Composition of the Board

Konstantine Vardzelashvili – Chairman of the Hearing, Judge Rapporteur;

Ketevan Eremadze – Member;

Maia Kopaleishvili – Member.

Secretary of the Hearing: Lili Skhirtladze

Title of the Case: JSC “Liberty Bank” v. the Parliament of Georgia

Subject of the Dispute: Constitutionality of section 4 of Article 2 of law of Georgia “On Amendments in the Tax Code of Georgia” (document number – 6211, 15/05/2012) with respect to paragraph 5 of article 42 of the Constitution of Georgia.

Participants of the Hearing: Representatives of the Claimant – Eprem Urumashvili, Alexi Khuroshvili and Alexandre Sukhishvili; representative of the Respondent, the Parliament of Georgia – Tamar Meskhia, witness – the Head of Judicial Disputes Branch of the Legal Department of the Revenue Service of Georgia Mamuka Bughadze.

I
Descriptive Part

1. On March 1, 2013 a constitutional claim (registration N552) was lodged to the Constitutional Court of Georgia by the JSC “Liberty Bank”. On March 4, 2013 N552 Constitutional Claim was assigned to the First Board of the Constitutional Court of Georgia for ruling on admission of the case for consideration on merits. Preliminary session of the First board of the Constitutional Court with oral hearing was held on August 5, 2013.

2. Pursuant to the Recording Notice (N1/4/548) of September 20, 2013, of the First Board of the Constitutional Court of Georgia the Claim was admitted for consideration on merits in the part disputing Constitutionality of section 4 of Article 2 of law of Georgia “On Amendments in the Tax Code of Georgia” (document number – 6211, 15/05/2012) with respect to paragraph 5 of article 42 of the Constitution of Georgia.

3. The legal basis indicated in the Constitutional Claim for submission of the constitutional claim is: subparagraphs “a” and “f” of paragraph 1 of article 89 of the Constitution of Georgia, subparagraphs “a” and “e” of paragraph 1 of article 19 and subparagraph “a” of paragraph 1 of article 39 of the organic law of Georgia “On the Constitutional Court of Georgia”, articles 15 and 16 of the Law of Georgia “On Constitutional legal proceedings”

4. According to the disputed provision section 47 of article 309 of the Tax Code of Georgia applies to the legal relationships conducted after January 1, 2011. Section 47 of article 309 of the Tax Code of Georgia defines that the possibility to carry forwards the tax losses for 10 years prescribed by the same code applies only to the losses incurred in year 2010 and years after that.

5. The right of legal persons to carry forward losses is established by section 4 of article 121 of the Tax Code of Georgia. According to the provision the excess of deductions over gross income in relation to a legal person shall be carried forward for a period of up to five years and be covered by the excess of gross income over deductions of the future periods. According to the section 1 of article 122 of the same code person has a right to change the mentioned 5 year period for carrying the looses with 10 year period for carrying the losses.

6. The Claimant Party indicated the JSC “Liberty Bank” exercised the right to carry forward losses for 5 years for the losses exercised on the year 2006 and next years. On October 20, 2011 the Claimant addressed the tax authority to change 5 years period for carrying the losses with 10 years period, but the latter declined the request. The mentioned ruling of the tax authority was appealed by administrative complaint within the administrative procedure and after that it was referred to the Tbilisi City Court and the Court of Appeals. The ruling of tax authority was declared to be lawful. The tax authority as well as the court considered that a right to switch on 10 year period for carrying forward losses was applicable only to the losses exercised at the year of referring tax authority with address and the years after that. Therefore, by the address submitted to tax authorities on the year 2011 tax payer was not authorised to request to switch to 10 years period for carrying losses exercised at the year 2006.

7. The Claimant party does not agree with the definition of the provisions of the Tax Code made by general courts. It considers that the right to carry losses for 10 years also extends to the losses experienced at the years previous to referring to tax authorities. The party defines that the Tax Code of Georgia enforced from January 1, 2011 was giving the right to a taxpayer to switch 5 years period for carrying the losses with 10 years period if at the moment of referring to the tax authorities with the application 5 years period for carrying the losses was not passed.

8. The Claimant party considers that based on the disputed provision on May 2012 the right of a taxpayer to carry forward losses for 10 years was retroactively terminated form January 1, 2011. According to its opinion the mentioned rule deteriorates taxpayers conditions, especially in cases when a taxpayer has already exercised the above mentioned right before adoption of the disputed provisions. It is indicated in the Constitutional Claim that as a result of retroactive application of the disputed provisions the lawful act of taxpayers conducted before the adoption of the provisions are declared to be undue fulfilment of tax obligation, which might cause imposition of tax liability prescribed by articles 252, 272 and 291 of the Tax Code of Georgia.

