Process: 96/2013-T

Date: July 8, 2015

Tax Type: IVA

Source: Original CAAD Decision

Summary

Case 96/2013-T addresses whether VAT applies when a natural gas distribution company passes through underground occupation fees (Taxas de Ocupação do Subsolo - TOS) to network users. The claimant, a gas distribution company, challenged VAT self-assessments totaling €208,658.36 for May-July 2012, arguing that re-invoicing TOS to trading entities should not attract VAT. The company pays TOS to municipalities for subsurface use to install gas pipelines, then recharges these exact amounts to gas traders without markup. The central legal question concerns whether this pass-through constitutes an 'economic activity' under Article 9(1) of the VAT Directive and whether TOS should be included in the VAT taxable base under Article 78(a). The claimant argued that: (1) no consideration exists for the TOS pass-through, making it non-taxable; (2) TOS lack direct nexus with the company's taxable operations; (3) TOS are excluded from the regulated network access tariff; (4) VAT neutrality principles require consistent treatment throughout the supply chain; and (5) since municipalities collect TOS outside VAT scope per Article 2(2) of the Portuguese VAT Code, mere pass-through shouldn't trigger taxation. The company cited CJEU precedents including Götz (regarding consideration requirements) and BGZ Leasing (on VAT neutrality when re-invoicing exact expense amounts). The Tax Authority maintained the assessments were proper, though factual matters remained uncontested. The arbitral tribunal, established under Decree-Law 10/2011, heard the case with reference to fundamental VAT principles including neutrality, the definition of economic activity, and proper determination of taxable base when public fees are involved in commercial transactions.

Full Decision

Case Number 96/2013-T

The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Dr. Joaquim Silvério Dias Mateus and Dr. Emanuel Augusto Vidal Lima (arbitrator members), designated by the Ethics Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, established on 04-07-2013, hereby agree as follows:

1. Report

A, S.A., NIPC ..., filed an application for constitution of the collective arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as RJAT), against the Tax Authority and Customs Service, with a view to:

(i) Declaration of illegality of the acts of self-assessment of Value Added Tax (VAT) relating to the months of May, June and July 2012, to which the periodic declarations no. ...64, filed on 28-6-2012, no. ...08, filed on 18-7-2012, and no. ...18, filed on 9-8-2012 refer, which were subject to administrative appeals nos. ...98, ...81 and ...42, dismissed, respectively, by official letters no. 007166, of 25-1-2013, no. 020729, of 20-3-2013, and no. 020702, of 20-3-2013;

(ii) Annulment of the acts of self-assessment better identified in the application for arbitral pronouncement, in the part wherein VAT was assessed on Subsurface Occupation Taxes, respectively, the amounts of € 71,354.88, € 79,885.53 and € 57,417.95.

The application for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Service on 30-04-2013.

Pursuant to the provisions of article 6, para. 2, subpara. a) and article 11, para. 1, subpara. b) of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal Councillor Jorge Lopes de Sousa, Dr. Joaquim Silvério Dias Mateus and Dr. Emanuel Augusto Vidal Lima, who communicated their acceptance of the appointment within the applicable deadline.

On 19-6-2013 the parties were duly notified of this designation, and did not express any wish to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, para. 1, subparas. a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provision of article 11, para. 1, subpara. c) of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective Arbitral Tribunal was established on 4-7-2013.

The Tax Authority and Customs Service responded, arguing that the application should be deemed inadmissible.

At the meeting provided for in article 18 of the RJAT, the production of testimony evidence was scheduled and a decision was made to allow written submissions.

The production of testimony evidence was abandoned, following the Tax Authority and Customs Service informing that the factual matter was not contested.

The Claimant presented submissions with the following conclusions:

  1. The TOS paid by the Claimant to the municipalities for the use of the subsurface for installation of the natural gas distribution network, which are subsequently passed on to the users of its infrastructure, such as natural gas trading entities, are not subject to VAT at the time of such rechargement, re-invoicing or pass-through

  2. The rechargement, re-invoicing or pass-through of the TOS by the Claimant does not constitute an economic activity within the meaning of article 9, para. 1 of the VAT Directive due to the absence of any direct or indirect consideration, and therefore, as it is not an onerous operation, generates no value added and is not subject to VAT (see CJEU judgment in case Gôtz).

  3. There is no place for application of the provision of article 78, subpara. a) of the VAT Directive, transposed into the internal legal order by article 16, para. 5, subpara. a) of the IVA Code, because the TOS do not have a direct nexus with taxable operations carried out by the Claimant, nor do they connect, directly or indirectly, with the free and legal exercise of the concession activity, nor do they constitute a requirement for validity thereof.

  4. In reality, the product of the collection of TOS does not represent the effective consideration for a taxable operation carried out by the Claimant to the trading entity, and therefore does not fall within the concept of consideration, and consequently the amount corresponding to the taxes cannot be included in the taxable value of VAT.

  5. Indeed, the consideration delivered by the trading entity to the Claimant for the use of the natural gas distribution network is a network access tariff defined and regulated by ERSE, in the composition of which the TOS do not feature.

  6. Furthermore, given that the TOS fall outside the scope of VAT when collected by the active subject (local authority) from the passive subject (Claimant) by virtue of article 2, para. 2 of the IVA Code, it is not through the mere pass-through or re-invoicing of its exact amount, without any consideration from the person to whom it is passed on -- i.e. without margin -- that its inclusion in the taxable value should proceed.

