July 3, 2015 representatives of LLC “Arab Energy Alliance UA” participated in a telephone conference with representatives of the IMF, which, on the instructions of Prime Minister of Ukraine Mr. Yatsenyuk, held Minister of Finance of Ukraine, Ms. Natalia Jaresko.

The conference was attended by representatives of the Ministry of Ecology and Natural Resources of Ukraine, the International Monetary Fund and the European Business Association, whose member is LLC “Arab Energy Alliance UA”. The meeting discussed the optimal model of taxation of business entities that carry out activities for the extraction of natural gas. Before the discussion Ms. Jaresko said that rent reduction is an absolute necessity, because after raising the rent for gas in August 2014 (55% for wells up to 5 km and to 28% for wells deeper than 5 km), gas producing companies significantly reduced investments in the development of production, leading to a decline in gas production in Ukraine. For the participants of the meeting was represented the analysis of models proposed by international company IHS and by the Ministry of Finance, which agreed its position with the IMF. Both models consider the transitional period from 1 October 2015 and the basic period from 01.01.2016 (on the initiative of the enterprise) or from 01.01.2017 (for all companies).

According to IHS, taking into account the world practice of taxation of gas production and analysis of geological and economic indicators of gas producing companies in Ukraine, in the present circumstances, the optimal in the short term would be the introduction of these rent rates: 34% – 29% – 14% depending on the depth, while maintaining the tax on profits 18%. In the further is offered to move to rental rate of 8%, regardless of the depth and the introduction of additional tax on profits 29% and 58% depending on the reinvestment of net income.

According to the model proposed by the Ministry of Finance is offered in the first phase to reduce rental rates to 40% and 20%, and in the second phase to move to a single rate of 20% and the introduction of additional income tax of 30%.

Business and relevant ministries representatives noted that the model proposed by IHS, allowing at the first stage to form a fund to invest in development (drilling of new wells, the overhaul of the old and construction of processing facilities), and the model provides for the long term, stimulates enterprises to reinvest profits and increase production.

Option proposed by the Finance Ministry and the IMF, in the first stage will save businesses from losses, but the investment may begin only on the second phase. Very important in determining the rent on the depth of the well is the fact that most of the wells drilled to a depth of at least 5 km. Thus, the companies are actually paying the maximum rent.

Given that the IMF support the model proposed by the Ministry of Finance, it is unlikely that this year gas producing enterprises will be able to invest in development and increase gas production.