Municipality VAT Deduction Rights: Mixed Inputs, Error of Law & Correction Deadline (CAAD 649/2017-T)

ARBITRAL DECISION

I. REPORT

1. On 14 December 2017, the Municipality of A..., Tax Identification Number..., with registered address at Rua..., ... (hereinafter, the Claimant), filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2, no. 1, subparagraph a), and 10, nos. 1, subparagraph a), and 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), aiming at:

• The declaration of illegality and annulment of the act of dismissal of the administrative appeal (reclamação graciosa) no. ...2017..., which was processed by the Finance Directorate of ..., which had as its object the act of additional VAT assessment no. 2016...;

• The declaration of illegality and annulment of the act of additional VAT assessment no. 2016....

The Claimant submitted six (6) documents and did not request the production of any other evidence.

The Respondent is the AT – Tax and Customs Authority (hereinafter, the Respondent or AT).

1.1. In essence and in brief summary, the Claimant alleged the following:

It is a public legal entity that pursues the public interest and, in this context, is entrusted with various attributions and activities, whether strictly of public management or also activities that may compete with the private sector or private management. In this context, it carries out operations outside the scope of the subjective scope of VAT (e.g. police activities), operations subject to VAT but exempt from this tax, which do not confer the right to deduction of the tax (e.g. lease of real property) and also operations subject to and not exempt from VAT (e.g. activity of water distribution to municipality residents).

The Claimant proceeded to deduct VAT exclusively connected with operations subject to and not exempt from VAT that confer the right to full deduction (e.g. water distribution to municipality residents), until, with the support of specialists in this area, it conducted, in 2016, an internal review of the procedures adopted in the field of VAT for the tax years 2014 to 2016 (until June).

In that sequence, it was identified, for the said period, that the exercise of the right to deduction effected by the Claimant had been lower than what it legally had the right to, since it had not proceeded to deduct any VAT incurred on goods and services partially allocated to taxable operations, that is, the so-called mixed inputs.

Specifically, the deduction of tax lower than that to which the Claimant had the right implied the declaration and payment of an amount effectively higher than the tax liability owed, in the total amount of € 48,448.78, thus distributed: € 20,441.88, relating to 2014; € 22,200.85, relating to 2015; and € 5,806.07, relating to 2016 (until June).

As a way to recover the VAT it had overpaid, the Claimant proceeded to deduct these amounts of tax in the periodic declaration of the second quarter of 2016 (€ 48,448.80), the respective tax credit generated, in the amount of € 59,714.39, having motivated the request for VAT refund in the said declaration which was submitted on 11 August 2016.

That additional deduction of VAT resulted from the implementation of the pro rata deduction percentage criterion relating to inputs of mixed use, determined in no. 4 of article 23 of the VAT Code.

Subsequently, the AT initiated an inspection procedure against the Claimant, which resulted in the partial dismissal, in the amount of € 42,642.73, on the grounds of alleged lack of timeliness of the deduction, an adjustment to the VAT deducted having been imposed on the Claimant in that same amount; specifically, the inspection services of the AT corrected the deduction relating to the years 2014 and 2015, on the grounds that the pro rata deduction percentage could only be applied to inputs of mixed use relating to 2016, as provided in no. 6 of article 23 of the VAT Code.

According to the Claimant, the AT bases its position on the incorrect interpretation of the provisions of articles 22, no. 2 and 23, no. 6, of the VAT Code, since, in the first place, using additionally no. 6 of the aforementioned article 23 to deprive a taxable person of the deduction of tax that is owed considering the criteria at his disposal, prejudices the neutrality of VAT and constitutes a prescription beyond the scope of that same legal norm.

The Claimant advocates that no. 6 of article 23 of the VAT Code does not regulate the time limit (of expiration) for the exercise of the right to deduction – this matter is governed by other norms, namely in article 98, no. 2, of the VAT Code – merely regulating the eventual regularization that may prove necessary due to the mandatory adoption of a provisional deduction percentage.

