Andrey Shpak, Tax Partner

1. International Fiscal Association / British BranchThe UK and the BRICs: Key Treaty Issues and Recent Developments: Russia Andrey Shpak, Tax Partner 16 February 2011

2. What will probably be the central tax treaty issues over the next two years (2011-2013)? • Practical implementation of the new Protocol to the Russia-Cyprus DTT (more extensive exchange of information, assistance in collection of taxes, applicability of domestic thin capitalisation rules etc) • Potential amendments of other key Russian double tax treaties (Luxembourg, Switzerland etc) • Beneficial ownership (“DTT override” draft legislation) • Application of “unjustified tax benefit” concept (based on the Resolution of the Supreme Arbitrazh Court No 53 dated 26 October 2003) to cross-border transactions • Testing the limits of “preparatory and auxiliary activity” (recent Bloomberg case)

3. Overall > 500 court cases at federal (cassation) level since 2002 (when the new Profits Tax Chapter of the Tax Code came into force) Key issue in most cases: meeting formal requirements for claiming DTT benefits (ie whether the tax agent had a valid certificate of tax residence prior to payment) – Resolution of the Supreme Arbitrazh Court No 990/05 dated 28 June 2005 (AvtoVAZ case) Out of cases mentioned above approx 20 deal with UK DTT issues (primarily obtaining DTT benefits on payments out of Russia), 2 with India DTT (claiming tax credit by Russian companies for Indian tax), and 1 with China DTT (obtaining DTT benefits on a payment out of Russia) What is a representative leading case of tax treaty interpretation in the passive and/or active income arenas

4. OECD Guidelines do not have a force of law Some Russian Ministry of Finance letters refer to the OECD Commentary to Model Tax Convention Several court cases that mention OECD documents when developing rationale for their decision Due to formal requirements (the need to base decision on formal sources of law) wide use in legal documents unlikely What are the roles of the OECD Transfer Pricing Guidelines and similar OECD documents in the area of tax treaty interpretation

5. What is the evolutionary path of transfer pricing dispute resolution since the arm’s length standard was introduced into domestic law • Current transfer pricing rules are rudimentary (20% “safety margin”, onerous proof requirements for the tax authorities, just three TP methods etc) • Since 1999 when the current TP rules (Article 40 of the Tax Code) was introduced, out of more than 300 000 tax-related court cases at cassation level that there were less than 10000 court cases in all of Russia that in one form or another involved Article 40. • Our analysis and analysis of various other authors indicates that the taxpayers tend to win75-90% (depending on the region and the period) of all such cases. • In most cases the tax authorities prefer to challenge the economic justification of the expense on the whole or assert “unjustified tax benefit”, rather than pursue TP arguments • New TP law (largely based on OECD guidelines) has been developed, but it’s currently not clear when, in what form and whether at all it will be adopted