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Vinnitskiy, D. V. (2020) Legal interpretation of tax law and tax treaties concluded by the Russian Federation. European and Asian Law Review. 3 (2), 48-67.
UDC 336.227
LAW086000 LAW / Taxation DOI: 10.34076/27821668_2020_3_2_48
Research Article
LEGAL INTERPRETATION OF TAX LAW AND TAX TREATIES CONCLUDED BY THE RUSSIAN FEDERATION
DANIL V. VINNITSKIY
Ural State Law University ORCID: 0000-0002-8150-4109
Interpretation is a key factor in any legal system as it is the vehicle by which law really affects society. The application of abstract provisions to particular fact situations is only possible with careful interpretation of the relevant norm in light of the particular facts. The author analyzes the issues of interpretation in Russian tax law and highlights two most principal types of legal interpretation in Russian tax law - administrative interpretation and judicial one. The relevance of administrative interpretation is restricted by the fact that the expression of administration interpretation by way of rulings is not binding for the courts and taxpayers as it represents only the official position of the tax administration. Judicial interpretation, particularly in respect of the application of anti-avoidance measures, is emerging as an important factor in tax law in Russia. The case law connected with international tax disputes in the Russian jurisdiction demonstrates the emergence of a relatively high degree of autonomy in the area of legal interpretation of tax treaties and domestic legislation as it related to cross-border transactions. The influence of international practice, in particular, OECD commentaries is becoming more significant.
Keywords: legal interpretation, administration interpretation, judicial interpretation, tax law, tax avoidance, judicial practice, tax treaties, taxes
Introduction
The Russian legal system belongs to the systems of continental law and, in the view of some historians and legal theorists, it possesses quite noticeable common features with the German legal system in particular (Perevalov, 2012: 336). However, the economy which existed in the USSR (based on the dominance of public property) also left significant traces and, in some aspects, still influences the legal system of modern Russia, although much of this influence has been removed in the course of modernization of legislation over the past two decades.
Interpretation is a key factor in any legal system as it is the vehicle by which law really affects society. In the tradition of legal systems belonging to the Romano-Germanic legal family, Russian law is based on major codified legislative acts, including a general part that contains the most abstract and important provisions. The Russian tax legislation is not an exception here; it is systemized into a single/codified act -the Tax Code of the Russian Federation. The Code consists of two parts, with first part a general part and the second part dealing with the rules in regard to particular taxes. Each particular factual situation, which requires the application of an abstract legal norm, is unique. The application of abstract provisions to particular fact situations is only possible with careful interpretation of the relevant norm in light of the particular facts.
In the recent years, and more precisely since 2006, one may see an increasing role for case law in the Russian legal system, especially in the area of tax law, which has led to a decreasing role of the pure doctrinal interpretation of legal norms and principles and of the administrative interpretation as
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well. Consequently, judicial doctrines, more concrete in their content, are starting to develop and become a relatively independent object of interpretation which leads to new 'derivative' doctrines splitting off (even more concrete and designed to be applied in regard to quite a narrow category of disputes), etc.
From a practical perspective the interpretation activity in the Russian legal system is manifest at four levels. The highest level of interpretation takes place at the constitutional level, with interpretation provided by the Russian Constitutional Court viewed as a special kind of interpretation. By virtue of the status of the Constitutional Court, it is equal in its legal force to the Russian Constitution itself if the object of interpretation are constitutional norms. If the object of interpretation by the Russian Constitutional Court is the norms of 'usual' laws then, while the law being interpreted is in force, this interpretation is binding for all those who will apply the respective law.
A second level of interpretation is judicial interpretation apart from the interpretation provided by the Russian Federation (RF) Constitutional Court. This type of interpretation is the most important kind of interpretation for tax law as the majority of tax disputes are solved in the commercial courts and in the courts of general jurisdiction.
A third level of interpretation is administrative interpretation. Administrative interpretation as a form of official interpretation was very important from 1991 to 1999, during the period of the Russian postsoviet tax system but before the codification of tax legislation. Since 1 January 1999, acts of administrative interpretation provided by tax authorities are not binding for taxpayers and courts.
The fourth level of interpretation is doctrinal interpretation outside the actual tax dispute resolution process. This kind of interpretation indirectly influences, through the legal education system and academic discussions, the interpretation activity at the levels of constitutional jurisprudence, proceedings in the 'usual' courts and administrative practice. However, the peculiarity of the doctrinal interpretation in the Russian Federation is that it is strictly segmented according to the branches of law, with the constitutional law playing the role of the connecting environment (Alekseev, 1981: 240-250). The practical consequence of such segmentation is a principle that precludes the application of rules established in one branch of law to situations regulated by other branches of law.
In order to examine in more detail the issues of interpretation in Russian tax law it is necessary first to look at a number of general issues characterizing the Russian legal and tax systems generally, and in particular: 1) to review the system of tax authorities and their powers; 2) to consider the Russian system of courts and their respective jurisdictions; 3) to summarize the Russian system of taxation; and 4) to look at the system of principles underlying Russian tax law and interpretation rules.
Materials and methods
The research based on analysis of judicial practice. The methods used in research were general scientific (analysis, deduction, induction) and specific scientific (legal interpretation).
Results
The results of the author's research are stated in conclusions.
Discussion
Tax Authorities, Taxation and Judicial System
The Interpretative Power of the Tax Authorities
The organizational structure of the authorities imposing taxes in the Russian Federation is defined in a special federal law - the RF Tax Code (the first part of this Code has been in effect since 1 January 1999). According to Article 30 (1) of the RF Tax Code, tax authorities form a single centralized system controlling compliance with tax laws, correct computation and payment of taxes to the Russian budgetary system. The organization of the tax authorities includes the central tax administration and its territorial subdivisions at the regional and municipal levels1. The central tax administration, known as the Federal Tax Service,
1 The regulation of the Government of the Russian Federation of September 30, 2004 No. 506 'On Federal Tax Service' (version of March 20, 2013) specifies the powers of the tax authorities. Additionally, the Order of the Ministry of Finance of August 9, 2005 No. 101-n adopted the Act 'On territorial subdivisions of the RF Federal Tax Service' (version of April 5, 2012).
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is a federal body of state power. Its territorial subdivisions are therefore not subordinate to the RF regions and municipalities. Article 30(4) of the RF Tax Code provides that the tax authorities perform their functions and interact with the executive authorities of the RF regions and municipalities. However, 'interaction' in this context means only the coordination of activities.
The Federal Tax Service may not lay down general rules for taxation (legal normative acts) but is obliged to strictly exercise the established tax rules in accordance with the procedures defined by the RF Tax Code1. With some exceptions2, only the Federal Tax Service possesses the authority to levy all federal, regional and local (municipal) taxes in the RF.
While carrying out its quite broad powers, the Federal Tax Service and its territorial subdivisions perform a great number of legally significant actions: inspections of taxpayers, the demanding and obtaining of documents, decisions on the recovery of taxes, interest and tax penalties, suspension of operations relating to accounts of the taxpayer, etc. According to Russian tax law, all these decisions and actions of the tax authorities may be appealed in the judicial or (and) administrative system. Some years ago, both kinds of remedies (judicial and administrative) could be used simultaneously but now pre-court procedure is obligatory in nearly all important tax disputes. In particular, if a taxpayer wishes to challenge the decision of a tax authority concerning tax sanctions, the taxpayer must first file an administrative complaint and only if and after it has been rejected (entirely or partly) is the taxpayer able to appeal to the court3.This rule has only been in effect since 1 January 2009 and is aimed at decreasing the great number of tax disputes with which Russian courts had to deal. As soon as the amendments of 2013 to the RF Tax Code are in force, the pre-court administrative procedure will be obligatory for nearly all important tax disputes.
When one considers interpretation of tax legislation by the tax authorities in Russia, it is important to take into account the special regime for recovery of taxes for natural persons (without the status of entrepreneur). In the case of natural persons, a court decision is needed in order to recover unpaid taxes, interest and sanctions. A tax authority has to apply to court within six months following the date on which its demand to pay a tax voluntarily was not met4. As a result, comprehensive judicial control over all decisions on tax recoveries concerning natural persons is exercised (irrespective of the citizenship, residence or domicile of the natural person). This approach is based on a decision by the RF Constitutional Court where it held that preliminary judicial control over the decisions of a tax authority is a necessary guarantee for natural persons from unjustified interference from tax authority control5.
System of Courts and their Interpretative Jurisdictions
Legal protection of taxpayers is quite a multi-faceted and urgent topic and there is probably no jurisdiction in the world where taxpayers' protection would be found wholly sufficient (for one reason or another). In particular, difficult issues arise when violations of taxpayers' rights are the result of conflicting interpretations of legal norms at different levels of legal regulations. In the Russian Federation, at least two classes of problems of this kind are evident. The first is when taxpayers' rights suffer due to conflicting interpretations of federal and regional laws, with one of the interpretations being more favorable for taxpayers than the other. The second class of problems arises when taxpayers' rights suffer due to conflicting interpretations of tax law norms (federal or regional) and constitutional legal regulations, particularly the RF Constitution.
It is interesting to see how these two categories of problems are dealt with in the Russian Federation. Of particular significance are the situations when the Russian legal system provides for the protection of taxpayers' rights in special courts (judicial bodies) and the preliminary ruling procedures can be applied.
The first set of problems, conflict between the interpretations of federal and regional tax legislation is quite rare in current Russian practice because, although establishing the main principles of taxation is
1 Articles 4, 31-32 of the Tax Code of the Russian Federation.
2 The powers of the Customs Service of the Russian Federation to levy VAT and excises on imports and the powers of some state authorities to impose levies of parafiscal character, for example, pension fund contributions.
