Forbidden Corporate Income Tax Losses

By Roman Blazhko 

Not long time ago, the State Tax Administration of Ukraine (STAU) published its letter of 8 September 2011 No 828/3/15 regarding the unprofitable businesses adversely affecting the meeting of the Sate Budget’s revenues targets.

According to the position of STSU contained in this letter, the taxpayers are eligible to form their expenses in the second quarter of 2011 out of the losses incurred only in the first quarter of 2011, but not out of the losses incurred in the preceding tax periods.

This stance, in the tax authorities’ point of view, is bolstered by para 3 of subsection 4 of section XX "Transitional Provisions" of the Tax Code of Ukraine. This para sets out that the taxpayer includes the losses arisen in the first quarter of 2011 into the expenses of the second quarter of 2011, but does not expressly provides that the mentioned losses arisen in the first quarter include the losses incurred in the preceding tax periods.

The logic of STSU fails in the light of para 22.4 of Final Provisions of the Law on Corporate Income Tax. The para at hand definitely provides that the losses not qualified as expenses in 2010 (this law confined the losses that may be included into expenses to 20 per cent of the losses incurred as at 1 January 2010) as well as the losses incurred in 2010 may be included into the gross expenses in 2011.

Thus, the Law on Corporate Income Tax clearly stipulates that the losses arisen in 2010 and in the preceding tax periods are to be included into the gross expenses in 2011 (in the first quarter of 2011). Accordingly, the losses incurred in the preceding tax periods make up the losses of the first quarter of 2011, which, in their turn, by virtue of the aforesaid paragraph of "Transitional Provisions" of the Tax Code of Ukraine must be included into the expenses of the second quarter of 2011.

Hence, the taxpayers once again faced the choice of either throw themselves upon the mercy of the tax authorities or passing through all the labyrinths of the judicial system. Let fortune favor the brave!

Amendments to the Tax Code of Ukraine (Personal Income Tax)

By Roman Blazhko 

Closing the series of the posts devoted to the amendments made to the Tax Code of Ukraine by the Law No 3609-VI (draft law No 8217), at this stage I would like to focus on those of them related to personal income taxation. Please, bear in mind that in my posts of 29 July 2011, 18 August 2011 and 6 September 2011 I already outlined the amendments brought by this law with regard to the administration of taxes, VAT and corporate income tax, respectively.

Hence, personal income taxation was confronted with the following changes:

- it is clarified that, similarly to salaries, the unified social contribution does not constitute the tax base for the income derived from works (services) performed (rendered) under civil agreements;

- it is specified that a taxpayers is entitled to utilize tax discount only by the end of the year following the reporting year;

- it is determined that in the case a tax agent has accrued the income in favor of a taxpayer, but has not paid it to the taxpayer yet, such a tax agent is still under obligation to remit the personal income tax to the state budget and must do so within the period established by the Tax Code of Ukraine for the monthly reporting period;

- the approach to the recognition of securities traders, including banks, as tax agents was altered. While formerly they were considered tax agents provided that the respective agreement had been entered into with the taxpayer, pursuant to the amendments made they are treated as tax agents irrespective of the conclusion of the mentioned agreement.

- the list of incomes and expenses taken into account while assessing derivatives transaction was set forth.

Practice of the European Court of Human Right and VAT refund

By Roman Blazhko 

Recently, more and more tax disputes have had a bearing on the issue of the responsibility of VAT payers for the abuses committed by their suppliers in the chain of supply. According to the tax authorities, a VAT payer (buyer of goods) is not entitled to input VAT (“tax credit”) and, accordingly, to VAT refund if some of its suppliers in the chain of supply have not declared their tax obligations or appeared to be fictitious companies (for example, those that are not located at their registered addresses, those that do not have sufficient fixed assets, those that are understaffed, etc.).

The Law of Ukraine "On Value Added Tax" and commencing 1 January 2011 the Tax Code of Ukraine do not provide an explicit answer to the question whether the VAT payer (buyer of goods) is eligible for input VAT (“tax credit”) as well as to VAT refund in such cases.

Fortunately, the above question finds its solution in the practice of the European Court of Human Rights. The practice of this court is recognized as an independent authority and must be applied by the courts of Ukraine (art.17 of the Law of Ukraine "On the Enforcement of Judgments and the Application of the Practice of the European Court of Human Rights").

To date, one can note three judgments of the European Court of Human Rights touching upon the issue in question. These encompass the judgments in Intersplav v Ukraine (2007, application No 803/02), “Bulves" AD v Bulgaria (2009, application No 3991/03), and Business Support Centre v Bulgaria (2010, application No 6689/03).

In the case of Intersplav v Ukraine (para 38 of the judgment), the European Court of Human Rights found for the VAT payer stating that the latter can not be denied the entitlement to VAT refund in the absence of any indication of its direct involvement in VAT abusive practices.

In the case of "Bulves" AD v Bulgaria (para 71 of the judgment), the European Court of Human Rights found that the VAT payer should not be held liable for the abuses committed by its suppliers, if it does not have knowledge of those abuses or the means to obtain such knowledge.

In the case of Business Support Centre v Bulgaria the European Court of Human Rights reaffirmed its conclusions contained in the case of "Bulves" AD v Bulgaria.

Consequently, relying on the practice of the European Court of Human Rights, it is possible to contend that a VAT payer should not be deprived of the entitlement to input VAT (“tax credit”) and VAT refund in the case of the abuse of its suppliers in the chain of supply. The exceptions are the only situations where VAT payer was involved in such abuses, or it had knowledge of those abuses or the means to obtain such knowledge.

To finish with a happy end, it is worth mentioning that the domestic courts have gradually begun to apply the practice of the European Court of Human Rights in relation to VAT disputes. For instance, as at 8 September 2011 there were 47 and 102 court decisions in the Unified State Register of Judgments of  Ukraine citing Intersplav v Ukraine and "Bulves" AD v Bulgaria, respectively.

Amendments to the Tax Code of Ukraine (Corporate Income Tax)

By Roman Blazhko 

Extending the series of the posts devoted to the amendments made to the Tax Code of Ukraine by the Law No 3609-VI (draft law No 8217), I would like to touch upon the most noticeable of them (at least in my opinion) related to corporate income taxation. Please, bear in mind that in my posts of 29 July 2011 and 18 August 2011 I already outlined the amendments brought by this law with regard to the administration of taxes and VAT.

Hence, corporate income taxation was subjected to the following changes:

- It is cleared up that if the primary document does not specify the useful life of intangible assets, the useful life of the intangible assets is said to be 10 years.

- The problem on the non-deductibility of the expenses related to the acquisition of initially offered securities appears to be solved. Such expenses are recognized in the reporting period when the respective securities are sold by the taxpayer.

- The problem on the non-deductibility of the expenses related to the sale of goods advance payment for which was received before the effective date of Title III ("Corporate Income Tax") of the Tax Code of Ukraine and was included into the gross income under the “first event” rule (see in detail my post of 3 June 2011). The amendments enable to recognize those expenses on the day of the delivery of the goods, as well as to adjust income/expenses once the advance is returned to the buyer.

- The period during which taxpayers are immune from liability for corporate income tax violations was prolonged. The corporate income taxpayers can not be penalized not only over 2 and 3 quarters of 2011, but also over 4 quarter of this year.