Changes regarding VAT taxation during the martial law

Starting from February 24, 2022, Ukraine lives in the martial law regime, which has been initially introduced by the Decree of the President of Ukraine No. 64/2022 "On introducing of the martial law in Ukraine" (approved by the Law of Ukraine dated February 24, 2022, No. 2102-IX "On approval of the Decree of the President of Ukraine "On introducing of the martial law in Ukraine"), and since has been repeatedly extended (most recently until May 25, 2022).

 

Under martial law, the authorities have already adopted many innovations, including in legislative form, which purpose is to maximize the simplification of doing business during the martial law, maintain the functioning of enterprises crucial to Ukraine's economics, support businesses and employees, establish mechanisms for supplying the Armed Forces of Ukraine and other Ukrainian paramilitaries with the necessary weapons, equipments and other accessories etc.

 

Amendments related to the value added tax (VAT) taxation under the martial law have been introduced by Laws dated:

 

· March 3, 2022, No. 2118-IX "On amendments to the Tax Code of Ukraine and other legislative acts of Ukraine on the peculiarities of taxation and reporting during the martial law" (Law 2118, entered into force on March 7, 2022);

· March 15, 2022, No. 2120-IX "On amendments to the Tax Code of Ukraine and other legislative acts of Ukraine on the effect of provisions for the martial law duration" (Law 2120, entered into force on March 17, 2022);

· March 24, 2022, No. 2142-IX "On amendments to the Tax Code of Ukraine and other legislative acts of Ukraine on improving of legislation for the martial law duration" (Law 2142, entered into force on April 5, 2022); and

· April 1, 2022, No. 2173-IX "On amendments to the Tax Code of Ukraine and other legislative acts of Ukraine on administering certain taxes during the martial law and state of emergency duration" (Law 2173, entered into force on April 16, 2022).

 

In addition to the abovementioned Laws, which have already entered into force, it is also reasonable to note that the Verkhovna Rada of Ukraine is currently preparing to the first consideration the Draft Law No. 7311-д "On amendments to the Tax Code of Ukraine and other Ukrainian laws on the peculiarities of collection of certain taxes and levies during the martial law and state of emergency duration" (Draft Law 7311-д). This Draft Law has been registered on May 1, 2022, and constitutes the revised version of the Draft Law No. 7311 "On amendments to the Tax Code of Ukraine and other Ukrainian laws on certain taxes and levies during the martial law and state of emergency duration" registered on April 24, 2022.

 

The Draft Law 7311-д, if adopted, will introduce new changes to the regulation of VAT during the martial law, including with regard to those provisions that have been introduced earlier with the entry into force of the abovementioned Laws.

 

Further in this article we will consider what innovations on VAT specifically have been introduced by the abovementioned Laws, as well as which ones can be introduced in the case of the adoption of the Draft Law 7311-д.

 

Features of VAT taxation for the taxpayers of the unified tax of the third group at the rate of 2% of income

 

One of the most significant amendments made to the Tax Code of Ukraine (TCU) became the introduction of the special taxation with the unified tax for the taxpayers of the unified tax of the third group. These amendments came into force on April 1, 2022, and will keep the effect until termination or cancellation of the martial law and the state of emergency in Ukraine.

 

The essence of the amendments is that during the specified period any individual entrepreneurs and legal business entities of any organizational and legal form, including those ones that previously applied the general taxation system (except for those ones which exhaustive list has been explicitly set out in the TCU), can,

without any restrictions on income volume, the number of persons employed with them, register as the taxpayers of the unified tax of the third group at the rate of 2% of income, i.e. switch to the simplified taxation system.

