Tax Code of Ukraine — One Step Ahead
The Tax Code of Ukraine has been in effect for more than 1 year now. The document was meant to attain a general aim — make our country favorable for doing business. We have asked our panelists to analyze the latest changes made to the Tax Code of Ukraine, major improvements and influence of such innovations to taxpayers, mainly the On State Support of the Software Industry Act of Ukraine, No.8267 and the On Amendments to the Tax Code of Ukraine Concerning the Special Regime of Taxation of the Software Industry Products Act of Ukraine, No.9744; the issue of electronic issuance of tax invoices; the pros and cons of the Draft Act On Amending the Tax Code of Ukraine Concerning Improvement of the Certain Tax Provisions, No.9661-d; as well as disputes arising in connection with the new Tax Code and hands-on experience.
On 24 May 2012 Ukrainian MPs adopted the On State Support of the Software Industry Act of Ukraine, No.8267 and the On Amendments to the Tax Code of Ukraine Concerning the Special Regime of Taxation of the Software Industry Products Act of Ukraine, No.9744, aimed at encouraging the development and boosting of the global competitiveness of the Ukrainian IT industry (the Acts). The Acts have not been signed by the President of Ukraine and so have not yet come into effect, though the chances of them being signed in due course are considered to be quite high.
The Acts provide for a number of tax incentives for IT companies for 10 years from 2013, namely:
— Reduction of corporate income tax rate for IT companies from 19% to 5%;
— Introduction of VAT exemption for domestic software sales (currently the domestic software trade is subject to 20% VAT);
— IT specialists employed with IT companies will be subject to a reduced personal income tax rate of 5% as compared to the current rates of 15% and 17%;
— Reduction of payroll tax burden on IT companies, namely the standard rate for the industry of 36.76% is now levied on the amount limited by two minimal statutory salaries as compared to the current cap of 10 minimum statutory salaries. This incentive will be available for five years from 2013.
These tax benefits will extend only to IT companies which engage in the types of activities listed in the Acts. Moreover, these benefits will be awarded subject to (i) compliance with certain registration criteria set by the tax authorities and (ii) obtaining approval from the State Agency for science, innovation and informatisation. There are concerns that the process of getting the required approval may become quite bureaucratic, thus many IT companies may face impediments in the prompt shifting to the beneficial tax regime.
Also, there are fears that the tax authorities may now start looking more rigorously into the issue of hidden employment, which was not a hot topic in previous years, but may become one after the mentioned benefits are introduced. Such fears, in fact, stem from the government’s alleged hesitation over the likely state budget losses that may be caused by the tax incentives if they are introduced. Considering that two thirds of the Ukrainian IT people are employed through civil law services contracts rather than through employment contracts, the Government concerns should be taken seriously.
The issue of electronic issue of tax invoices was recently resolved by the Ukrainian Parliament. On 24 May 2012 the latter passed Draft Act No.9661-d, which allows taxpayers to issue tax invoices in an electronic form after its registration in the Unified Register of Tax Invoices. The Act comes into force on 1 July 2012. This Draft will surely have a positive impact on the activity of taxpayers. Namely, it will reduce the time currently used by vendors for printing, signing, sealing and delivery of tax invoices to the purchaser. Due to the Draft’s adoption the Ministry of Finance of Ukraine is likely to amend the current procedure for fling of tax invoices, as adopted by Order No.1379 of 1 November 2011.
It can be expected that after 1 July 2012 taxpayers will not hurry to apply the possibility of issuing electronic tax invoices. Many purchasers who are actual recipients of tax invoices are aware of the tax authorities’ practice of denying the right to tax credit (which is proved by a tax invoice) due to technical errors in the tax invoices issued. Such errors may include a signature by an unauthorized person, absence of necessary details on a tax invoice, etc.). As the Draft does not cancel the paper form of issue of tax invoices, many purchasers are expected to continue demanding paper tax invoices from their vendors. And it may last until successful practice of applying the Draft’s norms is finally developed.
The recently adopted Draft Act On Amending the Tax Code of Ukraine Concerning Improvement of the Certain Tax Provisions, No.9661-d has finally been signed by the President of Ukraine. Below we outline the key changes to the tax legislation, as introduced by the Draft:
1) Corporate Profit Tax
Tax losses. The Draft Act introduces gradual utilization of tax losses accumulated prior to 1 January 2011. The tax losses may be carried forward to 2012-2015 within the limits specified for the legal entities, depending on their income level. The Draft will not eliminate existing controversies in the Tax Code regarding tax losses and the tax disputes which are still to come.
Advance payment. Currently, insurance companies are exempt from advance payment upon distribution of dividends. The Draft makes such advance payment obligatory for insurers. This requirement will definitely worsen investment opportunities in the insurance industry.
2) VAT
Voluntary registration. According to the Draft, certain mandatory requirements upon voluntary VAT registration have been removed. In particular, the charter capital and taxable transactions thresholds have been abolished. This initiative may be viewed as positive, since it improves the regulatory framework for newly established entities.
3) Mineral resources
The Draft Act canceled rental payment for oil, natural gas and gas condensate starting from 1 January 2013. However, the document also increased royalties for the use of mineral resources (by approximately 2-2.5 times). According to preliminary calculations, it will substantially increase the cost of international businesses operating in Ukraine’s oil and gas industry.
It seems natural that the number of appeals against decisions by the tax authorities has rapidly increased with the adoption of the new Tax Code of Ukraine, just like with the introduction of any substantial amendments to Ukrainian tax laws.
Disputes arising in connection with the new Tax Code should be classified by the subject of the claims rather than by economic sectors.
This is because the misapplication of tax laws by the tax authorities concerns companies of all types of business. The most progressive interpretation made by the tax authorities should probably be awarded to the prohibition of accounting of the negative values of the tax base from 2010 into the tax base of the II quarter of 2011. Hence, companies taking legal recourse most frequently were those which were unable to cover their losses before the end of 2010, which in practice usually occurred due to: (i) changes in the exchange rate, which lead to an increase in expenses for repaying loans in foreign currency; (ii) an increase in the price of fuel and gas which are used for the production of goods. While the first circumstance could negatively affect companies from different sectors of the economy, a circle of “victims” of the second circumstance can be formally narrowed to companies active in transportation, building and the heavy equipment industry.
