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Implications of new Tax Code still unknown
Ukraine’s new tax code entered into force on Jan. 1. Over the first two weeks of the year, the government issued a number of regulations on the implementation of this document. In addition, the Finance Ministry and State Tax Administration have expressed a number of opinions via the Internet on how the new tax rules should be interpreted. These two authorities have recently announced that they have issued their interpretations of the tax code – running to three volumes – but they remain unpublished. The code is very clear on the fact that its interpretations by authorities, unless they are specifically required by the code or are issued in the form of an individual tax ruling to a particular taxpayer, are not binding to businesses. But they are nevertheless to be considered strong guidance in the determination of any uncertainties. There is no doubt that the tax code will have a significant impact on Ukrainian businesses. However, because of the above considerations, recent activities of the authorities do not add clarity on how the provisions of the Code should apply. It will take two or three reporting periods to fully understand the implications of the code, good and bad. At the moment, there are five areas most businesses should be looking at to make sure their tax affairs are efficient and in compliance with the new code. Staff readiness Until the tax code entered into force, businesses may have been comfortable with the competence of their tax staff, provided no significant tax assessments were issued to them. Now is the time for the senior management of businesses to ask themselves whether or not their existing tax function suits the current needs of their organizations. It’s important to consider whether staff of all levels are sufficiently skilled to understand the new tax rules and new forms of tax returns, define issues and potential implications for businesses and make appropriate recommendations to senior management. Accounting software currently in use may need updating to support the changes in the tax law. Based on initial feedback from businesses, most of the software currently used in Ukraine requires adjustment as a result of the new value-added tax reporting formats. Using the grace period The business community will enjoy a grace period of six months after the introduction of the code. A nominal penalty of Hr 1 will apply to tax violations committed during this period. In addition, for corporate profits tax, no penalties will apply during the second and third quarters of 2011. In 2011 the tax authorities are likely to audit all previously unaudited periods. Businesses are likely to benefit from a review of their past unaudited years to determine whether their tax position in these periods was sound. If specific practices were overly aggressive, it is recommended to adjust the returns for these periods prior to an official audit and pay the respective taxes and relatively minor self-assessment penalties. During the grace period, businesses may consider a more aggressive strategy, particularly in situations where the new tax rules are ambiguous. Any resulting future assessments may be subject to the nominal penalties mentioned above along with potentially late interest penalties. Tax-planning opportunities The tax code offers a number of tax-planning opportunities and tax incentives that depend on particular industries and activities, though no general tax incentives are offered to foreign investments. Several areas that were unclear in the previously-existing tax legislation or that had been constantly challenged by the tax authorities, now represent tax-planning opportunities for many transparent international businesses. These include the restructuring headquarters charges, including secondment of foreign personnel to Ukraine; the structuring of an international presence in Ukraine in accordance with new permanent establishment rules; and preparation for the enactment of new transfer pricing rules in 2013. There are many comments from the business community on substantial limitations of tax deductions for businesses, including restrictions on royalties and a number of services paid by Ukrainian businesses to foreign entities. Still, a proper transparent structuring of such fees will provide for their tax deductibility in Ukraine. Managing profits The profits tax chapter of the tax code – which is one of the most hotly debated – will enter into force on April 1. This means that businesses will have two reporting periods for profits tax in 2011: the first quarter and the second to fourth quarters. If businesses incur losses in the first quarter, these losses can be carried forward indefinitely. However, for businesses that are overly profitable in this quarter, such as seasonal businesses, where sales are predominately in the first quarter of the year, this profit cannot be reduced by the costs of subsequent periods in 2011. Therefore, profit-making businesses are advised to carefully manage the level of their revenues and costs in the first quarter, including the negotiation of invoicing and payment terms with their suppliers and customers. Transitional deal Serious consideration will need to be given to the specific tax accounting treatment of expenses from April 1. Establishing a fixed-asset register to allow compliance with the new tax depreciation rules could be very time consuming for example. Furthermore, the determination of an appropriate inventory valuation methodology is likely to be another major area of focus.
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