Management Board Report on the activity of the JSW S.A. for 2012

4.8.2. Administrative proceedings

Besides the tax proceedings described below, the Company is not participating in administrative proceedings that could have a material and adverse impact on its operating activity, financial position and profitability.

Tax proceedings

Proceedings concerning the property tax on underground mine workings

JSW S.A. is a party to administrative court and tax proceedings regarding property tax. The subject of dispute is the classification of underground mine workings and the structures and plant situated in them for the purposes of possibly charging property tax. The dispute concerns the years 2003-2009 and the underground mine workings in the following townships: Jastrzębie-Zdrój, Ornontowice, Gierałtowice, Pawłowice, Mszana, Suszec and Świerklany. The proceedings are pending in connection with the decisions issued by tax authorities specifying the tax liabilities as well as in connection with the Company’s requests to declare an overpayment.

After a beneficial judgment of the Constitutional Tribunal issued on 13 September 2011 (case file no. P 33/09) in which the Tribunal unambiguously precluded underground mine workings (tunnel costs) from property tax and making the tax on plant and facilities located in these underground mine workings dependent on their classification as structures within the meaning of Construction Law, the tax proceedings remain pending.

In all the cases, the Voivodship Court of Administration in Gliwice issued decisions which were favorable to JSW S.A. with respect to the taxation of underground workings and their equipment and the Court generally rescinded tax decisions issued in this respect. However, the rationale for those decisions was challenged by the Local Government Appeal Court in Katowice and also the Local Government Board of Appeals in Bielsko-Biała, which filed cassation complaints with the Supreme Court of Administration against all the judgments which were favorable to JSW S.A. By submitting its answers to the cassation claims, JSW S.A. requested that they be dismissed. Additionally, the Company also submitted a request to the Supreme Court of Administration to examine the cassation complaint pertaining to the Ornontownice Township for 2003 out of order of receipt and stating the reference numbers of the remaining cases in the request. In July and September 2012, the Supreme Administrative Court issued two positive decisions for the mining industry, resolving the issue of underground mine workings following the judgment of the Constitutional Tribunal. The Supreme Administrative Court, quoting in its justification the judgment of the Constitutional Tribunal, shared the view expressed in the judgment mine workings are not subject to property tax, while accepting that facilities and equipment located in the workings may be subject to taxation. The Court emphasized that the tax base cannot take into account the value of the mine working calculated based on excavation costs.

In several JSW S.A. cases, the Local Government Board of Appeals in Katowice has rescinded decisions of the Townships and referred the cases for reexamination. In the proceedings conducted by the townships, it is argued that facilities and equipment located in the workings may be subject to taxation, but at the same time the townships qualify the entire workings (excavation costs) with their infrastructure as taxable objects. As a result of the proceedings conducted by the Townships, JSW S.A. received decisions determining its liability in the same amount as in the original decisions revoked by the Board of Appeals. JSW S.A. has filed appeals against those tax decisions with the Local Government Board of Appeals in Katowice. The position taken by the townships is identical for all the tax proceedings initiated throughout the years. In their decisions, the townships qualify the entire workings (excavation costs) with their infrastructure as taxable objects. In the case of those tax decisions, JSW S.A. has also filed appeals with the Local Government Board of Appeals in Katowice.

The total contested amount in the proceedings pending before public administrative authorities is PLN 169.2 million. In connection with the favorable ruling of the Constitutional Tribunal and the judgments of the Voivodship Court of Administration, as at 31 December 2011 the amount of provisions and liabilities was PLN 65.2 million. As at 31 December 2012 the total provisions and liabilities are PLN 147.6 million, including a provision of PLN 83.4 million and liabilities of PLN 64.2 million.

Proceedings concerning the property tax on rail infrastructure

JSW S.A. is a party to tax proceedings and an administrative court proceeding on charging property tax on land and structures related to rail infrastructure for the years 2007-2009. The subject of the dispute is the scope of the subject matter-related property tax exemption for this type of land and structures in the legal state in force since 1 January 2007. The Company submitted requests for the tax authorities to declare an overpayment in the Ornontowice and Gierałtowice Townships (the Company received a declaration of overpayment from the Czerwionka-Leszczyny Township). The total remaining disputed amount is PLN 1.1 million.

Proceedings on treating payments to employees as tax deductible expenses

The Company was a party to an administrative court proceeding related to the negative individual tax ruling on corporate income tax. The subject of the dispute was the ability to treat as tax deductible expenses the gross disbursements awarded when distributing the net financial result on the date of making them or making the funds available to an employee along with the part of the social insurance contributions financed by the payer of these contributions. The Company received a partially unfavorable individual tax ruling subsequently amended ex officio by the Finance Minister whereby it became totally unfavorable. JSW S.A. submitted a complaint against the amended ruling with the Voivodship Administrative Court in Warsaw, which in its judgment of 6 December 2010 (case file III SA/Wa 160/10) deemed the Finance Minister’s position to be correct. On 5 January 2011 the Company submitted a cassation complaint with the Supreme Administrative Court. On 3 October 2012, the Supreme Administrative Court in Warsaw issued a judgment dismissing the cassation complaint filed by JSW S.A.

Also, on 15 June 2012, the Company submitted a request for an individual tax ruling in this respect, presenting the new factual status (recording accounting events and preparing financial statements in accordance with IFRS). On 18 September 2012, JSW S.A. received a negative individual tax interpretation, which on 4 December 2012 it challenged before the Voivodship Court of Administration in Gliwice.

If the dispute is resolved in favor of the Company, it will be able to classify the higher costs as tax-deductible expenses; as a result the effective tax rate will decrease.

In the identical legal situation, on 5 November 2012, a Group company received a positive interpretation of the Finance Minister, ref. no. IBPBI/2/423-958/12/AP (regarding profit distribution) after a re-examination in connection with the judgment of the Supreme Court of Administration in Warsaw issued on 29 May 2012, file ref no. II FSK 2275/10 dismissing the cassation complaint filed by the Tax Authority.