VAT Deduction Rights Dispute: Credit Notes, Formal Requirements & Partial Deduction (CAAD 705/2016-T)

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Cristina Coisinha and João Cruz, appointed by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, agree:

I – REPORT

On 28 November 2016, A..., S.A., NIPC..., with registered office in ..., ... ..., no.... ... - ... Estoril, filed a petition for the constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework of 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 following VAT assessment acts:

and of the following assessments of compensatory interest:

as well as the decisions partially denying the gracious claim and the hierarchical appeal which had these as their subject matter, in the amount of €63,993.02.

To support its petition, the Applicant alleges, in summary:

• insufficient grounds for the assessment acts;

• omission of essential legal formalities;

• incompetence of the author of the acts, by violation of the provisions of article 82(6) of the VAT Code;

• corrections relating to the regularization of VAT resulting from the issuance of credit notes, without compliance with the formalities required by article 78(5) of the VAT Code, are based on a circular letter and a response to a binding ruling, but with no legal support;

• notwithstanding having deducted all VAT in January 2009, it regularized the situation through recognition of non-deductible VAT (13%) relating to period 200901 as an expense of the financial year and its respective accounting in POC account ...;

• the prerequisites for exclusion of the right to deduction are not met, in accordance with article 21(1)(d) of the VAT Code, as applied in the contested corrections, contained in section III.1.3.3 of the Inspection Report;

• the absence of date and place of service provision in certain invoices referred to in section III.1.3.4 of the Inspection Report shall not justify the exclusion of the right to deduct the VAT contained therein, in accordance with article 36(5)(f) of the VAT Code, as the Tax Authority understood;

• invoices nos. ... and ..., issued on 2 September and 23 October 2009, respectively, by B..., contain VAT borne and deductible by the APPLICANT, at the provisional deduction percentage it applied in the 2009 financial year (87%);

• there was duplication of regularization of VAT deducted in January 2009, in the amount of €2,745.86, arising from the determination of the definitive deduction percentage it made, as it regularized the tax deducted in excess throughout that year;

• illegality of the assessment of compensatory interest;

• illegality of the decision that denied the hierarchical appeal.

On 29-11-2016, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Applicant did not appoint an arbitrator, and therefore, pursuant to the provisions of article 6(2)(a) and article 11(1)(a) of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 25-01-2017, the parties were notified of these appointments and did not manifest any wish to refuse any of them.

In accordance with the provision of article 11(1)(c) of the RJAT, the collective Arbitral Tribunal was constituted on 09-02-2017.

On 16-03-2017, the Respondent, duly notified for such purpose, filed its answer, defending itself solely through objection.

On 19-05-2017, the hearing referred to in article 18 of the RJAT took place, where a witness presented by the Applicant was examined.

Having been granted a period for the submission of written arguments, these were presented by the parties, pronouncing on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the issuance of the final decision, after the submission of arguments by the Respondent.

Taking into account the judicial recess period and the provision of article 17-A of the RJAT, the period set out in article 21(1) of the RJAT was extended by two months, in accordance with the provision of n. 2 of this latter rule.

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

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March.

The proceedings contain no nullities.

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

All matters considered, it is necessary to render a decision.

II. DECISION

A. STATEMENT OF FACTS

A.1. Facts Deemed Proven

The APPLICANT is a commercial company with predominantly public capital, constituted in the form of a joint-stock company.

With a view to analyzing the tax situation of the APPLICANT, the Tax Authority initiated a tax inspection procedure, external in scope and of general ambit, with incidence on the 2009 financial year, authorized by Service Order no. OI2O11..., of 1 July 2011, which resulted in corrections to taxable matter and corrections to the calculation of corporate income tax.

The Conclusions of the Tax Inspection Report, drawn up after the right to prior hearing had been afforded, were notified to the APPLICANT through letter no. ..., of 19 February 2013.

Regarding VAT matters, the Inspection Report contains the following:

[details of VAT corrections in table format]

The suggested corrections were summarized, in the Inspection Report, in the following table:

[summary table]

Following the Tax Inspection Report referred to, the assessments that are the subject matter of the present arbitral action were issued, with the following voluntary payment periods:

[assessment details]

as well as the notices of assessment relating to compensatory interest, in which its reason and quantification appear, the tax on which the interest accrues, the period to which it refers, the applicable interest rate and the amount of interest due.

The Applicant, on 17-07-2013, filed a gracious claim regarding the aforementioned assessments, which was partially granted, regarding a calculation error in the VAT determined in the period 2009/07, in the following terms:

[details of partial grant]

The decision on the gracious claim was received by the Applicant on 25/09/2015.

On 23/10/2015, the Applicant filed a hierarchical appeal of the aforementioned gracious claim decision, which was denied by a decision notified on 08/09/2016.

During the inspection procedure, the Applicant, regarding the credit notes referred to in section III.1.3.1 of the Inspection Report, presented the following documentation:

• Regarding credit note no. ..., registered letter with return receipt, addressed to the supplier, on 21-09-2011, returned to sender on 03-10-2011, requesting confirmation of receipt of the credit note;

• Regarding credit note no. 107, duplicate of the credit note signed by "C...";

THE APPLICANT proceeded to attach the following documentation, within the scope of the initial petition of the Gracious Claim filed, regarding the credit notes referred to in section III.1.3.1 of the Inspection Report:

• Regarding credit note no. 91, duplicate of the credit note in question, with an illegible signature under the date "30-03-2009";

• Regarding credit note no. ..., duplicate of the credit note signed by "C...", registered letter with return receipt, addressed to the supplier, on 21-09-2011, with the return receipt signed on 23/09/2011, requesting confirmation of receipt of the credit note, this confirmation being signed by "C...";

• Regarding credit note no. ..., duplicate of the credit note in question, with a signature by "D..." with illegible surname under the supplier's stamp.

The Applicant, in the 2009 financial year, made the deduction of VAT borne in acquisitions of goods and services based on the pro rata method, using for such purpose a provisional value corresponding to the definitive pro rata of the previous year (87%), having deducted the VAT borne in accordance therewith, throughout the 2009 financial year, in its periodic declarations.

With regard to January 2009, the APPLICANT deducted all the VAT borne in its acquisitions during that period, in the total amount of €6,864.61.

The Applicant accounted for as an expense of the financial year, in POC account ..., as non-deductible VAT, 13% of the total VAT borne relating to period 200901.

After determination of the definitive deduction percentage (47%), the APPLICANT regularized all the tax deducted throughout the 2009 financial year, in favor of the State, in the amount of €361,578.96.

The invoices ..., ... and ... relate to expenses related to meals, including those of the Applicant's customers, participants in various initiatives of the latter, judges and reporters responsible for covering events, with a view to promoting tourism in Estoril and the remaining geographic area of intervention of the APPLICANT.

Following the conclusion of a protocol on 18 September 2007, between the Municipality of Cascais, the APPLICANT and B..., it was agreed that the event ... would be held in the years 2007, 2008 and 2009 in the Municipality of Cascais.

Within the scope of such protocol, the Applicant granted financial support to B... for the realization of the referred initiative.

It is to these supports that entries 70 and 27 in journal 4 relate, concerning the invoices nos. ... and ..., issued on 2 September and 23 October 2009, respectively, by B...

