ECU Alert Oil and gas tax regime in Russia: proposed changes 25 October 2016 EY s Russian Tax & Law practice was named a leading tax firm in Russia in World Tax 2015, an annual guide published by the International Tax Review. On 13 October 2016, the Government of the Russian Federation approved draft tax policy guidelines for 2017 and further plans for 2018-19. Pursuant to the guidelines, the Ministry of Finance developed a draft law, titled On Amendments to Parts One and Two of the Tax Code of the Russian Federation and other regulations of the Russian Federation, and submitted it to the Russian Government for approval. On 17 October, the Russian Government approved and tabled the bill in the State Duma 1. The bill amends the current oil and gas tax regime to introduce new definitions and make changes to the calculation methodology for Mineral Extraction Tax (MET) on crude oil, natural gas and gas condensate. It also establishes new excise duty rates on petroleum products for the period 2017-19. According to the accompanying statement, the amendments are intended to reduce Russia s budget deficit. However, the draft tax policy guidelines say that the proposed long-term increase in the tax burden on the oil industry would dramatically increase the likelihood of an accelerated output decline in mature oil provinces, and work is under way to develop an alternative mechanism to raise additional budgetary revenue without increasing pressure on the oil refineries. 1 http://asozd2.duma.gov.ru/main.nsf/(spravka)?openagent&rn=11078-7
Impact assessment of the proposed changes According to estimates of the EY Moscow Oil & Gas Center, the refining margin of an average oil refinery in Russia totaled RUB 1,000 per metric ton in Q3 2016. The proposed increase in excise duty on petroleum products paid by refineries may have an adverse impact on the economics of refining projects, given that it is difficult to shift the fiscal burden onto consumers as the oil retail business can do. For instance, an increase in excise duty of RUB 2,700 per metric ton for Grade 5 gasoline and of RUB 1,707 per metric ton for diesel fuel in 2017 versus the current 2017 plan might increase the amount of tax paid by refineries by around RUB 300 per metric ton* given the limited flexibility in price set by the refineries to their customers. The tax burden on upstream projects that do not enjoy any incentives, determined as a percentage of revenue, can vary from 42% to 65% in different pricing scenarios in 2017 and beyond. According to our estimates, the bill in question would drive this tax burden up by 1% to 3% in 2017-19, depending on macro fundamentals. Tax burden increase for upstream projects (compared with current conditions for 2017)** 3 % 2 % 1 % 0 % 2017 2018 2019 30 USD/bbl, 75 RUB/USD 50 USD/bbl, 62 RUB/USD 80 USD/bbl, 42 RUB/USD * excluding the impact of excise duty on other petroleum products and other factors, with 50% of the excise duty increase to be shifted onto consumers ** compared with the current economics of projects that do not enjoy any incentives. Tax burden = (Export duty on crude + MET on crude) / Revenue. 2
Term subsurface site The bill would add a provision to the Tax Code to define the term subsurface site as follows: a subsurface site is a subsurface area, whether or not limited by depth, the dimensional boundaries of which are identified by the geographic location of corner points as determined by the subsoil use license, including any mining and geological allotments. The current version of the Tax Code does not provide for this definition, and taxpayers have been guided by other laws and regulations, namely the Law on Subsurface Resources. However, the tax authorities often disagree with taxpayers over the issue when the application of reduced MET rates is at stake. Defining this term would eliminate the ambiguity in terminology. MET on natural gas At the end of 2015, a coefficient for natural gas (Cgp), standing for the export margin of one unit of fuel equivalent, was added to the formula used to calculate the coefficient Usf ( unit of standard fuel ) for determining MET rates on natural gas. Previously, the Usf formula, which is based on the prices of natural gas and gas condensate, as well as on the quantity of output, included a multiplication factor of 0.15 that was effectively raised to 0.2051 for taxpayers owning Unified Gas Supply System facilities and their affiliates in 2016. It was initially planned that increased MET rates on natural gas and gas condensates would only be applied in 2016. However, the bill submitted to the State Duma stipulates that for taxpayers owning Unified Gas Supply System facilities and their affiliates the 0.15 multiplication factor will be adjusted by a Cgp coefficient that will be equal to: 1.7744 in 2017 1.4477 in 2018 1.4876 in 2019 MET on gas condensate In 2016, the above multiplier of 0.2051 was also used to calculate the amount of MET on gas condensate. Since taxpayers that own Unified Gas Supply System facilities