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FORMER
SECOND SECTION
CASE OF
INTERSPLAV v. UKRAINE
(Application
no. 803/02)
JUDGMENT
STRASBOURG
9
January 2007
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 Intersplav v. Ukraine,
The
European Court of Human Rights (Second Section), sitting as a Chamber
composed of:
Mr J.-P. Costa, President,
Mr A.B.
Baka,
Mr I. Cabral Barreto,
Mr K. Jungwiert,
Mr V.
Butkevych,
Mrs A. Mularoni,
Ms D. Jočienė,
judges,
and Mr S. Naismith, Deputy Section
Registrar,
Having
deliberated in private on 31 March 2005 and on 5 December 2006,
Delivers
the following judgment, which was adopted on the last mentioned
date:
PROCEDURE
- The
case originated in an application (no. 803/02) 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-Spanish Joint Venture “Intersplav” (“the
applicant”), on 6 December 2001.
- The
applicant was represented by Mr. Aleksandr Syomkin.
The Ukrainian Government (“the Government”) were
represented by their Agents, Mrs V. Lutkovska
and Mrs Z. Bortnovska.
- The
applicant alleged, in particular, that the State’s practice of
groundlessly refusing to confirm the applicant’s entitlement to
VAT refunds constituted an interference with the peaceful enjoyment
of its property, and that such interference was disproportionate and
caused significant losses to its business.
- The
application was allocated to the Second Section of the Court (Rule 52
§ 1 of the Rules of Court). Within that Section, the
Chamber that would consider the case (Article 27 § 1 of the
Convention) was constituted as provided in Rule 26 § 1.
- By
a decision of 31 March 2005, the Court declared the application
partly admissible.
- On
1 April 2006 the Court changed the composition of its Sections
(Rule 25 § 1), but this case remained with the Chamber
constituted within the former Second Section.
- The
applicant and the Government each filed observations on the merits
(Rule 59 § 1).
THE FACTS
I. THE CIRCUMSTANCES OF THE CASE
- The applicant company, “Intersplav”
(hereinafter “the applicant”), is a joint venture
enterprise, based in the town of Sverdlovsk in the Lugansk Region,
Ukraine.
9. The
facts of the case, as submitted by the parties, may be summarised as
follows.
- The
applicant manufactures goods using recycled scrap metal purchased in
Ukraine, bearing a 20 % VAT rate. The major part of the applicant’s
production is exported from Ukraine at a zero VAT rate. The applicant
is thereby entitled to a refund of the VAT due on the price of the
scrap metal. Under the Law on Value-Added Tax (see the Domestic Law
part below) such a refund should be made within a one-month period
following the applicant’s submission of the relevant
calculations to the local tax administration. If the refund is
delayed, compensation is payable. Both payments (the refund and
compensation) are made by the State Treasury upon the submissions of
the relevant tax authority.
- Since
April 1998, the VAT refund to the applicant has been systematically
delayed due to the failure of the Sverdlovsk Town Tax Administration
to confirm the amounts involved. For the same reason, the applicant
could not receive compensation for the delayed VAT refund.
- Since
1998, the applicant has complained to the Lugansk Regional Tax
Administration and the State Tax Administration about the failure of
the Sverdlovsk Town Tax Administration to issue certificates for the
VAT refunds on time. However, these authorities found no illegalities
in the actions of the Sverdlovsk Town Tax Administration, whilst
recognising the existence of the State’s debts to the
applicant.
- The
applicant also complained to the Sverdlovsk Prosecutor and the
General Prosecutor’s Office, without any result.
- In
its letter of 22 October 2002, the applicant claimed that further
obstacles had arisen in running its business, including new
discriminatory legislation, transport controls by the police, and
judicial proceedings against its employees for defamation instituted
by the Tax Administration.
- Since
1998, the applicant has instituted a number of proceedings, more than
140
so far, in the Lugansk Commercial Court against the Sverdlovsk Town
Tax Administration and the State Treasury Department in order to
receive compensation for the delayed refund of the VAT.