9. The Claimant indicated that a taxpayer is guided by the version of the Tax Code in force at the end of a calendar year. Therefore it considers the amendments of the provision regulating past legal relationships to be unacceptable, while taxpayers have specific accounting plans. The party indicates that they referred to the tax authority with request to switch to 10 years period for carrying forward tax losses at the time when the disputed amendments were not yet adopted. Therefore the party considers the disputed provision to have true retroactivity, since its application was extended to the legal relationships which were already completed at the time of its adoption. According to the opinion of the Claimant, after the moment when taxpayer chooses one from two alternative methods – specifically 5 years or 10 years period for carrying forward the losses, any legal act which restricts the mentioned right has true retroactive power.

10. At the same time the Claimant indicates that a commercial bank periodically presents financial statement before the National Bank, in which tax losses is indicated as actives of a bank. The Claimant considers that including some losses as an active in the statement becomes unlawful based on the disputed provision. Therefore, in parallel to the tax liability the Claimant considers that the National Bank might impose a fine on it due to presenting incorrect financial statement.

11. Derived from above mentioned, the Claimant considers that the disputed provision contradicts paragraph 5 of article 42 of the Constitution of Georgia. According to paragraph 5 of article 42 of the Constitution of Georgia “no one shall be held responsible for an act which did not constitute an offence at the time it was committed. No law shall have retroactive force unless it reduces or abrogates responsibility”. The Claimant considers that the mentioned provision of the Constitution prohibits retroactivity of law in cases, when it negatively changes legal result of the acts conducted in the past and by this a subject of law is damaged or might be damaged. The regulation should cover not only retroactive imposition or aggravation of responsibility, but also every occasion when retroactive application of law causes worsening legal conditions of an individual, including in a financial sense.

12. The Claimant indicates that paragraph 5 of article 42 of the Constitution protects the right of individual to have assumption of reliability and stability towards the law. As well as to have a right to employ the law that is in force at the moment of conducting a certain act by him/her. According to its opinion paragraph 5 of article 42 prohibits restriction which retroactively changes the past and causes certain legal consequences which could not be reasonably expected from the subject of the law. The Claimant considers that the disputed provision enables true retroactive application of law towards it.

13. The Respondent defines that correct interpretation of the disputed provision clarifies that the right to switch from 5 to 10 years period for carrying the losses forward never existed for the losses exercised before the year 2010. Therefore the disputed provision does not worsen legal rights of the taxpayers. The Respondent indicated that the sole purpose for adoption of the disputed provision was to prevent non-uniform interpretation of the law by its addressees.

14. The Respondent considers that increasing the tax burden in cases when the law does not establishes possibility for imposition of legal responsibility on an individual should not be considered as retroactive application of the law prohibited by the Constitution of Georgia. The law contradicts the Constitution in cases when it has retroactive power and at the same time establishes or aggravates responsibility of individuals. At the same time the Respondent indicated that for violation of the mentioned constitutional provision it is necessary the person to be under real danger of imposition of responsibility, since the Claimant has not exercised the right to carry forward losses exercised before the year 2010 for 10 years, it is impossible any kind of responsibility to be imposed on it. Therefore the Respondent considers that the disputed provision does not contradict paragraph 5 of article 42 of the Constitution of Georgia.

15. At the same time the Respondent considers that the retroactive power of the law prohibited under paragraph 5 of article 42 would be presented even if as a result of application of the disputed provision the basis for imposition of responsibility would become other legal provision. However the respondent considers that in the present case there is no possibility for imposition of responsibility either based on the disputed provision or based on the other provision of the law in combination with the disputed provision. According to its opinion argument about possibility of imposition of responsibility by the National Bank has no basis, because the disputed provision regulates legal relationship only between the tax payer and tax authorities.

16. The witness, the Head of Judicial Disputes Branch of the Legal Department of the Revenue Service of Georgia Mamuka Bughadze stated that based on the provision of tax code enforced on January 1, 2011 regulating carrying forward the losses the taxpayer was not authorised to deduct losses formed before the year 2010 for 10 years period. According to the opinion of the witness the 10 years period for carrying forward losses was applicable only on losses exercised at the year of referring to the tax authorities with an address and the years after that.

17. The witness stated that according to the tax code in force at the period from January 1, 2011 till May 29, 2012 in case of 10 years term of carrying forward losses11 years period of limitation for tax inspection was applicable, commencing not from the end of the year of formation of loss, but from the end of the year of submitting an address, which precluded possibility for exercising this right for the loss formed at the year 2006.

18. According to the witness statement the purpose of adoption of the disputed provision was to ensure application of 11 years limitation period on full period of 10 years term of carrying forward the loss starting from the years of formation of loss. Accordingly by the amendments the legislator made the mentioned correlation between the term of carrying forward losses and limitation period for tax inspection clearly readable.

