CAAD Case 646/2018-T: VAT Deduction Rights for Mixed Taxable Persons - Pro Rata Calculation

ARBITRAL TAX JURISPRUDENCE

Process No. 646/2018-T

Decision Date: 2019-10-21

VAT

Amount of Claim: € 4,403,514.20

Subject Matter: VAT – Mixed-use taxable person; Right to deduction.

ARBITRAL DECISION

I – REPORT

1. On 19 December 2018, A..., S.A., Tax ID No. ..., with registered office at Rua..., ..., ...-... Porto, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as subsequently amended (hereinafter, abbreviated as RJAT), seeking a declaration of partial illegality of the VAT self-assessment act relating to the year 2017, embodied in the periodic tax return No. ..., relating to the month of December of that year, filed on 9 February 2018, in the amount of € 4,403,514.20, as well as the decision on the Grace Period Claim which had that act as its object.

2. To substantiate its request, the Claimant alleges, in summary, that it applied a deduction percentage of 8% to the VAT incurred in mixed-use resources acquired, calculated in accordance with the understandings conveyed by the Tax Authority (AT), namely the instructions of Circular Letter No. 30108, when, in accordance with national and EU VAT legislation, the deduction percentage should correspond to 29%.

3. On 20-12-2018, the request for constitution of the Arbitral Tribunal was accepted and automatically notified to the Tax Authority.

4. The Claimant did not proceed to appoint an arbitrator, wherefore, pursuant to 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 undersigned as arbitrators of the collective Arbitral Tribunal, who communicated acceptance of the appointment within the applicable time period.

5. On 08-02-2019, the parties were notified of such appointments and did not manifest any intention to refuse any of them.

6. In accordance with the provision of paragraph c) of Article 11(1) of the RJAT, the collective Arbitral Tribunal was constituted on 28-02-2019.

7. On 02-04-2019, the Respondent, duly notified for such purpose, filed its response defending itself by way of objection.

8. On 04-06-2019, the meeting referred to in Article 18 of the RJAT took place, where witnesses presented by the Claimant were examined.

9. Having been granted a time period for submission of written pleadings, these were submitted by the Claimant, pronouncing on the evidence produced and reiterating and developing its respective legal positions.

10. It was indicated that the final decision would be notified by the deadline provided in Article 21(1) of the RJAT, which deadline was extended pursuant to Article 21(2) of the same provision.

11. The Arbitral Tribunal is materially competent and is duly constituted, in accordance with Articles 2(1)(a), 5, and 6(2)(a) of the RJAT.

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

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the consideration of the case.

Having considered all the foregoing, it is appropriate to deliver:

II. DECISION

A. MATTER OF FACT

A.1. Facts Established as Proven

1. The Claimant is a commercial company with registered office in the national territory, which exercises the operations described in Article 4(1) of the General Regime for Credit Institutions and Financial Companies, approved by Decree-Law No. 298/92 of 31 December, being classified with Economic Activity Codes (CAE), on a principal basis, as "OTHER MONETARY INTERMEDIATION (CAE 64190), and on a secondary basis, as "FACTORING ACTIVITIES" (CAE 64991).

2. For VAT purposes, the Claimant qualifies as a taxable person pursuant to paragraph a) of Article 2(1) of the VAT Code, being classified in the standard monthly periodicity regime, pursuant to paragraph a) of Article 41(1) of the same instrument.

3. The Claimant exercises activities that confer the right to deduction and also carries out operations within the scope of financial activity, which is exempt from VAT pursuant to Article 9(27) of the VAT Code, proceeding to ascertain the tax for each period using the method set out in Article 23 of the same instrument.

4. With respect to situations in which the Claimant identified a direct and exclusive connection between certain acquisitions of goods and services (inputs) and active operations (outputs) carried out by it, it applied, for purposes of exercising the right to deduction, the method of direct allocation, pursuant to the provision in Article 20(1) of the VAT Code.

5. In acquisitions of goods and services used exclusively for the performance of operations that do not confer the right to deduction, the Claimant did not deduct any amount of VAT.

6. In situations where the Claimant identified a direct but non-exclusive connection between certain acquisitions of goods and services (inputs) and active operations (outputs) carried out by it, and managed to determine objective criteria regarding the level/degree of actual use, it applied the method of real allocation, in accordance with the provision in Article 23(2) of the VAT Code.

7. To determine the amount (quantum) of deductible VAT with respect to other acquisitions of goods and services, allocated indistinctly to the various operations undertaken by it, that is, to "mixed-use resources", the Claimant applied the general and supplementary method of the deduction percentage, as provided in paragraph b) of Article 23(1) of the VAT Code.

8. The determination of the aforementioned deduction percentage was made in compliance with the content in point 9 of Circular Letter No. 30108 of 30 January 2009 from the Office of the Deputy Director-General of the Tax Management Area of VAT.

9. The value of deductible VAT according to the deduction percentage method was temporarily deducted throughout the year 2017, based on the deduction percentage of the previous year.

10. Subsequently, the value of temporarily deducted VAT was subject to adjustment/final regularization for the difference in the periodic return relating to the last period of the year.

11. From the aforementioned procedure resulted, for the Claimant, a deduction of € 1,680,452.37.

12. If the Claimant had:

i. disregarded, in determining the definitive deduction percentage for the year 2017, the resources used in the own securities portfolio management activity and, instead, adopted the method of integral real allocation for the deduction of the tax paid on resources allocated to this area of activity;

ii. included, in the deduction percentage for the aforementioned year, values relating to the transmission of vehicles acquired within the credit granting activity with reservation of title;

iii. included, in the aforementioned deduction percentage, amounts relating to financial amortizations of financed leasing contracts;

the deduction percentage calculated for the year in question would be 29%, instead of 8%, and the value of deductible VAT in the acquisition of mixed-use resources in that year would be € 6,083,966.5.

1. In the case referred to in point i. of the preceding number, there is no VAT to be recovered additionally by the Claimant in light of the revision of the VAT deduction methodology in the year 2017, as per the table below:

[table omitted]

1. In the case referred to in point ii. of number 12, the additional amount relating to the transmission of vehicles acquired within the credit granting activity with reservation of title corresponds to a 5% variation in the deduction percentage for the year 2017, as per the table below:

[table omitted]

1. In the case referred to in point iii. of number 12, the additional amount relating to amounts relating to financial amortizations of financed leasing contracts corresponds to a 16% variation in the deduction percentage for the year 2017, as per the table below:

[table omitted]

1. The Claimant paid, in due time, the tax resulting from the VAT self-assessment relating to the period of December 2017 and also timely filed a Grace Period Claim concerning the same.

2. On 1 August 2018, the Claimant was notified of the draft decision rejecting the Grace Period Claim filed, to exercise its right to prior hearing within a 15-day period, and the Claimant chose not to exercise the same.

