Annual report 2011 - VTB

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VTB BankNotes to the Consolidated Financial Statements – 31 December 2011 and 2010(in billions of Russian Roubles)33. Income Tax (continued)As at 31 December 2011 VTB, “VTB Arena”, CJSC, “VTB Bank (Austria)” AG and “VTB Bank (Georgia)”, JSC hadunused tax losses of RUR 23.1 billion (2010: VTB, “VTB Capital”, Plc and “VTB Bank (Georgia)”, JSC –RUR 29.1 billion) for which no deferred tax asset was recognized due to uncertainty that these entities wouldanticipate to have sufficient future taxable profits against which unused tax losses could be utilized. Tax losses ofVTB incurred in 2008-2009 can be utilized over next 7-8 years in accordance with the Russian Tax Coderequirements. Losses of “VTB Bank (Austria)” AG and “VTB Capital”, Plc do not expire.As at 31 December 2011, the aggregate amount of temporary differences associated with investments in subsidiaries,associates and joint ventures for which deferred tax liability has not been recognized amounted to RUR 17.7 billion(31 December 2010: RUR 14.2 billion).The following table provides disclosure of income tax effects relating to each component of other comprehensiveincome for 2011 and 2010:2011 2010BeforetaxTax(expense)/recoveryNet of taxBeforetaxTax(expense)/recoveryNet of taxNet result on financial assets availablefor-sale,net of tax 3.5 (0.8) 2.7 0.6 – 0.6Actuarial losses net of gains arising fromdifference between pension planassets and obligations (0.5) – (0.5) (0.2) – (0.2)Share of other comprehensive incomeof associates and joint ventures (0.5) – (0.5) (0.2) – (0.2)Effect of translation 2.4 – 2.4 (2.4) – (2.4)Other comprehensive income 4.9 (0.8) 4.1 (2.2) – (2.2)34. Basic and Diluted Earnings per ShareBasic earnings per share are calculated by dividing the net profit or loss attributable to ordinary shareholders by theweighted average number of ordinary shares in issue during the year, excluding the average number of ordinaryshares purchased by the Group and held as treasury shares.The Group has no dilutive potential ordinary shares; therefore, the diluted earnings per share are equal to basicearning per share.2011 2010Net profit attributable to shareholders of the parent 89.4 58.2Weighted average number of ordinary shares in issue 10,458,649,872,302 10,458,002,643,882Basic and diluted earnings per share(expressed in Russian Roubles per share) 0.00855 0.0055735. DividendsThe Regulation on VTB’s Dividend Policy states that the proposals on dividend payments are made by theSupervisory Council taking into consideration the Bank’s financial performance in the appropriate year and otherfactors and, as a rule, should envisage a dividend payment constituting at least 10 percent of the Bank’s statutory netprofit. The dividend payment is proposed by the VTB Supervisory Council to the General Shareholders’ Meeting. Thefinal decision on dividend payment, including decisions on dividend amount and payout mode, is taken by the GeneralShareholders’ Meeting.The amount of dividends to be declared and paid is decided at the VTB’s annual shareholders’ meeting on the basisof VTB’s net profit for the previous fiscal year determined in accordance with Russian Accounting Legislation on astand-alone basis.In June 2011 the annual general meeting of VTB shareholders declared dividends in the amount of RUR 6.1 billion for2010 (RUR 0.00058 per share). In June 2010 the annual general meeting of VTB shareholders declared dividends ofRUR 6.1 billion for 2009 (RUR 0.00058 per share).In July 2011 “Russian Commercial Bank (Cyprus) Limited” paid interim dividends in the amount of USD 100 million(RUR 2.8 billion), including USD 40 million (RUR 1.1 billion) attributable to non-controlling shareholders.49
VTB BankNotes to the Consolidated Financial Statements – 31 December 2011 and 2010(in billions of Russian Roubles)36. Contingencies, Commitments and Derivative Financial InstrumentsLegal proceedings. From time to time and in the normal course of business, claims against the Group are received.As at the reporting date the Group had several unresolved legal claims. Management is of the opinion that therewould be no material outflow of resources and accordingly no material provision has been made in these consolidatedfinancial statements.Tax contingencies. Transfer pricing legislation became effective in the Russian Federation on 1 January 1999. Thislegislation allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities inrespect of all “controlled” transactions, provided that the transaction price differs from the market price by more than20 percent. “Controlled” transactions include transactions with related parties, barter transactions, foreign tradetransactions and transactions with third (unrelated) parties with significant price fluctuations (i.e., if the price of suchtransactions differs from the prices on similar transactions by more than 20 percent within a short period of time). Inaddition, specific transfer pricing rules allow the tax authorities to make transfer pricing adjustments in respect ofsecurities and derivative transactions. There has been no formal guidance as to how some of the rules