• Service: Tax, Global Transfer Pricing Services
  • Type: Regulatory update
  • Date: 7/13/2011

Russia - Final reading of draft transfer pricing law; possible taxpayer actions steps, prior to enactment 

The final reading of the draft transfer pricing law, in the Parliament of the Russian Federation, took place on 8 July 2011.

Certain changes to the draft law had been advocated by the business community; however, significant amendments have not been made during the legislative process.

The following discussion provides an overview of certain key provisions under the draft law, and examines certain steps that taxpayers may want to consider as the draft law moves closer to enactment.

Overview of Provisions

Under the current legislative provisions—

  • A number of additional obligations would arise for taxpayers (in particular, requiring taxpayers to analyze and “detect” controlled transactions and prepare and provide transfer pricing documentation).
  • The transfer pricing legislation would apply to a broader range of transactions.
  • Prices would no longer be permitted to deviate up to 20% from market prices, thus possibly making it more difficult for taxpayers vis-à-vis certain tax planning opportunities. Instead, the legislation introduces the concept of arm’s length range. Accordingly, prices in controlled transactions would have to be established within the arm’s length range.
  • Penalties would be introduced for non-compliance with the provisions of the transfer pricing law. For example, in instances when there is an underpayment of tax because arm’s length prices were not applied, the penalty would be approximately 40% of the amount of unpaid tax but no less than RUB30,000 (approximately US $1,070).

KPMG observation

Transfer pricing professionals in Russia have noted that the pending transfer pricing legislation would have the following effect on taxpayers:

Transfer pricing professionals in Russia have noted that the pending transfer pricing legislation would have the following effect on taxpayers:

  • Existing methods applied by most companies for monitoring transfer pricing risks would be insufficient.
  • The list of controlled transactions would be expanded to include—
    • All cross-border transactions between related entities and exchange trades of commodities (oil, metals, etc.)
    • Russian domestic transactions between related entities with an annual turnover exceeding RUB3 billion (for 2012)
    • Transactions with foreign related parties, regardless of the amount involved, and all transactions with residents of offshore jurisdictions.
  • Prices that companies currently plan to use for 2012 would be subject to tax audit.
  • Depending on the type of transaction, the tax authorities could require special transfer pricing documentation (including all cross-border intercompany transactions) that would have to be prepared in advance.

To address these new rules, it has been suggested that taxpayers would potentially find it reasonable now to:

  • Prepare an action plan for when the law is effective in 2012
  • Analyze prices planned for 2012 and corresponding pricing methodology to verify compliance with the law’s requirements
  • Prepare and implement changes to pricing methodology and to the essential conditions of agreements, in order to consider potential tax risk
  • Prepare transfer pricing documentation, for presentation to tax authorities during special inspections

For more information, contact a tax professional with KPMG in Russia or a member of KPMG’s Transfer Pricing Services group:

Natalia Valkovskaya

+7 (495) 514 13 05

Konstantin Karpushin

+7 (495) 937 44 44

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