Exit Capital Tax in respect of the regular price application
Suggestions concerning introduction of radically different philosophy in taxation of enterprises widen – the idea of replacing the Corporate Profit Tax (‘CPT’) to the new Exit Capital Tax (‘ECT’) on transactions finds morefollowers.
The keynote of the proposed innovations is introducing taxation for transactions, which result in capital withdrawal from business. The business is no stranger to such transactions. This is the owner’s decision on payment of dividends to exit capital taxpayer, the hidden withdrawal by means of equal payments (royalty, interests in favor of non-residents, financial aid to non-payers, investments abroad). These are also transactions that require surcharges under certain conditions.
Let us analyze application of the regular price in the proposed model – the model of Exit Capital Tax the rules of settlement and estimation of which (regular price) have always been and remain imperfect in the Tax Code of Ukraine.
Application of the regular price to transactions on capital withdrawal is a protector for capital withdrawal from taxation through using of non-market prices during the sale of goods (works, services) to non-payers or abuse of contributions assessment to the charter capital of the exit capital taxpayer.
Accordingly, in the suggestions concerning the legislative initiative, developed by Alexander Shemiatkin, the Partner, attorney law of “KM Partners” law firm and by Tatiana Shevtsova, the managing Partner of “Capital Plus” audit firm with the participation of experts of the “KM Partners” law firm and “Capital Plus” audit firm (the full text of the suggestions is published on KMP.UA web-site) concerning Exit Capital Tax it is proposed to apply the regular price in order to determine the tax base for a number of transactions in connection with:
- sale of goods (services, works) to non-taxpayers in all transactions, except for sales by the public offers through the trade networks, shops, websites, etc.;
- implementation of the non-monetary contribution;
- payment of non-monetary dividends.
Reference to the regular price is not introducing something radically new. Today, in accordance with the provisions of the Tax Code, application of the regular price is envisaged for a number of specific cases prescribed by law.
Accordingly, for the purposes of the Value Added Tax (VAT), the regular price is applied as the lower limit boundary for determining the tax base of the independently manufactured goods (services) and fixed assets (in case of the accounting data absence). For the purposes of personal income tax charge the regular price is used for the noncash income and as to received the free of charge goods (works, services).
As for CPT, which is proposed to be replaced by ECT, the regular price is briefly mentioned for the purposes of the financial result adjustments.
However, the application of the regular price in accordance with the current version of the Tax Code, leads to some difficulties. The only provision in the tax legislation that regulates the issue of regular price estimation for all the above mentioned situations, is the provision of subparagraph 14.1.71 of the Tax Code.
Based on the current version of subparagraph 14.1.71 of the Tax Code, the regular price is determined as “the price for goods (works, services), established by the parties of the agreement, unless otherwise is provided by this Code.”
In other words, the basic rule that shall be applied on default is the fact that the price under the agreement is the regular price. There are some special rules regarding estimating regular prices in the following situations: the state regulation of prices; transaction with obligatory assessment; holding of an auction; execution of the forward and futures agreement; sale of the mortgaged property.
At this point determination of the regular price application, based on the current version of the Tax Code, is complete, while the questions begin beginning to arise. This is in reference to the provision “Unless otherwise proven, it shall be considered that such regular price corresponds to the market price level”, which brings more questions than answers, beginning with the manner and the rules proving the opposite, and ending with correspondence of regular price with the market price.
For the unambiguous application and understanding of the provisions regarding the regular price by the authorities of the State Fiscal Service and taxpayers, the suggestions concerning the legislative initiative on ECT contain points regarding change the definition of regular price, significantly elaborating the rules of the regular price, procedure and conditions for its estimation.
In particular, the suggestions to determine the regular price as the monetary equivalent of the value of goods (works, services), fixed assets, which is determined by the following rules in order of priority:
- under the level not lower than the purchase price of goods (works, services), and for fixed assets – not lower than the book (residual) value according to accounting data;
- under the level not lower than the weighted average selling (alienation) price of goods (works, services) taking into account the possible seasonal fluctuations in customer demand;
- under the price estimated at the level of the productive cost, which is calculated according to accounting data.
The first rule on the purchase price is not new and already is applied in practice for the purposes of VAT taxation.
The suggestions regarding application of weighted average selling price among other things, take into account the relevant situation on the market of sale of goods (services, works). Those are seasonal fluctuations in consumer demand, natural for many markets. Therefore, in such cases it is proposed to establish the selling (alienation) price within relevant periods.
Accordingly, application of price at production cost level according to the accounting data is proposed to fix as rule which can be used by the taxpayers of their choice without regard to order of priority.
However, even the proposed rules cannot solve all cases that occur in business. For example, the issue of revaluation of the goods, the provision of marketing discounts, etc. Therefore, the risk of a dispute with authorities of the State Fiscal Service still remains.
In this regard, the suggestions concerning the legislative initiative on the ECT, contains proposal to return the pass-off standard from the regular prices, if the deviation in the direction of the decrease or increase in the range of 20%. In this case, the tax liability for regular price application by the authorities of the State Fiscal Service may not be charged
Others special rules of regular price application (government regulation, auctions, evaluation, etc.) provided by the current version of the Tax Code, remain.
The analyzed above suggestions about the change of the regular price will not only provide a clear and unambiguous understanding and application of regular price at practice for purposes of ECT taxation , but will also contribute to the solution of the existing problems with the regular price application for the purposes of VAT and PIT taxation.
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