New Russian tranfer rules - AllIURIS

DECEMBER 2011
NEW RUSSIAN TRANSFER
PRICING RULES
in effect from January 01, 2012
CONTENTS:
INTRODUCTION
RELATED PARTIES
CONTROLLED TRANSACTIONS
TRANSFER PRICING METHODS
TRANSFER PRICING DOCUMENTATION
TAX CONTROL, LIABILITY AND SYMMETRIC CORRECTIONS
PRACTICAL ISSUES

INTRODUCTION
Starting from the January 01, 2012 after a long period of debates new
transfer pricing rules shall finally come into force in Russia. Thus, a step
forward will be taken to adjust the Russian tax legislation to the OECD
Transfer Pricing Guidelines and international transfer pricing principles.
Generally, Russian and foreign businesses are expected to gain more
transparency and clarity.
The key changes include a new definition of related parties which has
been precised as well as new regulations on controlled transactions and
pricing control by the Russian tax authorities based on comparison with
the market level and profitability of related parties’ transactions.
RELATED PARTIES
The parties are deemed to be related:
if one party directly or indirectly participates at least 25% in
another (previously – 20%), or
if one party to transaction is entitled to appoint more than 50% of
the board of directors of another party, etc.
The notion of related parties shall apply not only to the enterprises
incorporated in accordance with the Corporate Law, though. Such relation
may result, as earlier, from other circumstances i.e. family ties or kinship
connections. From now on there will be eleven criteria for that instead of
only three as previously. Such relation may also be established by court
based on other grounds. Of novelty is that in the cases not specified by
law enterprises may declare themselves as related under certain
circumstances.
CONTROLLED TRANSACTIONS
According to the new transfer pricing rules the tax authorities’ control
shall apply to the controlled transactions which are the transactions
between the related parties and specific transactions between entities
which are not considered as related. Specifically enumerated are the
following transactions:
cross-border transactions between related parties;
cross-border transactions dealing with the exchange-traded goods
on the condition that the transaction revenue with one entity
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exceeds RUB 60 million annually;
transactions with the entities based in the jurisdictions “blacklisted”
by the Russian Ministry of Finance (offshores) if the revenue
from the transactions with one entity exceeds RUB 60 million
annually;
transactions between related parties on the Russian domestic
market inasmuch as their proceeds in 2012 exceed RUB 3 billion
(as from 2013 RUB 2 billion, as from 2014 RUB 1 billion);
transactions between related parties which are conducted through
intermediates whereby the latter run no risks, assume no extra
functions and use no property;
other transactions between related parties on the Russian domestic
market with annual revenue from such transactions from RUB 60
million, particularly, if one of the parties to the transaction is
exempted from the profits tax.
Excluded from this general rule, however, are particularly the
transactions:
whereby the contracting parties constitute the consolidated group
of taxpayers, or
which parties are Russian enterprises registered in the same
federal subject of the Russian Federation having no separate
subdivision in other federal subjects of Russia or outside Russia
and having no losses for tax purposes.
TRANSFER PRICING METHODS
The TP methods have been extended up to five:
comparable uncontrolled price method;
resale minus method;
cost plus method;
transactional net margin method; and
profit split method.
Application of the comparable uncontrolled price method shall prevail. The
tax authorities may also apply a combination of two or more methods. If
the market level price with regard to a certain transaction on the basis of
the above methods could not be determined then an independent
appraisal may take place.
There has been retained the presumption of the “arm-length” price
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applied in controlled transactions, whereby the tax authorities in case of
doubt must prove if they think it otherwise. This determination has been
extended by the right of the taxpayer to correct the tax base in the
contract independently if the contract price appears below the market
level.
TRANSFER PRICING DOCUMENTATION
Now the enterprises are under obligation to notify the tax authorities and
submit to them the documentation related to the controlled transactions.
But this applies only subject to the total amount from the controlled
transactions between the two entities exceeding RUB 100 million
annually. This threshold value will be reduced down to RUB 80 million in
2013, with no restrictions applied as from 2014. The tax authorities may
request the documents to be submitted. The taxpayer is obliged to
provide them within 30 days. The taxpayer may also submit other
documents and additional information beyond the required by virtue of
law to prove that transactional pricing is at the market level. Moreover,
the major taxpayers may enter into advance pricing agreements with the
tax authorities prior to intended transactions which might mitigate tax
risks in advance.
However, the above obligations in relation to the documentation do not
apply to:
taxpayer’s transactions with parties which are treated as nonrelated
to such taxpayer;
transactions which pricing set forth by the Russian Anti-Monopoly
Service;
securities and futures trading on the organized equity market;
transactions with regard to which the advance pricing agreements
with the tax authorities are concluded.
TAX CONTROL, LIABILITY AND SYMMETRIC CORRECTIONS
Starting from January 01, 2012, the tax authorities may conduct in
relation to the controlled transactions a new form of tax audit, which may
be performed independently from the currently existing on-site and field
tax audits. New transfer pricing rules make also the “symmetric”
correction of tax obligations of one of the contracting parties possible if
another party has been subject to tax charge by results of TP tax audit. If
the tax authorities discover that prices have been determined incorrectly
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significant penalties may be imposed. This penalty, however, shall apply
starting from 2014 and shall amount 20% of the underpaid tax. The fines
and penalties will be increased up to 40% of the underpaid tax as of
2017.
PRACTICAL ISSUES
Given the new transfer pricing rules, the businesses are currently
challenged with the responsibility of clarifying the issue to what extent
they will get affected by these new transfer pricing regulations. It will
consequently mean that the businesses will have to review the pricing
methods used by them, introducing appropriate corrections if required.
Moreover, the businesses will have to take all precautions and use their
best efforts to make their transfer pricing documentation comply with the
statutory requirements.
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Contacts:
Thomas Brand
Lawyer
Partner
E-Mail: thomas.brand@bbpartners.de
Mob.: +7 (965) 106 56 11
Tel.: +7 (495) 662 33 65
Fax: +7 (963) 966 33 66
Valeria Khmelevskaya
Lawyer and tax advisor
Partner, Head of Tax Practice
E-Mail: valeria.khmelevskaya@bbpartners.de
Mob.: +7 (916) 171 67 56
Tel.: +7 (495) 662 33 65
Fax: +7 (963) 966 33 66
Note: This information represents only a general overview and does not replace the advice in
particular cases. Any liability for the content is completely excluded.
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