We have previously written about the Gulbahar Rus case, in which the courts of three instances recognized the simultaneous imposition of excise duties on both disposable electronic nicotine delivery systems (ENDS) and the liquid in them as unlawful.

As TC expert Sergei Ivanov had previously anticipated, the Supreme Court of the Russian Federation overturned the decisions of lower courts and upheld the position of the customs authority. The expert commented on this decision in a Kommersant piece.

What will be the consequences for business?

Formal-legal

As the Constitutional Court of the Russian Federation pointed out in its Decision No. 592-0 of 18.03.2018, the failure to impose excise duty on liquids in ECDNs leads to the fact that this liquid enters the legal market, «ignoring» the law on the imposition of excise duty. In such a case, the main purpose of the excise tax - to limit the entry and consumption of liquid into the market by reducing the profitability of its producer - is not achieved.

Continuing this approach, in its Ruling the Supreme Court of the Russian Federation stated that from 01.03.2023 the excise duty on ESDN was abolished, and only liquids are recognized as excisable. The court points out that the legal regulation before 01.03.2023 and after this date are, so to say, unrelated things, as the legislator has the right to independently, at its own discretion to change and determine the legal regulation in specific periods of time. In this regard, the will of the legislator is as follows:

• before 01.03.2023 both device and liquids were excisable;
• after 01.03.2023 - only liquids.

It should be recognized that this approach of the Supreme Court of the Russian Federation does not take into account that market participants at a particular moment (importation of goods, payment of excise duty, etc.) have certain legitimate expectations regarding the interpretation and application of the current law. The approach of the Supreme Court of the Russian Federation may lay down a certain trend, according to which changes in the law, which only clarify or introduce a greater degree of certainty as to the correct approach to its application, may be qualified by the courts as a complete change in the legislator's approach to the regulation of these legal relations, which divides the law into «before» and «after». This may create certain risks in terms of uniformity of application of the law and lead to more frequent changes in the law enforcement approach. All this may adversely affect legal certainty and the investment climate.

Economic

The ruling of the Supreme Court of the Russian Federation will create a lot of problems for importers, as now the customs authorities will demand additional payment of excise duty on liquids for 2022 - February 2023.

At the same time, importers will have to think about where to get funds to cover the additional charges, since excise duty on liquids was not included in the price of ESDN. This could lead to:

• A sharp jump in the prices of current products (which, in turn, could also be subject to scrutiny by the tax authorities);
• a threat to the stability of the industry as a result of reduced profitability and possible bankruptcy of those companies for which the additional excise tax will become an unaffordable burden.

In general, the issue of minimizing the consequences of additional charges should be approached carefully in order not to create additional risks.

Thus, as our experts assumed, the outcome of the case of the Supreme Court of the Russian Federation has created significant legal uncertainty for business. The Tax Compliance team will continue to closely monitor the development of the situation.