CAAD Ruling 572/2018-T: ISV Environmental Component Tax on Used Cars Imported from EU Member States

ARBITRAL DECISION[1]

The arbitrator, Dr. Sílvia Oliveira, appointed by the Ethics Council of the Administrative Arbitration Centre (CAAD) to form the Singular Arbitral Tribunal, constituted on 30 January 2019, decided as follows:

REPORT

A..., taxpayer no..., unmarried, resident at Street ..., no..., ..., ..., in ... (hereinafter referred to as "Claimant"), filed a request for arbitral pronouncement and constitution of a Singular Arbitral Tribunal on 16 November 2018, under the provisions of Article 2, paragraph 1, letter a) and Article 10 of Decree-Law no. 10/2011, of 20 January [Legal Regime for Arbitration in Tax Matters (RJAT)], in which the Tax and Customs Authority is the Respondent (hereinafter referred to as "Respondent").

The Claimant petitions in the arbitral request that "(…) the ISV assessment (…) be corrected (…), and the amount of €417.80 paid in excess (…) be reimbursed, plus the indemnity interest owed (…)", indicating in the request, for purposes of evidence, two witnesses.

1.4. The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 19 November 2018 and notified on the same date to the Respondent.

1.5. Given that the Claimant did not proceed with the appointment of an arbitrator, under the provisions of Article 6, paragraph 1 of RJAT, the undersigned was appointed as arbitrator on 10 January 2019 by the President of the Ethics Council of CAAD, with the appointment having been accepted within the legal timeframe and terms.

1.6. On the same date, both Parties were properly notified of this appointment and did not express their wish to reject it, in accordance with the combined provisions of Article 11, paragraph 1, letters a) and b) of RJAT and Articles 6 and 7 of the Code of Ethics.

1.7. Thus, in conformity with the provisions of letter c) of paragraph 1 of Article 11 of RJAT, the Arbitral Tribunal was constituted on 30 January 2019, with an arbitral order being issued on the same date directing the Respondent to, under the provisions of Article 17, paragraph 1 of RJAT, submit a Response within a maximum of 30 days and, if it wished, request the production of additional evidence.

Additionally, it was also stated in that arbitral order that the Respondent should remit to the Arbitral Tribunal, within the Response deadline, a copy of the administrative file.

On 26 February 2019, the Respondent submitted its Response, defending itself by way of opposition and concluding that "(…) having the disputed assessment been carried out in accordance with national and Community law, it does not suffer from any defect", and "(…) being in total harmony with the applicable legal norms to the underlying facts, the disputed assessment (…) should be maintained in the legal order" and "(…) the request for arbitral pronouncement should be judged entirely without merit".

On the same date (but received on 27 February 2019), the Respondent remitted to this Arbitral Tribunal a copy of the administrative file.

On 6 March 2019, both Parties were notified of an arbitral order with the following content:

"Taking into account:

The fact that no preliminary exception of which the Tribunal must be aware was raised in the Response submitted on 27 February 2019;

The fact that the position of the Parties is fully defined in the Record and supported by the means of documentary evidence attached;

In this context, it appears that witness evidence is not necessary and no utility is seen in holding the meeting provided for in Article 18 of the Legal Regime for Tax Arbitration (RJAT).

Thus, under the principles of the autonomy of the Arbitral Tribunal in the conduct of proceedings, expedience, procedural simplification and informality (Articles 19, paragraph 2, and 29, paragraph 2, of RJAT), as well as taking into account the principle of limitation of unnecessary acts provided for in Article 130 of the Code of Civil Procedure (CPC), applicable by virtue of Article 29, paragraph 1, letter e) of RJAT, this Arbitral Tribunal decided:

• To dispense with the holding of the meeting referred to in Article 18 of RJAT;

• To forgo the examination of the witness evidence presented by the Claimant;

• To determine that the proceedings continue with optional written submissions, to be presented within the successive period of 10 days;

• To designate 8 April 2019 for purposes of issuing the arbitral decision.

Finally, the Arbitral Tribunal also warns the Claimant that, until the date of issuance of the arbitral decision, it must proceed with payment of the subsequent arbitration fee, under the provisions of paragraph 3 of Article 4 of the Regulations for Costs in Tax Arbitration Proceedings and communicate that payment to CAAD. (…)".

The Claimant submitted written submissions on 15 March 2019, to reiterate what was stated in the request and attaching copies of two documents relating to a complaint filed by the Claimant's representative on 20-07-2017 with the European Commission, on the basis of alleged violation by Article 11 of the ISV Code (as amended by the 2017 State Budget – Law 42/2016, of 28 December) of the provisions of Article 110 of the Treaty on the Functioning of the European Union (TFEU), as well as a copy of an email of 25-01-2019 in which the Claimant's representative was informed "(…)" that the Commission had decided "(…) to initiate an infringement procedure against Portugal, for not taking into account the environmental component of the motor vehicle registration tax applicable to used vehicles imported from other Member States for purposes of depreciation".

By arbitral order of the same date, the Respondent was notified to, "(…) if it wished, within the scope of the principle of contradictory proceedings, comment on the content of said documents, within the 10-day period granted for optional submissions (…)" which at that date was still ongoing.

The Respondent submitted, on 28 March 2019, written submissions in which it reiterated what it had already stated in the Response, wherefore it considers that "(…) the tax assessment act in question was carried out in accordance with the law, as was demonstrated in paragraphs 36 to 50 of (…) the Response".

Additionally, the Respondent understands in its submissions that "with the Claimant invoking the non-conformity of (…) Article 11 of CISV with Article 110 of TFEU, such a claim falls outside the scope of the arbitral action provided for in Article 2 of (…) (RJAT), since the arbitral process provided for and regulated in RJAT (…) only covers acts susceptible to judicial review, the proper procedural means for discussion of the legality of the tax assessment act", wherefore it understands that "(…) this procedural means does not permit scrutiny of the integrity of norms emanated in the exercise of the State's legislative-political function, since such assessment is excluded from administrative and tax jurisdiction".

In these terms, the Respondent came to invoke, in its submissions, that "(…) we are faced with a preliminary exception of lack of material jurisdiction of the arbitral tribunal, under letter a) of Article 577 of (…) (CPC), which prevents knowledge of the merits of the case and has as a consequence the dismissal of the instance of the Respondent", "but even if this were not understood, the ISV assessment act in question, carried out by AT, should be maintained in the legal order for being lawful, as was demonstrated".

1.17. With its submissions, the Respondent also attached a copy of Information no. .../2010, of 16/04/2010, from DSIECIV, issued within the scope of Process no. 020.20.01/1-1/2010 ("Pre-Contentious – Administrative Letter - Taxation of used vehicles in Portugal" concerning a request for clarification formulated on 24/03/2010 by the European Commission regarding the fact that, at that date, "(…) no reduction was being applied to the environmental component of ISV applied to used vehicles admitted (…)" since the Commission understood that such conduct by the Portuguese State "(…) was contrary to the provisions of Article 90 of the CE Treaty (now Article 110 of the Treaty on the Functioning of the European Union)".[2]

1.18. By arbitral order of 29 March 2019, the Claimant was notified, within the scope of the principle of contradictory proceedings, to comment, if it wished, within 5 days on the content of the document attached by the Respondent with its submissions, as well as on the matter of exception raised therein.

