Russia wants to reduce the export tax on crude oil and petroleum products to zero
The Russian government passed the decree twice in July and August 2018 to reform the taxes and fees of the domestic oil industry. The general principle is to reduce the export tax on crude oil and petroleum products until the cancellation, and increase the oil exploitation tax in equal amounts. Although this tax reform will increase the price of domestic refined oil products in Russia in the short term, and the new tax refund system and dumping factor will make its oil tax system more complicated, in the long run, the new tax system will help increase government revenue and Russia. The competitiveness of oil in the international market can also promote the upgrading of its domestic refining industry. Both the Russian government and the oil industry have advantages and disadvantages.
Cancellation of export tariffs is not a temporary rise
The abolition of export tariffs on crude oil and petroleum products was not a temporary rise in Russia. It was tried in the mid-1990s, but the subsequent financial crisis forced it to give up. Since then, Putin has repeatedly asked the relevant departments to study the elimination of crude oil and oil export tariff measures. When the plan began to take shape, it caught up with the oil price collapse in the second half of 2014 and was postponed again. However, with the implementation of joint production cuts, international oil prices have generally warmed since the beginning of 2017, and the Russian government's fiscal and oil companies have greatly improved their operations, providing an opportunity for tax reform. In addition, from the perspective of the direction and content of the adjustment, this time is not an independent adjustment. It continues the basic principles and directions for the adjustment of the petroleum tax policy from 2015 to 2017, and supplements the problems that were not resolved by the last adjustment. The solution eventually formed a relatively complete tax reform program.
Russia's 2015-2017 oil tax policy adjustment is mainly to reduce the export tax rate, while increasing the mining tax rate, keeping the upstream oil company's profitability basically stable, and raising the export tariff of petroleum products to the crude oil export tariff level from the original plan. The 2015 is postponed until 2017, giving refiners enough time to modernize the equipment to avoid a shortage of gasoline in the country or a sharp rise in oil prices. An important background for the reform at that time was that at the beginning of the establishment of the Eurasian Economic Union in Russia, Kazakhstan and Belarus in 2015, due to the import tariff exemption within the Union, the government’s tax revenue will inevitably decrease. In order to maintain the level of federal tax revenue, it is necessary. Considering the additional tax revenue, oil taxation, as the main source of budget revenue for the Russian Federation, naturally becomes the government's preferred target for adjustment.
However, the Russian government believes that the oil and gas sector reforms in 2015-2017 are not thorough enough, and some problems have not been fundamentally resolved. First, Belarus and Kazakhstan imported crude oil from Russia, which led to the loss of tariffs on Russian exports of crude oil. For a long time, for different purposes, Belarus and Kazakhstan have always imported crude oil from Russia, especially Belarus. The annual refining capacity greatly exceeds the consumption (for example, Belarus refines 20 million tons in 2014, consumes 7.5 million tons), and the rest All oil and gas products are exported, equivalent to importing crude oil from low tariffs in Russia (before the establishment of the Eurasian Economic Union) or zero tariffs (after the establishment of the Eurasian Union), and exporting high value-added petrochemical products after domestic refining, Belarus, The Kazakh government thus received additional tariff revenues, while Russia suffered from tariff losses. Second, the problems caused by the difference in export tax rates between crude oil and petrochemical products are essentially equivalent to the Russian government providing subsidies to refining companies. In the past, the export tariffs imposed on petrochemical products were relatively low (66% of crude oil export tariffs after October 2011), while the export tariffs imposed on crude oil exports were heavier. After the crude oil refineries purchased crude oil, they paid for the primary refining process. After exporting less tariffs to the international market, it can obtain a relatively large profit. Therefore, refineries generally lack the enthusiasm to carry out deep processing of products, or invest in the modernization of refineries, resulting in a lower proportion of refining products in the Russian market that have reached the European standard. .
The Russian government believes that the fundamental way to solve the above problems is to gradually eliminate the export tariffs on crude oil and petrochemical products, and increase the oil and gas exploitation tax to compensate for the decline in federal tax revenue caused by the reduction (cancellation) of export tariffs, so as to ensure that the federal tax revenue is not Reducing, and avoiding the loss of tariffs due to the existence of the Eurasian Economic Union in the future, can also solve the problem of export subsidies to downstream enterprises. After the gradual cancellation of export tariffs, Russia’s domestic petrochemical products will be more involved in international competition. Refining companies will be more proactive in improving the technological level, modernizing equipment and producing more high-quality refining and chemical products. The 2018 oil tax policy will be further adjusted.
Great tax reform
The main contents of Russia's oil tax reform include three aspects: reducing crude oil and oil product export tax year by year, increasing oil exploitation tax (MET) year by year, providing tax incentives and introducing tax refund system.