  7. The functioning of VAT is incompatible with differentiated treatment of agents along a given commercial chain, as would occur if it were concluded that VAT is due upon pass-through of the TOS, following non-taxation at a prior moment, which would result in violation of the principles of neutrality and uniformity of VAT.

  8. As the CJEU rightly decided in the recent case BGZ Leasing, the principle of VAT neutrality requires that the VAT treatment of a given expense (non-taxation or exemption) must be maintained when the exact amount of that expense – as happens with TOS – is re-invoiced to a third party.

  9. The acknowledgement of the illegality of the VAT assessments on TOS and the consequent reimbursement of the tax unduly paid do not constitute unjust enrichment because: (i) the pass-through of VAT is a legal requirement and does not imply, nor does it presume juris et de jure this enrichment; (ii) national legislation does not require, as a condition for reimbursement of unduly assessed VAT, proof of its actual pass-through to third parties; (iii) the principle applies among us that the Member State has the duty to reimburse the taxpayer the taxes collected in violation of Community law, which results from the principle of VAT neutrality (see CJEU judgments in cases Michailidis, Comateb, Weber's Wine World and Génius Holding).

  10. As to what is alleged by the Tax Authority in article 34 of the pleading in response, there is no composite or complex service provision directed to the final consumer, not least because the Claimant is not legally authorized to sell natural gas to final consumers.

  11. Furthermore: (i) the legal and accounting separation of distribution and trading activities means that the Claimant does not perform any service to the final consumer; (ii) the pass-through or rechargement of TOS has no economic content and is not a service provision for VAT purposes; (iii) the rechargement of TOS, even if hypothetically considered together with distribution and sale of natural gas by the trading entity to the final consumer, does not stand in an ancillary relationship to these latter activities, nor does it constitute a single inseparable economic provision whose decomposition would be artificial (see CJEU judgments in cases CPP and Levob Verzekeringen BV and OV Bank NV).

  12. Furthermore, subjecting to VAT any and every service provision by virtue of its mere connection, even if indirect, to a taxable provision is contrary to the logic of neutrality underlying the common system of tax (see CJEU judgment in case BGZ Leasing).

It is therefore submitted that the application for arbitral pronouncement should be fully upheld and, consequently, the illegality of the acts of self-assessment of VAT for the months of May 2012, June 2012 and July 2012, to which the periodic declarations nos. ...64, ...08, and ...18 respectively refer, should be declared, annulling the same in the part wherein VAT was assessed on the Subsurface Occupation Taxes passed through by the Claimant.

The Tax Authority and Customs Service presented a counter-submission, stating as follows, in summary:

– the acts of self-assessment relating to the periods of May, June and July of the year 2012, which support the Claimant's application, were subject to three administrative appeals on which the dismissal orders now challenged were issued;

– the Claimant intends, with the filing of the application, the reimbursement of the amounts of tax self-assessed in those periods (unduly self-assessed according to its claim);

– in the administrative appeals, the Claimant expressly formulated in each of them:

"– the annulment of the self-assessment [...]

– the reimbursement of the tax unduly assessed, on the same grounds; and,

– payment of the compensatory interest due."

– the applications submitted by the Claimant have no foundation whatsoever if we take into account the pass-through nature of the tax self-assessed by it;

– reimbursing the now Claimant the amount of tax that it assessed and received from its client (B – which in turn passed it through to the final consumer), would constitute unjust enrichment that national law and Community law do not permit;

– this follows from the basic principles of the functioning of the tax and its characteristics, namely, pass-through and neutrality – the tax does not constitute an expense of the passive subjects – in the present case neither the Subsurface Occupation Tax nor the VAT that was assessed on it was an expense of the Claimant;

– moreover, the same is derived from the analysis of what is provided in subpara. c) of para. 1 of article 2 of the IVA Code, by considering as a passive subject of the tax individuals or legal persons who unduly mention VAT on an invoice;

– the case-law of the CJEU, namely the Judgment, of 16 May 2013, delivered in case C-191/12, where it can be read: "It follows that the right to reimbursement of the unduly paid is intended to resolve the consequences of the incompatibility of the tax with Union law, neutralizing the economic burden that unduly burdened the operator who, after all, ultimately bore it effectively. However, by way of exception, this reimbursement may be refused when it would lead to unjust enrichment of the holders of the right. The protection of the rights guaranteed in this matter by the legal order of the Union does not require the reimbursement of taxes, charges and duties collected in violation of Union law when it is proven that the passive subject responsible for the payment of those charges passed them on effectively to other persons."