19. In relation to imposition of responsibility the witness stated that it is not possible to impose legal responsibility of a taxpayer solely for presenting an address requesting to switch to 10 years term for carrying forward the losses. The legal responsibility might be caused only by reflecting the 10 years term of carrying forward the losses in the tax declaration, because it would cause reduction of payable tax and this very reduction of tax is the ground for legal responsibility as indicated by the Claimant.

II
Reasoning Part

1. Paragraph 5 of article 42 of the Constitution of Georgia establishes prohibition of retroactive application of the law, it prescribes one of the fundamental principles for the state based on the Rule of Law - nullum crimen, nulla poena sine praevia lege poenali, “it restricts the freedom of the legislator to introduce such law that would impose responsibility to a person for an action which was not punishable at the moment of its commission“ (Judgment N1/1/428,447,459 of the Constitutional Court of Georgia dated May 13, 2009 on the case of “The Public Defender of Georgia, citizen of Georgia Elguja Sabauri and Citizen of the Russian Federation Zviad Mania v. the Parliament of Georgia”, II-1).

2. Paragraph 5 of article 42 of the Constitution of Georgia prescribes the basis for application of law in time, which is derived from the necessity of legal security and protection of principle of legal stability. It also includes important guarantee for protection of constitutional rights and freedoms, since it prohibits adoption of law, which retroactively declares the acts conducted and completed in the past to be offences, retroactively sets or aggravates responsibility and by this ex post facto changes legal results. “In the event of disrespect of this principle, not only the constitutional rights of an individual person will be endangered, but also the order of values, legal security, which itself is the foundation of the existence (protection) of the constitutional rights. The normative order of values is the tool for determining the behavior of an individual citizen. Under the circumstances of such order, people have the reasonable expectation that the State will act within the limits established by the law and will assess the action committed by him/her under the circumstances of existing normative reality”.(Judgment N1/1/428,447,459 of the Constitutional Court of Georgia dated May 13, 2009 on the case of “The Public Defender of Georgia, citizen of Georgia Elguja Sabauri and Citizen of the Russian Federation Zviad Mania v. the Parliament of Georgia”, II-1).

3. Imposition of legal responsibility for the act which was not considered as an offence before enforcement of the law also contradicts with the principle of the Rule of Law, it might lead to arbitrary use of the law, cause disproportionate and unjustified restriction of right. The principle of prohibition of retroactivity of the law constitutes important guarantee for ensuring freedom to act within the boundaries of the right recognised by the Constitution and the Law. It creates legitimate expectation of every individual that the act conducted according to the law, a realised right, will not be declared as an offence in the future. Without existence of solid guarantees for protection of the mentioned principle there are risks that an individual will abstain from exercising their legal rights which will sufficiently devaluate the meaning of each constitutional right and their effect on ensuring the well-being of the people. “The first sentence of paragraph 5 of Article 42 of the Constitution of Georgia ensures a person’s ability, pursuant to beforehand defined, publicly accessible and non-individualised legal rules, to predict what actions are criminal offences and to accordingly conduct his own behaviour, which is an important guarantee against arbitrary persecution and prosecution” (Judgment N1/1/428,447,459 of the Constitutional Court of Georgia dated May 13, 2009 on the case of “The Public Defender of Georgia, citizen of Georgia Elguja Sabauri and Citizen of the Russian Federation Zviad Mania v. the Parliament of Georgia”, II-1).

4. The foreseeability of legal results prescribed by the law, quality of legal certainty is essentially dependent on how the law is applicable in time.“By prohibiting retroactive force, the Constitution provides the guarantee that subjects of law be protected from negative consequences caused as a result of the operation of the laws. Since any law is an immediate product of the life of the society, it is not excluded that a new law in comparison with the rule aggravates the condition of a subject” (Judgment N1/1/428,447,459 of the Constitutional Court of Georgia dated May 13, 2009 on the case of “The Public Defender of Georgia, citizen of Georgia Elguja Sabauri and Citizen of the Russian Federation Zviad Mania v. the Parliament of Georgia”, II-6). Therefore, the legislator as well as the law enforcers should treat application of the law in time with extreme caution. In cases when the law aims (or has side effect) to regulate legal relationship arisen in the past, its assessment should be conducted within the scope of paragraph 5 of article 42 of the Constitution of Georgia.

