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. Last Updated: 07/27/2016

Disputed Oil Tax Bill Set for Key Duma Vote

The State Duma on Friday is scheduled to vote on a new tax that, if passed, would likely result in battle lines being drawn between different sectors of the oil industry.

The tax — called the mineral resource extraction tax — was conceived to replace the existing mineral replenishment tax, excises and royalties. This kaleidoscope of taxes created an uneven playing field for oil companies and forced each company to negotiate its own tax burden.

The Duma's budget committee Monday recommended that these legislative changes be passed during Friday's second reading.

The new tax is meant to simplify the tax-paying process and overall burden, said Viktor Borodin, a manager with Andersen, formerly known as Arthur Andersen.

"Basically, the idea is to decrease the tax burden by decreasing the tax rate," Borodin said. "But if we do the analysis in terms of whether the new tax will let companies pay less, the answer may not be so positive."

For example, the current taxation procedure considers the difficulty of developing certain oil fields around the country. Companies that choose to develop reserves in harsh climates or in Siberia's swampy wetlands can negotiate themselves some kind of a tax break.

If this new tax goes into effect, then companies will have less wiggle room, Borodin said.

The actual rate will be levied in rubles per barrel and depend on the ruble's exchange rate to the dollar and the average price of the Russian benchmark Urals brand. At a world market price of $18 a barrel, the new tax would be 425 rubles per ton ($2 per barrel) — or 11 percent of the price.

One top oil executive said the nation's oil chiefs are satisfied with this system.

"We came to this compromise with the Finance Ministry through a series of baby steps," the executive said. "And I am relieved that we have finally come to an agreement."

The mineral resource extraction tax was negotiated in tandem with the new profit tax, which is up for its third reading in the Duma Friday.

The draft law on the profit tax calls for a decrease in the rate from 35 percent to 24 percent, but would eliminate most exemptions.

While oil companies officially paid rates of around 36 percent, they really only paid 18 percent, the executive said. The new 24 percent rate would in fact be an increase for the oil industry.

"But my colleagues support it because it will give everyone less incentive to use their government ties to try to cut the best deal," he said. "It will also allow us to be more transparent in our affairs."

Not everyone, however, is happy with the new profit tax.

The tax will hit the state-run geological exploration sector the hardest, said Viktor Orlov, head of the Russian Geological Society.

The lower tax will divert funds away from the exploration of new fields, and regional geological agencies will be left with nothing.

"By 2002, there will be no money for new mineral discoveries," Orlov said.

"The government — especially where resources are concerned — should always have strategic reserves."