VAT Rate on Golf Game Sales: CAAD Arbitration Decision 633/2014-T Analysis

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 633/2014-T

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Alberto Amorim Pereira and Marta Gaudêncio, appointed by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree on the following:

I – REPORT

1. On 28 August 2014, A… – Sociedade Unipessoal, Lda, holder of NIPC …, with registered office at Avenida …, …, ... (hereinafter referred to as "Claimant"), submitted to the Administrative Arbitration Centre (CAAD) a request for the constitution of an arbitral tribunal with a view to the declaration of illegality and consequent annulment of the additional VAT assessments relating to the year 2011 in the amount of €137,414.41, as well as the respective assessments of compensatory interest.

2. The following assessments are at issue:

1. The Claimant requests that the above-identified assessments be declared illegal, determining their annulment, as well as the condemnation of the Public Treasury to reimbursement of the amounts already paid, plus compensatory interest.

2. On 30 October 2014, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

3. The Claimant did not proceed with the appointment of an arbitrator; accordingly, pursuant to the provisions of paragraph a) of Article 6(2) and paragraph a) of Article 11(1) of the RJAT, the President of the Deontological Council of CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time-limit.

4. On 15 October 2014, the parties were notified of these appointments and did not manifest any intention to refuse any of them.

5. In accordance with the provisions of paragraph c) of Article 11(1) of the RJAT, the collective Arbitral Tribunal was constituted on 30 October 2014.

A – The Claimant sustains its request as follows:

1. Following an inspection action, the Claimant was confronted with the issuance of the above-identified additional VAT assessments and compensatory interest assessments.

2. In disagreement with the same, the Claimant submitted the request for constitution of an Arbitral Tribunal which gave rise to the present proceedings.

3. The Claimant is engaged in the commercial operation of its tourist accommodation establishment located at …, ..., named B….

4. This establishment integrates all typical elements that characterize an establishment intended for tourist accommodation and the services provided therein do not distinguish themselves, as to their nature, from the services provided in a hotel.

5. The establishment further integrates some infrastructures of its own for sport and leisure, namely tennis courts, squash, football and bowling and snooker room, which permits the Claimant to provide, in exchange for an additional consideration, services that consist of providing the use of these infrastructures.

6. Because the establishment does not have golf courses, the Claimant has been establishing partnerships with various companies that operate them, in order to complement its offerings and thus meet the integrated demand for hotel and golf services, in which its clients early showed decisive interest.

7. In 2011, as in prior years, the Claimant contracted with various companies preferential conditions for access by its clients to various golf courses, making it possible for clients to use any one of the courses, which permitted the Claimant to strengthen its offerings and retain and/or attract current and potential clients who do not forgo the practice of golf during their stay at the establishment.

8. Between March and December 2011, the Claimant sold golf rounds to its clients in the total amount of €787,040.21, plus VAT at the rate of 6%, having paid for the acquisition of said golf rounds the amount of €720,304.11, plus VAT at the rate of 6%, whereby its gross margin was approximately 8%.

9. The Tax Inspection services understood that the VAT rate to be applied by the Claimant in the sale of golf rounds would be the standard rate, of 23%, and not the reduced rate, such that the additional assessments at issue in the present proceedings correspond to the difference between the applicable VAT rates.

10. The Claimant understands that the VAT rate applicable to the sale of golf rounds is the reduced rate, considering that the additional assessments in question nullify the gross margin it obtains, leading to the operation recording a loss.

11. The Claimant further states that its interest does not reside in the margin obtained in the operation, but rather in the preponderance that golf arouses in the clients' choice for its establishment, to the detriment of others in that region.

12. With respect to the practice of golf, the Claimant understands that:

a. Golf is a game widely recognized as sporting, self-regulated through 34 rules recognized by the International Golf Federation and published by The Royal and Ancient Golf Club of St. Andrews.

b. In Portugal, golf competitions are organized by the Portuguese Golf Federation, affiliated with the International Golf Federation and the European Golf Association, entity which used, in 2011, the "EGA Handicap System".

c. All golf courses used by the Claimant are classified by the Portuguese Golf Federation for purposes of application of the "EGA Handicap System", and all companies that operate them are Member Clubs in the sense of that system, insofar as they are all affiliated with the Portuguese Golf Federation as Clubs, Tournament Organizers or Companies.

d. Thus, any client of the Claimant wishing to access one of said golf courses to practice the sport therein will need to be a member of the federation and possess a specific handicap certificate that enables him so to do, under the rules of the "EGA Handicap System".

