Groundlessness of bringing to responsibility for “tax evasion” under the Criminal Code while applying sanctions under the Tax Code

29 February, 2016 Newsletters

In this review, we have analyzed the practice of the European Court of Human Rights (hereinafter – “the ECHR” or “the Court”) on the application of the ne bis in idem principle in tax disputes, that is inability of bringing to responsibility twice for the same offense. We have also examined such approach in terms of the Ukrainian legislation and the practical value of the mentioned case for Ukraine.

Entrenchment of the ne bis in idem principle

The “ne bis in idem” principle is known since ancient times. It is mentioned in a number of international instruments such as the International Covenant on Civil and Political rights1, the European Convention on the International Validity of Criminal Judgments2, the EU Charter of Fundamental Rights3 etc.; as well as national legislation of almost all civilized countries.

In Ukraine this principle is prescribed at the constitutional level, in particular, Article 61 of the Constitution states: “No person shall be brought to legal liability of the same type for the same offence twice”.

It is rather interesting, that this principle and the right not to be “tried twice” has never been mentioned in the European Convention on Human Rights and Fundamental Freedoms (hereinafter referred to as “the Convention”) dated of November 4, 1950. Only later, in 1988, with the adoption of Protocol No. 7 to the Convention, Article 4 of this Convention guaranteed that:

No one shall be liable to be tried or punished again in criminal proceedings under the jurisdiction of the same State for an offence for which he has already been finally acquitted or convicted in accordance with the law and penal procedure of that State.4

The ECHR practice on application of the ne bis in idem principle

The ECHR has considered several cases against Finland5 and Sweden6 concerning the lawfulness of simultaneous application of tax surcharges with penalties under the tax legislation as well as application of sanctions under the criminal legislation and the alleged violation of the ne bis in idem principle – inability of bringing to responsibility twice for the same offense, envisaged by Article 4 of Protocol No.7.

The last and probably the most revealing case, heard by the ECHR, was the case of Österlund v. Finland”  as of February 10, 2015.

The tax authorities of Finland have imposed tax surcharges on the applicant – natural person. Under the results of the administrative consideration of the case, in January 2013 the Higher Administrative Court of Finland has confirmed the lawfulness of the tax surcharges. Along with such surcharges, the criminal proceedings were started against the applicant for the tax fraud. All three instances, including the Supreme Court, in October 2010 have admitted the applicant guilty of a crime. Under such conditions, the applicant applied to the ECHR and claimed that he was punished twice for the same offense by being admitted guilty in criminal proceedings and by being imposed of tax surcharges in the administrative proceedings.

While hearing this case, the ECHR has examined four key issues, crucial for the correct dispute resolution:

  • were such proceedings “criminal” per se?
  • were such offences identical – “idem”?
  • was the final judgement awarded in the case?
  • was there a duplication of proceedings?

The ECHR has established that the proceedings in the criminal case are definitely criminal under Article 4 of Protocol No.7.

The situation with the tax surcharges is more complicated. The court has repeatedly observed in its practice that classification and characteristics of the measures and responsibility under the national legislation of the Convention country-member are not determining for the Court when deciding on the type of responsibility and on the possibility of application of Article 4 of Protocol No. 7.

Formally, tax surcharges are not criminal, however, the Court has noted that such surcharges have the nature of sanctions, rather than the compensation of damages, therefore they shall be considered as criminal sanctions.

Thus, the Court has noted that “under Finnish law, the tax surcharges were not intended as pecuniary compensation for damage but as punishment to deter re-offending. The surcharges were thus imposed by a rule, the purpose of which was deterred and punitive.”7 Under such circumstances, the Court has established that tax surcharges were of criminal nature for the purposes of Article 4 of Protocol No. 7 application.

The Court has also reiterated that Article 4 of Protocol No. 7 prohibits the repetition of criminal proceedings that have been concluded by a “final” decision. Article 4 of Protocol No. 7 is not only confined to the right not to be punished twice but extends also to the right not to be prosecuted or tried twice. The Court reiterates that Article 4 of Protocol No. 7 contains three distinct guarantees and provides that no one shall be (i) liable to be tried, (ii) tried or (iii) punished for the same offence.8

However, the aforementioned guarantees as well as Article 4 of Protocol No.7 are applied differently by the ECHRin the so-called consecutive and parallel proceedings.

