Arbitration cases and court system: results of 2013

The growing role of case law in Russian arbitration practice is not surprising at the moment but at the same time makes both lawyers and business follow the cases produced by the court not least important than alterations of current laws.

2013 year confirmed the trend of enhancement of role of precedent facilitated by the courts and was marked by a number of interesting constructions and interpretations of controversial issues in various areas of law.

Some of them we have tried to cover in our review.

Tax law

On August 27 the text of the Resolution of the Plenum of Supreme Arbitration Court of the Russian Federation dated 30.07.2013 N 57 "On some issues arising in application by arbitration courts of Part One of the Tax Code of the Russian Federation" was published.

Part One of the Tax Code of the Russian Federation has been ignored by the courts for a long time. Meanwhile, it has been more than 10 years since Part One of the Tax Code of the Russian Federation was enacted and many weak spots have become apparent during this time require some solution.
Below you will find court interpretations that seemed significant to us.

Recovery of amount of tax by tax agent

In the past the case law stated that each distribution of income to foreign legal person referred to in paragraph 1 of Art 309 of the Tax Code of the Russian Federation, a company constituting a tax agent is required to deduct from income tax and remit it into the budget. Due to the fact that on the basis of subparagraph 1 of paragraph 3 of Article 24 and paragraph 1 of Art. 310 of the Tax Code of the Russian Federation the aforesaid tax shall be remitted into the budget out of money funds distributed to foreign company and tax agent may not be requested to remit tax into the budget out of income paid to a foreign company that has not been withheld improperly.

However, the Resolution of Plenum of Supreme Arbitration Court of the Russian Federation states another position regarding this matter. Subject to the Plenum of Supreme Arbitration Court of the Russian Federation, in case of failure to withhold tax when remitting money funds to a foreign person a tax agent may be charged both tax and interest accrued thereon until the fulfillment of obligation to pay tax, as recommendations relating to impossibility of charging against tax agent the amount of non-deducted tax and relating to limitation of period for levying penalty, based on the fact that liable person remains a taxpayer (subparagraphs 5, paragraph 3 of Art. 45 of the Tax Code of the Russian Federation), that shall incur liability against tax authority relating to payment of tax, is not applicable when paying money funds to a foreign person due to non-registration of the latter in Russian tax authorities and impossibility of its tax administration.

This recommendation may lead to risks when making payments to foreign companies and more closer look at such transactions by tax authorities since tax agent may be subject to taxes, penalty and interest.

Tax authorities are allowed to make mistakes

Until recently in situations where claim for payment of tax was executed by supervisory authority in violation of the rules, taxpayers could challenge such document in court. There has been large number of arbitration cases on this issue .

Meanwhile, the conclusions of the Plenum of Supreme Arbitration Court of the Russian Federation stated in the Resolution dated 30.07.2013 N 57, most probably, will not give to taxpayers, in most cases, the chances of success as paragraph 52 of the said Resolution contains provisions which allow supervisors to make mistakes when executing a claim.

Subject to reasoning of judges, tax payment claim can not be invalidated due to absence therein of information specified in paragraph 4 of Art. 69 of the Tax Code of the Russian Federation, if such data is contained in the ruling, tax declaration, notice and there is a reference to such documents in such claim.
The leeway for appealing claims of tax authorities on formal grounds, frequently practiced by taxpayers, has lessened significantly. Now, before appealing tax payment claims issued by controllers, the taxpayer shall ensure that he is not exposed to reference to a document (ruling, tax return, tax notice ) that corrects identified deficiency. And if such reference is in place, such document shall be analyzed with regard to content of required information therein.

How to calculate the penalty

The Plenum confirmed its long-standing position relating to penalty calculation rules.

The penalty is imposed on the day of payment of tax owed. Therefore:

if the tax owed is not paid at the time of filing claim with the court, Inspectorate of Federal Tax Service may increase the amount of penalty;
if the tax owed is not paid at the time of the court ruling, the court ruling shall reflect the following:

The amount of tax owed subject to imposed penalty;
The date of commencement of imposing penalty;
Interest rate of penalty;
Reference to the fact that imposed penalty shall be inclusive of the day of payment of tax owed.

