Process: 556/2015-T

Date: March 9, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

This arbitration case (Process 556/2015-T) concerns VAT additional assessments totaling €312,107.71 for periods 2011-2013, challenging the Tax Authority's treatment of invoice discounts and price reductions. The claimant argued that designations 'reversal of uncollected accommodation service fees' and 'disturbance allowances' constitute concurrent discounts that should be excluded from the taxable value under Article 16(6)(b) of the Portuguese VAT Code (CIVA). The central legal dispute focused on whether Article 78 CIVA, which governs subsequent discounts requiring credit notes, applies to discounts deducted directly on invoices at the time of issuance. The claimant contended that concurrent discounts—those immediately reflected in the invoice's taxable amount—differ fundamentally from subsequent discounts because clients cannot separately deduct VAT on amounts never included in the taxable base. For continuous service contracts with successive payments, the claimant invoked Article 7(3) and 7(9) CIVA, arguing that VAT becomes due only at the end of each payment period for amounts actually received or receivable, not on bookkeeping entries serving merely as accounting controls. A secondary issue involved the reduced VAT rate for sports facilities under item 2.15 of List 1, with the claimant arguing that legislative amendments in 2010-2011 maintained applicability to golf services, contrary to Tax Authority Circular 30124/2011. The claimant challenged this circular as null, alleging the Director-General usurped legislative powers reserved to Parliament. The case raises fundamental questions about proper VAT taxable base determination, the temporal aspects of VAT chargeability in ongoing service relationships, and the validity of administrative interpretations that potentially exceed regulatory authority.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), João Ricardo Catarino and Joaquim Silvério Dias Mateus, appointed by the Deontological Council of the Centre for Administrative Arbitration agree to form an Arbitral Tribunal:

I – REPORT

On 27 August 2015, A…, LDA., NIF…, with registered office at Avenue…, …, …-…, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the acts of additional assessment of value added tax (VAT) relating to the period 2011 Q4, in the amount of €121,259.67, and to the periods between 2012 and 2013, in the total amounts of, respectively, €135,468.82 and €55,379.22.

To substantiate its request, the Claimant alleges, in summary, that:

The designations 'reversal of uncoll accom serv fee' and 'disturbance allowance' constitute price reductions, as recognized by the tax inspection services, and nothing prohibits, indeed everything requires, that these be excluded from the taxable value of the invoices issued by the Claimant;

Thus, the assessments now challenged, as they are based on the application of article 78 of the VAT Code, are tainted by illegality, by violation of the provision in subparagraph b) of article 16, paragraph 6, of the VAT Code;

Since the client cannot deduct the tax contained in the discounts because the discounts were immediately deducted from the taxable value of the invoice and the corresponding tax – they are discounts concurrent with the invoice – article 78 of the VAT Code does not appear at all applicable to the case at hand.

In the present proceedings, the only case that falls within the scope of article 78 of the VAT Code – that relating to discounts from April to September 2013 – gave rise to credit note no. …, issued to C… on 31 October 2013, which the tax administration did not challenge;

As for the others, it is to be concluded that VAT does not apply to discounts included in invoices and much less to bookkeeping entries of amounts excluded from the invoiced value that serve only as an instrument of accounting and financial control.

In the provision of continuous services, resulting from contracts giving rise to successive payments, as in the present case, it is considered that the services are performed only at the end of the period to which the payment relates, and the tax is due and becomes payable for the respective amount – article 7, paragraph 3, of the VAT Code.

In such cases, when no payment periodicity is established, the tax is due and becomes payable at the end of each 12-month period, for the corresponding amount – article 7, paragraph 9, of the VAT Code.

The corresponding amount is the value of the consideration obtained or to be obtained from C… in accordance with the services effectively provided to C…, for the value that it receives or is to receive therefrom, as agreed between the parties – article 16, paragraph 1, of the VAT Code.

The Claimant should not assess VAT on the values debited now only in the account of C… or also in the invoice issued to C… that do not correspond to any taxable operation, but rather to discounts, bonuses or allowances – article 16, paragraph 6, of the VAT Code.

Article 103 of Law no. 55-A/2010, of 31.12, left intact the previous wording of item 2.15 of List 1 annexed to the VAT Code, which had been given to it by Law 67-A/2007, of 31.12, thus preserving, within the scope of its legal provision, both sports events, both sports manifestations, and games recognized as sporting.

Had the legislator wished item 2.15 of List 1 annexed to the VAT Code to contemplate solely entrance tickets or admission tickets to spectacles, sports events and manifestations and other public entertainments, it would have said so simply: "Entrance tickets for spectacles and sports manifestations".

As it did, moreover, in the original drafting of the norm in question, in the version of Decree-Law no. 394-B/84, of 26 December – which was indeed of much more restricted scope – where it wished to contemplate, precisely, only and solely "Entrance tickets for spectacles and sports manifestations" and nothing more.

The legislator did not intend to do this in 2011, and thus did not wish, decisively, to restrict the scope of application of item 2.15 to entrance tickets or admission tickets.

Had this been the case, the legislator would surely have repealed the express exclusion norm established in subparagraph b), at the end, of the same item 2.15 of List 1 in the version in force at the time of the facts, instead of repealing only the segment 'practice of physical and sporting activities', incorporated only in 2008 in its respective preamble.

Equally illustrative of this unequivocal intention of the legislator is the comparison of item 2.15 of List 1 annexed to the VAT Code in the version in force at the time of the facts, with Annex II of Directive 2006/112, of 28 November, which distinguishes entrance to sports manifestations from the use of sporting facilities.

With this norm, the Community legislator wished to preserve the discretion of the Member State to apply or not a reduced rate solely to entrance to sports manifestations, or solely to the use of sporting facilities, or, if it so wished, to both.

Until the entry into force of Law no. 64-B/2011, of 30 December, Portugal wished the reduced rate of VAT to benefit both entrance to sports manifestations and the consideration due for the use of sporting facilities by way of events or mere manifestations, provided that in any case these or those embodied the practice of a game recognized as sporting.