1. In this context, the Claimant understands that, with respect to golf, we are faced with a sporting manifestation, whereby the VAT rate applicable is the reduced rate, in accordance with item 2.15 of List I attached to the VAT Code.

2. This understanding, which according to the Claimant has been that of the case law, has as its foundation the fact that the law, at that date, established that subject to the reduced VAT rate were:

"Performances, competitions and sporting manifestations and other public entertainments. Excepted are:

(…)

b) The provision of services consisting of providing the use of mechanical and electronic games in establishments open to the public - machines, flippers, machines for games of fortune and chance, electric shooting games, video games with the exception of games recognized as sporting."

1. The understanding of the Respondent, the Claimant defends, is based on the circumstance that "on 2011-02-14 there was published Circular Notice No. 30124 of the VAT Services Directorate, wherein in point 7 it states «...it being understood that item 2.15 of List I attached to the VAT Code contemplates only admissions or entry tickets to performances, competitions and sporting manifestations and other public entertainments», noting that the understanding takes effect as of 1 March 2011".

2. The Claimant considers that this understanding has no legal foundation and that, between March 2011 and December of the same year, the law taxed at the reduced VAT rate, as it had always done since the entry into force of Law No. 39-B/94, of 27 December, competitions and sporting manifestations and, as well, the provision of services consisting of providing the use of games recognized as sporting.

3. It is true that Article 103 of Law No. 55-A/2010, of 31 December, removed from the wording of item 2.15 of List I attached to the VAT Code the expression "practice of physical and sporting activities".

4. However, this does not signify that the standard VAT rate applies to competitions, sporting manifestations or other provision of services consisting of providing access thereto/use of games recognized as sporting.

5. Since, if the legislator intended for item 2.15 of List I attached to the VAT Code to contemplate only entry tickets to performances and sporting manifestations and other public entertainments, it would have simply said: "Entry tickets for performances and sporting manifestations".

6. Thus, the Claimant considers that, given the particular situation of golf already described, one cannot but understand that, when one pays a green fee for the practice of the sport, the golfer should be considered a user or practitioner of a game recognized as sporting, if not in the concept of a competition, at least in that of a sporting manifestation.

7. The golfer will always be in competition, always in a competition that has consequences for the classification of his individual sporting performance (handicap), whereby the practice of golf translates into a competition or sporting manifestation, as happens with other sports (bowling, football, snooker, tennis or squash).

8. Thus, the understanding of the Tax Authority, set forth in Circular Notice No. 30124, of 14 February 2011, issued after publication of the State Budget Law for 2011 (Law No. 55-A/2010, of 31 December), whereby only the reduced rate provided for in item 2.15 of List I attached to the VAT Code applies to entry tickets or admissions to performances, competitions and sporting manifestations and other public entertainments, cannot proceed.

9. The Claimant concludes by requesting the annulment of the additional VAT assessments and the assessments of compensatory interest above identified, as well as the reimbursement of the amounts previously paid, plus compensatory interest.

B – The Respondent, in its response, alleges the following:

1. The Claimant applied, throughout the year 2011, the reduced rate of 6% to services related to the practice of golf, namely in green fees.

2. Law No. 55-A/2010, of 31 December, conferred upon item 2.15 of List I attached to the VAT Code the following wording:

"Performances, competitions and sporting manifestations and other public entertainments."

1. Previously (since Law No. 67-A/2007, of 31 December), the wording of the rule was as follows:

"Performances, competitions and sporting manifestations, practice of physical and sporting activities and other public entertainments."

1. It is thus verified that the Legislator intended to tax at the reduced rate only the provision of services that translate into providing the public the opportunity to attend performances and sporting manifestations, through the acquisition of the respective entry ticket.

2. The provision of services linked to the practice of physical activities and to the practice of any sport ceased to be covered by item 2.15 of List I attached to the VAT Code.

