VAT Exemption Waiver for Dental Services: CAAD Arbitral Tribunal Jurisdiction and Preliminary Ruling (682/2016-T)

ARBITRAL DECISION

I - REPORT

1. A..., LDA., (hereinafter referred to as Claimant or A...), taxpayer identification no. ..., with registered office at ..., no. ..., ..., rooms ... to ..., ...-... Porto, filed on 16/11/2016 a request for constitution of an arbitral tribunal, pursuant to the terms set out in article 2, section 1, subsection a) and article 10, sections 1 and 2, both of Decree-Law no. 10/2011, of 20 January (hereinafter referred to as LRAT), in which the Tax and Customs Authority is requested (hereinafter referred to as TCA or Respondent), with a view to the declaration of nullity of the act dismissing the administrative appeal, and consequently the annulment of the VAT assessments and corresponding compensatory interest, with reference to the years 2011 to 2013, which amount to a total value of €234,573.57, being the amount of €215,840.78 corresponding to the disputed assessments and the amount of €18,732.79 referring to compensatory interest (see list of assessments attached to the request for arbitral pronouncement).

2. The request for constitution of the Collective Arbitral Tribunal was accepted by His Excellency the President of CAAD and notified to the Respondent on 02/12/2016.

3. Pursuant to and for the purposes of article 6, section 2, subsection a) of the LRAT, by decision of His Excellency the President of the Ethics Council of CAAD, duly notified to the parties within the prescribed timeframes, the undersigned arbitrators were designated, who communicated to that Council their acceptance of the appointment within the timeframe stipulated in article 4 of the Code of Ethics of the Centre for Administrative Arbitration.

4. On 17/01/2017 the parties were notified of this appointment, and they did not manifest any intention to refuse the appointment of the arbitrators, in accordance with the combined terms of article 11, section 1, subsections a) and b) of the LRAT and articles 6 and 7 of the Code of Ethics.

5. The Collective Arbitral Tribunal was constituted on 01/02/2017, in accordance with the requirement of article 11, section 1, subsection c) of the LRAT, as amended by article 22 of Law no. 66-B/2012, of 31 December.

6. On 06/03/2017, the Respondent submitted its response and attached the administrative file.

7. By arbitral order issued on 06/03/2017, the holding of the meeting referred to in article 18 of the LRAT was dispensed with, inviting the parties to submit their submissions in writing.

8. The Claimant, on 14/03/2017, submitted a response to the exception of material incompetence of the Arbitral Tribunal raised by the TCA, and also addressed the question of the referral for a preliminary ruling and formulated its submissions.

9. On 27/03/2017, the TCA submitted its submissions, where, essentially, it refers to the contents of its response.

10. An arbitral order was issued on 11/04/2017, duly notified to the parties, indicating the time limit for the issuance and notification to the parties of the arbitral decision.

11. To support its request, the Claimant invoked, in summary, and with relevance to what matters here, the following (mentioned mostly by transcription):

i. The Tax and Customs Authority directed additional VAT assessments to the Claimant for the years 2011 and 2013, which totalled €215,840.78, to which were added €18,732.79 as interest, amounts which it paid;

ii. The additional assessments in question resulted from a tax inspection carried out by the Tax Inspection Services;

iii. As the Claimant disagreed with them, it filed an administrative appeal in July 2016;

iv. an appeal which was subsequently dismissed;

v. The Claimant is a limited liability company engaged in dental medicine activity and related activities, having commenced its activities in 2007;

vi. in the declaration of commencement of activity it was classified under the normal VAT regime with monthly periodicity (see document no. 6 attached to the request for arbitral pronouncement);

vii. the Claimant claims the understanding that, as a clinic providing ambulatory health services, it would be covered by the exemption provided in section 2 of article 9 of the VAT Code;

• that for this reason it was permitted to waive the exemption provided in subsection b) of section 1 of article 12 of the VAT Code;

viii. the Claimant makes various considerations throughout its request for arbitral pronouncement regarding the interpretation to be given to articles 9 and 12 of the VAT Code, reiterating, in a position at variance with that put forward by the TCA, its classification in the exemption situation contemplated by section 2 of article 9 of the VAT Code permitting the waiver of the same provided in subsection b) of section 1 of the same normative code;

ix. to support its request, the Claimant attached an opinion on the question of waiver of the VAT exemption;

x. the Claimant claims, as can be drawn from its request, for the declaration of illegality of the underlying assessments and for the recognition of the right to compensatory interest, pursuant to the terms provided in articles 43 and 100 of the General Tax Code and article 61 of the Tax Code of Procedure.

12.1. The TCA, duly notified for this purpose, timely submitted its response, raised the dilatory exception of material incompetence of the arbitral tribunal on the grounds that the question at issue is the recognition of a right in tax matters, embodied in the right to waive the VAT exemption, further claiming a referral for a preliminary ruling to the Court of Justice, sustaining by way of challenge the lack of merit of the request for arbitral pronouncement.

• by way of challenge

12.2. In the response by way of challenge, identifying the request for arbitral pronouncement formulated by the Claimant, it reiterates the factual matters emerging from the Tax Inspection Report (summarised below in what is relevant here) with its argument not differing, upon which it anchors the lack of merit of the request, from the grounds that justified the dismissal of the administrative appeal timely raised by the Claimant.