1.19. Consequently, in the arbitral order referred to in the previous point, the issuance of the arbitral decision (scheduled for 8 April 2019) was also postponed to 30 April 2019.

1.20. On 10 April 2019, the Claimant submitted a request in which it states:

1.20.1. Regarding the matter of the exception of lack of jurisdiction of the Arbitral Tribunal invoked by the Respondent, it understands that it is untimely (because invoked in the submissions) and without any foundation inasmuch as the Claimant in the arbitral request "does not intend (…) to have declared with general binding force, nor indeed the suspension, [the illegality] of the legal norm that was the basis of the assessment being challenged" "but only the declaration of illegality of this specific tax act";

1.20.2. Regarding the document submitted by the Respondent in the submissions, "the Claimant congratulates itself on the attachment of the document (…), since it confirms the lack of foundation in the defense presented by the Respondent".

CAUSE OF ACTION

2.1. The Claimant begins by stating in the arbitral request that "(…) it introduced into Portugal (…), originating from Germany, a used passenger motor vehicle, make..., model..., powered by diesel fuel", clarifying "that it is intended for its private use", and that "the vehicle had been registered for the first time in its country of origin (…) on 17.02.2017 (…)".

2.2. The Claimant further states that "the acquisition price paid (…) in the country of origin was €40,400.00", and that, "in compliance with its legal obligations, in particular tax obligations, (…) it proceeded with the customs declaration of the vehicle, with the AT assessing ISV (…) in the amount of €5,503.35, a tax (…) that was paid in full (…)".

2.3. The Claimant clarifies that, of the total ISV assessed, "(…) €4,267.00 corresponds to the cubic capacity component and €2,089.75 to the environmental component", "and that, as regards the cubic capacity component, that amount was reduced by the sum corresponding to 20% of its amount, namely €853.40, by virtue of the reduction resulting from the number of years of use of the vehicle (…)".

2.4. However, the Claimant "(…) considers that the ISV assessment made is defective with a vice of illegality with respect to the calculation of the environmental component (…)" since it understands that "(…) the legal norm that was the basis of that assessment – Article 11 of CISV – violates Article 110 of TFEU (…), as has already been declared by a final judgment of the Court of Justice of the European Union".

2.5. In this context, the Claimant begins by stating that ISV "(…) has as its subject matter, among other tax facts, the admission of taxable vehicles (…) in national territory from another Member State of the European Union", "subject matter which applies to new and used vehicles, and in the present proceedings only the importation of a used vehicle is under consideration".

2.6. The Claimant continues by stating that "the calculation of ISV is based on the cubic capacity of the vehicle and the (…) environmental component", and that "according to the original wording of Article 11 of CISV, in the case of admission of used vehicles, a reduction percentage was applied in the tax calculation according to the number of years of the vehicle", "a reduction equivalent to the average commercial depreciation of used vehicles marketed in the national market".

2.7. According to the Claimant, "(…) in the original wording of Article 11, this reduction only applied to the cubic capacity component of vehicles and not to the environmental component (…), also causing by this means an unequal criterion in the calculation of ISV with respect to used vehicles registered in Portugal and vehicles admitted in Portugal, registered in other Member States", "since, with respect to vehicles originally registered in Portugal, the depreciation applied to both components".

"However, faced with this choice by the legislator, the importers of these vehicles (…) reacted before various public authorities (…)", "with a view to eliminating unequal and discriminatory treatments given to used vehicles admitted in Portugal, relative to used vehicles registered and marketed in Portugal".

As a consequence, "(…) the European Commission opened infringement proceedings 2009/2296 against the Portuguese Republic, on the basis of the fact that no account was being taken of vehicle depreciation for purposes of calculating the environmental component of ISV", "proceedings that were closed following a pertinent amendment to the ISV Code introduced by Law no. 55-A/2010 of 31-12, which approved the State Budget for 2011".

"With this legislative amendment, part of the illegality was resolved, but the illegality regarding the depreciation of vehicles until the end of the first year of use and after five years of use was not remedied" so that "faced with the maintenance of this discrepancy between ISV calculations between used vehicles registered in Portugal and used vehicles from other member states (…), the European Commission opened a new process that took the nature of an action for failure to fulfill obligations against the Portuguese Republic, which proceeded under no. C-200/15".

In the scope of the said process, "(…) the respective Judgment was issued on 16.06.2016 (…)" pursuant to which it was decided that "the Portuguese Republic, by applying, for purposes of determining the taxable value of used vehicles from another Member State, introduced into Portuguese territory, a system for calculating vehicle depreciation that does not account for depreciation before these vehicles reach one year of age, nor depreciation exceeding 52% in the case of vehicles more than five years old, did not fulfill the obligations incumbent upon it under Article 110 of TFEU".

Additionally, the cited Judgment also states that "this Article (110 of TFEU) is violated whenever the tax on the imported article and that on the similar domestic product are calculated differently and according to different modalities that result (…) in higher taxation of the imported product (…)", and that "(…) a Member State cannot charge a tax on used imported vehicles, calculated on the basis of a value higher than the real value of the vehicle, having the effect of more burdensome taxation of these relative to that of similar used vehicles available in the national market (…)".

"Now, in the sequence of this judgment (…), the national legislator introduced a new amendment to CISV through Law 42/2006 of 27 December (…)", "an amendment implemented through a new wording of Article 11 of CISV and of Table D that forms part of that same Article" with the aim of "(…) extending the reduction percentages to the first year of use of the vehicle, extending them up to 10 or more years of use".

"However, (…), alongside this amendment, another was introduced, much more burdensome for the calculation of ISV" because "(…) the legislator, with the new wording given to Article 11, again limited the application of the reduction percentages only to the cubic capacity component, excluding it from the environmental component (…)".

"That is, with this amendment, the legislator went back to 2010 and again put into effect a legal norm that had already been the subject of a process initiated by the European Commission and that formed the basis of the legislative amendment carried out with Law 55-A/2010 of 31 December".

"Thus, the Claimant understands that the norm currently in force, and which formed the basis of the assessment of the tax paid by the Claimant, directly violates Article 110 of TFEU (…)" because "(…) it permits the Tax Administration to charge a tax on imported vehicles based on a value higher than the real value of the vehicle", "burdening them with a tax rate higher than that applied to similar used vehicles available in the national market".

2.17. Thus, the Claimant argues that "having done so by resorting to a legal norm that violates European law (…), as such, it is defective with illegality", and comes to petition that "(…) the ISV assessment [be] (…) corrected, reducing the ISV value payable to the value of €1,671.20 (…)" as regards the part of the tax applicable to the environmental component, "and the amount of €417.80 paid in excess (…) be reimbursed", "plus the indemnity interest owed (…)".

