Re:Big deal? (Score 1)

To give you some perspective on my point of view, I'm from Ukraine, I'm a developer but not a freelancer yet (and chances I become one a significantly lowered by this new law).

There are several aspects of this thing.

1. It is not that there is a crisis everywhere, but everything is perfect in Ukraine. Obviously Ukraine has big problems, may be not as big as Greece for instance, but nobody really knows.
2. After this year's election old government was changed by their rivals. Obviously previous government was not able to take any serious unpopular measures having election in the nearest future. On the other hand, current government seems to be able to afford this in terms of politics. And it seems that government has to do something unpopular like in many other countries. Despite all the talks, neither of major political parties actually represents middle class as there is almost no middle class in Ukraine (i.e. not enough voting power to be the main audience). Most powerful parties represent interests of big business (or so called "oligarchs") and are supported by votes of low class people (that is majority of population). The differences between parties are different supporter oligarchs and different regions of Ukraine where parties are popular. That said it is obvious that main target of unpopular changes of current government might be:
   • Business of rival oligarchs, but only if it does no severe damage to your own business
   • Small and middle business
   • Usual people, but you can't do much as they are your voters. However retirement age probably will be increased.

   Taking into account this and very high level of corruption, it is obvious that middle class (including software developers) has no belief in government and that taxes will be used in a good for them way.

3. We have relatively high tax level (but AFAIK not really higher than in Western Europe). Taxation system is also very cumbersome and contradictory. Just to make an example: our fiscal police has actual plans for fines and literally any firm might be fined during regular checks. It means that bookkeeper is not mandatory but corresponding stuff actually can not be properly done by a person without corresponding education and who tries to run business at the same time.

4. For a long time there also has been a "simplified taxation scheme" that was originally intended for different kinds of entrepreneurs and small business. There were two major simplifications:

   • Very few taxes and simplified reports
   • Much lower taxes rates

   There are some limits on total income and business areas to be eligible for such scheme.

   However this legal scheme is also used in different kinds of "tax optimizations" and money laundering schemes. That's why it is an obvious target for government who wants to get more money.

5. For software outsourcing companies salary is major part of expenses (more than 1/2 according to their claims) and thus optimization of salary taxes is important goal. The biggest salary tax is pension tax and is about 1/3. Entrepreneurs with simplified taxation doesn't pay it. Taking into account fact that usually developers in Ukraine are relatively young (mostly under 30-35) and have no belief in government and in state pension system, it makes sense to not pay this tax and either pay higher salaries or reduce rates for customers. That's why most of big software firms, that have to run their business in a reasonably legal way, nominally have almost no employees. All of the employees are nominally contractors and entrepreneurs eligible for simplified taxation. In most of cases, software firms employ (or rather contract) special bookkeepers to fill reports for their "contractors".

   There are also "real" software developers entrepreneurs who work directly with western customers. And of course many of them also use simplified taxation (other just don't pay taxes at all).

   Also there is whole range in between entrepreneurs and big outsourcing firms i.e. firms of different sizes that developed from contractors' business.

6. New law is going to make software development for western customers not eligible for simplified taxation. Actually any work for abroad customers is prohibited. There are also some other prohibitions that makes developers-freelancers not eligible for simplified scheme but this one is already enough. It seems that this specific prohibition is important for government to "fix" many tax optimization schemes (not only in software development business). Most of software development firms work for western customers, domestic market is too small to employee so many developers and to pay salaries competitive to outsourcing ones. So this prohibition is going to make all software developers either use "usual" taxation scheme or to find some other hole in laws. Usual taxation scheme has two impacts:
   • Direct: higher tax level
   • Indirect: overhead both in time and money for bookkeeping

   The smaller firm is the more important indirect overhead is. For single developer working on abroad customer it might effectively reduce income 2-3-fold AND make them to do stuff most of developers not like to do: deal with government.

I don't know exact figures, but I would say that more than 1/2 of developers are currently "employed" using this tax optimization scheme and among higher paid developers working in big firms in big cities this fraction is even higher. Taking into account crisis times, it is obvious that software firms can't raise rates to pay additional taxes without loosing customers. Moreover there already were such precedences of reducing salaries in big firms "because of crisis" last two years so developers don't believe that firms will reduce their profitability to keep salaries. That's why developers reasonable expect that new law will reduce their salaries proportionally. As number of such developers is significant, this will make pressure on salaries of all other developers unless business finds some other hole in laws. That's why all developers are very disturbed. However, being developer myself, I understand government reasons: it believes that using such scheme relatively highly paid developers pay too few taxes and government don't see any special reasons to make life for developers better. What I found important here is that for employed developers any tax rates raise is bad and the only measure if difference in effective rates: the lower rates - the better.

"Real" self-employed freelancers working on abroad customers is a different story (not only in software development area). AFAICS most of them are ready to pay higher rates (if they are reasonable) but they are not ready to use complicated "usual" taxation scheme. They have neither will nor time to deal with it. And having additional paid bookkeeper is going to kill most of their businesses and will make it almost impossible to start such business legally in future (for me, for example). In my opinion they are victims of "you can't make an omelette without breaking eggs" rule. Personally I strongly support this group of people but it is too small to affect politic and economic decisions now especially taking into account fact that there is no simple way to separate real freelancers and tax-optimized employees. I really don't like this specific change but I don't see what can be done here. It seems that government doesn't agree to leave simplified taxation scheme for freelancers with some reasonably higher tax rates. I don't know reasons for it, probably it is not related to software development at all.