Amendments to Transfer Pricing Rules in Russia

BRICS Consulting

Amendments to Transfer Pricing Rules in Russia

27.10.2014 transfer pricing 0 Comments

We are glad to take this opportunity to remind you about the current Russian transfer pricing rules in effect since January 1, 2012.

This alert provides a brief overview of the current rules.

BRICS Consulting provides, among others, the following services:

  • Analysis of transfer pricing risks taking into account the current rules and recommendations to minimize such risks;
  • Development of transfer pricing strategy and recommendations on how to implement it;
  • Advice to select and apply the appropriate transfer pricing methods;
  • Support in preparing the necessary transfer pricing documentation;
  • Conducting comparability analysis;
  • Support in transfer pricing reporting;
  • Support in tax disputes and tax audits;
  • Support and advice on any other issues related to transfer pricing and taxes in general.

Should you have any questions regarding the current transfer pricing rules or other legal issues, please contact us.

Applicability (controlled transactions)

The current rules put an extra administrative burden on, among others, Russian companies trading with their foreign related companies. These rules affect international companies selling products to or buying products from their Russian subsidiaries and other related companies in Russia. Transfer pricing rules applied to cross-border related-party transactions deriving income in the amount of RUB 100 million and RUB 80 million in 2012 and 2013, respectively. Starting in 2014, all cross-border related-party transactions are subject to transfer pricing rules.

By and large, the current rules significantly narrow the sphere of transactions to which transfer pricing rules apply. According to the general rule, domestic related-party transactions are subject to transfer pricing rules only if the aggregate value of such transactions exceeds RUB 1 billion (RUB 2 billion in 2013; RUB 3 billion in 2012). Lower threshold values apply to certain domestic related-party transactions, such as, for instance, transactions involving an entity subject to unified tax on imputed income, in which case transfer pricing rules apply if the aggregate value of the transactions between the parties exceeds RUB 100 million.

In brief, cross-border related-party transactions are always subject to transfer pricing rules, while as a general rule, domestic related-party transactions are subject to transfer pricing rules only if the aggregate value of the transactions exceeds the above-referenced threshold values.

Transfer pricing documentation 

Under the current rules, when taxpayers have cross-border related-party transactions, they are required to keep so-called transfer pricing documentation.

The rules do not set forth a specific form for the documentation, but regulate its content. Transfer pricing documentation must provide for, among other relevant information:

  • The activities of the parties to such transactions;
  • A list of the parties with which such transactions were executed;
  • A description of the transaction, including the terms of the transaction, the method applied for determining the price, terms of payment, and other relevant information;
  • A functional analysis clarifying the functions performed and risks assumed by the parties;
  • The reason why a certain transfer pricing method is used;
  • Sources of information;
  • Information about received income and expenses incurred in a controlled transaction;
  • Calculation of the arm’s length range (comparability analysis); and
  • Information on any relevant tax adjustments made by the taxpayer, if any.

Please note that a transfer pricing policy is one of the key documents to justify prices. As a rule, this policy covers, among other things:

  • the existing objective economic “commercial” conditions for the business of a company;
  • a description of risks associated with the business of a company;
  • a description of factors affecting a company’s pricing;
  • a procedure for assessing risks and other factors affecting a company’s pricing;
  • a description of the markets in which a company operates and the characteristics allowing demarcation between these markets;
  • pricing methods, including bonuses and discounts;
  • justification for the market nature of prices (including dependence on the terms of supply, the terms of payment, etc.).

The transfer pricing documentation should also provide for other information that affected the pricing of the transactions.

N.B.: It is recommended to start planning the process of complying with the current transfer pricing rules as early as possible.

Comparability analysis

Comparability analysis is a key aspect of compliance with the current rules. It is important for taxpayers to conduct a comparability analysis justifying the prices that they apply. In the course of such analysis, taxpayers have to collect and select information on internal and external comparable transactions (comparables). We strongly advise starting comparability analyses at an early stage.

Comparables means transactions between non-related parties. A transaction may be qualified as a comparable after conducting a comparability analysis. A comparability analysis conducted under prescribed rules allows selecting comparables, which are most suitable for comparability analysis purposes. Comparables may be internal (in-house), transactions between the taxpayer and non-related parties, and external, transactions between non-related third parties. It is usually required to find at least four comparables; they may include internal comparables.

