Process: 562/2017-T

Date: March 14, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

In Process 562/2017-T, pharmaceutical company A... S.A. challenged additional VAT assessments for 2013-2015 before the CAAD arbitral tribunal. The company, primarily engaged in exporting medicinal products, maintained a permanent VAT credit position as most sales were exports (exempt under Article 14 CIVA) while acquiring goods domestically with VAT deduction. The Tax Authority's inspection focused on triangular operations involving sales to Brazilian company D... Ltd, where goods were purchased from F... Lda but shipped directly from India/China to Brazil without entering Portuguese territory. The company invoked the exemption under Article 6(1) and Article 14 of the VAT Code for goods not passing through national territory. Key issues included: lack of payment from the Brazilian entity due to financial difficulties, use of cash pooling system for intercompany payments through parent company C... SGPS, and documentary evidence including AWB/Bill of Lading showing direct shipment from Asia to Brazil. The company also sought compensation for guarantee costs incurred to suspend tax enforcement proceedings. The arbitral tribunal, constituted on 08-01-2018 with arbitrators Dr. Jorge Lopes de Sousa, Dr. Filipa Barros, and Dr. Ana Luísa Ferreira Cabral Basto, examined whether the VAT deduction right was properly exercised and whether the exemption regime was correctly applied to these export operations involving goods not transiting through Portuguese territory.

Full Decision

TRANSLATION TO ENGLISH

The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Dr. Filipa Barros and Dr. Ana Luísa Ferreira Cabral Basto (arbitrators members), appointed by the Deontological Council of the Administrative Arbitration Centre to constitute the Arbitral Tribunal, constituted on 08-01-2018, agree as follows:

1. Report

A…, S.A., a company with the single registration number and collective person number …, with headquarters in …, …-… –… (hereinafter referred to as "Claimant" or "A…"), filed a request for constitution of the collective arbitral tribunal, pursuant to Decree-Law No. 10/2011 of 20 January (hereinafter RJAT), in which the TAX AUTHORITY AND CUSTOMS AUTHORITY is Respondent.

The Claimant intends that the illegality be declared and the following additional assessments of Value Added Tax (VAT) for the periods from January to July and from September to December 2013, from April to June of August to December 2014 and from January to March and June 2015 be annulled:

The Claimant further seeks the condemnation of the TA to pay indemnity for expenses incurred with the guarantee provided to suspend fiscal executions instituted for 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 Authority and Customs Authority on 24-10-2017.

Pursuant to the provisions of paragraph a) of article 6(2) and paragraph b) of article 11(1) of the RJAT, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable period.

On 15-12-2017, the parties were duly notified of this appointment and did not express their will to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11(1), paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

In accordance with the provision in paragraph c) of article 11(1) of the RJAT, the collective arbitral tribunal was constituted on 08-01-2018.

The Tax Authority and Customs Authority replied, contesting the admissibility of the request for arbitral decision.

By order of 13-02-2018, it was decided to dispense with the meeting provided for in article 18 of the RJAT and that the proceedings continue with submissions.

The Parties presented submissions.

The Tribunal is competent and was regularly constituted.

The parties possess legal personality and capacity, are legitimately constituted and are duly represented (articles 4 and 10(2) of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings are free from nullities.

2. Statement of Facts

2.1. Established Facts

The following facts are considered established as relevant to the decision:

  • The Claimant was constituted and commenced its activities on 04-05-1999;

  • A is classified in the Classification of Economic Activities (CAE) with activity 2101 (Manufacture of Medicinal Products);

  • The activity carried out by the Claimant consists of the commercialization of medicinal products, mainly for the external market;

  • The Claimant is integrated in Company B…, with "C… SGPS, SA" as its parent company;

  • In the years 2013, 2014 and 2015, the Claimant is taxed in accordance with the REGTS, being classified, for VAT purposes, under the normal monthly periodicity regime;

  • In the referred years, the Claimant found itself in a situation of permanent VAT credit, given that the majority of its sales are made for the external market (without VAT assessment), acquiring the goods commercialized in the domestic market (deducting VAT), whereby it requests refunds;

  • The Tax Authority and Customs Authority conducted a tax inspection of the Claimant pursuant to service orders OI2016…, OI2016…, OI2016…;

  • In that tax inspection, the Tax Inspection Report was prepared, a copy of which is attached as document No. 24 with the request for arbitral decision, the content of which is reproduced, in which the following is stated, among other things:

III - Description of facts and grounds for purely arithmetic corrections to taxable matter

The present service orders were opened to analyze the company's situation for VAT purposes, as it is in a situation of permanent credit.

From the analysis conducted, it is found that the company's sales are made mostly to third countries (exports), with these operations being exempt pursuant to article 14 of the VAT Code.

The company acquires goods and services in the domestic market, proceeding to deduct VAT, which results in it being in a tax credit situation.