With article 103 of Law no. 55-A/2010, of 31-12, the "new" item 2.15 of List 1 annexed to the VAT Code continued thus to be applicable namely to golf.

The Director-General of Taxes legislates by circular memorandum, permitting itself to revoke "understandings" of earlier times as if they were old law, to define the application in time of its circular memorandum as if it were new law, even lending itself to "remedy" operations, as if a tax amnesty could grant.

The Director-General of Taxes usurped a (legislative) power that no ordinary or constitutional law attributes to him, and therefore the circular memorandum no. 30124 of 14 February 2011 is null (article 133/2-a CPA) and so too the additional assessment acts challenged that are consequent to it (article 133/2-i CPA).

On 31-08-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to appoint an arbitrator, and therefore, pursuant to the provision in subparagraph a) of paragraph 2 of article 6 and subparagraph a) of paragraph 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the charge within the applicable period.

On 27-10-2015, the parties were notified of these appointments, having shown no will to refuse any of them.

In conformity with what is prescribed in subparagraph c) of paragraph 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 11-11-2015.

On 14-12-2015, the Respondent, duly notified for this purpose, presented its response defending itself solely by way of objection.

On 18-01-2016, pursuant to the provision of article 421 of the Code of Civil Procedure, applicable under article 29/1/e) of the RJAT, approval was granted for the use of testimonial evidence produced at the meeting of 09 April 2015 in case no. 741/2014-T, and, given that in this case none of the purposes legally assigned to it were present, and having regard to the position taken by the parties, pursuant to articles 16/c) and 19 of the RJAT, as well as the principles of procedural efficiency and prohibition of useless acts, the holding of the meeting referred to in article 18 of the RJAT was dispensed with.

Having been granted a period for the submission of written submissions, these were submitted by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the pronouncement of final decision, after the submission of submissions by the Tax Authority.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of the RJAT.

The parties have legal personality and capacity, are entitled and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to consideration of the merits of the case.

All things considered, it is necessary to render

II. DECISION

A. FACTS

A.1. Facts Established

  1. The Claimant is a limited liability company and began the activity of "Tourist Settlements with Restaurant" on 1987-12-01.

  2. The corporate purpose of the Claimant comprises "Promotion, construction, management and operation of own tourist enterprises, purchase and sale of real property".

  3. The Claimant is, and was, at the date of the tax facts, the owner of a tourist enterprise, located at…, called "B…", consisting of 77 terraced houses and 55 apartments, where, in addition to accommodation, ancillary services are provided in the area of sport, leisure, food and beverage.

  4. The Claimant conferred the occupation rights of the enterprise to the company called C…, with registered office in…, United Kingdom, which manages the enterprise through a members' club.

  5. The right of accommodation in the enterprise belongs, and belonged, at the date of the tax facts, to the club members, under the terms of the contracts entered into between them and C….

  6. The invoicing of that accommodation is, and was, at the date of the tax facts, effected by the Claimant to the company C…, on the basis of values stipulated in the contract entered into between both entities.

  7. The Claimant operates, and operated, at the date of the tax facts, directly the equipment and facilities of the club, including the facilities designated by "D…" which encompass the restaurant, hairdresser, shops and bar.

  8. The Claimant's enterprise includes all the typical elements that characterize any establishment intended for tourist accommodation and the services provided therein do not differ, as to their nature, from the services provided in a hotel.

  9. The Claimant's enterprise also includes some infrastructure specific to sport and leisure.

  10. The Claimant provides all its services to the general public, but offers more advantageous conditions to the designated members of B… – …(Club), managed by C…(C…) a company incorporated under English law.

  11. The Club was created by the developers of the Claimant's establishment still in the eighties, with the purpose of aggregating and retaining clients and thus promoting a high and constant occupancy rate of the tourist establishment, independent of tourist seasonality and economic cycles.

  12. C… holds certain rights, including accommodation in the settlement, against a consideration that it pays to the now Claimant, updated annually and established by mutual agreement.

  13. The status of Club member depends on the timely payment that the member makes to C… and which exempts the member from payment of any other consideration for accommodation in a specific house of the settlement during a specific week of each year.

  14. The Claimant invoices periodically to C… the weeks that are being used by the members of the Club according to the values that are fixed for this purpose each year.

  15. When a Club member rescinds this status or when fails to make any payment due to C…, and therefore does not exercise or cannot exercise his right of accommodation, no value is due from C… either, since no service is provided by the now Claimant.

  16. Among the rules that determine the calculation of the consideration to be paid by C… to the now Claimant is that the "conditions established in the Membership Titles (Club Membership)" will always be observed and that "the referred values [those presented in annex 1] will be updated annually by C… in accordance with the conditions established in the Membership Titles (Club Membership)".

  17. Under the terms of the clauses of the contract entered into between the Claimant and C…, "The right of accommodation in the enterprise belongs to the club members under the terms agreed between them and C…, with A… being able to accommodate third parties only in cases and conditions specially provided for and authorized by C…".

  18. In accordance with the "conditions established in the Membership Titles" the status of member and their inherent right of accommodation is suspended or extinguished if the member fails to make any payment charged to the member by C….

  19. The values corresponding to accommodation that members could not or did not wish to use, because they did not pay or simply because they lost interest, were not charged by the Claimant to C….

  20. Those values were reflected either only in the bookkeeping of the now Claimant, or also in the invoices issued to C…, under the designation of "reversal of uncoll accom serv fee".

  21. Such values were taken into account negatively in the calculation of the invoiced value by identifying all weeks that were not occupied by members during a given period for any one of the said reasons that led to the suspension or extinction of their rights of accommodation in the Claimant's settlement.

  22. The Claimant was subject to general inspection actions, under service orders nos. OI2012… and OI2014…, in which corrections were made to it, under VAT, which gave rise to the additional assessment acts that are the subject of this arbitral action.

