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Ukraine parliament approves key amendments to budget, tax code

Ukraine parliament approves key amendments to budget, tax code

1 August 2014

Ukraine’s Verkhovna Rada voted on July 31 to approve key amendments to the state budget and tax code that will increase state revenue through higher taxes, much of them targeted at oligarchs. The additional revenue and redistribution of budget expenses will cover UAH 9 bln needed to finance the anti-terrorist operation in the Donbas region and about UAH 2 bln to pay for restoration work in the war-afflicted territories. The added revenue will also enable the government to keep the budget deficit within the limits agreed to with the IMF, ensuring further tranches and loans from Western governments and institutions.

 

On top of that, the government will be able to increase the charter fund of Naftogaz (NAFTO) by an additional UAH 63.3 bln by the end of 2014 (after already boosting it by UAH 33.4 mln earlier this year).

 

The amendments should lead to an increased tax burden on certain economic sectors by a total amount of more than UAH 20 bln in August-December 2014. Core contributors will be private oil & gas and iron ore producers, high-ranking state officials (who will receive no bonuses) and MPs (who will also see their salary decrease). The legislation also introduces an interim “war tax” of 1.5% on personal income.

 

Alexander Paraschiy: The successful legislation is good news for sovereign solvency given that a positive decision by the IMF board regarding a new tranche for Ukraine looks certain this month (estimated at anywhere between USD 1 bln and USD 1.4 bln). In turn, this will open a window for new tranches from other financial institutions and relax pressure on the local currency. Meanwhile, securing more money for Naftogaz (NAFTO) ensures a smooth repayment of its USD 1.6 bln Eurobond in late September.

 

The development is negative for private gas producers, who will face a 3.2x increase in their production-based tax, up to 55% of the market price for natural gas. This will reduce private gas producers’ operating profit by about 3x in Ukraine. The companies that will be most affected are Serinus Energy (SEN PW), Cadogan Petroleum (CAD LN) and JKX Oil & Gas (JKX LN). Regal Petroleum (RPT LN), which extracts gas from wells deeper than 5 km, will face a production tax increase to 28% of the market price for gas, which will only halve its operating profit. At the same time, tax rates for new wells (commissioned after August 1) will be reduced 1.8x during their first two years of operations.

 

Another affected company is Ukrnafta (UNAF UK), which will face a hiked production tax on oil to 21%-45% of the market price (depending on a well’s depth), up from 17%-39%. The good news is that this hike will only be applied until January 1, 2015.

 

Another group of companies that will suffer from the new legislation are iron ore producers, including the subsidiaries of Ferrexpo (FXPO LN) and Metinvest (METINV). Their production-based tax will increase to 8% of market price of iron ore, up from 5% charged since 2Q14, and from less than 1% charged before.

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