CAAD 716/2016-T: VAT Invoice Requirements Under Article 36(5) of the Portuguese VAT Code

ARBITRAL DECISION

The Arbitrator Dr. Filipa Barros (sole arbitrator), designated by the Ethics Council of the Center for Administrative Arbitration ("CAAD") to form the Sole Arbitral Tribunal, constituted on 14 February 2017, decides as follows:

I. REPORT

The company A..., S.A. with VAT number..., with address at Av..., ..., ... –...Lisbon, hereinafter "Claimant", comes, under the provisions of Article 2, no. 1, paragraph a), and Articles 10 et seq. of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT"[1], to request the constitution of an Arbitral Tribunal to pronounce on the illegality and consequent annulment of VAT assessments, and respective compensatory interest, for the year 2012, relating to improperly deducted VAT, identified by the following numbers:

To substantiate its request, the Claimant considers, in summary, that in the exercise of its activity of management and operation of hotel establishments and similar facilities, the Tax Authority (AT) improperly disregarded the VAT deduction contained in invoices issued by the following suppliers:

a) A batch of invoices issued by company B..., SA (B...), for not containing in the description the mention of the services actually provided;

b) A batch of invoices issued by the same entity, for referring in its description "services provided" and "miscellaneous"; and

c) A batch relating to invoices issued by another entity - C... S.A. to a VAT taxpayer other than the Claimant D.... This batch is not at issue in this request for arbitral pronouncement.

The Claimant argues that it was subject to an inspection action at its facilities and that during the presence of AT officials, the question of clarifying the content of the aforementioned invoices was never raised, nor of the failure to comply with the legal requirements contained in Article 36, no. 5 of the VAT Code. For this reason, and without any intention of withholding elements in the inspection phase, the Claimant only became aware of what was at issue during the prior hearing, immediately attaching the schedules annexed to the issued invoices which contain the details to clarify which services were actually provided and the relevant elements for purposes of calculating the tax.

In this context, the Claimant alleges that within the scope of the duty of cooperation between the AT and taxpayers, it is not reasonable that, with inspectors present in the facilities, they do not specifically state what they need so that non-compliance with legal rules leading to the disregard of costs or deductions for VAT purposes is not determined, translating such actions into an increase in tax burden with additional sanctions charged to the taxpayer.

Drawing on the jurisprudence of the CJEU, and on doctrine, it argues that the problem of formal defects in invoices is based on the structural nature of the right to deduction and its importance in the neutrality of the tax. Thus, the analysis of the sufficiency of the mentions contained in the invoice should be guided according to the principle of proportionality, seeking the harmonization between the exercise of the right to deduction and the objective of correct tax collection and effective control of operations. Indeed, the CJEU has been relativizing the formal requirements for the exercise of the right to deduction and the function that the invoice has therein, understanding that the substance of operations prevails over invoice defects relating to elements typified in the Directive, provided that this does not create a risk of fraud.

The Claimant concludes by asserting that the AT advocates an intransigent and formalistic reading of the provision in no. 5 of Article 36 of the VAT Code, by disregarding the possibility of its invoices containing an annexed grid that completes the formal requirements of the operation.

Such understanding is contrary to the principle of neutrality, with the objective of these norms being to ensure the effective supervision of tax obligations, allowing the identification of the operation in such a way as to enable the extraction of the due consequences regarding the tax to be collected, requirements that are secured in the present case, if the invoice is read in conjunction with its respective annexed schedules.

On 30 November 2016, the request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and immediately notified to the Respondent in accordance with legal terms.

The Claimant did not appoint an Arbitrator.

Thus, under and for the purposes of the provision of no. 1 of Article 6 and paragraph b) of no. 1 of Article 11 of RJAT, by decision of His Excellency the President of the Ethics Council, duly communicated to the parties within the legally prescribed periods, the undersigned was designated as arbitrator of the Sole Arbitral Tribunal, who communicated to the Ethics Council and to the Center for Administrative Arbitration the acceptance of the position within the period stipulated in Article 4 of the Ethics Code of the Center for Administrative Arbitration.

In accordance with the provision in paragraph c) of no. 1 of Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Sole Arbitral Tribunal was constituted on 14 February 2017, followed by the relevant legal procedures.

The Respondent, duly notified to that effect, presented its response in which it argues for the dismissal of the request for arbitral pronouncement.

To that end, it considers that the service provisions invoiced to the Claimant are evidenced by documents that do not contain the itemization of the services actually provided, the unit quantities and their totals, and cannot be considered for the purposes of exercising the right to deduct VAT. Contrary to what the Claimant intends, the correction in question is not based on a mere formalistic requirement, but on a true substantive requirement relating to the proof of the deductibility of the VAT supported with the service provisions invoiced, since, lacking the said mentions in the invoice, the AT cannot know what service provisions the invoices actually relate to.

Furthermore, in due course, the Claimant did not present the supplementary information requested of it to clarify which services were provided by entity B..., S.A., excusing itself on the grounds of not having understood the clarification requested, which, in light of the tenor of the respective notification, seems incomprehensible.

In fact, the Claimant merely stated that the services provided refer to personnel assignments to meet staffing needs in the context of the operation of D..., however, according to the AT, the lack of legal form is not remedied by declarations attesting to the omitted elements, since those declarations do not constitute invoices. The AT also contests the allegation that the invoices in question had been issued with an annexed schedule, considering that the Claimant provides no proof of this fact, nor, in any case, can the failure to comply with invoice formalities be remedied by other means of proof.

Finally, the Respondent understands that the jurisprudence of the CJEU extensively cited by the Claimant in its written brief does not apply to the factual situation under discussion.

Concludes by arguing for the dismissal of the request for arbitral pronouncement.

On 24 April 2017, taking into account that, in this case, none of the purposes legally assigned to it were evident, and having regard to the position taken by the parties, under the provisions of Articles 16, paragraph c), 19 and 29, no. 2 of RJAT, as well as the principles of procedural economy and prohibition of useless acts, the meeting referred to in Article 18 of RJAT was dispensed with, and the parties were notified to present successive written submissions within a period of 10 days.

