Dental Implants and Abutments Subject to Reduced VAT Rate – CAAD Ruling 678/2015-T

ADMINISTRATIVE ARBITRATION CENTER: TAX ARBITRATION

Case No.: 678/2015-T

Subject: VAT – Partial withdrawal of proceedings; dental implants and abutments intended for implantology; reduced rate

ARBITRAL AWARD

The Arbitrators José Poças Falcão (President Arbitrator), Clotilde Celorico Palma and Filipa Barros, appointed by the Deontological Council of the Administrative Arbitration Center to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 13 November 2015, A…, Ltd., legal entity No. …, with registered office at…, No. …, …, in Lisbon, submitted a request for constitution of an Arbitral Tribunal, pursuant to the combined provisions of articles 2, no. 1, letter a), 5, no. 3, letter a), 6, no. 2, letter a) and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter abbreviated as RJAT), seeking the declaration of illegality of the assessments of Value Added Tax (VAT), and respective compensatory interest, relating to the years 2011, 2012 and 2013, which amount to a total of €481,166.50 (compensatory interest included), corresponding to the following assessments and respective taxation periods:

To substantiate its request, the Applicant alleges, in summary, that the assessment acts are based on an incorrect interpretation and application of article 18, no. 1, letter a) of the VAT Code (CIVA) and entry 2.6 of List I annexed to the Code, in that, in essence:

i. The "sole implant unit" simply does not exist since the dental prosthesis effected through an implant necessarily comprises three elements: implant, abutment and crown;

ii. The fact that the dental implant comprises three distinct components does not alter the nature of a dental prosthesis, since the components, although placed in phases and at different moments, do not have their own autonomous functionality;

iii. The interpretation that the Tax and Customs Authority (AT) makes of entry 2.6 of List I annexed to the CIVA, by which it considers that the reduced rate of VAT would only apply when the taxable person invoiced to the acquirer a set of goods consisting of prosthesis, implant and connecting pieces, transacted as a "package", has no basis in the literal and teleological elements of the rule;

iv. Such interpretation followed by the AT of the said entry moreover reveals a profound lack of understanding of the reality of the dental implantology sector;

v. Being the dental prosthesis by implant a composite good, the subjection of each of its components to different VAT rates would violate the principle of neutrality and non-discrimination;

vi. From the provisions of article 98 of Council Directive 2006/112/CE, of 28 November 2006, and its respective Annex III, Point 4, concerning goods subject to the reduced rate of VAT, no argument can be drawn in support of the AT's thesis;

vii. Finally, and with regard to the refusal to apply the VAT exemption mechanism provided in article 14 of the Intra-Community VAT Transactions Regime (RITI) in relation to the sale of prostheses for intra-community customers, on the basis of the alleged lack of valid registration in the VIES system, the Applicant states that it has provided proof of the departure of the goods from Portugal destined for its intra-community customers, and that the alleged lack of registration in the VIES system would never prejudice the validity of the tax identification number of a VAT taxable person;

viii. Nevertheless, even if by mere hypothesis it were understood that the conditions for exemption provided in Article 14 of the RITI are not met, the VAT rate applicable to intra-community transmission of dental prostheses would be 6% and not 23%.

On 20-11-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Applicant did not appoint an arbitrator, so, pursuant to the provisions of letter a) of no. 2 of article 6 and letter a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of the CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 07-01-2016, the parties were notified of these appointments and did not express any intention to refuse any of them.

In accordance with the provision of letter c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 22-01-2016.

On 24-02-2016, the Respondent, duly notified for such purpose, submitted its defense through objection.

To this end, it invokes, in summary, the following:

i) The position defended in the Inspection Report is based on the repeated and consistent administrative understanding of the VAT Services Directorate and the General Directorate of Customs from the beginning of the VAT Code, according to which, "although it is difficult to distinguish between components and complete prostheses (implants), it appears that when transacted complete (…) so as to constitute a unit of implant properly said + connecting pieces + tooth constituting a unit of sale per taxable in entry 2.5 of list I annexed to the CIVA, are subject to VAT at the reduced rate. Transmissions of various individual components, parts and pieces are subject to VAT at the normal rate."

ii) Thus, the Respondent makes a distinction between the material concept of implant and that of prosthesis, the former, the implant, being a mere part, piece or accessory, used in the preparation and fixation of the prosthesis, while the prosthesis properly said configures an artificial piece capable of replacing autonomously and, in a single moment, an organ of the human body or part thereof, deserving, unlike the implant, classification under entry 2.6 of list I annexed to the VAT Code.

iii) It further appeals to the literal element of interpretation of the rule, from which it results that the legislator refers to prosthesis material and not to material for prosthesis (for application of a prosthesis), which indicates the exclusion of connecting or fixing pieces of prostheses, as those transacted by the Applicant;

iv) It clarifies that the titanium implant and the abutment are only components, each performing the function for which they were designed, of support and fixation of the prosthesis, which means that in their effective function they do not replace a deficient dental organ, being mere pieces or instrumental accessories that contribute to the final result of oral rehabilitation.

v) Regarding the VAT corrections effected on intra-community transmissions of goods carried out by the Applicant without proof that the acquirer with registered office in another member state is registered in the VIES system, the AT considers that it is a necessary condition for the application of the exemption of article 14 of the RITI to verify such condition, on the part of the transmitter, at the moment prior to the intra-community transmission of goods, which, moreover, also follows from articles 41 and 42 of the Sixth Directive.