3. The aforementioned Grace Period Claim was, on 14 September 2018, definitively rejected by the Tax Authority.

4. The use, by the Claimant, of the mixed-use resources acquired is distinct in the commercial banking activity, which is based on the entire branch network, consumers of the majority of mixed-use resources acquired, compared to other activities, among which the activity relating to the management of own securities portfolio, which consumes a limited and defined set of resources at the level of central services.

5. Insofar as the Claimant had applied the 8% deduction criterion to the VAT incurred, it proceeded to regularize in favor of the State the aforementioned amount of € 7,673.26.

6. Within the scope of its activity, the Claimant enters into credit contracts with a reservation of title clause intended for the acquisition, by its clients, of motor vehicles, new or used, pursuant to which the client appears in the vehicle ownership register as the owner thereof, notwithstanding the constitution of reservation of title in favor of the Claimant.

7. In these cases, the Claimant enters into, in a first moment, a purchase and sale contract with a third party, acquiring the vehicle required by its client, and, in a second moment, a loan contract with its client, in which the granting of credit is agreed which enables the latter to acquire the desired motor vehicle.

8. With the execution of the loan contract, the Claimant's client accepts that the reservation of title be stipulated in favor of this entity, until the Claimant receives the credit that was meanwhile constituted in full.

9. The constitution of the reservation of title in favor of the Claimant aims to ensure the full payment, by its client, of the amounts owed with reference to the loan contract executed, in order to prevent possible situations of non-performance, allowing the Claimant, simultaneously, to obtain the expedited restitution of the asset, in case of failure to pay the agreed installments.

10. For the development of the activity of credit granting with reservation of title, the Claimant resorts to its branch network, as well as to the directions of Automobile Financing, Business Marketing, Planning, and Operations, utilizing the respective resources.

11. The commercialization of the credit product with reservation of title by the various branches of the Claimant involves, in itself, the consumption of part of the human and technical resources that make up its structure.

12. The activity of credit with reservation of title is coordinated by the Automobile Financing Direction, which ensures the management of all automobile financing operations, that is, leasing operations, ALD and credit with reservation of title.

13. The Automobile Financing Direction allocates the resources necessary for the pursuit of the activity of credit with reservation of title, in particular in the part relating to the transmission of vehicles to clients, namely human resources, communications, office materials, displacements and stays, litigation and notarial matters, and fuels.

14. The Business Marketing Direction, responsible for the development of advertising actions, and the directions involved in risk management (Planning Direction and Operations Direction) also allocate part of their resources to the Claimant's credit activity with reservation of title.

15. The VAT corresponding to these mixed-use resources was not subject to deduction via the application of the specific allocation criterion in the self-assessment subject to the present arbitral action.

A.2. Facts Established as Not Proven

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

A.3. Reasoning for the Proven and Not Proven Matter of Fact

With respect to the matter of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate proven matter from unproven matter (see Article 123(2) of the Code of Tax Procedure and Article 607(3) of the Code of Civil Procedure, applicable pursuant to Article 29(1)(a) and (e) of the RJAT).

Accordingly, the facts pertinent to the adjudication of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (see former Article 511(1) of the Code of Civil Procedure, corresponding to current Article 596, applicable pursuant to Article 29(1)(e) of the RJAT).

Thus, having regard to the positions taken by the parties, in light of Article 110(7) of the Code of Tax Procedure, the documentary evidence and the procedural file attached to the record, as well as the witness testimony produced, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Court Decision of TCA-South of 26-06-2014, delivered in process 07148/13, "the evidential value of the tax inspection report (...) may have probative force if the assertions contained therein are not disputed."

In particular, the facts established as proven in points 12 to 15 were alleged substantively by the Claimant since its Grace Period Claim petition, and were never challenged by the Tax Authority.

The facts established as proven in points 19, and 25 to 29 result essentially from the witness testimony produced, which narrated them coherently and in accordance with the normal rules of experience.

Allegations made by the parties and presented as facts were not established as proven or not proven, consisting of strictly conclusive statements, incapable of proof, whose veracity must be assessed in relation to the concrete matter of fact above consolidated.

B. LAW

As both parties agree, the questions to be resolved in the present proceedings are as follows:

a) (In)admissibility of the Claimant's use of the real allocation method in the own securities portfolio management activity;

b) (Non-)consideration of the value of the transmission of vehicles relating to the credit granting activity with reservation of title in the numerator and denominator of the deduction percentage applied to the VAT incurred by the Claimant in mixed-use resources;

c) (Non-)consideration of the value of financial amortizations relating to financed leasing contracts in the calculation of the deduction percentage applied to the VAT incurred by the Claimant in mixed-use resources.

Let us examine each of them.

i.

With respect to the first of the questions to be considered, the Respondent bases itself on Circular Letter No. 30103 of 2008-04-23, in the part where it states that "in the case of use of real allocation, whether mandatory or optional, and also according to Article 23(2), the criteria to which the taxable person has recourse to determine the degree of allocation or use of goods and services for the performance of operations that confer the right to deduction or operations that do not confer such right may be corrected or altered by the Directorate-General for Tax Revenue (DGCI), with due grounds of fact and law, or, where applicable, cease the use of the method, if significant distortions in taxation are verified," arguing that the application of the specific allocation coefficient is the only one that is appropriate for the calculation of the deduction percentage, eliminating distortions in taxation and being in accordance with EU law and internal legal norms (namely, Articles 173 and 174 of the VAT Directive, and Article 23 of the VAT Code), safeguarding the principle of neutrality.

The Respondent thus concludes that the application of the "full deduction method" proposed by the Claimant does not prove to be appropriate for determining the amount of deductible VAT.

Invoking, further, Circular Letter No. 30082/2005 of 17 November, the Respondent argues that cases such as the present one are not susceptible of being framed in the regularization cases provided for in Article 78 of the VAT Code, with point 8 of the aforementioned administrative instruction identifying the situations that are excluded from its scope, not because they could not be included therein, but because their discipline is regulated in other legal provisions, such as Articles 23 to 25 of the VAT Code.

For the Respondent, being at stake the calculation of the deduction percentage, such should be regularizable exclusively through the mechanism provided in Article 23(6) of the VAT Code, that is, in the last return of the period to which it relates.

Which did not happen.

The Claimant, for its part, argues that the use of the specific allocation coefficient to determine the capacity to deduct VAT incurred in resources used by the own securities portfolio management activity does not prove appropriate, since it objectively does not allow demonstrating the real use of the referred resources in each of the typologies of operations undertaken by the Claimant.

The Claimant further states that the result of the application of the real allocation criterion in question is not contrary to the objective pursued by the provisions of the VAT Directive, nor does it result from a set of objective elements that the essential purpose of the operations in question is the obtaining of a tax advantage.