– furthermore, this case-law was delivered following that previously established in the CJEU Judgment, of 6 September 2011, delivered in case C-398/09, where the concept of unjust enrichment is defined for this purpose in the following terms: "The rules of Union law concerning reimbursement of the unduly paid must be interpreted as meaning that reimbursement of the unduly paid can only result in unjust enrichment in the event that the amounts unduly paid by a passive subject, by virtue of a tax collected in a Member State in violation of Union law, were passed directly on to the buyer";

– and if this is so when express violation of Community law is at issue, a fortiori it must also be so when there is no violation of its rules, as is the case in the present proceedings;

– the claim for compensatory interest has no foundation, since the Claimant, in addition to having passed through the amount of the Subsurface Occupation Tax, "TOS", also passed through and received the amount of the VAT that was assessed on it, constituting neither one nor the other any charge or expense inherent to the exercise of its activity;

– to support the unfounded claim the Claimant argues the illegality of subjection to value added tax of the so-called Subsurface Occupation Tax, "TOS", in the following terms:

– "Not any economic activity or act of consumption underlying the assessment of TOS, since it is a tax that has as its consideration – or tax event, or legal or factual assumption – the individualized use of a public asset by a private party";

– here too the Claimant is entirely without merit, effectively, the use or utilization of a public domain asset (use of the subsurface), as with so many other acts of use and enjoyment of immovable property, constitutes an act of consumption that for value added tax purposes subsumes to a service provision within the terms and for the purposes of what is provided in articles 1, para. 1, subpara. a) and 4 of the IVA Code;

– to say that the payment of the Subsurface Occupation Tax (TOS) does not have a direct nexus with the taxable operations of the Claimant – distribution of gas – also does not hold, because such nexus is all too evident when distribution is carried out through the ground of a given municipal jurisdiction;

– the question is different as to whether this service provision is carried out by someone who has the status of a passive subject, or not, within the terms and for the purposes of what is provided in article 2 of the IVA Code;

– in this respect, the Claimant, together with the Respondent, considers that the Subsurface Occupation Tax, "TOS" assessed and collected by the municipalities is not subject to VAT since these, when conceding public domain assets, are exercising one of their functions, as a means of satisfying the collective needs of the populations residing in their jurisdiction;

– given this, the services provided in this context – granting the right to use the subsurface – are carried out in the exercise of their powers of authority and in this circumstance are not subject to tax;

– it is, however, that these rules of non-taxation, deriving from the non-qualification as a passive subject by whoever performs the operations, contained in paras. 2 and 3 of the IVA Code are, contrary to what the Claimant intends, of strict interpretation, given that they constitute an exception to the general principle of taxation;

– in fact, when through the concession contract is recognized the right of the concessionaire "to pass on to natural gas trading entities or to final consumers the full amount of the subsurface occupation taxes assessed by the local authorities which comprise the concession area", there is no doubt that these services are not taxed by virtue of what is provided in para. 2 of article 2 of the IVA Code;

– it should be said, moreover, that even if it were understood that the municipalities, in collecting the said taxes, were not doing so in the exercise of their powers of authority, such service provisions would always be exempt from VAT, under the provisions of article 9 of the IVA Code, since the only service provided by the municipality amounted to the ceding of the right to use the subsurface of its territorial jurisdiction.

– the question of the pass-through of the tax carried out by the Claimant to its client – B – and by the latter to the final consumers is different;

– in fact, the collection of the said tax will form part of a composite service provision which ultimately amounts to the supply of gas to final consumers;

– it is, however, that, given that the Claimant and the Respondent have assumed in the present case that the collection of TOS is carried out by the municipalities in the exercise of their powers of authority, it must still be said that such powers are not susceptible of delegation, whence it makes no sense whatsoever the Claimant's thesis that it also passes through the tax in the exercise of such powers;

– the EU Court of Justice has interpreted the concept of powers of authority in a literal and narrow sense, that is, that this is only applicable when the activities carried out are actually conducted by legal entities under public law, "denying such treatment even where powers of authority delegated by public entities to legal entities under private law are at issue";

– for this reason, in the case of the now Claimant this does not apply to it given that "It follows from established case-law of the Court, being a clear fact, that the activities carried out in the capacity of public authorities within the meaning of article 13, para. 1, first paragraph, of the VAT Directive, are those developed by public law organisms within their own regime, with the exclusion of those which they exercise under the same legal conditions as private law operators";

– thus according to the case-law of the EU Court of Justice the "action of a legal entity under public law must be direct, excluding cases of indirect management such as concession of public services or concession of operation, even if involving delegation of powers of authority, as well as operations carried out through commercial companies that have exclusively public or mixed capital.";

– the self-assessments now challenged therefore do not suffer from any illegality;

– in this way, it may be concluded that the claim contained in the present proceedings lacks any foundation whatsoever because A is not, and cannot be, in any manner whatsoever, characterized as a normal passive subject of the tax for purposes of the right to deduct tax borne upstream, the correction proposed being maintained in the amount of €163,796.05

By judgment of 19-11-2013, it was decided to suspend the proceedings to refer questions to the CJEU for a preliminary ruling on the following matters:

  1. Does EU law preclude that, in the pass-through, without any additional charge, by a private company supplying natural gas distribution infrastructure to a company acquiring its services, of the amounts of Subsurface Occupation Taxes, paid to the municipalities in which the piping comprising these infrastructures is located, VAT should be assessed?

  2. Given that Subsurface Occupation Taxes are assessed by local authorities in the exercise of their powers of authority, without assessment of VAT, does EU law preclude that in the pass-through of the amounts of these taxes paid by a private company supplying natural gas distribution infrastructure to a company acquiring its services, VAT should be assessed?

