Russia: Transfer pricing audits, focus on pre-audit analysis

The concept behind the pre-audit analysis is to gain information about a controlled transaction without opening a full transfer pricing audit.

Gain information about controlled transaction without opening full transfer pricing audit

While the transfer pricing legislation in Russia was introduced almost 10 years ago (in 2012), judicial practice in this area remains very limited.

There have not been many actual transfer pricing audits, given that in recent years, the Russian tax authorities have focused more on pre-audit analysis. In 2020, 54% of the government’s budget revenues came from such pre-audit analytical work by the tax administration, with the remaining 46% from the use of classic or standard control measures.

Pre-audit analysis mechanism

Pre-audit analysis provides the tax authorities with a flexible negotiation tool, allowing them to perform transfer pricing audits economically. The concept behind the pre-audit analysis is to gain information about a controlled transaction without opening a full transfer pricing audit and, if required, to arrange for the taxpayer to voluntarily adjust its tax obligations without the cumbersome framework of a transfer pricing audit. The procedure for a pre-audit analysis is not directly set out in the tax law of the Russian Federation, but when making pre-audit analysis requests, the tax authorities often refer to Articles 93 and 93.1 of the tax law.

As a rule, during a pre-audit analysis, the tax authorities follow these action steps:

  • Identify companies with a high-risk profile
  • Submit requests for information, interview employees, and discuss circumstances with the taxpayer
  • Suggest that the company independently adjust its tax obligations
  • Absent an agreement with the taxpayer, open a full transfer pricing audit

Requests from the tax authorities as part of a pre-audit analysis may be classified into the following three types:

  • Collect general information about the company's intra-group operations: As part of their inquiry, the tax authorities may request a broad range of information about the controlled transactions of the taxpayer. This type of request does not necessarily mean additional tax will be charged—receipt of such a request may simply mean that the tax authorities are collecting information about companies in a particular sector in an effort to identify companies or transactions that are high risk.
  • Obtain detailed information and calculations for specific controversial transactions: The tax authorities may request details and clarifications about a particular transaction. This may mean that the tax authorities have done preliminary work and see the potential for additional charges in relation to a specific controlled transaction. This could be a good moment for a taxpayer to enter into substantive dialogue with the tax authorities.
  • Request calculations and clarifications of tax obligations: To assess whether the prices in the controlled transaction are at arm’s length, the tax authorities may independently select the applicable transfer pricing method, conduct a benchmarking study, and perform relevant calculations. As part of the pre-audit analysis request, a taxpayer may receive these calculations with a suggestion that the taxpayer voluntarily adjust the calculated tax liabilities. The taxpayer’s reply would need to include a detailed answer with data from the transfer pricing documentation. Based on the results of the pre-audit analysis, the taxpayer can then independently decide whether to adjust the tax base (or not). 

KPMG observation

The pre-audit analysis mechanism can be convenient for both taxpayers and the tax authorities.

  • For the tax authorities, it affords an opportunity to encourage a taxpayer to voluntarily adjust its tax base without challenging the transfer pricing documentation or going through litigation.
  • For a taxpayer, no penalties or other sanctions are applied when a decision on an adjustment is made (except for late-payment interest). Additionally, it affords a taxpayer a chance to continue the dialogue with the tax authorities for future clearance, in particular, in the form of an advance pricing agreement (APA).

The pre-audit analysis also can be used in non-transfer pricing matters. The types of requests sent to taxpayers in such instances are similar to those described above.

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

Komal Dhall | +1 212 872 3089 |


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