3. From the various elements of interpretation (systematic, historical and rational or teleological) it results that this is the only possible interpretation of the rule – the standard VAT rate applies to the provision of services at issue in the present proceedings.

4. Whereby it is concluded that the additional assessments issued do not suffer from any illegality and should be maintained in the legal order.

II – PRELIMINARY RULING

Both parties were notified for that purpose and came to the proceedings communicating that they dispensed with the holding of the meeting referred to in Article 18 of the RJAT, whereby the holding of the first meeting of the Arbitral Tribunal, in accordance with and for the purposes of Article 18 of the RJAT, was dispensed with, given that, in this case, none of the objectives legally entrusted thereto were verified, and the arbitral process is governed by the principles of procedural economy and prohibition of the performance of useless acts.

Subsequently, the Claimant and the Respondent submitted their respective written pleadings, in which they maintained and developed the positions previously assumed and defended in their initial pleadings.

The Tribunal is materially competent and is regularly constituted, in accordance with the provisions of paragraph a) of Article 2(1), as well as Articles 5 and 6 of the RJAT.

The parties have legal personality and capacity, are entitled to sue and be sued, and are represented, in accordance with the provisions of Articles 4 and 10 of the RJAT and Article 1 of Decree-Law No. 112-A/2011, of 22 March.

There are no nullities and preliminary issues affecting the entire process, whereby it is necessary to rule on the merits of the claim.

III. DECISION

A. MATTERS OF FACT

A.1. Proven Facts

1. The Claimant is engaged in the commercial operation of its tourist accommodation establishment located at …, ..., named B….

2. This establishment integrates all typical elements that characterize an establishment intended for tourist accommodation and the services provided therein do not distinguish themselves, as to their nature, from the services provided in a hotel.

3. The establishment integrates some infrastructures of its own for sport and leisure, namely tennis courts, squash, football and bowling and snooker room, which permits the Claimant to provide, in exchange for an additional consideration, services that consist of providing the use of these infrastructures.

4. Because the establishment does not have golf courses, the Claimant has been establishing partnerships with various companies that operate them, in order to complement its offerings and thus meet the integrated demand for hotel and golf services, in which its clients early showed decisive interest.

5. In 2011, the Claimant contracted with various companies preferential conditions for access by its clients to various golf courses, making it possible for clients to use any one of the courses, which permitted the Claimant to strengthen its offerings and retain and/or attract current and potential clients who do not forgo the practice of golf during their stay at the establishment.

6. Between March and December 2011, the Claimant sold golf rounds to its clients in the total amount of €787,040.21, plus VAT at the rate of 6%, having paid for the acquisition of said golf rounds the amount of €720,304.11, plus VAT at the rate of 6%, whereby its gross margin was approximately 8%.

7. By virtue of the tax inspection action carried out by the Tax Authority, the Claimant was notified to proceed with payment of the additional VAT assessments, relating to 2011 and corresponding compensatory interest.

8. Such additional assessments were issued taking into account the difference between the VAT rates applicable in the present proceedings, of 23% and 6%.

9. On 09 June 2014, the present challenging party made full payment of the additional VAT assessments and the corresponding assessments of compensatory interest at issue in the present proceedings.

10. The Tax Inspection services understood that the VAT rate to be applied by the Claimant in the sale of golf rounds would be the standard rate, of 23%, and not the reduced rate, such that the additional assessments at issue in the present proceedings correspond to the difference between the applicable VAT rates.

11. For purposes hereof, the "EGA Handicap System" provides as follows:

"2.24 MEMBER CLUB ("HOME CLUB")

A "Member Club" is a Club that is a member through which the player is a member of the FPG.

MARKER

A "Marker" is a player who: a) has, or has had, an EGA Handicap, b) a player who has a handicap assigned by an authority recognized by the FPG, or c) any other player approved by the Handicap Committee.

MEASURED COURSE

A "Measured Course" is any measured course whose length is certified by the FPG or Regional Authority, in accordance with the requirements provided in Clause -1 and in Appendix A, section 12.

