Reduced VAT Rate on Dental Implants and Abutments – CAAD Arbitration 585/2015-T

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Filipa Barros and Nuno Maldonado de Sousa, designated by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal:

I – REPORT

On 8 September 2015, A…, Ltd., legal entity no.…, with registered office at…, no.…, Block…, room…, …-…Porto, filed a request for the constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the following acts, which total €190,326.55 (including compensatory interest):

VAT Assessment No.…, relating to period 201101, in the total amount payable of €4,819.20 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201101, in the total amount payable of €798.01 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No.…, relating to period 201102, in the total amount payable of €3,723.69 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201102, in the total amount payable of €603.54 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No.…, relating to period 201103, in the total amount payable of €4,994.84 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201103, in the total amount payable of €793.7 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No.…, relating to period 201104, in the total amount payable of €8,403.57 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201104, in the total amount payable of €1,304.05 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No.…, relating to period 201105, in the total amount payable of €3,477.3 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201105, in the total amount payable of €528.93 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No.…, relating to period 201106, in the total amount payable of €6,050.82 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201106, in the total amount payable of €900.49 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No.…, relating to period 201107, in the total amount payable of €2,992.15 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201107, in the total amount payable of €434.48 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No.…, relating to period 201108, in the total amount payable of €2,778.56 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201108, in the total amount payable of €394.94 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No.…, relating to period 201109, in the total amount payable of €2,072.36 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201109, in the total amount payable of €287.52 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No.…, relating to period 201110, in the total amount payable of €7,746.12 and whose voluntary payment deadline ended on 31 July 2015;

Surcharge Assessment No.…, relating to period 201110, in the total amount payable of €1,047.53 and whose voluntary payment deadline ended on 31 July 2015;

VAT Assessment No. 2015…, relating to period 201111, in the total amount payable of €2,088.2 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201111, in the total amount of €275.75 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201112, in the total amount payable of €5,504.79 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201112, in the total amount of €708.23 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201201, in the total amount payable of €7,149.33 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201201, in the total amount payable of €895.52 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201202, in the total amount payable of €4,823.08 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201202, in the total amount payable of €588.81 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201203, in the total amount payable of €7,946.01 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201203, in the total amount payable of €943.94 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201204, in the total amount payable of €3,227.71 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201204, in the total amount payable of €372.11 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201205, in the total amount payable of €4,324.83 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201205, in the total amount payable of €484.85 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201206, in the total amount payable of €5,827.62 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201206, in the total amount payable of €633.53 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201207, in the total amount payable of €605.81 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201207, in the total amount payable of €63.80 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201208, in the total amount payable of €5,691.06 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201208, in the total amount payable of €580.64 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201209, in the total amount payable of €5,412.88 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201209, in the total amount payable of €532.68 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201210, in the total amount payable of €8,085.21 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201210, in the total amount payable of €770.86 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201211, in the total amount payable of €1,643.24 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201211, in the total amount of €151.08 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201212, in the total amount payable of €3,646.48 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201212, in the total amount of €322.48 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201301, in the total amount payable of €5,370.64 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201301, in the total amount payable of €458.49 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No.…, relating to period 201302;

VAT Assessment No. 2015…, relating to period 201303, in the total amount payable of €1,416.05 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201303, in the total amount payable of €111.57 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201304, in the total amount payable of €5,936.62 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201304, in the total amount payable of €446.95 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201305, in the total amount payable of €8,586.18 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201305, in the total amount payable of €619.14 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201306, in the total amount payable of €596.76 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201306, in the total amount payable of €40.87 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201307, in the total amount payable of €8,252.27 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201307, in the total amount payable of €538.99 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No.…, relating to period 201308;

VAT Assessment No.…, relating to period 201309;

VAT Assessment No. 2015…, relating to period 201310, in the total amount payable of €1,045.48 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201310, in the total amount payable of €57.85 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No.…, relating to period 201311;

VAT Assessment No. 2015…, relating to period 201312, in the total amount payable of €15,498.91 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201312, in the total amount payable of €752.44 and whose voluntary payment deadline ended on 21 August 2015;

VAT Assessment No. 2015…, relating to period 201402, in the total amount payable of €12,978.46 and whose voluntary payment deadline ended on 21 August 2015;

Surcharge Assessment No. 2015…, relating to period 201402, in the total amount payable of €166.55 and whose voluntary payment deadline ended on 21 August 2015.

