The
Law of
Ukraine
of
31
July 2014 №
1621
"On
Amendments
to the Tax
Code
of
Ukraine
and
Certain
Legislative Acts of
Ukraine"
introduced a radically
different
system of
VAT
administration.
The
new system,
called the electronic
system
of administration
will
take effect
from
1 January
2015.
Rationale
The
system of electronic administration is called to combat a favorite
item of many unconscientious Ukrainian entrepreneurs – conversion
of non-cash funds of their enterprises into unaccounted (black) cash.
It is quite possible today to transfer a huge amount of money to a
sham company for, say, something like "consulting services"
and receive that amount, less about 7-10%, in cash. By doing so, an
entrepreneur "kills two birds with one stone":
-
Reduces
the
tax burden
of
VAT
and
corporate income
tax (the costs of
the "purchased"
services are deductible for the functioning of the both mentioned
taxes);
-
Utilizes the resultant
unaccounted cash for
the “purposes of the business activities"
(paying
salaries “under the table”,
all sorts of bribes,
etc.),
as well as for personal
needs
(something like paying dividends to yourself).
It
is noteworthy that the system
of electronic
administration
will not likely get rid of the business of sham companies at all, but
it will strike a
severe blow to
their
effectiveness.
An attractive
price of
7-10%
of the converted
money is
largely
achieved
through
the evasion
of
VAT. Sham companies either do not
declare
output VAT arising
from the
supply of
their
goods/services at all,
or
fail to remit the reported VAT to the state revenues. The electronic
system of administration is directed exactly at closing the above VAT
evasion possibilities currently available through the recourse to
sham companies.
Sham
companies will be obliged to pay VAT,
and this will
mean
a
significant
rise in
prices
for
their services.
By
adding
20%
VAT
to
the price of
7-10%,
we obtain 27-30%
price.
This price will
be high enough to expect a
significant
decline in the business of the operators of sham companies.
First
of all, the new
system of administration
will benefit
the state
by
enlarging VAT revenues.
Conscientious business players will also gain from its introduction.
Their
unconscientious
competitors
will no
longer
receive
unjustified tax
benefits
arising from the “cooperation” with
sham
companies.
How
will this
work?
Under
the current administration system, VAT
is
payable
after the end of a taxable period.
A taxable person reports his input and output VAT for a taxable
period (as usual, a calendar month) in his VAT return.
Where the output VAT exceeds
the input VAT, the
taxable person remits the surplus
to the state revenues.
The
problem
of
the current system
is
the lack of a direct link between
a purchaser’s input VAT and a seller’s output VAT.
The seller
can
issue a VAT invoice
entitling the purchaser to the enjoyment of the input VAT without
either declaring
his output VAT or remitting it to the state revenues.
The
electronic system
will make
this swindle
impossible
due
to
the
implementation of the principles of
"prepayment":
a seller first
remits VAT
to the state revenues and only after the remittance has actually been
made the purchaser can enjoy its input VAT deduction.
The
“prepayment” principle is implemented through the introduction of
special VAT
accounts and the imposition of a limit
on
the
issuance of VAT invoices.
VAT
accounts.
VAT accounts are special bank accounts on which the amounts of VAT
will be held. These bank accounts will be opened in a centralized
manner by the State Fiscal Service of Ukraine (hereinafter - "SFSU")
for each taxable person. The accounts will be opened automatically.
Taxable persons will not have to carry out any formalities for having
them opened. All VAT accounts will be opened at Clearing
Сenter
for
Servicing
Contracts
in
the Financial Markets,
which
has
the status of
a
bank
under
Ukrainian law.
Funds
into VAT accounts
will be deposited by only
taxable persons to whom such accounts belong.
The transfer
of funds
to
these accounts by the counterparties of taxable persons (purchasers
of
goods/services) will not occur.
The
system
will
work
in such a way that the
amounts
accumulated
on
VAT
accounts
are usually
equal
to
the
amounts of VAT
remittable to
the state revenues.
Such
amounts
will be withdrawn by the SFSU itself according to the
relevant
registers
to
be submitted
to
the bank.
Moreover,
it is envisaged that in the event of VAT deregistration, all the
funds held on the VAT account of a deregistered taxable person will
be transferred to the state revenuers.
Limit
on the issuance of VAT invoices.
