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On the government resolution on taxation

 THE CONSTITUTIONAL COURT OF
THE REPUBLIC OF LITHUANIA

 R U L I N G

 On the compliance of the Resolution of the Government of the Republic of Lithuania (No. 872) “On a Partial Amendment to the 16 October 1992 Resolution (No. 773) of the Government of the Republic of Lithuania” of 23 November 1993 with the second paragraph of Article 14 of the Law on Enterprises and the Law “On the Procedure for Promulgation and Enforcement of Laws and Other Legal Acts of the Republic of Lithuania”

 16 March 1994, Vilnius

The Constitutional Court of the Republic of Lithuania, composed from the Justices of the Constitutional Court: Algirdas Gailiūnas, Zigmas Levickis, Vladas Pavilonis, Pranas Vytautas Rasimavičius, Teodora Staugaitienė, Stasys Šedbaras and Juozas Žilys

The court reporter—Rolanda Stimbirytė

Anicetas Ignotas, Deputy Minister of Industry and Trade, and Genovaitė Kraujelienė, Deputy Director of the Department of Enterprise Finance of the Ministry of Finance, acting as the representatives of the party concerned

The Constitutional Court of the Republic of Lithuania, pursuant to Paragraph 1 of Article 102 of the Constitution of the Republic of Lithuania and Paragraph 1 of Article 1 of the Law on the Constitutional Court of the Republic of Lithuania, in its public hearing, on 8 March 1994, considered case No. 3/94 subsequent to the petitions submitted to the Court by a group of members of the Seimas of the Republic of Lithuania requesting an investigation into whether the Resolution of the Government of the Republic of Lithuania (No. 872) “On a Partial Amendment to the 16 October 1992 Resolution (No. 773) of the Government of the Republic of Lithuania” of 23 November 1993 is in compliance with the second paragraph of Article 14 of the Law on Enterprises and the Law “On the Procedure for Promulgation and Enforcement of Laws and Other Legal Acts of the Republic of Lithuania”.

The Constitutional Court

has established:

On 23 November 1993, the Government of the Republic of Lithuania passed the Resolution (No. 872) “On a Partial Amendment to the 16 October 1992 Resolution (No. 773) of the Government of the Republic of Lithuania” (Official Gazette Valstybės žinios, No. 64 (49)-1221, 1993) by which Item 8 of the Government Resolution “On the Currency Funds and the Procedure for Contributions to the State Budget of the Republic of Lithuania” (Official Gazette Valstybės žinios, No. 32-994, 1992; No. 2-37, No. 9-228, 1993) has been amended. Now it is formulated in the following way:

“8. To establish that enterprises, institutions and organisations of the Republic of Lithuania:

8.1. in book accounting, shall recalculate income and expenditures in foreign currency into the litas according to official exchange rate that existed on the day of receiving income or bearing expenditures;

8.2. since 1 October 1993, shall incalculate into earned income (sales revenues) foreign currency, obtained from production (goods) that have been exported and from rendered service, in the following procedure:

8.2.1. convertible currency—on the income day according to the official exchange rate;

8.2.2. non-convertible currency—only after buying the litas, convertible currency, material values for it and after paying for rendered service as well selling goods obtained through exchange in kind;

8.3. shall evaluate material values obtained for foreign currency and rendered service by their acquisition value according to the official exchange rate on the day of payment, and material values obtained through exchange in kind on the day of their debiting according to the official exchange rate of foreign currency;

8.4. at the end of accounting period, shall include the results of reappraisal of convertible currency remainder into taxable profit (losses);

8.5. earned income in non-convertible currency for the first-third quarters of 1993, shall recalculate according to Item 8.2.2. of this resolution, adjust financial results of this period, computation of general excise and debt to the budget.

If after the recalculation of said income, funds to be returned from the budget are formed, they are incalculated as advance instalments of fourth quarter;

8.6. shall include into taxable profit (losses) the results of reappraisal of foreign currency remainder of first-third quarters of 1993, adjust computation of taxable profit (losses) and debt to the budget”.

