The idea of Diia.City is under threat

08/ 10/ 2021

For almost two years now, the IT industry, in close cooperation with the Ministry of Digital Transformation, has been working on an initiative for a special tax and legal regime – Diia.City. The results of such extensive and close cooperation resulted in two draft laws – №4303 (which establishes the framework, signed by the President this summer) and №5376 (which specifies the tax details, adopted in the first reading). In tandem with business, the Ministry has managed to crystallize comfortable conditions for IT, which have every chance to stimulate the development of the industry ultimately bringing enormous benefits to the state. After all, given the global competition, the pandemic, and the activities of other countries, everyone wants to have such a tidbit as IT in their trade structure. And thanks to a range of conditions – the talent of IT professionals, entrepreneurs, sufficient mathematics school, flexible hiring conditions, and effective tax burden backed up by the predictability and benefits provided by the Diia.City, our domestic IT industry would have every chance to become one of the best in the world. But unfortunately, all this ideology is currently under threat. Thus, the tax part of Diia.City is being prepared now for the second reading – it is being considered by the Verkhovna Rada Committee on Finance, Tax and Customs Policy. Svitlana Mykhailovska. EBA Deputy Director for Advocacy. The text adopted in the first reading was agreed between the Ministry of Digital Transformation and industry players. We have agreed on conditions, tax rates, transition periods, etc. But MPs are trying to make a lot of amendments that call into question the benefits of the concept itself and its positive impact on the development of the industry in the future. Such initiative raises many questions. Thus, it is worth mentioning the following critical issues: · Tax burden for gig-workers and those who work under an employment contract are set at the rate of 5% PIT, the SSC – at 22% of the minimum insurance premium and the tax on withdrawn capital – at 9%. The proposed amendments provide for a significant increase for most of these rates: SSC at 5% of the salary and the tax on withdrawn capital at 18% (ie twice as high). Despite all previous calculations and forecasts – such rates nullify the attractiveness of the concept and its ability to stimulate the growth of the industry. · Preferential taxation on salaries is provided without restrictions for certain professions. Instead, the MPs propose the amendments that set strict limits on one single NACE (ie, only a small group of programmers are eligible to preferential rates) - as if such a rule should eliminate possible abuses by non-IT businesses. At the same time, the framework law has already clearly specified the criteria for admission of companies to the special regime, that would eliminate potential violators. Besides, many modern IT professions do not even have similar equivalents in our classifier of professions. · In the previously agreed version, the restrictions on interaction with specialists in the simplified taxation system apply only to companies that choose the withdrawn capital tax at the rate of 9%. Currently, some deputies of the Tax Committee are proposing to ban interaction with sole proprietors for both those who are taxed on withdrawn capital and those who remain on preferential terms of 18% on income tax. · Those who choose the tax on withdrawn capital are provided with 3 years transition period to reregister the staff from FOPs to gig/employment contracts. Now it was proposed to shorten this period to 1-1.5 years which makes it impossible for companies to comfortably transit to new conditions. · The tax conditions should remain unchanged for 25 years. It is also being discussed in the Verkhovna Rada Tax Committee which proposes to remove the norm completely. · Law №4303 provides that entry into Diia.City is carried out on a declarative basis based on the criteria confirmed by an independent audit. However, it is now proposed to add a tax audit, which will obviously increase the possibility of pressure on business, corruption risks, and bureaucratic processes. Valery Krasovsky. Co-chair of the EBA IT Committee, CEO Sigma Software. Despite extensive work on the concept, it will lose its appeal to the industry due to such amendments. And this, in turn, calls into question its feasibility in general: now the industry is growing by 20-25% annually, and under such conditions, which significantly increase the existing taxation - it will be simply impossible to compete in the international arena with other countries. The IT industry hopes that the conditions for business development, which are enshrined in the existing text of the draft law, will be preserved, and these harmful novelties - removed by the VRU Tax committee. The main idea was to stimulate the development of industry, which will turn Ukraine into a major IT hub in Europe and attract as many companies as possible to capitalize and develop their business in Ukraine. Under such a scenario, the amount of taxes to the budget, the number of jobs (not limited by IT only), foreign exchange earnings, as well as revenues from exports of services will increase. This situation will be beneficial for all stakeholders, so we hope for the understanding and objectivity of the deputies. Oleksandr Bornyakov. Deputy Minister of Digital Transformation for IT Development, Project Manager of Diia City. Our team is in constant dialogue with the IT industry. Together with representatives of IT companies, we are working to improve the special regime Diia.City so that it is as comfortable as possible for business and meets the interests of the state. A draft law on of Diia.City is currently being prepared for the second reading. It is important that it is adopted in the format that we have proposed and that is supported by the industry. This will allow Diia.City to become the driving force that will help Ukraine to take a worthy place among the world leaders in the digital economy. Therefore, the European Business Association very much hopes that the deputies will still take the side of the development of the technology industry and help to implement the favorable concept of Diia.City. Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