By judgment of 11-06-2015, delivered in case C-256/14, the CJEU decided that "articles 9, para. 1, 73, 78, first paragraph, subpara. a), and 79, first paragraph, subpara. c), of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, must be interpreted as meaning that the amount of taxes, such as those at issue in the main proceedings, which is paid to the municipalities by the company operating the gas distribution network by virtue of the use of the public domain of those municipalities and which is subsequently passed on by that company to another company responsible for marketing the gas, and then by that company to final consumers, must be included in the taxable amount of the value added tax applicable to the service provided by the first of those companies to the second, in accordance with article 73 of that Directive".

The arbitral tribunal was duly established, is competent to decide the questions raised, and the parties have legal personality, capacity and legitimate standing (articles 4 and 10, para. 2, of the same statute and article 1 of Portaria No. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullity.

2. Statement of Facts

2.1. Facts Deemed Proven

a) The Claimant A S.A. is a joint-stock company holding the concession, on an exclusive basis, of the public service of regional natural gas distribution network of Regional Area ..., by virtue of a concession contract entered into with the Portuguese State (document no. 7, filed with the application for arbitral pronouncement, the contents of which are reproduced herein).

b) As the operator of the distribution network, the Claimant is the entity responsible, in a specific area, for the development, operation and maintenance of the distribution network and, where applicable, its interconnections with other networks, as well as ensuring the guarantee of network capacity over the long term to meet reasonable requests for natural gas distribution (article 8 of the application for arbitral pronouncement, which is not challenged);

c) The natural gas distribution network consists, among other elements, of the piping that transports this product and which is installed in the public domain of some local authorities situated in the concession area (article 9 of the application for arbitral pronouncement, which is not challenged);

d) The local authorities referred to in the preceding subparagraph assess to the Claimant subsurface occupation taxes (hereinafter, simply "TOS") (article 9 of the application for arbitral pronouncement, which is not challenged);

e) The Claimant pays to the local authorities the subsurface occupation taxes that they assess (article 12 of the application for arbitral pronouncement, which is not challenged);

f) At a later time, the amount paid by the Claimant to the local authorities in the form of TOS is passed on, first, to the entities using the infrastructure of the distribution network and, subsequently, to the final consumers of natural gas (article 13 of the application for arbitral pronouncement, which is not challenged);

g) The Claimant is authorized by the Portuguese State to proceed in the manner described in the preceding subparagraph (article 14 of the application for arbitral pronouncement, which is not challenged);

h) The pass-through of TOS allows the Claimant to recover the amount previously paid to the municipal treasuries by including in the invoice issued by the trading entity to the final client an additional, autonomous line item, containing the amount of the public tax – which corresponds only to what was actually paid, as the concession contract requires – and the indication of the municipality to which the tax relates (article 17 of the application for arbitral pronouncement, which is not challenged);

i) The pass-through of the quantum of TOS is not carried out directly by the Claimant to final clients because it ceased to be able to exercise the activity of trading this product (article 18 of the application for arbitral pronouncement, which is not challenged);

j) Company B, S.A., legal entity no. ..., was established, to which were transmitted all existing supply contracts and which in 2006 were held by the Claimant (articles 21 and 22 of the application for arbitral pronouncement, which are not challenged);

k) Company B, S.A., established specifically to pursue the activity of trading natural gas in the concession area of A, was granted a last resort natural gas trading license, on a public service basis (article 23 of the application for arbitral pronouncement, which is not challenged);

l) The pass-through of the TOS amount is carried out in the following manner:

– First, the Claimant pays to the local authorities the TOS assessed to it;

– Second, the Claimant issues an invoice to the trading entity for the use of the gas network infrastructure for supply to customers, which includes, among others, a specific line item dedicated to TOS with the global amount that the concessionaire intends to pass on to consumers, and the Claimant assesses VAT on that TOS amount;

– Subsequently, the trading entity issues an invoice to the final customer for the supply of natural gas which contains, among other amounts, an amount relating to TOS;

– In that invoice issued to the final natural gas customer there is an additional, autonomous line item in which the amount of the public tax and the municipality to which it relates is indicated;

– The amount passed through to each customer corresponds to what was actually paid by the Claimant, without any costs or additional amounts;

– On the TOS amount included in the invoice issued to the final customer by the trading entity, and also on the TOS indicated in the invoice issued by the Claimant to the trading entity, VAT is assessed (articles 24 and 30 of the application for arbitral pronouncement, which are not challenged);

m) The assessment of VAT on TOS was carried out by the Claimant only because that was the guidance it received from the Tax Authority in the binding ruling sanctioned by dispatch of His Excellency the Director-General of Taxes on 05.08.2011, following a request made in May 2011, in which the following conclusions were formulated:

a) The concession contracts between the Portuguese State and concessionaires constitute operations not subject to VAT by virtue of para. 2 of article 2 of the IVA Code, since we are dealing with operations included within the scope of the State's powers of authority;

b) In the charging of amounts relating to TOS by concessionaires to trading entities or to final consumers, the said normative provision contained in para. 2 of article 2 of the IVA Code does not apply, since we are dealing with entities under private law, and there should be assessment of tax at the reduced rate of 6% VAT, provided for in subpara. a) of para. 1 of article 18 of the IVA Code;

c) When charging TOS to final consumers, the exclusion of the taxable value provided for in subpara. c) of para. 6 of article 16 of the IVA Code does not apply, since in the concrete case the invoices or equivalent documents are not originally issued in the name thereof.

