A series of tax disputes involving Russian automotive market distributors (namely, Mazda Motors Rus, Suzuki Motors Rus, and Hyundai Motor CIS) and the application of art. 40 RF TC is currently before the commercial courts. The distributors posted losses for 2009-2010 which, in the opinion of the Russian tax authorities, shows that the multinational automotive corporations shifted profit by applying overstated transfer prices with dependent distributors in Russia. These court cases may affect the application of “new” transfer pricing rules.
On July 17, 2014, the Moscow District Federal Arbitration Court returned the Mazda Motors Rus case for retrial on the basis that the lower court had not examined the possibility of the tax authorities applying the comparable uncontrolled price for identical/homogeneous goods method (art. 40.4 RF TC). The tax authority's assertion that there were no identical/homogeneous goods on the market because OOO Mazda Motors Rus is the exclusive dealer of Mazda vehicles in Russia was not, in the opinion of the cassation court, sufficient for application of the resale price method (MD FAC No. А40-4381/13 of July 21, 2014).
In the Suzuki Motor Rus case, the court of appeal instance reached a similar conclusion that the inspectorate should have applied the first method with respect to the disputed import transactions. In the opinion of the court, similar vehicles imported by other distributors that OOO Suzuki Motors Rus views as direct competitors should be treated as identical or, where there are minor differences in technical characteristics, homogeneous to Suzuki vehicles. The cassation instance returned the case for retrial after deciding that the parties’ arguments were insufficiently examined (MD FAC Ruling No. А40-111951/12-20-580 of September 16, 2013). This case is currently awaiting the performance of an expert examination.
In the event that the courts broaden the interpretation of identical/homogeneous goods, with vehicles from various manufacturers with various technical characteristics being treated as homogeneous goods, the comparable uncontrolled price method may be extended to controlled transactions with numerous goods of different types and classes (for example, household goods), rather than only commodities. The courts taking such a position could impose an additional burden on both taxpayers and tax authorities with respect to justifying why the first method was not applied and other transfer pricing methods were used (for example, the transactional net margin method).
The Hyundai Motor CIS case accepted by the Moscow Arbitration Court in April 2013 has yet to be heard on the merits following an expert examination. However, in this dispute the court is likely to go beyond examining the market for comparable transactions with vehicles identical/homogenous to the vehicles imported by OOO Hyundai Motor CIS, and the grounds for not applying the first method. The court will put contentious issues relating to the justification of profit margins for transfer pricing purposes to the experts. In particular, the ruling contains questions concerning the permissibility of loss-making sales with consideration for marketing strategy, the ability to group transactions with loss making and profitable goods, and other questions that may arise when applying the transactional net margin method (Moscow Arbitration Court ruling No. А40-50654/13 of May 15, 2014).
The outcome of these court cases may have a significant impact on current transfer pricing practice and may be taken on as another tool in preparing for tax audits.