Russia mulls mounting tax burden on metallurgy

Russia's finance ministry may link the rate of the mineral extraction tax (MET) to global commodity prices, while the metallurgy industry suggests linking it to companies' dividend payments and capital expenditures.

The mechanism and a formula for calculating the MET rate was included in the ministry's updated draft on planning for the tax and budgetary policy for 2022-2024. And the mechanism was revealed to metallurgical companies last week.

The mechanism and formula may increase the MET base rate for iron ore, coking coal and fertilisers for mining companies by up to 6pc. Taxes for each commodity will be based on a constant percentage of its corresponding benchmark price. It was heard that the government suggests using a spot 62pc Fe cfr China price as the benchmark for iron ore.

The scheme, if implemented, will increase the tax burden for Russian ferrous products and coking coal producers. It is estimated that it could generate up to 130bn roubles ($1.8bn) and Rbn23bn ($317mn) of tax revenues from the ferrous and non-ferrous metallurgy industries in 2022, respectively.

Metal companies were heard to have suggested a progressive income tax linked to companies' dividend payments and capital expenditures instead.

The new measures were intended to eventually replace the increased export duties on a range of ferrous and non-ferrous product imposed for 1 August-31 December, which were expected to bring substantial losses to the country's major metallurgical producers.

The mechanism was actively discussed in governmental meetings last week and discussions with the industry will continue this week, as new meetings are expected to have been scheduled. The last meeting between steelmakers and the country's deputy prime minister, Andrei Belousov, was held on Saturday, but no solution was heard to have been reached.

Meanwhile, Russian steel association Russtal said today that the finance ministry prepared another suggestion — a retrospective increase in income tax for companies that paid more dividends than they invested over the past five years. Under this new proposal, the tax rate for such companies may rise to 25–30pc from the current 20pc.

"This initiative violates a fundamental principle of the Russian tax legislation, which assumes that any law has no retroactive effect, and a fundamental principle of the market economy, which is owners' freedom to dispose their funds after paying taxes," Russtal said.

The proposed measures may lead to a decrease in investment, since those projects that look attractive in the current environment may not be selected because of the increased tax burden. The risk of companies unable to implement previously agreed investment obligations also increased, as these investments were based on calculations using different indicators, Russtal added.

By Valery Zavyazkin