While implementing the so-called “tax reform”, which gave birth to the Tax Code, the lawmakers failed to give up the application of a consumption tax in the form of VAT. The developers of this document have obviously done their best to reduce a VAT refund abuse. Consequently, the Tax Code of Ukraine (TC) is strewn with provisions that directly or indirectly restrict the right to form a tax credit for a number of industries. This idea is reflected in the TC provisions on registration as a VAT payer.
No Tax Logic
There has recently emerged a trend of the lack of VAT amounts actually paid to the budget in connection with VAT cash refund claimed by business entities. Such illogical computational results are quoted by both politicians and tax authorities as stemming from “dormant companies” (which actually do not carry out business) that are used in a chain of operations aimed to minimize taxes.
On the other hand, we are not the only State where abuses on VAT may exist. According to an official statement made by the European Union, its annual losses reached EUR 200 to 250 billion in connection with the burgeoning of “carousel” schemes and the application of a zero rate of VAT to exports.
Thus, our tax authorities decided that such tax minimization schemes must be clamped down as soon ass possible. For this reason, they now try not only to keep track of “dormant company” links in the chain, but also to prevent the possibility of their establishment (or at least their registration for VAT purposes). The fact is, however, that such “eradication of dormant companies” may affect a number of enterprises engaged in transparent business activities and willing to legitimately take advantage of the right to a VAT refund. All arguments against such novelties are obviously outweighed by the need to fill the state treasury with money.
Everybody Is Required to Pay!
The TC expanded the list of persons liable for VAT (compared to the list contained in the previous wording of Law of Ukraine No. 168/97-VR “On Value Added Tax” dated April 3, 1997). Being a taxpayer for the purposes of Article 180 of the TC and having the right to be registered with a state inspectorate (as a VAT payer) are, however, quite different concepts. A lot of enterprises will have to do their business according to the following principle: “you may be not registered but you will, nevertheless, be obliged to pay tax.” Importers (who are not registered for VAT) have long since started abiding by such policy in the customs clearance process. It is obviously due to registration restrictions that some other companies (in particular, newly established ones or those dealing with VAT non-payers) have also been confronted with the requirement to comply with such policy.
These rules may trigger an outflow of hard cash from companies in the form of VAT paid in the price of purchased goods (works or services) and make it impossible to recognize such amounts as a tax credit since the right to form the tax credit is conferred upon a registered VAT payer only.
Selectively Voluntary Behavior
The criteria for mandatory registration of a company for VAT purposes (according to Article 181, operations relating to the supply of goods, works and services in the amount in excess of UAH 300 thousand (exclusive of VAT) over the last 12 months) have practically not changed since January 1. This is, however, not the case with the criteria for those who voluntarily wish to register for VAT purposes, which have undergone significant metamorphosis.
Such voluntary options are laid down in Article 182, but their content, already from the first day of TC publication, gave rise to many questions and ambiguous conclusions about “manual” regulation of the procedure for taxpayer registration and control (by the way, registration as a type of tax control is indicated in Article 62 of the TC).
If a company does not fall under the “UAH 300 thousand” criterion, as was also the case before, it may be registered voluntarily. But what does “voluntary registration” mean?
Based on the content of Article 182, the following conclusion suggests itself: only those companies may be registered voluntarily which have been existing at least for a year and which have been supplying goods/services to other VAT payers (at least 50% of total supplies). If, until recently, such conclusion was either unsupported or refuted by tax authorities, there is currently no doubt that voluntary registration rules have been tightened.
Things became clear after the approval of the Regulation on Registration of VAT Payers (Order No. 978 dated December 22, 2011 of the State Tax Administration of Ukraine (STAU)) and STAU Letter No. 4021/7/16-1417 dated February 14, 2011. Tax authorities confirmed that the voluntary registration is now a privilege and, furthermore, a temporary one, because, in case of the reduction of supplies to other taxpayers, the taxpayer’s certificate shall be cancelled (under Clause 184.1(и) of Article 184 of the TC).
