBITRAL DECISION
The arbitrators Carlos Alberto Fernandes Cadilha (Presiding Arbitrator), designated by the Deontological Council of the Centre for Administrative Arbitration, and Rogério M. Fernandes Ferreira, and Carla Castelo Trindade, nominated by the parties to form an Arbitral Tribunal, hereby decide as follows:
I – REPORT
On 2 August 2017, A…, S.A., with registered office at …, no. …, …-… …, municipality of Seixal, with tax number …, wholly owned by B…, Ltd., a company incorporated under the laws of Mauritius, with registered office in …, …, …, Mauritius, filed a petition for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2, paragraph 1, subparagraph a) and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the tax acts of additional assessment of VAT and VAT interest relating to the years 2013, 2014 and 2015, in the total amount of €987,282.26.
To support its petition, the Applicant alleges, in summary, that:
The disputed acts result from the improper application of the general anti-abuse clause, provided for in Article 38 of the General Tax Law (LGT);
The disregard, for purposes of VAT refund, of the technical services provision contract entered into between the Applicant and B…, Ltd., based on the erroneous assumption that the Applicant was incorporated by such company for the purpose of enjoying the right to VAT deduction;
The violation of the principle of freedom of business initiative and organisation and the principle of legal certainty;
The inapplicability of the general anti-abuse clause in that its material requirements were not met;
The inapplicability of the procedure provided for in Article 63 of the Tax Procedure and Process Code (CPPT) in relation to abusive situations that may have occurred in VAT matters;
The unconstitutionality of the normative interpretation made by the Tax Authority with respect to Article 38 of the LGT, by violation of Article 103 of the Constitution.
In response, the Tax Authority contends that:
B… Mauritius wholly owns the share capital of the Applicant;
The Applicant is subject to the control and direction of the parent company, having no autonomy to incur expenses related to its activity;
The contract entered into between both companies, by which the Applicant undertakes to provide technical and management services to B… Mauritius, for remuneration of 5% on the value of costs, is solely for the purpose of allowing the Applicant to carry out active operations subject to tax with full deduction rights;
The fact that this would not occur if such activity were carried out by A…, subsequently incorporated.
The petition for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority in accordance with applicable regulations.
Pursuant to subparagraph b) of paragraph 2 of Article 6 of the RJAT, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the parties designated the arbitrators and the Deontological Council designated the third arbitrator, Presiding, who communicated acceptance of the appointment within the applicable period.
On 20 November 2017, the parties were notified of such designation and did not express any intention to challenge them, pursuant to the combined provisions of Articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provisions of paragraph 7 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 14 December 2017.
On 17 April 2018, the meeting referred to in Article 18 of the RJAT took place, where party testimony was given and five witnesses presented by the Applicant were heard.
Having been granted a deadline for submission of written submissions, these were submitted by the Applicant on 2 May 2018.
The Respondent entity did not submit written submissions.
The Arbitral Tribunal is materially competent and is properly constituted, pursuant to Articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 2, subparagraph b), of the RJAT.
The parties have legal standing and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.
The proceedings contain no nullities and no objections were raised.
All matters being duly considered, a decision must be made.
II. DECISION
A. MATTERS OF FACT
It is important to emphasise that the tribunal is not required to pronounce on everything alleged by the parties; rather, it has the duty to select the facts that are relevant to the decision and to distinguish proven facts from unproven facts. All in accordance with Article 123, paragraph 2, of the Tax Procedure and Process Code and Articles 607, paragraphs 2, 3 and 4, of the Code of Civil Procedure, applicable by virtue of Article 29, paragraph 1, subparagraphs a) and e), of the RJAT.
Thus, the facts relevant to the adjudication of the case are selected and delimited in function of their legal relevance, which is established in accordance with the subject matter of the dispute and the various evidentiary topics (see Article 596, paragraph 1 of the Code of Civil Procedure applicable by virtue of Article 29, paragraph 1, subparagraph e), of the RJAT).
