Decision No. 2 of 4 February 2014 on Constitutional Case No. 3/2013
The petition that was filed by 49 Members of Parliament is against § 44, p. 3, littera „а“ and p. 5 of the Transitional and Concluding Provisions of the Act Amending the Value Added Tax Act whereby paragraph 4 of Art. 169 was amended and paragraph 1 of Art. 179 of the Tax and Social Insurance Procedure Code (TSIPC) was repealed.
The petitioners believe that the amendments that they challenge affect the philosophy, principles and modus operandi of the retirement and health insurance systems in the Republic of Bulgaria inasmuch as they infringe on the underlyng principle as entrenched in the Constitution of their sources of financing, namely, the law-established earmarked funds that accumulate from the social security and health insurance contributions. The petitioners believe that a real risk arises to misappropriate retirement and health insurance contributions whose special purpose, under the law, is to finance the security and insurance systems so as to pay off taxes due, hence activities that, as the law prescribes, shall be financed by the Government budget with its tax receipts. The petitioners insist that such actions constitute a threat to the exercise of some fundamental social rights of the citizens.
The Constitutional Court granted the petition on grounds as follows:
Any act amending an existing act is a new piece of legislation that may be subject to control to make sure it is not unconstitutional. Pursuant to Interpretative Decision No. 22/1995 should a challenged text from such a piece of legislation be found to be unconstitutional, then the legal effect of rescission is to terminate the new provision and to restore the status quo ante.
1. The challenge of the constitutionality of the abolished paragraph 1 of Art. 179 of the TSIPC was found to be tenable.
The Constitutional Court assumed that tax payments and contributions (for social security and health insurance) rest on different legal grounds and have different legal implications. Though either group constitutes public claims, they are distinct in terms of legal nature, makeup and purpose. The major differences between the two groups are to be sought in the sources that generate their financing and in the funds management and spending. Expenditure for health and retirement schemes is dependent on the compulsory health insurance and social security contributions. These contributions are not to be seen as a tax as the scheme-covered person is entitled to relevant compensations whereas taxes are public claims against no entitlement.
The right to health insurance as per Art. 52, para 1 of the Constitution is of extreme importance for the life of citizens, hence the Constitution proclaims it a fundamental right. It is an irrevocable right (Art. 57, para 1 of the Constitution). Its existence derives directly from the Constitution as the supreme law. No doubt the same holds true of the right to social security and welfare aid as proclaimed by Art. 51, para 1 of the Constitution.
The Constitution does not specify the procedure and the mode of the practical exercise of the abovementioned social rights. It is the State that shall see that such rights are exercised as it codifies the needed social security system.
The Constitution makes it binding on the Legislature to provide guarantees that the Constitution-proclaimed rights will be exercised and to decline to pass acts that may infringe on these rights. The State is bound to guarantee and protect social rights and shall not impede the exercise of such rights. Constitutional protection comprises the obligation of the State to codify a social security system and to enable the operation of its different forms.
The Constitution defines the Bulgarian State as a state committed to the rule of law. Abidance by the Constitution and by the laws is the core of any state committed to the rule of law. The laws shall express the Constitution-proclaimed principles and put forward fair and socially justified solutions within the framework of the matter that they treat. The rule of Art. 4, para 1 of the Constitution is the underlying principle of constitutional order and the basis on which all relations within a society are legitimately regulated.
The principle of the state committed to the rule of law calls for clear, precise and unambiguous texts of the pieces of legislation. If the texts were not such, the legislation would be unfit to regulate the main relations within society. It is along these lines that an answer is to be given to questions whether the revenue and expenditure part alike of the social security and health insurance systems have been breached and whether the breach affected the guarantees that are to ensure the exercise of the citizens’ fundamental Constitution-proclaimed rights.
The repealed text of Art. 179, para 1 of the TSIPC made it binding to transfer the NRA (National Revenue Agency) received social security and health insurance contributions to the respective state social security accounts of the NSSI (the National Social Security Institute), to the NHIF (the National Health Insurance Fund) accumulation account and to the Fund „Guaranteed Claims of the Factory and Office Workers“ before the end of each working day. Thus a clear differentiation was made between the modes of the collection of specific public claims and their allocation to individual accumulation accounts that will finance the social security and health insurance funds.
The reasoning of some precedent Constitutional Court’s decisions differentiates between budget funds and other public special purpose funds. This is not accidental and is justified inasmuch as the precepts concerning such funds are different. The differences at issue concern the accumulation and the expenditure.
The rescission of Art. 179, para 1 of the TSIPC in contravention of the principle of the state committed to the rule of law creates uncertainty over the reception of the social insurance contributions made by the scheme-covered persons and over the allocation as all payments are made to a single tax and social-insurance account. There is some risk that when all insurance contributions and taxes paid-up are put in one basket, this may lead to misuse where they will be spent on purposes other than the purposes for which they have been collected and accumulated. In the Constitutional Court’s view the non-differentiation between public claims that are essentially different (tax payments and insurance contributions) is a real factor that may infringe on the Constitution-proclaimed rights of the citizens to social security and health insurance. It is a right and an obligation of the Legislature to establish the collection and expenditure procedure for social security and health insurance contributions, however, this should be done with clear and unambiguous rules that preclude any misuse of funds where they will be spent on purposes other than the purposes for which they have been collected and accumulated. The Constitutional Court found that as it is, the rescission of Art. 179, para 1 of the TSIPC abolished law-provided guarantees that the right to social security and health insurance will be exercised. The reason is that the new version tolerates the mix-up of sources of financing for insurance funds in one basket and this will inevitably impact the expenditure section and thus impinge on the exercise of the Constitution-guaranteed rights to social security and health insurance.
