The State Tax Service wants to ban providers from working on a single tax

The State Tax Service of Ukraine has addressed the Ministry of Finance of Ukraine with a proposal to consider abolishing the simplified taxation system (STS) for business entities engaged in the provision of Internet access services.

The Expert Council for the Preparation of Generalized Tax Consultations under the Ministry of Finance is planning to consider this issue in the nearest future.

The Internet Association of Ukraine addressed all members of this Expert Council: Letter No. 17/1-34 dated 05.03.2024 to the Expert Council on the Preparation of Generalized Tax Consultations under the Ministry of Finance on the Application of the Simplified Taxation System by Taxpayers Engaged in the Provision of Internet Access Services.

The appeal of the UAA contains a clear legal argumentation that the prohibition of the simplified taxation system for Internet access providers (code IA.S1 of the Indicative list of types of electronic communication services under Classifier of economic activities 61.90) is illegal and unreasonable.

In addition to the fact that such a decision will be illegal, the EBA emphasizes a number of negative social, economic and security consequences of the abolition of the STS, especially devastating during the war, in particular

• the abolition of the simplified taxation system for small businesses in the field of Internet access will disrupt the market balance and lead to the takeover of small operators by large ones;

• monopolization of the market and reduction of competition will destroy the unique advantages of the industry and lead to an increase in the cost and deterioration of the quality of Internet access services and mass consumer dissatisfaction;

• the abrupt abolition of the simplified taxation system will lead to the simultaneous termination of services by a significant number of small business operators and will leave a significant number of consumers, especially in rural areas, without communication services for some time;

• the abolition of the STS will force those small businesses that will remain "afloat" to hire additional administrative staff and increase direct costs, which will reduce tax revenues to the state budget;

• small and micro enterprises in the industry have Ukrainian owners and keep their profits in Ukraine, while almost all large operators, which will increase their market share if the STS is abolished, have foreign beneficiaries who are objectively interested in withdrawing profits from Ukraine;

• changing the interpretation of legislation depending on the situation spoils the image of the state and leads to a loss of confidence among entrepreneurs and international investors and threatens to withdraw capital abroad;

• the abolition of the simplified taxation system and the withdrawal of small businesses from the Internet access market will worsen national security and the sustainability of Internet networks, as cyberattacks and bribery of personnel to destroy network management systems are more effective against a small number of large players in the access market than against a significant number of small ones (as shown by the recent experience of cyberattacks on large Ukrainian operators).

The IAU notes that if the state really needs to deny small businesses in the electronic communications sector the use of the simplified taxation system, it should use the mechanism of changing legislation, not changing the interpretation of legislation, and entrepreneurs should have time to adapt to the new rules of doing business. But such changes to the legislation, if necessary, should not be implemented during the war.