Top-5 innovations of Tax Code of Ukraine (for year 2011)

Below, I give 5 the most important, in my opinion, innovations of the Tax Code of Ukraine in terms of their influence on Ukrainian businesses:

Photo from http://www.tribalblogs.com

1. Accrual method. Since the second quarter of 2011 the corporate income tax payers have had to forget about the good old method of "first event". The Tax Code of Ukraine replaced it with the accrual method. According to this method, income is recognized at the date of the transfer of the title to the goods or at the date of signing the acceptance certificate in respect of the supply of works (services). Expenses are recorded by a taxpayer in the period when it recognizes the income from the sale of the relevant goods (works, services).

2. Automatic VAT refund. Automatic VAT refund seems to be the pleasant surprise of the Tax Code of Ukraine. "Automatism” lies in that the VAT refund is provided without a documentary tax audit (based on a cameral tax audit only) and within a shorter time frame. Despite the active opposition of the tax authorities, some taxpayers did manage to obtain VAT refund on “automatic basis" in 2011.

3. Criminal case without issuing a tax assessment. In the event of a tax-crime the tax assessment is not issued to the taxpayer until the trial of the criminal case ends. This change deprived the taxpayers of one of the most efficient ways to fight against groundlessly instituted tax-crime cases. Before the Tax Code of Ukraine took effect it had been possible to abolish the tax assessment through administrative court and then based on the decision of the administrative court to have the resolution on the institution of the criminal case canceled through the general court.

4. The concept of beneficial ownership. The introduction of the concept of beneficial ownership into the Tax Code of Ukraine substantially increased the tax risks of Ukrainian holdings encompassing non-resident companies and as a result caused quite a stir among tax advisers. This concept is mainly applied to detect the possibility to use the tax advantage granted by a double tax treaty (a full exemption from or a reduced rate of withholding tax). According to the concept the enjoyment of the benefits of double tax treaties is only possible where the payment of income is made to a non-resident being a beneficial (actual) owner of income, rather than an intermediary, agent or nominee.

5. Restricted deductibility of expenses related to goods (works, services) received from non-residents and unified tax payers. The Tax Code of Ukraine brought the inconvenient for business restrictions related the deductibility of consulting, marketing, advertising and engineering services purchased from non-residents as well as the complete non-deductibility of the goods (works, services) acquired from individuals-unified tax payers, safe for IT services. While the non-deductibility of the goods (works, services) purchased from unified tax payers has been repealed since 1 January 2012, the restrictions pertaining to non-residents remain in force.

Lastly, in 2011 the market was really shocked by the non-deductibility of the previous taxperiods losses incurred prior to 1 January 2011. Nevertheless, the instant “achievement” should be ascribed not to the Tax Code of Ukraine, but to the tax luminaries of the State Tax Service of Ukraine who found "the time and inspiration" for this overly "advanced" interpretation of the Tax Code of Ukraine.

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!