Imagine a situation where one company has a product, but can not find a buyer, another company wants to buy this product, but it lacks monetary funds. What should be done in this case? The product can be purchased under commodity loan terms with instalment or deferral of payment. How should it be reflected in accounting and what tax consequences should be expected?
Registration of commodity loan
Purchase of goods under commodity loan terms is permitted by the current legislation of Ukraine and is considered one of the varieties of sales transactions. The seller and the buyer are the parties to the contract of sale of goods on credit. In addition, the circle of participants in such an agreement is not limited. They can be both legal entities and individuals, both residents and non-residents.
It should be recalled, what is the essence of sale of goods on credit: the buyer can pay for the received goods not immediately, but with instalments (with payment instalments) or the full amount after a while (with deferral of payment).
The peculiarities of the legal relationship between the parties to the contract of sale of goods on credit are established by Articles 694, 695 and 697 of the Civil Code of Ukraine (hereinafter − CCU), and they are primarily aimed at protecting the interests of the seller.
The Tax Code of Ukraine (hereinafter − TCU), unlike the Civil Code, distinguishes the concept of “installment trading” and “commodity loan”.
Commodity loan is the transfer of goods under the terms of postponement of final settlements for a specified period and at interest (para. 14.1.245 of TCU).
Installment trading involves the sale of goods under installment terms of final settlement for a specified period at the interest (para. 14.1.249 of TCU).
In general, the definition of these concepts corresponds to the requirements of the contract of sale of goods on credit under terms of deferral or installment payment established by the CCU. Except for the fact that TCU obliges to pay interest under such contracts and establishes different conditions for the transfer of ownership of the goods.
A buyer who acquires goods under commodity loan must pay to the seller the interest for deferral of payments in addition to the value of the goods.
Peculiarities of accounting and taxation
The sale and purchase of goods under commodity loan terms in the accounting of both counterparties is considered as two separate transactions: the sale of goods and the credit transaction.
Income tax
The subject to taxation of the income tax is determined on the basis of the financial result before tax, calculated according to the rules of accounting (para. 134.1.1 of TCU).
In accounting the seller should reflect the income from the sale of goods on the date when all conditions are carried out under para. 8 of Accounting Standards 15. Generally this is the date of shipment of products. At the same time, there also should be the recognition of expenses in the amount of cost price of sold products (para. 7 of Accounting Standards 16 “Expenses”).
Instead, the buyer enrolls goods entered at the original cost on the balance (para.8 of Accounting Standards 9 “Stock”). The initial cost of a commodity is its cost, which is formed according to the rules established in para. 9 of Accounting Standards 9, and consists of the following actual costs:
- amounts paid to the supplier (seller) according to the contract minus indirect taxes;
- amounts of import duty;
- amounts of indirect taxes in connection with the acquisition of stocks that are not reimbursed to the company;
- transportation and procurement costs;
- other expenses that are directly related to the acquisition of stocks and bringing them to a state in which they are suitable for use in the planned purposes. Such expenses include, in particular, direct material expenses, direct labor costs, other direct costs of the company for refinement and improvement of qualitative technical characteristics of stocks.
It should be noted that this list does not provide for interest for the use of credit to the original value of the goods.
Interests are the income that is paid (accrued) by the borrower in favor of the creditor as a payment for the use of borrowed funds or property for a specified or indefinite period. Consequently, the seller’s payment for delaying payment of the goods in the form of interest should be recognized as income. The amount of such income is determined as the difference between the fair value and the nominal amount of cash to be received for goods (para. 22 of Accounting Standards 15). In other words, this is the amount of interest set by the commodity loan contract.
Interests are recognized in the reporting period to which they belong (para. 20 of Accounting Standards 15). If it is set the interest on a quarterly basis in the contract of purchase and sale of the goods on the loan, then the seller’s income also occurs quarterly. Regardless of whether the buyer paid the interest. Consequently, during the same period the buyer has the right to assign the amounts of accrued interest to expenses.
VAT
Transactions for the transfer of ownership of goods transferred under commodity credit are considered to be the supply of goods and, accordingly, are subject to the value added tax (hereinafter − VAT) (para. 14.1.191, para. “a” p. 185.1 of TCU).
Usually the tax liability of the seller and buyer’s tax credit arise according to the rule of the first event: on the date of payment or on the date of shipment. In the case of sale of goods under conditions of deferral or installment of payment, the first event is the shipment of goods. As of this date, the seller makes a tax invoice (hereinafter − TI) and registers it in the Unified Register of Tax Invoices (hereinafter − URTI). This TI is the basis for the buyer to include the amount of VAT to the tax credit under this transaction.
Interests provided by the terms of a commodity loan credit are also the subject to VAT, since it is a payment to the seller for the service provided by him/her for delaying payments for the goods received by the buyer. The procedure for their taxation of VAT defines a separate para. 187.3 of TCU. The date of increase of tax liabilities in the part of such interests is the date of their accrual in accordance with the terms of the relevant agreement.
Consequently, the tax liabilities of the seller and the buyer’s tax credit in part of interests arise on the date of their accrual. Moreover, for the buyer, the reason for assigning the amount of VAT to a tax credit is TI compiled and registered in the URTI by the seller.
