The first meeting of the working group for the development of changes in legislation regarding royalties on gas production took place on April 1st

4/1/15

To increase the energy independence of Ukraine, which requires an increase in domestic natural gas production, the Ministry of Finance is working on finding the optimal model of taxation for the oil and gas industry in Ukraine that would combine both the needs of the state budget and increase the investment attractiveness of the gas production industry.

To this end, the Ministry of Finance created a working group, which aims to develop proposals for changes in tax legislation that will meet the best international practice in the field of taxation in oil and gas sectors as well as the fiscal needs. The first meeting of this committee took place on April 1st.

The working group includes representatives of the executive and legislative branches of government, as well as representatives of the business community. From the executive branch are representatives from the Ministry of Finance, Ministry of Economic Development and Trade, Ministry of Environment, Ministry of Energy and Mines, and State Fiscal Service from the Government.

From the legislative branch, the working group includes representatives of all parliamentary groups within the government coalition. In particular, there are representatives of the political parties “Block of Petro Poroshenko”, "Samopomich", "Narodnyi Front", National Union "Batkivschyna" and “Radicalna Partiya”.

From the business community and international organizations representatives include the European Business Association (EBA), the American Chamber of Commerce (ACC), IHS, the European Bank for Reconstruction and Development (EBRD), and the International Monetary Fund (IMF).

"We strive to find a balance of interests. The government, MPs, civil society and business community will work on innovations. Only by comparing the oil and gas industry taxation in Ukraine with international experience, can we draw conclusions about the future of modeling tax regimes in our country." - Olena Makeyeva, Deputy Minister of Finance of Ukraine. To advise the staff of the Ministry of Finance on the best international practices in the taxation of gas production, the IMF technical mission worked with the Ministry from 18 to 25 March 2015. The mission presented a model for evaluating fiscal regimes in the extractive industries to civil servants. The model provides the possibility of finding the optimal regime for mining, including oil and gas, based on the use of actual economic performance of enterprises and by the selection of tax rates.

While working with the technical mission, the Minister of Finance’s staff compared the impact of different tax regimes for budget revenues and for enterprises' profit or loss, and analysed several scenarios involving changes in the taxation of the gas production industry by reviewing the rates of rent for use of subsoil with simultaneous change in the tax rate on profits.

"Targeting only royalties may lead to a distortion of the amount of investment and production. The profitability of the industry should become one of the major targets regarding the energy security of our country, "- commented Olena Makeyeva.

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