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FIFTH
SECTION
CASE OF SHCHOKIN v. UKRAINE
(Applications
nos. 23759/03 and 37943/06)
JUDGMENT
STRASBOURG
14 October
2010
FINAL
14/01/2011
This
judgment has become final under Article 44 § 2 of the
Convention. It may be subject to editorial revision.
In the case of Shchokin v.
Ukraine,
The
European Court of Human Rights (Fifth Section), sitting as a Chamber
composed of:
Peer Lorenzen, President,
Karel
Jungwiert,
Rait Maruste,
Mark
Villiger,
Isabelle Berro-Lefèvre,
Mirjana
Lazarova Trajkovska,
Ganna Yudkivska, judges,
and
Claudia Westerdiek,
Section Registrar,
Having
deliberated in private on 21 September 2010,
Delivers
the following judgment, which was adopted on that date:
PROCEDURE
- The
case originated in two applications (nos. 23759/03 and 37943/06)
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
Yuriy Shchokin (“the applicant”), on 17 June 2003 and 6
September 2006 respectively.
- The
applicant was represented by Mr A. Shumilov, a lawyer practising in
Kyiv. The Ukrainian Government (“the Government”) were
represented by their Agent, Mr Y. Zaytsev.
- The
applicant alleged, in particular, that his property rights had been
violated by unlawful increases in his income tax liability by the
authorities.
- On
15 January 2009 the President of the Fifth Section decided to give
notice of the applications to the Government. It was also decided to
examine the merits of the applications at the same time as their
admissibility (Article 29 § 1).
THE FACTS
I. THE CIRCUMSTANCES OF THE CASE
- The
applicant was born in 1971 and lives in Kharkiv.
A. Taxation of the applicant's income earned in 2001
- In
March 2002 the applicant submitted to the Oktyabrskyy District Tax
Inspectorate of Kharkiv (the “Tax Inspectorate”) his 2001
income tax declaration. The declaration specified the amount of
income tax paid by the applicant in 2001 and distinguished, in
particular, two types of income: (a) income earned at the
applicant's principal place of business and (b) income
earned outside his principal place of business.
- In
respect of the first type of income, the tax had been calculated
under the progressive tax-rate rule, as required by Article 7 §
1 of Cabinet of Ministers Decree no. 13-92 “On citizens' income
tax” of 26 December 1992 (the “Income Tax Decree”).
- In
respect of the second type of income, the tax had been calculated at
the fixed 20% rate, as required by Article 7 § 3 of the Income
Tax Decree.
- On
9 April 2002, on the basis of the applicant's declaration, the Tax
Inspectorate reassessed the amount of income tax due from the
applicant and requested him to pay the outstanding balance in the
amount of 1,774.61 Ukrainian hryvnias (UAH). The amount payable
had been increased as a result of applying the progressive tax rate
in respect of the income earned by the applicant outside his
principal place of business. The recalculation had been effected in
accordance with Instruction no. 12 “On citizens' income tax”
issued by the Principal Tax Inspectorate on 21 April 1993 (“the
Instruction”).
- On
27 May 2002 the applicant instituted proceedings in the Oktyabrskyy
District Court of Kharkiv (the “District Court”) against
the Tax Inspectorate, seeking to have the decision of 9 April 2002
invalidated. He claimed, in particular, that the amount of tax
payable in respect of his income earned outside his principal place
of business should have been determined by reference to the special
tax rate laid down in Article 7 § 3 of the Income Tax Decree
(having legal force as the law of Parliament) whereas the Tax
Inspectorate had recalculated and increased that amount relying on
the Instruction. However, the Instruction was a by-law which,
according to Article 67 of the Constitution, could not change the
applicable tax rates.