In very brief summary, and the key point of the question to be settled, the understanding of the TCA comes down to the fact that it understands the activity developed by the Claimant (dental medicine and dentistry) is found, as regards the VAT exemption, to be classified under section 1 of article 9 of the VAT Code, consequently there is no possibility of waiving the exemption under the terms of subsection b) of section 1 of article 12 of the VAT Code, understanding therefore (as it continues to reaffirm) that such possibility of exemption is solely for taxable persons exempt under section 2 of article 9.

II – ADJUDICATION

• question of material incompetence of the Tax Arbitral Tribunal

Dilatory exceptions prevent the tribunal from knowing the merits of the case and, having their assessment an ex officio and priority character, it is necessary to assess, from the outset, the dilatory exception of material incompetence of the tax arbitral tribunal invoked by the Respondent.

• position of the Tax and Customs Authority

The TCA raises the exception of material incompetence of this Arbitral Tribunal for the following reasons, in summary, and with relevance:

(i) "Prior to the assessment of the legality or illegality of the disputed assessments there is another question to be decided: the Claimant requests that the tribunal assess the legality of the conditions of the right to waive the exemption which it exercised, under the terms of subsection b) of section 1 of article 12 of the VAT Code;

(ii) the acts of additional VAT assessments made should be qualified as consequential acts;

(iii) in the present case, the acts of additional VAT assessments, pending assessment in this arbitral instance, are in a relationship of dependence on the recognition or otherwise of the right by the Claimant to waive the VAT exemption, under the terms of article 12, section 1, subsection b) of the VAT Code;

(iv) this dependence being of a substantive and not merely formal nature;

(v) the recognition of the right which the now Claimant has, or otherwise, to waive the exemption in the terms referred to will determine, or not, the annulment of the additional tax assessments, since this depends directly and exclusively on that;

(vi) the present arbitral instance is materially incompetent to determine (...) whether the now Claimant has or does not have the right to waive the exemption provided under section 2) of article 9, as provided in article 12, section 1, subsection b), both of the VAT Code;

(vii) the scope of competence of arbitral tribunals established under the terms of Decree-Law no. 10/2011, of 20 January (LRAT), does not contemplate the possibility of assessing requests aimed at the recognition of rights in tax matters;

(viii) a circumstance which follows from the letter of section 1 of article 2 of the LRAT which, as is known, defines the types of claims that may be assessed by arbitral tribunals in tax matters;

(ix) the same follows equally from the comparison between the law and the legislative authorization, under which arbitration in tax matters was instituted – namely, when it stated that "The tax arbitral process must constitute an alternative procedural means to the process of judicial challenge and to the action for recognition of a right or legitimate interest in tax matters", (see sections 2 and 4, subsection b) of article 124 of Law no. 3-B/2010, of 28 April);

(x) from this it results, unequivocally, that the legislator chose not to contemplate (in the LRAT) the possibility of assessing requests aimed at the recognition of rights in tax matters".

• position of the Claimant

The Claimant, in its response to the exception raised by the TCA, signals, in very brief note for what matters here, the regimes provided in Decree-Law no. 10/2011, of 20 January and in the Binding Ordinance regarding the competence of Tax Arbitral Tribunals, so as to conclude that the competence of the arbitral tribunal to assess the legality of the underlying assessments will have to be assessed solely in light of the LRAT, flowing from its article 2 the definition of competence according to types of acts that are the subject of the claims of taxpayers – in this case, acts of additional VAT assessment – and not according to the type of questions that it is necessary to assess in order to decide whether those acts are legal – in this case, whether the taxpayer could or could not waive the VAT exemption under the terms of article 12 of the VAT Code, concluding in the sense of the lack of merit of the exception of material incompetence of the present Arbitral Tribunal, raised by the Respondent.

• decision on the question of material competence

The question of material incompetence of the Arbitral Tribunal in factual situations entirely similar to that which underlies the present proceedings, has already been submitted for assessment and arbitral decision, among others in proceedings nos. 168/2015-T, 782/2015-T and 788/2015-T.

Drawing from proceedings no. 168/2015-T, which is transcribed here with due deference, the following;

"The Ordinance no. 112-A/2011, regarding acts that can be classified as indicated in article 2, only excluded from the scope of the Tax Administration's binding effect, in non-customs matters, claims relating to acts of self-assessment, withholding at source and payment on account that were not preceded by recourse to the administrative route and claims relating to acts of determination of taxable matter and acts of determination of taxable income, both by indirect methods, including the decision of the revision procedure.

It is clear that we are not faced with any of the situations in which Ordinance no. 112-A/2011 excludes the competence of arbitral tribunals functioning in CAAD, so competence must be assessed solely in light of the TCPT.

As can be seen from article 2 of the LRAT, the competence of arbitral tribunals functioning in CAAD was defined by the LRAT only having regard to the type of acts that are the subject of taxpayers' claims and not according to the type of questions that it is necessary to assess to decide whether the acts are legal or illegal.

There is, in particular, no prohibition on the assessment of matters relating to the verification of the conditions of the right to waive the VAT exemption or any other questions of legality relating to acts of the types mentioned in article 2 of the LRAT. A tax assessment departing from the disregard of an exemption or a waiver of exemption does not cease to be a tax act of assessment. And the claim for assessment of the legality or illegality of this disregard underlying an assessment act does not therefore cease to be the assessment of a claim relating to the declaration of illegality of assessment acts, in which this disregard is materialized.

