Process: 60/2019-T

Date: June 17, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision addresses the procedural consequences of administrative annulment of disputed tax acts during pending arbitration proceedings. The taxpayer, A... S.A., challenged a VAT additional assessment of €86,968.20 plus compensatory interest of €12,761.97 for failure to regularize deductions on unoccupied property fractions. The Tax Authority had argued that annual regularization of 1/20 of VAT deductions was required for fractions not used in taxed operations. However, before submitting its response, the Tax Authority revoked the disputed acts through a dispatch by the Deputy Director-General for VAT, based on CJEU case law establishing that the right to VAT deduction is maintained even when circumstances beyond the taxpayer's control prevent use of goods or services in taxed operations. The arbitral tribunal analyzed whether this revocation constituted grounds for terminating the proceedings. Under the new Administrative Procedure Code (CPA), the tribunal distinguished between revocation (based on merit or convenience) and administrative annulment (based on invalidity), determining that the Tax Authority's act constituted administrative annulment despite using traditional terminology. The decision examines article 13(1) RJAT regarding effects of administrative acts practiced during arbitration and their impact on the tribunal's jurisdiction, particularly concerning the taxpayer's claim for indemnity interest. The case also involved procedural complications due to the company's insolvency declaration, requiring appointment of a new judicial representative by the insolvency administrator.

Full Decision

ARBITRAL DECISION

They agree in arbitral tribunal

I – Report

1. A..., S.A., with registered office at Street ... no. ..., ..., ...-..., Lisbon, holder of tax identification number ..., hereby requests the constitution of an arbitral tribunal, under the terms of articles 2, no. 1, paragraph a), and 10 of Decree-Law no. 10/2011, of 20 January, to assess the legality of the tax acts of additional VAT assessment, in the amount of € 86,968.20 and compensatory interest assessment, in the amount of € 12,761.97, relating to the period of December 2014, further requesting the condemnation of the Tax Authority to pay indemnificatory interest.

The judicial representative of the Applicant subsequently requested that the judicial mandate be declared lapsed due to the finality of the insolvency declaration judgment.

The insolvency administrator was notified to appoint a new judicial representative, and a power of attorney was attached to the proceedings constituting the lawyer B... as judicial representative.

The Tax Authority was notified to respond by dispatch of 10 April 2019, and still within the deadline set for the submission of the response, communicated that the disputed tax acts were revoked by dispatch of the Deputy Director-General for VAT.

Following the Court's request, the complete text of the revocation dispatch and the information from the services on which it is based were subsequently attached to the proceedings.

By dispatch of 13 May 2019, the Applicant was notified to comment on the revocation act and its consequences for the continuation of the proceedings, with nothing being requested within the set deadline.

2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority in accordance with the regulatory terms.

Under the terms of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories hereto, who communicated acceptance of the appointment within the applicable deadline.

The parties were duly and timely notified of this designation and did not express their intention to refuse it, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Accordingly, in compliance with the provision of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 9 April 2019.

The arbitral tribunal was regularly constituted and is materially competent, according to the provisions of articles 2, no. 1, paragraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same statute and 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities, having been raised an exception of incompetence of the arbitral tribunal to adjudicate on the matter of indemnificatory interest condemnation, following the revocation of the disputed acts.

It is incumbent to assess and decide.

II - Grounds

3. In the context of an inspection action which had as its object the analysis of the tax situation of the Applicant, corrections were made in VAT, in the amount of € 86,968.20, plus compensatory interest in the amount of € 12,761.97, for having failed to regularize the tax in the last periodic declaration relating to the year 2014 with respect to property fractions that remained unoccupied during one or more calendar years. The regularization was considered justified, under the terms of article 26 of the VAT Code, on the understanding that the taxable person could exercise the right to deduct VAT incurred in the construction of the development based on its subsequent use in taxed operations, but annual regularization of 1/20 of the deduction made in relation to fractions that had not been used would be required.

The Applicant submitted a request for arbitral ruling to assess the legality of the acts of additional VAT assessment and compensatory interest, alleging that it deducted the upstream tax charged against the tax assessed in the provision of space availability services and in relation to the unoccupied fractions, it always sought proactively to enter into space assignment contracts together with other services ancillary to their use. And, basing itself on CJEU case law, it sustains that the taxable person may deduct the tax incurred on investment works even when for reasons of economic circumstances or market conditions beyond its control it has not made use of the goods or services to carry out taxed operations.

Still within the deadline for submitting the response, the Tax Administration communicated the revocation of the disputed tax acts by dispatch of the Deputy Director-General for VAT.

