08ASTANA1164, KAZAKHSTAN – 2008 INVESTMENT DISPUTES REPORT UPDATE

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Reference ID Created Released Classification Origin
08ASTANA1164 2008-06-23 06:32 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO0694
OO RUEHLN RUEHVK RUEHYG
DE RUEHTA #1164/01 1750632
ZNR UUUUU ZZH
O 230632Z JUN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2656
INFO RUCNCIS/CIS COLLECTIVE 0533

UNCLAS SECTION 01 OF 02 ASTANA 001164 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EEB/IFD/OIA AND L/CID 
 
E.O. 12958: N/A 
TAGS: KIDE CASC EINV OPIC PGOV KZ
 
SUBJECT: KAZAKHSTAN - 2008 INVESTMENT DISPUTES REPORT UPDATE 
 
REF: STATE 43784 
 
1. (SBU) This cable constitutes post's response to reftel.  The 
United States Government is aware of recent claims by two (2) United 
States persons against the Government of Kazakhstan (GOK).  Claimant 
B's dispute was fully resolved during the reporting period. 
 
2. (SBU) a.  Claimant A 
 
b.  1996 
 
c.  Although it has faced a number of regulatory issues, Claimant A 
has had two disputes that raise expropriation concerns. 
 
Claimant A's dispute on electricity deliveries with the state-owned 
power transmission monopoly (now known as KEGOC) and the Government 
of Kazakhstan (GOK) began in 1996.  Claimant A ultimately signed two 
memoranda of understanding (MOUs) with KEGOC and the GOK, outlining 
how the dispute would be resolved.  Claimant A, however, considered 
KEGOC to be in breach of some of the contracts arising from the 
MOUs.  KEGOC and the GOK submitted to the case to international 
arbitration.  Claimant A prevailed in a December 2007 ruling, and 
the Kazakhstani side paid it compensation, which appears to have 
resolved the matter. 
 
Claimant A also asserts that discriminatory regulatory actions by 
regional authorities amount to expropriation.  According to the 
Claimant, a regional government -- with the support of some 
officials in the central government -- has forced the Claimant to 
choose between lowering its rates (which would be politically 
expedient for the local authorities) or facing severe regulatory 
actions.  Claimant A maintains that this is an example of improper 
tactics to extract financial benefits from the Claimant.  Claimant A 
also complains of improper threats of criminal prosecution, which 
forced Claimant A's expatriate manager to depart Kazakhstan.   In 
April 2008, an Almaty Court ruled in favor of local regulatory 
authorities, levying a USD 148 million fine against Claimant A for 
alleged anti-trust violations in its electricity sales.   On May 30, 
2008, Claimant A publicly announced it had completed the sale of its 
ownership stake in a local power plant and coal mine to a 
Kazakhstani company, though it would continue to serve as manager 
and operator of the two facilities.   While the sale was reportedly 
very profitable for Claimant A, it appears to have been partly 
motivated by Claimant A's regulatory problems with Kazakhstani 
authorities. 
 
The USG is in regular contact with Claimant A and has on multiple 
occasions appealed to the Kazakhstani government in support of a 
just and fair resolution of the company's disputes with the 
authorities. 
 
3. (SBU) a.  Claimant B 
 
b.  2001 
 
c.  In July 2001, the Kazakhstan Ministry of State Revenue (MSR) 
performed an audit and determined that Claimant B, a subsidiary of a 
U.S. parent company, owed USD 29 million in taxes.  The assessment 
was based on MSR's finding that USD 100 million received by the 
Claimant from a customer as reimbursement for capital expenditures 
incurred by Claimant in modifying a barge rig was taxable income. 
(The customer was the operating consortium of the offshore Kashagan 
oil field.)  Claimant B challenged the decision in Astana City 
Court, which ruled in the Claimant's favor, holding that the 
reimbursements were not, in fact, taxable income.  Following an 
appeal by the MSR, Kazakhstan's Supreme Court ruled in favor of 
Claimant B in March 2002. 
 
The Kazakhstani tax authorities subsequently appealed the March 2002 
decision.  In May 2006, the Supreme Court reversed itself, ruling in 
favor of the Kazakhstani tax authorities.  Claimant B subsequently 
contacted the USG.  The USG's efforts to negotiate a final 
resolution with the Kazakhstani authorities in accordance with our 
bilateral tax treaty did not meet with success.   In April 2007, the 
Kazakhstani Supreme Court granted to Claimant B a Supervisory Panel 
Appeal.  In July 2007, the Supreme Court's Supervisory Panel ruled 
against Claimant B.  Claimant B subsequently appealed the interest 
assessed on the tax liability.  In February 2008, the Atryrau 
Economic Court ruled that the interest was payable only from October 
2005, not from the original 2001 tax assessment date.  In March 
2008, the Claimant publicly announced that, in accordance with this 
ruling, it had made a reduced tax payment, and that it now 
considered the tax dispute to be resolved.   Claimant B noted that 
it would receive a foreign tax credit for this payment against 
future payments which would otherwise be paid to the U.S. Treasury. 
 
 
4. (SBU) Claimant A:  AES Corp.; Claimant B: Parker Drilling, Inc. 
 
 
ASTANA 00001164  002 OF 002 
 
 
ORDWAY

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