Summary
Full Decision
The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Prof. Dr. Clotilde Celorico Palma and Prof. Dr. Regina de Almeida Monteiro (arbitrators-voters), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 20-12-2017, agree as follows:
1. Report
A… LDA, with registered office in …, …-… …, …, holder of the sole identification number for legal persons … (hereinafter referred to as "Claimant" or "A…" or "A…"), filed a request for constitution of the collective arbitral tribunal, in accordance with Decree-Law no. 10/2011 of 20 January (hereinafter RJAT), in which the TAX AND CUSTOMS AUTHORITY is the Respondent.
The Claimant requests that the legality of the implicit rejection of the administrative appeal presented against VAT assessments relating to the monthly periods from January to December 2012, identified under nos. 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, and 2016…, and the legality of such assessment acts be reviewed.
The Claimant further seeks the condemnation of TA for compensation of the expenses incurred and to be incurred with the guarantee provided in the tax enforcement proceedings instituted for coercive collection of the assessed amounts.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority on 12-10-2017.
In accordance with the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of RJAT, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.
On 28-11-2017, the parties were duly notified of such appointment and did not express any intention to refuse the appointment of arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.
In accordance with the provisions of paragraph c) of no. 1 of article 11 of RJAT, the collective arbitral tribunal was constituted on 20-12-2017.
The Tax and Customs Authority replied, arguing that the request for arbitral ruling was unfounded.
By order of 02-02-2018, it was decided to dispense with the meeting provided for in article 18 of RJAT and that the proceedings continue with submissions.
Only the Claimant filed submissions.
The Tribunal is competent and was regularly constituted.
The parties have legal personality and capacity, are parties with standing and are duly represented (arts. 4 and 10, no. 2, of RJAT and art. 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings do not suffer from any nullities.
2. Matter of Fact
2.1. Proven Facts
The following facts are considered proven as relevant to the decision:
- The Claimant is engaged in the provision of plastic products manufacturing services, marketed by other companies in the multinational group in which it operates, i.e. the B… Group, an activity which it has exercised in Portugal for approximately two decades;
- The Claimant conducts its activity under a Manufacturing Services Agreement ("Tolling Agreement" attached to the Appeal filed with the Initial Request as document no. 1, whose content is reproduced as follows), concluded with C… S.A. ("C…"), a company in the group based in Switzerland, in December 1997;
- As stated in that Manufacturing Services Agreement, the Claimant undertakes to manufacture the products in accordance with and under the instructions and specifications provided by C…, and the Claimant is bound to respect the brand quality standards through the use of know-how, designs, standards and other requirements issued by C… (Article 2 of the Agreement cited);
- The manufacturing process of plastic products begins with the acquisition of raw materials and components by C…, in its own name, and is subsequently imported by the Claimant, which incorporates them into the finished products it manufactures for C…, so that the latter may ultimately proceed with their sale under the G… brand;
- The Claimant presents itself at the Portuguese customs as "importer of record", acting on account of C…, due to the latter not having any structure of human and technical resources that would allow it to carry out imports in Portugal;
- For this purpose, that is, to carry out the clearance of the raw materials and components referred to, the Claimant contracted in its own name the company D…, Lda. ("D…") as Official Customs Broker, and the costs of providing this service are refactored to C…;
- All raw materials and components that incorporate the finished product, work-in-progress products and finished products are the property of C… (Article 4.1 of the Agreement cited);
- The agreed value for the provision of manufacturing services by the Claimant corresponds to the costs and expenses incurred, plus a fee equivalent to 15% of its value, as per Article 6 of the aforementioned Manufacturing Services Agreement;
- The Claimant provides storage services for products in Portuguese territory to E… S.A. and to C…, which include the storage of products produced both by the Claimant and by other companies in the B… Group, as well as by companies not part of it;
- It is under a Warehousing Services Agreement, concluded between the Claimant and C… in 1997, that the Claimant provides warehousing, handling, loading onto trucks and issuance of delivery notes to C…, with respect to the raw materials, components and finished products that are the property of C… (Article 2.1 of the "Warehousing Services Agreement", attached to the appeal filed as document no. 1 to the Initial Request);
- All goods used and manufactured throughout the production chain, including raw materials, components, finished products and other goods necessary for production, are stored in the Claimant's facilities, whether in … or in a warehouse rented in …, …– and C…'s goods are physically separated from the remaining goods.
- The value of the warehousing service covers all costs and expenses related to the warehousing services provided under the Warehousing Services Agreement, to which is added a profit margin of 10% on the same (Article 6 of the aforementioned contract);
- In connection with the warehousing services provided, the Claimant sometimes contracts for transportation services in its own name but on account of other entities in the Group, subsequently refactoring them to C…;
- In the specific case, the transportation of the goods from their origin to the place of discharge in … is the responsibility of the respective supplier, and the Claimant may contract for transportation itself in exceptional situations, with the cost being refactored to C…;
- Taking into account the above, the Claimant is subject to the monthly periodicity regime and is a "full" VAT taxable person, insofar as it carries out exclusively operations with VAT deduction rights;
- The services invoiced to C… under the Manufacturing Services Agreement correspond to more than 90% of the operations carried out by the Claimant;
- The Tax and Customs Authority conducted a tax inspection of the Claimant relating to VAT for the year 2012, during which it prepared the Tax Inspection Report contained in the administrative file, whose content is reproduced as follows, in which it states, among other things, the following:
III – DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO THE TAX BASE
The legislative provisions cited in this report are those in force at the date of the facts.
