Transfer Pricing in Russia
7 answers you need to know to sleep easy until May 20, 2017
1. Are my transactions subject to transfer pricing control in Russia?
The following transactions are considered controlled under the Russian Tax Code:
- International (cross-border) transactions with related parties*;
- Domestic (between Russian taxpayers) transactions between related parties (if income from the transaction exceeds 1 bln. RUB; or less in some specific cases);
- Certain cross-border transactions with unrelated parties;
- Transactions through intermediary, if the transaction without the intermediary would be a controlled transaction and the intermediary does not carry additional risks/has additional significant functions;
- Other special cases.
* criteria and definition of related parties are provided in Section 14.1 of the Russian Tax Code.
2. When do I need to submit a transfer pricing notification?
Russian taxpayers who execute controlled transactions should prepare and submit transfer pricing notification, even if the transaction covered only one pen.
TP notification should be submitted to the Russian tax authorities by 20th May. The notification should cover controlled transactions of the previous year i.e. for 2016 transactions the deadline is 20th May 2017.
3. In which form should transfer pricing notification be and how difficult is it to create it?
TP notification should be prepared and submitted in electronic form (XML format) and transferred to the local tax authorities via electronic communication channels.
The notification should include all controlled transactions, therefore its preparation is quite a costly and time-consuming process and should be started 1-2 months in advance. Of course, it is advisable to leave it to professionals.
4. When do I need to prepare a transfer pricing documentation?
Apart from notification on controlled transactions, the Russian transfer pricing rules introduce documentation requirements and provide that Russian tax authorities may request transfer pricing documentation based on information from notification or during a tax audit.
Transfer pricing documentation for 2016 transactions can be requested starting from 1st June 2017. A taxpayer will have only 30 days to prepare and submit the requested documentation to the tax authorities.
5. How much time do I need to prepare transfer pricing documentation?
TP documentation is prepared for each controlled transaction separately and should be quite a detailed document. Therefore its preparation may require up to 3-4 months.
6. What documents / information do I need for the documentation?
For the process of documentation preparation a taxpayer should use not only contracts covering controlled transactions and information about its counterparty, but also its financial information (based on the Russian accounting standards) segmented by each separate transaction. Transfer pricing methodologies and policies applied internationally in the group can also be useful.
7. What happens if I do not hand in my notification / requested documentation?
If a taxpayer does not (timely) submit a transfer pricing notification, or completes it inaccurately, a penalty of RUB 5,000 will be imposed. If the taxpayers does not submit a documentation upon request, the tax authorities can assess the correctness of the prices themselves. If they come to the conclusion that prices are not at arm´s length, the fine amounts up to 40% of the transfer pricing adjustment for underpayment of tax liability as a result of applying prices which are not arm’s-length. For periods 2014-2016 the penalty of 20% is applied.