Given the fund-based organization of the social security and health insurance systems there must be precise rules to guarantee that the contributions collected are spent on what they are intended for and also to expose the sources of contributions to the funds. Prudential considerations like alleviation of administrative burden, minimization of bank transaction fees and reduction of the effective tax burden and suchlike shall not justify the abolition of already existing law-provided guarantees that the Constitution-proclaimed rights will be exercised. It is a fundamental constitutional principle that certain public interests shall not be justification for the curtailment of fundamental Constitution-proclaimed rights even of one individual citizen whereas possible exceptions shall be allowed only subject to Art. 57, para 3 of the Constitution.
The rescission of Art. 179, para 1 of the TSIPC conditions the abolition of the NRA’s obligation to remit the amounts of the compulsory social and health insurance contributions received on a daily basis to the NHIF and the NSSI respectively. Such an operation causes an apparent imbalance and creates a state of legal uncertainty which is incompatible with the principle of the state committed to the rule of law under Art. 4, para 1 of the Constitution. To fix a deadline by which transfers are to be made in legal acts of various degree is tantamount to unequal treatment of the different insurance systems, the public and the private one, and is seen as incompatible with the Constitution.
2. The challenge of constitutionality of the amendment to paragraph 4 of Art. 169 of the TSIPC is just as tenable.
Prior to the amendment Art. 169, para 4 of the TSIPC reads thus: „Taxes due shall be paid up in the order they arise and whenever they are owed for one and the same year, the person shall be free to declare which liability he or she extinguishes.“ The amended provision reads thus: „Whenever the debtor of several public claims as established by the NRA that he or she is not in a position to pay up all together pending the initiation of an enforcement procedure any amount received shall extinguish the liability of the relevant type whose maturity is the earliest one in relation to the payment date, unless otherwise provided for by law. Where the maturity of two or more public liabilities of the same type is on the same date, such liabilities shall be extinguished proportionately.“
The previous text of paragraph 4 of Art. 169 of the TSIPC determined solely the tax payments whereas the amendment challenged prescribes the same mode for all public claims, including the compulsory social security and health insurance contributions.
Despite the differences, the social security and health insurance funds continue to be governed by public law, so the precepts of private law shall not apply to them. The funds are a form of accumulation of money in the finance system and of earmarking such money for specific ends. The nature of the fund may be defined as a correlation of a specific category of financial resource with specific spending. It is important to stress that the related receivables are intended for the specific fund alone and shall not be reallocated to ends other than the intended ones.
With the Pay As You Go (PAYG) system, the social insurance contributions are made up primarily by the earmarked payments. With that system in place each fund has specific sources of income and specific beneficiaries that are entitled to benefit from the financial resource thus accumulated. It is inadmissible to take money from a fund it was intended for and shift it into another fund.
The exercise of rights and the fulfillment of the obligations to collect social security and health insurance contributions guarantee that social rights will be exercised. The fact that insurance contributions are not transferred to the funds that are administered by the respective competent authority (the NSSI and the NHIF), and that they are collected by the NRA does not change the proper party to the legal relationship of fund raising. The National Revenue Agency acts but as an intermediary to enable a more efficient collection of social and health insurance contributions in an effort to alleviate the administrative burden on citizens and businesses. The general collecting procedure that the TSIPC provides for cannot and shall not lead to a concoction of the legal nature of public claims as by doing so it will threaten the exercise of the Constitution-proclaimed fundamental rights of citizens. The text challenged provides a real opportunity to reallocate what the social security and health insurance contributions generate to for the payment of taxes due. The two kinds of public claims, i.e. the social security and health insurance, and tax payables, arise within the framework of different relationships that are governed by public law. The insurance relationship of funds accrual is established between the insurer and the insurance authority and is a major factor that is instrumental in the appropriate exercise of the Constitution-proclaimed subjective public right to social insurance where the accumulated resource is intended for a specific end.
The two kinds of contributions (social security and health insurance) are intended for ends that are established by law: they are to finance the health and the retirement systems. Taxes finance activities that, pursuant to law, are to be financed by the national budget. The social security and health insurance contributions correlate with rights that are enjoyed by the obligated persons and that the Constitution guarantees to them. In that context each individual should know all the time whether he or she are loyal payers and whether he or she may exercise the rights that a law-abiding citizen is entitled to.
The amendment to Art. 169, para 4 of the TSIPC deprives the payer of public claims of the freedom to choose what liability to extinguish first: taxes or social security/health insurance contributions. Thus a possibility is raised to reallocate collected social security/health insurance contributions to pay up taxes due. This is particularly conspicuous when employers deduct sums of money from the wages of scheme-covered persons and to their detriment so as to pay their contributions with their own money. If an employer, i.e. an insurer faces outstanding and exigent tax payables, the deduction thus made from the employer’s staff’s wages to be transferred to the single account might be used by the NRA to liquidate the employer’s unsettled tax liability. It is true the national insurance legislation respects the principle of guaranteed rights no matter whether the compulsory social security or health insurance contributions have been paid up. An employer’s failure to pay up the contributions will not strip factory or office workers of their entitlement to NHIF-compensated healthcare. However, the fundamental principles of operation and financing of the fund-based insurance systems have been infringed upon. The option of co-payment in the case of the insurance system is irrelevant.
The Court likewise found that the new wording of Art. 169, para 4 of the TSIPC causes controversies and uncertainties in the whole act inasmuch as it mixes up different raisons d'être about the occurrence of (taxation and insurance) legal relationships. The situation as it is conflicts with the principle of the state committed to the rule of law that appeals to the Legislature to keep away from the passage of laws and bylaws with precepts that exclude one another.