VAT on Professional Training Funded by POPH: Arbitral Decision 87/2017-T on Tax Exemption

ARBITRAL DECISION

The arbitrators Professor Doctor Clotilde Celorico Palma, in the capacity of Arbitral President, Dr. Alexandra Coelho Martins, designated by A…, Lda., and Professor Doctor António Carlos dos Santos, designated by the Tax and Customs Authority to form the Collective Arbitral Court, constituted on 19 April 2017, agree as follows:

REPORT

A…, Lda., legal entity number…, with registered office at … no.…, …, …-… …, hereinafter "Claimant", came to request the constitution of an Arbitral Court, pursuant to the provisions of articles 2, number 1, sub-paragraph a) and 10 and following of the Legal Framework for Tax Arbitration ("RJAT"), approved by Decree-Law no. 10/2011, of 20 January.

The request for arbitral pronouncement was submitted following notification of the dismissal order of the Gracious Complaint lodged against the tax acts of additional assessment of Value Added Tax ("VAT") and compensatory interest [no. 2015…], in the amounts of € 144,770.10 and € 3,284.09, respectively, by reference to the period of December 2014, and aims at the declaration of illegality and consequent annulment of the same, the reimbursement of the amounts paid and the payment of compensatory interest at the legal rate.

Pursuant to the faculty of arbitrator designation provided for in article 6, number 2, sub-paragraph b) of the RJAT, the Claimant, in accordance with article 10, number 2, sub-paragraph g) of the said framework, manifested the intention to designate Alexandra Coelho Martins as arbitrator, with the Tax and Customs Authority ("TA" or "Respondent"), observing the provisions of article 11, number 2 of the RJAT, designating António Carlos dos Santos.

Both arbitrators designated, as Arbitral President, Clotilde Celorico Palma (cf. article 11, number 6 of the RJAT). The parties, duly notified of the designations, did not manifest any intention to refuse them.

In conformity with the provisions of article 11, number 7 of the RJAT, the Collective Arbitral Court was constituted on 19 April 2017.

The Claimant alleges in support of the claim raised formal defects of lack of reasoning, incompetence of the author of the act and improper practice of a single annual act of assessment.

It also invokes, on substantive grounds, defects of error in the assumptions of fact and law. In this regard, it sustains that there is no operation or tax fact within the scope of VAT incidence, as the professional training actions carried out by it in the capacity of external training entity ("ETE"), financed by the Operational Program Human Potential ("POPH"), through an application to the Institute of Employment and Vocational Training, IP, ("IEFP"), form an integral part of public and social policies for the promotion of employment and development of skills, without commercial or profit-making objectives.

It reinforces that in apprenticeship courses financed by the IEFP there is merely a reimbursement of expenses, so that, in its view, there is no price. It also understands, without conceding, that if there is a subsidy, this does not have as its backdrop an operation or tax fact and that, additionally, there is no nexus whatsoever between the incentive and the price, which, it adds, is not previously fixed. It would be, in this manner, a subsidy to operation, that is, deficit coverage, not subject to VAT. It invokes, on the other hand, that the costs are borne by it on behalf and for the account of the IEFP.

With regard to compensatory interest, it raises the pretermission of the right to be heard before assessment and the absence of demonstration of the taxpayer's culpability in the delay of the assessment of VAT, should the tax be due.

It attached 7 documents, 6 with the petition, and listed two witnesses.

The Respondent submitted a reply, in which it contested in a detailed manner the defects alleged by the Claimant, and attached the administrative file ("PA"). It considers that the Claimant carries out taxable operations materialized in provision of training services, the consideration for which is an integral subsidy of its price, subject to VAT to the extent that the prerequisites set forth in article 16, number 5, sub-paragraph c) of the VAT Code are met and that the faculty of waiver of exemption was exercised.

It adds that the activity of the Claimant is private and of an economic nature and that profit is not a condition for VAT taxation, it being precisely the economic nature on which the Claimant relies to exercise the right to full deduction of VAT incurred in its activity, including the tax relating to expenses of these professional training courses financed by the IEFP. It states that the Claimant does not exercise public powers, but rather the IEFP does, and that the expenses of the courses are not, contrary to what it alleges, incurred on behalf of the IEFP. The Respondent concludes, in this manner, for the dismissal of the claim for lack of merit.

On 29 June 2017, the meeting referred to in article 18 of the RJAT was held, jointly with case 86/2017-T, on grounds of identity of factual and legal matter, and, with the objective of ascertaining material truth, contradictory examination of the two witnesses listed by the Claimant was carried out. At that meeting the parties were notified to present written submissions and a deadline of 30 September 2017 was set for delivery of the award, which was later extended by two months.

The parties submitted successive submissions.

PROCEDURAL SOUNDNESS

The Court was regularly constituted and is competent ratione materiae, in accordance with articles 2, 5 and 6 of the RJAT.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (cf. articles 4 and 10, number 2 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March), so there is no obstacle to the examination of the merits of the case.

SUBJECT MATTER (ISSUES TO BE DECIDED)

The illegality of the tax acts relating to VAT and compensatory interest for the year 2014 is discussed in the present action.

There are three formal defects to be elucidated, relating to lack of reasoning, incompetence of the author of the act and improper aggregation in a single annual tax act of VAT assessment.

The substantive issue in dispute, to be examined in the event of lack of merit of those defects, is whether the professional training actions, relating to the "Apprenticeship Courses" of the IEFP, carried out by the Claimant constitute provision of services executed within the scope of an economic activity subject to VAT and, on that premise, whether the payment of the respective actual costs, i.e., without margin, made by the IEFP in the context of the POPH, is framed as a subsidy directly connected with the price, pursuant to the provisions of articles 4, number 1 and 16, number 5, sub-paragraph c) of the VAT Code. It also falls to examine whether these costs are borne by the Claimant, or merely incurred by it on behalf and for the account of the IEFP, in which case the regime provided for in article 16, number 6, sub-paragraph c) of the said Code is invoked.

Finally, as regards compensatory interest, it is important to assess the alleged pretermission of the right to be heard and the prerequisites for its assessment.

REASONING

PROVEN FACTS

With relevance to the decision of the case, the following established facts should be noted:

A…, Lda., here Claimant, is a commercial company, VAT taxpayer, which has been engaged in the activity of vocational training since 1 July 1994, under the CAE[1] 8559 – cf. Tax Inspection Report ("TIR"), part of the administrative file ("PA3").

The Claimant is subject to the normal quarterly VAT regime, by virtue of, on 3 October 2011, having exercised the option to waive the exemption from this tax with respect to vocational training services, pursuant to article 12, number 1, sub-paragraph a) of the VAT Code – cf. TIR.

For more than 15 years the Claimant has been working on dual certification training projects within the Apprenticeship System on an alternation basis and develops, on an outsourcing basis to the IEFP, Apprenticeship System courses, holding the status of external training entity of this system. It is also accredited by INOFOR, IQF and by the Directorate-General for Employment and Labour Relations ("DGERT"), with Certificate no.…/2013 – cf. TIR.

The activity of vocational training is developed by the Claimant in two distinct aspects. A first one, which it designates as "private sector", in which it provides training to individuals and legal entities without receiving any financing therefor. The vocational training services provided within this scope are invoiced to the recipients and the corresponding VAT is assessed thereon – cf. TIR and testimony of the witnesses.

In another aspect, which it designates as "public sector", the Claimant carries out professional training actions in the capacity of external training entity of the IEFP, activity financed within the context of the POPH, where the activity developed in "Apprenticeship Courses" stands out, which are initial vocational training courses, on an alternation basis, aimed at young people, giving priority to their insertion in the labour market and enabling the pursuit of studies – cf. TIR and testimony of the witnesses.

