Ukraine to tax foreign-supplied digital services from January 2022

Ukraine's Parliament has passed a VAT Bill plan that will tax the supplies of non-resident digital businesses to customers based in Ukraine. The effective date of introduction for these new VAT rules is January 1, 2022.

The details of Ukraine's plan to tax (at a VAT rate of 20%) the supplies of non-resident digital businesses are available here (bill No. 4184).

The key focus of the bill is two-fold: one, to raise additional revenue for the Ukraine exchequer and, two, level the playing field between domestic and international digital service suppliers. 

On June 3, 2021, the Bill passed its second reading in Ukraine's Parliament. This is significant as it means the Bill passed all the necessary parliamentary stages and was adopted by Ukraine's Parliament. We understand that during the second reading a significant number of amendments to the text of the bill were proposed by deputies, these amendments will only be understood when the law is published.

Revenue-raising aim of Ukraine VAT Bill

Regarding revenue-raising, the bill makes mention of the revenue-raising successes of similar rules in place across the globe, for example, in the European Union (EU) and Australia, and in neighbouring jurisdictions such as Russia, Kazakhstan, and Belarus. 

In relation to Russia, the bill states that "according to official budget data" such digital businesses paid 9.4 billion rubles (circa USD$148.3m, EUR€134.5m, GBP£113m) in tax in 2017; 12 billion (circa USD$189.4m, EUR€171.6m, GBP£144.5m) in 2018, and another 12 billion in the first quarter of 2019. The larger Q1 2019 number was due to the extension of the scope to include B2B sales.

According to the information contained in Ukraine's VAT Bill, 70% of the tax intake came from the largest digital companies. Note, again, that the current VAT rate in Ukraine is 20%.

Affected non-residents and sales threshold

Ukraine’s bill describes potentially affected non-resident digital businesses as “a business entity with no permanent establishment and:

1. Provides electronic services independently to the customs territory of Ukraine, except for the provision of such services through an intermediary;
2. Is an intermediary in transactions for the supply of electronic services for the benefit of individuals.”

Foreign digital service suppliers that meet the descriptions above should also note that the current bill includes a sales threshold above which registration obligations kick in. The proposed threshold is UAH 1,000,000 (circa USD35,500, EUR30,000, GBP27,400). UAH is the local Ukraine currency, the Hryvnia.

Definition of affected digital services

As with many similar rules around the globe, the affected digital services come with a broad definition. In Ukraine’s bill, the definition refers to services “provided through a worldwide public information system that is logically linked by a global address space and based on an Internet protocol defined by international standards (hereinafter referred to as “the Internet”), automated, using information technology and preferably without human intervention.”

Such services include, but are not limited to:

1. The supply of images or texts, including photographs, e-books and magazines, etc.
2. The supply of audiovisual works, custom videos, games, gambling, including the provision of services for participation in such games
3. Providing access to information, commercial, educational and entertainment electronic resources and other such resources
4. Provision of cloud technologies for data placement, etc.
5. The supply (transfer of rights of use) of software and updates to it, as well as remote maintenance of software and electronic equipment
6. Providing advertising services on the Internet, mobile applications and other electronic resources

The bill also refers to services that are not covered and these include (again, this list is not exhaustive):

• Delivery of services if – when ordering through the Internet – the services are provided without using the Internet
• Supply (transfer of rights of use) of programs for electronic computers (including computer games), databases on physical media
• Provision of e-mail consulting services
• Providing Internet access services

Customer location evidence

Another common characteristic of rules on the cross-border supply of digital services is the evidence required to be collected to determine the location of the end customer. Again, Ukraine’s bill follows a similar approach to other rules in place. 

In Ukraine, the location of the customer will be determined by the collection of pieces of evidence such as:

1. The country code on the SIM card used by the service recipient;
2. The location of the telecommunications provider whose services the recipient used in the process of receiving the electronic service;
3. The location of the device, which is determined by its IP address used by the service recipient;
4. The location of the bank where the account through which the payment for the electronic service is opened.
5. The place of residence information provided by the service recipient.

It is not clear from the bill as to how many pieces of evidence need to match to confirm the end customer’s location. 

We will, of course, keep you up to date on developments in Ukraine.

Acknowledgement: Thanks to Alexander Minin, Inna Taptunova, and Andriy Denysenko of WTS Consulting LLC | Kyiv, for their help in researching this article.