Climate change taxation reforms and incentives in Russia

Russia signed the Paris Agreement in April 2016. However, it was finally ratified by the Russian Government Decree N1228 only last year and entered into force on 6 November 2019.

Currently, Russia is in the process of developing the special system related to the estimation, monitoring and record-keeping system of greenhouse gas emissions and measures for its reduction. The key concept of the planning changes and main steps have been adopted by the Government Decree dated 22 April 2015 No 716-r and the Order of the Russian Government dated 03 November 2016 No 2344-r.

Due to ratification of the Paris Agreement, it is expected that the relevant amendments on the state regulation of greenhouse gas emissions will be passed on a short-term horizon.

Excise tax on fuel (Акцизы на топливо) 

Excise tax on fuel applies to gasoline, diesel and engine oils.

The amount of the excise is passed off to the consumer as part of the purchase price of the excisable goods and defined as the multiplication of excise tax base on a fixed excise rate for a tonne of the excisable goods.

Transport tax (Транспортный налог) 

Transport tax is payable by the owners of the transport vehicles (including сars, aeroplanes, yachts) to the regional budget.

Applicable tax rates correlate with engine output (horsepower).

Exemption from tax is provided for certain vehicles types – for example, for passenger and freight transport, cars used by people with disabilities, commercial sea and river vessels, etc.
Along with vehicle owners, there are certain tax obligations designated for car importers and producers. They are liable to pay an excise tax on cars (Акцизы на автомобильный транспорт) with an engine output of between 90 and 500 horsepower. 

In 2020, the excise tax rate varies from RUR 49 (EUR 0.7) to RUR 1,408 (EUR 20) based on horsepower. Similarly to transport tax, the final excise rates for passenger cars varies depending on the engine yield. In 2018 excise duty has increased by an average of 4%.

Mineral resources extraction tax (Налог на добычу полезных ископаемых) and Excess-profits tax on hydrocarbon production (Налог на дополнительный доход от добычи углеводородного сырья).

The tax is payable by companies operating in mineral extraction. The tax is based on an estimate of the volume of the extracted resources or their value. The tax calculation depends on various coefficients and types of mineral resources. 

For example, the tax calculation for oil is linked to a number of coefficients, such as changes in world oil prices, oil characteristics, and the specifics of oil extraction and its location. Similarly, for ferrous-amenable iron, the recovery technique is taken into account.

The applicable tax rate may vary from 0% (for accompanying gas, subsoil water, stannic amenable iron, etc) to 8% (for extracted diamonds and certain types of amenable iron).

In 2018, a special tax regime on excess-profits of hydrocarbon production was introduced in pilot mode for companies extracting hydrocarbon (oil, associated gas and gas condensate). This tax regime is based on the taxation of economic result, rather than the volume of extracted minerals – the tax rate applies not to the volume of hydrocarbons but to the revenue deducted on the costs related to their extraction.

To stimulate oil and gas extraction in new Russian fields, reduced tax is applicable to greenfield extraction within certain territories e.g. Eastern Siberian Russian regions (Sakha Republic (Yakutia), Irkutsk Region, Komi Republic, Krasnoyarsk Territory, Tyumen Region, Khanty-Mansiysk Autonomous District and Yamalo-Nenets Autonomous District).

Water tax (Водный налог)

Taxpayers involved in the use of waterbodies are obliged to pay federal water tax at the place of a waterbody location. The applicable tax rate depends on the type of waterbody and its use. The tax rate for withdrawal from the territorial sea ranges from RUR 4.32 (EUR 0.06) to RUR 14.88 (EUR 0.2) per thousand cubic meters. The maximum tax rate for waterbody (rivers) use for hydropower is RUR 13.7 (EUR 0.2) per thousand cubic meters.

Land tax (Земельный налог)

Land tax is payable to the local authorities both by legal entities and individuals. The precise tax rate is established on the local level but cannot exceed the maximum rates in the Russian Tax Code which are: 0.3% for agricultural, residential, utilities infrastructure and personal use lands and 1.5% for other types of land use. The tax calculation is based on the cadastral value approved by the regional authorities at the place of land plot location.