2.18. Additionally, the Claimant understands that "this violation, despite having already been recognized by the judgment issued by the Court of Justice (…), should form the basis for a preliminary reference of this question to the Court of Justice for its interpretation in light of the Treaty", "which (…) it requests".

RESPONSE OF THE RESPONDENT

3.1. The Respondent understands that the Claimant's arguments are not well-founded inasmuch as, "considering that the vehicle is a used light passenger vehicle, of German origin, diesel-powered, with CO2 gas emissions of 120g/Km, the Customs Authority carried out (…) the calculation of the tax due by application of the table applicable to light passenger vehicles (Table A), with the reduction for years of use provided (…) for the cubic capacity component (…)".

3.2. Indeed, the Respondent argues that "(…) the vehicle owner (…) does not challenge the facts established that supported the assessment now being contested", and that "what is relevant in the ISV regime is that the vehicle was taxed (…) in accordance with the applicable norms (…) of CISV in force" since, "given all the documentation (…) the prerequisites of taxation are proven as against the applicable law and, specifically, the ISV assessment that is being contested".

3.3. "However, it is not a matter of fact that the now-claimant is contesting but rather a matter of law exclusively concerning an amendment to a provision of CISV and its rationale, which the claimant deems illegal for violating a Community provision that supersedes national law".

3.4. The Respondent understands that "(…) the Claimant is not correct (…)" because "(…) the depreciation of vehicles in the national market (…) is calculated by reference to the average commercial depreciation of vehicles, by means of a table of reductions that varies in accordance with the time of use of the vehicle" and, "in accordance with the said table, the legislator decided to apply the reduction percentages only to the tax resulting from the cubic capacity component, excluding the environmental component, with the aim of imparting coherence between the taxation of new vehicles and used vehicles".

3.5. "The Claimant understands that the fact that no reduction is applied to the environmental component of ISV applicable to used vehicles admitted goes against Community law, violates the provisions of Article 110 of TFEU" but, for the Respondent, "the argument used centers on the fact that the environmental component affecting used vehicles admitted is not subject to any reduction (…)".

3.6. Thus, the Respondent understands that "the Claimant is not correct because the model of taxation of used vehicles (…) does not intend to go against Community law, but rather to respect Community guidelines on reducing CO2 emissions, with a view to fulfilling the environmental responsibilities assumed within the Kyoto Protocol" and "these two aspects, that of tax fairness and that of environmental protection, constitute two objectives of the pursuit of fiscal policy to which the Portuguese State is obliged (…)".

3.7. Thus, according to the Respondent, "the amendment to Article 11 of CISV in the manner mentioned above is found (…) in accordance with the provisions of Article 1 of the same code, which enshrines the Equivalence Principle (…)" in accordance with which it is stated that "the Motor Vehicle Tax follows the principle of equivalence, seeking to tax taxpayers in the measure of the costs they cause in the areas of the environment, road infrastructure and road accidents, in implementation of a general rule of tax equality (…)".

The Respondent further adds that "(…) the Judgment of the Court of Justice of the European Union of 16 June, issued in Proc. C-200/15, does not pronounce (…) on the matter that constitutes the subject of (…) the Request for Constitution of the Arbitral Tribunal, in particular, as to the question of whether the reduction percentage applicable to a used vehicle applies only to the specific element of taxation (Cubic Capacity) and not to the environmental component of ISV", "and therefore cannot be inferred, without more, from this Judgment, the declaration of gross violation of Article 110 of TFEU as regards the current norm of Article 11 of CISV, a matter that was not the subject of analysis within the scope of the aforementioned Judgment".

Thus, the Respondent argues that "in the name of the unity and coherence of the automobile taxation model in force in Portugal, it is inevitable to conclude that the non-application of the full environmental component to used vehicles would violate the above-referred principles, making it a source of serious injustices, since it would clearly benefit used vehicles to the detriment of new ones, without valid reasons for this", reiterating that "the environmental component should not, therefore, be subject to any reduction, since it represents the cost of environmental impact and should not (…) be understood as contrary to the spirit of Article 110 of TFEU since it aims to guide consumers toward greater selectivity in the purchase of automobiles, according to their level of pollution (…)".

Finally, the Respondent understands that "(…) the arguments of the Claimant ultimately do not hold because the law offers/contemplates an alternative proposal for calculating tax for situations/cases in which the taxpayer understands that the amount of tax determined in accordance with paragraph 1 of Article 11 of CISV is not correct (…)", "(…) provided for in paragraph 3 of Article 11 of CISV", "and the claimant did not request this possibility".

Thus, and in conclusion, the Respondent understands that "(…) in the specific case, as to the alleged vice of illegality of Article 11, paragraph 1 of CISV (…) such argument fails (…)", wherefore "(…) the request for arbitral pronouncement should be judged entirely without merit".

ANALYSIS OF PROCEDURAL MATTERS

4.1. The request for arbitral pronouncement is timely, being presented within the period provided in letter a), paragraph 1, Article 10 of RJAT.

4.2. The Parties have legal personality and capacity, are legitimate with respect to the request for arbitral pronouncement and are duly represented in accordance with the provisions of Articles 4 and 10 of RJAT and Article 1 of Ordinance no. 112-A/2011 of 22 March.

4.3. The Tribunal is regularly constituted in accordance with Article 2, paragraph 1, letter a), Articles 5 and 6, all of RJAT.

4.4. As to the jurisdiction of the Arbitral Tribunal to proceed with the examination of the request for arbitral pronouncement formulated by the Claimant, it should be noted that in this context there is a preliminary question of which the Tribunal must be aware.

4.5. Indeed, the Claimant asks in its arbitral request that the ISV assessment act identified be partially annulled, in the part relating to the tax applicable to the environmental component, since it understands that "the norm of Article 11 of CISV directly violates the provisions of Article 110 of TFEU".

4.6. The Respondent, in its written submissions, raised the exception of lack of relative jurisdiction of this Arbitral Tribunal on the basis of the matter, since it understands that "(…) this procedural means does not permit scrutiny of the integrity of norms emanated in the exercise of the State's legislative-political function, since such assessment is excluded from administrative and tax jurisdiction".

4.7. Now, knowledge of the exception of lack of jurisdiction is priority under Article 13 of the Code of Procedure in Administrative Courts (CPTA), applicable to tax arbitral proceedings by virtue of Article 29, paragraph 1, letter c) of RJAT.

4.8. In these terms, see the analysis of this question in Chapter 6 of this Decision, to which reference is made here.

4.9. No procedural nullities were identified.

4.10. There are no other exceptions of which the Tribunal must be aware.

MATTER OF FACT

5.1. Preliminarily, and as regards the matter of fact, it is important to note that the Tribunal need not pronounce on everything alleged by the Parties; rather, it has the duty to select the facts relevant to the decision and to distinguish the proven facts from those not proven [see Article 123, paragraph 2, of the Code of Procedure and Tax Process (CPPT) and Article 607, paragraphs 3 and 4, of CPC (applicable ex vi Article 29, paragraph 1, letters a) and e) of RJAT)].

5.2. In this manner, the facts relevant to the judgment of the case are selected and delimited according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s).