However, from the analysis conducted, it was found that the company presents invoices for sale to the Brazilian company "D…, Ltd", which also belongs to the "Group E…", as shown in the organizational chart which constitutes annex 2.

The referred invoices present the following references:

"Goods dispatched directly to Brazil without passage through national territory.

Outside the scope of tax defined in article 6(1), VAT Code/Exempt pursuant to Article 14 VAT Code."

The "CC" was questioned regarding these operations and was informed that the goods were acquired from company "F…, Lda", NIF…, but that they did not enter the domestic market, that is, the goods were shipped directly from India or China to Brazil.

It was also stated that regarding some acquisitions the goods were invoiced by company "F…" to companies of Group E… "G…, SA", NIF…, and "B…, SA", NIF …, which in turn invoiced them to Portuguese company "A…" for the same value they acquired from "F…". Portuguese "A…" invoiced the referred goods to Brazilian "D…".

Documents supporting these operations were requested, namely sales documents, purchase documents, transport documents, payment documents and receipt documents.

Receipts:

With respect to receipt documents it was stated by the company that "D…" of Brazil has been inactive since September 2015 and that before that date had many financial difficulties, which is one of the reasons why the group in Portugal ensured the shipment of raw materials for the company's activity.

With regard to sales made to company "D…" of Brazil in the years 2013, 2014 and 2015, the same are almost entirely unpaid, and it was stated by the "CC" that the debt remains outstanding, having not constituted provisions for doubtful collections because they are not accepted for tax purposes.

Payments:

For invoices issued directly by "F…" to Portuguese "A…", the company presented payment documents (bank transfers) which in most cases paid invoices issued by "F…" to company "A…" and also invoices issued by "F…" to other companies of Group E…, as the group uses the "cash pooling" system for treasury management, with "C… SGPS" responsible for making payments for group companies.

With respect to "indirect" acquisitions, invoiced by group companies "G…" and "B…" it was stated by the company that intercompany invoices are assigned to the parent company, C… SGPS, in a "cash pooling" system, with annual account settlement between subsidiary companies, that is there is no transfer of money between group companies.

Transport Documents

With respect to transport documents the company presented for each operation AWB - Airway Bill or BL - Bill of Lading documents indicating that the merchandise was transported from India or China to Brazil, destined to Brazilian company "D…, Ltda". Company "A…" presented declarations issued by "F… Portugal" for the years 2013, 2014 and 2015 (annex 5), stating that the merchandise listed in the invoices identified in the listing (which subsequently gave rise to invoices issued by "A…" to "D…" Brazil) did not enter the domestic market and were shipped from Other Markets, outside the European Union, directly to Brazil.

"F…" also refers in the declarations that "... the final exporter, company A…, SA., acted under article 14 of the VAT Code and being outside the scope of tax defined in article 6(1) of the VAT Code".

Sales Documents

Purchase Documents:

With respect to purchase invoices relating to goods invoiced by Portuguese "A…" to Brazilian "D…" it was found that the same came from "F…" or from companies of Group E… "G…" and "B…".

In the case of purchase invoices from "G…" and "B…" the goods were previously invoiced by company "F…" and subsequently invoiced (at the same value as invoices from "F…") to Portuguese company "A…".

In any case VAT was assessed at the rate of 6% (reduced rate - medicinal products) by the invoice issuers which Portuguese company "A…" deducted.

Summary map of operations with Brazilian "D…":

A map was prepared, which constitutes annex 6, in which for each invoice issued to Brazilian company "D…", the purchase invoice is identified and, in the case of purchase invoices to group companies, the purchase invoice issued by company "F…" was also identified, as well as the document relating to transport.

Documents relating to invoices 1400000005 and 1400000006 are attached as annexes 7 and 8, respectively, issued by Portuguese "A…" to Brazilian "D…", by way of example.

The chronological sequence of the supporting documents of these operations is not always logical, as follows:

For example, invoice No. 1400000005 (annex 7) issued by "A…" to Brazilian "D…" has the date of 28-01-2013; the purchase invoice issued by "G…" has the date of 18-02-2013; the invoice issued by "F…" to "G…" has the date of 31-01-2013 and the document for transport of merchandise from India to Brazil has the date of 10-01-2013.

Analysis of VAT situation - Invoices issued by Portuguese "A…" to Brazilian "D…":

The company does not assess VAT on invoices issued to Brazilian "D…", placing on the invoices "Goods dispatched directly to Brazil without passage through national territory. Outside the scope of tax defined in Art. 6, No. 1, VAT Code/Exempt pursuant to Article 14 VAT Code".

From the elements obtained there is no evidence that the merchandise entered the domestic market, according to the transport documents presented (transport from India or China directly to Brazil) and the declarations of company "F…".

