Draft amendments to the Russian Tax Code regarding controlled transactions involving intangibles and commodities, the profit split method and mutual agreement procedures
We wish to draw your attention to amendments being made to the Russian Tax Code (RTC) by the Russian Ministry of Finance in order to achieve key policy aims for Russia’s budget and tax and customs policies for 2019 and the planned periods of 2020 and 2021, as well as the Base Erosion and Profit Shifting Plan (BEPS Plan). The draft law became available for public discussion on 15 March 2019 (follow this link to read the draft).
The proposed adjustments address issues of tax administration, VAT, Excise and Corporate Income Tax. With regard to transfer pricing, the following amendments are of interest:
1. Amendments to transfer pricing tax control on transactions with intangibles
Specialised functional analysis will be required, taking account of:
— DEMPE functions (development, enhancement, maintenance, protection and exploitation of intangibles), followed by the OECD BEPS initiative;
— risks related to DEMPE and other specific risks;
— additional comparability criteria for intangibles (e.g. their exclusivity, duration of legal protection, etc.).
These amendments reflect the latest developments in transfer pricing for intangibles; however, they will require detailed and in-depth analysis. It is also possible that some of them may only be implemented in practice with great difficulty.
2. Amendments to transfer pricing tax control on commodity transactions
When applying the CUP method based on exchange quoted prices and determining the date of cross-border commodity transactions, it is proposed that the actual circumstances be taken into account, along with documents filed during execution of the transaction and the actual conduct of the parties involved.
These amendments seek to clarify calculation of the arm’s length range in commodity transactions; however, they may be inapplicable to some pricing mechanisms (e.g. if the business applies a quotation period). The application of exchange quoted prices to Russian domestic transactions is not clarified in the draft amendments.
3. Modifications to the Profit Split method
The draft law proposes that control over intangibles (i.e. not only legal ownership) be considered when analysing applicability of the Profit Split method.
4. Development of Mutual Agreement Procedures (MAP)
As part of the BEPS initiative, Russia committed to implement the minimum standard on effective dispute resolution. Thus, the draft law suggests:
— having a fixed period in which the taxpayer’s application shall be considered and the Russian Ministry of Finance shall decide whether to initiate the MAP or not (90 days from receipt of the taxpayer’s application. This period can be prolonged if time is needed to wait for the taxpayer’s documents as listed below);
— an option for the Russian Ministry of Finance or the Russian tax authorities to request the provision of further documents for MAP purposes. The initial documents required, which have to be attached to the taxpayer’s application, are listed in the Guidelines for MAP implementation;
— an increased potential risk of a field tax audit and (or) transfer pricing audit in respect of particular controlled transactions (though audited periods cannot exceed 10 years prior to the year when the decision to perform an audit was made). Repeat tax audits are possible;
— that MAP results be implemented (tax base adjustments that may lead to tax return / offset or additional tax charges) regardless of time limits set by the RTC;
— that the Russian tax authorities be obliged to suspend the implementation of field tax audit decisions once notified about MAP until the final results are available.
These amendments aim to enhance dispute resolution within the area of DTT application as well as facilitate the more active use of MAP as an instrument of double taxation avoidance.
At the same time the following nuances should be taken into account:
— there is a potential need for the long-term storage of the documents needed for MAP;
— the risk of additional tax charges resulting from tax audits;
— corresponding tax base adjustments in Russia will depend on the Russian Ministry of Finance’s acknowledgement of any adjustments made by foreign competent authorities in respect of any foreign counterparties, etc.
The draft law is expected to be adopted in spring 2019, with the amendments entering into force in 2020.
How KPMG can help you
As the draft law is currently under public discussion, you are welcome to provide your comments (either on your own or through your tax advisor).
If your company has intangible or commodity transactions with Russia and (or) transactions where applicability of the profit split method is under question, it may be helpful to analyse these transactions in light of the suggested amendments.
If your company has faced international double taxation involving Russia, we suggest considering the applicability of MAP to your situation.
Our KPMG specialists will be happy to answer any questions you have and help you with your analysis.
Изменения в Налоговый кодекс РФ в области трансфертного ценообразования и взаимосогласительных процедур.