Summary
Full Decision
ARBITRAL DECISION
I. Report
1. On 11-12-2017, Company A… filed a request for constitution of a sole arbitrator tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFATM), with a view to obtaining a declaration of illegality of the tax acts concerning VAT assessments and corresponding compensatory interest, relating to the third quarter of 2016.
2. Pursuant to Article 6(1) of the LFATM, the Ethics Council of the Arbitration Centre appointed the arbitrator now signatory, notifying the parties.
3. The tribunal is duly constituted to review and decide on the subject matter of the proceedings.
4. The arguments supporting the Applicant's request for arbitral pronouncement are, in summary, as follows:
4.1. The Applicant is a company incorporated under German law that was registered for VAT purposes in Portugal from 1 January 2015, with tax identification number …, and ceased business on 28 July 2016.
4.2. The Applicant has neither had nor currently has tax residence or tax establishment in Portugal.
4.3. The activity carried out in Portugal consisted of wholesale sales of frozen food products, with the sole customer being company B… Lda. (with tax identification number …).
4.4. In the sales made to its customer, the Applicant did not charge VAT in accordance with the provisions of Article 2(1)(g) of the VAT Code.
4.5. In turn, the Applicant acquired goods locally from its supplier C… (with tax identification number …), incurring VAT, which was deducted in its periodic VAT returns.
4.6. In this context, the Applicant was notified on 14 August 2017 of VAT Assessment No. 2017…, and the corresponding compensatory interest assessment No. 2017…, relating to the tax period of the third quarter of 2016, in the total amount of € 2,525.96.
4.7. The Applicant found itself in a repeated situation of tax credit, having requested the respective refund in the periodic VAT return for the third quarter of 2016, which was rejected – the Tax Authority having issued the aforementioned additional VAT assessments and compensatory interest, in the total amount of € 2,525.96.
4.8. In this context, the present Applicant filed an administrative action with the Lisbon Tax Court seeking to annul the decision rejecting the refund request, which is currently pending.
4.9. Article 2(1)(g) of the VAT Code provides that the following are passive subjects of this tax: the natural or legal persons referred to in subparagraph (a), who are acquirers in transfers of goods or provision of services carried out in national territory by passive subjects who have neither their seat, stable establishment or domicile there nor have appointed a representative in accordance with Article 30.
4.10. This rule results from the transposition into the Portuguese legal order of Directive No. 2000/65/EC of the Council of 17 October, which amended Council Directive No. 77/388/EEC of 17 May (the "Sixth Directive"), as regards the determination of the VAT debtor.
4.11. In the EU VAT system, the passive subject of the tax shall, in principle, be the supplier of the goods transferred or the provider of the service provided, with such person being responsible for the assessment of the tax.
4.12. However, exceptionally, the EU legislator established that the responsibility for assessing the tax be transferred from the supplier/provider to the acquirer of the goods or services – the so-called "reverse charge" or "inversion of the passive subject".
4.13. In Directive 2000/65/EC of the Council of 17 October, which amended the Sixth Directive as regards the determination of the VAT debtor, the EU legislator amended Article 28-G of the Sixth Directive (which replaced Article 21 of that same Directive), with Article 21 now providing for reverse charge situations in which the debtor of the tax would be the recipient of the goods or services.
4.14. In certain provision of services (subparagraph (b) of Article 21(1) of the said Directive) and in certain transfers of goods (subparagraph (c) of the same paragraph), and subject to the requirement of certain conditions, the Sixth Directive began to require the mandatory inversion of the passive subject.
4.15. In the second paragraph of Article 21(1)(a) of the Sixth Directive, the EU legislator permitted Member States the (optional) establishment of the reverse charge mechanism.
4.16. The establishment of this exceptional mechanism for inversion of the passive subject, mandatory in some cases and optional in others, is based on grounds of practicability, because it proves impossible or difficult to exact the tax from the supplier/provider, and on grounds of combating fraud, because it is safer to exact the tax from the acquirer than from the supplier/provider.
4.17. This establishment is also based on the need, expressed in the Recitals of Directive 2000/65/EC, to eliminate the obligation to appoint a tax representative, an obligation that created various difficulties for subjects not established in the State where the tax event occurs, which constituted an obstacle to the development of their business that could hardly be reconciled with the "spirit of the single market".
4.18. The repeal of the Sixth Directive and its replacement by Council Directive 2006/112/EC of 28 November, relating to the common system of VAT ("VAT Directive"), did not eliminate the possibility of Member States opting to establish the reverse charge rule in cases where the passive subject effecting the transfer of goods or provision of service is not established in the territory of the country, with this option being enshrined in Article 194 of the VAT Directive.
4.19. The national legislator transposed Directive 2000/65/EC, amending the VAT Code through Decree-Law No. 179/2002 of 3 August.
4.20. One of the amendments made by the legislator was precisely the addition of a new rule in Article 2(1)(g) of that Code.
4.21. This addition consisted in the adoption of the expansion of the scope of subjective incidence, pursuant to the option offered to Member States by the amendment to Article 21 of the Sixth Directive by Directive 2000/65/EC, an option that remains valid under Article 194 of the VAT Directive.