Article 6(1) of the VAT Code establishes that "Supplies of goods which are situated in national territory at the moment when transport or dispatch to the purchaser begins, or, in the case of no dispatch or transport, at the moment when they are placed at the disposal of the purchaser, are taxable."

As the goods do not enter national territory, the referred operations fall outside the rules of the scope of tax (article 6(1) of the VAT Code, a contrario).

Neither are we dealing with exports or operations assimilated thereto as referred to in article 14 of the VAT Code. As these operations fall outside the scope of VAT, no VAT should be assessed by invoices issued by Portuguese "A…" to Brazilian "D…".

However, the company deducted VAT contained in the purchase invoices for goods that were sent directly from China or India to Brazil.

As the referred sales to Brazil are operations outside the field of tax, that is operations not subject to VAT, the VAT incurred to effect these sales is not deductible, by force of the provision in article 19(1) and 20(1), both of the VAT Code.

By the foregoing, the company could not deduct the VAT contained in the purchase invoices for goods that were sent directly from India and China to Brazil.

The deduction of VAT was made through account 2432111000 - VAT Ded.Exist.TR Domestic Market, with the current account relating to the years 2013, 2014 and 2015 attached as annexes 9, 10 and 11, respectively.

(...)

The sales invoices to Brazilian "D…" and the respective purchase invoices, in relation to which VAT was deducted, constitute annexes 12, 13 and 14 (years 2013, 2014 and 2015, respectively).

By the foregoing, VAT shortfall was detected in the amounts of € 108,215.89 for the year 2013, € 49,162.55 for the year 2014 and € 15,605.13 for the year 2015.

It was stated by the "CC" that the company ceased to carry out these operations from 2015 onwards.

(...)

IX - Prior Hearing

To comply with article 60 of the General Tax Law (LGT) and article 60 of the Complementary Regime of the Tax and Customs Inspection Procedure (RCPITA), the Taxable Person "A…, SA", was notified through Office No. … of 07/04/2017, postal registration RD … PT, to, if it wished, exercise the right of prior hearing, regarding the draft Tax Inspection Report.

Within the stipulated period the company exercised the right of hearing (annex 15), through Lawyer Dr. I…, NIF …, professional ID No. …, belonging to Law Firm J…. - Branch, NIF… .

On the first page of the document which embodies the exercise of the right of hearing (annex 15) the Taxable Person, by inadvertence, indicated a NIF (…) and a registered office address (…, No. …, …-… Lisbon) that do not correspond to the company. Company "A…, SA" has as NIF … and presents as registered office …, …, …-… … .

Also on this same page a total of VAT corrections is indicated in the amount of € 108-215.89, however this amount corresponds only to the corrections proposed for the year 2013.

The corrections proposed for VAT purposes were € 108,215.89, for the year 2013, € 49,162.55, for the year 2014, and € 15,605.13 for the year 2015.

Correcting these inadvertences we shall proceed to the analysis of the arguments presented by the company in the right of hearing in disagreement with the proposed corrections.

The company begins by stating that "... the understanding of the tax administration services set out above collides with the nuclear principle inherent to the common VAT system, which is the principle of neutrality"

It states that "... neutrality is ensured through the right to deduct the tax incurred on the acquisition of goods and services used for the performance of taxable operations, thus leading that mechanism to the fact that, regardless of the number of phases of the economic circuit, the tax burden incurred on a given good/service is the same".

The company considers that the understanding of the Tax Administration "... translates into a violation of the neutrality of the tax, burdening the Respondent with the charge of tax incurred on acquisitions destined for exports to Brazil, as if it were a final consumer."

It also argues that "Not being a situation of fraud or tax evasion and given that the VAT of the corresponding acquisitions was assessed and paid into the State's coffers, the tax administration cannot promote the present correction, under penalty of violating the principle of neutrality."

The company invokes the judgment of the Court of Justice of the European Union (CJEU) of 19 September 2000, in Case C-454/98, stating that "when the invoice issuer, in a timely manner, completely eliminated the risk of loss of tax revenue, the principle of VAT neutrality requires that this wrongfully invoiced tax may be regularized, (...) the measures that Member States have the possibility to take, pursuant to article 22(8) of the Sixth Directive, to ensure proper collection of tax and prevent fraud should not exceed what is necessary to achieve those objectives"

Also referred to is judgment C-110/98 to C-147/98 of the CJEU, of 21 March 2000 (Gabalfrisa) "They cannot therefore be used in a way that undermines the neutrality of VAT, which constitutes a fundamental principle of the common VAT system established by community legislation on the matter (...)"

The Taxable Person also invokes the judgment of the CJEU regarding Case C-111/14, of 23/04/2015, stating that "the principle of VAT neutrality should be interpreted as precluding a national provision that permits the Tax Administration to refuse the service provider the refund of VAT that it paid, when the recipient of those services, who also paid the said tax for the same services, was denied the right to the respective deduction"

The Company considers that "... it is imperative that the tax administration proceed to the correction regarding the VAT that it considers to have been wrongfully assessed by F… Lda or refrain from promoting the present correction restricting the right to deduction, under penalty of violating the principle of neutrality and, equally, under penalty of violating the principles of good faith and justice provided in article 266 of the CRP.

