Taxing authority and tax law
Tax authority: The Federal Tax Service of the Russian Federation
Tax law: The Tax Code of the Russian Federation (the Tax Code)
Relevant regulations and rulings
The transfer pricing rules are stipulated primarily in Articles 20 and 40 of the Russian Tax Code. A number of clarifications from the tax authority and extensive court practice exist; however, these sources are of a non-binding nature.
OECD guidelines treatment
The tax authority does not recognize the OECD guidelines. However, to a certain extent, the Russian Tax Code’s provisions follow these guidelines, insofar as three transfer pricing methods are stipulated (CUP, Resale Minus and Cost Plus), although it is noted that the application of the Resale Minus and the Cost Plus methods differ from the approach set out in the OECD guidelines.
Amendments to the TP law were approved by the Russian Parliament in the first reading on 19 February 2010. Two more readings are still required in order for the draft law to be approved by the president. If the amendments are introduced, the Russian transfer pricing rules will be brought much more in line with international practice, including explicit functional analysis requirements, transfer pricing documentation and reporting on transfer prices and policies when filing a tax return. However, certain differences will remain between the expected Russian rules and OECD practice. In relation to the treatment of restructuring the draft law does not introduce any new provisions.
The targeted introduction date of the proposed TP rules is 1 January 2011; however, given the recent postponement of the second parliamentary reading, the introduction might be delayed until mid 2011 or even 1 January 2012.
Priorities/pricing methods
There are three methods mentioned in the Tax Code: CUP, Resale Minus and Cost Plus methods. In the Tax Code, the three methods are set out in a strict hierarchy. The Resale Minus method is used only if there is no information available about the prices used in identical or similar transactions by independent entities, and the Cost Plus method is applied only if both the CUP and the Resale Minus methods are inapplicable. The Resale Minus and Cost Plus methods are tested at the operating margin level, which in effect makes them similar to the OECD guidelines’ TNMM method.
Transfer pricing penalties
There are no specific transfer pricing penalties. In case of a tax assessment as a result of a transfer pricing adjustment, the tax authority will charge the tax itself and interest, which is calculated as 1/300 of the refinancing rates of the Russian Central Bank for each day while the tax was underpaid. The current refinancing rate is 7.75%.
The tax authority may also seek to charge a 20% penalty (40% in the case of a deliberate tax violation), and although the Tax Code does not provide the tax authority with the right to do so, it has been successful in imposing such penalties in a number of court cases.
Currently, transfer pricing documentation is not required. However, the above-mentioned proposed amendments stipulate the obligation to have such documentation for certain transactions (and corresponding fines for its absence). However, recent indications from the Ministry of Finance suggest that the introduction of explicit TP penalties will be delayed by two years after the introduction of the amended TP rules.
Penalty relief
Penalties are not imposed if the taxpayer voluntarily pays the tax before the tax authority indicates the tax underpayment.
As noted above, there are no specific transfer pricing penalties in the Tax Code and the court practice has been of conflicting nature in this area. In some cases, there were penalties imposed by the tax authority for transfer pricing violations, but these were cancelled by the court (generally, based on the grounds that transfer pricing rules are of an estimative nature rather than a precise tax calculation). At the same time, there are at least three court cases at the level of the Federal Arbitration Court where the court upheld both the transfer pricing adjustment and the penalty imposed by the tax authority.
Documentation requirements
There are no specific documentation requirements under the current Russian transfer pricing rules.
Documentation deadlines
As there are no specific documentation requirements currently, documentation deadlines are not applicable.
Statute of limitations on transfer pricing assessments
The general rule is that the tax authority may audit the taxpayer for up to the three years before the year that the audit is conducted. For example, if the tax audit is performed in 2010, in addition to 2010, the tax authority can audit 2007, 2008 and 2009. In a case where it is proved that a taxpayer acted in “bad faith,” including where a taxpayer actively prevented the tax audit procedures, the statute of limitations could be expanded.
Return disclosures/related-party disclosures
There are no disclosure requirements at the present time. However, the expected amendments to the transfer pricing rules would require the disclosure of transactions with related parties and also other types of third-party transactions which would remain subject to TP control (e.g., transactions with parties located in low-tax jurisdictions and cross-border sale of oil and oil products, minerals).
Audit risk/transfer pricing scrutiny
If the proposed amendments to the Russian transfer pricing rules are introduced and as the authorities become more experienced at implementing legislation which conforms more closely to OECD guidelines, it is likely that the level and effectiveness of transfer pricing scrutiny will increase from its historically relatively low level. For example, as of 2009, based on the available data, the tax authority only succeeded in approximately 15% of the transfer pricing tax court cases. Although taxpayers win the majority of transfer pricing cases, the tax authority continues to increase the number of cases they take to courts at the federal level year by year, and in 2008, more than 750 court cases, but in 2009 this figure decreased to 672 (the number of cases does not include cases at lower levels of the Russian court system) court cases included references to the transfer pricing rules. Out of those cases, it is estimated that approximately 20% were primarily focused on transfer pricing issues.
The risk of a transfer pricing audit in Russia would be estimated as medium.
APA opportunity
APAs are not allowed under the current legislation, but it is included in the draft law. The APA program would be available from 1 January 2012 and at the initial stage it might be available only for “major taxpayers.” Both unilateral and bilateral APAs are expected to be available.
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