On February 1, 2018, the Ministry of Finance issued its order No. 77 “On the Implementation of Summarizing Tax Consultations regarding Certain Issues of the Corporate Tax and Income Tax Application”. According to this order, three summarizing tax consultations for the banking sectors have been introduced. Minister of Finance Oleksandr Danyliuk announced the order during his meeting with Roman Shpek, Chairman of the Independent Association of Ukrainian Banks.
What’s it about?
Unclear tax regulations result in numerous administrative and court disputes between taxpayers and tax authorities.
The summarizing tax consultations pose an effective tool which makes it possible to significantly reduce the number of reasons for such disputes.
The order of the Ministry of Finance No. 77 implements three summarizing tax consultations:
1. On the limit of reserves which, if exceeded, increases the financial result before taxes (regarding the application of the regulation of sub-paragraph 139.3.3 of paragraph 139.3 of article 139 of the Tax Code of Ukraine in the version valid till January 1, 2018); this consultation states the following: to calculate the limit of reserves which, if exceeded, increases the financial result before taxes, the total balance value of the assets shall be applied whose devaluation is acknowledged by creating reserves in accordance with the international financial reporting standards, irrespective of the fact of these reserves for such assets being made.
2. On receivables which are acknowledged by banks as irrecoverable (regarding the application of the regulations of sub-paragraph 14.1.11 of paragraph 14.1 of article 14 of the Tax Code of Ukraine); this consultation states the following: for tax reasons, irrecoverable are receivables related to the financial asset which are written off and include the core debt as well as pending interest rates.
3. On loans provided by banks to debtors which are written off by banks as a financial asset (regarding the application of the regulations of sub-paragraph “e” of sub-paragraph 164.2.17 of paragraph 164.2 of article 164 of the Tax Code of Ukraine); this consultation states the following: the fact that a bank writes off a loan provided to a debtor as a financial asset in its accounting records is not considered as a debt release. The sum of this debt written off by a bank is not included into the taxable income of a debtor for the application of the private income tax.
What’s the benefit?
The clarification of these issues will help improve the quality of the credit portfolio of banks by reducing the number of taxation-related issues which hamper the processing of problem loans by banks due to unclear tax regulations.
Tax consultations shall clarify, how the banks shall handle their bad loans which are not served by debtors and, at the same time, improve their credit portfolio and avoid possible double taxation.
“Last year, the legal procedure for providing summarizing tax consultations was improved, the powers of the Ministry of Finance in this area were extended. We are confident that this is one of the most effective tools preventing tax disputes. Within a year, internal procedures were developed, issues needing clarification were consolidated and prioritized, the Expert Council was convened to provide proposals and recommendations on the summarizing tax consultations and the preparation of such consultations. The first consultations have been issued already. I will be doing my best for the process of summarizing tax consultations to go ahead as fast as possible and to settle as many disputes as possible”, Minister of Finance Oleksandr Danyliuk said.
The Independent Association of Ukrainian Banks whose members are involved in the work of the Expert Council welcomes the first summarizing tax consultations and is eager to further participate in the preparation of required financial tools.
“On behalf of the entire banking community we express our deep appreciation for the adoption of the first three summarizing tax consultations. This is what the Independent Association of Ukrainian Banks has been aspiring to achieve for almost two years”, Chairman of the Association Roman Shpek said. “We are also expecting all important basic issues to be settled and are confident that the direct dialogue between the Government and business is the tool which will help us solve all problems in the financial sector of the country”, Roman Shpek added.
What comes next?
Given numerous issues which need to be clarified, the Ministry of Finance – following the requirements of the Tax Code and the Procedure for Providing Summarizing Tax Consultations (approved by the order of the Ministry of Finance No. 811 of September 27, 2017, registered at the Ministry of Justice under No. 1266/31134 on October 13, 2017) – will be making its utmost to make the preparation and publication of summarizing tax consultations as effective and fast as possible.
For the preparation and issue of summarizing tax consultations, the Expert Council was convened whose members represent the Ministry of Finance, the State Fiscal Service, the Parliament’s committee for tax and customs policy, the office of the Business-Ombudsman, business associations and audit companies.
The Expert Council is a permanent advisory body at the Ministry of Finance. It was established to provide proposals and recommendations regarding summarizing tax consultations and to prepare the drafts of such consultations.