VAT Deductibility on False Invoices and Simulation: CAAD Arbitral Decision 767/2016-T

ARBITRAL DECISION

The Arbitrator Dr. Filipa Barros (sole arbitrator), designated by the Deontological Council of the Administrative Arbitration Center ("CAAD") to form the Single Arbitral Tribunal, constituted on 1 March 2017, decides as follows:

I. REPORT

The company A… S.A. with Tax Identification Number (NIPC) and registered in the Commercial Registry Office of … under the unique number …, with capital of €10,000,000.00 with registered office in …–…, …, …-… …, hereinafter "Claimant", comes, pursuant to Article 2, n.º 1, subparagraph a), and Articles 10 et seq. of Decree-Law n.º 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 the following tax acts:

a) Additional Value Added Tax ("VAT") assessment n.º 2015…, of 07-11-2015, relating to period 2011-12, and consequent VAT interest assessment n.º 2015…, of 07-11-2015;

b) Additional VAT assessment n.º 2015…, of 07-11-2015, relating to period 2012-09, and consequent VAT interest assessment n.º 2015…, of 07-11-2015;

c) Additional VAT assessment n.º 2015…, of 07-11-2015, relating to period 2012-11, and consequent VAT interest assessment n.º 2015…, of 07-11-2015;

d) The annulment of the decision denying the administrative appeal which upheld the aforementioned tax acts.

To substantiate its claim, the Claimant considers, in summary, that there are no grounds for the Tax Authority and Customs Authority (hereinafter "AT") to disregard the deduction of VAT incurred with the provision of market development and prospecting services provided by company B… SGPS, S.A (hereinafter "B…"), since such services were effectively contracted and rendered in pursuit of the Claimant's objective of strategic business development, there having never been any intention to deceive third parties. In fact, the Claimant intended to develop its activities in external markets, namely in Portuguese-speaking territories, attracted by the fact that these markets, at the time, were recording good economic growth rates.

In this context, given that the Claimant was partially held by B…, personal relationships between the administrators of the two companies were strengthened, and B… informally agreed with the Claimant to use its network of contacts to support the development of efforts and identify strategic partnerships in the aforementioned destinations. Within the scope of a verbal agreement between the parties, the administrators of B… developed contacts and identified internationalization opportunities in markets such as the United Kingdom, Brazil, Angola, Mozambique, and Cape Verde.

The Claimant thus maintains that in the case of invoices issued by Company B… to the Claimant, the services did take place, and the structural elements of simulation as provided in Article 19, n.º 3 of the VAT Code are not present, and such services had a clearly business purpose (they were not tourism trips) and any absence of results in some of the markets approached should be attributed, on the one hand, to the inherent business risks, and on the other hand, to the economic context that then erupted in Spain, with a request for financial assistance on 25 June 2012, which led the parent company (C… Spain) to reconsider the investments of its subsidiary abroad.

The conclusions reached by the AT based on the absence of profitable results from the actions undertaken and the absence of written reports proving the measures taken represent an unacceptable interference with the Claimant's freedom of action, not permitting substantiation of the lack of veracity of the operations, a burden of proof that fell to the AT, in accordance with Article 74 of the General Tax Law.

Relying on the jurisprudence of the Court of Justice of the European Union (CJEU), the Claimant argues that it is incumbent upon the AT to demonstrate, in light of objective elements, that the right of deduction is used fraudulently or abusively, and it is certain that all the AT's actions in this case are characterized by the raising of suspicions without ever achieving proof of the absence of economic substance of the operations.

On the basis of the same arguments, relying on the jurisprudence of the superior courts and CJEU rulings, the Claimant contests the illegality of the correction relating to the deduction of VAT incurred with the acquisition of IT services by the Claimant from company D…, Ltd. (hereinafter "D…").

The Claimant challenges the conclusions that the AT drew from the indicia collected, namely, that it would be strange that there were no written contracts, that advisory services for the acquisition of a "datacenter" should be supported by reports issued by the service provider, and, finally, that the provision of technical support should be easily proven through records of the presence of D… employees at the Claimant's premises.

In this regard, the Claimant clarifies that D… has been a reference supplier since the 1990s, with deep knowledge of the Claimant's IT systems/needs, and given the long-standing relationship, all of D…'s technicians always had free access to the Claimant's premises, including VPN access, with some having been hired by the Claimant.

Consequently, given the informality of the commercial relationship that existed, the agreements were not reduced to writing, nor did employees keep entry/exit records; however, numerous meetings were held where proposals were discussed and the suitability of all investments in compatibility with the company's network structure was evaluated.

The Claimant concludes by stating that the strangeness manifested by the AT regarding the prices charged and the manner of commercial operation of the Claimant do not constitute serious and objective indicia that the operation contained in the invoice does not correspond to reality, and it must be concluded that the AT failed to discharge the burden of proof incumbent upon it.

On 29 December 2016, the petition for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and immediately notified to the Respondent in accordance with law.

The Claimant did not appoint an Arbitrator.

Thus, in accordance with the provisions of n.º 1 of Article 6 and subparagraph b) of n.º 1 of Article 11 of the RJAT, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties within the legal timeframes, the undersigned was designated as arbitrator of the Single Arbitral Tribunal, and she communicated to the Deontological Council and to the Administrative Arbitration Center the acceptance of the appointment within the timeframe stipulated in Article 4 of the Deontological Code of the Administrative Arbitration Center.

In accordance with the provisions of subparagraph c), of n.º 1, of Article 11 of Decree-Law n.º 10/2011, of 20 January, as amended by Article 228 of Law n.º 66-B/2012, of 31 December, the Single Arbitral Tribunal was constituted on 1 March 2017, following the pertinent legal procedures.

The Respondent, duly notified for that purpose, submitted its response in which it defends the inadmissibility of the request for arbitral pronouncement.

To do so, it invokes the existence of strong indicia that the invoices identified in the Tax Inspection Report (hereinafter "RIT"), issued by B…, relating to market prospecting services in Brazil, Cape Verde, Angola, and Mozambique, are false. The indicia that raise suspicions about the actual provision of services are the following:

• B… is a company with special relationships with the taxpayer, participating in 19.98% of the capital of A…;

• B… is a holding company and is prohibited, by its legal regime, from providing commercial service provisions associated with market prospecting, and furthermore, such provision is not supported in a written contract.

• Group E… has an international structure that would allow it to develop commercial contacts for market prospecting, being remarkable that it would have to resort to a national company, without purpose or specialization, for that purpose;

• The necessity of such services for A…'s activity is questioned, creating doubt as to why such services did not continue to be provided in late 2012 and 2013;

• All travel and accommodation expenses were borne by the administrators of the SGPS and not by the Company;

• The description of the invoices makes mention of agreements and memoranda, which were allegedly signed by the parties involved; however, neither A… nor B… presented such documents;

• The reports presented by A… do not permit overcoming the doubts outlined;

As for the invoices issued by D…, although some of these invoices evidence the existence of an agreement between the parties, the Claimant was unable to present any written contract regarding the type of services that were provided. Additionally, two invoices were issued relating to the acquisition and installation of a new "datacenter," and for this purpose, according to the Claimant such services involved the identification of needs, definition of solutions to be adopted, and analysis of proposals, without any documents surprisingly existing that evidence the analyses and work performed.

