CAAD Case 88/2018-T: VAT on Second-Hand Goods Under Decree-Law 199/96 – Additional Assessments Challenged

ARBITRAL DECISION

The arbitrators Judge José Poças Falcão (arbitrator-president), Prof. Dr. Clotilde Palma and Prof. Dr. Carlos Lobo (arbitrators), designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 23 May 2018, agree as follows:

1. Report

A..., LDA. – also referred to, in abbreviated form, as "A..." – taxpayer no. ..., with registered office at Rua ..., no. ..., hereby submits, pursuant to Decree-Law 10/2011 of 20 January, a request for arbitral pronouncement seeking a declaration of the illegality of the additional Value Added Tax assessments for 2015 and respective compensatory interest with nos. ..., ..., ..., ..., ..., ... and ..., in the total amount of €97,085.87 (ninety-seven thousand eighty-five euros and eighty-seven cents), relating to the year 2011, as well as the decision partially dismissing the administrative appeal it filed.

In addition to certain corrections it considered due and which had their origin in administrative and accounting errors, the Applicant challenges those assessments for lack of foundation and "for deficient legal framework of the situations identified."

The facts are the same as those found proven in arbitral proceeding no. 168/21017-T – which the Applicant accepts – to the extent that those facts, relating to Corporate Income Tax, have repercussions in Value Added Tax matters.

In summary, the assessments under challenge are, according to the claimant, based on an alleged omission of sales and consequent failure to assess Value Added Tax.

The TAX AND CUSTOMS AUTHORITY is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 23-05-2018.

Pursuant to subparagraph a) of article 6(2) and subparagraph b) of article 11(1) of the Arbitral Tribunal Rules, as amended by article 228 of Law no. 66-B/2012 of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories hereto, who communicated acceptance of the assignment within the applicable time period.

The parties having been duly notified of such designation, and having expressed no intention to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11(1) subparagraphs a) and b) of the Arbitral Tribunal Rules and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of subparagraph c) of article 11(1) of the Arbitral Tribunal Rules, as amended by article 228 of Law no. 66-B/2012 of 31 December, the collective arbitral tribunal was constituted on 23-05-2018.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2(1)(a) and 10(1) of the Arbitral Tribunal Rules, and is competent.

By order of 2 July 2018 and after weighing the positions of the parties in their pleadings and the documentary evidence, the meeting provided for in article 18 of the Arbitral Tribunal Rules was dispensed with as unnecessary, and the production of witness testimony was deemed unnecessary.

The parties were further notified to submit their final arguments, on questions of fact and law, in writing.

2. Case Management

This arbitral tax tribunal is competent.

The parties are duly represented, have legal standing and capacity, and have locus standi (articles 4 and 10(2) of the same instrument and article 1 of Ordinance no. 112-A/2011 of 22 March).

There are no exceptions or preliminary issues to be considered.

The case does not suffer from nullities.

3. Reasoning

Matter of Fact

3.1. Findings of Fact

Based on the documents in the case file and the administrative inspection file attached thereto, as well as on the facts declared proven in the judgment rendered in the aforementioned CAAD proceeding no. 168/2017-T (published at www.caad.org.pt) – which the Applicant expressly accepts (cf. article 14 of the Code of Arbitral Procedure) – the following facts are considered proven:

a) The Applicant is a limited liability company which exercised, in 2011, as its principal activity, the auctioning of art objects and antiques for sale and, accessorily, the purchase and resale of the same second-hand objects and antiques;

b) The Applicant's auctioneering activity, with respect to property it sells on behalf of private parties, is conducted as follows:

• The Applicant does not acquire ownership of the property it places at auction, acting in the name of the seller;

• The Applicant and the seller of property bind themselves to each other by execution of a service provision contract;

• The service provision contract contains, among other elements, the following: minimum sale price for each item; commission owed by the seller to the Applicant; in the event of sale of the property and the amount received by the buyer, the Applicant undertakes to deliver to the seller the sale amount less its commission and taxes;

• The buyer undertakes to pay to the Applicant the amount due for the purchase of the property, that is, the hammer price plus a commission with VAT included at the legal rate;

• In parallel, the Applicant purchases property (whether in the domestic market or in third countries) for resale;

c) In 2011, the Applicant conducted 3 auctions with 3 sessions each, and when property is sold to the end customer (buyer) it issues an invoice (corresponding to series 01) indicating the adjudication value (which it designates as hammer price), plus a commission corresponding, on average, to 14% of that price, with VAT included at the standard rate, and corresponding to the amount received from that end customer;

d) When a piece is sold, the Applicant issues an invoice (corresponding to series 02) to the consignor of the auction sales, mentioning the adjudication price and the respective commission to be charged to that consignor corresponding, on average, to 11% of that price, with the consignor entitled to receive the difference between the final price and the commission with VAT included at the standard rate;

e) The Applicant records in an information system the receipt of pieces and their submission to auction;

f) From the moment the auction sale is completed and the invoice (series 01) is issued, the business risk runs exclusively through the Applicant, which assumes towards the consignor the payment of the transacted piece;

g) The Tax and Customs Authority conducted a tax inspection of the Applicant in fulfillment of Service Order no. OI2013... of 14/08/2013, which resulted in adjustments in Value Added Tax and Corporate Income Tax (already dealt with in proceeding no. 168/2017), relating to the fiscal year 2011;

h) The Tax Inspection Services verified the following situations (as to Value Added Tax):

• Failure to assess Value Added Tax;

• Error in completing periodic Value Added Tax returns;

• Value Added Tax improperly deducted;

• Value Added Tax not assessed on the sale of pieces

i) The Applicant filed an administrative appeal against the resulting assessments, processed under no. ...2016...

j) The appeal was partially granted – €179.63 – as evidenced by notification of the respective decision to the Applicant on 13/12/2017 (Doc 3, attached with the Application);

k) In the arbitral proceeding instituted on 10-3-2017 and which proceeded under proceeding no. 168/2017-T in CAAD, the Applicant submitted a request for arbitral pronouncement seeking a declaration of illegality of the Value Added Tax assessments now under challenge, combined with a request for challenge of Corporate Income Tax assessments (Doc 1, attached with the Application);

l) With respect to the request for declaration of illegality of the aforementioned Value Added Tax assessments, the respondent Tax Authority was absolved of the claim by virtue of improper cumulation of claims, by order issued in those proceedings on 2-2-2018 (Doc 2, attached with the Application);

m) The facts supporting the adjustments made are extensively explained in the Report of the tax inspection action mentioned which is hereby reproduced and incorporated, from which the following is highlighted:

i) Chapter III – Description of facts and grounds of merely arithmetic corrections

