VAT on Contract Termination Compensation: CAAD Arbitration Case 589/2017-T Analysis

ARBITRAL DECISION

The arbitrators Judge José Pedro Carvalho (arbitrator-chairman), Rita Guerra Alves and Henrique Nogueira Nunes (arbitrators-members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the present Arbitral Tribunal, hereby agree as follows:

I – REPORT

1. On 9 November 2017, A..., S.A., holder of the corporate tax identification card and tax identification number no. ..., with registered office at ..., no. ..., ...-..., Lisbon, at the time of the facts designated as B..., S.A., hereinafter referred to as the Claimant or Taxpayer, filed a request for constitution of an Arbitral Tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking, as the main claim, the annulment of the act of implicit dismissal of the hierarchical appeal, filed with reference to VAT for the fiscal year 2013, as well as of the VAT assessments nos. 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2016..., 2016..., 2016..., 2016..., 2016..., 2016..., 2016..., 2016..., 2016..., 2016..., 2016... and 2016..., in the total amount of € 1,658,143.35, with the necessary legal consequences, namely the recognition of the right to compensation for guarantee improperly provided.

2. As an alternative, the Claimant requests the partial annulment of said assessment acts, based on the amount of compensation actually paid by customers, with the VAT considered to be included in the amount already charged and actually collected.

3. It further requests the annulment of the decision of express dismissal of the hierarchical appeal relating to assessments for the months of April, October and November 2013, issued by the Deputy Director-General of AT, on 08-08-2017, as well as of assessments nos. 2015..., 2015..., 2015..., 2016..., 2016... and 2016..., all relating to VAT and compensatory interest, relating to the year 2013, in the part corresponding to the assessments relating to VAT regularizations made in favour of the Claimant, in the amount of € 544.01, for lack of substantiation and breach of violation of law.

4. To substantiate its claim, in addition to verifying the formal defects of lack of substantiation of the assessments and omission of essential legal formality (prior hearing before assessment) the Claimant alleges, in summary, that VAT is not due for the operations underlying the assessments it contests, since, in its understanding, these do not have underlying the provision of any service.

5. The respondent is the Tax and Customs Authority (AT).

6. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD, and in accordance with the provision in subparagraph c) of paragraph 1 of Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Collective Arbitral Tribunal was regularly constituted on 24-01-2018, to hear and decide on the subject matter of the present proceeding, and the Tax and Customs Authority was automatically notified on 24-02-2018.

7. The Claimant did not proceed with the appointment of an arbitrator, and therefore, in accordance with paragraph 1 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as Arbitrator-Chairman Dr. José Pedro Carvalho (arbitrator-chairman), Dr. Rita Guerra Alves as Arbitrator (arbitrator-member) and Dr. Henrique Nogueira Nunes (arbitrator-member), with the appointment being accepted by them in the terms legally provided.

8. On 04-01-2018, the parties were duly notified of this appointment, and did not express any wish to refuse it, in accordance with Article 11 paragraph 1, subparagraphs a) and b), of the RJAT and Articles 6 and 7 of the Deontological Code.

9. By order of 25-01-2018, the respondent was given a deadline to submit its response.

10. On 20-02-2018, the Claimant submitted a Motion in the case, reiterating the request for preliminary ruling to the CJEU, which it had made in its Initial Claim, supplementing it with new grounds.

11. By order of 20-02-2018, the respondent was afforded the right of reply with respect to the motion referred to in the preceding point.

12. On 01-03-2018, the respondent submitted its Response in which it argued for suspension of the proceedings until the decision in the preliminary ruling case no. C-295/17, pending before the CJEU, and that the arbitral decision request should be judged unfounded.

13. On 06-03-2018, the respondent submitted a motion with its right of reply, concerning the motion submitted on 20-02-2018, by the Claimant.

14. On 05-04-2018, the meeting provided for in Article 18 of the RJAT was held, and the witnesses presented by the Claimant were examined.

15. Regarding the request for preliminary ruling to the Court of Justice of the European Union (CJEU), this Tribunal decided, by order of 20-04-2018, not to proceed with a preliminary ruling with respect to the subject matter of the second question suggested by the Claimant for referral by this arbitral tribunal; and to await the response from the CJEU to the questions raised in the context of the preliminary ruling made in arbitral case 282/2016T, suspending the proceedings of the present arbitral case until that decision, in accordance with Articles 269, paragraph 1, subparagraph c), and 272, paragraph 1, both of the CPC, specifically with regard to the following questions:

"1) Articles 2, paragraph 1, subparagraph c), 64, paragraph 1, 66/1/a), and 73, all of Directive 2006/112/EC, should be interpreted in the sense that Value Added Tax is due by a telecommunications operator (television, internet, mobile network and fixed network) for charging its customers, in the event of termination of a contract with an obligation to remain for a determined duration (loyalty period), due to a reason attributable to the customer, before the completion of such duration, of a predetermined value, equivalent to the value of the base monthly payment owed by the customer under the contract, multiplied by the number of monthly payments outstanding until the end of the loyalty period, where, when the said value is invoiced, and regardless of its actual collection, the provision of services by the operator has already ceased, and:

a) the invoiced value has as its contractual purposes to discourage the customer from failing to comply with the loyalty period to which it committed and to compensate the loss that the operator suffered with the breach of the loyalty period, in particular by the deprivation of the profit it would have earned if the contract had continued until the end of the said period, as well as by the contracting of lower tariffs, the supply of equipment or other offers, free or at a reduced price, as well as by advertising and customer acquisition expenses;

b) the contracts with a loyalty period that were acquired have a remuneration for the canvassers that is higher than that of contracts without loyalty acquired by them, such that the value of the remuneration of canvassers, in both cases (i.e., in contracts with and without loyalty) was calculated based on the value of the monthly payments set in the contracts acquired;

c) the invoiced value is capable of being qualified, under national law, as a penalty clause[?]

1. Would the eventual non-fulfilment of any, or some, of the subparagraphs of the first question be capable of altering the answer thereto?"

1. The CJEU issued its Judgment of 22 November 2018, in Case C-295/17, determining the following:

"For the reasons set out above, the Court of Justice (Fifth Chamber) hereby declares:

1. Article 2, paragraph 1, subparagraph c), of Council Directive 2006/112/EC of 28 November 2006, on the common system of value added tax, should be interpreted in the sense that the predetermined amount received by an economic operator in the event of early termination of a contract by its customer, or due to a reason attributable to that customer, of a contract for the provision of services which provides for a minimum period of binding the contract, an amount which corresponds to the amount that that operator would have received in the remainder of the said period if that termination of the contract had not occurred, which it is for the referring court to verify, is the remuneration of a service provided for consideration and, as such, subject to that tax.

