Ius Gentium

University of Baltimore School of Law's Center for International and Comparative Law Fellows discuss international and comparative legal issues

Getting Global Tax into Top Gear: Part III Formulary Apportionment in the Context of Bunker Oil Pricing Distortions

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Julia Brent

In my two previous blogs (here and here), I defended a much-criticized theory of tax reform (“formulary apportionment” or FA), by examining tax dynamics in the oil industry in Russia and discussing FA broadly in the context of transfer-pricing regimes.   FA is a theoretical answer to the problem that multi-national corporations (MNCs) gravitate to low-tax areas and erode their tax base of origin.  This week, I examine the distortions in the Russian bunker oil industry that were likely brought about by the several tax regimes implemented in a short of period of time. I also assert that the ability to arbitrarily change tax rates on a whim is an entrenched feature for the Russian system.  The Putkin-led State Duma will likely find reasons to avoid FA, and a unitary system will not find its way to Russia, unless the theory takes hold in small increments.


The bunker oil market in Russia is a good industry to examine to see the effects of market distortion brought about by application of various tax structures.  Bunker oil is a product of initial crude oil extractions from the sub-soil.  Of all the products refined from crude (i.e. gasoline, kerosene, etc.), bunker oil quality is one of the most rough—just above asphalt.  It is used for marine fuel and in industrial heating units.[1]


In January, President Putin’s government increased the export taxes levied on bunker fuel under what was called the “Oil Tax Maneuver” (Nalogovyye Manevry Masla, нефтяные налоговые маневры).  The action forced lead bunker suppliers and exporters to significantly raise prices.  While the tax revenue total so far makes a solid contribution to the government need that has grown out of lowered oil prices, generally, the Russian bunker oil industry has taken a hit. Ports like Singapore, not under such a regime, can now offer marine fuel at a better price.  Unfortunately, bunkering traffic had just bloomed.  For example, the port of Nakhodka, Primorsky Krai, located in the Far East of Russia, had an increase in shipping from 600 vessels in 2013 to 1,800 vessels in 2014.   While most of these vessels called in port for cargo loadings, it is likely that all these vessels also bunkered (i.e. purchased marine fuel) at the same time.[2]  Provided all favorable factors fall into place, the region was on course to double its bunker sale volumes.[3]  Already in a price war with Malaysia,[4] Singapore is lining up to be a major bunker hub.  Suppliers are already using Singapore standards for operational standards and fuel quality.  Russia, meanwhile, in addition to raising the export tax on its own bunker oil, forbids “bunker-only” calls.  This has resulted in ship-owners buying small quantities of consumer goods, like mineral water, just to be able to call in port for, what was once, cheaper bunker fuel.  There are proposed regulations that would eliminate even this fix.  Russia is headed toward a significant decrease in the bunker fuel industry in the future because of these measures.  This is exactly the kind of market distortion that scholars and legislatures alike study to avoid, both on a state and international scale.

As discussed in my second blog, critics of FA state that the distortive effects of FA would be equal to that of properly designed transfer pricing regime, and for this reason claim that FA lacks legitimacy.  One proponent of FA states that an updated version would lead to formulary apportionment in the long-run.  However, a stable worldwide system is needed in the short-run to restore base erosions and prevent exploitation in the third world.[5]  At present, many other countries engage in need-of-the-moment legislation, as discussed in my first blog.  The dangers of this instability can be seen in the current bunker oil industry.

Constant change in a regulation system can create havoc, regardless of a regulation’s favorable or unfavorable nature.  In addition to complaining about the uncompetitive design, bunker oil traders are distraught, simply, at the multiple and arbitrary changes in the last few years.  One trader interviewed for this piece, Alain Georgiades, lives in Geneva and trades Russian bunker oil in the Black Sea.  “They are always issuing new regulations,” he said.  “It creates chaos.” Georgiades also pointed out that the industry is already twisted by the seasons.  “Shipping traffic thrives in summer but shuts down in winter when the Volga freezes,” he said.  “Now, they come in and grab their take in the summer when the traffic is the highest. We already struggling—unless a shipping company dominates the traffic, it’s very hard to squeeze in transportation during the summertime.”

