CAAD 498/2018-T: VAT Pro Rata Deduction for Mixed Taxable Persons in Financial Leasing by Banking Institutions

ARBITRAL TAX JURISPRUDENCE

Process No. 498/2018-T

Decision Date: 2021-07-26

VAT

Claim Value: € 1,358,262.98

**Subject: VAT - Mixed-purpose Taxable Person - Banking Institution - Financial Lease - Pro rata Deduction - Amendment of Arbitral Decision (annexed to the decision).
Replaces the arbitral decision of 28 May 2019.

ARBITRAL DECISION

The Arbitrators José Poças Falcão (Chairman), Isaque Marcos Lameiras Ramos and José Ramos Alexandre (adjunct arbitrators), appointed by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form this Collective Arbitral Tribunal, in fulfillment of the judgment of the Supreme Administrative Court (Plenary) – hereinafter "SAC" - rendered in process No. 52/19.0BALSB which decided to annul the previous arbitral award, agree as follows:

I. Report

A..., S.A. (hereinafter Claimant), holder of collective person number ..., with headquarters at ... Street, ..., ...-... Lisbon, filed on 08/10/2018 a request for arbitral pronouncement and constitution of an arbitral tribunal, under the provisions of Article 4 and No. 2 of Article 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter designated as "LFATM"), in which the Tax and Customs Authority is Respondent (hereinafter designated as "Respondent" or "TA").

In the referred request for arbitral pronouncement, the Claimant seeks that the Arbitral Tribunal declare:

• the annulment of the tax acts consisting of VAT self-assessments relating to the periods 01/2016, 02/2016, 03/2016, 04/2016, 05/2016, 06/2016, 07/2016, 08/2016, 09/2016, 10/2016, 11/2016 and 12/2016;

• the revocation of the decision dismissing the Administrative Complaint filed by the Claimant against said tax act ("Administrative Complaint Procedure No. ...2018...");

• the restitution of the sum of 1,358,262.98 euros relating to VAT not deducted,

• the payment of compensatory interest from the date of presentation of the respective periodic declarations relating to the periods 2016/01, 2016/02, 2016/03, 2016/04, 2016/05, 2016/06, 2016/07, 2016/08, 2016/09, 2016/10, 2016/11 and 2016/12, respectively, until actual restitution.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and notified to the Respondent, on 12 December 2018.

The Claimant did not proceed to nominate an arbitrator, so, under the provisions of Article 6, No. 2, letter a), of the LFATM, the signatories were appointed as arbitrators by the President of the Deontological Council of CAAD, with the appointments being accepted under the terms and timeframes legally provided for.

The parties, notified of said appointment, raised no opposition.

The Arbitral Tribunal was constituted on 17 December 2018, with the Tax Authority being notified on the same date to submit a Response, which it did on 1 February 2019, simultaneously submitting the Administrative file.

By Order of 22 February 2019, the arbitral meeting provided for in Article 18 of the LFATM was dispensed with, and the Claimant and Respondent were invited to present written submissions.

Only the Claimant presented, on 1/02/2019, written submissions, having, in essence, reaffirmed all the arguments it had already set out in the Request.

The request for arbitral pronouncement submitted by the Claimant is based, essentially, on the following:

• On 16 February 2016, it submitted, via Internet, the periodic VAT declaration for the month of January 2016 – which was subsequently replaced by the declaration submitted on 17 March 2016.

• On 22 March 2016, it submitted, via Internet, the periodic VAT declaration for the month of February 2016 – which was subsequently replaced by the declaration submitted on 05 April 2016.

• On 13 April 2016, it submitted, via Internet, the periodic VAT declaration for the month of March 2016 – which was subsequently replaced by the declaration submitted on 06 May 2016.

• On 17 May 2016, it submitted, via Internet, the periodic VAT declaration for the month of April 2016 – which was subsequently replaced by the declaration submitted on 07 June 2016.

• On 23 June 2016, the Claimant submitted, via Internet, the periodic VAT declaration for the month of May 2016 – which was subsequently replaced by the declaration submitted on 07 July 2016.

• On 13 July 2016, it submitted, via Internet, the periodic VAT declaration for the month of June 2016.

• On 10 August 2016, it submitted, via Internet, the periodic VAT declaration for the month of July 2016 – which was subsequently replaced by the declaration submitted on 30 August 2016.

• On 12 September 2016, it submitted, via Internet, the periodic VAT declaration for the month of August 2016 – which was subsequently replaced by the declaration submitted on 03 October 2016.

• On 24 October 2016, it submitted, via Internet, the periodic VAT declaration for the month of September 2016 – which was subsequently replaced by the declaration submitted on 09 November 2016.

• On 29 November 2016, it submitted, via Internet, the periodic VAT declaration for the month of October 2016 – which was subsequently replaced by the declaration submitted on 07 December 2016.

• On 16 December 2016, it submitted, via Internet, the periodic VAT declaration for the month of November 2016 – which was subsequently replaced by the declaration submitted on 04 January 2017.

• On 16 January 2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of December 2016.

• Because the Claimant is, for VAT purposes, a mixed-purpose taxable person, it deducted throughout the fiscal year 2016 the VAT based on the calculation of a provisional pro rata of 14%, corresponding to the definitive pro rata for the fiscal year 2015.

• In the last declaration relating to December 2016, submitted on 16 January 2017, the Claimant, in compliance with the provisions of No. 6 of Article 23 of the VAT Code, corrected the amounts deducted throughout the year by virtue of the pro rata determined for the fiscal year 2016 (definitive pro rata for 2016).

• In determining the pro rata, the Claimant should have considered, both in the numerator and in the denominator, namely, (i) the financial amortizations relating to financial lease contracts and (ii) the values of sale/scrapping by destruction of leased assets.

• However, the Claimant, in determining the calculation of the pro rata, excluded from the numerator and denominator of the fraction the financial amortizations relating to financial lease contracts and the values of sale/scrapping by destruction of leased assets.

• The Claimant adopted this methodology by virtue of the doctrine contained in Circular Letter No. 30108, of 30/01/2009, sanctioned by the Director General and adopted by the Inspection Services in inspection proceedings with the Claimant in previous fiscal years.

• In adopting the criterion imposed by the Tax and Customs Authority, the Claimant was forced to reduce its pro rata from 56% to 14%, whereby, consequently, it saw the amount of tax to deduct decrease from € 1,653,537.54 to € 413,384.39.

• In the last declaration of the fiscal year 2016, the Claimant corrected the amounts deducted throughout the year by virtue of the application of the definitive pro rata for 2016, which increased from 14% to 15% (definitive pro rata for 2016), in accordance with the criterion imposed by the TA, whereby, with reference to 2016, the amount of VAT to be deducted by the Claimant decreased from € 1,801,174 to € 442,911.84.