Thus, in the arbitral process, like what happens in the process of judicial challenge, any illegality may, as a general rule, be imputed to acts of assessment, as follows from article 99 of the TCPT, subsidiarily applicable.

This will not be the case only in situations where the law provides for the autonomous challengeability of administrative acts that are prerequisites of assessment acts, only being to that extent that the assessment of the legality of the assessment acts is excluded in all aspects.

But, for this autonomous challenge to exist, there must be some administrative act in tax matters, since challengeability pertains to acts and not to legal positions assumed expressly or implicitly as prerequisites of assessment acts but not materialized in autonomous tax acts.

The consequential acts, of which the Tax and Customs Authority speaks, are consequential to other tax or administrative acts and, in the case at hand, there is no notice that any administrative act was performed assessing whether the Claimant has or does not have the right to waive the VAT exemption.

That is, for there to be a limitation on the challengeability of the disputed assessment acts, some administrative act would have had to be performed previously, which would be a prerequisite of these assessment acts, which did not occur in the case at hand.

Therefore, being acts of assessment harmful to the interests of the Claimant and being the only acts performed by the tax administration regarding the situation assessed in them, their contentiousness challengeability must be ensured on the basis of any illegality, as follows from the principle of effective judicial protection, enshrined in articles 20, section 1 and 268, section 4 of the Constitution of the Portuguese Republic.

On the other hand, when there is no autonomous challengeable act prior to an assessment act dealing with its prerequisites, any illegality previously committed may be invoked in the challenge of the final decision" (final part of article 54 of the TCPT), so that all questions relating to the legality of assessment acts may be assessed in tax tribunals in the process of judicial challenge, as follows from subsection a) of section 1 of article 97 and article 99 of the same Code.

In fact, in tax tribunals, even when, having been performed assessment acts, we are faced with a situation in which it could be more useful for the taxpayer to use the action for recognition of a right or legitimate interest (by making possible, in addition to the assessment of the legality of acts, the definition for the future of the taxpayer's rights), the use of the action instead of judicial challenge is a mere faculty, as follows from the text of article 145, section 3, of the TCPT itself, in stating that "actions may only be brought whenever this procedural means is the most appropriate to ensure full, effective and efficient protection of the right or legally protected interest"

That is, what this rule provides is limitation on the use of the action and not limitation on the use of the judicial challenge process.

Indeed, it is clear that the judicial challenge process includes the possibility of recognition of rights in tax matters, such as the right to annulment or declaration of nullity of assessments, the right to compensatory interest and the right to compensation for improper guarantee, so that the fact that the recognition of rights is at issue is not an obstacle to the use of judicial challenge.

Thus, as the Tax and Customs Authority states, having the tax arbitral process been created as an alternative to the judicial challenge process, it is to be concluded that there is no obstacle to the legality of the assessment acts in question in this process being assessed by this Arbitral Tribunal, since in tax tribunals this legality could be assessed in the process of judicial challenge".

Concluding in the decision which we have just transcribed;

"Therefore, as regards the request for annulment of the assessment acts, the exception of material incompetence raised by the Tax and Customs Authority on the grounds that the recognition of a right in tax matters is at issue is without merit."

Given what has been exposed, this Collective Arbitral Tribunal finds no decisive and determining reasons to decide otherwise than what has been indicated, moreover supported by several other decisions issued within the scope of CAAD, among which, by way of merely exemplary and due to their more recent character, those issued in proceedings 782/2015-T, 788/2015-T, 789/2015-T and 160/2016-T stand out.

Consequently, the exception of material incompetence of the Arbitral Tribunal raised by the TCA is judged to be without merit.

The parties have legal personality and capacity, are legitimate and are duly and legally represented (article 3, 6 and 15 of the TCPT, ex vi article 29, section 1, subsection a) of the LRAT).

The process is not affected by nullities, and there are no other exceptions or preliminary questions that prevent the assessment of the merits of the case.

Before deciding, on facts and law, it is also necessary to resolve the

III - QUESTION OF PRELIMINARY RULING

The Respondent, in its response, requests "that the referral of the process be ordered to the Court of Justice, under the terms of article 267 of the Court of Justice, for the purpose of defining the scope of the waiver of the said exemption regime".

It sustains for this that "all the case-law of the Court of Justice, with some similarity to the case of the present proceedings, resulted from cases which are situated in an antagonistic position or, if you will, in a mirror position facing the situation of the present proceedings", since, "in those cases, the parties involved previously sought to benefit from the exemption regarding the provision of medical services, when the tax administrations sought their subjection/taxation", reason by which it will be necessary "to ascertain whether the concept of "conditions socially similar" must be assessed having in mind whether this entails or not a violation of the principle of equal treatment regarding other operators that provide the same services in comparable situations, e.g. Judgment Dornier C-45/01, of 6 November 2003".

It is anticipated from the outset that the Respondent's position is without merit.

In effect, without need for any other considerations, it will be said, synthetically, that: (i) arbitral tribunals form part of the set of national courts as follows from article 209 of the Constitution of the Portuguese Republic (CRP), (ii) the preamble of Decree-Law no. 10/2011, of 20 January, made it clear that "(...) in cases where the arbitral tribunal is the final instance of decision of tax disputes, the decision is subject to a preliminary ruling in compliance with § 3 of article 267 of the Treaty on the Functioning of the European Union", (iii) in case of doubt regarding the interpretation of European law norms the arbitral tribunal may resort to a preliminary ruling, (iv) the Respondent did not indicate the specific questions it might wish to place before the Court of Justice, (v) in the case at hand there are no doubts for the arbitral tribunal about the interpretation of the norm(s) at issue.

