Front Matter Page

Fiscal Affairs Departments

Authorized for distribution by Liam P. Ebrill

Contents

• Summary

• I. Introduction

• II. The Current Situation

  • A. Current Revenues

  • B. Actual Revenues vs. Notional Liability

• III. Reasons for the Low Tax Burden

  • A. Infrastructure and Export Constraints

  • B. Weak Administrative Capability

  • C. Tax Structure

• IV. Taxation of Petroleum Production

  • A. Considerations for Establishing an Economically Efficient Fiscal Regime in Petroleum Producing Countries

  • B. Present Tax Arrangements and Revenues in Kazakhstan

  • C. Taxation of Petroleum Production in Russia

  • D. Present Tax Arrangements and Revenues in Azerbaijan

  • E. Trends and Common Issues in Taxation of Petroleum Production

• V. Downstream Taxation of Petroleum Products

  • A. Structure and Reasons for Downstream Taxation of Petroleum Products

  • B. Revenues from Taxation of Petroleum Products

  • C. Potential for Revenue Enhancement

• VI. The Level and Structure of Taxation of Natural Gas

  • A. Considerations for Establishing an Economically Efficient Tax Regime for Gas

  • B. Present Tax Arrangements and Revenues in the Russian Gas Sector

  • C. Tax Structure Issues and Revenue Enhancement in the Russian Gas Sector …

  • D. Taxation of Gas Production in Other BRO Countries

• VII. Conclusions

• Text Tables

• 1. Types of Instruments Typically Used in Market and BRO Economies

• 2. General Government Revenue and Revenue from the Petroleum Sector

• 3. International Comparison of Revenues from Oil and Gas and Relative Tax Burden

• 4. Russia: Estimated Notional Liability and Actual Revenues in 1995

• 5. Relative Tax Burden for Oil and Gas Sectors in Russia and Azerbaijan: Actual Revenues vs. Notional Liability

• 6. Kazakhstan: Revenues from the Oil and Gas Sectors, 1995-96

• 7. Russia: Oil Sector Revenues

• 8. Azerbaijan: Revenues from the Oil Sector, 1994-96

• 9. Retail Prices of Gasoline and Diesel

• 10. Estimated Revenues from Taxes on Petroleum Products in Selected BRO Countries, 1996

• 11a. Approximate Gasoline Excise Tax Revenue

• 11b. Approximate Diesel Excise Tax Revenue

• 12. Russia: Gas Sector Revenues

• 13. Turkmenistan: Estimated Gas and Oil Sector Revenues

• Text Boxes

• 1. Theory of Taxation of Mineral Rents

• 2. Fiscal Federalism and its Relation to Taxation of Energy and Resource Rents

• 3. Impact of Improved Fiscal Incentives for Production

• 4. Economics, Pricing, and Taxation of Natural Gas in the BRO

• Appendices

• I. International Comparison of Revenue from Oil and Gas and Relative Tax Burden

• II. Russia Energy Sector: Nonpayment and Tax Evasion in the Energy Sector

• III. Supply, Demand, Pricing, and Taxation of Gas in Russia

• IV. Revenues from Government Shareholding and Windfall Tax: Lessons of Experience from Other Countries

• V. Background Data on Taxation of Oil and Gas in Russia

• VI. Background Data on Taxation of Oil and Gas in Kazakhstan, Azerbaijan, and Turkmenistan

• VII. Background Data on Consumption of Oil Products in the BRO

• Appendix Tables

• 14. Gasprom 1996 IAS Accounts

• 15. Russia: Selected Characteristics of Oil and Gas Sector Taxes, March 1997

• 16. Russia: Oil and Gas Revenues (in millions of U.S. dollars)

• 17. Russia: Oil and Gas Sector Revenues (as a percent of GDP)

• 18. Russia: Oil Price Path

• 19. Kazakhstan: Revenues from the Oil and Gas Sector, 1995-96 (in millions of Tenge)

• 20. Kazakhstan: Revenues from the Oil and Gas Sector, 1995-96 (in percent of GDP)

• 21. Azerbaijan: Revenues from the Oil and Gas Sector, 1994-96 (in billions of manat)

• 22. Azerbaijan: Revenues from the Oil and Gas Sector, 1994-96 (in percent of GDP).

• 23. Turkmenistan: Gas and Oil Sector Revenues

• Figures

• 1. Gasprom Production and Sales by Volume and Western Europe Consumption and Imports

• 2. Gas Price and Excise Rate

• 3. Russia and BRO: Gas Supply, Demand, Pricing, and Taxation

• Bibliography

summary

Four of the Baltics, Russia, and other former Soviet Union (BRO) countries are large hydrocarbon producers. The relative tax burden for most BRO oil and gas producers in 1996 was about half to two-thirds that of non-BRO petroleum-rich countries. These revenues averaged 4.5 percent of GDP, about one-fourth that of non-BRO oil producers.

Actual revenues from the oil and gas sector were about half to two-thirds the notional liability in Russia, Azerbaijan, and Kazakhstan. Foreign companies produce 9 percent of BRO oil. In Russia, they complain about the high tax burden. Over 80 percent of BRO oil and gas is produced by recently privatized Russian enterprises¹ and about 10 percent by state companies, and they account for most exemptions, arrears, and noncompliance.

In the oil sector, low revenues are caused partly by infrastructure constraints. Oil producers receive low prices due to insufficient crude oil export capacity, monopoly control of crude export by Russia, and inefficient refining. Additional reasons are weak tax administration and inappropriate tax structure. Kazakhstan and Azerbaijan have new fiscal regimes to attract investors. In Russia, many taxes are fixed production-based levies and reform is hampered by federal and regional disagreements. Reforms proposed in the Russian Draft Tax Code could eventually add revenue equal to 0.5 percent of GDP. Increased taxation of oil product consumption in all BRO countries could increase revenue by 0.5-1.5 percent of GDP.

One monopoly dominates the BRO gas sector, Russia’s Gasprom. The actual tax burden remains low because statutory tax rates are low and tax structure does not capture monopoly or resource rents; not all taxes are paid; and there are noncash settlements for energy, which facilitates tax avoidance. Additional taxation could raise 0.7-1.0 percent of GDP.