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Section 3. Tax law
https://doi.org/10.29013/EJLPS-20-2-21-26
Efremova Ekaterina S., Associate Professor of the Department of Entrepreneurial, Competition and Financial Law of the Law Institute of the Siberian Federal University, Candidate of Legal Sciences,
E-mail: Efremova1977@list.ru
THE ABILITY TO ACHIEVE TAX COMPLIANCE IN THE FACE OF FORMAL EQUALITY OF TAXATION
Abstract. This research focuses on the principle of equality of taxation. We surveyed the Tax Code of the Russian Federation and litigation practices in correspondence with the current legislation of the Russian Federation. The results obtained show that the principle of equality in taxation is not achievable.
Keywords: tax compliance, the principle of equality of taxation.
Introduction: The aim of this research is to investigate the principle of equality of taxation provided in Article 3 of the Tax Code of the Russian Federation. The principle of equality of taxation is one of the most important principles formulated by Adam Smith. This principle has been argued in literature by learned lawyers and economists for many years. The viewpoints of the Russian lawyers on the principle of equality of taxation can be divided into two groups. The first group define equality of taxation as the equality of all payers before the tax law, in other words, it means formal equality which is provided in Article 19 of the Constitution of the Russian Federation (Bryzgalin [7, P. 134]; Demin [9, P. 143]. The second group take a stand that equality of taxation is not rooted in law, but in uniformity of taxation. This equality is estimated solely on the basis of a comparison between the economic opportunities of various taxpayers (Pilipenko [15, P. 62]; Belyx [6, P. 147]; Pepelyaev [16, p. 113-115]).
According to the classical British economist John Mill, the level of welfare always correlates with revenues. For this reason, taxpayers whose revenues are equal should pay equal taxes. What logically follows is that inequality in revenues will mean inequality in taxes levied. Francis Edgeworth developed Mill's ideas and claimed that perfect equality in welfare distribution is impossible without increasing taxation on higher revenues (Jarczok-Guzy [20, P. 70-82]).
The uncertainty regarding the principle of equality of taxation raises the following questions: 1) Is the principle of equality of taxation a branch principle or is it a general principle that is being refracted within the tax law? 2) How are the provisions for tax equality implemented in taxpayers' legal relationships? To answer the question of tax equality we studied the acts of the Constitutional Court of the Russian Federation (including those adopted before the Tax Code of the RF entered into force) and a number of acts in the current legislation of the Russian
Federation. Our paper contains suggestions on how Article 3 of the Tax Code of the Russian Federation could be amended.
Methods: We reviewed available literature with a special focus on the principle of equality of taxation and carried out a comparative analysis of the legislation and litigation practices of several countries. We surveyed the acts of the Constitutional Court of the Russian Federation, some early sources on tax law of the Russian Federation and compared the taxation methods including the equivalent, proportional and progressive methods.
Results: Governments solve the problem of equality of taxation differently. Victor Thuronyi in his book "Comparative Tax Law" points to substantially different approaches to the interpretation of the principle of equality of taxation by the constitutional courts in different countries. The author maintains that in the dispute on the equality of taxation, Germany extremely favors the taxpayer, because "the German Constitutional Court has been active in striking down tax legislation for violating the principle of equality. In the opinion of the German Constitutional Court, tax legislation should take into account the taxpayer's ability to pay tax" (Thuronyi [17, P. 82]). In many cases the decision of the Constitutional Court (in which the fact of violation of the principle of equality is established) entails changes in the current legislation. For example, in the decision of June 27, 1991, the German Constitutional Court has established the fact of tax evasion, which arose as of violation of the
Table 1.- Some prerequisites which allow to
The analysis of the acts of the RF Constitutional Court also revealed the following issues that required could be an object for the present research:
1. What does the actual ability to pay tax mean?
obligation to declare interest income. As a consequence, those taxpayers who declared their income were taxed unfairly. The Court ruled that in order to avoid such a situation, one of two ways could be chosen: "it could provide for effective provision of information by banks to the tax authorities, so that declarations could be subject to effective checking, or it could impose a flat-rate withholding tax, among other possibilities" (Thuronyi [17, P. 83]).
A more moderate position on compliance with the principle of equal taxation is taken by the French Constitutional Council. "The Constitutional Council has invalidated tax legislation for violating the principle of equality in several cases, particularly in the instances where the tax law was seen as violating the principle of procedural equality before the law (procedural due process)" (Thuronyi [17, P. 92]).
The Supreme Court in the United States holds a derogation from the principle of equal taxation if there is an appropriate state interest (this is known as "rational basis") (Thuronyi [17, P. 85]).
