VAT Deduction Denied: Burden of Proof on Property Maintenance Expenses Under Article 20 CIVA - CAAD 546/2018-T

ARBITRAL DECISION

The arbitrator Nuno Cunha Rodrigues, appointed by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the present Arbitral Tribunal, constituted on 30.03.2016, decides as follows:

I. REPORT:

1. A..., Lda., taxpayer no. ..., with registered office at Rua ..., no. ..., ...-... Lisbon, requested the constitution of the arbitral tribunal in tax matters with a view to declaring the illegality of the VAT assessment acts and consequent annulment of the additional VAT assessments relating to the year 2014, in the amount of € 3,649.11 and the corrective VAT assessments relating to the year 2015 and respective assessments of late payment interest, in the amount of € 4,108.78, all in the total amount of € 7,757.89;

2. The Applicant alleges, in summary, that:

a) The Respondent Tax Authority understood that it could not accept as a fiscally relevant expense, in the year 2014, the amount of € 3,825.62 and, as deductible VAT, the amount of € 3,663.51, which led it to proceed with additional VAT assessments in the amount of € 3,649.11;

b) From said additional assessments, no amount was collected from the applicant, the value of the corrections being credited to the VAT credit on current account held by the applicant and which changed from € 9,018.30 in the 1st quarter of 2014 to € 2,949.84 in the 4th quarter of 2014.

c) In addition to the additional assessments directly resulting from the Tax Inspection Report, the Tax Authority (TA) also notified the applicant, in August 2018, of the corrective VAT assessments relating to the year 2015, made in accordance with Article 87 of the VAT Code (CIVA), as well as the assessment of the respective late payment interest, for late or insufficient payment, in accordance with Article 96 of the CIVA;

d) The corrective assessments contain no exposition of the facts underlying the respective corrections and which would allow the applicant to grasp the reason and scope thereof, being completely unaware of what, in concrete terms, the corrected values relate to and why they were corrected;

e) In the Applicant's view, the basis for the Respondent TA's consideration of the VAT values as non-deductible is that the expenses recorded by the Applicant for maintenance and repairs carried out on the land and the building located at the place of ..., in ..., were recorded incorrectly, as such works do not appear necessary for the realization of the income obtained by the taxpayer;

f) The Applicant understands that the installations are being profitably utilized for its benefit and the investments made therein proved necessary to obtain the same, determining, in fact, an increase in the income generated, with no reason why the costs incurred by the applicant with those investments should not be considered fiscally relevant, in accordance with the provisions of Article 23 of the Corporate Income Tax Code (CIRC), and that the VAT paid thereon should not be deductible, in accordance with Articles 19 and 20, no. 1 of the CIVA.

1. For its part, the Respondent - Tax and Customs Authority (TA) - in response to the allegations made the following brief statement:

a) It is important to correct the value of the case to € 4,108.78, as this is the value that corresponds to the economic benefit it seeks to obtain with the granting of its arbitral request;

b) The corrections based on improper deduction of tax relate to the dwelling and land located at the place of ..., ...;

c) There is no lack of substantiation, a defect invoked by the Applicant;

d) The tax was not considered deductible because the Applicant failed to demonstrate that the tax incurred was levied on goods and services used by it in the performance of operations that confer the right to deduction;

e) It was incumbent on the Applicant to have demonstrated its right to deduction, in accordance with the provisions of Article 74 of the General Tax Law (LGT), specifically in this case, demonstrating that the services in question were used in the performance of operations that confer the right to deduction, which it failed to do;

f) It concludes by pronouncing in favor of the dismissal of the request, that is, the maintenance of the assessment acts.

1. The request for constitution of the arbitral tribunal, filed on 6 November 2018, was accepted by the President of CAAD and automatically notified to the Respondent (TA) on 12 November 2018.

2. In accordance with the provisions of paragraph a) of no. 2 of Article 6 and paragraph b) of no. 1 of Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrator of the singular arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable period, and notified the parties of that appointment on 26 December 2018.