4.22. To this extent, the aforementioned new Portuguese rule, which remains unchanged to this day, instituted a broadly encompassing mechanism for inversion of the passive subject, respecting the condition imposed by EU law that such inversion be applied only to cases involving a passive subject not established in the territory of the country, transferring the responsibility for assessment of the tax to the acquirer of the goods or services, when the transfer of goods or provision of services is carried out in national territory "by passive subjects who have neither their seat, stable establishment or domicile there nor have appointed a representative in accordance with Article 30".
4.23. In these situations, the passive subjects acquiring the goods or services must proceed with the self-assessment of VAT due on the taxable transaction, which relieves the transferor of the goods or provider of the service from that same VAT assessment obligation.
4.24. However, it has been the practice of the Tax Authority to interpret Article 2(1)(g) of the VAT Code in such a way as to consider that a passive subject transferring goods or providing a service, who does not have in national territory a seat, stable establishment or domicile, or has not appointed a tax representative in accordance with Article 30 of the VAT Code, but who has VAT registration, is not relieved of the obligation to assess tax under the reverse charge mechanism provided for in that rule.
4.25. Such interpretation by the Tax Authority is completely contrary to the letter and spirit of both the Portuguese rule and the EU rule, whether the EU rule provided for in Article 21 of the repealed Sixth Directive or the EU rule provided for in Article 194 of the current VAT Directive.
4.26. In this context, the letter of the rule provided for in Article 2(1)(g) of the VAT Code clearly delimits the situations in which reverse charge is applicable, using precise and clear concepts, defined long ago by the jurisprudence of the CJEU and adopted by the legislations of the Member States and followed by the jurisprudence of national courts.
4.27. Pursuant to Article 10 of the aforementioned Implementing Regulation, it is understood that the seat of a passive subject is the place where the functions of the company's central management are carried out, with account being taken in determining this place of: the place where essential general management decisions are made, the place of its registered office, and the place where management bodies meet.
4.28. In Articles 11(1) and (2) of the aforementioned Implementing Regulation, a stable establishment is understood, for VAT purposes, as "any establishment, other than the seat of the economic activity referred to in Article 10 of the same Regulation, characterized by a sufficient degree of permanence and an adequate structure, in terms of human and technical resources, enabling it to receive and use the services provided for the needs of that establishment" or "enabling it to effect the deliveries of goods or provisions of services in which it participates." The extensive jurisprudence of the CJEU on this matter is consistent with this legal concept.
4.29. In Articles 12 and 13 of the Implementing Regulation, the term "domicile" is used respectively ("the address as it appears in the population register or similar register, or the address communicated by that person to the competent tax authorities, unless there is evidence that that address does not reflect reality") and the term "habitual residence" ("the place where that natural person habitually resides due to personal and professional ties"). These two terms are used for natural persons, whether or not passive subjects.
4.30. The national legislator uses the concept of tax domicile in Article 2(1)(g) of the VAT Code. Pursuant to Article 19 of the General Tax Law, tax domicile shall be, for natural persons, their habitual residence, for legal persons, the location of their seat or their effective management, or failing that, their stable establishment.
4.31. Pursuant to Article 30 of the VAT Code, it is provided that it is possible to appoint a tax representative by "non-resident passive subjects, without stable establishment in national territory, who carry out taxable operations here and who have their seat, stable establishment or domicile in another Member State".
4.32. Thus, there may exist entities that, having neither seat, stable establishment, nor domicile (or habitual residence), and that do not proceed with the appointment of a tax representative, nonetheless do not cease to carry out operations subject to VAT in Portugal.
4.33. In these cases, these non-resident entities must register for VAT purposes, in accordance with the combination of Article 29(1)(a) and Article 31, both of the VAT Code.
4.34. It is clear that entities that merely proceed with their registration for VAT purposes may have neither seat, stable establishment, domicile nor tax representative in Portugal, i.e., these entities merely registered for VAT purposes constitute, for the purposes of Article 2(1)(g), "passive subjects who have neither their seat, stable establishment or domicile there nor have appointed a representative in accordance with Article 30".
4.35. Consequently, when such entities transfer goods or provide services in national territory to natural or legal persons referred to in Article 2(1)(a), there must be an inversion of the passive subject and such acquirer of the goods or services must proceed with the self-assessment of VAT due on the transaction.
4.36. It is not possible, as the Tax Authority wrongly does with a defect of illegality, to consider that an entity with mere VAT registration can constitute or be analogous to a passive subject with seat, stable establishment or domicile, and consequently, to consider the aforementioned rule as not applicable.
4.37. This mistaken understanding by the Tax Authority is illegal because it violates not only this national rule provided for in the VAT Code, but also contradicts the EU rule provided for in former Article 21 of the Sixth Directive and current Article 194 of the VAT Directive.
4.38. Both EU rules provide that Member States may apply the reverse charge mechanism when the passive subject effecting the VAT-taxable operation (i.e., the supplier of goods or provider of services) "is not established in the territory of the country" (e.g., Article 21(a) of the Sixth Directive – in the same sense, Article 194 of the VAT Directive).
4.39. In view of Article 21(a) of the Sixth Directive and Article 194 of the VAT Directive, and the interpretation clarified by the CJEU of "passive subject not established in the territory of the country", an entity that merely has VAT registration in the Member State, but does not have there a seat, stable establishment or domicile, is, for the purposes of these EU rules, a passive subject not established in the territory of that Member State, which may benefit from a reverse charge that establishes the acquirer of the goods or services as the debtor of the tax.