  23. In the report prepared in the context of the first of those inspection actions, and insofar as it is relevant to this proceeding, the inspection states that:

i. "to the services that are invoiced by SP in a given month, various amounts are deducted, either in the invoice (situation 1), or directly in the bookkeeping entry (which does not correspond directly to the invoice, only to the net value, as in situation 2).";

ii. "in the case of invoicing of accommodation income due by C… Ltd, the SP functions from a cash perspective, being recognized as profit only the net value of the operation, when the correct procedure would be:

  • To invoice the amount resulting from the monthly provision of services, recognize that profit accounting and settle the corresponding VAT;

  • To issue a credit note to regularize situations of improper invoicing or reduction of the invoiced value, as is the case with discounts, provided that such are accounting and tax wise sound.";

iii. "that in situations where the amounts deducted refer to suspensions and resignations of members, which SP designates by 'Reversal Of Uncoll Accom Serv Fee', it is understood that this deduction from profits is not the responsibility of SP, since the client of SP is the English company 'C… Ltd' with registered office in…, United Kingdom and not the shareholders of the members' club, who enjoy the accommodation services and complementary services provided by SP and who entered into a contract with C… Ltd.";

iv. "With regard to what SP designates by 'Disturbance Allowance', that is, reductions to the price practiced depending on the time of year, these are provided for in the transfer pricing file prepared by SP at point 5.3.2., and in practical terms, constitute a discount on the price practiced.";

v. "VAT operates according to the input tax credit method (…) That is, to the VAT calculated on active operations is deducted the tax borne on passive operations, there is no place for set-off of accounts.";

vi. "Regularizations at the level of rectification of the taxable value or the tax are provided for in article 78 of the VAT Code, concluding that SP's practice does not comply with what is provided in this article, and therefore the regularizations carried out are improper.";

vii. "Corrections in VAT are calculated, assigning the amounts to be corrected to the periods of the invoices in which they were improperly deducted:

";

viii. "After analyzing SP's bookkeeping, it was found that in 2011 the reduced rate was applied to services related to the practice of golf, namely in 'green-fees' (amount charged to the golfer for the practice of the sporting activity on the golf course). In the revenue documents it appears that VAT is included, referring to the rate of 6%.

It was verified that the bookkeeping agrees with the periodic statements (DP's) submitted by SP and that field 3 (Tax levied - reduced rate) contains the amounts of VAT levied in accounts 24331181 (VAT liq- sales -tx 6% MN) and 24331281 (VAT Liq - Op. General – Tx 6% MN).

In account 24331181 the VAT levied, at the reduced rate, on golf sales is recorded and in account 72438 - Golf tx 6% the corresponding revenue, whose extracts are in the contributor's file (from March to December)."

ix. "As mentioned, in 2011 to sports services, including golf, the normal VAT rate should be applied, namely, 23%.

Having SP applied 6%, an additional 17% should be assessed on the taxable base, as appears in the table that comprises annex 1 (6 pages printed front and back, totaling 12 pages) to this draft report and which is summarized in the following table:

"

  1. In the context of the second of those inspection actions, the inspection stated that:

i. "The elements analyzed allow the conclusion that the income subject to invoicing by SP to client C… Ltd, relating to the service provided under the contract entered into between the parties is recognized in account SNC 72.22 - Accommodation 23%.

However, upon analysis of the extract of that account, it was found that debit and credit entries were made that do not correspond to the amounts mentioned in the invoices.";

ii. "It is verified that the amount recorded in the invoices corresponds to the difference between the amount recorded on the credit side (income) in account SNC 72.22 and those recorded on the debit side (deductions from income) of the same account, each month.";

iii. "It is concluded that, in the case of invoicing of 'accommodation services' income due by C… Ltd, SP functions from a cash perspective, being recognized as profit only the net value of the operation, when the correct procedure would be:

  • To invoice the amount resulting from the monthly provision of services, recognize that profit accounting and settle the corresponding VAT;

  • To issue a credit note to regularize situations of improper invoicing or reduction of the invoiced value, as is the case with discounts, provided that accounting and tax constraints are respected"

iv. "It is further added that the situations of deductions from the value of income, according to what was explained by SP in response to the notification of 05 February, refer to suspensions and resignations of members and it is understood that this deduction from profits is not SP's responsibility, since SP's client is the English company 'C… Ltd' with registered office in…, United Kingdom and not the shareholders of the members' club, who enjoy the accommodation services and complementary services provided by SP and who entered into a contract with C… Ltd";

v. "for the preparation of the referred tables, consideration was given to the fact that invoice no. … of 2012 was annulled in its entirety by credit note no. … of 2012 and that the income recognized in account 72.22 through documents no. … and … of 31-12-2012, with the description 'remittances' were subject to invoicing in 2013 (invoices no. … and…)";

vi. "In 2013 consideration was given that, as mentioned, of the total of invoices no. … and … of 2013, only €225,153.66 and €280,207.56 (net values) refer to 'accommodation services' and that to the sum of the debit amounts in the attached table no. 2 of €389,641.58 the value of credit notes no. … and … was deducted (€65,796.54 and €83,065.85).";

vii. "Arising from what is stated in point 111.1.3 and with respect to invoicing of 'Accommodation services' the following is verified:

viii. VAT operates according to the input tax credit method, that is, (…) to the VAT calculated on active operations is deducted the tax borne on passive operations, there is no place for set-off of accounts.

Regularizations at the level of rectification of the taxable value or the tax are provided for in article 78 of the VAT Code, concluding that SP's practice does not comply with what is provided in this article, and therefore the regularizations carried out are improper.