5. Within existing practice the Constitutional Court of Georgia has made definitions of paragraph 5 of article 42 of the Constitution during assessing constitutionality of the provisions defining criminal responsibility, hereby the approaches established regarding the prohibition of retroactivity of the law mainly relates to the rules of application of the criminal law (for example see: Judgment N1/1/428,447,459 of the Constitutional Court of Georgia dated May 13, 2009 on the case of “The Public Defender of Georgia, citizen of Georgia Elguja Sabauri and Citizen of the Russian Federation Zviad Mania v. the Parliament of Georgia”). However the scope of protection of the mentioned constitutional provision is not limited merely to the prohibition of retroactivity of the law establishing criminal responsibility. “The Constitution generally speaks about an offence and we should think that it does not imply only criminal offences. … The principle on prohibition of retroactivity of the law, stemming from this paragraph of the Constitution, implies the prohibition of retroactivity of the law determining the legal responsibility” (Judgment N1/1/428,447,459 of the Constitutional Court of Georgia dated May 13, 2009 on the case of “The Public Defender of Georgia, citizen of Georgia Elguja Sabauri and Citizen of the Russian Federation Zviad Mania v. the Parliament of Georgia”, II-4).

6. It is also important to indicate that the term “responsibility” implies any legal responsibility. “As for abrogation of the responsibility, here, first of all, it supposes the exclusion of this or that illegal action from the category of offences. Accordingly, establishment of responsibility for the action is declaration of this action as an offence.” (Judgment N1/1/428,447,459 of the Constitutional Court of Georgia dated May 13, 2009 on the case of “The Public Defender of Georgia, citizen of Georgia Elguja Sabauri and Citizen of the Russian Federation Zviad Mania v. the Parliament of Georgia”, II-5). Therefore the word "offence" mentioned in paragraph 5 of the article 42 of the Constitution implies any act which is unlawful and on the ground of which the state becomes authorised to impose sanction, notwithstanding its criminal law or administrative law nature. The first sentence of the same constitutional provision generally refers to prohibition of retroactive imposition of the responsibility for an act which was not declared to be an offence at the time of its commission.

7. As a rule "responsibility is linked to an offence" and therefore, ex post facto determination of an act to be an offence creates unjustified ground for interference into a human's (person's) constitutional right “... the given sentences of paragraph 5 of Article 42 of the Constitution create an organic unity and ensure that the criminal offence that is the ground for responsibility and responsibility by itself, because of this criminal offence as an aggregate of coercive measures undertaken by the State, will be such, as it was determined by the law that was applicable at the time the offence was committed. There is only one exception from this absolute constitutional requirement – within the scope of protection of paragraph 5 of Article 43, the legislator may award the law retroactive force, if it abrogates or mitigates the responsibility provided for by the law that was applicable at the time the criminal offence was committed." The given sentences of paragraph 5 of Article 42 of the Constitution create an organic unity and ensure that the criminal offence that is the ground for responsibility and responsibility by itself, because of this criminal offence as an aggregate of coercive measures undertaken by the State, will be such, as it was determined by the law that was applicable at the time the offence was committed" (Judgment N1/1/428,447,459 of the Constitutional Court of Georgia dated May 13, 2009 on the case of “The Public Defender of Georgia, citizen of Georgia Elguja Sabauri and Citizen of the Russian Federation Zviad Mania v. the Parliament of Georgia”, II-3).

8. It should also be indicated that the Constitutional Court cannot uphold the statement according to which paragraph 5 of the article 42 of the Constitution of Georgia prescribes general and absolute prohibition of retroactivity of any type of law. Such blanket restriction would make retroactivity of the laws which establish the right (or privilege) impossible. For example the legislator would be restricted from establishing retroactively privileges (including tax privileges) and/or providing social assistance. Based on the objectives of the Constitution it would be unreasonable to see such restriction in the second chapter of the Constitution.

9. As it was already indicated one of the main purposes of the Constitution is to ensure protection of a human (a person) from the state, adequate protection if his/her rights and freedoms. The provision prohibiting retroactivity of the law has a similar purpose - restriction of state’s ability to act in order to ensure protection of human rights. At the same time the Constitution does not preclude possibility for extending the scope of protection of human rights, the state is authorised to establish standards higher than indicated in the Constitution or create new right. Based on paragraph 5 of article 42 of the Constitution the state is allowed to give the retroactive power to the law and retroactively arm individual with a right or otherwise ensure receiving of some benefits by him/her.

10. Based on above mentioned in order to decide constitutionality of the disputed provision it is needed to assess what the legal effects the disputed provision imposes are, whether the disputed provision establishes an offence ex post facto, sets, aggravates or creates possibility for imposing the responsibility. In order to answer the mentioned issue, first of all it is necessary to determine what obligations were prescribed by the law in force at the moment of enforcement of the disputed provisions. The legal results caused by the disputed provision need to be identified.

11. According to section 47 of the article 309 of the Tax Code of Georgia, 10 years term for carrying forward the losses prescribed by the same code becomes applicable only to the loss exercised at the year 2010 and years after that. Application of the mentioned rule on legal relationships arisen from January 1, 2011 was specifically defined by the disputed provision (May 29, 2011) (according to section 4 of article 2 of the law of Georgia “On Amendments in the Tax Code of Georgia” (document number – 6211, 15/05/2012) "Application of section 47 of the article 309 of the Tax Code of Georgia, indicated in subparagraph "e" of section 51 of article 1 of this law, should extend to the legal relations arisen from January 1, 2011). Since the disputed provision adopted on May 29, 2012 enforced the rule established by section 47 of article 309 of the Tax Code of Georgia from January 1, 2011, its probable retroactive effect is limited to the period of time from January 1, 2011 to May 29, 2012.

