Last months of 2010 Ukrainian IT outsourcing went through the turning point in its history, the second after Global Crises, this time by weathering the Tax Code reformation. Many international observers agreed that never before in history of this young, but very dynamic industry in Ukraine have players been as united as in those critical days.

The Ukrainian hi-tech sector which began to form itself since Ukraine gained independence (first IT outsourcing contract in 1991) just for several decades developed in the strong and dynamic industry, which value by skeptical analysts exceeded 1 billion USD in 2010.

In recent report by Global Services Advisory Ukraine was ranked 11th ITO destination worldwide and 1st in the region. Another research made by Central and Eastern European Outsourcing Association in 2010 ranks Ukraine first in CEE region in the following categories:

• Market Volume
• Number of specialists involved in IT industry
• Market Growth

With the overall amount of IT outsorced services exported by companies from CEE region comes to USD $4 billion, Ukrainian share accounts for a quarter of that sum with annual growth rate 9.51 percent, while the number of hi-tech specialists employed in Ukraine reaches 20,000.

Favorable Climate Facilitated Growth

Such a positive growth of Ukrainian hi-tech sector has been conditioned by numerous factors which either were inherited from Soviet Union such as strong engineering potential and educational system or gained trough recent times among which “orange revolution” and pro-western re-orientation.

But many experts agreed that those indicated factors together with unique geographical and cultural advantages which lifted Ukraine to the top in outsourcing arena were multiplied by possibilities provided by the favourable tax and law climate offered to Ukrainian hi-tech sector.

Since its Independence Ukrainian tax system offered probably the lowest, comparing to other outsourcing destinations taxation rate in IT sector. Most companies in the sector worked with the private entrepreneur model, where employee acted as a self-employed entrepreneur and worked under a direct contract with his employer otherwise to the payroll model.

In this model the so-called employee had an honest single flat tax (0.24 percent from gross revenue with limit of 500,000 UAH) which in many cases was sponsored by an employer. Thereby either employee or company had to pay trivial 1,200 UAH from annual income of 500,000 UAH. No other national IT industry could offer such tax holidays.

Flashing Point

It came as no surprise that once talks about Tax reform in Ukraine were sounded by politics all software vendors alarm the bell. The first draft Tax Code submitted by Parliament wasn’t even close to what had been hoped for in tax reform, and, in fact, contained a numerous new provisions that negatively impact the business environment in Ukraine and the IT outsourcing industry in particular.

Under the new code not only taxation rate skyrocketed by 40 percent, but the whole model was impossible as self-employed entrepreneurs were deprived of possibility to work for one client (read employer) and export their services under the single flat tax.

The serious concerns arose across the country. Being supported by established local and international organizations and associations such as European Business Association, American Chamber of Commerce in Ukraine, Ukrainian IT Association and other major industry players immediately responded to the government over the draft of proposed Tax Code.

Levi9 Ukraine joined forces with American Chamber of Commerce and other companies to establish a working committee which aim was to form a collective position of IT business community and actively collaborate with the government over upgrading Tax legislation to improve business climate.

The established working committees and national IT associations managed to establish close cooperation with the government, namely Deputy Prime Minister Sergei Tigipko, who headed the working committee responsible for the Code, to provide Code feedback and amendments to the much disputed draft document.

Discussions about the Tax Code have been underway for almost three months and IT companies were actively seeking improvements to the draft Tax Code as the original draft of tax reform might have seriously damaged the development of the industry.

Fortunately to the industry, the government came to realization of the seriousness of consequences for the future of most dynamic industry and reacted on the appeal to harmoniously upgrade and adopt new Tax Code.

As a result of this cooperated work and structured approach the following crucial amendments have been added to the Tax code with regards to IT industry:

• IT companies can book payments for Private Entrepreneurs IT services/work as COST
• Private Entrepreneurs in IT area can get 100% of its income from just one client
• Private Entrepreneurs in IT area can fulfill foreign-economic activities
• VAT interpretation problem for IT service providers was solved

Moreover, as a result of close cooperation between government and IT sector representatives it became known that Ukrainian IT Association is preparing a proposal for government to establish an economical experiment for 4 years to facilitate the development and growth of the industry.