Tax Arbitration and VAT: The Portuguese ExperienceSince its introduction in 2011, tax arbitration has become an important element of the Portuguese justice system. In this article, the author examines its main features, its impact on VAT litigation and the growing use of tax arbitration as a fast track to the Court of Justice of the European Union.

1. The Portuguese Tax Arbitration System

1.1. Introduction

The introduction of tax arbitration in Portugal in 2011 was a matter of choice as much as a matter of necessity. For three decades, the growing complexity of tax legis-lation coupled with the improved efficiency of the tax authorities and relentless litigation by taxpayers eventu-ally clogged the judicial tax courts system. Underfunded and understaffed, judicial courts were unable to keep up with the rapid transformation of the tax system and the demands for timely justice. Tax disputes would routinely take ten years to be decided, results were often frustrating, and pending cases ran into the tens of thousands.

Congestion at the judicial courts certainly was the main reason for introducing tax arbitration in Portugal. However, it was not the sole reason for the choice.

Taxpayers currently expect informed decisions that are aligned with the latest developments in domestic, inter-national and European taxation. This has always proved to be difficult for the judicial courts, composed by career judges who lack the continuous training, not to mention the available time, to dig deep into the complex problems they are now facing. Arbitration is about quicker deci-sion-making as much as better decision-making, allowing experienced professionals with a different background – scholars, lawyers, consultants – to bring their know-how into the tax justice system.

The introduction of arbitration was not without resistance. On the one hand, there were concerns over the “privatiza-tion” of the justice system and whether arbitration would perpetuate the underfunding of the judicial tax courts. On the other hand, many fretted over the participation of arbitrators who are not career judges and whether that might skew decisions against the tax authorities.

Those concerns were not unreasonable, given there was no precedent for the experiment. At the end of the day, however, the critical situation of the judicial courts and the lack of any short-term alternative led the majority

of legal professionals and political forces to believe that arbitration should be given a chance. And so it was that in 2010 the Portuguese parliament voted in favour of the creation of arbitral tax tribunals. The system would come into operation in 2011.1

1.2. Features

The Portuguese tax arbitration system is not based on ad hoc tribunals. Given the novelty of tax arbitration and the need to endow it with a credible setting and capable struc-ture, the system was entrusted to the Centre for Adminis-trative Arbitration (Centro de Arbitragem Administrative, CAAD), an institution that had been successfully running administrative arbitration tribunals since 2009. CAAD provides the facilities, administrative support and super-vision for the arbitration system.

It is within this setting that tax arbitration tribunals are convened. They are composed by a single arbitrator for disputes of up to EUR 60,000 and by a panel of three arbi-trators for disputes above that threshold. As a rule, arbi-trators are appointed by the Ethics Board of CAAD from an official roster of experts. However, and irrespective of the disputed amount, the taxpayers are always entitled to appoint an arbitrator of their choice. In that case, tax authorities will also appoint one and a third arbitrator will be co-opted as the panel’s president. However, this has proved to be the exception, even in high-value disputes. Arbitrators may have a law or economics background but must, in any case, have a ten-year professional experience in the field of taxation. Only retired judges and scholars with a PhD in tax law may preside over panels in disputes equal or above EUR 1 million.2 At the moment, the official roster of experts comprises over 250 professionals.

Submitting a case to arbitration is not much different and not any harder than submitting it to the judicial courts. As a rule, when faced with a tax assessment, the taxpayer has three months to lodge an appeal. Within this period, the taxpayer may freely choose to submit it to the judicial courts or to CAAD. If the taxpayer opts for arbitration, the tax administration cannot object.

One should note that not all tax disputes may be referred to arbitration. The system is only made available for dis-putes of up to EUR 10 million regarding taxes directly managed by the central tax authorities. Minor taxes and charges managed by municipalities or by minor public bodies such as regulatory agencies are therefore excluded

1. PT: Law no. 3-B/2010, 28 Apr. 2010, and PT: Decree-Law no.10/2011, 20 Jan. 2011. The first case was lodged before CAAD in July 2011.