• For not agreeing with the position established in the cited Circular Letter, the Claimant filed an administrative complaint requesting the annulment of the self-assessment acts "since they were based on said generic guidance from the TA - relating to the rules for determining the right to deduction by credit institutions when simultaneously carrying on Leasing or ALD activities - which in its view is manifestly contrary to law".

• What is at issue in the present proceedings is solely and exclusively the procedure adopted by the Claimant in applying the pro rata method for deduction of tax borne on goods and services of mixed use, that is, to determine whether the following should be considered in the numerator and denominator of the fraction for calculating the pro rata: (i) the financial amortizations relating to financial lease contracts and (ii) the values of sale/scrapping by destruction of leased assets.

On 1 February of the current year, the Tax and Customs Authority submitted its Response defending the dismissal of the request, essentially, for the following reasons:

• The Claimant is a credit institution covered by the General Scheme for Credit Institutions and Financial Companies approved by Decree-Law No. 298/92, of 31 December, whereby, in the scope of its activity, it performs operations to which No. 27 of Article 9 of the VAT Code applies, namely financing and credit granting operations.

• Such operations constitute simple or incomplete exemptions which, as such, do not permit the right to deduct the tax borne upstream.

• In addition, the Claimant carries out financial lease operations, through financial lease contracts, namely mobile financial lease "Leasing and Long-Term Financial Lease", operations subject to and not exempt from tax which grant the right to deduction under the terms of letter a) of No. 1 of Article 20 of the VAT Code.

• Taking into account the characterization of the financial lease contract through which there is no transfer of ownership, but rather the transfer of the use of a good, the Claimant, as lessor, undertakes "to provide a service consisting in the availability of the asset in question, receiving in return a payment, without prejudice to the possibility of including a purchase option at the end of the contract, in favor of the lessee, for a residual value fixed by agreement of the parties".

• Financial lease is characterized as a service provision subject to tax under the terms of No. 1 of Article 4 of the VAT Code.

• The consideration is materialized in the rents collected by the Claimant, as leasing entity, this being composed of a portion corresponding to interest and another to financial or capital amortization, since these lease operations (leasing and ALD) represent a form of credit.

• As such, this activity carried out by the Claimant translates into nothing more than "in substance, the grant of financing, whose remunerative consideration consists essentially of interest and other charges included in the rents".

• Indeed, in the scope of the financial lease contracts that the Claimant concludes, it deducts the tax it bore in the acquisition of said goods, in accordance with the actual allocation method, and delivers said goods to the lessee receiving in return rents, which include capital amortization, interest and possibly other expenses.

• Effectively, the full deduction effected by the Claimant regarding the acquisition of said leased goods occurs by direct attribution because said goods are intended for an activity subject to tax with the right to deduction under the terms of Article 20 of the VAT Code.

• However, this does not apply to the acquisition of goods and services of mixed use, the so-called goods and services of a promiscuous nature intended indifferently for the various activities of the Claimant – subject and not exempt and exempt without right to deduction.

• Regarding said goods, deduction is made taking into account the general rule established in letter b) of No. 1 of Article 23 and calculated under the terms of No. 4 of the same legal provision or the method of actual allocation in accordance with objective criteria.

• It is further noted that, regarding financial lease activities, the various economic operators concluded that it is not possible to adopt the method of actual allocation in accordance with objective criteria given the nature of said activity.

• In those circumstances, "Circular Letter No. 30108/2009 was issued, extensively cited in the information contained in the instructional file and which support the dismissal decisions to which these proceedings refer, in order to clarify the determination of a method as precise as possible, in the absence of the objective criteria imposed by the actual allocation method, for all economic operators of said activity".

• Being certain that, "the wording of No. 2 of Article 23 of the VAT Code does not prevent the objective criterion from being determined in accordance with the percentage of deduction applicable to all the resources of the now Respondent, it is no less certain that this criterion had to reflect only the amount of income from its taxed activity (the interest) under penalty of subverting the neutrality that presides over the entire system that grants the right to deduction".

• Thus, it concludes, "the procedure adopted by the Claimant when making the self-assessments was correct".

• The Court of Justice of the European Union has already considered that Article 17, No. 5, third paragraph, letter c) of the Sixth Directive:

"(…) must be interpreted to mean that it does not prevent a Member State, in circumstances such as those of the main proceedings, from requiring a bank which carries out, in particular, financial lease activities to include, in the numerator and denominator of the fraction which serves to establish a single and same pro rata of deduction for all its goods and services of mixed use, only the portion of the rents paid by customers, in the context of their financial lease contracts, which corresponds to the interest, when the use of those goods and services is above all determined by the financing and management of those contracts, which it is incumbent upon the referring court to verify."

• Furthermore, on this matter the Supreme Administrative Court has also ruled, by Judgment of 29 October 2014, rendered in the framework of process No. 01075/13, 2nd Section, where it was expressly decided:

"Banks, whose line of business also includes the conclusion of Leasing and ALD contracts, e.g. of motor vehicles, must include in the numerator and denominator of the fraction which serves to establish a single and same pro rata of deduction for all goods and services of mixed use, only the portion of the rents paid by customers in the context of those contracts which corresponds to the interest".

• As such, the Claimant's reasoning regarding the considerations it makes in the body of its request for arbitration is entirely without merit, in what concerns the determination of the pro rata of deduction at issue in these proceedings, as well as regarding the concept of turnover that, for this purpose, it seeks to apply.

• Indeed, in light of sound competition among the various economic actors in the European Union space and in defense of the principle of VAT neutrality regarding its tax burden, the dismissal of the request regarding the tax "allegedly self-assessed in excess is not tainted with any illegality as the Claimant seeks to assert".

• Moreover, the principle of neutrality through which the "equality of companies is achieved before the taxation of consumption" would equally be undermined to uphold the thesis defended by the now Claimant.

• On the other hand, given the Treaties, the Court of Justice of the European Union is the guarantor of the interpretation and uniform application of Union law across the territory of all Member States, which is realized through the decisions rendered in the framework of referral proceedings, under Article 267 of the TFEU, as is the case with the Judgment cited above.

• Furthermore, that interpretation leaves no room whatsoever for doubts, whereby the calculation of the pro rata that the Claimant applied in the periods in question was correctly calculated, the self-assessments that it seeks to correct not suffering from any type of error.

• To proceed with an interpretation such as that defended by the Respondent would, without any room for doubt, offend the so-heralded principle of tax neutrality and more than that the principle of sound competition in the European Union space, the true driver of all indirect harmonization and the consequent obligation to introduce VAT by all Member States.

• As such, the interpretation of the Respondent is the one that best materializes the principle of neutrality and the principle of equal treatment to which the Banco Mais Judgment gives effect, in a situation similar to that of these proceedings, and of a competitor of the Claimant.

