Transfer pricing documentation: submission of notification of controlled transactions
Transfer pricing is a method of setting prices in transactions between members of a group of companies or other interdependent entities used to reduce the tax burden. The transfer price is the price set in transactions between these companies as a result of such pricing.
The price is the basis for determining the tax base on income. Independent market participants (counterparties) are at a certain distance from each other (at arm’s length) and conclude deals with each other at prices formed under the influence of the market. This is the essence of the «outstretched arm» principle.
For what purposes transfer pricing is used
Transfer prices make it possible to redistribute the total profit of a group of persons in favor of persons located in states (territories) with lower taxes.
This is the simplest and most common scheme for minimizing taxes paid, which inevitably requires increased attention from any state.
The Central Office of the Federal Tax Service of Russia, namely the Transfer Pricing Department, carries out tax control of the following three groups of transactions:
- transactions between related parties, the amount of which exceeds the established amount:
- transactions equated to transactions between related parties:
- transactions recognized by the court as controlled.
All companies whose transactions fall under the controlled category must submit notifications to the tax inspectorate by May 20, 2022. At the same time, starting from June 1, 2022, the tax authorities have the right to request documentation from companies confirming the level of transfer prices applied by them in controlled transactions last year.
Procedure for determining prices for tax purposes
When conducting tax control over prices in controlled transactions, the prices in the analyzed transactions must be compared with the prices that are used for tax purposes.
The prices that are calculated for tax purposes are determined on the basis of the methods specified in paragraph 1 of Article 105.7 of the Tax Code of the Russian Federation:
Methods regulating the transfer pricing process
- the method of comparable market prices;
- the method of the subsequent sale price;
- expensive method;
- the method of comparable profitability;
The order of application of price determination methods
- Priority methods are applied first of all, regardless of the desire of the taxpayer or the tax authority:
- the method of comparable market prices is a priority in all cases, with the exception of transactions for the purchase of goods for the purpose of resale without processing to non-dependent persons;
- If the priority method cannot be applied, then the method of the subsequent sale price or the cost method is used, depending on which of these methods, taking into account the actual circumstances and conditions of the controlled transaction, allows the most reasonable conclusion to be drawn about the compliance or non-compliance of the price applied in the transaction with market prices;
- If the subsequent sale price method or the cost method cannot be applied, then the method of comparable profitability is used;
- If it is impossible to apply the method of the subsequent sale price, the cost method or the method of comparable profitability, then the method of profit distribution is used;
Submission of notification of controlled transactions
These transfer pricing regulations have placed an extra administrative burden on Russian companies trading with their foreign related companies. Under these rules, when taxpayers have cross-border related-party transactions, they are required to keep so-called transfer pricing documentation and to provide tax authorities with reports on controlled transactions.
Analyzing transactions and preparation of transfer pricing documentation is a necessary precondition for effective preparation and filing of reports to tax authorities. Considering the deadline for filing the reports, it is now the right time to start their preparation, as well as to draft a plan for elaboration (if it has never been developed before), or update transfer pricing documentation for transactions conducted in the previous year.
Please note that failing to submit or submitting the controlled transactions report after the deadline, as well as providing reports with inaccurate information, may result in a RUB 5,000 penalty for a legal entity. Furthermore, if the prices applied in controlled transactions do not conform to market prices, tax authorities may add to a taxpayer’s taxable income the revenue that the taxpayer would have earned if correct pricing had been applied (tax adjustments). If a tax check reveals understated taxes for transactions, a company will also face a special penalty, which is 40% of unpaid tax (no less than RUB 30,000).
We will be pleased to provide you with services related to ensuring compliance of your Russian company with the new transfer pricing rules in Russia. We offer:
- Analyzing transactions of your company to find out which of them are subject to transfer pricing rules
- Advising on effective transfer pricing strategy to safeguard your operations from tax risks and to set up a transfer pricing policy to ensure effective cash and goods / services flow within your group
- Preparing transfer pricing documentation for your company
- Preparing and assisting with filing reports on controlled transactions to tax authorities