Proven Facts

5.3. On 17-09-2018, a Vehicle Customs Declaration (DAV) was submitted to the Customs Office of ..., for introduction into consumption of a used light passenger vehicle, make..., model..., commercial designation..., powered by diesel, engine number..., cubic capacity... cc, with the permanent registration ..., assigned in Germany on 17-02-2017.

5.4. The said DAV (to which the number 2018/... was assigned) was submitted by the Claimant (through an indirect representative), with the declarant having recorded in Frames F and G (referring to the presentation of the vehicle and previous registrations) that it was a used vehicle from Germany with 8,879 kilometers traveled.

5.5. In Frame E of the above-identified DAV, concerning the characteristics of the vehicle, in item 51 (relating to Particle Emissions) there is the value of 0.0004 g/Km and in item 50 (relating to CO2 Gas Emissions) there is the value of 120g/Km.

5.6. Taking into account the date of first registration (in the country of origin), the vehicle in question was considered as a vehicle with more than one year of use (and up to two years) for purposes of the brackets of Table D provided for in paragraph 1, Article 11 of the ISV Code, to which corresponds a reduction percentage of 20%.

5.7. In Frame R of the said DAV, relating to the calculation of ISV, it appears that the calculation of this tax was carried out by the Tax and Customs Authority with recourse to the application of the table applicable to light passenger vehicles (Table A), for the total amount of EUR 6,356.75.

Of the total tax amount, EUR 4,267.00 relates to the cubic capacity component and EUR 2,089.75 relates to the environmental component.

As regards the cubic capacity component, the amount of EUR 4,267.00 was reduced by the sum corresponding to 20% of its amount, namely EUR 853.40, by virtue of the reduction resulting from the number of years of the vehicle, in accordance with the reduction percentages set out in Table D provided for in paragraph 1, Article 11 of the ISV Code applicable to used vehicles.

Regarding the amount of EUR 2,089.75, relating to the part of ISV applicable to the environmental component, no deduction percentage was applied.

The Claimant was notified of assessment no. 2018/..., of 17-09-2018, relating to the amount of ISV assessed by the Customs Office of ..., in the total amount of EUR 5,503.35, having paid the full amount of the tax on the same date.

To the vehicle identified in point 5.3, above was assigned in Portugal on 17-09-2018 by the District Office of Transport of ..., the registration ... .

Justification as to the Matter of Fact

5.13. As to the matter of fact proven, the conviction of the Arbitral Tribunal was based, in addition to the free assessment of the positions assumed by the Parties (on matters of fact), on the content of the documents attached to the record, as well as on the analysis of the administrative file remitted by the Respondent.

Unproven Facts

No other facts were verified as unproven with relevance for the arbitral decision.

6. MATTER OF LAW

Preliminary Question – Exception of Lack of Material Jurisdiction of the Arbitral Tribunal

6.1. In this context, as mentioned in points 4.4 to 4.8, above, knowledge of the question of lack of jurisdiction is priority, wherefore it is now appropriate to analyze and decide preliminarily the possible validity of the same.

6.2. The Claimant seeks, with the arbitral request, to have "(…) the ISV assessment (…) corrected (…), with the amount of €417.80 paid in excess (…) being reimbursed, plus the indemnity interest owed (…)" .

6.3. The Claimant bases its claim by stating that "(…) it considers that the ISV assessment made is defective with a vice of illegality with respect to the calculation of the environmental component (…)" since it understands that "(…) the legal norm that was the basis of that assessment (…) violates Article 110 of TFEU (…)".

6.4. The Respondent in its written submissions came to invoke the exception of lack of material jurisdiction of the Arbitral Tribunal to hear the legal claim formulated by the Claimant because it alleges that "(…) the arbitral process provided for and regulated in RJAT (…) covers only acts susceptible to judicial review (…)", wherefore it understands that "(…) this procedural means does not permit scrutiny of the integrity of norms emanated in the exercise of the State's legislative-political function, since such assessment is excluded from administrative and tax jurisdiction".

6.5. In response to the exception invoked, the Claimant came to state that, on the one hand, its invocation is untimely, inasmuch as it was invoked for the first time in the submissions and, on the other hand, it has no foundation because the Claimant in the arbitral request "does not intend (…) to have declared, with general binding force, nor indeed the suspension, [the illegality] of the legal norm that was the basis of the assessment being challenged" "but only the declaration of illegality of this specific tax act", thus arguing for the jurisdiction of this Tribunal to hear the arbitral request.[3]

6.6. Now, given that the determination of the jurisdiction of courts is a matter of public policy and its knowledge must precede that of any other matter [as may be gleaned from the combined reading of the provisions of Articles 16 of CPPT, 13 of CPTA and Articles 96 and 99 of CPC, subsidiarily applicable by reference of paragraph 1 of Article 29 of RJAT], the matter of exception should be analyzed immediately since, should it be judged well-founded, knowledge of the merits of the case will be precluded, justified by a decision of dismissal of the instance [Article 89, paragraph 2 of CPTA, subsidiarily applicable by virtue of Article 29, paragraph 1, letter c) of RJAT].

6.7. In this context, and preliminarily, as to the timeliness of the raising of the exception invoked by the Claimant in its defense against the same, it has no merit in light of the following arguments.

6.8. In accordance with the provisions of Article 572, letters a) to c) of CPC, applicable by virtue of Article 29, paragraph 1 letter e) of RJAT, "in the response the defendant must: a) identify the action; b) set out the grounds of fact and of law on which it opposes the plaintiff's claim; c) set out the essential facts on which the exceptions raised are based, specifying them separately, under penalty that the respective facts will not be considered admitted by agreement for lack of challenge (…)" (emphasis added).

6.9. Additionally, in accordance with the provisions of Article 573 of CPC, "all defense must be raised in the response, except for incidents which the law requires to be raised separately", and "after the response only exceptions, incidents and means of defense that are subsequent may be raised, or which the law expressly admits after that point, or of which the Tribunal must be aware ex officio" (emphasis added).

6.10. Now, in the case at hand, the Respondent raised the exception of lack of relative jurisdiction of the Arbitral Tribunal to examine the claim formulated by the Claimant, which under the provisions of Article 577 of CPC configures a preliminary exception which, in conformity with what is provided in Article 576, paragraph 2 of CPC, if successful prevents "(…) the tribunal from knowing the merits of the case (…)" resulting in "(…) dismissal of the instance (…)".

6.11. And being an exception to be known ex officio (Article 578 of CPC), this Arbitral Tribunal understands that it may be raised in the submissions, in conformity with what is stated in point 6.9, above.

6.12. As to the analysis of the validity of said exception itself, it should be noted that in accordance with the provisions of letter a) of paragraph 1 of Article 97 of CPPT, "tax proceedings comprise the challenge to tax assessments, including parafiscal taxes and self-assessment acts, withholding at source and payment on account" (emphasis added).

6.13. As is written in Note 18 to Article 97 of CPPT in the work of Counselor Jorge Lopes de Sousa ("Code of Procedure and Tax Process", Volume II, Áreas Editora, page 53 et seq.), "(…) From this Article it is clear that in cases where the act to be challenged is an assessment act (…) the appropriate means is the challenge procedure. (…)".

