Tax on Facebook: a bill on 20% VAT on online services of foreign companies introduced in the Verkhovna Rada

On October 2, 2020, a bill No. 4184 regarding imposing VAT (20% tax) on digital services delivered by foreign companies was introduced in the Verkhovna Rada. It will affect most of the foreign services used by Ukrainians, such as Facebook, Netflix, Steam, Apple, Amazon, etc.

What’s new in the bill?

The document supplements the Tax Code with another Article 208 on the taxation of electronic services. According to the text of this article:

  • Electronic services that non-resident companies supply to individuals in Ukraine are subject to VAT (20%).
  • A non-resident company is a company that does not have a permanent representative office in the country. It must register in the Ukrainian tax office as a VAT payer to provide services to Ukrainians. This condition works if the previous year, the company delivered services to individuals in Ukraine for the equivalent of UAH 1 million. If the amount is less, it is possible to register as a VAT payer voluntarily. All this can be done through the electronic service “VAT for non-residents.”
  • If services are delivered in Ukraine through an intermediary, the one is the supplier for this project. If the intermediary is also a non-resident, he or she has to act following the article.
  • At the same time, the “tax on foreign advertising” rule is excluded from the code. That means that Ukrainian legal entities and individual entrepreneurs will not have to pay a 20% tax when buying electronic services from foreign companies, as Oleksandr Bornyakov, the Deputy Minister of Digital Transformation of Ukraine, explains.

The authors of the bill in an explanatory note cite the example of the EU countries and Russia. In the latter, such services are subject to VAT since January 1, 2017. Since then, Apple, Google, Microsoft, Netflix, Bloomberg, Alibaba, have registered as VAT payers in the Russian Federation, according to the authors of the bill.

Analysis of similar bills

Previously, we wrote more about what this initiative can result in (in particular, for the advertising market).

A similar bill has already been submitted to the parliament in May this year, but voting has not yet been held. At that time, many experts agreed that it would mean a 20% increase in the price of services for users.