In April 2020, six owners of commercial property in Moscow lodged a complaint with the Constitutional Court of the Russian Federation. The ground was an infringement of taxpayers' rights by the inclusion of an amount of value added tax (VAT) in the cadastral value, which significantly increases the tax liabilities of owners of commercial property.
The VAT stumbling block
Paying property tax on a cadastral value that includes VAT is a long-standing problem for Moscow and for the other regions of the Russian Federation. Disputes between owners, lawyers and the public authorities have been running for 6 years.
According to the Federal Tax Service, in 2014-2019 the Moscow budget received more than 50 billion roubles from the funds of owners of commercial property, because corporate property tax was charged on a cadastral value that included VAT. That figure increases every year and will go on growing,
- points out Sergei Pivovarchik.
The Supreme Court of the Russian Federation was the first to try to get to the bottom of the dispute. In February 2018, hearing the case of the closed joint-stock company "Trading House Zelenograd", it set aside the decisions of the lower courts, which had previously fixed the building owner's cadastral value "including VAT".
It might have seemed that the matter could rest there. 2 years later, however, the same case came back to the Supreme Court of the Russian Federation, this time with an approved cadastral value that had been reduced by the amount of VAT. This time the court was again dissatisfied, and again set the lower decisions aside.
In plain terms, the Supreme Court of the Russian Federation changed its position on VAT in cadastral value. Cadastral value, like market value, should reflect the price of a transaction, and VAT is therefore an integral part of that price. Cadastral value should, in other words, include VAT. That position is confirmed by many decisions of the arbitration courts of the Russian Federation and of the Judicial Collegium for Economic Disputes of the Supreme Court of the Russian Federation,
- explains Sergei Pivovarchik.
In 2019 the Moscow City Court, relying on the Supreme Court's view of February 2018, set a market value "excluding VAT" for almost every property whose cadastral value its owners were challenging. After the Supreme Court changed its position two years later, the value of every such property was increased on appeal by the amount of VAT (by 18% or 20%, depending on the date of valuation). That is thousands of taxpayers and, with them, billions of roubles of tax in Moscow alone. What will happen if regions that have until now calculated the property-tax base "excluding VAT" begin, for that same calculation, to increase the final cadastral value by the amount of the VAT itself?
In addition, the Constitutional Court of the Russian Federation, in Resolution No. 41-P of 19 December 2019, stated: "At the same time, the price (tariff) of goods (work, services) includes the amount of the tax and, accordingly, the burden of paying it lies on the purchaser..."
By this resolution the Constitutional Court of the Russian Federation confirms the position of the arbitration courts and of the Judicial Collegium for Economic Disputes of the Supreme Court: VAT is part of the price.
To sum up at this stage, if market (cadastral) value is the price of a transaction, then, under the legislation and the court practice that has formed, the amount of VAT is included in the price of the transaction. That is the position the Supreme Court of the Russian Federation took in 2020 when it heard the case of the closed joint-stock company "Trading House Zelenograd". It is wrong to exclude VAT from market value or from cadastral value, because the tax is a component of the price.
And that is logical. If market value, as the offer price of a good or a service, were not put before the buyer in full, the buyer would be misled as to what the final price actually is.
A tax on a tax?
Where, then, is the infringement of the rights of owners of commercial property, if by law both cadastral value and market value must include VAT? In my view, the problem lies not in the calculation of cadastral or market value, but in the use of those amounts in tax relations.
Under Article 374 of the Tax Code, the object of corporate property tax is "immovable property". It therefore seems right to calculate the tax on the value of the immovable property itself, and not on the potential price of a transaction with that property.
If cadastral (market) value is the potential price of a transaction with the property, then, as set out above, it consists of the "price of the property" plus the "amount of VAT" which the seller will pay to the budget.
The value of the property itself will be lower than the price of a transaction with the property, by the amount of VAT.
We can then say that paying property tax on the price of the transaction, rather than on the value of the property itself, has no economic justification and unlawfully increases the tax liabilities of property owners. The base for calculating property tax should be stated not as "cadastral value", but as "cadastral value reduced by the amount of VAT",
- says Sergei Pivovarchik.
At present, the only way for property owners both to bring the disputes to an end and to bring clarity into the legislation is to apply to the Constitutional Court of the Russian Federation. Only that court can hold the provisions of the Tax Code now in force unconstitutional, and restore the infringed rights of property owners.
In April 2020, six organisations filed a complaint that their rights had been infringed in the manner described (for example, JSC "DPP-Plaza", case No. 3047/15-01/2020). It has now passed the preliminary review and is being examined by a judge.
By the end of the year, at least 100 such complaints may be filed. The Arbitration Court of Moscow has heard more than 200 cases in which taxpayers themselves reduced the cadastral value by the amount of VAT when calculating property tax. The arbitration courts, unfortunately, refused every one of them protection.
Today, with the pandemic and a crisis that is closing in, the problem is becoming still more pressing. During the lockdown, business is incurring huge losses every day. A decision of the Constitutional Court of the Russian Federation in favour of the taxpayers could give owners of commercial property substantial support.
If the Constitutional Court of the Russian Federation reaches a final decision, in the taxpayers' favour, on the inclusion of VAT in cadastral value when property tax is calculated, that will not only reduce the tax burden today but will also help owners recover from the budget the sums they have overpaid,
- Sergei Pivovarchik, managing partner of Consul Group.
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