Regarding consecutive proceedings the Court’s position is unequivocal: Article 4 of Protocol No. 7 clearly prohibits consecutive proceedings if the first set of proceedings has already become final at the moment when the second set of proceedings is initiated.9 That is, if a final decision has been taken concerning certain offenses in particular proceedings, the second set of proceedings cannot be started (initiated) for the same offense.

The position of the ECHR on parallel proceedings is not so definite. The Court considers that Article 4 of Protocol No.7 does not prohibit several concurrent sets of proceedings. This is due to the fact that in such a situation it cannot be said that an applicant is prosecuted several times “for an offence for which he has already been finally acquitted or convicted”, since no final judgement is taken on any of the proceedings. Therefore, two parallel sets of proceedings are deemed admissible until the final judgment in one of them is awarded. In this case the second set of proceedings is discontinued after the first set of proceedings has become final.10 In cases when such proceedings are not discontinued, the ECHR detects violation of the ne bis idem principle.

Since the Court has established in this case that the criminal proceedings against the applicant were concluded on November 19, 2010, further, after this date, examination of the parallel case (on the lawfulness of tax surcharges by the courts of administrative jurisdiction) was illegal since it should have been concluded on the basis of the final decision in the criminal proceedings.

Therefore, the ECHR has established that Finland has infringed the rights of the applicant not to be brought to responsibility for the same offence twice according to Article 4 of Protocol No 7.

Practical meaning of the analyzed practice of the ECHR

Let us remind that the ECHR practice in cases against Ukraine as well as in cases against other countries is deemed to be the authority of law in Ukraine11 and should be applied by courts and other state authorities.

In the case of “Opuz v.Turkey”,  the ECHR admitted the erga omnes effect of its judgements, indicating the necessity of taking into account the principles following from its judgments on similar issues, even when they concern other States since the Court provides final authoritative interpretation of the rights and freedoms defined in Section I of the Convention, the Court will consider whether the national authorities have sufficiently taken into account.12

The judgement of the commented case has practical value in Ukraine due to similarity of the situation.

Thus, the Tax Code of Ukraine envisages not only surcharges of a particular sum of taxes and application of the fine interest as compensation for late payment, but application of the financial sanctions as well. The most exemplary are penalties under Article 123 of the Tax Code of Ukraine at the amount of 25% or 50% of the surcharged taxes. They are aimed at punishing the taxpayer for tax legislation violation and are intended to prevent such violations in the future. In terms of the ECHR practice, such sanctions have the nature of criminal responsibility.

The criminal nature of penalty, determined according to the Tax Code of Ukraine, is also affirmed by its similarity with the main type of punishment for tax evasion in accordance with Article 212 of the Criminal Code of Ukraine, which is also applied in a form of a fine.

It shall be mentioned that when it comes to Part 3 of Article 212 of the Criminal Code of Ukraine (tax evasion in especially big amount13) then, in light of the provisions of Part 2 of Article 53 of the Criminal Code of Ukraine14, bringing to liability under this Part may lead to imposition of the penalty in the amount equal to the sum of the tax surcharges. Therefore, in such case, the Criminal Code may be even more lenient than the Tax Code.

Therefore, as a result of payment of the agreed amount of tax surcharges with the punitive damages under the Tax Code, a person is already brought to responsibility, which is “criminal” by its nature.

Considering the abovementioned, an attempt of bringing to responsibility under the Criminal Code of an individual taxpayer or an individual entrepreneur, the sanctions to whom have been applied under the Tax Code on the same grounds, would violate the principle of inability of bringing to responsibility twice. And the opposite – if such person is brought to responsibility for tax evasion under the Criminal Code, sanctions cannot be applied to such person under the Tax Code.

Concerning criminal proceedings, started against officials of the company as a result of the surcharges to legal entities, the analyzed decision of the ECHR, unfortunately, cannot be applied directly. This is due to the fact that in such case sanctions shall be applied to the legal person-taxpayer under the Tax Code, while individuals – officials of the taxpayer are brought up to liability under the Criminal Code.

