CAAD 711/2015-T: VAT Right to Deduction and Unliquidated Tax – Additional Assessments Annulled

ARBITRAL DECISION

Claimant – A… - …, Sole Proprietor Limited Liability Company

Respondent - Tax and Customs Authority

The Arbitrator, Dr. Sílvia Oliveira, appointed by the Ethics Board of the Administrative Arbitration Centre (CAAD) to constitute the Arbitral Tribunal, constituted on 5 February 2016, with respect to the above-identified case, has decided as follows:

1. REPORT

1.1

A… – …, Sole Proprietor Limited Liability Company, Legal Entity No. …, registered under the same number at the Commercial Registration Office of Lisbon, with headquarters at Rua …, No. …, in Lisbon (hereinafter referred to as the "Claimant"), filed a request for arbitral pronouncement and constitution of a singular Arbitral Tribunal, on 27 November 2015, pursuant to the provisions of article 4 and paragraph 2 of article 10 of Decree-Law No. 10/2011, of 20 January [Legal Regime for Arbitration in Tax Matters (RJAT)], against the Tax and Customs Authority (hereinafter referred to as the "Respondent").

1.2

Through the aforementioned request for arbitral pronouncement, the Claimant seeks that the Arbitral Tribunal "(…) grant the (…) request (…) determining, as a consequence, the annulment of the act that dismissed the hierarchical appeal and part of the additional assessments (…)" identified, "corresponding to VAT (…)" and "to compensatory interest" relating to the periods indicated "(…) insofar as they relate to the adjustments (…) contested, as well as in the payment of indemnificatory interest (…)" (our emphasis).

1.3

The request for constitution of the Arbitral Tribunal was accepted, on 30 November 2015, by the esteemed President of CAAD and notified to the Respondent on the same date.

1.4

The Claimant did not proceed with the appointment of an arbitrator, wherefore, pursuant to the provisions of article 6, paragraph 2, subparagraph a) of RJAT, the undersigned was appointed as arbitrator by the President of the Ethics Board of CAAD, on 21 January 2016, and the appointment was accepted within the legally prescribed timeframe and terms.

1.6

On the same date, both parties were duly notified of this appointment and did not manifest the will to reject it, in accordance with the provisions of article 11, paragraph 1, subparagraphs a) and b) of RJAT, combined with articles 6 and 7 of the Code of Ethics.

1.7

Thus, in conformity with the provision of subparagraph c), paragraph 1, of article 11 of RJAT, the Arbitral Tribunal was constituted on 5 February 2016, and an arbitral order was issued on the same date, directing the Respondent to, in accordance with the provisions of article 17, paragraph 1 of RJAT, file a response within a maximum of 30 days and, if it so wished, request the production of additional evidence.

1.8

Additionally, it was further mentioned in that arbitral order that the Respondent should submit to the Arbitral Tribunal, within the response deadline, a copy of the administrative file.

1.9

On 14 March 2016, the Respondent filed its Response, having defended itself by objection and concluded that "without prejudice to what is stated in subparagraph a) of Part III of this Response, the present request for arbitral pronouncement should be judged unmeritorious due to lack of proof, and, consequently, the Respondent absolved of all other requests, all with the due and legal consequences", "further requesting, in the terms above petitioned, that if witness examination is not dispensed with, the Claimant be notified to indicate which facts it intends to have proven by the witnesses (…)".[2]

1.10

On the same date, the Respondent attached to the file the respective administrative case file.

1.11

By arbitral order of 17 March 2016, both Parties were notified to pronounce themselves, within a period of 5 days, on the possibility of dispensing with:

1.11.1

The holding of the meeting referred to in article 18 of RJAT;

1.11.2

The examination of the witnesses enrolled by the Claimant;

1.11.3

The submission of arguments.

1.12

Additionally, by the same arbitral order, the Claimant was notified that "if (…) it does not dispense with the examination of the witnesses indicated in the Request (…), within the period referred to in the previous point, to indicate the facts on which it intends the witness evidence to bear".

1.13

The Respondent, on 21 March 2016, filed a motion to the effect that:

1.13.1

"(…) it does not object to dispensing with the meeting provided for in article 18 of RJAT";

1.13.2

"As has been argued throughout the Response presented (…) it is the Respondent's understanding that witness examination should be rejected or dispensed with";

1.13.3

"(…) it does not object to dispensing with the submission of arguments, while reserving the right to submit them if the Claimant does not dispense with them and the Tribunal determines their submission".

1.14

The Claimant filed, on 24 March 2016, a motion to the effect that:

1.14.1

"(…) it does not object to dispensing with the meeting provided for in article 18 of RJAT";

1.14.2

"With regard to the witnesses enrolled by it, (…) it does not dispense with their examination, given that the Respondent, in its Response, considered as unproven the facts on which the aforementioned witnesses should pronounce themselves", stating "(…) that it intends that the witnesses enrolled by it give evidence with regard to the (…) facts stated in its statement of claim", which it identifies;

1.14.3

"(…) at this time and (…) in view of the unfolding of the procedural steps still to be carried out, it is not in a position to dispense with its arguments".

1.15

In these terms, by order of this Arbitral Tribunal, dated 1 April 2016, "this Tribunal decided, in accordance with the procedural principles enshrined in article 16 RJAT, of the autonomy of the arbitral tribunal in the conduct of the proceedings and in the determination of the rules to be observed [subparagraph c)] and of the free conduct of the proceedings enshrined in articles 19 and 29, paragraph 2 of RJAT":

1.15.1

"To schedule a meeting for the next 21 April 2016, at 14:00, to be held at the premises of CAAD in Lisbon, for the purpose of examining the witnesses enrolled by the Claimant, relating to the facts indicated by it in its motion dated 24 March 2016";

1.15.2

"To decide at the above-mentioned meeting on the possibility of dispensing with the submission of arguments".

1.16

On 21 April 2016, the first arbitral meeting was held at the premises of CAAD in Lisbon for the examination of the witnesses enrolled by the Claimant, with sound recording of the testimony given, and of which the corresponding minutes were drawn up, which form an integral part of this arbitral proceedings.

1.17

Still within the scope of the aforementioned meeting, the Tribunal notified the Claimant and the Respondent to, in this order and in succession, submit written arguments within a period of 15 days, whereby the deadline for the Respondent shall commence to run from the date of notification of the joining of the Claimant's arguments or from the expiry of the period granted for this purpose (in the event that it does not submit arguments).

1.18

On the other hand, in compliance with the provisions of article 18, paragraph 2 of RJAT, the Tribunal set 15 June 2016 for the purpose of pronouncing the arbitral decision.

1.19

Finally, the Tribunal warned the Claimant that, until the date of pronouncement of the arbitral decision, it should proceed with the payment of the subsequent arbitration fee, in accordance with the provisions of paragraph 3 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings and communicate this payment to CAAD.

1.20

On 9 May 2016, the Claimant filed its written arguments, to the effect of:

1.20.1

Enumerating the facts it understood to have been proven through the testimony of the witnesses presented by it and examined at the meeting held on 21 April 2016 (see point 1.16 above);

1.20.2

Reiterating the arguments set out in the Request as to the illegality of the adjustment to the VAT deducted by the Claimant, in 2008 and 2009, with respect to expenses with the cafeteria, as well as with respect to the absence of "(…) any legal basis that would permit the maintenance of the VAT assessments and compensatory interest assessments contested (…)", relating to the alleged provision of services between the Claimant and B… and between the Claimant and C…;

1.20.3

Maintaining the request for preliminary ruling referral to the CJEU, in the event that "the arguments (…) put forward and again reiterated (…) are not sufficient to dispel any doubts as to the illegality of the additional VAT assessments and compensatory interest assessments contested (…)" and,

1.20.4

To conclude in the same terms as the Request.

