Legislation overview (August 2019)

Taxes

VAT

The State Fiscal Service of Ukraine through the Office for servicing large taxpayers drew the attention to the most common mistakes when submitting pay adjustment to a VAT declaration.

Mistake 1

When submitting pay adjustment to a VAT declaration the tax payers who determine understatement of tax liabilities by themselves forget to accrue and pay penalties in the amount of 3%. It is worth mentioning that the penalties are payed before submission of the pay adjustment.

Mistake 2

Improper reflection of line16.2 in the VAT declaration, specifically the balance of the pay adjustment negative value is increased/reduced.

One should remember that the value of the field 6 line 21 of the pay adjustment (both increase and reduction) are considered in line 16.2 of declaration for the reporting period when the pay adjustment is submitted.

Mistake 3

The payers improperly fill in a table (breakdown) to the VAT declaration where they must indicate pay adjustments included to the declaration.

Mistake 4

The payers in the VAT declaration report negative balance between the sum of tax liabilities and sum of tax credit (line 19). However, in case the pay adjustment is submitted instead of moving line 19 from the VAT declaration to the pay adjustment it is moved to line 18 “Positive balance sum between tax liabilities and sum of tax credit of the current reporting period”

Mistake 5

The payers submit empty adjustments. In this case the payer purposely reports absence of the activity for the month adjusted. In this case the taxmen have the variety of choices how to conduct audit.

Corporate Income Tax

The State Fiscal Service of Ukraine, through the Large Taxpayers Office, considered the requirements for tax royalty taxation provided for in the TCU.

Thus, in accordance with para. 140.5 of the TCU, the financial result of the tax (reporting) period is increased:

• for the amount of royalty costs (para. 140.5.6 of the TCU) (excluding transactions recognized as controlled under Art. 39 of the TCU) for the benefit of a non-resident (including a non-resident registered in the states (territories) referred to in para. 39.2 .1.2 of TCU) exceeding the amount of royalties increased by 4% of net income from the sale of products (goods, works, services) according to the financial statements for the year preceding the reporting period (excluding entities operating in the field television and radio broadcasting in accordance with the Law of Ukraine “On television and broadcasting”), and for banks exceeding 4% of operating income (net of VAT) for the year preceding the reporting period (restrictions are not applied by the taxpayer if the amount of such costs is confirmed by the taxpayer at the prices determined on the arm’s length principle, in accordance with the procedure established by Art. 39 of the TCU, but without submission of the report);
• for the full cost of royalties in full (paras. 140.5.7 of the TCU), if the royalties are charged in favor of:
  • a non-resident who is not the beneficial (actual) recipient (owner) of the royalty, except when the beneficiary (actual owner) has granted the right to receive the royalty to other persons;
  • non-resident in respect of objects for which the intellectual property rights first arose in a resident of Ukraine. The requirements of this subparagraph should not apply to cases where the subject of cinematography of royalty for the use of intellectual property rights (films, literary works, musical works, works of art, photographic works, phonograms, video grams), except when a resident of Ukraine is a subject of a cinematographer who has property copyrights and related rights as a result of the creation (production) of the aforementioned works, if he/she subsequently transmitted or made alienation of the property copyrights or related works to non-resident and provides charging royalties for the use of this object;
  • a non-resident who is not taxable on royalties in the country of which he/she is a resident.

The State Tax Service of Ukraine urged taxpayers to be careful when filing income tax returns. If you have any questions, you can contact your tax coordinator for assistance.

Excise Tax

The State Fiscal Service of Ukraine through the Large Taxpayers Office answered the question whether companies that manufacture alcohol-containing medicines should be registered as the excise taxpayers.

According to paragraphs. 14.1.6 of TCU excise warehouse, in particular, it is specially equipped premises in a limited territory (hereinafter – premises) located in the customs territory of Ukraine, where under the control of the permanent representatives of the controlling body the excise warehouse manager conducts his/her economic activity by producing, processing , mixing, bottling, packaging, packaging, storage, receipt or dispensing of ethyl alcohol, vodka and liqueurs.

The manager of the excise warehouse is an entity that has been licensed to produce alcohol, alcoholic beverages, registered by the taxpayer of exercise tax (para. 14.1.224 of TCU).

The list of persons belonging to the excise taxpayers is defined in para. 212.1 of TCU. Excise taxpayer is a person who is charged with fulfilling the conditions for the intended use of excisable goods (products), which are subject to a tax rate of UAH 0 per 1 liter of 100% alcohol, in case of violation of such conditions.

The production (purchase) of ethyl alcohol by manufacturers of medicinal products is carried out in order to use it as a raw material for the production of medicinal products, in particular, in accordance with paras. “б” of para. 229.1.1 of TCU.

The Cabinet of Ministers of Ukraine Resolution “Issue of use of ethyl alcohol for the production of medicines” of 05.01.2011, No. 19 approved the annual quotas for the dispatch to the manufacturers of medicinal products of ethyl alcohol used for the production of medicines (including blood components and products made from them), except for medicines in the form of balms and elixirs, at the rate of excise tax in the amount of UAH 0 per 1 liter of 100% ethyl alcohol.

