Does a violation of procedural law constitute grounds for reversing the tax authority’s decision?

28 November 2023
Law Messenger
Decision of the Moscow Arbitration Court of 30 October 2023 in Case No. А40-159742/23-140-2532

In dealing with tax disputes, the courts often proceed from the premise that a violation of certain procedures of tax law does not entail the unconditional reversal of the tax authorities’ decisions following a tax audit. Nevertheless, the tax authorities’ departure from procedural law may become one of the main reasons for reversing a decision to impose tax liability.

In this dispute, the court provided a comprehensive interpretation of the facts, both in terms of the substance of the imputed violation (unjustified use of a property tax exemption) and the tax authority’s compliance with the procedure for conducting a desk tax audit.

As a result of litigation, the court ruled in the taxpayer’s favor. In our opinion, the court’s arguments regarding the procedural violations by the tax authority are especially worthy of notice.

In particular, the taxpayer’s rights were grossly violated during the tax audit: (1) prior to receiving the Act, the Company was not notified that it had wrongfully taken the tax exemption, while the Act was drawn up without requesting explanations or a position on the disputed issue; (2) the Act was received much later than the deadline (10 months later), which misled the Company as to the legitimacy of taking the exemption, since an Act based on the results of a desk tax audit does not have to be prepared in the absence of violations, and caused losses in the form of additional tax charges, fines and penalties.

According to the court, the decision of a higher tax authority to eliminate previously granted property tax exemptions worsens the taxpayer’s position, not due to the taxpayer’s fault, and the tax authority’s unlawful actions result in losses.

In addition, the tax authority failed to adhere to the principle that contradictions and ambiguities in legislative acts on taxes and levies should be interpreted in favor of taxpayers (Article 3.7 of the Russian Tax Code).

Given the position taken by the court, it is important to note the following:

  • The tax authority’s approach violates the taxpayer’s lawful rights, since it deprives the taxpayer of the opportunity to provide explanations to support its position during a tax audit.
  • The tax authority’s inaction misled the taxpayer as to the legitimacy of taking the exemption, and the tax authority was thus not entitled to enforce collection of tax or charge penalties and fines after the deadline for documenting the results of the tax audit.
  • Procedural violations may lead to losses in the form of additional tax assessments for the entire period during which the taxpayer was unaware of the violations of laws and its rights.

The courts, including the Constitutional Court of the Russian Federation, have repeatedly emphasized the importance of interpreting uncertainties, ambiguities and contradictions in tax law. Otherwise, in our view, the principles of equality of arms and fairness are violated, which affects the balance of private and public interests.

This tax dispute was heard by the court of first instance. We will monitor the development of the case in higher courts and keep you informed of the outcome.

Our Tax Controversy experts have broad experience and are ready to provide assistance in resolving tax disputes at the pre-trial and trial stages. You can contact us by writing to controversy@b1.ru.

Authors:
  • Irina Luzhina
    Senior Manager
    Tax Controversy Services
  • Artur Pimkin
    Senior
    Tax Controversy Services
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