What is the “Google Tax”?
What do well-known companies for many Ukrainians, such as Instagram, Netflix, Facebook, Spotify, YouTube, Microsoft, have in common with paying VAT in Ukraine? Quite a lot recently.
The “Google Tax” is an unofficial term for the value-added tax introduced by the Law of Ukraine No. 1525-IX of June 3, 2021, for non-residents, i.e., foreign companies that do not have a permanent presence in Ukraine and provide electronic services on the customs territory of Ukraine under the B2C rule—directly to individuals, including individual entrepreneurs.
The purpose of the Law is to increase the State Budget’s revenue from value-added tax by attracting new taxpayers and equalizing conditions for doing business in Ukraine for both residents and non-residents.
Who is liable for the “Google Tax”?
As mentioned above, the Law applies to foreign companies providing electronic services, which, according to their legislative definition, include:
“…services provided over the Internet, automated, using information technology, and predominantly without human intervention, including by installing a special application or app on smartphones, tablets, television receivers, or other digital devices.”
These electronic services include:
- Supply of electronic copies with access to images, texts, and information – this could be subscriptions to electronic newspapers, magazines, books, providing access to and/or downloading of photos, graphic images, video materials (e.g., Vogue, The New York Times).
- Access to databases, including the use of search engines and catalog services on the Internet (pertaining to search queries on Google).
- Supply of electronic copies and/or access to audiovisual works, on-demand video and audio works, games, including the provision of services for participating in such games, supply of access services to television programs (channels) or their packages, excluding access to television programs simultaneously with their broadcast over a television network.
- Provision of access to informational, commercial, entertainment electronic resources, and similar resources, including but not limited to (TikTok, YouTube, Instagram, Facebook).
- Provision of distance learning services on the Internet, the conduct and provision of which do not require human participation, including by providing access to virtual classes, educational resources where students complete tasks online, and grades are assigned automatically, without human (or with minimal human) participation – (e.g., Coursera or Duolingo).
- Provision of cloud services in providing computing resources, storage resources, or electronic communication systems using cloud computing technologies (Google Drive, Dropbox).
- Supply of software and updates to it, as well as remote servicing of software and electronic equipment (e.g., Microsoft, Adobe, BAS).
- Provision of advertising services on the Internet, mobile applications, and other electronic resources, providing advertising space, including by placing banner ads on websites, web pages, or web portals (Instagram, Facebook, Google Ads).
NOT considered electronic services:
- Supply of goods, services, orders (reservations) for which are made over the Internet, using mobile applications, and other electronic resources, and the actual supply is made without using the Internet (e.g., car rental services, catering services with product delivery, passenger transport services, etc.).
- Supply of goods and/or other services, different from electronic services, which include electronic services, if the cost of electronic services is included in the total value of such goods/services.
- Distance learning services on the Internet, if it acts exclusively as a means of communication between the teacher and the listener. Supply of copies of works in the field of science, literature, and art on material media.
- Provision of consulting services by email.
- Provision of Internet access services.
How to Identify the Recipient of Electronic Services?
In order for a non-resident to pay VAT in accordance with Ukrainian legislation, the place of service provision must be located on the customs territory of Ukraine. To determine this information, one should consider the actual location of the individual – the recipient of services, taking into account the following details:
- Provider’s location
- Mobile country code of the SIM card
- IP address
- Billing address
- Bank details
Procedure and Specifics of Tax Payment by a Non-Resident
The law sets the following requirements for taxpayers:
- More than 1,000,000 hryvnias – the total amount from operations conducted in Ukraine
A non-resident must submit an application for registration as a taxpayer if, as a result of the previous calendar year, the total amount from operations providing electronic services to individuals in Ukraine collectively exceeds the amount equivalent to 1,000,000 hryvnias, calculated at the official exchange rate of the Ukrainian currency to foreign currency established by the National Bank of Ukraine.
- Simplified Tax Declaration
For registered non-resident suppliers, a simplified procedure for VAT taxpayer registration is established. Such a declaration can be submitted remotely through the taxpayer’s Electronic Cabinet.
- Electronic Identification of a Non-Resident
This is initiated during the registration of a non-resident as a value-added tax payer in electronic form through the non-resident’s Electronic Cabinet, which provides electronic services, on the official website of the State Tax Service, including through the Unified State Web Portal of Electronic Services “Diya Portal.” Communication between the tax authority and the taxpayer will also be conducted through these resources.
- Tax Rate and Amount
The tax rate is 20% of the taxable base and is added to the cost of electronic services, except for operations exempt from value-added tax.
The taxable base and tax amount are determined in a foreign currency of the non-resident’s choice: in euros or US dollars.
- Document Flow Language
Reporting in the form of documents and forms is approved in two languages: Ukrainian and English. Additionally, taxpayers will have access to official English translations of document completion guidelines.
As of today, the goals of enacting the Law have been successfully achieved. Following the practice of European countries, the “Google Tax” has initiated positive processes in replenishing the State Budget of Ukraine. However, its implementation will undoubtedly lead to an increase in the tax burden on businesses and other users of electronic services through the rise in costs for end consumers.