Ministry of Finance Initiates a Revision of Tax Burden on Oil & Gas And
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Tax & Legal 01 October 2020 LT in Focus Ministry of Finance initiates a revision of tax burden on oil & gas and mining companies On 30 September, the Russian State Duma held the third reading of Bills No. 1023275-7, No. 1023276-7, and No. 1023277-7, which provide for an increase of tax burden on oil and gas and mining companies. The legislative package is aimed at generating additional fiscal revenue to compensate undercollection: in January–August 2020, the total tax revenue decreased by 12 percent YoY1. The main provisions of the bills are expected to enter into force in 2021. Learn more from our LT in Focus. Added income tax Bill No. 1023276-7 “On amendments to Articles 25.4 and 26 of Part II of the Russian Tax Code.” MET Customs Added income tax tariffs Executive summary Expansion of AIT scope Oil and gas companies that operate deposits from and/or territorial sea waters of the Russian Groups One and Two for added income tax (AIT) Federation) may be included in Group Three for AIT purposes will be eligible for AIT, if they file a purposes. notification claiming the AIT regime by 31 March The proposal calls for expanding Group Four by and 31 December 2021 respectively. including hydrocarbon deposits located above the Hydrocarbon deposits with a historical depletion of 65th parallel north fully within the borders of the oil reserves2 greater than or equal to 0.8, as well as Komi Republic, in Orenburg Region, and in Samara the deposits fully or partially located within the Region within the established geographical borders of the North Caucasian Federal District, coordinates. Sakhalin Region (with the exception of offshore The document also revises the criteria for hydrocarbon deposits, as well as deposits partially attribution to Group Four for AIT purposes. located within the borders of internal sea waters 1 Source: Federal Tax Service Website https://www.nalog.ru/rn77/news/activities_fts/10034883/ 2 Historical depletion is determined in accordance with the following formula: Lhdr (Сивз) = N / V, where N is the cumulative production of oil from a particular reservoir (including mining losses) in accordance with the data of the national register of mineral resources approved in a year preceding the tax period and V is the amount of recoverable oil reserves of all categories as of 1 January 2006 and the cumulative production since the beginning of mining at a particular deposit in accordance with the national register of mineral resources as of 1 January 2006. If oil reserves in a specific deposit were not included in the national register of mineral resources as of 1 January 2006, the initial recoverable oil reserves (V) are determined based on the data of the national register of mineral resources as of 1 January of a year, following the one in which the deposit reserves were first recorded in the register. Changes in expensing rules and clarification of gas pricing procedures for AIT purposes The bill expands the list of deductible expenses to include: Unit cost for the purposes of calculating the minimum tax base 1) expenses attributable to storage and transportation of are set at RUB 7,140 as of 1 January 2021 and RUB 8,600 as of produced oil and gas condensate to the place of transfer to 1 January 2024. third parties, related to: Expensing rules for the costs of construction (drilling) of • deposits whose technical design provides for shipment of exploration and appraisal wells have been changed: the costs produced oil and gas condensate through offshore oil that have been effectively incurred before the entry into force terminals to ships of the law, but have not been previously expensed can be deducted evenly over three tax periods after the law becomes • deposits located in Krasnoyarsk Territory, Irkutsk Region, effective. and the Republic of Sakha (Yakutia) The bill is expected to bring clarity to the pricing of 2) costs of transportation of feedstock (materials) and other wholesale/associated gas and indicative oil transportation freight to storage and production sites. tariff. Hydrocarbon extraction expenses are deducted less the subsidies provided for the acquisition, construction, manufacture, and delivery of equipment. New loss carryforward rules for AIT purposes According to the amendments, a taxpayer that posted losses in At the same, starting from 2021, the loss indexation factor will a previous tax period must carry them over, reducing the amount to: current period’s profit. • 1.1 for deposits of AIT Group One The carryforward of losses to tax periods from 1 January • 1.163 for deposits of AIT Group Five through 31 December 2023 is capped at 50 percent of the current income tax base, the limit not applying to AIT Group • 1.07 for other AIT groups. Five deposits. Starting from 2024, losses can be fully carried