Exxon Mobil, the world’s largest oil company, filed a lawsuit against Russia at the Stockholm Arbitrage Court claiming that it overpaid taxes on a project in the country.

Exxon Mobil

Exxon Mobil’s complaint

In its complaint, ExxonMobil said it overpaid $500 million in value added tax (VAT) to the Russian government on its Sakahlin-1 oil and gas project.

The oil giant claimed that its subsidiary ExxonNeftegas paid excess tax over the past six years after Russia reduced its tax rate from 35% to 20%.

The Russian government reduced the profit tax for production sharing agreements such as Exxon Mobil’s Sakhalin-1 project in 2008. Its subsidiary continued to pay the original rate of 35% based on the original agreement in 1995 despite the reduction.

Exxon Mobil is the major operator of the Sakhalin-1 project. It owns a 30% stake in the Russian Far East project while Japan’s Sodeco and India’s ONGC owns 30% and 20% stakes, respectively. It is the largest recipient of direct foreign investment in Russia. The project produced 7 million tons of oil or approximately 140,000 barrels per day in 2013.

Exxon Mobil is asking Russia to reimburse 50% of the $500 million overpaid taxes as a compromise. The oil giant is also demanding the Russian government to reduce its future VAT payments to the current rate of 20%.

Last month, Exxon Mobil CEO Rex Tillerson engaged in a negotiation with Moscow regarding the issue, but the parties failed to reach an agreement.

Russia is considering an out-of-court settlement with Exxon Mobil

Russia is preparing a response to Exxon Mobil’s complaint, and it is considering an out of court settlement.

Russian Energy Minister Alexander Novak said the government is considering Exxon Mobil’s request regarding the issue of reducing its tax payment to the current rate.

Exxon Mobil and Rosneft developed a close relationship in recent years. The companies have joint projects in the Arctic and Far East. The American oil company was forced to stop its offshore operation in the Arctic in September due to Western sanctions against Russia. In February, it reported $1 billion losses from joint ventures with Rosneft due to the frozen projects.

Exxon Mobil continued to buy rights to develop oil deposits in Russia although it suspended its operations in the Arctic. The company’s oil assets in Russia increase by 450% last year.