The Cabinet amends tax rules for the oil and gas industry

Yatsenyuk wants to relieve the tax burden on Naftogaz of Ukraine

Photo: Reuters

The government has proposed to the Verkhovna Rada to change taxation in the oil and gas industry and the electricity sector. Arseniy Yatsenyuk’s Cabinet chose the European experience in taxation as a guideline. In addition, on the eve of creation of a joint venture for the management of Ukraine’s gas transport system the government recommended to exempt NJSC Naftogaz of Ukraine from payment of rent for the transit of gas.

Up and cancel

The Cabinet proposed to annul several taxes to optimize their number, according to the draft amendments to the Tax Code published on the website of the Verkhovna Rada. However, their quality and size also underwent certain changes. In particular, the government is going to cancel a special surcharge to the existing natural gas tariff for consumers of all forms of property, the rental fee for transportation of oil and petroleum products through major oil pipelines, as well as the rent for the transit of natural gas.

Under the current Tax Code, the surcharge is 2% of the cost of gas supplied to municipal heating companies, thermal power plants, power stations, boiler stations, budget organizations and industrial enterprises, while for the households the surcharge is 4% of the price of gas. The code also provides the rent for the transit of gas at the rate of UAH 1.67 per 1,000 cu m for every 100 km of the route of transportation, the rent for the transit of oil – UAH 4.5 per 1 t of oil and the rent for oil products – UAH 4.5 per 1 t.

Big money

Acting President of the Ukrainian NGO Union of Members of Liberalization of the Gas Market Oleh Bakulin explained in a conversation with Capital that today the highest gas prices are set for industrial consumers and state-funded organizations. The National Energy Regulation Commission (NERC), which recently folded, set a limit on gas prices for these consumers at UAH 4,874 per 1,000 cu m. Thus, they pay a surcharge of UAH 97.48 for each 1,000 cu m of purchased gas.

It is not that much money, but on the scale of the country a fairly notable amount accumulates by the end of the year – in 2014 the national budget should receive revenues of UAH 2.1 bn from this surcharge. Nonetheless, the government will not lose much by eliminating the surcharge. “Annulment of the tax may go unnoticed on the backdrop of the imminent hike in gas prices for consumers,” said Bakulin.

The anticipated proceeds from other taxes proposed for cancellation by the Cabinet are also significant. In particular, this year the budget should receive UAH 104 mn from the rent for transportation of oil and petroleum products through main pipelines. The government planned to receive even more from the rent for the transit of natural gas – UAH 1.5 bn.

Co-chairman of the Energy Strategies Foundation Dmytro Marunych believes the Cabinet decided to forego the money as it hopes to attract an investor in the company that will manage the gas transport system. “The joint venture for transit must be profitable, otherwise who will invest money in it?” he stressed.

Excise duty on electricity

Another innovation of the Cabinet is the inclusion of electricity on the list of excisable goods. The explanatory note to the aforementioned bill reads that the surcharge on the current electricity and heat rates will be cancelled, which is currently 3% of the cost of electricity. Instead, a 3.2% excise duty on electricity will be charged.

Marunych says such principles of taxation are implemented in the European model and the Cabinet is simply adjusting the Ukrainian model to it. “I presume it would be difficult for our government to explain to representatives of the energy community the essence of the surcharge,” he added.

At the same time, a representative of one energy companies, who requested anonymity, said the cancellation of the surcharge on power is a correct move. “This surcharge was transferred to the budget from which miners, farmers and others benefited, though the power industry clearly did not benefit from it. One year power companies transferred UAH 1.2 bn of this surcharge to the budget, but received approximately UAH 500 mn,” said the source. “The Cabinet used the money at its own discretion”.