Collection of VAT from non-residents for provision of electronic services in Ukraine

On December 19, 2019, the bill No. 2634 “On amendments to the Tax Code of Ukraine on taxation by means of a value-added tax on electronic services provided by non-residents to individuals in the customs territory of Ukraine” (hereinafter – the bill), was registered in the Verkhovna Rada.

We have analyzed the proposed changes and will explain below the main innovations.

Key issues:

  • What are electronic services?
  • Who is required to register as a VAT payer?
  • How is it possible to determine the place of provision of electronic services?
  • How to register as a VAT payer?
  • How to file a non-resident tax declaration?
  • Should a non-resident register a tax note?
  • How can a non-resident pay tax obligations?
  • What kind of responsibility envisaged for the provision of electronic services without VAT registration?
  • How does the supervisory authority send tax notices to non-residents?
  • How to claim a tax notice from the supervisory authority?

1. What are electronic services?

According to the bill, electronic services are services which provided through a worldwide common public information system that is logically linked by a global address space and based on the Internet protocol defined by international standards (hereinafter – the Internet) and automatized with the use of information technology and generally without human intervention.

The following services include:

  • supplying images or texts, e-books, and magazines; supplying audiovisual content, videos “on-demand”, games, gambling, including the provision of services for participation in such games;
  • providing access to electronic resources for purposes including but not limited to information, commerce, education and entertainment;
  • provision of cloud technologies for data placement; supply (transfer of rights of use) of software and updates for this purpose, as well as remote servicing of software and electronic equipment;
  • providing advertising services on the Internet, mobile applications and other electronic resources.

The declaration should be submitted within 40 calendar days of the last calendar day of the tax period, regardless of whether the non-resident provided electronic services to individuals during that tax period.

2. Who is required to register as a VAT payer?

Non-residents (both legal entities and individuals) – business entities, which do not have a permanent establishment and:

  • provide electronic services in the customs territory of Ukraine to individuals, except for the provision of such services through an intermediary;
  • intermediaries, which supply electronic services for the benefit of individuals.

3. How is it possible to determine the place of provision of electronic services?

The location of supply of electronic services is considered to be the location of the recipient of such electronic services, which is determined in the following ways:

  • for recipients of services registered as legal entities – at the place of registration of the recipient entity;
  • for recipients of services who are individuals – using information about the location of the recipient of the services received by the taxpayer in the process of providing services, in particular by:

– the country code of the SIM card used by the electronic service recipient;
– the location of the device(determined by its IP address) used by the electronic service recipient;
– the location of a bank or other financial institution in which an account is opened through which payment for electronic services is made;
– residence information provided by the electronic service recipient.

4. How to register as a VAT payer?

To be registered as a VAT payer, a non-resident must apply for registration as a non-resident tax payer, who provides electronic services to individuals in the customs territory of Ukraine to the central executive authority, which implements the state tax policy.

5. How to file a non-resident tax declaration?

A non-resident registered as a value-added tax payer should file a tax declaration in a simplified form and submit it electronically via “VAT for non-residents”, which is the electronic service for VAT payers.

The declaration should be submitted within 40 calendar days of the last calendar day of the tax period, regardless of whether the non-resident provided electronic services to individuals during that tax period.

There is the penalty envisaged for non-residents who provide electronic services to individuals in the customs territory of Ukraine without registering such a non-resident as a value-added tax payer. The proposed fine is 8,500 UAH.

6. Should a non-resident register a tax note?

A non-resident, who is registered as a VAT payer, does not need to collect or register tax notes for transactions regarding the provision of electronic services provided in the customs territory of Ukraine.

7. How can a non-resident pay tax obligations?

The bill provides the possibility of payment by a non-resident of tax obligations in foreign currency within 30 calendar days of the deadline for submission of the declaration.

8. What kind of responsibility envisaged for the provision of electronic services without VAT registration?

There is the penalty envisaged for non-residents who provide electronic services to individuals in the customs territory of Ukraine without registering such a non-resident as a value-added tax payer. The proposed fine is 8,500 UAH.

9. How does the supervisory authority send tax notices to non-residents?

The bill establishes that tax notices to non-residents, both those who are registered as VAT payers and those who are not registered as VAT payers, are sent by the tax authority in writing.

10. How to claim a tax notice from the supervisory authority? 

The non-resident has the right to file a complaint to the central executive authority, which implements the state tax policy:

  • if the non-resident person is registered as a VAT payer – within ten days of the day the non-resident receives the tax notification ;
  • if the non-resident person is not registered as a VAT payer – within 3 months of the day the non-resident receives the tax notification.

The complaint of a non-resident person or entity who is registered as a VAT payer shall be filed electronically in the electronic service “VAT for non-residents”, and the complaint of a non-resident person or entity who is not registered as a VAT payer shall be filed following the procedure established by the international treaties (conventions) of Ukraine.

Conslusion

Clearly, the bill will have a significant impact on the taxation of e-services market giants, such as Bloomberg, Facebook, Google, Netflix and others.

However, gradually, the tax authorities will also focus on smaller players, who will have to take into account the new requirements of the tax legislation of Ukraine if they decided to start or continue their activities in the territory of Ukraine.

It is interesting that similar rules are contained in the legislation of many European countries: in neighbouring Russia there is a similar law which has been in force since 2017, and in Belarus since 2018. Therefore there is no doubt that this draft bill will be adopted, it is only a matter of time.

If such requirements are not new or unusual for e-market leaders, as large companies typically do business in many jurisdictions, then for start-ups and less powerful business the new rules may be more of a surprise.