The AT argues that another indication that the invoices issued do not correspond to real and actual service provisions is the absence of records of the presence of D…'s employees at the Claimant's premises, or of timesheets where the service provider would evidence the carrying out of such services.

Thus, it is the understanding of the Respondent that it was incumbent upon the AT only to call into question the veracity of the operations evidenced by the invoices, by collecting circumstantial facts of their lack of credibility, and it falls to the Claimant to prove the existence of the tax facts it alleged as grounds for its right, that is, the actual existence of the transactions alleged.

In this regard, the Respondent emphasizes the guidance issued by the extensive jurisprudence of the CJEU and the Superior Tax Court that reinforce the interpretation made in the context of the inspection procedure. It concluded by arguing that the Claimant failed to prove the materiality of the operations in question, and given that the Claimant bears the burden of proof of the constitutive facts of the right to VAT deduction, the evidentiary uncertainty should be resolved against its claim.

The Respondent concludes by defending the inadmissibility of all defects attributed to the administrative action.

On 8 May 2017, the meeting provided for in Article 18 of the RJAT took place, in which, among other things, the examination of witnesses called by the Claimant took place, namely Messrs. F…, G…, H…, I… and J… interviewed via Skype (cf. Minutes of the Meeting of the Single Arbitral Tribunal).

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

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

II. PROCESS SANITATION

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, n.º 1, subparagraph a), 5 and 6, n.º 1, of the RJAT.

The parties have legal personality and capacity, are legitimately before the Tribunal, and are duly represented, (cf. Articles 4 and 10, n.º 2 of the RJAT and Article 1 of Decree n.º 112-A/2011 of 22 March).

The process is not vitiated by any defects of nullity.

III. GROUNDS

1. Facts Established as Proven

The facts were established as proven based on the documents attached in the context of the administrative proceeding, the petition for arbitral pronouncement, witness evidence, and the response presented by the AT, as indicated below.

1. The Claimant is a Portuguese commercial company, created in 1978, and is part of a multinational group founded in Germany;

2. The Claimant's corporate purpose is the manufacture of articles in stainless steel, household appliances, and telecommunications products, as well as the trading, importing, and exporting of the same products;

3. Currently, the Claimant's capital is composed as follows:

i) C…, S.A. ("C…"), with registered office in Spain – 79.97%

ii) B… SGPS, S.A. ("B…"), with registered office in Portugal – 19.98%;

iii) K…– 0.013%;

iv) L…– 0.013%; and

v) M…– 0.013%.

1. Until late 2012, company B… was held 50% by K… and his two sons (F… and N…), whose equity participation in the capital was 25%;

2. The history of partnership and development of B… with Group E… goes back to 1970, when K… began exclusive importation of products …, a company associated with Group E…;

3. It is during this period that K… meets businessman M…, founder of C…, with whom he establishes a friendship of decades and which was the support for the development of the present Claimant (testimony of witness F…);

4. M… exercised strong influence in decision-making within the multinational group E… (testimony of witness F…);

5. In 1975, C… (represented by M…) verbally agreed with K… on the exclusive distribution by him of products … in the Portuguese market;

6. In 1978, given the difficulties of importing A… products, by verbal agreement between M… (founder of C…) and K…, it was decided to create an industrial facility in the national territory for local manufacture of dishwashers (testimony of witness F…);

7. In 1978, K… held 45% of the capital of the Claimant, with the remaining 55% held by Group E…;

8. The day-to-day management of the Claimant was carried out by K… as a consequence of the establishment of a lasting relationship of trust with M… (testimony of witness F…);

9. The families of M… and K… participated in the meetings of the board of directors of A… (testimony of witness F…);

10. The management of the Claimant was conducted independently and with autonomous decision-making authority in relation to other companies in the group, and there were no formalized control procedures typical of multinational companies because integration with other group entities was minimal. A… functioned as if it were a domestic company (testimony of witnesses F… and G…);

11. The percentage of K…'s participation was reduced to 40%, at which time his participation in B… increased, and was reduced to 19.9% in 2015, by the strengthening of Group E…'s stake in the Claimant's capital to the current 79.97%;

12. Since 1978, by verbal agreement with M…, exclusive territorial distribution rights for products … in national territory, respectively in the northern, central and southern regions, were granted to companies O…, Ltd., P… Ltd. and Q…, S.A;

13. As a consequence of Portugal's entry into the European Union, the present Claimant terminated the exclusive territorial distribution agreements with P… Ltd. and Q…, S.A..

14. The Claimant was subject to an external general audit for the fiscal years 2011, 2012 and 2013, and a partial audit (income tax) for fiscal year 2014, conducted by the Tax Inspection Services (hereinafter "SIT") of the Financial Directorate of …, authorized by service orders n.º OI2014… and OI2015…;

15. In the context of the tax inspection, the SIT proposed, with regard to deductible VAT, corrections relating to invoices issued by company participant B….

16. The invoices issued by company B… contained the following description:

• Invoice n.º 139 of 23.12.2011 – "Development and prospecting of sub-Saharan African and Brazilian markets; Mozambique – Distribution agreement HM; Angola – visits and development study for expanded presence; Cape Verde MoU multi-year partnership with R…; Brazil – Visits and development study for expanded presence;"

• Invoice n.º 149 of 04.09.2012 – "Technical administration and management services provided from March to August of the current year: (Development of future presence in the Brazilian market) 6 x 10,000.00"

• Invoice n.º 151 of 14.11.2012 - "Technical administration and management services provided from September to December of the current year: (Development of future presence in the Brazilian market) 4 x 10,000.00. Idem (Commercial development in England. Negotiation process with S…) 4 x 4,812.5.

1. Invoices n.º 139, 149 and 151 issued by B… fall within the scope of a strategy of internationalization of the Claimant's business essentially in Portuguese-speaking territories (CPLP countries), through the reproduction of the corporate model used for the establishment of the company in Portugal, seeking to establish local partnerships (testimony of witness F…);

2. Discussion was held with M… regarding the use of the network of contacts of F… and his brother, in CPLP territories to expand the market of A… where there was no factory so as to then proceed to distribution and definition of partners with whom a relationship of trust could be established (testimony of witness F…);

3. For A… it was proposed by the administrators of B… prospecting in CPLP markets and a "reshoring" strategy in the United Kingdom with the S… chain (testimony of witness F…);

4. There was a perception that all competitors sold to Brazil and Angola except A…. The commercial director of A… did not have the availability to develop those markets nor did he have a network of contacts in CPLP countries (testimony of witness H…);

5. In the execution of service provision contracts, B… and D… have the commercial practice of only reducing the contract to writing in cases where clients request it, never having been such a request made by A…, since historically it was not a normal standard of conduct with A… and with M… (testimony of witness F…);

6. The prospecting trips to CPLP markets in search of partnerships were not performed exclusively in the service of A…, they were conducted in the normal course of the business of B…, projects of company D…, and also in the service of real estate companies owned by the administrators of B…, taking advantage of the network of contacts they had in those territories (testimony of witness F…);

7. With A… a global amount was negotiated which was understood to be reasonable given the objectives of prospecting and searching for partners, so never were specific costs of travel, hotel accommodation, or meal expenses during those trips charged to A… (testimony of witness F…);

8. After each trip, meetings were held with A… where a summary of the measures taken was presented, and in some territories, such as Brazil, investment was discouraged, given the great potential risks identified in that market (testimony of witness F…);