On 17-03-2016, considering that, in this case, none of the purposes legally entrusted to it were present, and taking into account the position taken by the parties, pursuant to articles 16, letter c), 19 and 29, no. 2 of the RJAT, as well as the principles of procedural economy and the prohibition of performing useless acts, the holding of the meeting referred to in article 18 of the RJAT was dispensed with, the parties being notified to present successive written submissions within a period of 15 days.

In the context of its submissions, the Applicant maintains, in summary, the following:

a) With regard to the corrections made by the Tax Inspection, relating to the years 2011, 2012 and 2013, concerning the reduced rate of VAT applied by the Applicant to taxable supplies of implants and other pieces that integrate dental implant prostheses, under entry 2.6 of Table I Annexed to the CIVA, it considers that such correction lacks legal basis, violating the fundamental principles of VAT and expressly contradicts the unanimous case law established by Arbitral Tribunals, as well as the administrative practice of all other Member States of the European Union which advocates for the taxation of the various components of a dental prosthesis at the reduced rate, even if transmitted separately.

To this end, it reiterates that the fact that the dental implant comprises 3 distinct components (implant, abutment and crown) and with autonomous placement phases does not alter its nature as a dental prosthesis, since it is not possible to place the crown without the other components, which do not have any other medical use or purpose other than to integrate the dental prosthesis.

b) With regard to the corrections made to the years 2011 and 2012, in the amounts of €5,253.20 and €3,415.40 respectively for failure to meet the conditions for exemption on intra-community transmissions provided in article 14 of the RITI, regarding the lack of registration of the Applicant's intra-community customers in the VIES system, it alleges that the alleged lack of authorization to carry out intra-community operations never prejudices the status of a VAT taxable person.

It further states that even if it were understood that the conditions for exemption provided in article 14 of the RITI were not met, the corrections relating to intra-community transmissions of goods should be partially annulled since, being transmissions of dental prostheses, it would always be applicable the VAT rate of 6% and not 23%.

On 13 April 2016, the Respondent submitted its submissions before this Tribunal reiterating the position defended in the Response, as summarized below:

a) It is reiterated doctrine conveyed by the AT that Entry 2.6 only covers the transmission of "complete goods", that is, of the article that in itself configures an artificial piece that replaces the organ of the human body or part thereof, autonomously or unitarily, applying the normal rate of tax to the transmission of connecting or fixing pieces in the dental implant prosthesis given that they do not themselves fulfill the objective function described in the said entry. It argues that such interpretation results from the general principles of interpretation and application of laws, concluding that the transmission of titanium implants and the abutment are mere components of fixation of the prosthesis, therefore, taxed at the normal VAT rate due to lack of classification in any of the lists annexed to the CIVA, namely entry 2.6 of list I.

b) With regard to VAT assessments on intra-community transmissions due to the lack of proof of the status of taxable person in such operations as regards the acquirer, insofar as the latter is not registered in the VIES system, the Respondent considers, supported by the jurisprudence of the STA, that such registration is essential for the purposes of the exemption applicable to intra-community operations, provided in article 14 of the RITI. For this purpose, it adds that it is not sufficient to establish that the acquirer is an entity qualifying as a VAT taxable person. It is also necessary that the acquirer be covered by a regime of taxation of its own intra-community acquisitions, in the member state of destination of the good or in any other member state different from the one from which the good was sent, and it is certain that such requirement follows directly from the provisions of the Sixth Directive.

By order of 6 May 2016, it was decided to proceed with a hearing of the parties regarding the possibility of decreeing the suspension of proceedings until the decision of the CJEU was known, in a preliminary ruling (case No. 364/2015-T), within the scope of which the question of the interpretation of article 14, letter a) of the RITI was raised, as follows:

"i) Articles 131 and 138, no. 1, of Directive No. 2006/112 are to be interpreted to the effect that they do not preclude a Member State's tax authorities from refusing to grant a VAT exemption on an intra-community supply by a supplier established in that Member State because the customer, established in another Member State, is not registered in the VIES system nor is covered by a regime for taxation of intra-community acquisitions of goods, although the customer has, at the time of the transaction, a valid VAT identification number in that other Member State, a number that was used on the invoices of the transactions, when the material requirements of an intra-community supply are already cumulatively met, that is, when the right to dispose of the good as owner has been transferred to the customer and the supplier proves that the good was dispatched or transported to another Member State and that, as a result of that dispatch or that transport, the same physically left the territory of the Member State of supply to a taxable person or a legal person acting as such in a Member State other than that of departure of the goods?"

The order was based on the principle of the binding nature of national courts, including arbitral tribunals, to an interpretation of national law made in accordance with European law, as has been affirmed in constant case law of the CJEU, and widely accepted by the courts of the various member states.

On 17 May 2016, the Applicant came forward to express opposition to the proposed suspension of proceedings, alleging the absence of interpretative doubts as to the fulfillment of the requirements of article 14 of the RITI and also the circumstance that such suspension could cause grave economic harm to its sphere. Alternatively, the Applicant formulates a request for partial withdrawal of the proceedings, regarding the assessment of the legality of the corrections for the years 2011 and 2012, in the amounts of €5,253.20 and €3,415.40, respectively, for alleged failure to meet the conditions for exemption in intra-community transmissions it carried out, pursuant to article 14 of the RITI, continuing the proceedings regarding the part concerning the correction relating to the VAT rate applicable to transmissions of dental implants and other connecting or fixing pieces of dental prosthesis.

