The September issue of the journal Nalogoved discusses a decision of the Collegium in a case on the review of cadastral value and an additional tax assessment made retrospectively, a decision that has drawn a mixed response from experts. The discussion concerns the Ruling of the Economic Disputes Collegium of the Supreme Court of 19 July 2019 in case No. A40-232515/2017, Yumaks, a limited liability company (the Company).
The facts of the case
In 2017 the Company paid property tax on the basis of the cadastral value of a building, determined as at 1 January 2014 and amounting to 58.2 million roubles (Moscow Government Resolution No. 688-PP of 21 November 2014). In February 2016 a decision of the commission found the results of the cadastral valuation unreliable, because of an error in the group assigned to the property. The building's cadastral value was recalculated and exceeded 863 million roubles. In June of the same year the corresponding entry was made in the cadastre.
By Resolution No. 937-PP of 26 December 2016, the Government of Moscow introduced amendments on the new cadastral value of the property. A court, however, held that the provision of that Resolution applying the changed cadastral value from 1 January 2016 was of no legal effect, citing Article 5 of the Tax Code, on the impossibility of giving retrospective effect to legal regulation that worsens the position of taxpayers.
The tax authority nevertheless considered that, for 2016, the Company ought to have calculated and paid the tax on the new cadastral value, and it made an additional tax assessment.
The taxpayer took the view that the new cadastral value could not be applied retrospectively, by virtue of paragraph 15 of Article 378.2 and of Article 5 of the Tax Code, and applied to the court.
The courts of three instances agreed with the tax authority. They held that the change in cadastral value was caused by a technical error in the cadastral valuation of the property. By the time the tax return was filed, the new value had been entered in the cadastre. The courts relied on Article 24.20 of Federal Law No. 135-FZ of 29 July 1998 "On Valuation Activities in the Russian Federation" (the Valuation Law). Under that rule, a changed cadastral value is to be applied in the year in which an application for its review was filed with the commission. In this case, that year was 2016. The courts also noted that the Company, as owner of the building, could not have been unaware of its actual use and purpose, which was what gave rise to the error.
The position of the Supreme Court
The Economic Disputes Collegium of the Supreme Court agreed neither with the conclusions of the lower courts and of the tax authority, nor with the position of the taxpayer.
First, in the Collegium's view, the use of unreliable information in determining cadastral value shows an objective distortion of the tax base. Such a cadastral value is not a proper value characteristic of the real property that is subject to tax. Once the commission adopted its decision in 2016 finding unreliable the information about the property that had been used to determine its cadastral value, the value previously determined could no longer be applied for tax purposes, either in that tax period or in subsequent ones.
Second, the amount of property tax for 2016 in this situation must be determined by the calculation method (subparagraph 7 of paragraph 1 of Article 31 of the Tax Code), on the basis of objective information on the value of real property that corresponds to the facts (for tax purposes, preference is given to applying a cadastral value of real property equal to its market value).
Third, calculating property tax on a reliably determined cadastral value, in the situation that has arisen, does not show that the taxpayer's position is worsened, and gives no ground for finding a breach of the principle of maintaining confidence in the law and in the actions of the state, because only the taxpayer's legitimate expectations are protected. The corrected cadastral value departs from the original by a large multiple. That supports the conclusion that the cadastral valuation was carried out in a manifestly incorrect way, of which the taxpayer, as an operating commercial organisation, could not have been unaware.
The Collegium set aside all the judicial acts adopted in the case and remitted the case for a fresh hearing. It recommended that the court of first instance, if necessary, consider appointing an expert examination to determine the market value of the building for the disputed period.
An expert's comment
Sergei Pivovarchik, managing partner of Consul Group, a participant in the case:
"The Collegium's approach contradicts positions previously stated by the Supreme Court, explanations given by the Constitutional Court, and the normative acts in force.
First, the Collegium directs that Moscow Government Resolution No. 688-PP of 21 November 2014, which approved the original cadastral value, be disregarded. As the ground for refusing to apply it, the Collegium proposes to follow a decision of a commission that is not part of the system of state authorities and that has no power to repeal normative legal acts.
Second, the Collegium proposed that the results of the cadastral valuation be reviewed, in breach of the established division of jurisdiction over disputes.
Article 375 of the Tax Code requires that the tax base be the cadastral value recorded in the cadastre as at 1 January. The Supreme Court has repeatedly pointed out that it is impermissible to use as the tax base any figure other than the cadastral value stated in the cadastre. The Collegium now departs from that position and directs the lower courts, where necessary, to determine the market value of the object of taxation, which an arbitrazh court has no power to determine (that lies within the competence of a court of general jurisdiction).
Third, the Collegium denies the legitimacy of the taxpayer's lawful conduct. It insists that an "improper cadastral value" (this term is a novelty in Russian legislation) may not be applied, not only in future tax periods but also in the current one. Since that conclusion contradicts the special rules of the Tax Code (Articles 375 and 378.2), the Collegium declines to apply them and relies on the general rules of the Code, giving those rules a very particular interpretation.
Thus, in justifying the use of the calculation method (Article 31 of the Tax Code), the Collegium refers to "improper recording" of the property. Left out of account is the general thrust of the rule, which is directed at the calculation method in cases where the taxpayer distorts its tax records, or fails to provide or conceals information about its activity (that is, where it acts in bad faith). In the case of the company Yumaks, in our view, that approach has without justification been extended to situations in which state authorities are to blame for the distortion of the records.
The Constitutional Court has repeatedly stated that state authorities are under a duty to ensure that information in the cadastre is reliable (taxpayers use it as the tax base and are not supposed to recheck it), and that those authorities also bear responsibility for the proper performance of that duty. That approach is set out in Judgment of the Constitutional Court No. 20-P of 11 July 2017, which the Collegium quoted selectively. The position of the Constitutional Court set out in Judgment No. 13-P of 28 February 2019 in the case of Parus, a limited liability company, on excluding the possibility of placing on the taxpayer the adverse consequences of errors made by the authorities, was ignored altogether."
Read the comments of other experts in the full version of the publication in the journal.
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