Novelties of 2013 in the IT business taxation
IT business is exempt from the value added tax (VAT) and also pays the corporate profit tax (CPT) at the reduced rate starting from January 1, 2013 and until January 1, 2023.
Subsection 2 of the Transitional Provisions of the Tax Code provides for an exemption from VAT of transactions on supply of “software products” for the period of 10 years, starting from January 1, 2013. Software products include the result of computer programming, particularly in the form of operating system, system, application, entertainment, educational computer software, web sites and online services, as well as cryptographic protection of information tools.
However, the legislator does not define what is meant under the supply of the software products. Thus, the software products may be considered at least in two following aspects:
- an object of proprietary right, in this case the supply is realized as transferring of the proprietary right to copy of the software product;
- an object of intellectual property right. In this casethe supply of software products is realized as transferring of copyright in software products. Namely, the new holder of copyright, for example to a computer program, obtains the right to sell such computer program, exclusive right to permit its use, the right to prevent illegal using by other persons, etc.
Therefore, since there is no clear definition and explanations in respect of this question in the Tax Code, we believe that it is possible to use this relief from VAT in both of the above cases of supply of software products. Namely, the relief should be applied both in case of transfer of copyright and in case of supply of a copy of the software. This approach may also be justified by one of principles of tax law which is presumption of lawfulness of decisions of a taxpayer in the case of ambiguity in tax legislation (para. 4.1.4 of The Tax Code of Ukraine).
Corporate Profit Tax
Who has the right for tax benefits?
A Business entity engaged in software industry has the right for application of tax benefits. This is the business entity, which within four consecutive reporting periods (for newly established entities1, which operate within no less than two quarters – during the actual period of activity):
- was not a tax debtor;
- was not subject to any bankruptcy court resolutions;
- initial value of fixed assets and/ or of intangible assets exceed more than 50 minimum wage amounts, set as of January 1st of the reporting period;
- not less than 70 % of revenues from all types of economic activity shall consist of income from supplying goods, works and services belonging to the software industry.
Which activity falls within category “activity in software industry” is stipulated by the Tax Code of Ukraine (subpara. 1.5 para. 15 subch. 10 Chapter XX). This includes in particular computer-based programming, software maintenance, consulting on the matter of informatization etc.
Upon accordance of business entity to abovementioned requirements and upon submission of application and other documents to tax authorities, the State tax service includes this entity to the Registry of entities, which use the special rules of taxation of software industry and issues the certificate to this entity. This document provides the right to apply tax benefits, namely payment of the profit tax at the reduced rate of 5 % (from 01.01.2013 for other entities the rate makes 19 %).
At the same time the Tax Code of Ukraine stipulates the obligation of taxpayers, whose income of former period exceeded 10 million UAH, to arrange monthly advance installment at the rate of no less than 1/12 of accrued tax in the preceding period (in January-February 2013 – 1/9 of accrued tax within 9 months of 2012 V). In 2012 the corporate profit tax made 21%, while in 2013 for software products’ entities it is envisaged at the level of 5 %. As a result, in fact in 2013 the profit tax would be paid at the rate of 21% and no exceptions for ‘exempt entities’ were foreseen.
Taxpayers are imposed with responsibility to conduct separate recording of incomes and expenses in respect of the income in software industry. The given rule applies to depreciation amount, which is included in the expenses of the operational activity, for which the fixed assets were used.
When capital assets are used for profit-making simultaneously from multiple activities (operations in software industry and other businesses), then the part of amortization amount, which would be referred to the cost of profit-making activity in software industry, should be computed according to the following formula:
where a – rate of the total amount of accrued depreciation, which refers to the cost of profit-making activity in software industry,
a1 – total amount of accrued amortization in reporting tax period,
b– amount of income from the activities in software industry,
b1 – total amount of income from all businesses.
The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.
1It is not deemed as newly established entities, which were created after effective date of the Law of Ukraine “On Introduction of Changes to Chapter XX ‘Transitional Provisions’ of the Tax Code of Ukraine pertaining to peculiarities of taxation of entities of software production industry” by way of reorganization (acquisition, accession, separation, appropriation, transformation), privatization and corporatization.
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