Transfer pricing and pre-audit analysis in Russia

Despite transfer pricing (TP) legislation being introduced in Russia almost 10 years ago (in 2012), judicial practice in this area remains very limited. Indeed, there are not many actual TP audits, as in recent years the Russian Tax Authority (RTA) has focused more on pre-audit analysis (PAA).  

In the first nine months of 2020, 50% of the state’s budget revenues came from this pre-audit analytical work by the Federal Tax Service of Russia, with the remaining 50% from the use of classic control measures.

PAA provides the RTA with a flexible negotiation tool that allows them to significantly economise the performance of TP audits.  The idea of the PAA is to gain information about a controlled transaction without opening a full TP audit and, if required, to induce the taxpayer to voluntarily adjust its tax obligations without the cumbersome framework of a TP audit.  The procedure for a PAA is not directly set out in the Tax Code of the Russian Federation, but when making PAA requests, the RTA are referring to Articles 93 and 93.1 of the Tax Code of the Russian Federation. 

As a rule, during a PAA the RTA follow this scheme: 

• Identify companies with a high-risk profile;
• Submit requests for information, interview employees, discuss circumstances with the taxpayer;
• Suggest that the company independently adjusts its tax obligations; and
• In the absence of any agreement with the taxpayer, the RTA open a full TP audit.

Requests from the RTA as part of a PAA may be classified into the following three types.

Collecting general information about the company's intra-group operations

As part of their inquiry, the tax authorities may request a wide range of information about the controlled transactions of that taxpayer.  This type of request does not necessarily mean additional tax will be charged – receipt of such a request may simply mean that the RTA is collecting information about companies in a particular sector to identify companies or transactions that are high risk.

Obtaining detailed information and calculations for specific controversial transactions 

The RTA may request details and clarifications about a particular transaction. This may mean that the RTA has done preliminary work and see the potential for additional charges in relation to a specific controlled transaction. This is an ideal time for a taxpayer to enter into substantive dialogue with the RTA.

Requests for calculations and clarifications of tax obligations

To assess whether the prices in the controlled transaction are at arm’s length, the RTA may independently select the applicable TP method, conduct a benchmarking study, and perform relevant calculations. As part of the PAA request, a taxpayer may receive these calculations with a suggestion that they voluntarily adjust their calculated tax liabilities. The taxpayer’s reply should contain a detailed answer with data from the TP documentation. Based on the results of the PAA, the taxpayer can then independently decide on whether to adjust the tax base.

Convenience of pre-audit analysis

PAA can be convenient for both the RTA and taxpayers. 

For the RTA, it gives the ability to encourage a taxpayer to voluntarily adjust its tax base without challenging the TP documentation and going through litigation.  

For a taxpayer, no fines or other sanctions are applied when a decision on an adjustment is made. It additionally gives the taxpayer the chance to get advance pricing agreements faster and easier, because the RTA has studied the transaction and already has an idea of the fair pricing for it.

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