Russian oil companies, government still at odds on production tax hike

21 September 2016, Week 37, Issue 899

Russian oil operators and the Finance Ministry remain at odds over tax issues, with the latter calling for higher production taxes and the former suggesting that consumers pay more.

This disagreement took centre stage last week at a meeting in Moscow between oil company representatives and government officials. At the meeting, which was chaired by Deputy Prime Minister Arkady Dvorkovich, the Finance Ministry began talks by suggesting that mineral extraction tax (MET) rates be raised to 1,392 rubles per tonne (US$2.93 per barrel), up from the current rate of 473 rubles per tonne (US$1 per barrel).

Ministry officials said this proposal would help the Kremlin cover budget expenses by generating 238 billion rubles (US$3.68 billion) in additional tax revenues. The MET increase would be accompanied by a reduction in the profit tax, so the government’s net gain would be around 200 billion rubles (US$3.09 billion), they added.

Oil company representatives were wary of this plan, which would cut into their own revenues at a time of relatively low oil prices. As such, they suggested that the Finance Ministry shift part of the burden of revenue collection onto consumers. Specifically, they called for suspending a scheduled reduction in excise taxes on refined petroleum products.

In Russia, diesel and gasoline are currently subject to excise duties of 5,290 rubles per tonne (US$10.9 per barrel) and 10,130 rubles per tonne (US$18.5 per barrel) respectively. Rates are due to sink in 2017 to 7,430 rubles per tonne (US$13.6 per barrel) for gasoline and 5,090 rubles per tonne (US$10.5 per barrel) for diesel. But if they remain the same, the government could collect an additional 97-100 billion rubles (US$1.5-1.55 billion) in revenues and then cover other holes in the budget by raising MET rates from 473 rubles per tonne to 716 rubles per tonne. (This would represent an increase of about US$0.515 per barrel.)

Russia’s Prime news agency reported that oil company delegates had put forward a second proposal that would be even more favourable to the industry. They said that if excise duties on diesel were raised by about 1 ruble per litre, MET rates would only have to go up to 601 rubles per tonne. (This would mark a rise of nearly US$0.14 per barrel.)

Alternatively, oil company representatives said, both MET and fuel excise rates could be left at current levels while oil export duties are raised. An increase of 450 rubles per tonne (US$0.95 per barrel) would allow the government to collect the money it needs, they said.

The Finance Ministry and other Kremlin agencies did not react immediately to these proposals. After the meeting, Economic Development Minister Alexei Ulyukayev said that the oil companies’ suggestions would have to be examined further. “I think this idea has not been sufficiently discussed,” he told reporters in Moscow. “I know the idea. I believe this is not the best decision.”

Ulyukayev indicated, though, that he was sympathetic to oil producers’ position. “The tax burden on the oil industry is quite big, and it is being revised too often, which creates uncertainty among investors,” he said. “We would certainly like investors to come to us.”

Joseph Murphy

Edited by

Joseph Murphy

Editor

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