In accordance with the requirements of para. 229.1.4 of TCU, enterprises, which use zero-rate alcohol, have established tax posts, the procedure of which was approved by the Ministry of Finance Order No. 9 of 23.01.2015.

Therefore, the TCU does not provide for the obligation to register excise tax payers of companies that manufacture medicinal products using ethyl alcohol, except in cases of breach by the entity of the conditions for the targeted use of ethyl alcohol, and the formation of medicines on the territory of the manufacturer of excise warehouse.

PIT and War Tax

The Ministry of Finance of Ukraine by its Order “On Amendments to the Order of the Ministry of Finance of Ukraine dated October 02, 2015 No. 859” of 25.04.2019 No. 177 approved the form of the tax declaration on property status and income and updated the instruction on its completion.

In addition to the tax return form itself, there are three annexes to it:

• calculation of personal income tax liabilities and the war tax of income derived from investment property transactions (Annex Ф1);
• calculation of personal income tax liability and the war tax of income received by self-employed (Annex Ф2);
• calculation of the amount of tax reduced by the personal income tax liabilities in connection with the use of the right to a tax exemption (Annex Ф3).

The need to update the property tax return and income has arisen due to changes in tax legislation.

In particular:

1. To expand the list of expenses allowed for inclusion in the tax rebate. Namely, they supplemented paras. 166.3.9 of the Tax Code of Ukraine (hereinafter – TCU), which provides for the right to include the amount of funds in the form of rent in the tax exemption under the lease of a dwelling (apartment, house), made in accordance with the requirements of the current legislation, actually paid by the taxpayer who has status of internally displaced person.

2. As the list of expenditures for the application of the right to a tax exemption has been increased, the procedure for calculating the amount of tax reduced by the tax liabilities on personal income tax (hereinafter – PIT), in connection with the use of the right to a tax exemption, has been separated in a separate annex Ф3.

3. Amounts of remunerations and other payments accrued (paid) to the taxpayer in accordance with the civil contracts by individuals – payers of the unified tax of group 4, who operate exclusively within the farm, their recipient is obliged to include in the income in the annual tax declarations for the reporting year and pay taxes and fees independently. A separate line 10.2 was provided in the form of a tax return for the implementation of the stated norm to reflect the stated income.

4. The amount of tax levied by the tax agent on the income for the lease of land plots to individuals (sublease, emphyteusis), such a tax agent pays to the appropriate budget at the location of such objects of lease (sublease, emphyteusis). Separate lines are provided for the implementation of the specified norm in the form of tax return:

“10.4.1” – for reflection of the stated incomes;

“17” – to reflect the tax (military levy) on such income.

Simplified Tax System

The State Fiscal Service of Ukraine in its Individual Tax Advice “Regarding Reflection of the Company in the Tax Calculation under f. 1 ДФ payments in favor of the individual – unified tax payer who provided services to a seconded employee” of 29.07.2019, No. 3545/6/99-99-13-02-03-15/ІПК reported: if the legal entity did not pay, but only compensated the employee for the cost of a business trip, it is not necessary to reflect in f. No. 1 ДФ payment of the last funds for services provided during the business trip of individual-entrepreneur – the unified tax payer (hereinafter – individual entrepreneur).

But if the calculation (payment) of incomes was made by the company directly to the entrepreneur, it acts as a tax agent in the part of reflecting such accrual in the form No. 1 ДФ on the basis of income “157”.

Representatives of the fiscal office stressed that if the payment of the cost of services for hired workers on a business trip came to the account of an individual-entrepreneur of group 2 from a legal entity that is not the unified tax payer, the conditions of stay on the simplified system will be violated. The individual entrepreneur will lose the right to be on the unified tax.

Accounting and Reporting

The Ministry of Social Policy of Ukraine by its Order “On Approval of Reporting Form No. 1- ПА “Information on the Number of Employed Citizens by Business Entities who Provide Employment Mediation Services” and the Order of its Submission” of 03.06.2019 No. 851 approved the Report Form No. 1-ПА “Information on the number of employed citizens by economic entities providing employment mediation services”, as well as the procedure for its submission.

Business entities will report on the form specified, who:

• provide employment mediation services in Ukraine,
• hire employees to continue their work in Ukraine with other employers,
• provide employment mediation services abroad.

If the entity has branches, representative offices, branches and other separate units, such entity will file the specified report No. 1-ПА on the results of the activities of all its units.

Form No. 1-ПА should be submitted on a quarterly basis to the city, district and city district employment centers no later than the 15^th of the month after the reporting quarter (in electronic or paper form).

Control and Responsibility

The Cabinet of Monsters of Ukraine approved the Resolution developed by the Ministry of Economic Development, which approved the rules of insurance against commercial and non-commercial risks, reinsurance and guarantees of the Export Credit Agency.

The Government’s implementation of the decision is a continuation of a set of measures to support exporters of Ukrainian products (goods, works, services) through instruments of insurance against commercial and non-commercial risks, reinsurance and guarantees under contracts that ensure export development.

