Thursday, January 19, 2012

Expenses Related to Unified Tax Payers: No Return Back

Although the provisions of the Tax Code of Ukraine (para 139.1.12.) prohibiting corporate income tax players from including the value of goods (works, services) purchased from individuals-unified tax payers into the expenses (except for IT services) were repealed, the complete return to the good old days when the recognition of such expenses was performed almost without any restrictions, did not happen.

Under the new unified tax assessment rules, which came into force on 1 January 2012 (sections 291-300 of the Tax Code of Ukraine), not all unified tax payers are eligible to supply goods (works, services) to corporate income tax payers.

Whereas the third group of individuals-unified tax payers (paying the unified tax as a percentage of their revenue) enjoys no restrictions, the second and third groups of such taxpayers (paying the unified tax at low fixed rate) are rather confined in terms of the list of their activities and customers.

Number of the group of individuals-unified tax payers
The list of permitted activities
Possible customers (to whom the goods (works, services) may be supplied)
Trading goods at retail markets
No restrictions
Personal services
Only to people (not businesses)
Services, including personal services
Only to people (not businesses) and unified tax payers
Production and/or sale of goods
No restrictions
Restaurant business
No restrictions

There naturally arises the question as to what consequences may experience a corporate income tax payer that buys works or services from the unified taxpayers of the first and second groups at variance with those limitations.

In this respect, the legislature demonstrates a "noble silence", and therefore everything is in the hands of "pious" tax officials. In view of their usual arsenal of tools, it can be assumed that they either try to cancel the respective expenses of the corporate income tax payer or to charge it as an alleged tax agent of the unified tax payer with the additional tax liabilities on personal income tax. There is also the possibility that the tax authorities resort to these two methods simultaneously.

Although the legality of the above measures constitutes a big question, it does not make much sense once again to tempt the fate.

Another important point surrounding the cooperation with unified tax payers is that the corporate income tax payer is obliged to file along with its usual corporate income tax return the list of incomes and expenses obtained/incurred while dealing with the unified taxpayers (para 152.3 of the Tax Code of Ukraine, which entered into force on 1 January 2012).

To date, the model for the aforesaid list of incomes and expenses has not been approved yet, but I believe that by the end of the first quarter of 2012 the State Tax Administration of Ukraine will have coped with this not difficult task.

Wednesday, January 11, 2012

Top-5 innovations of Tax Code of Ukraine (for year 2011)

Below, I give 5 the most important, in my opinion, innovations of the Tax Code of Ukraine in terms of their influence on Ukrainian businesses:

1. Accrual method. Since the second quarter of 2011 the corporate income tax payers have had to forget about the good old method of "first event". The Tax Code of Ukraine replaced it with the accrual method. According to this method, income is recognized at the date of the transfer of the title to the goods or at the date of signing the acceptance certificate in respect of the supply of works (services). Expenses are recorded by a taxpayer in the period when it recognizes the income from the sale of the relevant goods (works, services).

2. Automatic VAT refund. Automatic VAT refund seems to be the pleasant surprise of the Tax Code of Ukraine. "Automatism” lies in that the VAT refund is provided without a documentary tax audit (based on a cameral tax audit only) and within a shorter time frame. Despite the active opposition of the tax authorities, some taxpayers did manage to obtain VAT refund on “automatic basis" in 2011.

3. Criminal case without issuing a tax assessment. In the event of a tax-crime the tax assessment is not issued to the taxpayer until the trial of the criminal case ends. This change deprived the taxpayers of one of the most efficient ways to fight against groundlessly instituted tax-crime cases. Before the Tax Code of Ukraine took effect it had been possible to abolish the tax assessment through administrative court and then based on the decision of the administrative court to have the resolution on the institution of the criminal case canceled through the general court.

4. The concept of beneficial ownership. The introduction of the concept of beneficial ownership into the Tax Code of Ukraine substantially increased the tax risks of Ukrainian holdings encompassing non-resident companies and as a result caused quite a stir among tax advisers. This concept is mainly applied to detect the possibility to use the tax advantage granted by a double tax treaty (a full exemption from or a reduced rate of withholding tax). According to the concept the enjoyment of the benefits of double tax treaties is only possible where the payment of income is made to a non-resident being a beneficial (actual) owner of income, rather than an intermediary, agent or nominee.

5. Restricted deductibility of expenses related to goods (works, services) received from non-residents and unified tax payers. The Tax Code of Ukraine brought the inconvenient for business restrictions related the deductibility of consulting, marketing, advertising and engineering services purchased from non-residents as well as the complete non-deductibility of the goods (works, services) acquired from individuals-unified tax payers, safe for IT services. While the non-deductibility of the goods (works, services) purchased from unified tax payers has been repealed since 1 January 2012, the restrictions pertaining to non-residents remain in force.

Lastly, in 2011 the market was really shocked by the non-deductibility of the previous taxperiods losses incurred prior to 1 January 2011. Nevertheless, the instant “achievement” should be ascribed not to the Tax Code of Ukraine, but to the tax luminaries of the State Tax Service of Ukraine who found "the time and inspiration" for this overly "advanced" interpretation of the Tax Code of Ukraine.