VAT Reduced Rate for Tourist Accommodation Under CIVA List I Clause 2.17

Arbitral Decision

REPORT

1. On 22 September 2015, A..., a Single-Member Limited Liability Company, with registered office at Street..., ..., ..., NIPC..., hereinafter referred to as the Claimant, requested the establishment of an arbitral tribunal and filed a request for arbitral pronouncement, pursuant to subparagraph a) of item 1 of Article 2 and subparagraph a) of item 1 of Article 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as LRATM), in which the Tax and Customs Authority is the Respondent (hereinafter referred to as TCA).

2. The Claimant is represented in these proceedings by its representative, Dr. B..., and the Respondent is represented by the legal experts, Dr. C... and Dr. D....

3. The request for establishment of the arbitral tribunal was accepted by the Illustrious President of CAAD and notified to the Respondent on 1 October 2015.

4. By means of the request for establishment of the arbitral tribunal and arbitral pronouncement, the Claimant seeks the partial annulment of the self-assessment acts of Value Added Tax (VAT) for November and December 2014, in the amount of € 22,396.98 (twenty-two thousand, three hundred ninety-six euros and ninety-eight cents), as well as the declaration of illegality of the act of tacit rejection of the administrative appeal that it filed against those self-assessment acts.

5. Having verified the formal regularity of the request filed, pursuant to subparagraph a) of item 2 of Article 6 of the LRATM, and the Claimant not having proceeded to appoint an arbitrator, the undersigned was appointed by the President of the Deontological Council of CAAD.

6. The Arbitrator accepted the appointment made, the arbitral tribunal having been constituted on 30 November 2015, at the headquarters of CAAD, located at Avenida Duque de Loulé, No. 72-A, in Lisbon, as evidenced by the minutes of constitution of the arbitral tribunal, which were drawn up and are attached to these proceedings.

7. The Respondent, after being notified for that purpose, filed its response on 14 January 2016.

8. On 24 February 2016, the Tribunal, with a view to assessing the utility of producing witness evidence requested in the initial petition, notified the Claimant to indicate, in light of the position assumed by the Respondent in its response, whether it wished to maintain the production of witness evidence, and if so, to indicate the respective facts to which the witnesses were to testify, with the Claimant responding, through the petition it filed on 8 March 2016, manifesting its non-opposition to the waiver of the requested inspection, maintaining, however, its position regarding the examination of the witnesses it had listed.

9. On 14 April 2016, the Tribunal, through an order, notified the designation of 3 May 2016, at 3 p.m. for the holding of the meeting provided for in Article 18 of the LRATM, as well as for the examination of the witnesses listed by the Claimant, this date having been postponed, due to unavailability of the hearing room, to 5 May 2016 at the same time, through an order dated 15 April 2016, of which full notice was given to the parties.

10. On 5 May 2016, the meeting provided for in Article 18 of the LRATM took place, for the pursuit of the objectives set out therein, and the witnesses listed by the Claimant were examined, which proceeded to attach 3 documents to the proceedings, with the consent of the Respondent, which may issue its comments on the same at the final arguments stage, as evidenced by the respective minutes attached to the proceedings.

11. Also on 5 May 2016, at the meeting provided for in Article 18 of the LRATM, the Tribunal notified the Claimant and Respondent to successively present written arguments within 15 days in this order, with the Respondent's period commencing only with notification of the attachment of the Claimant's arguments, extended the period for issuing the decision by two months, pursuant to Article 21, item 2 of the LRATM, thus designating 30.06.2016 for the same, and finally warned the Claimant that it should proceed to payment of the subsequent arbitral fee, pursuant to item 3 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings, and communicate the same payment to CAAD.

12. On 23 May 2016, the Claimant presented its written arguments, which were responded to through the counter-arguments presented by the Respondent on 3 June 2016.

The Claimant substantiates its claim, in summary, as follows:

The Claimant substantiates the request for partial annulment of the self-assessment act of Value Added Tax (VAT) for November and December 2014, in the amount of € 22,396.98 (twenty-two thousand, three hundred ninety-six euros and ninety-eight cents), by arguing that it is affected by illegality, in so far as:

a) The Claimant alleges that it "manages, administers and operates a tourist accommodation establishment located in..., in the Algarve, named E.... The establishment integrates all the typical elements that characterize any establishment intended for tourist accommodation and the services provided therein are not distinguished, in nature, from the services provided in an ordinary hotel. (...) it has rooms (...) 114 accommodation units (...), it has complementary equipment (...) it integrates support, sports and leisure infrastructure, such as reception, bar, outdoor and indoor swimming pools, spa, hair salon, games room, common rest areas, among other similar facilities. (...) it is sought exclusively for non-residential purposes and the use by all its clients is limited to short periods of time intended for rest and leisure."

b) Furthermore, it states that it "provides all its services to the general public, but offers more advantageous conditions to the so-called members of the E... Club (Club), managed by F... (F...), a company under English law. F... holds certain rights, including accommodation in the village complex, in exchange for a payment to the present Claimant, updated annually and established by mutual agreement."

c) It further states that "the quality of membership in the Club, [on the one hand], confers on clients the right to use temporary accommodation of a particular accommodation unit during a particular week of each year, at preferential prices, and, [on the other hand], depends on an annual payment that waives any other payment for accommodation, but which tends to be lower than the price of identical accommodation charged to other clients. If any annual payment is missed, the client permanently loses his membership status and is treated as any other client, being able to occupy an accommodation unit only available by paying the price due by any non-member client of the Club."