- On
4 July 2002 the District Court considered the applicant's claim. It
found that the Income Tax Decree envisaged a special tax rate for
income earned outside the principal place of business. Despite the
Instruction, the Income Tax Decree did not provide for any
recalculation of that type of income on the basis of the progressive
tax rate. It noted that according to Article 67 of the Constitution
the citizens were obliged to pay taxes only in accordance with the
procedure established by the laws and not by the by-laws. In
conclusion the District Court allowed the applicant's claim and
quashed the decision of 9 April 2002. The Tax Inspectorate appealed.
- On
18 December 2002 the Kharkiv Regional Court of Appeal (the “Court
of Appeal”) quashed the judgment of 4 July 2002, stating that
the Instruction had been validly issued and purported to expand on
the relevant provisions of the Income Tax Decree. Accordingly, the
Tax Inspectorate had acted lawfully when applying the Instruction.
- On
16 April 2003 the Supreme Court upheld the Court of Appeal's
judgment, stating that there had been no irregularities in the
application of the law in the case.
B. Taxation of the applicant's income earned in 2002
- In
March 2003 the applicant submitted his 2002 income tax declaration to
the Tax Inspectorate. The amount of tax regarding the income the
applicant earned outside his principal place of business was
calculated on the basis of the fixed tax rate laid down in Article 7
§ 3 of the Income Tax Decree.
- On
22 April 2003, on the basis of the applicant's declaration, the Tax
Inspectorate reassessed the amount of income tax due from the
applicant and requested him to pay the outstanding balance in the
amount of UAH 3,378.05. The amount payable had been increased as
a result of the application of the progressive tax rate in respect of
the income earned by the applicant outside his principal place of
business. The recalculation had been effected in accordance with the
Instruction.
- On
23 July 2003 the applicant instituted proceedings in the District
Court against the Tax Inspectorate, seeking to have the decision of
22 April 2003 invalidated. He claimed in particular that the increase
in his income tax liability had not been lawful because the Income
Tax Decree (having legal force as the law of Parliament) did not
envisage the progressive tax rate for the income earned by the
applicant outside his principal place of business. In addition, the
Instruction, referred to by the tax authorities, was a by-law which,
according to Article 67 of the Constitution, could not change the
applicable tax rates.
- On
20 April 2005 the District Court rejected the applicant's claim,
stating that the amount of tax determined by the Tax Inspectorate had
been based on the Instruction and also on Presidential Decree no.
519/94 of 13 September 1994 “On increasing the amount of
tax-free monthly income and rates of progressive taxation of
citizens' income” (“the Presidential Decree”).
- On
18 May 2005 the applicant appealed against that judgment to the Court
of Appeal, alleging that Article 7.3 of the Income Tax Decree should
have been applied to the income earned outside the principal place of
business.
- On
30 June 2005 the Court of Appeal upheld the judgment of 20 April
2005 after finding that the recalculation of the applicant's income
tax had been based specifically on the Presidential Decree.
- On
25 July 2005 the applicant appealed in cassation, repeating the
arguments he had advanced before the Court of Appeal.
- On
19 April 2006, following the applicant's appeal in cassation, the
Higher Administrative Court upheld the judgment of 20 April 2005,
noting in particular that the Income Tax Decree provided only one
scale of progressive taxation, which therefore had to be applied to
all the income of the applicant, and concluded that the recalculation
of the tax had been carried out in accordance with the law. The
special tax rate provided in Article 7 § 3 of the
Income Tax Decree was not mentioned.
C. Taxation of the applicant's income earned in 2003
- In
March 2004 the applicant submitted his 2003 income tax declaration to
the Tax Inspectorate. The amount of tax regarding the income of the
applicant earned outside his principal place of business was
calculated on the basis of the fixed tax rate laid down in Article 7
§ 3 of the Income Tax Decree.
- On
26 April 2004, on the basis of the applicant's declaration, the Tax
Inspectorate reassessed the amount of income tax due from the
applicant and requested him to pay the outstanding balance in the
amount of UAH 642.20. The amount payable had been increased as a
result of the application of the progressive tax rate in respect of
the income earned by the applicant outside his principal place of
business. The recalculation had been effected in accordance with the
Instruction.