Written submissions were presented by the Claimant, followed by submissions by the Respondent.

In the submissions presented, the parties reiterated in essence the positions defended in their respective pleadings.

II. CASE MANAGEMENT

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, no. 1, paragraph a), 5 and 6, no. 1, of RJAT.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented, (see Articles 4 and 10, no. 2 of RJAT and Article 1 of Ordinance no. 112-A/2011 of 22 March).

The case does not suffer from any defects of nullity.

III. REASONING

1. Facts Established as Proven

The facts were established as proven on the basis of the documents attached in the scope of the administrative proceedings, the request for arbitral pronouncement and in the response presented by the AT, in accordance with the following indications.

1. The Claimant is registered for the exercise of the activity Hotels with Restaurant (CAE - 055111), since 1979-11-01;

2. The Claimant is a participant of E...SGPS S.A. to the extent of 85.8% and participant in all other companies of the GROUP E..., directly or indirectly;

3. The Claimant has as its activity the management and operation of hotel establishments, either through the direct operation of hotel units that are owned by Group companies (F..., and D...), or with respect to the operational management of hotel units that have established hotel management contracts, namely:

• G... SA, VAT no...;
• B... (Porto) SA, VAT no...;
• H... SA, VAT no...;
• I... Lda, VAT no...;
• J... SA, VAT no...;
• K...Lda, VAT no....

1. The Claimant carries out the direct operation of two 3-star hotels, whose properties are owned by third parties:

• F..., located on Rua da ..., ...-... Porto, with 62 Rooms,
• D..., located at ... -..., ...-... Porto, with 120 Rooms.

1. The following entities participate in the capital of the Claimant:

• 85.76%, (€4,288,000.00) the company E..., SGPS, S.A., VAT no..., with headquarters in Av. ... ... ... Lisbon;
• 8.9% the company L... Lda, and,
• The remaining capital of 5.34% is distributed among individual shareholders: M... and N....

1. The Claimant participates in the following entities:

1. The Claimant was subject to an inspection procedure directed to the exercise of 2012, authorized by service order OI2015..., carried out by the Finance Office of Lisbon, Tax Inspection Services, Division..., Team...;

2. On the basis of the inspection report, corrections were made relating to the disregard of VAT deduction contained in a set of invoices issued by suppliers of the Claimant;

3. Based on the conclusions found in the IT Report, whose content is hereby fully reproduced, the AT made a set of corrections to the total VAT deducted by the Claimant to the following situations:

"III-6- VAT Underpaid - Improper VAT Deduction, in accordance with Articles 19, no. 2 and 36, no. 5 b) both of the VAT Code, contained in invoices issued by supplier ... - B..., SA

It was verified that the invoices issued by supplier B..., SA (B...), which are attached in Annex V pages 162 to 170, and pages 151 to 158 of Annex IV, do not contain in the description the mention of the services that were actually provided.

Through notification of 05.05.2016, (Annex III page 137) the taxpayer was requested to provide the necessary clarification regarding the services provided by entity B..., VAT no..., accounted for as expenses in account 62211-specialized works and with VAT deducted in account 24323123-VAT deducted at 23% rate, by credit from account 2213702- B..., and which are referred to in the invoices mentioned below since in the description contained in the said invoices is mentioned, "Miscellaneous- service provisions" and "miscellaneous":

(...)

In response to the notification which is attached in Annex IV page 146, the taxpayer informs that:

"the services provided by the company refer to personnel assignments to meet staffing needs in the context of the operation of D..."

Only tax contained in invoices issued in legal form confers the right to deduction.

As the law establishes certain requirements relating to the issuance of invoices, as stated in Article 36 of the VAT Code, which enumerates various and detailed requirements regarding their completion, which are a condition for the deduction of tax by the acquiring taxpayer, in harmony with the provision in Article 19, no. 2 of the VAT Code, it can be concluded that the invoice constitutes a formality "ad substantiam" for the exercise of the right to deduct VAT, which cannot be waived in the proof of the respective fact, nor replaced by testimonial evidence.

The invoices that do not meet all the legal requirements referred to in Article 36 of the VAT Code, namely for not itemizing the services that were actually provided, the unit quantities and their totals, cannot be considered as issued in legal form, and consequently do not allow the deduction of the respective VAT in accordance with Article 19, no. 2 of the VAT Code, regardless of proof of the reality of the underlying operations.

This lack of legal form is not remedied by the attachment of declarations attesting to the omitted elements, since those declarations do not constitute invoices.

Thus, the VAT deducted value of €24,060.37 is not accepted, in accordance with Articles 19, no. 2 and 36 both of the VAT Code.

III-7- VAT Underpaid - Improper VAT Deduction, in accordance with Articles 19, no. 2 and 36, no. 5 b) both of the VAT Code, contained in invoices issued by supplier 2213802- B..., SA

It was verified that the invoices issued by supplier B..., SA (B...), do not contain in the description the mention of the services that were actually provided, as verified from the respective photocopies which are attached in Annex VI pages 171 to 183.

In fact, in the description contained in the invoices mentioned below, in the table that follows, is mentioned, "Miscellaneous- service provisions" and "miscellaneous":

The cited invoices were accounted for by debit of accounts 62211-specialized works and 24323123-VAT deducted at 23% rate, by credit from account 2213802-B..., SA

(...)

As mentioned in the previous point, the invoices that do not meet all the legal requirements referred to in Article 36 of the VAT Code, namely for not itemizing the services that were actually provided, the unit quantities and their totals, cannot be considered as issued in legal form, and consequently do not allow the deduction of the respective VAT in accordance with Article 19, no. 2 of the VAT Code, regardless of proof of the reality of the underlying operations. This lack of legal form is not remedied by the attachment of declarations attesting to the omitted elements, since those declarations do not constitute invoices.

Thus, the VAT deducted value of €15,266.69 is not accepted, in accordance with Articles 19, no. 2 and 36 both of the VAT Code."

