Russian taxation of oil, gas, and excise duties

¶ … Tax Law

Oil and Gas is currently at the core of Russia's economy, even though there has been talk at the head of the Russian federation of intentions to attempt to move the economy from one which is based solely in these natural resources, to one which is based on rapidly evolving technology. Of course it will be at least a decade before movements and developments in this fashion are able to unfold with real significance. However, given the strong presence and foundation of the oil and gas sector in Russia's economy, it is natural that the bulk of the regulatory law is founded around these pillars.

Excise Tax

Excise taxes in Russia refer to taxes which need to be paid out on certain goods in Russia, such as raw and refined alcohol, alcoholic drinks which are stronger than 1.5% by volume, cars and motorcycles with engines that have horsepower greater than 150, along with tobacco products and various forms of fuels, oils and gas (Gola, 2013). "The Russia law regulates strict licensing rules for oil refineries and alcohol distillers. Rates are set progressively increasing until 2010 fiscal years. By 2010 share of excise taxes in retail price of a typical cigarette pack will reach 15-30% - still less than its European counterpart. Cigarettes are taxed based on a percentage of manufacturer's suggested retail price. The excise duties in Russia are also lower than in EU" (Gola, 2013). Thus, these taxes are necessary and are in place, and largely operated upon, but they're still considered more lenient when compared to the rest of the nation.

When it comes to tax on oil in particular, there is a tax on the extraction of mineral resources, something which has to be paid by all oil companies. Thus, the determination of a tax rate for oil is thus delegated to the government whereas rates placed on other mineral resources are set in Russian law as a set portion of their market value, ranging from 3.8% to 17.5% for substances like potassium salts to gas condensate (Gola, 2013). Other substances have a fixed ruble amount per volume, for things like natural gas which is built up and then paid monthly (Gola, 2013). Essentially, excise tax is payable on the sale (within the nation) of particular goods developed in Russia -- like the named alcohol and tobacco taxes, and of course the mentioned taxes on petrol, diesel and motor oil. It's important to acknowledge that there is a significant variability between the rates. Thus, for example, things like imported alcohol and tobacco are cleared via customs only if these goods have things like excise stamps on them; furthermore, while there are some exceptions, export sales are free from excise tax (ey.com, 2011).

The United Kingdom is a place which also has excise taxes on fuel as well, though their difference is that Britain has the highest rate of excise taxes of any nation in the world. "In Britain the excise tax on gasoline is about $2.80 per U.S. gallon (50 pence per liter), nearly three times the 2001 wholesale price, while in the United States federal and state taxes together amount to about $0.40/gal" (Parry & Small, 2012). There are three basic lines of defense that the British government uses to defend high gasoline taxes: reduction of pollutants, reduction of traffic, and governmental revenue (Parry & Small, 2012). The rationale for the importance of these decisions is transparent: by placing a penalty on the consumption of gasoline, the taxes reaped couldn't help but minimize the amounts of carbon dioxide and other local air pollutants that were caused (Parry & Small, 2012). Furthermore, by taking gasoline heavily it made many middle class citizens, who were the bulk of the population anyway; look for alternative methods of transport, and mass transit, thus minimizing both accidents and traffic. And obviously, the final reason was a strong justification for virtually any government, as revenue is essential for virtually any organized ruling body. For instance, "in the UK, motor fuel revenue is nearly one-fourth as large as the entire revenue from personal income taxes (Chennells et al. 2000). This third argument finds an intellectual basis in Ramsey's (1927) insight that taxes for raising revenue should be higher on goods with smaller price elasticities. Gasoline taxes have also been defended on other grounds, such as a user fee for the road network (its primary role in the U.S.) and as a means to reduce dependence on oil supplies from the Middle East" (Parry & Small, 2012). This demonstrates a common way in which excise taxes are often used: they're used to manipulate and influence the behaviors of people in society. Government leaders often use forms of taxation to help influence the behavior of citizens so that they'll engage in habits considered healthier and more ideal for society at large.