12. As it was already indicated "retroactive application of the law is presented in cases when the disputed provision regulates the legal relationship conducted before enforcement of the law, thus establishes legal results in relation to acts or events which was implemented in the past" (Recording Notice №1/5/552 of the Constitutional Court of Georgia of September 20, 2013 on the case of "JSC “Liberty Bank” V. the Parliament of Georgia", II-4). Accordingly, for the purposes of paragraph 5 of article 42 of the Constitution retroactive increase of tax burden creates legal obligation, which did not exist before and non-fulfilment of which might cause imposition of responsibility. It should also be indicated that setting or increasing tax burden, which creates additional financial obligation by itself is not enough to consider that the provision has retroactive effect. The law would be in conflict with paragraph 5 of article 42 of the Constitution, if setting/increasing tax burden changes the legal results of completed legal relationships, for the tax period which has already passed. Hereby, in order to adjudicate on the present constitutional dispute it is also important to determine whether the disputed provision relates to the legal relationships which are already completed.

13. The disputed provision relates to the rule of changing 5 years term for carrying forward loss to 10 years term and its application is limited only to the period from January 1, 2011 to May 29, 2012. The sole competed calendar/tax year (year 2011) falls under this period, therefore the retroactive application of the disputed provision might exist only if it regulates deduction of loss carried forward for the year 2011 from the previous years. Accordingly retroactive application of the disputed provision will exist if it regulates the legal relationships which has been already realised in a new way, thus the tax loss, which is already deducted by a taxpayer or time for deduction has come, and at the same time the law aggravates the conditions of a taxpayer (for example increases profit tax base which was already formed and/or on which tax was already paid at the time of adoption of the law). Calculation of profit tax base and payment of profit tax is conducted according to the situation at the end of the year, based on the difference between the gross income of a taxpayer and the amounts of deductions stipulated under the Tax Code of Georgia. This is exactly when the loss exercised in the previous years is deducted; the right to carry forward losses is exercised. Therefore, the disputed provision will have retroactive force if it regulates right to carry forward losses for already completed calendar/tax year (in cases when deduction of losses is already realised).

14. Prior to enforcement of the disputed provision the right to carry forward losses for 10 years term and rules to exercise this right was prescribed by section 1 of article 122 of the Tax Code of Georgia. It had the following content: "A person shall be entitled to replace the five-year period of loss carrying forward determined under Article 121 of this Code with a 10-year term of loss carrying forward. With regard to the abovementioned person shall address to a tax authority according to place of tax registration. In such case, the time of limitation envisaged under Article 5 of this Code shall be 11 years that should be counted from the closure of a calendar year in which a person applied to a tax authority. 11 years time of limitation does not apply on a periods prior to a calendar year in which person addressed the tax authority".

15. The mentioned provision was used in practice towards the Claimant by the tax authorities and the first and the second instance courts as well. They indicated that the taxpayers right to change 5 years term for carrying forward the losses by 10 years term, is applicable only to loss exercised at the year of referring tax to the authorities with an address and years after (not prior) that. The Court and the administrative body indicated that 10 years term for carrying forward losses is in essential correlation with 11 years limitation period for tax inspection. According to the mentioned approach the purpose of the legislator was to allow carrying forward the losses only if tax authorities had an opportunity to inspect validity of the loss. Since the law clearly indicated that 11 years time of limitation does not apply on a periods prior to a calendar year in which person addressed the tax authority, the tax authority would not have an opportunity to check validity of the losses exercised in the years prior to the year of the address. Therefore, the court concluded that by allowing the right on 10 years term for carrying forward the losses to be applicable on the losses exercised prior to the year of the address, the taxpayer will receive the right to carry forward the losses, while tax authorities would not have the authority to inspect the validity of the loss, which would contradict the purposes of article 122 of the Tax Code of Georgia.

16. In order to determine the content of the disputed provision among other factors the Constitutional Court takes practice of its use into consideration. The general courts within the scope of their competency deliver final decision on normative content of the law, on its practical use and therefore on its enforcement. Therefore, the interpretation of the provisions made by general courts has huge importance for determining real content of the law. As a general rule the Constitutional Court considers and assesses the legal provision with the same normative content as it was used by a general court. However several exceptions might exist from this general rule, among them in cases when the Constitutional Court is certain that the interpretations of the law made by same instance courts are contradictory. In such cases the content of the provision cannot be considered to be ultimately defined by the general courts. Non-uniform practice of interpretation of the provision might also indicate to its vagueness and unconstitutionality. Besides that in exceptional cases the Constitutional Court is also authorised not to agree with the interpretation of the provision made by the general court if it is clearly unreasonable.

