MinFin to delay questionable tax initiative for gas producers

Ukraine’s Finance Ministry has adopted a new proposed tax regime for its private natural gas exploration and production companies, based on its presentation of tax reforms published on Aug. 17. According to the document, MinFin will reduce its tax rate for gas producers to 29% (and 14% for those extracting gas from wells deeper than 5,000m) from the current rates of 55% (28%). In addition, it plans to decrease the production tax rate to 20% (10%) and introduce a special profit tax as of January 2018.

A month ago, the Ukrainian government prepared a draft law for natural gas E&Ps that reduced tax rates to 29% (14%) since Oct. 1, but the bill has yet to approved by parliament. The bill also includes a controversial change in the tax regime for gas wells launched since January 2016. In particular, it introduces a decrease of production tax for these new wells to 20% (10%), but imposes an additional tax on their free cash flow that eats away at the benefits from the lowered tax.

Alexander Paraschiy: The postponement of questionable changes to gas production taxation to 2018 from 2016, as outlined by the MinFin presentation, is good news for independent gas producers. At least the industry and the government will have more time to agree on a new, possibly more transparent and fair tax regime.

It is very likely that production tax rates cut as of October will be supported by Ukraine’s parliament, given that the tax reduction is one of the commitments that Ukraine gave to the IMF. Hopefully, this will initiate a period of more predictability in the tax regime for gas producers, at least for the next two years, till the beginning of 2018.