Taxpayers' Rights in the Practice of the Russian Constitutional Court

The Constitutional Court of the Russian Federation is the judicial body for constitutional supervision, which independently exercises its autonomous judicial power through a constitutional legal procedure.

The Constitution of the Russian Federation and the Federal Constitutional Law "On the Constitutional Court of the Russian Federation" endow the Constitutional Court with wide-ranging authority. The Constitutional Court has the power to verify the constitutionality of laws and other statutory acts of state bodies, of domestic agreements, as well as of international treaties before they enter into force. It has the power to resolve disputes between Russian authorities concerning their spheres of competence, to provide official interpretations of the Constitution, and also to check the constitutional validity of laws when so requested by citizens or by courts of law.

From the mid-1990s one could observe a general trend towards a broader understanding of the Constitutional Court's authority in the tax area. This was manifested in a number of decisions which on the whole tended to protect the interests of taxpayers and free enterprise. In particular, the Constitutional Court ruled that a number of "retroactively" enacted laws were unconstitutional, because "the Constitution stipulates that laws introducing new taxes or deteriorating the position of taxpayers may not have retroactive effect". This provision is intended "to secure stability in the taxation provisions and to assure taxpayers that their legal and economic situation is completely stable".¹

The Constitutional Court also established that fines for fiscal offences can be imposed on taxpayers only through a court procedure² and pointed out that "the extra-judicial procedure for collecting fines on taxpayers who challenge the respective orders of the tax police goes beyond the constitutionally acceptable restriction of the right enshrined in Article 35 (part 2) of the RF Constitution, which stipulates that no one may be deprived of property otherwise than by a court decision".

In addition, the Constitutional Court passed a number of decisions designed to define the limits for delegation of the legislator's authority in the taxation area to the Russian Government.³ In particular, clarifying the legal content of the principle that mandatory taxes and dues should be legally established, as set forth in Article 57 of the RF Constitution, the Court pointed out that:

this principle is not confined to requirements on the legal form of an act establishing this or that mandatory payment, or to the procedure of its adoption; the content of such act should also comply with certain requirements.

A federal tax can be regarded as legally established only if the essential elements of this tax liability are set forth in a law, not in a sub-statutory act passed by an executive authority.

In addition, the Constitutional Court has relieved taxpayers of responsibility for improper actions of banks that delayed transfer of tax payments to the Treasury,⁴ and has recognized that the size of fines for tax offences, as established by the law, constituted "a disproportionate restriction of the rights and freedoms guaranteed by the Russian Constitution", and "a way to excessively limit free enterprise".⁵

It should be noted that the Constitutional Court's decisions concerning taxation and the activities of tax authorities, which are well-founded legal documents based on a systemic interpretation of the Constitution, have undoubtedly had a great impact on Russia's new tax legislation. When the first ever Russian Tax Code, which came into force in 1999, was being drafted and adopted, the legal positions of the Constitutional Court were clearly taken into account. The adoption of this Code also brought about new approaches in the tax authorities' activities and also a new judicial practice, mostly with regard to tax disputes relating to business activities. Moreover, there has been a perceptible increase in the number of large-scale criminal cases linked to tax evasion in the recent period.

The first manifestations of new trends in the interpretation of tax legislation, signalling a considerable abridgement of taxpayers' rights and a strengthening of the state fiscal positions, became noticeable in 2001, when the Constitutional Court started a reassessment of its former liberal approaches.

A good reference point in this respect is Ruling No. 138-0 of 25.07.2001, where the Constitutional Court commented on one of its earlier decisions, namely, the Decree of 12 October 1998. In this Decree the Constitutional Court took the position that a taxpayer is not responsible for the actions of all the entities (primarily commercial banks) involved in the multi-stage process of payment and transfer of taxes into the state budget, and that a tax is considered to be paid by a legal entity on the date when the respective financial institution withdraws the due amount from the taxpayer's current account, regardless of the moment when this amount is finally entered into the appropriate budget account.

Such conclusion apparently did not satisfy the Tax Service, which officially petitioned the Constitutional Court asking for clarification of the Decree of 12 October 1998 and suggesting that it should be amended in the state's favour, even though the law does not envisage that decisions of the Constitutional Court can be amended.

In its Ruling of 25 July 2001, issued in response to this petition of the Ministry of Taxes and Dues, the Constitutional Court explained that its liberal conclusions made in the Decree of 12 October 2001 applied only to "good faith taxpayers". Thus the Constitutional Court in effect introduced the criterion of good faith behaviour by a party to a legal relationship, hitherto unknown in Russian judicial practice. In fact, this concept can be found in Russian civil law, but Russian tax legislation never mentioned the concept of a "good faith taxpayer". Following this decision, a number of commentators pointed out that by introducing this concept in an act of the supreme judicial authority, the Constitutional Court in fact assumed the function of the legislator.⁶

Turning to its earlier practice, one can observe that the Constitutional Court sought to limit itself to its function as the sole interpreter of the Constitution, and took every precaution not to infringe on the power of the legislator, which would be against the principle of division of state power in the Russian Federation into legislative, executive, and judicial branches.⁷ However, starting from 2001, the Constitutional Court has increasingly often engaged in direct regulation of legal relationships in the tax area, thus becoming actively involved in the legislator's sphere of authority.