2. It is not decisive for the classification of the predetermined amount in the contract for the provision of services, for which the customer is liable in the event of early termination of that contract, the fact that the fixed amount is intended to discourage customers from failing to comply with the minimum period of binding the contract and to compensate the loss that the operator suffers with the breach of that period, the fact that the remuneration received by a commercial agent for the conclusion of contracts which stipulate a minimum period of binding to them is higher than that provided for in the context of contracts which do not stipulate that period and the fact that the said amount is capable of being qualified, under national law, as a penalty clause."

1. By order of 28-11-2018, the suspension of the proceedings, determined by the decision of 20-04-2018, was declared terminated, taking into account the issuance of the judgment handed down by the CJEU, in the context of the preliminary ruling made in case 282/2016T, and the parties were notified to, if they so wished, given the decision of the CJEU, exercise their right of reply.

2. The Claimant submitted a motion on 11-12-2018, with attachment of documents and listing of witnesses, exercising its right of reply.

3. By order of 19-12-2018, the parties were given the opportunity to, if they so wished, submit final submissions within 10 days. Moreover, the respondent was given the opportunity to, if it so wished, exercise its right of reply regarding the documentation attached by the Claimant on 11-12-2018.

4. Submissions were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

5. By order of 16-01-2019, the examination of witnesses listed by the Claimant in its motion of 11-12-2018 was rejected and it was indicated that the final decision would be notified by 28/02/2019.

6. By motion of 23-01-2019, the Claimant attached to the case the transcript of the testimony given in arbitral case no. 107/2018-T, by the witness E...

7. By order dated 24-01-2019, the respondent was given the opportunity to exercise its right of reply concerning the preceding motion, which it did, by motion submitted on 07-02-2019, requesting the removal of the document attached by the Claimant, or, alternatively, a deadline to exercise its right of reply on its contents.

8. By order dated 12-02-2019 it was decided to admit the document in question, and a new deadline was given to the respondent to exercise its right of reply.

9. By motion of 19-02-2019, the Claimant attached to the case an audio file containing the testimony whose transcript it had attached on 23-01-2019.

10. By motion of 26-02-2019, the respondent exercised its right of reply, granted by the order of 12-02-2019.

11. By order of 28-02-2019, taking into account the complexity of the case, the procedure followed, and the suspension of deadlines resulting from the provision of Article 17-A of the RJAT, in accordance with and for the purposes of Article 21/2 of the RJAT, the deadline for issuance and notification of the final decision referred to in paragraph 1 of that article was extended by two months, and effect was given to the provision of paragraph 3 of Article 11 of the Deontological Code, in the wording in force from 02-10-2017.

12. The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, paragraph 1, subparagraph a), 5, and 6, paragraph 2/b), of the RJAT.

13. The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.

14. The case does not suffer from nullities.

II. MATERIAL FACTS

II.1. The following facts are established:

1. In relation to VAT, the Claimant is, and was at the time of the tax facts in question, classified under the normal monthly periodicity regime, and is, as it was at that time, a taxable person that carries out operations subject to VAT.

2. The Claimant is considered a "Taxpayer of High Economic and Fiscal Significance" or "Large Taxpayer", being included in the Special Register of Taxpayers, as per Dispatch of the Director General of AT no. 6999/2013, of 30 May.

3. The Claimant was subject to an Inspection Procedure carried out by the Large Taxpayers Unit, authorized by service order no. OI2015..., of general scope.

4. The action was initiated on 11 May 2015 and ended on 22 October 2015.

5. From the inspection action resulted corrections to taxable income in respect of Corporate Income Tax which are not contested by the Claimant in these proceedings, and were subject to voluntary regularization.

6. The Claimant was notified of the draft report, to exercise its right of hearing.

7. From the Tax Inspection Report (RIT), submitted on 03-11-2016, the contents of which are taken as reproduced (cf. pp. 4 to 68 of the Administrative File (PA)), the following is contained, among other things:

a. "B..., with registered office at ..., no. ... in Lisbon, was constituted on 22 March 1991 and has as its main activity the provision of mobile telecommunications services.

Additionally, the company may provide other telecommunications services: public use telecommunications; provision of fixed telephone service, establishment and provision of a public telecommunications network and provision of virtual private network services, being licensed by the Institute of Communications of Portugal ("ICP"), now ICP – National Communications Authority ("ANACOM").

On 27 January 2014 it changed its company name to A..., SA."

b. "III.2. VAT

III.2.1. Corrections to VAT Assessed

III.2.1.1. Compensation for breach of contractual loyalty period – € 1,647,881.62

B..., in the context of contracting with its customers, concluded service provision contracts, more specifically, mobile voice service provision contracts, data service provision contracts – internet on mobile, mobile broadband and wi-fi internet and fixed voice service provision contracts, in the context of which minimum periods of contract validity were established as well as compensation to be paid by the customer in the case of deactivation of products and services, at its initiative, before the agreed period had elapsed, as detailed below.

B...'s Mobile Voice Service

The mobile voice service allows making and receiving national, international and roaming calls, and sending and receiving written messages ("SMS" – short message service) and multimedia messages ("MMS" – multimedia message service) and accessing emergency numbers through a number or numbers included in a national or international telephone numbering plan.

The contract provides for this service as follows:

"8.1. These Specific Conditions take effect on the date of subscription to the service and remain in effect for the period of one month, automatically renewable for equal periods, unless terminated by either Party, by valid communication, with a minimum notice period of 15 (fifteen) days relative to the end of the validity period or renewal.

8.2. For renewal purposes, these Specific Conditions are deemed to have commenced on the first day of the respective month.

8.3. B... and the CUSTOMER may agree on the provision of the service for a minimum period of validity, indicated in the Form. At the end of the agreed minimum validity period, these Specific Conditions shall be renewed for successive periods of 1 (one) month, unless terminated by either Party in accordance with the terms provided in Condition 8.1.

8.4. In the event of termination of these Specific Conditions by the CUSTOMER or for a reason attributable to it, before the agreed minimum validity period has elapsed, initially or subsequently, B... shall have the right to receive compensation calculated as follows: (minimum validity period – number of months in which services were active) x (value of the agreed monthly payment).

8.5. The existence of a minimum validity period may result from the offering of promotional conditions, from investment costs in equipment acquisition, whenever the subscription to the service involves the transfer of equipment essential to the provision of the same, as well as from service activation costs and customer acquisition, and the CUSTOMER may at any time, through the customer support service 1696, consultation at www...pt or B... store, obtain information about when the agreed minimum validity period will be completed and the exact value that will have to be paid as compensation for early termination of these Specific Conditions, which shall correspond to the value of the agreed monthly payment, multiplied by the number of months outstanding to complete the mentioned minimum validity period."

