CG expert view
How did this start?
By Decree of the Government of Moscow of 26.12.2016 No. 937-ПП, the cadastral value of 2,502 Moscow trade and business centres was increased because unreliable information had been used in the state cadastral valuation.
The situation was the result of the following chain of events.
1. In the latest state cadastral valuation, unreliable (incomplete) information on the properties being valued was used. It did not make it possible to establish how a property was actually used, which is required if the correct specific indicator of cadastral value is to be applied. Such properties were placed by default in the "Other" group, and lower specific indicators of cadastral value were therefore applied to them.
2. Having found, from a check of how the property was actually used, that the information was unreliable, the executive authorities initiated a review of that property's cadastral value before the commission for the consideration of disputes on the results of determining cadastral value.
3. On the basis of the commission's decision, the valuers who had determined the cadastral value recalculated it.
4. The results of the recalculation were approved under Order of the Ministry of Economic Development of Russia of 18.03.2011 No. 114. The Government of Moscow intended to apply the newly established cadastral value so as to collect additional tax as early as the 2016 tax period. To that end it intended to rely on clause 15 of Article 378.2 of the Tax Code, which provides that the new cadastral value applies from the beginning of the tax period in which the application was sent to the commission.
Owners of large commercial property in Moscow were encountering this practice for the first time.
Disregarding the guidance the Constitutional Court had already given on the collection of tax (Resolution of 02.07.2013 No. 17-П), the Government of Moscow was able in this way to collect an additional 12 billion roubles of tax for 2016 alone. That is almost 1/3 of all receipts (43 billion roubles, according to the official website of the Moscow City Property Department).
In fact, the newly adopted decree conflicts with the legislation in force. It also fails to create the conditions needed for business to develop normally, and it unsettles the collection of tax,
believes Sergei Pivovarchik.
What consequences await taxpayers?
Besides the obvious and substantial overpayment of corporate property tax, taxpayers face other unpleasant consequences.
The owner of a building caught by Decree No. 937-ПП who does not accept a demand for the additional payment may encounter the means of pressure widely used by the Federal Tax Service of Russia. The most common are:
- blocking of the company's bank accounts;
- seizure of property;
- liability for a tax offence, in the form of a fine of 20 to 40% of the arrears.
In any event the taxpayer will have to pay late-payment interest for each day of delay, at the refinancing rate, under Article 75 of the Tax Code.
For example, one company did not pay, by the due date, an additional tax assessment of more than 180 million roubles on its properties. It now faces a fine of 36 to 72 million roubles.
There is, moreover, the question of criminal liability for the company's managers and beneficiaries. In practice, one of the most effective ways in which the Federal Tax Service of Russia compels a taxpayer to meet its demands is to open a criminal case. The offences most often used are Article 159 of the Criminal Code (fraud) and Article 199 of the Criminal Code (evasion of taxes and (or) levies payable by an organisation). To open a prosecution under Article 199 of the Criminal Code it is enough to establish evasion of tax on a large scale, that is, a debt of more than 5 million roubles. A debt of more than 15 million roubles constitutes the aggravated form of that offence.
What has been done to change the situation?
A group of large taxpayers whose interests Consul Group represents applied to the Moscow City Court with a joint claim seeking a declaration that Decree of the Government of Moscow of 26.12.2016 No. 937-ПП is unlawful (case No. 3а-0655/2017). Requests were at the same time sent to the Ministry of Finance of Russia for clarification.
The legal position set out in the claim rests on provisions of the Tax Code that prohibit the retrospective application of changes to the elements of a tax. In the consultants' view, that decree of the Government of Moscow not only breaches those prohibitions but also conflicts with the guidance of the Constitutional Court. The Ministry of Finance of the Russian Federation has already agreed with that position. Its clarifications are, by law, binding on the tax authorities (Article 32 of the Tax Code).
The Moscow City Court did not agree. On 27 June 2017 the proceedings were terminated because the contested decree "does not in fact apply, although it has not formally been repealed". Representatives of the Government of Moscow linked this to the fact that the period in which the cadastral value had been in force had already expired, as had the deadline for filing corporate property tax returns. Both the prosecutor and the judge accepted those arguments. It remains an open question whether the court was right, in law and in its reasoning, to conclude that a legal act which serves as the basis for additional tax assessments does not in fact apply. The ruling terminating the proceedings is under appeal. Given the resonance and the significance of the problem (12 billion roubles of budget funds are at stake), the case is likely to be referred to the higher courts.
At the same time, the clarifications on the lawfulness of applying the results of a review retrospectively give reason to hope that the pressure on property owners will ease. Since the beginning of the year, almost all of them have repeatedly received demands to amend their returns.
It is too early to treat the question as closed. The legal uncertainty has not yet been fully removed. Despite clarifications that confirm the taxpayers' position, and despite the legal positions the courts had already formed, retrospective application of the new cadastral value has still not been cancelled.
Inspectors of the Federal Tax Service of Russia are therefore caught "between a rock and a hard place". On one side is the Decree of the Government of Moscow, which the court refused to declare unlawful. On the other are the clarifications of the Constitutional Court, the Ministry of Finance of Russia and the Federal Tax Service of Russia, which expressly direct that legal acts of this kind are not to be applied, because they do not conform to the law.
A plan of action for taxpayers
First, the operations staff should check which of the properties owned by the company are caught by the decree. If any are found, the accounts department should be asked whether the calculation of the corporate property tax liability was adjusted and, consequently, whether the additional amount was paid.
Whether or not the corporate property tax has been paid, active steps should be taken to challenge the retrospective application of the cadastral value. That can be done by the company itself or with outside experts. The essential point is not to delay dealing with the problem. Given the current economic situation, it should not be ruled out that a favourable outcome on this question will be obtained only by those taxpayers who actively defend their rights, including in court.
Regional practice
We have already recorded similar practice in particular regions of the country, for example in Omsk Region (Decree of the Government of Omsk Region of 19.12.2007 No. 174-П).
In some cases owners who took the dispute to the administration and/or the tax authorities defended their rights, but until now the practice has not been widespread.
A review of cadastral value carried out in this way, with retrospective effect, does not create the conditions needed for business to develop normally. It unsettles the collection of tax, and it directly conflicts with the legislation in force.
The practice now taking shape will, we hope, settle the question and rule out any future repeat of cases in which owners have the amount of their tax liabilities revised retrospectively, not only in Moscow and the Moscow Region but in every region of Russia.
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