Those VAT payers carrying out exclusively benefits transactions will not have problems with VAT, since VAT does not arise either on the “input” or on the “exit”
For example, in accordance with para.261 of sub-section 2 of section XX of the Tax Code of Ukraine (hereinafter - TCU), temporarily (from January 1, 2013 to January 1, 2023) software supply transactions are exempt from VAT throughout the supply chain. That is, VAT on such transactions does not arise either during the acquisition or during the sale.
However, it often happens that the service provided by the VAT payer falls within the scope of the benefit, but for its provision, the taxpayer has incurred costs that are subject to VAT on general grounds. In other words, the taxpayer has a tax credit, but there are no tax obligations. It is in such cases that the payer should be careful and timely “balance” the tax credit through the self-assessment of “compensating” tax obligations in accordance with the rules established in 198.5 of TCU.
If there is a tax credit, but there are no tax obligations in connection with the application of the benefits, it is necessary to calculate them independently in order to compensate the tax credit.
It should be recalled how that mechanism works. If the VAT payer has purchased goods/services, non-current assets with VAT, he/she has an unconditional right to the tax credit for such transactions on the basis of a tax invoice registered in the URTI, or a customs declaration (in case of import of goods), or other documents, the list which is given in para. 201.11 of the TCU. Supposing that in the future the VAT/goods purchased/services, the non-taxable assets the payer uses (or purchased for use) in transactions that:
- is not subject to VAT taxation;
- exempt from VAT;
- are carried out by the VAT payer within its balance sheet, including the transfer for non-productive use, the transfer of production non-current assets into non-productive non-current assets;
- are not economic activities of the payer.
These are precisely the cases in which a VAT payer is obliged to calculate tax liabilities to her/himself and prepare not later than the last day of the reporting (tax) period and register in the URTI the consolidated tax invoice within the established time frame. The basis for taxation should be the cost of purchasing goods/services, and for non-current assets - their residual value (para. 189.1 of TCU). Therefore, these tax liabilities were called “compensating”.
Sometimes goods purchased with VAT are used simultaneously in taxable and non-taxable VAT transactions. In this case, also the VAT payer is obliged to pay “compensating” tax liabilities, but not in the full amount of input VAT, but according to the proportion of use of these goods in non-taxable transactions (para. 199.1 of TCU). In the same way as in the case of purchased goods/services with VAT, non-current assets in non-taxable VAT transactions in full, in case of partial use, also prepare a consolidated tax invoice.