(Document no. 8, filed with the application for arbitral pronouncement, the contents of which are reproduced herein);

n) The Claimant does not agree with the understanding conveyed in this ruling (article 34 of the application for arbitral pronouncement);

o) Notwithstanding its disagreement with this guidance, the Claimant complied with the instructions of the Tax Authority and assessed VAT at the rate in force on the amounts relating to TOS which were subsequently passed on to final consumers in the months of May, June and July 2012 (article 35 of the application for arbitral pronouncement, which is not challenged);

p) In May 2012, on the TOS (€ 310,252.44) the Claimant, in the periodic declaration no. ...64, filed on 28-6-2012, assessed VAT, at the standard rate of 23%, and obtained a tax of € 71,354.88 (seventy-one thousand three hundred fifty-four euros and eighty-eight cents) (article 36 of the application for arbitral pronouncement, which is not challenged);

q) In June 2012, the Claimant, in the periodic declaration no. ...08, filed on 18-7-2012, assessed VAT at the standard rate on the global amount of TOS that it intended to pass through (€ 347,330.68), obtaining a tax of € 79,885.53 (seventy-nine thousand eight hundred eighty-five euros and fifty-three cents) (article 37 of the application for arbitral pronouncement, which is not challenged);

r) In the month of July 2012, on a global amount of TOS of € 249,782.10 the Claimant, in the periodic declaration no. ...18, filed on 9-8-2012, assessed VAT at the standard rate in force and determined a tax of € 57,417.95 (fifty-seven thousand four hundred seventeen euros and ninety-five cents) (article 38 of the application for arbitral pronouncement, which is not challenged);

s) These amounts of tax were reflected by the Claimant in the periodic declarations relating to each of the months and were paid in a timely manner (article 39 of the application for arbitral pronouncement, which is not challenged);

t) On 24-10-2012, the Claimant filed an administrative appeal relating to the VAT assessed in declaration no. ...64, for the month of May 2012, in which, among other things, it requested reimbursement of the amount of 71,354.88 €, as well as payment of the compensatory interest due, arguing that said amount was unduly assessed on the basis of erroneous administrative guidance, which appeal was dismissed by dispatch of 24-1-2013, of the Head of the Administrative Justice Division of the Finance Directorate of ..., notified to the Claimant on 29-1-2013 (administrative appeal no. ...98, filed with the response, the contents of which are reproduced herein);

u) On 15-11-2012, the Claimant filed an administrative appeal relating to the VAT assessed in declaration no. ...08, for the month of June 2012, in which, among other things, it requested reimbursement of the amount of 79,885.53 €, as well as payment of the compensatory interest due, arguing that said amount was unduly assessed on the basis of erroneous administrative guidance, which appeal was dismissed by dispatch of 18-3-2013, of the Head of the Administrative Justice Division of the Finance Directorate of ..., notified to the Claimant on 21-3-2013 (administrative appeal no. ...8, filed with the response, the contents of which are reproduced herein);

v) On 6-12-2012, the Claimant filed an administrative appeal relating to the VAT assessed in declaration no. ...18, relating to the month of July 2012, in which, among other things, it requested reimbursement of the amount of 57,417.95 €, as well as payment of the compensatory interest due, arguing that said amount was unduly assessed on the basis of erroneous administrative guidance, which appeal was dismissed by dispatch of 18-3-2013, of the Head of the Administrative Justice Division of the Finance Directorate of ..., notified to the Claimant on 21-3-2013 (administrative appeal no. ...42, filed with the response, the contents of which are reproduced herein);

w) On 29-4-2013, the Claimant filed the application for constitution of the arbitral tribunal which gave rise to the present case (CAAD computer system).

2.2. Facts Deemed Not Proven

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

2.3. Basis for the Facts Proven

The facts proven are based on the documents indicated for each point and on the statements of the Claimant which are not challenged by the Tax Authority and Customs Service.

3. Matters of Law

3.1. Question of VAT Incidence and CJEU Decision

The essential question that is the subject of the present case is whether VAT should be incurred on the amount of TOS at the moment it is passed through by the Claimant to B, S.A., as the Parties agree that VAT should not be assessed by the local authorities, by virtue of the provision of article 2, para. 2, of the IVA Code, which establishes that "the State and other legal entities under public law are not, however, passive subjects of the tax when they carry out operations in the exercise of their powers of authority, even if they receive taxes or any other consideration, provided that their non-taxation does not cause distortion of competition."

The Claimant argues that the pass-through of TOS does not constitute an economic activity, within the meaning given to it by article 9, para. 1, of the VAT Directive (Directive No. 2006/112/EC of the Council, of 28-11-2006), which establishes that "any activity of production, commercialization or provision of services, including extractive activities, agricultural activities and the activities of members of the liberal professions or equivalent activities, is understood by 'economic activity'. In particular, the operation of a tangible or intangible asset with a view to earning income on an ongoing basis is considered an economic activity."

The Tax Authority and Customs Service argues that the use or utilization of a public domain asset (use of the subsurface), like so many other acts of use and enjoyment of immovable property, constitutes an act of consumption that for value added tax purposes subsumes to a service provision within the terms and for the purposes of what is provided in articles 1, para. 1, subpara. a), and 4 of the IVA Code.

