Russian Federation

Introduction

In July 2011, the Russian parliament approved the new Transfer Pricing regulations, being ratified by the President. These rules came into force on January 1, 2012, and are generally based on the Organization for Economic Cooperation and Development (OECD), but with certain differences.

Before the Transfer Pricing rules introduction in 2012, the control of pricing practices was determined by Article 40 of the Russian Tax Code, which states that regional tax bodies were responsible for controlling prices in both Transactions with associated parties.

Arm’s Length Principle

Transactions must be at the Arm’s Length Principle, i.e., related company transactions must be carried out on terms and conditions similar to those agreed upon between unrelated companies, following the OECD Guidelines.

Related Parties

Under the new law, the following parties are recognized as related parties under the Tax Code:

Entities where a party (the party and its related parties) has more than 25% direct or indirect equity stake therein.
An individual and a company where the former directly and/or indirectly participates in that organization whose equity interest amounts to over 25%.
Companies where a single person holds a direct and/or indirect equity stake in those companies and the size of the equity stake in each company exceeds 25%.
A person who is authorized to appoint (elect) the individual executive body of the company or appoint (elect) not less than 50% of the members of the collegial executive body or corporate board of directors.
Companies whose individual executive bodies or not less than 50% of the members of whose executive collegial body or board of directors have been appointed (elected) by the decision of a single person.
Companies in which the same individuals and related persons comprise more than 50% of the members of the collegial executive body or the board of directors.
Company and the person exercising the powers of its individual executive body.
The court may consider that the companies are related on other grounds.

The Transfer Pricing rules are currently only applicable to transactions between associated parties. The Transfer Pricing rules generally only cover associated party transactions executed on the domestic market exceeding the following legal thresholds:

RUB3 thousand million for transactions executed in 2012.
RUB2 thousand million for transactions executed in 2013.
RUB1 thousand million for transactions executed in 2014.

Transfer Pricing Methods

The Transfer Pricing methods, accepted in Russia, are as follows:

Comparable Uncontrolled Price Method.
Cost Plus Method.
Resale Price Method.
Profit Split method.
Transactional Net Margin Method.

The law contains the best method rule with a certain hierarchy in the application thereof. The CUP method is still the preferred Transfer Pricing method over all others.

Transfer Pricing Documentation

Local Report

It applies to multinational companies with consolidated annual group revenues equal to or exceeding RUB 50,000 million if the parent group company is a Russian resident. The local report requirement applies to fiscal years beginning on or after January 1, 2018.

The local report must be provided only within the Transfer Pricing Audit upon request of the Federal Taxation Service, which will schedule the review. The company has 30 days to file the Local Report after the request date.

Master File

It applies to multinational companies with consolidated annual group revenues equal to or exceeding RUB 50,000 million if the parent company of the group is resident in Russia for fiscal years beginning on or after January 1, 2017. The Master File must be provided in Russian if required by the Russian tax authorities within three months of the request.

Country by Country Report

It applies to multinational companies with consolidated annual group revenues equal to or exceeding RUB 50,000 million for fiscal years beginning on or after January 1, 2017. It must be filed within 12 months after the last day of the MNE’s fiscal year (i.e., December 31). Entities must notify the Russian tax authorities which entity member will file the Country-by-Country Report.

It must be drafted in Russian. The foreign language is valid in the preparation when the parent company of the multinational group is located outside the Russian Federation.

Related Penalties

Failure to file or file the controlled transactions report after the deadline or provide reports with inaccurate information may result in a fine of RUB 5,000 for a legal entity.

In addition, if the prices applied in related transactions do not conform to market prices, the tax authorities may add to a taxpayer’s taxable income the income that the taxpayer would have earned if the correct price had been applied (Transfer Pricing adjustments).

If a tax check reveals understated taxes for transactions, a company will also face a special penalty of 40% of the unpaid tax (RUB 30,000 or more).

There are no penalties for taxpayers if they make a Transfer Pricing self-adjustment and pay additional tax liabilities along with late payment interest before the tax audit.

A taxpayer is exempt from the 20% or 40% penalty if the relevant Transfer Pricing documentation supporting the Arm’s Length Principle was properly prepared and provided to the tax authorities within 30 business days after the request.

Source: Federal Taxation Service

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