Ukraine Rada postpones measure to cut gas production taxes

Ukraine’s parliament (the Verkhovna Rada) failed to gather enough votes on its Nov. 10 session to approve draft law #2835 aimed at cutting the tax rate on natural gas production for private producers to 29% (and 14% for deposits deeper than 5000 m) as of 4Q15, from the existing levels of 55%/28%, respectively. After a series of failed votes for the second reading of that draft, the Rada decided to include it in the agenda for Thursday, Nov. 12 for a repeated vote.

After the bill was adopted in the first reading on Oct. 6, it was amended to exclude a controversial item to reduce to 29%/14% the tax rates on gas that is mined based on joint production agreements with state companies (70% currently). They key remaining controversial item was a tax rate cut for the gas produced by state companies and supplied to households (also currently 70%, and is proposed to decrease to 29% in an amended draft).

Alexander Paraschiy: The new postponement does not look encouraging for internationally listed gas production companies, including JKX Oil & Gas (JKX LN) and Serinus Energy (SEN PW). The companies have been waiting for the adoption of the tax-reducing law since June 2015, the original deadline committed to the IMF. We are sure they will eventually see the tax cut, as this remains an IMF commitment, though it will not necessarily happen on Nov. 12.

The key question that this draft law does not address is what should be the “actual price” of gas to which the 29% tax rate will be applied. The currently valid tax code stipulates that the “actual price” for private gas producers is a regulatory “marginal price,” which is non-existent since October 1, as a new law on gas market does not allow for the regulation of prices. Therefore, to bring #2835 and the tax code in accordance with the changed legislation on the gas market, the Rada will also have to adopt draft law #3073. This draft defines the “actual price” for private gas producers as equal to the average import price for Ukraine for a certain month.