Taxable persons are not obliged to deduct VAT incurred in the tax declaration of the period in which they receive the corresponding invoice or in the immediately subsequent period, to the extent that article 22, no. 2, of the VAT Code enshrines a permission to deduct in a later period, not imposing any time limit on taxable persons to exercise such right.

The imposition of that time limit, according to the Claimant, is found in no. 2 of article 98 of the VAT Code, which is in line with the general rules of expiration of taxes, contained in the General Tax Law (LGT), which provide for special provisions (time limits) of which the example is that contained in article 78, no. 6, of the VAT Code for the specific situation provided there and which is not the one at issue here (an aspect on which both parties agree).

The Claimant understands that the provisions of articles 22, no. 2 and 98, no. 2, of the VAT Code should be interpreted in a combined manner, the second being complementary to the first, whereby taxable persons should deduct VAT incurred "in the declaration of the period or a later period from that in which the receipt of invoices or payment receipt of VAT which forms part of import declarations" until "the expiration of four years after the birth of the right to deduction".

The Claimant considers that only this interpretation of the law enables the correct application of no. 2 of article 22 of the VAT Code, the utility of no. 2 of article 98 of the VAT Code and its harmony with the provisions of the LGT.

Thus, the Claimant sustains that the time limit applicable to fully effect its right to deduction is the four-year period established in no. 2 of article 98 of the VAT Code – which is of automatic application and independent of any other procedural rule, being only conditioned by the existence of that same right, under the terms of articles 19 to 26 of the VAT Code, and any eventual applicability of a special provision that sets it aside (non-existent in this case) – since neither the special time limit provided for in no. 6 of article 78 of the VAT Code appears to be applicable – since the incorrect deduction it effected was not due to a material or calculation error, on which both parties agree – nor the time limit established in no. 6 of article 23, since it is not a matter of a correction of the provisional deduction percentage to the definitive one, under the same deduction method, but rather a situation that can be classified as a so-called error of law.

All the more so that, according to the Claimant, in the Tax Inspection Report the accuracy of the value of the tax deducted is not disputed, with the AT having validated its legitimacy materially and formally.

Finally, the Claimant understands that, once the illegality of the said VAT assessment act is declared and annulled, compensatory interest shall be owed, under the combined provisions of article 22, no. 8, of the VAT Code and article 43 of the LGT, at the legal rate, counted from the date on which the aforementioned amount of € 42,642.73 should have been refunded to the Claimant.

The Claimant concludes its initial submission by petitioning as follows:

"In these terms, the Claimant respectfully requests that Your Excellencies, with the full allowance of the present appeal, and as is the most elementary sense of justice:

• the decision of dismissal of the administrative appeal no. ...2017... be annulled;

• the VAT assessment of the years 2014 and 2015 in the amount of € 42,642.73 be annulled;

• the AT be condemned to restore the tax in the amount of € 42,642.73, plus compensatory interest.

It further requests:

Should it be so understood by the Tribunal, the referral for a preliminary ruling to the CJEU, under article 267 of the TFEU, with the consequent suspension of the present instance under article 272, no. 1, of the Code of Civil Procedure."

1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on 18 December 2017.

2. The Claimant did not nominate an arbitrator, so, under the provisions of no. 1 of article 6 and subparagraph a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrator of the singular Arbitral Tribunal, who communicated acceptance of the appointment within the applicable time limit.

3. On 1 February 2018, the Parties were duly notified of that appointment, and did not manifest any willingness to challenge the appointment of the arbitrator, under the combined terms of article 11, no. 1, subparagraphs b) and c), of the RJAT and articles 6 and 7 of the CAAD Deontological Code.

4. Thus, in accordance with the provisions of subparagraph c) of no. 1 of article 11 of the RJAT, the singular Arbitral Tribunal was constituted on 21 February 2018.

5. On 28 February 2018, the Respondent, duly notified to that effect, submitted its Response in which it specifically contested the arguments raised by the Claimant and concluded for the lack of merit of the present action, with its consequent acquittal from the claims.

The Respondent did not submit any documents, nor request the production of any other evidence.

