Russian Eurobonds should be liable to tax ? Finance Ministry

February 1, 2012


Russian firms that have issued more than $100 billion in Eurobonds overseas may have to pay tax on interest retroactively, Finance Minister Anton Siluanov was quoted as saying on Wednesday.

A debate on Eurobond taxation has flared as the government seeks to staunch net capital outflows that reached $84 billion last year, crack down on the use of offshore structures by state firms, and boost revenues.

“Yes, according to the law (taxes) may be levied for past periods,” Siluanov told the Vedomosti financial daily in an interview that is likely to deepen concern among borrowers and investors.

Siluanov did not elaborate, but his comments raise the prospect that corporate Eurobond issuers may have to withhold Russia’s 20 percent profits tax on interest payments at source.

Bondholders could, meanwhile, be hit if issuers redeem their bonds at par, as is provided for in bond covenants when there is a material change in the tax regime.

Oil pipeline monopoly Transneft said last week it may call in over $4 billion in bonds at par, a move that would inflict losses on bondholders as the bonds trade above par.

The Finance Ministry, in an opinion provided to Russia’s tax inspectorate at the end of 2011, stated that Eurobond interest is by law liable to profits tax, which should be withheld at source.

The tax has not been collected in the past, but large state corporations have recently reported receiving tax demands from the Federal Tax Service on interest on their Eurobonds.

Seeking to allay investor concerns, the Finance Ministry said in a statement last Friday that it would draft legislation allowing tax relief for Eurobond holders in countries that have signed double-taxation treaties with Russia.

In contrast to Siluanov’s latest comments, it had also said it would prepare legislation “within a reasonable timeframe” allowing interest-free deferment on tax due on Eurobonds issued before Jan. 1 of this year.

Eurobonds are typically issued via special-purpose vehicles in countries like Ireland and Luxembourg, with proceeds deposited in Russia. In the view of the Finance Ministry, these SPVs should be treated as intermediaries, not final investors.

The structuring of such loan participation notes is designed to be tax efficient, and it is doubtful that such double-tax treaties would apply to bondholders. That would leave issuers to pick up the tab, raising their borrowing costs as a result.

Hard to Borrow

In other comments, Siluanov said that borrowing on both domestic and foreign markets was becoming increasingly challenging and that the Finance Ministry might wait a while before issuing a planned sovereign Eurobond.

“To borrow in large amounts on foreign markets is today impossible,” Siluanov told Vedomosti.

Russia had said in December that it would be ready to place Eurobonds early this year. The amount has not been disclosed, but the ministry’s borrowing plan for this year calls for raising around $7 billion on international markets.

On the domestic market, the ministry plans to borrow 1.8 trillion roubles ($59.5 billion) this year, with 300 billion roubles of that in the first quarter, to finance a budget deficit planned at 1.5 percent of gross domestic product (GDP).

Siluanov said that borrowing on the domestic market is not easy either.

“There is no extra liquidity on the domestic market, and to take it away in these conditions to (fulfill) the budget would not be right,” Siluanov said.