The share of cloud computing on the global market of information technologies is rapidly growing. Today, we perform more and more tasks, which we entrusted only to our home PCs just a decade ago, through Internet on remote servers of Amazon or Microsoft. Almost each of us stores pictures on Google-disc or uses applications on a smart phone when the larger part of data is stored outside of the device itself and can be found “in the cloud”.
Such model of delivering services is called a cloud-based service (or online-service) — it is a service in the form of providing temporary access to the user to computing resources (program resources as well as hardware resources) by remote access to them through Internet.
There are three basic models of offering cloud-based services on the market:
— IaaS (infrastructure as a service), that is the rental of hardware resources, for instance, computing capacities, storage space on the remote server. The provider of IaaS-service is responsible only for the equipment; the client independently monitors the issues related to the operating system and application programs;
— PaaS (platform as a service) is the model when a provider provides equipment and administers an operating system while the customer develops, runs and manages applications on the platform. The service on the provision of virtual machines with the installed operating system is an example of such a service;
— SaaS (software as a service) is a model when a provider grants access to the customer to the complete application program and maintains it independently. Any service of electronic mail, for instance Gmail, is the simplest example of SaaS.
Tax relief of VAT: today…
Despite technological public availability of cloud-based services, the Ukrainian tax payers often face problematic issues related to the taxation of cloud-based services, especially with regard to the value added tax (VAT).
The Ukrainian legislation provides for the tax relief of VAT for the operations on software supply (in accordance with item 26¹ of subsection 2 of section XX of the Tax Code of Ukraine). According to this provision the program products include, among other things, “the result of computer programming in the form of an operating system, a system program, software applications, an entertainment program and/or education program (their components) as well as in the form of Internet Web-sites and/or online-services and access to them” (as in force from 1 January 2018).
Therefore, online-service is a program product but only when it is a result of computer programming (that is a computer program). In this case an operation on its supply (providing access to it) shall be relieved from taxation of VAT. If online-service is not a computer program, it will subject to taxation of VAT under generally established procedure.
The definition «supply of program products», prescribed by the provision of item 26¹ as in force until 1 January 2018, did not contain the words «access to online-service». At first glance, it seems quite natural since in the minds of the majority of lawyers the definition “supply” is associated with the transfer of goods to the ownership but not with providing temporary access to anything. However, we recall that tax-law definition “supply” is broader than civil-law one and is applicable to the operations not only with goods but also with services and intellectual property objects, including computer programs (sub-item 14.1.185 of item 14.1 of Article 14 of the Tax Code of Ukraine). That is why, the definition «supply of program products» may be used not only in the meaning of the sale of software as goods (for instance, on physical media), but also in the meaning of its delivery in the form of service, that is the temporary providing access to it. For this reason, an access to online-service under SaaS model shall be a supply of program products and shall be relieved from taxation of VAT according to the new wording of item 26¹ of the Tax Code of Ukraine as well as according to the previously existing wording.
Cloud-based services and modifications to them
For instance, in the individual tax advice from 26 March 2018 № 1231/6/99-99-15-03-02-15/ІПК the State Fiscal Service of Ukraine came to the conclusion that operations on providing access to online-services shall be taxable at the total tax rate 20% as the providing access “does not result in any modifications in program products”.
It is difficult to agree with that viewpoint of the fiscal authority and not only because of the fact that the use of any online-service by the user does not imply, as a matter of principle, its implementation and software modifying by the service. This position is controversial because this case deals with online-service of electronic document management «ВЧАСНО» that is delivered according to the SaaS model and is a result of computer programming; thereby this service should be relieved from taxation of VAT on the basis of explicit provision of item 26¹ of the Tax Code of Ukraine.
Transfer of a copy of the program – is it an essential feature
In the individual tax advice from 16 May 2018 № 2183/6/99-99-15-03-02-15/ІПК the State Fiscal Service of Ukraine notes that in case if the providing access to the customer to program products, including online-service (Internet-service, Internet-platform) means exclusively granting of the right to undertake an analysis of the quality of a signal of cellular network, to collect statistical data on delivered telecommunication services and to take other similar actions without actual supply of a program product (its copy) to the customer, so an operation on providing such an access shall be considered as the operation on delivery of services that is subject to taxation of VAT under generally established procedure at the tax rate 20%.
At the same time, the main operational principle of online-services of SaaS model is that the client does not receive a copy of the program to his computer but he uses the program hosted remotely on the provider’s server. But it doesn’t change the fact that SaaS-service is a computer program and constitutes the definition “program products”. Therefore, we believe that the providing access to the SaaS-service shall be the operation on supply of program products and shall be relieved from taxation of VAT as expressly stated in item 26¹ of the Tax Code of Ukraine.
Subscription or supply
Under the conditions of volatility of fiscal authorities’ approaches the tax payers expect to get answers to the questions on taxation of cloud-based services in judicial practice. But, as of today, it is still at the stage of development.
In this context, the most interesting is the determination of Kyiv Appeal Administrative Court from 26 April 2017 in case № 823/900/16.
As it follows from the materials in the case file, the Ukrainian company «П» purchased from the French company «G» a subscription for the use of monitoring system «A» — software in the form of web-platform for monitoring of weather patterns’ impact on the condition of agricultural plants (SaaS model). The Ukrainian company has classified this operation as a supply of software and has not paid a VAT from the amount of the subscription cost.
The court found that since the payer was given the right only to use the monitoring system within a certain time frame, and the company «G» is the owner of all the rights to the product «A» and offers only a subscription to the service, so such operation shall not be considered as a supply of program products and shall not be relieved from taxation of VAT.
From our perspective, such a position is rather controversial and contradicts with item 26¹ of the Tax Code of Ukraine as the fact that online-service is delivered on the subscription basis shall not mean that it is not a program product and shall not invalidate grounds for exemption from taxation of VAT. For the reasons given above, in tax-law understanding the delivery of a subscription-based service is also a supply of a service.
What should we do?
As we see, we cannot speak about common approach to VAT taxation of online-services. Therefore, our best advice to the Ukrainian tax payers using cloud-based services is the following: it is necessary to determine whether one or another service is covered by the definition “program products” or not. The understanding of this issue will permit to form an approach that must be followed in case of an inspection by tax authorities. Since it is difficult to predict the position of supervisory authorities, the tax payers have no other choice but to form its own position on this matter.
The rule of belonging of online-services to program products may be formulated as follows: if a service contains at its core an access to the computer program (SaaS model and in certain cases — PaaS model), so its delivery shall be a supply of program products. If not (IaaS model), so an access to such service shall not be a supply of program products and shall subject to taxation of VAT under generally established procedure.
The article was published in the #45 of the periodical “Legal Practice” dated 11.06.2018
and on the website http://pravo.ua/article.php?id=100118116
The author: Anna Kravchuk
Reprints, total or partial reproduction of text articles, translation, publication of the article or its translations into other sites and other online resources, any other use of it without written permission is strictly prohibited