Now, taking into account the positions adopted by the parties, the documentary evidence attached to the proceedings and the testimonial evidence produced at the meeting held, the following facts are considered proven as being relevant to the decision:
A.1. Facts established as proven
The Applicant was notified by the Tax Authority of the acts of additional VAT assessment based on corrections made by the tax inspection services and of the assessment of VAT interest, relating to the years 2013, 2014 and 2015, in the total amount of €987,282.26 (documents nos. 1 to 23 attached with the initial petition).
B…, Ltd, a company incorporated in accordance with the laws of the Republic of Mauritius, developed and executed a project for the construction, installation, operation and maintenance of a submarine fibre optic cable (telecommunications) between Europe and Africa, with connection points (terrestrial stations) in Seixal (Portugal), in Accra (Ghana) and in Lagos (Nigeria), for the provision of international telecommunications services.
It incorporated, on 10 December 2008, a limited company bearing the name A…, S.A., with its share capital wholly held by B…, having the following corporate purpose (documents nos. 24 and 25):
To ensure the operation and maintenance of terrestrial cable stations with connection to cable systems and to telecommunications networks onshore, offshore, terrestrial, submarine, domestic and international, for the provision of telecommunications services to telecommunications operators, internet service providers, national or multinational companies and other information technology service providers;
To allocate, distribute, authorise, lease, sell, assign and/or provide international interconnectivity, access to terrestrial infrastructures of telecommunications cable systems, return transport channel and other telecommunications traffic distribution services, to telecommunications operators, internet service providers, national or multinational companies, other information technology service providers and to consumers;
To promote, either directly or through subsidiaries, branches or agents, the provision of broadband internet, information technology services, direct voice connectivity, Voice over Internet Protocol and the sending and receiving of voice and message signals in accordance with any type of licenses obtained for such purpose;
To coordinate, supervise and monitor the performance, operations and activities of terrestrial cable stations and other infrastructure and telecommunications connection equipment, internet and other information technology service providers and consumers to terrestrial, submarine, domestic and international cable systems, whether these currently exist or are installed in the future;
To provide companies and enterprises with project management, technology management, consultancy and advisory services in the search for business and technological solutions based on their existing networks;
And also, the exercise of all activities connected with the activities described herein.
A…, S.A. has its registered office at the facilities of …, located at …, no. …, parish of …, municipality of Seixal (document no. 25).
On 31 May 2016, the Applicant entered into, in the capacity of assignee/user, a contract for temporary assignment of use of a warehouse, in the vicinity of where the registered office operates and where various materials necessary for the Applicant's activity are stored (documents nos. 26 and 27).
A…, S.A. has in its employ, since April 2010, an employee with whom it entered into an employment contract (document no. 28).
The employee works in close relationship with the remaining subsidiary companies and in coordination with the administration of the parent company for whom he prepares periodic reports on the main management matters of the company.
On 6 July 2009, B…, Ltd entered into a technical telecommunications services contract with the Applicant, by which the latter, as service provider, undertook to perform the following services (document no. 29):
to maintain and improve the quality of the portion of the cable in Portuguese territorial waters ("PSCS");
to monitor and provide technical assistance for the interconnection of the PSCS to the remaining portion of the Submarine Cable System;
to support the distribution of international traffic through third-party networks based in Portugal;
to evaluate and report on the quality of the PSCS monthly;
to handle the company's compliance and regulatory requirements in Portugal, in collaboration with the company's legal advisors; and
to manage supply contracts, submarine cable maintenance contracts and technical support, spare parts storage and other related technical services, on behalf of the company, relating to the PSCS.
Under the terms of that contract it was agreed that B…, Ltd would pay for the services to be provided an amount corresponding to reimbursement of costs plus an additional margin of 5% (document no. 29).
On 26 April 2010, B…, Ltd registered in the Commercial Registry Office of Lisbon a permanent representative in Portugal, bearing the name A…– Branch in Portugal, with registered office at …, no. …, parish of …, municipality of Seixal, and commencement of activity as of 3 July 2012 (documents nos. 30, 31 and 32).