In tandem with business, the Ministry has managed to crystallize comfortable conditions for IT, which have every chance to stimulate the development of the industry ultimately bringing enormous benefits to the state. After all, given the global competition, the pandemic, and the activities of other countries, everyone wants to have such a tidbit as IT in their trade structure. And thanks to a range of conditions – the talent of IT professionals, entrepreneurs, sufficient mathematics school, flexible hiring conditions, and effective tax burden backed up by the predictability and benefits provided by the Diia.City, our domestic IT industry would have every chance to become one of the best in the world. But unfortunately, all this ideology is currently under threat.

Thus, the tax part of Diia.City is being prepared now for the second reading – it is being considered by the Verkhovna Rada Committee on Finance, Tax and Customs Policy.

Svitlana Mykhailovska EBA Deputy Director for Advocacy

"The text adopted in the first reading was agreed between the Ministry of Digital Transformation and industry players. We have agreed on conditions, tax rates, transition periods, etc. But MPs are trying to make a lot of amendments that call into question the benefits of the concept itself and its positive impact on the development of the industry in the future. Such initiative raises many questions.

Thus, it is worth mentioning the following critical issues:

· Tax burden for gig-workers and those who work under an employment contract are set at the rate of 5% PIT, the SSC – at 22% of the minimum insurance premium and the tax on withdrawn capital – at 9%. The proposed amendments provide for a significant increase for most of these rates: SSC at 5% of the salary and the tax on withdrawn capital at 18% (ie twice as high). Despite all previous calculations and forecasts – such rates nullify the attractiveness of the concept and its ability to stimulate the growth of the industry.

· Preferential taxation on salaries is provided without restrictions for certain professions. Instead, the MPs propose the amendments that set strict limits on one single NACE (ie, only a small group of programmers are eligible to preferential rates) – as if such a rule should eliminate possible abuses by non-IT businesses. At the same time, the framework law has already clearly specified the criteria for admission of companies to the special regime, that would eliminate potential violators. Besides, many modern IT professions do not even have similar equivalents in our classifier of professions.

· In the previously agreed version, the restrictions on interaction with specialists in the simplified taxation system apply only to companies that choose the withdrawn capital tax at the rate of 9%. Currently, some deputies of the Tax Committee are proposing to ban interaction with sole proprietors for both those who are taxed on withdrawn capital and those who remain on preferential terms of 18% on income tax.

· Those who choose the tax on withdrawn capital are provided with 3 years transition period to reregister the staff from FOPs to gig/employment contracts. Now it was proposed to shorten this period to 1-1.5 years which makes it impossible for companies to comfortably transit to new conditions.

· The tax conditions should remain unchanged for 25 years. It is also being discussed in the Verkhovna Rada Tax Committee which proposes to remove the norm completely.

· Law №4303 provides that entry into Diia.City is carried out on a declarative basis based on the criteria confirmed by an independent audit. However, it is now proposed to add a tax audit, which will obviously increase the possibility of pressure on business, corruption risks, and bureaucratic processes.

Valery Krasovsky Co-chair of the EBA IT Committee, CEO Sigma Software

Despite extensive work on the concept, it will lose its appeal to the industry due to such amendments. And this, in turn, calls into question its feasibility in general: now the industry is growing by 20-25% annually, and under such conditions, which significantly increase the existing taxation - it will be simply impossible to compete in the international arena with other countries. The IT industry hopes that the conditions for business development, which are enshrined in the existing text of the draft law, will be preserved, and these harmful novelties - removed by the VRU Tax committee.

The main idea was to stimulate the development of industry, which will turn Ukraine into a major IT hub in Europe and attract as many companies as possible to capitalize and develop their business in Ukraine. Under such a scenario, the amount of taxes to the budget, the number of jobs (not limited by IT only), foreign exchange earnings, as well as revenues from exports of services will increase. This situation will be beneficial for all stakeholders, so we hope for the understanding and objectivity of the deputies.

Oleksandr Bornyakov Deputy Minister of Digital Transformation for IT Development, Project Manager of Diia City

Our team is in constant dialogue with the IT industry. Together with representatives of IT companies, we are working to improve the special regime Diia.City so that it is as comfortable as possible for business and meets the interests of the state. A draft law on of Diia.City is currently being prepared for the second reading. It is important that it is adopted in the format that we have proposed and that is supported by the industry. This will allow Diia.City to become the driving force that will help Ukraine to take a worthy place among the world leaders in the digital economy.

Therefore, the European Business Association very much hopes that the deputies will still take the side of the development of the technology industry and help to implement the favorable concept of Diia.City.

Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.