To support its request, the Claimant alleges, in summary, that the assessment acts are based on an incorrect interpretation and application of Article 18, paragraph 1, subparagraph a) of the VAT Code and item 2.6 of List I attached to the Code, insofar as, in sum:

i. The "single implant unit" simply does not exist;

ii. The interpretation that the Tax and Customs Authority (TA) makes of item 2.6 of List I attached to the VAT Code and by which it considers that the reduced VAT rate applies only to the "single implant unit" has no support in the literal wording of the norm;

iii. The said interpretation violates the principle of neutrality and the principle of free competition or non-discrimination;

iv. Council Directive 2006/112/EC, of 28 November 2006, is not directly applicable in the Portuguese legal order and from it or from the Combined Nomenclature no argument emerges in support of the TA's thesis.

On 09-09-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the TA.

The Claimant did not proceed to nominate an arbitrator, therefore, pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph a) of paragraph 1 of Article 11 of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 05-11-2015, the parties were notified of such designations and did not manifest any intention to refuse any of them.

In accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 20-11-2015.

On 08-01-2016, the Respondent, duly notified to this effect, filed its response defending itself by exception and by challenge.

On 19-01-2016, the Claimant, also duly notified to this effect, exercised its right of reply concerning the matter of exception raised by the Respondent.

Pursuant to Article 421/1 of the Code of Civil Procedure, applicable pursuant to Article 29/1/e) of the RJAT, permission was granted to use in the present proceedings the expert evidence produced in case 530/2014T of CAAD, requested by the Claimant.

On 21-01-2016, given that no legal purpose was served in the present case and having regard to the position taken by the parties, pursuant to Articles 16/c), 19 and 29/2 of the RJAT, as well as the principles of procedural economy and the prohibition of useless acts, the holding of the meeting referred to in Article 18 of the RJAT was waived, as well as the submission of pleadings, and a period of 30 days was set for the pronouncement of a final decision, after the submission of pleadings by the TA.

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

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March.

The proceedings are free from nullities.

Everything considered, it is necessary to render

II. DECISION

A. MATTERS OF FACT

A.1. Facts Accepted as Proven

1. Under the external inspection order OI2014… corrections were made in VAT matters, relating to the years 2011 to 2013, of which the Claimant was notified on 22-11-2014.

2. In the said inspection procedure, it was found that the Claimant carried out internal supplies of various types of dental implants and related material, better described on pages 18 to 44 of the Court File, which are hereby incorporated by reference, having applied the reduced VAT rate.

3. In the course of that inspection procedure, corrections were made relating to the application of the reduced VAT rate (6% VAT pursuant to item 2.6 of List I attached to the VAT Code) to the said supplies of goods.

4. The said corrections amount to €58,237.89 for the year 2011; €61,778.22 relating to 2012; and €52,001.80 relating to 2013.

5. The claimant was cited in the respective enforcement proceedings and timely requested exemption from the provision of security.

6. The Claimant is a limited liability company dedicated to the trade in dental prosthesis material, with particular emphasis on implants and accessory material.

7. The Claimant is subject to the general corporate income tax regime and the normal monthly VAT period regime, by option.

8. In the exercise of its activity, in the periods to which the tax acts in question in the present proceedings relate, the Claimant made purchases in the national and intra-community markets, and its sales were channelled, in their vast majority, to the domestic market.

9. The articles marketed by the Claimant were essentially medical devices used in the implantology sector, inter alia, dental implants and other prosthetic devices.

10. The Claimant's customers were dentists and dental prosthetics technicians who worked in implantology and used the Claimant's products for oral rehabilitation of their respective patients.

