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Draft amendments to the Russian Tax Code regarding controlled transactions involving intangibles

Draft amendments to the Russian Tax Code regarding...

We wish to draw your attention to amendments made to the Russian Tax Code (RTC) by the Russian Ministry of Finance aimed at achieving 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), which we previously notified you of, have been brought before the State Duma (please follow this link to read draft No. 720839-7).

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We wish to draw your attention to  amendments made to the Russian Tax Code (RTC) by the Russian Ministry of Finance aimed at achieving 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), which we previously notified you of, have been brought before the State Duma (please follow this link to read draft No. 720839-7).

During the public discussion, the draft law was amended (the previously proposed changes to transfer pricing tax control on commodity transactions were excluded). At the moment the suggested transfer pricing amendments are as follows:

1. Development of a Mutual Agreement Procedure, ‘MAP’

Statements in the draft law have been soften, for example:

—    Instead of initiating tax audits the Russian Ministry of Finance will be able to address to the tax authorities to obtain a motivated opinion only, which Russian Ministry of Finance will consider during the decision-making with respect to MAP results.

The Russian tax authorities shall issue a requested opinion within 3 months from the date on which documents are received from the Russian Ministry of Finance. They might also request documents from the taxpayer or its contractors (including TP documentation), even though the documents may have already been requested previously.

The taxpayer and/or its contractor shall answer to this request within the deadlines set by art. 93 and 93.1 of the RTC (10 days as a general rule).

—    The period which could be audited within a tax audit for MAP purposes (10 years) is excluded; instead, the draft stipulates that expiry of the financial and tax records storage terms does not act as an excuse for any failure to submit the documents to the tax authorities.

—    The possibility of additional tax charges is now removed. Tax base adjustments might result either in a tax refund or in tax offset.

What remained unchanged:

—    The period in which a taxpayer’s application shall be considered and in which the Russian Ministry of Finance shall decide whether to initiate a MAP (90 days from receipt of the taxpayer’s application).

—    The potential opportunity for the Russian Ministry of Finance to request for additional documents needed for MAP (the taxpayer shall provide them in one month).

We also wish to draw your attention to the fact that a MAP may be initiated by a taxpayer or a competent foreign authority of the country which has entered into a double tax treaty with Russia. The taxpayer may apply for a MAP within 3 years from the moment of first notification on the actions that are leading to a double taxation. The draft law suggests that this period should start from the moment the tax audit protocol delivery.

These amendments will enter into force on 1 January 2020.

2. Amendments to transfer pricing tax control on transactions with intangibles

There have been no changes made to this part of the draft law. It suggests that specialised functional analysis will be required that takes account of (1) DEMPE functions (development, enhancement, maintenance, protection and exploitation of intangibles), (2) risks related to DEMPE, and (3) additional comparability criteria for intangibles (e.g. their exclusivity, duration of legal protection, etc.).

3. Modifications to the Profit Split method

The draft also remains unchanged in this part. It suggests that control over intangibles should be considered when analysing the applicability of the Profit Split method.  

The amendments stated in points 2 and 3 will apply to periods staring from 1 January 2020, regardless of the date on which the respective agreement was concluded.

The draft law is expected to be adopted in the spring session of 2019.

Our KPMG specialists will be happy to answer any questions you have and help you with your analysis. Please do not hesitate to contact us if you have any queries.

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