3 Article 101.2 (5) of the Tax Code of the Russian Federation.
4 Article 48 of the Tax Code of the Russian Federation.
5 Decision of the Constitutional Court of the Russian Federation of December 17, 1996 No. 20-P examining the constitutionality of Article 11 (1) (2 and 3) of the Law of the Russian Federation of June 24, 1993 'On the Federal bodies of tax police'; in particular paragraph 4. The Law of the Russian Federation of June 24, 1993 'On the Federal bodies of tax police' was abolished but it is not relevant for the legal significance of the above-mentioned court decision as it was based directly on the interpretation of the Constitution of the Russian Federation.
a joint competence of the federal and regional governments within the RF1, in fact the Russian tax legislation is quite centralized, being based on the RF Tax Code. The regions of the Federation2 may only regulate quite a narrow range of tax matters such as granting tax privileges and deferral with regard to the payment of tax (under certain conditions provided for by the RF Tax Code).
In case there are certain contradictions between the interpretations of regional and federal tax legislation that infringe taxpayers' rights, a taxpayer can go to an 'ordinary' court3 to challenge the regional law. In addition, 14 regions of the Russian Federation, in particular St.-Petersburg and Sverdlovsk region, have special courts known as Charter Courts4 that provide taxpayers with the additional possibility of challenging regional tax legislation on grounds of its conflict with the Charter5 of the region. However, the preliminary ruling procedure is not applicable in the case of Charter challenge cases. If a taxpayer decides to challenge regional tax legislation in an 'ordinary' court, the court has no right to forward a request to the Charter Court even if it finds that the regional tax legislation contradicts the Charter of the given region. Thus, the jurisdiction of Charter Courts is not of an exceptional or imperative character.
Claims that taxpayers' rights have been violated by a conflict between tax legislation (federal or regional) and the RF Constitution (and the constitutional principles formulated in it) may only be pursued in the RF Constitutional Court, which has exclusive authority in this field. The Federal Constitutional Law provides that taxpayers may directly address the RF Constitutional Court, as well as 'ordinary' courts (which hear tax cases), if they have doubts whether the application of (federal or regional) tax law is in accordance with the RF Constitution6. An 'ordinary' court may forward a request to the RF Constitutional Court to rule on the constitutionality of tax measures at any stage of the procedure7. Once the issue has been forwarded, the proceedings in the 'ordinary' court will be suspended.
Article 3(3) of the RF Tax Code specifies that 'with the purpose of protecting the constitutional order, the fundamental rights and freedoms and providing the supremacy and direct effect of the RF Constitution on the entire territory of the Russian Federation', the RF Constitutional Court, at the request of other courts, reviews 'the constitutionality of a law which is applied or has to be applied in a certain case'. However, the RF Constitutional Court deals only (and exclusively) with the legal matters. When carrying out constitutional proceedings, the RF Constitutional Court must refrain from establishing and examining the facts of the case to the extent of the competence of other courts or other authorities. Referrals are made to the RF Constitutional Court on the basis of 'the uncertainty which has been found in understanding the provisions of the RF Constitution'8.
It is not often that ordinary courts forward requests to the RF Constitutional Court. The number of direct applications by citizens is significantly greater. One of the important recent cases which was tried at court request is the Decision of the Constitutional Court of the Russian Federation of 14.07.2005 No. 9-P 'On the case of controlling the constitutionality of provisions of Article 113 of the RF Tax Code in connection with the complaint from G.A. Polyakova and the request from the Federal Commercial Court of Moscow district'. In this case the RF Constitutional Court decided to examine two independent cases together - the complaint from the individual and the court request - because they both concerned the same tax norm, which defines the time limitation for legal responsibility of a taxpayer.
Where the law9 does not sufficiently specify the procedural details for dealing with a court request, the grounds on which the RF Constitutional Court may deny the request to hear a case are also not quite
1 Article 72 of the Constitution of the Russian Federation.
2 There are 83 regions of the Russian Federation; they are usually called 'subjects of the Russian Federation'.
3 By 'ordinary' courts we mean a court of general jurisdiction to which individuals have access and commercial courts that companies and businesses can address.
4 The term derives from the title of the main legal act that determines the status of the respective regions of the Federation - 'Charter'.
5 All Charters of the regions of the Federation include a rule that regional legislation must comply with federal legislation. Due to this clause, Charter Courts can in fact handle a wide range of matters, including the compliance of the regional legislation with federal legislation. However, the decisions of 'ordinary' courts in any case have priority in this field, on the basis of the jurisdiction provided for by the Constitution of the Russian Federation.
6 Federal Constitutional Law of July 21, 1994 No. 1-FKZ (amended 05.04.2013) 'On the Constitutional Court of the Russian Federation'.
7 Ibid, article 101.
8 Ibid, article 36.
9 Chapter XIII of Federal Constitutional Law of July 21, 1994 No. 1-FKZ (amended April 5, 2013) 'On the Constitutional Court of the Russian Federation'.
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obvious. In particular, the RF Constitutional Court can decide that there is no uncertainty as to the meaning of the RF Constitution and that the tax law under challenge is quite in accordance with it. Such a decision can be adopted without open proceedings in which the taxpayer could participate.
As the RF Constitutional Court does not examine the facts of a case, even its affirmative decision only provides limited (constitutional) protection of taxpayers' rights because the 'ordinary' court has to decide the case on a broader account of facts and legal principles than presented to the RF Constitutional Court1. The RF Constitutional Court may disagree with the opinion expressed in the request of an 'ordinary' court and find the legal norm that is challenged to be in accordance with the RF Constitution. However, it may give a new interpretation which will be different from the one expressed in the 'ordinary' court's practice. In this situation the 'ordinary' courts will have to follow this new interpretation as it has a binding character for them.
A Decision of the RF Constitutional Court on an 'ordinary' court ruling request is not only binding for the requesting court and the taxpayer involved, but will have precedence for all other courts dealing with similar cases and even for the legislator. The latter may not override or repudiate the RF Constitutional Court position by adopting a new law with the same content as such a law would be initially invalid because of its conflict with the established interpretation of the RF Constitution.
Tax System and Principles
General Overview of the Russian Tax System and Recent Trends in Tax Policy. The Russian tax system has undergone very important changes since 2000. During this period the second part of the Russian Federation Tax Code, each chapter of which is devoted to a certain tax, was developed and adopted. The second part of the RF Tax Code has replaced the un-systemized legislation of the 1990s, which was developed in quite a hurry and under conditions of permanent budget deficit and which, as a result, had many shortcomings, including those connected with legislative technique.
[a] Tax on Income of Natural Persons. In the post-2000 reforms, the primary changes in terms of the personal income tax were the lowering of tax rates and broadening of the tax base. A flat tax rate of 13 % was adopted for most types of income derived by resident natural persons. However, a relative high rate of 30 % for non-residents remained unchanged, as well as a high 35 % rate for some irregular categories of income such as income from lottery winnings and grants received from affiliated persons). The introduction of a flat tax rate allowed abolishing the uniform procedure of filing tax returns, previously compulsory for everyone, and reducing compliance costs. The tax base was significantly broadened by abolishing some ineffective tax privileges and mainly by including into the tax base non-monetary incomes, that is payments in kind or as a 'material benefit' such as interest-free loans and written off debts.
[b] Tax on Profits of Organizations. The general principle of the reform, lowering the rates and broadening the tax base, also applied to the reform of the tax on profits of organizations. However, the tax rate was not reduced significantly, falling from 24 % to 20 % (with the possibility of further reduction of the latter at the regional level. At the same time, with the adoption in 2002 of the new 25th chapter of the Russian Federation Tax Code dealing with the tax on profits of organizations, all previous tax privileges were abolished. Among the other significant innovations was the introduction of an open list of deductions allowable when calculating taxable income2.
[c] Other Business Taxes. Some business taxes were introduced in the framework of special tax regimes established by Part II of the RF Tax Code. These include a simplified system of taxation, a single tax on presumed income, a single tax on agriculture producers, a fixed business tax for small business, and a single tax for production sharing agreement regimes.
[d] Value Added Tax. The adoption of the second part of the RF Tax Code (Chapter 21 'VAT') saw a significant improvement of the VAT system. In particular, collection rules in regard to different kinds of operations were specified, as well as the conditions of applying tax privileges, including the reduced rate of VAT (10 %). On the whole, the general trend of the reform was to move the Russian VAT model closer to the VAT model applied in the European Union, Russia's main trade and economic partner. In regard to
1 Not all the legal norms relevant for the case will be checked by the Constitutional Court of the Russian Federation but only those which were pointed out in the 'ordinary' court request.
2 Previously there was a closed list of expenses approved by the Ruling of the Government of the Russian Federation No. 552; evidently, that approach did not correspond to the realities of the market economy.
import and export of goods (including transportation and ancillary services) a concept of a '0 % tax rate' was introduced and the detailed rules providing for the conditions of its application and VAT refund to exporters were established. Also, all the legislative powers connected with VAT regulation were transferred to the federal level exclusively and the previous regional sales tax was abolished in 2004.
[e] Excises. The legal regime for excises is provided for by Chapter 22 of the RF Tax Code, which replaced a previous special law. The production of alcohol, tobacco, fuel and cars remained subject to excise tax but the production of oil and natural gas was shifted to a specific tax on the extraction of natural resources in Chapter 26 of the Code. Similar as with VAT, the legal regime for excises in the Customs Union (of the Russian Federation, the Republic of Kazakhstan, the Republic of Belarus) was regulated in detail through a system of special international multilateral tax treaties, the first and the most basic of which was concluded on 25 January 2008.
[f] Recurrent Taxes on Capital. Within the framework of tax reform and the adoption of the second part of the RF Tax Code, Chapter 30 was included into the Code, dealing with taxation of property of organizations. This tax was given the status of a regional tax. However, the tax on property owned by natural persons is still regulated by the law of 1991, because there are certain social obstacles to taxing property (real estate) of natural persons on the basis of its market value. Moreover, the creation of a unified state cadastre of property has not yet been completed.