Indeed, it is known that the tax administration is bound by those constitutional imperatives and not merely to strict formal legality."

The Taxable Person argues that "To the extent that it is no longer possible for the taxable person itself to proceed with the regularization/correction, as the periods for that effect have already elapsed, the tax administration should perform such correction or refrain from correcting the exercise of the right to deduction.

Otherwise, with the tax administration performing the projected correction, without concurrent correction of VAT in acquisitions, the principle of neutrality would be compromised and an amount of tax superior to the due would be collected."

The company concludes that "... in view of the foregoing, and under penalty of violation of Community Law, specifically the principle of neutrality of value added tax, and the principles of good faith and justice enshrined in articles 266(2) of the CRP and 55 of the LGT, the projected correction should be accompanied by a correction of VAT assessed, or the tax administration should refrain from effecting the correction to VAT deducted."

Taking into account the arguments presented by the Taxable Person, the following is stated:

Article 2(1)(c) of the VAT Code considers as taxable persons "Individuals or collective entities that wrongfully mention VAT in an invoice".

Article 27(2) of the VAT Code establishes the conditions of payment of VAT for persons referred to in article 2(1)(c).

It is therefore concluded that VAT wrongfully indicated in invoices is due to the State and must be paid, as stipulated in article 27 of the VAT Code.

The company, in exercise of the right of hearing, argues that the Tax Administration should make corrections to VAT assessed by company "F…", as it would have been wrongfully indicated in invoices.

The entity which could, if it wished, regularize the VAT assessed in invoices from "F…" would be "F…" itself, within the periods and conditions expressed in article 78 of the VAT Code.

As follows from the analysis of article 2(1)(c) and article 27(2), both of the VAT Code, the VAT assessed in invoices from "F…", even if wrongfully assessed, must be paid into the State's coffers, which conflicts with the Taxable Person's claim.

Regarding this matter, reference is made to the judgment of the Central Administrative Court of the North - Case 00012/08.6BCPRT of 30-10-2014 - 2nd Section, in which the following is stated "On the other hand, pursuant to article 2(1)(c) of the VAT Code, the tax may also be demanded from the invoice issuer who wrongfully mentions it. Indeed, this legal provision states that taxable persons are "individuals or collective entities that, in an invoice or equivalent document, wrongfully mention VAT".

In this way, the mention of VAT in such documents, even if it should not appear, because no VAT assessment should exist in that operation, gives rise to a tax obligation..."

"Finally, it should also be noted that, even if there is no subsequent deduction of tax, the demand for wrongfully mentioned VAT is always legitimate, as this tax is revenue of the State, and cannot, in any circumstances, be the subject of appropriation by the invoice issuer, even in the case of wrongful assessment."

It should be emphasized that what is at issue in the present tax inspection is the undue deduction of VAT by "A…" for the reason that the invoices in relation to which it proceeded to deduct tax gave rise to operations outside the scope of tax.

The company refers to judgment C-454/98 of the CJEU, which concerns entities that wrongfully assessed VAT in invoices, but which, in a timely manner, completely eliminated the risk of loss of tax revenue (for example, ensured that the wrongfully assessed VAT was not subsequently deducted by its customers), which does not apply to the case at hand as the proposed corrections relate to VAT deductions not accepted for tax purposes as they relate to operations outside the scope of tax.

The obligation to pay the wrongfully assessed tax is expressly referred to by the CJEU:

. ."It should be recalled, in the first place, that pursuant to article 21(c) of the Sixth Directive, VAT is due in the domestic regime by all persons who mention value added tax in an invoice or in any document that replaces it..."

...It should, secondly, be considered that the Sixth Directive contains no provision on the regularization, by the invoice issuer, of wrongfully invoiced VAT... "

..."In these circumstances, it falls in principle to Member States to determine the conditions under which wrongfully invoiced VAT may be regularized."

Regarding the right to deduction it is important to note what the referred CJEU states in the cited case.

..."The exercise of the right of hearing was limited only to taxes owed..."if all invoiced tax could be deducted, even when it does not correspond to legally due tax, tax fraud would be facilitated..."

The Taxable Person invokes the judgment of the CJEU C-110/98 to C-147/98, to state that the proposed corrections call into question the principle of neutrality, which is a fundamental principle of the common VAT system. The referred judgment concerns the deductibility of VAT in relation to operations carried out before the commencement of activity, when that activity is within the rules of VAT application.

