VAT on Bonuses and Free Offers: CAAD Arbitration Ruling on Taxable Value Exclusion (Process 588/2016-T)

ARBITRAL DECISION

I. REPORT

1. On 30 September 2016, the commercial company A..., S.A., NIPC ..., with registered office in ..., ..., ..., ... (hereinafter, Claimant), filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2, no. 1, paragraph a), and 10, nos. 1, paragraph a), and 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as LFATM), seeking:

• The declaration of illegality and annulment of the act of dismissal of the gracious complaint no. ...2016..., which proceeded through the Financial Services of Matosinhos-... and the Large Taxpayers Unit, filed against the acts of VAT self-assessment for the 12 (twelve) monthly periods comprised between January and December 2014, insofar as excessive tax was assessed and paid, in the total amount of € 20,764.63; and

• The declaration of illegality and partial annulment of the acts of VAT self-assessment for the 12 (twelve) monthly periods comprised between January and December 2014, insofar as excessive tax was assessed and paid, in the total amount of € 20,764.63.

The Claimant initially attached 7 (seven) documents and listed 4 (four) witnesses, having not requested production of any other evidence; subsequently, the Claimant attached to the case file a CD containing 526 (five hundred and twenty-six) documents.

The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1.1. As the Claimant itself summarized, its disagreement with the act of dismissal of the aforementioned gracious complaint and, therefore, the foundation of its request for declaration of illegality and annulment of that act and of the aforementioned VAT self-assessment acts, is based on the following aspects:

"- The Claimant assessed VAT on bonuses in the periods comprised between January and December 2014, in the amount of € 20,764.63;

• Pursuant to the applicable rules, bonuses are excluded from the taxable amount, whereby VAT was paid in excess to the State Treasury;

• The bonuses in question are inserted in a commercial logic and aim to promote the sale of certain products, ultimately the satisfaction and well-being of the final consumer;

• Contrary to what the AT alleges, the rules in force do not establish that products delivered as bonuses must be of the same nature as the products being sold;

• In any case, in the vast majority of situations, bonuses attributed do have the same nature as the products being sold, defining nature with the scope indicated above (see Article 39 ["Therefore, the Claimant now understands that the product attributed as a bonus does not have to be identical to the product sold that gives rise to the bonus, and may include products of the same nature or category (for example, beers with another presentation, packaging or labeling, with other brands, with other alcohol content, with other flavors, other capsule system, etc. or soft drinks, carbonated or not, with another presentation, packaging or labeling, with other brands, with other flavors, another capsule system, etc. or, still, natural or spring mineral waters, carbonated, carbonated or still, with other brands, presentation, flavors and packaging), since all of them contribute to satisfying the objective of offering the final consumer beverages that aim, cumulatively or subsidiarily, to satisfy thirst."]).

The Claimant concludes its initial pleading by petitioning as follows:

"In these terms, the Claimant requests that this Esteemed Arbitral Tribunal declare illegal the acts of self-assessment for the fiscal year 2014, embodied in the monthly periodic declarations, from January to December 2014, with all legal consequences flowing therefrom, namely, the declaration of illegality and annulment of the act of dismissal of the gracious complaint and, consequently, the condemnation of the AT to reimburse the Claimant the VAT assessed in excess in the periods in question, in the total amount of € 20,764.63, plus the legally due indemnificatory interest, condemning the AT, now Respondent, in the costs of the present proceedings."

1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on 17 October 2016.

2. The Claimant did not proceed to nominate an arbitrator, whereby, under the provisions of no. 1 of Article 6 and paragraph a) of no. 1 of Article 11 of the LFATM, the President of the Deontological Council of CAAD designated the undersigned as arbitrator of the singular Arbitral Tribunal, who communicated acceptance of the assignment within the applicable time limit.

3. On 6 December 2016, the Parties were duly notified of this designation, having not expressed the will to refuse the designation of the arbitrator, in accordance with the combined provisions of Article 11, no. 1, paragraphs b) and c), of the LFATM and Articles 6 and 7 of the Deontological Code of CAAD.

4. Thus, in conformity with the provision of paragraph c) of no. 1 of Article 11 of the LFATM, the singular Arbitral Tribunal was constituted on 22 December 2016.

5. On 2 February 2017, the Respondent, duly notified for this purpose, filed its Reply in which it specifically contested the arguments adduced by the Claimant, having concluded that the action was unmeritorious, with its consequent dismissal of the claim.

The Respondent attached no documents, nor requested production of any other evidence.

7.1. Essentially and briefly, let us review the most relevant arguments adduced by the Respondent:

The Claimant did not attach either to the gracious complaint or to the present request for arbitral pronouncement the periodic VAT declarations from January to December 2014, having not demonstrated the lack of correspondence to the reality of the tax facts that it stated in its periodic declarations.

The Claimant does not minimally explain a cognitive process that would permit concluding that the documents presented (in bulk) demonstrate the assessment of a concrete amount of VAT allegedly paid in excess.

The services of the AT did not appreciate such factual basis, in the scope of the gracious complaint procedure, because the legal framework established by the Directorate of VAT Services binds the services of the Large Taxpayers Unit – which oversees the tax management of the Claimant – in the appreciation of the disputed question, whereby, the Claimant then alleging a factual situation whose legal framework is established in different terms by the services of the tax in question, verifying whether the 526 documents presented (in bulk and without any explanation or cognitive roadmap) would confirm the alleged factual situation would be a task absolutely forbidden, as useless.

