Quite often, business entities arrange promotions and drawings in order to interest persons to buy their products. For example, the buyer can take part in the competition or win valuable prizes and get the desired gift by purchasing a certain item. What tax consequences should be expected when arranging a prize drawing, – in the following.
Tax accounting
PIT
As a result of a drawing during the promotional campaign, the winner usually receives a prize. The recipient is a particular individual identified by the organizers of the event among the participants. Therefore, recipients of prizes can be personified. And if so, then the legal entity that makes the drawing should include the income in the form of the value of won prize to the total taxable income of the winner – an individual (para. 164.2.8 of the Tax Code of Ukraine, hereinafter – TCU).
Consequently, the value of non-cash prize received from legal entity is included in the total monthly taxable income of the individual and is taxed by the personal income tax (hereinafter – PIT) at the rate of 18% in the source of payment (para. 170.6.3 of TCU). The fiscal authorities also emphasize this in the category 103.14 “ZIR”.
If the prize is issued in non-monetary form (in the form of a product), then the basis for taxation of the income tax should be determined using a natural coefficient.
The value of the natural coefficient at the rate of 18% PIT is 1.219512 in 2019.
The information on the award of the prize to the winner of the action, the legal person should reflect in sec. I of the Tax calculation according to the form No. 1 DF and indicate the amount of accrued/paid income and PIT deducted from it with the income sign “111”.
If the promotional action is established in the way when the winner receives not a prize, but a gift at the end, then it is possible to save on PIT. According to paras. 165.1.39 of TCU, the taxable income of the individual does not receive the value of non-cash gifts in the part that does not exceed 25% of one minimum wage (per month), established on January 1 of the reporting tax year.
In 2019, the minimum wage amount on January 1 amounted to UAH 4 173. Therefore, para. 165.1.39 of TCU deducts gifts in non-monetary form the taxable income, the value of which does not exceed UAH 1 043.25 (per month).
At the same time, a legal entity can give a gift to the client for the amount more than UAH 1 043.25. In 2019, if in the reporting month the value of the non-monetary gift or the total value of several gifts (if other non-cash gifts were issued to the individuals during the month) would exceed the non-taxable limit specified in para. 165.1.39 of TCU, then it will be necessary to impose PIT according to the rules provided for the taxation of an additional benefit, only the amount of such excess.
In order to apply this release in the material under which the drawing is made, it should be noted that the winner will be able to get a gift, but not a prize in the draw. Only in this case the company – tax agent will have all grounds to apply the “gift” norms and tax the PIT only on a part of the value of the gift exceeding UAH 1 043.25.
If the winner receives the gift as a result of the drawing, information about this should be indicated in sec. I of the Tax calculation according to the form No. 1 DF. Gift amount:
- in the amount not more than UAH 1.043.25 (that is, the non-taxable part of the gift), in the form No. 1 DF is reflected with a sign of income “160”;
- in the amount more than UAH 1.043.25 (that is, the taxable part of the gift), in the form No. 1 DF is reflected with a sign of income “126” as an income in the form of an additional benefit.
War tax
The rules for taxing the prize by the war tax are the same as for the taxation of prizes by the PIT (para. 1.7 of para. 161 of sub-sec. 10 of sec. of XX of TCU).
If a gift is issued on the results of the drawing, then the rules provided for the income tax are also valid. That is, only a part of the gift taxable by the income tax will be included in the tax base by the war tax (the value of the gift in the amount that exceeds UAH 1 043.25 in 2019). The war tax is not required to be withheld from the value of the gift, which is not subject to taxation of the PIT (cost less than the above amount).
Whatever option you choose (a gift or a prize), since the prize is granted in non-monetary form, then the basis for taxing the war tax will be the value of the prize given, which is reflected in the accounting, but not taking into account the natural coefficient provided for the maintenance of the personal income tax. The point is that in the case of taxation of incomes issued in non-monetary form (including prizes), the TCU does not provide the use of such a coefficient. This is emphasized by the tax authorities in the letters of the State Fiscal Service of Ukraine (hereinafter – SFSU) of 20.11.2015, No. 24759/6/99-99-17-02-01-15 and of 08.06.2016, No. 12626/6/99-99-13-02-03-15, as well as in consultation 103.25 “ZIR”.
The amount of the war tax withheld from the taxable expensive gifts should be reflected in sec. II of the Tax calculation according to the form No. 1 of DF in the line “War tax”.
Since the income is paid in kind, the tax agent does not have a source of withholding of the war tax from the winner. Therefore, the question arises, where to take funds for the withholding of such amount. There are two ways to solve this:
- ask the winner to reimburse the amount of the war tax by making it to the company’s cash desk;
- to pay the war tax to the company from its own pocket.
USC
Gifts awarded to the winners of the promotional campaign are given to persons who are not connected with the company by labor relations, and therefore the unified social contribution is not required to be accrued to the income in the form of a gift. In this case, the gifted persons are not insured persons.
Income tax
The subject to taxation of the income tax is the financial result before tax, which is determined by the rules provided for in the accounting and adjusted for tax differences.
The TCU does not provide for the adjustment of financial results under transactions for the transfer of prizes (gifts) to individuals. Therefore, all taxpayers of income tax (both high-income and low-income) show these transactions in “profitable” accounting solely according to accounting rules.
VAT
The transfer of prizes to individuals won in promotional campaigns is considered as a free transfer transaction, which is subject to value added tax (hereinafter – VAT) as a general rule. The point is that the free transfer (donation) of goods falls under the definition of the term “supply of goods” (para. 14.1.191 of TCU).
As it concerns the free transfer of goods, the company will have to “extend” the tax base of VAT transactions to its minimum limit (as required by para. 188.1 of TCU). In this regard, in the VAT account for such a transaction, two tax invoices (hereinafter – TI) must be drawn up:
a) first one – for the transaction for the supply of prizes to the name of the recipient, if it is registered as a VAT payer;
b) second one – the difference between the size of the minimum tax base and the actual supply price. In the case of a free transfer, the price of the raise is equal to “0”, so the second TI should be written in view of the minimum tax base.
Both TI should be registered in the Unified Register of Tax Invoices.
In the case of a free transfer of goods (including gifts) to charge tax liabilities only in accordance with para. 188.1 of TCU. That is, by “extension” of the contractual delivery price to the minimum tax base.
It is not required to accrue “compensatory” tax liabilities in accordance with para. 198.5 of TCU. Free transfer of goods cannot be considered as the use of goods in non-business activities (letters of the SFSU dated 11.10.2017, No. 2204/ІПК/28-10-01-03-11 and dated 10.05.2017, No. 96/6/99-99-15-03-02-15/ІПК).
Consequently, if the company grants prizes to individuals, it is only necessary to calculate tax liabilities one time. This should be done according to the rules stipulated in para. 188.1 of the TCU.
