New Year Tax Gifts 2014

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Co-author Andriy Kuleba

(junior associate of Lavrynovych and Partners Law Firm)

Dear readers, take our warmest wishes for upcoming New Year and Christmas!

Below is a brief account of what will be expected since 1 January 2014 in the area of Ukrainian taxation (so-called New Year Tax Gifts 2014). 

 

Tax Novelties since 1 January 2014

No	After Novelties Take Effect	Before Novelties Take Effect	Possible Consequences
VAT
1	The rate of VAT lowers to 17%*. *- It is expected by some commentators that the Ukrainian Parliament will change the law so as to avoid the reduction of the current 20% VAT rate in 2014.	The rate of VAT constituted 20%.	Favorable implications. Theoretically, it can cause the prices for VAT taxable goods and services to fall down by 2.5% with the resulting increase of total demand.
2	No requirement on the indication of the details of a customs declaration in the VAT invoice issued with regard to imported goods.	A VAT invoice issued in respect of imported goods must include the details of the relevant customs declaration.	The simplification of the procedure.
3	The supplies of grain crops (wheat, rye, barley, oats, corn, rice, sorgo, buckwheat, panic grass) and industrial crops (seeds of rape and sunflower) become VAT taxable.	Temporary exemption from VAT.	The exporters of the grain will run into a “headache” called “VAT refund”.
4	The supplies and imports of waste and scrap of ferrous and non-ferrous metals and the wood (certain items) become VAT taxable.	Temporary exemption from VAT.	Slightly forgotten problems for the exporters of metallurgical products related to the refund of VAT paid to the suppliers of the scrap and waste metals. It is not a rare occasion that the latter resort to non-transparent chains of supply in which the tax authorities are keen to discover “fake nature” deals.
5	Possibility to file for VAT registration by means of electronic communication (provided that there is an agreement executed between the taxable person and the tax authority on the recognition of the electronic documents).	No such possibility.	The simplification of the VAT registration.
6	The introduction of 5 calendar days term for the carrying out of in-office (cameral) audits of tax returns of VAT taxable persons with positive tax history for the purposes of automatic VAT refund. To have the positive tax history means to meet a number of criteria over 36 successive months.	In-office (cameral) audits for the purposes of the automatic VAT refund were to be carried out within 20 calendar days.	The acceleration of the VAT refund procedure for the taxable persons having positive tax history.
7	The cessation of the possibility of receiving VAT refund through the issue of financial treasury bills.	VAT refund was possible through the issue of financial treasury bills.	The VAT taxable persons lose the alternative way of VAT refund.
Corporate Income Tax
8	The rate of corporate income tax lowers to 16%*. *- It is expected by some commentators that the Ukrainian Parliament will change the law so as to avoid the reduction of the current 19% corporate income tax rate in 2014.	The rate of corporate income tax constituted 19%.	Positive implications. Reduced tax burden for enterprises.
Excise Tax
9	The rate of excise tax increases to UAH 32 for 1 liter of 100% spirits.	The rate of excise tax constituted UAH 29 for 1 liter of 100% spirits.	The increase in prices of alcoholic drinks.
10	The specific rate of excise tax for non-filtered cigarettes rises to UAH 77.50 per 1 thousand pieces, and for filtered cigarettes – to UAH 173.20.	The specific rate of excise tax for non-filtered cigarettes constituted UAH 72.70 per 1 thousand pieces, and for filtered cigarettes – UAH 162.60.	The increase in prices of cigarettes.
Administration
11	The introduction of documental unscheduled electronic audits for taxpayers using simplified tax system. Such audits are carried out exclusively at the instance of the taxpayer with the minor level of tax risk. The audits are called “electronic” considering that the documents for the audits are provided in the electronic form.	No such possibility.	This brings the unique possibility of having your tax calculations audited on a free-of-charge basis. The taxpayer applies to the tax authority and provides it with all required documents for the purposes of such an audit. The tax authority carries out the audit. Should tax irregularities be detected, the notice of assessment is not immediately issued. The taxpayer is given a time during which he is able to made the required adjustments himself (self-correction) without the imposition of 25 (50)% fine. At the same time, this does not exempt him from paying a 3 (5)% fine (for the self-correction of tax mistakes) as well as daily default penalty. If the taxpayer fails to correct the mistakes, the separate tax audit can be carried out with the resulting notice of assessment.
12	The Methodology of the Accounting of Temporary and Permanent Tax Differences comes into force (Accounting Standard “Tax Differences” approved by the order of the Ministry of Finance of Ukraine No. 27 dated 25 January 2011).	No such Methodology.	Additional requirements to the financial statements. Financial statements for accounting periods of 2014 should be prepared with the consideration of tax differences.
13	The applications on the voluntary VAT registration and on the selection of the simplified tax system regime may be filed directly with the Registrar of Companies at the moment of the state registration of a legal entity or a sole proprietor.	No such possibility.	More facile procedure for VAT registration and accession to simplified tax system regime.
Other Issues
14	The actual rates of ecological tax equal to 100% of the rates stipulated by the Tax Code of Ukraine.	The actual rates of ecological tax constituted 75% of the rates stipulated by the Tax Code of Ukraine.	Additional tax burden for ecological tax payers.
15	Renewal of real estate tax for individuals.	The real estate tax has already come into effect for individuals and legal entities. Nevertheless, since August 2013 the application of the tax to individuals has been suspended.	Additional tax burden for individuals holding residential real estate.

