Government agrees Urals discount to Brent when calculating taxes

The Government of the Russian Federation submitted to the State Duma a draft law specifying the mechanism for determining the price of Urals oil for calculating taxes. When calculating taxes, the discount in the price of Urals to the price of Brent oil will be limited to $25-34 per barrel, follows from the document and the explanatory note to it, published in the electronic database of the lower house of parliament.

The revised mechanism will be applied when calculating the mineral extraction tax (MET), additional income tax (ATD), excise tax on crude oil, as well as when calculating damper parameters in the oil industry.

According to the text of the document, if the price of Urals oil, calculated according to the current legislation, in April turns out to be less than the price of Brent oil by more than $34/bbl, then for tax purposes its price is taken as the price of Brent minus $34/bbl. In May, the discount is set at $31/bbl. (under a similar condition, that is, if Urals is cheaper than Brent by more than $31/bbl), in June – $28/bbl, from July 1 – $25/bbl.

Previously, the government could not reach a final agreement with the oil companies on the final parameters of the new mechanism for calculating taxes on the sale of oil, two Vedomosti sources close to the cabinet said. They explained that the main unresolved issue was the discount of Russian Urals to the price of Brent oil. The government chose from two alternatives based on the size of the discount: $20/bbl. or $25/bbl

Regarding the indicator, the interlocutors explained, the discussion is no longer ongoing: the authorities have settled on the fact that the Brent benchmark will be used for tax purposes. So far, the Ministry of Finance continues to focus on the Urals quotation, the assessment of which is being prepared for the government by the Argus agency – but the department acknowledged the loss of representativeness of this indicator.

The second, besides the size of the discount, the debatable issue was the date of entry into force of the new mechanism, the sources say. The discussion was about whether the regulation will work immediately – already from April, or whether a transitional period will be provided.

On February 9, Andrey Makarov, chairman of the State Duma Committee on Budget and Taxes, announced that a meeting was scheduled for Monday, at which deputies would consider amendments to the Tax Code (TC) prepared by the government related to taxation of the oil industry and the operation of the damper mechanism.

He explained that the government had prepared its proposals, which were considered at a meeting on 9 February. A source close to the government then specified to Vedomosti that a final meeting was to be held over the weekend, at which final decisions would be made.

Vedomosti sent a request to representatives of the government apparatus, the Ministry of Finance and the Ministry of Energy.

The authorities have begun intensive discussions on changing the principles for calculating the price of oil for tax purposes against the backdrop of a sharp decline in the cost of Urals in recent months.

The discount on Urals began to increase since October last year – after the Western countries agreed on a price ceiling for Russian oil and oil products. The average monthly price for Russian oil in September 2022 was $68.25/bbl, in October – $70.62/bbl, in November – $66.47/bbl, in December – $50.47/bbl, in January – $49.48 per barrel (1.7 times lower than a year earlier), the Ministry of Finance reported. The average price of Brent oil in September 2022 was about $90.2/bbl, in October – $93/bbl, in November – $90.6/bbl, in December – $81.6/bbl, in January – $85/bbl. bbl

The growth of the discount led to a decline in federal budget revenues. At the end of January, a record monthly deficit of almost 1.8 trillion rubles was recorded. The Ministry of Finance explained this primarily by a 46% year-on-year decline in oil and gas revenues due to a decrease in the price of Urals. In a commentary on the execution of the budget, the department acknowledged that the quotation had ceased to be representative.

“Given the decline in the representativeness of Urals oil price quotations as an objective price indicator of export prices for Russian oil, approaches are currently being developed to switch to alternative price indicators for tax purposes,” the representative of the Ministry of Finance emphasized.

On January 11, at a meeting of the president with members of the government, the issue of increasing the Urals discount was discussed, among other things. Vladimir Putin asked Deputy Prime Minister Alexander Novak to analyze this problem so that it “does not create any problems with the budget.”

According to the Tax Code, taxes are calculated on the basis of the average Urals oil prices for the tax period on the world oil markets, in particular the Mediterranean and Rotterdam markets. Prices are monitored by the Ministry of Economic Development. Since 2013, the agency has been using quotes from the Argus agency, which tracks deliveries to the ports of Augusta (Italy) and Rotterdam (Netherlands) and forms its estimates based on surveys of sellers and buyers. Before switching to Argus data, Reuters and Platts quotes were used. It is important that the price of oil for tax purposes also includes the cost of transportation – freight, insurance, financing and a number of other parameters (CIF basis, Cost, Insurance and Freight). Since November, Argus has changed the pricing methodology.

Now the agency evaluates the quotes of spot transactions in Russian ports – in fact, the cost before loading into tankers (FOB basis, Free On Board). To the price on this basis, Argus adds the cost of delivery to the same ports – Augusta and Rotterdam, where Russian oil is not actually delivered after the sanctions. As Deputy Finance Minister Alexei Sazanov said earlier, using only FOB quotes will lead to a loss of budget revenues of 1 trillion rubles, therefore, in order to use this basis, it will be necessary to change the legislation, in particular, change the formula for calculating the MET.

At the same time, a Vedomosti source in one of the major oil companies notes that now when oil is sold in Russian ports (that is, without taking into account the cost of sea transportation and insurance of raw materials in the price), the actual discount to Brent is about $30/bbl.

If the quotation used by Argus is abandoned, tax revenues from the sale of oil may increase by 20-25%, estimated Sergey Grishunin, managing director of the National Rating Agency (NRA) rating service.

Those discount levels that are published in Argus do not reflect reality at all, he noted. An indirect proof of this is the growth in shipments of Russian oil in January. Obviously, if they were really as large as foreign news agencies say, supplies would be reduced, since it would be more profitable to refine and sell oil on the domestic market, the expert explained. In this regard, the planned level of discount mainly reflects the cost of transportation to new key markets, Grishunin said. Nevertheless, there is an insufficiently developed point in the proposed taxation system, he added. In particular, when oil prices fluctuate sharply, the discount remains fixed, which can create distortions.

Ekaterina Krylova, managing expert of the PSB Analytics and Expertise Center, believes that the proposed Urals quote calculation system is “quite adequate”, because it will allow for a more accurate determination of the price of Russian oil and will encourage companies to reduce discounts. This will lead to an increase in the taxable base and will bring additional revenues to the budget. According to Krylova, oil and gas budget revenues in 2023 will amount to 7.8 trillion rubles. at a Brent price of $84/bbl. and Urals at $63/bbl.

The current discount on Urals, notes Krylova, at the moment is $26/bbl. when calculating on the basis of CIF (cost, insurance, freight) and in the Mediterranean region. At the same time, on the basis of FOB in Primorsk, the discount may be larger, because the price does not include insurance, delivery and transshipment.

Yury Fedyukin, managing partner of Enterprise Legal Solutions, believes that plans to start applying the new system as soon as possible are “relatively real”. According to him, due to the fall in oil and gas budget revenues, tax amendments “can be called inevitable and rather urgent.”