15 Nov 2021
Transfer Pricing and Customs requirements for importers: the right balance

Transfer Pricing and Customs requirements for importers: the right balance

Wilhelmina Shavshina

EY Associate Partner, Global Trade Services Leader in the CIS, Tax & Law

EY Associate Partner, expert in foreign trade and customs law. She is a travel and Nordic walking buff.

Evgenia Veter

EY Partner, Transfer Pricing and Operating Model Effectiveness Leader for Central, Eastern and Southeastern Europe & Central Asia (CESA)

Partner, expert in transfer pricing. Works with major EY clients in a variety of industries.

15 Nov 2021

In this article for AEB magazine, EY partners Evgenia Veter and Wilhelmina Shavshina share some practical highlights on TP and customs issues.

Integration of the Russian tax and customs authorities is ongoing. Despite the fact that both authorities are assigned different responsibilities, they remain in close cooperation and may exchange information on foreign trade participants and their activities.

In practice, when it comes to setting a transfer price on products imported into Russia, taxpayers have to meet both the tax and customs requirements, i.e.:

  • From the customs perspective, they need to ensure that the customs value of imported goods is not understated due to the fact that interconnection between related parties may influence the transaction price.
  • From the tax perspective, the transfer price should be set taking into account the established transfer pricing (“TP”) policy, each of its elements must be compliant with the arms’ length principle, and the transfer price should not be overstated.

It is critical to find the right balance meeting the regulatory requirements and to ensure that a transfer price set by a taxpayer is acceptable for both customs and tax purposes.

Key compliance requirements

The methodology for determining a defendable price for customs and TP purposes has its own features in each case, however, there are also similarities as outlined below.

  • TP aspects

    A taxpayer is expected to apply the appropriate TP method in order to support an arm’s length level of its intercompany prices. Although the TP methods are to a large extent similar to those recommended by the OECD Transfer Pricing Guidelines, there are some specific points to note:

    • The comparable uncontrolled price (“CUP”) is based on analysis of prices set in comparable third-party transactions with identical or homogeneous products.
    • The resale price method is a priority method for a distributor and is based on gross margin analysis of the distributor.
    • The cost plus method is based on analysis of the gross margin of a supplier.
    • The transactional net margin method is applied based on analysis of the operating profit to be earned by the least complex entity in the transaction.
    • The profit split method is based on analysis of the arm’s length split of the consolidated profit earned by all participants of a transaction.
  • Customs aspects

    When moving products across the customs border of the Eurasian Economic Union, the customs value of the products has to be determined.

    In general, the starting point and primary customs valuation method is that method based on the invoice value of the products, also known as the transaction method. Application of the transaction method may be restricted in situations where the parties in the transaction are related to one another and such a relationship has influenced the transaction price.

    In a case when the transaction method of customs valuation is not applicable, the following methods are applied sequentially:

    • transaction value method of identical goods
    • transaction value method of similar goods
    • deductive method
    • computed method
    • fallback method (method of last resort).

    The customs valuation methods have similarities with the TP methods, however, there is one significant difference between them: except for CUP, the TP methods may be applied to a group of homogeneous transactions whereby customs legislation requires the application of all methods on a transactional basis. This often creates a practical challenge where a taxpayer applies a TP method measuring its operating or gross profit on a bundled basis to a group of transactions or even to the whole entity. In these cases, the customs authorities would still expect application of the customs valuation methods on a transactional basis.


TP documentation for customs purposes: a practical view

Customs authorities pay close attention to the customs value of products moved between related parties. When the buyer and the seller are related, customs may examine the transaction in order to determine whether the relationship affects the price. Therefore, any importer which belongs to a multinational group of companies should be ready to demonstrate that their intercompany relationship did not have an impact on the price of the imported products. This requires a proper set of supporting documents.

The transfer pricing documentation can potentially be used for customs purposes to validate the customs value. However, in our experience, the transfer pricing documentation alone is not easy for the customs authorities to interpret. Moreover, in the worst-case scenario it may even be interpreted as evidence that the intercompany relationship did have an impact on prices. In this regard, in order to support the customs value, it is necessary for customs and TP professionals to work together in order to build up a defense case for customs purposes.

Case studies: practical aspects and highlights

  • Case study: TP adjustments

    Where a TP policy targets an arm’s length return of a Russian entity, it is common to observe that such a TP policy mandates a need for a TP adjustment where the reported margin of the Russian entity is different from the targeted level. Tax and customs implications of such an adjustment are quite controversial.

