Taxation during martial law
Since the beginning of the martial law in Ukraine, quite a lot of enterprises have been forced to temporarily suspend work, especially in those cities and villages of Ukraine, where such work was impossible due to the brutal military actions of the aggressor country — the Russian Federation.
Given the difficult circumstances for business, the Verkhovna Rada of Ukraine passed a number of laws, aimed at getting things easier for business. In particular, the following laws were adopted:
- No 2118-IX and No 2115-IX dated March 3, 2022 (became effective as of March 7, 2022)
- No 2120-IX dated March 15, 2022 (became effective as of March 17, 2022)
- No 2142-IX dated March 24, 2022 (became effective as of April 5, 2022)
By reviewing these Laws, we, experts of BDO in Ukraine in Ukrainian and international taxation, would like to comment on the main changes related to VAT, income tax, excise tax, land fees and property tax.
Interesting on the topic: News in the field of indirect taxes Issue 1/2022 — January 2022
Let’s start with the general changes that have affected all or most taxpayers.
Thus, due to changes in the Transitional Provisions of the Tax Code during martial law / state of emergency in Ukraine, the tax office will not penalize taxpayers for late payment of taxes, late submission of tax returns, if the deadline for reporting was from 24.02.2022 to the last day of the month of termination of martial law, late registration of tax and excise invoices, late submission of electronic documents on the actual balances and volume of fuel, ethyl alcohol, etc.
But to avoid the penalties, provided by the TCU, for the above tax violations, all tax obligations must be fulfilled within 6 months after the termination of martial law in Ukraine. Initially, this period was 3 months, and after the Law No 2142 became effective — the legislator extended this period to 6 months.
We would like to add that the penal tax moratorium, defined in the Tax Code, applies only to violations of taxes and fees, provided for by the Tax Code of Ukraine — VAT, PIT, ML, income tax, land fees and other taxes and fees, determined by the TCU.
With regard to financial liability in the form of fines, the penalty is also not accrued during martial law, and the penalty accrued during martial law is subject to write-off.
We believe that attention should also be paid to the fact that those taxpayers, who are really unable to meet their tax obligations due to the war, are exempt from financial responsibility under the amendments to the transitional provisions of the Tax Code. Therefore, we believe that those taxpayers, who still have the opportunity to fulfill tax obligations, it is better to fulfill them. And if this is not really possible, in order to avoid disputes with the tax office — taxpayers, in our opinion, should apply to Ukrainian Chamber of Commerce and Industry to obtain an individual certificate of force majeure, despite the fact that Ukrainian Chamber of Commerce and Industry posted a general certificate of force majeure on its official website on February 28, 2022.
Next we move on to tax audits. During the martial law, there is a moratorium on inspections by the tax authorities, and ongoing inspections should be suspended, except for office audits related to the amounts of VAT recoverable, and except for the actual audits.
Thus, despite the moratorium on penalties, taxpayers will not be able to avoid liability under the Tax Code in the event of office and/or actual audits.
Next, we move on to the changes that during the martial law affected VAT taxation.
Let’s start with supply of both fuel and other goods and services for the military.
Transfer of any goods / services in favor of the Armed Forces of Ukraine, TDF and other military units of Ukraine, formed in accordance with the Law is not a supply for the period of martial law. That is, such a transaction is not subject to VAT.
But if the company will supply goods for refueling (refilling) or to provide goods for military transport, such supply will be subject to VAT at a rate of 0%.
Changes in VAT rates during martial law
Thus, during martial law / emergency, a VAT rate of 7% was set for transactions on import and supply to Ukraine (both imported and produced in Ukraine) of motor gasoline, heavy distillates, liquefied gas, which are subject to excise tax of EUR 0.00 per 1000 liters, and oil / petroleum products according to UСG FEA codes 2709 00 10 00 and 2709 00 90 00.