I - VAT RECORDED IN DOCUMENTS RELATING TO TAX ASSESSMENT ON IMPORTS IN THE NAME AND ON ACCOUNT OF THIRD PARTIES
A… deducted, in the year 2012, the VAT recorded in the assessment records identified in the tables below:
(...)
A… recorded the VAT in account #2432241-"DED.O.B.S.-RATE and declared the VAT deduction in the DP, relating to the period of tax identified in each of the above tables.
Each assessment note corresponds to a single import document (DU). Accordingly we prepared a table with the correspondence between the assessment notes and the single import document and part of the information recorded in the DU ("Shipper/Exporter", "Recipient" and "Declarant/Representative").
Based on the data recorded in the DU table, the importer is A…, as it is this entity that presents itself at the customs to make the import and pays the respective VAT.
It is important to note that the "Declarant/Representative": D…, Lda, identified in box 14 of the DU, states that it is carrying out an indirect import having for this purpose entered in the aforementioned box the code "3".
In the analysis carried out on the DUs, it was verified that the invoices recorded in them, which are identified by the code "N380", state that:
- The imported goods and invoiced in each of the invoices identify the customer as C…,
- The address where they should be delivered is: "A…, Lda -… …- … …-Portugal".
Based on the description above, we prepared a table with the identification of the DUs, identification of the invoices recorded in box 44 and compiled some elements recorded in the aforementioned invoices which, in our opinion, are relevant for the assessment of the matter of fact:
(...)
In consultation with the AT database, it was verified that C…, SA (hereinafter referred to as C…) - an entity resident in a third country (Switzerland) is registered in Portugal for VAT purposes without a permanent establishment, having been assigned the VAT identification number … . In the system it appears that A… was appointed its representative, in accordance with no. 2 of art. 30 of the VAT Code.
C… (non-resident entity) declared in its Periodic VAT Returns active operations subject to VAT at the normal rate (field 3), intra-Community supplies (field 7) and exempt operations that confer the right to deduction (field 8).
Within the scope of this internal inspection procedure, which aims to analyze the legitimacy of the VAT refund request made by A… in the DP relating to the 2015/07 period, the following situations were verified:
A. A… deducted the VAT recorded in the VAT assessment records relating to the import of products that are the property of C…, S.A – an entity resident in a third country (Switzerland), which is registered in Portugal for VAT purposes as a non-resident entity without a permanent establishment, having been assigned the VAT identification number … . The aforementioned documents will be identified in the following points of this report.
B. Issuance of invoices by A… to the customer C…, SA (C…), an entity resident in Switzerland for purposes of:
"freight incurred by A…, Lda (Portugal MFG) on Transactions of finished products to/from other European C… locations as attached." (emphasis ours), in accordance with documents identified in the table below.
(...)
All the aforementioned invoices have recorded "Not Subject to VAT in Portugal- Art. 6 no. 6 paragraph a) of CIVA to the contrary - Self-Assessment VAT"
The situations described in "B" will be described in detail in another point of this report.
Within the scope of the notification made by means of letter no. …, already described in this information and in order to better understand the operations described above, the TP was questioned on the following:
"(...)
4- What is the legal and economic relationship existing between A… and C…, S.A., an entity resident in Switzerland and registered for VAT purposes without a permanent establishment in Portugal, with the NIPC …?
The taxable person replied on 30-11-2015 as follows:
Beginning of quotation:
Legal and Economic Relationship
A… and C… belong to the B… Group, with F… being the ultimate holding entity of both entities.
C… is the entity in the B… Group that is authorized to produce and market the products of the G… brand globally, including Portugal.
A… is an autonomous company with its own management, being responsible for the conduct and daily management of its activity. A… holds decision-making power with respect to its personnel structure, salary policy, production plan and acquisition of equipment.
As mentioned previously, C… and A… concluded the Toller Agreement and the Warehousing Services Agreement.
Registration for VAT purposes in Portugal of C…
With respect to C…, it should be noted that this entity does not have any own facilities or employees in national territory. Thus, and similarly to the contract concluded with A…, C… concluded contracts of identical nature in several European countries, including France, Belgium and Greece, some of which are the subject of Advance Pricing Agreements in their respective jurisdictions.
However, since C… makes intra-Community acquisitions of goods (raw materials) in Portugal and intra-Community supplies of goods (finished products) from Portugal, it is obliged to register for VAT purposes.
As an entity established in Switzerland, C… was obliged to appoint a tax representative, in accordance with article 30, no. 2 of CIVA, having designated A….
(...)
End of quotation.
