VAT on Expenses Charged on Behalf of Third Parties: Requirements for Non-Taxation (CAAD 50/2015-T)

ARBITRAL DECISION

1. Report

A…, Law Partnership RL, with offices at Av. …, no. …, … floor …, in Lisbon, with Tax Registration Number …, requested the constitution of an Arbitral Tribunal pursuant to the corresponding Legal Framework for Tax Arbitration (RJAT), for examination of the legality of four Value Added Tax (VAT) assessments relating to the year 2010, in the total amount of € 321.98 (three hundred and twenty-one euros and ninety-eight cents), with a view to their annulment. The Claimant further petitions for compensatory interest.

The respondent is the Tax and Customs Authority.

The application for constitution of the arbitral tribunal was filed on 29-01-2015, was accepted by the President of CAAD on the following day, and was communicated and notified to the Tax and Customs Authority (AT) on the 30th of that month and the 12th of the following month, respectively.

Pursuant to the provisions of Article 6(2)(a) and Article 11(1)(b) of RJAT, the Deontological Council designated the undersigned arbitrator as sole arbitrator, who communicated acceptance of the appointment within the applicable deadline, which was notified to the parties on 25-04-2015.

In accordance with the provisions of Article 11(1)(c) of RJAT, the sole arbitral tribunal was constituted on 14-04-2015, which was likewise notified to the parties, and an arbitral order was issued in accordance with Article 17 of RJAT, which was also duly notified to the parties.

The Tax and Customs Authority (AT) filed a timely response and appended the administrative file to the record.

The meeting provided for in Article 18 of RJAT took place on 18-09-2015, and witness examination was conducted on 27-10-2015, with all witnesses called by the Claimant.

The parties presented written pleadings, maintaining their respective positions.

The arbitral tribunal was duly constituted and is competent.

The parties possess legal personality and capacity, are duly entitled, and are properly represented. (Arts. 4 and 10(2) of the same instrument and Art. 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings are not affected by any nullities.

2. Subject Matter of the Dispute

The basis of the dispute stems from the AT's position that the Claimant should have assessed VAT on a set of debits it issued in the year 2010, a procedure which the Claimant did not adopt. The unassessed VAT amounts to a total of € 321.98 and gave rise to four additional assessments, one for each quarter of the said year. These assessments thus result from the application of the same tax law provisions to homogeneous factual circumstances.

More specifically, such assessments are based on the failure to fulfill all the requirements upon which depends the non-assessment of VAT on debits for expenses incurred in the name and on behalf of third parties.

The Claimant contends that these four assessments are voidable due to violation of law, lack of reasoning, and illegality based on founded doubt regarding the prerequisites. Conversely, the Respondent contended that the tax act should remain stable.

3. Facts

3.1. Proven Facts

1. The Claimant is a law partnership.
2. It is registered with the corresponding Bar Association.
3. Within the scope of its activities it provides legal advocacy services.
4. In that context, the partners and associate lawyers of the Claimant incur expenses on behalf of its clients.
5. These partners and associate lawyers prepare "expense sheets" relating to such expenses.
6. These, after approval, are reimbursed to them by the Claimant.
7. Subsequently, the Claimant requests reimbursement of these expenses from its clients.
8. The invoices or debit notes that the Claimant issues to its clients itemize the amount charged for fees and the amount charged for expenses.
9. Expenses incurred on behalf of clients, namely those relating to administrative and procedural costs, certificates, registrations, and travel, are debited separately.
10. These debits correspond entirely to the amounts incurred, with no additional value being added thereto, for any reason whatsoever.
11. These expenses are recorded in third-party accounts.
12. Thus, they do not form part of the Claimant's result as an expense, nor does their debit form part of the same result as income.
13. Some documents supporting expenses considered to be of the same nature are issued in the name of the Claimant and include its tax identification number.
14. Other documents, also considered to relate to expenses of the same nature, notably those for tolls and parking, are not issued in the name of any entity.
15. The Claimant was subject to external inspection of general scope.
16. From that inspection resulted the four additional VAT assessments here questioned, with numbers … to …, relating to each of the four quarters of 2010, in the amounts of € 77.47, € 119.62, € 61.41 and € 63.48, all totaling € 321.98 (three hundred and twenty-one euros and ninety-eight cents).
17. Such assessments result from the AT's understanding that VAT should have been assessed on certain debits.
18. This was stated in the Opinion of the Team Leader of 16-07-14 and in the Order of the Division Head of the same date.
19. Such Orders refer to point 3 of the report of the corresponding inspection process.
20. It reads as follows: "… From the documents presented justifying the debit notes, the majority thereof refer to court fees and other charges (certificates, fees, taxes), so there is no doubt that these expenses are the responsibility of the clients. In the case of court fees, although the documents are issued in the name of the taxpayer and not of the client, it is acknowledged that given the activity of the taxpayer, when the latter makes payment of court fees, this may be acting in the name and on behalf of the client.

