Regarding specifics of filling out the VAT reporting in case that the taxpayer carries out the VAT-exempted transactions to which provisions of Article 199 of the Code do not apply

In case that the taxpayers carry out transactions exempted from the value added tax, for example, those specified in Sub-paragraphs 4 and 5 Paragraph 32 Sub-section 2 Section XX "Transitional provisions" of the Tax Code of Ukraine (hereinafter – Code), in terms of product supply under state contracts (agreements) for defense procurement, to which provisions of Paragraph 198.5 Article 198 and Article 199 Section V of the Code do not apply, procedure for determining calculation of the usage share of products/services, non-current assets in taxable/non-taxable transactions, provided for in Paragraph 199.2 Article 199 Section V of the Code, is applied as follows.

Procedure for forming tax credit, if the purchased products/services are used simultaneously in taxable and non-taxable transactions, is established by Article 199 Section V of the Code.

In particular, if purchased and/or manufactured products/services, non-current assets are partly used in taxable transactions, and partly not, the taxpayer is obliged to calculate tax liabilities based on the tax base determined according to Paragraph 189.1 Article 189 Section V of the Code, and compile not later than the last day of the reporting (tax) period and register a consolidated tax invoice in the Unified Register of Tax Invoices, for the total amount of share of tax paid (accrued) during their purchase or manufacture, which corresponds to the share of use of such products/services, non-current assets in non-taxable transactions (Paragraph 199.1 Article 199 Section V of the Code).

Share of use of products/services, non-current assets in taxable transactions is determined in percentages as a ratio of supply volumes of taxable transactions (excluding tax amounts) for the previous calendar year to the total supply volumes of taxable and non-taxable transactions (excluding tax amounts) for the same previous calendar year. Value determined in percentages is applied during the current calendar year (Paragraph 199.2 Article 199 Section V of the Code).

Taxpayer, based on results of the calendar year, recalculates usage share of products/services and non-current assets in taxable transactions, based on the actual volumes of taxable and non-taxable transactions carried out during the year (Paragraph 199.4 Article 199 Section V of the Code).

Usage share of products/services, non-current assets in taxable transactions, determined taking into account norms of Paragraphs 199.2 – 199.4 Article 199 Section V of the Code, is used to adjust amounts of tax liabilities specified in Paragraph 199.1 Article 199 Section V of the Code. Recalculation results of the tax liabilities amounts are reflected in tax declaration for the last tax period of the year (Paragraph 199.5 Article 199 Section V of the Code).

At the same time, the Code contains a number of provisions according to which rules of Article 199 Section V of the Code do not apply. Paragraph 199.6 Article 199 Section V of the Code stipulates that rules of Article 199 Section V of the Code do not apply in the case of:

carrying out transactions provided for in Sub-paragraph 196.1.7 Paragraph 196.1 Article 196 Section V of the Code;

carrying out transactions provided for in Sub-paragraph 197.1.28 Paragraph 197.1, Paragraphs 197.11 and 197.24 Article 197 Section V of the Code.

Also, separate provisions of the Code define other transactions, in the case of which provisions of Article 199 Section V of the Code do not apply, specifically transactions exempted from the value added tax, which are defined in Sub-paragraphs 4, 5 Paragraph 32 Sub-section 2 Section XX "Transitional Provisions" of the Code. 

Mechanism from the VAT exemption of transactions to which rules of Article 199 Section V of the Code do not apply is similar to procedure used for applying zero VAT rate. That is, transactions exempted from the VAT are carried out without charging the VAT with the tax credit right generated when purchasing products/services used in such transactions exempted from the VAT, without further accrual of tax liabilities.

Form and procedure for filling out the value-added tax declaration (hereinafter – declaration) are approved by Order of the Ministry of Finance of Ukraine № 21 as of 28.01.2016, registered in the Ministry of Justice of Ukraine on 29.01.2016 under № 159/28289, with changes (hereinafter – Procedure № 21)

According to Sub-paragraph 6 Paragraph 3 Section V of Procedure № 21, line 5 of the declaration indicates volumes of transactions with:

supply of products/services that are not subject to taxation;

supply of services outside the customs territory of Ukraine and services provided outside the customs territory of Ukraine, taking into account their supply place according to Paragraphs 186.2, 186.3 Article 186 Section V of the Code;

supply of products/services exempted from taxation and adjustments for such transactions.

For taxpayers who complete line 5 of the declaration, it is obligatory to submit Annex 5 (D5).

Annex 5 (D5) is filled in in terms of transactions that are not subject to taxation, exempted from taxation, transactions for the supply of services carried out outside the customs territory of Ukraine, taking into account their supply place according to Article 186 Section V of the Code.

Calculation of the usage share of products/services and non-current assets in taxable/non-taxable transactions is carried out in Table 1 of Annex 5 to the declaration.

According to the form established by Order № 21, in column 4 of table 1 Annex 5, the total supply volume is indicated (sum of values ​​of lines 1.1, 1.2, 1.3, 2.1, 2.2, 2.3.1, 2.3.2, 2.3.3, 3, 5, 7.1, 7.2.1, 7.2.2 and 7.2.3 of column A of the declaration and all clarifying calculations).

Therefore, according to the current norms of the Code and Procedure № 21 for determining the usage share of products/services, non-current assets in taxable transactions, the following are included in taxable transactions (column 5 of table 1 Annex 5 (D5)): volumes of transactions taxed at rates 0 %, 7 %, 14 %, 20 %;

total supply volume of products/services (column 4 of table 1 Annex 5 (D5)) includes all taxable and non-taxable supply transactions of products/services, including those transactions in which provisions of Paragraph 198.5 Article 198 and Article 199 Section V of the Code do not apply. Share of non-taxable transactions in the total supply volume of products/services is calculated as follows: 100 – the usage share of products/services in transactions subject to the value added tax.  

It should be noted that the Code and, accordingly, Procedure № 21 do not provide for exceptions regarding inclusion/non-inclusion of certain transactions performing such calculation of the share.

Therefore, despite the fact that for products/services purchased for use partly in taxable transactions and partly in transactions defined, specifically by Paragraph 199.6 Article 199 Section V of the Code and other provisions of the Code (in particular, Sub-paragraphs 4, 5 Paragraph 32 Sub-section 2 Section XX "Transitional Provisions" of the Code), the value added tax liabilities provided for in Article 199 Section V of the Code are not accrued, however, volumes of such transactions are taken into account for calculating the usage share of products/services, non-current assets in taxable/non-taxable value added tax transactions.

If the taxpayer carries out only those preferential transactions to which provisions of Article 199 Section V of the Code do not apply (in particular, but not exclusively, those specified in Sub-paragraphs 4, 5 Paragraph 32 Sub-section 2 Section XX "Transitional Provisions" of the Code), then such taxpayer may not determine the usage share of products/services, non-current assets in taxable/non-taxable transactions, since such taxpayer has no obligation to calculate the value added tax liabilities taking into account such share.

Otherwise, if the taxpayer carries out preferential transactions, both those to which provisions of Article 199 Section V of the Code do not apply, and those to which such provisions apply, then such  taxpayer is obliged to determine the usage share of products/ services, non-current assets in taxable / non-taxable transactions in a general manner, and apply it exclusively for calculating the value added tax liabilities on those transactions to which provisions of Article 199 Section V of the Code apply.