By 2024 Russia will reduce export duties on oil and oil products to zero.1 The Russian mineral extraction tax (MET) and excise taxes for the oil and gas industry will be gradually increased starting from 2019 to compensate for the repeal of export duty.2
Russian oil refining companies (that obtain the necessary licenses) will be permitted to use increased reverse excise tax deductions to receive a refund from the Russian budget designed to compensate for the economic effect of increased domestic prices for hydrocarbons and to stimulate modernization of the oil refining industry.
What does the Law say?
Repeal of Oil Export Duties
Starting in 2019, Russia will apply a new adjustment coefficient gradually decreasing the current 30% export duty rate for oil and export duty rates for oil products down to zero by 2024. Russian MET rates on hydrocarbons and excise taxes on oil products will be increased to fully replace export duties by 2024.
|Name||Export Duties on Crude Oil||MET on Crude Oil|
|Decreasing Coefficient||Decreasing Coefficient||Adjustment Coefficient||Increased MET rate for crude oil*|
* As percentage of the current export duty rate
The Russian Government will retain the right to temporarily restore Russian export duties on oil and oil products in case of a sharp (more than 15%) increase in oil prices (compared to the average oil prices calculated for the preceding three months).
New Excise Tax for Oil Stock Refining Companies
As a compensatory mechanism for the oil refining industry, starting in 2019 Russia will introduce a new reverse excise tax (the "RET") on processing hydrocarbons (oil, gas condensate, vacuum gasoil, tar and fuel oil) to mitigate the economic effect of increasing domestic prices for feedstock due to a higher MET.
In particular, the RET should allow Russian refining companies to effectively receive a monetary refund from the Russian budget in the amount of the substituted export duties plus 60% of the margin between the export and internal market prices on the Euro-5 gasoline and diesel produced in 2019 (50% staring in 2020). The amount of the refund will also depend on the chemical parameters of the output oil products and the location of the oil refining facilities (the so-called regional coefficient compensating transportation costs for certain refiners). This RET-based compensation mechanism is currently applied for the feed stock of certified petrochemical companies.
To apply the RET deductions an oil refiner must obtain a processing certificate, which is provided if the taxpayer meets either of the following requirements:
- the company is subject to restrictive measures administered or enforced by foreign countries and/or international organizations; or
- the output Euro-5 gasoline and/or output naphtha transferred to certified petrochemical plants exceeds 5000 tons within the preceding three years and represents more than 10% of the refined oil stock; or
- the company enters into a refining facilities modernization agreement with the Russian Ministry of Energy before 1 June 2019, provided that the company refined at least 600,000 tons of oil stock in 2017 and satisfies either of the following criteria: (i) the compan0y's investments in oil refining facilities will exceed RUB 60 bln. (approximately USD 900 mln.) by 2024 or (ii) produced Euro-5 gasoline constitutes at least 10% of the refined oil stock.
Regulations for entering into a refining facilities modernization agreement are being prepared by the Russian Government.
Actions to consider
- assess the potential effect of the gradual repeal of Russian export duties on oil and oil products with a corresponding incremental increase of the Russian MET and excise taxes;
- consider whether the taxpayer qualifies for a processing certificate and can apply the beneficial RET deductions. This may raise technological, commercial and legal issues;
- consider the feasibility of entering into a refining facilities modernization agreement with the Russian Ministry of Energy for refining companies with low refinery output levels;
- assess whether any technological or legal changes would be needed to ensure compliance and maintain profitability.
1. Federal Law No. 305-FZ "On Amendments to Article 3.1 of the Russian Law on Customs Tariffs", dated 3 August 2018.
2. Federal Law No. 301-FZ "On Amendments to Part Two of the Russian Tax Code", dated 3 August 2018.