1.

For the first quarter of 2020, perhaps, many companies were still “in the positive” with a profit. This means that under normal conditions, corporate income tax is expected to be paid.

In Ukraine the authorities still not able to make any decision to release, reduce or at least defer payment of this tax. At the same time companies themselves badly need this money for financing in the current severe conditions of the coronavirus and crisis.

In such circumstances, one says that cash (actually available money) is a king. And reducing expenses, including tax expenses, saving money for priority expenses – is one of the important tasks of the business now.

So if the authorities do nothing about it, then what can the business itself practically do?

2.

To begin with, let us model the situation and expectations.

Despite the certain negative economic expectations, the macroeconomic indicators of 2019 weren’t bad in general. For example, according to the NBU real GDP has increased by 3.2% and according to the State Treasury Service of Ukraine revenues from corporate income tax have increased by 12,1% and have amounted UAH 117.3 billion.

The expected revenues from corporate income tax of UAH 118.9 billion are recorded in the budget law for 2020. Fees for the first quarter (already paid) of this amount are based on the results of 2019. As of March 1, 2020 UAH 9.58 billion was received. At the time of writing this letter we haven’t seen more recent data regarding this issue on the website of the State Tax Service of Ukraine yet.

The economic indicators for the first quarter of 2020 remained still quite good. Of course, events of the March 2020 have already made some adjustments, but the first quarter’s indicators in general were not significantly affected.

At the same time, in the second quarter of 2020 and further by the end of the year, a significant deterioration of the economic situation, the transition to “minus”, is expected because of the coronavirus pandemic and the quarantine measures.

In the context of corporate income tax, this means “withdrawal” of a large portion of the working capital to pay corporate income tax by results of the first quarter of 2019. While already by the results of the first half of the year (in view of the expected loss of the second quarter, which may overlap the profit of the first quarter), or of 9 months of 2020 there will be no profit, but there will be a loss. This means that the tax paid for the first quarter of 2020 will be an overpayment, an excessively paid tax.

By law, companies have the right to return them on the basis of submitted application to the tax service. However! This right will arise not earlier than the submission of tax return for the second or, in the relevant part, for the third quarter. It means, that in a best-case scenario the process of returning funds by results of the first half of the year will be started in the second half of the third quarter, but funds need to be paid (as a tax for the first quarter) in the middle of the second quarter. In other words, when companies are most in need of funds, the state will withdraw them.

And will the state return funds, or return in time at least? Unfortunately, the experience of relations with the state in this regard is not very positive, especially in recent times. And who can be sure that the tax authorities will not delay the return “in the usual way”, or the authorities will decide that they need the money more than companies at all, so they will not return them (we already have examples when government neglects, in the broad sense of the term, even constitutional provisions under the motto of combating the coronavirus, so why should we believe that the provisions of the Tax Code on taxpayers’ rights will be respected more than the Constitution?).

Therefore, if does not expect “mercy” from the authorities on this issue, can the taxpayer somehow deal with this problem on the principle “the rescue of a drowning man is the drowning man’s own job”?

1.

To begin with, let us pay more attention to the technical side of the issue:

Under para. 49.18.2. of Article 49 of the Tax Code of Ukraine (the “Tax Code”) tax returns for the quarter or half-year shall be submitted within 40 calendar days following this period. If the last day of the submission falls on a day off or holiday, then under para. 49.20. of Article 49 of the Tax Code the term shall be continued until the first following business day. So, in fact, the term set for submission of tax return for the first quarter lasts till May 12, 2020 inclusive.

The term for payment of the tax is defined in para. 57.1 of Article 57 of the Tax Code as 10 days after the respective deadline for submission of tax return under the law. We are counting, for simplicity, 20 May, 2020 as the payment date for the first quarter.

So, till 12 May the taxpayer of corporate income tax must determine and declare the absence or existence of profit (and corporate income tax) according to the Tax Code and be ready to pay the declared amount within a decade.