A – Corporate Income Tax – taxable matter and missing Value Added Tax: unrecognized income in accounting, failure to assess Value Added Tax and error in completing periodic Value Added Tax returns

A.1) The taxpayer was personally notified on 13/03/2015 to justify the discrepancies between the amount of commissions (earnings) appearing in the invoices listed in the SAFT-PT billing file and the amount thereof recognized in accounting account SNC 7211 – Service Provision/Domestic Market. In the response submitted on 13/04/2015, at point 3 thereof, the taxpayer confirmed the failure to recognize in said account 7211 the value of commissions in the amount of €3,593.14, which it itemizes in attachments 3.2. and 3.3. that it submitted in said response.

By the foregoing, there is a missing declaration of income subject to Corporate Income Tax in the amount of €3,593.14, corresponding to omitted income, pursuant to article 20 of the Corporate Income Tax Code.

(...)

A.2) The taxpayer recorded journal entry no. ... of 30/04/2011 with recognition of various debits in account SNC 121 – Demand Deposits/B..., by credit of account 21111001 – Customers Current Account – General Customers – Domestic Customers – Current Account, having been notified on 13/03/2015 to justify the entries made through that journal entry and, specifically, to justify individually and with supporting evidence the reasons for the adjustments made, as well as the entities (Name and Tax Identification Number) that made the payments that entered the bank account and for what reason they were made.

In response the Applicant states that regarding the "debits by counterpart of account SNC 21111001 – Customers CC: the entries in the bank of monetary means from deposits, transfers and immediate payments were considered as customer collections". It further presents attachment 22.1. containing a table in which, with respect to part of those debits recorded in account 121, it is observed that it cannot identify who made the payments and what the supporting document is for the respective entry in the bank account.

Thus, amounts were received in the bank account held by the company, in its favor, which are not individually identified in customer accounts that permit their identification and association with the respective income document (invoice), and even after being notified, it did not identify on what basis those entries were made and who made them.

In light of the foregoing, such debits result from the normal activity of the company, that is, they respect to customer collections resulting from its activity and which became part of its patrimony, being therefore income obtained and which was not subject to invoicing, in a total amount of €46,188.03 (...)

(...)

D – Corporate Income Tax – taxable matter and missing Value Added Tax: omission of income and Value Added Tax not assessed on the sale of pieces

On 23/12/2011 the taxpayer (A...) issued invoices nos. 433, 434, 435 and 436 to itself (self-invoicing).

The invoices relate to the sale of pieces, in a total adjudication price to the end customer of €301,715.00, commissions (which the taxpayer considered as consignor commissions) in the amount of €30,139.46 and Value Added Tax assessed on this commission of €6,932.07.

Said invoices were recognized, by the commission amount, at debit of account SNC 6221 – Specialized Services and at credit of account SNC 7211 – Service Provision/Domestic Market. The respective Value Added Tax assessed (on the commission) was recognized at debit of a deductible Value Added Tax account and at credit of a Value Added Tax assessed account, that is, these invoices, accounting and fiscally, had a neutral effect.

From the response to question 27 of the personal notification issued on 13/03/2015, in the table presented by the taxpayer in Attachment 27.2, which contains identification of all invoices issued to consignors relating to pieces sold in 2011, the aforementioned invoices nos. 433, 434, 435 and 436 appear. However, with respect to the pieces sold, which the taxpayer listed in said invoices, it did not identify, as it should have and as it was obligated to do pursuant to articles 9 to 13 of the Special Regime (Decree-Law no. 199/96 of 18 October), the respective consignors, and it cannot be concluded that any commission sale contract underlies them (cf. article 9(1) and article 2(e) of said Special Regime). Furthermore, with respect to the sale of said pieces, the taxpayer does not prove that they were alienated on behalf of (cf. article 9(1) of the Special Regime):

"a) any person that is not a taxable person (...)"

b) Another taxable person, provided that the transfer made by that other taxable person is exempt from tax under article 33(9) of the Value Added Tax Code or identical legal provision in force in the Member State where the transfer of goods is effected;

c) Another taxable person, provided that the transfer made by that other taxable person had as its object an investment good and is exempt from tax pursuant to article 53 of the Value Added Tax Code or identical legal provision in force in the Member State where the transfer of goods is effected;

d) Another reseller taxable person, provided that the transfer made by that other reseller taxable person is subject to tax pursuant to the special regime for margin taxation provided in this instrument, or identical regulation in force in the Member State where the transfer is effected."

Effectively, for the taxpayer to be able to apply, as an organizer of auction sales, the Special Regime, the transfers must be made on behalf of a consignor, as defined in its article 1. However, this does not occur with the pieces invoiced to itself (to the taxpayer itself), given that no invoice was issued to the respective consignors, as should have occurred.

In fact, it is worth recalling that the taxpayer uses two invoicing series: one for invoices issued to the acquirer of property at auction (end customer) and another (where the invoices in question, nos. 433, 434, 435 and 436 appear) for consignors. According to the procedures adopted in its activity, invoices are only issued to the consignor after invoices are issued to the acquirer/end customer, that is, when the piece is sold, whereby it is concluded that the pieces appearing in said invoices were all sold. Moreover, in this regard, article 9(2) of the Special Regime itself provides that:

"the transfer of goods from the consignor to the organizer of auction sales, referred to in subparagraphs b), c) and d) of the preceding number, shall be deemed to be effected at the moment of the sale at auction of those same goods."

The taxpayer, by email of 05/06/2015, came to state that the pieces included in said invoices are its own pieces and that the same gave rise to sales invoices issued to end customers, in which it calculated commissions and assessed Value Added Tax. However, the accounting does not reveal the recording of inventories of own pieces or consigned pieces, nor does it reveal any recording of the individual current accounts of customers and consignors.