That is, when a credit entry is made in account SNC 72.22 accommodation 23% the corresponding VAT settlement is made in account SNC 24331221 - VAT Levied Op. General - tx 23% MN (credit entry of this account). When a debit entry is made in the same account of revenue 72.22, a debit entry is also made in the VAT account SNC 24331221 - VAT Levied Op. General - tx 23% MN, which constitutes a regularization in favor of SP, although a VAT regularization account (2434 ___ ) is not used. In 2013 the account SNC 24341222 - VAT Reg F/E - OG Tx23 – Pr. Ser. was also used.";

ix. "The corrections in VAT are calculated, assigning the amounts to be corrected to the periods in which the bookkeeping movements were made to the debit of the revenue accounts (72-22) and of VAT levied:

";

x. "As appears in the table comprising annex 2, through doc. … the income was recognized as credit of account 72.22 in the amount of €409,468.40 and on the debit side €16,571.93 were recorded (€14.52 + €2,975.87 + €13,581.54), which corresponds to the net value of €392,896.47. VAT was assessed on this amount through doc. No. … of 31-05-2012. Therefore, there is a shortfall in VAT assessment of €3,811.53

".

  1. The now Claimant distinguished accounting between the total value of the income it would obtain from C… if it did not have to grant C… any discounts – which it recorded as credit in the respective profit account – and the value of the discounts effectively granted – which it recorded as debit in the same account.

  2. The invoiced value corresponded to the value actually due by C…, that is, the difference between the maximum possible revenue and the allowances to be granted pursuant to what was stipulated between the parties.

  3. The Claimant included in its invoices nos. …/2011 and …/2011, of 30 November 2011 and 31 December 2011, respectively, both issued to C…, under the rubric "reversal of uncoll accom serv fee" negative values of €57,203.25, €24,230.08, €74,623.46 and €78,551.34, in the November invoice, and €84,225.44 in the December invoice.

  4. Furthermore, the now Claimant also included, in the same invoices nos. …/2011 and …/2011, under the rubric "disturbance allowance", negative values of €25,306.95, in the November invoice, and €26,150.52 in the December invoice.

  5. The first values are based on accommodation services that were not actually provided to members in the course of 2011, detailed in C…'s calculation schedules.

  6. The latter are based on a discount granted to C… that applies to the price of accommodation for Club members in low season months.

  7. In the year 2013, the final value of discounts to C…, namely under the heading of "reversal of uncoll accom serv fee" was only calculated by the parties in the last quarter of the year.

  8. For this reason, the values invoiced in January, February and March 2013 (low season) included only the estimated discounts of "disturbance allowance", totaling €74,756.10.

  9. The values invoiced to C… between April and September 2013 did not contemplate any immediate reduction.

  10. Because subsequent to the issuance of the respective invoices, contrary to all other cases in this proceedings, the discounts and allowances of April to September 2013 were included in credit note no. …/…, issued to E… on 31 October 2013, for the amount of €65,796.54.

  11. The amount of €65,796.54 corresponds to the difference between the total final discounts of the year until September 2013, inclusive, of €140,552.64, and the estimated value of discounts of "disturbance allowance" for January, February and March of €74,756.10, so that credit note no. …/…, of 31 October 2013, reflected discounts of January to September 2013, totaling €140,552.64 purged of discounts already granted provisionally in January, February and March 2013, in the total value of €74,756.10.

  12. With respect to the months of October, November and December 2013 the now Claimant resumed its prior procedure; that is, it immediately included in the respective invoices the value of the discounts that C… was entitled to.

  13. In this manner, on 31 October 2013 the now Claimant charged to the credit of C…'s account the amount of €377,600.32 which corresponds to the total revenue it would obtain if no member had resigned from this status or failed to make any payment due to C… and if October were not a low season month.

  14. On the same day, the Claimant charged to the debit of the same account, the amounts of €2,862.95, under the heading of "disturbance allowance", and €10,602.99 ("suspension of members") and €3,574.88 ("resignation of members"), under the heading of "reversal of uncoll accom serv fee".

  15. Invoice no. …, dated 31 October 2013, was issued to C… for the amount of €360,559.50, plus VAT.

  16. On 28 November 2013 the now Claimant charged to the credit of C…'s account the amount of €264,331.33 which corresponds to the total revenue it would obtain if no member had resigned from this status or failed to make any payment due to C… and if November were not a low season month.

  17. On the same day, the Claimant charged to the debit of the same account, the amount of €21,309.53, under the heading of "disturbance allowance", and €13,867.27 ("suspension of members") and €5,860.79 ("resignation of members"), under the heading of "reversal of uncoll accom serv fee".

  18. Invoice no. …, dated 28 November 2013, was issued to C… for the amount of €223,293.74, plus VAT.

  19. On 30 December 2013 the now Claimant charged to the credit of C…'s account the amount of €176,845.88 which corresponds to the total revenue it would obtain if no member had resigned from this status or failed to make any payment due to C… and if December were not a low season month.

  20. On the same day, the Claimant charged to the debit of the same account, the amount of €12,900.70, under the heading of "disturbance allowance", and €13,867.27 ("suspension of members") and €6,420.61 ("resignation of members"), under the heading of "reversal of uncoll accom serv fee".

  21. Invoice no. …, dated 30 December 2013, was issued to C… for the amount of €143,657.30, plus VAT.

  22. Given that its enterprise does not have golf courses, the now Claimant established partnerships with a range of companies that operate them, in order to complement its offering and thus respond to the integrated demand for hotel and golf services.

  23. In 2011, the Claimant entered into contracts with the following companies for preferential access conditions for its clients to the following golf courses:

[Table with NIF, COMPANY, and GOLF COURSES columns containing company information - content preserved as listed in original]

  1. The Claimant's clients were able to make use of any of the referred golf courses, which enabled the now Claimant to strengthen its offering.

A.2. Facts Established as Not Proved

With relevance to the decision, there are no facts that should be considered as not proved.

