Transfer Pricing Methods

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereinafter ─ OECD Guidelines) provide guidance on the application of the “arm’s length principle”, which is the international consensus on transfer pricing (the valuation, for tax purposes, of cross-border transactions between related parties). Regarding TP in Russia, Ukraine, Poland, Kazakhstan, and Belarus, only the first three countries have TP regulations which are based on the OECD Guidelines. Poland and Russia are also part of the anti-BEPS initiative of G20/OECD and are already on their way to implementing the anti-BEPS actions, including the Masterfile concept for transfer pricing documentation and Country-by-Country reporting. Respective legislation will probably be adopted in Russia in 2017. In January 2017, Ukraine also officially announced that it will implement the anti-BEPS action plan. In 2016, Belarus made a big step towards getting closer to OECD-standards. To some of these countries, TP is still a new phenomenon. This brochure provides the reader with all relevant information about current TP issues in Russia, Ukraine, Poland, Kazakhstan, and Belarus. We will give you a short overview of the most used methods for determining whether prices applied to controlled transactions conform to “arm’s length” prices:

Comparable market price / comparable uncontrolled price (CUP) method

This method is based on comparing the price applied during a controlled transaction with the price/price range in comparable uncontrolled transactions. In practice, this method can be applied only in cases where the taxpayer performs similar transactions with both related and nonrelated parties, since it is difficult to collect information regarding prices used by other taxpayers performing similar transactions. In case a seller does not have a dominant market share, at least one transaction that matches the comparability criteria is sufficient for applying the comparable market price method.

Resale price method

The resale price method is applied by comparing the gross margin earned by the reseller in a controlled transaction with the respective gross margin range established on the basis of uncontrolled, comparable transactions. The resale price method prevails over other methods to confirm the prices at which the goods are acquired by a purchaser from a related party and resold to a non-related party. This method will be applied if the reselling party does not have intangible assets significantly influencing its gross margin level. This method can be used solely when the purchaser resells the product.

Cost plus method

The cost plus method compares the gross margin of costs of the party of the analyzed transaction to the market range of the gross margin of costs using comparable transactions. The cost plus method is generally applied in cases when, in the course of rendering the services, intangible assets are used which significantly influences the seller’s gross margin level. The cost plus method is largely used in Western Europe, where most tax authorities have announced that a markup of 5-10% is usually accepted. Such a statement is missing in Russia and Ukraine, so a benchmark study is required. Furthermore, the Russian and Ukrainian transfer pricing rules require the applying the resale price method and the cost plus method so that the accounting data of the related party and the non-related party are brought into comparable formats. As the details of such nonrelated party data are usually unavailable, the applicability of these methods in Russia and Ukraine is fairly limited.

Transactional net margin method (TNMM)

This method is currently applied in most benchmark studies and TP documentation in Russia and Ukraine. For applying the TNMM, the following profitability indexes could be used: sales margin, cost margin, margin of commercial and management expenses, margin of assets, other margin parameters reflecting the correlation between the functions performed, assets used, economic (commercial) risks assumed, and the level of remuneration.

Profit split method

The profit split method compares the actual split (distribution) of total profits between the parties to the split (distribution) of profit between parties of comparable transactions. The profit split method may be used in the following cases:

  • If the other methods could not be applied, and a material interconnection of activities by the parties to the analyzed transaction exists (a group of homogeneous transactions being analyzed)
  • If the parties to the analyzed transaction own rights to intangible assets that significantly influence the gross margin level.

The analysis of the profit split between parties of the analyzed transaction will be made based on the contribution proportion of the party to the total profit received by that party from the transaction, pursuant to the following criteria:

  • In proportion to their contribution to the total profit from the analyzed transaction
  • In proportion to the split between the parties of the analyzed transaction of the return on invested capital raised with respect to such a transaction
  • In proportion to the split of profit between parties of a comparable transaction
Artem Barinov
Associate Director, Legal & Tax
+380 / 44 / 490 55 28
Adrian Branny
Partner, Warsaw
+48 / 22 / 695 03 10
Alex Stolarsky
Partner, Rechtsanwalt Legal, Compliance, Tax & Interim Management
+7 / 495 / 956 55 57
Kirill Afanasyev
Partner, Almaty, Nur-Sultan, Aktau
+7 / 727 / 355 44 48
Sergey Odintsov
Certified Tax Consultant, Head of Tax Department, Minsk
+375 / 17 / 290 25 57