OJSC Oil Company Rosneft Consolidated Financial Statements

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OJSC Oil Company Rosneft Notes to Consolidated Financial Statements (continued) 20. Income and Other Taxes (continued) Although the Company does not pay tax on a consolidated basis, a reconciliation of expected income tax expense to the actual tax expense for the years ended December 31 is as follows: 2008 2007 2006 Income before income taxes and minority interest 13,119 17,789 4,165 Statutory income tax rate 24.00% 24.00% 24.00% Theoretical income tax expense 3,149 4,269 1,000 Add /(deduct) tax effect of: Change in valuation allowance 102 (42) (94) Effect of income tax preferences (167) (135) (77) Previously unrecognized deferred tax asset – – (539) Adjustments of income tax for prior periods 7 (36) (30) Unrecognized income tax benefits (4) 18 – Effect from the change of income tax rate (956) – – Permanent accounting differences arising from: Non-deductible items, net 373 202 86 Foreign exchange effects, net (814) 276 113 Accrued tax interest 56 177 – Other 158 177 81 Income taxes 1,904 4,906 540 Effect of income tax preferences, in the above table, represents the impact of lower income tax rates for Rosneft and certain of its subsidiaries under applicable regional laws. These laws provide that the income tax exemptions, ranging from 3.5% to 4%, are granted to the oil and gas producing companies which make capital investments, agreed with regional administrations, within the respective region and participate in various social projects. These exemptions are granted on an annual basis. Effect from the change of income tax rate in the above table represents the impact of statutory income tax rate decrease from 24% to 20%. Tax law amendments were enacted by Federal Law No.305-FZ on December 30, 2008, and are effective January 1, 2009. As of December 31, 2008 and December 31, 2007 the Company analyzed its tax positions for uncertainties affecting recognition and measurement thereof. Following the analysis, the Company believes that it is more likely than not that most tax positions stated in the income tax return that reduce the income tax base would be sustained upon the examination by the tax authorities. This is supported by the results of the examinations of the income tax returns which have been conducted to date. During 2007 and 2008, the tax authorities held tax examinations in the Company and its subsidiaries for 2004-2007 fiscal years. The Company does not expect results of examinations to have a material impact on the Company's consolidated financial statements. Tax years or periods prior to 2004 are not subject to examination. 42
OJSC Oil Company Rosneft Notes to Consolidated Financial Statements (continued) 20. Income and Other Taxes (continued) The following table shows a reconciliation of the beginning and ending unrecognized tax benefits for 2008 and 2007: 2008 2007 Unrecognized tax benefits as of the beginning of the year 18 – Increase for tax positions of prior years 38 13 Decrease for tax positions of prior years (6) – Decrease for tax positions due to settlements with tax authorities (36) – Increase of tax positions of the current year – 5 Unrecognized tax benefits as of the end of the year 14 18 The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is US$ 10 million and US$ 12 million as of December 31, 2008 and December 31, 2007, respectively. Accrued liabilities for interest and penalties for income tax totalled US$ 301.6 million and US$ 300.1 million as of December 31, 2008 and December 31, 2007, respectively. Interest for income tax in the amount of US$ 62 million and US$ 89 million were accrued in the consolidated statement of income and comprehensive income in 2008 and 2007, respectively. In addition to income tax, the Company incurred other taxes as follows: 2008 2007 2006 Mineral extraction tax 12,817 9,323 6,342 Excise tax 1,120 861 329 Property tax 261 186 107 Other 612 520 212 Total taxes other than income tax 14,810 10,890 6,990 21. Asset Retirement Obligations The movement of asset retirement obligations is as follows: 2008 2007 Asset retirement obligations as of the beginning of the reporting period 2,130 748 Recognition of additional obligations for new wells 21 11 Accretion expense 120 78 (Decrease)/increase as a result of changes in estimates (371) 909 Acquired liabilities – 908 Disposed liabilities of OJSC Tomskneft VNK – (521) Spending on existing obligations (4) (3) Asset retirement obligations as of the end of the reporting period 1,896 2,130 Asset retirement obligations represent an estimate of costs of wells liquidation, recultivation of sand pits, slurry ponds, disturbed lands and dismantling pipelines and power transmission lines. Russian legislation does not stipulate any funds reservation for purposes of settling asset retirement obligations. 43
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OJSC Oil Company Rosneft Consolidated Financial Statements

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