The Constitutional Court of the Russian Federation has repeatedly defended the taxpayer, recognizing certain norms of tax legislation as violating the principle of equality of taxation. In order to identify certain aspects of the principle of equality of taxation in the Russian Federation we analyzed the acts of the Constitutional Court of the Russian Federation (including those adopted before published the Tax Code of the Russian Federation).
The results of the analysis are presented in (Table 1).
implement the principle of equality of taxation
2. Should wealthy citizens pay taxes at higher rates?
3. If this is the case, then should we go back to progressive taxation?
1. accounting for the actual ability to pay tax [1_
2. prohibition of discriminatory tax rules [2]
3. unified tax calculation procedure for all taxpayers [3]
4. statutory benefits for certain categories of subjects [4_
According to Isaev and Yanzhul, true equality is possible, provided all taxpayers bear an equal tax (property) burden.
Is it really so?
Taxation practices generally use three methods: equal, proportional and progressive taxation. The method of equal taxation means that all taxes are imposed on taxpayers (regardless of their income) equally. For example, in accordance with Article 333.19 of the Tax Code of the Russian Federation, all individuals and legal entities "in the event of filing a statement of claim of a property nature with a claim price of up to 20,000 rubles must pay 4 percent of the price of the claim" [5]. The method of proportional taxation means that each entity pays tax in proportion to the amount of the income received. Since 2001 an equal tax on the income of individuals has been introduced in Russia, which means that the received income of individuals (regardless of their size) is taxable by the rate of 13 percent.
If by uniformity of taxation we mean equal tax burden on all entities, these two methods (equal and proportional) do not seem applicable. Equal method does not take into account the property capacity of taxpayer. The proportional method assumes that the one who earns more pays more. This is mathematical equality, and it is by no means subjective. People with low income will pay taxes with much greater privations than rich people.
"True equality implies that the deprivation associated with the administration of the tax duty should be the same for all taxpayers; it requires not only objective, but also subjective equality, which is not ensured by mathematical equality" (Yanzhul [19, P. 252]). Thus, the introduction of a tax on the personal income with identical rate of tax (13 percent) in Russia does not correspond with the principle of equal taxation.
Galina Petrova - a highly reputed Russian authority in the area of finance expressed the view that it is possible to achieve uniformity of taxation by introducing the method of progressive taxation, which
suggests increasing the tax rate with the growth of the tax base (Petrova [14, P. 34]).
In theory and practice of financial law, three types of progression are distinguished, i.e the simple bitwise progression, simple relative progression and complex progression. The essence of the simple bitwise progression is that the bits are set for the total size of the tax. Then the tax amount is determined for each bit. We will immediately emphasize the drawback of this progression - the tax amount increases abruptly. This system has been widely used in the past. The simple relative progression means that ranks are set for the total size of the tax base, and different rates are determined for each rank. An example of the simple relative progression is the scale of tax rates on property of individuals, as is established by Article 406 of the Tax Code of the Russian Federation. In accordance with this article, a taxpayer owning property worth up to 300 thousand rubles pays a tax which amounts up to 0.1 percent. A taxpayer possessing property, the value of which exceeds 300 thousand rubles, but not higher than 500 thousand rubles, is subject to taxation which amounts to 0.1 to 0.3 percent. Thus, it may happen that some individuals will pay tax at an increased rate while the value of their property exceeded the lower property rank literally by one ruble. This circumstance entails a completely logical question of whether it is in compliance with the principle of tax equality. As you can see, applying the method of progressive taxation does not contribute to the achievement of real equality of taxpayers.
Thus, if by equality of taxation we understand equal tax burden on taxpayers, none of the methods of taxation will comply with this principle, because it is impossible to achieve equal suffering of all taxpayers.
The branch principles of law are designed to reflect the essential features of the branch. "Tax law as a branch is a set of legal rules governing relations of the organization and implementation of property withdrawals from individuals and organizations unilaterally by the state in order to financially support public
activities" (Kustova [12, P. 25]). Undoubtedly, the amounts of these withdrawals from individuals will always be unequal, because individuals do not have equal incomes, expenses and property. In this regard, if we understand the principle of equality of taxation as equality in taxation, then this principle cannot be recognized as the principle of the branch of tax law, since it does not reflect its specificity.
Discussion: In view of this, it should be recognized that application of the principle of equality of taxation is impossible, or to accept that it can be applied as the principle of formal equality and expressed in the equality of conditions in the obligation to pay taxes. That is, with an equal object of taxation and other conditions, taxpayers must bear equal tax burden.
