This article is based on a Russian-language article entitled "Чем поможет прецедент" which originally appeared in the publication Главная книга. It has been translated, edited, and adapted for an English-speaking audience.
Legal Precedent In Russia: Taxation Issues
A short guide to Russia's high courts, written for foreign business professionals
"The legislature has decided that the main task of the courts with supervisory instance is to create a unified legal practice.”
- A.A. Ivanov, Chairman of the Supreme Arbitration Court of the Russian Federation
Legal precedent is not yet an official source of law in Russia. Judges, in fact, often cite the fact that an arbitration court's decision on a particular matter is only an example of the interpretation and application of a certain legal norm in the context of the particular circumstances of the case at hand. In other words, case decisions are technically not supposed to provide precedents for other cases or provide models for a broader understanding of the law.
However, in practice, when disputing a tax issue, the taxpayer must understand the legal precedents related to their case. Courts, as a part of a larger effort to develop a uniform application of the law in Russia, are beginning to cite legal precedent as not only a guide to deciding particular cases, but also as a mechanism for which past cases can be appealed.
Perhaps because of this, the Ministry of Finance and the Federal Tax Service, which serve to enforce and implement the Tax Code, are increasingly following legal precedents and incorporating them into their guiding documents and practices. Tax inspectors, likewise, can increasingly be swayed by arguments from taxpayers that are based on legal precedent because the inspectors increasingly understand that precedents provide a fairly solid indicator for how well their arguments would hold up in court.
Therefore, understanding how precedents work, and particularly understanding the hierarchy of the various documents and decisions issued from Russia's two highest courts, the Supreme Arbitration Court and the Constitutional Court, can help taxpayers win tax arguments both in and out of court. This is, again, despite precedent to being legally recognized as a source of law in Russia.
Understanding Constitutional Court Decisions
This Constitutional Court can issue two types of decisions: resolutions and non-binding resolutions.
Both resolutions and non-binding resolutions, and the opinions within them, are equal in terms of their legal weight. They are equally obligatory for all, are not subject to appeal, and do not require confirmation from other government organs or officials.
So why then does the court in some cases issue resolutions and, in others, non-binding resolutions? A resolution is issued if the court reaches a decision on the constitutionality of a law (or part of a law). Resolutions are indicated by the presence of the Russian letter "П" within the index number of the decision. However, if the court decides not to hear or rule on a case because, for instance, the court had already ruled on a case involving the same legal issue or legal norm, then the court will issue a non-binding resolution. These will be marked with the Russian letters "О," "О-О," or "О-П" in the index. Why the case was not ruled on can be found in the reasoning section of the non-binding resolution.
If a law or part of a law is ruled to be unconstitutional, that law or part of the law loses force either from the moment the binding decision is proclaimed by the Constitutional Court, or at a time specified by the court. Accordingly, the decisions of lower courts' decisions based on the rescinded legislation are then subject to review based on the decision of the higher court.
The Ministry of Finance and the Federal Tax Service are legally bound by the decisions of the Constitutional Court. Of course, this does not mean that they will always recognize those decisions as a precedent to follow for other cases on the same issue. For example, at the end of last year, officials were again forced to acknowledge that expenses used to reduce taxable income cannot be judged in terms of the "justifiability" of their expediency, rationality, effectiveness, or achieved result. The court has ruled repeatedly that expenses are the taxpayer’s personal business: whom, how much, and for what to pay. Decisions of the Ministry of Finance and the Federal Tax Service cannot supersede those of the Constitutional Court.
While these government entities are occasionally content to hit the same wall again and again, you can also be certain that the courts will rule similarly in your case as well. Arguing against a Constitutional Court decision (resolution or non-biding resolution) is only a waste of time and money.
"The work of the legal system should be predictable… We need to more actively study judicial practice on all levels and devote special attention to analyzing it and drawing generalizations from it. We need to bring prejudicial inquiry into practice, examining other cases to find answers without which the current case cannot be resolved. And most importantly – it is necessary to recognize the decisions of higher courts as judicial precedents."
