CAAD 83/2016-T: VAT Deduction Rights on Property Construction Services – Partial Reimbursement Dispute

ARBITRAL DECISION

I. REPORT

A…, Tax ID No.…, with tax domicile at …, Plot … …, … (hereinafter referred to only as the Claimant), filed on 15-02-2016, a request for the constitution of a sole arbitral tribunal, in accordance with articles 2 and 10 of Decree-Law No. 10/2011 of 20 January (Legal Regime for Tax Arbitration, hereinafter referred to only as RJAT), in conjunction with paragraph a) of article 99 of the Tax Procedure Code, wherein the Tax and Customs Authority (hereinafter referred to only as the Respondent) is the respondent.

The Claimant requests a declaration of illegality of the VAT assessment of the period 201209T in which only part of the tax incurred in its activity was recognized as deductible. Consequently, the Claimant should be recognized the right to a refund of the amount of €51,010.14, plus compensatory interest.

The request for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD on 16-02-2016 and notified to the Tax and Customs Authority on that same date.

Pursuant to the provision of paragraph a) of item 2 of article 6 and paragraph b) of item 1 of article 11 of the RJAT, the Ethics Council appointed as arbitrator of the sole arbitral tribunal the present signatory, who communicated acceptance of the appointment within the applicable deadline.

On 14-04-2016 the Parties were duly notified of this appointment, and neither manifested a will to refuse the appointment of the arbitrator, in accordance with the combined provisions of article 11, item 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

In conformity with the provision of paragraph c) of item 1 of article 11 of the RJAT, the sole arbitral tribunal was constituted on 29-04-2016.

Notified to make a statement, the Respondent filed a motion raising the issue of untimeliness of the request for arbitral pronouncement, and further maintained the legality of the disputed tax assessment act. It therefore concluded that the Claimant's petition should be dismissed in its entirety.

The Claimant had the opportunity to make a statement on the exception raised, proposing, in the alternative, an expansion of the petition, in accordance with item 2 of article 265 of the Code of Civil Procedure.

On 13-07-2016 the meeting provided for in article 18 of the RJAT took place in which the witnesses called by the Claimant were heard. Following the production of evidence, the parties were granted a deadline for the submission of successive written arguments, which both proceeded to submit.

II. REQUEST FOR ARBITRAL PRONOUNCEMENT

The Claimant filed a request for arbitral pronouncement aimed at the annulment of VAT assessment No. 2014…, relating to the period 201209T, with a value to be refunded of only €18,942.25, instead of the €76,934.06 initially requested.

The reduction of the amount actually refunded as against the petition that had been submitted by the Claimant resulted from the fact that the Respondent considered, among other grounds, that a significant portion of the VAT deducted by the Claimant had been improperly assessed, in violation of the provision of paragraph c) of item 6 of article 16 of the VAT Code, and moreover had not even been paid into the State coffers by the service provider, the company "B…, Lda.", Company Tax ID No….

The Claimant contests this understanding, arguing that the VAT assessed by said company corresponds to the tax due for the services contracted by the Claimant relating to the construction of a property, garden and respective swimming pool on the plot… acquired by the Claimant in the tourist development C….

The contract executed between the Claimant and the company in question amounted to a "turn-key" type contract in which the Claimant would only have to pay the amount provided for in the contract and that amount included all and any materials, equipment and services necessary for the completion of the construction of the ready-to-use dwelling. The service provider company would assume full conduct and management of the works, assuming responsibility for its implementation and for delivery of the constructed dwelling, in accordance with the specifications provided for contractually.

As consideration for the services contracted (services subcontracted to contractors, as well as services provided directly by the company), the Claimant paid €377,130.00, plus VAT at the legal rate in force, which amount corresponds to the total of the amounts expressly fixed in the contract. This payment by the Claimant was documented in the debit note No.…, in the total amount of €452,556.00 (VAT included).

As the work was being carried out, the contractors issued invoices in the name of the company which proceeded to pay them based on the funds initially made available by the Claimant. In situations where suppliers issued invoices in the name of the Claimant, the project management company proceeded to pay them and issued a credit note in the name of the Claimant to justify the use of the funds and avoid duplication of amounts.

The company "B…, Lda." carried out an actual provision of services subject to VAT whereby any advance that was made would always be subject to tax. To that extent, the VAT was assessed in accordance with the applicable tax rules, granting the Claimant the right to its deduction, in accordance with the respective legal deduction regime.

However, even if it were understood that the tax had been improperly assessed, this would not be grounds for refusal of the right to deduction, as was already decided by the Supreme Administrative Court in the judgment of 23-09-2015, case No. 01034/11, in which that court concluded that "(…) having the Tax Authority accepted the VAT assessment relating to a certain transaction (…), it cannot then, for purposes of exercising the right to deduct the tax, understand that the same assessment is invalid".

On the other hand, the fact that the entity in question did not proceed to pay the tax in question cannot be invoked against the Claimant as grounds for refusing the right to deduct the VAT borne, being irrelevant for this purpose the alleged existence of an insolvency proceeding of the service provider and the failure to claim any credit on the part of the Claimant in the context of the insolvency proceedings.

The Claimant concludes, thus sustaining that the VAT assessed by "B…, Lda." was actually due whereby it granted the Claimant the right to its deduction, subject to the respective VAT assessment regime. To that extent, the disputed VAT assessment is illegal in that it did not recognize the Claimant's right to deduct the VAT borne and paid in the amount of €51,010.14.

Considering that the tax refunded to the Claimant was less than what, legally, would be due, the Claimant shall be entitled to compensatory interest, under item 8 of article 22 of the VAT Code in conjunction with article 43 of the General Tax Law.