Thus, with respect to the pieces appearing in the invoices under analysis, we were not provided any other additional information that conclusively and unequivocally identified the origin and source thereof.

Finally, it should be noted that the accounting does not reveal third-party accounts that permit the control provided for and required in article 13 of the Special Regime, which moreover is a condition for applicability of said regime, and which provides:

"Organizers of auction sales who effect transfers of goods under the conditions provided in article 9 are obligated to record, in third-party accounts and duly justified:

a) The amounts obtained or to be obtained from the buyer of the good; and

b) The amounts reimbursed or to be reimbursed to the consignor."

Despite the absence of these accounts and respective individual recordings, the taxpayer was notified to present them pursuant to the mentioned article 13, having only in response presented a listing of invoices issued to buyers and respective sale values, commissions and Value Added Tax, and a listing of invoices issued to consignors, also with sale values, respective commissions and Value Added Tax. It did not present, therefore, the third-party current accounts and the respective justifications, in particular regarding the amounts obtained or to be obtained from buyers and the amounts reimbursed or to be reimbursed to consignors.

In conclusion, it is verified that the conditions for application of the Special Regime for Value Added Tax are not met in the sales of pieces effected that appear in the invoices issued by the taxpayer to itself (invoices nos. 433 to 436), whereby the General Regime of Value Added Tax must be applied to these transfers, applying the general rules of incidence of the Value Added Tax Code. We are thus facing transfers of goods and provision of services, subject to Value Added Tax pursuant to articles 3, 4, 7 and 8 of said instrument, at the standard rate of 23%, provided in article 18(1)(c) of the Value Added Tax Code. The taxable value is determined pursuant to article 16(1) of said Code, in the very invoices issued nos. 433 to 436, which is the value of the sale of pieces appearing therein, in a total amount of €301,715.00.

With respect to the sales of the pieces in question, it is verified that the taxpayer did not proceed to record the respective gain in the amount of €301,715.00, since, not having proven the origin and source thereof, in particular regarding the respective consignors or eventual suppliers, it cannot be accepted as gain subject to Corporate Income Tax, only the eventual commission invoiced to the end customer.

(...)

n) In addition to the business of sales at auction of art objects and antiques, the Applicant engaged, in 2011, in an accessory capacity in the purchase for resale of goods of the same kind in second-hand form (using auctions as a sales channel);

o) The Applicant proceeded to so-called "self-invoicing" (issuance to itself of the invoices mentioned in the Tax Inspection report – nos. 433, 434, 435 and 436) to highlight the sale at auction of its own pieces;

p) The Applicant sold pieces to end customers in a total adjudication value of €301,715.00 and the same were invoiced to them;

q) The Applicant engaged, collaterally with its auctioneering business, in the business of resale of art and antique pieces;

r) With respect to acquisitions from private parties, the Applicant prepares documents which it designates as "sales declarations," although it did not do so for all acquisitions, in the amount of €85,820.62";

s) From the comparison between acquisition costs and the prices at which they were sold, it results that the Applicant obtained an overall profit margin of €9,722.35, with Value Added Tax included;

t) With respect to Value Added Tax, and considering that in calculating the margin, pieces sold with a negative margin do not enter the calculation, the margin is €20,760.00;

u) A margin which, for purposes of determining the taxable value in Value Added Tax, in view of the sale of goods with a negative margin, is €21,390.24;

v) Of the €301,715.00 contained in invoices nos. 433, 434, 435 and 436, the Applicant has only elements that permit it to determine the purchase price of objects sold for a total value of €181,130.00 [€70,215.00 + €111,095.00].

3.2. Facts Not Proven

There are no other essential facts among those alleged by the parties, either proven or not proven.

3.3. Motivation of the Factual Finding

The factual framework established by the Tribunal results from critical analysis of the positions of the parties expressed in their respective pleadings, in combination with the administrative inspection proceeding and other documents attached to the case file, as well as the enumeration of facts proven in the arbitral proceeding by the Tribunal constituted within the scope of CAAD under no. 168/2017-T, which received the parties' assent.

The assessments in question are those appearing in documents nos. 4 to 11 of the Application.

3. Reasoning (Continued)

3.1 On the Law

It is necessary, in particular, to determine in the concrete case, in light of the proven facts set forth above whether, in view of non-compliance with the formal requirements for purposes of applying the Special Regime for the Taxation of Second-Hand Goods, Art Objects, Collectibles and Antiques (hereinafter "SRSTHGACA"), it is or is not difficult or demanding for the Tax Administration to adequately identify each transfer of goods and compliance with such requirements. The issue is essentially, as was noted in proceeding 168/2017-T of this Tribunal, proof of the accounting of transactions corresponding to amounts received by the Applicant. Can the taxpayer prove, in view of the documents in question, that it possesses the necessary requirements for application of the margin regime in question?

Let us examine this matter.

For this purpose we will analyze in general terms the characteristics and functioning of the Special Regime for the Taxation of Second-Hand Goods, Art Objects, Collectibles and Antiques, addressing its framework at the level of EU Law, domestic law, and doctrine and jurisprudence.

3.1.1 Framework in EU Law

The Special Regime for the Taxation of Second-Hand Goods, Art Objects, Collectibles and Antiques, approved by Decree-Law no. 199/96 of 18 October, consists of a special taxation regime that provides a distinct way of calculating tax by adopting the so-called margin taxation regime (underlined emphasis) which corresponds to the difference between the purchase value and the sale value.

Said instrument transposed, in terms of Community harmonization, Council Directive no. 94/5/EC of 14 February 1994, relating to the taxation in Value Added Tax of transfers of second-hand goods, art objects, collectibles and antiques, being currently incorporated in Chapter 4 of Title XII of the so-called VAT Directive which provides for the special regimes applicable to second-hand goods, art and collectible objects and antiques.

Subsection 1 of Section 2 of this chapter of the VAT Directive establishes the margin regime for reseller taxable persons, regulated in its respective articles 312 to 325.

The Special Regime applies to sales effected by reseller taxable persons in general, including by organizers of auction sales. In the case of sales effected by organizers of auction sales occurring within the scope of commission sale contracts with the owners of goods, the Special Regime defines certain specifics.

