On October 15, 2024, a roundtable discussion “Ways to Solve Problematic Issues of Taxation of Internet Service Providers” was held in Kyiv, organized by a number of specialized associations and public organizations that have united and jointly oppose the abolition of the simplified taxation model for Internet service providers ⎼ small businesses in Ukraine. The BRDO was represented at the event by the CEO Оleksii Dorogan.
The State Tax Service has banned the use of the simplified taxation system for small internet service providers starting from October 1, 2024. This decision contradicts the provisions of the Tax Code, the Constitution of Ukraine and the official explanation of the regulator of electronic communications (NCEC). In response, in early October, business associations, NGOs, and think tanks issued a joint appeal to prevent the unlawful abolition of the single tax for small businesses. The relevant petition received 25,000 votes from Ukrainians.
“The single tax for small Internet providers should be preserved. This is not only a requirement of the times, but also a prerequisite for the country’s development on the path to European integration. A single letter from the State Tax Service cannot ban the simplified taxation model for the entire industry. This is a dangerous precedent and a signal to other market sectors. If there are specific abuses, they must be dealt with legally, and the abolition of the taxation system should take place only through changes to the Tax Code,” said Оleksii Dorogan, CEO of the Better Regulation Delivery Office (BRDO).
As of the beginning of this year, about 2,672 Internet access service providers (over 65%) were under the simplified taxation system (single tax). About 3 million private subscribers, institutions and organizations in Ukraine receive broadband Internet access services from providers operating under the single tax system. Small Internet service providers are key to keeping the frontline regions and the de-occupied territories connected, and their stable operation means security for millions of Ukrainians.
“The issue of abolishing the simplified taxation system is being delayed. We have been working on finding effective solutions for more than six months. The worst part is that the process of closing down about five hundred small Internet providers all over Ukraine has already begun, and this is most critical for the frontline regions. The loss of such providers can lead to a lack of access to critical communications, weakening of network resilience and price increases,” Оleksii Dorogan also added.
Representatives of the Verkhovna Rada of Ukraine, the National Commission for the State Regulation of Electronic Communications, Radio Frequency Spectrum and the Provision of Postal Services (NCEC), the State Regulatory Service, as well as representatives of telecom associations, NGOs and businesses took part in the roundtable.
Sergiy Shtepa, Deputy Chairman of the Committee on Digital Transformation, noted the crisis situation with taxation and the unreasonableness of the additional tax burden on small Internet providers. In his opinion, this will lead to monopolization of the market and deterioration of the quality of communication, especially in the run-up to the winter period. The MP emphasized that he is ready to register a relevant draft law to solve the problem of banning the single tax for small Internet access providers if there is a joint decision of the industry and support from the Ministry of Digital Transformation.
Oleksandr Fediyenko, Chairman of the Subcommittee on Cyberspace Security, noted that the issue of taxation changes is political in nature. He emphasized the importance of SMEs for the Ukrainian economy, as it is primarily the work of small providers that provides connectivity in the frontline areas. However, according to the most recent data from the National Commission, 487 Internet providers – small businesses – filed applications for termination of operations in August-October 2024 due to the abolition of the single tax. According to the MP, all the actions currently being taken by the State Tax Service should be stopped immediately, otherwise there will be less than ten providers left in the entire market.
Denys Pozdnyakov, Advisor to the Vice Prime Minister for Innovations, Development of Education, Science & Technologies and Minister of Digital Transformation of Ukraine, also drew attention to the urgent need for a relevant legislative initiative for the industry. All government agencies – the Ministry of Finance, the Ministry of Digital Transformation, and the Tax Committee – are in favor of market transparency, as abuse of the simplified taxation system is unacceptable. According to him, the Ministry of Digital Transformation is ready to start working together with the Ministry of Finance on a legislative initiative, as both government agencies are in favor of transparency and stopping the abuse of the simplified taxation system in the telecom market.
Nadiia Kostryba, expert of the Better Regulation Delivery Office, presented the BRDO’s joint efforts with specialized associations to change the legislation on the prohibition of the simplified taxation system. The proposed changes to the law “On Electronic Communications” make it impossible to use the interpretation that is currently used by the tax authorities to prohibit the simplified taxation system for Internet providers. We propose:
- a clear definition of the service of technical maintenance and operation of networks and its features: what exactly is considered this service and what is not. This proposal is based on the existing practice and current by-laws, which will provide legal certainty on this issue;
- to determine how to classify a particular type of activity as a certain type of service specified in the Law “On Electronic Communications”, since this law introduces the European classification, which is part of Ukraine’s European integration commitments. This is necessary to prevent recent interpretations of the electronic communications legislation by the State Tax Service;
- consider introducing a fifth taxation group specifically for Internet access services, with a 4% single tax and 4% military fee, setting the income criteria for this group at €2 million. Such changes will both increase tax revenues and help preserve the simplified taxation system for small Internet providers.
The work on developing legislative proposals made possible by the Digital Transformation Activity with support from USAID and UK Dev. The implementing partner is the BRDO.