d) It believes that, since "the service that (...) it provides to all its clients – members and non-members of the Club (...) is identical; (...) and which consists of accommodation in a hotel-type establishment" should be taxed at the reduced VAT rate. Adding that, "given the identity of the services it provides to all its clients," it should "treat them uniformly for purposes of VAT taxation," citing arbitral and judicial jurisprudence in support of its thesis.

e) Furthermore, the Claimant explains that "the price established (...) [by it] with the Club for the hotel accommodation service it provides is, and always has been, a final price, including VAT. Any tax charged, whether or not legally due, is contained and incorporated in that price and is borne by the Claimant. If it charges more tax than is due, the Claimant will see its margin reduced; if it charges less tax than is due, the Claimant will have to bear the additional portion without being able to demand it from its client." Thus, "the purchaser of the service – the Club – has no right of refund, since it has not paid the service provider – the Claimant – any amount in addition to the value of the annual charge to which it committed itself."

f) It further adds that "(...) in November and December 2014, the Claimant charged for the same identical hotel accommodation service the same price it charged since January 2015, but included in it VAT at the normal rate of 23% which it self-assessed in the respective periodic declarations and paid to the State. Without being able to charge its client any amount in addition to the value of the fixed annual charge it contracted with it, the Claimant reduced its margin, i.e., its taxable base, so that in the same price it could include 23% VAT."

g) It also cites, as the legal basis for the position it assumes, that "the service of accommodation in a hotel-type establishment is taxed at the reduced VAT rate, as determined by item 2.17 of List I attached to the respective Code in conjunction with subparagraph a) of item 2 of Article 18 of the same legislation. This is a choice exercised by the Portuguese State that results from point 12 of Annex III of Directive 2006/112/EC, of 28 November, which gives EU Member States the discretion to apply a reduced rate to 'accommodation in hotels and similar establishments, including holiday accommodation and the use of camping and caravan sites.'"

h) It continues by noting that "the reduced VAT rate applies to any accommodation services within hotel activities or with analogous functions, since all such services are in potential competition. The normal structure of a hotel or similar contract includes typical elements of four named contracts: lease, provision of services, bailment and purchase and sale, in a unified, organic and autonomous whole composed of interests, through a consideration. The normal structure of the performance owed by the hotelier or similar is characterized by the provision of accommodation, meals and provision of complementary services. Well, all these typical elements are present in the service at issue in these proceedings."

i) Thus, "through an annual payment that waives any other payment for performance, the member of the Club acquires the right to use temporary accommodation of a particular unit for a particular week of each year. This is precisely what is at issue here: a periodic monetary performance that constitutes the consideration for the provision of periodic temporary accommodation integrated in a tourist enterprise."

j) It further adds that "from the Club member client's perspective, his annual payment does not constitute the consideration of a distinct and independent service performance separate from the service performance that consists of providing tourist accommodation services. When that client pays the annual amount for each of the periods of use of the property, they have no intention of acquiring any service other than tourist accommodation in a specific property for one week of the year. Therefore, the annual payment invoiced to the Club, under the title of tourist accommodation, specifically in the months of November and December 2014, originated from a single indissociable economic performance, whose decomposition would be artificial in character."

k) "In summary, what is at issue in these proceedings is a service of accommodation in an establishment that presents all the typical characteristics of a hotel and that provides most hotel-type services,"

l) Concluding to the effect that "the self-assessment acts challenged here are therefore illegal, and so is the (immediate) act of tacit rejection of the administrative appeal filed against them, for violation of item 2.17 of List I attached to the VAT Code in conjunction with subparagraph a) of item 2 of Article 18 of the same legislation. [They are also] for violation of the EU principles of fiscal neutrality, objectivity and uniform VAT taxation rate, on the one hand, and the principle of effectiveness or efficacy, on the other, which opposes an internal law or administrative practice that makes impossible or excessively difficult the exercise of rights conferred by EU law, specifically presuming unjust enrichment based solely on the legal burden of the tax on third parties."

m) As to the matter that the VAT in question was not borne by the Claimant, but by the client, it understands and explains that this "thesis has no correspondence with reality. First, because the Claimant could in no case charge the client any amount in addition to the value of the fixed annual charge it contracted, nor could the latter be reimbursed any amount that could be found wrongly discriminated in that value. Because it is, therefore, a final price."

n) Furthermore, the Claimant advances that "it is not to be said that to correct this error the Claimant would have to reimburse its client by issuing credit notes in accordance with Article 78 of the VAT Code, (...) because the Club has no right to any refund since it has not paid the Claimant any amount in addition to the value of the annual charge to which it committed. (...) It would not be otherwise only if the Claimant had possibly agreed with the Club an annual amount excluded from VAT."

o) The Claimant makes considerations as to possible unjust enrichment, mentioning that "The State is obliged to reimburse taxes charged in violation of law. It need not do so only if and when this has the consequence of unjust enrichment of the respective refund recipient. This is an exceptional rule introduced to the general right to recover excessive tax," according to which "the State will not have to reimburse the taxpayer if it proves that the improper tax payment made by it was fully borne by a third party. If the State proves that it was the consumer, charged, who bore the improper tax payment, and that the refund would therefore lead to unjust enrichment of the supplier, liable, it may refuse the refund."

p) With application to the concrete case, the Claimant asserts that "the economic burden that the improperly charged tax between November and December 2014 represented in the sphere of the Claimant was in no way neutralized through legal burden. (...) The improperly charged tax between November and December 2014 caused the Claimant to have to reduce its margin by € 22,396.98 so that it could integrate this 23% tax in the fixed remuneration owed for its services provided to client members of the Club."