The revocation dispatch, dated 2 May 2019, reads as follows: "I agree. I revoke the disputed tax acts. Proceed with payment of indemnificatory interest as proposed". The same was issued on the basis of information from the VAT Services Directorate, which concludes that the acts in question should be revoked in light of CJEU case law which holds that the right to VAT deduction is maintained, even if subsequently, due to circumstances beyond its control, the taxable person does not make use of the goods or services that gave rise to the deduction within taxed operations.

In this context, it is necessary to analyze the procedural effects of the said revocation act.

4. In this regard, it is important to first note that the new Administrative Procedure Code, approved by Decree-Law no. 4/2015, of 7 January, has made a distinction between revocation and administrative annulment, assigning to each of these figures the two previous modalities of abrogative or extinctive revocation and annulatory revocation. According to the definition in article 165 of the CPA, revocation is "the administrative act that determines the cessation of the effects of another act, for reasons of merit, convenience or opportunity", whereas administrative annulment is "the administrative act that determines the destruction of the effects of another act, on the grounds of invalidity". Revocation produces, as a rule, only effects for the future (article 171, no. 1), whereas administrative annulment, having as its object the elimination from the legal world of voidable acts, has, as a rule, retroactive effects (article 171, no. 3).

In the case at hand, the Tax Authority understood that it should follow the decision-making direction of CJEU case law, and accordingly practiced, according to the new terminology, an administrative annulment act, that is, an act based on considerations of administrative legality and not mere discretion. Thus, the said dispatch of 2 May 2019, although it adopts the verbal formula previously applied, corresponds to a true annulatory act.

The question that could first arise is whether—given the provision of article 13, no. 1, of the RJAT—it is possible to proceed, pending the arbitral proceedings, with administrative annulment of the disputed tax acts.

The cited article 13, no. 1, of the RJAT, under the heading "Effects of the request for constitution of the arbitral tribunal", provides as follows:

In requests for arbitral ruling which have as their object the assessment of the legality of the tax acts provided for in article 2, the head of the tax administration service may, within 30 days from knowledge of the request for constitution of the arbitral tribunal, proceed to revoke, ratify, reform or convert the tax act whose illegality has been raised, practicing, when necessary, a substitute tax act, and shall notify the president of the Center for Administrative Arbitration (CAAD) of its decision, whereafter the counting of the deadline referred to in paragraph c) of no. 1 of article 11 shall commence.

The deadline provided in paragraph c) of no. 1 of article 11 to which this provision refers is that relating to the communication to the parties of the constitution of the arbitral tribunal, which makes it possible to conclude that this is a procedural deadline, inserted in the procedure of constitution of the tribunal, and which still occurs before the start of the arbitral proceedings (see article 15).

This does not mean, however, that administrative annulment of the disputed act is barred to the Administration even pending the arbitral proceedings.

The Tax Authority, as an administrative entity, is subject to the provisions of the Administrative Procedure Code (article 2, no. 1), and, on the other hand, as results from the provision of article 29 of the RJAT, the rules on proceedings in administrative courts are subsidiarily applicable to the tax arbitral proceedings, in accordance with the nature of the case omitted.

Article 168 of the CPA, which defines the conditions applicable to administrative annulment, in its no. 3, establishes that "when the act has been subject to judicial challenge, administrative annulment can only take place until the closure of the discussion". Closure of the discussion should be understood, in correspondence with what is established in article 604, no. 3, paragraph e) of the CPC, as the moment when the parties produce oral submissions or the expiration of the deadline for written submissions or the end of the pleadings phase when the parties have waived final submissions and the state of the proceedings permits the assessment of the claim without need for further investigation.

It must therefore be concluded that the CPA has expanded the powers of disposition of the Administration pending the proceedings, allowing, in line with what doctrine has already suggested, that administrative annulment, when the act has been subject to judicial challenge, can take place until closure of the discussion, and not only until the response, as was provided for in article 141, no. 1, of the CPA of 1991.

In any case, nothing prevents the Administration, under the cited article 168, no. 3, from annulling the disputed tax act pending the proceedings, provided it is within the time limit defined in that provision, and this power has nothing to do with the specific regime to which article 13, no. 1, of the RJAT refers, which grants the possibility for the Administration to annul the disputed act still within the procedure of constitution of the arbitral tribunal.

That said, it cannot be denied that the administrative annulment is timely, since the Tax Authority practiced the annulment act still within the deadline for submission of the response, and the corresponding legal effects must be attributed to the annulment under these conditions.

