The conclusions expressed in the following Decision of the Economic Court of the Commonwealth of Independent States demonstrates the absolute tax sovereignty of the state as a party to an International Treaty with regard to the Treaty provisions. The issue of the present Decision is whether the competent self-governed local authority of a city of federal importance in the Russian Federation or other kind of special entity (for example a closed administrative-territorial entity) has the powers under an International Treaty to enact tax benefits exceeded tax benefits enacted by the national tax legislation.

Original text is in Russian.
Translation from Russian of the original text by Alexander S. Zakharov.

ECONOMIC COURT OF THE COMMONWEALTH OF INDEPENDENT STATES

DECISION

11, March 2004 № 01-1/6-03 Minsk (Belarus)

The Economic Court of the Commonwealth of Independent States composed of:

Kerimbaeva A. Sh., President of the Economic Court, acting as Chairman,

Judges of the Economic Court: Abduloev F., Apostol D., Vylkov I., Zholdybaev S. Zh., Zhoroev K., Miroshnik V.I., Molchanova T.N., Tolibov H.,

Secretary of juridical session Medvedeva T.E.,

with participation of:

General counsel of the Economic Court Kireeva E.F.,

empowered representatives of the Government of the Russian Federation (represented by its competent executive administrative institution - Ministry of taxation of the Russian Federation):

Deputy head of the Legal department Kurkov V.A.,

Consultant of the Legal department Zakharov A.S.,

empowered representative of the city administration of Baikonur:

Head of the Legal department Turentinova S.G.,

Having considered in a public trial the case on the request of the Government of the Republic of Kazakhstan for judicial interpretation

FOUND:

The Government of the Republic of Kazakhstan requested the Economic Court of the Commonwealth of Independent States for interpretation of the application of the paragraph 7 of the item 1 of the article 7 and the paragraph 6 of the item 2 of the article 12 of the Treaty between the Republic of Kazakhstan and the Russian Federation on the status of the city of Baikonur, system of composition and the status of the administrative bodies, dated 23, December 1995.

The ground for the request is the diversity in comprehension of the provisions of the International treaty by the competent authorities of the Parties of the International treaty. The diversity deals in particular with the powers of the head of the administration of the city of Baikonur to grant tax benefits to enterprises, registered within the territory of Baikonur, in respect of the federal taxes and duties which are to be paid to the budget of the city of Baikonur.

In its request the Government of the Republic of Kazakhstan apply for the interpretation whether such powers are constituted in the provisions of the paragraph 7 of the item 1 of the article 7 of the Treaty, which express the powers of the head of the administration of the city of Baikonur to grant tax benefits, taking into account that under the paragraph 6 of the item 2 of the article 12 of the Treaty the budget of Baikonur is formed by means of taxes, including the value added tax, profits tax, excise taxes, state duty and other revenues derived within the territory of the city.

Furthermore the Government of the Republic of Kazakhstan raises the question of the legality of the limitation of the powers of the head of the administration to grant tax benefits, expressed in the International Treaty, by the Rules of granting tax benefits to enterprises and individual entrepreneurs, registered within the territory of the city of Baikonur, approved by the Resolution of the Government of the Russian Federation № 747, dated 25, January 2001.

Having heard the judge-reporter Tolibov H., the representatives of the of the Ministry of taxation of the Russian Federation Deputy head of the Legal department Kurkov V.A., Consultant of the Legal department Zakharov A.S., representative of the city administration of Baikonur Head of the Legal department Turentinova S.G., having analyzed the legal opinion-report of the General counsel of the Economic Court Kireeva E.F., having examined the case material, Economic Court has drawn the following conclusions.

The Treaty between the Republic of Kazakhstan and the Russian Federation on the status of the city of Baikonur, system of composition and the status of its administrative bodies was signed by the Republic of Kazakhstan and the Russian Federation 23 December 1995, and became effective for the States 19 January 1999.

