Demand for Ukrainian tech services was high last year despite the pandemic.
The country’s export of information technology services grew by 20% to $5 billion in 2020 — a slightly slower rate of growth than in 2019 when annual tech exports expanded by 30% to $4.17 billion, according to data from the National Bank of Ukraine (NBU).
Local companies that provide tech services were more resilient to the coronavirus crisis than those that work in transport, tourism or financial industries, according to the Ministry of Economy.
While IT export grew by $853 million over the year, the country’s overall service exports plummeted by 28.5% to $11.17 billion.
According to the Ukrainian IT Association, the country’s tech sector bounced back quickly last year because the global demand for IT-related services was high. To satisfy it, Ukrainian companies exported their services and opened new vacancies even amid the crisis.
Now IT is the most exported service in Ukraine — it accounts for 8.3% in the country’s $60.4 billion export of goods and services.
The industry has been growing steadily since 2013, when its exports of $1.3 billion were just 1.6% of Ukraine’s total export, the NBU said.
The growth was helped along by the absence of government regulations, abundance of skilled workers and the benefits of Ukraine’s tax system that allows tech entrepreneurs to pay a simple 5% tax on their work income, according to the Ukrainian IT Association.
Now Ukrainian techies worry that this leeway will end with the introduction of new bills aiming to take control over the country’s IT industry.
In 2020, the Ministry of Digital Transformation introduced a new project called Diia City, an economic zone with taxation, legislation and employment benefits tailored for local and foreign tech firms.
The ministry said this would bring Ukraine over $11.8 billion and create 450,000 new jobs by 2025. However, some experts and tech entrepreneurs criticized the initiative because it will overregulate the untamed IT market.
“We shouldn’t change a system that works,” according to Konstantin Vasyuk, executive director at Ukrainian IT Association.
Vasyuk said that Diia City is the government’s experiment and local tech industry isn’t ready for it, especially amid the global crisis.
According to Kharkiv IT Cluster, which represents over 100 tech companies, local IT businesses will relocate to other countries or stop paying taxes if Ukraine implements the project without the changes that the industry asked for.
The ministry’s decision to introduce gig contracts in Diia City, instead of hiring tech specialists as individual entrepreneurs, triggered the strongest response.
A gig contract will be a civil law contract that has some characteristics of employment contracts. For example, it can be concluded for an indefinite term, the working hours must not exceed 40 hours per week unless the contractor works flexible or irregular working hours, and gig-contractors will be entitled to sick leave payments, according to Max Lebedev, a partner at the law firm GoLaw.
Right now, almost all Ukrainian techies are registered as private entrepreneurs. This makes sense for them because many tech specialists have flexible work conditions, offer services to multiple employers or develop their own projects. It is less affordable for them to sign a contract with one employer and pay a 19.5% tax on income, instead of their current 5%.
According to Vitaly Sedler, head of Ukrainian IT Association, it is “unacceptable” to replace private entrepreneurs with gig workers. Sedler said that the Ukrainian tech industry took off because tech companies could work with private entrepreneurs and save money on taxes.
Vasyuk said that low taxes make the IT industry more competitive. Tech companies spend nearly 80% of their revenue on salaries.
Although the individual entrepreneur taxation model wasn’t created for IT, it is “unique and very important,” he said.