3. Duly notified of that appointment, the parties did not express their will to refuse the appointment of the arbitrator in accordance with the combined provisions of Article 11, no. 1, paragraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

4. Thus, in accordance with the provisions of paragraph c) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the singular arbitral tribunal was constituted on 16 January 2019.

5. On 25 March 2019, the meeting provided for in Article 18 of the RJAT took place, during which and by agreement of the parties, statements were made by the witnesses B... and C..., both called by the Applicant.

6. The Parties were granted a period for successive optional pleadings, which only the Applicant did submit.

7. The Arbitral Tribunal was properly constituted and is competent.

8. The parties have legal personality and capacity and are legitimate (Articles 4 and 10, no. 2, of the same statute and Article 1 of Ordinance no. 112-A/2011, of 22 March).

9. The case does not suffer from nullities and no obstacle arises to the examination of the merits of the case.

II. QUESTION OF THE VALUE OF THE ACTION:

In accordance with Article 97-A, no. 1, paragraph a) of the Code of Tax Procedure (CPPT), the admissible values, for purposes of court costs or other provisions in law, for actions proceeding in tax courts, correspond, "when the assessment is contested, to the amount whose annulment is sought."

The issue in the present action concerns the request for a declaration of illegality of the additional VAT assessments relating to the year 2014, in the amount of € 3,649.11 and the consequent corrective VAT assessments relating to the year 2015 and respective assessments of late payment interest, in the amount of € 4,109.78, all in the total amount of € 7,758.89.

Given that the impugned assessments (additional and corrective) of VAT in the total amount of € 7,758.89 are at issue, which corresponds to the economic benefit sought to be obtained with the granting of the arbitral request, it cannot but be considered that this is the value of the action for purposes of the provisions of Article 10, no. 2, paragraph e) of the RJAT and Article 97-A, no. 1, paragraph a) of the CPPT.

III. FACTUAL MATTER:

A. Proven Facts

With relevance for the examination and decision of the substantive issue, the following facts are established and proven:

i) The Applicant is a limited liability commercial partnership whose corporate purpose is the provision of accounting services, economic and tax studies, review and audit of accounts, company reorganization, personnel management, financial and professional management and other activities related to the management, organization, foundation or restructuring of commercial, industrial or agricultural companies;

ii) During the course of 2017, the Applicant was subject to an external inspection action of general scope, carried out by the Tax Inspection Services of the Finance Directorate of Lisbon, accredited by Service Order no. OI2017... and aimed at verifying the overall tax situation of the Applicant, in accordance with the provisions of Articles 13, paragraph b) and 14, no. 1, paragraph a) of the Complementary Tax Inspection and Customs Procedure Regime (RCPITA);

iii) In August 2018, the Tax Authority (TA) notified the Applicant of the following additional VAT assessments relating to the year 2014:

1. Assessment no. ... – period 1403T – Value of correction: € 713.84;

2. Assessment no. ... – period 1406T – Value of correction: € 2,280.76;

3. Assessment no. ... – period 1409T – Value of correction: € 460.60;

4. Assessment no. ... – period 1412T – Value of correction: € 193.91.

All in the total amount of € 3,649.11;

iv) From said additional assessments, no amount was collected from the applicant, the value of the corrections being credited to the VAT credit on current account held by the Applicant and which changed from € 9,018.30 in the 1st quarter of 2014 to € 2,949.84 in the 4th quarter of 2014.

v) The Tax Authority (TA) notified the Applicant, in August 2018, of the following corrective VAT assessments relating to the year 2015, made in accordance with Article 87 of the VAT Code (CIVA), as well as the assessment of the respective late payment interest, for late or insufficient payment, in accordance with Article 96 of the CIVA:

