International Business Articles
By Bartosz Dzionsko, Esq.
WINHELLER Attorneys at Law & Tax Advisors
We are currently observing increased controls of tobacco deliveries in Germany. In many cases, customs authorities seize the goods, initiate criminal investigations, and issue (sometimes) high tax bills against all parties involved (seller, forwarder, purchaser, and agent, if any).
Smoking Tobacco or Raw Tobacco?
According to Art. 5 of the Council Directive 2011/64, manufactured tobacco is subject to excise duty. The mentioned Council Directive has been transposed into the EU member states’ national legislations. Like most of the other EU member states, Germany has adopted the directive nearly literally in its Tobacco Duty Act (Tabaksteuergesetz; “TabStG”). According to this Act “manufactured tobacco” includes not only cigarettes, cigars and cigarillos but also smoking tobacco, hence tobacco, which can be smoked directly.
However, the tobacco duty does not apply to raw tobacco, which is uncut and unsplit tobacco that needs further industrial processing before it can be used as smoking tobacco.
Raw Tobacco Now Treated as Smoking Tobacco for Tax Purposes
In legal practice, however, the differentiation between raw tobacco and smoking tobacco is difficult. A Czech court, for instance, held that dried, partly stripped leaf tobacco fell within the definition of “manufactured tobacco” subject to excise duty. The European Court of Justice (ECJ) confirmed this view (Judgement of April 06, 2017, Case C-638/15). In its reasoning, the Court explained that leaf tobacco, although it is incapable of being smoked in an unfinished condition, has to be considered as manufactured tobacco, if only “simple processing” is required to make it ready to be smoked.
This means that, if raw leaf tobacco is capable of being smoked after simple processing like crushing or hand cutting, it is regarded as manufactured tobacco and, hence, subject to excise duty. In this way, the ECJ seeks to prevent companies from circumventing applicable tax regulations too easily by simply offering raw tobacco that can easily be made “ready to be smoked”.
Serious Problems for Tobacco Dealers and Their Suppliers
Tobacco dealers and manufacturers, which previously sold (stripped) leaf tobacco duty-free, are currently facing stricter controls by the German customs authorities. In many cases, the customs authorities now classify raw tobacco, which was sold and transported duty-free until only recently, as smoking tobacco. When customs authorities control a tobacco transport, they generally seize the goods, initiate criminal tax proceedings, and issue a (high) tax bill.
Especially back payments of tobacco duty can be significant and even largely exceed the value of the delivery. This development seems to be directly related to the above referenced ECJ judgment. We expect that following the German example, other EU member states will also increase controls in the near future. It is rather unlikely that the ECJ will overturn the legal precedent in this case. Back in 2016, the ECJ – in a different customs context – already classified non-stripped tobacco leaves as smoking tobacco in the above circumstances.
Directors and Employees May Face Personal Penalties!
Besides the civil-law consequences in case of a dispute among the contractual partners concerning the question as to who is ultimately liable for the damage (duties and loss of the goods), the threatened penalties under criminal law are even worse. Because the directors and employees are personally responsible. In this context, an accusation for tax evasion cannot be ruled out. This is punishable by a fine or imprisonment of up to ten years – in very serious cases, the minimum imprisonment is six months.
Tobacco Distribution to be Checked as a Matter of Urgency
Tobacco producers and dealers are recommended to urgently have experts check whether they should take action. It will be necessary to determine whether they produce and/or distribute taxable goods, whether they need to set up a tax warehouse, and whether transports need to be notified to the main customs office in order to ensure they can be carried out without payment of tobacco duty.
In the event that the customs authority has already seized a delivery, it will be important to verify whether the goods seized actually fall under the definition of “smoking tobacco” set out in the Tobacco Duty Act, and whether the person concerned really is liable to pay the duty. In practice, we have seen many cases, where customs authorities chose too simple solutions for these complex issues. Please do not hesitate to contact our experienced attorneys!