31. Commitments and Contingencies
During 2012 the Russian tax authorities completed reviews of the operations of certain Russian subsidiaries of the Company for the year ended December 31, 2010 and 2009. There were no significant findings as a result of these reviews.
Russian tax and customs legislation is subject to varying interpretations and changes that can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group (including allocation between federal and regional budgets) may be challenged by the relevant authorities. The Russian tax authorities may take a more assertive position in their interpretation of legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for the preceding three calendar years. Under certain circumstances reviews by tax authorities may cover longer periods. The years 2009, 2010 and 2011 are currently open for review. Management believes it has adequately provided for any probable losses that might arise from these reviews.
Russian transfer pricing legislation was amended starting from January 1, 2012 to introduce significant reporting and documentation requirements. The new transfer pricing rules appear to be more technically elaborate and, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD). The new legislation allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controllable transactions (transactions with a related party and some types of transactions with an unrelated party), if the transaction pricing was not at arm’s length. The Group’s transactions with related parties are subject to the constant internal review on compliance with the new transfer pricing rules. The Group believes that the transfer pricing documentation that the Group has prepared to comply with the new legislation provides sufficient evidence to support the Group’s tax positions and related tax returns. In addition to mitigate potential risks the Group negotiates with the tax authorities pricing approaches in major controllable transactions for advance pricing agreements conclusion. Given that the practice of implementation of the new transfer pricing rules has not yet developed and some clauses of the new law have contradictions and cannot be called unambiguous, the impact of any challenge to the Group’s transfer prices cannot be reliably estimated.
The transfer pricing legislation that is applicable to transactions on or prior to December 31, 2011 also allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controllable transactions if transaction price differs from the market price by more than 20%. Management believes it has adequately provided for any probable losses that might arise and that the probability the Group can be challenged by tax authorities is remote.
While there have been improvements in the economic situation in the Russian Federation in recent years, the country continues to display some characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the Russian Federation, restrictive currency controls, and a high level of inflation. The prospects for future economic stability in the Russian Federation are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory, and political developments.
The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its potential obligations under environmental regulation. Management is of the opinion that the Group has met the government’s requirements concerning environmental matters, and the Group does not therefore have any material environmental liabilities.
As of December 31, 2012 the Group has entered into contracts to purchase property, plant and equipment for RUB 28,683 million (December 31, 2011: RUB 16,794 million; January 1, 2011: RUB 18,317 million).