What is reason for this draft and what are its provisions?
On 17 February the Ukrainian Parliament adopted Draft Law No. 4184 in the first reading. The main purpose of the Draft Law is to introduce VAT on supplies of electronic services by non-residents to Ukrainian individuals. Legislators substantiated this by it referring to the principles of equality and neutrality of taxation, since for non-residents’ supplies to Ukrainian businesses there is a “reverse-charge” mechanism in place, but there is no effective mechanism to tax respective supplies by non-residents to Ukrainian individuals.
The Draft Law introduces the notion of “electronic services”. Non-residents suppling electronic services in the amount exceeding UAH 1 million to Ukrainian individuals will have to register as VAT payers by filing an application through their personal electronic cabinet. In the event of non-registration, the Draft Law provides for severe penalties in the amount of 100% of the cost of electronic services supplied. When registered, non-resident VAT payers will have to calculate the number of supplies to individuals in Ukraine (under the Draft Law the place of supply can be determined based on the country code on the SIM card, location of the device according to IP address, etc.) and on the last day of the reporting period (quarter) assess VAT liabilities. Non-residents will have to submit a simplified tax return and can pay VAT liabilities in foreign currency.
Notably, it also repeals the advertisement tax that Ukrainian residents paying to non-residents for the advertising services are required to withhold at their own expense.
In general terms, adoption of the Draft Law does correspond to international practice. Still, from the view point of tax administration several issues arise that require clarity: how will the Ukrainian tax authorities track the supply of electronic services to individuals in Ukraine, and how are non-resident VAT payers expected to do that since it may probably involve a great deal of expense on their part. Also, the Draft Law includes, under the notion of “electronic services”, the supply of gambling games. This contradicts the Law of Ukraine On Gambling
No. 768-IX, which provides that only residents can supply gambling games in Ukraine as well as to the provisions of the Tax Code that provide VAT exemption for making a bet/buying the right to participate in a game, thus the reconciliation of these provisions may also be welcomed.
Andrii Buznytskyi, Manager, International Tax, KPMG in Ukraine
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