However, in addition to these expenses mentioned above, the taxpayer debited to clients expenses relating to travels to courts and other public entities. These expenses are only supported by internal documents and/or external documents (postal service receipts, toll receipts) that do not comply with the requirements of Article 36 of the VAT Code… or when they do comply, they identify as the recipient of the goods or services the taxpayer itself and not the client.

…

When a supply of services is constituted by one or several components, and these are essential for the realization thereof, that is to say that on the "economic level, they form a whole", we are faced with a single supply.

…

Annex 5 contains a list of all Debit Notes and copies thereof and of the supporting expenses in which it is considered that VAT assessment is lacking.

…

With respect to these expenses considered subject to VAT, the question of VAT deduction is not raised since these expenses relate to travel for which VAT is not deductible, and to the fact that, as they are not supported by documents, (invoices or equivalent documents) issued in the legal form pursuant to Article 19(2)(a) of the VAT Code, they are also not deductible.

…".

1. The Claimant was notified to exercise its right to be heard, by letter … of 25-06-2014.
2. This notification included the draft inspection report and its annexes.
3. It included the text transcribed above.
4. The right to be heard was not exercised by the Claimant.
5. The Claimant was subsequently notified of the assessments at issue herein.
6. Such assessments, relating to the identified quarters and with the total amount mentioned, do not expressly refer to any opinion or information containing their reasoning.
7. The reasoning contained in the assessment notes refers to these being "additional assessments made on the basis of corrections made by the Tax Inspection Services," contains the itemization of the corrected values, an indication of the amount due, and clarifies that indirect methods were not used.
8. The assessment note, in addition to other indications unrelated to its reasoning, further mentions the tax period to which it relates.
9. These assessments were paid in full on 30-10-2014, within the time limit for voluntary payment.
10. The amount of VAT additionally assessed did not apply to the debit of expenses for court fees and other similar charges (certificates, fees, and taxes) on which the Claimant had not assessed VAT.
11. The charges debited and on which the AT assessed additional VAT concern expenses evidenced by invoices or similar documents that do not identify the recipient of the services or that identify the Claimant as the recipient thereof.

3.2. Unproven Facts

There are no other facts with relevance to the proper decision of the case.

3.3. Basis

The facts given as proven result from documents filed with the record whose authenticity was not disputed, from statements by the parties not disputed by the other party, and also from witness testimony.

4. Law

4.1. Grounds for Challenge

The Respondent defends itself by contesting the tax acts on the basis of violation of law, absence of reasoning, and existence of founded doubt regarding the prerequisites.

Reasoning

The Claimant alleges that the tax act at issue suffers from the defect of lack of reasoning. And it cannot fail to be acknowledged that the system of notification of additional VAT assessments adopted by the AT is clearly insufficient, as has been seen, and to that extent, open to criticism, as it does not include its reasoning.