6.14. Now, as regards the jurisdiction of Arbitral Tribunals, in accordance with the provisions of Article 2 of RJAT, this comprises, in what is now relevant, "the declaration of illegality of tax assessment acts (…)" (emphasis added).

6.15. Additionally, Article 95, paragraph 1 of the General Tax Law (LGT) provides that "the interested party has the right to challenge or appeal any act that violates their rights and legally protected interests in accordance with the forms of process prescribed by law", and may be injurious, by virtue of paragraph 2 thereof, in particular, "the assessment of taxes (…)" (emphasis added).

6.16. In this matter, it results from the normative framework above transcribed that, in general terms, the claim for declaration of illegality of assessment acts may be subject either to judicial review or to a request for arbitral pronouncement.

6.17. On the other hand, it has also been understood, in harmony with the jurisprudence of the Supreme Administrative Court, that following the declaration of illegality of assessment acts issued in judicial review proceedings, decisions condemning payment of indemnity interest may be issued and also, by virtue of Article 171, paragraph 1 of CPPT, condemnation to pay indemnities for undue guarantee.

6.18. Having reached this point, and in light of the above, it is clear to this Arbitral Tribunal that it has jurisdiction to hear the claim formulated by the Claimant, that is, to evaluate and decide whether the ISV assessment made is defective with a vice of illegality with respect to the calculation of the tax applicable to the environmental component by violation of the provisions of Article 110 of TFEU, as well as to determine the validity of the request for payment of indemnity interest, if applicable, thus rejecting the preliminary exception of lack of relative jurisdiction of the Arbitral Tribunal on the basis of the matter invoked by the Respondent.

6.19. Thus, with the matter of fact fixed as proven (see Chapter 5 of this Decision), it now remains to determine the applicable law to the underlying facts in accordance with the questions to be decided.

6.20. In the record, the claims formulated by the Claimant were with the aim of obtaining (i) the declaration of partial illegality of the ISV assessment act identified and its consequent partial annulment and (ii) the reimbursement of the tax paid, according to the Claimant, unduly, plus the indemnity interest calculated on the said amount.

6.21. Indeed, in the case under analysis, as a result of the submission of the DAV for introduction into consumption of the light passenger vehicle identified in point 5.3, above, the Claimant was assessed for the respective ISV in the total amount of EUR 5,503.35, corresponding EUR 3,413.60 to the cubic capacity component (already with the 20% reduction included) and EUR 2,089.75 to the environmental component (without any reduction).

6.22. Recall that, although the Claimant paid the total tax assessed on 17-09-2018, it did not agree with the amount of ISV relating to the environmental component since it understands that a reduction should also have been applied thereto resulting from the number of years of the vehicle, similar to what occurred with the cubic capacity component, which is the reason it filed this arbitral request.

6.23. As we have seen, the Claimant supports its arbitral request on the fact that it understands that the Respondent assessed ISV on the vehicle identified in the record "by resorting to a legal norm that violates European law (…) which as such is defective with illegality", requesting that "(…) the ISV assessment [be] (…) corrected (…)", "with the amount of €417.80 paid in excess being reimbursed", "plus the indemnity interest owed (…)" (emphasis added).

6.24. For its part, the Respondent understands that "in the name of the unity and coherence of the automobile taxation model in force in Portugal (…)", "the environmental component should not (…) be subject to any reduction since it represents the cost of environmental impact and should not (…) be understood as contrary to the spirit of Article 110 of TFEU since it aims to guide consumers toward greater selectivity in the purchase of automobiles according to their level of pollution (…)" (emphasis added).

6.25. On the other hand, the Respondent further states that "(…) the arguments of the Claimant ultimately do not hold because the law offers/contemplates an alternative proposal for calculating tax (…)", "and the claimant did not request this possibility".

6.26. In this context, it is the duty of the Arbitral Tribunal to analyze the claim and the position of each of the Parties so as to decide which Party's argument is correct.

6.27. For this purpose, this Arbitral Tribunal must evaluate whether the ISV assessment relating to the used vehicle identified in the record (point 5.3, above) suffers or not from partial illegality and if in the affirmative should order its partial annulment (as the Claimant argues) or if on the contrary, as the Respondent argues, the ISV assessment act should be entirely maintained in the legal order for not suffering from any illegality.

6.28. Based on the above, to assess the legality of the assessment made in the ISV context, it is necessary to answer the following disputed legal question:

6.28.1. Is the current Portuguese legislation embodied in Article 11 of the ISV Code in conformity or not with Community law, in particular with the provisions of Article 110 of TFEU?

6.29. To decide the question above stated it will be necessary to determine whether the interpretation carried out by the Respondent of Article 11, paragraph 1 of the ISV Code (as amended by Article 217 of Law no. 42/2016 of 28 December) from which resulted the ISV assessment in question (whose partial annulment was the subject of this arbitral request) violates or not the provisions of Article 110 of TFEU and, in case of doubts, to determine whether there will be a need to promote a preliminary reference to the Court of Justice of the European Union (CJEU) in the terms suggested by the Claimant.

6.30. Indeed, it should be noted that although the Claimant understands that the alleged violation mentioned in the previous point "(…) has already been recognized by (…) the Court of Justice (…)", the Claimant came to petition that it "(…) should form the basis for a preliminary reference of this question to the Court of Justice for its interpretation in light of the Treaty", but did not formulate in the request any questions to pose to that Court.

6.31. The question regarding the decision on preliminary reference, for reasons of economy in the exposition and justification of this arbitral decision, will be dealt with last (and not on a preliminary basis).

Brief Historical Overview

6.32. In 2007, automobile taxation was the subject of a profound reform in Portugal with Law no. 22-A/2007 of 29 June, abolishing the Motor Vehicle Tax, the Municipal Tax on Vehicles, the Circulation Tax and the Truck Tax, giving rise to the Motor Vehicle Tax (ISV) and the Single Circulation Tax (IUC).

6.33. These changes in the context of automobile taxation were promoted in line with the concerns of the European Union, with the objective of clarifying and simplifying the tax system, reducing the tax burden at the time of vehicle acquisition and introducing environmental concerns in the adjustment of tax rates based on CO2 emissions.[4][5]

6.34. Indeed with the introduction of ISV and IUC, it was possible to introduce an environmental element in the calculation of the tax amount to be paid based in particular on the level of CO2 emissions emitted by the vehicle and the cubic capacity.[6]

6.35. As is known, ISV and IUC are governed by the principle of equivalence or the polluter-pays principle, that is, the responsibility is assigned to the taxpayer for the main environmental costs caused, aiming to compensate for environmental costs, rather than placing this responsibility on automobile manufacturers, who are the original persons responsible for atmospheric pollution.[7][8]

6.36. Thus it can be stated that in general automobile taxation includes environmental criteria in the various categories of taxes, and taxes affecting automobiles integrate ecological aspects in their taxable base (such as the CO2 emission factor and the type of fuel) designed to influence people's consumption and to be more selective in their choices.

