Are any changes expected to be introduced to the format of the notifications, making easier to fill out?
Companies preparing notifications run into various practical, as well as theoretical, difficulties. In particular, the tax authorities require disclosing information on each transaction with a breakdown per each item of goods , which requires working with a large volume of data.
Currently, changes to the notification form, and the option to aggregate data on Sheet 1B, are under discussion. However, even if the changes are finalised and approved, they will come into force no earlier than next year (i.e. will become effective in respect of filing notifications for 2013). Accordingly, we recommend preparing the notification taking into account the current requirements and seeking professional consultation assistance, when necessary.
How can a company that is part of a larger group simplify the procedure for submitting information regarding large numbers of transactions?
Various programming solutions are available for automating the preparation of notifications and their submission electronically to the tax authorities in a special XML format.
We recommend first confirming that the accounting program in use supports the generation of notifications on controlled transactions in an electronic form. If it does, it is possible to use the company’s existing accounting program.
If it does not, the following options are available:
- Use a standardised system (accounting program) with the existing solution to generate the notification;
- Use a special conversion program based on MS Excel or MS Access to generate the notification. Such conversion programs are developed and offered by KPMG and other consultants.
In practice, using software simplifies notification preparation in cases involving large numbers of transactions. The given programs’ operating principle includes 3 steps: (1) uploading data from the current accounting system, (2) processing it and adding details on controlled transactions and (3) subsequently converting it to a special format accepted by the tax authorities.
However, the accounting system does not contain all the data needed for the notification. A tax or accounting specialist will have to input additional details on the terms of the transaction (e.g. by configuring relevant directories or manually in MS Excel). As a result, the software automation is only partial.
When should companies automate the preparation of notifications?
All cases should be assessed on an individual basis. Take this example. If a company's principle economic activity involves a small number of controlled transactions during the year (e.g. rendering services for which acts of delivery and acceptance are produced monthly), automation is likely to be more expensive than manual completion.
What are the typical questions in respect of completing notifications?
One of the most common errors concerns rounding the values for income/expenses for a group of similar controlled transactions. Rounding values to the nearest integer for each operation on the sheets in Section 1B leads to that the total for the group of operations does not match the value given on sheet 1A of the notification (which taxpayers receive from the accounting system).
To solve this issue, two options are available: (1) adjusting the total on sheet 1A in accordance with the value of transactions on the sheets in Section 1B or (ii) adjusting price per item on the sheets in Section 1B. Tax authorities take the position that the value given on sheet 1A of the notification should match the value from the accounting system; it is also acceptable to amend price per item to achieve this result (Letter of Federal Tax Service of 2 July 2013 № ОА-4-13/11860@). We know that both options are taken in practice by companies. For this reason, we recommend clarifying the approach applied in the explanatory notes that the taxpayer is entitled to submit with the notification.
Other common questions concern defining the subject of the transaction in the case of financial operations (loans and guarantees) and how to choose the measurement unit code or indicate the cost per unit. According to clarifications made by the tax authorities, such transactions can be classified as "services" when choosing the subject of the transaction for Sheet 1B. As the unit of measurement for financial operations, our view is that it is acceptable to use "items" (shtuki in Russian). Accordingly, the unit cost for loans is the amount of interest accrued/paid for the year. Please note that if a company decides to specify interest as the unit of measurement, in practice this is likely to lead to a number of complications when completing Sheet 1B (e.g. how to specify the annual interest rate if a loan is issued or repaid over a year).
What problems and sanctions can companies face if they submit an incomplete or inaccurate notification? What do companies need to be aware of?
According to Article 129.4 of Russian Tax Code, the fine for failing to provide the notification, or providing false information, is 5,000 rubles per taxpayer (approx. 170 US$). While the fine is immaterial, taxpayers who submit notifications without the details required by the tax authorities, or with errors, are likely to be among the leading candidates for transfer pricing audits. Therefore, when preparing a notification, it is important to find a "golden mean" between the level of details disclosed on the controlled transactions and the time of accounting specialists to be spent on preparing the notification.
In addition, preparation of methodologically correct notification is one of the key factors in developing a structured approach to transfer pricing internal controls. For example, an important aspect of filling out the notification is choosing which approach to apply for defining group transactions when completing sheet 1A. The notifications are closely connected with the preparation of subsequent transfer pricing documentation; and, if the taxpayer groups transactions incorrectly in the notifications (even if this is corrected in subsequent transfer pricing documentation), the error can affect the taxpayer's position when defending its position on aggregation of transactions for profitability analysis in the course of potential transfer pricing audits. Therefore, we recommend using a consistent approach to grouping transactions in the notification and the documentation where possible.
Should you have any questions on completing notifications, it would be our pleasure to discuss them in detail and provide support for completing notifications either on paper or electronically.