Preferences for oil refineries

The Ministry of Energy and Coal Industry of Ukraine prepared two bills for the development of domestic oil refineries and to improve the competitiveness of Ukrainian oil products. As Interfax-Ukraine reports, referring to a copy of the corresponding documents, the first bill presupposes establishing a zero VAT rate on oil imports until December 31, 2012 (for oil refineries at all stages of the technological and production process for oil product production). The second bill presupposes cancelling duties and establishing a zero VAT rate on imports of “critical” equipment for the reconstruction and modernization of oil refineries and gas refineries until December 31, 2013. So far there is no official information about these documents from the Ministry of Energy and Coal Industry of Ukraine. However, as the news organization’s sources state, the Cabinet of Ministers was supposed to consider these bills on May 18. The Day’s experts confirmed the existence of these documents and assessed their influence on the sector.

COMMENTARIES

Serhii KUIUN, director of the A-95 Consulting Group:

“The bill on privileges for oil imports, which the Ministry of Energy and Coal Industry of Ukraine elaborated, can substantially deform competition on the oil products market, and cause big losses in what concerns consumer interests and the state budget. This document creates a field for avoiding taxation, in our case – avoiding VAT payments while supplying oil by means of using temporary firms, which will all disappear, taking with them the obligation to pay the VAT. If the bill is approved as it is, then, if the oil price remains at 100 dollars per barrel, the loss for the state budget from its supply to Ukraine by the end of 2011 will constitute over eight billion hryvnias.

“Ideally, the bill will provide a postponement for oil refineries importing oil. That is they will pay taxes not on the border, but based on their shipment of ready products. In this case oil refineries will not freeze current assets, as it is being done at present. For an enterprise a little postponement in paying taxes will allow to decrease the pressure on current assets. But the problem of this document lies in the fact that in its current state it poses a huge threat of creating a tax loophole from which oil import revenues will leak out of. I mean that the bill presupposes VAT privileges for all – any company can come and get a postponement for paying the VAT at the border. Then it will resell this oil to a plant without paying the VAT, and then this mediating company disappears without a trace. If the law doesn’t mention that only oil refineries will get a VAT privilege while importing oil, one should expect a lot of [companies like] Livela.”

Hennadii RIABTSEV, deputy director of Scientific-Technical Center “Psyche”:

“If the bill on preferential oil and oil products imports is approved, the budget will lose 4.4 billion hryvnias as a result of canceling the VAT. This figure doesn’t include a billion from the excise decrease. In addition, the transport duty will be cancelled for three months. This document is not beneficial for Ukrainian oil producers either, since the oil they extract will be 20 percent more expensive than imported oil. So it looks like it’s also a blow to Ukrainian oil production.”

Leonid KOSIANCHUK, president of the association Union of Oil Market Operators of Ukraine:

“Per se, the law on preferences on importing oil for domestic oil refineries can be good, but only if the points on exempting mediating structures from VAT payments are eliminated and this right is kept only for oil refineries. If these changes are not introduced, it will become one more step to the redistribution of domestic retail oil products market and its monopolization by companies owning oil refineries. So far it is in the committees of the parliament and in the field ministry. It is unknown when it will be submitted to the Rada and whether they will be able to vote for it before the holidays.

“I elaborated another document back in 2007, when I worked as a department director at the Ministry of Energy and Coal Industry of Ukraine. But it was never submitted to the parliament because Viktor Yushchenko disbanded the Rada. This document is rather useful for the modernization of production capacities and is needed for the field.”