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The open joint stock company Kolskaya Mining and Smelting Company filed with the RF Supreme Court a claim to render the Resolution (as amended on June 14, 2001) unlawful referring to the fact that it did not comply with the current legislation since it unlawfully set forth a tax payment.

The Supreme Court ruled that in terms of law the payment for abuse of environment should be defined as a tax in accordance with Article 8 of the RF Tax Code (it was mandatory, not individually repayable, transferred by payers to finance the state).

The representatives of the RF Government admitted that the payment for abuse of environment is a federal tax in a written response to the claim (application) and in the course of proceedings. The court also took into account the fact that according to Supplement 2 to the law On the Budget Classification of the Russian Federation, where payments for abuse of environment were included in the section of tax budgetary revenues (code 1050600, what corresponds to the sub-group of payments for the use of natural resources of the group of tax RUSSIAN ECONOMY in trends and outlooks revenues), and Supplement 2 to the RF law On the Federal Budget for 2002, where payments for abuse of environment were included in the list of federal taxes and charges.

However, all substantive elements of the aforesaid tax payments were determined not by a federal law, but by a resolution of the RF Government and regulatory acts of the federal executive authorities.

The Supreme Court satisfied the claim of the open joint stock company Kolskaya Mining and Smelting Company substantiating the ruling by the following facts: proceeding from Article 17 of the RF Tax Code, a tax due to the federal budget should be deemed as lawfully set forth only in the case the respective payers and elements of taxation are directly defined in a federal law, and ruled the Procedure and Resolution unlawful as not complying with Article 6 of the RF Tax Code and infringing upon the rights of the claimant making the claimant pay a tax not stipulated by a federal law.

The representatives of the RF Government argued that the Resolution complied with the current tax legislation, since according to Article 7 of the law of 1998 On Enactment of Section One of the RF Tax Code normative and legal acts of the RF Government concerning the issues which according to Section One of the RF Tax Code might be regulated only by federal laws should remain in force until respective federal laws were approved.

However, the Supreme Court did not agree with this argument and ruled as follows:

According to the legal standing of the Constitutional Court of the Russian Federation as expressed in Ruling No. 16-P of November 11, 1997, in relation to the Case of verification of compliance of Article 11.1 of the Russian Federation law of April 1, 1993, On the State Border of the Russian Federation with the RF Constitution, authorization of the RF Government to determine substantive elements of tax obligations do not comply with the legislatively set delimitation of power between the legislative and executive authorities Taking into account the fact that the challenged Resolution and Procedure contain legal provisions similar to those ruled non-constitutional by Ruling of the RF Constitutional Court No. 16-P of November 11, 1997, the court has no right to rule these provisions lawful even in spite of Article 7 of the federal law of July 31, 1998, On Enactment of Section One of the RF Tax Code. The Court also pointed out that at present the challenged Resolution of the RF Government runs counter to the federal law of January 10, 2002, On environmental protection since according to item 1 of Article 16 negative influence on environment shall be paid for, while concrete forms of such payments shall be set forth by federal laws. The Supreme Court considered this provision as an additional confirmation of the conclusion that payments for abuse of environment may be set only by a federal law and not by an act of the RF Government.

According to Determination of the Supreme Court No. KAS 02-232 of June 4, 2002, this ruling remained in force, while the appeal of the Russian Government was repudiated.

Later the RF Government requested the RF Constitutional Court to verify if the Resolution complied with the Constitution claiming that payments for abuse of environment were not tax payments and could not be defined as tax obligations in terms of constitutional law, therefore being outside the system of payments set forth by laws as stipulated by Articles and 75 (section 3) of the RF Constitution. According to the claimant, the Resolution had been approved in compliance with the constitutional powers of the RF Government and did not in INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru fringe upon stipulations of federal laws, therefore it should be enforced in contravention to the ruling of the Supreme Court.

The Constitutional Court having examined the relevant normative and legal complex issued its Determination No. 284-O of December 10, 2002, as concerns the request of the RF Government to verify the compliance with the RF Constitution of the RF Government Resolution On the approval of the procedure governing determination of amounts of maximal payments for abuse of environment, pollution, and other harmful actions and Article 7 of the law On Enactment of Section One of the Tax Code of the Russian Federation, pointing out that:

payments for negative influence on environment as a necessary condition under which legal persons and individual entrepreneurs may be granted the right to carry out economic and other activities negatively affecting the environment shall be defined as mandatory public law payments (in the framework of financial legal relations) for the measures undertaken by the state in order protect and restore environment as concerns the consequences of economic and other activities negatively affecting the environment within limits set forth by the state. These payments are of individually payable and compensatory nature and therefore, in legal terms, are not a tax but a fiscal charge. The general principles of exaction of such charges, a number of substantial features thereof, i.e. payers, object of taxation types of harmful (negative) influence on the environment, as well as the tax base in general form standards of pollution, waste disposal, etc., and the list of standards of maximal acceptable negative impact on the environment and respective substantial characteristics shall be directly set forth by a federal law. As concerns the procedure governing the determination of maximal amount of payments, the federal legislature has granted this right to the RF Government.