4.40. It should also be noted that, given Article 6(6)(a) of the VAT Code, the Tax Authority recognizes in its Binding Information No. 3043 of 26 March 2012, that mere registration for VAT purposes "is not considered as a sufficient element of connection for the localization and consequent taxation of the operation in the Member State of that registration", since that rule provides that only the provision of services carried out to "a passive subject referred to in Article 2(5), whose seat, stable establishment or, failing that, the domicile, to which the services are provided, is located in national territory, wherever the seat, stable establishment or, failing that, the domicile of the provider is located", shall be taxed in Portugal.
4.41. The condition of whether the natural or legal person has or does not have a seat, stable establishment or domicile (and in the case of Article 2(1)(g), a tax representative), is the relevant condition in both aforementioned rules for determining the application or not of the reverse charge mechanism (Article 2(1)(g)) or the localization or not of the operation in national territory (Article 6(6)(a)), being irrelevant, because it is not expressed in any of the rules, the possession of a mere VAT registration number.
4.42. The Applicant requests that in the present proceedings, it be recognized the right to indemnificatory interest in its favor, in accordance with Article 43 of the General Tax Law, should it proceed to pay the tax and compensatory interest pending this arbitral proceeding.
4.43. In the event that the Applicant is required to provide security to suspend any enforcement proceedings that may be instituted for coercive collection of the tax and interest subject to the assessments at issue in these proceedings, the Applicant requests that it be recognized the right to indemnification for security improperly provided in accordance with Article 53 of the General Tax Law.
5. In turn, the Tax Authority and Customs Authority filed a response, in which it defended itself, in summary, as follows:
5.1. As the Applicant admits, there is pending before the Lisbon Tax Court, registered under No. …/17…BELRS, a special administrative action which has as its object the review of the decision rejecting the VAT refund request.
5.2. In the context of the aforementioned special administrative action, in which the present Applicant is the plaintiff, it challenges the decision rejecting the refund request on the terms and with the grounds set out in the petition and in all respects identical to the request for arbitral pronouncement filed with the CAAD.
5.3. The decision that is ultimately rendered necessarily constitutes res judicata as to the defects intended to be imputed to the assessments challenged in the present arbitral proceedings.
5.4. In that special administrative action, the annulment of the decision rejecting the VAT refund request is sought, on grounds of error in matters of fact and law, with the legal consequences thereof.
5.5. The act consequent to the possible annulment of the decision rejecting the refund will be the annulment of the assessments challenged here.
5.6. In that the present arbitral proceedings, the Applicant petitions that the illegality of the tax acts relating to the assessments and VAT and the corresponding compensatory interest be declared, for, among other defects, violation of law and error in matters of fact and law.
5.7. From which results identity of claim and cause of action, with the analysis of the legality or illegality of the grounds on which the assessment acts are based – rejection of the refund request – being pursued before the Lisbon Tax Court.
5.8. It is added that in the context of the special administrative action, an exception of error in form of proceedings was raised, on the understanding that that procedural means is inadequate to hear the plaintiff's claim.
5.9. To date, no ruling has been issued on the invoked exception which, if upheld, could result in conversion to judicial review.
5.10. Thus, in accordance with the provisions of Article 577(i) and Article 576(2), both of the Code of Civil Procedure, applicable ex vi Article 29 of the LFATM, the exception of lis pendens shall be judged as well-founded, which prevents the continuation of the proceedings, dismissing the respondent entity from the case.
5.11. The Applicant requested a refund of VAT credit in the amount of 19,689.84 euros, relating to the tax period 16/09Q.
5.12. The passive subject ceased business operations on 28/07/2016.
5.13. It was registered for VAT purposes in Portugal with tax identification number …, as a non-resident, without stable establishment, here carrying out the activity of Wholesale Trade in Fish, Crustaceans and Mollusks (CAE 46381) (see Doc. No. 1 of the P.A.).
5.14. Thus, the Applicant was in Portugal classified for VAT purposes as a passive subject of the general regime with quarterly periodicity, which carried out exclusively operations that confer the right to deduction.
5.15. The refund requested in the final period of activity was classified by the risk matrix for inspection purposes.
5.16. In this sequence, in the context of the inspection procedure, corrections were established, in the total amount of €22,161.31, which resulted in a settlement note for the remaining amount of €2,471.47 (in favor of the State), plus compensatory interest and the consequent rejection of the refund request due to insufficient tax credit balance.
5.17. In summary, the argument on which the Tax Authority based the rejection of this amount was having concluded in the inspection procedure that the Applicant was subject to compliance with VAT Code obligations, namely the assessment and payment of tax due on operations carried out in national territory, thus emptying of content the provision contained in Article 2(1)(g) of the VAT Code, in accordance with the terms provided in Point 1 of Circular Letter 30073/2005 of 24/3.
5.18. In requesting a VAT refund, the Applicant had to prove the right thereto, in accordance with Article 74 of the General Tax Law, and it is recalled that no proof thereof was produced for the present proceedings, namely the invoices demonstrating the VAT borne, as well as its connection to operations it carried out and which confer the right to deduction.