6.1. In essence and also briefly, it is important to extract the most relevant arguments on which the Respondent based its Response:

The understanding of the AT, with support in doctrine and jurisprudence, is that the alteration of the method of deduction of tax and the retroactive application of a method of deduction find no legal support, and the choice of the method of deduction can only be made at the moment when the right to deduction is constituted under the conditions provided in no. 1 of article 20, in no. 1 of article 22 and in article 23 of the VAT Code.

The Respondent also understands that, although no. 2 of article 98 of the VAT Code establishes that, without prejudice to special provisions, the right to deduction can be exercised up to the limit of four years, the VAT taxable person does not have freedom to determine the moment of exercise of that right, with that norm only fixing a general maximum time limit, beyond which that right cannot be exercised. To understand it otherwise would mean that the norms that provide for special time limits would have no useful purpose, since they would always be overridden by the norm that establishes the general four-year time limit, in manifest violation of no. 3 of article 7 of the Civil Code.

The Respondent sustains that, in the case at issue, the Claimant does not intend to exercise the right to deduction, because it was already exercised in due time in the respective periodic declarations, on the basis of supporting documents that were already recorded in the accounting, nor does it even intend the regularization of the tax due to any error, but rather that it be recognized the possibility of retroactively modifying the method of deduction used in the capacity of a mixed taxable person.

Now, alleges the AT, given that there are specific provisions of the VAT Code – article 23 – which determine that, for mixed taxable persons, the alteration of the method of appraisal of tax cannot occur after the declaration of the last period of the year to which they relate, there is no way that the rule of article 98 of the same Code can be applied. Furthermore, the possibility of official revision and the consequent use of the four-year time limit, under article 98 of the VAT Code, also has as a requirement the error imputable to the services which the Claimant does not invoke nor demonstrates in any way. In addition, at the moment when it made the refund request, in August 2016, the norm previously contained in article 78, no. 2, of the VAT Code, which equated error in self-assessment with error by the services, had already been repealed by Law no. 7-A/2016, of 30 March.

As a precaution and without conceding, should the Tribunal come to consider that, in the case at issue, the Claimant could, within the four-year period, regularize the invoices in question, the AT understands that it will always be necessary to promote the appraisal, substantiating in fact and in law, of the legality of such regularization, which is required in the two-fold aspect of compliance with the other requirements in light of the basic principles of VAT (namely, the principle of neutrality and the principle of non-deductibility of transferred tax) and validation of the amount actually to be regularized against the VAT allegedly assessed in excess.

In other words, the AT understands that if, perchance, the Tribunal decides for the application of article 98 of the VAT Code to the concrete case, it cannot, without more, decide for the assessment of VAT in excess, as petitioned by the Claimant in subparagraphs b) and c) of the final request. In this sense, given the circumstance that knowledge of this question was prejudiced by the decision taken in the inspection proceeding, the Tribunal should determine that the process be returned to the AT and it pronounce itself on the requested regularization; since, from the content of the inspection report, no agreement can be drawn with any legal framework of the economic operations at issue here, in the field of VAT.

Should this not be understood – which the Respondent admits as a precaution, without conceding – the Tribunal taking to itself the decision of such a question, it is necessary to emphasize that the Claimant did not submit a copy of the invoices issued in the periods in question, nor the proof imposed by article 78, no. 5, of the VAT Code, that is, proof that the acquirer became aware of the correction or that was refunded the tax, without which the respective deduction is deemed improper. That is, should the Tribunal conclude for the possibility of regularization within the four-year period, under article 98 of the VAT Code, to determine whether the Claimant actually assessed VAT in excess and in what amount, the combined analysis of the cancelled invoices, credit notes and new invoices issued will always be essential.

Finally, as to the petitioned payment of compensatory interest, the AT understands that, with the arbitral request being lack of merit, this necessarily determines the lack of merit of that request due to non-verification of its prerequisites.

The Respondent thus concludes its submission:

"By which terms, and with your erudite supplementation, should,

• Be judged lack of merit, as not proven, the present request for arbitral pronouncement and, consequently, the Respondent absolved from all requests, with the legal consequences.

