Ecological Surprises of Tax Code of Ukraine

Photo from www.dashboardinsight.com

Our legislature does not allow the taxpayers to "relax" by affecting them again and again with the depth and scope of its "brilliant" ideas. This time it happened with the adoption of the Tax Code of Ukraine, in particular its chapter relating to duty for special use of water.

Whereas in the past pursuant to the Regulation on Procedure of Calculation of Duty for Special Use of Water* (para 4.8) business entities and individual entrepreneurs using water only for drinking and sanitation needs were exempt from duty for special use of water, there is no such exception for the present (para 324.4 of the Tax Code of Ukraine). To put it differently, an undertaking that does not carry out industrial activities associated with the use of water resources, and engaged in, say, the provision of financial, accounting or legal services still needs to pay duty for special use of water - just for the fact that there is cold/hot water available at its office and its employees use it.

The State Tax Service of Ukraine (the "STS of Ukraine") spelled out that duty for special use of water is not payable when the taxpayer buys drinking water in bulk water packs or when it leases its offices from the lesser (the Integral Base of Tax Knowledge published on the STS’s official  website, index 270.01). However, in the latter case, the burden to pay duty for special use of water still lies with the tenant if he rather than the lesser has directly entered into a contract for water supply.

Bank Forum tried to challenge in court the individual tax advice of the STS of Ukraine outlining the necessity to pay duty for special use of water in the situation under consideration (http://reyestr.court.gov.ua/Review/17074439). Expectantly, the result is negative. As noted above, the Tax Code of Ukraine does not provide exemption from the duty for special use of water for those using it only for drinking and sanitation needs. Hence, releasing the “non-manufacturers" from the duty for special use of water requires the respective amendments to be made to the Tax Code of Ukraine.

Another gift of fate for business has turned out to be ecological tax to the extent it concerns the taxation of waste disposal.

The stance of the tax authorities here is that ecological tax is payable by business entities even when they have entered into a contract for waste (trash)  removal with the enterprises licensed to collect and stock waste as secondary raw materials (the Integral Base of Tax Knowledge, index 300.01). The reasoning of the tax officers appears to be genius: before the transfer of waste (trash) to the aforesaid licensed enterprises the business entity has been keeping it for some time on its own territory. As a result, the exemption from the ecological tax (s.  242.1.3 of the Tax Code of Ukraine) covering the cases where waste is placed on the areas belonging to the enterprises licensed to collect and stock it as secondary raw materials does not apply.

Fortunately, there has been already a successful example of combating such "anti-waste" tax initiatives. Trading house  “Amstor "(large supermarket chain mainly located in Donetsk and Zaporizhia regions) proved the wrongness of the position of the  tax authorities before the Donetsk District Administrative Court (http://reyestr.court.gov.ua/Review/18677631). The court reversed the individual tax advice of the local tax office and found that the operation is not subject to the ecological tax if the taxpayer had entered into a contract for waste removal with enterprises holding the respective license.

Let us hope that in future the state will gift taxpayers with fewer such "ecological surprises”.

 

*- approved by the joint order of the Ministry of Finance of Ukraine, the State Tax Administration of Ukraine, the Ministry of Economy of Ukraine and the Ministry of Environmental Protection and Nuclear Safety of Ukraine dated 1 October 1999 No 231/539/118/219.

Doubtful Deductibility of Expenses Related to Advance Payment

Among many other issues accompanying the entrance into force of the Title III "Corporate Income Tax" of the Tax Code of Ukraine (the “Tax Code”) one can notice the issue on the deductibility of expenses related to the income recognized in accordance with the Law of Ukraine “On Corporate Income Tax” (the “CIT Law”).

Suppose that before 1 April 2011 (the effective date of Title III "Corporate Income Tax" of the Tax Code) your company received an advance payment for goods to be delivered and included this payment into its gross income pursuant to the “first event” rule laid down by the CIT Law. The company had not managed to buy those goods from its suppliers by 1 April 2011 and thus did not include their value into its gross expenses according to the above-mentioned “first event” rule. 

The Tax Code does not provide for the “first event” rule anymore, replacing it with the accrual method. According to this method deductible expenses are recognized in the same reporting period in which the income from the sale of the respective goods is recognized. 

Since in our situation the income was determined by the company before the introduction of the accrual method, it can be held that the company did not determine its income in the meaning of the Tax Code. As a result, the Ukrainian tax authorities believe that the company is disallowed to deduct the expenses related to that income (Integral Base of Tax Knowledge published on the State Tax Administration of Ukraine’s website in category 110.07.03).

It well appears to be unfair for the taxpayer not to declare the expenses related to the income recognized. On the other hand, the Tax Code, unfortunately, contains no provisions allowing a taxpayer to deduct the expenses forming the cost of goods if the income derived from those goods is not recognized pursuant to the Tax Code.

The taxpayer is put in the situation where it either must risk by deducting the expenses at issue or to concur with the position of the Ukrainian tax authorities and to suffer an extra tax burden. If the former way is chosen the probability of success appears to be rather theoretical, as there are no direct legal provisions supporting the deductibility. The maximum what the taxpayer can do is to refer to the rule of law provided by the Constitution of Ukraine. The rule of law is construed by the Constitutional Court of Ukraine as the maxim vesting the court with the right to decide based on equity if the applicable legislation appears to be unfair. However, given the current state of the Ukrainian court practice, the likelihood of the application of the rule of law is almost a delusive hope.

There is also an alternative option which seems to be more appropriate from the tax risk management point of view. The parties cancel the agreement under which the advance was paid, the seller returns the advance to the buyer, and finally the parties enter into the same new agreement. In this case the seller based on p140.2 of the Tax Code reverses its previously recognized income and forms the income and the related expenses pursuant to the Tax Code on the basis of the new agreement.

There is the risk that such a “maneuver” may be considered as being inconsistent with the tax legislation, as the tax authorities submit that the above p140.2 is only applicable to the income formed pursuant to the Tax Code. Nevertheless, this risk seems to be much lesser than one discussed above.