5.19. Refraining from repeating the arguments already contained in the P.A. and which are hereby deemed to be fully reproduced, it should be noted that, adhering to the Applicant's perspective, the refund should never have been requested through the periodic return, but rather through the aforementioned mechanism for VAT refund to non-resident passive subjects, as provided for in Article 5 of Decree-Law No. 186/2009 of 12 August.
5.20. Given the Applicant's thesis, it would have only carried out transfers of goods for which the tax was due by the acquirers, in accordance with Article 2(1)(g) of the VAT Code.
5.21. Thus, it should have been under this regime (because special) that such refund would have been reviewed, and that under this regime, all elements necessary to verify the right to refund accompany the request from the outset.
5.22. Already in the refund mechanism provided for in the VAT Code and carried out by the Applicant in periodic returns, the inspection of such right is subject to the selection of the passive subject by an existing risk matrix for inspection purposes.
5.23. And this is because, from the outset, passive subjects that submit periodic tax returns (that is, with VAT registration) are bound by compliance with the obligations contained in the VAT Code, from the outset those contained in Article 29 of the VAT Code.
5.24. Thus, there is no reason for the Applicant, because in truth, what would not make sense would be that a passive subject of tax who is obliged to submit periodic tax returns, as is its case, proceeded with the deduction and possible refund request under general terms, while being a taxpayer of the general regime that it is, but did not assess the tax on the invoices it issues.
5.25. Note that, if this were the case, there would be no control mechanism regarding the self-assessment of tax by the acquirer of the goods.
5.26. Because, if the acquirer of the goods is a resident passive subject, the obligation to submit the recapitulative return does not apply, and in fact, the Applicant never submitted one.
5.27. That is, the Applicant, according to its theory, should have requested the refund of tax under the aforementioned special regime. The only reason (which is also not legal and does not bind it) is that stated in Article 2 of Circular Letter 30073/2005 of 24/3, and, acting in accordance with this, with the legitimacy that only this provides to it, it does not accept part of it.
5.28. Not only were the operations in question not reported in recapitulative returns, but also, the Applicant does not even allege, and therefore does not prove, that the recipient of the goods ever proceeded with self-assessment and remittance of the tax to the State.
5.29. Moreover, as noted in the I.R.T., the Applicant's only supplier was C…, tax identification number …, also non-resident and with VAT registration, from the same group as the Applicant and which assessed the tax on the transfer of goods to it.
5.30. Otherwise, the Applicant would never have found itself in a tax credit position, since the tax it would have deducted would correspond to that which it self-assessed.
5.31. The Applicant was a passive subject of the general regime, with quarterly periodicity bound by compliance with the obligations contained in the VAT Code, specifically those contained in Article 29 thereof.
5.32. And, as it well states in Article 23 of the request for arbitral pronouncement, "Member States may provide, under conditions laid down by them, that the debtor of the tax is the recipient of the supplies"...
5.33. Now, these were the conditions established by the Portuguese State and which, although contained in a Circular Letter, were observed by the Applicant, which, as noted, would otherwise have to request the refund under the aforementioned special regime.
5.34. By adopting the Applicant's part of the Letter which gives it the legitimacy to request the refund through the periodic tax return, to then invoke that the remainder contained therein is not applicable to it because it is not law, constitutes an abuse of rights in the modality of venire contra factum proprium.
5.37. The Applicant always acted in good faith, fully adhering to the terms of the Circular Letter and accepting all parts thereof, as it would have accepted the refund request under the special regime, within the conditions provided therein, if that had been the Applicant's option.
5.38. It was the Applicant's actions, adopting the deduction/refund rules contained in the general regime, that created the trust in the Applicant that it would accept the terms of the Circular Letter, to the extent that only this would give it the right to so proceed, a right that is manifestly incompatible with the legal solution of non-compliance with the law, which now comes in manifest contradiction, claiming the Circular Letter to have.
6. On 09/04/2018, an arbitral order was issued as follows:
"Notify the applicant to respond, if it wishes, within 10 days to the exception of lis pendens invoked by the respondent".
7. The Applicant filed a pleading in which it responded to the exception of lis pendens invoked by the Respondent, stating, in summary, the following:
7.1. The demonstration that there is no lis pendens is obvious and results, among other grounds, from the fact that there is no identity of claim in the present arbitral action and the special administrative action and the object of both actions is very different.
7.2. Lis pendens is a dilatory exception, of ex officio knowledge, provided for in Article 577(i) of the Code of Civil Procedure and presupposes the "repetition of a cause (…) while the previous one is still pending", as legally defined in Article 580(1) of the Code of Civil Procedure and, pursuant to Article 580(2) of the same rule, aims to "prevent the court from being placed in the alternative of contradicting or reproducing a prior decision".
7.3. It results from Article 581(1) of the Code of Civil Procedure that the exception of lis pendens does not occur in the present action because "an action identical to another is not brought as to the subjects, the claim and the cause of action".
7.4. Now, the Applicant acknowledges that both the act of rejecting the refund, to be reviewed in the context of the administrative action identified above, and the additional VAT assessment sub judice, to be reviewed in the context of the present request for arbitral pronouncement, result from the corrections made in the Tax Inspection Report of July 2017.
7.5. However, note that the corrections made in the aforementioned Tax Inspection Report were in a total amount of € 22,161.31, corresponding to the alleged failure to assess in the sales made by the Applicant.