Preliminary Framework

6.37. In general terms, in accordance with the provisions of the ISV Code (current version), subject to this tax are in its standard regime in particular "light passenger motor vehicles (…)" [Article 2, paragraph 1, letter a)], and "the taxable persons in respect of the tax are registered operators, recognized operators and private individuals (…) who proceed with the introduction into consumption of taxable vehicles, being understood as such the persons in whose name the vehicle customs declaration is issued" (Article 3, paragraph 1).

6.38. In accordance with the provisions of Article 5 of the ISV Code, "the taxable event constitutes the manufacture, assembly, admission or importation of taxable vehicles into national territory that are required to be registered in Portugal", and for this purpose, in accordance with paragraph 3, letter a) of the same Article, "(…) admission is understood as the entry of a vehicle originating from or in free circulation in another Member State of the European Union into national territory" (emphasis added).

6.39. As regards the exigibility of the tax, in accordance with the provisions of Article 6, paragraph 1, letter b) "the tax becomes exigible at the moment of introduction into consumption, which is understood to occur (…) at the moment of submission of the vehicle customs declaration by private individuals", and "the rate of tax to be applied is the one in force at the moment in which the tax becomes exigible" (paragraph 3) (emphasis added).

6.40. As regards the introduction into consumption, Article 17, paragraph 1 of the said Code establishes that "the introduction into consumption and the assessment of the tax are effected by the vehicle customs declaration (DAV)", and in accordance with paragraph 3, "for purposes of registration, light motor vehicles (…) are subject to processing of the DAV".

6.41. In accordance with the provisions of Article 20, paragraph 1 of the ISV Code, "private individuals and taxable persons not constituted as registered operators or recognized operators are required to submit the DAV (…)" within the deadlines therein provided, and in accordance with paragraph 2, the documents that should accompany it are listed.

6.42. The rates applicable for purposes of calculating ISV do not apply to the value of the automobile but are based on cubic centimeters per cubic capacity (cm3) (cubic capacity component) and grams of CO2 per kilometer (environmental component), and have been structured in standard rate, intermediate rate and reduced rate and rate for used vehicles in accordance with the provisions of Articles 7 to 11 of the ISV Code.

6.43. Thus as regards ISV taxation, the applicable rates have as their tax base a cubic capacity component and an environmental component, with the first component providing for a rate applicable depending on the cubic capacity and the type of vehicle and the second component establishing positive discrimination between gasoline vehicles and diesel vehicles, providing for progressive taxation based on the CO2 level g/km.

6.44. To the extent relevant to this case, that is the calculation of ISV due for used vehicles bearing permanent Community registration plates assigned by other Member States of the European Union, Article 11, paragraphs 1 and 2 of the ISV Code provide that "the tax on vehicles bearing permanent Community registration plates assigned by other Member States of the European Union is subject to provisional assessment in accordance with the rules of this Code with the exception of the cubic capacity component to which the reduction percentages provided in Table D are applied to the tax resulting from the respective table, which are associated with the average commercial depreciation of vehicles in the national market (…)" (emphasis added).

6.45. As regards jurisdiction for assessment of ISV, in accordance with the provisions of Article 25, paragraph 1 of the Code of that tax, this is "(…) carried out by the Tax and Customs Authority (AT) based on the DAV (…) within the (…) deadlines (…)" provided.

6.46. Paragraphs 3 and 4 of Article 11 of the ISV Code state that "without prejudice to the provisional assessment made, whenever the taxable person understands that the amount of tax determined in accordance with paragraph 1 exceeds the tax calculated by application of the formula (…) [therein] indicated, may request the director of the customs office to apply the same to the taxation of the vehicle by payment of a prior fee (…) with a view to the definitive assessment of the tax (…)", under pain of presumption "(…) that the taxable person accepts as definitive the assessment of the tax made by application of the table contained in paragraph 1".

National and European Union Law - Brief Historical Overview

6.47. In the context of ISV there is a long path with respect to the questions that the European Commission has raised to the Portuguese State regarding the legality of national norms in particular as to the tax burden on used vehicles.[9]

6.48. Indeed that legality was questioned early on by the European Commission even in the context of the Motor Vehicle Tax, since it understood that the Portuguese norms then in force did not observe the provisions of Article 95 of the Treaty of Rome and, as it was necessary for Portugal to lose its protectionist character, it was essential that the amount of tax be identical to the remainder of the tax incorporated in the price of similar used vehicles marketed on the Portuguese market, that remainder to be calculated from the percentage of the depreciation of the value of those vehicles.[10][11]

6.49. Nevertheless, in 2001, the Judgment of the CJEC (of 22-02-01) called "Gomes Valente", issued by way of preliminary ruling, came to create the conditions for breaking at the national level with the classical framework of taxation of used vehicles based exclusively on fixed reductions based on the number of years of use.

6.50. In this context although it was stated that the application of a table of rates for used vehicles founded on a single depreciation criterion would not be contrary to Article 95 of the Treaty of Rome, it was emphasized that it was important that other depreciation factors be taken into account in addition to age so as to ensure that the said table reflected more precisely the real depreciation of vehicles and would make it easier to achieve the objective of taxation of used vehicles in such a way that in no case could this exceed the amount of the residual tax rate incorporated in the value of used vehicles already registered in national territory.

6.51. This jurisprudence was reinforced by the Judgment of the CJEC no. 101/00, issued on 19 September 2002 in proceedings involving the Finnish Government and Antti Sillin, in which it was considered that Article 95 first paragraph of the Treaty CE (which after amendment became Article 90 first paragraph) allowed a MS to apply to used vehicles imported from another MS a taxation system in which the taxable value is determined by reference to the customs value as defined but prevented the taxable value from varying depending on the phase of commercialization when this could result at least in certain cases in the amount of tax on a used vehicle imported exceeding the amount of residual tax incorporated in the value of a similar used vehicle already registered in national territory.

6.52. It should also be noted that following the so-called "Gomes Valente" Judgment, jurisprudence has understood that for a taxation system of used vehicles to be compatible with the Treaty provisions it is necessary to adopt either a taxation model based on the assessment of each vehicle or a taxation model based on fixed tables that excludes any discriminatory effect.[12]

6.53. On the other hand the current Article 110 of TFEU is opposed to a MS applying to used vehicles imported from another MS a taxation system in which the tax on those vehicles does not take account of the real depreciation of the vehicle and does not make it possible to ensure always that the amount of tax it sets does not exceed the amount of residual tax incorporated in the value of a similar used vehicle already registered in national territory.

6.54. Further it was considered that when a MS applies to used vehicles imported from other Member States a taxation system in which the real depreciation of vehicles is defined generally and abstractly based on criteria determined by national law the Treaty requires that this taxation system be organized so as to exclude any discriminatory effect.

6.55. It can thus be stated that the Judgment of the CJEC issued in the "Gomes Valente" case opened the door to a new form of taxation of used vehicles admitted from other Member States.[13]

6.56. But as regards the present case it should be noted that in 2006 in the context of the Hungarian taxation system in the Judgment of the CJEU of 5 October 2006 (C-290/05) in the Nádasdi case the environmental question was analyzed for the first time in relation to automobile taxes applicable within the European Union area.

