Russian Ministry of Finance publishes Order on advance pricing agreements involving Russian and foreign tax authorities
MinFin publishes Order on advance pricing agreements
Russian Ministry of Finance publishes Order approving the procedure to enter into advance pricing agreements involving Russian and foreign tax authorities
On 3 May 2018 the Russian Finance Ministry published an order “On Approving the Procedure For Entering Into Advance Pricing Agreements In Respect of Cross-border Transactions In Which At Least One Counterparty is a Tax Resident of a Foreign State That is a Party to a Double Taxation Treaty Involving the Competent Government Authority of the Foreign State” (“the Order”). The Order will enter into force one month after its official publication, i.e. on 3 June 2018.
The Order is designed to plug the existing legal gap caused by an absence of a formal procedure to enter into advance pricing agreements with respect to cross-border transactions involving foreign tax authorities, and to encourage taxpayers to use this tool.
According to the Order, the procedure to enter into an advance pricing agreement (“APA”) contains the following specific features:
- an APA may only be concluded with countries with which Russia has a double taxation agreement (treaty)
- the Federal Tax Service of the Russian Federation (“FTS”) is the competent authority for the mutual agreement procedure and for information exchange
- the FTS may ask the taxpayer to provide explanations related to issues that arise during negotiations with the component authority of a foreign state
- only Russian companies classified as the largest taxpayers can apply to enter into an APA
- the amount of stamp duty to be paid for filing the application to enter into an APA is set at RUB 2 million
- the application to enter into an APA should have the following documents attached:
– a draft APA with respect to cross-border transactions
– other documents stipulated in Paragraph 1 of Article 10522 of the Russian Tax Code, including copies of charter documents, copies of state registration and tax registration certificates, and proof of payment of tax duties
It should be noted that the approved Order does not contain recommendations on the APA structure, or a list of specific applicable documents relevant for entering into an APA, which were cited in the previous draft version of the Order.
However, based on our experience, we expect that the FTS will request the following information related to cross-border transactions:
- a functional analysis
- a description of the market (commercial) strategies of counterparties
- a description of the proposed procedure for determining prices and/or applying pricing methods and the attendant rationale
- an illustration of the results of applying the recommended procedure for determining prices and/or applying pricing methods for the past three years
- critical assumptions and a description of how changes related to these assumptions affect the reasonableness and applicability of the procedure for determining prices and/or applying pricing methods
- any other information relevant to confirming the declared procedure for determining prices and/or applying pricing methods
The stages of creating an APA in accordance with the Order are generally comparable with current international practice, and include:
1. Preliminary discussions (based on a relevant application prepared in any form) to assess the existence of the grounds for entering into an APA, the procedure for determining prices and/or applying pricing methods suggested by the taxpayer, the procedure and timeline for entering into the APA, the prospects for mutual agreement between the competent authorities and its implementation in the Russian Federation.
2. The taxpayer’s formal filing of an application to enter into (amend) an APA with respect to cross-border transactions.
3. Consideration of the application by the FTS, resulting in one of the following decisions:
– a refusal to enter into an APA
– the need to amend an APA draft
– the commencement of negotiations with the competent authority of the foreign state
4. Negotiations with the competent authority of the foreign state that result in the FTS making a decision:
– on the need to amend the APA draft – stamp duty of RUB 2 million to re-examine the application to enter into the APA is not levied
– on concluding the APA, or
– on refusing to enter into the APA if it is not possible to reach a mutual agreement with the competent authority of the foreign state
5. Conclusion of the APA: at this stage, the taxpayer must notify the FTS in a manner of its own choosing about its agreement (disagreement) with the FTS decision. Failure to submit such a notification within 30 days after the receipt of the said decision will be deemed to constitute the taxpayer disagreeing with the decision.
The approved Order is aimed, among other things, at ensuring an economically justified and fair distribution of the tax base between the Russian Federation and foreign states, eliminating double taxation and uncertainty, ensuring that the taxation of cross-border transactions is predictable, and preventing the non-payment / underpayment of taxes.
Click here to find out more about the Order.
KPMG professionals will be happy to answer in detail any questions that you might have about the approved Order, and also assist you in entering into APAs.
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