7.6. Thus, the VAT credit refund that the Applicant requested, in the amount of € 19,689.84, was rejected, having also "resulted in an additional tax assessment in the amount of € 2,471.47 = (€ 22,161.31 - € 19,689.84)" – i.e., the additional VAT assessment sub judice corresponds to the amount corrected by the Tax Authority and not covered by the tax credit established in favor of the passive subject at the time of the refund request rejected by the Respondent.
7.7. In this context, it is to be concluded that the overall amount of corrections established by the Respondent in the Inspection Report – € 22,161.31 – was materialized through two distinct tax acts, and without any relationship of prejudiciality, even though based on the same factual and legal grounds:
• the act of rejecting the refund request in the amount of € 19,689.84, which results from the extinction of the tax credit established by the Applicant in the tax period in which this refund was requested, and;
• the tax act of additional VAT assessment, in the amount of € 2,471.47, which represents the amount of tax that the Applicant must actually remit to the State, due to insufficiency of tax credit to cover this amount.
7.8. On the one hand, the administrative action has as its claim the review of the legality of the act rejecting the refund request filed by the Applicant, in the amount of € 19,689.84, an act based on insufficiency of tax credit balance, resulting from the aforementioned elimination of the tax credit carried out by the corrections made in the Inspection Report.
7.9. On the other hand, the present request for arbitral pronouncement has as its object the review of the legality of the tax act of additional VAT assessment, and corresponding compensatory interest, in the amount of € 2,471.47, a value corresponding to the aforementioned corrections that is not covered by the tax credit held by the Applicant in the tax period sub judice and, as already stated, eliminated following these same corrections.
7.10. Even if the rejection of the refund request is annulled, the additional VAT assessment will not be annulled in the Applicant's legal sphere by virtue of the court decision to be rendered in the context of the administrative action.
7.11. This annulment of the additional VAT assessment, subsequent to the annulment of the rejection act, cannot depend on the (good) will of the Tax Authority, and it is certain that the impossibility of its annulment is foreseeable, considering the time it will take for the conclusion, with res judicata effect, of the special administrative action.
7.12. Furthermore, if the Applicant had not petitioned for the annulment of the additional VAT assessment in the present request for arbitral pronouncement, it would have been prevented from challenging this assessment after the expiration of the periods of administrative or judicial remedies available for such challenge, even if the act rejecting the refund is annulled in the context of the administrative action.
8. On 20/04/2018, an arbitral order was issued dispensing with the meeting provided for in Article 18 of the LFATM, given that the circumstances covered by the various subparagraphs of Article 18(1) were not present, with the possibility of its holding in the event that the parties request it.
9. The parties did not request the holding of the meeting provided for in Article 18 of the LFATM.
II – Proved Facts
10. Based on the documentation attached to the case, the following facts are deemed to be proved:
10.1. The Applicant is a company incorporated under German law that was registered for VAT purposes in Portugal from 1 January 2015, with tax identification number …, and ceased business on 28 July 2016.
10.2. The Applicant has neither had nor currently has tax residence nor tax establishment in Portugal.
10.3. The activity carried out in Portugal consisted of wholesale sales of frozen food products, having as sole customer company B… Lda. (with tax identification number …), a fact that appears in the aforementioned tax register.
10.4. The Applicant was registered for VAT purposes in Portugal with tax identification number …, as a non-resident, without stable establishment, here carrying out the activity of Wholesale Trade in Fish, Crustaceans and Mollusks (CAE 46381).
10.5. In the sales made to its customer, the Applicant did not assess VAT.
10.6. In turn, the Applicant acquired goods locally from its supplier C… (with tax identification number …), incurring VAT, which it deducted in its periodic VAT returns.
10.7. The Applicant was notified on 14 August 2017 of VAT Assessment No. 2017…, and the corresponding compensatory interest assessment No. 2017…, relating to the tax period of the third quarter of 2016, in the total amount of € 2,525.96.
10.8. The Applicant requested a refund of VAT credit in the amount of 19,689.84 euros, relating to the tax period 16/09Q, which was rejected by the Tax Authority.
10.9. In the context of the inspection procedure, corrections were established in the total amount of €22,161.31, with the Tax Authority determining a settlement note for the remaining amount of €2,471.47 (in favor of the State), plus compensatory interest and the consequent rejection of the refund request due to insufficient tax credit balance.
10.10. The Applicant filed a special administrative action before the Lisbon Tax Court under No. …/17…BELRS, seeking to annul the decision rejecting the refund request, which is currently pending.
III – Unproved Facts
11. It is deemed not proved, as no evidence was presented to that effect, that the Applicant proceeded with payment of the assessments in question or was cited for any enforcement proceedings with a view to coercive collection of the debts relating thereto, pending this proceeding.
IV – Law
12. The following legal issues are to be reviewed in this proceeding:
A) The exception of lis pendens
B) The illegality of the VAT assessments and compensatory interest
C) The right to restitution of tax paid and to indemnificatory interest
These issues shall be examined below.
A) THE EXCEPTION OF LIS PENDENS
13. The Respondent invokes that the exception of lis pendens is present, on the basis that a special administrative action is pending before the Lisbon Tax Court under No. …/17…BELRS, seeking to annul the decision rejecting the refund request.
