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. Last Updated: 07/27/2016

Johnson & Johnson Pays Taxes Of $6.7M

Russian tax authorities said Monday they have dropped all criminal tax evasion charges against senior executives of the Moscow offices of Johnson & Johnson after the U.S. pharmaceutical giant paid off tax arrears and fines worth millions of dollars.

The Moscow tax police originally filed criminal charges against Johnson & Johnson's former Russia director John Bailey, former financial director Kevin Kohut and former chief accountant Wayne Blanchard in July, holding the three U.S. citizens responsible for the company's unpaid taxes.

The case came as tax chief Boris Fyodorov was promising a vicious crackdown on tax cheats, and was the first in which the tax service launched criminal charges against a foreign company doing business here. As Fyodorov talked of sending tax evaders "to Siberia," Bailey, Kohut and Blanchard were accused of crimes that carried a potential four-year prison sentence.

But on Monday, tax police spokesman Yury Lavrukhin said Johnson & Johnson had cooperated with the investigation and paid the 117 million ruble ($6.7 million) bill in full, and so allcharges had been dropped.

"Johnson & Johnson is a serious company and their attitude [toward paying the tax bill] has also been very serious," Lavrukhin said.

Johnson & Johnson, a multinational company with yearly sales of $22 billion, was also helped out in dollar terms by the collapse of the ruble following the Aug. 17 devaluation and domestic debt default. If the 117 million ruble bill was $18.9 million when assessed in July, by the time it was settled in November it was worth about a third of that.

Johnson & Johnson's Russian operations had estimated yearly sales of about $100 million, experts said.

Kerry McCarter, who has replaced Bailey as Johnson & Johnson's Russia director, confirmed Monday that Johnson & Johnson had paid all back taxes in full and was now in the clear with the tax authorities.

"We are current on all taxes we pay now," he said.

McCarter added the company was still waiting to receive final official notification that the case had been closed. But he said they expected that as a formality. He said the successful conclusion of the matter augured well for foreign businesses in Russia.

"This represents the beginning of a much better working relationship between our company and, I hope, other companies and the tax authorities," he said.

"In this environment, we have to work together to make sure we come out of this present crisis as best as possible."

Throughout the five-month investigation that followed July's criminal charges - during which tax police froze the company's bank accounts - Johnson & Johnson was able to carry on its business without interruption, McCarter said.

"They froze some, but not all, of our assets," he said. "So we continued to do business, and we hope to do so in the future."

Yelena Khokhlova, head of the purchasing department for Uniland, a large Russian wholesaler of home products, confirmed that Johnson & Johnson continued to supply them with goods without a break during the audit and investigation.

The tax authorities had been carrying out checks into Johnson & Johnson since 1994, Lavrukhin said. Along the way, they found irregularities in the payment of value-added, advertising and profit taxes, he said.

Tax experts at the time the criminal charges were announced suggested that such irregularities could have much to do with Russian tax and accounting laws, which are infamously ambiguous.

But tax experts added that it was rare for such a tax audit to result in criminal charges, particularly against a large Western multinational.

Some suggested the criminal charges reflected Fyodorov's new aggressive stance. The former tax chief famously seized some minor Gazprom assets, sent armed men in ski masks to audit Moscow warehouses and began to try to tax the under-the-table monthly rent payments many Muscovites give and receive for living space in the capital.

The new tax chief, Georgy Boos, by contrast has talked less of punitive raids to bring in taxes, and instead has advocated lowering rates, on grounds that this will make people pay taxes more willingly.

Last week, Boos argued for lowering VAT from its current 20 percent to 10 percent. He suggested the immediately lost revenue would be offset by potential new taxpayers.

The Finance Ministry, the IMF and the analysts criticized that logic, arguing that VAT made up nearly half of the budget revenues and was already so easily collected that cutting it would only cut revenues.

Prime Minister Yevgeny Primakov, citing Boos' argument, proposed sending legislation to the State Duma, the lower house of parliament, to cut VAT to 14 percent.