07MOSCOW3801, RUSSIA’S SUPREME ARBITRATION COURT RULES IN FAVOR

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Reference ID Created Released Classification Origin
07MOSCOW3801 2007-08-02 13:18 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Moscow

VZCZCXYZ0000
PP RUEHWEB

DE RUEHMO #3801 2141318
ZNY CCCCC ZZH
P 021318Z AUG 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 2644
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L MOSCOW 003801 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/RUS 
TREASURY FOR MEYER, BAKER 
FRANKFURT FOR IRS TAX ATTACHE 
NSC FOR MCKIBBEN 
 
E.O. 12958: DECL: 08/02/2017 
TAGS: EFIN PGOV RS
SUBJECT: RUSSIA'S SUPREME ARBITRATION COURT RULES IN FAVOR 
OF PWC IN TAX CASE 
 
REF: MOSCOW 3343 
 
Classified By: Acting ECON M/C Kathleen Doherty, Reasons 1.4 (b/d). 
 
Summary 
------- 
 
1.  (U) The Supreme Arbitration Court (SAC) has ruled in 
favor of PricewaterhouseCoopers Russia (PWC) following a July 
10 hearing in which the Federal Tax Service (FTS) claimed PWC 
had improperly accounted for its expatriate employees' 
salaries in 2002.  SAC Chairman Anton Ivanov dismissed the 
FTS claim, which had prevailed in the first and appellate 
instances at the Federal Arbitration Court level.  The 
decision voided the FTS's use of representative samples as a 
basis for concluding that all of PWC's expatriate salary 
expense accounting was not in keeping with Russia's tax code. 
 Although the ruling leaves the door open for FTS officials 
to initiate a more comprehensive review of PWC's accounting 
practices for the year in question, it is also likely to 
influence the course of tax inspections going forward.  End 
Summary. 
 
Ruling in Taxpayers' Favor 
-------------------------- 
 
2.  (U) The Supreme Arbitration Court (SAC) has released the 
text of its formal decision in favor of PricwaterhouseCoopers 
Russia (PWC) following a July 10 hearing between the auditing 
firm and the Federal Tax Service (FTS).  At issue in the 
one-day presentation of arguments was the FTS claim that 
PWC's practice of accounting for expatriate salary expenses 
during 2002 was unlawful and that, as a result, the auditor 
owed approximately USD 14 million in back taxes (reftel). 
Lower courts had upheld the FTS position in the initial 
instance and in two appeals. 
 
3.  (U) SAC Chairman Anton Ivanov, however, dismissed the 
earlier judgments against PWC in his two-part ruling.  First, 
Ivanov placed the burden of demonstrating the impropriety of 
a given expense on tax officials.  He indicated the tests for 
such a determination would be found in the volume, 
reliability and consistency of documents that companies 
furnish in the course of a tax inspection.  Second, and 
closely related, the ruling invalidated the FTS' use of 
representative samples to conclude that PWC's expatriate 
salary expense accounting practices were inconsistent with 
Russia's tax code.  The decision held that only the revenues 
and expenses that tax authorities actually checked could form 
the basis for any decision affecting PWC.  The SAC has 
remanded the case back to the Federal Arbitration Court for 
further review in light of the SAC's ruling on the Federal 
Tax Service's practices. 
 
Comment 
------- 
 
4.  (C) Former PricewaterhouseCoopers Russia Managing Partner 
Mike Kubena (amcit) told Econoffs in late 2006 that, as part 
of this case, FTS officials had conducted only a small number 
of interviews with employees of PWC's clients who had had no 
contact with members of PWC's auditing teams.  Kubena 
observed that these employees' responses formed the basis for 
the erroneous FTS conclusion that, because PWC did not employ 
expatriates, the expatriate salary expenses were therefore 
fraudulent.  PricewaterhouseCoopers Russia's current Managing 
Partner Peter Gerendasi is hopeful that the outcome of this 
appeal will make tax inspections more transparent.  End 
Comment. 
RUSSELL

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