Ukraine - Digital Platform PornHub and VAT Compliance Challenges

In June 2021, the Ukrainian Government decided that there is a necessity to combat VAT fraud by following the EU-based trend of tax reforms related to online commerce and the digital economy. The main country-based regulators decided to adopt significant amendments to the Tax Code. 

The main goal of the regulators is the drive to combat the gray economy caused in the first place in this sector by foreign digital service providers. These legislative changes primarily affected the tax treatment of the delivery of digital services carried by foreign digital service providers. 

The new measures established VAT obligations for these providers once a specific threshold was surpassed.

The amended Tax Code empowers the Tax Authority to use various channels to enforce compliance among foreign taxpayers. An important tool that was established with the adopted amendments of the Tax Code, is seen in the possibility of the central department of the tax authority to directly contact the relevant foreign tax authority to ensure that non-compliant foreign digital service providers operate under the Ukrainian fiscal framework.

Using this provision, the Ukrainian tax authority reached out to the Canadian Tax Authority through a public notification, seeking assistance in enforcing the indirect tax liabilities of a digital platform based in Canada. This platform, widely known as PornHub, is the world's largest distributor of "adult content." 

The management company that is the owner of the PornHub platform is based in Canada, permitting the Ukrainian tax authority to reach out to their colleagues in the Canadian tax office.

To enforce compliance with local tax laws, the Ukrainian tax authority issued a formal notice to PornHub's management company, imposing a fine of approximately USD 5,500 for failing to register for VAT despite meeting the necessary conditions.

This formal procedure operated under the national rules, conducted last December, brought great results. The positive effect of the chosen path can be seen in the action of PornHub's platform operator, which registered for VAT on May 2, 2024, complying with Ukrainian law as an electronic service provider.

Impact of the tax rules

The Ukrainian tax authority's persistence resulted in a major achievement, underscoring the importance of the monitoring powers being at the disposal of the authorities. The flexibility of the Tax Code provisions, which allow the authorities to pursue non-compliant digital platform operators across borders, has proven effective in ensuring VAT registration.

Takeaway 

The triumph of the Ukrainian tax authorities shows the importance of clear, practical, and transparent tax policies in combating VAT compliance challenges in the ever-evolving digital economy. 

Cross-border operating digital platforms, as well as online vendors, should bear in mind this precedent when they are automatically delivering electronic services to customers residing in Ukraine.

The strict rules adopted and practically applied in Ukraine, are just a reminder to international digital providers operating cross-border, to be aware of the local rules, before they start delivering their digital products to local customers