• Revenue. This refers funds or income derived by the government whether from tax or any other source in another sense.

• Internal Revenue. It refers to taxes imposed by the legislature other than duties on imports and exports.

• Customs Duties. These are taxes imposed on goods exported into a country.

Entities Exempted from Taxation

• Religious Institutions

• Charitable Institutions

• Non-Profit, Non-Stock Educational Institutions

• Non-profit Cemeteries

• Government Institutions

• Foreign Diplomats

Situs of Taxation

Situs is a latin term which means “situation”, “location”, or “place.” In short, its literal meaning refers to a place taxation. In real property, the rules is tax is imposed to a place or state where the property is located and subject to be tax has a jurisdiction over the said property.

Double Taxation

• Direct Duplicate

Elements:

• Taxing twice

• By the same taxing authority

• Within the same taxing jurisdiction

• For the same purpose

• In the same taxable period

• Involving the same purpose

• Indirect duplicate

Indirect duplicate taxation, on the other hand, occurs when taxes on the property are not imposed by the same taxing authority. The local and national governments imposed taxes on the same property during one taxable period. This kind of imposition is legal.

Forms of Escape from Taxation

6 forms of escape from taxation

1. Shifting. It is one way of passing the burden of tax from one person to another. Ex. Taxes paid by the manufacturer may be shifted to the consumer by adding the amount of the tax paid to price of the product.

Kinds of Shifting

• Forward shifting occurs when the burden of the tax is transferred from a factor of the production to the factor of distribution.

• Backward shifting occurs when the burden of tax is transferred from the consumer to the producer or manufacturer.

• Onward shifting occurs when tax is shifted to two or more times either forward or backward.

• Capitalization. This refers to the reduction in the price of the tax object to the capitalized value of future taxes which the purchaser expects to be called upon to pay. Ex: A reduction made by the seller on the price of the real estate, in anticipation of the future tax to be shouldered by the future buyer.

• Transformation occurs when the manufacturer or producer upon whom the tax has been imposed pays the tax and endeavor to “recoup” (make up for) himself by improving his process of production

• Tax Evasion is the practice by the taxpayer through illegal or fraudulent means to defeat or lessen the amount for tax. This is also know as “tax dodging.”

• Tax Avoidance is the exploitation by the taxpayer of legally permissible methods in order to avoid or reduce tax liability. This is also known as “tax minimization.”

• Tax Exemption is the grant of immunity or freedom from a financial charge or obligation or burden to which others are subjected.

Grounds for tax exemption:

Contract, wherein the government is the contracting party.

Public policy

Reciprocity

2. Tax policy and tax system of Ukraine

On 04 December 2010, the Tax Code of Ukraine (the “TCU” or the “Code”) was officially published. In its entirety, the TCU will become effective on 01 January 2011, while some of its provisions will take effect later (the most important, Section III dealing with corporate income tax, will become operative from 01 April 2011).

The TCU essentially changes the existing rules of taxation in Ukraine. Below you may find a brief overview of major changes in tax administration, assessment and imposition of CIT, PIT, VAT, and property tax.

Administration of Taxes, Duties (Compulsory Payments)

Positive changes:

- During the administrative appeal procedure, the obligation to substantiate the decisions of the tax authorities lies with the tax authorities, and not with the taxpayer (art. 56.4);

- The tax authorities may not apply indirect methods (including economic analysis, observation, analogy, control over individual tax payers’ income and expenses) as a means of calculating the taxpayer’s tax liability;

- The fines for correction of self-identified errors by means of filing an amended tax return have been decreased from 5% to 3%. If a prior period error is corrected by means of amending the current period tax return, the fine remains at the level of 5%. Filing an amended tax return constitutes a ground for the tax authorities to perform an unscheduled field tax audit.

- The fines for violations in accrual, withholding and payment of taxes have been decreased. Under the Tax Code, the amount of fine depends on the frequency of violations during a period of 1,095 consecutive days (statute of limitation for tax purposes), in particular:

- 25% - for the first violation;

- 50% - for the second violation;

- 75% - for the third and any subsequent violation.

There is no clear guidance as to the criteria based on which the violation would be regarded as the first, second, third and subsequent.

- The fines for violation of tax payment deadlines have been decreased:

- 10% - if tax payment is overdue for less than 30 days;

- 20% - if tax payment is overdue for 30 days and more;

Violations of the tax legislation during the transition period from 01 January 2011 to 01 June 2011 will be subject to a symbolic fine of UAH 1 (one hryvnia). Violations of Part III of the Tax Code (Corporate Income Tax) during the transition period from 01 April 2011 to 01 September 2011 will not be subject to fines.

Negative changes

- The Tax Code introduces fines for overstatement of VAT receivables, VAT refundable or net tax losses during the period of 1,095 consecutive days (i.e. fines might be imposed even in the case when no tax liability is accrued), in particular:

- 25% - for the first violation;

- 50% - for the second violation;

- 75% - for the third and any subsequent violation.

A new term “factual tax audit” is introduced. The factual tax inspection is performed at the place of actual performance of the taxpayer’s entrepreneurial activities and is intended to check the taxpayers’ compliance with the rules set for petty cash transactions, availability of licenses, trade patents, certificates including registration certificates, manufacturing and circulation of excisable goods, the employer’s compliance with labor legislation with regard to conclusion of labor agreements, documenting of labor relations with the employees. Duration of factual tax inspection is limited to 10 calendar days.

