Overview of key taxation changes in the Russian Federation with the largest impact on the Company’s financial and business operations
Taxation in the oil industry
Сompletion of the tax manoeuvre and introduction of the tax on additional income from hydrocarbon extraction (AIT)
The reporting year saw the government continue to take steps towards completing the tax manoeuvre, namely 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, and the introduction of the reverse excise tax on petroleum feedstock.
Additionally, some fields continued to be subject to the AIT regime providing for a lower MET as compared to the general tax regime and a 50% AIT rate applicable to the tax base calculated as free cash flow from a subsurface development project after return on investment (as prescribed in the Russian Tax Code). As at 31 December 2020, the total number of subsurface sites transferred to AIT was 36 (excluding non-producing sites in 2020). In 2020, these subsurface sites produced 29 mmt of oil.
Incentives for projects in northern Russia
On 1 April 2020, the government introduced tax benefits for projects to develop hydrocarbon resources in the
- there is now a new fifth group of subsurface sites transferable to AIT, comprising areas located north of 70 degrees of northern latitude within the borders of the Krasnoyarsk Territory, the Republic of Sakha (Yakutia) or the Chukotka Autonomous Area, with oil reserve depletion less than 0.1% as at 1 January 2019;
- until the expiration of 12 years after the start of the commercial production, Group 5 subsurface sites are subject to a zero MET rate and reduction coefficients (CGR) in the subsequent four years (0.2, 0.4, 0.6, and 0.8). On 1 January 2021, the period of the zero MET rate was extended from 12 to 16 years;
- a MET deduction was granted until 31 March 2030 for projects located north of 67 degrees of northern latitude and south of 69 degrees of northern latitude within the borders of the Krasnoyarsk Territory, which provide for the construction of road, transport, engineering and energy infrastructure necessary for the development of AIT Group 5 sites (deduction on infrastructure). The deduction cap is set based on the positive difference between the actual Urals price and the baseline price (Pbas) equal to USD 42.45 per barrel for 2020, subject to further indexation. On 1 January 2021, the baseline price for calculating the MET deduction on infrastructure was reduced to USD 25 per barrel;
- a zero MET rate is introduced for the production of natural gas and gas condensate together with natural gas at subsurface sites located in certain regions of the Russian Arctic and used exclusively for the manufacture of liquefied natural gas (LNG) and/or petrochemicals at new facilities, until the accumulated extraction volume (250 bcm of gas or 20 mmt of gas condensate at the subsurface site) is reached or until the expiration of 12 years from the first day of the month in which the sale of the first LNG or petrochemical batch took place;
Other taxation changes in the oil industry
To compensate for additional budget expenses arising out of changes in the damper mechanism (part of the reverse excise tax on petroleum feedstock), from 1 January 2020 the CMGDF coefficient used to increase the MET rate for oil was supplemented with a new increment (NBUG) in the amount commensurate with the damper (the changes were introduced in 2019 to allow for increased excise deductions as compared to the previous formula).
From 1 April 2020, new offshore hydrocarbon deposits located in White, Pechora and Okhotsk seas and the southern part of the Barents Sea, for which the date of the start of commercial hydrocarbon production falls after 1 January 2020, are reclassified to Group 4 in terms of oil extraction complexity (the most attractive tax benefits) for the purposes of MET.
Excise tax on petroleum feedstock and petroleum products
In 2020, the Company continued to apply the so-called reverse excise tax introduced from 1 January 2019 as part of completing the tax manoeuvre. The scheme envisages levying excise tax on petroleum feedstock supplied for refining in Russia and granting the relevant tax deduction.
The petroleum feedstock excise rate is calculated based on current global oil prices, USD/RUB exchange rate, the quantity and types of refining products. Certain constituent entities of Russia (including the Krasnoyarsk Territory and Irkutsk Region) apply higher regional coefficients.
The deduction also includes a damping component calculated as the difference between global and notional domestic prices for gasoline and diesel fuel and can be both positive (reimbursable from the budget) and negative (payable to the budget) depending on the said price difference. Given the macroeconomic conditions, starting from February 2020 the damper was negative.
From 1 January 2020 the government increased the excise tax for petroleum products, with the exception of jet fuel and heavy marine fuel, by 3.2–5.8% as planned.
From 1 April 2020, the middle distillate category used for excise tax purposes was significantly expanded to comprise nearly all heavy petroleum products, with certain exceptions listed in Article 181 of the Russian Tax Code and heavy marine fuel excluded from the list of excisable goods as a standalone item.
Other changes include a tax deduction for middle distillates used as fuel for electricity and/or heat generation, and an increased tax deduction for the sale of middle distillates as bunker fuel exported from Russia as supplies.
|Excisable goods||from 1 January to 31 December 2019||from 1 January to 31 March 2020||from 1 January to 31 December 2020|
|Non-compliant with EURO-5||13,100||13,100||13,100|
|Non-compliant with EURO-5||12,314||12,752||12,752|
|Benzene, paraxylene, orthoxylene||2,929||3,058||3,058|
|Middle distillates||9,241||9,535|| |
|Heavy marine fuelFor fuel produced at refining facilities located in the Khabarovsk Territory; in other cases the excise is equal to zero.||2,100||2,100||-|
Further changes in tax legislation
The reporting period saw the adoption of several federal laws significantly changing the fiscal regime for the oil industry starting from 2021. Some of the new tax measures with the greatest impact on the Company include:
Tax deduction for the Priobsky subsurface site
A monthly tax deduction of RUB 3,830 mln is applied to oil production at subsurface sites meeting the statutory criteria (including the Priobsky site) until the accrued deduction reaches RUB 460 bln.
