Reimbursement of expenses as method of struggle against tax lawlessness: Part II
Reimbursement of expenses for court appeal of illegal decisions of tax authorities
In the article is reviewed the issue regarding reimbursement of taxpayers’ expenses for tax disputes and the usage of this instrument for controlling the excessive pressure of the tax authorities – stimulating factor against the tax authorities’ pressure.
In particular, this part is devoted to the issue of reimbursement of court expenses for the legal assistance in view of appealing the unlawful decisions of the tax authorities.
Regulatory restrictions of compensation versus expenses realia: towards what actually impels the law?
In accordance with Article 87 of the Code of Administrative Procedure of Ukraine (hereinafter – “CAPU”) expenses for legal assistance connected with consideration of the case (including expenses for legal services of lawyers and/ or attorneys) shall be considered to be the court expenses.
Such expenses shall be compensated under the condition of winning the case but within the limits determined by the law (part 3 of Article 90 of CAPU).
As it has been mentioned in the first part of this newsletter, limitation of expenses for reimbursement is established at a rather low level at the rate of UAH 437.60 per hour and is applicable only concerning particular actions.
But in practical terms, assisting the dispute with tax authorities in court is a rather expendable service. As a kind of indicator: according to the data of the World Bank, provided within the frames of research Doing Business 2012 (page 98) concerning Ukraine, when directing the dispute to court expenses for professional legal assistance make up on average 22,7 % of the claim cost. Although these facts are not connected only with tax disputes, they still show the expendability of the legal assistance.
So, the cost of the legal support is rather high, that is why the possibility of reimbursement of these costs is a weighty argument while choosing the legal support.
Ukraine, as seen, chose the way of limiting the possibility of reimbursement of such expenses.
Interesting is the fact that, besides others, such approach provides the conditions for corrupting development in the tax authorities from the economical point of view. Such opinion concerning influence of limiting the reasonable costs belongs1to rather prominent Russian tax lawyer Mr. Sergii Pepeliaiev who expresses the following opinion:
The taxpayer considers different ways of solving the situation covering the economical point of view and if he sees that even in the case of victory in the court he will spend the costs for the legal assistance, for instance at the rate of 22,7 % of the amount in the dispute and will be “punished by hryvnia” in such way for the dispute itself, then “solving” the problem with tax authorities at the primary level of the dispute with tax authorities for 10-15% of the cost of disputable issues is economically more beneficial. Thus, the taxpayer who won the dispute with tax authorities but did not get the compensated expenses for the legal assistance in an adequate amount the next time facing the same problem, will compare the risks while choosing the way of actions differently, with less “for” in favor of the court expertise.
“Arithmetic” of such calculations is simple: even if the average amount of the bribe is 10-15% of possible additional charge, then in case of resorting to court one shall be obliged to pay 22.7 % from this amount for the legal services, not considering other court expenses that shall not be reimbursed even in case of winning the dispute as well as risks and absence of confidence in the final positive solution of the dispute, so economically “attractive” is the bribe to the tax officers.
Foreign experience (the USA)
International experience indicates that the institute of recovery of the court expenses from the tax authorities which lost the tax dispute in the court is widely used broad as the instrument of struggle against rights abuse by the tax authorities and as the motive for the tax authorities to disputes resolution mainly in the pre-trial order and, respectively, decreasing the workload of the courts.
For instance, the aims of implementation of exaction of the court expenses in such cases in the USA by the institute were2:
- Struggle against abuse of the rights of the tax authorities.
- Provoking the taxpayer to cooperation with the tax authorities (if the taxpayer avoided the possibility to solve the dispute at the pre-trial stage, the amount of the court expenses to be reimbursed is reduced).
- Protection of the rights of the taxpayer irrespective of the economic condition.
Exemption of the Tax Court of the USA from consideration of the same legal situation for many times. Court expenses shall be always reimbursed to the taxpayer if the tax body knew or had to know that the chances of winning are not significant or there are no such chances at all (determined based on the analysis of the court decisions regarding analogical cases, in which this tax body participated), but lead the case to the court appealed the court acts on formal grounds.