Subsidiarily, should this not be understood:

• The knowledge of the question whose knowledge was prejudiced by the solution given to the inspection procedure and to the administrative appeal, should be judged under the terms petitioned in articles 46 and following of this Response, to which reference is made."

6.2. At the same time, the Respondent submitted to the record the respective administrative file (hereinafter, abbreviated as PA).

1. On 4 April 2018, an order was issued dispensing with the holding of the meeting referred to in article 18 of the RJAT, as well as the submission of allegations, with 31 July 2018 being fixed as the deadline for delivering the arbitral decision.

2. Only the Respondent submitted written allegations, maintaining its previous position as to the merit of the substantive question.

II. JUDGMENT ON THRESHOLD MATTERS

The Arbitral Tribunal was regularly constituted and is competent.

The process does not suffer from any nullities.

The parties have legal personality and capacity, are duly represented and are legitimate.

There are no exceptions or any preliminary questions that prevent the knowledge of the merits and of which it is necessary to know.

III. REASONING

III.1. ON THE FACTS

§1. FINDINGS OF FACT

The following facts are deemed proven:

a) The Claimant is a public legal entity, whose activity consists of pursuing its municipal attributions in the most diverse areas of activity.

b) The Claimant is classified, for purposes of VAT, under the normal regime with quarterly periodicity. [cf. PA attached to the record]

c) In pursuing its attributions, the Claimant carries out operations outside the scope of VAT, because they result from its powers of authority, operations subject to VAT but exempt from this tax and also operations subject to and not exempt from VAT.

d) In August 2016, the Claimant requested a VAT refund in the total amount of € 59,714.39, when submitting the periodic tax declaration relating to the second quarter of that year (201606T).

e) Which the Claimant did following an internal review of the procedures adopted in the field of VAT for the tax years 2014, 2015 and 2016 (until June), which led it to effect a regularization of the tax paid to the State, as in those periods it had not calculated any pro rata percentage for deduction of VAT incurred in the acquisition of goods and services of mixed use, deducting only the VAT relating to taxable operations (using the method of real allocation).

f) The value of the refund requested (€ 59,714.39) results from the value of VAT deducted relating to taxable operations of the period (€ 6,476.66), the value of carried forward from previous periods (€ 9,233.40) and regularizations in field 40 of the periodic declaration calculated on the basis of the pro rata calculated for the years 2014, 2015 and 2016 (€ 48,448.80) and € 873.94 relating to credit notes from water invoices of customers. [cf. PA attached to the record]

g) Per year, the amount of deductible VAT and the respective pro rata percentages calculated were as follows [cf. document no. 5 with the PI and PA attached to the record]:

h) Under Service Order no. OI2016..., issued on the basis of information provided by the Tax Inspection Division of the Finance Directorate of..., in the course of the analysis of the aforementioned VAT refund request submitted by the Claimant on 11/08/2016, relating to the periodic declaration of 201606T, in the amount of € 59,714.39, the Claimant was subject to an internal tax inspection procedure, focusing on VAT, relating to the tax year 2016. [cf. PA attached to the record]

i) The tax inspection services considered that the amounts declared in field 40 of the periodic declaration of 201606T, relating to the years 2014 and 2015, described above in finding of fact g), were not susceptible to deduction, so they proceeded to a correction in the field of VAT, relating to the period 201606T, in the amount of € 42,642.73. [cf. PA attached to the record].

j) Following the aforementioned correction, an additional VAT assessment no. 2016..., relating to period 201606T, was issued on 14.12.2016, with the amount to be refunded of € 17,831.41, notified to the Claimant and received by it. [cf. documents nos. 3 and 4 with the PI and PA attached to the record]

k) On 17 April 2017, the Claimant filed an administrative appeal against the aforementioned additional VAT assessment, which was registered under process no. ...2017... at the Finance Service of ... and forwarded to the Finance Directorate of ... and, once the instruction of the process was completed, the respective Draft Decision was prepared, which was notified to the Claimant, by letter dated 17 August 2017, from the Finance Directorate of..., for the purpose of exercising, if it so wished, the right to participate in the form of prior hearing. [cf. PA attached to the record]

