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42. Contingencies

Operating environment of the group

The Group’s operations are primarily located in the RF. Consequently, the Group is exposed to the risk of the economic and financial markets of the RF which display characteristics of an emerging market. The legal and tax frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the RF. The consolidated financial statements reflect assessment of the Group’s management of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.

Tax contingencies

The taxation system in the RF continues to evolve and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes fuzzy and contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to audit and investigation by a number of authorities, which have the authority to impose severe fines and penalties charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the RF suggest that the tax authorities are taking a more tough stance in their interpretation and enforcement of tax legislation.

These circumstances may create tax risks in the RF that are substantially more significant than in other countries. The Group’s management believes that it has provided adequately for tax liabilities in these consolidated financial statements based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of these provisions by the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.

Russian revised transfer pricing legislation is effective from 1 January 2012. The new transfer pricing rules appear to be more technically elaborate and, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development. The Group’s management prepared transfer pricing documentation to comply with the new legislation and believes that its pricing policy and implemented internal procedures are adequate to meet the new transfer pricing legal requirements.

Changes in tax legislation or its enforcement in relation to such issues as transfer pricing may lead to an increase in the Group’s effective income tax rate.

In 2012 – 2013, the approach of some of the Group’s entities to VAT accounting treatment for a certain type of transactions was challenged by tax authorities. This decision was challenged in court, and as at 31 December 2013 no liability was recognised in these consolidated financial statements. It is possible that such approach can be challenged by tax authorities other entities of the Group. Management is unable to reliably estimate the potential effect of such claims, but it may be significant. In January 2014, the Group won the law suit related to this claim of tax authorities in the first instance.

In addition to the above matters, as at 31 December 2013 management estimates that the Group has other possible obligations from exposure to other than remote tax risks of USD 232.5 million (31 December 2012: USD 210.0 million). These risks are mainly related to VAT accounting treatment for a certain type of transactions specific for a Group’s subsidiary, and they represent estimates arising from uncertainties in the interpretation of Russian tax legislation and related requirements for documentation. Management will vigorously defend the Group’s positions and interpretations that were applied in calculating taxes recognised in these consolidated financial statements, if these are challenged by the tax authorities.

Insurance

The Group maintains insurance in accordance with the legislation. In addition, the Group insures risks under various voluntary insurance programs, including management’s liability, Group’s liability and risks of loss of aircraft under operating and finance lease.

Litigation

During the reporting period the Group was involved (both as a plaintiff and a defendant) in a number of court proceedings arising in the ordinary course of business. Management believes that there are no current court proceedings or other claims outstanding which could have a material effect on the results of operations and financial position of the Group.

During 2013, the Group accrued USD 30.9 million under the claim for additional payments to the employees for their night work and for hazardous exposure and harmful working conditions. These charges are recorded within other operating costs in the Group’s consolidated statement of profit or loss. As at 31 December 2013, all liabilities to the employees under the above claim are settled.