A step backward in the availability of communication: What mobile operators say about tax hikes

The government is planning a significant tax hike to raise additional revenue for the Ukrainian budget. Mobile operators operating in Ukraine are among those who will be affected by the tax increase. UNN interviewed telecommunications companies about how the tax increase will affect their operations. Read more in the article.

Due to Russia's regular shelling of energy infrastructure, Ukrainians once again faced massive blackouts. In addition to the lack of electricity, another problem was the absence of mobile communication during the blackouts.

Since this is a critical area, especially in the context of a large-scale war, the National Center for Operational and Technical Management of Telecommunications Networks has obliged telecommunications companies to ensure the availability of mobile communications during power outages for 10 hours, instead of 4 hours as it was before. This decision was made to ensure that citizens have vital mobile communications.

Currently, there are three mobile operators in Ukraine: Kyivstar, lifecell, and Vodafone. These companies said they would have to make billions of dollars in investments to comply with the regulator's decision.

“We bear a huge investment burden to ensure the stable operation of the grid during long blackouts. In order to meet the National Center's requirements for 10 hours of operation during blackouts, we need to invest billions of hryvnias in autonomous power systems, in addition to the funds invested earlier,” Vodafone's press service said.

Following the tightening of requirements for mobile operators, it also became known that the Government has submitted to the Verkhovna Rada draft laws on tax increases and amendments to the state budget for 2024. The Cabinet of Ministers proposes to the Parliament to increase the military duty rate to 5%, and for some transactions to 30%. In particular, mobile operators will also pay 5% of the military tax. Danylo Hetmantsev, chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, supported the government's initiative, noting that he sees no other options than to accept the Cabinet's proposal to raise certain taxes (military duty, excise taxes, in particular on fuel and tobacco), increase the relevant tax base, and place more government bonds, which may also include NBU issuance. 

“Yes, this is a bad decision that will hinder economic recovery, the growth of citizens' incomes and potentially pose risks to macrofinancial stability. However, there is no other way than to close the gap in the military now, because in a few months we will face a significant shortage of funds for the current maintenance of the army, which will begin to deepen sharply by the end of the year,” Hetmantsev wrote .

Telecommunications companies consider the increase in the tax burden on them unfair.

“At a time when the enemy is deliberately destroying Ukraine's electronic communications infrastructure and power grid, Kyivstar continues to provide customers with communications, restore destroyed base stations and build new ones, buy generators and batteries to power the network autonomously, which requires an increase in costs. The cost of telecom tariffs is affected by many factors, including tax pressure on the industry. At the same time, the military fee is only one of 15 different taxes and fees that our industry pays to the state budget of Ukraine. According to a GSMA study conducted in 2019-2020, taxes in Ukraine account for 35% of mobile operators' revenues. Even before the full-scale war, this share was much higher in Ukraine than in the EU,” Kyivstar's press service said.

The company reminded that on July 1, a law came into force that increases the tax burden on the industry by almost UAH 700 million a year in terms of paying a specific tax - rent for frequencies. This is without taking into account almost UAH 350 million per year of additional rent from radio frequency spectrum licenses, which are estimated at UAH 2.8 billion and are to be auctioned this fall. 

Mobile operators believe that such a decision would be a step backward in ensuring the availability of mobile communications and emphasize that their services are vital and not “luxury items.

“In our opinion, this is a step backwards in terms of accessibility. In today's world, especially in times of war, mobile services are a necessity, not a luxury, for both people and the economy. Now, the draft law proposes to introduce a 5% military tax on mobile services for end users starting from August 1, 2024. In fact, this is already becoming the second “luxury tax on mobile communications” in addition to the 7.5% pension fund tax already introduced many years ago. In addition, the draft law  also provides for an additional 1% military tax on the total income from the operator's activities. Also,  starting July 1, 2024, the state has already increased the tax burden on mobile operators by UAH 1 billion by raising the rent for the use of radio frequency spectrum, increasing rental rates by 17%,” the lifecell press service said.

Mobile operators point out that in such circumstances, prices for mobile services will rise.

“Any tax increase during the war may become a matter of survival for many businesses. It will also significantly hinder the attraction of foreign investment in the restoration and development of mobile networks,” lifecell emphasized.

The mobile operators reminded that according to the World Bank, the total losses from the war's impact on the electronic communications industry as of December 31, 2023, amounted to more than $2 billion, and the necessary funding to restore Ukraine's electronic communications networks to pre-war levels is about $4.7 billion. 

Recall

Earlier, the draft law that envisages tax increases was criticized by Yaroslav Zheleznyak, deputy chairman of the parliamentary tax committee. According to him, it is not clear why such tax changes are proposed and what calculations they are based on. 

The head of the Rada's tax committee has repeatedly voiced the idea of raising taxes in Ukraine. According to economic expert Yuriy Havrylechko, the elimination of tax and customs and the transfer of the economy to a war footing may be an alternative to Hetmantsev's idea of raising taxes to close the budget gap