A.3. Substantiation of the Factual Matters Proved and Not Proved

With respect to the factual matters the Tribunal does not have to pronounce on everything that was alleged by the parties, being instead its duty to select the facts that matter for the decision and to distinguish the proved matter from the not proved (cfr. art. 123, paragraph 2, of the Tax Procedure Code and article 607, paragraph 3 of the Code of Civil Procedure, applicable ex vi article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

In this manner, the facts relevant to judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions of the question(s) of Law (cfr. previous article 511, paragraph 1, of the Code of Civil Procedure, corresponding to the current article 596, applicable ex vi article 29, paragraph 1, subparagraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of article 110/7 of the Tax Procedure Code, the documentary evidence and the Procedure File attached to the proceedings, and the testimony given at the meeting of 09 April 2015 in case no. 741/2014-T, where the witnesses questioned appeared to testify impartially and with knowledge of the facts about which they pronounced.

B. ON LAW

At issue in this proceeding are corrections made under VAT, for the years 2011, 2012, and 2013, relating to two types of situations, namely:

a) VAT relating to the provision of accommodation services; and

b) VAT relating to the sale of golf.

Let us examine each of these.

i. With regard to the corrections relating to the provision of accommodation services, contracted between the Claimant and C…, these are based essentially on the understanding set out in both inspection reports, according to which "the SP functions from a cash perspective, being recognized as profit only the net value of the operation, when the correct procedure would be:

  • To invoice the amount resulting from the monthly provision of services, recognize that profit accounting and settle the corresponding VAT;

  • To issue a credit note to regularize situations of improper invoicing or reduction of the invoiced value, as is the case with discounts, provided that such are accounting and tax wise sound.".

From this premise, the Tax Authority drew, in the corrections in question, the consequence of requiring from the Claimant VAT not invoiced nor received by the latter, relating to a taxable base likewise not invoiced, nor received or even collected, by the Claimant.

That is: verifying that the Tax Authority that the Claimant used its bookkeeping to, in essence, record the operations for calculating the final value to be required, pursuant to the contractual relationship established with the recipient of the services provided by it, used the initial values, and not the final values, to set the taxable base of the assessable tax.

With all due respect, it will have no reason whatsoever.

Indeed, and in the first place, one must not, in any case whatsoever, lose sight of the fact that taxes are founded and necessarily have their justification in the occurrence of a tax fact, and their measure in the quantification of that, as manifestations of taxpaying capacity.

It is certainly and well-known that VAT is a tax that carries special formal requirements, justified by its mechanism of operation, essentially based on the invoice. Hence, sometimes formal reasons impose taxation under that tax, deviating from the tax fact, or its quantification, positively confirmed. Simply, such situations are imposed, always, in function of the essentiality of the invoice, and, as such, being based on invoicing improperly issued and placed in circulation by the taxpayer, generating patrimonial risks, at the level of the obligation to reimburse tax, downstream.

What is striking, in this case, is that, based on arguments of a strictly formal order, the Tax Authority – which not infrequently zealously advocates for the prevalence of substance over form – intends to require tax, based on taxpaying capacity of which it not only does not suspect but, in fact, will know does not exist.

In fact, it does not appear in the slightest from the proceedings, on the contrary, that the Claimant has earned, has the right, or even intends to have the right, to the taxable base formulated by the Tax Authority. On the other hand, the Claimant's invoicing did not give rise to any risk of the obligation to reimburse downstream, which would justify charging the Claimant with potential responsibilities of the Tax Authority, derived from non-compliance with legal duties that, in such matter, assist the taxpayers.

In this manner, the Tax Authority's tax claim is based, in an exclusive manner, on an interpretation of the norms respecting the manner of accounting for and invoicing of a reality that it does not challenge, an interpretation which, at least in part, is held to be not correct, on one hand, and which, even if it were acceptable, should never be held as legitimizing the taxation sought but, solely, as the basis of eventual administrative infraction responsibility, for non-compliance with the accessory duties eventually violated, since in no case, by definition, can the tax obligation be generated by way of penalty for violation of duties or obligations, even if of a tax nature.

The normal system of VAT assessment, which is what is at issue in this proceeding, is based on the assessment of the tax to the acquirer of goods or services, by the supplier or provider, and on the subsequent self-assessment of the tax to be remitted to the Tax Authority, by the taxpayer, deducting from the tax assessed the tax borne by the taxpayer upstream. The Tax Authority may and should proceed to the ex officio correction of the tax due, assessing ex officio tax, when one of two situations occurs:

i. when the self-assessed tax is different, for less, the difference between the tax assessed downstream in the invoicing issued by the taxpayer, and the tax borne upstream, evidenced by invoices issued in the legal form;

ii. when the invoicing issued and in the possession of the taxpayer is not in conformity with reality, for, in the latter case, not corresponding to tax and expense actually borne by the latter, for application in its productive process, or, in the first, the tax assessed in the invoices being less than that due, or the taxable value being higher than invoiced.

Now, being in the case at hand, manifestly, the last of the referred hypotheses, for the correction operated to be legitimate, it was necessary that the Tax Authority demonstrated that, in fact, the taxable value of the operations practiced by the taxpayer, corresponds to what was considered for purposes of calculating the tax required.

In this regard, article 16, paragraph 1 of the VAT Code provides that "the taxable value of the transfer of goods and the provision of services subject to tax is the value of the consideration obtained or to be obtained from the acquirer, the recipient or a third party.".

In this manner, in summary, for the corrections now in question to be legal in light of the norm in question, the Tax Authority would have had to demonstrate that the value of the consideration obtained or to be obtained by the Claimant, was, in fact, that relative to which tax was assessed.

As written in the decision of the Supreme Administrative Court of 22-04-2015, delivered in case 0879/14[1], "In the VAT tax, both the possibility of collection of the tax, as the possibility of deduction of the tax calculated, is intimately connected with the existence of a concrete commercial transaction, transfer of goods or provision of services, relative to which the calculation of the concrete tax that must apply to that same transaction can be made.".

