VAT Exemption Waiver for Clinical Analysis Labs: CAAD Arbitral Tribunal Jurisdiction Ruling 788/2015-T

ARBITRAL DECISION

The arbitrators Dr. Jorge Lopes de Sousa (president-arbitrator), Prof. Doctor Nuno Cunha Rodrigues and Dr. António Nunes dos Reis, appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, constituted on 02-03-2016, hereby agree as follows:

1. REPORT

A…, S.A., VAT identification number …, with registered office at …, …, … floor, Room …, …, …-…, …, came, pursuant to subsection a) of article 10(1) and subsection a) of article 5(3), both of Decree-Law No. 10/2011, of 20 January, named Legal Framework for Tax Arbitration ("LFTA"), to request the constitution of the Collective Arbitral Tribunal with a view to the declaration of illegality of the tacit dismissal of the administrative complaint presented on 22-06-2015 and the annulment of the official VAT assessments and compensatory interest, relating to the year 2013, in the total amount of € 1,293,295.27 hereinafter indicated:

The application for constitution of the arbitral tribunal was accepted by the President of the Center for Administrative Arbitration and notified to the TAX AND CUSTOMS AUTHORITY on 04-01-2016.

Pursuant to the provision of subsection a) of article 6(2) and subsection b) of article 11(1) of the LFTA, the Deontological Council appointed as arbitrators the undersigned, who communicated their acceptance of the assignment within the applicable time period.

On 16-02-2016, the parties were notified of this appointment, and neither party manifested the will to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11(1), subsections a) and b) of the LFTA and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of subsection c) of article 11(1) of the LFTA, the collective arbitral tribunal was constituted on 02-03-2016.

The Tax and Customs Authority raised an exception of lack of material jurisdiction on the grounds that the issue at stake is whether the Applicant has or does not have the right to renounce the exemption which embodies the recognition of a right in tax matters and requested that a preliminary ruling be referred to the CJEU. On the merits, the Tax and Customs Authority argues that the request for an arbitral ruling should be dismissed.

By order of 08-04-2016, the meeting provided for in article 18 of the LFTA was dispensed with and it was decided that the proceedings would continue with written submissions.

Only the Applicant submitted written submissions.

The Arbitral Tribunal was regularly constituted.

The parties have legal personality and judicial capacity, possess standing (articles 4 and 10(2) of the same decree-law and article 1 of Ordinance No. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not suffer from any nullities.

It is necessary to examine the exception of lack of jurisdiction as a matter of priority.

2. QUESTION OF MATERIAL INCOMPETENCE OF THIS ARBITRAL TRIBUNAL DUE TO THE MATTER INVOLVING RECOGNITION OF A RIGHT IN TAX MATTERS

The Tax and Customs Authority argues that this Arbitral Tribunal is materially incompetent to examine the request for an arbitral ruling because, in short, to examine the legality of the assessments, it is necessary to previously decide on the legality of the prerequisites of the right to renounce the exemption that the Applicant exercised, under the provision of subsection b) of article 12(1) of the VAT Code, whereby "the acts of additional VAT assessment carried out should be qualified as consequential acts taking into account the concept, albeit restricted, adopted both by doctrine and by case law".

The Tax and Customs Authority states that "acts should be qualified as consequential acts which were produced, or endowed with certain content, by reason of the existence of previous supposedly valid acts which serve as cause, basis or prerequisite thereof" and understands that "the acts of additional VAT assessment, pending examination in this arbitral instance, are in a relationship of dependence on the recognition or otherwise by the Applicant of the right to renounce VAT exemption, under article 12(1), subsection b), of the VAT Code".

Therefore, the Tax and Customs Authority considers that "this arbitral instance is materially incompetent to know of one of the various claims formulated in the present proceedings, namely, whether the Applicant has or does not have the right to renounce the exemption provided for under subsection 2) of article 9, as provided for in article 12(1), subsection b), both of the VAT Code" and that "determining whether the Applicant should be classified under the normal VAT regime with the right to VAT deduction does not translate into an act that may be subject to examination by this Tribunal, since it lies outside the material scope of tax arbitration as shaped by the legislator".

The jurisdiction of the arbitral tribunals functioning within the Center for Administrative Arbitration is defined, in the first place, by article 2(1) of the LFTA, which establishes the following:

1 - The jurisdiction of the arbitral tribunals comprises the examination of the following claims:

a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and advance payments;

b) The declaration of illegality of acts of determination of the taxable basis when they do not give rise to the assessment of any tax, of acts of determination of the taxable amount and of acts of determination of patrimonial values;

In the second place, the jurisdiction of the arbitral tribunals functioning within the Center for Administrative Arbitration is limited by the submission of the Tax and Customs Authority which, pursuant to article 4(1) of the LFTA, was defined by Ordinance No. 112-A/2011, of 12 March, which establishes the following, as far as relevant here:

The services and bodies referred to in the previous article are bound by the jurisdiction of the arbitral tribunals functioning within the Center for Administrative Arbitration which have as their object the examination of claims relating to taxes whose administration is incumbent upon them, referred to in article 2(1) of Decree-Law No. 10/2011, of 20 January, with the exception of the following:

a) Claims relating to the declaration of illegality of acts of self-assessment, withholding at source and advance payments that were not preceded by recourse to the administrative remedy under articles 131 to 133 of the Tax Procedure Code;

b) Claims relating to acts of determination of the taxable amount and acts of determination of the taxable basis, both by indirect methods, including the decision of the review procedure;

c) Claims relating to customs duties on imports and other indirect taxes levying on goods subject to import duties; and

d) Claims relating to tariff classification, origin and customs value of goods and tariff quotas, or whose resolution depends on laboratory analysis or formalities to be carried out by another Member State in the context of administrative cooperation in customs matters.

