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Russian TP rules – lessons learned

In 2011, Russia enacted revised transfer pricing (TP) rules. However, over the last 18 months the Russian Tax Authority (RTA) has issued various letters clarifying its views on the new TP rules. Evgenia Veter, Steve Cawdron, Anuar Mukanov and Filip Vukovic of Ernst & Young have interpreted these clarifications and their potential impact for businesses as they attempt to comply with the revised legislation.

The TP rules introduced a requirement for legal entities operating in Russia to prepare TP documentation and to disclose certain information about their related party transactions to the RTA. For transactions conducted in fiscal year 2012, taxpayers were faced with a mandatory notification deadline of May 20 2013 and the possibility of requests for documentation being made by the tax authority from June 1 2013. However, due to the complexity and uncertainty related to the fulfillment of these mandatory requirements, the Russian government has allowed more time for taxpayers to prepare TP documentation and submit the TP notification form (disclosure of related party transactions) in relation to fiscal year 2012 controlled transactions.

Despite the postponement of these deadlines, transfer pricing still remains at the forefront of both Russian-parented and Russian-based subsidiaries of multinational companies' agendas. Concerns still persist about differences between Russian rules and the OECD model, about the limited information available regarding the practical approach of the RTA, and about the position of the Russian Ministry of Finance (MoF) with respect to the application of transfer pricing legislation.

Background: Brief overview of Russian TP rules

On July 18 2011 changes to the TP section of the Russian Tax Code were adopted, and became effective from January 1 2012.

Dependence criteria

The main condition for two entities to be regarded as related parties under the Russian rules is direct or indirect ownership of more than 25%. There are a number of other criteria on which two entities can be considered related, including joint management, or, in some cases, economic dependence or control.

Controlled transactions

All cross-border transactions between related parties are subject to TP control and TP documentation requirements (subject to transition rules for 2012 and 2013 during which the threshold will be RUB 100 million ($3.1 million) and RUB 80 million, respectively).

Domestic transactions between related parties in excess of RUB 1 billion are also subject to TP control and documentation requirements (subject to transition rules for 2012 and 2013 during which the threshold will be RUB 3 billion in 2012, and RUB 2 billion in 2013).

Special provisions exist for inter-company transactions with offshore zones, certain commodity and mineral products, and situations involving different tax regimes within Russia.

TP methods

The revised rules provide for the following TP methods:

  • Comparable uncontrolled price (CUP) method (preferred method)

  • The resale minus method

  • The cost plus method

  • The comparable profits method (CPM, similar to OECD TNMM)

  • The profit split method (regarded as the method of last resort)

TP compliance requirements

TP compliance requirements in Russia include:

  • TP documentation: Preparing TP documentation including information on the company's profile, functional analysis, transaction details and economic analysis; and

  • TP notification: Disclosure of certain information relating to the Russian taxpayer's controlled transactions to the tax authorities via the prescribed notification forms.

The rules explicitly specify certain criteria that must be used to perform benchmarking searches, and that local comparables should be used where the Russian entity to the transaction is the tested party.

The TP notification must be submitted to the Russian tax authorities by November 20 2013 for fiscal year 2012. The TP documentation should be available for submission to the Russian tax authorities, if requested, from December 1 2013 for fiscal year 2012.

The dates presented above are valid only for fiscal year 2012. In future periods, the applicable deadlines will be June of the following year (for TP documentation) and May 20 of the following year (for TP notification).

Russian TP hot topics

The recent Tax Code amendments align, to a large extent, Russian rules with the OECD guidelines and other commonly adopted international transfer pricing principles. Although this represents a step toward greater transparency of the Russian tax system, departures from the approach applied in OECD jurisdictions are expected. In particular, the Russian TP rules are not intended to replace, but rather complement existing tax provisions, which have historically been strictly enforced by the RTA.

Whilst TP audits are yet to commence, RTA representatives have been developing their TP related expertise through discourse with various jurisdictions worldwide, and through active participation in OECD discussions around intellectual property and base erosion. It remains to be seen whether the RTA practice will be aligned with the OECD guidelines, or whether it will encompass certain practices applied in other emerging markets such as India, Brazil and China.

Outlined in this article are some of the more significant issues associated with the revised Russian TP legislation that are attracting the attention of many multinational companies operating in Russia.

Feasibility of implementing OECD-compliant TP models

Since the TP rules were adopted, many multinationals have been questioning whether they can now start following TP models commonly used within their groups and compliant with OECD practices. For example, where Russian entities are seen as limited risk distributors, contract manufacturers or routine service providers, a question arises as to what extent these TP models can now be implemented in Russia.