In the referred invoices there is no mention of "VAT included", nor is any amount relating to that tax discriminated, with the mention "VAT at 20%" appearing.

The APPLICANT accounted for the referred invoices, having recognized as expenses:

• €250,000.00 (€125,000.00 + €125,000.00) in account 62.1 (subcontracting); and,

• €6,500.00 (€3,250.00 + €3,250.00) in account 63.1.2.99 (pro rata VAT)

The Applicant deducted the VAT calculated "on the inside", in the amount of €21,750.00, in each tax period (in a total amount of €43,500.00), corresponding to the percentage it considered deductible of the VAT, based on the pro rata it applied (87%).

Since the assessment acts that are the subject matter of the present arbitral process were not paid within the respective voluntary payment period, fiscal enforcement proceedings no. ...2013..., were instituted for coercive collection thereof.

On 24 April 2013, the APPLICANT provided security, which consisted of a voluntary mortgage on real property, in the amount of €805,286.62, which includes the amount relating to the debt of Value Added Tax and Compensatory Interest, relating to the year 2009.

This security was subsequently increased, through the constitution, on 26 June 2013, of a new voluntary mortgage on the same real property.

A.2. Facts Deemed Not Proven

1- That the invoices referred to in section 16 of the facts deemed proven relate exclusively to meals for the persons indicated in that section.

A.3. Substantiation of the Proven and Not Proven Facts

With respect to the statement of facts, the Tribunal need not pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish proven from unproven matters (see article 123(2) of the Tax Procedure and Process Code and article 607(3) of the Civil Procedure Code, applicable ex vi article 29(1)(a) and (e) of the RJAT).

Thus, the facts pertinent to the trial of the case are chosen and defined in terms of their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (see former article 511(1) of the Civil Procedure Code, corresponding to current article 596, applicable ex vi article 29(1)(e) of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110(7) of the Tax Procedure and Process Code, the documentary evidence and the facts joined to the record, the facts listed above were considered proven, with relevance to the decision, taking into account that, as was written in the Court Decision of the Tax Court of South [Tribunal da Relação de Cascais—Secção de Direito Tributário] of 26-06-2014, issued in proceedings 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

In particular, the fact deemed proven in section 16, as well as the fact deemed not proven, result from the witness testimony produced, which left no doubt that the meals to which the invoices in question relate were connected with events and with the activity of the Applicant, and that the persons indicated there would have been covered by the expenses contained in those same invoices, but it did not demonstrate nor express direct and well-founded knowledge to the effect that only those persons benefited from the expenses in question.

Allegations made by the parties and presented as facts, consisting of strictly conclusive statements not susceptible of proof and whose veracity must be assessed in relation to the concrete statement of facts consolidated above, were neither deemed proven nor not proven.

B. LAW

On the defect of substantiation

The Applicant begins by arguing the lack of substantiation of the assessments that are the subject matter of the present arbitral action, stating that "in the assessment acts notified, the grounds that determined their issuance are not explicitly stated, only a set of values being indicated that is imperceptible to a normal recipient and also to the Applicant", and that "they do not allow knowing the cognitive itinerary that underlies them, and are thus tainted with a defect of violation of law, in accordance with the provision of article 268(3) of the Constitution of the Portuguese Republic and article 77 of the General Tax Law".

Furthermore, the Applicant states that "there is no reference to any possible explicit reference to a concrete external document", that "in cases where substantiation by reference is admitted, such reference must be express, so that the substantiation is as accessible to the taxpayer as if it were contained in the act itself", that "in the assessment acts that also form part of the subject matter of the present Arbitral Petition, there is no express, or implicit, reference to the Inspection Report Conclusions or any other concrete document", and therefore "the contested assessment acts are not substantiated in the terms legally required, imposing their annulment for violation of the provisions of articles 103(2), 268(3) of the Constitution of the Portuguese Republic and 77 of the General Tax Law".

As is well known, and both parties acknowledge it, substantiation is a requirement of tax acts in general, being a constitutional requirement (article 268 of the Constitution) and legal requirement (article 77 of the General Tax Law).

In summary, it can be said that it is now established in both domestic doctrine and jurisprudence that the required substantiation must have the following characteristics:

• Officiousiness: must always proceed from the initiative of the administration, not being permissible substantiations at request;

• Contemporaneity: must be coeval with the practice of the act, not being possible to have deferred substantiations;

• Clarity: must be comprehensible by a reasonable recipient, avoiding polysemous or deeply technical concepts;

• Completeness: must contain all essential elements that were determinative of the decision taken. This characteristic unfolds into two requirements, namely: the duty of justification (legal norms and factuality – domain of legality) and of motivation (domain of discretion or opportunity, when assessment is required).

Now, if substantiation is, as referred to, necessary and mandatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the substantiation required of a concrete tax act must be that which is functionally necessary so that it does not present itself to the taxpayer as a mere demonstration of arbitrariness. This should be – it is believed – the touchstone for compliance with the duty of substantiation: to what extent, before a reasonable recipient placed in the position of the actual recipient, the tax act presents itself, from a standpoint of reasonableness, as a product of pure administrative arbitrariness, by not being able to discern the grounds of fact and/or law on which it rests, the act will suffer from lack of substantiation.

Article 77(1) of the General Tax Law thus states: "The decision of a procedure is always substantiated by means of a succinct exposition of the grounds of fact and law that motivated it, and the substantiation may consist of a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those comprising the tax inspection report."

Descending to the concrete case, it is verified that the assessment acts in question occurred following an inspection act and in accordance with the homologated tax inspection report by decision, which report contains the grounds for the assessments in question, which the Applicant, since the gracious claim, has demonstrated to understand, taking, in a well-founded manner, the decision not to accept.

Moreover, the Applicant itself ends up conceding precisely this – at least implicitly – by arguing, also since the gracious claim, that the reference to the inspection report should be explicit.

However, this understanding is, from the outset, contradicted by the Decision of the Supreme Administrative Court of 19-05-2004, issued in proceedings 0228/03, which states that "Substantiation presented after the practice of the act does not count as substantiation, nor does that contained in previous instructional documents to which no express or implicit reference has been made." Thus admitting that the reference may be implicit, that is, arising from the context of the act itself or from which it emerges.

In this same sense, the jurisprudence of the Supreme Administrative Court is oriented, which considers that "Despite the absence of express indication of the applicable legal provision, the required substantiation of law of the tax act will be sufficient with the reference to pertinent legal principles, to the applicable legal regime or to a determined normative framework, provided that, in any case, one can conclude that these were known or cognoscible by a reasonable recipient placed in the concrete position of the actual recipient." and that "The legal and constitutional requirement of substantiation of the tax act, arising from articles 268 of the Constitution, 77 of the General Tax Law and 125 of the Administrative Procedure Code, aims primarily to allow interested parties to know the reasons that led the Administration to act, in order to enable them a conscious choice between accepting the legality of the act and its judicial impugnation."

Thus, it is understood that, considered the concrete context in which the assessment acts in question in the present record were produced, it will be perceptible, for a reasonable recipient placed in the position of the actual recipient, that the grounds thereof are those contained in the inspection report that preceded them, being certain that it is more evident that the Applicant understood precisely this.