Data Service – Internet on Mobile, Mobile Broadband and Wi-Fi Internet of B...

With regard to the data service, which includes, in particular, i) Internet Service on Mobile, which allows data communication, Internet access via mobile phone (hereinafter "Internet on Mobile"); ii) mobile broadband Internet access service, which allows data communications, Internet access and sending/receiving written messages (SMS) (hereinafter "MBB"); and iii) wireless Internet access service (Public Wireless Lan) in public access areas (Hot Spot) through WI-FI technology (Wireless Fidelity – Wireless Lan), (hereinafter "Wi-Fi").

Regarding the provision of the data service, the following is determined:

"9.1. These Specific Conditions take effect on the date of subscription to the service and remain in effect for the period of one month, automatically renewable for equal periods, unless terminated by either Party, by valid communication, with a minimum notice period of 15 (fifteen) days relative to the end of the validity period or renewal.

9.2. For renewal purposes, these Specific Conditions are deemed to have commenced on the first day of the respective month.

9.3. B... and the CUSTOMER may agree on the provision of the service for a minimum period of validity, indicated in the Form. At the end of the agreed minimum validity period, these Specific Conditions shall be renewed for successive periods of 1 (one) month, unless terminated by either Party in accordance with the terms provided in Condition 9.1.

9.4. In the event of termination of these Specific Conditions by the CUSTOMER or for a reason attributable to it, before the agreed minimum validity period has elapsed, initially or subsequently, B... shall have the right to receive compensation calculated as follows: (minimum validity period – number of months in which services were active) x (value of the agreed monthly payment).

9.5. The existence of a minimum validity period may result from the offering of promotional conditions, from investment costs in equipment acquisition, whenever the subscription to the service involves the transfer of equipment essential to the provision of the same, as well as from service activation costs and customer acquisition, and the CUSTOMER may at any time, through the customer support service 1696, or B... store, obtain information about when the agreed minimum validity period will be completed and the exact value that will have to be paid as compensation for early termination of these Specific Conditions, which shall correspond to the value of the agreed monthly payment, multiplied by the number of months outstanding to complete the mentioned minimum validity period."

B...'s Fixed Voice Service

The fixed voice service allows making and receiving calls at a fixed location, national and international calls and accessing emergency numbers through a number or numbers included in a national or international telephone numbering plan.

The contract provides for this service as follows:

"8.1. These Specific Conditions take effect on the date of subscription to the service and remain in effect for the period of one month, automatically renewable for equal periods, unless terminated by either Party, by valid communication, with a minimum notice period of 15 (fifteen) days relative to the end of the validity period or renewal.

8.2. For renewal purposes, these Specific Conditions are deemed to have commenced on the first day of the respective month.

8.3. B... and the CUSTOMER may agree on the provision of the service for a minimum period of validity, indicated in the Form. At the end of the agreed minimum validity period, these Specific Conditions shall be renewed for successive periods of 1 (one) month, unless terminated by either Party in accordance with the terms provided in Condition 8.1.

8.4. In the event of termination of these Specific Conditions by the CUSTOMER or for a reason attributable to it, before the agreed minimum validity period has elapsed, initially or subsequently, B... shall have the right to receive compensation calculated as follows: (minimum validity period – number of months in which services were active) x (value of the agreed monthly payment).

8.5. The existence of a minimum validity period may result from the offering of promotional conditions, from investment costs in equipment acquisition, whenever the subscription to the service involves the transfer of equipment essential to the provision of the same, as well as from service activation costs and customer acquisition, and the CUSTOMER may at any time, through the indicated customer support service, at consultation www...pt or B... store, obtain information about when the agreed minimum validity period will be completed and the exact value that will have to be paid as compensation for early termination of these abovementioned Specific Conditions, which shall correspond to the value of the agreed monthly payment, multiplied by the number of months outstanding to complete the mentioned minimum validity period."

Based on the foregoing, it is inferred that, if the minimum contractual period established for the provision of the service is not complied with, B... has the right to receive compensation from its customers calculated taking into account the number of months remaining to complete the agreed period for the provision of the service, multiplied by the value of the respective monthly payment.

From the Accounting

In accounting matters, in accordance with NCRF 20 – Revenue, point 22 "Revenue is only recognized when it is probable that the economic benefits associated with the transaction will flow to the entity. However, when there is uncertainty about the collectability of an amount already included in revenue, the uncollectable amount, or the amount with respect to which recovery has ceased to be probable is recognized as an expense (...)".

Following this, considering the uncertainty that underlies the receipt of these amounts, the taxable person, at the time of invoice issuance, recognizes the amount in SNC account 282 – Revenue to be Recognized (PIC account 217220000 – Deferred Income – Early Invoiced Advance Facts – Compensation Invoice).

From the Tax Treatment

With regard to the treatment in the context of value added tax, it was found that the taxable person did not assess VAT on the compensation collected from its customers in 2013 on the grounds that the said compensation is outside the scope of the said tax.

B... had already pronounced itself on this understanding, in the context of the inspection procedure for the period of 2013, through an email dated 18 November 2014, which stated: "In the context of its activity, B..., S.A., hereinafter under the abbreviated form "B...", concludes service provision contracts for mobile communications, in which it is common to establish advantageous promotional conditions, and these conditions are, as a rule, associated with a quid pro quo: the commitment undertaken by the customer to remain bound by the contract for a minimum period of validity of the same.

Non-compliance by the customer of the contractual obligations to which it is subject, namely the failure to pay promptly, implies the payment of compensation to B....

In the situation in question, there is no relationship between the amounts owed to B... as compensation and the performance of corresponding service provisions, since the obligation to compensate derives from the customer's contractual non-compliance, the immediate effect of which is the suspension of the communications service by B... and the termination of the contract. Thus, it is the non-provision of services for the minimum period agreed that grounds the right to compensation in the sphere of B.... On one hand, compensation derives from the undeniable loss caused to B... by the non-continuation of the provision of communications services for a certain period of time, which would have generated business volume and profit for the company. On the other hand, the compensation amount to be received by B... does not give the "counterparty" the right to any service provision. Indeed, the payment of compensation by customers does not generate any reciprocal obligation on the part of B..., and the amounts delivered to it are intended for the compensation, above indicated, of the damages suffered as a consequence of contractual non-compliance, namely those relating to the initial investment implicit in the offering of advantageous promotional conditions, underlying the loyalty contracts. Consequently, the compensation in question is not subject to VAT taxation."

During the course of this inspection procedure, the taxable person was again asked to confirm whether VAT was assessed on these operations and, if not, to justify its non-assessment, having been provided with a justification identical to the one identified above.