and their affiliates do not receive any economic rent from gas condensate production, a decision was made to provide for a mechanism to compensate these producers for the increased Usf coefficient. In particular, the bill stipulates that the adjusting factor (Ccm) used in the gas condensate MET formula should be divided by the respective Cgp coefficient to equalize MET rates on gas condensate for both the above organizations and independents. MET on crude oil Under the reform known as the big tax maneuver, export duty on crude oil was to gradually lower from 42% in 2015 to 36% in 2016 and to a further 30% in 2017. The planned reduction in the maximum rate from 42% to 36% in 2016 was later postponed, however, the maximum rate of export duty on crude oil is to be lowered to 30% in 2017. MET rates on crude oil are to be raised to reduce the national budget deficit. A new value is expected to be added to the formula used to calculate Em, a coefficient representing oil extraction factors. This value is due to be set at: 306 in 2017 357 in 2018 428 in 2019 Excise duty on petroleum products The bill provides for a further increase in excise duty rates on petroleum products in 2017-19. Oil products Grade 5 gasoline Tax rate, Russian rubles per metric ton 2017 (previo usly) 2017 2018 2019 7,430 10,130 10,535 10,957 Other gasoline 12,300 13,100 13,100 13,100 Straight-run gasoline 12,300 13,100 13,100 13,100 Diesel fuel 5,093 6,800 7,072 7,355 Middle distillates 5,093 7,800 8,112 8,436 3
Please note that the bill can undergo changes during discussion in the State Duma. We will continue to monitor the legislative process and keep you up to date with key developments in our subsequent reports. Authors: Rustam Nizametdinov Dmitry Dzyuba Anna Sokolova 4
Inquiries may be directed to one of the following executives: Moscow CIS Tax & Law Leader Peter Reinhardt +7 (495) 705 9738 Oil & Gas, Power & Utilities Alexei Ryabov +7 (495) 641 2913 Victor Borodin +7 (495) 755 9760 Financial Services Irina Bykhovskaya +7 (495) 755 9886 Maria Frolova +7 (495) 641 2997 Ivan Sychev +7 (495) 755 9795 Industrial Products Alexei Kuznetsov +7 (495) 755 9687 Consumer Products & Retail, Life Sciences & Healthcare Dmitry Khalilov +7 (495) 755 9757 Real Estate, Hospitality & Construction, Infrastructure, Transportation Vladimir Abramov +7 (495) 755 9680 Anna Strelnichenko +7 (495) 705 9744 Svetlana Zobnina +7 (495) 641 2930 Technology, Telecommunications, Media & Entertainment; Tax Performance Advisory Ivan Rodionov +7 (495) 755 9719 Vadim Ilyin +7 (495) 648 9670 Tax Technology Sergey Saraev +7 (495) 664 7862 People Advisory Services Zhanna Dobritskaya +7 (495) 755 9675 Gueladjo Dicko +7 (495) 755 9961 Sergei Makeev +7 (495) 755 9707 Ekaterina Ukhova +7 (495) 641 2932 Cross Border Tax Advisory Vladimir Zheltonogov +7 (495) 705 9737 Marina Belyakova +7 (495) 755 9948 Transfer Pricing and Operating Model Effectiveness Evgenia Veter +7 (495) 660 4880 Maxim Maximov +7 (495) 662 9317 Tax Policy & Controversy Alexandra Lobova +7 (495) 705 9730 Alexei Nesterenko +7 (495) 622 9319 Global Compliance and Reporting Yulia Timonina +7 (495) 755 9838 Alexei Malenkin +7 (495) 755 9898 Sergei Pushkin +7 (495) 755 9819 Law Dmitry Tetiouchev +7 (495) 755 9691 Georgy Kovalenko +7 (495) 287 6511 Tobias Luepke +7 (495) 641 2935 Alexey Markov +7 (495) 641 2965 St. Petersburg Dmitri Babiner +7 (812) 703 7839 Anna Kostyra +7 (812) 703 7873 Vladivostok Alexey Erokhin +7 (914) 727 1174 Ekaterinburg Irina Borodina +7 (343) 378 4900 For information about Foreign Countries Business centers in EY Moscow office please follow the link. Private Client Services Anton Ionov +7 (495) 755 9747 Customs & Indirect Tax Vitaly Yanovskiy +7 (495) 664 7860 Transaction Tax Yuri Nechuyatov +7 (495) 664 7884 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. 2016 Ernst &Young (CIS) B.V. http://www.ey.com/
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY works together with companies across the CIS and assists them in realizing their business goals. 4,800 professionals work at 21 CIS offices (in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Kazan, Krasnodar, Togliatti, Vladivostok, Yuzhno-Sakhalinsk, Rostov-on-Don, Almaty, Astana, Atyrau, Bishkek, Baku, Kyiv, Donetsk, Tashkent, Tbilisi, Yerevan, and Minsk). EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Contacts Almaty +7 (727) 258 5960 Astana +7 (7172) 58 0400 Atyrau +7 (7122) 99 6099 Baku +994 (12) 490 7020 Bishkek +996 (312) 39 1713 Ekaterinburg +7 (343) 378 4900 Kazan +7 (843) 567 3333 Kyiv +380 (44) 490 3000 Krasnodar +7 (861) 210 1212 Minsk +375 (17) 240 4242 Moscow +7 (495) 755 9700 Novosibirsk +7 (383) 211 9007 Rostov-on-Don +7 (863) 261 8400 St. Petersburg +7 (812) 703 7800 Tashkent +998 (71) 140 6482 Tbilisi +995 (32) 215 8811 Togliatti +7 (8482) 99 9777 Vladivostok +7 (423) 265 8383 Yerevan +374 (10) 500 790 Yuzhno-Sakhalinsk +7 (4242) 49 9090 2016 Ernst & Young (CIS) B.V. All Rights Reserved. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.