From January 2022, Ukraine will apply a 20% tax on web-based services provided by foreign tech firms.
According to the law, passed by parliament in June, foreign tech companies have to pay a 20% value-added tax, or VAT, for digital services they provide to local users. The law targets products such as electronic books, photos, magazines, games, and services such as online advertising and data storage.
While Google and Meta (formerly Facebook) have said that they will pass the tax onto their customers by raising the price of services, other tech giants, including Netflix, Apple, Microsoft and Spotify, haven't yet announced whether they will charge more next year.
Netflix and Apple told Ukrainian tech media dev.ua in December that they include all local taxes in the price of their services. The monthly subscription for Apple’s streaming service Apple TV costs $4.99 in Ukraine. In November, the U.S. film streaming service Netflix significantly reduced the cost of its monthly subscription in Ukraine to 4.99-9.99 euros depending on the plan.
Imposing additional taxes on tech giants has become a common practice in many European countries and Ukraine is now one of them, according to Danylo Hetmantsev, head of the parliamentary committee on finance, taxation and customs policy, who initiated the new levy.
The government expects to receive $111 million annually from foreign tech firms.
What changes for Google users
To comply with new legislation, Google will be charging an additional 20% tax on digital services for ordinary users and individual entrepreneurs who are not registered as businesses, the company announced on Dec. 1.
It means that Ukrainians will pay more for mobile apps, movies, books and several paid subscriptions like YouTube Premium and Google Drive. The price of YouTube Premium could increase from $3.70 per month to $4.40, while the cost of Google Drive could go up from $30.40 to $36.50 a month.
The tax change can also influence the local advertising market. Ukraine’s businesses have paid VAT for Google advertising services before, but the new law also affects individual entrepreneurs.
What changes for Facebook users
The U.S. tech company Meta makes money in Ukraine by selling digital ads on its social network Facebook. According to Getmantsev’s law, Meta will impose additional taxes on Ukrainian advertisers who are not registered as businesses or individual entrepreneurs.
To avoid the 20% tax, advertisers should manually add their VAT number to their Facebook ad account. “It will confirm whether or not you’re a legal entity or an individual entrepreneur responsible for self-assessing and paying VAT,” the company said.
What changes for Ukraine
Getmantsev said that additional taxes from tech companies could bring millions of dollars to the state budget. According to him, Ukraine loses huge amounts in taxes from digital services provided from abroad.
For international tech businesses like Google, Apple and Facebook, Ukraine is a huge market with over 40 million people, affordable taxation and softer laws on data protection. That is why these companies launch their services in the country but do not open physical offices here — it allows them to avoid taxation.
Many countries amend their tax legislation to force tech behemoths to play fair. These additional taxes bring them big returns. In Russia, for example, digital service providers have been paying 16.67% VAT since 2017. Every year it brings over $669 million to Russia's state budget.
Canada will start collecting a 3% digital services tax from foreign tech platforms like Netflix, Amazon and Spotify from Jan. 2. The country expects to receive around $544 million annually from the new levy.
During the G7 summit in July, its participants, including Canada, France, Germany, Italy, Japan, the U.K. and the U.S., agreed to create a global minimum 15% corporate tax rate for tech companies. It could reduce companies’ incentives to shift profits to low-tax offshore havens and could bring billions of dollars to countries. Tech companies like Google and Facebook praised the deal but asked to then give up taxes on local digital services such as the one introduced in Ukraine.
However, some experts are not certain about whether the law will be effective.
Since tech companies pay additional taxes by increasing the price for their consumers, their revenue in Ukraine might drop. And with the lack of economic incentives, some services might simply leave the country.
“At the moment, our country needs these services more than they need us,” according to Artem Borodatyuk, head of tech company Netpeak Group.