Today, on 17 February 2021, the Parliament of Ukraine voted for a bill introducing value-added tax (VAT) on certain services provided via the Internet (so-called “Google tax” bill). The document passed the first reading, which means it is subject to further parliamentary discussion and must be finally adopted in the second reading before being signed into law.
According to the bill, service will be subject to 20% VAT, if (1) it is an 'electronic service' provided via the Internet, and (2) it is provided by a foreign provider to an individual customer located in Ukraine. Below we briefly discuss the key concepts of the bill based on its current version (although the technicalities may change by the second reading):
The “Google tax” is essentially close to the “electronically supplied services” concept which has existed in the EU since 2015. The initiative arose to address the fast growth of various foreign-based online platforms penetrating the Ukrainian market such as social media, streaming services, and app markets. Unlike local players, foreign providers do not currently pay VAT in the similar settings. The idea of the law to eliminate the economic distortion that may result in unfair tax benefit being available (i) to foreign platforms or (ii) Ukrainian platforms, which pretend to be foreign (i.e., which operate through offshore subsidiaries purely for tax planning purposes).
The opponents of the idea say that the new rules would only hit the pockets of Ukrainian customers to whom the foreign providers will transfer the increased tax burden. Generally, however, we do not see any meaningful opposition to this initiative in the Parliament, so it can be expected that the law will be finally adopted by the end of 2021. In such case, it will start applying from 1 January 2022.
Besides bringing up the VAT on e-services, the bill proposes to abolish a very controversial 20% tax on advertising purchased by Ukrainian companies from foreign providers. Introduced decades ago as an anti-avoidance measure, that tax has become a huge obstacle for the Ukrainian businesses intending to place their ads on the foreign-based online platforms. Abolishing that tax would be another small step towards lifting unnecessary trade and investment barriers in Ukraine.
If you need more information regarding the “Google tax” bill and its potential impact on your business, please feel free to contact our tax partner Constantin Solyar and associate Yurii Dmytrenko.