In this context, and to better discern the legal-tax framework in which the question of fact should be placed, we turn to Article 562 of the Civil Code (CC), in which the general principle relating to the obligation of compensation is found. There it can be read as follows:

"Whoever is obliged to repair damage must restore the situation that would exist if the event that requires repair had not occurred." Attention is drawn to the fact that this general principle makes express mention of the term "damage", a matter to which we will return at a later time.

It is now important, with a view to a fuller clarification of the issue in question, to resort to the doctrine relating to this matter, so that, since it proves pertinent to the appraisal in question, we note below what is expounded by Mário Júlio de Almeida Costa (Law of Obligations, 6th edition) on the subject of the penalty clause.

"The penalty clause is defined as the stipulation in which, in a legal transaction, namely in a contract, the parties fix the amount of compensation in the event of its non-compliance (Article 810, paragraph 1). (...) the clause has a fixed value – no more and no less – whether the damage presents itself in reality lower or higher than its amount. The law views it as advance settlement (à forfait) of damages, which the parties freely agree, only with the reservation of mandatory provisions. (...)

This is, therefore, a form agreed upon by the parties to compensate, indemnify, potential damage that may occur during the term of the contract.

We now observe what was expressed by the same author, op. cit., regarding damage and, more concretely, with respect to the classification that distinguishes emerging loss and lost profits. (...)

As taught by Prof. Galvão Teles, "Law of Obligations", 6th ed., page 373, "Emerging losses result in a decrease in the entity's equity, lost profits in its non-increase. If the asset decreases or liabilities increase, there is an emerging loss (damnum emergens); if the asset ceases to increase or liabilities cease to decrease, there is lost profit (lucrum cessans). In the former case there is a loss, in the latter the frustration of a gain." Nevertheless, and now recentering the observation in progress from a point of view fundamentally fiscal in nature, the crux of this issue will be in verifying whether, underlying the compensation, there is, or is not, a transfer of goods or provision of services, that is, whether it has an inherent compensatory character.

VAT, as a tax on consumption and which corresponds, basically, to the provision of Directive 2006/112/EC of the Council (hereinafter Directive), aims to tax the consideration for taxable operations and not the compensation of losses that do not have a compensatory character.

The concept of service provision contained in the Directive is residual, in so far as a service provision is understood as any provision that is not a transfer of goods.

After this residual formulation, the Directive gives examples of service provisions, including here "the obligation not to act or to tolerate an act or a situation", an obligation of negative content (not to perform a certain act).

In accordance with paragraph 1 of Article 3 of the VAT Code, transfer of goods is generally considered as the onerous transfer of tangible goods in a manner corresponding to the exercise of the right of property, while in accordance with paragraph 1 of Article 4 of the VAT Code, service provisions are considered as operations carried out for consideration that do not constitute transfers, intra-community acquisitions or imports of goods.

Aligned with Community legislation, the concept of service provision given by Article 4 has a residual character, service provisions being considered as provisions carried out for consideration that do not constitute transfers or imports of goods.

VAT applies to all economic activity, which is nothing more than an operator providing services or transferring goods (except for certain particular cases) to the economic beneficiary, who must provide a certain consideration. There is, therefore, a synallagmatic link.

Thus, in accordance with the foregoing, the criterion to be adopted to discern whether a given compensation is subject to VAT taxation will be related to the existence of a reposition of income, which compensates for an increase in equity not verified following the damage, that is, a compensatory character associated with the compensation. And if so, they have underlying an economic activity, a prerequisite of VAT taxation.

It is therefore necessary to ascertain whether the compensation is intended to compensate lost profits, that is, to restore the level of income that, as a result of damage, the taxable person failed to obtain.

In other words, it is necessary to ascertain whether the payment was intended to restore the income that would have been obtained through the provision of services, had the customer not broken the contractual relationship.

In the situation under examination, this is the reality in question since the compensation in dispute had that purpose, as can be seen from the contracts themselves, specifically from point 8.4 of the specific conditions of the mobile voice service provision contracts, and from the fixed voice service provision contracts and point 9.4 of the specific conditions of the data service provision contract – internet on mobile, mobile broadband and wi-fi internet in which the following can be read:

"In the event of termination of these Specific Conditions by the CUSTOMER or for a reason attributable to it, before the agreed minimum validity period has elapsed, initially or subsequently, B... shall have the right to receive compensation calculated as follows: (minimum validity period – number of months in which services were active) x (value of the agreed monthly payment)."

Thus, and to the extent that the compensatory character of the compensation is derived from the text of the contract itself, it should be considered that the same is subject to VAT.

In fact, from the manner of calculation of the compensation itself, it is inferred that this was intended to compensate B... for a loss of revenue on the assumption that it had "(...), at the moment of the injury, a right to the gain that was frustrated, or rather, the ownership of a legal situation which, if maintained, would give it the right to that gain. - cf. Supreme Court of Justice judgment of 23/5/78., B.M.J. no 277; p. 258." Cf, Supreme Court of Justice Judgment no 04B3907 of 16.12.2004.

Also, the reason why B... justifies the existence of a minimum period of contractual validity, specifically "(...) The existence of a minimum validity period may result from the offering of promotional conditions, from investment costs in equipment acquisition, whenever the subscription to the service involves the transfer of equipment essential to the provision of the same, as well as from service activation costs and customer acquisition (...)" reflect that the recovery of the investment will be guaranteed by the revenues obtained during the loyalty period or, if that is discontinued (via customer withdrawal), the return is maintained through compensation, since it accommodates revenues for the months remaining until the end of the contract.

The same level of profit is thus guaranteed. B... did not suffer losses in the form of lost profits, because compensation was contractually fixed that incorporates such profits.

What B... seeks to repair is not the investment made – it remains as it was made – what it seeks, ultimately, is to obtain revenues to recover that investment, from an economic perspective.

This objective is achieved through the existence of the loyalty period, and when this is not complied with, the CUSTOMER is charged a compensation fee.

It is thus concluded that this compensation falls within the concept of lost profit and as such is subject to VAT.

To corroborate what has been said, the content of the information provided by B..., previously mentioned, is recovered, "Thus, it is the non-provision of services for the minimum period agreed that grounds the right to compensation in the sphere of B.... On one hand, compensation derives from the undeniable loss caused to B... by the non-continuation of the provision of communications services for a certain period of time, which would have generated business volume and profit for the company. (...)"

With the termination of the contract at the customer's initiative, before the contractually established period has ended, B... saw its profits reduced by loss of revenue, to which corresponds a non-increase of its assets (through the value received from its customers). There was no reduction in existing assets (situation of emerging loss) but rather a non-increase thereof, through loss of revenue, as referred to by Prof. Galvão Teles' citation, already mentioned.