The execution of these actions or apprenticeship courses financed depends on the prior presentation and subsequent approval of application processes before the IEFP, which include a detailed project of the number of training actions and trainees involved, as well as the estimated costs, calculated and itemized by categories – cf. Specific Regulations of the IEFP Apprenticeship Courses attached as document 4, TIR and testimony of the witnesses.

The approval of the projects and payments by the IEFP imply, and depend on compliance with the ancillary obligations of accounting control and technical-pedagogical obligations of the Apprenticeship Courses, including the maintenance of management information by specific cost centres for each financing request/course – cf. Specific Regulations of the IEFP Apprenticeship Courses attached as document 4, TIR and testimony of the witnesses.

The Claimant is reimbursed for the full amount of (eligible) expenses it demonstrably incurs and which are directly related to the training, without addition of any margin and net of the VAT amount or, in other words, purged of the amount of tax incurred – cf. Specific Regulations of the IEFP Apprenticeship Courses attached as document 4, TIR and testimony of the witnesses.

To obtain payments within the scope of projects financed by the IEFP, the Claimant needs to present a body of documentation, as provided for in the Specific Regulations of the IEFP Apprenticeship Courses, which comprises specific forms for interim reimbursement requests and final balance payment request; expense listings, incurred and paid by the Claimant; documentary sample of expenses and receipts of bank transfers made to trainees and trainers – cf. TIR, Specific Regulations of the IEFP Apprenticeship Courses attached as document 4, document 5 and testimony of the witnesses.

When the applications are approved and after the start of the first training action, the Claimant, upon request, obtains an advance corresponding to a percentage (15%) of the total amount approved for the calendar year. To this are added, throughout the execution of the project, interim payments, occurring, at the end, a settlement of the remaining balance up to the maximum limit of the approved amount – cf. TIR, Specific Regulations of the IEFP Apprenticeship Courses attached as document 4 and testimony of the witnesses.

The following expenses are eligible for IEFP apprenticeship courses by nature:

R1 – Charges with trainees: study material allowances, professionalization allowances, food expenses, transport expenses, personal accident insurance and other expenses (e.g.: accommodation of dependents);

R2 – Charges with trainers: remuneration, permanent internal trainers, occasional internal trainers, external trainers and other expenses (food, accommodation and transport);

R3 – Charges with other personnel assigned to the project: charges with remuneration, personnel assigned to the internal project, personnel assigned to the external project, food expenses, accommodation and transport;

R4 – Rents, leases and amortizations: rents and amortizations of facilities, leases and amortizations of equipment;

R5 – Direct charges with preparation, development, monitoring and evaluation of actions: disclosure of actions, selection of trainees and trainers, acquisition, elaboration and reproduction of teaching resources, study visits within the scope of training, expenses with examination boards and other expenses inherent to the performance of the tests, other expenses;

R6 – General project charges: materials and non-durable goods, work clothing and safety and protection equipment, tools and other utensils, current expenses with consumable teaching materials, energy, water and communications, general maintenance expenses of equipment and facilities (e.g.: security services, cleaning and insurance of equipment and facilities assigned to training, as well as minor repairs and equipment maintenance contracts);

with the understanding that the beneficiary entities (here the Claimant) can manage with flexibility the allocation approved for the set of categories 3 and following, respecting the total approved cost – cf. Specific Regulations of the IEFP Apprenticeship Courses attached as document 4 and testimony of the witnesses.

The applications and approval of projects by the IEFP segregate the detailed cost structure of training by categories and are based on an estimate or forecast of the charges to be incurred. In this context, the approved amounts constitute a maximum ceiling that may vary depending on the proof of expenses and the execution of the trainings, namely the number of trainees, their absences and dropouts, number of training sessions, in addition to transfers and allocations among categories – cf. Specific Regulations of the IEFP Apprenticeship Courses attached as document 4 and testimony of the witnesses.

The receipts of the actions financed and paid by the IEFP are accounted for by the Claimant in category 75 – subsidies to operation – cf. TIR and document 6 attached as a subsequent matter.

With respect to these training actions financed and paid by the IEFP, the Claimant does not issue invoices for the receipts, whether as an initial advance, interim payment or final balance settlement (up to the limit of the approved amount), nor does it assess any VAT – cf. TIR and testimony of the witnesses.

The Claimant deducts in full the VAT incurred in the acquisitions of goods and services it carries out, on the basis of invoices issued in its name, whether these [goods and services acquired] are intended for the performance of training sessions in the "private sector", in which it assesses VAT, or in the courses of the "public sector", in which it does not assess VAT, or indistinctly to both sectors of activity – cf. TIR and testimony of the witnesses.

The training actions of the "private sector" and "public sector" take place in distinct facilities, with the Claimant having a specific space, located in…, where it conducts exclusively and solely the financed trainings, with the others taking place in its facilities in… or in the facilities of its customer companies – cf. testimony of the witnesses.

The activity of the Claimant in the year 2014 resulted in income in the amount of € 110,605.81 from the "private sector" unfinanced, invoiced with VAT, and € 732,423.14 relating to training funds financed by the IEFP, on which VAT did not apply – cf. TIR.

The gain or advantage for the Claimant in the co-financed projects relates to the possibility of spreading the fixed costs with salaries of its personnel, by allocating some company employees to co-financed programs, of testing and maintaining a set of trainers who can be used in services provided to customers, and also with its projection and prestige as a training entity of reference in the region in which it operates – cf. TIR and testimony of the witnesses.

On 13 February 2015, the Claimant requested a VAT reimbursement request through the periodic declaration, in the amount of € 36,846.48, having for that reason been selected for analysis and subject to a partial scope tax inspection action (VAT), for the years 2013 and 2014, in accordance with Service Orders OI2015… and OI2015…, respectively – cf. TIR.

As justification for the emergence of the tax credit and consequent reimbursement request, the Claimant referred to the progressive decrease in invoicing to individuals and companies in recent years, in conjunction with the deduction of tax borne on inputs relating to other goods and services assigned to all training activity including the financed one – cf. TIR and testimony of the witnesses.

As a result of the inspection action, VAT corrections were proposed to the Claimant for alleged failure to assess this tax on receipts from the IEFP, qualified as price subsidies for provision of vocational training services, with the Draft Report, nor the final Tax Inspection Report making reference to compensatory interest – cf. TIR.

The Claimant was notified by official letter (no.…), dated 13 August 2015, of the Draft Report for exercise of the right to be heard – cf. TIR.

The Claimant exercised the right to be heard, on 2 September 2015, recommending non-subjection to VAT of the said receipts as they do not constitute taxable operations nor price subsidies – cf. TIR.

Subsequently, the Claimant was notified of the Final Tax Inspection Report ("TIR") which maintained the corrections proposed in the amount of € 168,457.32 relating to VAT, based on the following grounds:

"1. Characterization of the company and activity of the SP

In response to the request for clarification made to the SP, the latter informed the following:

The entity A…, Lda. (holder of the registered trademark A…), with TIN…, has as its sole corporate purpose "Business and vocational training".

It is a training entity with 20 years of experience, with more than 15 of them working also on dual certification training projects within the Apprenticeship System on an alternation basis. It states that the experience of all these years has always been directed at the employment and business market (employment supply and demand) and, from a continuous improvement perspective, leading to constant and adequate evolution of training works.

It is intrinsically involved in the socio-economic fabric of the region, in continuous partnership with employing entities and socio-economic promoting entities, developing inter-company training (open courses) where participants are on one hand individuals, and on the other, from companies, as well as in-company training (training tailored to the client) which leads to adaptation of work by the same to the needs and process of the client entity.

Parallel to continuous training work for active individuals, it develops on an outsourcing basis to the IEFP, Apprenticeship System courses, having seen renewed the status of external training entity of this system by the IEFP.

Located in the northern region of Lisbon, the entity has its own facilities consisting of 11 training rooms rigorously sized and equipped for the purpose of capital importance to works of local influence.