 

This also applies to taxpayers who, as of the moment of such transition, were also registered as VAT taxpayers. For such taxpayers, registration as a VAT taxpayer is suspended for the duration of their being considered as the unified tax taxpayers (which means suspending of all rights and duties of a VAT taxpayer established by the relevant provisions of the TCU, including those ones related to formation of VAT credit)1. Including, accordingly, the exemption from the following duties is provided:

 

1. accrual and payment of VAT for transactions for the supply of goods, works and services in the customs territory of Ukraine, as well as for the import of goods into the customs territory of Ukraine;

2. execution and registration of tax invoices and calculations of adjustments to them; and

3. submission of VAT tax reporting (i.e. there is no duty to file a VAT return). The last reporting (tax) period for a VAT taxpayer who has chosen the simplified taxation system at the rate of 2% of income is the reporting month (its part), when the taxpayer applied for the simplified taxation system at the rate of 2% of income2.

 

These exemptions do not apply to transactions for the supply and import of goods originating from the Russian Federation, imported from its territory and / or from the occupied territory of Ukraine.

 

It should be noted that registration as a VAT taxpayer is namely suspended, but not terminated3. And after termination or cancellation of the martial law and the state of emergency the taxpayers who have switched to the simplified taxation system with the unified tax at the rate of 2% of income from April 1, 2022, will automatically be considered to apply the taxation system they have applied before the switch to the simplified taxation. Accordingly, for VAT taxpayers their registration of VAT taxpayer will be automatically renewed together with renewal of all rights and duties regarding VAT they had before the switch to the simplified taxation system.

 

Herewith, in case of consuming (supplying, selling) by the taxpayer, during his applying the simplified taxation system at the rate of 2%, of goods / services, non-current assets purchased or produced with VAT before transition to the simplified taxation system, the VAT taxpayer is obliged, after renewal of VAT taxpayer registration and not later than the last day of the reporting period when such renewal occurred, to accrue "contingent" tax liabilities, execute and register consolidated tax invoice for such goods / services, non-current assets in the Unified Register of Tax Invoices.

 

If a VAT taxpayer purchased or produced goods / services, non-current assets with VAT before transition to the simplified taxation system, but, being on the simplified system, did not supply them until the end of the martial law and the state of emergency, such taxpayer retains the right to transfer VAT credit amounts for such goods / services, non-current assets, to reporting periods in the future after renewal of VAT taxpayer registration. In this case, the data of row 21 ("The amount of negative value credited to the VAT credit of the next reporting (tax) period") of VAT tax return for the last reporting period before transition to the simplified system shall be transferred to row 16.1 ("Negative value of row 21 of the previous reporting (tax) period, which is included to the VAT credit of the current reporting (tax) period") for the first reporting period after the end of the martial law and state of emergency.

 

Accordingly, the VAT taxpayer thus retains, after the end of the martial law and state of emergency, the right to VAT credit formed before transition to the simplified taxation system, including the right to use the relevant amounts of VAT included in the VAT credit for calculation of VAT tax liabilities for reporting periods after the end of the martial law and state of emergency.

[1] Subclause 9.5 of clause 9 of subsection 8 of section XX of the TCU.

[2] See explanation of the State Tax Service of Ukraine at the link: https://tax.gov.ua/media-tsentr/novini/578879.html

[3] Subclause 9.9 of clause 9 of subsection 8 of section XX of the TCU.

[4] See explanation of the State Tax Service of Ukraine at the link: https://tax.gov.ua/media-tsentr/novini/578879.html

[5] The obsolete term "defense products" was replaced by the term "goods for defense purposes" with the entry into force of Law 2120. Thus, the terminology of the TCU was brought in line with the currently effective Law of Ukraine dated 17 July 2020 No. 808-IX "On defense procurements".

[6] Clause 32 of subsection 2 of section XX of the TCU.

[7] Clause 32¹ of subsection 2 of section XX of the TCU.

[8 Resolution of the Cabinet of Ministers of Ukraine dated March 2, 2022, No. 178 "Certain issues of taxation with value added tax at zero rate during the martial law".

[9] Clause 32¹ of subsection 2 of section XX of the TCU.

 
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