BAILII is celebrating 24 years of free online access to the law! Would you
consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £1, it
will have a significant impact on BAILII's ability to continue providing free
access to the law.
Thank you very much for your support!
[New search]
[Contents list]
[Printable RTF version]
[Help]
FIFTH
SECTION
CASE OF SERKOV v. UKRAINE
(Application
no. 39766/05)
JUDGMENT
STRASBOURG
7 July
2011
This
judgment will become final in the circumstances set out in Article 44
§ 2 of the Convention. It may be subject to editorial
revision.
In the case of Serkov v. Ukraine,
The
European Court of Human Rights (Fifth Section), sitting as a Chamber
composed of:
Dean Spielmann,
President,
Elisabet Fura,
Karel
Jungwiert,
Boštjan M. Zupančič,
Mark
Villiger,
Ganna Yudkivska,
Angelika Nußberger,
judges,
and Claudia Westerdiek,
Section Registrar,
Having
deliberated in private on 14 June 2011,
Delivers
the following judgment, which was adopted on that date:
PROCEDURE
- The
case originated in an application (no. 39766/05) against Ukraine
lodged with the Court under Article 34 of the Convention for the
Protection of Human Rights and Fundamental Freedoms (“the
Convention”) by a Ukrainian national, Mr Sergey Nikolayevich
Serkov (“the applicant”), on 25 October 2005.
- The
Ukrainian Government (“the Government”) were represented
by their Agent, Mr Y. Zaytsev.
- The
applicant alleged he was unlawfully obliged by the authorities to pay
value-added tax and this amounted to a violation of Article 1 of
Protocol No. 1.
- On
5 November 2009 the President of the Fifth Section decided to give
notice of the application to the Government. It was also decided to
rule on the admissibility and merits of the application at the same
time (Article 29 § 1).
THE FACTS
I. THE CIRCUMSTANCES OF THE CASE
- The
applicant was born in 1961 and lives in Kharkiv. He is a private
entrepreneur who has registered as a payer of the single (unified)
tax in accordance with the Presidential Decree “On a Simplified
System of Taxation, Accounting and Reporting for Small Business”
no. 727 of 3 July 1998, with further
amendments (“the Presidential Decree”).
- Between
March and July 2004, when the applicant imported goods into Ukraine,
he was requested by the customs authority to pay value-added tax
(“VAT”) in accordance with the Law “On Value-Added
Tax” of 3 April 1997 (“the VAT Act”).
- The
total amount of the VAT imposed by the customs authorities was
214,107.19 Ukrainian hryvnias (UAH). The applicant paid the VAT
required.
- On
10 August 2004 the applicant instituted proceedings in the Kharkiv
Regional Commercial Court against the customs authority and a local
department of the State Treasury, seeking recovery of the VAT,
arguing that he was covered by the simplified tax regime, as provided
by the Presidential Decree. He specified that according to section 11
of the Law “On State Support for Small Business” (“the
Small Business Act”) the simplified system of taxation provided
for the replacement of taxes and duties by the single (unified) tax.
He further claimed that according to paragraph 6 of the
Presidential Decree the single (unified) taxpayer was exempt from
paying VAT. Therefore, no VAT obligations could arise in the course
of his business activity.
- On
2 September 2004 the court rejected the applicant’s claim as
unfounded, stating that the principles established in section 11 of
the Small Business Act were not applicable as regards VAT because the
relevant amendments had not been made to the VAT Act as required by
section 11.4 of the latter Act. At the same time, the provisions of
Sections 2 and 3 of the VAT Act indicated that the applicant’s
operations were subject to VAT. The court therefore concluded that
the VAT Act did not make any exemptions for private entrepreneurs
covered by the simplified taxation regime. Moreover, having regard to
paragraph 1 of the Presidential Decree, which laid down the criteria
for registering under a simplified system of taxation, the court
found that that system provided VAT exemption with respect to sales
operations only and did not cover import operations.