In this regard, Article 580 of the Code of Civil Procedure provides:
"1 - The exceptions of lis pendens and res judicata presuppose the repetition of a cause; if the cause is repeated while the previous one is still pending, there is lis pendens; if the repetition occurs after the first cause has been decided by judgment which no longer admits ordinary appeal, there is the exception of res judicata.
2 - Both the exception of lis pendens and that of res judicata aim to prevent the court from being placed in the alternative of contradicting or reproducing a prior decision.
3 - The pending of the cause before foreign jurisdiction is irrelevant, unless otherwise provided by international conventions."
Article 581 of the same statute also provides:
"1 - A cause is repeated when an action identical to another is brought as to the subjects, the claim and the cause of action.
2 - There is identity of subjects when the parties are the same from the point of view of their legal capacity.
3 - There is identity of claim when in both causes it is intended to obtain the same legal effect.
4 - There is identity of cause of action when the claim made in the two actions proceeds from the same legal fact. In real actions the cause of action is the legal fact from which the real right is derived; in constitutive actions and in actions for annulment it is the concrete fact or the specific nullity invoked to obtain the intended effect".
There being no doubt that we are dealing with the same subjects, it must be verified whether we are dealing with the same claim and cause of action.
The Applicant understands in this regard that: "the overall amount of corrections established by the Respondent in the Inspection Report – € 22,161.31 – was materialized through two distinct tax acts, and without any relationship of prejudiciality, even though based on the same factual and legal grounds:
• the act of rejecting the refund request in the amount of € 19,689.84, which results from the extinction of the tax credit established by the Applicant in the tax period in which this refund was requested, and;
• the tax act of additional VAT assessment, in the amount of € 2,471.47, which represents the amount of tax that the Applicant must actually remit to the State, due to insufficiency of tax credit to cover this amount."
The Applicant further states that: "The object of the present arbitral action consists of the VAT assessments and compensatory interest formalized by Doc. 1 attached to the r.i., and the claim submitted to the Court is as follows:
"a) That the illegality of the tax acts which are the subject of the present Application be declared, relating to the VAT assessments and the corresponding compensatory interest above identified (Document 1), for, among other defects, violation of law and error in matters of fact and law and, in consequence,
b) The annulment of the tax assessments and interest be ordered and
c) The restitution of the tax and interest be determined, plus indemnificatory interest, in the event that the Applicant proceeds to pay the same pending this arbitral action, or it be determined that indemnification for improperly provided security shall be owed if the same Applicant is notified for that purpose and with a view to suspending any enforcement proceedings for coercive collection of the debts subject to the assessments discussed in these proceedings."
The object of the special administrative action is the act rejecting the VAT refund request No. …, of 1 August 2017 and the claim submitted to the Lisbon Tax Court is the following, as may be gathered from the respective p.i. which is attached hereto as Doc. 1 (Case No. …/17…BELRS pending before the Lisbon Tax Court, Organizational Unit …):
"a) The decision rejecting the Applicant's VAT refund request, above better identified, be annulled, on grounds of error in matters of fact and law underlying it, with the legal consequences thereof;
b) The Tax Authority be condemned to grant the refund request and to refund the VAT in the amount of € 19,689.84 of the VAT subject to the refund request, plus indemnificatory interest in accordance with Articles 43 of the General Tax Law, 61 of the Code of Tax Procedure and 22(8) of the VAT Code."
Although it may be understood that we are dealing with the same cause of action (corrections made by the Tax Authority), there is no doubt that we are dealing with different claims, with this Arbitral Court being responsible for deciding on the annulment of the tax assessments, and the Lisbon Tax Court being responsible for deciding on the rejection of the refund requested by the Applicant.
As stated in the Decision of the Supreme Court of Justice of 13 May 2003, Case No. 02A4354: "The exception of lis pendens presupposes the repetition of a cause while the previous one is still pending. A cause is repeated when an action identical to another is brought as to the subjects, the claim and the cause of action (Articles 497 and 498 of the Code of Civil Procedure). The existence of the aforementioned exception aims to prevent the court from being placed in the alternative of contradicting or reproducing a prior decision (Article 497(2) of the Code of Civil Procedure), with the damage that would result therefrom for the prestige of Justice."
In fact, in the concrete case, there is no possibility of repetition of cause, to the extent that the Court is able to decide in any direction, without that putting at risk the proceedings pending before the Lisbon Tax Court.
On those grounds, and by reason of the absence of identity of claims, the exception of lis pendens is dismissed.
B) THE ILLEGALITY OF THE VAT ASSESSMENTS AND COMPENSATORY INTEREST
14. The issue of illegality of the VAT assessments and indemnificatory interest shall now be reviewed.
Article 2(1)(g) of the VAT Code provides that the following are passive subjects of the tax:
"g) Natural or legal persons referred to in subparagraph (a), who are acquirers in transfers of goods or provision of services carried out in national territory by passive subjects who have neither their seat, stable establishment or domicile there nor have appointed a representative in accordance with Article 30".
