Not just a legal conflict: why the conflict between tax authorities and Internet providers could have been avoided
21 April 09:42
In March 2024, the Expert Council under the Ministry of Finance refused to issue a generalized tax consultation on the simplified taxation system for Internet providers. This was reported by MP Nini Yuzhanina, referring to the response of the Ministry of Finance to the Internet Association of Ukraine and the Association of Content Owners and Providers regarding the possibility of Internet providers being on the simplified taxation system, according to
“Following the discussion and voting, the members of the Expert Council decided that it was impossible to resolve the issue by preparing a generalized tax consultation. It was noted that this issue can only be resolved by introducing appropriate legislative changes,” emphasizes Nina Yuzhanina.
She explains that a few months before the mass exclusion of Internet providers from the simplified taxation system, the government actually recognized the legal uncertainty in this matter and the ambiguous interpretation of the rights and obligations of taxpayers.
“According to the law, in this case, the presumption of legitimacy of the taxpayer’s decisions, which provides for decisions in favor of taxpayers, should have been applied. But the Ministry of Finance and the tax authorities, in flagrant violation of the Tax Code, did the opposite and made decisions not in favor of taxpayers. And even now, after numerous court decisions, they insist on their own way,” summarizes MP Nina Yuzhanina.
Why did the conflict situation arise in the first place?
In January 2022, the Law on Electronic Communications came into force in Ukraine. The legislative changes caused a legal conflict, which was later exploited by the State Tax Service, massively canceling the decision to register a single tax payer in relation to Internet providers and “forcing” them to switch to the general taxation system.
As EP explains, the essence of the problem is that the previous law clearly delineated the roles of telecom industry participants. The new legislation equates the concepts of “operator” and “service provider”. In fact, an “operator” builds, maintains and operates telecommunications networks, while a “service provider” uses these networks to provide electronic communications services to consumers.
At the same time, the Tax Code prohibits the use of the simplified taxation system for companies engaged in “maintenance and operation of telecommunication networks”. Based on this, the tax authorities decided that Internet providers could not operate under the simplified system and began to work with them actively.
These battles also hide a conflict in the fixed-line Internet market. Small providers want to operate under the simplified taxation system, as they did before. However, some large players and some government officials believe that this model gives them a non-competitive advantage and does not ensure a level playing field.
What were the results of the State Tax Service’s work with providers?
The decision to cancel the registration of a single tax payer was made in respect of 1066 entrepreneurs, 158 suppliers applied for the general taxation system after “explanatory work”, another 105 legal entities and 3557 individual entrepreneurs switched to other types of activities and remained on the simplified taxation system, and 138 suppliers ceased their activities. These data were published on the Internet by the Ukrainian Business Association following a meeting with representatives of the State Tax Service three weeks ago.
However, there is another side to this “medal”, as the court practice has proved the illegality of decisions to cancel the simplified taxation system. According to the Internet Association, the courts of first instance have already considered 120 (63%) claims of Internet access providers, and in 99% of cases they have decided to recognize the decisions of the State Tax Service as unlawful and cancel them. There is also a decision of the Supreme Court that overturned the decision of the appellate court to exclude the provider from the register of single tax payers, i.e., sided with the providers.
What’s next
Representatives of business associations who participated in the meeting with the tax authorities emphasized that the best way to solve the problem may be to adopt a generalized tax consultation taking into account the explanation of the National Commission for the State Regulation of Electronic Communications, Radio Frequency Spectrum and Postal Services (NCCS) and court practice.
Following the meeting, it was agreed that the State Tax Service would start consultations with the NCCIR.
