Russian Cooperative compliance program – Tax monitoring Ivan Rodionov Head of Tax Performance Advisory, Russia and the CIS 28 September 2015

Page 2 Overview of the Tax Monitoring Regime

Page 3 Tax Control in Russia - Traditional Approach and Recent Developments ►Antagonistic way of interaction between tax authorities and taxpayers ►More than 20 thousand tax disputes annually, ►Additional tax assessments are unofficially regarded as key KPI for tax authorities, ►Service approach is not a key priority for the tax inspectors. ►Form over substance approach: ►“No/insufficient documentation – no tax deduction/benefit” approach, ►Tons of documents requested by the tax authorities in the course of audits, ►Thousands of man-hours spent by both parties. ►Insufficiently developed tax audit methodologies: ►Unsystematic use of analytical procedures in the course of tax audits, ►Limited use of sampling, materiality concepts and technology ►Recent developments: ►Development of alternative dispute resolution methods ►Risk-based approach in selection of the tax audit targets ►Extensive use of technology: VAT invoices, Transfer pricing etc. ►Tax Monitoring initiative – Russian cooperative compliance regime. Cooperative Compliance program for large taxpayers in Russia – Tax Monitoring DRAFT FOR DISCUSSION PURPOSES

Page 4 The Development of a Tax Monitoring Regime in Russia 25 December 2012 ► The Russian Federal Tax Service (FTS) signed the first agreements on “Horizontal Monitoring” – enhanced information exchange” with four taxpayers (RusHydro, INTER RAO UES, Mobile TeleSystems and the Moscow branch of Ernst & Young (CIS) B.V.) and the initial pilot project commenced. ► Initially the 2012 and 2013 tax periods were covered (in August 2014 the terms of the agreements were extended) 26 March 2013 ► The FTS signed an agreement with “Severstal”. 10 February 2014 ► The Government approved a tax administration development plan (“roadmap”), which includes the development of a “Horizontal Monitoring” regime. ► The main goals of the roadmap are: ► Reduction of time spent on tax reporting preparing and filing; ► Enhancement of cooperation between taxpayers and tax authorities; ► Further convergence between tax and accounting rules; ► Documents flow improvement, including electronic document flow between companies. 4 November 2014 ► The Tax monitoring (“TM”) Law, Federal Law No. 348-FZ, was signed by the President. It came into force on 1 January Certain provisions will not apply to consolidated groups of taxpayers until 1 January Cooperative Compliance program for large taxpayers in Russia – Tax Monitoring DRAFT FOR DISCUSSION PURPOSES

Page 5 Overview of Russian Tax monitoring regime ►Applicable to Large/Medium taxpayers, meeting the following PY financial criteria: ►Income exceeds 3 bn. RUR (approx. 40MEUR) ►Assets exceed 3 bn. RUR (approx. 40MEUR) ►Taxes paid in PY exceed 300 MRUR (approx. 4 MEUR) ►Voluntary regime – by application, subject to approval by Tax authorities (starting 2016 tax year) ►Period -1 calendar year ►Covers all taxes ►Formalized in a separate Law and regulations ►Taxpayers administered by the largest industry tax inspectorates under supervision of FNS Cooperative Compliance program for large taxpayers in Russia – Tax Monitoring

Page 6 - Key benefits, constraints and challenges ►No field and in-house tax audits ►Early discussions and opportunity to clear UTPs through “Motivated opinion” mechanism ►Conducting tax audit procedures on the tax authority’s site (rather than the taxpayer’s site); ►Ability to demonstrate reliance on tax internal controls, that allows to to reduce the volume of procedures and documents for inspection ►Direct supervision by FTS Key Benefits ►“Motivated opinion” applies only to positions already taken (not a tax ruling) ►No “Clean Slate” ►Tax audits can still take place ►Transfer pricing out of scope ►No clear methodology and basis for TCF assessment and control reliance ►Level of qualification of client teams at Tax authorities ►Lack of business awareness and audit experience at Tax authorities Key Constraints/Concerns +

Page 7 Section 3. Information on the internal control system (Tax Control Framework): ► Approaches to identification and assessment of tax risks ► Main control procedures aimed at eliminating (reducing) those risks ► Information on the system for documentation and confirmation of the performance of internal control procedures, and on the time periods for the provision of supporting documentation to the tax authority ► Description of the process by which and timeframe within which the taxpayer is to obtain (prepare) results generated by the internal control system and present them to the tax authority Section 1. Procedures for the provision of documents (information) to tax authority: ► Selected form of information provision: in electronic form and (or) access to the taxpayer’s IT systems ► List of information/documents to be provided to the tax authorities. Taxpayers providing information about their tax internal control systems can determine the scope, quantity and principles for the selection of primary documents and other supporting documentation provided to the tax authorities at their own discretion. Section 2. Information on tax reporting system: ► Information on the forms and methods of statutory accounting ► Procedures for the disclosure of income, expenses and taxable items in statutory and tax accounts, as well as information on analytical tax ledgers (as it would be reported in a tax return) ► Procedures for the disclosure of other information relevant to the correct calculation (withholding) and the complete and timely payment (remittance) of taxes and levies. Regulations on information exchange

Page 8 Lessons for other emerging economies from Russian experience 1.Even in immature environment and in absence of certain pillars cooperative compliance program can be launched 2.It does make sense to “run ahead of the train” and launch the pilot cooperative compliance program in emerging markets as this provides an opportunity to actively shape and customize the program to the country environment 3.In the environments with inherent lack of trust cooperative compliance tends to get very formalized and regulated 4.Key risks for the cooperative compliance in the emerging markets are: ►Lack of impartiality and independent public oversight of the program ►The risk of abuse of the participants’ transparency by tax authorities ►Inability to formulate reliable methodology for Tax Control Framework assessment by tax authorities Cooperative Compliance program for large taxpayers in Russia – Tax Monitoring