For instance, this has recently been done in Russia as a means of adapting and changing the ways that Russians consume alcohol and the frequency that they consume alcohol. "Alcohol consumption in Russia is down 13% this year, but growing drug use among young people and poor drinking habits have health officials concerned, Kommersant reported Friday. Recent figures from the Health Ministry show that 13.5 liters of alcohol are consumed annually per person, a reduction over previous years" (MoscowTimes, 2013). The reduction is undeniably a result of the fact that the government has long has a well-administrated anti-alcohol policy which revolves around a bolstered excise tax on alcohol. This tax cannot improve unhealthy habits in their entirety, but aggressive excise taxes can influence human behavior and change habits, along with public service messages and changes in how the media portrays alcohol consumption (MoscowTimes, 2013).

However, recently in Russia there has been a movement and a collective decision to not raise further excise taxes on the production of crude oil, due to a concern regarding a drop in output (Korsunskaya, 2013). This is largely as a result of the government of Russia, the largest producer of crude oil in the world, engaging in a balancing act between the necessity in replenishing its coffers and anxieties about turning away investment into projects that would bolster the production of oil and gas, as taxes placed on the energy industry already add up to half of what is placed on the nation (Korsunskaya, 2013). Thus the balancing act has been composed in a reduction on taxes in mineral extraction and fuel oil, with excise tax rises; though earlier this year, the ministry proclaimed that increased energy taxes, even if they took the form of excise fees was necessary for upgrades in infrastructure which are absolutely crucial for long-term development (Korsunskaya, 2013). One of the major problems that this increase is causing is among oil companies who said that the resulting tax burden would hurt their productivity in present and future, ultimately leading to a drop in state revenues: "Tweaks to the tax system in recent years have reduced the marginal tax rate on each barrel of crude exported to 82% from around 87%, although some experts say that is still too high to create an incentive to invest" (Korsunskaya, 2013). Ultimately, the intentions of the Finance Ministry to increase the excise tax on fuel did not receive approval and will eventually be a more gradual increase, as the government has explained (Korsunskaya, 2013). At its core, the excise tax for low level Euro II fuel hits at 10,100 roubles per ton, which roughly breaks down to $320 per ton, whereas the fees applied to higher grades of Euro V is at 5.143 roubles (Korunskaya, 2013).

However, despite these movements towards the future, when it comes to taxes on fuels, the UK remains the most highest taxed country in the European Union: "Sixty per cent of the price of unleaded petrol and 58 per cent of the cost of diesel is made up of duties and VAT in Britain, the highest percentages in the European Union…The figures show that the soaring tax take has made overall diesel pump prices in Britain the highest in the EU, while the price of unleaded petrol is the eighth highest. The mid-January price for diesel in the UK was 141.3p a litre. But without tax and duties, it would be only 59.8p. Unleaded petrol cost 132.9p, although without tax and duties it would be a much more manageable 52.8p" (Martin, 2012). These figures demonstrate quite clearly the intensive taxes on fuels that the UK is forced to confront; for example, tax percentages on France are only at 47%, and in Germany, they're at 48%, with the country in the EU with the lowest fuel tax rates is Luxembourg at 38% (Martin, 2012).

Below is a table, courtesy of Korsunskaya of Reuters, which shows the figures of fuel tax in Russia, as given the figures provided by Prime Minister Dmitry Medvedev.

2014 gasoline 2014 diesel

Euro II 11,110 Euro II 6,446

Euro III 10,725 Euro III 6,446

Euro IV 9,916 Euro IV 5,427

Euro V 6,450 Euro V 4,767

2015 gasoline 2015 diesel

Euro II 13,332 Euro II 7,735

Euro III 12,879 Euro III 7,735

Euro IV 10,858 Euro IV 5,970

Euro V 6,923 Euro V 5,244

($1 = 31.2600 Russian roubles)

(in roubles per ton)

-(Korsunskaya, 2013).