- The
applicant appealed, claiming that paragraph 6 of the Presidential
Decree did not make any distinctions between import and sales
operations. He argued that neither type of operation was
subject to VAT if a person was registered under the simplified
taxation regime.
- On
2 November 2004 the Kharkiv Commercial Court of Appeal quashed the
judgment of 2 September 2004 and found for the applicant, noting that
the Ukrainian legislation provided for general and simplified systems
of taxation. The latter provided for the substitution of VAT and
other taxes and duties by a single (unified) tax. As the applicant
had been registered under the simplified system of taxation, the
first-instance court had wrongly referred to the VAT Act in support
of the conclusion that the applicant’s import operations were
subject to VAT. The court of appeal further noted that paragraph 1 of
the Presidential Decree set out only the conditions for applying a
simplified taxation regime and did not differentiate between business
operations exempt from VAT. At the same time, paragraph 6 of the
Presidential Decree provided VAT exemption without any reservation as
to the type of business operation.
- The
customs authority appealed on points of law.
- On
2 February 2005 the Higher Commercial Court quashed the judgment of 2
November 2004 and upheld the judgment of 2 September 2004. It
referred to the VAT Act, which provided that both sales and import
operations were subject to VAT. The court further referred to
paragraph 1 of the Presidential Decree which, in its opinion, had not
merely set out criteria for the application of a special taxation
regime, but had also indicated that the single (unified) tax was
targeting income received from business operations. Accordingly, the
court concluded that the VAT exemption established by the
Presidential Decree applied only to sales operations, while import
operations fell under the general taxation regime. It further
referred to the decision of the Supreme Court of 23 December 2003 in
which the same approach had been applied in a similar case.
- The
applicant appealed to the Supreme Court on points of law. He
reiterated that paragraph 6 of the Presidential Decree made no
distinction between business operations and provided for a general
exemption of single (unified) tax payers from the VAT obligations. He
further referred to the Supreme Court decision of 15 January 2003 in
which the VAT exemption provided by the Presidential Decree was
interpreted as also covering import operations. He also claimed that
under section 4.4.1 of the Law “On the Procedure for
Payment of Taxpayers’ Liabilities to Budgets and State Purpose
Funds” of 21 December 2000 (“the Taxpayer Liabilities
(Payments) Act”) the courts were obliged to accept the
interpretation of domestic law which was the more favourable to a
taxpayer.
- On
28 April 2005 a panel of the Supreme Court refused to open appeal
proceedings in the applicant’s case.
II. RELEVANT DOMESTIC LAW AND PRACTICE
A. The Constitution of Ukraine of 28 June 1996
- According
to paragraph 4 of the Transitional Provisions of the Constitution,
for three years after the Constitution came into effect the President
of Ukraine was empowered to adopt decrees on economic issues not
covered by the laws of the Parliament.
B. The Law of Ukraine “On Value-Added Tax”
(“the VAT Act”) of 3 April 1997 (in force at the
relevant time)
- At
the material time section 2 of the Act
provided, inter alia, that any physical person or legal entity
importing goods with the purpose of using or consuming such goods on
the customs territory of Ukraine should be considered to be a payer
of VAT, except for those physical persons who were not registered as
VAT payers and who imported goods within the non-taxable limits.
On 25
March 2005 this provision was amended, providing, inter alia,
that it applied to import operations regardless of which taxation
regime had been chosen by the importer.
- According
to sections 3.1.1 and 3.1.2 of the Act VAT was applicable to both
sales and import operations.
- Section
11.4 of the Act provided that changes in the VAT charging regime
could be introduced only by amendments to this Act.
C. The Law “On State Support for Small
Businesses” (“the Small Business Act”) of 19
October 2000
- Section
1 of the Act provides that the subjects of small businesses are,
among others, physical persons who have registered as private
entrepreneurs.
- According
to section 11 of the Act, the simplified system of taxation,
accounting and reporting may be applied to the subjects of small
businesses. The system provides for substitution of taxes and duties
by a single (unified) tax.