If at the time of the ruling the tax owed has been paid, the court will indicate in the ruling the penalty in fixed amount.

An appeal may be filed with the court only upon filing it to Federal Tax Service

Legal cases related to possibility of appealing the part of tax authority's resolution that has not been appealed in Federal Tax Service are not quite uniform. Many courts considered that pre-trial proceedings are complied with, even if the complaint to IFTS was submitted against part of the ruling. Now the Plenum of Supreme Arbitration Court of the Russian Federation clarified that resolution of IFTS in inspection may be challenged in court only to the extent of appeal to Federal Tax Service. In addition, the Resolution is deemed to have been appealed in full, unless the complaint explicitly states that the resolution is appealed in part.

IFTS shall comply with terms of processing of a complaint

In the past the case law stated that in case of omission by IFTS of processing of complaint, it did not infringe the rights of taxpayers, despite the fact that penalties continue to be imposed. Currently the Plenum has allowed not only to challenge in court omission of IFTS but also appeal directly to the court tax authority's resolution that was suspended in IFTS, without waiting when IFTS decided to issue a resolution.

Since 2014 a similar procedure for filing appeal will be applied subject to the Tax Code in respect of any non-normative instructions of tax authorities, actions (omissions) of officers (until 2014 subject to the Tax Code it is enforceable only with regard to resolution upon inspections).

For failure to submit declaration for the reporting period within prescribed term it is unlawful to impose liability on taxpayer subject to Art. 119 of the Tax Code of the Russian Federation

It should be noted that prior to Resolution of the Plenum of Supreme Arbitration Court of the Russian Federation in the case law there has not been a uniform approach to the issue of imposing liability on taxpayer under Art. 119 of the Tax Code of the Russian Federation for late submission of tax returns for the reporting period. The Plenum of Supreme Arbitration Court of the Russian Federation pointed out the difference between tax return submitted for the tax period and calculation of advance payment remitted for the reporting period. Accordingly, in case of failure of submission or late submission of calculation of advance payments it is not possible to impose liability on taxpayer under Art. 119 of the Tax Code of the Russian Federation, that stipulates a penalty for late submission of tax returns.

Application of calculation method when challenging transactions with unconscious contractors

The obligation of application of calculation method by tax authorities in case of absence of company documents and in case of discrepancies of documents. In case of absence or discrepancies of documents with regard to particular transactions income and expenses relating to such transactions shall be determined by tax authority based on data from similar operations of the taxpayer.

The burden of proving that the amount of income and (or ) expenses determined by tax authority does not correspond to the actual conditions of economic activity shall be imposed on taxpayer.
It should be noted that the application of the calculation method does not apply to VAT deductions.

The Resolution of the Plenum enacted a number of provisions that may change current enforcement practices. Therefore encourage you to read full text thereof.
It should be noted that conclusions reflected in resolution of the Plenum may be applied in cases related to previous tax periods.

On application of Article 122 of the Tax Code of the Russian Federation specifying liability for non-payment or partial payment of tax amount (fee)

Article 122 of the Tax Code provides liability for non-payment or partial payment of the amount of tax as a result of reduction of the tax base, other miscalculation of tax or other unlawful actions (omissions).
When applying these provisions as noted in paragraph 19 of Resolution of the Plenum of Supreme Arbitration Court of the Russian Federation N 57, the courts should proceed from the premise that omission of the taxpayer involving failure to remit the amount stated in tax return into the budget, does not constitute an offense subject to this Article. In this case, he shall be charged penalty.

In paragraph 20 of the Resolution of the Plenum of Supreme Arbitration Court of the Russian Federation N 57 it is stressed that by virtue of Art. 122 of the Tax Code of the Russian Federation unlawful actions (omissions) of the taxpayer shall constitute an offense if it led to non-payment or partial payment of the amount of tax, i.e. formation of tax debt.