q) Furthermore, the Claimant states that "any attempt to subordinate the annulment of the VAT challenged in these proceedings to a prior refund to the Club in accordance with the aforementioned item 5 of Article 78 of the VAT Code would always be dependent on prior demonstration that appropriation of that VAT by the Claimant would constitute unjust enrichment, when, for the reasons already stated, the opposite was precisely demonstrated. Once its illegality is recognized, the administration cannot refuse to return the VAT claimed by not having complied with the provision in item 5 of the aforementioned Article 78."

r) Finally concluding its position to the effect that "The self-assessment acts challenged here are therefore illegal, and so is the (immediate) act of tacit rejection of the claim filed against them, for violation of item 2.17 of List I attached to the VAT Code in conjunction with subparagraph a) of item 2 of Article 18 of the same legislation. They are likewise illegal for violation of the EU principles of fiscal neutrality, objectivity and uniform VAT taxation rate, on the one hand, and the principle of effectiveness or efficacy, on the other, which opposes an internal law or administrative practice that makes impossible or excessively difficult the exercise of rights conferred by EU law, specifically presuming unjust enrichment based solely on the legal burden of the tax on third parties."

III. In its Response, the Respondent, invoked, in summary, the following:

a) Against the Claimant's pretension, the Respondent mentions, on the one hand, that "(...) the factual basis underlying the Claimant's request is rooted in the fact that, in the taxation periods in question, it charged, allegedly in error, tax to members of its Club (purchasers of the services it provides) by applying the 23% rate, instead of the 6% rate. It is important, however, to note that, regardless of whether there was or was not an error in the self-assessment, the Claimant did not issue the corresponding credit notes to which it was obliged under Article 29, item 7 of the VAT Code," as well as "(...) did not proceed with any regularizations in accordance with Article 78 of the VAT Code, as the Claimant itself admits in Article 130 of the petition for arbitral pronouncement."

b) The Respondent believes that "it is important not to forget that the taxable value of the transaction and the corresponding tax are altered as a consequence of the change in the VAT rate advocated by the Claimant." whereby, "in this way it results, in summary, (...) that the correction of the inaccuracy of the invoices issued by the Claimant in November and December 2014 regarding the applicable rate and, consequently, regarding the taxable value of the provision of services, is carried out through the issuance of credit notes and new invoices (with the fields of the taxable value and tax due correct in light of the new applicable rate), in accordance with Articles 29, items 1 and 7, 36, 44, 45 and 78 of the VAT Code, which must be entered in field 40 of the periodic declaration for the period in which the regularization was carried out and never through the substitution or annulment of the periodic declaration relating to the period corresponding to the invoices that were annulled."

c) Thus, and also in this sequence, the Respondent questions "where are the invoices corresponding to the periods whose self-assessments the Claimant says are incorrect?" A question it raises, considering that "contrary to what the Claimant wishes to suggest, the invoices do not reflect incorrect self-assessments. Tax self-assessments are what may suffer from error when there were inaccuracies in the invoices relating to either VAT charged or deductible VAT; in the concrete case, when the invoices were issued by the Claimant in light of the services provided."

d) It further explains that, "(...) in the concrete case, there would always have to be invoice issuance that included a certain rate, to which would correspond, likewise, a certain taxable value. When it is intended to change the application of the rate to the aforementioned services, new invoices would have to be issued that necessarily would have to show an alteration in the taxable value. This to meet the factuality presented by the Claimant when it states that the total value of the invoice was not altered. That is, the self-assessments concerning the periods corresponding to the invoices whose rate was later concluded to be incorrect do not suffer from any error, based on the accounting of those invoices with the 23% rate, and instead should be promoted by the Claimant the procedure set out in Articles 20 to 25 of this Response," whereby the Claimant in the case at hand "should (instead of presenting the claim on the self-assessment) have promoted the corresponding regularization, which would have effects both in terms of VAT and in terms of corporate income tax, at the level of revenues for the period and corresponding taxable profit."

e) Concluding on this matter to the effect that "Not having promoted such corrections, the self-assessments now being challenged do not suffer from any illegality and are therefore not subject to annulment, even partially, as the Claimant seeks to argue," indicating arbitral tribunal jurisprudence for this purpose.

f) It further adds, regarding the Claimant's pretension that "With all due respect and better opinion, we also believe that the claim formulated by the Claimant has not the slightest foundation, if we take into account the repercussibility of the tax it charged," since it believes that "restitution to the Claimant of the amount of tax it charged and received from its clients (final consumers, in this case, as it alleges) would result in unjust enrichment, which neither national law nor EU law allows. Now, in accordance with the basic principles of tax functioning and its characteristics, namely, repercussibility and neutrality – the tax does not constitute an expense of taxpayers." Explaining that "Not constituting an expense of the taxpayer, the Claimant would have had to present the credit notes that demonstrate the return of the amount it allegedly charged in excess. Similarly, the same is drawn from the analysis of what is provided in subparagraph c) of item 1 of Article 2 of the VAT Code, by considering as taxpayer persons, natural or legal, who wrongly mention VAT in an invoice," indicating EU jurisprudence to support this position.

g) It concludes also to the effect that "Now, in the case sub judice and in the administrative appeal that gave rise to it, the Claimant seeks nothing more than the return of an amount of tax that it does not prove it actually bore and, as a consequence, is not owed to it."