l) The Claimant did not exercise the right of hearing. [cf. PA attached to the record]

m) On 14 September 2017, the Director of Finance of the Finance Directorate of ... issued an order of dismissal of the administrative appeal, based on the Information dated 11 August 2017, contained in the respective process, namely on the grounds of the respective recitals set out in "As regards the retroactive application and change of methods and deduction criteria" and on "The right to deduction and the right to regularization of tax" which are hereby deemed fully reproduced [cf. document no. 1 with the PI and PA attached to the record]

n) The Claimant was notified, by letter no.... dated 14 September 2017, from the Finance Directorate of ..., sent by registered mail with acknowledgment of receipt, of the decision of dismissal of the aforementioned administrative appeal. [cf. document no. 2 with the PI and PA attached to the record]

o) On 14 December 2017, the Claimant submitted the request for constitution of an arbitral tribunal that gave rise to the present process. [cf. CAAD procedural management information system]

§2. FINDINGS NOT MADE

With relevance to the appraisal and decision of the case, there are no facts that have not been proven.

§3. REASONING ON THE FACTUAL MATTER

With regard to the proven factual matter, the Tribunal's conviction was based on the facts alleged by the Parties, whose adherence to reality was not called into question, on the documents and the respective administrative file attached to the record.

III.2. ON THE LAW

§1. ON THE ADMISSIBILITY OF THE CONTESTED TAX DEDUCTION

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

1 - When, due to reasons imputable to the services, tax has been assessed in excess of the amount due, official revision shall proceed under the terms of article 78 of the general tax law.

2 - Without prejudice to special provisions, the right to deduction or refund of tax paid in excess can only be exercised within four years after the birth of the right to deduction or overpayment of tax, respectively.

3 - No assessment shall be annulled when its amount is below the limit provided in no. 4 of article 94.

This legal provision thus comprises two enactments, namely: in its no. 1 it imposes an obligation on the AT to proceed with official revision in the cases provided therein; and in its no. 2 it establishes a general and subsidiary time limit for VAT taxable persons to promote, in their favor, the correction of assessed and deducted tax.

As regards the four-year time limit provided for in that no. 2, it will only be applicable in the absence of special provisions, which we can find in article 78 of the VAT Code.

Thus, it is important to pay attention to nos. 2, 3 and 6 of that article 78, which state as follows:

2 - If, after the registration referred to in article 45 has been effected, the operation is annulled or its taxable amount is reduced as a consequence of invalidity, resolution, rescission or reduction of the contract, by return of goods or by the granting of allowances or discounts, the supplier of the goods or provider of services may effect the deduction of the corresponding tax until the end of the tax period following that in which the circumstances determining the annulment of the assessment or the reduction of its taxable amount occurred.

3 - In cases of inaccurate invoices that have already given rise to the registration referred to in article 45, the correction is mandatory when there is tax assessed at less than due, and may be effected without any penalty until the end of the period following that to which the invoice to be corrected relates, and is optional when there is tax assessed in excess, but may only be effected within two years.

6 - The correction of material or calculation errors in the registration referred to in articles 44 to 51 and 65, in the declarations mentioned in article 41 and in the guides or declarations mentioned in subparagraphs b) and c) of no. 1 of article 67 is optional when it results in tax favorable to the taxable person, but can only be effected within two years, which, in the case of the exercise of the right to deduction, is counted from the birth of that right under the terms of no. 1 of article 22, and is mandatory when it results in tax favorable to the State.

In light of these legal norms, we can group the situations in which there is the faculty (and, eventually, the obligation) to regularize assessed and deducted VAT as follows (as systematized by Alexandra Martins and Pedro Moreira, "VAT Regularizations - The Supervening Alteration of the Elements of the Operation, Material or Calculation Error and Error of Classification or Error of Law", in AA. VV., Coordinated by Sérgio Vasques, VAT Handbooks 2014, Coimbra, Almedina, 2014, pp. 61-62):

"i) The supervening alteration of the objective and subjective conditions that presided over the performance of the operations, reflected in the annulment of the operation or the reduction of its taxable amount;

ii) The inaccuracy of the invoice or material or calculation error in transcribing its elements into the accounting or periodic VAT declarations of taxable persons;

iii) The error in classification of the operation, reflected in the invoice or in the accounting of taxable persons."