Therefore, even if the Tribunal did not subscribe to the legal framework given to the situation by the services of the Respondent, the eventual annulment of the dismissal decision would never result per se in recognition of the right to reimbursement of any concrete amount of VAT assessed in excess. Insofar as, no prior determination of the factual prerequisites of such right was made and, moreover, the Claimant failed to make such a demonstration in this arbitral process, limiting itself to presenting thousands of pages of documentation without a demonstration that supports the intended legal effect.

The Claimant also does not demonstrate, as was incumbent upon it, to have in its possession any evidence that the purchaser of the goods became aware of the correction, as prescribed in no. 5 of Article 78 of the VAT Code; inasmuch as, it is important not to forget that the taxable amount of the operation and the corresponding tax are altered as a consequence of the alteration advocated by the Claimant, whereby it was necessary to issue a corrective invoice document, that is, credit notes and new invoices, pursuant to no. 7 of Article 29 of the VAT Code, as well as the accounting of the adjustment and entry in field 40 of the respective periodic declaration, pursuant to Articles 44 and 45 of the VAT Code.

Regarding the VAT framework of the facts under consideration, it is important to highlight that bonuses may be configured as a reduction of the effective consideration for purposes of exclusion from the taxable amount, whereby, only if they constitute goods of the same nature – which occurs only in the case of true quantity bonuses – can a situation equivalent to a price reduction be configured.

Thus, it is only possible to configure the situation at issue as a gift (promotional) and the framework of these gifts in VAT determines their subjection, as operations assimilated to transmission, except if they comply with the provision of no. 7 of Article 3 of the VAT Code, whose regulation is found in Ordinance no. 497/2008, of 24 June, which is not applicable here, because the respective prerequisites are not verified.

Consequently, when it assessed VAT on the crossed bonuses, as it alleges to have done, the Claimant merely complied with the applicable legal requirements.

The Respondent concludes thus its pleading:

"In these terms, and in what more is a matter of law, and with the most learned supplementation of Your Excellency, the present request for arbitral pronouncement should be judged unmeritorious as unproven and, consequently, the Respondent absolved of all claims, all with the due and legal consequences."

7.2. On the same occasion, the Respondent attached to the case file the respective administrative file (hereinafter, abbreviated as AF).

1. On 28 March 2017, the meeting referred to in Article 18 of the LFATM took place – in which was addressed what is recorded in the respective minutes which are hereby given as entirely reproduced –, and, furthermore, the examination of three witnesses listed by the Claimant took place. At that meeting, 15 June 2017 was fixed as the deadline for the pronouncement of the arbitral decision.

2. Both Parties filed written submissions, which are hereby given as entirely reproduced, in which they reiterated the positions previously assumed in their respective pleadings.

II. SANITATION

The Arbitral Tribunal was regularly constituted and is competent.

The case suffers from no nullities.

The parties possess legal personality and capacity, are duly represented, and are legitimate.

There are no exceptions or preliminary matters that prevent knowledge of the merits and of which knowledge must be taken.

III. GROUNDS

III.1. FACTUAL MATTERS

§1. PROVEN FACTS

The following facts are considered proven:

a) The Claimant is a commercial company whose object is the production, commercialization and export of beverages and other products, exercising, as its principal activity, activity in the scope of "Beer Manufacturing" (CAE 11050) and, as its secondary activity, the "Manufacturing of soft drinks and other non-alcoholic beverages, NE" (CAE 11072). [cf. AF attached to the case file]

b) For purposes of Value Added Tax (VAT), the Claimant is classified in the normal regime, monthly frequency. [cf. AF attached to the case file]

c) The Claimant is considered a "taxpayer of high economic and fiscal relevance," pursuant to the provisions of Article 68-B of the General Tax Law, appearing in the list provided for in Order no. 6999/2013, of 30 April 2013, issued pursuant to the provision of Ordinance no. 107/2013, of 15 March. [cf. AF attached to the case file]

d) For commercial reasons, in the beverage commercialization market there is an entrenched practice embodied in the free delivery of products to current and potential customers, it being usual for companies in the beverage sector to effect this type of delivery. [cf. testimony of witness B...]

e) In the case of the Claimant, such free deliveries aim at an eminently promotional purpose of its products and brands, based on a diversified commercial policy of customer loyalty strategy and acquisition of new customers. [cf. testimonies of all witnesses]

f) The Claimant designated these deliveries as "crossed bonuses," embodying the delivery of goods, normally of the same brand, albeit with different packaging or categories, depending on the purchase of certain quantities by customers (e.g., beer bonus "..." of 0.25 liters upon acquisition of beer "..." of 0.33 liters; beer bonus "..." of 0.33 liters, through the acquisition of the same beer in a 50-liter barrel; soft drink bonus "... Orange" upon acquisition of soft drink "... Pineapple"), with the products delivered forming part of the portfolio of usual purchases of the customer in question. [cf. testimonies of all witnesses]

g) The designation of "crossed bonuses," in the deliveries at issue, results from the specificity of being attributed, to the various products that are commercialized by the Claimant, different references for each type of packaging, size, brand and flavor, whereby, whenever the product attributed has a reference (it is merely a code) different from the products whose sale it is associated with, the same is designated as a "crossed bonus." [cf. testimonies of witnesses C... and D...]

