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People who have had to deal with tax-related issues this way or another probably know about the long-lasting confrontation between taxpayers and tax authorities about the possibility/impossibility of carrying
forward tax losses incurred before January 1, 2011.
The confrontation ended in May 2012, as amendments were made to the Tax Code (paragraph
3 of Chapter 4 of Part XX), whereby:
- taxpayers whose income in 2011 was below UAH 1 million, are permitted to carry
forward such losses in full, based on the results of the first half of 2012;
- taxpayers whose income in 2011 equaled to, or exceeded UAH 1 million, are permitted to carry
forward such losses by degrees: 25% following
the results of the first half of 2012, 2013, 2014 and 2015,
respectively.
Tax officers decided not to stop at what has been achieved and interpret the above amendments to the Tax Code to their maximum benefit (to
raise additional public revenues).
This time, it hurt taxpayers that carry out securities transactions, mostly
banks and securities dealers. In its letter
No. 320/0/71-12/15-1217 “On Reflecting the Negative Financial
Performance of Securities and Derivatives Transactions in 2012-2015”, dated 9
August 2012, the State Tax Service of Ukraine explained that the
provision of the Tax Code related to the 25% partial carrying forward of tax
losses incurred before January 1, 2011 in 2012, 2013, 2014 and 2015, is
also applicable to the tax losses of securities and derivatives transactions
carried out by taxpayers whose income in 2011 equaled to, or exceeded UAH 1
million.
Therefore, in the opinion of the State Tax Service of Ukraine, corporate
profit tax payers whose income in 2011 equaled to, or exceeded UAH 1 million have the right to
carry forward in 2012 only 25% of the amount of tax
losses of securities and derivative transactions accumulated as of 1 January
2012. They will be entitled to carry forward the rest of such losses in 2013, 2014 and 2015 – 25% for
each year, respectively.
The tax losses to which the above-mentioned provisions of the Tax Code (regarding the gradual carrying
forward during 2012, 2013, 2014 and 2015) are applied, and the tax
losses of securities and derivatives transactions are two completely different things. Consequently, taxpayers and tax lawyers/advisors unanimously state that it is groundless
on the part of the tax authorities to apply the 25% restriction to securities and
derivatives tax accounting.
Even the Committee of the Verkhovna Rada of Ukraine on Finance, Banking, Tax and Customs Policy made a
comment regarding this issue. In its letter No.
04-39/10-990 of 10 September 2012, the Committee supported taxpayers and pointed out that it is groundless
for the tax authorities to apply the 25% restriction to tax
accounting of securities and derivatives transactions.
Be that as it may, the tax authorities stand their ground and actively implement the said letter of the State Tax Service of Ukraine. Under such
circumstances, a large number of judicial disputes may arise between the tax
authorities and taxpayers on applying the 25% restriction
to securities and derivative tax accounting.
To date, some decisions related to the problem in question can be found in the Uniform State Register of Court Decisions (for instance, a case concerning the claim lodged by Subsidiary enterprise “Polygraphic combine “Zorya” to the District State Tax Service
– the Central Office for Servicing Large Taxpayers, http://www.reyestr.court.gov.ua/Review/26237868). Unfortunately, in the above case the court did not analyze the lawfulness of applying the 25% restriction to securities and derivatives tax
accounting, and refused to initiate proceedings, being governed solely by
procedural rules.
No one knows how this story will end and what the court practice in cases on applying the 25% restriction to securities and
derivative accounting will be like. Looking at the issue of carrying
forward losses incurred by 1 January 2011, the court practice will hardly be
unambiguous.
It is most likely that courts, depending on their preferences and the level of concern about raising
public revenues, will make decisions both in favor of taxpayers and in favor of the tax authorities. It can even be assumed that the matter will be put to rest on a lawmaker – amendments that will be made to the Tax Code will establish whether the 25% restriction
should be applied to tax accounting of securities and derivatives transactions.
Hopefully, such amendments will provide that the above restriction will not be
applied. However, somewhere deep inside there is a feeling that things will turn out the
opposite of what we expect.
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