1. The operations undertaken by the Claimant relating to hotel activities confer the right to deduct VAT supported in the acquisition of goods and services necessary for the exercise of the activity;

2. All invoices issued by supplier B..., S.A. to the Claimant have as common description the following: "Miscellaneous – service provisions";

3. To the common description is added, as the case may be, the date of issuance of the invoice and the month to which the services relate, namely: "Oct" or "January";

4. The specific terms of the calculation of the amount of each of the invoices issued relating to the designation of "Miscellaneous – service provisions" result from a schedule annexed to the invoice entitled, namely, "Personnel Assignment / Month of October 2012" or "Personnel Assignment / Month of January 2012" through which the amount to be invoiced is determined;

5. The invoices issued by supplier B..., S.A. to the Claimant do not mention in their description the existence of an annexed schedule;

6. From the schedule annexed to the invoice the following information appears: name of the worker, functions performed, entity to which it was assigned, amounts paid (salaries, holidays, meal allowance, night shift allowance, absence allowance, language bonus, holiday allowance, Christmas allowance, bonuses, occupational medicine, charges, insurance), total charges per worker and the final sum.

7. All invoices from supplier B..., S.A were subject to VAT at the normal rate of 23%, calculated on the values of the final sum contained in the annexed schedule;

8. On 5 May 2016, the Tax Inspection Service of the Finance Office of Lisbon, Division..., Team..., notifies the Claimant to "clarify specifically which services were provided by entity B..., S.A. VAT no..., accounted for in account 2213702 – B...(which is attached at pages 6) and to which the following mentioned invoices refer since in the description contained in the said invoices is mentioned, namely, "Miscellaneous-serv. Services". "miscellaneous".

Also clarify in which expense accounts the invoices in question were accounted for, which are as follows:"

1. On 12 May 2016, in response to the notification sent by the AT, the Claimant responds in point 2 of its statement as follows: "2.1 The services provided by entity B..., S.A. (VAT No.:...) refer to personnel assignments from this company to A..., S.A. to meet staffing needs in the context of the operation of D..., whose ownership belongs to A..., S.A.

2.2 The invoices contained in the table presented were accounted for in account 62211- Specialized Works"

2.3 Copies of the invoices are attached: (...)".

1. The Claimant was notified of the draft report to exercise its Right to be Heard under Article 60 of the General Tax Law and Article 60 of the Tax Procedure and Process Code, in the context of Service Order no. OI2015...;

2. On 29 June 2016 the Claimant exercised its Right to be Heard against the draft Report prepared by the Tax Inspection in which it stated the following: "the expenses mentioned in this point of the report correspond to, as mentioned in the same, personnel assignments to meet staffing needs in the context of the operation of D..., thus constituting expenses demonstrably indispensable for the realization of income subject to tax. However, due to limitations of invoicing software that the supplier had at the time of the operation, the invoices were issued with an annexed schedule that details all the elements necessary for a correct identification of the quantity and nature of the services provided, as well as the dates of provision of the same, for which reason we understand that the expenses in question should be considered accepted. We attach a copy of the invoices in question, with the said annexed schedule.

For the reasons set out in the previous point and given that the invoice combined with the said "annexed schedule" meets the legal requirements, taking into account that the VAT was correctly charged and fully paid by the supplier, there being therefore no prejudice to the State, we understand that the mentioned shortfalls are remedied, and the respective deduction should be accepted."

1. On 5 July 2016 the Claimant was notified of the decision on the right to be heard, in the sense of its dismissal;

2. On 8 July 2016 the Claimant was notified of the corresponding VAT assessments, in the total amount of €46,231.46, having proceeded to pay them;

3. On 30 November 2016, the Claimant filed the request for constitution of the Arbitral Tribunal that gave rise to the present case (see electronic application to CAAD).

1. Facts Not Established as Proven

No facts with relevance to the assessment of the matter were found that were not proven.

1. Motivation

With respect to factual matters, the Tribunal does not need to pronounce on everything that was alleged by the parties, falling to it, rather, the duty to select the facts that matter for the decision and to discriminate the matter proven from that not proven (see Article 123, no. 2, of the Tax Procedure and Process Code and Article 607, no. 3 of the Code of Civil Procedure, applicable by virtue of Article 29, no. 1, paragraphs a) and e), of RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of Law (see previous Article 511, no. 1, of the Code of Civil Procedure, corresponding to current Article 596, applicable by virtue of Article 29, no. 1, paragraph e), of RJAT).

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

1. Matters of Law

Having established the relevant facts, it is necessary to delimit the object of the request in the present arbitral proceedings.

The invoices disregarded for purposes of the right to VAT deduction, as results from the IT Report, correspond to 2 different situations:

• Two batches of invoices issued by company B..., S.A. (B...), for referring in their description "services provided" and "miscellaneous-January", not containing in the description the mention of the services actually provided. With respect to the schedule annexed to the invoice, the AT understands that this would not be contemporaneous thereto. The corresponding additional assessments of tax and compensatory interest amount to €46,231.46, and the annulment of this amount of correction is the object of the request for arbitral pronouncement.

• A third batch relating to invoices issued by another entity – C..., S.A. - relate to a VAT taxpayer other than the Claimant, corresponding to the additional assessments of tax and compensatory interest to the amount of €5,678.72. This batch of invoices and the corresponding additional assessments are not the object of the request for arbitral pronouncement.

Thus, the question to be decided in the present proceedings is to determine whether the VAT contained in invoices issued to the Claimant by company B..., S.A. should or should not be subject to deduction, taking into account the rules governing this tax in accordance with European Union Law, with its respective transposition at the internal level and with the administrative and judicial interpretation that has been carried out on them, especially by the Court of Justice of the European Union (CJEU). In this regard, it will be important to analyze the question of whether or not the requirements necessary for the respective deductibility are fulfilled, taking into account the interpretation of the provisions of Articles 226 of the VAT Directive and Articles 19, no. 2, paragraph a) and 36, no. 5 of the VAT Code.

In these terms, it is important to make some preliminary considerations relating to the nature and scope of the right to deduction.

4.1 On the Right to Deduction

As is known, VAT is an indirect tax of Community origin, multi-stage, which tends to reach every act of consumption.

