Are Things Really Getting Better?

UnknownSergei Pepeliaev Managing Partner Pepeliaev, Goltsblat & Partners
Arbitration court statistics for 2007 help form an objective impression of the way tax relations are tending to develop in our country, indicating that there are still considerable risks involved in unjustified actions on the part of the tax authorities. On the other hand, the state arbitration courts are finding the strength, on the whole, to stand up against breaches of the laws in tax relations.

The number of suits entered by taxpayers disputing tax office decisions is still growing, but the growth rate has fallen off somewhat. Last year, the arbitration courts heard 60,000 such cases, against 57,000 in 2006, 48,000 in 2005 and 42,000 in 2004. The year-on-year increase in the number of suits submitted to arbitration courts by taxpayers was 3,000, not 6,000 or 8,000, as previously.

This is probably because the VAT refund issue is not quite so acute, so there has been a fall in the number of exporters judicially disputing a refusal to refund the tax.

Against this background, the number of disputes resolved in favor of taxpayers is rising: their claims were satisfied in 76 percent of cases, whereas, in previous years, the respective figure was about 73 percent. This indicator may be higher or lower, depending on the court. For instance, the Moscow Arbitration Court ruled in favor of taxpayers in 84.5 percent of cases.

On matters not related to VAT refund, the taxpayers' positions are thus more convincing than the tax inspectors' arguments. Overall, excluding the results of VAT cases, which distort the statistics, the situation surrounding observance of audit legality by tax authorities does not appear favorable.

The Supreme Arbitration Court also provides other figures confirming this conclusion. The number of cases in the country disputing acts, decisions and actions of state authorities is rising, having gone up from 89,000 to 98,000, that is 10 percent over the last year. Of these, 61.3 percent are cases disputing tax authority acts. Of all the cohorts of inspectors carrying out checks, supervising and exercising control, it is the tax officials that lead in the number of disputes and annulled decisions. The other groups of inspectors demonstrate more moderate, though still significant figures: the most frequently annulled decisions are those of the authorities controlling use of the land (67 percent), the environment (62.4 percent) and of the customs authorities (61.1 percent).

The chairman of the Moscow Arbitration Court, Oleg Sviridenko, justifiably remarks that the quality of the tax officials' work cannot be judged reliably from the number of their decisions that are annulled, since far from all tax inspectorate decisions are appealed in court. The taxpayers agree with and voluntarily fulfill some of them. In cases when taxpayers do not actually dispute decisions assessing extra taxes but fail to fulfill them, the tax officials win 59 percent of the cases entered for execution of such decisions. It should be remembered, however, that the country-wide figure for suits filed by tax authorities being satisfied was 54 percent in 2007. In recent years, this figure has fluctuated considerably for obvious reasons: 2006 -- 63 percent, 2005 -- 15 percent, 2004 -- 81 percent.

Among the cases for recovery of upwardly assessed taxes, there are, moreover, many "undisputed cases?" when the respondent does not even turn up at court, so the high number of "victories" is neither surprising nor confusing.

Also comparable are the figures relating to cases appealing against tax inspectorate resolutions holding organizations, their officials and businessmen administratively liable. In over half such cases (52 percent), the courts recognize these decisions as being invalid.

It is interesting that, in aggregate for 2007, there was a 2.9-fold increase in Moscow (up to 7.8 billion rubles) in amounts levied on the basis of field tax audits and subsequently recognized as unlawful by superior tax authorities and courts. These statistics demonstrate that the risks created by unjustified actions on the part of tax authorities are still substantial. On the other hand, state arbitration courts are finding the strength to stand up to breaches of the law in tax relations.