In the situation sub judice, the parties agree as to the fact that in the VAT self-assessments relating to the years 2014, 2015 and 2016 (until June), the Claimant did not incur any material or calculation error, so it is already ruled out the application in this case of the provisions in no. 6 of article 78 of the VAT Code[1].

On the other hand, there is no doubt that in the concrete case we are also not facing a situation of fact classifiable within the first group of situations to which we referred, that is, there was no supervening alteration of the objective and subjective conditions that presided over the performance of the operations, reflected in the annulment of the operation or the reduction of its taxable amount.

For this very reason, contrary to what was alleged by the AT, the Claimant is not obliged to provide "the proof imposed by article 78, no. 5, of the VAT Code, that is, proof that the acquirer became aware of the correction or that was refunded the tax, without which the respective deduction is deemed improper".

Indeed, it follows from the proven facts that the review of the procedures adopted in the field of VAT, carried out by the Claimant, for the tax years 2014, 2015 and 2016 (until June) and which led it to consider that the tax deduction in those periods was lower than what it understands it is entitled to, was of a merely internal character, that is, it had no interference in the sphere of third parties.

To that extent, in this case, there is no need for prior correction of invoices and accounting records under article 78 of the VAT Code; furthermore, the rule provided in no. 5 of this article 78 does not apply here, since it is transversally applicable to all categories of regularizations that may entail a deduction of tax by the acquirer of goods or services of a value higher than the corresponding assessment by its supplier or provider, which is manifestly not the case here.

Having said this, let us now proceed to the analysis of the aforementioned third group of situations, referring to errors in classification or errors of law.

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

We consider that the concept of error of fact covers "situations in which the taxable person makes an incorrect representation of factual reality (which determines its subsumption under an incorrect norm)" (Afonso Arnaldo and Tiago Albuquerque Dias, loc. cit., pp. 45-46), and that "the error of fact that does not give rise to a consequent error of law will have no relevance for these purposes, since it will have no influence on the quantum of tax to be deducted or assessed" (idem, ibidem).

By contrast, error of law occurs in "situations in which, notwithstanding the correct representation of factual reality, the taxable person is mistaken in determining the applicable norm" (idem, ibidem), that is, where there is an error of classification, because the taxable person has made an incorrect interpretation of the factual situation or an erroneous application of the law and, consequently, assesses or deducts tax in excess or in deficit.

As classifiable within errors of law, we have, by way of example, "situations in which there is an incorrect appraisal of the pro rata, motivated by an inexact subsumption in the applicable normative of the operations that influence the calculation, namely, as regards the classification of an operation as taxed when it is exempt" (idem, ibidem), as well as those situations "in which the taxable person, developing various activities, effects the deduction by resorting to the pro rata at one moment and starts to use the method of real allocation to effect the deduction of tax exclusively allocated to a certain activity, seeking to correct the deduction it effected in the past on the basis of the pro rata method." (idem, ibidem).

When the verification of an error of classification or error of law results in a regularization of tax in favor of taxable persons, these can promote it under the terms of the provisions of article 98 of the VAT Code, that is, within the general and subsidiary four-year time limit provided therein.

Having reached this point, turning to the concrete case, it is necessary to conclude that the aforementioned lapses committed by the Claimant in the VAT self-assessments relating to the years 2014, 2015 and 2016 (until June), from which resulted a deduction of tax lower than that to which it is entitled, constitute errors of classification or errors of law.

Effectively, due to an incorrect or incomplete interpretation of the law, the Claimant erroneously applied the deduction methods provided for in article 23 of the VAT Code.

Given that such errors in the deduction of VAT constitute errors of classification or errors of law, they are not subject to the regime set out in no. 6 of article 78 of the VAT Code.