APPEALS FROM TAX ASSESSMENTS: NEW RULES FOR COURT FEES

Once again the rules for payment of court fees in cases involving appeals from tax assessments have been altered. The respective law on amendments to the Law on Court Fees entered into force on 23 October 2013.

*- minimum statutory salary taken into account for the calculation of court fees in 2013 amounts to UAH 1,147.

As one can see, the amounts of court fees have increased approximately twofold, but in most cases the payment will be at least half less at the phase of the filing of the claim. 
 

It is noteworthy that the procedure for payments of court fees has been also recently modified. Pursuant to its letter of 16 August 2013 No 12-4618/13 the State Judicial Administration of Ukraine abolished the requirement of putting an inscription "UAH ____ Remitted to the State Revenues (date)” being signed by the first and second officers of the bank and made under the bank’s round seal to a court fees-related payment order. 
 

Consequently, to date such an inscription on the payment order is no more mandatory. 

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Ukrainian Tax Litigation: Recent Trends

Co-author Andriy Kuleba

(junior associate of Lavrynovych and Partners Law Firm)

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One of the crucial problems faced by those bringing lawsuits against tax assessments is still the congestion of administrative courts in Ukraine. While at the level of the courts of first instance the mentioned problem is not heavily felt (in most cases tax disputes are resolved within one or two months), at the level of the courts of appeal and the Highest Administrative Court of Ukraine (hereinafter – the “HAC”) the situation is much more difficult. There are so many cases under the consideration of the senior courts that you will normally have to wait for the appointment of your court hearing for at least one year in the court of appeal and for at least two years in the HAC. It is obvious that bona-fide taxpayers are very unsatisfied with such state of affairs.

With respect to the categories of tax disputes, the situation is still practically without changes. The cases related to shams (“fake nature” deals) are leading in the number.

In this context it is worth mentioning new approaches of inspectors of taxes in their struggle against shams or perhaps it is more proper to say “pseudoshams”. At present, some “taxmen” not only “cancel” input VAT and deductible expenditure of a “guilty” taxpayer, but also compel such a taxpayer to enter into his accounts an additional income for the purposes of the calculation of taxes. They contend that since the taxpayer has actually received goods/services, but the underlying transaction was nothing, but a sham, such goods/services have been obtained by him free of charge and therefore should increase his base of assessment.

It also worth noting the landmark judgment of 14 November 2012 of the panel of justices of the HAC chaired by Justice Bukhtiiarova I. A. (“PVK “BUDIVELNYK”, LLC v State Tax Inspection in Obolon District of Kyiv, case No  2а-9864/11/2670). In this judgment the HAC came to the following revolutionary conclusions:

- the tax authorities do not have a right to qualify transactions as shams in their tax audit reports and 

 

- the presumption of the lawfulness of a transaction is applicable in the tax relations (a transaction based upon which the taxpayer obtains the tax benefit in the form of input VAT or deductible expenditure is not taken into account for the purposes of taxation if only there is a court judgment invalidating the transaction in question).

