Lower Tax Burden for Businesses and Simplified Tax Administration
Changes to the Tax Code of Ukraine came into force
On April 16, 2022, the Law of Ukraine “On amendments to the Tax Code of Ukraine and other legislative acts of Ukraine regarding the administration of certain taxes during the martial Law” of 01.04.2022 № 2173-IX (“the Law 2173”) entered into force.
The Law 2173 provides for several amendments to the Tax Code of Ukraine (“the TCU”) to reduce the tax burden on businesses and simplify tax administration.
The major changes include the following.
We should remind that in early March 2022, the TCU was amended, which allowed major businesses to apply for a simplified taxation system during martial law and pay only 2% Unified Tax out of turnover amount. The only restriction left for such application was income limit of no more than 10 billion hryvnias. However, the Law 2173 abolished the income limit for such taxpayers as a mandatory condition for staying within Unified Tax group.
The Law 2173 also eased the restrictions on the types of activities that can be carried out by taxpayers of the Unified Tax (group 3, 2% rate). It is now allowed to pay the Unified Tax at 2 % rate for taxpayers involved in the retail sale of excise goods, as well as groundwater and surface water extraction (on condition such taxpayers also provide centralized water supply and sewerage services).
The Law 2173 provided regulations regarding the consequences for transition from Corporate Profit Tax (CPT) to payment of the Unified Tax at 2% rate.
As expected, the lawmakers indicated that the negative value of the CPT taxation object, which existed prior to the date of transition to the Unified Tax, may be used to reduce of the CPT taxation object after the taxpayers resumes CPT payment.
In addition to that, the overpaid amount of CPT, unaccounted advance payments of this tax due to dividends payment, as well as unaccounted interest amounts as per the limit set by paragraph 140.2 of the TCU, which existed on the date of transition to the Unified Tax at 2 % rate, may be used to reduce CPT amount after the resumption of CPT payment.
After the end of the martial law, ia taxpayer who during the calendar year switched to payment of the Unified Tax at 2 % rate resumes payment of CPT in the same year must prepare and submit a CPT tax return cumulatively from the beginning of such calendar year. At the same time, the results of activities for the periods of payment of the Unified Tax must not be taken into account during calculation of CPT taxation object. Nevertheless, such results must be taken into account during identification of financial criteria for the purpose of transfer pricing, as well as application of tax differences.
We should remind that even during the martial law, the tax authorities have the right to conduct the following tax audits:
Off-site audits of VAT tax returns or their adjustments (if any), if (i) an application for VAT refund was submitted alongside with such tax returns / their adjustments and (ii) VAT refund amount was formed on the basis of VAT invoices and/or their adjustments and/or customs declarations, except for goods (products) specified in paragraphs. 215.3.1, 215.3.2, 215.3.2-1 and 215.3.3-1 of the TCU;
Off-site audits of tax returns of the taxpayer of the Unified Tax (4th group); and
On-site audits related o settlements with customers, validity of licenses etc.
The Law 2173 supplemented the provisions of the TCU on conducting off-site and on-site audits. In particular, in case of violations identified during off-site tax audits, an audit report must be executed and sent to taxpayer's electronic office (cabinet) by the tax authority. Simultaneously, the tax authority sends to tax payer’s e-mail address (addresses) information about the type of document, date and time of its submission to the taxpayer's electronic office (cabinet). At the same time, the deadlines for submission and consideration of objections, additional documents and explanations, acceptance, sending and appeal of the tax assessment notice are considered suspended.
In case tax violations were identified as a result of on-site audits, the taxpayers must be held liable in accordance with the TCU and laws supervised by tax authorities. As a result, during the period of martial law, fines can be applied only due to tax violations identified during on-site tax audits.
Prices control: new powers of tax authorities
It should be noted that the Law 2173 provides the tax authorities with new powers to control prices / pricing during the period of martial law / state of emergency.
As a result, from April 16, 2022 the tax authorities carry out such control by conducting on-site tax audits based on at least one of the following grounds:
receiving information from state bodies or local self-government bodies in accordance with the procedure established by law, which indicates possible violations by the taxpayer of the legislation regulating prices / pricing; or
receiving of a written request from the buyer (consumer), executed in accordance with the law, on violation by the taxpayer of the established procedure for the formation, establishment and application of state-regulated prices.
However, we should draw your attention to the fact that the Law 2173 does not provide the right to apply administrative and economic sanctions for violations of laws on prices and pricing. In other words, the tax authorities having received the right to conduct on-site audits related to prices / pricing, did not receive the right to apply sanctions. The results of such an audit shall be submitted by the tax authorities to the authorized body for decision-making regarding sanctions for the identified violations. Such a body is the State Food and Consumer Service of Ukraine or another body that controls the prices of certain goods during the martial law based on Resolution of the Cabinet of Ministers of Ukraine №1548.
Regarding objections of the results of the mentioned on-site audits, the taxpayer must send them not to the tax authorities, but to the relevant state body, e.g. the State Food and Consumer Service of Ukraine.
As an exception to the provisions of Article 44 of the TCU, special rules can be applied to confirm the legality of business transactions of taxpayers / tax agents that cannot provide primary accounting documents and conducted business activities within the territories of Ukraine where the hostilities occurred or within the territories of Ukraine temporarily occupied by the armed forces of the Russian Federation.
The Law 2173 stipulates that in case of loss and/or impossibility to collect primary accounting documents, the taxpayer / tax agent submits to the tax authorities in any form a notice signed by the director of the taxpayer and the chief accountant (if any). It should indicate the circumstances of loss and/or impossibility for collection of primary accounting documents, tax (reporting) periods, as well as a general list of primary accounting documents (if possible - with details).
This procedure is vital due to the following:
the submitted notice is the basis for proving the taxpayer’s costs and/or the negative value of the CPT taxation object and / or VAT tax credit amount, and/or the amount of the negative value of VAT of previous tax (reporting) periods; and
taxpayers/tax agents that submitted a notice of loss of primary accounting documents must not be subject to tax audit by the tax authorities for the tax (reporting) periods specified in the notice, including after the end of martial law.
The obligation to prove the absence of grounds for the application of Article 44 of the TCU was assigned to the tax authorities. However, a taxpayer/tax agent that unjustifiably applied the above-mentioned rules is considered to be a tax evader and liable under the TCU and other laws of Ukraine.
Authors: Viktoriya Fomenko, Partner, Head of Tax and Customs, Attorney-at-law Konstantin Kharchenko, Senior Associate, Tax and Customs