The rules that have been in force since 1 January 2012 for the control of prices between related parties granted taxpayers who fall into the category of major taxpayers a right to enter into a pricing agreement for tax purposes with the Russian Federal Tax Service (the “FTS”).
Such an agreement in accordance with the requirements of the Russian Tax Code should determine the types of controlled transactions regulated by the agreement and the list of goods (work or services), the procedure for prices to be determined and/or a description of pricing methods and of how they should be applied, a list of sources of information and the regime for documentary confirmation that the terms of the agreement have been met.
Concluding a pricing agreement presupposes complying with a fairly complex and lengthy procedure to negotiate it with the FTS. However, it means that a taxpayer can significantly reduce its risks in relation to applying transfer prices, ensuring that prices are regarded as market prices if they are determined under the agreement that has been concluded.
OAO NK ROSNEFT has been the first company in Russian practice to sign a pricing agreement for tax purposes with the FTS. It sets the parameters for pricing under transactions for the sale of oil on the internal market, which the taxpayer enters into with its subsidiaries.
The FTS advises that, by the end of 2012, it is proposed to enter into around one tenth of the total number of pricing agreements for tax purposes.
What this means for taxpayers
The fact that the first pricing agreement in Russian practice has been signed is evidence that the FTS is striving actually to implement the new transfer pricing control rules within the scope of the state policy aimed at counteracting tax avoidance through price manipulation. The first audits under the new rules will already be taking place in 2013.
By signing a pricing agreement with the FTS, major taxpayers who carry out operations that involve agreements being concluded within their holding structure can significantly reduce their tax risks in relation to applying transfer prices. This will restrict the subject matter of specific audits to whether the taxpayer is complying with the terms and conditions of the agreement that has been concluded.
Concluding an agreement allows a taxpayer considerably to simplify the control procedure for whether the prices applied in transactions correspond to market prices. It can therefore reduce the costs if tax control being carried out in relation to transfer prices (in particular, those that relate to preparing notifications regarding controlled transactions, supplying documents for the purposes of tax control of transfer prices and to defending itself in any tax dispute).