- A.A. Ivanov, Chairman of the Supreme Arbitration Court of the Russian Federation
Understanding Supreme Arbitration Court Decisions
The Supreme Arbitration Court (SAC) – and the entities within it – can issue several documents, which, in contrast to those issued by the Constitutional Court, vary in judicial strength. These are the:
Decision of the Supreme Arbitration Court;
Resolution of the Plenum of the Supreme Arbitration Court;
Informational Letter from the Presidium of the Supreme Arbitration Court;
Resolution of the Presidium of the Supreme Arbitration Court;
Declaration of the Supreme Arbitration Court.
Decisions of the Supreme Arbitration Court
We will start with the Decision of the Supreme Arbitration Court, since these cases are often the most extraordinary in the legal norms they consider and circumstances under which they are considered. The Supreme Arbitration Court is often the court of first instance for taxpayer issues. Taxpayer should apply first to this court if he feels that a regulation or government document:
does not conform to the law or to another legal norm with great judicial weight; or
it violates taxpayer rights or legal interests or encumbers the taxpayer with duties that interfere with normal work.
The "great judicial weight" is of especial interest here. In the case of tax disputes, for instance, the Tax Code is often cited as a normative document with such judicial weight as it stands above documents issued either by the Ministry of Finance or the Federal Tax Service.
Tax payers who find examples, for instance, of the SAC overturning a letter from the Ministry of Finance that tax inspectors are still trying to enforce can often win their arguments against the tax authorities.
These decisions, however, can be overturned by the Plenum of the Supreme Arbitration Court.
Supreme Arbitration Court Plenum Resolutions
The Supreme Arbitration Court Plenum (not to be confused with the Presidium) "resolves the most important issues of all the arbitration courts" and passes binding resolutions for them.
While these resolutions are only binding for the arbitration courts, the Ministry of Finance has officially suggested following these resolutions in certain instances. In particular, this it was cited as a reason for reforming how fines related to advance payments of the Unified Social Tax and Pension Fund are calculated.
Informational Letter from the Presidium of the Supreme Arbitration Court
Informational Letters from the Presidium may either review arbitration court cases which SAC agrees with, or can provide information on the position of the SAC regarding a particular problem. These letters are non-binding. They contain only recommendations to the arbitration courts and general information. In practice however, positions stated in these letters are rarely contradicted, especially in the decisions of lower arbitration courts.
For example, Informational Letter #71 unambiguously declared that if a taxpayer owed no tax for a tax period, the taxpayer was not freed from the obligation of filing a tax return. The Ministry of Finance and the tax authorities have repeatedly cited this letter, to the point that zero-sum tax returns are now common.
Officials will even broadly interpret informational letters, using them as argumentation in cases only loosely unrelated to the case the letter had actually considered.
For example, Informational Letter #98 addressed the problem of whether income derived from property used free of charge but for material benefit should be taxed. The letter affirmed that it was applicable to taxation. After its publication, arbitration court rulings on this issue, which had before been non-uniform, now conform with the position stated in the letter.
The letter had also stated that Article 40 of the Tax Code was applicable in this particular case for determining the tax base for such free-of-charge property use. The Ministry of Finance, in turn, has drawn a generalization from this, and now insists that Paragraph 40 should apply to any transaction involving property rights – from determining the market value of the use of a trademark to the value of a share of registered capital.
The authorities have also been generally supportive of informational letters which have been disadvantageous to tax collections.
For example, in 2006, the SAC declared that Unified Social Tax should not be paid for certain expenses related to payments for services rendered under service agreements. In 2008, an amendment to the Russian Tax Code, supported by the Ministry of Finance, came into force which brought the Tax Code in line with the opinion stated in this letter.
