Let’s consider what changes the Draft law No. 1210 introduces for payers of income tax. In particular, the document expands the list of payers, changes criteria that attribute entities to a cohort of high-income earners, that is, entities that are required to report quarterly and apply tax differences. Detail below.
New payers
Draft law No. 1210 extends the list of income tax payers. Following these changes, the Tax Code of Ukraine (hereinafter – TCU) will state that the income tax payers are considered (subitem 133.1.1 of the TCU):
- legal entities that are payers of a single tax if they pay income (profit) to a non-resident with their source of origin from Ukraine or in case of receiving adjusted profit of a controlled foreign company.
At the same time, group IV of single tax payers are not income tax payers in the event of payment of incomes with source of their origin from Ukraine, which are equal to dividends;
- natural persons-entrepreneurs, including those who have opted for a simplified taxation system, and natural persons who pursue independent professional activity in respect of income (profits) paid to non-residents with their source of origin from Ukraine.
These individuals have previously paid income tax, namely withholding tax on repatriation while paying non-residents the income (profit) with their source from Ukraine. Now they will do it legally, without coercion. In addition, there will be another new income tax payer, namely a legal entity established under the laws of other countries (foreign companies) and effectively managed in Ukraine. Such legal entities will become income tax payers from January 1, 2021.
Non-profit organizations
The list of entities that may be non-profit organizations will increase. For example, non-profits are not only associations of co-owners of apartment buildings, but also housing cooperatives (subitem 133.4.1 of the TCU).
High income earners
The criterion that attributes entities to the cohort of high-income entities, that is, entities that are required to report quarterly and apply tax differences, has been changed.
Such taxpayers include those enterprises whose annual income from any activity exceeds not 20, but 40 million UAH (subitem 134.1.1 of the TCU). These changes indicate that the number of sources should be reduced several times. In other words, there will be more low-income enterprises.
Fixed assets
The approach to determining the assets that will be considered as fixed assets for tax depreciation purposes has been changed. From now on, the fixed assets will also include tangible assets, assigned to the taxpayer for use in business activities, whose value exceeds 20,000 UAH (previously 6,000 UAH) and gradually decreases due to physical or moral deterioration and the expected useful life (operation) which is more than one year from the date of commissioning (or the operating cycle, if it is longer than one year) (subitem 14.1.138 of the TCU).
Audit report
The procedure for filing income tax reports by taxpayers who are required to disclose annual financial statements and annual consolidated financial statements together with the audit report will change. The reporting procedure for public interest entities, public joint stock companies, natural monopoly entities in the nationwide market and economic entities operating in the mining sectors, as well as large enterprises, medium and other financial institutions belonging to micro – and small enterprises (Article 14 of Law of Ukraine “On Accounting and Financial Reporting in Ukraine” No. 996-XIV of July 16, 1999).
Such entities are required to file income tax statements in two steps (item 46.2 of the TCU):
- Stage 1 – submit tax returns to the taxpayers within the general time limits for filing the income tax return for the relevant tax (reporting) period, together with the financial statements, namely the statement of financial position (balance sheet) and the statement of profit and loss and other comprehensive income (statement of financial performance), which have been prepared before auditing the financial statements by the auditor;
- Stage 2 – submit to the taxpayers no later than June 10 of the year following the fiscal period annual financial statements, which are to be published together with the auditor's report. That is, they submit the audited financial statements.
The controllers will subject the enterprises to penalty for failing to provide audit report as for failure to provide regular reporting.
Agronomic reporting
Draft law No .1210 intends to re-entitle agrarians – payers of income tax to report on a specific annual reporting period, which begins on July 1of the last reporting year and ends on June 30 of the current reporting year.
