By the end of this week, Rada promises to register a full set of bills that are needed to launch a special legal regime for the IT industry - Diia City. At the same time, industry representatives say they did not get exactly what they were promised.
In an interview with NV Business, Constantine Vasuk, Executive Director of the IT Ukraine Association, explained why the IT industry praises the Diia City concept, but has comments on the laws, and what needs to be done to ensure that IT professionals support all the efforts of the Ministry of Digital Transformation.
- What was the role of the IT Ukraine Association in creating bills for Diia City?
- The dialogue between the IT industry and the authorities began during the work of the previous government. At the same time, several industry initiatives were launched. Perhaps, for the first time in the history of Ukraine, the Ministry of Digital Transformation proposed a concept of regulating the IT industry, which departed from the classic "fiscal" approach. Earlier, when they undertook to reform the industry, they started with taxes - "you pay them insufficiently" or "you pay too much of them." This is almost the first time that the goal has been to stimulate the development of the industry, the inflow of investments, and to strengthen the protection of the rights of industrial entities. But specifically, these bills were written without the participation of the IT industry itself.
- Why?
- The Ministry of Digital Transformation has changed the approach to writing these documents precisely in technical terms, i.e. the writing itself. We formed common approaches and passed our vision to the ministry, where they instructed their experts to write the text of the bill. This process is managed by Denis Aleinikov as the legal-head of the project office and Alexander Bornyakov, who is in charge of Diia City in the ministry. We, in fact, have an "advisory voice": more than a week ago we were provided with the texts of the bills and we sent our comments to them.
- Did experts from other IT associations take part in writing the bills?
- Today, all 5 associations representing the IT sector are consolidated and communicate a common position. If representatives of some association took part, we would know about it. That is, I would like to emphasize that there was a dialogue with the Ministry of Digital Transformation, but we did not take part in the technical writing stage of these documents. None of the associations.
– Does the industry like Diia City as a concept?
- As an association, we support the approach and concept that was presented to the Digital Transformation and which was then improved. We perceive the concept of Diia City as an ambitious experiment that needs attention, deserves the right to live, and which, conceptually, we support. Cool, ambitious, interesting, but - an experiment.
Let's go back to the presidential decree on stimulating the development of the IT industry in Ukraine. When we talk about stimulating the industry, we mean that there is something wrong with this industry, that it is poorly developed or its potential is not fully realized. If we talk about stimulating the IT industry, it is worth talking about improving what we have, because the industry is growing by 30% per year. These are very cool indicators and attempts to improve them even more, probably, should be considered an experiment.
If in 2012 the industry came to the Government and asked for benefits, proposed a new law (which was then vetoed), today the state comes and brings benefits for the industry, which we did not ask for and which might not contribute to our development.
- I understand that you have questions about the implementation of the "experiment"
- The very concept of the experiment deserves attention, but its possible implementation raises many questions. In particular, the initiative proposes to establish a special regime for a limited number of industry entities - residents of Diia City. We have a big industry that is growing, and here is a project that offers incentives for a particular part of the industry to develop, but unfortunately does not address issues that are pressing for the whole industry. IT associations propose a comprehensive framework law that would develop the entire industry and would have among other things, a special regime of Diia City as an organic element of the law.
IT associations propose a comprehensive framework law that would develop the entire industry
Diia City seems like a voluntary choice, but in reality, it is an illusion. Diia City offers unequal conditions for residents and non-residents of Diia City. The special regime should be implemented for the whole industry as an element of a comprehensive law. For example, the Ministry of Digital Transformation promises to provide legal protection against the arbitrariness of law enforcement officers for residents. And what about the others? Let me remind you that we registered the bill "Masks-show stop-3", which offered to protect everyone. The document passed all parliamentary committees, but for some reason does not get to the deputies in the session hall. This bill completely closes the problematic issues for all businesses, and now they want to do better only for those who will be in a virtual cocoon. They wanted the best, but there was discrimination. If we create inequality in Ukraine, it will be used as a history of corruption. There is such a risk.
In the original version of the bill, companies that work with specialists using the individual proprietorship model could not become residents of Diia City. This looked like an artificial restriction on the ability to work with individual proprietors for residents of this special regime. After our remarks, this norm was removed. However, the part of the tax bill, which has not yet been submitted to the Parliament, still has a norm on the tax on withdrawn capital. This is generally a fairly progressive norm, but 9% of the additional tax on external payments (i.e. on the same payments to individual proprietors) plus the existing rate of 5% of income - is already 14%. This is an increase in taxation. The company must pay 9% to the individual proprietor, and then the individual proprietor has to pay another 5% of turnover and SSC.
In the dry residue - there are no restrictions in the law, but they are there. Once again, we return to "fiscal reforms", when taxation of the industry increases and will be 16%. Today it is 7%. So you can count.
– Is the IT-sphere not satisfied with the tax burden in Diia City?
