Source: delo.ua.
BRDO experts provided recommendations that will help to make Ukraine more friendly for IT specialists.
The Better Regulation Delivery Office (BRDO) established at the initiative of the Ministry of Economic Development and Trade has developed the so called Green Paper on regulation of the IT sector. We examined how the software development market operates in the last article devoted to this document. But how is it regulated?
The BRDO Office admits that Ukraine has no comprehensive regulation of the software market.
There are no legislative acts that regulate the sector as well as no licensing. And such a situation is not a result of any special reform or deregulation, but it happened in a natural way. “The lack of strict regulation of the market facilitated its development and did not bring additional risks, therefore, in our view, it will be effective to continue refraining from introducing special regulation for the software development sector,” experts say.
Language difficulties
However, according to experts, there are a number of processes requiring state participation in the sector. One of them is the hiring of personnel and payment for labor. “Given the need to attract foreigners to work on export-oriented projects, we should pay particular attention to the process of employment of foreigners in Ukraine,” analysts say. This aspect is especially important for the IT sector, as there are many international companies working in the market and attracting a large number of foreign specialists. Earlier, they passed through the same registration procedure as all other foreigners who find employment in Ukraine. Starting from September 27, it is easier to register foreign IT specialists due to amendments to the Law “On employment of the Population”.
So, now a work permit is issued for them for a term of up to three years.
In addition, they don’t have minimum wage restrictions. In other sectors, when employing a foreigner, an employer can obtain a permit if he pays a position wage in the amount of at least 10 minimum wages. As experts say, the second factor will not have a significant impact on the employment of experienced specialists, but it will help attract young IT specialists from abroad.
However, this aspect includes other problems that complicate the life of foreign specialists. In particular, this is the requirement to leave Ukraine after receiving a work permit and return to register a residence permit. Today, a foreigner can obtain it after receiving a long-term visa, which, in turn, is issued outside the country. According to experts, the impossibility to obtain it in Ukraine complicates the process of employment of foreign IT specialists increasing the amount of time and expenses required. “In our opinion, providing foreigners with an opportunity to obtain a long-term visa in the Department of Consular Service of the MIA in Ukraine could be a possible solution to this problem,” BRDO experts say.
However, specialists from countries, which do not require a long-term visa, face the same situation.
They still have to leave the country after obtaining a work permit, but only because the State Migration Service of Ukraine refuses to accept documents for a residence permit, if the date of entry into Ukraine is prior to the date of obtaining a work permit. Having analyzed regulatory documents, BRDO experts concluded that this barrier had no legal basis and “could be removed by changing the wrong law enforcement practice”.
Experts say that another negative point of the employment of foreigners is that it is impossible to cooperate with companies within the framework of the IE model. BRDO experts believe that solving this issue and allowing to register foreign IT specialists as IEs, Ukraine could compensate the outflow of industry specialists abroad.
Got caught by IE
Another feature of the sector is the fact that labor costs in IT companies amount to 80% of their income. According to experts, there is a significant total tax burden on employee payments, which exceeds 36%, in companies of this sector, while in many industries, these expenses rarely exceed 10%. That is why many companies register their employees as individual entrepreneurs (IEs), which allows to significantly reduce the tax burden. And, as the BRDO Office explains, this fact gives Ukrainian IT companies competitive advantages in the world market.
However, experts see certain risks in using such a model. In particular, companies may suffer if requirements for single tax payers of the third group are changed as well as if economic relations between IEs and companies are turned into labor relations.
To minimize these risks for the sector and prevent decreasing its investment attractiveness, analysts propose two options:
- state guarantees that it is possible for companies operating in the sector to use the IE model for a certain period of time;
- a significant reduction in the tax burden on payments to highly qualified employees.
“We believe that if a long-term guarantee is created for the software development market, the sector will be able to show even more rapid growth,” experts say.
Regulation is also needed in the process of importing prototypes of equipment for testing and developing software products for it. Now, when importing RED and emitting devices, it is required to provide a conformity document, which, as a rule, is received by companies that import serial products. When importing prototypes, producers can not provide such a document and it is costly for them to receive it, since just one or two radio electronic devices are usually imported to test software. Therefore, experts believe that this issue can be solved simply by
making an exception for the procedure of RED registration, allowing to import no more than 10 product units without a special conformity declaration.
All for export
Another process where the state can help the sector is the regulation of export operations and, in particular, the requirement for mandatory sale of foreign currency proceeds. As it is known, in Ukraine, there is the NBU’s Resolution, according to which, IEs and legal entities are obliged to sell 50% of foreign currency proceeds. This provision doesn’t significantly affect outsourcing companies, since most of their income is used to pay wages to specialists, which should be in hryvnas. At the same time, product-oriented companies selling their products and services in the global market are very sensitive to this resolution, and such a provision has a negative impact on their development.
Expert opinion: Executive Director of the IT Committee of the European Business Association Konstantin Vasyk
The IT Committee as well as other industry associations consider this study is a litmus test for the state of the IT sector and, particularly, an additional opportunity to bring into focus the further development, support and additional incentives into the high-tech industry. For example, the Green Paper has described for the first time the comparative dynamics of classic trends of Ukrainian exports, such as food products and raw materials, metallurgy and machine building products along with the software development.
We constantly emphasize that the IT sector ranks third in the Ukrainian export structure and is 3.3% of the country’s GDP.
And when, for example, the dynamics of IT export growth increased by 58% over the last three years against similar but negative rates of other sectors, this is more than the figure. This indicates gradual changes in the structure of our export as well as put emphasis on resources we have now to be competitive in the global market. But this requires also certain regulatory actions from the government. Key proposals on what exactly the government should do first are described in the study.
In fact, it is not referred to the regulation of the IT sector yet. The study demonstrates strong points and positive developments of the sector and shows problem areas, which will require further development by all parties in the future. And actually, in our opinion, the study is aimed attracting even more attention of the authorities to problems of the IT market.
Today, the software development industry is the least regulated.
This fact as well as the talent and professionalism of Ukrainian programmers facilitate the growth of the Ukrainian IT sector.
Authors of the study suggest the best practices that mainly concern the employment and the entry of foreign developers into the country, the relaxation of requirements for importing equipment prototypes as well as the most topical issue – maintaining existing tax conditions. The IT Committee fully supports and shares the proposed initiatives. As for IT Committee’s proposals, it sees the need for further development of a special export strategy for the IT sector of Ukraine.
The EBA’s IT Committee is convinced that now any local regulation of the Ukrainian export industry, which is competitive in the global market, is highly undesirable.
The Association Committee and other specialized associations are highly skilled experts on relations with representatives of various branches of government. That is why, we are trying to start effective communication with the “triangle” of the Ukraine’s Presidential Executive Office – the Cabinet of Ministers – the Parliament of Ukraine.
The state can facilitate the further IT development directly through maintaining the existing tax environment of the sector, developing the education system, and involving experienced specialists from other countries in the domestic IT industry.
Written by Oksana Tarasenko