36. Commitments and Contingencies
Russian tax and customs legislation is subject to frequent changes and varying interpretations. Management’s treatment of such legislation as applied to the transactions and activity of the Group, including calculation of taxes payable to federal and regional budgets, may be challenged by the relevant authorities. The Russian tax authorities may take a more assertive position in their treatment of legislation and assessments, and there is a risk that transactions and activities that have not been challenged in the past may be challenged later. As a result, significant additional taxes, penalties and interest may be accrued. Fiscal periods remain open to review by the authorities in respect of taxes for the preceding three calendar years from the year when the tax authorities make decision regarding tax reviews. Under certain circumstances reviews by tax authorities may cover longer periods. The years 2012, 2013 and 2014 are currently open for review. Management believes it has adequately provided for any probable additional tax accruals that might arise from these reviews.
Russian transfer pricing legislation was amended starting from January 1, 2012 to introduce significant reporting and documentation requirements regarding market environment at the date of transaction. Compared to the old rules the new transfer pricing rules appear to be more technically elaborate and 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 constant internal review for 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 in order to mitigate potential risks, the Group negotiates pricing approaches for major controllable transactions with tax authorities in advance. Nine pricing agreements between the Group and tax authorities regarding some significant intercompany transactions have been concluded in
Economic Environment in the Russian Federation
The Russian Federation displays certain characteristics of an emerging market. Tax, currency and customs legislation is subject to varying interpretations and contributes to the challenges faced by companies operating in the Russian Federation. The political and economic instability, uncertainty and volatility of the financial markets and other risks may have negative effects on the Russian financial and corporate sectors. The future economic development of the Russian Federation is dependent upon external factors and internal measures undertaken by the government to sustain growth, and to change the tax, legal and regulatory environment. Management believes it is taking all necessary measures to support the sustainability and development of the Group’s business in the current business and economic environment.
In 2014 the U.S., the EU and certain other countries imposed sanctions on the Russian energy sector that partially apply to the Group.
The U.S. sanctions prohibit any U.S. person, and U.S. incorporated entities (including their foreign branches) or any person or entity in the United States from (1) transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity for a number of Russian energy companies, including JSC Gazprom neft, and (2) from providing, exporting, or reexporting, directly or indirectly, goods, services (except for financial services), or technology in support of exploration or production for deep water, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory to Russian companies, including JSC Gazprom neft. These sanctions also apply to any entity if 50% or more of its capital is owned, directly or indirectly, separately or in the aggregate, by sanctioned entities.
The EU sanctions, imposed in July 2014, prohibit: (1) the sale, supply, transfer or export of the equipment or technology for projects pertaining to deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in the Russian Federation; (2) technical assistance or brokering services related to such technologies; (3) financing or financial assistance related to any sale, supply, transfer or export of such technologies.
The sanctions, imposed by the EU and several other countries in September 2014, additionally prohibit: (4) provision of drilling, well testing, logging and completion services and supply of specialized floating vessels necessary for deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia, (5) purchasing, selling, providing investment services for or assistance in the issuance of, or other dealings with transferable securities, money-market instruments and new loans or credit with a maturity exceeding 30 days, issued by / extended to a number of Russian companies, including JSC Gazprom neft and any legal person, entity or body established outside the Union which are directly or indirectly owned for more than 50% by JSC Gazprom neft.
In November 2014 Switzerland imposed the following restrictions: (1) authorisation is required for issuance and trade in financial instruments, issued by JSC Gazprom neft, with a maturity exceeding 30 days and for the granting of loans with a maturity exceeding 30 days in favor of Gazprom neft; (2) notification of the Swiss competent authority is required in case of trade in financial instruments with a maturity exceeding 30 days, issued by JSC Gazprom neft outside Switzerland and EU; (3) notification of the Swiss competent authority is required for provision of drilling, well testing, logging and completion services and supply of specialized floating vessels necessary for deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.
The Group continues to assess the impact of the sanctions but currently does not believe they have a significant impact on the Consolidated Financial Statements.
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, 2014 the Group has entered into contracts to purchase property, plant and equipment for RUB 230,578 million (December 31, 2013: RUB 109,314 million).