9. In the case of Angola, it was proposed to A…'s commercial director, H…, that a first commercial agreement be made, and then with that partner a branch be established. H… visited the local companies, but by decision of A… there was no further development, for reasons that B… is unaware of (testimony of witness F…);

10. In Cape Verde everything was arranged to establish a partnership with group T…; however, this did not proceed (testimony of witness F…);

11. With S…, there was an opportunity for "reshoring," insofar as production that had been placed in China was returning to Europe by virtue of the possibility of reducing transport costs and environmental costs. An agreement was negotiated with this English retailer for long-term production to be done in Portugal; however, once again, A…, through H…, in 2013, did not wish to follow this strategy (testimony of witness F…);

12. Written reports of the measures taken and results achieved in prospecting trips were prepared in a very summarized manner at the request of M… (testimony of witness F…);

13. The reports produced were addressed, in copy, to U… and V… who at the time of the creation of the documents were no longer in positions at A…;

14. U… was M…'s right-hand man and his lawyer, having assumed the role of administrator at A… on 8 November 2012 (testimony of witness F…);

15. V… ceased to serve in the position of executive administrator of A… due to permanent impediment on 7 July 2010;

16. The date of preparation of the report identified as "… :S…_UK_Nov12" is that shown in the creation properties of the Word document, that is, on 03-01-2012, at 16:36, having been subsequently modified on 02-11-2012 at 20:44;

17. The date of preparation of the report identified as "W…_Fev12" is that shown in the creation properties of the Word document, that is, on 09-06-2010, at 14:09, having been subsequently modified on 10-03-2012 at 11:28;

18. The date of preparation of the report identified as "W…_Ago12" is that shown in the creation properties of the Word document, that is, on 09-06-2010, at 14:09, having been subsequently modified on 28-08-2012 at 16:52;

19. With the implementation in CPLP markets, the Claimant intended to benefit from the high economic growth rates that existed at the time in those territories, especially in Angola (testimony of witnesses G…, H…);

20. Within the scope of the contacts established with potential partners and CPLP countries, trips were made by A…'s commercial management and customers were received who came to visit the factory (testimony of witness H…);

21. In the period to which the B… invoices relate, X… together with other people from A… visited Mozambique (cities of Beira and Maputo) with a view to establishing local partnerships for the commercialization and distribution of A… products (testimony of witness J…);

22. In Mozambique, within the scope of the agreement reached with the local partner, A… provided after-sales support and training, and has since been commercializing A… products in that market, although an exclusivity contract was never signed by decision of A… (testimony of witnesses J… and F…);

23. Group E… experienced a radical change in strategy when M… lost control of the group, ceasing to be president of the board of directors in 2012, in combination with the fact that at the international level the group was on the verge of collapse, and the idea of implementing the commercial development proposals in CPLP countries presented by B… was abandoned (testimony of witness F…);

24. In the context of the tax inspection identified in point 18 above, the SIT proposed, with regard to deductible VAT, corrections relating to an invoice issued by company D…, identified under n.º …, in the amount of € 58,466.00;

25. D… has been providing IT services to A…, in competition with other service providers since 1991, having been responsible for building the IT infrastructure of the company until M…'s departure (testimony of witness F…);

26. D… is a company controlled by B… SGPS and by the family of K…;

27. The services provided by D… to A… were the subject of verbal agreement, as a result of a relationship of informality and trust existing for more than 20 years between M… and K… (testimony of witness F…);

28. In 2006, A… recruited the main technician of D… (Y…) to its staff, significantly reducing from that date on the provision of services and the sale of hardware to A… (testimony of witness F…);

29. In early 2010, collaborator Y… ceased his collaboration with A…, and the latter felt the need to contract an agreement with D… to ensure the functioning of the network, given the deep knowledge it had of the IT infrastructure (testimony of witnesses F… and G…);

30. From 2011 onwards D… issued invoices to A… on a monthly basis in the amount of € 6,000.00 with the following description "Service – Structured Network. Infrastructure maintenance service. Ethernet";

31. The agreement entered into between A… and D… aimed to ensure the immediate operation of the entire IT structure of A… making the transition until such time as the newly hired employee was able to assume those responsibilities (testimony of witnesses F… and G…);

32. On 28-09-2012, D… issued invoice n.º 1203590, in the amount of € 58,466.00, whose description states "Service - Structured Network. Infrastructure Maintenance Service. Ethernet";

33. On 14-11-2012, D… issued invoice n.º 1204255, in the amount of € 23,250.00, whose description states "Service - Structured Network. Infrastructure Maintenance Service. Ethernet – JAN-JUN. DISCOUNT OF 12,750 Eur. Related to SLA failure as agreed";

34. On 20-11-2012, D… issued invoice n.º 1204323, in the amount of € 36,000.00, whose description states "Service - Structured Network. Infrastructure Maintenance Service. Ethernet – JUL-DEC."

35. C… had implemented a new IT system corresponding to an approximate investment of €250,000.00, and it was a concern of the board of A… to reduce the value of the investment made in the IT system to be acquired in Portugal (testimony of witness F…);

36. In November 2012, A… acquired a new "datacenter" from company Z…, Ltd., in the amount of €78,529.13, plus VAT;

37. Invoice n.º 1203590, in the amount of € 58,466.00, was issued by D… within the scope of a verbal agreement for the provision of advisory and proposal analysis services aimed at the acquisition of a new "datacenter," as well as subsequent installation and technical support in the phase of entry into operation of the new system (testimony of witnesses F… and G…);

38. In the period to which the additional VAT assessments relate and until the entry of the new administration of A…, coinciding with M…'s departure, D… ensured all network maintenance services, developing applications suited to A…'s specific needs (testimony of witness F…);

39. D… was an old partner of A…, and its employees were considered "company people," there having never been the practice of recording the entry and exit of D…'s employees from A…'s premises (testimony of witness G…);

40. D…'s employees had remote access via VPN, and could perform work and access the entire internal network of A… without the need to travel to its premises (testimony of witnesses F… and I…);

41. Based on the conclusions drawn by the SIT of …, the contents of which are hereby fully incorporated herein, the AT proposed a set of corrections to the total VAT deducted by the Claimant in relation to periods 2011-12, 2012-09, and 2012-11;

42. The Claimant was notified of the draft Tax Inspection Report (hereinafter "RIT") to exercise the right of prior hearing, which it did;

43. The AT upheld the corrections initially proposed in the RIT, of which the Claimant was notified on 03 November 2015;

44. Based on the final corrections resulting from the inspection action, the AT made the following assessments:

1. Demonstration of VAT Assessment n.º 2015…, of 07-11-2015, relating to period 2011-12, which gave rise to the Demonstration of Account Settlement n.º 2015…, of 10-11-2015 (compensation n.º 2015…), from which resulted an amount due of €12,305.00, which amount was paid by the Claimant on 06-01-2016;

2. Demonstration of VAT Interest Assessment n.º 2015…, of 07-11-2015, relating to period 2011-12, which gave rise to the Demonstration of Account Settlement n.º 2015…, of 10-11-2015 (compensation n.º 2015…), from which resulted an amount due of €1,829.90, which amount was paid by the Claimant on 06-01-2016;