Article 314 of the VAT Directive enunciates that "The margin scheme shall apply to supplies of second-hand goods, works of art, collectibles or antiques carried out by a taxable person acting as a reseller, where those goods have been supplied to him in the territory of the Community by one of the following persons:

a) A person who is not a taxable person;

b) Another taxable person, insofar as the supply by that other taxable person is exempt in accordance with Article 136;

c) Another taxable person, insofar as the supply by that other taxable person is covered by the exemption for small undertakings provided for in Articles 282 to 292 and concerns an investment good;

d) Another taxable person acting as a reseller, insofar as the supply by that other taxable person acting as a reseller was subject to value added tax in accordance with this special scheme."

Pursuant to article 315 of the VAT Directive, "The taxable amount of supplies of goods referred to in Article 314 shall consist of the amount invoiced to the customer, in accordance with Article 339, less the amounts following: a) The net amount paid or to be paid by the organizer of the auction sale to its principal, as determined in accordance with Article 337; b) The amount of VAT owed by the organizer of the auction sale for its supply.

Article 337 The net amount paid or to be paid by the organizer of an auction to its principal shall be equal to the difference between the hammer price of the goods at the auction and the amount of commission obtained or to be obtained by the organizer of the auction for that purpose, under the commission sale contract."

It should be noted that, pursuant to the statute, "Article 338 Organizers of auction sales who supply goods under the conditions laid down in Articles 333 and 334 shall be required to record in their accounts, in suspense accounts, the following amounts: a) The amounts collected or to be collected from the customer; b) The amounts paid or to be paid to the principal. The amounts referred to in the preceding paragraph shall be duly substantiated."

By its turn, it is determined that "Article 339 The organizer of an auction sale shall issue an invoice to the customer which clearly shows the following: a) The hammer price of the goods; b) Taxes, duties, levies and charges; c) Ancillary costs, such as commissions, packaging, transport and insurance charged by the organizer to the customer. The invoice issued by the organizer of an auction sale may not separately show any VAT."

3.1.2 Framework in Domestic Law

In terms of material scope, according to the provisions of article 1 of the SRSTHGACA, transfers of second-hand goods, art objects, collectibles and antiques effected by reseller taxable persons or by organizers of auction sales acting in their own name, on behalf of a consignor, pursuant to a commission sale contract, are subject to Value Added Tax according to the special margin taxation regime.

Whereas in the general regime tax is calculated based on the sale value, in the case of second-hand goods the calculation is based, as we have seen, on the gross margin of the sale, in order to avoid double taxation.

For purposes of this Special Regime, the following are understood to mean:

a) Second-hand goods – movable goods susceptible of reuse in the condition they are found or after repair, excluding art objects, collectibles, antiques, precious stones and precious metals, not including coins or artifacts made of such materials;

b) Art objects, collectible objects and antiques – the goods mentioned respectively in points A, B and C of the attached list;

c) Reseller taxable person – the taxable person who, in the scope of its activity, purchases, allocates to the needs of its enterprise or imports, for resale, second-hand goods, art objects, collectibles or antiques, whether that taxable person acts on its own account or on behalf of another pursuant to a buy-sell commission contract;

d) Organizer of auction sales – a taxable person who, in the scope of its economic activity, proposes the sale of goods, in its name, but on behalf of a consignor, pursuant to a commission sale contract, with a view to its adjudication at auction;

e) Consignor of an organizer of auction sales – any person who delivers goods to an organizer of auction sales, pursuant to a commission sale contract, with a view to their adjudication at auction.

As determined in article 3(1), transfers of second-hand goods, art objects, collectibles or antiques effected by a reseller taxable person are subject to the special margin taxation regime, provided that that party has acquired such goods within the European Union under any of the following conditions:

a) From a person who is not a taxable person;

b) From another taxable person, provided that the transfer made by that party was exempt from tax under article 9(33) of the Value Added Tax Code, or identical legal provision in force in the Member State where the transfer was effected;

c) From another taxable person, provided that the transfer made by that party had as its object an investment good and was exempt from tax under article 53 of the Value Added Tax Code, or identical legal provision in force in the Member State where the transfer was effected;

d) From another reseller taxable person, provided that the transfer of goods by that other reseller taxable person was effected pursuant to the provisions of this instrument, or identical regulation in force in the Member State where the transfer of goods was effected.

Pursuant to the provision in article 3(2) of said legal provision, reseller taxable persons may opt for application of the Special Regime to the following transfers:

a) Of art objects, collectibles or antiques which they themselves have imported;

b) Of art objects which have been acquired within the EU from their author, heirs or legatees;

c) Of art objects which have been acquired from another non-reseller taxable person, provided that the transfer by that other taxable person or the intra-Community acquisition of goods by the reseller taxable person, if applicable, has benefited from application of the reduced tax rate provided in articles c) and e) of article 15 of the Special Regime.

With respect to taxable value, article 4 determines the following for the purposes that are presently of interest:

"Article 4

Taxable Value

1 – The taxable value of transfers of goods referred to in the preceding article, effected by the reseller taxable person, shall consist of the difference, duly substantiated, between the consideration obtained or to be obtained from the customer, determined pursuant to article 16 of the Value Added Tax Code, and the purchase price of the same goods, including value added tax, if it has been assessed and appears in the invoice or equivalent document.

(…)

4 – When it is not possible to exactly determine the purchase price of art objects, a value equal to 50% of the consideration shall be considered taxable, determined pursuant to no. 1."

It should be noted that, in our understanding, the provision in no. 4 of this article should only be applicable when, as it states, it is not possible to exactly determine the purchase price of art objects, and not, as the Applicant argues, when there is impossibility of determining the purchase price of the objects.

From the provisions cited above, it is concluded that the transposition into domestic law of EU Law was effected in identical terms.

Thus, for calculation of tax within the scope of this SRSTHGACA, it must first be determined: (i) The consideration obtained or to be obtained from the customer, determined pursuant to article 16 of the VAT Code; (ii) The purchase price of the same goods (the purchase value). Now, article 16 of the VAT Code, in addition to indicating in subparagraph f) of article 16(2) that the taxable value is, for "transfers of second-hand goods (…), effected in accordance with special legislation, the difference, duly substantiated, between the sale price and the purchase price," also establishes which elements are to be included in article 16(5), and which elements are to be excluded in article 16(6).