11. Each tooth is an individual entity, having in common being anatomically constituted by crown, root or roots and periodontium.

12. All the constituent parts of the tooth are inseparable, that is, one part cannot exist without the other.

13. Implantology is a surgical area of Dentistry that is dedicated to the placement of dental implants, that is, it aims to replace lost teeth through titanium dental implants and crowns.

14. Dental prosthesis by dental implant is constituted by three elements: implant, abutment and crown.

15. The implant is the structure positioned surgically in the maxillary bone below the gum, with a view to fulfilling the function of the tooth root.

16. Dental implants are structures of pure titanium, placed in the maxilla or mandible, which replace the root of a natural tooth that, for whatever reason, was extracted.

17. Dental implants offer a safe and permanent solution for the replacement of one or more teeth, functioning as support pillars for unit crowns and fixed or removable bridges, partial or total.

18. The abutment is a cylindrical structure inserted in the implant.

19. A crown is placed on the abutment, an artefact that allows replacement of the visible part of the tooth.

20. The crown is normally elaborated by dental prosthesis laboratories and needs to be adjusted to the characteristics of the patient's dentition, so it is specifically produced for each case.

21. Whereas implants and abutments are mass-produced.

22. The nature and quality of implants and abutments do not change with their placement.

23. The implants and abutments transacted by the Claimant could only be used in the context of implantology, aiming at the replacement, in whole or in part, of the patient's tooth, and could not have any other purpose or use.

24. The surgical procedure of placing a dental prosthesis generally involves three stages and may have more than one intervening party, as it includes surgery work, which must be done by a physician and prosthesis elaboration work, which must be done by a prosthetics technician.

25. The first stage consists of the surgical burial of the dental implant levelled with the bone, but within the gum.

26. After the placement of the dental implant, the process of union of the dental implant to the bone begins, the so-called "osseointegration" or "osteointegration".

27. At the end of the "osseointegration" process, the dental implant needs to be exposed by removing the overlying gum.

28. In a second stage, the surgeon checks the implant to confirm whether osseointegration was successful and, if so, places the fixation abutment which penetrates the gum.

29. In a third stage, after the healing process that delimits the space to be occupied by the implant is completed, the dental crown (artificial tooth in porcelain or other material) is fabricated and placed on the osseointegrated dental implant.

30. Medical technique advises segmentation of the process into two phases: placement of the dental implant, in an initial phase, and subsequently placement of the abutment and crown.

31. Oral rehabilitation by dental implant allows conferring or optimizing the masticatory function of a patient who is partially or completely edentulous.

32. The alternatives to the dental implant are rehabilitation of edentulous spaces in fixed manner by executing bridges on teeth, which implies an invasive procedure of at least two teeth or the use of removable prostheses supported only by the mucosa.

33. Dental implants maintain the bone structure and facial aesthetics that are lost with the absence of teeth, and the integrity of adjacent teeth.

34. The VAT assessments in question in the present arbitral proceedings, relating to the year 2014, are not official assessments arising from any corrections elaborated by the tax inspection, being assessments resulting from a self-assessment operation.

A.2. Facts Accepted as Not Proven

1. Often the Claimant's customers make acquisitions of implants and abutments that subsequently prove to be inadequate for their patients (given the need for abutments and implants to be adjusted to the morphological characteristics of each patient, as demonstrated in the factual account above described).

2. To that extent, the products are returned to the claimant, which proceeds to issue the respective credit note, with a view to cancelling the corresponding invoice.

3. This is what happened with respect to the invoices identified in document no. 9 attached with the Initial Request.

A.3. Reasoning of Matters of Fact Proven and Not Proven

With respect to the matters of fact, the Tribunal does not have to rule on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and discriminate between what is proven and what is not proven (see Article 123, paragraph 2, of the Tax Code of Procedure and Process and Article 607, paragraph 3 of the Code of Civil Procedure, applicable pursuant to Article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and delimited according to their legal relevance, which is established having regard to the various plausible solutions to the legal question(s) (see former Article 511, paragraph 1, of the Code of Civil Procedure, corresponding to current Article 596, applicable pursuant to Article 29, paragraph 1, subparagraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in the light of Article 110/7 of the Tax Code of Procedure and Process, the documentary evidence and the Court File attached to the proceedings, the facts listed above were considered as proven, with relevance for the decision.

