On 24 December 2015 the Ukrainian Parliament adopted Law No. 3688 on amending the Tax Code of Ukraine (the “Law”). The Law is aimed at balancing Ukraine’s national budget. In particular, it significantly reduces royalty rates for the production of natural gas, which had been dramatically increased in August 2014 as a supposed temporary measure to sustain immense budget expenses. The Law is still subject to the President’s signature and becomes effective once it is signed and officially published. A summary of the changes introduced by the Law with respect to royalty tax rates for the produced natural gas is provided below.
- royalty rates for the production of natural gas in Ukraine will be substantially decreased:
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- the “lowering coefficient” of 0.55 will be abolished (currently it is applicable to royalties paid for natural gas extracted from new gas wells registered after 1 August 2014);
- the basic tax (reporting) period for subsoil use royalties will be a calendar month (currently royalties are paid on a quarterly basis);
- the requirement to make royalty payments in advance will be abolished (currently gas producing companies are required to make advance payments (i.e. 1/3 of the relevant tax liability) before the 30th day of the month);
- the relevant changes and amendments will become applicable once the Law on State Budget in 2016 comes into effect (i.e. as expected – on 1 January 2016).
Reverting the royalty tax rates for natural gas production to their previous, more reasonable levels is a very important step towards normalisation of the domestic gas production, which has been falling, ever since the rates had been increased in August 2014. Roll-back of the rates for gas production should allow investors to reconsider their investment and drilling programmes that they had been forced to cut or put on hold. However, a more radical revision of the upstream taxation system is required for Ukraine to be competing on a global scale with, and motivate investors to consider Ukraine against, other more rewarding oil and gas jurisdictions, if the Ukrainian Government truly wants to deliver on its promises and set free of the Russian gas dependence by boosting domestic natural gas production in a new low oil price world reality.
LAW: Law No. 3688 “On Amending the Tax Code of Ukraine and Other Legal Acts with Respect to Ensuring the Balance of Budget Revenues in 2016” adopted on 24 December 2015