This judgment states at point 44 "The common VAT system therefore ensures, complete neutrality as to the tax burden of all economic activities, regardless of the aims or results of those activities, provided that the said activities are, themselves, subject to VAT" (our emphasis).

As stated, in the case at hand, the VAT deductions subject to correction are related to activities outside the field of tax, whereby the principle of neutrality is not violated.

The judgment in Case C-111/14 of the CJEU concerns double imposition of VAT (VAT assessed by the service provider and by the purchaser of the service), with the principle of neutrality being called into question, a situation which does not occur in the case at hand as the VAT deductions were not accepted because they relate to operations outside the field of tax.

As an alternative to the regularizations of VAT assessed by company "F…" proposed by Taxable Person "A…", company "A…" argues that the Tax Administration should refrain from correcting the VAT deductions made by itself relating to the sales of goods invoiced to company "D… Brazil", arguing that this correction burdens the company with the charge of tax incurred on acquisitions destined for exports to Brazil, as if it were a final consumer.

Regarding this issue it should be emphasized that the goods invoiced by company "A…" to company "D… Brazil" do not constitute exports or assimilated operations, as provided for in article 14 of the VAT Code, as the goods did not enter national territory, nor the territory of the European Union.

As the goods do not enter national territory (or the territory of the European Union), the referred operations fall outside the rules of the scope of tax, as follows from the analysis of article 6(1) of the VAT Code (a contrario).

This same article is indicated in invoices issued by "A…" to "D…" as justification for non-assessment of VAT - "Goods dispatched directly to Brazil without passage through national territory". "Outside the scope of tax defined in Art. 6, VAT Code/ /Exempt pursuant to Article 14 VAT Code."

As the operations carried out by "A…" with "D…" fall outside the rules of tax, the VAT deductions related to these operations are not accepted for tax purposes. It is not a matter of considering company "A…" as a final consumer, but rather as an entity that carries out some operations outside the rules of tax, with the VAT associated with those operations not being deductible, pursuant to article 19(1) and 20(1), both of the VAT Code.

  • As a consequence of the inspection, the Tax Authority and Customs Authority issued the following assessments and account settlement statements, which appear as documents Nos. 1 to 23 attached with the request for arbitral decision, the contents of which are reproduced:

  • F…, Lda., paid to the State the VAT relating to invoices paid by the Claimant (documents Nos. 25 to 48 attached with the request for arbitral decision, the contents of which are reproduced, which are not contested);

  • The Claimant provided bank guarantee to suspend fiscal executions Nos. …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017…, …2017… and …2017…, which were instituted for collection of the assessed amounts (document No. 51 attached with the request for arbitral decision, the contents of which are reproduced);

  • On 23-10-2017, the Claimant filed the request for arbitral decision which gave rise to the present proceedings.

2.2. Unproven Facts and Justification of the Decision on Factual Matters

There are no facts relevant to the decision in the case that have not been proven.

The statement of facts was based on the administrative proceedings and documents attached with the request for arbitral decision.

There is no controversy regarding the statement of facts.

3. Statement of Law

Claimant A…, SA, acquired from company F…, Lda. (directly and through Portuguese companies G…, S.A. and B…, S.A.), goods which it sold to D…, Ltd., belonging to the same group, with registered office in Brazil.

The referred goods were dispatched directly from India or China to Brazil without passage through national territory.

However, in the invoices for acquisitions made by the Claimant, VAT was assessed, which was paid by the Claimant.

The sales invoices issued by the Claimant to Brazilian "D…" were issued without VAT assessment, and state "Goods dispatched directly to Brazil without passage through national territory" "Outside the scope of tax defined in Art. 6(1), VAT Code/Exempt pursuant to Article 14 VAT Code."

The Claimant deducted VAT contained in the purchase invoices for goods from F… Lda.

The Tax Authority and Customs Authority understood that "as the referred sales to Brazil are operations outside the field of tax, that is operations not subject to VAT, the VAT incurred to effect these sales is not deductible, by force of the provision in article 19(1) and 20(1), both of the VAT Code" and that "by the foregoing the company could not deduct the VAT contained in the purchase invoices for goods that were sent directly from India and China to Brazil".

The Tax Authority and Customs Authority further states, in appreciating the exercise of the right of hearing, that "as the operations carried out by "A…" with "D… Brazil" fall outside the rules of tax, the VAT deductions related to these operations are not accepted for tax purposes. It is not a matter of considering company "A…" as a final consumer, but rather as an entity that carries out some operations outside the rules of tax, with the VAT associated with those operations not being deductible, pursuant to article 19(1) and 20(1), both of the VAT Code".

In the present proceedings, the Claimant contends, in summary:

– that it could deduct the VAT actually incurred and paid to the Portuguese State by virtue of the provision in article 20(1)(b)(II) of the VAT Code;

– that the impossibility of VAT deduction by the Claimant violates the principles of neutrality and effectiveness and the principles of justice, proportionality, good faith and legitimate expectations.