In particular, the facts accepted as proven in points 11 to 33 took into account the expert report produced in case 530/2014T of CAAD, beyond the remaining documentation in the Court File and submitted by the Claimant.

It should also be noted that, in its pleadings, the Respondent itself acknowledged that the titanium implant and the abutment have "no other application than in dental medicine" because they are "parts (...) that contribute to the final result of oral rehabilitation."

The facts accepted as not proven are due to the absence of evidence concerning them.

B. ON THE LAW

i.

The TA begins, in the present proceedings, by asserting that "it is not within the competence of arbitral jurisdiction to directly challenge self-assessment acts that are not preceded by the necessary administrative complaint," therefore, since "The VAT assessments relating to the year 2014, identified by the Claimant in its request for arbitral pronouncement, are not, therefore, official assessments arising from any corrections elaborated by the tax inspection" but "assessments resulting from a self-assessment operation," there will be "the material incompetence of the Arbitral Tribunal with respect to them."

The Respondent further alleges that "it cannot be considered that there is identity of the circumstances of fact underlying the different assessments when some result from corrections made by the Tax Inspection and others result from self-assessment operations carried out by the Claimant," therefore, in the opinion of the TA, there will also be "the exception of illegal accumulation of claims, since the cause of action underlying the 2014 self-assessments, being not identical to that serving as the cause of action in the present proceedings, which is based on the illegality of the corrections made by the tax inspection, determines the absolution of the Respondent from the instance with respect to this part of the claim."

In the exercise of the right to reply that fundamentally asserts itself, the Claimant alleged that "what happened was that the TA, in the corrections made for the years 2011 to 2013, consumed the VAT credits that the claimant had (thus leaving no credits to consume in the following periods). However, the claimant continued to submit the VAT returns assuming that it had the said credits (since it did not agree with the corrections and consequent VAT assessments made by the TA), which gave rise to the said assessments, given that the TA corrected the assessments as if the VAT credit did not exist."

Thus, still according to the Claimant, "since the assessments of 2011 to 2013 are annulled for illegality, so too are those of 2014, because they are absolutely dependent on the former," therefore "we are not facing self-assessments of tax as the TA claims" but "facing tax assessments that are illegal insofar as those relating to the preceding VAT periods are also."

With all due respect, it does not appear that the Claimant's position is correct.

Indeed, regardless of whether the illegality of the (self-)assessments relating to the year 2014 results or does not result from the illegality of the assessments relating to the prior years – a situation which, moreover, is not quantified nor even demonstrated – the truth is that Article 131 of the Tax Code of Procedure and Process imposes that, in case of self-assessment, "the challenge shall be obligatorily preceded by an administrative complaint directed to the director of the regional peripheral body of the tax administration, within 2 years after submission of the return," a provision that has correspondence in subparagraph a) of Article 2 of Order No. 112-A/2011, of 22 March, which excludes from the competence of tax arbitral tribunals "Claims relating to the declaration of illegality of self-assessment acts (...) which have not been preceded by recourse to the administrative route pursuant to Articles 131 to 133 of the Tax Code of Procedure and Process."

And, in the case, it is not apparent that, with respect to the tax acts in question (relating to the year 2014), the administrative route was followed.

Now, as was written in the Decision of the Supreme Administrative Court of 27-02-2012, rendered in case 0982/11, "in self-assessment situations where the tax administration has not taken a position concerning its relationship with the taxpayer, there is no conflict of interests that matters to be resolved and in which the constitutional necessity of judicial protection is imposed."

Thus, whether it is considered that this is a question of competence, or whether it is considered that there is a lack of a procedural prerequisite legally required for the contentious challenge of the tax acts in question, one would be facing a dilatory exception, as defined by Article 576/2 of the Code of Civil Procedure, cognizable ex officio, according to Article 578 of the Code of Civil Procedure, which bars consideration of the merits of the claim in that respect, and which determines the absolution of the instance.

ii.