Detailed rules and regulations on insurance tariffs, composition of insurance reserves, rules for their formation and use, strategy and policy of risk management, procedures for managing them, as well as a list of risks, their marginal amounts, as well as the composition and forms of reporting on the activities of the Export Credit Agency to be approved by the Agency’s Supervisory Board.

It should be recalled that the Export Credit Agency is an integral part of the export support system in Ukraine by providing financial support to Ukrainian enterprises in accordance with the Export Strategy of Ukraine: Road Map for Strategic Trade Development for the period 2017–2021.

Controlled Transactions and Transfer Pricing

The Ministry of Finance of Ukraine approved General tax advice on some issues arising from application of transfer pricing rule by the representative office of non-resident in Ukraine.

This document addresses two issues:

1) is the representative office of non-resident that provides only support and preparatory work for such non-resident obliged to present reports on controlled transactions in the case the funds, received from the non-resident for household needs or for transferring to an account of resident who provided services (performed works) to the non-resident, exceed 10M UAH (minus indirect taxes) for the tax (reporting) year?

According to the explanations presented by the Ministry of Finance the transactions conducted by the representative office of the non-resident which is not permanent and given that these transactions are conducted in the framework of preparatory and support activity for such non-resident are not recognized as controlled for the purposes of art. 39 of the Tax Code of Ukraine (hereinafter – TCU). So, there is no need to submit reports on the controlled operations;

2) Are the funds received from non-resident for permanent representation household needs (remunerations. etc.), tax and charge payments or for transferring to an account of resident who provided services (performed works) to the non-resident taken into account when determining cost criterion of business transactions volume for the application of transferring pricing?

The document established that as the funds received from non-resident for household needs of permanent representation or for transferring to the account of resident who provided services (performed works) to the non-resident are the business transactions for transferring pricing then, according to subitem 39.2.1.7 TCU these funds are fully taken into account for determining cost criterion of business transactions volume for the application of transferring pricing.

Let us remind, that general tax consultations are the instruments that allow to significantly cut down the grounds for administrative and legal disputes between the taxpayers and the controlling authorities as it eliminates the possibility of ambiguous interpretation of certain rules of tax law. The Ministry of Finance provides them in compliance with requirements laid down in Law of Ukraine “On Amendments to the Tax Code of Ukraine regarding Improvement of Investment Climate in Ukraine” No. 1797 of April 15, 2017.

Labor and Salaries

The Cabinet of Ministers of Ukraine announced new wave of labor legislation changes which, in particular, propose to increase annual vocations, provide for flexible working hours and remote work.

European Business Association supported the modernization of relationships between employer and staff. Business representatives see fit to change the soviet Labor Code (LC) for the modern one and give up trying to make single changes to the labor legislation. Updated text has been waiting for consideration in Parliament’s second reading (Draft law 1658). However, it doesn’t provide for real changes in law legislation in many respects, so it should be substantially improved and at the same time reserve key innovation.

Business proposed following innovations:

• possibility to conclude labor contracts (contract-based type of relationships) as well as term contracts;
• moving from paper-based to electronic form of communication with an employer;
• increase of annual vocation from 24 to 30 days;
• possibility to test all the employee assessing both hard and soft skills;
• liberalization and adaptation to modern requirements of relationships between an employer and trade union and revision of trade unions’ powers;
• simplification of hiring and dismissal procedure, including possibility to fire an employee in the event of committing actions which are subject to criminal, administrative, civil, legal and disciplinary responsibility under legislation of prevention of corruption;
• implementation of single working environment authority instead of a bunch of different agencies which operate right now;
• systematic failure to perform assigned tasks or gross labor misconduct must suffice for dismissal;
• moving outdated occupational classification to nonbinding instruments;
• extension of list of persons who may be employed without obtaining license to employ foreigners or stateless persons.

Summary of Court Rulings

The Supreme Court of Ukraine in its judgement of June 26, 2019 on case 808/1641/16 declared that the minor defect in the primary documents can not be considered as the ground for deprivation of the taxpayer of the right to the tax credit.

For the purpose of studying actual purchase of assets within the framework of the business activities it is necessary to determine the content of business transactions, contract terms, actual shipping order, shipping volume and content, purpose of purchase, terms of payments, properly study the primary documents on business transactions, find out whether the primary documents reveal the content of the transactions of assets purchase and assess such evidences both collectively and discretely and together with other evidences in the case.

The reality requires to investigate whether the respective assets are actually received form the contract partner indicated in the primary documents and in accordance with the provided terms. To perform this task, one should establish the circumstances and manner in which the business relations between the complainant and contract partner are organized, persons involved in this process, interrogate respective persons as witnesses for finding out the nature and terms of disputed transactions conduct.

If the goods actually purchased by the taxpayer, are entered in the books then the defects in the primary documents, in case the information they specify gives the opportunity to identify the business entities and business transactions, cannot be used as a ground for deprivation of the taxpayer of the right to the tax credit.

Unjustified tax benefit is characterized by the absence of actual business transaction conduct, conduct of transactions without business purpose and transactions accounting irrespective of their economic content, coordination of actions between customer and supplier for simulation of condition for budgetary reimbursement.