[g] Non-recurrent Taxes on Capital. The inheritance and gift tax on property was abolished in 2006. Under current law, inheritance of property is exempted from taxation, but gifts (unless between close relatives) are subject to personal income tax in accordance with Chapter 23 of the RF Tax Code.
[h] Compulsory Social Security Contributions Paid to Government. Social security contributions were traditionally held in extra-budgetary funds such as the pension fund and the compulsory medical and social insurance funds. The legal regime of their collection has changed twice in opposite directions since 2000. First, they were shifted from the area of parafiscal contributions to the area of taxation. After a short time, the former collection regime was restored and contributions were withdrawn from the Russian tax system. As with personal income tax, the most important material changes are lower rates and broader tax base. In particular, a regressive scale of rates was introduced for taxing employers (contributions are computed in regard to payroll)1, as well as the lump-sum tax for self-employed persons.
[i] Environmental Taxes. The Russian tax system includes no taxes specifically identified as environmental taxes. However, materially, some taxes actually perform this function including water tax (Chapter 25.2) and charges for the use of wildlife and aquatic biological resources (Chapter 25.1). In addition, parafiscal charges that depend on the level of pollution are imposed.
[j] Other Taxes. An important tax in terms of revenue generation is the tax on the extraction of natural resources2. Most natural resources are taxed on the basis of the cost or value of the resources extracted. The extraction taxes imposed on oil and natural gas are levied on the basis of the volume of extraction of these resources (Article 388 of the RF Tax Code). Other taxes introduced in Part II of the RF Tax Code include a municipal land tax, a regional transport tax and a regional gambling business tax.
A review of the Russian tax system reveals that there is no organizational or economic basis for segmentation of legal interpretation depending on the characteristics of a particular tax. Moreover, the Russian tax system is quite centralized and the main actors involved in tax law interpretation are all part of the federal level of government (the Federal Tax Service, the RF Constitutional Court, commercial courts and courts of general jurisdictions, the RF Ministry of Finance, etc.).
Principles of Russian Tax Law and Interpretation Rules
[a] General Constitutional Framework for Legal Interpretation by the Tax Authorities. Although the formulation of general principles of taxation is constitutionally a joint competence of the federation and RF regions3, according to the RF Constitutional Court insofar as the general principles of taxation are connected with securing the fundamental rights of individuals, they are within the competence of the federation4. This approach also reflects, according to the Court, one of the foundation stones of the
1 For instance, from 26 % to 2 % (before abolishing the single social tax per 1 January 2010).
2 Chapter 26 of the Tax Code of the Russian Federation.
3 According to Article 72 (1) ('i') of the Constitution of the Russian Federation.
4 Foremost, and taking into account its structural links to other provisions of the Constitution of the Russian Federation, in its Decision of the Constitutional Court of the Russian Federation of March 21, 1997 No. 5-P 'On verifying the constitutionality of Articles 18 (2) and 20 of the Law of the Russian Federation 'On the fundamentals of the RF tax system'.
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RF constitutional system, the principle of a 'unified economic space'1 which means, in particular, that within the limits of the territory of the Russian Federation any customs borders, charges, duties or any other obstacles to the free movement of goods, services or capital are strictly prohibited2. From a procedural perspective, the 'unified economic space' and, consequently, the unified tax system are secured by the single system of federal tax authorities - the Federal Tax Service. The tax authorities as federal bodies under the RF Constitution are subordinate exclusively to the federal government3.
In a 2004 case, the RF Constitutional Court clearly formulated general constitutional parameters for the tax administration to observe when exercising its authority4. In this case, the provisions of the RF Tax Code on the time limits for tax inspections, including the inspections exercised by the superior tax authority (as a form of control of the activities of an inferior tax authority which held a previous inspection) were analyzed. In its decision, the RF Constitutional Court stressed that in giving the authority to tax administration the legislator must ensure compliance with Articles 55, 8, 17, 34, 35 of the RF Constitution. According to these provisions, a restriction of taxpayer constitutional rights is allowed when the following principles are respected and implemented: the principles of justice, adequacy, proportionality and the admissibility of restrictions in favor of the public interest which is evidently of constitutional value.
[b] Principle of Legality in Russian Tax Law. The principle of legality is a key principle, directly derived from the RF Constitution. Normative legal rules must be applied in accordance with the procedures provided for by law, and in particular, by the RF Tax Code. The system of taxes and the general taxation principles in the RF are established by federal law5. In this context, as the RF Constitutional Court has stressed repeatedly, the activities of tax authorities must be exercised in accordance with general constitutional principles of organization and activities of all state executive authorities, including the principles of 'rule of law' and inadmissibility of arbitrary interference in the economic activities of the company (entrepreneur) being inspected. Court practice follows the principle of necessity of taxation and obligation to pay taxes. At the same time, the procedural requirements established by law are obligatory for tax authorities6 and may not be ignored under the pretext of the constitutional significance of taxation7.
[c] Principle of Determinacy in Russian Tax Law. There have been a considerable number of court decisions, including RF Constitutional court decisions, which have held tax normative acts invalid because of violation of the principle of determinacy or certainty of legal regulation. An example is a 1999 decision of the RF Constitutional Court8 in which the court found that the procedure of imposing sanctions on a taxpayer had not taken the degree of culpability into account and that the grounds for imposing different sanctions were not clearly identified9. According to the Court, uncertainty or indeterminacy as to the legal content of the provisions conflicts with the basic principles of law in regard to imposing public law sanctions10. The fundamental legal criteria of certainty or determinacy, clarity, non-ambiguity of a legal norm follows from the constitutional principle of equality11, as equality can only be implemented in the case of a uniform understanding and interpretation of a norm by all courts and executive authorities. Indeterminacy or uncertainty as to the content of a legal norm, in contrast, would lead to an unlimited discretion in its application and, consequently to the violation of the principles of equality and supremacy of law.
1 Article 8(1) of the Constitution of the Russian Federation.
2 Article 74(1) of the Constitution of the Russian Federation; Article 3(4) of the Tax Code of the Russian Federation.
3 Articles 71('j'), 78(1) of the Constitution of the Russian Federation.
4 Decision of the Constitutional Court of the Russian Federation of July 16, 2004 No. 14-P 'On verifying the constitutionality of Article 89 (2) of the Tax Code of the Russian Federation in connection with the complaints of A. D. Yegorov and N.V.Chuyev'.
5 On the basis of Articles 72(1)(i) and 75(3) of the Constitution of the Russian Federation.
6 Articles 15, 18 of the Constitution of the Russian Federation.
7 See, e.g., the Constitutional Court of the Russian Federation of December 1, 1997.
8 Decision of the Constitutional Court of the Russian Federation of July 15, 1999 No. 11-P 'On verifying the constitutionality of Laws of the Russian Federation on the Tax Service of the Russian Federation', 'On the fundamentals of the tax system of the Russian Federation' and 'On the federal bodies of tax police'.
9 See e.g., Article 13(1)(a) of the former Law of the Russian Federation 'On the fundamentals of the RF tax system'.
10 Earlier the criterion of determinacy of a legal norm as a constitutional requirement for the legislator was formulated in the Decision of the Constitutional Court of the Russian Federation of April 25, 1995 on a non-tax case 'On verifying the constitutionality of Article 54 of the Housing Code of the Constitutional Court of the Russian Federation'.
11 Article 19(1) of the Constitution of the Russian Federation.
[d] Principle of Equality and Proportionality in Russian Tax Law. In a 2004 case, the RF Constitutional Court stressed the importance of the principle of equality when procedural rules are applied in tax matters1. This principle does not exclude differences in the legal treatment of taxpayers taking into account the objective differences in their actual circumstances, however. In particular, the RF Constitutional Court pointed out that the RF Tax Code provides for both a unified and differentiated approach to establishing time limits within which a tax inspection may be carried out. This dualistic approach is aimed at realizing equal treatment and equal legal protection for all taxpayers while allowing flexibility to the extent taxpayers' situations are demonstrably different2. Accordingly, the Court held that it is in accordance with the RF Constitution to differentiate between the time limits of tax inspections based on such criteria as the peculiarities of the tax regime to be applied, the scope of economic activity, etc. However, the differentiation must be justified and the criteria used to make the differentiation must be established in accordance with the principles of certainty, determinacy, clarity and non-ambiguity of a legal norm.
[e] Presumption of Bona Fide and the Burden of Proof in Russian Tax Law. An important constitutional guarantee in tax matters derived from Russian legal doctrine is that a taxpayer is not obliged to prove the lawfulness of his activities (operations); they are presumed to be lawful and his intentions are considered bone fide until proven otherwise3. This principle influences the distribution of the burden of proof in tax cases as it means the burden of proof lies primarily on the tax authorities, although, in accordance with the judicial procedural rules, a taxpayer is obliged to provide proof supporting the arguments which are used for the taxpayer's position.
[f] Right of Appeal and Comprehensive Court Control. As the RF Constitutional Court has repeatedly pointed out, the guarantee of judicial protection applies to all persons4 and cannot be subject to any restrictions as it secures the actual implementation of all other constitutional rights and freedoms. According to the RF Constitutional Court, the state is responsible for the comprehensive implementation of the right of judicial protection, which must be fair, competent and effective. In the Decision of 16 July 2004 No.14-P, the Court held that it is not the original task of 'ordinary' courts to control the activities of tax authorities if they exercise those activities in the framework of their discretionary competence. However, 'to secure the balance of public and private interests' it is necessary for courts to verify the exercise of discretionary competence in case the activities of a tax authority infringe the fundamental rights of taxpayers in respect of activities such as inspections, the demanding and obtaining of documents, or assigning expert examination.
As follows from Articles 46(1), 52, 53 and 120 of the RF Constitution, a taxpayer must have a right to go to court in the case of the possible arbitrary exercise of discretionary competence of executive authorities including the tax authorities. Thus, the RF Constitutional Court proceeds from the principle of comprehensive judicial control and considers it necessary to also control the exercise of discretionary competence of tax authorities.
