Ruling on first Transfer Pricing court case

January 27, 2017, the text of the decision of the Moscow Arbitration Court on Case No. А40- 123426/2016 was published, placing emphasis on the first transfer pricing dispute with the Federal Tax Service. The tax authorities analysis of oil sales from Dulisma Oil Company ZAO (“the taxpayer”) to an independent buyer in Hong Kong, resulted in an under declaration of revenue, and therefore required additional tax.

This is the first court case over the application of the transfer pricing rules in relation to controlled transactions.  This precedent denotes the beginning of negative transfer pricing case practice for taxpayers.

It should be noted that the taxpayer was deficient in their TP reporting, i.e. did not prepare TP documentation in the proper manner, nor was the TP method in the notification indicated.  Although these actions are not obligatory under the Russian Tax Code, this negligence greatly affected the outcome of the court proceedings.

It is also noteworthy that a comparatively small company was implicated, debunking an expert community’s assumption that TP audits would predominantly affect large taxpayers.

Thus, it becomes clear, that small companies are also prone to risk, denoting a significant necessity for paying close attention when preparing TP documentation, ensuring that prices used in controlled transactions are economically justified.

We will be pleased to answer your questions and provide you with necessary TP assistance from a planning and compliance perspective.

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