Consequently, given the inapplicability of that norm or any other special provision, in the case of error of law in the deduction of VAT, the general and subsidiary four-year time limit counted from the birth of the right to deduction, contained in article 98 of the VAT Code, should be applied.

This was, moreover, the position taken in the decision delivered in case no. 117/2013-T, in which it was concluded that "as the regime of the aforementioned article 78, no. 6, is not applicable, nor is there any special temporal limit regime for the exercise of the right to deduction based on error of law, the general regime on this matter contained in article 98, no. 2, of the VAT Code will be applicable, which, as stated in the judgment of the Supreme Administrative Court of 18-5-2011, delivered in case no. 966/10, establishes a maximum limit of four years that cannot be exceeded in any case".

Thus being, as it effectively is, the act of dismissal of the said administrative appeal suffers from a vice of violation of law, due to error on the legal prerequisites, embodied in the erroneous interpretation of article 98, no. 2, combined with articles 22, no. 2 and 23, no. 6, all of the VAT Code, which implies the declaration of its illegality and consequent annulment.

The contested additional VAT assessment act suffers from the same vitiating defect, which implies equally the declaration of its illegality and consequent annulment.

The Respondent alleges that there is a question whose knowledge was prejudiced by the solution given to the inspection procedure and the administrative appeal; specifically, the Respondent says that this Arbitral Tribunal, deciding for the application of article 98, no. 2, of the VAT Code to the concrete case – as it did – "cannot, without more, decide for the assessment of VAT in excess, as petitioned by the Claimant in subparagraphs b) and c) of the final request", since "given the circumstance that knowledge of this question was prejudiced by the solution given to the inspection proceeding, the Tribunal should determine that the process be returned to the Tax Authority and it pronounce itself on the requested regularization", since from the inspection report "no agreement can be drawn with any legal framework of the economic operations at issue here, in the field of VAT".

Having examined the Tax Inspection Report (RIT), we note that the sole grounds invoked for not granting the Claimant the full VAT refund it requested in the periodic declaration of 201606T, in the amount of € 59,714.39, was that the temporal prerequisites set out in article 23, no. 6, of the VAT Code were not met, as regards the years 2014 and 2015.

This is evidenced by the following excerpts from the RIT:

"7 – In these terms, (...) only the pro rata deduction percentage relating to goods of mixed use can be applied as regards the year 2016, under the provisions of no. 6 of article 23 of the VAT Code. It is not possible to use such methods as regards the previous years (2014 and 2015) on the basis of the periodic declaration of period 2016.06T.

8 – Pursuant to the foregoing, the amounts declared in field 40 of the periodic declaration of 2016.06T relating to the years 2014 and 2015 (...) are not susceptible to deduction."

For this reason – let us emphasize, for this reason alone – only was the Claimant recognized the right to deduction of the said VAT relating to the year 2016 (until June).

Thus, the Tax Inspection Services did not contest the correctness of the values of tax assessed and declared by the Claimant, which is further evidenced by the fact that it was recognized the right to deduction of the said VAT relating to the year 2016; for this reason, we cannot but agree with the Claimant in the affirmation that "in the Tax Inspection Report, the accuracy of the value of the tax deducted by the Claimant is not disputed, with the AT having validated its legitimacy materially and formally".

For its part, the decision on the administrative appeal follows the same direction as the RIT, sustaining the dismissal of the said refund request, nuclearly, on the following grounds: on the one hand, "the retroactive application of a method of deduction, as is the case here, or the alteration of the method or criterion of tax deduction, can only be effected under the terms of no. 6 of art. 23 of the VAT Code, that is, until the declaration of the last period of the year to which it relates"; and, on the other hand, "[s]eeking the appellant to exercise the right as regards documents timely recorded in its accounting, in no case could the four-year time limit provided for in no. 2 of art. 98 of the VAT Code be applied", since that "norm is intended for the exercise of the right to deduction, when what the appellant raises is the exercise of the right to regularization of tax".

