Innovations for payers of the income tax were implemented by the Law of Ukraine “On Amendments to the Tax Code of Ukraine on improving the investment climate in Ukraine” of 21.12.2016, № 1797-VIII (hereinafter − the Law № 1797). The leitmotif of the majority of the innovations this year and last is the correction of inaccuracies and detailing of existing tax rules. However, there are new rules.
Here are the key amendments valid on January 1st, 2017.
Adjusted subject of taxation
The subject to the income tax is, in particular, income from a source of origin from Ukraine and abroad, which is determined by adjusting the financial result before tax, as defined by accounting rules, on the differences (sub-para. 134.1.1 of the Tax Code of Ukraine, hereinafter − TCU). However, earlier this norm was about the adjustment of such financial results for “differences arising under the provisions of this section”. The two last words were changed for “this Code” due to the Law № 1797.
In other words on 01.01.2017, in sub-para.134.1.1 of TCU it is appeared an appropriate reference of the subject of taxation to the differences given, in particular, in the Transitional provisions of TCU. In addition, the legislators determined the special procedure for the adjustment of the financial result for agricultural enterprises − payers of the income tax.
The right to accelerated depreciation of fixed assets
The income tax payers are entitled to use minimum allowed two-year period for the tax depreciation of fixed assets of the fourth group (machinery and equipment) on straight-line basis (para.43 of sub-sec.4 of sec. XX of TCU). However, this right applies only to fixed assets (hereinafter − FA), costs for purchases of which incurred (accrued) by the taxpayer after 01.01.2017, and if the following requirements are simultaneously met for these FA:
- they have not been put into operation and not used in the territory of Ukraine;
- putting into operation to be in the period from 01.01.2017 to 31.12.2018;
- FA are used in one’s own business activities and not sold or not granted a lease to other persons (except for taxpayers whose principal activity is to provide services of the property lease).
If the following requirements will not be met within two years, starting from the date of FA putting into operation, the income tax payer should be accrued the differences. It should be done in the tax (reporting) period when there was the fact of the use of FA in non-commercial activity or their sale.
The differences for non-productive non-current assets
It should be reminded that the so-called highly-profitable companies that received more than UAH 20 million of income for the previous tax (reporting) year are obliged to adjust the financial result before tax on the differences, provided for by sec. III of TCU.
Thus, there was increase in differences relating to non-current assets. In particular, in case of liquidation or sale of a particular object of non-productive FA or non-productive intangible assets, the financial result before tax should be increased by its residual value determined in accordance with accounting regulations. Also, this financial result should be increased by the amount of “accounting” costs of repairs, renovation, modernization or other improvement of non-productive FA or non-productive intangible assets.
Accordingly, there is diminutive difference, which is used in case of sale of non-productive FA or intangible assets. The indicator of the difference is equal to initial cost of acquisition or manufacture of a particular object of non-productive fixed assets or non-productive intangible assets and costs for their repairs, renovation, modernization or other improvements, including those classified as “accounting” expenses. However, the value of the mentioned difference could not be more than the amount of income (revenue) received from such sale.
Revaluation of non-current assets
Tax authorities long ago have come to the decision that the revaluation of non-current assets does not affect their tax depreciation. Now, there is legal basis for this statement − new paragraph in sub-para.138.3.1 of TCU. It defined that the revaluation (price reduction, revaluation surplus) conducted in the accounting does not affect the value of fixed assets and intangible assets, which is the subject to tax depreciation.
Differences in case of creation of reserves and provisions
One of the significant legislative errors of sec. III of TCU to 01.01.2017 was the absence of diminutive difference, which, logically, would occur in the event of writing off the bad receivables within the reserve of doubtful debts. Therefore, it was extremely disadvantageously for highly-profitable companies to create such reserves.
However, due to the law № 1797 the income tax payers got the possibility to reduce the financial result before tax for the amount written off receivables (including at the expense of created reserve of doubtful debts), which corresponds to the tax attributes of bad debts (sub-paras.14.1.11, 139.2.2 of TCU).
Taxation of incomes on loans from non-residents
Incomes of non-residents in the form of interest on loans or financial loans granted to residents should be taxed at a rate of 5% (sub-para. 141.4.11 of TCU).
However, this rate can be used on condition of simultaneous compliance with certain conditions. In particular, the borrower can not be the “offshore” non-resident, and the money given by him/her for loans or financial loans to resident should be involved by placing the foreign debt securities on foreign stock exchanges.
