Ukraine commits to changing agri taxes, easing oil & gas taxes in 2016

The Ukrainian government undertook commitments to cancel its special VAT payment regime with Ukrainian farming companies as of January 2016, according to its memorandum with the IMF that was made public on March 11. The agriculture sector is planned to be brought “under a general VAT regime in line with international practice,” the document stated. Currently, farming companies are effectively not paying VAT. The government had promised to keep this regime at least until the end of 2016, and the current tax code stipulates keeping the special VAT regime until the end of 2017.

According to the memorandum, authorities also took a commitment to revise royalties in Ukrainian extraction industries as of 2016 “based on best international practices.” The respective amendments to tax legislation are planned to be drafted by July 1, 2015. In July 2014, Ukraine introduced a 55% royalty tax on Ukrainian private natural gas producers (up from 28%), effectively raising the tax burden for gas producers 2.5 times. This tax regime, in even stricter form (with less exemptions), remained valid in 2015 as well.

Alexander Paraschiy: The possible revision of extraction taxes (which assumes some easing of the tax burden) will clearly benefit international E&P companies focused on Ukraine, including JKX Oil & Gas (JKX LN) and Serinus Energy (SEN PW).

The government plan to bring the agriculture sector under a general VAT regime does not mean parliament will approve changes that will harm farmers. In any case, the risk of adverse regulatory changes are increasing for all Ukrainian agriculture companies that currently benefit from the special VAT regime, including poultry producer MHP (MHPC LI), agri-holding Ukrlandfarming (UKRLAN), sugar producer Astarta (AST PW) and grain trader Kernel (KER PW).