This, moreover, has been the judgment of our superior courts in analogous cases, and reference can be made in this regard to the Decisions of the Supreme Administrative Court of 10-09-2014, issued in proceedings 01226/13, of the Tax Court of the North of 13-09-2012, issued in proceedings 00334/05.8BEBRG, and of the Tax Court of the South of 23-05-2006, issued in proceedings 01156/06.

Thus, and in this manner, there will be nothing to censure, from the standpoint of the duty of substantiation, in the tax acts that are the subject matter of the present proceeding.

On the omission of essential legal formalities

Regarding this matter, the Applicant argues, in summary, that it was not "notified in accordance with the provisions of article 60(1)(a) of the General Tax Law".

However, and as is evident from the facts deemed proven, the fact is that the Applicant was notified to exercise its right to prior hearing, which it did, within the scope of the inspection procedure from which resulted the assessments against which it objects.

Thus, and taking into account the provision of article 60(3) of the General Tax Law, the hearing of the Applicant was dispensed with before the assessment, and therefore this defect should also be deemed not verified.

On the incompetence of the author of the acts

The Applicant also raises the issue of incompetence of the author of the acts, by violation of the provision of article 82(6) of the VAT Code.

The Applicant bases this allegation on the circumstance that the wording of article 82 of the VAT Code, as given by article 2 of Decree-Law no. 102/2008, of 20 June, which conferred competence for assessment to the Tax Authority, was approved under the authorization granted by Law no. 67-A/2007, which was published on 31 December 2007 and was valid until 30 March 2008.

In the Applicant's view, therefore, that Decree-Law no. 102/2008, of 20 June, would have been published after the respective legislative authorization had expired.

However, as the Respondent correctly points out, "Decree-Law 102/2008, of 20 June, was approved on 27.03.2008 in the Council of Ministers, therefore within the period set by the authorization law".

Now, as referred to by the Constitutional Court, in Decision no. 206/94, of 2 March, also cited by the Respondent, "The moment relevant to determining whether a legislative authorization was used during its period of validity is that of approval in the Council of Ministers of the authorized diploma", and "The Constitutional Court has already established jurisprudence, in both its sections in a unanimous manner, on the moment to be considered to determine whether the authorized diploma was drawn up during the period of validity of the corresponding legislative authorization. While it is abstractly sustainable that the relevant moment could be that of approval in the Council of Ministers, that of sending to the President of the Republic for ratification, that of ratification, that of referral, or that of publication, the Court considered that the moment to be considered should be that of approval in the Council of Ministers of the authorized diploma."

Therefore, this defect should also fail.

On violations of law

In substantive terms, the Applicant contests the assessments that are the subject matter of the present arbitral action, beginning by arguing that the corrections relating to the regularization of VAT resulting from the issuance of credit notes, without compliance with the formalities required by article 78(5) of the VAT Code, are based on a circular letter and a response to a binding ruling, but without any legal support, alleging that "being administrative instructions, even though one of them (circular letter) translates a generic instruction, it produces no effects outside the Service from which it emanates, not binding or imposing any duty on taxpayers", "the assessment acts by being sustained (always without granting) by mere administrative instructions do not appear substantiated in appropriate terms and violate the provisions of articles 103(2) of the Constitution of the Portuguese Republic and 8 of the General Tax Law".

The Applicant further understands that the burden of proof of non-fulfillment of the prerequisites provided for in article 78(5) of the VAT Code lies with the Tax Authority, which, in any case, has demonstrated the fulfillment of those prerequisites, and that "the tax administration was required to conduct all necessary inquiries to determine the material truth, thereby ensuring legality, justice, impartiality and public interest, all principles constitutionally enshrined in articles 8(2), 103(3), 266(1) of the Constitution of the Portuguese Republic, articles 55 and 58 of the General Tax Law, articles 13 and 114 of the Tax Procedure and Process Code".

Regarding the use in the Inspection Report of a circular letter and a binding ruling, as referred to by the Constitutional Court in its Decision 42/2014:

"we do not find grounds to affirm the parametric significance of the normative sense adopted by the Tax Administration and contained in the referred circular, in terms of supporting the formation of binding effects on individuals – which is not confused with its irrelevance in the formation of taxpayers' will, nor with reinforced persuasive force, by virtue of the executive privileges granted to the Administration – and, especially, which constitute a criterion or normative standard shaping the jurisdictional action of Courts, when called upon to assess disputes in its respective field of regulation (see Jorge Miranda, Constitutional Law Manual, Volume V, 4th edition, 2010, p. 226). This has also been the understanding adopted by the Supreme Administrative Court, of which examples are Decisions of 16/01/2002, issued in proceedings no. 26638, and 7/07/2004, issued in proceedings no. 1784/03 (both available at www.dgsi.pt), equally marking other legal systems, such as the German and Italian (thus, João Taborda da Gama, cited work, p. 161, note 8, and Ana Paula Dourado, cited work, pp. 726, note 2178, and 727)."

Also in Decision 583/2009 of the same Court, it was written that:

"Since Decision no. 26/85 (published in the Official Journal, II Series, of 26 April 1985) the Constitutional Court, with a view to proceeding to the identification of the appropriate subject matter of constitutionality review proceedings, has been adopting a concept of norm functionally adequate to the control system that the Constitution entrusts to it. This concept of norm includes acts of public power that contain a 'rule of conduct' for individuals or for the Administration, a 'criterion of decision' for the latter or for the judge or, in general, a 'standard for the assessment of conduct'. But, as it is a concept of control finalistically directed to ensure the protection system typical of the constitutional democratic rule of law that is at issue, it is not enough that the instrument in question binds the Administration to adopt, in the practice of individual and concrete acts of application and while it does not alter it, a determined criterion that it has established. It is necessary that this criterion be endowed with binding force also for the other subject of the relationship (heteronomous normativity) and constitute a parameter that the judge cannot fail to consider while he has not made an instrumental judgment of invalidity thereon. If the 'criterion of decision' is of administrative origin and only binds within the administrative service from which it emanates, there is no need for the type of legal protection and affirmation of the supremacy of the Constitution that justifies the intervention of the Constitutional Court.

Now, a problem frequently raised in tax law is that of the normative relevance of the so-called administrative guidelines. It is, as says Casalta Nabais, Tax Law, 5th ed., p. 201 (although affirming that this does not deprive them of the quality of legal norms):

"[…] internal regulations which, by having only the tax administration as addressee, only this owes them obedience, being therefore mandatory only for organs situationally below the organ author of the same.

Therefore they are not binding either for individuals or for courts. And this whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating methods of work or modes of action, whether they are interpretative regulations, which proceed to the interpretation of legal (or regulatory) provisions.

It is true that they densify, clarify or develop the legal provisions, previously defining the content of the acts to be performed by the tax administration upon their application. But this does not convert them into a standard of validity of the acts they support. In fact, the assessment of the legality of acts of the tax administration should be effected through direct confrontation with the corresponding legal norm and not with the internal regulation, which has been interposed between the norm and the act".

