The first and most important requirement of the European Convention on Human Rights’ Article 1 of Protocol 1 (a person’s right to peaceful enjoyment of his possessions), is that any interference by a public authority with the peaceful enjoyment of possessions should be lawful and not arbitrary. The requirement that the interference be provided for by ‘law’ alludes to the same concept found elsewhere in the Convention, which firstly requires that the measure which causes the interference with the right should have a basis in domestic law, and must also bear the ‘quality of law’, ie, it must be accessible to the persons concerned, and it must be precise and foreseeable in its application. The proportionality of a particular measure only becomes relevant once a provision has been found to have the ‘quality of law’.
In an appeal brought by a Mr Yuriy Shchokin (Shchokin v Ukraine [2010] ECHR 1518 (14 October 2010)), the European Court of Human Rights (ECtHR) has finally decided that part of the tax legislation of a country (the Ukraine) was so unclear as to be unlawful. It should be noted, though, that the facts in Shchokin were extreme.
The facts
Mr Shchokin was living in the Ukraine. For each of the tax years 2001–03, the local tax inspectorate reassessed the amount of income tax due from him for income he had earned outside his principal place of business, increasing the amount of tax due. Mr Shchokin was contesting the legality of the increase.
At that time, the legislation imposing income tax was a Ministerial Decree of 1992 which had the legal status of an Act of Parliament. The Decree provided for two systems of tax rates for taxing an individual’s business income. First, for income earned at the individual’s principal place of business, the Decree laid down a progressive scale of taxation. Second, for income earned by the taxpayer outside his principal place of business, the Decree established a 20% fixed rate. However, for each of the three years in question, the local tax inspectorate took income earned by the taxpayer outside his principal place of business and applied the progressive scale of taxation. The consequence was an increased tax liability of just under 5,800 Ukranian hryvnias (about €580).
The tax inspectorate had based its approach on an Instruction issued by the Principal Tax Inspectorate in 1993. They also pointed to a Presidential Decree of 1994 on the application of progressive taxation. However, Article 67 of the Ukrainian constitution provided that bye-laws (such as the Instruction) could not change the applicable tax rate. There was therefore a clear conflict between the different legal norms: the Ministerial Decree having force of law provided for a flat 20% rate of tax, while the Instruction and Presidential Decree provided for progressive taxation.
Notwithstanding that s 4.4.1 of the Law ‘On the procedure for payment of taxpayers liabilities to budgets and state purpose funds’ of 21 December 2000 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, the authorities, and indeed the Ukrainian courts, opted for the less favourable interpretation of the law, ie, the one which resulted in an increase in the applicant’s tax liability.
The ECtHR’s decision
In deciding that there was a violation of Article 1 Prot.1. the ECtHR held as follows (at [56]): ‘... 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 legal relevant acts have 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 public authorities with the applicant’s property rights.’
The Court awarded the applicant €1,200 in respect of non-pecuniary damage (the claim was for €20,000), and €1,500 in respect of costs (claim was for €8,000).
Conclusion
One hopes that this case will represent a powerful weapon to force governments to ensure that tax laws meet minimum quality standards.
Note that previous attacks on unclear tax laws have been brought in the ECtHR. In Spacek s.r.o v The Czech Republic (application number 26449/95, judgment of 9 November 1999) a claim brought by a company (as opposed to an individual taxpayer) had failed. The principal issue in that case was whether an internal rule was adequately publicised, in accordance with the relevant statute, so that it could have the force of law.
The claim had failed partly because the Court had held (at [59]) that a company might be expected to seek advice from a tax adviser who would have access to the internal rule in issue in that case. In Shchokin there is no such suggestion. Is it therefore implicit that it is appropriate to apply different quality standards to corporate taxpayers and to individuals? Perhaps not: in Spacek the Court recorded that it had never been alleged that the applicant had been unaware of the provisions of the relevant Financial Bulletins.
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Marika Lemos, Barrister, Gray’s Inn Tax Chambers