However, as the AT states, the failure to notify existing reasoning is different from the absence of reasoning, and only the latter constitutes cause for voidability of the tax act. And the fact is that the concrete tax act at issue herein is duly reasoned, as follows from the operative orders, which refer to the inspection report and this, at point 3, extensively justifies the reasons of fact and law by which the AT understands that VAT should be assessed on certain debits. Indeed, from it flows the understanding that the Claimant could not fail to assess VAT on well-identified debits, on the basis of Article 16(6)(c) of the VAT Code, since the supporting documents for these concrete debits are not issued in the name of the entities in whose name and on whose behalf the expenses would have been incurred by the Claimant herein. That is, in this sense, the AT observed the provisions of Article 77 of the General Tax Law (which in the Claimant's words gives effect to Article 268(3) of the Constitution) and Article 63(1) of the Administrative Procedural Code. And contrary to what the Claimant sustains, it is not understood that this interpretation contravenes the principle of legality to which the AT is bound (Article 104 of the Constitution invoked by the Claimant), as the tax act indicates the concrete legal norms which, in the AT's understanding, legitimize its actions. Indeed, the AT identifies the legal provisions which it understands to justify the tax act, identifies, qualifies, and quantifies the tax facts, and enumerates the quantification operations of the tax base and the tax.

However, as we have seen, this reasoning does not appear in the notification of the additional assessment to the taxpayer. Nevertheless, it is equally true that the tax act notified has the reasoning that was briefly referred to above. That is, there is not a tax act without reasoning, but rather a notification of a tax act from which the concrete (and existing) reasoning of that same act is absent.

Moreover, if it is true that the notification of the tax act does not contain any reasoning that is minimally intelligible to any recipient, it is equally true that the Claimant was notified of the draft decision, which included the said inspection report, for purposes of exercising its right to prior hearing, having chosen not to exercise that right. And it is equally true that, once notified of the assessment, the Claimant could have requested a certificate containing the reasoning of the notified tax act, a procedure which it also did not adopt (Article 37(1) of the Tax Procedural Code).

On the other hand, it clearly follows from the petition that the Claimant already possessed full and complete knowledge of the reasoning of fact and law of the tax act at issue, which is why, among other things, the invocation of ignorance thereof would constitute manifest abuse of right. In truth, it is all too evident that the coincidence with the values and the time periods mentioned in the draft decision would lead a normal recipient, as indeed occurred, to conclude that the reasoning of the tax act is that which follows from the draft decision and, therefore, from the report of the inspection process. This is sufficient to allow knowledge of the facts and legal grounds of the act and, if desired, to react against it, as indeed occurred.

The AT cites, in this regard, the Decision of the Central Administrative Court, of 14-02-2006, issued in case 872/05. And as was decided in the Decision of CAAD, of 24-10-2014, in Case No. 144/2014-T (accessible at https://caad.org.pt/tributario/decisoes/decisao.php?s_it=1&s_processo=144%2F2014&s_data_ini=&s_data_fim=&s_resumo=&s_artigos=&s_texto=&id=464) "… one must distinguish between the reasoning of an assessment act and its notification. The notification of an assessment act is an external act posterior to the notified act, so that defects affecting the notification cannot carry over into the notified act, which is already performed and remains as it is with or without notification. If the act contains reasoning, but this is not duly notified, we are faced with a defect of the notification act, posterior to the notified act, but not with a defect of lack of reasoning of the notified act, as the deficiency of notification does not deprive the reasoned act of the reasoning it contains," adding that Article 37(1) … "is intended to remedy deficiencies of the "communication" of the decision and not deficiencies of reasoning of the decision" and that if the Claimant did not request within the 30-day period provided for in Article 37(1), the notification of the omitted reasoning requirements… it lost the right to demand the remedy of the deficiencies in the notifications of the assessments."

Thus, in conclusion, the tax act contains proper reasoning, and there is no cause for voidability on this ground.

Expenses incurred in the name and on behalf of third parties

As is well known, the VAT system is based on the mechanism of forward taxation, through the mechanisms of assessment and deduction, the latter being denied to the final consumer. Naturally, we find exceptions to the right of deduction, either because the active transactions carried out are exempt from tax (such exemption being incomplete, not allowing the right of deduction), or because some expenses do not confer that right on the economic agent that incurs them (typically, to prevent abuse of the right of deduction, namely for self-consumption which is difficult to quantify).

It is thus understandable that exceptions to these mechanisms of assessment and deduction are limited. Expenses that are incurred in the name and on behalf of third parties are, precisely, one of these exceptions, in this case by exclusion of the corresponding amount from the VAT tax base. Exceptionally and in order not to burden the economic circuit, in particular not to increase the costs of final consumers or of taxpayers who do not have the right, in full or in part, to deduction, or of those who incur expenses for which VAT is not deductible, the VAT Code excludes from the tax base the debit of certain expenses, by those incurring them, to the entity in whose name and on whose behalf they were incurred (Article 16(6)(c) of the VAT Code).