The petitioner requests that the Constitutional Court recognise that the 23 November 1993 resolution (No. 872) of the Government of the Republic of Lithuania is not consistent with the laws of the Republic of Lithuania. The petitioner bases his request on the fact that the Government in Items 8.4 and 8.6 of said resolution established its retroactive validity since 1 January 1993, because it commissioned enterprises, institutions and organisations to reappraise currency remainder which existed in the first through third quarters of 1993 and to impute the difference ensuing from the change in the exchange rate into the taxable profit.

In the opinion of the petitioner, because of such administrative decision of the Government, not all the enterprises can enjoy equal legal-economic conditions of business activity which could not be foreseen as this resolution of the Government has retroactive validity. Hereby, the second paragraph of Article 14 of the Republic of Lithuania’s Law on Enterprises is violated, because some of the enterprises acquired unearned profit, whereas others groundlessly bore losses.

During the preliminary investigation of the case the petitioner’s representative, while responding to the statements of representatives of the party concerned, submitted the following additional arguments and reasoning:

  1. The Government is not entitled to the right to freely interpret the law and provide for a new basis for the assessment of taxable profit not relating to the category of income, namely, the result of the reassessment of currency funds. By said resolution, the Government expanded Article 3 of the Law on Taxes on Profits of Legal Persons.
  2. The interpretation of representatives of the party concerned that advance payments by applying the instalment rate are determined in Article 12 of the Law on Taxes on Profits of Legal Persons, is also groundless. In the above-mentioned Article it is stipulated that the instalment rate shall be computed by dividing the total profit tax assessed for the preceding taxable year by the amount of earned income received during the preceding taxable year. By means of the impugned resolution, the Government, disregarding the law, retroactively established a new basis for taxation in accordance with the principles and procedure of accounting not ascribed to income. Enterprises could not forecast it, therefore, the legal-economic conditions of their business activity have groundlessly become unequal.
  3. Said resolution of the Government is applied to all business entities, personal enterprises—factual economic communities without the rights of a legal person—among them. Their taxation is regulated by the Provisional Law on Income Tax of Natural Persons in which such general income as the result of reappraisal of currency remainder, is not provided for.

Since, due to the ex post facto government resolution, different legal-economic conditions for the business activity of enterprises have been provided, it may be not be applied to those business entities who suffer unforeseen losses.

The representatives of the party concerned have explained that the petitioner’s request is groundless because of the following reasons:

  1. The requirements set forth in Item 8.6 of this resolution did not have any influence upon the financial results of enterprises, i.e. the inclusion of the results of reappraisal of foreign currency remainder, which existed in the first through third quarters of 1993, into the taxable profit did not change the amount of balance profit, did not increase balance profit and did not cause balance losses in any enterprise. The purpose of this resolution is to achieve that enterprises gaining profit due to the change in the rate of exchange would be taxed and those incurring losses would decrease payments into the budget.
  2. The financial year of an enterprise lasts 12 calendar months. Accountants, while computing the factual debt to the budget which has formed during financial year, shall conform to general principles of accounting declared in the Republic of Lithuania by the Law on Accounting Principles, and procedures of accounting established in International Standards of Accounting, at the end of accounting period shall adjust records of this debt.
  3. Fluctuations of the foreign currency exchange rates is one of risk factors in the activities of an enterprise and exerts influence on the profit of an enterprise irrespective of its economic activities.
  4. Enterprises, conforming to the requirements set forth in the Resolution of the Government of the Republic of Lithuania (No. 872) “On a Partial Amendment to the 16 October 1992 Resolution (No. 773) of the Government of the Republic of Lithuania” of 23 November 1993, adjusted their records of the debt to the budget in November and December of 1993, i.e. after the day of enforcement of this resolution.
  5. This resolution does not contradict the Law on Taxes on Profits of Legal Persons, since in Article 13 of this Law it is specified that advanced payments for a year shall be made and the amount of advance payments shall be computed by applying the instalment rate. The instalment rate shall be estimated by dividing the total amount of the profit tax paid for the preceding taxable year by the amount of sales revenue received during the preceding taxable year.
  6. The Resolution of the Government of the Republic of Lithuania (No. 872) “On a Partial Amendment to the 16 October 1992 Resolution (No. 773) of the Government of the Republic of Lithuania” of 23 November 1993 did not provide for unequal conditions of business activity for industrial enterprises. These conditions were dependant on the actual remainder in foreign currency accounts and exchange fluctuations during accounting period.

