UPDATE ON PWC'S RUSSIAN TAX ISSUES

C O N F I D E N T I A L MOSCOW 000466 SIPDIS SIPDIS SENSITIVE STATE FOR EUR/RUS, EB/ESC/IEC, EB/CBA FRANKFURT FOR SUSAN STANLEY, BILL COTTER TREASURY FOR BAKER/GAERTNER NSC FOR TRACY MCKIBBEN USDOC FOR 4231/IEP/EUR/JBROUGHER E.O. 12958: DECL: 02/02/2017 TAGS: EFIN ECON RS SUBJECT: UPDATE ON PWC'S RUSSIAN TAX ISSUES REF: A. MOSCOW 177 ¶B. MOSCOW 81 Classified By: ECON M/C Quanrud, Reasons 1.4 (b/d). ¶1. (C) On January 30, the Department of Economic Security (DES) within the Ministry of Interior (MVD) called on PricewaterhouseCoopers' (PWC) senior managing partners to provide a detailed explanation of the firm's expense accounting for its expatriate employees. DES officials interrogated the partners aggressively for seven hours to determine whether PWC's practices merited criminal charges. The basis for the questioning was the November 2006 Federal Arbitration Court decision in favor of the Federal Tax Service which had charged that PWC underpaid USD 14 million in taxes as a result of improperly expensing expatriate salaries. Although PWC has paid the back taxes, the amount exceeds the threshold to pursue criminal charges. PWC's criminal defense counsel concluded that the case was rapidly escalating, and moving toward the possible initiation of criminal charges. PWC Global CEO Sam DiPiazza will come to Moscow the week of February 5 for government meetings that the Embassy is helping to organize. ¶2. (C) PWC senior managers and legal counsel say that the damage from criminal proceedings would not be limited to PWC. They explained that to conduct a legal audit of a company, the auditing firm must be independent from the shareholder's influence. Since a criminal case would bring a major shareholder in a significant number of firms PWC audits into conflict with the auditor, PWC's independence would be "impaired," and the firm would not be in a position to release audited financial statements for its clients with significant state-owned shares (like Sberbank, RAO UES, and Gazprom). This could, for instance, complicate the efforts of some PWC clients, like Sberbank, to comply with disclosure requirements related to issuing financial securities. Sberbank is planning to conduct a USD 7.5 billion stock offering by the end of the first quarter of 2007. Comment -------------- ¶3. (C) To date, no criminal charges have been filed. Speculation is brewing, however, that PWC could be caught in the money-laundering allegations which may be in the works against former Yukos chief Mikhail Khodorkovsky. End Comment. BURNS