forward. MET Increase in the tax rate for ores and chemical raw materials Bill No. 1023276-7 proposes a 3.5-time increase of MET on ores and chemical raw materials. In particular, the tax will be charged at a rate determined as a product of mineral resource rent coefficient and the previously effective rate. At the same time, a rent coefficient Crent (Крент) of 3.5 is set for potassium salts, apatite-nepheline, apatite and phosphorite ores, conditioned ores of ferrous and non-ferrous metals, rare metal ores, chemical non-metallic raw materials, natural salt and pure sodium chloride, non-metallic minerals, concentrates and other intermediate products (excluding those containing gold and silver), multicomponent complex ores and their components (excluding precious and rare metals), as well as a number of other minerals (excluding the widespread ones). For other minerals, the coefficient will amount to 1. At the same time, a Crent of 1 is applied to minerals extracted from the deposits whose depletion as of 1 January 2021 is under one percent, provided that extraction of such minerals is part of a new investment project implemented under an agreement for the protection and encouragement of investments. In this case, a Crent of 1 is applied for five calendar years immediately following the year when commercial mining commenced at the deposit. Change in the Cy (Кг) coefficient for AIT treatment of hydrocarbons The Cy (Кг) coefficient for oil produced from the AIT Group Two deposits might be raised for the period from 1 January 2021 to 31 December 2023, to: • 1.2 - for deposits spanning areas within Nefteyugansk, Surgut and Khanty-Mansi Regions of the Khanty-Mansiysk Autonomous District • 1.95 - for deposits located entirely within the borders of Yamal Region of the Yamal-Nenets Autonomous District. Starting from 2024, Cy (Кг) for such deposits will be set at 1. The zeroing of the Cy (Кг) coefficient for deposits of AIT Group Five is expected to be extended from 11 to 15 years, immediately following the year when commercial production commenced at the deposit. Other important changes in tax treatment of hydrocarbons • Tax benefits for heavy crude oil and depleted deposits will • The bills also provide for tax deductions for deposits be discontinued (coefficients Cd (Кв) and Cvo (Свн) will be located in the Republic of Tatarstan and deposits of AIT excluded from the formula). Group Two located entirely within the borders of Yamal Region of the Yamalo-Nenets Autonomous District, subject • The Pbase (Цбаз) coefficient used for calculating the tax to certain conditions. deduction for construction of infrastructure facilities at AIT Group Five deposits will amount to 25. In the previous • If a taxpayer is entitled to several tax deductions, it may version, its value was set at 42.45 for 2020, subject to choose which to apply. further indexation. • The bill proposes discontinuing the tax deduction for • At the same time, the bills introduce a tax deduction of 20 deposits spanning geographical locations specified in Sub- percent of the assessed tax for AIT Group Three deposits Paragraph 4, Paragraph 5, Article 3.1 of Federal Law “On with oil depletion above 0.8. The new tax deduction will be Customs Tariff”(in particular, Novoportovskoye, Vostochno- available as of 1 January 2021 for deposits located in the Messoyakhskoye, and Dulisminskoye oil and gas Sea of Okhotsk and starting from 1 January 2024 – for other condensate fields). deposits. Bill No. 1023277-7 “On amendments to Articles 343.2 of Part II of the Russian Tax Code” MET Tax deduction for hydrocarbon deposits spanning areas within the borders of Surgut and Khanty-Mansi Regions of Khanty-Mansi Regions Autonomous Okrug–Yugra The bill establishes a MET deduction for oil production at The total deduction for all hydrocarbon deposits amounts to: licensed blocks that in aggregate meet the following criteria: • RUB 3,830 million for one tax period, if the price of one • are located in areas belonging to Surgut and Khanty-Mansi barrel of Urals oil was higher than the benchmark set in Regions of Khanty-Mansi Autonomous Okrug–Yugra Paragraph 4, Article 96 of the Russian Budgetary Code • the licence is valid until 1 January 2018 • RUB 0, if the price of one barrel of Urals oil goes below such benchmark. • one billion tonnes or more of recoverable oil reserves as at 1 January 2018. If the amount of tax deductions exceeds the notional amount of additional budget revenues for a certain time period, the The deduction is conditioned on the licence holder’s signing excess shall be payable to the budget by March 31 of the year an investment agreement on stimulating oil production from a following the last year of the corresponding time period, particular hydrocarbon deposit with the Ministry of Finance which is from 31 December 2020 until the expiration of 3, 6, 9, and the Ministry of Natural Resources of Russia by 1 July 2021.