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Russia: First court case on new transfer pricing rules ends

23 March 2017

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Russia's first court decision on a transfer pricing (TP) audit conducted by tax authorities has been published, highlighting the steps taxpayers must take to avoid similar disputes

Elena Ivannikova Uliana Maksimova

On 27 January 2017, Russia's first court decision (No. A40-123426 / 16-140-1066) on a transfer pricing (TP) audit conducted by the Russian Federal Tax Service (FTS) was published.

The audit related to sales of crude oil from JSC Oil Company Dulisma (the company) to the unrelated company Concept Oil Services Limited (the trader), which is registered in an offshore zone (Hong Kong). The transaction took place in fiscal year 2012.

The tax authorities proved that the prices for particular deliveries were lower than the arm's length range and assessed additional corporate income tax liabilities and penalties of RUB 177 million ($3 million).

Court's main conclusions

The court concluded that:

  1. The absence of TP documentation enables the Russian tax authorities to defend their position;
  2. Transactions with offshore counterparties are subject to TP control, even if they are unrelated parties;
  3. The comparable uncontrolled price method (CUP) is the one most commonly used for commodities;
  4. The FTS uses a narrow quotation period;
  5. Official comments from pricing agencies can be used as supporting documentation;
  6. Adjustments made to justify application of the TP method can only be accepted if there is sufficient argumentation in their support (the FTS did not apply any adjustments); and
  7. Information on confidential transactions cannot be used for TP purposes.

The court did not accept the company's arguments that the trader is an unrelated party in line with the Russian Tax Code, and instead said that counteragents registered in offshore zones are to be treated as related.

The court further concluded that The FTS used the Platt's quotations on the date nearest to the date when the transaction was performed. This approach is in line with OECD BEPS initiatives under Actions 8-10.

The FTS received a written official response from the agency Platt's, which confirmed that the quotations published can be considered as comparable.

As a result, taxpayers should take the following steps:

  • Prepare TP documentation and indicate the TP method used in the TP Notification;
  • Revise TP documentations prepared previously for controlled transactions in order to identify possible weak points that may be exploited by the FTS;
  • Prepare a defence file with detailed justification, explaining and showing that parties to the transaction were not interdependent (for transactions with unrelated parties);
  • Apply the CUP method for TP documentation or document the fact that it was not possible to apply this method;
  • Analyse whether it is possible to obtain from external agencies confirmation that the correct market indicators were used; and
  • Analyse whether is it is possible or necessary to adjust price indicators and document this analysis.

Elena Ivannikova and Uliana Maksimova
KPMG in Russia and the CIS

International Correspondents