The prosecution instituted proceedings against two entities; a tobacco merchant (first accused) and a warehouse operator (second accused) on charges of tax evasion for possession of cigarettes without the required distinctive signs (tax stamps).
On May 27, 2020, the warehouse operated by the second defendant was inspected by the prosecution where eighty thousand cartons of cigarettes were found lacking any distinctive signs.
The cigarettes belonged to the first accused and were sent for storage with the second accused because they were then exported to Pakistan.
The first defendant admitted knowing that the goods did not have the required tax stamps and that no evidence had been provided by the seller validating the entry of the goods into the United Arab Emirates. The defense of the first accused was based on whether the legal provisions relied on by the prosecution were valid at the time of the indictment by the prosecution.
The second defendant, however, argued primarily that the storage service was performed as part of his licensed business activities, that he had no interest or benefit in evading the tax, and that none of the criminal elements were ‘was held against him.
The Federal Supreme Court upheld the conviction handed down by the Federal Court of Appeal against the first accused.
However, the Supreme Court overturned (reversed / annulled) the judgment of the Court of Appeal, holding that the mere presence of the goods in the warehouse of the second defendant is not sufficient to condemn the second defendant to have participated in tax fraud with the first defendant. .
Arguments – first accused
The first accused confirmed that:
- They sent the tobacco products to the warehouse of the second accused for shipment to Pakistan.
- They knew that the goods did not bear any distinctive signs (revenue stamps) because they were intended for export out of the country.
- They did not obtain documents from the party that sold the cigarettes proving their entry into the country through customs.
The first defendant argued – however – that the federal courts of first instance and appeal applied a repealed law, as the date of the arrest was May 27, 2020, and the provisions in force at that time were those of Law No. 2/2019 on the implementation of the law. Tobacco and tobacco product marking system.
Prior to Law No. 2/2019, the procedural law was Law No. 3/2018 – also on the implementation of the tobacco and tobacco product marking system.
Article 1 of Law No. 2/2019 set the date for the entry into force of certain prohibitions:
- Ban on the import of designated excise products without tax stamps from March 1, 2020.
- Prohibition on supplying, transferring, storing or possessing designated excise products without tax stamps as of June 1, 2020.
Article 1 of the canceled Law 3/2018 provided for similar prohibitions on importation and supply.
The federal courts considered that these changes between the repealed law n ° 3/2018 and the applicable law n ° 2/2019 were nothing more than a renewal of this ban and did not justify the storage of products subject to excise without the required marks.
Arguments – second accused
The second accused did not dispute that the goods had been seized from his warehouse, but insisted;
- the criminal elements of the conviction were lacking;
- his actions were in good faith;
- the goods were stored on behalf of third parties as permitted by its business license;
- that he had stored the goods seized belonging to the first defendant without knowing that they do not carry the distinctive signs (fiscal stamps) which would prevent their possession or their storage;
- that the first accused asked to store them in order to send them out of the country;
- and that the second accused had no interest in evading the tax imposed and due on the goods.
The main argument of the second accused (the storekeeper) was that he had been convicted despite the absence of the elements of the crime and the absence of criminal intent و and that he demonstrated the presence in good faith and that he was unaware that the stored cartons do not bear the distinctive marks (fiscal stamps) and that it has no interest in not paying the tax and that it has not violated the authorized commercial activity of the company in its license and that the tax law did not provide for the criminalization of storage work for others, and the seized property was in the possession of its owner – possession by means.
The second defendant focused on the argument that the judgments of the first instance and appellate courts did not prove the second defendant’s contribution to the non-payment of the tax and that the first defendant admitted that the goods belonged to him and that he deposited them in the warehouse of the second defendant until they were to be exported out of the country and the first defendant bears the full tax due.
The Federal Court of First Instance and Appeal relied on the testimony of the second accused during questioning with the Crown, which was quoted as follows:
“The second accused stated that during the questioning of the prosecution, a quantity of tobacco which was not allowed to circulate inside the warehouse of the second accused was seized and that it belonged to the first accused, and that the first accused had sent it to their warehouse for the purpose of storing it and then shipping it out of the country, but they could not export it and therefore it remained in their possession (to the second accused). This indicates that the second defendant participated with the first defendant in the evasion of tax provided for by the laws of the State and that he will be jointly responsible before the State with the first defendant for the payment of the tax due. and administrative fines.