Considering the reply of the TP to the notification identified above, we conclude the following:
i. C…, as a registered taxable person, for VAT purposes in Portugal, makes intra-Community acquisitions of goods (raw materials), in accordance with art. 3 of the Intra-Community VAT Regime (RITI) combined with no. 1 of art. 8 of the same instrument;
ii. The aforementioned acquisition of goods (raw material) is placed in the factory in …, owned by A… and at the disposal of this entity, for this to provide the molding service provided for in the Tolling contract, which will be analyzed further in this information. The raw material and the finished product are the property of C…, a non-resident entity but registered for VAT in national territory, and were, respectively, acquired or sold "using" the Portuguese tax identification number:
iii. C…, as a registered taxable person, for VAT purposes in Portugal, makes supplies of goods to:
a. national territory:
b. the European market:
iv. A… was appointed tax representative of C…, in accordance with no. 2 of art. 30 of the VAT Code.
(...)
In summary:
• A… contracted with C… to provide the manufacturing services necessary to produce the G… brand Products: This operation constitutes an onerous provision of services classified in paragraph c) of no. 2 of art. 4 of the VAT Code
• C… (an entity resident in Switzerland and registered for VAT purposes without a permanent establishment in Portugal) is the owner of the raw materials and all materials necessary to produce the finished product to be marketed under the G… brand - G… Products;
• the raw materials are acquired by C… using the Portuguese tax identification number for VAT purposes:
• the raw materials and finished products are stored in the factory in … . For said storage service, C… pays A… an amount provided for in the "Warehousing Service Agreement" contract.
• C… is the owner of the finished product – G… Products:
• the finished product is supplied onorously by C… using the Portuguese tax identification number for national territory and for the European market.
(...)
In view of the above, we conclude that the imported goods described in table I, relating to which A… deducted the VAT, concern goods that are not its property and therefore are not used for the performance of the operations subject to tax related to the operations of supplies of goods and/or provisions of services within the sphere of the Portuguese entity (A…).
Article 20 of the VAT Code provides that:
"1 - Only the tax that has been charged on goods or services acquired, imported or used by the taxable person for the performance of the following operations may be deducted:
a) Supplies of goods and provisions of services subject to tax and not exempt from it;
b) Supplies of goods and provisions of services consisting of:
I) Exports and exempt operations within the meaning of article 14;
II) Operations carried out abroad that would be subject to tax if carried out in national territory;
III) Provisions of services whose value is included in the tax base of imported goods, in accordance with paragraph b) of no. 2 of article 17;
IV) Supplies of goods and provisions of services covered by paragraphs b), c), d) and e) of no. 1 and nos. 8 and 10 of article 15;
V) Exempt operations within the meaning of nos. 27) and 28) of article 9, when the recipient is established or domiciled outside the European Community or which are directly connected to goods intended to be exported to countries not belonging to the same Community;
VI) Exempt operations within the meaning of article 7 of Decree-Law no. 394-B/84, of 26 December.
2 - However, the tax relating to operations giving rise to the payments referred to in paragraph c) of no. 6 of article 16 does not confer the right to deduction"
Thus, the VAT recorded in the import documents for goods owned by C… was improperly deducted during the year 2012, in the amount of € 1,458,114.92, as described by tax period in the following table:
(...)
2 - VAT RECORDED IN DOCUMENTS RELATING TO THE TRANSPORTATION AND CUSTOMS CLEARANCE OF IMPORTED GOODS IN THE NAME AND ON ACCOUNT OF THIRD PARTIES.
A… deducted the VAT on the basis of documents issued by companies providing transportation services for imported goods in the name of C…, as demonstrated by tax period in the following tables:
(...)
Likewise, A… deducted the VAT recorded in the invoices issued by D…, Lda, NIPC …, relating to the provision of services carried out within the scope of the import customs clearance, which are described by tax period in the following table:
(...)
In summary, regarding the provisions of services described above, VAT was improperly deducted in the total amount of € 12,750.44, as described by tax period in the table below:
(...)
Subsequently, the TP issued the Assessment Notices, identified in tables no. XXIV and no. XXV, in favor of the customer C…, SA., to refactor the charges incurred and paid on account of the entity resident in Switzerland (where included the expenses subject to VAT and exempt from VAT).
The accounting entries made by A… are as follows:
(...)
A… refactors to C… the charges (excluding VAT) with transportation and any charges related to the imports of goods owned by C….
A… deducts the VAT recorded in the invoices issued by the service providers which are subsequently refactored to C…, but excluded from VAT.
Once again, it should be noted that, according to the information provided by the TP, the imported goods (owner is a non-resident entity) are used in the production of finished products of the "G…" brand (owner non-resident entity) are sold, by the non-resident entity, to the Portuguese territory, European Union territory and third country territory using the Portuguese VAT identification number,
It is important to report that the non-resident entity declares the sales of finished products in its periodic VAT return in the respective tax period, filed in national territory as a non-resident TP without a permanent establishment.
In view of the above, it is concluded that it is the non-resident entity that in determining the selling price of the finished product will include in its formation the charges incurred with:
• the acquisition of raw material and other components:
• transportation of goods by third parties: and
• customs brokers.
Moreover, in the formation of the selling price of finished products, are also included the charges incurred with the production of the "G…" products plus the profit margin (added value), which is subject to VAT in accordance with art. 1 of the VAT Code.