The right to deduction is an essential element of the functioning of the tax, and must guarantee its main characteristic – neutrality.

The mechanism of the right to deduction allows the taxpayer to purge from its burden the VAT supported upstream by removing the cumulative effect and cascade taxation that characterized previous systems of consumption taxation. Thus, the right to deduction is based on the so-called method of deduction of the tax, method of tax credit, indirect subtractive method or also method of invoices.

According to this method, and in accordance with the provision in Article 19 of the VAT Code, through an arithmetic operation of subtraction, from the tax calculated in sales and service provisions (outputs) and identifiable in the respective invoices, the tax supported in purchases and other expenses (inputs) is deducted. As determined by the 2nd paragraph of no. 2 of Article 1 of the VAT Directive: "In each operation, the VAT, calculated on the price of the good or service at the rate applicable to that good or service, is chargeable, with prior deduction of the amount of tax that has directly burdened the cost of the various constituent elements of the price."

As provided for in the VAT Directive, the VAT Code determines, as a general rule, the deductibility of the tax due or paid by the taxpayer in the acquisitions of goods and services made from other taxable persons.

The express situations of exclusion from the right to deduction are exceptional and relate to specific cases enunciated by the national legislator in exhaustive terms, in accordance with what is established in the VAT Directive, depending on the type of expenses in question.

The rules of the exercise of the right to deduction of the tax contemplate objective requirements, more related to the type of expenses, subjective requirements, relating to the taxpayer, and temporal requirements, relating to the period in which it is possible to exercise the right to VAT deduction, which must be verified simultaneously in order to exercise the right to deduction.

As objective requirements of the exercise of the right to VAT deduction we have, namely, the fact that the tax supported must be contained in an invoice issued in legal form (that is, it must comply, in its requirements, with the general terms provided for in current Article 36, no. 5, and Article 40 of the VAT Code), that it is Portuguese VAT, and that the expense, in itself, confers the right to deduction of the tax (that is, it should not be an expense excluded from the right to deduction, in accordance with the provision in Article 21 of the VAT Code).

As subjective requirements of the exercise of the right to deduction of the tax it is determined, namely, that the goods and services should be directly related to the development of an economic activity. In fact, in accordance with the VAT Directive, in Article 168 (transposed, in part, by Article 20, no. 1, paragraph a), of the VAT Code), the taxable person may deduct VAT supported in the Member State in which it is established, in supplies of goods and provisions of services, as well as operations assimilated in intra-Community acquisitions of goods and in imports located there, provided that "the goods and services are used for the purposes of its taxed operations (...)" (emphasis ours).

It should be noted that the CJEU admits the possibility of VAT deduction even if there is no actual performance of taxable operations, in the event that these operations, due to facts beyond the entity's control, do not actually take place, with the company being liquidated. Furthermore, this provision, in accordance with European Union Law rules, comes to require that there be a causal nexus between the acquired good or service (input) and the taxed output, so that the VAT is capable of being deductible. That is, the VAT supported upstream in a given operation is only deductible to the extent that it can be related downstream with an operation actually taxed, with the relationship to be assessed depending on the allocation and inclusion of the cost supported in the price of the taxed operation.

With respect to VAT deduction regimes, the CJEU has come to consider that the right to deduction is an integral part of the mechanism of the tax itself, which cannot in principle be limited, and is exercised in relation to the totality of the taxes that have burdened the operations carried out upstream, further emphasizing that "any limitation of the right to deduction has an impact on the level of tax burden and must be applied in the same way in all Member States. Consequently, only derogations expressly provided for by the Directive are permitted"[2].

It should further be noted that any limitation of the right to deduction must observe the principles of proportionality and equality, which presupposes a balanced weighing of the benefits derived from the measure and the sacrifice it entails[3].

4.2 On the Formal Requirements for the Exercise of the Right to Deduction

Under Article 178, paragraph a) of the VAT Directive, the taxable person "... must possess an invoice in compliance with Articles 220 to 236, 238, 239 and 240." It must therefore be interpreted the concept of "invoice" by reference to the combined provisions of Articles 226 and 231 of the VAT Directive.

It should be noted that the formal importance of the document in support in VAT exceeds that which applies in income taxes. However, such importance will necessarily be more reduced in a context of reverse charge since we are not dealing with a tax passed on by third parties, but rather with the tax due by the recipient himself, for which the risk inherent to tax evasion is likewise reduced.

With respect to the elements that must be contained in invoices, Article 226 of the VAT Directive reads as follows:

"Without prejudice to the specific provisions provided for in this directive, the only mentions that must obligatorily appear, for the purposes of VAT, in invoices issued in application of Articles 220 and 221, are the following:

1. The date of issue of the invoice;

2. The sequential number, based on one or more series, that identifies the invoice uniquely;

3. The VAT identification number, [...], on the basis of which the taxable person made the supply of goods or the provision of services;

4. The VAT identification number of the customer or recipient [...];

5. The name and complete address of the taxable person and of the customer or recipient;

6. The quantity and nature of the goods supplied or the extent and nature of the services provided;

7. The date on which the supply of goods or the provision of services was completed [...];

8. The taxable amount for each rate or exemption, the unit price net of VAT, as well as discounts and other bonuses if any, if not included in the unit price;

9. The VAT rate applicable;

10. The amount of VAT to be paid, except in the case of application of a special regime for which this directive excludes such a mention."

Transposing these rules to the VAT Code, Article 36, no. 5 of this legal act determines that invoices must contain the following elements:

"a) The names, company names or corporate designations and the address or domicile of the supplier of goods or service provider and of the recipient or customer, as well as the corresponding tax identification numbers of taxable persons;

b) The quantity and usual denomination of the goods transmitted or the services provided, with specification of the elements necessary for the determination of the applicable rate;(...)

c) The price, net of tax, and the other elements included in the taxable value;

d) The applicable rates and the amount of tax due;

e) The justifying reason for the non-application of the tax, if applicable;

f) The date on which the goods were made available to the customer, on which the services were performed or on which payments prior to the performance of operations were made, if that date does not coincide with the date of issue of the invoice."

