VAT accrual and levying is regulated by the Law of Ukraine “On Value Added Tax”   (hereinafter referred to as the “VAT Law”).
 
Taxpayer

As regards the taxpayer issue, the VAT Law has the concept of “taxable volume of trade” meaning supply of goods (services) during twelve calendar months for the total amount exceeding UAH 300,000 (VAT exclusive) (an equivalent to approximately USD 60 thousand).

VAT payers are broken down into the following groups :

1) Persons whose registration as VAT payers is obligatory. These include legal entities and individuals (individuals, which are subject to the simplified tax system or carry out trade activity and pay a market charge ), who have a taxable volume of trade.

2) Persons who voluntarily register as VAT payers. These include legal entities and individuals (individuals, which are subject to the simplified tax system or carry out trade activity and pay a market charge) who carry out (or plan to carry out)  business activity and whose volume of trade is less than taxable volume.

3) Persons that import (in case of individuals  – bring in/send) goods (related services) into the customs territory of Ukraine with the view of their use or consumption in volumes subject to taxation.

4) If a non-payer of VAT enters into one or more contracts that envisage transactions which volume during the reporting tax period would exceed the taxable volume of trade by two or more times, such person shall be mandated to register as a VAT payer before the end of such reporting tax period.

Objects of Taxation

Defining the concepts of “supply of goods” and “supply of services” is important in the context of VAT object. In accordance with the VAT Law:

Supply of goods shall mean any transactions carried out under civil agreements and stipulating the transfer of title to such goods in exchange for compensation irrespective of the term of such supply, including transactions whereby under financial leasing agreement a lessor transfers property to the balance sheet of a lessee.

Supply of goods does not include transactions that do not provide for the transfer of title to (use or disposal of) such goods to another person, including operating leasing transactions.

Supply of services shall mean any civil transactions resulting, in particular, in the granting of the right to use or dispose of goods within the scope of leasing contract.

The object of taxation for the parties to leasing contract shall be:

• transfer of the financial leasing asset in use to a lessee.
• accrual and payment of interest or commission fees as part of leasing payment under the financial leasing contract in the amount exceeding the double NBU discount rate (effective as of the day of accruing such interest (commissions) for the relevant period of time) calculated based on the value of leasing asset ;
• the return to a lessor of leasing asset previously transferred to a lessee under financial leasing contract;
• bringing in (import) to Ukraine of goods (related services) under leasing contracts (including return of leasing asset to a resident lessor or another person upon the orders of such person), including cases where such import is related to the return of goods due to expiration of respective contracts; 
• bringing out of Ukraine goods (related services) under financial leasing contracts (including return of financial leasing objects to a non-resident lessor or another person upon the orders of such person), including cases where such bringing out is related to the expiration of the term of contracts.

The following shall not be the object of taxation for the parties to leasing transactions:

• transfer of property in operating leasing;
• return to a lessor of leasing assets previously transferred to a lessee under operating leasing contract.
• accrual and payment of interest or commission fees as part of leasing payment under financial leasing contract in the amount not exceeding double NBU discount rate (effective as of the day of accruing such interest (commissions) for the relevant period of time) calculated based on the value of leasing asset .

Tax Liability

 Tax liability shall mean the total amount of VAT received (accrued) in the reporting (tax) period by the taxpayer.
   
The date of the emergence of tax liability

Under financial leasing transactions the date of the emergence of lessor’s tax liability is the date of actual transfer of leasing asset in use to a lessee..

In case of import the date of the emergence of tax liability shall be:

• in case of import of goods – the date of submission of customs declaration specifying the amount to be paid;
• in case of import of services – the earlier of two dates: the date of debiting the amount of payment for such services from the taxpayer’s settlement account or the date of formalizing the documents confirming the fact of provision of services by non-resident.

The person that had taxable shipments over the past twenty calendar months may opt for the cash method of tax accounting  if the value of such shipments was no larger than the taxable volume of trade.  

Tax Credit

Tax credit means the amount by which the taxpayer is entitled to reduce the tax liability in the reporting (tax period). Tax credit in the reporting period consists of the amount of taxes accrued (paid) by the taxpayer during such reporting period in connection with:

• purchase or manufacture of goods and services (including their import) with the view of their further use in taxable transactions in the course of taxpayer’s business activity.
• purchase (construction) of fixed assets, including their import, for their further use in production and/or shipments for taxable transactions in the course of taxpayer’s business activity.

Taxpayer’s tax credit shall not include VAT payments incurred in connection with the purchase (manufacture) of goods (services) intended for use in transactions that are not VAT-taxable.  That means that a lessor who purchases goods for their subsequent provision in operating leasing may not include in its tax credit the VAT paid as part of the price of these goods.

The amount of tax paid by VAT payer in case of purchase of cars (except for taxis) which are included into its fixed assets is attributed to gross expenses and shall not be included in the tax credit.

Date of Emergence of the Right to Tax Credit:

The earlier of the two dates shall be considered the date of vesting the VAT payer with right to tax credit:

• the date of debiting taxpayer’s bank account for the amount of payment for goods (services).
• The date of receipt of the tax bill certifying the purchase of goods (works) by the taxpayer.