These acts, in which "circulars" stand out, emanate from the power of self-organization and the hierarchical power of the Administration. They contain generic orders of service and it is for this reason and only within its respective subjective scope (of the hierarchical relationship) that they have assured observance. They incorporate guidelines for future action, transmitted in writing to all subordinates of the administrative authority that issued them. They are modes of standardized decision, assumed to rationalize and simplify the functioning of the services. Although they may indirectly protect the legal certainty of taxpayers and ensure equality of treatment through uniform application of the law, they do not regulate the matter they concern in confrontation with these, nor do they constitute a rule of decision for the courts.

The fact that the Tax Administration is bound (n. 1 of article 68-A of the General Tax Law) by the generic guidelines contained in circulars that are in force at the time of the tax event and has the duty to proceed with the conversion of binding rulings or other types of understanding provided to taxpayers into administrative circulars, in certain circumstances (n. 3 of article 68 of the General Tax Law), does not alter this perspective because it does not transform that content into a norm with external effect. It is true that the administrated party may invoke, in confrontation with the administration, the content of the publicized administrative guidance and, if the case may be, assert it before the courts, even with sacrifice of the principle of legality (see Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law, commented and annotated, 3rd ed., p. 344). But it is under the principle of good faith and legal certainty, not because of its normative value, that the content of the circulars prevails. The administrated party only accepts them if and insofar as it suits them, for the same reasons that justify that they may invoke individual binding rulings that favor them (article 59(3)(e) and article 68 of the General Tax Law).

Consequently, lacking heteronomous binding force for individuals and not imposing itself on the judge except by the doctrinal value they may possess, the prescriptions contained in the "circulars" of the Tax Administration do not constitute norms for purposes of the constitutionality review system of the Constitutional Court's competence."

Also the Supreme Administrative Court has considered that these are acts which "are not binding either for individuals or for courts. And this whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating methods of work or modes of action, whether they are interpretative regulations, which proceed to the interpretation of legal (or regulatory) provisions.

It is true that they densify, clarify or develop the legal provisions, previously defining the content of the acts to be performed by the tax administration upon their application. But this does not convert them into a standard of validity of the acts they support. In fact, the assessment of the legality of acts of the tax administration should be effected through direct confrontation with the corresponding legal norm and not with the internal regulation, which has been interposed between the norm and the act."

That is, and in summary, "lacking heteronomous binding force for individuals and not imposing itself on the judge except by the doctrinal value they may possess," the abstract legality or illegality of circular letters or binding rulings will not, by itself, repercuss on the acts (tax, in the case) performed based on them.

Rather, the acts themselves will be legal or illegal, depending on whether the Law has, or has not, been correctly applied in the respective concrete case, and this regardless of whether this application results – or not – from circular letters or binding rulings, and of whether these make, or not, a correct (abstract) interpretation of the Law.

The circular letters or binding rulings will thus form part of the substantiation of the tax act, which, regardless of the accuracy thereof, should be deemed substantiated in appropriate terms, with no violation of the provisions of articles 103(2) of the Constitution of the Portuguese Republic and 8 of the General Tax Law.

Thus, it will have to be verified whether the interpretation arising from the circular letter and/or binding ruling and applied in the tax act in question is, in concrete, illegal.

Regarding the Applicant's position that the burden of proof of non-fulfillment of the prerequisites provided for in article 78(5) of the VAT Code lies with the Tax Authority,

With due respect, it is also understood that reason does not lie with the Applicant here. In fact, the Tax Court of the South states, "It is the taxpayer who bears the burden of proof of the right it invokes, in this case, the right to deduction of VAT borne with acquisitions of goods and services from third parties (see article 74(1) of the General Tax Law)".

In the case, being at issue, as a prerequisite of the regularizations made by it, the "proof that the purchaser became aware of the correction or that he was reimbursed the tax," it will undoubtedly be the Applicant who bears the burden of presenting such proof.

As was written in the Decision of the Tax Court of the South of 19-03-2015, issued in proceedings 08034/14:

"I - In accordance with article 71(5) of the VAT Code, when the taxable value of an operation or the respective tax undergoes correction for less, the regularization in favor of the taxpayer may only be effected when the latter has in its possession proof that the purchaser became aware of the correction or that he was reimbursed the tax, without which the respective deduction will be considered undue.

II - Without this proof, in the possession of the taxpayer, the regularization is undue.

III – The requirement that the taxpayer has in its 'possession proof that the purchaser became aware of the correction or was reimbursed the tax' refers us to documentary proof."

Regarding the Applicant's position, according to which "the tax administration was required to conduct all necessary inquiries to determine the material truth, thereby ensuring legality, justice, impartiality and public interest, all principles constitutionally enshrined in articles 8(2), 103(3), 266(1) of the Constitution of the Portuguese Republic, articles 55 and 58 of the General Tax Law, articles 13 and 114 of the Tax Procedure and Process Code", it is considered that the "duty imposed on the Tax Authority to ascertain the material truth does not dispense taxpayers from the obligation to collaborate in the production of evidence, as provided for in article 59 of the General Tax Law. On the other hand, the provision of this obligation of the Public Treasury to ascertain the facts relevant to the decision does not mean that it bears the burden of proof of those facts, as only the insufficiency of proof of facts constituting the rights invoked by the Tax Authority is valued procedurally against it (article 74(1) of the General Tax Law)." and that "The principle of inquiry does not prejudice the burden of allegation and proof that falls on the interested parties."

Now, in the case:

"First, the Tax Authority is not required to conduct instructional inquiries not requested and which, presumably, do not have relevance to the decision, which, in the case, the appellant does not identify.

Second, the Tax Authority refused no inquiry that had been requested by the appellant.

Third, and finally, the record clearly demonstrates that the Tax Authority carried out a set of inquiries aimed at ascertaining the facts".

It is thus considered that there is no violation of the provisions of articles 8(2), 103(3), 266(1) of the Constitution of the Portuguese Republic, articles 55 and 58 of the General Tax Law, articles 13 and 114 of the Tax Procedure and Process Code.

It remains thus to determine whether, as the Applicant asserts, it has demonstrated the fulfillment of the prerequisites of article 78(5) of the applicable VAT Code, and, more specifically, whether it presented the "proof that the purchaser became aware of the correction or was reimbursed the tax".

Regarding this matter, the Respondent alleges that "the photocopies of the credit notes do not have, as required by the good interpretation of article 78(5) of the VAT Code, the competent signature and stamp affixed by the purchaser, which is why the documents presented are not suitable to prove that the latter came to be aware of the correction to be made by the taxpayer".

Now, as results from the proven facts (sections 10 and 11), the Applicant attached relevant documentation regarding credit notes nos. ..., ..., ... and ....

Regarding credit note no. 91, a duplicate of the credit note in question was presented, with an illegible signature under the date "30-03-2009". No proof having been presented of the identity of the person who signed, the capacity in which he did so, and what he intended to attest with the signature in question, one cannot consider the "proof that the purchaser became aware of the correction or was reimbursed the tax" to have been made.

Regarding credit note no. ..., it is verified, however, that the registered letter with return receipt, addressed to the supplier requesting confirmation of receipt of the credit note, on 21-09-2011, was returned to sender on 03-10-2011, and therefore one cannot consider the "proof that the purchaser became aware of the correction or was reimbursed the tax" to have been made.