1 Assessment no. 2018... and respective account settlement statement – period 201509T – Amount payable: € 827.41;

2 Assessment no. 2018... and respective account settlement statement, relating to late payment interest on the amount of € 827.41 calculated between 17/11/2015 and 31/07/2018 – Amount payable: € 112.90;

3 Assessment no. 2018... and respective account settlement statement – period 201512T – Amount payable: € 2,821.70;

4 Assessment no. 2018... and respective account settlement statement, relating to late payment interest on the amount of € 2,821.70 calculated between 16/02/2016 and 31/07/2018 – Amount payable: € 347.77;

All in the total amount of € 4,109.78;

vi) The Applicant's activity focuses on the provision of accounting services and room rental services, being the owner of 5 properties: an urban property in Lisbon, located at Rua ..., no. ... and basement (registered office of the Applicant company), an urban property in Portalegre, located at Rua ..., no. ... and..., basement and sub-basements, an urban property and a rustic property (dwelling and land) located at the place of ..., parish of ..., municipality of ... and an urban property in ..., located at Rua..., plot 4.

vii) The Applicant uses the installations located at the Place of ... for, among other activities, handling accounts of small clients. Part of the installations are leased to third parties and the rustic property located at the Place of ... is leased for exploitation, generating income for the Applicant;

viii) In 2014, the Applicant obtained income from the installations located at the Place of ... in the amount of 1230.00/year (VAT included), as a result of the lease of the rustic property to farmer D..., and in the amount of € 147.60/year for the lease of storage space to company E..., Lda.;

ix) The Applicant incurred expenses for maintenance and repairs carried out on the land and the building located at the place of ..., in ... .

B. Unproven Facts

There are no other facts with relevance for examination of the merits of the case that have not been proven.

C. Substantiation of the Determination of Factual Matter

The Tribunal does not have to pronounce on all details of the factual matter alleged by the parties, it being incumbent on it to select the facts relevant to the decision and discriminate the factual matter it deems proven and declare those it considers not proven (cf. Article 123, no. 2, of the CPPT, and Article 607, no. 3, of the Code of Civil Procedure (CPC), applicable ex vi Article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and conformed according to their legal relevance, which is established in light of the various solutions for the subject matter of the dispute in applicable law (v. Article 596, no. 1, of the CPC, applicable ex vi Article 29, no. 1, paragraph e), of the RJAT).

The conviction of the Arbitral Tribunal was based on the free assessment of the positions adopted by the Parties (on the factual matter), on the statements made by the witnesses called by the Applicant and on the content of the documents attached to the case, not contested by the Parties, as well as on the analysis of the administrative file attached by the Respondent TA.

IV. ON THE LAW:

A. The fundamental issue in the present case is whether the Applicant may proceed with the deduction of VAT with respect to the values above established as proven.

This is a matter – the deductibility of VAT – analyzed in various case law, notably from CAAD.

Let us see.

Article 20, no. 1 of the CIVA makes the deduction dependent on the fact that the cost is necessary to generate income.

The question at issue in the present arbitral proceedings is whether the Applicant could deduct the costs related to maintenance and repairs carried out on the land and the building located at the place of ..., in ... .

In other words, it is sought to determine whether such works were necessary for the realization of the income obtained by the Applicant, in which case they would have conferred the right to deduct VAT.

Regarding the possibility of proceeding with the deduction of VAT and its respective framework, reference is made to what was stated in Arbitral Decision no. 426/2017-T, of 25 March 2018, which we transcribe:

The Court of Justice of the European Union (hereinafter, "CJEU") has consistently held that "the deduction scheme aims to relieve the taxable person entirely of the burden of VAT due or paid in the course of all his economic activities. The common VAT system thus ensures fiscal neutrality with respect to the burden of all economic activities, whatever their aims or results, provided that the said activities are, in principle, themselves subject to VAT (v., in particular, judgment Eon Aset Menidjmunt, C-118/11, EU:C:2012:97, no. 43 and case law referred to)." (Judgment of the CJEU of 22 October 2015, delivered in case C126/14, Sveda, ECLI:EU:C:2015:712).