NATIONAL FEDERATION ("NATIONAL ASSOCIATION")

A "National Federation" is any national golf organization affiliated with the EGA and authorized to act on behalf of the EGA for the administration of the EGA Handicap System in its country (FPG in Portugal) (..)

2.32 QUALIFYING COMPETITION

A "Qualifying Competition" is any competition where the Handicap Conditions prevail. (...)

PART 4. HANDICAP MANAGEMENT (HANDICAPPING)

(...) The FPG:

12.1 Has full jurisdiction over the administration of the EGA Handicap System in Portugal, subject only to the jurisdiction of the EGA. (..)

12.4 Must determine the Course Rating and the Slope Rating for all Reference Courses of Member Clubs and all other courses approved by the FPG for handicap purposes (..)

12.8 Has the right, at any time, to obtain information related to handicap management from Regional Authorities and Member Clubs (..)

12.13 Must establish the procedures to be adopted for the registration of Valid Results (..)

1. RIGHTS AND OBLIGATIONS OF THE MEMBER CLUB

14.1 Is the Handicap Authority for all members who have it as their Member Club, being subject to the overall jurisdiction of the Regional Authority (if applicable) and the FPG (...)

1. RIGHTS AND OBLIGATIONS OF THE PLAYER

The Player:

16.1 Will have an Exact Handicap assigned and registered by its Handicap Authority. That handicap will be used in any course, including at other Member Clubs of which the player is a member (..)

16.6 It is his responsibility to ensure that ALL Valid Results, complete or not, are delivered to his Handicap Authority. If the game took place at a Member Club other than his Member Club, the player is obliged to report all results to his Member Club.

16.7 Before any competition, the player is responsible for ensuring that all changes to his Exact Handicap have been duly made (...)

16.9 Must deliver, in each calendar year, at least four (4) Valid Results so that his Handicap Authority has sufficient information about his playing ability to confirm or adjust his Exact EGA Handicap in the annual review (...)

APPENDIX P

OPTIONS TAKEN BY THE PORTUGUESE GOLF FEDERATION

In accordance with the provisions of Appendix K, the Portuguese Golf Federation decided to establish for Member Clubs, affiliated players and Institutional Members the following:

1. USE OF THE EGA HANDICAP SYSTEM

1.1 In Portugal there are no Regional Authorities, the FPG having full jurisdiction over the administration of the EGA Handicap System in Portugal.

1.2 A player's Handicap Authority is his Member Club, by delegation of the FPG. The FPG may delegate or assume the responsibility of Handicap Authority as it shall determine.

1.3 The EGA Handicap System can only be used by players affiliated with the FPG, members of a Member Club. Organizations and Associations, which are institutional members of the FPG, may be authorized by the FPG to use the official software in the form and parameters that the FPG shall determine on a case-by-case basis ( ..)

AFFILIATION WITH THE FPG

All players who are members of a Member Club in Portugal must be affiliated with the FPG and pay the annual Amateur License. Players must have a Member Club in Portugal regardless of whether they have a Member Club in another National Federation. The Member Club is the Club that registers the player with the FPG and pays the respective Amateur License (...)

All players who pay the Amateur License, regardless of whether or not they have a handicap, must be entered in the Datagolf software.

HANDICAP MANAGEMENT

3.1 The registration of all Valid and Validable Results must be done using the software provided by the FPG for that purpose (...)

3.4 An Exact EGA Handicap cannot be assigned by the Handicap Commission without a prior examination on the basic Rules of Golf and etiquette, this responsibility falling to the Member Club or to the accredited teaching professionals to whom the Member Club delegates this function (...)"

A.2. Facts Found Not Proven

There are no facts with relevance to the decision that have not been proven.

A.3. Substantiation of the Matters of Fact Proven and Not Proven

With respect to matters of fact, the Tribunal need not rule on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven from unproven matters (see Article 123(2) of the CPPT and Article 607(3) of the CPC, applicable by virtue of Article 29(1), paragraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delineated in function of their legal relevance, which is established in regard to the various plausible solutions of the question(s) of Law (see former Article 511(1) of the CPC, corresponding to current Article 596, applicable by virtue of Article 29(1), paragraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence and the Administrative Procedure together with the case file, it was considered proven, with relevance to the decision, the facts listed above, which were moreover consensually recognized and accepted by the parties.