D. The Law “On the Procedure for Payment of
Taxpayers’ Liabilities to Budgets and State Purpose Funds”
(“the Taxpayer Liability (Payments) Act”) of 21 December
2000 (in force at the relevant time)
- Section
4.4.1 of the Act provided that if the norm of the law or another
normative legal act issued on the basis of the law, or if the norms
of different laws or normative legal acts offered ambiguous or
multiple interpretations of the rights and obligations of taxpayers
and supervising authorities, the decision taken should be in favour
of the taxpayer.
E. The Presidential Decree “On a Simplified
System of Taxation, Accounting and Reporting for Small Businesses”
no. 727 (“The Presidential Decree”)
of 3 July 1998 (with further amendments)
- Paragraph
1 of the Decree provides that a simplified system of taxation,
accounting and reporting may be applied to, among others, a private
entrepreneur who has employed during a year a maximum of ten people
under labour contracts and whose annual income from the sale of
products, works and services does not exceed UAH 500,000.
- Paragraph
6 of the Decree provides as follows:
“Small businesses paying the single (unified) tax
shall not be considered payers of the following taxes and duties:
value-added
tax, except for legal entities which have opted to pay single
(unified) tax at the 6% rate;
corporate
income tax;
personal
income tax;
land
tax;
duty
for special use of natural resources ...”
F. Jurisprudence of the Ukrainian courts
- On
15 January 2003 the Supreme Court adopted a decision in a dispute
between a single (unified) tax payer and a customs authority
concerning the charging of VAT on import operations. The Supreme
Court noted that the Ukrainian legislation provided for general and
simplified systems of taxation which operated separately. The general
system of taxation was regulated by the Law “On the System of
Taxation” of 25 June 1991 and by the laws dealing with
particular taxes and duties. The simplified system of taxation was
regulated by the Presidential Decree and the Small Business Act. The
Supreme Court further found that the plaintiff, having been
registered under the simplified system of taxation, was not obliged
to pay VAT on import operations because the plaintiff’s VAT
obligations had been replaced by the obligation to pay single
(unified) tax. The Supreme Court therefore overturned the finding of
the lower court suggesting that the VAT exemption was not applicable
to import operations.
According
to the information letter of 26 May 2003, the Higher Commercial Court
recommended the lower commercial courts to take that decision into
account in the course of consideration of tax disputes. The decision
was also published in the specialised legal journal on commercial
jurisprudence.
- On
23 December 2003 the Supreme Court adopted another decision in a
dispute between a single (unified) tax payer and a customs authority
concerning the charging of VAT on import operations. The Supreme
Court noted that the VAT Act provided for application of VAT to sales
and import operations. At the same time, according to paragraph 1 of
the Presidential Decree, the application of the simplified system of
taxation depended on the amount of income earned from sales
operations. The Supreme Court therefore concluded that the VAT
exemption provided by the Presidential Decree applied only to sales
operations and not to import operations.
By
the information letter of 18 June 2004, the Higher Commercial Court,
“complementing [its] information letter of 26
May 2003”, notified the lower commercial courts of that
decision. The decision was further published in the specialised legal
journal on commercial jurisprudence.
THE LAW
I. ALLEGED VIOLATION OF ARTICLE 1 OF PROTOCOL NO. 1
-
The applicant complained that the authorities had unlawfully obliged
him to pay value-added tax. He relied on Article 1 of Protocol No. 1,
which reads as follows:
“Every natural or legal person is entitled to the
peaceful enjoyment of his possessions. No one shall be deprived of
his possessions except in the public interest and subject to the
conditions provided for by law and by the general principles of
international law.
The preceding provisions shall not, however, in any way
impair the right of a State to enforce such laws as it deems
necessary to control the use of property in accordance with the
general interest or to secure the payment of taxes or other
contributions or penalties.”
A. Admissibility
- The
Government submitted that the application was manifestly ill-founded.
