Mukhtar Bekzhigitov, Partner of MinTax Group, I Category Tax Consultant, in his article describes most frequently occurring errors in the assessment of the tax on property of legal entities.
The practice of tax audits shows that taxpayers (legal entities) often make mistakes in determining the taxable item for the assessment of property tax, as a rule, underestimating the taxable base which eventually leads to additional tax assessments during tax inspections, charging of penalties and bringing to administrative responsibility.
In many cases, taxpayers, without going into details, recognise only the data from the “Buildings, structures” sub-account as taxable items, without taking into consideration that in other groups of fixed assets there may also be structures that are to be recognized as such in accordance with the classification established by the authorized state body for technical regulation and metrology (hereinafter – CFA).
According to the CFA, a structure shall mean each individual structure with all devices that form a single whole with it. For example, an oil well comprises a tower and casing; a bridge comprises a span structure, supports, a bridge floor (bridge guard bars, control and bridge flooring); a trestle comprises the foundation, supports, span structures, decking, trestle ways, fencing.
There are many fixed assets that have the properties of equipment or look like equipment, but, according to the CFA, must be recognized as structures. It often happens that, the accountant, relying on his professional judgment, designates such fixed assets to a wrong group, which ultimately leads to additional tax assessments.
In this connection, we recommend that a more thorough assessment of fixed assets should be made in order to check whether they are classified properly, and that a CFA code should be assigned to each asset. Of course, this is a somewhat laborious process, but it will allow to avoid unpleasant additional charges.
It should be taken into account that this issue is closely related to the calculation of depreciation charges in the assessment of corporate income tax (CIT), where the entity may be exposed to a risk of overstatement of deductions and understatement of CIT. The structures that should be designated to the first group are incorrectly designated to the second, and sometimes, to the fourth group.
Another frequent error is determining the tax base for the calculation of current payments of Property Tax when taxable items are received during the tax period. In particular, often the current payments are calculated on the basis of the carrying amount of newly received items for which depreciation was already charged on the date of calculation; whereas, such calculation should be made on the basis of the initial value, as established by the Tax Code. Of course, in such cases the tax base and, accordingly, the current payments are underestimated.
We would like to remind that pursuant to paragraph 6 of Article 399 of the Tax code, effective before 1 January 2018, and paragraph 10 of Article 522 of the new Tax Code effective from 1 January 2018, when taxable items are received during a tax period, current payments of Property tax shall be increased by amount to be computed by way of applying a tax rate to 1/13 of the historic value of received taxable items as determined on the basis of accounting
data on the date of receipt, multiplied by the number of months of the current tax period starting from the month in which the taxable items were received until the end of the tax period.
The amount by which current payments are to be increased shall be distributed in equal portions in accordance with the periods established by paragraph 5 of Article 399 of the previously effective Tax Code and paragraph 7 of Article 522 of the new Tax Code. In that respect, the first date of payment of current payments shall be the next regular date following a date of receiving the taxable items.
Further, another disputable issue is the need to submit additional reports on current payments, in particular, in cases where current payments have been understated. Very often, taxpayers do not submit additional statements of current payments, correcting only the total tax amount in the annual declaration. In our opinion, additional statements of current payments of Property tax must be submitted, since the obligations have been actually understated and the budget did not receive taxes when due.
In the meantime, the Tax Code does not prescribe otherwise, that is, it does not stipulate that statements of current payments of Property Tax are not to be submitted.