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

Similarly, in case no. 562/2017-T of CAAD, reference was made to the essential lines of the right to deduct VAT indicated, among many others, in the judgment of the CJEU of 18-12-2008, delivered in case no. C-488/07, in these terms:

"15. The deduction scheme aims to relieve the taxable person entirely of the burden of VAT due or paid in the course of all his economic activities. The common VAT system thus ensures perfect fiscal neutrality with respect to the burden of all economic activities, whatever their aims or results, provided that the said activities are, in principle, themselves subject to VAT (v. judgment of 22 February 2001, Abbey National, C-408/98, Colect., p. I-1361, no. 24 and case law referred to).

1. Thus, when goods or services acquired by a taxable person are used for the purposes of exempt operations or operations not covered by the scope of VAT, there can be no downstream tax collection nor upstream tax deduction (judgment of 14 September 2006, Wollny, C-72/05, Colect., p. I-8297, no. 20)."

In domestic law, Article 19 of the CIVA establishes the rule that "for the determination of tax due, taxable persons deduct, in accordance with the following articles, from the tax levied on taxable operations they carried out: a) The tax due or paid for the acquisition of goods and services from other taxable persons".

On the other hand, Article 20 of the CIVA clarifies which operations confer the right to deduction, as follows:

Article 20

Operations conferring the right to deduction

1 - Only the tax that has been levied on goods or services acquired, imported or used by the taxable person for the performance of the following operations may be deducted:

a) Transfers of goods and supply of services subject to tax and not exempt therefrom;

b) Transfers of goods and supply of services consisting of:

I) Exports and operations exempt in accordance with Article 14;

II) Operations carried out abroad that would be taxable if carried out within the national territory;

III) Supply of services whose value is included in the taxable base of imported goods, in accordance with paragraph b) of no. 2 of Article 17;

IV) Transfers of goods and supply of services covered by paragraphs b), c), d) and e) of no. 1 and by nos. 8 and 10 of Article 15;

V) Operations exempt in accordance with nos. 27) and 28) of Article 9, when the recipient is established or domiciled outside the European Community or which are directly linked to goods intended for export to countries not belonging to the same Community;

VI) Operations exempt in accordance with Article 7 of Decree-Law no. 394-B/84, of 26 December.

2 - However, the tax relating to operations that give rise to the payments referred to in paragraph c) of no. 6 of Article 16 does not confer the right to deduction.

In the case at hand, the Applicant argues that it can deduct the costs related to maintenance and repairs carried out on the installations located at the Place of ..., and established as proven, given the provisions of Article 20 of the CIVA, which makes deduction dependent on the fact that the cost is necessary to generate income.

The requirements for the right to deduction under this rule are, insofar as is relevant here, as follows:

– that "the tax has been levied on goods or services acquired, imported or used by the taxable person" [body of no. 1];

– "for the performance of operations" of "supply of services subject to tax and not exempt therefrom" [body of no. 1, paragraph a)];

The Respondent TA argues that the costs sub judice could not have been accepted as a tax-deductible expense, as provided in no. 1 of Article 20 of the CIRC.

On this point, we concur with the decision of CAAD in case no. 426/2018-T, note 5, when it states that "as a general rule, under no. 1 of Article 20 of the VAT Code, for the exercise of the right to deduction to be possible, it is necessary that the tax to be deducted has been supported in goods or services acquired, imported or used by the taxable person, for the performance of operations subject to tax and not exempt therefrom. At this phase, of direct attribution, a direct allocation of inputs is made to the economic activities for which they are intended, deducting the entire VAT if that input is consumed in an activity that confers the right to deduction or no portion of VAT is deducted, if the activity in which that input is consumed does not confer that right. It is therefore an all-or-nothing rule, which should be taken as far as technically possible, as a way to obtain more rigorous and neutral results without distortions."