- In
the proceedings during 1999-2000, the applicant requested the court
to oblige the Tax Administration to confirm the amounts of
compensation due to the applicant. The court found for the applicant
and ordered the tax administration to issue the requested
confirmation for the amounts claimed.
- In
the proceedings during 2001-2003, the applicant changed the subject
of its claim and requested the courts to award it the amounts of the
VAT refund and compensation directly. The Tax Administration and
Treasury both opposed the claims; the former on the basis of an
alleged lack of competence in VAT refunding, the latter on the basis
of the impossibility of refunding any VAT without prior confirmation
of such an amount by the Tax Administration. The court found for the
applicant and awarded the claimed amounts in its decisions between
2001 and 2004. It confirmed the applicant’s right to
compensation for the various delayed VAT refunds.
- The
court decisions given between 1999 and 2002 were executed within
periods ranging from four days to two years and eight months. The
oldest decision that remained unenforced in February 2004, according
to the applicant, was given on 18 March 2003.
- In
its further correspondence, the applicant maintained that the Tax
Authorities claimed that the court decisions given in its favour
should not be directly enforceable, but would require the prior
confirmation of the awarded amounts by the Tax Administration.
- On
17 March 2004 the applicant lodged a claim with the Lugansk
Commercial Court against the Lugansk Regional Department of the State
Treasury and the Sverdlovsk Town Tax Administration for their refusal
to enforce the judgments rendered by the said court in the period
between March 2003 and February 2004 (see the annex) and for a
proposal to convert the amounts awarded by the above judgments into
loan bonds with a five-year term.
- On
24 May 2004 the court found for the applicant and ordered the
defendants to enforce the impugned judgments.
- The
applicant maintained that, as of 18 June 2004, the amount of the
State debt to the company confirmed by court decisions was
UAH 26,363,200 (around EUR 4,119,250).
II. RELEVANT DOMESTIC LAW
- The
collection and refunding of value-added tax (VAT) is regulated by the
Law on Value-Added Tax. Article 3 of the law provides that both the
sale of goods in Ukraine and the export of goods from Ukraine are
subject to taxation. Under Article 6 of the law, the former is taxed
at a 20 % rate, whereas the latter is taxed at 0 %.
- The
procedure to establish the amount of VAT due or to be refunded is
regulated by Articles 7 and 8, which provide as relevant:
“7.7. The procedure to establish the amount of
tax to be paid into the budget or to be used as compensation from the
budget, and the terms of settlements within the budget
7.7.1. The amount of tax to be paid into the budget or
refunded from the budget shall be determined as the difference
between the total amount of tax obligations, which commence with any
sale of goods (works, services) within the reporting period, and the
amount of tax to be credited during the reporting period.
Payment of the tax shall be made not later than the
twentieth day of the month that follows the reporting period.
7.7.2. The tax payer shall submit a tax declaration to
the local body of State tax services ...
7.7.3. Where ... the amount determined by subparagraph
7.7.1 of this Article is negative, it shall be refunded to the tax
payer from the State budget of Ukraine within a month following the
reporting period. ...
Amounts that are not so refunded to the tax payer ...
shall be considered a budget debt. Interest at 120 % of the basic
rate of the National Bank of Ukraine shall be charged on that debt
from the moment it arises and for the whole period of its validity,
the repayment date inclusive. The tax payer is entitled at any moment
after commencement of the budget debt to apply to a court
with an action to collect the budget funds and establish the
liability of the officials responsible for the untimely refund
of overpaid taxes. ...
7.7.5. Amounts of value-added tax are included in the
State budget and shall first be used for budget refunds of
value-added tax according to this Law. ... Where the amount of budget
receipts obtained from the payment of value-added tax ... does not
cover the amount subject to refunding ..., funds from other [State
budget] resources ... shall be used for such compensation. ...
8.1. A tax payer that performs export operations ... and
files calculations for export compensation ... may receive such
compensation within 30 calendar days from the date of submitting such
calculations. ...