Aggravated Issues for Russia

However, the good intentions to help rework the Russian tax policy have been largely mismanaged, creating a situation which has generated more complications than illumination for the nation. Ultimately there have been massive waves of both cheap and dirty fuel oils pouring out of Russian refineries and onto world markets: these are all telltale manifestations of tax policies and perverse incentives which skew the intentions of Russian national leaders in their attempts to help modernize the industry at large (Zhdannikov, 2013). The bottom line is that all endeavors to help fix the tax system have largely been futile as it remains that it's still more profitable to export cheap fuel oil, than the crude oil from which it originates. "The result has been a glut of exports of the lowest-value refined oil product and very slow progress in improving Russia's creaky refining industry, which has ballooned into the world's third largest to meet domestic demand for gasoline" (Zhhannikov, 2013). One of the reasons that this has been so problematic is that costs for Russia for needed investments into the oil industry at large remain highly aggravated. For instance, at this time, Russia has been making a tremendous push into the Arctic for oil with new tax breaks for shale oil (Mead, 2012). This kind of push means that more expensive and advanced technologies are necessary, technologies like hydraulic fracturing and horizontal drilling (Mead, 2012). This thus puts Russia in a situation where they're dependent on tax breaks in order to help fuel a fracking boom -- largely as a result of the fact that certain tax breaks can run as high as $21 a barrel -- a massive incentive when looked at comparatively (Mead, 2012). While Russia is still able to produce around 10 million barrels of oil per day (just under Saudi Arabia at 10.5million and the U.S. At 6 million) it still has an overwhelming need to unlock new oil fields for the betterment of the nation at large and to keep those numbers up (Mead, 2012).

Mineral Extraction Tax

Another significant tax which exists in Russia is something which is known as the Mineral Extraction Tax or the (MET) which is placed on legal bodies or businesses when it comes to removing minerals from the earth and from waste products connected to production. The following products are taxable according to the MET deposits from the subsoil on all earth contained by the Russian Federation and all waste products or related losses. Fundamentally, the MET is calculated in Russia based on the physical quantity of material at stake, or the physical quantity of mineral resources extracted (Deloitte, 2012). "Value is determined based on the quantity of minerals extracted and their selling price, net of VAT, customs duties and levies, and less transportation expenses. If no sales of a particular mineral resource were made during a tax period, taxpayers should calculate the value of the extracted minerals based on their production cost" (Deloitte, 2012).Accounting records can also come into play when assessing and re-evaluating the tax legislation and developing new methods of taxation in this arena. And thus describes the essential formula by which mineral taxes and the object of mineral taxes are calculated in Russia. There has been talk, as already discussed in this paper, of raising the Mineral Extraction Tax as a means of achieving a more acute sense of balance within the economy. However, such a change would of course cause an increase in domestic fuel prices which is something the nation is completely trying to avoid.

On the other hand, the United Kingdom has legislation in place which is known as Mineral Extraction Allowances which refer to functions of expenditures that businesses and other entities can be granted. For instance, "a writing-down allowance of 10% per annum for qualifying expenditure on the acquisition of minerals or rights over them, and a rate of 25% per annum in relation to all other qualifying expenditure (s.98);relief to commence generally when the expenditure is incurred, whether or not mineral planning permission has been granted or applied for" (voa.gov.uk). On the other hand this legislation doesn't allow for the relief of land elements and has various exclusions from qualifying expenditures.

Conclusion

Thus, this paper has looked at the various tax laws in place in both the Russian Federation and in The United Kingdom. Both these nations have areas of overlap in their tax codes, but fundamentally, in almost all areas, the United Kingdom has higher rates of taxation. However, the UK has a more concerted desire to use their taxation as sources of revenue to reinvest into their land and to encourage better habits of consumer spending and to better the environment. It appears that many of Russia's lower taxes generally just function to bring more money in and to help bankroll the exploitation of tight oil and the technology needed there. While the UK may have a stronger tendency to orbit more of their oil, gas and transport related taxation based on the needs of the economy, the Russian federation just doesn't have those same priorities. Both nations also have personal income tax, taxes for social contributions, land taxes and various fees in connection to licensing.