2. PT: Portaria no. 112-A/2011, 22 Mar. 2011, art. 3.

Portugal Sérgio Vasques*

* Católica Global School of Law, Lisbon.

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from the system. Anyhow, this allows solving through arbitration many significant disputes regarding personal and corporate income taxes, VAT, excise duties, stamp duty and real estate taxation.

The tax arbitration tribunals cannot solve disputes according to equity or by agreement between the parties. Disputes must be resolved strictly according to the law as in any judicial court, and arbitral awards3 are binding on taxpayers and the tax authorities as any decision from the judicial courts.

Arbitral proceedings are very f lexible, and the tribunals are required to issue an award within six months from being convened.4 Arbitral awards allow limited rights of appeal. When constitutional matters are at stake, parties may appeal directly to the Constitutional Court. When an arbitral award contradicts previous arbitral awards or pre-vious judicial courts’ decisions, parties may appeal to the Supreme Administrative Court. In most instances, arbi-tral awards are final.

Arbitral awards are promptly published on CAAD’s website, after being anonymized.

1.3. Results

Tax arbitration has become a critical part of Portugal’s justice system since it began operating. By the end of 2019, 5,253 proceedings totalling EUR 1,516 million had been brought before CAAD. Personal and corporate income taxes accounted for 2,293 of the cases, stamp duty levied

3. The arbitrator’s final decision on a case is called “award”. This is like a judge’s or jury’s decision in a court case.

4. PT: Decree-Law no. 10/2011, 20 Jan. 2011, art. 21.

on financial operations accounted for 1,161 cases, VAT for 632 cases and property taxes for 615 cases.5 See Figure 1.

In 2019 alone, 953 arbitral proceedings totalling EUR 387 million were initiated. VAT disputes accounted for 19.4% of the number of cases.

Not just large taxpayers take advantage of arbitration. The breakdown of cases by disputed amount evidences that many minor tax disputes are now solved by arbitration as individuals and small businesses become aware of its advantages, in particular the speed of arbitral proceed-ings relative the judicial courts. The average duration of the proceedings is four and a half months. Almost one in every four appeals against tax assessments is now lodged before the arbitral tribunals. See Figure 2.

These figures should be to be put into perspective. Every year, the first-tier judicial courts are faced with 15,000 new tax court proceedings, including 3,500 new appeals against tax assessments. Pending court proceedings exceed 45,000, including 20,000 appeals. The average duration in first-tier courts is 37 months.6

Figures only tell half the story, in any case. Swift proceed-ings allow arbitral tribunals to address new disputes as they occur, and not with a three or four-year delay. Arbi-trators with a more specialized background can provide more authoritative decisions, in a manner not always available to career judges. As a result, Portuguese tax case law has become much more exciting and up-to-date.

5. Source: CAAD, 2020, www.caad.org.pt. Statistics are regularly pub-lished in Revista de Arbitragem Tributária, a periodical edited by CAAD.

6. See Superior Council of the Tax and Administrative Courts, 2018 Report, 50, www.cstaf.pt.

Figure 1 – Distribution of cases by tax between 2011 and 2019

Corporate income tax 27%

Personal income tax 17%

Stamp duty 22%

VAT 12%

Property taxes12%

Other 11%

< 6059%

500 > 1,0006%

> 1,000 6%

heeft opmaak toegepast: Subscript

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2. Tax Arbitration and VAT

2.1. Fast-track to the ECJ

Arbitration has proven particularly suited to solve VAT disputes, for several reasons.

First, arbitration is more useful in areas where the judi-cial courts appear to be less well prepared. Career judges in Portugal have a broad-based training and experience, mostly focused on tax procedure and income taxes, which is not always adequate to highly specialized areas of taxa-tion. Consequently, taxpayers facing complex VAT-related issues will often choose arbitration over the judicial courts as a way to minimize risk and secure informed decisions.

Second, arbitration is most useful in areas whose concepts stem from European law. These are the areas the Portu-guese judicial courts usually find most challenging and where a definitive interpretation may only be provided by the Court of Justice of the European Union (ECJ). When it comes to VAT, taxpayers now widely regard arbitration as the fast track to the ECJ, and the arbitral tribunals have shown little reluctance in making case referrals, contrary to the more restrained practice of the judicial tax courts.

