Ukrainian lawmakers are drafting a bill introducing a VAT (i. e. a 20% tax) on all digital services provided to Ukrainians by foreign companies. This will affect paid services from Facebook, Viber, Netflix, Steam, etc. The bill will also influence the price of ad placements for Ukrainians and Ukrainian companies.

The Government believes that such innovations will create extra ₴3 billion of tax revenues, as was expressly stated by the Head of Verkhovna Rada’s Committee on Finance, Taxation and Customs Policy, Danylo Hetmatnsev. He also assured the public that Facebook and Viber had agreed to collaborate. AIN.UA’s editor has been able to neither obtain comments from the representatives of the services nor find out where the 3 billion figure came from. The committee that initiated the bill also failed to explain it. It is understood that Ukrainian advertisers themselves will pay for VAT introduction: it is they who will have to pay more for advertising services.

In this article, the AIN.UA editor explains what the draft bill is suggesting, to whom it is targeting, and how it will affect the digital advertising market.

About the bill

The matter concerns the bill No. 2634 on the VAT on digital services provided by foreign companies with no Ukrainian offices to individuals in Ukraine. What this document proposes to change:

  • Non-residents having no representative office in Ukraine and providing digital services to individuals in Ukraine are to be added to the list of VAT payers. Intermediaries for such types of services should be added as well.
  • The VAT is 20% and is included in the price of digital services.
  • According to the text of the bill, digital services include all services provided via the Internet, such as:
    • images, texts, photos;
    • games (incl. gambling);
    • advertising services on the Internet and in mobile applications;
    • cloud-based data storage services;
    • software supply and updating, remote software maintenance, etc.
  • Non-resident companies without local representative offices should be registered as VAT payers. The registration is mandatory if the company generated a revenue of more than ₴1 million for digital services in Ukraine during the previous year. Such companies have been promised a simplified registration procedure. They do not issue VAT invoices but submit simplified tax returns.
  • If a non-resident company does not get registered it will be liable to a fine of ₴8,500.

In a nutshell: foreign companies having no representative offices in Ukraine (such as Facebook or Viber), or intermediaries granting access to their services, will have to be registered as VAT payers and pay the VAT on services provided to individuals, with the sum of the tax included in the price of their services.

Regardless of the ₴8,500 fine, it is still unclear how exactly the Ukrainian tax authorities will ensure that non-resident companies are registered in Ukraine as VAT-payers.

If the bill is passed, it will enter into force the day following the publication and will cover taxation periods after January 1, 2021.

What do non-resident companies say?

In a recent interview, the Head of Verkhovna Rada’s Committee on Finance, Taxation and Customs Policy (and the initiator of this project), Danylo Hetmatnsev said, that these innovations have already been discussed with international companies that provide digital services to Ukrainians. According to him, Facebook and Viber agreed to pay VAT in Ukraine, and revenues from VAT on advertising services will bring the budget ₴3 billion per year.

The editor of AIN.UA has addressed requests to representatives of Facebook and Viber. Viber refused to comment, the Facebook press service promised to provide data, but at the time of publishing this article, there was no response.

It is worth noting that not many international companies that provide digital services are physically present in Ukraine. For example, Google has an office in Kyiv and has been registered in Ukraine as a VAT payer since 2007. Facebook, Valve, Viber, Amazon, Alibaba, and others have no registered legal entities in Ukraine.

Conclusions

Let’s summarize everything we’ve written before, by way of example. There is a Ukrainian company X, which advertises its services on Google and Facebook. If the bill is passed, the price of advertising on Google will not change for it, because Google already pays VAT, and includes it in the price of its services.

The prices of ads on Facebook will increase by 20% if the company pays them as a private individual. But individual employees of the company will face the fact that the subscription to Netflix and games on Steam have increased in price.

All this will only happen if Facebook, Netflix, and others register as Ukrainian VAT payers.

The editors of AIN.UA will follow the passing of this bill. We will write more details about how it will work for individuals who use unadvertised digital services of foreign companies, a little later.