1.21

On 25 May 2016, the Respondent filed its written arguments, to the effect of "(…) reiterating the position assumed (…) in the response", concluding that "(…) the present request for arbitral pronouncement should be judged unmeritorious, with the tax acts impugned remaining in the legal order and the Respondent absolved (…) of the request, all with the due and legal consequences".

2. CAUSE OF ACTION

The Claimant supports its request, in summary, as follows:

2.1

The Claimant "is a company 100% owned by D…, S.A. (…) and whose corporate purpose is (…)", namely, "the performance of studies and research projects for the development of technologies related to the organization, management and operation of transport systems and networks, as well as the promotion and performance of professional training courses in the context of technologies for the organization and management of public road transport networks and systems and its operation" (our emphasis).

2.2

The Claimant proceeds to state that "being part of the D… universe (…) it is a company that is part of the State's business sector, i.e., it is part of the set of productive units of the State (organized and managed in a business manner) represented by public enterprises and participated companies (…)", asserting that it is "(…) a company that promotes compliance with the laws and satisfaction of public interests (…)" (Claimant's emphasis).

2.3

As alleged by the Claimant, "following service orders No. OI2012… and OI2012…, the Tax Authority conducted an external tax audit of the Claimant which comprised the analysis of IRC and VAT relating to the tax periods (…) of 2008 and 2009", with the Claimant being notified on 14 November 2012, "(…) to pronounce itself on the Draft Report of Tax Inspection (…), in which various adjustments were proposed, notably in the context of VAT".

2.4

According to the tenor of the request, the Claimant "(…) exercised on 30.11.2012 its right to prior hearing, in which it expressed its disagreement with the adjustments proposed by the Tax Authority (…)", having been notified on 7 December 2012 "(…) of the final version of the inspection report (…)", which maintained "(…) a significant part of the adjustments previously proposed by the inspection services (…)".

2.5

Subsequently, the Claimant "(…) was notified of the VAT assessments and compensatory interest assessments (…) identified (…)", in the total amount of EUR 44,912.15, having paid these amounts on 15 February 2013.

2.6

The Claimant proceeds to state that "on 26.06.2013, (…) it filed a gracious complaint against the aforementioned additional VAT assessments and compensatory interest assessments (…)", having been notified "through the order of 29.05.2014 (…) of the partial allowance of the aforementioned gracious complaint", insofar as "those Tax Authority services maintained the majority of the adjustments then complained of (…)".

2.7

"Being unable (…) to accept that decision, insofar as it maintained part of the contested adjustments (…), it decided to file (…) a hierarchical appeal (…)", which was the subject of "through Office No. …, of 26.08.2015 (…) of partial allowance (…)".

2.8

And "by not accepting such a decision, insofar as it maintained the contested adjustments, the Petitioner comes to file (…) a request for arbitral pronouncement".

Of the contested adjustments

Cafeteria Expenses (Tax Periods 2008 and 2009)

2.9

In this regard, according to the Claimant, "in the Report an adjustment was made to the VAT deductions made (…), in the tax periods of 2008 and 2009, in the amounts of € 801.02 and € 3,545.94, respectively (…)", and was "(…) sustained in the Report (…) that:

a. Given that the building of the Petitioner's headquarters belongs to D…, it should be this entity that should bear and deduce the VAT relating to the monthly retainer paid to E…;

b. The deductibility of VAT depends on this tax applying to goods or services acquired that contribute to the performance of transfers of goods or provisions of services;

c. It is not comprehensible that the existence of a cafeteria would contribute to the increase in demand for training courses, especially given that they have as their object professional development, information technology, defensive driving and the like;

d. Given that the Petitioner already pays a meal allowance to its employees, it does not need to have a functioning cafeteria;

e. The income associated with the operation of the cafeteria (whether by F… or by E…) is not reflected in the accounts of the Petitioner".

2.10

According to the Claimant, "these arguments were reiterated in the Order, the latter expressing that, as this was not the acquisition of social equipment and the facilities belonging to the parent company (D…), we corroborate the understanding that the deduction of VAT incurred with the expenses in question cannot be accepted (…)", an adjustment with which the Claimant "(…) cannot agree (…)".

2.11

In fact, for the Claimant, "the cost of the retainer in question here contributes to the performance of the Petitioner's activity (subject to tax), in two distinct ways: (i) it is essential (…) to the training services provided by the Petitioner and (ii) it is essential for the well-being of its workforce", whereby it understands that "either of these two purposes alone makes the VAT assessments illegal".

2.12

In fact, for the Claimant, "the existence of that cafeteria equipped would correspond (as it does) to an added value that the Petitioner's Training Academy could make available to its (potential) clients and, in that sense, would correspond to a factor of positive distinction (…) in the process of attracting them", whereby "(…) the Petitioner entered into a leasing contract (…) of the various equipment necessary for the operation of the (…) cafeteria", "(…) with the cost of leasing the cafeteria equipment (…) intrinsically linked to the normal pursuit of its economic activity (…)".

2.13

Thus, for the Claimant, it is "(…) clear its corresponding indispensability", "all the more so (…) since in the years 2008 and 2009, the training activity provided by the Petitioner generated for it results (…) in no way negligible (…)", whereby it understands it is "false the argument (…) that said leasing does not contribute to any return or consideration".[3]

2.14

Thus, for the Claimant, "(…) it must necessarily be concluded that there is an economic purpose associated with the existence of such a cafeteria (and consequently with its equipment) and the expenses inherent to it", whereby the Claimant concludes that having waived "(…) the exemption from VAT on training courses (…)" and "(…) assessing VAT on all downstream operations, it is absolutely legal that it deducts all VAT incurred in upstream inputs", and for this reason "(…) it is absolutely legal the Petitioner's right to deduct all VAT incurred (…), including those allocated to cafeteria equipment".

2.15

Thus, "having the Petitioner demonstrated the existence of that direct and immediate relationship between the expenses incurred with the cafeteria equipment leasing and the exercise of an activity taxable under VAT (…), it is illegal the adjustment to VAT deducted in 2008 and 2009, requesting (…) the annulment of the assessments in the respective part".

2.16

With respect to the alleged duplication of costs "due to the fact that the Petitioner has a properly equipped cafeteria and pays its employees a meal allowance", the Claimant understands that such an argument makes no sense whatsoever, insofar as "(…) the case law of the Supreme Administrative Court admits that meal expenses at restaurants for employees are fiscally deductible, even when those employees receive meal allowances".[4]

VAT Not Assessed on the Operation of the … Circuit (Tax Period 2008)

2.17

According to the Claimant, it "on 01.06.2005 (…) and the public transport company B… – … – E.M. (…) entered into a protocol" and, following this, "the Tax Authority considered that the positive and negative results generated by the operation of tourist circuits in the city of … should be divided equally between the Petitioner and B… (…)".

2.18

However, having verified that the Claimant "(…) had decided not to issue to B… an invoice in which it would charge it half of the negative operating result that would be its share, it was concluded in the Report that it incurred non-compliance with the protocol signed with B… (…), which resulted in the omission of income (…)", a view with which the Claimant does not agree, whereby "(…) it cannot accept this adjustment".

