4. Net Income Taxation The taxation of the net income determined in some way is the most perfect form for oil production taxation, applied in a number of developed countries, for in stance, in Norway, the Great Britain, and the USA. Such an approach secures really differentiated taxation, since when it is applied not only the gross income, obtained by the producer is taken into account but also costs for oil production at a particu lar oil field. As a result, no economic obstacles for oil fields development, which are characterized by higher development costs (capital, exploitation or transportation), arise.
There are different forms of such an approach fulfillment. For example, a bet ter taxation system can be created, the basis for severance ad valorem tax rate ap plication being not the value of oil produced but the net income. This way is used in some countries, for instance the USA, to calculate royalty. In this case net income is calculated as the value of oil per wellhead excluding exploitation costs for its ex traction (lifting). The value of oil per wellhead is determined by reverse calculation, by the calculation of the net price on the basis of some basic price or independent deals price established by the market.
Ad valorem tax, which is based on oil price per wellhead excluding certain ex ploitation expenses, allows taking the real conditions of oil production into account, since all mining and geologic, economic and geographic oil field’s characteristics are finally reflected in the income, produced by its development. This system of taxation considers not only obtained incomes but also expenses for oil production at a particular oil field, thus securing differentiated approach depending on the real Section The Real Sector conditions of oil production (higher expenses mean lower amount of net profit and consequently tax value).
At the same time effective implementation of such an approach in practice in the situation existing in modern Russia is quite difficult since it requires the solution of a number of administration, methodological and technological problems, includ ing the problem of oil market prices determination and application in order to or ganize registration and control of the incomes and expenses during oil production regarding oil fields (licensed areas).
Application of the tax for additional income from hydrocarbons production (TAI) is another possible form of taxation. TAI taxation base is defined as the value of produced and sold hydrocarbons, decreased by the amount of production out put and sales (excluding amortization) costs, production investments and uncom pensated expenses of the previous taxation period. Tax rate is determined by the value of P factor, calculated as a proportion of accumulated from hydrocarbons production and sales income to accumulated capital and exploitation expenses for their production.
In theory, TAI has a number of advantages as compared with the severance tax. In contrast to the severance tax TAI is based on the indices of additional in come and P factor, which reflect real economy efficiency of a particular oil field de velopment. TAI directly takes into account mining and geological, economic and geographic conditions for hydrocarbons production, as it is directly related to the indices of oil field profitability – additional income and P factor. In case of highly efficient project TAI implementation secures progressive skimming of resource rent for the benefit of the state, the conditions of low efficient project are improving at the same time. An important feature of TAI is the fact that its application intensi fies investments in new oil fields development, as the tax is not levied before the to tal payback of the investments.
At the same time when TAI is implemented it is reasonable to sustain sever ance tax as a minimum tax, which provides the government with a certain level of tax proceeds from the project fulfillment, first of all, at the initial stages of develop ment and in the periods of low prices. Severance tax, however, should be levied at quite low rates (for example, coefficient being equal to 0.3 0.5) with the implemen tation of TAI.
It should be, however, noted that the taxation scheme, which is based on TAI is considerably more complicated both in regard to making tax calculations and practical control for their reliability. This creates opportunities for the underde claration of tax liabilities by producer, the consequence being the relative decrease in the state budget incomes.
TAI system being the taxation system which is based on the determination of additional income and P factor, potentially can stimulate the investor to overesti mate costs during project fulfillment. The increase of the costs means the decrease in the income amount levied with tax, which leads to the decrease in investor’s tax liabilities, P factor also decreases, reducing correspondingly tax rate. The qualifi RUSSIAN ECONOMY IN trends and outlooks cation and objectiveness (absence of corruption) of the government control for the project fulfillment costs parameters gains big importance.
Practical application of TAI can be effective only on the condition that the problem of oil market prices for determination and use in order to calculate taxes is solved, otherwise TAI application loses economic base.
Thus, as the implementation of the considered approaches is not possible without creation of particular prerequisites (for instance without solution of the problem for oil market prices for determination and use in order to calculate taxes), the transfer to some net income taxation systems can be fulfilled only in future.
5. Agreements on the Share of Production The procedure of production share agreement (PSA) enables to secure sTa ble economic and legislation regime for the investor over the whole period of in vestment project fulfillment, as well as individual approach for the projects of par ticular minerals fields development. A considerable part of taxation parameters of PSA, and first of all the parameters of the very sector, are the results of talks be tween the government and the investment companies. The creation of the scale of production share depending on the field development profitability, which is esti mated by the values of the internal profit norm or by R factor, allows imparting flexibility to the system regarding the natural rent impressments and creating ac cepTable conditions for both high profiTable and low profiTable fields develop ment.
PSA system in Russia has not been development to any noticeable extent. At present there are only 3 PSA, which were concluded in the middle of 1990ies be fore the entry in effect of the Federal Law “On agreements on share of production” (2 projects are being fulfilled at the Sakhalin island shelf, 1 project – in Nenets Autonomous Okrug ).