h) The aforementioned free deliveries are mentioned in the sales invoice itself of the products ("crossed bonus within the invoice") or in a separate invoice, which makes reference to an initial sales invoice ("crossed bonuses outside the invoice"). [cf. testimonies of witnesses C... and D..., documents nos. 4, 5 and 6 attached with the IP and the invoices contained in the batch of documents, numbered 1 to 526, attached by the Claimant on CD]

i) The information regarding the quantity and type of product delivered is mentioned in the invoice sent to the customer, with the price of the product not being referred to in that document, nor the respective tax (VAT). [cf. testimonies of witnesses C... and D..., documents nos. 4, 5 and 6 attached with the IP and the invoices contained in the batch of documents, numbered 1 to 526, attached by the Claimant on CD]

j) The products object of the aforementioned free deliveries are intended to be, subsequently, sold by the customers of the Claimant – they are, in their vast majority, merchants (wholesalers and retailers) – to third parties. [cf. testimonies of all witnesses]

k) In the period comprised between January and December 2014, the Claimant assessed VAT on the aforementioned free deliveries of products, doing so on the basis of the list price of the product delivered as a "bonus," insofar as it considered them as gifts for VAT purposes. [cf. testimonies of witnesses C... and D...]

l) The Claimant adopted this procedure because such deliveries were considered, by the Tax Administration, as gifts for VAT purposes – namely in the Binding Information, contained in a doctrinal sheet, issued in case no. ..., by order of 01.04.2010, of the VAT SDG, by delegation of the Director-General of Taxes, and in the Binding Information, contained in a doctrinal sheet, issued in case no. ..., by order of 15.06.2010, of the Director-General of Taxes, both published on the Internet site of the Tax Administration ("Tax Portal") –, an understanding that the Claimant followed in the framing of those deliveries under VAT. [cf. testimonies of witnesses C... and D...]

m) The Claimant did not pass on the VAT assessed on such free deliveries of goods to its customers. [cf. testimonies of witnesses C... and D..., documents nos. 4, 5 and 6 attached with the IP and the invoices contained in the batch of documents, numbered 1 to 526, attached by the Claimant on CD]

n) Regarding the twelve monthly periods comprised between January and December 2014, in the respective periodic tax declarations, the Claimant self-assessed VAT on the aforementioned free deliveries of goods in the total amount of € 20,764.63. [cf. testimonies of witnesses C... and D..., document no. 2 attached with the IP and the accounting documents and invoices constituting the batch of documents, numbered 1 to 526, attached by the Claimant on CD]

o) The Claimant proceeded to review its procedures in the area of VAT, namely as regards the attribution of gifts, samples and bonuses to customers, in order to make the taxation of these acts in VAT more rigorous, taking into account the legal discipline in the matter and the objectives presiding over these acts. [cf. testimonies of witnesses C... and D...]

p) Consequently, the Claimant understood that the framing of the aforementioned free deliveries of goods, in VAT, should be reviewed, having further considered that in the monthly periods comprised between January and December 2014, it had improperly assessed VAT on the same. [cf. testimonies of witnesses C... and D...]

q) Consequently, on 7 March 2016, the Claimant filed a gracious complaint – whose initial request is hereby entirely reproduced – seeking the partial annulment of the acts of VAT self-assessment, relating to the monthly periods comprised between January and December 2014, insofar as it understood that excessive tax had been assessed and paid, in the total amount of € 20,764.63. [cf. document no. 1 attached with the IP and AF attached to the case file]

r) The aforementioned gracious complaint was registered, under no. ...2016..., with the Financial Services of Matosinhos-... and subsequently referred to the Large Taxpayers Unit, the Claimant being notified, by registered letter, of the respective draft decision and in order, if it so wished, to exercise the right to a hearing. [cf. AF attached to the case file]

s) The Claimant did not exercise that prior right to a hearing, having, however, proceeded to submit accounting-financial documentation (accounting documents and invoices), totaling 526 documents, in order to prove the amount of VAT that it understood was improperly paid – € 20,764.63 – in the monthly periods comprised between January and December 2014. [cf. AF attached to the case file]

t) The Claimant was notified, through official letter no. ..., dated 1/07/2016, from the Large Taxpayers Unit, Division of Tax Management and Assistance, sent by registered letter, of the decision of dismissal of the gracious complaint, in conformity with Opinion no. .../2016, of 30.06.2016, with the following grounds [cf. document no. 3 attached with the IP and AF attached to the case file]:

[Administrative reasoning regarding VAT classification as gifts not bonuses]

u) On 30 September 2016, the Claimant filed the request for constitution of an arbitral tribunal that gave rise to the present proceedings. [cf. case management information system of CAAD]

§2. UNPROVEN FACTS

With relevance to the appreciation and decision of the case, there are no facts that have not been proven.

§3. REASONING REGARDING FACTUAL MATTERS

Regarding the factual matters proven, the conviction of the Tribunal was founded on the facts articulated by the Parties, whose correspondence to reality was not called into question, on the documents and on the administrative file attached to the case file and, also, on the testimonial evidence produced.

