Ukraine increases payroll tax for IT industry employees

Author : Iryna Shostak

Source : 112 Ukraine

Salaries in Ukrainian IT companies reach $ 5,000
12:00, 13 August 2020

MPs from the Servant of the People and Batkivshchyna factions initiated a bill that changes the taxation of the IT sector, namely, increases the tax on wages of Ukrainian IT specialists 2-8 times. According to them, such a step would help Ukraine to achieve European and world leadership in the information technology industry in the coming years

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The IT environment is almost the only sphere in Ukraine, whose representatives can easily afford to buy a car or even an apartment with their salaries. After all, salaries in Ukrainian IT companies range from $ 400 to $ 5,000. Therefore, after several years of intensive work and constant training, a graduate of a university might well grow to a highly qualified specialist with a salary of $ 2,000-2,500.

Related: Wages of public officials not to be increased in 2019

"In Ukraine, there is a constant increase in the salaries of IT specialists. So, already our middle developers reached the level of Romanian colleagues and get a little less than the Poles (the difference is about $ 200 on average). We are still one of the best in the world in terms of price-quality correlation," Maks Yakover, the CEO and managing partner of UNIT.City, notes. And for a number of positions, according to Vitaliy Horovoy, Managing Partner of InSoft Capital, salaries have already reached the level of some European countries or even exceeded them.

Of course, one should not forget that 5,000 dollars in Europe and in Ukraine are two very different figures. But one way or another, the salaries of programmers in many developed countries are subject to huge taxes, which is not the case with the income of Ukrainian IT workers. According to the MPs, this is what impedes Ukraine's achievement of European and world leadership in the information technology industry. As a solution, the MPs decided to change the taxation of this sector.

The future of Ukraine IT sphere: The MPs’ vision

On July 23, MPs from the Servant of the People and Batkivshchyna factions registered in parliament a draft law on amendments to the Tax Code of Ukraine regarding the specifics of taxation of subjects of the information technology industry, which, in their opinion, will contribute to an increase in the level of competitiveness and attractiveness for foreign and domestic customers of the information technology industry of Ukraine.

The draft law proposes setting for IT companies for the period from 01.01.2021 to 31.12.2030 taxation features, namely:

  • the tax burden on the salaries of employees at the level of 10% (5% of personal income tax (instead of 18%) + 5% of the unified social contribution (instead of 22%) + exemption from paying 1.5% of the military tax);
  • the income tax rate of an industry entity is applied with a coefficient of 0.5, which is 9%.

Related: Salary of doctors in Ukraine should be at level of $700-800, - Healthcare Minister

The text of the bill also provides for safeguards against abuse of the taxation:

  • closed list of types of economic activities (only 6 types according to Standard Industrial Classification DK 009: 2010);
  • strict compliance criteria (90% of income from IT activities, the share of labor costs is equal to or exceeds 50%);
  • significant fines for violation of the peculiarities of taxation - 200% of the amount of the accrued tax liability;
  • the condition for the application of reduced rates of personal income tax and ERUs is the minimum amount of tax/levy on wages - it cannot be less than the tax/levy at the standard rate of five times the minimum wage:

Personal income tax - UAH 4,723 * 5 * 18% = UAH 4,250.7 ($ 154);

Unified social tax (UST) - UAH 4,723 * 5 * 22% = UAH 5,195.3 ($ 189).

That is, a reduction in the tax rates of personal income tax and UST is possible provided that the salary of an IT specialist exceeds $ 3,743 per month.

Related: Share of IT industry makes four percent of Ukraine's GDP, - Ministry of Economy

The initiators of the bill explain such changes by the fact that Ukraine has a high and uncompetitive tax rate for IT business.

"Ukraine made a big mistake when, having a special 10-year taxation regime for the IT sector (from January 1, 2013 to January 1, 2023), it canceled it in the second year of its existence - on the basis of Law No. 71-VIII dated December 28, 2014," the explanatory note to the bill reads.

In order to demonstrate the differences in the policy of relations with the IT environment, MPs cite examples of a number of countries that have introduced tax incentives for the IT sector (Bagmane Tech Park in India and Hi-Tech Park in Belarus, IP box in Cyprus and in Ireland, exemption of income of IT specialists from personal income tax in Romania and a special taxation regime for profits in Estonia).

