Taxmen Have Good Chances of Winning Cases in the Constitutional Court

Until 1 January 1999, Russian tax legislation did not envisage liability on the part of the taxation officer for the withholding and transfer of taxes from the incomes of foreign juridical persons from sources in the Russian Federation, including income in the form of demanding the uncollected sum of the tax at the expense of the means of the source of payment itself.

In considering disputes on this matter, Russian arbitration courts acted on the premise that demanding that a tax officer pay the sum equal to that not collected from a foreign juridical person is an imposition of responsibility (sanction).

Thus, in a Resolution of 28 October 1997 No.6403/95, the Presidium of the Supreme Arbitration Court of the RF indicated that the RSFSR Law “On the state taxation service of the Russian Federation”, the RF Law “On the fundamentals of the taxation system in the Russian Federation” and other legislative acts do not establish the responsibility of the source of payment for non-collection of the tax from the payer, including levying of sanctions to the amount of the uncollected sums of tax at the expense of the source of payment.
When the first part of the Taxation Code of the RF (TC RF) came into force, the taxation bodies were given the right to hold the tax collectors responsible.

Thus, art. 123 of the TC RF (in the edition of 9 July 1999 No.154-FZ) provides that wrongful failure to transfer (incomplete transfer) of tax subject to withholding and transfer by the tax collector carries a fine equal to 20 percent of the sum subject to transfer.

At the same time, p.1 art. 46 TC RF established the rule that in cases of non-payment or only partial payment of the tax in the stipulated period, liability for payment of the tax is enforced by drawing the requisite amounts from the bank accounts of the taxpayer or the tax collector.

In p.11 of the joint Resolution of the Plenum of the Supreme Arbitration Court of the RF No.41 and the Supreme Arbitration Court No.9 of 11 June 1999 “On certain questions concerning the introduction of part one of the Taxation Code of the Russian Federation” there was the following clarification: in the application of p.1 art.46 TC RF, it is necessary to bear in mind that the sense of the given norm, the tax not transferred by the tax collector – organization, that was due to be collected from the taxpayer and fines are levied from the tax collector according to the rules of recovery of the arrears and fining of the taxpayer i.e. indisputably (with the exceptions stated in p.1 art.45 TC RF <*>).

In this way, the order for collecting arrears established in current taxation legislation equalizes the legal status of the property of both taxpayer and tax collector.

However, the following must be noted.

If the legality of the provision of the Taxation Code that fines (tax sanctions) are carried out by the taxation body only through the courts does not give rise to doubts, the constitutionality of the norm that empowers taxation bodies to collect, indisputably, sums equivalent to the amount of arrears from the income of a foreign juridical person from the tax collector’s personal property (financial means), and also fines for overdue transfer of taxes, does raise considerable doubts.

The indisputable right of taxation bodies to effect collections of taxation arrears from juridical bodies and also impose fines for overdue payment has been the subject of numerous examinations by the Constitutional Court of the RF to test its correspondence to the Constitution of the RF.

In its Resolution of 17 December 1996 No.20-P, the Constitutional Court of the RF recognized the provisions of p.p. 2 and 3 part 1 art.11 of the RF Law of 24 June 1993 “On federal taxation police bodies”, that endowed federal taxation police bodies the right, on the basis of art. 7 (p.p. 8 and 9) and art.8 of the Law of the RSFSR of 21 March 1991 “On the state taxation service of the RSFSR” and art.13 of the RF Law of 27 December 1991 “On the fundamentals of the taxation system in the Russian federation”, to collect arrears from juridical persons, and also impose fines in cases of overdue payment of taxes in an indisputable order, that does not violate the Constitution of the RF.

The above Resolution also mentioned checking of the constitutionality of the indisputable right of taxation bodies to collect arrears and impose fines directly from the taxpayer. In doing so, the Constitutional Court reasoned on the basis that the taxpayer does not have the right to exercise his own discretion in the disposal of that part of his property that, in the form of a specific sum of money, is subject to become state revenue and is obliged to transfer this sum to the state on a regular basis, otherwise the rights and legally protected interests of other parties, and also the state, would be violated.

In accordance with art. 19 TC RF, taxpayers are deemed to be organizations and natural persons who, according to the TC RF, are liable to pay taxes.