6.57. Indeed the Hungarian fiscal system ignored vehicle depreciation and treated all vehicles with the same engine and environmental behavior equally.

6.58. However the said Judgment came to declare that "Article 90 first paragraph EC should be interpreted as being opposed to a tax such as that instituted by the law relating to the motor vehicle tax to the extent that it is charged on used vehicles when they are first put into circulation in the territory of a Member State and to the extent that its amount exclusively determined on the basis of technical characteristics of vehicles (type of engine cubic capacity) and their environmental classification is calculated without taking into account their depreciation in such a manner that when applied to used vehicles imported from other Member States it exceeds the amount of the said tax contained in the residual value of similar used vehicles already registered in the Member State of import It is not relevant to make a comparison with used vehicles put into circulation in the Member State in question before the introduction of that tax" (emphasis added).

6.59. Additionally it was considered that Member States (MS) have freedom to select the criteria to be used in the calculation of the tax and to establish a tax system differentiated for certain products based on objective criteria applied and that such differentiations will only be considered compatible with EU law if on the one hand they pursue objectives also compatible with Treaty requirements and EU law and if on the other the forms they take are such as to avoid any form of discrimination direct or indirect of "imports" from other MS or of protection in favor of competing national production.

6.60. Thus although in general terms in the context of a fiscal regime relating to automobile taxation criteria such as engine type cubic capacity and a classification based on environmental factors constitute objective criteria and may be used in the taxation system from their use there cannot result discrimination and the tax that is calculated cannot burden more heavily products from other MS than similar national products entailing that the charging by an MS of a tax on used vehicles from another MS is contrary to Article 110 of TFEU when the amount of the tax calculated without taking into account real vehicle depreciation exceeds the residual amount of the tax incorporated in the value of similar used motor vehicles already registered in national territory.

6.61. In 2009 interpreting the same Article 110 of TFEU the CJEU in the Judgment of 19 March 2009 (which opposed the European Commission to Finland) considered that this Article aims to ensure perfect neutrality of internal taxation with respect to competition between products already in the national market and imported products in a way that cannot in any case have discriminatory effects.

6.62. Now noting that under the provisions of Article 8 of the Constitution of the Portuguese Republic (CRP) international law prevails over internal Portuguese law and is directly applicable in national territory without developing any justification it echoed a communication from the European Commission informing that it had initiated a proceeding at the CJEU against Portugal to defend that it was censurable that Article 11 of the ISV Code did not account for any depreciation in the calculation of ISV on used vehicles until the vehicle was more than one year old nor any reduction of actual value for vehicles over five years of use a proceeding which culminated in the issuance of the CJEU Judgment (C-200/15) of 16-06-2016 mentioned above.

6.63. Indeed in matters of international law Article 8 paragraph 4 of the CRP establishes that "the provisions of treaties governing the EU and norms emanated from its institutions in the exercise of their respective competences are applicable in the internal order in the terms defined by EU law with respect for the fundamental principles of the democratic rule of law state" (emphasis added).

6.64. In this context as is written in Arbitral Decision no. 577/2016-T of 1 June 2017 "(…) although only Member States have competence in direct taxation the Court of Justice (CJ) has held through its decisions that those States must exercise this competence in conformity with EU law Thus avoiding violations of the five fundamental economic freedoms in particular (…) the free movement of goods (Articles 28 et seq of TFEU) (…) Now it is precisely through the protection of each of these freedoms directly applicable that there occurs a true harmonization through the jurisprudential route that results in the obligation for national legislations to conform to each of these freedoms (…) Portuguese law enshrines a clause of full automatic reception of international conventional law once the formalities of approval ratification and publication are met (…) From this it follows that the treaties are immediate sources of rights and obligations for their addressees and can be invoked before the courts" (emphasis added).

6.65. And the same decision continues by stating that "treaties are hierarchically superior to ordinary law This superiority results not only from Articles 26 and 27 of the Vienna Convention on the Law of Treaties but also from Articles 8 paragraphs 1 and 2 of the CRP It thus appears clear that for the convention to be in force in the internal order it is necessary that subsequent ordinary law cannot revoke it That is international conventional law cannot be set aside by ordinary laws appearing as superior to them Whether those laws are subsequent which will be materially unconstitutional if they contradict them; or prior which will have to be suspended if they conflict with that international conventional law only resuming force in the event of suspension or cessation of the international convention in question" (emphasis added).

6.66. Notwithstanding internal provisions and as we have already seen Article 110 of TFEU (following Article 90 of the Treaty of Rome) provides that "no Member State shall impose directly or indirectly on the products of other Member States internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products".

6.67. On the interpretation of this Article in light of national rights the CJEU has already pronounced itself several times specifying its scope given that the admission in national markets of motor vehicles bearing permanent registration plates of other Member States that is used vehicles is governed exclusively by national law but that law cannot nevertheless contradict the principles on which EU functioning is based.

6.68. Therefore within the conforming freedom that the national legislator has to model the tax so as to proceed with its collection in an executable and effective manner it is necessary to take into account in addition to the opinion of the European Commission as the entity responsible for ensuring respect for the Treaty the community jurisprudence that will be produced.

6.69. And such is the case that in conformity with the document attached by the Respondent with its written submissions it is understood that the Portuguese State interpellated by the European Commission in 2009/2010 as to the way in which used vehicles admitted in Portugal from the EU were taxed (because contrary to the provisions of the said Article 110 of TFEU) found itself forced to amend the legislation in force in matters of ISV in particular Article 11 paragraph 1 of the ISV Code (then in force) through Law no. 55-A/2010 of 31 December (Budget Law for 2011) with a view to:

"The tax on vehicles bearing permanent Community registration plates assigned by other Member States of the European Union is subject to provisional assessment based on the application of the reduction percentages provided for in Table D to the tax resulting from the respective table which are associated with the average social depreciation of vehicles in the national market calculated by reference to the average commercial depreciation corrected for the respective environmental impact cost:

6.70. However as the question of depreciation of used vehicles originating from another MS with less than one year and more than five years of age was not contemplated with the said legislative amendment there then arises the already cited Judgment of the CJEU no. C-200/15 of 16 June 2016 (mentioned and cited by the Claimant) directly targeting national legislation embodied in Article 11 of the ISV Code (as worded until 2016) in the terms of which it came to be considered that "the Portuguese Republic by applying for purposes of determining the taxable value of used vehicles from another MS introduced into national territory a system for calculating vehicle depreciation that does not account for its depreciation before reaching one year nor depreciation exceeding 52% in the case of vehicles over five years old did not fulfill the obligations incumbent upon it under Article 110 of TFEU" (emphasis added).

6.71. And thus the national legislator was forced to amend the said Article 11 of the ISV Code with a view to including the depreciation referred to in the previous point through Law no. 42/2016 of 28 December but excluding again from the wording of the article the question of depreciation affecting the environmental component of ISV.