The Claimant adds that it made available to the Tax Authority reports with the explanation and detail of the method of calculation of the deduction criterion in question, the respective supporting documentation thereof, and lists supporting the determination of deductible VAT, and that if the Tax Authority had any doubt as to the method of determining the criterion in question or the respective deductible VAT, it should have questioned the Claimant, who would promptly make available all the documentation that the Tax Authority deemed relevant.

Finally, the Claimant notes that it appears to be settled in Tax Case Law that the time period for the exercise of the right to regularize VAT in situations in which taxable persons have made an error in the regime of the right to deduct tax incurred in the acquisition of resources used within their activity is the general and supplementary time period of 4 years, enshrined in Article 98(2) of the VAT Code.

Having reached this point, it must be noted that the Claimant and Respondent are in agreement, and it is established in the matter of fact given as proven, that there is no additional VAT to be recovered by the Claimant in light of the revision of the VAT deduction methodology in the year 2017 within the scope of the own securities portfolio management activity.

Now, since the question at hand does not contend with the amount of tax assessed in the tax act subject to the present arbitral action, it is not capable of founding the invalidity thereof, and is, therefore, irrelevant for the decision to be rendered in the present proceedings.

Accordingly, there is nothing to be decided by this Arbitral Tribunal with respect to the same, and it is necessary to proceed to the consideration of the remaining questions raised.

ii.

With respect to the (non-)consideration of the value of the transmission of vehicles relating to the credit granting activity with reservation of title in the numerator and denominator of the deduction percentage applied to the VAT incurred by the Claimant in mixed-use resources, the Respondent begins by noting that the inclusion of the reservation of title clause does not mean that the client/purchaser becomes the full owner of the vehicle, but rather becomes the holder of a legal expectation of acquisition of the asset, since while the reservation of title persists, he can only enjoy the asset in question, but cannot exercise all the rights inherent to full ownership, such as the possibility of alienating it to third parties, since only with full payment of the agreed price will the reservation of title cease and the transfer of ownership to the client occur.

The Respondent further notes that the reservation of title clause constitutes a suspensive condition of the real effect of the contract, and therefore, the transmission of ownership of the vehicles is subordinated to a future and uncertain event, that is, the performance by the purchaser of the agreed obligations, normally the payment of the price.

The Respondent continues, stating that the inclusion of the value of the transmission of vehicles relating to the credit granting activity with reservation of title in the calculation of the specific allocation coefficient obtained by the application of the real allocation method would unjustifiably increase the deduction percentage, which would be at odds with the principle of tax neutrality, since the variables that compose the fraction for calculating the specific allocation coefficient should be homogeneous/coherent among themselves, on pain of determining unjustified advantages that would occur if the aforementioned fraction included in one of its components taxable values corresponding to the value of alienation of vehicles to the Claimant's credit clients, given that the greater the credit granted (an operation subject to VAT, but exempt therefrom by force of the provision in paragraph 27 of Article 9 of the VAT Code), the greater would be the VAT deduction that would result from the application of the specific allocation coefficient, which would contribute to the occurrence of significant distortions in VAT taxation, whereby it is not possible, nor appropriate, to use the pro rata method defined in paragraph b) of Article 23(1) and Article 23(2), and developed in Articles 23(4) to (8), but rather the provision in Article 23(3) of the VAT Code should be applied, in conjunction with the understanding set out in Circular Letter No. 30103 of 23-04-2008.

The Claimant, for its part, clarifies that in the credit activity with reservation of title there are always two distinct operations, autonomous and with different VAT treatment: 1) the taxation, in the general terms, of the operation of transmission of vehicles and 2) the exemption of VAT in the granting of credit, pursuant to paragraph a) of Article 9(27) of the VAT Code, whereby the consideration of the component of transmission of vehicles of the credit activity with reservation of title in the specific allocation coefficient, given the consumption of resources necessary to perform it, proves to be crucial for assessing the exact extent of the right to deduction.

The Claimant invokes, in its support, the decision in the Volkswagen Financial Services judgment (Case C-153/17) of the CJEU, considering that it applies fully here, and also suggesting that the case law of CAAD, although pronouncing on financial leasing operations, applies equally to the acquisition of vehicles within the scope of reservation of title contracts, specifically to the situation sub judice.

Let us examine this.

The Volkswagen Financial Services judgment (Case C-153/17) of the CJEU, referred to by the Claimant, sought to answer the question of whether Articles 168 and 173(2)(c) of the VAT Directive should be interpreted in the sense that, on the one hand, even when the general costs relating to financial leasing services for movable property, such as those at issue in the main proceedings, are not passed on in the amount owed by the client for the availability of the asset in question, that is, the taxable part of the operation, but rather in the amount of the interest owed in respect of the "financing" part of the operation, that is, the exempt part of the operation, such general costs should be considered, for VAT purposes, as a constituent element of the price of that availability, and, on the other hand, Member States may apply an apportionment method that does not take into account the initial value of the asset in question at the time of its delivery.

It should be noted from the outset that the situations of the Claimant in the present proceedings and of Volkswagen Financial Services in case C-153/17 are not identical, since the latter is a specialized institution dedicated exclusively to financial operations connected with the automobile sector, and the judgment in question concerns ALD operations, not credit granting with reservation of title.

Notwithstanding, the Tribunal still considers that the CJEU issued, with clarity, a pronouncement with relevance to the subject matter that is now being discussed, whereby it will be useful to analyze the decision in question.

In it, the CJEU begins by defining whether, from the VAT perspective, different operations such as the granting of financing and the provision of vehicles should be treated as distinct operations taxable separately or as single complex operations composed of various elements, concluding that the answer to such a question should be given by the national court, taking into account the following criteria:

a) each operation should normally be considered distinct and independent, and an operation consisting of a sole provision on the economic plane should not be artificially decomposed, so as not to alter the functionality of the VAT system;

b) it should be considered that there is a single provision when two or more elements or acts supplied by the taxable person are so closely linked that they form, objectively, a sole indivisible economic provision, whose decomposition would be artificial in nature;

c) one is in the presence of a single provision when one or more elements should be considered the main provision, while should be considered an ancillary provision or provisions that share the tax treatment of the main provision when it does not constitute for the clientele an end in itself, but the means of benefiting, under the best conditions, from the supplier's main service.

Additionally, the CJEU clarified that the deferred payment of the purchase price of an asset, through the payment of interest, may be considered as a granting of credit, which constitutes an exempt operation pursuant to this provision, provided that the payment of interest does not constitute an element of the consideration received for the delivery of the assets or the provision of services, but rather the remuneration of that credit.