When applying the aforesaid norm it is necessary to take into account relevant provisions of Art. 78 and 79 of the Tax Code of the Russian Federation, stipulating that the debt of taxpayer relating to payment of tax may be offset against excess payment of tax, penalties and fines by the taxpayer.

The Plenum of Supreme Arbitration Court of the Russian Federation stated that the courts shall proceed from the premise that subject to provisions of aforesaid interrelated norms the reduction of the amount payable for upon particular tax period shall not lead to formation of outstanding tax amount (and therefore does not incur liability stated in Art. 122 of the Tax Code of the Russian Federation) in the case of compliance with the following terms and conditions:

On the date of expiry of the deadline set forth by current laws for the tax period, for which tax authority accrued penalty, the taxpayer had excess amounts of the same tax equal to understated tax, at the amount exceeding or equal to the amount of understated tax;
At the time of approval of resolution by tax authority on the basis of results of tax inspection these amounts have not been offset against other outstanding amounts of the taxpayer.

If under these conditions the amount of excess payment was less than the amount of understated tax, the taxpayer shall be exempt from liability respectively.

In the past the Plenum of Supreme Arbitration Court of the Russian Federation expressed different position: the offense set forth in Art. 122 of the Tax Code of the Russian Federation is not deemed to have been committed, if in the previous period taxpayer had an excess payment of tax that overlaps the amount of the same taxes, reduced in subsequent period and payable into the same budget or equal to that amount and said excess payment has not been previously offset against other outstanding tax amounts. Such provision was stated in paragraph 42 of Resolution sated 28.02.2001 N 5, that ceased to be in force and effect due to issuance of Resolution of the Plenum of Supreme Arbitration Court of the Russian Federation N 57. It is often referred to by arbitrators when addressing the issues related to application of Art. 122 of the Tax Code of the Russian federation ( see Regulation of FAS PO dated 01.12.2011 N A12-2316/2011 FAS MO dated 10.11.2010 N KA-A41/13624-10, FAS SZO dated 15.10.2008 N A05-1446/2008).

On impossibility of disposal of evidence obtained in violation of the Tax Code

Paragraph 27 of Resolution of the Plenum of Supreme Arbitration Court of the Russian Federation N 57 states: interrelated interpretation of Art. 88, 89, 93, subparagraph 1, 1.1, Article 93.1 and Art. 101 the Tax Code of the Russian Federation states that retrieval from the taxpayer, its contractors or other persons (including public bodies) of documents relating to taxpayer business is permitted only during inspection of the taxpayer or enforcement of additional tax control.

Accordingly, the courts shall proceed from the premise that the request on provision of required documents may be sent by tax authority to such persons only within the time limits set forth in paragraph 2 of Art. 88, paragraph 6 of Art. 89 and paragraph 6 of Art.101 of the Tax Code of the Russian Federation.

The Plenum of Supreme Arbitration Court of the Russian Federation paid attention to the following point: it should be taken into account that the tax authority subject to subparagraph 2, paragraph 4 of Art. 101 of the Tax Code of the Russian Federation when investigating the materials of tax inspection shall be entitled to investigate the documents received pursuant to the Tax Code of the Russian Federation prior to the start of relevant tax inspection.

Arbitration proceedings

In 2013 the Resolution of the Plenum of the Russian Federation dated 08.11.2013 N 80 that states rules relating to submission of documents to arbitration courts in electronic form by completing the forms posted on the official web-site.

Persons participating in proceedings shall be entitled to submit documents to arbitration court in electronic form, complete forms of documents posted on official website of arbitration court, in the manner prescribed by Supreme Arbitration Court of the Russian Federation. For this purpose the aforesaid persons shall be registered in "My Arbitrator" system, posted on official website of Supreme Arbitration Court of the Russian Federation. A person registered in this system by creating his account, forming "personal account" shall be deemed user of the system.

For electronic submission the documents shall be converted into digital form by scanning it in Adobe PDF format in black and white or gray, ensuring preservation of authenticity (graphic signature, seal, letterhead stamp), as well as outgoing number and date of the application. File size should not exceed 10 MB.