The Administration of C…, IP entered into a concession contract with A…– Branch in Portugal having as its object the use of public maritime domain land for the installation and maintenance of the submarine cable … and other accessory infrastructure (document no. 33).
B…, Ltd decided to establish subsidiaries in each of the countries where the submarine cable would have connection points, namely, in Portugal, in Ghana and in Nigeria.
The decision to establish a subsidiary in Portugal was essentially due to the fact that such was the corporate structure chosen by the parent company for the various countries related to the project.
B…, Ltd intended from the outset to expand the activity of the subsidiary company in Portugal to the provision of telecommunications services and to other business areas.
The Finance Directorate of … initiated an external inspection procedure against the Applicant, pursuant to Article 14, paragraph 1, subparagraph a), of the Supplementary Regime of the Tax Inspection Procedure, based on service orders issued on 30 November 2015, and relating to the years 2011, 2012, 2013 and 2014 (documents nos. 34 to 37 attached with the initial petition and administrative proceedings).
Pursuant to the provisions of Article 63 of the CPPT, the Applicant, by letter from the Finance Directorate of ..., dated 12 July 2016, was notified to exercise the right of hearing on a draft application of the general anti-abuse clause provided for in Article 38, paragraph 2, of the LGT (document no. 38 attached with the initial petition and administrative proceedings).
The Applicant exercised the right of hearing on 12 August 2016 (document no. 39 attached with the initial petition and administrative proceedings).
By order of the Director General of the Tax Authority, dated 16 December 2016, the application of the general anti-abuse clause was authorised relating to the years 2012 to 2014 (document no. 40 attached with the initial petition and administrative proceedings).
By letter dated 18 January 2017, the Applicant was notified to exercise the right of hearing as to the draft Tax Inspection Report (document no. 41 attached with the initial petition and administrative proceedings).
The Applicant exercised the right of hearing on 7 February 2017 (document no. 42 attached with the initial petition and administrative proceedings).
By letter dated 6 March 2017, the Applicant was notified of the Tax Inspection Report, which concludes, in application of the anti-abuse rule, that the contract for provision of technical services entered into on 6 July 2009 should be disregarded for tax purposes as regards VAT (document no. 43 attached with the initial petition and administrative proceedings).
The Applicant made payment of the additional VAT assessments referred to in the preceding point 11), on 20 April 2017 (documents nos. 44 to 51).
A.2. Facts established as not proven
As stated, with respect to the matters of fact established as such, the tribunal is not required to pronounce on everything alleged by the parties; rather, it has the duty to select the facts that are relevant to the decision and to discriminate proven facts from unproven facts as provided for in Article 123, paragraph 2, of the CPPT and Articles 607, paragraphs 2, 3 and 4 of the Code of Civil Procedure, applicable by virtue of Article 29, paragraph 1, subparagraphs a) and e), of the RJAT. Thus, the facts relevant to the adjudication of the case were, as stated above, selected and delimited in function of their legal relevance, with no other factuality alleged being relevant to the proper resolution of the procedural dispute.
B. ON THE LAW
B.1 Inapplicability of the anti-abuse clause in VAT matters
The Applicant begins by considering that the procedure provided for in Article 63 of the CPPT takes place only when the application of the general anti-abuse clause referred to in Article 38 of the LGT is at issue and not already when the alleged abusive practice stems from the applicability of the legal regime of VAT.
Indeed, as is evident from the Tax Inspection Report, the Tax Authority – although what was at issue was the disregard for tax purposes of the VAT deduction in relation to certain service provisions – initiated the procedure provided for the application of the anti-abuse provision contained in Article 38, paragraph 2, of the LGT.
However, this does not result in the illegality of the procedure adopted.
As decided in the judgment of the Supreme Administrative Court of 25 November 2015 (Case no. 0576/13), the procedure provided for in Article 63 of the CPPT must be mandatorily used even when a situation regulated by the VAT Code is at issue. The court ruled in this sense following the judgment of the Court of Justice of the European Union of 12 February 2015 (Case C-662/13), issued in preliminary ruling proceedings, which established the following understanding: "Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as not precluding the prior and mandatory application of a national administrative procedure, such as that provided for in Article 63 of the Tax Procedure and Process Code, in the event that the Tax Administration suspects the existence of an abusive practice".