However, for such category of persons the other argument may be applied, namely in case of application of surcharges with sanctions under the Tax Code to legal entities, officials of which they are, the required element of the offense, such as actual underpayment of the funds to the budget, is missing. Whereas all taxes along with sanctions have come to the budget through application of the procedures of the Tax Code. In such case, one can refer to Part 2 of Article 11 of the Criminal Code of Ukraine, which states that relevant acts shall not be deemed crime, when they caused no significant damage to society or state. And the most importantly, such approach, common with the approach applied to individual taxpayers, is probably the most fair and thus meets this key element of the rule of law (as explained on equity in a number of decisions of the Constitutional Court of Ukraine), which is established by Article 8 of the Constitution of Ukraine and is one of the cornerstones of the social system in Ukraine.

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. 

Footnotes:

1 Para.7 of Article 14 of the International Covenant on Civil and Political rights. Electronic resource.

2Articles 53-57 of the European Convention on the International validity of criminal verdicts. Electronic resource.
3 Article 50 of the EU Charter of Fundamental Rights. Electronic resource.

4Article 4 of Protocol No. 7 of the Convention of Human Rights and Fundamental Freedoms. Electronic resource.

5Judgement in the case “Kilveri v.Finland” as of February 14,2015, Application no. 53753/12. Electronic resource;Judgement in the case “Rinas v.Finland” as of January 27,2015, Application no. 17039/13. Electronic resource, Judgement in the case “Österlung v.Finland” as of February 10,2015. Electronic resource. 

6 Judgement in the case “Lucky Dev v.Sweden” as of November 27,2014, Application no. 7356/10. Electronic resource.

7 Abbreviate of the judgement in the source language:  “The Court observed that the tax surcharges were imposed by general legal provisions applying to taxpayers generally. Further, under Finnish law, the tax surcharges were not intended as pecuniary compensation for damage but as a punishment to deter re‑offending. The surcharges were thus imposed by a rule, the purpose of which was deterrent and punitive.”

8 Abbreviate of the judgement in the source language: “The Court reiterates that Article 4 of Protocol No. 7 prohibits the repetition of criminal proceedings that have been concluded by a “final” decision. Article 4 of Protocol No. 7 is not only confined to the right not to be punished twice but extends also to the right not to be prosecuted or tried twice (see Franz Fischer v. Austria, cited above, § 29). …The Court reiterates that Article 4 of Protocol No. 7 contains three distinct guarantees and provides that no one shall be (i) liable to be tried, (ii) tried or (iii) punished for the same offence (see Nikitin v. Russia, cited above, § 36).”

9 Abbreviate of the judgement in the source language: “The Court notes that Article 4 of Protocol No. 7 clearly prohibits consecutive proceedings if the first set of proceedings has already become final at the moment when the second set of proceedings is initiated (see for example Sergey Zolotukhin v. Russia [GC], cited above).”

10 Abbreviate of the judgement in the source language:”As concerns parallel proceedings, Article 4 of Protocol No. 7 does not prohibit several concurrent sets of proceedings. In such a situation it cannot be said that an applicant is prosecuted several times “for an offence for which he has already been finally acquitted or convicted” (see Garaudy v. France (dec.), no. 65831/01, ECHR 2003‑IX (extracts)). There is no problem from the Convention point of view either when, in a situation of two parallel sets of proceedings, the second set of proceedings is discontinued after the first set of proceedings has become final.”

11 Article 17 of the Law of Ukraine “On judgements enforcement and implementation of the ECHR practice”.

12 Judgment as of June 09,2009 in the case “Opuz v.Turkey”, Application no. 33401/02. Electronic resource. The abbreviate of the judgement in the source language: 163. In carrying out this scrutiny, and bearing in mind that the Court provides final authoritative interpretation of the rights and freedoms defined in Section I of the Convention, the Court will consider whether the national authorities have sufficiently taken into account the principles flowing from its judgments on similar issues, even when they concern other States.

13 Newsletter as of January 25, 2016.

14 For the offense, the punishment for which envisages a fine of more than three thousand tax-free minimum incomes, the imposed by the court fine shall not be less than the amount of the property damage caused by the offence or derived from the offense of income, regardless of the fine limit the fine prescribed by the sanction of the Article (the sanction of the part of the Article) of the Special Part of this Code.

Kind regards,

© WTS Consulting LLC, 2016

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