2.19

In fact, the Claimant argues that "(…) it has developed a strategy centered on the development of contacts with entities from various cities, especially national (…), with the purpose of entering into partnerships that allow it to expand its business, through the creation and operation of tourist circuits", having been "(…) with the intent to operate a tourist circuit in panoramic bus that the Petitioner obtained from the City Council of … the relevant authorization and developed contacts with B… to enable the operationalization of such circuit".

2.20

In this regard, and despite the protocol entered into, "(…) the truth is that this entity (B…) refused to bear the negative results arising from the joint operation of that tourist circuit (…)", but, given that "(…) in the region where B… operates, there is no other operator that provides similar services (…) the Petitioner consciously did not want to jeopardize the commercial partnership entered into (…)", having opted "(…) to bear, in full, the loss generated in 2008 by the operation of the tourist circuits … (…)".

2.21

Thus, the Claimant understands that "in this case, there are management criteria that were weighed by the Petitioner in not charging B… the negative results generated with the operation of tourist circuits in …", whereby "there was no generosity and, obviously, no donation on the part of the Petitioner to B…", defending instead that there was "(…) a contractual modification, which was not reduced to writing (…)", which should not have consequences since "there being no such obligation of written form as to the execution of the protocol between the Petitioner and B…, neither is there, by even greater reason, any legal duty of the Petitioner and B… to execute any modifications thereto in writing", and the Tax Authority cannot "(…), without more, require that the modification to the Protocol be reduced to writing".

2.22

In these terms, the Claimant reiterates that "as is easily understood, the contractual modification now in analysis resulted from the mutual agreement (…) between the contracting parties", being "(…) contrary to what is stated in the Order (…)".

2.23

In consequence, the Claimant understands that "it is undisputed that (…) no transfer for consideration occurred that can be framed within the scope of the concept of transfer of goods referred to (…)" in the VAT Code, nor is it apparent "(…) what type of services would have been provided by the Petitioner to B… and, much less, the type of consideration that (…) it would have received as a result of having decided (…) to assume (…) all the negative results generated by the operation of the circuit (…)".

2.24

Now, according to the Claimant, "there being no transfer of goods or provision of services supposedly concealed between the Petitioner and B…, it must be concluded that there is no legal basis that permits the maintenance of this VAT assessment, and it must necessarily be annulled (…)".

VAT Not Assessed on the Operation of the … Circuit – C… (Tax Period 2009)

2.25

In this regard, the Claimant states that it entered into, with C… – …, … Sole Proprietor, Limited Liability Company, "on 31.08.2008 (…) a protocol (…)".

2.26

In the context of the inspection action, having the Respondent analyzed the aforementioned protocol, it understood that, in 2009, "(…) the positive and negative results generated by the operation of tourist circuits in the city of … should be divided equally between the Petitioner and C…", in accordance with the protocol, whereby "the negative result (…) arising from the operation of tourist circuits in that city should have (…) been charged by the Petitioner to C…".

2.27

However, "as this did not occur, the Tax Authority understood that the Petitioner had made a waiver to C… equivalent to the value of the depreciation of the bus used in the operation of the tourist circuits in Porto", having incurred the "(…) non-compliance with the protocol signed (…)" and having violated "(…) the accounting principle of exercise matching (...) which resulted in the omission of income (…)", whereby, states the Claimant, the Respondent understood that it "(…) did not proceed with the calculation of the tax that should have applied to the active operations described (…)".

2.28

But, according to the Claimant, in this case as well, "(…) the Tax Authority is not correct", whereby it reiterates that it was with the commercial intent that "(…) it obtained from the City Councils of …, … and … the relevant authorization and developed contacts (…) to enable the operationalization of circuits in those municipalities in the metropolitan area of …".

2.29

In fact, the Claimant asserts that "it was (…) naturally that (…) it established (…) the aforementioned protocol with C… which resulted in the creation and operation of various tourist circuits (…)", and "(…) the first years of its joint operation (…) generated negative results".

2.30

According to the Claimant, "the main reason that led to the obtaining of these negative operating results was the manner in which the buses (…) used in those tourist circuits were depreciated for accounting and tax purposes", in that, on the one hand, "following the rates (between 12.5% and 25%) provided for in Regulatory Decree No. 2/90 (…) the Petitioner calculated the corresponding expense for the depreciation of the buses (…)", but on the other hand, "(…) for C…, the buses used had a useful life period considerably longer than that which resulted from the application of those depreciation rates".

2.31

In these terms, according to the Claimant, "(…) in 2008, the result of the partnership was negative (…)" and "respecting what had been protocolled (…), the Petitioner charged the amount corresponding to half of that value to C…(…)".

2.32

However, given that "(…) C… proved unwilling to, in 2009, maintain the partnership (…) if the results were again harmed because of the depreciation of the buses (…)", the Claimant "wanted to prevent any argument (…) that would jeopardize the maintenance of the partnership".

2.33

Thus, in 2009, "(…) the Petitioner took into account the actual period of use of the buses in question (…)" defining "(…) a new (…) formula for the allocation of gains and losses attributable to the operation of the tourist circuit of …", whereby "(…) the allegations in the Report as to the existence of a waiver on the part of the Petitioner or that it followed two distinct interpretations and procedures are refuted".

2.34

The Claimant further states that "C… will not cease to bear its pro-rata share in the results (namely the negative ones) that were generated by the operation of the tourist circuits in …, insofar as the Petitioner merely allowed the result of the accounting of the depreciation of the buses in those results to be spread over a longer period of time".

2.35

Thus, for the Claimant, "(…) in this situation as well it makes no sense to presume that there was any transfer of goods or provision of services between the Petitioner and C…" and that "the Petitioner omitted income as a result of the performance of that supposed operation", whereby "(…) it must be concluded that there is no legal basis justifying the adjustment present in the Report and maintained by the Order, and it must consequently be annulled".

VAT Improperly Deducted Relating to Expenses with Invoices Issued by Community Suppliers (Tax Period 2008)

2.36

In this regard, the Claimant maintains that "the Report determined the non-acceptance of the VAT deduction made by the Claimant on the basis of invoices issued by a community supplier (G…), based in Prague", on the basis of the following arguments:

2.36.1

"The Claimant deducted VAT incurred on the basis of pro forma invoices issued by a community supplier (G…)";

2.36.2

"The pro forma invoices supported the accounting entries made by the Claimant";

2.36.3

"The taxpayer did not present a bank statement to support the veracity of the statements made".

2.37

Now, according to the Claimant, "(…) these invoices (...) resulted from services that it provided (…) in the context of a study (…) concerning the feasibility of creating and operating a tourist circuit in Prague (…)" and, having the Claimant subsequently presented, "(…) the final invoices (…) issued by that service provider (…)", "such documents demonstrate (…) that the Claimant deducted the VAT incurred taking into account final documents and not provisional ones (…)", which it reiterates "(…) contain all the mandatory elements so that the deductibility of the VAT resulting from them cannot be called into question".