Main Steps

Conducting comparability analysis is a rather time-consuming and complicated process, which can be broken down into the following main steps:

  1. Collecting and systematizing the necessary information about the taxpayer and its controlled transactions;
  2. Analyzing the collected information for the purposes of comparability analysis, conducting functional analysis;
  3. Determining the required comparability parameters;
  4. Identifying sources of information on comparables that meet the defined comparability parameters;
  5. Searching for and identifying comparables required for the analysis;
  6. Collecting information on and selecting the comparables;
  7. Analyzing the collected information on the selected comparables;
  8. Conducting comparability analysis;
  9. Making comparability adjustments, if necessary;
  10. Establishing the arm’s length range;
  11. Preparing a report on comparability analysis.

Factors to consider

Transactions comparable to controlled transactions must occur in similar commercial and/or financial conditions to those of controlled transactions.

The following factors should be considered to determine comparability of transactions:

1) Characteristics of goods (services) that are the subject of transactions;
2) The functions performed by the parties to the transactions, including the characteristics of the assets used by the parties to the transaction, risks that they are taking and allocation of responsibilities between the parties, as well as other terms and conditions of transactions (functional analysis);
3) Terms and conditions of agreements (contracts) entered into between the parties affecting the price of goods (services);
4) Economic conditions of the parties to the transactions, including the characteristics of the markets for goods (services) affecting the price of goods (services);
5) Market (commercial) strategies of the parties to a transaction affecting the price of goods (services).

Information requirements

When conducting a comparability analysis, taxpayers must use:

  • The information available at the time of execution of controlled transactions, but no later than December 31 of the calendar year in which the controlled transactions were executed; or
  • Data of Russian accounting records for the three calendar years preceding the calendar year in which controlled transactions were executed; or
  • Data of Russian accounting records for the three calendar yearspreceding the calendar yearin which the pricesfor the controlledtransactions were set.

Transfer pricing reporting

Under the current rules, taxpayers are required to provide tax authorities with reports on controlled transactions by May 20 of the following year. These reports must indicate the calendar year to which they refer, the subject of the transaction, information on the parties of the transactions, and revenue received from such transactions.

Tax authorities may request taxpayers to present the relevant transfer pricing documentation. Taxpayers are required to provide the documentation within 30 days from the date of such request, but tax authorities may not request this documentation before June 1 of the following year.

Arm’s length range

The previous transfer pricing rules provided for a price range within which applied prices are valid (safe harbor) as long as they do not deviate more than 20% from prices applied by independent parties on the market (arm’s length rule). The current rules abolish this range and require that prices applied in controlled transactions generally correspond to prices applied by independent parties on the market for comparable transactions. These current rules also provide for procedures for calculating the price range within which the price of goods and services should fall (arm’s length range).

To identify comparable transactions, a so-called functional analysis must be conducted and certain transfer pricing methods applied.

Related parties

Compared to the previous rules, the current transfer pricing rules expand the scope of related parties. According to the previous rules, related-party transactions arose when one of the parties to a transaction owned at least 20% of the charter capital of the other party or when the parties are individuals, with one party officially subordinated to the other, or are family relations.

In essence, according to the current rules, the following transactions are considered as related-party transactions:

  • Transactions in which one of the parties owns directly or indirectly more than 25% of the charter capital of the other party;
  • Transactions between sister companies, if the mutual parent company owns more than 25% in both sister companies;
  • Transactions between a company and a party authorized to appoint the general director or at least 50% of the members of its supervisory or management board;
  • Transactions between companies of which the general director or at least 50% of their supervisory or management board have been appointed by the same party;
  • Transactions between companies of which 50% of their supervisory or management board consists of the same individuals or their close relatives;
  • Transactions between a company and its general director;
  • Transactions between companies that have the same general director; and
  • Transactions within company chains (including individuals) in which each company owns more than 50% of the charter capital in the following company;
  • individuals, if one individual is subordinate to the other individual according to their official positions;
  • a natural person, his or her spouse, parents (including adoptive parents), children (including adopted), full and half brothers and sisters, guardian (trustee) and ward.

As before, courts may on other grounds deem parties to a transaction as related parties, if the relationship between the parties is such that one party can influence the other party’s decision-making.

