The new transfer pricing law significantly changes the existing transfer pricing regulations in Russia. Under the new law, the price applied by the taxpayer need no longer deviate by more than 20% from the fair market price in order to be subject to transfer pricing control; the tax may now be recalculated based on the fair market price, even if the actual price deviates from the fair market value by less than 20%. Any transaction between affiliates may be subject to control if its value exceeds a particular amount. Other types of transaction are also subject to transfer pricing control, most notably transactions with parties from an offshore tax haven.
Another difference under the new law is that the taxpayer must report any controlled transaction to the tax authorities and must supply supporting documentation to confirm the price reported. Previously, the burden of proving that an unfair price had been applied lay with the tax authority. Transfer pricing control will be distinct from a standard tax audit, since a special department of the Federal Tax Service will have responsibility for transfer pricing matters.
The new law introduces two new methods of transfer pricing control and provides that a symmetrical adjustment may be made (ie, one taxpayer's tax burden may be reduced to mirror the tax increase of the counterparty in a controlled transaction). Big companies may also sign a transfer pricing agreement with the tax authorities, setting out the methods that will be applied to the company's transactions. It has already been announced that such a tool will not be commonly used; the tax authorities maintain that they will sign no more than 20 such agreements in 2012.
The law on tax consolidation allows a consolidated taxpayer to be created from a number of individual taxpayers in the same group of companies. The main thinking behind this law is to allow the members of a consolidated group to offset income against the losses of other members. This will initially be an option only for the biggest holding structures, but there is an intention to simplify the requirements for consolidation in future.
The government has recently started to renegotiate Russia's double taxation treaties by signing protocols to certain such treaties. Following the protocol with Cyprus which was signed in 2010, protocols with Switzerland and Luxemburg were signed in Autumn 2011. The protocols:
- regulate how the place of effective management should be defined;
- establish anti-avoidance provisions;
- create an information exchange regime; and
- establish that a gain deriving from a disposal of shares in a company that owns real estate is taxed in the jurisdiction where the real estate is located.
Moreover, the treaty regime will not exclude the state's right to apply the thin capitalisation rule. Russian court practice is also moving towards applying the thin capitalisation rule without regard to the non-discrimination rules.
For further information on this topic please contact Andrey Tereschenko or Ivan Zelenin at Pepeliaev Group by telephone (+7 495 967 0007), fax (+7 495 967 0008) or email ([email protected] or [email protected]).