As regards in-company training, they normally use the client's facilities which range from the Algarve to the Minho, moving trainers and materials to the professional domiciles of the trainees. The clients are private and public entities, among which are identified companies of importance in the Portuguese business fabric.

The A… also invests in innovation, passing through the qualification of human resources, with its projects being directed at the reality of the business market, following management guidelines and concepts that lead traditional companies to competitive companies, with capacity to respond to the solicitations of a globalized market.

The SP also states that the A… is unequivocally dedicated to vocational training since its foundation in 1994, having since 1998 been accredited by INOFOR, IQF and subsequently by DGERT (Directorate-General for Employment and Labour Relations) with Certificate no. …/2013. This accreditation was subject to renewal in 2002, 2005, 2008 and 2013.

It also states in the submission sent in response to the notification for provision of clarifications that in co-financed training, there is no invoicing per se, at least not directly for the training, but rather payment by the IEFP, of the expenses incurred by the SP with the training, VAT excluded.

[…]

1. Analysis of reimbursement

[…]

From consultation with the TA's Taxpayer Management and Registration System, it was possible to verify that, on 03/10/2011, the A… exercised the right to renounce the VAT exemption through the filing of the respective change declaration in the Tax Service of … having opted for the normal quarterly VAT regime, starting from that date to assess VAT in its [its] provision of services and to deduct the tax borne on its inputs.

Having analyzed the documents submitted, we verified that IEFP, IP, in addition to conducting Apprenticeship Courses within the scope of its Vocational Training Centers network is also the competent body for, annually, defining the areas of education and training to be privileged according to labour market dynamics and establishing the period for submission of applications by other training entities, deciding on the approval thereof.

In this way, it is incumbent upon the SP to submit application processes for the development of professional training actions, with acceptance by the IEFP of the decision to approve the application conferring, as soon as the training action begins, the right to obtain a first advance of 15% of the amount approved for the calendar year, in the same way that the sum of the advance with interim reimbursements cannot exceed 85% of the amount approved for each calendar year.

The entity is entitled to receipt of the difference between the amount approved in the final balance payment request and the sum of the advance and reimbursements already made.

Thus it appears that, in this type of projects, the SP is entitled to full reimbursement of expenses incurred and demonstrably paid, provided that they prove that these expenses are directly related to training, being reimbursed later for these same expenses, without regard to the amount of tax borne.

To attest to the receipt of these amounts, the SP sent a copy of 2 invoices issued to the IEFP – Vocational Training Center of…, relating to what it designated as, payment of the final balance request and payment of the reopening of the final balance request, with nos 1 and 2 and dated 17/07/2014 and 30/12/2014 respectively (Annex I), where it was found that the same, do not comply with the provisions of sub-paragraphs d), e) and f) of article 36 of the CIVA.

Further ascertained through contacts established with its accounting technician and according to explanations from the latter, that the gain in co-financed projects, is limited to the possibility of spreading, by the company, the fixed costs with salaries of its personnel, that is, there is the possibility of, through the allocation of some company employees to co-financed programs, allocating a percentage to the project which is subsequently paid by the IEFP and which is calculated through the listings sent with employee salaries and confirmed through salary declarations.

Thus the SP justifies the origin of the tax credit and consequent reimbursement request, by the fact of the existence of the decrease in invoicing in recent years to individuals and companies combined with the deduction of tax borne on inputs relating to other goods and services assigned to all training activity including co-financed training, where as stated above and according to the same, there is not properly an invoicing, but rather a payment by the IEFP of the expenses incurred with the said training and accounted for in category 75 – subsidies to operation.

From the analysis carried out on the documentation submitted and the evolution of the VAT declarations filed in the three-year period 2012-2014, it appears that the amount of provision of services where tax was assessed at the normal rate, has been declining since the year 2012 to 2014, by approximately 42%, having been recorded amounts in field 3 of € 265,107.91 in 2012, € 190,289.21 in 2013 and € 110,605.81 in 2014.

To be highlighted in these active operations and consulted were the documents sent by the SP, the trainings in the areas of pedagogical training of trainers, project management, IT tools, marketing for pharmacists, management and administrative techniques, among others.

Regarding passive operations, consistency was observed throughout the years in the amounts entered in fields 20 to 24 with inputs related to trainers, leasing of computer equipment, repairs and maintenance of tangible fixed assets, consumables, accounting services, etc.

Thus, it could be concluded that the determining factor for the generation of the tax credit and consequent reimbursement request, would be the decrease in the activity of training subject to tax at the normal tax rate, allied to the maintenance of the cost structure associated with inputs for the so-called normal training activity, as well as in the co-financed one, which would cause the deductible tax to exceed the assessed tax and consequently, cause the accumulated tax credit.

III. DESCRIPTION OF FACTS AND GROUNDS OF PURELY ARITHMETIC CORRECTIONS TO TAXABLE MATTER

As already mentioned, we verified from consultation with the TA's computer applications that the SP is an SP of those referred to in sub-paragraph a) of number 1 of article 2 of the CIVA who has training as its main activity. Being thus, and once accredited by DGERT, the training activity carried out by the same is exempt by number 10 of article 9 of the CIVA, regardless of whether the training is co-financed or not, covering all operations carried out by the same, to the extent that they promote the development of its accredited training activity.

It was found that, notwithstanding its framework, the SP renounced this exemption pursuant to sub-paragraph a) of number 1 of article 12 of the CIVA on 03/10/2011, through the filing of the respective change declaration in the Tax Service of … having opted for the normal quarterly VAT regime, starting from that date, to be able to use the faculty of deducting tax borne on its inputs, but simultaneously remaining with the obligation to have to assess VAT on all taxable operations.

Further verified through analysis of simplified business statements (IES) namely on their pages 4 where the profit and loss statements of the [the] exercises of 2013 (exercise from which the SP is in tax credit) and 2014 are contained, attached to this report (Annex II) that, the SP recorded as subsidies to operation, the amounts of € 495,395.71 and € 732,423.14 and which was concluded to be amounts earned by the SP as co-financed training.

It was also noted that the SP did not assess these active operations, the respective tax, as it considered that such subsidies were not qualified as price subsidies, as defined pursuant to sub-paragraph c) of number 5 of article 16 of the CIVA.

Faced with the subsidies in question, as well as with the content of the specific apprenticeship regulation for the co-financed apprenticeship courses and also the final listings of reimbursement requests sent by the SP, it is important then to assess, whether such subsidies or subsidies, constitute or not price subsidies, that is, whether they fall within the conceptual limits established in sub-paragraph c) of number 5 of article 16 of the CIVA and as such, whether they are exempt from the assessment of the respective tax.

It is in this legal norm that it is defined which subsidies are considered price subsidies, encompassing those that "are established according to the number of units supplied or the volume of services provided and are fixed prior to the performance of the operations".

To support such a norm, it is also important to assess, as has been the understanding of the CJEU in various judgments delivered, the various conditions for the said subsidies/subsidies to constitute or not the character of price subsidies, with the same being so, if the following prerequisites are met cumulatively:

1. The financier of the subsidies is not the recipient of the taxable operations carried out by the financed party (SP);

2. The subsidy is awarded to the subsidized party, to the extent of the provision of services provided by him, only being granted the right to earn that same subsidy, to the extent that such services are carried out by him;

3. The practice by the subsidized party, of prices lower than what would be possible for it to carry out, in the absence of that same subsidy and that;

4. The counterpart of the price reduction by force of the subsidy, is already determined or of possible determination, not requiring, however, that such subsidy be in the exact measure of that reduction, it being sufficient for this that it be in a significant manner.

Thus, it is clear that only the cumulation of these prerequisites allows unequivocally, the inclusion of the subsidy, pursuant to sub-paragraph c) of number 5 of article 16 of the CIVA.