It follows, therefore, from this provision, moreover as confirmed in the context of Case C-368/09, of 15 July 2010, of the CJEU, that "it is not legitimate for Member States to associate the exercise of the right to VAT deduction with the fulfillment of requirements relating to the content of invoices that are not expressly provided for in the provisions of the VAT Directive. This interpretation is equally corroborated by Article 273 of this directive, which provides that Member States may impose obligations they consider necessary to ensure the exact collection of VAT and to prevent fraud, but that this power cannot be used to impose invoicing obligations supplementary to those laid down, in particular, in Article 226 of the said directive". This means that, according to CJEU jurisprudence, although this provision allows Member States to adopt certain measures, these should not, however, go beyond what is necessary to achieve that objective and cannot, therefore, be used in such a way as to systematically put in question the right to VAT deduction, which is a fundamental principle of the common VAT system[4].

In fact, the principle of effectiveness requires that national legislations, as well as the administrative procedures adopted by Member States, do not make, in practice, impossible or excessively difficult the exercise of rights conferred by the Community legal order. In this sense, the CJEU pronounced itself in the Decision issued in case C-25/03[5], which states "(…) it is established case-law that the requirement, for the exercise of the right to deduction, of other elements in the invoice beyond those listed in Article 22, no. 3, paragraph b), of the Sixth Directive, must be limited to what is necessary to ensure the collection of value added tax and its supervision by the Tax Administration. Furthermore, these elements must not, by their number or technicality, make it impossible in practice or excessively difficult to exercise the right to deduction (Decision of 14 July 1988, Jeunehomme and EGI, 123/87 and 330/87, Coll. p. 4517, no. 17). Moreover, the measures that Member States have the possibility of taking, under no. 8 of Article 22 of the same Directive, to guarantee the exact receipt of the tax and prevent fraud must not exceed what is necessary to achieve those objectives. They cannot therefore be used in a way that puts in question the neutrality of VAT, which is a fundamental principle of the common VAT system established by Community legislation on the matter (decisions of 21 March 2000, Gabalfrisa and others, C110/98 to C147/98, Coll., p.I1577, no. 52, and 19 September 2000, Schmeink & Cofreth and Strobel, C454/98, Coll., p. I6973, no. 59)."

Thus, within the scope of the jurisprudence enunciated, the problem has always been raised of determining in what circumstances formal defects in the invoice should put in question the right to deduction of the tax existing in the plane of the underlying material relationship, considering in particular the importance of the principle of neutrality in the application of VAT.

Now, in the proceedings mentioned above, which moreover do not exhaust the analysis of the question relating to the content of invoices in the field of VAT application, results a uniform understanding that associates the formal requirements of invoices with the purposes of tax collection and its effective supervision by the Tax Administration of Member States, admitting the thesis that the existence of formal defects does not itself and automatically determine the denial of the exercise of the right to deduction.

In fact, in this regard, we cite the statement made by Attorney-General Sir Gordon Slynn according to which "an invoice that meets the conditions constitutes the title to access the right to deduction, subject to the tax administration subsequently demonstrating that it is false; if the invoice does not meet the conditions, it may happen that the taxpayer is in a position to prove the existence of the transaction and that its supplier has declared the tax paid upstream, but if the invoice is incomplete in an essential aspect, it is up to the taxpayer to prove its right to deduction."[6]

Consequently, following the aforementioned jurisprudence, for formal defects to put in question the exercise of the right to deduction, it is necessary that the capacity for correct tax collection and supervision be removed, such that the AT would not be in a position to know the underlying material reality in light of the elements of proof carried into the proceedings by the taxpayer.

1. Application to the Present Case

The central question raised in the case at hand revolves around whether the invoices issued to the Claimant by company B..., S.A. would or would not be formally valid for purposes of exercising the right to deduction, in light of the legal assumptions provided for in paragraph a) of no. 2 of Article 19 of the VAT Code, combined with no. 5 of Article 36 of the same Code, also considering the provision in Article 226 of the VAT Directive.

It is therefore important to analyze, in light of the said legal precepts, the question of the fulfillment of the legal requirements necessary for the deductibility of VAT.

In this regard, the AT alleges, among other things, that the description contained in the invoices "Miscellaneous-service provision-OCT." and "Miscellaneous" "does not mention the services that were actually provided," and this reference is manifestly insufficient. Furthermore, according to the AT, "The invoices that do not meet all the legal requirements referred to in Article 36 of the VAT Code, namely, for not itemizing the services that were actually provided, the unit quantities and their totals, cannot be considered as issued in legal form, and consequently do not allow the deduction of the respective VAT in accordance with Article 19, no. 2 of the VAT Code, regardless of proof of the reality of the underlying operations."

Drawing on the clarifications provided by the Claimant in the context of the inspection process and, later, in the context of the Right to be Heard, the AT understands that "This lack of legal form is not remedied by the attachment of declarations attesting to the omitted elements, since those declarations do not constitute invoices."

As results from the evidence, through notification of 05 May 2016, the taxpayer was requested to provide the necessary clarification regarding the services provided by entity B..., S.A., and the taxpayer informed, in response to that notification, that "the services provided by the company refer to personnel assignments to meet staffing needs in the context of the operation of D...".

In the context of the Right to be Heard, it was further explained that "due to limitations of the invoicing software that the supplier had at the time of the operation, the invoices were issued with an annexed schedule that details all the elements necessary for a correct identification of the quantity and nature of the services provided, as well as the dates of provision of the same".

For its part, for the AT, the assertion of the existence of an annexed schedule contemporaneous with the invoices is false by the simple fact that the invoice does not contain mention of any annex, considering that it is not minimally proven what the service provisions underlying the assessed VAT are. In this sense, the AT concludes that due to failure to fully comply with the formalism legally imposed with respect to the issuance of invoices, the deductibility of the VAT cannot be considered proven by recourse to "written declarations, subsequent documents or testimonial evidence".

Now, in our humble opinion, the AT is not correct, as we shall see below.

