August 12, 2020 · 4 min read
Last month, we discussed the specifics of applying sub-paragraph 140.5.10 of the Tax Code of Ukraine (hereinafter – TCU), and this time we will try to understand the nuances of applying sub-paragraph 140.5.11 of the TCU.
It would seem that this sub-paragraph is written quite simply: the financial result for corporate income tax purposes must be increased "by the amount of expenses from recognized fines, penalties, forfeits, accrued in accordance with civil legislation and civil law contracts in favor of persons who are not taxpayers (except for individuals), and in favor of taxpayers who are taxed at a 0 percent rate in accordance with paragraph 44 of sub-section 4 of section XX "Transitional Provisions" of this Code". Therefore, there should seemingly be no difficulties in its practical application. However, in reality, such difficulties do exist.
Evidently, the main purpose of this paragraph in the TCU is to prevent unscrupulous corporate income taxpayers from evading this tax by "artificially" creating grounds for the accrual and subsequent payment of penalties/fines/forfeits (for example, for non-fulfillment of terms of commercial contracts) to non-corporate income taxpayers (or to corporate income taxpayers at a "non-standard" rate), since funds withdrawn in this manner will be taxed at the recipient either at a reduced rate (for example, 3 or 5 percent for individuals and legal entities – single tax payers of group 3) or not taxed at all.
Conversely, if such funds are taxed by their recipients at the standard rate of 18% (as corporate income tax or as personal income tax), the state will ultimately lose nothing from such operations – therefore, in such cases, the adjustment (increase) of the financial result should not occur (accordingly, the provisions of sub-paragraph 140.5.11 of the TCU should not apply). That is, the provisions of sub-paragraph 140.5.11 of the TCU, logically, should apply to operations involving the accrual of penalties/fines/forfeits in favor of individuals – single tax payers and should not apply to operations involving their accrual in favor of individuals – entrepreneurs under the general taxation system (as, by the way, do the provisions of the "neighboring" sub-paragraph 140.5.10 of the TCU).
The provisions of sub-paragraph 140.5.11 of the TCU do not contain information about the specifics of their application by individual entrepreneurs in general (as well as by individuals – single tax payers and individual entrepreneurs under the general taxation system). The State Fiscal Service of Ukraine (SFS) provided a Letter dated 03.03.2017 No. 4486/6/99-99-15-02-02-15 (hereinafter – SFS Letter) on this matter, in which they concluded that there were no legislative grounds for applying the provisions of sub-paragraph 140.5.11 of the TCU for the accrual of penalty (financial) sanctions in favor of any individual – thus violating the entire logic of this sub-paragraph's existence.
The Ministry of Finance of Ukraine drew attention to this discrepancy and, by its Letter dated 10.04.2017 N 11210-09-10/9617, informed the SFS of the need to amend the aforementioned SFS Letter (stating therein that the provisions of sub-paragraph 140.5.11 of the TCU should be fully applied to operations with individual entrepreneurs who have chosen the simplified taxation system). However, publicly available information from the Internet, as well as the "Liga:Zakon" search information system, indicate that as of today, this SFS Letter is valid and no changes have been made to it.
That is, taxpayers who, for the purpose of obtaining additional information regarding the specifics of applying sub-paragraph 140.5.11 of the TCU, come across the currently valid SFS Letter, may draw an erroneous conclusion that the accrual of penalties in favor of an individual entrepreneur – single tax payer does not necessitate the application of the provisions of sub-paragraph 140.5.11 of the TCU.
In fact, the SFS implemented the recommendations of the Ministry of Finance of Ukraine and made appropriate changes to its SFS Letter. However, it did so in a rather peculiar way – not by reissuing the SFS Letter in an updated version, but by publishing a separate Letter (dated 18.04.2017 N 9772/7/99-99-15-02-02-17), in which it stated that "regarding the adjustment of the financial result before taxation for the amounts of penalty (financial) sanctions and fines transferred in favor of an individual entrepreneur, one should be guided by the letter of the Ministry of Finance of Ukraine dated 10.04.2017 N 11210-09-10/9687". Thus, corporate income taxpayers, when operations specified in sub-paragraph 140.5.11 of the TCU arise, should be guided not by the SFS Letter, but specifically by the MoF Letter dated 10.04.2017 N 11210-09-10/9617.