Fees for use of wildlife and aquatic biological resources (Сборы за пользование объектами животного мира и объектами водных биологических ресурсов).

Special fees apply to taxpayers who use wildlife and aquatic biological resources such as rare species of animals, birds, marine mammals and fish. The payment can be regular or on a one-time-basis according to usage.

The fee is calculated based on each unit of the animal world expropriated (item for animals and birds and tonnes for fish). 

The maximum rate has been established for: crabs –  RUR 35,000 (EUR 500) per tonne; orca whales – (RUR 30 000 (EUR 429) per tonne; and musk buffaloes – RUR 15,000 (214 EUR) per item. An exception from the fee is made for use related to research fisheries, public health protection, preventing damage to the economy or reproduction of wildlife species.

The Russian Tax Code does not contain any provision for pollution taxes. In fact, this type of taxation is formalised in Russia as a type of obligatory payment for legal entities as so-called “quasi taxes”. 

However, in 2018 the Russian government reported plans to embed such payments into the  tax code. Appropriate amendments were developed but have not yet been adopted. 

The following obligatory payments are due in Russia to ensure environmental safety and protection from harmful and pollutant effects of various kinds:

• Utilisation fee (Утилизационный сбор) applicable to locally manufactured vehicles and imported cars for personal usage and which are not over 30 years old;
• Ecological fee (Экологический сбор) paid by goods producers and importers with consideration to special utilisation limits adopted by law. The list of goods subject to utilisation is set out in the Government Decree of the Russian Federation dated 28 December 2017 No 2970-r and mainly include goods to be disposed of after use or consumption (e.g. textiles, packaging and paper materials);
• Fee for negative environmental impact (Плата за негативное воздействие на окружающую среду) payable for pollutant effects on the environment (pollutant air emissions, pollutant discharges in water and waste disposal including storage and burial).

As Russia is a party to the Paris Convention, it has committed to reduce carbon emissions and create a monitoring system.

Currently, the introduction of a carbon tax is under discussion but the prospects for its adoption remain unclear. 

Apparently, the Russian government initiative to introduce a new tax will face resistance from the business community. For this reason, the Russian government will possibly contemplate the redistribution of payment for carbon emissions within the existing framework of fees – for example, by way of an increase in the ecological and negative environmental impact fees.

The main tax incentive encouraging Russian taxpayers to adopt new technologies are the following:

• corporate income tax credit (from 1 to 5 years) for taxpayers carrying out R&D or production re-equipment. To benefit from the tax credit, it is necessary that these activities should be aimed at: (i) protecting the environment from pollution by industrial waste; or (ii) increasing the energy efficiency of production or (iii) creation or improving the applied technologies or types of raw materials.
• 3-year exemption from corporate property tax is provided in relation to: (i) property with high energy efficiency, in accordance with the list of high energy efficiency facilities and technologies adopted by the Government Decree N 600 dated 17 June 2015; or (ii)  property for which energy efficiency class determination provided by legislation. 
• increasing depreciation coefficient to environmental protection devices and equipment used in carrying out chemical, physical and other technological processes (so-called “key process equipment used for the implementation of the best available technologies”).  

Additionally, partial reimbursement of interest expenses on loans issued by the Russian banks to finance investments in energy conservation and energy efficiency projects is provided by Federal law No 261 dated 23 November 2009 on energy conservation and on improving energy efficiency. 

No special tax reform is under way in Russia in connection to climate change. Planned changes to the Tax Code related to the implementation of pollution fees are mainly targeted at the systematisation of the current system of environmental levies. 

These measures are not essentially reformative – they just ensure the efficiency of tax administration in relation to budget revenues from obligatory environmental payments.

It should be noted that Russian tax legislation does not provide any special taxation regime or impose any additional burden on producers using environmentally hazardous technologies and manufacturers of potentially dangerous products for consumption.

It must be acknowledged that, despite some tax incentives, the current framework of environmental fees and taxes are not enough to motivate business to take decisive action aimed at environment safety.This is why most Russian companies opt to pay charges for damage to the environment rather than change their current course and adopt new environmental policies.