h) It further asserts, challenging what was stated in the initial petition that "it is false that its clients bore the amount of tax included in the price, since the amount paid by them did not suffer changes, and what happened was that its profit margin was what was reduced." Well, "if it had been so, then one would be talking about other tax charges and not those which, according to the Claimant's thesis, are at issue in these proceedings," in so far as by "admitting that its margin was reduced is exactly the confirmation that it was the clients who bore the value of 23% tax included in the price charged for the provision of services rendered."

i) Further adding that "in the case at hand, having been a taxpayer to whom the tax was passed on, this does not imply that the right to deduction is impaired as the Claimant wishes to suggest. Indeed, what the various rulings cited by the Claimant say is that national legislation cannot place on the taxpayer the burden of proving that improperly paid tax was not passed on to third parties. However, in the case of the proceedings, this issue does not arise since the Claimant assumes it clearly, although it comes to say that this only happened in so far as it reduced its profit margin. The Claimant asserts that this option of not raising final prices implied a reduction in its revenues and directly imputes this fact to the increase in the VAT rate included in the services charged. If it reduced its revenues, it surely also paid less corporate income tax, but it cannot now want to benefit from an extraordinary profit from the return of tax it did not actually bear."

j) Furthermore, the Respondent states that "after all, the Claimant cannot certainly ignore that whoever actually bears the tax, in the case of VAT, is the consumer of the good or service, given the legal obligation to pass it on," whereby, "the claim of the Claimant cannot be accepted as manifestly unfounded," arguing, accordingly, for the dismissal of the petition for arbitral pronouncement.

IV. Sanitation

The Tribunal is competent and is regularly constituted, pursuant to subparagraph a) of item 1 of Article 2 and Articles 5 and 6, all of the LRATM.

The parties have legal personality and capacity, are shown to be legitimate, are regularly represented, and the proceedings are not afflicted with nullities.

V. Factual Matters

For the conviction of the Arbitral Tribunal, regarding the proven facts, the documents attached to the proceedings were relevant, the administrative record, as well as the testimony of the witnesses presented by the Claimant, which proved to be suitable and with direct knowledge of the facts under discussion in these proceedings.

a. Facts Established as Proven

With interest for the decision, the following facts are established as proven:

A. The present Claimant is a corporate income tax taxpayer, resident in national territory, and is under the normal VAT regime with monthly periodicity, having as its main activity the operation of tourist villages with restaurant service. – see Agreement of the parties and administrative record attached to the proceedings –

B. The Claimant manages, administers and operates a tourist establishment located in..., in the Algarve, named E.... – see Agreement of the parties and administrative record attached to the proceedings –

C. The tourist establishment referred to in B... includes all the typical elements that characterize any establishment intended for tourist accommodation and the services provided therein are not distinguished in nature from the services provided in an ordinary hotel; – see Agreement of the parties –

D. The tourist establishment referred to in B... has rooms, that is, 114 fully equipped and ready to occupy and use accommodation units that enjoy daily maid service and cleaning, replacement of towels, bed linens and personal hygiene consumables; – see Agreement of the parties –

E. The tourist establishment referred to in B... has complementary equipment, integrating support infrastructure, sports and leisure, such as reception, bar, outdoor and indoor swimming pool, spa, hair salon, games room, common rest areas, among other similar facilities; – see Agreement of the parties –

F. The tourist establishment referred to in B... is sought exclusively for non-residential purposes and the use by all its clients is limited to short periods of time intended for rest and leisure.

G. The Claimant provides all its services to the general public, but offers more advantageous conditions to the so-called members of the E... Club (Club), managed by F... (F...) a company under English law. – see Agreement of the parties –

H. F... holds certain rights, including accommodation in the village complex, in exchange for a payment to the Claimant, updated and established by mutual agreement – See Administrative record – Doc. No. 3 attached with the Administrative Appeal –;

I. Membership in the Club depends on an annual payment that waives any other payment for accommodation, but which is lower than the price of identical accommodation charged to other clients. – see Agreement of the parties –

J. If any annual payment is missed, the client permanently loses his membership status and is treated as any other client, being able to occupy an accommodation unit only available by paying the price due by any non-member client of the Club. – see Agreement of the parties –

K. From the services available, both members of the "Club," the so-called members of the E... Club, and any user, in general, can enjoy, although under different conditions, notwithstanding, the services are identical for both, which consist of accommodation in a hotel-type establishment. – see Agreement of the parties –

L. The Claimant periodically invoices F... the weeks that are being used by Club members in accordance with the values that are set for that purpose each year. – see Agreement of the parties –

M. The Claimant charged VAT in November and December 2014 on hotel accommodation services provided to clients who are not members of the Club at the reduced rate of 6% – See Administrative record - Doc. No. 4A to 4 G attached with the administrative appeal –

N. The Claimant charged VAT in November and December 2014 on hotel accommodation services provided to clients who are members of the Club at the normal rate of 23% – See Administrative record - Doc. No. 5A and 5B G attached with the administrative appeal –

O. On 7 January 2015, the Claimant filed the periodic VAT declaration for the period 2014/11M – see Administrative record – Doc. No. 1 A attached with the administrative appeal –

P. On 02 February 2015, the Claimant filed the periodic VAT declaration for the period 2014/12M – see Administrative record – Doc. No. 1 A attached with the administrative appeal –

Q. On 4 March 2015, the Claimant filed an administrative appeal against the VAT self-assessment acts for November and December 2014, in the amount of € 22,396.98 (twenty-two thousand, three hundred ninety-six euros and ninety-eight cents). -see Administrative record –

R. On 29.05.2015 the Claimant filed the petition for establishment of the arbitral tribunal that gave rise to this proceeding, in light of the tacit rejection of the administrative appeal indicated above.