Transfer pricing methods

The current transfer pricing rules increase the number of transfer pricing methods that can be applied to evaluate and determine the arm’s length range. The earlier hierarchy of methods is replaced with the best method principle which consists in selecting the most appropriate method to a specific situation, while the comparable uncontrolled price method generally remains the primary method.

Comparable uncontrolled price (CUP) method

The current rules provide that the CUP method is the primary method (except for trading companies that must apply resale minus method on a priority basis) for evaluating the appropriateness of applied prices. Applying the CUP method requires that there is at least one comparable transaction between independent parties on the market to which the transaction under review can be compared, as well as that sufficient information is available on that transaction. Transactions executed between the taxpayer and third parties may also be qualified as comparable transactions.

Resale minus method

The resale minus method may be used when goods acquired from a related party are resold by the purchaser to a third party. The method allows determining whether the purchase price of the acquired goods conforms to market prices by comparing the gross margin of the purchaser (at resale) to gross margins in comparable transactions where resold goods have been acquired from an independent party. This is the primary method for trading companies.

Cost plus method

According to the current rules, the cost plus method is mainly applicable to services specified by law. This method allows comparing the gross profit on cost that the seller receives in a controlled transaction with the gross profit on cost received by a seller in comparable independent transactions and thus allows determining whether the applied price conforms to market prices.

Comparable profit method

The comparable profit method should be used if there is not enough information available on comparable transactions to apply the resale minus or the cost plus method. Under the comparable profit method, the company’s operational profit is compared to the profit of companies in comparable transactions taking into consideration the company’s functions and risks, as well as the assets available.

Profit split method

The profit split method should be used when the profit from a transaction is split between two or more parties, unless one of the above methods can be applied. This method is in particular applicable to transactions involving intellectual property rights. Profit should be split by the parties in proportion to their contributions to the transaction.

Sources of information

When conducting comparability analysis taxpayers, in addition to information about their own activities, may use any publicly available sources of information. Tax authorities are permitted to use the following sources of information for comparability analysis purposes:

  • Prices and quotations on Russian and foreign trade exchanges;
  • Customs statistics;
  • Official information on prices published by government bodies or foreign governments or international organizations as well as information on prices available in other similar public databases;
  • Information from agencies publishing data on prices;
  • Companies’ internal information on comparable transactions;
  • Companies’ financial and statistical reports;
  • Information from independent appraisals.

In addition to the above, a company is allowed to use other information necessary for determining the market price as required by the applied transfer pricing method.

Transfer pricing audits

The current law authorizes tax authorities to conduct transfer pricing audits to ensure that taxes are duly paid. In general, such audits should not last more than six months, but tax authorities may extend such audits up to 21 months in certain cases.

Burden of proof

Although taxpayers are under documentation and reporting obligations, the burden of proof lies with tax authorities, and tax authorities must demonstrate that a price is not in line with prices applied on the market.

Symmetrical adjustments

If a party to a transaction has been subjected to additional taxes due to the fact that it had not applied market prices, the other party to the transaction is entitled to adjust its taxes accordingly, i.e., in practice to decrease its taxes. Such symmetrical adjustments, however, apply to domestic transactions only.

Advance pricing agreements (APA)

The current transfer pricing law also provides for advance pricing agreements. An advance pricing agreement is entered into between a taxpayer and tax authorities. The subject-matter of an advance pricing agreement is the method for determining prices of controlled transactions. Advance pricing agreements are only available for so-called major taxpayers. A taxpayer must pay duties in the amount of RUB 1.5 million for consideration of an application for entering into an APA.


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 would have been applied (tax adjustments).

From 2014 onwards, in addition to tax adjustments a special penalty of 20% is imposed on taxpayers not applying market price rates. From 2017 onwards, this penalty will be increased to 40%, unless the breach relates to the financial years 2014-2016 in which case the 20% penalty rate will apply.    

Permanent establishments

The current rules also touch upon the taxation of permanent establishments of foreign legal entities in Russia and provide that the revenue of a permanent establishment must be determined taking into consideration the permanent establishment’s functions, assets and assumed risks. According to the position taken by the Russian Ministry of Finance, transactions between a permanent establishment of a foreign company in Russia and a Russian entity are subject to the transfer pricing rules regardless of their value (starting in 2014).

Should you have any questions or require any further assistance regarding the current transfer pricing rules, please do not hesitate to contact us.


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