With respect to the right to deduction, the CJEU reaffirmed that the common VAT system thus ensures perfect neutrality as to the tax burden of all economic activities, irrespective of their respective purposes or results, provided that those activities are themselves subject to VAT, and that a right to deduction is admitted in favor of the taxable person, even in the absence of a direct and immediate relationship between a particular upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question are part of the general expenses of the latter and are, as such, constituent elements of the price of the assets supplied or the services provided by it, and that the decision not to include these costs in the price of the taxable operations, but solely in the price of the exempt operations, cannot have any repercussion on this factual conclusion and that the result of these economic operations is not pertinent, in light of the right to deduction, provided that the activity itself is subject to VAT.

The CJEU does, however, point out that the scope of that right to deduction varies depending on the use to which the assets and services in question are destined, since, while, for assets and services destined to be used exclusively for the performance of taxable operations, taxable persons are authorized to deduct all the tax that was imposed on assets or services supplied to them or provided to them, for assets and services destined for mixed use, it follows from Article 173(1) of the VAT Directive that the right to deduction is limited to the part of the VAT that is proportional to the value relating to the operations that confer the right to deduction performed through such assets or services, and that pursuant to Article 173(2)(c) of the said Directive, Member States may authorize or require the taxable person to effect the deduction based on the allocation of all or part of the assets and services.

In this regard, recalling the Banco Mais judgment, the CJEU adds that any Member State that decides to authorize or require the taxable person to effect the deduction based on the allocation of all or part of the assets and services must ensure that the methods of calculating the right to deduction allow establishing with the greatest precision the part of the VAT relating to the operations that confer the right to deduction, since the principle of fiscal neutrality, inherent to the common VAT system, requires that the methods of calculating the deduction reflect objectively the real part of the expenses incurred in the acquisition of goods and services of mixed use that can be attributed to operations that confer the right to deduction, and that the method chosen does not necessarily have to be the most precise possible, but must be able to guarantee a more precise result than that which would result from the application of the apportionment criterion based on turnover.

Still with respect to the Banco Mais judgment, the CJEU states that the calculation of the right to deduction in application of the method based on turnover, which takes into account the amounts relating to the part of the rents that clients pay and which serve to compensate the provision of the vehicles, leads to determining a pro rata of VAT deduction paid upstream less precise than that resulting from the method based solely on the part of the rents corresponding to the interest that constitutes the consideration for the financing and management costs of the contracts supported by the financial lessor, since these two activities constitute the essential part of the use of goods and services of mixed use destined for the performance of financial leasing operations for the automobile sector.

The CJEU concludes that given the fundamental nature of the right to deduction, whenever the methods of calculating the deduction do not take into account a real and significant allocation of a part of the general costs to operations that confer the right to deduction, one cannot consider that such methods reflect objectively the real part of the expenses incurred in the acquisition of goods and services of mixed use that can be attributed to such operations, whereby such methods are not capable of guaranteeing a more precise apportionment than that which would result from the application of the apportionment criterion based on turnover.

With relevance to the subject matter at hand, Article 23 of the VAT Code applicable provides:

"1 - When the taxable person, in the exercise of its activity, effects operations that confer the right to deduction and operations that do not confer such right, pursuant to Article 20, the deduction of tax supported in the acquisition of goods and services that are used in the performance of both types of operations is determined as follows:

a) In the case of a good or service partially allocated to the performance of operations not arising from the exercise of an economic activity provided for in paragraph a) of Article 2(1), the non-deductible tax as a result of such partial allocation shall be determined in accordance with Article 23(2);

b) Without prejudice to the provision of the preceding paragraph, in the case of a good or service allocated to the performance of operations arising from the exercise of an economic activity provided for in paragraph a) of Article 2(1), part of which do not confer the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations that give rise to deduction.

2 - Notwithstanding the provision of paragraph b) of the preceding number, the taxable person may effect the deduction according to the real allocation of all or part of the goods and services used, based on objective criteria that allow determining the degree of use of such goods and services in operations that confer the right to deduction and in operations that do not confer such right, without prejudice to the Directorate-General for Tax Revenue coming to impose special conditions on it or to cease such procedure in the event that it is verified that it causes or may cause significant distortions in taxation.

3 - The tax authority may oblige the taxable person to proceed in accordance with the provision of the preceding number:

a) When the taxable person exercises distinct economic activities;

b) When the application of the procedure referred to in Article 23(1) leads to significant distortions in taxation.

4 - The deduction percentage referred to in paragraph b) of Article 23(1) results from a fraction comprising, in the numerator, the annual amount, tax excluded, of operations that give rise to deduction pursuant to Article 20(1) and, in the denominator, the annual amount, tax excluded, of all operations performed by the taxable person arising from the exercise of an economic activity provided for in paragraph a) of Article 2(1), as well as non-taxed subsidies that are not equipment subsidies.

5 - In the calculation referred to in the preceding number, however, not included are the transfers of assets of the fixed assets that have been used in the company's activity nor the property or financial operations that have an accessory character in relation to the activity exercised by the taxable person."

As previously noted, the Tax Authority argues that paragraph b) of Article 23(1) and Article 23(2), developed in Articles 23(4) to (8) should not be applied, but rather the provision in Article 23(3) of the VAT Code should be applied, in conjunction with the understanding set forth in Circular Letter No. 30103 of 23-04-2008.

The question that arises in the first place, then, is that of the application of Article 23(3).

This norm, as has been seen, provides that the Tax Authority may oblige the taxable person to use the method provided for in the preceding number (real allocation), when, among other things and insofar as it matters here, the application of the procedure referred to in Article 23(1) (pro rata) leads to significant distortions in taxation, which is what the Tax Authority alleges in the proceedings.

Notwithstanding, what is verified in the case is that the Tax Authority did not oblige the Claimant, in the exercise of 2017, to use the real allocation method with respect to the credit granting activity with reservation of title undertaken by it, there being no notice that any act of authority imposing such obligation on the Claimant was practiced.

And while it is true that the record mentions references to prior inspection procedures in which the Tax Authority will have expressed the understanding that it now seeks to uphold for the exercise of 2017, the fact is that it is not established, nor is it even mentioned, that from such inspection procedures there emerged any binding determination by the Tax Authority, in the sense of obliging the Claimant to adopt, for the future, the real allocation method with respect to the credit granting activity with reservation of title undertaken by it.

What is verified is that, confronted with the Grace Period Claim filed by the Claimant, the Tax Authority rejected it on the grounds that it could oblige it to use the real allocation method, without taking care to verify and demonstrate that it had practiced an act of authority in that sense, and without practicing it expressly.

Notwithstanding, even if it had done so, or if it were considered that such determination is implicit in the grace period rejection decision, it would always have to be understood that it would not be possible to recognize such act retroactive effect.