Regarding credit note no. ..., a duplicate of the credit note in question was presented, with a signature that is partially legible under the supplier's stamp, and it is understood that this documentation is sufficient for it to be considered proven that an identifiable person declared, in the name of that supplier, to be aware of the credit note in question.

Regarding credit note no. ..., the documents being signed with legible signature, allowing identification of who is presented as having become aware of the credit note, as well as a registered letter with return receipt signed and confirmation of receipt of that same credit note, it is understood that the "proof that the purchaser became aware of the correction or was reimbursed the tax" has been fully made.

Thus, and given the foregoing, it is judged that the arbitral petition should proceed, in this part, regarding credit notes ... and ....

The Applicant also alleges that, notwithstanding having deducted all VAT in January 2009, it regularized the situation through recognition of non-deductible VAT (13%) relating to period 200901 as an expense of the financial year and its respective accounting in POC account ....

Regarding this matter, Applicant and Respondent agree that the Applicant should have deducted only 87% of the VAT borne, and not all of it.

The dispute lies in the fact that the Applicant alleges having, post hoc, regularized the excess tax deducted in January in question (13%), which was not considered in the Inspection Report.

On this matter, the Respondent alleges that "it is not relevant, for purposes of regularization of VAT deducted indebtedly, the accounting and correction in the POC, as done by the Applicant for the remaining periods (...) because, not having proceeded with the regularization in the terms provided for in the VAT Code, it will necessarily have to maintain the correction in the amount of €892.40, relating to period 0901" and that "the VAT Code establishes in its article 22 rules relating to the right to deduction, which should be effected in rule in the declaration of the period, notwithstanding the regularizations apparent in article 78 of the VAT Code".

It is thus verified that it is not disputed that, as shown in the accounting extract presented, the Applicant regularized the situation through recognition of non-deductible VAT (13%) relating to period 200901 in POC account ..., a movement dated 31-01-2009.

Now, as recently affirmed by the Court of Justice of the European Union, "The Court of Justice stated that the fundamental principle of VAT neutrality requires that the deduction of this upstream tax be granted if the material requirements are met, even if the taxpayers have neglected certain formal requirements."

In the case, this is what occurs. The Applicant may not have followed the appropriate formal procedures – the submission of a rectification declaration correcting the undue deduction – but it is not questioned that materially it rectified the situation, from which no prejudice results, at the level of the amount of tax collected, to the Tax Authority, as indicated by the Court of Justice in the decision cited, which may apply "if appropriate, a fine or a proportionate pecuniary sanction to the severity of the infraction, in order to punish the violation of formal requirements".

Thus, article 87(1) of the applicable VAT Code, which provides that "Without prejudice to the provision of article 90, the Tax Authority proceeds to the rectification of the declarations of taxpayers when it reasonably considers that they contain a lower tax or a higher deduction than due, additionally liquidating the difference," should, in accordance with community law as it has been understood by the Court of Justice, be interpreted in the sense that the assessment of the existence of "a lower tax or a higher deduction than due" should be made against the materiality existing at the time of the rectification by the Tax Authority, that is, taking into account whether, at that time, in terms of the declaration to be rectified, there still exists a lower tax or a higher deduction than due, and not simply whether, given the formally applicable rules, in the declaration to be corrected should appear a higher tax or a lower deduction than that declared by the taxpayer, and for this reason it is necessary that, materially, there be verified, at the moment of rectification, an actual prejudice to the Tax Authority, arising from the error to be rectified.

Thus, by disregarding that the Applicant regularized the situation through recognition of non-deductible VAT (13%) relating to period 200901 in POC account ..., a movement dated 31-01-2009, the correction in question was erroneous in its factual premises, and consequent error of law, and therefore should be annulled, with the arbitral petition proceeding in this part.

Proceeding further, the Applicant considers that the prerequisites for exclusion of the right to deduction are not met, in accordance with article 21(1)(d) of the VAT Code, as applied in the contested corrections, contained in section III.1.3.3 of the Inspection Report.

The Applicant alleges in this regard, in summary, that there are "at issue expenses necessary for the normal course of any promotional event to which these are normally associated, forming part of the protocol followed by any company sharing the corporate purpose of the APPLICANT and contributing, in an essential manner, to the realization of supplies of goods or provision of services, in accordance with article 20(1)(a) of the Value Added Tax Code".

Article 21 of the VAT Code provides, in the applicable wording, that:

"1 — The following deductions are excluded:

a) Expenses relating to the acquisition, manufacture or importation, lease, use, transformation and repair of passenger motor vehicles, pleasure boats, helicopters, aircraft, motorcycles and mopeds. A passenger motor vehicle is considered to be any motor vehicle, including a trailer, which by its type of construction and equipment is not intended solely for the transport of goods or for use with an agricultural, commercial or industrial character, or which, being mixed or for passenger transport, does not have more than nine seats, including the driver;

b) Expenses relating to fuel normally usable in motor vehicles, with the exception of acquisitions of diesel, liquefied petroleum gases (LPG), natural gas and biofuels, the tax on which is deductible at the rate of 50%, unless it is the goods listed below, in which case the tax relating to consumption of diesel, LPG, natural gas and biofuels is fully deductible:

i) Heavy passenger vehicles;

ii) Vehicles licensed for public transport, except rent-a-car;

iii) Machinery consuming diesel, LPG, natural gas or biofuels, which are not registered vehicles;

iv) Tractors used exclusively or principally for carrying out cultural operations inherent in agricultural activity;

v) Goods transport vehicles with weight exceeding 3,500 kg;

c) Expenses of business transport and travel of the taxpayer and his staff, including tolls;

d) Expenses relating to accommodation, food, beverages and tobacco and reception expenses, including those relating to the reception of persons outside the company and expenses relating to real property or parts of real property and their equipment, intended mainly for such receptions;

e) Entertainment and luxury expenses, being considered as such those which, by their nature or amount, do not constitute normal operating expenses.

2 — The exclusion does not apply, however, in the following cases:

a) Expenses mentioned in the preceding item a), when they relate to goods whose sale or exploitation constitutes the object of the activity of the taxpayer, without prejudice to the provision of item b) of the same number, with respect to fuel not acquired for resale;

b) Expenses relating to the supply to the company's staff by the taxpayer himself of accommodation, meals, food and beverages, in canteens, economats, dormitories and the like;

c) Expenses mentioned in items a) to d) of the preceding number, when incurred by a taxpayer acting in his own name but on behalf of a third party, provided that the latter is debited in order to obtain the respective reimbursement;

d) Expenses mentioned in items c) and d), with the exception of tobacco, both of the preceding number, incurred for the direct needs of participants, relating to the organization of congresses, fairs, exhibitions, seminars, conferences and the like, when they result from contracts concluded directly with the service provider or through legally qualified entities for such purpose and demonstrably contribute to the realization of taxable operations, the tax on which is deductible at the rate of 50%;

e) Expenses mentioned in item c) and expenses relating to accommodation, food and beverages provided for in item d), both of the preceding number, relating to participation in congresses, fairs, exhibitions, seminars, conferences and the like, when they result from contracts concluded directly with the entities organizing the events and demonstrably contribute to the realization of taxable operations, the tax on which is deductible at the rate of 25%.

