During the execution of the transport forwarding contract, sometimes due to circumstances beyond the freight forwarder control (in particular, queues at the customs), it can be vehicle idle time for payment of which an additional account is to billed. Despite the fact that these costs are to be reimbursed to the freight forwarder by the client, the following question arises – as a fine or additional payment for services? And, accordingly, is there a VAT?
Transport forwarding contract
It should be recalled that the transport forwarding contract is a kind of intermediary contracts. Its essence is one party (forwarding agent) is obliged to fulfill or organize the performance of freight transportation services specified in the contract by the payment and at the expense of second party (client). Accordingly, the transport and forwarding service is the direct organization and provision of transportation of export, import, transit or other cargo under the transport forwarding contract.
Principles of activity
The legal and organizational principles of freight forwarding in Ukraine are determined by Chapter 65 of the Civil Code of Ukraine (hereinafter - CCU) and the Law of Ukraine “On Freight Forwarding Activity” dated 01.07.2004, No. 1955-IV (hereinafter - Law No. 1955). These regulations provide the freight forwarder with broad powers. In particular, in order to execute the client’s order, he/she has the right to conclude contracts with carriers, ports, airlines, shipping companies, etc., which are residents or non-residents of Ukraine. In the relationship with them, the forwarder operates on his/her behalf or on behalf of the client.
Fine or Services?
The basis of VAT taxation of transactions in the supply of goods/services is their contractual value. It does not include the amount of penalty (fines and/or penalties), three percent annual and inflationary payments received by the payer as a result of non-fulfillment or improper performance of contractual obligations (para. 188.1 of the Tax Code of Ukraine, TCU).
How to take into account the expenses for vehicle idle time – as a fine or an additional payment for services?
Considering the requirements of para. 188.1 of TCU, the payment for vehicle idle time under such conditions is not a penalty. After all, the vehicle idle time is not related to the improper performance of contractual obligations by one of the parties to the contract. In addition, a fine for vehicle idle time, as a rule, is executed by a claim, but not draw up a bill.
It should be recalled that a forfeit is a penalty, which is calculated as a percentage of the amount of an unfulfilled or inadequately fulfilled obligation (Part 2 of Art.549 of TCU).
The legislation does not give a clear regulation on the legal nature of the payment for vehicle idle time. In our opinion, in such cases, the payment for vehicle idle time should also be considered as a payment for the services. That’s how it should be defined in the contract. This is not limited by the list of additional services necessary for the delivery of goods, as defined in the Law No. 1955. Accordingly, the payment for vehicle idle time to non-resident for services related to the carriage of goods is not subject to VAT (para. “в” of paras. 186.2.1 of TCU).