This claim by the Claimant was not accepted in the context of the administrative appeal, the Respondent issuing a partial denial order which maintained, as valid, the disputed tax act. With respect to this decision, the Claimant considers that item 1 of article 56 of the General Tax Law was violated insofar as the Respondent did not make a statement on all the issues raised by the Claimant.

Finally, the Claimant made a request for a preliminary ruling to the CJEU considering that the issues under consideration in the present case are related to the interpretation of EU law.

III. RESPONSE BY THE RESPONDENT

In the response submitted, the Respondent raises the exception of untimeliness of the request for arbitral pronouncement insofar as, having as its subject matter the VAT assessment notified to the Claimant in September 2014, on the date of submission of the request for arbitral pronouncement that gave rise to the present case (15-02-2016) the 90-day deadline provided for in article 10 of the RJAT would already have expired, when combined with article 102, item 1, paragraph b), of the Tax Procedure Code.

In its defense, the Respondent considers the petition presented by the Claimant to be entirely without merit, sustaining the legality of the corrections made and, consequently, of the disputed VAT assessment. The Respondent further considers that there is no place for any preliminary ruling to the CJEU.

IV. REPLY TO THE EXCEPTION

In exercising the right of reply, the Claimant proceeded to reiterate the conformity and timeliness of the petition presented, proposing, as an alternative, an expansion of the petition, under item 2 of article 265 of the Code of Civil Procedure, applicable by reference from article 29 of the RJAT, in order to also request the annulment of the denial order of the administrative appeal.

V. PROCEDURAL ORDER

The Arbitral Tribunal was properly constituted and is competent.

The parties possess legal personality and capacity and have standing (articles 4 and 10, item 2, of the same instrument and article 1 of Ordinance No. 112-A/2011 of 22 March).

The proceeding is not affected by any defects.

VI. MATTERS OF FACT

A. Proven Facts

The following facts are considered proven:

1. The Claimant was the owner of plot No. 118 of the tourist development called "C…".

2. As owner of said plot, the Claimant executed with "B…, S.A.", Company Tax ID No.…, an Agreement for Concession of Tourist Operation by which it would cede to that company, for purposes of its tourist operation, the dwelling to be constructed on the site, for 40 weeks per calendar year.

3. By contract executed on 25-01-2008, the Claimant contracted the company "B…, Lda.", Company Tax ID No.…, for the provision of the following services, as results from the First Clause:

"B… undertakes before the SECOND PARTY [the present Claimant] to provide it with the following services: a) to contract, in the name of the SECOND PARTY, contractor(s) for the construction of the project identified in Annex II, with the specifications prepared by the designers; b) to contract contractor(s), in the name of the SECOND PARTY, for the construction of the garden project for the covering of the plot and respective irrigation system; c) to contract, in the name of the SECOND PARTY, contractor(s) who construct the swimming pool, with all appropriate machinery and, further, to provide the surrounding area thereof, all in accordance with the option defined by Mr. Architect D…, should the SECOND PARTY wish it, which should communicate to B… prior to the beginning of the construction of the dwelling identified in paragraph a) above; d) to proceed with the work necessary to implement the standard garden project provided for the plot in question, should the SECOND PARTY wish it, which should communicate to B… prior to the beginning of the construction of the dwelling identified in paragraph a) above; e) upon completion of construction, B… shall proceed to the plant fencing of the plot, in accordance with the base fencing design existing for the group of plots in which it is located; f) the programming and coordination of all work; g) the supervision of all work, with exclusive responsibility of B…".

1. In accordance with the Third Clause of the contract referred to in the previous item, the agreed price and payment conditions were the following:

"2. The price of the work and services, including goods and works, defined in item 1 of the First Clause, are: a) €318,530 (…) to which VAT at the legal rate in force is added, relating to the construction of the project, the garden project for the covering of the plot and respective irrigation system, as well as to the arrangement of the vegetation covering of the plot, including the services referred to in paragraphs f) and g) of item 1 of the First Clause; b) €35,000 (…) to which VAT at the legal rate in force is added, relating to the construction of the swimming pool and surrounding area; c) €23,600 (…) to which VAT at the legal rate in force is added, relating to the construction of the standard garden.

1. This amount shall be paid in 15 (…) equal and successive monthly installments, with the first becoming due 15 (…) days after the beginning of excavation for foundations (…).

2. The SECOND PARTY undertakes, therefore, to deliver to B… the amount corresponding to the price of the works and services mentioned in paragraph a) above and in paragraphs b) and c), should it opt for the respective services, in the deadlines referred to in the previous item. Each of the 15 (…) installments shall correspond to one or more invoices issued by the contractors and another from B…".

3. Not being provided for a specific and concrete consideration for the services provided by "B…, Lda.", it would be remunerated by the difference between the amount previously defined in the contract with the Claimant and the actual cost of the works to be contracted, making its own that amount (if it occurred).

4. Under the terms of the contract, "B…, Lda." bore the risk that the final cost of the construction would exceed that agreed between the parties since the amount fixed with the client was a final amount.

5. On 22-01-2011, "B…, Lda." issued the following Debit Notes in the name of the Claimant:

• No.…, in the amount of €452,556, with VAT included in the amount of €75,426, with the description "Amount relating to the advance made relating to the service provision contract executed" (translation by this tribunal);

• No.…, in the amount of €68,110.26, with VAT included in the amount of €1,351.71, with the description "C…– Plot…; Amount debited refers to soil modeling" (translation by this tribunal);

• No.…, in the amount of €8,053.09, with VAT included in the amount of €1,342.18 with the description "C…– Plot…; Amount debited refers to window glass and window frame" (translation by this tribunal);

• No.…, in the amount of €1,829.87, with VAT included in the amount of €304.98 "C…– Plot…; Amount debited refers to window glass and window frame" (translation by this tribunal).