Such is, for instance, the position taken by Constitutional Court Judge Anatoly Kononov and officially formulated in his Dissenting Opinion concerning one of the Court's decisions on taxation matters.⁸ He says:

The Constitutional Court recognises and repeatedly mentions in this decision that the federal legislator enjoys his own discretion in the regulation of tax relationships, and that establishing liability for tax offences belongs to the legislator's scope of authority, and also that determining the limitation periods for tax liabilities is the constitutional prerogative of the legislative branch of power. Moreover, the Constitutional Court admits that, by virtue of Article 10 of the RF Constitution, it cannot replace the legislator in this respect. However, the Constitutional Court has accepted for review an issue which, by its obvious nature and according to the Court's own declaration, lies within the scope of the legislator's authority. Therefore, the Constitutional Court not only goes back on its own pronouncements, but apparently exceeds the scope of its authority, as defined in the Constitution and other acts of law, and actually intrudes into that of the legislator.

Another Constitutional Court Judge, Vladimir Yaroslavtsev, also filed his Dissenting Opinion regarding Decree of 14.07.2005, indicating that:

the Constitutional Court acted in contradiction of the legality principle, because it enabled, through its constitutional interpretation of the law, courts to restore the limitation period for prosecution, in other words, the Constitutional Court exceeded the scope of its authority and assumed the function of the legislator.

This law-making activity of the Constitutional Court has led to a situation where the tax authorities started referring to alleged "bad faith practices" of a taxpayer in justification of practically any measures restricting or denying his rights. The trend towards a more active involvement of the Constitutional Court in fiscal law-making is becoming ever more apparent in the recent period. Thus, in April 2004 the Constitutional Court made a decision which introduced a hitherto unknown principle in tax legislation: a taxpayer is entitled to make a tax deduction or obtain a VAT refund only where he paid the tax to his supplier from his own funds, which in the Constitutional Court's interpretation does not include any raised (borrowed) money.⁹

This decision of the Constitutional Court triggered a wave of inspections by tax authorities throughout the country checking the indebtedness of individual companies and denying VAT refunds to those who had outstanding debts with respect to borrowed money.¹⁰

The consequences of the Ruling of 8 April 2004 frightened even the Russian government, who notified the Constitutional Court that a mass-scale refusal to refund VAT would stem the flow of investments and destabilize market relationships in the Russian economy. The government even requested a clarification of this Ruling (which in effect amounted to an appeal to soften the Court's stance on VAT), but recalled its request the following day.

A similar request was submitted to the Constitutional Court by the Russian Association of Industrialists and Entrepreneurs (Employers). The Constitutional Court subsequently issued a clarification to its Rul­ing of 8 April 2004. It allowed tax deductions for VAT amounts paid with borrowed money, but added another novelty to the tax legislation - the principle that a VAT amount paid to one's supplier is deductible only where the supplier has properly paid his own tax.¹¹

In this context, it should be noted that the European Court of Jus­tice took a different approach: its decision of January 2006 made it clear that one's right to deduct VAT should not depend on whether the other members of the VAT chain pay their tax.¹² Against the back­ground of such trends in the jurisprudence of the Constitutional Court, it is only logical that the Court recently issued the already mentioned Decree No. 9-P of 14.07.2005 on the constitutionality of the provi­sions contained in Article 113 of the RF Tax Code that establishes a three-year limitation period for prosecution in connection with tax offences.

The constitutionality of Article 113 of the RF Tax Code was tested following a request from the Federal Arbitrazh Court of the Moscow District. The Arbitrazh Court dealt with a specific dispute, where it declined to rule on the legality of the multi-billion fines imposed by Russian tax authorities on the YUKOS Oil Company for offences committed outside the limitation period as established by Article 113 of the RF Tax Code. Instead, the Arbitrazh Court chose to turn to the Constitutional Court, asking it, with reference to Article 125, part 4 of the RF Constitution, to verify the constitutionality of Article 113 of the RF Tax Code.