Additionally and conclusively, we recover here, with due deference, what is stated in judgment 315/2015-T, reiterated in judgment 782/2015-T of CAAD;

"As referred to in point 7 of the recommendations to national courts relating to the submission of cases for preliminary ruling (2012/C 338/01) of the Court of Justice:

"the role of the Court in the framework of a preliminary ruling procedure is to interpret European law or pronounce on its validity, and not to apply this law to the factual situation underlying the main proceedings. This role is incumbent on the national judge and that is why the Court is not competent to pronounce on questions of fact raised in the context of the dispute in the main proceedings nor on any divergence of opinion regarding the interpretation or application of national law rules"

Moreover, it is recalled, in point 12 of those same recommendations, that the preliminary ruling to the said Court should not be made when:

i. jurisprudence on the matter already exists (and when the possibly new framework does not raise any real doubt about the possibility of applying this jurisprudence to the specific case); or

ii. when the correct way to interpret the legal rule in question is unequivocal.

Consequently, it is continued in point 13, "a national court may, in particular when it considers itself sufficiently enlightened by the case-law of the Court, itself decide on the correct interpretation of European law and its application to the factual situation of which it is aware.

Finally, as stated in point 18 of the same recommendations, "The national court may submit a request for a preliminary ruling to the Court from the moment it considers that a decision on the interpretation or validity is necessary to deliver its decision"

In the case, it is not considered that a decision on the interpretation of community norms is necessary to issue nor does the Respondent demonstrate this, not having even presented any specific question that demonstrates it.

On the other hand, and as will be seen below, it is understood that the available case-law of the Court of Justice sufficiently clarifies, in terms of being able to decide on the correct interpretation of European law and its application to the factual situation of which we are aware."

Given what has been stated, this Tribunal decides to reject the request for a preliminary ruling to the Court of Justice, raised by the TCA.

IV – ASSESSMENT

A. MATTER OF FACT

A.1. Facts established as proven

a- the Claimant was constituted on 27/01/2007, in the form of a limited liability company;

b- the Claimant is registered for the exercise of "dental medicine and dentistry activities" (CAE 086230), having commenced its activities on 27/01/2007;

c- the Claimant submitted on 26/01/2007 a Declaration of Commencement of Activity, with the ... Tax Office of Porto, having indicated that it would carry out "transfers of goods and/or provision of services conferring the right to deduction";

d- for VAT purposes the Claimant is classified under the normal regime with monthly periodicity from the date of its activity;

e- for CIT purposes the Claimant is classified under the general regime for determination of taxable profit;

f- under Service Order no. OI 2014..., it was subject to an inspective procedure of an external nature, of general scope, with reference to the periods 2011 and 2012;

g- the Claimant was selected for inspection by criteria defined at the district level;

h- as a result of the said inspective action the Claimant was notified of the Tax Inspection Report, through Official Letter no.../... of 2015-12-29, where the grounds for the disputed assessments are set out;

i- the tax acts subject to the present request for arbitral pronouncement resulted from the said inspective action, which culminated with the notification to the Claimant of the respective Report;

j- from the Tax Inspection Report, it appears, among other things, the following:

III – DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO THE TAXABLE MATTER AND THE TAX IN DEFAULT

A. Value Added Tax

A.1. Improper Deduction of Tax

A.1.1. Legal Classification of the Activity of Dentistry/Dental Medicine.

The following exposition aims to proceed with the classification of the activity of Dentistry/Dental Medicine, in terms of VAT.

"Article 9 of the VAT Code enumerates certain operations which, being considered of general or social interest and for purposes of relevant importance, are covered by the exemption provided in this article, the legislator thus intending to relieve, both administratively and financially, such activities.

With regard to health, in section 1 of article 9 of the VAT Code the following are exempt from tax: "The provision of services carried out in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions". It should be noted that this exemption, provided in section 1 of article 9 of the VAT Code operates independently of the legal nature of the service provider and, in particular, whether it is a natural or legal person.

In section 2 of article 9 of the VAT Code it is established that the following are exempt: "The provision of medical and health services and operations closely connected with them carried out by hospital establishments, clinics, dispensaries and similar establishments.

Note that section 2 of article 9 of the VAT Code transposes into internal legal order subsection b) of section 1 of article 132 of Council Directive 2006/112/EC of 28 November, providing that the following activities are exempt from tax; "Hospital and medical care, and also operations closely related to them, provided by public law bodies or, in conditions socially similar to those applying to the latter, by hospital establishments, medical care and diagnostic centres and other establishments of the same nature duly recognized,"

It can therefore be concluded that the exemption provided in section 2 of the said article covers the provision of medical and health services (health acts) which consist of providing assistance to persons, diagnosing and treating diseases or any anomalies of health and operations connected with them carried out by the establishments expressed in the said norm or by similar establishments (hospitalization/admission).

On the other hand, establishments similar to those for the purposes of the exemption referred to are considered to be health establishments, that is, establishments that actually perform operations that have the nature of health services.

