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24 september 2020

( - ALROSA, already affected by the pandemic, will lose ₽2-₽3 bn per year as a result of the amendments proposed by the Ministry of Finance in the calculation of the tax on diamond mining. The corresponding bill has already been submitted to the State Duma and involves estimating the value of mined stones based on their sales prices and not on the Ministry of Finance’s price lists. As a result, the amount of the severance tax levied from the company may grow by 10%. Nevertheless, the analysts believe that the impact on the company's financial performance will be negligible.

Diamond mining company ALROSA, which faced a large-scale drop in sales this year due to the coronavirus, will also not avoid the severance tax growth like other mining and metallurgical companies in Russia. The government has submitted a bill to the State Duma containing a new procedure for assessing the value of mined precious stones. The new procedure is to estimate the value of mined stones based on their sales price (excluding VAT) and not on the Ministry of Finance’s price lists, however, in any case, not lower than their level.

The severance tax for mining diamonds is 8% of the price. Now, the taxable income is calculated based on the price lists of the Ministry of Finance, which, in turn, are determined taking into consideration the proposals coming from Gokhran, Almazyuvelirexport and mining companies. The price list is revised in case the prices change by more than 10% and stay at that level for 90 days. At the end of 2019, ALROSA paid the severance tax in the amount of ₽21.9 bn, and ₽20.6 bn in 2018.

The ALROSA’s press service told Kommersant daily, “if the bill enters into force it will increase the amount of tax paid by the company for the difference between the listed prices and the market ones for the mined diamonds, provided that the market conditions are favorable.” At the same time, the company notes, the current legislation contains some uncertainty and the company is going to send its additional proposals to the Ministry of Finance and the relevant State Duma committee. The company did not specify what kind of inaccuracy was in the law.

However, the bill, in contrast to the explanatory note, does not mention that the sale price used for calculating the severance tax for diamonds is to be reduced by the taxpayer's expenses for their delivery to those who receive the goods, as is done, for example, in the case of precious metals.

The Ministry of Finance was going to change the severance tax for diamonds early in the year, that is, before the pandemic (see Kommersant daily of February 11). Then, the Ministry of Finance estimated the possible increase in the budget revenues by about ₽3.3 bn a year. In addition, the Ministry of Finance planned to increase the severance tax for coal and mineral fertilizers. Subsequently, the decision was made not to increase the tax for coal taking into account the decline in coal prices.

However, the diamond market realities are even worse. ALROSA turned out to be among the mining companies most affected by COVID-19. In April, the company’s sales fell to a minimum of $15.6 mn. In the first half of the year, ALROSA did not pay dividends and showed its negative cash flow. However, in August, the market began to recover gradually, and the company's diamond sales increased six times compared to July, up to $216.7 mn.

According to Boris Sinitsyn, a VTB Capital analyst, the change in the calculation of the severance tax will affect ALROSA insignificantly. “The Ministry of Finance’s price list is regularly revised following the changes in comparable diamond prices. Typically, selling prices could be up to 10% higher than the listed prices. This will be an additional tax at the amount of ₽2 bn a year. In our forecasts, we have always taken the severance tax based on sales prices, so this will not affect our net profit forecasts in 2021,” he says.

In parallel, the Ministry of Finance is going to significantly increase the severance tax, by 3.5 times, for most solid minerals, which should additionally give ₽56 bn a year to the budget. On September 18, the respective bill was submitted to the State Duma. Norilsk Nickel will be hit hardest by the increase in the taxes. At the same time, the business still hopes to mitigate the proposed measures, which will be discussed at the traditional meeting of First Deputy Prime Minister Andrei Belousov with the members of the Russian Union of Industrialists and Entrepreneurs (RUIE) on September 22.