It should be noted that, for the requirement of indispensability provided for in Article 20, no. 1, of the CIRC to be satisfied, it is sufficient that the expenses are incurred in the interest of the company and are connected with its activity, regardless of whether or not income has been obtained therefrom or whether its relevance to the maintenance of the income source has been confirmed.

In this context, it is important to recall that the Applicant is a limited liability commercial partnership whose corporate purpose is the provision of accounting services, economic and tax studies, review and audit of accounts, company reorganization, personnel management, financial and professional management and other activities related to the management, organization, foundation or restructuring of commercial, industrial or agricultural companies.

At this point, the issue arises as to who bore the burden of proof regarding whether the costs sub judice could – or could not – be accepted as a tax-deductible expense in the proceedings at hand.

Let us see.

The rules on the burden of proof in tax procedure are set out in Article 74 of the LGT, which establishes the following:

Article 74

Burden of Proof

1 - The burden of proof of the facts constituting the rights of the tax administration or of taxpayers falls on whoever invokes them.

1. When the elements of proof of the facts are in the possession of the tax administration, the burden provided for in the previous number is considered satisfied if the interested party has proceeded to its correct identification with the tax administration.

2. In case of determination of the taxable matter by indirect methods, the tax administration bears the burden of proving the verification of the conditions for their application, with the taxable person bearing the burden of proving the excess in their quantification.

In this case, the Applicant presented supporting documents of the costs incurred and their indispensability.

It was incumbent on the Respondent TA to prove that the requirement of indispensability, provided for in Article 20, no. 1, of the CIRC, had not been fulfilled by the Applicant, since this is the constitutive fact of the assessment right it exercised (cf. Article 74, no. 1, of the LGT), knowing that the Applicant satisfied what is provided for in no. 2 of Article 74 of the LGT, as "the elements of proof of the facts" were "in the possession of the tax administration," the Applicant having proceeded "to their correct identification with the tax administration."

In fact, and as follows from the Judgment of the Superior Administrative Court of 15-11-2017 (case no. 0485/17), "(…) within the scope of tax procedure and process, the burden of proof of the facts constituting the rights of the TA and of taxpayers falls on whoever invokes them (no. 1 of Article 342 of the Civil Code and no. 1 of Article 74 of the LGT). Thus, (…), the burden of proof of the factuality that leads it to proceed with corrections to the taxable matter declared by taxable persons falls on the TA. That is, it is incumbent on the TA to bear the burden of proving the verification of the legal (binding) conditions of its action, as constitutive facts of such right, in terms of that principle of legality, according to its current understanding, understood not as a mere limit to the activity of the administration but as the foundation of all its activity, it being incumbent, in turn, on the taxpayer to present sufficient proof of the illegality of the act, when these conditions are verified (...)" (emphasis ours).

In other words, if, for the Respondent TA, the criteria provided for in Article 20, no. 1 of the CIRC were not fulfilled, it was incumbent on it to substantiate its position by adducing economic and accounting reasons appropriate to the reality of the Applicant, so as to put into question the tax treatment adopted.

The Respondent TA should have proven the factuality that led it to reject the tax deduction, factuality that, as has been recently recognized by the North Administrative Court, "must be capable of undermining the presumption of truthfulness of the operations contained in the taxpayer's records and their supporting documents."

It happens that, in the case, that burden is not satisfied, the TA limiting itself, in terms of substantiation, to issuing poorly supported opinion judgments, such as when it states that "in our view, it is not enough for the Applicant to allege the existence of an office (…)" (cf. Article 56 of the response); "indeed, it does not seem to us that annual rents" (…) (cf. Article 58 of the response) or that "being construction works, if it were expected that they would result in a future economic increase, the amounts spent should have been recorded as Tangible Fixed Assets (…)".

The Respondent TA further states that "the dwelling located at the place of ... in ... has the characteristics of a residential house, and no activity related to the preparation of accounts has been observed (…)", which was not proven as a result either of the documentation attached to the administrative file – notably the contracts established as proven at point viii) above – or as a result of the witness testimony.

