As just over a year has passed since the entry into force of the new transfer pricing rules, we now have an opportunity to analyze the impact of the new rules on the largest Russian and international companies in the oil & gas sector operating in Russia. Natalia Valkovskaya, Partner and Head of the Transfer Pricing Group, says that the new rules have had a significant impact on business: “Most companies admitted that the new transfer pricing legislation had necessitated corresponding changes.” Over half the respondents confirmed that at present they are reviewing the current business model or structure of contractual relations in the group, while three of the 12 companies are planning or implementing reorganization.
In addition, the respondents believe that the following are the key difficulties encountered during the adaptation process:
- the significant volume of information required on the controlled transactions (10 out of 12 companies),
- the need to modify the accounting system (8 out of 12 companies),
- the lack of automation of processes (7 out of 12 companies),
- the instability of tax legislation (7 out of 12 companies).
Owing to the adoption of the new transfer pricing rules, companies have had to tackle additional tasks, which include not only the identification of controlled transactions, functional analysis, determination of the transfer pricing method, statistical research and management of the identified tax risks, but also the preparation of notices and documentation on the controlled transactions. Sergei Schelkalin, Partner, Tax & Legal, KPMG in Russia and the CIS, comments: “We can see that 90% of the respondents are acutely aware that they lack the necessary staff due to the increasing volume of the tasks, and that the overwhelming majority of the respondents prefer to outsource the most time-consuming segment of the work – the statistical research (10 out of 12 companies).”
Even though automation of the process for preparing notices on controlled transactions is considered a key issue, less than half the respondents plan to automate this process. Sergei Schelkalin notes: “It goes without saying that the processes in this area require substantial elaboration and optimization and that companies are only at the start of this complex path today. At present, however, it is already possible to point out that companies plan to automate the identification of controlled transactions for instance.”
Rustem Sadykov, Partner, Tax and Legal, KPMG in Kazakhstan, comments: “The results of this research are quite informative in terms of understanding how the Russian petroleum businesses responded to the transfer price regulations adopted in Russia last year, and comparing this information with the reaction that Kazakhstan saw when similar legislation was adopted in Kazakhstan a few years ago. As in both countries the oil and gas sector is on the top of the tax authorities’ list from the perspective of potential transfer price scrutiny, we think that the information on the Russian market outlined in this report will be of high interest to many similar businesses in Kazakhstan as well”.