Establishing Article 38, paragraph 2, of the LGT a general anti-abuse clause, applicable to all situations not covered by other specific provisions, and the VAT Directive not opposing the use of the prior procedure generally provided for in Article 63 of the CPPT, there is no reason to consider the alleged illegality to be established.
B.2 Anti-abuse clause
In the context of the inspection procedure for application of the general anti-abuse rule, the Tax Authority determined the disregard for tax purposes of the technical services provision contract entered into between B…, Ltd. and the Applicant, with the consequent correction and assessment of VAT, relating to the tax periods of 2013, 2014 and 2015, through exclusion of the deduction right that applied to the acquired services.
To reach this conclusion, the Administration rests essentially on the presumption that the Applicant was incorporated for the purpose of enjoying the right to VAT deduction, drawing this inference from various sets of considerations: (a) B…, Ltd. holds 100% of the share capital of the Applicant and the latter does not have financial autonomy and is subject to the control and direction of the parent company; (b) the Applicant has in its employ only one employee; (c) the remuneration agreed for the provision of services, calculated by applying an additional margin of 5% on the cost of services, is what permits justifying the existence of added value, qualifying the Applicant as a taxable person for VAT purposes; (d) VAT deduction would not take place if the same services were provided by the permanent establishment in Portugal that had subsequently been incorporated (A…).
Contesting this perspective, the Applicant alleges, as a first line of analysis, that, as a subsidiary company, it corresponds to a typical and standard structure, also implemented within the group in other situations of international expansion, and that the subsequent establishment of a branch was merely due to the legal requirement to obtain the concession for use of public maritime domain land from the Portuguese authorities, concluding that B…, Ltd. merely exercised business management freedom and opted for a solution adequate to the pursuit of its activity in Portugal.
The question to be decided is, therefore, whether the anti-abuse clause referred to in Article 38, paragraph 2, of the LGT applies in the circumstances of the case, which justifies beginning with the characterisation of this figure as a mechanism for controlling tax avoidance.
The cited provision of the LGT declares as "ineffective, in the tax context, acts or legal transactions essentially or mainly aimed, by artificial or fraudulent means and by abuse of legal forms, at the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or at obtaining tax advantages that would not be achieved, wholly or partially, without the use of such means". And in that case, it determines that taxation shall be carried out in accordance with the rules that would be applicable if such means had not been used, with the tax advantages it was intended to obtain not materialising.
Additionally, Article 63 of the CPPT provides for a specific tax procedure for application of the anti-abuse provision and imposes on the Administration a special duty of substantiation of that decision which must necessarily comprise (i) the description of the legal transaction entered into or the legal act performed and of the transactions or acts of identical economic purpose, as well as an indication of the rules of tax incidence applicable to them; and (ii) the demonstration that the entry into the legal transaction or performance of the legal act was essentially or mainly aimed at the reduction, elimination or temporal deferral of taxes that would be due in the event of a transaction or act of identical economic purpose, or at obtaining tax advantages.
As Sérgio Vasques notes, the general anti-abuse clause established in the LGT comprises three essential elements. "Firstly, there is required the performance of an artificial or fraudulent act or transaction and that expresses an abuse of legal forms, in the sense that we are dealing with negotiation schemes that conceal their true purposes and to which is given a use manifestly anomalous in relation to common legal practice. Secondly, there is required the sole or principal objective of obtaining through such negotiation schemes a tax advantage, whatever its nature, with the evident marginalisation of real economic objectives. Thirdly, there is required that it result clearly from the law the intention to tax the assets in question, on the same terms as they would be taxed if the taxpayer had resorted to the most common legal forms and negotiation practices" (Manual of Tax Law, Almedina, 2018, page 374).