It is further added that, according to the arguments of the taxable person itself, the fact that such compensation emerges from contractual relationships which on the part of B... constitute "(...) offering of advantageous promotional conditions" and on the part of the customer "the commitment undertaken (...) to remain bound by the contract for a minimum period of validity of the same", means that they arise in the context of the exercise of economic activity and concomitantly related to the provision of telecommunications services, which is B...'s activity.

To corroborate the position now defended, reference is made to the Judgment of the Supreme Administrative Court (STA) no 01158/11 of 31.10.2012, whose position clearly supports the understanding here propounded: "In light of all that has been set out, we conclude, in accordance with the learned Opinion of the Office of the Public Prosecutor, according to which it is necessary to distinguish:

a) The compensation paid by the insurer, "(...) intended for the compensation of damage caused by the loss of the asset", the same should be considered excluded from the objective scope of VAT, "in so far as it does not assume the nature of consideration for the transfer of a good or provision of a service (Articles 1, paragraph 1, 4, paragraph 1 and 16, paragraph 1 VAT Code)";

b) The amounts paid by the lessee to the lessor, being paid "complementary to the lessor by lessees do not have the nature of indemnification (because they are not intended for the compensation of loss and damage) but rather are rooted in the fulfillment of contractually assumed obligations (in each of the categories of contracts in question). As these contracts have the nature of service provision contracts, those amounts represent, moreover, consideration for operations subject to VAT".

It is therefore concluded that the present compensations aim to compensate for ceased income and derive from the fulfillment of contractually assumed obligations within the scope of service provision contracts, and therefore represent consideration for operations subject to VAT.

In terms of classification under the VAT Code, the compensation in dispute constitutes consideration for a service provision, subject and not exempt, in accordance with Article 4, paragraph 1, with the tax-generating event and consequently the tax being due at the time of invoice issuance, in accordance with Article 8, paragraph 1, subparagraph a), with the taxable value being that of the compensation, in accordance with Article 16, paragraph 1, with the 23% rate, provided for in Article 18, paragraph 1, subparagraph c), all of the VAT Code, being applicable."

c. "Following this, it is important to proceed to the quantification of the taxable base distributed by months, and for this purpose, the taxable person was requested (email of 4.05.2015) for the following information: listing of all invoices issued to customers during 2013, indicating their value and period of issuance and relating to situations of contract termination before the minimum period of validity of the same had elapsed (loyalty period).

Following the request, an Excel file was provided with the requested information.

From the analysis and computer processing of the data provided by B..., it was possible to obtain a file with the following identifying elements for each record/invoice: invoice number and reference; date, period and invoice value; customer name and number; service description and VAT rate.

From this universe of duly organized data, the values were analyzed by type/reason for compensation, of which those considered subject to tax were selected as contained in Annex IV (fls. 1) and which total the amount of € 7,164,402.68.

Given this, it should be noted in this context that the methodology used takes into account the content of Article 75 of the General Tax Law (LGT), with the heading "Declaration and other elements of taxpayers", according to paragraph 1 of which "The declarations of taxpayers presented in accordance with the law, as well as the data and calculations recorded in their accounts or records, when these are organized in accordance with commercial and tax legislation, are presumed to be true and in good faith", from which there also arises a particular binding between the available elements and the results now obtained.

Thus, based on the data obtained from the verification and validation carried out on the elements provided by the taxable person, it was possible to determine a total amount of € 7,164,402.68, corresponding to compensations billed to customers, on which VAT was not assessed, to which corresponds a total value of VAT in arrears, at the normal rate, of € 1,647,881.62 (Annex IV and Annex V on CD)."

d. "In summary, in light of what has been set out above, it is concluded that these compensations are subject and not exempt from tax. Consequently, in accordance with paragraph 1 of Article 4, Article 8, paragraph 1, subparagraph a), paragraph 1 of Article 16, and subparagraph c) of paragraph 1 of Article 18, all of the VAT Code, outstanding tax was calculated in the total amount of € 1,647,881.62.

The following table shows a summary of the corrections in respect of VAT, by tax period:

Period Taxable Base Tax in Arrears

Jan-2013 451,351.60 103,810.87

Feb-2013 859,280.96 197,634.62

Mar-2013 952,077.73 218,977.88

Apr-2013 702,246.42 161,516.68

May-2013 563,854.88 129,868.62

Jun-2013 916,606.17 210,819.42

Jul-2013 560,725.57 128,966.88

Aug-2013 558,304.62 128,410.06

Sep-2013 355,146.65 81,683.73

Oct-2013 281,598.40 64,767.63

Nov-2013 535,025.81 123,055.94

Dec-2013 428,483.87 98,551.29

Total General 7,164,702.68 1,647,881.62"

e. "IX.3. VAT

IX.3.1. Unassessed Tax – Compensation for breach of contractual loyalty period (Point III.2.1. of the Draft Report)

In the context of the prior hearing, the taxable person expressed its disagreement with the correction proposed in point III.2.1. based on the grounds described below:

The taxable person presented, in points 119 to 138 of the right to hearing, the objections to the proposed correction, with the grounds briefly indicated below.

On the nature of the contracts

(...) With regard to whether or not compensations are subject to VAT, we first note that subjection to VAT taxation has underlying the carrying out of economic activity and the existence of consideration. In this sense, there is a synallagmatic obligational link, a prerequisite of an economic operation.

Thus, as already mentioned in point III.2.I., in the case of compensation, the criterion to be adopted to assess subjection to VAT taxation will be related to the existence of a reposition of income, which compensates for an increase in equity not verified following the contractual breach, that is, a compensatory character associated with the compensation.

In other words, it is necessary to assess whether the compensation is intended to compensate lost profits, that is, to restore the level of income that, due to an exogenous factor, the taxable person failed to obtain, or whether it was simply intended to indemnify or repair damage caused. That is, the purpose and nature of the payment underlying the compensation will determine its classification as compensatory consideration or as reparation for damage caused. It can be stated that, for these cases of compensation for contractual non-compliance, only a case-by-case analysis of the substance of the operation can lead to the understanding of the scope of the compensation and to the contextualization of its compensatory or reparatory function, and consequently to the assessment of its subjection or not to VAT.

In these terms, it is necessary to ascertain whether the payment was intended to restore the income that would have been obtained through the provision of services, had the customer not broken the contractual relationship.

Now, in the situation under examination, this is the reality in question since the compensation in dispute had that purpose, as can be derived from the contracts "In the event of termination of these Specific Conditions, by the CUSTOMER or for a reason attributable to it, before the agreed minimum period of validity, B... shall have the right to receive compensation calculated as follows: (minimum validity period – number of months in which services were active) x (value of the monthly payment)."

From this clause, the compensatory character of the compensation is derived, since the same level of profit that would be obtained is thus guaranteed. B... did not suffer losses in the form of lost profits, because compensation was contractually fixed that incorporates such profits.