Taking into consideration the provisions of para. 137.4 of Article 137 of the Tax Code tax reporting on corporate income tax shall be submitted on a cumulative total basis. It means that in case of losses for the second quarter, which will completely overlap the indicators of the first quarter according to the tax calculations in the tax return for the first half of the year, then since August 10, 2020 a negative value of tax arises in the amount of the paid tax for the first quarter. The said value will be the amount of the excessively paid corporate income tax, and can be claimed for the refund.

The excessively paid corporate income tax may be refunded under the application submitted by the taxpayer in the order and within the terms defined in Article 43 of the Tax Code: within 20 days from the date of submission of the application for a refund. Accordingly, by law the excessively paid tax (in the case of cumulative losses according to the results of the first half of the year) may be refunded till September 2020.

In other words, under normal ideal circumstances, the company is deprived of the amount paid as corporate income tax for the first quarter for the period May 20 – September 1, 2020.

However, in practice, given the current realities and the apparent difficulties of filling the budget in this year, refund of the excessively paid corporate income tax with “cold” cash can be significantly difficult, and, not exclusively, will even require a lawsuit. So, funds paid as corporate income tax for the first quarter, despite the existence of grounds for return, can stuck in the budget. And it means that using these funds to keep the business “afloat” will be exactly impossible within the period since the second half of May to the end of August 2020, and in reality, perhaps, for the future, as the refund (at least timely) of these funds by the state is very much in doubt.

Now the exemption from the corporate income tax for the first quarter, unlike the exemption from the tax on immovable property and the land tax for a certain period, is not prescribed unfortunately.

So, the question is what can be done by the company itself in this respect?

2.

Variant 1 is about timely submission of corporate income tax return with declared amount of the tax, and at the same time non-payment of the tax.

According to such scenario, a tax debt arises for the taxpayer, and measures can be taken regarding its collection as well as sanctions can be applied, such as:

(1)inventory of the assets for a tax lien,

(2) penalty of 10% (with a delay of up to 30 calendar days) or 20% (with a delay of more than 30 days) of the amount of tax debt under para. 126.1 of Article 126 of the Tax Code for the periods after May 31, 2020 (in the event that the current exemption from this penalty under para. 52-1. of sub-section 10 of Section XX “Transitional Provisions” of the Tax Code shall not be extended for periods after May 31, 2020),

(3) a fine for the same period for each day of delay, calculated at 100 percent annual discount rate of the National Bank of Ukraine under para. 129.4. of Article 129 of the Tax Code in case the amount of the accrued tax will be overlapped only based on the results of 9 months (if the tax amount is overlapped in the first half of the year, taking into account the terms of submission of tax return and payment of the tax, the corresponding actions will take place within the 90-day period, which is exempted from the accruing a fine under subpara. 129.1.3 of para. 129.1 of Article 129 of the Tax Code).

Futhermore, there are risks of bringing taxpayer officials to administrative liability under Article 163-2 of the Code of Ukraine on administrative offences – non-submission or untimely submission of payment orders for transfer of taxes and fees (compulsory payments) by officials of enterprises, institutions and organizations – in the form of the penalty from 85 to 170 UAH.

And in the worst case, although it is unlikely, but rather as a means of pressure, there can be used threats to bring taxpayer officials to liability even under Article 212 “Tax evasion” of the Criminal Code of Ukraine.

In its “pure” form, this variant does not look very attractive. While it is possible to postpone payment until the end of May without real financial sanctions because of the temporary exemption from them during this period, at least some pressure from the state authorities can be expected if the tax amount is declared but is not paid on time.

3.

Variant 2: do not submit a tax return for the first quarter. It appears that the objective circumstances actually cause this. After all, the coronavirus pandemic and quarantine measures have caused failures to ensure proper documents circulation, such as drafting, signing, receiving and processing documents, difficulties of keeping records in remote access, even if it is provided.

Therefore, in order to prepare properly and submit timely the tax return for the first quarter of 2020, business, perhaps, will have to exert intensive efforts. And while difficulties arise, attention and resources are also necessary for more urgent directions of business retention.