Ordinance No. 112-A/2011, with respect to the acts that may be classified as indicated in article 2, only excluded from the scope of submission of the Tax Administration, in non-customs matters, the claims relating to acts of self-assessment, withholding at source and advance payments that were not preceded by recourse to the administrative remedy and the claims relating to acts of determination of the taxable amount and acts of determination of the taxable basis, both by indirect methods, including the decision of the review procedure.

It is manifest that none of the situations are present in which Ordinance No. 112-A/2011 excludes the jurisdiction of the arbitral tribunals functioning within the Center for Administrative Arbitration, whereby jurisdiction must be assessed solely in light of the LFTA.

As is evident from article 2 of the LFTA, the jurisdiction of the arbitral tribunals functioning within the Center for Administrative Arbitration was defined by the LFTA having regard only to the type of acts which are the object of the claims of taxpayers and not as a function of the type of questions that it is necessary to examine to decide whether the acts are legal or illegal.

There is, in particular, no prohibition on the examination of matters relating to the verification of the prerequisites of the right to renounce VAT exemption or any other questions of legality relating to acts of the types referred to in article 2 of the LFTA. An assessment of a tax that departs from the non-consideration of an exemption or a renunciation of exemption does not cease to be a tax act of assessment. And the claim for examination of the legality or illegality of that non-consideration underlying an act of assessment does not therefore cease to be the examination of a claim relating to the declaration of illegality of acts of assessment, in which that non-consideration is materialized.

Thus, in the arbitral proceedings, similarly to what occurs in judicial review proceedings, any illegality may, as a rule, be imputed to acts of assessment, as follows from article 99 of the Tax Procedure Code, subsidiarily applicable.

This will only not be the case in situations where the law provides for the autonomous reviewability of administrative acts which are a prerequisite of the acts of assessment, and only to that extent is the examination of the legality of the acts of assessment excluded in all respects. But, for this autonomous reviewability to exist, it is necessary that there be some administrative act in tax matters, since reviewability relates to acts and not to legal positions assumed expressly or implicitly as prerequisites of the acts of assessment, but not materialized in autonomous tax acts.

The consequential acts, of which the Tax and Customs Authority speaks, are consequential to other previous tax or administrative acts and, in the case at hand, there is no record that any administrative act was carried out examining whether the Applicant has or does not have the right to renounce VAT exemption.

That is, for there to be a limitation on the reviewability of the impugned acts of assessment, some administrative act that was a prerequisite of these acts of assessment would have previously had to be carried out, which did not occur in the case at hand.

Therefore, as the acts of assessment are injurious to the interests of the Applicant and as they are the only acts carried out by the tax administration on the situation examined therein, their contentious reviewability must be ensured on the basis of any illegality, as follows from the principle of effective judicial protection, enshrined in articles 20(1) and 268(4) of the Constitution of the Portuguese Republic. That is, it would be materially unconstitutional by violation of these norms, a hypothetical limitation of the defects attributable to acts of assessment, of a nature injurious to their addressee.

On the other hand, when there is no autonomous reviewable act prior to an act of assessment dealing with its prerequisites, "any illegality previously committed may be invoked in the review of the final decision" (final part of article 54 of the Tax Procedure Code), whereby all questions relating to the legality of the acts of assessment may be examined in tax tribunals in judicial review proceedings, as follows from subsection a) of article 97(1) and article 99 of the same Code.

In truth, in tax tribunals, even when, having been carried out acts of assessment, one is in a situation where it could be more useful for the taxpayer to use the action for recognition of a right or legitimate interest (by enabling, in addition to the examination of the legality of acts, the definition for the future of the rights of the taxpayer), the use of the action instead of judicial review is a mere faculty, as follows from the very text of article 145(3) of the Tax Procedure Code, by saying that "actions may only be brought whenever that procedural means is the most appropriate to ensure full, effective and efficient protection of the right or legally protected interest". That is, what is provided in this norm is a limitation on the use of the action and not a limitation on the use of judicial review proceedings.

Indeed, it is manifest that judicial review proceedings include the possibility of recognition of rights in tax matters, such as the right to annulment or declaration of nullity of assessments, the right to indemnificatory interest and the right to compensation for undue security, whereby the fact that recognition of rights is at stake is not an obstacle to the use of judicial review proceedings.

Thus, as the tax arbitral proceedings were created as an alternative to judicial review proceedings, it must be concluded that there is no obstacle to the legality of the acts of assessment at issue in these proceedings being examined by this Arbitral Tribunal, since in tax tribunals this legality could be examined in judicial review proceedings.

Therefore, the exception of lack of material jurisdiction raised by the Tax and Customs Authority is without merit.

3. FACTUAL MATTERS

3.1. Proven Facts

The following facts are deemed to be proven:

A) The Applicant commenced operations on 06-01-1978, being registered for the exercise of "Clinical Laboratory Analysis" (Economic Activity Code 086901);

B) The Applicant has its registered office at … and has collection points, for patient care and sample collection, in various locations, providing services in the field of Clinical Pathology (Clinical Analysis), namely, Biochemistry, Haematology, Coagulation, Serology, Microbiology, Immunology, Endocrinology, Drug Monitoring and Clinical Toxicology, and also, residually and of insignificant materiality, in the field of Veterinary Clinical Pathology (Veterinary Clinical Analysis);

C) For VAT purposes, it was classified, on 01-01-1986, under the exemption regime established in article 9 of the VAT Code;