- On
10 August 2004 the applicant instituted proceedings in the District
Court against the Tax Inspectorate, seeking to have the decision of
22 April 2003 invalidated. He claimed, in particular, that the
increase in his income tax liability had not been lawful, because the
Income Tax Decree (having legal force as the law of Parliament) did
not envisage the progressive tax rate for the income earned by the
applicant outside his principal place of business. At the same time
the Instruction, referred to by the tax authorities, was a by-law
which, according to Article 67 of the Constitution, could not change
the applicable tax rates.
- On
21 July 2005 the District Court rejected the applicant's claim,
stating that the amount of tax determined by the Tax Inspectorate had
been based on the Instruction and also on the Presidential Decree.
- On
17 August 2005 the applicant appealed against that judgment to the
Court of Appeal, alleging that Article 7.3 of the Income Tax Decree
should have been applied to the income earned outside the principal
place of business.
- On
25 October 2005 the Court of Appeal upheld the judgment of 21 July
2005 after finding that the recalculation of the applicant's income
tax had been based, in particular, on the Presidential Decree and the
Income Tax Decree. No reasons were offered for the disregard of the
special tax rate fixed in Article 7 § 3 of the Income Tax
Decree.
- On
9 March 2006, following an appeal in cassation by the applicant, the
Higher Administrative Court upheld the judgment of 21 July 2005,
noting that the recalculation of the tax had been carried out in
accordance with the law.
II. RELEVANT DOMESTIC LAW AND PRACTICE
A. Constitution of 20 April 1978 (in force until
28 June 1996)
- According
to Article 114-5 of the Constitution the President of Ukraine was
empowered to issue decrees in the field of economic reforms if the
relevant matters were not covered by the laws of Parliament.
B. Constitution of 28 June 1996
- Article
67 of the Constitution provides that everyone is obliged to pay taxes
and duties in accordance with the procedure and at the rates
established by the laws of Parliament.
C. The Laws nos. 2796-XII and 2813-XII of 18 and 21
November 1992 empowering of the Cabinet of Ministers to issue Decrees
- According
to these Laws, during the period between 24 November 1992 and 21 May
1993, the Cabinet of Ministers had legislative powers in certain
fields, including the field of taxation. For this purpose, the
Cabinet of Ministers was empowered to issue Decrees which had the
legal force as the law of Parliament.
D. The Law “On the procedure for payment of
taxpayers' liabilities to budgets and state funds” of 21
December 2000
- Section
4.4.1 of the Law provides 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 offer ambiguous or multiple
interpretations of the rights and obligations of taxpayers and
supervising authorities, the decision taken shall be in favour of the
taxpayer.
E. Cabinet of Ministers Decree no. 13-92 “On
citizens' income tax” of 26 December 1992 (as worded at the
material time)
- Article
7 § 1 of the Decree laid down a table of progressive taxation
rates in respect of income earned at the taxpayer's principal place
of business. The table referred to the concept of an official minimum
salary as a basis for the determination of the progressive tax rate
applicable in the individual case.
- Article
7 § 2 of the Decree provided that the copyright awards,
repeatedly paid to the successors, were taxed at the double rates
fixed in Article 7 § 1 of the Decree which, however, could not
exceed 70 percents.
- Article
7 § 3 of the Decree established a fixed 20% tax rate in respect
of income earned by the taxpayer outside his or her principal place
of business.
- Article
23 of the Decree provided that the Principal Tax Inspectorate would
issue an instruction on the application of the Decree.
