PROOF OF LOSSES LINKED TO THE NATURE OF THE PRODUCT IN SPANISH LAW & JURISPRUDENCE

In the field of excise duties, product losses under a tax suspension regime are linked to a taxable event in a negative sense, since it would not be possible to release the product for consumption. Therefore, when reference is made to losses, it must necessarily be understood that a specific product, previously entered under a duty suspension arrangement, can no longer be placed into the market.

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In this regard, the EU Court of Justice has recently stated, referring to the concept of loss (judgment of 7 September 2023, case C 323/22 KRI SpA, paragraphs 48 and 50) that “In accordance with the usual meaning in everyday language of the word ‘loss’, the loss suffered by the authorised warehousekeeper refers to the fact of being deprived, wholly or in part, of something that it used or possessed. It follows that the disappearance of a product in the course of its production, processing, storage or movement constitutes a ‘loss’. Thus, the disappearance of a product which is under a suspension arrangement can mean only the material impossibility for that product to be released for consumption, or even to enter into commercial channels of the European Union”.

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The EU legislator, for its part, has extended that previous concept by associating losses with those products that can no longer be used as such because they have been damaged, pointing out, in Article 6, paragraph 6, of Directive 2020/262, that ““For the purposes of this Directive, goods shall be considered totally destroyed or irretrievably lost when they are rendered unusable as excise goods”.

Examples of the above would be the expiry of the consumption date for a drink in the scope of the excise duty on alcohol, or contamination of fuel, in the field of excise duty on energy products. The essential thing in all these cases, according to the EU regulation, is that losses had to be proven to be considered not taxable (excluding irregularities during circulation and robbery of products, since in both cases it cannot be excluded that the goods will subsequently be illegally introduced into the market, and therefore the concept of losses cannot be applicable).

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In this regard, until the entry into force of the current Directive 2020/262, the EU legislator fully recognized that no tax was applicable if the existence of a loss was demonstrated, whatever its origin. Thus, section 4 of article 7 of  former Directive 2008/118 laid down that: “The total destruction or irretrievable loss of excise goods under a duty suspension arrangement, as a result of the actual nature of the goods, of unforeseeable circumstances or force majeure, or as a consequence of authorisation by the competent authorities of the Member State, shall not be considered a release for consumption”, adding that ““The total destruction or irretrievable loss of the excise goods in question shall be proven to the satisfaction of the competent authorities of the Member State where the total destruction or irretrievable loss occurred or, when it is not possible to determine where the loss occurred, where it was detected”.

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Such a provision could therefore be considered as a general principle applicable for all Member States, regardless of whether they could establish their own rules in matter of losses.

With the implementation of new regulations by Directive 2020/262, however, a subtle, but in our opinion important change to the said principle, has occurred.

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The current article 6, sections 5 and 9 of the aforementioned Directive refers to the admission of losses, as long as they are proven, only in cases of unforeseeable circumstances, force majeure or authorization to destroy by the competent authorities, excluding, therefore, those due to the nature of the product (“The total destruction or irretrievable loss, total or partial, of excise goods under a duty suspension arrangement, as a result of unforeseeable circumstances or force majeure, or as a consequence of an authorisation to destroy the goods by the competent authorities of the Member State, shall not be considered a release for consumption. The total destruction or irretrievable loss, total or partial, of the excise goods as referred to in paragraph 5 shall be proven to the satisfaction of the competent authorities of the Member State where the total destruction or irretrievable loss, total or partial, occurred or, when it is not possible to determine where the loss occurred, where it was detected”).

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On the other hand, point 7 of said article refers to the losses linked to the nature of the product, laying down that in this case only will be admitted those ones not exceeding of the legal limits (“Partial loss due to the nature of the goods that occurs during a duty suspension movement between the Member States shall not be considered a release for consumption in so far as the amount of loss falls below the common partial loss threshold for those excise goods, unless a Member State has reasonable cause to suspect fraud or irregularity. That part of a partial loss which exceeds the common partial loss threshold for those excise goods shall be treated as a release for consumption”).

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It is true that this paragraph refers only to losses in intra-Community circulation under suspensive arrangement and not to those incurred during the process of production or storage, and that paragraph 8 of the same provision allows member States to establish their own rules relating to partial losses arising from the nature of the product in cases other than that described above, but the problem, in our opinion, arises since the possibility of admitting losses derived from the nature of the product and duly proven, when exceeding certain thresholds imposed by national legislation, has disappeared from the articles of the current Directive, and so the existence of a general principle recognized by the EU legislator can no longer be invoked in the event of an action carried out by the national authorities.

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In the case of Spain, due to the rules applicable at the national level and, above all, to their interpretation by the Courts of justice, it is accepted that losses resulting from the nature of the product exceeding the thresholds set by law and sufficiently proven are not taxable. This interpretation is based in the fact that said thresholds for production processes are set in the law in a general way, and that losses exceeding these common limits may occur in a given company due to specific circumstances such as the complexity of the production process, the contribution of raw materials related or not to excise duties, the characteristics of the devices used or, as the same EU legislator has recognized in section 11 of the Preamble of Directive 2020/262 referring to the elements to be taken into account for losses produced during transport, “the physical and chemical characteristics of the goods (such as nature of excise goods, especially energy products (volatility), the ambient temperature during movement, the distance of movement or time consumed during movement)”.

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Ignore these peculiarities, which entail the impossibility of release the product for consumption and imply, therefore, the non-production of the taxable event, constitutes, from our point of view, an injustice, and this has been fully understood by the Spanish Courts.

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As an example of what we have been explaining, we can mention the judgement 2469/2014 of the Spanish Supreme Court (case “Azucarera de Guadalfeo”) regarding the existence of losses in an alcohol factory greater than those legally established for the alcoholic fermentation process, in which said body admitted the losses “as it has been proven in the proceedings that the appellant incurred losses that exceed the regulatory percentage of 10% established in art. 90.1.letter a) of the Regulation, on the occasion of the alcoholic molasses fermentation processes carried out", reasoning in this regard that "This is deduced from the result of the expert test carried out in the instance, from which it appears that it was totally impossible to achieve 90% of the chemical-theoretical efficiency, (61.2 litres of pure alcohol for every 100 kilos of sucrose used), and that it was normal for fermentations to reach between 50 and 55 litres, because in the production of the alcohol there are two phases: a first, aerobic, in which between 15% and 20% of the sucrose is used to make the yeast necessary to transform the rest of the sucrose into alcohol, and a second, anaerobic phase, in which the yeast obtained in the previous phase joins the rest of the sucrose, and in which alcohol is obtained; in this phase the sucrose is transformed into alcohol, although not all of it, since the cane molasses (which contain the sucrose) has inhibitors to preserve them during transportation from the country of production, preventing them from fermenting during transportation.”

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In the interest of justice, we hope that this criterion will be maintained in the future, despite the significant modification suffered by the EU rules.