Why the Ukrainian tax authorities fined PornHub – a lawyer’s analysis

What tax did PornHub fail to pay?

In fact, the “Google tax” is a VAT for non-residents (foreign persons) who provide electronic services, the place of supply of which is the customs territory of Ukraine.

The Tax Code (TC) defines electronic services as those that are delivered via the Internet, automated, with the help of information technology, and mainly without human intervention, in particular by installing a special application or program on smartphones, tablets, television receivers, or other digital devices.

The PC provides an indicative list of services that may be considered electronic services. For example:

• supply of electronic copies; provision of access to images, texts, and information, including, but not limited to, subscriptions to electronic newspapers, magazines, books, provision of access and/or downloading of photographs, graphic images, video materials;
• providing access to informational, commercial, entertainment electronic resources and other similar resources, including, but not limited to, those posted on information or video sharing platforms.

Only those electronic services whose place of supply is the customs territory of Ukraine are subject to the “Google tax.” The place of supply of electronic services is the location of the person receiving the service. For an individual, it is their actual place of residence. The TC specifies the methods by which the payer must establish the location of the person receiving the service. In particular, by establishing

• the location of the telecommunications provider;
• the mobile country code of the SIM card;
• location from which other means of communication were used or through an IP address.

Additional evidence of location is:

• billing address;
• bank details, in particular, the location of the bank account used to pay for electronic services;
• other commercially important information.

What exactly did PornHub have to do to register as a taxpayer?

A non-resident is obliged to register as a VAT payer if, according to the results of the previous calendar year, the total amount of transactions for the provision of electronic services to individuals, the place of supply of which is in Ukraine, exceeds UAH 1,000,000 in aggregate.

Registration is carried out electronically at the request of a non-resident. The application can be submitted only via the State Tax Service’s electronic cabinet using a separate functionality for non-residents — e-service providers.

The application must be submitted by March 31 of the year following the year in which the non-resident exceeded UAH 1,000,000 in income from electronic services.

Should the Ukrainian tax authorities have informed PorbHub of this obligation?

From the point of view of the law, sending a tax notice-decision (TND) is an actual informing of a non-resident of their obligation. No additional notifications are required.

What is the justification for such a fine?

A non-resident is fined 30 times the minimum wage as of January 1 of the respective year for supplying electronic services in the customs territory of Ukraine without registering as a VAT payer. In 2023, this is UAH 201,000. At the current NBU dollar exchange rate, this is $5,385.

Hetmantsev writes that PornHub was fined $5,543. The amount is slightly different, as it is calculated at different rates, but it is a fine for failure to register as a VAT payer.

What happens if PornHub continues to do nothing?

PornHub must pay the penalty or appeal it within 90 days of receiving the notice. If it fails to pay the fine, the tax service has the right to apply to the competent authorities of Canada to enforce it [PornHub is headquartered in Montreal, Canada].

What are the chances that sanctions against PornHub will be imposed abroad?

Ukraine and Canada are parties to the Convention on Mutual Administrative Assistance in Tax Matters. According to it, states are obliged to provide assistance in collecting tax debts and bringing taxpayers to administrative responsibility.

However, the chances of actually collecting a fine from PornHub in Canada are difficult to assess, as it depends entirely on the actions of the Canada Revenue Agency. The agency obviously has all the power to collect this fine, but it can also approach the request from a purely formal point of view. The Ukrainian tax authorities will not be able to influence this.