2.38

On the other hand, and with respect to the alleged discrepancy in values noted in the invoices and in the bank statements, the Claimant defends that "(…) the explanation could not be clearer" insofar as "given that the invoices were issued by a taxpayer resident in the Czech Republic, it is normal that the same used for this purpose the legal tender of the local currency (…)" and "given that the Claimant is in Portugal and should prepare its accounts in accordance with the legal tender in this territory, it is normal (…) that it resorts to exchange rates (…) publicly disclosed by banks (…) using as reference the rate of the day on which it occurred, namely, the taxability of the tax".

2.39

Thus, for the Claimant, "neither here is it apparent why the right to deduct VAT that (…) it incurred by having contracted the services of G…" whereby it understands that "(…) the VAT adjustment defended in the Report and maintained by the Order is manifestly illegal and must be annulled".

Of Indemnificatory Interest

2.40

In this matter, the Claimant alleges that "concluding that [it is] correct (…) and that the VAT and compensatory interest assessments correspond to illegal acts, the Tax Authority should pay indemnificatory interest (…) on the value of the tax here contested improperly assessed and paid (…)".

Of the Preliminary Ruling Referral to the CJEU

2.41

Notwithstanding the Claimant's understanding that "the Arbitral Tribunal will be capable of deciding in accordance with the applicable law, national and community, as well as the principles of the VAT system, with no need for referral to the CJEU of any question for a preliminary ruling", "should this Tribunal understand that doubts subsist as to the interpretation of the rules (…) mentioned in light of Community Law, this Tribunal has the legal duty to submit the appropriate questions to the CJEU".[5]

2.42

The Claimant concludes its request, asking that "(…) it be pleased to grant the request (…) for arbitral pronouncement determining, as a consequence, the annulment of the act that dismissed the hierarchical appeal and part of the additional assessments (…)" of VAT and compensatory interest identified, "(…) insofar as they relate to the adjustments (…) contested, as well as in the payment of indemnificatory interest (…)".

3. RESPONSE OF THE RESPONDENT

3.1

The Respondent responded sustaining the lack of merit of the request for arbitral pronouncement, having invoked the following arguments:

Of the adjustments Relating to VAT Improperly Deducted Relating to Expenses with Invoices Issued by Community Suppliers (Tax Period 2008)

3.2

With respect to this matter, the Respondent states in the response filed that "considering that in those intra-community acquisitions of services VAT was assessed in national territory by the Claimant (…) it is credible that the difference in values between the pro forma invoices considered in the Tax Inspection Report and the corresponding final invoices is related to the currency exchange differences, in the meantime occurred, of the Czech crown against the euro", "whereby the right to deduction exercised by the Claimant should be considered valid if based on the same document that served for the self-assessment of the tax", and "as such, it is considered that the adjustments to the VAT deducted by the Claimant in the periodic declarations of June and November 2008 concerning this matter should be annulled" (our emphasis).

3.3

The Respondent proceeds by stating that "as to the rest, it is necessary to reiterate what is stated in the decision granting partial allowance of the hierarchical appeal (…) justifying itself only for some additional appraisals of the arguments now renewed by the Claimant".

Of the adjustments Relating to Cafeteria Expenses (Tax Period 2008 and 2009)

3.4

In this matter, according to the Respondent, "(…) it is not sufficient for the Claimant to allege that these are expenses essential to the training services provided and to the well-being of its workforce, when it was proven during inspection that:

• The cafeteria was not even used in 2008 (neither by trainers or trainees, in support of the performance of training courses, nor for the purpose of strengthening professional, social or personal ties among the Claimant's employees);

• The cafeteria is used both by employees of the Claimant and by employees of the parent company (D…), which owns the facilities".

3.5

On the other hand, according to the Respondent, "although the Claimant refers to the existence of a leasing contract (…), the truth is that it does not present it, nor do the attached elements (…) prove it", whereby it concludes that "(…) no flaw can be attributed to the adjustments made and the resulting tax assessments and compensatory interest".

Of VAT Not Assessed on the Operation of the … Circuit (Tax Period 2008)

3.6

In this matter, the Respondent defends that "neither in the course of the inspection procedure, nor in the context of administrative challenge procedures (gracious complaint and hierarchical appeal), did the Claimant succeed in presenting proof – by any suitable means – of the existence of the alleged negotiations that would have led to the modification of what was protocolled", "it being certain that on it devolved (…) the burden of proof of the facts it invokes (…)".

3.7

Thus, for the Respondent, "the charging of any expenses incurred, and notwithstanding the same corresponding to a mere reimbursement, gives rise to VAT assessment, as it is considered a provision of services, in light of the provision of paragraph 1 of article 4 of the VAT Code" (our emphasis).

Of VAT Not Assessed on the Operation of the … Circuit (Tax Period 2009)

3.8

In this respect, for the Respondent, "it is clear that had there been a modification to the manner of allocation of profits and losses arising from the operation of the said circuit, not only should the same be formalized with the same formalities ad substantiam and or formatione that characterize the protocol executed between the entities", "but it should have been properly reflected in the accounting elements of the Claimant (…)", "which did not occur".

3.9

Additionally, the Respondent considers that "the charging (…) of the negative results of the operation of the Porto circuit constitutes a provision of services for the purposes of the provision of paragraph 1 of article 4 of the VAT Code, and is, as such, subject to taxation".

3.10

The Respondent reiterates that "in accordance with this rule, the concept of provision of services has a residual character, encompassing all operations arising from an economic activity that are not defined as transfers or imports of goods", concluding that "the operation in analysis is, manifestly, arising from an economic activity", "whereby the impugned assessments do not suffer from any flaw" (our emphasis).

Of Indemnificatory Interest

3.11

In this matter, the Respondent understands that "(…) given that, as fully demonstrated, there is no error attributable to the services in this case, there is no basis for the payment of indemnificatory interest".

Of Witness Examination

3.12

In this respect, the Respondent considers that "(…) no documentary proof apt to support the facts evoked by the Claimant is attached", being "(…) that (…) the only suitable means of proof to prove such facts (…)", "whereby it cannot be accepted that it comes to request witness examination with a view to proving facts that the law requires (…) that be proven by documentary proof", "and that (…) it is not accepted that they be proven through any other type of proof".

3.13

The Respondent concludes its Response requesting that "without prejudice to what is stated in subparagraph a) of Part III of this Response, the present request for arbitral pronouncement should be judged unmeritorious due to lack of proof, and, consequently, the Respondent absolved of all other requests, all with the due and legal consequences", "further requesting, in the terms above petitioned, that if witness examination is not dispensed with, the Claimant be notified to indicate which facts it intends to have proven by the witnesses, which are not susceptible to documentary proof".

4. PRELIMINARY EXAMINATION

4.1

The request for arbitral pronouncement is timely since it was filed within the period provided for in subparagraph a) of paragraph 1 of article 10 of RJAT.[6]

4.2

The parties have capacity to sue and be sued, have standing with respect to the request for arbitral pronouncement and are duly represented, in accordance with the provisions of articles 4 and 10 of RJAT and article 1 of Order No. 112-A/2011, of 22 March.

4.3

The Tribunal is competent to rule on the request for arbitral pronouncement filed by the Claimant.

4.4

The cumulation of requests is legal, as the requirements set forth in article 3, paragraph 1 of RJAT are met, that is, the merit of the requests depends essentially on the appraisal of the same circumstances of fact and the interpretation and application of the same principles or rules of law.

4.5

No exceptions were raised that need to be ruled upon.

4.6

There are no irregularities, whereby it is now necessary to rule on the merits of the request.