In view of the above, we conclude that A… improperly deducted the VAT relating to the transportation of imported goods and customs brokers' fees that are the property of C… (non-resident entity), because the same were not intended for the performance of the supplies of goods and provisions of services within the sphere of A…, in accordance with paragraph a) no. 1 of art. 20 of the VAT Code.
IX-RIGHT TO HEARING
(...)
II - Conclusions of Draft Corrections
a. Import of goods
In view of the above, we conclude that within the sphere of the Portuguese entity – A…- the acquisition of imported goods did not:
– contribute to the formation of the price of the Provisions of Services carried out at the request of C…;
– give rise to sales of finished products to national territory, intra-Community territory and third countries;
– produce sales of goods in the same state as they were acquired to national territory, intra-Community territory and third countries;
In the analysis carried out on the DUs, it was verified that the invoices recorded in them, which are identified by the code "N380", state that the acquirer of the imported goods is C….
In accordance with no. 1 of article 20 of the VAT Code (transcribed on page 36 of the Draft Report) only the VAT that has been charged on goods or services acquired, imported or used by the taxable person for the performance of the following operations may be deducted:
• Supplies of goods and provisions of services subject to tax not exempt from it;
- Exports.
In consideration of the description in point III.1 of the Draft Report and now within the scope of the right to hearing, the value of acquisition of imported goods did not contribute to the performance of the supplies of goods and provisions of services subject to tax, as provided for in paragraph a) no. 1 of art. 20 of the VAT Code.
(...)
III - Classification of Operations and Correct Application of VAT
The taxable person in items 22 to 29 makes a brief summary of the contractual clauses provided for in the contracts "Manufacturing Services Agreement" and "Warehousing Agreement".
The passive TP acknowledges that all imported goods are the property of C… (cfr item 26), which justifies the issuance of the invoice for acquisition of the goods by the supplier thereof in the name of C… and not of A….
A… was contracted by C… to provide a service of molding and assembly of raw materials and production components (property of C…) placed by order of C… in the Factory in …, for the latter entity to perform the provision of services already described in this report. For said provision of services A… is remunerated by C…, in accordance with what is provided for in the "Manufacturing Services Agreement".
Thus, the value of acquisition of imported goods is not an input of A… (moreover there is not nor could there be any record in the accounts of the net value of the import of goods), but rather of the first entity (C…), as it is this entity that imports the goods and will proceed with the sale of finished products and possibly some imported goods.
Let us see:
i) The supplier of imported goods issues an invoice to C… (in its capacity as customer), which is identified in box 44 in the DU;
ii) A… presents itself to the Customs Authority as being the Importer and pays the respective VAT. However, the actual importer is C… (entity registered for VAT as a non-resident entity without a permanent establishment), as it is the owner of the goods that will subsequently supply the finished product onorously in national territory, using the Portuguese VAT identification number;
iii) A… deducts the VAT paid at the Portuguese Customs Requests the refund of the VAT paid at the Customs, when the importer is C…, registered for VAT without a permanent establishment in Portugal;
iv) A… provides the molding service provided for in the Tolling contract, for which it is remunerated. However, the remuneration for the provision of services does not include nor could it include the value of imported goods, as it is not their owner;
v) In the right to hearing it continues to be incomprehensible why it is not explained why C… does not carry out the import directly.
The TP alleges that in art. 168 of the VAT Directive the right to deduct VAT does not "(...) contain any reference related to the ownership of imported goods." (art. 33 of the document exercising the right to hearing.").
Considering the allegation, it becomes necessary to frame the operation in light of that directive: Let us see:
i. Article 14, no. 1, of this directive provides:
«'Supply of goods' means the transfer of the right to dispose of tangible property as owner.» (emphasis ours)
The owner of the imported goods is always C….
ii. Article 24, no. 1, of the same directive provides:
«'Provision of services' means any transaction which is not a supply of goods.» (emphasis ours).
As demonstrated previously, the goods were never supplied by C… to A…, in the sense of the latter being able to exercise the right of property so that they would be used for the purposes of its taxed operations (provisions of services).
Thus, there cannot be an upstream deduction that does not generate a downstream operation within the sphere of A…. For, if that were the case, any TP could deduct VAT on a document issued in its name even if there were taxable operations downstream that incorporated that value.
So much so that in no. 2 of art. 72 of the VAT Directive it provides that the taxable amount is determined:
"As regards services, by an amount not less than the expenses incurred by the taxable person in the execution of the provision of services." (emphasis ours.)
The value of the import of goods is not an expense that contributes as a positive component in the formation of the price of the provision of services carried out by A… (as has already been demonstrated) Therefore, said import does not generate taxable operations within the sphere of A… and consequently the right to deduction on imported goods is prevented, in accordance with paragraph a) of no. 1 of art. 20 of the VAT Code.
Note that if there were no limits to the deduction of VAT any entity that had in its possession a document in its name with the invoicing of a good/service in its name that did not generate a taxable operation downstream would be in a position to exercise the right to deduction (according to the TP's interpretation).