There will a limit on the issuance of VAT invoices that are not
guaranteed by the remitted VAT. There will be a special formula to
determine the maximum amount for which a taxable person is eligible
to issue a VAT invoice.
The
formula is as follows:
Σ
VATInv
= Σ
RecVATinv
+ Σ
Cust
+ Σ
Dep
-
IssVATinv
- Σ
Ref
-Σ
Surp,
where:
RecVATinv
–
input VAT under VAT invoices received from suppliers;
Σ
Cust
–input VAT equal to the amount of
VAT
remitted to the customs authorities on the importation;
Σ
Dep
-
amount deposited into a VAT account;
Σ
IssVATinv
– output VAT under VAT invoices issued;
Σ
Ref
– amount
of VAT claimed as VAT refund;
Σ
Surp
-surplus
of the output VAT indicated in VAT returns of a taxable person over
the output VAT specified
in
the VAT invoices issued by him.
The
surveillance of
the
amount for which
it
will be possible
to
issue a VAT invoice will be carried out automatically
by
the system
of
electronic
administration
on its own. For the purposes of
this
surveillance, there will be the cancelation of the printed paper
format of VAT invoices and the introduction of all-embracing
compulsory registration of VAT invoices in the
Unified Register
of
VAT Invoices (hereinafter - "URVI
").
The registration in the URVI will be done, regardless
of the amount
of
VAT concerned.
A right
to
an
input VAT deduction will be conferred only by those VAT invoices that
have been registered
in
the URVI.
The
aforesaid formula will apply at the stage of
the registration
of
VAT invoices in the URVI to determine
whether
a VAT invoice is within the
specified
limit.
If
the
VAT invoice does
not fit
in
with the
limit,
its registration
will be
denied.
Before registering
such
a VAT invoice in the URVI, the taxable person should deposit a
respective amount of funds into his VAT-account, thereby increasing
the above limit to the sufficient level.
Example.
As
one can see,
the new administration
system
is
quite complicated.
For
a better
understanding
of how
it works,
it is worth considering a
simple example.
Company
A
registered as a VAT taxable person on 15 January 2015. On 20 January
2015 it purchased from Company B
(VAT taxable person) stationery for UAH 120,000, including UAH 20,000
of VAT. In addition, on 22 January 2015 Company A
imported stationery valued at UAU 150,000 and remitted UAH 30,000 of
VAT to the customs authorities. On 24 January 2015 Company A
supplied all the foregoing stationery to Company C
(VAT taxable person) for UAH 420,000, including UAH 70,000 of VAT.
Questions:
1.
Should Company C
transfer the VAT included in the price of the goods supplied, to the
VAT-account of Company A?
2.
Does Company A
need to deposit some funds into its VAT-account with a view to issue
Company C
with a respective VAT invoice? If so, what amount it should be?
Answer
to the first question.
Company C
transfers all the funds in return for the purchased goods to the
current account of Company A.
No funds should be transferred by Company C
to the VAT-account of Company A.
If needed for the purposes of issuing a VAT invoice to Company C,
it is Company A
that must deposit funds into its VAT-account out of the funds
received from Company C.
Answer
to
the
second question.
To
determine
whether
Company
A
needs
to
deposit additional funds to its VAT-account
for the
issuance of a VAT invoice to Company C,
the
formula given
above
must be conferred with.
Given
that
in
the case under consideration Company
A
is a newly
registered
taxable person, the two following parameters will be decisive in the
application of the formula:
-
RecVATinv
–
input VAT under VAT invoices received from suppliers
and
-
Σ
Cust
–
VAT
remitted to the customs authorities on the importation.
By
way of adding
RecVATinv,
the
amount of which
is
UAH 20,000
(purchasing
the stationery from
Company
B),
and Σ
Cust,
the amount of
which is UAH 30,000 (the import
of the stationery), together, and subtracting
Σ
IssVATinv,
Σ
Ref
and Σ
Surp
equaling collectively to zero, we
arrive at UAH 50,000.
Thus,
one can conclude that Company A’s
limit
for
the issuance of VAT invoices is UAH 50,000.
In order to issue to Company C
a VAT invoice for the amount of UAH 70,000 of VAT,
Company A
should deposit an extra UAH 20,000
into its VAT account.
To
what should business be prepared?
Adverse
impact on cash flow.
With
the introduction
of
the new system
of
administration, there will be a need for additional
liquidity.