• Therefore, the calculation of the pro rata initially calculated by the Claimant, in accordance with the interpretation conveyed by the Respondent, does not merit any censure.

• In that sense, the act of dismissal of the administrative complaint does not suffer from any illegality inasmuch as, regarding the leasing and ALD activity, the portion relating to capital amortization included in the rents cannot form part of the terms of the fraction of the pro rata of deduction.

II. Procedural Matters

• The Tribunal is competent and properly constituted, under the terms of Articles 2, No. 1, letter a), 5 and 6, all of the LFATM.

• The parties have legal personality and capacity, are legitimate and are represented, under the terms of Articles 4 and 10 of the LFATM and 1 of Ordinance No. 112-A/2011, of 22 March.

• The joinder of claims is admissible under the terms of the provision of No. 1 of Article 3 of the LFATM, since the merits of the claim depend essentially on the appreciation of the same circumstances of fact and the interpretation and application of the same principles or rules of law.

• There are no nullities nor preliminary questions affecting the entire proceedings, whereby it is now necessary to rule on the merits of the claim.

• In fulfillment of the SAC's judgment, annulling the previous arbitral decision, additional evidence was produced to expand the factual matter, as results from the minutes of witness examination of 5-5-2021 (see pages..., of the file).

III. Subject Matter of the Arbitral Pronouncement

The request for arbitral pronouncement sub judice has as its immediate subject the dismissal decision, by Order of 6/07/2018, of the administrative complaint No. ...2018..., referring to VAT self-assessments, relating to the periods from January to December of the year 2016;

In terms of mediate subject matter, the Tribunal is asked to pronounce on the following matters:

• On the one hand, whether in the procedure adopted in the application of the pro rata method for deduction of tax borne on goods and services of mixed use, the financial amortizations relating to financial lease contracts and the values of sale/scrapping by destruction of leased assets should be considered in the numerator and denominator of the fraction for calculating the pro rata;

• On the other hand, whether the VAT self-assessment acts already challenged and now impugned based on the criterion imposed by the TA, in Circular Letter No. 30.108, of 30/01/2009, are tainted with illegality;

• Whether the TA is liable to be condemned to reimburse the sums allegedly paid in excess plus compensatory interest for the period from the date of payment of the self-assessed tax until actual reimbursement; and

• Whether Articles 1 and 2 of Article 23 of the VAT Code, in the interpretation given to them by Circular Letter 30.108 of the Tax and Customs Authority, are tainted with formal and/or substantive unconstitutionality.

It should be noted that this last issue was raised by the Claimant in the request submitted in the proceedings on 13-1-2021, that is, after the SAC's judgment that annulled the previous arbitral decision.

The Claimant alleged the formal and substantive unconstitutionality of that provision in the interpretation given to it by the TA and which, allegedly, would violate the principles of separation of powers, tax legality and the reservation of law to the Parliament - Articles 2, 111, 112-5, 103-2 and 165-1/i), of the Constitution of the Republic.

IV. Factual Matter

A. Proven Facts

Based on, in particular, the positions assumed by the parties, the documentary evidence produced and attached to the proceedings and the testimony produced in the sequence of and in fulfillment of the SAC's judgment, annulling the previous arbitral decision, the following facts with relevance to the decision are considered proven:

1. The Claimant is a credit institution covered by the General Scheme for Credit Institutions and Financial Companies (approved by Decree-Law No. 298/92, of 31 December and subsequent amendments) and which exercises, among others, the activities of leasing (financial lease) and ALD (long-term rental);

2. For VAT purposes, the Claimant is a mixed-purpose taxable person (performs operations that grant the right to deduction and operations that do not grant this right);

3. The financial lease activity carried out by the Claimant involves the acquisition of vehicles and their availability to clients and the activity of granting credit or financing to individuals and companies and their management;

4. The activity of financial lease and ALD are the activities primarily carried out by the Claimant and were so on the dates referred to below, in 5;

5. It timely presented, as observed from the documents attached under numbers 1 to 12, the periodic VAT declarations for the fiscal year 2016, namely:

• On 16 February 2016, it submitted, via Internet, the periodic VAT declaration for the month of January 2016, which it replaced with another declaration delivered on 17/05/2016;

• On 22 March 2016, it submitted, via Internet, the periodic VAT declaration for the month of February 2016 which it replaced with another declaration delivered on 05/04/2016;

• On 13 April 2016, it submitted, via Internet, the periodic VAT declaration for the month of March 2016 which it replaced with another declaration delivered on 06/05/2016;

• On 17 May 2016, it submitted, via Internet, the periodic VAT declaration for the month of April 2016, which it replaced with another declaration delivered on 07/06/2016;

• On 23 June 2016, the Claimant submitted, via Internet, the periodic VAT declaration for the month of May 2016, which it replaced with another declaration delivered on 07/07/2016;

• On 13 July 2016, it submitted, via Internet, the periodic VAT declaration for the month of June 2016.

• On 10 August 2016, it submitted, via Internet, the periodic VAT declaration for the month of July 2016, which it replaced with another declaration delivered on 30/08/2019;

• On 12 September 2016, it submitted, via Internet, the periodic VAT declaration for the month of August 2016, which it replaced with another declaration delivered on 03/10/2016;

• On 24 October 2016, it submitted, via Internet, the periodic VAT declaration for the month of September 2016, which it replaced with another declaration delivered on 09/11/2016;

• On 29 November 2016, it submitted, via Internet, the periodic VAT declaration for the month of October 2016, which it replaced with another declaration delivered on 07/12/2016;

• On 16 December 2016, it submitted, via Internet, the periodic VAT declaration for the month of November 2016, which it replaced with another declaration delivered on 04/01/2017;

• On 16 January 2017, it submitted, via Internet, the periodic VAT declaration for the month of December 2016.

1. In all the first declarations of each period of the fiscal year 2016 presented, the Claimant took into account the VAT borne based on the calculation of a provisional pro rata of 14%;

2. In the declaration corresponding to the period of December 2016, the Claimant corrected the amounts deducted throughout the year, by virtue of the definitive pro rata of 15% determined for the fiscal year 2016, in compliance with the instructions of the TA contained in Circular Letter No. 30.108, of 30/01/2009.

3. By virtue of the adoption of the TA's doctrine, the amount of VAT to be deducted by the Claimant decreased from € 1,801,174.82 to €442,911.84.

4. The tax relating to all the periodic VAT declarations here in question has been paid.

5. The Claimant presented, on 09/02/2018, an administrative complaint of the VAT self-assessments referred to above,

6. This complaint, to which the number 3247201804001303 was assigned, was dismissed by Order of 6/07/2018 (see document No. 13).

