A Switchover to Tax on Financial Results

By way of improving the taxation system applied in the oil sector, during Parliamentary hearing on 13 March in the State Duma's Budget and Tax Committee a draft law regarding the introduction of a tax on financial results (TFR) was submitted by MPs for Khanty-Mansi Autonomous Okrug.

Judging by the experiences of the UK and Norway, it can be stated with assurance that a switchover to taxation based on financial results in the oil industry is usually beneficial for its development, and so this is a step in the right direction in the course of improving the existing tax system. However, the text of the draft law in itself has given rise to some questions that need to be dealt with, if possible, prior to the consideration of the draft law in the State Duma.

Firstly, questions arise in connection with the placement of some specific projects on the suggested list of pilot projects. The projects that have been specifically selected so far are those presented by big oil companies; the draft law lists no projects authored by independent producers, in spite of the great similarity in the properties of relevant oil fields.

Secondly, no description is offered either of the goals of this experiment, or of its timelines and the possibilities that may arise as a result of it. So, it will be feasible to legislatively consolidate some distinctly defined criteria for the selection of pilot projects, the experiment's actual timeframe, and practical applicability of its results.

Thirdly, it will be necessary to alter the record-keeping system for companies' incomes and expenditures, so as to replace the by-company taxation principle by a by-territory approach. This is, in fact, the key issue in the framework of switchover from tax on mineral resources extraction to tax on financial results, and it also must be ascertained as part of the draft law.
In addition to these fundamental issues, there exist many minor ones than need to be elaborated in the course of elaboration of the draft law prior to it being submitted to the State Duma, for example the issue of uplift rates.

At the same time, all the issues mentioned above notwithstanding, the idea of a switchover to taxation based on financial results is undoubtedly a good one; however, it should be further elaborated in the framework of the recently presented draft of a new law.

Yelena Velikova – Senior Researcher, Center for Macroeconomics and Finance