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Tax disputes: statistics, trends, developments in court practice

Contents 1. Tax disputes: interesting statistics and key trends 2. Development of court practice 2.1. Thin capitalisation 2.2. Dispute: the Oriflame case

Tax disputes: statistics, trends, developments in court practice PwC

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1. Tax disputes: interesting statistics, latest trends

Tax disputes: statistics, trends, developments in court practice PwC

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Tax disputes: interesting statistics 9 000

Total field tax audits in Moscow

8 000 7 000 6 000

Total field tax audits resulting in additional tax assessments

5 000 4 000 3 000 120 000 000

2 000

100 000 000

1 000

80 000 000

0

2006

2008

2010

2012

2014

60 000 000 40 000 000 20 000 000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total additionally assessed taxes in Moscow, RUB million

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Tax disputes: interesting statistics 20 18 16 14 12 10 8 6 4 2 0 2006

2007

2008

2009

2010

2011

2012

2013

2014

Average number of additional tax assessments following field tax audits, RUB million

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Number of tax disputes considered by arbitrazh courts and total tax disputes won by taxpayers

70 000

80%

60 000

75%

50 000 70% 40 000 65% 30 000 60%

20 000

55%

10 000 0 2005

2006

2007

2008

2009

2010

2011

2012

2013

Total challenges to decisions made by the tax authorities (according to the Russian SAC)

Tax disputes: statistics, trends, developments in court practice PwC

50% 2005

2006

2007

2008

2009

2010

2011

2012

2013

Percentage of disputes resolved in favour of taxpayers (according to the Russian SAC)

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Tax disputes: interesting statistics

78% 72%

80% 63%

70%

66% 2010

60% 50%

2011 41%

2012 2013

40%

2014 30% 20% 10% 0% 2010

2011

2012

2013

2014

The ratio of total claims in favour of the tax authorities and total claims to organisations/ from organisations Tax disputes: statistics, trends, developments in court practice PwC

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Tax disputes: key trends •

A field tax audit is a key tool for assessing additional taxes;

•

If a field tax audit is initiated, the risk of additional tax assessments is almost 100%;

•

Average additional tax assessments in Moscow come to around RUB 14 million;

•

Claims from the tax authorities are becoming more difficult and complex;

• Special attention is paid to appropriate collection of evidence (i.e. through specific tax control efforts) – surveys, expert reviews (!) , etc.

The number of court tax disputes initiated by taxpayers is decreasing; The percentage of disputes resolved by courts in favour of the tax authorities is increasing (43%); Court procedures are becoming more time-consuming and controversial (mandatory pretrial settlement of tax disputes, changes in the court system, etc.).

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2. Development of court practice 2.1. Thin capitalisation

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Thin capitalisation Are thin cap rules discriminating? Courts follow the position taken by the Russian SAC Praesidium in Resolution No. 8654/11 of 15 November 2011: (-) Ruling No. 304-КГ14-2268 of the Russian Supreme court of 13 October 2014 (Resolution No. А81-1195/2013 of the West Siberian District Federal Arbitrazh Court of 30 June 2014, ОАО Severneftegazprom, Germany); (-) Resolution No. А40-78665/12 of the Moscow Region Arbitrazh Court of 5 August 2014, Ruling No. 305-КГ14-4260 of the Russian Supreme Court of 25 November 2014 (ZAO BAT-SPb, Netherlands); (-) Ruling No. 1579-О of the Russian Constitutional Court of 17 July 2014 (ZAO Severstal Management); (-) Ruling No. 1578-О of the Russian Constitutional Court of 17 July 2014 (OAO Gurovo-Beton); (-) Resolution No. А40-78665/2013 of the North-West District Federal Arbitrazh Court of 9 july2014, Ruling No. 307-КГ143037 of the Russian Supreme Court of 5 November 2014 (OOO Rzhevsk House-building Plant, Cyprus);

(-) Resolution no. А56-37161/2014 of the 13th Arbitrazh Appellate Court of 11 November 2014 ((!)sent for re-examination by Resolution of the North-West District Arbitrazh Court, ООО Desna Development, Netherlands); (-) Resolution No. А54-979/2014 of the 20th Arbitrazh Appellate Court of 13 November 2014 (Resolution of the Central District Arbitrazh Court of 19 March 2015, OOO Gipertsentr-Ryazan, Luxembourg) (+) Decision No. А40-87775/14 of the Moscow Arbitrazh Court of 28 January 2015 (ООО Novaya Tabachnaya Kompaniya, appellate court examination scheduled for 20 April 2015).

