Information technology specialists should be a breed apart in Ukraine — at least when it comes to taxation.
Well, so thinks the IT Ukraine Association, the tech labor union, which on March 1 submitted a draft law on taxing techies to parliament. They propose to introduce a separate tax group for tech specialists to keep their taxes low and foster growth in the local IT industry.
The draft proposes to create a “fifth tax group” for individual entrepreneurs. It’s designed for those entrepreneurs registered as “programmers” or anything else related to IT, who will be taxed differently.
Entrepreneurs
Ukraine’s State Tax Service splits entrepreneurs into four groups depending on their revenues and line of work. The most simple and numerous one is the third group.
A large share of the entrepreneurs in this group in Ukraine are IT specialists — out of 1.8 million entrepreneurs, nearly 130,000 are registered as programmers, according to online data aggregator OpenDataBot. And the number is rapidly growing — rising by 45 percent in the last three years alone.
Individual entrepreneurs registered in this group pay a 5-percent revenue tax and a social tax of $360 per year.
Apart from simplicity and low tax rate, “it turns out that this (third group)… matches the relationships between customers and creative suppliers in the 21st century in the best way possible,” said Dmytro Ovcharenko, the acting head of the IT Ukraine Association.
“It gives mobility, flexibility, and the ability to work with several customers simultaneously.”
The newly submitted draft suggests retaining the same conditions — 5 percent revenue tax plus the social tax — but starting from 2021 to gradually increase the revenue tax by 1 percent every year, reaching the maximum of 10 percent by 2026; and to double social tax to $720.
Angry techies
However, these proposals aren’t an initiative from the tech labor union to increase taxes on their members — rather the draft law represents a compromise to what was offered in February by the Ministry of Social Policy.
That ministry first introduced a bill aimed at overhauling the way individual entrepreneurs are taxed in Ukraine. But when they saw it, IT people were aghast.
The ministry suggested that some of the IT entrepreneurs should be reclassified as employees if they have a constant client from whom they have earned at least 75 percent of their income over the last six months.
But tech entrepreneurs who are declared employees would see their tax bills rocketing.
While today “individual entrepreneurs” pay a tax of five percent of their revenues, being reclassified as employees would see them having to pay a 19.5-percent income tax, while their employers would also have to pay an additional 22 percent tax on the gross salary they offer.
Overall, it looked like a five percent tax would be increased to 41.5 percent for those with constant employers.
“My first reaction to the bill was that I wanted to argue that it was the right decision, which was in the interests of the country,” Ovcharenko from the IT Ukraine Association said. “So we sent an official letter to the Ministry of Social Policy with comments about the document and proposed to talk to them about it openly.”
Misunderstanding
But according to Social Policy Minister Andriy Reva, the intention of the bill has been misunderstood.
“Who criticized the bill? IT people. Freelance journalists. I’d like to calm them down: it’s not about them,” Reva said during an interview on the ICTV television channel.
The issue is that large enterprises are trying to minimize their taxes using tools the government gives to small business, the minister said.
For example, the minister said, big supermarket chains or restaurants hire waiters or cashiers to work for them as contractors. However, they treat them as full-time employees: often giving them a workplace, insurance and vacation time.
By hiring contractors, both parties save on taxes, but an employer also can easily fire a person and reduce their vacation time.
The Ministry of Social Policy thus views this as a violation of labor rights. With such relations, nobody can guarantee that such an “employee” would not be fired or that they would get time off.
Reva said that by reducing their taxes through registering their staff as entrepreneurs, large businesses “rob” their employees and society as a whole.
“They put billions of hryvnias in their pockets by avoiding taxes,” he said.
Social Policy Minister Andriy Reva (R) speaks at a session of the Cabinet of Ministers on Feb. 27, 2019. Reva’s ministry first introduced a bill aimed at overhauling the way individual entrepreneurs are taxed in Ukraine. But IT people were aghast when they read it. (Wladyslaw Musiienko)
Community compromise
The ministerial bill does not divide entrepreneurs into groups depending on their type of work, so it would concern all local entrepreneurs, not just those from the IT industry.
Reacting to the proposals from Reva and his ministry, within several weeks the tech community rolled out its own draft law. The main goal, according to Ovcharenko, was to convince the government that taxes should not increase abruptly, so as to retain investors and “brains.”
In general, software developers in Ukraine operate on low margins — only 10–15 percent of net income after subtracting expenses, so any increase is “very sensitive for retaining customers and tech specialists” in Ukraine, Ovcharenko said. He said that the market would only be able to adjust and cope with a tax increase if it is gradual.
The IT Ukraine Association evaluates that if it’s done their way, by 2024 the tech industry will grow from 130,000 tech specialists to 400,000; and from an export volume of $4.5 billion to $10 billion.
Leaving the country?
Now that both laws have been presented, public discussion of them has started. Surveys show that most programmers would agree to an increase in the revenues tax up to 10 percent. If they had to become employees as the ministry proposes, some would consider moving abroad.
About 14 percent of programmers surveyed by online tech platform DOU.ua have already said they would leave the country immediately if the tax increased to 41.5 percent. Some 48 percent said they would stay, but would start looking for opportunities abroad.
According to the survey, 91 percent of the tech people — typically young professionals who speak multiple languages and have experience working on global markets — don’t like the idea of paying high taxes in Ukraine because of corruption and the lack of reforms in the country.
Besides, the IT Ukraine Association claims that the tech sphere is already paying three times more money to the budget in taxes than other sectors, because IT earnings are much greater than in industries where companies pay 41.5 percent in taxes. It’s impossible to check this claim, however.
The row over taxes has attracted the attention of top state officials, who moved to placate the IT industry, which accounts for 3.3 percent of Ukraine’s gross domestic product. Ukrainian President Petro Poroshenko and Prime Minister Volodymyr Groysman met with IT industry representatives to discuss the issue on Feb. 23.
Groysman said that the ministry had introduced the bill just to “discuss the idea.” “Nobody wants to see companies fall — this goes against the national interests,” he said.
But the discussion goes on, and the two draft bills are still lying in parliament’s in-tray.
“It’s a long process,” says Ovcharenko.
“But the point is different,” he went on. “IT became the second biggest industry in terms of export volumes in 2018… And it could become the biggest in the next couple of years, bringing much needed cash into the country,” which, unlike international loans, won’t have to be returned.
“It is important for all participants, both the industry and the state, to unite and find a solution that will benefit the whole country.”
The Kyiv Post’s technology coverage is sponsored by Ciklum and NIX Solutions. The content is independent of the donors.
