9 November 2014
Major provisions of Federal law No. 227-FZ dated 18 July 2011 "On introduction of amendments into certain legislative acts of the Russian Federation in connection with improvement of principles of price definition for tax purposes" came into effect on 1 January 2012, leading to substantial changes in the Russian legislation on transfer pricing.
Transactions between related parties and certain types of transactions between non-related parties have become subject to transfer control.
The changes that took place in the Russian tax legislation with respect to transfer pricing are to a large extent in line with international principles of transfer pricing published by the Organization for Economic Cooperation and Development (OECD). However, Russian regulations have a number of special features that should be considered, in particular, by international companies operating in Russia. It is possible that the Russian environment shall require adjustment of their global transfer pricing policies.
According to the new rules taxpayers are obliged to notify tax authorities of their controlled transactions until 20 May of the year following the year of execution of controlled transactions (for transactions executed in 2012 – until 20 November 2013); and starting from 1 June of the year following the year of execution of controlled transactions (for transactions executed in 2012 – starting from 1 December 2013) upon request of tax authorities taxpayers are obliged to produce documents justifying arm's length prices for controlled transactions (within 30 days of receipt of the respective request).
The definition of related parties has been broadened. Participation share still remains the major criterion of a related party, namely when one entity (together with its related parties) directly and (or) indirectly participates in another entity and the share of such participation exceeds 25 per cent. In addition to that, as it was provided for before, the court is entitled, having taken into account actual circumstances, to declare entities and (or) individuals related on other grounds should it be established that there is an influence over the terms and conditions or the outcome of transactions due to the relationship between the parties.
Not all transactions between related parties are subject to transfer control but only those that are recognized as controlled transactions subject to the criteria set forth in article 105.14 of the Russian Tax Code.
Who is subject to legislation on transfer pricing?
- entities and individuals that transact with Russian related parties the annual income of which exceeds 100 million roubles if one of the parties of the transaction is a taxpayer applying special tax treatment: a uniform tax for imputed earnings for certain types of activities or a uniform agricultural tax;
- entities and individuals that transact with Russian related parties if:
- the object of the transaction is merchandise subject to mineral extraction tax and taxed at ad valorem tax rate;
- or at least one of the parties of the transaction is exempted from the payment of company income tax or applies a zero per cent tax rate in accordance with item 5.1 article 284 of the Tax Code;
- or at least one of the parties is a resident of the special economic zone (such transactions shall be controlled starting from 2014).
- The said transactions are subject to control if they exceed the threshold of 60 million roubles (the annual transaction amount);
- entities and individuals that have other transactions with Russian related parties if the aggregate amount of revenues (expenses) generated by such transactions in 2012 exceeds 3 billion roubles (2013: 2 billion roubles, 2014: 1 billion roubles);
- entities and individuals that have transactions with foreign:
- related parties (without limitations);
- third parties from countries (territories) included, inter alia, into the List of Countries determined by the Russian Ministry of Finance in accordance with subitem 1 item 3 article 284 of the Tax Code provided that the amount of revenue from such transactions exceeds 60 million roubles.
- third parties with the object of transactions being commodities of the world exchange trade falling into the following commodity groups: oil and oil products, ferrous metals, non-ferrous metals, mineral fertilizers, precious metals and precious stones, provided that the amount of revenue from such transactions exceeds 60 million roubles.
Taxpayers are obliged to submit notices of executed controlled transactions to tax authorities if the aggregate amount of revenue from all controlled transactions executed with one party within a calendar year exceeds 100 million roubles (in 2013 - 80 million roubles, starting from 2014 this limitation is not applied).
Transactions shall not be recognized as controlled if the parties of the transaction are members of one consolidated group of taxpayers (after the law on consolidated taxpayer treatment takes effect), as well as in the event the following conditions are satisfied simultaneously: the parties of the transaction are registered in one subject of the Russian Federation; they do not have separate subdivisions on the territory of other subjects of the Russian Federation; and they do not pay income tax to the budgets of other subjects of the Russian Federation; and they do not have losses applied for income tax calculation; and there are no other reasons for control mentioned above (in respect of which the thresholds of 60 and 100 million roubles are applied).
Please note that for the purpose of determining the amount of revenues for transactions for the calendar year in order to recognize the transactions as controlled based on the respective aggregate amount, the transaction revenues should be summed up for the calendar year with respect to each counterparty to such transactions. Accordingly, generally the fact of exceeding the aggregate amount for recognition of the transactions as controlled shall be established with respect to each set of transactions executed with each related party.
In order to comply with transfer pricing legislation requirements (section V.1 of the Russian Tax Code) companies should work out a set of organizational procedures that shall include:
- detection of controlled transactions,
- collection, processing of information with respect to prices, comparing the adequacy of controlled transactions prices against market prices (profitability),
- preparation and submission of all necessary documentation to tax authorities within prescribed time limits.