7. On 08/10/2018, the Claimant filed the present request for arbitral pronouncement with CAAD.

8. The financial lease and ALD activity carried out by the Claimant, involving operations of acquisition and availability of vehicles, requires the accomplishment or performance, by the Claimant, of specific acts and services, distinct from the grant of credit.

9. This entails the assignment of costs and common resources of the Claimant, such as, for example, water, gas, electricity, communications, computer equipment, paper and costs with the provision of services by third parties, such as lawyers, etc.

10. The Claimant needs and expends a set of human and material resources that are common to the activity of acquisition and availability of vehicles within the scope and duration of the "leasing" and/or ALD contracts it concludes.

11. The common or mixed costs are determined, above all, by the availability of the vehicles that are the subject of the cited contracts, to its clients.

B. Facts Not Proven

There are no other facts with relevance for the appreciation of the claim that should be considered proven or not proven.

V. Reasoning on the Factual Matter

The judge (or arbitrator) has no duty to pronounce on all the factual matter alleged, but rather has the duty to select what is relevant to the decision, taking into account the cause of action that supports the claim formulated by the plaintiff, and to decide whether it considers it proven or not proven (Art. 123, No. 2, of the Tax Procedure Code and Article 607, No. 3 of the Code of Civil Procedure ("CCP"), applicable by virtue of Article 29, No. 1, letters a) and e), of the LFATM).

On the other hand, according to the principle of free assessment of evidence, the Tribunal must base its decision regarding the proofs produced on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the proceedings and in accordance with its experience of life and knowledge of people and circumstances.

In the case, the Tribunal formed its conviction based on the critical analysis of the documents presented by the party, which were not contested, on the copy of the instructional administrative file, presented by the TA and on the testimony given by the witnesses in hearing, namely: B..., financial director of the Claimant and C... who, at the date of the facts, as now, performs duties in the Accounting area of the Claimant who, with direct knowledge of the facts and with the academic training they possess, stated, among other things, that the pro rata calculated by the Claimant considered, in the numerator, the leasing, with the interest component, whereas all resources (paper, computers, electrical energy, communications, etc) to ensure the vehicle acquisition process and its delivery to the client as well as those necessary for managing the rent, collecting the Single Tax on Circulation, insurance, etc., were common, making it difficult to quantify the percentage of those resources allocated to one or the other task.

Thus, and taking into account the positions assumed by the parties, what is provided for in Article 110 of the Tax Procedure Code, the documentary and testimony evidence produced and the Administrative file attached, the facts listed above were considered proven, with relevance to the decision.

VI. Law

As results from the settled factual matter, the Claimant is a credit institution covered by the General Scheme for Credit Institutions and Financial Companies that performs operations subject to differentiated VAT deduction regimes, namely: (i) financial activities and credit granting, exempt from VAT and which do not grant the right to deduction (cfr. art. 9, No. 28, of the VAT Code) and, (ii) other activities, namely financial lease which, as a rule, constitute service provisions, or subject to VAT and not exempt from it or with respect to which there was a waiver of exemption, and which permit the deduction of the VAT incurred in upstream acquisitions of goods and services.

The Claimant thus assumes the nature of "mixed-purpose taxable person" attributable, in the terminology of VAT, to taxable persons who perform operations that grant the right to deduction and, simultaneously, operations that, because they are not taxable or are exempt, do not grant this right. Such taxpayers, as results from Article 23 of the VAT Code, may only exercise the right to deduct the tax borne in acquisitions intended for operations that grant the right to deduction.

For purposes of exercising the right to deduct the tax borne regarding these mixed-use goods, these taxable persons may resort to the method of actual allocation or to the method of the deduction percentage or pro rata.

The method of actual allocation replaces the simple presumption underlying the pro rata "by indicators unrelated to turnover by allocating mixed costs to operations with the right to deduction and to operations without the right to deduction in accordance with different indicators, better suited to the taxable person's activity".

The pro rata, on the other hand, seeks to find the permissible deduction percentage through a fraction in which the numerator shows the annual amount (without tax) of transfers of goods and services that give rise to deduction and, in the denominator, the annual amount of all operations performed (also without tax), including the exempt or "outside the scope" of the tax (cfr. No. 4 of Article 23 of the VAT Code).

The measure (percentage) of the deduction of the VAT borne upstream is determined based on the relationship between the volumes of turnover that permit the deduction of the VAT borne and by the activities that do not permit this deduction.

In the case at hand, the question to be decided consists, precisely, in knowing whether a taxable person, a credit institution, that performs leasing and ALD operations should, in the application of the pro rata method for deduction of tax borne on goods and services of mixed use, consider, in the numerator and denominator of the calculation fraction, the full amount of rent or only the portion corresponding to interest (and which constitutes the income or revenue of the lessor).

In other words, what is at issue is determining whether, having weighed the methods or forms of calculation of VAT deduction, when the taxable person performs operations that grant the right to deduction and others that do not grant this right, the VAT self-assessments (made in compliance with instructions of the Tax Authority) in which the calculation of the pro rata excluded from the numerator and denominator of the fraction the financial amortizations relating to leasing contracts and the values of sale/scrapping by destruction of leased assets, are tainted with illegality or not.

Let us begin by analyzing the legal provisions, European and national, most relevant to the matter at hand.

Articles 173, 174 and 175 of Directive No. 2006/112/EC, of the Council, of 28 November 2006 (hereinafter, abbreviated as "VAT Directive") provide:

"Article 173

1. As regards goods and services used by a taxable person to carry out both transactions that grant the right to deduction, referred to in Articles 168, 169 and 170, and transactions that do not grant the right to deduction, deduction shall be allowed only in respect of the proportion of the VAT relating to the amount of transactions in the first category.

The deduction pro rata shall be determined in accordance with Articles 174 and 175 for the sum of transactions carried out by the taxable person.

1. Member States may adopt the following measures:

Article 174

1. The deduction pro rata shall be determined by a fraction comprising the following amounts:

a) in the numerator, the total amount of annual turnover, exclusive of VAT, relating to transactions that grant the right to deduction in accordance with Articles 168 and 169;

b) in the denominator, the total amount of annual turnover, exclusive of VAT, relating to transactions included in the numerator and to transactions that do not grant the right to deduction.

Member States may include in the denominator the amount of subsidies that are not directly linked to the price of the supply of goods or provision of services referred to in Article 73.

1. By way of derogation from paragraph 1, the following amounts shall not be taken into account in calculating the deduction pro rata:

a) the amount of turnover relating to the supply of capital goods used by the taxable person in carrying on his business;

b) the amount of turnover relating to services connected with land and financial services;

c) the amount of turnover relating to the transactions referred to in points (b) to (g) of Article 135(1) if they are incidental transactions.