Regarding the testimony given by the witnesses listed by the Claimant – C... [employee of the Claimant for approximately 8 years, currently performing the functions of financial director (questioned on the factual matters contained in Articles 12, 13, 14, 15, 16, 17, 18, 52, 55, 56, 58, 59, 60, 61, 62, 63, 65, 66, 67 and 68 of the IP)], D... [employee of the Claimant for approximately 9 years, currently performing the functions of tax advisory manager (questioned on the factual matters contained in Articles 12, 13, 14, 15, 16, 17, 18, 51, 52, 55, 56, 58, 59, 60, 61, 62, 63, 65, 66, 67 and 68 of the IP)] and B... [employee of the Claimant for approximately 25 years, currently performing the functions of manager of the commercial area ("...") (questioned on the factual matters contained in Articles 9, 10, 11, 39, 40, 41, 42, 43, 51, 53, 54, 57, 63, 64, 70, 71, 72 and 73 of the IP)] who testified in a clear, objective and impartial manner on the facts to which they were questioned, with unequivocal and detailed direct knowledge of the same, which resulted revealed and proven by the detailed manner in which they explained them, whereby their testimonies merited total credibility –, the same corroborated, in essence, the factuality alleged by the Claimant, upon which they testified.

In this context, it is important to further emphasize that the testimonies of witnesses C... and D... – particularly that of the latter – revealed themselves to be of particular importance for the correct and complete understanding of the extensive set of documents that the Claimant attached to the case file, specifically the accounting documentation and invoices that make up the batch of documents, numbered 1 to 526, attached by the Claimant on CD, and, consequently, for the determination and proof of the amount of VAT that is referred to in proven fact n).

It is further important to note, as to that concrete fact, that for the formation of our conviction was also duly considered both the circumstance that such documents were not materially/substantially contested by the AT, as well as the impressive statement contained in the decision of the gracious complaint at issue, according to which "all elements sent by the Complainant" were "analyzed" – which includes the said batch of documents, numbered 1 to 526 – and that "the AT at no point had questioned" the aforementioned tax amount of € 20,764.63 (cf. page 96 of the AF attached to the case file).

III.2. LEGAL MATTERS

The thema decidendum in this proceedings lies in assessing which the legal-tax qualification of the free deliveries of goods effected by the Claimant to its customers is, that is, to discern whether those should be considered bonuses – as the Claimant sustains – or gifts – as the Respondent propounds – and, consequently, to determine whether the same are or are not subject to taxation under VAT.

The Claimant argues, in summary, that "the product attributed as a bonus does not have to be identical to the product sold that gives rise to the bonus, and may include products of the same nature or category (for example, beers with another presentation, packaging or labeling, with other brands, with other alcohol content, with other flavors, other capsule system, etc. or soft drinks, carbonated or not, with another presentation, packaging or labeling, with other brands, with other flavors, another capsule system, etc. or, still, natural or spring mineral waters, carbonated, carbonated or still, with other brands, presentation, flavors and packaging), since all of them contribute to satisfying the objective of offering the final consumer beverages that aim, cumulatively or subsidiarily, to satisfy thirst."

For its part, the Respondent understands that once bonuses can be configured as a reduction of the effective consideration for purposes of exclusion from the taxable amount, then, only if they constitute goods of the same nature – which occurs only in the case of true quantity bonuses – can a situation equivalent to a price reduction be configured; therefore, it is only possible to configure the free deliveries of goods at issue as promotional gifts.

In this context, there is no doubt that the epicenter of the disagreement that opposes the Parties in this proceedings lies in the qualification of the aforementioned free deliveries of goods made by the Claimant to its customers, having in consideration what is the business/commercial activity of the Claimant.

The answer to this first and essential question will condition the subsequent legal-tax framework of those free deliveries of goods under VAT, to be made in accordance with the rules specific to this tax.

§1. ON THE DEFINITION AND FRAMEWORK UNDER VAT OF BONUSES AND GIFTS

The pursuit of promotional activities with a view to attracting and retaining customers performs, currently, a relevant function in the development of companies.

The diverse conceptions that promotional activities can assume and, likewise, the constant creation of models in order to achieve such purposes require careful analysis at the level of their respective tax framework, particularly under VAT.

The economic substance underlying a promotional activity constitutes the foundation for purposes of assessing the respective tax regime; effectively, the qualification of an operation constitutes the starting point for its respective framework under tax. In the pursuit of such objective it is important to take into account that, once the remaining hermeneutical rules are exhausted, persisting doubts about the incidence of the rules, the economic substance of the tax facts takes prevalence over the respective form (cf. Article 11, no. 3, of the General Tax Law).

Given the diversity of actions that are developed with a view to attracting and retaining customers, it is not possible to extract, from the legal framework currently in force, a univocal set of rules capable of being applied to the generality of promotional schemes adopted by economic agents. In this sense, having assessed the economic substance of the promotional activity, there are essentially three categories in which this can be embodied:

a) The grant of a discount, allowance or bonus;

b) The grant of samples and small-value gifts; or

c) The provision of a service free of charge.

However, the framing of promotional activities in one of these categories does not always appear to be a simple task for the interpreter.

Our subsequent analysis will be limited to the first two categories, since only these are relevant to the present case.

§1.1. The grant of discounts, allowances and bonuses

As a rule, pursuant to the provision of Article 73 of the VAT Directive[1], the taxable amount on the deliveries of goods and provision of services under this tax comprises everything that constitutes the consideration which the supplier or service provider has received or should receive relative to these operations, whether from the purchaser or recipient or from a third party.