This authorization of the RF Government shall not be viewed as arbitrary an unsubstantiated, since, according to the RF Constitution, the Government of the Russian Federation shall execute its authority by ensuring (including the issuance of normative legal acts) the pursuit of single financial and ecological policies in the Russian Federation; the rights and freedoms of citizens (including their right for favorable environment, what requires to ensure environmental protection and ecological security) and execute other powers vested with it by federal laws regulating the spheres within the jurisdiction of the Russian Federation and its subjects (items b, c, f, and g of Section 1, Article 114 in relation with Article 42, items c and f of Article 71, items b and e of Section 1, Article 72, Section 1 of Article 110, Article 115, and item a of Section 2, Article 125, of the RF Constitution) (paragraphs 6 and 7 of item 5 of the justificatory section).

However, we find the argument that the RF Government shall have the right to set forth the procedure governing determination of maximal amounts of payments for abuse of environment, pollution, and other types of harmful influence because according to the RF Constitution the RF Government undertakes measures ensuring rights and freedoms of citizens (therefore, including the right for favorable environment, what requires to ensure environmental protection and ecological security) is too vague and arguable. Finally, the Constitutional Court ruled as follows:

Resolution of the RF Government No. 632 of August 28, 1992, On the approval of the procedure governing determination of amounts of maximal payments for abuse of environment, pollution, and other harmful actions (No. 463 as amended on June 14, 2001), since it was adopted by the RF Government to enforce the authority vested with it by the federal law and stipulated exaction of payments of RUSSIAN ECONOMY in trends and outlooks non-tax nature, shall remain in force and be enforced by courts, other agencies, and officials as an act being in compliance with the RF Constitution as concerns the delimitation of jurisdiction between the Federal Assembly and the Government of the Russian Federation (item 1 of the judicial disposition);

The constitutional and legal purport of this Determination concerning the Resolution of the RF Government On the approval of the procedure governing determination of amounts of maximal payments for abuse of environment, pollution, and other harmful actions shall be compulsory, what excludes any other interpretation of this Resolution by enforcement agencies including general jurisdiction courts (item 2 of the judicial disposition).

Appendix 3. Reforming the Taxation of Small Businesses The new articles of the Tax Code setting forth special taxation regimes of small businesses and introducing imputed income for certain types of activities were approved in July of 2002 and should be enacted in 2003. The first outcomes of the reform will become clear only in a year. However, at present it is possible to advance some hypotheses about the prospects of further development of small businesses and the possible effect of the reform on tax revenues, including other taxes and taxes on other enterprises, not only small businesses and enterprises27 operating under simplified regimes.

In order to analyze the special taxation regime, it is necessary to establish what the introduction of the special regime is aimed at.

Different countries aim to achieve different goals working out the procedures of taxation of small businesses, what to the greater extent determines the differences in applied regimes. The goals depend on the environment small businesses have to operate in, their contribution to GDP production, sectoral structure of the economy, size of tax evasion in the society and specific forms of this evasion across countries. Besides, the specifics of regimes of taxation of small businesses may be generated due to differences in both tax and non-tax legislation, and the institutional structure of a concrete society. In the countries where small businesses make greater contribution to GDP production due to the specifics of the structure of production the fiscal component aimed to minimize tax evasion of small businesses per se may prevail, since in this case the contribution of small businesses in budget revenues may be considerable. In other cases the circumstances may determine that different rates of taxation of revenues from different sources make taxpayers seek to derive revenues in the forms taxed at lower rates. It is often more feasible at the level of small businesses, therefore special regimes may aim at establishing rules tightly regulating classification of incomes as derived from specific sources. Certain countries seek to lower the tax burden on small businesses, since there are specific types of economic costs, which primarily affect small enterprises. In this case small businesses either are taxed at lower rates, or granted certain privileges. In a number of cases there are introduced simplified regimes allowing to more or less precisely evaluate obligations pertaining to different types of taxes and (or) exempt small businesses of certain taxes in order to decrease alternative costs of taxation, which are higher for small enterprises due among other factors to the lack of internal need to use a developed accounting system. In Russia, small businesses do not constitute a developed sector of the economy gen Hereinafter understood as a legal entity or individual legally carrying out entrepreneurial activities rather than the property complex as defined in the RF Civil Code.

INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru erating a considerable share of revenues. The insignificant share of small businesses (in comparison with many other countries) and their insufficient contribution to the size of employment, as well as unsatisfactory dynamics of output and investment lead to the conclusion that small enterprises in the Russian economy are in an unfavorable situation. For instance, although the share of employment in small businesses increased from 12 per cent to 12.9 per cent in 1997 through 2001 (remaining rather low), the share of respective output declined from 8 per cent to 5.6 per cent, while investment in fixed assets fell from 5.4 per cent to 2.per cent28. The real situation may be even worse: in certain cases medium sized and large enterprises are prompted to use the special regime of taxation of small businesses in order to minimize their tax obligations conducting certain transactions via small businesses, sometimes established specifically to perform this function. For instance, the procedure of taxation of individuals using the simplified system of taxation, which was in force in Moscow until 2003, was rather favorable. This regime was especially favorable in the case the taxpayers expenditures relating to purchase of goods, works, and services from third parties were low or absent. Therefore, large and medium sized enterprises often used this regime to make payments under civil law contracts instead of employing and remunerating (or additionally remunerating) their own workforce. In other cases it might be feasible to overstate costs of services rendered to enterprises using simplified or imputed regimes. For instance, it is difficult to verify the costs of transportation services rendered by an enterprise paying the tax on imputed income, at the same time, the consumer overstating the cost of such services may be granted larger exemptions from the profit tax base, what does not affect the tax obligations of the producer. Therefore, it may be assumed that the aggregate indicators of real small businesses are even lower than statistics demonstrate as concerns officially registered small businesses.

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