relating totransfer pricing legislation should apply.The new transfer pricing rules became effective from 1 January 2012. Compared to the previous Russian transferpricing rules, the new rules are more technically elaborate and, to a certain extent, better aligned with the internationaltransfer pricing principles developed by the OECD. The list of the “controlled” transactions under the new transferpricing legislation includes transactions with related parties and certain types of cross-border transactions. The newtransfer pricing rules may have a potential impact on tax costs arising from the pricing mechanism applied in“controlled” transactions, in particular, transactions with related parties located in and outside of Russia. The price ofthe “controlled” transactions should be confirmed by functional and benchmarking analysis as well as by the relevanttransfer pricing documentation which should be available for the Russian tax authorities.The tax authorities will have right to accrue additional tax liabilities if the prices under the “controlled” transactionsdiffer from those which would have been used by independent counterparties under similar conditions. However, it isstill unclear what effect the new transfer pricing rules may have on the Russian entities of the Group.The Group also operates in various jurisdictions and includes companies incorporated outside of Russia that aretaxed at different rates and under different legislation. Tax liabilities of the Group are determined on the basis thatthese companies do not have a permanent establishment in Russia and hence are not subject to Russian profits taxexcept for Russian tax withheld at source (i.e. dividend, interest, certain capital gains, etc.). Russian tax laws do notprovide detailed rules on taxation of foreign companies. It is possible that with the evolution of these rules andchanges in the approach of the Russian tax authorities, some or all of the foreign companies of the Group may betreated as having a permanent establishment in Russia and thus subject to Russian taxation in a manner broadlysimilar to the taxation of a Russian legal entity.The interpretations of the relevant authorities could differ and if the authorities were successful in enforcing theirinterpretation, additional taxes and related fines and penalties may be assessed, the effect, of which cannot be practicablyestimated, but could be significant to the financial condition of the Group. However, based upon Management’sunderstanding of the tax regulations, Management believes that its interpretation of the relevant tax legislation isreasonable and will be sustainable. Moreover, Management believes that the Group has accrued all applicable taxes.The Group includes subsidiaries incorporated and operating in various jurisdictions. In some jurisdictions where theGroup operates tax, currency and customs legislation as currently in effect is subject to varying interpretations, andchanges, which can occur frequently at short notice and may apply retroactively. Based upon its understanding of theapplicable tax regulations Management of the Group believes that based upon the best estimates Group subsidiarieshave paid or accrued all taxes that are applicable to their operations as of 31 December 2011, in jurisdictions of theirincorporation, and complied with all provisions of laws and regulations in the jurisdictions to which the Group issubject. If however the relevant tax authorities differently interpret the applicable tax legislation as applied to thetransactions and activity of the Group, the tax position may be challenged; if the authorities were successful inenforcing their interpretation of these regulations, additional taxes, penalties and interest may be assessed, whichmay affect the financial position of the Group.The Russian Ministry of Finance on its official website placed a draft of Federal Law which defines the conditions ofexemption for companies reside in Russia from the tax agent’s obligations in case such companies pay income toforeign companies which issue Eurobonds. Such draft appeared due to the Russian Ministry of Finance opinion thatspecial purpose entities set up in Ireland to issue Eurobonds are not eligible for the benefits of the double tax treatybetween Ireland and Russia with regard to interest payments. If this view were to be enforced by the Russian taxauthorities (and potentially applied to other structured entities set up for issuing bonds from any foreign jurisdictionother than Ireland), the Group may face a fine at 20% of tax not withheld on interest paid on Eurobonds for the periodof 2011 and for prior periods and late payment interest. If such Federal Law is adopted as proposed by the RussianMinistry of Finance, the tax contingency will be fully remediated for 2011 and prior periods. At the moment the draft ofthe Law is in the State Duma and is planned to be adopted during 2012 year. Management believes its tax positionwith respect to the Eurobonds is sustainable and the resolution of this contingency will not have a material effect onthe consolidated financial statements of the Group.50
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