Tax Administration in Russia: Legal Defense of Taxpayers’ Rights in 2009

Galina Akchurina
Head of Tax Litigation

Tax administration reform is ongoing in the Russian Federation. One of its main purposes is the creation of more transparent and predictable tax control mechanisms. From one side this mechanism must protect entrepreneurs from the officials’ tyranny; from the other side it must ensure an effective control over observation of tax legislation by the state.

The Supreme Arbitrage Court of the Russian Federation has made an important contribution to ensuring the balance between private and public interests during execution of tax administration. In 2009 the Supreme Arbitrage Court adopted a number of decrees forming effective protection for taxpayers from some forms of “tax blackmailing,” giving tax control procedures more publicity and certainty.

In particular, on Sept. 1, 2009, the Supreme Arbitrage Court of the Russian Federation adopted Decree No. 4381/09 in which it indicated the inadmissibility of using illegal methods to vindicate tax liability for which the tax body had lost its rights, including cases when the right for collection was lost due to expiration of the limitation period.

For instance, currently the tax bodies widely use the practice under which they continue accounting for liability for which the collection right is lost in the companies’ personal account cards. This takes place in spite of the fact that in the majority of cases taxpayers have judicial acts in relation to such liability under which the tax body is directly prohibited from collecting additional accruals set in the personal account card. However, the tax bodies consider their actions legal. They base their position on the fact that according to the decree by the Russian government, liquidation of a company is the only reason for defining tax liability as uncollectible. Thus, they legally count the taxpayer’s liability as prohibited for collection in their personal account card.

The very fact of such a situation would not have created unfavorable consequences for taxpayers, because the given personal account cards cannot establish any rights or impose any obligations on companies, as was repeatedly indicated by courts. However, the situation changes when a taxpayer has to turn to the tax bodies for a certificate confirming lack of liability to the budget. For instance, such a necessity originates when entrepreneurs apply to a bank for a credit, want to participate in a tender providing conclusion of a contract, or apply to state bodies for licenses in order to begin licensed activity. In these cases that very liability, for which the tax body lost its collection right but that remains in the personal account card, originates in certificates received by businessmen. So the tax body provides data showing that the company has a tax liability. Such data in the tax body’s certificate becomes a barrier to gaining licenses, participating in tenders, receipt of credit, etc. Actually, the tax body’s certificates showing liability to the budget have become an effective method of “tax blackmailing” and of vindicating those additional tax accruals for which the tax bodies do not have legal right of collection. Facing the necessity of making the choice between losing a profitable offer or credit, or to pay funds to the budget, very often the taxpayers voluntarily transfer the relevant amounts to the budget.

Actually, the Supreme Arbitrage Court prohibited the tax bodies from using such mechanisms for collection of liability for which the tax inspectorate had lost its right. In its decree the court indicated that, based on the necessity of observing the balance between private and public interests and reflecting impartial data about the state of settlements in the certificate, when indicating data about liability in the certificate, the tax body also has to indicate availability or lack of its lawful right to collect liability set in the certificate. Thus, if it follows from the certificate that the amounts set in the personal account card cannot be collected, such information should not be a barrier to conducting business activity: obtaining credit, license, participation in tenders, etc.

In 2009 the Decree of the Supreme Arbitrage Court of the Russian Federation of July 28, 2009, No. 5172/09 was of high importance for collation of tax administration procedures and creation of a more effective system for pretrial appeal of the tax body’s nonregulatory acts. In this decree the Supreme Arbitrage Court recognized that the practice, under which the taxpayer’s claims in relation to acts drawn by the tax body become the reason for new additional tax accruals, is illegal. Considering the given case, the court reminded the tax body that a claim in relation to the inspectorate’s document cannot be the reason for unfavorable tax consequences. The superior state body that received a claim in relation to acts of the subordinated body cannot go beyond its limits. Otherwise this would mean that the creation of barriers for administrative appealing of documents drawn in relation to a company and would lead to leveling down and discrediting of this control procedure. Thus, today the taxpayer does not risk additional accrual within the same inspection when filing a claim.

Finally, we would like to note that in 2009 the Supreme Arbitrage Court of the Russian Federation continued the successive implementation of its position aimed at improving tax procedures’ public nature, transparency and compulsory preliminary notification to taxpayers about all claims that can be presented to them. Thus, in the Decree of June 16, 2009, the Supreme Arbitrage Court indicated that a taxpayer’s participation in considering tax inspection materials that the tax body has, must be ensured during all tax control stages. If the tax body sets additional tax control activities after considering a taxpayer’s objections against a document drawn after inspection, and the tax body gains new materials for inspection by the results of these new activities, then the taxpayer’s objections must be considered by the tax body once again. Violation of the given procedure is recognized as an unconditional reason for canceling the tax inspectorate’s decision.

The analysis of the above-listed judicial acts allows the conclusion to be drawn that in 2009 courts are continuing their policy aimed at collating tax control procedures and striking a balance between private and public interests at execution of such procedures, while emphasizing guarantees of taxpayers’ rights. We hope that these judicial decisions will help companies to ensure more efficient protection of their rights in relations with tax bodies.