17. In the present case the Constitutional Court considered that applying 10 years term of carrying forward the losses only on the loss exercised at the year of addressing to the tax authorities and the years after that is not a result of unreasonable interpretation of the law by the general courts, since the intent of the legislators not to allow extension of 10 years term of carrying forward losses on the losses exercised in the year when the authority on tax inspection did not exist was clearly identified. Unlike the current version of the Tax Code of Georgia version in force at the time of adoption of the disputed provisions linked 11 years limitation period for tax inspection not to the year in which the loss was exercised, but to the year of presenting the address to the tax authorities. Besides that, unlike the current version, the law did not clearly indicate that the use of 10 years term for carrying forward losses was possible on the loss exercised before the year of addressing the tax authorities. Therefore, the judge of the general court could logically consider that the year of switching to 10 years term for carrying forward losses, similar to the 11 years limitation period for tax inspection was the year of addressing the tax authorities. Based on abovementioned the Constitutional Court takes the interpretation of the law made by the general court as an established criterion for defining the content of the above mentioned provisions.

18. Accordingly, in order to adjudicate on the present case it should be assessed whether the disputed provision causes the increase of tax burden of a tax payer arisen in the 2011 tax year in case the content of section 1 of article 122 (version in force before enforcement of the disputed provision) of the Tax Code of Georgia is understood as was interpreted by the tax authority and the general courts. According to the mentioned interpretation of the law a taxpayer had a right to use 10 years term for carrying forward losses only for the loss exercised at the year of addressing the tax authorities and the years after that.

19. It should be indicated, that 10 years term for carrying forward losses was introduced for the first time in Georgian legislation by the law of Georgia N206 “On Amendments and Addendum in The Tax Code of Georgia” of June 15, 2008 (date of publication 22/07/2008). By this law article 192² was added to Georgian Tax Code of December 22, 2004. The article prescribed the right to change 5 years term for carrying forward losses with 10 years term. By the same law, paragraph 34 was added to article 281 of the Tax Code of 2004. According to the paragraph application of 10 years term of carrying forward losses prescribed by the provisions of article 192² was extended only to the loss exercised in the year 2010 and years after that. The use of 10 years term of carrying forward losses was regulated accordingly till termination of the 2004 Tax Code (January 1, 2011). Therefore, the law in force till January 1, 2011 did not allow for the possibility for addressing the tax authorities and switching to 10 years term of carrying forward the losses for the loss exercised before the year 2010. Therefore, prior to January 1, 2011 there was no legal basis enabling a taxpayer to apply to the tax authority and use 10 years term of carrying forward losses for the loss exercised before the year 2010. Consequently according to the definition of the law offered by the general courts, in 2011 tax year there was no legal basis allowing deduction of loss which was exercised more than five years before. Therefore retroactive increase of tax burden on tax payer does not happen.

20. As it was already indicated the Claimant does not agree with the definition of section 1 of article 122 (version in force till May 29, 2012) of the Tax Code made by the tax authority and the general courts and considers such definition to be unreasonable. Specifically, the Claimant considers that according to section 1 of article 122 of the Tax Code of Georgia the tax payer was authorised to demand carrying forward the loss exercised not only in the year of addressing the tax authorities and years after that, but also to the losses exercised in the years prior to making such an address if at the moment of presenting the address 5 years term for carrying forward losses had not already been lapsed.

21. The Claimant applied to the tax authorities on October 2011 and demanded switching to 10 years term of carrying forward the losses sustained in the year 2006 and years after that. The Claimant also indicates that in the year 2011 it was not able to demand switching to 10 years term for carrying forward loss sustained in the year 2005, since at that moment the 5 years period had already been lapsed for the loss sustained in year 2005; therefore, its request would have been groundless.

22. In the present case, in order to provide comprehensive assessment of the disputed matter the Constitutional Court considers it appropriate to evaluate whether the disputed provision would have retroactive power in case section 1 of article 122 (version in force till May 29, 2012) of the Tax Code was interpreted as offered by the Claimant.

23. The Claimant considers that if not for the disputed provision the JSC “Liberty Bank” would have switched to 10 years term of carrying forward the losses in October, 2011 as a result of addressing the tax authorities and in the year of 2012 and years after that it would have deducted the losses sustained in the year 2006 and the following years. However, according to the statement of the Claimant party the disputed provision excluded the mentioned possibility, retroactively established by the law that the Claimant (and other tax payers in the similar situation) did not have such right.

