Neither Hollywood, nor Facebook can appear in a country with value added tax

“We will continue our work,” this is how Viktor Yanukovych Jr. reacted to his father’s vetoing his legislative initiative. “When there are some contradictions left you have to agree on them while you are still on the shore. If there is a chance to improve the suggested initiative, we will work on it and will achieve positive results,” Yanukovych Jr. wrote on his Facebook page on The Day when the official website of the parliament reported that the president returned for revision the laws on tax incentives for IT-industry adopted by the Parliament on May 24, 2012. The Day got the exclusive interview from MP Viktor Yanukovych Jr. on the prospects for compromise and the fate of IT-laws.

Objectively, the national software industry is an extremely powerful innovative and intellectual cluster of the economy of Ukraine which has been growing in high rates. Even in time of the global economic crisis, its growth was more than 30 to 40 percent per year. Therefore, as noted by experts IT-industry, as one of the most progressive sectors of the economy, requires progressive legislation for its further development. Otherwise, without such “incentives,” national IT-industry will simply not have enough resources to compete in the international market. And, it seems, that there is more understanding of this at the level of government offices now. However, judging from the event of the last week, it is not the same in all of them.

IT experts do not see any other mechanism to solve their problems except to have a personal meeting with the president. “We sent a proposal to have a meeting with the president. We have no other way to solve this issue,” said Ihor Lysytsky answering The Day’s question about prospects for reaching a compromise. “I am certain that if we met in person we would manage to convince the president that we suggest really important things for the industry.” However, at the moment they have no information about possible meeting.

Meanwhile, Oleksandr OLSHANSKY, president of Imena.UA company and the owner of online business (Mirohost.net; Banner.kiev.ua; Mail.ua; Pingwin.ua; Avanport-Design.com) in an interview to The Day noted that the whole point of the initiatives is only one tax – outdated for the modern world VAT.

What do you think about the president’s refusal to sign your legislative initiative into law? For the market has in fact celebrated victory after the Verkhovna Rada vote. Do you have to comfort IT businesspeople? What are you saying to them?

“Every law is subject to a certain adoption procedure. And the more progressive the initiative is, the more difficult it is to put it into practice. If we find an opportunity to improve these documents, we will do so.

“There are no grounds to say today that the laws will not come into force. We have received support from society as well as the Cabinet of Ministers and the Verkhovna Rada. We have walked too a long road to drop from the ultimate goal – to create as lucrative conditions as possible for the development of the national IT industry.

“Unless our IT sector has these stimuli, it will lack the ‘margin of safety’ to withhold competition on the international market.”

According to parliament’s official website, the president did not like the introduction of a special method to assess and pay a unified charge for mandatory state-sponsored social insurance by a sectoral principle. The head of state’s administration believes this is a violation of the Constitution and the equality of entrepreneurs before the law. Are you prepared to give up this mechanism?

“It is one of our fundamental positions that there is no contradiction here with either the Constitution or the new Taxation Code or any other laws of Ukraine. Taxation conditions should be created with due account of the needs of a concrete industry so that it can reveal its potential as much as possible. The states that are vying for leadership on the IT market – the US, India, Singapore, and Belarus – have already embarked on this path. If we remain on the fringes of these processes due to ‘egalitarianism,’ we will lose competitiveness forever.

“In any case, we will be looking for the compromises that will suit all the sides.”

The president considers it necessary that the law identify the software businesses that are eligible for governmental support. Out of what considerations were they not identified? And do you have a clear idea of who will be included in this circle?

“Law No. 9744 clearly sets out to which sectors special taxation conditions can be applied. The president suggests introducing such a special definition as ‘software products.’ This should be done without a shadow of a doubt.”

Interestingly, the president considers it unacceptable to cut the tax rate on the income of software industry employees to 5 percent (on which IT market players insisted as a key point of special conditions). Conversely, Mr. Yanukovych proposes excluding these provisions from the law. What kind of a compromise decision will there be?

“We are sure that our proposals will find understanding and support because this will allow IT companies to ‘walk out of the shadow,’ officially recruit the staff, and provide the latter with stability and confidence in tomorrow.

“This approach will make it possible to create thousands of new highly-paid jobs. This will be to the benefit of everybody – market players and the state as a whole.