Based on the testimony of the interrogation, the Federal Court of Appeal upheld the conviction of the second defendant in accordance with the order of the court of first instance.
Supreme Court trial
The first defendant was represented by the owner of the business in questioning and in liability.
The second defendant was represented by a corporate officer in questioning and in liability.
The allegedly evaded excise tax amounted to AED 320,000.
The allegedly evaded value added tax was 24,000 AED.
The legal provisions in question and reviewed by the Federal Courts were as follows:
- Articles 1, 2, 26 (1) of the Tax Procedures Law.
- Articles 1, 2, 4, 23 (1), 23 (2) and 23 (3) of the Implementing Regulations of the Law on Tax Procedures.
- Articles 2 and 4 of the Law on Value Added Tax.
- Article 1 of the Law on Excise Duty.
- Articles 1 and 2 of Cabinet Decision No. 42/2018 on the Marking of Tobacco and Tobacco Products.
- Articles 1, 2 and 3 of Cabinet Decision No. 38/2017 on Excise Products, Excise Tax Rates and the Excise Price Calculation Method.
- Article 1 of FTA Decision No 3/2018 on the implementation of the tobacco and tobacco product marking system.
In February 2021, the Federal Court of First Instance ordered the confiscation of the goods (amounting to a few million dirhams), the payment of excise duties and value added tax amounting to AED 344,000. and a four-month prison sentence for both accused parties. .
In June 2021, the decision was upheld by the Federal Court of Appeal.
The first and second defendants both asked the Supreme Court to overturn the judgment of the Court of Appeal.
In October 2021, the Federal Supreme Court ruled on the case.
Supreme Court judgment – first accused
The Supreme Court rejected the arguments of the first defendant and upheld the decision of the Court of Appeal convicting the first defendant of tax evasion for the supply, transfer, storage or possession of cigarettes without distinctive signs (tax stamps).
Supreme Court judgment – second accused
The Supreme Court quashed (overturned / set aside) the judgment of the Court of Appeal concerning the reasoning of the second accused as follows:
“It was proved in the evidence that the second defendant did not dispute that the goods had been seized in his warehouse, but he considered that the elements of the crime were lacking and that good faith was established, and that the second defendant stored for the benefit of others under his business license and that he had stored the seized goods belonging to the first defendant without knowing that they did not bear distinctive marks prohibiting their possession or storage, and that the first defendant requested that they be store to be shipped out of the country, and that the second defendant had no interest in not paying the tax imposed and due on the goods.
The judgment under appeal had established its bench by condemning the appellant [second accused] of what he mentioned in his testimony during the questioning of the public prosecutor that a quantity of tobacco which was not authorized to circulate inside the warehouse of the second accused was seized and that he belonged to the first accused, and that the first accused sent it to their [second accused] warehouse in order to store it and then ship it out of the country, but they were unable to export it, so it remained in their [second accused] possession. The Court of Appeal held that this indicates that the second accused participated with the first accused in evading tax under the laws of the state and that he is jointly and severally liable to the state with the first accused. payment of tax due and administrative costs fines.
What the judgment under appeal concluded is not valid in response to the defense of the second defendant and does not condemn him. In addition, the finding of the Court of Appeal according to which the mere presence of the goods in the warehouse of the second defendant is considered as a participation with the first defendant in tax evasion as provided for by the laws of the State, without indicating the laws criminalizing the act and validating the conviction, stigmatizes the judgment for insufficient causality and violates the [second accused’s] right of defense, which demands that it be set aside.
(The translation of the judgment is for informational purposes only and does not replace the official judgment. The original version of the judgment, found at the Federal Supreme Court of the United Arab Emirates, is the only final and official version.)
The Federal Supreme Court ruled that it was not valid to condemn the second accused of complicity with the first accused for the offense of tax evasion for simple storage of non-compliant tobacco products when no legal provision allows such conviction.
The Supreme Court ordered the annulment (set aside / annulment) of the judgment of the Court of Appeal concerning the second accused.