Transfer Pricing in Russia

Transfer Pricing

Transfer pricing is the setting of transfer prices that are different from market pricing, for deals between interdependent persons, which usually belonging to the same holding (group of companies).

Therefore, the transfer price is defined as the price set in business transactions between different members of a single group of companies.

Price setting between such companies is called transfer pricing.

For what purposes transfer pricing is applied

Transfer prices allow redistributing the total profit of a group of persons in favor of persons, who are residents of countries (territories) with lower taxes.

It is the simplest and common scheme of minimization of taxes to be paid, which invariably requires increased attention from any country.

Tax control

The central office of the Federal tax service, namely the Administration of Transfer pricing, implements tax control of the following three groups of transactions;

1. transactions between interdependent persons, which amount is higher than fixed rate;

  • any transactions in combination exceeding 1 million rubles per year;
  • one party of the transaction is a payer of the tax to extraction of natural resources and the object of deal is extracted mineral, if the sum of transactions is more than 60 million rubles;
  • one party of the transaction is a payer of the single agricultural tax or the single tax on imputed income (if the appropriate deal is entered as a part of that activity), the other party is a person that does not apply referred special tax regimes, if the sum of the transactions exceeds 100 million rubles;
  • one party of the transaction is either exempted from taxpayer obligations of the income tax or is the Skolkovo project participant and applies the 0% tax rate, the other party is not exempted from these obligations and does not apply the 0% tax rate, if the sum of the deals exceeds 60 million rubles;
  • one party of the transaction is a resident (participant) of a special (free) economic area that tax regime provides special benefits for corporate income tax (in comparison with the general tax regime in relevant constituent entity of the Russian Federation), the other party is not a resident of such zones, if the sum of deals exceeds 60 million rubles;
  • one party of the transaction undertakes activities related to production of hydrocarbon raw materials in the new offshore hydrocarbon field, and calculates profit tax in accordance with article 275.2 of the Tax Code of the Russian Federation, the other party does not apply the statute of article 275.2 of the Tax Code of the Russian Federation, if the sum of the deals exceeds 60 million rubles;
  • one party of the transaction is a participant of a regional investment project, applying the 0% profit tax rate to the federal budget and (or) a lower rate to the budget of the subject of the Russian Federation, if the sum of the deals is more than 60 million rubles.

 

2. deals assimilated to transactions between interdependent persons:

  • transactions between interdependent persons involving the independent persons as a pass-through;
  • transactions in the field of external trading in goods of the world stock trading (petrol, ferrous and non-ferrous metals, mineral fertilizers, precious metals and gems), if the sum of the deals with one person exceeds 60 million rubles;
  • offshore transactions.

 

3. deals declared by a court as controlled.

Recognition transactions as controlled (besides the formal entry of the deal in the above-mentioned list) is carried out in performing the regulations of paragraph 11 of article 105.14 of the Tax Code of the Russian Federation, according to which «recognition of transactions as controlled is made based on the statutes of paragraph 13 of article 105.3 of the current Code».

In accordance with paragraph 13 of article 105.3 of the Tax Code of the Russian Federation, rules provided by this chapter extent to transactions, application of which requires accounting by at least one side to such transactions’ income, expenses and (or) the cost of extracted mineral resources, which leads to an increase and (or) reduction of tax basis on the following taxes:

  • according to corporate income tax;
  • according to personal income tax paid by entrepreneurs, notaries engaged in private practice, lawyers established law offices, and other persons engaged in private practice – on the amounts of incomes received from such activities;
  • according to the tax to extraction of natural resources (in case one of the parties of the transaction is a taxpayer of listed taxation and an object of the deal is extracted mineral recognized for the taxpayer as an taxation object of the tax to extraction of natural resources, when production of which the taxation takes place according to the tax rate established in percentages);
  • according to VAT (in case the one party of the deal is an organization (individual entrepreneur), which is not a taxpayer of the value added tax or relieved from duties of VAT taxpayer).
If, as a result of transfer pricing, VAT, income tax, tax to extraction of natural resources or personal income tax would be underreported, taxing authority will charge taxes in addition with penalty fees and fines.

Procedure for determining the prices for taxation purposes

During the tax control over prices in controlled transactions, prices in analyzed transactions should be compared with prices that are applied for taxation purposes.

Prices, which are calculated for taxation purposes are determined according to methods listed in paragraph 1 of article 105.7 of the Tax Code of the Russian Federation:

Methods governing the process of transfer pricing

Chapter 14.3 of the Tax Code of the Russian Federation reviews general regulations related to methods of determining market prices, calculation of profitability interval, and describes techniques and terms for applying all methods.

Specifically, the Tax Code of the Russian Federation sets the methods of transfer pricing for taxation purposes, which could be used by the Russia Federal Tax Service and its regional agencies under tax control due to transactions between interdependent persons:

  • comparable uncontrolled price method;
  • netback pricing method;
  • cost plus method;
  • transactional net margin method;
  • profit split method;
  • independent evaluation price method.

 

This list is conclusive; however priority is given to the comparable uncontrolled price method.

Application of that method is compulsory: for determining of price conformity used in controlled deal, if there is at least one comparable deal, the objects of which are identical or similar goods (works, services) on the relevant market; if there is enough information about controlled transaction.

However, it is accepted that if using of comparable uncontrolled price method is impossible or it does not allow reasonably making a conclusion about compliance or non-compliance of prices used in transactions to market prices; for taxation purposes another methods are used, for example those, which on the basis of actual facts and conditions of controlled deal provides an opportunity to judge most reasonably about compliance or non-compliance of the price used in the deal to the market price.

Moreover, it is possible to use a combination of two or more methods.

Thus, in respect of the remaining methods, the principle of choice the «best method» would operate, i.e. such method that based on the actual facts and conditions of the deal will allow making the most valid conclusion about compliance of the applied price to the market price.

When selecting the method, fullness and reliability of the source data should be taken into account, as well as validity of corrections being implemented to provide comparability of transactions to the analyzed deal.

Order of application of determining prices methods

1. Priority methods are used first of all, regardless of desire of taxpayer or tax authority:

  • comparable uncontrolled price method is a priority in all cases, except for transactions for buying of goods for the purposes of their reselling without recycling to non-interdependent persons;
  • netback pricing method is a priority for transactions of purchasing goods for the purposes of their reselling without recycling to non-interdependent persons;

 

2. If the priority method cannot be applied, then the netback pricing method or cost plus method is used, depending on which one of those methods based on actual facts and conditions of controlled transaction allows making most reasonably a conclusion about compliance or non-compliance of the priced used in the deal to market prices;

3. If the netback pricing method or cost plus method cannot be applied, then the transactional net margin method is used;

4. If the netback pricing method, cost plus method or transactional net margin method cannot be applied, then the profit split method is used;

5. If above-listed methods cannot be applied in a one-time transaction, then the independent evaluation price method is used.