On the issue of taxation of a court penalty in the context of sanctions pressure

Stankovskii Maksim Vladimirovich ORCID: 0000-0003-0787-6147 Graduate student; Faculty of International Economic Relations; Financial University under the Government of the Russian Federation 5 Lesnaya str., Moscow, 127349, Russia maksj37@gmail.com Other publications by this author

Vasil'ev Dmitrii Anatol'evich ORCID: 0009-0007-9510-0280 Graduate student; Faculty of International Economic Relations; Financial University under the Government of the Russian Federation 32 Flotskaya str., Moscow, 125581, Russia dimasik-vasik00@mail.ru

Introduction

In the context of increasing sanctions pressure on the Russian economy, it is becoming relevant to study current trends in the interaction of Russian organizations with foreign counterparties in the field of civil and tax law. This topic attracts the attention of a large number of economic scientists. The nature of economic sanctions and restrictive measures from the point of view of international law is considered in detail in the works of S. V. Bakhin, I. O. Eremenko ^[1]. Theoretical approaches to determining the ratios of sanctions, public order and superimpressive norms were developed in the scientific works of Abrosimova E. A. and Rzaev R. G. ogly ^[2]. It is necessary to focus attention on the fact that the introduction of sanctions and restrictive measures inevitably affects the results of financial and economic activities of economic entities. Particular attention is drawn to the termination of business relations and non-fulfillment of contractual obligations by foreign contractors. A natural consequence is the appointment of damages in favor of the injured party and the award of compensation amounts in the form of court penalties. The analysis of the consequences of non-fulfillment of contractual obligations is reflected in articles, monographs and scientific reports by Russian scientists. In particular, the issues of income recognition in the form of court penalties were actively reviewed in the works of Beletskaya Yu. A. and Kazantseva E. P. ^[3-4]. An analysis of current trends in judicial practice in the context of foreign economic restrictions is given in the scientific works of Chokora M.O. and Nadezhdina Yu.Yu. ^[5]. However, upon a detailed examination of the scientific works of scientists who studied the taxation of court penalties, it turned out that the works did not address the issue of improving the current mechanism for taxation of income in the form of court penalties under sanctions pressure.

Definition of economic restrictions and sanctions

The introduction of foreign economic sanctions against Russia had a direct impact on the relationship between domestic organizations and foreign contractors. In this regard, the key issue was the understanding of sanctions from the point of view of international and Russian law. In recent decades, considerable attention has been focused on the terminological problem of the concept of "sanctions".

In the recent past, this term meant collective measures by States within the framework of the United Nations (hereinafter — the UN) in response to violations of international law ^[6-7]. Economic sanctions were considered as coercive measures taken by decision of the UN Security Council ^[8]. At the same time, unilateral coercive measures applied without a decision of the Security Council were considered illegitimate and inconsistent with international law and the UN Charter. As a result, such unilateral coercive measures were not sanctions in their classical sense.

The Declaration on the Inadmissibility of Interference in the Internal Affairs of States, adopted on December 21, 1965 by Resolution 2131 of the UN General Assembly, provides that no State may use economic or political measures to coerce another State in order to deprive it of sovereign rights or to obtain any advantages ^[9]. A similar provision is contained in article 32 of the Charter of Economic Rights and Obligations of States, adopted on December 12, 1974 by Resolution 3281 of the UN General Assembly ^[10].

The principle of non-interference in the internal affairs of States, including the inadmissibility of economic and political measures to subordinate another State, is enshrined in the Declaration on Principles of International Law, adopted on October 24, 1970 by UN General Assembly Resolution 2625 ^[11].

Nevertheless, in the current geopolitical conditions, the concepts of "sanctions" and "unilateral measures" are often identified, which leads to an incorrect interpretation of the norms of international law. Let us turn to the report of the Special Rapporteur Idris Jazairi on the negative impact of unilateral coercive measures. In this report, the speaker notes that unilateral measures are any measures other than those taken on the basis of Article 41 of the UN Charter. After the Security Council makes a decision on sanctions, States are obliged to comply with it, without changing its content, according to Articles 25, 48 (2) and 103 of the UN Charter ^[12]. Only such measures can be qualified as international sanctions. At the same time, measures taken by individual States or regional associations are considered unilateral, since they are prescribed by rules not recognized by the country against which these measures are directed.

The speaker also noted that different terms are used for unilateral measures: "sanctions", "restrictive measures", etc. It is important to note that "restrictive measures" do not have a punitive meaning and do not reflect unilateralism, which is important for assessing their legitimacy.

Thus, international sanctions in the strict sense are only measures imposed by a decision of the UN Security Council ^[13]. Other restrictions should be considered as unilateral measures.