Pronouncing itself on doubts of classification in section 1 or section 2 of article 9 of the VAT Code, the Court of Justice of the European Communities (CJEC), in the Judgment of 10 September 2002, issued in Case C-141/00, relating to the Kügler case (no. 36), showed that subsections b) and c) of section 1 of article 132 of the VAT Directive, although they regulate the exemptions that are applicable to medical care services, have different scopes. While subsection b) – which corresponds to section 2 of article 9 of the VAT Code – exempts the provision of care services provided in hospital environment, including operations closely connected, subsection c) – which corresponds to section 1 of article 9 of the VAT Code – is intended to exempt the provision of medical and paramedical services provided outside these places, whether in the private home of the provider, whether in the home of the patient, whether in any place.

From which it was concluded that the activity of Dentistry/Dental Medicine, exercised in a context different from care services in hospital environment, should be classified under section 1 of article 9 of the VAT Code".

A.1.2. Situation of the Taxpayer

A.1.2.1. Activity Actually Carried Out

The taxable person commenced its activity of provision of health services, in the area of dentistry/dental medicine, on 26/01/2007.

The activity actually carried out by the taxable person consists of the provision of dental medicine and dentistry services performed in a clinic, which is embodied in the performance of medical consultations, treatments and surgical procedures in the field of dental medicine, as well as in the performance of complementary diagnostic examinations connected.

It is emphasized that in no case do the services provided involve the hospitalization or admission of patients. Moreover, as set out in the previous paragraph, the said services provided are not performed in hospital environment.

A.1.2.2. Declaration of Commencement of Activity and Classification in Terms of VAT

A.1.2.2.1. Declaration of Commencement of Activity

The Declaration of Commencement of Activity may be submitted by verbal declaration, made by the taxable person, in accordance with article 35 of the VAT Code, with all the elements necessary for registration of commencement of activity. The said elements are immediately entered in the computer system and confirmed by the declarant, after their printing in a standardized document (Document Evidencing Commencement of Activity).

Thus, at the moment of submission of the Declaration of Commencement of Activity, made by verbal declaration (front-office), there can be no doubts in the taxpayer's sphere regarding its tax classification in terms of the different taxes, nor as to its future obligations arising therefrom.

The taxable person submitted the Declaration of Commencement of Activity, provided in article 31 of the VAT Code (CIVA), through verbal declaration (front-office), on 26/01/2007, at the... Tax Office of Porto (code...).

In the said declaration the taxable person marked, as to the type of operations it would carry out, only the option of "transfers of goods and/or provision of services conferring the right to deduction", not having marked the option "exempt not conferring the right to deduction". Moreover, the taxable person also did not fill in any field in the table "Option for the Regime of Taxation (VAT)", in particular the one referring to the possibility of choosing the waiver of the exemption, provided in sections 1 and 2 of article 12 of the VAT Code.

A.1.2.2.2. Classification in Terms of VAT

As a result of the elements contained in the Declaration of Commencement of Activity referred to in the previous point, in terms of VAT, the taxable person came to be classified under the normal taxation regime, with monthly periodicity, from 26/01/2007 (date of commencement of activity)

As a result of its classification, the taxable person subjected to VAT all operations carried out within the scope of the activity developed and deducted all the tax borne in the acquisition of goods and services.

However, given the activity that the taxable person actually came to develop – dental medicine and dentistry – it should have indicated in the Declaration of Commencement of Activity that it would perform exempt operations, given that this activity is listed in article 9 of the VAT Code, in particular in its section 1.

At best, if the taxable person had the intention to carry out other operations, subject to VAT and exempt from it, it should have marked in the said declaration that it would perform transfers of goods and/or provision of services:

• Conferring the right to deduction,

and,

• Exempt not conferring the right to deduction.

In this latter case, it would be classified as a mixed taxable person, since in the exercise of its activity it would always practice exempt operations not conferring the right to deduction of tax borne, namely dental medicine services.

Moreover, given the activity developed by the taxable person and the environment in which it is performed (outside hospital environment), it could not be classified under section 2 of article 9 of the VAT Code.

A.1.2.2.3. Possibility of Waiver of the Exemption and Exercise of that Right

Should it be admitted, by mere academic hypothesis, without conceding that the provision of dental medicine services were classified under section 2 of article 9 of the VAT Code, there would then be the possibility of being able to waive the exemption provided in subsection b) of section 1 of article 12 of the VAT Code.

Regarding the possibility of waiving the exemption regime, section 1, subsection b) of article 12 of the VAT Code provides that may waive the exemption, choosing the application of tax to their operations "hospital establishments, clinics, dispensaries and similar establishments, not belonging to public law legal persons or to private institutions integrated in the national health system, which carry out the provision of medical and health services and operations closely connected with them"

Thus, the choice for taxation of the operations carried out by the taxable person (which in this case would only be admissible if the same were classified within the scope of section 2 of article 9 of the VAT Code, which is not the understanding of the TCA) would only be possible, if previously such choice was communicated, by means of delivery of the Declaration of Commencement of Activity or of Amendments, as the case may be, always producing effects from the date of its submission.