They also draw attention to the fact that changes in the tax policy of a number of EU countries regarding the IT industry, in particular in Serbia (introduction of the "test for independence for entrepreneurs"), Hungary (narrowing of the special taxation regime for small businesses - KATA) and Romania (abolition of 0 % of the personal income tax rate for IT specialists as part of the fight against "hidden employment") have created a window of opportunity for Ukraine since the beginning of the year to achieve undisputed European leadership in the information technology industry over the next few years and, as a maximum, to attract foreign specialists from Serbia, Romania, and Hungary.

Related: Why creeping wages increase does not reduce large-scale labor migration in Ukraine

Idea vs. implementation

"Businessmen believe, this bill was created without understanding the specifics of the industry and the mechanisms that ensure its active growth and stability in general," says Olga Kunнchak, manager of the IT committee of the European Business Association.

According to the expert, the bill will be ineffective precisely because of the established "unrealistic limits on wages and forms of interaction between companies and specialists."

The lack of norms on the preservation of the mechanism of interaction "company - sole proprietor" is also causing concern, which can harm the industry (the mechanism contributed to the development of Ukrainian IT at a phenomenal rate of 25-30% annually or any other alternative comparable method of interaction).

Related: Uncertain prospects for Ukraine's IT industry

"That is, the imposition of employment under the existing Labor Code could be traced, which is unacceptable due to the specifics of contractual relations in the IT-sphere," adds Olha Kunychak.

Therefore, there is a possibility that the adoption of the project could slow down the development and growth of IT, because in the near future there might be further changes in the working conditions, and the industry in a short time will need to completely change its format of work, as well as withstand the additional tax burden, volume which they propose to increase.

Along with the negative aspects of the bill, environmental experts define it as a completely correct direction of movement. The only thing that raises doubts is the implementation mechanism. For example, director of LEAD9 Mobile Marketing Nazar Hrynyk thinks: “I think that, in general, streamlining taxation in the IT sector and making them more attractive than in other countries is the right direction. But I am worried about fines and checks because, in our country, any repressive powers turn into a source of abuse, so I would be very careful with this part of the bill.”

A similar thought was expressed by Daria Martynovych, Ph.D. in Economics, owner of the online resource IT-Woman, noting that if one wants to follow the rules, then raising taxes for the IT industry is a logical action from the point of view of equalizing the incomes of the population and building a middle class.

"Indeed, IT specialists now receive high salaries and pay meager taxes, since almost all of them are registered as SPDs. Something needs to be done about this situation since our population's income inequality is growing," says Martynovych.

And on the other hand, according to the expert, small taxes become the main reason that the IT industry workers remain in Ukraine. Thus, they can afford more (buy an expensive car, build an apartment) than IT specialists abroad, who pay 40-50% of taxes.

Senior Software Engineer Maksym Sharov predicts similar situation, he notes that since the IT sphere is one of the most mobile spheres, finding a job abroad for a specialist with good skills is not a big deal, and therefore, the amount of taxation will play far from the last role in choosing a place of work. “For example, during my career, I worked in three countries. What stops an ordinary developer from working, say, in Germany or the Netherlands with their developed infrastructure and high social standards? First of all, these are taxes and the relative cheapness of life in Ukraine. Therefore, the increase in taxes for the IT industry will be "killing the goose that lays the golden eggs,” he said.

Related: UNIT Factory that trains future IT specialists opened in Kharkiv

The instability of changes can also affect the significant outflow of qualified personnel to neighboring countries because the ten years of the draft law is a fairly short period, which may affect the decision of investment companies to enter Ukraine.

Experts agree that the introduction of such changes is premature because if you do raise taxes for the IT industry, do it systematically, with the improvement of infrastructure, in the conditions of a transparent system of budget expenditures, and the absence of corruption. Moreover, it is necessary to take into account the existing and future consequences of quarantine, because, in the context of a coronavirus pandemic, such a tax initiative will only help exacerbate stagnation.

Related: Government promised to increase real wages by 9%


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