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Tax reform in the oil sector of Russia - a positive assessment

Subbotin, Viktor (2004): Tax reform in the oil sector of Russia - a positive assessment. Published in: Papers of the Vth International Scientific Conference "Competitiveness and Modernization of Economy", Higher School of Economics, Russia (2004)

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Abstract

I analyze the system of taxes imposed on the Russian oil sector before and after the tax reform of 2002. I first establish a price parity relation explaining the gap between the world and domestic prices through export duties and alternative transportation costs. Based on it, I argue that the indirect taxes (VAT, the sales and excise taxes) do not decrease the net profits of oil producers, but are mostly shifted onto consumers. The tax burden on producers, on the other hand, consists of the export duties, resource payments, the profit tax and the property tax. I show that the tax reform had little effect on the total amount of taxes imposed on producers, but changed its structure across the types of taxes. After the reform the share of efficiently collected taxes, most importantly the extraction tax (ET), increased, explaining higher tax revenues. Finally, I estimate the extent to which the extraction tax is economically inefficient. By showing that the deadweight loss associated with ET is only a small fraction of the generated tax revenues, I argue that ET is a better choice for capturing the natural rent in the Russian oil sector than the poorly controlled profit tax. On the whole, this evidence depicts the reform of oil taxation in 2002 as a big step forward of the Russian fiscal system. This report is a shorter English version of the paper "Estimating the tax burden in the Russian oil sector under the price parity hypothesis" (Ekonomika i Matematicheskie Metody (2005), 41, 3).

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