Taxation of marketing costs

Ukrainian CIT law allows deduction of marketing costs if it regards business activity of taxpayer. In addition, tax authorities consider that goods shall be own by taxpayer at the moment of marketing actions. Otherwise they can’t be referred to business activity. Such expanding approach results in tax assessments and fines for understatement of taxable profit. The poor court practice on this matter is contradictory.

At the end of 2008 Kyiv district administrative court in the “Orimi-trade” case noted that CIT law doesn’t specify whether goods shall be owned by the taxpayer or not. By applying “conflict of interests” approach the court decided that ownership is not required for deduction.

Nevertheless, Kyiv district administrative court changed its opinion in the recent Red Bull case. Red Bull Ukraine bore marketing expanses regarding goods which it had already sold to wholesale traders. The court decided that positive effect of marketing actions regards to the wholesale traders’ business activity, not Red Bull. Thus marketing costs are not deductible for it.

The issue may be settled by appellate courts. Generally it may take up to 1 year. In addition State tax administration may issue clarifying Letter, which is unlikely to be favorable for taxpayers.