Profit Tax Rate for Sakhalin-2 Contractors.

17.11.2010

Legal Update No. 194

Goltsblat BLP advises of publication of Resolution of the Presidium of the RF Supreme Arbitration Court (SAC) No. 1674/10 of 29 September 2010, highlighting the court’s position regarding the profit tax rate to be applied by the contractors and subcontractors of the Sakhalin-2 Project. 

The Sakhalin-2 Production Sharing Agreement prescribes special taxation rules for project investors, differing from the rules contained in the Russian Tax Code. For example, investor profit is taxed at 32%, but this is offset by certain tax concessions. The same system applies to both contractors and subcontractors engaged by the investor in implementing the project.

These regulations raise the question as to whether it is legal to apply the 32% profit tax rate to contractors and subcontractors.

The tax authorities interpret the agreements literally as requiring assessment of 32% tax.

The Presidium of the RF SAC has stated that the Production Sharing Agreement, being between the state and the investor using the subsoil, may not apply to the obligations and taxation of persons not party to this agreement. Accordingly, the investor’s contractors and subcontractors of the investor should apply the rules prescribed by the effective tax legislation and not the agreement.

With reference to this position of the RF SAC, contractors and subcontractors may assess their profit tax at the rate prescribed in the Russian Tax Code. In this case, however, it will be unlawful for such contractors and subcontractors to apply the benefits offered by the agreement.

Contractors and subcontractors engaged by the investor are now, therefore, able to challenge additional tax charged if the tax authorities apply the 32% rate, while contractors and subcontractors computing their profit tax liability at 32% may adjust their tax liabilities, recalculate their profit tax at the rate set in the Russian Tax Code and claim a refund of the overpaid tax. In this case, however, no benefits provided by the agreement should be allowed for in the adjustment.   

For additional information, please contact:

Andrey Shpak, Partner,Tax consulting/ tax litigation, Goltsblat BLP;
T: +7 (495) 287 44 44,
E-mail: info@gblplaw.com

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