Whenever transfers are effected under this regime, tax should not be discriminated in the invoice and it is mandatory to mention "VAT – Second-Hand Goods."

It should be noted that, for purposes of compliance with accounting or record-keeping obligations, article 6(2) establishes the need for reseller taxable persons to evidence the elements that permit assessment of compliance with the requirements for application of the special margin taxation regime referred to in article 3(1), as well as, in the case of opting for said regime, the requirements indicated in article 3(2) (underlined emphasis). Furthermore, also pursuant to article 6(2), reseller taxable persons must evidence the elements necessary for calculating the purchase and sale prices of transferred goods, for purposes of determining the taxable value defined in article 4.

With respect to reseller taxable persons who apply, in the course of their activity, either the general taxation regime or the special margin taxation regime, article 6(3) of the Special Regime requires that the recording of operations of those two types be done separately.

Despite the existence of this special taxation regime, the reseller may opt to assess Value Added Tax based on the general regime. If it does so, it may deduct the tax borne in acquisitions or imports at the moment of sale.

In accordance with the provision in article 9(1), transfers of goods effected by organizers of auction sales acting in their own name, pursuant to a commission sale contract for those goods at auction, are also subject to value added tax according to the special margin taxation regime provided in this instrument, on behalf of:

a) Any person who is not a taxable person;

b) Another taxable person, provided that the transfer made by that party is exempt from tax under article 9(33) of the Value Added Tax Code or identical legal provision in force in the Member State where the transfer of goods is effected;

c) Another taxable person, provided that the transfer made by that party had as its object an investment good and is exempt from tax pursuant to article 53 of the Value Added Tax Code or identical legal provision in force in the Member State where the transfer of goods is effected;

d) Another reseller taxable person, provided that the transfer made by that party is subject to tax pursuant to the special regime for margin taxation provided in this instrument, or identical regulation in force in the Member State where the transfer is effected.

The taxable value of transfers of second-hand goods, art objects, collectibles or antiques, effected by organizers of auction sales, in accordance with the provisions of article 9, shall consist of the amount invoiced to the buyer, pursuant to article 12, less:

a) The net amount paid or to be paid by the organizer of auction sales, determined pursuant to article 11; and

b) The amount of tax owed by the organizer of auction sales, relating to the transfer of goods (article 10).

In accordance with the provision in article 11, the net amount paid or to be paid by the organizer of auction sales to its consignor is equal to the difference between:

a) The adjudication price of the good at auction; and

b) The amount of commission obtained or to be obtained by the organizer of auction sales from the respective consignor, in accordance with what is established in the commission sale contract.

Pursuant to articles 12 and 13 of this Special Regime, the auctioneer must issue an invoice to the customer/buyer, showing the adjudication price, taxes, duties, levies and charges, excluding the tax itself, ancillary expenses, such as packing, transport and insurance, charged to the customer, and the notation "VAT – Special Regime for the Sale of Goods at Auction" (underlined emphasis). It should be noted that the auctioneer may not discriminate in the invoice the Value Added Tax assessed pursuant to this Special Regime.

It is equally an obligation of the auctioneer, in accordance with the rules provided in Decree-Law no. 199/96 and the VAT Directive, to deliver a report to the consignor, which contains the identification of the consignor and the adjudication price less the amount of the commission.

This report replaces the invoice which the consignor, in case of being a taxable person, should issue to the auctioneer.

As clarified in Information provided in Proceeding no. 2263, with order of the Director-General's Deputies for Taxes, substitute legal representative of the Director-General of Taxes, on 2011-08-03:

"9. When second-hand goods are acquired from private parties (sales effected by private parties are outside the scope of the tax and as such not subject to VAT), they are relieved of the obligation to issue the respective invoice or equivalent document.

1. In this manner, when the acquirer, a taxable person, purchases goods from private parties, because it must document the respective purchases, it has been the understanding of these Departments that the acquirer may issue the respective purchase document (reseller) in substitution for the private party, identifying it, however, or alternatively, a sales declaration may be issued by the private party, with identification of the buyer, identification of goods and its value."

The transfer of goods from the consignor to the auctioneer shall be deemed to be effected at the moment the sale at auction of those same goods is realized (article 9(2) of the Special Regime).

The auctioneer should also record in third-party accounts the amounts received or to be received from the customer/buyer and the amounts paid or to be paid to the consignor.

In accordance with the provision in article 12(1), organizers of auction sales, for purposes of compliance with the invoicing obligations provided in article 29(1)(b) and article 36 of the VAT Code, must issue for each sale an invoice showing the adjudication value, the value of other taxes, duties, levies and charges that may apply to the transaction in question, as well as ancillary expenses that are charged to the customer, for example, those relating to commission, packing, transport or insurance. As established in article 12(2), the invoice must contain the wording "VAT – Special Regime for the Sale of Goods at Auction," but may not contain discrimination of the value of Value Added Tax assessed on the transfer of goods.

Additionally, in accordance with article 12(3) and (4) of the Special Regime, the organizer of auction sales must provide to the consignor a document prepared by itself in which appears the identification of the consignor, as well as the adjudication price less the amount of the commission. As results from the final part of article 12(4) of said instrument, the document to be provided by the auctioneer to the consignor – which the domestic and EU provisions denominate as a "report" – replaces the invoice which the consignor, in case of also being a VAT taxable person, would be obligated to issue to the auctioneer.

As notes Rui Laires, "From the tenor of this provision, it appears that the consignor, even if it is a VAT taxable person acting as such, is relieved of the obligation to issue an invoice for the operation assimilated to transfer of goods which it effects to the auctioneer, pursuant to article 3(3)(c) of the VAT Code. Although of questionable rationale, such relief does not assume direct relevance in terms of tax control, given that submission to the margin scheme, in view of the conditions provided in article 9(1) of the Special Regime, has as a prerequisite that the realization of the operation assimilated to transfer of goods, by the consignor, does not give rise to separate mention of any amount as Value Added Tax."

At the accounting level, auctioneers should record the amounts received or to be received from buyers and sellers in third-party accounts (underlined emphasis), carrying only the commission earned to the operating account (article 13).

