Taxpayers who are legal entities do not have the right to apply for the simplified taxation system during the supply of electronic communication services – this clarification was recently published by the State Tax Service of Ukraine.
BRDO experts are convinced:
- This interpretation of the STS norms of the Law “On Electronic Communications” and the Tax Code is wrong.
- Its consequence may be the deterioration and increase in the price of Internet access throughout Ukraine.
Last week, BRDO addressed the Cabinet of Ministers of Ukraine with an official letter regarding the resolution of this issue.
What happened?
The simplified taxation system cannot be applied to providers of Internet access services, which are legal entities. This explanation was published on the STS website in May this year.
According to BRDO, this official position is based on incorrect interpretation of certain provisions of the Tax Code and the Law “On Electronic Communications”, the development of which our team directly participated in.
Our understanding of the relevant legal provisions is detailed in the text of the letter.
Reference on the EU experience of simplified tax accounting for small businesses.
How will it affect the electronic communications sector of Ukraine?
The ability to use Internet services has already become a basic need, and in the conditions of war it has turned into one of the warranties for timely information about danger and further survival. The position of the STS may lead to an increase in prices and a decrease in the availability of the Internet for Ukrainians.
There are approximately 4,000 providers working in the segment of fixed broadband access to the Internet in Ukraine, and these are mainly small business entities (SMEs) on a simplified system that pay 5% of the single income tax. At the same time, some large Internet providers spend less than 1% of their revenue on income tax on the general taxation system. It is the simplicity of accounting and reporting that is the key reason for their choice of a simplified system.
Its cancellation will lead to the fact that, in order to comply with tax legislation, SMEs will be forced to pay disproportionately higher costs than large providers. This will significantly reduce their competitiveness and ability to develop networks and services.
EU policy is based on the fact that SMEs should receive state assistance and support due to the disproportionality of such costs. In the Action Plan on Fair and Simple Taxation in Support of the Recovery Strategy (2020), the European Commission indicates that the estimated tax compliance costs for large companies are around 2%, while for SMEs it is around 30% of taxes paid.
What are the specific negative consequences for business, service users and the state?
- reduction of competition, monopolization of the market of fixed SHS;
- deterioration of the stability of networks: it is more difficult to carry out a cyber attack on the network management systems of thousands of small service providers than on similar systems of large providers;
- an increase in state costs for fulfilling the obligation to ensure price and geographic availability of universal services, which is enshrined in the Law “On Electronic Communications”.
Why is BRDO involved and how do we propose to solve the problem?
The BRDO team has experience in optimizing regulatory relations, implementing European integration reforms and measures to facilitate doing business in the field of electronic communications.
In particular, we took an active part in the development of the new Law of Ukraine “On Electronic Communications” and the draft Strategy for the Development of Electronic Communications.
In recent years, we have conducted several studies in this area, as a result of which the analytical reports “Regulation of the market of fixed broadband access to the Internet”, “How to use the radio frequency resource to ensure quality communication in Ukraine”, “Market of voice telecommunications services” have been published.
Based on the knowledge of BRDO experts in the field of electronic communications of Ukraine, we emphasize the need to maintain a simplified taxation system for Ukrainian Internet providers, including legal entities.
We appeal to the CMU with a request to take measures to bring the position of the STS on the specified issue in line with the Tax Code of Ukraine, the Law “On Electronic Communications”, Articles 19 and 67 of the Constitution of Ukraine, in particular, to cancel the above-mentioned explanation of the STS.