Disputes between producers of alcoholic beverages and tax authorities illustrate the significant variability of tax claims against representatives of this industry.

Below we suggest familiarizing ourselves with a number of such specific tax risks.

When alcohol is added to wine the increased tax rate should be applied

Joint-Stock Company "Winogradnoe".

Resolution of the Arbitration Court of the North Caucasus District from 14.12.2020 № F08-10331/2020 in case№A63-21822/2019

The tax authority at the end of the audit charged the company excise taxes on wine without adding ethyl alcohol from food raw materials and VAT, citing the fact that it unlawfully applied an underestimated rate of excise tax.

The Court of Cassation dismissed the taxpayer's claim to invalidate the tax authority's decision, stating that the disputed products (fruit (fruit) wine), taking into account the expert study is either a wine drink with added alcohol, or special wine, therefore, in accordance with Article 193 of the Tax Code, when calculating the excise amount in relation to the disputed product should be applied at a rate higher than that used by the company.

Underproduction is equated to sales and is subject to taxation

The case of LLC "Center-Product"

Resolution of the Arbitration Court of the North Caucasus District of 28.01.2019 № F08-11103/2018 in case№A63-14180/2016

In this case, the Company was charged with excise duty, fine and penalties on personal income tax for understatement of the volume of sale of ethyl alcohol in the disputed period.

The court of cassation instance, refusing to recognize the taxpayer's decision of the tax authority in terms of additional excise duty accruals as unlawful, pointed out that:

• the company has not documented the fact of destruction of alcohol;
• technical conditions and material resources for this operation are absent;
• In accordance with clause 4 of Art. 195 of the Tax Code, the identified shortage of products is equated with its sale and is subject to taxation.

It should be noted that the Supreme Court of the Russian Federation Decision of 15.05.2019 № 308-ES19-5653 refused to transfer the case to the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation to review the decision by way of cassation proceedings.

Tax deduction is limited to the limits of norms of technological losses and natural loss

Case of JSC ROSSPIRTPROM

Ruling of the Arbitration Court of the Moscow District on 05.03.2019 № F05-1244/2019 in case № A40-123860/2018 

The tax authority additionally assessed the advance payment of excise tax on alcohol products, penalties in connection with the conclusion that the taxpayer improperly reflected in the revised declaration the merged semi-finished liquor production, as well as the rejected liquor products as losses of purchased alcohol within the norms of natural loss.

The Arbitration Court of the Moscow Circuit sided with the tax authority, noting that technological losses and losses from marriage, during storage and transportation, as well as due to violations of the standards or rules for technical operation or packaging do not constitute natural loss of ethyl alcohol.

The key conclusion of the court should also be noted:

"In accordance with the provisions of Article 200 of the Tax Code of the Russian Federation, the amount of excise tax calculated in accordance with the provisions of Article 194 of the Tax Code, which organizations engaged in the production of alcohol products and (or) excisable alcohol-containing products on the territory of the Russian Federation, are paid in advance payments, can be reduced by the amount of excise tax that relates to irrevocably lost excisable goods in the process of their production, storage, transportation and subsequent technological processing. 

However, this deduction may be made only within the limits of norms of technological losses and (or) norms of natural loss approved by the authorized federal executive body, and since the actions of disposal actually carried out by the applicant, as correctly established by the courts of the first and appellate instances, do not belong to natural loss or to technological losses, the company had no grounds for the corresponding deduction. 

Subsequently, the Supreme Court of the Russian Federation by Ruling dated 31.05.2019 № 305-ES19-7167 refused to refer this case to the SCEC of the Supreme Court of the Russian Federation as well.

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The Tax Compliance team has considerable experience in representing taxpayers in courts of all instances when disputing tax claims.