VI. Facts Established as Not Proven

There are no facts established as not proven, because all facts relevant to the assessment of the claim have been established as proven.

VII. Legal Grounds

In these proceedings, the fundamental question that arises is whether the Claimant, despite having improperly charged VAT at the normal rate to Club member clients and having made no correction, has the right to contest the self-assessment acts of November and December 2014 on the basis of the illegality of such self-assessment, and consequently recover the excessive VAT charged and paid.

In order to answer this question, it is necessary to determine the scope, reach and meaning of item 2.17 of List I attached to the VAT Code, analyzed in the EU and internal context, which is, precisely, what we propose to do.

Let us see,

Value Added Tax

VAT is a complex tax, which, according to the teachings of Clotilde Celorico Palma is "characterized essentially as an indirect tax of EU matrix, multiphase, which tendentially affects any act of consumption through the indirect subtraction method."

It is, in truth, a tax on consumption, given its incidence at all stages of the economic circuit and in taxing every act of consumption (as opposed to special taxes on consumption).

It is "charged at all stages of production, (...) does not favor or disfavor the combination or separation of operations of productive units. Insofar as the taxable value is, in principle, the effective price of the transaction, and not a normal value," and "aims to tax all consumption of material goods and services, covering its incidence all stages of the economic circuit, from production to retail, but the taxable base is limited to the value added at each stage."

In effect, neutrality must find expression at all essential stages of the life of this tax, in particular, regarding the rules of objective and subjective incidence, location, exemptions and the exercise of the right to deduction.

Now, as stated in the CAAD decision issued in case No. 429/2014-T, regarding the characterization and specification of the principle of neutrality, this principle "is set forth in VAT Directives, being systematically invoked by the Commission to oppose national legislations deemed incompatible with the rules of EU Law, as well as by the tax authorities and taxpayers of the various Member States."

In effect, "the application of the principle of neutrality should be taken into account at the essential stages of the life of this tax, such as the rules of objective and subjective incidence, location, exemptions and the exercise of the right to deduction. We can state that this has been the principle most invoked by the CJEU to ground its rulings, appearing many times allied to the principle of equal treatment, uniformity and elimination of competition distortions. Thus, the CJEU has been concerned, particularly, with regard to the realization of the objectives of the common system, to guarantee the neutrality of the tax burden of all economic activities, whatever their objectives or results (...)" assuring "economic agents equal treatment, achieve a uniform definition of certain elements of the tax and guarantee legal certainty and facilitate actions aimed at its application."

Thus, in accordance with this fundamental principle, and as already alluded to, VAT should be interpreted and applied, internally and internationally, so as to ensure a homogeneous system that guarantees sound competition within the EU space.

Now,

Taking into account the matter at hand, we believe it prudent to mention, first and foremost, that the provision of reduced VAT rates in the internal legal systems of each Member State originates from existing EU Directives on that matter.

In effect, the most comprehensive questions related to VAT are found in the now effective Directive No. 2006/112/EC, of 28 November (hereinafter referred to as the VAT Directive), which provides the necessary guidance for transposition by Member States of the rules of this tax, so that it can be harmonized within the EU space.

Now, with regard to the application of VAT rates (normal and reduced), we note that the VAT Directive in its Articles 96 and 97 provides for fixing the rate at a percentage of the taxable value not less than 15% until 31 December 2015.

However, and in addition to the normal rate, the VAT Directive also provides, already in its Article 98, on the one hand, that Member States may apply internally "one or two reduced rates" at a percentage that cannot, according to Article 99 of the VAT Directive, be less than 5%, further providing, on this point, that "Each reduced rate is fixed so that the amount of VAT resulting from the application of that rate normally allows the deduction of all the tax for which the right to deduction is granted in accordance with Articles 167 to 171 and 173 to 177," and on the other hand, that such reduced rates should apply "only to the supplies of goods and services of the categories listed in Annex III [not applying, however,] to the services referred to in subparagraph k) of item 1 of Article 56," and that "when applying the reduced rates provided for in item 1 to the categories relating to goods, Member States may use the Combined Nomenclature to define precisely each category." (emphasis ours).

That is, Member States that so wish can adopt, when transposing the Directive into their legal systems, the reduced rate of tax, which must comply with EU Law standards.

Now, of interest to these proceedings, taking into account that we are faced with a situation of application of reduced rate to accommodation in hotels and similar establishments, we can note that point 12 of Annex III of the VAT Directive provides that "accommodation in hotels and similar establishments, including holiday accommodation and the use of camping and caravan sites" may have the reduced rates provided for in Article 98 of the VAT Directive applied.

In effect, when the Portuguese Republic transposed the norms of the VAT Directive into its legal system, it deemed it well to establish in subparagraph a) of item 1 of Article 18 of the VAT Code, in complement with item 2.17 of List I attached to this legislation, the application of a reduced rate of 6% to services of "accommodation in a hotel-type establishment. The reduced rate applies exclusively to the price of accommodation (...)."

Thus, and taking into account the case sub judice, it will be unquestionable to state – in light of the facts established as proven in these proceedings, the jurisprudence, doctrine and binding information existing on this matter – that the services provided by the Claimant to Club member clients, in the aforementioned hotel establishment that it manages and operates, to which it applied a normal VAT rate (23%), are subject, in reality, to the reduced rate of (6%).

