Companies calculating depreciation for corporate profits tax may increase the book values of their fixed and intangible assets to mitigate the effect of annual inflation for the previous year.
This adjustment is at the taxpayer's discretion, and is not applied automatically.
The adjustment is based on the percentage increase in the consumer price index for the previous year (X), using the formula: [X-10]/100
As the index for 2007 is 116.6% of its value in 2006, book values may be increased to 1.066% of their 2007 level ([116.6 10]/100). This means a 2008 tax saving of 0.27% (25% of 1.066%).
Any growth in asset values during a reporting period (ie quarter) is not recognised until the next reporting period. So assets with a book value of UAH 10,000 in the first quarter of 2008 can be adjusted for inflation to UAH 10,106.6 from the start of the second quarter of 2008.
Companies are also entitled to deduct up to 10% of a fixed asset's book value to reflect improvements. Besides, no capital gain (and consequently gross income) is arising because of such inflation increase of the book values (which is different from the tax treatment of inflation adjustment of the book value of the capitalized expenses related to the extraction of minerals).
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 29/05/2008.