Whilst the revised Russian TP rules have resulted in a closer alignment with the OECD environment, the corporate tax, VAT and customs regime has not undergone significant changes and these regimes still introduce limits in terms of how far certain OECD based structures can be implemented. For example, it is still difficult, if not impossible, to implement a foreign-based principal model due to limitations on the Russian VAT and customs side as well as difficulties with the TP adjustments mechanism.

Nevertheless, there is a growing interest from the multinationals in such principal structures because the companies are driven by consistency and better TP risk management on the global level. As part of this, we see more companies also interested in exploring feasibility of more complex TP models involving value-based fees, variable royalty and franchising arrangements. There is also more interest in potential bi-lateral APAs with Russia and initiation of MAPs, as a way to resolve double taxation situations. We have yet to see how practice develops in this respect.

Grouping of transactions

The Tax Code does not support testing of the overall entity profit: transfer prices should be tested transaction by transaction, and grouping is allowed only for transactions that are "homogeneous". Based on a strict reading of the Tax Code, the definition of "homogeneous" transactions suggests that only transactions with interchangeable goods that have been concluded under comparable commercial and/or financial conditions are homogeneous. In practice, this may be interpreted as the obligation to analyse profitability on a product by product, or service by service, basis.

However, the MoF recently published guidance stating that it is possible to group transactions in which the taxpayer performs similar functions and uses the same TP method and profit level indicator. Whilst this guidance issue is indicative of a softening of the tax authority position, it does not amend the legislative position. Accordingly, there is still uncertainty as to how the legislation will ultimately be interpreted once transfer pricing audits commence. Until then, grouping remains a hot issue in discussing the strategy for Russian TP documentation among multinational companies.

TP documentation requirements

The MoF and the RTA provided recommendations with respect to the content of the TP documentation. Although consistent with international practices (such as OECD and EU Joint Transfer Pricing Forum), it should be noted that a single TP documentation set is preferred to the master file and local TP documentation approach. In addition, new benchmarking studies will have to be prepared for each subsequent financial year (merely rolling forward the results of the study by updating the financial data will not be sufficient). And, there are still uncertainties regarding the documentation volume necessary for achieving penalty protection.

Self-initiated adjustments to the tax base

In situations where the actual related-party transactions result in a price and/or margin that differs from the arm's-length range, a company may be willing to adjust its tax base to align its transfer pricing policies with the market range.

Although the tax code definition of the arm's-length principle is consistent with the OECD guidelines, the tax code stipulates that recognition of income in line with the said principle is possible as long as it does not lead to a reduction of tax in Russia. In addition, the tax code provides a taxpayer with the right to perform self-initiated tax base adjustments in case of an inconsistency between the price in a related-party transaction and the market price, but only in a case where such inconsistency leads to an underpayment of tax in Russia. Hence, the tax code implies that only upward self-initiated tax base adjustments, resulting in an increase of the tax base in Russia, are allowed.

A number of letters issued by the MoF reconfirm that taxpayers have the right to self-assess taxes, whereas none of these letters comment on whether downward tax base adjustments are available. Accordingly, the generally adopted position within Russia is that there is no legal basis for self-initiated downward adjustments to taxable profits, whilst upward adjustments are possible.

Accordingly, multinational companies need to monitor and control the level of profits of their Russian operations on a proactive basis, whilst retro-active adjustments should be used as a last resort.

TP audits of related-party transactions where the transaction value does not exceed the prescribed threshold

According to legislative provisions on TP audits during the transition years (2012 and 2013), TP audits may occur only in cases where the total transactional value of all controlled transactions between two distinct related parties exceeds a certain financial threshold. Considering this clause, a question arises of whether the tax authorities are entitled to audit transactions of 2012 and 2013 from the standpoint of TP regulations if the threshold is not exceeded.

MoF guidance letters covering this issue argue that the RTA may identify a controlled transaction during an audit or the courts may proclaim a transaction as being controlled if there is sufficient evidence demonstrating that the taxpayer artificially created conditions based on which the transaction was not qualified as a controlled transaction. A number of clarifications also state that the court may determine an actual association between parties to a transaction or alleged manipulation of prices resulting in an unjustified tax benefit. Additionally, it is relevant to highlight one MoF explanation on the respective procedure to be followed in such situations. In particular, the guidance details that a local tax authority suspecting an unreported or unrecognised controlled transaction may communicate the related evidence supporting such claims to the Federal Tax Authority which, in turn, can serve as a base for a TP audit.