It is a formal condition enunciated by the legislator as an essential requirement for the taxable person to be able to choose to tax certain operations. In this regard and in this line of guidance there is the following case-law:

(i) Judgment of the Central Administrative Court South, of 22-05-2012 in Case 05235/11 - "The waiver of the exemption, made possible by article 12, section 1 VAT Code, in no circumstance is susceptible of being presumed, so that, if the taxable person does not submit a request/declaration of waiver, it must be submitted to the exemption regime, because, originally, its own",

(ii) Judgment of the Central Administrative Court South, of 21-05-2013, in Case 05447/12 – "Once it waives the exemption, the natural or legal person in question becomes, from the moment of waiver and never retroactively, a normal taxable person, capable of assessing and deducting tax, referring to the taxable facts verified after the date on which it becomes effective the waiver, in the manner common to all persons not exempt and hence the imperious necessity of submission of the identified declaration, the only legal route to activate the functioning of the mechanisms private to the action of VAT.

A.1.2.3. Tax Consequences

The taxable person could not have considered that its activity – dental medicine – would be subject to VAT and not exempt from it, by the same being classified under section 1 of article 9 of the VAT Code.

Thus in the absence of other operations, beyond those carried out within the scope of the activity of dental medicine (operations exempt under section 1 of article 9 of the VAT Code), with reference to the years 2011 and 2012, this implies the non-acceptance of all VAT deducted, as provided in section 1 of article 20 of the VAT Code".

k. on 2016-04-21 the Claimant submitted an administrative appeal to the respective tax offices against the assessments from the SIT report which was assigned no... of the Tax Directorate of Porto;

l. on 2016-07-18, the Claimant was notified of Official Letter no. 2016..., of the draft Tax Inspection Report, and to exercise the respective right of hearing;

m- by official letter 2016..., dated 2016-08-31, the Claimant was notified of the dismissal of the administrative appeal sanctioned by order of 2016-08-29;

n- the Claimant proceeded to full payment of the tax resulting from the assessments.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts established as not proven.

A.3. Grounds for the Matter Established as Proven and Not Proven

Regarding the matter of fact, the tribunal does not have to pronounce itself on everything that was alleged by the parties, it being incumbent upon it, rather, the duty to select the facts that matter to the decision, to discriminate the matter proven from not proven [( see art. 123, section 2 of the TCPT and article 607, section 3 of the Code of Tax Procedure and Process, applicable, ex vi article 29, section 1, subsections a) and e) of the LRAT)].

In this way, the facts relevant to the judgment of the case are chosen and shaped according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of law, (see article 596 of the CPC. applicable ex vi of article 29, section 1, subsections e) of the LRAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence attached to the file and the PA annexed, the facts listed above are considered proven with relevance to the decision.

B – MATTER OF LAW

Before we address the central question which the present proceedings convoke, a brief incursion into the normative and jurisprudential framework that underlies it is necessary (exemptions in VAT, waiver of exemption)

• exemptions in VAT

It seems appropriate to emphasize that the concept of exemption, being not alien to interpretative difficulties of various and complex order, is distinct from that of non-incidence of tax, following the conceptualization proposed by Alberto Xavier in the sense that non-incidence "results from the non-occurrence of a positive element of the legal type of the taxable event or the occurrence of a negative element of it", while in exemption "notwithstanding the taxable event having occurred in all its elements, the constitutive efficacy of this is originally paralyzed by the occurrence of another fact to which the law attributes this imperative efficacy".

In the domestic legal framework article 9 of the VAT Code states the list of "exemptions in internal operations" and before the usual systematic and normative proposal, exemptions in the mode of incomplete, simple or partial, (in contrast with complete or total exemptions), pursuant to which the right to deduction of VAT borne is not conferred, amounting to saying that in these exemptions the passive subject beneficiary does not assess tax in its active operations, but does not have the right to deduct VAT borne for their realization.

In this type of exemptions it can be stated that the chain of deductions is broken, since the exempt operator cannot deduct the tax borne upstream, being able to speak of a "hidden tax" meaning with this that the tax borne by the operator for the realization of its activity (inputs), not being able to be deducted, will tend to be incorporated, tendentially, in the value of the goods or services, thus placing in crisis the neutrality of tax on added value, as one of its fundamental and distinctive characteristics of other taxes.

The exemptions in internal operations provided in article 9 of the VAT Code, and for what matters here, transpose article 132 of Council Directive 2006/112/EC of 28 November 2006, in that "Member States shall exempt the following operations";

"b) Hospital and medical care, and also operations closely related to them, provided by public law bodies or, in conditions socially similar to those applying to the latter, by hospital establishments, medical care and diagnostic centres and other establishments of the same nature duly recognized";

"c) The provision of assistance services within the framework of the exercise of medical and paramedical professions, as defined by the Member State concerned".

For their part, articles 9 and 12 of the VAT Code establish the following:

Article 9

Exemptions in Internal Operations

The following are exempt from tax:

1. The provision of services carried out in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions;

2. The provision of medical and health services and operations strictly connected with them carried out by hospital establishments, clinics, dispensaries and similar establishments.

Article 12

Waiver of Exemption

1. May waive the exemption, choosing the application of tax to their operations:

(…)

b) Hospital establishments, clinics, dispensaries and similar establishments, not belonging to public law legal persons or to private institutions integrated in the national health system, which carry out the provision of medical and health services and operations closely connected with them.

1. The right to choose is exercised by means of submission, at any tax office or other legally authorized place, of the declaration of commencement or amendments, as the case may be, producing effects from the date of its submission.

