Russia's Finance Ministry Proposes Raising Oil Extraction Tax in 2014-15

April 9, 2013

Russia's Ministry of Finance has proposed raising the mineral extraction tax for oil in 2014-15 in order to reduce state budget deficits for road construction. The ministry calculates that it lacks 108.7 billion rubles for road construction and maintenance projects, according to Russian newspaper Vedomosti.

Prior tax incentives that stimulated production of more environmentally-friendly fuels at oil refineries contributed to road budget deficits. The excise taxes for producing Euro-4 and Euro-5 fuel types were increased slower than those for Euro-2 and Euro-3 types. As a result, in 2012 Euro-5 production increased faster than the Ministry of Energy originally anticipated and state budgets received less tax revenue from refineries than before, Vedomosti reports.

According to Vedomosti, Russia's regions feel the deficit most of all. Excise taxes on fuel production contribute to over 70 percent of regional road budgets. In order to solve the problem, the Ministry of Finance proposes increasing excise taxes on Euro-4 and Euro-5 fuels, although this would not completely eliminate the deficits. Accordind to the Finance Minister Anton Siluanov,  the state should also "modify export taxes on oil products" and "consider an increase in oil extraction taxes", Interfax quotes. The minister explained that additional income from oil extraction taxes could be directed towards road construction and maintenance funds in the form of subsidies.

Yet, Aleksey Kondrashov, manager at Ernst&Young, shared his thoughts with OGE that the proposal seems inadequate: companies would receive benefits at first, but increases in the mineral extraction tax for oil may adversely affect the industry.

According to Vedomosti, experts believe that the oil industry is the only industry in Russia that generates profit. The Finance Ministry's proposal to fund regional road budgets with tax revenue from refineries could further increase the state budget's dependency on revenue from "black gold."

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