Based on these MoF letters, taxpayers can conclude that there is sufficient legislative ground to extend TP control to transactions with values below the threshold in situations of deemed tax abuse and manipulation.

Applicability of TP regulations to transactions between unrelated parties

The TP rules regard certain transaction types as related-party transactions. These include: (i) transactions in which a third party intermediates between related parties without accepting any risks, using any assets and performing any functions except for arranging the resale; (ii) cross-border transactions involving certain commodities; and (iii) transactions with parties residing in offshore zones.

Accordingly, these transaction types are subject to TP requirements, even if they take place between unrelated parties. The MoF position is such that transactions are considered as controlled and therefore subject to the documentation requirement. This interpretation arguably contradicts the legal provision of the tax code, which releases transactions between unrelated parties from documentation requirements.

In practice, taxpayers will encounter difficulties in documenting the arm's-length nature of these transactions. In particular, if:

  • All other transactions of the Russian taxpayer are deemed to be controlled, leaving no internal comparables, and no reliable external comparables exist, or such transactions are also deemed as controlled (applicable when considering the comparable uncontrolled price method).

  • Considering profit-based methods, the tested party may be reluctant to reveal information about profit / losses resulting from the transaction in question or the use of the reporting Russian taxpayer as a tested party in some cases may be inappropriate due to its more complex profile or the nature of the tested transaction.

Analysing risk

We have highlighted some of the key transfer pricing issues attracting the attention of multinational companies operating in Russia. The presented topics above are only a part of many TP issues that need to be resolved, but provide a clear indication that multinational companies have to pay special attention to their transfer pricing policies and applicable business structure and analyse related TP risks and exposures.




Evgenia Veter

Ernst & Young

Tel: + 7 495 660 4880


Evgenia Veter is a partner and the head of the transfer pricing practice for Ernst & Young in the CIS.

Evgenia has more than 18 years of experience in providing advisory services to Russian and international companies on various areas of taxation and conducting business in Russia, structuring investments, and coordinating approaches to tax planning. Since 2007 Evgenia has been focusing on transfer pricing and has led transfer pricing planning and documentation projects for multinational and Russian clients in various industry sectors, including the structuring of entry/exit strategies of clients from the transfer pricing perspective, adaptation of global transfer pricing policies to Russian requirements, business restructuring, and development of sustainable transfer pricing methodologies.

Evgenia is a member of the Association of Chartered Certified Accountants (ACCA), co-leader of the transfer pricing working group of the Association of European Business and a frequent speaker on transfer pricing topics.




Steve Cawdron

Ernst & Young

Tel: + 7 495 287 6536


Steve Cawdron is an economist and partner in transfer pricing and tax efficient supply chain management (TESCM) practice. He is based in the Moscow office of Ernst & Young.

Steve has extensive experience in the design and documentation and of transfer pricing systems and tax effective supply chain systems. He has also helped clients resolve transfer pricing conflicts with tax authorities and assists with advanced pricing agreement negotiations. Since early 2012, Steve has been based in our Moscow office, where he is responsible for leading the inbound side of our Russian transfer pricing practice.

Steve is a member of the Association of European Businesses in Russia's transfer pricing task force. Steve frequently speaks on transfer pricing and tax effective supply chain management issues at Russian and international conferences and seminars. He has also written for a number of industry journals such as International Tax Review, UK Tax Journal and BNA.




Anuar Mukanov

Ernst & Young

Tel: +74956647835


Anuar Mukanov is a senior manager in the transfer pricing services team at Ernst & Young in Moscow. Anuar holds a MA degree in Economics from Vanderbilt University, USA. Anuar has specialised in transfer pricing since 2004 and before Russia he worked in Indonesia and Kazakhstan. During his career Anuar has served many global and regional clients across various industries.

His primary areas of transfer pricing expertise include compliance, mitigation of risks, client defence and dispute resolution, and development of internal policies and procedures.




Filip Vukovic

Ernst & Young

Tel: + 7 495 287 6533


Filip Vukovic is a senior manager in transfer pricing & tax efficient supply chain management (TESCM) in the international tax services group based in Moscow. Filip is an economist with extensive transfer pricing, international tax and financial consulting experience.

Previously, Filip was based in France, focusing on TP controversy and value chain transformation projects. In addition, he was active in several jurisdictions in the Balkans region (SE Europe), performing transfer pricing, cross border financial, tax and legal assignments.

Filip holds a MSc in International Management and is also an expert member of the International Fiscal Association (IFA), Serbian branch.

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