Deputy Prime Minister Sergiy Tigipko is leading the push for information technology industry tax cuts.
Under the proposal, income, social and salary taxes would be 5 percent, a significant reduction from the current 23 percent income tax and 41 percent social taxes.
Such privileges are designed to make Ukrainian IT services more competitive on the global market, where top competitors include India, China, Israel, Ireland, Russia and Belarus.
If the IT sector lands the tax breaks, it could also end up helping the household of Tigipko, a wealthy businessman who earned his fortune in banking but has invested into other sectors of the nation’s economy.
Tigipko’s wife, Victoria, is the co-founder and managing partner of TA Venture, a venture capital firm that invests into information technology in Ukraine. She says there is no conflict of interest here since “it’s completely a different business [that she is in].”
“I’m not in the business of outsourcing. I’m just managing the fund which invests in IT projects,” Viktoria Tigipko added.
In 2011, the Viktoria Tigipko’s TA Ventures plans to raise its commitment from $20 to $50 million on the Ukrainian market.
Currently TA Ventures fund is working on three projects in Ukraine: Pixonic, which is a social games and application publisher; Bravoavia, a cheap flights and low-cost airline tickets search engine; and Linguee, a dictionary and translation search engine.
Viktoria Tigipko backed her husband’s push for the tax breaks, saying: “It’s so important to support this sector because it’s a really strategic area for Ukraine. It brings a lot of money into the country.”
But not all industry insiders are so hyped up about the planned tax breaks.
Andriy Kolodiuk, president of AVentures, an investment management company which invests into the hi-tech sectors, said the new law would not be a major stimulus for investors, but would help.
According to him: “The law does not regulate the sector. It says that we [government] understand that you [IT] are independent from us, at least pay the taxes honestly, because paying taxes on existing tax rates would make IT sector uncompetitive.”
Some economists think such privileges are bad for the overall economy.
Vasyl Yurchyshyn, an expert at Razumkov Center, says “for some businesses it’s good, but from an economy’s point of view, we’ll have to see. Because privileges are done at somebody else’s cost.
There are spheres where Ukraine’s potential is considered substantial like telecommunications, transport infrastructure and agricultural sector.”
The new law could help attract foreign investors. Kolodiuk says tax breaks would be “a stimulus for big foreign investors to look at Ukrainian IT sector, because the rules would be more transparent” and the incentive for evading taxes would be removed.
Karl Robb, executive vice president of EPAM systems, said that “global investors will bring money and jobs more likely than oligarchs here.” He explains that “everyone here wants to invest in land, property, chemicals, shipping – that’s the easy low-hanging fruits. Ukrainian oligarchs are not interested in this industry [IT] for the most part.”
One of the few local billionaires that invested in Ukraine’s IT sector heavily was Viktor Pinchuk, son-in-law to former president Leonid Kuchma.
His EastOne Group invested into Exigen. Kolodiuk says he invested at least $30 million in the Ukrainian IT sector.
Investment in Ukraine’s IT market lags others, with an estimated $20 million in 2010, compared to $500 million in Russia and $24 billion in the US. The biggest investment last year was $10 million into Viewdle, a mobile-focused computer vision company, based in Silicon Valley but doing research and development in Ukraine.
“There is a dramatic gap between Ukraine and Russia and the West in terms of numbers of business angels [investors in start-ups],” says Victoria Tigipko. “We have 50 business angels as compared to 1,000 in Russia, 300,000 in the US, and 75 000 in Europe.”
Apart from investment figures, outsourcing revenues are more impressive.
Ukraine is ranked the 5th largest exporter of IT services in the world. In 2011, the outsourcing market is anticipated to exceed $1 billion, according to the Central and Eastern European Outsourcing Association.
There are more than 1,000 outsourcing companies in Ukraine, employing hundreds of thousands of programmers. With such high rates, Ukraine was added to the Garter’s List of top 30 outsourcing locations.
More venture capital is also coming to Ukrainian market, as companies begin to recognize the potential. TA Ventures along with Vivex Invest were the only two locally represented venture funds in 2010. But in 2011, 10 more venture funds have set up their offices in Kyiv already, says Viktoria Tigipko.
Foreign investors into Ukrainian IT include Kite Ventures, Almaz capital, ABRT, Qualcomm, Best Buy and Blackberry Partners Fund. Majority of IT investments settle in e-commerce, online travel, social games, social networks and mobile applications.
Kyiv Post staff writer Maryna Irkliyenko can be reached at [email protected].
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