New Russian transfer pricing rules that took effect Jan. 1 are largely based on guidelines of the Organization for Economic Cooperation and Development, but owing to their interaction with domestic tax law, they also contain some "peculiarities" that can trigger transfer pricing for both unrelated companies and related companies operating only within Russia, a practitioner in Moscow said Jan. 27.
"It is important to understand where these rules crop up and what areas you might need to address that you wouldn't ordinarily expect to address under transfer pricing rules in other systems," Alexander Chmelev, of Baker & McKenzie's Moscow office, said in a webinar sponsored by the law firm and Bloomberg BNA.
The new regime replaces transfer pricing rules that were unique to Russia, including a safe harbor for demonstrating compliance with the arm's-length standard (20 Transfer Pricing Report 305, 7/28/11), Chmelev said.
Among the changes adopted was the creation of an advance pricing agreement program for large taxpayers and the elimination of the 20 percent safe harbor that had "effectively made transfer pricing not much of a consideration in Russia," Chmelev said.
The new rules make transfer pricing an important issue in Russia, he said, but they also can create some pitfalls for taxpayers accustomed to transfer pricing in other countries.
'Special Relationship,' Domestic Companies.
For example, the Russian Tax Code provides that transfer pricing can attach to a situation where a court has determined that a "special relationship exists that affects the transaction, even if there is no true relatedness that is apparent," Chmelev said.
In addition, certain types of cross-border transactions involving international commodities such as oils or metals—or transactions with companies in jurisdictions on the Russian Ministry of Finance's blacklist—can be covered by Russia's transfer pricing rules.
"So although companies that fall under these rules may not be related, they will still be covered by Russian transfer pricing," he said.
Transfer pricing extends to transactions between domestic companies as well, he noted. The rationale, he said, lies in the way Russia's 20 percent corporate profits tax is apportioned. Only 2 percent goes to the federal budget, but 18 percent goes to regional budgets.
"So it is important for the Russian tax system to get the tax take right, depending on what region different companies are located in," he said. The system also is intended to "address situations where, in transactions between two [related] companies, one might be subject to special tax exemptions or may have losses."
Need for Russian Comparables.
Chmelev cautioned that U.S. taxpayers should not think they can simply take their U.S. transfer pricing reports and translate them into Russian, because Russian transfer pricing rules require that taxpayers use Russian comparables. If they cannot use Russian comparables, they must show that such comparables do not exist.
Another new element is that taxpayers must file a notification of controlled transactions by May 20 after the close of their tax year. After that, the federal tax services can request documentation—and the taxpayer will have 30 days to submit it.
"That essentially means taxpayers need to prepare their documentation and have that ready by the end of June in the event the federal tax service does request it," Chmelev said.
Choice of Documentation.
Taxpayers have the option of filing a short-form report, which does not go into a detailed analysis, or a long-form report, which essentially is a "full blown" transfer pricing study, he said.
"Which route you go essentially affects the burden of proof," Chmelev cautioned.
If a taxpayer files a short-form report, the federal tax service can, in doing an audit, conduct its own study and arrive at its determination of what the transfer price should have been.
"If you challenge what they determined you have an uphill struggle," he said.
But if a taxpayer files a long-form report, it will be in a much stronger position, because "the federal tax service cannot simply do its own [transfer pricing] study and ignore your study," he said. "It actually has a much higher burden of proof to show your study was incorrect."
Two Audits Possible.
Another important consideration, he said, is that under the new transfer pricing regime, a special department has been set up in the federal tax service to conduct transfer pricing audits. This means that taxpayers could be facing two audits—one from the specialized transfer pricing team, and a regular audit from the regular federal tax inspector.
"What this can mean is, if we take intergroup charges, you will have the federal tax service looking at the transfer pricing issues for those charges. At the same time, or in a totally separate audit, you will have the tax inspector looking at those same charges" and determining whether they are justified economically or whether they have a business purpose and therefore should be an allowed expense.
"Those two audits may happen at very different times and will be quite independent of each other," he said.
By Dolores W. Gregory
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