VAT Treatment of Services Acquired by Non-Profit Organizations

Acquisition of various services from non-residents by non-profit organizations

In the process of auditing the general and/or project financial statements of non-profit organizations, we very often encounter transactions involving the acquisition of various services (consulting, legal, translation, advertising, seminar organization, etc.) by such organizations from non-residents (and not only legal entities, but also individuals).

Since the place of supply of such services, in accordance with para. 186.2 and para. 186.3 of the Tax Code of Ukraine, is the territory of Ukraine, such services, in accordance with subpara. B) of para. 185.1 and para. 208.2 of the Tax Code of Ukraine, are subject to VAT. At the same time, for accountants of non-profit organizations, this is almost always a revelation (since they all, as a rule, believe that if a non-profit organization is not a VAT payer, then it cannot, in principle, have operations subject to VAT). After familiarizing themselves with the audit results, accountants of non-profit organizations ask a perfectly reasonable question: "How can this be corrected?", "What penalties do we need to pay, in addition to the VAT itself?", "How to submit an amended calculation to the SFS?"

How to submit an amended calculation to the tax authority and pay the VAT amount with penalties?

At first glance, there can be nothing complicated about this – it is simply necessary to submit the relevant document to the tax authority and pay the VAT amount along with fines and penalties. However, in reality, the situation with a non-profit organization is far from simple (both with submitting documents to the State Tax Inspectorate and with calculating possible penalties that a non-profit organization is obliged to pay for untimely declaration and payment of tax liabilities to the budget).

In a situation of untimely payment of VAT tax liabilities to the budget, one should be guided by the norms of para. 126 1 of the Tax Code of Ukraine – Article 126 "Violation of rules for payment (transfer) of taxes". This article is the only article in the Tax Code of Ukraine that sets out the consequences (sanctions) for a legal entity in case of untimely payment of tax liabilities (while para. 126.2 and para. 126.3 of this article cannot be applied in our case). However, our situation is complicated by the fact that the non-profit organization is not a VAT payer (and, accordingly, did not submit VAT declarations for previous periods). A literal reading of para. 126.1 of the Tax Code of Ukraine, in our opinion, suggests that this norm can only be applied in case of untimely payment to the budget of an "agreed amount of monetary obligation" – i.e., the amount of tax liability declared by the non-profit organization in the VAT declaration submitted to the SFS bodies (see also para. 54.1 of the Tax Code of Ukraine) or another reporting document (see below). Since in the case of a non-profit organization, VAT liabilities for the previous tax period were not declared, we can hardly speak of the existence of an "agreed amount of monetary obligation."

In our case, we can rather talk about the possible application of the norms of the third paragraph of para. 50.1 of the Tax Code of Ukraine – the accrual of a penalty in the amount of 5% of the understated VAT tax liability for previous tax periods (months in which the NPO carried out operations subject to VAT). But, on the other hand, from a technical point of view, this will hardly be possible (the reason – the NPO accountant will need to submit an amended calculation to the declarations for the corresponding previous tax periods, which, of course, were not submitted by the NPO accountant to the SFS).

At the same time, neither a declaration nor an amended calculation to it could have been submitted by the non-profit organization (as a non-VAT payer) – in accordance with para. 208.4 of the Tax Code of Ukraine, such an organization was required to submit a special reporting document "Calculation of tax liabilities accrued by the recipient of services, not registered as a value-added tax payer, supplied by non-residents, including their permanent establishments, not registered as taxpayers, on the customs territory of Ukraine" (see Order of the Ministry of Finance of Ukraine No. 159/28289 dated 28.01.2016). And what is most regrettable – the template of this document does not even provide for columns such as "amended calculation", "reporting period being amended", etc.

Given all the above, in this situation, we recommend the following:

1. Fill out and submit to the SFS at the NPO's registration address "Calculations of tax liabilities accrued by the recipient of services, not registered as a value-added tax payer, supplied by non-residents, including their permanent establishments, not registered as taxpayers, on the customs territory of Ukraine" for those months in which the non-profit organization had taxable operations, reflecting in them the amount of tax liabilities for the respective reporting periods.
2. After that, await the possible mailing of tax notices to the non-profit organization regarding the imposition of penalties for untimely submission of these documents for the relevant tax periods (UAH 170 or UAH 1020 in accordance with para. 120.1 of the Tax Code of Ukraine). As one of the potentially possible (though unlikely) options – the SFS may send the non-profit organization a tax notification-decision on the need to pay a 5% penalty in accordance with para. 50.1 of the Tax Code of Ukraine.
3. In case of receiving the tax notification-decisions specified in the previous point – pay the penalties indicated in such documents within the terms provided by current legislation.

However, all this can only be started after there is full certainty that the operations actually carried out earlier by the non-profit organization with non-residents can indeed be classified as operations with a "place of supply in the territory of Ukraine" in accordance with the Tax Code of Ukraine. Given the large number of various caveats / exceptions / conditions, etc., in the Tax Code of Ukraine, doing this correctly is not always easy. Our company's specialists will be happy to help you determine whether your organization has similar operations, after which they will be able to offer you a clear step-by-step action plan to correct the situation.