Tax on Financial Result to Restore Oil Production in Western Siberia

23 june 2015

The Analytical Center held a round table on the problems and prospects of introducing a tax on financial result in the oil industry, during which experts discussed options for reforming the taxation in the oil industry, specifically whether the mineral extraction tax should be kept in place, whether a new tax on financial results/excess profits tax, a combined system, should be introduced, as well as mechanisms, procedures and the timeframe for introducing the new taxation system for the oil industry.

Deputy Director of the Oil and Gas Production and Transportation Department of  Russia’s Energy Ministry Andrey Tereshok noted that work to improve the taxation system has been underway for a long time and several stages have already been completed, one of which was the so called tax manoeuvre. “The idea was to swap the export tariffs on oil and petroleum products and the mineral extraction tax charged on oil production,” the specialist said. Mr. Tereshok also identified the goals of the tax manoeuvre, one of which was to create additional incentives for oil companies, promote deep processing, reduce inefficient processing and subsidies to unprofitable oil refineries. “The audit conducted showed that almost all of the targets have been achieved,” said Mr. Tereshok, “The tax manoeuvre did what it was supposed to but there are some problems that still remain, having to do with maintaining the current levels of production at existing fields.” According to him, one negative development was declining output in Western Siberia. “The tax manoeuvre was supposed to have supported oil production but today the amount of tax paid by operators of traditional fields has increased so our goal now is to create conditions that would support production in Western Siberia,” Mr. Tereshok believes. The tax on financial result is a key innovation that should help achieve this goal. 16 pilot projects have been identified for transitioning to the tax on financial result. In addition, pilot projects proposed by independent oil companies are now being reviewed, Mr. Tereshok added.

VYGON Consulting Director for Business Development Anton Rubtsov believes that at the moment there are no criteria or a transparent mechanism for selecting pilot projects and no clear concept for how the result of the sector should go about transitioning to the tax on financial result once it’s been tested on the pilot projects. According to Mr. Rubtsov, the impacts of various options of the tax on financial result and excess profits tax on budget revenue, certain groups of fields and companies should be analysed. “We also need to use the system of state audit of project documents to select pilot projects and analyse the effectiveness of the tax on financial result as part of the audits. The tax on financial result should be introduced for all brown fields with the rate being gradually increased so it can slowly replace the mineral extraction tax and the export tariff. Then parameters for the excess profits tax should be developed for green fields and the new tax should then be introduced there,” Mr. Rubtsov believes.

The Head of the Center for Monitoring and Audits of the Energy and Energy Efficiency Policy of the Russian Union of Industrialists and Entrepreneurs Artem Plaksin believes that investments can ensure quality economic growth so the proposed reform of the taxation system should create the best possible conditions for the currently unprofitable fields as well as a stable system of state finances. “The main problem in the sector is lack of alternatives because the existing system of exemptions is not only inefficient from the point of view of the quality of state governance but it also has no future,” the expert believes. Mr. Plaksin also noted that business does not believe in reforms because of a perceived lack of political will.