Overview of Key Taxation Changes in the Russian Federation with the Largest Impact on the Company’s Financial and Business Operations
Tax policy in the oil industry: tax manoeuvre completion and AIT introduction
Completion of the tax manoeuvre in the oil industry
On 1 January 2019, the Russian Tax Code and Russian Law on the Customs Tariff were amended to effect a phased reduction in export duties on oil, gas condensate and petroleum products until they are reduced to zero in 2024, with an equivalent increase in MET for oil and gas condensate.
Additionally, the tax manoeuvre ended with the adoption of the so-called reverse excise tax on petroleum feedstock, a scheme providing for an excise tax to be levied when crude oil is sent to a refinery with increased deductions received. The right to receive the reverse excise tax and to have relevant amounts reimbursed by the government is granted to the owners of petroleum feedstock sent for refining (including under tolling arrangements) in Russia.
Introduction of reverse excise tax on petroleum feedstock
The excise tax rate per tonne of petroleum feedstock to be refined depends on the actual past-month macroeconomic performance (Urals price and USD rate) and the refinery's product portfolio. An increased rate applies to refineries located in certain regions. For example, the highest multipliers are used in the excise tax calculation formulas for the Krasnoyarsk Territory (1.5) and Irkutsk Region (1.4).
The reverse excise tax also contains the so-called damping component (damper), which increases (in case of a positive damper) or decreases the final amount of excise tax reimbursed by the government, depending on the volume of motor gasoline and diesel fuel produced and supplied by the taxpayer to the domestic market, as well as the difference between the export alternative and notional domestic prices. Simultaneously, the MET calculation formula for oil was changed to include C MGDF, an additional summand increasing the rate in case of a positive damper.
|Excise tax due||Tax deduction amount||Amount to be reimbursed by the government (reverse excise tax)|
|E PF × V PF||E PF × V PF × 2 + СDAMP||E PF × V PF × 2 + СDAMP|
E PF is the excise tax rate depending on the actual past-month macroeconomic performance, the portfolio of products made at the refinery and refinery location;
V PF is the volume of petroleum feedstock sent for refining;
C DAMP is a damping component determined depending on the volume of motor gasoline and class 5 diesel fuel sold domestically and the difference between the domestic and international prices for these petroleum products (can be either positive or negative). The CDAMP calculation formula effective since 1 January 2019, was adjusted on 1 July 2019.
Tax on additional income from production of hydrocarbons
With effect from 1 January 2019, a limited number of oil production projects in Russia (see below for applicability criteria) are subject to a tax on additional income from hydrocarbon extraction (AIT).
|Group||Geographic location of subsoil areas||Depletion level as at 1 January 2017||Notes|
|1||Sakha Republic (Yakutia), Irkutsk Region, Nenets Autonomous Area, Yamal-Nenets Autonomous Area, north of the 65th parallel north, Krasnoyarsk Territory, Caspian Sea||Below 5%||Right of one-time exemption from AIT payment|
|2||No applicable limitations||No applicable limitations|| |
Subsoil areas include reserves of the fields specified in Note 8 to the EAEU Commodity Nomenclature of Foreign Economic Activity as at 1 January 2018.
Voluntary transition to AIT
|3||Khanty-Mansi Autonomous Area – Yugra, Yamal-Nenets Autonomous Area, Komi Republic, Tyumen Region||20%–80% (10%–80% if the depletion level as at 1 January 2011 is below 1%)||The subsoil areas are listed in the law|
|4||Khanty-Mansi Autonomous Area – Yugra, Yamal-Nenets Autonomous Area, Komi Republic, Tyumen Region||Below 5%||The subsoil areas are listed in the law|
The AIT rate is 50% of the tax base determined individually for each subsoil area using the following formula:
For the purpose of AIT tax base calculation, the estimated revenue is determined based on the market prices for hydrocarbons, the capital expenditures are recognised when paid, and losses (including historical losses incurred in the development of subsoil areas of groups 1, 2 and 4) are carried forward with an annual indexation of 16.3%. Given the specifics of tax base calculation, AIT is actually paid after the start of commercial production in the subsoil area and reimbursement of losses incurred.
Transition to AIT does not exempt from MET, though payable at a much lower rate than usual, and export customs duties. Besides, subsoil areas belonging to groups 1 and 2 are expected to be exempt from oil export duties at the initial development stage (seven years from the beginning of commercial production).
Excise on Petroleum Products
With effect from 1 January 2019, excise duties on petroleum products increased as planned (excise duties grew by 50% for Euro5 motor gasoline and diesel fuel, and by 39% for middle distillates, compared to the rates applied from June 2018) and a reverse excise tax was introduced for dark marine fuel with an increased tax deduction (with rate 2) allowed when it is used as fuel for marine vessels and installations (structures).
VAT and Corporate Property Tax
On 1 January 2019, the generally applicable VAT rate increased from 18% to 20%, and movable property ceased to be subject to corporate property tax.
|Excisable goods||1 January to 31 May 2018||1 June to 31 December 2018||1 January to 31 December 2019|
|Non-compliant with EURO-5||13,100||13,100||13,100|
|Straight-run gasoline||13,100||13,100||13,912 The rates are determined using the following formulas: ESRG = 100 + 865 × Cadj for straight-run gasoline; EBPO = 800 + 774 × Cadj, where Cadj= 0.167, for benzene, paraxylene, orthoxylene.|
|Benzene, paraxylene, orthoxylene||2,800||2,800||2,929 The rates are determined using the following formulas: ESRG = 100 + 865 × Cadj for straight-run gasoline; EBPO = 800 + 774 × Cadj, where Cadj= 0.167, for benzene, paraxylene, orthoxylene.|
|Dark marine fuel||–||–||2,100For fuel sold by an organisation registered as an entity engaged in petroleum feedstock refining, and produced at the refining facilities located in the Khabarovsk Territory; in other cases of sale (receipt) of dark marine fuel, the excise is equal to zero.|
Further changes in tax legislation
A number of laws adopted in 2019 provide for further changes in the oil industry's fiscal regime. Some of the new tax measures with the greatest impact on the Company include:
- adjustment of MET on oil due to the changing damper mechanism
- to compensate for additional budget expenses arising out of the changing damper mechanism, which is used as part of the reverse excise tax on petroleum feedstock, from 1 January 2020, the C MGDF coefficient used to increase MET rate for oil will be supplemented with a new increment in the amount commensurate with the new damper (the new damper calculation formula has been in use since 1 July 2019 and is generally meant to increase excise deductions compared to the previously used formula);
- changes in middle distillate excise taxation
- From 1 April 2020, the middle distillates category used for excise calculation and payment purposes will be significantly expanded to include nearly all heavy petroleum products, with certain exceptions listed in Article 181 of the Russian Tax Code.
From the said date, a new middle distillate excise rate formula will apply. The formula is linked to the excise rate for diesel fuel and prices for diesel fuel. An increased tax deduction (with coefficient 2) will be introduced for middle distillates used as fuel for electricity and/or heat generation, and the tax deduction will increase for the sale of middle distillates as a bunker fuel taken outside of the Russian Federation as supplies.