Changes regarding VAT taxation during martial law

Since February 24, 2022, Ukraine has been living under martial law, which was initially introduced by the Decree of the President of Ukraine No. 64/2022 “On the introduction of 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 the Introduction of Martial Law in Ukraine”), and has since been extended to several times (most recently until May 25, 2022).

Within the framework of martial law, the authorities have already adopted many innovations, including in legislative form, the purpose of which is to maximize the simplification of the conduct of business during martial law, to maintain the operation of businesses crucial to the Ukrainian economy, to support businesses and employees, to establish mechanisms to provide the Ukrainian Armed Forces and other Ukrainian paramilitaries with necessary weapons, equipment and other accessories, etc.

Changes relating to the imposition of value added tax (VAT) under 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 martial law” (Law 2118 , effective 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 duration of martial law” (Law 2120, entry effective 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 legislation during the term of martial law” (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 the administration of certain taxes during the term of martial law and state of emergency” (law 2173, entered into force on April 16, 2022).

In addition to the above-mentioned laws, which have already entered into force, it is also reasonable to note that the Verkhovna Rada of Ukraine is currently preparing for the first time draft law No. 7311-д “On amendments to the Tax Code of the Ukraine and other Ukrainian laws on the peculiarities of the collection of certain taxes and duties during the period of martial law and a state of emergency” (Bill 7311-д). This bill has been registered on May 1, 2022 and is the revised version of Draft Law No. 7311 “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Certain Taxes and Levies During Martial Law and State of Emergency Duration recorded on April 24, 2022.

Bill 7311-д, if passed, will introduce new changes to VAT regulations during martial law, including with respect to provisions that were introduced earlier with the entry into force of the aforementioned laws.

Further in this article, we will consider which VAT innovations were specifically introduced by the above-mentioned laws, as well as which ones can be introduced in the case of the adoption of Bill 7311-д.

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

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

The essence of the changes is that during the specified period, all individual entrepreneurs and legal business entities of any organizational and legal form, including those who previously applied the general tax regime (except for those whose list exhaustive has been explicitly established in the TCU), may,

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

This also applies to taxpayers who, at the time of this transition, were also registered as subject to VAT. For such taxpayers, registration as a VAT taxpayer is suspended for the duration of their unified tax taxpayer status (meaning the suspension of all rights and duties of a VAT taxpayer established by the relevant provisions of the CCU, including those relating to the constitution of the VAT credit)1. Including, accordingly, exemption from the following duties is provided:

1. accumulation and payment of VAT for transactions on the supply of goods, works and services to the customs territory of Ukraine, as well as for the import of goods to the customs territory of Ukraine;

2. Execution and registration of tax invoices and calculations of adjustments thereto; and

3. filing of the VAT return (i.e. there is no obligation to file a VAT return). The last reporting (taxation) period for a VAT taxpayer who has chosen the simplified tax regime at the rate of 2% of income is the reporting month (his share), when the taxpayer applied for the tax regime. simplified taxation at the rate of 2% of income2.

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

It should be noted that the registration as liable for VAT is notably suspended, but not terminated3. And after the end or cancellation of martial law and the state of emergency, taxpayers who have switched to the simplified tax system with the unified tax at the rate of 2% of income from April 1, 2022 , will automatically be deemed to apply the system taxation that they applied before the transition to simplified taxation. Thus, for those subject to VAT, their registration as subject to VAT will be automatically renewed at the same time as the renewal of all the rights and obligations in terms of VAT that they had before the transition to the simplified tax system.

Attached, in the event of consumption (supply, sale) by the taxpayer, when applying the simplified tax regime at the rate of 2%, of goods/services, fixed assets purchased or produced with VAT before switching to the simplified regime , the VAT taxpayer is obliged, after the renewal of the VAT taxpayer’s registration and at the latest on the last day of the declaration period during which this renewal took place, to accumulate “contingent” tax debts, to execute and register the consolidated tax invoice for these goods/services, non-current assets in the unified register of tax invoices.

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

Consequently, the VAT taxpayer thus retains, after the end of martial law and the state of emergency, the right to the VAT credit constituted before the transition to the simplified tax system, including the right to use the relevant VAT amounts included in the VAT credit for calculating VAT tax obligations for reporting periods after the end of martial law and the state of emergency.

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