3. Demonstration of VAT Assessment n.º 2015…, of 07-11-2015, relating to period 2012-09, which gave rise to the Demonstration of Account Settlement n.º 2015…, of 10-11-2015 (compensation n.º 2015…), from which resulted an amount due of € 27,247.18, which amount was paid by the Claimant on 06-01-2016;

4. Demonstration of VAT Interest Assessment n.º 2015…, of 07-11-2015, relating to period 2012-09, which gave rise to the Demonstration of Account Settlement n.º 2015…, of 10-11-2015 (compensation n.º 2015…), from which resulted an amount due of €3,227.85, which amount was paid by the Claimant on 06-01-2016;

5. Demonstration of VAT Assessment n.º 2015…, of 07-11-2015, relating to period 2012-11, which gave rise to the Demonstration of Account Settlement n.º 2015…, of 10-11-2015 (compensation n.º 2015…), from which resulted an amount due of €13,627.50 €, (cf. Document n.º 14, attached hereto), which amount was paid by the Claimant on 06-01-2016;

6. Demonstration of VAT Interest Assessment n.º 2015…, of 07-11-2015, relating to period 2012-11, which gave rise to the Demonstration of Account Settlement n.º 2015…, of 10-11-2015 (compensation n.º 2015…), from which resulted an amount due of €1,526.28, which amount was paid by the Claimant on 06-01-2016.

1. The aforementioned assessments totaled the amount of €59,763.71;

2. On 14 March 2016, the Claimant filed an administrative appeal against the aforementioned assessments;

3. The administrative appeal was completely denied by the AT by decision of 30 September 2016, and the denial was communicated to the Claimant via postal mail on 03 October 2016;

4. On 29 December 2016, the Claimant filed the petition for constitution of the Arbitral Tribunal that gave rise to the present case (cf. electronic petition to CAAD).

2. Facts Not Established as Proven

No facts were found to have relevance for the determination of the matter that were not proven.

3. Reasoning

With respect to the factual matter, the Tribunal is not required to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven facts from those not proven (cf. Article 123, n.º 2, of the Code of Tax Procedure and Process and Article 607, n.º 3 of the Code of Civil Procedure, applicable by virtue of Article 29, n.º 1, subparagraphs a) and e), of the RJAT).

Accordingly, the relevant facts for the judgment of the case are chosen and selected in function of their legal relevance, which is established with attention to the various plausible solutions of the question(s) of law (cf. previous Article 511, n.º 1, of the Code of Civil Procedure, corresponding to the current Article 596, applicable by virtue of Article 29, n.º 1, subparagraph e), of the RJAT).

Thus, having regard to the positions taken by the parties, in light of Article 110, n.º 7 of the Code of Tax Procedure and Process, the documentary and witness evidence and the administrative file attached to the record, the facts listed above were considered proven, with relevance for the decision.

4. Legal Matter

The question to be decided in the present case is whether the VAT on the invoices issued to the Claimant by suppliers B… and D… should or should not be deductible, taking into account the AT's allegation of the existence of indicia that the invoices issued do not correspond to real and actual service provision. Thus, the AT calls into question the existence of the taxable operations as formally declared by the Claimant, raising the question of the correspondence of the aforementioned invoices to reality.

As VAT is a tax of EU origin, it is necessary to make some preliminary considerations regarding the nature and scope of the right of deduction, considering in this analysis the rules governing this tax in accordance with European Union Law, with its transposition at the national level, and the administrative and judicial interpretation that has been made thereof, especially by the Court of Justice of the European Union (CJEU). In this regard, it will be important to analyze the issue of VAT deductibility, taking into account the interpretation of the provisions of Article 168 of the VAT Directive (DIVA) and Article 19, n.º 3 of the VAT Code.

4.1. The Right of Deduction

The right of deduction forms an integral part of the VAT mechanism and cannot, in principle, be limited, and is exercised in relation to the totality of VAT that has weighed on upstream operations.[2]

In this understanding of the principle of neutrality, the regime established by the DIVA allows taxpayers to deduct the VAT that has burdened the acquisition of goods and services intended for taxed activities. It should be noted that the CJEU refers to the principle of VAT neutrality in yet another sense, according to which the VAT system should not interfere with economic decisions or with price formation throughout the economic circuit.

Therefore, the mechanism of the right of deduction allows the taxpayer to relieve itself of the VAT burden supported upstream, eliminating the cumulative effect and cascade taxation that characterized prior systems of consumption taxation. Thus, the right of deduction is based on what is called the tax credit method, the credit method, the indirect subtractive method, or also the invoice method.

In accordance with this method, and in conformity with the provisions of Article 19 of the VAT Code, through an arithmetic subtraction operation, from the tax calculated on sales and service provisions (outputs) and identified in the respective invoices, the tax borne in purchases and other expenses (inputs) is deducted. As the 2nd paragraph of n.º 2 of Article 1 of the DIVA provides: "In each transaction, the VAT, calculated on the price of the good or service at the rate applicable to that good or service, becomes payable, after prior deduction of the amount of tax that has directly weighed on the cost of the various component elements of the price."

As provided in the DIVA, the VAT Code provides, as a general rule, the deductibility of the tax owed or paid by the taxpayer in the acquisition of goods and services made to other taxpayers.

The express situations of exclusion from the right of deduction are exceptional and refer to specific cases expressly enumerated by the national legislator, in accordance with what is provided in the DIVA, depending on the type of expenses in question.

The rules governing the exercise of the right of deduction of tax include objective requirements, more related to the type of expenses, subjective, relating to the taxpayer, and temporal, pertaining to the period in which it is possible to exercise the right of deduction, which must all be verified simultaneously for the right of deduction to be exercised.

As objective requirements for the exercise of the right of deduction of VAT, we have, namely, the fact that the tax borne must appear in an invoice passed in legal form (that is, it must comply, in its requirements, with the general terms provided in the current Article 36, n.º 5, and Article 40 of the VAT Code), that it be Portuguese VAT, and that the expense, in itself, confers the right of deduction of the tax (that is, it should not be an expense excluded from the right of deduction, in accordance with the provisions of Article 21 of the VAT Code).

As subjective requirements for the exercise of the right of deduction of 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 DIVA, in Article 168 (transposed, in part, by Article 20, n.º 1, subparagraph a), of the VAT Code), the taxpayer may deduct the VAT borne in the Member State in which it is established, in the transmission of goods and provision of services, as well as assimilated operations 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 added).

It should be noted that the CJEU admits the possibility of VAT deduction even if there is no actual performance of taxed operations, in the case that these operations, due to circumstances beyond the control of the entity, are not actually performed, occurring at the liquidation of the company. Furthermore, this provision, in accordance with the rules of European Union Law, requires that there be a causal nexus between the acquired good or service (input) and the taxed output, so that the VAT is susceptible of being deductible. That is, the VAT borne upstream in a given operation is only deductible insofar as it can be related downstream to an actually taxed operation, and the relationship should be assessed based on the reporting and inclusion of the cost borne in the price of the taxed operation.

With regard to VAT deduction schemes, the CJEU has considered that the right of deduction forms an integral part of the VAT mechanism itself, which cannot in principle be limited, and is exercised in relation to all taxes that have weighed on upstream operations, further emphasizing that "any and all limitation of the right of deduction has an impact on the level of tax burden and must be applied in the same manner in all Member States. Consequently, derogations are only permitted in cases expressly provided for by the Directive"[3].