5. MATTERS OF FACT

5.1 Facts Proven

5.2 The Following Facts are Considered as Proven:

5.2.1

The Claimant began its activity on 3 January 1986, being registered as a VAT taxpayer, of the mixed type with real allocation of all assets, for the exercise of the activity of urban land passenger transport, with CAE 49310, and classified under the normal monthly frequency regime as of 1 January 2005 (as indicated in doc. No. 7, attached to the case with the request and administrative file).

5.2.2

The Claimant is 100% owned by D…, S.A. (…) and has as its corporate purpose the performance of studies and research projects for the development of technologies related to the organization, management and operation of transport systems and networks, as well as the promotion and performance of professional training courses in the context of technologies for the organization and management of public road transport networks and systems and its operation (as indicated in docs. No. 1, 2 and 7, attached to the case with the request and administrative file).

5.2.3

Additionally, the Claimant may also pursue the following activities (as indicated in docs. No. 2 and 7, attached to the case with the request and administrative file):

a) The management and operation of public internal or international collective road passenger transport;

b) The activity of organization and sale of tourist trips, reservation of services in tourist undertakings with ticket sales and reservation of places in any means of transport, reception, transfer and assistance to tourists, as well as representation of other travel and tourism agencies, national or foreign or foreign tourist operators and intermediation in the sale of their respective products;

c) The activity of rental of vehicles without driver, car rental;

d) The management and operation of parking in covered or uncovered areas, as concessionaire, sub-concessionaire or pursuant to a management contract with third parties;

e) The provision of advisory services or others, in Portugal or abroad, in the context of the activities developed;

f) The representation of equipment or its components that are directly related to the set of activities to be developed;

g) The activity of operation of driving schools, including the teaching of driving, promotion and performance of training in this area and in the area of prevention and road safety;

h) Tourist animation, including the activity of maritime tourist operator.

5.2.4

For the development of training activity, the Claimant has a Training Academy in which it develops "training and consulting projects for companies whose activity is linked to the transport of passengers and goods, thereby contributing to the growth of knowledge, development of new skills, motivation and enhancement of human resources of companies (…)", with the training offer encompassing training initiatives in transport, technical/official training and behavioral training (as indicated in doc. No. 14, attached to the case with the request and administrative file).

5.2.5

The Claimant had and had at the date to which the assessments relate (this fact was not contested by the Respondent), facilities in ... (property of D…), where it developed training activity (training academy), which included 6 training rooms (equipped with air conditioning, video projector, computer, whiteboard and projection screen), auditorium, cafeteria and parking (as indicated in doc. No. 16, attached to the case with the request and administrative file).

5.2.6

The Claimant, in the fiscal years 2008 and 2009, obtained results arising from the training activity developed in the amount of, respectively, EUR 912,420.63 and EUR 1,064,517.67 (as indicated in doc. No. 18, attached to the case with the request and not contested by the Respondent, as well as the administrative file).

5.2.7

The Claimant waived the exemption from VAT on the training courses it conducts (as indicated in doc. No. 7 attached to the case with the request and administrative file).

5.2.8

The Claimant entered into, on 1 June 2005 (with entry into force on the date of commencement of operation), a written protocol with B… – … – E.M., valid for a period of three years, automatically and successively renewable for equal periods (provided it was not terminated by either party by registered letter with return receipt requested), aiming at the joint operation of the tourist circuit of … (operation coordinated by the Claimant), in which were defined obligations for both parties, as well as the manner of allocation of profits or losses obtained from the sale of tickets (in equal parts), as indicated in doc. No. 20, attached to the case with the request and administrative file.

5.2.9

The Claimant entered into, on 31 August 2008 (with entry into force on 1 September 2008), a written protocol with C… – …, …, Sole Proprietor, Limited Liability Company, valid for a period of two years, automatically and successively renewable for equal periods (provided it was not terminated by either party by registered letter with return receipt requested), aiming at the joint operation of the tourist circuits of … (operation coordinated by the Claimant), in which were defined obligations for both parties, as well as the manner of allocation of profits or losses obtained from the sale of tickets (in equal parts), as indicated in doc. No. 23, attached to the case with the request and administrative file.

5.2.10

The Claimant was subject to an internal general audit action conducted in respect of the fiscal years 2008 and 2009, in compliance with Service Orders Nos. OI2012… and OI2012…, both of 22 November 2011, commencing on 29 February 2012, with the audit acts being concluded, after two extensions, on 4 October 2012 (as indicated in doc. No. 7, attached to the case with the request).

5.2.11

Following the audit action referred to in the previous point, the following arithmetic adjustments were identified in the context of VAT, as indicated in doc. No. 7, attached to the case with the request and administrative file (the amounts are expressed in Euros – EUR):

5.2.12

Included in the above-mentioned arithmetic adjustments were the following VAT adjustments, subject to the request for arbitral pronouncement, in the total amount of EUR 19,178.33 (as indicated in doc. No. 7, attached to the case with the request and administrative file):

5.2.12.1

VAT improperly deducted, in the years 2008 and 2009, in the amount of EUR 801.02 and EUR 3,545.94, relating to cafeteria expenses;

5.2.12.2

VAT improperly deducted, in the year 2008, in the amount of EUR 2,006.00, relating to invoices issued by intra-community supplier (G…);

5.2.12.3

VAT not assessed, in the year 2008, in the amount of EUR 1,107.89, relating to the protocol "B… – …";

5.2.12.4

VAT not assessed, in the year 2009, in the amount of EUR 11,717.48, relating to the protocol "C… – …".

5.2.13

On 14 November 2012 (order of 12 November 2012), the Claimant was notified to pronounce itself on the Draft Report of Tax Inspection, in which were proposed, among others, the above-presented adjustments (as indicated in doc. No. 5, attached to the case with the request and administrative file).

5.2.14

The Claimant exercised on 30 November 2011 its right to prior hearing, in which it expressed its disagreement with the adjustments proposed in the Draft Report of Tax Inspection identified in the previous point, requesting its revision (as indicated in doc. No. 6, attached to the case with the request and administrative file).

5.2.15

On 7 December 2012, the Claimant was notified of the final version of the Tax Inspection Report, in which were maintained the adjustments subject to the request for arbitral pronouncement (above identified in point 5.2.12), as indicated in doc. No. 7, attached to the case with the request and administrative file.

5.2.16

In consequence, the Claimant was also notified of the following VAT and compensatory interest statements (amounts in Euros – EUR), as per doc. No. 8, attached to the case with the request and administrative file:

5.2.17

The Claimant paid the amounts identified in the previous point, in a total of EUR 44,912.15, on 15 February 2013 (as indicated in doc. No. 9, attached to the case with the request and administrative file), that is, within the voluntary payment deadline (28 February 2013).

5.2.18

The Claimant filed a gracious complaint relating to the adjustments in the Tax Inspection Report (and, in consequence, relating to the assessments subject to the request for arbitral pronouncement) on 26 June 2013 (as indicated in doc. No. 10, attached to the case with the request and administrative file).

5.2.19

After instruction of the case and appraisal of the disputed matter, the Respondent made, on 26 March 2014, the draft decision relating to the gracious complaint identified in the previous point, which was communicated to the Claimant, by registered mail, on 15 April 2014, to exercise, in writing, its right to prior hearing, within a period of 15 days (as indicated in doc. No. 11, attached to the case with the request and administrative file).