Within the framework of this study, key attention is paid to the study of the consequences caused by the increasing sanctions pressure on the domestic economy, in terms of civil and tax legislation.

Analysis of the directions of judicial practice

Domestic legislation provides for certain mechanisms aimed at protecting the sovereignty of the State and ensuring the supremacy of national legislation. Firstly, the courts can use the provisions of the legislation to protect the public order of Russia. For example, article 1193 of the Civil Code of the Russian Federation provides that the norms of foreign law should not violate Russian public order. If such a rule violates it, the court applies Russian law instead. It is not the process of applying a foreign norm that is important, but its result. If the consequences of applying a foreign norm contradict the Russian legal order, its application is impossible.

It is necessary to focus on the fact that the strengthening of the sanctions policy against Russia after 2022 has strengthened existing trends in judicial practice and revealed new trends.

According to the authors, due to the increasing sanctions pressure from Western countries, the issue of interaction between domestic companies and foreign counterparties is attracting more and more attention. In this regard, this study proposes to consider legal disputes between Russian and foreign companies regarding the fulfillment of contractual obligations. Due to the restrictions imposed, most foreign companies refuse to fulfill their obligations, as a result of which domestic companies file lawsuits regarding the fulfillment by foreign contractors of the provisions of concluded contracts. Let us turn to the analysis of the trial No. A40-257889/22 ^[5].

The mentioned court case deals with a dispute between JSC Russian Railways (plaintiff) and Siemens Mobility GMBH (defendant 1), Siemens Mobility LLC (defendant 2). In the framework of this dispute, the plaintiff demands to invalidate the unilateral termination of the contract by the defendants. As a result, the plaintiff makes a claim for payment of a penalty for non-fulfillment of obligations under the contract.

According to the defendants, the circumstances for the unilateral termination of the agreement were the sanctions imposed by the European Union against the Russian Federation, which made it impossible to fulfill obligations.

The court rejected the defendants' arguments based on civil law and interpretation of the provisions of the contract. The agreement provided for the right of unilateral termination due to unforeseen circumstances, as well as sanctions, in case of an "important reason" provided for in the agreement. In this case, an "important reason" is understood as an objective circumstance that prevents the fulfillment of obligations under the concluded contract.

However, this applies to cases where the fulfillment of obligations is impossible due to sanctions lasting at least 180 days. First, it should be noted that Siemens Mobility GMBH notified Russian Railways of the termination of the contract in April 2022, while sanctions were imposed in March 2022 (which is less than 180 days). Secondly, the agreement between the parties is of a long-term nature (until 12/31/2053). On the basis of which it can be argued that the unilateral termination of the contract by the defendants was unjustified.

An important reason, according to the agreement, was a violation of payment deadlines in the form of late payment for a period of more than 90 days, or an open case of insolvency of one of the parties to the agreement. Based on the meaning of the above points, the sanctions imposed by themselves are not an important reason for termination of the contract. Thus, the court recognized the termination of the contract as unjustified and assigned the defendants an obligation to pay a penalty in favor of the plaintiff in the amount of 16 million rubles for each calendar day of non-fulfillment of obligations.

Approaches to the recognition of income in the form of a court penalty

The authors believe that the most controversial issue is the procedure for recognizing the specified court penalty in the framework of calculating corporate income tax. It should be noted that the tax legislation of the Russian Federation does not directly regulate the procedure for recognizing the specified court penalty for the purpose of calculating income tax.

Thus, paragraph 4, paragraph 4 of Article 271 of the Tax Code of the Russian Federation defines the moment of recognition in tax accounting of non-operating income in the form of fines, penalties or other sanctions for violation of contractual or debt obligations, as well as in the form of amounts of compensation for losses (damage) (paragraph 3 of Article 250 of the Tax Code of the Russian Federation). These incomes are subject to recognition for income tax purposes on the date of recognition by the debtor or on the date of entry into force of the court decision.

The provisions of Article 308.3 of the Civil Code of the Russian Federation provide for mechanisms to protect the rights of creditors on unfulfilled obligations. Thus, in case of non-fulfillment of contractual obligations in favor of the creditor, payment of a penalty may be provided in accordance with paragraph 1 of Article 330 of the Civil Code of the Russian Federation. In this case, a court penalty is a type of sanctions for non-fulfillment of civil obligations. The term "astrent" is used to designate this type of judicial penalty in the framework of civil law turnover.

At first glance, it can be assumed that the procedure for recognizing income in the form of a court penalty should be regulated by the norm of clause 4, clause 4, Article 271 of the Tax Code of the Russian Federation. However, upon closer examination of this rule, it becomes obvious that it is impossible to apply it in the case under consideration.