B. ON THE LAW

The Claimant expressly submits to the appreciation of this Tribunal the following question: what is the VAT rate applicable to the sale of golf rounds by the Claimant, between March and December 2011?

At the date of the facts in question (the additional assessments refer to the months of March to December 2011), item 2.15 of List I attached to the VAT Code established that the following were subject to the reduced VAT rate (6%):

"2.15 - Performances, competitions and sporting manifestations and other public entertainments. Excepted are:

a) Performances of a pornographic or obscene character, as such considered in the legislation on the matter;

b) The provision of services consisting of providing the use of mechanical and electronic games in establishments open to the public - machines, flippers, machines for games of fortune and chance, electronic shooting games, video games, with the exception of games recognized as sporting."

This wording of the rule is based on Law No. 55-A/2010, of 31 December (State Budget Law for 2011), which eliminated from said item the expression "practice of physical and sporting activities".

Following the approval of the State Budget Law for 2011, and in particular with respect to this amendment, Circular Notice No. 30.124 was published on 14 February, in which the following can be read:

"(…)

1. Law No. 67-A/2007, of 31 December, altered the wording of the item, now providing, in the legal text, for "practice of physical and sporting activities". The introduction of this expression corroborated, in the form of law, the understanding of the fiscal administration published by Circular Notice No. 30088, of 2006.01.19, of the VAT Services Directorate, according to which the item contemplated not only entry tickets, but equally the use of facilities intended for sporting practice and performances or other public entertainments.

2. With the publication of the 2011 Budget, the legislator suppressed from the legal text the expression "practice of physical and sporting activities" restoring to the rule, in essence, the wording it held before and which had been the reason for the administrative instructions that sought to clarify it.

3. The elimination of that expression from the legal text can have no other consequence than the repeal of the administrative understanding that was subject to it.

4. In this sense, that administrative doctrine is considered superseded, and it should be understood that item 2.15 of List I attached to the VAT Code contemplates only entry or admission tickets to performances, competitions and sporting manifestations and other public entertainments.

5. Circular Notice No. 30088, of 2006.01.19 is repealed, as well as any understandings that contradict the doctrine now published.

6. This understanding takes effect as of 1 March 2011, permitting taxpayers to make the necessary adjustments. (…)"

It is thus necessary to determine whether the elimination of the above expression results in it being the legislator's intention to restrict the application of the reduced rate to entry or admission tickets to sporting competitions, as expressed in Circular Notice No. 30124, of 14 February 2011, and whether such results in a violation of the principle of legality. The fundamental question is therefore one of interpretation of the applicable rule.

To analyze the question fully, it becomes necessary to analyze the evolution of the rule from a historical perspective. Thus, in the original wording (Decree-Law No. 394-B/84, of 26 December), the VAT Code provided for taxation at the reduced rate, in accordance with item 3.13 of List III attached to the decree, (a) entry tickets for performances of opera, ballet, concert, theater, circus, revue, cinema sessions (with the exception of films of a pornographic or obscene character, as such considered in the legislation on the matter) and (b) entry tickets for performances and sporting manifestations.

Decree-Law No. 122/88, of 20 April, altered this item, which adopted the following wording:

"3.13 – Performances, sporting manifestations and other public entertainments, with the exception of those referred to in item 3.13-A of List III.

Excepted are performances and entertainments of a pornographic or obscene character, as such considered in the legislation on the matter."

It should be noted that List III attached to the VAT Code concerned goods subject to an increased rate, and it came to provide, on the same date, in items 13 and 13-A, the following:

"13 – Games and game accessories (dice, chips).

Included are mechanical and electronic games for establishments open to the public – flipper machines, machines for games of fortune or chance, electric shooting games, video games, lotto or bingo.

Excepted are game equipment recognized as sporting and game equipment with toy characteristics.

13-A – Provision of services consisting of providing the use of the games mentioned in item 13 of the present list, which are not exempt from tax in accordance with paragraph 32 of Article 9 of the VAT Code."

With the publication of Law No. 39-B/94, of 27 December (State Budget Law for 1995), the wording of the rule became as follows:

"2.13 – Performances, sporting manifestations and other public entertainments.

