Monday, April 27, 2015

Dung Quat Refinery: the ball of oil rolls on the field of tax and tariffs

Vietnam Ministry of Finance has promulgate Circular No. 48/2015/TT-BTC to reduce the MFN import tariffs on some petroleum products, releasing the high-raised concerns by Binh Son Oil Refinery and Petroleum Company (BSR) over the possible profit loss and even business closure facing the Dungquat refinery.

In a simple logic, currently supplying around 30% of the domestic demand for petroleum products, if the Dungquat refinery had not faced some kind of “import tariff”, the state budget would have lost a considerable amount of revenue coming from taxes imposed on petroleum imports. Meanwhile, this refinery was initially invested by the state budget. Therefore, contrary to the thinking of many outsiders, Dungquat oil refinery despite being a domestic-based oil producer still has to pay the some  import duties imposed on its oil and gas products sold domestically under a special tax adjustment mechanism stipulated by the Vietnam prime minister under a regulatory decision promulgated since 2009 – the year this refinery was completed and put into operation.

According to the said mechanism, such import duties are lower than and based on the applicable import tariffs framed by the National Assembly and regulated in details from time to time by the Ministry of Finance. The specific rates shall be the MFN import rates deducted certain percentages dependent on each type of petroleum products (7% for petrol and diesel; 5% for LPG and 3% petrochemical products). This factor in combination with some new arising factors have stirred a intense controversy in local mas media in April 2015.

Dropping crude oil prices can lead to dropping business?

When crude oil prices started to decrease dramatically last year, the debates over the scenario of Vietnam economy, under end-users, enterprises and government perspectives, also began to get heated. Considering the fact that taxes collected from crude oil export and oil products import constitute a high percentage in the state revenue.

In reaction to that circumstance, Vietnam Ministry of Finance in late 2004 decided to raise the import tariffs on petroleum products. A decision by the Ministry clearly defined that import tax on petroleum products would be based on the price of crude oil, in the principle that the lower crude oil price is, the higher import duties are. Accordingly, if the Platt's crude oil price is below $60 per barrel, the import duty of petrol, kerosene, diesel, fuel oil shall be at the maximum rate of 40%. For example, if the price of crude oil is at around $ 52 per barrel as recently, the import duty for fuels and oil products can be raised to the rate of 40%; when crude is priced at 60-75USD per barrel, the import duty on kerosene, gasoline and diesel fuel would be at 35%, fuel oil at 30%.

Meanwhile, earlier this year, it was estimated that Petro Vietnam Group’s total revenues in 2015 could drop to 434.5 trillion VND (20.2 billion USD) and remittance to the State budget would be only 79.8 trillion VND (3.7 billion USD) in case the oil price was 40 USD per barrel compared to 33.4 billion USD and 7.4 billion USD, respectively, if the price was 100 USD per barrel.

The two factors including the decreasing crude prices and increasing duties seemed to put Dungquat refinery at an hard time of business, and warnings of possible business loss were widely circulated.

The coming “threats” from ASEAN petroleum products?

In application of the ASEAN Trade in Goods Agreement (ATIGA), Ministry of Finance in Nov 2014 , specified the tariffs for imported goods from the ASEAN member countries, of which the rate imposed on petroleum products  have been significantly lower than those applied by the MFN tariffs (normal rate) to which Dungquat refinery’s products are subject to. For example, the ATIGA import rate for petrol (HS 2710) shall be only 20% in 2015-2018; meanwhile, the MFN rate for the same goods at that time was at a high level of 35%.

Sensing the possible threats coming from ASEAN petroleum products because they are enjoying lower tax rates, PVN and BSR raised their voices of concerns and petitions in early April 2015 to Ministry of Finance and some other ministries. They said that such tax situations would make their petroleum products less competitive in the local market and the closure of the young and first refinery in Vietnam may happen, and petitioned to the Ministry to lower the MFN rates on petroleum to the same rates as per ATIGA.

 Some observers commented that the said spoken concerns by BSR were groundless; however Ministry of Finance on 13th April 2015 issued Circular No. 48/2015/TT-BTC cutting the MFN import tariffs for petrol from 35% down to 20%, diesel from 30% down to 20%, jet fuel from 25% to 10%. These rates are largely similar to these of ATIGA and the concerns by BSR are said to be released.

 Upon issuing that new circular, a representative from Ministry of Finance did not forget to note in a news conference that the cut taxes would make the state revenue reduced by VND 13,000 billion (~ USD 600 million). However, consumers in Vietnam shall not benefit so much from this tax cut because the environmental protection levy imposed on petrol will be tripled from the current 1.000 VND (~4.62 cent) per liter to 3.000 VND (~14 cent)/liter since May 2015.

At this point of time, the situations seem to be harmonized somehow, however, another issue relating to the above-mentioned “special tax adjustment mechanism” may arise when the MFN import tariffs are lower than the “deducted rates”, and shall be analyzed in another article.


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