However, the Respondent believes, on the one hand that "in a situation like the one sub judice, where there is a change in the applicable VAT rate, from 23% to 6%, regardless of whether the total amount paid by the recipient is the same (as defended in the arbitral petition), it is always necessary:

• The issuance of a corrective invoice document, that is credit notes and new invoices, in accordance with Article 29, item 7 of the VAT Code, as well as

• The respective accounting of the regularization and entry in field 40 of the periodic declaration for the period to which the regularization relates, in accordance with Articles 44 and 45 of the VAT Code (...)

That is, (...)

When it is intended to change the application of the rate to the aforementioned services, new invoices would have to be issued that necessarily would have to show an alteration in the taxable value. This to meet the factuality presented by the Claimant when it states that the total value of the invoice was not altered. That is, the self-assessments concerning the periods corresponding to the invoices whose rate was later concluded to be incorrect do not suffer from any error, based on the accounting of those invoices with the 23% rate, and instead should be promoted by the Claimant the procedure set out in Articles 20 to 25 of this Response.

Thus, the Claimant should (instead of presenting the claim on the self-assessment) have promoted the corresponding regularization, which would have effects both in terms of VAT and in terms of corporate income tax, at the level of revenues for the period and corresponding taxable profit."

...and on the other hand, the Respondent states that "the claim formulated by the Claimant has not the slightest foundation, if we take into account the repercussibility of the tax it charged," because, "restitution to the Claimant of the amount of tax it charged and received from its clients (final consumers, in this case, as it alleges) would result in unjust enrichment, which neither national law nor EU law allows."

Let us consider this in parts,

Now, as regards the issue of the appropriate procedure for regularizing the disputed self-assessment act, we will resort to what has already been stated in the CAAD decision issued in case No. 348/2014-T, which dealing with a matter entirely similar to that of these proceedings, we accompany in its entirety for its clarity and transparency. Thus, in that ruling the Sole Arbitrator Ricardo Rodrigues Pereira alludes to the following:

"Article 98 of the VAT Code provides for the standard regime of official revision and exercise of the right to deduction of VAT, establishing the following:

1 - When, for reasons attributable to the services, tax superior to what is due has been charged, official revision is carried out in accordance with Article 78 of the general tax law.

2 - Without prejudice to special provisions, the right to deduction or reimbursement of improperly paid tax can only be exercised until the expiration of four years after the birth of the right to deduction or payment of excess tax, respectively.

3 - No liquidation is annulled when its value is below the limit provided for in item 4 of Article 94.

This legal provision thus contains two rulings: in its item 1 it imposes on the TCA the obligation to proceed with official revision in the cases provided therein; and in its item 2 it establishes a general and suppletive period for VAT taxpayers to promote, in their favor, the correction of charged and deducted tax.

(...)

In light of these legal norms [items 2, 3 and 6 of that Article 78 of the VAT Code], we can group the situations in which there is the faculty (and possibly the obligation) to regularize charged and deducted VAT, in the following way:

"i) The supervening alteration of the objective and subjective conditions that presided over the realization of the transactions, reflected in the annulment of the transaction or reduction of its taxable value;

ii) The inaccuracy of the invoice or the material error or miscalculation in the transcription of its elements to the accounting or periodic VAT declarations of the taxpayers;

iii) The error of classification of the transaction, reflected in the invoice or accounting of the taxpayers."

In the case sub judice, it is important to clarify whether we are faced with inaccurate invoices, as the Respondent alleges, or with a situation of legal error, as the Claimant defends, for from this classification will depend the decision of the exception at hand.

Regarding what should be understood by inaccurate invoice, it follows from the provision in subparagraph b) of item 1 of Article 29 of the VAT Code that, in addition to the obligation to pay the tax, taxpayers must "issue an invoice or equivalent document for each transfer of goods or provision of services." As follows from item 7 of the same Article 29, in the version applicable to the date of the facts, "an invoice or equivalent document must also be issued when the taxable value of a transaction or the corresponding tax is altered for any reason, including inaccuracy."

Item 5 of Article 36 of the VAT Code stipulates the various requirements that invoices must observe, (...)

"In the case the transaction or transactions to which the invoice relates include goods or services subject to different tax rates, the elements mentioned in subparagraphs b), c) and d) must be indicated separately, according to the applicable rate."

Since the requirements that invoices must observe are expressly provided for in item 5 of the cited Article 36, we will then be faced with a situation of inaccuracy of the invoice when one of the requirements to which the same is bound is not observed, that is, "it will be subsumed in this concept an invoice whose issuance was carried out without respect for the requirements of Article 36 of the VAT Code."

Having said this, let us now see what should be understood by classification error or legal error.

In this context, it will be useful to begin by defining what should be understood by factual error so that, in light of this, we delimit the concept of legal error.

Thus, we consider that situations are covered by factual error "those in which the taxpayer makes an incorrect representation of factual reality (which determines its subsumption to an incorrect norm)" [Afonso Arnaldo and Tiago Albuquerque Dias, loc. cit., pp. 45-46.], and that "factual error that does not give rise to a consequent legal error will have no relevance for these purposes, since it will have no influence on the amount of tax to be deducted or charged."

By contrast, legal error occurs in "situations in which, despite the correct representation of factual reality, the taxpayer errs in the determination of the applicable norm, that is, in which there is an error of classification, because the taxpayer has made an incorrect interpretation of the factual situation or an erroneous application of the law and consequently charges or deducts tax too much or too little."