In terms of lowering export taxes, the new program stipulates that since January 1, 2019, the constant coefficient was introduced at the time of the export of crude oil and oil products, which was 0.833 in 2019, and then decreased year by year. From 2020 to 2023, it was 0.677, 0.5, respectively. 0.333 and 0.167, will be reduced to 0 by 2024, and the export tax will be completely cancelled. In terms of raising the mining tax, the formula for calculating the crude oil exploitation tax rate is designed by considering the factors such as crude oil reserves, output, quality, oil price and exchange rate. From January 1, 2019, the tax rate calculated by this formula is multiplied by the constant coefficient. The tax rate is 0.167 in 2019, 0.333, 0.5, 0.667, and 0.833 in 2020 to 2023, respectively, and increased to 1 in 2024, corresponding to the reduction in export taxes.
Since the tax base of mining tax is greater than the export tax, the implementation of the new tax system will inevitably lead to an increase in the price of crude oil and oil in Russia, which will have a greater impact on downstream enterprises and consumers. To balance the interests of many parties, the Russian government has introduced a refinery. Tax incentives, including refineries in remote areas, refineries that invest in upgrading refinery facilities, refineries with high octane gasoline ratios, and sanctioned refineries, almost all of Russia’s subordinates The factory helps it to alleviate the short-term impact of rising raw material prices, and introduces a tax refund system and dumping factor to reduce the increase in domestic oil prices and the length of fluctuations, and reduce the impact of tax reform on the cost of living for end consumers.
Positive impact far exceeds negative impact
Given that oil plays a pivotal role in Russia's economic development and diplomacy, the impact of the oil industry's tax adjustment on Russia is multifaceted, and in terms of overall and long-term development, the positive impact far exceeds the negative impact.
First, the new tax system has increased government revenues while reducing the financial burden. In the past, the crude oil export tax was levied on crude oil for export. This part of crude oil accounts for about half of Russian crude oil production. The tax on mining tax is all crude oil produced in Russia, and its tax base ratio is export tax. Large, therefore, although the increase in the mining tax rate and the reduced export tax rate in this reform are the same, the actual tax revenue of the government is increasing. The Russian Deputy Prime Minister expects this reform to add $20-25 billion in fiscal revenue to the government over the next six years. According to Wood McKinsey's oil-based estimates, the new tax plan will provide the Russian government with an additional $112 billion in revenue between 2019 and 2024. Although the expected data is quite different, the basic understanding is the same, that is, the new taxation scheme will help increase the government's fiscal revenue and benefit the implementation of Russia's “economic recovery plan”. Before 2017, Russia’s oil export tariffs have been significantly lower than crude oil export tariffs. It is very refinery for refining companies to only domestically produced crude oil. After extracting light diesel oil and gasoline, the remaining heavy oil will be used as oil. Earn profits at a lower tax rate. As Russia's domestic refinery technology is lagging behind, in order to meet the domestic market demand for oil consumption, the Russian government often needs to subsidize the refinery to help it upgrade its technology and equipment, with an annual cost of about 15 billion US dollars. After the crude oil and oil export tax rates are unified, the refinery will be more proactive in upgrading equipment and government subsidies will be greatly reduced.
The second is to increase the competitiveness of Russian oil and oil products and related companies. The reshaping of the global oil market by the US shale oil revolution continues. The current oil market is still in a state of oversupply. The "peak demand for oil" is gradually becoming a consensus. The oil market is increasingly developing into the buyer's market. The oil-producing countries have shown their ability to compete for the market. Russia's oil resources are abundant and the cost of exploration and development is lower than that of most resource countries. After the elimination of export tariffs, the cost advantage of Russian crude oil and oil products in the international market will be more obvious, which will help to enhance Russia's influence in the oil market. In addition, after this tax reform, although the taxation of mining tax is wider than that of export tax, the tax burden of companies engaged in upstream business will increase. However, since Russia has changed the mineral resource tax to profit tax, it has helped the oil company to reduce part of the tax burden, and the export revenue of crude oil after the cancellation of export tax will increase significantly. The overall operating environment of the upstream company is getting better. For the downstream refining and chemical enterprises in Russia, after the oil export tax is abolished, these enterprises will participate more in the world oil market, promote the modernization of domestic refining enterprises, and improve the overall level of the domestic refining industry and the competitiveness of enterprises.
The third is to solve the tax losses on Russian oil exports caused by the low tariffs of the Eurasian Economic Union. The Eurasian Economic Union is composed of six former Soviet states including Russia, Belarus, and Kazakhstan. The purpose is to deepen economic, political cooperation and integration and plan to form a supranational alliance. Since January 1, 2019, the tax exemption threshold for products within the alliance has dropped to 500 euros, and will be further reduced until cancellation in the future. The annual tax losses caused by Russia's export of crude oil and oil to the member states of the alliance are close to 10 billion US dollars. The tax reform has enabled Russia to comply with the rules of low tariffs and even zero tariffs within the alliance, and to avoid tax losses by means of source taxation.
Of course, this reform has also had an adverse impact on Russia. On the one hand, this tax and fee reform introduced many new calculation formulas and tax measures, making the tax system of the Russian oil industry more complicated. On the other hand, Russia's new oil tax system has obvious "self-interest" color, which may affect Russia's relations with some trading partners, especially Belarus, Kazakhstan, etc., and the probability of local divergence around oil import and export. Increase.