The Claimant and the Tax Authority and Customs Authority agree that VAT should not be assessed on acquisitions made by the Claimant, as they were not "made in national territory", for purposes of article 1(1)(a) of the VAT Code, as they did not have as their object "goods which are situated in national territory at the moment when transport or dispatch to the purchaser begins" (article 6(1) of the VAT Code).

However, it is also uncontroversial that VAT is due by F…, Lda, for having mentioned it in the invoices [article 2(1)(c) of the VAT Code].

3.1. Question of whether or not the Claimant could deduct the VAT actually incurred and paid to the Portuguese State by virtue of the provision in article 20(1)(b)(II) of the VAT Code

The essential lines of the right to deduct VAT are indicated, among many others, in the judgment of the CJEU of 18-12-2008, delivered in Case No. C-488/07, in these terms:

15 . The deduction scheme aims to relieve the taxable person entirely of the VAT due or paid in the context of all his economic activities. The common VAT system therefore ensures complete neutrality as to the tax burden of all economic activities, whatever the purposes or results of those activities, provided that the said activities are, in principle, themselves subject to VAT (see judgment of 22 February 2001, Abbey National, C‑408/98, Colect., p. I‑1361, no. 24 and case law cited).

  1. Thus, where goods or services acquired by a taxable person are used for the purposes of exempt operations or operations not covered by the scope of VAT application, there can be neither downstream tax collection nor upstream tax deduction (judgment of 14 September 2006, Wollny, C‑72/05, Colect., p. I‑8297, no. 20).

Article 19 of the VAT Code establishes the rule that "for the purpose of calculating the tax due, taxable persons deduct, pursuant to the following articles, from the tax due on the taxable operations they have carried out: a) The tax due or paid for the acquisition of goods and services from other taxable persons".

Article 20 of the VAT Code clarifies which operations confer the right to deduction, as follows:

Article 20

Operations Conferring the Right to Deduction

1 - Only tax which has been incurred on goods or services acquired, imported or used by the taxable person for the purpose of carrying out the following operations may be deducted:

a) Supplies of goods and provision of services subject to tax and not exempt from it;

b) Supplies of goods and provision of services which consist of:

I) Exports and operations exempt pursuant to article 14;

II) Operations carried out abroad which would be taxable if carried out in national territory;

III) Provision of services whose value is included in the taxable base of imported goods, pursuant to article 17(2)(b);

IV) Supplies of goods and provision of services covered by article 15(1)(b), (c), (d) and (e) and article 15(8) and (10);

V) Exempt operations pursuant to article 9(27) and (28), when the recipient is established or domiciled outside the European Community or which are directly related to goods intended to be exported to non-Community countries;

VI) Exempt operations pursuant to article 7 of Decree-Law No. 394-B/84, of 26 December.

2 - However, tax does not confer the right to deduction in respect of operations giving rise to the payments referred to in article 16(6)(c)

In the case at hand, the Claimant contends that its situation falls within article 20(1)(b)(II) of the VAT Code.

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

– that "the tax has been incurred on goods or services acquired, imported or used by the taxable person" [body of article 20(1)];

– "for the purpose of carrying out the operations" of "supplies of goods" [body of article 20(1)(b)];

– which consist of "operations carried out abroad which would be taxable if carried out in national territory" [article 20(1)(b)(II)].

The Claimant deducted tax which was incurred on goods it acquired for the purpose of carrying out supplies of goods, which is not contested by the Tax Authority and Customs Authority, as being carried out in the context of its medicinal product commercialization activity.

Thus, the tax deducted was incurred on goods acquired by the Claimant for the purpose of carrying out supplies of goods operations, so the first two requirements referred to are satisfied.

On the other hand, the supplies are considered to have been carried out abroad, in the light of articles 1(1)(a) and 6(1) of the VAT Code, as the goods were not "situated in national territory at the moment when transport or dispatch to the purchaser begins".

Furthermore, it is unquestionable that, if the supply operations were carried out in national territory, they would be taxable, as, by force of the provision in article 1(1) of the VAT Code, "the following are subject to value added tax: a) Supplies of goods and provision of services carried out in national territory, for valuable consideration, by a taxable person acting as such".

In this context, it appears manifest that the requirements for the exercise of the right to deduction invoked by the Claimant are met.

In fact, the reason invoked by the Tax Authority and Customs Authority in the Tax Inspection Report to refuse the right to deduction, which is that "as the referred sales to Brazil are operations outside the field of tax, that is operations not subject to VAT, the VAT incurred to effect these sales is not deductible, by force of the provision in article 19(1) and 20(1), both of the VAT Code", has no legal basis.