Resolution of the Presidium of the Supreme Arbitration Court
The Presidium also reviews decisions from provincial arbitration courts, appellate arbitration courts, and federal regional arbitration courts.
A SAC Presidium Resolution is also, in practice, a precedent-setting document. If your case is the same as one described in a resolution, it makes little sense to bring your case to court if the resolution was against your argument. It is highly unlikely that your decision will come differently from that in the resolution.
However, in the past, the tax authorities have attempted to ignore SAC Presidium resolutions by either simply ignoring them and pushing their own view again and again, or by coming back to the arguing that the SAC's supervisory role is technically limited to examining specific instances and specific circumstances that don't create a general rule.
Although courts are not obligated to be guided by the SAC Presidium's Resolutions in practice, the courts do consider these resolutions as part of the effort to create a uniform legal practice and to make sure that their decisions are not later overturned. In addition, not long ago, the SAC itself declared that the Presidium's resolutions issued after the issuance of court decisions which contradict the opinions stated in the resolution would be grounds for reviewing cases.
Therefore, while technically non-binding, these resolutions should be analyzed by taxpayers and tax authorities when resolving tax conflicts.
Adding to the legal weight of these resolutions is that facts that the Ministry of Finance and the Federal Tax Service have stated that the resolutions should be a source of guidance to government workers. In 2006, the Federal Tax Service directly recommended to their regional subsections should, when carrying out tax inspections, take into account positions stated in these resolutions. The Ministry of Finance has also agreed with resolutions that were disadvantageous to tax collections and also advised the tax service to be guided by the resolutions in their everyday work.
This all said, taxpayers planning to use Presidium resolutions in their argumentation should first check to make sure that their situation is exactly analogous to that considered in the resolution and that the legislation surrounding the issues in resolution has not changed.
Determination of the Supreme Arbitration Court
Determinations are issued after the SAC completes a preliminary investigation of a case and either approve or reject the case for review by the SAC Presidium.
Obviously, if a case has been approved for review, it is better to seek out what decision the court reached than to use the related declaration in your arguments. If need be, wait until the case concludes and watch for the related resolution to be released. The judicial weight of a SAC denied determination is not great and to argue something referencing one of these resolutions to the tax authorities is not likely to work unless if you have several of them so as to draw a generalization from them.
Determinations only show the SAC agrees with a particular court decision. Such determinations are not published and not binding for anyone. This said, sometimes arbitration courts will refer to denied determinations when justifying their own decisions.
It is important to be cautious with "denied" determinations. The more complex the issue is at hand in the case related to the SAC determination, the less likely the determination is to be valuable in your arguments. Also, the SAC has delivered "denied" determinations concerning issues that have been handed contradictory rulings by various lower courts.
Furthermore, even accepted determinations are passed for considerations and with advice on how to rule on a case that are later rejected in the final Plenum resolution.
In short, it is better to avoid using determinations in your arguments as these are the weakest documents available in terms of judicial weight.
The Gap between Theory and Reality
Courts in Russia are prevented from performing "explanatory work." They are expected to only consider the facts of each individual case in the context of existing legislation. However, when the Constitutional Court and the Supreme Arbitration Court consider a case, such as a tax dispute, they quite often explain how the tax legislation is to be understood and applied, removing any gaps and resolving any contradictions the law may contain.
This is a natural function of the courts. In addition, if Russia is to achieve "rule of law," it will need consistency in its court rulings. The only way to achieve this is if judicial precedence is given legal weight. This will also make all three branches of government more efficient by allowing them to not fight essentially the same court cases again and again.
For these reasons, the government offices such as the Ministry of Finance and the Federal Tax Service are slowly starting to use Supreme Arbitration Court and Constitutional Court decisions as further explanation of the law and as guidance in carrying out their duties. Thus, tax risk is more accurately calculated when taking precedence into account. Being able to argue your case in terms of precedence (particularly if you can find multiple cases similar to yours), you stand a much better chance of winning arguments against the tax inspectors.
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