[g] Compensation for Damages Incurred as the Result of Unlawful Actions. Article 35 of the RF Tax Code provides for the possibility of compensation for damages incurred as the result of unlawful actions by the tax administration. Payment of compensatory damages is provided through the federal budget and the procedure is regulated by and based on general principles of tort law, including the principle of full compensation of damages. The order in which compensation is paid out is provided for by the RF Budget Code. In practice, claims by taxpayers for compensatory damages are quite rare. On the whole, the RF Tax Code clearly proceeds from the baseline that causing unlawful damages to a taxpayer is prohibited5. Abuse of power by a tax authority is also the violation of constitutional rules6.
1 Paragraph 3 of the Decision of the Constitutional Court of the Russian Federation of July 16, 2004 No. 14-P; Decision of the Constitutional Court of the Russian Federation of July 15, 1999 No. 11-P 'On verifying the constitutionality of Laws of the Russian Federation on the Tax Service of the Russian Federation', 'On the fundamentals of the tax system of the Russian Federation' and 'On the federal bodies of tax police'.
2 See Article 19 of the Constitution of the Russian Federation.
3 One of the important court decisions on this issue is the Decision of the Constitutional Court of the Russian Federation of July 25, 2005 No. 138-O, taken at the request of tax authorities of the Russian Federation to interpret the previous Decision of 12 October 1998. The Court stressed that according to the meaning of Article 3 (7) of the Tax Code of the Russian Federation and provisions of the Constitution of the Russian Federation the presumption of the bona fide of taxpayers exists in tax relations.
4 Articles 46(1) and 46(2) of the Constitution of the Russian Federation.
5 Articles 35, 103 of the Tax Code of the Russian Federation.
6 See, Decision of the Constitutional Court of the Russian Federation of June 16, 2004 No. 14-P, Decision of the Constitutional Court of the Russian Federation of July 15, 1999 No. 11-P 'On verifying the constitutionality of Laws
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Administrative Interpretation in Russian Tax Law
Individual Acts of Interpretation Issued by Tax Authorities
General overview. The complexity and the detailed character of tax legalisation give great significance to the practice of interpretation by tax authorities and accordingly the tax legislation contains a number of provisions dealing with legal interpretation by tax authorities. Three particularly important sets of provisions are those establishing the right of a taxpayer to receive an 'act of interpretation' (tax ruling) and the obligations of some state authorities to issue it1, the provisions defining the legal nature of tax rulings and determining the powers of the state authorities to issue them2, and the provisions determining the legal consequences of compliance by a taxpayer with an 'act of interpretation' (tax ruling) that turned out to be wrong and inconsistent with tax legislation3. The importance of these provisions for practice may be illustrated by statistics on the involvement, by mid-year of 2013, of the Commercial Courts4 in which taxpayers sought relief from penalties levied on the basis of an incorrect act of interpretation in tax rulings provided by tax authorities or the Ministry of Finance. In all, about 1450 cases during 13 years of the rule being in force were tried at different levels of the Commercial Court system, demonstrating the great practical significance of the issue.
Legal Framework and Nature. Russian tax law does not establish a clear borderline between two different kinds of acts of administrative interpretation - private tax rulings (aimed at a single taxpayer) and general tax rulings (for any person). In this context, it is necessary to define the correlation between tax rulings as acts of interpretation and as sources of tax law. This issue is quite important in connection with the activity of the Ministry of Finance and tax authorities, as it is they who are authorized to officially interpret Russian tax legislation. Often state authorities give an abstract interpretation of a tax rule in their response to a taxpayer's ruling request. This reply may later be published (or put in an electronic database), thus potentially providing guidance to all taxpayers in the same or similar situation. The question arises of whether in such a situation tax ruling becomes normative, or remains an act of interpretation.
The RF Tax Code distinguishes clearly between acts of statutory regulation and legal rules produced by executive authorities. The former includes acts adopted by the Russian State Duma (Parliament), regional parliaments and by the representative bodies of municipalities (Article 1 of the RF Tax Code). The latter includes legal acts of executive authorities mentioned in Article 4 of the RF Tax Code5. It follows from the wording of this Article that normative legal acts may be issued by three executive authorities: the RF Government, the RF Ministry of Finance6, and the Federal Customs Service7. Article 4(2) of the RF Tax Code specifies that the Federal Tax Service with its territorial subdivisions8 may not issue normative legal acts on taxation. Thus, from the point of view of the RF Tax Code, the RF Ministry of Finance may, in principle, issue normative legal acts9 but the Federal tax Service is not granted this power.
of the Russian Federation on the Tax Service of the Russian Federation', 'On the fundamentals of the tax system of the Russian Federation' and 'On the federal bodies of tax police'.
1 Articles 21(1)(1), 21(1)(2), 32(1)(4) and 31(1)(6) of the Tax Code of the Russian Federation.
2 Articles 4, 32(1)(5) and 34.2 of the Tax Code of the Russian Federation.
3 Articles 75(8) and 111(1)(3) of the Tax Code of the Russian Federation.
4 Commercial Courts of federal districts (which are 10 in Russia) are the cassation, i.e. the third court instance (after the first and appellate ones). Commercial Courts deal, in particular, with cases between tax authorities and taxpayers which have the status of an organization (legal entity) or an individual entrepreneur. Commercial Courts, as a rule, do not deal with cases involving individuals without the status of an individual entrepreneur.
5 The norm is effective in the version amended by the Federal law of June 27, 2006 No.137-FZ.
6 See: § 1 of the Regulation 'On the RF Ministry of Finance' adopted by the Decree of the Government of the Russian Federation of June 30, 2004 No. 329 (version of May 30, 2007).
7 See: § 2 of the Decree of the President of the Russian Federation of May 11, 2006 No. 473 (version of September, 24 2007).
8 Article 30 of the Tax Code of the Russian Federation.
9 The concept of normative legal act is mostly dogmatic, formulated by academics. However, courts have defined this concept too. Thus, according to § 12 of the Ruling of the Supreme Court Plenum of the Russian Federation of January 20, 2003 No. 2 'On certain issues which arose in connection with adopting the Code of Civil Procedure of the Russian Federation' a normative legal act means an act issued in the established order by the authorized state body, municipal body or an official, establishing legal norms (norms of behavior) which are: 1) obligatory for some categories of persons; 2) designed to be applied repeatedly; and 3) are in force regardless of the fact whether a certain legal relation provided for by the act arose or was terminated.
The issuing of normative legal acts in the form of letters and telegrams is not allowed1. Structural subdivisions and territorial subdivisions of executive federal state authorities may not issue normative legal acts. However, a large majority of individual tax law interpretation acts of financial and tax authorities are given in the form of so-called letters and are issued on behalf of certain departments of the central administration of the RF Ministry of Finance or the FTS or on behalf of territorial subdivisions of these authorities. Consequently, according to the above-mentioned formal criteria, the interpretation acts of both the RF Ministry of Finance and the FTS should not be regarded of normative character.
There are inconsistent court decisions on this issue. The RF Supreme Court2 refused to find letter rulings3 invalid on grounds that it lacked jurisdiction to rule on this4. The Court argued that the letters challenged by the claimant are not normative legal acts as they do not establish legal norms and also did not undergo state registration in the RF Ministry of Justice, which is obligatory for such normative legal acts. Commercial Courts reached similar conclusions concerning letters of interpretation character issued by territorial tax authorities. For example, the Commercial Court of the East Siberian federal district held that letters of tax administration which contain tax law interpretations are of recommendation character, are not obligatory5 and do not entail any legal consequences for taxpayers6. In contrast, the RF Supreme Commercial Court has a different point of view on the issue7. The Court has held that a letter ruling had features of a normative legal act. The Court considered that this letter is addressed to territorial tax administrations and aimed at establishing a uniform order of levying an income tax for individuals on daily allowances. As the RF Ministry of Taxes and Charges (RF MTC)8 instructs this order should be brought to the notice of the subordinate tax administrations and this distinguishes the given letter from the interpretation acts on some specific requests of taxpayers (private tax rulings). The letter in question was found inconsistent with the RF Tax Code and not effective as a legal normative act. It should be stressed that the challenged letter was adopted on 17 February 2004; on the date of its adopting the right of the RF MTC to issue normative legal acts within the framework of their competence was established by § 11 of the Regulation 'On the RF Ministry of Taxes and Charges' approved by the RF Government Decree of 16 October 2000 No. 7839. However, this decision of the RF Supreme Commercial Court is still important in regard to legal acts of the RF Ministry of Finance.
The position of the RF Ministry of Finance is that the information on tax legislation and written interpretation acts on applying tax laws which taxpayers are entitled to obtain in accordance with Article 21 (1) (1 and 2) of the RF Tax Code are not of normative character and, mutatis mutandis, taxpayers are not obliged to comply with its position10. Thus, the RF Ministry of Finance intention is to avoid giving its acts of tax law interpretation the force of normative legal acts.
Subjective Scope and Objective Scope of a Tax Ruling.
[a] Applicants Entitled to Obtain a Ruling. According to Article 21(1)(1) and 21(1)(2) of the RF Tax Code it is the taxpayers who are entitled to obtain tax law interpretation acts from tax and financial authorities.
1 See § 2 of the Regulation 'On preparing normative legal acts of executive federal state bodies and their registration' adopted by the Decree of Government of the Russian Federation of August 13, 1997 No. 1009 (version of 27.03.2013).
2 In accordance with Article 27(1)(2) of the Code of Civil Procedure of the Russian Federation, the Supreme Court of the Russian Federation as a court of first instance tries cases of challenging normative legal acts of different executive federal state bodies concerning the rights, freedoms and interests of individuals and organizations.