In its Initial Request, the Claimant alleges that "in the inspection proceedings, and with a view to making the calculations on which the application of the 23% rate should fall, the TA completely disregarded several credit notes issued by the claimant with a view to cancelling invoices issued in the year 2010." Indeed, according to the Claimant, the credit notes relating to the "invoices identified in document no. 9," attached with its Initial Request, would have been disregarded by the TA, "presenting no valid justification for doing so," therefore "a total absence of reasoning supporting such action – in clear violation of what is expressly stated in Article 77 of the General Tax Law and also in Article 268 of the Constitution of the Portuguese Republic," having consequently been obtained by the TA "VAT revenues relating to values that were not earned, thus violating the principle of contributory capacity, under Article 4 of the General Tax Law."

Now, having examined the said document 9, it is evident from the outset that it is not possible to establish any relationship between it and the invoices on which the TA based the corrections in question in the present arbitral proceedings, listed on pages 18 to 44 of the Court File.

On the other hand, no evidence was presented that allows concluding that the said document 9 was presented and discussed in the course of the inspection procedure, and it is not even mentioned in the document concerning the prior hearing exercised by the Claimant, therefore one cannot assert, and hence draw the respective consequences, that an obligation to provide reasoning from the TA on such matter has been generated, in terms of its non-compliance being able to be reduced to a violation of the duty of reasoning that asserts itself.

In the same way, from the facts ascertained in the present arbitral proceeding, it does not result that the official VAT assessments now in dispute have computed VAT that has been cancelled, by means of credit notes, by the Claimant.

Therefore, the Claimant's allegations on this matter must fail.

iii.

Having arrived here, it is then possible to address the substance of the question that presents itself for decision by this Arbitral Tribunal in the present proceedings, which is whether the interpretation that the Tax and Customs Authority makes of item 2.6 of List I attached to the VAT Code is acceptable, and by which it considers that the reduced VAT rate applies only to what it designates as the "single implant unit."

Indeed, the TA understands that it should be considered that "goods consisting of pieces, parts and accessories of those prostheses are not covered by item 2.6, given that, in addition to not being prostheses, they are not able to fulfill, considered individually, the function of replacing a part of the body or its function."

For the TA, "item 2.6 covers only the transmission of the article that, in itself, constitutes an artificial piece that replaces an organ of the human body or part thereof, that is, 'autonomously or unitarily.'"

In the TA's perspective, "the titanium implant and the abutment are only components, each performing the function for which they were conceived, of support and fixation of the prosthesis, but that, in and of themselves, objectively considered, do not perform nor replace the function of the dental organ."

The TA further considers that "the legislator refers to prosthesis material and not to material for prosthesis (for application in a prosthesis), which indicates excluding the pieces of connection or fixation of prostheses, such as those transacted by the taxable person."

Thus, still in the same perspective, the reduced VAT rate in question would refer solely to "'complete goods' as being those that, by themselves, can replace an organ or member of the human body and not any elements that are individually used in the process of replacement," "products specifically designed for the correction or compensation of deficiencies or for the replacement, total or partial, of organs or members of the human body," and that, always in the opinion of the TA, "if we are talking about the neutrality of the taxation of different types of prosthesis we have to compare the transmission of the removable prosthesis with that of the fixed prosthesis. And not with that of the fixed prosthesis plus fixation and connection pieces."

It must be stated, from the outset, that the understanding persistently sustained by the TA is not subscribed to, at its various levels.

Indeed, the understanding according to which dental implants and abutments are "pieces, parts and accessories" of prostheses, and are not "able to fulfill, considered individually, the function of replacement of a part of the body or its function," being "only components, each performing the function for which they were conceived, of support and fixation of the prosthesis" is not subscribed to.

