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 3 billion in 2012, 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.

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 2012, 2011 and 2010. However, the general risk remains that relevant authorities could take different position with regard to interpretative issues and the effect could be significant.

In February 2010, the Federal Tax Service of the Russian Federation completed the comprehensive tax inspection for the period of 2007-2008 and, as a result, issued a claim in the amount of 715 of additional taxes, fines and penalties. In September 2010, higher taxing authority declared 410 of the total amount invalid. The Group appealed the decision of the higher taxing authority in respect of the remaining 305 to the Arbitration Court of Moscow. In June 2011 the claim of the Group was fully settled, though in October 2011 that decision of the Court was changed as a result of the tax authority’s appeal. The Court declared 265 of 305 invalid. The Group and the tax authority disputed that decision in the Federal Arbitration Court of Moscow Region, which declared 242 of 305 invalid. The claim of the tax authority was declared valid in the amount of 34. The Group appealed the decision in the amount of 28 to a higher taxing authority. No consideration of the suit was held by the moment the present statements were published. Management believes that, overall, taxes for 2007-2008 have been properly calculated by the Group and fairly stated in its financial statements based on the Group’s analysis of the sustainability of liability. However, certain transactions revealed during the tax inspection management assessed as unlikely to be successfully defended in higher courts. As a result, the Group has accrued additional tax liabilities. The total provision for tax liabilities for the period 2004-2008 amounted to 63 as 31 December 2011 (2010:16).

(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 2013 up to 2021.

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 2012, contractual commitments of the Group for the acquisition of property, plant and equipment amounted to 44,058 (2011: 56,705; 2010: 8,435).

(e)  Operating leases

As at 31 December 2012, 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 2012, 2011 and 2010 were as follows:

  31 December 2012 31 December 2011 31 December 2010
As lessee      
Current portion 147 170 1,963
Between one to five years 264 418 1,404
Over five years 1,003 2,100 4,960
Total minimum rental payables 1,414 2,688 8,327
As lessor      
Current portion 151 100 834
Between one to five years 207 281 444
Over five years 2 94 490
Total minimum rental receivables 360 475 1,768