By order of 3 June 2016, it was determined to notify the AT so that, within 5 days, it would pronounce on the Applicant's request, considering that the withdrawal of proceedings after presentation of the defense is dependent on acceptance by the opposing party.

On 7 June 2016, the Respondent comes to communicate acceptance of the request for partial withdrawal of proceedings.

By interlocutory award issued on 8 June 2016, the tribunal approved the request for partial withdrawal of proceedings formulated by the Applicant and accepted by the Respondent, determining the continuation of the proceedings for assessment of the remaining request.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, letter a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to 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.

All considered, it falls to render a decision.

II. DECISION

REGARDING THE REQUEST FOR PARTIAL WITHDRAWAL OF PROCEEDINGS

Having approved the request for partial withdrawal of proceedings, requested by the Applicant and accepted by the Respondent, regarding the assessment of the legality of VAT corrections relating to the fiscal years 2011 (€5,253.20) and 2012 (€3,415.40), resulting from the application of the exemption provided in letter a) of article 14 of the RITI, the object of the proceedings remains the analysis of the legality of the additional VAT assessments and compensatory interest for 2011, 2012 and 2013, in the total amount of €481,166.50 relating to the application of the reduced rate to transmissions of dental implants and other connecting or fixing pieces of prostheses, provided in Entry 2.6 of List I Annexed to the VAT Code.

FACTUAL MATTER

B.1. Facts established as proven

1. Under the external inspection order OI20140…/…/… of 26 September, corrections were made in the context of VAT, relating to the years 2011, 2012 and 2013, of which the Applicant was notified on 3 June 2015.

2. Within the scope of the inspection procedure, it was found that the Applicant carried out transmissions of goods mainly destined for the domestic market and some for the community market;

3. The said transmissions concern various materials such as connecting and fixing pieces of prostheses and components of dental implants better described on pages 110 to 126 of Annex 7 of the case file, which are here reproduced, to which the reduced rate of VAT was applied;

4. Within the scope of that inspection procedure, corrections were made regarding the application of the reduced VAT rate (of 6% VAT under entry 2.6 of List I annexed to the CIVA) to the said transmissions of goods;

5. On 30 April 2015, the Applicant was notified of the Draft Report under which the Lisbon Finance Directorate (DLF) proposed the making of corrections in the context of VAT for the years 2011, 2012 and 2013 in the amounts of €113,308.26, €154,032.76 and €169,168.98, respectively;

6. In the tax inspection report, which is hereby fully reproduced, it appears, among other things, that:

"As we were able to confirm, in the fiscal years under review, the taxable person applies the reduced rate to the majority of the materials marketed, which is not, however, the understanding of the tax administration, set out in binding information, as well as the most recent information No. 2115 of 04/08/2014 clarifying the VAT rate applicable to transmissions of dental implants and other connecting or fixing pieces of dental prosthesis, requested by the Lisbon Finance Directorate from the VAT Services Directorate, on 06/06/2014 and which is reproduced in part below, being in full in an annex to this report (annex 6).

1. On the matter at issue, it should be said that the doctrine repeatedly disseminated by this Directorate has concluded that the reduced rate of the tax is not applicable to implants and other connecting pieces that allow the fixation of a dental prosthesis (called fixed prosthesis by implant).

(...)

1. As a result, it is understood that goods consisting of pieces, parts and accessories of those prostheses are not covered by entry 2.6, given that, in addition to not being prostheses, they are not fit to fulfill, considered individually, the function of replacing a part of the body or its function.

(...)

1. Thus, although it is difficult to distinguish between components and complete prostheses (implants), it appears that when transacted complete (and we emphasize that the information was provided by reference to a catalog presented by the company in question, which included the prostheses themselves and other materials for their fixation (such as implants and abutments) so as to constitute a unit of implant properly said + connecting pieces + "tooth", constituting a unit of sale per taxable in entry 2.5 of List I annexed to the CIVA, are subject to VAT at the reduced rate. Transmissions of various individual components, parts and pieces, are subject to VAT at the normal rate.

(...)

1. Entry 2.6 applies, therefore, to the devices in themselves, the final product. In the case of implant prostheses, it applies to the artificial tooth (prosthesis)".

2. On 15 May 2015, the Applicant exercised its right to be heard, in which it contested the corrections proposed by the DFL regarding the VAT rate applicable to transmissions of dental prostheses;

3. On 4 June 2015, the Applicant was notified by the DFL of the final tax inspection report, under which the corrections proposed in the context of VAT, relating to the fiscal years 2011, 2012 and 2013, were entirely maintained;

4. The Applicant is a limited liability company engaged in the wholesale trade of dental prosthesis material, implants and accessory material;

5. The Applicant is classified under the general corporate income tax regime and the Normal monthly VAT periodicity regime;

6. In the exercise of its activity, the Applicant acquires by means of intra-community acquisitions materials and components for dental implantology;

7. In the periods to which the tax acts in question in the present proceedings refer, the Applicant carried out transmissions of goods on the domestic market and intra-community market, with its sales being channeled, in their vast majority, to the domestic market;

