By Dmytro Savchuk
Below, please see the article by my colleague Dmytro Savchuk touching upon accrual method in corporate income taxation.
One of the most anticipated changes brought by Title III of the Tax Code of Ukraine is a new method of determining income and deductible expenses.
Income and deductible expenses will be determined not under the "first event" rule enshrined in the Law of Ukraine "On Corporate Income Tax" (hereinafter - the “CIT Law”), but based on the accrual method. Under this method the income from the sale of goods is determined on the date of the transition of the title to such goods to the buyer, and the income from services rendered and works performed is determined on the date of the execution of the report or another similar document confirming the rendering of the services or the performance of the works. Deductible expenses making up the cost of goods (works, services) are recognized in the reporting period in which the income from the sale of such goods (works and services) was determined.
Given that the said procedure for recognizing income and deductible expenses coincides with the methodology defined by financial reporting standards, the transition from the “first event” rule to the accrual method may draw closer tax accounting and business accounting to each other. Differences that may arise between tax accounting and business accounting as a result of the application of the accrual method are said to be so-called tax differences. They result from the economically reasonable restrictions imposed by the state in respect of corporate income taxation. In addition, the convergence of tax accounting and business accounting may simplify the preparation of a corporate income tax return.
At the same time, against the background of the growth in receivables owed for the goods delivered, the transition to the accrual method in determining income may adversely affect the liquidity of some businesses.For example, the CIT Law stated that in case of the sale of goods (works, services) for state budget funds the income was recognized on the date of the receipt of the money or other consideration (the cash method). The Tax Code of Ukraine does not provide for an alternative to the accrual method.
At the same time, against the background of the growth in receivables owed for the goods delivered, the transition to the accrual method in determining income may adversely affect the liquidity of some businesses.For example, the CIT Law stated that in case of the sale of goods (works, services) for state budget funds the income was recognized on the date of the receipt of the money or other consideration (the cash method). The Tax Code of Ukraine does not provide for an alternative to the accrual method.
The suppliers of budgetary organizations will also determine income based on the accrual method. Since our budgetary organizations do not have the habit of timely disbursing their obligations, such taxpayers will have to pay tax on profits, which even does not exist yet.
In general, the determination of income and deductible expenses according to the accrual method is a very expected and favorable innovation in the tax legislation. Nonetheless, despite all the advantages of this method, some taxpayers would rather favor the cash method (income and deductible expenses are determined on the date when the respective funds are received/paid). For instance, the Tax Code of the Russian Federation enables certain taxpayers to opt, on their own, for the cash method.
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