EHRM, 07-07-2011, nr. 39766/05

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.

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.

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.

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.

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:

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 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.

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 individua'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.

The applicant claimed UAH 249,044.21. in respect of pecuniary damage, which comprised the amount of the impugned VAT (UAH 214,107.192.) plus the amount of inflation losses (UAH 34,937.013.) incurred by the applicant up to the date of the application being lodged with the Court. The applicant further claimed UAH 50,0004. 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.

The applicant did not submit any claim under this head. The Court therefore makes no award.

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.