8. The articles marketed by the Applicant were, essentially, medical devices used in the dental implantology sector, among others, dental implants in titanium, screws and other prosthesis devices;

9. The Applicant's customers are dentists and dental clinics specialized in implantology who used the said products for oral rehabilitation of patients;

10. Implantology aims at the replacement of lost teeth through the placement of dental implants in titanium and crowns;

11. The dental prosthesis effected through an implant comprises 3 elements: implant, abutment and crown, with the latter constituting the visible part of the tooth;

12. Dental implants are artificial tooth roots, which have the format of a screw positioned surgically in the jawbone;

13. Dental implants serve as a fixed support for the visible part of dental prostheses, with the viability of these prostheses being conditional on the prior placement of the implant;

14. The placement of the crown is not possible without the prior placement of the implant and the connecting piece between the two components;

15. The dental implant has the same purpose as a "post" when coupled to a dental prosthesis;

16. The three components that comprise the implant per dental prosthesis are inseparable, of necessary placement in phases and have no other medical use;

17. The surgical procedure for placement of the dental implant prosthesis occurs in two distinct but necessarily related phases:

1st Surgical Phase – placement of the implant and biological process of Osseointegration – biological process that allows the connection between the implant and the bone, being a process of cellular remodeling in which the cells of the human body will attach to the implant. This connection allows support for all loads during the chewing process;

2nd Prosthetic Phase – occurs after the Osseointegration process which is composed of several technical stages that allow, in addition to healing the tissues (gums surrounding the implant), also transferring to the Dental Prosthesis Laboratory some essential stages so that the final tooth (crown) can be made which is coupled to the implant as a single piece. In this phase, various pieces are used: healing cap, abutment, transfer and replica indispensable to any type of treatment with implants.

1. The surgical procedure for placement of a dental prosthesis implies that the process takes place in distinct phases in which the various pieces that make up the prosthesis are placed;

2. The separate sale of each of the components of the prosthesis results from the characteristics inherent to the process of implanting the dental prosthesis, since the placement of the crown is conditional on a previous clinical process of osseointegration which takes 4 to 6 months;

3. Each tooth or crown is designed to the customer's specifications;

4. There are no complete or final implant products transacted together, given that the process is carried out in phases;

5. The fact that the dental implant comprises 3 distinct components and with autonomous placement phases does not alter its nature as a dental prosthesis, since it is not possible to place the crown without the other components, which do not have any autonomous proper functionality;

6. The tooth comprises the following elements: Crown, Root, Enamel, Cementum, Dentin and Pulp;

7. The dental prosthesis aims to replace "the tooth" in all the elements that compose it;

8. On 13 November 2015, the Applicant deduced the request for constitution of the Arbitral Tribunal that gave rise to the present proceedings. (see electronic request to the CAAD).

B.2. Facts established as not proven

There are no facts that should be considered as not proven with relevance to the decision of the main claim.

However, regarding the request for compensation formulated, the Applicant did not indicate proof of the existence of an ongoing fiscal execution process, nor did it prove the costs incurred with the suspension of said proceedings, nor did it present evidence of the amount of the bank guarantee that it claims to have been provided.

B.3. Reasoning of the factual matter proven and not proven

Regarding the factual matter, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and discriminate the proven matter from the unproven matter (cf. art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable pursuant to article 29, no. 1, letters a) and e), of the RJAT).

Thus, the facts relevant for judgment 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 issue(s) (cf. previous article 511, no. 1, of the CPC, corresponding to the current article 596, applicable pursuant to article 29, no. 1, letter e), of the RJAT).

Thus, taking into consideration the positions assumed by the parties, in light of article 110, no. 7 of the CPPT, the documentary evidence and the case file attached to the proceedings, the facts listed above were considered proven, with relevance to the decision.

In particular, the facts established as proven in points 13 to 29 took into account the tax inspection report, in addition to the remaining documentation in the case file and submitted by the Applicant, considering that such facts are not controversial in nature.

C. REGARDING THE LAW

Of special interest is to decide on the question to be analyzed in the present proceedings, whether the "individualized" transmission of connecting and fixing pieces of prostheses and components of dental implants in question may be taxed at the reduced rate of 6% by subsuming itself within the scope of the provision of entry 2.6 of List I annexed to the Value Added Tax Code.

The question of the rate applicable to the individualized transmission of connecting and fixing pieces of prostheses and components of dental implants in question has already been the subject of some decisions in this Tribunal, namely in Case 188/2015-T, of November, being based essentially on the grounds invoked in Case No. 429/2014-T, of 24 November 2014, for which we will limit ourselves to reproducing the considerations then made and to subsume the factual matter therein, in everything similar to that which was then addressed.

It is important, for this purpose, to take into account the rules governing this tax according to the Law of the European Union, with its respective transposition at the internal level and the administrative and judicial interpretation that has been carried out on them, especially by the Court of Justice of the European Union (CJEU).

Indeed, as has been peacefully understood by case law and is a corollary of the mandatory preliminary ruling obligation provided in article 267 of the Treaty on the Functioning of the European Union (which replaced article 234 of the Treaty of Rome, previous article 177), the case law of the CJEU has binding force for national courts, when it has for its object questions connected with the Law of the European Union.

