en
Calculation of depreciation provisions in profit tax-exempt enterprises
Calculation of depreciation provisions in profit tax-exempt enterprises
The topic is commented on by tax expert Azər Qənbərov. As is known, in certain areas of activity, such as in enterprises that produce agricultural products, as well as in residents of industrial or technological parks and KOBI cluster companies, based on the relevant provisions of Article 106 of the Tax Code, profit tax exemption is applied for periods of 13 years (since 2014), 10 years, and 7 years (from the date of registration). During this period, regardless of whether the enterprise makes a low or high profit, profit tax is not calculated on the profit that should be taxed.
At the same time, according to Article 121.3 of the Tax Code, during the period when the taxpayer has the right to a profit (income) tax exemption, amounts arising from applying depreciation and repair expense norms below the established standard are not added to the amounts deducted from income in subsequent years after the exemption period ends. In this case, the question arises as to when it would be advantageous for the enterprise to conduct or not conduct depreciation calculations.
According to Article 114.4 of the Tax Code, if a lower depreciation rate than the established rate for fixed assets of any category is applied, the difference resulting from this can be added to the amount of depreciation deducted from income in subsequent tax years. But what happens when a lower depreciation rate is applied or when no depreciation calculations are made at all, and the amounts arising in the future due to applying a lower rate are not reflected in the profit tax declaration for future periods? Can the enterprise calculate depreciation for these fixed assets within the established norms and include it as a deductible expense in the periods when profit tax is applied?
Example: Let’s consider an enterprise that is a resident of an industrial or technological park. Residents of such parks are exempt from profit tax for 10 years from the date they start generating income. If at the beginning of the year when the enterprise is registered it has equipment worth 10,000,000 manats and during those years it does not make depreciation provisions, and does not reflect the amounts resulting from applying a lower rate in the report, what tax risks might arise?
If the enterprise were not exempt from profit tax, it could have applied the following rules for the equipment mentioned above:
1. The initial cost of the equipment is depreciated using the declining balance method, with the remaining value reduced by 20%, and “0” is written in the depreciation expenses. The unused 20% of depreciation would be reflected in future expenses or other assets. In this case, the remaining value is reduced for property tax calculation. However, since residents of industrial or technological parks are also exempt from property tax for the assets they use in the park, no tax risk arises. Only after 10 years would the property tax be reduced based on the calculation. If the enterprise’s activity coincides with the profit tax exemption period, depreciation would not be used in the future.
2. The initial value of the equipment is not depreciated and no “depreciation fund” is created, meaning no depreciation amount is set aside for future use. The decision of the enterprise manager may allow for depreciation at a lower rate or no depreciation at all, to be applied in future reporting periods. In this case, the fixed asset’s remaining value remains unchanged and will be depreciated within the norm after the profit tax exemption period ends. Since the amounts not used in the previous years are not reflected in the declaration, there is no need to consider whether these amounts are recognized. Property tax will be higher after the exemption period ends, due to the higher remaining value.
3. The initial cost of the equipment is depreciated at 5%, and no depreciation fund is created. The depreciation of 5% would be reflected in deductible expenses. Thus, after 10 years, the remaining value of the equipment would be depreciated at the same rate and would be included in the deductible expenses for profit tax purposes. In this case, the property tax will also be higher after 10 years.
As seen, in both the 2nd and 3rd cases, the depreciation amounts not used in previous years are not reflected, and the enterprise operates within the framework of the Tax Code provisions, applying lower depreciation rates to reflect expenses for the current reporting period, without using these amounts in future reporting periods.
The topic is commented on by tax expert Azər Qənbərov. As is known, in certain areas of activity, such as in enterprises that produce agricultural products, as well as in residents of industrial or technological parks and KOBI cluster companies, based on the relevant provisions of Article 106 of the Tax Code, profit tax exemption is applied for periods of 13 years (since 2014), 10 years, and 7 years (from the date of registration). During this period, regardless of whether the enterprise makes a low or high profit, profit tax is not calculated on the profit that should be taxed.
At the same time, according to Article 121.3 of the Tax Code, during the period when the taxpayer has the right to a profit (income) tax exemption, amounts arising from applying depreciation and repair expense norms below the established standard are not added to the amounts deducted from income in subsequent years after the exemption period ends. In this case, the question arises as to when it would be advantageous for the enterprise to conduct or not conduct depreciation calculations.
According to Article 114.4 of the Tax Code, if a lower depreciation rate than the established rate for fixed assets of any category is applied, the difference resulting from this can be added to the amount of depreciation deducted from income in subsequent tax years. But what happens when a lower depreciation rate is applied or when no depreciation calculations are made at all, and the amounts arising in the future due to applying a lower rate are not reflected in the profit tax declaration for future periods? Can the enterprise calculate depreciation for these fixed assets within the established norms and include it as a deductible expense in the periods when profit tax is applied?
Example: Let’s consider an enterprise that is a resident of an industrial or technological park. Residents of such parks are exempt from profit tax for 10 years from the date they start generating income. If at the beginning of the year when the enterprise is registered it has equipment worth 10,000,000 manats and during those years it does not make depreciation provisions, and does not reflect the amounts resulting from applying a lower rate in the report, what tax risks might arise?
If the enterprise were not exempt from profit tax, it could have applied the following rules for the equipment mentioned above:
1. The initial cost of the equipment is depreciated using the declining balance method, with the remaining value reduced by 20%, and “0” is written in the depreciation expenses. The unused 20% of depreciation would be reflected in future expenses or other assets. In this case, the remaining value is reduced for property tax calculation. However, since residents of industrial or technological parks are also exempt from property tax for the assets they use in the park, no tax risk arises. Only after 10 years would the property tax be reduced based on the calculation. If the enterprise’s activity coincides with the profit tax exemption period, depreciation would not be used in the future.
2. The initial value of the equipment is not depreciated and no “depreciation fund” is created, meaning no depreciation amount is set aside for future use. The decision of the enterprise manager may allow for depreciation at a lower rate or no depreciation at all, to be applied in future reporting periods. In this case, the fixed asset’s remaining value remains unchanged and will be depreciated within the norm after the profit tax exemption period ends. Since the amounts not used in the previous years are not reflected in the declaration, there is no need to consider whether these amounts are recognized. Property tax will be higher after the exemption period ends, due to the higher remaining value.
3. The initial cost of the equipment is depreciated at 5%, and no depreciation fund is created. The depreciation of 5% would be reflected in deductible expenses. Thus, after 10 years, the remaining value of the equipment would be depreciated at the same rate and would be included in the deductible expenses for profit tax purposes. In this case, the property tax will also be higher after 10 years.
As seen, in both the 2nd and 3rd cases, the depreciation amounts not used in previous years are not reflected, and the enterprise operates within the framework of the Tax Code provisions, applying lower depreciation rates to reflect expenses for the current reporting period, without using these amounts in future reporting periods.