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The following article is an excerpt from Awara Russian Tax Guide, the first comprehensive book offering a full overview of all Russian taxation laws and rules. Awara Russian Tax Guide provides insight into the general framework of the Russian tax laws, the Tax Code and its principles. It describes the general rules of the Tax Code Part I and each type of tax and tax regime of Tax Code Part II, among them: Profit Tax, VAT, Personal Income Tax, Property Tax, Employer’s Social Contributions. The book also covers the now so important case law and taxation principles set by court precedents.
In this chapter we present the three main specific tax regimes applicable for taxation of oil, gas and other natural resources. (Hereby to bear in mind that other tax laws, such as profit tax and VAT may apply simultaneously). These are the minerals extraction tax, excise tax, and the taxation regime for taxation of production sharing agreements. In addition to those types of taxes, export duties are also a major form of taxation of oil and gas revenues.
Minerals Extraction Tax
The provisions of the minerals extraction tax are in chapter 26 of the Tax Code.
When introduced in 2002 the minerals extraction tax replaced the separate taxes previously levied on the oil, gas and mining industries. -With the adoption of the mineral extraction tax, the excise tax was no longer levied on crude oil and gas condensate as well as natural gas.
All legal entities and individual entrepreneurs which according to the Law “On subsoil” (of 21 February 1992, No. 2395-1) are defined as subsoil users are liable for the minerals extraction tax (art. 334).
The subsoil users have to register separately as payers of the minerals extraction tax with the tax inspectorate at the location of the subsoil plot granted for use within 30 days from state registration of the relevant license (permit) for the use of subsoil. When the extraction plot is in the continental shelf of Russia, an exclusive economic zone of Russia, land or water territory outside of Russia, registration will take place at the place of legal registration of a legal entity or the habitual residence of the individual entrepreneur.
Object of Taxation and Tax Rates
The object of taxation includes certain types of extracted minerals, namely:
1) minerals extracted from the subsoil on the territory of Russia
2) minerals extracted from mining industrial waste (if such extraction requires a separate license)
3) minerals which have been mined from the subsoil located outside Russian territory but within Russian jurisdiction (as well as territories that have been leased or that are used in foreign countries by virtue of an international agreement)
Types of minerals falling within the scope of the law are, for example:
– anthracite coal,
– coking coal,
– brown coal and coal,
– hydrocarbon resources (crude oil and gas condensate extracted at gas condensate fields natural gas and associated gas),
– marketable ores,
– mining and chemical non-metallic raw materials,
– rare metals,
– non-metallic materials for the construction industry,
– precious stones,
– natural salt,
– underground waters containing mineral resources or mineral waters,
– raw materials of radioactive metals (art. 337)
The law provides for detailed provisions for the measurement and valuation of the extracted minerals (art. 339, 340).
Tax Period, Tax Payments and Tax Rates
The tax period is defined as a calendar month. The tax is paid no later than the 25th of the month following the tax period.
The tax rates vary from 3.8% to 8% (0% in certain cases) depending on the minerals in question. The tax rates in regards to oil and gas may be set as a fixed sum in rubles per volume indicators (tones or cubic meters) for the extracted mineral. The amounts may vary and may be set differently depending on the time of the year and tax period. The tax rate may also be set as special coefficients, for example, the tax rate for oil extraction is set by a special coefficient reflecting the change of the price of oil on the world market.
The provisions of the Excise Tax are in Chapter 22 of the Tax Code.
All Russian and Foreign Legal Entities and Individual Entrepreneurs are recognized as payers of the tax. The tax is also levied at customs when goods are imported into Russia and in certain cases when goods are exported from Russia.
Excisable Goods and Raw Materials
The Excise Tax is applied to goods specified in the law. Excisable goods are, for example, the following:
• alcoholic products
• ethyl spirit
• gasoline, diesel fuel and motor oils
• spirit-containing products (except for medicinal products)
• cars and motorcycles (with engine power in excess of 112.5 kW, or 150 hp)
Crude oil, condensate and natural gas are no longer excisable goods and are instead subject to the mineral extraction tax.
The law contains an extensive and specific list of operations that are excisable and those that are exempt from the tax (article 182, 183). Exports are exempt when specified in the law. Tax rates vary depending on the kind of goods and their qualities, and even time of the year. The rates are frequently changed as a result of economic policy and inflation (the rates are lump sums in roubles and are exacted from a certain amount of excisable good).
Amounts of Excise Tax paid at import of products which are resold or included in resalable products can, along with certain other items, under certain circumstances be deducted from the amount of the excise tax.
Taxation under Production Sharing Agreements
The tax code (chapter 26.4) provides for a special tax regime in relation to so-called production sharing agreements referenced in the Law “On Production Sharing Agreements” (No. 225-FZ of 30 December 1995). A production sharing agreement (PSA) is an arrangement between a government and an investor setting out terms for exploration and extraction of mineral resources (most notably oil). A major condition of such agreements is the division of revenue of the extracted resources (or division of the actual resources extracted).
According to the law there are two basic principles for sharing the proceeds: (i) sharing of the profitable production (art. 8.1 of Production Sharing Law; this option is available when the investor’s share is max. 75%) or; (ii) sharing of total production (art. 8.2; this option is available when the investor’s share is max. 68%). In the first option the shared production will not include the production that has been allocated to the investor for the purpose of compensating for the investor’s costs.
The tax regimes are different based on which principle for sharing the proceeds has been chosen. The different tax regimes set which taxes (charges, duties) the investor must pay; which taxes investor must pay but with subsequent compensation; and which taxes the investor is exempt for.
In the first variant, sharing of the profitable production, the investor must pay (without compensation): profit tax and minerals extraction tax.
The investor must pay but is compensated for: VAT, excise tax, natural resources exploitation dues; environmental protection fees and charges, state duties; customs duties (concerning qualifying goods); customs declaration and processing fees; land tax; dues for exploitation of water resources (water tax).
The investor is exempt from property tax and transport tax.
In the second variant, sharing of total production, the investor must pay (without compensation): VAT; state duty; customs duties (concerning qualifying goods); customs declarations and processing fees; environmental protection fees and charges.
The investor is exempt from all other taxes than the above mentioned. However, exemption from land tax and transportation taxes, which are regional taxes, is pending that such exemption is foreseen by regional law.
Under both regimes employer’s social contributions are paid according to the general rules.
The most well-known case of production sharing agreements in Russia is the referred to as Sakhalin 2 concluded for the development of oil and gas deposits on the island Sakhalin. The PSA in question has given rise to a lot of debate and tax disputes which now seems to have been authoritatively resolved with a ruling by the Supreme Commercial Court (Ruling No. 1674/10 of 29.09.2010).
The disputes had centered around questions whether the subcontractors, consultants and other suppliers of the contractual parties were also to be bound by the agreement, and whether the terms of the agreement should stay in force after changes in the tax laws even in the case that the PSA terms were more detrimental than the new laws. Among other things it was not at all clear how a supplier was awarded the status of being a contractor bound by the PSA. The PSA stipulated that profit tax would be paid at the rate of 32%, which at the time of agreement was considered as a beneficial concession. But after the profit tax rate according to the general law later (in 2002) fell to 24%some tax offices still insisted that the 32% profit tax rate was applicable to the suppliers. Courts tended to support the tax offices in this. However the Supreme Commercial Court ruled that the suppliers could not be considered to be bound by the PSA, in relation to which they essentially were third parties, The court does authoritatively ruled that the suppliers to Sakhalin 2 investors were to be taxed by the general provisions of the law.