Subject to Simplified Taxation System, but not Fully Simplified
It is also important that individual entrepreneurs who pay a flat tax may not be registered as VAT payers at all. This category is fully excluded from the list of “individuals” for VAT purposes (for details, see Clause 14.1.139. of Article 14 of the TC). Based on the interpretations provided by the STAU in its Letter No. 674/7/16-1417 dated January 12, 2011, there must be no room for other conclusions.
The situation with legal entities that switched to the simplified taxation system is somewhat different. The TC does not contain any prohibition of registration of such companies for VAT purposes, nor does the economic Constitution contain any express indication of such possibility. It, however, could never contain such indication as the developers of this document could hardly suppose that its section dedicated to the simplified system would disappear from the final text of the TC and that the taxpayers who pay a flat tax would continue their semi-legitimate existence on the basis of Presidential Decree No. 727 dated July 3, 1998.
And while the situation is being rectified (a draft law on the simplified taxation system is being developed), legal entities that pay income tax at the rate of 6% (flat tax) could, based on a logical inference from the analysis of the TC provision, count on the registration for VAT purposes (according to Clause 1 (1) of subsection 8 of Section ХХ of the Tax Code). This issue was, however, also put under control of tax authorities, which decided to independently clarify the registration procedure (in the same STAU Letter No. 4021/7/16-1417 dated February 14, 2011, which was addressed to regional tax inspectorates).
The tax authorities now use the following criteria: a legal entity that already pays a flat-rate tax will now have to pay VAT (and be registered for VAT purposes). However, if a company is a newly established one or only intends to switch to the flat tax, there appears a pitfall, which takes the form of the necessity to comply with the “UAH 300 thousand” criterion or with the “50% of operations with taxpayers over the last 12 months” criterion. In other words, the company must fall under the criteria of either voluntary registration for VAT purposes or mandatory registration. If the company does not fall under any of these criteria, it won’t be registered as a VAT payer and this will be not the only unpleasant conclusion.
Based on the criteria of the cluster of “the flat tax at the rate of 6% and the VAT,” the taxation authorities arrived at a conclusion that if a legal entity does not fall under the criteria of mandatory or voluntary registration, it “may not be registered as a value-added tax payer and, thus, may not be transferred to the simplified system of taxation at a 6% rate of the flat tax.”
It transpires that, by restricting the registration for VAT purposes, authorities automatically propose to bar the possibility of the transfer of legal entities to the flat-rate tax. Had such provision been expressly contained in the TC, there would be nothing for it but to take it as a truth. What is more important is that Presidential Decree No. 727.98 dated July 3, 1998 does not contain similar conditions for transfer to the simplified system. In other words, we have only Letter No. 4021/7/16-1417 where the position of the taxation authorities is laid down.
This very position will, most probably, be used by local inspectorates when dealing with registration issues. It is, however, common knowledge that the position taken by the tax administration as laid down in its letter does not always guarantee stable interpretation of any provision by the taxation authorities in the future (as an illustrative example, consider an approach to determination of penalties for the period from January 1 to June 30, 2011: contradictory STAU Letters No. 2963/7/10-1017/302 dated February 3, 2011 and No. 29429/7/10-1017/5190 dated December 31, 2010 or peripeteia around non-resident income taxation two years ago).
Déjà vu
The problems with registration for VAT purposes appeared not today. Back at the end of last year, many companies had no opportunity to exercise the right guaranteed by Law of Ukraine No. 168/97-VR “On Value Added Tax” dated April 3, 1997. At that time, registration barriers had no grounds prescribed by law. Nevertheless, it was next to impossible to become registered for VAT purposes in practice.
Now, registration gates are closed for the newly established companies (whose income does not exceed UAH 300 thousand). Likewise, the gates are closed for individuals who are subject to the simplified tax system.
Those who still hope to be registered should be prepared for the scrupulous examination of documents supporting the right to registration (breakdown of the volumes of supplies (evidently, in terms of months) and of the correctness of preparation of the registration application and for other discouraging procedures.
