Today we would like to discuss the issue of value added tax (VAT) reimbursement. In this overview we will disclose general principles of the VAT reimbursement procedure in Ukraine and share our practical experience. We are not going deeply into the algorithm of filling in VAT returns or the legal background of one or another transaction, but will review a general scheme and action plan for VAT reimbursement.
We believe you have heard about the VAT reimbursement procedure. You have also heard that it is complicated (or even impossible) and probably decided not to risk pretending for reimbursement, but to wait to offset accumulated VAT deductibles against future VAT obligations. This may be good for short-term projects, but if we are speaking about long-term projects, ‘freezing’ of 20% of the project value is not a good way to go, especially when financing is limited, counting value of money in time and other circumstances. Moreover, the whole project can turn out not to be attractive from an investment point of view if not refunding the VAT paid to suppliers/customs clearance and not reinvesting this money in further development.
Current legislation of Ukraine identifies the mechanism of VAT reimbursement and its terms. In case all criteria are met, transactions are correctly reflected in the company’s books and reports, the amount of VAT applied for reimbursement is deposited into the bank account of the company a maximum of 2 months from the application date. So, let’s see what the action plan is.
Firstly, let’s consider the nature of VAT itself: it is indirect tax, which is paid by the final consumers. So, companies – VAT payers, are only a ‘transit’ source: accumulating VAT credits (deductibles) of the value of goods/services paid to suppliers and VAT obligations (payables) of value of the sold goods/services. VAT itself does not impact PL statement and is counted separately (despite cases when VAT cannot be utilized). As a result of the reporting period, in Ukraine it is 1 calendar month, the positive difference between VAT obligations and VAT credit is to be paid to state budget. A negative difference can be reported as part of VAT credit of the next reporting period or reimbursement to the bank account can be pretended for.
The following scheme has a place:
So, the decision is made, and you decided to apply for VAT reimbursement. What is next? We recommend that you follow the action plan described below:
- Analysing if the company has a right to pretend for reimbursement. Following conditions must be complied with at the same time:
– There is no VAT debt
– There is a registration limit equal to or exceeding the amount to be applied for on the date of submitting the VAT return
– VAT was actually paid as a part of payment to suppliers for goods/services and in case of import – paid at the point of customs clearance
- To ensure availability and conformity to all criteria of primary documents to confirm actual delivery of goods/services. Also, it is important to check conformity of reflection transactions in accounting records and financial statements. Tax Code of Ukraine (TCU) does not contain a norm regarding obligatory delivery fact as a background for VAT reimbursement. Art. 200.4 of TCU foresees the following conditions for the amount to be reimbursed: “…in amount of tax, actually paid by the buyer of goods/services in previous and current reporting periods to suppliers of such goods/services”. But fiscal authorities consider the wording “suppliers” as confirmation of delivery fact. This position was also supported by the courts, so we recommend keeping to the current practice and pretending VAT reimbursement only after both actions (payment and delivery) are completed. It would also be very good if you can monitor your contractors and make sure they have enough facilities to complete the contract (fixed assets, personal assets, etc.), absence of active criminal cases. To secure delivery fact with additional documents such as delivery invoices, acts of acceptance, stock records or photos.
- After the amount is identified, the VAT reimbursement application should be prepared and submitted as a part of the monthly VAT return. In order to avoid formal rejection of the application due to mistakes in the VAT return, all demands regarding the correct filling in of the reporting package must be complied with. The amount to be reimbursed should be stated in a section 20.2.1 of the VAT return. Do not forget to mention the registration limit according to art. 2001.3 of chapter V of TCU on the date of submission. Together with the monthly VAT return, the following amendments must be submitted: Amendment 3 – calculation of state reimbursement; Amendment 4 – reimbursement application Note: in the final part of the VAT return in the fields “Marks about amendments” each amendment submitted must be marked.
Pay attention! The amount, applied for to be reimbursed to the bank account, for the period while it is being audited by fiscal authority, does not form part of the registration limit of the VAT system (SEA) nor does it consist of VAT credits of the next reporting period. In case the following month’s VAT obligations exceed the VAT credit, such difference should be paid to the state budget, despite the accumulated amount of VAT credit, in respect of which reimbursement was applied for.
Terms for tax audit are as follows:
- 30 calendar days, following deadline for VAT return submission to on-desk tax audit (art. 200.10 of TC). During on-desk audit the correctness of the VAT return and arithmetic is to be confirmed. If you are lucky, you can go to p. 3 and 4 from this point, but most likely an additional audit will be assigned.
- 60 calendar days, following the deadline for the VAT return to documentary tax audit. During this stage, tax officers visit the company and check all primary documents for correctness, they also can visit a site in order to make an inventory.
- If, as a result of the tax audit (according to p. 1 (and) p. 2 above), the fiscal authority has not identified any violations, a confirmation certificate is issued within 5 business days after completing of tax audit.
- Within 5 business days from the date the confirmation certificate was sent to the company, the amount of VAT applied is deposited into the company’s bank account.
So, careful reconciliation of VAT within periods, the correct accounting system and the confirmation primary documents, allows the company to pretend for VAT reimbursement into bank account and to not “freeze” funds, but to re-invest them already in development. Completing of contract conditions: payment from the buyer to the supplier and delivery of goods/services to the buyer is enough background to pretend for VAT reimbursement. Any additional conditions proposed by fiscal authorities, for example, fact of commissioning or anything else, are illegal and may be successfully claimed.
We wish you good luck!
Managing partner, Oxana Kuzyura
We would be glad to share our experience with regard to reimbursement procedures and provide you with a professional support.