Russian oil companies use legal schemes to deny federal coffers
A report prepared for the government by tax authorities suggests that Russian oil companies are using complicated yet
legal schemes to deny federal coffers about $ 25 in tax revenue per ton of oil -- or roughly a staggering $ 9 bn
annually. $ 9 bn is about a quarter of the entire 2001 federal budget.
It's also about twice the sum the Finance Ministry has been casting about for since it became clear that neither the International Monetary Fund nor those holding Soviet-era sovereign debt was likely to cut Russia a break next year. The joint report by the Tax Ministry and the Federal Tax Police Service found that on average, oil companies are underpaying their taxes by about 700 roubles ($ 25.13) per ton.
The argument focuses on "corporate pricing" or "transfer pricing" - the practice of the oil extraction unit of a company selling the oil it gets from the ground to other arms of the company, including perhaps those offshore, at artificially low prices. "Oil companies sell oil internally at $ 55-$ 75/ton, compared with the domestic market price of $ 160/ton and the export price of $ 210/ton," wrote Aton brokerage's Steven Dashevsky in a recent report. Such arrangements steeply lower the taxes to be paid.
All agree that transfer pricing goes on. But the conclusion that it is happening to the tune of $ 25 per ton of oil
is much more aggressive than the estimations of other oil watchers.
The Troika Dialog brokerage, for example, has suggested that transfer pricing allowed oil companies to lower their average oil tax-per-ton burden by about $ 9 in 1999 and about $ 11 this year, while the Independent Fuel and Energy Institute has estimated it has saved the companies $ 11.30 in 1999 and $ 14.60 in 2000.
Finance Minister Alexei Kudrin talked of transfer pricing as a tax evasion scheme and promised to report to the president, while a source in the Tax Ministry said that Tax Minister Gennady Bukayev had been instructed by the Kremlin to draw up a draft decree outlawing the practice. That followsDeputy Prime Minister Viktor Khristenko's insistence that oil companies bid for the right to ship their oil out of Russia through the national pipeline monopoly, Transneft.
Hitting the oil companies up for tax revenue does have a particular logic to it: Oil and gas are the big dollar-earners for Russia, and in the early and mid-1990s the industry moved from state to private hands via a privatisation process that has become synonymous with corrupt dealings.
But the oil companies are politically powerful, and they argue against hefty new taxes with a logic of their own: They argue the government should think more long-term than try to patch holes in the 2001 budget, and instead should let the windfall of sky-high world oil prices be reinvested in developing new fields and improving existing ones.
Oil companies are already using more of that cash to invest in their business than it may at first seem, according to
a joint study by three think tanks: the Independent Fuel and Energy Institute, the Institute of Macroeconomic
Research and the Institute of Investment Problems. That study found that oil companies' investment is about 30 % more
than what is broadly announced and documented.
Both publicly and privately, oil companies are lobbying furiously to head off the new taxes.
A spokesperson for oil major Sidanco, for example, said the company's leadership was in the midst of negotiations with the government on the matter, and so obviously could not comment. A representative of Tyumen Oil, or TNK, would only note that "it is quite a delicate issue." Representatives of other companies, including Sibneft, LUKoil and Yukos, simply declined comment.
Not all oil companies reduce their taxes by $ 25 a ton, according to the tax authorities' report; that was just the average. The report found large differences among companies, with Sibneft, for example, paying about 49 roubles ($ 1.76) per ton of oil to the budget last year, while Sidanco paid about 173 roubles ($ 6.02).
Oil players in turn questioned the methodology of the report behind the 700-ruble evasion conclusion. They noted, for example, that different oil companies also got better or worse prices for their oil sales per ton -- depending on how much oil was sold abroad and how much at home, for depressed prices.
They also even challenged some of the math. The Russian-Belarussian oil company Slavneft, for example, said that by
its count the company paid about 189 roubles ($ 6.55) in tax per ton of oil -- while the tax authorities report
credited Slavneft as paying just 76 roubles a ton.
Slavneft argued the report did not include all arms of its company, including some that are loss-making. "No one can say what the domestic price is for a ton of oil," said Dmitry Penevalov, a vice president of Slavneft, in an interview. "Our earnings depend on how much oil is supplied to the export markets. Sometimes we aren't paid when we supply state agencies. We can cover our losses with corporate pricing."
Andrei Shtork, a fellow vice president at Slavneft, added other factors that influence how much an oil company earns per ton -- and so, how much it pays in taxes. "The amount earned per ton] depends on ecological and physical conditions. It depends on the distance from the pipes and the number of orders made for the company's oil," Shtork said.
Like Penevalov and other oil players, Shtork defended transfer pricing because the transactions all occur inside "the same team" -- Slavneft. His colleague Penevalov said that by keeping more profits back from the tax man, Slavneft could invest in its older and less efficient Saratov refinery, while other oil players could sink the money back into the economy in the form of new gas stations in Moscow and other profitable ventures.