24. It should be indicated that accounting of the taxable base for profit tax, as well as defining deductions allowed from taxable income is conducted at the end of tax year based on the law in force at the time. At the moment of accounting taxable base for profit tax of the year 2012 and the following years, section 47 of article 309 of the Tax Code of Georgia was already in force and this provision, by itself, independent from the disputed provision, prohibits carrying forward/deduction of the taxable loss sustained before the year 2010 for more than 5 years term. Prescription of rules regulating carrying forward the losses to the year 2012 and following years does not fall under the scope of the disputed provision. Right to carry forward the loss sustained before the year 2010 until the year 2012 and the following years for more than 5 years term was restricted for the Claimant based on the article 309 of the Tax Code, notwithstanding in which regime (5 of 10 years) of carrying forward losses it was at the 2011 tax year.

25. Pursuant to the Recording Notice N1/5/552 of September 20, 2013 (On the Case of JSC “Liberty Bank” v. the Parliament of Georgia) the Constitutional Court has already established that, in 2012 and the following years the right to deduct taxable loss sustained more that 5 years prior is restricted by article 309 of the Tax Code; however it is not a result of retroactive application of the law. Section 47 of article 309 regulated the legal relationships conducted after its adoption. The address to tax authorities is the ground for changing 5 years term for carrying forward the losses with 10 years term, but it does not by itself constitute realisation of right to deduct losses. As it was already indicated the right to deduct losses is realised not at the moment of presenting the submission to the tax authorities, but at the end of the calendar year, together with formation of taxable base for profit tax. Therefore, at the moment of adoption of section 47 of article 309 of the Tax Code the right to deduct taxable losses was not realised for the year 2012 and the following years and regulating it differently does not constitute retroactive application of the law. The disputed provision, similar to section 47 of article 309 of the Tax Code of Georgia relates to deduction of taxable losses from the gross income while calculating the taxable base for the profit tax. Therefore possible retroactive effect of the mentioned provision might be related not to the moment of making an address to the tax authority, but in cases when they regulate retroactively already realised right to deduction of taxable losses.

26. Based on the above mentioned, even if section 1 of article 122 (version in force prior to May 29, 2012) of the Tax Code of Georgia is interpreted as offered by the Claimant, the disputed provision could have retroactive effect only if it restricted the possibility of a taxpayer to deduct taxable loss for the year 2011 or retroactively increased already decreased and paid tax burden as a result of deducted taxable loss.

27. For the year of 2011 the need to use 10 years term for carrying forward losses existed only with respect to the losses sustained prior the year 2006. Therefore based on the disputed provision taxpayer might have lost the opportunity of deducting only if he/she/it had tax loss sustained in 2005 and years before that and exercised the right to carry forward the mentioned loss for 10 years term in the year 2011. Based on the definition made by the Claimant, in order to exercise the mentioned opportunity a taxpayer would have needed to have addressed the tax authorities till the end of 2010 (till 5 years period had lapsed) and had demanded switching to 10 years term for carrying forward losses for the loss sustained at the year 2005. As it was already indicated the Tax Code in force prior to January 1, 2011 prescribed the possibility to carry forward losses for 10 year term only with respect to loss sustained in the year 2010 and the following years. Accordingly it is impossible for a taxpayer who referred to tax authority with submission till the end of year 2010 and created the right to exercise 10 years term for carrying forward losses for the loss sustained in 2005 and years before that to exist. Based on above mentioned even if section 1 of article 122 (version in force till May 29, 2012) of the Tax Code is interpreted as offered by the Claimant, it will be impossible the disputed provision to increase tax burden of any taxpayer for the year 2011. Therefore, even under the mentioned circumstances, the disputed provision would not have retroactive power prohibited by the second sentence of paragraph 5 of article 42 of the Constitution of Georgia.

28. The Claimant party also indicates that a commercial bank has an obligation to periodically present financial statement to the National Bank. The actives and obligations of the bank are included in the statement. According to the Claimant a commercial bank is obliged to include the taxable loss which is deductable in the next year in the statement, because it constitutes an active pursuant to the international accounting standards. Therefore, the Claimant indicates that as a result of retroactive application of the law the taxable loss indicated by him in the financial statement becomes incorrect and it could be fined for presenting an incorrect financial statement to the National Bank.