Excepted are:

a) Performances of a pornographic or obscene character, as such considered in the legislation on the matter;

b) The provision of services consisting of providing the use of mechanical and electronic games in establishments open to the public - machines, flippers, machines for games of fortune and chance, electronic shooting games, video games with the exception of games recognized as sporting."

In 2008, and following the approval of Law No. 67-A/2007, of 31 December (State Budget Law for 2008), the rule became:

"2.13 - Performances, competitions and sporting manifestations, practice of physical and sporting activities and other public entertainments. (…)"

Finally, the wording given to the rule by Law No. 55-A/2010, of 31 December, already referred to above, came into effect:

"2.15 - Performances, competitions and sporting manifestations and other public entertainments. Excepted are:

a) Performances of a pornographic or obscene character, as such considered in the legislation on the matter;

b) The provision of services consisting of providing the use of mechanical and electronic games in establishments open to the public - machines, flippers, machines for games of fortune and chance, electronic shooting games, video games with the exception of games recognized as sporting."

Item 2.15 was finally repealed by Law No. 64-B/2011, of 30 December.

Having analyzed the various wordings of the rule at issue here, it is verified that only between January 2008 and December 2010 did it contain express reference to the expression "practice of physical and sporting activities". The wording in question was introduced by a legislative amendment carried out in consonance with the possibility provided for in Directive No. 2006/112/EC, of the Council, of 28 November 2006. This Directive provides, in Article 98, the possibility for States to apply one or two reduced VAT rates to the goods and services provided for in Annex III, among which are found "admission to sporting events" and "use of sporting facilities". The legislative amendment would have been made in order to relieve access to gyms and other sporting facilities.

On the other hand, only in the original wording of the VAT Code, and until the amendment carried out by Decree-Law No. 122/88, of 20 April, were entry tickets to activities expressly referred to.

Having reached this point, it becomes necessary to determine how the rule should be interpreted, namely whether access to a golf course qualifies as a performance, sporting competition, sporting manifestation or public entertainment. It is important, therefore, to determine the objective sense of the law.

Article 9 of the Civil Code, applicable by virtue of Article 11 of the General Tax Law, expressly prohibits interpretations based exclusively on the literal meaning of the rules by providing that «interpretation should not be confined to the letter of the law», and should instead «reconstruct from the texts the legislative thought, having especially in mind the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied».

Indeed, the interpretation of any legal rule is done through four elements: the literal, the teleological, the systematic and the historical, as can be seen in the Decision issued in the scope of case No. 743/12.6BELLE, which took place in the Administrative and Tax Court of Loulé. In this case, two of these elements will be of special importance, the literal and the historical.

The literal element is based on, as the name itself indicates, the letter of the law, and, pursuant to Article 9(2) of the Civil Code, the interpreter cannot consider a legislative thought that has no correspondence in the letter of the law, even if imperfectly expressed. The Claimant's interpretation is in accordance with this legal precept, insofar as the letter of the rule permits it.

In this regard, the following should also be considered:

a. If the legislator intended for the reduced VAT rate to apply exclusively to entry tickets to sporting competitions, it would certainly have left this expressly stated in the text of the law, as it had done previously, in the original wording of the VAT Code (Decree-Law No. 394-B/84, of 26 December).

b. Directive No. 2006/112/EC distinguishes, as we saw above, "admission to sporting events" and "use of sporting facilities", whereby it is clear that we are faced with different realities, each of which may or may not benefit from the application of the reduced rate.

It should further be noted that the Tax Authority itself, through Circular Notice No. 30088/2006, of 19 January, made clear its understanding to be that "within the scope of application of said item are not included only the respective entry tickets but equally the use of facilities intended for sporting practice and performances or other public entertainments." It is certain, thus, that even when the wording did not refer to it expressly, it was understood that the use of facilities intended for sporting practice was included herein.

As to the historical element, it takes into account the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied. We have already seen above the different versions of the rule in question.