Article 1, para. 1, subpara. a), of the IVA Code establishes that subject to value added tax are the transfers of goods and the provision of services carried out in the national territory, on an onerous basis, by a passive subject acting as such. In subparas. a) and b) of the same para. 1, the subjection to VAT of imports of goods and intra-Community operations carried out in the national territory is established, as defined and regulated in the Regime of VAT in Intra-Community Transactions.

Article 4, para. 1, of the IVA Code clarifies that "operations carried out on an onerous basis which do not constitute transfers, intra-Community acquisitions or imports of goods are considered as service provisions."

From these norms it follows that VAT is a general tax on consumption, since all economic activities that are not considered transfers, intra-Community acquisitions or imports of goods, fall within the broad and residual concept of service provisions.

"Characteristically, the vocation for universality of this tax implies that it be understood that any type of patrimonial allocation that is not the consideration for a transfer of goods has underlying it a taxable service provision. This in particular leads to the simple charging of expenses being able to constitute a taxable operation under this tax, being, ultimately, the respective taxable value the normal value, calculated according to the provisions of article 16, paras. 3 and 4."

A question was submitted to the CJEU concerning whether the amount of TOS, paid to the municipalities by the company operating the gas distribution network for the use of the public domain of said municipalities and which is subsequently passed on by that company to another company responsible for marketing gas, and then by the latter to final consumers, should be included in the taxable value of VAT applicable to the service provided by the first of those companies to the second.

The CJEU decided as follows:

According to article 78, first paragraph, subpara. a), of the VAT Directive, the taxable amount includes taxes and other charges, except for VAT itself. The Court of Justice has already clarified that, in order for a tax to be included in the taxable amount of VAT, even if it does not represent any value added and does not constitute the economic consideration for the transfer of goods or the provision of services, it must have a direct nexus with that transfer or provision and that the question of whether the tax event of said tax coincides with that of VAT is a determining element to demonstrate the existence of such nexus (v., in this sense, judgments De Danske Bilimportører, C-98/05, EU:C:2006:363, no. 17; Commission/Poland, C-228/09, EU:C:2010:295, no. 30; Commission/Austria, C-433/09, EU:C:2010:817, no. 34; and TVI, C-618/11, C-637/11 and C-659/11, EU:C:2013:789, nos. 37 and 39).

In the case at hand, it follows from the order for reference that the TOS are paid by A to the municipalities prior to the operation subject to VAT between A and the company responsible for marketing gas to consumers, and independently of that operation, as consideration for the use of the municipal public domain resulting from the establishment in it of gas network infrastructures which A operates. It subsequently passes through the amount of TOS to the company responsible for marketing gas when it invoices to it the use of said infrastructures for the supply of gas to consumers.

It thus follows that the TOS do not represent value added and do not constitute the economic consideration for the operation subject to VAT that occurs between the company operating the gas distribution network and the company responsible for marketing gas, and that the tax event of those TOS does not coincide with that of VAT, whereby the TOS do not have a direct nexus with that operation.

Consequently, the TOS are not taxes that should be included in the taxable amount of VAT, pursuant to article 78, first paragraph, subpara. a), of the VAT Directive.

Moreover, in passing through the amount of TOS to the company responsible for marketing gas in the invoicing it makes for the use of said infrastructures for the supply of gas to consumers, A does not pass through the TOS, as such, but the price of the use of the municipal public domain. That price forms part of the set of costs borne by A and which enters into the price of its provision, to be paid by the company responsible for marketing gas. The fact that, in accordance with the concession contract, the amount of TOS is the subject of a separate line item in the invoice issued by A and subsequently in the invoices sent by the company responsible for marketing gas to consumers is, in this regard, irrelevant.

Consequently, the amount of the TOS constitutes an element of the consideration obtained by A from the company responsible for marketing gas for its provision, which is indisputably an "economic activity" within the meaning of article 9, para. 1, of the VAT Directive. In accordance with article 73 of that Directive, that amount must therefore be included in the taxable amount of VAT of that provision.

On the other hand, the amount of the TOS cannot be excluded from the taxable amount of that latter provision on the ground of article 79, first paragraph, subpara. c), of the VAT Directive, since that amount is not collected as reimbursement of expenses incurred on behalf and on account of the company responsible for marketing gas or consumers, but as consideration for the cost of use of the municipal domain borne by A by virtue of its activity.

Contrary to what the latter alleges, the inclusion of the amount of TOS in the taxable amount of VAT applicable to the provision it makes to the company responsible for marketing gas is not contrary to the principle of fiscal neutrality, which precludes deliveries of goods or provisions of similar services, which are in competition with each other, from being treated differently from the VAT perspective (v., in this sense, judgment BGŻ Leasing, C-224/11, EU:C:2013:15, no. 65 and cited case-law).

Indeed, pursuant to article 13, para. 1, first paragraph, of the VAT Directive, the municipalities are not considered VAT passive subjects when they collect taxes such as TOS, whereas, by application of article 9 of said Directive, companies such as A are considered VAT passive subjects when they exercise "economic activities" within the meaning of that provision. On the other hand, as follows from the conclusions in nos. 31, 33 and 34 of the present judgment, the collection of TOS by the municipalities and the ceding, by A to the company responsible for marketing gas, of the right to use the gas network which it operates in exchange for consideration that includes the amount of TOS do not constitute "similar operations."