3 — Acquisitions of goods referred to in item f) of n. 2 of article 16 also do not confer the right to deduct tax, when the value of their subsequent transfer, in accordance with special legislation, is the difference between the selling price and the purchase price."

The norm transcribed, as it could not fail to be, in terms of the well-known community matrix of VAT, has correspondence in article 176 of Council Directive 2006/112/EC (which reformulated the Sixth Directive), which provides that:

"The Council, acting unanimously on a proposal from the Commission, shall determine which expenses do not confer the right to deduct VAT. In any case, the following are excluded from the right to deduction: expenses which do not have a strictly professional character, such as sumptuary, recreational or representative expenses. Until the entry into force of the provisions referred to in the first paragraph, Member States may maintain all the exclusions provided for in their national legislation on 1 January 1979 or, in the case of Member States that acceded to the Community after that date, on the date of their respective accession."

This norm succeeded article 17(6) of the Sixth Directive, in force at the time of Portugal's accession to the EC, which provided that:

"No later than the end of a period of four years from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall determine which expenses do not confer the right to deduct value added tax. In any case, expenses which do not have a strictly professional character, such as sumptuary, recreational or representative expenses, shall be excluded from the right to deduction. Until the entry into force of the provisions referred to above, Member States may maintain all the exclusions provided for in their respective national legislation at the time of entry into force of this Directive".

The fact that, notwithstanding the provision of this latter normative, the Council resolution referred to therein was not approved, over thirty years later, gives a good account of the delicacy and sensitivity of the question, related to the evidence that we are dealing with one of the situations of stronger tension between the principle of VAT neutrality, repeatedly affirmed by the Court of Justice as structurally basic and constitutional of the entire VAT system, and the need to combat fraud and tax evasion by States.

In fact, and as detailed by Clotilde Celorico Palma and Maria Odete Oliveira and João Seixas Cambão, notwithstanding various attempts over the years, it has never been possible to achieve the unanimity necessary among Member States regarding the matter in question.

That is, while it is notorious and consensual the existence, within the scope of business activities, of expenses, in the case subject to VAT, which do not have an "strictly professional" allocation, the appropriate form and measure of the framing of such expenses within the VAT system has not yet been found. And, if such insurmountable divergences exist among States, which necessarily share the same side of the legal-tax relationship, it will be easy to understand the extent and scope of the dissatisfaction that taxpayers, on the opposite side of the same, will express on this matter.

As was written in the Decision of the Tax Court of the South of 04-06-2015, issued in proceedings 06391/13:

"9. The ground for the exclusion of the right to deduction provided for in article 21 of the VAT Code is found in the fact that many of the situations provided for therein relate to VAT borne on 'inputs' in respect of which it is difficult, or even impossible, to control its propriety, seeking, through the exclusion, to prevent the deduction of the tax borne with goods or services not essential to productive activity or easily divertible to private, non-business/professional consumption. This norm is, in essence, a special anti-abuse provision in VAT, in the terms in which the doctrine defines them.

1. This means that the legislator, even admitting that the goods or services identified in article 21(1) of the VAT Code may be destined for business purposes, by recognizing that it is particularly difficult to control the use of the referred goods or services and with the intent to avoid the possibility of a high level of fraud, sought to avoid the difficulties that would arise in the administration of the tax due to the litigation that would inevitably be generated on this matter, enshrining in the cited legal norm a set of goods and services excluded from the right to deduction, regardless of their use."

Although it is conceivable that situations may arise in which restrictions on the right to deduct VAT may be postponed, as, in the case, the Applicant intends, it is always considered that such a possibility will necessarily require the demonstration that, in the concrete case, is excluded, beyond any reasonable doubt, any non-"strictly professional" allocation of the expenses to be deducted.

Now, in the case, such does not happen.

In fact, as results from the combination of the fact proven in section 16 with the fact deemed not proven, it is not possible, given the evidence produced, to conclude that the expenses titled by the invoices in question had a "strictly professional" allocation, and therefore the arbitral petition should fail in this part.

The Applicant also considers that the absence of date and place of service provision in certain invoices, referred to in section III.1.3.4 of the Inspection Report, shall not justify the exclusion of the right to deduct the VAT contained therein, in accordance with article 36(5)(f) of the VAT Code, as the Tax Authority understood.

In fact, as results from the reading of the Inspection Report, the VAT titled by the invoices referred to in the section in question was not accepted for deduction, because the Tax Authority considered that the formal requirement of the specific dates and places where the services were performed was not "proven".

Now, the provision of the referred article 36(5)(f) of the VAT Code is:

"5 — Invoices or equivalent documents must be dated, numbered sequentially and contain the following elements: (...)

f) The date on which the goods were placed at the disposal of the purchaser, on which the services were performed, or on which payments prior to the realization of the operations were made, if that date does not coincide with that of the issuance of the invoice."

The Respondent understands in this respect that "the obligation to date the provision of the services rendered is extensible to cases in which the realization of the operations or their payment do not coincide with the dates of the respective issuance (...) What does not authorize the Applicant to consider itself dispensed from this obligation because the provision of the services occurred on the date of issuance of the invoices."

With due respect, it is considered that the understanding sustained by the Respondent has no support, literal or rational, in the legal text, since, on the one hand, the provision is clear that the date "on which the services were performed" must be contained in the invoice, "if that date does not coincide with that of the issuance of the invoice," and, on the other, the clarification suggested by the Respondent would make no sense, since if the legal provision were simply that the date "on which the services were performed" must be contained in the invoice, there would be no doubt whatsoever that this obligation would apply to all situations, including in cases where "that date does not coincide with the date of issuance of the invoice."

Furthermore, as VAT applies to practically all economic transactions, the norm in question aims to simplify, to the extent possible, the issuance of invoices, precisely by providing that those only need to contain the date "on which the services were performed (...) if that date does not coincide with that of the issuance of the invoice."

Moreover, and as the Applicant correctly points out, "with respect to the indication of the place in the invoices, no reference is made in the law". Nevertheless, as the Respondent refers, "Regarding the indication of the place in the invoices, it will be easily understood that taxpayers for purposes of VAT deduction must be in a position to prove that the services billed were actually performed," the fact is that such obligation only arises if the Tax Authority gathers factual indications to the effect that the invoices do not correspond to actually performed services.

In fact, as was written in the Decision of the Tax Court of the North of 15-11-2013, issued in proceedings 00201/06.8BEPNF:

"1. The burden of proof of the constitutive facts of the right to additional assessment falls on the tax administration and the burden of proof of the constitutive facts of the right to annul that assessment falls on the taxpayer – article 74(1) of the General Tax Law.

1. Being at issue VAT deducted based on invoices which, allegedly, have no underlying transaction, it falls to the tax administration to demonstrate the adequacy between the fact-indications collected in the procedure and the judgment on the non-existence of the fact that confers the right to deduction and to the taxpayer to demonstrate the existence of the tax fact."

Now, not only are no factual indications presented to the effect that the invoices in question do not correspond to actually performed services, but it is not even that which is the ground for the assessments in crisis, contained in the Inspection Report.

