The Ministry of Finance opposed the expansion of the additional income tax

As Kommersant learned, the Ministry of Finance rejected proposals from oil companies to transfer new areas in Western Siberia from the regular tax system to an additional income tax (ATT). The government discussed this idea in the fall after the August meeting in Khanty-Mansi Autonomous Okrug. However, the Ministry of Finance believes that the expansion of the MET may lead to a shortfall in budget revenues, since there will be a “flow” of production to preferential areas instead of maintaining it at fields with the full MET rate.

According to Kommersant’s sources, the Ministry of Finance did not support expanding the perimeter of the additional income tax by including new areas of the fourth group. We are talking about new fields in Western Siberia with a depletion rate of less than 5% and total reserves of no more than 50 million tons per year. The government instructed to study the possibility of expanding the perimeter of the AIT following a meeting on August 30 in the Khanty-Mansi Autonomous Okrug, which was dedicated to increasing the economic and technological efficiency of the oil and gas industry. This proposal came from the Ministry of Energy and the head of the Khanty-Mansi Autonomous Okrug, Natalya Komarova, who said that oil companies wanted to transfer 70 areas from the regular tax system to the AIT.

The Ministry of Finance confirmed the information to Kommersant. Expanding the perimeter of the mineral extraction tax will create more favorable economic conditions for the development of subsoil areas compared to oil production in areas for which the mineral extraction tax is applied without benefits, the Ministry of Finance explained to Kommersant, noting that there is currently no trend towards a decrease in oil production in Russia. “As a result, there is a possibility that current oil production, to which the mineral extraction tax is applied without benefits, will be displaced by oil production volumes to which a preferential tax regime is applied, which will lead to a reduction in planned budget revenues,” the ministry believes. They added that the Ministry of Finance is ready to consider tax incentives for oil and gas production starting in 2027 upon provision of “relevant financial and economic justifications.”

The ministry recalled that in 2022, a decision was made to expand the perimeter of the ADD in a number of subsoil areas in the Khanty-Mansi Autonomous Okrug-Yugra, Yamalo-Nenets Autonomous Okrug, Komi, Tomsk and Omsk regions. In addition, from 2024, areas in which at least 70% of annual production is accounted for by ultra-viscous oil are transferred to the third group of extra-viscous taxation. The previously existing tax breaks on the mineral extraction tax for ultra-viscous oil have been canceled since 2021, this mainly affected LUKOIL and Tatneft.

The key difference between AIT and MET is that the basis for paying the former is not production volumes, but revenue reduced by costs incurred. This approach improves the economics of developing new fields, as well as mature assets with high maintenance costs.

At the August meeting, as Kommersant reported on October 30, the industry proposed introducing tax deductions for mineral extraction tax for the development of hard-to-recover reserves. It was also once again proposed to introduce a tax deduction for mineral extraction tax in the amount of geological exploration costs. Kommersant’s interlocutor claims that the Ministry of Finance rejected the idea of ​​​​deductions from the mineral extraction tax, since it, in particular, could lead to additional shortfall in income.

The policy of the Ministry of Finance, which annually increases taxes on the oil and gas industry, often becomes the target of criticism from oil companies. Thus, last week, the head of Rosneft, Igor Sechin, said that the constant change in the tax system “significantly complicates long-term investment planning and the further implementation of already started projects.” He, in particular, criticized the reduction of the damper in September, the Ministry of Finance’s approach to calculating taxes based on an “irrelevant price indicator for Russia (Brent quote),” as well as the decision to differentially raise gas tariffs.

Tax expert Boris Lutset suggests that the Ministry of Finance is not entirely satisfied with the first results of the previous expansion of the AIT perimeter, the analysis of which has not yet been made public. “Oil workers and the Ministry of Finance speak different languages ​​when discussing the issue of income tax,” continues Boris Lutset. “If companies operate in terms of profitability in relation to their own resource base, then the financial department proceeds from the general balance of production in different tax conditions.” It is unlikely that it will be possible to find a fundamental compromise on this issue, the expert believes, but individual solutions are possible in relation to unprofitable fields of the fourth group while fixing obligations to increase budget revenues. “It is the normative consolidation of such obligations that can become one of the issues for discussion. As always, give the Ministry of Finance concrete guarantees that budget revenues will not decrease, then we can talk,” he says. The expert also notes that as it expanded, the AIT became “the main tax benefit instead of becoming the base tax in the industry.”

Dmitry Kozlov