Finance Ministry Unveils Oil and Gas Tax Breaks

The Finance Ministry unveiled a series of tax-break proposals for oil and gas industries on Monday as part of its fiscal policy strategy for 2009-2011.

The draft document, which will be reviewed by the government on April 3, includes proposals to cut the mineral extraction tax, change excise duties on high quality oil products and introduce tax breaks for exploration on the continental shelf.

Finance Minister Alexei Kudrin, whose ministry oversees the tax policy, said last week that he would propose cutting the mineral extraction tax by raising the nontaxable threshold to $15 per barrel from the current $9.

The increase will result in a much-campaigned-for break across the heavily taxed industry of 100 billion rubles, about $4.2 billion per year, or about 0.25 percent of the country's projected 2009 gross domestic product.

The ministry proposed introducing either tax holidays for firms carrying out offshore exploration or granting them mineral extraction tax breaks. The draft also sees a change in the taxation of oil products, which would create a beneficial regime for producers of higher quality and environmentally cleaner fuels.

The oil companies currently pay around $154 per ton for high-octane gasoline, $113 per ton for low-octane gasoline and $46 per ton of diesel.

The proposals did not include more radical measures, such as rebalancing export duties or scrapping excise duties on oil products, floated by industry lobbies and other government agencies.

The draft only briefly touched on the issue of cutting the value-added tax, an idea backed by both outgoing President Vladimir Putin and President-elect Dmitry Medvedev. The ministry pledged to calculate the effects of such a cut by August 2008.

The draft also recommended raising mineral extraction tax for natural gas no earlier than 2011 -- an important victory for gas export monopoly Gazprom, which strongly opposed an immediate hike.