Regarding formation specifics of tax liabilities and tax credit by budgetary institutions – value added tax payers in case of simultaneous use of purchased products/services in taxable and non-taxable VAT operations, including those exempted from taxation

Press service of the State Tax Service of Ukraine, published 11 December 2023 at 12:36 Chapter: News

In order to ensure that individual payers, whose activities are fully or partially related to the supply of products/services (educational services, medical services, etc.), supply operations of which are not subject to the value added tax (hereinafter – VAT) (exempted, not subject to the VAT), timely and in to the full extent of fulfillment of tax obligations in terms of the VAT, the State Tax Service informs the following.

If budget institution is registered as the VAT payer, general VAT taxation rules and accounting apply to such institution. Budgetary institutions can carry out activities related, in particular, to provision of paid services that are exempted from the VAT, supply of products/services subject to the VAT and carry out activities that are financed from the budget and are not considered economic, since they are not aimed at obtaining income, and for performance of legally defined functions of the institution.

Legal bases of the VAT taxation are established by Section V and Sub-section 2 of Section XX of the Tax Code of Ukraine (hereinafter – TCU).

Formation rules of the VAT liabilities, tax credit and preparation of tax invoices/adjustment calculations to tax invoices and their registration in the Unified Register of Tax Invoices are established by Articles 187, 198 and 201 of Section V of the TCU and are obligatory for all VAT payers regardless of what management form the payer has (private, state, communal) and what operations the payer carries out (exempted from the VAT, taxable).

Provisions of Paragraph 187.1 Article 187 Section V of the TCU stipulates that date of occurrence of the VAT liabilities for supply of products/services is defined as the date that falls on the tax period during which any of events that occurred earlier occurs:

a) date of crediting of funds from the buyer/customer;

b) date of shipment of products/date of issuance of document certifying provision of services.

Paragraph 187.7 Article 187 Section of the TCU defines that date of occurrence of tax liabilities in case of supply of products/services with payment from budget funds is the date of crediting such funds to the taxpayer's account in a bank/non-bank payment service provider or the date of receipt of appropriate compensation in any other form, including reducing such taxpayer’s debt for his/her obligations to the budget.

Carrying out supply of products/services (including those exempted from the VAT), the taxpayer is obliged, according to Paragraphs 201.1 and 201.3 Article 201 Section V of the TCU, to compile tax invoice and register it in the Unified Register of Tax Invoices within period established by the TCU.

Paragraph 198.3 Article 198 Section V of the TCU stipulates that tax credit is calculated regardless of whether such products/services and fixed assets were used in taxable operations within the scope of taxpayer's business activities during the reporting tax period, as well as whether the taxpayer carried out taxable operations during such reporting tax period.

For the buyer of products/services, basis for accruing tax amounts related to the tax credit is tax invoice compiled and registered in the Unified Register of Tax Invoices by the taxpayer who carries out operations for supply of products /services (Paragraph 201.10 Article 201 Section V of the TCU).

That is, if budgetary institution – VAT payer carried out operations for the purchase of products/services, then regardless of whether such products/services began to be used in taxable operations within the scope of economic activity or not, it must comply with requirements of the TCU regarding the tax credit formation! Accordingly, the VAT amounts according to tax invoices received and registered in the Unified Register of Tax Invoices should be reflected in appropriate section of the VAT declaration, regardless of direction (operations) of the use of such purchased products/services.

At the same time, it should be borne in mind that for products/services, non-current assets purchased/produced with the VAT for their use in operations exempted from the VAT taxation, the taxpayer is obliged to calculate tax liabilities according to Paragraph 198.5 Article 198 Section V of the TCU. Taxation base in this case is determined according to Paragraph 189.1 Article 189 Section V of the TCU.

If purchased and/or manufactured products/services, non-current assets are partly used in taxable operations, and partly not, the taxpayer is obliged to calculate tax liabilities according to Paragraph 199.1 Article 199 of Section V of the TCU. Taxation base in such case is also determined according to Paragraph 189.1 Article 189 Section V of the TCU.

Calculating tax liabilities according to Paragraphs 198.5 Article 198 and 199.1 Article 199 Section V of the TCU, the taxpayer is obliged to compile not later than the last day of the reporting (tax) period and to register tax invoices in the Unified Register of Tax Invoices for amount of accrued tax liabilities separately for each point.

Therefore, if payers use (fully or partially) purchased products/services in operations exempted from the VAT taxation, then they have obligation to calculate tax liabilities according to Paragraph 198.5 Article 198/Paragraph 199.1 Article 199 Section V of the TCU and to compile and register corresponding tax invoices in the Unified Register of Tax Invoices in a period determined by the TCU.

If products/services purchased by the VAT payer, for which tax amounts were included in tax credit, are intended for use or begin to be used in operations exempted from the VAT, then such taxpayer (including if such purchased products/services are paid at the expense of budget funds) there is obligation to calculate the VAT tax liabilities according to rules defined by Paragraph 198.5 Article 198 Section V of the TCU.

Also, according to norms of these Articles, budget institutions calculate tax liabilities for products/services used in the non-taxable operations (in activities that are financed from the budget and are not considered economic and aimed at fulfilling legally defined functions of the institution).

If products/services purchased by the VAT payer, for which tax amounts were included in tax credit, are used partly in the VAT taxable (renting of real estate) and partly in the VAT-exempted and the VAT-exempted operations, then such taxpayer has obligation to calculate VAT liabilities according to rules defined by Paragraph 199.1 Article 199 Section V of the TCU.

Informing about the above specified, the State Tax Service considers it necessary to additionally draw payers’ attention to the following.

Purchasing products/services that are simultaneously used in taxable and tax-exempted operations, the tax credit formation is carried out on the basis of the entire volume of purchase on the basis of tax invoices registered in the Unified Register of Tax Invoices.

Further, regardless of whether the tax payer-buyer formed tax credit or not, such taxpayer, in the presence of tax invoices registered by the supplier in the Unified Register of Tax Invoices, has obligation to calculate tax liabilities according to Paragraph 198.5 Article 198 Section V of the TCU (if such products/ services are used in the VAT-exempted operations in full), or according to Paragraph 199.1 Article 199 Section V of the TCU (if such products/services are partially used in the VAT-exempted operations and partially in taxable).

Tax invoices compiled in connection with the accrual of such tax liabilities are subject to obligatory registration in the Unified Register of Tax Invoices within terms established of by TCU.

In case of violation of a deadline for registration (absence of registration) of such tax invoices in the Unified Register of Tax Invoices, fines provided by the TCU for untimely (absence) of registration of tax invoices in the Unified Register of Tax Invoices are applied.