13.02.09

It is not a secret that tax authorities often lose court cases, especially if the company they are suing hires an experienced layer. Now, it seems, the tax authorities have decided to make lawyers’ work for companies extremely difficult, if not impossible.

Tax Authorities’ Opinion

Hiring a lawyer, especially in cases against the tax authorities most often leads to a tax inspection. This will find “unjustified expenses” in payment for the lawyer’s service, especially if the company already has an in-house lawyer. This will often lead to additional profit tax, fines and fees.

Recently, the tax authorities celebrated one of our clients’ court victories with such an inspection – with the sole purpose of stopping one of largest defense companies of the region from using highly qualified legal professionals.

Unfortunately, in recent years, the Ministry of Finance (MinFin) and Federal Tax Service (FTS) formed rather contradictory and at times very negative positions regarding accounting for legal expenses (Article 264 paragraph 1 subparagraph 14 of the Tax Code of the RF). These positions are expressed in Letters of the Ministry of Finance and of the Federal Tax Service [1]. Although these letters are not considered legally enforceable regulations, in most cases the local tax authorities refer to them, avoiding interpreting the law differently.

Judicial practice

It should be noted that the Supreme Arbitration Court (SAC) does not accept this position. Resolution of the SAC # 14616/07 from March 18, 2008, clearly states that “The Tax Code of the RF does not contain provisions that would allow tax authorities to evaluate the economic feasibility, rationality and/or effectiveness of a taxpayer’s expenses.”

Established practice of interpretation of the tax legislation could be changed if arbitration courts of all levels would adopt single unambiguous position, as has happened in the past in relation to other issues. However, judicial practice related to calculation of profit tax by companies hiring external legal services, is far from being uniform.

Several courts’ ruled in favor of companies appealing the actions of the tax authorities [2]. However, the same courts often rule against companies in very similar cases [3].

The above-mentioned SAC Resolution [4] offers a certain hope for the establishment of a consistent judicial practice related to this issue, although it is doubtful that tax authorities will promptly abandon their erroneous practices.

Legal Opinion

While attempting to evaluate the effectiveness of a company’s decision to hire external legal consultation, tax authorities emphasize the presence of salaried lawyers on the company’s staff. They presume that if the functions of an in-house lawyer and the hired attorney, as expressed in contract, are technically similar, this is a violation of tax legislation! Indeed, what is the difference between in-house lawyers and a retained attorney, and why would the in-house lawyer, fulfilling similar functions, may not be sufficient? After all, virtually all practicing lawyers are graduates of law schools and have very similar basic professional education and knowledge. Is it possible that in hiring outside legal consultation, the company indeed is not defending its rights, but misusing tax benefits?

Lawyers assure that it is not so.

First of all, a company’s in-house lawyer and attorneys of broad legal practice are very different. In-house lawyers often check agreements, do claims work, manage personnel affairs and current tax planning. This requires very different qualifications and skills than work of an attorney with broad experience in different fields of law, or, on the contrary, of an attorney specialized in a particular field and thoroughly familiar with a specific issue.

In the process of solving complex legal issues and/or participating in complex court cases, the services of an in-house lawyer, even with extensive experience (but inevitably limited to his professional responsibilities), are often insufficient. Moreover, it is impossible to find someone specializing in all fields of law at the same time, and complex legal issues often require a team of professionals specializing in different areas, and such teams are, most of the time, formed in legal firms.

Naturally, a salary paid to an in-house lawyer (due to the difference in the nature of his services) will never equal an outside attorney’s honorarium. One will hardly find a professor or a doctor of law, or a unique highly specialized professional in the position of an in-house lawyer even in large and prosperous company.

Secondly, legal privileges established in the Federal law “On Advocacy and Practice of Law” are extremely important. An attorney, unlike and in-house lawyer, may not be questioned in relation to information provided to him by a client. Consequently, in some instances recruitment of external attorney is an only way of obtaining competent legal assistance, especially in light of governmental constraints against business.

Thirdly, sometimes a case may be so complex that a CEO’s interests may contradict the interests of the company as a whole or its shareholders. In such cases an in-house lawyer, being dependent on senior management, encounters a conflict of interests which prevents him from being effective in defending the interests of those he represents. In this situation, it is also impossible to avoid hiring outside legal help.

There may be thousands of reasons for hiring outside legal help, even if the reasons are not related to differences in experience and professional qualification. After all, in-house lawyers may simply not have enough time to deal with out-of-the-ordinary lawsuits that would require his absence from his daily tasks for indefinite period of time.

Finally, I would love to see the reaction of a tax inspector prohibited, for example, from consulting a highly specialized medical professional only because similar doctors are available in his local clinic.

Legal work often comes down to a series of one-type statutory procedures. Procedural legislation often does not allow all the different responsibilities to be listed in an in-house lawyer’s job description and attorney’s contract.

Legally, companies have the right to independently determine the feasibility of outsourcing legal services based on a reasonable understanding of their own interests.  Any kind of discrimination against such companies must be completely eliminated.

The leadership of the Federal Chamber of Attorneys must demand that the Ministry of Finance and the Federal Tax Service publish completely unambiguous instructions for tax authorities of all levels which prohibit them from discriminating against attorneys and their clients. The practice evaluating the feasibility of outsourcing legal services must be terminated as violating Article 48 of the Constitution of the Russian Federation, its tax legislation and advocacy legislation.

[1] письма Минфина России от 5 апреля 2007 г. № 03-03-06/1/222 , от 6 декабря 2006 г. № 03-03-04/2/257, от 31 мая 2004 г. № 04-02-05/3/42, письма ФНС России от 20 октября 2006 г. № 02-1-08/222, УФНС России по г. Москве от 7 декабря 2004 г. № 26-12/78777

 

[2] постановления ФАС Уральского округа от 10 января 2008 г. № Ф09-10873/07-С2, ФАС Западно-Сибирского округа от 21 января 2008 г. № Ф04-231/2008, ФАС Московского округа от 20 апреля 2005 г. № КА-А40/2944-05, ФАС Поволжского округа от 27 апреля 2007 г. № А55-11750/06-3, ФАС Северо-западного округа от 23 июля 2007 г. № А05-11777/2006-36 и др.

 

[3] постановления ФАС Поволжского округа от 13 сентября 2006 г. по делу № А12-31539/05-С42, ФАС Уральского округа от 14 августа 2007 г. № Ф09-6372/07-С3

 

[4] постановление ВАС РФ от 18 марта 2008 г. № 14616/07

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