And the legislator's intention is well understood: the entity incurring the expense does not do so in its own name, nor in its own interest, but rather in the name and in the interest of another; it adds no economic value in this transaction; and for this reason it passes on this cost without any margin to the entity that should bear it. Recognizing this particularity, the VAT system thus permits that the possibility of deduction or non-deduction of the VAT incurred in this expense be assessed in the sphere of the latter entity (the one in whose name and on whose behalf the expense was incurred) and, additionally, that should the VAT supported in the expense not be fully deductible (either by the nature of the VAT system to which the entity initially incurring the expense is subject, or by the nature of the expense itself) VAT is not assessed (downstream) on VAT already incurred (upstream).

The essentiality of the assessment and deduction systems justifies, however, that the legislator surround itself with particular safeguards in the exceptions it permits. And it is recalled that under the VAT Code, any onerous transaction that is not (in the broad sense) a transfer of goods shall be qualified as a supply of services (cf. Article 4(1) of the VAT Code) and, if not excepted, VAT at the standard rate shall apply thereto. Now, we find such safeguards, precisely, also regarding the regulation of expenses incurred in the name and on behalf of third parties. Indeed, from the VAT Code there flows a set of requirements for the exclusion of the duty to assess VAT on such debits.

Thus, for VAT not to be validly assessed on the re-billing of the expense it is not sufficient merely that, materially, we are faced with an expense incurred for the benefit of a third party and that is being re-billed to that third party without the addition of any margin. On the contrary, several other cumulative requirements must be satisfied in order for such exception to the VAT assessment duty to be validly applied (as has been seen, by exclusion of the re-billing amount from the tax base).

Such requirements, cumulative, as mentioned, correspond, briefly and first and foremost, to the recording of the expense (and consequently of the debit) in appropriate third-party accounts, which do not thus affect profit and loss accounts, but only balance sheet accounts (Article 16(6)(c), in fine).

But, additionally, from the reference to "amounts paid in the name and on behalf of the purchaser of goods or the recipient of services" (first part of the same provision), there further follow the following requirements for debits that are relevant to the exception to the VAT assessment duty at issue here:

a) The document supporting the expense must contain the identification of the third party in whose name and on whose behalf the expense was incurred (cf. also VAT Code, Article 36(5)(a) and Nos. 15 and 16 a contrario);

b) The original of this document must be sent to the third party (usually, together with the debit note);

c) The entity incurring the expense cannot add a margin to the incurred expense, that is, it must be reimbursed therefor in the amount paid.

Finally, the debit note must also mention the reason for the exclusion of VAT assessment (cf. Article 36(5)(e) of the VAT Code).

Should such requirements, which are cumulative, not be satisfied, the service provider must assess VAT on the re-billing of the charge incurred on behalf of another.

The AT cites in support of this thesis, which it adopts, Opinion No. E-9/03, of 05-03-2003, of the General Council of the Bar Association (also cited in the inspection report), the article by Helena Costa Cabral, "Re-billings under VAT. Debits without added value," in VAT Notebooks, 2013, Almedina, and also the Decision of the Central Administrative Court of 07-02-2013, in case 6505/13.

But surely, at least for those who do not understand it differently, the taxpayer will always have to overcome the burden of demonstrating, fully, the prerequisite of the non-inclusion in the tax base: that the expenses were paid in the name and on behalf of the third party to whom they are being imputed.

The expenses at issue

In the case at hand, the Claimant incurred numerous expenses on behalf of its clients, third parties. A good part of these expenses followed the regime of said Article 16(6)(c) of the VAT Code, without any objection from the AT. This occurs, for example, in the case of taxes, court fees, and fees for registrations (even though some of these documents are not issued in the name of the client, but rather of the Claimant itself).

However, in other cases of expenses that the Claimant considers were equally incurred in the name and on behalf of its clients, the AT understands that the requirements required by said Article 16(6)(c) of the VAT Code for the non-assessment of VAT are not observed, since the corresponding documents are not issued in the name of a third party and the AT does not consider it demonstrated that the charges were incurred on behalf of the entity to whom they are being debited.