The Constitutional Court

holds that:

In the second paragraph of Article 14 of the Law on Enterprises it is established that “All enterprises shall have equal legal-economic conditions”.

One of legal prerequisites to ensure such conditions of business activity are provisions determined in the Law on Taxes on Profits of Legal Persons: the equal computing of taxable profit for all legal persons (Articles 3 and 4), the same tax rates (Article 7), uniform procedure for computation and payment of tax (Articles 11, 12, 13 and 14).

The establishment of uniform conditions for business activity means the equality before the law of business entities but not the equality of the results of economic activities. Cases, when legal regulation of activities is more favourable for some business entities and less favourable for others, are possible. Therefore, not only the contents of legal norms but also their temporal validity is important for legal subjects, especially if, due to a newly adopted or amended legal act, they must be prepared to correct their activities. In order legal subjects could organise their activities in compliance with the requirements of legal norms, the procedure for promulgation and enforcement of laws and other legal acts is determined.

In the second paragraph of Article 7 of the Constitution of the Republic of Lithuania it is specified: “Only laws which are promulgated shall be valid”, and in Articles 70 and 72 the procedure for promulgation and enforcement of laws is regulated.

Conforming to the provisions of the Constitution, the procedure for promulgation and enforcement of laws and other legal acts is specified in detail. In Article 4 of the Law on the Procedure for Promulgation and Enforcement of Laws and other Legal Acts of the Republic of Lithuania it is established: “Laws of the Republic of Lithuania shall become effective only after the signing and official promulgation thereof in the official gazette ‘Valstybės žinios’ by the President of the Republic, unless the laws themselves establish a later enforcement date”.

In Article 8 of this Law it is stipulated: “Resolutions of the Government of the Republic of Lithuania which establish or amend legal norms, or recognise that such norms are no longer valid, shall become effective the day following the signing thereof by the Prime Minister and official promulgation thereof by appropriate Minister in the official gazette ‘Valstybės žinios’.

Resolutions of the Government of the Republic of Lithuania in which legal norms are not established, amended or declared null and void along with directives of the Prime Minister, shall become effective from the day of their signing thereof, unless the resolutions and directives themselves provide for a later enforcement date”.

Conforming to the Constitution and Law “On the Procedure for Promulgation and Enforcement of Laws and Other Legal Acts of the Republic of Lithuania”, the conclusion can be drawn that the date of enforcement of a legal act which has been promulgated shall be:

1) for laws: a) the day of their promulgation in the official gazette “Valstybės žinios”; b) a later enforcement date established in the law itself;

2) for resolutions of the Government—the day following their promulgation in the official gazette “Valstybės žinios”.

The power of a law or other legal act is prospective. It is not possible to require from the person to keep to the rules that did not exist in the time of his activities and, therefore, he was not likely to know future requirements. A legal subject must be sure that his acts committed in compliance with legal rules that were in effect in the time of their commitment shall be considered lawful. In contrary case, the law itself would lose its authority and that would prevent from establishing a stable legal order.

The jurisprudence and legal traditions allow us to draw the conclusion that in the sphere of legal regulation a general rule is valid: a law has no retroactive validity. The essence of this rule is that laws, with the exception of some particular cases, normally “do not go to the past” i.e. they are not applied to legal facts that have already occurred, and legal consequences that existed prior to the enforcement of a newly adopted normative act.

In order to investigate this case, it is important to determine whether the Government of the Republic of Lithuania by its resolution No. 872 of 23 November 1993 has exerted influence on the legal relations which existed prior to the adoption of this resolution.

The material gathered for this case as well as circumstances established during the judicial investigation confirm the fact that, by means of the impugned government resolution, the computation of currency income has been changed. Conforming to it, enterprises had to estimate the income from the sale of currency, excises, profit and profit tax in the other way.