In its ruling on Ascendi,7 the ECJ first acknowledged the Portuguese arbitral tribunals as real courts for the purposes of article 267 of the Treaty on the Functioning of the Euro-pean Union (TFEU8), that is to say, bodies established by law, of a permanent nature, whose jurisdiction is compul-sory, applying an inter partes procedure based on the rule of law and operating in an independent manner.9 In fact, the Portuguese tax arbitration system was established by law, and arbitral tribunals are recognized as national courts by the Portuguese Constitution. The composition of each trial formation is ephemeral but, as a whole and as part of

7. PT: ECJ 12 Jun. 2014, Case C-377/13, Ascendi Beiras Litoral e Alta, Auto Estradas das Beiras Litoral e Alta, SA v. Autoridade Tributária e Adua-neira, ECLI:EU:C:2014:1754.

8. Treaty on the Functioning of the European Union (TFEU), OJ L115 of 9 May 2008, Primary Sources IBFD.

9. PT: Ascendi (C-377/13), see supra n. 7, para.23-34. See also R. Garcia Anton, “Ceci n’est pas une Pipe”: The Notion of Tax Court under Article 267 of the TFEU, 55 Eur. Taxn. 11 (2015), pp. 515-522, Journal Articles and Papers IBFD (accessed 24 June 2020).

CAAD, the tribunals have a permanent institutional foun-dation. The jurisdiction of arbitral tribunals is compulsory, in the sense that it stems directly from the law and not from an agreement between the parties. The inter partes proce-dure is guaranteed by the law governing tax arbitration, and arbitral tribunals may never adjudicate on the basis of equity. Arbitrators are independent and usually chosen from within the roster prepared by CAAD’s Ethics Board.

Since Ascendi, the number of preliminary rulings referred by arbitral tax tribunals has grown consistently, in partic-ular in VAT matters. In VAT, the first referrals took place in 2014, with the first decisions being issued by the ECJ in 2015. This created a “feedback loop” that has encour-aged taxpayers, tax authorities and tribunals to resort to the ECJ whenever the need arises.

The ECJ has taken 16 months on average to adjudicate on referrals made by the Portuguese arbitral tax tribunals. This means that a final decision on complex VAT-related disputes can be secured in slightly over two years, which makes arbitration an attractive option for taxpayers and a good test bed for consultants.

As things stand now, the number of referrals to the ECJ made by the arbitral tribunals far outstrips referrals made by the judicial courts. In 2019, the ECJ admitted seven referrals for preliminary rulings in tax matters from Por-tugal. All seven were referred by CAAD tribunals and all seven relate to VAT.

Numbers may vary from year to year, but the trend is unlikely to change in the near future. The Portuguese tax justice system can now truly operate seamlessly with the ECJ.

2.2. Leading cases: From Barlis to MEO

In many instances, cases referred by the tax arbitral tribu-nals to the ECJ bear close relation to Portuguese law and how the Portuguese lawmaker and authorities implement VAT. However, on several occasions, the disputed issues are of relevance for other Member States and the EU VAT system as a whole.

That is arguably true in the Barlis case.10 Privileging sub-stance over form, the ECJ took the view that national authorities cannot deny the right to deduct input VAT where the taxable person holds an invoice that fails to meet formal requirements clearly and unconditionally pre-scribed by the VAT, if the necessary information is avail-able to the authorities to determine whether the substan-tive requirements for the exercise of that right are met.11

That is also applicable in the MEO case.12 The ECJ held that compensation for the early termination of a fixed-

10. PT: ECJ, 15 Sept. 2016, Case C-516/14, Investimentos Imobiliários e Turísti-cos SA v. Autoridade Tributária e Aduaneira, ECLI:EU:C:2016:690, Case Law IBFD (accessed 24 June 2020).

11. M. Lamensch The principle of ‘substance over form’ with respect to the exercise of the right to deduct input VAT – A critical analysis of the Barlis jurisprudence, pp. 129-137, 6 World J. of VAT/GST Law 2 (2017).

