Some CPT taxpayers may still have debts in foreign currency (for goods delivered and services provided) that occurred up until 2015, which are unlikely to be repaid, yet cannot be written off in tax accounting until the debt is paid off. Such debt, if kept in the accounting records, shall be considered for the purposes of calculating exchange rate differences and may generate “income” that is not actually received, while tax liabilities increase.<\/p>\n
Starting from January 1, 2015, the CPT rules have been changed, as well as the rules for accounting for debts. At the same time, para. 17 of subsection 4 of section XX of the Tax Code o Ukraine established special rules for accounting for bad debts for those taxpayers who, prior to January 1, 2015, applied the mechanism stipulated by subpara. 159.1.1 of the Tax Code o Ukraine in the wording prior to 2015 – filed a lawsuit against the debtor.<\/p>\n
Such new special rules of tax accounting envisage that taxpayers should record “old” debt for tax accounting purposes until it is paid off or recognized as bad debt pursuant to the procedure established by para. 17 of subsection 4 of section XX of the Tax Code o Ukraine (i.e., when the buyer declared bankrupt has insufficient assets and the debt is written off according to the terms of the settlement agreement concluded in accordance with the bankruptcy law).<\/p>\n
In case such debt was neither repaid nor recognized as bad debt as described above, we believe that there may be several approaches to tax accounting of such “old” debt.<\/p>\n
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The old debt has lost the characteristics of an asset in the context of bookkeeping, therefore, should be excluded from the accounting records. The taxpayer may keep the debt on a separate non-balance sheet account intended exclusively for recording such debt for tax purposes.<\/p>\n
Yet, such approach<\/em> is risky, since the tax authority may argue that bad debts should also be reflected in the accounting records and, accordingly, that foreign exchange gains\/losses due to exchange rate fluctuations should be recognized in the accounting and tax records.<\/p>\n If the “old” debt meets the criteria of bad debt as defined by subpara. 14.1.11 of the Tax Code, then pursuant to an aggressive approach, the financial result should be reduced upon writing-off the debt according to subpara. 139.2.2 of the Tax Code.<\/p>\n However, the tax authority may argue that the taxpayer used the right to reduce its income long ago (under subpara. 159.1.1 of the Tax Code), therefore, the reduction of the financial result is now excessive.<\/p>\n One should not exclude that debt deemed to be bad debt based on other grounds not specified in para. 17 of subsection 4 of section XX of the Tax Code o Ukraine should increases the financial result.<\/p>\n For instance, if a taxpayer decides to exclude a debt from the accounting records because it is no longer an asset and the taxpayer has already tried all possible methods to collect the debt, the taxpayer should increase the financial result by the amount of the debt.<\/p>\n Yet, we believe that this approach is not based on the provisions of the Tax Code, since the provision in question does not contain a direct requirement to increase the financial result.<\/p>\n\n
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