It should also be noted that any limitation of the right of deduction must comply with the principles of proportionality and equality, which presupposes a balanced weighing of the benefits derived from the measure and the sacrifice it implies[4].

4.2. The Right of Deduction in Cases of Fraud

The CJEU has been reiterating that the fight against fraud, tax evasion, and any eventual abuses constitutes a recognized and encouraged objective of the DIVA, and taxpayers cannot, fraudulently or abusively, take advantage of the rules of Union law.[5]

It is therefore incumbent upon the national authorities and the courts of the Member States to refuse the right of deduction, if it is demonstrated, in light of objective elements, that this right is invoked fraudulently or abusively.[6]

Accordingly, the right of deduction exercised fraudulently may be refused, or when the taxpayer knew or should have known that it participated in VAT fraud (even if the operation in question meets the objective criteria on which the concepts of transmissions of goods performed by a taxpayer acting as such are based).

In the same sense, while affirming that the right of deduction, once arisen, continues to exist even when the taxpayer has not been able, for reasons beyond its control, to use the goods or services that gave rise to the deduction within the scope of taxed operations, the CJEU reserves that this will only occur "in the absence of fraudulent or abusive circumstances".[7]

On the other hand, it follows from the jurisprudence of the CJEU that it is not compatible with the right of deduction regime to refuse this right to a taxpayer who neither knew nor could know that the operation in question formed part of a fraud committed by the supplier or that another operation included in the supply chain, before or after that performed by the said taxpayer, was vitiated by VAT fraud.[8]

The provisions of Article 19, n.ºs 3 and 4, of the VAT Code are precisely intended to enshrine the prevention of the right of deduction arising from fraudulent operations.

In the first place, bearing in mind that only VAT that has weighed on acquisitions of goods and services intended for the exercise of the taxed activity performed by the taxpayer confers the right of deduction, necessarily tax that does not relate to actual transmissions of goods or service provisions does not confer the right of deduction, so n.º 3 of Article 19 of the VAT Code clarifies that "deduction shall not be allowed for tax arising from a simulated operation or an operation in which the price stated in the invoice or equivalent document is simulated." This legal provision, by virtue of its wording, applies both in situations of absolute simulation, of which so-called "false invoices" are a paradigm in the context of VAT, and in situations of relative simulation, of which one variant could be the simulation of the operation's value.

This conception that the right of deduction presupposes that the VAT has weighed on actual service provisions or transmissions of goods is widely recognized by national jurisprudence in stating that "The right of deduction of VAT paid upstream can only exist, according to the very nature of things, with respect to tax actually borne in economic operations that actually occurred. Otherwise, we would be faced with a mere intellectual or virtual archetype and not with a tax that aims to affect in a general way the real consumption of goods and services at various stages of the economic circuit. The inadmissibility of the deduction of tax relating to a simulated operation or an operation in which the price is simulated, positively affirmed in n.º 3 of Art.º 19º of the VAT Code, corresponds thus to a forced conclusion or one deriving from the very nature of the tax, whose formal explanation is justified only for reasons of clarity"[9].

It is finally important to note that it has already been understood by the CJEU that the simulated nature of the operation may not prevent the exercise of the right of VAT deduction, when this does not entail the risk of loss of tax revenue.[10]

5. Application to the Present Case

The AT contends that the invoices issued by B… and D… do not represent any commercial transaction, that is, that they are simulated operations, and therefore, in accordance with n.º 3 of Article 19 of the VAT Code, the Claimant could not have deducted the tax relating to these simulated acquisitions.

Let us begin by referring to the burden of proof in the context of the corrections under analysis. As has been repeatedly and uniformly emphasized by the jurisprudence of our superior courts, when the AT disregards invoices it considers false, the rules of the burden of proof of Article 74 of the General Tax Law apply, with the AT required to prove that the legal prerequisites that legitimize its action are met, that is, that there are serious indicia that the operation contained in the invoice does not correspond to reality, and the burden of proof then shifts to the taxpayer regarding the veracity of the transaction.[11]

It should be noted that the AT does not have to prove the falsity of the invoices[12], but must allege facts that translate a high probability that the operations referred to in the invoices are simulated, thereby weakening the legal presumption of veracity of the taxpayers' statements and the data contained in their accounting records, enshrined in Article 75 of the General Tax Law. It shall therefore be incumbent on the AT to carry out at least indirect proof, resorting to "facts indicating from which, with the aid of the rules of common experience, science or technique, an inference regarding the facts indicated will be sought. The conclusion or proof is not obtained directly but indirectly through a judgment of normal relationship between the indication and the subject matter of proof.[13]

As stated in the judgment of the Northern Regional Court of Accounts, 23 November 2012[14], "what is essential with respect to the proof incumbent on the Administration in the distribution of the burden of proof which we noted above is that it does so with sufficient circumstantial facts from which the Court can conclude, by virtue of the natural laws known by men and which function as rules of experience, that there is a high probability (or even certainty) that the transaction declared by those parties does not correspond to the reality materialized in that invoice."

In this task, the AT may make use of elements obtained through cross-checking with other taxpayers, to obtain the said indicia, so that such indicators of the falsity of the invoices do not necessarily have to arise from elements of the taxpayer being audited.

Let us then examine whether, keeping in mind the legal framework drawn with respect to the burden of proof and considering the facts established in the inspection proceeding, with a view to answering the question of whether it follows from the facts considered that the AT provided proof of the existence of indicia that permitted it to conclude that the invoices for which the VAT contained therein was disregarded (three invoices issued by B… SGPS[15] and one invoice issued by D…[16]), did not have underlying them any economic operations carried out between these companies and the Claimant.

If affirmatively, it will be important to know whether the respondent succeeded in demonstrating in the Tribunal that, notwithstanding the indicia collected, they are real, that is, such economic operations between the entities involved actually existed.

In the case of the invoices issued by B…, to conclude that there were serious indicia that the invoices do not correspond to real economic operations, the AT relied, in summary and essentially, on the following elements:

• The market prospecting services are not proven by credible reports that support the measures taken because:

· The reports sent to the SIT were prepared by X… administrator of B… relating to introductory negotiations with S… (UK) and with distributors of the Brazilian market, whose contents do not reveal profitable results;

· The reports were sent to the SIT by e-mail on 2 June 2015, containing a docx file on computer support, whose properties indicate that the report was created on 21 May 2015;

· The S… report, of 02 November 2012, lists V… as a recipient, who ceased the position of executive administrator of A… on 7 July 2010;

· The two reports relating to the Brazilian market, sent in computer-supported pdf format on 7 July 2015 designated "W…_Fev12.pdf" and "W…_Ago12.pdf", relating to reports made by X… on 10 March 2012 and 28 August 2012, analysis of properties shows that they were created on 7 July 2015;

· The W… reports list U… and V… as recipients, the latter no longer exercising the position of administrator at A…, while the former only assumed the role of administrator on 8 November 2012;

• It is strange that Group E…, being a multinational, with presence in 33 countries, would resort in market prospecting to a national company (B… SGPS) whose corporate purpose is the mere management of equity holdings;

• The trips made by the company administrator to countries in Africa, America, and Asia, stamped in their respective passport, which include the countries mentioned in the invoices, would have some certainly touristic character;

• The expenses of the trips made are not accounted for in B… SGPS, having probably been borne by its administrators, hence the touristic nature of the same;

• B… is a company with special relationships with the taxpayer, participating in 19.99% of A…'s capital;