In light of all the foregoing considerations, it is important to respond to the two questions submitted that articles 9, para. 1, 73, 78, first paragraph, subpara. a), and 79, first paragraph, subpara. c), of the VAT Directive must be interpreted as meaning that the amount of taxes, such as those at issue in the main case, which is paid to the municipalities by the company operating the gas distribution network by virtue of the use of the public domain of said municipalities and which is subsequently passed on by that company to another company responsible for marketing gas, and then by the latter to final consumers, must be included in the taxable amount of VAT applicable to the service provided by the first of those companies to the second, in accordance with article 73 of that Directive.

Given the binding character which has been understood should be attributed to CJEU decisions, which is a corollary of the mandatory nature of the preliminary reference provided for in article 267 of the Treaty on the Functioning of the European Union, the understanding adopted in the transcribed judgment should be adopted.

3.2. Consideration of the Question

By virtue of the provision of article 78, first paragraph, subpara. a), of the VAT Directive, "the taxable amount includes (…) taxes and other charges, except for VAT itself;".

In the same sense, article 16, para. 5, subpara. a), of the IVA Code states that "the taxable amount of the transfers of goods and service provisions subject to tax, includes (…) taxes and other levies, except for value added tax itself."

Thus, taking as its premise that CJEU case-law, it is to be understood that in order for a tax (such as TOS) to be included in the taxable amount of VAT, even if it does not represent any value added and does not constitute the economic consideration for the transfer of goods or the provision of services, it must have a direct nexus with that transfer or provision and that the question of whether the tax event of said tax coincides with that of VAT is a determining element to demonstrate the existence of such a nexus.

In the case at hand, the TOS are charged by the municipalities to A, the company operating the gas distribution network, as consideration for the installation of piping and other gas network infrastructure in the subsurface of the public domain of the municipalities situated in the concession area. This charging is done before the operation subject to VAT occurs.

The operation subject to VAT occurs subsequently, at the moment when A supplies the use of those network infrastructures to the company responsible for marketing gas. In the invoice issued by A the amount of TOS is passed through in a separate line item. Finally, the distribution company passes through the TOS to consumers in gas supply invoices.

In these terms, in line with that case-law, it is to be understood that the TOS do not have a direct nexus with the operation subject to VAT, since:

– They do not represent value added;

– They do not constitute the economic consideration for the operation subject to VAT – that which occurs between the company operating the gas distribution network and the company responsible for marketing gas to consumers;

– Their tax event does not coincide with that of the operation subject to VAT.

For this reason, in light of that case-law, the TOS are not taxes that should be included in the taxable amount of VAT pursuant to article 78, first paragraph, subpara. a), of the VAT Directive and the corresponding article 16, para. 5, subpara. a), of the IVA Code, since the activity developed by the Claimant, and which underlies the issuance of the invoices, consists of providing to the distributor the use of an asset, and this involves the "operation of a tangible asset (…) with a view to earning income on an ongoing basis" which, in the cited article 9, para. 1, of the VAT Directive, is expressly indicated as an activity of economic nature.

As the CJEU states in the transcribed judgment "in passing through the amount of TOS to the company responsible for marketing gas in the invoicing it makes for the use of said infrastructures for the supply of gas to consumers, A does not pass through the TOS, as such, but the price of the use of the municipal public domain. That price forms part of the set of costs borne by A and which enters into the price of its provision, to be paid by the company responsible for marketing gas. The fact that, in accordance with the concession contract, the amount of TOS is the subject of a separate line item in the invoice issued by A and subsequently in the invoices sent by the company responsible for marketing gas to consumers is, in this regard, irrelevant."

But in terms of economic activity, the situation of the use of public domain in exchange for the payment of a tax is essentially similar to that of the use of any private land in exchange for payment of a price to its owner, and therefore it is not justified that, by virtue of the fact that the ownership of the asset used is public, it can be concluded that TOS is not a cost of the supply of the service provided by the Claimant.

Furthermore, the exclusion of public law entities from the scope of subjective VAT incidence, when they do not engage in activities that might lead to significant distortion of competition, provided for in article 2, para. 2, of the IVA Code and article 13, para. 1, of the VAT Directive, is of a personal nature, and there is no legal basis for extending such exclusion to private entities or replacing the criterion for definition of incidence used there, which is the nature of the entity, with another based on delimiting the exclusion from incidence according to the type of activity engaged in.

Thus, it must be concluded that the pass-through of the tax by the Claimant to B constitutes a service provision for VAT purposes and there is no situation of exclusion from subjective or objective VAT incidence.

In fact, for VAT purposes, the value of TOS represents one of the various elements that constitute the consideration obtained by the Claimant from B for the provision made, which, as stated, constitutes an economic activity.

Consequently, in accordance with article 73 of the VAT Directive and the corresponding article 16, para. 1, of the IVA Code, the value of TOS must be included in the taxable amount of VAT due for that provision, as understood by the CJEU in the transcribed judgment, when it states that "articles 9, para. 1, 73, 78, first paragraph, subpara. a), and 79, first paragraph, subpara. c), of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, must be interpreted as meaning that the amount of taxes, such as those at issue in the main case, which is paid to the municipalities by the company operating the gas distribution network by virtue of the use of the public domain of said municipalities and which is subsequently passed on by that company to another company responsible for marketing gas, and then by the latter to final consumers, must be included in the taxable amount of the value added tax applicable to the service provided by the first of those companies to the second, in accordance with article 73 of that Directive."