5.2.20

The Claimant exercised its right to hearing relating to the draft decision regarding the appraisal of the gracious complaint on 5 May 2014, reiterating the arguments advocated (as indicated in doc. No. 11, attached to the case with the request and administrative file).

5.2.21

The Claimant was notified of Office No. …, of 30 May 2014, relating to the partial allowance of the gracious complaint above identified (No. …2013…), in conformity with the order of 29 May 2014 (as indicated in doc. No. 11, attached to the case with the request and administrative file), in accordance with which the following adjustments to the assessments at issue were based (amounts in Euros – EUR):

5.2.22

The Claimant filed a hierarchical appeal of the decision granting partial allowance of the gracious complaint No. …2013…, on 27 June 2014 (as indicated in doc. No. 12, attached to the case with the request and administrative file).

5.2.23

The Claimant was notified through Office No. …, of 26 June 2015, sent under postal registration on 29 June 2015, to exercise, if it so wished, its right to prior hearing, within a period of 15 days relating to the draft grant of partial allowance of the hierarchical appeal (as indicated in doc. No. 13, attached to the case with the request and administrative file), a right that was not exercised by the Claimant.

5.2.24

The Claimant was notified of Office No. …, of 26 August 2015, relating to the partial allowance of the hierarchical appeal above identified (No. …2014…), in accordance with the order of 14 August 2015 (as indicated in doc. No. 13, attached to the case with the request and administrative file), in accordance with which it is understood that "the Appellant is correct as to VAT not assessed (other tourist circuits), whereby (…)" it orders the annulment of part of the VAT adjustments, in the amount of EUR 3,825.68 and EUR 4,115.84, relating to the years 2008 and 2009, and corresponding compensatory interest.

5.3

Beyond the factuality described relating to the facts proven, inherent to the characterization of the Claimant and the activity developed (points 5.2.1 to 5.2.10 as well as those relating to the inspection and tax procedures (points 5.2.11 to 5.2.24), above), based on the documentation attached to the case, the following facts are also given as proven, based on the documentation attached (whenever applicable) and on the testimony of the witnesses (H…, I…, J…, K… and L…) enrolled by the Claimant and heard by the Arbitral Tribunal on 21 April 2016, regarding the facts previously indicated by the Claimant:

5.3.1

The cafeteria installed in the Training Academy contributed to the improvement in the functioning of the training courses held there, as it facilitated the satisfaction of the basic food and social needs of the trainees and trainers;

5.3.2

The Claimant, in the context of an "agreement" entered into with E… – …, Ltd. (as per the "equipment proposal – cafeteria ...", dated 10 September 2004, whose conditions were modified at a meeting held on 13 September 2004), registered in 2008 four invoices relating to "equipment and furnishings agreement", in the monthly amount of EUR 914.22 (EUR 1,106.21, VAT included), relating to the months of January to April 2008 (as indicated in doc. No. 17, attached to the case with the request and administrative file), in the total amount of EUR 3,656.88 (EUR 4,424.44, VAT included).[7]

5.3.3

The Claimant developed a commercial strategy with the objective of asserting itself as the leading operator of panoramic bus tourist circuits, whether in the national or international market, having for this purpose, in national terms, entered into various partnerships with local operators [namely, in the case in analysis, with B… (…) and with C… (…), in conformity with what is stated in points 5.2.8 and 5.2.9, above.

5.3.4

As a result of those partnerships, the Claimant asserted itself as the main operator of tourist circuits in Portugal, being present in 6 national cities (…, …, …, …, … and … (as indicated in doc. No. 21, attached to the case with the request and administrative file)

5.3.5

The Claimant, in face of the negative results obtained, in 2008, in the partnership entered into with B… (tourist circuit of …), verbally agreed with the officials of this entity that those negative results would be borne entirely by the Claimant [contrary to what is provided in clause 5 of the protocol entered into (point 5.2.8)], so as not to jeopardize the maintenance of the commercial partnership in the operation of that tourist circuit, a strategic factor for the Claimant.

5.3.6

The verbal agreement described in the previous point was not reduced to writing.

5.3.7

As a consequence of that verbal agreement, the Claimant (entity coordinating the commercial partnership) assumed entirely, in 2008, the negative result of the joint operation with B… relating to the tourist circuit of …, in the amount of EUR 11,078.43, and no invoice was issued to B… for 50% of this value, given that the previously established allocation criterion had been modified, in accordance with what is described in points 5.3.5 and 5.3.6, above.

5.3.8

The Claimant, in face of the negative results obtained, in 2009, in the partnership entered into with C… (tourist circuit of …), verbally agreed with the officials of this entity that those negative results would be borne entirely by the Claimant (contrary to what is provided in clause 5 of the protocol entered into (point 5.2.9)), so as not to jeopardize the maintenance of the commercial partnership in the operation of that tourist circuit, a strategic factor for the Claimant.

5.3.9

The verbal agreement described in the previous point was not reduced to writing.

5.3.10

As a consequence of that verbal agreement, the Claimant (entity coordinating the commercial partnership) assumed entirely, in 2009, the negative result of the joint operation with C… relating to the tourist circuit of …, in the amount of EUR 117,174.84, and no invoice was issued to C… for 50% of this value, given that the previously established allocation criterion had been modified, in accordance with what is described in points 5.3.8 and 5.3.9, above.

5.3.11

Having in consideration the method of depreciation adopted with respect to the depreciation of the buses used by the Claimant (and which led to an excessive reduction of income), this prepared, internally, in March/2011, a proposal to modify the methodology adopted in the matter of depreciation practices and charged to both parties, in the context of the partnerships entered into for the operation of tourist circuits, increasing the useful life period of the buses used in the tourist circuit of … to twelve years (with effect from the fiscal year 2009) and extending the application of these procedures to partnerships of the same nature already existing, having approved the aforementioned proposal for modifications internally in April/2011 (as indicated in doc. No. 27, attached to the case with the request and administrative file).

5.4

Following analysis of the entire case file, evidence was not obtained of the following invoices, issued by E… (in 2008) and by M… (in 2009), mentioned in the Tax Inspection Report and not contested by the Claimant as to their existence:

5.5

No other facts susceptible to affecting the decision on the merits of the request were proven.

5.6 Facts Not Proven

5.7

It was not proven that the Claimant omitted income in the partnerships entered into with B… and with C…, respectively, in the year 2008 and 2009, taking into account the facts above given as proven in points 5.2.8, 5.3.5 to 5.3.7 (partnership with B…) and 5.2.9, 5.3.8 to 5.3.10 (partnership with C…).

5.8

There were no other facts found as not proven with relevance to the arbitral decision.

6. LEGAL FOUNDATIONS

6.1

In this case, the Arbitral Tribunal understands that there are two essential questions to decide, which are identified below:

6.1.1

To determine whether or not the adjustments in the context of VAT that gave rise to the VAT assessments subject to the request for arbitral pronouncement, made in August 2015, and relating to the tax periods 2008 and 2009, are affected by illegality and, in consequence, determine whether they should be annulled;

6.1.2

To assess whether the decision granting partial allowance of the hierarchical appeal filed (against the decision granting partial allowance of the gracious complaint filed relating to the VAT assessments already identified) should or should not also be annulled on the basis of illegality thereof.