Effectively, as stated in the Court Decision of the Supreme Administrative Court (STA) of 25-05-2011, delivered in case 0169/11, referring to the imposition of the pro-rata method in substitution of the real allocation method, but in terms that are deemed directly transposable to the present case, "with due respect for the contrary opinion, it is understood that the Tax Authority could not impose retroactively to the exercises of 1993 to 1995 the pro-rata method, but, possibly, make cease the application of the real allocation method for the future with the ground provided in the aforementioned Article 23."

Effectively, taxable persons have the right to plan their tax life with a minimum of certainty and security, and while the Tax Authority should be recognized the powers conferred by law to conform, in concrete, the methods and procedures to determine the tax owed, such prerogatives cannot, nor should, be extended to the past.

Additionally, out of respect for the aforementioned principles of legal security and certainty, as well as the provision in Article 23(2) of the VAT Code applicable, when determining, pursuant to Article 23(3) of the same norm, the application of the method of direct allocation, the Tax Authority would necessarily have to indicate "objective criteria that allow determining the degree of use of such goods and services in operations that confer the right to deduction and in operations that do not confer such right," on pain of imposing on the taxable person an indeterminate obligation potentially impossible to comply with.

Indeed, one should not lose sight of the fact that the scope of Article 23 of the VAT Code relates to resources designated as promiscuous, that is, those not capable of direct allocation to activities subject to or not subject to the tax, whereby, if the Tax Authority does not admit the supplementary method provided for in law, the burden should rest with it to densify the "objective criteria that allow determining the degree of use of such goods and services in operations that confer the right to deduction and in operations that do not confer such right," as that same law provides, and not simply to indicate that the method provided for in Article 23(2) of the VAT Code must be used, leaving the taxable person in the position of having to guess what the terms will be that, for the Tax Authority itself, will be acceptable for the execution of such method.

It should also be said that it cannot be judged that the imposition on the Claimant to use the real allocation method with respect to the credit granting activity with reservation of title undertaken by it results from Circular Letter No. 30103, or from any other administrative guidance.

Effectively, as is settled today, "The administrative guidelines conveyed in the form of a circular by the Tax Authority are not binding on the judge except for the doctrinal value they may possess and lack heteronomous binding force for individuals."

Hence, lacking heteronomous binding force, no binding effect can be drawn from the Circular invoked by the Tax Authority for the Claimant.

It is not, thus, a matter of denying recognition of the faculty conferred on the Tax Authority by Article 23(3) of the VAT Code applicable, nor, much less, the EU provisions that legitimate the recognition in the national legal order of such faculty, in the terms that emerge from CJEU case law, but simply to note that, in this case, the Tax Authority did not exercise, with respect to the Claimant's exercise of 2017, the aforementioned prerogative.

This does not mean, thus, that substantial reasons may not assist what the Tax Authority ponders with respect to the distortions that the pro rata method may be susceptible of introducing in the Claimant's taxation in VAT.

Notwithstanding, it is evident, as indeed results from the proven facts, that the credit granting activity with reservation of title undertaken by the Claimant consumes common resources, and that the modality used (credit with reservation of title) implies the use of determined resources, and possibly additional ones, in relation to the mere granting of credit without guarantee or with other types of guarantee (such as surety, for example).

On the other hand, as is not questioned, the rule regime of Article 23 is that contained in Article 23(1), with the regime of Article 23(2) being an alternative to be used by option of the taxable person or by imposition of the Tax Authority.

Now, just as the Tax Authority argues vehemently, in terms analyzed below, that the criterion adopted for the exercise of the right to deduction with respect to the consumption of resources of a mixed nature, insofar as it translates an option, cannot retroactively be altered by the taxable person, it should conform with the same understanding with respect to the alteration of such criterion by imposition of the Tax Authority, which cannot, following the aforementioned Court Decision of the STA, operate retroactively.

In light of the foregoing, and having regard to the facts established as proven, it is considered that the VAT assessment subject to the present arbitral action suffers from error in the legal grounds, in the part in which it disregarded the value of the transmission of vehicles relating to the credit granting activity with reservation of title in the numerator and denominator of the deduction percentage applied to the VAT incurred by the Claimant in mixed-use resources, given that the option exercised by the Claimant in the tax return concerned was the pro rata method, no legal obstacle to the use of such method is verified (in particular the imposition by the Tax Authority of the real allocation method, for the activity and exercise at issue, pursuant to Article 23(3) of the VAT Code applicable), and, as results from the matter of fact, the value in question was not integrated into the pro rata factors, notwithstanding the activity underlying consuming common resources.

Accordingly, the arbitral request should be upheld in this part.

iii.

With respect to the (non-)consideration of the value of financial amortizations relating to financed leasing contracts in the calculation of the deduction percentage applied to the VAT incurred by the Claimant in mixed-use resources, as the Respondent notes, what is at stake is assessing the legality, in light of EU law norms or internal law norms, of the exclusion from the calculation of the deduction percentage of the part of the lease payment corresponding to the financial amortization, considering only the amount of interest and other charges charged.

In this regard, the Respondent begins by noting that the object of this type of contract is not the transfer of ownership, but rather the ceding by the lessor of the use of the asset, concluding that financial leasing constitutes a supply of services subject to the tax, pursuant to the provision in Article 4(1) of the VAT Code, and is effected by the taxable person in the scope of an economic activity.

The Respondent calls attention to the need to respect the principle of equality, ensuring equivalent tax treatment, in the sense of equal tax burden, in relation to the one who acquires an asset through a financial leasing contract, compared to another person who acquires it directly.

For the Respondent, not all of the value paid as rent under a financed leasing contract corresponds to the financial amortization or capital that must be included in the calculation of the deduction percentage, together with the part corresponding to interest and other charges, since, it continues, the rent constitutes the payment for the service of granting financing to the lessor, being composed of two parts: capital or financial amortization, which is nothing more than the reimbursement of the amount "lent"; and interest, plus any charges, which constitute the remuneration of the lessor.

The Respondent concludes that the part of financial amortization included in the rent should be excluded from the calculation of the deduction percentage, since this is nothing more than the restitution of the financed/invested capital for the acquisition of the asset, since in light of the principle of neutrality on which the VAT system is based, it should be considered that the imposition of VAT on the entirety of the rent is the only way to ensure that the State recovers the value of the tax that was already deducted by the taxable person, and that it is only that differential value (which, generically, corresponds to interest) that is connected with the costs of acquisition of resources used indistinctly in operations with and without the right to deduction, since, otherwise, it allowed an artificial increase in the VAT deduction percentage incurred with the generality of goods or services with mixed use acquired by the taxable person.

The Respondent also relies, on the decision in the CJEU judgment of 10 July 2014, delivered in case C-183/13, which it considers applicable to the case.