However, there are situations in which adjustments must be made to that consideration, some with a positive sign, others with a negative sign. These adjustments are provided for in Articles 78 and 79 of the VAT Directive, the first typifying certain elements that, while not forming part of the consideration, are included in the taxable amount for purposes of VAT; the second, typifying certain elements that, while forming part of the consideration, are excluded for purposes of the taxable amount.

Pursuant to Article 78 of the VAT Directive, the taxable amount includes taxes, customs duties, fees and other charges that burden the taxable operation, with the exception of VAT itself. Pursuant to the same rule, the taxable amount also includes ancillary expenses required by the supplier from the purchaser of the goods and services, such as commission, packaging, transport or insurance expenses.

Pursuant to Article 79 of the VAT Directive, the taxable amount excludes price reductions resulting from early payment discount, as well as allowances and bonuses that are granted to the purchaser at the moment at which an operation is carried out. This same rule also excludes from the taxable amount the sums that the taxable person receives from the purchaser, by way of reimbursement of expenses incurred on its behalf and at its expense, recorded in its accounting in pass-through accounts.

From the transposition of Article 73 of the VAT Directive into our national legislation results that, as a rule, the taxable amount, that is, the amount on which the tax is levied, corresponds, in internal operations, to the value of the consideration received or to be received from the purchaser, recipient or a third party, as provided for in no. 1 of Article 16 of the VAT Code.

From the fact that the concept of consideration is based fundamentally on the principle of real and effective reciprocity, results the exclusion of discounts, allowances and bonuses from the taxable matter of VAT. This exclusion of discounts, allowances and bonuses from the taxable amount of operations flows, as we have seen, from Article 79 of the VAT Directive, transposed into national legislation via paragraph b) of no. 6 of Article 16 of the VAT Code. For its part, no. 3 of Article 3 of Ordinance no. 497/2008, of 24 June, excludes from the concept of gift for purposes of VAT quantity bonuses granted by taxable persons to their respective customers.

The grant of discounts, allowances and bonuses constitutes a practice employed by economic agents with a view to attracting and retaining customers, embodying one of the promotional business policies par excellence. However, although widely applied in commercial practice, these terms do not find express definition either in the VAT Directive or in the internal legal framework. However, it is possible to extract from the jurisprudence emanating from the CJEU some guiding criteria as to their respective meaning.

It follows from European jurisprudence, firstly, that the grant of a discount or price allowance presupposes the delivery of a good or the provision of a service on an onerous basis.

On the other hand, the CJEU has come to consider that the terms discount and allowance make reference to a partial reduction of the total price agreed upon by the parties; in contrast, when the reduction covers the entirety of the price one would be facing a delivery or provision of services effected free of charge (in this sense, see CJEU judgments C-126/88, Boots Company Plc, of 27 March 1990 and C-48/97, Kuwait Petroleum GB Ltd., of 27 April 1999).

Finally, it is important to emphasize that, in general, the grant of the discount or allowance does not provide the seller or service provider other advantages than the prospect of, through the capturing and retaining of customers, increasing the respective volume of business or effecting the disposal of its products or services.

Similarly to what occurs as to the definition of discounts and allowances, also as to the concept of bonus the law – VAT Directive and internal legislation – is completely silent.

In this context, the AT has come, since always, to pronounce itself to the effect that bonuses granted in kind have legal coverage in paragraph b) of no. 6 of Article 16 of the VAT Code, advocating, however, that the delivery of a product only subsumes itself in the normative provision if the bonus delivered and the good acquired share the same nature.

If this is not the case, that is, if the supplier delivers a good by occasion of the purchase of another of different nature, the AT understands that there is no bonus framing in paragraph b) of no. 6 of Article 16 of the VAT Code and, as such, excluded from the taxable base of the operation.

§1.2. The grant of samples and small-value gifts

Article 16 of the VAT Directive assimilates to the transmission of goods on an onerous basis the allocation, by a taxable person, of goods from its business to its own use or that of its personnel, the respective transmission free of charge or, in general, their allocation to ends outside the business, provided that those goods have given rise to the deduction of VAT.

However, the allocation of such goods to samples and small-value gifts is excluded from that general regime-rule, provided that they are effected for the purposes of the business.

The transposition of these European rules into our national law permits the definition of a legal framework for the conceptualization of samples and small-value gifts.

Paragraph f) of no. 3 of Article 3 of the VAT Code provides that is considered transmission of goods, for purposes of VAT, the permanent allocation of goods from the business to its owner's own use, that of the personnel, or in general to ends outside the same, as well as its free transmission, when, relative to those goods or to the elements that constitute them, there has been total or partial deduction of the tax.

However, as follows from no. 7 of the same Article 3, are not assimilated to onerous transmissions and, consequently, are not subject to tax, "goods not intended for subsequent commercialization that, by their characteristics, or by different size or format from the product that constitutes the unit of sale, aim, in the form of a sample, to present or promote goods produced or commercialized by the taxable person itself, as well as gifts of unitary value equal to or less than € 50 and whose annual global value does not exceed five per thousand of the volume of business of the taxable person in the previous calendar year, provided that in conformity with commercial usage," pursuant to the terms defined by ordinance of the Minister of Finance.

