Russia’s government has taken an important step towards reforming the taxation regime governing the oil industry.
On July 5, members of the State Duma, the lower house of the country’s parliament, voted in the third and final reading to approve a bill imposing a tax on the profits earned by crude oil producers. The new profit tax will replace the current regime, known as the mineral extraction tax (MET), which targets production.
Legislators began debating the measure earlier this year and approved it in the first reading in April. They will now send the bill to the upper house, the Federation Council, for another vote. Once it secures approval there, it will be sent to President Vladimir Putin for signature.
The Russian Energy Ministry has hailed the results of the third round of voting. In a statement dated July 5, it said that the switch to a profit tax “would take a more correct and rational approach to subsoil development, increase the profitability of subsoil use, ensure inflows of investment in the development of mature and unconventional deposits and promote the use of enhanced recovery methods.”
This echoes the line of reasoning that Russian oil companies have followed when lobbying for a profit tax. Oil operators have long argued that the government’s decision to tax production and not income discourages investment in development operations.
The new rule is due to take effect on January 1, 2019. It will levy a 50% tax on excess profits – that is, sales revenue minus export tariffs, production and transportation costs and reduced MET payments.
Initially, the rule will apply only to a limited number of fields – specifically, to 35 sites in Western Siberia that have been assigned to Rosneft, Lukoil, Surgutneftegaz, Gazprom Neft and other domestic oil operators. According to Russia’s Finance Ministry, these fields are set to yield about 22 million tpy (440,000 bpd) of crude in the first few years after the new tax regime takes hold. This will be equivalent to about 4% of the country’s total oil output.