12. PT: ECJ, 22 Nov. 2018, Case C-295/17, MEO – Serviços de Comu-nicações e Multimédia SA v. Autoridade Tributária e Aduaneira, ECLI:EU:C:2018:942, Case Law IBFD (accessed 24 June 2020).

Figure 2 – Distribution of tax cases by disputed amount between 2011 and 2019 (EUR 1,000)

Corporate income tax 27%

Personal income tax 17%

Stamp duty 22%

VAT 12%

Property taxes12%

Other 11%

< 6059%

500 > 1,0006%

> 1,000 6%

heeft opmaak toegepast: Subscript

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term contract triggered by the customer’s default that is equal to the amount the economic operator would have received for the duration of the contract must be regarded as consideration for the supply of services and, as such, subject to VAT. That would hold even if the compensa-tion aims to discourage the customer’s default and to com-pensate the damage suffered by the operator, regardless of whether the compensation is classified under national law as a penalty.13

Below is an exhaustive list of cases where the referring court was a Portuguese tax arbitral tribunal:

13. Y. Radeva, VAT Implications of Cancellation Charges: New Substance-over-Form Rule?, 30 Intl. VAT Monitor 1 (2019), p.4, Journal Articles and Papers IBFD (accessed 24 June 2020).

Looking ahead, the decision on Superbock14 may also have an impact for other Member States. In that case, the refer-ring tribunal asks whether, based on the principles of neu-trality and proportionality, national rules that exclude the expenditure on given supplies from the right to deduct input VAT must be set aside whenever the taxpayer is able to prove such supplies are used entirely for business pur-poses. Should the ECJ concur with the taxpayers’ position, national rules limiting the right to deduct will have to be taken as iuris tantum presumptions, and their usefulness in dealing with mixed business/personal expenditure will be significantly reduced.

Referral to the ECJ is a learning process. It is not always easy to distinguish fact-finding from legal assessment, to decide where a given issue can be appropriately settled through acte claire or acte éclairé,15 or to properly frame and limit the questions to address the ECJ. The more the arbitral tribunals interact with the ECJ, however, the more confident they will feel in dealing with VAT and the intri-cacies of a tax that, largely, rests on European case law. This learning process should not be any harder for the tax arbitral tribunals than it has been for the judicial courts.

2.3. Impact on administration and courts

Since 2011, the impact of arbitration on the Portuguese tax authorities and judicial courts has been significant and not just because of the interaction with the ECJ, which involves a limited number of cases.

Regarding the tax authorities, the speed of arbitral pro-ceedings has been an important driver of change. In appeals lodged before the judicial courts, there may be a hiatus of ten years between tax assessments and the courts’ final decision. Such long-drawn proceedings do not encourage caution on the part of audit teams as there is no immediate judicial control of the tax authorities’ actions and mistakes may be left unchecked.

Arbitration has been a game-changer in this respect as it allows for the examination of tax assessments in a matter of months. As a result, the tax authorities are forced to weigh their actions carefully and to make better use of mechanisms such as administrative rulings and guide-lines. When disputes cannot be avoided, the speed of arbi-tral proceedings enables the authorities to quickly review their position on a given issue that the arbitral tribunals have ruled untenable. Either way, arbitration has the effect of preventing litigation, something that often goes unno-ticed and cannot be ref lected in official statistics.

Regarding the judicial courts, the quality of arbitral awards has been the main driver of change. The limited specialization of Portuguese career judges and the work-load they face sometimes lead to unsatisfactory decisions on VAT and an inclination to settle cases through proce-dural arguments. Judicial courts often find it challenging

14. PT: ECJ Pending Case C-837/19, Super Bock Bebidas, S.A. v. Autoridade Tributária e Aduaneira.

15. IT: ECJ, 6 Oct. 1982, Case 283/81, Srl CILFIT and Lanificio di Gavardo SpA v. Ministry of Health, ECLI:EU:C:1982:335, Case Law IBFD (accessed 24 June 2020).