1. Debit Note No. … corresponds to the total of the works and services contracted, in accordance with the terms fixed in the Third Clause of the contract.

2. On the same date, the company in question issued in the name of the Claimant the following Credit Notes:

• No.…, in the amount of €165,618.56, with VAT included in the amount of €27,603.09;

• No.…, in the amount of €15,228.14, with VAT included in the amount of €2,538.02;

• No.…, in the amount of €30,788.65, with VAT included in the amount of €5,131.44;

• No.…, in the amount of €12,360.32, with VAT included in the amount of €2,145.18.

1. The Credit Notes issued by "B…, Lda." have the description "C…– Plot…; Value for service provision; Credit relating to the advance made in accordance with article 78 of the VAT Code" (translation by this tribunal).

2. All these documents were recorded in the Claimant's accounts, in the respective accounts (deductible VAT and adjustments in favor of the State, respectively).

3. "B…, Lda." was declared insolvent by judgment rendered on 22-12-2011, in the context of case No. …/11… TYVNG which was heard by the 2nd Court of the Commercial Court of Vila Nova de Gaia.

4. On 15-11-2012, the Claimant filed its periodic VAT return for quarter 201209T in which it requested a refund of €76,934.06.

5. Following that refund request, the Respondent initiated an internal control procedure under control order 2012….

6. Through official letter No. …, dated 17-01-2013, the tax representative of the Claimant was notified to submit elements necessary for the evaluation of the refund request.

7. This official letter was never answered by the tax representative of the Claimant.

8. In the absence of further information, the Respondent concluded that:

[Note: The specific conclusions are referenced in the facts but details omitted in source document]

1. Following this official letter, the Tax Office of…, through control order 2014…, initiated an external tax inspection procedure whose final report was notified to the Claimant, through its tax representative, by registered letter with acknowledgment of receipt sent on 07-07-2014.

2. In the context of the inspection, and with respect specifically to the refund amount under discussion in the present case (in the amount of €51,010.14), the Respondent reached the following conclusion:

[Note: Specific conclusions referenced but details in brackets omitted in source document]

1. On 29-07-2014, the Respondent made the VAT assessment for quarter 201209T, under No. 2014…, which resulted in tax to be refunded in the amount of €18,942.25.

2. In said assessment, the Respondent recorded in Field 41 ("Adjustments in favor of the State") the amount of €57,991.81.

3. The Claimant filed an administrative appeal in which it contested the correction of adjustments made in favor of the State (i) in the amount of €51,010.14 and (ii) in the amount of €999.00, which correspond to non-deductible VAT (in the Respondent's view).

4. The administrative appeal was partially granted, the Claimant being recognized as correct regarding the correction in the amount of €999.00.

5. The decision on the administrative appeal was notified to the Claimant, through its tax representative, by registered letter with acknowledgment of receipt received on 17-11-2015.

B. Unproven Facts

No other facts with relevance to the arbitral decision were proven.

C. Basis for the Matters of Fact

The matters of fact given as proven are based on the documentary evidence presented and not contested, namely the administrative proceeding, as well as on the testimony of witnesses E…, official accounts technician, and F…, civil engineer. The testimonies referred to were viewed as serious and impartial in the eyes of the Tribunal, insofar as, alongside their characteristics of spontaneity, they demonstrated logical structure and coherence.

VII. MATTERS OF LAW

A. The Exception of Untimeliness

As mentioned, the Respondent considers that the present request for arbitral pronouncement is untimely insofar as, limiting the subject matter of the present action to the declaration of illegality of the VAT assessment act for quarter 201209T, effected in July 2014, the 90-day deadline referred to in article 10 of the RJAT would have expired on the date the petition was submitted.

From the Respondent's perspective, the delimitation of the subject matter of the present case results expressly from the formulation of the petition presented by the Claimant which states, at the beginning of the initial pleading, that "(…) respectfully comes to request the declaration of illegality of VAT assessment No. 2014…, of 29.07.2014, issued by the Tax and Customs Authority, relating to the third quarter of 2012 (…)", concluding, finally, that "(…) the Claimant respectfully requests: a) The declaration of illegality and corresponding annulment of the VAT assessment here impugned, which shall be replaced by a new assessment that considers the aforementioned amount of Euro 51,010.14 of VAT to be refunded to the Claimant, with the consequent actual restitution of this amount to the Claimant; b) Recognition of the Claimant's right to compensatory interest, under the terms referred to above; and c) Condemnation of the Respondent to payment of the arbitral costs."

The Respondent further considers that, notwithstanding the fact that the Claimant made reference to the existence of an administrative appeal which was partially granted, the truth is that it did not present or specify any petition aimed at annulment of what was decided in that context.

The Respondent argues that, given that this Tribunal is limited to making a pronouncement on the petition presented in concrete form and cannot, under articles 608, item 2, and 609, item 1, of the Code of Civil Procedure, condemn in an object different from or in a quantity greater than that which has been requested, it is inevitable to conclude that the only subject matter of the present case is the VAT assessment act carried out in July 2014.

With the subject matter fixed in these terms, the Respondent concludes that the request for arbitral pronouncement is untimely by having been presented well beyond the deadline provided for in article 10 of the RJAT, counted from the date of notification of the disputed act. Wherefore it remains only for this tribunal to absolve the Respondent from the instance, under paragraph e) of item 1 of article 278 of the Code of Civil Procedure.