In proper terms, if the tax functioned in the way the TP seeks to have accepted the right to deduct VAT would place in crisis the principles of tax certainty and equality of taxation between TPs.
The TP interprets the word "used" recorded in no. 1 of art. 20 of the VAT Code in the broad sense when it must be interpreted in a narrow sense. Thus, considering the allegations of the TP, any good that is used by the TP, even if supplied by its customer (cost incurred by the customer), the VAT can be deducted by the service provider, which is at least absurd because it contradicts the method and philosophy of the calculation of the Tax on Added Value.
Moreover, what the legislator intended by the mention of the word "used" was to permit the deduction of VAT on operations that do not title definitive acquisitions, namely "rentals", but whose expenses/costs enter into the formation of the price of the provisions of services/goods that will be supplied by the TP and consequently are taxable downstream.
In view of the above, there are described objective facts that demonstrate that the TP does not have the right to deduct the tax paid relating to the imports of goods from C…, for not meeting the requirements expressly provided for in art. 168 of the VAT Directive.
For this deduction of VAT would place in crisis the system of fiscal neutrality, because, as has already been mentioned, there is no downstream operation of supply of goods within the sphere of A… and the value of imported goods does not enter into the formation of the price of the provision of services. Thus, the right to deduction of VAT on imported goods and the charges related to them is ruled out in accordance with paragraph a) no. 1 of art. 20 of the VAT Code.
(...)
- Following the inspection action, the Tax and Customs Authority issued the VAT assessments relating to the monthly periods from January to December 2012, identified under nos. 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, and 2016…, as well as the respective account settlement statements, which were attached with the request for arbitral ruling, whose contents are reproduced as follows;
- On 20-03-2017, the Claimant filed an administrative appeal against the aforementioned assessments;
- The claimant did not proceed to pay any VAT assessed by the Tax Administration with respect to the monthly periods from January to December 2012 (€ 28,599.01, € 142,011.89 € 23,833.64 € 44,116.96, € 186,885.14, € 174,814.26, € 169,054.63, € 199,637.72, € 129,262.15, € 0.00, € 291,121.39 € 155,319.51), totaling the amount of € 1,544,656.30.
- After the expiry of the voluntary payment period set in the notification of the assessments (12 January 2017), the Claimant was cited for the corresponding tax enforcement proceedings, instituted under nos. …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017… and …2017…;
- The Claimant provided a bank guarantee to suspend such tax enforcement proceedings, in the amount of € 1,954,380.39 (guarantee attached as document 15 to the administrative appeal, which appears on page 176 and following of the document called «Annex 1 - Appeal VAT 2012 p. 363-543.pdf»);
- The administrative appeal was not decided until 12-10-2017, the date on which the Claimant filed the request for arbitral ruling that gave rise to the present proceedings.
2.2. Unproven Facts
There are no facts relevant to the decision of the case that have not been proven.
2.3. Grounds for Fixing the Matter of Fact
The matter of fact was fixed on the basis of the administrative file and the documents attached to the request for arbitral ruling.
3. Matter of Law
The Claimant A… deducted the VAT recorded in the VAT assessment records relating to the import of products that are the property of C…, S.A. (C…), an entity resident in a third country (Switzerland), registered in Portugal for VAT purposes as a non-resident entity without a permanent establishment.
A… contracted with C… to provide the manufacturing services necessary to produce the G… brand products and provides such services, which in the Tax Inspection Report was considered to be "an onerous provision of services classified in paragraph c) of no. 2 of art. 4 of the VAT Code".
C… is the owner of the raw materials and all materials necessary to produce the finished product to be marketed under the G… brand - G… Products.
The finished product is supplied onorously by C… using the Portuguese VAT identification number for national territory and for the European market.
The Tax and Customs Authority understood that the imported goods "relating to which A… deducted the VAT concern goods that are not its property and therefore are not used for the performance of the operations subject to tax related to the operations of supplies of goods and/or provisions of services of the Portuguese entity (A…)".
The Tax and Customs Authority understood that the Claimant could not deduct VAT borne by the Claimant in the import of goods that it uses in the production of the products it manufactures in the course of its activity, nor the VAT borne by the Claimant with the transportation and clearance of such imported goods that it uses in the manufacture of finished products.
The question that is the subject matter of the proceedings is whether the Claimant can deduct the VAT that it deducted, which was actually borne by the Claimant, but which relates to operations concerning goods that do not belong to it.
This question was raised in absolutely identical terms in arbitral proceedings no. 410/2016-T and decided in terms that are considered appropriate and well-founded, and will therefore be followed closely in its reasoning, in essence.
3.1. The Right to Deduction by the Importer of Goods that are not its Property
The right to deduct VAT aims to ensure that "a taxable person of the tax only remits to the State the VAT that results from the balance between the VAT value that it calculates on the taxable operations it performs downstream and the value of VAT that it bears on acquisitions upstream".
"The deduction regime aims to completely free the entrepreneur from the burden of VAT, whether due or paid, within the scope of all its economic activities, and including, minimizing, as much as possible, the financial charges caused by the management of the tax. The common system of value added tax therefore ensures perfect neutrality with regard to the tax burden of all economic activities, whatever the purposes or results of such activities, provided that such activities are themselves subject to VAT".