1. Where they make use of the option provided for in Article 191 not to require adjustment for capital goods, Member States may include the proceeds from the disposal of such goods in calculating the deduction pro rata."

"Article 175

1. The deduction pro rata shall be determined annually, fixed as a percentage and rounded up to the nearest unit.

2. The deduction pro rata applicable provisionally to a given year shall be calculated on the basis of the transactions of the previous year. If such reference is not available or if it is not significant, the deduction pro rata shall be estimated provisionally, under the control of the administration, by the taxable person, in accordance with its forecasts.

However, Member States may continue to apply their rules in force on 1 January 1979 or, as regards Member States which acceded to the Community after that date, on the date of their accession.

1. The fixing of the final pro rata deduction, which is determined for each year during the following year, entails the adjustment of the deductions made on the basis of the provisional pro rata."

With regard to national legislation, Article 23 of the VAT Code provides:

"1 - When the taxable person, in the exercise of its activity, performs operations that grant the right to deduction and operations that do not grant this right, under the terms of Article 20, the deduction of the tax borne in the acquisition of goods and services that are used in carrying out both types of operations shall be determined as follows:

a) If it is a good or service partially dedicated to the performance of operations not arising from the exercise of an economic activity provided for in letter a) of No. 1 of Article 2, the non-deductible tax resulting from such dedication is determined under the terms of No. 2;

b) Without prejudice to the provision of the preceding letter, if it is a good or service dedicated to the performance of operations arising from the exercise of an economic activity provided for in letter a) of No. 1 of Article 2, part of which does not grant the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations that give rise to deduction.

2 - Notwithstanding the provision of letter b) of the preceding number, the taxable person may perform the deduction in accordance with the actual allocation of all or part of the goods and services used, based on objective criteria which allow determining the degree of use of those goods and services in operations that grant the right to deduction and in operations that do not grant this right, without prejudice to the General Tax Authority coming to impose special conditions on it or to cease such procedure in case it is found that they cause or may cause significant distortions in taxation.

3 - The tax administration may oblige the taxable person to proceed in accordance with the provision of the preceding number: a) When the taxable person carries on distinct economic activities; b) When the application of the process referred to in No. 1 leads to significant distortions in taxation.

4 - The deduction percentage referred to in letter b) of No. 1 results from a fraction that comprises, in the numerator, the annual amount, tax excluded, of operations that give rise to deduction under the terms of No. 1 of Article 20, and in the denominator, the annual amount, tax excluded, of all operations carried out by the taxable person arising from the exercise of an economic activity provided for in letter a) of No. 1 of Article 2, as well as non-taxed subsidies that are not equipment subsidies.

5 - In the calculation referred to in the preceding number, the transfers of goods from fixed assets that have been used in the activity of the business are not, however, included, nor the immovable property or financial operations that have an accessory character in relation to the activity carried out by the taxable person.

6 - The deduction percentage referred to in letter b) of No. 1, calculated provisionally based on the amount of operations carried out in the previous year, as well as the deduction made under the terms of No. 2, calculated provisionally based on the objective criteria initially used to apply the actual allocation method, are corrected in accordance with the final values relating to the year to which they refer, giving rise to the corresponding adjustment of the deductions made, which should appear in the declaration of the last period of the year to which it relates.

7 - Taxable persons who initiate activity or alter it substantially may practice the deduction of tax based on a provisional estimated percentage, to be entered in the declarations referred to in Articles 31 and 32.

8 - For purposes of determining the deduction percentage, the quotient of the fraction is rounded up to the nearest hundredth.

9 - For purposes of this article, the Minister of Finance may, regarding certain activities, consider as non-existent the operations that give rise to deduction or those that do not grant this right, whenever they constitute an insignificant part of the total turnover and it is not viable to proceed in accordance with the methods provided for in Nos. 2 and 3."

Also relevant to these proceedings is Circular Letter No. 30.108, dated 30 January 2009, which deals precisely with "Rules for determining the right to deduction by credit institutions when simultaneously carrying on Leasing or ALD activities".

It stated there:

"For the knowledge of the Services and other interested parties, and with a view to disclosing the correct interpretation to be given to Article 23 of the VAT Code with respect to its application by credit institutions that exercise, among others, Leasing or ALD activity, it is communicated that, by my order of 2009.01.30, rendered on information No. 106, of 19 January 2009, from the Office of the Sub-Director-General of the VAT Management area, the following was determined:

1. Circular Letter No. 30103, of 2008.04.23, from the Office of the Sub-Director-General of the VAT Management area, proceeded to disclose generic instructions with a view to standardizing the interpretation to be given to the amendments introduced to Article 23 of the VAT Code (CIVA), to ensure the correct framing of the various activities in light of the new provisions, to establish the procedures to be followed in determining the deduction of the tax and, moreover, to clarify the criteria to use, when resorting to actual allocation in determining the quantum of the tax to deduct and whenever mixed-use goods and services are involved.

2. In accordance with said instructions and following the rules of Article 23 of the VAT Code, to determine the deductible tax contained in mixed-use goods and/or services, the method of percentage or pro rata is applied as a supplement, except when operations not arising from an economic activity are involved, in which case actual allocation is mandatory. In the other cases, actual allocation is optional, though the Tax Administration may impose this method of allocation when the application of the pro rata leads to significant distortions in taxation (No. 3 of Art 23).

3. In the case of use of actual allocation, mandatory or optional, and according to No. 2 of Article 23, the taxable person to determine the degree of allocation or use of the goods and services to the performance of operations that grant the right to deduction or of operations that do not grant this right, must resort to objective criteria and, in any case, the determination of such objective criteria must be adapted to the concrete situation and organization of the taxable person, to the nature of its operations in the context of the overall activity carried out and to the goods or services acquired for the needs of all operations, whether or not integrated in the concept of relevant economic activity.

4. The criteria adopted may be corrected or changed by the DGCI, with proper foundations of fact and law, or, if applicable, put a halt to the use of the method, if it is found that the occurrence of significant distortions in taxation.

5. In the specific case of financial entities that also develop Leasing or ALD activities, the joint practice of credit granting and taxed leasing operations, including financial leasing, entails, when there are goods and services acquired that are jointly used in both, the need to resort to the provisions of Article 23 of the VAT Code for determining the portion of the tax borne that is subject to the right to deduction.

6. Given the previous wording of Article 23 of the VAT Code, within the scope of application of the actual allocation method, whenever the application of allocation in calculating deductible VAT for mixed-use goods was not viable, the solution found and followed by the Services as being the one that most approximated the desired neutrality, was with a view to applying a proportion between the two types of operations, in order to determine, as approximately as possible, the allocation of inputs to each of them. However, this was not about the application of No. 4 of Article 23 of the VAT Code but about determining deductible tax by applying a specific pro rata, since previously the method used had been that of actual allocation.