In the cases of sales effected by auctioneers where the conditions for application of the Special Regime in question are not verified, namely, in sales of goods not covered by the Special Regime or in cases where the auctioneer sells in the name and on behalf of another and where the requirements for application of the Special Regime are not verified, the general rules of the Value Added Tax Code are applicable.

3.2 Jurisprudence of the Court of Justice of the European Union

The Court of Justice has rendered significant jurisprudence in which it pronounced on the interpretative criteria of this Regime.

Thus, in its Judgment of 1 April 2004, Case Stenholmen, it considered that in delimiting its scope attention should be paid to the intention which underlay the creation of the regime. To that end, the judgment specifically invoked the third and fifth recitals of Directive 94/5/EC, in which the intention to prevent the occurrence of double taxation in Value Added Tax of goods covered by the special regime was manifested. For that reason, added the Court of Justice, the respective scope of application need not be subject to restrictive interpretation, to the extent that this would distort the pursuit of the objectives sought.

That is, the interpretation of the provisions of this special taxation regime should not be subject, at the outset, to a particularly strict criterion, unlike what occurs, for example, according to the Court of Justice's interpretation, with the norms establishing Value Added Tax exemptions.

Although they relate to invoicing and the exercise of the right to deduct Value Added Tax borne, we believe that the Conclusions of Advocate General Evgeni Tanchev, presented on 30 May 2018 in Case C‑664/16, Case Lucreţiu Hadrian Vădan, not yet decided by the Court of Justice, are relevant and transferable to the case in question.

The question was raised in particular whether, in the circumstances in question, the right to deduct Value Added Tax paid upstream provided in the VAT Directive could be refused by a national tax authority when the taxpayer presents no invoices to prove it. Thus, one of the questions consisted in knowing whether the VAT Directive in general and, in particular, its articles 167, 168, 178, 179 and 273, as well as the principle of proportionality and the principle of neutrality, can be interpreted to the effect that they permit a taxable person who meets the material requirements for deduction of Value Added Tax to benefit from the right to deduction in the case where, in a specific context such as that of the principal proceedings, that taxable person cannot prove, by presenting invoices, the amounts previously paid for supplies of goods and provision of services. Thus, the question was raised in particular whether the articles mentioned should be interpreted to the effect that a taxable person who has not retained the invoices that prove its right to deduct Value Added Tax relating to the supply of goods or provision of services can prove those operations through a report prepared by experts designated by the referring national court to estimate the value of the real property, taking into account the considerable period of time already elapsed since the new buildings in question were subject to transactions.

As noted, the invoice is an essential element of a taxable person's right to deduct Value Added Tax paid upstream, pursuant to the VAT Directive (underlined emphasis). Indeed, the properly issued invoice has been classified as the "key to access" the right to deduction, given that it has an "insurance function" for the national tax authority (underlined emphasis) by establishing a nexus between the deduction of tax paid upstream and the payment of tax.

The Court of Justice declared that the fundamental principle of Value Added Tax neutrality requires that the deduction of this tax paid upstream be granted if the substantive requirements are met, even if the taxable persons have neglected certain formal requirements. Since the tax administration has the necessary data to determine that the taxable person, as recipient of the transactions in question, is debtor of Value Added Tax, it cannot impose, with respect to its right to deduction, additional requirements that may have the effect of rendering impossible the absolute exercise of this right.

However, the jurisprudence of the Court of Justice admits an exception which, as has been emphasized, is relevant to the principal proceedings. This is the situation where the violation of formal requirements has the effect of preventing proof of compliance with the substantive requirements.

Now, in the opinion of the Romanian Government, this is verified in the principal proceedings. The lack of invoices or other adequate documents prevents proof of compliance with the substantive requirements for the right to deduct tax paid upstream.

The objective of the particulars that must necessarily appear in the invoice, pursuant to article 226 of the VAT Directive, consists of permitting tax administrations to control the payment of tax owed and, if applicable, the existence of the right to deduct Value Added Tax (underlined emphasis). The date of provision of services object of the invoice permits control of when the taxable event occurred and, therefore, to determine the tax provisions that must, from a temporal point of view, apply to the operations to which the document relates. It is incumbent on the taxable person seeking deduction of Value Added Tax to prove that it meets the eligibility requirements to benefit therefrom.

The Court of Justice declared that the fact of not having organized accounting which permits application of Value Added Tax and its control by the tax administration, and the failure to record issued and received invoices are capable of preventing exact collection of the tax and, consequently, of compromising the proper functioning of the common Value Added Tax system.

The Reisdorf Judgment defends the thesis that taxable persons, when no longer in possession of the original invoice, may present "other conclusive proofs" demonstrating that the transaction which is object of the deduction request actually existed.

The Court of Justice confirmed the right to deduct tax paid upstream in circumstances involving various types of invoice deficiency. It is particularly important to emphasize that, however, as notes the Advocate General, it appears that jurisprudence has not yet concretely addressed the question of total absence of invoices or any other adequate supporting documents.

Thus, it continues,

"76. The Uszodaépítő Judgment, for example, concerned alteration of invoice content and presentation of a supplementary declaration. The Polski Trawertyn Judgment referred to an invoice issued prior to registration and identification of a company for Value Added Tax purposes, issued in the name of future partners of said company. The Idexx Laboratories Italia Judgment had as its object a situation where the taxable person had not registered in the Value Added Tax register some invoices subject to the reverse charge regime. In the Senatex proceeding the issue was correction of an invoice.

1. In its Conclusions in the Vámos proceeding, Advocate General N. Wahl observed that '[i]n cases where the Court of Justice rejected a formalist approach, the objective consisted of ensuring that, notwithstanding the taxable person having committed a minor procedural error, the operations would be taxed taking into account their objective characteristics [...]. Member States cannot penalize strict non-compliance with formal requirements of [such as to] compromise the neutrality of the system, for example by treating competing businesses differently or by depriving key provisions of the VAT Directive of their useful effect'."

2. I further note that, pursuant to article 242 of the VAT Directive, taxable persons must maintain sufficiently detailed accounting which permits application of Value Added Tax and its control by the tax administration. Article 244 of the same directive obliges taxable persons to ensure that copies of invoices issued by them are stored, as well as all invoices received. By virtue of article 250(1), taxable persons must submit a Value Added Tax return showing all data necessary for determination of the amount of tax due.