Ordinance no. 497/2008, of 24 June, which regulates the conditions delimiting the concept of samples and small-value gifts, defines samples as goods not directed at subsequent commercialization – they are intended to present or promote the products produced or commercialized by the taxable person – and which are presented in a format or size different from that which it is intended to show or presented in capacity, weight or measure substantially inferior to those that constitute the sales units.

As to the delimitation of the concept of gift, Ordinance no. 497/2008 specifies that the same can be constituted either by goods commercialized or produced by the taxable person or by goods produced by third parties.

Excluded from the concept of gifts are, expressly, quantity bonuses granted by taxable persons to their respective customers, pursuant to no. 3 of Article 3 of the aforementioned Ordinance.

Regarding both samples and gifts, it is important to heed the legal reference to commercial usage, which aims to exclude liberalities that do not present any connection with the business activity of the taxable person; that is, those must always have an underlying economic or commercial intent, namely that of making known the commercialized products and of promoting an increase in the volume of sales.

§2. ON THE CONCRETE CASE: THE QUALIFICATION OF THE FREE DELIVERIES OF GOODS EFFECTED BY THE CLAIMANT TO CUSTOMERS

As we stated above, it is the understanding of the Tax Administration that there is no bonus framing in paragraph b) of no. 6 of Article 16 of the VAT Code in cases in which a supplier delivers to its customer a good by occasion of the purchase of another of different nature. However, this does not mean that the grant of that good of different nature is necessarily subject to tax; inasmuch as, although we are not facing a bonus, but already facing a gift, this may or may not be taxed, as we have seen, depending on whether the respective unitary value is equal to or less than € 50 and whose annual global value does not exceed five per thousand of the volume of business of the taxable person in the previous calendar year and provided that it is in conformity with commercial usage (Article 3, no. 7, of the VAT Code).

Despite this understanding that makes the distinction between bonuses and gifts rest solely on the fact that the products offered are, respectively, of equal or distinct nature from the products whose acquisition motivates their respective delivery, being profusely invoked by the AT, we have not been able to find any substantive reason, particularly legal, capable of justifying that position.

In our perspective, first of all, it is important to emphasize that bonuses are found associated with sales effected to customers and an ineluctable link of the bonus to the commercial relationship with the purchaser in question can be ascertained, contrary to what occurs with gifts.

To this point, we understand that the criterion of distinction adopted in the arbitral decision pronounced in the scope of case no. 141/2012-T of CAAD, appears to be of fine precision and unequivocal solidity, whereby it merits our full adherence and, for that reason, with the greatest respect, we adopt it in the resolution of the case sub judice[2]:

"Bonuses, by their characteristics, are not confused with small-value gifts: we are, in the case of bonuses, within the scope of an operation of transmission of goods or provision of services to a customer in which goods or services of equal nature are attributed to him free of charge; in the case of small-value gifts, (...), (i) the scope is broader as to its recipients, which can be customers or third parties, (ii) there is no direct connection with a concrete sales operation and the (iii) their value should, according to commercial practices or legal requirements, be reduced.

Despite the existence of a relationship between the bonus and a concrete operation, there may not exist a direct correlation between its value and the balance of sales of customers. Indeed, reasons of a commercial nature may dictate, for example, the necessity of a more aggressive commercial policy relative to a customer or specific group of customers.

Notwithstanding, common to both figures is the objective of promotion of a product and the increase of sales or provision of services. It shall be incumbent upon the taxable person, in the freedom of the exercise of a commercial activity, to opt for the means that it considers most apt and effective to achieve those objectives. (...)

As we have stated, the concepts of bonus or small-value gifts, despite the framework under VAT being similar, are not synonymous and should heed the "animus" underlying: was it the intention of the taxable person to attribute free of charge goods of equal nature within the scope of a determined operation or, in a different sense, was it a gift of reduced value intended to promote a determined product, without any direct relationship of dependence with the products sold to the recipient of the gift?"

Returning to the concrete case, given the evidential record produced and the factuality that resulted proven, it is imposed with meridian evidence the existence of an unequivocal connection between the deliveries of free goods and the sales effected to the customers of the Claimant – we remind here of the testimony of witness B... to this effect, who stated that the free deliveries of goods made by the Claimant are always associated with the volume of purchases (he called it "purchase effort rate") of the customers that benefit from them, that is, the composition, quantity and value of those deliveries of goods are made by purchase brackets –, whereby we cannot but conclude that the requirements for the qualification of those deliveries as bonuses are verified.

As stated in the arbitral judgment pronounced in case no. 539/2015-T of CAAD – relating to VAT self-assessed by the Claimant, in the period comprised between the months of January and December 2013, on free deliveries of goods effected to its customers, the same legal questions as those in issue here having been appreciated there –, it is imposed that "the emphasis in the analysis of the question to be decided should be placed not on the circumstance that the products that constitute the bonuses are – or are not – different from those that commercially justified their attribution, but, rather, on the concrete contours of the justification and destination of the attribution of those bonuses.

Indeed, being in issue, as is the case, free deliveries that are justified by the acquisition of determined quantities of product, and that are intended, not to be consumed, nor to be the object of free gift, there must be concluded that, what occurs in reality – independently of the commercial presentation that may be given (...) – is that the purchase price of the whole (base product plus gift product), is discounted, because determined conditions are fulfilled. (...)

It is verified therefore, that the final price fixed, is not price solely of the quantities of product A transacted, but, rather, the discounted price of the quantity of product A, plus the quantity of product B, not being comprehensible how it is that the different nature of the products encompassed can fundedly hinder, as the AT intends, the fixing of a global discounted price.