From consultation of the specific apprenticeship course regulations, we verified that the courses taught and subsidized by the IEFP, are aimed at young people under 25 years of age and who have 9 years of schooling, without completion of secondary education, with the possibility of other candidates being admitted in exceptional situations to be defined by the Regional Delegation of the IEFP that meet some requirements specified there.

It is also verified that in the approval of the project by the POPH (European Social Fund – Human Potential Operational Program) all the detailed information relating to the structure of training expenses, as well as the amount requested by the SP and the respective approved amounts is included. It is also stated in the acceptance deed that, the granting of financing to the SP, is dependent on full compliance by the same, of the project that has been approved.

It is also stated in the specific apprenticeship course regulations that trainees are entitled to receive, through a request to be submitted at the beginning of each training period, some social support, such support being eligible for financing applications by the SP, highlighting among them, professionalization allowances, allowances for study materials, food subsidies, transport expenses or subsidy, accommodation subsidy and a housing subsidy.

From analysis of the financing applications sent by the SP, it is further verified that the same are submitted through detailed project presentations, containing the same, the number of training actions to be conducted, the number of trainees included to whom the apprenticeship courses are aimed, as well as expenses calculated and itemized by categories, as demonstrated in Annex III, by way of example.

In the light of the above, we believe that the existence of the performance of a prior analysis of control and verification by the one financing, of the purpose to which the assigned subsidy is intended, as well as of the training actions and trainees involved, is demonstrated, concluding unequivocally that the subsidy accounted for as subsidies to operation, is awarded according to the volume of services provided and as such qualified as a price subsidy, pursuant to sub-paragraph c) of number 5 of article 16 of the CIVA, as these are nothing more than the counterpart of the taxable operations, whereby the SP should have assessed tax on these amounts, with respect to the years 2013 and 2014, as demonstrated in the table below.

In this way, the following corrections will be made, assigning the same to the last period of each year as it is more favorable to the SP:

[table of corrections]

By what was previously set out, it is proposed to make the corrections to the tax for the periods 1312T and 1412T, in the total amount of € 282,398.34 and the consequent total rejection of the reimbursement request made, with respect to the period of 1412T in the amount of € 36,846.47..

[…]

IX. RIGHT TO BE HEARD

The taxpayer was notified by official letter no. … dated 13/08/2015, pursuant to article no. 60 of the General Tax Law, approved by Decree-Law No. 398/98, of 17 December and article no. 60 of the Supplementary Regime of Tax Inspection Procedure, approved by Decree Law No. 413/98, of 31 December, to exercise the right to be heard, within the term of 15 (fifteen) days with respect to the proposed corrections and contained in the draft report.

The SP received the notification on 2015/08/19 as evidenced by the "print" (Annex II) taken from the CTT website.

During the term to exercise the right to be heard and after sending of the draft report by these services, the SP exercised the right to be heard through the sending on 02/09/2015 of an official letter with the ref... -…, which was received by these services, being assigned the number 2015…, with the analysis of the same and of the documentation previously analyzed, being able to summarize and analyze the following points:

The SP states in its submission that the waiver of exemption carried out on 03/10/2011 and referred to in the draft corrections, was assumed by the management of the A… with the intention that the expenses relating to co-financed training, could be imputed in the respective listings of expenses without the said tax, because the same when deductible, is not eligible;

The waiver of exemption is a faculty that the VAT code enshrines for the waiver by SP's that carry out for example, operations of provision of services referred to in number 10 of article 9 duly recognized, enabling them in this way to deduct the tax borne in acquisitions of goods and services assigned to their operations, requiring, however, to assess VAT on the taxable operations downstream.

Thus, it does not seem to us at all logical that a company that is framed in the exemption regime of article 9 of the CIVA, (which as an incomplete exemption that it is, does not allow it to deduct the tax borne with its acquisitions, nor on the other hand, does it see itself in the obligation to assess tax on its transfers of goods and/or services) opt to renounce the exemption, under the pretext that in this way, it can allocate the expenses in the listings of expenses without VAT, when that fact in its sphere would be innocuous, that is, by the fact of being framed in article 9 of the CIVA, upon submission of the applications, the tax since it would not be recoverable (deductible) would have to be accepted within the scope of the same and as such added to the subsidies received.

The SP also describes in its right to be heard that, the A…, made the decision to renounce the exemption based on the demands/insistences of the IEFP and POPH institutions; With respect to this point we only find it appropriate to point out that, the management of the company, is only a matter for its administrators, not seeming to us therefore a valid argument that, the same were by any reason forced to make any decision.

In its submission, the SP also states that the trainees to whom the co-financed courses are aimed, are "clients" of the IEFP and not of the A….

Also here, we are forced not to agree with such a statement, as the trainees, as stated in the Specific Apprenticeship Regulation (REA), are admitted by External Training Entities (ETE), although in accordance with the rules defined on who such courses are intended for. It is to the ETE, that falls all the organization of the different components of training, the organization and presentation of application processes, among others, as defined in the REA.

It also reinforces in its right to be heard that, the subsidies earned are not price subsidies, because the activity to which it designates as commercial (and therefore where it assesses tax on its provision of services) in no way benefits from them;

The question raised here is once again irrelevant for the alteration of the facts presented in the draft corrections as, at no moment was the tax assessed on the provision of services to which the SP designates as commercial put in question, never referring at any moment in the said report that the subsidies influenced this component. The SP assesses tax on this type of operations (the so-called commercial ones), not by force of receipt of the subsidies, but by force of its waiver of exemption pursuant to sub-paragraph a) of number 1 of article 12 of the CIVA.

It also concludes that such subsidies are not considered price subsidies pursuant to sub-paragraph c) of number 1 of article 16 of the CIVA, given the unpredictable fact of the value that the A… receives, after the approval of each project and the respective signing of the acceptance deeds, as the same, according to the latter, such receipts vary according to the attendance of trainees for example.

According to the REA, ETE are entitled to full reimbursement of expenses incurred and demonstrably paid, provided they prove that these expenses are directly related to training. The training project must, furthermore, be considered as a whole, encompassing not only the training activity in the strict sense but also all the coordination and support activities that are inherent to it.

The argument mentioned of attendance, does not seem to us that it is a relevant factor for the consideration or not of the amounts received being considered at price, as, even though the SP considers that the total amount to be earned by the entity is not defined, it is indubitable the percentage that the same will earn with the expenses incurred, being the same percentage well defined in the REA itself.

It was thus concluded that, the counterpart represented by the subsidy, is well determined, an issue that, also it is essential for the subsidy to be considered at price, whereby we do not agree with the claim to see the subsidy dismissed as not being at price.

It further states that it does not consider such subsidies as price subsidies pursuant to sub-paragraph c) of number 1 of article 16 of the CIVA, as the prices practiced do not translate into "lower prices", as the trainees have no expense in attending the courses, and can even receive allowances, meal subsidies and transport subsidies;

Also here, we cannot agree with the claim of the SP, as it is only possible for the entity to conduct the said courses in these terms, by force of the subsidy/subsidy earned, enabling in this way for trainees not to spend any amounts for attending them, having even the right to receipt of some social support. If it were not so, all training would fall into what the SP itself defines as "commercial" training.

In conclusion, the SP has not shown us that in the draft corrections, the essential requirements were not demonstrated for the subsidies earned to be considered as price subsidies, as has also been the understanding either of the Tax Authority namely in its binding ruling no. 2827, delivered by order of the SDG of taxes, legal substitute of the Director-General on 03-01-2012 and also through the various judgments delivered by the CJEU, given the cumulation of the following prerequisites:

1. The financier of the subsidies is not the recipient of the taxable operations carried out by the financed party (SP);

2. The subsidy is awarded to the subsidized party, to the extent of the provision of services provided by him, only being granted the right to earn that same subsidy, to the extent that such services are carried out by him;

3. The practice by the subsidized party, of prices lower than what would be possible for it to carry out, in the absence of that same subsidy and that;

4. The counterpart of the price reduction by force of the subsidy, is already determined or of possible determination, not requiring, however, that such subsidy be in the exact measure of that reduction, it being sufficient for this that it be in a significant manner.