Tax credit for supply transactions at a VAT rate of 7%, if the company, before the introduction of a new rate of 7%, purchased goods / services at a rate of 20%, and after the introduction of a rate of 7% uses previously purchased goods / services at a rate of 20% in the transactions at the rate of 7%, then tax credit formed earlier at the rate of 20% does not need to be adjusted.
Possibility of forming a negative value of value added tax amount, defined as the difference between TL amount at the rate of 7% and TC amount at the rate of 20%, such a negative value is not reimbursable from the state budget and reduces the amount of tax liabilities payable to the budget in subsequent reporting periods.
It follows that if the taxpayer, who carried out supply transactions at a rate of 7% during the reporting period, has the difference between the amount of TL and TC in the VAT return is negative as a result of the reporting period, then such a negative difference can not be reported (neither in the current reporting period nor in subsequent reporting periods) to the budget reimbursement, and must be included exclusively in the tax credit of subsequent reporting periods. However, this temporary ban on the application for budget reimbursement does not apply to the situation when the VAT payer exported goods in the reporting period and due to exports at a rate of 0% for the reporting period, he had a negative difference between TL and TC in the VAT return.
Accrual of compensating software for VAT
During a martial law / emergency, if the goods were previously purchased with VAT, but due to military actions such goods were destroyed or lost, it is not necessary to accrue compensating TL with VAT, because the destruction / loss of goods is not treated in this case as use in non-economic activities or in non-taxable transactions. Also, the transfer of goods / services to state ownership for defense purposes won’t be considered as a use in non-economic activities / non-taxable transactions.
Given the circumstances due to which many enterprises lost not only property, but also goods that could be stored in warehouses on the date of hostilities (mostly enterprises of Mariupol, Kharkiv, Kyiv, Chernihiv, Donetsk, Luhansk regions), then the possibility of exemption from the accrual of compensatory TL in these circumstances is good news for companies that have suffered significantly from the actions of the aggressor.
Even so, we believe, it will be useful to get an individual certificate of force majeure for companies, whose property and goods were actually damaged during the war, in order to be exempt from charging VAT compensating TL. And it would also be useful to have primary documents that would confirm transactions of voluntary transfer of goods / services to military bodies for the needs of defense.
Inclusion in VAT tax credit of not confirmed by registered TI / AC
The legislator considered this aspect. Inclusion of this aspect in the Tax Code was caused by the fact that, as we remember, from 24.02.2022, at this time and until the termination of martial law it is impossible to register TI / AC in URTI. As explained by the State Tax Service itself, such an unpleasant situation occurred due to the fact that the new form of TI / AC, which had to be updated in URTI and accessible from 01.03.2022, as of 24.02.2022 was not updated, so when companies try to register TI / AC during the war, they receive a notification of refusal to register.
So, now, due to the martial law and the fact that it is technically impossible to register TI / AC in URTI, the legislator allowed VAT payers to form a tax credit for purchased goods / services on the basis of primary / payment documents drawn up in compliance with all legal requirements.
Nevertheless, VAT payers, who legally took advantage of such a benefit from the state, will still have to register in URTI such unregistered during the war TI / AC within 6 months after the termination of martial law. And, if there is any discrepancy between the VAT in the TI / AC and the VAT in the primary document, it will have to be adjusted by submitting a clarifying declaration.
Good news for income taxpayers, who are actively involved in charity during the war, because of changes in the tax code:
- Voluntary free-of-charge transfer / alienation / seizure of goods, including excisable goods, provision of services for the benefit of the Armed Forces of Ukraine, the Security Service of Ukraine and other military units, hospitals, authorities is not considered a sale for tax purposes. That is, apparently, in terms of income tax, it is said that such sales transactions are not recorded in the Annex PI to the income tax return and therefore do not adjust the pre-tax financial result…
- Taxpayers are allowed not not increase the pre-tax financial result by the amount of free-of-charge transfers in excess of 4% of the object of taxation of the previous year, if during martial law such income taxpayer voluntarily transferred funds or special personal protective equipment (helmets, bulletproof vests, technical means of surveillance, medicines and medical devices, personal hygiene products, food, as well as other goods, services according to the list, determined by the Cabinet of Ministers of Ukraine), which are voluntarily transferred / provided to the Armed Forces of Ukraine, Security Service of Ukraine and other military units, to a special account of the SSU for the AFU, hospitals.