- Raising taxes is only one problem. Individual proprietors and legal entities according to IT-COEAs (Classification of economic activities) pay all taxes following the current legislation and the contribution of the IT industry is growing from year to year. This is easy to see by reading the statistics. If the state wants to raise taxes, the IT industry is understanding. But such a step must be taken carefully and gradually.
Many companies are worried about another thing - the risk of retraining in the employment relationship with individual proprietors. IT can not be considered as other sectors of the economy, because here the IT specialist can work on several projects simultaneously, in different time zones and adjust the length of your working day. That is why the model of working with individual proprietors is suitable for the industry. And that's why it was kept in Diia City, with one difference - raised taxes. And what will happen to other companies that have not become residents for various reasons? It turns out they have no choice. And this is not right from a legal or moral-ethical point of view.
- Then what is the risk of retraining relations with an individual proprietor?
- The risk is that at any moment the state may recognize the relationship of the individual proprietor with the company as labor relations and make additional taxes and fines for the entire period of cooperation.
In Ukraine we have created something that the world is just coming to - a system of flexible interaction with employees, which is transparent in terms of taxation, is flexible and clear, it does not create complex obligations, and even solves the problem of transferring copyright to the software product. This model should be one of the options of choice: you in Diia City can work with a specialist under a gig contract, employment contract, or as with an individual proprietor.
I predict that if the risk of retraining is removed, the number of IT companies that will register a Ukrainian representative office, a Ukrainian company, and start paying income tax will increase. And such growth will take place due because individual proprietors who previously worked under sports contracts will be able to work with Ukrainian companies directly without any risks. Returning to the issue of taxation, I would like to note that the taxes currently planned in Diia City are very interesting for companies, but many of them are hesitant to become residents: they do not know how this model will work. This is an experiment. But if the experiment pays off, IT companies will join. If, of course, just do not threaten them with a whip - the risk of retraining individual proprietorship. I emphasize: the law must be comprehensive for the entire industry. It is now speculated that IT professionals need individual proprietorship to pay lower taxes. We are talking about individual proprietorship not as a model of tax optimization, but as a model of optimizing the relationship between specialist and company. If the gig employment model offered by Diia City solves this problem, it would be great. But it doesn’t do it.
- Why doesn’t it solve the problem?
- We are told that individual proprietorship is a "gray zone, a shadow model". And in the experiment, there is no clear understanding of how it will work. You can, of course, build a plane while flying, attach the wings and passenger seats. But it is doubtful that many passengers will want to experiment and get on an incomplete plane. Maybe if they are extremes, but I am not sure.
If you take the classic civil law contract - you do not need to invent gigs. It is enough to reduce the personal income tax to 5% under this agreement and it will contain everything necessary for the cooperation of a specialist with the company on a competitive basis. Why are complex systems being made instead? A complex system of administration will require the involvement of additional specialists, accountants. Why? There are many unanswered questions. For example - what if the company ceased to be a resident? What to do with the people? (gig contract loses force if the company loses the status of the resident - NV Business). Another question is how to administer gig workers? I understand that I want to introduce something new against the background of rapid changes in the world, but the "gig model" is not just a new language. This is a system term around which the whole system should be built at a time when there are already tested models of full-time employees and individual proprietors. If you want to give benefits to the IT industry, then lower the rate for full-time employees with IT-COEAs, or enter individual proprietorship in Diia City. But no, we are offered an experiment.
We propose to return to the texts of the bills and start over with the key issues.
- Are these the industry's main questions to lawmakers?
- Not at all. In the bill, we see the creation of a new regulatory body - the Ministry of Digital Transformation. At the same time, it is planned to give them very broad powers - from the definition of essential features, the criteria of a resident, to the exclusion from the list of residents. The Ministry of Digital Transformation becomes a regulatory and supervisory body at the same time - it even has the authority to inspect the activities of residents.
Yes, the Belarusian model is cool (based on the Diia City model of the Belarusian High Technology Park - NV Business), but what is the result? As a result, now, during the political crisis, Belarus is under administrative pressure on companies participating in the High Technology Park. They are all under the hood and now they are being repressed there. And we want the same model in Ukraine - regulator, register, hidden additional payments…
Another step is the Diia City Residents' Association, which requires mandatory membership. It is planned that such a fee is a certain percentage of the company's turnover. This is a discriminatory story: if you are not a member of the Association, you are expelled from Diia City. This Association is a regulatory body and I believe it will be a tool to restrict competition in the industry. And again, this is a choice without a choice.
Moreover, there is no declarative principle of joining Diia City. Profile associations wrote about it in a letter to the president, but it, unfortunately, was not implemented. And the criteria for eligibility of a Diia City resident are set subjectively.
- What do you mean?
- For example, there are "IT" -COEAs, and there are "non-IT"-COEAs. The draft law stipulates that the Cabinet of Ministers may establish the activities inherent to the participants of the Diia City. That means, marketing companies, advertising companies can become residents, and tomorrow we may have not 200, but 300 thousand IT specialists. The Ministry of Digital Transformation predicts an increase in the number of IT professionals to 400,000 in 2025, but I think if the bills on Diia City are adopted in the current version, then next year there will be 300,000 "IT professionals".