• The services provided are not supported by a written contract or memoranda, a written contract being a requirement imposed by the legal regime of holdings companies;

• The services, even if provided, were not essential for A…'s activity, given its strategic dependence on a multinational group;

• If they were essential, they should have been continuously provided in late 2012 and 2013;

In turn, in the case of the invoice issued by D…, to conclude that there were serious indicia that it does not correspond to real economic operations, the AT relied, in summary and essentially, on the following elements:

• In the periods of 2011 and 2012, D… was a company related to the Claimant;

• No contract for the provision of services was concluded between the Claimant and D… to support the charge related to invoice FT 1203590 of 28-09-2012;

• There are two invoices relating to ongoing services covering the months of January to December 2012;

• The clarifications provided to the SIT by the financial director and statutory official accountant, according to which A… had acquired and installed a new "datacenter" in the period to which the invoice relates, and that the same related to "assistance in identifying needs, definition of solutions to be adopted, analysis of proposals, as well as technical support in the phase of installation and startup of the new system" are not supported by reports issued by the service provider;

• Any provision of technical support in the phase of installation and startup of the new system should be easily proven through records of the presence of D…'s employees at A…'s premises, on "job sheets" where the service provider would evidence the actual performance of such services;

• There is a disproportion between the cost of the equipment (€78,529.13 + VAT) and the services of analysis of proposals, even if added to possible technical support for installation of the system (€58,466.00);

• The absence of written contracts is strange, since one of the invoices mentions a discount "related to an SLA failure, as agreed."

It results from the set of elements collected during the inspection proceeding, to which we made express reference above, that the main argument of the AT to conclude that no actual service provisions were made by B… and D… is based on the absence of contractual formalization, being not, as it states, "credible that the actual existence of services did not generate a minimally tangible body of documentary evidence"[17].

In fact, according to the AT, in the case of the B… invoices, it is "strange" (i) the absence of service provision contracts to support the allegedly performed activities, (ii) that a company like A…, inserted in a multinational structure, would resort to a national company to expand its activity in the CPLP markets and United Kingdom, (iii) the absence of profitable results combined with the incipience of the diligence reports produced. In turn, in the case of D…'s invoices, it is "strange" (i) the informal nature of the negotiation, (ii) the consulting services for the purchase of a new "datacenter," and (iii) the installation of the system, without "job sheets" and entry and exit records of D…'s employees at the Claimant's premises having been produced.

In a connected analysis, this Tribunal understands that the "circumstantial facts" gathered by the AT lack satisfactory objective elements that permit the conclusion that the VAT contained in the invoices pointed out by the AT should be disregarded because it relates to simulated operations.

It should be noted that, although some of the indicia collected by the AT raise doubts about the Claimant's conduct, the latter took care to present evidence capable of justifying its conduct, explaining credibly the reasons underlying the alleged informal nature of the contracts, as well as the economic reasons underlying the performance of services by both B… and D….

In this regard, it must be said that the Tribunal considered the testimony of witness F…, particularly important for proving the facts identified above, first because he is a common shareholder in the two companies providing the services (B… and D…), and then because of his proximity relationship (filiation) to K…, the manager to whom A…'s founder (M…) entrusted the destiny of the company in national territory until the end of 2012, thus encompassing the period to which the VAT corrections relate.

Notwithstanding his proximity relationship to the shareholder structure of the Claimant, the witness explained in a coherent and convincing manner the genesis of the constitution of A… in Portugal, the role that personal trust assumed in the model of daily and strategic management followed by the company, reflecting the affinity of leadership styles between M… and K…. The testimony of this witness, corroborated by statements of other witnesses, permits the conclusion that A…, despite commercializing and representing the products of a brand with international presence, enjoyed until 2012 complete autonomy in its management, being, in principle, decisions taken by M… without prior consultation, consent, or interference from the structure of the multinational A…..[18]

Furthermore, it was possible to determine that its model of organization in national territory was based on the existence of a factory, which, as was also stated, allowed A… to take advantage of such a structure to negotiate directly with retailers in other geographies (for example, S… in the United Kingdom, or partners in Angola) agreements for the production of merchandise from Portugal.

At various points in the testimony, it is possible to obtain a vision of the relationships that were established between the families of M… and K… through which successive commercial synergies were enhanced, successful over more than 20 years, as a result of the trust existing between A… and the companies held by members of K…'s family.

Thus, on the basis of management of a family nature, the facts pertaining to the proof of the contractual informality prevailing in the form of the Claimant's conduct with the suppliers D… and B… (points of proof n.ºs 5 and 6, 8, 12, 13, 15, 24, 26 and 27, 31, 46 and 58) are a natural corollary resulting from the aforementioned conditions under which the company was founded and developed in Portugal.

On the other hand, the absence of a written contract, even though it is a service provision carried out by a holding company, does not constitute an indication of falsity of the underlying operations and rather constitutes non-compliance with a formality resulting from the provisions of Article 4 of Decree-Law n.º 495/88, of 30 December, the absence of which cannot have as a consequence preventing the right of deduction, a fundamental principle of the neutrality of the tax. In fact, the jurisprudence of the CJEU systematically states that any limitation of the right of deduction must comply with the principles of proportionality and equality, which presupposes a balanced weighing of the benefits derived from the measure and the sacrifice it implies.[19]

Within the scope of the organizational independence of the Claimant, both the pleadings and the testimony of G… and H… permitted confirmation of the autonomy enjoyed by A… in relation to other group companies, highlighting the decision-making power of K…, the informality of procedures as a standard of conduct of the company, as well as the desire nurtured by the need felt for expansion to CPLP markets (points n.ºs 21, 23, 38 and 42), at a time when it was well known that the entire national economy was turning to these markets as a way to overcome the economic crisis being lived internally.

In light of these facts, it would not be strange that for the distribution strategy of A…'s products in CPLP markets, a company in the group was chosen, which, moreover, was developing its own business in those countries and had a privileged network of contacts. It is also understandable that a national company would be contracted for negotiating partnerships in the CPLP. In fact, given the historical affinities between Portugal and these countries, national companies would theoretically be in a better position to establish such an approach. On the other hand, since it was intended to replicate the business model that had been established in Portugal, advocating the establishment of a local company with local partners, owned by A…, it must be agreed, contrary to what the AT states, that it should not be strange that the development of this model was entrusted to a company managed by people in the confidence of the members of the board of A….

Furthermore, it was proven in the record the existence of reports, demonstrating the measures taken both in the CPLP and in the United Kingdom with S…. The Claimant succeeded in proving, in its Petition for Arbitral Pronouncement, the preparation of the said reports, through disclosure of the properties of the original files in word format whose creation or last modification relates to the dates to which the disputed facts pertain. In turn, the Respondent, in its response, presented no counter-argument that called into question the said facts.

Additionally, for the formation of the Tribunal's conviction regarding the services provided by B…, the testimony of witness J…, an employee of the company in Mozambique with which A… maintains a commercial partnership since then to the present day, was important, confirming, in addition to the partnership, the existence of trips to that geography and the conduct of multiple contacts with F…, administrator of B…, as well, within the scope of the same objectives, with employees of A… (points n.ºs 40 and 41). The witness credibly confirmed the existence of commercial cooperation between the Mozambican company and A…, promoted through visits made by F… at the time to which the invoices disregarded by the AT pertain.