Pursuant to currency income, financial results of enterprises, the computation of general excise, profit tax and debt to the budget have been readjusted. Exchange rate of convertible currency fluctuated considerably over a year (until the introduction of the litas it rose and after that it fell), therefore, upon changing the taxation of the results of reappraisal of the currency remainder which existed in the first through third quarters of 1993 from non-taxable profit into taxable one, a larger profit was calculated for enterprises having a considerable convertible currency turnover, and, accordingly, their profit tax also increased.

On the basis of government resolution No. 872 of 23 November 1993, the amount of profit tax and debt to the budget has changed not since 23 November 1993, but rather since the beginning of that year. Thus, the regulation of lasting legal relation has been changed by the government resolution. However, such change did not have to exert influence on legal relations that existed prior to the enforcement date of this resolution.

The statement of representatives of the party concerned that the impugned resolution of the Government has no retroactive validity is groundless. A real increase or decrease in profit taxes of enterprises appeared not due to economic activities of enterprises but because the Government established other computation of income. Thus, the Government by its resolution actually changed the taxation of enterprises and established its retroactive validity.

The fact that enterprises, conforming to government resolution No. 872 of 23 November 1993, made records adjusting the debts in November–December of 1993, i.e. after the enforcement date of said resolution, and in Article 13 of the Law on Taxes on Legal Persons it is determined that payment for given taxable year shall be made in instalments, in advance, and the amount of a given instalment shall be computed by applying the instalment rate, does not change the essence of the matter.

Any government resolution is a substatutory act. “The norms of a law are realised by it, however, such an act may not replace the law itself and create new legal rules of general nature that in their power would compete with the norms of the law. It is an act of application of the norms of a law irrespective of the fact whether this act is of one-off (ad hoc) or permanent validity” (the Republic of Lithuania’s Constitutional Court’s ruling of 19 January 1994). Thus, the government resolution which has been adopted applying the norms of a law and establishing their retroactive power, in all cases is not consistent with the law, since it interferes into the scope of the law validity, and its supremacy over substatutory acts is violated.

In view of the material gathered for the case and findings established during the court hearing of the Constitutional Court, the conclusion can be drawn that the Government by its resolution since 1 January 1993 having changed the imputation of the results of revaluation of currency remainder from non-taxable profit into taxable one, was striving towards implementation of necessary measures of stabilisation of Lithuania’s industry and market. The result of said resolution is that, conforming to it, the profit computed for the majority of enterprises decreased and alongside decreased profit tax and debt to the budget. The resolution predetermined the situation when due to the results of established reappraisal of currency remainder, a number of enterprises computed a larger profit and also had to pay bigger taxes. The circumstance that, in the opinion of representatives of the party concerned, there were very few such enterprises, is of no relevance. This fact allows one to maintain that, because of the Resolution of the Government of the Republic of Lithuania (No. 872) “On a Partial Amendment to the 16 October 1992 Resolution (No. 773) of the Government of the Republic of Lithuania” of 23 November 1993, enterprises found themselves in an unequal position. Because of the retroactive validity of this resolution, a number of enterprises could not foresee that a greater profit would be calculated and they would have to pay a bigger profit tax.

Conforming to Article 102 of the Constitution of the Republic of Lithuania and Articles 53, 54, 55 and 56 of the Law on the Constitutional Court of the Republic of Lithuania, the Constitutional Court of the Republic of Lithuania gives the following

ruling:

To recognise that Subitems 8.4 and 8.6 of Item 8 of the 16 October 1992 resolution (No. 773) of the Government of the Republic of Lithuania, as newly formulated by the 23 November 1993 resolution (No. 872) of the Government of the Republic of Lithuania, contradict the second paragraph of Article 14 of the Republic of Lithuania’s Law on Enterprises and the Republic of Lithuania’s Law “On the Procedure for Promulgation and Enforcement of Laws and Other Legal Acts of the Republic of Lithuania”.

This ruling of the Constitutional Court is final and not subject to appeal.

The ruling is pronounced in the name of the Republic of Lithuania.

Justices of the Constitutional Court:

Algirdas Gailiūnas                           Zigmas Levickis                               Vladas Pavilonis

Pranas Vytautas Rasimavičius         Teodora Staugaitienė                       Stasys Šedbaras

Juozas Žilys