Now, in the case, not only does the Tax Authority fail to demonstrate that, in fact, the value received or to be received by the Claimant is that on which it assessed tax, but there are even indications to the contrary, that is, that, in fact, the tax corresponding to the consideration obtained or to be obtained by the Claimant was, in fact, the one assessed by the latter.

This is not to say – let it be stressed – that it is immaterial how a taxpayer accounts for and/or invoices its taxable operations, provided that the corresponding tax is assessed and remitted to the State. Indeed, non-compliance with the norms relating to accounting and invoicing may, from the outset, generate the remittance of improperly stated tax in the invoices issued (cfr. article 2, paragraph 1, subparagraph c) and 97, paragraph 3 of the VAT Code), in addition to, independent of such obligation to remit, administrative infraction responsibility. What such non-compliance cannot, as has been said already, do is generate the tax obligation, since tax is paid by having or manifesting taxpaying capacity, and not by violating accessory tax duties.

On the other hand, the invoked norm of article 78 of the VAT Code will not prevent the above exposition, nor will it have application in this case.

In this regard, it should be stated from the outset that the inspection reports are silent as to which of the various hypotheses set out in the article in question applies.

Notwithstanding, it may always be concluded that none of the various hypotheses provided there, encompasses the situation sub iudice. Thus, as written in the Decision of CAAD delivered in arbitral case 741/2014-T[2]:

"article 78 VAT Code refers to regularizations, subsequent to the issuance of invoices, as results explicitly from its paragraph 1, when establishing, in the wording in force in 2011, that 'the provisions of articles 36 and following must be observed whenever, having issued the invoice or equivalent document, the taxable value of an operation or the respective tax should be subject to rectification for any reason'.

In the case at hand, at the moment of issuance of the invoice a reduction was carried out, relating to 'disturbance allowance' and, therefore, the issuance of the invoice should be carried out, as it was, deducting the value of the discount from the overall value of the service provided, as follows from article 16, paragraph 6, subparagraph b), of the VAT Code which establishes that 'from the taxable value referred to in the preceding paragraph are excluded: (...) b) Discounts, allowances and bonuses granted'.

Thus, having the referred invoices been issued when there was already ground for the reduction, this norm gives legal support to non-consideration of the value of the reduction, to the value of the transaction.".

Even taking into account the Claimant's procedure, of invoicing monthly provisional values, and settling, at year end the value of the overall provision owed to it, or of discounts, by "disturbance allowance", there being, as is the case, no indications that this is a fraudulent action or aimed at erosion of the taxable base[3], there will always be a need to conclude that this is a contractual procedure and, consequently, fiscally permitted, within the scope of the faculty that is recognized to the parties of shaping their respective economic relationships in the manner that, from their point of view, appears to them more practical or suitable, there being no material justification to impose, as the Tax Authority wishes, a different procedure.

On the other hand, the understanding that "the situations of deductions from the value of income, according to what was explained by SP in response to the notification of 05 February, refer to suspensions and resignations of members and it is understood that this deduction from profits is not SP's responsibility, since SP's client is the English company 'C…' with registered office in…, United Kingdom and not the shareholders of the members' club, who enjoy the accommodation services and complementary services provided by SP and who entered into a contract with C… Ltd", is not capable of being ratified. Indeed, notwithstanding the relationship of the members of the club, suspended or exonerated, being with C…, nothing prevents that, as happens, being that the agreement of the parties, the price of the services to be provided by the Claimant to C…, be adjusted according to the suspensions and exonerations that, at each moment, are verified.

Thus, given that, as has been repeatedly stated by the Supreme Administrative Court, "It is exclusively in light of the substantiation put forth by the TA at the time of the practice of the additional VAT assessment that the legality of that tax act is to be assessed." (Dec. of the Supreme Administrative Court of 23-09-2015, delivered in case 01034/11), and that, as such, the Tribunal must abide, in the assessment of the legality of the acts in question, to the substantiation, both of fact and of law, set forth therein, so, from the outset, will also not prevent the above concluded, the allegation that there was not "demonstrated the existence of an unequivocal connection between the discounts and the operations to which they relate."[4], that the "entries must be supported by appropriate documents", noting further that it is the inspection reports themselves that recognize that the Claimant practiced "price reductions", and that the corrections operated do not arise from any doubt regarding the "connection (...) between the discounts and the operations to which they relate", or to the documentation of the operations, but, exclusively, to the understanding that the accounting and invoicing procedures practiced by the Claimant were not those considered correct.

In light of all the above exposition, there will have to be concluded the occurrence of error in the presuppositions of fact and, consequently, of law, which implies the voidability of those, in the part now under consideration.

ii. Now with regard to the additional VAT assessments relating to the sale of golf, amounting to a total of €36,092.74, in light of what has been the jurisprudence subsequently formed by the Supreme Administrative Court[5], there will have to be concluded the lack of merit in the Claimant's claim.

With effect, that high Court concluded, in this matter, that:

"I - The so-called 'green fee' is not intended to permit the player access to the golf course to participate in a competition, event or sports manifestation, but rather is intended to permit the player access to the course to practice his individual game, or accompanied by other players, but without being able to attribute to such sporting activity the characteristics proper to a sporting manifestation, or event, as such.

II - This 'field use fee' did not find support in item 2.15 of List I annexed to the VAT Code, and therefore on the same applied, in the year 2011, VAT at the normal rate of 23%.".

It is certainly true that the jurisprudence in question did not address a circumstance, which could be central to the position to be taken, which relates to the content of Circular Memorandum no. 30088/2006, of 19 January, which disclosed that "within the scope of application of the said item there are included not only the respective entrance tickets but, equally, the use of facilities intended for the practice of sporting and spectacles or other public entertainments.", and which, combined with the historical element of interpretation would point towards the understanding that, when the wording did not refer to it expressly, it was understood that the use of facilities intended for the practice of sport was included in the item in question.