The following procedures have also been determined: procedure for filing documents with arbitration court of first instance (claim, answer to complaint, counter-claim), at the stage of reversal of court rulings, procedure for filing application for compensation due to violation of the right to judicial trial within reasonable term and procedure of submission of documents in electronic form.

Establishment of new court

Plenum of the Supreme Arbitration Court of the Russian Federation dated 02.07.2013 enacted Resolution N 51 "On commencement of activity of Intellectual Property Rights Court". This document states the functions of the first specialized court within the system of arbitration courts and features of cases relating to protection of intellectual property rights.

Possibility of establishment of specialized courts is prescribed in Article 26 of Federal Constitutional Law dated 31.12.1996 N 1 -FKZ "On Judicial System of the Russian Federation". Operation of specialized judicial body that would professionally and properly deal with disputes related to formation, implementation and protection of intellectual property rights, is necessary not only for improvement of protection of rights and legitimate interests of citizens and legal persons in this sphere, but also for strengthening reputation of Russian economy. Such specialized courts operate in several countries. In Germany, for example, there is Federal Patent Court, in Japan – Intellectual Property Protection Court.

Such Court shall have the following powers:

as the court of first instance court on intellectual property rights resolves:

1. cases related to challenging regulations of federal authorities of executive power affecting the rights and legitimate interests of claimants in the sphere of legal protection of intellectual property rights and means of individualization, inclusive of patent rights and selection achievements rights, rights related to topography of integral circuits, trade secrets rights (know -how), rights related to means of identification of legal persons, goods, services and businesses, right to use the results of intellectual activity as part of the same technology;
2. cases related to disputes on granting or termination of legal protection of intellectual property and similar means of individualization of legal persons, goods, services and businesses (other than copyright and related rights, topographies of integrated circuits), inclusive of:

challenging regulations, decisions and actions (omissions) of Federal authority of executive power on intellectual property, Federal authority of executive power on selection achievements and their officers, and bodies authorized by Government of Russia to process a patent application for secret invention;
Challenging the resolution of federal antimonopoly body claiming unfair competition behavior related to acquisition of exclusive rights to means of individualization of legal person, goods, works, services and businesses;
Identification of patentee;
Invalidation of a patent for an invention, utility model, industrial design or selection achievement, resolution to provide legal protection to a trademark, name of country of origin and provision of exclusive rights on such name, unless federal law provides a procedure for invalidation;
Early termination of legal protection of a trademark due to non-exploitation of patent.

The aforesaid cases are resolved by the Court on intellectual property rights, irrespective of whether the participants of legal relations, that gave rise to dispute, constitute organizations, individual entrepreneurs or citizens. In addition, the cases are resolved by collegial panel of judges.

Court on intellectual property rights as a court of cassation instance resolves cases resolved by it in first instance, and cases related to protection of intellectual property rights, resolved by arbitration courts of subjects of the Russian Federation in first instance, arbitration courts of appeal.

To investigate specific matters arising in particular cases related to competence of specialized court, its staff pursuant to Art. 87.1 of Arbitration procedure Code of the Russian Federation stipulates formation of group of advisers having qualification relevant to specialization of the court. In addition, arbitration process involves participation of specialists in legal proceedings if it is required to obtain the opinion of persons having special knowledge in specific areas, in order to provide independent assistance to the court in clarification of particular circumstances. Such experts participate exclusively orally. There is possibility of involvement of advisers of the court on intellectual property rights as specialists.

Thus, the Court on intellectual property rights today has very limited powers and its further development prospects are dim, taking into account a new wave of judicial system reform.

However, most important changes in the life of court society in 2013 were not connected with law-making process of arbitration courts but their existence as such in future.

REFORM OF COURT SYSTEM: REASONING BEHIND UNIFICATION OF SUPREME COURT OF THE RUSSIAN FEDERATION AND SUPREME ARBITRATION COURT OF THE RUSSIAN FEDERATION.

