As previously reported, the Ministry of Finance was considering amendments to the Tax Code which would, inter alia, (i) change the scope of transfer pricing rules and (ii) introduce new transfer pricing methods to supplement the traditional transactional methods currently contained in the Tax Code. Details of the draft bill, prepared by the Ministry of Finance, have become available. To become law, the bill must be approved by the government, both chambers of the parliament, and signed by the president.
Scope
The scope of transactions subject to transfer pricing rules would be broadened to cover:
| - | any transactions between related parties, including when a third-party intermediary is interposed; | |
| - | barter transactions; | |
| - | cross-border transactions in services, property rights, information or intellectual property; | |
| - | cross-border transactions in specific commodities, such as oil and oil products, ferrous and non-ferrous metals and precious metals and stones; and | |
| - | cross-border transactions between Russian enterprises (or Russian permanent establishments of foreign entities or Russian resident individuals) and companies or individuals resident in countries and territories, which either (i) apply a special tax regime to foreign-sourced income, or (ii) apply lower or zero rates to foreign-sourced income, or (iii) lack a traditional system of taxation or tax administration, or (iv) do not share information on taxpayers with the Russian tax authorities. The draft list of the foregoing countries and territories contains 59 items and includes, in addition to traditional off-shore locations, New Zealand, Luxembourg, Montenegro, and certain territories of Ireland, Portugal, the United States and Switzerland. |
Market price range
Currently, the Tax Code allows a 20% safe harbour deviation from the market price, i.e. the transfer pricing rules only apply to transactions where the price deviates by more than 20% from the market price for similar goods or services. The bill abolishes the 20% safe harbour by requiring that the price for any transaction, to which the transfer pricing rules apply, to be within a "market price range" (a term to be expressly defined in the Tax Code). To establish the market price range, the bill allows the use of the following sources of information:
| - | global exchange quotations or other information in the public domain; | |
| - | customs statistics; | |
| - | pricing information available in official publications issued by state or municipal bodies; | |
| - | valuation reports prepared in line with the relevant regulations; and | |
| - | other information or data used in line with acceptable transfer pricing methods. |
Methods
The bill introduces three new transfer pricing methods to supplement the comparable uncontrolled price (CUP) method, the resale price method and the cost-plus method. The new transfer pricing methods are:
| - | the secondary product method; | |
| - | the comparable profitability method; and | |
| - | the profit-split method. | |
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In spite of the introduction of alternative methods, the use of the CUP method is clearly preferred. In addition, the profit-split method may be employed, provided that none of the other five methods is applicable.
Documentation
The bill sets out the scope of transfer pricing documentation for tax audit purposes. Transfer pricing documentation must include:
| - | detailed information on the taxpayer's activities in respect of the controlled transaction, as well as a description of the controlled transaction, the related parties involved, and the functions performed and risks assumed by each party; | |
| - | a detailed description of the transfer pricing methods employed and sources of information used, a calculation of the controlled transaction's profitability, and an analysis of the economic benefits derived from the transaction; and | |
| - | a description of other circumstances which influenced the transfer prices used. |
APAs
From 1 January 2010, it would be possible to conclude a unilateral advance pricing agreement (APA) on the transfer prices used and the transfer pricing method applied by the taxpayer. The APA may initially cover up to 3 years (renewable for subsequent 2 years). The APA would only be available to large taxpayers and its conclusion would be subject to a fee of RUR 1.5 million (approximately EUR 43,000). The taxpayer's breach of the conditions set forth in the APA would trigger a penalty in the same amount.