Russia: Tax audit guidelines, verifying reasonableness of expenses for intra-group services

Russia: Tax audit guidelines, intra-group services

Russia’s federal tax service issued guidance for lower tax authorities to follow in examining the reasonableness of expenses claimed for intra-group services.


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Until now, the tax authorities did not have a unified approach with regard to verifying expenses claimed for intra-group services. The guidance (Letter No. SHU-4-13/12599 (6 August 2020)) instructs lower tax authorities on how to verify expenses claimed in relation to intra-group services and specifically in terms of the economic justification and the sufficiency of supporting documentation with regard to the intra-group services. In particular, the guidance directs the lower tax authorities to verify the following five items, in this order:

  • Services were actually rendered.
  • There are no claims of expenses for identical services.
  • The services have economic or commercial value to enhance and maintain the commercial position of the taxpayer.
  • The expenses claimed by the taxpayer do not constitute compensation for expenses on shareholder activity.
  • There is a transparent pricing methodology that is identical throughout the multinational enterprise (MNE) group even though the actual expense and assessment of the arm's length price of the transaction are not the subject of the field (desk) tax audit.


The tax authorities often challenged expenses on intra-group services provided by foreign (non-Russian) group companies, since the tax authorities consider such payments to be a mechanism to repatriate profits in favour of the headquarters of MNEs. The tax authorities had not had a unified approach for verifying intra-group services, in particular as regards the following:

  • Identifying the subject of field (desk) tax audits and transfer pricing audits (i.e., what a field audit may verify as regards the services remuneration based on the costs of the provider)
  • What evidence in supporting documentation is sufficient to confirm the receipt of services, their type and scope, and the economic benefits received from the consumption of the services
  • The distinction between the terms "shareholder activity" and "management and consulting services"
  • Not allowing substitution of the terms "indirect-charge method for determining the cost of services" and "reallocation of expenses within the MNE"

The results concerning cross-border intra-company service charges have historically not been favorable for taxpayers. Thus, the guidance and clarifications were highly anticipated.

Guidance, overview

Taxpayers are to be allowed to submit transfer pricing documentation (or certain components of such documentation) to satisfy the inquiry. In addition, this information may be obtained from the Master file of the MNE group. In connection with this, taxpayers need to verify not only the existence of a transparent methodology used to form the cost of services but also the consistency of its description in both the Master file and the transfer pricing documentation (Local file).

Given that the audit guidance highlights the importance of functional analysis when confirming the commercial value of a service and also in light of the criterion as to whether the entity would be prepared to pay an unrelated, independent third party for similar services on comparable terms or would engage in this activity using its own resources, one option for the taxpayer’s supporting documentation may be to supplement the transfer pricing documentation with a description of the commercial and economic benefits derived from the receipt of the services—that is, a “benefits test.”

The audit guidance puts forward that applying the procedure for determining the price based on the total costs of the service provider's expenses plus mark-up is a standard business practice and may not be considered, per se, as the reallocation of income and loss among MNE companies or to serve as the sole independent grounds for declaring corresponding expenses to be unjustified. However, the federal tax service has not directly commented on the indirect-charge method that is applied extensively in practice when the aggregate amount of the service provider’s costs incurred in the delivery of the services to all recipients is determined and when the cost of services to a particular recipient is determined based on this aggregate pool of expenses and allocation keys. In addition (and unlike the OECD Transfer Pricing Guidelines), the federal tax service has not specified what is an acceptable level of such a surcharge (or mark-up).

KPMG observation

The audit guideline recommendations provided to lower tax authorities may give taxpayers hope that the methods for verifying cross-border intra-group services charges and the approaches to challenge them will become less formal and more justified. However, it already appears to be clear that tax audits will be detailed and the process for justifying expenses will not be easy for taxpayers. To prepare, taxpayers may want to analyze existing services agreements to determine if they need to be amended; and collect supporting evidence to confirm the receipt of services, their use in the company's operations, their value for the company, and the absence of duplication costs. In addition, it may be prudent to conduct and include a benefits test in the transfer pricing documentation; to justify the services remuneration structure; to prove the absence of allocation of the shareholders’ costs; to prepare employees and former employees for potential interviews regarding the services; and if the expenses are challenged, to consider a mutual agreement procedure (MAP) process available under an applicable income tax treaty.

For more information, contact the Global Leader of KPMG’s Global Transfer Pricing Services:

Komal Dhall | +1 212 872 3089 |

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