The main provisions of the law:

• A number of additional obligations will arise for taxpayers (in particular, to analyze and detect controlled transactions and prepare and provide transfer pricing documentation).
• Transfer pricing legislation will apply to a wider range of transactions.
• Prices will no longer be permitted to deviate up to 20 percent from market prices, making it more difficult to conduct tax planning. Instead, the concept of arm’s length range will be introduced. Prices in controlled transactions should be established within the arm’s length range.
• Fines will be introduced for breaching the transfer pricing law’s provisions (for example, for underpayment of tax due to not at arm’s length prices applied – the fine will be around 40 percent of the unpaid tax but no less than RUB30,000).

 

As a result, the adoption of the Draft Law will have a significant impact on our clients:

• Existing methods applied by most companies for monitoring transfer pricing risks will be insufficient.
• The list of controlled transactions will expand to include, inter alia:
  • all cross-border transactions between related entities and exchange trades of commodities (oil, metals, etc.)
  • Russian domestic transactions between related entities with an annual turnover exceeding RUB3 billion (for 2012)
  • Transactions with foreign related parties, regardless of the amount involved, and all transactions with residents of offshore jurisdictions.
• The prices that companies currently plan to use for 2012 will be subject to tax audit.
• Depending on the type of transaction, the tax authorities could require special transfer pricing documentation (including all cross-border intercompany transactions) that would have to be prepared in advance.

 

In the near future, it would be reasonable to:

• prepare action plan that would help companies to prepare for when the law goes into effect in 2012
• analyze prices planned for 2012 and corresponding pricing methodology to verify compliance with the law’s requirements
• prepare and implement changes to pricing methodology and agreements’ essential conditions to mitigate tax risk
• prepare transfer pricing documentation, which can be presented to tax authorities during special inspections.