The first deadline set by the Russian transfer pricing regulations is approaching rapidly. The relevant rules are applicable to controlled transactions entered into from 1 January 2012, and the respective reporting and documentation requirements have to be complied with in the coming months. This Tax Outlook sets out the main documents that need to be prepared in the short-term, and provides advice on their preparation and content.

Section V.1. of the Russian Tax Code, effective as of 1 January 2012, imposes a new obligation on Russian entities entering into controlled transactions. Now they must document their transfer pricing policies and report the application of transfer prices to the competent tax administrations. Though this requirement would not surprise the OECD countries representatives, it is a new and challenging requirement for Russian taxpayers whom have previously never been obliged to document transactions falling within the scope of the rules on prices control.

Russian companies are now actively trying to determine the impact of the transfer pricing rules on their activities and hectically preparing their first transfer pricing country-files. Primarily the new rules will concern Russian companies entering into cross-border transactions with related parties, as all such transactions are treated as controlled for transfer pricing purposes, whereas substantial limits are applicable to intra-group domestic operations.

What requirements need to be complied with?

As noted above, according to the Russian Tax Code, two main types of transfer pricing requirements exist:

  • reporting (notification) requirement, under which companies have to annually notify their ordinary tax inspectorates of all controlled transactions between related parties concluded during the previous calendar year. The notifications should contain general information on the subject-matter of the transactions, the parties involved, the transfer pricing methods applied in the definition of prices, as well as the amount of profits received and expenses incurred as a result of the transactions1; and
  • documentation requirement, under which tax authorities are entitled to request more detailed information on all controlled transactions between related parties on the basis of the aforementioned notification requirement, or as a result of a tax audit. This detailed information includes documentation (a sole document or separate documents drafted in free form) describing:
  1. activities of the taxpayer connected with the controlled transactions, including terms of such transactions (e.g. conditions and terms of payment), a list of parties to these transactions, as well as the results of the relevant functional analysis; and
  2. information on transfer pricing methods, including reasons for the application of the relevant methodology, sources of information used, market price range calculated, the amount of received profit (incurred expenses) as a result of the transactions and profitability obtained, as well as other factors which, as the case may be, have influenced the price (profitability), such as market strategy of the taxpayer.

The thoroughness of the documentation prepared should correspond to the complexity of the relevant transaction and the means of its price formation.

When does the taxpayer need to be ready by?

Russian taxpayers should submit transfer pricing notification on the transactions, falling within the scope of the required transfer pricing documentation in 2012, to their ordinary tax inspectorates (where general tax filings are being realised) before 20 May 2013.

The tax authorities may demand documentation relating to controlled transactions entered into in 2012, as well as initiate first transfer pricing audits after 1 June 20132. As soon as a documentation request is submitted by the tax administration, the taxpayer has 30 days to file it.

However, please note that 2012 and 2013 are treated as transitional periods. Therefore, not all controlled transactions entered into in 2012 and 2013 are subject to Russian transfer pricing requirements. In 2012, only those controlled transactions concluded between same related parties where the total income derived as a result of the transaction exceeds RUB 100 mln (about EUR 2.5 mln) are subject to both the notification and documentation requirements. In 2013, this turnover limit will be decreased to RUB 80 mln (about EUR 2 mln). As of 2014, turnover limits will cease to apply, meaning all controlled transactions will need to be documented.

How to prepare?

As indicated, two main documents may need to be prepared by Russian entities for transfer pricing purposes during the first half of 2013: a notification form and a transfer pricing country-file. To simplify this process, we recommend the following procedure to be implemented:

Firstly, begin by analysing of all the transactions entered into by the Russian subsidiary of your group in 2012, and defining those transactions which may be treated as (i) controlled for transfer pricing purposes, and (ii) subject to the documentation requirement in 2013.

This process will allow you to determine whether the Russian transfer pricing requirements are applicable to the entity with respect to its transactions entered into in 2012. If they are, it must then be determined which transactions the transfer pricing notification and documentation obligations apply to. This analysis will also benefit the long-term goals of the company, enabling it to determine how its transfer pricing documentation should evolve in light of the changes in Russian transfer pricing legislation and the company’s economic results.

Thereafter, a functional analysis of the Russian subsidiary should be carried out defining its main functions, risks undertaken and assets held. Though this is a local exercise, the information contained in the transfer pricing master-file of the group, as well as the existing country-files of those other subsidiaries of the group similar to the Russian one, if available, may be useful.

On the basis of this information an economic analysis should be carried out. This represents the most challenging part of the exercise. Transfer pricing methodologies applied by the company in its transfer pricing policy documentation should be defined and verified, and the applicable arm’s length range determined. In order to do this, numerous factors should be taken into account, these including the information in place, the extent of the benchmarking analyses already realised at the level of the foreign companies of the group (if any), sources of information to be used and the necessity to adjust the financial reporting of the Russian company, etc.

Finally, all the information gathered as a result of the above should be centralised and supplemented with other general elements required by Russian transfer pricing regulations (e.g. description of the sector the Russian company is operating in, its market strategy, etc.).