What B... seeks to repair is not the investment made – it remains as it was made – what it seeks, ultimately, is to obtain revenues to recover that investment, from an economic perspective.

In the arguments presented in the hearing, the taxable person stated that such compensations derive from the investment made for the provision of those services (equipment and technical structures).

As has already been demonstrated, the value of the compensation corresponds to the total revenue that B... would have received had the contract continued until its final date. Consequently, it is entirely inadmissible to consider that the totality of the compensation was intended to repair damage. It would be the same as admitting that B... would not obtain any profits resulting from the contracts for the provision of broadband internet access services and television and multimedia services that it concludes, that is, that all revenue earned was only to compensate for the investment made. Which in reality does not happen.

[…]

In this sense, even if the compensations could contain a part of their value intended to repair damage, this was not presented or proven by the taxable person.

And in invoking this fact – the existence of damage – it is up to the taxpayer, in accordance with paragraph 1 of Article 74 of the LGT, to bear the burden of proof of the facts that constitute [the claim]. (...)

Given this, B... also presented case law, namely, the Tolsma Judgment, of 3 March 1994, in the context of case C-16/93. This judgment pronounces on the concrete case of the provision of an activity consisting of playing music in the public highway and of its subjection to VAT. On this operation, the CJEU concludes that "the concept of a service provided for consideration, (...), does not cover the activity consisting of playing music on the public highway, with respect to which no remuneration is stipulated, even if the interested party requests a monetary contribution and receives certain amounts whose amount is, however, neither determined nor determinable".

However, this is neither the case nor are there similarities with the situation under scrutiny, since in the case in debate there is underlying the carrying out of an economic activity consisting of the provision of telecommunications services. Note that the compensations here in question have a previously determined amount and as such have a character of consideration associated with them.

In summary, payments made for contractual non-compliance are owed in the context of the compensatory responsibility of the service acquirer and not as indemnification for damage caused to the service provider, so that, given all that has been set out, it is concluded that these compensations fall within the concept of lost profit and as such are subject to VAT.

From the calculation of the VAT allegedly due

The taxable person understands, in paragraphs 163 to 168, that the compensation amounts charged have as "(...) recipients, for the most part, customers who do not have the nature of VAT taxable persons (individuals), and that, (...), their payment almost never takes place (...)", therefore the amounts that AT is assessing, "(...) would, in large part, be recovered within six months (...)", and the VAT of other customers would likewise be recoverable by application of Articles 78 and 78-A, both of the VAT Code, concluding that government revenue would not be prejudiced.

Faced with this argument, the taxable person seems to argue that the additional assessment is devoid of utility, since had it assessed VAT and delivered it to the State, given the low collectability rate and the possibility contained in Article 78, it would have already recovered it.

The taxable person deduces this argument based on a hypothetical situation, as seen in its statement "(...) the amounts (...) assessed by the applicant would, in large part, be recovered (...)", whereas AT never considers situations that are not actual ones. Furthermore, it is disregarding the financial effect in the sphere of the State, arising from the delivery of the tax and subsequent recovery, and finally seems to disrespect the conditions that the law imposes for these regularizations.

Let us see then that the VAT Code regulates in Article 78, the rectifications/regularizations of the tax, establishing certain conditions so that taxable persons can effect the deduction/regularization that is due.

Thus, and for the purposes of the case, paragraph 1 of Article 78 provides for the VAT recovery mechanism (i) in uncollectable debts (Article 78, paragraph 7) (ii) as well as in overdue debts (Article 78, paragraphs 8 to 10).

However, the reference that the taxable person makes to this recourse seems to suggest that the entire process is automatic, when, nevertheless, the VAT Code provides, as already mentioned, the need to comply with various legal requirements, so that VAT regularization is made in debts, being preceded by the assessment of the VAT itself, a situation which in the case in question has not yet occurred.

For this purpose, the taxable person must carry out, regularizations of VAT, in Field 40 of the respective Periodic Declarations, relating to VAT recovery relating to overdue debts in accordance with subparagraphs a), b), c) and d) of paragraph 8 of Article 78 of the VAT Code.

The taxable person must also present the necessary certifications of the Official Auditor, in accordance with what is set out in paragraphs 9 and 10 of Article 78 of the VAT Code. In the said certifications, the amount of debts not collected, the amount of tax to be regularized, as well as confirmation that the taxable person carried out the necessary measures for the recovery of the debts in question should be described. This certification must be carried out for each of the periods to which the regularization/deduction refers.

Also with regard to debts falling due after 1 January 2013, paragraph 1 of Article 78-A of the VAT Code adds as a requirement to the regularization/deduction of the tax, the evidencing of debts in the accounts, with debts considered of doubtful collection or as debts considered uncollectable.

Finally, also for debts falling due after 1 January 2013, paragraph 1 of Article 78-B of the VAT Code, for debts of doubtful collection of subparagraph a) of paragraph 2 of Article 78-A, the deduction of the tax is carried out by means of a request for prior authorization to be submitted electronically, within six months counted from the date on which the debts are considered of doubtful collection.

Now, in this case, neither was the VAT assessed nor are the conditions of the regularization/deduction proven.

If and when B... comes to meet the prerequisites for possible regularization in accordance with the cited Articles 78 and 78-A of the VAT Code, the exercise of that right is assured through the legally provided procedures, should it have proceeded with the delivery of the tax to the State coffers.

Thus, without need for other considerations, none of the prerequisites for VAT regularization under Article 78 and 78-A to D are considered to be met in this case.

From the calculation of the amount of tax to be assessed

Finally, the taxable person comes forward, in paragraphs 169 to 171, to argue that the amount of the correction that AT determined is incorrect, since "...VAT would always constitute a component of the collected amount, and never an element that would increase that value", presenting as grounds the content of the Judgment Corina Hrisi Tulica, handed down on 7 November 2013, in the context of joined cases C-249/10 and C-250/12 of the CJEU. In the words of the CJEU "when the price of a good has been determined by the parties without mention of VAT and the supplier of the said good is the debtor of VAT due on the taxed operation and should the supplier not have the possibility to recover from the acquirer the VAT demanded by the tax administration, if should be considered that the agreed price already includes VAT" Thus, B... seeks to have, "the tax to be assessed in this context (…) should always be considered as included in the value of the debit made by the Applicant (…) and cannot increase the same, with VAT to be assessed being € 199,476.20".[...]