And if the tax return is not submitted timely, then there really will be no reason to make and submit it in the future, when the declaration for the next six months will be already needed.

Formally, even if there are objective reasons for non-submission of tax return for the first quarter, tax authorities still could try to qualify it as a ground for applying the sanctions under para. 120.1 of Article 120 of the Tax Code (for non-submission or untimely submission of tax return). However, the penalty for this is only 170 UAH to 1020 UAH, that is relatively insignificant. In addition, due to the current situation the corresponding penalties shall not be subject to imposition for such violations for the period until May 31, 2020 under para 52-1. of sub-section 10 of Section XX “Transitional Provisions” of the Tax Code.

It is possible that such period with the continuation of the coronavirus pandemic can be extended. And even if such a period is not extended until the submission of the first half-year tax return, there are certain legal arguments in favor of not applying these penalties.

Let us consider the question whether in case of non-submission of tax return tax authorities can independently determine the tax payable for the first quarter and accrue penalties under Article 123 of the Tax Code, which shall be applied in case of the accrual of the tax liabilities.

In practice, the abovementioned can potentially be done only (a) by the controlling authority (b) as part of documentary tax audits.

With regard to (b) the tax audits under para. 78.1.2. of Article 78 of the Tax Code, there is moratorium till May 31, 2020, established by para. 52-2 of sub-section 10 of Section XX “Transitional Provisions” of the Tax Code. It is not excluded that such a moratorium can be extended by the legislator, but even without a special extension there are arguments in favor of the inability to conduct tax audits and make accruals within the period before the submission of the tax return for the first six months with a “loss”. There are also legal arguments regarding the absence of the right to conduct a separate audit for the first quarter solely for tax accrual for that quarter. And the existence of a dispute over such right can be used as a ground for non-admission to a tax audit. And final argument on this aspect is on which grounds tax authorities can determine the indicators if the taxpayer could not ensure adequate availability of financial records/accounting data during that time due to an emergency situation.

We will also remind that the issue regarding the absence of powers of the controlling authority in the State Tax Service under the Tax Code is still not properly resolved at the legislative level. About this, in particular, in the publications on our site  and 

Therefore, we believe that if there are objectively caused difficulties in compiling and submitting the tax return for the first quarter, it may be quite likely postponed until the end of the first half of the year if conditions are improved by then.

For the sake of completeness, let us also mention the potential possibility for imposing an administrative penalty on officials of the enterprise under Article 163-1 of the Code of Ukraine on Administrative Offences from 85 to 170 UAH for violation of tax accounting rules. However, consideration of such  situation as a violation is more likely to be unlawful, since there is no fault of the taxpayer in this situation (the situation is caused by objective factors – an emergency situation, as recognized by the government) and, accordingly, there is no ground for liability.

Also there are other legal arguments regarding the inapplicability of sanctions and penalties.

As a result, variant (2) with the non-submission of the tax return for the first quarter is considered to be sufficiently caused objectively, and actually leads to the solution of the issue on avoiding temporary overpayment (withdrawal of funds).

When implementing this variant, we would recommend to inform the tax authority in writing that it is not possible to make a tax return for the first quarter in proper way (in view of the delays in drawing up and receiving documents on business transactions, difficulties in work, including accounting units, due to the quarantine).

4.

The third variant is based on the possible accounting features for the first quarter, which may be manifested at the time of the declaration and determine the peculiarities of tax reporting for the first quarter.

According to the general rule, the declaration of corporate income tax is carried out solely on the basis of accounting data and financial statements, as it is prescribed by para. 44.2 of Article 44 of the Tax Code:

“44.2. For calculation of taxation object, the taxpayer of corporate income tax should use the accounting data and financial statements of income, expenses and financial result before taxation”.