Notwithstanding, mindful of the forcefulness of the body of jurisprudence formed, and the prevalence that the jurisprudence of the Supreme Administrative Court enjoys over the jurisprudence of tax arbitration, arising from the regime of article 25, paragraph 2 of the RJAT, it is considered to be incumbent to accept such jurisprudence, which does not recognize merit to the Claimant's claim, in this matter.

The following allegations of the Claimant will be incapable of altering such understanding, according to which "To the extent that the application of circular memorandum no. 30124 carries external efficacy in additional assessments such as that which is being challenged in this proceeding, the said is tainted by manifest vice of unconstitutionality, by violation of the principle of legality embodied in article 103 and of the reserve of formal law contained in article 165, paragraph 1, subparagraph i), both of the Constitution of the Republic" and "The Director-General of Taxes usurped a (legislative) power that no ordinary or constitutional law attributes to him, and therefore circular memorandum no. 30124 of 14 February 2011 is null (article 133/2-a CPA) and so too the additional assessment acts challenged that are consequent to it (article 133/2-i CPA).".

Indeed, as wrote the Constitutional Court in its Decision 42/2014[6]:

"we do not find grounds to assert the parametric relevance of the normative meaning accepted by the Tax Administration and embodied in the referred circular, in terms of supporting the formation of binding effects on individuals – which is not confused with its irrelevance in the formation of the will of the taxpayers, nor with persuasive force reinforced, by virtue of the executive privileges conferred on the Administration – and, above all, that constitute criterion or normative standard shaping the jurisdictional action of the Courts, when called upon to assess disputes in the respective field of regulation (cfr. Jorge Miranda, Manual of Constitutional Law, Volume V, 4th edition, 2010, p. 226). This has been, moreover, the understanding accepted by the Supreme Administrative Court, of which examples are the Decisions of 16/01/2002, delivered in case no. 26638, and of 7/07/2004, delivered in case no. 1784/03 (both available in www.dgsi.pt), equally marking other legal systems, such as the German and the Italian (thus, João Taborda da Gama, op. cit, p. 161, note 8, and Ana Paula Dourado, op. cit., pp. 726, note 2178, and 727).".

Also already in Decision 583/2009 of the same Court[7], it had been written that:

"There is, however, another obstructive issue that must be appreciated and to which the appellant and the appellee have already given, by anticipation, their contribution. It is that of knowing whether the prescriptive content of the referred 'Circular' constitutes an appropriate subject matter for the recourse of concrete review of constitutionality. (…)

Since Decision no. 26/85 (published in the Official Journal, II Series, of 26 April 1985) the Constitutional Court, with a view to proceeding with the identification of the appropriate subject matter of the processes of review of constitutionality, has been adopting a concept of norm functionally adequate to the system of control that the Constitution entrusts to it. This concept of norm includes the acts of public power that contain a 'rule of conduct' for individuals or for the Administration, a 'criterion of decision' for the latter or for the judge or, in general, a 'standard of valuation of conduct'. But, as is a concept of control purposefully ordered to ensure the system of legal protection typical of the democratic constitutional rule-of-law state that it is a matter of, it is not enough that the instrument in question binds the Administration to adopt, in the practice of individual and concrete acts of application and so long as it does not alter it, a given criterion that it has established. It is necessary that that criterion be endowed with binding force also for the other subject of the relationship (heteronomous norms) and constitute a parameter that the judge cannot fail to consider so long as does not make of it an instrumental judgment of invalidity. If the 'criterion of decision' is of administrative origin and only binds within the scope of the administrative service from which it emanates, there is no need for the type of legal protection and affirmation of the supremacy of the Constitution that justifies the intervention of the Constitutional Court.

Now, a problem frequently raised in tax law is that of the normative relevance of the so-called administrative guidance. As says Casalta Nabais, Tax Law, 5th ed., p. 201 (albeit affirming that this does not take from them the quality of legal norms):

'[…] internal regulations which, as they have as their recipient only the tax administration, only this should obey them, being thus obligatory only for the bodies hierarchically below the body that issued them.

Therefore they are not binding either on individuals or on the courts. And this whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating methods of work or ways of acting, or interpretative regulations, which proceed to the interpretation of legal (or regulatory) provisions.

It is true that they densify, explicate or develop the legal provisions, previously defining the content of the acts to be practiced by the tax administration in its application. But this does not convert them into a standard of validity of the acts they support. In fact, the assessment of the legality of the acts of the tax administration must be carried out through direct comparison with the corresponding legal norm and not with the internal regulation, which interposed itself between the norm and the act'.

These acts, in which the 'circulars' stand out, emanate from the power of self-organization and of the hierarchical power of the Administration. They contain generic service orders and it is for this reason and only within the respective subjective scope (of the hierarchical relationship) that their observance is assured. They incorporate action guidelines for the future, transmitted in writing to all subordinates of the administrative authority that issued them. They are modes of standardized decision, assumed to rationalize and simplify the functioning of the services. Although indirectly they may protect the legal security of the taxpayers and ensure equality of treatment through uniform application of the law, they do not regulate the matter on which they turn in confrontation with these, nor do they constitute a rule of decision for the courts.

The circumstance that the Tax Administration is bound (paragraph 1 of article 68-A of the General Tax Law) to the generic guidance contained in circulars that are in force at the time of the tax fact and has the duty to proceed to the conversion of the binding information or other type of understanding provided to taxpayers in administrative circulars, in certain circumstances (paragraph 3 of article 68 of the General Tax Law), does not alter this perspective because it does not transform that content into a norm with external efficacy. It is certainly true that the citizen may invoke, in confrontation with the administration, the content of the publicized administrative guidance and, if applicable, make it count before the courts, even at the sacrifice of the principle of legality (cfr. Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law, commented and annotated, 3rd ed., p. 344). But it is under the principle of good faith and legal security, not for its normative value, that the content of circulars prevails. The citizen only accepts them if and insofar as it is convenient for him, for the same reasons that justify that he may invoke individual binding information that favors him (article 59, paragraph 3, subparagraph e) and article 68 of the General Tax Law).

