Steelmaker Severstal, controlled by Russian tycoon Alexei Mordashov, expects possible government claims to amount to about $400 million of taxes on dividends transferred to the British Virgin Islands through Cyprus companies in 2009-2015.
The company said that the figure was based on 2015 changes in the law on controlled foreign corporations aimed at regulation of operations with foreign companies, including taxation of dividends, which might affect Severstal’s tax position.
Previously, the Federal Tax Service imposed 982 million rubles of additional taxes and penalties on Severstal for 6.96 billion rubles of dividends it paid for 2011 to Cyprus-based Astroshine Limited, Loranel Limited, Rayglow Limited, and Pearlgreen Limited. Russia and Cyprus have an agreement on avoidance of double taxation, but the companies were owned by firms from the British Virgin Islands, which did not have a similar agreement with Russia.
Severstal challenged the decision, but in October 2016 the Moscow Arbitration Court rejected its countersuit and agreed that the Cyprus-based firms were only technical and the ultimate receivers of the income were firms from the British Virgin Islands, and they had to pay a 20% tax on dividends. Later the court of appeals turned down the company’s appeal against the decision.
Alexei Artyukh, a partner at law firm Taxology, said that the $400 million in possible tax claims were connected to the service’s case against Severstal.
“One may expect that the tax authorities will add taxes for further periods. Speaking of possible claims and potential losses, the company means that it does not know how the legal process for 2011 will end and expects more tax decisions with similar claims for further periods,” he said.
Oleg Petropavlovsky of financial group BCS said that Severstal could pay the $400 million without any damage, but foreign investors might see its actions as an attempt to avoid taxes, which contradicted their investment policy. The issue covers all large businesses, and other companies with a similar ownership structure may get similar claims from the tax authorities, including Norilsk Nickel, Novolipetsk Steel (NLMK), PhosAgro and Acron, he said.
Alexander Ovesnov of consulting company MEF-Audit said despite the fact that the law came in effect only in 2015, the tax service was actively challenging operations of companies for previous periods quoting an unjustified tax benefit.
Atryukh added that tax inspectors would use their new approach further.
“The Severstal case and the service have destroyed the most popular instrument of tax optimizations, which has been in effect for decades, so now all companies are analyzing the risks,” he said. (Prime/Ukrainian metal)