The Claimant, for its part, begins by noting that financial leasing does not have any specificity nor does it have a special discipline under which the rent may be severed into its various (and implicit) components, whereby rent amounts under financial leasing contracts are entirely subject to VAT, whether in the part corresponding to the consideration of the financial amortization or capital, whether in the part corresponding to interest and remuneration of other charges (or gains).

The Claimant also points out that the partial deduction percentage results from a fraction whose composition or calculation formula is pre-defined without any concessions to a margin of free discretion of the Member States (and much less via administrative means), as results from Article 174(1) of the VAT Directive.

The Claimant further recalls that it did not opt for the real allocation method, and that it only exercises a single activity – the financial activity.

In the Claimant's view, there are no significant distortions in taxation deriving from the deduction percentage method advocated by it, nor did the Tax Authority point them out in Circular Letter No. 30108, whereby, having the Claimant not opted for the deduction of tax incurred on mixed-use resources in accordance with the real allocation method, this criterion cannot be imposed in this case.

The Claimant concludes, by stating the illegality of Circular Letter No. 30108, considering the solution therein enshrined violative of Article 103(2) of the Portuguese Republic Constitution, by creating a true tax incidence norm via administrative means, and incompatible with the provisions of Articles 173 and 174 of the VAT Directive.

The Claimant further invokes, on the decisions in arbitral processes No. 309/2017-T, 311/2017-T, and 312/2017-T of CAAD.

Effectively, as the Claimant points out, the subject matter now being discussed has already been considered in several arbitral decisions, and in addition to those referred to above, those delivered in arbitral processes No. 335/2018-T, 339/2018-T, and 498/2018-T may be indicated.

In all the aforementioned decisions, delivered by collective Arbitral Tribunals, following analysis of the applicable national and EU legal framework, it was unanimously understood that the VAT Code effected the transposition of Article 17(5), third paragraph, paragraph c), of the Sixth Directive (to which corresponds Article 173(2)(c) of Directive 2006/112/CE) to domestic law but does not allow sustaining the application of a specific allocation coefficient based on the deduction of the annual amount corresponding to interest associated with the financial leasing activity, it not being determinant that the Court of Justice interpreted the Directive in the sense that it does not preclude that, in financial leasing activities, only the part of the rents corresponding to interest should enter into the calculation of the percentage to be deducted, since the Court of Justice merely interpreted EU law and the norm in question leaves a margin of free conforming power to the legislator, it being up to the national judicial authorities to verify whether there subsists a norm in the domestic legal order that allows adopting the interpretative criterion adopted by the Court of Justice.

Accordingly, in the arbitral decision delivered in process No. 309/2017-T of CAAD, can be read that:

"To begin with, it must be clarified that, pursuant to Article 267 of the TFEU, the competence of the CJEU in preliminary reference proceedings is limited to "interpretation of the Treaties" and to "validity and interpretation of acts adopted by the institutions, bodies or agencies of the Union," whereby it does not extend to the interpretation of Article 23 of the VAT Code, in the part in which it embodies options of the national legislator in matters explicitly left by Directive No. 2006/112/CE of the Council of 28-11-2006, to its discretion.

On the other hand, it must be borne in mind that paragraph c) of Article 173(2) of Directive No. 2006/112/CE of the Council of 28-11-2006 is not a provision of direct application, since it is directed at "Member States" to "authorize or require the taxable person to effect the deduction based on the use of all or part of the goods and services."

In a State governed by the rule of law, in matters subordinated to the principle of legality and reservation of law [Articles 103(2) and 165(1)(i) of the Constitution and Article 8 of the General Tax Law], the choice for the application in our domestic law of that optional norm of Directive No. 2006/112/CE of the Council of 28-11-2006 must be made via legislation.

Furthermore, it must be clarified that the two sole methods of deduction provided for mixed-use goods allocated to the performance of operations arising from the exercise of an economic activity provided for in Article 23 of the VAT Code are:

– the application of a "percentage corresponding to the annual amount of operations that give rise to deduction" [Article 23(1)(b) with reference to Article 23(4)];

– "the real allocation of all or part of the goods and services used, based on objective criteria that allow determining the degree of use of such goods and services in operations that confer the right to deduction and in operations that do not confer such right" (Article 23(2)).

Pursuant to Article 23(3) of the same provision, when the application of the method referred to in Article 23(1) (which for those allocated to the performance of operations arising from the exercise of an economic activity is the deduction percentage, as referred to in paragraph b) of Article 23(1)] "leads to significant distortions in taxation," the Tax and Customs Authority may oblige the taxable person to proceed in accordance with the provision in Article 23(2).

Accordingly, the question that arises is reduced to knowing whether in this Article 23(2) is included the possibility of determining real allocation through a deduction percentage.

In this Article 23(2) is provided only the "real allocation of all or part of the goods and services used, based on objective criteria that allow determining the degree of use of such goods and services in operations that confer the right to deduction and in operations that do not confer such right."

It is manifest that the determination of allocation based on a percentage, whatever form it takes, does not constitute an objective criterion that allows determining the degree of allocation of goods or services. In fact, it is evident that on the basis of the value of the rents, in whole or in part, one cannot objectively determine, for example, what electricity or water expenses or the maintenance of elevators in buildings common to the activities of the two types allocated to financial leasing activity are.

That is, the application of a percentage, whatever it may be, does not allow "determining the degree of use of such goods and services in operations that confer the right to deduction" and, therefore, cannot constitute an objective criterion for purposes of Article 23(2).

Being so, it must be concluded that the power conferred on the Tax Authority by Article 23(3) does not include the possibility of imposing on the taxable person the application of a deduction percentage.

Consequently, the deduction percentage method can only be used in situations where it is directly provided for, in paragraph b) of Article 23(1) of the VAT Code, and this method is that contained in Article 23(4) of the same provision.

And, pursuant to this Article 23(4), this percentage is determined through "a fraction comprising, in the numerator, the annual amount, tax excluded, of operations that give rise to deduction pursuant to Article 20(1) and, in the denominator, the annual amount, tax excluded, of all operations performed by the taxable person arising from the exercise of an economic activity provided for in paragraph a) of Article 2(1), as well as non-taxed subsidies that are not equipment subsidies."

For this reason, although Directive No. 2006/112/CE of the Council of 28-11-2006 allows the Portuguese State to "require the taxable person to effect the deduction based on the allocation of all or part of the goods and services," it was not legislatively provided for in the VAT Code the possibility of application of a deduction percentage different from that indicated in Article 23(4) of the VAT Code.

And, this possibility not having been legislatively provided for, cannot apply the Tax and Customs Authority, since it is subordinated to the principle of legality in all its actions (Articles 266(2) of the Constitution and Article 55 of the General Tax Law) and made explicit in Article 3(1) of the Administrative Procedure Code.

