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Taxation Panopticon

In August this year, the Ministry of Taxes and Collections (MTC) of the Russian Federation issued a document, which caused concern among broad sections of Russian taxpayers. The Ministry’s Order BG-3-18/297 dated 18 August 2000 “On measures to ensure the taking and implementation of decisions of the committee of the Ministry of Taxation and Collections of Russia to examine questions related to the reflection of funds in taxpayers’ personal accounts, drawn from their settlement accounts but not entered in accounts recording budget incomes.” The basic idea behind this document is that the MTC of Russia decided unilaterally that moneys drawn off the taxpayer’s settlement account to pay taxes (collections), but which have not reached state coffers through the fault of the servicing bank are deemed to be owed by the taxpayer to the budget.

The question of determining the moment at which the taxpayer-juridical person has carried out his obligations is an old one.

The taxpayers maintained that their obligations were fulfilled from the moment their banks drew the relevant sum off their settlement account to pay due taxes (collections).

The taxation authorities, naturally, adhered to a different point of view: in the interests of the budget, they insisted that the taxpayer’s duty was discharged only when the relevant funds were actually received into the budget. In a contrary situation, there would be a shortfall, which was to be corrected by the taxpayer, and not the bank performing the transaction on his instructions.

This viewpoint was shared by the Presidium of the Higher Arbitration Court of the Russian Federation, which ruled against the taxpayer in all cases connected in one way or another with the moment of fulfillment of taxation obligations.

It is interesting to note that the Ministry of Finances of the Russian Federation assumed a different position, considering that the tax (collection) was deemed executed on the date the bank drew the money off the taxpayer’s account for this purpose.

In the end, the issue was brought before the Constitutional Court of Russia.

In its Resolution No.24-P of 12 October 1998, the Constitutional Court acknowledged that, from a constitutional point of view, the obligations of the juridical body concerning payment of taxes are observed when the crediting institution draws money off the taxpayer’s account, irrespective of the time the money is actually paid into the relevant budgetary or non-budgetary accounts.

When the first part of the Taxation Code of the Russian Federation went into effect on 1 January 1999, it seemed that this question had been resolved once and for all, and taxpayers could finally breathe a sigh of relief.

Moreover, the Taxation Code of the Russian Federation addressed the issue much more radically than the Constitutional Court, which is known for its liberal approach to taxpayers (who have virtually never lost a case in Russia’s chief Court): art. 45 of the Code states that the obligation of paying taxes is considered executed from the moment of submission of instructions by the taxpayer to the bank to transfer the due sum, providing there are sufficient funds on his account to do so.

That would seem to be that.

But one should know Russian taxmen. Who but they will worry about the budget?

The convoluted traps of the taxmen

Clearly there is no sense in entering into an open debate with the Constitutional Court and the fundamental law of the land on taxation.

Therefore, as it often happens, a virtuoso bureaucratic gambit was employed in order to reach the desired goal: a crucial problem in the system of taxation legal relations was presented to the public as a strictly specific, narrowly-administrative issue – regulation of order in the recording of funds designated as payment of taxes in the personal accounts of taxpayers.

This was how Order No. BG-3-18/297 of the MTC of 18 August 2000 - “On measures to ensure the taking and implementation of decisions of the Committee of the Ministry of Taxation and Collections of Russia to examine questions related to the reflection of funds in taxpayers’ personal accounts, drawn from their settlement accounts but not entered in accounts recording budget incomes” - was born.
Yet if the crux of the matter really lay merely in the order of reflecting sums drawn off accounts but not yet entered into the budget! If that were so, nobody would have paid any serious attention to this wretched Order! Despite all the cunning of the country’s leading tax collectors, the true substance of the Order of 18 August 2000 is crystal clear – even to a non-specialist.

In 99 cases out of 100, a commercial bank in which taxation payments have “stuck”, is either bankrupt or tottering on the brink of bankruptcy.