During the pre-registration period, business owners will experience a significant outflow of hard cash. Needless to say what tyoe of impact it will make on the overall investment attractiveness of the State for foreign companies. This gives rise to a question: “Are we on the right path, Sirs?”
No Tax Logic
There has recently emerged a trend of the lack of VAT amounts actually paid to the budget in connection with VAT cash refund claimed by business entities. Such illogical computational results are quoted by both politicians and tax authorities as stemming from “dormant companies” (which actually do not carry out business) that are used in a chain of operations aimed to minimize taxes.
On the other hand, we are not the only State where abuses on VAT may exist. According to an official statement made by the European Union, its annual losses reached EUR 200 to 250 billion in connection with the burgeoning of “carousel” schemes and the application of a zero rate of VAT to exports.
Thus, our tax authorities decided that such tax minimization schemes must be clamped down as soon ass possible. For this reason, they now try not only to keep track of “dormant company” links in the chain, but also to prevent the possibility of their establishment (or at least their registration for VAT purposes). The fact is, however, that such “eradication of dormant companies” may affect a number of enterprises engaged in transparent business activities and willing to legitimately take advantage of the right to a VAT refund. All arguments against such novelties are obviously outweighed by the need to fill the state treasury with money.
Everybody Is Required to Pay!
The TC expanded the list of persons liable for VAT (compared to the list contained in the previous wording of Law of Ukraine No. 168/97-VR “On Value Added Tax” dated April 3, 1997). Being a taxpayer for the purposes of Article 180 of the TC and having the right to be registered with a state inspectorate (as a VAT payer) are, however, quite different concepts. A lot of enterprises will have to do their business according to the following principle: “you may be not registered but you will, nevertheless, be obliged to pay tax.” Importers (who are not registered for VAT) have long since started abiding by such policy in the customs clearance process. It is obviously due to registration restrictions that some other companies (in particular, newly established ones or those dealing with VAT non-payers) have also been confronted with the requirement to comply with such policy.
These rules may trigger an outflow of hard cash from companies in the form of VAT paid in the price of purchased goods (works or services) and make it impossible to recognize such amounts as a tax credit since the right to form the tax credit is conferred upon a registered VAT payer only.
Selectively Voluntary Behavior
The criteria for mandatory registration of a company for VAT purposes (according to Article 181, operations relating to the supply of goods, works and services in the amount in excess of UAH 300 thousand (exclusive of VAT) over the last 12 months) have practically not changed since January 1. This is, however, not the case with the criteria for those who voluntarily wish to register for VAT purposes, which have undergone significant metamorphosis.
Such voluntary options are laid down in Article 182, but their content, already from the first day of TC publication, gave rise to many questions and ambiguous conclusions about “manual” regulation of the procedure for taxpayer registration and control (by the way, registration as a type of tax control is indicated in Article 62 of the TC).
If a company does not fall under the “UAH 300 thousand” criterion, as was also the case before, it may be registered voluntarily. But what does “voluntary registration” mean?
Based on the content of Article 182, the following conclusion suggests itself: only those companies may be registered voluntarily which have been existing at least for a year and which have been supplying goods/services to other VAT payers (at least 50% of total supplies). If, until recently, such conclusion was either unsupported or refuted by tax authorities, there is currently no doubt that voluntary registration rules have been tightened.
Things became clear after the approval of the Regulation on Registration of VAT Payers (Order No. 978 dated December 22, 2011 of the State Tax Administration of Ukraine (STAU)) and STAU Letter No. 4021/7/16-1417 dated February 14, 2011. Tax authorities confirmed that the voluntary registration is now a privilege and, furthermore, a temporary one, because, in case of the reduction of supplies to other taxpayers, the taxpayer’s certificate shall be cancelled (under Clause 184.1(и) of Article 184 of the TC).
Subject to Simplified Taxation System, but not Fully Simplified
It is also important that individual entrepreneurs who pay a flat tax may not be registered as VAT payers at all. This category is fully excluded from the list of “individuals” for VAT purposes (for details, see Clause 14.1.139. of Article 14 of the TC). Based on the interpretations provided by the STAU in its Letter No. 674/7/16-1417 dated January 12, 2011, there must be no room for other conclusions.
