Tax Dispute Disrupts Ford's Russian Production Unit

by Tatiana Smolenskaya, Tax-News.com, Moscow

22 June 2006

Production at Ford Motor Company's Russian assembly plant was disrupted recently, after the local tax authority called into question the company's right to exploit a tax break agreed with the federal government.

Under the deal signed with the Ministry of Economic Development and Trade, Ford is exempt from paying import duties on components, provided that 40% of the parts used to build cars at the Ford Focus plant are sourced locally. The tax break is worth about $700 per car.

However, tax inspectors in the Leningrad region claim that Ford has breached this agreement by not achieving 40% localisation as per the agreement with the ministry.

The dispute has reportedly caused Ford to halt production at its Vsevolozhsk plant 1,500 cars short of its production target. The company is aiming to produce about 68,000 cars at the site this year.

According to Reuters, a Ford spokeswoman has denied that the firm was in breach of its agreement, and stated that production was suspended due to a dispute with the tax authorities concerning the clearing of new cars for sale.

However, a report by Russian daily Kommersant quoted a customs official as saying that Ford "acknowledges a debt of 124 million rubles ($4.6 million) and intends to pay off the remaining debt in the coming weeks”.

The dispute is likely to be keenly watched by other major auto manufacturers such as Nissan, Toyota and Volkswagen, all of which are opening production plants in Russia.

Some observers have suggested that the Ford dispute may be a deliberate signal of intent by the tax authorities that any car-maker stepping out of line with tax laws will be penalised in a similar manner to the treatment dished out by the Federal Tax Service to firms in the oil industry and telecom sector.

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