So, let’s get started. The key point is to distinguish between consumers and clients of Google. This tax issue only affects clients who order services from Google. It does not concern individuals who simply use Google search every day.
Understanding the necessary terminology
Non-resident - A company providing services but legally registered in another country.
VAT - Value Added Tax (20% in Ukraine), which has a specific accounting structure within a company’s bookkeeping as a balance of incoming and outgoing tax.
Legal entity - An economic entity with registration status that represents its interests as an organization.
Individual - A person participating in economic relations in their own name.
Who and when pays VAT?
Let’s consider an example based on Google advertising. This is simpler since there are currently three payment schemes in operation.
➊ If a legal entity that is a VAT payer orders Google Ads services – a legal contract is concluded with LLC "Google," which is registered in Kyiv and acts as a conduit for the funds. In this case, the invoice includes VAT. The enterprise pays it but receives a tax credit in return, so it incurs no financial loss.
If the legal entity is not a VAT payer, then LLC "Google" does not provide a tax credit, and the financial loss is borne solely by that legal entity.
➋ If an individual pays for services – an invoice is generated for LLC "Google," including VAT.
➌ If an individual makes a payment online with a card – the payment is processed through an international bank outside Ukraine, meaning VAT is not applied. This is the situation that the government dislikes, as millions of funds can flow without VAT.
The government cannot resolve this issue simply by issuing a government decree. It’s all about the legislative framework.
What actions are being taken by the government?
Currently, the solution to this issue is being discussed in the Verkhovna Rada of Ukraine.
A draft law has been developed and is under discussion: "Draft Law on Amendments to the Tax Code of Ukraine regarding the Cancellation of Taxation of Income Received by Non-residents from Payments for the Production and/or Distribution of Advertising and Improving the Taxation Procedure for Value Added Tax on Transactions with Non-resident Electronic Services for Individuals".
The following committees are involved in the development:
- Committee on Finance, Taxation, and Customs Policy.
The following committees are participating in the discussion:
- Committee on Digital Transformation
- Committee on Economic Development
- Committee on Humanitarian and Information Policy
- Committee on the Budget
- Committee on Anti-corruption Policy
- Committee on Ukraine’s Integration with the EU
The draft proposes to make non-resident companies providing electronic services to individuals with annual income exceeding UAH 1 million VAT payers at a rate of 20%.
Consequently, the VAT payment will fall on the shoulders of the clients ordering these services – the advertisers. As a result, advertising costs will increase.
The author of the law suggests that this implementation could generate up to UAH 3 billion per year for the state. However, frankly speaking, if we consider the size of the digital advertising market in Ukraine and its clients, such figures are far from realistic. Individuals do not have such turnover, while top clients are already VAT payers, and it is beneficial for them to make payments in non-cash form.
This draft could have been easily analyzed by exporting the registries from the NBU of payments made by individuals to non-residents to calculate amounts and the feasibility of this introduction. However, the process has already been initiated, and we expect this to negatively impact microbusinesses and individual entrepreneurs.
What’s the global practice?
For example, in neighboring Russia, this law has already been enacted, and all customers of foreign companies’ services pay VAT unconditionally. A similar situation exists in many developed countries.
What should you do?
Work with your accountant and advertising agency to optimize this situation. Some suggest looking for countries where this law hasn’t been enacted yet. However, you also need to find a resident of that country, which can become unreliable in this scheme.
In any case, you can reach out to us for consultation. Our experience and knowledge will surely be beneficial to you.
P.S. On February 17, 2021, the Verkhovna Rada of Ukraine approved in the first reading the draft law on the introduction of VAT on electronic services for foreign companies. To finalize this draft law, it must be approved by the Verkhovna Rada in the second reading. Therefore, we are closely monitoring the developments.
P.P.S. On June 3, 2021, the Verkhovna Rada adopted in the second reading draft law No. 4184, which introduces VAT on online services from non-resident companies. A transition period for non-resident companies is expected, along with a clear establishment of timelines for the development of this area. Simplified VAT payer registration and subsequent reform of billing algorithms for advertising systems will take place. VAT will already be included in clients’ invoices, which will, in turn, increase advertising expenses.
In confirmation of the above, starting December 1, 2021, letters from "Google" regarding the addition of VAT to payments began to arrive.
VAT in Google after 2021:
- Charged across all Google Ads accounts.
- You can find information online about "how to avoid paying VAT in Google Ads," but not all methods are effective or legally safe for you. In any case, such manipulations are outside the legal framework of Ukraine, so we do not recommend using them. Saving money can have unpredictable consequences.
Similarly, as with the Facebook Meta account, the payment profile must be registered to a sole proprietor and VAT payer. In this case, only the budget will be debited. However, if VAT isn't being charged in the account, this doesn't guarantee that the relevant authorities won't later charge you directly.
Tax, VAT on Facebook ads
Meta, particularly its subsidiary social network Facebook, also reacted to changes in Ukraine’s legislation.
Starting January 1, 2022, "Meta" implemented some changes.
👉 Legal entities and individual entrepreneurs will be asked to provide their VAT payer certificate number.
👉 If you provide this number, then Meta (Facebook):
- Will not charge VAT in your account;
- Will send data about the tax credit to the tax authorities of Ukraine;
- Leaves the responsibility for VAT payment with the advertiser.
* It’s important to note that Meta (Facebook) does not organize documentation flow as Google does.
👉 If you do not provide VAT payer information, then VAT will be included in your account's advertising expenses, whether you are a legal entity, individual entrepreneur, or just an individual.
** As of today, VAT is already included in all payments of all persons in the Google Ads and Meta Ads.
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