KAZAKHSTAN - 2008 INVESTMENT DISPUTES REPORT UPDATE

UNCLAS SECTION 01 OF 02 ASTANA 001164 SENSITIVE SIPDIS DEPARTMENT FOR EEB/IFD/OIA AND L/CID E.O. 12958: N/A TAGS: KIDE CASC EINV OPIC PGOV KZ SUBJECT: KAZAKHSTAN - 2008 INVESTMENT DISPUTES REPORT UPDATE REF: STATE 43784 ¶1. (SBU) This cable constitutes post's response to reftel. The United States Government is aware of recent claims by two (2) United States persons against the Government of Kazakhstan (GOK). Claimant B's dispute was fully resolved during the reporting period. ¶2. (SBU) a. Claimant A b. 1996 c. Although it has faced a number of regulatory issues, Claimant A has had two disputes that raise expropriation concerns. Claimant A's dispute on electricity deliveries with the state-owned power transmission monopoly (now known as KEGOC) and the Government of Kazakhstan (GOK) began in 1996. Claimant A ultimately signed two memoranda of understanding (MOUs) with KEGOC and the GOK, outlining how the dispute would be resolved. Claimant A, however, considered KEGOC to be in breach of some of the contracts arising from the MOUs. KEGOC and the GOK submitted to the case to international arbitration. Claimant A prevailed in a December 2007 ruling, and the Kazakhstani side paid it compensation, which appears to have resolved the matter. Claimant A also asserts that discriminatory regulatory actions by regional authorities amount to expropriation. According to the Claimant, a regional government -- with the support of some officials in the central government -- has forced the Claimant to choose between lowering its rates (which would be politically expedient for the local authorities) or facing severe regulatory actions. Claimant A maintains that this is an example of improper tactics to extract financial benefits from the Claimant. Claimant A also complains of improper threats of criminal prosecution, which forced Claimant A's expatriate manager to depart Kazakhstan. In April 2008, an Almaty Court ruled in favor of local regulatory authorities, levying a USD 148 million fine against Claimant A for alleged anti-trust violations in its electricity sales. On May 30, 2008, Claimant A publicly announced it had completed the sale of its ownership stake in a local power plant and coal mine to a Kazakhstani company, though it would continue to serve as manager and operator of the two facilities. While the sale was reportedly very profitable for Claimant A, it appears to have been partly motivated by Claimant A's regulatory problems with Kazakhstani authorities. The USG is in regular contact with Claimant A and has on multiple occasions appealed to the Kazakhstani government in support of a just and fair resolution of the company's disputes with the authorities. ¶3. (SBU) a. Claimant B b. 2001 c. In July 2001, the Kazakhstan Ministry of State Revenue (MSR) performed an audit and determined that Claimant B, a subsidiary of a U.S. parent company, owed USD 29 million in taxes. The assessment was based on MSR's finding that USD 100 million received by the Claimant from a customer as reimbursement for capital expenditures incurred by Claimant in modifying a barge rig was taxable income. (The customer was the operating consortium of the offshore Kashagan oil field.) Claimant B challenged the decision in Astana City Court, which ruled in the Claimant's favor, holding that the reimbursements were not, in fact, taxable income. Following an appeal by the MSR, Kazakhstan's Supreme Court ruled in favor of Claimant B in March 2002. The Kazakhstani tax authorities subsequently appealed the March 2002 decision. In May 2006, the Supreme Court reversed itself, ruling in favor of the Kazakhstani tax authorities. Claimant B subsequently contacted the USG. The USG's efforts to negotiate a final resolution with the Kazakhstani authorities in accordance with our bilateral tax treaty did not meet with success. In April 2007, the Kazakhstani Supreme Court granted to Claimant B a Supervisory Panel Appeal. In July 2007, the Supreme Court's Supervisory Panel ruled against Claimant B. Claimant B subsequently appealed the interest assessed on the tax liability. In February 2008, the Atryrau Economic Court ruled that the interest was payable only from October 2005, not from the original 2001 tax assessment date. In March 2008, the Claimant publicly announced that, in accordance with this ruling, it had made a reduced tax payment, and that it now considered the tax dispute to be resolved. Claimant B noted that it would receive a foreign tax credit for this payment against future payments which would otherwise be paid to the U.S. Treasury. ¶4. (SBU) Claimant A: AES Corp.; Claimant B: Parker Drilling, Inc. ASTANA 00001164 002 OF 002 ORDWAY