The general meaning of the rule is, in these terms, to permit the disqualification for tax purposes of any act or legal transaction performed by the taxpayer with the sole or principal objective of obtaining a tax advantage, which may constitute a violation of tax law. The legal effect that results from the operation of the anti-abuse clause is to consider acts as performed in accordance with the normal standard of legal commerce to obtain the same economic result, with the tax obligation being determined in function of equivalent acts that might be performed.
It is required, therefore, that an artificial or fraudulent act or transaction has been performed that represents an abuse of legal forms and that has had as its sole or principal objective the obtaining of a tax advantage (on these aspects, Serena Cabrita Neto/Carla Castelo Trindade, Tax Proceedings, vol. I, Coimbra, 2017, pages 430-433).
The application of the anti-abuse clause depends, on the other hand, on a case-by-case assessment, with it being necessary to weigh the concrete conduct attributable to the taxpayer in function of the circumstances of fact that may be considered as established (see judgment of the Southern Administrative Court of 15 February 2011, Case no. 04255/10, and arbitral judgment rendered in Case no. 377/2014).
In the present case, it was concluded, by the documentary and testimonial evidence produced, that B…, Ltd. incorporated a subsidiary company, bearing the name A…, S.A., with a corporate purpose related to the operation and maintenance of terrestrial cable stations with connection to cable systems and telecommunications networks and other connected activities and that such was a strategic option equally adopted in relation to other countries where connection points to the submarine cable were established; and that, on the other hand, the parent company intended to expand the activity of its subsidiary to the provision of telecommunications services in the national market within the framework of a more comprehensive project that aimed at the various subsidiary entities intervening in the telecommunications sector.
Although having only a single employee in Portugal, it was further demonstrated that this employee worked in close relationship with the departments of the other subsidiary companies and in coordination with the administration of the parent company, for whom he prepares periodic reports on the company's activity.
Furthermore, the establishment, on 26 April 2010, of a permanent representative in Portugal, bearing the name A…– Branch was due to legal requirements related to the concession contract for the use of public maritime domain land for the installation and maintenance of the submarine cable that was subsequently entered into with C…, IP.
It is in no way evident, in light of all that has been stated, that the creation of a subsidiary corporate structure by B…, Ltd, with functions associated with the realisation and development of the submarine cable installation project, is devoid of economic rationality nor that it can be understood as a purely artificial expedient to which an exclusive or principal tax motivation should be attributed.
Beyond which the provision of Article 38 of the LGT – as decided in the cited judgment of the Southern Administrative Court of 15 February 2011 – cannot fail to be interpreted in conformity with the Constitution, especially in the aspect of freedom of economic initiative and business management and which presupposes, not only the freedom to initiate a certain economic activity, but also the freedom of organisation and ordering of the institutional means necessary to carry out such activity, including therein the possibility of choosing the form of organisation of the enterprise (judgment of the Constitutional Court no. 304/2010).
Certainly, the freedom of initiative as freedom of business organisation is exercised on the terms defined by the Constitution and by law and taking into account the general interest, with nothing preventing limits that may be imposed by the need to prevent anomalous or abusive tax planning operations in order to ensure the principle of equality and the fair distribution of tax burdens.
The point is that the application of the general anti-abuse rule, although showing itself to be justified at the constitutional level as a means of preventing violation of the spirit of tax law, is conditioned by a special duty of substantiation, which constitutes a guarantee for the taxpayer and which is justified, not only by the restrictive effect that the rule produces in the private sphere, but also by the fact that it is a general open clause comprised of indeterminate concepts whose case-by-case implementation involves the exercise of a margin of free decision.
On another level, it is important to bear in mind the rules of evidentiary law that result from Article 74 of the LGT: it falls to the Tax Authority to prove the facts constitutive of the application of the anti-abuse clause and this burden of proof is maintained in the process of judicial challenge, given that the challenger, although in the procedural position of alleging and demonstrating the illegality of the tax act, does not have to prove the facts for which it was not responsible to prove within the framework of the tax procedure. And such did not occur, particularly in the course of the present arbitral proceedings, with no submissions even being presented despite there being hearing of the party and witnesses.