Regarding the procedural consequences of administrative annulment, the provision of article 64 of the CPTA is relevant, subsidiarily applicable, which, among other provisions, refers to situations in which, pending the challenge proceedings, the disputed act is subject to administrative annulment accompanied or followed by a new definition of the legal situation, in which case it is admitted that the challenge proceedings continue against the new act on the grounds of recurrence of the same illegalities. The typical hypothesis of expansion of the object of the proceedings is envisaged when, pending a challenge proceedings, the Administration annuls the disputed act by practicing a new act in its place against which the challenger may still have an interest in reacting.

It is clear, however, that this is not the situation in the case at hand.

The Administration annulled the acts without instituting any new regulation of the legal situation, limiting itself to determining payment of indemnificatory interest. That is, however, a consequence of administrative annulment, as results from the provision of article 172 of the CPA, which imposes on the Administration the duty to reconstitute the situation that would have existed if the annulled act had not been practiced, in accordance with what is also established in article 43 of the General Tax Law.

Now, the annulment of the act challenged by the Administration itself, pending the proceedings, satisfying the challenging claim of the applicant, leads to the supervening impossibility of the dispute, which constitutes a cause of extinction of the instance (article 277, paragraph e), of the CPC).

III – Decision

Accordingly, the instance is declared extinct due to supervening impossibility of the dispute.

Value of the Claim

The Applicant indicated as the value of the claim the amount of € 99,730.17, which was not contested by the Respondent and corresponds to the value of the assessment which was intended to be opposed, and accordingly the value of the claim is fixed at that amount.

Costs

Under the terms of articles 12, no. 2, and 24, no. 4, of the RJAT, and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached to that Regulation, the amount of costs is fixed at € 2,754.00, which is charged to the Respondent (article 536, no. 3, second part, of the CPC).

Notify.

Lisbon, 17 June 2019

The President of the Arbitral Tribunal

Carlos Fernandes Cadilha

The Arbitrator Member

Catarina Belim

The Arbitrator Member

João Marques Pinto

Frequently Asked Questions

Automatically Created

What happens when the Tax Authority revokes the contested tax assessment during arbitral proceedings?
When the Tax Authority revokes contested tax assessments during arbitral proceedings, the tribunal must determine whether the revocation constitutes grounds for terminating the case. Under article 13(1) RJAT, the head of the tax administration service may revoke, ratify, reform or convert disputed tax acts within 30 days of notification. However, the tribunal retains jurisdiction to decide on indemnity interest claims arising from unlawful assessments, even after administrative annulment of the underlying tax acts.
Can arbitral tribunal proceedings be terminated due to administrative annulment of the disputed tax act?
Arbitral tribunal proceedings can be terminated due to administrative annulment of disputed tax acts when the revocation eliminates the object of the dispute. However, the tribunal maintains competence to adjudicate claims for indemnity interest resulting from the unlawful assessment, as this constitutes a distinct legal claim. The distinction between revocation (future effects) and administrative annulment (retroactive effects) under the new CPA is crucial for determining procedural consequences.
How does a company's insolvency declaration affect ongoing tax arbitration at CAAD?
A company's insolvency declaration affects ongoing CAAD tax arbitration by requiring judicial representation through the insolvency administrator. The original judicial mandate lapses upon finality of the insolvency judgment, and the insolvency administrator must appoint new legal counsel. The arbitration proceedings continue with the properly appointed representative, as the insolvency estate retains legal interest in contesting unlawful tax assessments and claiming indemnity interest.
What are the legal consequences of revoking a VAT additional assessment and compensatory interest liquidation?
Revoking a VAT additional assessment and compensatory interest liquidation eliminates the taxpayer's obligation to pay these amounts and triggers the right to indemnity interest under article 43 LGT for the period the amounts were unlawfully assessed. When revocation is based on administrative annulment (illegality), it produces retroactive effects, restoring the taxpayer's legal position as if the unlawful acts never existed and generating entitlement to compensation for financial prejudice.
Is the taxpayer entitled to indemnity interest when the Tax Authority revokes an unlawful tax assessment?
Yes, taxpayers are entitled to indemnity interest when the Tax Authority revokes an unlawful tax assessment. Article 43 LGT establishes the right to indemnity interest for amounts paid or deposited resulting from unlawful tax acts, calculated from payment until restitution. Even when administrative annulment occurs before payment, indemnity interest may be due if the unlawful assessment caused financial prejudice. The Tax Authority's revocation dispatch explicitly recognized this entitlement by ordering payment of indemnity interest as proposed by the services.