Thus, it is probably more profitable now, from income tax point of view, to voluntarily transfer goods / services according to the list, determined by the Cabinet of Ministers of Ukraine, directly to the Armed Forces of Ukraine and other military units, and not through a charitable (non-profit) organization.
Single tax of 2%
From April 1, 2022 and until the termination of martial law / emergency, private individuals and legal entities are given the opportunity to be on the Single tax Group 3 with a tax rate of 2% of turnover. By turnover is meant — funds received in cash / non-cash, tangible / intangible forms for goods sold, works, services.
But in order for an enterprise, that has decided to switch to this system, to be able to switch to it, it must meet such criteria as revenue for the previous year of no more than UAH 10 billion; type of activity — everything except gambling, currency exchange, trade in excisable goods, minerals, import of cars; types of enterprises — all except financial institutions, insurers, non-residents. The limit on the number of employees in this group of ST payers does not apply.
So far, some companies have managed to switch to this tax system from April 1, 2022 by submitting an application for the transition until March 31, 2022 inclusive to the State Tax Service at the place of tax address. And those companies, that are just planning the transition, can apply now and then next business day the transition will be made. For newly established enterprises, the transition will be from the date of their state registration, if the application is submitted within 10 business days from the date of state registration. At the same time, when applying for a transfer, it is not necessary to submit a calculation of income for the previous year (at least that is what the Law No 2142 says).
The tax reporting period is a calendar month. Therefore, reporting must be submitted within 20 calendar days following the reporting month, and tax must be paid within 10 calendar days after the reporting deadline.
Payers of the single tax of group 3 are exempt from accrual, payment and submission of tax returns on corporate income tax, personal income tax in terms of income from economic activities, VAT by 2%. Also, the exemption applies to property taxes and land fees, but we’ll talk about that later. Also, when importing goods, the ST payer at the rate of 2% is temporarily (from 01.04.2022 until the termination of martial law) exempt from VAT and import duties (except for beer, alcohol, tobacco, liquid for electronic cigarettes, spirit), but only, if the import of such goods is not from the aggressor country (RF) and/or from countries that support the actions of the aggressor in Ukraine (such as Belarus), and/or from the temporarily occupied territory (TOT).
However, despite the temporary non-taxation of VAT on imports of goods, imported by the ST payer at a rate of 2%, we believe that all taxpayers will have to prove the country of origin at customs, and most likely have to prove it with the authentic certificate of origin. By the way, payers of ST of 1st, 2nd groups and ST of 3rd group (at the rate of 5%) are temporarily exempt from VAT on imports from April 1, 2022 until the termination of martial law.
In fact, the ST at a rate of 2% is a temporary tax regime, so when the martial law / emergency in Ukraine terminates, the company will automatically return to its previous tax regime from the first day of the month following the month of the termination of martial law. And also, if the company tries to follow this tax system, but it does not like this system, then such a company will be able to apply for a waiver of this tax system at any time.
But we recommend that companies, that are still considering whether to switch to this system or not, think carefully about it, because not everyone can afford such a system in economic terms.
Who exactly is not profitable: private individuals of 1st and 2nd groups, which generally have the right not to pay a single tax from 01.04.2022 and until the abolition / termination of martial law / emergency, non-payers of VAT — legal entities under the general system.
Who exactly benefits from this: private individuals and legal persons of 3rd group at a rate of 5%.
Who should consider whether it is profitable or not: private individuals of the 3rd group at the rate of 3% with VAT, legal entities of the 3rd group at the rate of 3% with VAT, legal entities under the general system — VAT payers.