The situation with legal entities that switched to the simplified taxation system is somewhat different. The TC does not contain any prohibition of registration of such companies for VAT purposes, nor does the economic Constitution contain any express indication of such possibility. It, however, could never contain such indication as the developers of this document could hardly suppose that its section dedicated to the simplified system would disappear from the final text of the TC and that the taxpayers who pay a flat tax would continue their semi-legitimate existence on the basis of Presidential Decree No. 727 dated July 3, 1998.
And while the situation is being rectified (a draft law on the simplified taxation system is being developed), legal entities that pay income tax at the rate of 6% (flat tax) could, based on a logical inference from the analysis of the TC provision, count on the registration for VAT purposes (according to Clause 1 (1) of subsection 8 of Section ХХ of the Tax Code). This issue was, however, also put under control of tax authorities, which decided to independently clarify the registration procedure (in the same STAU Letter No. 4021/7/16-1417 dated February 14, 2011, which was addressed to regional tax inspectorates).
The tax authorities now use the following criteria: a legal entity that already pays a flat-rate tax will now have to pay VAT (and be registered for VAT purposes). However, if a company is a newly established one or only intends to switch to the flat tax, there appears a pitfall, which takes the form of the necessity to comply with the “UAH 300 thousand” criterion or with the “50% of operations with taxpayers over the last 12 months” criterion. In other words, the company must fall under the criteria of either voluntary registration for VAT purposes or mandatory registration. If the company does not fall under any of these criteria, it won’t be registered as a VAT payer and this will be not the only unpleasant conclusion.
Based on the criteria of the cluster of “the flat tax at the rate of 6% and the VAT,” the taxation authorities arrived at a conclusion that if a legal entity does not fall under the criteria of mandatory or voluntary registration, it “may not be registered as a value-added tax payer and, thus, may not be transferred to the simplified system of taxation at a 6% rate of the flat tax.”
It transpires that, by restricting the registration for VAT purposes, authorities automatically propose to bar the possibility of the transfer of legal entities to the flat-rate tax. Had such provision been expressly contained in the TC, there would be nothing for it but to take it as a truth. What is more important is that Presidential Decree No. 727.98 dated July 3, 1998 does not contain similar conditions for transfer to the simplified system. In other words, we have only Letter No. 4021/7/16-1417 where the position of the taxation authorities is laid down.
This very position will, most probably, be used by local inspectorates when dealing with registration issues. It is, however, common knowledge that the position taken by the tax administration as laid down in its letter does not always guarantee stable interpretation of any provision by the taxation authorities in the future (as an illustrative example, consider an approach to determination of penalties for the period from January 1 to June 30, 2011: contradictory STAU Letters No. 2963/7/10-1017/302 dated February 3, 2011 and No. 29429/7/10-1017/5190 dated December 31, 2010 or peripeteia around non-resident income taxation two years ago).
Déjà vu
The problems with registration for VAT purposes appeared not today. Back at the end of last year, many companies had no opportunity to exercise the right guaranteed by Law of Ukraine No. 168/97-VR “On Value Added Tax” dated April 3, 1997. At that time, registration barriers had no grounds prescribed by law. Nevertheless, it was next to impossible to become registered for VAT purposes in practice.
Now, registration gates are closed for the newly established companies (whose income does not exceed UAH 300 thousand). Likewise, the gates are closed for individuals who are subject to the simplified tax system.
Those who still hope to be registered should be prepared for the scrupulous examination of documents supporting the right to registration (breakdown of the volumes of supplies (evidently, in terms of months) and of the correctness of preparation of the registration application and for other discouraging procedures.
During the pre-registration period, business owners will experience a significant outflow of hard cash. Needless to say what tyoe of impact it will make on the overall investment attractiveness of the State for foreign companies. This gives rise to a question: “Are we on the right path, Sirs?”
LIGA:ZAKON, Feb 25, 2011