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In Russia, The Taxman Cometh -- Again And Again


Will there be another Yukos? That question has been haunting Russian business ever since 2003, when the Kremlin began its legal onslaught against the oil company and threw its owner, Mikhail B. Khodorkovsky, in jail. So far, Russia's other oligarchs are at liberty, and their companies remain intact. But the tax investigation into Yukos is not turning out to be a one-off, as many investors had optimistically hoped. In recent months, Russia's tax authorities have hit one company after another with multimillion-dollar bills for back taxes.

Several other Russian oil companies have been accused of lowering their tax bills by using tax havens that seemed legal at the time. Last year Sibneft and TNK-BP were presented with back-tax bills of $730 million and $87 million, respectively. True, these claims are minor compared with the massive $28 billion levied against Yukos. But the uncertainty over how much they eventually will have to pay remains. What's more, recent tax probes have not been limited to natural resources companies.

Foreign investors were appalled when VimpelCom (VIP), a leading mobile-phone operator, was hit in December with a $158 million back-tax bill for 2001. The company, which sells its service under the Beeline brand, is 29% owned by Norway's Telenor (TELN). The government has since scaled back the claim to $35 million. But more tax probes keep emerging. Even the direct subsidiaries of foreign companies are not immune. In January, JT International, a unit of Japan Tobacco Inc., revealed that a Russian subsidiary had been sent an $85 million bill for value-added tax dating back to 2000.

What explains the recent flurry of back-tax claims? Businessmen say that the Kremlin's treatment of Yukos has given tax officials a signal to interpret the law any way they like. Yukos' tax arrangements conformed to the letter of the law, so prosecutors had to come up with brand-new legal concepts, such as the idea that a taxpayer can be prosecuted for "bad faith." Petr Medvedev, head of Ernst & Young International's tax practice in Moscow, says such vagueness has given tax inspectors a huge amount of arbitrary power not matched by their knowledge of how individual businesses and industries work.

A POWERFUL TOOL

Not everyone is so critical of the taxman. In Russia, tax evasion has been rampant until recently. "In a way it's a logical stage. But the government overdid it," says Igor Yurgens, first vice-president of the investment bank Renaissance Capital. "We have to find a compromise between the interests of the state and the interests of the private owner."

At least President Vladimir V. Putin seems to be wising up to the damage caused by the escalating probes. In February he signaled his support for measures to limit the time allowed for tax audits and to reduce the powers of tax inspectors to conduct repeat checks. Still, implementing these reforms could take a while. And business leaders are calling for guarantees such as a "tax amnesty" to protect them from tax claims that cover years long past.

That would go a long way toward ending the uncertainties hanging over many Russian businesses. The snag is, a tax amnesty would also limit the Kremlin's favorite tool for keeping opponents and troublesome oligarchs in check. As long as Putin cares more about political control than about Russia's investment climate, businesses will continue to wonder if they could be the next Yukos.

By Jason Bush in Moscow


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