Indeed, the circumstances mentioned belie the conclusions reached by the RIT according to which such measures could not have existed given the absence of any profitable results. In all truth be told, the absence of profitable results in a provision of market prospecting services, whose results are by nature uncertain, does not justify the allegation of a simulated performance of the parties, as the Respondent seeks to defend. Notwithstanding, in the case at hand, the Claimant went further, taking care to prove that the commercial expansion effort undertaken by A… over the years 2011 and 2012 bore fruit, resulting in the establishment of a partnership in Mozambique.

For the reasons given, the suspicion that the trips made by the administrators of B… to CPLP countries were private trips with tourist objectives does not appear to be supportable. Furthermore, after analysis of the measures taken by the SIT with the objective of determining what the real activity of B… and of other companies held by it was, specifically with regard to clarifying whether this entity developed or did not develop any kind of activity in the CPLP, the SIT merely presented the stamps of the passports to these destinations and the fact that the trips were paid for directly by the administrator.

Now, with all due respect, such elements are too generic, in no way undermining the presumption of veracity of the invoices issued by B… to A…, nor are they sufficient to call into question the admission of VAT deductibility. In fact, it follows from the proof that trips to CPLP countries were not performed exclusively in the service and in the exclusive interest of A…, since B… and other companies held by it developed their own projects in these markets, which justified the existence of a network of contacts which A…, at a given moment, intended to take advantage of, agreeing on the payment of a global amount for that purpose, that is, independent of the specific value of the expenses actually incurred in travel, hotels, meals, and other.

Accordingly, with respect to the invoices issued by B…, despite the indicia collected by the AT to the effect of absence of actual service provisions, which in any case proved to be insufficient to justify the tax corrections, the Claimant was able to present convincing evidence of the substance of the operations, and the elements of fact set forth above permitted the conclusion of the existence of a verbal agreement between B… and the Claimant for the performance of prospecting actions in the CPLP and in the United Kingdom (with S…) during the years 2011 and 2012.

It was further clarified that with M…'s departure from the presidency of the board of A…, a reorganization occurred in the management of the group, ending the policies launched by the previous administration, which justified the interruption of the prospecting services performed by B…. This fact also raises no doubts, as it is customary for changes in the leadership of companies to be accompanied by changes in strategies.

Thus, the elements contained in the record and the facts established through the witness evidence produced reveal themselves to be sufficient for the formulation of a well-grounded judgment that B… provided A… with market prospecting services, in accordance with the terms contained in the invoices issued, with no objective evidence existing that the operations referred to in those invoices were simulated.

With respect to the invoice issued by D…, the previously mentioned considerations made regarding the informality that prevailed between A… and its suppliers apply, with business juristic acts being conducted, as a rule, by verbal agreement.

Furthermore, it is also indisputable in the case of D… that there exists an undeniable context of a long business relationship between the two companies, which defines and justifies the concrete form of conduct of the parties in the disputed case.

Thus, such commercial relationship, in accordance with the proof, dates back to 1991[20], and the witnesses examined confirmed, with knowledge of the matter, the responsibility of this supplier for the installation of the entire IT network system of the Claimant, noting that by virtue of the deep knowledge of the structure, the Claimant actually hired employees of D… to its staff, thereby interrupting by this means the need to maintain an agreement with the supplier.

The witnesses referred to the occurrence of anomalous circumstances that determined the need for dismissal of the employee responsible for IT, as a factor that triggered the re-establishment of an agreement with D…. This fact is not disputed, as it equally results from the RIT (points 45 and 50).

Still within the context of the services provided by D…, whose deducted VAT is called into question, it was extracted from the RIT the need for the Claimant to acquire a new "Datacenter," which, constituting a substantial investment, implied, according to the explanation of witness F…, the need to conduct market consultations, at the request of M…, seeking to select proposals that would minimize costs, without losing sight of the concerns of adapting the new equipment to A…'s specific needs (points 54 and 57).

It appears from the testimony of witnesses F… and G… that by virtue of the advisory services provided by D… to the Claimant, the latter acquired a new "datacenter" adapted to its needs at a price significantly lower than the "datacenter" that had been acquired by C…. Furthermore, the invoice issued by D… outside the agreement (invoice n.º 1203590) also included the services of installation and operationalization of the new "datacenter," and no evidence was presented in the RIT that calls into question this circumstantiality and the materiality of the underlying operations.

Furthermore, the allegation that these IT works are not supported by memoranda, by "job sheets," or by records of entry and exit of D…'s employees from A…'s premises is justified in a coherent manner by the mutual and lasting knowledge that existed between the parties, with D…'s employees being considered "company people," having even had remote access via VPN to A…'s system, facts that permit the conclusion that any records would be redundant, as well as the lack of merit of the indicia advanced by the Respondent, especially those based on subjective judgments.

With all due respect, it is understood that the inconsistencies alleged by the AT in the RIT lack objective elements to support them, falling into the negligent attitude of first qualifying the taxpayer as a "multinational" and then negatively assessing all circumstances found that escape the typical modus operandi of such structures, seeking to force the taxpayer to conform to a reality that does not fit its prevailing organizational model.

However, as stated, the doubts were duly clarified by the Claimant, and in light of such clarifications, the Respondent was unable to provide counter-arguments that would shake the Tribunal's conviction regarding the actual existence of the operations.

In conclusion, the Tribunal understands that in the present case we are not faced with the performance of occasional service provisions separated from a given organizational model, but rather of several years of contractual collaboration that justifies them and gives them a real meaning. This context is the defining basis of the contours in which the services were agreed, justifying a "modus operandi" reflected in the informality of procedures, in the relationship of mutual trust between the parties, and in the primacy of verbal agreement.

Therefore, the Tribunal understands that the elements aforementioned, weighed in light of experience and grounded in a context of great probability, permit the conclusion that the invoices in question have underlying them economic operations, and the tax acts in question in the present case should be annulled due to violation of law.

6. Indemnificatory Interest

The Claimant further petitioned for the condemnation of the Respondent in indemnificatory interest, accrued and to accrue until the date of reimbursement of the amounts of tax improperly assessed, considering that, in the present case, there was an assessment of VAT exceeding the amount due as a result of error imputable to the services.

Under Article 43 of the General Tax Law and Article 61 of the Code of Tax Procedure and Process, "Indemnificatory interest is due when it is determined, in an administrative appeal or judicial impugnation, that there was error imputable to the services resulting in payment of the tax debt in an amount exceeding the legally due."

Error imputable to the administration is understood as error not imputable to the taxpayer and based on incorrect factual and legal presuppositions for which the taxpayer is not responsible. Thus, "the right to indemnificatory interest covers only one of the causes of responsibility of the tax administration, acting as such: that originating from the payment of unduly paid taxes owed to it (...) the right to indemnificatory interest in favor of the taxpayer comes, as a general rule, from a duty of indemnification of the tax administration resulting from the forced unproductiveness of the amounts disbursed by the taxpayer."(cfr. António Lima Guerreiro, General Tax Law Annotated, King of Books Publisher, p. 204 and 205).

In the case at hand, it was demonstrated that the Claimant proceeded to pay the tax and the corresponding compensatory interest as a result of the assessments that are the subject matter of the present case.

