More Budget Revenue Can be Generated at the Expense of the Oil and Gas Sector

20 february 2016

The Analytical Center has held a Round Table on the optimization of the taxes in the oil and gas sector as the country is facing a short-term budget deficit. During the Round Table experts discussed possible changes to the key tax and export tariff rates levied on the oil and gas sector in 2016-2018, including the rate changes being implemented as part of the efforts to adjust the tax maneuver. Experts also considered some scenarios involving changes in the budget revenue, the financial situation and the production performance of oil and gas companies depending on the kinds of taxes they have to pay.

“Almost half of the federal budget revenue comes from the oil industry; and in 2015, it accounted for about 40 % of the federal budget revenue. The revenue of the oil and gas sector (about 80%) paid for industry growth,” said the Head of the taxation, customs and rates policy in the oil and gas sector of the Oil and Natural Gas Production and Transport Department of the Russian Ministry for Energy, Roman Kabakov. According to him, since early 2015, the Government has been implementing a tax maneuver in the oil and gas industry in order to shift the bulk of the tax burden from exports to production by gradually reducing the export tariffs on oil and petroleum products while simultaneously increasing the rate of the mineral resources extraction tax levied on oil. At the same time, the parameters of the tax maneuver were calculated while the oil prices were still high and now they are much lower with no prospect of oil getting more expensive any time soon, the specialist explained. “Naturally, the Finance Ministry is concerned about the short-term problems stemming from budget deficit and the easiest way to boost budget revenue is by levying more tax on the oil and gas sector,” Kabakov believes.

The government official reminded those present that in late January 2016, the Finance Ministry developed a draft proposal to increase the excise on motor fuel, which was backed by the government. “The finance ministry estimates that the higher excise should generate an extra RUB 90 billion in tax revenue. Our estimates are similar,” Kabakov said, “but this increase does not take into account the VAT factor that plays a role when the final consumer prices for motor oil are set and that translates into an additional increase of about 18%. Therefore, we are facing a direct risk that fuel prices may go up.”

There are also problems with the possible changes of the mineral resources extraction tax for oil. The proposed change would reduce the exemption from USD 15 to USD 7.5 a barrel, the official noted. “This proposal completely upends the entire taxation system in the oil industry to favor the state’s interests and increasing the tax burden on the oil extraction companies,” Mr. Kabakov pointed out.

Inna Rykova, the Head of the Centre for Sector Economics of the Financial Research Institute, believes that the current system is quite good at protecting the short-term interests of oil companies by damping the impact of oil price and currency exchange rate fluctuations but it does not do enough to take into account the diversity of oil production, transport and selling conditions. “The overall tax burden on the oil industry is hardly critical today, but the effectiveness of the current taxation system for both the treasury and the industry has been falling for quite some time,” the expert said.

Artem Plaksin, the Head of the Center for Monitoring and Assessment of the Energy Policy and Energy Efficiency Committee of the Russian Union of Industrialists and Entrepreneurs, believes that the Finance Ministry’s innovations will not change the structure of the industry, will only have a short-term effect and create conditions that may foster a crisis. “If the Government wants to raise taxes it must only be done when the economy is rising and not when it is shrinking,” the expert is sure. In his opinion companies need to optimize the costs they incur as a result of regulatory requirements found in laws and statutory acts.

Also read:

20th February 2016 - Article

List of Participants