New taxation model focused on financial result is being formed for the oil and gas sector

20 september 2016 | Rossiyskaya Gazeta

Expert of the Analytical Center Alexander Kurdin has his own column in Rossiyskaya Gazeta. The expert discusses whether the new taxation model is helpful in budgetary deficit elimination.

Alexander Kurdin
Alexander Kurdin
Department for Fuel and Energy Sector

Statistics of the Reserve Fund expenditure suggests that chances are high for it to be exhausted next year, unless oil prices gain sustainable level above USD 50 per barrel.

During the first 8 months of 2016, approximately RUB 1.6 trillion was spent out of RUB 3.6 trillion of the Reserve Fund as of the beginning of the year. And this is not the most pessimistic result — according to the February estimates of the Analytical Center, given current external situation, expenses could have exceeded RUB 1.9 trillion.

There is the National Wealth Fund as well, which (USD 73 bn) by more than 2 times exceeds the Reserve Fund, but its purposes are different, and its use for budget financing would be an extreme measure that would be a significant negative signal of structural instability of the Russian budgetary policy.

What are other sources to finance the deficit? The easiest way to find them, according to a well-known joke, is to search 'under a lamp', i.e. in those industries where profits are visible. First of all, in the oil and gas sector.

The level of total net profits of major oil and gas companies in 2015 was RUB 2-2.5 trillion, and it can reduce slightly in 2016-2017 against the backdrop of reduced oil prices. The level of the probable federal budget deficit in 2017, subject to oil prices of approximately USD 40, can be slightly higher, above RUB 2.5 trillion.

There are several ways to increase the tax burden on the oil sector. The main one is to increase (by approximately 1.5 times) the mineral extraction tax (MET). If the basic MET rate increases by 1.5 times (i.e. the actual rate increases by approximately RUB 3,000 per ton), then the additional income to the federal budget resulting from this measure may reach RUB 1.3 trillion. Generally speaking, in this case, the budget deficit burden in 2017 is equally divided between the state and its Reserve Fund, on the one side, and the oil and gas sector companies, on the other side (1/5 of this amount is de facto covered by regional budgets due to decreased income tax). In this case, the Reserve Fund is quite sufficient for 2017, and there will be a certain balance in it.

Thus, it is possible to balance the tax system at the expense of the oil and gas sector. But the state has to try to settle simultaneously 2 other tasks that are hardly compatible with this one. First, to ensure stable rules of the game in order not to scare away investors, especially before of state company share privatisation. Second (but no less important), to improve structural parameters of the industry tax system in general, including resistance to external shocks in view of spending of the larger part of the Reserve Fund and continued unfavourable situation on the raw material markets. However, interests of oil and gas sector companies are the same, and the main issue is that of cost distribution, and which is even more important, new mid- and long-term rules.

Consequences of the budget balancing at the expense of oil and gas companies will be quite unfavourable for the latter, i.e. loss of half of respective profits for the state needs is relatively acceptable for state companies, but it is hardly acceptable for private companies. In fact, the risks of oil and gas companies (including private ones) that arise in case of unbalanced state budget may justify such compromise for investors. However, these will hardly justify a constant search for a compromise.

In this connection, especially important are other elements of the tax system reform package that is being coordinated these weeks by authorities both among themselves and with companies.

The solution is a new taxation model for the oil and gas sector focused on financial result, although now the name has changed, and it concerns additional incomes. Arguments for the system retaining MET (first of all low possibilities for manipulation) and that based on financial result (economic performance) have been considered many times, and now it is important that the package of tax reforms contains inherent stabilizers. If a tax system, as it is the case now, provides for withdrawal of all or almost all additional income of oil and gas companies subject to high prices and minimisation of tax burden subject to low prices, then the conjunctural risks are passed to the state. Then it turns out that these risks come back to the companies again, once the state lacks money. All the players would be more confident, if the tax burden dependence on prices was more even.

Source: Rossiyskaya Gazeta