Real estate tax (according to recent legal developments) and tax on “a car with a big engine” are not legally to be paid at least in 2015
In late 2014 the Cabinet of Ministers with the support of the Verkhovna Rada ’endowed‘ Ukraine with new taxes, in particular, an updated real estate tax and transport tax on vehicles with the engine displacement in excess of 3 liters.
These taxes are not in the list of national taxes and duties (Article 9 of the Tax Code of Ukraine, hereinafter “the TCU” “the Tax Code” or “the Code”). According to para. 9.4. Article 9 of the TCU “Establishment of national taxes and duties not covered by this Code, shall be prohibited”; according to para. 4.2. “National and local taxes and fees which are not envisaged by this Code, shall not be payable”.
The new taxes hide among local ones (Article 10 of the TCU). Furthermore, Article 10, which establishes the list of local taxes, does not directly list such taxes. Instead, there is “property tax” now (subpara. 10.1.1.), which consists of three different taxes, each with different elements of tax, as defined by para. 7.1 Article 7 of the TCU. In other words, there are three different taxes with different objects of taxation, tax rate, calculation procedure, etc.; the Cabinet of Ministers prescribed these three taxes, which are different by their definitive elements, to be counted as one, to create the appearance that the number of taxes in Ukraine decreased.
According to the updated Article 265:
“265.1. Property tax consists of:
Tax on real estate other than a land plot is prescribed by Article 266. The transport tax (i.e. tax on passenger cars, which were in use for no more than 5 years and with engine displacement not exceeding 3000 cc) is prescribed by Article 267.
Local taxes are peculiar because under the law they cannot be established directly by the decision of the Verkhovna Rada of Ukraine.
According to para. 8.3. Article 8 of the TCU, “8.3. The local taxes and fees are established in accordance with the list and within the limits of the rates determined by this Code, by decisions of the village, town and city councils within their competence, and are required to be paid in the territory of the respective local communities”. At the same time, according to para. 4.4 Article 4 of the TCU: “The establishment and abolition of taxes and fees, as well as the privileges of the tax payers are carried out in accordance with this Code by the Verkhovna Rada of Ukraine and the Verkhovna Rada of the Autonomous Republic of Crimea, village, town and city councils within their competence established by the Constitution of Ukraine and laws of Ukraine”.
In other words, direct establishing of local taxes (and, thus, real estate tax and transport tax) is attributed by the Tax Code to the authority of rural and municipal councils within their power.
Establishing local taxes exclusively by appropriate decisions of local councils is stipulated by para. 24, Part 1, Article 26 of the Law “On Local Self-government in Ukraine” and Article 143 of the Constitution of Ukraine.
Consequently, the Verkhovna Rada of Ukraine cannot directly impose such taxes as local taxes in respective territories.
Presently, the Code also stipulates the following:
“10.2. Local councils are required to establish the single tax and property tax (regarding transport tax and land fee).
10.3. Local councils within the competence defined in this Code, shall decide on matters in accordance with the requirements of this Code regarding establishing of the property tax (regarding tax on real estate other than a land plot) the fee for parking of vehicles and tourist tax”.
Therefore, according to the TCU the local councils are obliged to establish (by the appropriate decision of the local council) the transport tax and decide (at their own discretion) whether to introduce the tax on real estate other than a land plot.
Para. 4.4. of Article 4 and para 8.3 of Article 8 of the Tax Code provide that literally only the decisions of village, town and city councils (i.e., regional councils have no authority to establish such taxes) shall establish taxes which are required to be paid “in the territory of the respective local communities” (para. 8.3. of Article 8 of the TCU).
The abovementioned taxes are not payable without such decision.
Moreover, the Tax Code provides for a specific procedure of coming into force of decisions on establishing of local taxes:
“12.5. Officially released decision to establish local taxes and fees is a regulatory instrument on establishment of local fees and taxes, which shall enter into force subject to the terms provided in subpara. 12.3.4 of this Article”.