In case of import the date of vesting the VAT payer with right to tax credit shall be:

• in the case of goods import – the date of submission of customs declaration specifying the amount to be paid;
• in the case of import of services – the earlier of the two dates: the date of debiting the taxpayer’s settlement account for the amount of payment for such services or the date of formalizing the documents confirming the fact of provision of services by non-resident.

The date of emergence of lessee’s right to increase the tax credit for financial leasing transactions is the date of actual receipt of financial leasing asset by a lessee.

Tax base

VAT tax base is determined based on contract price of goods (services) set under free prices but no lower than their regular price including the excise duty, import duty, other national taxes and duties (obligatory payments) except for VAT, which is included in the price of goods (services).

For goods (services) imported (supplied by non-residents) to Ukraine, the tax base shall be the contract price of such goods (services), which should not be lower than their customs value. 

Tax rate

Normal VAT rate is 20% .

Any legal entity or individual engaged in business activity in the area of agriculture, forestry, fishing, processing of the above products manufactured by it, as well as engaged in the provision of relevant related services (hereinafter referred to as “agricultural enterprise”) may opt for a special VAT treatment.  This special treatment envisages taxation of sales of agricultural products by such enterprises at the following VAT rates:

• For forestry, fishing products and related services – 6 %;
• For agricultural products and related services– 10% till January 1, 2007, and 9% thereafter.

Calculation and Payment of Tax

The amount of tax payable (1) to the budget or (2) subject to the budget refund is determined as a difference between the amount of tax liability and the amount of tax credit in the reporting tax period.
 
If this amount has positive value, it is payable to the budget within the term stipulated for the relevant tax period.

Should this amount have negative value, it is (1) taken into account when reducing the VAT debt of the prior tax periods,  and if there is no debt (2) it is included in the tax credit of the future tax period.

VAT payer may decide that the entire amount of budget refund due to him may be offset against its tax liabilities of future tax periods.

VAT payer entitled to the budget refund shall file a tax return and relevant refund application to the appropriate tax authority.  Within five days thereafter it shall submit a copy of the tax return (with the endorsement of tax authority) to a respective body of the State Treasury of Ukraine for making the relevant entry to the registry of tax returns.

Within five business days following the receipt of conclusion from the ax authority, the Treasury shall remit the amount of budget refund from the budget account to the current bank account of VAT payer.

The amount of budget refund, which was not timely reimbursed to VAT payer, shall be considered a budget debt . Penalty shall be accrued on such budget debt at 120% annual interest rate of the NBU discount rate effective as of the day such debt arises.   

Tax Period

 Tax period for VAT shall be:

• One quarter, if the taxpayer’s volume of VAT-taxable transactions over the past 12 monthly tax periods did not exceed the taxable volume of trade.
• One calendar month, if during any period from the beginning of application of quarterly tax period, the taxpayer’s volume of VAT-taxable transactions over the past 12 monthly tax periods has exceeded the taxable volume of trade.

For agricultural companies subject to a special tax regime the tax period shall be one quarter.

Tax bill

The tax bill must be issued by the taxpayer supplying the goods (services).  It is the ground for accruing tax credit by the purchaser of goods.
  
The tax bill shall indicate, inter alia, (1) the price of goods (services) shipment VAT exclusive, (2) tax rate, (3) tax amount, and (4) the overall amount payable, tax inclusive.

In the event of goods import, the document entitling the entity to receive tax credit is the customs cargo bill (it confirms payment of VAT) or paid tax anticipation bill. 

Taxpayers are mandated to maintain separate accounting of VAT-taxable transactions related to shipment and/or purchasing of goods (services), as well as the accounting of non-taxable transactions. Consolidated results of such accounting are recorded in tax returns.

Special Tax Treatment of Agricultural Companies – Potential Lessees

The amount of VAT accrued by an agricultural enterprise:

• Is fully retained by the enterprise, is not payable to the budget and is used to refund the VAT amounts paid (accrued) by it as part of the price of goods (services).
• Is not included in the gross income of agricultural enterprise for corporate profit tax purposes.

If VAT amount accrued by agricultural enterprise is smaller than VAT amount paid by such enterprise as part of the goods price, such negative difference shall not be refunded from the budget and shall not be tax-deductible for this enterprise.

Tax Anticipation Bill

In case of import of goods and execution of customs declaration VAT payers may submit to the customs authorities tax anticipation bill for the amount of tax liability.

Tax anticipation bill must be guaranteed (endorsed) by a commercial bank.  

The amount indicated in the tax anticipation bill is included in the amount of the VAT payer’s tax liability in the tax period during which occurs the thirtieth calendar day from the date of provision of such tax anticipation bill to the customs control authority. Tax anticipation bill is considered as paid but VAT amount, indicated in it, shall not be separately paid to the budget and is taken into account when calculating tax liabilities based on the results of the tax period in which the tax anticipation bill was paid. VAT amount indicated in that tax anticipation bill shall be included in taxpayer’s tax credit in the next tax period.

The taxpayer may decide to early repay tax anticipation bill by (1) remitting funds to the budget or (2) offsetting against the amount of budget refund.