The results of implying such approach speak for themselves: today most of the tax disputes are resolved in the pre-trial order, while only from 5 to 15% (according to different estimations) of the tax disputes occurring in practice end in the Tax Court of the USA.
Further consideration of the regulatory control in Ukraine
In Ukraine, as seen, this institute is developed in the other direction. As it was mentioned earlier, the Law of Ukraine “On the Limit of Compensation Costs for Legal Assistance in Civil and Administrative Cases” came into force since 11.01.2012 (hereinafter – “Law“), in which it is established:
- limitation of the highest rate of reimbursement expenses (set fixed limit amount at a rather low level);
- narrowing the types of legal assistance services, expenses for which shall be reimbursed (expenses for the services of only of procedural type).
None of the mentioned “novation” of the Law is aimed at providing efficient and qualitative court consideration of the disputes with tax authorities. Let us analyze each of them separately:
Limit of compensation costs for court expenses
New order of determining the limit of compensations costs involving state authorities
In accordance with the Law the amount of compensation expenses for the legal assistance in administrative case shall not exceed:
- 40 % of the set by law minimum monthly salary per 1 hour of participation in the case – under the condition that it is paid by the power entity (Article 1);
- 2,5 % of the set by law minimum monthly salary per 1 hour of participation of a person determined in respective court decision – if the party in administrative case is released from payment of expenses for legal assistance (Article 2). In such case compensation shall be done at the cost of state budget within the foreseen expenses for the State Judicial Administration of Ukraine for executing justice by the local general and local administrative courts.
What particular amount of compensation is possible in case of dispute with tax authorities?
We suppose that according to the tax disputes it is determined by Article 1 of the Law and respectively as of today the highest amount of such compensation shall be UAH 437.6/ hour taking into consideration the provisions of the law on state budget for 2012.
What concerns the provision of Article 2 of the Law, in accordance with which the limit is determined at the rate of 25 % of the minimum monthly salary per 1 hour of work, it is not applied to the tax disputes which proves the following:
According to part one of Article 90 of CAPU the expenses for legal assistance shall be incurred by the parties besides the cases of providing free of charge legal assistance, foreseen by the law.
Part three of Article 16 of CAPU foresees that “The court completely or partly releases theperson from payment of the legal assistanceand guarantees providing the legal support in cases and order, established by law, if the respective body refused providing legal assistance to the person“.
This fact shall be mentioned in the claim by the party, that is determined by point 5 of Part one of Article 106 of CAPU “if necessary – the petition on release of the court fee payment; on release from legal assistance payment and providing the legal support if the respective body denied provision of the legal assistance“.
According to the explanations of the Higher Administrative Court of Ukraine (letter as of 25.07.2007 No. 09.1-22/688) “In accordance to the provisions of the mentioned rules which correspond to each other, providing the legal assistance shall be solved by the respective law. In case of stating the petition on provision of legal support, before passing such law, the court shall grant it within the frames determined by part two of Article 105 of CAP concerning assisting in drafting the claim“.
That is the Law of Ukraine “On Free Legal Aid ” as of 08.07.2011 # 3671-VI which came into force on 09.07.2011. Proceeding from the system analysis and its norms, the tax body is not the subject of law for free legal aid (primary or secondary3).
That means that tax authorities cannot be “the party which is released from payment of the expenses for the legal aid” in accordance with the law.On the contrary, according to the acting practice, the tax authorities do pay for the legal assistance which lies in payment of the salaries to those tax body employers who represent the interests of the tax authorities in the court hearings. Respectively, the compensation limit, foreseen by Article 2 of the Law, shall NOT be applied to reimbursement of the expenses for the legal assistance in tax disputes.
Lawfulness of such conclusion also confirms the fact that in case of applying Article 2 of the Law compensation of the expenses for the legal assistance is performed at the costs of the state budget within the expenses foreseen for the State Judicial Administration of Ukraine for executing justice by the local general and local administrative courts.
