New debates around taxation reforms in oil sector

Government bodies, oil companies and expert organizations keep discussing drafts of the new tax legislation for the Russian oil sector. According to the government’s coordinated position, as of January 1, 2012 the oil export duties will be cut from 65% to 60% and the export duties on oil products will be unified at 66% of the oil duties (the so-called 60-66 system). But there are more radical ideas.

In particular, experts, who draft 2020 Strategy, suggest canceling export duties, raising the oil production tax and introducing some exotic for Russia taxes (profit tax and carbon tax). Experts of the Economic Expert Group headed by Yevsey Gurvich in fact suggest giving up processing in Russia as unprofitable. Given that processing is currently subsidized, it is proposed to let part of processing enterprises die off and count on some enterprises that may survive having carried out technological modernization (without it business will have to be closed).

It seems that such ideas will not be approved by the government in the near future, although they are very beneficial for oil producers as they open nice opportunities for raising tax free exports of crude not being disturbed by processing problems. Firstly, if the government refuses export duties, this will mean rejecting substantial guaranteed tax revenues to the budget that are especially necessary in the pre-election period of 2011 to 2012. Secondly, de facto giving up development of processing in Russia with the aim to increase crude exports (probably to bring imported motor fuels to Russian consumers) is too defiantly against all slogans voiced on the highest political level about the necessity to diversify the economy, increase production of goods with high added value, etc.

By Stanistav Mitrakhovich, NESF leading expert