Supreme Arbitrazh Court decision
In a recent case the presidium of the Supreme Arbitrazh Court confirmed that it was lawful for the representatives involved in a taxpayer's defence to recover expenses of almost Rb3 million from the tax authorities.
Aelita Software Corporation pursued an overpayment dispute - with a value of over Rb24 million - through three levels of the Russian court system. On the conclusion of the dispute, the taxpayer applied to the arbitrazh (ie, commercial) court to recover legal representation costs of Rb2,889,302 from the authorities.
The first instance court upheld the taxpayer's application in full. The appeal court reduced the award to Rb100,000 - a decision with which the court of cassation subsequently agreed.
The Supreme Arbitrazh Court upheld the first instance court's ruling and set aside the appeal court and cassation court decisions.
Supreme Arbitrazh Court decision
The court reiterated a number of its previous findings,(1) but also reached the following new conclusions.
Importance of objective basis for reduction
The amount by which the court may reduce the court costs claimed by the taxpayer may not be established arbitrarily. Rather, the court's decision must include an explanation of the amount that the court considered reasonable, while the case file must contain calculations and other evidence in support of the court's conclusions.
This finding reminds the lower courts that they must be as objective as possible is determining the amounts awarded, and that it should be easy for higher courts to review and evaluate their explanations for their awards.
Onus on losing party
The losing party must present the court with evidence, calculations and arguments that the costs are not reasonable; the court may not look for such justifications on its own initiative. This view follows from the adversarial nature of the litigation process in the state arbitrazh courts.
The court was not dissuaded by the large sum being sought in recovery. This may lead to a clarification of the court's legal position in Information Letter 121/2007. Even if the court costs are significant, a court may not determine that they are clearly excessive (and thereby release the tax authority from the burden of proving that they are excessive).
Factors in identifying 'reasonable' costs
The court also set out new evidential and legal guidelines to establish whether the court costs that a party seeks to recover are reasonable (ie, not excessive). It referred to information about the legal costs payable to other, similar law firms. In addition, the court should assess the choice of service provider (and, accordingly, the cost of services provided), taking due account of the nature and complexity of the dispute. The issue should be considered "not from the court's position, but from the position of the party incurring the expenses, without being certain of the outcome of the case".
The court is making it more difficult for the authorities to refute the reasonableness of a taxpayer's costs, which must be shown to meet not only the criteria of accuracy and lawfulness, but also a criterion of appropriateness. A tax inspectorate will be required to prove to the court that the court costs which the former regards as reasonable correspond to the pricing levels that have evolved on the market among similar service providers. Such similarity should be assessed according to criteria that are material from the client's perspective, not merely from that of the court. Relevant factors include reputation, prominence, transparency and service quality.
In the case in question, the tax inspectorate agreed that there was no uniform case law on the substance of the main dispute. This made the dispute complex and necessitated the use of professional legal assistance. Therefore, the resolution may lead to a large number of legally less complex tax disputes being resolved out of court. The average amount of court costs recovered may also increase.
In order to ensure that costs are recovered as fully as possible, companies must be ready to explain to the court why they chose their legal representative from among similar candidates, as well as ensuring that the breakdown of costs is as transparent as possible.
For further information on this topic please contact Konstantin Sasov at Pepeliaev Group by telephone (+7 495 967 0007), fax (+7 495 967 0008) or email ([email protected]).
(1) See Resolution 18118/07 of May 29 2008, Resoultion 6284/07 of April 9 2009 and Resolution 100/10 of May 25 2010.