Legal opinion on prohibition to transfer losses of previous years in Ukraine
It seems that a list of illegal actions of Ukrainian tax authorities was added with a new one. This time the State Tax Administration of Ukraine gave a clear command to its subordinates to deny recognition of losses that taxpayers faced until the 1st of January 2011. Taxpayers that included such losses in their tax returns for the second quarter will face additional imposition of taxes and fines in the amount up to 25% of their tax obligations. Such additional impositions and fines are quite possible to be appealed against in court if one knows how to prove that the State Tax Administration is wrong. We’ve prepared a legal advice on the issue.
Based on letters of the State Tax Administration number 24240/7/15-1217 dated 08.09.2011, number 828/3/15-1212 dated 08.09.2011 and number 10-2018/3582 dated 12.09.2011 one can see that Clause 3 of Subchapter 4 of Chapter 20 of Transitional provisions of the Tax Code of Ukraine serves as a ground for denial of losses recognition that occurred prior to the 1st of January 2011. The mentioned clause provides that if the calculation of taxation object of a taxpayer that is a resident after the first quarter of 2011 results in negative numbers then the amount of such negative numbers is subject to inclusion into expenses of the second calendar quarter of 2011.
According to the State Tax Administration of Ukraine direct interpretation of this clause allows to state that the second quarter of 2011 can include only negative amounts of taxation object that were obtained by business entities based on the results of conducted business activities for the first quarter of 2011 without inclusion of negative numbers that had been included in the first quarter of 2011 from 2010. This is allegedly upheld by the second paragraph of this clause according to which calculation of taxation object for the second quarter, second and third quarters, second through fourth quarters of 2011 is performed with consideration of negative amounts that were received for the first quarter of 2011 (the State Tax Administration of Ukraine specifies that this is done without inclusion of other reporting periods).
But in reality the mentioned clause does not provide non-inclusion of losses that occurred prior to the 1st of January 2011. In turn negative numbers of the first quarter of 2011 includes not only results of this quarter but all the previous tax periods that were not considered.
The thing is that during the first quarter of 2011 a Law “On taxation of income of enterprises” was in force. On the one hand its Clause 22.4 provided limitation regarding inclusion of losses that occurred prior to the 1st of January 2010 to gross expenses of 2010 (not more than 20%). On the other hand it provided that all losses that were not considered in 2010 as well as losses derived from the results of 2010 were subject to inclusion into gross expenses without any limitations.
Thus, all the losses which occurred prior to the 1st of January 2011 and were not included in returns were legally transferred to gross expenses of the first quarter of 2011. By these means they formed a negative value of taxation object for the first quarter of 2011 which is mentioned in Clause 3 of Subchapter 4 of Chapter 20 of Transitional provisions of the Tax Code of Ukraine. And now, in accordance with the second paragraph of the mentioned clause this negative value must be considered when calculating taxation object of income tax within gross expenses by means of increasing result until complete repayment.
We would like to exemplify the nature of amendments which are not understood by the State Tax Administration of Ukraine. Based on the results business activities until the 1st of January 2010, an enterprise faced losses (expenses exceeded income) in the amount of 10 million UAH. In 2010 it was possible to pay off only 2 million (20%). Other 8 million were transferred to the expenses of the first quarter of 2011. And if income of this period was for example 1 million UAH then other 7 million of losses are to be considered as expenses of subsequent quarters.
However this scenario is possible only if the law is followed. On contrary logic of the State Tax Administration is not subject to the law and therefore taxpayers need to engage professional legal support and be ready to prove their right to accounting of losses from previous periods in court.
This material was prepared by law firm “Pravova Dopomoga” within practice of Taxation.