Indemnificatory interest is due from the dates of the payments that prove to have been made, and calculated on the basis of the respective amount, until its full reimbursement to the Claimant, at the legal rate, in accordance with the provisions of Articles 43, n.ºs 1 and 4, and 35, n.º 10, of the General Tax Law, 61 of the Code of Tax Procedure and Process, and 559 of the Civil Code and Decree n.º 291/2003, of 8 April (without prejudice to any subsequent alterations of the legal rate).

Furthermore, in accordance with the provisions of subparagraph b) of Article 24 of the RJAT, the arbitral decision on the merits of the claim to which no appeal or impugnation lies binds the Tax Administration from the end of the period provided for appeal or impugnation, and the latter must, in the exact terms of the admissibility of the arbitral decision 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, "restore the situation that would exist if the tax act that is the subject matter of the arbitral decision had not been executed, adopting the acts and operations necessary for that purpose," which is in line with the provisions of Article 100 of the General Tax Law [applicable by virtue of the provisions of subparagraph a) of n.º 1 of Article 29 of the RJAT], which provides that "the tax administration is obliged, in case of full or partial success of an appeal, judicial impugnation or appeal in favor of the taxpayer, to the immediate and complete restoration of the legality of the act or situation which is the subject matter of the litigation, including the payment of indemnificatory interest, if applicable, from the end of the period of execution of the decision."

Although Article 2, n.º 1, subparagraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function in the CAAD, not making reference to condemnatory decisions, it should be understood that it comprehends within its competences the powers that in the process of judicial impugnation are attributed to the tax courts, being this the interpretation that harmonizes with the sense of the legislative authorization on which the Government based itself to approve the RJAT and in which it proclaims, as a first directive, that "the tax arbitral process must constitute an alternative procedural means to the process of judicial impugnation and to the action for the recognition of a right or legitimate interest in tax matters."

The process of judicial impugnation, although essentially a process for the annulment of tax acts, admits the condemnation of the tax administration in the payment of indemnificatory interest, as is clear from Article 43, n.º 1, of the General Tax Law, in which it is established that "indemnificatory interest is due when it is determined, in an administrative appeal or judicial impugnation, that there was error imputable to the services resulting in payment of the tax debt in an amount exceeding the legally due," and Article 61, n.º 4 of the Code of Tax Procedure and Process (as amended by Law n.º 55-A/2010, of 31 December, to which corresponds n.º 2 in the original wording), which "if the decision recognizing the right to indemnificatory interest is judicial, the payment period is counted from the beginning of the period for its spontaneous execution."

Thus, n.º 5 of Article 24 of the RJAT in saying that "it is due payment of interest, regardless of its nature, in accordance with the terms provided in the general tax law and in the Code of Procedure and Process" should be understood as permitting the recognition of the right to indemnificatory interest in the arbitral process.

In the case at hand, it is clear that, as a consequence of the declaration of illegality and consequent annulment of the assessment acts being challenged, there is place for reimbursement of the tax, by virtue of the aforementioned Articles 24, n.º 1, subparagraph b), of the RJAT and 100 of the General Tax Law, since this is essential to "restore the situation that would exist if the tax act that is the subject matter of the arbitral decision had not been executed," with respect to the portion corresponding to the correction that was considered illegal.

Thus, the Respondent shall give execution to the present award, in accordance with Article 24, n.º 1, of the RJAT, determining the amount to be reimbursed to the Claimant and calculating the respective indemnificatory interest at the supplementary legal rate of civil debts, in accordance with the provisions of Articles 35, n.º 10, and 43, n.ºs 1 and 5, of the General Tax Law, 61 of the Code of Tax Procedure and Process, 559 of the Civil Code, and Decree n.º 291/2003, of 8 April (or the decree or decrees that succeed it).

Indemnificatory interest is due from the dates of the payments made until the date of processing of the credit note in which they are included (Article 61, n.º 5, of the Code of Tax Procedure and Process).

It is thus concluded that the Claimant's claim for payment of indemnificatory interest has merit.

IV. DECISION

For these reasons, this Arbitral Tribunal judges the arbitral claim filed by the Claimant to be well-founded and, as a consequence:

a) Annuls the assessment acts that are the subject matter of the present case, in the total amount of €59,763.71;

b) As a consequence, orders the reimbursement of that amount of VAT the deduction of which was denied;

c) Condemns the Respondent to the payment of indemnificatory interest;

d) Condemns the Respondent to pay the costs of the process.

V. VALUE OF PROCESS

The value of the process is fixed at € 59,763.71, in accordance with Article 97-A, n.º 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of n.º 1 of Article 29 of the RJAT and n.º 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS

The arbitration fee is fixed at € 2,142.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was completely well-founded, in accordance with Articles 12, n.º 2, and 22, n.º 4, both of the RJAT, and Article 4, n.º 4, of the aforementioned Regulation.

Let notification be made.

Lisbon, 24 June 2017

The Arbitrator

(Filipa Barros)

[1] Acronym for Legal Regime for Tax Arbitration.

[2] See, inter alia, Judgment of 22 December 2010, Dankowski, C-438/09, n.ºs 22 and 23.

[3] See, in particular, judgments of 6 July 1995, BP Soupergaz, C-62/93, n.°18, and of 21 March 2000, Gabalfrisa C-110/98 to C-47/9, n.° 43, as well as of 6 July 2006, Kittel and Recolta Recycling, C-439/04 and C-440/04, n.°47.

[4] See judgment of 11 July 1989, Schrader, C-265/87, n.º 21 and judgment of 19 September 2000, Ampafrance, C-177/99.

[5] Inter alia, judgment of 21 February 2006, Halifax C-255/02, n.ºs 68 and 71; of 27 October 2011, Tanoarch, C-504/10, n.ºs 50; of 21 June 2012, Mahagében and Dávid, C-80/11 and C-142/11, n.º 41; and of 6 December 2012, Bonik, C-285/11, n.ºs 35 and 36.

[6] See judgments already referenced, Kittel and Recolta Recycling, n.º 55; Mahagében and Dávid, n.º 42; Bonik, n.º 37.

[7] Judgment of 8 June 2000, Schloβstraβe, C-396/98, n.º 42.

[8] See, inter alia, judgments of 12 January 2006, Optigen C-354/03, C-355/03 and C-484/03, n.ºs 52 and 55; and, already referenced, Kittel and Recolta Recycling, n.ºs 45, 46 and 60, Mahagében and David, n.º 47, and Bonik, n.º 41.

[9] See judgment of the Superior Tax Court, proc. n.º 026635, of 17-04-2002.

[10] Judgment of 27 September 2007, Albert Collée, C-146/05, n.º 37.

[11] Inter alia, Court of Appeals (Northern), 24-01-2008, proc. n.º 2887/04 Viseu; of 27-01-2011, proc.nº 455/05.7BENF.

[12] Judgment of the Superior Tax Court, of 27/10/2004, proc. n.º 810/2004.

[13] In this sense, Alberto Xavier, Concept and Nature of the Tax Act, p. 154, Almedina.

[14] Proc. n.º 1523/05.0BEVIS-Aveiro.

[15] Point 19 of the probatório.

[16] Point 51 of the probatório.

[17] Cfr. point 48 of the response.

[18] See point 13 of the probatório.

[19] Inter alia, judgment Pannón of 15 July 2010, case C-368/09 and judgment Albert Collée of 27 September 2007, case C-146/05.

[20] Point 44 of the Probatório.