3. Indeed, according to constant jurisprudence of the Court of Justice, Member States are not prevented from treating as tax evasion the failure to maintain regular accounting.

4. In the principal proceedings, non-compliance with a formal requirement, such as retention of invoices, led to refusal of the right to deduction, given that non-compliance prevents irrefutable proof that substantive requirements were observed. More than non-compliance with a formal requirement, there is lack of the information necessary to demonstrate that substantive requirements were satisfied. Or, as an advocate general recently emphasized, it is "perfectly logical" to refuse the benefit of the right to deduction if the violation of formal requirements "is such that it makes impossible or excessively difficult the control of compliance with the substantive requirements of the right to deduction."

5. Thus, the principal proceedings constitute one of two exceptions to the principle of prevalence of substance over form, the other being participation in tax evasion.

6. Accordingly, although it cannot be excluded that there may exist circumstances where the substantive requirements for deduction of tax paid upstream may be determined by expert reports, in the absence of invoices, it is for the referring court to verify, in my opinion such circumstances are not present in the principal proceedings."

In this context, it concludes that, in the circumstances of the principal proceedings, the principle of tax neutrality cannot be legitimately invoked by a taxable person which seeks to endanger the functioning of the common Value Added Tax system, by failing to maintain the records required pursuant to the VAT Directive during a long period.

Terms in which it concludes that,

"86. Accordingly, I propose that the Court of Justice answer the questions submitted by the Curtea de Apel Alba Iulia (Court of Appeal of Alba Iulia, Romania) in the following manner:

'In the circumstances of the principal proceedings, articles 167, 168, 178 and 226 of Council Directive 2006/112/CE, relating to the common system of value added tax, should be interpreted to the effect that a taxable person who has not retained the invoices that prove its right to deduct value added tax relating to the supply of goods or provision of services cannot prove the existence of those transactions by means of a report prepared by experts designated by the referring court to estimate the value of building materials and labor relating to the construction of the buildings, taking into account the considerable period of time already elapsed since the new buildings in question were transacted."

Recall en passant, in this context (although not the subject matter of the present case) and only to emphasize the need for Member States to be particularly demanding in controlling the right to deduct Value Added Tax, that the Court of Justice has repeatedly considered that private parties cannot avail themselves abusively or fraudulently of the norms of Union Law (Judgment of 18 December 2014, Case Schoenimport "Italmoda" Mariano Previti et al., Procs. C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, no. 43).

The Court of Justice initially concluded, within the scope of constant jurisprudence on the right to deduction of Value Added Tax provided in the VAT Directive, that it is for national authorities and courts to refuse the benefit of the right to deduction if it is demonstrated, in light of objective elements, that this right is invoked fraudulently or abusively. Subsequently, it considered that the consequence of abuse or fraud is also, in principle, related to the benefit of the right to exemption within an intra-Community supply (cf., in this sense, Judgment of 6 September 2012, Case Mecsek‑Gabona, Proc. C‑273/11, EU:C:2012:547, no. 54). The Court of Justice lastly affirmed that, since a possible refusal of a right based on the VAT Directive reflects the general principle whereby no one should benefit abusively or fraudulently from rights arising from the Union legal system, such refusal is generally incumbent on national authorities and courts, whatever the Value Added Tax right affected by the fraud, including therefore the right to refund of Value Added Tax (cf., in this sense, Judgment of 18 December 2014, Case Schoenimport "Italmoda" Mariano Previti et al., Procs. C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, no. 46).

According to constant jurisprudence, this occurs not only when tax fraud is committed by the taxable person itself but also when the taxable person knew or should have known that, through the transaction in question, it was participating in an operation involved in tax fraud committed by the supplier or another operator present upstream or downstream in the chain of supplies (cf., in terms of right to deduction, Judgment of 6 December 2012, Case Bonik, Proc. C‑285/11, EU:C:2012:774, nos. 38 to 40; in terms of right to exemption of an intra-Community supply, Judgment of 6 September 2012, Case Mecsek‑Gabona, cit., no. 54; and, in terms of Value Added Tax refund, Judgment of 18 December 2014, Case Schoenimport "Italmoda" Mariano Previti et al., cit., nos. 49 and 50).

Thus, it is not contrary to Union Law to require an operator to act in good faith and take all measures reasonably exigible to ensure that the operation it effects does not imply its participation in tax fraud (Judgment of 6 September 2012, Case Mecsek‑Gabona, cit., no. 48 and jurisprudence cited).

By contrast, it is not compatible with the regime of the right to deduction provided in the VAT Directive to refuse this right to a taxable person that did not know and could not have known that the transaction in question was part of fraud committed by the supplier or that another operation included in the chain of supplies, prior or subsequent to that realized by said taxable person, constituted tax fraud. Indeed, the establishment of a system of objective liability would exceed what is necessary to preserve the rights of the Public Treasury (Judgment of 6 December 2012, Case Bonik, Proc. C‑285/11, EU:C:2012:774, nos. 41 and 42 and jurisprudence cited).

It results herefrom that, even where all substantive requirements for obtaining the right to exemption of Value Added Tax of an intra-Community supply or deduction of Value Added Tax are not met, the Court of Justice considered that said right cannot be refused to the taxable person that acts in good faith and takes all measures that can be reasonably exigible to ensure that the transaction it effects does not imply its participation in tax fraud (cf., in this sense, Judgments of 27 September 2007, Case Teleos et al., Proc. C‑409/04, EU:C:2007:548, no. 68, and of 6 September 2012, Case Mecsek‑Gabona, cit., nos. 47 to 50 and 55).

These considerations are pertinent in case of refusal by national authorities or courts of the right to apply the margin scheme provided in article 314 of the VAT Directive.

According to the jurisprudence of the Court of Justice, the determination of the measures that may, in a concrete case, be reasonably exigible of a taxable person that seeks to exercise a right conferred by the VAT Directive to ensure that its operations do not form part of fraud committed by an operator upstream depends essentially on the circumstances of said concrete case (Cf., by analogy, Judgments of 21 June 2012, Case Mahagében and Dávid, Procs. C‑80/11 and C‑142/11, EU:C:2012:373, nos. 53, 54 and 59, and of 6 September 2012, Case Mecsek‑Gabona, already cited, no. 53).

