Ukraine: Parliament reduces tax for oil production, fails to motivate drilling new gas wells

On 20 December 2016 Parliament adopted Draft Law No. 5132 “On Amendments to the Tax Code of Ukraine with Respect to Ensuring the Balance of Budget Revenues in 2017” registered on 15 September 2016 (the “Law”).

The Law is aimed at balancing Ukraine’s national budget, and was adopted as part of the 2017 Budget Laws package. It provides for numerous amendments to Ukraine’s tax legislation and significantly reduces royalty rates for oil production. The document is subject to the President’s signature and is expected to come into force on 1 January 2017.

The reduced tax rates are as follows:
 

Name of mineral 

Percentage of the “value of extracted minerals”*

Currently

From 1 January 2017

Oil:

extracted from deposits that lie entirely or partly at depths of up to 5,000 metres 

45%

29%

extracted from deposits that lie entirely at depths of more than 5,000 metres

21%

14%

*   which, according to the Tax Code of Ukraine, is considered to be equal to the average price of a barrel of Urals oil (taking into account that one tonne of Urals oil contains 7.28 barrels), determined according to the relevant data of UralsMediterranean and UralsRotterdam, calculated and published on a monthly basis by the Ministry of Economic Development and Trade. 

Originally the draft of the Law also provided for: (i) a similar reduction in royalty rates for production of gas condensate (to 29% and 14%); and (ii) a significant reduction in the royalty rate for production of natural gas extracted from new wells to be drilled after 1 January 2017, i.e. 12% of the “value of extracted gas” (which, according to the Tax Code of Ukraine, is considered equal to the average customs value of imported natural gas, calculated and published by the Ministry of Economic Development and Trade on a monthly basis) irrespective of the depth of the deposits. 

However, these suggested amendments were declined by the Parliament without any reason or substantiation. The industry hopes that the Parliament will reconsider this approach when voting for the next draft law, No. 5459, which contains similar provisions aimed at motivating the drilling of new gas wells to target Ukraine’s ambitious energy independence aspirations and Government programme.

LAW: Draft Law No. 5132 “On Amendments to the Tax Code of Ukraine with Respect to Ensuring the Balance of Budget Revenues in 2017” adopted on 20 December 2016

Authors:

Vitaliy Radchenko, Partner, Vitaliy.Radchenko@cms-cmck.com