Indeed, such understanding appears contradictory in its own terms, and it is not clear how, if it is considered that it is the characteristic of the prosthesis to have "the function of replacing a part of the body or its function," one can consider, in the manner in which the TA does, that implants and abutments are mere means "of support and fixation of the prosthesis," since without implants and abutments, the remaining part of what may be – for the TA – the prosthesis, will not, likewise, be capable of ensuring individually "the function of replacement of a part of the body or its function," and therefore, in essence, there would be no prosthesis. That is: according to the thesis sustained by the TA, there would be no fixed dental prostheses, since each of the elements that make it up, considered and applied individually (it being certain that their joint application, all at once, will be clinically prohibited), will not be capable of ensuring the replacement of the bodily function that they aim, together, to provide.

Therefore, it is judged that implants and abutments are not, thus, "additions" of fixation and connection, insofar as they add nothing to the prosthesis, not least because without them the prosthesis itself does not exist.

Thus, it is considered that the prosthesis, as an object designed to ensure "the function of replacement of" a tooth, by means of a fixed implant, includes the implant, the abutment and the artificial crown. It is this set, as a whole, that ensures "the function of replacement of" a tooth, and not only one of those elements, detached from the others. On the other hand, what is ascertained is that implants and abutments ensure the replacement of part of the tooth – the root – so that, even in the reading presented by the TA, according to which "item 2.6 covers only the transmission of the article that, in itself, constitutes an artificial piece that replaces an organ of the human body or part thereof" (emphasis ours), these should be considered as falling within the said item 2.6. This conclusion is not hindered by the circumstance, mentioned in the expert report, that the root "does not perform only the function of fixation of the tooth to the alveolar bone, but rather ensures multiple functions that, manifestly, are not pursued by the implant," since if only artefacts that completely replace all the functions of the part of the human body replaced were considered prostheses, practically no prostheses would exist, if indeed any existed, given that the normal state will be that, given its artificial character, the prosthesis, by definition, does not substitute exactly, in all its functions, the part of the human body that is missing.

Neither is the understanding, suggested by the TA, that the implant and abutment will, in essence, be mere materials acquired for the manufacture of the prosthesis subscribed to. It is considered, rather, that those goods are already finished parts of the prosthesis itself, since they have no other purpose, application or utility than their insertion in the human body, so as to ensure "the function of replacement of" a tooth, and that, by their very nature, the prosthesis in question has no possibility of being "completed" except upon its implantation in the human body and in the course of a process that extends substantially over time. Indeed, it is not apparent that one can sustain that either the implant or the abutment, properly finished, are equivalent to, for example, raw titanium that will be transformed into the former, or any other element, raw material or component that, by means of a process of transformation, or even assembly, will become the prosthesis. On the contrary, it is considered that both the implant and the abutment, properly finished, are parts of the final prosthesis, and the process of their implantation in the human body, with a view to replacing the tooth, is not a process of transformation or even assembly, but truly a process of application of the prosthesis in that same body, in accordance with the medically prescribed procedures for this purpose.

Furthermore, disagreement is also expressed with the reading presented by the TA regarding the text of the norm in question, when it states that "the legislator refers to prosthesis material and not to material for prosthesis (for application in a prosthesis), which indicates excluding the pieces of connection or fixation of prostheses, such as those transacted by the taxable person." Indeed, it is understood that in referring to "prosthesis material," and not simply to "prosthesis," the legislator is precisely giving the opposite indication to that presented by the TA, wishing expressly not to limit itself only to the prosthesis as a singular object ("complete good," in the TA's terminology).

This same understanding was already unanimously adopted, regarding a matter entirely identical to that of the present proceedings, in various arbitral proceedings, which may be consulted, among all, in case 429/2014-T of CAAD, where it was considered in sum that:

"It is important to note that the meaning and scope of the reduced rate applied in this field should take into consideration the good rules of hermeneutics, taking into account not only the grammatical element, but also its context, reason for being and purposes pursued by item 2.6, and should result in a declarative interpretation (and not a restrictive one, contrary to what the TA sustains).

Now, from the outset, the letter of the provision seems to indicate that dental implants fall within the said list, being we face prosthesis material designed to replace an organ of the human body, in the case, the dental apparatus.

