Is the issue regarding the transfer of the negative amount of the object of taxation from the 1st quarter of 2011 to the 2nd quarter of 2011 solved?! Analysis of the provisions of the Law of Ukraine “On Amendments to the Tax Code of Ukraine on Improvement of Some Tax Rules”

31 May, 2012 Newsletters

Dear Sirs!

We avail ourselves of this opportunity to express to you assurances of our highest consideration and bring to your attention the amendments in view of adopting on May 24, 2012 the Law of Ukraine “On Amendments to the Tax Code of Ukraine on Improvement of Some Tax Rules”, which is currently on the signing of the President of Ukraine (No. 9661-d, as amended on May 23, 2012) (hereinafter – the “Law”), namely in the part of inclusion of the negative amount of the object of taxation to deductible expenses of the following reporting (tax) periods.

First of all, we are to note that the Law does not change the current rules of para. 3 of subsection 4 of Section XX “Transitional Provisions” of the Tax Code of Ukraine on including negative amount of the object of taxation in the year 2011. That is, the problem of ambiguous interpretation of these rules by state authorities still remains.

However, we may hope that the Law still makes some positive changes.

Thus, in accordance with the Law, the negative amount of the object of taxation as of January 1, 2012, “… considering the negative amount of the object of taxation for 2010 taxable year …” (subpara. 23 of para. 100 of the Law) shall be included to deductible expenses of the taxpayer. We tend to conclude that if a negative amount of the object of taxation for the year 2010 is to be included to the expenses in the year 2012, then it is included as well to the expenses in the year 2011 without any restrictions.

However, if a fiscal approach is applied to the interpretation of this rule of Law, there is a risk of restriction of rights of the taxpayers. As it is known, para. 22.4 of the Article 22 of the Law “On Corporate Profit Tax” (as of December 28, 1994, No. 334/94-VR) sets the limit on the transfer of negative amount of the year 2009 to the deductible expenses of the year 2010 at the rate of 20 percent and the remaining 80 percent to be included to the expenses of the first quarter of the year 2011. There is a risk that tax authorities may insist on the transfer of the negative amount of the years 2011 and 2010 to 2012-2015 without considering the negative amount of the year 2009 at all.

Thus, the Law, widely advertised as the solution of the problems of the taxpayers may actually be another trap for taxpayers in case of applying the fiscal approach in interpretation of its rules by the state authorities.

The Law stipulates that taxpayers-residents with income of 1 million USD and more for the year 2011 shall step-by-step include the sum of the negative amount for the years 2010 and 2011 at the rate of 25 percent to the next reporting periods, starting from the first half of the year 2012 and till the end of 2015. The subjects of small business shall include negative amount of the year 2011 to the following periods in full amount to their full redemption, that is not limited in time.

The abovementioned provisions of the Law shall enter into force on July 1, 2012 if signed by the President of Ukraine.

Further development of the situation, please see here

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.

Kind regards,

© TOV "KM Partners", 2012

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