Treasury gains more than expected from the big tax maneuver

28 march 2017

"The natural gas and oil sector plays a big role both in federal budget revenue and in ensuring the country's economic growth, so the issue of optimizing the taxation of oil and natural gas companies is getting more and more relevant," Alexander Kurdin, Head of Research at the Department for the Fuel and Energy Sector, said as he opened the round-table on the impact of the taxation system in the financial and economic stability of Russian oil and gas companies.

Mr. Kurdin is of the opinion that some of the most important decisions have been made in the past 3-4 years: the implementation of the tax maneuver, measures to stimulate the development of complex and hard-to-get-to deposits, on-the-fly adjustments aimed at balancing the federal budget. At the same time, further steps are being planned to reform the taxation in the oil and gas industries. The steps require precise estimates of their impact on the companies, the specialist believes.

During the discussion the experts assessed the impact of the planned tax reforms on the financial and economic stability of the companies and identified informational and methodological problems with the efforts to analyze the effects of the taxation system. The specialists noted that it was very important to keep a balance between the tax load and the impact of other external factors on the companies to prevent negative consequences for the industry in the future.

Analytical Center expert Irina Pominova presented an overview of the approach to estimating the impact of taxation systems. "In our opinion the most suitable and currently the most common method is simulation. However, it requires availability of big data," the expert said. Ms. Pominova also highlighted econometric modeling and company surveys as promising methods. "Preliminary estimates for 2016 suggest that at the level of the industry as a whole the tax burden has gone down thanks to the flexibility of the existing system," the expert said. "At the same time, there was a slight increase in the tax burden in the oil refining sector, but the effect of that has been dampened somewhat by the new tariffs." The analyst went on to point out that the situation at the level of companies is roughly the same as in the industry as a whole.

The tax maneuver balances the interests of the government, the industry and the consumers by changing the tax on the extraction of mineral resources, tariffs and excise rates, believes VYGON Consulting Chief Economist Sergey Ezhov. In his opinion, as a result of the big tax maneuver, the treasury made an extra RUB 70 billion in 2015 compared with the old tax system. At the same time, the added budget revenue in 2016 also came primarily as a result of reduced oil production, Mr. Ezhov noted.

The potential of independent oil and gas companies depends on the state approach to regulating this sector, Elena Korzun, the CEO of AssoNeft, is sure. "Independent oil and gas companies can increase production within the framework of the existing tax laws," the expert said. "However, it is important to draw on the international experience in supporting such companies and create a targeted system for stimulating their activities."

The experts also noted that improvements are needed not just in the tax system but also in the laws and regulations, including licensing, land allocation laws and others.