8.6. Export compensation shall be provided within 30
calendar days, following the day of the filing of export compensation
calculations.
In case the tax payer fails to submit the calculation of
export compensation within the established terms, export compensation
shall not be provided and the amounts of such compensation shall be
taken into account when calculating the tax payer’s future tax
obligations ... Calculations of export budgetary compensation shall
be submitted together with the declarations for the corresponding
reporting period.”
- According
to the Procedure for the Refund of Value Added Tax, adopted by the
joint decree of the State Tax Administration of Ukraine and the Main
Department of the State Treasury of Ukraine No. 209/72 on 2 July
1997, the VAT refund is made by the State Treasury of Ukraine on the
basis of a confirmation by the tax authorities or a court decision.
The VAT refund shall be made within five days after the tax authority
has submitted the confirmation of the amount claimed.
THE LAW
I. ALLEGED VIOLATION OF ARTICLE 1 OF PROTOCOL NO. 1 TO THE
CONVENTION
26. The
applicant company claimed that the State’s practice of
groundlessly refusing to confirm its entitlement to VAT refunds
constituted an interference with the peaceful enjoyment of its
property in violation of Article 1 of Protocol No. 1 to
the Convention. This provision 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. Whether there was a possession
1. The submissions of the parties
- The
Government maintained that the applicant’s entitlement to VAT
refunds could only be considered a “possession” under
Article 1 of Protocol No. 1 after confirmation of the
amounts by court decisions. If the tax authorities disputed the
entitlement of the applicant to the claimed VAT refund, it was only
by virtue of a court decision that the applicant acquired
“possessions” or “legitimate expectations” to
receive them.
- The
Government disagreed with the conclusion reached in the admissibility
decision that the tax authorities had not objected to the amounts of
the VAT refund claimed by the applicant.
- The
applicant maintained that the basis for the VAT refund under the law
was the information provided by the applicant itself in its tax
declarations. The court decisions given in its favour in the present
case showed that its right to the VAT refunds was violated prior to
its application to the courts, thus demonstrating that the right
existed prior to those decisions. Moreover, under the law, the State
could only use funds received from VAT payments for other purposes
after all VAT refunds had been made. Until then, therefore, the link
between the VAT and the taxpayer remained. It concluded that the
right to VAT refunds, and compensation for delays in their payment,
constituted “possessions” within the meaning of Article 1
of Protocol No. 1.
2. The Court’s assessment
- The
Court points out that the concept of “possessions” in the
first part of Article 1 of Protocol No. 1 has an autonomous meaning
which is independent from the formal classification in domestic law
(see Beyeler v. Italy [GC], no. 33202/96, § 100,
ECHR 2000-I). The issue that needs to be examined is whether the
circumstances of the case, considered as a whole, conferred on the
applicant an entitlement to a substantive interest protected by
Article 1 of Protocol No. 1.
- In
this connection, the Court notes that in the instant case the dispute
does not concern the particular amount of a VAT refund or of
compensation for the delay, but the applicant’s general
entitlement under the law to VAT refunds and compensation. The Court
observes that, having met the criteria and requirements established
by the domestic legislation, the applicant could reasonably expect
the refund of the VAT it had paid in the course of its business
activities, as well as compensation for any delay. Even though a
particular claim for a VAT refund may be subject to checks and
objections from the competent State authorities, the relevant
provisions of the Law on Value-Added Tax do not require the prior
judicial review of a claim to validate a company’s eligibility
for a refund.
As to
the Government’s objection to the conclusion reached in the
admissibility decision that the tax authorities had not objected to
the amounts of the VAT refund claimed by the applicant, the Court
notes that that conclusion was based on the materials in its
possession. From the case-file materials it appears that the tax
authorities did not dispute the amounts of the VAT refunds to be paid
to the applicant, but simply refused to confirm them without any
apparent reason, relying erroneously on a lack of competence in
refunding matters. It is true, however, that on several occasions,
and only once successfully, the calculations of the compensation for
the VAT refund delay made by the applicant had been objected to by
the tax authorities in the courts’ proceedings. This latter
point, however, does not negate the Court’s conclusion about
the original VAT refund proceedings.
