The company, which is a VAT payer, transfers fixed assets free of charge to another company-VAT payer. What tax consequences on VAT would have a person who transfers noncurrent asset?
According to paragraph 14.1.191 of the Tax Code of Ukraine of 02.12.2010, № 2755-VІ TCU (hereinafter - TCU) goods delivery is any transfer of the right to dispose of goods as owner including the sale, exchange or donation of such goods. Thus, the free transfer of item of fixed assets is considered to be its delivery.
As defined in para. 185.1 of TCU, the subject to tax is the transactions for the goods delivery of VAT payers, place of delivery of which is situated in the customs territory of Ukraine, according to Art.186 of TCU.
The date of tax liabilities for delivery of goods/services is considered to be the date, which is accounted for by tax period during which some of events happen that occurred earlier (para. 187.1 of TCU):
- date of crediting funds from the buyer/customer to the bank account of the taxpayer as payment for goods/services, which are the subject to delivery. And if the delivery of goods/services for cash – the capitalization date of funds at cash desk of the taxpayer, and in the absence of such - the date of cash collection in a banking institution providing services to the taxpayer;
- date of goods shipment, and in the case of export of goods - the date of issuance of the customs declaration certifying the fact of crossing the customs border of Ukraine, which meets the requirements of customs legislation, and for services – the date of registration of the document certifying the fact of services delivery by the taxpayer.
The point at issue is only about goods shipment (item of fixed assets) in the situation under consideration.
In general, provisions of para. 188.1 of TCU are used when determining the basis for VAT accrual. It is specified there that the taxation base of delivery of goods/services is determined proceeding from their agreed cost inclusive of state taxes and fees.
The tax base of transactions for deliveries of goods/services should not be lower than:
- purchase price of goods / services;
- cost of self-produced goods/services;
- book (residual) value of noncurrent assets under accounting data, arisen as of the beginning of the reporting period, when the supply of noncurrent asset was held; if the accounting of noncurrent assets is not maintained - not lower than the usual price.
In fact, agreed cost of the asset should be equal to zero when free transfer. Therefore, tax liabilities for VAT should be accrued based on the minimum taxation base. That is, in this case, the tax liability for VAT should be charged on the book (residual) value of non-current assets under accounting data, established at the beginning of the period when there was a delivery of noncurrent asset (if the accounting of noncurrent assets is not maintained - not lower than the usual price).
Additionally, a question may arise, should be tax liabilities for VAT charged when a free transfer according to para. 198.5 of TCU, if we included input VAT in a tax credit on such an asset in previous periods?
It should be reminded that in accordance with para.198.5 of TCU, VAT payer is obliged to accrue tax liabilities for VAT based on the tax base determined in accordance with paragraph 189.1 of TCU. And also the VAT payer not later than the last day of the reporting (tax) period should draft and register in URTI the consolidated tax invoice for goods/services, non-current assets (for goods/services, noncurrent assets acquired or produced before 01.07.2015, - in the case if VAT amounts to be included in the tax credit when such acquisition or production), if such goods/services, noncurrent assets to be intended for their use or come into use in transactions, which are not economic activities of the taxpayer.
However, economic activity is interpreted as being the activities of a person related to the production (manufacture) and/or the sale of goods, work delivery, services provision oriented to income receipt and to be conducted independently by such a person and/or through their separate units, and also through any other person acting in favor of first person particularly under commission contracts, letter of authority and agency agreements (paras. 14.1.36 of TCU).
Unfortunately, free fixed asset transfer has no any connection with business activities of the company. Therefore, taxpayers should formally recognize the lack of communication with the business activities of such a transaction and comply with provisions of para. 198.5 of TCU.