Table 1 – Referrals from CAAD to the ECJ

Case Name of the case

Brief description of the legal issues

c-256/14 Lisboa Gás taxable amount – inclusion of municipal land use taxes

c-516/14 Barlis right of deduction – details required in invoices

c-21/16 Euro Tyre exemption for intra-community supply – purchaser’s failure to register

c-26/16 Santogal exemption for intra-community supply – purchaser’s temporary registration

c-672/16 Imofloresmira exemption for the leasing and letting of immovable property – adjustment of deduction

c-16/17 TGE Gas Engineering

Origin and scope of the right to deduct

c-295/17 MEO Supply for consideration – compensation for early termination

c-672/17 Tratave taxable amount – reduction for unpaid debts

c-211/18 Idealmed III exemption for healthcare services – option for taxation

c-661/18 CTT Adjustment of deductions – retroactive assessment

c-42/19 SONAECOM right to deduct – services connected to a failed acquisition

c-43/19 Vodafone Portugal

Supply for consideration – compensation for early termination

c-581/19 Frenetikexito exemptions – nutrition advice connected to fitness services

c-630/19 Page Internacional

Limitations to deduction – presumptive character

c-695/19 Rádio Popular Financial operations – sale of extended warranties on appliances

c-756/19 Ramada Storax

Limitations to adjustment of tax – insolvency proceedings

c-837/19 Superbock Limitations to deduction – presumptive character

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to grasp the principles and latest VAT developments and occasionally rule on VAT disputes with little attention to EU case law.

Arbitration has been changing things for the better. The decisions of arbitral tribunals and the ECJ rulings on refer-rals originated at CAAD are now routinely debated by the judicial courts. Arbitral cases feed the judicial courts with up-to-date cases on new VAT developments and in-depth analysis of the most complex VAT issues. For their part, judicial courts provide a safety valve for the system and in particular, for awards by arbitrators with no judicial expe-rience, since arbitral decisions can always be appealed in the case of procedural error or conflicting judgements. In short, arbitration has made everybody up their game.

3. Two Final remarks and a Caveat

After almost a decade in operation, arbitration has proven valuable to the Portuguese tax justice system and a key mechanism for VAT-related dispute resolution. However, the success of the Portuguese experiment cannot be taken as an unconditional recommendation for its introduction.

First, arbitration is not always necessary as a general alter-native to the judicial courts. The usefulness of tax arbitra-tion in Portugal owes to the persistent clogging of the judi-cial courts and the limited specialization of career judges, which resulted in lengthy proceedings and unsatisfactory decision-making. In jurisdictions where tax litigation is not a serious problem, there may not be many reasons to resort to arbitration, in particular, if career judges are given continuous training in highly specialized areas such as VAT. Similar gains may be obtained by allowing for broader participation of non-career judges in the judicial system itself.16

16. In the field of tax law, in Portugal non-career judges are only allowed to join the Supreme Administrative Court, which is the last-resort judicial court in tax matters. Though such participation is limited, it has had a very significant impact on the court’s work.

Second, arbitration is not always feasible as a general alter-native to the judicial courts. The success of arbitration is predicated on the existence of a pool of experts willing to join the arbitral tribunals and able to deal with the dif-ferent areas of taxation. While these conditions may be taken for granted in Europe, this is not always the case in other countries currently debating the introduction of arbitration, where specialization in tax law is still limited in the private sector.17

Furthermore, the case for arbitration cannot be made without openly addressing its risks. Judicial courts, staffed by career judges subject to strict guarantees of indepen-dence and impartiality, are a unique feature of the modern state and are provided with a legitimacy the arbitral tri-bunals cannot match. Much of the success of arbitration comes down to choosing the right institutional setting for the arbitral tribunals, carefully framing the arbitra-tors’ conflicts of interests in the distribution of cases and providing a safety valve for the system in the form of an appeal to the judicial courts in case of procedural error. Arbitration should be taken as a complement to and not a replacement of the judicial system.

Where these conditions are met, arbitration may become a game-changer in regulating the relations between taxpay-ers and tax authorities. That has certainly been the case in Portugal, in particular when it comes to VAT.

17. The Portuguese experience has led other Portuguese-speaking nations to debate the introduction of tax arbitration. Cabo Verde already approved the legal framework for tax arbitration in 2016 and is now in the finishing stages of implementing the system.

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