Thus, it must be concluded that the Claimant is not correct and the application for arbitral pronouncement is inadmissible.

4. Decision

In these terms, this Arbitral Tribunal agrees to:

– declare the application for arbitral pronouncement inadmissible;

– absolve the Tax Authority and Customs Service from the claims.

5. Value of the Case

In accordance with the provision of article 315, para. 2, of the Code of Civil Procedure and article 97-A, para. 1, subpara. a), of the Code of Tax Procedure and article 3, para. 2, of the Regulation of Fees in Tax Arbitration Proceedings, the case is valued at € 208,658.36.

6. Costs

Pursuant to article 22, para. 4, of the RJAT, the amount of costs is fixed at € 4,284.00, in accordance with Table I attached to the Regulation of Fees in Tax Arbitration Proceedings, to be borne by the Claimant A, S.A.

Lisbon, 08 July 2015

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Joaquim Silvério Dias Mateus)

(Emanuel Augusto Vidal Lima)

Frequently Asked Questions

Automatically Created

Is VAT applicable to underground occupation fees (Taxas de Ocupação do Subsolo) in Portugal?
Underground occupation fees (TOS) paid to municipalities are generally excluded from VAT scope under Article 2(2) of the Portuguese VAT Code when collected by local authorities. However, controversy arises when companies pass through these fees to third parties. In Case 96/2013-T, the claimant argued that re-invoicing TOS without markup does not constitute a taxable supply because: (1) it lacks consideration under the VAT Directive; (2) the fees have no direct nexus with taxable operations; and (3) VAT neutrality principles require maintaining the non-taxable treatment throughout the chain. The CJEU's BGZ Leasing precedent supports that exact expense pass-throughs should preserve their original VAT treatment. The determination depends on whether the recharge constitutes an independent economic activity or merely administrative cost recovery.
What constitutes an economic activity for VAT taxable person status under Portuguese tax law?
Under Portuguese tax law and the VAT Directive, an economic activity requires activities performed for consideration on a continuing basis, including supply of goods or services. Article 9(1) of the VAT Directive defines economic activities as exploitation of tangible or intangible property for income. For VAT taxable person status, there must be: (1) an activity of an economic nature; (2) performed independently; and (3) involving supply of goods/services for consideration. In Case 96/2013-T, the tribunal examined whether passing through municipal fees constitutes economic activity. The claimant argued that mere cost recovery without consideration (no margin or value-added) fails the economic activity test under CJEU Götz jurisprudence. The absence of consideration means no value is added, thus excluding the transaction from VAT scope regardless of the operator's general taxable person status.
How is the VAT taxable base determined when public fees are included in service charges?
The VAT taxable base in Portugal follows Article 73 of the VAT Directive, comprising everything constituting consideration for the supply. Article 78(a) includes taxes, duties, and levies except VAT itself. However, inclusion requires that charges have a 'direct link' to taxable transactions. In Case 96/2013-T, the issue centered on whether TOS paid to municipalities should be included when recharged to network users. The claimant argued TOS lack the requisite direct nexus because: (1) they're not part of the regulated tariff approved by ERSE; (2) they're charged by municipalities for subsurface occupation rights, not for network access services; and (3) their pass-through involves no consideration from the recipient. The taxable base should only include amounts forming actual consideration for taxable supplies, not amounts collected as agent for third parties without economic content.
Can a company challenge VAT self-assessments through tax arbitration at CAAD?
Yes, companies can challenge VAT self-assessments through tax arbitration at CAAD (Centro de Arbitragem Administrativa) under Decree-Law 10/2011 (RJAT - Legal Framework for Arbitration in Tax Matters). Case 96/2013-T demonstrates this process: the claimant filed for arbitral tribunal constitution after administrative appeals were dismissed, challenging self-assessments from periodic VAT declarations. The procedure involves: (1) filing an application for tribunal constitution; (2) designation of three arbitrators by the Ethics Council; (3) acceptance and establishment of the tribunal; (4) Tax Authority response; and (5) evidence and submissions phase. The arbitral tribunal has jurisdiction to declare illegality and annul tax acts. This alternative dispute resolution mechanism provides taxpayers specialized, faster resolution compared to administrative courts, with decisions having the same force as judicial rulings.
When can a preliminary ruling referral to the CJEU be requested in Portuguese VAT disputes?
Preliminary ruling referrals to the CJEU under Article 267 TFEU can be requested when Portuguese tax tribunals face questions on interpretation of EU law necessary for decision. In VAT disputes, referrals are appropriate when: (1) the case involves interpretation of the VAT Directive provisions; (2) there's uncertainty about EU law application; (3) no clear CJEU precedent exists; or (4) conflicting interpretations arise. Case 96/2013-T involved potential grounds for referral regarding Article 9(1) (economic activity concept) and Article 78(a) (taxable base) of the VAT Directive. Portuguese arbitral tribunals, as courts adjudicating EU law matters, can request preliminary rulings. Courts of last instance have mandatory referral obligations absent acte clair or acte éclairé. The referral would address whether cost pass-throughs without consideration constitute economic activities and whether municipal fees must be included in VAT taxable base when recharged.