1.    Introduction

Taxation is one of the essential elements of sovereignty in every State, and is one of the essential instruments to generate public funds. In a theoretical terms the reason why a State should raise taxes is that they need to pay for the welfare and other public services provided by governments. This may be compared to a contract that is crucial both for the smooth functioning of the State and for people’s lives. Tax collection, however, must comply with respect for the taxpayer’s fundamental rights. The prohibition of confiscatory taxation laid down in domestic law^[3] is a manifestation of this respect. The “no confiscatory taxation” principle serves to strike a balance between public and the private interests. However, this might not be sufficient for the protection of private property rights, since it only regulates basic tax matters. In order to strike the right balance, more work is needed both at the domestic and international level.

This article provides on overview of the protection of taxpayers’ property rights when taxes are unduly paid. The right to property is laid down in Article 1  of the First Protocol to European Convention on Human Rights (hereafter, the ECHR):

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

Many of the States in the world have related provisions in their constitutions to safeguard property rights, regardless of whether they have signed the ECHR^[4] or not^[5].

With regard to the characteristics of taxation – the obligatory contribution to public funds – the mainstream understanding is that taxation is, per se, an encroachment on possession within the meaning of Article 1, yet  justified according to the public interest. However, the public interest cannot and should not be a universal and unconditional ground in all situations related to taxation. It needs to be subject to certain tests which are implied in Article 1, First Protocol ECHR.

2.    Proportionality test: an essential element to determine whether there is a violation of Article 1 of the First Protocol

On the basis of Article 1, three distinct rules may be distinguished: the first and the fundamental rule is the peaceful enjoyment of property, which is enshrined in the first sentence of paragraph 1. From this basic assumption derives the second one, stating that individuals may be deprived of their property on certain conditions^[6]. The third rule, embodied in the second paragraph, allows States to regulate the use of property in accordance with the general interest by enforcing such laws as they deem necessary for that purpose^[7].

In relation to these rules and to the well-established Strasbourg case law, in the case of interference with the peaceful enjoyment of property, to establish whether the interference is in compliance with Article 1 of the First Protocol, three tests should be applied: this is crucial to determine whether an interference constitutes a violation of Article 1 of the First Protocol.

The first two are the lawfulness test^[8] and the legitimate aim test^[9]. Considering the wide margin of appreciation of national authorities in the field of taxation, it may be useful to focus on the third requirement, that is, that the interference must strike a ‘fair balance’ between the public interest and the protection of the individual’s fundamental rights. In other words, it is the proportionality test that is applied to establish whether the requirement is met, States are entitled a wide margin of appreciation to choose the means of enforcement and to evaluate whether the consequences of enforcement are justified. However, the Court can usually do much more work on this test than on the other two. From the perspective of the taxpayer, the Court can make an assessment on the enforced measures made by the authorities to establish whether the interference imposes a disproportionate or excessive burden on the applicant. In the case of unduly-paid taxation, the test can be essential to determine whether interference is reasonable. These cases can be complicated, as they concern not just the measures taken to raise taxes, but the authorities’ refusal to refund unduly-paid amounts.

A tax may be unduly-paid for different reasons: it may have been paid according to a national law later found to be in conflict with EU law,^[10] it may be the result of the failure of a third party to fulfill their obligations,^[11] or it may be a withholding taxation that has been overpaid^[12]. Whatever the reason, in these cases, the authorities do not usually deny that the tax has been unduly-paid, but they refuse to allow it on the grounds of the public interest based on their wide margin of appreciation. As a result, the Court does not always identify a feasible way to ensure the refund of the unduly-paid taxation. In the case of Bulves AD v. Bulgaria, “the government stated that the applicant company could have initiated an action against its supplier under the general rules of tort in order to seek compensation for the VAT it had not been allowed to deduct because of the supplier’s failure to comply with its VAT reporting obligations”^[13].

It may be argued that the Court should shine more light on the respect of the general interest of the State in the field of taxation. At least, some affirmative signs could be given,^[14] such as counteracting tax evasion or preventing the taxpayers enjoying the benefit of a windfall, thus providing some objective materials in the balance of the proportionality test.

