№4(15)(2013)

Tax differences:

CIAA Offers

Ladies and Gentlemen,

On behalf of the International Public Organization "Council of Independent Accountants and Auditors" (CIAA) let me assure you in high regard and seek comments and suggestions on the draft Law of Ukraine "On Amendments to the Tax Code of Ukraine to determine the list of tax differences". Results of draft amendments to provisions of Title III of the Tax Code of Ukraine (hereinafter - TCU), CIAA members decided the following:

1. Support the idea of determining object of taxation for income tax through adjustments due to financial result of tax permanent and temporary differences only for large companies;

2. Promote the right to choose other ways of income tax calculation for taxpayers (request of entrepreneurs and accountants) among SMEs (small and medium entities defined by legislation). Other options for calculating income tax to write in the TCU;

3. Improve structure of the draft law, highlighting there the common approaches, sector specific taxation and taxation of operations of special type;

4. Align income and expenses in accordance with requirements of related documents of one direction. Draft Law on determination of tax differences (Section III of the TCU) - Order #27 - Order of forming the declaration of income tax. To prove the effectiveness of new mechanism, the provisions of these documents should be considered all together;

5. Prescribe general procedures to reflect tax differences in accounting registers and tax records. We offer two options for action:

a) identify names and status of accounting registers in TCU standards or in order #27;

b) provide a statutory right for taxpayer to determine structure and content of accounting registers.

6. Prescribe methods of calculation of tax differences, their accounting and reporting, either in Section III of TCU, or in guidelines;

7. Finalize terminology of the draft law with a view to harmonization of accounting standards, regulatory and legal framework for economic activity in Ukraine.

8. Postpone dates for filing reporting on tax differences, starting with the reporting periods in 2014. Introduction of changes in definition of object of taxation for income tax through adjustments due to financial result on tax permanent and temporary differences, make compliance with applicable provisions of the Tax Code of Ukraine, namely "... changes to any aspect of taxes and duties can not be made later than six months before the end of fiscal period in which the new rules will apply ..."

Attached to Project provided comments and suggestions that we propose to include in the project.

Appendix 1. Suggestions and comments on the draft law.

We appeal to you to consider proposals of CIAA and make appropriate changes to the Bill and current legislation of Ukraine.

When you need our peer review or professional help, we will be happy to be of assistance to you.

Sincerely,

T. Kovtun,

Chairman of the Tax Committee of NGO CIAA

L. Aksenova,

President of NGO CIAA

Worked on preparation

suggestions and comments

to the project law

member of the Tax Committee of CIAA,

Ph.D., associate professor, auditor

O. Malyshkin

Appendix 1

Suggestions and comments on the draft law

I. Determining accounting approach to income taxes

1. According to Article 134 Section III of the TCU object of taxation is: income from sources originating from Ukraine and abroad, which is determined by reducing the amount of income in reporting period, determined in accordance with Articles 135-137 of the Code, on the cost of goods sold, work performed, services rendered and the amount of other expenses of the tax period, determined in accordance with Articles 138-143 of the Code, subject to the rules laid down in Article 152 of this Code; income (loss) of non-resident to be taxed under Article 160 of the Code, from sources with Ukraine.

That is, the profit before tax at TCU rules can be calculated by the formula 1:

Inc. / Loss _tax. = R - C - OE (1)

Where:

Inc. / Loss _tax. - Profit / loss according to the norms of TCU;

D - income;

C - cost of goods sold, work performed, services rendered;

IP - other expenses.

This is the algorithm for determining the object of taxation laid down in the form of declaration of income tax, approved by the Ministry of Finance of Ukraine from 28.09.2011, № 1213 (as amended by the orders of the Ministry of Finance from 21.12.2011 № 1684, from 12.05.2012 № 1281) for reporting for 2012.

2. According to the rules of Regulation (Standard) of Accounting "Tax differences", approved by the Order of Ministry of Finance of Ukraine from 25.01.2011, № 27 (hereinafter - Order № 27), profit before tax is proposed to define differently: profit or loss before taxation is calculated by comparing income of reporting period with costs that were made for these revenues, which are recognized and valued in accordance with regulations (standards), adjusted by amount of permanent tax differences and amount of temporary tax differences related to reporting period.