On the other hand, conviction as to the existence and content of the tax fact must be based on adequate evidentiary means and on objective presuppositions, with mere invocation of conjecture or supposition not being sufficient.
In the concrete case, as was seen, the Tax Authority concluded that the creation of A… Portugal, S.A. had as its sole objective permitting the deduction of VAT on services provided by considering that such services could be performed by the permanent establishment, in which case there would be no occasion for deduction of the tax. It was demonstrated, however, that the branch was created solely by mere legal requirement in view of the concession of public maritime domain land, having remained inoperational and that the decision to establish a subsidiary in Portugal was connected with the fact that such was the corporate structure chosen by the parent company for the various countries where there are connection points to the cable.
In this context, the considerations adduced as to the absence of financial autonomy of the affiliated company do not assume particular significance, especially since the company is held in 100% of the capital by the parent company, finding itself in a relationship of complete control. And, on the other hand, the composition of the labour force of the affiliated company is not, in itself, indicative of illegitimate tax planning. What is important to consider is that the existing position has a defined functional content and that the company remains operational and that there is the intention to expand the scope of activity to the provision of telecommunications services and to other areas of business.
The presuppositions for the application of the anti-abuse clause are accordingly not met, whereby the tax acts in question must be considered as illegal, with the consideration of the constitutional questions raised being prejudiced.
Indemnificatory interest
The Applicant further requests condemnation of the Tax Authority in indemnificatory interest calculated from the date of the improper payment of the tax until full reimbursement of the amount due.
In harmony with the provisions of subparagraph b) of Article 24 of the RJAT, the arbitral decision on the merits of the claim for which no appeal or challenge is available binds the Tax Administration, in the exact terms of the procedence of the arbitral decision in favour of the taxpayer, requiring it to "restore the situation that would have existed if the tax act subject to the arbitral decision had not been performed, adopting the acts and operations necessary for such purpose". Which is in line with the provision of Article 100 of the LGT, applicable by force of the provision in subparagraph a) of paragraph 1 of Article 29 of the RJAT.
Further pursuant to paragraph 5 of Article 24 of the RJAT "payment of interest, irrespective of its nature, is due, on the terms provided for in the General Tax Law and in the Tax Procedure and Process Code", which refers to the provision of Articles 43, paragraph 1, and 61, paragraph 5, of each of such enactments, entailing payment of indemnificatory interest from the date of improper payment of the tax until the date of processing of the respective credit note.
There is accordingly occasion, following declaration of illegality of the tax acts of VAT assessment, for payment of indemnificatory interest, on the terms of the cited provisions of Articles 43, paragraph 1, of the LGT and 61, paragraph 5, of the CPPT, calculated on the amount improperly paid by the Applicant, at the rate of legal interest (Articles 35, paragraph 10, and 43, paragraph 4, of the LGT).
III – DECISION
For these reasons, it is decided:
a) To uphold the petition for arbitral ruling and to annul the corrections reflected in the additional VAT assessments nos. …, …, …, … and … and, likewise, the VAT assessment statements nos. 2017…, 2017…, 2017…, 2017…, 2017 … and 2017 … and the VAT interest assessment statements nos. 2017 … and 2017 …, in the total amount of €987,282.26, relating to the tax periods of 2013, 2014 and 2015, and, in consequence, to determine the restitution of the tax and interest improperly paid by the Applicant.
b) To condemn the Respondent to payment of indemnificatory interest, calculated from the date of payment of the VAT tax and interest, until the date of issue of the credit note, on the terms of Articles 24, paragraph 5 of the RJAT, 43 of the LGT and 61 of the CPPT.
Value of the case
The value of the case is fixed at the amount of €987,282.26, which corresponds to the value of the assessments which it was sought to contest (Article 97, paragraph 1, subparagraph a), of the CPPT).
Notify accordingly.
Lisbon, 11 June 2018
The Presiding Arbitrator
(Carlos Fernandes Cadilha)
The Arbitrator Member
(Rogério Fernandes Ferreira)
The Arbitrator Member
(Carla Castelo Trindade)
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