1. Application of the reduced VAT rate to connecting and fixing pieces of prostheses and components of dental implants

1.1 Interpretation of tax rules

As is well known, article 11 of the LGT prescribes that in determining the meaning of tax rules and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed. Now, no. 1 of article 9 of the Civil Code is clear when it determines that interpretation should not only be limited to the letter of the law (literal or grammatical element), but should reconstruct from the texts the legislative thinking (ratio legis), taking into account the unity of the system (systematic element), the circumstances in which the law was prepared (teleological element) and the conditions specific to the time in which it is applied (historical element).

The first hermeneutic factor to which the interpreter can resort to achieve the true meaning and scope of application of legal texts is, therefore, what corresponds to the literal or grammatical element.

As for the systematic element, it determines the interpretation of the rule in an integrated manner considering the other provisions that form the normative complex into which the rule being interpreted is integrated.

Regarding the teleological element, "It consists of this element in the reason for the law (ratio legis), in the objective pursued by the legislator in elaborating the rule. The knowledge of this objective, especially when accompanied by knowledge of the circumstances (political, social, economic, moral, etc.) in which the rule was elaborated or of the socio-economic and political conjuncture that motivated the legislative "decision" (occasio legis) constitutes a subsidy of the greatest importance for determining the meaning of the rule.

It suffices to recall that the clarification of the ratio legis reveals to us the "assessment" or weighing of the various interests that the rule regulates and, therefore, the relative weight of those interests, the choice between them expressed by the choice that the rule expresses"[1].

Finally, according to the historical element, it is necessary to determine the historical context of the elaboration of the rule.

The interpretation of the rule in question should, therefore, attend to these elements of interpretation.

1.2 The principle of VAT neutrality

As is well known, VAT is an indirect tax of community origin, multi-phase, which tends to affect all acts of consumption (general tax on consumption), and is noted as its main characteristic its respective neutrality[2].

It is customary to distinguish the neutrality of transaction taxes relative to the effects on consumption and on production. There will be neutrality relative to consumption, when the tax does not influence the choices of the various goods or services by consumers. A tax will be neutral from the perspective of production if it does not induce producers to changes in the form of organization of their production process.

As Xavier de Basto notes, "Neutrality relative to consumption depends exclusively on the degree of objective coverage of the tax and the structure of the rates, being it out of question to outline a tax on consumption that is completely neutral. Some exemptions will always have to be granted (.....) and there will probably be differentiations in the rate applicable to the various transactions of goods and services".[3]

In general terms, according to the principle of neutrality, taxation should not interfere with economic decisions nor in the formation of prices, implying the extension of the scope of application of this tax to all phases of production and distribution and to the services provision sector[4].

As Teresa Lemos points out, neutrality can be viewed from several aspects: neutrality in relation to production circuits – the tax burden does not depend on the greater or lesser integration of economic circuits, neutrality as to the incidence of the tax on different products and sectors, insofar as the rate is uniform, neutrality regarding the choice of production factors – capital and labor, and neutrality regarding consumer preferences – equal taxation of different products[5].

The principle of neutrality is reflected in VAT Directives, being systematically invoked by the Commission to oppose national legislation deemed incompatible with the rules of European Union Law, as well as by tax administrations and taxpayers of the various member states, and has been, countless times, applied by the CJEU[6].

The application of the principle of neutrality should be taken into consideration in the essential phases of the life of this tax, such as the rules of objective and subjective incidence, location, exemptions and the exercise of the right to deduction. We can assert that this has been the principle most invoked by the Court to substantiate its judgments, appearing to us often allied with the principle of equality of treatment, uniformity and the elimination of distortions of competition.

Thus, the CJEU has been concerned, namely, as to the realization of the objectives of the common system, in ensuring the neutrality of the tax burden of all economic activities, whatever their objectives or results (which, as it points out, is achieved through the mechanism of deductions that frees the entrepreneur from the burden of VAT paid in his acquisitions)[7], in ensuring economic agents equality of treatment, achieving a uniform definition of certain elements of the tax and guaranteeing legal security and facilitating actions aimed at its application[8].

From the outset, the CJEU sought to draw the due consequences of equal treatment in VAT of similar activities and the absence of the impact of the extension of production and distribution chains on the amount of tax received by tax administrations.

It is in light of this fundamental principle that the tax should be interpreted and applied, so as to ensure a uniform system that guarantees fair competition in the space of the European Union.

1.3. Application of reduced VAT rates

1.3.1 The rules of the VAT Directive

According to the rules of Directive No. 2006/112/CE, of 28 November, to which we will henceforth refer to as the VAT Directive or DIVA[9], taxable operations are subject to the tax at the rates and conditions of the member state in which they are located. The normal VAT rate is fixed, pursuant to the provisions of articles 96 and 97 of the DIVA, at a percentage of the taxable value that cannot be less than 15% until 31 December 2015[10].

According to article 98 of the DIVA, member states may apply one or two reduced rates at a percentage that cannot be less than 5%. Reduced rates may only be applied to supplies of goods and provision of services of the categories listed in Annex III of the VAT Directive, e.g. Annex H of the Sixth Directive (as last amended by Directive 2009/47/CE).

The determination and definition of the operations that may benefit from a reduced rate under these provisions of the VAT Directive are the competence of the member states.

It was with Directive 92/77/CEE, of the Council, of 19 October 1992[11], that community harmonization of VAT rates was carried out, with a view to the operation of the internal market, which occurred on 1 January 2003. Until that date, each member state had full autonomy to set the number of rates and their level.

