Changes in the taxation of intercompany transactions and regulation of TP issues in Russia
On 27 November 2023, Federal Law No. 539-FZ (hereinafter - the "Law") introduced significant amendments to the Tax Code of the Russian Federation (hereinafter - the "TC RF"). They are largely related to the issues of transfer pricing regulation (hereinafter – “TP”). Some other legislative provisions have also been amended.
TP: new transactions to control
The list of criteria for recognising persons (entities) as interdependent has been extended. It adds controlling persons and controlled foreign companies, as well as the case where two companies have a common person (entity) holding an interest or having the authority to appoint executive bodies. This eliminates possible doubts about the combination of interdependence criteria. From practical point of view, these changes should not have a significant impact on the situation of international groups of companies, as their transactions are often subject to control based on simpler criteria, such as more than 25% shareholding.
New requirements for TP documentation
From 2024, in addition to the mandatory information, supporting documents will need to be attached to the TP documentation. For example, information on income, expenses, profit, value of fixed and intangible assets of a foreign company must be supported by financial statements, if transactions are carried out between persons (entities) that are recognised as interdependent.
From practical point of view, the change in approach in this part makes it much more difficult to prepare documentation within the 30-day filing deadline. However, this situation is less problematic than the new obligations of companies dealing in exchange-traded goods, for which documentation work becomes part of their daily activities, as they will need to submit documentation on such transactions together with the notification of controlled transactions.
Notification of controlled transactions
The possibility of submitting a notification on paper is retained only for individuals. Legal entities shall submit notifications only electronically.
The wording of the Law adds to the information to be disclosed in the TC RF the information that had previously been required only for the preparation of a notification. More significant changes have occurred with respect to transactions involving exchange-traded goods: subsequent purchasers of such goods, information on the ultimate purchaser, commercial and financial terms of such transactions must be additionally specified.
Thus, the form of the notification will undergo changes. For a wide range of taxpayers, the preparation of the notification should not change dramatically. In addition, it is expected that in practice taxpayers will not encounter these changes until 2025, as the new form will not be ready for the next reporting filing in May 2024.
Adjustment of prices by the Federal Tax Service of RussiaThe Law establishes a secondary adjustment mechanism: in case of deviation of prices from the market ones, the difference by which the Russian taxpayer's tax base was understated is equated to dividends, i.e. is subject to withholding tax at the rate of 15%, but without the possibility of applying a reduced rate on the basis of double taxation treaties (hereinafter – “DTTs”).
However, withholding tax, fines and penalties will not apply, if a foreign counterparty returns unjustified income (in the non-market part) to a Russian taxpayer. The position of the Russian Federal Tax Service (hereinafter - the "FTS") is that the monetary refund should be made to the Russian taxpayer's account. If the refund was made after the profit tax payment date but before the tax authority's audit, interest is payable based on the rate of 1/300 of the key rate of the CB RF for each day of unreasonable use of funds.
Calculation of market price interval and sources of information
From 2024, it is proposed to use the median in addition to the market interval boundary. The law adds a formula for calculating the interval and allows it to be used by the FTS to make adjustments. The median will be used by the FTS when conducting an audit, if it is proved that prices do not fall within the market interval. Previously, adjustments were made to the boundaries of the interval, but from 2024, the median will be used for this purpose, which makes a possible error more expensive.
Equally important is the need to take into account the information on both parties' own transactions without the possibility of referring to the unavailability of data, as could be done previously. In general, it appears that a taxpayer must comply with the requirements of the legislation, so when preparing documentation it is necessary to ascertain the reasonable impossibility of applying the counterparty's transactions.
Thus, the timely preparation of TP documentation makes it possible to introduce the necessary adjustments in advance, since at the stage of adjusting the transaction prices applied by the taxpayer, its consequences will be less tangible. Thus, the legislation encourages a taxpayer to make the relevant adjustments independently on the basis of the TP documentation.
Significant increase in fines
In addition to the tightening of price controls, no less important changes have occurred in terms of liability for violations of control rules. Below is the table of changes in fines.
|Fine as amended by the Law (RUB)
Failure to submit reports on time
|Notifications on controlled transactions
|Notification of participation in the IGC
1 000 000
|Documentation in respect of the IGC
1 000 000
|Transaction-specific (group) documentation
1 000 000
|Consolidated financial statements of IGC and financial statements of IGC participants
1 000 000
Deviation of prices from the market level
|Deviation of prices
|40% of the unpaid tax amount, but not less than RUB 30 thousand
It is important to take into account the increase in the volume and detail of information provided. Particular attention should be paid to reporting to ensure compliance with the new requirements. Although formalised reports, such as the notification of controlled transactions, will not change until 2024, it is worth preparing now. This is due to possible difficulties in obtaining information from the foreign part of the business and restrictions on the tax authorities' access to information on the business operations of your group of companies.
On the positive side, separate penalties only apply to transactions occurring no earlier than 2024.
Safe harbours for interest rates reviewed
After a long period of applying extended "crisis" interest rate intervals, new safe harbours have been published. The values for a number of currencies are summarised below.
10% of the key rate of the CB RF,
but not less than 2%
150% of the key rate of the CB RF,
but not less than 2%
|€STR в € + 7%
|SOFR в $ + 7%
|SHIBOR в ¥ + 7%
It can be concluded that we are back to the situation with the uncertain status of interest-free loans: in practice, they exist, but if a Russian company issues loans to a group company, the tax authorities will be entitled to increase the tax base at the rate of the minimum 1% for foreign currency loans. At the same time, interest-free loans issued to a Russian company are unlikely to raise questions from the FTS.
Advanced pricing agreement
The fee for consideration of an advanced pricing agreement has been halved, i.e. reduced to RUB 1 million. Unfortunately, for the time being this instrument remains available only to a limited number of entities - the largest taxpayers, as the fee for reviewing documents for the conclusion of such an agreement may in many cases be comparable to or exceed the amount of risks under TP.
Withholding tax on services purchased from group companies
The list of income of foreign companies subject to withholding tax has been extended: from 2024, services purchased from related parties will be taxed at the rate of 15%. It is important to take into account that in some cases it is possible to avoid increasing the tax burden on your group, if you have a valid DTT. More details on this in our previous publication.