In this regard, the AT emphasizes that while in the first type of expenses it appears to it unequivocal that such expenses were incurred on behalf of clients, in the second type this conclusion cannot be reached, at least with reasonable certainty.

Indeed, the documents supporting the charges imputed to its clients by the Claimant without the assessment of required VAT and which give rise to the tax act at issue (taxi journeys, parking, and tolls), do not identify the recipient of the service or, when they do identify, identify the Claimant itself.

It thus follows that at least one essential requirement for the exclusion of the duty to assess VAT is not satisfied, which justifies the doubt raised in the reasoning of the tax act and referred to above (that such charges were incurred on behalf of the third parties to whom they are being debited).

And against this conclusion one cannot argue (as the Claimant attempts to do), with greater or lesser difficulty in obtaining documentary evidence of the expense that identifies the purchaser, nor with double taxation in VAT. Besides, in this regard, one need only think of the charges necessary for the transfer of goods or the provision of services which, under Article 21 of the VAT Code, are not deductible and which are, implicitly or explicitly, included in the consideration received from clients. Naturally, the hidden VAT (incurred upstream) will again be subject to VAT (assessed downstream), without it being possible to speak of inadmissible double taxation. Moreover, as the AT states, citing abundant case law of the Court of Justice of the European Union in this sense, we will be faced with a single supply of services (thus, covered by Article 4(1) of the VAT Code) even though it consists of several elements, if these are essential for its realization, that is, if on an economic level they objectively form a whole, as occurs in the cases analyzed herein. It is added that all the charges on whose debits the AT understood VAT should be assessed, giving rise to the assessments here questioned, correspond to expenses for which VAT would not be deductible, as they concern either travels (Article 21(1)(c) and (d) of the VAT Code), or expenses not supported by documents issued in the legal form (Article 19(2)(a) of the VAT Code). From the tax act does not follow the impossibility of deduction of a VAT that would otherwise be deductible, in the context of the service provider or the beneficiary of the service (cf. also Article 20(2) of the VAT Code).

Burden of Proof

There is thus a non-observance of the provision of said Article 16, regarding the debit of expenses incurred in the name and on behalf of third parties, which justifies the AT's doubt as to whether such expenses were, in fact, incurred in those terms. Now, seeking the Claimant to benefit from the exceptional regime of that Article 16, it was incumbent upon it, under Article 74 of the General Tax Law, to demonstrate that such charges were incurred in the name and on behalf of the entity to whom they are being imputed.

However, given the aforementioned limitations of the documents and the absence of confirmation through witness testimony (which would be practically impossible to effectively carry out) that the concrete expenses at issue had actually been incurred in the name and on behalf of the entity to which they were re-billed, it leads to the conclusion that the Claimant does not overcome such burden. Wherefore also for this reason such debits do not observe the requirements of Article 16(6)(c) of the VAT Code.

Thus, in the case under examination, if it is true that the expenses incurred by the Claimant on behalf of clients, namely those relating to administrative and procedural costs, certificates, registrations, and travel, are recorded in third-party accounts, are debited separately, and these debits correspond in their entirety to the amounts incurred, without any margin being added thereto, it is equally true that it is not demonstrated that all these debits correspond, exclusively, to expenses incurred in the name and on behalf of third parties, namely those whose supporting documents are issued in the name of the Claimant and those that are not issued in the name of any entity.

Indeed, in the case at hand there is not sufficient evidence, unlike what occurred, for example, in the case of the Decision of the Central Administrative Court of 14-03-2006, in case 7147/02, in which the exclusion of the debit from the VAT tax base was based on the fact that, although the "invoice was issued in the name of the appellant, in the same a third party is mentioned, duly identified" and furthermore because "the action of the appellant in the name and on behalf of the third party recipient of its services, as regards publicity expenses, is evidenced in the initial contract proposal by both subscribed," (accessible at https://inforfisco.pwc.com/inforfisco/DetalheJurisprudencia.aspx?doc=621639).

