Russia passes bill on excess profits tax in oil industry

Russia passes bill on excess profits tax in oil industry

Russia's State Duma passed the bill on introducing the excess profits tax in the country's oil industry in the final reading today.

The new tax system will be tested from January 1, 2019 on a limited number of oil deposits for several years, after which it will be decided whether to extend it to the entire industry, TASS reports.

Now, oil companies pay the mineral extraction tax (MET) and export duties. The excess profits tax is designed to partially replace the MET: its rate will be 50%, but unlike the MET, it will be levied not on the amount of oil produced, but on the sales revenue less the export duty, reduced MET and extraction and transportation costs.

The list of pilot projects includes 35 licensed sites in Western Siberia being developed by Rosneft, Lukoil, Gazprom Neft, Surgutneftegaz and other companies. According to the Ministry of Finance, under the excess profits tax regime, the extraction in these areas in the first years will be about 22 million tons or 4% of Russia's annual production.

A leading analyst of the National Energy Security Fund, a lecturer at the Financial University under the Government of the Russian Federation, Igor Yushkov, speaking to Vestnik Kavkaza, noted that the purpose of introducing the  excess profits tax is to encourage oil companies to develop new fields. "Only medium and small fields are being developed, due to which, production volumes are projected to fall - old fields are depleted and there is nothing to replace them. It is assumed that the excess profits tax will stimulate the development of new projects and, at the same time, the development of old ones to the last drop, which is not profitable for the  oil industry under the current tax regime," he said.

"In general, logic of this tax system is simple: you do not earn much money - you pay less in taxes, you earn more money - you pay higher rates of tax," Igor Yushkov explained.

Such a scheme will be really beneficial for companies. "Companies will launch new projects, the volume of production will increase, more projects will become profitable. The state will receive very high revenues at the peak of production. It is necessary to stimulate the launch of new projects, otherwise we will see a decline in budget revenues, and it is better to introduce a more profitable tax and monitor its execution, than just leave the MET," the leading analyst of the National Energy Security Fund stressed.

The advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house, economist Sergey Hestanov, drew attention to the shortcomings of the new tax. "When oil prices are high, the excess profits tax allows to receive large revenues to the budget. But on the other hand, when oil prices go down, the same tax brings less money to the state in comparison with the mineral extraction tax. Revenues depend heavily on the oil market situation. The excess profits tax looks more fair, as its value correlates with company revenues, while the excess profits tax is fixed," he noted.

"While oil prices are high, companies will pay more money, so in the current market situation the introduction of this tax will lead to an increase in budget revenues. But it is indirectly related to stimulating companies to develop new deposits. Rather, it was due to the need to levy taxes from oil companies more efficiently in the current situation," Sergei Hestanov concluded.

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