It is definitely not profitable: for those legal entities and private individuals, who stopped their economic activity during the war — due to occupation, destruction of production facilities, etc. For example: in a situation where a company, for example, provided its valuable employees to other companies to perform tasks / projects (relocate staff) and received remuneration for such relocation, and due to military actions relocation in most regions of Ukraine and abroad became impossible or simply unnecessary for the customer of such a service, or not necessary for the customer in terms of rising costs for the organization of the relocate, due to the destruction of the customer’s property during the war and so on.
And I would like to comment in more detail on the VAT situation for those companies that switched to the ST Group 3 at a rate of 2%, and were VAT payers before the date of transition.
In case of transition to the ST at the rate of 2% pre-registration as a VAT payer is not canceled, but it is only suspended for a certain period (from the date of transition to the termination of martial law / emergency, and in case of voluntary refusal to stay in the ST group 3 at rate 2 — from the date of transition to the date of voluntary refusal).
All supply transactions carried out by the ST payer at the rate of 2% are non-object transactions for VAT purposes, that is all norms written in Section V of VAT and in Subsection 2 of Section XX of the Tax Code do not apply to the ST payers at the rate of 2%.
We would like to draw your attention to the following points regarding VAT:
- if on the date of transition to the rate of 2% the company purchased goods / works / services / non-current assets with VAT at the rate of 20%, then supplying the same goods / works / services / non-current assets during the ST period (2%) — such supply transactions will not be subject to VAT, but after the company returns to the VAT payers, then by the end of the month, in which VAT registration will be resumed, the VAT payer will need to accrue tax liabilities on these goods / works / services / non-current assets (purchased at a rate of 20% before the transition to 2% and to do so with the sold ones during the ST period (2%);
- if the company purchases goods / works / services / non-current VAT certificates, being on the ST at the rate of 2%, then certainly the company does not have the right to a tax credit. Imagine that after the martial law is terminated and the company became a VAT payer again, it still has the goods in stock that it bought with VAT, being the ST at rate of 2%, but was not entitled to a TC. And then it decides to sell these goods from the warehouse, which he had previously bought with VAT, but had no right to a TC, because it was the ST at the rate of 2%. After the war, selling these goods, it will charge VAT as usual (of course, if it is not exports at the rate of 0% or some other benefit). Therefore, there will be a situation where we bought goods without the right to a TC, and then sell goods with VAT after the war. We are sure that business will not agree with such a schedule and sooner or later will ask the Verkhovna Rada Committee on Taxes to add a rule to the tax code that would eliminate such fiscal injustice. After all, it is not very profitable for business;
- What’s more interesting is that this temporary regime of the ST at the rate of 2% was established from April 1, 2022 and until the termination of not only martial law, but also emergency. Therefore, it suggests that even when the martial law is terminated, emergency may continue for some time after that, so it is difficult to predict period of ST regime validity at the rate of 2%, and the duration of emergency after termination of martial law.
Property tax and land fee
Changes that occurred in the sphere of property tax and land fees, will be discussed further.
Among other things, all legal entities are exempt for the period from 01.03.2022-31.12.2022 from charging / paying property tax for residential real estate located in areas where either there are hostilities, or these territories are occupied by the Russian Federation, or residential real estate has just become uninhabitable as a result of hostilities. As for individuals, they are also exempt from paying this tax on residential real estate, but for the periods — 2021 and 2022.
In addition to temporary tax on residential real estate in the period from 01.03.2022 to 31 December of the year, in which the martial law is terminated, legal entities do not accrue or pay property tax for non-residential real estate, located in areas where hostilities are conducted, or these territories are occupied by the Russian Federation. Also, legal entities within 6 months after the month in which the martial law is terminated, may submit a clarifying declaration on non-residential real estate and adjust the tax, accrued for the period from 01.03.2022 to 31 December of the year in which the martial law is terminated, and reduce such tax if non-residential real estate was during the period from 01.03.2022 to 31 December of the year in which the martial law is terminated on the territory, determined as occupied and/or on the territory where hostilities were by the Cabinet of Ministers.
