Why Russia's guidance on controlled transactions is a headache

Since Russia’s new transfer pricing rules were released last year, there has been much debate over how they should be applied.

The threshold value for domestic related party transactions to qualify as controlled is RUB3 billion ($103 million).

Taxpayers can determine whether a transaction exceeds the threshold by considering the aggregate income of all transactions between pairs of related companies.

Or, as the ministry stated in a recent letter, taxpayers can make calculations based on the sum of all transactions performed with all related parties in a year.

Under the ministry’s interpretation, if a Russian parent company provides services, loans, or sells goods to a subsidiary, and the total income received is below the threshold, those transactions could still be classed as controlled if income from transactions with all other subsidiaries in the group takes the total above the threshold.

The tax authorities can request transfer pricing documentation for all controlled transactions, which must be provided by taxpayers within 30 days of receiving the request.

The authorities will then be able to make transfer pricing adjustments if they decide the transactions do not meet with arm’s length standards.

A transfer pricing director for a Russian oil company, who wished to remain anonymous, said if the principle of calculating the overall income of all transactions with all related parties is enforced, the number of controlled transactions may radically increase.

“The more controlled transactions we have, the more money we spend on transfer pricing staff and other supplementary services,” said the director.

“The chance of not filing the notification on time will also increase and that may lead to a transfer pricing audit,” the director added.

Evgenia Veter, of Ernst & Young, said taxpayers must now decide to what extent they want to follow the ministry’s recommendations and what risk there will be if they do not.

“Companies will need to assess the risk of not documenting some transactions against the cost of being completely compliant,” said Veter. “To be fully compliant taxpayers will need to spend a lot of time and money on people and management services to prepare transfer pricing documentation for even very small transactions.”

“Taxpayers will still want to prepare documentation for more sensitive transactions but may be willing to accept some risk to avoid the cost of documenting every transaction,” she added.

It is questionable whether the tax authorities will actually have the resources to audit such a greatly increased number of controlled transactions.

However, the possibility of disputes arising if taxpayers do not follow the guidance will be high.

Veter said the tax authorities seem to be trying to find the safest answer from a legislative or technical perspective but this is not always practical.

“In the medium term, the ministry’s opinion must be taken into account by those taxpayers who are planning their intra-group arrangements, for example, considering setting up a shared services centre, and providing uniform transactions by one group member to other members,” said Svetlana Stroykova, of PwC.

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