- While
the Court does not find it necessary to determine the precise content
and scope of the legal interest in question, it is nevertheless
satisfied that the factors outlined above show that the applicant had
a proprietary interest recognised by Ukrainian law, and protected by
Article 1 of Protocol No. 1 (see, mutatis mutandis,
Buffalo S.r.l. en liquidation v. Italy, no. 38746/97,
§ 29, 3 July 2003).
B. Whether there was interference
- The
parties did not dispute that the delays in refunding the VAT to the
applicant could be regarded as interference with the applicant’s
right to peaceful enjoyment of its possession. In the Court’s
opinion, this situation comes within the first sentence of the first
paragraph of Article 1 of Protocol No. 1, which lays down the
principle of peaceful enjoyment of property in general terms (see
Buffalo S.r.l. en liquidation, cited above, § 31).
C. Whether the interference was justified
1. The submissions of the parties
- The
Government maintained that there were exceptional circumstances that
necessitated measures to protect the economic interests of the
country. The State faced a situation in which the system of VAT
refunding was abused; in particular, there were numerous cases of VAT
evasion, groundless claims for VAT refunds and fictitious export
operations. In this situation the Government were required to take
measures to stop such abuses and to prevent them in the future. In
the Government’s opinion, the judicial control over the VAT
refunding was necessary to secure the public interest and to prevent
abuses.
- The
Government further stated that the tax authorities’ actions in
the present case were based on a disproportion between the amounts
paid by the applicant in taxes and the amounts of VAT refund which it
claimed. This created a suspicion that the applicant was using
fictitious companies for its scrap metal supplies. According to the
Government, such fictitious enterprises had indeed been discovered by
the authorities.
- The
Government considered, therefore, that the measures taken were within
the State’s margin of appreciation and the interference was
proportionate, and therefore a fair balance had been struck between
the interests of the applicant and the public interest.
- The
applicant maintained that it had paid its taxes lawfully and these
payments had been checked on numerous occasions by the State
authorities. It pointed out that it was not responsible for other
companies from whom it bought metal, the price of which was inclusive
of VAT. The obligation to pay that VAT was on the latter companies,
not the applicant. The applicant underlined that it had neither the
competence nor the possibility to control other businesses, and the
situation referred to by the Government demonstrated the
unsatisfactory workings of the tax authorities, for which the
applicant should not be held liable. It further underlined that
numerous checks of its activities conducted by the tax authorities
had revealed no irregularities on which the latter could base their
refusals.
2. The Court’s assessment
- The
Court reiterates that States have a wide margin of appreciation in
determining what is in the public interest as the national
legislature has a wide discretion in implementing social and economic
policies. However, that margin of appreciation is not unlimited and
its exercise is subject to review by the Convention institutions (see
Lithgow and Others v. the United Kingdom, judgment of 8 July
1986, Series A no. 102, p. 50-51, §§ 121-22). In
the Court’s view, when the State authorities possess any
information about abuse of the VAT refund system by a concrete
entity, they can apply appropriate measures to prevent or stop such
abuses. The Court cannot, however, accept the argument about a
general situation with the VAT refunds advanced by the Government, in
the absence of any indication of the applicant’s direct
involvement in such abusive practices.
- The
Court further notes that since April 1998 the VAT refunds to the
applicant have been systematically delayed. Such delays were caused
by the situation in which the tax authorities, not disputing, as it
appears from the case-file, the amounts of VAT refunds due to the
applicant, constantly failed to confirm these amounts. Such failure
prevented the applicant from recovering the claimed amounts in due
time and created a situation of chronic uncertainty. Furthermore, it
forced the applicant to appeal to the courts on a regular basis with
identical claims. In the Court’s view, it
may be considered reasonable to require that such refusals be
challenged in a single or a few cases. However, in
the present case, the applicant’s recourse to this remedy has
not prevented the tax authorities from
continuing the practice of delaying
payment of the VAT refunds, even after court decisions have been
given in the applicant’s favour (cf. paragraph 18 above).