That is, the income before tax at norms of R(S)A can be calculated by formula 2:

Inc. / Loss _tax = Inc.acc. + / - PTD + / - TTD report.period, (2)

Where:

Inc. / Loss _tax - Income / loss according to the norms of TCU;

Inc.acc. - Profit / loss according to the norms of R(S)A;

PTD - permanent tax differences;

TTD report.period - temporary tax differences related to reporting period.

3. Under Article 134 of Chapter III of the Draft Law of Ukraine "On Amendments to the Tax Code of Ukraine to determine the list of tax differences" (hereinafter - the Draft Law on determination of tax differences) object of taxation are: income from sources in Ukraine and abroad which is determined by adjusting the profit before tax specified in financial statements with permanent and temporary tax differences on revenue and expenses and permanent tax differences arising from individual transactions in accordance with Articles 136-140 of this Code.

Tax differences are recognized in reporting tax period in which revenue and expenses are recognized, in respect of which they arise, in determining income in financial statements.

That is, income before tax, as proposed by amendments to Chapter III of TCU can be calculated by the formula 3:

Inc. tax. = Inc.f. + / - TTDr. + / - PTDr. + TTDc. + / - PTDc. (3)

Where:

Inc. tax. - Income of tax (declarative);

Inc.f. - Income before tax in the financial statements;

TTDr. - temporary tax differences on revenue (§ 139.1 TCU);

PTDr. - permanent tax differences on revenue (§ § 136.1, 136.2 TCU);

TTDc. - Temporary tax differences on costs (Section 140.1 TCU);

PTDc. - Permanent tax differences on costs (§ § 137.1, 137.2 TCU).

This option of calculation and accounting for object of taxation is eligible for implementation in legislation, as is close to the norms of the Order № 27.

It should be noted that formulas 1, 2 and 3 have a different algorithm for determining the same rate of taxation. However, the result of calculation by formulas 1, 2 and 3 should give a same value of income / loss.

Now taxpayers use formula 1 as the basic algorithm. This algorithm performs calculative function and illustrates approach from the standpoint of tax rules of TCU to determine income. Formulas 2 and 3 illustrate accounting approach to determination of income.

According to the Order № 27 tax differences are taken into account in determining taxable income (loss) for reporting period, for accounting purposes are divided into:

tax difference regarding revenue from the sale of goods (works, services);

 tax differences regarding other operating revenue;

 tax differences regarding other revenue;

tax difference regarding cost of sales of goods (works, services);

 tax differences regarding other operating expenses;

 tax differences regarding other expenses;

 tax difference regarding extraordinary revenues;

 tax differences regarding extraordinary expenses.

Thus, analytical position of differences according to draft Law and Order № 27 do not match, and it can not be considered acceptable.

4. Proposals on tax differences in the TCU is desirable to link with changes in forms of financial statements in accordance with the draft Order of the Ministry of Finance of Ukraine from 25.02.2013, which is located on web-site of MFU for discussion "On Amendments to Some Legal Acts of the Ministry of Finance of Ukraine on accounting". The project proposes to amend in notes to financial statements, namely, to introduce new tables of the following form:

"Appendix

to Regulation of Accounting

"Tax differences"

Tax differences

RECONCILIATION OF FINANCIAL RESULTS

AND TAX INCOME (LOSS)

In our opinion, these tables should be reduced at all, or set a right to submit information about tax differences upon decision of taxpayer in a simplified form (see Tables 1 and 2).

Table 1

Table 2

RECONCILIATION OF FINANCIAL RESULTS

AND TAX INCOME (LOSS)

5. Norm in paragraph 1.17.12 of TCU gives taxpayer the right to use techniques of the tax differences mechanism. However, TCU does not offer other options to calculate the object of taxation.

II. Positive implications of mechanism of tax differences on calculation of corporate income tax

1. Voluntary use of mechanism of tax differences (paragraphs 01.17.12 TCU).

2. Theoretically, there are three possible options to prepare information of declaration on basis of: tax accounting, accounting without using mechanism of tax differences, accounting with using mechanism of tax differences. The choice of alternative accounting should be given to the taxpayer.

3. It is possible to save time on record keeping and filling the declaration on group of operating income and expenses of taxpayer through due to using information from accounts of revenue (Class 7) and expenses (Class 9) without further processing for those taxpayers who have a small amount of tax differences.

4. From the standpoint of tax authority the mechanism provides reliable information for inspection, monitoring and imposition of penalties in case of violations of the law. Reliability is increased in case of audit of tax information.