In sum, the Respondent TA errs in its factual and legal assumptions, since, contrary to its argument, it does not appear that the criteria adopted by the Applicant were not met, nor was it proven by the Respondent TA that the expenses sub judice do not fall within the concept of the economic activity carried out by the Applicant.

In other words, the Respondent TA did not demonstrate, in a proven manner, that the costs sub judice could not have been accepted as a tax-deductible expense.

Thus, the request for arbitral pronouncement is well-founded as the assessments under examination are tainted by the defect of violation of law, which justifies their annulment, in accordance with the provisions of Article 163, no. 1, of the Code of Administrative Procedure, subsidiarily applicable pursuant to Article 2, paragraph c), of the LGT, as it was not proven by the Respondent TA that the costs sub judice could not have been accepted as a tax-deductible expense.

Consequently, the impugned assessments must be annulled.

B. Questions of Knowledge Prejudiced:

Given that the request for arbitral pronouncement is to be judged well-founded on the basis of defects of violation of law, which ensure stable and effective protection of the interests of the Applicant, the examination of the remaining questions raised is prejudiced, as being unnecessary (Article 130 of the CPC).

C. On Compensatory Interest:

The Applicant proceeded to pay the tax determined in the amount of € 4,109.78 (four thousand one hundred nine euros and seventy-eight cents).

It happens, as we have seen above, that the assessments are tainted by the defect of violation of law, and that amount was paid unduly.

Under the provisions of Article 100 of the LGT, the tax administration is obliged, in case of full or partial success of complaints or administrative appeals, or of court proceedings in favor of the taxable person, to immediately and fully restore the situation that would have existed if the illegality had not been committed, including the payment of compensatory interest, in accordance with the terms and conditions provided for in law.

The assessment acts are the sole responsibility of the Respondent TA, having led to a payment of tax in an amount higher than legally due, being thus tainted by the defect of violation of law, having been performed by error imputable to the services, so the Applicant is entitled to payment of compensatory interest.

Indeed, under Article 43 of the LGT, compensatory interest is due when there is error imputable to the services resulting in the payment of a tax debt in an amount higher than legally due.

Compensatory interest is due, from the date of payment, being calculated on the basis of its value, until full reimbursement to the Applicant, at the legal rate, in accordance with Articles 43, nos. 1 and 4, and 35, no. 10, of the LGT, Article 61 of the CPPT and Article 559 of the Civil Code, at the legal rate in force.

V. DECISION:

Thus, this Arbitral Tribunal hereby agrees to:

a. Judge the request for arbitral pronouncement to be well-founded;

b. Declare the illegality and provide for the consequent annulment of the tax acts assessing VAT relating to the year 2014 and the 3rd and 4th quarters of 2015, as well as assessment of late payment interest on these latter values, in the total amount of € 7,758.89 (seven thousand seven hundred fifty-eight euros and eighty-nine cents), with the consequent annulment of the respective collection documents and condemnation of the TA to refund to the Applicant the amounts already paid by it, in the amount of € 4,109.78 (four thousand one hundred nine euros and seventy-eight cents) and respective compensatory interest.

c. Condemn the Respondent TA to pay the costs of the proceedings.

VI. Value of the Case:

In accordance with the provisions of Articles 306, no. 2, and 297, no. 2 of the CPC, Article 97-A, no. 1, paragraph a) of the CPPT and Article 3, no. 2, of the Regulation on Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 7,758.89 (seven thousand seven hundred fifty-eight euros and eighty-nine cents).

VII. Costs:

In accordance with Article 22, no. 4, of the RJAT, the amount of the costs is fixed at € 612 (six hundred twelve euros), in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Respondent TA.

Notify.

Lisbon, 30 May 2019.

The Arbitrator

(Nuno Cunha Rodrigues)