29. The Claimant’s argumentation regarding the possible imposition of a fine on it by the National Bank might be relevant only in case there is a loss which was deductable by the JSC "Liberty Bank" and the right on the deduction was taken away based on the disputed provision. As it was already indicated the disputed provision regulates legal relationship from January 1, 2011 till May 29, 2012. Therefore in order the Court to consider possibility of imposition of responsibility on the Claimant, it is necessary to establish that it had taxable loss which due to the retroactive application of the disputed provision was incorrectly indicated (could have been indicated) in the financial statement presented to the National Bank during the period of time from January 1, 2011 till May 29, 2012. Even if the Constitutional Court agrees with the interpretation of section 1 of article 122 (version in force prior to May 29, 2012) of the Tax Code offered by the Claimant, the Claimant had the right on 10 years term of carrying forward the losses only on the loss sustained in the year 200 and the following years. The Claimant was authorised to carry forward the loss sustained in the year 2006 till the year 2011 based on 5 years term of carrying forward the losses. Therefore the argument of the Claimant regarding the possibility of imposition of a fine on the JSC "Liberty Bank" for incorrectly indicating deductable loss during the 2011 tax year is groundless. If the deductable loss is considered as an active, than considering the losses sustained in the year 2006 and following years as an active cannot be undermined by removing the right to carry forward the losses for 10 years, because for 2011 tax year the mentioned loss constitutes an active within the 5 years term of carrying forward the losses.

30. With respect to the period from January 1, 2012 till May 29, 2012, it should be stated that during the oral hearing on merits the Claimant indicated that in 2011 tax year he entirely deducted the loss sustained in the year 2006. Therefore in the period from January 1, 2012 till May 29, 2012 the Claimant did not have the loss sustained more than 5 years before, indicating of which in the financial statement might be considered as an offence because of the disputed provision. In the year 2012 consideration of the loss sustained in the year 2007 and the following years as an active does not depend on existence of 10 years term for carrying forward the losses, because authority to deduct (therefore consider as an active) the mentioned loss still exists within the 5 years term. Based on all above mentioned the arguments of the Claimant Party on the possibility of imposition of responsibility on it for presenting improper financial statement to the National Bank of Georgia caused by the disputed provision is groundless.

31. The Constitutional Court also takes into consideration the submission of the Claimant that the financial statement presented to the National Bank also includes short and long term prognosis of financial state of a commercial bank. Since the Claimant considered switching to 10 years term for carrying forward the losses was lawful, there is a real probability of the statement presented to the National Bank to be based on false data, which might lead supervisory body to a mistake. This statement of the Claimant unquestionably indicated that the disputed provision as well as article 309 of the Tax Code had influence on the Claimant’s financial state and had appropriate legal consequences as well. But the normative effect of the mentioned provisions is oriented on the perspective, is related to acts and circumstance which will take place in the future (even in the near future).

32. Paragraph 5 of article 42 of the Constitution of Georgia does not restrict the ability of the state to change a tax regime, if the change has effect in a perspective and does not result in the review of the legal relationships completed in the past. It is obvious that the decision of the state to harden tax regime, increase tax burden or cancel tax privilege changes expectations of a taxpayer, influences his/her/its future actions. Although adoption of tax privilege creates expectations, leads to suitable action of the tax payers, it would be incorrect to include such expectation within the scope of protection of paragraph 5 of article 42 of the Constitution of Georgia. It is also possible that the legal provision which violates the mentioned expectations might fall within the ambit of the right protected with different article of the Constitution. In the present case the court assessment is limited with checking the compatibility of the disputed provision with respect to paragraph 5 of article 42 the Constitution of Georgia as indicated in N552 Constitutional Claim.

33. Based on all above mentioned it is clear that the disputed provision does not create any additional tax burden on the Claimant retroactively and cannot become a ground for imposition of a responsibility. Therefore, the Constitutional Court of Georgia considers that the disputed provision does not aggravate legal conditions for the Claimant retroactively, accordingly it does not contradict paragraph 5 of article 42 of the Constitution of Georgia.

III
Ruling part

Based on subparagraph “f” of paragraph 1 and paragraph 2 of article 89 of the Constitution of Georgia, subparagraph “e” of paragraph 1 of article 19, paragraph 2 of article 21, paragraph 3 of article 25, subparagraph “a” of paragraph 1 of article 39, paragraphs 2, 4, 7 and 8 of article 43 of the organic law of Georgia “On the Constitutional Court of Georgia”, paragraph 2 of article 7, paragraph 4 of article 24, articles 30, 31, 32 and 33 of the Law of Georgia “On Constitutional Legal Proceedings”

THE CONSTITUTIONAL COURT
RULES:

1. The Constitutional Claim N552 (JSC “Liberty Bank” v. the Parliament of Georgia) on constitutionality of section 4 of article 2 of the law of Georgia “On Amendments in the Tax Code of Georgia” (document number – 6211, 15/05/2012) with respect to paragraph 5 of article 42 of the Constitution of Georgia shall not be upheld.

2. This judgment is in force from the moment of its public announcement on the hearing of the Constitutional Court.

3. The judgment is final and is not subject to appeal or review.

4. A copy of the judgment shall be sent to: the parties, the President, the Government and the Supreme Court of Georgia.

5. The judgment shall be published in the “Legislative Herald of Georgia” within the period of 15 days.

Composition of the board:

Konstantine Vardzelashvili

Ketevan Eremadze

Maia Kopaleishvili