The systematic
nature of the failings of the State
authorities has
resulted in an excessive burden being imposed on the applicant.
- In
these circumstances, therefore, the Court considers that interference
with the applicant’s possession was disproportionate. In fact,
the constant delays with VAT refund and compensation in conjunction
with the lack of effective remedies to prevent or terminate such an
administrative practice, as well as the state of uncertainty as to
the time of return of its funds, upset the “fair balance”
between the demands of the public interest and the protection of the
right to peaceful enjoyment of possessions. In the Court’s
view, the applicant bore and continues to bear an individual and
excessive burden (see, mutatis mutandis, Buffalo S.r.l. en
liquidation, cited above, § 39).There has accordingly been
and continues to be a violation of Article 1 of Protocol No. 1.
II. 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
1. Pecuniary damage
- The
applicant claimed UAH 52,909,140 (around EUR 826,709.38) as
compensation for loss of profits, UAH 8,380,385.68 (around
EUR 1,309,435.26) as compensation for inflation losses,
UAH 2,114,900.06 (around EUR 330,435.13) of expenses for bank
credits, and UAH 583,943.12 (around EUR 91,241.11) of expenses
for severance payment.
- The
Government maintained that the applicant’s claims under this
head were ill-founded.
- The
Court takes into account that in the present case interest at 120 %
of the basic rate of the National Bank of Ukraine should be charged
on debts of VAT refund to the applicant from the moment they arise
and for the whole period of their validity. Whilst the Court cannot
speculate as to the economic performance of the applicant, it does
not find it unreasonable to regard the applicant as having suffered
some material loss. Ruling on an equitable basis, in accordance with
Article 41, the Court awards EUR 25,000.00 (see, mutatis
mutandis, Pélissier and Sassi v. France [GC],
no. 25444/94, § 80, ECHR 1999 II).
2. Non-pecuniary damage
- The
applicant claimed a symbolic sum of 1 Euro for non-pecuniary damage.
- The
Government left the issue to the Court’s discretion, if the
latter should find a violation of the Convention.
- The
Court considers that in the present case, there is no call for a
pecuniary award under this head. Accordingly, it does not make any
award in that respect.
- The
Court further considers that in the circumstances of the present case
the most appropriate form of redress would, in principle, be the
elimination of the administrative practice of delaying the VAT
refund, which has been found to be contrary to Article 1 of Protocol
No. 1.
B. Costs and expenses
- The
applicant claimed UAH 3,585.16 (around EUR 560) for travel expenses
and UAH 106,953.77 (around EUR 16,711.53).
- The
Government considered this claim unsubstantiated, without giving any
further specification.
- The
Court considers that in so far as the applicant claims travel
expenses, given the number of the domestic proceedings (see paragraph
15), the claimed amount appears to be justified. The Court,
therefore, awards it in full. As to the court fees which remained due
to the applicant in the domestic proceedings at issue (see appendix
to the admissibility decision of 31 May 2005), the Court considers
that full payment of the court fees awarded to the applicant within
the domestic proceedings listed in the Annex to the admissibility
decision of 31 March 2005 would constitute final settlement in
this part.
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
- 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
from the date on which the judgment becomes final in accordance with
Article 44 § 2 of the Convention, any remaining
court fees due to the applicant in the domestic proceedings examined
in the present case, as well as EUR 25,000 (twenty five thousand
euros) in respect of pecuniary damage, and EUR 560 (five hundred and
sixty euros) in respect of costs and expenses, to be converted into
the national currency of the respondent State at the rate applicable
at the date of settlement, plus any tax that may be chargeable;
(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 9 January 2007, pursuant
to Rule 77 §§ 2 and 3 of the Rules of Court.
S. Naismith J.-P. Costa
Deputy Registrar President
