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Ukraine finance ministry proposes tax cut for gas E&Ps

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Ukraine finance ministry proposes tax cut for gas E&Ps in 2016

The Ukrainian Finance Ministry’s proposal to reform the Tax Code, published on Dec. 1, proposes more than halving the natural gas production tax for private exploration and production companies in 2016. According to the draft law, new rates for private gas producers will decrease to 29% from 55% (and to 14% from 28% for gas mined from wells deeper than 5,000m). On top of that, the tax base will also change from “marginal price” (which is UAH 6600/tcm, or USD 225/tcm) to the average import price of gas (expected to be about USD 210/tcm in 1Q16).

The draft law introduces another tax regime for gas E&Ps as of January 2018: the production tax rate will be lowered to 20% (and 10% for deep wells), while an additional 15% “surcharge to profit tax” will be imposed on the difference between a company’s revenue from natural gas sales and CapEx into E&P. The negative difference can be shifted to following periods. Meanwhile, payments of the surcharge tax are not deductible from the regular profit tax.

Alexander Paraschiy:The MinFin’s initiative repeats a separate proposal for adjusting taxes on gas E&Ps that was rejected by Ukraine’s parliament (the Verkhovna Rada) on Oct. 6. Recall, on that day, the Radaapproved a differentpopulist bill that – like the rejected proposal – also assumed a tax rate reduction to 29% (14% for wells deeper than 5,000m). This alternative draft, however, was not adopted in full by the Rada.

As MinFin’s tax reform has been blessed by the IMF, we believe it has a high chance to be approved by the Rada this time, in the current edition. The bad news for gas E&Ps like Serinus Energy (SEN PW) and JKX Oil & Gas (JKX LN) is that lower taxation will only be implemented as of January 2016. The previous, failed drafts assumed the tax decrease would start in 4Q15, as the Ukrainian government had earlier committed to the IMF.

Nonetheless, the Rada’s approval of these adjustments will significantly improve the profitability of gas E&Ps active in Ukraine. Based on our estimates, the consolidated EBITDA of JKX Oil & Gas would have been 2.2x higher in 1H15 if the proposed tax regime was implemented then. For Serinus Energy, EBITDA would have been about 1.4x more in 9M15 under the drafted tax decrease.
- See more at: https://concorde.ua/en/research/daily/ukraine-finance-ministry-proposes-tax-cut-for-gas-e-in-2016-14816/#sthash.BnFElgBO.dpuf