31. Commitments and contingencies

(a) Legal proceedings

The Group is subject to a number of proceedings arising in the course of the normal conduct of its business (refer to (b) below). Management believes that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Group.

(b) Taxation

Russian tax, currency and customs legislation is subject to varying interpretations and changes occurring frequently. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Group may not coincide with that of management. As a result, tax authorities may challenge transactions and the Group may be assessed additional taxes, penalties and interest, which can be significant. The Group’s tax returns are open for review by the tax and customs authorities with respect to tax liabilities for three calendar years preceding the year in which the decision on the conduct of the tax audit was adopted. Under certain circumstances, reviews may cover longer periods.

New transfer pricing legislation enacted in the Russian Federation starting from 1 January 2012 provides for major modifications making local transfer pricing rules closer to OECD guidelines, but creating additional uncertainty in practical application of tax legislation in certain circumstances.

The new transfer pricing rules introduce an obligation for the taxpayers to prepare transfer pricing documentation with respect to controlled transactions and prescribe new basis and mechanisms for accruing additional taxes and interest in case prices in the controlled transactions differ from the market level. The new transfer pricing rules eliminated the 20-percent price safe harbour that existed under the previous transfer pricing rules applicable to transactions on or prior to 31 December 2011.

The new transfer pricing rules primarily apply to cross-border transactions between related parties, as well as to certain cross-border transactions between independent parties, as determined under the Russian Tax Code. In addition, the rules apply to in-country transactions between related parties if the accumulated annual volume of the transactions between the same parties exceeds a particular threshold (RUB 2 billion in 2013, and RUB 1 billion in 2014 and thereon).

Since there is no practice of applying the new transfer pricing rules by the tax authorities and courts, it is difficult to predict the effect of the new transfer pricing rules on these consolidated financial statements.

In 2014 based on acts of comprehensive tax inspection for the period of 2011-2012 Federal Tax Service of the Russian Federation issued a claim in the amount of 676 of additional taxes. The Group has appealed the decision of Tax authorities.

Management believes that its interpretation of the relevant legislation is appropriate and that it is probable that the Group’s tax, currency and customs positions will be sustained upon examination. Management of the Group believes that it has adequately provided for tax liabilities in the consolidated statements of financial position as at 31 December 2014 and 2013. However, the general risk remains that relevant authorities could take different position with regard to interpretative issues and the effect could be significant. As a result, the Group has accrued tax liability reserve in the amount of 9.5 million. Due to tax audit initiates by Tax authorities and results can be disputed in administrative procedure and in court there is an uncertancy about the execution date of tax liability.

(c) Licenses

Substantially all of the Group’s revenues are derived from operations conducted pursuant to licenses granted by the Russian Government. These licenses expire in various years from 2015 up to 2022.

The Group has renewed all other licenses on a regular basis in the past, and believes that it will be able to

renew licenses without additional cost in the normal course of business. Suspension or termination of the Group's main licenses or any failure to renew any or all of these main licenses could have a material adverse effect on the financial position and operations of the Group.

(d) Capital commitments

As at 31 December 2014, contractual commitments of the Group for the acquisition of property, plant and equipment amounted to 50,040 (2013: 15,131).

(e) Operating leases

As at 31 December 2014, all lease contracts are legally cancellable. However, the Group was involved in a number of operating lease agreements for land, on which the Group constructed certain leasehold improvements. Thus, it is reasonably certain that these leases would not be cancelled. Future minimum lease payments under these operating leases as at 31 December 2014 and 2013 were as follows:

31 December 2014 31 December 2013
As lessee  
Current portion 228 129
Between one to five years 311 320
Over five years 1,180 1,267
Total minimum rental payables 1,719 1,716
As lessor  
Current portion 172 109
Between one to five years 86 125
Over five years 35 25
Total minimum rental receivables 293 259

My Annual Report

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