6.72. Thus the current outlines of national legislation ignore in Article 11 paragraph 1 Table D the provisions of Article 110 of TFEU and the position that the CJEU has assumed (and had already assumed in light of the provisions of Article 90 of the Treaty of Rome) that this Article aims to ensure perfect neutrality of internal taxation with respect to competition between products already in the national market and imported products in such a way that it cannot in any case have discriminatory effects.

6.73. The described situation led (again) the European Commission in its pursuit of community justice to initiate a proceeding against Portugal for this MS not taking into account the environmental component in the calculation of ISV applicable to used vehicles "imported" from other MS generating discriminatory effects on these vehicles relative to used vehicles purchased in national territory.

6.74. Indeed the Commission again understands that national legislation is not compatible with the provisions of Article 110 of TFEU in that used vehicles "imported" from other MS are subject to a tax burden higher compared with used vehicles purchased in the national market.[14]

Competence of the European Commission

6.75. In accordance with Article 4 of TFEU "(…) competences not attributed to the Union in the Treaties belong to the Member States" (paragraph 1) and "Member States take all general or specific measures appropriate to ensure the fulfillment of the obligations arising from the Treaties or resulting from acts of the institutions of the Union" (paragraph 4).

6.76. And pursuant to the provisions of Article 17 paragraph 1 of TFEU "the Commission promotes the general interest of the Union and takes appropriate initiatives to that effect The Commission ensures the application of the Treaties as well as measures adopted by the institutions by virtue of these It oversees the application of EU law under the supervision of the Court of Justice of the European Union (…)"

6.77. Indeed pursuant to Article 258 of TFEU "if the Commission considers that a Member State has failed to fulfill any of the obligations incumbent upon it under the Treaties it shall issue a reasoned opinion on the matter after having given that Member State the opportunity to submit its observations If the Member State concerned does not comply with the opinion within the period laid down by the Commission the latter may refer the matter to the Court of Justice of the European Union".

6.78. Thus if any breach of European legislation is identified by the Commission or reported by complaint the latter attempts to resolve the underlying problem through dialogue with the MS in question with the objective of finding a quick solution that is in conformity with EU legislation and thus avoid resort to a formal infringement proceeding.[15]

6.79. In the event that the MS does not agree with the Commission or does not take measures to rectify the potential violation of EU legislation the Commission can open a formal infringement proceeding with this process comprising several stages.

6.80. In this context the European Commission invites through written notification the national authorities of the MS to comment on the identified compliance problem within a maximum of two months and in the event of absence of response or unsatisfactory response the Commission will indicate the reasons why it considers that the MS violated EU legislation and the national authorities have a maximum period of two months to comply with European legislation.

6.81. Nevertheless in case of absence of response or unsatisfactory response the Commission can ask the CJEU to open proceedings against the non-compliant MS with the CJEU deciding on average within two years on the existence of a violation of European legislation.[16]

6.82. In the case pursuant to the evidence produced by the Claimant an infringement procedure initiated in January 2019 by the Commission is pending clarifications from the Portuguese State regarding the fact that Portugal does not take into account any reduction on the environmental component of ISV in the calculation of the tax applicable to used vehicles "imported" from other MS.

6.83. In this context it should be noted that in conformity with the above analysis with the legislative amendment that took place in 2016 with effects from 1 January 2017 and in violation of the provisions of Article 110 of TFEU Portugal ceased to consider the ISV reduction percentages relating to vehicle depreciation with respect to the environmental component intending thereby according to the Respondent "(…) to impart coherence between the taxation of new and used vehicles" because "(…) the model of taxation of used vehicles amended through the Budget Law/2017 does not intend to contradict Community law but rather to respect Community guidelines on reducing CO2 emissions with a view to fulfilling the environmental responsibilities assumed within the Kyoto Protocol".

6.84. And the Respondent reiterates that "(…) the principle of environmental protection is (…) enshrined in Article 191 of TFEU by stipulating that the Union's policy will contribute to the pursuit of preservation protection and improvement of environmental quality" wherefore "(…) the interpretation of Article 110 of TFEU must be carried out in light of the provisions of Article 191 of the same treaty under penalty of conflict between the two norms".[17]

6.85. Notwithstanding the Respondent's statement that "(…) the content of Article 110 of this treaty came from Article 90 of the CE treaty to which the environmental concerns as they are now placed were not yet underlying" such a statement would not be altogether correct because Article 191 of TFEU originated in Article 174 of that Treaty and also the jurisprudence of the CJEU referred at various times to environmental issues in the interpretation of the said Article 90 in particular in the already cited case C-290/05.

6.86. And recall that in conformity with what is defended by the Claimant the Judgment of the CJEU (C-200/15) of 16-06-2016 states that "this Article (110 of TFEU) is violated whenever the tax on the imported article and that on the similar domestic product are calculated differently and according to different procedures that result (…) in higher taxation of the imported product (…)" and that "(…) a Member State cannot charge a tax on imported used vehicles calculated on the basis of a value higher than the real value of the vehicle having the effect of more burdensome taxation of these relative to that of similar used vehicles available in the national market (…)".

6.87. In these terms this Arbitral Tribunal understands that what should be relevant here is that Article 11 of the ISV Code is in non-conformity with the provisions of Article 110 of TFEU because that Article cannot in conformity with what this Article provides calculate the tax on used vehicles from another MS without taking into account their depreciation in such a manner that in this case the tax calculated exceeds the amount of ISV contained in the residual value of similar used vehicles that have already been registered in the importing MS that is used national vehicles.[18]

6.88. Consequently the answer to be given to the question to be decided stated in point 6.28.1 will be negative because it is understood that the current Portuguese legislation embodied in Article 11 of the ISV Code is not in conformity with Community law in particular with the provisions of Article 110 of TFEU (applicable by virtue of Article 8 paragraph 4 of the CRP) wherefore this Arbitral Tribunal determines that the ISV tax assessment act which is the subject of the request should be partially annulled because it suffers from illegality in the part in which it did not consider the ISV reduction applicable to the environmental component applicable in conformity with the provisions of Article 110 of TFEU.[19]

Question of Preliminary Reference

6.89. For this purpose having analyzed the matters at hand and considering the question to be decided the Arbitral Tribunal understood that it was not necessary to promote a preliminary reference to the CJEU in accordance with the grounds stated below.

6.90. The preliminary reference is a fundamental mechanism of EU law which has as its purpose to provide national courts with the means to ensure uniform interpretation and application of that law throughout the Union.

6.91. By force of the provisions of Article 19 paragraph 3 letter b) of the Treaty on European Union and Article 267 of the Treaty on the Functioning of the European Union the CJEU is competent to decide by way of preliminary ruling on the interpretation of EU law and on the validity of acts adopted by the institutions organs or bodies of the Union.

6.92. National courts are considered as common courts of the legal order of the European Union given the considerable number of norms and community acts consisting of directly applicable provisions or having direct effect with it falling to the national courts of Member States to apply them in the disputes submitted to them for examination and also the duty to apply Community law even against provisions of internal law.

6.93. Arbitral Tribunals form part of the set of