120Factors that affect the total tax chargeThe total tax charge/(credit) for the year of $22.9m (2010:$0.4m) is higher (2010: lower) than the average rate of UK corporation tax of 26.5% (2010: 28%). The differences are explained below: Total tax reconciliation 2011 2010 $000 $000Profit before tax 20,792Tax calculated at 26.5% (2010: 28%) 21,750 5,822Other fixed asset differences 179 68Net change in unrecognised losses carried forward 2,197 (2,295)Other temporary differences 806 1,135Permanent foreign exchange differences 392 140Effect of tax rates in foreign jurisdictions (2,958) 2,618Other non-deductible expenses 2,446 2,775Recognition of prior period losses (24) (7,549)Total excluding impact of change in tax rates, tax losses of prior year not previously recognised and impairment and write down of fixed assets 24,788 2,714Effect of changes in tax rates (3,415) (4,945)Impairment of oil and gas assets/write off of exploration costs 1,567 1,867Total tax charge/(credit) 22,940(364)No liability to UK taxation has arisen during the year (2010: $nil) due to the availability of tax losses and relief for overseas taxes paid on dividends received. The current tax charged in the period relates to Ukrainian corporation tax which has arisen in the Group subsidiary, Poltava Petroleum Company. Taxes charged on production of hydrocarbons in Ukraine and Hungary are included in cost of sales (see note 18).Factors that may affect future tax chargesA significant proportion of the Group's income will be generated overseas. Profits made overseas will not be able to be offset by costs elsewhere in the Group. This could lead to a higher than expected tax rate for the Group.The main rate of UK corporation tax effective from 1 April 2011 was reduced from 27% to 26%. The 2012 Budget announced a reduction to the main rate of UK corporation tax from 26% to 24% from 1 April 2012 and proposes to make further reductions to the main rate of 1% per annum to 22% by 1 April 2014. The impact of the rate reduction is not expected to have a material impact on provided and unprovided UK deferred taxation.In December 2010 a new Ukrainian tax rate was introduced. New corporation tax rates in the Ukraine for 2011 are as follows: from 1 January 2011 to 31 March 2011 - 25%; from 1 April 2011 to 31 December 2011 - 23%;and the expected corporation tax rates in 2012 - 21%; in 2013 - 19%; after 31 December 2013 - 16%. Taxation in Ukraine - production taxesThe Group is subject to uncertainties relating to the determination of its tax liabilities. Ukrainian tax legislation and practice are in a state of continuous development, with new laws coming into effect at times which can conflict with others and, therefore, are subject to varying interpretations and changes which may be applied retrospectively. Management's interpretation of tax legislation as applied to the transactions and activities of the Group may at times not coincide with that of the tax authorities. As a result, the tax authorities may challenge transactions and the Group may be assessed for additional taxes, penalties and fines which could have a material adverse effect on the Group's financial position and results of operations.Since PPC's inception in 1994 the Company has operated in a regime where conflicting laws have often existed, including in relation to effective taxes on oil and gas production. Various laws and regulations have existed and have implied a number of variable rates.PPC has at times since 1994 sought clarification of their status regarding a number of production related taxes, and has been subject to a number of such taxes, at various rates, which have been paid and accounted for within Operating Costs within the Group Income Statement. In late 2009, coinciding with the lead up to the Presidential election in Ukraine, PPC was subjected to increased operational pressures in several areas, including broader taxation.Group financial statementsNotes to the financial statements continued
JKX Oil & Gas plc Annual Report 2011121At a glance01-17Board statements18-23Operational review24-36Financial review37-47CSR review48-61Directors' reports62-83Financial statements84-136On 1 January 2010 yet another law came into force in Ukraine in the area of production related tax, the Law of Ukraine on 'On Rent Charges for Oil, Natural Gas and Gas Condensate' which had been suspended since 2004. During 2010 conflicting laws (most particularly the Law of Ukraine on 'Amending Certain Legislative Acts of Ukraine') which may be a basis for the Ukrainian Tax Authorities to assert that further production related taxes are due from various oil and gas companies, including PPC for periods through to 31 December 2010.PPC continues to defend itself in court against action initiated by the tax authorities concerning rules of calculation and payment of various production related taxes for periods from January to March 2007. The statutory period of limitation in Ukraine for such matters is three years. If PPC was subject to maximum production related taxes for the periods from January to March 2007 and from April 2009 to December 2010, additional production related taxes could be approximately twenty per cent of Ukraine gross revenues for those periods (net of corporate tax savings), plus interest and penalties. The Group considers that the likelihood of additional production related taxes for the period from January 2008 to March 2009 is remote on the basis of tax audits completed, the related legal position and the three year statute of limitation. The Group would exhaustively challenge the payment of any further production related taxes (over and above those it has already paid) for the period through 31 December 2010. Given the lack of clarity over the legal position together with arguments that the Group has to defend its position, the Group considers that no payments are likely to be made in the next 12 months.A new tax code became effective in Ukraine on 1 January 2011 replacing most of the previous tax laws. The new tax code has removed uncertainty over the applicability of rental fee payment by PPC from 2011 and accordingly PPC has paid $67.1m during the year (2010: nil) (see note 18). The fees are levied on production volumes in accordance with a rates schedule which may change from time to time. Such payments are recorded in Cost of sales.26. Deferred tax Assets Liabilities Net20112010 Provided deferred taxation - net2011 2010 2011 2010$000$000 $000 $000 $000 $000Fixed asset differences - - 13,061 17,049 13,061 17,049Other temporary differences (4,809) (7,967) - - (4,809) (7,967)Tax losses (8,623) (10,624) - - (8,623) (10,624)Net deferred tax asset (371) (1,542)A deferred tax liability of $12.1m (2010: $11.5m) arises in respect of PPC's activities and $1.2m (2010: $0.5m) in respect of Hungarian activities.A deferred tax asset of $3.8m (2010: $5.7m) has been recognised in respect of brought forward UK losses, $7.9m (2010: $4.9m) in respect of Yuzhgaznergie LLC comprising Russian tax losses. The movement on the deferred tax account, without taking into account the offsetting of tax in the same jurisdiction, is as follows: 1 January Charge/(credit) 31 December 2011 the year 2011 $000 $000 $000Deferred tax liabilitiesFixed assets differences 14,997 1,205 16,202Deferred tax assetsOther temporary differences (7,967) 3,158 (4,809)Net change in recognised losses carried forward (8,572) (3,192) (11,764)(16,539) (34) (16,573)Net deferred tax movement (1,542) 1,171 (371)The main rate of UK corporation tax effective from 1 April 2011 was reduced from 27% to 26% and from 26% to 24% from 1 April 2012. Deferred tax has therefore been provided at 25% based on when the deferred tax is expected to unwind and the substantively enacted rate at the reporting date.