3 Letter of the Department of Tax, Customs and Tariff Policy of the Ministry of Finance of the Russian Federation of May 3, 2005 No. 03-05-01-05/54 and the letter of the Ministry of Finance of the Russian Federation of July 11, 2005 No. 03-05-01-03/63.
4 Decision of the Supreme Court of the Russian Federation of December 27, 2005 No. GKPI05-1625.
5 Article 21(1)(11) of the Tax Code of the Russian Federation provides that taxpayers 'shall have the right to ... not fulfill unlawful legal acts and requirements of tax bodies, other competent bodies and their officials which do not correspond to the Tax Code of the Russian Federation or other federal laws'.
6 Decision of the Commercial Court of the East Siberian federal district of July 1, 2004 No. A78-552/04-C2-28/74-F02-2381/04-C1
7 Decision of the Presidium of the RF Supreme Commercial Court of January 26, 2005 No. 16141/04 'On finding invalid the letter of the Ministry of Taxes and Charges of the Russian Federation of February 17, 2004 No.04-2-06/127'.
8 The RF Ministry of Taxes and Charges was transformed into the Federal Tax Service of Russia.
9 This legal act became ineffective due to the issue of the Decree of Government of the Russian Federation of September 30, 2004 No. 506.
10 Letter of March 3, 2006 No.03-02-07/1-47.
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The concept of a taxpayer is defined in Article 19 of the RF Tax Code as organizations and individuals on whom tax liability is imposed in accordance with the Code. In addition, Article 11 of the RF Tax Code defines the concept of organization to include, in addition to Russian and foreign legal entities, branches and establishments of foreign legal entities, branches and establishments of international organizations, and foreign corporate formations without the status of legal entity but possessing civil legal capacity.
As a consequence, organizations that are not civil law subjects according to Russian civil law will still be entitled to independently realize their tax rights, including the right to obtain tax law interpretation rulings.
Article 21(3) of the RF Tax Code states that payers of state charges in general have the same rights as taxpayers. Consequently, the payers of state charges (for example, State duty) will also be entitled to receive tax law interpretation rulings along with taxpayers.
Article 24 of the RF Tax Code includes the definition of the concept of another participant in the tax process - tax agent. Article 24(1) defines tax agents as persons on whom in accordance with the RF Tax Code the obligations to compute, withhold and transfer tax payments to the budget of the RF are imposed. By virtue of Article 24(2) of the RF Tax Code, tax agents enjoy the same rights as taxpayers unless the RF Tax Code explicitly states otherwise. Also otherwise provided for by the RF Tax Code, tax agents, similar to taxpayers, are entitled to obtain tax law interpretation acts. This issue is of interest in respect to subjects that are not taxpayers in regard to taxes but retain the status of tax agent. For example, a subdivision of the Federal Tax Service is not a taxpayer but would be recognised as a legal entity from the point of view of civil law and, because it has the status of a tax agent in respect of the individual income tax it withholds from its employees' salaries, it would be entitled to obtain a ruling.
[b] Issues For Which a Ruling May Be Requested. In accordance with Article 21(1) of the RF Tax Code taxpayers are entitled to obtain the information (also in written form) from the tax authorities where they are registered on existing taxes and charges, on statutory legislation on taxes and charges and normative acts adopted in accordance with them, on the order of computing and paying taxes and charges, on rights and obligations of taxpayers, and on the powers of tax authorities and their officials. Article 21(1)(1) entitles taxpayers to receive the forms of tax returns and the information on how to complete them. Thus, the RF Tax Code allows taxpayers to request any information concerning tax legislation both of general character and in regard to specific taxes. Taxpayers are not obliged to confirm whether they intend to apply the ruling request at any point in the future. It is therefore of no significance whether the taxpayer's ruling request relates to a present or a future transaction. However, the tax period to which a respective ruling of a competent authority refers may be quite relevant.
Issuing Authorities: Tax and Financial Bodies. In accordance with Article 21(1) of the RF Tax Code, taxpayers are entitled to obtain necessary information on taxation in writing from the tax office of registration1, and written interpretation rulings from the RF Ministry of Finance on the application of RF tax legislation. A practical issue arises in determining which government entity should issue a tax ruling at the taxpayer's request. The RF Ministry of Finance believes that in specific economic situations a taxpayer should address the tax office with which the taxpayer is registered with specific questions on computing and paying taxes. At the same time, a taxpayer is entitled to a ruling from the RF Ministry of Finance (or from other financial authorities of RF Regions or municipalities) on abstract questions of applying tax legislation2.
Other letter rulings offer a slightly different model of allocating competence to issue tax law interpretation rulings. Tax offices have the obligation to provide copies of information contained in tax legislation and the normative legal acts adopted in accordance with the legislation. In this model of division of responsibilities, elementary questions which do not require a legal opinion and interpretation of laws on taxation should be directed to the tax authority and questions which require the analysis and interpretation of tax legislation and a legal opinion should be directed to the RF Ministry of Finance3.
The uncertainty resulting from these differing views and the controversial position of the RF Ministry of Finance is not of essential significance, as it happens very seldom that a tax office would refuse to issue a ruling to a taxpayer and should a tax local office have any problems reaching a decision, it can
1 This taxpayer's right corresponds with the obligation of tax authorities to provide such information, see Article 32(1)(4) of the Tax Code of the Russian Federation.
2 Letter of September 21, 2004 No. 03-62-07/39 (§ 1 and § 2).
3 Letter of the Ministry of Finance of the Russian Federation of January 26, 2005 No. SHS-6-01/58@
request advice from the Central Administration of the Federal Tax Service which in its turn can come to an agreement on the legal position with the RF Ministry of Finance.
With a system that authorizes both the RF Ministry of Finance and the FTS to issue tax rulings, the more urgent problem appears to be the potential for conflicting or contradictory opinions concerning the same or similar situations. Under Article 32(1) (5) of the RF Tax Code, tax authorities are obliged to follow guidance provided by rulings of the RF Ministry of Finance on applying tax legislation. Consequently, when collisions arise priority is given to the rulings issued by the RF Ministry of Finance. To reduce the occurrence of inconsistent rulings, a joint commission has been formed to coordinate the interaction between the RF Ministry of Finance and the Federal Tax Service in regard to interpretation of tax legislation1.
Protection Enjoyed by the Recipient of a Ruling (Act of Official Interpretation). Article 111(1)(3)2 of the RF Tax Code effectively makes tax rulings binding on the tax authority by exonerating a taxpayer from any wrong-doing and preventing the imposition of tax penalties if taxpayer has complied with directions in written rulings on computing and paying a tax (or on any other question of applying tax legislation) issued by a competent tax authority. Article 75(8) of the RF Tax Code similarly protects a taxpayer (and other persons placed on the same footing) from interest charges if an underpayment results from compliance with incorrect rulings3. The principle underlying these measures have a constitutional basis in the principle 'of maintaining trust of the citizens to law and the actions of the state'4. A ruling is effectively binding on the tax authority in respect of tax periods covered by the ruling, regardless of when the ruling itself has been issued. However, rulings are not binding on the tax authority if they are based on incomplete and incorrect information given to the authority by a taxpayer.
Officials authorized to sign rulings of the Federal Tax Service are the Head of the Tax Service of Russia and the Head's deputies as well as heads of territory subdivisions of the Service and their deputies within their competence5. Officials authorized to express the position of the RF Ministry of Finance in written rulings on the issues of applying RF tax legislation are the RF Minister of Finance and Deputy Minister of Finance as well as the head and deputy head of the Department of Tax, Customs and Tariff Policy6. Only rulings signed by these persons represent the position of the RF Ministry of Finance in the sense of Article 111 and Article 75(8) of the RF Tax Code.
In addition to the letters of the RF Ministry of Finance and the FTS of Russia, the Commercial Courts quite often recognize in their case law four types of communication as official rulings that exempt taxpayers from tax penalties:
decisions by a tax authority based on the results of a previous tax audit in which the computation of a tax in similar situations was accepted7,
written directives of a superior state authority to an inferior one8, methodology recommendations on computing and paying a tax9, instructions on filling in tax returns10.
Articles and commentary in mass media, replies to questions given by officials in database on their face should not be considered as official rulings as they usually represent a personal opinion of an official of a certain state authority. However, case law is not consistent in this respect. Courts, at times, have protected taxpayers in receipt of information other than a technically compliant ruling. In one case, for example, a taxpayer claimed that he treated short-term loans as tax exempt services on the basis of a written opinion of the deputy head of the Department of Analysis and Methodology of Indirect Taxes of the RF Ministry of Finance published in a newspaper. The Court held that in this situation the taxpayer should
1 By Decree of the Ministry of Finance of the Russian Federation of August 9, 2005 No. 102n (version of 17.07.2006).
2 The article is effective in the version amended by the Federal Law of August 27, 2006 No. 137-FZ.
3 An earlier version of Article 75(8) of the Tax Code of the Russian Federation did not limit the possibility of levying interests on taxpayers who erred in their tax reporting due to compliance with an incorrect tax ruling.
4 See, for instance, the Decision of the Constitutional Court of the Russian Federation of July 5, 2005 No. 246-O.
5 Letter of Ministry of Finance of the Russian Federation of January 13, 2005 No.03-02-07/1-1.
6 Letter of the Ministry of Finance of the Russian Federation of May 6, 2005 No. 03-02-07/1-116
7 Decision of the Commercial Court of the North Western federal district of March 4, 2005 No. A56-26746/04
8 Decision of the Commercial Court of the Moscow federal district of January 13, 2005 No. KA-A41/12802-04.
9 Decision of the Commercial Court of the Volgo-Vyatskiy federal district of December 23, 2004 No. A79-5685/2004-CK1-5372.