The taxpayer is not only obliged to provide information to the tax body with respect to execution of controlled transactions by serving notices, but it is also obliged, upon request of the tax body, to provide it with information with regard to each controlled transaction (a group of similar controlled transactions) by way of showing documentation containing certain details provided for in article 105.15 of the Russian Tax Code. Thus, the documentation shall contain description of the subject of the transaction, types of activities the taxpayer is engaged in, the group structure of the taxpayer, a detailed description of the transaction, information on the functions of the parties to the transaction, the risks assumed by the parties, the assets used (functional analysis).
One of the most important sections of documentation is the choice of method of determining the adequacy of transaction prices compared to market prices, with the types of methods being stipulated by chapter 14.3 of the Russian Tax Code. The Tax Code does not contain provisions matching certain methods with certain types of transactions. Therefore, the taxpayer shall choose the most appropriate method taking into account certain circumstances of the transaction, circumstances of similar transactions with non-related counterparties, open sources of information In order to find similar transactions, companies may need to use specialized databases such as Bloomberg Terminal, Thomson Reuters Eikon, SPARK Interfax and others.
The adequacy of prices applied in a transaction compared to market prices is determined by way of comparing the price (profitability) against the market price range (profitability range). If the transaction price (profitability) does not fall within the computed price range, the taxpayer should evaluate the risks and take the decision on adjustment of the tax base.
To have an understanding of the usual types of procedures required in order to comply with the transfer pricing legislation please see below a sample plan of such procedures with respect to communication of the company’s structural departments in order to comply with transfer pricing regulations (section V.1 of the Russian Tax Code).
Participation of several company departments having necessary information with respect to transfer pricing analysis and reporting shall be required to increase report generation efficiency (the efficiency of producing notices and documentation with respect to controlled transactions) in order to comply with transfer pricing regulations.
Well-organized communication of company departments shall speed up the process of reports’ generation and shall improve the quality of reports.
FinExpertiza advisors have developed a sample plan wherewith you can estimate the number of necessary procedures and the time for their implementation as well as the number of departments involved required to comply with the transfer pricing requirements. Direct application of the recommended plan in particular circumstances shall require its adaptation subject to the existing organizational structure of the company and the functional profile of its departments.
|SAMPLE PLAN OF PROCEDURES WITH RESPECT TO COMMUNICATION BETWEEN COMPANY’S STRUCTURAL DEPARTMENTS IN ORDER TO COMPLY WITH TRANSFER PRICING LEGISLATION REQUIREMENTS|
|#||Name of the procedure||Time for implementation||Responsible department||Notes|
|1||Identifying related parties and parties with similar status||Until 31.01||Legal department, corporate security department||The status of related parties is established based on the criteria indicated in article 105.1 of the Russian Tax Code|
|2||Agreeing the final list of related entities and individuals||Until 05.02||Department responsible for compliance with the requirements of Section V.1 of the Russian Tax Code (hereinafter, responsible department)||Responsible department agrees the list.|
|3||Producing the register of transactions with related parties and parties with similar status for the reporting year||Until 15.02||Department of bookkeeping and tax accounting|
|4||Producing a comprehensive list of transactions with related parties and parties with similar status||Until 20.02||Responsible department||The list shall be filled in with details of contracts, subjects of transactions. Responsible department shall communicate with appropriate department with regard to provision of necessary contracts.|
|5||Identifying controlled transactions||Until 22.02||Responsible department||Controlled transactions ar selected out of the list of transactions with related parties and parties with similar status taking into account the criteria set forth in article 15.14 of the Russian Tax Code|
|6||Arranging similar controlled transactions in groups||Until 25.02||Responsible department|
|7||Agreeing the final list of controlled transactions (groups of transactions)||Until 28.02||Responsible department||Notices are completed and documentation is prepared in accordance with the final list.|
|8||Preparing notices and documentation with respect to all controlled transactions (groups of transactions)||Until 01.05|
|9||Providing information on the type of business, major competitors, factors influencing pricing||Up to 2 days for 1 request||Marketing department||This information is required to complete documentation.|
|10||Providing information on transaction profitability||Up to 2 days for 1 request||Economics department||This information is required to apply methods based on profitability provided for by the Russian Tax Code.|
|11||Agreeing, adjusting and submitting notices to the tax body||Until 20.05||Chief accountant and the responsible department|
|12||Agreeing, adjusting and approving documentation||Until 01.07||Chief accountant and the responsible department|
|13||Submitting documentation to tax bodies||30 days from the day of receipt of request||Chief accountant and the responsible department||Item 6 article 105.17 of the Russian Tax Code. There is no option of extending the time for submission of documents.|