Question of Preliminary Ruling Referral

6.2

For the decision of the two questions above enunciated, it will still be important to assess whether the interpretation of the applicable rules, carried out by the Tax Inspection Services (SIT) of the Respondent (and ratified by the decision rendered in the Hierarchical Appeal presented by the Claimant, and whose contents this also intends to review with this request) violates or not the provisions of Directive 2006/112/EC of the Council of 28 November and, in consequence, assess whether there will be a need to promote a preliminary ruling referral to the CJEU, in the terms suggested by the Claimant.

6.3

Indeed, it should be noted that, notwithstanding the Claimant's understanding that "the Arbitral Tribunal will be capable of deciding in accordance with the applicable law, national and community, and with the principles of the VAT system, with no need for referral to the CJEU of any question for a preliminary ruling", it has formulated in the request filed that "should this Tribunal understand that doubts subsist as to the interpretation of the rules (…) mentioned in light of Community Law, this Tribunal has the duty to submit the appropriate questions to the CJEU", having, for this purpose, and in case of doubt, listed the questions it intends to be submitted to that entity (our emphasis):

6.3.1

"Is it permissible to interpret article 168, subparagraph a) of Council Directive 2006/112/EC of 28 November, relating to the Common System of Value Added Tax (VAT Directive), in the sense of excluding the right to deduct VAT incurred by a VAT taxpayer on the equipment of a cafeteria used by it for the purposes of attracting and pursuing a taxable activity in the context of this tax, based on the arguments that such training courses are not related [to] a culinary activity and that the aforementioned taxpayer already pays a meal allowance to its employees?"

6.3.2

"The fact that a VAT taxpayer, in the course of its activity and following economic management rationales, has decided to bear in full in a given tax period the negative results of operation of tourist circuits it had organized in partnership with other economic agents (not invoicing the latter immediately for the part of those negative results that would be theirs) can be viewed as an operation on which a general tax on consumption, as is VAT, can be levied, in light of the provisions of article 1, paragraph 2, of the VAT Directive?"

6.3.3

"In case of an affirmative answer to the previous question, does that decision of the taxpayer constitute a taxable operation in the context of VAT of what nature: a transfer of goods, in accordance with article 14, paragraph 1, of the VAT Directive, or a provision of services, as provided for in article 24, paragraph 1 of the VAT Directive?"

6.4

The question relating to the decision on the preliminary ruling referral (see point 6.2, above), for reasons of economy in the exposition and foundation of this arbitral decision, will not be addressed as a priority matter, thus following the same order of exposition adopted by the Claimant in its arbitral request.

OF THE ADJUSTMENTS SUBJECT TO CHALLENGE

Cafeteria Expenses (Tax Periods 2008 and 2009)

6.5

As we have seen above, one of the adjustments that resulted from the Tax Inspection Report, made to the fiscal years 2008 and 2009, concerns the adjustment of "VAT deductions made by the Claimant", in those tax periods, in the amounts of EUR 801.02 and EUR 3,545.94.

6.6

Indeed, in the aforementioned Report, the Respondent sustains the above-identified adjustment on the basis of the following arguments:

a) "Given that the building of the Petitioner's headquarters belongs to D…, it should be this entity that should bear and deduct the VAT relating to the monthly retainer paid to E…;

b) The deductibility of VAT depends on this tax applying to goods or services acquired that contribute to the performance of transfers of goods or provisions of services;

c) It is not comprehensible that the existence of a cafeteria would contribute to the increase in demand for training courses, especially given that they have as their object professional development, information technology, defensive driving and the like;

d) Given that the Petitioner already pays a meal allowance to its employees, it does not need to have a functioning cafeteria;

e) The income associated with the operation of the cafeteria (…) is not reflected in the accounts of the Petitioner".

6.7

The understanding described in the previous point was maintained, both in the decision granting partial allowance of the gracious complaint filed against the tax assessment (as per doc. No. 11 attached with the request and administrative file), and in the matter of the decision that fell on the hierarchical appeal filed against the decision granting partial allowance of the aforementioned gracious complaint (as per doc. No. 13 attached with the request and administrative file).

6.8

However, the Claimant in the request for arbitral pronouncement reiterates that "it cannot agree with this adjustment", insofar as "the cost of the retainer in question here contributes to the performance of the Claimant's activity (subject to tax), in two distinct ways: (i) it is essential to the [performance of] the training services provided by the Claimant and (ii) it is essential for the well-being of its workforce", adding still that the Claimant that the training activity is highlighted in its corporate purpose and that "to perform that training activity, the Claimant understood that it would be very important to be able to count on a fully equipped cafeteria, in such a manner that it could be used by trainers and trainees in the course of the training courses" (our emphasis).

6.9

In this matter, it will therefore be fundamental to determine whether the existence of the cafeteria facilities and the costs associated with its operation contribute or not to the performance of taxable provision of services [as is the case with the training courses developed by the Claimant, which according to the information made available by this and not contested by the Respondent, generated, in 2008 and 2009, "results of € 912,420.63 and € 1,064,517.67, respectively (…)]".[8][9][10]

Of the Right to Deduction Under VAT

6.10

As Clotilde Celorico Palma states, "(…) VAT is characterized, essentially, as an indirect tax of European origin, multiphase, which tends to affect all acts of consumption through the indirect method", being that "(…) it is a tax that applies to all phases of the productive process from producer to retailer, through the so-called indirect subtractive method, of invoice credit or fractional payment system".[11] [12]

6.11

Still according to the same author, "(…) VAT operating through this method at the various phases of the production and commercialization chain of goods and services, will apply only to the value added in each one, the final price of the good being equivalent to the sum of the added values (…)", the final consumer being the one who economically bears the VAT, although not being a tax subject.

6.12

Through this method, it is sought to safeguard the neutrality of the tax, and for this purpose the deduction mechanism proves essential, freeing economic operators from the burden of VAT in the context of their activities.

6.13

The right to deduction has as its presupposition that the entity that bears the VAT in its respective upstream acquisitions will realize, downstream, taxed operations or exempt operations that confer the right to deduction.

6.14

Thus, the taxpayer, acting as such, may deduct in its outputs (sales of goods or services with VAT) the VAT incurred in its inputs (purchase of goods or acquisitions of services with VAT from other taxpayers).

6.15

In this context, it is appropriate to recall that, as the VAT system is conceived, based on the principle of neutrality (Community Directive 77/388/EEC, amended by Community Directive 2006/112/EC), the right to deduction has as its presupposition that the entity that incurs it in its respective acquisitions or imports realizes, in turn, downstream, taxed operations or exempt operations that confer the right to deduction.

6.16

Which means that the possibility of deduction of VAT incurred upstream by a taxpayer is dependent on the type of active operations that that taxpayer performs in its activity, and there must still be a direct and immediate relationship between an upstream operation and one or more downstream operations that confer the right to deduction. [13]

6.17

Indeed, already in article 2 of Directive 67/227/EEC of 11 April (First Council Directive), relating to the harmonization of the legislation of the Member States with respect to taxes on turnover [subsequently replaced by Directive 2006/112/EC of the Council of 28 November (VAT Directive)], it was provided that the principle of the common VAT system "consists in applying to goods and services a general tax on consumption exactly proportional to the price of goods and services, whatever the number of transactions occurring in the production and distribution process prior to the taxation stage" and thus "in each transaction, the VAT, calculated on the price of the good or service at the rate applicable to the said good or service, is payable, with prior deduction of the amount of tax that has applied directly to the cost of the various elements constituting the price" (our emphasis).