They accepted that charging VAT to the applicant constituted
interference with the applicant’s property rights. However,
this interference was justified under the second paragraph of Article
1 of Protocol No. 1, providing that the States should not be
prevented from enforcing such laws as they deem necessary to control
the use of property in the public interest and to secure the payment
of taxes.
- They
further argued that the lawfulness of the applicant’s
obligation to pay the VAT in question had been confirmed by the
domestic courts, which were better placed to interpret the domestic
legislation and assess the evidence. Lastly, in the Government’s
opinion, the interference with the applicant’s property rights
did not impose an excessive individual burden on the applicant, as
the measures would be the same for any other private entrepreneur
importing goods from abroad.
- The
applicant disagreed, claiming that the interference was contrary to
domestic legislation, in particular to paragraph 6 of the
Presidential Decree. The amendments to the VAT law adopted
subsequently (see paragraph 18 above) indicated a lack of legal
grounds for the measures in question. He further referred to
decisions of the Supreme Court of 15 January and 23
December 2003 as examples of inconsistent interpretation of
the domestic legislation on this matter by the domestic courts. He
insisted that the courts should have chosen the legal interpretation
which was the more favourable to the taxpayer.
- The
Court considers that the applicant’s complaint raises questions
requiring examination of the case on the merits. The Court further
notes that the complaint is not inadmissible on any other grounds. It
must therefore be declared admissible.
B. Merits
- It
is a common ground that charging VAT to the applicant constituted an
interference with his property rights within the meaning of Article 1
of Protocol No. 1. The Court does not see any reason to hold
otherwise. The question to be determined is therefore whether this
interference was justified in accordance with the requirements of
that provision.
- The
first and most important requirement of Article 1 of Protocol No.
1 is that any interference by a public authority with the peaceful
enjoyment of possessions should be lawful: the second sentence of the
first paragraph authorises a deprivation of possessions only “subject
to the conditions provided for by law” and the second paragraph
recognises that States have the right to control the use of property
by enforcing “laws”. Moreover, the rule of law, one of
the fundamental principles of a democratic society, is inherent in
all the Articles of the Convention. It follows that the issue of
whether a fair balance has been struck between the demands of the
general interest of the community and the requirements of the
protection of the individual’s fundamental rights becomes
relevant only once it has been established that the interference in
question satisfied the requirement of lawfulness and was not
arbitrary (see Iatridis v. Greece [GC], no. 31107/96, §
58, ECHR 1999 II).
- When
speaking of “law”, Article 1 of Protocol No. 1 alludes to
the same concept to be found elsewhere in the Convention (see Špaček
s.r.o. v. the Czech Republic, no. 26449/95, § 54, 9
November 1999). This concept requires firstly that the measures
should have a basis in domestic law. It also refers to the quality of
the law in question, requiring that it be accessible to the persons
concerned, precise and foreseeable in its application (see Beyeler
v. Italy [GC], no. 33202/96, § 109, ECHR 2000-I).
- The
scope of the concept of foreseeability depends to a considerable
degree on the content of the instrument in issue, the field it is
designed to cover and the number and status of those to whom it is
addressed. The mere fact that a legal provision is capable of more
than one construction does not mean that it fails to meet the
requirement of “foreseeability” for the purposes of the
Convention. The role of adjudication vested in the courts is
precisely to dissipate such interpretational doubts as remain, taking
into account the changes in everyday practice (see Gorzelik and
Others v. Poland [GC], no. 44158/98, § 65, 17 February
2004). The task of the supreme courts in securing
a uniform and coherent application of the
law cannot be underestimated in this regard (see, mutatis
mutandis, Tudor Tudor v. Romania, no. 21911/03, §§
29-30, 24 March 2009, and Ştefănică
and Others v. Romania, no. 38155/02, §§
36-37, 2 November 2010). A failure
by a supreme court to cope with that task may produce consequences
incompatible, inter alia, with the requirements of Article 1
of Protocol No. 1 (see Păduraru v. Romania, no.
