Belarus: Significant Risks in Allocation of Costs to a Permanent Establishment

​Published on February 14, 2017

The date for submission of tax returns for the year 2016 is approaching. In case a foreign company runs its business in Belarus through a permanent establishment, then certain expenses may be recognized in Belarus for the purpose of corporate income tax (hereinafter – CIT).
 
For the recognition of expenses, it is necessary to make sure that all expenses are confirmed by an auditor. In the meantime, the new rules in Belarus with regard to preparation of audit reports are in force starting from January 1, 2016 and, therefore, foreign auditors should make themselves aware of the said regulations.

If costs are incorrectly recognized, this may result in additional tax assessment and penalties.
 
In order to ensure a timely recognition of foreign costs in a Belarusian CIT return, foreign companies should have in place audit reports for the year 2016 and provide it to the accountant responsible for Belarusian permanent establishment by the end of January 2017 at latest.

In case a foreign company operates in Belarus through a permanent establishment, the following costs may be allocated to a Belarusian permanent establishment in the following cases:

1. Costs incurred in the Republic of Belarus are borne by a foreign company.
2. Costs incurred outside of the Republic of Belarus, but directly related to the activities of a permanent establishment in the Republic of Belarus, including managerial and administrative expenses, are borne by a foreign Company.

Step 1: Allocation of Costs

All foreign costs should be confirmed by an audit report conducted by an auditor of the country in which the foreign company is located. In the event that costs of a foreign company are allocated to a Belarusian permanent establishment partially, it should be specified in an auditor's report what percent of these cost is to be attributable to the activities of a permanent establishment and on what basis this calculation has been made.
 
All costs incurred abroad should be deemed as those permissible to be recognized for CIT purpose according to both tax laws of a country of a residence of a foreign company and Belarusian tax regulations. Therefore, cost items that may not be recognized as expenses for CIT purpose in a country of residence of a foreign company may not be included in the audit report and allocated to the Belarusian permanent establishment.   

Step 2: Verification of the assignability according to Belarusian law

All costs mentioned in an audit report should be checked for compliance with Belarusian tax rules. In case a cost item may not be recognized as expenses for CIT purposes in Belarus, it is not allowed to allocate it to a Belarusian permanent establishment.  

Example

• According to the German tax law, taxi fares may be recognized for the purpose of CIT.
• According to the Belarusian tax law, such costs may not be deducted for the purpose of CIT. Nevertheless, as a rule, this cost position is included in the auditor's report for further allocation to Belarusian permanent establishment.
• However, it is recommended not to include it in the audit report, since a Belarusian accountant or the tax inspection would refuse to consider these costs as deductible for the purpose of CIT.

New Formal Requirements for Auditor's Reports

• be indicated not only in a foreign currency, but in Belarusian rubles as well;
• be divided by cost elements or positions;
• contain the date the costs have been included for tax purposes by a foreign company in accordance with the laws of the country in which a foreign company is located.

Costs should be recorded in Belarusian rubles in accordance with the exchange rate of the National Bank of the Republic of Belarus as of the date on which respective costs have been subject for tax purposes in accordance with the laws of the country in which a foreign company is located.
 
If no obligation to maintain tax records is provided by the foreign laws, this should be indicated in the audit report with the reference to the respective legal provisions. In this case, foreign costs should be converted according to the exchange rate of the Belarusian National Bank as of the date on which costs have been included for accounting purposes.

Reference:

Foreign auditor's report should be filed with the Belarusian tax office with the tax return of a Belarusian permanent establishment for the year 2016 no later than on March 20, 2017.