"The CJEU has moreover persistently affirmed that the right to deduction forms an integral part of the mechanism of VAT and cannot, in principle, be limited".
"However, the exercise of the right to deduct VAT borne on upstream operations on goods and business services is not an absolute and unconditional right. The VAT Directive, in articles 176, 177 and 395, admits restrictions to this right for reasons of legal certainty, for economic reasons and with the aim of combating tax fraud or tax evasion or simplifying the collection of tax. The limitations on the right to deduction have an impact on the level of the tax burden, and must therefore be applied in a similar manner in all Member States. Consequently, exceptions are only authorized in cases expressly provided for by the VAT Directive".
"To trigger the mechanism of deductions it is necessary for a taxable person, acting in that capacity, to acquire a good or a service, or to proceed with the import of a good".
For the exercise of the right to deduction, it is required that, in accordance with article 2 of CIVA, it be a taxable person who uses in its economic activity the goods and services whose supported tax it intends to deduct.
The Claimant has the status of taxable person not only with the provision of article 2, no. 1, paragraph a), but also in paragraph b) of the same number, since it carries out production activities and provision of services and performs imports of goods, in accordance with customs legislation.
In fact, the Claimant provides services under a manufacturing contract, according to the terms of an empreitada contract, denominated "Toller Agreement", whose materials are totally or essentially supplied by C… in its capacity as owner of the work and imported by the Claimant.
The VAT whose deduction is questioned concerns imported goods that are not the property of the Claimant.
XAVIER DE BASTO and ODETE OLIVEIRA, in an opinion reproduced in the arbitral decision rendered in proceedings no. 410/2016-T, state the following:
"In the situation under analysis, the specificity is merely that the delivery of materials by the owner of the work to the contractor (builder) does not occur directly in national territory, but reaches it only after crossing the territorial boundaries of Portugal and also the Customs Union. And this presents various consequences, which we must analyze to properly conclude.
"First, that an import occurs, which CIVA defines as a taxable operation in view of the application of the destination principle in international trade which the tax follows, and whose definition is made by national tax legislation in conjunction with the Customs Code (a Community Regulation)."
"The second consequence is that the entity considered as importer – taxable person in the import – is that defined by customs legislation by reference made in paragraph b) of no. 1 of article 2 of CIVA, which considers as the importer the person who appears as recipient in the import document, insofar as article 4, no. 18 of the Community Customs Code (CAC) considers as "declarant" the person who makes the customs declaration in their name or the person on whose behalf the declaration is made, and article 201, no. 3, first paragraph of CAC says that the debtor is the declarant."
"It should be recalled that although the VAT Directive considers that the VAT on imports can be paid by a taxable person or by a mere debtor (article 21, no. 2 of the Sixth Directive), the Portuguese legislator did not adopt the same solution, instead always considering the importer as a taxable person, sometimes only with the nature of "debtor" of the tax for the application of the destination principle (paragraph b) of no. 1 of article 2 of CIVA), since in the others, that importer, if a taxable person, is already covered by paragraph a) of the same number and article. It should be noted, moreover, that according to constant case law of the CJEU, "the VAT on imports and customs duties present essential characteristics comparable insofar as they give rise to the fact of import in the EU and the consequent introduction of goods into the economic circuit of the Member States. Parallelism which is confirmed by the fact that article 71, paragraph 1, second indent, of the VAT Directive authorizes the MS to link the taxable event and the chargeable event of VAT on imports to the taxable event and the chargeable event of customs duties" [This is the doctrine of Judgment C-273/12, of 11 July 2013, no. 41, and reference made therein to the Judgments C-343/89, of 6 November 1990, no. 18 and C-230/08, of 29 April 2010, nos. 90 and 91: "In this regard, it should be recalled that the VAT on imports and customs duties present essential characteristics comparable insofar as the taxable event is the import into the Union and the subsequent entry of the goods into the economic circuit of the Member States. This parallelism is furthermore confirmed by the fact that article 71, no. 1, second paragraph, of the VAT directive authorizes the Member States to link the taxable event and the chargeable event of VAT on imports to the customs duties (v., designadamente, judgments of 6 December 1990, Witzemann, C‑343/89, Coll., p. I‑4477, no. 18, and 29 April 2010, Dansk Transport og Logistik, C‑230/08, Coll., p. I‑3799, nos. 90 and 91)".