As we have stated, Annex III of the VAT Directive contains the list of supplies of goods and services to which the reduced rates provided in article 98 can be applied, and contemplates, in the respective point 4, for the purposes of interest to us, the following realities: "Medical equipment, auxiliary material and other devices normally used to relieve or treat deficiencies, for exclusive personal use by disabled persons, including their repair, as well as car seats for children".

This wording is similar to that of the previous Annex H of the Sixth Directive amended by the said Directive 92/77/CEE (since revoked), which covered the following operations: "Medical equipment and other devices, normally used to relieve or treat deficiencies, for exclusive personal use by disabled persons, including their repair and car seats for children", the main difference being the later extension of its scope which came to contain "auxiliary material".

It follows from the above that the possibility of applying a reduced tax rate is just that: a faculty that member states may or may not exercise. However, if they make use of such possibility, they must do so in accordance with the rules of EU Law. On the other hand, it is important to note that the different goods and services to which member states may apply reduced tax rates are limited to specific situations, resulting from a consensual position among themselves, in which it is recognized that they are goods or services whose social, educational, or cultural character leads them to consider as essential, as is the case, for the purposes that now occupy us, of health.

It is worth noting that in its recitals the VAT Directive states that, "a VAT system achieves the greatest degree of simplicity and neutrality if the tax is collected in the most general way possible" (recital 5) and that "should, even though taxes and exemptions are not completely harmonized, lead to competitive neutrality, in the sense that, in the territory of each Member State, goods and services of the same type are subject to the same tax burden, regardless of the extent of the production and distribution circuit" (recital 7).

1.3.2 The rules of the CIVA

The VAT Code (CIVA) provides in no. 1 of its article 18 the following tax rates:

"a) For imports, supplies of goods and provision of services listed in List I annexed to this act, the rate of 6%;

b) For imports, supplies of goods and provision of services listed in List II annexed to this act, the rate of 13%;

c) For the remaining imports, supplies of goods and services, the rate of 23%."

Regarding the applicability of the rates, according to article 18 of the CIVA, the normal rate of VAT applies whenever the good or service in question does not fall under one of the two reduced rates provided in Lists I and II annexed to the Code.

If one is in the presence of groupings of various goods forming a distinct commercial product, one should take into account that, when they do not undergo changes in nature or lose their individuality, the rate that corresponds to them applies, or, if different rates apply, the highest one (article 18, no. 4, of the CIVA).

In the situation under analysis, entry 2.6 of List I is at issue, which represents the transposition at the level of domestic law of said point 4 of Annex III of the DIVA, under which the application of the reduced VAT rate to the following goods is determined: "2.6. Orthopedic devices, medical-surgical supports and medical hosiery, wheelchairs and similar vehicles, driven manually or by motor, for disabled persons, devices, artifacts and other material of prosthesis or compensation intended to replace, in whole or in part, any limb or organ of the human body or the treatment of fractures and lenses for correction of vision, as well as orthopedic footwear, provided that prescribed by medical prescription, on terms to be regulated by the Government within 30 days." (emphasis is ours).

As is well known, the general rate of the tax only applies if there is no place for the application of reduced rates. On the other hand, for purposes of application of the tax rate, it is important to ascertain whether we are in the presence of a single operation or of principal and ancillary operations.

Indeed, when an operation comprises various supplies of goods and/or provision of services, it raises the question of whether it should be considered as a single operation or as several distinct and independent services that should be assessed separately.

This question is of special importance, from the perspective of VAT, namely for purposes of application of the tax rate and of the provisions relating to exemptions.

1.3.3 The jurisprudence of the CJEU

The community case law on the application of reduced VAT rates is not very abundant. However, we can highlight some fundamental ideas that guide it, appearing to be sufficiently elucidative for the purpose.

In accordance with the understanding of the CJEU, the principle of tax neutrality also includes two other principles frequently invoked by the Commission: that of VAT uniformity and the elimination of distortions of competition.

The CJEU has been emphasizing that the principle of tax neutrality implies that all economic activities should be treated in the same way[12]. The same is true for economic operators that carry out the same operations[13].

Similar provision of services, which are, therefore, in competition with each other, should not be treated differently from the perspective of VAT[14].

As Advocate General Juliane Kokott notes in her conclusions presented in the TNT Case[15], the principle of tax neutrality is opposed to goods or services being similar, which are therefore in competition with each other, being treated differently from the perspective of value added tax (no. 43). In this context, she notes that "The principle of tax neutrality, which underpins the common system of tax and must be taken into account in interpreting the rules of exemption, does not allow economic operators that carry out the same operations to be treated differently in terms of collection of value added tax. (...) It includes the principle of elimination of distortions of competition resulting from differential treatment from the perspective of value added tax (...) " (no. 59).

The CJEU has also clarified that the delimitation of goods and services that may benefit from reduced rates should be carried out based on objective characteristics. Thus, in its Judgment of 23 October 2003, Case Commission v. Germany[16], the CJEU came to reinforce the objective character of the situations in which the application of reduced VAT rates is permitted, concluding that, in the case of goods or services that are similar and that are in competition with each other, it is not permissible for them to be treated in a discriminatory manner.

That is, in accordance with the case law of the CJEU, the establishment and maintenance of different VAT rates for goods or services that are similar are only permissible if they do not violate the principle of tax neutrality inherent to the common system of VAT, in accordance with which member states must transpose the community rules[17].

