April 26, 2015, 22:12 / Economics

The Kremlin may oppose a tax experiment for oil workers

Officials are afraid of risks to the budget Margarita Papchenkova

Prime Minister Dmitry Medvedev will discuss tax reform / PhotoXPress

The Ministry of Finance and the Ministry of Energy are preparing for a fight at a meeting with Prime Minister Dmitry Medvedev, at which a decision on tax reform in the oil industry should be made. Several officials told Vedomosti about this. There is no such meeting in the plan for this week, says the prime minister’s press secretary Natalya Timakova. Medvedev himself previously said that he was going to hold a meeting last week. But it did not take place, two officials said.

A bill on an experiment with a financial results tax (FRT) was submitted to the State Duma by the Khanty-Mansiysk Okrug, the government is preparing a review. The Ministry of Energy selected 16 fields that do not currently have benefits (Gazprom Neft, Rosneft, Lukoil and Surgutneftegaz). The Ministry of Finance is categorically against it and is serious, says a senior official. He does not intend to propose amendments to the bill, but to insist on a complete rejection of the bill, another official knows.

The Ministry of Finance fears that the reform will have a negative impact on the budget. And these concerns are shared by presidential aide Andrei Belousov, two officials say. He believes that the experiment will create a tax hole, says an acquaintance of Belousov, although he admits that there are problems in taxation of the industry.

The current system does not take into account companies' production costs, but there are incentives for a large number of new fields. Their list is so wide that to read the Tax Code regarding oil taxes, one must already have special geographical knowledge, admitted the director of the tax department of the Ministry of Finance, Ilya Trunin.

According to the bill, instead of the mineral extraction tax, the NFR is introduced, which is levied at a rate of 60% on the difference between income from the sale of oil and the costs of its production and bringing it to marketable condition. In essence, this is a specific income tax. The current tax burden, according to calculations by the EY Moscow Oil and Gas Center, is 60% of the price of a barrel (at $60 per barrel), with the NFR it depends on expenses. The Ministry of Finance is not against the reform itself, but does not agree with its parameters.

The Prime Minister made a principled decision to approve the experiment, Energy Minister Alexander Novak said in a recent interview with Vedomosti. If Medvedev finally approves the idea, the Finance Ministry may try to initiate a discussion with the president, two officials believe. Last June, at the commission on the fuel and energy sector, Putin spoke skeptically about the transition to the NFR, warning about the risks (see sidebar). Novak then assured the president that the experiment would help minimize risks. The experiment with the NFR is discussed only in the government, this is its prerogative, says presidential press secretary Dmitry Peskov.

Vladimir PutinPresident

A financial result is not a ton, it’s such a moving thing. There are very experienced people sitting here, and they have such good specialists working for them that they are no match for you and me <...> I don’t even understand what they will tell you and me. And the financial result will be minimal all the time, and the tax base is negligible.

The president can discuss the issue informally, behind closed doors, as was the case, for example, when the decision was made to approve a tax maneuver in the oil industry, the federal official recalls. In addition, a review of the bill must be written by the Main Legal Department of the Presidential Administration, and on sectoral laws it usually consults with the Expert Directorate (supervised by Belousov), notes one of the officials. But there are different positions in the Kremlin, the Finance Ministry official worries: there is also a commission on the fuel and energy sector, the secretary of which is Rosneft President Igor Sechin. The GPU may also request her position.

The Ministry of Energy declined to comment. Trunin suggested waiting for a meeting with the prime minister. Timakova addressed all questions to the relevant Deputy Prime Minister Arkady Dvorkovich. And his press secretary replied that the Prime Minister had already spoken on this matter.

The Ministry of Finance believes that, under the guise of an experiment, it is proposed to give benefits to fields that currently do not have them. The Ministry of Finance should propose “calling a spade a spade - this is not an experiment, but individual benefits and we need to decide whether we are ready to provide them now,” one of the officials describes the possible tactics of the Ministry of Finance. With the proposed parameters, the NFR will not be able to completely replace the current system, the official explains: it is less profitable for many fields with benefits for mineral extraction tax and duty. With the proposed parameters, the NFR is worse even for many fields without benefits, but with high profitability, adds Grigory Vygon, CEO of Vygon Consulting. The experiment is another targeted benefit to support a small segment of “tail” projects, he explains, low-profit ones that do not have benefits.

Novak told Vedomosti that the tax system can be different: mineral extraction tax for preferential projects, NFR for the rest. Of course, the Ministry of Finance will never allow this, one of the officials is categorical.

The Ministry of Finance points out that oil companies already benefited from the devaluation: after the fall in oil prices, their cash flow in rubles increased, and budget revenues from the oil industry fell by 28% (compared to income at $100 per barrel and an exchange rate of 38 rubles. /$). The Ministry of Energy is afraid that without reform, production will soon begin to fall. While companies benefited from the devaluation, their currency-linked equipment costs also increased; therefore, many have indeed slowed down development, admits the financial block official. According to the calculations of the Ministry of Energy, at pilot fields, with the transition to the NFR, production will increase over three years and, as a consequence, tax revenues (see table). Companies can pay more taxes at the first stage in order to prove the effectiveness of the experiment and achieve the implementation of the NFR at all non-preferential fields, admits the official of the financial and economic block.

It is necessary to conduct an independent assessment of the companies’ data on the impact of the NFR on budget revenues and production growth, suggests Vygon. And the tax parameters and criteria for selecting pilots must be more justified, he insists: “The industry did not wait 13 years for this reform in order to hastily make such decisions.”