Russian Constitutional Court Waters Down Statute Of Limitations In Tax Cases

by Tatiana Smolenskaya, Tax-News.com, Moscow

18 July 2005

A ruling by Russia's Constitutional Court last week has given tax inspectors the right to reopen investigations into a company's tax affairs beyond the three year statute of limitations.

The ruling, which has alarmed the country's businesses and legal experts, will give the Russian Tax Service the right to re-open tax investigations if it can be proved that a company deliberately obstructed the work of tax inspectors in previous probes.

However, the tax service failed to convince the court that the statute of limitations itself is unconstitutional and should be overturned. The tax authority had argued that the statute of limitations clause in the Tax Code contradicts two articles in the Russian Constitution which call for all taxes to be paid in full and guarantees equality before the law. It believed that by allowing those who have committed past tax offences to escape justice while others continue to pay their dues, offenders were being afforded special treatment under the law.

The court's ruling came in response to a $1.4 billion back tax claim against oil giant Yukos for 2001, and another case involving pensioner Galina Polyakova, who was ordered to pay taxes on a dacha she sold in July 1999. Although inspectors demanded she pay up in May 2002, the courts did not back up the claim until three years had passed.

Tax and legal experts warn that that a watering down of the statute of limitations for tax prosecutions could undermine all sorts of business and investment decisions. It also further undermines President Putin's recent assurances to investors that they have nothing to fear from the Russian authorities and that the country is open for business.

Sergei Pepelyayev, a managing partner at Pepelyayev, Goltsblat and Partners, who represented oil firm Yukos in its battle against back tax claims which ultimately amounted to $28 billion, described the ruling as "very dangerous".

"It frees the hands of the tax inspectors to conduct even more checks," Pepeliaev remarked, according to the Washington Post.

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