The State Fiscal Service of Ukraine has once again changed its position, and this time the changes made concern the question of writing off losses incurred while transporting goods (grain). In this article, we will have a look at what constitutes regular practice regarding this issue.
When writing off of losses within the framework of regulations on the natural loss of goods, the acquisition of which VAT amounts were attributed to the tax credit and were unmerchantable, VAT tax liability shall not be charged (provided that the value of such goods is included in the price of the finished products, subject to taxation).
If the amount being claimed for write-off happens to exceed the norms for natural loss, and therefore, it cannot be used within the framework of the VAT payer’s business activity, the taxpayer is required to charge tax liabilities based on the base taxation amount, determined in accordance with Paragraph 189.1 of the Tax Code of Ukraine. This should be done not later than the last day of the reporting (tax) period in which the amount is being declared.
However, the latest letter from the State Fiscal Service expressed quite a different position. It noted that, in the case that a company carries a loss for write-offs incurred during the transportation of products, such products can no longer be used for business purposes. In the event that the amount of VAT charged in acquiring goods (grain) is included in the tax credit, the company has effectively accrued tax liabilities in accordance with Paragraph 198.5 of the Taxation Code of Ukraine.
We cannot concur with the updated position expressed by the State Fiscal Service. Losses within the framework of natural loss is a phenomenon that the taxpayer cannot avoid – handling operations include the fact that a certain percentage of the product is lost. In addition, certain properties of goods cause natural loss.
In addition, the company cannot manipulate the amount of such losses due to the fact that they have been fully documented with invoices, elevator certificates, and other relevant documentation. In the case of deficiencies, the established norms regarding natural loss during the products’ acceptance are not presented as complaints to the suppliers owing to the fact that such variations do not actually indicate the improper fulfillment of contract terms. For this reason, certificates about goods’ deficiencies are not drawn up and adjustments are not made to the documents when registering goods on the books.
Consequently, a deficiency of goods within the rules of natural losses is due to objective reasons arising in the course of the taxpayers’ business activities and therefore, in our opinion, it is unreasonable to assert that the natural loss of the goods is not part of the taxpayer’s business activity. Accordingly, there are no grounds for calculating tax liabilities in the amount of losses within the norms of natural loss.
In addition, the question also arises as to what the regulations regarding natural loss the taxpayer may use in analyzing product losses.
The norms for natural loss under the different categories of raw materials/products were established in the Soviet era. However, in Resolution number 1066 (1), which entered into force on March 17, 2017, the Cabinet canceled some “Soviet standards” for many types of products. On the one hand, those rules were adopted over 20 years ago and had not been revised since that time, despite the fact that the conditions of storage, transportation, loading and handling have changed significantly. Respectively, there was an urgent need to revise them, as those regulations were no longer relevant. However, unfortunately, nothing else was proposed following the abolition of business entities.
Thus, the taxpayer can only work on developing relevant regulations regarding natural losses in orders or accounting policies, taking into account the properties of the product, the conditions of its carriage, international practice and the like. As for the question of the additional accrual of tax liabilities, the payer has the right to approach the State Fiscal Service for individual tax advice. However, we must keep in mind that the findings contained therein may not correspond to the taxpayer’s expectations.
Author: Anna Steshenko