This can be explained by the fact that in cases of providing secondary legal assistance in accordance with the Law of Ukraine “On Free Legal Aid” no party which shall reimburse expenses to the other party is mentioned. Therefore, according to part two of Article 29 of the Law of Ukraine “On Free Legal Aid”, financing the free secondary legal support shall be performed at the costs the State Budget of Ukraine. Respectively, Article 2 of the Law only clarifies within what expenses – foreseen for the State Judicial Administration of Ukraine – secondary support shall be financed.
In tax disputes the party which compensates the expenses is the tax body as the power entity. And this corresponds to the principle of justice. That also corresponds to the provisions of the Tax Code we have considered in the first part of our comments regarding this issue.
So, the limit of compensation of the expenses to the taxpayer for the legal assistance shall be determined at the level in accordance with Article 1 of the Law, which in 2012 is UAH 437.6/ 1 hour.
But clear understanding of this issue is absent even at the court level. This proves the practice of the administrative courts which during solution of the issue concerning compensation of expenses for the legal assistance in tax disputes use Article 2 of the Law at present and calculate the compensation amount at the rate of 2,5% of the minimum monthly salary per hour of the attorney’s work (for instance, resolution of the Poltava district administrative court as of 03.04.2012 regarding the case No. 2а-1670/106/12).
In addition to that substantiation or even reference to the fact that tax authorities are released from payment of the expenses for legal assistance in accordance with the law which is the prerequisite for implementation of Article 2 of the Law are lacking in respective decisions of the administrative courts. This gives the grounds to affirm that the courts, most likely, apply the provisions of the Law by analogy with the Ruling of the Cabinet of Ministers No. 590 dated April 27,2006 (hereinafter – “Ruling No. 590”), applied prior to the Law and determine the compensation limit at the lowest rate (among the set ones).
It shall be reminded that provisions of the Ruling No. 590 have been formulated in such way that compensation was done either (1) at the expenses of the power entities (40% of the minimum salary per hour) or (2)at the expenses of the state (5% of the minimum salary for complete working day).
The Ruling No. 590 has not determined any other conditions for calculation of the compensation limit. Since tax authorities are financed by the state (the funds of the State budget of Ukraine), the courts , while solving the issue on reimbursement of court expenses for legal assistance, proceeded from the limit amount, foreseen for payment by the state funds (5% of the minimum salary for complete working day).
That is why at the beginning of the year 2012 the limit for reimbursement of the court expenses for legal assistance which the taxpayer shall receive if winning the tax dispute, was equal to UAH 53.65/day, that is UAH 6.71/1 hour.
However, following such approach the courts “leave out” the fact that the criteria for determining the compensation amount have been considerably changed due to passing the Law. As it has been previously analyzed in details, implementation of Article 2 of the Law in tax disputes is considered to be unjustified and erroneous.
From the moment of the Law coming into force, the taxpayer has the rights for receiving the compensation of the expenses for legal aid not more than 40% of the set by law minimum monthly salary per 1 working hour, that is in accordance with Article 1 of the Law.
Practice of the ECHR and foreign countries regarding compensation limit
For comparison let us analyze the practice of European Court of Human Rights (hereinafter – “the ECHR”) and other countries regarding limits of the compensation amount.
The ECHR does not recognize the limits for reimbursement of the expenses for legal aid at the level of national legislation of a country. For instance in the case “Kӧnig v. Germany“ dated March 10, 1980 (subpara.3 of para.25) the ECHR has established that the limit of the amount of the expenses for the legal aid to be reimbursed, foreseen by the national legislation of the defendant country shall not be taken into consideration by the court when determining the amount of such reimbursement.
Formed practice of the ECHR is grounded on the fact that the applicant has the right for reimbursement of expenses in the amount that was necessary and reasonable and really incurred. In particular, in the case “Neumeister v.Austria“ it was decided that the expenses for the legal assistance shall be casted in the case if they were incurred in fact, were necessary and reasonable in quantitative relation (para.43 of the decision “Neumeister v.Austria“).