D) On 29-12-2000, by means of delivery of a declaration of amendments, the Applicant renounced the VAT exemption, under subsection b) of article 12(1) of the VAT Code and, in consequence, was classified, from 01-01-2001, under the normal VAT regime on a monthly periodicity, by option, subjecting to VAT the totality of the operations carried out within the scope of its activity, as well as deducting the totality of the tax supported in the acquisition of goods and services;

E) The Tax and Customs Authority carried out an external inspection procedure accredited by the Service Order OI2014… and directed to VAT for the period 201405, whose scope was extended to the year 2013 and periods 201401 to 201404, inclusive, having taken place between 22-07-2014 and 28-11-2014;

F) In that inspection action, the Tax and Customs Authority understood that, by means of delivery of a declaration of amendments on 29-12-2000, the Applicant had improperly renounced the VAT exemption, under subsection b) of article 12(1) of the VAT Code, whereby corrections should be made;

G) In the Tax Inspection Report drawn up in that inspection action, the content of which is deemed to be reproduced, reference is made, among other things, to the following:

II.3.1. Tax Classification of the Taxpayer

The taxpayer commenced operations on 06-01-1978, being registered for the exercise of the activity of "Clinical Laboratory Analysis" (Economic Activity Code 086901).

For VAT purposes, the taxpayer was classified, on 01-01-1986, under the exemption regime established in article 9 of the VAT Code, having renounced the VAT exemption, under subsection b) of article 12(1) of the same Code, on 29-12-2000, by means of delivery of a declaration of amendments. In consequence, it was classified, from 01-01-2001, under the normal regime on a monthly periodicity, by option.

II.3.2. Activity Carried Out and Its Classification for VAT Purposes

The A… SA (hereinafter referred to as A… or taxpayer) has its registered office at …, in the city of …, its premises occupying several floors of the same building, in a total area of approximately 2,000 m2, and having branches (collection points), for patient care and sample collection, in various locations.

The activity of A…, a reference clinical analysis laboratory in the city of …, which carries out practically all clinical analyses of current clinical utility available worldwide, is the provision of services in the field of Clinical Pathology (Clinical Analysis), namely: Biochemistry, Haematology, Coagulation, Serology, Microbiology, Immunology, Endocrinology, Drug Monitoring and Clinical Toxicology.

The analysis carried out of the taxpayer's accounts also made it possible to identify the provision of services, albeit residual and of insignificant materiality, in the field of Veterinary Clinical Pathology (Veterinary Clinical Analysis).

The provision of Clinical Analysis services benefits from VAT exemption established in article 9 of the VAT Code, in contrast to the provision of Veterinary Clinical Analysis services which are subject to VAT at the normal rate.

II.3.3. Renunciation of VAT Exemption

On 29-12-2000, the taxpayer made its choice for the normal taxation regime for the activity of Clinical Analysis, under subsection b) of article 12(1) of the VAT Code, by means of delivery of a declaration of amendments.

In consequence, A… came to subject to VAT the totality of the operations carried out within the scope of its activity, as well as to deduct the totality of the tax supported in the acquisition of goods and services.

As will be demonstrated in Chapter III of the present Report, the said renunciation of VAT exemption could not have been carried out due to lack of legal grounds.

Thus, since in the exercise of its activity A… carried out operations which, under article 20 of the VAT Code, would confer the right to deduction (Veterinary Clinical Analysis) and operations which did not confer such right (Clinical Analysis), in compliance with the provision of article 23(1) of that Code, it could only deduct part of the tax supported in the acquisition of goods and services.

III. DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETICAL CORRECTIONS

III.1. Legislative Framework of Clinical Analysis Activity

The following exposition is intended to classify the activity of Clinical Analysis for VAT purposes.

III.1.1. Article 9(1) of the VAT Code

Pursuant to article 9(1) of the VAT Code, the following are exempt from tax: "The provision of services carried out in the exercise of the professions of physician, dentist, midwife, nurse and other paramedical professions".

Given that the VAT Code does not contain any definition with respect to paramedical activities, it is necessary to resort to Decree-Law No. 261/93, of 24 July, as well as to Decree-Law No. 320/99, of 11 August, since these are the decrees that contain the requirements to be observed for the exercise of the respective activities.

The list annexed to Decree-Law No. 261/93, of 24 July, provides, in its item 1, the activity of Clinical Analysis and Public Health. According to the description presented there, this activity translates into "the development of activities at the level of clinical pathology, immunology, clinical haematology, genetics and public health, through the study, application and evaluation of analytical techniques and methods proper thereto, for purposes of diagnosis and screening".

It is important to note that the exemption provided for in article 9(1) of the VAT Code operates independently of the legal nature of the service provider and, in particular, of the fact that it is a natural or legal person and, furthermore, that such exemption is based on subsection c) of article 132(1) of Council Directive 2006/112/EC, of 28 November (which reformulated Council Directive 77/388/EEC, of 17 May, commonly known as the Sixth Directive).

III.1.2. Article 9(2) of the VAT Code

Pursuant to article 9(2) of the VAT Code, the following are exempt: "Medical and health services and operations closely connected therewith carried out by hospitals, clinics, dispensaries and similar establishments".

This provision transposes into the internal legal order subsection b) of article 132(1) of the aforementioned Council Directive 2006/112/EC, of 28 November, which provides that Member States shall exempt the following operations: "Hospitalisation and medical care, and operations closely related thereto, provided by public law bodies or, under conditions analogous to those applying for the latter, by hospitals, medical and diagnostic centres and other establishments of the same nature duly recognised".

Thus, this exemption covers the provision of medical and health services (health acts) which consist in providing assistance to persons, diagnosing and treating diseases or any health anomalies and operations connected therewith, carried out by the establishments expressed in the said norm or by similar establishments (hospitalisation/admission).