At the same time, in accordance with Article 44 of the Tax Code:

“44.1. For taxation purposes, taxpayers should maintain accounts of their income, expenses, and other indicators related to identifying the objects of taxation and/or their tax liabilities, on the basis of primary documents, accounting registers, financial statements, and other documents relevant for calculation and payment of taxes and fees, and maintaining of which is prescribed by legislation.

Taxpayers shall be prohibited from compiling the tax reporting indicators and customs declarations on the basis of data that is not confirmed by documents , which are defined in paragraph one of this Item”.

It means that data of the tax reporting (in particular regarding income!) should be confirmed by primary and other relevant documents. The primary documents must comply with the Law of Ukraine “On Accounting and Financial Reporting in Ukraine”. It means that abovementioned documents should contain all the required details of the primary documents specified in Article 9 of the Law of Ukraine “On Accounting and Financial Reporting in Ukraine”.

As a consequence, in case of the absence of properly prepared primary documents in accordance with the Law of Ukraine “On Accounting and Financial Reporting in Ukraine” at the time of reporting for the first quarter, or the inability to access such documents, such data can not be used for the purposes of determining tax, in particular, income tax. At the same time, such non-compliance with the requirements on the timeliness of the documents’ circulation should be recognized as such which caused by the actual state of the country.

Therefore, if due to the current situation and restrictive measures, supporting documents for certain business transactions have not been received properly, there is no reason to reflect the indicators of such business transactions in tax returns.

The presence of certain difficulties in ensuring documentary confirmation is obviously already understood by the legislator. Thus, the Law of March 17, 2020 No. 533-IX “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Support of Taxpayers for the period of Measures Aimed at Preventing the Occurrence and Spread of the Coronavirus Disease (COVID-19)”, and taking into consideration the changes made by the Law of Ukraine No. 540-IX “On Amendments to Certain Legislative Acts Aimed at  Providing Supplementary Social and Economic Guarantees because of the Spread of the Coronavirus Disease (COVID-2019)” ( the “Law No. 544-IX”), granted a temporary exemption from sanctions for failure to ensure the relevant requirements, and the moratorium on documentary tax audits are also established till May 31, 2020 (except for tax audits on VAT budget refund):

“52-2. Moratorium on documentary and actual tax audits shall be established for the period from March 18 to May 31, 2020,except for:

documentary unscheduled tax audits on the grounds specified in subpara. 78.1.8 of para. 78.1 of Article 78 of this Code…”.

In addition, the Law No. 540-IX stipulates the absence of consequences regarding responses to requests from controlling authorities:

“52-8. … Such suspension doesn’t cause any consequences prescribed by Article 56 of the Tax Code of Ukraine, Articles 52-52 of this Code regarding individual tax advice given by the tax authorities in writing, Articles 73 and 78 of this Code regarding taxpayers’ replies to requests from the controlling authorities (except for requests from controlling authorities on lawfulness of declaration of VAT stated for budget refund and/or VAT negative value), which have been received (will be received) by taxpayers till May 31, 2020. Since June 1, 2020 the running of the limitation periods, which have been stopped in accordance with this paragraph, shall be continued taking into consideration the time elapsed before such a suspension”.

In other words, the legislator understands that receiving documents at requests and conduction of tax audits on the basis of documents is impossible as it follows from the current situation.

Thus, the absence of properly completed primary documents (in the case of existence of such circumstances) should be taken into account when declaring the results of activity in the first quarter.

We separately note that under para. 50.1. of Article 50 of the Tax Code the taxpayer is not obliged to submit adjustments for the previous period if the corresponding adjusted indicators will be included into the tax return for any subsequent tax period.

5.

To sum up, considering the abovementioned, the current situation with its economic and other realities, taking into account the need for funds for the livelihood of the business, including those that could be temporarily withdrawn when applying the ordinary model, we believe that objective circumstances leave opportunity for taxpayers’ independent actions in the legal field with proper consideration of the features of the period to prevent the temporary withdrawal of funds.

In our opinion, the variants of “the rescue of a drowning man is the drowning man’s own job” are quite possible.

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.