What They Need to Know

Oleg Moskvitin discusses the recent decision of the Supreme Commercial Court which restricted the right of the tax authorities to request information about taxpayers. Banks, and possibly other organisations, are now allowed to assess the relevance of the requested data to the objectives of fiscal control.

Oleg Moskvitin
senior lawyer
Muranov, Chernyakov & Partners

+7 495 783-74-50

According to article 93.1 of the Tax Code, the tax authorities have the power to request data (documents) from any person (including banks) that has such data about a taxpayer under audit.

There are penalties for the failure to provide the requested documents or information (article129.1 of the Tax Code). It should be noted that such fine are the common causes of litigation about between banks and tax authorities, and banks do not always win.

Decision of the Supreme Commercial Court №5355/2011

Hopefully, from now banks will find it a bit easier to defend their interests. On October 18 last year, the Presidium of the Supreme Commercial Court has ruled against the prosecution of a bank for the refusal to give documents about its client.

Taxmen requested agreements between the bank and its client, the counterparty to the taxpayer being audited, its power of attorney and a bank card bearing the signatures and the stamp of the corporate seal.

The Presidium, as well as the Appellate Court before it, has ruled that the documents about the relations between the bank and its client, the counterparty to an audited taxpayer, do not relate to the activities of the audited company and do not reflect the economic relationship between the bank's customer and the audited taxpayer.

Therefore, the bank was not obliged to give these documents to the tax authorities and the penalty was imposed unlawfully.

The earlier case law lacked uniformity

It should be noted that prior to this ruling of the Supreme Commercial Court, there were two diametrically opposing positions on the matter.

The first aimed at ensuring that banks must fulfil such requests unconditionally and that they may not assess such requests. Courts, that followed this view, noted that taxmen collect evidence of possible fraud and only they must decide which documents are relevant (see, i.e., the decision the Federal Commercial Court of the Volga Region of April 7, 2011, case №A55-15446/2010).

Other courts believed that banks are required to issue only those documents that have a link to the activities of the taxpayer and that banks, therefore, are entitled to evaluate the requests of tax inspectors in terms of their legality and validity (see, i.e., the decision of the Federal Commercial Court of the Northwest Region of March 10, 2011 №Ф07-584/2011, case №A56-32621/2010).

As we can see, the latter view has prevailed.

The position of the Presidium of the Supreme Commercial Court is binding on the lower courts - they must follow it in similar cases. Moreover, as it has been clearly stated in the Ruling №5355/2011, earlier cases ruled in favour of taxmen may be reviewed.

In the beginning was the word of the Constitutional Court

For fairness’ sake, we must mention that this position has deep roots. The Constitutional Court in the Ruling №453 of the December 14, 2004 considered a similar situation.

According to the Tax Code (article 2, paragraph 86) banks must provide the tax authorities with statements about operations and accounts of taxpayers. The Constitutional Court noted, however, that this duty does not imply that a bank is obliged to give such documents upon any request of the taxmen. The request must be justified by the goals and objectives of the fiscal control. Otherwise, the request for giving such information is unlawful and the failure to grant it does not trigger a penalty.

The Ruling №5355/2011 does not mention this opinion of the Constitutional Court.

Achievements and possible consequences of the Ruling №5355/2011

It is unlikely that the ruling will substantially reduce the number of litigations between banks and tax authorities on this matter.

First, the taxmen do not always change their practices following the explanations of the higher courts. Second, if the position about bank contracts and signature cards is getting clear, the opinions of the tax authorities and banks on the legality of requests for other documents will continue to diverge. Moreover, the risk that the courts will support the taxmen remains.

However, the very fact of recognition of the banks’ right for critical assessment of the tax inspectors’ demands, the destruction of the ‘general presumption of the feasibility’ of their claims is a great achievement.

It is equally important that this position should, in our view, extend to cases where the request is addressed not to a bank, but to a taxpayer’s counterparty or any other person. Since the request for documents is governed by the same article 93.1 of the Tax Code, other persons should also have the right not to provide to the tax authorities ‘irrelevant’ information about their business partners.

Thus, the decree of the Presidium of the Supreme Commercial Court shall have a broad spectrum of application and will be used not only by banks.

It should be noted also that the Presidium has referred to subparagraph 11 of paragraph 1 of article 21 of the Tax Code, which allows taxpayers not to fulfil unlawful demands of the tax authorities. The court has noted that this is a general principle of the tax law and it concerns not only taxpayers but also banks and, we can add, other persons.

We are not inclined to argue that such an appeal to one of the basic articles of the ‘general part’ of the Tax Code should be seen as a revolution in practice. This is a logical step which comes naturally.

At the same time, it is a good when the highest courts remind the executive branch about the basic guarantees to the business. In practice such reminders are often more effective than a direct and unambiguous indication of the law. In this case, the court has signalled that subparagraph 11 of paragraph 1 of article 21 of the Tax Code is not a ‘dead’ rule and that courts should apply it to the favour of taxpayers.

Muranov, Chernyakov & Partners