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The Council helps tomato paste producer save over UAH 2 mn by proving to tax authorities purchase of gas relates to its production activity

15.04.2021

Complainee: Large Taxpayers Office of the State Tax Service (LTO)

Complaint in brief: A production enterprise with two tomato paste production plants in the south of Ukraine turned to the Council. The company complained that tax audit resulted in unexpected conclusions from LTO auditors, who stated that all the gas purchased by the company during the period under review was not related to the complainant's production activities. Thus, according to the tax authority, the complainant had to accrue itself the so-called “compensatory” VAT liabilities for the for the whole amount of VAT included in the price of purchased gas – it was over UAH 2 mn. The conclusion surprised the complainant very much. After all, the company bought gas for the sole purpose – to use it as fuel for steam boilers, with the help of which fresh tomatoes are steamed, turning into a paste. Seemingly, connection with production activities is obvious here. The complainant’s activities do not provide for any other ways of using gas (e.g., for facilities heating or reselling to other consumers).
However, the LTO did not accept these complainant’s arguments while considering the objections to the tax audit report. Tax officers did not like the way in which the complainant accounted for the gas (there was a dispute over the accounting nuances – whether the gas should be considered a stock subsequently written off into production, or whether its value could be immediately attributed to costs). In addition, the LTO concluded the complainant should have set gas consumption rates (how many cubic meters were used to produce a certain amount of product) in its internal documents, and absence of such standards was an argument in favor of considering gas as “not used in production”.
The complainant had to appeal tax audit results to the highest level tax authority – the State Tax Service of Ukraine (STS). In an effort to ensure an objective and impartial consideration of the appeal, the tomato paste producer requested the Council to join its appeal consideration process.

Actions taken: The Council’s investigator examined the case file and concluded the complaint was substantiated.
Firstly, according to the investigator, the legislation currently does not imperatively oblige industrial enterprises to set standards for gas consumption in production. The corresponding norm rooted in the days of planned economy, has recently expired. And even if it remained in force, it was in any case unrelated to the taxation sphere, and was intended only to control the energy efficiency of production.
Secondly, the investigator concluded that the way in which the complainant accounted for the purchase of gas was in line with the company's accounting policies and did not contradict International Financial Reporting Standards (IFRS), based on which the company maintains its records. Considering that the gas purchased by the company was not stored and technically could not be stored in any gas storage facility, and after entering the territory of the enterprise it was consumed immediately and without alternative in steam boilers, the complainant's chief accountant’s judgement that gas is not a stock (an asset – a resource controlled as a result of past events), and, accordingly, does not have to be accounted as a material, but should be immediately included in the costs seemed quite reasonable from the Council's point of view. If we assume that boilers used by the company to produce steam would not be gas but electric, the company would also be unlikely to account electricity as a stock and then write it off. Of course, purchasing electricity would be perceived solely as a cost and not as an acquisition of an asset that could later be used in one way or another at the discretion of the enterprise. Exactly the same approach, from the Council's standpoint, was true for gas as well. In addition to the above, the Council’s investigator agreed with the complainant's representatives, who emphasized that all these accounting nuances were not directly related to VAT taxation.
For the above reasons, the Council proposed that the State Tax Service of Ukraine satisfy the Complainant's appeal and cancel tax notifications-decisions issued by the LTO issued based on the audit findings.

Result achieved: The State Tax Service of Ukraine followed the Council’s recommendations and canceled the contested tax notifications-decisions. The case was successfully closed.