The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
Oct. 5 — A draft template for Russia's new corporate income tax return form will require taxpayers that control foreign corporations to provide profit calculations and other new information on their controlled foreign companies (CFCs).
The updated tax return will replace the form in use since November 2014, and will introduce a section reflecting the amount of tax calculated from the taxpayer's share of CFC profits.
The change—under consultation through the Federal Tax Service until Oct. 13—is part of Russia's attempts to finalize the rules for controlled foreign companies, rules respond to the risk that taxpayers with a controlling interest in a foreign low-taxed subsidiary can shift income into the low-taxed subsidiary and avoid taxation.
The process began with the 2014 “de-offshorization law” N 376-FZ, which introduced taxation of undistributed profits of foreign companies, trusts or other structures controlled by Russian tax residents (24 Transfer Pricing Report 824, 10/29/15).
The 35-page tax return form requires legal entities or individuals that exercise control over foreign companies to provide detailed information about the CFC, including the CFC's number; full title in Russian and English transcription; country code; registration number in the country of incorporation; tax identification number in the country of incorporation; address, and date of the registration.
The form requires calculation of the tax on profits of the CFC based on its financial accounting statements, taking into account—among other figures—profits (losses) before tax; adjusted profits (losses), including paid dividends, revenues from sales of securities to the advantage of the beneficiary, etc; the amount of profit (loss) after adjustments and the amount of loss decreasing the tax base for the reported tax period.
According to Article 309 of the Tax Code, the CFC's profits can be calculated on the basis of its financial accounting statements if its residence country has an international tax treaty with Russia, or if an audit report on its financial statements does not contain a negative opinion.
The government is also suggesting the inclusion of detail relating to calculation of carrying-forward losses and calculation of the CFC profits (losses) for securities transactions and financial futures instruments.
Taxpayers are expected to complete and file the new tax return to the tax authorities March 28, 2017, for the 2016 accounting period.
By March 20, 2017, Russian taxpayers are also obliged to notify the authorities—through additional documents—of ownership of more than 10% of the shares in a CFC, within one month of the acquisition date, as well as their participation in CFCs, for controlling entities and individuals that include income earned by a CFC within their own taxable income for 2016.
While the notifications will provide tax authorities with the information about foreign companies that Russian tax residents own and control, the tax form facilitates the calculation of the actual tax amount for the CFCs undistributed profits, Ekaterina Lazorina, a Moscow-based partner at PwC, told Bloomberg BNA by phone on Oct. 4.
CFC undistributed profits are taxed at 20 percent for legal entities and 13 percent for individuals. Failure to submit notifications will net fines of 50,000 rubles ($800) to 100,000 rubles ($1,600), while failure to report and pay tax on a CFC's income results in a 20 percent penalty on the underpaid tax. Penalties take effect from Jan. 1, 2017.
Lazorina told Bloomberg BNA that the draft template of the tax form contains multiple shortcomings. For instance, the current version of the draft doesn't allow the taxpayer to adjust the tax base based on their proportionate share of a CFC's income.
The draft template also doesn't provide for when the controlling entity exercises control over the company via other controlling entities, in which case the legislation allows to offset the profits already taken into account by such entities.
There are also parts of the form which don't account for a credit for profits tax calculated in accordance with foreign legislation, and the profits tax calculated for the CFC permanent establishment in Russia.
“The draft is currently under discussion, so it is a good moment for the taxpayers to contribute their feedback, since the tax authorities will review this draft form taking the comments into consideration,” Lazorina said.
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The decree, the draft tax return form and the draft guidance for tax return filing, in Russian, are available at: http://regulation.gov.ru/p/48655.
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