If YUKOS’ oilfield licenses are revoked – and there is little doubt about it, judging by the latest developments, – this will destroy not only the oil company. The economic and social security of whole regions will be threatened. This conclusion is based on purely economic considerations. YUKOS is one of Russia’s largest companies, which has subsidiaries and affiliates in 34 regions of the country. In some regions, taxes paid by YUKOS make up to 50 percent of budget revenues, the Nezavisimaya Gazeta says.

On Monday, the State Duma Budget Committee decided to abolish three Russian ‘internal offshore centers’, which allowed YUKOS, Sibneft and some other companies to avoid paying $1.5bn in profit taxes last year. Tax breaks in the Chukotka, Mordovia and Kalmukia regions will be abolished starting January 1, 2004.

The Finance Ministry has been fighting against ‘internal offshore centers’ for quite a long time already, the newspaper Kommersant reports. In 2001, it closed the ‘tax paradise’ of closed administrative-territorial formations. In the 1990s, local authorities were allowed to distribute tax revenues collected in such formations, and grant tax privileges. Later, profit tax breaks granted to certain categories of companies, including small businesses, were limited. Finally, amendments were made to the Tax Code, saying that regions could not cut profit tax rates by more than 4 percent (out of 24 percent). However, there have been exceptions to this rule, the newspaper notes.

According to one of the amendments to the Tax Code, companies that signed investment agreements with regional authorities before July 1, 2001, can enjoy privileges envisaged in such contracts “until the expiration of the period for which they were granted”. If the term was not fixed, the privileges should apply until July 1, 2004.

In particular, this applies to three regions of Russia – Mordovia (where tax breaks are used by YUKOS’ oil traders, according to the Russian Audit Chamber), the Chukotka region (where, according to the same source, Sibneft-linked companies use the opportunity to optimize their tax payments) and Kalmykia. In these regions, privileged tax payers pay only the federal part of the tax rate (currently at 6 percent), the Kommersant says.