F. Presidential Decree no. 519/94 “On increasing
the amount of tax-free monthly income and rates of progressive
taxation of citizens' income” of 13 September 1994 (in force at
the material time)
- The
Decree introduced a new table of progressive taxation rates in
respect of taxpayers' income. The table referred to the concept of
tax-free monthly income as a basis for the determination of the
progressive tax rate applicable in the individual case. The Decree
specified that the rates of progressive taxation, established in it,
had to be applied as of 1 October 1994 in respect of the salaries and
the other income of the citizens.
G. Principal Tax Inspectorate Instruction No. 12 “On
citizens' income tax” of 21 April 1993 (as worded at the
material time)
- Paragraph
7.1 of the Instruction laid down a table of progressive taxation
rates in respect of income earned by a taxpayer at his or her
principal place of business.
- Paragraph
7.3 provided that the local tax inspectorates were to recalculate
income earned outside the principal place of business, according to
the table of progressive taxation rates set out in paragraph 7.1 of
the Instruction.
H. Information letter of the State Tax Administration
of 20 November 2002
- By
this letter the State Tax Administration provided official
interpretation of certain issues concerning tax legislation. It
specified, among other things, that the copyright awards repeatedly
paid to the successors were to be taxed in accordance with Article 7
§ 2 of the Income Tax Decree.
THE LAW
I. JOINDER OF THE APPLICATIONS
- Pursuant
to Rule 42 § 1 of the Rules of Court, the Court decides to join
the applications, given their common factual and legal background.
II. ALLEGED VIOLATION OF ARTICLE 1 OF PROTOCOL NO. 1
- The
applicant complained of a violation of his property rights, alleging
that when the tax authorities recalculated and increased the amount
of his income tax, they had not acted in accordance with the law. 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 did not submit any comments as to the admissibility of the
complaint.
- The
Court notes that this complaint is not manifestly ill-founded within
the meaning of Article 35 § 3 of the Convention. It further
notes that it is not inadmissible on any other grounds. It must
therefore be declared admissible.
B. Merits
1. The parties' submissions
- The
applicant insisted that the tax authorities had unlawfully increased
his income tax liability. He argued that the authorities had
disregarded Article 7 § 3 of the Income Tax Decree establishing
a special 20% tax rate in respect of the income earned outside the
principal place of business. Moreover, when so doing, the authorities
relied on the Instruction which, by virtue of Article 67 of the
Constitution of 28 June 1996, could not change the applicable rates
of tax and the procedures for their payment.
- The
applicant further contended that the increased tax liability imposed
an excessive financial burden on him and could not be considered
proportionate for the purposes of Article 1 of Protocol No. 1.
- The
Government admitted that those measures constituted an interference
with the applicant's property rights. They maintained however that
the interference was lawful. In particular, the Instruction had been
validly adopted and was foreseeable in its application. In their
opinion the Instruction could be viewed as “law” for the
purpose of the Convention. Moreover, the application of progressive
taxation to all types of the applicant's income was supported by the
Presidential Decree and the Income Tax Decree.
- The
Government further submitted that those measures were compatible with
the proportionality requirement provided by Article 1 of
Protocol No. 1 and did not impose an excessive burden on the
applicant.
2. The Court's assessment
- It
is not in dispute between the parties that the increase of the
applicant's tax liability by the authorities constituted an
interference with his property rights within the meaning of Article 1
of Protocol No. 1. The Court is accordingly called upon to determine
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 the 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
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).
- Turning
to the present case, the Court notes that the Income Tax Decree,
which had the legal force of the law of Parliament, explicitly
established a 20% fixed tax rate for income earned outside a
principal place of business. Nevertheless, the tax authorities and
the courts ignored that rule and applied a progressive tax rate with
respect to that type of income, thereby increasing the applicant's
overall income tax liability. They relied on the Instruction of the
Principal Tax Inspectorate as authority to do so. Subsequently, they
also relied on the Income Tax Decree and the Presidential Decree.
