The Ukrainian regulators introduced a package of “E-Commerce” legislative changes to the Tax Code, in June 2021 to address the necessity of ever-growing expansion of the digital economy in the country. This sort of reform could be most vividly described through the adoption of the amendments that addressed the change of tax treatment of the foreign providers of digital services.
At the time, the Government was searching for the best possible measure on how to reduce the fragment of the VAT gap that was derived from the provision of Electronically Supplied Services by foreign digital providers. The adopted measures introduced the VAT liability for foreign digital service providers after the stipulated threshold is surpassed.
The amendment to the Tax Code opens the doors for the Tax Authority to use different channels by which it can pursue the enforcement of the strict provisions when foreign taxpayers are operating in a non-compliant manner.
This is most transparently observed through the measure where the specifically designed department of the Ukrainian tax authority can reach out directly to the foreign tax authority where the non-compliant foreign provider of digital services is established, seeking for sort of collaboration to “put” the non-compliant platform operator in the tax framework of the country where the services are delivered.
Leveraging the instituted provision, the Ukrainian tax authority has reached out to the Canadian Tax Authority, through a public notification, looking for help, to be able to enforce its provisions of the Tax Code concerning indirect tax liabilities of the digital platform, which is established and has a place of business in their country.
This foreign digital platform is the globally largest distributor of “adult content”. This platform is better known as PornHub. The management company that “stands” behind the PornHub, has its place of business in Canada, this is why the Ukrainian tax authority has reached out to Canadian tax authorities.
To enforce the applicability of the local tax provisions, the Ukrainian tax authority sent a formal notice to the management company of PornHub to pay a fine in value of around USD 5,500 for not registering for VAT when the conditions were met.
Alongside the formal notice to the platform operator, the tax authority has reached out to the Canadian tax authority to raise awareness that the digital platform that is established in their jurisdiction isn’t cooperating with the stipulated rules of the Ukrainian Law.
This formal procedure was orchestrated last December.
The effort of the Ukrainian tax authority made a great result. The digital platform operator that manages the PornHub platform, is registered under Ukrainian Law as the taxpayer.
The parent company that manages the PornHub platform, registered for VAT on May 2, 2024, as a provider of electronically supplied services in Ukraine.
Enforceability of the Law
The perseverance of the Ukraine tax authority is without a doubt, a great triumph of the rule of law. Founded on the flexibility of the provisions of the Tax Code, when it comes to the possibility of moving “the borders” in looking for a way to track non-compliant digital platform operators, and “instruct” them to get VAT registered, is without any doubt a worthwhile achievement.
It shouldn’t be forgotten that we are speaking here, about a multi-million dollar business stronghold. The numbers don’t lie, it’s calculated that approximately the Ukrainian tax treasury will receive more tax-generated income from PornHub in comparison to competitor Only Fans.
Platform provider Only Fans, which is also a provider of “adult digital content” has transferred in the state budget around USD 700,000 for the first quarter of 2024.
Foreign Providers of Digital Services that operate cross-border are witnessing the continuous adoption of new regulations across the globe, as a mandatory requirement to make local tax authorities able to enforce indirect tax rules upon these service providers. The Ukrainian indirect tax system specifically designed for non-established providers of digital services(both platforms and online vendors), shows that Governments all around the world will persistently seek to develop new mechanisms to be able to enforce local rules upon the non-complying service providers.
The battle of the Ukrainian tax authority to make a foreign digital platform compliant is a straightforward answer when there is a good mechanism in place, derived from strong legal foundations, it’s always possible to track the taxpayers who aren’t operating under the law.
Aleksandar Delic
1stopVAT Senior Indirect Tax Researcher (Global Content)