Статья посвящена новеллам, содержащимся в Налоговом кодексе Украины, а также некоторым двусторонним соглашениям об избежании двойного налогообложения, стороной которых является Украина, в частности, франко-украинскому и кипро-украинскому. Особое внимание уделяется автором положениям о недискриминации, содержащимся в международных соглашениях об избежании двойного налогообложения.
This month marks the first anniversary of the enactment of the Tax Code by the Ukrainian Parliament. The Code is designed as a single compilation of tax law in Ukraine and it should not be forgotten that tax law in Ukraine is also regulated by international treaties dealing with taxation. Closer analysis shows that a certain number of these treaties may be at odds with provisions of the Tax Code.
Limits on deductibility for services provided by non-residents are among the most controversial provisions introduced by the new Tax Code. In particular, the Tax Code limits the deductibility of marketing and consulting services (including engineering) to 4% of the previous year’s turnover (the 4% rule) . This limitation has long been singled out by the business community as a disincentive for new investors. Critics point to the fact that the rule effectively bars new investors, who for obvious reasons cannot show turnover for the previous year, from deducting any expenses related to services provided by non-residents at the precise moment when most such expenses are incurred.
A separate limitation for engineering services directly linked to works, limits their deductibility to 5% of the customs value of imported equipment . This limitation is often insufficient for complex industrial equipment, requiring the services of specialist technicians to begin operations.
And finally, a third limitation applies to the payment to non-residents of royalties and other fees related to the exploitation of industrial and business processes. Deductibility of such costs, when paid to non-residents, is completely excluded by the Tax Code.
All three limitations apply exclusively to non-residents. They were originally intended as a catch all measure to combat fraudulent practices based on sham service agreements or royalty payment. However, these stringent across-the-board limitations on deductibility have been justifiably identified as poor economic policy, for penalising much needed new investment and restricting com-petition by unfairly singling out foreign-based service providers and rights-holders. But it appears that the application of the limitations described above by the State Tax Service may also be in direct violation of Ukraine’s bilateral treaty obligations with numerous significant trading partners.
Ukraine has signed over 60 so-called double taxation treaties (DTTs) with countries around the world. As can be deduced from their names, these “aim to prevent double taxation” by agreeing certain rules with regard to taxation of individuals and legal entities from the respective countries. Legal practitioners regularly consult DTTs to identify specific withholding tax rates applicable to non-residents of respective jurisdictions. The most renowned such provisions may of course be found in DTT between the USSR and Cyprus. This treaty, which was adopted by the USSR in 1982 provides a 0% withholding tax rate for dividend, royalty and interest payments. Interestingly, this treaty still remains in force in Ukraine, while other former USSR member states, including Russia, have already re-negotiated new DTTs with Cyprus.
On the other hand, it is a less-known fact that DTTs may also have an influence on other aspects of tax law, including with respect to legal entities incorporated in Ukraine as subsidiaries of foreign companies. International tax treaties signed by Ukraine are generally based on model taxation treaties such as those prepared under the auspices of the UN and the OECD. While certain standard provisions, if properly interpreted, should be understood to have a direct influence on the issue of deductibility, the France-Ukraine DTT contains specific provisions which are particularly clear on this issue.
General non-discrimination provisions in DTTs
One of the most common “standard” provisions included in DTTs concern non-discrimination. These provisions are worded in various ways. Some simply provide for an obligation to renegotiate the DTT, in the event that more favourable conditions are later provided to a third country4. Others, so-called most-favoured-nation clauses call for the automatic application of more favourable provisions concluded between Ukraine and any other country. Finally a particularly common form of non-discrimination provision obliges the contracting state to apply “national treatment” to persons/entities of the other contracting state. This means that qualifying persons/entities must be treated in the same manner as nationals in the respective contracting state. This type of non-discrimination provision in particular has the potential to directly influence limitations on deductibility applied to non-residents under the Tax Code. In fact any limitations on deductibility or other unfavourable provisions of tax legislation drafted to apply exclusively to non-residents would be in violation of DTTs with non-discrimination clauses requiring “national treatment”. Residents of major trading partners, including the Netherlands and Germany, may thus not be treated differently from Ukrainian service providers or rights-holders with regards to the deductibility of expenses.
The special case of France-Ukraine DTT
Among all DTTs signed by Ukraine, the France-Ukraine DTT stands out from the pack in its treatment of the issue of deductibility. It not only contains a “national-treatment” non-discrimination provision, but also specific rules on the issue of deductibility. These supersede the provisions of the Tax Code on the basis of the principal of primacy of international law over national law. The additional protocol to the treaty, contains an Article 10, which sets out that a company which is at least 20% owned by one or more residents of France may deduct:
(i) All interest and fees related to its industrial and commercial operations irrespective of whether these are paid to a bank or other legal entity.
(ii) Wages, salaries and other remuneration paid by the company in exchange for services rendered as well as all other expenditure related to its industrial or commercial activity.