“The [Presidential] Administration’s proposals do not take into account market calculations, and, as far as I know, representatives of this industry have already turned to the president for a personal meeting in order to defend their position.”

How long do you think it will take you to modify the law?

“We will make every effort to cross the I’s and dot the T’s during the current [presidential] term.”

“The fact that the president won’t sign the bill on special terms and conditions for the IT industry is self-apparent. The only question is whether this will happen now (I mean the president’s veto) or later, when this mode will start being canceled ‘behindhand.’”

Why?

“This is the fourth attempt in the past decade to provide preferential conditions for the IT industry. In fact, the problem is that these businesses are fleeing Ukraine and the process has acquired a disastrous scope. There are many reasons, particularly the value added tax. For those who specialize in intellectual products all their value is added. In other words, VAT for them becomes a sales tax. No business can endure paying 20 percent of the turnover. This isn’t a specific Ukrainian problem. The matter of prohibiting VAT is raised in a number of countries, considering that this tax emerged before the information era. Simply put, this tax has become obsolete. It doesn’t exist in the United States and Japan that are the world’s leading hi-tech suppliers.”

What do you think will be the outcome of this last attempt to legally seal preferential conditions for the IT industry?

“I can think of three scenarios. First: nothing happens, period. That’s bad because the IT industry will disappear in Ukraine. Second: the bill will be revised and the president will sign it. It will cancel VAT for the IT industry and the procedures will be simplified and made absolutely transparent. By the way, this wouldn’t take re-inventing the wheel. There are certain procedures whereby VAT is nullified, the way it was lifted from health care and medical drugs. I mean, this wouldn’t require drawing up a bill, and so on. I think VAT isn’t the main point in the bill at issue. There are innovative clauses concerning income tax and uniform social contribution that are simply unrealistic.”

In other words, IT business could do without them.

“It’s like when they ask me whether this bill is useful for IT business. It’s like asking whether a perpetual motion machine is useful. It is, but there is none.”

You said there are three scenarios and mentioned two. What about the third one?

“It’s the best one, but it will take time. The state will have to prohibit VAT, sooner or later. I mean not only Ukraine. Other countries will have to do just that, so the first to do so will be riding high.”

You said this is the fourth attempt in Ukraine [to provide preferential conditions for IT business]. Meaning the previous three attempts failed. Why?

“The idea of sectoral economic regulation, with one sphere having other tax conditions than the next, is a half-measure. Such methods can serve to extinguish the fire, but you won’t live long with them. The IT sphere is on fire and Ukraine risks losing this most promising industry forever. Therefore, preferential conditions, without the VAT, are good for such businesses, but globally speaking, our tax system isn’t fit for the modern world.”

You say the result is a tempestuous migration of Ukrainian IT business abroad. Any statistics over the past couple of years?

“Here is the best one. There isn’t a single Internet company in Ukraine that answers the world standard. This is more than surprising, considering Ukraine’s place in the international division of labor, in terms of software. Russia has Yandex and mail.ru; Estonia, this small country, has Skype. Ukraine has none. This sends red lights flashing.

“There are quite a few companies across the world where one can find a Ukrainian ‘trace,’ yet none of them has any formal contacts with us, and never will. Once something worthwhile emerges in Ukraine, it immediately flees to the United States. Today, an expert doesn’t even have to fly there. And so we keep working for the benefit of the States, probably because we’re so rich we can afford this.”

Is this problem understood “upstairs”?

“Yes, to an extent, I’d say on a minimum level. You can’t knock your head against a brick wall for 10 years and understand nothing. We lack the understanding that this is a global problem, that it doesn’t concern just the IT sphere; it is simply most apparent there.

“Computers, IP telephony, refrigerators, washing machines, air conditioners were all invented in the United States. All this serves to change our reality. Try to think of an invention in Europe after WW II that has made a strong impact on our life. There are none. And nothing will work for as long as we have the VAT. It is a very serious problem, indeed, and we have just started realizing how serious it is. Americans realized this 50 years ago. They sell know-how all over the world. Hollywood, the Internet, pharmaceutics – intellectual work has the lion’s share there, without material losses. Intangible assets make up 90 percent of any medical drug, precisely what we pay for. There can be no such commodities in a country with a value added tax, because all their value is ‘added.’ Nor can there be Hollywood, the Internet, computers, Google or Facebook. VAT is a tax incompatible with the modern world.”