Indeed, nothing in the letter of the law leads us to restrict its application to situations of transmissions of 'complete goods' of implant, in the sense that the TA seeks to convey.

Furthermore, it results from the facts accepted as proven that such a concept does not exist as such, existing rather implants constituted by the three pieces of which we now treat – crown, implant and abutment, which, in accordance with surgical technique, are introduced in phases into the patient's mouth, then giving rise, together, to an implant. In reality, these three pieces are indivisible and unusable except for the composition of an implant as a composite prosthesis.

Not existing such "complete goods" of implant, in the sense that the TA seeks to convey, the understanding of the Tax Administration ends up denying the benefit of the reduced rate to this type of prosthesis, thereby calling into question, without an acceptable rational reason, the ratio legis that led the legislator to adopt this item in the form in which it is drafted – the protection of public health. Indeed, if such understanding were to be accepted, an arbitrary discriminatory treatment would be introduced between the different dental prostheses. On the one hand, prostheses composed of a single piece would benefit from the reduced rate of 6%, on the other hand, 'composite' prostheses would be subject to the normal rate. This fact is discriminatory, contravening, in particular, the provisions of Articles 5, paragraph 2 and 7, paragraph 3 of the General Tax Law. Indeed, in accordance with what is provided in the first norm, of the heading 'Purposes of taxation,' taxation respects the principles of generality, equality, legality and substantive justice. In turn, in accordance with the provisions of Article 7, paragraph 3, 'Taxation does not discriminate against any profession or activity nor prejudices the practice of legitimate acts of a personal character, without prejudice to exceptional increases or benefits determined by economic, social, environmental or other purposes.'

But we would essentially be facing an intolerable offense to the principle of neutrality that governs this tax at the level of European Union Law, treating equal goods differently without any acceptable rational reason, a fact that violates the rules governing this tax as well as all the case law of the CJEU to which we have alluded.

As is well known, in accordance with the provisions of paragraph 2 of Article 11 of the General Tax Law, whenever in tax norms terms proper to other branches of law are used, they should be interpreted in the same sense as they have there, unless otherwise follows directly from the law. In turn, in paragraph 3 of the said norm it is determined that, if doubt persists about the meaning of the rules of application to apply, account should be taken of the economic substance of the tax facts. Now, what the Community legislator, the European Commission and the case law of the CJEU determine is that, in the use of concepts employed for purposes of applying reduced rates, Member States should have regard to the economic effects in question so as not to call into question the essential principle of the neutrality of the tax.

That is, if the understanding conveyed by the TA were to be accepted, in the concrete case we would have a difference in treatment for identical realities not resulting from the VAT Directive but from a deficient application of it by the Tax Administration.

It is true that derogating norms, such as the norm that enables Member States to apply reduced rates of the tax, must be applied restrictively, but we must not confuse this fact with a selective application, a completely different reality that calls into question the most basic characteristics of the tax.

In this context, it is also important to note that the invocation by the TA of the argument of the Combined Nomenclature does not proceed, since this Nomenclature was created for statistical purposes and for the application of the common tariff schedule and has no relevance in the matter of classification of goods and services for VAT purposes in Portugal.

The only case in which the VAT Code resorts to the Combined Nomenclature to define the scope of the tax regime of goods is provided for in its Article 14, paragraph 1, subparagraph i), for purposes of determining the exemption regime (complete or zero rate), in accordance with which are exempt "supplies of goods for provisioning on board warships classified by code 8906 00 10 of the Combined Nomenclature, when they leave the country bound for a port or anchorage situated abroad," a provision which is not applicable in the situation at hand.

While it is true that, in accordance with what is established in Article 98, paragraph 3, of the VAT Directive, Member States may use the Combined Nomenclature to define with precision each category subject to the reduced rate, it is equally true that the Portuguese legislator did not embrace this option.

That is, for VAT purposes, the classification that implants, crowns and abutments deserve in the Combined Nomenclature is irrelevant.