Upon a superficial analysis of the request for arbitral pronouncement, this Tribunal might even conclude as does the Respondent.

However, upon a more detailed and careful analysis of the submitted pleading, this Tribunal is led to conclude – as, moreover, the Claimant itself alleged in the reply to the exception – that the subject matter of the present request for arbitral pronouncement also encompasses the decision denying the administrative appeal.

Indeed, in articles 199 and following of the initial pleading, the Claimant dwells on the content of the decision made by the Respondent following the administrative appeal filed. See, by way of example, articles 210, 214, 215 and 216, and more specifically article 213 in which the Claimant concludes that "Indeed, the partial denial order of the Administrative Appeal is deficient in the factual presuppositions that were at the genesis of the correction and the assessment in question".

The Claimant further points to a specific defect of the denial decision, in articles 216 and 217, when it alleges that "(…) what becomes apparent from the content of said partial denial order of the administrative appeal is that the Tax Authority did not concern itself minimally with evaluating the arguments adduced by the Claimant in the administrative appeal presented (and respective attached documentation), thus incurring the Tax Authority in violation of article 56, item 1 of the General Tax Law".

It is, therefore, incorrect the allegation that the Claimant limited itself to making an allusion to the existence of an administrative appeal and its respective denial (even if partial).

The pleading submitted by the Claimant is, in the analysis of this Tribunal, more comprehensive than, at first glance, could be drawn from strict reading of the petition presented finally.

The judge is required to conduct an adequate and detailed evaluation of the pleadings and elements submitted by the parties for purposes of definition of the subject matter of the proceeding, with a view to maximum access to justice.

This very matter has been defended in diverse decisions of the Supreme Administrative Court in considering that, in the interpretation of the petition formulated, some flexibility should be used not ruling out recourse to the figure of the implicit petition in order to better safeguard compliance with the principles of effective judicial protection and pro actione. An example of this is the judgment of the Supreme Administrative Court of 16-12-2015, handed down in case No. 01508/14 (available at www.dgsi.pt) in which it was argued that, "(…) in accordance with the understanding that has been adopted by this Supreme Administrative Court, in the interpretation of the petition the judge should not limit himself to the wording that was given to it; one must go a bit further, not forgetting that in this hermeneutic task the concrete causes of action invoked cannot be ignored, insofar as they allow one to discern the true claim for legal protection, even using the figure of the implicit petition (…). In fact, our procedural law has always sought to avoid, whenever possible, that a party lose the case on purely formal grounds – that form prevail over substance (Cf. MANUEL DE ANDRADE, Elemental Notions of Civil Procedure, 1979, p. 387, regarding the flexibility that should temper the principle of legality of procedural forms.) – and this concern with the principle of effective judicial protection of the rights and interests of the parties has increasingly found expression in the adjective law, which seeks to avoid formalistic rigor in the interpretation of procedural documents (Cfr. article 7 of the Code of Procedure in Administrative Courts, which provides: «For the realization of the right of access to justice, procedural norms must be interpreted in the sense of promoting pronouncements on the merits of the formulated claims».). Note that, in the interpretation of procedural documents, the principles applicable to the interpretation of legal acts (common to the interpretation of laws) are applicable by virtue of the provision of article 295 of the Civil Code (…), being valid, therefore, that sense which, in accordance with the provision of article 236, item 1, of the Civil Code (…), the normal or reasonable recipient should draw from the written statements contained in the pleading (On the other hand, the principle applicable to formal legal acts – called the principle of minimum verbal correspondence – also applies here, according to which "a statement cannot be valid with a sense that does not have a minimum correspondence in the text of the respective document, even if imperfectly expressed" (article 238, item 1 of the Civil Code).), beyond which we cannot forget that formalistic rigor in the interpretation of procedural documents is today prohibited by the principles of modern civil procedure and likewise by the constitutional principle of effective judicial protection (cfr. articles 20 and 268, item 4, of the Constitution of the Portuguese Republic), for which reason the court should extract from the petition presented to it the sense most favorable to the interests of the petitioner, inquiring into its real claim (In this sense, the following judgments of this Section of Tax Contentious of the Supreme Administrative Court: - of 15 May 2013, handed down in case No. 154/13, published in the Appendix to the Official Journal of 15 April 2014 (…);- of 8 January 2014, handed down in case No. 32/13, published in the Appendix to the Official Journal of 15 September 2014 (…)."

In light of the foregoing, following the case law of the Supreme Administrative Court, this tribunal concludes that the present arbitral case has as its subject matter, although implicitly, not only the VAT assessment act identified by the Claimant, but also the partial denial order of the administrative appeal filed against it. The Claimant's petition is, therefore, broader than the Respondent considered, this tribunal having legitimacy to pronounce itself on the legality of both acts.

In such a case, the exception of untimeliness raised by the Respondent is without merit since the request for arbitral pronouncement was submitted within the 90-day deadline counted from the partial denial decision of the administrative appeal (this decision being the subject matter of the present case). Consequently, the remaining issues raised by the Claimant in reply to the raised exception are prejudiced, namely the proposed expansion of the petition.

B. Request for Preliminary Ruling to the CJEU

Considering that EU law is at issue, the Claimant formulates, in articles 228 and 229 of the initial pleading, a request for a preliminary ruling to the CJEU in the following terms:

"National VAT legislation, when interpreted in the sense that it denies the service purchaser the right to deduct the VAT that was allegedly improperly assessed to it by the respective supplier (and which the latter will not have paid to the State) is compatible with the EU VAT Directive, specifically regarding the right to deduct VAT borne upstream, where there is no indication whatsoever of fraud or tax evasion on the part of the service purchaser?".

