Recently Ukrainian State Tax Service (STSU) published a number of tax circulars containing STSU's interpretations of the tax law. The above circulars cover a variety of issues. Some of the key points are as follows:

Corporate Profit Tax (CPT)

1. Allowable expenses from private entrepreneurs using fixed-tax system

Starting from 1 January 2012, any expenses incurred by a company from private entrepreneurs registered as fixed-taxpayers may be generally deductible for CPT purposes, if linked with the company's business. Previously, such expenses were disallowed for tax deduction. (Ref.: Order of STSU #121 as of 15 February 2012)

2. Tax accounting of royalty

As a general rule, royalty payments for the use of IP rights shall be qualified as so-called "other" business expenses for tax accounting purposes. If, however, it is possible to attribute the royalty payments to specific goods/services, such expenses should be accounted for as COGS (i.e., cost of relevant goods/services sold). Respectively, STSU noted that if royalty is treated as "other" business expenses – they are eligible for immediate tax deduction, while those accounted for as COGS – should be permitted for tax deduction in the tax period when the company receives income from sale of the relevant goods/services. (Ref.: Order of STSU #122 of 15 February 2012)

3. Deductibility of marketing and advertising costs

STSU acknowledged that sales promotion initiatives (bonuses, incentive payments, merchandising, etc.) should be generally CPT deductible as long as such activities exclusively relate to a business activity of the relevant taxpayer. The marketing and advertising expenses should be properly documented to justify direct link with the taxpayers' business. (Ref.: Order of STSU #123 as of 15 February 2012)

4. FOREX tax accounting rules

Foreign exchange differences regarding certain assets and liabilities arising before 1 April 2011 should be recalculated according to the Ukrainian national accounting standards. Any assets or liabilities nominated in foreign currency and arising before 1 April 2011 should be accounted for at the official exchange rate set up by the National Bank of Ukraine on 31 March 2011. (Ref.: Order of STSU #120 as of 15 February 2012)

Value Added Tax (VAT)

5. VAT invoices

The tax authorities provided their opinion regarding various aspects of VAT administration. However, the main message was that VAT invoices that give a right for VAT credit in the respective month and received by a taxpayer with some delay (i.e., in subsequent month) may be still valid and reported as VAT credit in subsequent month if (i) from the date of their issue passed less than 365 days and (ii) the taxpayer has a documentary proof of such delay. (Ref.: Order of STSU #127 as of 16 February 2012)

6. VAT credit/liabilities adjustments

Tax authorities raised certain issues relating to adjustment of VAT credit and/or liabilities upon a so-called "deemed supply"* of goods/services. According to STAU the adjustment return may be filed only for one reporting period, whereas the adjustment returns for different reporting periods should be filed for each reporting period separately. (Ref.: Order of STSU #128 as of 16 February 2012)

7. Proportional allocation of VAT credit

The tax ruling clarifies the mechanism for re-calculation of VAT credit that was previously declared on purchase of goods/services and when such goods/services started to be used simultaneously in VAT-able supplies and – in VAT-exempt supplies. Such proportional VAT credit allocation should be conducted once a year based on a relevant ratio specifically calculated by the taxpayer. (Ref.: Order of STSU #129 as of 16 February 2012)

* The "deemed supply" is not an actual supply of goods/services, but rather a technical adjustment (assessment of VAT liability) in tax accounts made by a taxpayer under certain circumstances (such as VAT deregistration, use of the goods in VAT-exempt transactions, etc.).

For further information please contact managing partner Oleksiy Didkovskiy,
counsel Alexey Khomyakov or senior associate Kostya Solyar