BP's Russian Venture Pays Huge Tax Bill

by Tatiana Smolenskaya, Tax-News.com, Moscow

13 November 2006

TNK-BP, the Russian-British joint oil exploration venture, has agreed to pay US$1.44 billion in back taxes to the Russian government as the Kremlin's grip on the country's oil sector continues to tighten.

The company revealed on Friday that the tax claim, which related to the 2002/2003 tax year, had been paid in full and there were no more outstanding tax liabilities against it for that year.

However, tax audits by the authorities for subsequent years are ongoing.

A BP spokesman told reporters that the company has yet to decide how the back tax bill will be apportioned between TNK-BP's owners, which, according to Reuters, include Russian billionaires Mikhail Fridman, Viktor Vekselberg and Len Blavatnik.

"The payment was made from TNK-BP's tax reserve and the partners are yet to decide how to split the bill based on the existing agreements," the spokesman stated.

However, BP itself may be liable to three months' worth of the tax bill since it didn't enter into the partnership with TNK until September 2003. BP has previously stated that it was indemnified by its partners against any historical tax claims when it bought into TNK.

Like much of the oil sector operating in Russia, TNK-BP is no stranger to demands for back taxes, and the sum paid last week was the second highest since the aggregate $28 billion in back tax demands which sank Yukos.

However, many analysts believe that government tactics reflect its desire to control the energy sector - a vital cog in the nation's economy - by pressuring them to sell assets to state-run gas monopoly Gazprom.

In another possible example of this, Russian prosecutors started a criminal investigation into licence violations at TNK-BP subsidiary Rospan, which is developing two gas fields.

Projects under other companies such as Exxon and Royal Dutch Shell have also come under increasing scrutiny from government agencies, it has been reported.

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