The tax deduction is applicable to a certain month provided an oil production agreement has been signed with the Russian Ministry of Finance and the Ministry of Natural Resources and Environment (Rosneft signed the agreement with the said federal executive bodies in January 2021) and the Urals price has exceeded the baseline set out by Article 96.6 of the Russian Budget Code.
On top of that, the deduction cannot exceed the federal budget’s additional notional revenue from the applied deduction determined as a sum of MET and export duties on incremental production resulting from such deduction (the difference between the actual and baseline production (without the deduction) set out by the oil production agreement).
Adjustment to fiscal benefits for projects in northern Russia
As mentioned above, from 1 January 2021 the period of the zero MET rate for AIT Group 5 subsurface sites was extended until the expiration of 16 years from the start of commercial production. Moreover, the government increased the cap for MET deduction on infrastructure on the back of a lower baseline price (Pbas) of USD 25 per barrel for the whole period, and granted a statutory exemption from oil export duties for the period of the MET relief.
Changes in fiscal terms for depleted sites and sites containing high-viscosity oil
Starting 1 January 2021, reductions in the MET rate for high-viscosity oil and oil extracted on depleted sites (the Cd coefficient) are cancelled, while the Cdp reduction coefficient for the MET rate for depleted deposits of hard-to-recover oil remains in effect.
In addition, depleted sites may now be transferred to AIT (Group 3 for the purposes of AIT). Starting 1 January 2024, these sites are eligible for tax deductions of 20% from the MET amount, which become applicable once the depletion level reaches 80% (for the purposes of deduction, depletion calculations account for increments and write-offs in the oil reserves after 2006, unlike the similar calculation used to determine the Cd coefficient). For the depleted sites in the Sea of Okhotsk, the specified deduction comes into force starting 1 January 2021.
The Russkoye field, which is being developed by the Company and has high-viscosity oil reserves, is also eligible to the AIT regime.
Changes in fiscal terms for fields that applied reduced export duties on oil
Starting 1 January 2021, no longer effective are special formulas for calculating export duty rates for certain subsurface sites specified by the Federal Law of the Russian Federation On the Customs Tariff, as well as reduced MET on oil produced in such areas. Until the end of 2021, these sites may be transferred to the AIT regime.
Changes in AIT terms
In addition to the subsurface site categories above, starting 1 January 2021 the right to switch to AIT has been granted for the sites that are:
- located entirely or partially within the North Caucasian Federal District or the Sakhalin Region (except for offshore fields);
- located north of 65 degrees of northern latitude and entirely within the Komi Republic (and meeting the criteria set by the Russian Tax Code for AIT Group 4), as well as six subsurface sites in the Orenburg and Samara regions (the geographical coordinates can be found in the Russian Tax Code).
Starting 1 January 2021, there have also been certain changes in calculating AIT and MET on oil for subsurface sites transferred to AIT.
There is now a temporary limitation on the carry-forwards of historical losses: they may not reduce the tax base for 2021–2023 by more than 50% (this limitation does not apply to subsurface sites falling under AIT Group 5).
Also, there have been changes in the loss indexation coefficient: instead of a universal carry-forward loss indexation coefficient (1.163), there are now different coefficients depending on the tax period and subsurface site group. The old 1.163 coefficient remains in effect for Group 5.
There are new details on defining the unit cost value for calculating the minimum AIT tax base: the unit cost value is taken to be RUB 7,140 per tonne until 31 December 2023 and RUB 8,600 per tonne starting 1 January 2024, multiplied by the deflator.
The MET rates for subsurface sites transferred to AIT increased for certain Group 2 sites due to the cancellation of lower rates for sites that as at 1 January 2021 had no grounds for applying the MET tax holidays under the general tax regime and due to higher rates for individual sites for 2021–2023.
The resolutions on revised fiscal terms passed in 2020 are comprehensive and balanced in nature. Overall, the new taxation parameters bear no adverse impact on the Company’s plans as regards its oil production projects.
Excise tax adjustments
There have been adjustments to certain aspects of the reverse excise tax on petroleum feedstock effective from 1 January 2021. In particular, an investment mark-up (Cinv) has been introduced, which increases excise deductions for owners of the petroleum feedstock supplied for processing. Eligible for the mark-up are the companies that before 1 October 2021 sign investment agreements with the Russian Ministry of Energy.
The definition of middle distillates has been updated as follows:
- the density threshold for a mixture of hydrocarbons to be recognised as a middle distillate has been lowered, meaning a number of heavy petroleum products (e.g. tar and fuel oil) are now excluded from the category;
- the criteria for defining high-viscosity products not belonging to middle distillates have been refined, which also means that a number of products are no longer subject to excise tax.
In addition, starting 1 January 2022 the reverse excise tax will be introduced for ethane and liquefied petroleum gas (LPG) if such ethane and/or LPG are supplied for processing into goods that constitute petrochemical products.