RS Brief news Mineral Extraction Tax (MET)

Mineral Extraction Tax (MET)

June 2012

Increasing the rent burden on mineral mining was one of Vladimir Putin’s main points during his presidential campaign for modifying the tax system. In the document entitled “Main tax policy course for 2012-2015”, which was approved at Putin’s last meeting as Prime Minister on May 3rd, the government more clearly outlined its intentions regarding the raw materials sector.

MET on Gas

Starting on July 1st, 2013 a new formula for calculating MET will be used for natural gas producers. This new system includes taking away 80% of any additional income from an increase in wholesale gas prices on the domestic market (higher than the forecast inflation rate). With that being said, cost increases on transporting gas and new tax payments (without allowances) into the budget for gas transportation infrastructure assets are not to be considered part of this additional income.

The government decided to nullify MET on coal bed methane. It is used primarily at individual mines on a need-basis. Many are hoping that this tax decrease will stimulate the use of coal bed methane for industrial purposes on a large scale.

MET on ‘difficult’ oil-fields

It seems as though the Ministry of Finance is interested in following up on suggestions made by “Strategy 2020” experts regarding modifying tax regulations in the oil industry. In 2013 the department is planning on looking into the possibility of shifting to a tax system which depends on the earnings from the financial and operational activities of particular companies and oil-fields. The Ministry of Finance warns that “the introduction of such mechanisms may lead to a complete overhaul of the resource rent tax system—starting with MET and export customs duties and ending with oil excise taxes”. Authors of “Strategy 2020” are pushing to completely do away with export customs duties on oil and oil products. Budget losses will be compensated for by an increase in MET and growth in profit tax payments due to the fact that oil and oil product prices will be equal on the domestic and foreign markets.

Taxing financial earnings will supposedly stimulate the development of new and “difficult” oil-fields. In addition to the effective 0% MET tax rate for onshore hydrocarbon exploration above the Arctic Circle the government is aiming to develop new tax incentives for exploring all raw materials on the shelf and in the domestic waters.

Investment projects for exploring oil-fields where extraction is particularly difficult will be awarded special benefits. On May 3rd Putin signed an order stating that the government should outline draft regulations for decreasing the current MET rate for such fields by October 1st. Depending on the project difficulty(there are four categories) the discount can be up to 50% of the current MET rate. Tax and customs terms for particular deposits should remain unchanged for 5-10 years. Additional allowances are to be made if the price of oil drops below $60 a barrel and/or any extraordinary circumstances are to occur. A decrease in export customs duties payments for superviscous oil is guaranteed for the next 10 years.

MET on other exported raw materials

The tax for miners of other minerals (metals, salts and construction materials) is to be reformed using the analogue of specific customs MET rates for coal.

Currently, the specific customs MET rates for coal are set based on a formula and depend on global coal prices.

Also using this analogue the government will look into setting up MET rates for minerals, whose proportion of export accounts for more than 50%, depending on global prices for that raw material. Regions will be authorised to set MET rates for the most widespread minerals (sand, crushed rock, plaster, clay, peat).

Andrey Chernyavsky from the Centre for Development for the Higher School of Economics claims that “Gazprom’s tax burden will increase even more, but not significantly, which is not the case for the rest of the raw materials sector (a decrease in burden is expected) due to allowances. This tax manoeuvre on the part of the government practically speaking will include a tax increase for the non-oil raw material sector”.

Andrei Susarov,
Tax observer for the Moscow News
Exclusively for Russian Survey RS