As the CJEU takes pains to emphasize, it follows from the community rules that the determination and definition of the operations that may benefit from a reduced rate are the competence of member states. As the Commission has been emphasizing in its reports on reduced rates, one of the greatest problems in the application of the rates is precisely the optional nature of such application and the absence of common definitions for the categories of goods and or services covered[18].

However, notwithstanding this, in exercising this competence, member states must respect the principle of tax neutrality. Now, as we have seen, this principle is opposed, in particular, to goods or services being similar, which are therefore in competition with each other, being treated differently from the perspective of VAT, so that the said products should be subject to a uniform rate[19].

Since the reduced rate is the exception, the fact that its application is limited to concrete and specific aspects is consistent with the principle that exemptions or derogations should be interpreted in strict terms, provided that the principle of neutrality of the tax is not violated[20].

Indeed, the application of one or two reduced rates is a possibility recognized to member states by derogation of the principle whereby the normal rate applies. Now, it follows from settled case law that provisions that have the character of derogation of a principle should be subject to strict interpretation, while ensuring, however, that the derogation does not become devoid of useful effect[21].

Member states may not, in particular, interpret the concepts used in Annex III of the Directive in a selective manner so that, without regard to objective criteria, different treatment is granted to identical realities. Indeed, being certain that the determination of operations subject to reduced VAT rate is the competence of member states, with no abstract definitions for this purpose in community legislation, it is necessary that the principle of neutrality be respected. Thus, a taxation at reduced rates of the tax that, being selective, violates the fundamental characteristics of tax neutrality, objectivity and uniform taxation rate would be contrary to the principles of EU Law, not allowing sub-groups to be instituted within a taxable activity, with the aim of applying different taxation rates to them, with no objective reason justifying such difference in treatment[22].

In particular, the principle of objectivity requires the application of one and the same rule to taxable operations of the same nature, there being a presumption of similarity when the operations in question correspond to different variants of one and the same taxable operation included in one of the categories of Annex III of the VAT Directive.

It is also important to note in this context that the question of composite supplies versus independent supplies was the subject of appraisal by the CJEU in some judgments[23].

In this regard, it follows from article 2 of the VAT Directive that each operation should normally be considered distinct and independent[24].

However, in certain circumstances, several formally distinct supplies, susceptible of being carried out separately and thus giving rise, in each case, to taxation or exemption, should be considered as a single operation when they are not independent.

This is the case, for example, when, on the basis of an analysis, even if merely objective, it is found that one or more supplies constitute a principal supply and that the other supply or supplies constitute one or more ancillary supplies that share the tax treatment of the principal supply.

In this context, it is established case law by the CJEU that "…one is in the presence of a single supply, namely in the case in which one or several elements must be considered the principal supply, while, conversely, one or several elements must be considered ancillary supplies that share the same tax treatment of the principal supply. A supply must be considered ancillary in relation to a principal supply when it does not constitute an end in itself for the clientele, but a means of benefiting under the best conditions of the main service of the service provider"[25].

It can also be considered that one is in the presence of a single operation when two or several elements or acts provided by the taxable person are so closely linked that they form, objectively, a single indissociable economic operation whose decomposition would have an artificial nature[26].

Thus, the CJEU emphasizes that "… when an operation consists of a set of elements and acts, account must be taken of all the circumstances in which the operation in question develops, to determine, on the one hand, whether one is in the presence of two or more distinct supplies or of a single supply, and, on the other, if, in the latter case, this single supply should be qualified as a supply of services"; and that "The same occurs [or is, one is in the presence of a single supply] when two or several elements or acts provided by the taxable person to the consumer … are so closely connected that they form, objectively, a single indissociable economic supply whose decomposition would have an artificial nature".

But the position of the CJEU on the question of the fragmentation of the principal supply into several elements does not end there, having continued, over the years, to be the subject of requests for preliminary decisions, namely within the scope of the Part Service Case[27].

Indeed, it was the understanding of the CJEU in the said process that "51…it follows from article 2 of the Sixth Directive that each operation should normally be considered distinct and independent.

1. However, in certain circumstances, several formally distinct supplies, susceptible of being carried out separately and thus giving rise, in each case, to taxation or exemption, should be considered as a single operation when they are not independent.

2. This is the case, for example, when, on the basis of an analysis, even if merely objective, it is found that one or more supplies constitute a principal supply and that the other supply or supplies constitute one or more ancillary supplies that share the tax treatment of the principal supply (…)" [28].

Now, in view of the case law of the CJEU just enunciated and which, over the years, has come to be established, where there are principal and ancillary supplies, economically inseparable, a single VAT regime will apply, corresponding to that of the principal supply, namely for purposes of application of the rates of the tax.

This happened in the Case Commission/France, in which the application of the reduced VAT rate to electricity, specifically to electricity subscription, was under analysis[29].

For the Commission, if it were to be considered that the subscription was a supply, the application of a reduced VAT rate to the subscription of energy network services and a normal rate to any other supply of energy would violate the principle of neutrality inherent in the Sixth Directive. Indeed, according to its understanding, even if it were a supply, the same rate should be applied to the subscription and to any other consumption of electricity, according to the principle of neutrality.

According to the conclusions of Advocate General Siegbert Alber presented on 10 October 2002, the subscription could only be considered an autonomous supply if it were a supply that should be distinguished from the actual supply of natural gas and electricity.