On this matter, the Respondent alleges, correctly, that the request for a preliminary ruling "(…) will have to occur in the face of a specific provision, and a concrete and founded interpretive doubt of that provision, which in the case at hand was not indicated, nor raised". In fact, the Claimant does not indicate which provision of the VAT Code whose compatibility with EU law should be analyzed, nor specifies which interpretive doubt would justify the intervention of the CJEU.

However, it occurs that the inadequate formulation of such a preliminary ruling request by either party does not inhibit, nor prevent the judge from himself formulating a preliminary ruling request, requesting the intervention of the CJEU.

On this matter there must be taken into account the recommendations to judicial bodies disclosed through Recommendation No. 2012/C 338/01 of the CJEU[1]. Thus, as stated in item 7 of said recommendation "the role of the Court in the context of a preliminary ruling proceeding consists in interpreting EU law or pronouncing on its validity, and not in applying this law to the factual situation underlying the main proceedings. This role falls to the national judge and, therefore, the Court is not called upon to rule on questions of fact raised in the context of the dispute in the main proceedings nor on any differences of opinion regarding the interpretation or application of the rules of national law".

To that extent, the preliminary ruling request is always required when, the decision to be handed down not being subject to judicial appeal under internal law, interpretive doubts arise concerning EU law, except when there is already case law on the matter or when the correct way to interpret the legal rule in question is unequivocal (cfr. item 12 of the recommendation).

Consequently, "a national judicial body may, in particular when it considers itself sufficiently clarified by the case law of the Court, decide for itself the correct interpretation of EU law and its application to the factual situation of which it is aware" (cfr. item 13 of the recommendation).

This is, precisely, the case, insofar as this tribunal considers that regarding EU legislation and internal legislation on the matter there arise no interpretive doubts not clarified by case law of the tax tribunals and the CJEU itself.

In light of all that has been set forth, no request for a preliminary ruling to the CJEU is formulated. Being this tribunal in full conditions to pronounce itself on the subject matter of the dispute, the petition presented by the Claimant is denied.

C. Request for Arbitral Pronouncement

Similarly to judicial impugned, the arbitral proceeding corresponds essentially to a proceeding of mere annulment in which the judge limits himself to declaring the validity or invalidity, total or partial, of a certain tax act, drawing therefrom the inherent legal consequences and effects.

Having this in mind, from all that has been set forth it results that the question to be decided in the present case relates to the legality of the corrections made by the Respondent following the VAT refund request submitted by the Claimant in the periodic return of quarter 201209T. More specifically, it is necessary to evaluate the legality of the Respondent's refusal to accept the deduction of VAT borne by the Claimant, in the amount of €51,010.14. Such act is or is not susceptible to annulment (here understood in a broad sense) by verification of some error or legal defect.

It results from the evidence presented that, from the Respondent's perspective, the exclusion of the right to deduction of tax in the amount in question is justified by the following reasons:

(i) the tax was improperly assessed, in violation of paragraph c) of item 6 of article 16 of the VAT Code;

(ii) the tax mentioned in the Debit Notes issued by "B…Lda." were not included in the periodic VAT return of the respective period of the issuing company;

(iii) at the time of issuance of the Credit Notes, the company in question was already in insolvency proceedings being heard in the Judicial Court of Braga; and

(iv) the Claimant did not appear in the insolvency proceedings to claim the values relating to the payment made based on the debit notes which should still be found with an outstanding balance in the Claimant's accounts.

Now, in face of this reasoning that precedes the disputed tax act (and not any other reasoning presented subsequently by the Respondent, namely in the context of the administrative appeal which is here disregarded, under article 77 of the General Tax Law), it is necessary to analyze whether the Claimant or the Respondent is correct.

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Without taking a position on whether or not the tax mentioned in the debit notes is due, whether or not it was properly assessed, taking into account the contract executed between the parties and the provision of paragraph c) of item 6 of article 16 of the VAT Code, we shall, for decision-making purposes, assume that the tax was improperly assessed as the Respondent alleges. Accordingly, we shall evaluate next whether such fact is, in accordance with applicable law, grounds for refusing the right to deduct the tax incurred.

The right to deduct tax borne is regulated in articles 19, 20 and 21 of the VAT Code, and is subject to various substantive and formal requirements duly identified by Sérgio Vasques[2], in the following terms:

(i) subjective: the right to deduction may only be exercised by those who are taxable persons;

(ii) objective: the tax incurred in the acquisition of all and any goods or services from other taxable persons is deductible, provided that they are used to carry out taxed operations;

(iii) purposive: only the tax incurred in the acquisition of goods and services effectively applied to the realization of active operations that are taxed is deductible;

(iv) temporal: the right to deduction comes into being at the moment the deductible tax becomes due; and

(v) formal: only the tax borne in a document (invoice or equivalent document) issued in conformity with legal requirements is deductible.

These criteria shall, further, be weighed against the exclusions of the right to deduction, whether with reference to the nature of certain goods and services (for example, article 21 of the VAT Code), or with reference to certain operations in concrete (for example, items 3 and 4 of article 19 of the VAT Code).

Now, from the combined application of all the invoked provisions, it is demonstrated that the right to deduct the VAT incurred is not dependent on such tax having been properly assessed by the taxable person, contrary to what the Respondent states.