"It should therefore be concluded that the MS have no margin of discretion as regards the requirement of VAT on imports in accordance with customs legislation, in accordance with article 204 of Regulation no. 2913/92, and it being certain, as recalled in the conclusions of Advocate General Juliane Kokott, in Case C-414/10, that "This is the doctrine of Judgment C-273/12, of 11 July 2013, no. 41, and reference made therein to the Judgments C-343/89, of 6 November 1990, no. 18 and C-230/08, of 29 April 2010, nos. 90 and 91: "In this regard, it should be recalled that the VAT on imports and customs duties present essential characteristics comparable insofar as the taxable event is the import into the Union and the subsequent entry of the goods into the economic circuit of the Member States. This parallelism is furthermore confirmed by the fact that article 71, no. 1, second paragraph, of the VAT directive authorizes the Member States to link the taxable event and the chargeable event of VAT on imports to the customs duties (v., designadamente, judgments of 6 December 1990, Witzemann, C‑343/89, Coll., p. I‑4477, no. 18, and 29 April 2010, Dansk Transport og Logistik, C‑230/08, Coll., p. I‑3799, nos. 90 and 91)" and that "if the right to deduction aims to ensure that value added tax remains economically neutral for businesses, the deduction of upstream tax borne cannot be denied unless we are facing issues of fraud, evasion or abuses, whose fight against is a recognized and encouraged objective by the Sixth Directive, and no margin should remain for abusive or fraudulently being able to take advantage of the right of the Union, and as such, if a Tax Administration verifies that the right to deduction was exercised fraudulently, it can request, with retroactive effect, the refund of the sums deducted and it is up to the national court to refuse the benefit of the right to deduction if it is proven, with objective elements, that this right is invoked fraudulently".
"In the situation at hand, this issue does not arise, and there must be recognized however, and as results from point 45 of the Conclusions of the same Advocate General, in the same case that "As regards the collection of value added tax on imports, it is not, however, discernible for what reason in this case there would generally be a greater risk of fraud that would make it necessary to make the right to deduction dependent, in any case, on the prior payment of value added tax on imports" and, further on, "Also the proof of the import which, in accordance with article 18, no. 1, paragraph b), of the Directive, the taxable person must submit in order to be able to deduct the tax paid upstream and which indicates him as debtor of the value added tax and at least allows the calculation of the amount of tax due, reduces the possibility of fraud", position recognized in the Judgment in points 30 and 33, with point 34 recognizing that "Indeed, the import of a good constitutes a physical act that is certified and verifiable by the competent Administration, due to the presence of the good at customs" and that "the fact that the debtor of VAT on imports is also the holder of the right to deduction of said VAT does not also appear to increase the risk of fraud or abuse in relation to VAT.
On the contrary, as the European Commission argued, the fact that one and the same person is at the same time debtor of VAT and holder of the right to deduction approximates this situation to that which arises within the self-assessment regime of VAT provided for by the Sixth Directive".
The imports of goods constitute a taxable event, in accordance with article 2, no. 1, paragraph d), of the VAT Directive, and article 1, no. 1, paragraph b), of CIVA.
In article 201 of the VAT Directive it is established that "on imports, VAT is due by the person or persons designated or recognized as debtors by the Member State of import" and in article 2, no. 1, paragraph b), of CIVA, it is stated that "Taxable persons are: b) Natural or legal persons who, in accordance with customs legislation, carry out imports of goods."
Under CIVA, the importer acting in accordance with customs legislation is always considered a taxable person, even when this importer already has previously the status of taxable person under paragraph a) of no. 1 of article 2 of CIVA, by carrying out an economic activity.
By virtue of the provision in article 71, no. 1, 2nd paragraph, of the same Directive, "when imported goods are subject to customs duties […], established under a common policy, the taxable event occurs and the tax becomes chargeable at the moment when the taxable event and the chargeable event of those duties occur", which is in line with article 7, no. 1, paragraph c), of CIVA, which establishes that on imports the tax is due and becomes chargeable "at the time determined by the provisions applicable to customs duties, whether or not these duties are due or other Community levies established under a common policy".
The national legislator considers that, on imports, the person responsible for the payment of the customs duties due is also the person responsible for the payment of VAT.
Now, in article 4, no. 12, of the Community Customs Code (CAC) (in force in 2012, the year to which the facts of this case refer) ( [1] ), it is established that there is «Debtor: any person responsible for the payment of a customs debt».
When a person files a customs declaration in their own name, but on behalf of another person ("indirect representation", in accordance with article 5, no. 2, of the CAC), the person who fills in the customs declaration is the declarant (4, no. 18, of the CAC) and is also considered as debtor of the tax, along with the indirectly represented person, as established in article 201, no. 3, of the CAC: «The debtor is the declarant. In case of indirect representation, the person on whose behalf the customs declaration is made is likewise considered a debtor».
Thus, as stated in the opinion of XAVIER DE BASTO and ODETE OLIVEIRA reproduced in the arbitral decision rendered in proceedings no. 410/2016-T "it should therefore be concluded that the MS have no margin of discretion as regards the requirement of VAT on imports in accordance with customs legislation, in accordance with article 204 of Regulation no. 2913/92".
Now, in accordance with article 19, no. 1, paragraph b), of CIVA, taxable persons have the right to deduct the tax due or paid on the import of goods. The deduction is made from the amount of tax of which they are debtors.
In this context, the fact that the Claimant is not the owner of the imported goods for which it bore VAT does not preclude the right to deduction.
3.2. The Right to Deduction by the Service Provider
Article 20, no. 1, of CIVA sets out the operations that confer the right to VAT deduction.
In its paragraph a) it is established that "the tax charged on goods or services acquired, imported or used by the taxable person for the performance of the following operations may be deducted: a) Supplies of goods and provisions of services subject to tax and not exempt from it".