10 Decision of the Commercial Court of the West Siberian federal district of December 22, 2004 No. A56-276/04.
not be subject to tax penalties in accordance with Article 111(1)(3) of the RF Tax Code1. In another case, heard by the Commercial Court of the North-Western federal district, for example, the taxpayer was unsuccessful in arguing that the opinion of the adviser of the FTS published in a database could serve as a ground for exemption from penalties according to Article 111(1)(3) of the RF Tax Code2.
Rulings only protect taxpayers against imposing tax penalties and interests. They do not prevent the tax authority from computing and collecting underreported taxes from the taxpayer. The law does not specify any particular validity period for tax rulings. However, a systematic analysis of the RF Tax Code suggests that taxpayers complying with a tax ruling are protected until the underlying law interpreted by the ruling has been changed or until the ruling has been abolished, either directly or indirectly (i.e., by the issuing authority or a superior authority). Once a tax ruling has been found in violation of the law by a competent court, it ceases to provide taxpayer protection prospectively. Subsequent transactions are not covered by ruling protection.
Juridical Interpretation in Russian Tax Law
It is evident that the application of the RF Tax Code to a large extent will depend on how the provisions of the RF Tax Code are interpreted by the courts, especially the RF Supreme Commercial Court of the Russian Federation. Judicial decisions, especially decisions of the RF Supreme Commercial Court, may be regarded as precedent, although Russian doctrinal texts will more often use the phrases 'legal position' or 'judicial doctrine' to describe a rule applicable in subsequent judicial acts. It is not unusual for judicial decisions, especially judicial decisions of the RF Supreme Commercial Court, to go beyond a literal interpretation of statutory norms and, basically, create new, derivative norms - legal interpretations that are binding upon inferior courts. Case law3 has undergone very substantial changes in the last 5 years.
Judgments of the Courts as Acts of Interpretation and Sources of Law4, Approaches of Academics and Practitioners. The role of case law and, in particular, decrees of the Presidium of the RF Supreme Commercial Court (RF SCC) has been the subject of constant academic debate. Some authors consider it to be a special source of Russian law while others view it as an interpretative/derivative source. A third group does not regard it as a source of law at all, although this group concedes it is of key importance in the resolution of individual legal cases (Sorokin, 2003; Notin, 2003; Miroshnik & Raygorodskiy, 2008; Kopina, 2008; Tonenkova, 2010; Mktrtumyan, 2008; Tsyganova, 2006).
This debate has a long history. In the Soviet era, views were expressed (though not as often or universally as now) to the effect that 'judicial doctrine serves as an important source of Soviet law because the supreme courts of the Union and the Union republics publish bulletins of 'model judgments' and verdicts in specific cases. Theoretically, the inferior courts are not bound by these judgments. In practice, however, every lawyer knows that if he refers in court to a ruling of the RF Supreme Court in a similar case, the court will decide his case in exactly the same way (...). But, apart from that, the Plenums of the RF Supreme court issue resolutions that provide theoretical explanations of the law, which, in effect, establish new legal norms'(Tille, 1975: 143).
Starting in the 1990s, under the new economic conditions and following the modernization of the legal system, these views became more and more widespread. For example, Professor V.P. Mozolin argued that '(...) the rulings and decrees/resolutions of the higher courts formulate general judicial doctrine as a source of law that stands alongside the legal consciousness and statutes (and other normative acts)' (Mozolin, 2003) while O.M. Sviridenko, President of the Central District Federal Commercial Court and formerly the President of the Moscow City Commercial Court, suggested that: 'because clarifications from the RF Supreme Court and the RF Supreme Commercial Court are binding upon judges we should concur with those academics who recognize the case law of the higher courts as a source of law. We think that vesting the courts with the law-making function will facilitate improvements to existing legislation' (Sviridenko, 2010: 64-65).
1 Decision of the Commercial Court of the Volgo-Vyatskiy federal district of November 10, 2004 No. A43-14279/2003-31-632.
2 Decision of the Commercial Court of the North-Western federal district of March 22, 2004 No. A05-9051/03-20.
3 In this chapter, the term 'case law' is used to denote the totality of court precedents that contain applicable legal positions and judicial doctrines.
4 The author used for the preparation of this part of the article his previously presented expert opinions for courts and international arbitrage.
Decisions of the RF Supreme Commercial Court which are issued by a panel of RF Supreme Commercial Court judges where they take a technical decision whether or not to pass the case onto the Presidium for consideration may also sometimes be treated as governing rules. The regulatory significance of rulings of the RF Supreme Commercial Court is evidenced by the fact that inferior courts regularly cite them in their judgments.
The Legislative Basis for the Judicial Role. Article 127 of the RF Constitution establishes that the RF SCC is the highest judicial authority in the resolution of economic disputes and other cases heard by the commercial courts and provides, in the procedural forms envisaged by federal law, judicial supervision of their activities and provides clarification of questions of case law. Article 23 of the Federal Constitutional Law (1996)1, in effect, reproduces that provision of the RF Constitution. Article 16 of the Federal Constitutional Law (1995)2 clarifies the powers of the Presidium of the RF SCC. It states that the Presidium of the RF SCC reviews in-force decisions of the commercial courts in the Russian Federation and examines individual issues arising in case law and informs commercial courts in the Russian Federation of the outcome of that process. Accordingly, in terms of statutory law, the legally binding nature of decrees of the Presidium of the RF SCC is predetermined by its capacity to review court decisions produced by the inferior commercial courts where they do not reflect the legal positions formulated in decrees of the Presidium and/or resolutions of the Plenum of the RF SCC.
Chapter 36 of the RF Commercial Procedure Code (RF CPC) and, in particular, article 292, envisage that 'in-force judicial acts of the commercial courts in the Russian Federation may be judicially reviewed according to the rules of this chapter by the Supreme Commercial Court of the Russian Federation at the request of parties to the case, or other persons as specified in Article 42 of this Code and, in the cases specified in Article 52 of this Code, upon a representation from the prosecutor'. Further, by virtue of Article 298 of the RF CPC, the RF SCC may even suspend execution of a judicial act rendered by an inferior court pending consideration of the matter of its revocation on the merits.
Article 304 of the RF CPC sets out in detail how the RF SCC is able to monitor the inferior courts' practice for compliance with the legal positions developed by it and expressed, inter alia, in decrees of the Presidium of the RF CPC. Section 1 of that Article establishes that 'in-force judicial acts of the commercial courts are subject to variance or revocation in the event that the Presidium of the Supreme Commercial Court of the Russian Federation establishes by judicial review that the contested judicial act (...) breaches the uniformity of the commercial courts' interpretation and application of legal norms; (...) or infringes the rights and lawful interests of an indefinite range of persons or other public interests'.
By virtue of this, both the RF SCC itself and the lower courts often cite and apply both resolutions of the Plenum of the RF SCC and decrees of the Presidium of the RF SCC. Recently, to support and encourage this practice, a specific direction was added to Article 170 of the RF CPC which states that 'the explanatory part of a judgment (of commercial court) may include references to resolutions of the Plenum of the Supreme Commercial Court of the Russian Federation relating to questions of case law and decrees of the Presidium of the Supreme Commercial Court of the Russian Federation'3.
Special Cases of Procedural Retroactivity in Judicial Interpretation. Decrees of the Presidium of the RF SCC acquired their additional governing weight and strong influence on case law when they began to be treated as grounds for a review of previously adopted, in-force judicial acts of the lower courts. The claimed judicial power to retrospectively examine previous lower decisions stands in contrast to tax legislation which, as a consequence of Article 5 of the Tax Code can only have a prospective application (the Article provides a general prohibition upon the retroactive application of tax legislation).
Many practitioners consider a 2007 Resolution of the Plenum of the RF SCC to be the most important step in the partial adoption in Russia of a common law precedent based system of law, particularly in the area of taxation, in which judicial doctrine already played an unusually large role in delimiting lawful and unlawful conduct. The Resolution indicated that appellate courts should take account of contrary subsequent
1 Federal Constitutional Law of December 31, 1996 No. 1-FKZ 'On the Judicial System in the Russian Federation'.
2 Federal Constitutional Law of April 28, 1995 No. 1-FKZ 'On Commercial Courts in the Russian Federation'.
3 Article 170 of the Commercial Procedure Code of the Russian Federation - 'Content of judgment' (version of 23.12.2010).
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appellate decrees of the RF SCC when asked to reviewing earlier lower court decisions1. This approach was upheld by the RF Constitutional Court2. The legal position of the RF SCC and the RF Constitutional Court concerning the governing role of decrees of the Presidium of the RF Supreme Commercial Court was subsequently incorporated into statutory law3. A later decree of the Plenum of the RF SCC explicitly confirmed that previous inconsistent decisions can be reviewed retroactively directly by the courts which issued the respective decisions4.
Judicial Interpretation and Anti-avoidance Doctrines in Russian Tax Law
General Overview. A key concept in Russian tax law respected by courts but not actually mentioned in Russian tax legislation is that of a 'justified or unjustified tax benefit', a notion related to other unlegislated guiding concepts such as 'the good faith of the taxpayer'. An understanding of how the Russian tax authorities and courts currently interpret and apply the norms of the RF Tax Code concerning the procedure for calculating and paying corporate income and VAT requires an understanding of how the concept of 'justified or unjustified tax benefit' evolved and the particularities of how it is used.
Many countries, regardless whether they belong to the civil law or common law legal traditions, have incorporated a General anti-abuse rule (GAAR) directly into their legislation5. However, the Russian Federation uses general anti-abuse mechanisms based primarily on case law and legal interpretation. This point is clearly confirmed by various Decisions of the Plenum of the RF Supreme Commercial Court, Decrees of the Presidium of the RF Supreme Commercial Court and Decisions and Rulings of the RF Constitutional Court.