On the other hand, establishments similar, for purposes of the said exemption, are considered to be establishments, public or private, which diagnose and treat diseases or any other health anomaly, that is, establishments which effectively carry out operations which have the nature of health services.[1]

III.1.3. Judgment of the Court of Justice of the European Communities – Scope of Articles 9(1) and 9(2) of the VAT Code

The Court of Justice of the European Communities (CJEC), in the Judgment of 10 September 2002, delivered in Case C-141/00, relating to the Kügler case (point 36), demonstrated that subsections b) and c) of article 132(1) of the VAT Directive, although they aim to regulate the exemptions that are applicable to medical assistance services, have distinct scopes.

Whereas subsection b) – which corresponds to article 9(2) of the VAT Code – exempts the provision of assistance services rendered in the hospital setting, including closely connected operations, subsection c) – which corresponds to article 9(1) of the VAT Code – is intended to exempt the provision of services of a medical and paramedical character provided outside such locations, whether in the private residence of the service provider, in the residence of the patient, or in any other place.

III.2. Concrete Situation of the Taxpayer

III.2.1. Activity Actually Carried Out

The activity actually carried out by the taxpayer, which benefited from VAT exemption, under article 9 of the VAT Code and for which the Laboratory … renounced the exemption, under subsection b) of article 12(1) of the VAT Code, consisted, essentially, in the provision of health services in the field of Clinical Pathology, that is, in the provision of Clinical Analysis services.

The collection of samples to be analysed was carried out, as a rule, in the central laboratory or in one of the various collection units, and could also occur in the patient's residence or in the facilities of the respective employer entity. Subsequently, the processing of the samples to be analysed was carried out and the relevant analysis report was issued. A… also proceeded to process samples collected in collection posts of other entities, in particular related entities, when its services were subcontracted.

It should be noted that in no case did the services provided involve the hospitalisation or admission of patients, and, as set out in the preceding paragraph, it is verified that they were not carried out in a hospital setting.

III.2.2. Classification for VAT Purposes

As follows from the exposition in point III.1. Legislative Framework of Clinical Analysis Activity, the taxpayer cannot consider the activity carried out in the field of Clinical Analysis as exempt from tax by classification under article 9(2) of the VAT Code, but only by invocation of the provision of article 9(1) of the same.

Consequently, as it was classified under article 9(1) of the VAT Code, the taxpayer could not renounce the exemption, due to the non-existence of legal provision which would allow it to do so, since the renunciation of the exemption provided for in subsection b) of article 12(1) of the VAT Code applies only to the exemption of article 9(2) of the VAT Code.

III.2.3. Tax Consequences

The taxpayer, unable to have carried out the renunciation of VAT exemption due to lack of legal grounds, should be considered as a mixed taxpayer, since in the exercise of its activity it carried out operations which, under article 20(1) of the VAT Code, conferred the right to deduction (in particular the provision of services in the field of Veterinary Clinical Pathology which are subject to VAT at the normal rate) and operations which did not confer such right (the provision of Clinical Analysis services, exempt from VAT under article 9(1) of the VAT Code).

Consequently, in compliance with the provision of article 23(1) of the VAT Code, it could only deduct part of the tax supported in the acquisition of goods and services.

The determination of the amounts of tax supported which the taxpayer could deduct should follow the rules stipulated in the said article 23 of the VAT Code: in particular that contained in subsection b) of article 23(1) thereof which indicates that "(…) where a good or service is used for the purposes of carrying out operations in respect of which the right of deduction arises, part of which do not give rise to the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations which give rise to deduction [pro rata].

However, subsection b) of article 23(3) of the same article stipulates that "the tax administration may require the taxpayer to proceed in accordance with the provision of the preceding number (…): b) When the application of the process referred to in paragraph 1 gives rise to significant distortions in taxation".

In fact, in the case under examination, the application of a pro rata system would give rise to significant distortions in taxation, since, given the reduced materiality of the provision of Veterinary Clinical Analysis services, it would lead to a deduction of tax disproportionate, tens/hundreds of times higher than the amounts of tax assessed on those services in the periods in question.

On the other hand, the use of the real allocation method for the determination of the amounts of tax supported relating to goods and services allocated to the carrying out of Veterinary Clinical Analysis services appears to be impossible to implement.

Article 8 of Circular Order No. 79783, of 18-07-1989, from the VAT Services Directorate, which deals with substantially identical issues, states that "With respect to the (…) goods and services whose allocation is totally impossible to implement, the deduction of the tax should be carried out in proportion to the indicators which prove to be the most fair and rational: turnover, occupied space, number of machinery hours, etc. (…)".

Thus, we shall consider that the tax which the taxpayer could deduct corresponds to a proportion of the tax deducted in the periods under examination determined by the weight of Veterinary Clinical Analysis services in the total provision of services (see footnote 2).[2] Since the amounts ascertained of deductible tax are materially irrelevant, their distribution by item and by period is not justified, whereby they will be considered in the first tax period of each year in field 24 of the periodic VAT statement.

It is noted that the VAT which was regularized in favour of the taxpayer (field 40 of the periodic VAT statements) is not relevant for determining the amount of tax improperly deducted, given that it relates to corrections to tax previously assessed.

Likewise, in the operations on the passive side, the amounts of VAT regularizations in favour of the State should be corrected.

Thus, when the acquisitions of goods or services which gave rise to those regularizations were recorded and the respective VAT deducted in the periods under examination, as the VAT deducted by the taxpayer was considered non-deductible, the respective regularization in favour of the State will be eliminated.

