Verkhovna Rada has adopted the Draft Law No. 4184: “Google Tax” and other important changes
On June 3, 2021 the Verkhovna Rada of Ukraine adopted the Law «On Amendments to the Tax Code of Ukraine Concerning the Abolition of Taxation of Income Received by Non-Residents in the Form of Payment for Production and/or Distribution of Advertising and Improvement of the Procedure for Value Added Taxation of Transactions on Supply of Digital Services by Non-Residents to Individuals» (the Law) (the bill No. 4184)1.
Since the first reading, a set of amendments have been made to the text of the bill, thereby the final version of the Law differs significantly from the previous one.
It is expected that the Law will enter into force on the day following the day of its promulgation (except for certain paragraphs). In particular, with regard to the procedure for value added taxation of transactions on supply of digital services by non-residents to individuals, the Law will apply to tax periods starting from January 1, 2022.
The text of the Law has not been signed by the President or published in official sources yet. Therefore, this material is based on the text of the bill submitted for the second reading and will require revision after the official publication of the Law.
According to the text of the bill for the second reading published on the website of the Verkhovna Rada, the following changes are proposed.
1. The bill provides that non-residents, who supply digital services to individuals, the place of supply of which is in the customs territory of Ukraine, shall be registered as VAT payers.
Para. 12 of the Law amends para. 180.1 of the Tax Code of Ukraine (the TCU) and ascribes a non-resident, who does not have a permanent establishment and supplies digital services to individuals in the customs territory of Ukraine, to the list of taxpayers.
The provisions of the TCU are also supplemented by Article 208-1, where para. 2 describes the procedure of VAT payer registration for non-resident, who supplies digital services to individuals, the place of supply of which is in the customs territory of Ukraine. The obligation to register arises if the amount of income received from transactions provided by such non-resident in the previous calendar year exceeds UAH 1 million.
The regulation provides that registration of a non-resident may take place remotely – “in digital form through a special portal solution for non-resident users who provide digital services by means of electronic identification”.
2. The list of digitally supplied services is defined.
The definition and the list of digitally supplied services were also defined for the second reading. The text of the bill states:
“Digitally supplied services are services delivered over the Internet, in an automated manner, by means of information technologies and involving minimal human intervention, including installing a special application or application on smartphones, tablets, TVs or other digital devices. These services include, but are not limited to:
a) supply of electronic copies, provision of access to images, texts and information, including , but not limited to subscription to electronic newspapers, magazines, books, providing access and/or downloading of photos, graphic images, videos;
b) provision of access to databases, including use of search systems and directory services on the Internet;
c)supply of electronic copies (electronic-digital information) and/or provision of access to audio-visual works, video and audio on demand, games, including the supply of services for participation in such games, provision of services for access to television programs(channels) or their packages, except for access to television programs simultaneously with their broadcasting through a television network;
d)provision of access to information, commercial, entertainment electronic resources and other similar resources, in particular, but not limited to resources hosted on platforms for sharing access to information or video materials;
e) supply of services for online learning on the Internet without human involvement, including provision of access to virtual classrooms, educational resources where students perform tasks online and grades are generated automatically, without human participation (or with minimal participation);
f) cloud services for the provision of computing resources, data storage resources or electronic communications systems using cloud computing technologies;
g) supply of software and related updates, including electronic copies and access to them, as well as supply of remote support services of software and electronic equipment;
h) provision of advertising services via the Internet, in mobile applications, and via other electronic resources, supply of advertising space, including banner advertisements on websites, web pages or web portals”.
3. The bill determines the procedure of taxation of digital services provided by non-residents.
In addition to the obligation and procedure for registration of non-residents as VAT payers, Article 208-1 of the TCU defines the tax treatment of non-residents, namely:
- quarterly reporting period;
- tax liability date is a last day of the reporting period;
- tax base is determined based on the cost of digital services;
- tax rate is 20 % of the tax base and shall be added to the cost of digital services;
- non-resident is required to file and submit a simplified tax return in electronic form through a dedicated portal solution for non-resident users, who supply digital services through electronic identification;
- simplified tax return shall be submitted within 40 calendar days following the last calendar day of the reporting period;
- tax liabilities shall be paid within 30 calendar days after submission of a simplified tax return;
- simplified tax return is subject exclusively to a special cameral tax audit, the deadline for which cannot exceed 90 calendar days;
- tax notification regarding the non-resident’s obligation to pay the amount of the tax liability is compiled in electronic form, and the tax notification regarding the non-resident’s obligation to register as a VAT payer is compiled in writing form;
- non-resident, who is registered as a taxpayer, carries out an administrative appeal in electronic form through a special portal solution for non-resident users supplying digital services; non-resident, who is not registered as a taxpayer, carries out an administrative appeal in accordance with the procedure established by international treaties of Ukraine, in case of absence of an international treaty of Ukraine with the non-resident’s country – in accordance with the procedure established by the Cabinet of Ministers of Ukraine;
- a complaint against the tax notification shall be submitted by non-resident within 90 days of the receipt of the tax notification and must be сonsidered within 90 calendar days.
4. Non-resident pays VAT liabilities only in foreign currency.
The Law provides that in accordance with para. 208-1.9 of the TCU, the amount of the tax liability is payable in foreign currency. At the same time, it was clarified for the second reading that foreign currency means euro or the United States dollar. The tax payment will be made through a special foreign-currency-denominated account.
5. Non-residents will not register tax invoices.
According to para. 208-1.7 of the TCU, a non-resident shall not form tax credit or issue tax invoices for transactions on digitally supplied services.
6. Provision of educational digital services is exempt from VAT taxation.
Para. 197.1 of the TCU, which contains a list of transactions exempt from taxation, has been updated. From January 1, 2022 the following services will not be subject to VAT taxation:
a. distance learning services on the Internet (if the Internet is used only as a means of communication);
b. educational services provided through access to public educational, scientific and information resources on the Internet. The services should be provided (1) in the fields of knowledge and specialization for which the higher education applicants are trained and (2) automatically (without the participation of the teacher, students perform tasks online, grades are generated automatically).
7. The rules for determining the place of supply of digital services are established.
From now on, the TCU contains clear rules for determining the place of supply of digital services. Under the general rule of para. 186.3-1 of the TCU, “the place of supply of digital services is the location of the recipient of services”. In addition, the place of supply is detailed for individuals registered as economic entity (place of registration) and individuals, who are not registered as economic entity, in cases of the supply of digital services by fixed means of communication (country of establishment of the fixed line), means of mobile communication (country of SIM card) or other means of communication (country in which such other means of communication are located or to which an access card is sent for use).
In addition to changes in VAT taxation of digital services supplied by non-residents, the Law also provides other important changes, such as:
1. The Law abolishes the 20 % tax when paying for advertising services abroad.
The law excludes the regulation (sub-para. 141.4.6 of the TCU) according to which residents must pay tax at the rate of 20% when paying income to non-residents for the production and/or distribution of advertising.
This regulation will be effective from January 1, 2022.
2. The date of the execution of the document drawn up in electronic form is defined.
The Law supplements para. 3 of para. 187.1 of the TCU and specifies that the date of the execution of the document certifying the supply of services by the taxpayer is the date when such electronic document has been drawn up. In our material “Review of VAT changes in Draft Law 4184, or not only Google” we have considered challenges which might be caused by introduction of such a regulation.
The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.
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