A New Headache for Taxpayers

Unlike Western countries, in Russia it is very common to use the courts to settle disputes with tax authorities. As a result, the arbitration courts are overloaded with tax disputes. In an effort to ease the position of the arbitration court and force parties to settle conflicts amicably without litigation, from January 1, 2009, legislators have obligated taxpayers to appeal decisions to a superior tax authority before a court. However, it is already clear that the new appeal procedure may create problems for all parties to the tax dispute resolution process.

At present only a fairly small number of tax decisions are appealed under administrative procedure. The main reason for this is that administrative appeals are ineffective, with the taxpayer winning only approximately 10% of the time. However, even with a small number of appeals the superior tax authorities are frequently unable to keep to the one-month term for considering appeals, which results in delay in the administrative proceedings, with appeals not being heard for 3-4 months, or more. When the flow of appeals rises, the tax authorities work even slower, or just rubber-stamp the decisions of the lower tax inspectorates.

In the event a decision is not received from the higher tax authority on time, the taxpayer is forced to go to court to complain against the unlawful inaction of the tax authority. Otherwise, the taxpayer risks losing the right to defend his rights because he has missed procedural deadlines for appeals. Therefore, the arbitration court will receive a claim concerning the inaction of the tax authority, namely the failure to consider the taxpayer's appeal in due time. Subsequently, if the higher tax authority upholds the tax inspectorate's decision, the taxpayer will need to file a second claim, for invalidation of the tax inspectorate's decision. That is, if tax authorities fail to comply with appeal timing, the arbitration courts risk receiving two claims instead of one, further overloading the arbitration courts.

So, from 2009 there will be additional work for the tax authorities, and perhaps for the arbitration courts. What about the taxpayers?

Firstly, the new procedure will undoubtedly increase the time required to consider tax disputes, which will be detrimental to the tax refund claims of the taxpayers.

Secondly, there will be an increased volume of administrative work for taxpayers — an appeal to a higher tax authority will need to be prepared additionally in a short period.

Thirdly, mandatory administrative appeals of tax inspectorate decisions mean that taxpayers will only be able to appeal tax inspection decisions in court that have entered into force. Since decisions will most likely be swiftly enforced by tax authorities once they enter into force, taxpayers will be subject to enforcement, penalties and fines until the court settles the dispute.

Fourthly, the higher tax authorities will be able to correct the mistakes of lower tax inspectorates, which will reduce the chances of taxpayers successfully disputing the tax inspectorate's decisions in court.

In addition to the large number of potential problems, the legal vacuum in regard of a number of procedural issues in administrative appeals means the affect of the new procedure is likely to be primarily negative.