As for the VAT regularized in favour of the State which relates to the rectification of tax deducted in years prior to 2013[3], the same will not be corrected since in those years it was fully deducted by the taxpayer.

III.3. Regularizations in Favour of the State Lacking

Following the analysis carried out of the documents supporting the taxpayer's accounting records, it was verified that it did not proceed to regularization of VAT in favour of the State in the situations, amounts and periods identified in Table I.

III.4. Ascertainment of the Amounts of VAT Lacking

As duly explained in point III.2.3. Tax Consequences, the tax supported by the taxpayer during the periods under examination would only be deductible in the part corresponding to the operations which confer the right to deduction (provision of Veterinary Clinical Analysis services), whereby the VAT deducted in the remainder will have to be considered as improperly deducted, under article 20(1) of the VAT Code. On the other hand, the amounts of VAT regularizations in favour of the State will have to be corrected.

In light of the foregoing, the amounts of VAT lacking are those ascertained in Tables II to IV, amounting, in the years 2013 and 2014, to a total of € 1,367,351.17 and € 562,070.36, respectively:

It is important to note that the amounts considered in the preceding tables of VAT deducted and regularizations in favour of the State were those recorded in the periodic VAT statements delivered by the taxpayer with reference to those periods.

H) Following the inspection, the following assessments were made:

I) On 26-03-2015, the Applicant paid the amounts assessed, in the total amount of € 1,293,295.27 (documents No. 3 attached with the request for arbitral ruling, whose contents are deemed to be reproduced);

J) On 22-06-2015, the Applicant submitted an administrative complaint of the assessments referred to (document No. 4 attached with the request for arbitral ruling, whose content is deemed to be reproduced);

K) The administrative complaint was not decided until 29-12-2015;

L) On 20-12-1989, the VAT Services Directorate issued a Circular Order No. 147532, relating to "Clinical Analysts"[4] in which it states, among other things, the following:

Clinical analysis services are included in the exemption provided for in article 9(2) of the VAT Code, and the following requirements must be taken into account:

The carrying out of analyses connected to health care is still a provision of medical services;

Clinical analysis laboratories, whether directed by medical analysts, pharmacists or other graduates, are considered to be covered by the expression "similar" referred to in the cited article 9(2).

M) On 29-12-2015, the Applicant submitted the request for arbitral ruling which gave rise to the present proceedings.

3.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

3.3. Grounds for the Establishment of the Factual Matters

The facts were deemed to be proven on the basis of the documents attached to the request for arbitral ruling and the administrative file.

4. LEGAL MATTERS

The Applicant provides clinical analysis services which do not involve hospitalization of those to whom the analyses are carried out.

The Tax and Customs Authority, in the Tax Inspection Report underlying the impugned assessments, understood, in short, the following:

– The exemption provided for in article 132(1), subsection b), of Directive No. 2006/112/EC of the Council, of 28-11-2006, "covers medical and health services (health acts) which consist in providing assistance to persons, diagnosing and treating diseases or any health anomalies and operations connected therewith, carried out by the establishments expressed in the said norm or by similar establishments (hospitalisation/admission)";

– "similar establishments, for purposes of the said exemption, are considered to be establishments, public or private, which diagnose and treat diseases or any other health anomaly, that is, establishments which effectively carry out operations which have the nature of health services";

– "whereas subsection b) – which corresponds to article 9(2) of the VAT Code – exempts the provision of assistance services rendered in the hospital setting, including closely connected operations, subsection c) – which corresponds to article 9(1) of the VAT Code – is intended to exempt the provision of services of a medical and paramedical character provided outside such locations, whether in the private residence of the service provider, in the residence of the patient, or in any other place";

– "The collection of samples to be analysed was carried out, as a rule, in the central laboratory or in one of the various collection units, and could also occur in the patient's residence or in the facilities of the respective employer entity. Subsequently, the processing of the samples to be analysed was carried out and the relevant analysis report was issued. A… also proceeded to process samples collected in collection posts of other entities, in particular related entities, when its services were subcontracted";

– "in no case did the services provided involve the hospitalisation or admission of patients, and, as set out in the preceding paragraph, it is verified that they were not carried out in a hospital setting".

– The Applicant "cannot consider the activity carried out in the field of Clinical Analysis as exempt from tax by classification under article 9(2) of the VAT Code, but only by invocation of the provision of article 9(1) of the same";

– "consequently, as it was classified under article 9(1) of the VAT Code, the taxpayer could not renounce the exemption, due to the non-existence of legal provision which would allow it to do so, since the renunciation of the exemption provided for in subsection b) of article 12(1) of the VAT Code applies only to the exemption of article 9(2) of the VAT Code".

The contentious regime provided for in the LFTA is one of mere legality, aiming only at the declaration of illegality of acts of the types provided for in subsections a) and b) of article 2(1) thereof.

Therefore, the legality of the impugned acts must be assessed, as they were carried out, with the grounds used in them, it not being relevant whether other possible grounds exist which could support other acts, of a decision-making content totally or partially coincident with the act carried out. Thus, grounds invoked afterwards, after the end of the tax procedure in which the act whose declaration of illegality is requested was carried out, are irrelevant, including those put forward in the judicial proceedings.

Thus, the Tribunal cannot, upon finding the invocation of an illegal ground as support for the administrative decision, examine whether its action could be based on other grounds and refrain from declaring the act illegal because, possibly, there exists the abstract possibility of a hypothetical act with decision-making content totally or partially identical, with other grounds, which would be legal, but was not carried out.[5]

In these terms, the question to be examined consists, in the first place, in determining whether the position taken by the Tax and Customs Authority is correct in considering that only the activity carried out in a hospital setting falls within article 9(2) and that the Applicant's activity is not carried out in that setting, being developed in its own facilities or in partnership, without the services provided having involved the hospitalization or admission of patients.

