How to help programmers save the economy?

20-04-2017

Source – biz.nv.ua

The Ukrainian IT-sector requires a special tax regime.

Recently, the emotional evaluation of the IT-sector has been changed dramatically. It keeps the image of an economy segment, which is the most promising and rapidly developing one, but there have been increasing accusations that this sector is in the category of resource sectors exporting the “brains” while evading taxes. Is it true?

A middle class with high incomes is the basis of democracy

While assessing industries and economic events, you should answer a simple question: “Does it make ordinary Ukrainians richer?”. The economy has its specific purpose and value – high incomes of households, and a rise of incomes should be the main task. After all, the middle class is the foundation of a democratic society.

Therefore, the GDP, investments, Ukraine’s positions in various rankings are important factors, but not the main ones. They are interesting only because, overall, population’s incomes depend on them.

Currently, it is painful to see the main indicator of the economic efficiency (wealth of the population):

According to the Global Wealth Report prepared by the Credit Suisse Bank, nearly 24.6 million adult Ukrainians (35.4 million) are among the poorest twenty percent of the world’s population. We entered the anti-Top 10 countries in the world by this indicator.

According to the report, the poorest 20% of the world’s adult population are:

– 70% of the Ukrainian population;

– 57% of the population of Ethiopia;

– 30% of the population of India;

– 25% of the Russian population.

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The poorest 20% of the world’s adult population

70% of the population of Ukraine

In such a critical situation, it seems natural and important to ask, “What will allow Ukrainians to become richer as soon as possible?”

Probably, right answers will contain such words as “institutions”, “ownership right”, “predictability” and others. We can not argue the sound receipt prescribing that “we need the rule of law” or any other similar answers. However, this way will take the decades, and we need the growth in incomes today.

IT is that particular sector dealing with the task of increasing incomes of Ukrainians under the existing environment. Why is it?

Rapidly growing and competitive

As a rule, in order to assess the general impact on the economic development in an unbiased manner, they consider a sector’s share of GDP, an amount of attracted investments, volume of exports and so on.

It should be said that the impact of these global criteria on income growth is rather indirect. For example, the increased share of the military sector does not mean improving the welfare of citizens (the USSR is a good illustration). And investments in various sectors have multipliers of creating jobs, which differ dramatically. For example, investing $180 million in the production and transhipping complex creates only 170 jobs, while their wages are hardly higher than the average wage in the country.

Therefore, I propose to assess the sector’s efficiency in creating a middle class in terms of average wages of people working there.

The export IT-sector (IT-outsourcing, IT outstaffing, RND-centers, etc.) is an absolute leader in terms of this indicator in Ukraine.

This sector creates jobs with an average salary, which is more than $2000 (according to the data of companies; relevant surveys). Each such job in the IT sector allows to earn ten times more than the national average.

However, a main number of employees involved in the export IT-segment is growing rapidly every year. While there were 42.4 thousand IT-specialists in 2011, now there are about 100 thousand.

It may seem that these figures are not as important for our great country. But according to the Ministry of Finance, in 2015, a rate of wages was as follows:

  • less than 25 000 hryvnas – for 9,802,768 people;
  • more than 25 000 hryvnas – for 91,063 people.

The statistics did not consider almost all IT pros, since they work as private entrepreneurs, often under foreign economic contracts. Thus, just the IT-sector created as many jobs as almost all other sectors altogether.

It is important that we are talking not only about small companies, but also about the large ones. Under the three-year economic recession, the armed conflict and migration waves, the largest players of the IT-sector systematically create new jobs with average wages that exceed 50 thousand hryvnas. And I remind that it actually creates the middle class in our country.

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The growth of Big Five companies

(Source – dou.ua)

I wish to draw your attention to the fact that the average age of IT-outsourcing employees is 27 years, and they know at least the English language. This means that the middle class is growing allowing for mobile educated young people who may leave the country, but may stay in Ukraine if there is a decent work at home.

According to PwC, EBA and Luxoft forecasts, the number of people working in the export IT-sector will reach 140-180 thousand specialists by 2020; there are the experts who are more optimistic and talk about achieving the number of 200 thousand. That is, the IT-sector will create from 40 to 100 thousand new jobs with the average wage above 2 thousand dollars in the next three years. Considering the average size of households in Ukraine as 2.6 people, this fact will raise the living standards of 100 -260 thousand people dramatically.

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A number of jobs in the IT-sector: 42.4 ths. 100 ths. 160 ths. 2011 2017 2020 (forecast)

A model of self-employed individuals slows the sector’s development

And we see the growing conflict here. Thus, the IT-sector is a leader in terms of investments in human capital. Expenditures on the service IT-sector staff are 50-80% of the cost structure. At the same time, in the sector of industry, labor costs sometimes do not exceed even 10% (prime costs – raw materials, equipment, etc.).

Therefore, India, Belarus and Kazakhstan adopted special tax regimes for the IT-sector.

Ukraine does not have a special tax regime for IT, and, in practice, it is replaced with the single tax.

How it works: companies enter into contracts with employees as with self-employed individuals and pay much lower taxes than with usual employment.

taxes under model of self-employed individuals taxes under employment contracs
5% – single tax 18% – personal income tax
704 hryvnas – unified social tax 22%* – unified social tax

*Is not paid from the salary part exceeding 25 living minimum wages (it is 38,600 hryvnas for today)

1.5% – military fee

It should be admitted that an average IT-pro pays almost the same amount of taxes as an average Ukrainian:

  • Taxes of an average IT-pro = 50,000 hryvnas (income) * 5% + 704 hryvnas = 3204 hryvnas
  • Taxes of an average Ukrainian = 6,008 hryvnas (salary) * (22% + 18% + 1.5%) = 2493 hryvnas and 32 kopecks

However, budget revenues from a single tax of IT-pros increase every year.

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Dynamics of growth in taxes from the IT-sector

Although the model of self-employed individuals is convenient for IT-companies now, it does not allow the long-term planning and thus hinders the sector’s development. The reason is that the prospects of using this instrument are undefined on a nationwide scale. Relations with self-employed individuals can be qualified as the labor ones, or a system of regulating the single tax can be changed prohibiting IT-companies to use it. The published IMF Memorandum providing the strengthening of requirements to the simplified taxation regime starting from January 1, 2017 confirm chance of this negative for IT-sector scenario.

Therefore, the Better Regulation Delivery Office (BRDO) together with relevant associations and market players would like to consider possibilities to develop and implement a legal mechanism that will ensure the further development of IT-industry and create quality jobs in Ukraine.

The task of such a mechanism is to provide companies with long-term guarantees of stable tax conditions, which are competitive in the international market, ensure the creation of new jobs and increase the inflow of currency and tax payments into the country.

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