The aforesaid judgment with regard to the presumption of the lawfulness of a transaction directly contradicts the position of the HAC stated in its well-known letter dated 2 June 2011 No 742/11/13-11. In this letter HAC let us expressly know that the presumption at hand is not applicable in tax relations.

However, despite so different formal approaches even at the level of the HAC, the key role in deciding “sham cases” has been and is still attributed to the determination of the genuine (true) nature of underlying transactions based on primary accounting documents and other evidence submitted to the court. 

 

If the fake nature of a transaction has found its confirmation during the court hearings, it is very unlikely that such a “magic wand” as a reference to the absence of the judgment in respect of the invalidation of the transaction (the implementation of the presumption of the lawfulness of a transactions) can help you. 

 

The recently formed Ministry of Revenues and Levies of Ukraine also expressed its opinion on shams in tax relations (letter dated 27 May 2013 No. 3642/6/99-99-19-04-01-15). As usual, the “taxmen” were “unprecedentedly clear” in their statements, “The bodies of the State Tax Service in the discharge of their monitoring and controlling functions can reflect in tax audit reports the indicators of shams, but the additional tax assessment should be exclusively imposed for the breaches of tax rules”. What the Ministry was trying to say by these words remains the mystery. As one can see, we have not obtained a clear answer to the question whether the tax authorities are entitled to treat transactions between taxpayers as shams anymore.

Finally, we would like to mention an increase in the number of “transfer pricing” cases. Perhaps, not the least role here was played by the new transfer pricing rules (Article 39 of the Tax Code of Ukraine) which came into force on 1 January 2013.

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)

10 days for tax appeal

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The Tax Code of Ukraine sets forth two limitation periods in respect of challenging tax assessments in courts. The general rule is that a lawsuit against the tax assessment should be brought with 1095 days after the deadline established for the payment of the underlying tax liabilities (paras 56.18 and 102.1 of the Tax Code of Ukraine). However, where the taxpayer has already resorted to the administrative proceedings conducted by the tax authorities of the higher level, this period is reduced to one month after the cessation of such administrative proceedings (para 56.19 of the Tax Code of Ukraine).

Nonetheless, in practice, it is strongly recommended to challenge the tax assessments in court with 10 calendar days upon either (i) the receipt of the tax assessment or (ii) the receipt of the decision of the tax authorities of the higher level issued pertaining to the taxpayer’s appeal.

The point here is that after the expiration of the above 10 days term the tax liability becomes overdue (tax debt). Although the consequent filing of the action with the administrative court should result in the tax liability is no more considered to be overdue (para 56.18 of the Tax Code of Ukraine), this provision is very difficult to rely on in practice. If the action is not filed within the aforesaid 10 calendar days, the tax authorities may treat the tax liabilities overdue (tax debt) and take steps towards the collection of the tax debt.

What does it mean for the taxpayer?

First, the assets of the taxpayer (to the extent to which their book value is compatible with the amount of the tax debt) is subject to tax pledge. Accordingly, the taxpayer faces significant obstacles related to the disposal of his property.

Second, the taxpayer is deprived of the entitlement to an automatic VAT refund. The availability of the tax debt is sufficient ground for moving the taxpayer outside the scope of this simplified procedure (para 200.19.7 of the Tax Code of Ukraine).

Finally, the taxpayer may experience certain problems while applying for labour permits required for the employment of foreign people in Ukraine. In order to obtain such a permit the employer should summit the tax compliance certificate issued by the tax authorities*. It can be assumed that the indication of the tax debt in the certificate may be viewed as a hindrance for receiving the labour permit.

How to act if you see that you cannot manage to prepare and file the high quality lawsuit with the administrative court within 10 days after the receipt of the tax assessment?

The usual practical solution is as follows. The taxpayer lodges the “formal” administrative claim with the tax authorities of the higher level. At the time when the tax authorities are considering your claim (at least 20 days), you are preparing and filing the high quality lawsuit with the administrative court.

*- Para 5 of the Procedure for Issuance, Prolongation and Cancellation of Labor Permits for Foreigners and Stateless Persons approved by the Resolution of the Cabinet of Ministers of Ukraine of 8 April 2009 No 322.