In light of the above, we can then state that we will be faced with situations of inaccuracy of invoices when, despite correct classification of the transaction, the taxpayer indicates an incorrect VAT rate or the tax amount is incorrectly computed or indicated in the invoice.

We will not "be faced with a situation classifiable in this concept whenever the correction of the deduction is caused by error, i.e., we will not be within the scope of inaccurate invoices in situations in which excess charging results from an incorrect representation of factual reality or from an incorrect determination of the applicable norm..."

As Alexandra Martins and Pedro Moreira state "the inaccuracy, in these situations of legal error, is not specific to the invoice, which is not strictly inaccurate: it merely reflects a legal error that is anterior to it. Put another way, (...), there [in situations of legal error] is a coincidence between the will of the taxpayer and what the taxpayer sets forth in the invoice, whereas in situations of inaccurate invoices, there is "a dissociation between his will and his statement." (See Alexandra Martins and Pedro Moreira, "VAT Regularizations - The Supervening Alteration of the Elements of the Transaction, Material or Calculation Error and Classification Error or Legal Error", in AA. VV., Coordination by Sérgio Vasques, VAT Records 2014, Coimbra, Almedina, 2014, p. 65)

Having reached this point, turning to the concrete case, it is necessary to conclude that the lapse committed by the Claimant regarding the VAT rate applicable to the services provided to its Club member clients, which was reflected in the invoices issued in March 2012 and, consequently, in the VAT self-assessment of that same period, unquestionably constitutes a situation of classification error or legal error. In effect, by virtue of an incorrect or incomplete interpretation of the law, the Claimant applied to those services a VAT rate (23%) higher than the legally applicable one (6%).

In this manner, since, contrary to what the TCA argues, we understand that we are not faced with any inaccurate invoices, but rather with an error of classification or legal error, the Claimant did well to resort to the administrative appeal, in accordance with the provision in Article 131 of the General Tax Code, which, having been filed on 11 September 2013 (see fact 19 of the proof), shows itself to be absolutely timely, as the periodic VAT declaration corresponding to the self-assessment of tax for March 2012, which was the subject thereof, was filed on 10 May 2012 (see fact 18 of the proof).

In light of the foregoing, and taking into account that the Claimant committed a lapse regarding the VAT rate applicable to the services provided to its Club member clients, which was reflected in the invoices issued in November and December 2014 and, consequently, in the VAT self-assessment of that same period, unquestionably constitutes a situation of classification error or legal error, whereby, in reality, by virtue of an incorrect or incomplete interpretation of the law, the Claimant applied to those services a VAT rate (23%) higher than the legally applicable one (6%).

Thus, this Tribunal understands that the procedure adopted by the Claimant, resorting to the administrative appeal, in accordance with Article 131 of the General Tax Code to address its pretension is adequate and correct.

Regarding the issue of restitution to the Claimant of the amount of tax that it charged and received from its clients (final consumers, in this case, as it alleges), resulting in unjust enrichment, this Tribunal understands that it may resort to what has already been discerned in case No. 78/2014-T, which having been applied to a case very similar to that of these proceedings, fully, clearly and transparently expresses the position of this Tribunal on the matter at hand. Let us see,

Thus, that ruling states the following:

"(...) the real reason for the position of the Tax and Customs Authority of rejection of the administrative appeal in which the Claimant sought to have declared such illegality is the lack of legitimacy of the Claimant to request such declaration and receive the improperly charged amount, derived from, in the understanding of the Tax and Customs Authority, the Claimant not being harmed by the illegal VAT charge, which was fully passed on to its Club member clients. In a situation of this type one can see, from another perspective, the creation of a situation of unjust enrichment of the Claimant in allowing it to obtain amounts of VAT that it charged to its clients.

But if it is true that there are situations of this type in which a situation of unjust enrichment can be configured that justifies the non-recognition of legitimacy to contest charges of taxes passed on to third parties, there are also situations in which this does not occur, as the CJEU already recognized in the ruling of 06-09-2011, issued in case No. C-398/09 (cited by the Claimant) in which the following was understood:

"The rules of EU law on the repetition of undue payments must be interpreted to mean that the repetition of undue payments can only give rise to unjust enrichment in the event that the amounts improperly paid by a taxpayer, as a result of a tax charged in a Member State in violation of EU law, have been passed on directly to the buyer."

On the other hand, as was understood in the CJEU ruling of 21-02-2000, issued in case No. C-441/98, "although EU law does not prevent a Member State from refusing the reimbursement of taxes charged in violation of its provisions if it is proved that such reimbursement will result in unjust enrichment, it excludes the application of any presumption or rule of proof intended to place on the operator in question the burden of proving that the improperly paid charges were not passed on to other persons and intended to prevent the presentation of evidence to contest an alleged burden."

Thus, in harmony with this CJEU jurisprudence, the answer to the question of the Claimant's legitimacy to request the declaration of illegality of the VAT self-assessment acts depends on determining, in light of the concrete circumstances of fact, whether the reimbursement to the Claimant of improperly charged VAT generates or does not generate a situation of unjust enrichment. Or, from another perspective, the solution to the question depends on knowing whether the Claimant was or was not harmed by the illegal charge.

Now, in the factual context that results from the evidence produced, it was the Claimant that ended up bearing the difference between the VAT at the normal rate and the VAT at the reduced rate, in the period from September 2011 to April 2013.

In effect, it was proved that the Claimant charged all its clients an identical price, with VAT included, which came down to the fact that, when it improperly charged VAT at the normal rate, the Claimant obtained from the services provided a revenue lower than what it earned when applying the reduced rate.