In this way and from the analysis of the right to be heard exercised by the SP with respect to the corrections proposed in the draft report, the SP brought no new facts to the proceedings that call into question what was ascertained during the inspection, whereby the proposal of the corrections listed therein is maintained, by the fact that it is considered that the subsidies earned by the entity are price subsidies, and as such, liable to taxation under VAT." – cf. TIR, attached by the Claimant as document 5 and contained in the PA.

The Claimant came to be notified of the additional VAT assessments and compensatory interest under tax act no. 2015…, dated 23 September 2015, in the amount of € 144,770.10 and € 3,284.09. Both assessments, VAT and interest, are signed by the Director-General of Taxes and have a payment deadline of 26 November 2015 – as per copies attached to the arbitral request as Document 1.

The VAT assessment contains the following mention: "REASONING Assessment made on the basis of correction carried out by the Tax Inspection Services". The compensatory interest assessment states "REASONING Interest calculated pursuant to article 96 of the CIVA and articles 35 and 44 of the General Tax Law, for having delayed the assessment of part or all of the tax or for having had delay or insufficiency of payment, by fact imputable to the taxpayer. Its count took into account the date on which payments were sent and or, in their absence or insufficiency, the date of availability of other credits" and contains the base value, the calculation period and the applied rate – as per copies attached to the arbitral request as Document 1.

On 25 January 2016, the Claimant proceeded to payment of the additional assessments in question – as per Document 6 attached with the arbitral request.

Not conforming to the tax acts of assessment of VAT and compensatory interest, the Claimant submitted a Gracious Complaint, with entry in the Tax Service of … on 21 March 2016 – as per PA attached to the proceedings.

After notification of the Claimant to exercise the right to be heard on the draft decision of the Complaint, which it chose not to exercise, the Complaint came to be rejected by Order of the Head of Division (in Substitution), dated 17 October 2016, which fell upon substantiated Information from the Administrative Justice Division of the Tax Directorate of Lisbon – as per PA and Document 2 attached with the arbitral request.

The decision to reject the Complaint was notified to the Claimant on 31 October 2016 – as per PA.

On 24 January 2017, the Claimant submitted a request for constitution of a Collective Arbitral Court with the CAAD – cf. electronic request in the CAAD system.

FACTS NOT PROVEN

Other facts with relevance to the decision of the case were not proven.

REASONING OF THE DECISION: PROVEN AND NOT PROVEN FACTUAL MATTER

The factual determination was carried out on the basis of examination and critical analysis of the documents and information attached to the proceedings above set out with respect to each one of the items of proof, which were complemented with the depositions of the witnesses B…, employee of the Claimant, and C…, Official Accounting Technician of the Claimant who, notwithstanding his professional relationship with the Claimant, proved to be suitable and confirmed the context and circumstances of the exercise of activity of the Claimant.

It should be noted that the Court does not have to pronounce itself on everything that is alleged by the parties, it being incumbent upon it the duty to select the facts that are relevant to the decision and to discriminate the proven factual matter from the not proven – cf. article 123 of the Code of Tax Procedure and Process ("CPPT") and article 607, numbers 2 and 3 of the Code of Civil Procedure ("CPC"), applicable ex vi article 29, number 1, sub-paragraphs a), c) and e), of the RJAT.

In this way, the facts pertinent to the judgment of the case were chosen and delineated according to their legal relevance, established in accordance with the subject matter of the dispute (cf. article 596 of the CPC, applicable ex vi article 29, number 1, sub-paragraph e), of the RJAT). In particular, the allegations appear to be irrelevant to the issues to be decided, that the waiver of exemption resulted from communications with the IEFP and POPH (45 of the p.i.); or the characterization of the mission of the IEFP and the public functions pursued by it (what is at issue in the proceedings is the activity of the Claimant as an entity (sub)contracted by the IEFP and not the activity and operations of the IEFP itself - 53 to 58 of the p.i.); or the framing that the IEFP decided to give to the amounts paid in 2015.

Allegations presented as facts consisting of conclusive affirmations were not considered proven nor not proven.

THE LAW

LACK OF REASONING

The Claimant argues the annullability of the VAT assessment acts and compensatory interest, with support in articles 77, number 2 of the General Tax Law ("GTL") and 135 of the Code of Administrative Procedure ("CAP", current article 163 of the "new CAP").

To this end, it alleges that the assessment acts sub iudice do not spell out all the grounds that determined their issue, do not identify, even, the concrete legal provisions on which they are based, nor do they make explicit reference to any other external document containing that same reasoning. It also considers that even if the tax acts referred to the report, that would not be sufficient to comply with the requirements of contemporary and contextual reasoning that the taxpayer should not have to assume, but rather result clear and unequivocally from the act.

The principle of reasoning of injurious acts has increased importance in the Fiscal State, whose action is increasingly aggressive, and today benefits from the constitutional protection granted by article 268, number 3 of the Constitution of the Portuguese Republic ("CPR"). It constitutes a specific guarantee of taxpayers and a general duty of all administrative activity (cf. articles 124 to 126 of the CAP and 152 to 154 of the new CAP, in development of what on this matter was already provided by Decree-Law no. 256-A/77).

Such duty is imposed - even if carried out in a summary form - with respect to all injurious, impositive acts and constitutive of duties or charges in which are naturally included, tax acts, and performs primordial functions in a Rule of Law sustained in the legality of administrative action. Indeed, reasoning allows the addressee of the act to become aware of the reasons underlying the decision, allowing the control of its validity, promotes ordering to the principle of impartiality, in its aspect of necessary weighing of the interests at stake and, no less relevant, makes accessible the contentious guarantee.

The duty of reasoning of tax acts is specifically regulated in article 77 of the GTL, which provides in its numbers 1 and 2:

"1 - The procedure decision is always reasoned by means of a succinct exposition of the reasons of fact and law that motivated it, the reasoning being able to consist in mere declaration of concordance with the grounds of previous opinions, information or proposals, including those that form part of the tax inspection report.

2 - The reasoning of tax acts can be carried out in a summary manner, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax."

With regard to compensatory interest, article 35, number 9 of the GTL determines that "[the] assessment must always clearly show the principal amount of the obligation and the compensatory interest, explaining clearly the respective calculation and distinguishing them from other obligations due."

The case law of the Supreme Administrative Court ("SAC") advocates that reasoning is a relative concept that varies depending on the type of legal act, aiming to respond to the needs for clarification of the taxpayer, enabling it to know the reasons, of fact and law, that determined its performance and why the decision was made in one sense and not another (cf. Judgment of the SAC, case no. 01114/05, of 2 February 2006).

Reasoning can be summary and per relationem, provided that the primordial function of making known the cognitive and evaluative iter of the act is guaranteed. It is thus considered that an act is sufficiently reasoned whenever a normal addressee, placed before the act in question, can become aware of the reasons supporting the decision rendered therein (cf. Judgment of the SAC, case no. 42180, of 20 November 2002). And even that an act is properly reasoned which, directly and by reference, contains the contextual indication of the motives of fact and law that allow its normal addressee, to apprehend the decision-making reasoning, the causes and the sense of the decision (cf. Judgment of the SAC, case no. 46796, of 14 March 2001).

In the concrete situation it is found that the tax act, as regards VAT (the compensatory interest will be dealt with hereinafter), contains the express reference that the assessment was made on the basis of corrections by the Tax Inspection Services, in a clear allusion to the inspection activity carried out against the Claimant.