If it is acknowledged that one cannot demand payment of shortfalls from the taxpayer, the taxation authorities’ only option is to take their place in the line and wait patiently – for years in some cases – for the bank to pay out the “stuck” tax submissions. Moreover, in such a situation, the taxation body cannot employ all the administrative levers in its arsenal of taxation legislation, because the bankruptcy of a crediting organization as a civil-legal institute, puts the taxation authorities on the same level as the bank’s other creditors, at best. Our taxation authorities have neither the ability nor the desire to play this waiting game.

Hence, article 1.6. in our Order of 18 August 2000 reads: Quote: “the recording in a taxpayer’s personal account of the sum drawn off that account as payment of taxes, but not yet received in the budget, does not affect the arrears (debt) regarding the tax”, because the indicator “debt” or “arrears” reflects the situation vis-a-vis the budget i.e. funds which have not been transferred into the budget accounts.”

How’s that for a double whammy!

In our naivete, we had assumed that the acting taxation and budgetary laws discern a difference between the concepts payment of taxes and receipt of taxes, that the taxpayer is not held responsible for the actions of all the organizations involved in the tortuous process of payment and transfer of taxes into the budget, that, when all is said and done, the Constitution of the Russian Federation (art.57) assumes that the constitutional duty of a taxpayer – juridical person, is deemed performed on the day a crediting institution draws funds off his account, if the balance on the account is sufficient to cover the required sum.

This is not something dreamed up by the author of this article – these are extracts from Resolution No. 24-P of the Constitutional Court of the Russian Federation dated 12 October 1998, which is binding on the entire territory of the Russian Federation for all representative, executive and legal bodies of state power etc.

But it is evident from the conditions set out in Order of 18 August 2000, that funds drawn from the taxpayer’s settlement account for the purpose of paying taxes, but which have not appeared in the budgetary income and which do not affect the indicator “arrears (debt) regarding taxes due” are a direct and unambiguous contradiction of all the conclusions of the Constitutional Court of the Russian Federation in its Resolution of 12 October 1998, and the conditions of art.45 of the Taxation Code of the Russian Federation.

Even if one were to follow the logic of the Order of the MTC of Russia, one would have to affirm the presence of a unique (in its degree of absurdity) legal paradox: the MTC does not argue against the thesis that with the drawing of funds from the taxpayer’s account, the constitutional duty of the taxpayer has been fulfilled. Then who is the debtor? Correct, that very same conscientious taxpayer. That is the outcome. Somehow, all this has a familiar ring. Remember: “Of course Detochkin is guilty. But – he’s not guilty!”

Swallowing indignation

Actually, this is no laughing matter for numerous enterprises.

Let us examine a hypothetical situation.

An enterprise applies for a license to, say, engage in the wholesale trade of tobacco products. Among other things, the enterprise must show evidence from its taxation bureau that it has no outstanding tax debts. What does a competent taxation officer do when the entrepreneur approaches him for such a clearance? He picks up the Order of 18 August 2000 and answers something like this: “Yes, you’re an exemplary taxpayer and have carried out your taxation obligations. However, I can’t give you a clearance because there’s a little debt hanging over your head.” The most astounding aspect is that there is nobody at whom the entrepreneur can direct his indignation, and the taxation officer is certainly not at fault. In all likelihood he does not know himself why he gave such an answer.

What can be done (if anything), how does one overcome the legal nihilism of the taxation authorities?

One must and should fight. It is heartening to note that the Supreme Court of Russia has, on a number of occasions and without the traditional bureaucratic red tape, heard a number of complaints against the actually illegal actions of the taxation authorities that violated the rights and legal interests of taxpayers, and ruled in favor of the plaintiffs.

The question is who among those who have suffered from the implementation of the Order of the Ministry of Taxes and Collections of Russia dated 18 August 2000 shall be the first to direct a complaint to the Supreme Court?

I have only one question: when will the state finally learn to respect its citizens?

V.A. Sobolev

Source publication: Business Lawyer [Biznes-advokat], 2000, No.12

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