That is, for assessing the legality of the corrections carried out, it is not relevant what the Tax and Customs Authority states in the Reply submitted in the present proceedings, about, in the event it is understood that the Applicant's situation falls within article 9(2), whether it is possible to renounce the exemption in light of the principle of neutrality. In truth, the grounds which the Tax and Customs Authority did not examine when carrying out the act, are not grounds of the act carried out, their invocation constituting grounds put forward subsequently.

Therefore, with only the contemporaneous grounds of the act being relevant, if it is concluded that the Applicant's situation falls within article 9(2) of the VAT Code, it will be necessary to conclude the illegality of the act by reason of error as to the legal prerequisites.

4.2. Applicable Legal Regime

At the time of the facts under examination, articles 9 and 12 of the VAT Code established the following, as far as relevant here:

Article 9

Exemptions in Domestic Operations

The following are exempt from tax:

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

2. Medical and health services and operations closely connected therewith carried out by hospitals, clinics, dispensaries and similar establishments;

(...)

Article 12

Renunciation of Exemption

1 - The following may renounce the exemption, opting for the application of the tax to their operations:

(...)

b) Hospitals, clinics, dispensaries and similar establishments not belonging to public law legal entities or private institutions integrated into the national health system, which carry out the provision of medical and health services and operations closely connected therewith;

(...)

2 - The option is exercised by means of delivery, at any finance office or other legally authorized location, of a declaration of commencement or amendments, as the case may be, producing effects from the date of its presentation.

3 - Having exercised the option in accordance with the preceding numbers, the taxpayer is obliged to remain in the regime opted for during a period of at least five years, and should, at the end of such period, in the event of wishing to return to the exemption regime:

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

b) Subject to taxation the remaining stock and proceed, under article 24(5), to the adjustment of the deduction as regards capital assets.

These exemptions are connected with article 132 of Directive No. 2006/112/EC, of 28-11-2006, which establishes the following, as far as relevant here:

1. Member States shall exempt the following operations:

(...)

b) Hospitalisation and medical care, and operations closely related thereto, provided by public law bodies or, under conditions analogous to those applying for the latter, by hospitals, medical and diagnostic centres and other establishments of the same nature duly recognised;

c) Services provided in the exercise of medical and paramedical professions, as defined by the Member State in question;

4.3. Possibility of Renunciation of Exemption

The said subsection b) of article 12(1) of the VAT Code permits the renunciation of VAT exemption by "hospitals, clinics, dispensaries and similar establishments not belonging to public law legal entities or private institutions integrated into the national health system, which carry out the provision of medical and health services and operations closely connected therewith".

Article 9(2) of the VAT Code provides for the exemption of "medical and health services and operations closely connected therewith carried out by hospitals, clinics, dispensaries and similar establishments", whereby, in view of the textual correspondence, it must be concluded that only these entities classified under this paragraph 2) may renounce the exemption and not also those which benefit from the exemption under paragraph 1).

The Tax and Customs Authority understood that the fields of application of subsections b) and c) of article 132 of Directive No. 2006/112/EC correspond to the fields of application of paragraphs 2) and 1), respectively, of article 9 of the VAT Code.

With that premise, in line with the case law of the CJEU on the field of application of the provision of subsections b) and c) of article 13-A(1) of the Sixth Directive [literally corresponding to subsections b) and c) of article 132 of Directive No. 2006/112/EC][6], it understood that subsection c) and, consequently, article 9(1) of the VAT Code, covers the provision of health services by legal entities and that subsection b) – which corresponds to article 9(2) of the VAT Code – exempts the provision of assistance services rendered in the hospital setting, including closely connected operations, whereas subsection c) – which corresponds to article 9(1) of the VAT Code – is intended to exempt the provision of services of a medical and paramedical character provided outside such locations, whether in the private residence of the service provider, in the residence of the patient, or in any other place.

However, the CJEU, in the L.u.P. judgment[7], subsequent to the Kügler judgment, clarified that

"Article 13-A(1)(b) of Council Directive 77/388/EEC of 17 May 1977, (…) must be interpreted to the effect that clinical analyses aimed at the observation and examination of patients for preventive purposes, carried out, as in the main proceedings, by a private law laboratory external to a medical assistance establishment on the prescription of general practitioners, are capable of being covered by the exemption provided for in that provision as medical care provided otherwise".

In this L.u.P. judgment, the CJEU understood that "since clinical analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical care' provided for in article 13-A(1)(b) of the Sixth Directive, a laboratory such as that in the main proceedings should be considered an establishment of 'the same nature' as the 'hospitals' and 'medical and diagnostic centres' within the meaning of that provision" (point 35).

In a recent judgment, the CJEU reaffirmed "that a private law laboratory which carries out clinical analyses should be considered an establishment 'of the same nature' as the 'hospitals' and 'medical and diagnostic centres' within the meaning of that provision, since those analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical care' provided for in that provision (point 35 of the De Fruytier judgment, of 02-07-2015, delivered in Case No. C-334/14, in which the L.u.P. judgments, C-106/05, points 18 and 35, and CopyGene, C-262/08, point 60 are cited).

Therefore, it must be concluded that, in light of the case law of the CJEU, the exemption provided for in subsection b) of article 132 covers the services provided by entities of the types that the Applicant provides, notwithstanding whether the provision occurs or does not occur in a hospital setting, an interpretation that is in manifest consonance with the text of this norm, by making reference to the exemption of operations closely related to hospitalization and medical care provided to "medical and diagnostic centres".

