Hulley v. Russia 2014

which could have been invoked by the Russian authorities/courts to deny the VAT refunds to Yukos even if it had filed “proper” monthly VAT returns:

Q.Okay. Do you see the sentence pursuant to which the court [the Moscow Arbitrazh Court rejecting Yukos’s VAT argument in relation to the 2002 tax year] says:

“The court did not accept the argument of … YUKOS [Oil Company] that tax returns submitted to tax authorities by the said organisations [i.e., the trading entities] shall be deemed as tax returns of … YUKOS [Oil Company] since such returns were signed by persons who had no powers to submit tax returns on behalf of … YUKOS [Oil Company].”

Do you see that?

A.Right.

. . .

PROFESSOR GAILLARD: So what interests me is this sentence which we read, the court saying that they:

“... did not accept the argument of … Yukos that tax returns submitted … by the [trading companies] shall be deemed as tax returns of … YUKOS [Oil Company] since such tax returns were signed by persons who had no powers to submit tax returns on behalf of … YUKOS [Oil Company].”

Can you confirm that this is a correct translation of the Russian original?

A.I think it is. And I think, again, as you have read out, the court responds to “the argument of … Yukos”. So this sentence suggests that Yukos argued that they should be deemed as if they were filed by Yukos. And probably the question was: how can someone act on behalf of Yukos? And the court said, “Look, they cannot be accepted as Yukos tax returns, at least because someone who signed them, in the name of Yukos-M here, could not act on behalf of Yukos.”

Q.But conversely the papers themselves would say that Ratibor -- or Yukos-M, in this example -- is the exporter. The documentation they could file would say Yukos-M, Ratibor, Fargoil, whatever, has sold abroad. So the documents are not going to bear the name of Yukos, are they?

A.Absolutely.

Q.Right. So Yukos loses one way or the other, because either the documents do not say that they are the exporter, or they are not deemed to be the beneficiaries of the revenues, right?

A.No, Yukos wins one way: it simply refiles.732

693.According to Respondent, Claimants’ submission that there was no reason to believe that, had Yukos made proper filings, the tax authorities would have accepted them, is “gratuitously self-

- 234 -

period to correct those errors. As for the 2004 tax year, the managers appointed by Claimants failed to submit any amended returns at all. Accordingly, Claimants and their appointees bear sole responsibility for Yukos’ mishandling of the VAT filings. Mr. Rebgun cannot be blamed, if only because by the time he finally took office (a) the 2000-2004 tax assessments had already been issued and become due and payable for all five of the relevant years, (b) the court rulings that had upheld the 2000-2003 tax assessments had become res judicata, and (c) in any event, the three-year time limits to file amended VAT returns had already expired for the whole of the 2000, 2001, and 2002 tax years, as well as for more than half of the 2003 tax year. In any event, as established at paragraphs 388-395 above, it is clear as a matter of public international law that the Russian Federation is not responsible for acts or omissions of bankruptcy receivers such as Mr. Rebgun.737

697.To conclude this subsection, the Tribunal will now quote the following exchange between a member of the Tribunal and Respondent’s expert Mr. Konnov, in respect of Yukos’ VAT liability.

JUDGE SCHWEBEL: Is it right, then, to infer from your testimony—particularly what you’ve just said—that the management of Yukos, or its counsel, in not filing full VAT returns monthly, committed an astounding error worth more than $13 billion?

A.Right. It’s absolutely clear to me—whether you call it “error” or whether that was intentional action, I don’t know—but the defect in the VAT return was so apparent for not only a professional tax advisor and not only for Yukos, which, as we know, had a big tax team and was filing and processing this VAT return on a routine basis, but we also -- I think I referred to documents, correspondence by Golub where she admitted that it should be monthly and they required it monthly.

So I think I have absolutely no doubt that they perfectly understood that the amended returns cannot and will not be accepted.

JUDGE SCHWEBEL: And can you find any rational explanation for such behaviour?

737Rejoinder ¶ 719(v) (citing Reply ¶ 252; Second Konnov Report ¶ 95; Kotov v. Russia, ECtHR, Appl. No. 54522/00, Judgment (3 April 2012) ¶ 107, Exh. R-3371, noting that: “It would appear that the liquidator, at the relevant time, enjoyed a considerable amount of operational and institutional independence, as State authorities did not have the power to give instructions to him and therefore could not directly interfere with the liquidation process as such. The State’s involvement in the liquidation procedure resulted only from its role in establishing the legislative framework for such procedures, in defining the functions and the powers of the creditors’ body and of the liquidator, and in overseeing observance of the rules. It follows that the liquidator did not act as a State agent. Consequently, the respondent State cannot be held directly responsible for his wrongful acts in the present case. The fact that a court was entitled to review the lawfulness of the liquidator’s actions does not alter this analysis.”)