In summary, in the original wording of the VAT Code, the legislator determined taxation at the reduced rate of the provision of services consisting of the sale to the public of entry tickets to performances and sporting manifestations. Subsequently, the scope of application of the rule was expanded, whereby the provision of services connected with sporting manifestations, performances and other public entertainments came to be taxed at the reduced rate (with some exceptions), and it was understood that use of facilities intended for sporting practice was encompassed herein. In 2007, reduced taxation came to apply to services connected with sporting competitions and the practice of physical and sporting activities. Finally, in 2010, the legislator considered removing from the text of the item relating to reduced taxation with which we are concerned the mention added by Law No. 67-A/2007 (maintaining only the reference to "competitions", which is not relevant for this case).

This evolution took into account numerous factors, from the policy followed at a particular moment in terms of relieving access to certain activities, to the financial needs of the State. But it is notorious that only at an initial moment was the reduced rate applied to entry tickets to certain activities (the expression "tickets" was used in a short period of validity of the law) and that sporting activities and manifestations have been included in the wordings of the rule since 1988 (Law No. 122/88, of 20 April), and it was always understood that use of facilities intended for sporting practice is included therein.

It is thus clear that the distinction underlying the amendment made by Law No. 55-A/2010, of 31 December is related to the removal from the scope of reduced taxation of the provision of services connected with the practice of physical activities, a matter in which Law No. 67-A/2007 was innovative, and not with those related to the use of facilities intended for sporting practice.

Because, in the interpretation of legal rules, it is essential to appeal to other branches of law, in order to know in detail the concepts used in those branches of law that are mentioned in the tax rules, it is further necessary to mention, for purposes of clarifying the distinction between sporting practice and physical activities, the Basic Law on Physical Activity and Sport (Law No. 5/2007, of 16 January), which defines the foundations of policies for the development of physical activity and sport. When this Law was approved, a dual concern of the legislator became clear: to promote physical activity (in a more free and less regulated manner) and to support regular sporting practice and competition (in the case of sports that have evolved to the stage of formally regulated and recognized sport, as is the case with golf).

As can be read in the aforementioned Decision, "The legislator develops that dichotomy throughout the Basic Law, as is visible, for example, in the opposition between 'Promotion of Physical Activity' (Article 6) and 'Development of Sport' (Article 7), or, further ahead, in Chapter IV, titled 'Physical Activity and Sporting Practice', when it contrasts 'Traditional Games' (Article 30) with 'Competitions or sporting manifestations in public spaces' (Article 32), an expression which, as has been seen, in the same year of 2007, the legislator used in the new wording of item 2.15 of List I attached to the VAT Code with which we are concerned.

With respect to these competitions and sporting manifestations in public spaces, the new legal regime makes them dependent on a mandatory opinion issued 'by the respective sporting federation' (paragraph 1), and this federation must 'homologate the regulation of the competition or sporting manifestation (…) in order to ensure respect for the rules of protection of the health and safety of participants, as well as compliance with the technical rules of the sport'. Which is well understood: given that the competition or sporting manifestation takes place in a public space, not in the usual sporting facilities of the sport, the legislator intended that the respective sporting federation have an active role in the protection of the physical integrity of the athletes and in compliance with the technical rules of the game."

It is thus verified that the legislator distinguishes the concept of physical activity – a mere ludic and spontaneous behavior that is not regulated – from sporting practice – as a sport that is formally regulated. And golf, taking into account that it is formally regulated and practiced under strict rules, cannot but be considered a sporting practice. When accessing the green, players must and may do so only if certain rules issued by the International Golf Federation and the Golf Federation of the country where they are located are complied with.

In this context, it is concluded that item 2.15 of List I attached to the VAT Code applies to sporting practice, thus encompassing golf, which should have been taxed at the reduced rate. The application of the standard rate results from Circular Notice 30124 of 14 February 2011, which states «...it should be understood that item 2.15 of List I attached to the VAT Code contemplates only entry or admission tickets to performances, competitions and sporting manifestations and other public entertainments», noting that the understanding takes effect as of 1 March 2011".

