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Taxes are being concentrated around liquefied gas

23 September 2022

Kondratiev Sergey V. Principal Director on Economic Studies, Head of the Economic Department

Sergey Kondratiev, Deputy Head of the Economic Department of the Institute for Energy and Finance, commented to the Kommersant newspaper about the increase in the income tax rate for LNG projects.

According to Kommersant, to cover the budget deficit, the government intends to raise the income tax rate to 32% for LNG producers for three years. This will primarily affect the Yamal LNG projects of NOVATEK and Sakhalin-2 of Gazprom. At the same time, both projects have obligations for non-deterioration of tax regimes, agreed with foreign shareholders.

As Sergey Kondratiev notes, the intergovernmental agreement on cooperation between Russia and China does not directly enshrine a preferential income tax regime, there are only remarks about “other favorable conditions”. Thus, the Russian side can formally revise the income tax rate, but this will probably cause dissatisfaction among Chinese partners, he believes, recalling the situation with the dividend tax: over the past five years, the Chinese side has turned to Russia with a request to lower the rate from 10% to 5% (up to the level of another shareholder of the project - the French Total Energies, which owns 20%).

There is also the question of applying an increased income tax rate for the Sakhalin-2 project, which continues to operate in the PSA regime. The PSA now has a standard rate of 20%, profit is defined as the difference between revenue (the cost of profitable production) and production costs.

For Sakhalin-2, a special procedure for distributing income tax has been established: 75% goes to the federal budget, 25% goes to the region. Thus, the formal application of the new norm will not lead to a change in federal budget revenues (20% • 0.75 = 15%), Mr. Kondratiev notes, but will increase regional budget revenues, which can grow by 45–50 billion rubles in year. In the draft budget for 2022-2024, revenues from Sakhalin-2 in 2023 are planned at the level of 20.1 billion rubles.

Kondratiev Sergey V. Principal Director on Economic Studies, Head of the Economic Department
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