Nothing was allowed to stand in the way of the Yukos tax manipulation scheme which was so tortuously complex that when a listing on NYSE was mooted the idea was quickly dropped because the disclosure required by the NYSE would jeopardize the scheme. The Russian Federation’s defence submission submitted in The Hague on 29 July 2011 details this and the structure of the scheme:
“In the summer of 2002, Yukos’ owners and managers explored the feasibility of listing Yukos shares—including Claimants’ shares—on the New York Stock Exchange. The project was ultimately abandoned, for reasons that included the express concern that, as a result of the disclosures required by the U.S. Securities and Exchange Commission, the secrecy of Yukos’ “tax optimization” scheme, which Yukos had always strived to protect, would be jeopardized, with the result that, in the words of a Yukos manager:
“We understand that the Company has set up a complex structure of subsidiaries in various jurisdictions primarily with the purpose of maximizing tax efficiency. This structure enables the Company to exploit inconsistencies between legal regimes and treat certain entities differently for the purposes of Russian legal and tax regime and, say, US accounting rules. There is a risk (whose extent we are now trying to ascertain) that the filings with the SEC and publicly available materials would have to disclose the names of such entities and their affiliation with the Company. Such information may be used by the Russian tax authorities to challenge our approach to certain transactions and, consequently, will result in substantial tax claims against the Company.”
Other Yukos internal communications confirm that it was an ongoing “headache” for Yukos’ employees to ensure that the transactions among the trading shells were structured in a way that would prevent detection of the scheme by Russian tax authorities.
The Structure Of The Yukos Tax Evasion Scheme
Yukos’ controlling shareholders—Claimants in these proceedings—pursued their objective of having Yukos engage in large-scale tax evasion with determination, imagination, and sophistication. By using a broad panoply of subterfuges in remote regions of Russia, they tried to confuse and mislead the tax authorities, and for years were largely successful.
Reduced to its essentials, Yukos’ “tax optimization” scheme involved five key ingredients.
First, it entailed the interposition of dozens of purportedly independent trading shells established in Russia’s low-tax regions, with no business purpose other than facilitating tax evasion.
Second, those trading shells would intercept the lion’s share of the artificially inflated profits resulting from purchases of oil from Yukos’ production subsidiaries at prices far below those that a seller would have charged in arm’s length transactions and the sale of oil and oil products to independent customers at vastly higher prices.
Third, there was no meaningful investment by the trading shells in the low-tax regions where they were established. Because the trading shells were nominally established in, and purported to operate from, Russia’s low-tax regions, their artificially inflated profits were lightly taxed at those regions’ low rates.
Fourth, the scheme entailed the transfer of the trading shells’ artificially inflated profits to Yukos—which was not established in a low-tax region—and other offshore entities ultimately owned by the Oligarchs, through Claimants. Specifically, Yukos resorted to a variety of techniques designed to mask its affiliation with the trading shells, make it extremely difficult, if not impossible, for Russian authorities to trace the proceeds of Yukos’ “tax optimization” scheme, and shelter those profits from taxes which would have been otherwise levied by Russia and other countries upon receipt by Yukos or its affiliates, including by way of:
(i) “donations” or “gifts” to a purported “Production Development Financial Support Fund”;
(ii) fictitious transactions involving “promissory notes” issued by Yukos or its affiliates;
(iii) the siphoning off from Russia of the trading shells’ profits through offshore intermediary shell companies.
Fifth, each of the foregoing key elements was concealed, including by keeping secret Yukos’ continued de facto ownership and control of the trading shells, masking the artificial transfer pricing scheme implemented through the trading shells, and interposing multiple layers of non-transparent offshore entities between Yukos and the trading shells.”