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Fiscal Innovations: from Tax Manoeuvre to New Experiments

Fiscal Innovations: from Tax Manoeuvre to New Experiments

The oil industry has insisted that the taxation system should be changed for a long time now. So far, however, every innovation seems to add more problems. For instance, this concerns the tax manoeuvre. There is no intention to carry it through.

The promise to cancel the export duty seems to be a prospect of too distant a future. Besides, there seems to be no way the government can think of how to help oil refining, the main victim of the tax manoeuvre.

Thus the tax manoeuvre becomes not only long-drawn-out, but increasingly complicated. Meanwhile, there is already a new fiscal system on the horizon.

This year the industry has finally approached a change of the philosophy of taxation on the oil sector: from taxing revenue to taxing profits. Additional income tax (AIT) parameters have already been defined. It will be an experiment so far though.

And there is every chance that it will be a slow one. It is especially so because companies, realising the extremely slow speed of transition to taxing profits, have clearly changed their tactics. While they fought for AIT earlier, now they defend fiscal incentives. The Finance Ministry would like to sacrifice the latter and trade them for AIT. However, even the Finance Ministry’s strong bastions sometimes cannot withstand lobbying attacks mounted by oil companies, which is clearly exemplified by the affair with a new incentive for Samotlor, one of the 2017 hits.

The report elaborates on the following issues:

  • The fate of the tax manoeuvre

    • Originally, it consisted in gradual reduction of the export duty on oil to zero along with simultaneous growth in MRET. However, neither the draft state budget nor other official documents show any signs of a zero rate of the export duty for the next three years.
    • How is the tax manoeuvre actually being carried out?
    • what adjustments have been made to it?
    • In what form and within what time frame can it be completed?
  • Oil refining as the main victim of the tax manoeuvre

    • Expecting more trouble: the prospects for refining after the export duty on oil is reduced to zero
    • Salvation options: “negative” excises and good old individual benefits
  • Dividends of state-controlled companies

    • The fight for payment of 50% of profit as a method for collecting additional money for the state budget
    • Who has won in the fight between the Finance Ministry and the state corporations?
  • The system of incentives

    • It is the industry’s main “lifesaver” in the period of low oil prices, the agreement with OPEC, and a budget deficit
    • What specific incentives oil companies get
    • How the amount of incentives has changed in recent years
    • The fight for incentives for fields with a high water cut: the Samotlorskoye case ”
    • The bureaucratic results of the “fight for Samotlor
  • Additional income tax: what is it after all?

    • Although the law on AIT has not been tabled in the Duma to date, the parameters of the experiment with the new tax are already known. The idea to tax profits underwent significant changes while it was discussed.
    • Why was financial performance tax not approved?
    • What are the main differences between the two tax treatments?
    • How will AIT work?
  • The Russian budget and levies on oil and gas companies

    • The financial performance of vertically-integrated oil companies in the first half of 2017
    • The dynamics of tax revenue collected from the companies in the sector
    • The winners and the losers
    • The new design of federal budget rules
    • The dynamics of the share of taxes in the costs of Russian companies
  • A medium-term forecast of developments

    • What taxes are oil and gas companies to expect in 2018-2020?

Contents of the report:

INTRODUCTION 3
Chapter 1. RUSSIAN BUDGET AND LEVIES ON OIL & GAS COMPANIES 4
Chapter 2. OIL AND GAS COMPANIES IN MIRROR OF ‘TAX MANOEUVRE’ 14
Chapter 3. A MILLSTONE ROUND THE NECK: HOW MUCH OIL & GAS INCENTIVES COST FEDERAL BUDGET 24
Chapter 4. AIT: FIGHT FOR OR AGAINST INCENTIVES? 40
4.1 Transformation of the financial performance tax concept 40
4.2 A bird in the hand: the fight for incentives for fields with a high water cut 45
4.3 Bolivar can carry double 50
Chapter 5. UNAVOIDABLE SACRIFICES TO TAXATION 53
A MEDIUM-TERM FORECAST OF DEVELOPMENTS 60
Date of release: December 4, 2017

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Analytical series “The Fuel and Energy Complex of Russia”:

New OPEC+ Deal and Future of Oil Business in Russia
Gazprom on the background of external and internal challenges
Regulation of Oil and Gas Sector in 2019 and Prospects for 2020
Fiscal Policy on Oil and Gas Sector: Revised as Often as Wikipedia
The tax system in the oil and gas sector continues to undergo radical changes. The beginning of 2019 saw the introduction of a new tax regime: additional income tax. That experiment was supposed to start migration of the oil industry to an innovative principle of taxation: on profit, not revenue. It seemed that a new main road was found. In the same year, however, the Finance Ministry launched an overt offensive against AIT. The fear of loss of government revenue now is more powerful than the threat of causing oil production to collapse in the medium term because of a tax system that does not stimulate investment. The Finance Ministry would strongly prefer to speed up the tax manoeuvre completion that earns the state budget additional money. Oil and gas companies respond to this with individual lobbying, attempting to wangle special treatment for their projects.
Ukrainian Gas Hub: Climax at Hand
The “zero hour” comes in less than a month: the contracts for gas transit through Ukraine and for supplying Russian gas to the country terminate at 10 am on 1 January. Meanwhile, Gazprom and Naftogaz are very far from looking for a mutually acceptable solution. The entire European gas business is watching intently the negotiations between Russia and Ukraine. Everyone is waiting for a new “gas war”: the January 2009 events proved to be a serious test both to European consumers and to Gazprom as a supplier. Is there still a chance of agreement? If there is not, will Gazprom cope with its obligations to deliver gas to Europe? Is Russia bluffing as it assures that the new infrastructure and gas in underground storage facilities will enable it to get by without Ukrainian transit even as soon as this winter? What will happen to Ukraine itself at the beginning of 2020?

All reports for: 2015 , 14 , 13 , 12 , 11 , 10 , 09 , 08 , 07

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