12. Income tax expense

Current income tax liabilities/receivables

The Group entities are subject to corporate income tax. The amount of current tax liability is transferred to the appropriate tax authorities. The final settlement of the corporate income tax liabilities of the Group entities for the year 2013 is made within the statutory deadline. According to regulations on considering tax liabilities as past due, tax authorities can verify the correctness of income tax settlements within 5 years from the end of the accounting year in which the tax declaration was submitted. 

Deferred tax asset/liability

In 2013, KREDOBANK SA conducted proceedings related to legal claims described below with the tax authority in Ukraine.

1) The legal claim concerned the possibility of recognition of the loss from previous years – for the period 2008-2010 in the amount of UAH 771 437 thousand (PLN 285 895 thousand*) – as tax deductible expenses. The negative outcome of the legal claim would result in a decrease in the deferred tax asset by UAH 123 430 thousand (i.e. PLN 45 743 thousand). On 31 January 2013 KREDOBANK SA obtained a legally valid judgment of the court of second instance favourable to the Company. The tax authority had 20 days for filing a motion for cassation of this judgment. KREDOBANK SA does not have any information indicating that the tax authority within the statutory term applied on cassation of the judgment. The risk of further continuation of the presented legal claim, KREDOBANK SA considers as minor.

2) The legal claim concerns the possibility of recognition of the legal costs in litigation conducted by KREDOBANK SA as tax deductible expenses, questioned by the tax authority as a result of the audit conducted in 2003.

The court of first instance (2003) and second instance (2004) issued a favourable verdict for KREDOBANK SA, however the decision of the court of second instance was not delivered to the tax authority within the statutory period. This situation allowed the interruption of the limitation period and renewal of claims by the tax authority.

On 10 December 2012, the court of the first instance, and on 19 December 2013, the court of the second instance, issued an unfavourable verdict for KREDOBANK SA in this proceeding.

As a result, in January 2014, KREDOBANK SA paid UAH 396 thousand (PLN 147 thousand) of corporate income tax and UAH 198 thousand (PLN 73 thousand) of financial sanctions to the State Treasury of Ukraine. Default interest remained to be paid, however, the tax authority has not yet presented a calculation of the above mentioned liability.

As at 31 December 2013, KREDOBANK SA recognised a provision for above mentioned legal claims in the amount of UAH 594 thousand
(PLN 220 thousand).

3) The legal claim concerned recognition of the costs related to the transaction of selling loans in 2011, including factoring transactions between KREDOBANK SA and Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o. as tax deductible expenses by KREDOBANK SA (the tax authority questioned the legal basis treating the above mentioned costs as tax deductible).

Recognition of the decision of the tax authority would result in resolving deferred tax assets and the elimination of tax losses of KREDOBANK SA from previous years and the need to pay additional income tax up to UAH 62 909 thousand (PLN 23 314 thousand).

On 5 October 2012, KREDOBANK SA filed a claim against the basis of the inspection by the tax authority and applying for annulling the decision to pay income tax based on the inspection protocol. On 6 December 2012, the court of the first instance granted the complaint of KREDOBANK SA. On 21 March 2013, KREDOBANK SA obtained a legally valid judgment of the court of the second instance confirming the correctness of KREDOBANK SA’s position.

The tax authority applied a motion for cassation of this judgment to the Higher Administrative Court

On 19 November 2013, the Higher Administrative Court awarded the elimination of tax loss of KREDOBANK SA in the amount of UAH 1 084 316 thousand (PLN 401 848 thousand) within the factoring operations between KREDOBANK SA and Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o. On the other hand, within the transaction of sale of loans to legal entities and individuals (assignment agreement), the Court recognised the right of KREDOBANK SA to tax deductible costs resulting from the above mentioned transactions, recognised by the tax authority as invalid, maintaining the position of the lower courts on lack of competence of tax authorities to invalidate agreements. At the same time, the Court invalidated the tax decisions stating the tax liability occurrence.

The elimination of tax loss arising from the above mentioned judgment of the Higher Administrative Court resulted in recognition of income tax from legal entities in the amount of UAH 44 583 thousand (PLN 16 522 thousand) in the financial statements of KREDOBANK SA for 2013, prepared in accordance with IAS/IFRS, and due to the need to resolve deferred tax assets, recognition in the net profit in the amount of UAH 116 882 thousand (PLN 43 317 thousand). As a result of the above mentioned, the total net profit of KREDOBANK SA was decreased by UAH 161 465 thousand (PLN 59 839 thousand).

Judgment of the Higher Administrative Court was based on the interpretation that the loans constitute material assets, i.e. goods, which, in the opinion of PKO Bank Polski SA and KREDOBANK SA, stands in clear contradiction with the law regulations in Ukraine and business practice, including international. Moreover, KREDOBANK SA and PKO Bank Polski SA held legal opinions, clearly confirming the correctness of tax returns in this area, made by KREDOBANK SA.

On 18 February 2014, KREDOBANK SA filed a claim for cassation of the Higher Administrative Court’s judgment to the Supreme Court of Ukraine. Filing this claim and possible further appeal activities does not suspend the execution of the judgment of the Higher Administrative Court and the maturity of financial liabilities, resulting from this execution.

4) The legal claim concerns the results of tax audit, which covered the period from 1 April 2011 to 30 September 2012. Legal claims mainly concern recognition of the costs related to the transaction of selling loans in the period covered by the inspection as tax deductible expenses, the adequacy of recognition of impairment allowances on loans, the correctness of the settlement of VAT on property sales and withholding tax for the payment of fees for services.

The value of disputed claims amounted to UAH 877 thousand (i.e. PLN 325 thousand) and the amount of reducing tax loss from previous years - UAH 626 282 thousand (i.e. PLN 232 100 thousand).

KREDOBANK SA appealed against the above mentioned tax decision consecutive to the Regional State Tax Service and The Ministry of Revenue and Duties of Ukraine, and these appeals were rejected. On 2 August 2013, KREDOBANK SA filed a claim against the results of the inspection and applying for annulling the above mentioned tax decision. On 5 November 2013 the court of first instance issued a favourable verdict for KREDOBANK SA, which accepted a position of the Company, except the correctness of calculation of tax depreciation on tangible fixed assets in the total amount of UAH 336 thousand (PLN 125 thousand).

On 26 November 2013, the tax authority appealed to the court of second instance. On 6 December 2013, the court opened proceedings in the above mentioned case - the date of the hearing was scheduled for 2 April 2014.

In February 2013, KREDOBANK SA paid a part of the legal claims in the total amount of UAH 439 thousand (PLN 163 thousand). This value is still included in subsequent appeal claims.