- In public communication, the Ministry of Digital Transformation promotes the idea of self-government in Diia City with the help of the Residents' Association, at the same time the ministry becomes a controlling body. Why so?
- This question is not for me to answer.
- Also in Diia City, among other things, the English law norms are promised …
- This is not in the bill, but I understand why. English law is a precedent. Its provisions are useful for IT in matters of copyright, but the functioning is possible only through the implementation of certain rules of English law in domestic law. There is no other way. And to do so, of course, is difficult. Therefore these norms have not been introduced yet, so as not to overload the document and it could "pass" in the Rada.
In general, we support the introduction of elements of English copyright law. This is really important for both product companies and startups, and especially for the gaming industry. Countries, where copyright issues are regulated, are becoming a magnet for investors.
We have much in common, but our approaches in the implementation of the concept differ
It is extremely important for us today to give the right signal with these projects, these experiments, that everything is getting better in Ukraine. Instead, we are signaling that things are getting complicated.
- Diia City worsens the situation in the industry?
- We see attempts to find a certain set of tools and legislate the rules of the game for the industry. There is communication between us and the Ministry of Digital Transformation, but now in the format of an exchange of feedback with wishes on the concept of the bill on Diia City. And that's all. We are not lawmakers. We are not even lobbyists for the industry in the full sense of the word now, because the lobby arises when there are problems and difficulties. We have not had any difficulties in the last 15 years of the industry's development in comparison with other branches. It was not necessary to make significant efforts and powerful resources for the lobby, because there was simply no regulation. It is obvious that the situation is changing because there are clear signs of risks for the industry, and we, the associations, must also respond accordingly and change approaches.
As for supporting the industry, let's take a look at how much attention is paid to education in Diia City. The answer is none. Education is perhaps the main factor in the growth of the industry. The problem of education is solved very simply. At the level of the law, it is necessary to lay the foundations for the development and training of those specialists who will enter the market in 7-8 years. Today, our IT companies are investing millions of dollars in the education of Ukrainian specialists. It is the business that invests, not the state. The demand for specialists, of course, is great, but it is the demand for senior-level specialists, and their shortage is growing every year. So, the issue of education is very important, and it is not mentioned in the law. Education is missed out, and it is the restoration of our human capital, it is talent and our future middle class.
- It looks like you are in opposition to the Ministry of Digital Transformation and Diia City.
- On the contrary. Our communication is consolidated from 5 associations. We take a partnership position and do our best not to pass the point of no return, to establish a dialogue, and, as a result, to prepare a bill that will really develop the industry, create new jobs and generate export revenue. Otherwise, ordinary IT specialists will come out tomorrow and say, "We don't want that." What will they do with Diia City then?
We are definitely allies. But if we offer one and end up with another, then there are probably communication problems somewhere.
We largely agree with the Ministry of Digital Transformation, but our approaches differ in the implementation of the concept. When we say that we do not want additional regulation - we get additional regulation; we say that it is necessary to introduce the declarative principle of joining Diia City - we see a complicated bureaucratic procedure; we say that we want to keep the tax burden - there are nuances regarding Withdrawn capital tax and SSC.
If we offer one and end up with another, then there are probably communication problems somewhere
I will draw an analogy. Imagine that we are in the gym on a treadmill. It is installed horizontally and you run on it, having energy and potential. Then this track begins to lift, change the angle. Now, to run at the same speed, you will need to spend much more energy. These bills are now an angle that can change for us, and for the IT industry to continue to grow in Ukraine by 25-30% annually, we will have to make a lot of additional efforts. And the track can be greased to slip.
- In your opinion, what are the chances that the bills, so to speak, will be more acceptable for the industry before the second reading?
- It depends on how the interaction between the Ministry and the industry will continue. Again, today, as an IT association, we represent only a part of the industry and do not claim to speak on its behalf in general. However, our association includes more than 50 companies of various scales, 9 of which are the largest IT companies in the country. This is more than 50 thousand IT specialists. We are an important part of the industry. I must say: this law may become acceptable not only before the second reading, but it may also be acceptable in the first reading if you work with it. The bill can be finalized in each committee. We are now, as always, very willing to cooperate, because, I repeat, this is the first attempt of the authorities to find a systematic approach to regulation and help the industry.
- What will change for the IT industry if the bills on Diia City fail in Rada?
- If the idea fails, and if the proposals of the associations are not taken into account, the opportunity to try new approaches and tools for the development of a growing industry, which today accounts for 3% of Ukraine's GDP, will be lost. At the same time, we will not get risks that we cannot manage yet. I would say the balance will be zero: if this bill does not pass, it will be unfortunate, but at the same time - not critical. The industry is likely to continue to grow. But we would like to get another scenario: to meet and talk about all the key points with the authors of the bills and, during its passage in parliament, to remove all complex and unnecessary regulations and fix transparent rules of the game for the Ukrainian IT industry for the next 15 years.
Source: NV Business