JB Blog3 1

Gazprom Marketing & Trading’s (GM&T) newly delivered LNG carrier “Pskov” receiving bunkers (Heavy Fuel Oil and Marine Gas Oil) at the port of Nakhodka in the Primorskiy Region of Russia

SOURCE: http://www.gazprom.com/about/subsidiaries/news/2014/september/article200307/

This observation is important, not only to understand the impact of design and manner of execution, but also predict how likely Russia is to enter into bilateral or multi-lateral agreements instituting a unitary, apportionment structure.  Not only may Russia never formally adopt the new theory of FA based on its merits, but adopting any formal theory which would preclude an ability to be arbitrary may be out of the question.

The current tax structure in Russia was wrestled out of the grip of oligarchs under Putin’s leadership in the early 2000’s, continuing reforms that began in 1997.  The lack of a stable and predictable tax system was widely considered as one of the main reasons for the economic woes of the 1990s.[6]  Sweeping changes included a flat income tax reduced, from 30 to 13 percent, and a reduced corporate tax, from 35 to 24 percent.[7]  The government started applying the new tax laws to big enterprises, especially the oil and gas companies, which had previously enjoyed individually negotiated taxes.[8]  Many enterprises changed ownership, which revived them.  Senior owners were forced to sell to young, ambitious entrepreneurs for a song.[9]  The economy revived.  These changes were created, and helped create, a ruthless leadership.  The intensity of the current leadership is notorious.  A certain military leader said of Putin, “He’s ugly, he’s ruthless, he’s vicious, and I don’t like him at all, but he’s brilliant. He’s got a long-term strategy and his goals are clear.”[10]  Putin began running the country when corruption pervaded every business and top institution.  The country was filled with “parasitic companies and banks that split profits among themselves.”[11]  Now, not only does the current leadership strong-arm the system to match its current needs, the upheaval of the previous decade has set the tone.  The constant and sweeping change that preceded the current prosperity has made it easy and normal to make radical change, as evidenced in the bunker oil world, the very thing Putin sought to change at the beginning of his political tenure.  While FA may ultimately be consistent with Russia’s long-term goals, the path to FA in Russia will likely be uphill.

Julia Brent is a third year law student at the University of Baltimore, focusing on International Tax (candidate for J.D. 2016). Julia graduated from the University of Hawaii with a B.A. in political science. As a CICL student fellow, she is interested in the tax impact of cross-border transactions on medium to large businesses. Julia has extensive experience in the management of high volume cases, including handling distributions related to a multi-million dollar art estate and managing all expert witness contracts for the Savings & Loan (WINSTAR) litigation, a $30 billion dispute involving 125 cases, on-site at the Department of Justice.

[1] http://www.kittiwake.com/fuel_terminology

[2] http://www.platts.com/latest-news/shipping/petropavlovsk-kamchatsky/higher-export-taxes-on-russian-fuel-oil-to-impact-27225677

[3] http://shipandbunker.com/news/emea/873024-higher-fuel-export-taxes-may-lead-to-russian-bunker-price-hike

[4] http://shipandbunker.com/news/apac/898912-malaysia-takes-on-singapore-with-aggressive-oil-plan

[5] http://www.taxpolicycenter.org/briefing-book/key-elements/international/formulary-apportionment.cfm; http://www.taxjustice.net/wp-content/uploads/2013/04/TJN-Briefing-BEPS-for-Developing-Countries-Feb-2014-v2.pdf

[6] http://www.awaragroup.com/introduction-tax-guide/

[7] http://www.iie.com/publications/papers/paper.cfm?ResearchID=974

[8] Id.

[9] Id.

[10] http://insider.foxnews.com/2015/09/28/ralph-peters-vladimir-putin-ugly-ruthless-vicious-brilliant

[11] Bruno Sergi, Misinterpreting Modern Russia: Western Views of Putin and His Presidency Ch. 10 (1990).

Author: Ius Gentium

Ius Gentium is a legal forum for the University of Baltimore School of Law's Center for International and Comparative Law Fellows to write on and discuss international and comparative legal issues.

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