Fluctuations in Precedent. The origins of the modern general anti-avoidance principles are commonly traced to a 2001 Ruling of the RF Constitutional Court6 considering an application from the RF Ministry of Taxes and Charges for clarification of how an earlier ruling on protection of private property would apply to a case in which the tax authority sought to recover unpaid taxes7. The Court stated it was an implied understanding of the law that the protections extended only to bona fide taxpayers and could not be used as shields against collection of unpaid taxes by persons who had deliberately arranged their affairs to frustrate collection. The position taken by the RF Constitutional Court was confirmed by its later rulings and has some resonance with earlier decrees that set the course for the bona fide doctrine by protecting the right of bone fide taxpayers8.
1 Resolution of the Plenum of the Supreme Commercial Court of the Russian Federation of March 12, 2007 No. 17 'On the Application of the Commercial Procedure Code of the Russian Federation in the Review of In-force Judicial Acts Based on Newly Discovered Facts' (version of 14.02.2008, Resolution of the Plenum of the RF SCC No. 14).
2 See, in particular, Decision of the Constitutional Court of the Russian Federation of January 21, 2010 No. 1-P 'Verification of the Constitutionality of the Provisions of Part 4 of Article 170, Section 1 of Article 311 and Part 1 of Article 312 of the Commercial Procedure Code of the Russian Federation, Pursuant to Appeals from Closed Joint Stock Company Production Association Bereg, Open Joint Stock Company Karbolit, the Mikroprovod factory and Research and Production Enterprise Respirator'.
3 Subsection 5 of section 3 of Article 311 of the Commercial Procedure Code - 'Grounds for review of judicial acts based on new or newly discovered facts' (version of December 23, 2010).
4 Resolution of the Plenum of the Supreme Commercial Court of the Russian Federation of June 30, 2011 No. 52 (version of December 23, 2012) 'On the Application of Provisions of the Commercial Procedure Code of the Russian Federation in the Reviewing of Judicial Acts on the basis of New or Newly Discovered Facts'.
5 See, for example, the provision of § 42 (2) of Germany's Abgabenordnung (General Fiscal Law), Article L. 64 of the French Livre de Procédures Fiscales (Tax Procedures Code) and Article 25 of Spain's Ley General Tributaria (General Tax Law). As to common law jurisdictions, Australia, India, New Zealand, South Africa, the UK, and the US all have GAAPs as well.
6 Ruling of the Constitutional Court of the Russian Federation of July 25, 2001 No. 138-O.
7 The earlier Decision of the Constitutional Court of the Russian Federation of October 12, 1998 No. 24-P was based on the concept of 'the bona fide taxpayer'. The Decree states '(...) charging a bona fide taxpayer more than once for taxes that have not been paid to the budget infringes constitutional guarantees relating to private property. (...) The constitutional duty to pay taxes is deemed discharged at the time at which part of the bona fide taxpayer's property is actually expropriated within the framework of public-law relations'.
8 These include Decision of October 28, 1999 No. 14-P where the court said no restrictions should be placed on a taxpayer disposing of privately owned property where tax has already been paid. This right of the bona fide taxpayer is secured by the guarantees of a judicial remedy under Articles 35 and 46 of the Constitution of the Russian Federation. In the decision of the Constitutional Court of the Russian Federation of December 4, 2000, entitled 'Denial of Application
Other cases make it clear that the burden of proving bad faith on the part of the taxpayer lies with the competent state authorities. This is illustrated in a RF Supreme Court decision of 7 February 19971 that struck down as unreasonable onerous on bona fide taxpayers instructions issued by the RF State Tax Service on the conditions imposed on exporters seeking allowances available in respect of the taxation of exported goods The court thought that the requirements that were intended to prevent the faking of exports, created an excessive burden for bona fide exporters, effectively and incorrectly shifting to legitimate exporters the duty to prove their good faith.
The issue of what actions by the taxpayer might constitute 'bad faith' has been the subject of many court disputes and for the most part case law is rather unfavorable to taxpayers as it does not clearly define the criteria for delimiting 'good faith' and 'bad faith' actions. Particular difficulties occurred in assessing good faith in the context of applying the provisions of a 1996 Order of the RF President aimed at increasing tax collections in the face of a budget crisis2. The concept of bad faith, when it is interpreted in conjunction with the provisions of the Order, has sometimes caused transactions, aimed at avoiding tax, to be declared invalid under Article 169 of the RF Civil Code and, consequently, assets of both parties to the transaction were confiscated and paid to the budget3. Later case law since 2006 proved considerably softer and more liberal towards taxpayers in the resolution of tax avoidance disputes.
In particular, the main document that currently defines judicial approaches to the interpretation of Russian anti-avoidance doctrines in tax law is the Resolution of the Plenum of the RF Supreme Commercial Court of 12 October 2006 No. 53, entitled 'Evaluation of Legitimacy of Tax Benefit Claimed by Taxpayer' (hereinafter 'Resolution No. 53'). The Resolution established a presumption of good faith on the part of taxpayers and thus a presumption that taxpayers were entitled to any tax benefits or concessions they sought but at the same time set out a number of factors that could displace that presumption.
However, a tax benefit may be deemed unjustified, in particular, where operations have been taken into account for taxation purposes not in accordance with their true economic intent or operations have been taken into account which were not occasioned by reasonable economic or other grounds (business objectives). A tax benefit cannot be deemed justified if it was received by a taxpayer outside the context of genuine entrepreneurial or other economic activities (para. 3 and 4 of Resolution No. 53).
Not been applied uniformly in practice since its adoption and decrees of the Presidium of the RF Supreme Commercial Court appear from time to time that to some extent compete with, or clarify, or add to the criteria for resolving disputes that are within the ambit of Resolution No. 53. These decrees might be applied in conjunction with Resolution No. 53 or, in some cases, independently with regard to some category of dispute or other. From an academic point of view, it can be said that this constant clarification and modification of case law undulates somewhat, i.e., there is a cycle of prevailing tendencies in precedent law that are less favorable to taxpayers being replaced by ones more favorable to them and these in turn being replaced as the cycle evolves.
Thus, the 2006 Resolution No. 53 that established a presumption of good faith (and consequent presumption of entitlement to tax benefits) set out an extensive list of factors that could be used to displace the presumption. These focused on the economic substance of transactions, looking at whether they were part of genuine entrepreneurial activity, evidence of business purpose, and the impact of non-arm's length transactions on financing or timing decisions. Taxpayers have been able to use the enumerated list as a shield in debatable circumstances by arguing the tax authority had been able to show the taxpayer's claim was unambiguously an unjustified tax benefit in light of the specific factors. For example, in a 2007 case,
by State Unitary Enterprise NITSIAMT for Official Clarification of a Decree of the Constitutional Court of the Russian Federation of October 12, 1998', the Court made it clear that a ministry or other RF department should not use the concept of 'bona fide taxpayer' to impose any additional duties that were not envisaged by the legislation.
1 On application of paragraphs 5, 6 and 7 of section 22 of the Instruction of the State Tax Service of the Russian Federation of October 11, 1995 No. 39 (version of August 22, 1996).
2 Order of the President of the Russian Federation of August 18, 1996 No. 1212 entitled 'Measures to Increase the Collection of Taxes and Other Mandatory Payments to the Budget and to put in Order the Circulation of Cash and Non-Cash Money'.
3 The Resolution was subsequently supplemented by the Resolution of the Plenum of the RF SCC of April 10, 2008 No. 22 entitled 'Certain Issues of Practice in Consideration of Disputes Relating to the Application of Article 169 of the Civil Code of the Russian Federation', which restricted the application of Article 169 of the Civil Code of the Russian Federation to tax relations.
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No. A40-11992/06-143-75, the RF SCC prevented the State Tax Service from denying a benefit available to exporters on the grounds of technical points related to the taxpayer's paperwork without evidence they impacted on the legitimacy of his transactions. By the following year, however, courts were moving to reduce the ability of taxpayers to use the 2006 Resolution No. 53 as a shield when claiming deductions for corporate income tax and input-tax credits under VAT. Courts sometimes seized on section 1 of Resolution No. 53, which provides that, under certain circumstances, the taxpayer can be stripped of tax advantages if the tax authority proves 'that information contained in (...) documents (that the taxpayer has submitted) is incomplete, inaccurate and (or) inconsistent' and section 4 of Resolution No. 53, which says that a tax benefit cannot be received 'outside the context of genuine entrepreneurial or other economic activities', to deny taxpayers' claims. The new court decisions adopted strict views of the need for the accuracy of documents and the information they contain (understood in a formal sense) and the genuineness of business operations.
A turning point in the formulation of this approach was the Decree of the Presidium of the RF SCC of 11.11.2008 No. 9299/08 (hereinafter 'Kestroi 1' or 'Decree No. 9299/08'). The court dismissed the taxpayer's appeal against the tax inspectorate's assessment for additional profit tax, interest and fines for non-payment of the tax and a reduction of VAT rebates, in effect reversing the onus set out in 2006 Resolution No. 53. The court decision noted that taxpayer's claims regarding the calculation of profits tax and entitlement to VAT rebates are recognized unless the tax authority proves that information contained in documents is incomplete, inaccurate or inconsistent but went on to say that the taxpayer's claims will be treated as legitimate only where there are accurate documents evidencing genuine economic operations, leaving the taxpayer with responsibility for proving entitlement to benefits rather than the tax authority accepting the taxpayer's report. Based on section 1 of Resolution No. 53, the court was about to reject in whole the taxpayer's claims, pointing out that the tax invoices had been attributed to a natural person who did not sign them and who had nothing to do with that organization. In fact, the court pointed out there was no senior manager or chief accountant at the company able to sign the invoices, leaving the taxpayer with no primary accounting documents that would evidence the incurring of expenses. Strengthening the tax authority's case was evidence presented by the authority that the taxpayer lacked the management and technical staff, fixed assets, production assets, storage facilities and means of transport to carry on the economic activity claimed to be performed for taxation purposes.
