4 Problematic Issues of Unified Tax in the Life of Ukrainian Farmers

Unified tax of the 4th group (formerly known as  fixed agricultural tax) is for compelling reasons selected to be paid by the overwhelming majority of Ukrainian farmers.

Below, we have summarized those major issues that arise while paying this tax.

Problem No 1 - uncertainty for the future

The base of taxation is the official appraisal of land.  In 2018, a new all-Ukrainian official appraisal of agricultural land is being carried out  (in accordance with the resolution of the Cabinet of Ministers of Ukraine dated 7 February  2018 No. 105).

If the new official appraisal of land turns out to be significantly higher than it is of today, some farmers cannot see any economical sense in keeping paying  the unified tax. They may consider switching instead to the general system of taxation, including corporate profit tax.

However, let us not rush to conclusions. We are waiting for the results of the new official appraisal of agricultural lands.

Problem 2 - the impossibility of confirming the status of a unified tax payer in the presence of a meager tax debt

If your company for certain magical reasons is identified as one having a tax debt in a funny amount of several hryvnias as of 1 January, it is very likely that the tax authorities will not confirm your status of a unified tax payer for the new year.

Fortunately, there is court jurisprudence on this issue available in favor of taxpayers. Courts can uphold the following taxpayers’ arguments:

- the presence of a small amount  tax debt does not constitute a ground for the refusal to confirm the status of the unified tax payer (for example, the ruling of the High Administrative Court of Ukraine dated  6 September 2016 in the case No. 821/354/16);

- The existence of a tax debt may be a ground for the refusal to vest a farmer with the initial status of a unified  tax payer, but it cannot be a reason for not confirming his already existent this status (the resolution of the Supreme Court of 8 May 2018 in the case No. 816/1088/17).

Problem 3 - improperly executed lease agreements

To qualify  for the unified tax, it is necessary that the share of agricultural production of the taxpayer is at least 75% of his total production. The tax authorities are trying to maintain that the 75% share of agricultural production must be carried out mandatory on land, the rights to which are properly formalized.

Consequently, if your company’s  land comprises a significant portion of  land plots with no properly formalised rental rights, there is a risk of losing the status of a unified tax payer.

Fortunately, the tax authorities do not do this quite often now. It was much more interesting for them to carry out such inspections at the time when the special VAT regime for agricultural producers was still in force. Then they were trying to deprive farmers of both the  status of the subject of the special VAT regime and the status of a unified tax (fixed agricultural tax) payer at the same time.

There is also taxpayer-favorable  court jurisprudence in this context. The courts share the view that the whole crop of the farmer  must be taken into account for the calculation of the share of agricultural production, irrespective of whether it has been grown on land parcels rights  to which have been properly or improperly executed (for example, the ruling of the High Administrative Court of Ukraine dated 6 September 2016 in case No. 808/7906/13a).

Problem 4 - cultivating hayfields and pastures

It is not uncommon for today that farmers sow grain crops on pastures or hayfields. If you do so, it would be advisable for you to pay for such parcels of land the unified tax as if for  arable land, that is, taking into account the coefficient of 1,756.

Otherwise, there will  is the risk of an additional tax assessment.

A striking example of the additional assessment is the case No. 808/2649/17, in which courts, including the Supreme Court, found for  the tax authorities. In this case the tax authorities, having analyzed the taxpayer’s form SG-29 (СГ-29),  managed to ascertain that the taxpayer had used its hayfields as arable land. As a result, the taxpayer was charged the additional unified tax, taking into account the specified coefficient of 1.756. Moreover, a 25% fine  was imposed on the taxpayer for the underreporting of the unified tax.

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Unified Tax in Table Format

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The simplified tax system which at its outset numbered the two groups of the unified tax payers only showed the considerable rise and currently numbers as many as six groups of the unified tax payers (Chapter 1 of Part XIV of the Tax Code of Ukraine). 

What follows is the brief characteristic of today’s six groups of unified tax payers.

Number of group	Requirements to taxpayers				Rate of tax
	Individual entrepreneur/ legal entity	Permitted number of employees	Yearly revenue (gross receipts)  up to, UAH	Allowed business activities
1	Individual entrepreneur	0	150,000	Personal services Selling goods at retail markets	Fixed monthly charge in the range from 1 to 10 per cent of the minimum statutory salary. The precise rate is to be determined by local authorities.
2	Individual entrepreneur	Up to 10	1,000,000	Provision of services, including personal services, either to (i) other payers of unified tax or to the general public (B2C rather than B2B) Manufacturing and/or selling goods Restaurant business	Fixed monthly charge in the range from 2 to 20 per cent of the minimum statutory salary. The precise rate is to be determined by local authorities.
3	Individual entrepreneur	Up to 20	3,000,000	No special limitation	3 % charge levied on gross receipts (if VAT is additionally payable) 5 % charge levied on gross receipts (if VAT is not additionally payable)
4	Legal entity	Up to 50	5,000,000	No special limitation
5	Individual entrepreneur	No limitation	20,000,000	No special limitation	5 % charge levied on gross receipts (if VAT is additionally payable) 7 % charge levied on gross receipts (if VAT is not additionally payable)

Expenses Related to Unified Tax Payers: No Return Back

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Although the provisions of the Tax Code of Ukraine (para 139.1.12.) prohibiting corporate income tax players from including the value of goods (works, services) purchased from individuals-unified tax payers into the expenses (except for IT services) were repealed, the complete return to the good old days when the recognition of such expenses was performed almost without any restrictions, did not happen.

Under the new unified tax assessment rules, which came into force on 1 January 2012 (sections 291-300 of the Tax Code of Ukraine), not all unified tax payers are eligible to supply goods (works, services) to corporate income tax payers.

Whereas the third group of individuals-unified tax payers (paying the unified tax as a percentage of their revenue) enjoys no restrictions, the second and third groups of such taxpayers (paying the unified tax at low fixed rate) are rather confined in terms of the list of their activities and customers.

Number of the group of individuals-unified tax payers	The list of permitted activities	Possible customers (to whom the goods (works, services) may be supplied)
І	Trading goods at retail markets	No restrictions
	Personal services	Only to people (not businesses)
ІІ	Services, including personal services	Only to people (not businesses) and unified tax payers
	Production and/or sale of goods	No restrictions
	Restaurant business	No restrictions

There naturally arises the question as to what consequences may experience a corporate income tax payer that buys works or services from the unified taxpayers of the first and second groups at variance with those limitations.

In this respect, the legislature demonstrates a "noble silence", and therefore everything is in the hands of "pious" tax officials. In view of their usual arsenal of tools, it can be assumed that they either try to cancel the respective expenses of the corporate income tax payer or to charge it as an alleged tax agent of the unified tax payer with the additional tax liabilities on personal income tax. There is also the possibility that the tax authorities resort to these two methods simultaneously.

Although the legality of the above measures constitutes a big question, it does not make much sense once again to tempt the fate.

Another important point surrounding the cooperation with unified tax payers is that the corporate income tax payer is obliged to file along with its usual corporate income tax return the list of incomes and expenses obtained/incurred while dealing with the unified taxpayers (para 152.3 of the Tax Code of Ukraine, which entered into force on 1 January 2012).

To date, the model for the aforesaid list of incomes and expenses has not been approved yet, but I believe that by the end of the first quarter of 2012 the State Tax Administration of Ukraine will have coped with this not difficult task.