(...) considers that the situation in issue in the case file, has the same substance, and should have the same treatment, as the so-called quantity bonuses, because, in reality, they are essentially the same thing. (...)

Thus, although, (...), "paragraph b) of no. 6 of Article 16 of the VAT Code refers to 'bonuses', without making any distinction between the various categories of the same", the truth is that no material reason exists, as has been seen, to exclude the concrete situation sub iudice from the scope of the said rule, including the circumstance that "the goods delivered by the Claimant to its customers, are translated into products of different nature from those that were sold" rather, on the contrary, there being substantial reasons that corroborate the subsuming of such situation to the rule in issue.»

Consequently, the acts of VAT self-assessment disputed suffer from the vice of violation of law, embodied in the erroneous interpretation and application of the provision of Articles 3, no. 7 (combined with paragraph f) of no. 3 of the same article) and 16, no. 6, paragraph b), both of the VAT Code, which results in the respective annulment in the part in which excessive tax was assessed and paid, in the total amount of € 20,764.63.

The same vitiating defect strikes down the act of dismissal of the gracious complaint no. ...2016..., which will also be finally annulled.

§3. ON THE REGULARIZATION OF VAT BY THE CLAIMANT

Subsequently to the presentation of the periodic declaration having as its basis the accounting record, any correction to the deduction of tax exercised constitutes and is governed by the norms of VAT regularization. Such correction may bear, in particular, on the tax fact, the invoice that titles it, the accounting record or the periodic declaration.

Article 184 of the VAT Directive provides for the regularization of the deduction of tax initially effected by taxable persons, which, in accordance with Article 186 of the VAT Directive, must be disciplined normatively by the Member States.

In our internal legislation, the regularization of tax is regulated in Articles 23, no. 6, 24 to 26 and 78 to 78-D of the VAT Code.

Within the scope of the regularizations provided for in the VAT Code, those regulated by Article 78 thereof are to be highlighted and which bear on the following aspects: the taxable event (Article 78, nos. 2 and 4); the invoice that titles the taxable event (Article 78, no. 3); the accounting record and the periodic declaration (Article 78, no. 6); and bad debts (Articles 78, nos. 7 to 12, and 78-A to 78-D).

This stated.

Bonuses in kind are susceptible of being attributed (i) at the moment at which the taxable operation occurs, or (ii) only at a moment subsequent to the transaction.

Regarding bonuses granted at the moment at which the taxable operation is realized, these are found excluded from the taxable amount pursuant to paragraph b) of no. 6 of Article 16 of the VAT Code, provided that, obviously, they are contained in the respective invoice. This means that, in cases in which they are contained in the invoice, the taxable base of the operation, for purposes of VAT, corresponds to the net value evidenced in the same.

If bonuses are granted at a moment subsequent to that of the taxable operation that underlies them and, therefore, after the issuance of the invoice, to the attribution of the bonus there should correspond the issuance of an invoice without assessment of tax, being that, in order to observe the provision of paragraph e) of no. 5 of Article 36 of the VAT Code, the indication of the justifying reason for the non-assessment of the tax must integrate the mention that it concerns a bonus and, also, the reference to the invoices (namely, the respective number, date and values) relating to the taxable operations that were at the basis of the a posteriori attribution of the bonus granted in kind.

This stated, returning to the concrete case, it flows from the proven factuality that the errors in the accounting records of the Claimant – which embody errors of law and, in that measure, are not subsumable to no. 6 of Article 78 of the VAT Code, which is expressly circumscribed to material error or calculation error –, with reflections in the periodic declarations relative to the months of January to December 2014, are of merely internal character, that is, they had no interference in the sphere of third parties, whereby their correction can be effected in the same manner in which the impugning of the periodic declaration proceeds, provided for in Article 97 of the VAT Code, without need for the prior correction of invoices and accounting records pursuant to Article 78 of the VAT Code; furthermore, the rule provided for in no. 5 of this Article 78 does not have application here, since the same is of transversal application to all categories of regularizations that may entail a deduction of tax by the purchaser of the goods or services of value superior to the corresponding assessment by its transmitter or service provider, which is manifest that does not occur in the concrete case.

§4. ON THE REIMBURSEMENT OF AMOUNTS PAID AND THE PAYMENT OF INDEMNIFICATORY INTEREST

The Claimant further petitions the condemnation of the Tax Administration to the reimbursement of the improperly paid tax, plus the respective indemnificatory interest.

Article 24, no. 1, paragraph b), of the LFATM provides that the arbitral decision on the merits of the claim that is not subject to appeal or impugning binds the tax administration from the end of the deadline provided for appeal or impugning, and this, in the exact terms of the decision being meritorious in favor of the taxable person and until the end of the deadline provided for spontaneous execution of the judgments of the tax judicial courts, must restore the situation that would have existed by adopting the acts and operations necessary for the effect, which should be understood, in conformity with the provision of Article 100 of the General Tax Law, applicable ex vi paragraph a) of no. 1 of Article 29 of the LFATM, as encompassing the payment of indemnificatory interest, in consonance, moreover, with the provision of no. 5 of the same Article 24 of the LFATM.

