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IdentifierCreatedClassificationOrigin
06MOSCOW9206 2006-08-23 14:30:00 CONFIDENTIAL Embassy Moscow
Cable title:  

KHODORKOVSKIY-ASSOCIATED NGO HIT WITH HUGE TAX BILL

Tags:   PGOV PHUM PREL KDEM RS 
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1. (C) SUMMARY. Russian tax authorities recently imposed a
USD 180,000 bill for back taxes on an NGO headed by one of
Mikhail Khodorkovskiy's lawyers. The Federal Tax Service
claims the Center for International Legal Defense (CILD) owes
taxes on grants it has received from the National Endowment
for Democracy (NED) and other foreign donors. CILD head
Karina Moskalenko told us that the NGO was targeted because
of its participation in the Other Russia conference, which
took place shortly before the tax bill was delivered. Other
human rights activists said that CILD was also targeted
because of its court successes and its close connection to
Yukos and Khodorkovskiy.
.


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CILD Targeted by Tax Service...


--------------------------





2. (SBU) In late July, the Russian Federal Tax Service (FTS)
filed a major tax claim against CILD after it was checked
three times by tax inspectors. The total tax claims and
fines against CILD are about USD 180,000, which if collected
could potentially put the NGO out of business. The FTS
claims that the center failed to pay profit taxes on grants
totaling USD 500,000 received between 2002 and 2004 from the
Ford Foundation, the Soros Open Society Institute, the
MacArthur Foundation, and NED. CILD's lawyers are trying to
reach an agreement with the FTS; if that fails, they will
appeal the claims in Russian courts. CILD General Director
Oksana Preobrazhenskaya told the press the NGO would pursue
its case at the European Court of Human Rights (ECHR) if
necessary.



3. (SBU) According to Russian tax law, recipients of grants
must meet two conditions for tax-exempt status. The grant
money has to be used for one of the specific pre-approved
purposes established by the Russian Government (support of
education, culture, human rights, the environment, and
certain health issues), and the grantor has to be on the
Russian Government list of organizations that can give
tax-free grants. Grant money given to NGOs otherwise is
subject to 24 percent corporate income tax, and the grantee's
purchases are also subject to Value Added Tax (in most cases,
18 percent). The NED, which gave CILD USD 105,000 between
2002 and 2005, is not on that list. CILD lawyers, however,
cite a 1992 U.S.-Russian bilateral agreement, which was never
ratified by the Duma, under which no grants from that
organization are taxable because it is a U.S. government
organization.
.


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...Because Too Successful


--------------------------





4. (SBU) CILD won the first-ever case brought against the GOR
before the ECHR. Moskalenko and other CILD attorneys have
represented defendants in several high profile cases,
including Khodorkovskiy and his codefendant Platon Lebedev,
as well as Igor Sutyagin, a researcher accused of espionage.
It also provides training to Russian attorneys and legal
assistance to Russians who want to file cases before the ECHR.



5. (SBU) Russian authorities unsuccessfully attempted to have
Moskalenko disbarred in 2005 and have lodged other complaints
against her, including efforts to have her removed from cases
before the ECHR. The GOR never objected to CILD's receipt of
foreign funding, however, even though it kept them informed
about its grants. In 2005, however, authorities
re-interpreted the tax law and ruled that grants received for
human rights activities could be taxed.
.


--------------------------


Tax Claim Politically Motivated


--------------------------





6. (C) Moskalenko told us recently that she believed the tax
claim was politically motivated and that having to pay the
tax bill would likely put CILD out of business. Moskalenko
believed these measures were in response to her participation
in the Other Russia conference, as well as her continued
visits to see Khodorkovskiy about every 4-6 weeks. (NOTE: Her
last visit was in June, and she plans to visit him again in
August.) Moskalenko fears that her staffers will lose their
jobs or face intimidation if the tax bill is actually
collected. Additionally, her husband was dismissed from his
job at a classified nuclear research facility, two months
before qualifying for his pension.



7. (SBU) At the beginning of August, thirty of the most
influential NGOs in Russia -- including the Moscow Helsinki
Group, Memorial, and For Human Rights -- issued a joint

MOSCOW 00009206 002 OF 002


statement claiming the tax case against CILD was politically
motivated. The activists asserted that the authorities
waited until after the G8 Summit to begin a campaign of
harassment against legal experts, and that CILD was the first
target. Human rights activists worry that the same claims
can be made against any of them and could lead to their
organizations being bankrupted and shut down. Independent
Legal Council member Mara Polyakova told the press that if
the FTS claims are upheld, it could set a precedent that
could be used against any NGO receiving foreign grants.



8. (C) Darya Miloslavskaya, a legal specialist, said that
article 251 of the Tax Code, which covers the taxation of
grants, is written so that it can be interpreted to the
state's benefit in any situation. Gerald Staberock, Director
of the Global Security and Rule of Law Program of the
Geneva-based International Commission of Jurists (ICJ), of
which Moskalenko is a member, concurred, noting that the ICJ
believed authorities were engaged in selective enforcement of
the law in retaliation for CILD's success in exposing the
GOR's violations of human rights. Moscow Carnegie Center
analyst Liliya Shevtsova predicted continued targeted
harassment of NGOs as Russian law enforcement officials test
both the extent of Kremlin interest in cracking down on
"Western" NGOs and Western government reaction in the G8
aftermath.



9. (C) COMMENT. Although much attention has been focused on
the NGO law and its implementation, tax claims against CILD
suggest other methods exist to pressure NGOs. The Ambassador
plans to raise this case next week with senior GOR officials
while reinforcing U.S. interest in a transparent and fair
process of re-registering foreign NGOs.
BURNS