Discrete method for calculating capitalisation ratio Courts follow the position taken by the Russian SAC Praesidium in Resolution No. 3715/13 of 17 September 2013: (-) Resolution No. Ф09-2109/14 of the Urals District Federal Arbitrazh Court (ZAO Uralnefteservis); (-) Ruling No. ВАС-19447/13 of the Russian SAC of 14 January 2014, Resolution No. А40-88761/12-99-495 of the Moscow Region Federal Arbitrazh Court of 24 September 2013 (ZAO Severstal Resource); (-) Resolution No. А40-16818/13 of the Moscow Region Federal Arbitrazh Court of 17 January 2014 (ZAO Domodedovo International Airport). Thin capitalisation PwC

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Thin capitalisation Enforcement of thin capitalisation rules for loans from foreign sister companies In most cases, the courts deem such debt as controlled: (+) Resolution No. А21-3697/2013 of the North-West District Federal Arbitrazh Court of 20 March 2014 (ZAO Teleset Ltd); (+) Resolution No. 09АП-58460/2014 of the Ninth Arbitrazh Appellate Court of 28 January 2015 (ZAO Topaz Spirits Distillery); (-) Resolution No. А11-9549/2013 of the Eastern Military District Arbitrazh Court of 2 December 2014 (ZAO Kolchugtsvetmet, upheld by Eastern Military District Arbitrazh Court);

(-) Resolution No. А52-4072/2012 of the North-West District Federal Arbitrazh Court of 6 June 2014 (OOO United Bakers-Pskov); (-) Ruling of the Russian SAC No. ВАС-5060/14 of 28 april 2014, Resolution No. А40-16818/13 of the Moscow Region Federal Arbitrazh Court of 17 January 2014 (ZAO Domodedovo International Airport); (-) Decision of the Moscow Arbitrazh Court of 15 April 2014 No. А40-4757/14 (approved by Resolution of the 9th Arbitrazh Appellate Court of 11 July 2014, not challenged under a cassational procedure) (ООО Bransvik Rail); (-) Resolution No. Ф03-7391/2013 of the Far East District Federal Arbitrazh Court of 13 February 2014 (OOO Olekminskiy Rudnik); (-) Ruling No. ВАС-19447/13 of the Russian SAC of 14 January 2014, Resolution No. А40-88761/12-99-495 of the Moscow Region Federal Arbitrazh Court of 24 September 2013 (ZAO Severstal Resource). Thin capitalisation PwC

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Thin capitalisation Application of rules set by Article 269.4 of the Russian Tax Code (-) Resolution No. Ф03-5649/2014 of the Far East District Federal Arbitrazh Court of 23 December 2014 (OOO Terneiles, Japan); (-) Resolution of the Ninth Arbitrazh Appellate Court No. 09АП-37050/2014 of 6 October 2014 (ООО Zarnikov Sugar (Eurasia), UK, not examined in a cassational procedure); (-) Resolution No. А41-21630/2013 of the Moscow Region Federal Arbitrazh Court of 2 September 2014 (OOO Aluplast Rus; Germany); (-) Ruling No. 305-ЭС14-518 of the Russian Supreme Court of 18 August 2014 (Resolution of the Moscow Region Federal Arbitrazh Court of 28 June 2014, OOO Kverneland Group CIS, Netherlands); (-) Resolution No. А54-979/2014 of the 20th Arbitrazh Appellate Court of 13 November 2014 (Resolution of the Central District Arbitrazh Court of 19 March 2015, OOO Gipertsentr-Ryazan, Luxembourg);

(-) Resolution No. А33-23100/2013 of the Third Arbitrazh Appellate Court of 21 November 2014 (Resolution of the West Siberia District Arbitrazh Court of 19 March 2015, OOO YII-Sibir). Enforcement collection of dividends tax (Article 269.4 of the Russian Tax Code) from a tax agent (-) Resolution No. А52-3653/2013 of the North-west District Arbitrazh Court of 27 august 2014 (ООО United Bakers Pskov) (including penalties until discharge of obligations); (-) Resolution No. А55-10796/2014 of the 11th Arbitrazh Appellate Court of 26 November 2014 (ZAO Samaraagroprompererabotka) (including assessment of penalties); (-) Resolution No. Ф03-5649/2014 of the Far East District Federal Arbitrazh Court of 23 December 2014 (OOO Terneiles).

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2.2. Dispute: the Oriflame case

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Franchise/permanent establishment The Oriflame case (1/2) Details of the dispute: The tax authorities challenged the company's expenses on payment of royalties under a franchise agreement with one of the group’s companies on the grounds that the taxpayer is not an individual and, thus, acts as a permanent establishment (PE) of the parent company. Therefore, it cannot bear the expenses. Period: 2009-2010 Status: The dispute was lost in the first and appellate instances (Case No. A40-138879/14)

Amount: Additional assessments amounting to USD 9 million and losses removed amounting to USD 35 million. Arguments from the courts and tax authorities: •

The company operates not as an individual party but as an integrated component of a global business. The company individually positioned itself in the Russian market as a part of Oriflame’s global network;

•

The legal form company as an individual legal entity cannot be taken into account with respect to the concept of "corporate unveiling".

Thin capitalisation PwC

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Franchise/permanent establishment The Oriflame case (2/2) Arguments from the courts and tax authorities (continued):

• The company was not autonomous in its operations when taking managerial decisions. The operations performed were under the supervision of the parent company. • Payments under the franchise agreement were intended for receiving unjustified tax benefits in the form of expense deductions, which is additionally confirmed by comments provided by foreign tax authorities that the parent company did not pay tax on its income sourced from Russia.

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Thank you! Maria Mikhaylova Senior Associate [email protected] Tel.: +7 495 967 60 87

Svetlana Samokhvalova Senior Associate [email protected] Tel.: +7 495 232 57 55

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