Russia Reviews Eurobond Tax Rules as Claims Raise Concerns

Russia’s Finance Ministry is holding talks with issuers of foreign debt after the tax authorities sought a levy from some Eurobond coupon payments, Deputy Minister Sergei Shatalov said.

Coupon payments made to foreign debt holders through offshore special purpose vehicles, known as SPVs, are taxable under the current law, although the rules haven’t often been enforced, Shatalov said today by phone. Applying a 20 percent tax would add “certain risks” and make borrowing more expensive, he said.

“All we are saying is there’s a law,” Shatalov said in the interview. The Vedomosti newspaper earlier reported he’d written a letter to the tax service about the application of the law. “Maybe it’s not good, maybe it’s bad, maybe somebody doesn’t like it, but it should be obeyed.”

OAO Transneft, Russia’s oil pipeline operator, is considering buying back its $4 billion of outstanding Eurobonds within a year as authorities seek to tax the interest payments, Igor Dyomin, a spokesman for the state-controlled company, said by phone. The company received a claim from the Federal Tax Service for more than 2 billion rubles ($66 million), which hasn’t yet been “formalized,” according to Dyomin.

The yield on the company’s dollar bonds due 2018 fell 11 basis points to 4.639 percent, the lowest since Sept. 9, according to data compiled by Bloomberg.

Alter or Enforce

No decision has yet been made as the government considers whether to alter or enforce the legislation, Shatalov said. The issue shouldn’t hurt Russian corporate and bank Eurobond sales, he said.

“We would like to discuss this topic as soon as possible,” Shatalov said. There are “a few” banks and other “reasonably large” companies that have received claims, he said, without elaborating.

“If it ever happens in the proposed form though, it would certainly affect the access of Russia’s corporate borrowers to debt capital markets as the cost of borrowing for them would increase by the amount of the withholding tax,” Maxim Miller, an emerging-markets credit analyst at BNP Paribas SA in London, and a former Fitch Ratings analyst, said by phone today.

BNP Paribas arranged the most non-ruble international bond sales out of Russia last year, or 14 percent of the total, and was picked by the Russian government to sell its next sovereign offering.

Miller said he doesn’t believe the changes will be implemented in the current form “given the amount of debt that could be affected.”

Russian banks and companies have about $100 billion of foreign bonds outstanding, Shatalov said.

“I would expect strong resistance with proper lobbying efforts from the managers of most state corporations as they would likely to be among the worst affected,” Miller said.

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