In running through the chain of events it becomes perceptible, without notable effort, that it was the Claimant itself that triggered a tax inspection action to VAT for the years 2013 and 2014[2], by virtue of the submission of a reimbursement request on 13 February 2015. That inspection action gave rise to a Draft Report, on which the Claimant exercised the right to be heard.

In September 2015, the (final) Tax Inspection Report (or TIR) was issued which maintains the VAT corrections advocated in the previous Draft. The Claimant was equally notified of this Report. Days later, on 23 September 2015, the corresponding VAT assessment is issued (and likewise, that of compensatory interest) and notified to the Claimant, stating that it was made on the basis of corrections by the Tax Inspection Services.

It is found that there is, at the very least, reasonably explicit reference to the TIR, i.e., that the VAT assessment was issued for the reasons contained in the TIR, which falls within the normative permission of article 77, number 1 of the GTL that provides that reasoning consist of "mere declaration of concordance with the grounds of previous opinions, information or proposals, including those that form part of the tax inspection report."

For its part, the reasoning contained in the TIR, to which the tax act of VAT refers, is not summary or succinct. It is a reasoning, of fact and law, extensive, sufficiently detailed and perceptible, making express reference to the applicable legal norms.

So much so that it is perceptible that the Claimant understood it, as the allegations articulated in the p.i., made on the premise (correct, besides) that that was the reasoning for the act, evidence that the Claimant followed in exemplary manner the cognitive and evaluative iter of the TIR, understood the facts and the technical framework advocated by the TA, understood its sense and scope.

A separate question, as the Respondent points out, is whether the Claimant disagrees with the reasoning because it does not consider the essential prerequisites for taxation set out therein to be verified or demonstrated. In this case it is not a question of examining the formal defect of lack of reasoning, but the substantive validity of the tax act[3], which is examined below.

With regard to compensatory interest, contrary to VAT, the TIR is silent. However, it is the act of assessment itself that, with respect to interest, contains expressly the respective grounds, indicating them to be interest calculated pursuant to articles 96 of the VAT Code and 35 and 44 of the GTL, for having delayed the assessment of part or all of the tax or for having had delay or insufficiency of payment by fact imputable to the taxpayer. Moreover, it mentions with clarity the elements required by article 35, number 9 of the GTL, the base value, the interest, the calculation period and the applied rate.

However, if doubts had been raised to the Claimant it could always resort to the mechanism provided for in article 37 of the CPPT and, within the term provided therein, request its notification or the issuance of a certificate containing the omitted requirements. It is noted, in this regard, by António Lima Guerreiro, in his annotation to article 77, that "[it] has been uniform case law of the Supreme Administrative Court (followed from the Judgment of 11 December 1991, Appeal number 11,897), that the lack of notification of the reasoning does not affect the legality of the act. […] The lack of notification of the reasoning leads only to the consequence provided for in article 22 of the C.P.T. (37 of the C.P.P.T.), under which, if the notification does not contain all the requirements provided for by law, the interested party may request notification of those that have been omitted or the issuance of a certificate containing them free of any payment, with the term for complaint, appeal or judicial challenge only being counted from the notification of the omitted grounds or the issuance of the certificate containing them" – cf. Annotated General Tax Law, Ed. Rei dos Livros, 2000, p. 341.

In our system, the eventual deficiencies that the notification presents affect the efficacy of the notifying act and not its perfection or validity, as, clearly resulting from article 132 of the CAP (in the wording in force at the date of the facts, current article 160 of the new CAP) and article 77, number 6 of the GTL, the communication of the impositive or constitutive of duties and charges act is only a condition of efficacy.

For this reason, the problems existing with respect to non-compliance or defective compliance with the duty to communicate the grounds cannot be reflected in the validity of the act being communicated, as stated by case law of the SAC (cf. Judgment no. 0872/11, of 15 February 2012).

In this way, the invocation of the defect of lack of reasoning of the tax acts raised by the Claimant lacks merit.

INCOMPETENCE OF THE AUTHOR OF THE ACT – VIOLATION OF ARTICLE 82 OF THE VAT CODE

According to the Claimant, the assessment acts that are the subject of the request for arbitral pronouncement are illegal by violation of article 82 of the VAT Code, as they were signed, and are deemed to have been performed, by the Director-General of Taxes when, in its view, they should have been signed by the Head of the Tax Service or by the Director of Collection Services.

First and foremost, it should be noted that, from review of the cited provision – article 82 of the VAT Code – it is found that it concerns notifications, a matter completely unrelated to the Claimant's argument. It is also incomprehensible the reference by the Claimant to the fact that the assessment acts do not contain mention of the existence of delegation or subdelegation of powers, given that we are not dealing with the act of a subordinate body, but of the Director-General of the Tax and Customs Authority, regarding whose conclusiveness no doubts are raised[4].

In an effort to make sense of the Claimant's allegations this Court inquired into previous versions of the VAT Code and identified as relevant article 87 of the VAT Code resulting from the renumbering that this diploma was subject to in the year 2008 (cf. article 6 of Decree-Law no. 102/2008, of 20 June).

The Claimant invokes the unconstitutionality of the diploma that attributed competence for the issue of the assessment act to the Directorate-General of Taxes (cf. Decree-Law no. 102/2008, of 20 June, in particular its article 2), for having as its basis a legislative authorization that had already expired, that contained in the State Budget Law for 2008 (cf. article 91, number 1, sub-paragraph a), of Law no. 67-A/2007, of 31 December[5]), in violation of the provisions of articles 112 and 165 of the Constitution of the Portuguese Republic ("CPR"), which would profile, if verified, an organic unconstitutionality.

The legislative authorization in question was valid for a period of 90 days[6] and the Claimant counts the term from the date of publication of the authorization law – 31 December 2007 – until the moment of promulgation, by His Excellency the President of the Republic, of the Decree-Law "authorized", on 5 June 2008. If, in fact, the term were to be counted in this manner, that is, until the moment of promulgation of Decree-Law no. 102/2008 by the President of the Republic, the Government would have legislated, as the Claimant states, without a valid legislative authorization, as it would have expired.

However, the Constitutional Court has understood, in uniform case law, that the relevant moment is that of approval of the authorized diploma in Council of Ministers, not having to take into account the circumstance that promulgation, countersignature and subsequent publication of the diploma occur after the term of expiration – or dies ad quem – of the legislative authorization, as, by way of illustration, is judged by Judgments nos. 461/99, of 13 July; 507/96, of 21 March; 672/95, of 23 November; 265/93, of 30 March and 150/92, of 8 April, all of the Constitutional Court, accessible online on the page http://www.tribunalconstitucional.pt/tc/acordaos. In this sense it is also expressed by Gomes Canotilho confirming the prevailing thesis – cf. Constitutional Law and Theory of the Constitution, 7th Edition (4th reprint), Almedina, Coimbra, 2003, p. 769.

In the case at hand, Decree-Law no. 102/2008 was approved in Council of Ministers on 27 March 2008. From 31 December 2007 to 27 March 2008, the 90 days duration of the legislative authorization had not yet elapsed, whereby the allegation of organic unconstitutionality by the Claimant fails.

On the matter of unconstitutionality, the Claimant also understands that the Government was not authorized to introduce alterations with the amplitude of Decree-Law no. 102/2008, namely as regards the rules of competence for the practice of additional assessment acts, exceeding the material limits of the legislative authorization law[7], that is, disposing on a matter of reserved competence without being provided with the enabling diploma and norm.

In the situation of the proceedings, the legislative authorization granted to the Government provided that the revision and publication of the VAT Code endow this diploma "with better systematization and internal coherence, through the alteration, fusion, elimination and organization of chapters, sections and subsections, the transfer of numbers or the fusion between articles, without alteration of the substantial sense of the existing provisions", corrected referential incongruities and proceeded with renumberings (cf. article 91, number 2 of the SB 2008). It is recognized, therefore, that the content of the legislative authorization does not include the determination of the body or service which, within the TA, has competence to issue assessments.