The right to deduct VAT borne on the import of such goods used for the purposes of the taxable operations of the taxable person is also clear under article 168, paragraphs a) and e), of Directive no. 2006/112/CE of the Council, of 28-11-2006, which establishes the following:
Where the goods and services are used for the purposes of its taxed operations, the taxable person has the right, in the Member State in which it carries out those operations, to deduct from the amount of tax of which it is debtor the following amounts:
a) The VAT due or paid in that Member State in relation to goods that have been or will be supplied to it and in relation to services that have been or will be provided to it by another taxable person;
(...)
e) The VAT due or paid in relation to goods imported into that Member State."
In the case at hand, the goods were imported for the purposes of the taxable operations of the Claimant, as without them the Claimant could not exercise its production activity.
The acquisition of transportation services for the imported materials is also clearly connected with this taxable activity of the Claimant.
The conditions for the exercise of the right to deduction are therefore met.
3.3. Issues of Prejudicial Knowledge
As stated above, the challenged assessments suffer from a defect of violation of law, which justifies their annulment, article 163, no. 1, of the Code of Administrative Procedure subsidiarily applicable in accordance with article 2, paragraph c), of LGT.
As the request for arbitral ruling is to be judged well-founded on the grounds of a defect of violation of law, knowledge of the other defects that are attributed to the challenged assessments is prejudiced as being useless (article 130 of CPC).
4. Compensation for Undue Guarantee
The Claimant provided a guarantee to suspend tax enforcement proceedings instituted for coercive collection of the challenged assessments and formulates a request for compensation for the expenses "incurred and to be incurred with the guarantee", in accordance with article 53 of LGT.
Article 171 of CPPT establishes that "compensation in case of a bank guarantee or equivalent improperly provided shall be requested in the proceedings in which the legality of the debt to be enforced is contested" and that "compensation shall be requested in the appeal, objection or recourse or in case its ground is supervenient within 30 days after its occurrence".
Thus, it is clear that the judicial challenge proceedings encompass the possibility of condemnation to payment of undue guarantee and is even, in principle, the appropriate procedural means to formulate such a request, which is justified for obvious reasons of procedural economy, as the right to compensation for undue guarantee depends on what is decided on the legality or illegality of the assessment act.
The request for constitution of the arbitral tribunal and arbitral ruling has as a corollary that it is in the arbitral proceedings that the "legality of the debt to be enforced" will be discussed, so, as results from the express wording of that no. 1 of the referred article 171 of CPPT, it is also the arbitral proceedings that is appropriate to appraise the request for compensation for undue guarantee.
The regime for the right to compensation for undue guarantee is contained in article 53 of LGT, which establishes the following:
Article 53
Guarantee in case of Improper Performance
1. The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be compensated in whole or in part for the damages resulting from its provision, if it has been maintained for a period exceeding three years in proportion to the outcome in administrative recourse, judicial challenge or opposition to execution which have as their object the debt guaranteed.
2. The period referred to in the previous number does not apply when it is verified, in administrative appeal or judicial challenge, that there was an error attributable to the services in the assessment of the tax.
3. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of compensatory interest provided for in this law and can be requested in the judicial appeal or challenge proceedings themselves, or autonomously.
4. Compensation for provision of undue guarantee shall be paid by deduction from the revenue of the tax in the year in which the payment is made.
In the case at hand, it is manifest that the errors underlying the IRC assessments and compensatory interest are attributable to the Tax and Customs Authority, as the corrections were at its initiative and the Claimant in no way contributed to these errors being committed.
For this reason, the Claimant is entitled to compensation for the guarantee provided.
As there are no elements that permit determining the exact amount of the compensation, the condemnation must be made with reference to what will be assessed in execution of this judgment, in accordance with the provision in article 609, no. 2, of the Code of Civil Procedure, subsidiarily applicable by virtue of the provision in article 29, no. 1, paragraph e), of RJAT.
5. Decision
In these terms, this Arbitral Tribunal agrees:
- To judge the request for arbitral ruling as well-founded;
- To annul the VAT assessments nos. 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, and 2016…;
- To judge the request for condemnation of the Tax and Customs Authority to pay to the Claimant the compensation that will be assessed in execution of this judgment for the guarantee provided to suspend the tax enforcement proceedings instituted for coercive collection of the amounts assessed as well-founded.
6. Value of the Proceedings
In accordance with the provisions of articles 306, no. 2, of CPC and 97-A, no. 1, paragraph a), of CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 1,544,656.30.
7. Costs
In accordance with art. 22, no. 4, of RJAT, the amount of costs is fixed at € 20,502.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Lisbon, 08-03-2018
The Arbitrators
(Jorge Lopes de Sousa)
(Clotilde Celorico Palma)
(Regina de Almeida Monteiro)
[1] The Community Customs Code was approved by Regulation (EEC) no. 2913/92 of the Council, of 12-10-1992.
The Regulation (EC) no. 450/2008 of the European Parliament and of the Council, of 23 April 2008, which approved the Modernized Customs Code, but only the provisions referred to in article 188, no. 1, and those relating to rates and fees indicated in article 30 thereof were in force in 2012.
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