It shall be also mentioned that even in Ukrainian legal framework limit on compensation of the legal aid costs is considered to be“wrong”. Thus, in scientific practical commentary to Article 90 of the CAPU4 it is mentioned that :”Of course it would be more justified if the court could determine in every particular case the amount of reasonable (necessary and sufficient) expenses for the legal aid which shall be compensated. But to prevent various court practice and abuse, the legislator has decided that it would be better to limit the maximum amount of compensation of the court expenses legislatively but not in the court order.” Then reasonable question arises – who will get the benefit if all understand that solving this issue in every particular case would be justified proceeding from the actual facts of the case, its complexity, duration etc.?
For comparison, even in the Russian Federation the expenses for the representative services shall be reimbursed within reasonable bounds, which is directly determined by Article 110 of the Code of Arbitral Procedure of the Russian Federation. Hereat the Russian courts do not see any interferences for compensation of the stated court expenses in full under the condition (1) of providing documentary proofs, confirming: the fact of incurred court expenses, their necessity, amount and specification of the rendered services, their relation to the court consideration, information on the actual participation of the representatives in preparation to the case as well as (2) the hourly rate of the lawyers at reasonable size.
Recent practice of the Supreme Arbitration Court of the Russian Federation (hereinafter – “SAC of the RF”) shows that reasonable cost of the representative services in the tax dispute varies depending on such factors as duration of the consideration, complexity of the case, location of the arbitrage court etc.
While resolving the issues regarding recovery of actual damages, the courts proceed from (1) the recoverer shall prove the amount of actual expenses (provide documentary proof etc.), (2) the subject who lost the dispute, shall prove the excessiveness of the expenses (in case of disagreeing with the stated amount to be reimbursed) by providing the actual supporting facts of such excessiveness, (3) the court does not have the right to reduce the amount of the recovery arbitrarily.
Thus, by Resolution as of 09.04.2009 No. 6284/07 the Presidium of the SAC of the RF has approved exaction from the tax body, the decision of which was acknowledged invalid, about 1.5 million rubles. The court proceeded from the fact that the expenses of the taxpayer (1) are actually incurred and documentary proved, (2) their amount corresponds with the cost of similar services in the region, etc. Moreover, the tax inspection (3) does not provide evidences of their excessiveness while (4) the court has not “noticed” obvious excessiveness of the expected reimbursement of the amount within reasonable bounds, which excludes the right of the court to reduce the exaction amount on one’s initiative.
On March 15, 2012 the Presidium of SAC of the RF has passed the similar decision in favor of the taxpayer in case А 40-20664/2008, by which approved exaction of the court expenses for the representative services (of the law firm) from the tax body at the rate of about 2.8 million rubles.
Whereas the case developed in the following way:
The facts in case were similar to the abovementioned of the case in 2009, that are: the decision of the tax authority was acknowledged invalid, the taxpayer provided documentary evidence of the amount of the incurred costs, and the tax authority didn’t provide the evidence of their excessiveness. That is why the court of primary jurisdiction answered the claims of the taxpayer in full.
The court of Appeal has changed this decision, exacting on one’s initiative only 100 000 rubles. The cassation left the court decision valid.
But according to the judges of the SAC of the RF, the inferior courts have not taken into consideration the legal view of the Constitutional court of the Russian Federation (decision as of 21.12.2004 No. 454-О) that the amount of the stated court expenses shall be reduced not arbitrarily, but by proving its excessiveness. The tax body didn’t state that, it insisted on refusal from meeting the requirements in full not providing any evidence hereat. Recognizing the court expenses overrated of own motion, the Court of Appeal undertook the responsibility to justify the amount calculation to be exacted, but the court does not possess such justification. Moreover, such approach should consider different factors not only from the view of the court but also of the applicant, who is not confident in the result of the main dispute at the beginning.