As concerns article 9 of the VAT Code, the text of its paragraph 2) also does not provide explicit support for the thesis defended by the Tax and Customs Authority that only activity carried out in a hospital setting falls within it, and, in particular, that outside its scope is the provision of clinical analysis and diagnostic services connected with hospital activities.

In truth, in this paragraph 2) of article 9, reference is made, in addition to hospital establishments, also to "clinics, dispensaries and similar establishments".

The reference to "dispensaries" unequivocally encompasses the provision of health services outside that hospital setting, since the meaning of "dispensary" is that of "a charitable establishment for the treatment of patients with economic difficulties, giving them access to free consultations and medicines"[8], or "an establishment for providing, free of charge, care and medicines to poor patients who can be treated at home"[9].

On the other hand, the reference to "similar establishments", interpreted in consonance with the parallel norm of subsection c) of article 132 of Directive No. 2006/112/EC, which makes reference to "medical and diagnostic centres and other establishments of the same nature", allows the conclusion that entities of the type of the Applicant, which provides health services of clinical analysis and diagnosis in connection with hospital establishments, would also fall within that concept.

Thus, the thesis defended by the Tax and Customs Authority that the exemption applicable to establishments of the type of the Applicant is not provided for in article 9(2) of the VAT Code has no textual support.

By the foregoing, the Applicant was entitled to the exemption under this norm and, consequently, had the right to renounce it, under article 12(1), subsection b) of the VAT Code.

As concerns the preliminary ruling which the Tax and Customs Authority seeks (in its Reply), it is not indicated what question of interpretation of norms of European Union law it intends to have clarified and only with respect to questions of this type is there the possibility of a preliminary ruling, as follows from article 267, subsections a) and b) of the Treaty on the Functioning of the European Union. In the case at hand, in addition to the existence of recent case law, which has been cited, on the interpretation of norms of Union law, there arises the question of interpretation of subsections a) and b) of article 9 of the VAT Code, different from those norms, whose interpretation does not fall within the scope of that article 267.

Therefore, this is not a situation in which a preliminary ruling is warranted.

The assessments of compensatory interest have the assessments of VAT as their prerequisite, in which they are integrated (article 25(8) of the General Tax Law), whereby they suffer from the same defect.

By the foregoing, it is concluded that the impugned assessments suffer from a defect of violation of law, by reason of error as to the legal prerequisites, which warrants their annulment.

4.4. Questions Made Moot

Resulting from the foregoing the declaration of illegality of the assessments which are the object of the present proceedings, by reason of a defect which precludes the renewal of the acts, the examination of the remaining defects imputed thereto by the Applicant is made moot, in particular that of the impossibility of non-consideration of the renunciation of the exemption with retroactive effect and of the consequent reclassification of the taxpayer with retroactive effect.

In truth, article 124 of the Tax Procedure Code, subsidiarily applicable by virtue of the provision of article 29(1) of the LFTA, by establishing an order of examination of defects, presupposes that, judged to be well-founded a defect which ensures effective protection of the rights of the parties, it is not necessary to examine the remaining ones, for, if it were always necessary to examine all the defects imputed to the impugned act, it would be irrelevant in what order they were examined.

By the foregoing, no examination is made of the remaining defects imputed by the Applicant to the impugned assessments.

5. REPAYMENT OF THE AMOUNT PAID AND INDEMNIFICATORY INTEREST

The Applicant further requests that the Tax and Customs Authority be condemned to reimburse it of the amount paid, plus indemnificatory interest.

In accordance with the provision of subsection b) of article 24 of the LFTA, the arbitral decision on the merits of the claim which is not subject to appeal or review binds the tax administration from the expiry of the period provided for appeal or review, whereby the tax administration, in the exact terms of the well-founded nature of the arbitral decision in favour of the taxpayer and until the expiry of the period provided for the spontaneous execution of the decisions of tax judicial tribunals, must "restore the situation that would have existed had the tax act which is the object of the arbitral decision not been carried out, adopting the acts and operations necessary for that purpose", which is in consonance with the provision of article 100 of the General Tax Law [applicable by virtue of the provision of subsection a) of article 29(1) of the LFTA] which establishes that "the tax administration is obliged, in the event of total or partial success of an administrative complaint, judicial review or appeal in favour of the taxpayer, to the immediate and full restoration of the legality of the act or situation which is the object of the dispute, including the payment of indemnificatory interest, if applicable, from the expiry of the period of execution of the decision".

Although article 2(1), subsections a) and b), of the LFTA uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals functioning in the Center for Administrative Arbitration, making no reference to condemnatory decisions, it should be understood that the powers which in judicial review proceedings are attributed to tax tribunals are included in its jurisdiction, and this is the interpretation that is in consonance with the meaning of the legislative authorization on which the Government based itself in approving the LFTA, in which it proclaims, as the first directive, that "the tax arbitral proceeding must constitute an alternative procedural means to the judicial review proceedings and to the action for recognition of a right or legitimate interest in tax matters".

The judicial review proceeding, despite being essentially a proceeding for the annulment of tax acts, admits the condemnation of the Tax Administration to pay indemnificatory interest, as can be inferred from article 43(1) of the General Tax Law, in which it is established that "indemnificatory interest is due when it is determined, in an administrative complaint or judicial review, that there has been an error attributable to the services which results in payment of the tax debt in an amount greater than that legally due" and from article 61(4) of the Tax Procedure Code (in the wording given by Law No. 55-A/2010, of 31 December, to which corresponds article 61(2) in the original wording), which states that "if the decision which recognized the right to indemnificatory interest is judicial, the period for payment is calculated from the beginning of the period for its spontaneous execution".