Temporarily, during the period from March 1, 2022 to December 31 of the year following the year in which the martial law is terminated or abolished, fee for land and the general minimum tax for land, located on the territories where hostilities are (were), or on the territories temporarily occupied and are in the property / use by the Russian Federation, — is not charged or paid.
As in the case of property tax, tax payers of land fee can specify the amount of land fee for 2022, because they had to submit a report for 2022 before the war — until 21.02.2022 inclusive, and during the war due to hostilities, they may no longer have to pay for these land plots… But we have to wait for the Cabinet of Ministers to officially publish the list of territories for which land plots can be tax-free for the period from March 1, 2022.
The procedure for declaring residential real estate unfit for habitation due to the military aggression of the Russian Federation and the list of territories where there are hostilities and the list of temporarily occupied territories, have to be determined by the Cabinet of Ministers. As of April 5, 2022, there is no such Decree and List yet.
Then we move on to the excise tax.
In particular, most of the tax changes from this tax affected such excisable goods as fuel. And, as we know, fuel is an extremely important commodity during the war, because it provides its logistical component, so many benefits were adopted by the Verkhovna Rada in relation to fuel supply transactions.
Firstly, fuel supply transactions on the customs territory of Ukraine shall not be considered as the sale of fuel:
- fuel supply transactions as humanitarian aid in the manner, prescribed by the Cabinet of Ministers of Ukraine,
- fuel supply transactions that are carried out in connection with its forced alienation or seizure for the needs of the state under the Law of Ukraine “On the transfer, forced alienation or seizure of property under the legal regime of martial law or emergency state” without compensation for forcibly alienated or seized fuel,
- fuel supply transactions that are carried out in connection with its transfer to the Armed Forces of Ukraine, TDF and other military formations of Ukraine, formed under the Law, without prior or subsequent reimbursement of its value.
That is, there will be no excise tax liability on the above transactions.
Secondly, temporarily, for the period before the termination or abolition of martial law on the territory of Ukraine, the 0% rate of excise tax on certain types of fuel is set:
- gasoline motor
- heavy distillates (gas oil)
- liquefied gas (propane or a mixture of propane and butane) and other gases
- butane, isobutane.
Thirdly, if the excise payer cannot register the excise invoice in the Unified Register of Excise Invoices, he is allowed to move fuel by transport by having TTN with all the information as in the excise invoice, which must be registered in the Unified Register of Excise Invoices within three months after termination / abolition of martial law.
Fourthly, renewal of fuel accounting in excise warehouses that are partially destroyed and located in areas of hostilities or in the temporarily occupied territories by the armed forces of the Russian Federation, will be based on inventory data, which will be conducted after the termination of martial law.
Audit report submission
The submission of an audit report, which must be submitted in accordance with applicable law, may be submitted within three months after the termination of martial law or war. However, administrative and criminal liability for non-submission / late submission does not apply, but does not apply only during martial law, as well as within three months after the termination of martial law.
The same applies to other documents (non-tax), which according to current legislation must be submitted to the relevant regulatory authorities by individuals, legal entities and individual entrepreneurs.
However, persons, who do not have the physical ability to submit reports / documents even within three months after the termination of martial law due to the direct consequences of participation in hostilities, are released from administrative and/or criminal liability and submit reports / documents within one month from the date of termination of the consequences that made it impossible to submit them within three months after the termination of martial law.
We believe that changes in taxation due to the imposition of martial law in Ukraine will generally support business economically and help withstand the test called war. Today, of course, the main priority for business is: to survive, to save the lives of its employees, to establish work in those regions of Ukraine where work during the war is possible to support the economy of our country as a whole. We predict that most companies will take advantage of all the temporary tax innovations, which will help legally reduce the tax burden.