In fact, in the situations provided for in article 20(1)(b)(II) of the VAT Code, there is a right to deduct the VAT incurred for the purpose of carrying out operations not subject to VAT, but which would be subject to it if carried out in national territory, whereby the fact that the "sales to Brazil" are "operations outside the field of tax" is no obstacle to the exercise of the right to deduction.

Moreover, as the Claimant aptly recalls, the Tax Authority and Customs Authority itself recognizes the right to deduction in these circumstances, in point II 3. of Circular Office No. 30103, of 23-04-2008 ( [1] ), which states that "the tax incurred on acquisitions of goods or services exclusively allocated to operations that, within the concept of economic activity for tax purposes, are taxed, exempt with right to deduction or, furthermore, not taxed which confer that right, pursuant to article 20(1)(b)(II) of the VAT Code, confer the right to complete deduction".

It should further be noted that this possibility of deducting VAT in relation to operations outside the scope of tax application has a correspondence in article 169(a) of Council Directive No. 2006/112/EC of 28-11-2006, which establishes that "in addition to the deduction referred to in article 168, the taxable person has the right to deduct the VAT referred to therein, provided that the goods and services are used for the purposes of the following operations: a) Operations related to the activities referred to in the second paragraph of article 9(1), carried out outside the Member State in which that tax is due or paid, which would have conferred the right to deduction if they had been carried out in that Member State".

By the foregoing, it is concluded that the assessed amounts under challenge are affected by a defect of violation of law, which justifies their annulment, in accordance with the provision in article 163(1) of the Administrative Procedure Code, subsidiarily applicable pursuant to article 2(c) of the LGT.

3.2. Questions of Moot Issues

As it is to be held that the request for arbitral decision has merit on the basis of defects of violation of law, which ensure stable and effective protection of the interests of the Claimant, the consideration of the remaining questions raised becomes moot, as it is futile (article 130 of the Code of Civil Procedure).

4. Indemnity for Undue Guarantee

The Claimant provided guarantee to suspend fiscal executions instituted for coercive collection of the assessed amounts under challenge and formulates a request for indemnity, pursuant to article 53 of the LGT.

Article 171 of the CPPT establishes that "indemnity in the case of a bank guarantee or equivalent wrongfully provided shall be requested in the proceedings in which the legality of the debt to be executed is contested" and that "indemnity must be requested in the objection, challenge or appeal or if its basis occurs subsequently, within 30 days of its occurrence".

Thus, it is unequivocal that the judicial challenge proceedings encompass the possibility of condemnation to payment of undue guarantee and is in fact, in principle, the appropriate procedural means to formulate such a request, which is justified by evident reasons of procedural economy, as the right to indemnity for undue guarantee depends on what is decided regarding the legality or illegality of the tax assessment act.

The request for constitution of the arbitral tribunal and for arbitral decision has the consequence that it is in the arbitral proceedings that will be discussed the "legality of the debt to be executed", whereby, as follows from the express wording of article 171(1) of the CPPT, the arbitral proceedings is also the appropriate forum to hear the request for indemnity for undue guarantee.

The regime of the right to indemnity for undue guarantee is contained in article 53 of the LGT, which establishes the following:

Article 53

Guarantee in Case of Undue Payment

  1. The debtor who, in order to suspend execution, offers a bank guarantee or equivalent shall be indemnified totally or partially for the damages resulting from its provision, if it has maintained it for a period exceeding three years in proportion to its satisfaction in administrative appeal, judicial challenge or opposition to execution which have as their object the debt guaranteed.

  2. The period referred to in the preceding number shall not apply when it is verified, in gracious claim or judicial challenge, that there was error attributable to the services in the assessment of the tax.

  3. The indemnity referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed amount of the indemnity interest rate provided for in the present law and may be requested in the very proceeding of claim or judicial challenge, or autonomously.

  4. Indemnity for provision of undue guarantee shall be paid by deduction from the tax revenue of the year in which payment is made.

In the case at hand, it is manifest that the error underlying the assessed amounts under challenge is attributable to the Tax Authority and Customs Authority, as they were of its own initiative and the Claimant in no way contributed to those errors being committed.

Therefore, the Claimant has the right to indemnity for the guarantee provided.

As there are no elements that permit determining the exact amount of the indemnity, the condemnation must be made by reference to what comes to be assessed in execution of the present judgment, in accordance with the provision in article 609(2) of the Code of Civil Procedure, subsidiarily applicable by force of the provision in article 29(1)(e) of the RJAT.

5. Decision

In these terms, this Arbitral Tribunal agrees to:

  • Hold that the request for arbitral decision has merit;

  • Annul the VAT assessments:

  • Assessment No. … of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2013;

  • Assessment No. 2017… of 2014;

  • Assessment No. 2017… of 2014;

  • Assessment No. 2017… of 2014;

  • Assessment No. 2017… of 2014;

  • Assessment No. 2017… of 2014;

  • Assessment No. 2017… of 2014;

  • Assessment No. 2017… of 2014;

  • Assessment No. 2017… of 2014;

  • Assessment No. 2017… of 2015;

  • Assessment No. 2017… of 2015;

  • Assessment No. 2017… of 2015; and

  • Assessment No. 2017… of 2015.