In accordance with art.24 of the TC RF, tax collectors are recognized as endowed by the TC RF with the responsibility of calculating and collecting taxes from a taxpayer and transferring it into the relevant budgetary (unappropriated) fund, that is, tax collectors are not liable for the payment of taxes.

The obligations of taxpayers and tax collectors, as established by legislation on taxation and collections, are also correspondingly defined.
If the taxpayer, in accordance with art.23 if the TC RF, is obliged to pay lawfully established taxes, then tax collectors are charged, in accordance with art.24 of the TC RF, with duties that are, in our opinion, fundamentally different: to make correct and timely calculations and withholdings from the means paid by the taxpayer, and transfer the relevant taxes into the budget (unappropriated funds).

Article 8 of the TC RF established that a tax means an individually gratis payment, levied from organizations and natural persons in the form of deductions from their rightful property, economic administration or operational management of financial means with the aim of ensuring the activities of the state and (or) municipal bodies.

An analysis of this situation shows that irrespective of the means of payment of the tax (directly by the taxpayer or through the tax collector) such payment must be effected only at the expense of the means (property) of the taxpayer, which means that any arrears are the “sin” of the taxpayer alone.

A taxpayer who carries out his taxation obligations independently is obliged to do so out of his own property, while the tax collector, carrying out the taxpayer’s duty, is obliged to extract not part of his own property, but part of “another’s” property (that of the taxpayer).

Thus, the constitutional principles arising out of art. 57 of the Russian Constitution and set out in the Resolution of the Constitutional Court of the RF concerning taxpayers-owners of property, part of which must be paid into the state budget, cannot act automatically with relation to tax collectors, transferring taxes into the state coffers at the cost of another person – the taxpayer.

The indisputable right of the taxation bodies to levy the sums of unpaid taxes from the taxpayer is based on the condition that the taxpayer does not have the right to dispose of that part of his property that, in the form of a certain sum, must be paid into state coffers, and which he is obliged to transfer on a regular basis.
As, in accordance with art.57 of the Constitution, the property of the taxpayer is subject to tax, taxation bodies have the indisputable right of demanding payment of the sum of that tax, thereby legalizing the compulsory extraction of part of the taxpayer’s property.

Contrarily, transfer of tax into the budget is executed by the tax collector out of the property of a third party – the taxpayer directly. Consequently, the obligation to transfer tax places no legal burden on the property of the tax collector.

In a situation where the taxpayer was obliged to pay taxes but did not do so, he received direct economic benefit, because he had illegally retained, as part of his property, property that legally belongs to the state.

In a case when a tax agent has paid income to a foreign juridical person-taxpayer, without having deducted and transferred the relevant tax into the budget, it is the taxpayer (and not the tax collector) who illegally acquires a sum that is subject to tax.

Consequently, in the presence of the indisputable demand to the taxation officer, and at his expense, of a sum equivalent to the sum not levied by him from the income of a foreign juridical person (the taxpayer himself), there is no legal confiscation of part of the taxpayer’s property on the basis of constitutional public-legal obligation to pay taxes established in law, but an arbitrary, compulsory confiscation of part of the property of the taxation officer, who is under no obligation to pay this tax. Such a demand, by its very nature, goes beyond the boundaries of taxation obligations as such. It is not regenerative, but penal in character and is a punishment of a misdemeanor, that is, for an offense specified by law.

In view of this, such actions by the taxation authorities are a breach of constitutionally permissible (art.55, part3; art.57 of the Russian Constitution) limits the right enshrined in art.35 (part 3) of the Constitution of the RF, according to which nobody may be deprived of their property other than by court sanction.

At present, however, the provisions of the law analyzed above concerning taxation have retained their force and continue to act, the indisputable levying by the taxation authorities from the taxation officer of sums equivalent to those not gathered by the taxation officer and at his expense, from the income of a foreign juridical person, must be deemed legal.

The existing situation can be altered only by the Constitutional Court of the RF, as has been the case on many occasions.

In any case, it looks as though Russian taxmen, who have suffered the indisputable levying of sums and fines for the non-transfer (incomplete transfer) of taxes due, and who are not willing to accept this state of affairs, have a good chance of winning their case against the taxation authorities in the Constitutional Court.

A.V. Popov, V.A. Soboloev

Source publication: Business Lawyer [Biznes-advokat], 200, No.3