63252/00, §§ 98-99, ECHR 2005 XII (extracts)).
- The
Court admits that it is primarily for the national authorities to
interpret and apply domestic law. However, the Court is required to
verify whether the way in which the domestic law is interpreted and
applied produces consequences that are consistent with the principles
of the Convention, as interpreted in the light of the Court’s
case-law (see Scordino v. Italy (no. 1) [GC], no.
36813/97, §§ 190 and 191, ECHR 2006 V).
- In
the present case the applicant’s claim against the customs
authority was refused as the courts found that the VAT exemption was
not applicable to the import operations undertaken by the applicant.
However, the legal provisions concerning the scope of the VAT
exemption were subjected to divergent interpretations by the domestic
courts. In particular, on 15 January 2003 the Supreme Court adopted a
guiding decision suggesting that the VAT exemption was applicable to
import operations undertaken by a single (unified) tax payer (see
paragraph 25 above). Subsequently, on 23
December 2003 the Supreme Court adopted the opposite approach,
finding that VAT exemption was not applicable to import operations
carried out by such taxpayers. That decision was disseminated and
officially recommended for guidance in June 2004 (see paragraph 26
above), that is, at the time when the applicant was in the process of
importing goods from abroad (see paragraph 6 above).
- It
cannot be excluded that the entitlement to the VAT exemption, as
interpreted by the Supreme Court on 15 January 2003, was a
significant factor in the applicant’s decisions to enter into
commercial agreements preceding the relevant import operations. It
appears however that at a certain moment of his business activity the
applicant had to discover that the guiding interpretation as to the
taxation regime in respect of import operations had drastically
changed.
- The
Court admits that there may indeed be cogent reasons why the guiding
legal interpretations need to be revised. The Court itself, applying
dynamic and evolutive approaches in interpreting the Convention, may
depart, where necessary, from its previous interpretations, ensuring
thereby the effectiveness and contemporariness of the Convention (see
Vilho Eskelinen and
Others v. Finland [GC], no. 63235/00, §
56, ECHR 2007 IV, and Scoppola v. Italy (no. 2)
[GC], no. 10249/03, § 104, ECHR
2009 ...).
- However,
the Court cannot discern any justification for the shift of legal
interpretation the applicant faced. In fact no reasons were given by
the Supreme Court to explain the reinterpretation in question. Such a
lack of transparency must have affected public confidence and trust
in the law. In the circumstances of the present case the Court
considers that the manner in which the domestic courts interpreted
the relevant legal provisions undermined their foreseeability.
- The
Court further notes that the possibility of such divergent
interpretations of the same legal provisions was essentially
generated by the inappropriate state of domestic law on this issue.
The rules contained in the Presidential Decree and the VAT Act gave
unjustified leeway in interpreting the ways in which they could be
correlated, as well as in understanding the exact scope and meaning
of their requirements.
- Accordingly,
in the Court’s opinion, the lack of the required foreseeability
and clarity of the domestic law on such an important fiscal issue,
producing opposing judicial interpretations, upset the requirement of
“quality of law” under the Convention.
- In
this regard the Court cannot overlook the requirement of
section 4.4.1 of the Taxpayer Liability (Payments) Act, which
provided that if domestic legislation offered ambiguous or multiple
interpretations of the rights and obligations of the taxpayers the
domestic authorities were obliged to take the approach which was more
favourable to the taxpayer. However, in the present case the
authorities opted for the less favourable interpretation of the
domestic law, which resulted in the applicant being charged VAT (see
also Shchokin v. Ukraine, nos. 23759/03 and 37943/06,
§ 57,
14 October 2010).
- The
foregoing considerations are sufficient to enable the Court to
conclude that the interference with the applicant’s property
rights was not lawful for the purposes of Article 1 of Protocol No.
1. It holds for this reason that there has been a violation of that
provision.
II. OTHER ALLEGED VIOLATIONS OF THE CONVENTION
- The
applicant complained under Articles 6 § 1 and 13 of the
Convention that the proceedings in his case were unfair, alleging
that the courts had applied the domestic law wrongly.