It is consistent case law of the superior courts that VAT improperly assessed in an invoice or equivalent document is, notwithstanding, due to the State, with the responsibility for its payment falling to the entity issuing the document in question. Only in this way can the principle of neutrality of the tax be ensured, both for the parties and for the State itself. By way of example, see the judgment of the Central Administrative Court South of 04-06-2015, handed down in case No. 07111/13 (available at www.dgsi.pt) in which it is concluded that "(…) each invoice with mention of tax constitutes a true "check on the treasury", as it grants to the recipient who is a taxable person the right to deduct the VAT contained therein. Therefore, the mere mention of VAT in an invoice (even if perhaps out of place, by there being no tax in that case, for any reason) always gives rise to the obligation to pay, regardless of the quality of the issuer, that is, whether or not it is a taxable person. By the mere fact of the mention, it shall become a "debtor of tax". Only in this way is it achieved that to the right to deduction, which the invoice grants to the recipient taxable person, there always corresponds an obligation to pay and the regular functioning of the fractional payment system in the VAT context is ensured (cfr. Supreme Administrative Court-2nd Section, 24/4/2002, case 26636; Supreme Administrative Court-2nd Section, 26/9/2012, case 555/12; Central Administrative Court South-2nd Section, 17/1/2012, case 4711/11; José Guilherme Xavier de Basto, Taxation of Consumption and Its International Coordination, Lessons on Tax Harmonization in the European Economic Community, C.T.F. 362, Apr./Jun. 1991, p.42 et seq.; F. Pinto Fernandes and N. Pinto Fernandes, VAT Code Annotated and Commented, Rei dos Livros Publisher, 4th edition, January 1997, p.51; Clotilde Celorico Palma et al., VAT Code and RITI, Notes and Comments, Almedina, 2014, p.47). (…) The reason for this obligation derives from the fact that these same invoices contain VAT deductible by the entity in whose favor they were issued and, to that extent, it is necessary to ensure that the tax contained therein has entered the State coffers." (emphasis ours).

This understanding by the Central Administrative Court South is supported in the aforementioned judgment of the Supreme Administrative Court of 26-09-2012, case No. 555/12 (also available at www.dgsi.pt), in which it was concluded that "(…) the mere mention of VAT in such documents, even if perhaps out of place, by there being no ground for it, gives rise to obligation of tax. As stated in the Judgment of this Supreme Court of 24/4/2002, case No. 26636, this result derives both from the rigid and formalist character of VAT and from the fact that the taxable person recipient of the invoice has the right of deduction thereof. In the words of XAVIER DE BASTO (Cfr. "Tax Harmonization in the EC", Science and Fiscal Technique, No. 362, p. 44.), each invoice with mention of tax constitutes "a check on the treasury, as it grants to the recipient who is a taxable person the right to deduct the VAT contained therein. Therefore, (…) the mere mention of VAT in an invoice (even if perhaps out of place, by there being no ground for tax in that case, for any reason) gives rise to obligation to pay, regardless of the quality of the issuer, that is, whether or not it is a taxable person. By the mere fact of the mention, it shall become a "debtor of tax". Only in this way is it achieved that to the right to deduction, which the invoice grants to the recipient taxable person, there always corresponds an obligation to pay. Thus is ensured the regular functioning of the fractional payment system." Applying the foregoing to the case at hand, it is verified that the appellant was not a taxable person for VAT and was not obliged to issue an invoice, a copy of which is in item c) of the evidence. However, in doing so, the mention in the same of tax granted to the recipient (in the case at hand, to B…, SA.), the right to deduct based on it the VAT. Hence the legislator ordains that the mere mention of VAT in the document in question gives rise to obligation to pay, regardless of the quality of the issuer, who becomes a "debtor of the tax", as only in this way is it achieved, as XAVIER DE BASTO refers, "that to the right to deduction, which the invoice grants to the recipient taxable person, there corresponds an obligation to pay", with a view to ensuring "the regular functioning of the fractional payment system" (emphasis ours).

Given the foregoing, this tribunal considers that the deduction of the tax mentioned in the debit notes issued by "B…, Lda." and duly recorded in the Claimant's accounts cannot be refused on the basis of the alleged understanding that the tax was improperly assessed, in violation of the provision of paragraph c) of item 6 of article 16 of the VAT Code. As Clotilde Celorico Palma[3] states, even in situations where there is VAT improperly mentioned in an invoice or equivalent document, the chain of assessment and deduction of the tax is initiated, with all the inherent effects. And one of these effects is, as stated, the granting to the purchaser of the right to deduct the tax borne, verified that the remaining legal requirements are met.

It should also be noted that sustaining the refusal of deduction based on item 2 of article 20 of the VAT Code would not make sense in the case at hand insofar as the provision in question is intended for the taxable person providing the service who seeks to deduct the tax borne with expenses incurred in the name and on account of the client, evidenced by documents issued in the name of the client itself and duly recorded in accounts of third parties[4]. Such limitation would be imposed, at most, on "B…, Lda." as the service provider, but never on the Claimant as the entity purchasing the services.

Given the foregoing, it is concluded that the Claimant had the right to deduct the tax mentioned in the debit notes issued by "B…, Lda.", the refusal of deduction and the consequent correction made by the Respondent being improper.

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Another argument invoked by the Respondent relates to the fact that the tax assessed in the debit notes was not declared by the entity that issued them and, consequently, was not paid to the State.

Now, the refusal of the right to deduction on the grounds that the tax assessed is not paid to the State by the service provider is provided for in item 4 of article 19 of the VAT Code. However, this exclusion of the right to deduction is limited to situations where "the taxable person has or should have knowledge that the supplier of goods or service provider does not have adequate business structure capable of carrying out the declared activity".