Thus, by considering that the prerequisites of article 36(5)(f) are not met, and violation of article 19(2)(a) being verified, both of the VAT Code, there is an error in the factual premises, and consequent error of law, and therefore, in that part, the arbitral petition should proceed.

The Applicant further understands that the invoices nos. ... and ..., issued on 2 September and 23 October 2009, respectively, by B..., contain VAT borne and deductible by the APPLICANT at the provisional deduction percentage it applied in the 2009 financial year (87%), also understanding that "if the Tax Authority intends to challenge the effective VAT assessment underlying the invoices in question, to the effect that it may not have existed, it should undertake inquiries to that effect, such as, for example, proceeding to simply notify B... for provision of clarification and attachment of supporting documentation".

Regarding this matter, it is verified that, as is referred to in the Inspection Report and is proven, in the invoices in question there is no mention of "VAT included", nor is any amount relating to that tax discriminated, with the mention "VAT at 20%" appearing (section 20 of the proven facts).

Given this circumstance, the Tax Authority understood that there was non-compliance with the provisions of article 36(1)(c) and (d) of the VAT Code, because the issuer of the invoice did not mention that it proceeded with the assessment of the tax, either expressly through the calculation thereof, or implicitly, through the mention "tax included at the rate in force", contrary to the provision of article 19(2) of the same Code.

With due respect, it is understood that the Tax Authority is not correct.

In fact, as it itself recognizes, the indication that the issuer of the invoice proceeded with the assessment of the tax may be made implicitly, and the expression used in the case, "VAT at 20%," is not susceptible of leaving a reasonable recipient, placed in the position of the concrete recipient, any reasonable doubt that the price contained in the invoice(s) in question contains VAT at the rate referred to, and one cannot fail to take into account that, as refers the Court of Appeal of Porto, "To the price presented or displayed by a merchant obliged to issue an invoice, VAT is presumed to be added, in accordance with the combined provisions of articles 1(1)(a), 4(1), 29(1)(b), and 37(1) of the VAT Code."

Thus, there is also here an error in the factual premises, and consequent error of law, and therefore, in that part also, the arbitral petition should proceed.

Finally, the Applicant alleges that there was duplication of regularization of VAT deducted in January 2009, in the amount of €2,745.86, arising from the determination of the definitive deduction percentage it made, as it regularized the tax deducted in excess throughout that year.

In this regard, the Applicant argues that, as results from the Inspection Report and is deemed proven, "After determination of the definitive deduction percentage (47%), the APPLICANT regularized all the tax deducted throughout the 2009 financial year, in favor of the State, in the amount of €361,578.96".

The Respondent, for its part, merely states that "it was not proven in the record the regularization of the VAT wholly deducted in period 2009.01, when the quality of the Applicant as a Mixed Subject was disregarded, and therefore it is not possible for us to assess the duplication of any amounts."

Now, as results from the statement of facts above fixed, reason does not lie with the Respondent.

In fact, it is the Tax Authority itself which recognizes, in section III.1.3.7 of the Report, that the taxpayer proceeded with the recalculation of the proportion of the definitive pro rata and with the regularization, in favor of the State, in the amount of €361,578.96, in compliance with the provisions of articles 23(6) of the VAT Code, a conclusion supported in Annex 35 to the Inspection Report, which comprises that calculation and the journal entry on 31-12-2009.

Thus, there is also in this part an error in the factual premises, and consequent error of law, and therefore, to that extent, the arbitral petition should also proceed.

On the assessment of compensatory interest

Regarding this matter, the Applicant argues that "at no moment in the acts notified did the Tax Authority demonstrate the prerequisites upon which the assessment of compensatory interest depends, having merely formally alleged, to that effect, the provision of articles 96 of the VAT Code and 35 of the General Tax Law", since "from the notices of assessment of compensatory interest notified to the APPLICANT, there does not result the concrete demonstration of the taxpayer's fault in the alleged delay in the assessment of the tax," and further alleging that "at no moment was it notified by the Tax Authority to pronounce on the intention of the Tax Authority to promote the assessment of compensatory interest, and therefore the act of assessment in question is also illegal by violation of the provision of article 60 of the General Tax Law."

As results from the facts deemed proven, in the notices of assessment relating to compensatory interest, its reason and quantification appear, the tax on which the interest accrues, the period to which it refers, the applicable interest rate and the amount of interest due.

Thus, in accordance with the established jurisprudence of the Supreme Administrative Court, "The legal duty of substantiation is fulfilled if in the assessment of compensatory interest there are explicitly stated the reason for the assessment (there has been delay in the assessment of part or all of the tax, due to fact attributable to the taxpayer - articles 89 of the VAT Code and 35 of the General Tax Law) and if there appear the indication of the tax in arrears on which the interest accrues, the period to which the interest rate applies, the interest rate applicable to the period (made by reference to the statutory interest rate set in accordance with article 559(1) of the Civil Code) and the value of the interest."

Regarding the alleged failure to comply with the provision of article 60 of the General Tax Law (right to hearing), it is verified that there is no element in the record that allows demonstrating such compliance.

Moreover, in the decision of the gracious claim, where the Applicant raised this issue from the outset, the Tax Authority merely referred to the understanding that prior hearing would only be pertinent for purposes of determining the attribution of fault to the Applicant, and that such attribution results from the tax facts ascertained during the tax inspection, and therefore prior hearing for the assessment of interest would be dispensed with, given the provision of article 60(3) of the General Tax Law.

However, examining the final report of that tax inspection, it is verified that no mention whatsoever of interest is made therein, and therefore it is not possible to consider the prerequisites of that rule of the General Tax Law to be filled.

Thus, given the violation of the provision of article 60(1)(a) of the General Tax Law, the assessments of compensatory interest must be annulled, due to a defect of form.

On the decision denying the hierarchical appeal

The Applicant also argues the illegality of the decision that denied the hierarchical appeal, in that it listed, under article 72 of the General Tax Law, a witness whose hearing appeared essential to the correct decision of the petition formulated, a witness who was not heard.

As explains Carla Castelo Trindade, "the defects proper to acts of denial of gracious claims and hierarchical appeals or requests for official review of the tax act are not arbitrable because they escape the material ambit of tax arbitration. In other words, these acts of denial may only be "brought" to the arbitral jurisdiction, under the strict condition that they themselves have assessed the (i)legality of the tax act that the taxpayer truly and actually intended to impugn through the arbitral avenue." That is, "The subject matter of the arbitral petition will thus be the (i)legality of the first-instance tax act, regardless of whether the taxpayer points to this (the first-instance act) or the second-instance act as the subject matter of its arbitral action, which is always provided that the second instance act assesses the (i)legality of the first-instance act."

Without prejudice, it will always be said that reason does not lie with the Applicant, since, notwithstanding arguing that the hearing of the witness appeared essential to the correct decision of the petition formulated, it has not demonstrated this, nor did it demonstrate it when the request for hearing was formulated, by indicating which concrete facts the witness's deposition was intended to prove and how the same would determinately influence the decision to be taken.

Thus, and for all the foregoing, the arbitral petition should fail in this part.

On compensation for undue security

The Applicant formulates, further, a petition for compensation for undue security.