2. Having exercised the right to choose in accordance with the above sections, the taxable person is obliged to remain in the regime for which it chose for a period of at least five years, and, upon expiration of such period, if it wishes to return to the exemption regime;

a) Submit, during the month of January of one of the years following that in which it has completed the period of the chosen regime, the declaration referred to in article 32, which produces effects from 1 January of the year of its submission;

b) Subject to taxation the remaining inventories and proceed, in accordance with section 5 of article 24, to the regularization of deduction regarding assets of the fixed assets"

The grounds for the exemptions, which some of those enumerated in article 9 of the VAT Code present, have to do with "certain activities of general interest", underlying "a set of internal exemptions which are motivated by reasons of economic and social order, aiming to promote the access and consumption of what is usually called merit goods"[1], with particular interest, and for what matters to us, of significant social relevance, the exemptions relating to the exercise of functions of "doctor, dentist, midwife, nurse and other paramedical professions", whether practiced by "hospital establishments, clinics, dispensaries and similar establishments" (section 2 of article 9), or outside them (section 1 of the same article).

Such exemptions pertain to "activities that have the objective of diagnosing, treating and if possible curing diseases or anomalies of health".[2].

It is also important to note, in the synopsis of the normative framework, that the Code of Tax on Added Value (VAT Code) which came into force on 01 January 1986 corresponds in its rules to the transposition of the commonly designated Sixth EEC Directive (Directive 77/388/EEC) of the Council, of 17 May 1977, a directive subsequently repealed by Directive 2006/112/EC, usually referred to as the VAT Directive (VAT Directive), of 28/11/2006, relating to the common system of tax on added value, which reformulated the text of the Sixth Directive in essentially formal terms.

It will thus prove to be of central relevance to invoke in light of the VAT Directive, albeit perfunctorily, some aspects related to exemptions, their objective character and their interpretation, which have been carried out in the case-law of the Court of Justice of the European Union (CJEU).

For this purpose, we follow, closely following the laborious and exhaustive analysis carried out by Sérgio Vasques, (in his recent work already cited), starting, from the outset, with the principle "that the rules of exemption possess an exceptional character in the context of VAT, and should therefore be interpreted in a strict manner i.e., literally, with extensive interpretation or by analogy being prohibited."

Such interpretation of exemption norms, reiterated several times in CJEU case-law, takes into account the circumstance that, being VAT a general tax on consumption, "it is subject to a principle of generality, and should tend to apply to all goods and services, reason why the rules of exemption, entorse that they are to the generality of tax, must be "expressed and precise"[3].

Notwithstanding the reiterated reaffirmation of the CJEU as to the qualification of exemption norms, as of an exceptional character, excluding their extensive interpretation or analogy,[4] the fact is that the CJEU has "tempered" such interpretation in the sense that "this strict interpretation is not confused with a restrictive interpretation and that the VAT Directive exemption rules should not be interpreted in a manner that would "deprive them of their effects"[5], amounting to saying that the purposive element has served for the CJEU to fix the meaning of the VAT exemption rules, observed that the limits determined by its literal element are observed.

Beyond the literal and purposive elements and as Sérgio Vasques informs us (work and location cited) "the tribunal [CJEU] has also paid attention, to a greater or lesser extent, to the historical element, seeking in many cases to look at the origin and evolution of the exemption rules to fix their meaning", concluding also the author that "also the systematic element has served in many cases for the CJEU to fix the meaning of the exemption rules provided in the VAT Directive".

Being the provision of health services at issue, this will be exempt from tax insofar as it falls within the norm transcribed. The application of the exemption, when conditions are met, is mandatory.

Considering that with respect to the concept of medical services provision, the understanding of the CJEU, in particular in the Judgment of 14.09.2000, Case C-384/98, is that those consisting of providing assistance to persons, diagnosing and treating a disease or any anomaly of health are considered as such.

Similarly, in the Judgment of 10.06.2010, of the same CJEU, in Case C-262/08, activities aimed at preventing, avoiding or preventing a disease, injury or anomalies of health, or detecting latent or incipient diseases are considered to have the nature of medical services provision.

Now, the Claimant provides, in a clinic – and not in any other place -, dental medicine and dentistry services, and also performs complementary diagnostic examinations there, so it benefits from the mandatory exemption provided in section 2 of article 9 of the VAT Code.

Its activity is classifiable under section 2 and not under section 1, since the latter refers to the provision of services outside hospital environment, and the Claimant provides its services in an establishment - clinic - specifically dedicated (and, necessarily, equipped) to this provision, and not in any other place, namely, in the home of the doctor or technician or in that of the patient.

The fact that the services provided by the Claimant are provided in an ambulatory regime, not including, in any case, hospital admission, is irrelevant, since such admission is neither a requirement of community law nor of national law – in particular, it is not a factor of exclusion of the provision of section 2 of article 9 of the VAT Code or of inclusion in that of section 1.

• waiver of exemption

As has been seen, the exemptions enumerated in article 9 of the VAT Code assume (for various reasons) a mandatory character, with their waiver being admitted solely in the situations provided in article 12 of the statute, with the objective of avoiding the penalizing effects of these exemptions. That is, they may be taxed by express choice of the taxable person the operations provided for there.

