RS From problem to solution Transfer pricing

Transfer pricing

March 2013

New tax control rules on transfer pricing have been in force for more than a year in Russia. These rules came into effect starting in 2012 and their goal is to counteract the use of transfer prices for avoiding paying taxes and taking profit out of Russia (by sending it abroad). We would like to point out that May 20th of next year is the deadline for when taxpayers must submit an accounting report to tax authorities on the transactions they completed throughout the year. Consequently, taxpayers must report on their controlled transactions performed during 2012 by May 20th of this year

Prices on transactions between associated entities and transactions equated to them (transactions with black and color metals, oil and oil products, precious metals and gems, transactions with off-shore zone residents, transactions with independent people whose role in upholding contracts is minimal) are subject to control.

The list of associated entitiesis determined based on the characteristics cited in the Russian Tax Code. The Tax Code gives tax authorities the right to try to prove how entities are associated based on other grounds which are not specified directly in the Russian Tax Code, however if the auditors believe that such entities are associated, while the taxpayer does not agree with that then the final decision is made by a court for resolving tax additional charge disputes.

The main requirement of the regulations taking effect in 2012 outlines the pricing tax consequences: the transaction parties should use actual transaction prices (not market ones) for taxation purposes.

Please note that:

Prices on transactions between associated entities and equated to them transactions are subject to control if they impact the size of the following taxes: profit tax for the organizations, personal income tax, extraction tax and VAT (if one of the transaction parties is exempt from paying VAT). If the price of the transaction did not lead to a decrease in the amount of the tax to be paid then this price will not be recalculated for taxation purposes.

Tax authorities have the right to request documentation justifying the prices used.

In order to determine whether or not the prices used are justified controlled transactions must be compared with other similar transactions which do not fall under such control. The following is needed for this:

  • determine the transaction terms which are significant for auditing purposes;
  • separate the terms impacting the price into insignificant, derivative and random ones;
  • select data sources on comparable transactions or establish that such data does not exist;
  • collect and systematize all available data on comparable transactions by using one of the methods which will allow one to determine the real market price or profitability of the audited transaction.

Control for transfer pricing is separated into its own category of tax audits. RS

The auditing company ICLC offers its services on developing policies for transfer pricing.

The following measures are taken when rendering services:

  • conducting audits on the group of companies for the purpose of determining transactions subject to tax control,
  • auditing the compliance of applied pricing methods to the requirements outlined in the current law, making suggestions on changing the pricing system,
  • calculating possible tax additional charges,
  • preparing memorandums and the appropriate documentation for controlled transactions to be submitted to tax authorities.