Diia City: Highlights of the Discussion by Lviv IT Cluster

10 Feb, 2021

During the last week, Lviv IT Cluster held a meeting with representatives of its member companies to discuss the details of the Diia City bill proposed by the Ministry of Digital Transformation of Ukraine to be implemented within the tech community. Key tech industry executives who participate in the negotiation process with the authorities spoke at the meeting, explaining what to expect if the law is passed, highlighting important points in the bill, and discussing an alternative bill that would take into account the requirements of the IT business.

A real debate about the introduction of a special regime for the IT industry called Diia City has been going on for several months now. Lviv IT Cluster decided to move the heated discussion from social media and news inside the biggest Ukrainian community of tech companies in Ukraine. During the meeting, more than a hundred representatives of the country’s key tech companies discussed the main points of the bill №4303, which is proposed by the Ministry of Digital Transformation. Among speakers were: Vitaly Sedler, CEO, Intellias & President, IT Ukraine Association; Taras Kytsmey, Co-Founder & Board Member, SoftServe; Vitaliy Odzhykovkyy, Counsel, Sayenko Kharenko; Stepan Veselovskyi, СЕО, Lviv IT Cluster.

Monopoly on the tech industry regulation

According to the bill, a supervisory/regulatory body of the tech industry has to be established. The bill proposes the Ministry of the Digital Transformation to serve as such a body. Any association or special regime that imposes restrictions or additional fees should be clear and transparent. Businesses that become part of such systems also expect stable and predictable rules and conditions, both at the level of global decision-making and at the level of operational management.

“The concept of Diia City, of course, deserves attention, but the proposed method of its implementation is very controversial. During the year, representatives of the IT community met with the authorities several times and discussed the project, but our suggestions and critical feedback were ignored. We are a large and successful industry; an industry that operates in the most transparent conditions according to world standards of approaches to work processes. Therefore, of course, we are against any abuse of power, expansion of the powers of regulatory authorities or the creation of favorable conditions for corruption”, comments Vitaly Sedler.

“Of course, when the power is gathered in one body, it can treat many things on its own. Our approach is simple: the criteria for companies eligible for Diia City must be clearly set out in the law. Verification of compliance of these criteria with the requirements of residency in Diia City should be performed by the Tax inspection, which has the appropriate practices and powers, or by audit companies. The role of the Ministry of Digital Transformation is to create policies in the field of informatization, work with the law and to exercise general supervision over the legal regime of Diia City, and not to be an organization that conducts inspections. A self-regulatory organization with mandatory membership is no longer public, there are many risks of corruption, and this issue is now of considerable concern in the IT industry,” adds Taras Kytsmey.

Is Diia City an alternative or a must?

Is Diia City a legal regime for all companies or only for those who agree to its not completely clear points of law and not fully spelled out rules? Can companies continue to use the model of working effectively for 25 years and not enter the legal regime? If not, what will happen to companies that do not agree? A mandatory authoritarian regime or attractive innovation for IT business? Representatives of the industry still have a lot of questions.

“It is unknown whether Diia City will be a voluntary regime. It is often said by officials that everything that is not included in Diia City is bad and illegal. There is strong negativity against the current PE system and we would like to know why, because all IT companies use this model, which is completely legal and was proposed by the authorities. The IT industry is definitely not about corruption and obscure schemes,” continues Vitaly Sedler.

PE vs GIG

Given that the PE system used by all tech companies is often referred to as the “shady scheme” in official communication of the Ministry of Digital Transformation, it looks like an alternative method of gig contracts will be the only correct and acceptable way to legalize employees in Diia City. However, there is no information on what will happen to the already existing private entrepreneur system. Thus, not only companies but also tech professionals face certain turbulence and uncertainty regarding the proposed bill.

The proposed know-how Ukrainian gig contracts, are not identical to gig contracts in developed countries (USA, Canada, Israel), create conflicts with Ukrainian legislation and international conventions, and do not provide obvious advantages.

“The concept of “gig” is being introduced in Ukraine for the first time, so it is still unknown how these gig contracts will work. It is possible that e.g. in court, gig contracts will be treated as ordinary labor relations. There are no restrictions for private entrepreneurs in the bill, but there might be in the Tax Law. Moreover, the Ministry of the Digital Transformation already plans to introduce new taxes for PEs. The concept of “gig workers” is globally understood as contractors who perform only certain individual tasks (or their combination) from customers (for example, the services of Uber drivers or Glovo couriers). Therefore, such a type of involvement of employees is not a full-fledged replacement for the PEs who work on the basis of business contracts,” said Vitaliy Odzhykovkyy.

Alternative №4303-2 is an option for everyone

The abovementioned precautions regarding the Diia City regime are shared by all Clusters and big IT Associations of Ukraine, including IT Ukraine and IT committees of the American Chamber of Commerce in Ukraine, the European Business Association, and the Union of Ukrainian Entrepreneurs that represent a significant share of the country’s tech business.

“We do have a problem with communication because discussing such global innovations should be a process. We have already had a lot of meetings, presentations, as well as many promises, which, unfortunately, are not being kept. To be heard, we went even further and proposed our own version of the law. The authorities promise to accept some of the proposed recommendations but it’s still unclear which ones and why only some of them,” shared Vitaly Sedler.

“Our bill includes well-worked controversial points. We would like them to be taken into account so that laws are created in this way in common communication, and not in isolation from everyone. Our bill was submitted to the Verkhovna Rada and supported by 16 MPs from different factions. We believe that the industry’s proposal is reasonable and necessary for consideration and adjustment,” sums up Taras Kytsmey.

Bill №4303-2, in contrast to the one proposed by the Ministry of Digital Transformation, resembles the real conditions of the industry as closely as possible and is focused on solving its problems. In addition, it provides opportunities for development without destroying the existing benefits:

 

  • Guarantees the freedom of activity, the possibility of choosing a model of cooperation with tech professionals, the presumption of legality of decisions of the subjects of the IT industry, non-interference of the state in the legitimate activities of the subjects of the IT industry, the stability of business conditions.
  • Provides transparent conditions for the acquisition and loss of Diia City resident status, which will prevent corruption risks.
  • Clearly establishes a detailed list of types of IT activities at the level of law (developed on the basis of Classifiers of economic activity, international standards such as ISIC, NACE and Methodological bases and explanations to the positions of Classifiers of economic activity, takes into account the peculiarities of modern business practices at IT companies).
  • Eliminates the requirement for mandatory membership of Diia City residents in any associations.
  • Doesn’t limit the term of a special regime.
View bill № 4303-2 here.