What is at issue in the case is the non-compliance with the provision in paragraph b) of no. 5 of Article 36 of the VAT Code, due to the lack of specific indication of the services provided, the unit quantities and their totals.

In this regard, one cannot speak of a pure and simple omission, but rather of the sufficiency or otherwise of such legal references in the body of the invoice.

In fact, as referred to by the AT and results from the matter of fact established, all invoices contain a mention, albeit vague, of the performance of miscellaneous service provisions, indicating a quantity by reference to the monthly duration of the services that results from the inscription in the body of the invoice of the month to which the services relate, namely, "Oct." or "January". The invoice also makes mention of the VAT rate, the taxable value and the total value.

Now, in the domain of the sufficiency of references regarding the quantity and denomination of the goods supplied or services provided, we follow the position defended by the Arbitral Tribunal in case no. 411/2014-T of 27 March 2015 according to which, appealing to a hermeneutic perspective, the mentions in the invoices may have a generic character considering in particular the following:

1. The literal element of the norm, in particular the use of the words "nature" and "usual denomination";

2. The transnational nature of VAT and the vocation of this tax for economic transactions in the European Union space, little compatible with excessive formalism;

3. The possibility of repetitive use of expressions so as to reduce bureaucratic work;

4. The functionalization of formal requirements to the needs for supervision and control by the Tax Administration;

5. The fact that the VAT Directive itself presents an abstract description of services, with the national norm being the expression of a Community regulation that is positioned upstream; and finally we add,

6. The position that has been repeatedly taken by CJEU jurisprudence regarding the wording of Article 226, no. 6 of the VAT Directive, according to which the extent and nature of the services provided should be specified, without, however, requiring that it is necessary to describe the specific services provided in an exhaustive manner.[7]

It should be noted that also at the level of national jurisprudence, in the Decision of the Superior Administrative Court of the South of 07-01-2004, issued in case 0479/03, it was written that "The designation of the quantity and the usual denomination of the goods transmitted or the services provided must be indicated in the invoice so that the Administration can effectively supervise the tax obligations."

That is, the requirement of form of invoicing at the level of VAT, relating to "the designation of the quantity and the usual denomination of the goods transmitted or the services provided," will aim, as noted, to ensure "that the Administration can effectively supervise the tax obligations," allowing "to identify the operation in such a way as to enable the extraction of the due consequences regarding the tax (its incidence, subjects, rate, collection, refunds, etc.)".

This functionalization of the formalities now at issue cannot justify the total omission of minimum requirements that allow the identification of the specific legal-tax framework of the operation; however, this Tribunal understands, following the jurisprudence of the CJEU, that the degree of requirement in the description of the invoices should not be disproportionate for purposes of the exercise of the right to deduction, given the objectives of identification of the operation and control of fraud and tax evasion.

Consequently, from the perspective of neutrality, it being understood that in substance the taxpayer has the right to deduction, it will be important to know whether, in the specific case, possible incompleteness of the invoice could put in question the objectives of correct tax collection and effective control of operations.[8]

In fact, the consideration of the functional value attributed to the formal requirements of invoices would lead the CJEU to consider that "(...) although an invoice has indeed an important documentary function by virtue of being able to contain controllable data, there are circumstances in which the data can be validly proved by other means than an invoice and in which the requirement of having an invoice in all respects conforming to the provisions of Directive 2006/112 would have the consequence of putting in question the right to deduction of a taxpayer.[9] (Emphasis ours).

Appealing to a more flexible approach than that which has been used by national jurisprudence, the CJEU admits that the substance of operations, once proven, prevails over invoice defects, when elements provided for in the internal law of Member States are concerned, and to the limited extent to which the VAT Directive permits their introduction. The Court goes further, even admitting that the substance of operations prevails over defects of invoices with respect to elements typified in the VAT Directive, provided that this does not create a risk of fraud.[10]

Considering the reality of the case, if doubts existed regarding the nature and quantity of the services provided, evidenced by the invoices of supplier B..., S.A., such doubts would have been overcome by using the clarifications provided by the taxpayer in the context of the inspection procedure and the annexed schedule supporting the invoices presented in the context of the Right to be Heard, which is part of the administrative proceedings.

In fact, what is at issue is a provision of personnel assignment services, which is, in the view of this Tribunal, sufficiently reflected in the common description used by the supplier "Miscellaneous- Service Provision - January," mentions that are accompanied by an annexed schedule entitled "personnel assignment" in which the name of the worker, the functions performed, the value of the salary, the allowances and other charges paid, the unit value per assigned worker, the month to which the provisions relate, and the total value net of tax are indicated, with, in turn, the body of the invoice containing the VAT rate (23%) applicable to the total value of the service provision, calculated on the basis of the sum of the various unit values contained in the annexed schedule.

It should be noted that, starting from the analysis of the letter of paragraph b) of no. 5 of Article 36 of the VAT Code, which finds direct correspondence in point 6 of Article 226 of the VAT Directive "the only mentions that must obligatorily appear, for the purposes of VAT, in invoices issued in application of Articles 220 and 221, are the following (...) 6) The quantity and nature of the goods supplied or the extent and nature of the services provided."

Now, in the context of the services provided, even though the indications contained in the body of the invoices appear generic, such indications should not cease to be associated with the documents attached in the context of the inspection procedure and the Right to be Heard, to the extent that such elements, and in particular the annexed schedule to the invoices, would allow the AT to carry out its functions of controlling tax evasion and fraud through the cross-referencing of relevant information.

In fact, this Tribunal understands that for the purposes of ensuring effective control of the tax revenue resulting from the service provisions in question, the schedule annexed to the invoice is a fundamental element of proof for purposes of exercising the right to VAT deduction, allowing not only to assess the specific nature of the services provided, but also to know the various constituent elements of the price, through qualitative and quantitative elements, such as the name and functions of each of the employees involved in the personnel assignment, the salary practiced, the value of accessory benefits, the duration of the services, the total values per assigned employee, and the total price net of tax.