A new term “beneficial owner” is introduced. A recipient of Ukrainian source income shall be regarded as a beneficial owner of such income rather than a mere intermediary. A legal entity or individual acting in the capacity of an agent or nominee (nominee owner) or recognized as an intermediary may be regarded as a non-beneficial owner of income even if such legal entity or individual is legally entitled to receive such income (art. 103.3). Only payments to beneficial owners will be protected by Double Tax Treaties. The taxpayer’s right to deduct certain outbound payments to a non-resident is also limited if such non-resident is not a beneficial owner (see more details in the following section).

Corporate Income Tax

Effective date

Section III of the Code that deals with corporate income tax (“CIT”) will become effective from 01 April 2011.

Tax rate: The Tax Code provides for a gradual reduction of the CIT rate from 25% to:

- 23% - from 01 April 2011 to 31 December 2011;

- 21% - from 01 January 2012 to 31 December 2012;

- 19% - from 01 January 2013 to 31 December 2013;

- 16% - from 01 January 2014.

Tax base: Recognition of income/expenses for tax purposes will be based chiefly on financial accounting principles (standards). Basically, it is a positive change intended to harmonize the tax treatment of a transaction and the economic substance.

- The “first event rule” is abolished. Income/expenses will be recognized at the time of their accrual;

- Interest expenses will be capitalized for tax purposes provided that such expenses are capitalized in financial accounting;

- Forex accounting will be based on financial accounting principles (standards);

- Securities transactions accounting remains mainly unchanged;

- Accounting and depreciation of all groups of depreciable fixed assets will be itemized (versus the group based approach in current legislation);

- The number of fixed asset groups has been increased substantially: up to 16 for tangible assets, and up to 6 for intangible assets;

- The list of tax depreciation accrual methods has been significantly expanded. The Tax Code provides for five methods, including the straight line method, reducing balance method, and accelerated depreciation method (for certain groups of fixed assets).

- Opening tax basis of depreciable fixed assets as of 01 April 2011 will be determined based on inventory take (accounting book value);

- Should the total accounting book value of fixed assets as of 01 April 2011 be less than the total tax basis of such fixed assets, the difference will be recognized as a separate item of a depreciable asset and will be depreciated based on the straight line method over three years. Book revaluations made during 2010 are not taken into account when comparing the tax basis to book value on 01 April 2011.

Permanent and temporary difference accounting

Reconciliation of book-to-tax income with disclosure of permanent and temporary differences will have to be filed together with tax returns effective from 01 January 2012. The form of tax returns is to be approved by the Ministry of Finance of Ukraine;

Statutory financial statements will have to be filed together with tax returns effective from 01 January 2012.

Taxation of certain operations

Dividends

- Dividends paid by Fixed Agricultural Tax payers, Mutual Funds, Real Estate Fund managers, Holding Companies (within their accumulated dividend income), as well as in-kind dividends (as long as they do not change the ownership structure) and dividends to individuals are not subject to Advance CIT;

- Advance CIT payment may be offset against current CIT liabilities. Any overpaid amount of Advance CIT payment will be carried forward to future periods;

- Dividend income is tax exempt unless derived from non-controlled (less than 20%) non-residents or non-residents with offshore status.

Royalties

The Tax Code considerably restricts the deductibility of royalties. In particular, it is not allowed to deduct royalty payments in favor of those non-residents which are:

- considered “offshore” (as defined);

- residents of the jurisdictions which do not tax royalty income;

- non-beneficial owners of such royalties;

- receiving royalties for an item of intellectual property the original right to which was created in Ukraine.

Accrual of royalties in favor of those non-residents, which do not meet any of the above criteria, is allowed up to 4% of prior year sales (revenue).

Royalties accrued in favor of resident legal entities which are not CIT payers based on common rules are not deductible.

Transfer pricing rules

- The Code contains a more expanded list of Transfer Pricing methods. The list is closely mirrored to the OECD list;

- Detailed guidance as to the Transfer Pricing methodologies is not provided in the Code but is expected in the next couple of years;

- The said Transfer Pricing methods will apply to transactions from 01 January 2013. Until then, the current transfer pricing rules, as set forth in Clause 1.20 of the Law “On Corporate Income Tax”, will apply.

Deductibility restrictions

- Expenses incurred in favor of Unified Tax payers (except those providing IT services) are not deductible;

- Expenses related to purchases of consulting, marketing and advertising services from non-residents (except for purchases from non-residents’ permanent establishments) are deductible to the extent of up to 4% of prior year sales (revenue). The Code imposes an outright ban on the deduction of expenses related to purchases of the aforementioned services from “offshore” non-residents.

Tax benefits

- 80% of corporate income earned within the customs territory of Ukraine from sale of energy-saving equipment and materials of own production, as specified by the Cabinet of Ministers of Ukraine, will be tax exempt;

- 50% of income derived from the implementation of energy-saving and energy-efficient projects by companies included in the State Register of Enterprises, Institutions and Organizations engaged in implementing energy-saving and energy-efficient projects.

- 0% CIT rate is established for the period from 01 April 2011 to 01 January 2016 for those newly set-up enterprises and certain types of existing companies, the total income of which for the reporting year does not exceed UAH 3 mln. The Code also imposes a number of other restrictions with regard to the application of this benefit.