Under the new system, VAT must be remitted to the state revenues much
earlier
than it
is
today.
Currently,
the
overwhelming majority
of
taxable persons remit VAT within
30
days after the
end of
the taxable period
(20
days
for filing a VAT return,
plus 10
days
for
remitting the tax the state revenues).
Under the new system, a taxable person will part with the money much
earlier.
In the course of a
taxable
transaction
a
seller will need to deposit funds into his VAT-account
so as to enable the issuance of a VAT invoice to the purchaser.
After
the
transfer
of funds to
a VAT-account,
a taxable person loses the possibility of disposing of
such funds.
Therefore,
the time at which the money is being transferred to a VAT-account can
be
put on the same footing as the remittance of VAT to the state
revenues.
Depending
on
the time of
the implementation
of
a taxable
transaction,
the remittance of VAT to the state revenues can occur about
30-60
days
earlier.
For
instance,
if a
taxable
transaction
takes
place
at
the beginning of
a monthly
taxable period,
the VAT should be remitted about
60
days
earlier.
If
it takes place at the end of
the taxable period, the remittance should be made about 30 days
earlier.
Supplies/purchases
planning.
In
view of the new administration system, taxable persons should take a
more careful approach
to
the planning of theirs supplies/purchases to prevent
the excessive
"freezing"
of
their working
capital
on
the VAT
accounts.
Under
the present system
of administration the sequence of supplies/purchases made within the
same taxable period has no special significance for the determination
of the VAT bill. The VAT payable to the state revenues is calculated
at the end of the taxable period as a difference between output VAT
and input VAT. If this difference is positive, a taxable person
remits it to the state revenues. If it is negative, a taxable person
can claim it as a VAT refund payable from the state revenues.
Under the new system the sequence of supplies/purchases comes to the fore. An amount which a taxable person should deposit into his VAT-account will be determined at the stage of implementation of a taxable transaction, rather than at the end of the taxable period.
It
will be in the interests of taxable persons to organize
their work
in
such
a way that
the
purchases precede the supplies,
and
not vice versa.
Due
to
such
purchases
a taxable person will be able to accumulate the input VAT which can
be taken
into account
in the
increase in
the
amount for which
it
is possible
to
issue VAT invoices without depositing extra money into the
VAT-accounts. Thus,
the
taxable person will be able to
save
part of
the
cash that would
have
been transferred to the VAT-account had the supply preceded the
purchase.
Potential
problem
for
retailers.
Para 201-1.4
(“в”)
of
the Tax
Code
of
Ukraine
poses a potential problem
for
retailers
and other
businesses
that
sell
most
of their
products/services
to
customers
for
cash.
This
paragraph
provides
that
VAT collected from
customers
when
selling goods/services
for
cash goes to a VAT-account.
It
is not clear enough from the paragraph at issue whether the
transfer
of the collected VAT to the VAT-account is a right or an obligation
of
a taxable person.
If
the SFSU clings to the position
that
it
is an obligation,
retailers
and
other similar
businesses
can
get
in
a very
difficult
situation.
The transfer
of all the VAT received
from
the customers
to VAT-accounts will
mean
that those accounts will be in a state of permanent
"overpayment"
(amounts accumulated on the VAT-accounts
will be much greater
than
those calculated
in accordance
with
the above formula).
Given
the
necessity of complying with a number
of
formalities for getting the overpaid tax back,
the existence of
such "overpayments"
can be
quite
a
blow to
the
liquidity
of
the taxable persons concerned.
It
is hoped
that DFSU will take a weighted approach to
this issue.
In
Lieu of Conclusion
The
electronic
administration
system
is primarily
designed
to
combat the currently wide-spread illegal
business
of
sham companies concerned with the conversion
of black cash.
Hopefully,
it will succeed in its mission
and
the above illegal business will quickly shift from a
state of
prosperity
to a
deep recession
or
even
sink
into
oblivion.
In
spite of its progressive nature, the electronic system of
administration is not deprived of certain drawbacks as compared with
the classical system. The new system is more complicated to
understand and use. Furthermore, it creates additional pressure on
the cash flow of taxable persons. Businesses will need to seek
additional financial resources for the implementation of the new
system. It is not excluded that such a quest for additional financial
resources will lead to a general rise in the prices of goods/services
in Ukraine.
