Transfer Pricing

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The new rules of the game

It’s been over three years now since Russia’s new price control regulations for tax purposes (“transfer pricing rules” or “TP rules”) were enacted and took effect. Over this time, a new understanding has developed of how the new rules are applied in practice. The Russian Ministry of Finance (MinFin) and Federal Tax Service (FTS) have taken an active stance in providing extensive guidance on various issues related to how the new transfer pricing rules should be applied. The MinFin and FTS’ outreach efforts have included holding conferences and taking part in panel discussions with the business community. They have also issued official letters and clarifications, and provided procedural guidance on applying specific articles of Section V.1 of the Russian Federation Tax Code.

In 2012, many corporate taxpayers restructured their intragroup relationships to ensure they would be in compliance with the new TP rules. As part of such efforts, taxpayers identified controlled transactions, revised their current pricing approach, drafted sets of relevant documents, and submitted applications to conclude advance pricing agreements (over 15 such agreements have been concluded for internal Russian controlled transactions). By 20 November 2013, taxpayers submitted their first controlled transaction notifications under the new rules. The tax authorities are currently conducting their first special audits for 2012 and 2013 to check for compliance with TP rules. In addition, to date litigation is still ongoing regarding reviews of the arm’s length level of intragroup transactions that took place before the new Russian Tax Code provisions took effect. There are a number of complexities involved in applying the new TP rules. These include ambiguities in some of the legislative provisions, the time-consuming process of completing tax notification forms, and a lack of clarity regarding the approaches to controlling the arm’s length level of intragroup financial transactions and transactions involving intangible assets. Based on feedback from taxpayers, however, lawmakers are taking additional measures to ease the burden on taxpayers, including:

  • extending the deadline for submitting 2012 controlled transaction notifications to 20 November 2013 (from 20 May, which the Tax Code has established for other reporting periods);
  • extending the time for submitting 2012 TP documentation to 1 December 2013 (from 1 June 2013, which was established in general for other reporting periods);
  • exempting from control certain financial transactions with contractual terms that had been agreed before the new rules took effect, and which remained unchanged during 2012;
  • issuing clarifications regarding potential groupings of certain types of transactions;
  • further developing some additional proposals from the business community (e.g. a bill on cost distribution).

Global experience

In drafting Russia’s new transfer pricing rules, the lawmakers took as their models the Transfer Pricing Guidelines issued by the Organisation for Economic Co-operation and Development (OECD) as well as the practical experience of a number of other countries in implementing their own TP rules. We should point out that the Russian tax authorities are already actively trading notes and sharing their experience with their foreign counterparts, both under relevant agreements as well as during international conferences and roundtable discussions, particularly as regards applying TP rules, conducting tax audits and concluding advance pricing agreements.

Unquestionably, how Russia’s TP legislation develops further will depend significantly on the evolving treatment of various TP issues in global practice. Specifically, the Russian tax authorities closely monitor new recommendations pertaining to TP rules and other OECD regulations governing transfer pricing in OECD member countries. As of today, it’s safe to say that any future revisions of Chapter 6 of the OECD Transfer Pricing Guidelines (Special Considerations for Intangible Property) will likely lead to corresponding amendments in Russian tax law.

Furthermore, in early 2013 the OECD published an Action Plan on Base Erosion and Profit Shifting (BEPS). The plan also covers specific international legislative trends targeted at stemming opportunities for base erosion and the consequent drop-off in government tax receipts. Such issues, which are regularly on the agenda at summits of heads of state and finance ministers, have been a featured topic at numerous roundtable discussions held by the Russian tax authorities as a forum for sharing experience in applying TP regulations.

Despite the similarities between Russia’s TP rules and the OECD Guidelines, the Russian rules do contain some unique features and in some cases differ fundamentally from global practice. So, multinational corporate taxpayers should closely monitor their global intragroup TP policy to make sure it is in compliance with the requirements of Russian tax law, as well make necessary amendments in documents to be filed with Russian authorities so that they meet current standards under the Russian Tax Code.

Our experience with transfer pricing in Russia

PwC Russia’s Transfer Pricing practice group employs professionals specialising in various areas related to the application of TP rules. Over the past several years, our practice group has successfully carried out numerous TP-related engagements for enterprises in various industry sectors, including: energy, mining, automotive, iron and steel, retail, pharmaceutical, high-tech and communications, and legal and business consulting, as well as engagements for banks and financial institutions, etc.

Several of PwC Russia’s transfer pricing professionals have advised members of the Russian Ministry of Finance’s working group on technical issues related to the application of the international TP principles currently in use in OECD member countries, as well as on specific aspects of current TP laws in a number of foreign countries.

On several occasions, PwC Russia has been named the Russian Transfer Pricing Firm of the Year by International Tax Review magazine, an authoritative trade journal in the field of taxation.

Thanks to support from the global PwC network of specialists in transfer pricing services, which includes over 1,500 professionals worldwide, we can offer our clients TP services in any country where they operate, and assist them in resolving complex issues related to documenting and substantiating their prices in controlled transactions.

How can we help?

Among the transfer pricing services that PwC Russia offers are:

  • assisting with drafting TP documentation, including substantiation of methodology used and confirmation of the arm’s length level of prices in controlled transactions, and preparing controlled transaction notifications;
  • conducting diagnostics of transfer pricing risks and recommendations on improving pricing policies, in particular by reorganising production and supply chains, and adjusting the client company’s pricing approach;
  • substantiating the methodology used and confirming the arm’s length level of current prices;
  • advising on the structuring of intragroup transactions following the arm’s length principle, particularly in transfers of intellectual property rights and financial transactions;
  • assisting multinational companies in adjusting their global TP policies to meet the requirements of Russian law;
  • developing and assisting in the establishment of retail and procurement structures;
  • making recommendations on structuring TP functions at the enterprise level and putting in place procedures that ensure effective cooperation between corresponding corporate functions within the overall TP compliance framework;
  • consulting on the development of TP methodologies for services and cost distribution models for management services;
  • developing business processes and internal control systems for ensuring compliance with TP rules;
  • assisting with the resolution of disputes arising from the results of tax audits regarding pricing for tax purposes (including disputes regulated by Article 40 of the Russian Tax Code and the new Tax Code provisions pertaining to price control for tax purposes).
 
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