The Supreme Court clarifies the question of a tax on a tax

Valuers often take 20% VAT into account when calculating cadastral value, and the amount of property tax depends on that value. Why does this happen? And what will the decision of the Supreme Court change?

The Supreme Court had previously held that charging what is in effect a tax on a tax is unlawful, says Elena Muratova, a lawyer at the Kazakov and Partners law office. It cannot be ruled out that the courts will go on ignoring the new decision as well. "The highest court has kept to a consistent position that it is not permissible to calculate a tax on a tax. We hope that, in determining cadastral value, the courts will follow precisely the position of the Supreme Court, that the tax base is to be the value excluding VAT. In principle, the earlier judicial acts were already sufficient to exclude the charging of a tax on a tax. Practice is not uniform, and this is not a matter of some loopholes perhaps remaining. It is, in substance, a matter of the courts ignoring the position of the Supreme Court. Yes, those risks exist. The problem of a 'tax on a tax' is an acute one for legal entities. For the most part they are in dispute over commercial property, which is itself subject to VAT. It is simply that the Tax Code contains reliefs for flats, so flats are not subject to VAT," Muratova explained.

The ruling of the Supreme Court will not solve the problem of charging a "tax on a tax", the managing partner of Consul Group, Sergei Pivovarchik, is convinced.

"All that may disappear from the cadastral valuation is the mention of VAT. The final value will still not fall by 20%. The Supreme Court does not explain to the lower courts why VAT may not be included in cadastral value. It simply wrote that the inclusion of VAT in cadastral value has no basis in the law. The question is: what, then, is the exclusion of VAT from cadastral value based on? On nothing either.

An organisation's property tax ought to be calculated, and the base ought to be the value of the property itself. By drawing cadastral value into the tax, however, what was drawn in was not a base for the property itself, but the price of a transaction. A person who pays on cadastral value pays both a tax on the value of his own property and a tax on a notional amount of VAT. The Tax Code needs to be amended so as to state that the base for calculating an organisation's property tax is not simply the cadastral value, but the cadastral value reduced by the amount of VAT," Pivovarchik concluded.

On the estimates of Consul Group, the inclusion of VAT in cadastral value has cost Moscow taxpayers RUB 50 billion. The city authorities received that sum in addition over five years.

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