Limited development of PSA system in Russia is, in our opinion, accounted for by certain drawbacks, which are characteristic for this system. The drawbacks of PSA system are connected first of all with individualization of conditions for particu lar projects, which can lead to receipt of unjustified favorable conditions for the im plementation of the project in the environment of government officials corruption and insufficient qualification, the consequence of which being the loss of a certain amount of minerals fields development incomes for the government.
PSA system potentially can stimulate the investor to overestimate costs during project fulfillment. The increase of the costs means the decrease in the profiTable production and income amount levied with tax, which leads to the decrease in in vestor’s tax liabilities for expropriated for the benefit of the state profiTable produc tion and income tax. Besides, the value of the internal profitability norm decreases and consequently the share of the government in profiTable production decreases correspondingly.
Factors that are beyond the limits of actual tax legislation are of great impor tance in case of PSA system regime application. What is at issue is the corruption and the level of qualification of the government officials, who take part both in the negotiation process on PSA conclusion and in process of the regulation of given Section The Real Sector projects fulfillment. Corruption and insufficient level of qualification can signifi cantly decrease the efficiency of PSA regime application regarding the receipt of adequate tax proceeds by the government.
Thereupon the implementation of PSA regime should have, in our opinion, ex tremely limited nature. The application of such a regime at newly licensed fields is accepTable only after negative results of the auction for the granting of subsoil area exploitation on other than production share conditions.
Making any decisions on tax stimulation of the investments in new fields’ de velopment should correspond to the real possibilities of the government for ad ministration of implemented taxes. In the present situation Russia it is the applica tion of territory step down coefficient for oil production over the whole period of the field development that appears to be the best approach.
Electric Power Industry Since 1999 with the overcome for crisis phenomena and reanimation of eco nomic activity the trend for electric power production growth and demand expan sion has been retrieving. Over 2000 2006 the increase in electricity production was equal to 16.8%, the volumes of GDP increasing by 58.0% and industrial production – by 49.3% (Table 29).
Table The Dynamics of Electric Power, Industry, GDP and Investments in Fixed Assets over 1991 2006 as percentage to the previous year Electric power produc Investments in fixed GDP Industrial production tion assets 1991 98.7 95 92 1992 94.4 85.5 82 1993 94.9 91.3 86 1994 91.6 87.3 79 1995 98.2 95.9 96.7 89.1996 98.5 96.4 95.5 81.1997 98.5 101.4 102 95.1998 99.2 94.7 94.8 88.1999 102.3 106.4 111 105.2000 103.7 110 111.9 117.2001 101.5 105.1 104.9 110.2002 100.0 104.7 103.7 102.2003 102.8 107.3 107 112.2004 101.7 107.2 106.1 110.2005 102.1 106.4 104 110.2006* 104.0 106.7 103.9 113. * Refined estimations by the Ministry for Economic Development.
Source: Federal State Statistics Service.
The change in the level of electricity consumption in the national economy in post crisis period is accounted for by the dynamic expansion of domestic market demand under the influence of simultaneous growth in both goods and services production. The share of service production sector was 27.9% of the total volume of electricity consumption in the economy against 27.0% in 1999 and 22.2% in RUSSIAN ECONOMY IN trends and outlooks 1990. Besides, growing consumers’ demand for electricity due to the increase in household appliances demand and intensive construction of modern housing also had a considerable influence on the dynamics of electricity consumption in service sector.
Formation of new segments of services market – for instance, dynamic devel opment of modern communication systems, data processing service, financial, credit and insurance organizations – was accompanied by fundamental changes in material and technological basis, work creation and the increase in labor efficiency.
The change in the technologies of service rendering on the basis of the increase in the level of electricity application in the labor of those employed in the service sec tor was the factor that determined the increase in effectiveness of the potential created over the years of reforms utilization. According to the data of electricity balance electricity consumption in service sector over 2000 2005 increased by 16.8%. The dynamics of electricity demand was considerably influenced by the change in market situation (Table 30).
Table Electricity Balance of the Russian Federation, kWatt hour bln.
Source: Federal State Statistics Service, Ministry for the Economic Development.
In 2005 the supply of electricity by RAO “UES of Russia” to its consumers in creased by 2.4% in comparison with 2004 and heat energy supply decreased by 0.8%. The proportion of the main groups of the consumers did not change signifi cantly in the structure of profiTable sales of electricity in 2005. In the structure of profiTable heat energy supplies the share of industrial consumers decreased by 4%, the share of housing and communal facilities increased by 6%. Industrial sec Section The Real Sector tor, whose share in 2005 was equal to 48.6% of the total amount of sold electric energy, remained the main consumer at the retail market. The share of energy con sumption by the bodies of housing and communal facilities was equal to 12.5%, transport and communication organizations – 11%, population – 7.6%. In the structure of heat energy consumption it is housing and communal service organi zations that have the biggest proportion of 47.6%, industrial consumers having the share of 25.4% (Table 31).
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