Moreover, the practice of the Claimant makes perfect sense, because, having the normal rate been applied to clients who were Club members and not to the general public, the maintenance of a fixed revenue for the services to which VAT would be added would have the consequence that Club members would receive more unfavorable treatment than the general public regarding the price they would pay for the same services, which would have no reasonableness, because it is obvious that if the quality of Club membership can justify some discrimination in relation to the general public, the discrimination will be positive, reflected in a more favorable price, and not negative.

In these circumstances, it must be concluded that the consequences of the illegality of the VAT charge fell on the Claimant and not on Club members to whom it charged VAT at the normal rate, because these members benefited from a reduction in the Claimant's revenue, in an amount equal to the difference between the normal and reduced VAT rates, so that the price they paid for the services would not exceed what was paid by the general public for the same services.

Being thus, restitution to the Claimant, as a consequence of the illegality of the charge, of the amount of VAT borne in excess will not imply a situation of unjust enrichment, because, despite the apparent burden of that excess on Club member clients, the reality is that it was the Claimant that bore it, which becomes apparent when it is noted that the price paid by Club members was annual and fixed, and was not altered in the months in which the Claimant began to charge VAT at the reduced rate to all clients.

On the other hand, in the situation at hand, in which it is considered proved that it was the Claimant that bore the VAT improperly charged, there is no place for the requirement made in Article 78, item 5 of the VAT Code, which establishes that when "tax is subject to correction for less, regularization in favor of the taxpayer can only be carried out when the latter has in its possession proof that the buyer became aware of the correction or that he was reimbursed the tax, without which the respective deduction is considered improper."

In effect, this norm is applicable to cases of correction carried out by the taxpayer itself and not to those in which there is a judicial declaration of illegality, which has as a corollary the duty of the Tax and Customs Authority to reconstitute the situation that would have existed if the illegal act had not been performed [Articles 100 of the General Tax Law and 24, item 1, subparagraph b), of the LRATM], regardless of whether the buyer of the services became aware of the illegality or not." (bold ours).

Thus being, considering and holding as established that:

a) The Claimant manages, administers and operates a tourist establishment located in..., Algarve, named E..., which includes all the typical elements that characterize any establishment intended for tourist accommodation and the services provided therein are not distinguished in nature from the services provided in an ordinary hotel, has rooms, that is, 114 fully equipped and ready to occupy and use accommodation units that enjoy daily maid service and cleaning, replacement of towels, bed linens and personal hygiene consumables; has complementary equipment, integrating support infrastructure, sports and leisure, such as reception, bar, outdoor and indoor swimming pool, spa, hair salon, games room, common rest areas, among other similar facilities; is sought exclusively for non-residential purposes and the use by all its clients is limited to short periods of time intended for rest and leisure;

b) The Claimant provides all its services to the general public, but offers more advantageous conditions to the so-called members of the E... Club (Club), managed by F... (F...) a company under English law, which holds certain rights, including accommodation in the village complex, in exchange for a payment to the Claimant, updated and established by mutual agreement. A payment that is set annually. If any annual payment is missed, the client permanently loses his membership status and is treated as any other client, being able to occupy an accommodation unit only available by paying the price due by any non-member client of the Club;

c) From the services available, both members of the "Club," the so-called members of the E... Club, and any user, in general, can enjoy, although under different conditions, notwithstanding, the services are identical for both, which consist of accommodation in a hotel-type establishment.

This Tribunal understands, on the one hand, that the act of tacit rejection of the administrative appeal of the VAT self-assessment act for November and December 2014 suffers from error regarding the legal assumptions, due to misinterpretation of the provision in Article 131, item 1 of the General Tax Code and Article 78, item 5 of the VAT Code, which justifies its annulment (see Article 135 of the Code of Administrative Procedure); and on the other hand, that the VAT self-assessment act disputed in these proceedings should be declared illegal, and as a consequence the amount of € 22,396.98 (twenty-two thousand, three hundred ninety-six euros and ninety-eight cents) should be reimbursed or returned to the Claimant.

In light of all the above, it is concluded that the VAT self-assessment acts for November and December 2014 are illegal, due to suffering from error regarding the legal assumptions, namely, due to misinterpretation of item 2.17 of List I attached to the VAT Code, whereby, as a consequence, they should be annulled and their amount of € 22,396.98 should be returned to the Claimant.

VIII. DECISION

For the factual and legal grounds set out above, it is decided, thus, in favor of the merits of the claim, and therefore should the VAT self-assessment acts for November and December 2014 be annulled, due to suffering from error regarding the legal assumptions, namely, due to misinterpretation of item 2.17 of List I Attached to the VAT Code, whereby, as a consequence, they should be annulled and their amount of € 22,396.98 should be returned to the Claimant.

Value of the Proceeding

The value of the proceeding is fixed at € 22,396.98 (twenty-two thousand, three hundred ninety-six euros and ninety-eight cents), in accordance with Article 97-A, item 1, a), of the General Tax Code, applicable by virtue of subparagraphs a) and b) of item 1 of Article 29 of the LRATM and item 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

Costs charged to the Respondent, in accordance with Article 12, item 2 of the LRATM, Article 4 of the Regulation of Costs in Tax Arbitration Proceedings, and Table I attached thereto, which are fixed at the amount of € 1,224.00.

Notify thereof.

Lisbon, 24 June 2016

The Arbitrator

(Jorge Carita)