The difference on transactions with related entities − non-residents
Receiving of credits, loans and other debt from related entities − non-residents can cause the occurrence of differences (paragraphs 140.1−140.3 of TCU). The precondition for its use is the excess of debt obligations arising from transactions with related entities − non-residents, the value of equity capital by more than 3.5 times.
The Law № 1797 specified that the financial result before taxation should be increased by the excess accrued in the accounting of interest on loans, borrowings and other debt obligations that arose from transactions with related entities – non-residents, over 50% of the financial results before tax, financial expenses and amounts of amortization payments.
Also, it was changed the wording, which regulated the use of the diminutive differences on debt transactions with related entities − non-residents. Thus, the interests that increased financial result before tax, should reduce it in future periods by the amount reduced annually by 5% of the amount of interest that were not included in the reduction of the financial result before tax. In other words now it is clear that it should be taken the unaccounted 5% of past period (s) to calculate such diminutive difference.
Changes for non-profit organizations
Before 01.01.2017, there was a demand in paras.34−35 of sub-sec.4 of sec. XX for non-profit organizations to conduct a “revision” of their statutory documents in compliance with TCU on non-profit status. If non-profit organizations did not meet such requirements, for the inclusion in the new register of non-profit institutions and organizations, they were required before 01.01.2017 to put in order their statutory documents and submit their copies to the supervisory authority. If the organizations did not bring such documents into compliance, it meant the loss of non-profit status from 01.01.2017.
Due to Law № 1797 “x time” for non-profit organizations was postponed from 01.01.2017 to 07.01.2017. However, before that date non-profit organization can not be excluded from the relevant registry for the non-compliance of statutory documents with the requirements under paragraph 133.4 of TCU.
Also, the law № 1797 specifies that the requirements for statutory documents do not apply to the public institutions.
The difference in case of cooperation with non-profit organizations
As before, the TCU requires increasing the financial result before tax in the amount of 30% of costs of goods, including non-current assets, works and services acquired, particularly in non-profit organizations (sub-para. 140.5.4 of TCU). However, this difference could be not applied, if the sum of the value of such assets, as well as works and services during the reporting year does not exceed 25 minimum wages as of January 1st of reporting year. In 2017 this ceiling limit is UAH 80 000 (in 2016 it was UAH 68 900).
Non-repayable financial aid in favour of zero tax rate payers and defaulters
As an initial matter we should note that the rate of 0% should be used by the income tax payers, who have an annual income not exceeding UAH 3 million for the last annual reporting period as defined by accounting regulations. The amount of wages (income) accrued for each month of the reporting period for each employee, who is in the employment relationship with such a taxpayer, should not be less than two minimum wages. There are other criteria for them established by para.44 of sub-sec.4 of sec. XX of TCU.
If the income tax payer provides non-repayable financial aid for such zero tax payer or defaulter (except non-profit organizations), he/she should increase the financial result before tax for the full amount of such aid (sub-para.140.5.10 of TCU).
Fines and penalties for zero tax rate payers and defaulters
The income tax payer, who in the accounting recognized costs in the amount of fines, fees, penalties accrued in favour of zero tax payer and those who are not the tax payers (other than individuals), should apply magnifying difference (sub-para. 140.5.11 of TCU ). The latter, in fact, is equal to the indicator recognized in the accounting of costs.
It should be noted that any differences did not arise before 01.01.2017 in case of recognition the cost of fines, fees and penalty.
The difference in case of changes in the tax system
The company, which changed the taxation system from the simplified to the general, could have transitional operations. One option for such transactions is the shipment of goods (services, works) on the simplified system, and payments receiving on the general system. Formally, in this situation there were no legal grounds for influence of incomes under transition operation both on the calculation of the unified tax and on the income tax.
However, the Law № 1797 provides for new magnifying difference equal to the amount of income received as payment for goods (works, services) shipped (provided) during their being on the simplified taxation system (sub-para. 140.5.12 of TCU).
Price determined on “arm’s length” principle instead of the usual
Transfer pricing requirements, as is known, affect the subject to the income tax through the mechanism of application of differences (sub-paras.140.5.1, 140.5.2 of TCU). Thus, Art.39 of TCU, which concerns with controlled transactions, uses the very term price defined on “arm’s length” principle. Therefore, this term replaced the phrase “regular price” in sec. III of TCU.
Finally, it should be noted that the Law № 1797 determined another important detail for the income tax payers who have controlled transactions. Namely, differences under such transactions (sub-paras.140.5.1, 140.5.2 of TCU) should be calculated only according to the results of reporting year.
