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Reducing Income Tax by the Amount of Excise Tax Paid on Used Heavy Distillates: Myth or Reality?
At the end of 2017, the new Clause 15 was added to Sub-section 4 of Section XX Transitional Provisions of the Tax Code of Ukraine, enabling corporate income tax payers to reduce the amount of corporate income tax paid by the amount of excise tax paid for certain types of heavy distillates (gas oil) that they purchased.
In accordance with the said provision, in order to reduce corporate income tax, purchased diesel fuel should be used to fill up diesel-electric locomotives and/or motor transport vehicles for the carriage of cargos, the capacity of whose vehicles exceeds 75 tons.
The said corporate income tax exemption was included in the Guidebook of Tax Exemptions under code 11020372 and came into effect on 1 January 2018.
Since these specific types of fuel are needed to fill up special-purpose vehicles, including increased lift capacity trucks that are normally used in heavy industry, it was expected that large ore mining plants and iron and steel works would, first and foremost be interested in the use of the said exemption.
According to public sources, state-owned national rail carrier Ukrzaliznytsia PJSC also planned to decrease its corporate income tax pursuant to Clause 15 of Sub-section 4 of Section XX Transitional Provisions of the Tax Code of Ukraine. The said exemption was no less important for other companies that used their own locomotives in their day-to-day operations.
However, the position later adopted by the tax authorities and the Ministry of Finance of Ukraine regarding the application of the exemption was not in line with the expectations of the business sector.
Business Entities which Sell Fuel Only
In May 2018, the Ministry of Finance of Ukraine, in its Letter No. 11320-10-10/12920 of 10 May 2018, stated that Clause 15 of Sub-section 4 of Section XX Transitional Provisions of the Tax Code of Ukraine should be extended to business entities which are payers of excise tax on the sale of fuel. That is, the entities that carried out transactions referred to in Paragraph two of Sub-Clause 14.1.212 of Clause 14.1 of Article 14 of the Tax Code of Ukraine (specifically, carried out transactions of actual delivery (sale, shipment) of fuel on a paid or free of charge basis, with or without transfer of title to such fuel).
In August 2018, the first detailed clarification was issued by the State Fiscal Service of Ukraine (No.3510/6/99-99-15-02-02-15/IPK of 10 August 2018), in which clarification of the supervisory authority expressed a position similar to the one taken by the Ministry of Finance of Ukraine regarding the right to the tax exemption only in respect of business entities that: (i) were payers of excise tax on the sale of fuel (for instance, suppliers of fuel), (ii) were registered as payers of the relevant tax, and (iii) paid excise tax directly to the State Budget based on the results of transactions involving the sale of fuel.
The said approach would exclude the possibility of using the exemption set out in Clause 15 of Sub-section 4 of Section XX Transitional Provisions of the Tax Code of Ukraine by corporate income tax payers, in which taxpayers consumed fuel and paid excise tax as part of the price paid for fuel purchased and, at the same time, were not registered as payers of excise tax.
Similar clarifications were subsequently reflected in a number of Individual Tax Advice.
However, the reasonability and lawfulness of such an attitude assumed by the tax authority and the Ministry of Finance of Ukraine is highly questionable.
To What Extent is Such an Approach Reasoned?
In our opinion, the interpretation by the tax authority of Clause 15 of Sub-section 4 of Section XX Transitional Provisions of the Tax Code of Ukraine to the effect that it permits a reduction in corporate income tax only for persons who carry out fuel sale transactions and who, at the same time, pay the excise tax directly to the State Budget, is erroneous.
Firstly, Clause 15 of Sub-section 4 of Section XX Transitional Provisions of the Tax Code of Ukraine does not limit the scope of persons who can take advantage of the exemption only to persons that carry out the sale of fuel. The said provision contains no list of any specific categories of excise tax payers entitled to exercise the exemption.
Secondly, the approach assumed by the tax authority that the said provisions extend exclusively to persons that carry out the sale of fuel (for instance, suppliers of fuel) fails to take into account the impossibility of compliance by such suppliers with one of the conditions granting the exemption (regarding the use of fuel for specific categories of transport vehicles). In other words, according to the attitude assumed by the tax authorities, a supplier or importer of fuel, in order to reduce corporate income tax, should use the fuel purchased, for instance, to fill up a special-purpose mining truck, which is highly unlikely in practice and negates the application of the whole provision.
Thirdly, Clause 15 of Sub-section 4 of Section XX Transitional Provisions of the Tax Code of Ukraine contains no requirements for the payment of sums of excise tax directly to the State Budget. The excise tax is an indirect tax on consumption of certain types of commodities (products), which is included in the price of such commodities (Sub-Clause 14.1.4 of Clause 14.1 of Article14 of the Tax Code of Ukraine). Thus, having paid the price of any excised commodity, the purchaser of such commodity automatically pays the excise tax included in the commodity price, the tax for which is eventually paid to the State Budget anyway.
Who is Entitled to the Exemption Then?
In our opinion, since Clause 15 of Subsection 4 of Section XX Transitional Provisions of the Tax Code of Ukraine contains no express reference to specific categories of excise tax payers or specific transactions subject to excise tax, which transactions, when effected, warrant the exercise of the exemption, the said provision allows any corporate income tax payer to reduce the amount of this tax, provided that it has fulfilled the following two conditions:
– has purchased heavy distillates (gas oil) classified under certain commodity sub-categories (2710 19 43 00, 2710 19 46 00, 2710 19 47 10), and has paid the relevant amounts of excise tax included in the purchase price of the fuel bought under excise tax invoices registered by suppliers;
– has used the purchased heavy distillates (gas oil) for specific transport vehicles (diesel-electric locomotives and motor transport vehicles for carriage of cargos, the capacity of which vehicles exceeds 75 tons).
Clause 15 of Sub-section 4 of Section XX Transitional Provisions of the Tax Code of Ukraine provides for no other conditions to reduce the amount of corporate income tax (in particular, the payment of excise tax directly to the State Budget by a person registered as a payer of excise tax).
The said approach is supported by the jurisprudence of courts of first instance and courts of appeal.
At the same time, as of the date of this publication, no opinion of the Supreme Court is available regarding the application of the corporate income tax reduction set out in Clause 15 of Sub-section 4 of Section XX Transitional Provisions of the Tax Code of Ukraine. However, the fact that, in this category of disputes, local courts and courts of appeal sustained exclusively the position of taxpayers gives hope that the same approach will be taken by the Supreme Court.
Heavy distillates (gas oil), with sulphur content not exceeding 0.005 mass % (diesel fuel classified under commodity sub-categories 2710 19 43 00, 2710 19 46 00, 2710 19 47 10 of the Ukrainian Classification of Commodities in Foreign Economic Activity (UCC FEA).
Code under UCC FEA 8602 10 00 00.
Code under UCC FEA 8704 10 10 10.
Individual Tax Advice No. 4292/6/99-99-15-02-02-15/IPK dated 05 October 2018 and Individual Tax Advice No. 597/6/99-99-15-02-02-15/IPK dated 19 February 2019.
See, for instance, the Ruling of the Third Administrative Court of Appeal in case No. 160/4438/19, dated 12 February 2020; the Ruling of the Third Administrative Court of Appeal in case No. 160/4329/19, dated 13 February 2020; the Ruling of the Donetsk Circuit Administrative Court in case No. 200/12405/19-а dated 18 December 2019.