The decision in Kestroi 1 has become a powerful precedent. Since the decision, the taxpayer's intention to obtain an unjustified tax benefit ceased to be the determining factor (as required according to Resolution No. 53) in resolving this category of disputes. The key question in determining the outcome of taxpayers' appeals has become whether the documents submitted by the taxpayer were accurate and whether they accurately demonstrated the genuineness of the commercial operations with named parties. If the documentation raises doubt as to the economic reality of the enterprise's operations, it is not necessary for the tax authority to accept the taxpayer's claim and proceed with detailed calculations based on the claim. Decree No. 9299/08 thus changed the distribution of the burden of proof between the tax authority and the taxpayer. From that point onwards it was the taxpayer who had to prove the reality of its business operations and the genuineness of documents if the representative of the taxpayer's counterparty in the business operation testified that she or he had not been involved in the operation.
The shifts in judicial approaches from 2006 following the release of 2006 Resolution No. 53 and the swing of the pendulum in the other direction following the 2008 Decree No. 9299/08 provides important insights into the dynamics of modern juridical interpretation in Russian Tax Law and the manner in which anti-avoidance judicial doctrine can evolve as the courts reconsider their role in the tax law system.
Interpretation of Tax Treaties in the Russian Legal System
General Overview
For the past twenty years the Russian Federation has pursued quite an active international tax policy; it has signed eighty-six conventions for the avoidance of double taxation with respect to taxes on income and on capital and at present, Russia has eighty double taxation conventions in force1. In addition, several double taxation conventions have been negotiated and signed, but not yet ratified by the RF Parliament. Russian double taxation conventions generally follow the Organization for Economic Cooperation and
1 Including two double taxation conventions (with Japan and Malaysia) concluded by the former USSR.
Development (OECD) Model (or sometimes UN Model). However, articles derogating from these models can be found in certain treaties concluded by Russia. In principle, the Russian approach to double taxation conventions is reflected in the model treaty approved by the RF Government Regulation of 24 February 2008 No. 84 (the previous model was approved by the RF Government Regulation of 28 May 1992 No. 352). The differences between it and the OECD Model are not significant.
The tax treaties concluded by the RF as a rule do not contain any special procedural rules not found in the existing models (e.g., OECD Model). The exception is a tax treaty on indirect tax that the RF has concluded with its close trading partners. On 25 January 2008 a treaty was signed between the Russian Federation, the Republic of Kazakhstan and the Republic of Belarus on procedures for collecting indirect taxes in the Customs Union1. The Annexes to this mentioned multilateral treaty contain a number of procedural rules in regard to filing a special tax return. Disputes have arisen concerning the question of whether it is possible to impose sanctions according to domestic legislation if a taxpayer did not file a tax return provided for only by the international treaty. The national courts taking into account the purpose of the above-mentioned international treaty (which is the harmonization of tax systems but not just avoidance of double taxation) usually allow the tax authorities of national states to apply the respective sanctions.
Case Law on Thin Capitalization Rules and Non-discrimination Clause as Examples of Tax Treaty Interpretation
General Overview. The methodology of tax treaty interpretation in the Russian legal system is still developing. One area that has given rise to litigation in recent years is the question of whether thin capitalization rules are compatible with the non-discrimination clause of the relevant tax treaty (Article 24 of the OECD MC).
Prior to 2001, taxpayers were nearly always successful in defeating the application of thin capitalization rules by arguing they were incompatible with the non-discrimination clause in Russia's double tax treaties. The decision of the RF CC in the Severniy Kuzbass case2 of 15 November 2011 opened the door to an important shift in judicial approaches to this issue when the Court concluded that there are no direct contradictions between the non-discrimination clause of respective tax treaties and the Russian thin capitalization rules (Vinnitskiy, 2013). The subsequent adoption of the same conclusion by the RF SCC in a series of important cases3 dealing with the application of the thin capitalization rules had led elevated the approach taken in Severniy Kuzbass to become a legal principle.
The Russian thin capitalization rules were introduced in 2001, but were mostly irrelevant until 2011, as taxpayers usually avoided them either through the sister-company loophole (a loan from an affiliated sister company is technically not subject to the thin capitalization rules) or on the basis that the rules were incompatible with the non-discrimination provisions in tax treaties. The sister-company loophole was eliminated by the RF SCC in the NaryanmarNefteGaz case4, where the court collapsed a loan arrangement made through a finance company related to the indirect owner of a Russian company (a US company had invested in the Russian company via a Dutch holding company). The tax authorities applied the domestic thin capitalization rules on the basis that the loan had been made through an affiliated
1 The Protocol was signed on March 23, 2007 and ratified by the Federal Law of April 1, 2008 No. 34-FZ.
2 Severniy Kuzbass vs. Russian Federation, case 8654/11 Supreme Commercial Court of the Russian Federation of November 15, 2011, Tax Treaty Case Law IBFD.
3 See: the Ruling of the Supreme Commercial Court of the Russian Federation of May 15, 2012 No. VAS-6159/12 (Terminal Sibir case, the non-discrimination clauses of the Russian tax treaties with Finland and Cyprus were considered as non-applicable); the Ruling of the Supreme Commercial Court of the Russian Federation of April 5, 2012 No. VAS-3867/12 (Promlizing case, the non-discrimination clause of the tax treaty with Cyprus was considered as non-applicable); the Ruling of the Supreme Commercial Court of the Russian Federation of March 19, 2012 No. VAS-10350 (Dallesprom case, again the non-discrimination clause of the tax treaty with Cyprus was considered as non-applicable); the Ruling of the Supreme Commercial Court of the Russian Federation of January 13, 2012 No. VAS-17705 (Bryanskiy Mashinostroitelniy Zavod, the non-discrimination clause of the tax treaty with the Netherlands was considered as non-applicable).
The only exception to this approach to interpretation is connected with the Ruling of the Supreme Commercial Court of the Russian Federation of March 2, 2012 No. VAS-13698/11 (Omskiy Zavod Polipropilena case, the non-discrimination clause of the tax treaty with Cyprus was applied) where the Court made reference to the principle of non-retroactivity and held that there were no grounds for the revision of the judgements previously held in favour of a taxpayer (the judgment of the respective court of cassation was held on June 23, 2011, i.e., before the Ruling of the Supreme Commercial Court of the Russian Federation on 'Severniy Kuzbass' case of November 15, 2011).
4 NaryanmarNefteGaz No. VAS-7104/12 June 21, 2012.
finance company for no commercial reason other than to avoid the Russian thin capitalization rules. Relying on the consolidated financial statements and correspondence between the companies, authorities argued on the basis of substance over form that in its true economic and legal nature the loan was made in directly by the US shareholder of the Russian company.
On the key question of whether the non-discrimination Article of a tax treaty prevented the application of thin capitalization rules on the basis that the rule prohibits a signatory from denying deductions for payments to non-residents if similar payments to residents would be deductible1, the RF SCC in NaryanmarNefteGaz and a series of parallel cases ruled that the non-discrimination article would not override the domestic thin capitalization rule.
The Application of Domestic Anti-avoidance Measures to Deny Treaty Benefits. The argument presented by the taxpayer in NaryanmarNefteGaz rested on a number of limbs. One was the fact that Russian authorities had levied interest withholding tax on payments to shareholders in treaty countries where the payments could have been treated as dividends had the thin capitalization rules applied. The application of interest withholding tax to the payments, the taxpayer claimed, was evidence of an implicit acceptance by Russian authorities that the thin capitalization rules were incompatible with the non-discrimination treaty article. The Court offered no support for this argument.
The primary argument put forward in the thin capitalization cases was that the application of thin capitalization rules treated foreign investors differently from domestic investors. The RF SCC's reasoning to support the conclusion that the non-discrimination article was compatible with domestic thin capitalization rules was based on the fact that the thin capitalization rules affected the taxable profits of resident companies, not foreign entities. The Court noted that it was only domestic firms owned by foreign shareholders that were affected by the thin capitalization rules but said the application of the rules did not increase the taxable profits of affected domestic enterprises to more than profit they would have realized if the loans were regarded as contributions to equity capital, which would have been the funding method used in arm's length arrangements2.
Conclusions
The analysis above demonstrates the main directions in which two most principal types of legal interpretation in Russian tax law - administrative interpretation and judicial one - have developed.
The relevance of administrative interpretation is restricted by the fact that the expression of administration interpretation by way of rulings is not binding for the courts and taxpayers as it represents only the official position of the tax administration. However, it is binding for territorial subdivisions of the tax administration. Judicial interpretation, particularly in respect of the application of anti-avoidance measures, is emerging as an important factor in tax law in Russia.
The case law connected with international tax disputes in the Russian jurisdiction demonstrates the emergence of a relatively high degree of autonomy in the area of legal interpretation of tax treaties and domestic legislation as it related to cross-border transactions. The influence of international practice, n particular, OECD commentaries is becoming more significant.
1 '3. Except where the provisions of paragraph 1 of Article 7 (Adjustments to Income in Cases Where Persons Participate, Directly or Indirectly, in the Management, Control or Capital of Other Persons,) paragraph 4 of Article 11 (Interest), or paragraph 4 of Article 12 (Royalties) apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable capital of the first-mentioned resident, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State.
4. A company which is a resident of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirements to which other similar companies which are residents of the first-mentioned State (whether owned by residents of that State or of a third State) are or may be subjected'.
2 In fact, the Courts cited clause 3 of the Commentary on Art. 9 para 1 to the OECD Model convention (the version before 2010).
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Information about the author
Danil V. Vinnitskiy - doctor of juridical sciences, professor, head of the Financial law chair, director of the BRICS Law Institute, Ural State Law University, Yekaterinburg, Russia (54 Kolmogorova St., Yekaterinburg, 620034, Russia; e-mail: [email protected]).
© D. V. Vinnitskiy, 2020
Date of Paper Receipt: September 9, 2020
Date of Paper Approval: November 10, 2020
Date of Paper Acceptance for Publishing: December 1, 2020