Founded Doubt

Finally, the Claimant invokes founded doubt regarding the prerequisites. That is, specifically, it being not unequivocal that the expenses were not incurred in the name and on behalf of third parties, and that under Articles 100(1) and 108(3), in interpretation, in the understanding of the Claimant, in accordance with the Constitution (Article 268(4)), all of the Tax Procedural Code, this burden would rest on the AT.

However, failing the requirement that the VAT Code imposes on the taxpayer seeking to benefit from the non-inclusion in the VAT tax base of a certain debit, not overcoming the burden of proof that weighs upon it, the alleged doubt is not verified. And this is so because, quite the contrary, the burden of proving the fulfillment of the requirements was incumbent, precisely, on the taxpayer, which failed to fulfill it.

Thus, the existence of the tax fact flows unequivocally from the debits made by the Claimant to its clients (Article 4(1) of the VAT Code), with the Claimant failing to demonstrate that it is in a position to benefit from the regime of Article 16(6)(c) of the VAT Code, for which reason the Claimant is not correct when seeking to invoke in support of its thesis Article 100(1) of the Tax Procedural Code.

And in this sense the AT's invocation, in the reasoning of the tax act, of the fact that we are faced with a single supply of services when it consists of several elements essential for its realization and that on an economic level objectively form a whole, as occurs in the cases analyzed herein, citing abundant case law of the Court of Justice of the European Union in this sense.

Indeed, this was decided in the Decision of the Central Administrative Court of the North of 16-04-2015 accessible at http://www.dgsi.pt/jtcn.nsf/89d1c0288c2dd49c802575c8003279c7/e683be89f2dae99180257e5a00351d38?OpenDocument, in which it is concluded that the provision of Article 100(1) of the Tax Procedural Code, under which "whenever from the evidence produced there results founded doubt as to the existence and quantification of the tax fact, the impugned act should be annulled, … is nothing more than the application to judicial proceedings of the general rule on the burden of proof in tax procedure, contained in Article 74(1) of the General Tax Law (identical to the rule provided for in Article 342(1) of the Civil Code), under which the burden of proof of facts constituting the rights of the Administration and taxpayers rests on whomever invokes them." And from the Decision of the Central Administrative Court of the South, of 26-06-2014, in case 7141/13, accessible at http://www.dgsi.pt/jtca.nsf/170589492546a7fb802575c3004c6d7d/13564f3b511dbd7780257d0a0038eaad?OpenDocument&Highlight=0,07141%2F13, it results that it is incumbent on "the taxpayer the burden of proof of the facts it alleged as foundation of its right," (in the case "of deduction of the tax under Article 19 of the VAT Code"), so that it is not sufficient for it to raise "doubt as to its veracity, even if founded, for in this case Article 100 of the Tax Procedural Code does not apply."

Conclusion

For the reasons set forth above, it is considered that the tax acts are duly reasoned, proceed to a proper application of the norms concretely applicable, and the application of the regime of founded doubt regarding the existence or quantification of the taxable fact is not justified. Thus, the alleged defects of absence of reasoning, violation of law, and existence of founded doubt should not be imputed to them. Consequently, the four tax acts at issue herein must remain unchanged in the legal order.

5. Compensatory Interest

Given the stability of the tax acts in the legal order, no compensatory interest is due.

6. Operative Part

In accordance with the above, it is decided to declare the application wholly unfounded, with the legal consequences thereof.

7. Case Value

In accordance with the provisions of Article 306(1) and (2) of the Civil Procedure Code and Article 97-A(1)(a) of the Tax Procedural Code and Article 3(2) of the Costs Regulation in Tax Arbitration Proceedings, the case value is fixed at € 321.98 (three hundred and twenty-one euros and ninety-eight cents).

8. Costs

Pursuant to Article 22(4) of RJAT, the amount of costs is fixed at € 306.00 (three hundred and six euros), under Table I annexed to the Costs Regulation in Tax Arbitration Proceedings, to be entirely borne by the Claimant.

Text prepared by computer, pursuant to the Civil Procedure Code (CPC), applicable by reference of Article 29(1)(e) of RJAT, with blank lines.

Lisbon, 11-12-2015

The Sole Arbitrator

(Jaime Carvalho Esteves)