Notwithstanding the arguments of the taxpayer, this judgment clarifies that "when a contract of sale has been concluded without mention of VAT, in the hypothesis that the supplier, according to national law, cannot recover from the acquirer the VAT subsequently demanded by the tax administration, to consider that the totality of the price, without deduction of VAT, constitutes the base to which VAT applies would have the consequence of VAT burdening that supplier and thus colliding with the principle that VAT is a tax on consumption, which must be borne by the final consumer. (...) On the other hand, this would not happen if the supplier had, according to national law, the possibility of adding to the agreed price a supplement corresponding to the tax applicable to the operation and recovering it from the acquirer of the good."

Thus, it is fundamental to verify whether suppliers of the good/service providers have or do not have, by force of national law, the possibility of recovering from the acquirers, beyond the agreed price, the VAT demanded by the tax administration. (...)

It is further stressed, regarding the passing on of the tax, that in accordance with the understanding embodied in Information no. 1233, of 02-03-90, of the VAT Services, "It is possible for a taxable person to whom tax was assessed officially to proceed to its invoicing to the recipient of the good or service".

On the other hand, it is not contradictory that B... defends the non-subjection to tax of these compensations, and simultaneously argues, when it attacks the quantification, that the tax is included in the amount collected. For if that were the case, we would be faced with tax assessed and not delivered, but AT considers that this did not happen.

In summary, B... argues (i) that the compensation in dispute is not subject to VAT, (ii) of the uselessness of this assessment in light of the various tax recovery regimes provided for in Article 78 of the VAT Code and (iii) of the incorrect quantification of the tax calculated by AT, on the grounds that the VAT is already included in the amount collected.

As a conclusion and considering all that has been said, the arguments presented by the taxable person are not accepted, and therefore, the correction proposed in the amount of € 1,647,881.62 is maintained."

1. The Claimant was notified, through Official Letter no. ..., of 04.12.2015, of the Tax Inspection Report, in accordance with which AT maintained the understanding previously defended, making a correction in respect of VAT in the global amount of € 1,647,881.62, relating to compensation for termination of contracts during the minimum binding period, due to a reason attributable to the customer.

2. In addition to the said corrections, another VAT correction – in the total amount of € 71,643.81 – was also proposed in the Inspection Report, on the grounds of improper tax regularization by the Claimant, on the grounds that it was considered that the conditions provided for in subparagraphs a), c) and d) of paragraph 8 of Article 78 and subparagraph b) of paragraph 2 of Article 78-A of the VAT Code, and in Article 36, paragraph 5 also of the VAT Code, were not met.

3. The Claimant proceeded to the voluntary regularization of the amount of € 71,077.75, through the submission of a replacement periodic declaration for the period of November 2013.

4. Of the total amount of credits analyzed by AT (€ 22,567,199.22), the amount of VAT of € 3,883,956.34 was identified, which includes the said amount of € 71,643.82, which covered:

i. € 544.01 relating to invalid or non-existent tax identification numbers, which were not in the AT computer system; and

ii. € 71,099.80 relating to taxable persons who carried out operations that gave rise to the right of deduction.

1. In the months of April, October and November 2013, it made VAT regularizations in field 40 of the respective periodic declarations, in the total amount of € 3,883,956.34, relating to:

i. Credits considered uncollectable, in accordance with subparagraphs a), b) and c) of paragraph 7 of Article 78 of the VAT Code; and

ii. Credits in arrears, in accordance with subparagraphs a), c) and d) of paragraph 8 of Article 78 and subparagraph b) of paragraph 2 of Article 78-A, both of the VAT Code.

1. Following that correction in respect of VAT determined by AT in the Report, the Claimant was notified of the following assessment acts relating to VAT and compensatory interest, relating to the months of April to December 2013 and compensatory interest relating to the months of January to December of the year 2013.

2. In the VAT assessments and compensatory interest assessments above indicated relating to the periods of April, October and November 2013 (assessments nos. 2015..., 2015..., 2015..., 2016..., 2016... and 2016..., respectively), the amounts corresponding to corrections relating to "Field 40 regularizations", in favour of the Claimant, are included.

3. Between the corrections contained in the Report and the sum of all the amounts payable from the VAT assessments that were notified to the Claimant, there is a difference in the amount of € 79,759.95.

4. With respect to the periods of taxation of April, October and November 2013, part of the additional VAT assessments identified above related to VAT regularizations relating to invalid tax identification numbers, as shown in the following table:

5. The Claimant was notified on 10-01-2016 of the assessments of compensatory interest for the months of January, February and March 2013, and on 25-07-2016 (following a request for issuance of a certificate of full substantiation of the assessment acts that had been notified to it), it was notified of the assessments of tax relating to those tax periods.

6. Since the Claimant did not proceed to payment of the VAT assessment acts relating to the months of April to December 2013 and compensatory interest relating to January to December 2013, within the voluntary period for such purpose, the respective tax enforcement proceedings were initiated by AT.

7. On 28-03-2016, the now Claimant submitted to AT, in accordance with and for the purposes of Article 169 of the CPPT, the bank guarantee no. GAR..., issued by Bank C.., S.A., in the amount of € 2,097,194.55, for purposes of suspension of the tax enforcement proceedings instituted for coercive collection of the amounts in execution and now in question.

8. On 05-05-2015, the Claimant submitted to the Tax and Customs Authority (Finance Service of Lisbon ...), for purposes of suspension of the tax enforcement proceedings, the bank guarantee no. ..., issued by Bank D..., S.A., in the amount of € 6,578,499.83.

9. The Claimant filed a request for administrative reconsideration, to which it attached documents and which included, in addition to the matter relating to compensation for termination of contracts during the minimum period of validity, due to a reason attributable to the customer, the matter relating to regularizations in its favour of VAT delivered to the State in the total amount of € 544.01.

10. The request for administrative reconsideration was processed under no. ...2016..., with the Claimant being notified of the draft decision.

11. The request for administrative reconsideration was expressly dismissed, by decision notified on 13-11-2016.

12. Against this decision, the Claimant filed on 12-12-2016 a hierarchical appeal no. ...2016..., which was not subject to a decision within the legal period.

13. On 08-11-2017 the Claimant filed a request for constitution of the present arbitral tribunal.

14. The Claimant is a joint-stock company whose corporate purpose consists in the establishment, design, construction, management and operation of telecommunications networks and infrastructure, as well as in the provision of telecommunications services and the transport and broadcasting of telecommunications signals.

15. The Claimant adjusts the volume, type, intensity, location and timing of its investments according to the acquisition of a (minimum) predictable number of customers with whom it expects to establish and maintain a certain commercial relationship.

16. In the context of its activity, the Claimant concludes with its customers contracts for the provision of telecommunications services, internet access, television and multimedia services.

17. The Claimant has carried out and carries out the marketing of its services, through the use of various forms and channels, with which it bears a variable amount of expenses.

