Debt forgiving is not the same as additional income: UAH 74 mn case

Complainee: The Main Department of the State Fiscal Service in Khmelnytsky region (MD SFS)
 
Complaint in brief: A Ukrainian plumbing manufacturer, who is part of an international concern with the head office in the Switzerland approached the Business Ombudsman Council. The company disagreed with the tax audit results, according to which it had to additionally pay over UAH 74 mn in taxes to the budget.
 
In the period of 2012-2015, a Swiss company gave a loan to its Ukrainian branch for the amount of EUR 40 mn. for business development. Later, it made a management decision to credit the loan amount to the Ukrainian company’s additional capital.
 
However, the MD SFS treated such a transaction as the Ukrainian company’s additional income. According to the MD SFS’s tax audit findings a corporate profit tax worth over UAH 74 mn was due to be paid. Disagreeing with the tax authority position, the company challenged the decision in the State Fiscal Service and asked the Council for help. 
 
Actions taken: After reviewing the circumstances of the case the investigator found out the Complainant conduct financial statement and accounting under International Financial Reporting and International Accounting Standards (IFRS/IAS). These standards do not equate the concepts of “equity” and “capital” and provide that shareholders may have different rights to a return of capital invested in a subsidiary company. 
 
According to IFRS/IAS, cancellation of an obligation, including debt forgiveness, means reducing taxpayer’s obligations and, accordingly, increasing its total taxable income. However, the revenue will only arise where an increase in economic benefits is not related to shareholders contributions. 
In view of the foregoing, the Council upheld the Complainant’s legal position and addressed the SFS in writing. The Council’s investigator participated in the complaint consideration at the SFS. 
 
Result achieved: The SFS accepted the Council’s arguments and satisfied the company’s complaint. Fines and additional payments were dropped and the case was successfully closed.