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Ukraine moves closer to digital services VAT

Ukraine has passed a draft bill that would impose VAT on foreign supply of digital services. VAT will be applied in cases where foreign companies supply digital services to customers in Ukraine. The digital services VAT applies from 1 January 2022.

What is the purpose of Ukraine’s digital services VAT?

As with similar measures in other countries, Ukraine’s new digital services VAT aims to enhance revenue collection and create a level playing field for local and non-resident businesses.

Note the threshold

According to the initial draft of the bill, nonresident businesses are liable for digital services VAT if their trade exceeds a threshold of ₴1 million (equivalent to a little more than €30 000 at the time of writing). Be aware that the final regulations may contain amendments to the first draft of the law.

What are digital services?

Ukraine’s digital services VAT will apply to Cloud software services, online advertising, gaming and streaming services, among other digital services. As the definition encompasses a wide range of digital services, businesses should consult a VAT expert if they have any doubts about their obligations. 

The global rise of digital services VAT

Why is digital services VAT becoming such a ubiquitous policy tool? 

Firstly, for the obvious reason that digital technology is increasingly central to the global economy. As such, authorities are updating tax regulations to account for online services and e-commerce. In the EU, for example, a suite of new VAT policies were designed to simplify distance selling VAT compliance

But there’s another important factor. Digital services are by their nature global in scope. There are low barriers to entry to providing digital services to customers in countries outside of a business’s base of operations. 

For that reason, domestic companies increasingly find themselves competing with nonresident businesses. And in cases where nonresident businesses are exempt from VAT, those nonresident businesses thus have an obvious competitive advantage. For that reason, digital services VAT on foreign companies can help to create a more level playing field.

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