Respondent further notes: “In particular: (a) the 2000 tax assessment became final and irreversible on 30 December 2005, when the Federal Arbitrazh Court of the Moscow District dismissed Yukos’ appeal of the Ninth Arbitrazh

Appellate Court decision in proceedings upon Yukos’ challenge of the 2000 tax assessment. See Resolution of the Federal Arbitrazh Court of the Moscow District, Case No. KA-A40/12571-04, 30 December 2005, Exh. R-1555;

(b) the 2001 tax assessment became final and irreversible on 20 February 2006, when the panel of three judges of the Supreme Arbitrazh Court dismissed Yukos’ application for supervisory review of the 2001 tax assessments. See Ruling of the Supreme Arbitrazh Court, Case No. 7801/05, 20 February 2006, Exh. R-589; (c) the 2002 tax assessment became final and irreversible on 12 October 2005, when the panel of three judges of the Supreme Arbitrazh Court dismissed Yukos’ application for supervisory review of the 2002 executive enforcement proceedings. See Ruling of the Supreme Arbitrazh Court, Case No. 11868/05, 12 October 2005, Exh. R-593; and (d) the 2003 tax assessment became final and irreversible on 22 February 2006, when the Supreme Arbitrazh Court dismissed Yukos’ application for supervisory review of the 2003 tax assessment. See Ruling of the Supreme Arbitrazh Court, Case No. 12304, 22 February 2006, Exh. R-1565.” Ibid. n.1134.

- 236 -

A.I have difficulties finding the rational behaviour, and there is nothing in the record. My only guess, and that would only be a guess: that what Yukos was trying to do, it was trying to take a position that in its view will not compromise its position with respect to the profits tax.

In other words, if Yukos—Yukos clearly would not follow my advice, and my advice, as you have seen, will be to refile both. If they refiled proper VAT return without refiling—sorry, if they refiled proper—if they refiled proper VAT returns without refiling proper profit tax return, I think they were—my guess, my speculation, is they thought that court would look at that and would see that as them taking an inconsistent position for VAT and profits tax purposes.

So therefore my guess, again, is that they filed something—which I would not call even maybe a VAT return, but something that they knew was apparently not acceptable—just to take procedural actions. But, as came during the crossexamination by Professor Gaillard, I think I mentioned that they file in August and they don’t even refer to these returns till the—till late 2005—till 2005.

So that’s my only guess: that they tried to put in—to file something with the tax service which could later on be used in argument, but would not compromise, in their view, their position on the profits tax.

JUDGE SCHWEBEL: Could the Trustee in Bankruptcy, who was charged with maximising the resources available for creditors, himself have filed the monthly forms for VAT return?

A.Yes, he could have refiled, subject to the three-year limitation that I referred to previously. So you look at the date when he came to power, if I may say, and for the previous three years he could have refiled.

…

THE CHAIRMAN: Should he be criticised for that?

A.I would say so. But it’s easy now to criticise, when I look back. So I would say I would—

Yes, I would say I would criticise him 738

v.Extracts from Other Yukos-Related Awards

698.The Quasar tribunal, citing the RosInvestCo tribunal’s holding, traversed the VAT issue in the following words and concluded without any hesitation that Respondent’s position on this issue was indefensible:

D)The rejection of the VAT refund

80. The unattractiveness of the Respondent’s position in this connection is readily apparent. The amounts involved were vast – in excess of $13.5 billion. The export sales in question undoubtedly qualified for VAT refunds. The trading company sellers had duly applied for them. But once the tax authorities had invalidated the transactions by which the sellers had come into possession of the goods, they concluded that Yukos was the true original owner and therefore should be deemed to be the true export seller. If this was so, one would expect that by a parity of reasoning under their basic premise, the tax authorities should have held that the true applicant for the refund was also Yukos – and that Yukos

- 237 -

was therefore entitled to the VAT credit in the same way as it was assigned the debit for the profit tax. To try to have it both ways would surely bespeak unprincipled hostility towards the taxpayer.

81.Yet that is precisely what the tax officials did – with the subsequent endorsement of the courts.