7. Given the current wording of Article 23, actual allocation is the method that, based on objective allocation criteria, most adjusts to determining deductible VAT in mixed-use goods and services.

8. Accordingly, considering that determining deductible VAT according to the application of the general pro rata established in No. 4 of Article 23 of the VAT Code is susceptible to causing unjustified advantages or disadvantages by the lack of coherence of the variables used therein, that is, may lead to "significant distortions in taxation", taxable persons who in the context of financial activities practice Leasing or ALD operations must use, under the terms of No. 2 of Article 23 of the VAT Code, actual allocation based on objective criteria that allow determining the degree of use of those goods and services, in order to determine the amount of VAT to deduct regarding the set of activities.

9. In the application of the actual allocation method, under the terms of the preceding number and whenever it is not possible to apply objective allocation criteria for common costs, a specific allocation coefficient must be used, taking into account the values involved, and only the annual amount corresponding to interest and other charges relating to the Leasing or ALD activity should be considered in calculating the deduction percentage. In this case, the aforementioned percentage does not result from the application of No. 4 of Article 23 of the VAT Code."

In the case at hand, what is at issue is the deduction of VAT regarding goods used, indifferently, both in the taxed activity (financial lease), and in the exempt activity (credit granting).

As follows from the legislation invoked and, in particular, from No. 1 of Article 173 of the VAT Directive, to means of mixed use, used indifferently "to carry out both operations that grant the right to deduction (...) and operations that do not grant the right to deduction, deduction shall be allowed only in respect of the proportion of the VAT relating to the amount of transactions in the first category".

On the other hand, where it is a good or service dedicated to the performance of operations arising from the exercise of an economic activity provided for in letter a) of No. 1 of Article 2, "the tax is deductible in the percentage corresponding to the annual amount of operations that give rise to deduction", under the terms of letter b) of No. 1 of Article 23 of the VAT Code.

This percentage of deductible tax, or "pro rata of deduction", results, as has already been mentioned, from a fraction that includes in the numerator, the total amount of annual turnover, exclusive of VAT, relating to operations that grant the right to deduction and in the denominator, the total amount of annual turnover, exclusive of VAT, relating to operations included in the numerator and to operations that do not grant the right to deduction (Article 174 of the VAT Directive and 23, No. 4, of the VAT Code).

However, and as follows from No. 2 of Article 23 of the VAT Code, the taxable person may opt to "perform the deduction in accordance with the actual allocation of all or part of the goods and services used, based on objective criteria which allow determining the degree of use of those goods and services in operations that grant the right to deduction and in operations that do not grant this right, without prejudice to the General Tax Authority coming to impose special conditions on it or to cease such procedure in case it is found that they cause or may cause significant distortions in taxation".

The use of this actual allocation method, in principle optional, will become mandatory if the Tax Administration determines it, which it may do, namely, "when the application of the process referred to in No. 1 leads to significant distortions in taxation" (cfr. letter b) of No. 3 of Article 23 of the VAT Code).

Note that this understanding is expressly endorsed by the TA in para. 2 of Circular Letter No. 30.108, of 30 January, where it stated: "in accordance with said instructions and following the rules of Article 23 of the VAT Code, to determine the deductible tax contained in mixed-use goods and/or services, the method of percentage or pro rata is applied as a supplement, except when operations not arising from an economic activity are involved, in which case actual allocation is mandatory. In the other cases, actual allocation is optional, though the Tax Administration may impose this method of allocation when the application of the pro rata leads to significant distortions in taxation (No. 3 of Art 23)" – the bold is ours.

Still, in said Circular Letter, the Tax Authority understood that, regarding credit institutions that, like the Claimant, simultaneously develop Leasing or ALD activities, "determining deductible VAT according to the application of the general pro rata established in No. 4 of Article 23 of the VAT Code is susceptible to causing unjustified advantages or disadvantages by the lack of coherence of the variables used therein, that is, may lead to 'significant distortions in taxation'", whereby, using the prerogative provided for in No. 3 of Article 23 of the VAT Code, it required the use of the method of "actual allocation" (cfr. para. 8 of said Circular Letter).

Furthermore, according to paras. 8 and 9, "actual allocation" should be done in two ways:

– if it is possible, "actual allocation based on objective criteria that allow determining the degree of use of those goods and services, in order to determine the amount of VAT to deduct regarding the set of activities" (para. 8);

– if it is not "possible to apply objective allocation criteria for common costs, a specific allocation coefficient must be used, taking into account the values involved, and only the annual amount corresponding to interest and other charges relating to the Leasing or ALD activity should be considered in calculating the deduction percentage" (para. 9), in which case the application of the percentage that would result from the application of No. 4 of Article 23 is excluded.

In the present proceedings, it is uncontroversial that it is not feasible to use the actual allocation method based on objective criteria, the Claimant, in compliance with para. 9 of that Circular Letter, using in the challenged assessments this "specific allocation coefficient" considering in calculating the deduction percentage only the annual amount corresponding to interest and other charges relating to Leasing or ALD activity and excluding from the numerator and denominator of the fraction the financial amortizations relating to financial lease contracts and the values of sale/scrapping by destruction of leased assets.

However, and despite having complied with the instructions set forth therein, the Claimant challenges the legality of this method, arguing that the pro rata of deduction should be calculated under the terms provided for in No. 4 of Article 23 of the VAT Code, considering in calculating the deduction percentage the annual amount of all financial lease rents and not merely the amount corresponding to interest and other charges relating to Leasing or ALD activity.

It must be said, from the outset, that the Claimant is right.

Indeed, the interpretation of No. 4 of Article 23 of the VAT Code contained in Circular Letter No. 30.108, of 30 January 2009 finds no foundation in the VAT Code and, therefore, cannot be endorsed.

As follows from letter h) of No. 2 of Article 16 of the VAT Code, in financial lease operations, the taxable amount for VAT purposes is that of the total rent, received or to be received, from the lessee.

On the other hand, under the terms of No. 4 of Article 23 of the VAT Code, the numerator of the fraction expressing the deduction percentage comprises the "annual amount", tax excluded, of "operations that give rise to deduction", that is, the value of operations that were taxed, and its denominator is the "annual amount, tax excluded, of all operations performed by the taxable person (...)", which obviously includes the first.

From the combination of both norms it follows that, in that fraction, the full value of rent (and not merely the interest and other charges) should be included.

The solution proposed by the Tax Administration to tax the entire rent, as required by letter h) of No. 2 of Article 16, regarding the taxable amount, and to exclude, from the numerator and denominator of the fraction, for purposes of determining the deduction percentage, the portion of rent corresponding to financial amortization, amounts to a true "made to order" pro rata not permitted by the VAT Code.

