Russia: Transfer pricing audits in Russia: Initial results and trends

Natalia Valkovskaya	Pavel Kasperovich

The Russian tax authorities recently published the first set of statistics gained from their transfer pricing audits (for FY 2012). For more information on the authorities' 2015 activities, see page 44 of the official report, available at www.nalog.ru/rn77/about_fts/fts/activities_fts/.

• The first Russian transfer pricing audits (started for FY 2012) have ended:

• Scope: 21 transactions undertak en by nine taxpayers

• Time: 2.5 years since the first audits were initiated

• Tax assessment: RUB 142 million ($2.2 million) on average (excluding late payment charges). However, for some transfer pricing audits, the amount of tax finally assessed is still not known, thus the overall tax amount assessed may increase

• Seven transfer pricing audits opened for calendar year (FY) 2013

• The Russian tax authorities have successfully established information exchange networks with foreign tax authorities

• More taxpayers are voluntarily performing transfer pricing adjustments (on their tax base amounts): RUB 15 billion ($230 million) was adjusted for FY2014 and RUB 30 billion ($460 million) for FY 2015

• The Russian Supreme Court confirmed that local tax authorities are entitled to adjust prices within intra-group transactions if unjustified tax benefit is proved. This ruling has led to RUB 1.2 billion ($18.5 million) of tax assessments

The scope of the first transfer pricing audits was quite limited; a positive move, as there was a need to ensure that quality reviews from the outset would be the norm. Another reason for the authorities' constrained ambition was the limited number of personnel who can legally be involved in a Russian transfer pricing audit: only a specific department in the Russian Federal Tax Service is allowed to initiate and participate in such audits. The role of the local tax authorities is limited to the collection and processing of data, though the role of foreign tax authorities has increased significantly, supplying the Russian authorities with a lot of valuable information as part of their transfer pricing audits.

The Russian tax authorities, while auditing FY2012:

• focused on export transactions as most important to the Russian budget;

• paid special attention to transactions with buyers located in low-tax jurisdictions (Switzerland, Cyprus, Hong Kong, the BVI, Jersey, among others), using these as red flags for transactions with potential price understatements;

• mainly covered the resource industries, that is, oil & gas (O&G), metals & mining (M&M) and fertilisers.

The Russian tax authorities have closed most of the aforementioned audits (16 transfer pricing audits performed on six taxpayers as at the end of 2015), and in each and every one of them, additional tax was assessed. Unless the Russian taxpayers challenge the decisions of the Russian tax authorities, it would appear that these audits have been quite lucrative for the Russian budget: as mentioned above, the average tax assessed was RUB 142 million (approximately $ 2.2 million at the current USD / RUB exchange rate). The current fine – of 40% of the underpaid tax – was not applicable in 2012; however, the assessment of late payment charges is likely to increase these amounts further.

So far there have been no challenges against the tax authorities' decisions, and thus there is no court practice to study. Based on the current situation (that is, a lack of judicial precedents and high unpredictability regarding the result), we do not expect there to be any major court cases on transfer pricing issues for FY 2012. However, there have been examples of pre-trial settlements.

Encouraged, the Russian tax authorities are busily trying to widen the scope of their activities to cover more taxpayers. Notably, the Russian tax authorities have already opened transfer pricing audits for FY 2013.

However, Russia's local tax authorities have also become more active in the transfer pricing field. They are currently using every opportunity they have to try and review intra-group transactions and assess additional taxes where they see any unjustified tax benefits occurring (for example, when general anti-abuse rules are broken). Despite the fact that the local tax authorities are not entitled to conduct specific transfer pricing audits, their right to challenge transfer pricing in order to evaluate whether unjustified tax benefits have been received is supported by the Ministry of Finance and the courts.

Natalia Valkovskaya (nvalkovskaya@kpmg.ru) and Pavel Kasperovich (pkasperovich@kpmg.ru)

KPMG in Russia and the CIS

Tel: +7 (495) 937 44 77

Website: www.kpmg.ru