This fact is due to the fact that the wording of the norm of clause 4, clause 4, Article 271 of the Tax Code of the Russian Federation does not take into account the specifics of the judicial penalty, which may be accrued after the entry into force of the judicial act until the debtor fulfills the established obligations. The mentioned norm provides only two options for determining the date of receipt of income in the form of a court penalty, which makes it impossible to apply it in cases that are not directly named in the legislation ^[14].

In this regard, theoretically two approaches to the recognition of income in the form of legal penalties are possible. The noted approaches are presented in a graphical interpretation in Figure 1:

Figure 1. Approaches to the recognition of income in the form of legal penalties

The first approach is based on the fact that a court penalty qualifies as non-operating income in accordance with paragraph 3 of Article 250 of the Tax Code of the Russian Federation. As a result, the recognition of this income should be based on the norm provided for in clause 4, clause 4, Article 271 of the Tax Code of the Russian Federation. In other words, the taxpayer must recognize income on one of the following dates: the date of recognition by the debtor or the date of entry into force of the court decision.

The second approach provides for attributing the court penalty to other non-operating income that is not directly named in Article 250 of the Tax Code of the Russian Federation. It should be noted that this position is based on a literal interpretation of paragraph 1 of Article 250 of the Tax Code of the Russian Federation, which provides for the disclosure of only private types of non-operating income in this article, thereby not providing an exhaustive list of them. In the case of qualification of income in the form of a court penalty in accordance with the second approach, the application of the provisions of paragraph 4, paragraph 4, Article 271 of the Tax Code of the Russian Federation when recognizing the specified income is not possible. In this case, it can be assumed that the procedure for recognizing income is to be determined based on the general principles of accounting for income using the accrual method – in the period when this income arose, regardless of the moment of receipt of funds on the basis of paragraph 1 of Article 271 of the Tax Code of the Russian Federation.

Nevertheless, none of the above approaches defines the procedure for recognizing the sanctions awarded by the court, accrued after the entry into force of the court decision, as in the case of litigation between Russian Railways and Siemens Mobility GMBH.

In relation to this issue, according to the authors, it is advisable to use the general principle of income recognition in accordance with paragraph 1 of Article 271 of the Tax Code of the Russian Federation. That is, to recognize the court penalty accrued after the entry into force of the court decision on a monthly basis.

This position is also indirectly confirmed in the explanations of the Ministry of Finance of the Russian Federation, according to which income in the form of amounts of civil penalties arising and payable after the date of entry into force of the court decision is subject to recognition in accordance with the general principles of income recognition when applying the accrual method set out in paragraph 1 of Article 271 of the Tax Code of the Russian Federation.

Thus, the obligation to accrue non-operating income from the taxpayer in the form of fines, penalties or other sanctions for violation of contractual obligations when collecting debt in court arises on the basis of a court decision that has entered into force. This applies both to the amounts determined by the court on the date of the court decision, and to the amounts that are calculated on the basis of the court decision and are subject to recovery after its adoption.

Taking into account the above, the taxpayer's income in terms of the amount of sanctions to be paid by the debtor, established by the court, is recognized on the date of entry into force of the relevant court decision.

Since the procedure for recognizing income in the form of sanctions for violation of contractual obligations arising and payable on the basis of a court decision that entered into force after the date of entry into force of the court decision, subparagraph 4 of paragraph 4 of Article 271 of the Tax Code of the Russian Federation is not defined, these incomes are subject to recognition in accordance with the general principles of income recognition when applying the accrual method ^[15].

The specified conclusion of the Ministry of Finance of the Russian Federation corresponds to the nature of the court penalty, which is not determined in absolute terms immediately on the date of entry into force of the court decision and is accrued after the specified date as the period of non-fulfillment by the defendant of its obligations increases.

Based on the results of the analysis of normative legal acts, explanatory letters and decisions regarding court proceedings, it can be concluded that the amounts of the court penalty should be qualified as non-operating income in accordance with the first approach previously outlined by the authors. When recognizing the specified income, it is necessary to be guided by the provisions of subparagraph 4 of paragraph 4 of Article 271 of the Tax Code of the Russian Federation (in terms of the penalty calculated at the time of the court decision) and paragraph 1 of Article 271 of the Tax Code of the Russian Federation (in terms of the penalty accrued after the entry into force of the court decision until the debtor fulfills his obligations).

Ways to improve the mechanism for recognizing income in the form of a court penalty

It should be emphasized that foreign counterparties do not recognize the decisions of the Russian courts, do not fulfill their contractual obligations and do not pay the penalty awarded by the court decision. At the same time, domestic organizations do not have the opportunity to collect a court penalty from foreign suppliers in unfriendly jurisdictions.