“12.3.4. The decision on the establishment of local taxes and fees shall be officially promulgated by the relevant local self-government authority by July 15 of the year preceding the budget period in which the established local taxes or are planned to be applied (planning period). Otherwise, the rules of the respective decisions shall be applied not earlier than the beginning of the budget period following the planning period“.
In other words, on the basis of the abovementioned provisions of the Code, the new taxes practically cannot be recognized as payable at least during 2015 since the local councils did not and could not adopt and release the decision on establishing of such taxes and fees by July 15, 2014.
It is worth to note that para. 12.3.5. Article 12 of the TCU provides for the following: “12.3.5. If the rural, settlement or city council did not adopt the decision on the establishment of respective local taxes and fees and excise tax in the part of retail sale of excisable goods by business entities, which are mandatory according to this Code, before its adoption such taxes shall be collected on the basis of the requirements of this Code at minimum rates, and land fee shall be paid using the rates which were effective before December 31 of the year preceding the budget period in which land fee is scheduled to be applied”.
According to the Code, the establishment of the transport tax is mandatory (para. 10.2. Article 10 of the TCU), but the requirement to establish the tax on real estate other than a land plot, is not provided for by the current version of the Code1.
Thus, considering the abovementioned provisions, the real estate tax (in terms of innovations which are currently not reflected in the decisions of local councils) shall not be paid at least during 2015.
There are also significant doubts regarding legitimacy and “obligation” of the transport tax as a local tax without appropriate decisions of local councils in 2015.
In particular, para. 4.4. of the TCU provides for the following:
“4.4. The establishment and abolition of taxes and fees, as well as privileges of the tax payers are carried out in accordance with this Code by the Verkhovna Rada of Ukraine and by the Verkhovna Rada of the Autonomous Republic of Crimea, by village, town and city councils within their competence as established by the Constitution of Ukraine and laws of Ukraine”.
However, as we remember, Article 19 of the Constitution of Ukraine establishes that “Bodies of state power and bodies of local self-government and their officials are obliged to act only on the grounds, within the limits of authority, and in the manner envisaged by the Constitution and the laws of Ukraine”.
The relevant authorities, their distribution between the Verkhovna Rada and the local councils, particularly regarding establishment of local taxes, are established by Article 12 of the TCU:
“Article 12. The competence of the Verkhovna Rada of Ukraine, the Verkhovna Rada of the Autonomous Republic of Crimea, village, town and city councils on taxes and duties.
12.1. The Verkhovna Rada of Ukraine establishes the national taxes and fees on the territory of Ukraine and determines:
12.1.2. the list of local taxes and fees, establishment of which is the responsibility of village, town and city councils;
12.1.4. provisions set forth in para. 7.1, 7.2 Article 7 of this Code regarding local taxes and fees.
12.3. Village, town and city councils shall, within their authority, make the decisions on establishment of local taxes and fees.
12.3.1. Establishment of local taxes and fees shall be carried out as specified in this Code.
12.3.2. The decision on the establishment of local taxes and fees shall necessarily define object of taxation, the tax payer, the tax rate, the tax period and other elements defined by Article 7 of this Code, subject to the criteria established in Section XII of this Code for relevant local tax or fee. …”
That is according to the Tax Code (as well as the Constitution of Ukraine and the Law “On Local Self-government of Ukraine”) the establishment of local taxes, including defining their specific rate, is attributed to exclusive authority of local councils.
In fact, such establishment of the tax is defined by para. 7.1. Article 7 of the TCU, which implies such establishment by specifying of such elements as prescribed by para. 7.1.
The Verkhovna Rada of Ukraine can establish only the list of local taxes [to be established by the local councils] and marginal characteristics of such taxes. The actual setting of local taxes following all the criteria prescribed by the Verkhovna Rada is only within the authority of the relevant local councils.