  • Hold that the request for condemnation of the Tax Authority and Customs Authority to pay to the Claimant the indemnity which comes to be assessed in execution of the present judgment for the guarantee provided to suspend the fiscal executions instituted for coercive collection of the amounts assessed, has merit.

6. Case Value

In accordance with the provisions of article 306(2) of the Code of Civil Procedure and article 97-A(1)(a) of the CPPT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the case value is fixed at € 172,983.57.

7. Costs

Pursuant to article 22(4) of the RJAT, the amount of costs is fixed at € 3,672.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax Authority and Customs Authority.

Lisbon, 14-03-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Filipa Barros)

(Ana Luísa Ferreira Cabral Basto)

[1] Published at https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/legislacao/instrucoes_administrativas/Documents/OficCirc_30103.pdf.

Frequently Asked Questions

Automatically Created

What is the right to VAT deduction under Portuguese tax law for pharmaceutical companies?
Under Portuguese tax law, pharmaceutical companies have the right to VAT deduction on goods and services acquired for their economic activity pursuant to Article 20 of the VAT Code (CIVA). For companies primarily engaged in exports, this creates a structural credit position as export sales are exempt under Article 14 CIVA while domestic acquisitions bear deductible VAT. The right to deduction requires: (i) the taxpayer be registered for VAT purposes; (ii) the goods/services be used in taxable operations; (iii) proper documentary support exists; and (iv) the tax be legally due and collected. Companies in permanent credit situations may request periodic refunds under Article 22 CIVA.
How did the CAAD arbitral tribunal rule on additional VAT assessments for periods between 2013 and 2015?
The text excerpt provided does not include the final decision of the CAAD arbitral tribunal. The document shows the preliminary sections including the report, statement of facts, and description of the Tax Authority's findings during inspection. The tribunal was examining additional VAT assessments related to triangular export operations where goods shipped directly from Asia to Brazil were invoiced through the Portuguese pharmaceutical company. The tribunal's analysis would focus on whether Article 6(1) and Article 14 CIVA exemptions were properly applied and whether VAT deduction rights were legitimately exercised.
What is the procedure for challenging additional VAT liquidations through CAAD arbitration in Portugal?
To challenge additional VAT liquidations through CAAD arbitration in Portugal: (1) file a request for arbitration within 90 days of notification of the tax assessment or rejection of administrative claim (Article 10 RJAT); (2) pay the required initial fee (€306 for amounts up to €30,000, scaling up based on disputed amount); (3) submit detailed grounds for illegality including factual and legal arguments; (4) provide supporting documentation; (5) the CAAD President accepts the request and notifies the Tax Authority; (6) the Deontological Council appoints arbitrators; (7) parties may refuse arbitrators within 10 days; (8) the tribunal issues a decision within 6 months (extendable). Arbitration may proceed even if tax enforcement is ongoing, with suspension possible if guarantee is provided.
Can a taxpayer claim compensation for guarantee costs incurred to suspend tax enforcement proceedings?
Yes, taxpayers can claim compensation for guarantee costs incurred to suspend tax enforcement proceedings under Portuguese law. Article 53 of the Tax Procedure and Process Code (CPPT) allows taxpayers to request indemnification for costs associated with guarantees provided to suspend collection when the underlying tax assessment is later annulled or declared illegal. This includes bank guarantee commissions, insurance premiums, or opportunity costs of blocked assets. In this case, A... S.A. specifically requested condemnation of the Tax Authority to pay indemnification for expenses with guarantees provided to suspend fiscal executions. The right to compensation requires: (i) full or partial annulment of the contested assessment; (ii) proof of actual costs incurred; and (iii) causal link between the illegal assessment and the guarantee expenses.
What are the legal grounds for annulling additional VAT assessments issued by the Portuguese Tax Authority?
Legal grounds for annulling additional VAT assessments issued by the Portuguese Tax Authority include: (1) substantive illegality - incorrect application of tax law, such as misapplication of exemption regimes under Articles 6, 14 CIVA, or denial of legitimate deduction rights under Article 20 CIVA; (2) procedural illegality - violations of taxpayer rights during inspection, including lack of prior hearing, insufficient notification, or failure to properly ground the assessment; (3) violation of principles of taxation - breach of legality, equality, proportionality or legitimate expectations principles; (4) errors in fact determination - when the Tax Authority's factual findings are contradicted by documentary evidence; (5) lack of supporting documentation - when assessments lack proper legal and factual grounds as required by Article 77 LGT. In this case, potential grounds included mischaracterization of triangular export operations and improper denial of VAT deduction rights for legitimate business operations.