82.Unsurprisingly, RosInvest viewed this conduct in the harsh light it deserves:

“The extremely formalistic interpretation of the VAT lax law regarding Yukos and its trading companies to the effect that, though exports were undisputedly not subject to VAT, the documentation also undisputedly submitted by the trading companies could not be used in relation to Yukos and thus Yukos was liable far more than US$ 13.5 billion in VAT related taxes is difficult to accept as a justification for a tax liability the size of which was sufficient to lead Yukos into bankruptcy.” (¶452)

The present Tribunal entirely endorses this conclusion, and agrees with the Claimants that the ECHR appears, in ¶¶601-602, to have entirely missed the point being made, namely that if the tax authorities were going to attribute to Yukos the transactions carried out in the names of its trading companies, they should also have attributed to Yukos the submission of normal VAT documentation by the trading companies. Given that the export transactions in question were indisputably zero-rated for VAT purposes, the refusal to do so can only seem confiscatory to a degree which comes close to validating the claims in their entirety on this basis alone.739

[emphasis added]

699.The following extract from the judgment of the ECtHR, which found in favour of the Russian Federation on this issue is of interest:

601.The Court notes that both Section 5 of Law no. 1992-1 of 6 December 1991 “On Value-Added Tax” governing the relevant sphere until 1 January 2001 as well as Article 165 of the Tax Code applicable to the subsequent period provided unequivocally that a zero rate of value-added tax in respect of exported goods and its refund could by no means be applied automatically, and that the company was required to claim the tax exemptions or refunds under its own name under the procedure set out initially in Letter no. B3-8-05/848, 04-03-08 of the State Tax Service of Russia and the Ministry of Finance and subsequently in Article 176 of the Tax Code to substantiate the requests in order to obtain the impugned refunds (see paragraphs 326-336). In view of the above, the Court finds that the relevant rules made the procedure for VAT refunds sufficiently clear and accessible for the applicant company to able to comply with it.

602.Having examined the case file materials and the parties’ submissions, including the company’s allegation made at the hearing on 4 March 2010 that it had filed the VAT exemption forms for each of the years 2000 to 2003 on 31 August 2004, the Court finds that the applicant company failed to submit any proof that it had made a properly substantiated filing in accordance with the established procedure, and not simply raised it as one of the arguments in the Tax Assessment proceedings, and that it had then contested any refusal by the tax authorities before the competent domestic courts (see paragraphs 49

and 171, 196, 196 and 216). The Court concludes that the applicant company did not receive any adverse treatment in this respect.740

739Quasar ¶¶ 80–82, R-3383.

740ECtHR Yukos Judgment ¶¶ 601–602, Exh. R-3328.

- 238 -

700.In the view of this Tribunal however, far from not receiving “any adverse treatment in this respect” as the ECtHR held, Yukos received some thirteen billion dollars worth of adverse treatment by reason of the imposition on it of VAT liabilities earlier excluded by the undisputed export of the oil in question.

(c)Fines

i.Introduction

701.Claimants contend that neither the “willful offender” nor the “repeat offender” fines should have been assessed, and that “the animating, confiscatory purpose behind the Respondent’s actions is palpable.”741 Claimants also assert that the imposition of fines for the year 2000 was barred by the statute of limitations, and that the authorities’ reliance on what Claimants characterize as a new, retroactive, and judicially-created exception to the statute is further demonstration of its expropriatory intent.742

702.Respondent insists that the authorities’ conduct was proper, that the Russian courts properly rejected Yukos’ arguments against the fines, and that the Tribunal should do the same here in the present arbitration.

703.The following questions with respect to fines arise from a review of the Parties’ written and oral submissions:

Were the fines levied in relation to the 2000 tax year barred by the statute of limitations?;

Were the “willful offender” fines properly imposed?;

Were the “repeat offender” fines properly imposed?;

Could Yukos have avoided the fines?; and

Was the quantum of the fines reasonable, in terms of both the rate and the absolute amount?

741Claimants’ Post-Hearing Brief ¶ 47.

742Ibid. ¶ 45.

- 239 -

ii.Were Fines Levied in Relation to the 2000 Tax Year Barred by the Statute of Limitations?

704.Article 113 of the Russian Tax Code establishes a three-year statute of limitations for all tax offenses.743 In respect of the 2000 tax year, Yukos had argued before the Russian courts that it was improper for the authorities to levy any fine because their assessment was not issued until 14 April 2004, i.e., a few months after the posited expiration of the statute of limitations for fines. Yukos’ argument was considered by Russia’s courts and ultimately rejected on the ground that the statute of limitations had been tolled by Yukos’ “interference” with the authorities’ following the December 2003 tax audit.

