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Tax regime

General taxation regime

The Russian tax regime encompasses federal taxes (established by the federal authorities and applied to all entities doing business in Russia), regional taxes (established by the Russian Tax Code and regional authorities, and applied to entities doing business in a particular region), and local taxes (established by the Russian Tax Code and local authorities, and applied to entities registered or doing business in a particular town). Below are brief descriptions of the major federal and regional taxes applicable to Russian oil & gas companies.

Profit tax

The Profit Tax Chapter of the Russian Tax Code became effective on 1 January 2002, and replaced the provisions of the Profit Tax Law, which had existed since the early 1990s. The Profit Tax Chapter introduced the following important elements into the profits tax regime:

▪Taxable profit became similar to real economic profit, and many expenses that were previously non-deductible became deductible for tax purposes, although certain limitations still exist.

▪Depreciation rates increased and moved closer to the economic life of the assets

– taxpayers were given a choice between the straight-line and declining balance methods of depreciation for tax purposes for most groups of assets; thus, the amount of depreciation in the early years may be significantly increased.

▪The loss carry-forward rules were amended to allow taxpayers to offset tax losses against profits in future tax periods over a 10-year period (instead of the previously applicable five-year period) – provided, however, that the amount carried forward does not exceed 30% of the tax base in any tax period (vs the previous 50% limit).

▪The general profit tax rate was cut from 35% to 24%, of which 5% was payable to the federal budget, 17% to regional budgets and 2% to local budgets; these rates changed to 6.5%, 17.5% and 0%, respectively, from 1 January 2005. The profit tax was subsequently reduced to just 20% from 1 January 2009, of which 2% goes to the federal budget, and 18% to the regional budgets.

▪The methods of profit-tax calculation were modified, with the accrual method becoming the only method available to major companies. Together with strict rules for doubtful/bad-debt provisions, this accelerated revenue recognition for most companies.

▪Simultaneously, the Profit Tax Chapter of the Russian Tax Code eliminated numerous tax exemptions that were available under the prior Profit Tax Law, including the deduction of capital investments in the year when the corresponding costs are incurred.

▪The Profit Tax Chapter also regulates various exemptions under which the rate of the profit tax payable can be reduced.

Renaissance Capital

20 June 2019

Russian oil & gas

Profit tax was greatly simplified in 2002

An increase in VAT rate to 20% from 1 January 2019 (from 18%) marked the first change in VAT rates since 2003. In June 2003, the State Duma adopted a government-inspired tax reform package, which included cutting VAT in 2004 from 20% to 18%. This came into effect on 1 January 2004.

In general, exported goods were made subject to 0% VAT except for exports of oil and natural gas to other CIS countries, which continued to draw the 20% VAT rate. This anomaly, however, was finally abolished from 1 January 2005, with the government raising the MET to compensate for the loss of revenue.

In parallel with the VAT cut agreed in 2003, taxation on oil and natural gas extraction was also amended, in a manner explained in the following section. In addition, the State Duma also approved the abolition of the sales tax, although this did not require any specific legislation as the relevant Tax Code chapter for this already envisaged its abolition in 2004. Minor changes to the taxation of property were also included with these measures.

VAT paid to suppliers of goods, works and services can be offset by the taxpayer against VAT received. With the introduction of Chapter 21 of the Russian Tax Code, VAT on constructed fixed assets also became recoverable in full. This amendment significantly lowered the cost of capital investments for Russia’s oil companies, and did away with a perverse flaw in the prior regime.

A further cut in VAT has been discussed by the government on a number of occasions, but has been resisted by Russia’s Finance Ministry. Instead, the government initiated discussions in 2017 about the so called budget manoeuvre, where the increased spending on infrastructure and healthcare was expected to be funded by a VAT increase from 18% to 22%, offset slightly by the expected reduction in social security contributions (discussed below). However, a different decision was made following presidential elections in Russia in April 2018. With no change to social security contributions, VAT was proposed to increase to 20%. The State Duma approved these amendments in July 2018, and it became effective from 1 January 2019.

We currently do not foresee any further changes to the VAT regime.

VAT rates have been stable at 18% since 2005

Other taxes

Prior to 2001, Russian businesses were subject to two turnover taxes based on their sales revenue. The Road Users’ Tax had been imposed at a rate of 2.5% and the

Housing Tax had been imposed at a rate of 1.5%. However, as of 1 January 2001, the Housing Tax was repealed and the Road Users’ Tax was reduced to 1%. Moreover, the Road Users’ Tax was repealed effective 1 January 2003.

From 1 January 2010, the so called Unified Social Tax was replaced with social security contributions to four different extra budgetary funds (the Pension Fund, the federal Medical Insurance Fund, local Medical Insurance Funds, and the Social Insurance Fund) at the aggregate rate of 26% of gross payroll. This was increased to 34% from 1 January 2011, but then reduced to 30% from 1 January 2012 for those employees whose annual salary was below a certain threshold. From 2017, the administration of social security contributions was returned to the Federal Tax Service, effectively returning to the pre2010 concept of a Unified Social Tax.

A host of other taxes have been steadily simplified or abolished