- Having
considered the applicant’s submissions in the light of all the
material in its possession, the Court finds that, in so far as the
matters complained of are within its competence, they do not disclose
any appearance of a violation of the rights and freedoms set out in
the Convention.
- It
follows that this part of the application must be declared
inadmissible pursuant to Article 35
§§ 3
(a) and 4
of the Convention.
III. APPLICATION OF ARTICLE 41 OF THE CONVENTION
- Article 41 of the Convention provides:
“If the Court finds that there has been a
violation of the Convention or the Protocols thereto, and if the
internal law of the High Contracting Party concerned allows only
partial reparation to be made, the Court shall, if necessary, afford
just satisfaction to the injured party.”
A. Damage
- The
applicant claimed UAH 249,044.2
in respect of pecuniary damage, which comprised the amount of the
impugned VAT (UAH 214,107.19)
plus the amount of inflation losses (UAH
34,937.01)
incurred by the applicant up to the date of the application being
lodged with the Court. The applicant further claimed UAH
50,000
in respect of non-pecuniary damage.
- The
Government submitted that the claims were unsubstantiated, relying
essentially on their assumption that the application was manifestly
ill-founded.
- The
Court has found that charging the applicant the VAT was not lawful
for the purpose of Article 1 of Protocol No. 1.
It therefore considers that the reparation of the violation found
should entail the reimbursement of the VAT unduly paid by the
applicant. As regards the inflation losses, the Court reiterates that
the adequacy of compensation would be diminished if it were to be
paid without reference to various circumstances liable to reduce its
value (see, for example, Wasserman v. Russia (no. 2), no.
21071/05, § 71, 10 April 2008). The Court notes that the
applicant presented a detailed calculation of inflation losses based
on the official tables, and that the Government submitted no
objections to the applicant’s claim or the method of
calculation. The Court finds these calculations reasonable (see
Skaloukhov and Others v. Ukraine, nos. 8107/06, 8473/06,
8475/06, 15941/06 and 32116/06, § 37, 19 November 2009). In sum,
the Court finds that the applicant’s claims for pecuniary
damage are substantiated and rounds the award in this respect to
EUR 23,000.
- As
regards the non-pecuniary damage, the Court finds that the applicant
must have suffered non-pecuniary damage on account of the violation
found. Ruling on an equitable basis, as required by Article 41 of the
Convention, it awards EUR 4,000 to the
applicant under this head.
B. Costs and expenses
- The
applicant did not submit any claim under this head. The Court
therefore makes no award.
C. Default interest
- The
Court considers it appropriate that the default interest should be
based on the marginal lending rate of the European Central Bank, to
which should be added three percentage points.
FOR THESE REASONS, THE COURT UNANIMOUSLY
- Declares the complaint concerning Article 1 of
Protocol No. 1 admissible and the remainder of the application
inadmissible;
- Holds that there has been a violation of Article
1 of Protocol No. 1;
- Holds
(a) that
the respondent State is to pay the applicant, within three months of
the date on which the judgment becomes final, in accordance with
Article 44 § 2
of the Convention, the following amounts, to be converted into the
national currency of the respondent State at the rate applicable on
the date of settlement:
(i) EUR
23,000 (twenty-three thousand euros), plus any tax that may be
chargeable, in respect of pecuniary damage;
(ii) EUR
4,000 (four thousand euros), plus any tax that may be chargeable, in
respect of non-pecuniary damage;
(b) that
from the expiry of the above-mentioned three months until settlement
simple interest shall be payable on the above amounts at a rate equal
to the marginal lending rate of the European Central Bank during the
default period plus three percentage points;
- Dismisses the remainder of the applicant’s
claim for just satisfaction.
Done in English, and notified in writing on 7 July 2011, pursuant to
Rule 77 §§ 2 and 3 of the
Rules of Court.
Claudia Westerdiek Dean Spielmann
Registrar President