705.The Tribunal notes that after the 2000 Audit Report was issued, Mr. Pepeliaev, in his first opinion to his client Yukos, on 5 January 2004, concluded that:

The Russian tax law envisages a legal process to collect fines. However the fine cannot be actually collected in 2004 due to the expiration of the 3-year limitation period.744

706. In a later opinion, Mr. Pepeliaev wrote:

In accordance with the currently applicable procedure set out in Art. 101 of the Tax Code of the Russian Federation, a decision to hold the company liable pursuant to the Inspection Report of December 29, 2003 may be passed no earlier than in 2004. Moreover, by virtue of art. 113 of the Tax Code of the Russian Federation no one may be held liable for a tax offence if three years have expired (limitation period) from the date of this tax offence or from the date following the end date of the tax period in which this offence was committed. In breach of this rule of law, the Inspection Report says that YUKOS should be held liable for the activities of 17 companies that took place in 2000.745

707.Respondent, in its Counter-Memorial, objects that Claimants did not raise the statute of limitations argument in their Memorial. In any event, Respondent submits, the argument is meritless. Respondent adopts the reasoning of the Russian Courts.746 Respondent adds: “[T]he statute of limitations provided a windfall to Yukos, insofar as the tax authorities never disturbed

743Russian Tax Code, Article 11(1), Exh. C-1276. Mr. Konnov opines, in his Second Expert Report, that, under Russian law, the statute of limitations applies to fines only, and does not apply to tax arrears or default interest. Second Konnov Report, ¶ 109.

744S. Pepeliaev, Summary of the tax inspection of OAO NK Yukos, p. 1, 5 January 2004, Exh. C-1128.

745S. Pepeliaev et al., Opinion regarding compliance with legislation of Inspection Report No. 08-1/1 of 20 December 2003 issued by the Tax Ministry of Russia, 15 January 2004, p. 3, Exh. C-1129.

- 240 -

Respondent says that it was issued in response to two different complaints, only one of which was related to Yukos.753

712.In his Second Expert Report, Mr. Konnov explains that the Constitutional Court ruled, in Resolution No. 9-P, as follows:

a.if a taxpayer obstructs tax control and tax audits, the arbitrazh court may rule that the tax authority was justified in acting after expiration of the limitations period; and

b.in any event, the limitations period for tax offenses ends at the moment of execution

of a tax audit report summarising documented facts of tax offenses identified in the course of the audit.754

713.Mr. Konnov addresses Claimants’ argument on this point:

The Claimants’ allegation (Claimants’ Reply on the Merits, para. 258) that the Russian Constitutional Court created an “exception to the statute of limitations for any taxpayer who “resisted” tax inspection, so long as an audit report was issued before the end of the limitations period” is misleading (emphasis added). The Constitutional Court made two separate conclusions not dependent on each other. The Claimants’ contention that the “tax audit report” rule was “tailor-made” for YUKOS is not correct either. The tax authorities would have nonetheless been deemed within the statute of limitations period under the obstruction of the audit limb of the Resolution.755

[emphasis in original]

714. Mr. Konnov also adds:

The ruling of the Constitutional Court issued in July 2005 is described by the Claimants as “tailor-made” to YUKOS and in conflict with the ruling of the Constitutional Court issued in January 2005. I cannot agree. There is no inconsistency between these two rulings. Rather, in the July 2005 ruling, the Constitutional Court analyzed, in particular, the impact on the limitations period resulting from obstruction of the audit, an issue which was not addressed in any way in the January 2005 ruling.

The Claimants’ reliance on the dissenting opinions in the July 2005 ruling is incomplete. The Claimants refer only to two dissenting opinions relating to the July 2005 ruling. However, they fail to mention the third dissenting opinion to the same ruling in which Judge G.A. Gadzhiev has taken an approach which, in my opinion, is even harsher than the approach taken by the Constitutional Court. In the view of Judge G.A. Gadzhiev, the statute of limitations should be applied differently depending on the amount of the tax arrears at issue. He believes that the non-differentiated statute of limitation, as it is

provided in the tax legislation, contradicts the constitutional principle of equality before the law.756

753Ibid. ¶ 724, n.1151.

754Second Konnov Report ¶ 111.

755Ibid., n.177.

756Ibid. ¶¶ 112–13.

- 242 -