There are more than 212,000 IT specialists-sole proprietors in Ukraine. This is 16% more than last year. IT services are included in the top 3 items of Ukrainian exports to the United States, and in general, the export of computer services from Ukraine in 2020 amounted to more than $5 billion. At the same time, the IT sector in Ukraine has great growth potential and experiences a certain shortage of professional staff and investment.
What hinders the more active development of the Ukrainian IT industry, how and how much can it grow, and what will be the consequences of imposing the special regime Diia City for IT? We asked Tymofiy Mylovanov, President of the Kyiv School of Economics and former Minister of Economic Development, Trade and Agriculture of Ukraine, about this.
About taxation: Sole proprietorship or Diia City
- The Ukrainian IT sphere is now actively developing and growing. At the same time, some international IT companies are in no hurry to open their offices in Ukraine. Why? What hinders Ukraine from attracting foreign investment in IT?
- International companies are often dissatisfied with the widespread practice in Ukraine of involving sole proprietors in the working process. For Ukrainians, such a system of employment is acceptable, but for international companies it is not, because the system of sole proprietorship is the shadow one.
Therefore, international companies work under the standard taxation system. They are forced to pay 41.5% of taxes as opposed to 5% paid by sole proprietors. This creates an unequal playing field. It is beneficial to Ukrainian companies already working on the market, but not beneficial to foreign companies that want to enter here. In the end, multinational companies lose out in the competition to those who are not concerned about this.
When I was the Minister of Economy, I met with representatives of Samsung. From that conversation, I remember that the Ukrainian branch also complained about the widespread model in Ukraine of involving workers from the number of sole proprietors.
Given this practice, such companies usually decide to develop in other countries. It is more profitable for them to create jobs in Polish R&D centers than in Ukraine. Samsung is unfortunately not the only example.
- How can we rectify this situation?
- The presence of foreign companies on the market and favorable taxation under the law, and not in the "shadow" zone, create opportunities for attracting capital. Now a transparent approach to the taxation of salaries in IT is offered by the special regime Diia City. In fact, it fixes the tax burden at the same level sole proprietors pay now at.
- The Diia City project is supported by such IT companies as, for example, Reface, Genesis, and EPAM. At the same time, the project has many opponents who regard Diia City with prejudice. Why do you think this is happening?
- The presence of foreign companies is both a threat to competition for Ukrainian companies, and at the same time an opportunity to develop. Depending on whether the company sees more threats or more opportunities, it forms its attitude to Diia City.
Those who regard the wide presence of foreign companies as an opportunity to sell them their products, attract even more international capital, and finally get an intellectual spillover from them—are "for" Diia City. Those who compete with Samsung and see threats for themselves in a situation where Samsung will pay a conditional 5%—are against.
This conflict accompanies every reform. And we saw a similar one when we worked with the team on implementing the land market. However, the transparency of the system leads to a greater inflow of large capital. It is worth remembering that with the introduction of systemic changes, it is not only the "piece of pie" that matters. The pie itself is getting bigger.
The fear of changes will quickly pass. Ukrainian companies that are faster and more flexible will benefit from Diia City. Overall, the market will benefit.
- The tax burden in Diia City is proposed to be fixed at the following level: personal income tax—5%, single social security tax—22% of the minimum salary, military tax—1.5%. Companies will be able to choose the corporate tax: either profit tax at the level of 18%, or tax on distributed profits—9%. Thus, the tax burden for companies will decrease several times. Skeptics say this could lead to lower tax revenues. Is it worth fearing?
- Diia City is a good pilot project. Of course, some have fears that tax revenues will decrease because of imposing the tax on distributed profits (TDP) at a rate of 9% as an alternative to income tax at a rate of 18%. But there is also an option that companies that did not pay this tax at all will come out of the shadows and start paying.
- What will be the overall result of implementing Diia City?
- The question is empirical. In 2—3 years we will understand. Then we can either extend this experience to other areas, or change the regulation rules to improve the situation. This is the essence of the pilot.
About IT education
- Now it seems that most people try to join the IT sector, and this market will soon become oversaturated. Are there really enough IT specialists on the market?
- No, not enough. The people we really lack in IT are another fundamental limitation for the IT industry development in Ukraine.
Annually, about 15,000 bachelors graduate in IT specialties. But the quality of their training is an open question. In order to increase the share of IT in GDP to 10—15%, it is necessary to reform the structure of IT education as a whole—from schools to Bachelor's and Master's programmes. as well as courses.
- And where should we start reforming IT education in Ukraine? Who or what can be the driving force here?
- Business can solve this problem on its own. We need to establish universities. There are already good examples. For example, EPAM is now entering the American University in Kyiv. The Kyiv School of Economics, for its part, together with Sergey Tokarev, a founder of the technology company Roosh, plan to launch Computer Science University in Kyiv this year. It will follow the example of Stanford. By the way, we will try to join Diia City with this project. And in partnership with Vladimir Mnogoletniy, co-founder of the company Genesis, we are making educational courses and our own product school. Mate Academy, which has taught IT skills to thousands of people, is also a good example.
In addition, companies can train specialists via corporate universities, as the company SoftServe does. But the problem is that this is just a skill enhancement. And the challenge is that it is necessary to involve people from other areas in IT.
If we are talking about training professional IT specialists, they often lack business skills. They will be especially needed when the Ukrainian IT industry starts moving from outsourcing to product IT.
I believe that businesses will invest in education, look for educational partners and create schools on their own. The future of the industry depends on this.
On future of Ukrainian IT industry in Diia City
- Soon, at the beginning of 2022, the Diia City project will be launched. What do you expect from it?
- The Diis City launch, as well as the IT education reform, can give a good impetus to the Ukrainian IT industry. The main thing when launching a special regime is that the IT companies that support it show by their example that they are joining a special regime. Then 80—90% of IT companies will also become residents of Diia City. After all, if your competitors and partners join it, then you will want to become a resident as well.
In that case, I'm expecting an explosion. The income of the IT industry can grow significantly. I expect that the share of IT in the structure of GDP will not be a few percent, but 10-15%, or even up to 20%. This will happen when we get enough resources—people. To do this, we need to train them.
Diia City can impact not only the IT industry, but other areas as well. It can form a brand of Ukraine abroad. If Diia City "makes a hit", we will create Ukraine’s reputation as an IT destination with comfortable tax and legal conditions.
However, the most important effect of Diia City is not in taxes or gig contracts that will allow companies to transparently hire specialists as opposed to the sole proprietors. It lies in the fact that the industry is showing a role model: you don't have to wait tens of years to change something. You can create effective rules of the game in your specific area: taxes, self-regulation, education, etc.
- And is there any element that Diia City lacks?
- I regret that the clause on the obligatory self-regulatory organization of residents was removed from the law on Diia City. It seems to me that it would be good for the community to direct part of its income or turnover to education or other needs at its discretion. This would allow the industry to develop much faster and serve as a good example for other areas.
- How can the imposition of Diia City impact other sectors of the economy, besides IT?
- I hope that other industries will mature and instead of expecting something or fighting with someone, they will move on to constructive cooperation with the state, as happened in the case of Diia City. In particular, I expect Diia City to lead to similar projects in other industries. If Diia City leads to Agro City, then there'll be no stopping it—the entire economy will develop.