It is not sufficient, therefore, for the Tax Authority to invoke that the tax assessed was not paid into the State coffers. It is necessary to demonstrate that the purchaser of the goods or services knew or should have known that the service provider did not have adequate business structure for the activity it carried out, which, in the legislator's view, might indicate some breach of legal procedures or omissive conduct.

In the case at hand, the Respondent alleged nothing, proved nothing, the correction made being entirely silent on this aspect. It should be noted, moreover, that the Respondent does not even invoke any provision to substantiate, as a matter of law, the proposed correction.

In fact, in the report of the tax inspection that preceded the disputed assessment act and which was transcribed above in the list of proven facts, nothing is mentioned regarding this aspect, as the Claimant highlights in article 143 of the initial pleading when it concludes that "(…) the Tax Authority did not demonstrate, nor even mentioned, that the Claimant had or should have knowledge that 'B…' would not have 'adequate business structure capable of carrying out the declared activity'". The Respondent limited itself to alleging that the tax mentioned in the debit notes had not been paid to the State to draw a consequence therefrom: the non-deductibility of that VAT on the part of the Claimant.

Under the rules governing burden of proof, it was incumbent on the Respondent to allege and prove facts that would allow concluding that the requirements for exclusion of the right to deduction were met, in order to thus support the correction made.

Indeed, article 74 of the General Tax Law provides that "The burden of proof of facts constitutive of the rights of the tax administration or of taxpayers falls on whoever invokes them". Being the Respondent who seeks to prevent the exercise of a right on the part of the Claimant, it was incumbent on the Respondent to make the allegation and proof of the presuppositions for application of item 4 of article 19 of the VAT Code, all the more so as the Claimant benefits from a presumption of truthfulness and good faith of its accounting records and the assessment of tax resulting from its accounts, under item 1 of article 75 of the General Tax Law[5].

In light of the foregoing, it must be concluded that the Respondent neither alleged nor proved the verification of the presuppositions for application of the exclusion of the right to deduct the tax borne when this is not paid to the State by the supplier of goods or service provider, under item 4 of article 19 of the VAT Code. The proposed correction is therefore without merit, and the Claimant should be recognized the right to deduct the tax borne in the identified debit notes.

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Furthermore, this Tribunal also does not attach any relevance to the fact that, as alleged by the Respondent, at the time the debit notes and credit notes were issued, an insolvency proceeding instituted against the company issuing such documents was pending in the Judicial Court of Braga.

The mere existence of an insolvency proceeding has no effects on the tax capacity of any taxable person legal entity, not operating as a limit on the exercise of any tax rights or on the fulfillment of any obligations. Such impact will only exist by virtue of the insolvency judgment, and even in these situations, tax obligations will be maintained until the completion of liquidation and extinction of the legal entity. This was itself recognized and disclosed by the Tax and Customs Authority through Circulars No. 1/2010 and No. 10/2015, duly published in the Tax Authority Portal.

Thus, from the fact that allegedly there exists an insolvency proceeding instituted against the company issuing the debit notes and credit notes, the Respondent cannot draw any legal consequence, in particular the one of preventing the deduction of the tax mentioned by such entity in the invoices and equivalent documents issued by it and delivered to its clients and suppliers. For the situation at hand, such fact is entirely irrelevant, not being able to support the correction proposed by the Respondent.

This aspect is all the more relevant insofar as, as results from the factual findings in the present proceeding, the company in question was only declared insolvent by judgment of December 2011 handed down by the Commercial Court of Vila Nova de Gaia, that is, several months after the issuance of the identified documents.

In light of the foregoing, the proposed correction is also here without merit and the Respondent's refusal to recognize the Claimant's right to deduction of the tax mentioned in the identified documents.

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Finally, the Respondent also raises the fact that the Claimant presents the supplier account with "B…, Lda." as settled (that is, without a creditor or debtor balance). This fact caused surprise to the Respondent insofar as, in its view, the account should record an outstanding balance, corresponding to the difference between the amounts debited to the Claimant and the credit notes issued by that company following the invoices issued by suppliers and contractors. This outstanding balance should, in the Respondent's view, have been claimed in the context of the insolvency proceeding.

However, as results from the factual findings in this proceeding, the Claimant contracted with the company "B…, Lda." a "turn-key" service by which it entrusted this entity with the conduct and management of all the construction works of the dwelling on the land plot of which it was owner. The fees due to this company for services rendered would correspond to the difference between the total value of the construction fixed in the contract and the actual value of the services subcontracted by the company. The balance between the debit notes and the credit notes would correspond, thus, to the fees of the company as service provider. Being the consideration for service provided, the Claimant would have no right to demand its refund, nor could present itself in the insolvency proceeding invoking any credit.

It is, moreover, for that reason that the account of "B…, Lda." is recorded as settled in the accounting records. The outstanding amounts were considered by the Claimant as fees for services rendered and, to that extent, no other balance, debit or credit was left to be settled between the parties.

To that extent, it would not be justifiable or comprehensible the existence of an outstanding balance in the supplier account of "B…, Lda.".

In light of the foregoing, the allegation made by the Respondent on this point has, therefore, no relevance, not being a legal ground for refusal of the right to deduction.

In conclusion, this Tribunal considers that the grounds sustaining the assessment made by the Respondent and confirmed in the context of the administrative appeal, insofar as it relates to the refusal of the right to deduct the tax borne by the Claimant, in the amount of €51,010.14, are not well-founded whereby such tax acts should be qualified as illegal by violation of the right to deduction and refund of tax, provided for and regulated in articles 19 and following of the VAT Code.