18. In certain contracts that the Claimant concludes with its customers, the obligation for the customer to remain bound by the contract during a minimum period is stipulated, and in these situations, promotional conditions are offered, namely, the fixing of monthly payments of lower value, as well as the offering of equipment, or its availability at a reduced price.

19. Consumers (whether they are customers of the Claimant or other electronic communications operators) are not restricted or limited to the possibility of concluding service provision contracts in which that minimum time period is necessarily provided, and the conditions in which services are offered are different (more onerous) from those offered in contracts that provide for a minimum period of validity.

20. When concluding these contracts, the Claimant provides its customers with the said promotional conditions, provided that they undertake to remain bound by such contracts during a "minimum period of validity", which may reach a maximum of 24 months.

21. This procedure is common in the telecommunications sector in Portugal, being practiced by the generality of operators.

22. In this type of contract, non-compliance by the customer of the contractual obligations to which it is subject – namely, the failure to pay the monthly payments due under the contract – generates, in that customer's sphere, the obligation to pay a certain amount to the Claimant, corresponding to the monthly payment multiplied by the number of months remaining to complete that period, in the event of deactivation of services, before the agreed contractual bond, at the Claimant's initiative due to a reason attributable to the customer.

23. During the term of the said period, it sometimes happens that the Claimant obtains revenue whose value exceeds the base monthly payment, in exchange for additional services or added value services that the Customer was not obliged to contract, provided under the same contract that provides for that "minimum period of validity", or for new contracts concluded by reference to other equipment, or other addresses.

24. When concluding contracts where the said clause appeared, the Claimant had the expectation that they would extend beyond the contracted minimum period of validity.

25. The provision of services (telecommunications, internet access, television and multimedia), by the Claimant, is based on a complex infrastructure whose assembly and maintenance implies a demanding investment of human and material resources, to which are added the human and administrative costs associated with customer acquisition and service activation.

26. On the basis of the value of the investment necessary for the provision of services, the Claimant determines a (minimum) number of contracts that must be concluded so that its business rationale can be achieved.

27. In situations where non-compliance with contracts by customers occurs, the Claimant ceases to receive the originally expected return, which was calculated on the basis of offsetting the various investments made (infrastructure, advertising/marketing, customer acquisition, service activation, discounts and other benefits granted to the customer).

28. In these situations of non-compliance with contracts by customers, the Claimant activates the clause included in its contracts.

29. In situations of non-compliance by the customer, the Claimant, at first, informs the customer of the need for regularization of the outstanding amounts and warns that, in the event of non-regularization, it will proceed to cancel services and debit the compensation arising from breach of the loyalty period, as provided for in the contracts.

30. Following this communication, and should the customer not regularize the outstanding amounts, the Claimant proceeds to cancel the contracted service provision.

31. After verification of non-compliance and the consequent cessation of service provision, the Claimant proceeds to debit the amount it considers due in accordance with the terms provided in the contract, corresponding to the "Value of the monthly payment (...) multiplied by the number of months remaining to complete that period".

32. The vast majority of the Claimant's customers, faced with the risk of debiting the said amount, prefer to comply with the contracted conditions, maintaining the binding during the minimum period of validity.

33. In situations where non-compliance persists, the Claimant has the right to collect the pre-fixed amount, without need to resort to court proceedings for proof and demonstration of the right to such amount, as far as its quantification is concerned.

34. In situations of breach of the minimum period of validity, the Claimant issues invoices to its non-compliant customers corresponding to the amounts debited as referred to, without VAT assessment and with the express mention "Not subject to VAT".

35. In such invoices, the Claimant mentions under the heading "Billing Details" that it is "COMPENSATION FOR CONTRACTUAL NON-COMPLIANCE – SERVICE".

36. The vast majority of the "compensations" charged in this context concerns individual customers.

37. In the year 2013, the Claimant billed a total of € 7,164,703.00, relating to breaches of loyalty periods by its customers, of which only part of that amount, not less than € 843,899.17 (€ 385,790.70 from former individual customers and € 458,108.47 from former customers who are VAT taxable persons), was subject to actual payment.

38. The Claimant, at the time of issuance of the corresponding invoices, records the respective amounts in the accounting line item # 282 - Revenue to be recognized, and only recognizes these amounts, from an accounting perspective, as results, at the time when its non-compliant customer makes payment of the invoiced amount.

39. In the monthly payments made by the customer during the period in which the contracts were complied with, the Claimant assessed VAT, which it promptly delivered to the State.

40. In the context of its activity of providing electronic communications services, the Claimant issues more than two million invoices monthly.

41. During its monthly billing cycles, the Claimant needs to issue corrective invoices in which it proceeds to reduce the taxable values of operations, in order to settle customer accounts, due to the application of discounts or adjustments after several invoices issued by reference to base values.

42. In these terms, the Claimant issues invoices to its customers for the base value of its service but, subsequently, for reasons of application of discounts or account adjustments, issues a credit note in which it corrects the billed values downwards, thus reducing the taxable base of the operation.

43. The tool available for validation of tax identification numbers in the Finance Portal requires manual entry, one by one, of each taxpayer number whose tax classification it is intended to verify.

44. During a tax inspection carried out in respect of VAT for the year 2015, the respondent – in a situation in which an initial correction proposal of € 8,588,243.00 had been made relating to alleged non-assessment – accepted a voluntary correction, by the Claimant, of VAT in the amount of € 931,687.00 corresponding to the indemnification amounts associated with the breach of the loyalty period that were actually received from (former) customers of the Claimant, with the following motivation:

[Details of motivation]

1. The AT, in situations identical to those referred to in the previous number, relating to other telecommunications operators, followed similar practices.

II.2. Facts given as not proven

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

II.3. Substantiation of the proven and not proven facts

With respect to the facts, the Tribunal does not need to pronounce itself on everything that was alleged by the parties, falling instead to it the duty to select the facts that matter for the decision and to distinguish the proven facts from those not proven (cf. Article 123, paragraph 2, of the CPPT and Article 607, paragraph 3 of the CPC, applicable ex vi Article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

In this way, the facts pertinent to the judgment of the case are chosen and delineated according to their legal relevance, which is established with attention to the various plausible solutions of the question(s) of Law (cf. previous Article 511, paragraph 1, of the CPC, corresponding to the present Article 596, applicable ex vi Article 29, paragraph 1, subparagraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110/7 of the CPPT, the documentary and testimonial evidence, and the PA attached to the proceedings, the facts listed above were considered proven, with relevance to the decision, taking into account that, as written in the Judgment of the TCA-South of 26-06-2014, delivered in case 07148/13, the "tax inspection report (...) may have evidentiary value if the assertions contained therein are not contested".

In particular, in addition to the facts that result directly from the available documentary evidence, which are not controversial, the facts 27 to 35,