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. Last Updated: 07/27/2016

Businesses Taking Tax Man to Court -- and Winning

A mistakenly placed zero by a tax inspector raised an extraction company's tax bill by 70 million rubles last year.

The company appealed to the tax authorities in vain. So in a sign of the times, it took the tax authorities to court -- and won, said Alexander Sotov, a senior tax lawyer at auditing firm FBK who represented the company.

Although the judicial system is widely perceived as being influenced by political factors, the courts now rule against the government in an overwhelming number of cases.

According to the former Tax Ministry's own assessment, obtained by Vedomosti earlier this month, businesses and individuals won 73.3 percent of the 22,938 suits they filed against the tax authorities in 2002, and 75.1 percent in 2003. Last year alone they retrieved 44 billion rubles ($1.5 billion) previously claimed by tax collectors.

"The arbitration courts are now on the taxpayer's side. That is what is really interesting," said Akhmed Glashev, senior legal adviser at Roedl & Partner Konsu, a consulting firm.

Moreover, say tax experts, litigation is unusually fast by world standards. All four levels of Russia's commercial court system can make a ruling within six months to a year, compared to the years it often takes to settle tax disputes in most Western countries.

The most obvious catalyst for change was the 1999 Tax Code, which instructed courts to give the benefit of the doubt to the taxpayer.

"In the early and mid-'90s, judges did not yet have the right qualifications in tax disputes and thought, 'Well, the tax inspection probably knows what it is talking about.' Since then ... they took the interpretation that it is the weaker side that must have the benefit of the doubt," said Denis Shchyokin, a partner at Pepeliaev, Goltsblat & Partners, which specializes in tax litigation.

The number of disputes shot up since 1999 and keeps growing by 10 percent to 15 percent each year, Pepeliaev said.

More suits against the tax authority by definition imply more victories, said Alexander Bragin, a tax partner at Deloitte & Touche CIS.

"Tax legislation is very much subject to interpretation, [so] if you go to court, you have good chances of getting a different interpretation than the one put forth by the tax authorities," he said.

Inspectors are also fining companies more haphazardly, provoking more suits.

"The local tax authorities are still running their business on a fixed budget and targets basis," said Constantine Lusignan-Rizhinashvili, managing partner at the Moscow office of EY Law, an affiliate of Ernst & Young. "Often, claims are launched just for the sake of ... collecting into the budget."

If so, the tax men are picking an uneven fight. The taxpayer normally knows the true situation better, Bragin said. And a faster turnaround gives businesses more of an incentive to fight.

Moreover, the tax authorities have fewer resources and are generally less qualified than their opponents. Many inspectors come straight out of college, gaining experience before moving on to more well-paid careers in the private sector. One out of seven or eight disputes involves arithmetical errors on the part of the tax inspectors, Sotov said.

The tax authorities have also lost much of the state's support. Last spring, the Prosecutor General's Office said in an internal document that it is shifting its tax priorities from defending the government's kitty to ensuring lawful tax collection. The Tax Police, with its far-reaching powers, was abolished last summer.

Just last week President Vladimir Putin told the Interior Ministry's top brass not to interfere in business disputes.

Tax men are also overstretched. In a trade publication last year, lawyer Sergei Pepeliaev noted that the average tax inspector oversees 130 businesses in Moscow, 70 in St. Petersburg and 40 in the country as a whole -- but has time to inspect just a fraction of them.

The workload of inspectors may help explain the geographical distribution of court decisions. On the whole, Shchyokin said, commercial courts in Moscow, St. Petersburg and most of the oil-producing centers tend to take the side of business, while those in the Far East and North Caucasus are generally more "conservative."

With the state losing its tax cases, experts are concerned it might try bypassing the courtroom.

In early March, the Interior Ministry announced a tax evasion probe against Deloitte. Since then, the firm has still not received any official notification, and some observers say the ministry was putting pressure on the optimizers.

Similar cases brought against Ernst & Young in 1999 and Citibank's Moscow office in 2000 also went nowhere, which to some suggests a scare tactic.

Despite the success of taxpayers in the courtroom, some lawyers say the pendulum may be swinging back, reflecting political and social dissatisfaction with big business.

"The tendency is back toward increasing severity," Shchyokin said. Only a judge can now dismiss a case against a tax cheat who has repented and paid up. And the newly introduced criteria of a bona fide taxpayer -- one who uses the rules in good faith and not legalistic opportunism -- has been used to rule against tax optimization schemes, Shchyokin said.

That does not have to be negative, said Victor Matchekhin, senior lawyer at Linklaters CIS. The "bona fide" concept means that tax courts are now ready to develop legal standards not strictly mentioned in the law, he said, strengthening the legal framework.

The final verdict on the court system's direction might be around the corner.

"The real test will be when you have some politicized cases coming before the courts, such as Yukos," Lusignan-Rizhinashvili said.

"That will [test] the level of resilience judges are prepared to demonstrate vis-?-vis political interventions into the judicial process."