- As
long as the domestic courts relied on the Income Tax Decree to
justify the increase in the applicant's income tax liability, the
Court fails to comprehend the reasons on which the existence of
Article 7 § 3 of that legal act was disregarded. The domestic
courts were silent on this issue despite the fact that the applicant
raised it in each set of the domestic proceedings. Reference by the
courts to the Instruction is not helpful since, by virtue of Article
23 of the Income Tax Decree, the Instruction could deal only with
issues of the application of the Income Tax Decree and could not
establish any rules conflicting with that legal act.
- The
Court further notes that the domestic courts also relied on the
Presidential Decree which introduced a new table of progressive
taxation and was stated to cover any income earned by a citizen.
However, none of the paragraphs of Article 7 of the Income Tax Decree
had been set aside. The question remained therefore how those legal
acts correlated with each other. In this regard the Court notes that
the Income Tax Decree had a legal force of the law of Parliament and
provided special rules for the taxation of specific types of
citizens' income. It is remarkable that, in contrast to the rates
fixed in the Presidential Decree, the tax authorities continued to
apply, for example, the special rule of Article 7 § 2 of the
Income Tax Decree (see paragraph 40 above). In these circumstances it
is unclear why the Presidential Decree had to be understood as
prevailing over Article 7 § 3 of the Income Tax Decree.
- Even
assuming that the interpretation by the domestic authorities was
plausible, the Court is not satisfied with the overall state of
domestic law, existing at the relevant time, on the matter in
question. It notes that the relevant legal acts had been manifestly
inconsistent with each other. As a result, the domestic authorities
applied, on their own discretion, the opposite approaches as to the
correlation of those legal acts. In the Court's opinion the lack of
the required clarity and precision of the domestic law, offering
divergent interpretations on such an important fiscal issue, upset
the requirement of the “quality of law” under the
Convention and did not provide adequate protection against arbitrary
interference by the public authorities with the applicant's property
rights.
- In
this regard the Court cannot overlook the requirement of
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 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 increase in
the applicant's income tax liability.
- 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 purpose of Article 1 of Protocol No. 1. It
holds for this reason that there has been a violation of that
provision.
III. OTHER ALLEGED VIOLATIONS OF THE CONVENTION
- The
applicant complained under Article 6 of the Convention that the
proceedings in his case had been unfair.
- 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 (see
Ferrazzini v. Italy
[GC], no. 44759/98, §§ 29-31, ECHR 2001 VII),
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 and 4 of the
Convention.
IV. 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 20,000 euros (EUR) in respect of non-pecuniary
damage.
- The
Government considered that this claim was unsubstantiated.
- The Court considers that the applicant suffered
non-pecuniary damage which cannot be compensated by the mere finding
of a violation of his Convention right. Making its assessment on an
equitable basis, the Court awards the applicant the sum of EUR 1,200
in respect of non-pecuniary damage.
B. Costs and expenses
- The
applicant also claimed UAH 80,000 or EUR 8,000 for the costs and
expenses incurred before the Court.
- The
Government contested those amounts.
- According
to the Court's case-law, an applicant is entitled to the
reimbursement of costs and expenses only in so far as it has been
shown that these have been actually and necessarily incurred and are
reasonable as to quantum. In the present case, regard being had to
the information in its possession, the Court awards EUR 1,500 in
respect of costs and expenses.
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
- Decides to join the applications;
- Declares the complaint under Article 1 of
Protocol No. 1 admissible and the remainder of the applications
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, EUR 1,200 (one
thousand two hundred euros) in respect of non-pecuniary damage and
EUR 1,500 (one thousand and five hundred euros) in respect of costs
and expenses, plus any tax that may be chargeable to the applicant,
to be converted into the national currency of the respondent State at
the rate applicable on the date of settlement;
(b) that
from the expiry of the above-mentioned three months until settlement
simple interest shall be payable on the above amount 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 14 October 2010, pursuant
to Rule 77 §§ 2 and 3 of the Rules of Court.
Claudia Westerdiek Peer Lorenzen
Registrar President
