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16 July, 2020

Ukrainian lawmakers seek ways to tax Facebook, Netflix, Apple

Ukraine wants to increase its annual state budget by imposing additional taxes on local operations of tech giants like Apple, Netflix and Facebook

The newly submitted bill aims to introduce a 20% value-added tax, or VAT, on all digital services provided by foreign companies to Ukrainians. This would mean more expenses for Ukrainian and foreign businesses here, but more budget money annually too.

The future of the bill, however, is unclear, as parliament still has to review it.

If passes this year, it could come into effect in January 2021, according to Constantin Solyar, a partner at law firm Asters. Solyar thinks that the law should be more detailed about how to make people abide by it.

“The question is how to control it,” he said.

Growing market 

Companies usually pay taxes in the countries where they work physically, and Ukraine is no exception.

International companies need to have an office in Ukraine to pay taxes, but, in the digital economy, firms can “move” the source of their profits to countries where tax rates are extremely low. As a result, the state loses huge amounts of tax revenue from electronic services provided from abroad, according to lawmakers.

This law could bring at least Hr 3 billion ($111.9 million) into government coffers annually, according to Danil Getmantsev, head of the parliament’s committee on finance, taxation and customs policy.

“And the market is growing,” Getmantsev told the Business Censor news site.

The tech industry generated $5 billion revenues in Ukraine in 2019, and the tech community accounts for 4% of the country’s gross domestic product (GDP).

If the bill is passed, the price of advertising on Google won’t increase for a Ukrainian company, because Google has an office in Ukraine and already pays VAT, including it in the price of its services.

Dmytro Sholomko, Google Ukraine’s CEO, said that his company is Ukrainian and, thus, already pays all taxes. In fact, Google was ranked 75th among the country’s top 100 taxpayers in 2020. “We are very transparent in terms of taxes,” Sholomko said.

For companies like Facebook, Steam and Netflix, however, which have no physical presence in Ukraine, prices of services will have to increase by 20% to include the tax.

The VAT draft law targets content such as images, text, photos and games. It includes gambling, advertising services on the internet and in mobile applications, cloudbased data storage services, software supply and updating, as well as remote software maintenance.

The draft also states that registration as a non-resident VAT taxpayer is mandatory if a company generated a revenue of more than Hr 1 million (roughly $37,000) from digital services in Ukraine during the previous year.

If the company does not register, it will have to pay a $300 (Hr 8,500) fine, which is meager compared to the $39 billion Google generated in ad revenue in the first quarter of 2020, as well as the $17 billion made by Facebook during the same period.

Common practice

It is a common practice to pay a different set of taxes locally, according to Viktoriya Fomenko, head of tax and customs at the Integrites law firm. She supports the law.

The United States, South Korea, Russia, Japan, Canada and some other countries have special rules on taxation of digital services, including indirect taxes, Fomenko said.

Several European countries, led by France, are discussing how to implement direct taxes, which will influence American tech companies to change their policies or review their implementation strategies; Italy, Spain, Austria and Great Britain have announced plans to levy digital services taxes.

Such taxes will apply to the online activity that takes place in those countries, regardless of whether the company has a physical presence there — just as the current bill suggests, she said.

Solyar said it took a lot of time to draft this bill because Ukraine’s tax system isn’t fully adapted to digital services yet. The tax system was born during the industrial revolution and, thus, is based on material assets, which makes it hard to amend it to include clauses regarding digital goods.

But Solyar also doubts tech giants would bother registering in Ukraine to pay taxes. “No one will voluntarily pay taxes,” he said.

Tech giants to comply 

Big tech companies have often faced criticism for not paying enough taxes.

A report released in December 2019 and covered by U.S. business magazine Fortune concluded that big tech companies allegedly used legal loopholes to avoid over $100 billion in taxes.

Nevertheless, most foreign companies have — at least officially — stated that they will comply with the laws.

During a conference in London on February 14, Facebook CEO Mark Zuckerberg, for example, supported an Organization for Economic co-Operation and Development plan, under which digital and internet companies would pay more tax in countries where they have significant economic activities and generate profits.

The debate has even been dubbed “the largest global economic battle of 2020” by Jim Tankersley, a New York Times journalist, on January 23.

In Ukraine, Getmantsev said Facebook was ready to pay taxes, and it already has the tools to do so.

The most popular messaging app in Ukraine, Viber, has also agreed to pay. The Japanese company’s press service told the Kyiv Post that the firm has always complied with the global and local regulations.

“We will cooperate with the government,” Viber spokeswoman Kateryna Didkovskaya said, “as we have always done before regarding new regulations and taxation models.”

Kyiv Post

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