3.    Possible remedies to a violation of Article 1 of the First Protocol, ECHR

According to the well-established case law of the Court, the remedies available to applicants usually consist of two kinds, namely, pecuniary damages and non-pecuniary damages. The attitude of the Court can be different in relation to the two kinds of damages in accordance with the merits of each case. However, some basic approaches can be identified in the case of an alleged violation of Article 1 of the First Protocol of the ECHR.

3.1. Pecuniary damage

On the basis of the cases requesting a refund of unduly-paid taxes, the claimed pecuniary damages can include: the amount of the unduly-paid taxation,^[15] interest on the arrears (default interest), the inflation rate,^[16] and costs and expenses^[17].

According to the literature and case law, there are no competing positions with regard to the calculation of the interest; however the same unanimity is not found with regard to the day from which the interest should be calculated^[18].

According to the case law, the starting date for the calculation of interest is when the applicant makes an application for the refund of the unduly-paid taxes. In the view of the present author, the time required to prepare the application should be considered. When a certain amount of tax is confirmed as unduly-paid, the taxpayer’s right to receive that amount is established, while there must be an interval between when the taxpayer becomes aware of the unduly-paid taxes and the submission of application for reimbursement. If the interval is long (within the period of validity) and the unduly-paid tax is completely out of the authorities’ responsibility, it is not clear whether it is reasonable for the taxpayer to bear that loss of interest. As a result, it should be borne in mind that the first time the applicant makes an application should not be the sole criterion in calculating the default interest.

Another matter that should not be ignored is the potential economic impact on the applicant resulting from the unduly-paid tax. Although this is not often noted by the taxpayers, it could be claimed in most cases. The impact could be significant: if the taxpayer is not in possession of the amount of the unduly-paid taxes, this means they could not make use of it, resulting in lost investment opportunities. The losses could be significant. The problem is clearly how to calculate them and how to make sure this would not be abused. However, it may be argued that this is one aspect that calls for closer attention.

3.2. Non-pecuniary damage

Together with the claim for pecuniary damages, there is usually a claim for non-pecuniary damages. In recent years, the Court’s attitude seems to be more unambiguous as a result of case-law rulings. In the early years, non-pecuniary damage was recognized by the Court but with no specific compensation^[19]. It is gratifying that in the case of Serkov v. Ukraine the Court awarded EUR 4,000 to the applicant for non-pecuniary damage.^[20] This is a positive sign for the protection of taxpayers’ rights.

4.    Suggestions for domestic taxation legislation

With regard to unduly-paid taxation cases, time plays an important role both for taxpayers and the tax authorities. However, due to the importance of taxation for a State, there is an obligatory administrative appeals procedure prior to the judicial appeals procedure in most EU countries. In other words, the judicial appeals procedure can be initiated only on condition that the administrative appeal channels have been exhausted^[21].This gives rise to two problems: the objectivity of the administrative appeal, and the time required to complete the administrative appeal that may at times be complicated. There are reasonable grounds for the existence of administrative appeals channels: however these two aspects should be borne in mind in the design of improved procedures. In the case of unduly-paid taxes, it should be possible to introduce a streamlined process.

Naturally, with regard to compensation for the taxpayer in the case of unduly-paid taxes, there is room for improvement in domestic procedures, and this calls for more  in-depth research.

5.    Conclusion

Taxation, as an encroachment on or at least an interference in the enjoyment of property rights,  is justified by the general interest, but only if certain conditions are met. As a result, the “fair balance” test between the general interest objectives pursued and the measures applied in the cases that involve unduly-paid taxation could be essential for determining the existence of a violation of the Article 1 to the First Protocol of the ECHR. The ECtHR does not shine much light on the elements that could be considered in the proportionality test, especially on the general interest side due to consideration for the State’s wide margin of appreciation. However, with the increasing attention to the protection of the human rights, the Court could do more^[22]. In addition, in terms of the protection of taxpayers’ rights,  there is much work to be done in the domestic law system both in procedural and substantial terms.

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