We cannot agree with the content of this Circular Notice. Indeed, and knowing the framework of the question at the time of the 2007 and 2011 legislative amendments (in the first, the question of the VAT rate to be applied by gyms was under discussion, as well as its impact on users of those facilities, that is, whether an increase or decrease in the VAT rate should correspond to an increase or decrease in the price paid by the consumer; in the second, it was intended to restrict as much as possible the set of activities subject to rates lower than the normal VAT rate), it is understood that the intention could even have been to eliminate sporting manifestations from that list. However, should that be the case, the intention was not duly enshrined in law, and does not result from the text of the rule, properly interpreted within the framework of its historical evolution, such a reduction in the scope of taxation.

Furthermore, the principle of tax legality constitutionally established (legal reserve) is in force in our legal order. Thus, in accordance with paragraph i) of Article 165(1) of the Constitution, it is the exclusive responsibility of the Assembly of the Republic to legislate on the "creation of taxes and fiscal system and general regime of rates and other financial contributions in favor of public entities", except for express authorization to the Government (formal legal reserve), and Article 103(2) of the Constitution further provides that taxes are "created by law, which determines the incidence, the rate, tax benefits and taxpayer guarantees" (material legal reserve).

This principle of material legal reserve (also called the principle of typicality) "(…) requires that the law (…) contain the regulation as complete as possible of the reserved matter, a matter which, pursuant to Article 103(2) of the Constitution, integrates, with respect to each tax, the incidence, the rate, tax benefits and taxpayer guarantees (…)" – see Tax Law, José Casalta Nabais, 2011, Almedina.

Now, if the Respondent's interpretation were accepted, we would have a Circular Notice governing essential aspects of a tax nature. Now, a Circular Notice cannot, naturally, create a rule of incidence, as would happen if the Respondent's interpretation were to remain in the legal order. If such an understanding were permitted, we would be faced with a situation of disrespect for the principle of legality provided for in Article 165(1), paragraph i), and Article 103(2), both of the Constitution, since we would have a Circular Notice disposing on a matter of the responsibility of the Assembly of the Republic – which is manifestly unacceptable.

The Claimant combines with its request to annul the tax act at issue in the present proceedings the request to condemn the Tax Authority to payment of compensatory interest on the amount paid by it following notification of the assessments now annulled.

It is a prerequisite for the award of compensatory interest that the error in which the Tax Authority labored be imputable to it (See Article 43 of the General Tax Law).

In the case of the proceedings, it is manifest that, following the illegality of the assessment acts, for the reasons pointed out previously, there is grounds for reimbursement of the tax paid by the Claimant, by virtue of the provisions of Articles 24(1), paragraph b), of the RJAT and 100 of the General Tax Law, as this is essential to "restore the situation that would exist if the tax act at issue in the arbitral decision had not been carried out".

It is also clear from the proceedings that the illegality of the assessment act impugned is directly imputable to the Respondent, which, on its own initiative, carried it out without legal basis, suffering from an incorrect assessment of the legally relevant facts and consequent application of the legal rules to the case in question.

Thus, the Claimant is entitled to receipt of compensatory interest, in accordance with the provisions of Articles 43(1) of the General Tax Law and 61 of the Code of Tax Procedure and Process.

Compensatory interest is owed to the Claimant from the date on which it made payment of the tax obligation at issue in the proceedings, until full reimbursement of the amount paid, at the legal rate.

C. DECISION

By this Arbitral Tribunal, it is decided as follows:

a) To find merit in the arbitration request and, in consequence, to declare the annulment of the additional VAT assessments and compensatory interest assessments and to condemn the Tax Authority to reimburse to the Claimant the amounts paid, plus compensatory interest, in accordance with Article 43(1) of the General Tax Law;

b) To condemn the Tax Authority in the costs of the proceedings.

D. Value of the Case

The value of the case is fixed at €137,414.41, in accordance with Article 97-A(1), a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of Article 29(1) of the RJAT and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Tax Authority, given that the claim was entirely successful, in accordance with Articles 12(2) and 22(4), both of the RJAT, and Article 4(4) of the cited Regulation.

Let notification be made.

Lisbon

24 March 2015

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Alberto Amorim Pereira)

The Arbitrator Member

(Marta Gaudêncio – Rapporteur)

[Text prepared by computer, in accordance with Article 131(5) of the Code of Civil Procedure (CPC), applicable by remission from Article 29(1), paragraph e) of the Tax Arbitration Regime. The wording of this decision is governed by the former spelling.]