In December 2013 State Duma adopted in the first reading the following bills (hereinafter - Projects), stating the liquidation of Supreme Arbitration Court of the Russian Federation:

the bill of Federal constitutional law N 390470-6 "On Supreme Court of the Russian Federation";
the bill of Federal constitutional law N 390478-6 " On Amending Federal Constitutional Law "On Judicial System of the Russian Federation";
the bill of Federal Law N 390479-6 "On procedure of selection of candidates for initial composition of Supreme Court of the Russian Federation , established in accordance with the Law of Russian Federation on amendment entered into Constitution of the Russian Federation "On Supreme Court of the Russian Federation and the Prosecution office of the Russian Federation".

The Supreme Court of the Russian Federation is expected to be the only supreme judicial body on civil, criminal, administrative and other cases and on resolution of economic disputes. It shall consist of 170 judges, selected subject to the rules contained in the bill. Thus, it is planned to form Special qualifications board for selection of candidates for the position of judge of the Supreme Court of the Russian Federation and procedure of selection. Judges will be selected on a competitive basis: they will have to pass a special qualification examination, the results of which will be assessed by Special Examination Board on appointing judges of the Supreme Court of the Russian Federation. The project contains definition of a new competence of the Plenum of the Supreme Court of the Russian Federation and Presidium of Supreme Court of the Russian Federation, and powers of the Chairman of the Supreme Court of the Russian Federation and his deputies. It should be noted that according to the bill the Supreme Court of the Russian Federation will be located in St. Petersburg, while permanent representative office thereof will be left in Moscow. Exact time frames of relocation of the Supreme Court of the Russian Federation will be determined by the President of the Russian Federation in consultation with Supreme Court of the Russian Federation.

Below you can find the summary of current events.

Currently, the judicial system is formed so that the Supreme Court of the Russian Federation and the Supreme Arbitration Court of the Russian Federation have different jurisdiction and do not interact with each other, causing a number of problems. There are frequent disputes regarding jurisdiction of cases, law enforcement practice of arbitration courts and courts of general jurisdiction is quite different. An example of such differences is the attitude of the courts to assessment of evidence. Let’s facilitate as an example evidence: as opposed to the courts of general jurisdiction, evidence in arbitration process is not rendered much importance, although it is not always correct from the point of proving procedure. There is also a difference in organization of the courts. It is no secret that organization of activity of arbitration court system has outstripped the development of the courts of general jurisdiction. This affects both the activity of the courts and the participants of the process negatively. It should be noted that currently it is quite difficult for individuals to track their rulings, while legal persons and entrepreneurs have possibility to receive information without further application to the court by checking it on relevant website. Similar problem also arises when forming case law base.

The model of court system can be outlined schematically as follows:

The model of court system facilitated upon the results of enactment of the bill of Federal constitutional law N 390470-6 "On Supreme Court of the Russian Federation", the bill of Federal constitutional law N 390478-6 " On Amending Federal Constitutional Law "On Judicial System of the Russian Federation":

We can assume that recent alterations of Civil Procedure Code of the Russian Federation and Criminal Procedure Code of the Russian Federation regarding the appeal of court judgments constitute precondition for the reform of judicial system. There is a strong drive for European model of judicial system aimed at establishment of the system of single application of procedure norms.

The main objective of the reform is to create a common legal practice. Reform seems rational solution to improve judicial system as a whole in case of well-coordinated work of judiciary bodies and effective exchange of experiences in the area of administration of the law. However, it is too early to judge how alterations in judicial legislation will be implemented in practice. It will be possible to understand strengths and weaknesses only upon enactment of laws in final version.

The aforesaid alterations have caused expressive reaction among legal professionals. It's not a secret that arbitration courts are well known for their organization, better technical capabilities, efficiency and professionalism of judges. Courts of general jurisdiction have always lagged behind pursuant to all indicators. The reasons behind this reform are to bring the courts of general jurisdiction to proper level. However, doing it at the expense of a well-functioning and stable structure is quite risky endeavor.

We can only hope that the reform in this area will be limited to unification of the highest ranks and reformist itch will not lead to total destruction of arbitration justice system.