The new tax laws are likely to increase the cost of services on the Ukrainians’ favorite media platforms and increase the administrative burden on international companies. They will have to register as VAT payers in Ukraine, file VAT returns and will likely have to pay fines.
As of January 2021, the Internet is used by over 29 million Ukrainians. A large portion of the Internet users regularly receive and pay bills for using Apple, Netflix, Apple Music services. For example, users pay monthly fees for the following electronic services:
- $2.99 to Apple for increasing file storage;
- €7.99 to Netflix for access to films; and
- $4.99 for music on Apple Music.
Similarly, Ukrainians pay Facebook and Instagram for the promotion of advertising content on these platforms.
In July 2021 the law on taxation of electronic services supplied to Ukrainian individuals by non-residents, such as Apple, Netflix, Youtube came into force. What will the law change for the Ukrainian users of electronic services, as well as for non-resident companies that offer such services? Will the services become more expensive in Ukraine?
What the new law regulates
The law introduces a 20% VAT for transactions involving the supply of electronic services by non-residents to individuals.
The law defines what the electronic service is, namely:
- supply of electronic copies, provision of access to images, texts (subscription to electronic magazines, newspapers, books, uploading photos, videos). For example, subscription to The Economist;
- provision of access to databases – lawyers often use the LexisNexis database where materials on legal matters can be found;
- supply of electronic copies or provision of access to audiovisual works, video and audio works, games (Netflix, Apple TV, YouTube, Apple Music, etc.);
- provision of access to information, commercial, entertainment electronic resources (Bloomberg, Wargaming);
- provision of distance learning services on the Internet (provision of access to virtual classrooms, educational resources such Coursera);
- provision of cloud storage services (Apple iCloud, Google Drive, etc.);
- provision of software and software updates (Adobe, etc.);
- provision of advertising services on the Internet (Facebook, Instagram, etc.).
Pursuant to the Law, such services will be subject to VAT if the following conditions are met concurrently:
- the services are provided by a non-resident that does not have a permanent establishment in Ukraine (such non-resident must register as a VAT payer as specified below);
- the services are provided to individuals, including individual entrepreneurs, who are not registered as VAT payers; and
- the services are supplied in the customs territory of Ukraine.
In case of individual entrepreneurs, it is their registration place. In case of individuals, things are much more complicated. Their location can be determined using an Internet service provider, mobile operator, or device through which access was made.
Who will pay VAT on electronic services
If all the above conditions are met, an electronic service is subject to the 20% VAT.
To put it otherwise, if a user previously received a monthly invoice for € 7.99 from Netflix, then, subject to this Law, the user will receive an invoice where the above amount will either be increased by the 20% VAT, or will remain unchanged for the user, but will include the 20% VAT. Whether the service will become more expensive as a result of the new regulation will become clear upon looking at the invoices.
According to the authors of the Law, users pay for electronic services to a non-resident company in accordance with an invoice issued by the latter, and the company is obliged to transfer 20 percent of the amount so received to the Ukrainian budget.
It is the worldwide practice for foreign companies to pay VAT in the country where they offer electronic services. In particular, the taxation of electronic services is provided in the EU, Japan, Belarus, Russia, etc. In Russia, such law was adopted in 2016, and 13 non-resident companies supplying electronic services were registered as VAT payers in 2017.
Thus, it is an individual or individual entrepreneur who will pay VAT as part of the service cost, while a non-resident who provides electronic services and is registered in Ukraine as a VAT payer will have to transfer the same to the state budget.
When and How Non-Residents Should Be Registered as VAT Payers
Non-resident companies that provide electronic services and have no permanent establishment in Ukraine should be registered as VAT payers in Ukraine. However, this applies only to those companies who, based on their performances for the previous calendar year, made transactions to provide electronic services for more than UAH 1 million.
Otherwise, registration is optional and voluntary for companies.
The law provides that the year of 2021 is the first year in which volumes of electronic services provided by a non-resident within the customs territory of Ukraine will be measured. Therefore, some non-residents will have to register as a VAT payer by 31 March 2022.
Generally, the authors of the Law have made an attempt to develop a convenient tax mechanism for non-resident companies. For example, they provided for simplified registration of a VAT payer in an electronic format via a specialized electronic service. A company will be able to submit all documents, including returns, in English. However, the government has not yet drafted subordinate legislation to regulate the procedure for registration as a VAT payer, submitting returns, etc.
In addition, non-resident companies who are registered as VAT payers are exempted from procuring tax invoices to provide their electronic services. Unlike residents, foreign companies will file a simplified tax return and will be able to pay VAT in a foreign currency instead of Hryvnia. The tax rate will be 20% of the cost of electronic services provided in Ukraine.
Sanctions for Non-Residents
If a non-resident company fails to file a simplified tax return or to pay its monetary liability as due, tax authority sends a tax notice to such company. Moreover, non-resident companies, as well as Ukrainian companies, will have the right to file complaints against tax notices but via an electronic service only.
The authors of the Law also provided that non-resident companies may be brought to financial liability. If a non-resident company who provides electronic services has not been registered as a VAT payer (if required), such company faces a fine of 30 minimum wages. For the time being it is UAH 180,000.
Advertising Tax Abolished
Currently the Tax Code contains a rule (clause 141.4.6), according to which Ukrainian advertising customers who pay foreign companies for advertising services must pay a profit tax in Ukraine at the rate of 20% of the amount they spent to pay for such services (the so-called “advertising tax”). The payer, however, does not deduct 20% of the amount payable to the non-resident and additionally pays, at its sole expense, 20% of the funds spent to pay for advertising services.
Instead, the Law excludes aforementioned clause 141.4.6 from the Tax Code with effect from 1 January 2022.
What Impact the Law will Have on the Market?
As the current “advertising tax” has been repealed, Ukrainian companies will bear a lesser profit tax burden upon ordering advertising services from non-residents.
It may be so that the VAT introduced for foreign companies who provide electronic services will not affect their financial performances in Ukraine if they increase the service cost accordingly. However, in view of requirements of the Law, the administrative burden will be increased – companies will have to register as VAT payers in Ukraine, file returns and, prospectively, pay fines.
As far as end users are concerned, it is not easy to predict now whether the novelty will affect the cost of electronic services because it will depend on a non-resident company’s policy in relation to the Ukrainian market. Meanwhile there is a risk that service prices will rise, we should already think about making our favorite subscriptions at the old price but on an annual basis.
Authors: Tetyana Berezhna, Counsel, Attorney-at-Law, Alina Ratushna, Junior Associate
Published: Forbes, 13 August 2021