In turn, subparagraph (a) of the same article includes among the passive subjects of VAT the following:
"a) Natural or legal persons who, in an independent manner and with the character of habituality, carry out activities of production, commerce or provision of services, including extractive activities, agricultural activities and those of liberal professions, and likewise those who, in the same independent manner, carry out a single taxable operation, provided that this operation is connected with the exercise of the aforementioned activities, wherever it occurs, or when, regardless of such connection, such operation meets the prerequisites of the real incidence of the tax on the income of natural persons (PIT) or the tax on the income of legal persons (CIT)";
As appears from the Proved Facts Nos. 1 and 2, the Applicant has neither seat, stable establishment nor domicile in Portugal, being merely registered in Portugal with tax identification number ….
Despite it being provided for, in accordance with Article 30 of the VAT Code, the possibility of appointing a tax representative by "non-resident passive subjects, without stable establishment in national territory, who carry out taxable operations here and who have their seat, stable establishment or domicile in another Member State", it is verified that the Applicant did not proceed with that appointment, but only with a tax registration.
The aforementioned Circular Letter of 24 March provides:
"Having been approved, by order of 2004.12.28 of the Director-General of Taxes, our information No. …, of 2004.12.20, the following is communicated:
1. Subparagraph (g) of Article 2(1) of the VAT Code includes in the concept of passive subject "natural or legal persons referred to in subparagraph (a), who are acquirers in transfers of goods or provision of services carried out in national territory by passive subjects who have neither their seat, stable establishment or domicile there nor have appointed a representative in accordance with Article 29". However, notwithstanding the absence of seat, stable establishment or domicile, non-resident passive subjects shall be bound by compliance with the obligations arising from the VAT Code, should they have here a registration for VAT purposes, regardless of the possibility given to them to proceed with the appointment of a tax representative, passive subject of VAT in national territory, provided with a power of attorney with sufficient powers. In these cases, they are in particular subject to compliance with the obligations of the VAT Code, namely those relating to assessment and payment of tax due on operations carried out in national territory, thus emptying of content the provision contained in subparagraph (g) of Article 2(1) of the VAT Code.
2. Thus, the following shall be observed:
2.1 Refunds requested by non-resident passive subjects, without seat, stable establishment or domicile in national territory, which do not have registration here and have not proceeded with the appointment of a representative, shall be granted under Decree-Law No. 408/87 of 31 December, once the respective conditions and requirements have been verified.
2.2 Refunds requested by non-resident passive subjects, without seat, stable establishment or domicile in Portugal, but which here have proceeded with the appointment of a representative, passive subject of VAT in national territory, provided with a power of attorney with sufficient powers, shall be granted under Article 22 of the VAT Code and respective supplementary legislation – Normative Order No. 342/93 of 30 October – through the presentation of the periodic return that is due.
2.3 Refunds requested by non-resident passive subjects, without seat, stable establishment or domicile in Portugal, who, although they have not proceeded with the appointment of a tax representative, passive subject of VAT in national territory, provided with a power of attorney with sufficient powers, here have, however, a registration for VAT purposes, shall be granted under Article 22 of the VAT Code and respective supplementary legislation – Normative Order No. 342/93 of 30 October – also through the presentation of the respective periodic tax return.
3. Given, however, that this has not been the practice of many passive subjects, it becomes necessary to establish a transitional period, which ends at the end of the month following the dissemination of these instructions, during which refunds meanwhile requested by non-resident passive subjects, without seat, stable establishment or domicile in national territory and who have here proceeded with registration for VAT purposes, be granted by using the legal rules through which they were requested (Decree-Law No. 408/87 of 31 December or Article 22 of the VAT Code and respective supplementary legislation – Normative Order No. 342/93 of 30 October).
4. The Tax Administration services, especially the Tax Office of Lisbon – 3, should make the passive subjects referred to in point 2.3 aware of the obligations to which they are subject, namely, in terms of correct and complete data as regards the start of activity, remaining declarative obligations and assessment and payment" (our emphasis).
The Respondent understands that "passive subjects that submit periodic tax returns (that is, with VAT registration) are bound by compliance with the obligations contained in the VAT Code, from the outset those contained in Article 29 of the VAT Code".
It further states that: "there is no reason for the Applicant, because in truth, what would not make sense would be that a passive subject of tax who is obliged to submit periodic tax returns, as is its case, proceeded with the deduction and possible refund request under general terms, while being a taxpayer of the general regime that it is, but did not assess the tax on the invoices it issues."
The Respondent further notes that the Applicant does not prove that the acquirer proceeded with the assessment of the tax that would be its responsibility, and that the Applicant came to request the refund in accordance with the provisions of point 2.3 of the Circular Letter, whereby it must be understood that it had to comply with all that is provided in the entire Circular Letter, on pain of incurring in venire contra factum proprium.
Now, such understanding cannot be accepted, since the aforementioned Circular Letter seeks to empty of content the provision contained in Article 2(1)(g) of the VAT Code, obliging service providers without seat or stable establishment in Portugal to assess VAT on invoices, when that provision states that such obligation legally rests with the acquirer, and the Tax Authority has no competence to alter fiscal laws, a matter reserved to Parliament.
