Author: Artem Afian, Managing Partner at Juscutum Attorneys Association
IT is well on the way to become Ukraine’s national idea. The prestige of IT profession and the number of IT educational volunteer projects indicate that the country is definitely going to strengthen its presence on the world map of IT professionals. The public is committed to make up for the brain drain through the extensive training of IT specialists. Not a month goes by that yet another Ukrainian startup or a company performing an off the shelf product does not announce investment raising or winning the tender. This news spreads across the country. IT has become the social lift against all the current negatives of Ukraine’s economy. With that in mind, the smartest and the brainiest are all out for IT.
While the IT industry is rapidly developing, on the contrary, the efforts made by the state are still at their infantry. Politicians mention IT in their speeches, have meetings with IT companies management; still, these important undertakings have not evolved into regulations intended to encourage business development. The most substantial help of state authorities lies in as less little interference as possible.
In 2011-2012, a number acts were passed by the Parliament in support of the IT industry originally intended to introduce tax concession for IT companies. Due to the specific features of the political process, the law that had been actually introduced hardly matched the initial version and never caused any excitement among IT companies. Changes in tax legislation adopted in 2013 and 2014 weren’t actually the sought tax reform. However, they repealed all tax concessions, including those granted to IT. The key factor that makes Ukraine exceptionally attractive for IT industry is the status of the self-employed and the applicable simplified tax regime. This has nothing to do with the special tax regime for IT companies. The thing is, the general fiscal terms for hiring self-employed contractors are favorable and allow hiring programmers and paying for their services with the general tax burden a bit more than 5%. All the above, coupled with the quality of training and the quantity of professionals, is the huge motivation for the offshore programming development and outsourcing. So far, there are companies in Ukraine currently hiring more than 5000 programmers.
However, Ukraine still lacks for the incentive mechanisms for product development companies and r&d centers, although these issues are permanently discussed in parliament.
Financial market restrictions imposed in 2014 intended to prevent the economic shrinks have not yet given the visible feedback. However, they are reportedly regarded as the key factor of economic collapse. In Ukraine, favorable conditions for payment systems are not established, which is a deterrent for e-commerce development. Rigid rules of e-money issuance introduced by state authorities and foreign currencies denial stand in the way of the majority of payment systems commonly used within the world online trade system. In addition, the National Bank cracks down on the currency outflow and imposes excessively high rates for the mandatory sale of the foreign currency revenue. On the one hand, these measures support the national currency; on the other hand, they turn the country into the kind of UAH reservation from the world market perspective. At the same time, there are private volunteer initiatives intended to attract global IT companies into Ukraine. The most active one is negotiations with PayPal held by Ilya Kenningstein. Authorities are not determined to play the leading part in this process. Representatives of the National Bank meet with volunteers, listen to them and give consent to their initiatives. Then volunteers go to PayPal headquarters to carry on the negotiations. Financially independent entrepreneurs and community leaders represent Ukraine on the international business arena.
Similarly, only private initiatives help to push forward such ideas as blockchain and open code software use. Big companies render their best practices to state authorities with the aim to assist in capacity building of the next-generation management system. A good example is the decision pushed forward by Dmytro Dubilet and Privatbank to render such open code systems to state authorities. Widely known is the case of Ivan Yani, who helped to develop open registries and launched public information analyses electronic systems. Another example is Prozorro, online procurement system developed by volunteers. Our company provided pro-bono legal support to this project. BankID and public e-services initiatives are as well currently coming from enthusiasts. State authorities decided not to take the lead in this process. They just pick proposals among the suggested and dryly express their gratitude. This explains the situation when IT initiatives are dotted across the country. Lately, Lviv has become the center for innovations. Local authorities attract volunteers and demonstrate their openness to innovation. Volunteers together with state officials who came to politics from business, are actively lobbying the idea of e-government implementation on the highest national level. Still, the bureaucratic machine representatives express their disapproval with restraint.
The decline in public contracts awarded to IT companies undermined the system integration market. Integrators who failed to break into the international market or firmly establish their positions within the private sector took the big heat. In fact, the system integration market is currently reloading. It is worth noting, however, that once again, state authorities expect the public to perform as a regulator. On their own initiative, private companies modify the outdated standards and hand them over to state authorities.
Reforming of the law enforcement is moving all too slow. At first, it doesn’t sound meaningful enough, however, the delay in reforms implementation is actually a serious driver hindering business development and, in particular causing major problems within the IT sector. The thing is, the corrupt law enforcement used the searches to actually terrorize the business. IT companies turn out to be extremely vulnerable, because seizures of computers during searches resulted in complete halt of business activities. Law enforcement reforming has already resulted in the establishment of the national police patrol force. Yet, patrol officers have nothing to do with searches in IT companies; they are actually carried out by investigating detectives. However, in late 2015, draft law No.3719 was registered intended to set forth a number of measures to prevent unlawful searches. Most notably, there is a provision stipulating that in case investigators are interested in any piece of information they should copy it from computers instead of seizing the equipment. It stands to mention that state authorities welcomed this initiative. Our company, acting as an independent law firm, worked out the said law draft. We never received any orders, nor were involved in any lobbying. Many politicians spoke in favor of our legislative draft. With that in mind, we believe there is a good likelihood that the problem will be cured as early as this year.
In addition, speaking about IT sector development, we can’t but mention The Special 301 Report and copyright abuse that unfortunately made Ukraine globally infamous. However, the root of the problem is not the copyright infringements. Rather, the issue is about communication problems. Ukraine somehow does not seek to demonstrate the modest, yet progress in procuring the licensed SW and computers with the pre-installed soft, whereby a few years ago loud statements were made against Ukraine regarding the use of counterfeit software by state authorities. Team management setup and Internet piracy problem are still under discussion as legislative proposals. All the said problems actually exist, but neither their scale, nor status allows us either to claim the situation has actually reached its critical point or nominate Ukraine as No.1 in the world infringer of copyright. Rather, it looks like the state seeks to be awarded the title of the most passive one in dealing with the said issues.
So far, the one and only actual effort to combat internet piracy cannot but raise hackles. The new law draft No.3081 on copyright protection passed the first reading. However, no one actually expects that its implementation will be efficient. The said legislative draft fully ignores the preliminary work of associations and advisory teams. It has been obviously lobbied through and written out in a hurry. Taking into account the low rate of internet expansion and the market extent, Ukraine cannot be regarded as the world leading internet copyright infringer. Here there are no sites with traffic even compared to that of The Pirate Bay and Mega (the successor of the famous Megaupload). To cure the counterfeit content distribution problem, it is necessary to make legal content available. Otherwise, the anti-piracy campaign will instead become the anti-internet one. The main factor preventing the legal services development is the lack of the customer purchasing power. As a result, this vicious circle confines successful business running.
However, the lucky one who breaks this circle will definitely prosper. In this sector, there are local players who will develop in line with the economic growth.
All in all, while our authorities mostly speak about IT, Ukrainians are actively developing it. What we need right now in order to fuel IT development, is that good words of politicians, at least in part, be embodied in laws.