Now, in this context, it is again important to note that, as was proven, the three "pieces" now in question – implant, crown and abutment – cannot be used separately, being specially designed and manufactured for the production of a piece that is designated as an implant. Indeed, contrary to what the TA alleges, there is no single implant piece in the factual sense that it seeks to grant it, but only the implant constituted, as such, by implant, crown and abutment, pieces that are indivisible having regard to this reality.

It is more than evident that the fact that such pieces are marketed separately, as in the case cited, the mere fact that segregated billing (with separate codes) or autonomous billing (on separate invoices) occurs cannot affect the classification and qualification for VAT purposes, making form prevail over substance.

In reality, what is at issue in the present proceedings and was proven subsumes itself in the legal provision of item 2.6 of List I attached to the VAT Code, consisting of "… devices, artefacts and other prosthesis or compensation material designed to replace, in whole or in part, any limb or organ of the human body."

And, let it be reiterated, the ratio legis that leads the legislator to embrace the application of the reduced VAT rate in such situations – the protection of health – is precisely what leads us to this interpretation.

It should be noted, finally, that, from the case law cited, even if such "complete goods" of implant supposedly existed, as the TA claims, in the sense it seeks to convey, we would always have to recognize that the crown, the abutment and the implant would be configured as a single piece or, failing that, even if wrongly not so understood, as accessory pieces, and as such should be taxed at the reduced rate, following the treatment of the principal operation.

That is: whether solely by recourse to Community rules or by simple application of the good rules of hermeneutics, the result is the same – one can only conclude that in item 2.6 of List I attached to the VAT Code are included both implants consisting of a single piece and composite implants.

Indeed, all the elements of interpretation of the tax norms available for this purpose, as well as the characteristics of VAT and the interpretation that the CJEU has been making of them, lead us to conclude that, in the present case, the reduced VAT rate provided in item 2.6 of List I attached to the VAT Code should be applied to the transmission of implants, crowns and abutments now under analysis, terms in which the Claimant is found to be correct.

In view of the foregoing, it is concluded that the VAT assessments impugned suffer from error regarding the legal prerequisites, due to incorrect interpretation of this item 2.6 of List I of the VAT Code."

It is concluded, thus, that the assessments subject of the present proceedings suffer from a vice in their respective matters of fact and law, as argued by the Claimant, and should, as such, be annulled in their entirety, thus making consideration of the remaining questions placed moot.

The Claimant cumulatively with the request for annulment of the tax acts subject to the present proceedings requests that "it be recognized that the claimant has the right to the compensation provided for in Articles 171 of the Tax Code of Procedure and Process and 53 of the General Tax Law, pursuant to Article 13, paragraph 5, of Decree-Law 10/2011, if it is judged to be undue."

However, in the case, it is not apparent that the Claimant has actually provided any guarantee.

As such, this request must fail.

C. DECISION

The terms are such that this Arbitral Tribunal decides to render a partially allowable judgment on the arbitral claim formulated and, in consequence:

a) To absolve the Respondent from the instance with respect to the claims relating to the following tax acts:

i. VAT Assessment No. 2015…, relating to period 201402, in the total amount payable of €12,978.46 and whose voluntary payment deadline ended on 21 August 2015;

ii. Surcharge Assessment No. 2015…, relating to period 201402, in the total amount payable of €166.55 and whose voluntary payment deadline ended on 21 August 2015.

b) To annul the remaining assessment acts subject to the present proceedings;

c) To condemn the parties in the costs of the proceedings, in the proportion of their respective defeat, fixing at €257.00 the amount to be borne by the Claimant, and at €3,415.00 the amount to be borne by the Respondent.

D. Value of the Proceedings

The value of the proceedings is fixed at €190,326.55, pursuant to Article 97-A, paragraph 1, a), of the Tax Code of Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €3,672.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was entirely allowable, pursuant to Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the said Regulation.

Notify.

Lisbon

29 February 2016

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

An Arbitrator Member

(Filipa Barros)

An Arbitrator Member

(Nuno Maldonado de Sousa)