«Three-level» Transfer Pricing Documentation in Russia

The transfer price is the price set in business transactions between different departments of a single company or between members of a single group of companies. The activity of setting prices between such companies is called transfer pricing. Transfer prices allow you to redistribute the total profit of a group of individuals in favour of individuals located in states with lower taxes. This is the simplest and most common scheme for minimizing taxes paid.

By Federal law No. 227-FZ dd 18.07.2011 (effective from 01.01.2012), the Tax Code of the Russian Federation was supplemented by Section v. 1 «Related persons. General provisions on prices and taxation. Tax control in connection with transactions between related parties. Pricing agreement», which provides the powers to the Federal Tax Service of Russia to control prices in transactions between related parties.

The provisions of Section v. 1 of the Code are closely related to the approaches laid down in the OECD Transfer Pricing guidelines 2010, which are widely used in the practice of leading foreign tax administrations.

The laws of the Russian Federation in transfer pricing are based on international experience. In particular, the most important principle is to compare the cost set by interdependent companies with the prices that would be formed by independent companies.

Will the transfer pricing be controlled?

Additional control is introduced for transactions with the following characteristics:

  • transactions between parties that are dependent on each other (including the participation of the supporter);
  • transactions between Russian companies and representative offices of other countries;
  • transactions made on the foreign market with exchange products (this includes, for example, metals). Additional verification is performed only when the company’s annual revenue exceeds 60 million rubles;
  • one of the parties is located in the zone with preferential taxation and for one of the counterparties, the tax rate is 0%;
  • the transaction is conducted with the participation of an entity that extracts natural resources and pays the mining tax;
  • transactions between sister firms, if their share in the parent company is 25% or more;
  • transactions between a company and its CEO;
  • transactions between companies where the CEO is the same person.
There may be other grounds for verification. However, all of them must be confirmed by law. Control is carried out only when the transaction amount exceeds a certain level. As a rule, this is 60–100 million rubles.

In what cases is there no control?

The list of transactions that are not subject to additional control is defined in article 104.4 of the Russian Federation’s Tax Code:

  • operations performed by representatives of the consolidated group that comply with the laws of the Russian Federation;
  • transactions are made between individuals with legal addresses within the same region;
  • transactions between enterprises that do not have separate divisions in other regions of the country or other States;
  • transactions between parties that pay tax to the budget of the same region;
  • one of the parties has no losses for the previous period, which reduce the tax;
  • none of the participants switched to a special tax regime.

Obligations of transfer pricing participants

Companies that set transfer prices have the following responsibilities:

  • annual notification to the Federal Tax Service of transactions that are subject to additional control. The notification must be sent by May 20 of the next period;
  • at the request of the Tax Authorities, the company must provide all documents related to the transaction.
The company can be checked at any time for the objectivity of pricing.

«Three-level» transfer pricing documentation

Starting from January 1, 2018, the provisions on «three-level» transfer pricing documentation are applied. A new concept of the International Group of Companies (IGC) was introduced.

The new rules apply to groups of companies that receive income in accordance with the consolidated financial statements in the amount of:

  • from 50 billion rubles, if the parent company of the group is a tax resident of the Russian Federation;
  • from the amount established by the legislation of a foreign state for the obligation to submit their country report, if the parent company of the group is a tax resident of this foreign state.
The reporting period is the year following the financial year in which the above amounts of revenue were achieved.

Participants of an International group of companies must submit the following documents:

  • notification of participation in the IGC;
  • global documentation for IGC;
  • the national documentation;
  • the country report.

Notification of participation in the IGC

In general, notification of participation in the IGC is submitted to the Federal Tax Service by all IGC participants who are taxpayers. The exception is foreign organizations that receive only the income specified in article 309 of the Tax Code of the Russian Federation. However, one company can report for all participants. This can be done by the parent company or an authorized participant. They must be either Russian organizations or foreign organizations (structures without legal entities) that have voluntarily recognized themselves as tax residents of Russia.

The notification is submitted in electronic form. You must report no later than 8 months from the end of the financial period for the parent company of IGC. A fine of 50 thousand rubles is imposed for violating the deadline for submitting a notification or for false information in it.

Global IGC documentation

Global documentation is provided at the request of the Federal Tax Service by participants of the IGC-taxpayers of the Russian Federation. Foreign organizations that receive only the income specified in article 309 of the Tax Code do not submit global documentation. These reports must be submitted within 3 months from the date of receiving the request.

The global documentation is drawn up in any form and, in particular, should contain the following information:

  • on the capital’s structure and control of the IGC;
  • markets for goods, works, and services where IGC participants conduct their main activities;
  • activities of the IGC;
  • IGC’s intangible assets;
  • financial activities of the IGC.
For violation of the deadline for submission, a fine of 100 thousand rubles is set.

National documentation

National documentation is submitted at the request of the Federal Tax Service by participants of the IGC — taxpayers of the Russian Federation who have made a controlled transaction with another participant of this IGC, whose place of registration, or place of residence, or place of tax residence is not Russia. Foreign organizations that receive only the income specified in article 309 of the Tax Code do not submit national documentation.

The participant must submit the documentation within 30 days from the date of receiving the request from the Federal Tax Service.

The documentation is drawn up in any form. It should contain the following information:

  • on the management structure of the taxpayer;
  • the taxpayer’s activities and market strategy;
  • the taxpayer’s main competitors;
  • the reasons for concluding that the price applied in the controlled transaction corresponds to the market price.
For violation of the deadline for submission, a fine of 100 thousand rubles is set.

The country report

The country report is submitted by the parent company of the IGC or an authorized participant of the IGC if they are Russian organizations or foreign organizations (structures without a legal entity) that have voluntarily recognized themselves as tax residents of the Russian Federation. The report must be provided not later than 12 months from the end of the reporting period. Furthermore, the country report should be submitted at the request of the Tax Authorities. This rule isn’t applied to participants of the IGC — foreign organizations that receive only the income specified in article 309 of the Tax Code.

There is a list of conditions under which, at the request of the Federal Tax Service, the country report may not be submitted by the IGC participant in respect of whom a notification of participation in the IGC was submitted (or the participant submitted such a notification itself).

In fact, it turns out that the country report is submitted by the Russian participant of IGC, where the parent company or authorized participants are tax residents of foreign States, in the following cases:

  • the state is included in the list of countries systematically not acting in the exchange of country reports;
  • the Federal Tax Service has information that the country report was not submitted abroad.
In this case, the country report must be submitted within the time limit set by the Federal Tax Service in the request. Moreover, this period may not be less than three months from receiving the request. The country report is submitted electronically.

The Federal Tax Service approved the format and rules for completing and submitting this report. The Tax Code of the Russian Federation sets the content of the country report.

For violation of the deadline for submission, a fine of 100 thousand rubles is set.

We are happy to offer you all the necessary services to ensure that your Russian company complies with Russia’s transfer pricing rules.