Russia: New Russian transfer pricing rules for corresponding adjustments
On June 8 2015, the President of the Russian Federation signed Federal Law No. 150-FZ, which introduced, inter alia, amendments to the Tax Code of the Russian Federation (RF Tax Code) regarding corresponding adjustments. Before that, corresponding adjustments could be performed based only on the decisions of the Russian tax authorities within transfer pricing audits. The new law not only clarifies the procedure by which the corresponding adjustments are to be made (based on the Russian tax authorities' decisions), but also allows Russian taxpayers to perform voluntary corresponding adjustments.
These amendments are particularly relevant given:
Existing legislation is ambiguous, and there is a distinct lack of experience regarding the application of corresponding adjustments in Russia;
It is anticipated that the Russian tax authorities will increase the number of companies included in the transfer pricing audit plan for 2013–2014; and
The Russian Parliament is thinking about amending current transfer pricing legislation in two to three years' time, including stipulating that transfer pricing adjustments performed by the Russian tax authorities must be based on a median of the arm's-length range. However, based on the current draft law, if voluntary adjustments have been made, they will be allowed to adjust prices/profitability to the lower/upper end of the arm's-length range).
Therefore, it is important for Russian taxpayers to understand which instruments they have available to mitigate their Russian transfer pricing risks.
Clarifying corresponding adjustments made on the basis of tax authority decisions
The law sets out in more detail the procedure for performing corresponding adjustments based on the decisions of the tax authorities in transfer pricing audits.
The law provides that only a notice from the Federal Tax Service of Russia is required to perform an adjustment. This notice should be sent to a taxpayer within a month from the date when the Russian tax authorities' decision is implemented, unless there are breaches in the stipulated procedure. If this notice is not sent, then penalties are introduced against the Russian tax authorities.
Additionally, some other minor issues are clarified by the law (for example, in which tax return the corresponding adjustment shall be reflected, and so on).
Voluntary corresponding adjustments
Based on the law, Russian taxpayers may now apply corresponding adjustments voluntarily in domestic transactions if their counterparty independently adjusted prices in accordance with the arm's-length principle and increased the tax base in its Russian tax return.
To substantiate the adjustment, it will be necessary to submit documents confirming that the counterparty adjusted the tax base and the tax amounts (losses), provide clarifications on the transaction in respect of which the adjustment was performed, and also confirm that the counterparty executed the tax payment obligation that arose as a result of the adjustment.
The aforementioned documents should be received directly from the counterparty. The Federal Tax Service does not submit its own corresponding data.
Important issues to consider
Despite the above positive developments there are still a lot of issues to be considered:
Issues with local tax authorities: The corresponding adjustments are performed at the location of the taxpayer, whereas the transfer pricing issues are resolved at the federal level. Accordingly, difficulties may arise when discussing the corresponding adjustments with the local tax authorities if they lead to a decrease in the taxes they collect;
Not possible to decrease your tax base in Russia: It is only possible to reduce the tax base when the other company – a Russian taxpayer – increases its tax base by the same amount. As a general rule, taxpayers may not adjust prices unilaterally if this results in an understatement of their tax liabilities; and
Taxpayers entitled to corresponding adjustments: The mechanism is only available for taxpayers which are Russian organisations. Branches of foreign companies may not benefit from corresponding adjustments.
The aforementioned amendments are a great sign for Russian taxpayers that more instruments are being made available to them to solve their transfer pricing issues in Russia. Please note that the corresponding adjustments mechanism is available only for domestic transactions. Unfortunately, Russian subsidiaries of foreign corporations are still unable to perform voluntary downward transfer pricing adjustments, and complex solutions are still required to design sustainable transfer pricing models in cross-border transactions.
KPMG in Russia and the CIS
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