Concerning deduction of payments to individuals on agreement between the parties in accordance with the Tax Code (Legal Alert 2011-2)
As far as you know on April 1, 2011 provisions of Chapter III “Corporate profit tax” of the Tax Code of Ukraine will come into force. These provisions will replace currently effective Corporate Profit Tax Law (hereinafter – the “CPT Law”).
In this connection we would like to pay your attention to changes in the rules of deduction of payments to individuals, made on agreement of the parties.
Thus, currently effective clause of subpara. 5.6.1 of CPT Law permits taxpayers to include into deductible expenses certain expenses on remuneration of labor, in particular “any other expenses in monetary or natural form, made on agreement of the parties”.
Mentioned formulation of subpara. 5.6.1 of CPT Law provides the grounds to understand under “agreement of the parties” the collective or labor agreement. I.e. according to current legislation the taxpayer may envisage some payments to the individual directly in labor agreement, and it is noе necessary to envisage such payment in collective agreement.
The Tax Code , generally is similar to the formulation of subpara. 5.6.1. of the Law. However there is certain alteration, particularly in part of expenses under consideration.
Thus, according to para. 142.1 of Article 142 of the Tax Code, “deductible expenses of taxpayer include <…> any other payment in monetary form or in-kind, established on agreement of the parties, according to collective agreements“.
As we can see the Tax Code narrowed the right of payer of corporate tax to include payments to individuals into deductible expenses. Thus, as soon as Chapter ІІІ of the Tax Code enters into force, the taxpayer shall include into deductible expenses only those payments to individuals, which are stipulated in the collective agreement with employees.
Thus, to avoid any problems during formation of deductible expenses, related to discussed payments to individuals, we suggest settling this question as prescribed by provisions of the Tax Code – in particular, by means of stipulation of respective payments to individuals in collective agreements – prior to the moment when Chapter ІІІ “Corporate profit tax” enters into force.
Moreover we would like to note that in accordance with Article 3 of the Law of Ukraine “On collective agreements”, the collective agreement shall be concluded not only with trade unions or other bodies empowered to represent employees, but also with representatives of employees, elected and empowered by them.
The procedure of election of representative of employees is regulated by labor legislation.
At the same time the collective agreement may include the separate addenda where systems of awarding and payment of bonuses with use of certain coefficients may be envisaged. It gives the possibility to keep certain individuality in determination, for example of bonuses to a certain employee.
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.
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