Prevention of Uncontested Recovery of Additionally Accrued Taxes

During the economic crisis, when the majority of companies feel the acute lack of free cash assets, unlawful additional accrual of taxes by the results of tax inspections, as well as further collection of such taxes may lead to serious negative consequences for business. On the other hand, the volume of unlawful additional accruals of taxes does not shrink. In this relation the taxpayer's ability to protect himself from uncontested collection of taxes before such dispute between the company and the tax body is considered in court is of special importance — i.e. knowledge of the mechanism that allows the granting of judicial measures aimed at securing company proprietary interests at the origination of the tax dispute, including suspension of the disputed act of the tax body.

In order to prevent uncontested recovery, the taxpayer should apply to the court with an application for interlocutory injunction. As it follows from the judicial practice of Moscow region, such applications will be filed after a request for payment of taxes is presented. It should be noted that every judicial district has its own requirements to such applications. We will consider only the basic ones. Our experience shows that execution of court requirements presented to an application for interlocutory injunction leads to the granting of an interlocutory injunction in 95 percent of cases at the minimum.

When submitting an application for interlocutory injunction, first of all the taxpayer has to: 1) prove that the possibility of material damage for him should no interlocutory injunction is applied, as well as enforceability and efficiency of the requested interlocutory injunction; 2) ensure that the balance between the private and the public interest should interlocutory injunction is applied; 3) prove a difficulty in execution or impossibility to execute the judicial decision if no interlocutory injunction is applied.

The possibility to obtain an interlocutory injunction considerably increases if the taxpayer provides a cross-undertaking to the court. Clause 93 (4) of the Russian Administrative Code of Judicial Practice sets that "no security for a claim can be denied if a person applying for a security provides a counter security." One of the most popular types of counter security is a bank guarantee.

Under article 94 (1) of the Russian Administrative Code of Judicial Practice, the minimal value of counter security is half of the claimed amount. In order to raise the possibility that the interlocutory injunction will be granted, usually the claimant provides a bank guarantee equal to 70 percent of the presented claims' value, and sometimes this guarantee is equal to 100 percent of the amount of claim. Bank guarantees provided to the court must be irrevocable. Should the application be filed to the Moscow Arbitrage Court, documents confirming bank's rights to issue bank guarantee to the bank guarantee itself, including certified copies of bank's charter, its license for execution of bank transactions and documents confirming authorities of persons who signed that bank guarantee should be enclosed. Otherwise the court may deny granting of interlocutory injunction.

However, even the existence of a cross-undertaking can not guarantee the granting of interlocutory injunction unless the taxpayer provides documented evidence of a possible material damage for him if no interlocutory injunction is granted. The main pieces of evidence are:

1) Deficiency of cash assets in accounts for repayment of all taxes, penalties and fines, additionally accrued according to the decision of a tax body. To prove the given circumstance an official document from the tax body containing data about opened bank accounts and statements of cash balance at the given accounts are presented to the court.

2) Presence of loss for the last reporting period, but on the condition that the company has property (including fixed assets) sufficient for payment of tax claims;

3) The company has to prove the absence of free cash assets allowing payment of additionally accrued taxes, should the latest reporting show that the company has profit. Such evidence may include company balance of payments for the running quarter. The court may take this balance into account if such a balance confirms that almost all incomings the company expects to receive in the running quarter will be used for payment of planned expenses and the company will be unable to conduct its production activity without such expenses. The taxpayer has to disclose all major incomings of cash assets that he expects to receive during the quarter, as well as those types of production costs that the incoming profit is expected to cover. It should be noted that all data of the balance of payments shall be supported with documents, as well as has references to indicators of similar expenses made in the previous quarter and supported with documents.

When proving the possibility of material damage caused by collection of additional taxes in absence of an interlocutory injunction, the taxpayer has to prove that the tax body will not lose the opportunity to receive all additionally accrued taxes if the judicial decision is made in its favor. Such evidence may include the stable and continuous work of the company within a long period, existence of property (including immovable) which cost exceeds the value of additionally accrued taxes.

When substantiating the observation of balance between private and public interests it is feasible for the taxpayer to indicate that the term during which the judicial decision on application of interlocutory injunction is in effect is not included into the term set by article 46 (3) of the Russian Tax Code for uncontested recovery of taxes, as during this period there are certain judicial barriers preventing the tax body from execution of activities necessary for recovery (clause 10 of the Decree of the Plenary Session of the Supreme Arbitrage Court of the Russian Federation of February 28, 2001 No.5). Thus, an application of interlocutory injunction will not disturb the balance of private and public interests.