Indeed, Article 23 of the VAT Code, consecrates objectively, in Nos. 1 and 4, the pro rata as the regime for deduction of VAT for the so-called "mixed-purpose taxable persons".

It is true that the taxable person may opt for deduction of the tax in accordance with the actual allocation method, based on objective criteria, whereby the Tax Authority may in certain circumstances impose special conditions or even cease that procedure, if it is deemed that it causes or may cause significant distortions in taxation (cfr. No. 2, of the cited Article 23). However, such imposition must be properly justified.

In sum, it follows from applicable legislation that:

• The method of deduction percentage should be the one applied in situations such as that underlying these proceedings;

• The method of actual allocation shall be optional for application by taxable persons;

• The Tax Authority may require the application of the actual allocation method in certain cases;

• However, the only formula for calculating the deduction percentage or pro rata provided for in Portuguese internal legislation is that contained in No. 4 of Article 23 of the VAT Code, and there is no room to alter it.

Accordingly, and subsuming all that precedes to the case at hand, one would have to conclude, as was concluded in the previous arbitral decision annulled by the SAC, that, the challenged self-assessments resulting from the guidance contained in Circular Letter No. 30.108, of 30 January 2009 – and in accordance with which, for the calculation of the pro rata only the interest component may contribute – are tainted, in light of what has been set out, with illegality due to error in the factual and legal presuppositions.

And, contrary to what the Respondent states, this understanding is not called into question by the Jurisprudence of the CJEU and, in particular, by the Judgment of that Court dated 10/07/2014 and rendered in the framework of case C-183/13 ("Banco Mais").

First and foremost, because, as stands out from mere reading thereof and has been denounced by Doctrine, the said Judgment is in error as to the facts. Indeed, as follows from paras. 18 and 19 of the said ruling, the CJEU based its decision on the presupposition that No. 2 of Article 23 of the VAT Code "reproduces, in substance, the rule for determining the right to deduction stated in Article 17, No. 5, third paragraph, letter c), of the Sixth Directive, which is a derogating provision to the rule provided for in Articles 17, No. 5, first paragraph, and 19, No. 1, of that Directive and constitutes the transposition, into the internal law of the Member State in question, of Article 17, No. 5, third paragraph, letter c), of the Sixth Directive".

Furthermore, the cited CJEU Judgment does not directly answer the preliminary question formulated and which was based on the question of whether the rent corresponding to financial amortization should be considered in the denominator of the pro rata, or, instead, whether only interest, since only this constitutes the remuneration or income of an entity developing financial lease activities (taxed) and other activities associated with credit granting (exempt), should be considered.

It is not ignored that the CJEU considered that the VAT Directive does not prevent Member States from applying, in a given operation, a method or criterion different from the method based on turnover, provided that such method ensures a more precise determination of the pro rata of deduction than that resulting from the other method.

However, and as is well noted in the Arbitral Decision rendered in the framework of process No. 309/2017-T (Jorge Lopes de Sousa), under the terms of Article 267 of the Treaty on the Functioning of the European Union ("TFEU"), the competence of the CJEU in preliminary ruling proceedings is limited to the "interpretation of the Treaties", and the "validity and interpretation of acts adopted by the institutions, bodies or offices of the Union".

It is not, therefore, incumbent on the CJEU to apply European law "to the factual situation underlying the main proceedings. That role is incumbent on the national judge and, therefore, it is not for the Court to pronounce on questions of fact raised in the context of the main proceedings or on any differences of opinion as to the interpretation or application of the rules of national law".

It follows from the foregoing that the said Jurisprudence has no bearing on the interpretation of Article 23 of the VAT Code, insofar as it contains choices of the national legislator on matters explicitly left to its discretion by Directive No. 2006/112/EC of the Council, of 28/11/2006. Recall in this regard that letter c) of No. 2 of Article 173 of the VAT Directive is not a provision of direct effect, requiring transposition into internal law in accordance with the legislative procedure in force in each Member State.

Now, in the case at hand, the rule of internal law (Article 23 of the VAT Code) provides for only two methods of deduction for mixed-use goods dedicated to the performance of operations arising from the exercise of an economic activity provided for, namely:

– the application of a «percentage corresponding to the annual amount of operations that give rise to deduction» - letter b) of No. 1 of Article 23 of the VAT Code by reference to No. 4 of the same rule; and

– «actual allocation of all or part of the goods and services used, based on objective criteria which allow determining the degree of use of those goods and services in operations that grant the right to deduction and in operations that do not grant this right» (No. 2 of Article 23 of the VAT Code).

Furthermore, under the terms of No. 3 of the same Article 23, when the application of the method provided for in No. 1 «leads to significant distortions in taxation», the Tax and Customs Authority may oblige the taxable person to proceed in accordance with the provisions of No. 2. However, in this rule only «actual allocation of all or part of the goods and services used, based on objective criteria which allow determining the degree of use of those goods and services in operations that grant the right to deduction and in operations that do not grant this right» is provided for.

Now, as was written in the already cited Arbitral Decision rendered in the framework of process No. 309/2017-T (Jorge Lopes de Sousa): "It is manifest that determining allocation based on a percentage, whatever the form of determining it, does not constitute an objective criterion that permits determining the degree of allocation of goods or services. Indeed, it is evident that based on the value of rents, total or partial, one cannot determine, objectively, for example, which portions of electricity or water or maintenance expenses for elevators of buildings common to the activities of the two types that are allocated to financial lease activity.

That is, the application of a percentage, whatever it may be, does not allow «determining the degree of use of those goods and services in operations that grant the right to deduction» and, therefore, cannot constitute an objective criterion for purposes of No. 2 of Article 23".

Thus, it seems appropriate to conclude that the authority granted to the Tax Authority by No. 3 of Article 23 does not include the possibility of imposing on the taxable person the application of a deduction percentage which, thus, can only be used in situations where it is provided for directly in letter b) of No. 1 of Article 23, and this method is the one in No. 4, of the same article.

Although, in light of the said Jurisprudence, it may be admitted that the VAT Directive permitted the internal legislator to "oblige the taxable person to effect deduction based on the allocation of all or part of the goods and services", the truth is that it did not use such prerogative, whereby the same could not be applied internally by absence of legal basis.

Without prejudice to the foregoing, already by itself, in the understanding of this Arbitral Tribunal, sufficient to lead to the annulment of the challenged tax acts, it will further be said, regarding the argument invoked by the Respondent in para. 41 of the Response, and according to which the application of the method referred to in Circular Letter No. 30.108 is a requirement of the "principle of tax neutrality and more than that the principle of sound competition in the European Union space", that this also does not hold.

