Russia: Transfer Pricing

Russia: Transfer Pricing

3 min.

On January 1, 2012, section V.1 of the Tax Code (TC) came into force, regulating the prices of transactions between related parties.

Certain provisions of the new law were deferred until 2013 and 2014. For some companies transfer pricing was not an issue in 2012 and 2013 due to the threshold of 100 million rubles for 2012 and 80 million rubles for 2013, but beginning in 2014 all external economic operations between related parties are subject to transfer pricing control.

Scope of transfer pricing control
The provisions of the new TC section largely correspond to the principles of the OECD Transfer Pricing Guidelines but have a number of national specifics. Prior to the amendments of the TC, not just transactions between related parties were subject to tax regulations, but almost any transactions if their prices differ by more than 20% from prices applied by independent parties (“market prices”).

The new rules apply mainly to transactions between related parties as well as to those defined as equivalent. The latter include foreign trade transactions with goods traded on world commodity markets, transactions with offshore residents and not-direct transactions between related parties through the mediation of independent third parties.

Transactions between related parties in the domestic market are subject to tax control only if they reach a specified monetary level, while the new transfer pricing rules always apply to external economic transactions between related parties. Tax transfer pricing control is carried out to verify the correctness of the calculation and payment of profit tax, tax on personal income, tax on the extraction of minerals and VAT.

Related parties
Compared to rules used before January 1, 2012, the new TC section expanded and specified the definition of what related parties are. Courts have the power to recognize parties as related for other reasons.

Market prices
In general, the new rules for determining market prices require that prices in controlled transactions correspond to the level of prices in comparable transactions between independent parties. The new TC introduced the procedure for calculating the price range within which the prices of goods and services must be set. This requires the application of certain transfer pricing methods.
The primary method is that of comparable market prices. Other methods can be applied only if this one cannot be used or if its application doesn’t allow an informed conclusion about compliance of the prices used in the transactions with market prices. For what are termed the largest taxpayers, the tax authorities may conclude agreements on pricing for tax purposes.

Documentation and reporting on transfer pricing
Taxpayers are required to maintain documentation on transfer pricing that contains information on the price applied in the transaction. No form has been established for such documentation. Tax authorities may require taxpayers to provide transfer-pricing documentation. Such documentation must be provided within 30 days of receipt of the request. However, the tax authorities have no right to demand such documentation before June 1 of the following year.
Taxpayers are required to provide to the tax authorities notice of controlled transactions in the prescribed form not later than May 20 of the following year.

Penalties
Starting in 2014, transfer pricing penalties amounting to 20% of the unpaid tax (as of 2017: 40 %) will be applied if the price (profitability) deviates from the market range and entails underpayment of tax.

Author
Liubov Stavrova
liubov.stavrova@ecovis.com

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