It can be said, in this context, that the schedule annexed to the invoice allows demonstrating the fulfillment of the substantive requirements for the exercise of the right to deduction, in a sufficient and credible manner, with it not being otherwise doubted the informatics difficulties alleged by the Claimant with respect to the processing in the body of the invoice of all the aforementioned information contained in the annexed schedule.

Moreover, despite the invoice not containing direct mention of the said annexed schedule, being an official assessment, it would be incumbent on the AT to demonstrate the assumptions of the legality of its action, with the Claimant enjoying, in principle, the presumption of veracity contained in Article 75, no. 1 of the General Tax Law.[11]

Now, from the IT Report no indicia result that the service provisions have not actually occurred, to the extent that the deduction of its value was entirely accepted for purposes of the consideration of the cost in the context of corporate income tax. Consequently, the AT recognizes that what is not at issue is the proof of the reality of the underlying operations, considering, however, that the fact that the Claimant has not operated a precise discrimination of the services provided, and unit quantities, constitutes a vice of form incapable of supplement by any other alternative means of proof.

Now, it is the conviction of this Tribunal that non-strict compliance with certain formal requirements in the issuance of an invoice may not be sufficiently serious to put in question the right to deduction, when other credible means of proof are presented that attest to the materiality of the operation and there is no serious risk of loss of tax revenue.[12] Moreover, in the contested case, the supplier subjected the total taxable value (resulting from the sum of the various unit values reflected in the invoice annex) to the applicable rate for the service provisions in question, specifically the normal rate of 23% (therefore, the highest rate), having been ensured the collection of the tax due.

Thus, it is not a matter of replacing the invoice with other means of proof; however, if applicable, it is a matter of specifying the contours of the underlying material operation through additional supporting information (in this case an annexed schedule to the invoice was chosen which should be read in conjunction with this), which validates its description and ensures the qualification of the operations in the legal-tax plan.[13]

In light of the considerations previously made, and without departing from the principle that has been followed by CJEU jurisprudence, according to which formal requirements cannot be dissociated from the objectives of controlling the payment of tax due and the risks of loss of tax revenue, we understand that the invoices in question meet the minimum compliance with the provision in Article 36, no. 5, paragraph b) of the VAT Code, for purposes of enabling the exercise of the right to deduction.

We cannot conclude without making reference to the recent jurisprudence of the CJEU, in the Barlis Decision, regarding the importance of weighing the consequences of a violation of Article 226 of the VAT Directive on the exercise of the right to deduction in light of the objectives pursued by the said norm.[14] Reinforcing its jurisprudence on formal defects, the Court states that the principle of neutrality of VAT "requires that the refund of this tax paid upstream be granted if the substantive requirements are met even if the taxable persons have neglected certain formal requirements. Consequently, when the Tax Administration has the data necessary to know whether the substantive requirements were met, it cannot impose supplementary conditions on the right of the taxable person to deduction of the tax that may have the effect of eliminating that right (see, in this sense, decisions of 21 October 2010, Nidera Handelscompagnie, C-385/09, EU:C:2010:627, no. 42; of 1 March 2012, Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wąsiewicz, C-280/10, EU:C:2012:107, no. 43; and of 9 July 2015, Salomie and Oltean, C-183/14, EU:C:2015:454, nos. 58, 59 and jurisprudence cited therein)". And it specifies, adding "This means that the Tax Administration cannot refuse the right to deduction of VAT by the mere fact that the invoice does not meet the requirements laid down in Article 226, no. 6 and 7, of Directive 2006/112, if it has all the data to verify whether the substantive requirements relating to this right are satisfied." (Emphasis ours). And finally, it adds, in defense of the principle of proportionality, that "Member States are competent to provide for sanctions in the event of violation of the formal requirements relating to the exercise of the right to deduction of VAT." (...) "European Union law does not preclude Member States from applying, where appropriate, a fine or a proportionate pecuniary sanction for the seriousness of the infringement, in order to punish the violation of formal requirements."

In summary, it appears to us that the formalities on which we have dwelt should be deemed sufficiently complied with, insofar as in the context of the services provided, the objectives highlighted by CJEU jurisprudence of identifying the operations in the legal-tax plan, assessing the respective incidence, determination of the applicable rate have been ensured, with the exact collection and effective supervision of the tax not being put in question.

Considering the invoices issued by supplier B..., S.A. as adequate to support the Claimant's exercise of the right to deduction, in compliance with paragraph b) of no. 5 of Article 36 of the VAT Code, the tax acts in question in the present proceedings, which amount to €46,231.46, should be annulled, due to the defect of violation of law.

1. Indemnity Interest

The Claimant further petitioned for the condemnation of the Respondent in indemnity interest, accrued and accruing until the date of the refund of the amounts of tax improperly assessed, on the grounds that, in the present case, there occurred assessment of VAT in excess of that due due to error attributable to the services.

Under Article 43 of the General Tax Law and Article 61 of the Tax Procedure and Process Code "Indemnity interest is due when it is determined, in a gracious petition or judicial challenge, that there was error attributable to the services from which resulted payment of the tax debt in an amount exceeding that legally due."

An error attributable to the administration is understood to be the error that is not attributable to the taxpayer and is based on erroneous assumptions of fact and of law that are not the responsibility of the taxpayer. Thus, "the right to indemnity interest covers only one of the causes of responsibility of the tax administration, acting as such: that originated by the payment of improper tributes, which is attributable to it (...) the right to indemnity interest in favor of the taxpayer comes, as a general rule, from a duty of indemnification of the tax administration resulting from the forced unproductivity of the amounts disbursed by the taxpayer."(see. António Lima Guerreiro, General Tax Law Annotated, Rei dos Livros Publisher, p. 204 and 205).

In the case at hand, it has been demonstrated that the Claimant proceeded to pay the tax and the corresponding compensatory interest, by force of the assessments subject to the present proceedings.

Indemnity interest is due, from the date of the payments that are shown to have been made, and calculated on the basis of the respective value, until its complete refund to the Claimant, at the legal rate, in accordance with Articles, Articles 43, nos. 1 and 4, and 35, no. 10, of the General Tax Law, 61 of the Tax Procedure and Process Code and 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (without prejudice to any subsequent changes in the legal rate).

