Contrary to the provisions of the U.S. - Kazakhstan tax treaty, in 2001 the Kazakhstan Ministry of Finance began assessing the Parker subsidiary's Kazakhstan branch for taxes on $99 million in reimbursements that the subsidiary received for work performed outside of Kazakhstan to upgrade the subsidiary's drilling barge prior to its importation into Kazakhstan. On two previous occasions the Kazakhstan Supreme Court ruled in favor of the Kazakhstan branch of the subsidiary, holding that the reimbursements were not taxable in Kazakhstan because they were not paid to, or earned by the branch but by the subsidiary before the drilling barge was imported into Kazakhstan. Accordingly, such payments were reported on the subsidiary's U.S. income tax returns.
These earlier rulings are consistent with the U.S. - Kazakhstan treaty, which specifically provides that reimbursements of this nature are not attributable as taxable income to the Kazakhstan branch of the subsidiary in Kazakhstan. The October 2005 assessment by the Ministry, in the amount of $57.3 million at the current exchange rate, is another attempt to tax the Kazakhstan branch on the reimbursements that the subsidiary received from its customer to upgrade Rig 257 prior to its importation into Kazakhstan.
Parker Drilling believes that if accepted for supervisory review by the Supreme Court, which is anticipated within thirty days, the five-member panel will reverse the opinion announced by the Supreme Court three-judge panel today based on the previous two Supreme Court rulings in favor of Parker's subsidiary on the identical issue. Upon learning of the decision, Mr. Robert L. Parker Jr., chairman, chief executive officer and president of Parker Drilling stated, "While we are disappointed that this particular three-judge panel chose not to follow the earlier decisions of the Supreme Court on this issue, we believe that the five-judge supervisory panel will act in accordance with the earlier Supreme Court decisions, which recognized that the U.S.-Kazakhstan tax treaty clearly prohibits this result, and will reverse this decision."
The acceptance of the supervisory review is subject to the discretion of the supervisory panel and it may not be granted. In the event that Parker is not successful in reversing the Supreme Court's decision, Parker currently estimates that the income statement impact of the assessment, based on the October 2005 assessment of $57.3 million, will be approximately $25 to $30 million. Parker believes that any amount that is ultimately paid, including any additional fines and interest that may be assessed, will not materially affect Parker's previously announced capital expenditure and growth programs or its ability to satisfy its debt service requirements for 2006.
In addition to the reversal of the ruling on corporate income tax, the Supreme Court also confirmed the lower court opinion regarding the VAT assessment of approximately $48.8 million against the Kazakhstan branch of the same Parker Drilling subsidiary. As previously reported, the customer of the Kazakhstan branch of the subsidiary has agreed to reimburse the Kazakhstan branch for the amount of the VAT assessment, so this assessment is not expected to have a financial impact on the Company.
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