However, the legislative authorization did not provide for, nor could it provide for such determination, under penalty of invalidity of the authorization law itself, because it is not a matter of reserved competence of the Assembly of the Republic which is limited, according to article 165, number 1, sub-paragraph i) of the CPR, to the creation of taxes and tax system and the general regime of rates and other financial contributions in favor of public entities, in articulation with the principle of tax legality of article 103 of the CPR which stipulates that "taxes are created by law, which determines the incidence, the rate, tax benefits and guarantees of taxpayers".

The internal organization of the TA and the definition of the competence of its bodies is incumbent upon the Government as the superior body of the Public Administration (article 182 of the CPR) and within the scope of its concurrent legislative competence, as provided by article 198, number 1, transcribed below:

"It is incumbent upon the Government, in the exercise of legislative functions: a) to make decree-laws in matters not reserved to the AR"

Thus, the Government has competence to legislate on the matter in question, which is why the same is not contained, nor could be contained, in the legislative authorization law coming from the parliamentary assembly.

It should be noted, furthermore, that even if the invoked defect (of unconstitutionality) were to proceed (which it does not), as the Director-General of Taxes is the hierarchical superior of all bodies of the TA and, consequently, of the Heads of Tax Services and the Director of Collection Services, the assessment acts would only suffer from relative incompetence if we were dealing with a competence (primary or dispositional) exclusive and not a concurrent competence of the subordinate body.

However, the understanding that appears to be correct is that at the date (2013) it had long been the case that the competence to proceed with the rectification of the declarations of VAT taxpayers was not exclusive competence of the Head of the Tax Service, being also the competence of the Director-General of Taxes, as results from the reiterated case law of the SAC – cf. namely, Judgments no. 76/16, of 6 April 2016, and no. 087/12, of 27 June 2012.

In this way, Decree-Law no. 102/2008, of 20 June does not suffer from the unconstitutionalities raised, being valid the wording of article 87 of the VAT Code that attributes to the Directorate-General of Taxes the competence to issue additional assessments, as introduced by Decree-Law no. 102/2008, of 20 June. Therefore, as the assessment acts in question are signed by the Director-General of the TA, the defect of relative incompetence of the author of the act does not occur.

Finally, as regards the nullity to which the Claimant refers anchored in the provisions of article 39, number 9 of the CPPT, it should be said that at the date of the facts this norm referred to electronic notifications, whereby the scope of its invocation is not understood. If, perchance, the Claimant intended to refer to number 11 (current number 12), we are dealing with the sanction of nullity of the act of notification and not of the assessment acts. In this way, not only is the normative provision not fulfilled, as there did not occur the "lack of indication of the author of the act and, in the case of it having performed it in the use of delegation or subdelegation of powers, of the capacity in which it decided, of its sense and its date", as if this had occurred, the invalidity would affect the notification and not the assessment.

IMPROPER PRACTICE OF A SINGLE ANNUALIZED TAX ACT – VIOLATION OF ARTICLE 95 OF THE VAT CODE

According to the Claimant, the issuance of a single VAT assessment act covering the whole of the year 2013 constitutes cause for annulability by not respecting the monthly or quarterly periodicity of VAT.

In this respect, article 95 provides, under the heading "Annualization of assessments" that: "[the] assessments referred to in articles 87 and 88 may be aggregated by calendar years in a single collection document." Thus, it appears that, without prejudice to, for VAT taxpayers, the periodic declarations and the corresponding determination of this tax having, in principle[8], a monthly or quarterly periodicity, article 95 contains express permission for annualization of assessment acts, contrary to what advocated by the Claimant who in it wishes to see what is not contained therein.

Furthermore, there are several VAT obligations whose compliance is annual and not monthly or quarterly, such as the final determination of the deductible VAT, as for taxpayers who have a regime of right to partial deduction (calculation of pro rata or actual allocation provided for in article 23, number 6 of the VAT Code); or the VAT regularizations contemplated in article 24 of the Code of this tax.

Given the above, no legal support is seen for obligating the TA to issue an assessment per monthly or quarterly period, being that, if assessments had been issued in such terms, the Claimant would even be prejudiced in the period of counting of compensatory interest. Thus, not only is the legal duty invoked by the Claimant not provided for, as, if it existed, given the absence of injury to the interests of the Claimant, it would in principle constitute the pretermission of a non-essential formality that should not lead to invalidity.

PRETERMISSION OF THE RIGHT TO BE HEARD WITH RESPECT TO COMPENSATORY INTEREST

The Claimant was not called to pronounce itself on the formation of the tax act in the part of compensatory interest. Indeed, neither the Draft Report, nor even the final Report make any mention of the intention of the TA to promote the assessment of compensatory interest. These appear for the first time in the final decisory act materialized in the assessment, whereby the Claimant invokes the illegality of the assessment by pretermission of the essential legal formality provided for in article 60 of the GTL.

Article 60, number 1 of this law provides for the participation of taxpayers in the formation of decisions that concern them, through the right to be heard before the conclusion of the tax inspection report (sub-paragraph e)) and the assessment (sub-paragraph a))[9]. However, as noted above, at none of these moments was the Claimant notified to exercise such right, which flows expressly from the Constitution. Article 267, number 5 of the CPR, which frames the processing of the administrative activity of the State, imposes the participation of citizens in the formation of decisions that concern them. And, on the other hand, the situations of waiver of this right, contemplated in numbers 2 and 3 of the cited article 60 of the GTL, do not obtain.

According to the Judgment of the SAC no. 01524, of 2 December 2015, of the Plenary of the Tax Litigation Section, the "consideration of any other elements beyond the taxpayer's statement or a different legal framework will already require their hearing". In the same sense is pronounced Judgment 049/16, of 10 May 2017, according to which: "when deciding in a sense divergent from the position of the taxpayer and in a sense unfavorable in relation to this position, as happens in the case at hand, the hearing, in principle, cannot be waived (cf. in this sense, Annotated General Tax Law, Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, 4th edition, Encontro da Escrita, pag. 508 and Judgment of this Section of 16.06.2004, appeal 1877/03.)."

The same judgment proceeds with the statement that: "[a]s flows from article 60, number 5 of the GTL, in any of the circumstances referred to in number 1, for purposes of exercise of the right to be heard, the tax administration must communicate to the taxpayer the draft of the decision and its reasoning. Indeed, the law intends for taxpayers to know in advance the reasons for the unfavorable acts they come to be recipients of so that these may present an advance defense of their interests, calling to the attention of the Administration any possible errors or omissions and that, by this means, disputes between the Administration and taxpayers be prevented (In this sense, Pedro Machete, ob. cited, pag. 323.[10])".

Thus, the Claimant is right in invoking the invalidity of the assessment of compensatory interest by pretermission of the right to be heard which cannot, in our view, fail to be qualified as violation of an essential formality, as the interest protected by the constitutional and sub-constitutional norms and their reason for being is to guarantee the participation of the interested party in the decision that will affect it and the adequate weighing, by the Administration (in this case, the TA), of the relevant elements, factual and valuative.

The Claimant, indeed, did not participate in the formation of the decision, as the prior hearing did not take place. Furthermore, in the specific case of the assessment of compensatory interest, it offers no doubt that the pretermission of that right [to be heard] is likely to influence the final decision of the procedure, as according to article 35 of the GTL, it depends on the imputation to the agent – on grounds of culpability – of the delay of the assessment.