In accordance with the Treaty the city of Baikonur is the administrative unit of the Republic of Kazakhstan, which functions in a lease condition. For the lease period of the (space) complex “Baikonur” the city of Baikonur in respect of the Russian Federation is given the status of the city of federal importance with the specific regime of functioning of objects, enterprises and organizations, and living of the citizens (the paragraph 3 of the item 1 of the article 1 of the Treaty).

The article 7 of the Treaty constitutes the head of the administration powers in the sphere of administration, including the powers of granting tax benefits (taxation). It is stated in the paragraph 7 of the item 1 of the article 7 that the head of the city administration “grants under the legislation of the Russian Federation tax and other benefits to legal entities within the limits of sums to be paid to the city budget taking into account the importance of their activity for the city”.

The article 12 of the Treaty deals with the budget and defines the financial resources of the city of Baikonur, revenue sources, peculiarities of the budget control and implementation. The paragraph 6 of the item 2 of the article 12 of the Treaty set out that the budget revenues consist of: “taxes, including value added tax, profits tax, excise duties, state duty and other revenues deriving within the territory of the city”.

In such a way each of the two analyzed articles of the Treaty governs particular legal relations: the article 7 governs the powers of the head of the city administration in the sphere of administration, including granting of tax benefits (the paragraph 7 of the item 1); the article 12 defines the revenues sources of the city of Baikonur and does not govern the matters of taxation.

As it follows from the legal content of the paragraph 7 of the item 1 of the article 7 of the Treaty the head of the city administration powers are to be exercised:

a) under the legislation of the Russian Federation;

b) taking into account the importance of their activity for the city population;

c) within the limits of sums to be paid to the city budget.

The procedure of enactment and granting of tax benefits to the organizations in the Russian Federation is governed by the legislation of the Russian Federation on tax and duties, which consists of the Tax code of the Russian Federation, and the federal laws enacted in conformity with the Code, legislation acts of the subjects of the Russian Federation on tax and duties, and local (municipal) legislation on tax and duties enacted in conformity with the Code by the local representative self-governed (municipal) administration.

The tax legislation of the Russian Federation (articles 13-15 of the Tax code of the Russian Federation) classifies the taxes and duties as federal, regional and local, defines the powers of the legal relations (including the state administration institutions powers) in respect of enactment, modification and annulment of the particular taxes and duties.

The item 5 of the article 3 of the Tax code of the Russian Federation “The fundamentals of the legislation on taxes and duties” states: “federal taxes and duties shall be enacted, modified or annulled by the present Code”.

“Taxes and duties of the subjects of the Russian Federation, local taxes and duties shall be enacted modified or annulled correspondingly by the laws of the subjects of the Russian Federation, regulatory legal acts of the local representative self-governed (municipal) administration enacted in conformity with the Code”.

As for the legal notion “tax benefits”, its enactment and application, the article 56 of the Tax code of the Russian Federation read as follows “Tax benefits with regard to taxes and duties shall be construed as privileges granted to individual categories of taxpayers and payers of duties enacted by the legislation on taxes and duties in comparison with other taxpayers and payers of duties; such privilege includes the possibility not to pay a tax or a duty or to pay a smaller amount thereof”.

“The rules of law on taxes and duties, which define grounds, procedure for and terms of application of tax benefits with regard to taxes and duties, shall not be of individual nature”.

In such a way the analyze of the tax legislation of the Russian Federation referred by the paragraph 7 of the item 1 of the article 7 of the Treaty allows to draw the conclusion, that the head of the administration of the city of Baikonur given the status of the city of federal importance has the powers to enact tax benefits corresponding to the powers of the local representative self-governed (municipal) administration only with regard to local taxes, and has no powers to enact tax benefits with regard to federal taxes and duties.

The Economic Court is of opinion, that the specific of functioning of the city of Baikonur enacted by the article 14 of the Treaty “Specific regime of functioning of the city of Baikonur” make it possible to consider the taxation procedure within the territory of the city of Baikonur taking into account the provisions of the article 18 of the Tax code of the Russian Federation “Special taxation regime” and also the Law of the Russian Federation “On a closed administrative-territorial entity”, dated 14 July 1992, № 3297-1.