In its Decree, the Constitutional Court justified the imposition of fines on the YUKOS Oil Company (and, accordingly, on any other taxpayer) for tax offences, despite the expiry of a three-year limitation period established by Article 113 of the RF Tax Code, with reference to the following:

the provisions of Article 113 of the RF Tax Code, with regard to its constitutional legal meaning in the existing legal system, do not rule out that in case a taxpayer obstructs tax inspections and tax audits, a court may find that there existed valid reasons for the tax authorities to miss the limitation period for sanctions, and subsequently to enforce taxation sanctions for the breaches revealed in an analysis of respective documents over the entire period covered by a tax audit.

Concerns over recent trends clearly observable in the activities of the Constitutional Court are voiced not only by the business community and prominent Russian legal experts¹³, but even by certain members of the Constitutional Court itself.

In his Dissenting Opinion on the mentioned Decree No. 9-P of 14.07.2005, Judge Anatoly Kononov sums up the outcome of the Constitutional Court's current work in no uncertain terms:

It is my opinion that in the present decision the Constitutional Court set aside its mission to protect the rights and freedoms of citizens (Article 3, part one of the Federal Constitutional Law "On the Constitutional Court of the Russian Federation") and adopted an unprecedented biased attitude in favour of public, primarily governmental, interests, thus opting for a repressive nature of the law. This Decree emphasises the need to protect public interests and repeatedly mentions the right of the state to resort to coercion, to prosecute, and to claim damages, as well as the sovereign right to recover all due amounts from a taxpayer.

And further on:

In my view, despite all the autonomy of the judicial power and independence of justice, the Constitutional Court has no right to encourage judges to use their discretion and to go beyond the limits imposed by law in their pursuit of some arbitrary considerations that lack clear meaning or convincing justification.

In conclusion, it should be pointed out that speaking recently at "The VIIth Dialogue of Russian and German Jurisprudence", Mr. Valery Zorkin, the Chairman of the Constitutional Court, stated that most tax disputes in Russia were due to imperfections in the tax legislation, and that taxpayers were often held responsible for deficiencies in the work of the legislator, rather than for a culpable failure to honour their liabilities. The head of the Constitutional Court believes that it would be wrong to punish such involuntary wrongdoers with fines. Therefore, his view is that fines ought to be the exception rather than the rule.¹⁴

At the same time, describing the work of the Constitutional Court as a whole, Chairman Zorkin noted that the views of the Constitutional Court in its interpretation of specific provisions of the Constitution could be clarified or modified with due regard to a particular social and legal context and changes in the legal system. Unfortunately, the vector of changes in Russia's particular social and legal context is so far quite unstable. At present this vector seems to be pointing primarily towards upholding the fiscal interests of the state, rather than towards a liberal interpretation of Russian tax legislation.

Alexey Popov**

^*           Translated from Russian by the editor.
^**         Candidate of Sciences, Moscow State University.
¹           (Decree No. 13-P of 08.l0.1997).
²           (Decree No. 20-P of 17.12.1996, Ruling No. III-O of 06.11.1997).
³           (Decree No. 3-P of 18.02.1997, Decree No. 6-P of 01.04.1997, and Ruling No. 258-O of 14.12.2000).
⁴           (Decree No. 24-P of 12.10.1998, Ruling No. 97-O of 01.07.1999).
⁵           (Decree No. 14-P of 12.05.1998),
⁶           See: A.I. Dikhtyar, N.A. Rogozhin. The effect of RF Constitutional Court decisions on the tax legislation development.// Yurist, 2002. No. 10. Cf. also M.Yu. Dedok. The date of performance for tax liabilities. // Advokat. 2002, No. 7.
⁷           (Article 10 of the RF Constitution).
⁸           (Decree No. 9-P of 14.07.2005 published in Vestnik Konstitutsionnogo Suda RF No, 4, 2005).
⁹           (Ruling No. 169-O of 08.04.2004).
¹⁰         S. Ivanova. The High Arbitrazh Court intercedes on behalf of borrowers.// Vedomosti. 12.01.2005.No. 2 (1283).
¹¹         (Ruling No. 324-O of 04.11.2004).
¹²         Judgment of the Court of Justice of the European Communities 12 January 2006 in Joined Cases C-354/03, C-355/03 and C-484/03: "The right to deduct input value added tax of a taxable person who carries out such transactions cannot be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by value added tax fraud, without that taxable person knowing or having any means of knowing".
¹³         See: The Constitutional Court put to work on the limitation period.// Kommersant. No. 95 (No. 3179) of 27.05.2005. Cf. also: V.I. Gumechuk. Limitation period in prosecution for tax offences. // Finansovoe pravo. 2005. No. 8; D.M. Schekin. The Constitutional Court abolished the limitation period for tax offences.// Glavbukh. 2005. No. 15; V.V. Bryzgalin. Additional measures of tax control. // Tax disputes: theory and practice. 2005. No. 9-10.
¹⁴         B. Grozovsky. Guilty without guilt.// Vedomosti. 17.01.2006. No. 5 (1532).