6.18

Being VAT a tax of Community origin, the matter relating to deductions is currently regulated essentially in articles 167 to 192 of Directive 2006/112/EC of 26 November, relating to the common VAT system, providing that "when goods and services are used for the purposes of its taxed operations, the taxpayer has the right, in the Member State in which it performs those operations, to deduct from the amount of tax of which it is a debtor (…)", namely, "the VAT due or paid in that Member State in relation to goods that have been or will be delivered to it and in relation to services that have been or will be rendered to it by another taxpayer" (our emphasis).[14]

6.19

In the Value Added Tax Code (VAT) [approved by Decree-Law No. 394-B/84 of 26 December, through which the transposition to domestic law of the Sixth Council Directive (Council Directive 77/388/EEC of 17 May) was carried out], the subjective, objective, formal and temporal requirements for the exercise of the right to deduction are regulated. [15]

6.20

Thus, only VAT taxpayers who do not benefit exclusively from incomplete exemptions may deduct the tax [cf. article 14 of the VAT Code and RITI, article 19, paragraph 1, subparagraph b), I, of the VAT Code, article 19, paragraph 2, of RITI and articles 9, 53 and 20, paragraph 1, of the VAT Code], it being that mixed taxpayers, who practice simultaneously activities that do and do not confer the right to deduction, have the right to deduct the tax that relates to non-exempt operations and integral taxpayers, to deduct all tax that burdened their upstream operations.

6.21

In these terms, the right to deduction is therefore a central element in VAT, and its exercise is dependent on the cumulative verification, as we have seen, of objective requirements (related to the type of expense), subjective requirements (relating to the taxpayer) and formal requirements.

6.22

Depending on the exemptions of which they benefit, tax subjects may have the right to full or partial deduction, or no right to deduction at all, taking into account compliance with certain objective and formal requirements.

6.23

With respect to objective requirements, for there to be a deduction, the expense must be deductible (and cannot be found excluded in accordance with the provisions of article 21, paragraph 1, of the VAT Code), with the tax provided for in article 19, paragraph 1, of the VAT Code (and in article 19, paragraphs 1 and 2, of RITI) being susceptible to deduction.

6.24

Thus, only the operations (non-exempt or benefiting from complete exemption) provided for in article 20 of the VAT Code confer the right to deduction, and the goods and services in question must be directly related to the activity of the taxpayer. [16]

6.25

On the other hand, and as a formal requirement of the right to deduction, in accordance with the provisions of article 19, paragraph 2, of the VAT Code, the tax must be mentioned in an invoice or equivalent document, passed in legal form, invoices or equivalent documents passed in legal form being considered those which contain the elements provided for in article 36 of the VAT Code (ex vi article 19, paragraph 6 of the VAT Code), or in the receipt of VAT payment that is part of the import declarations, as well as in documents issued electronically by the General Directorate of Customs and Special Consumption Taxes.[17]

6.26

With respect to the right to deduction, this right arises at the time when the deductible tax becomes payable, in accordance with the provisions of articles 7 and 8 of the VAT Code (by transposition of article 17, paragraph 1 of the Sixth Directive, current article 167 of Directive 2006/112/EC), and the aforementioned deduction must be effected, without prejudice to the provisions of article 78 of the VAT Code (Adjustments), in the declaration of the period following that in which the receipt of the invoices, equivalent documents or VAT payment receipt took place, and that, when the receipt of these documents takes place in a declaration period different from that of their issuance, the deduction may be effected (if it is still possible), in the declaration period in which that issuance took place (cf. paragraphs 1, 2 and 3 of article 22 of the VAT Code).[18]

6.27

The deduction of tax may be carried out through different methods (indirect subtractive, carryforward or refund), and operates:

6.27.1

Through the indirect subtractive method when from the tax assessed during a given period the amount incurred in the same period is deducted (cf. article 22, paragraph 1 of the VAT Code);

6.27.2

Through carryforward, when excess tax is carried forward to the following tax period (cf. article 22, paragraph 4 of the VAT Code) and,

6.27.3

Through refund (cf. article 22, paragraphs 5 and 6 of the VAT Code), namely, when after 12 months relating to the period in which the excess started, there remains credit in favor of the taxpayer in excess of EUR 250.00 or when there is cessation of activity or transition to a situation of exclusive practice of exempt operations without the right to deduction, or to the special exemption regime or special small retailer regime provided that the refund amount is equal to or in excess of EUR 25.00 or when the credit in its favor exceeds EUR 3,000.00.

6.28

In the matter of jurisprudence, whether at the national level or at the EU level, a large number of Judgments have been issued on questions relating to VAT, namely by the CJEU, proving to be of the greatest importance the clarification that results from its Judgments as to the interpretation of the rules of community law, namely:

6.28.1

That the right to deduction is an instrument for achieving the neutrality of the tax, through which the aim is to fully free entrepreneurs (taxpayers) from the burden of VAT due or paid in the context of all their economic activities (our emphasis);[19]

6.28.2

That the right to deduction, as an indissociable element of the mechanism of the tax, is only susceptible to being limited in cases expressly provided for in the Sixth Directive (currently VAT Directive) (our emphasis).[20]

6.29

Indeed, in accordance with the jurisprudence of that Court (our emphasis):

6.29.1

In the absence of a provision permitting Member States to limit the right to deduction conferred on taxpayers, this right must be exercised immediately in relation to the totality of the tax that burdened the operations carried out upstream;

6.29.2

And because limitations to the right to deduction must be applied in a similar manner in all Member States, only exceptions in cases expressly provided for by the Sixth Directive (currently VAT Directive) are authorized.[21]

6.30

Consequently, any rule or administrative practice that imposes a general restriction on the right to deduct when there is an use for business or professional purposes of goods or services acquired constitutes an inadmissible violation of article 17 of the Sixth Directive (articles 167 to 170 of the VAT Directive).[22]

6.31

In this context, with respect to the right to deduction of VAT, the jurisprudence of the Supreme Administrative Court has come to understand that it is admissible for the deductibility of costs that reveal a direct and immediate nexus with the set of the economic activity of the taxpayer, and that in a Judgment handed down on 3/07/2013 it was considered that "the VAT Code results from the transposition to the domestic legal order of various Community Directives relating to the harmonization of the legislation of the Member States with respect to taxes on turnover, and the interpretation of the domestic law must, in this field, be convergent with the principles and rules postulated in the respective community regulation", and that as to the right of deduction, "the jurisprudence of the Court of Justice of the European Community has come to affirm that the right to deduction provided for in articles 17 to 20 of the Sixth Directive is an integral part of the mechanism of VAT and cannot, in principle be limited (…)" (our emphasis).

6.32

Thus, for VAT to be deductible, the operations carried out upstream must have a direct and immediate relationship with the operations downstream with the right to deduction and presupposes that the expenses incurred with its acquisition have formed part of the constitutive elements of the price of the taxed operations downstream with the right to deduction.[23]

6.33

It still results clearly from the jurisprudence of the CJEU that although Member States have the faculty to adopt measures (under article 22, paragraph 8, of the Sixth Directive), to ensure correct collection of the tax and prevent fraud, they must not go beyond what is necessary to achieve such objectives (principle of proportionality), and such measures cannot be used so as to systematically call into question the right to deduction of VAT, given that this right constitutes a fundamental principle of the common VAT system, put into practice by the community legislation in the matter.[24]

6.34

With respect to the subjective requirements of the right to deduction, the CJEU and...

[Translation continues but appears to be truncated in the source document]