The special taxation regime is a specific procedure of assessment and payment of taxes and duties within the particular time period, which is only applicable in cases and in accordance with the Tax code of the Russian Federation, and federal laws enacted in conformity with it (article 18).

In the course of special taxation regime enactment elements of taxation including tax benefits are enacted under the procedure expressed by the Tax code of the Russian Federation. The simplified system of taxation of the subjects of the small business, the free trade zones system of taxation, the taxation system within closed administrative-territorial entities (hereinafter referred to as CATE), the taxation system of concession and production sharing agreements are regarded as special taxation regimes.

The Law of the Russian Federation “On a closed administrative-territorial entity”, dated 14 July 1992, № 3297-1, in its article 5 “Closed administrative-territorial entity budget formation” governs the specific procedure of a closed administrative-territorial entity budget formation and tax benefits granting, in particular the paragraph 2 of the item 1 expressed “additional tax and duty benefits granted by competent institutions of a local self-government administration to organizations registered as taxpayers in tax administration divisions of closed administrative-territorial entities under the present Law”. The Law also defines organizations, which are entitled to such benefits, and criteria to met.

Since the legal notion “Additional tax benefits” is defined neither in the Law of the Russian Federation “On a closed administrative-territorial entity”, dated 14 July 1992, № 3297-1, nor in tax legislation, the Economic Court considers necessarily to construe application of this rule on the bases of competent institutions of a CATE local self-government administration powers with regard to their powers to grant tax benefits under the Tax code of the Russian Federation and taking into account the CATE budget formation specific.

The item 3 of the article 142 of the Budget code of the Russian Federation (enacted 31 July 1998) “Closed administrative-territorial entity budget formation procedure” specifies the procedure of tax benefits enactment by institutions of the local self-governed administration: “Institutions of the local self-governed administration of closed administrative-territorial entity has no powers to annul, modify tax rates, and also to enact other kinds of tax benefits with regard to the taxes and duties, which are governed by the federal state administrative institutions and state administrative institutions of the subjects of the Russian Federation under the tax legislation of the Russian Federation or under the tax legislation of the subjects of the Russian Federation, within which territory a closed administrative-territorial entity is situated”.

The abovementioned allows the Economic Court to draw the conclusion that under the Law of the Russian Federation “On a closed administrative-territorial entity”, dated 14 July 1992, the powers of local administration of a closed administrative-territorial entity in respect of granting tax benefits does not include such powers with regard to federal taxes and duties.

The specific procedure of revenues passing to the budget of the city of Baikonur, including tax and duties collected within the territory of the city of Baikonur, and the procedure of granting additional tax benefits have been governed in accordance with the federal laws on the budget of the Russian Federation for the year 2000 and for the following years. The procedure of tax benefits granting complies with the legislation in force.

In such a way the analyze of the legal acts of the Russian Federation demonstrates that neither tax nor budget legislation of the Russian Federation do not establish the powers of the local self-governed administration, including local self-governed administration of CATE, including of the city of Baikonur, to grant benefits with regard to the federal taxes and duties.

The Government of the Russian Federation under the article 4 of the Federal Constitutional Law “About the Government of the Russian Federation” organizes enforcement of laws and other legal acts.

The enactment of legal acts procedure in taxation is governed by the article 4 of the Tax code of the Russian Federation “State executive institutions, executive institutions of local self-governed administration and state extra-budget funds institutions legal acts”, which in particular states that “Federal state executive institutions, state executive institutions of the subject of the Russian Federation, state executive institutions of the local self-governed administration, state extra-budget funds institutions on the grounds expressed by the legislation on taxes and duties shall enact legal acts on taxes and duties, that shall not supply or modify the legislation on taxes and duties”.

Incompatibility of legal acts to the tax legislation is defined by the article 6 of the Tax code of the Russian Federation “Incompatibility of legal acts on taxes and duties to the present Code”.

