New Ukraine tax code keeps gas royalty, no grain export VAT return

The Cabinet of Ministers of Ukraine published on Dec. 22 its proposed amendments to Ukraine’s tax code, aimed at simplifying tax administration and reducing the tax burden for small enterprises, according to its explanatory note. The draft proposes a decrease in the number of taxes and charges to nine from 22 by simple reclassification of some of them. The amendments will enable boosting budget proceeds up to UAH 40 bln annualized (or 11% of total tax revenue planned for 2014), according to the note.



The draft law fixes some interim tax burdens that were tested in 2014, namely, no refunding of VAT on grain exports and high royalty taxes for gas and iron ore production in Ukraine. In particular, the draft proposes prolonging non-refunding of grain export VAT (valid till the end of 2014) till the end of 2017. It also calls for the Cabinet to design and propose changes to the tax regime for grain exporters by end-1Q15.



The draft offers to keep, for all of 2015, the natural gas production royalty rate at 55% of the retail gas price for those producing gas from shallow deposits (the rate was 28% before it was heightened to 55% in August 2014 till the year end) and sets a 20% royalty rate for those producing gas from deep deposits, below 5 km (the rate was 15% before it was heightened to 28% in August 2014 till the year’s end).



On top of that, a new 70% tax rate is offered for those gas producers who operate under “agreements on common activity” with state gas producers. The Cabinet is also ordered to propose changes in the tax burden for gas producers by end-2Q15. The 2015 draft budget law foresees income from gas royalties of UAH 22.8 bln, which is UAH 12.5 bln more than the 2014 plan.



The draft law also introduces new taxes, like an excise tax for cash purchase of foreign currency (2%), a UAH 25K annual tax for luxury cars, as well as allows local governments to establish a tax for residential property. It will also establish an increased (20% vs. standard 15%) personal income tax for high-paid individuals (earning above USD 700/month) and keeps valid a 1.5% “war tax” on personal incomes, introduced in August 2014.



Alexander Paraschiy: At this moment, we believe most of the proposed tax initiatives have a high chance to be approved by the government. This is in line with what we anticipated in our initial report on local natural gas producers – the government cannot avoid the temptation to keep high tax burden, whatever it costs to affected industries.



Clearly, such initiatives promise little positives for domestic producers of gas, especially those operating shallow wells, JKX Oil & Gas (JKX LN) and Serinus Energy (SEN PW), whose share of Ukrainian gas in total hydrocarbon output was 39% and 71%, respectively, in 1H14. The draft law gives a chance for Regal Petroleum (RPT LN), which operates deeps wells in Ukraine, to slightly decrease its tax burden next year, as compared to 2H14.



No doubt, the news is slightly negative for grain exporter Kernel (KER PW), as well as for most Ukrainian grain producers, who will have to share the costs of non-reimbursed export VAT with grain exporters. The redemption of export VAT to grain exporters, which could become effective since Jan. 1, 2015, could have been one of growth drivers for Kernel (KER PW) (27% of its EBITDA was generated from grain trading segment in FY2014).



The new tax code retains a 8% tax for iron ore extraction (first time implemented in August 2014, up from 5% implemented in April 2014 and less than 1% before), though allows for adjustments, depending on iron ore grade. While this offers little surprise, it clearly promises nothing good for Ferrexpo (FXPO LN) and Metinvest (METINV) - we estimate the extraction tax will cut 6% and 4% of the companies’ EBITDA in 2015, respectively. In comparison, the effect of the tax on their EBITDA was less than 2% in 2013.

Источник: Конкорд Капитал