This matter has already been the subject of several decisions within the scope of the arbitral jurisdiction, and reference can be made, among others, to that of the CAAD arbitral proceedings no. 1/2013T, in terms that are now transcribed:

"In accordance with the provision of article 24(b) of the RJAT, the arbitral decision on the merits of the claim with respect to which no appeal or impugnation is available binds the tax administration from the expiration of the period set for appeal or impugnation, the administration being required, in the exact terms of the proceeding of the arbitral decision in favor of the taxpayer and until the expiration of the period set for spontaneous execution of the decisions of the judicial tax courts, to 'restore the situation that would have existed if the tax act that was the subject matter of the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose'.

In the legislative authorization on which the Government based itself to approve the RJAT, granted by article 124 of Law no. 3-B/2010, of 28 April, it is proclaimed, as a paramount guideline of the institution of arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, that 'the tax arbitration procedure should constitute an alternative procedural means to judicial impugnation proceedings and to the action for the recognition of a right or legitimate interest in tax matters'.

Although article 2(1)(a) and (b) of the RJAT uses the expression 'declaration of illegality' to define the competence of the arbitral tribunals functioning in the CAAD and makes no reference to constitutive (annulatory) and condemnatory decisions, it should be understood, in harmony with the referred legislative authorization, that the powers included in its competences are those that in judicial impugnation proceedings are attributed to the tax courts in relation to acts whose assessment of legality falls within their competences.

Although judicial impugnation proceedings are essentially proceedings for mere annulment (articles 99 and 124 of the Tax Procedure and Process Code), condemnation of the tax administration for the payment of indemnificatory interest and compensation for undue security may be pronounced therein.

In fact, although there is no express provision in that sense, it has been peacefully understood in the tax courts, since the entry into force of the codes of the 1958-1965 fiscal reform, that a petition for condemnation for the payment of indemnificatory interest may be cumulated in judicial impugnation proceedings with the petition for annulment or declaration of nullity or non-existence of the act, because in those codes it is stated that the right to indemnificatory interest arises when, in gracious claim or judicial proceedings, the administration is convinced that there has been an error attributable to the services. This regime was subsequently generalized in the Tax Procedure and Process Code, which established in article 24(1) thereof that "indemnificatory interest shall be due in favor of the taxpayer when, in gracious claim or judicial proceedings, it is determined that there has been an error attributable to the services," then, in the General Tax Law, in whose article 43(1) it is established that "indemnificatory interest is due when it is determined, in gracious claim or judicial impugnation, that there has been an error attributable to the services resulting in payment of the tax debt in an amount higher than legally due" and finally, in the Tax Procedure and Process Code, in which it is established, in article 61(2) (which corresponds to n. 4 in the wording given by Law no. 55-A/2010, of 31 December), that "if the decision recognizing the right to indemnificatory interest is judicial, the period for payment is counted from the beginning of the period for its spontaneous execution".

With respect to the petition for condemnation for the payment of compensation for the provision of undue security, article 171 of the Tax Procedure and Process Code establishes that "compensation in case of bank security or equivalent unduly provided shall be requested in the proceedings in which the legality of the debt subject to execution is contested" and that "compensation should be requested in the claim, impugnation or appeal or in case its ground is subsequent within 30 days after its occurrence."

Thus, it is unequivocal that the judicial impugnation proceedings encompasses the possibility of condemnation for the payment of undue security and is even, in principle, the appropriate procedural means for formulating such a petition, which is justified by evident reasons of procedural economy, since the right to compensation for undue security depends on what is decided regarding the legality or illegality of the assessment act.

The petition for constitution of the arbitral tribunal has as a corollary the fact that it will be in the arbitral proceedings that the "legality of the debt subject to execution" will be discussed, and therefore, as results from the express tenor of that n. 1 of the referred article 171 of the Tax Procedure and Process Code, the arbitral proceedings are also the appropriate means to assess the petition for compensation for undue security.

Moreover, the cumulation of petitions relating to the same tax act is implicitly presupposed in article 3 of the RJAT, in speaking of "cumulation of petitions even if relating to different acts," which allows for the understanding that the cumulation of petitions is also possible with respect to the same tax act, and the petitions for indemnificatory interest and condemnation for undue security are susceptible of being encompassed by that formula, and therefore an interpretation in this sense has, at least, the minimum of verbal correspondence required by article 9(2) of the Civil Code.

The regime of the right to compensation for undue security is contained in article 52 of the General Tax Law, which establishes the following:

Article 53

Security in Case of Undue Payment

1. The debtor who, to suspend execution, offers bank security or equivalent shall be compensated wholly or partially for the losses resulting from its provision, if he maintained it for a period exceeding three years in proportion to the expiration in administrative appeal, impugnation or opposition to execution having as object the debt secured.

2. The period referred to in the preceding number does not apply when it is determined, in gracious claim or judicial impugnation, that there has been an error attributable to the services in the assessment of the tax.

3. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the secured amount of the indemnificatory interest rate provided for in this law and may be requested in the very process of gracious claim or judicial impugnation, or autonomously.

4. Compensation for provision of undue security shall be paid by debit to the tax receipt of the year in which payment is made."

In the case at hand, it is manifest that the error of the assessment acts in the parts now declared illegal, embodied in assessments partly practiced without support in a presupposed tax fact of the tax, is attributable to the Tax Authority and Customs Authority, since the tax inspection and the assessment were its initiative, and the Applicant in no way contributed to that error being practiced.

For this reason, the Applicant is entitled to compensation for the security provided in excess, regarding the amount of tax now annulled.

However, the costs that the Applicant bore to provide the bank security were not alleged and proven, and therefore it is unviable to fix here the compensation to which the Applicant is entitled, which may only be effected in execution of this decision.

C. DECISION

Therefore, this Arbitral Tribunal judges the arbitral petition partially upheld and, in consequence:

1. Annuls the tax assessments, that are the subject matter of the present arbitral action, to the extent that they reflect the following corrections:

• Relating to credit notes ... and ..., referred to in section III.1.3.1 of the Inspection Report;

• Relating to section III.1.3.2 of the Inspection Report;

• Relating to section III.1.3.4 of the Inspection Report;

• Relating to section III.1.3.5 of the Inspection Report;

• Relating to section III.1.3.7 of the Inspection Report;

1. Annuls the assessments of compensatory interest;

2. Condemns the Respondent to pay compensation for undue security, as to the amounts corresponding to the amounts now annulled, in the amount that shall be demonstrated in execution of judgment;

3. Judges the remaining part of the arbitral petition not upheld;

4. Condemns the parties to the costs of the proceedings, in proportion to their respective judgment against, fixing in the amount of €90.00 the amount to be charged to the Applicant and €2,358.00 the amount to be charged to the Respondent.

D. Value of the Proceedings

The value of the proceedings is fixed at €63,993.02, in accordance with article 97-A(1)(a) of the Tax Procedure and Process Code, applicable by force of article 29(1)(a) and (b) of the RJAT and n. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €2,448.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective judgment against, above fixed, since the petition was partially upheld, in accordance with articles 12(2) and 22(4), both of the RJAT, and article 4(4) of the cited Regulation.

Notify.

Lisbon, 22 September 2017

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Cristina Coisinha)

The Arbitrator Member

(João Cruz)