State Tax Administration of Ukraine issues a clarification letter on tax accounting of marketing expenses
21/11/2008
The State Tax Administration of Ukraine (hereinafter – “STA”) has provided explanations on numerous occasions as to how marketing expenses have to be accounted for tax purposes. According to the previous comments of the tax authority, the issue of whether it is possible to include the expenses on events promoting products and other similar services provided by retail networks (supermarkets) in total costs remains controversial.
Sub-clause 5.4.4., Clause 5.4 of Article 5 of the Law of Ukraine “On Taxation of Corporate Income” No. 334/94 dated December 28, 1994 (hereinafter – “Law”) provides for the right of the taxpayer to include in total costs the expenses on pre-sale and promotional events relating to the products and/or works, services sold or provided by such taxpayer. Since the title to products, as a rule, passes to a retail network upon delivery of such products, the inclusion of such expenses in total costs involves the risk of being challenged by tax authorities. At the same time Sub-clause 5.4.4., Clause 5.4 of Article 5 of the Law allowed to report such expenses as costs paid or incurred due to the sale of products and/or works, services.
However, in its letter dated October 29, 2008, Ref. no. 1105/2008/АС/844/2008 the STA explained that a special procedure should be applied to the tax accounting of expenses on product promotion services as laid down in Sub-clause 5.4.4., Clause 5.4 of Article 5 of the Law. Thus, according to the explanations of the tax authority dated September 29, 2008, the total costs related to the purchase of product promotion services can include only actual costs of the real owner of products representing the object of such services.
Commenting on the subject Vasil Kisil & Partners associate Oksana Franko said: “Though this explanation is not legally binding, it proves that tax authorities have a fiscal approach to the interpretation of applicable laws which when it comes to practice, could significantly affect the business of companies that receive promotional services and other similar services provided by retail networks (supermarkets).”
Sub-clause 5.4.4., Clause 5.4 of Article 5 of the Law of Ukraine “On Taxation of Corporate Income” No. 334/94 dated December 28, 1994 (hereinafter – “Law”) provides for the right of the taxpayer to include in total costs the expenses on pre-sale and promotional events relating to the products and/or works, services sold or provided by such taxpayer. Since the title to products, as a rule, passes to a retail network upon delivery of such products, the inclusion of such expenses in total costs involves the risk of being challenged by tax authorities. At the same time Sub-clause 5.4.4., Clause 5.4 of Article 5 of the Law allowed to report such expenses as costs paid or incurred due to the sale of products and/or works, services.
However, in its letter dated October 29, 2008, Ref. no. 1105/2008/АС/844/2008 the STA explained that a special procedure should be applied to the tax accounting of expenses on product promotion services as laid down in Sub-clause 5.4.4., Clause 5.4 of Article 5 of the Law. Thus, according to the explanations of the tax authority dated September 29, 2008, the total costs related to the purchase of product promotion services can include only actual costs of the real owner of products representing the object of such services.
Commenting on the subject Vasil Kisil & Partners associate Oksana Franko said: “Though this explanation is not legally binding, it proves that tax authorities have a fiscal approach to the interpretation of applicable laws which when it comes to practice, could significantly affect the business of companies that receive promotional services and other similar services provided by retail networks (supermarkets).”