The CJEU, regarding the allegation raised on a subsidiary basis relating to the violation of the principle of uniformity of the tax rate, came to invoke the following:

"88.

The principle of tax neutrality would be violated if French tax legislation were such that equal services, which are in a relationship of competition, were treated differently in terms of value added tax.

1. As has already been explained, the subscription and the supply of natural gas and/or electricity, for the vast majority of final consumers, constitute an integrated supply that covers the provision of services and the supply of goods (27), and not distinct supplies. It is only the price of the supply that is divided into two parts, which are the amount of the subscription and the variable value to be paid according to the quantity of consumption.

(…)

Furthermore, this tax regime may violate the principle of tax neutrality. Indeed, different tax rates are applied to equal services."

It is thus in this context that the CJEU ruled in favor of the French Republic.

The same reasoning was adopted by the CJEU in its Judgment of 3 April 2008, Case Finanzamt Oschatz,[30], having concluded that a connection pipe was not distinct from water distribution, the same reduced VAT rate as electricity being applicable to it. As was emphasized, "40. Although the Sixth Directive does not contain the definition of water distribution/supply, neither does it follow from its provisions that this concept should be the subject of different interpretations depending on the annex in which it is mentioned. Being the individual connection pipe indispensable for the placing of water at the disposal of the public, as results from no. 34 of the present judgment, should it be considered that it is also covered by the concept of water supply mentioned in category 2 of annex H of the Sixth Directive."

Still in the same sense, cite the Judgment of the CJEU of 10 March 2011, Procs. joined C‑497/09, C‑499/09, C‑501/09 and C‑502/09, where the scope of the expression «foodstuffs» which appeared in its annex H, category 1, of the Sixth Directive was at issue, again for purposes of application of the reduced VAT rate. As the Court began by emphasizing there would be a need to assess "… whether, from the perspective of VAT, the various activities in question in each of the main proceedings should be treated as distinct taxable operations or as a single complex operation composed of several elements" (no. 51).

It also emphasized that, "As follows from the case law of the Court of Justice, when an operation consists of a set of elements and acts, account must be taken of all the circumstances in which the operation in question develops, to determine, on the one hand, whether one is in the presence of two or more distinct supplies or of a single supply and, on the other, if, in the latter case, this single supply should be qualified as a supply of goods or provision of services" (no. 52).

1.3.4 Conclusion

Given the reasoning set out above, whether by resorting to the community rules, by resorting to the rules of legal hermeneutics, or considering the consolidated case law existing on the matter, one can only conclude that the reality in question in the present proceedings is subsumed within the legal provision of entry 2.6 of List I annexed to the VAT Code, embodying itself as "(…) devices, artifacts and other material of prosthesis or compensation intended to replace, in whole or in part, any limb or organ of the human body".

Thus, it is concluded that the additional assessments relating to the supplies of prosthesis materials, such as the implant, abutment, connecting and fixing pieces, suffer from a defect in their respective factual and legal grounds, and should, as such, be annulled in their entirety.

D. PAYMENT OF COMPENSATORY INTEREST

The Applicant cumulates with the request for annulment of the tax acts subject of the present proceedings, the request for condemnation of the AT in the payment of compensatory interest for provision of undue guarantee.

Considering that the Applicant did not invoke, nor proved, any facts representative of costs incurred with the suspension and guarantee of fiscal execution processes, nor did it quantify them either, the requirements of article 53, no. 1 and 2 of the LGT are not fulfilled, whereby in this part the request formulated by the Applicant must be dismissed, (see, in this sense, decision rendered within the scope of Case No. 67/2015-T).

E. DECISION

This Tribunal hereby agrees to:

a) Judge the arbitral claim partially granted with the reduction as a result of the partial withdrawal of proceedings regarding the additional VAT assessment acts relating to intra-community transmissions of goods carried out in the years 2011 and 2012, in the amounts of €5,253.20 and €3,415.40 respectively;

b) Judge the annulment request of the other assessment acts subject of this proceeding to be granted, for violation of the provisions of article 18 of the CIVA and entry 2.6 of Table I annexed to this Code;

c) Judge the request for condemnation in the payment of compensation for provision of undue guarantee to be dismissed.

d) Condemn the parties in the costs of the proceedings in the proportion of 2% by the Applicant and 98% by the Tax and Customs Authority, considering the condemnation of the Applicant in the costs of the incident of partial withdrawal of proceedings and the value of that incident [€8,608.00] (See interlocutory judgment of 8-6-2016).

F. Value of the proceedings

The value of the proceedings is fixed at €481,166.50 (four hundred eighty-one thousand one hundred sixty-six euros and fifty cents) pursuant to article 97-A, no. 1, a), of the Code of Procedure and Tax Procedure, applicable by virtue of letters a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Arbitration Costs Regulations in Tax Arbitration Proceedings.

G. Costs

The arbitration fee is fixed at €7,650.00 pursuant to Table I of the Costs Regulations for Tax Arbitration Proceedings, to be paid by the parties in the aforesaid proportion (See articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the cited Regulations).

Notify.

Lisbon, 20-6-2016

The Collective Arbitral Tribunal,

José Poças Falcão

(President)

Clotilde Celorico Palma

(Member Arbitrator)

Filipa Barros

(Member Arbitrator)