This last provision, defining such principle, establishes that "The bodies of the Public Administration must act in obedience to law and to the law, within the limits of the powers conferred upon them and in accordance with their respective purposes."

In light of this norm, the principle of legality ceased to have "solely a negative formulation (as in the period of the Liberal State), to have a positive formulation, constituting the foundation, criterion and limit of all administrative action."

For this reason, lacking legal support for the use of the method provided for in point 9 of Circular Letter No. 30108 of 30.01.2009, the imposition of its use by the Claimant is illegal.

As to the need for application of the method referred to by imposition of the principle of neutrality, are not indicated nor demonstrated by the Tax and Customs Authority the reasons why such method is necessary to ensure "fair competition" or the equality of all companies, it being certain that, in the perspective of the national legislator, the application of the pro rata provided for in Article 23(4) is the appropriate means to ensure the right to deduction of all mixed taxable persons, in cases where it is impractical to effect real allocation with objective criteria that allow determining the degree of use of such goods and services in operations that confer the right to deduction and in operations that do not confer such right.

To the contrary, as explained in the Opinion of Professor José Xavier de Basto and Professor António Martins, attached to the record, it appears that "the calculation of the part of deductible VAT by the method that the administration attempts to impose causes, itself, significant distortions of taxation, since both in the modality of lease rents as of variable rents, and since the interest is calculated and paid before the amortization of capital, the proportion of interest contained in the entirety of the rent fluctuates over the contractual period, originating fluctuations of the deduction percentage, which have nothing to do with different intensities of use of the common inputs and which therefore have to be judged arbitrary and without legal and economic foundation" and that "by the method imposed by the administration, the part of deductible VAT is clearly misaligned with the purpose of the tax of freeing the entrepreneur from all VAT supported upstream, when it is certain that downstream the rent was entirely taxed."

But, even if the method provided for in point 9 of Circular Letter more effectively assured the referred principles, the lack of its prediction in a national legislative instrument, in a matter in which no norm of EU law is directly applicable, would always be an insuperable obstacle to its application, by force of the principle of legality, in which is inserted that of the hierarchy of sources of law, in light of which it is not constitutionally admissible that acts of a non-legislative nature be recognized "the power to, with external efficacy, interpret, integrate, modify, suspend or revoke any of its provisions" (Article 112(5) of the Constitution), all the more so in a matter subject to the principle of fiscal legality, in which there is at issue a matter inserted in the relative competence reservation of the Assembly of the Republic [Articles 103(2) and 165(1)(i) of the Constitution].

In fact, the binding force of circulars and other resolutions of the Tax and Customs Authority of a general and abstract nature, publicized, is circumscribed to the administrative order, as it results only from the hierarchical authority of the agents from which they come and from the duties of compliance of the subordinates to whom they are directed. For this reason, the general guidelines of the Tax and Customs Authority, namely as to the interpretation of tax law, bind only the employees over whom the issuer has a superior position in the hierarchy, but those guidelines do not bind individuals, citizens or taxpayers, nor the courts, which must interpret and apply tax laws without any dependence on the criteria adopted by the Tax Administration through the said "generic dispatches, circulars and instructions" (Article 203 of the Constitution). It is with this scope that Article 68-A(1) of the General Tax Law establishes that "the tax administration is bound by the general guidelines contained in circulars, regulations or instruments of similar nature, regardless of their form of communication, aiming at the uniformization of the interpretation and application of tax norms."

To this is added that, as decided by the CJEU in the cited judgment of 10-07-2014 delivered in case C-183/13 (Banco Mais), paragraph c) of Article 173(2) of Directive No. 2006/112/CE of the Council of 28-11-2006 does not preclude a Member State from requiring a bank exercising, namely, financial leasing activities to include, in the numerator and in the denominator of the fraction that serves to establish a single and same pro rata of deduction for all its mixed-use goods and services, only the part of the rents paid by clients, under the scope of their financial leasing contracts, corresponding to interest, "when the use of such goods and services is essentially determined by the financing and management of such contracts," which is implicit that it is not compatible with the rule referred to the imposition of a special deduction percentage in a generalized manner, independently of the actual use of goods and services.

For the foregoing, it is to be concluded that the imposition of use of the "specific allocation coefficient" indicated in point 9 of Circular Letter No. 30108 suffers from a defect of violation of law, for breach of the principle of legality, and the arbitral request proceeds."

In arbitral process 311/2017-T, the following was written:

"The Tax Authority, through Circular Letter No. 30.108 of 30.01.2009, came to disclose its interpretation of Article 23 of the VAT Code as it applies to credit institutions that exercise, inter alia, the activity of Leasing or ALD, for purposes of calculating the portion of the tax supported that is capable of the right to deduction.

It understood that these taxable persons should use, pursuant to Article 23(2) of the VAT Code, real allocation based on objective criteria that allow determining the degree of use of such goods and services, considering that the calculation of deductible VAT according to the application of the general pro rata established in Article 23(4) of the VAT Code is susceptible to causing unjustified advantages or disadvantages due to the lack of coherence of the variables used therein, that is, it may lead to "significant distortions in taxation" (See point 8 of the said Circular Letter).

And it further understood that, within the scope of the application of the real allocation method, whenever it is not possible to apply objective allocation criteria for common costs, a specific allocation coefficient (underlined) should be used, taking into account the amounts involved, and only the annual amount corresponding to interest and other charges relating to the Leasing or ALD activity should be considered in the calculation of the deduction percentage. In this case, the percentage referred to above does not result from the application of Article 23(4) of the VAT Code (point 9 of the said Circular Letter).

Now this interpretation given by the Tax Authority to Article 23(4) of the VAT Code and which was at the origin of the said circular letter No. 30108 of 30-1-2009 has no minimal support in the letter of the law [VAT Code and VAT Directive] and, consequently, that understanding (of the Tax Authority) that only the annual amount corresponding to interest and other charges relating to the Claimant's financial leasing activity should be considered in the calculation of the deduction percentage cannot, as such, be endorsed.

In fact, as provided for and imposed by Article 16(2)(h) of the VAT Code, in financial leasing operations, the taxable value for VAT purposes is that of the entirety of the rent (underlined) received or to be received from the lessee.

That is: it is on the entirety of the rent, without distinction between interest and capital, that VAT should be charged, since the taxable value of the tax in financial leasing operations is, pursuant to paragraph h) of Article 16(2) of the VAT Code, "the value of the rent received or to be received from the lessee"; and it must also be clear that the numerator of the fraction expressing the deduction percentage is constituted by the "annual amount," tax excluded, of operations that give rise to deduction," that is by the value of the operations that were taxed, and that the respective denominator is the "annual amount, tax excluded, of all operations performed by the taxable person…," which obviously includes the first ones.