III. Negative implications of mechanism of tax differences on calculation of corporate income tax

Disadvantages of proposed project are as follows:

1. Due to the fact that TCU does not provide other options for calculating the tax object, mechanism of tax differences is the only option so far for this calculation.

In our view, there should be given an option for taxpayers (request from entrepreneurs and accountants) of SMEs (small and medium, as defined by legislation) to choose option for accounting in order to make declaration of income tax;

2. There are no comparable figures of revenue and expenditure in accordance with the related documents of same direction: Draft Law on determination of tax differences (Section III TCU) - Order № 27 - Order of declaration of income tax. In an expert study to prove effectiveness of norm of the new mechanism these documents should be considered together;

3. The conflict exists between methods and direction of calculations in project Law on definition of tax differences (Section III TCU), Ministry of Finance Decree № 27, on the one hand, and R(S)A 17 or IAS 12 on the other hand. Draft Law on determination of tax differences does not correspond with the requirements of these standards in terms of permanent tax differences. Thus, calculation of deferred tax assets and deferred tax liabilities required to fill in a balance sheet and calculation on rules of TCU and Order № 27 to fill out declaration of income tax are different calculations.

This approach in regulations confirms thesis of existence of parallel accounting and calculations for purposes of tax and accounting, for financial reporting purposes. This fact confirms hypothesis on multidirectional nature of tax and financial information at all stages of accounting and reporting of company;

4. In legislation there is no written general order of tax differences reflecting in accounting registers and tax records, which causes difficulties in its application in practice. There are two possible options for action:

a) identify name and status of accounting registers in norms of TCU or in Order № 27;

b) provide a statutory right for taxpayer to determine own structure and content of accounting registers, which serve as the basis for preparation of information in returns for income tax. This decision is fixed in order on accounting policies. In the absence of such an order to believe that taxpayer does not comply with legal requirements regarding disclosure of components of income tax by applying it to sanctions provided by law;

5. It is not clear how the Draft Law will resolve the following issues:

Whether taxpayer needs to calculate the value of tax difference as the difference between the data of financial and tax accounting? For example, according to financial accounting data the amount of purchases of goods in offshore areas is (conditionally) 100 000 UAH, and TCU allows 85 000 UAH, the difference is 15 000 UAH. If needed, there is a need for additional calculations for recognition and determination of tax data (comparison base) and amount of difference. Thus, one should keep tax records (tax calculations);

How often one should calculate tax differences - monthly, quarterly, annually? Using annual period of calculation under the new order of filing is unlikely, since accounting approach provides a continuous, uninterrupted data representation of facts of economic life (principles of full disclosure and continuity). If you ignore constant detection of tax differences during the year, then at the end you will have to carry a bulky sample data from analytical accounting registers;

What is the method for accounting temporary differences that occur in the same accounting period and in subsequent periods will be written-off (how they are to be tracked)?

What is the method for summarizing data on tax differences to display in tabular form in notes of finreporting?

We believe that the method for calculation of tax differences, their accumulation, accounting and reporting must be written or in the text of Section III of TCU, or in separate methodic guidelines;

6. Means of software in accounting need to be changed in order to create new indicators, analytical and synthetic registers (tables);

7. It becomes necessary to re-train accounting personnel with new ways of working;

8. It becomes real to allocate calculations of tax differences in a separate section of work (sector) in accounting and likely to attach with an individual accountant (at large enterprises);

9. In case of entry into force of amendments to the Law of Ukraine on definition of tax differences in the middle of the year, tax accounting on transition date would be complicated, resulting in errors of arithmetic and logical character and providing inappropriate information in declaration;

10. In STS bodies yet there are no available experts to verify data from taxpayer on the basis of innovation, leading to inevitable conflict between taxpayers and revisers in evaluating and determining tax differences.

These factors are likely to result in increased costs for taxpayer on tax administration, including implementation of new calculations, providing current accounting and reporting. According to our estimates, based on results of surveys of practicing accountants - CIAA members, this growth may be to 20-30% compared to the costs for the applicable rules at TCU. Increased costs undermine benefits of mechanism of tax differences.

As a result, according to complications in accounting criteria and increased costs of administration, the new scheme will have no advantages even over schemes of autonomous taxation under previously existing Law on income № 334.

We offer a thorough approach to methods of innovations in collection of income tax. We consider it necessary to conduct experiments on several enterprises of different sizes, get feedback from accountants in practice and publish the results in media - printed accounting journals.

Sincerely,

T. Kovtun,

Chairman of the Tax Committee of NGO CIAA