Russia Says Oil Companies Aren't Paying Full Taxes

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November 25, 2000 Russia Says Oil Companies Aren't Paying Full Taxes By BLOOMBERG NEWS OSCOW, Nov. 24 -- An investigation into how much tax Russian oil companies have paid on their output of crude has found evidence of widespread evasion, Finance Minister Aleksei L. Kudrin said today.

The inquiry, started by the finance minister in July, was later taken over by the tax ministry and the tax police. The officials planned to report their findings to President Vladimir V. Putin.

"Their answers exceeded our expectations," Mr. Kudrin said of the oil companies. "The amount of money that wasn't paid in taxes exceeded the amount the ministry of finance discovered."

Oil and gas producers generate about 40 percent of Russia's hard-currency income and about 25 percent of its taxes. The government relies on the companies to contribute to the budget and has been trying to persuade the 14 largest oil producers to make their payments in cash.

Mr. Kudrin would not name the companies being investigated.

According to Russian media reports, the finance ministry's report in July showed that Sibneft, the nation's No. 6 oil company, paid only a third of the taxes paid by Lukoil Holding, Russia's biggest oil producer, and Surgutneftegaz, the No. 3 oil producer, paid about a quarter of what the oil companies Rosneft and Onaco pay.

Earlier this year, tax officials singled out several oil companies, including Lukoil and Sibneft. The companies have denied any wrongdoing and many of the inquiries ended with settlements.

Since his inauguration in May, Mr. Putin has been trying to curb the political influence of the small group of businessmen who accumulated large stakes in the oil, metals, gas and banking industries under President Boris N. Yeltsin.

Russia raised record revenue this year, helped by higher tax payments by commodity producers and other domestic industries. The government is also trying to control spending and drafted a balanced budget for the first time, for 2001.

"This year we are having a revolution in budget spending," Mr. Kudrin said. "The government is also doing considerable work to improve collection."

http://www.nytimes.com/2000/11/25/business/25OIL.html

-- Martin Thompson (mthom1927@aol.com), November 26, 2000

Answers

Saturday, Nov. 25, 2000. Page 1

Ministers, Oil Kings In Fight For Taxes

By Lyuba Pronina Staff Writer Top Cabinet ministers say the nation’s oil companies are evading taxes on a startling scale and are pledging a crackdown. Oil barons counter that in a clumsy search for revenue now that the IMF has apparently let Moscow down, the government is ready to risk killing off the industry.

A Finance Ministry study of tax evasion in the oil industry "surpassed all of our expectations," said Finance Minister Alexei Kudrin on Thursday.

He said the oil companies are evading taxes at a staggering rate, and said he would report on his findings in the nearest future to President Vladimir Putin.

Federal Tax Police chief Vyacheslav Soltaganov is talking equally tough.

"We have come to a point where we know all about the oil companies and they are aware of this," Soltaganov said Friday. He said his law officers were cooperating with the Tax Ministry and the Economic Development and Trade Ministry to develop new tax rules and enforcement practices to close off loopholes.

Rapid action in the form of a presidential decree may be in the offing.

The newspaper Vedomosti reported Friday, citing a source in the Tax Ministry, that Tax Minister Gennady Bukayev has been instructed by the Kremlin to prepare a draft of a decree that would end the controversial practice of corporate pricing.

Corporate pricing happens when a company’s oil extraction unit sells oil to the parent company, or the parent company’s offshore arm, at artificially low prices — on grounds it is all happening inside one company. The arrangement dramatically lowers the official, taxable price of oil.

According to a report by the independent Fuel and Energy Institute, the average corporate oil price in 1999 stood at $27 per ton of crude oil — while the average export price of Russian oil was $110.50.

In addition to targeting corporate pricing, the government has placed a threatening hand on the export faucet: the state-owned system of pipelines, Transneft.

Deputy Prime Minister Viktor Khristenko — who was earlier this month put in charge of parceling out oil export quotas via Transneft by President Putin — has talked of forcing oil companies to bid for some such quotas at auctions. As it is now, oil companies strike secret deals with Transneft for access, an arrangement seen as fertile for corruption.

Oil company executives are hitting back. Four top oil barons — Vagit Alekperov of LUKoil, Mikhail Khodorkovsky of Yukos, Yevgeny Shvidler of Sibneft and Simon Kukes of Tyumen Oil Co. — this week sent a letter to Prime Minister Mikhail Kasyanov declaring their opposition both to Khristenko’s export quota auctions and Kudrin’s talk of a tax crackdown.

"[These initiatives] do not help [oil companies] to use the favorable world situation for resolving the problems of the sector," Vedomosti quoted the letter as saying. On the contrary, "they are directed at limiting the ability of the oil companies to carry out large investment projects."

Charging for access to export pipes, meanwhile, is simply "the introduction of an extra tax for the oil producing companies."

The 2001 federal budget may need more tax revenue than expected: It assumed help from the IMF and from the Paris Club of Russia’s nation- creditors would give Moscow a break next year. That now seems less likely.

Then again, the 2001 budget is also conservative in its estimates of the world oil price, which continues to soar at $30 a barrel — making it unclear how much of a revenue shortfall to expect next year.

For now, the companies plead they already bring in a staggering 30 percent of the nation’s budget revenues. And they argue all would be better served if they could use the windfall of $30-a-barrel oil to upgrade equipment and expand production.

"When foreign companies or banks give us a loan [the collateral for it] is a certain volume of oil," said TNK vice president Josef Bakaleinik at a news conference Thursday. "When they learn that the company may not live up to this volume [because it can’t get export access], they feel like calling in their loans."

Oil analysts estimate the industry needs from $25 billion to $40 billion in investment over the next five years. Last year, companies put in a mere $3 billion — after being unable to invest much at all for almost a decade

http://www.themoscowtimes.com/stories/2000/11/25/002.html

-- Martin Thompson (mthom1927@aol.com), November 26, 2000.


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