Consequently, lacking binding force heteronomous to individuals and not imposing itself on the judge except by the doctrinal value that it may possess, the prescriptions contained in the 'circulars' of the Tax Administration do not constitute norms for purposes of the system of constitutional review of the competence of the Constitutional Court.".

Thus, and for the above exposition, which is subscribed to, to the extent that the Circular is not the basis of the tax claim against the Claimant, being rather the law as interpreted in light of the Circular, the claims of unconstitutionality and usurpation of power, presented by the Claimant, should be rejected, and there is also no reason visible – being that, moreover, no reason is presented – to proceed to any preliminary ruling, as suggested by the Claimant, which does not even formulate any question to be referred to the Court of Justice of the European Union.

C. DECISION

In these terms this Arbitral Tribunal decides to judge the arbitral request partially upheld and, in consequence:

a) To annul the acts of additional assessment of value added tax (VAT) relating to the period 2011 Q4, in the amount of €85,166.93, and to the periods between 2012 and 2013, in the total amounts of, respectively, €135,468.82 and €55,379.22;

b) To maintain the acts of additional assessment at issue, in the remaining part;

c) To condemn the parties to the costs of the proceeding, in the proportion of their respective default, fixing at €637.00 the amount to be borne by the Claimant, and at €4,871.00 the amount to be borne by the Respondent.

D. Value of the Proceeding

The value of the proceeding is fixed at €312,107.71, pursuant to article 97-A, paragraph 1, subparagraph a), of the Tax Procedure and Process Code, applicable by force of subparagraphs a) and b) of paragraph 1 of article 29 of the RJAT and of paragraph 2 of article 3 of the Regulations of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €5,508.00, pursuant to Table I of the Regulations of Costs in Tax Arbitration Proceedings, to be paid by the parties in the proportion of their respective default, above fixed, since the request was partially upheld, pursuant to articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and article 4, paragraph 4, of the cited Regulations.

Notify hereof.

Lisbon

9 March 2016

The Presiding Arbitrator

(José Pedro Carvalho - Reporter)

The Arbitrator Member

(João Ricardo Catarino)

The Arbitrator Member

(Joaquim Silvério Dias Mateus)

Frequently Asked Questions

Automatically Created

What is the taxable value for VAT when discounts are included directly on invoices?
When discounts are included directly on invoices (concurrent discounts), they should be excluded from the taxable value for VAT purposes under Article 16(6)(b) of the Portuguese VAT Code. These are price reductions granted at the moment of invoicing, meaning the taxable amount reflects the net value after discount. Unlike subsequent discounts, concurrent discounts do not require separate documentation or credit notes because they are immediately incorporated into the invoice's taxable base. The client receives an invoice showing the reduced amount and corresponding VAT, without any separate VAT deduction on the discount itself, since the discount was never part of the taxable transaction value.
How does Article 78 of the Portuguese VAT Code apply to concurrent invoice discounts?
Article 78 of the Portuguese VAT Code applies specifically to subsequent discounts—those granted after the invoice has been issued and the original VAT charge has been made. It does not apply to concurrent invoice discounts that are deducted directly from the taxable value at the time of invoicing. For concurrent discounts, the client cannot deduct VAT contained in the discount because the discount was immediately excluded from the invoice's taxable amount and corresponding tax calculation. Article 78 requires credit notes for post-invoicing adjustments, but when discounts are contemporaneous with the invoice issuance, they are governed by Article 16(6)(b) CIVA as direct reductions to the taxable base, not by the subsequent adjustment mechanism of Article 78.
Can the tax authority impose additional VAT assessments on discounts already deducted from the taxable amount?
The legality of additional VAT assessments on discounts already deducted from the taxable amount is contested when those discounts are concurrent with invoice issuance. According to the claimant's arguments, VAT should not be assessed on amounts that represent genuine price reductions excluded from the invoice's taxable value under Article 16(6)(b) CIVA. Additional assessments applying Article 78 CIVA to concurrent discounts would be illegal because they misapply a provision designed for subsequent adjustments to situations where the taxable value was correctly determined at the outset. Furthermore, VAT cannot be imposed on mere bookkeeping entries that serve only as accounting and financial control instruments without corresponding to actual taxable operations. The Tax Authority's power to make additional assessments is limited to correcting actual under-declarations, not recharacterizing legitimate price reductions.
What are the VAT rules for continuous service contracts with successive payments under Article 7 of CIVA?
Under Article 7(3) of the Portuguese VAT Code, for continuous services resulting from contracts with successive payments, services are considered performed at the end of the period to which each payment relates, and VAT becomes due and payable for that period's amount. When no specific payment periodicity is established, Article 7(9) provides that VAT becomes due at the end of each 12-month period for the corresponding amount. The 'corresponding amount' under Article 16(1) CIVA is the actual consideration obtained or to be obtained for services effectively provided during that period—the value actually received or receivable as agreed between parties. This means VAT is assessed on the actual economic value of services rendered per period, not on amounts debited to accounts that don't correspond to taxable operations, such as discounts, bonuses, or allowances excluded under Article 16(6)(b).
How did CAAD rule on the legality of additional VAT assessments related to 'reversal of uncollected accommodation service fees'?
While the complete arbitral decision is not provided in the excerpt, the claimant's position challenges the legality of additional VAT assessments on 'reversal of uncollected accommodation service fees' and 'disturbance allowances.' The claimant argues these designations constitute price reductions recognized even by tax inspection services and must be excluded from taxable value under Article 16(6)(b) CIVA. The assessments based on Article 78 are characterized as illegal because that provision applies only to subsequent discounts, not to concurrent price reductions reflected directly in invoices. The arbitral tribunal (CAAD) was constituted to determine whether these amounts represent legitimate exclusions from the taxable base or improperly undeclared VAT, with the outcome depending on whether the reductions qualify as Article 16(6)(b) discounts or taxable consideration mischaracterized as adjustments.