In this Issue:
1. Amendments to the Tax Code of Ukraine: Environmental Tax
2. Prohibition to transfer tax losses generated prior to 1 January 2011
3. Acknowledging economic agreements void
4. Peculiarities of fine imposition
5. Peculiarities of penalty charging when errors are detected independently
6. Application of the STSU letters issued before the Tax Code of Ukraine came into force
7. VAT treatment of services listed in subparagraph “в” paragraph 186.3 of the Tax Code of Ukraine

1. Amendments to the Tax Code of Ukraine: Environmental Tax

Amendments to Section VIII “Environmental Tax” of the Tax Code of Ukraine, introduced by the Law of Ukraine dated 7 July 2011 No. 3609- VI “On amendments to the Tax Code of Ukraine and some other
legislative acts of Ukraine concerning improvement of certain provisions of the Tax Code of Ukraine” came into force from 1 October 2011

A new procedure for the collection and payment of environmental tax comes into force from 1 October 2011:

* Environmental tax is collected and paid to the budget by tax agents - manufacturers and importers of fuel;
* The object and basis for taxation are quantity and types of fuel, including the one produced from raw materials delivered by the customer and sold or imported to the customs territory of Ukraine with some exceptions;
* Fuel manufacturers pay the tax on a quarterly basis within 10 calendar days from the date of submission of the tax return which should be submitted within 40 calendar days following the last calendar day of the tax period (quarter);
* Fuel importers pay the tax prior to or at the date of submitting the customs declaration;
* Fuel manufacturers pay the tax based on the quantity of sold fuel;importers pay based on the quantity of imported fuel;
* Control for paying environmental tax while importing fuel to Ukraineis performed by the customs authorities.

2. Prohibition of transferring tax lossesgenerated prior to 1 January 2011

State Tax Service of Ukraine (the “STSU”) increases pressure on lossmaking enterprises, that proceeds from the STSU letters dated 8 September 2011 No. 828/3/15-1212, dated 8 September 2011 No.24240/7/15-121, dated 12 September 2011 No. 10-2018/3582

In its letters the STSU comes to a conclusion that tax losses generated in the 1st quarter of 2011 only are to be included in the amount of expenses of the II–IV quarters 2011. Such position of the STSU is based on the “literal interpretation” of clause 3 subsection 4 Section XXof the Tax Code of Ukraine.

Thus, it is expected that the enterprises which took into account tax losses of previous years in the tax return for the 2nd quarter of 2011 may become the subject of a tax inspection with corresponding additionalassessments of tax liabilities and fines.

We do not share the opinion of the STSU on this issue and do not see grounds for such interpretation of the provisions of the Tax Code ofUkraine.

3. Acknowledging economic agreementsvoid

On 16 September 2011, the State Committee of Ukraine for Regulatory Policy and Entrepreneurship issued letter No. 7319 regarding inspections by the authorities of state tax service as well as acknowledging economic agreements void by them It is explained in the letter that the said faults in the acts of tax authorities, committed by business entities while concluding and executing agreements, are not basis for acknowledging transactions void because the applicable legislation does not establish such groundsfor acknowledging transactions being void.

Thus, the ground for acknowledging transaction void is its invalidity established by the law and not by the acts of tax inspection. Pursuant to the provisions of Article 10 of the Law of Ukraine “On State Tax Service in Ukraine” the STSU authorities are only authorised to submit to courts claims towards enterprises on acknowledging transactions void and recovering means, received by them under such agreements, to thepublic revenue.

Attention must be paid to the provision of the act of the Civil Code of Ukraine, set forth in part 1 Article 204 of the Civil Code of Ukraine according to which a transaction is legal unless its invalidity is expressed by the law or unless it is acknowledged invalid by the court(presumption of legitimacy).

We are aware that lately the procedure for acknowledging a transaction void by the results of tax inspections using corresponding tax results (non-recognition of tax credit, expenses resulted with ex officio assessment) became widespread. So, the said letter will become of use to the enterprises which do not agree with the procedure of tax authorities and make decisions regarding appeal of decisions of taxauthorities per the judicial or administrative procedure.

4. Peculiarities of fine imposition

On 18 September 2011, the STSU issued letter No. 15022/6/10- 1015/3288 regarding peculiarities of fine imposition pursuant to the TaxCode of Ukraine

It is mentioned in the letter that if a tax payer fails to pay the sum of selfassessed tax liability within periods set forth in the Tax Code of Ukraine,such tax payer is obliged to pay a fine as follows:

* if the delay is equal to or less than 30 calendar days following the last day of the period of payment of the tax liability – in the amount of 10% of the settled tax debt;
* if the delay is more than 30 calendar days following the last day of the period of payment of the tax liability – in the amount of 20% ofthe settled tax debt.

The letter points out that fines resulted out of audits performed by controlling bodies are applied in the amounts set forth by the law, applicable as of the date the tax assessment regarding implementingsuch fine was issued.

5. Peculiarities of penalty charging when errors are detected independently

On 29 August 2011, the STSU issued letter No. 23178/7/15-3417-26 regarding peculiarities of penalty charging when errors are detectedindependently

It is explained in the letter that the penalty is due in case of self-detected errors in calculation of tax liabilities. It has been said that the penalty shall be charged for the amount of understatement for the whole period as follows: from the day of occurrence of a period for payment of tax liability under a tax return in question up to the day of actual payment (inclusive) of the amount of understated tax liability. The penalty is charged for the whole amount of understatement at the rate of 120% per annum of the primary rate of the National Bank of Ukraine effective as ofthe day of understatement.

6. Application of the STSU letters issued before the Tax Code of Ukraine came into force

On 10 June 2011, the STSU issued letter No. 7019/5/15-0316 regarding the status of the STSU letters issued before the Tax Code of Ukrainecame into force.

The STSU notified that its letters regarding applying provisions of the Law on taxation of profit of enterprises which partially lost its force may not be applied for tax accounting of transactions under the Tax Code ofUkraine even if such provisions have not been changed.

7. VAT treatment of services listed in subparagraph “в” paragraph 186.3 of the TaxCode of Ukraine

On 17 August 2011, the STSU issued letter No. 9409/5/16-1516 regarding taxation of services listed in subparagraph “в” paragraph186.3 of the Tax Code of Ukraine

STSU draws attention to the procedure of VAT taxation of services listed in subparagraph “в” paragraph 186.3 of the Tax Code of Ukrainewithin the year 2011:

* from 01.01.2011 to 30.06.2011 such operations for provision of services were not VAT-able;
* from 01.07.2011 operations of providing such services to a resident entity including providing such services by a non-resident entity are subject to VAT. Upon that, in case services listed in subparagraph “в” paragraph 186.3 of the Tax Code of Ukraine are rendered by a non-resident entity to a resident – legal entity, registered as a VAT payer in Ukraine, reverse charge VAT procedure applies. Ukrainian recipient of services will have a right for VAT credit provided the conditions set force in Article 198 of the Tax Code of Ukraine aremet.