Amendments to the Russian Tax Code: relaxing of transfer pricing controls
Russian Tax Code: relaxing of transfer pricing controls
Adjustments come into effect on January 1, 2019.
On 18 July 2018, the State Duma adopted in the third reading amendments to the Tax Code of the Russian Federation (hereinafter – the “Russian Tax Code”) introducing direct and indirect adjustments to the regulation of transfer pricing (hereinafter – the “TP”) rules in Russia according to from January 1, 2019 the following amendments are made:
1. pricing in cross border transactions will be subject to control if the total amount of income between the related parties for the analysed year exceeds 60 million roubles;
2. control over the pricing of domestic transactions between the related parties will be exercised only if both conditions are met:
a. the parties apply different rates of corporate income tax or different tax regimes (as well as calculate the mineral extraction tax as a percentage of their tax base, or are exempt from the payment of income tax, or exempt from VAT, or apply the investment tax deduction);
b. the total amount of income between the related parties for the analysed year exceeds 1 billion roubles.
Here you can find the detailed comparison of TP conditions before and after 1 January 2019
These amendments to the Russian Tax Code will have impact to transactions after January 1, 2019. With respect to these transactions, we believe that although the prices within domestic and cross border transactions between the affiliate parties are removed from TP control, the tax authorities can still control it within a general tax audit applying the TP methods.
In case of the general tax audit applying the TP methods it is not possible to use “defence mechanisms”, that could be used if an audit is based on Section V.1 of the Russian Tax Code (if additional tax is charged within a TP audit a taxpayer has the opportunity to use so-called “defence mechanisms” e.g. a compensating adjustment and the non-applicability of the 40% penalty of the additional tax amount in case there is a substantiating TP documentation).
In practice, within the general tax audit the tax authorities use TP methods as body of evidence and win a significant number of cases because taxpayers did not perform an appropriate TP analysis. Although TP documentation is not obligatory when undergoing a general tax audit applying the TP methods, the presence of TP documentation increases the probability of a positive outcome.
In this regard, we recommend the companies:
- to assess necessity of TP analysis and TP documentation in terms of more material transactions with affiliated companies. This will allow to assess potential tax risks, and to strengthen the rationale of company’s position against challenges from the authorities following a tax audit.
- to develop a defence position (in particular, justification of the most applicable TP method, a benchmarking study, and calculation of the actual indicator for the transaction and comparison of that indicator with the arm’s length range).
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