For what matters here, subsection b) of section 1 of the noted norm determines:

ARTICLE 12

Waiver of Exemption

1. May waive the exemption, choosing the application of tax to their operations;

(…)

b) Hospital establishments, clinics, dispensaries and similar establishments, not belonging to public law legal persons or to private institutions integrated in the national health system, which carry out the provision of medical and health services and operations closely connected with them"

The waiver of VAT exemption will be materialized and produces effects with the submission of a declaration of amendments. This choice of waiver obliges the taxable person to remain in the general regime for a minimum period of five years.

It is important to consider the tax regularizations provided in article 25 of the VAT Code, a norm which refers to the change from an exemption regime to a general taxation regime.

From the moment when the taxable person submits a declaration of amendments, mentioning the intention to be classified in a general taxation regime, it must naturally proceed to the assessment of tax in the operations carried out by it, in particular subsidies, insofar as these are covered by subsection c) of section 5 of article 16 of the VAT Code.

And, thus,

• If the taxable person waived the exemption provided in article 9 of the VAT Code and, consequently, assesses VAT for the said services, the VAT borne for the realization of the operations in question is deductible;

• If the taxable person did not waive the exemption provided in article 9 of the VAT Code and, consequently, does not assess VAT for the said services, the VAT borne for the realization of the operations in question is not deductible, in accordance with article 20 of the VAT Code.

If the entity in question chose to waive the said exemption, having proceeded to the submission of the declaration of amendments, it must proceed to the assessment of VAT (fields 3 and 4 of table 06 of the Periodic Declaration).

Now, in the case, the Claimant not only did not waive the exemption of which it enjoys at the time of the declaration of commencement of activity as it did not do so at any later time – see section 2 of article 12 of the VAT Code.

This notwithstanding being in a position to waive the exemption, since it is a clinic not belonging to a public law legal person or to a private institution integrated in the national health system, which carries out the provision of medical services and operations closely connected with them, in accordance with subsection b) of section 1 of the cited article 12.

However, in the declaration of commencement of activity, the Claimant did not choose to waive the exemption, as the Respondent notes, nor is there any notice that, at any other time, it submitted a declaration of amendments.

And it should not be said that it did not have to do so: community law, in not expressly providing the manner in which the choice for waiver of exemption should be made, left to internal laws space to dispose on such matter, as can be read in section 2 of article 137 of the VAT Directive – although, here, the provision does not deal with the provision of health care.

In the case of Portuguese law, that space was occupied through article 12 of the VAT Code, which does not contain a regime inappropriate to the objectives of the collection and control of VAT, nor disproportionate, nor excessively onerous for taxpayers, in a manner that would hinder its choice.

The principle of fiscal neutrality that informs VAT is not affected, nor are those of proportionality and effectiveness breached.

In brief, the fact that the Claimant meets the substantive requirements to be able to choose to waive the exemption did not result in such choice operating automatically, in the absence of fulfillment of the formal requirements that national law legitimately and reasonably imposes.

And, thus, the action of the TCA does not appear to be contrary to law, deserving of censure neither the acts of assessment nor the act of dismissal of the administrative appeal here questioned. This entails the failure of the request for compensatory interest formulated by the Claimant.

Two complementary observations, for better clarification of what is decided here:

For anyone who perhaps understands that the TCA based itself on the understanding, and only on it, now considered erroneous, that the activity of the Claimant falls within the provision of section 1 of article 9 of the VAT Code, and not in that of section 1 – an understanding that is far from corresponding to reality -, nor for this reason could the decision be other, since the principle of the utilization of administrative acts imposed the same decision, since compliance with the law, correctly interpreted and applied, inevitably would lead to the solution adopted.

The second observation concerns the previous decision of CAAD issued in proceedings no. 782/2015-T, invoked by the Claimant. This arbitral tribunal did not ignore the command of article 8, section 3 of the Civil Code; the discrepancy does not result from diverse interpretation and application of the law, but from the same law having been applied to different factual contexts in the two proceedings, as evidenced by the respective comparison.

V - DECISION

In accordance with and for the reasons set out, it is decided:

• To judge the Claimant's request to be entirely without merit;

• To condemn it to the costs of the process, which are fixed at €4,284.00;

• To set the value of the process at €234,573.57, in accordance with the terms established in articles 296, sections 1 and 2 of the Code of Civil Procedure, approved by Law no. 41/2013, of 26 June, 97 A, section 1, subsection a) of the Code of Tax Procedure and Process, and article 3, section 2 of the Regulation of Costs in Tax Arbitration Proceedings.

Notify.

Lisbon, 28 June 2017.

The arbitrators,

(José Baeta de Queiroz)

(José Coutinho Pires)

(Hugo Freire Gomes)

Text prepared by computer, in accordance with the terms of article 131 of the Code of Civil Procedure, applicable by reference of article 29, section 1, subsection e) of the Legal Regime for Tax Arbitration, with blank lines, and revised by the arbitrators.

The drafting of the present decision is governed by the spelling prior to the Orthographic Agreement of 1990, except as regards the transcriptions made.

[1] Sérgio Vasques, "Tax on Added Value", Almedina, 2015, pages 316 et seq.

[2] Rui Laires, AAVV, VAT Code and RITI, Notes and Comments, coordinated by Clotilde Celorico Palma and António Carlos dos Santos, Almedina, 2014, page 124.

[3] Judgment CJEU, Commission v. Netherlands, C-235/85, 26.03.1987

[4] Judgment Copygene, of 13 June 2008, case C-262/08.

[5] Sérgio Vasques, work cited, page 327 et seq