Article 43, no. 1, of the General Tax Law provides that "indemnificatory interest is due when it is determined, in a gracious complaint or judicial impugning, that there was error attributable to the services from which results payment of the tax debt in an amount superior to the legally due", flowing from no. 2 of the same article that it is also considered "that there is error attributable to the services in cases in which, despite the fact that the assessment is effected on the basis of the declaration of the taxpayer, this one has followed, in its completion, the generic guidance of the tax administration, duly published"; for its part, no. 5 of Article 61 of the CPPT, in the part here to be considered, provides that interest is counted "until the date of processing of the respective credit note, in which they are included".

In the concrete case, as flows from the proven factuality and from the above exposition, it is verified that the illegality from which the contested VAT self-assessment acts suffer is entirely attributable to the AT, in the just measure in that it emerges from the fact that the Claimant followed the understanding of the AT, as to the concept of bonus, embodied in generic guidance, duly published[3], whereby the Claimant has the right, in conformity with the provision of Articles 24, no. 1, paragraph b), of the LFATM and 100 of the General Tax Law, to the reimbursement of the values of improperly paid tax, in the total amount of € 20,764.63 (twenty thousand seven hundred and sixty-four euros and sixty-three cents) and to the payment of indemnificatory interest, pursuant to the provision of Articles 43, no. 1, of the General Tax Law and 61 of the CPPT, calculated from the date of dismissal of the gracious complaint no. ...2016...[4], at the rate resulting from no. 4 of Article 43 of the General Tax Law, until the date of processing of the respective credit note, in which they are included.

IV. DECISION

Pursuant to the foregoing, this Arbitral Tribunal decides:

a) To judge the request for arbitral pronouncement wholly meritorious and, consequently:

• to declare illegal and annul the act of dismissal of the gracious complaint no. ...2016...;

• to declare illegal and partially annul the acts of VAT self-assessment for the 12 (twelve) monthly periods comprised between January and December 2014, in the part in which excessive tax was assessed and paid, in the total amount of € 20,764.63;

b) To judge meritorious the request to condemn the Tax and Customs Authority to reimburse the Claimant the values of improperly paid tax, in the total amount of € 20,764.63 (twenty thousand seven hundred and sixty-four euros and sixty-three cents), plus indemnificatory interest calculated, at the legal rate, from the date of dismissal of the gracious complaint no. ...2016... until the date of processing of the respective credit note, in which they are included;

c) To condemn the Tax and Customs Authority to payment of the costs of the proceedings.

VALUE OF THE PROCEEDINGS

In conformity with the provision of Articles 306, no. 2, of the CPC, 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of € 20,764.63 (twenty thousand seven hundred and sixty-four euros and sixty-three cents) is fixed to the proceedings.

COSTS

Pursuant to Article 22, no. 4, of the LFATM, the amount of costs is fixed at € 1,224.00 (one thousand two hundred and twenty-four euros), pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Tax and Customs Authority.

Lisbon, 2 May 2017.

The Arbitrator,

(Ricardo Rodrigues Pereira)

[1] Directive 2006/112/CE of the Council, of 28 November 2006, relating to the common system of value added tax.

[2] Seeking, in this manner, to pursue the objective of obtaining uniform interpretation and application of the law (cf. Article 8, no. 3, of the Civil Code).

[3] As results from the already cited no. 2 of Article 43 of the General Tax Law, it will be considered that there is error attributable to the services and not to the taxpayer, in cases in which this one has followed the generic guidance of the Tax Administration, duly published. This is, as refers Jorge Lopes de Sousa, "a rule that consecrates an evidence, in the face of the duties of information attributed by law to the Tax Administration to inform the taxable persons on the interpretation of the tax laws and on the manner of giving them execution, which (...), currently, result from paragraphs a), c) and f) of no. 3 of Article 59 of the General Tax Law. (...)

This imputability of errors to the Tax Administration is independent of the proof of the existence of concrete culpability of any of its organs, officials or agents, or even of the proof of the global culpability of the services.

It is a matter of objective responsibility, not dependent on culpability." (On the Civil Liability of the Tax Administration for Illegal Acts, Lisbon, Áreas Publisher, 2010, pp. 50 and 52).

The Claimant, in this case, followed the position of the AT contained in the Binding Information, contained in a doctrinal sheet, issued in case no. ..., by order of 01.04.2010, of the VAT SDG, by delegation of the Director-General of Taxes (published at http://info.portaldasfinancas.gov.pt/NR/rdonlyres/63F291DD-7167-4626-9A51-30FF278D9EEC/0/INFORMAÇÃO.544.pdf) and in the Binding Information, contained in a doctrinal sheet, issued in case no. ..., by order of 15.06.2010, of the Director-General of Taxes (published at http://info.portaldasfinancas.gov.pt/NR/rdonlyres/D08D5364-95C2-47ED-921E-C57044B3A62E/0/INFORMAÇÃO.731.pdf), which go beyond the concrete cases on which they bear.

[4] As emphasizes Jorge Lopes de Sousa, in cases "in which the practice of the act that defines the tax debt falls to the taxpayer (as occurs, namely, in the aforementioned cases of self-assessment, withholding at source and payments on account), (...), the error will become attributable to the Tax Administration after the eventual dismissal of the claim presented by the taxpayer, that is, from the moment when, for the first time, the Tax Administration takes a position on the situation of the taxpayer, having at its disposal the elements necessary to make a decision with correct assumptions." (Idem, ibidem).