On the other hand, it is verified that, with regard to the application of Article 6 of the VAT Code, the Tax Authority understands, in the Binding Information issued on 26 March 2012 (Case No. 3043):
"18. With respect to the provision of transnational services, the general criteria determining the place of taxation are defined in Article 6(6)(a) and (b) of the VAT Code, in accordance with which, the following are considered to be located and taxable in national territory: a) A passive subject referred to in Article 2(5), whose seat, stable establishment or, failing that, the domicile, to which the services are provided, is located in national territory, wherever the seat, stable establishment or, failing that, the domicile of the provider is located; b) A person who is not a passive subject, when the provider has in national territory the seat of its activity, a stable establishment or, failing that, the domicile, from which the services are provided.
19. The rules defined above are subject to the exceptions provided for in Articles 7 to 12 of the same Article, which lead to specific localization rules, in accordance with the elements of connection defined therein, applicable to the services contemplated (without application to the case at hand).
20. Given that the general rules for localization of the provision of services elect as elements of connection for their application the place of the seat, the stable establishment and the domicile (the latter for natural persons), and the quality of passive subject of the acquirer, it is important to clarify the scope of the aforementioned concepts.
21. With a view to the clarification and uniformization in the application of the rules of VAT, Implementing Regulation No. 282/2011 of 15 March 2011 - diploma establishing measures for the implementation of Directive 2006/112/EC, relating to the common system of VAT - provides in Article 11(3) thereof as follows: "The fact of having a VAT identification number is not in itself sufficient to consider that the passive subject has a stable establishment."
22. In keeping with the aforementioned Regulation, it should be understood, for the purposes of applying the rules for localization of the provision of services provided for in Article 6 of the VAT Code, that mere registration for VAT purposes is not considered as a sufficient element of connection for the localization and consequent taxation of the operation in the Member State of that registration.
23. Thus, a distinction should be made between passive subjects that are registered for VAT purposes in a given Member State, but that do not have there a seat, a stable establishment or a domicile, from those that are actually established there (that is, have a seat, stable establishment or a domicile".
In this regard, reference is also made to the Decision of CAAD No. 59-2013-T:
"In fact, on the assumption that the Applicant possessed a mere VAT registration in Portugal, an assumption that the Tax Authority and Customs Authority did not contest in the grounds of the assessment acts, the supplies effected by the Applicant's seat, being taxable in Portugal (given the criteria of connection stated above), were covered by the self-assessment mechanism, at the charge of the acquirer [B…], as provided for in Article 2(1)(g) of the VAT Code, which establishes a general rule of substitution of the tax debtor, using the prerogative granted to the Portuguese legislator by Article 194 of the VAT Directive.
(…)
This regime applies even if the recipient of the services does not proceed with the self-assessment of the tax due, a circumstance that is also not relevant for the purpose of determining the right to deduction in the sphere of the Applicant.
It is emphasized that the ratio legis of this regime of self-assessment by the acquirer or recipient is eminently related to the fight against "possible situations of fraud and tax evasion, avoiding, to the extent possible, that entities not established and who do not have a tax representative here who can be held responsible, be entrusted with the collection and remittance of tax (thus transferring such responsibility to the sphere of the Portuguese passive subject acquirer)".
Recognizing, in fact, that the Tax Authority acknowledges that we are dealing with a non-resident passive subject, without seat, stable establishment or domicile in Portugal, as well as without legal representative, and the Applicant not having assessed VAT on the sales it made to its sole customer in Portugal, by way of the inversion of the passive subject, it could never be understood, as the Tax Authority did understand, in the P.A., that "Thus, there is a failure to assess in the sales of the passive subject, in the total amount of € 22,161.31 =(€ 96,357.88* 23%)."
If, in fact, the Applicant erred (or not) by not requesting the VAT refund under the general regime and by following the provisions of the Circular Letter, such is relevant for the purposes of returning the refund, and not for the purposes of annulling the present additional assessment, whereby it should not be reviewed in this context.
Nor is the invocation of abuse of rights on the part of the passive subject appropriate, since the assessment of tax was the responsibility of another.
On those grounds, given that it is verified that it was not the Applicant's responsibility to proceed with the assessment of VAT on the sales made, as the inversion of the passive subject applies in the present case, the VAT assessment and consequent compensatory interest should be annulled.
C) THE REQUEST FOR REFUND OF TAX AND INDEMNIFICATORY INTEREST
15. As regards the request for "restitution of the tax and interest, plus indemnificatory interest, in the event that the Applicant proceeds to pay the same pending this arbitral action, or it be determined that indemnification for improperly provided security shall be owed if the same Applicant is notified for that purpose and with a view to suspending any enforcement proceedings for coercive collection of the debts subject to the assessments discussed in these proceedings", no evidence was presented showing that, pending the action, the payment of the tax, compensatory interest was made, or any security was provided, whereby this request cannot be granted.
V – Decision
16. Based on the grounds set out above, the following is decided:
The exception of lis pendens is dismissed.
The request for annulment of the VAT assessments and compensatory interest in the amount of € 2,525.96 is granted.
The request for restitution of the tax and compensatory interest, plus indemnificatory interest, is dismissed as unproved.
The case is assigned the value of € 2,525.96 (value stated and not contested) and the corresponding arbitration fee is set at € 612.00 in accordance with Table I of the Regulations on Costs of Tax Arbitration Proceedings.
Costs to be borne by the respondent entity in 70% and by the requesting entity in 30%, as this is deemed to be the proportion of their respective non-success.
Lisbon, 22 May 2018
The Arbitrator
(Luís Menezes Leitão)
Frequently Asked Questions
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