Depreciation differences
Draft law No. 1210 makes several changes to the procedure for applying the depreciation differences:
1) depreciation on fixed assets can be calculated in tax accounting by production method. Previously this method was banned;
2) it is stated that the tax depreciation is not accrued for the period of non-use (operation) of fixed assets in economic activity in connection with their modernization, reconstruction, completion, refurbishment and conservation. From now on, those entities that keep accounting to International Financial Reporting Standards (hereinafter – IFRS) and do not stop accruing depreciation in accounting, when reconstructing fixed assets by applying tax differences, increase the financial result for accounting depreciation calculated in accordance with IFRS, and thereby pay more tax. They will no longer be able to reduce the tax depreciation for these periods.
Other differences
Draft law No. 1210 amends the procedure for applying other differences, in particular, as of January 1, 2021, the approach to applying the differences under item 140.2 of the TCU is completely changed – the formula for calculating the difference will be simplified. For example, a taxpayer whose debt obligations arising from transactions with non-residents exceeds the amount of equity more than 3.5 times, the pre-tax financial result will increase by the amount exceeding the accrued interest in accounting for loans, borrowings and other debt obligations (with the exception of interest subject to capitalization before the relevant asset is put into operation), more than 30% of the amount of calculated taxable income for the reporting (tax) period, in which such interest is accrued, increased by the amount of financial expenses according to the financial statements and the amount of depreciation from the tax reporting data of the same reporting (tax) period. There are also changes in other differences.
Dividends
From January 1, 2021, the approach to dividend determination will change. Thus, for the purpose of taxation, namely the taxation of income tax, the following items are also considered as dividends (subitem 14.1.49 of the TCU):
- the payment in cash or in kind, made by a legal entity in favor of its founder and/or participant(s) in connection with the distribution of net income (part of it);
- the amount of income in the form of payments for securities (corporate rights) paid in favor of a non-resident specified in subparagraphs “a”, “c”, “d”, subitem 39.2.1.1 of the TCU in controlled transactions, in excess of the amount that complies with the “arm's length” principle;
- the value of goods (works, services), except for securities and derivatives purchased from a non-resident referred to in subparagraphs “a”, “c”, “d”, subitem 39.2.1.1 of the TCU, in controlled transactions, in excess of the amount that complies with the “arm's length” principle;
- the amount of undervaluation of the goods (works, services) sold to a non-resident referred to in subparagraphs “a”, “c”, “d”, subitem 39.2.1.1 of the TCU, in controlled transactions compared to the amount that complies with the “arm's length” principle;
- payment in cash or non-monetary form, made by a legal entity in favor of its founder and / or non-resident member of Ukraine in connection with the reduction of the authorized capital, the redemption by a legal entity of corporate rights in its own authorized capital, the withdrawal of the participant from the company or other similar transaction between a legal entity and its participant in the amount that leads to a decrease in the retained earnings of the legal entity;
Income in kind
Draft law No.1210 broadens the list of income received by a non-resident originating in Ukraine. Starting July 1, 2020, such income will also be considered as other income from conducting non-resident economic activities in the territory of Ukraine, except income in the form of proceeds or other types of compensation for the value of goods, works performed, services rendered, transferred, performed, provided to a resident (permanent representative office) from such non-resident, including the cost of international communications or international information services.
Preferential depreciation methods
Draft law No. 1210 also sets preferential terms for depreciation for the 4, 3, 5 and 9 groups of fixed assets. When determining the object of taxation for the period from January 1, 2020 to December 31, 2030, it is possible to calculate tax depreciation on fixed assets of:
- group 4 (machinery and equipment) and group 5 (vehicles), using a minimum permissible depreciation period of two years (five years total);
- group 3 (transfer device) and group 9 (other fixed assets), using a minimum permissible depreciation period of five years (20 and 12 total respectively).
In order to be able to use these periods to calculate tax depreciation, fixed assets must simultaneously meet the following requirements:
- put into operation by the taxpayer within one of the tax (reporting) periods from January 1, 2020 to December 31, 2030;
- have not been in use;
- are used in their own economic activity and cannot be sold or leased to other persons (except for taxpayers whose main activity is renting services).