When there exist indicia permitting suspicion of the existence of irregularities or fraud, the prudent operator may, according to the circumstances of the concrete case, be obligated to obtain information regarding another operator to whom it seeks to purchase goods or services, to ensure the reliability of that operator (cf., by analogy, Judgment of 21 June 2012, Case Mahagében and Dávid, cit., no. 60).

However, the tax administration cannot generally require that the taxable person which seeks to exercise the right to apply the margin regime, on the one hand, verify, in particular, that the issuer of the invoice regarding goods for which the exercise of this right is sought complied with its obligations of declaration and payment of Value Added Tax, in order to ensure that there are no irregularities or fraud at the level of upstream operators, or, on the other, that it possess documents in this regard (cf., by analogy, Judgment of 21 June 2012, Case Mahagében and Dávid, cit., no. 61).

Indeed, in principle, it is incumbent on the tax authorities to effect the necessary inspections of operators in order to detect irregularities and fraud in Value Added Tax, as well as to apply sanctions to the operator that commits such irregularities or fraud (cf., by analogy, Judgment of 21 June 2012, Case Mahagében and Dávid, cit., no. 62).

This does not, however, mean that the tax authorities must substitute themselves for taxpayers in proving compliance with the requirements of special taxation, as is the case of the Special Regime for the Taxation of Second-Hand Goods and/or by auctioneers.

In fact, these taxpayers not demonstrating compliance with the formal and substantive requirements for application of the Special Regime, there is no alternative for the Tax Authority other than taxation in light of the general Value Added Tax regime.

3.3 Subsumption

As is known, the invoice is an essential element of a taxable person's right to deduct Value Added Tax paid upstream, pursuant to the VAT Directive. Indeed, and as was previously noted, the properly issued invoice (underlined emphasis) has been classified as the "key to access" the right to deduction, given that it has an "insurance function" for the national tax authority by establishing a nexus between the deduction of tax paid upstream and the payment of tax.

In the case at hand, as results from the tax inspection proceedings and was not disproven by the claimant, with respect to the pieces sold, which the taxable person listed in particular in said invoices nos. 433, 434, 435 and 436, the respective consignors were not identified, pursuant to articles 9 to 13 of the Special Regime (Decree-Law no. 199/96 of 18 October), and it obviously cannot be presumed that a commission sale contract exists [cf. article 9(1) and article 2(e) of said Special Regime and article 314 of the VAT Directive].

It should further be noted that, with respect to the sale of said pieces, the taxable person does not prove that the same had been alienated on behalf of any of the entities mentioned in article 9(1) of said Special Regime.

True that the Applicant, by email of 05/06/2015, informed the Tax Authority that the pieces included in said invoices were its own pieces and that the same gave rise to sales invoices issued to end customers, in which it calculated commissions and assessed Value Added Tax. However, the accounting did not reveal the recording of inventories of own pieces or consigned pieces, nor did it reveal any recording of individual current accounts of customers and consignors (Cf. Tax Inspection Report).

It is recalled that, for the taxable person to be able to apply, as an organizer of auction sales, the Special Regime, the transfers must be effected on behalf of a consignor, as defined in its article 1. Now such clearly does not occur with the pieces invoiced to the Applicant (the taxable person itself). That is: there is, in the case, no issuance of an invoice to the respective consignors, as should have occurred.

On the other hand, the claimant neither alleges nor proves having complied with the recording of the transfers in question in a manner evidencing the elements that would permit conclusion regarding verification of the conditions provided in article 3 and the determinative elements of the taxable value referred to in article 4, as provided and required by article 6(2), all of the SRSTHGACA.

And if in terms of taxation in Corporate Income Tax there exists a less stringent requirement regarding the exclusivity of proof of the existence and value of transactions through an invoice issued with the general requirements provided in article 36(5) of the VAT Code (and, in the case, with the special notations to which the SRSTHGACA alludes), in terms of Value Added Tax, for the reasons already mentioned, in particular because of its essential function for a taxable person's right to deduct Value Added Tax paid upstream, pursuant to the VAT Directive, or as "key to access" the right to deduction and its "insurance function" for the national tax authority by establishing a nexus between the deduction of tax paid upstream and the payment of tax, the situation assumes distinct contours.

That is, and specifying better: the taxpayer failing to comply with or neglecting the duties imposed, in the case, by said Special Taxation Regime, it is not admissible or tolerable that such omission, in the concrete case, can be supplemented a posteriori with other means of proof, it not appearing that the Tax Authority, with the elements at its disposal, could adequately scrutinize the material compliance by the taxpayer of the requirements exigible for taxation on the terms it alleges.

In light of the foregoing and weighing the factual framework determined, it is concluded that there is a failure to prove verification of the conditions provided, in particular in said articles 3, 4 and 6 of said Special Taxation Regime in Value Added Tax of Second-Hand Goods (Decree-Law no. 199/96 of 18/10), necessary for application of said Special Regime.

Moreover, it was also not proven by the Applicant and Value Added Tax taxable person the origin and source of the goods object of the sales nor identified the respective consignors, or even the very existence of commission contracts.

This results in the total lack of merit of the claim due to absence of the vices pointed out both in the order dismissing the administrative appeal and in the acts of assessment subject to challenge.

4. Decision

On these grounds, the arbitrators agree in this Arbitral Tribunal to:

• Judge the request for arbitral pronouncement totally lacking in merit; and

• Maintain in the legal order the assessments under challenge; and

• Condemn the Applicant in the costs of the proceeding.

5. Value of the Case

In accordance with the provisions of article 306(2) of the Code of Civil Procedure and article 97-A(1)(a) of the Code of Tax Procedure and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €81,395.77.

6. Costs

Pursuant to article 22(4) of the Arbitral Tribunal Rules, the amount of costs is fixed at €2,754.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings and shall be borne by the Applicant as per the decision above.

Notify.

Lisbon, 30 October 2018

The Collective Arbitral Tribunal,

José Poças Falcão
(Arbitrator President)

Clotilde Celorico Palma
(Substitute Arbitrator)

Carlos Lobo
(Substitute Arbitrator)