Tax Breaks for Subsoil Users Won't Help

It was reported today that the government plans to grant subsoil users tax breaks, including on value added tax (VAT), in order to stimulate geological exploration.

All of this is fine, but the key question is whether it will work. Let me remind you that five years ago there was also an attempt to introduce incentives for subsoil users.

In 2009 and 2010, two government resolutions were adopted.

1. Resolution of the Government of the Republic of Kazakhstan No. 1528 of December 31, 2010, "On Approval of the Rules for Classifying a Hydrocarbon Field (Group of Fields, Part of a Field) as Low-Profit, High-Viscosity, Water-Flooded, Low-Yield or Depleted, and the Procedure for Taxation in Terms of the Mineral Extraction Tax (MET)."

2. Resolution of the Government of the Republic of Kazakhstan No. 492 of April 8, 2009, "On Approval of the Rules for Classifying a Subsoil Use Contract Providing for the Development of a Solid Minerals Deposit, Excluding Common Minerals, as Low-Profit."

In 2012, the second resolution was repealed and replaced by a new one: Resolution of the Government of the Republic of Kazakhstan No. 1379 of October 31, 2012, "On Approval of the Rules for Classifying a Solid Minerals Deposit (Group of Deposits, Part of a Deposit), Excluding Common Minerals, as Low-Profit, and Taxation in Terms of the Mineral Extraction Tax."

For reference: over the entire time these resolutions have been in force, only one field in the oil sector has been recognized as low-profit. It is the Karazhanbas oil and gas field (Tupkaragan District, Mangystau Region), whose oil is supplied to a bitumen plant. Among solid minerals, six deposits have been recognized as low-profit, three of them belonging to Kazakhmys corporation and another three to ENRC.

To obtain such incentives, one has to assemble a very large number of documents (I know this from personal experience) and go through a commission. Only after that does one have to press the government to issue the corresponding resolution. In short, the process is very long. Small companies are unlikely to overcome all the hurdles without political will. I have written about this many times, yet for seven years now no one has been able to solve the problem.

Perhaps our ministries could reduce the level of bureaucracy for subsoil users? For example, under the Law "On Subsoil and Subsoil Use," a permit for the alienation of subsoil use rights is to be issued within 20 working days, or roughly 30 calendar days. In practice, the actual period is much longer. Anyone who manages to get it done within three months can be considered a brilliant negotiator. The issue is not about incentives for subsoil users, but about the attitude toward them. To increase output, the government should not hand out tax breaks but cut the bureaucracy in reviewing documents. Without a pilot production project or a technological development scheme, it is impossible to begin production at a field. If a contract is not working because projects take six months each to approve, the field will not work either, even if the subsoil user is exempted from taxes entirely.