The software development market is the only export industry in Ukraine, which is growing steadily while showing an increase of 58% in 2013-2016. The export software development services is amounted to $3.2 billion in 2016, which brought the industry to the third place in terms of total currency earnings and provided 26% of total export of services. The market creates about 100 thousand highly paid jobs and has huge potential for growth.
However, instability of tax regulation and the lack of specialists are significant barriers for the industry’s development. The government, business and market representatives and experts discussed the ways of eliminating barriers in the market during the Roundtable “IT Future Talks: Regulation of the Software Development Market” as part of the Public Dialogue #PRODialog held at the UNIT.City on October 19.
The Better Regulation Delivery Office (BRDO) has analyzed the regulatory framework of the industry and presented the results in the Green Paper. According to the expert opinion, the rapid development of the sector was facilitated by the lack of specific industry regulation – rules and requirements for IT companies, their services or products, as well as the opportunity to work under favorable tax conditions.
“This is a successful example of an efficient self-regulated market, and this should not be changed. The capitalization of the 10 largest Ukrainian IT companies currently exceeds $4 billion, and raw material producing giants, their value is based on human capital. If the state provides the stable business environment, in particular taxation, as well as regulation of several regulatory barriers, industry profits can grow to $6 billion in 2020,” the head of IT sector at BRDO Oleksandr Kubrakov assures.
Wages in the IT sector are 5 times higher than the average in the country. At the same time, high wages remain not only in the capital, but also in regions where 56% of specialists work, and this is a significant factor of regional development.
“The industry is a powerful economic multiplier: 1 job in IT creates additional 3 jobs for related occupations. But the potential is much larger, and since the IT sector is the area, where Ukraine can become a global innovator, we should go safely in this direction,” the First Deputy Minister of Economic Development and Trade of Ukraine Maksim Nefyodov said.
The amount of direct taxes and fees paid by industry representatives has increased by 88% over the past 3 years, reaching 7.1 billion hryvnas in 2016. Given that the vast majority of tax deductions from IT companies are related to paying for work of specialists, the sector is very sensitive to taxation conditions. For example, while companies in the raw material sectors spend on such taxes no more than 3% of their income, IT companies – 19%. Thus, the simplified model of taxation not only allows optimizing the tax burden on businesses, but it is also a factor giving the Ukrainian IT industry a competitive advantage in world markets. At the same time, it should be understood that due to the instability and riskiness of this model, software market companies are limited in the long-term planning and investment attraction, which hinders the development of the industry.
The acting Head of Trade and Economic Section of the EU Delegation to Ukraine Joselin Gyuton also shared this opinion: “Ukraine is one of the most attractive countries for placing orders in the area of outsourcing business processes and IT. That is, it is not just a potential, it already creates real opportunities, makes a significant contribution to the country’s GDP. The lack of regulation is a clear stimulus. The business requires stable predictable conditions for further development in the global IT market.”
Another limiting factor is the labor shortage in the market. The reasons for the personnel shortage include the need to improve industry-specific education, a significant outflow of IT graduates from the country reaching 30%, as well as the difficulties of attracting foreign specialists to the market. In addition, the issue of importing prototypes of equipment for testing and developing software in the country should be resolved.
“Today there are three clear goals for Ukraine and the IT industry and three ways to achieve them. First, to develop the aspect that could grow independently. The IT industry has every chance to return to the growth of 25-30% annually. The second goal is the development of the domestic market, because it is difficult to expect the stable development of the industry in the long term without it. And the third one is the support for startups, product oriented companies, since they can bring significant investments in the country. The steps described in the Green Paper will help to achieve these goals: stable tax conditions, quality changes in the education system and a clear migration policy,” the President of the Association “Information Technologies of Ukraine”, Head of ERAM Ukraine Yuriy Antonyuk said.
The event was attended by the Head of the State Agency for E-Governance of Ukraine Oleksandr Ryzhenko, the Director of the Department for Tax Policy of the Ministry of Finance Viktor Ovcharenko, representatives of IT-business, experts and the public. The Head of Verkhovna Rada Committee for Informatization and Communications Oleksnadr Danchenko and the Vice-Chairman of the Verkhovna Rada Committee on Science and Education Oleksiy Skrypnyk participated by Skype.