Not a number, but an afterthought

The tax authorities won in the Supreme Court of the Russian Federation (SC) in the case of additional VAT and penalties on the amount of previously unpaid excise taxes on fuel mixtures (including “winter diesel”). Until 2020, such mixtures were not considered excisable goods, but then the Ministry of Finance revised its position, which resulted in additional excise taxes being charged to oil workers, including for previous years. Due to the non-accounting of excise tax in the price of goods, the FTS considered that companies also underpaid VAT on it (the so-called tax on tax). The Supreme Court eventually recognized the claims for VAT and penalties as legitimate. Lawyers note that this precedent creates risks for businesses of new additional charges for any taxes if the regulator at some point changes its position again.

The Supreme Court resolved the dispute between the Interregional Inspectorate for Largest Taxpayers No. 3 and OOO Tatneft-AZS-Zapad over VAT due to unpaid excise duty. Lawyers consider the decision of the Supreme Court a precedent and creates the risk of new additional tax charges to businesses, and not only from the oil industry.

A mixture of the Ministry of Finance with kerosene

Based on the results of the inspection for 2015-2017, the inspection in May 2021 additionally charged the company 90.3 million rubles. excise tax, 16.2 million rubles. VAT and 42.4 million rubles. penalties due to non-disclosure of information on the production and sale of excisable goods (a mixture of diesel fuel and kerosene, or “winter diesel”) in the reporting. According to the tax authorities, VAT was underestimated due to the failure to take into account the amount of excise tax. After the refusal of the higher tax authority to review this decision, Tatneft-AZS-Zapad went to court in February 2022.

The fact is that oil companies did not pay excise duty on fuel mixtures in 2013-2019, since the Ministry of Finance did not consider them excisable goods at that time. But in 2020, the ministry gave new clarifications according to which the excise tax on mixtures was to be charged, after which the tax authorities demanded that companies pay it in addition, including for previous periods.

Attempts by businesses to challenge this excise failed: in 2021, the Supreme Court recognized it as legal. In this regard, Tatneft-AZS-Zapad contested only the additional charge of VAT and penalties.

The Moscow Arbitration Court rejected the company’s claim, the appeal sided with the business, but the cassation again supported the tax authorities (more see “Kommersant” of June 28). Tatneft-AZS-Zapad appealed this to the Supreme Court, considering the additional VAT charge unfounded, since “the excise tax does not form an independent object of taxation”, and the tax base for the retail sale of diesel fuel “is formed based on the proceeds received from consumers”, but the excise tax was not taken into account in the price of goods in those years. From fines, the company pointed out, Art. 75 of the Tax Code (TC) in the event that “calculation and payment of tax are made on the basis of written explanations of the authorized state body” (here – the Ministry of Finance). The case was referred to the Economic Collegium, which in the end unexpectedly supported the tax authorities.

The Supreme Court noted that the tax base for VAT is defined as the cost of goods sold, including excises, while the amount of tax is calculated at the end of each tax period “taking into account all changes that increase or decrease the base.” The collegium also referred to the positions of the Constitutional Court of the Russian Federation (CC) dated April 29, 2020 and March 13, 2018, which stated that the excise “in essence, is intended, by influencing the price of a product of a certain category, to reduce the profitability of the production and sale of this product and thereby become a barrier to its entry into the market, and hence for its consumption.” Therefore, the legislator has the right to establish such features of the collection of excise upon sale, which “would cause the imposition of excise tax on each new supply of this excisable product to the market,” the Supreme Court pointed out.

Thus, “excises are an integral part of the value” of such goods, from which VAT is calculated, and if the excise was not paid, then it is legitimate to determine the actual value by increasing the sale price by the amount of the excise, the decision says.

According to the Supreme Court, changing the qualification of goods from non-excisable to excisable (as the Ministry of Finance did in 2020) can serve as a basis for recalculating VAT in such a way as if the tax “was initially presented for payment to the buyer within the framework of the actually formed price.”

Based on this, the collegium considered proven “the fact that the company underestimated the tax base for VAT” due to the non-inclusion in it of the amount of excise tax accrued as a result of the audit. The Supreme Court also recognized the accrual of fines as lawful. For the correct calculation of VAT arrears (using the rate of 18% instead of 18/118), the dispute was sent to the first instance.

Guilty without guilt

Lawyers state that the interests of the budget won in this dispute. Despite the transfer of the case for a new trial, its outcome “cannot be called positive even now,” since in fact only the issue of calculating the amount of arrears will be considered at the new round, points out Ekaterina Boldinova, partner at Five Stones Consulting. At the same time, although the tax has not been abolished, it will be mathematically recalculated downwards, says Artem Frantsuzov, Intana Legal tax practice adviser: “VAT is proposed to be calculated as if the excise includes it, that is, part of the excise will be paid at the expense of VAT. The tax authorities charged VAT on top of the excise.

According to Taxology partner Alexei Artyukh, the position of the Supreme Court “looks unexpectedly tough on both issues – both the legitimacy of additional VAT on the amount of unpaid excise duty, and the possibility of charging a penalty.” The Board, in fact, recognized that the explanations of the Ministry of Finance in 2013-2019 and the judicial practice that existed until 2020 “cannot justify the taxpayer and exempt him from penalties,” he points out.

Lawyers also have questions about the conclusions on VAT. “Unfortunately, the Supreme Court, following the tax authorities, formally approached the possibility of levying VAT on the part of the price of the goods that was actually not received by the taxpayer from the buyer (the same excise),” says Artyukh. Alexander Ovesnov, adviser to the practice of tax disputes at the IEF Legal, believes that the excise tax is a fixed tax and “cannot economically include the amount of another tax – VAT.” Aleksey Artyukh is also surprised by the reference of the Armed Forces to Art. 54.1 of the Tax Code, which prohibits the abuse of the right, as it applies to cases of deliberate tax evasion. “But here, non-payment of tax was the result of a change in the legal position of state bodies on the issue of calculating excises when mixing excisable goods. This is a story about tax methodology and interpretation of the law, so the mention of the “anti-abuse norm” looks incorrect and inappropriate,” says Mr. Artyukh.

Lawyers are also bewildered by references to the Constitutional Court’s clarifications on the essence of excise duty as a barrier to the sale and consumption of certain goods.

Historically, this applied to tobacco and alcohol products, Alexey Artyukh explains, but “today, a large number of harmless products are subject to excise taxes: cars, oil products, steel, perfumes.” In his opinion, it is “strange to refer to the nature of the excise tax” in a dispute about diesel fuel, “based on the idea that it is necessary to reduce the supply of goods on the market through tax regulation.”

The consequences of the decision of the Supreme Court will not be catastrophic for the oil industry, lawyers say. “The industry has already experienced the shock associated with a change in the approach to calculating excise in 2020-2021, and almost all companies now pay it. So the decision of the Supreme Court does not worsen the situation, but rather consolidates the current budgetary approach, depriving taxpayers of hope for improvements,” concludes Alexei Artyukh.

Nevertheless, according to Ekaterina Boldinova, in general, this is a “very unpleasant signal” for business, which can “create additional risks.” Thus, the Federal Tax Service “may apply this approach to other markets,” and the amount of VAT arrears and sanctions “may be huge,” she admits. In addition, Aleksey Artyukh argues, tomorrow the Ministry of Finance may again radically change the approach to the interpretation of any norm, “and if such a change is approved by the courts, taxpayers who conscientiously followed the previous explanations of the regulator will automatically owe the state not only tax, but also penalties with a fine, being innocently guilty.”

Ekaterina Volkova, Anna Zanina