In an effort to enforce transfer pricing rules that have been in effect since 1999, the Russian government implemented new transfer pricing regulations in 2012. These new rules give the Russian tax authorities more information about how companies are determining and applying transfer prices in controlled transactions. Tax authorities want to make sure the pricing is fair and that corporations are not mispricing transfers in order to avoid paying taxes.
What Is Transfer Pricing?
When two companies that are part of the same multinational corporation set the price for goods that they intend to trade with each other, this is known as transfer pricing. For example, when a Russian-based subsidiary of an international company buys goods from a German-based subsidiary of the same company, they may set their own prices regardless of open market prices. Because companies can easily artificially deflate prices to avoid paying higher taxes in this kind of transaction, the tax authorities in many countries are very interested in regulating transfer pricing.
Russian tax authorities consider the following types of business relationships to be interdependent for the purposes of transfer price regulation:
- Entities where one party has more than a 25% direct or indirect participation in the other entity or entities.
- Entities where more than 50% of the directors of these companies are the same individuals.
- Entities where not less than 50% of the directors are appointed or chosen by the same individual.
- Entities where the same individual or entity acts as the sole executive body.
- Other situations as determined by the court.
Entities that fall within these categories must understand and follow the rules set forth by the Russian tax authorities regulating transfer pricing actions for controlled transactions.
Not all transactions between related business entities are subject to the new transfer pricing rules. The rules apply to the following:
- Domestic transactions between related parties, if the value of those transactions exceeds RUB 2 billion (approximately USD 70 million) per calendar year.
- Cross-border transactions between related parties with no monetary threshold.
- Cross-border transactions with commodities such as oil and oil products, ferrous and nonferrous metals, fertilizers, and precious metals and stones, exceeding RUB 60 million per calendar year.
- Transactions of an operator or a license holder of a new offshore hydrocarbon deposit with third parties.
- Cross-border transactions with foreign entities registered in certain low-tax jurisdictions, according to a list established by the Russian Finance Ministry.
- Transactions between participants in regional investment projects in the Russian Far-East Region and third parties.
Exemptions to transfer pricing control include transactions between Russian companies registered in the same administrative region that do not have any subdivisions in other administrative regions within Russia or abroad.
Transfer Pricing Methods
Under the law, taxpayers are required to apply an approved method for determining transfer pricing. Taxpayers may choose the best method for their purposes, but the comparable uncontrolled price method should be used over all other methods if it is applicable. The profit split method should be used only as the last resort. Taxpayers must be able to support the pricing method they choose with valid reasons for choosing it. A taxpayer may also establish the transaction price with an independent appraisal in the case of one-off transactions when none of these methods can be applied. The transfer pricing methods are as follows:
- Comparable uncontrolled price (CUP). This method compares the price charged for goods transferred in a controlled transaction to the price charged for goods transferred in a comparable uncontrolled transaction.
- Resale price. In this method, the resale price margin that the reseller earns from the controlled transaction is compared with the gross margin from comparable uncontrolled transactions.
- Cost plus. The mark-up on costs that the manufacturer or service provider earns from the controlled transaction is compared with the mark-up on costs from comparable uncontrolled transactions.
- Transactional net margin (comparable profits method). This method examines a net profit indicator, such as costs, sales, or assets, that a taxpayer gained from a controlled transaction with the net profit earned in comparable uncontrolled transactions.
- Profit split. This method splits the combined profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated between independent enterprises.
Are You in Compliance With the Transfer Pricing Rules? Ask Jus Privatum
Transfer pricing regulations are complicated and you could face serious penalties if you are not in compliance. Talk to the corporate attorneys at Jus Privatum if you are unsure which rules apply to your business entity. We understand the law and can make sure you do as well.