Taking over the authority of the local councils by the Verkhovna Rada through introducing regulations to the TCU on mandatory collection of relevant local taxes even in the absence of appropriate decision by the local council (moreover, de facto deprivation of such councils of an opportunity to declare their intent by way of establishment of mandatory transport tax and fixed rates) and, hereby, establishing such tax “over the head” of local councils is abuse of authority by the Verkhovna Rada on tax issues, which is established by the law and Article 143 of the Constitution of Ukraine. Besides, it is interesting how the declared policy of decentralization relates to the actual seizure of relevant authorities of local councils by the Verkhovna Rada.
Hence, the requirement to pay transport tax (established by the Verkhovna Rada in excess of its authority according to the law and the Constitution) is at least controversial without relevant decisions by local councils. Therefore, it is possible that disputes on this issue will arise.
There are following arguments on illegitimacy of transport tax collection.
According to the TCU this tax is in fact national:
“8.2. Taxes and fees which are established by this Code and are required to be paid on the entire territory of Ukraine are national taxes, unless otherwise provided by this Code”.
It is worth noting that establishment of a tax implies mandatory definition of elements listed in para. 7.1. Article 7 of the TCU.
All such mandatory elements of the transport tax are defined directly by the Code (i.e. by the Verkhovna Rada) in Article 267.
In particular, the specific tax rate is established directly by the Verkhovna Rada in para. 267.4 Article 267 of the TCU. In other words, the Verkhovna Rada has defined not the rate limits (see Article 27 of the TCU), but a specific tax rate, which is the exclusive right of local councils. In the same way, the Verkhovna Rada established the rest of obligatory elements.
Therefore, this tax is de facto established by the Verkhovna Rada in the Code and is obligatory for payment on the entire territory of Ukraine. According to the Code, the collection of this tax (at a uniform rate for all regions of Ukraine) does not require adoption of any decision by local councils.
Moreover, this tax does not satisfy the obligatory criteria of local tax as prescribed by the Code.
“8.3. The local taxes and fees established in accordance with the list and within the limits of the rates determined by this Code, by decisions of village, town and city councils within their authorities, and are required to be paid on the territory of respective communities”.
According to the provisions of the Code the tax at hand does not require any appropriate decision by the local council for its establishment and is required to be paid not only on the territory of respective community/ies, but (without any exception) “is required to be paid on the entire territory of Ukraine”.
Thus, de facto this tax is a national tax and the Verkhovna Rada of Ukraine2 directly established its fixed and uniform rate for all regions of Ukraine.
However, this tax is not in the list of national taxes (Article 9 of the TCU). As it was mentioned in Part 1 of this newsletter, the Tax Code prohibits the establishment of national taxes, which are not provided for by the Code, and collection of national taxes which are not provided for by the Code is not allowed.
According to the law, the newly established tax on real estate other than a land plot, shall not stand to be paid at least during 2015.
The legitimacy of the transport tax i.e. the tax on vehicles with displacement in excess of 3 liters, in its present form, is rather doubtful. In addition, there are substantial legal arguments that it shall not be collected according to the law.
In view of the above, it is unclear why the Cabinet of Ministers made such haste with the adoption of these taxes before the New Year. As experience of 2014 demonstrates (for example, changing the procedure of interest taxation four times during the year), haste leads to uncertain consequences.
It should be mentioned that such actions consistently violate the principle of stability of taxation, which is provided for by the Tax Code: amending the key elements not later than 6 month before the beginning of the new budget period.
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.
1Unlike the previous version when Para. 10.3 Article 10 of the Tax Code established that local councils were obliged to establish, in particular, tax on real estate other than a land plot.
2Incidentally, this is one more argument why the regulations of subpara. 12.3.5. Article 12 of the TCU cannot be applied, they provide for collection of taxes literally “with application of minimum rates”, if there is no relevant decision by the local council. However, there is no minimum rate of the transport tax since according to para. 267.4 Article 267 of the TCU no marginal rate (minimum, maximum) is established, but a uniform, fixed, specific tax rate – “tax rate is established on the basis of calculation using the amount of 25 000 UAH per each passenger vehicle for calendar year”.
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