    • Prospective TP adjustments, where prices are revised only in relation to future transactions, may be possible in Russia. The main practical challenge of prospective price adjustments relates to potential disputes with the Russian customs authorities, which tend to challenge the customs value of imported goods even in case of insignificant price changes. The most sensitive changes for customs are price decreases, however, price increases may also raise questions about the sustainability of prices applied to past deliveries.
    • Retrospective TP adjustments which aim to bring the actual financial result of a taxpayer into line with the targeted result (margin) are not explicitly allowed under Russian legislation. Generally, they may be possible to the extent that they do not reduce the tax base in Russia. The only exception to this rule allowed for a cross-border transaction is an adjustment secured by way of a bilateral or multilateral advance pricing agreement. Practically, this means the following:
      • an upward TP adjustment (increasing the tax base in Russia) is generally possible and quite often used in practice. However, there should be an appropriate mechanism (form) used for these purposes in order to meet legal, accounting and tax requirements. From the customs perspective, such an upward TP adjustment would not qualify for a refund of customs duties and taxes;
      • a downward TP adjustment (decreasing the tax base in Russia, for example, a debit note) would most likely be challenged. The tax deduction of such an adjustment is likely to be an issue. Also, the customs authorities would most likely regard a downward adjustment as an understatement of the import price, assess customs duties and attempt to collect penalties for the customs value understatement.

    In practice, when balancing between tax and customs requirements, a good strategy is to set prices in such a way that any need for a subsequent downward TP adjustment is minimized, also avoiding multiple and frequent price revisions. The TP adjustment mechanism needs to be developed upfront, taking into account all applicable requirements: tax, customs, legal and accounting.


  • Case study: a change of operating model

    When a foreign investor is considering a change in its Russian operating model, customs and TP issues often come into play and need to be properly addressed. A common example is a switch from a direct sales model (sales between a foreign group entity directly to Russian customers) to a local sales model (sales through a local marketing and sales entity of the group). If a foreign company opts to stop its direct sales in the Russian market and to transfer the distribution function to a local subsidiary, this inevitably results in a reduction of import prices since the local subsidiary needs to cover its marketing and distribution costs as well as to retain an arm’s length margin.

    From the TP perspective, the local subsidiary becomes subject to local TP documentation requirements if its intercompany transaction value with each of its foreign counter-parties exceeds RUB 60m p.a. From the customs perspective, any reduction in the customs value (as compared to the direct sales model) is a trigger for the customs authorities to initiate control measures which, in the worst-case scenario, may lead to customs value adjustments, including penalties. In addition, the operational process of customs clearance may become more burdensome, thus potentially leading to business disruption. In order to manage such risks, it is important that the Russian subsidiary is fully equipped to justify its transfer prices to the customs authorities and that it has a defense file ready in case of questions around the customs value.


  • Case study: intragroup payments

    The period 2020-2021 has become one of the busiest ones for the business community in terms of tax and customs controversy related to intragroup payments.

    In terms of tax implications, the Russian tax authorities have issued special guidance on the tax treatment and qualification of intragroup services. In this guidance, the tax authorities define specific tests and requirements to be met in order to allow a tax deduction of the related charges, such as a reality test, benefit test, no duplication with any other function, proper documentary support, arm’s length tests and no charges representing shareholder functions. Where services do not meet any of the above tests, the respective fees will not be deductible. Moreover, in case a service is reclassified into shareholding activity, the fees are likely to be treated as a hidden dividend subject to withholding income tax.

    In addition to the tax implications outlined above, the customs authorities have also undertaken a significant number of customs audits during the last few years, where, inter alia, a common theme was the inclusion of various intercompany payments (including dividends) in the customs value of imported products. Court practice on this issue is still developing. Whilst there may be arguments that some of the intra-group payments should not be included in the customs value because they are not related to the imported products and (or) cannot be viewed as a condition of sale of such products, there is already an unprecedented number of controversy cases around this issue with some large multinational companies receiving customs assessments.



The import of products into Russia requires a foreign investor to manage a variety of complex TP and customs issues, as well as to find the right balance between them in order to meet all applicable requirements. The secret to success is a proactive approach in terms of the transfer pricing setup for Russia, with timely involvement of both tax and customs specialists within the organization who should work as a single team.

About this article

Wilhelmina Shavshina

EY Associate Partner, Global Trade Services Leader in the CIS, Tax & Law

EY Associate Partner, expert in foreign trade and customs law. She is a travel and Nordic walking buff.

Evgenia Veter

EY Partner, Transfer Pricing and Operating Model Effectiveness Leader for Central, Eastern and Southeastern Europe & Central Asia (CESA)

Partner, expert in transfer pricing. Works with major EY clients in a variety of industries.