In these terms, contrary to what was alleged by the Respondent, there is no question whose knowledge has been prejudiced by the solution given to the inspection procedure and to the administrative appeal and which, much less, imposes that the Arbitral Tribunal should determine that the process be returned to the Tax Authority in order for it to pronounce on the requested regularization.

§2. ON COMPENSATORY INTEREST

The Claimant further petitions the condemnation of the AT to payment of compensatory interest.

Article 24, no. 1, subparagraph b), of the RJAT provides that the arbitral decision on the merit of the claim, which is not subject to appeal or challenge, binds the tax administration from the expiration of the time limit provided for appeal or challenge, and this must, in the exact terms of the allowance of the arbitral decision in favor of the taxable person and until the expiration of the time limit provided for spontaneous execution of judgments of tax courts, restore the situation that would have existed by adopting the necessary acts and operations to that effect, which must be understood, in conformity with the provisions of article 100 of the LGT, applicable by virtue of subparagraph a) of no. 1 of article 29 of the RJAT, as embracing the payment of compensatory interest, in accordance, moreover, with the provisions of no. 5 of the same article 24 of the RJAT.

Article 43, no. 1, of the LGT determines that "compensatory interest is owed when it is determined, in administrative appeal or judicial challenge, that there was error imputable to the services resulting in payment of the tax liability in an amount exceeding that legally owed", establishing no. 5 of article 61 of the Code of Tax Procedure (CPPT) that "interest is counted from the date of improper payment of the tax until the date of processing of the respective credit note, in which they are included".

In the concrete case, it is verified that the illegality of the contested additional tax assessment, due to error in the legal prerequisites, is imputable to the AT since, in that assessment, it proceeded with the incorrect interpretation of article 98, no. 2, combined with articles 22, no. 2 and 23, no. 6, all of the VAT Code, whereby the Claimant is entitled, in accordance with the provisions of article 24, no. 1, subparagraph b), of the RJAT and article 100 of the LGT, to the respective compensatory interest, under the terms established in articles 43, no. 1, of the LGT and article 61 of the CPPT, calculated at the rate resulting from no. 4 of article 43 of the LGT, until the date of processing of the respective credit note, in which they are included.

IV. DECISION

In the terms set out, this Arbitral Tribunal decides:

• To judge as having merit, due to error on the legal prerequisites, the request for declaration of illegality:

• of the act of dismissal of the administrative appeal no. ...2017..., with its consequent annulment;

• of the act of additional VAT assessment no. 2016..., with its consequent annulment;

• To judge as having merit the request for condemnation of the Tax and Customs Authority to payment of compensatory interest, under the legal terms;

• To condemn the Tax and Customs Authority to payment of the costs of the process.

VALUE OF THE CASE

In accordance with the provisions of articles 306, no. 2, of the Code of Civil Procedure, 97-A, no. 1, subparagraph a), of the Code of Tax Procedure and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 42,642.73 (forty-two thousand six hundred and forty-two euros and seventy-three cents).

COSTS

Under article 22, no. 4, of the RJAT, the amount of costs is fixed at € 2,142.00 (two thousand one hundred and forty-two euros), under the Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 28 May 2018.

The Arbitrator,

(Ricardo Rodrigues Pereira)

[1] As stated by Afonso Arnaldo and Tiago Albuquerque Dias ("After all, what is the time limit for deducting VAT? Rules of Expiration and (In)Legal Certainty", in AA. VV., Coordinated by Sérgio Vasques, VAT Handbooks 2014, Coimbra, Almedina, 2014, p. 44), "the errors referred to in no. 6 of article 78 of the VAT Code are reduced to situations in which the taxable person is mistaken in the materialization of the act of deduction or assessment, namely, due to lapses in the transcription of values or for arithmetic reasons, i.e., in both situations minor and evident errors.

Thus, these concepts of error will typically cover situations in which the taxable person is mistaken in performing an arithmetic operation, namely, when seeking to ascertain the deductible tax contained in an invoice (with VAT included) of services from a supplier (calculation error), or, even if correctly performing the calculation, commits a lapse in recording the amount of tax to be deducted in the periodic declaration (material error)."