As a result, the Presidium of the SAC of the RF has met the requirements the taxpayer (resolution No. 16067/11 as of 15.03.2012 in the case А 40-20664/2008).
For the sake of completeness it shall be mentioned that proceeding from the world practice it may be concluded that the country still tends to set limits for reimbursement of the expenses by law. In particular, K.A.Sasov in his article “Limits of the legal discretion while determining the court expenses “ (Russian magazine “Korporatyvnyi yuryst” No.1, year of 2012.) states the following data:
- In the USA the maximum amount of the expenses for the attorney services that can be reimbursed by the taxpayer, shall be calculated at the rate of 180 US dollars per hour.
- Legislation of Germany allows the tax inspections to conclude amicable agreements with the taxpayers to the amount of the incurred court expenses at the rate within 5 thousand Euro.
- Belgian legislation sets the increased bank interest which the state is obliged to return to the taxpayer for usage of his money by way of overecovering the taxes. Such interest compensates all court expenses to the taxpayer, but directs his attorneys towards protraction of the court proceedings. As a result, tax disputes in Belgium sometimes last from 5 to 10 years.
- In the Czech Republic the amount of reimbursement expenses for the tax attorney services shall be established by the Ministry of the Czech Republic. Whereas the compensation amount is determined by the regressive rate from the disputable amount, all legal proceedings, travel time and expenses for the business trips by the norms established in the Labor Code of the Czech Republic. It is highlighted that in the national law of the Czech Republic exists strong legal protection of the citizens which provides responsibility of the state for illegal actions of the tax authorities in accordance with the principles of the legal state, stated in the constitutional acts “.
But in any case foreign tax attorneys admit that the amount of such compensations, although not identical to the actual expenses of the taxpayers, but is close to them.
Limitation of legal aid provision, expenses on which shall be reimbursed
Other limitation, established by the mentioned Law, is reduction of the legal assistance, expenses for which shall be reimbursed, only for the legal proceedings, that is: (1) participation of the lawyer (attorney) in the court hearing, (2) performing particular procedural actions out of the court hearing, and (3) familiarization of the lawyer (attorney) with the case material in court.
Thereby, the legislator limits legal aid provision only to the legal proceedings, performed only in accordance with the orders of KACU. Such narrowing of the legal aid concept does not correspond to the legislative definition of this term, which includes the services of legal information provision, preparation of the applications, claims, procedural and other legal documents (subparas. 3, 4 of part one of Article 1 of the Law of Ukraine “On free legal aid”).
It shall be mentioned that in accordance with the information in the Internet, at the end of March, 2012 the attorney Igor Golovan prepared the presentation to the Constitutional Court regarding acknowledgement of the Law of Ukraine “On the Limit of Compensation Costs for Legal Assistance in Civil and Administrative Cases”.
Limitation of the list of legal aid types, expenses on which might be compensated to the party, does not correspond to the world practice of such relations regulation.
Thereby, reimbursed shall be not only expenses for the outward lawyers, but also for the inward legal service. Thus, in the decision “The Sunday Times v. the United Kingdom ” dated November 6, 1980 ECHR decided that reimbursed shall also be the expenses of the in-house lawyer on the company, which is the effected party. Thus, the work of the lawyer of the applicant company “Times newspaper Ltd.”, which consisted of preparation of the memorandums, documents, participation in the Commission’s work and familiarization of the attorney with the case materials before the court consideration, shall be reimbursed by the respondent state (para.25 of the abovementioned decision).
Besides, in that decision ECHR has established that the effected party has the right for reimbursement of expenses for the legal aid irrespective of effectiveness of the actions within providing this aid, since the obligations of the lawyers include maximum full representation of the client’s interests, and with such approach one never foresees the importance of that or another legal action, if it is not obviously of no effect or void (para.28).
Taxpayer may refer to the ECHR practice for reimbursement of the expenses for the legal aid in broad sense of this notion (not restricting by the proceedings), including the cases when it was provided to the in-house lawyers, since according to part 1 of Article 17 of the Law of Ukraine “On execution of decisions and application of the European Court of Human Rights practice”, “the courts apply the convention and Court’s practice when considering the case as the source of law“.