Thus, paragraph 5 of article 24 of the LFTA, by stating that "payment of interest, regardless of its nature, is due, in the terms provided for in the General Tax Law and in the Tax Procedure Code", should be understood as permitting the recognition of the right to indemnificatory interest in the arbitral proceedings, as well as the repayment of the amount paid, which is a prerequisite for the existence of such interest.

It is therefore necessary to examine the request for repayment of the amount improperly paid of € 1,293,295.27, plus indemnificatory interest.

In the case at hand, it is manifest that, following the illegality of the act of assessment, there is grounds for repayment of the tax, by virtue of the said articles 24(1)(b) of the LFTA and 100 of the General Tax Law, since that is essential to "restore the situation that would have existed had the tax act which is the object of the arbitral decision not been carried out".

As concerns indemnificatory interest, it is also clear that the illegality of the acts of VAT assessment is attributable to the Tax Administration, which, on its own initiative, carried them out on the basis of an incorrect interpretation of the law.

There is a defect of violation of substantive law, embodied in error as to the legal prerequisites, attributable to the Tax Administration.

Consequently, the Applicant is entitled to indemnificatory interest, under article 43(1) of the General Tax Law and article 61 of the Tax Procedure Code, calculated on the amount of € 1,293,295.27 and calculated from 26-03-2015, until the full repayment of the said amount.

Interest is due at the legal default rate, in accordance with articles 43(1) and (4), and 35(10) of the General Tax Law, article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

6. DECISION

In these terms, the arbitrators in this Arbitral Tribunal hereby agree to:

a) Judge the exception of lack of jurisdiction of the Arbitral Tribunal, raised by the Tax and Customs Authority, to be without merit;

b) Judge the main request for arbitral ruling to be well-founded and annul the following assessments of VAT and compensatory interest:

c) Judge the request for repayment of the amounts paid, in the total amount of € 1,293,295.27, and for payment of indemnificatory interest on this amount, calculated at the legal default rate, from 24-03-2015, until full repayment of those amounts to be well-founded, and condemn the Tax and Customs Authority to effect these payments.

7. VALUE OF THE PROCEEDING

In accordance with the provision of article 306(2) of the Code of Civil Procedure, article 97-A(1)(a) of the Tax Procedure Code and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at € 1,293,295.27.

8. COSTS

In accordance with article 22(4) of the LFTA, the amount of costs is fixed at € 17,442.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, charged to the Tax and Customs Authority.

Lisbon, 24-05-2016

The Arbitrators

(Jorge Lopes de Sousa)

(Nuno Cunha Rodrigues)

(António Nunes dos Reis)

[1] In the copy of the Tax Inspection Report contained in the administrative file, the pages are ordered incorrectly, with page 7 appearing after pages 8 and 9, whereby the correct order is followed in the transcription.

[2] In the total amounts of € 973.73 and € 51.51 or 0.00582% and 0.00065% of the total provision of services (€ 16,741,789.67 and € 7,897,982.23), with reference to the periods examined in the years 2013 and 2014, respectively.

[3] The situations identified of this nature corresponded to the regularizations in favour of the State recorded through the journal entries from the Purchases journal with nos. 2209 and 2210 (201302), 3002 (201303), 4330 (201304), 5319 (201305), 4256 and 4259 (201404), in the amounts of € 5.42, € 165.80, € 2.11, € 15.18, € 8.28, € 115.38 and € 3,241.93, respectively.

[4] The text of the Circular Order is no longer available on the Finance Portal, but is referenced therein in "http://info.portaldasfinancas.gov.pt/NR/rdonlyres/30D56792-A0B8-41DF-B58A-B219EE136092/0/circulares_e_oficios_circulados_iva_de_1985_a_1989.pdf"

The text of the circular order is also reproduced in https://sites.google.com/site/portugaltax/iva/civa/capitulo-2---isencoes/civa-cap-2-sec-1-art-9

In EMANUEL VIDAL LIMA "VAT – Value Added Tax Commented and Annotated", 8th edition, pages 176-177, part of the Circular Order is also reproduced.

[5] In this sense, the following Supreme Administrative Court judgments may be consulted, regarding parallel situations that arise in contentious appeals proceedings:

– of 10-11-98, of the Plenary, delivered in appeal No. 32702, published in Appendix to the Official Journal of 12-4-2001, page 1207;

– of 19/06/2002, case No. 47787, published in Appendix to the Official Journal of 10-2-2004, page 4289;

– of 09/10/2002, case No. 600/02;

– of 12/03/2003, case No. 1661/02.

In similar sense, the following may be consulted:

– MARCELLO CAETANO, Manual of Administrative Law, Volume I, 10th edition, page 479 in which he refers that it is "irrelevant that the Administration later, pending the contentious appeal, invoke as determining reasons other reasons, not set out in the act", and Volume II, 9th edition, page 1329, in which he writes that "the respondent authority cannot (…), in its reply to the appeal, justify the practice of the impugned act by reasons different from those contained in its express motivation";

– MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where it is written that "the reasons objectively existing but which are not expressly adduced, as grounds of the act, cannot be taken into account in the assessment of its legality".

[6] Point 36 of the Kügler judgment, of 10-09-2002, delivered in Case No. C-141/00.

[7] Of 08-06-2006, delivered in Case No. C-106/05.

[8] Dictionary of the Portuguese Language, from Porto Editora, 5th edition, page 483, also available at http://www.infopedia.pt/dicionarios/lingua-portuguesa/dispensários.

[9] Priberam Dictionary, available at http://www.priberam.pt/dlpo/dispensário and Michaelis Dictionary, available at http://michaelis.uol.com.br/moderno/portugues/definicao/dispensario _947235.html.