In these terms, annulment of the tax act of assessment of compensatory interest is proceeded with, by pretermission of the right to be heard, in accordance with article 135 of the CAP, in force at the date of the facts, which implies annulment of all its effects "ex tunc", everything passing as if it had not been performed. As article 173, number 1, of the CPTA states "without prejudice to the possible power to perform a new administrative act, within the limits set by the authority of the res judicata, the annulment of an administrative act constitutes the Administration in the duty to reconstruct the situation that would exist if the annulled act had not been performed". Thus, regardless of whether the TA can or cannot perform a new tax act, free from the aforementioned defect, the annulment determines the restitution of the amount possibly paid as compensatory interest.

With respect to the substantive argument that the TA failed to demonstrate the prerequisites of exigibility of compensatory interest, its examination is prejudiced by the success of the defect of pretermission of the right to be heard (cf. article 95, number 1 of the CPTA and article 608, number 2 of the CPC, applicable ex vi article 29, number 1, sub-paragraphs c) and e) of the RJAT).

THE MERITS – ERROR IN ASSUMPTIONS

Preliminary Framework

The taxation of a given legal-economic reality depends on the assembly of a set of prerequisites of objective, subjective, spatial and temporal incidence which, in the domain of VAT, have particular characteristics, adjusted to the community model of tax on consumption – multi-stage and non-cumulative – currently enshrined in Directive 2006/112/EC, of the Council, of 28 November 2006 ("VAT Directive")[11], of which the VAT Code constitutes the transposition.

From the perspective of the Claimant, the TA not only failed to fulfill the burden of demonstrating the prerequisites of VAT incidence, but such prerequisites are non-existent, by not being verified. It bases this position on the fact that the professional training actions carried out by it and financed by the POPH Program form an integral part of public and social policies, without commercial or profit-making objectives. That is, it appears that the Claimant frames its intervention as an activity of public service. It reinforces this conclusion with the fact that this activity, which it designates as "public sector", does not entail the receipt of any profit margin. The financing of the Apprenticeship Courses corresponds only to strict reimbursement of eligible expenses and depends on compliance with demanding requirements for documentary proof. According to the Claimant, these expenses are, furthermore, incurred on behalf and for the account of the IEFP.

From this the Claimant derives that there is no:

• An operation or tax fact;
• A price; and
• Any nexus between the incentive and a price, that is, a price subsidy which, if it existed, could not be deemed to have been previously fixed. At this point it invokes the understanding of the IEFP itself which understands that the amounts received by the Claimant should be qualified as "subsidies to operation".

On the other hand, the Respondent argues that the Claimant does not exercise any public powers. These powers are found in the sphere of the IEFP and not of the Claimant, whose activity is private and of an economic nature, profit not being a condition for VAT subjection.

For the Respondent, it is precisely the economic nature of the Claimant that is the foundation for the exercise of the right to deduction of VAT incurred in the activity thereof, including the tax relating to expenses of these vocational training courses financed by the IEFP, which are not incurred on behalf of the IEFP, but of the Claimant.

From which results that, in this line of reasoning, the Claimant carries out taxable operations materialized in provision of training services, the consideration for which is an integral subsidy of its price, subject to VAT to the extent that the prerequisites set forth in article 16, number 5, sub-paragraph c) of the VAT Code are met, considering that the faculty of waiver of exemption was exercised.

Operations of the Claimant. Objective Incidence

Assessing the problems outlined, it begins by noting that VAT is assessed on economic operations defined in a broad manner by use of two concepts, transmission of goods (corporeal[12]) and provision of services. The delimitation of the latter is effected on a residual basis, considering as such all operations performed for valuable consideration that do not constitute transmissions of goods or cross-border operations on goods (intra-community acquisitions and imports).

The economic nature of operations refers to any activity, whether it is production, marketing or provision of services, including extractive, agricultural activities and those of liberal professions or equivalent and the exploitation of a corporeal or incorporeal asset with the aim of obtaining income with a character of permanence – cf. articles 1, number 1, 3, numbers 1 and 2, and 4, number 1 of the VAT Code and 2, 14 and 24 of the VAT Directive. The case law of the CJEU has been constant in affirming that economic activities are covered by the scope of VAT incidence regardless of the purposes (e.g. public or private) or results (e.g. profit-making or deficit) of such activities.

The same is to say that all provision of services, including those that have public nature, are, from the outset captured by the field of objective incidence of VAT. Examples of public services subject to VAT are punctuated, as occurs with the public service of broadcasting and television, whose remuneration, "the contribution for audio-visual", is subject to VAT at a reduced rate, as provided for in item 2.2 of List 1 annexed to the Code of this tax.

The public nature is in no way incompatible or antithetical to the economic nature of the activities pursued, so the fact that training actions are a public service or are integrated in the pursuit of social and public policies does not collide, nor compromises, by itself, the taxation in VAT.

In this way, the provision of vocational training services are operations that fall within the field of objective incidence of VAT, pursuant to the provisions of articles 1, number 1 and 4, number 1 of the VAT Code[13].

It further should be noted that the provision of vocational training services are not provided by the Claimant free of charge, nor is any animus donandi achieved. Their performance implies the duty, which rests with the IEFP, to make payments to the Claimant which, in addition to reimbursing itself for incurred expenses (even if without profit margin), spreads fixed costs and obtains competitive advantages in the sector and market of its region. It is noted that approximately 85% of the volume of activity of the Claimant in the year 2014 concerned vocational training actions fully financed by the IEFP.

Similarly, it should be established that the circumstance that the consideration for an activity does not contain a profit margin, or may even entail a loss, does not have as a consequence the exclusion of VAT taxation. This tax is assessed on the amount received or to be received as consideration for the operations performed, regardless of whether this amount corresponds to the exact value of the charges incurred, or is higher or lower than these charges[14].

For purposes of VAT, the connection between consumption and the economic activity exercised is not a value connection as this tax does not aim to tax profit or the net result of economic activity, on the contrary, for example, of IRC, but rather the gross value of the operations performed, regardless of whether they generate losses or not. Indeed, if the philosophy were not that, the situations of absence of VAT assessment by all companies that recorded losses would be justified, which is manifestly not the case and would be absurd.

There is no need to confuse the economic nature of an activity with the profit-making nature thereof. Non-profit organizations, whether public or private, most of the time develop economic activities which, objectively, are capable of VAT and, yet, do not aim at profit or profitability, being frequently deficit-making. Indeed, article 10 of the VAT Code is devoted exclusively to these entities which, we can affirm with complete confidence, configure, in general, VAT taxpayers.

The described framework nothing prevents, on the contrary postulates, that a "mere" reimbursement of expenses configures a provision of services that falls within the scope of VAT incidence, in the normative formula residual therein contained in article 4, number 1 of the Code of this tax[15].

A separate question resides in knowing whether entities of public law, or organisms without profit-making purpose, categories in which the Claimant does not fall (which is a commercial company by quotas of private law), are subjectively subject to VAT and in what terms.

Or, still, whether (or some of) the provision of services of public nature, or in which the pursuit of public interest is a preponderant factor, benefit from the application of exemption norms. Of course, to ask this question, whether the exemption regime is applicable, it is necessary that the operation has already entered the field of VAT incidence.

Operations of the Claimant. Subjective Incidence

Any "person"[16] who exercises, independently and in any place, an economic activity, whatever the purpose or result of that activity, constitutes a VAT taxpayer. There are excluded, for lack of independence, salaried employees and other persons who are bound to the employing entity by employment contract or by any other legal relationship that establishes ties of subordination with respect to working conditions and remuneration and the responsibility of the employing entity – cf. article 2, number 1 of the VAT Code and article 9, number 1 of the VAT Directive.

The exclusion of the State and other legal persons of public law from the subjective incidence of VAT flows from the norm of negative delimitation contained in number 2 of article 2 of the VAT Code, originating in article 13[... truncated due to length ...]

The complete text continues but has been truncated. The translation maintains the formal legal terminology and structure of the Portuguese original, preserving all article references and legal provisions cited throughout the arbitral decision.