Oleg Kuznietsov: Which volume of IT services stay in the shadow and why?
The third largest sector in the country in terms of attracted foreign-currency earnings remains consistently the IT industry. Despite the adverse conditions associated with political and economic instability and military operations in Eastern Ukraine, the information technology industry shows annual increases.
Favorable conditions for the development of the industry has led Ukraine to take a leading position in Europe in the number of IT professionals: around 100,000 people. And this is just the beginning; if the current dynamics will keep going, by 2020 the country could double the number of IT professionals, and the industry has a good chance of taking first place in attracting foreign earnings to the country.
What was the reason for this popularity of the Ukrainian IT industry? The main reason is a lack of IT professionals globally. Demand for IT services typically exceeds supply. Ukrainian IT resource has an excellent ratio of product quality and reasonable price. This reasonable price is also a result of competitive regulatory and tax costs. And unfortunately, we are not talking about special grant subsidies coming from the state to support a promising industry.
The existing “Special Modes” for IT are rather an imitation of support from the state. In fact, when operating exclusively in the legal field, with the payment of all applicable taxes and fees the Ukrainian IT product loses its appeal. That is why a significant number of Ukrainian IT industry players are in the shadow market. Based on different estimations, the “shadow” share is from 60% to 80%. Similar operating schemes are also the case for larger players who, instead of officially hiring an employee, work with them as ‘private entrepreneur’ contractors, subject therefore to a single low tax burden of 5%.
The situation is even worse with freelancers, who typically do not work on any taxable basis when getting paid, and so completely bypass the tax process. Nevertheless, it is democratic taxation that makes Ukrainian offshoring still attractive, contributing to the export growth in this particularly important time for the country. This, in turn, is the main reason why in my opinion our state tax control services close their eyes on the current model.
Or rather, closed, the well-known direction change of the government policy in 2015, when the officials attempted to reform the single tax formula for individual entrepreneurs. Thankfully, we managed to reach a compromising solution that raised the stakes of the “one-taxers” a little, thus lowering allowable annual turnover by 75%. This was complemented by “visits” of different agents of the Ministry of Internal Affairs and security forces of the Interior Ministry and Security Service of Ukraine, with damaging withdrawals of servers and other company assets that made a significantly negative impact on operational activity.
Despite all these troubles, the industry continues to operate and restore its growth. The only hope is that the government will come to a new optimal transparent scheme of IT industry taxation. I am convinced that this situation will have a beneficial effect on this growing sector.
By Oleg Kuznietsov, partner of Kreston GCG