Furthermore, in accordance with the provision in paragraph b) of Article 24 of RJAT, the arbitral decision on the merits of the claim for which no recourse or challenge is available binds the Tax Administration from the end of the period provided for recourse or challenge, with this, in the exact terms of the favorable decision on the arbitration in favor of the taxpayer and until the end of the period provided for the spontaneous execution of the decisions of the judicial tax courts, being required to "restore the situation that would exist if the tax act subject to the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose", which is in keeping with the provision in Article 100 of the General Tax Law [applicable by virtue of the provision in paragraph a) of no. 1 of Article 29 of RJAT] which establishes that "the tax administration is obliged, in the event of total or partial success of a petition, judicial challenge or appeal in favor of the taxpayer, to the immediate and complete reestablishment of the legality of the act or situation subject to the dispute, including the payment of indemnity interest, if applicable, from the end of the period of execution of the decision".

Although Article 2, no. 1, paragraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function in CAAD, without making reference to condemn decisions, it should be understood that the powers that in the process of judicial challenge are attributed to the tax courts are included in its competence, being this the interpretation that is in keeping with the sense of the legislative authorization on which the Government based itself to approve RJAT and in which it proclaims, as the first guideline, that "the tax arbitration process must constitute an alternative procedural means to the process of judicial challenge and the action for recognition of a right or legitimate interest in tax matters."

The process of judicial challenge, despite being essentially a process of annulment of tax acts, admits the condemnation of the tax administration in the payment of indemnity interest, as can be inferred from Article 43, no. 1, of the General Tax Law, in which it is established that "indemnity interest is due when it is determined, in a gracious petition or judicial challenge, that there was error attributable to the services from which resulted payment of the tax debt in an amount exceeding that legally due" and from Article 61, no. 4 of the Tax Procedure and Process Code (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which "if the decision that recognized the right to indemnity interest is judicial, the payment period runs from the beginning of the period of its spontaneous execution."

Thus, no. 5 of Article 24 of RJAT in saying that "payment of interest is due, regardless of its nature, in accordance with the terms provided for in the general tax law and in the Code of Tax Procedure and Process" should be understood as permitting the recognition of the right to indemnity interest in the arbitral process.

In the case at hand, it is evident that, following the declaration of illegality and consequent annulment of the tax assessment acts challenged, there is place for the refund of the tax, by force of the said Articles 24, no. 1, paragraph b), of RJAT and 100 of the General Tax Law, since this is essential to "restore the situation that would exist if the tax act subject to the arbitral decision had not been practiced," in the part corresponding to the correction that was considered illegal.

Thus, the Respondent should give execution to this decision, in accordance with Article 24, no. 1, of RJAT, determining the amount to be refunded to the Claimant and calculating the respective indemnity interest, at the supplementary legal rate of civil debts, in accordance with Articles 35, no. 10, and 43, nos. 1 and 5, of the General Tax Law, 61 of the Tax Procedure and Process Code, 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (or the legal instrument or instruments that follow it).

Indemnity interest is due from the dates of the payments made to that of the processing of the credit note, in which they are included (Article 61, no. 5, of the Tax Procedure and Process Code).

It is thus concluded that the Claimant's claim for payment of indemnity interest is well-founded.

IV. DECISION

In view of the foregoing, it is decided by this Arbitral Tribunal to find well-founded the arbitral request filed by the Claimant and, consequently:

a) Annul the assessment acts subject to the present proceedings, corresponding to the amount of €46,231.46;

b) Consequently, order the refund of this amount of VAT, the deduction of which was denied;

c) Condemn the Respondent to the payment of indemnity interest;

d) Condemn the Respondent in the costs of the proceedings.

V. VALUE OF THE CASE

The value of the case is fixed at €46,231.46, in accordance with Article 97-A, no. 1, a), of the Tax Procedure and Process Code, applicable by force of paragraphs a) and b) of no. 1 of Article 29 of RJAT and no. 2 of Article 3 of the Regulation on Costs in Tax Arbitration Proceedings.

VI. COSTS

The arbitration fee is fixed at €2,142.00, in accordance with Table I of the Regulation on Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was entirely well-founded, in accordance with Articles 12, no. 2, and 22, no. 4, both of RJAT, and Article 4, no. 4, of the said Regulation.

Let it be notified.

Lisbon, 1 June 2017

The Arbitrator

(Filipa Barros)

[1] Acronym for Legal Regime of Tax Arbitration.

[2] See, in particular, decisions of 6 July 1995, BP Soupergaz, C-62/93, no. 18, and of 21 March 2000, Gabalfrisa C-110/98 to C-47/9, no. 43, as well as of 6 July 2006, Kittel and Recolta Recycling, C-439/04 and C-440/04, no. 47.

[3] On this matter see decision of 11 July 1989, Schrader, C-265/87, no. 21 and decision of 19 September 2000, Ampafrance, C-177/99.

[4] See decisions of 18 December 1997, Molenheide and others C-286/94, C-340/95, C-401/95 and C-47/96, no. 47

[5] Decision of 21 April 2005, Finanzamt Bergisch Gladbach, C-25/03, no. 80.

[6] Decision of 14 July 1988, Lea Jeunehomme and EGI, C-123 and 130/87.

[7] Decision of 15 September 2016, Barlis 06, C-516/14, no. 26

[8] See Sérgio Vasques (2015) Value Added Tax, p. 344.

[9] Decision of 1 March 2012, Polsky Trawertyn, C-280/10, nos. 47-49.

[10] See, Sergio Vasques, p. 345.

[11] Decision of Southern Administrative Court of 16-01-2007, issued in case 00911/03.

[12] See in this sense, Miguel Agrellos, Paulo Pichel and André Mena Husgen, "Again on Invoice Formalities: analysis of the Jurisprudence of Portuguese Courts, VAT Notebooks 2016, p. 291.

[13] See in this sense Decision of the Supreme Administrative Court Proc. no. 24857, of 24 May 2000.

[14] Decision cited, Barlis 06, nos. 37-48.