The norms that impose an obligation on small hydroelectric power stations to pay natural resources tax are compatible with the Satversme
On 25 March 2015 the Constitutional Court pronounced a judgement in Case No. 2014-11-0103 “On the Compliance of Subparagraph “f” of Para 1 of Section 3(1), Section 191 of Natural Resources Tax Law, the Cabinet of Ministers Regulation of 14 January 2014 No. 27 “Amendments to the Cabinet of Ministers Regulation of 19 June 2007 No. 404 “Procedures for the Calculation and Payment of Natural Resources Tax and Procedures for the Issuance of Permits for Use of Natural Resources”” with Article 105 of the Satversme of the Republic of Latvia.”
The obligation to pay the natural resources tax was established to promote more efficient and responsible use of natural resources, as well as to ensure revenue would be received by the state budget
The Contested Norms
The contested norms of the Natural Resources Tax Law impose an obligation to pay natural resources tax on the owners of hydroelectric power stations that have installed hydroelectric generation station with the capacity below 2MW (hereinafter also referred to as small HPS). The amount of the tax is 0.00853 euro per 100 cubic meters of water that has flowed through the hydrotechnical facility. The contested provisions of the Cabinet of Ministers Regulation set out the procedure for calculating the volumes of water flowing through the hydrotechnical facility.
The contested norms of the Natural Resources Tax Law entered into force on 1 January 2014. Before the contested norms were adopted, the owners of small HPS had not been obliged to pay the natural resources tax.
The Norms of Higher Legal Force
The Constitutional Court assessed compliance of the contested norms with the first and the third sentence of Article 105 of the Satversme. [15]
The first and the third sentence of Article 105 of the Satversme: “Everyone has the right to own property. Property rights may be restricted only in accordance with law.”
The Facts
The case combines two cases, which were initiated upon the constitutional complaints submitted by several tens of small HPS owners. The applicants indicated in the complaints that the obligation to pay the natural resources tax, which had been introduced in 2014, placed a disproportionate restriction upon their right to own property. Moreover, this restriction allegedly has no legitimate aim.
The Court Findings and Ruling
On the scope of reviewing the contested norms
First of all, the Constitutional Court examined whether the contested norms envisaged a restriction upon the right to own property. The Constitutional Court recognised that the contested norms of the law, insofar they envisaged the obligation to pay tax, placed a restriction upon the persons’ right to own property. The contested provisions of the Cabinet of Ministers Regulation on their own do not envisage the obligation to pay the natural resources tax, their purpose being to set out the procedure for calculating the tax based on the calculation of the volumes of water flowing through the hydrotechnical facility. [16]
Therefore, the Constitutional Court assessed the contested norms of the law and the provisions of the Cabinet of Ministers Regulation, insofar the latter set out the procedure for calculating the volumes of water flowing through a hydrotechnical facility, as a single regulatory framework. [16]
In assessing whether the restriction placed upon the right to own property is justifiable, the Constitutional Court must examine:
- whether the restriction upon the fundamental right has been established by law,
- whether the restriction has a legitimate aim,
- whether the restriction is proportionate to its legitimate aim. [17]
The restriction had been established by law
Opinions expressed in the Case differed as to whether the contested norms of the law had been adopted in due procedure, i.e., whether the legislator was entitled to include a draft law envisaging introduction of a new tax into the package of draft budget laws. [18.1]
The Constitutional Court recognised: taking into account the special procedure established for consideration of the package of draft budget laws, the Saeima must also assess whether all the draft laws contained in the package comply with the criteria specified in Article 871 of the Saeima’s Rules of Procedure. Article 871 of the Saeima’s Rules of Procedure defines that the package of draft budget laws consists of a draft law on the annual state budget and draft laws governing or amending the state budget, i.e. budget-related draft laws. Should a draft law fail to comply with the mentioned criteria, the Saeima must exclude it from the package of draft budget laws. The legislator has a right, as well as an obligation, to only include in the state budget law and the package of budget-related laws the matters relevant to a particular economic year and closely related to the use of the state funds. [18.1]
The Constitutional Court recognised that the contested norms of the law complied with the mentioned criteria. The norms established an obligation to pay the natural resources tax as of 1 January 2014; therefore, they were relevant to the particular economic year. [18.1]
The Constitutional Court concluded that the contested provisions of the Cabinet of Ministers Regulation, too, had been adopted and announced in accordance with the procedure established in the Satversme.
Thus, the Constitutional Court recognised that the restriction upon the fundamental right had been established by law. [18.2]
On the legitimate aim of the contested norms
The natural resources tax should be regarded as one of the so-called environmental taxes. The environmental taxes ensure that taxpayers’ activity is environmentally friendly. The legislator established the obligation to pay the natural resources tax on using water in economic activity, water being a vital resource to the society. [19]
The Constitutional Court noted that the contested norms were intended not only to achieve a more efficient and responsible use of natural resources, but also to ensure that the state received revenue, which could in turn be used, inter alia, to finance measures to improve the environmental situation. [19]
The Constitutional Court recognised that the legitimate aim of the contested norms was the protection of welfare of the society.
