Breach of Procedure Leads to Refusal to Collect Taxes From the Taxpayer

UnknownGalina Akchurina Head of FBK-Legal Tax Litigation practice
The Tax Code pays much attention to the legal governing of both the procedure for calculation and payment of taxes as well as the procedure of tax administering. The law sets the terms for tax inspections, terms and procedure for making a taxpayer liable for tax breaches, procedure of expertise, interrogation of witnesses, as well as other procedures and actions aimed at controlling the observation of tax legislation.

However, taxpayers know that for a long time tax bodies did not pay due attention to the observation of tax control procedures. There were several reasons for this: lack of legal control or unclear procedure of legal control (for instance, for a long time the Tax Code lacked the provision governing terms for making a decision as a result of tax inspections); tax bodies' responsibilities were set without any consequences for nonexecution of such responsibilities indicated by law; and court practice that (except for some minor exceptions) recognized that breach of tax inspection procedures and making someone liable can not be the reason for recognition of decisions made by the results of a tax inspection illegal.

Tax bodies' conclusions regarding the existence of nonpayment or incomplete payment of taxes shall first be evaluated. If it was said that the taxpayer did not pay tax, then most often the courts did not pay attention to breaches in the inspection procedure.

The legislator attempted to solve the problem of gross breaches made during inspections and bringing about tax liability, by adopting Law N137-FZ of July 27, 2006. The Supreme Arbitration Court has facilitated this aim, having made several decrees on this issue.

Thus, the Federal Law of July 27, 2006, N 137-FZ introduced important changes that came into effect on Jan. 1, 2007. Article 101 (14) of the code states that a breach of material conditions in the consideration of tax inspection materials is a basis for an annulment of the tax body's decision by the superior tax body or the court. According to the legislation, such material conditions include providing the person who was inspected an opportunity to participate in the consideration of tax inspection materials personally and/or through his representative, as well as providing a taxpayer with an opportunity to present explanations. That is, should the person that was inspected by the tax bodies not be provided the opportunity to participate in the consideration of inspection materials, it is an unconditional reason for the decision of the tax body to be deemed illegal. Such decision is recognized as illegal regardless of the reasons with which the inspectors made their conclusion on nonpayment or incomplete payment of taxes by the taxpayer. In this case, taxes, penalties or fines cannot be collected from the taxpayer.

However, even after the Law N137-FZ was adopted, some courts continued to maintain the attitude that should no tax actually be paid, then the fact that the taxpayer was not given an opportunity to present his objections against the very inspection report is not a reason for recognizing the decision as illegal in full volume. The taxpayer would be released from tax liability only (a fine).

The Supreme Arbitration Court drew a line under this dispute. In the Decree of Presidium of the Supreme Arbitration Court of Feb. 12, 2008, N12566/07, the court considered a case where the tax inspection began in 2006, and the decision based on its results was made in 2007, in other words after the Law N137-FZ came into effect. According to this decision, the taxpayer was charged with additional taxes and fines, and was brought to tax liability. When considering the case, the courts found that the notice informing the taxpayer of consideration of objections to the inspection report was not sent in a timely fashion to the taxpayer -- thus, he was deprived of an opportunity to participate in the presentation of objections to the inspection report and to present his explanations. The lower courts refused to recognize the decision as illegal based on the indicated reason, and stated that the tax was not paid. The Supreme Arbitration Court overruled the decisions of the lower courts and recognized the tax body's decision as illegal in full volume, having indicated to the courts that the disregard of article 101(14) of the Tax Code is not allowed. Non-observation of requirements contained in the given provision is an unconditional reason for the recognition of the tax body's decision as illegal.

The decree of the Supreme Arbitration Court N130084/07 of March 18, 2008, is of the same importance to taxpayers. When considering the case, the court found that the tax body broke the terms set for the conduct of tax inspection. The tax body was unable to reason terms of inspection and their compliance with the requirements of the Tax Code. In relation to this, the court indicated that a breach of terms of the tax inspection does not change the terms for collection of taxes set by Articles 46-48 of the Tax Code. In such a way, coming from stability of legal order and legal clarity of principles, the court recognized that an illegal delay of terms set for the conduct of control activities does not change terms set for tax collection and can lead to the complete loss of the right to the enforced collection of an outstanding tax, accrued additionally.

Considering the above-listed court acts, one can make the conclusion that the taxpayer has obtained an additional mechanism to protect him from excessive and illegal tax administering that he can use in court.