Statement of Lviv IT Cluster On Proposal Restricting Activity of Private Entrepreneurs

20 Feb, 2019 1

Lviv IT Cluster, as one of the biggest and most active IT communities in Ukraine, cannot stand aside discussion about the new initiative of the Ministry of Social Policy of Ukraine regarding the Law on amendments to certain legislative acts of Ukraine to strengthen the protection of employee rights and to counteract the use of undeclared work. The draft law was published on the website of the ministry, and having thoroughly examined the draft, Lviv IT Cluster considers this law unacceptable, taking into account the following.

The IT industry is among the most dynamic in Ukraine – growing annually with 20% (according to the research by IT Ukraine Association). In 2018, the industry was ranked 2nd among the export services in Ukraine, which brings a significant amount to the country’s budget (₴10 billion in 2018) and improves GDP (3.3% of GDP contribution in 2018 according to the PWC).

The IT industry is special in a way that it operates on the global market by earning revenue from clients from all over the world, from USA and Canada, Europe and Asia, to Israel in the Middle East. The system of simplified taxation allowed companies to formally regulate business relations with different countries and continents, transferring intellectual property to customers. The 1971 model labor legislation of Ukraine is obsolete and cannot take into account the needs of the rapidly growing and developing technology industry. In addition, the simplified taxation system for private entrepreneurs is transparent, which enabled thousands of IT professionals and hundreds of IT companies in Ukraine to work legally and without excessive bureaucracy.

Lviv IT Cluster supports the idea of legal taxes in the country and official employment, however, we would like to offer to learn more about the specifics of the IT industry in Ukraine taking into account the positive aspects of its dynamic development, revenues to the budget of the country and the financial impact on the development of cities and the country as a whole, as well as the lack of transparent legal regulation of labor relations, which would correspond to the level and pace of development of the IT industry in the country.

Lviv IT Cluster is convinced that the adoption of the Law on amendments to certain legislative acts of Ukraine to strengthen the protection of employee rights and counteract the use of undeclared work will only have negative consequences for each individual IT specialist, as well as for the business and economy of Ukraine as a whole.

Negative consequences of the enactment of this Law:

  • The decline in the growth dynamics of the IT industry in Ukraine

Ukrainian IT companies will reduce their risks and costs – transfer employees to other locations, because many companies are already global with offices in neighboring countries. Some offices in Ukraine may be closed.

  •  Emigration of IT specialists

The worldwide struggle for talent and the colossal demand for IT professionals continues. According to IT Research 3.0,  33,7% of Ukrainian IT specialists have already thought about relocation to another country, and would be ready to do it if the work conditions wouldn’t be comfortable.

  • The decrease in financial indicators

According to a study by PWC, in the presence of the existing taxation system, the amount of revenue that goes to the state budget will amount to ₴21 billion by 2020, if the conditions change, this amount will decrease to ₴13 billion. This is a pessimistic scenario and just one of the indicators through which we can demonstrate financial losses.

Ivan Babichuk, Supervisory Board Chairman, Lviv IT Cluster;  VP of Engineering, Edunav, comments: “The technology industry is strategic for Ukraine, because it is perhaps the only industry that has the potential to bring the country out of the world’s outsiders to the leaders in the wake of the fourth industrial revolution. In addition, the internal role of the industry is essential for the development of the middle class and the stable growth of the country’s economy in general. The creative class competes in the global labor markets, its representatives are mobile and in high demand in all advanced economies. Abrupt changes in legislation, could easily trigger the so-called brain drain, however, on a much larger scale than it was in the 2000s.

Salaries make up more than 80% of expenses IT outsourcing companies. An abrupt and significant increase in tax burden, paired with a constant increase of global competition, will make their business model impossible for further growth, and many medium and small companies might even seize to exist. Representatives of IT business and government should jointly develop an effective and functional model that would have a positive impact on everyone. And we have both the resources and the desire to do it.

It’s common for other countries to support the technology industry in the state level. We can already see successful examples of such support in Estonia, Belarus or Poland. Technology is global, therefore, the competition for technology is also global. If we want Ukraine to be visible and competitive on this market, our authorities should understand this and look far in the future, supporting the development of the IT industry as the flagship for our economy. In 2018, the industry brought to the budget of the country over 10 billion and this amount increases annually,” tells Stepan Veselovskyi, CEO, Lviv IT Cluster.

Lviv IT Cluster together with the IT Ukraine Association is currently working on the alternative proposal regarding the activities of private entrepreneurs in Ukraine.