July 26, 2016
The Association of Gas Producers has continued the discussion of future gas production industry reforms amongst the famous Ukrainian experts. The round table, dedicated to the detailed discussion of the Roadmap in the Oil and Gas Industry in the Tax Policy part, has joined together the representatives of the Razumkov Center, the Subsoil Users Association, the Gas Traders Association, the EITI project, Everlegal, Easy Business companies, specialized journalists from Dzerkalo Tyzhnia, Unian, Hubs news agencies. The discussion that was publically initiated by the Association at the round table, has resumed in the expert environment.
Several tax reform key initiatives, developed by the Association in response to the government’s request to increase gas production in the next four years, were discussed.
It was clear to everyone, that the tax regime in the industry is regressive and complex, and the royalty rate – not competitive to attract capital to new projects. It was announced again, that the tax system in the industry today serves solely the purpose of filling the state budget, and does not stimulate attraction of technology into the old technological base of the industry. With respect to this, the Association has called for public expert discussion of the initiative of introducing a single royalty rate of 12 % for oil and gas, which will make the gas production on new deposits economically rational.
When arguing for the rate of royalty, the CEO of the Association, Roman Opimakh, pointed out that “the Association’s position is based on profound analysis of the Deloitte reports and the American consulting company’s, IHS Energy, report on Ukraine’s potential”. The participants have agreed that the losses in the budget from decreasing royalty to 12 % may be compensated via dividends of UkrGasVydobuvannya, which will make a transparent source for investments into production or coverage of housing subsidy programs. The state has already used this mechanism this year, when it compensated inflows through dividends of 1 billion hryvnia from Ukrtransnafta.
With respect to this, the President of the Subsoil Users of Ukraine Association, Roman Storozhev, has noted, that “from their calculations, to be competitive with the countries with substantial resources, which will be considered as alternatives, Ukraine has to lower the royalty rate to 12-15 % and account for the risk of decrease in gas prices”.
During the meeting, the Association’s initiative of transit to profit tax system from the income tax system with a three-year adaptation period was actively discussed. When expressing an assessment of this proposition, Victor Logatskiy, the expert of energy programs at the Razumkov Center has pointed out that “In states with established financial systems, such as Great Britain and Norway, the resource tax is indeed extracted from the financial results. As for our situation, the first EITI report was published, the tax system in the country is weak, the enterprises’ accounting system is primitive, and even the state-owned UkrGasVydobuvannya does not have electronic accounting system in all of its units. Thus, transit to exclusively profit taxation for oil and gas producers – is the untimely task”. He thinks that a different combination of resource taxes may be used, with an accent on profit tax. He also informed that the initiative of adding the capital export tax to the new Tax Code is currently being discussed on the Ministry of Finance level.
The experts have agreed on the following tasks as the timely tasks that should be supported: the position regarding decentralizing the royalty rates in the amount of 5 % (according to the project of law No. 3038), which will create financial incentive for the regions of direct exploration, drilling and gas extraction; the position regarding the royalty base, which should be determined by the gas price on a liquid European hub HCG, without accounting for the transportation expenses. The current royalty base is not optimal due to lack of competition in the market. When expressing his opinion, Victor Logatskiy from the Razumkov Center has pointed out that “today, the companies should by all means direct the government’s attention to decentralization of royalty payments, since land issues cannot be solved without the local authorities”.
The experts have unanimously arrived at a conclusion that a mistake in the double taxation of the production sharing agreement parties. “It should be a clear and transparent tool of government and investor cooperation”, – as stated by the expert from Razumkov Center. The participants have advocated for lowering or cancelling the royalty on PSA projects and government’s extraction of profit only in a form of resource product.
29 july 2016