It may be noted that unlike the Tax Code, these rules provide for the deductibility of expenditure, without taking into consideration any limitations. Thus, any expenses may be deducted irrespective of limitations provided for in the Tax Code, on condition that these are applicable to the company’s activities. As outlined above, under the principle of primacy of international law over national law, as set out in the Constitution of Ukraine and reaffirmed in Article 3 of the Tax Code, these provisions should be applied in place of general tax law rules, in all cases where the treaty is applicable. This of course raises the question whether these specific rules can and have been applied in practice.
Issues relating to the applicability of more favourable provisions under DTTs to foreign businesses operating in Ukraine have arisen from time to time, including prior to the enactment of the Tax Code.
In general, local tax authorities are more comfortable applying the standard provisions of national law and reluctant to apply specific rules contained in DTTs, in particular if no internal instructions have been issued with regard to the particular treaty in question.
As a result, taxpayers may be forced to initiate litigation, in order to enforce their rights under the double tax treaty. Whether or not this is a worthwhile proposition depends on the amount at stake, which must be significant enough to warrant the expense of potentially lengthy court proceedings. However, investors should not shy away from invoking their rights under DTTs, as practical examples show that courts in Ukraine readily recognize their superiority over general provisions in national law. In particular it is possible to name a case decided by the Higher Administrative Court of Ukraine under the France-Ukraine DTT . This case decided in February 2011, less than two months after the Tax Code came into force, upheld provisions on deductibility in Article 10 of the additional protocol to the France-Ukraine DTT clearly reaffirming that these must be applied in place of national legislation on this issue. In fact the, Higher Administrative Court merely upheld a decision by the Kiev Administrative Appeals Court which was favourable to the investor, despite an appeal by the State Tax Service, demonstrating the judiciary’s commitment to uphold Ukraine’s international obligations under DTTs.
This case relates to provisions applicable prior to the enactment of the Tax Code. However, as the primacy of international law is a recognized principle of Ukrainian constitutional law, the courts could not reasonably decide in a different manner with regard to limits on deductibility set out in the new Tax Code.
The firm position of Ukrainian courts in correctly applying DTTs, should strengthen the resolve of taxpayers seeking to apply provisions of the France-Ukraine DTT or other treaties to current and future reporting periods. It should also be noted that under certain conditions, taxpayers may also act to reopen past reporting periods to take advantage of favourable provisions of the DTT retroactively. This is, in fact, possible at any time during the 3 year limitation period. However, such an initiative should be carefully considered from a business stand-point considering the amount at stake. Tax authorities may be quite reluctant in their attitude towards such an initiative. So, an attempt to reopen past periods in order to add additional deductible expenses, can be expected to result in a Tax Controversy, at the very least at administrative level, possibly followed by litigation.
The effect of the France-Ukraine DTT on overall tax law in Ukraine
The favourable provisions relating to deductibility and the track-record of their correct application by the Ukrainian judiciary is of course good news for French companies covered by the DTT. However, the effect of these provisions may be much broader, applying to certain other states and also serving as a catalyst for modifications to Ukrainian tax legislation.
There is an increasing trend to make use of most-favoured nation clauses in DTTs. The most recent DTT ratified by Ukraine contains such a provision, as does the US-Ukraine DTT. Residents of such states may, therefore, directly take advantage of the specific pro-visions included in the France-Ukraine DTT as set out above. Such persons or entities could therefore also completely avoid the restrictive limitations on deductibility set out in the Tax Code.
It may be noted that, a significant number of DTTs signed by Ukraine contain a “national treatment” clause. Together with the France-Ukraine DTT and the residents of states able to “tag along-based on most-favoured nation clauses; this has the potential to poke holes in the strict limitations on deductibility of payments to non-residents intended by the Tax Code of Ukraine.
At this stage it is worth considering how the Ukrainian government, generally intent on tweaking tax law to optimize revenue inflows, may react. It would be possible, to introduce similar limitations on deductibility with regard to domestic service providers and rights-holders. This would allow restrictions on deductibility to continue to be applied to non¬residents based in countries which have concluded DTTs with Ukraine providing only “national treatment”.
However, the France-Ukraine DTT, as interpreted by Ukraine’s highest administrative court, would continue to overrule any restrictions on deductibility of operating expenses of companies qualifying for the application of the France-Ukraine DTT. Furthermore, an increasing number of other countries could benefit from these same provisions based on most-favoured nation clauses included in respective DTTs.
Alternatively, a more positive scenario would see the firmly entrenched opposition of the France-Ukraine DTT to arbitrary limits on deductibility serve as the motivation to entirely abolish these limits. This would certainly be the more advantageous choice from an economic policy stand-point and represent a further step in harmonizing Ukrainian tax legislation with European provisions.
Автор: Taras H. Koval
Источник: Ukrainian Journal of Business Law. – 2012. – № 1-2. – Р. 14 – 16.