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VAT on Digital services

Digital.Google.Facebook.
IT, Taxes, Ukraine

 

The Verkhovna Rada passed a law to improve the VAT procedure, which has become famous as the “Google Tax Law.” However, in reality, it affects not only the digital giant but also several other companies you know. These include Facebook, Netflix, Upwork, and other platforms that offer digital services to their users.

 

Okay, but what’s the point of all this Google law?

 

The main purpose of such innovations is an attempt of the legislator to regulate the digital services market in Ukraine and, of course, to increase the number of tax revenues to the budget.

Who will be affected by it all?

The key subjects to which the law applies are non-resident companies that supply electronic services in Ukraine and the consumers of these services – individuals and sole entrepreneurs without VAT payer status.

What are electronic services meant?

Within the legal framework, electronic services are services provided via the Internet, automatically, without human intervention, with the possible application on any digital devices. For example:

 

  • Providing access to video content (Netflix subscriptions);
  • Providing advertising services;
  • Providing supply and remote maintenance of software;
  • Providing access to commercial and other electronic resources.

Are there any exceptions?

The list of such services is not comprehensive, but the law provides cases that do not apply to electronic services. In particular:

 

  • provision of copies of works in the field of science, literature, and art on tangible media; 
  • provision of consulting services by e-mail; 
  • provision of Internet access services, etc.

I see, but what to do about it?

Non-resident companies, under the condition of supplying services that fall under the “electronic” according to the law, must register as VAT payers in Ukraine (according to the simplified procedure). However, they will only administer this tax (to collect and pay it to the budget), while the end consumer will be the direct payer.

 

Let’s take a more realistic situation with the example of the Upwork freelance exchange. Technically, it is an online job search platform and a number of software products for employers who want to hire and manage remote specialists. When you sign up for this platform, you use certain services that it provides. Going back to the definition of an electronic service by law, it is clear that this exchange falls under the subject of registration as a VAT payer in Ukraine. Accordingly, you must pay 20% tax to the budget as its user.

 

There is one important point to remember – you should not refer VAT to income taxes from the use of Upwork and other online labor exchanges. There are two basic rules here:

 

  • if you are registered as a legal entity or sole entrepreneur with the VAT status, you do not need to pay tax, but continue to keep standard records of your VAT duties;
  • if you are registered as a sole entrepreneur (group 3 without VAT status) or use the platform as an individual, you are subject to VAT for the use of the digital product.

 

At the same time, you pay VAT if you use paid services within the invoice’s framework.

 

This will also affect advertisers. By law, Facebook, Google, Instagram, etc., provide electronic services, particularly for advertising on the Internet. In such a case, VAT is charged for advertising and is calculated from the amount you spent on it. That is, you can safely add another 20% VAT to your spent budget.

 

So, when any online services send you a message to fill in your tax profile, correctly state the information about your legal form. And if you want to avoid new tax liability, we recommend that you place the status of VAT payer and switch from a sole proprietorship with 5% to 3%+20% VAT. It’s worth it!

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