Struggle for reimbursement of the expenses for the legal aid as the court expenses
Because of the abovementioned reasons and even for compensation of incurred expenses at least partly, there is the point of struggle for compensation of the court expenses for the legal aid by all possible legislatively foreseen means.
In this regard we want to pay your attention at the reasons mainly because of which the courts withhold reimbursement of the court expenses for the legal aid:
- “the court is not provided with the legal assistance agreement, acceptance-transfer act of the services under this agreement, documents confirming payment of the rendered assistance, calculation of the spend time for the legal aid by the representative ” – so, it is necessary to collect and submit all primary documents confirming fact of respective expenses incurrence and their amount;
- “the representative rendered not legal id but legal services – the wording of the rendered services’ name is of significant importance;
- “the representative was not present during the court hearings and provided consulting services, that is why such aid, to the court’s opinion, was rendered not with regards to the legal proceedings” – expenses only of “procedural nature” shall be reimbursed.
Offered possible actions:
To apply for reimbursement not only court fees (which, by the way, was considerably increased5), but also the court expenses for the legal aid at least within established limit according to Article 1 of the Law, mentioning that in the claim.
Besides, special attention shall be paid to correct and full documentation of respective services and expenses for their payment, that is possession of:
- legal aid agreement (not the legal services),
- evidence of amount, description and content of the rendered services, their “procedural nature” and relation to the tax dispute,
- respective acceptance-transfer Acts of rendered services and specifications, where shall be the division (separation) of particular procedural actions on the court case and other services, connected with court consideration of the tax dispute,
- payment documents confirming the fact of expenses incurring.
To pay separate attention of the judges to the fact that since the Law was passed, compensation of the expenses for the legal aid shall be done on the basis of Article 1 at the expenses of the power entity at the rate of 40% from the fixed by law minimum monthly salary per 1 hour of participation in the case. Provisions of Article 2 of the Law in this case are not applicable, since regard to the cases of release of the dispute party from paying the expenses for the legal aid, in other words the cases of rendering free legal aid regulated by the Law of Ukraine “On free legal aid “. As it follows from system analysis of Articles 16, 90 and para.2 of the chapter VII “Final and transitional provisions ” of CAPU, cases of rendering free legal aid shall be directly foreseen by the law, and the issues of relief of the person from legal aid payment by the court decision shall be accepted in case and order, established by law, if the respective body denied itself legal aid provision.
Application of the abovementioned measures will allow the taxpayers not only receive reimbursement of expenses for the tax decisions appeal at least within established limit, but also to control excessive pressure from the tax authorities in future, since exacting the respective court expenses shall be done “by indisputable write-off from the account of the respondent power entity “ (letter of the Higher administrative court of Ukraine as of 21.11.2011 No. 2135/11/13-11). We hope that requirements for reimbursement of the expenses for the legal aid will also restrain the tax officers from protraction of disputes in courts and groundless continuation of the disputes, from which the court practice forms in favor of taxpayers (for instance, disputes in view of consideration of the losses on previous periods “transient” to April 1, 2011).
We hope that the provided information will be useful for you.
The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.
1 Russian magazine “Nalogoved” as of April,2012.
2 This issue is presented in the article of Mr. Sasov “Determining the reasonableness of the limits for the court expenses of the taxpayer to be reimbursed”, Russian magazine “Nalogoved” Issue 8 dated year of 2011.
3 Legal services of interest intermediation in courts as well as preparation of the processes, are the types of free of charge secondary legal aid (para.2,3 of the part two of Article 13 of the mentioned Law).
4 Information retrieval system LIGA:LAW.
5 Since 2012 the claims on cancelation of the tax notifications-decisions were acknowledged the claims of property character (letter of the Supreme administrative court of Ukraine as of 18.01.2012 No.165/11/13-12), and, respectively, at the moment the amount of the court fee is UAH 2146.