The solution proposed by the Tax Authority of taxing the entire rent, as mandated by paragraph h) of Article 16(2), on the taxable value, and of purging, for purposes of calculating the deduction percentage, from the numerator and denominator of the fraction the part of the rent corresponding to the financial amortization, has no direct support in the legal texts.

Certainly in this type of contracts (also called leasing), the profit that is relevant for accounting purposes and, consequently, for purposes of income taxation, is only that which isolates the interest component of the rent to be paid by the lessor; that is: the part of the rent relating to the amortization of capital is not relevant in, say, the lessor's accounting sheet.

Being the interest portion the only one that affects the accounting result, so, consequently, the same occurs for purposes of corporate income taxation by force of the relationship of dependence (partial) provided for in Article 17 of the Corporate Income Tax Code.

This is not the case, however, for VAT purposes, insofar as the taxable base encompasses both components of the rent as one, fusing them in the general concept of consideration [rent in all respects] provided for in the said Article 16 of the VAT Code, whose heading is "taxable value."

For its part, Article 23 of the VAT Code, objectively enshrines the pro rata as the regime for deduction of VAT for – as is the case in the proceedings – the commonly denominated "mixed taxable persons" – See Article 23(1) and (4) – without prejudice to the option of the taxable person for deduction according to real allocation (underlined), based on objective criteria, and equally without prejudice – now yes – to the intervention of the Tax and Customs Authority (which could impose, in certain circumstances, special conditions or even make cease such procedure, if it is understood that it causes or may cause significant distortions in taxation) (Article 23(2) of the said provision).

Only in two situations, however, was the transposition to national legislation of the margin established in the VAT Directive made, as to the possibility of requiring a taxable person not to apply the pro rata method of deduction: (i) when the taxable person exercises distinct economic activities and (ii) in the event that significant distortions in taxation are verified – See Article 23(3) of the VAT Code.

Accordingly, in the case at hand, when initially placing, in the numerator and denominator of the pro rata the annual amount of the rents on which VAT was charged – that is, the amount of the consideration – the requesting Bank used the basis for VAT assessment that is owed and legal.

To the contrary, the assessments now impugned, in line with or in compliance with the determination in circular letter No. 30.108 of 30-1-2009 [which reflects the Tax Authority's understanding that for the calculation of the pro rata only the interest component can be considered], suffer, in light of the foregoing, from illegality due to error in the presuppositions of fact and law.

In fact, and in accordance with the EU legislation (Articles 173, 174, and 175 of Directive No. 2006/112/CE of the Council of 28.11.2006) and with the domestic legislation already cited (Article 23, Article 23(1), (4), (6), (7), and (8) of the VAT Code), it follows that: (a) the deduction percentage method must be that applied in situations such as those of the proceedings (b) the real allocation method will be of optional application by taxable persons, (c) the Tax Authority may require application of the real allocation method, (d) the only formula for calculating the deduction percentage or pro rata provided for in Portuguese domestic legislation is that contained in Article 23(4) of the VAT Code, (e) this Article 23 does not provide another formula for determining the pro rata.

From this it follows, it is reiterated, that the imposition of use of the "specific allocation coefficient" in the terms referred to in point 9 of Circular Letter No. 30.108 of 30.01.2009 of the Tax Authority has no necessary legal framework.

Emphasize also the manifestly unfounded or unsubstantiated nature of whether the application of the pro rata method sought by the Claimant in determining the degree of use of goods and services used in mixed operations according to the terms of Article 23(4) of the VAT Code leads to "significant distortions in taxation"(!)

The "Banco Mais" Case

The CJEU considered that the Sixth VAT Directive does not preclude Member States from applying, in a given operation, a method or criterion different from the method based on turnover, provided that such method guarantees a more precise determination of the deduction pro rata than that resulting from the other method.

Now, upon examination of the judgment of the CJEU delivered in the Banco Mais Case, it is immediately verified that it appears to rest on a misunderstanding, since it assumes, without actually ascertaining it, that Portuguese law (more precisely the provision in Article 23 of the VAT Code) provides or not mechanisms that allow the Tax Authority to impose other methods of deduction of VAT for mixed-use goods and services.

Accordingly, § 19 of the judgment of the CJEU states: "Consequently, it should be considered, as confirmed by the Portuguese Government at the hearing, that Article 23(2) of the VAT Code constitutes the transposition, to the domestic law of the Member State in question, of Article 17(5), third paragraph, paragraph c) of the Sixth Directive."

As well states JOSÉ MARIA MONTENEGRO (in Commentary to the Judgment "Treasury v. Banco Mais, SA" of 10 July 2014 – Proc C-183/13) it is "…in this point, I would say, critical point – that we distance ourselves from the judgment of the CJEU of 10 July 2014. For it is not true that the provision contained in Article 23(2) of the VAT Code (combined with Article 23(3)) reproduces, in substance, the rule for the determination of the right to deduction enunciated in Article 17(5), third paragraph, paragraph c) of the Sixth Directive, which is a derogatory provision of the rule provided for in Articles 17(5), first paragraph, and 19(1) of that Directive. And we will have greater difficulty in following the statement that Article 23(2) of the VAT Code constitutes the transposition, to the domestic law of the Member State in question, of Article 17(5), third paragraph, paragraph c) of the Sixth Directive" (Annotation to the aforementioned case law, reproduced as document 8, together with the Petition).

It is manifest, on the other hand, that the cited judgment of the CJEU does not directly answer the preliminary ruling question put and which was based on the question of whether rent corresponding to financial amortization should be considered in the denominator of the pro rata, or, instead, only interest should be considered, since only this constitutes the remuneration or profit of an entity developing financial leasing activities (subject) and other activities associated with the granting of credit (exempt).

Hence, reposed the question, the answer to the preliminary ruling request intends to focus precisely on "…whether the provisions of the common VAT system on the right to deduction, in particular those contained in the third paragraph of Article 17(5) of the Sixth Directive, allow a Member State to establish that banks that also carry out financial leasing operations ascertain the right to deduction relating to goods and services of mixed use taking into account, as regards the mentioned operations, the part corresponding to the remuneration of capital (interest) invested in the acquisition of the goods given on lease, as well as any commissions and similar charges."

Emphasize that, as results from the facts alleged and not contested by the Tax Authority in the course of the Grace Period Claim and Hierarchical Appeal procedures, financial leasing does not constitute merely an ancillary activity of a financial institution such as the Claimant."

In arbitral decision 312/2017-T it was held that:

"In summary and concluding:

The two sole methods of deduction provided for mixed-use goods allocated to the performance of operations arising from the exercise of an economic activity provided for in Article 23 of the VAT Code are:

– the application of a "percentage corresponding to the annual amount of operations that give rise to deduction" (Article 23(1)(b) of the VAT Code with reference to Article 23(4);

– "the real allocation of all or part of the goods and services used, based on objective criteria