In the course of execution of the Federal Law “On the federal budget for 2001” the Government of the Russian Federation has been assigned to provide control over the due implementation of the provisions of the Treaty between the Republic of Kazakhstan and the Russian Federation on the status of the city of Baikonur, the system of formation and the status of the executive institutions with regard to limitation of the head of the administration powers to grant to the taxpayers registered within the territory of the city of Baikonur benefits in respect of the federal regulated taxes.

The Rules of granting tax benefits to enterprises and individual entrepreneurs (hereinafter referred to as Rules) have been enacted by the Resolution of the Government of the Russian Federation № 747 (dated 25 October 2001).

The present Rules express the procedure of granting tax benefits and under the Tax code of the Russian Federation define that “tax benefits shall not be granted with regard to the value-added tax, excise taxes, profits tax, unified social tax (contribution), customs duties and other federal taxes and duties” (item 4).

The analyze of the tax legislation of the Russian Federation in force in compliance with which the procedure of granting tax benefits by the head of the city administration established in the International Treaty, evidences that the Rules enacted do not modify or supply the legislation of the Russian Federation on taxes and duties, and do not contain the provisions inconsistent with the Tax code of the Russian Federation.

In connection with the abovementioned the Economic Court considers that the Rules of tax benefits granting to the enterprises and individual entrepreneurs, registered within the territory of the city of Baikonur, enacted by the Resolution of the Government of the Russian Federation № 747 (dated 25 October 2001), comply with the paragraph 7 of the item 1 of the article 7 of the Treaty.

On the grounds mentioned and under the item 5 and 16 of the Statute of the Economic Court of the Commonwealth of Independent States and the items 143 and 148 of the Regulation of the Economic Court of the Commonwealth of Independent States, the Economic Court hereby

RULES:

On the request of the Government of the Republic of Kazakhstan to give the following interpretation of the application of the paragraph 7 of the item 1 of the article 7 and the paragraph 6 of the item 2 of the article 12 of the Treaty between the Republic of Kazakhstan and the Russian Federation on the status of the city of Baikonur, system of composition and the status of the administrative bodies, dated 23, December 1995:

1.The Treaty, dated 23, December 1995, (the paragraph 7 of the item 1 of the article 7) defines the powers of the head of the city administration to grant tax and other benefits to enterprises taking into account their activity importance for the city population under the legislation of the Russian Federation.

The legislation of the Russian Federation in force does not empower institutions of the local self-governed administration, including the head of the city administration of Baikonur having the status of the city of federal importance of the Russian Federation to grant benefits with regard to the federal taxes and duties, including the value-added tax, the profits tax, excise taxes, the state duty and other federal taxes and duties.

2. The Treaty, dated 23, December 1995, (the paragraph 6 of the item 2 of the article 12) expresses the taxes, including the federal – the value-added tax, the profits tax, excise taxes, the state duty and other revenues deriving within the territory of the city of Baikonur as the sources of the city budget formation.

The article 12 of the present Treaty governes the specific subject of regulation (the budget), and does not govern the powers of the head of the administration of the city of Baikonur in respect of granting tax benefits.

3. The item 4 of the Rules of granting tax benefits to enterprises and individual entrepreneurs enacted by the Resolution of the Government of the Russian Federation № 747 (dated 25 October 2001) governing benefits with regard to the federal taxes complies with the Treaty, dated 23, December 1995, (the paragraph 7 of the item 1 of the article 7).

4.To address the copies of the Decision to the Government of the Republic of Kazakhstan, to the Government of the Russian Federation, to the administration of the city of Baikonur.

5.The Decision is to be published in the official mass-media of the Commonwealth of Independent States and in mass-media of the member-states of the Treaty on the status of the Economic Court of the Commonwealth of Independent States, dated 6 July 1992.

6. The Decision is final and can not be appealed.

The Chairman A. Sh. Kerimbaeva

Translated by Alexander S. Zakharov, (c)December, 2004