As a result, being unable to receive payment of a court penalty from foreign suppliers, domestic organizations are forced to include it in income, thereby unreasonably increasing taxable profits. This fact leads to an increase in mandatory income tax payments due to the recognition of income based on the accrual method. A paradox arises, the court decisions taken in favor of Russian organizations regarding the payment of court penalties in their favor actually worsen the situation of domestic business by unjustifiably increasing income tax.

Based on the analyzed litigation between Russian Railways and Siemens Mobility GMBH, the authors determined the amount of income tax payable in connection with the appointment of a payment in the form of a court penalty in favor of the plaintiff. The calculation is presented in Table 1:

Table 1. Increase in the income tax of JSC "Russian Railways" on the accrued court penalty for 2023 and the first half of 2024

In accordance with the above calculations, the increase in income tax on the court penalty accrued in favor of JSC "Russian Railways" for 2023 and the first half of 2024 amounted to 1750.4 million rubles. It should be noted that the increase in income tax is calculated taking into account the application of a tax rate of 20 percent. The calculations given by the authors in table 1 indicate a significant impact on the financial flows of the organization. It is important to note that these calculations were based on the materials of a separate court case. At the same time, in practice, an organization may simultaneously be involved in litigation with several foreign counterparties. This fact can lead to a greater increase in income tax due to the appointment of several court penalties in favor of the plaintiff under various contracts at once. If the penalty is refused by foreign counterparties, the resulting amount of income tax will be paid by the organization at its own expense. This circumstance leads to a decrease in investment activity and a reduction in the volume of operating activities, which, in turn, provokes stagnation in the socio-economic sphere.

As part of the solution to this problem, the authors propose to include a court penalty awarded by a court to recover from foreign organizations located in countries unfriendly to the Russian Federation in income as funds, other property or property rights actually arrive.

To solve this problem, it is proposed to supplement subparagraph 4 of paragraph 4 of Article 271 with the following paragraph: "the date of receipt of funds (property, property rights), for income in the form of fines, penalties and (or) other sanctions for violation of contractual obligations, as well as in the form of amounts of compensation for losses (damage) payable on on the basis of a court decision that has entered into legal force, a foreign organization whose place of registration is a state included in the list of unfriendly countries in accordance with an Order of the Government of the Russian Federation." This proposal differs significantly from the norms of current tax legislation, according to which a court penalty is recognized in accordance with the accrual method, regardless of the actual receipt of funds.

The introduction of this amendment to the Tax Code of the Russian Federation will allow organizations to include the amounts of court penalties in non-operating expenses, thereby leveling the financial effect of the previous inclusion of these amounts in the income of the organization. In addition, the norm will ensure the recognition of income in the form of a court penalty only in case of actual receipt of funds from foreign counterparties. As a result of reducing the tax burden, organizations will be able to allocate additional financial resources for the development of industrial infrastructure and social security of employees.

It should be noted that it is advisable to establish a temporary procedure for the proposed rule. We propose to extend the effect of this paragraph to court penalties arising from the results of the first court decisions made in favor of domestic organizations, for example, from March 2022. It is proposed to apply these provisions for several years, for example, until the end of 2027.

It should be noted that the introduction of norms in force for a certain period of time has already been reflected in the tax legislation of the Russian Federation. Thus, with regard to the recognition of income/expenses in the form of positive/negative exchange differences, a temporary recognition procedure has been established for the date of termination (fulfillment) of claims (obligations).

Thus, the noted decision regarding the change in the procedure for recognizing income in the form of court penalties will minimize the discriminatory nature of taxation in relation to domestic organizations.

Conclusion

According to the results of the conducted research, it can be argued that the purpose of the scientific work has been achieved, and the tasks have been completed. In particular, a theoretical analysis and comparison of the concepts of "sanctions" and "restrictive measures" were carried out, the key characteristics inherent in each category were identified.

The paper also analyzes current trends and trends in judicial practice in the context of increasing sanctions pressure in terms of non-fulfillment by foreign counterparties of contractual obligations to Russian organizations. Approaches have been developed to the recognition of income in the form of a court penalty in accordance with civil and tax legislation.

As part of the scientific work, the problem of the discriminatory nature of income taxation in the form of a court penalty has been identified. In order to solve this problem, mechanisms have been developed to improve the procedure for recognizing income in accordance with Article 271 of the Tax Code of the Russian Federation. In addition, the possible socio-economic consequences of the implementation of the mentioned proposal are analyzed.

Thus, this scientific work may be of interest to a wide range of users due to the detailed study of the issue of taxation of judicial penalties in conditions of foreign economic restrictions.