Is the principle of tax equality really implemented in legal relations? To answer this question, let us consider a few practical examples.
• In accordance with Clause 3, Article 214.1 of the Tax Code (as amended on May 18, 2005), it was provided that "the income from securities purchase and sale operations is determined as the difference between the amounts of income received from the sale of securities and documented expenses for the purchase, sale, storage of securities actually made by the taxpayer, or property tax deductions used to reduce the proceeds of a sale in the manner prescribed by this item". Federal Law dated 06.06.2005 № 58-FL amended it; according to this amendment "in relation to income received from the sale of securities starting January 1, 2007, the tax base is calculated without applying a property tax deduction. The taxpayers that sold securities after January 1, 2007, were entitled to reduce the amount of income received only by the amount of documented expenses associated with the acquisition, sale and storage of securities". Thus, taxpayers that sold their securities before January 1, 2007, were in more favorable
conditions because in the event of impossibility to confirm the costs of the acquisition and storage of securities they were entitled to take advantage of property deduction. (What is more, in accordance with the Law of December 30, 2006 № 268-FL, the norm on obtaining this tax deduction extended to legal relations arising from January 1, 2002, that is, the taxpayer could file a revised tax return for 2002-2005 with the tax authority and get a deduction.) The problem of observing of the principle of tax equality in the sphere of the sale of securities by the taxpayer arises again when the article 219.1 of the Tax Code of the Russian Federation is passed in 2013. This article provides investment tax deductions for taxpayers upon implementation of the sale of securities owned by them for more than 3 years (paragraphs 1p.1 article 219.1 of the Tax Code). Tax asset is applied to income received from the sale of securities acquired by the taxpayer after 01/01/2014 (in accordance with Federal Law No. 420-03 dated 12.28.2013). Thus, taxpayers who have sold securities acquired in property before 2014 are not entitled to a deduction, and are in less favorable conditions.
Here is another example. The Tax Code of the Russian Federation provides for the right of a taxpayer to receive a property tax deduction when acquiring a certain immovable property. The procedure and conditions for the provision of such a deduction are fixed, in particular, by subparagraph 1 of paragraph 3 ofArticle 220 of the Tax Code of the Russian Federation. Since January 1, 2014, the rights of taxpayers to receive property tax deduction have been expanded. So, if the taxpayer used the right to receive a property tax deduction in the amount less than its maximum amount (for example, less than 2 million rubles established by law), the remainder of the property
tax deduction until its full use can be taken into account when receiving a property tax deduction in the future for new construction or for the acquisition of other property on the territory of the Russian Federation. At the same time, taxpayers who previously (before January 1, 2014) have exercised the right to receive the corresponding tax deduction, having received it in the amount less than the maximum amount, cannot claim the remainder of the property tax deduction after January 1, 2014. Citizens believe that in this case their rights are violated. The Arbitration Courts and the Constitutional Court, on the contrary, do not see in this case a violation of the principle of equality of taxation. The norms of Article 220 of the Tax Code of the Russian Federation provide the extension of the rights of taxpayers in connection with their property tax deduction and establish the range of relations to which they will apply. The Constitutional Court noted that the adoption of these norms refer to the discretionary powers of the legislator in the field of establishing rules of preferential taxation, which cannot be regarded as violating the rights of the taxpayer.
Conclusions: Thus, even these few examples indicate that today the category of "the principle of equal taxation" is very unstable. The legislator applies
this principle differently to legal relations that do not have significant differences, i.e, when this refers to one category or group of taxpayers.
In this regard, in paragraph 1 of Article 3 of the Tax Code of the Russian Federation the words on the equality of taxation should be replaced by the words on the equality of all taxpayers before acts of legislation on taxes and fees, i.e. this ought to refer to the formal equality of subjects. We believe that this phrasing will allow us to avoid the controversial situations outlined above.
Since formal equality can also be violated, the legislator, in our view, should provide a legal guarantee which will ensure the implementation of the principle of equality of all taxpayers before acts of legislation on taxes and fees.
We offer the following: the provisions ofArticle 21 of the Tax Code of the Russian Federation "The rights of taxpayers (tax bearer, contribution payers)" could be supplemented with a provision that taxpayers have the right not to comply with acts and requirements of tax authorities if they violate the principle of equality of all taxpayers before acts of legislation on taxes and fees, allow different legal regulation for taxpayers, which do not differ significantly.
The study was carried out with financial support from the Russian foundation for basic research in the framework of the scientific project no. 20-011-00080 "Tax Compliance and Legal Means of Its Support".
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