On the proportionality of restriction upon the fundamental rights
To assess the proportionality of the restriction upon fundamental rights, the Constitutional Court examines:
- whether the norm is appropriate for reaching its legitimate aim,
- whether no alternative, more lenient, measures exist that would allow reaching the legitimate aim at least at the same quality level,
- whether the benefit gained by society exceeds the damage inflicted upon an individual’s rights and lawful interests.
First of all, the Constitutional Court indicated that the specific nature of tax law influenced the scope of constitutional control. The state enjoys broad discretion when determining and implementing its taxation policy. As the Constitutional Court noted earlier, a person’s right to own property must not be viewed in isolation from a person’s constitutional obligation to pay taxes imposed in due procedure. Examining the legality of the restriction on fundamental rights, the Constitutional Court can mainly assess whether a tax payment proves to be a disproportionate burden for an addressee and whether the regulatory framework concerning the taxes complies with the general principles of law. In assessing whether a tax payment proves to be a disproportionate burden for an addressee, it must, inter alia, be examined whether the tax applied is not of a confiscatory nature. [20]
In assessing whether a tax payment is a disproportionate burden for an addressee, it must be taken into account that any tax is a constituent part of the tax policy, and that every person is normally obliged to pay several different taxes. The Constitutional Court recognised, though, that it was not bound to assess the proportionality of all the taxes the applicants were subject to. Such assessment would require reviewing the tax policy in various fields, which is not the task of the Constitutional Court. Therefore, the Constitutional Court only assessed whether the obligation to pay the natural resources tax on the use of water resources for power production on small HPS was compatible with the Satversme. [22]
To conclude whether the restriction on fundamental rights, as caused by the obligation to pay tax, is appropriate for reaching its legitimate aim, the Constitutional Court must verify whether the legislator’s action has a reasonable explanation, which is substantiated by objective and rational considerations, i.e.:
- whether the object of taxation and the tax calculation procedure have not been determined arbitrarily,
- whether the procedure for tax calculation allows determining the tax payment mathematically. [24.1]
The Constitutional Court recognised that the procedure for calculating the natural resources tax had a reasonable explanation, substantiated by objective and reasonable considerations. The Constitutional Court took into account, inter alia, that both the particular object of natural resources tax and the formula for calculating the volumes of flowing water had been chosen in order to promote more efficient and rational use of water resources. [24.1] The Court also recognised that the natural resources tax as state revenue allowed financing various social and economic measures aimed at protecting the welfare of society, which includes environmental welfare. [24.2]
Hence, the Constitutional Court recognised that the contested norms were appropriate for reaching the legitimate aim. [24.2]
Examining whether alternative, more lenient, measures existed, the Constitutional Court took into account that the legislator had assessed alternatives before adopting the contested norms. [25.1] The Court recognised that, in the given case, the absence of the tax could not be recognised as a lenient measure that would allow reaching the legitimate aim at least at the same quality level, especially considering that this tax performed a regulatory function. In order to reach a particular legitimate aim, the legislator has even a right to choose measures that could affect a person’s interest in starting a particular business or using particular technologies in business activity. Among other things, the legislator may use a tax to raise the expenditure of a respective business activity and thus restrict the amount of income that the person expects to get from it. [25.2]
Since the Constitutional Court found that the tax calculation procedure chosen by the legislator had a reasonable explanation, substantiated by objective and rational considerations, and that the legislator had weighed the alternatives to the contested norms, the Constitutional Court is not entitled to rule that the Legislator shall choose a different tax rate, a different procedure for tax calculation, or to include other elements in the tax calculation formula. [25.2]
Thus, the Constitutional Court recognised that no alternative, more lenient, measures existed that would allow reaching the legitimate aim at least at the same quality level. [25.2]
The Constitutional Court recognised that the benefit gained by society thanks to the contested norms exceeded the damage inflicted upon persons’ rights and lawful interests. The Constitutional Court recognised that small HPS contributed to the system of power supply in the state and to the strengthening of the state’s energy self-sufficiency. In addition to the benefit gained from electric power production in small hydroelectric power stations, the society benefits from a more efficient activity of those; thus, the overall welfare of society is promoted. The benefit gained by society – against the restriction on some taxpayers’ rights – consists in a more efficient activity of small HPS, as well as in the availability of state budget funds to be used for the protection of welfare of the society. [26]
Consequently, the contested norms comply with the principle of proportionality. [26]
Hence, the Constitutional Court recognised that the contested norms were compatible with Article 105 of the Satversme.
The Judgement by the Constitutional Court is final and not subject to appeal, it has entered into force.
Linked case: 2014-11-0103