First of all, the Respondent does not justify, as was its responsibility, its allegations. In any case, and as referred by José Xavier de Basto and António Martins in the Opinion attached to the file and already cited, such assertion is not rigorous. Indeed, "determining the portion of VAT deductible by the method the administration seeks to impose causes, itself, significant distortions of taxation, since both in the modality of leasing rents recorded as in variable rents, and once interest is calculated and paid before capital amortization, the proportion of interest contained in the total rent fluctuates throughout the contract period, giving rise to fluctuations of the deduction percentage, which have nothing to do with different intensities of use of common inputs and which therefore must be judged arbitrary and without legal and economic foundation" and that "by the method imposed by the administration, the portion of VAT deductible is clearly maladjusted to the purpose of the tax to free the entrepreneur from all VAT borne upstream, when it is true that downstream the rent was fully taxed".

Finally, it should be noted that the issue underlying these proceedings was already subject to appreciation by this CAAD, the jurisprudence being practically constant in the sense that here is also advocated. Reference is made in this regard and merely by way of example to the arbitral decisions rendered in the framework of processes Nos. 309/2017 (Jorge Lopes de Sousa), 311/2017 (José Poças Falcão), 312/2017 (Fernanda Maçãs) and 339/2018-T (Carlos Fernandes Cadilha).

Application of the Doctrine of the Judgment for Jurisprudential Harmonization Rendered in SAC Process No. 52/19.OBALSB

Notwithstanding the foregoing and which constitutes, essentially, what had already been argued in the arbitral decision annulled, it will be necessary, in compliance with what was decided by the learned judgment for jurisprudential harmonization of 4-3-2020, which became final (Proc No. 52/19.OBALSB), to transpose to this new arbitral decision the doctrine fixed in that ruling, in articulation with the provision of Article 8, No. 3, of the Civil Code.

In an appeal filed from the previous arbitral decision, rendered on 28-5-2019, the learned judgment considered that the circumstance that the Court of Justice considered that the Tax Administration could create a specific system to establish a single and same pro rata of deduction for all mixed-use goods and services does not mean that, under national legislation, such specific system is pure and simply admissible in all situations, as it is not, moreover, under Community legislation, and that this situation will be exceptional when the use of those mixed-use goods and services is above all determined by the financing and management of those contracts - those which obtain framework in the activity carried on by the Bank and which does not grant the right to deduction of tax because it is an exempt activity (...). What matters, therefore, is that a determination be made on the facts about whether the use of those mixed-use goods and services is or is not, above all determined by the financing and management of those contracts (underlined by us).

And in the line of what has just been stated, the learned judgment asserts that "(...) once the probative elements fixed in the arbitral decision in question are examined, it is not possible to discern whether the use of goods or services of mixed use by the Respondent (defendant), was above all determined by the financing and management of the financial lease contracts concluded with its clients or, instead, by the availability of vehicles (...) [with underlining of the judgment itself].

Now, with expanded factual matter and demonstrated, in the case at hand, a factual picture of mixed use of goods and services not determined by the financing and management of the "leasing" and "ALD" contracts and not being evidenced, nor facts having been alleged susceptible of allowing the Tribunal to formulate a judgment of "significant distortion of taxation", one will have to conclude that the tax acts consisting of VAT self-assessments relating to the periods 2016/01, 2016/02, 2016/03, 2016/04, 2016/05, 2016/06, 2016/07, 2016/08, 2016/09, 2016/10, 2016/11 and 2016/12 are illegal, for lack of factual and legal presuppositions, as well as the act of dismissal of the Administrative Complaint filed by the Claimant of the tax acts mentioned above (Administrative Complaint Procedure No....2018...).

Compensatory Interest

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

Under the terms of letter b) of No. 1 of Article 24 of the LFATM: "the arbitral decision on the merits of the claim which is not subject to appeal or challenge binds the tax administration [...]: a) to restore the situation that would exist if the tax act subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose".

On the other hand, and under the heading "Effects of decision favorable to the taxpayer", Article 100 of the General Tax Law provides that the "tax administration is obliged, in case of full or partial success of complaints or administrative or judicial proceedings in favor of the taxpayer, to immediately and fully restore the situation that would exist if the illegality had not been committed, comprising the payment of compensatory interest, under the terms and conditions provided for by law".

Notwithstanding the material scope of the LFATM does not expressly provide for condemnatory decisions, since Article 2, No. 1, letter a) of the LFATM refers only to "declaration of illegality", the jurisprudence of CAAD understands that it is within the competence of arbitral tribunals to appreciate requests for condemnation to payment of compensatory interest. In this sense, see, merely by way of example, the decisions of CAAD rendered in processes Nos. 142/2012-T (Jorge Lopes de Sousa), 303/2015-T(Jorge Lopes de Sousa), 681/2016-T (Fernanda Maçãs).

Indeed, since recourse to arbitration is an alternative means of dispute resolution, namely alternative to judicial challenge, and it is admissible in judicial challenge to petition compensatory interest and, consequently, to condemn the TA to its payment, nothing suggests that it should not be possible to condemn in arbitral proceedings.

Article 43, No. 1 of the General Tax Law provides that: "[c]ompensatory interest is due when it is determined, in administrative complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due.".

Moreover, it results from Article 24, No. 5 of the LFATM the recognition of the right to compensatory interest when it provides that "[c]ompensatory interest is due, regardless of its nature, under the terms provided for in the general tax law and the Tax Procedure and Process Code."

However, in order for compensatory interest to be due, four cumulative requirements must be met, namely:

• that there be an error in a tax assessment act;

• that it be attributable to the services;

• that the existence of such error be determined in administrative complaint or judicial challenge proceedings;

• that from such error payment of a tax debt in an amount higher than legally due has resulted.

In the case at hand, all the legal requirements are met. Indeed, the only presupposition of the right to compensatory interest that could raise doubts would be the requirement that the error be attributable to the services, since, as results from the factual matter, self-assessment tax acts are the mediate subject of these proceedings.

However, under the terms of No. 2 of Article 43 of the General Tax Law, if the self-assessment is effected in harmony with or in execution of instructions of the Tax Authority itself – as is the case in these proceedings – the judgment of attribution of responsibility to the services of the TA itself is justified and not to the taxpayer, and consequently, the cause of the error will no longer be properly in the taxpayer proceeding to the self-assessment but rather and above all in the TA which "imposed" a certain interpretation of the Law and thereby "forced" the taxpayer to proceed to the self-assessment based on criteria or presuppositions which were later not recognized judicially.

The request for condemnation of the TA to payment of compensatory interest thus also succeeds.

Preliminary Question

The appreciation of the issue of (un)constitutionality raised by the Claimant, that is, and concretely, whether Articles 1 and 2 of Article 23 of the VAT Code, in the interpretation given to them by Circular Letter No. 30.108 of the Tax and Customs Authority, are tainted with formal and/or substantive unconstitutionality, is obviously rendered moot.

VII. Decision

For the foregoing, the