Starting in 2019, oil and gas companies carrying out exploration and development activities in Russia on qualifying hydrocarbon deposits will be subject to a new Income-Based Tax (the "IBT"). The IBT is designed to encourage development of low-margin hydrocarbon deposits, including hard-to-recover reserves.
Also, starting in 2019, Russian oil and gas companies will be permitted to apply beneficial tax rules for non-recourse loans to their affiliates to finance foreign oil exploration projects.
Income-Based Tax in a Nutshell
Who would be liable for IBT?
The IBT will first apply in a test regime to major Russian vertically integrated oil companies (VIOCs) on the hydrocarbon deposits listed in Federal Law No. 199-FZ, dated July 19, 2018 (the Law). VIOCs will be testing the regime for projects with various characteristics and apply substantially decreased mineral extraction tax (MET) rates. If the experiment on introduction of the IBT proves successful the tax may be extended to cover all hydrocarbon production in Russia.
How does IBT work?
The IBT amount due (for each deposit due to ring-fencing) would be calculated as the Calculated Revenue from hydrocarbon development less related Actual and Calculated Expenses multiplied by the 50% IBT rate:
For IBT purposes:
- Calculated Revenue is revenue calculated based on the volume of extracted hydrocarbons (crude oil, natural gas, gas condensate and associated gas) and their prices on international markets;
- Actual Expenses are the sum of (1) actual expenses on purchase and construction of equipment and facilities (CAPEX) and (2) related actual production and sales expenses including material expenses, payroll expenses, R&D, maintenance costs, etc. (OPEX);
- Calculated Expenses are estimated base expenses: (1) calculated export duties and (2) calculated transportation costs depending on the region according to Russian Government methodology.
The IBT applies on an annual basis subject to quarterly IBT advance payments.
Deduction of Actual Expenses is limited to RUB 7,140 per ton in the period 2019-2020 and RUB 9,520 per ton starting in 2021 when calculating the IBT amount to ensure that companies do not overstate actual expenses. Special rules apply to new deposits where commencement of commercial production started within the past 7 years.
Losses incurred for IBT purposes may be carried forward indefinitely and may be adjusted by an increasing coefficient (1.163) for each year such losses were not used. For certain hydrocarbon deposits historical losses (incurred as of 2011) may be carried forward subject to specific requirements.
Residual Application of the MET?
IBT taxpayers would be subject to significantly reduced MET on extracted hydrocarbons.
The MET rate will be calculated as RUB 1 per ton of crude oil multiplied by an IBT coefficient balancing international oil prices, reducing export customs duties and special incentives for greenfields and brownfields. For greenfield projects the MET rate may be 30% of the current rate. For currently developed oil deposits the rate will depend on the term of exploitation.
Although the IBT may apply to natural gas, the Law does not provide for the reduction of the MET rate for gas companies, thus, the IBT will be first tested on oil companies.
Foreign Oil Exploration Projects
Russian VIOCs will be able to defer accounting for and taxation of interest payable on loans for financing foreign oil exploration projects (where the return of funds depends on discovery of hydrocarbons) until there is a commercial discovery (but for not more than 7 years). In case of a dry-well Russian lenders will write-off the loan and recognize the loss.
Actions to consider
- Assess impact of the IBT on oil development projects. Analyze potential cooperation with Russian VIOCs on projects applying the IBT;
- Monitor further developments in oil and gas taxation in Russia as the results of the introduction of the IBT become clearer;
- Assess the potential use of new tax rules for loans for foreign oil exploration projects. Consider options for restructuring current financing and provision of new loans.