Actuality March 26, 2008

   The discussion about the value added tax (VAT) reduction from 2009 is over. The Vice Prime Minister Alexey Kudrin declared that instead of VAT reduction in 2009 the state will reduce the mineral extraction tax (MET). And that will reduce the oil companies' tax collection by RUR 100 bln. However, the present tax imposition for Gazprom remains, for which the Ministry of Finance planned MET increase. The decision was approved by the president Vladimir Putin; therefore the lobbyists of VAT reduction have already considered it final.

   As it was assumed, the state hesitated about VAT reduction from 18% to 12-13% from 2009. The Ministry of Finance head Alexey Kudrinu convinced Vladimir Putin to postpone decision making till August,

2008, so that to introduce the new tax rate by 2010-2011. The Prime Minister Viktor Zubkov summed up the VAT discussion at the annual collegium of the Ministry of Economic Development and Trade (MEDT). He reported about the order directed to the Ministry of Finance and MEDT to present the government the calculations about the influence of this tax rate reduction on the economy by August, 2008. Alexey Kudrin explained that the Ministry of Finance will be able to "incorporate" the August decision only in the next three-year financial plan for 2010-2012. "2010-2011 can mark the beginning of reduction process", the Minister declared. This confirmed the MEDT head Elvira Nabiullina, who just recently insisted on the innovation introduction from 2009.

   The Ministers' consent is explained by decisions taken at the meeting with Vladimir Putin, where Alexey Kudrin reported he is not ready to hand down his opinion concerning the MEDT offer to approve the bill draft about the VAT reduction from 2009 during the current spring State Duma session. Vladimir Putin hesitated to take the decision priced at 2% GDP or RUR800 bln (the Ministry of Finance preliminary estimation) without precise calculations and agreed to set aside the issue solution till August. We will remind that Vladimir Putin will already become the Prime Minister by this term and will be responsible for the federal budget to the president Dmitry Medvedev.

Alexey Kudrin unexpectedly offered MET reduction for the oil industry instead of the set aside VAT reduction for all business.

   As the oil companies have often stated the decrease of the industry investment attraction, the Minister has promised to introduce to the government the proposals about the MET formula change at oil extraction.

Now the tax is not imposed on first $9 per oil barrel.

But the Ministry of Finance proposes to increase

this figure by $15. As Mr. Kudrin declared, such adjustment will allow reducing the fiscal load on a company by RUR 100 bln a year.

According to the Federal Tax Service (FTS) statistics, in 2007 the companies paid RUR 1,071 trillion for oil extraction as imposed MET.

Thus, the Ministry of Finance proposal means almost 10%-percent fiscal load reduction.

   Oil companies were pleased with the MET news.

"RUR 100 bln a year is lower, than we expected, but close to our forecasts", declared Gazprom Neft representative Natalya Vilkina.

Another large oil company representative marked that lately the industry faced the escalation of capital and operating expenditures on the background of high inflation, ruble consolidation

and tax load vigorous growth.

According to him, the taxes' stake in the oil companies' return has increased from 35% in 2002 up to 60% in 2007, thus the capital companies' expenditures have grown three times.

   According to Deutsche Bank analysts' accounts, in terms of MET formula change the oil companies will receive the tax burden reduction in size of $1,3 per extracted barrel.

As they estimated, small oil companies and the companies with high operating expenditures and low margin, such as Tatneft, Bashneft, will gain more from the innovation. In the opinion of Capital Investment Company analyst Vitaly Kryukov, the increase of reduction rate will allow the companies to increase the expenditures for geological prospecting and new technologies introduction. Veles Capital Investment Company analysts mark that the companies' returns will substantially increase in terms of MET reduction. So, Lukoil return by the net profit grows by 0,7 -0,8 percent point, Rosneft

- by 1,25, TNK-BP – by 1, Gazprom Neft – by 0,85.

   The gas industry was not disregarded also. Alexey Kudrin reported that the decision about the gas MET increase was set aside by 2010. According to him, "it is concerned with the substantial volume of Gazprom investment programs". We will remind that the report of the Ministry of Finance and MEDT with proposals about the surge in load on the gas industry was "taken into consideration" by Dmitry Medvedev in April, 2007. Later, Gazprom has been proving the government within the whole year that tax burden increase on gas industry is rather untimely.

In February, 2008 Viktor Zubkov agreed with this within the governmental meeting. And Vladimir Putin has also agreed within the analogical meeting in Kremlin on March, 24. Gazprom representative Sergey Kupriyanov declared that the taken decision "is economically sound". According to him, the company should invest significant capital into the development of such objects as gas production and transportation so that to provide the Russian consumers.

"It is obvious that this issue should be solved not only by means of gas export, but also by means of the internal market profit", said Sergey Kupriyanov.

   However, the representatives of another two industries are not satisfied with the announced decisions unlike oil and gas companies. "The Ministry of Finance stimulates the development of raw material industries of the economy to the detriment of non-primary sector", declared the Delovaya Rossiya (Business Russia) chairman Boris Titov. According to him, it contradicts to the political task of conversion to the innovative development model proposed in the presidential "Strategy 2020". "The processing industries' profitability is far lower, than the raw material one. So these industries need support," said Delovaya Rossiya head. Boris Titov supposes that the government postponed VAT reduction and would, probably, deceive the businessmen.

"It has already happened. Mikhail Fradkov government has taken the principle decision about the rate reduction to 15% from 2009. But it did not implement it."

   The Personnel System Certification Register (PSCR), which amalgamates the oil companies also, comments the raw material preferences rather prudent. " These industry representatives in PSCR have always stood for the tax load reduction. It is also necessary to stimulate them", said the deputy head of the union tax policy committee Sergey Belyakov. According to him, the businessmen expect the Ministry of Finance will not relate the given oil companies' remissions to the future VAT reduction. He marked that it is crucially important for PSCR that the tax reduction act (even from 2010) has been approved exactly in 2008. "The external economic situation can change later, and the budget state can worse. And that will again spark the discussion about the reduction necessity", Sergey Belyakov marked.