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. Last Updated: 07/27/2016

U.S. Giant Charged With Tax Fraud

Russia's tax authorities have honed in on U.S. pharmaceutical giant Johnson & Johnson for tax evasion, filing criminal charges against the company's two expatriate executives.

The Moscow tax inspectorate said Wednesday that Johnson & Johnson was holding back 117 million rubles ($18.9 million) in back taxes and in nonpayment fines.

Johnson & Johnson's former Russia director John Bailey and chief accountant Wayne Blanchard have been charged with tax fraud, and face heavy fines and a four-year prison sentence if convicted.

This case marks the first in which the tax inspectorate has launched criminal proceedings against a foreign company, said head spokesman of the Moscow tax inspectorate Yury Lavryonov.

A Johnson & Johnson spokesman, however, said the company had received no notification of any criminal proceedings.

"Our people are very surprised," said Jeff Leebaw, a spokesman from the company's New Jersey headquarters. "We have been in active discussions with federal tax authorities over the past several months about paying the taxes and penalties over a period of time, which Russian law allows."

Leebaw said Johnson & Johnson intends to pay its entire current tax obligation. The company has already paid $28 million in Russian taxes since it set up its offices in 1992.

Still, tax authorities say the company's previous payments aren't enough. In 1996 inspectors launched an audit of the company and found it owed 23.64 million rubles in profit, advertising and value-added taxes for years 1994, 1995 and part of 1996, Lavryonov said.

Johnson & Johnson contested the results in three separate arbitration court cases, all of which were decided in favor of the inspectorate, Lavryonov said. Last week, authorities sealed off the company's car park, which houses 89 Zhiguli cars, he said.

"There are a few companies that think our Russian laws are not to their liking, but they are still obliged to follow them," Lavryonov said.

"No one should think we are targeting Johnson & Johnson because they are a foreign firm," Lavryonov added. There are about 10,000 foreign companies in Moscow, about 1,500 of which are now under scrutiny. "And in cases like these, it is normal to come down on the director and chief accountant."

The tax police are obliged to audit Moscow's 596,000 companies once every two years. So far they've checked 34,000, most of which are legal, Lavryonov said.

Neither Bailey nor Blanchard was in town when the criminal proceedings began July 16. Bailey left Russia in January after his contract ended. Blanchard is on vacation in the United States until next week, his office said.

Tax specialists said Johnson & Johnson's situation could have been caused by accounting errors, as the current tax code is ambiguous and conflicting.

However, they said it is rare that a tax audit would go so far as to incite criminal proceedings.

"It either happens when there is political pressure from the government, or when negotiations to resolve the situation have gone as far as they can go and the government gets frustrated," said Polina Jaeger, a tax partner at Ernst & Young.

Tax inspectors have been more active ever since Boris Fyodorov took over as new chief, businessmen said. This latest targeting is no surprise.

"Fyodorov is doing exactly what he said he was going to do, and that is to crack down on high-profile offenders and send a message to the community," said Guy Marchand, a member of the European Business Community. "It is frightening. ... We are lucky the European companies are not so visible."

Johnson & Johnson is a multinational company with yearly sales of about $22 billion, of which their Russian operation accounts for just $100 million, sources who wished to remain anonymous said.