(CAA Analytics) Russian Ministry of Finance has abandoned its project of introducing a tax mechanism, designed to redistribute part of coal industry revenues in favor of the state budget in case of high prices on the world coal market.
In March, the Ministry of Finance published a draft amendment to the Tax Code, which, in particular, introduced a progressive mineral extraction tax (MET) for Russian coal industry.
The amendment suggested that existing rates should be increased by a special coefficient, tied to the positive dynamics of global coal prices.
According to the Ministry of Finance’s calculations, which were based on the prices and revenues of Russian companies in 2015-2018, an increase in MET on coal could add 40 billion RUR (570 mio USD)/year to the budget and might lead to a decrease in the profitability of coal mining companies by 3 percentage points to 21%. However, since then coal prices have fallen sharply.
The draft of a new tax mechanism was criticized by Russian coal companies during the public discussion. The sharp increase in MET when the market reaches a certain cut-off price caused serious concerns among market participants, primarily coal producers.
In particular, it was noted that ‘in the absence of stable demand for steam coal and with no prospects for price increases, it is absolutely irrelevant to talk about any excess profits for many coal producers, as they need their profits, earned in rare successful years, only for covering losses suffered within periods of low prices’.
Coal producers believe that the fiscal effect for the budget obtained from the introduction of progressive MET, tied to the growth of export prices, is insignificant compared to the possible negative consequences for Russian coal industry.
According to experts, the increase in MET will actually jeopardize the activities of many Russian coal companies, some of which are being shut down or stay on the verge of closure. This can lead to about 30 thousand employees’ dismissal, which threatens with a shortfall in personal income tax, contributions to social insurance funds, an increase in budget expenditures for the payment of unemployment benefits and worsening social and economic situation in the coal mining regions. Furthermore, new amendment could inevitably lead to a reduction in private investments in the Russian coal industry.
The Ministry of Finance reported that it took into account all the comments. Thus, in a new version of draft amendments to the Tax Code there will be no progressive MET for the coal industry.
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