Consequently, this Tribunal decides to declare illegal and, accordingly, to order the annulment of (i) the VAT assessment relating to quarter 201209T and (ii) the decision denying the administrative appeal, recognizing the Claimant's right to deduction and refund of the tax borne in the amount of €51,010.14.

D. Right to Compensatory Interest

Alongside the refund of the tax, the Claimant also requests payment of compensatory interest under item 8 of article 22 of the VAT Code and article 43 of the General Tax Law, calculated from the end of the deadline in which the refund should have been actually realized. The Respondent contests, alleging that the legal presuppositions for such payment do not exist, in particular the error attributable to the services.

Item 8 of article 22 of the VAT Code provides that the refund of tax shall be completed by the end of the second month following that of submission of the refund request, which, in the case at hand, implies that the refund should have been made by 31-01-2013.

It results from item 10 of the same article that the Minister of Finance may establish, by Order, the obligation for taxable persons to provide, together with the refund request, certain information and elements. This possibility was concretized through Normative Order No. 53/2005 of 15 December, with the amendments introduced by Normative Order No. 23/2009 of 17 June.

In that order it is determined that "The deadline for granting the refund is also suspended, as is the running of the interest referred to in the previous item, when, after the deadline fixed under article 23 of the Tax Procedure Code, the taxable person has not made available to the competent services the elements requested by these that allow verification of its legitimacy or the correct assessment of the tax" (cfr. item 9).

As the Respondent states, following the refund request and for its adequate analysis, additional information was requested of the Claimant which was never provided. The failure to provide information implied, as results above from the normative invoked, the suspension of the refund deadline and the running of compensatory interest whereby, contrary to the Claimant's claim, it does not have the right to compensatory interest from 31-01-2013.

However, this does not mean that the Claimant does not have the right to compensatory interest, under general terms.

As already mentioned, in the present case, the legal refund deadline was suspended by failure to provide information on the part of the Claimant. This suspension remained until the final decision of the inspection proceeding which determined the amount to be refunded, there being no justification for the maintenance of any suspensive effect beyond this decision.

Accordingly, if in the context of an administrative appeal, judicial impugn or request for arbitral pronouncement, the Respondent's decision comes to be annulled by error attributable to the services, the Claimant shall have the right to refund of the requested tax, plus compensatory interest.

It occurs that it was demonstrated in the present case that the refusal of deduction of the tax mentioned in the debit notes issued by "B…, Lda" resulted from error in the application of law. Such error is attributable to the services whereby, had it not occurred, the Claimant would have been timely refunded the amount in question. This delay implies breach of the legal deadline for refund, there not existing, at this stage, any fact that implies suspension of the running of compensatory interest.

It is, therefore, duly justified the request for payment of compensatory interest on the part of the Claimant since the contested tax assessment is shown to be tainted by illegality whereby it should be annulled.

Accordingly, in addition to the refund, the Claimant also has the right to payment of compensatory interest, at the legal rate in force, on the amount of €51,010.14, calculated from the date of the decision denying the refund of that amount, until the date of processing of the respective credit note, in which they are included – cfr. article 43 of the General Tax Law and article 61 of the Tax Procedure Code.

VIII. DECISION

In accordance with the foregoing, this Arbitral Tribunal decides:

(i) to declare the exception of untimeliness raised by the Respondent without merit;

(ii) to declare the request for preliminary ruling to the CJEU formulated by the Claimant without merit;

(iii) to declare the request for arbitral pronouncement with merit and, consequently, to declare illegal and, accordingly, to annul the decision denying the administrative appeal and the VAT assessment for quarter 201209T, recognizing the Claimant's right to refund of the amount of €51,010.14;

(iv) to condemn the Respondent to refund the amount of €51,010.14, plus compensatory interest, at the legal rate, calculated from the date of the partial denial of the refund request, until the date of processing of the respective credit note.

Process Value

In accordance with the provision of article 306, item 2, of the Code of Civil Procedure and article 97-A, item 1, paragraph a), of the Tax Procedure Code and article 3, item 2, of the Regulation of Costs in Tax Arbitration Proceedings, the process is assigned a value of €51,010.14.

Costs

Pursuant to item 4 of article 22 of the RJAT, the amount of costs is fixed at €2,142.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Let this arbitral decision be recorded and notified to the parties.

Lisbon, 24-10-2016

The Sole Arbitrator

(Maria Forte Vaz)

[1] Published in the Official Journal of the European Union, C 338/1, of 06-11-2012.

[2] Cfr. VAT, Almedina, 2015, pages 336 et seq.

[3] Cfr. Introduction to Value Added Tax, IDEFF Notebooks, No. 1, 2nd Edition, p. 67.

[4] As stated by F. Pinto Fernandes and Nuno Pinto Fernandes, VAT Code and Regime of VAT in Intra-Community Transactions, annotated and commented, Rei dos Livros Publisher, 4th Edition, 1997, p. 513, "Item 2 of article 20 provides yet another limitation to deduction. This is the refund of services paid by the taxable person in the name and on account of the purchaser of goods or recipient of services, e.g., postal charges, transportation, etc., which are excluded from the taxable amount under paragraph c) of item 6 of article 16, provided that recorded in accounts of appropriate third parties. Because such operations are carried out on behalf of third parties, they obviously do not give rise to the right to deduct the tax relating thereto".

[5] As stated by Diogo Leite Campos, Benjamim da Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law Annotated and Commented, 4th Edition, 2012, Writing Encounter, p. 664 "In item 1 of this article 75 of the General Tax Law, legal presumptions are established of truthfulness of declarations presented by taxpayers to the tax administration and of data contained in their accounts and records, if they are in accordance with commercial and tax legislation".